China Banking Corp. v. Commissioner of Internal Revenue

THIRTEENTH DIVISION [CA G.R. SP No. 33336. August 16, 1995.] (CTA Case No. 4504) CHINA BANKING CORPORATION , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE & COURT OF TAX APPEALS , respondents . D E C I S I O N IBAY-SOMERA , J p : This is a Petition for Review filed by China Banking Corporation seeking relief from the Decision rendered by respondent Court of Tax Appeals affirming the decision of respondent Commissioner of Internal Revenue. The dispositive portion of which is hereunder quoted, to wit: "CONFORMABLY WITH ALL THE FOREGOING, the decision sought to be reconsidered is hereby upheld and both motions for reconsideration and new trial are denied. SO ORDERED." (pp. 60-61, Rollo) The respondents, on March 16, 1994, were required by this Court to comment on the instant petition; however, no compliance was made by the former. Hence, the petition is submitted for decision without the comment of the public respondents. The undisputed facts of the case, as contained in the Decision of the public respondent Court of Tax Appeals, are as follows: "Petitioner is a corporation duly organized and existing under the laws of the Philippines and authorized to engage in the general banking business. Petitioner owns 106,000 shares of stock in a Hongkong subsidiary known as the First CBC Capital (Asia), Limited, amounting to P16,227,851.80, or approximately fifty-three percent (53%) of the total equity of the company. For the year ended in 1987, petitioner wrote-off as worthless securities its entire equity investment in First CBC Capital (Asia), Limited, consisting of the said 106,000 shares of stock amounting to P16,227,851.80, treating the same as a bad debt expense and consequently, considered it as an ordinary loss deduction from gross income in its 1987 income tax return. Respondent, on January 25, 1990, issued a letter of demand under Assessment No. FAS 1-5-87-90-000 against petitioner for, among other things, 1987 deficiency tax plus surcharge, interest and compromise penalty, in the total amount of P8,533,328.04 resulting from the disallowance of the bad debt expense the write-off of alleged worthless securities in First CBC Capital (Asia), Limited. Petitioner, in a letter, dated May 7, 1990, formally protesting said assessment stated in effect that: a. The total worthlessness of petitioner's shares of stock in First CBC Capital (Asia), Limited, was established beyond all doubt due to severe financial reverses and that said company ceased its business operations and even surrendered its license to operate. b. The write-off of worthless securities was correctly treated by petitioner as a bad debt expense for which an "ordinary loss" deduction from gross income was correctly taken under pertinent provisions of the TaxCode, more particularly Sec 3(e), now Sec. 29 (e) (2) thereof. Respondent, in a letter, dated August 22, 1990. rendered its final decision on petitioner's protest, denying the same and reiterating its demand for payment of the latter's 1987 deficiency income tax, plus surcharge, interest and compromise penalty, in the total amount of P8,533,328.04." (pp. 1-3, CTA Decision; pp. 42-44, Rollo) Petitioner's 1987 income tax return shows the amount of P16,227,851.80 as equity investment write-off as a deduction therefrom. Public respondent Commissioner of Internal Revenue disallowed said deduction claim in public respondent CIR's assessment and subsequently issued assessment No. FAS-1-5-87-90-000 for its deficiency income tax, plus surcharge, interest and compromise penalty in the sum of P8,593,328.04. Petitioner contested said assessment on the grounds that: "a. The total worthlessness of petitioner's shares of stock in First CBC Capital (Asia), Limited was established beyond all doubt by the fact that due to severe financial reverses, the latter had ceased business operation and even surrendered its license to operate. b. The write-off of "worthless securities" was correctly treated by petitioner as a "bad debts expense" for which an "ordinary loss" deduction from gross income was correctly taken under pertinent provisions of the TaxCode then in effect, particularly Section 30(e) of the TaxCodeof 1987." (p. 10, Rollo) As to the first ground, respondent Court of Tax Appeals was correct in its findings when it said: ". . . He further stated that the revocation of the registration of First CBC (Asia), Limited in 1987 was only for its deposit-taking activities while its (company's) financing and investment holding concerns remained; therefore, the alleged debt or investment could not be considered worthless and deductible in 1987. In the First CBC Capital (Asia) Limited Report and Financial Statements for the year ended 31 December 1987 prepared by Berne and Co. (Exh. E), it confirmed that the "principal activities of the company during the year were in financing and investment holding." It disclosed however that the company was "de-registered" as a deposit-taking company during the year. Based on the audited financial statements as reported by its external auditors to the shareholders of First CBC Capital (Asia), Limited, the company had collectible amounts due from the subsidiary of HK $4,459,595.00 included under interest in subsidiary, as well as loans extended to customers and other debtors totaling HK $46,264,929.00 although the auditors were unable to obtain independent confirmations of these balances. There was even an investment of HK $38,892.00 in the subsidiary. It would appear therefore that based on the audited financial statements for the year ended 31 December 1987, the First CBC Capital (Asia) Limited was a going concern, operating probably under difficult circumstances, but certainly, with no indication that it was going bankrupt. No evidence was introduced indicating that this company had applied for bankruptcy nor a declaration of bankruptcy under the banking laws and regulations of Hongkong where it is based. There was likewise no evidence presented that the company continued to exist, that is as of 1987, for purposes of liquidation. What is clear on the record is that the company was de-registered as a deposit-taking company, one of its business activities, during the year in question. However, its principal activities as a financing and investment holding company continued as shown by its exposure and business operations in the form of loans to customers and other debtors and investments. . . ." (pp. 45-47, Rollo) Anent the averment that "the write-off of worthless securities was correctly treated by petitioner as a bad debt expense for which an "ordinary loss' deduction from gross income was correctly taken . . .", it is emphasized "there is no loan or debt to speak of as understood under Sec. 30(e) (2), Now Sec. 29 (c) 92) of the Tax Code. Hence, no bad debt expense could arise where there is no valid or subsisting debt. SEC. 29. Deductions from gross income . In computing taxable income subject to tax under Section 21(a); 24(a), (b), and (c), and 25(a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (i) of this Section: Provided, however, That in computing taxable income subject to tax under Section 21(f) in the case of individuals engaged in business or practice of profession, only the following direct costs shall be allowed as deductions: xxx xxx xxx (c) Telecommunications, electricity, fuel, light and water; (2) Expenses allowable to private educational institution . In addition to the expenses allowable as deductions under subparagraph (1) of this paragraph, a private educational institution, whether stock or nonstock, may at its option, elect either (a) to deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the taxable year for the expansion of school facilities or (b) to deduct allowance for depreciation therefor under paragraph (f) of this Section. (As amended by Pres. Decree No. 1994). Exemptions from taxation are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority (Phil. Petroleum Corp. vs. Mun. of Pilillia, Rizal, 198 SCRA 82; Floro Cement Corp. vs. Gorospe, 200 SCRA 472). WHEREFORE, finding no reversible error in the decision appealed from, the same is hereby AFFIRMED in toto . SO ORDERED. Torres , Jr . and Lipana-Reyes, JJ ., concur.