A. Soriano Corp. v. Commissioner of Internal Revenue

FOURTEENTH DIVISION [CA-G.R. SP No. 45515. January 20, 2003.] A. SORIANO CORPORATION , petitioner , vs . THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS , respondents . D E C I S I O N TRIA TIRONA , J p : Before this Court is a petition for review of the decision of the Court of Tax Appeals dated July 1, 1997, in the case docketed as CTA Case No. 4803 "A. Soriano Corporation, petitioner, versus, Commissioner of Internal Revenue, respondent." The dispositive portion of the assailed decision reads as follows: acTDCI "WHEREFORE, in view of all the foregoing, the 1985 Deficiency Income Tax Assessment issued by the respondent against the petitioner is hereby MODIFIED. Petitioner is hereby ordered to pay respondent the amount of P6,735,539.20, representing deficiency income tax for the year 1985, plus 25% surcharge and 20% annual interest from April 15, 1989 until fully paid pursuant to Section 282 and 283 (now 248 and 249, respectively) of the Tax Code and cost of suit." The antecedent facts of the case are as follows: Petitioner, A. Soriano Corporation (ANSCOR, for brevity) is a domestic corporation created and existing under and by virtue of Philippine laws. Petitioner ANSCOR derives its income from managing other corporations affiliated with it, as well as from earnings from investments and rental of its property. On April 20, 1989, petitioner received a 1985 deficiency income tax assessment 1 and a letter of demand both dated April 15, 1989 in the amount of P9,746,864.00 computed as follows: "Gross Compensation/ Net Income per return P7,515,277.00 Add: Disallowances: Accounts written-off P12,027,749.00 Interest Expenses 5,377,364.00 17,405,113.00 Net/Gross Compensation income After investigation P24,920,390.00 Tax due thereon 8,712,137.00 Balance of Tax Due 8,712,137.00 Deduct Tax Paid 2,620,347.00 Deficiency Tax Due P6,091,790.00 Add: Interest from (Maximum) 60% 3,055,074.00 TOTAL AMOUNT DUE P9,746,864.00" ============= Petitioner contested the aforequoted deficiency income tax assessment in its protest letter dated May 18, 1989. SHECcD On April 13, 1992, a warrant of distraint 2 of personal property and warrant of levy 3 of real property were served upon petitioner, without the public respondent acting on their protest letter. The warrant of distraint of personal property and warrant of levy of real property, constituted the then commissioner's final decision to deny the protest letter. On May 13, 1997, petitioner filed before public respondent Court of Tax Appeals (CTA, for brevity) a petition for review. 4 At the hearing of the case, petitioner presented witnesses and several documents to support its position against the merit of the deficiency tax assessment, as well as its Formal Offer of Evidence 5 and its Formal Offer of Additional/Rebuttal Evidence. 6 On July 1, 1997, public respondent CTA issued the assailed decision, which modified the deficiency income tax assessment issued by the BIR. On July 30, 1997, petitioner moved for the reconsideration of the July 1, 1997 decision, however, the same was denied in a resolution dated September 16, 1997. Hence, this petition. Petitioner ANSCOR raised the following assignment of Errors 7 : "1. THE RESPONDENT COURT ERRED IN FINDING THAT THE BAD DEBTS CLAIMED BY PETITIONER AS DEDUCTIBLE EXPENSE FOR THE TAXABLE YEAR 1985 ARE NOT WORTHLESS. 2. THE RESPONDENT COURT ERRED IN FINDING THAT BAD DEBT EXPENSE CLAIMED BY PETITIONER AS DEDUCTION FOR THE TAXABLE YEAR 1985 DID NOT COMPLY WITH THE REQUIREMENTS FOR DEDUCTIBILITY." Petitioner ANSCOR contends that the debts it has written-off during the fiscal year ending 3 December 1985 were worthless and therefore should be allowed as a deduction from gross income for the same taxable year. They argue that a taxpayer may not postpone a bad debt deduction on the basis of a mere hope of ultimate collection. They maintain that a taxpayer may exercise sound business judgment based upon information reasonably obtainable in determining worthless debts and that there is no fixed formula for determining the year in which the deductible loss was sustained; when and/or whether a debt becomes worthless is a question of fact, the answer to which does not lie in any stereotyped legal test, but in an examination of all the circumstances." 8 Petitioner ANSCOR argues that they have satisfied these criteria. Section 30(e)(1) of the 1985 Tax Code 9 , as amended, provides: "Sec. 30. Deductions from gross income In computing net income these shall be allowed as deductions. xxx xxx xxx (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 subsection (b) of section 31 of the Code, " HTSAEa "Bad debts" are debts due the taxpayer, connected with trade, business or profession, actually ascertained to be worthless, and charged off within the taxable year all deductible from gross income. 10 Before a taxpayer may charge off and deduct a bad debt, it must be ascertained with a reasonable degree of certainty that the amount is uncollectible. There must be no likelihood of recovery at any time in the future. The taxpayer must have taken reasonable steps to collect the debt, although there is no need to go to court if the legal action in all probability would not result in the satisfaction or execution of the judgment. 11 In the present case, petitioner presented before public respondent tax court documentary evidence such as Statement of Accounts; Minutes of Special Meetings of the Board of Directors of the distressed corporations; and the debtor's Financial Statements showing certain losses, as well as witnesses who gave oral testimony as to the fact that the three (3) debtor corporation, namely: (1) Industrial Textile Manufacturing Corporation of the Phils.; (2) ANSCOR Transport and Terminal, Inc.; and (3) Herald Publication are losing to substantiate petitioner's claim for deductibility of the debts from the corporation's gross income. Petitioner ANSCOR filed to prove that it exerted diligent and earnest effort to collect the said debt. The Supreme Court in the case of Collector vs. Goodrich International Rubber Co. 12 and Philippine Refining Co. vs. Court of Appeals 13 held that: ". . . (F)or debts to be considered as "worthless", and thereby qualify as "bad debts" making them deductible, the taxpayer should show that: (1) there is a valid and subsisting debt; (2) the debt must be actually ascertained to be worthless and uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future. Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court." Evidence presented by petitioner before the public respondent tax court (CTA) reveals that petitioner did not even send demand letters for the collection of the debts they declared as "bad debts". It bears stressing that the amount of indebtedness charged off amounted to millions of pesos. We cannot admit nor appreciate, petitioner's argument that it has substantially proven its claim for the deductibility of the unpaid accounts in their gross income for the year 1985, because to our view it is a basic precept in all contractual obligations that a demand must first be sent out to debtors before a creditor can claim that it is no longer possible for the indebtedness to be collected. Corollarily, petitioner cannot claim that it exerted diligent efforts to collect the debt when there is no indication that it took steps to collect the same, i.e. demanding payment for the same. Granting arguendo that the accounts of the company can no longer be collected because it is already insolvent or bankrupt, it is not enough that the debtor's financial statement showing continued losses be presented. Petitioner must prove and show that debtor has insufficient properties to pay its creditors, to show the worthlessness of the debt. As aptly stated by public respondent tax court in its decision, which we quote: ". . . earnest effort exerted by the petitioner to collect from the debtors is a vital requirement for deductibility of bad debts. In the instant case, petitioner did not show sufficient proof that it exerted earnest efforts to collect said debts. It did not give the said accounts to a lawyer for the filing of a collection suit considering the huge amount involved. As a matter of fact, in the Minutes of Special Meeting of the Board Directors of ITEMCOP, it was stated that "the company's (ITEMCOP) machineries and equipment have a sound value of about P50M which, together with the value of its loads and buildings, would be sufficient to meet the company's liabilities" (p. 137, CTA rec.). But despite knowledge thereof; petitioner did not file a claim to enforce collection in order to be given priority among other creditors in case of liquidation of the said corporation. Thus, the evidence presented is not deduction of bad debts in 1985." This Court finds the aforequoted reason of the CTA in accord with law and jurisprudence. It is a well-settled rule that, factual findings of the Court of Tax Appeals are generally not disturbed on appeal when supported by substantial evidence and in the absence of gross error or grave abuse of discretion. 14 WHEREFORE, in view of the foregoing, the petition for review is DENIED and the appealed decision of the public respondent Court of Tax Appeals dated July 1, 1997 is AFFIRMED. SO ORDERED. Barrios and Sundiam, JJ . , concur. Footnotes 1. Exhibit "4-A", Original Records, pp. 222233. 2. Original Records, p. 250. 3. Ibid . 4. Original Records, pp. 13. 5. Original Records, pp. 5565. 6. Original Records, pp. 235238. 7. Petition, Rollo , p. 6. 8. Petition for Review, Rollo , p. 8. 9. Section 29(c)(1) of the National Internal Revenue Code of 1986; Section 34(E)(1) of 1997 Tax Code. 10. Reyes, V.D., Income Tax Law and Accounting, 122 (1st ed., 1999) 11. Ibid . 12. 21 SCRA 1336. 13. 256 SCRA 667. 14. Commissioner of Internal Revenue vs. BF Goodrich Phils, Inc. 303 SCRA 546.