Rizal Commercial Banking Corp. v. Commissioner of Internal Revenue

FOURTH DIVISION [CA-G.R. SP No. 41390. March 22, 2004.] RIZAL COMMERCIAL BANKING CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ASUNCION, EJ. , J p : This is a petition for review of the Decision of the Court of Tax Appeals (CTA), dated February 12, 1996, in C.T.A. Case No. 4672. The CTA Decision affirmed the Decision of the Commissioner of Internal Revenue (Commissioner) which ordered petitioner to pay deficiency income tax in the amount of P21,493,651.31 and deficiency gross receipts tax in the amount of P22,652,284.11, both for taxable year 1987, and imposing 25% surcharge on aforesaid amounts for late payment and 20% annual interest from December 3, 1991 until fully paid, pursuant to Section 282 and Section 283 of the 1986 Tax Code , as amended by Presidential Decree 1994 , which took effect on January 1, 1986. Petitioner Rizal Commercial Banking Corporation (RCBC), was assessed by respondent Commissioner of Internal Revenue to pay deficiency income tax and gross receipts tax (GRT) liability for the year 1987 in the respective amounts of P21,493,651.35 and P22,652,284.11, inclusive of increments. The income tax assessment arose from the disallowance by respondent of the bad debt deduction from its gross income taken by petitioner in 1987 amounting to P42,169,350.00. This amount represents the securities which petitioner had written-off on account of worthlessness, as its investment in RCBC International Finance Limited (RCBC IFL) had declined from P96,418,186.00 to P54,248,836.00, as a result of its quasi-reorganization. Also for 1987, petitioner declared gross receipts of P649,527,303.78 for which it paid the amount of P35,450,847.33 as gross receipts tax based on the maturities of the instrument. It used as tax base the trading gain it realized from all its sale transactions net of trading loss on the ground that, pursuant to Section 119 (C) of the Tax Code , as amended, the gross receipts tax (GRT) is imposed on "profits" derived from exchange transactions. The Commissioner disallowed the deduction on the ground that the gross receipts tax is imposable on every sale transaction which results in trading gain without considering the sale transactions which result in trading loss. Petitioner protested said assessments in its letters dated February 15, 1990, March 9,1990, and August 6, 1991. Upon denial of petitioner's protest by the Commissioner of Internal Revenue, petitioner appealed to the Court of Tax Appeals. On February 12, 1996, the CTA affirmed the decision of the Commissioner. The motion for reconsideration filed by herein petitioner was denied on July 11, 1996, hence, this present recourse. This case was first raffled to Justice Quirino Abad-Santos on July 30,1996. On February 3, 1998, RCBC filed a "Motion For Leave" of Court to pursue and enter into a compromise settlement with the Bureau of Internal Revenue (BIR), alleging that it filed an application with the Litigation Section, National Office, BIR, for compromise settlement under Revenue Memorandum Order (RMO) No. 61-97, offering to pay 50% of the basic deficiency income tax assessment for the year 1987 and that the BIR is in the process of issuing the Authority to Cancel Assessment which will formally terminate the 1987 deficiency income tax and gross receipt tax assessments. This motion was granted by the Court in a resolution dated March 31, 1998, giving RCBC thirty (30) days within which to enter into a compromise settlement with respondent BIR. Despite the period given, no compromise agreement was submitted by the petitioner. On July 20, 1998, petitioner filed a Manifestation/Motion to Archive the case stating that the Litigation and Prosecution Division of the BIR has accepted its application for compromise settlement. The court approved the said motion, giving petitioner another thirty (30) days within which to submit the approved compromise agreement with a caveat that failure to submit the same after the lapse of the said period, the case will be decided on its merits. For failure of petitioner to comply with the said order, the court considered the case submitted for decision. On July 30, 1999, this case was re-raffled for study and report. On December 8, 1999, the parties, through their respective counsels, filed a "Joint Manifestation and Motion" alleging that the BIR, pursuant to Section 204 , of the Tax Code , as amended, has accepted the compromise offer of the petitioner and prayed for the dismissal of this case. On January 27, 2000, this Court issued a resolution requiring the Office of the Solicitor General and the newly appointed Commissioner of Internal Revenue, Dakila Fonacier, to comment on the motion. On April 12, 2000, the Commissioner, through counsel, filed its "Comment with Motion to Withdraw the Joint Manifestation and Motion", alleging that the grounds cited by RCBC in its application for compromise under RMO 61-97 is not among any of the statutory grounds provided for in Section 204 of the Tax Code , as amended. On April 22, 2000, petitioner filed its opposition to the comment and motion to withdraw filed by respondent. The first point to be resolved now delves on whether or not the grounds cited by petitioner in its application for compromise under RMO 61-97 are among the statutory requisites provided for in Section 204 of the Tax Code , as amended. It is basic that the Commissioner of Internal Revenue has the authority to compromise tax related cases, whether civil or criminal in nature. Such power of the Commissioner is discretionary on his part and no court can compel him to exercise such discretion one way or the other. Compromise in the civil case may be made: (1) where there is reasonable doubt as to the validity of the claim against the taxpayer, or (2) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax ( Sec. 204, Tax Code ). In the case at bar, the Commissioner of Internal Revenue correctly argued that the grounds cited by RCBC in its application for compromise under RMO 61-97 is not among the grounds provided under Section 204 of the Tax Code , as amended. It must be stressed that the said RMO was premised on the power of the Commissioner to compromise under the same Tax Code provision. It follows, therefore, that any compromise entered into by the parties must be based on the grounds above-cited. Going now to the merits of the case, the main issue raised in this petition hinges on whether or not the decrease in value of petitioner's securities investment in RCBC IFL brought about by the reduction in the latter's share capital as a result of a quasi-reorganization is a deductible item under Section 29(e) (2) of the Tax Code , as amended. According to the petitioner, to avail of the deduction under Section 29(e) (2) of the Tax Code , as amended, all that is required is that the securities be ascertained to be worthless and charged off within the taxable year. The subsequent disposition of worthless securities is not required before the loss could be claimed as bad debt and reported as a deduction under the above-mentioned Tax Code provision. The Court of Tax Appeals, on the other hand is of the opinion that for petitioner to be able to claim stocks becoming worthless as a deduction, there must be an actual sale or disposition of said shares at their shrunken price. There being no such sale, petitioner could not validly claim a deduction for ordinary loss from its 1987 gross income. We find for the respondent Commissioner of Internal Revenue. Section 29 (e) of the Tax Code reacts: "(e) Bad debts. (1) In general . Debts due to the taxpayer actually ascertained to be worthless and charged off within the taxable year except those not connected with profession, trade or business and those sustained in a transaction entered into between parties mentioned under Section 30 (b) of this Code. DcHSEa (2) Securities becoming worthless . If securities as defined in Section 20 are ascertained to be worthless and charged off within the taxable year and are capital assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank or trust company incorporated under the laws of the Philippines a substantial part of whose business is the receipt of deposits, for the purpose of this Title, be considered as a loss from the sale or exchange , on the last day of such taxable year, of capital assets." (Emphasis Ours) It must be noted that the deduction from gross income being claimed by petitioner is treated as "bad debt" under Section 29 (e) (2) of the Tax Code , as amended. The obligation itself from the corporation issuing the securities alleged to be worthless must be charged off or written off as uncollectible. In this case, there was no bad debt to speak of. In this case, what was deducted by petitioner is an investment of a security of another corporation which underwent quasi-reorganization. The mere reduction in the amount of the book value of petitioner's securities investment in RCBC IFL as a result of a quasi-reorganization or otherwise, may not be claimed as "bad debt" deduction under Section 29 (e) (2) of the Tax Code , as amended. The loss allowable in such case is that actually suffered/incurred when the stock is actually disposed of. Petitioner's reliance in the case of Fernandez Hermanos, Inc. vs. Commissioner of Internal Revenue (29 SCRA 552) is misplaced. The facts obtaining in that case are different from the case at bar. In said case, the taxpayer deducted in 1950 the cost of shares he invested in Mati Lumber because he learned that the corporation was insolvent. The BIR Commissioner disallowed the deduction on the ground that Mati Lumber still had its sawmill and equipment of considerable value. The Supreme Court held that the deduction was proper and that there was sufficient basis to write off the stocks as worthless. In the instant case, there was no showing that RCBC IFL was insolvent or had ceased business operations. Petitioner has still reasonable hope of recovering the amount it wrote off in its securities investment in RCBC IFL. Thus, we find no cogent reason to disturb respondent Commissioner's assessment against petitioner for deficiency income in the amount of P21,493,651.55. Anent the propriety of deducting trading loss from trading gains for purposes of computing petitioner's gross receipts tax liability, petitioner submits that the gross receipts tax (GRT) should be imposed on the gross receipts of the bank net or exclusive of trading loss. On the other hand, the Tax Court ruled that the GRT should be based on the gross receipts without any consideration for trading loss. It made the following ratiocination: "Gross receipts 'means all the receipts arising from or growing out of the employment of the corporation's capital in its designated business or otherwise.' ( State vs. Central Trust Co ., 67 A. 267, 271, 106 Md. 268, cited in Words and Phrases 18, p. 769) "Gross receipts is synonymous with gross earnings 'which mean entire receipts without deduction for any expenditure, or any cost of operation, or other expenses or cost of service.' (Acts 1933, pp. 204, 207, 2, 8. Fort Smith Gas Co. vs. Wiseman , 74 S.W. 2d 789, 792, 189 Ark. 675; Ibid . Emphasis supplied) "Based on the first definition, GRT is a tax on gross receipts less capital. Its tax base allows no other deductions like cost of operation or service pursuant to the second definition. "Trading loss of herein petitioner is not capital and hence, not excludable from its gross receipts. It is a cost of operation or service, which may be allowed as a deduction from gross income pursuant to Section 29 of the Tax Code. . . ." (p. 53, Rollo ) We agree with the Tax Court. Sec. 119 (C) of the Code reads: "'There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) . . . (b) . . . (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 28 of this Code . . ." Gross receipts tax (GRT) is a tax on all gross earnings without any deductions. The only allowable deduction is capital. The term capital pertains to stockholders equity in the corporation and not the colloquial meaning of money invested in the purchase of goods. Purchase of government securities by a bank, therefore, does not represent increase in capital asset or stockholders' equity. Trading gain or loss in sale or exchange of government securities is merely the result of operations and the profits or gains therefrom are included in the computation of gross receipts without deducting the losses, otherwise, the tax base would be net gain/profit or net receipts which is not contemplated by law. Thus, respondent is correct in assessing petitioner deficiency gross receipts tax of P22,652,284.11. It should be emphasized that the Court of Tax Appeals is a highly specialized body specifically for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether or not an item is deductible through the evidence presented before it. Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent showing of gross error or abuse on its part ( Philippine Refining Company vs. Court of Appeals , 256 SCRA 667). In this case, we do not find any gross error or grave abuse of discretion on the part of the Tax Court in affirming the findings of the Commissioner of Internal Revenue. WHEREFORE, the petition is DISMISSED. The February 12, 1996 Decision of the Court of Tax Appeals in C.T.A. Case No. 4672 is AFFIRMED in toto . SO ORDERED. Jacinto and Bersamin, JJ . , concur.