Commissioner of Internal Revenue v. Universal Molasses Corp.

SPECIAL ELEVENTH DIVISION [CA G.R. SP No. 52297. December 28, 2000.] THE HON. COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . UNIVERSAL MOLASSES CORPORATION , respondent . D E C I S I O N ABESAMIS , J p : In the matter be fore Us, the Court is tasked to determine whether or not the Commissioner of Internal Revenue properly imposed upon the private respondents surcharges and interest penalties for the late payment of the capital gains tax due on the shares of stocks of Eastern Telecommunications Phil . , Inc . (ETPI) it owned and sold to Smart Communications (Smart) on 24 July 1996 . The Commissioner of Internal Revenue (Commissioner) appeals before Us the decision rendered by the Court of Tax Appeals (CTA) in CTA Case No. 5467 , entitled, " UNIVERSAL MOLASSES CORPORATION VS. HON. LIWAYWAY VINZONS-CHATO, ET AL .", the dispositive of which pertinently reads: "WHEREFORE, in view of all the foregoing, the ruling of the respondent Commissioner of Internal Revenue holding the petitioner liable for the payment of surcharge and interest for late payment of capital gains tax is hereby reversed and nullified. "Without pronouncement as to costs. "SO ORDERED. 1 The following are the undisputed facts of this case: On 24 July 1996 , private respondent sold its 196,000 shares of stocks in ETPI to Smart for a total consideration of P226,772,000.00. The said shares were under litigation before the Sandiganbayan and on 6 December 1996 , the Sandiganbayan upheld the validity of the said sale . Consequently, on 17 December 1996 , an order was issued by the Sandiganbayan for the entry of the said sale in the stock and transfer book of ETPI . Payment of the capital gains tax was made by the petitioner on 24 December 1996 in the amount of P41,434,400.00. On 5 February 1997 however, the Commissioner issued a ruling requiring private respondent to pay surcharges and interest payments for late payment of the capital gains tax due on the said sale. On 18 February 1997 , private respondent sought reconsideration of the said ruling . Without however, waiting for the Commissioner's response and taking into consideration the 30 day period to appeal was about to lapse, private respondent filed a petition for review before the CTA on 5 March 1997 . The CTA thus on 26 March 1999 , reversed and set aside the ruling of the Commissioner. The CTA reckoned in computing the 30-day period during which the capital gains tax should be paid began only on 6 December 1996, (the date when the validity and legality of the sale was finally resolved), rather than from 24 July 1996, the date reflected in the deed of absolute sale. 2 The facts of the case before Us readily shows: (a) the sale of the shares of stock is not disputed; nor (b) the liability of the private respondent to pay the capital gains tax; nor (c) the payment made by the private respondent. What is primarily contested is the starting point of the 30-day period to pay the said capital gains tax on the said sale in light of the attendant circumstances of this case. The sole issue thus before this Court, as correctly stated by the CTA is " WHETHER OR NOT THERE WAS LATE PAYMENT OF THE CAPITAL GAINS TAX DUE ON THE SALE OF SHARES OF STOCK OF ETPI BY PETITIONER (PRIVATE RESPONDENT HEREIN) TO SMART THEREBY MAKING THE FORMER LIABLE FOR SURCHARGE AND INTEREST UNDER SECTIONS 248 AND 249 OF THE TAX CODE , 3 AS AMENDED ." Corollary to this, We must perforce make a prior determination of the reckoning point when income, derived from the said sale, was realized and accrued to the private respondent (and thus made him liable for capital gains tax). Was income realized on the earlier date reflected on the instrument of conveyance? Alternatively, was it only after the approval by the Sandiganbayan of the said sale that income accrued in favor of the private respondents? It is only upon a judicious resolution of the said issue will this Court be able to settle the issue of the timeliness of the payment of the capital gains tax made by Universal Molasses Corporation. DCcAIS The CTA rendered its decision alongside the dissenting opinion of Judge Ramon O. de Vera. 4 The opinion of the CTA's majority was premised upon the consummation of the sale vis-a-vis the Sandiganbayan's final resolution upholding its validity in reaching the conclusion that income was realized on the later date of 6 December 1996. Hence, private respondent paid the capital gains tax due on the said sale well within the thirty-day period prescribed by law. The payment made by Universal Molasses Corporation, according to the CTA, was not late; therefore, the Commissioner made a reversible error in imposing surcharges and interest penalties upon Universal Molasses Corporation. The majority opined: "(I)ndubitably, until registration is accomplished, the sale or transfer, though valid between the parties, cannot be effective as against the corporation . Thus the unrecorded buyer or transferee cannot enjoy the status of a stockholder; he cannot vote nor be voted for and will not be entitled to the dividends (THE CORPORATION CODE, Vol. II, 1990 edition, p. 301, DE ERQUIAGA VS. CA, 179 SCRA 1)." xxx xxx xxx " Petitioner also relied upon a ruling issued by the respondent (Commissioner herein) (Exh. H) suspending the imposition of taxes pending resolution of the cases filed before the Sandiganbayan . As evinced by the records, herein Petitioner paid the capital gains tax within thirty days from the issuance of the resolution by the Sandiganbayan . It can rationally be inferred that Petitioner had no intention of delaying the payment of said tax . Pendency of the court action taken by the government to annul the sale justifies the non-payment of the tax. Petitioner can not be held for surcharge and interest when at the time these penalties were supposed to be incurred, it was still in quandary as to whether or not the validity of the said sale would be upheld by the Sandiganbayan. Logically, only when there is a valid date that liability for capital gains tax arises. Over time, courts have recognized with almost pedantic adherence that what is inconvenient or contrary to reason is not allowed by law ( REPUBLIC VS . CA, 258 SCRA 712 )." 5 (Emphasis supplied) To this foregoing proposition, the Commissioner argues that: "(S)uccinctly put, the payment of the capital gains tax is not conditioned upon the Authority to Make Entry of the Sale in ETPI's Stock and Transfer Book . Rather, the entry of the said sale and the issuance of the corresponding certificates are subject to the payment of the capital gains tax . Moreover, payment of taxes is not based on a speculation that respondent's motion may be denied by the Court. Taxes are the lifeblood of the government, the primary purpose being to generate funds from the State to finance the needs of the citizenry and to advance the common good so should be collected without necessary hindrance ( CIR VS . ALGUE, 158 SCRA 9 ; NPC VS . PROV . OF ALBAY , 186 SCRA 198 ; CIR VS . GOODRICH INTERNATIONAL RUBBER CO ., 22 SCRA 256 ; CIR VS . PINEDA , 21 SCRA 105 )." 6 (Emphasis supplied) It is readily seen that the arguments raised before Us, as well as the questioned CTA decision, devolve upon the basic definition of "sale" and its tax consequences under Philippine laws. Once more, We point out that the difference of opinion between the opposing parties lies mainly on when the 30-day period for paying capital gains tax begins. Considering that: (1) the sale of said shares of stock was subject to the Sandiganbayan's final approval; (2) the consideration (or the amount paid) for the shares of stock was deposited in an escrow account; and (3) Universal Molasses Corporation paid immediately within thirty (30) days after the final resolution of the Sandiganbayan upholding the validity of the sale, We find nothing erroneous in the decision of the CTA to reverse the Commissioner's imposition of surcharge and interest penalties. A capital gains tax is a tax imposed on income. It would be thus important when such income was realized by the seller for it to be taxable. Ordinarily, this would be reflected on the instrument of conveyance. However, where such sale is still subject to the court's approval, then the efficacy of the sale, among which is the income arising from such sale, would be held in abeyance. Not that the sale is valid or not, but rather We consider it taxable if income was received at all by the seller on the date reflected on the deed. Additionally, We note that the following requisites would make income taxable: (1) there must be gain or profit; (2) the gain must be realized or received; and (3) the gain must not excluded by law or treaty from taxation. 7 As the records show, no income accrued to Universal Molasses Corporation on the 24 July 1996 since the sale was contested and the price paid in consideration for the shares of stock was deposited in an escrow account. Obviously, by depositing the purchase price in an escrow account, the said amount was beyond the complete control of the seller and by no means could the same be disposed of by Universal Molasses Corporation without any court order. Simply stated, no taxable income was actually or constructively 8 received by Universal Molasses Corporation from the said sale until the final judgment of the Sandiganbayan was rendered in its favor. We also note the prompt payment of Universal Molasses Corporation of the capital gains tax which to Us shows good faith. (Though this certainly is not the overriding factor We considered in upholding the CTA's decision). On this entire matter, the Court finds enlightening the explanations of Justice Vitug: "A sale or exchange will ordinarily be held to occur on the date of transfer of title over the capital asset is effected or when ownership is terminated in the hands of transferor. In other words, what is generally taken account of is not the perfection of the contract but the consummation thereof (see American Fork Hoe Co ., T.O. Memo, OP. Dkt. 108334, 22 September 1943; US INDUSTRIAL ALCOHOL CO ., VS . HELVERING , 137 F.[2d] 511). Where the date of the sale is the definite event in cutting off the interest of the seller , such date is controlling (see HELVERING VS . HAMMEL , 31 U.S. 504, 85 L. ed. 303, 64 S. Ct. 368)" 9 (Emphasis supplied) In relation to this, Justice Vitug expounds on the tax consequences of a "sale or exchange." "An income tax was held properly assessed on dividends although the corporate resolution authorizing the distribution of said earnings was ruled to be null and void, the Court saying that the tax code stands as an indifferent neutral party on the matter of where the income comes from' ( Commissioner vs . Manning, 66 SCRA 14 ). This rule however, should not be construed as to apply to cases where the source of income constitute a tax base for the imposition of the tax ; accordingly, the tax incidence on certain sales or exchanges of property, such as the stock transfer tax and the 6% tax on the sale of realty would presuppose the validity of the transaction ." 10 (Emphasis supplied) xxx xxx xxx "In C . M . HOSKINS VS . COMMISSIONER (71 SCRA 511), the imposition by the Commissioner of the 25% surcharge was held to be unjustified when the tax liability of the transaction "was really a debatable matter" that was to rest only when the TUAZON case (58 SCRA 170) was finally decided or when the taxpayer relied upon a previous stand of the Bureau of Internal Revenue ( COMMISSIONER VS . REPUBLIC CEMENT CORPORATION L-3566872 10 August 1983, 124 SCRA 46). Good faith alone may not be sufficient to avoid the 25% surcharge which is designed to ensure timely compliance with the law (see LIM VS . POSADAS , 47 Phil. 460). 11 (Emphasis supplied) The last paragraph quoted is most appropriate in resolving this matter in favor of the private respondent considering the factual circumstances of this case: (1) the tax liability of the Universal Molasses Corporation rested upon the validity of the sale as to be then determined by the Sandiganbayan; and (2) the private respondent also relied upon the ruling issued by the Bureau of Internal Revenue to suspend payment of capital gains tax until the said final resolution of the Sandiganbayan. WHEREFORE, in view of the foregoing, the decision of the Court of Tax Appeals in CTA Case No. 5467 , entitled " Universal Molasses Corporation vs . Hon. Liwayway Vinzons-Chato, Commissioner, Bureau of Internal Revenue ," is AFFIRMED. SO ORDERED. Santos and * Guevara-Salonga, JJ . , concur. Footnotes * Per Office Order No. 175-00-M. 1. Promulgated on 26 March 1999, p. 27, Rollo . 2. 24 July 1996, the date of the sale reflected in the instrument was the basis used by the Commissioner in ordering Universal Molasses Corporation to pay surcharges and interest payments for its tardiness in paying the capital gains tax due upon the said sale. 3. Under the Tax Code, as amended, it is pertinently provided: " 248. CIVIL PENALTIES . (a) There shall be imposed in addition to the tax required to be paid, penalty equivalent to twenty-five percent (24%) of the amount due, in the following cases: xxx xxx xxx (3) Failure to pay the tax within the time prescribed for its payment; . . " 249. INTEREST . (A) IN GENERAL . There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by regulations, from the date prescribed for payment until the amount is fully paid. . . . In relation to this, 7 of Revenue Regulation 2-82 states: " 7. PAYMENT OF TAX AND MANNER OF FILING RETURNS . The tax imposed by 5 of these regulations shall be collected as follows: (A) Payment of tax . 1. . . . 2. Tax on gains on sales of shares stock not traded through any local stock exchange . The tax on net capital gains shall be paid by the seller on a per transaction basis upon filing the required return within 30 days following each sale or other disposition of shares of stock ." (Emphasis supplied) 4. The dissent on the other expressed a contrary view. While nonetheless premised upon the same consideration. Judge de Vera opined that the sale of the shares of stock was consummated on the date reflected in the instrument. Judge de Vera essentially saw the decision of the Sandiganbayan as having no bearing or any effect upon the perfection of the sale. From this viewpoint, the parties perfected the contract of sale on 24 July 1996, when their minds met and agreed upon the object and consideration of the sale. According to him, there was no "condition" upon which the validity of the sale depended. The approval of the sale of the shares of stock by the Sandiganbayan was not a condition precedent for the sale's perfection. Thus, whatever capital gains tax was due on the said sale, the same should have been paid within 30 days from the date reflected on the deed of sale (Annex A 29-40, Rollo ). See also quoted portions of the PETITION, infra at note 8 . 5. CTA DECISION, pp. 26-27, Rollo . 6. PETITION, p. 7-8, pp. 12-13, Rollo . 7. Hector De Leon, Comprehensive Review of Taxation, (1998), pp. 39-40. 8. Income may be received not only by physical transfer but also by constructive receipt thereof. "Income which is credited to the account of, or set apart for, a taxpayer and which may be drawn by him anytime, is subject to tax for the year during it was so credited or set apart although not yet then actually received or reduced to his possession. To constitute receipt in such a case, the income must be credited to the taxpayer without any substantial limitation or condition upon which payment is to be made." Ibid ., citing Sec. 52, Regs. No. 2, p. 40. (Emphasis supplied) 9. Justice Jose C. Vitug and Judge Ernesto D. Acosta, TAX LAW AND JURISPRUDENCE, 2nd ed., (2000), p 106. 10. Ibid ., p. 106. 11. Ibid ., pp. 323-324.