Commissioner of Internal Revenue v. Oranbo Realty Corp.

TENTH DIVISION [CA-G.R. SP No. 44093. May 26, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ORANBO REALTY CORPORATION and COURT OF TAX APPEALS , respondents . D E C I S I O N BARCELONA , J p : This petition for review assails the Decision of the Court of Tax Appeals dated April 7, 1997 entitled Oranbo Realty Corporation v. Commissioner of Internal Revenue. The decretal portion of the questioned decision reads, as follows: "WHEREFORE in view of the foregoing premises, the instant Petition for Review is hereby GRANTED. Accordingly, respondent is hereby directed to REFUND or in the alternative issue a TAX CREDIT CERTIFICATE in favor of petitioner the sum of P973,014.00, representing overpaid income tax for the year 1982 as a result of excess and unutilized expanded withholding tax for the same year. No pronouncement as to cost. SO ORDERED." (p. 36, Rollo ) The antecedents as found by the Court of Tax Appeals are reproduced herein below, the same being largely undisputed by the parties. "On April 15, 1993, petitioner filed its Annual Income Tax Return (ITR for short) for the calendar year ended December 31, 1992 (Exh. 'A'). It reflected a rental income of P19,480,721.00 (Exh. 'A-2') and a 5% creditable EWT thereon in the amount of P974,036.00 (Exhs. 'A-1' and 'B'). With only a tax due of P1,022.00 (Exh. 'A', supra ) minus the creditable EWT of P974,036.00, petitioner declared an excess income tax paid of P973,014.00 (Exh. 'A-4'). Petitioner elected to have the latter amount refunded, as shown by an 'x' mark on the appropriate box of the ITR. On January 18, 1994, petitioner filed with respondent's Revenue District Office No. 47, East Makati, a letter requesting the respondent to refund or issue a tax credit certificate on the abovementioned (sic) overpaid income tax for 1992, resulting from the excess payment of creditable EWT of P973,014.00 (Exh. 'D'). In said letter, petitioner averred that the overpayment was not claimed nor used as a tax credit against its income tax liability for the succeeding year 1993, because it had no taxable income or taxable liability for that year. Petitioner waited for respondent's action. None was forthcoming bearing in mind that a claim for refund can only be maintained in this Court within a two-year period from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment as provided under Section 230 of the Tax Code, as amended, petitioner moved to suspend the running of the prescriptive period." (pp. 18-20, Rollo ) On April 3, 1995, Oranbo Realty Corporation appealed this case to the Court of Tax Appeals. On April 7, 1997, the Court of Tax Appeals rendered a decision in favor of herein respondent Oranbo Realty Corporation. Not in accord with said decision, petitioner, Commissioner of Internal Revenue, has come to this Court via the present petition for review raising its lone assignment of error, to wit: "THE TAX COURT ERRED IN NOT CONSIDERING THE DISALLOWANCE OF INTEREST EXPENSE ON LOANS ORANBO OBTAINED WITH BPI, UCPB AND ARIS (PHILS )" Herein petitioner argued that CTA committed grave error in disregarding petitioner's position in disallowing the interest expense for the loans obtained by Oranbo with BPI, UCPB and Aris (Phils.). When herein respondent claimed that it overpaid an income tax amounting to P973,014.00, the revenue officers who conducted a belated investigation came out with this report. "Oranbo Realty Corporation has outstanding loans from various companies. Said loans are enumerated below: BPI July 1989 P40,000,000.00 UCPB August 1990 27,000,000.00 Aris Phils. Various 26,878,435.00 The above loans were used in the acquisition of real [e]state and shares of stocks, correspondingly interest were incurred and paid by the subject taxpayer. Interest expense were charged and paid to the following: BPI P8,973,972.58 UCPB 5,638,411.62 Aris Phils. 3,289,905.20 Total P17,902,289.40 =========== The above interest expense was part of the deductions claimed by the subject taxpayer as operating expenses amounting to P19,484,337.00 for the year 1992. It is also the subject of disallowance by the undersigned Revenue Officer. . . . ."(p. 3-4 Decision, CTA Case No. 5222, pp. 20-21, Rollo ) Petitioner contends that Oranbo's claim for refund should be denied for reason that the interest expense incurred by the said company for the acquisition of the real property should be capitalized as part of the cost and should not be charged to operation as current expense. We are not persuaded. It is noteworthy to quote the findings of the Court of Tax Appeals, thus: "As regards the loan with the Bank of the Philippine Islands, petitioner correctly remarked by citing our previous ruling in Oranbo Realty Corporation vs. CIR, CTA Case No. 4820, January 23, 1985, involving the same parties herein, that the reason why its financial statements for the year 1990-1991 did not reflect the acquisition of all the outstanding shares of stock of NOMA Development Corp. was simply due to the fact that the latter corporation was 'liquidated earlier in 1989 and therefore the investment in shares was replaced by real estate assets (by way of liquidating dividends) in petitioner's statements beginning 1990' (p. 8, Petitioner's Memorandum; p. 156, CTA records). Verily, such real estate assets are necessary in petitioner's real estate leasing operations. Respondent also assails petitioner's treatment of the interests on loans it obtained with the Bank of the Philippine Islands (BPI), United Coconut Planters Bank (UCPB) and Aris (Phils.), Inc. as interest expense deductible from gross income. She contends that the same should be capitalized because 'land in most instances appreciates and that cost pertaining to such acquisition should not be charged to operation but rather be capitalized to determine the real purchase value (Exh. '2', supra ). We deem respondent's preceding ratiocination to be anchored on hollow grounds. In refutation, We are of the opinion that the case of PAPER INDUSTRIES CORP. OF THE PHILS. (PICOP) vs. COURT OF APPEALS, COMMR. OF INTERNAL REVENUE AND COURT OF TAX APPEALS, G.R. Nos 106949-50; and COMMR. OF INTERNAL REVENUE vs. PICOP, THE COURT OF APPEALS AND THE COURT OF TAX APPEALS, G.R. Nos. 106984-85, December 1, 1995, decided by the Supreme Court En Banc, which although it involves the allowance of interest on loans for the purchase of machinery and equipment as a deduction from gross income, nevertheless, may apply to interests paid on loans contracted from: (1) Aris (Phils.), Inc., to acquire real properties (Exhs. '5-a', '6-a' and '7-a') and shares of stocks of NOMA Development Corp. (Exh. '8-a'), an entity also engaged in the real estate business; (2) UCPB to finance its working capital (Exh. '4'); and (3) BPI to refinance the acquisition of all outstanding shares of stock of NOMA Development Corp." (pp. 6-8, CTA Decision, ibid; pp. 23-25. Rollo ). In this petition, the Commissioner of Internal Revenue likewise questioned the applicability of the PICOP ruling considering that PICOP purchased machinery and equipment, whereas in the instant case, Oranbo purchased lands. The Court opines that Section 29(b) of the National Internal Revenue Code does not distinguish whether the loan upon which the taxpayer paid an interest, was used to purchase machinery and equipment or land. Section 29 of the National Internal Revenue Code provides, thus: "Section 29. Deductions from gross income . In computing taxable income subject to tax under Sections 21(9); 24(a), (b), and (c); and 25(a) (1), there shall be allowed as deductions the items specified in paragraphs (a) to (l) of this Section . . . xxx xxx xxx (b) Interest; . . . (1) In general The amount of interest paid or accrued within a taxable year or 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. (2) No deduction shall be allowed in respect of interest under the succeeding sub-paragraphs: (i) If within the taxable year an individual taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount or otherwise: Provided, That such interest shall be allowed as a deduction in the year the indebtedness is paid: and Provided further, That if the indebtedness is payable in periodic amortizations, the amount of interest which corresponds to the amount of the principal amortized or paid during the year shall be allowed as deduction in such taxable year. (ii) If both the taxpayer and the person to whom the payment has been made or is to be made are person specified under Section 30(b). (iii) If the indebtedness is incurred to finance petroleum exploration (as amended by Exec. Order No. 37.)" (pp. 134-135, NIRC, Annotated, Fifth Edition, 1994) Time and again, the Supreme Court has declared that where the law speaks in clear and categorical language, there is no room for interpretation, vacillation or equivocation there is room only for application ( Director of Lands v. Court of Appeals, 276 SCRA 276 ). Hence, if the law does not distinguish, We must not also distinguish. Again, the deduction claimed by Oranbo (interest) should be allowed for such is not included in the list of the items not deductible under Section 30 of the National Internal Revenue Code, which provides: "SEC. 30. Items not deductible . (a) General rule . In computing taxable income no deduction shall in any case be allowed in respect of (1) Personal, living, or family expenses; (2) Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. prcd This subsection shall not apply to intangible drilling and development cost incurred in petroleum operations which are deductible under subsection (g, 1) of Section 29 of this Code. (as added by Pres. Decree No. 1682.) (3) Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or (4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy. (b) Losses from sales or exchanges of property . In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly (1) Between members of a family. For the purposes of this paragraph, the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; (2) Except in the case of distributions in liquidation, between an individual and a corporation more than fifty per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; (3) Except in the case of distributions in liquidation, between two corporations more than fifty per centum in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applicable to such taxable year, a personal holding company or a foreign personal holding company; prcd (4) Between a grantor and a fiduciary of any trust; (5) Between the fiduciary of a trust and the fiduciary of another trust, if the same person is a grantor with respect to each trust; or (6) Between a fiduciary of a trust and a beneficiary of such trust." The above-quoted law is implicit. The interest payment made by Oranbo on a debt used to purchase land, is not one of those not allowed by law to be deducted. In other words, it is deductible. In the case of Province of Bulacan v. Court of Appeals (299 SCRA 442 11998]) , the Supreme Court had the occasion to state: ". . . taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares,, tax statutes being construed strictissimi juris against the government." WHEREFORE, premises considered, the instant petition is hereby dismissed for lack of merit and the assailed decision of the Court of Tax Appeals is hereby AFFIRMED in toto . SO ORDERED. Buzon and Cruz, JJ., concur .