Commissioner of Internal Revenue v. Chartered Bank

FORMER EIGHTH DIVISION [CA-G.R. SP No. 37681. June 27, 1996.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . CHARTERED BANK (now named as STANDARD CHARTERED BANK) , respondent . D E C I S I O N AUSTRIA-MARTINEZ , J p : The only issue in the present petition for review is whether or not respondent Court of Tax Appeals committed an error in cancelling the deficiency income tax assessment in the amount of P6,465,407.16 imposed by petitioner Commissioner of Internal Revenue against private respondent Chartered Bank (now named as Standard Chartered Bank). Chartered Bank filed its 1984 Income Tax Return reflecting therein its taxable income in the amount of P248,104,840.00 and non-taxable income in the amount of P17,782,720.00 which total to P265,887,560.00. Chartered Bank claimed deductions of P177,317,609.00, thus leaving a net income of P70,787,231.00. On January 29, 1988, after an investigation conducted by the petitioner, the latter issued an assessment, as follows: "1984 Deficiency Income Tax Net income per return P70,787,231.00 Add: Unallowable deduction: Disallowed portion corresponding to non- taxable revenue 11,859,108.38 Net income per investigation P82,646,339.38 Income tax due thereon P28,916,219.00 Less: Income tax already paid 24,765,531.00 Deficiency income tax P4,150,668.00 Add: 20% int. fr. 4-16-85 to 1-29-88 2,314,719.16 TOTAL AMOUNT DUE & COLLECTIBLE P6,465,407.16" (Petition for Review, p. 13, Rollo) Chartered Bank protested but petitioner denied its protest. A petition for review was filed with public respondent Court of Tax Appeals. After hearing, public respondent rendered herein assailed decision against petitioner. Respondent court held: "As regards the total deductions amounting to P177,317,609.00. Petitioner presented its financial accounting records and other documentary evidence to prove that the same were business expenses incurred and directly attributable to the generation of its total taxable income. This is in consonance with Section 30 (now Section 29) of the National Internal Revenue Code which provides thus: ' Deductions from Gross Income . In computing taxable income subject to tax under Section 24 . . ., there shall be allowed as deductions the items specified in paragraph (a) to (I) of this section. xxx xxx xxx '(a) Expenses . (1) Business Expenses . '(A) In general . All ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in pursuit of a trade, profession or business; rentals or other payments required to be made as condition to the continued use or possession, for the purpose of the trade, profession or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. '(b) Interest . (1) In general . The amount of interest paid or accrued within a taxable year on indebtedness 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. . . .' "The aforesaid section of the Tax Code allow (sic) the deductions of business expenses provided the following requirements have been complied with, to wit: "1. The expense must be both ordinary and necessary; "2. They must be paid or incurred during the taxable year; "3. They must be paid or incurred in carrying on the trade or business of the taxpayer; and "4. They must be supported by records or pertinent papers. "No distinction is made as to the nature of the income, whether taxable or non-taxable, to which the business expense may be charged to be deductible for income tax purposes. Section 29 of the NIRC therefor (sic) allows deduction of business expenses regardless of whether or not such expenses are allocable to income. "Where the law provided no qualification for the granting of the privilege, the court is not at liberty to supply any (Republic Flour Mills vs. Commissioner of Internal Revenue, 31 SCRA 520). "This particular provision of the Tax Code has been interpreted and passed upon by the Supreme Court in two cases, namely: Zamora vs. Collector, L-15280, May 13, 1953 and reiterated in Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, L-26911, January 27, 1981, 78 O.G. 393, wherein the Court ruled that: "The principle is recognized that when a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross income for purposes of the income tax in Section 29 (a) (11) of the National Internal Revenue Code which allows a deduction of all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. . . ." "The documentary evidence and testimonial evidence submitted by petitioner amply indicate that all expenses claimed and declared by it were incurred in the pursuit of its business." (pp. 42-44, Id .) Hence, the present petition for review filed by the Commissioner of Internal Revenue positing the following grounds in support thereof, to wit: "1. The Tax Court erred in holding that since respondent presented evidence to prove that the business incurred are directly attributable to the generation of its total taxable income, the same are deductible regardless of whether or not such expenses are allocable to income since no distinction is made as to the nature of the income, whether taxable or non-taxable. "2. The Tax Court in holding that for failure of petitioner to present evidence it was not proven that the assessment is based on actual facts." Petitioner advances the arguments that deductions pertaining to non-taxable income cannot be claimed as against taxable income; that under Section 36 of Revenue Regulations No. 2 (Income Tax Regulations), the net income tax, means the taxable gross income less the statutory deductions connected with the productions of income, that is, taxable income; that only the deduction which produced the taxable income can be claimed for income tax purposes; that respondent declared both taxable and non-taxable income and claimed deductions without specifying which deductions pertain to non-taxable income that in the absence of evidence indicating that would constitute a reasonable basis for the allocation of expenses to non-taxable income, petitioner adopted the following formula, to wit: '"Non-taxable income x deductions = portion of deductions Taxable and non-taxable allocable to non-taxable income income'" or '"17,782,720.00 x 177,317,609.00 = 11,859,108.38'" 265,887,560.00 that the amount of P11,859,108.38 arrived at is the amount of deductions that pertain to non-taxable income and therefore should not be deducted from the taxable income; that the petitioner may assess the proper tax on the best evidence obtainable and compute the net income in accordance with such method as in his opinion clearly reflects the income, under Section 16 (b) of the Tax Code, to wit: "(b) Failure to submit required reports, statements, etc . When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable." (p. 29, Id .) In its Memorandum, private respondent maintains that: "(1) The Deficiency Income Tax Assessment Was Devoid of Factual Basis as the Deductions Claimed by Private Respondent were Attributable to the Taxable Income and Partakes of Proper and Acceptable Business Expenses Deductible under Section 30 (now Section 29) of the National Internal Revenue Code." "(2) . . . the determination of which expense was attributable to the taxable income of private respondent is not in question. Respondent has proven by both documentary as well as the testimonial evidence that the total expenses appearing on its annual corporate income tax for the year 1984 (in the amount of P177,317,609.00) were all incurred in the generation of its total taxable earnings (of P248,104,840.00). Thus, it is improper to allocate a portion of these expenses to the non-taxable income respondent has generated for the year 1984. . . . "(3) . . . The Ruling of the Supreme Court in the case Collector of Internal Revenue vs. Benipayo , 4 SCRA 182, is very apt as it declared that: 'To our mind, the appealed decision has no factual basis and must be reversed. An assessment fixes and determines the tax liability of a taxpayer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. . . . 'In order to stand the best of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption . . . In the case under consideration there are no substantial facts to support the assessment in question. . . .'" (Memorandum for the Private Respondent, pp. 120 and 123, Id .) We agree with the respondent Tax Court. The petition is without merit. Section 30 (now Section 29) of the Tax Code as herein-above quoted is explicit and clear. It is a cardinal principle of statutory construction that where the words and phrases of a statute are not obscure or ambiguous, its meaning and the intention of the legislature must be determined from the language employed, and where there is no ambiguity in the words, there is no room for construction. 1 Section 30 (now Section 29) of the Tax Code refers specifically to taxable income and the business expenses that may be deducted from said income. To be deductible as a business expense, three conditions are imposed, namely: (1) the expenses must be ordinary and necessary; (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying on a trade or business. 2 It was error for the petitioner to impose upon private respondent an additional requirement and that is to allocate a portion of the business expenses incurred by the corporation in carrying on its business to non-taxable income. The Tax Code does not provide for such procedure. Petitioner should not do so. As the Supreme Court held in Republic Flour Mills, Inc. vs. Commissioner of Internal Revenue: "It is true that in the construction of tax statutes tax exemptions (and deductions are in this nature) are not favored in the law, and are construed strictissimi juris against the taxpayer. However, it is equally a recognized principle that where the provision of the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid of judicial addition or subtraction. . . . Where the law provided no qualification for the granting of the privilege, the court is not at liberty to supply any. 3 To emphasize, Schedule 1, which is not controverted by petitioner, submitted by private respondent discloses the following deductions: Interest expense, net of interest paid to Head Office, Branches and Agencies for P3,528 102,871,408 Manpower costs, net of retirement plan contribution for past service cost in excess of allowable amount of P1,963,878 33,099,252 Taxes, licenses and fees, net of provision for 1974 contested gross receipts tax of P302,286 20,439,402 Occupancy costs 4,943,200 Share in London Head Office expenses 3,728,648 Depreciation 2,556,856 Travel and entertainment 2,006,839 Stationery, printing and publication 1,623,761 Computer costs 1,014,715 Central Bank supervision fees 821,032 Insurance 635,135 Professional fees 447,700 Advertising and publicity 409,989 Bad debts written-off 398,996 Other expenses 2,320,676 TOTAL DEDUCTIONS P177,317,609.00 4 ========== The formula utilized by petitioner to the effect that portions of the above expenses are allocated to non-taxable income and therefore not qualified to be lawful deductions from the taxable income is not just and fair to private respondent. If the intention of Section 30 (now Section 29) of the NIRC is to separate business expenses in carrying on a trade or business that produce taxable income from those that generate non-taxable income, then it would have so expressly provided in said provision of law. WHEREFORE, the appealed judgment is AFFIRMED. No costs. SO ORDERED. Lantin and Salas, JJ . , concur. Footnotes 1. Provincial Board of Cebu vs. Presiding Judge of Cebu Court of First Instance, Branch IV, 171 SCRA I 2. Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue, 175 SCRA 149. 3. 31 SCRA 520. 4. Exhibit J, Folder of Exhibits.