Far East Bank & Trust Company v. Commissioner of Internal Revenue, et al.

EIGHTH DIVISION [CA-G.R. SP No. 56773. January 31, 2006.] FAR EAST BANK & TRUST COMPANY , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS , respondents . D E C I S I O N SUNDIAM , J p : This is an appeal by way of Petition for Review from the Decision [ Rollo , pp. 22-30], dated October 4, 1999, and Resolution [ Rollo , pp. 32-33], dated December 16, 1999, issued by the Court of Tax Appeals [CTA] in C.T.A. Case No. 5487. The dispositive portion of the assailed Decision reads: "WHEREFORE, in view of all the foregoing, the instant petition for review is hereby DENIED FOR LACK OF MERIT" [ Ibid, p. 30 ]; and the dispositive portion of the assailed Resolution reads: "WHEREFORE, in view of the foregoing, Petitioner's Motion for New Trial is hereby DENIED for lack of merit. SO ORDERED" [ Ibid, p. 33 ]. The antecedents, as borne by the records, are as follows: Petitioner Far East Bank & Trust Company ["Bank"] is a domestic corporation organized and existing under and by virtue of the Philippine laws. It is principally engaged in the business of corporate banking and foreign currency transactions. Some of its income is subject to the expanded withholding tax under Revenue Regulations No. 6-85 which is creditable against its income tax liability under Section 24 of the Tax Code [ Record, p. 1 ]. On April 10, 1995, petitioner bank separately filed with the Bureau of Internal Revenue ["BIR"] two (2) Corporate Annual Income Tax Returns: one for its Corporate Banking Unit (CBU) and another one, for its Foreign Currency Deposit Unit (FCDU), for the calendar year ending December 31, 1994. The CBU's income tax return, however, is already a consolidation of petitioner bank's overall income tax liability for 1994, showing a refundable income tax of Php 12,682,864.00 detailed as follows: "FCDU CBU Gross Income P13,319,068 5,348,080.630 Less: Deductions 1,397,157 5,432,828.719 Net Income 11,921,911 [84,748,089] Tax Rate 35% 35% Income Tax Due Thereon 4,172,669.00 NIL Consolidated Tax due for Both CBU and FCDU P4,172,669.00 Operations Less: Quarterly Income Tax Payments CBU-1st Quarter 633,085 2nd Quarter 11,844,333 FCDU-1st Quarter 955,280 2nd Quarter 1,104,942 Less: Creditable Taxes Withheld at Source 2,3173,893 Refundable Income Tax [P12,682,864.00]" [see Rollo, pp. 22-23; Record, pp.82; 106]. Pursuant to Section 69 of the National Internal Revenue Code (NIRC), to wit: "Sec. 69. Final Adjustment Return . Every corporation liable to pay tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar year or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either: (a) Pay the tax still due; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year"[Emphasis Ours]. petitioner Bank carried over and applied its excess income tax credit for 1994 the amount of P12,682,864.00 against its income tax liability for the succeeding taxable year ending December 31, 1995 [ Rollo, p. 24 ]. Petitioner Bank's 1995 Annual Income Tax Return filed on April 15, 1996, showed a total overpaid income tax in the amount of P17,443,133.00 since an additional prior year's excess income tax credit alleged withheld in 1994 but booked only in 1995 was included, thus: 1uptax06 FCDU CBU Gross Income P16,531,038 7,076,497,628 Less: Deductions 1,327,549 7,086,821,354 Net Income 15,203,539 [10,423,728] Tax Rate 35% 35% Income Tax Due 5,321,239 NIL Thereon Consolidated Tax due for Both CBU and FCDU P5,321,239 Operations Less: Prior year's (1994) excess 12,682,864 income tax credit Additional prior year's excess income tax credit 6,283,484 Creditable Taxes Withheld at source 3,798,024 Refundable Income Tax [P17,443,133.00]" [see Rollo, p. 24] Petitioner Bank opted to carry over to the next taxable year (1996) its 1995 excess creditable withholding tax in the amount of P3,798,024.00 only but sought a tax refund for the remaining unutilized creditable withholding tax in the amount of P13,645,109.00. CacEID Through a letter, dated May 8, 1996, petitioner Bank filed on May 17, 1996, a claim for the refund of the amount of P13,645,109.00 with the Bureau of Internal Revenue. There being no action taken by the Bureau of Internal Revenue regarding the letter-claim for refund, on April 8, 1997, a petition for review was elevated to the Court of Tax Appeals [CTA] [ see Rollo, p. 25 ]. In his Answer to the petition, respondent Commissioner of Internal Revenue by way of Special and Affirmative Defense alleged, inter alia , that: "7. Petitioner's allegation that it overpaid its income tax for the years under review does not ipso facto warrant the refund. Petitioner must prove that it is indeed entitled to a refund under the Tax Code and its implementing rules and regulations. Moreover, the same must be supported by evidence. Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise ( Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc ., 145 SCRA 671 [1986]). All presumptions are in favor of the correctness of tax assessments ( Sy Po vs. Court of Tax Appeals, et al ., 164 SCRA 524, 530 [1988]; Collector of Internal Revenue vs. Bohol Land Transportation Co ., 58 O.G. 2407 [1960]. xxx xxx xxx 9. Claims for tax refund are construed strictly against the claimant as it partakes of the nature of an exemption from tax and it is incumbent upon the petitioner to prove that it is entitled thereto under the law. Failure to prove the same is fatal to its claim for tax refund; Exemption from taxation are highly disfavored in law and he who claims exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications ( Asiatic Petroleum Co. vs. Llamas , 49 Phil. 466 cited in Collector vs. Manila Jockey Club Inc. , L-8755, March 23, 1956; Davao Light and Power Co., Inc. vs. Com. Of Customs , L-28731, March 29, 1972). 10. . . . The amount of P13,645,109.00 was not illegally or erroneously collected, hence, the petition for review has no basis. . . . In this case, petitioner failed to meet the burden of showing that the tax claimed was erroneously or illegally collected [ Record, pp. 27-33 ]. Counsel for respondent Commissioner of Internal Revenue manifested during the hearing of January 14, 1998, that he is submitting the case for submission in view of the fact that he has no evidence to present nor records to submit relative to this case [ see Rollo, p. 28 ]. On October 4, 1999, a Decision was rendered by public respondent CTA finding petitioner Bank to have failed to satisfy all the requirements set forth in the Tax Code in order to be entitled to the tax refund being claimed, ruling thus: "xxx xxx xxx Petitioner's claim for refund filed with the Bureau of Internal Revenue on May 17, 1996 as well as its Petition for Review filed with this Court in April 8, 1997 are both within the two-year period from the date of the filing of the return on April 10, 1995. Petitioner likewise submitted various certificates of Creditable Tax Withheld at Source as well as Monthly Remittance Returns of Income Taxes Withheld to establish the fact of withholding. However, an examination of these certificates and returns would reveal that the income upon which these taxes were withheld were not included in the return of the Petitioner . Note that the Certificates of Creditable Tax Withheld at Source submitted by Petitioner pertain to rentals of real property while the Monthly Remittance Returns of Income Taxes Withheld refer to sales of real property . But, if we are to look at Schedules 3, 4 and 5 of the Annual Income Tax Return of Petitioner for 1994 (Exhibit "A") , there was no showing that the Rental Income and Income from Sale of Real property were included as part of the gross income appearing in Section A of the sold return . In fact, under the said schedules, the phrase "NOT APPLICABLE" was printed by Petitioner. Verily, the income of Petitioner coming from rent and sale of real property upon which the creditable taxes withheld were based were not duly reflected . As to the certifications issued by the Petitioner (Exh. UU) the same cannot be considered in the absence of the requisite Certificates of Creditable Tax Withheld at Source. Based on the foregoing, Petitioner has failed to comply with two essential requirements for a valid claim for refund. Consequently, the same cannot be given due course" [ Rollo, pp. 29-30 ]. Thereafter, petitioner Bank filed a Motion for New Trial invoking the paramount interest of justice and equity to allow it to present additional evidence to fully support the claim for refund [ Record, pp. 56-528 ]. On December 16, 1999, respondent CTA rendered a Resolution denying petitioner Bank's motion for new trial. Hence this instant appeal via petition for review, with petitioner Bank raising as issues the following: "I. WHETHER OR NOT THE RESPONDENT COURT OF TAX APPEALS ERRED IN DENYING THE ENTIRE CLAIM FOR REFUND DESPITE THE DOCUMENTARY EVIDENCE PRESENTED BY THE PETITIONER IN COMPLIANCE WITH THE REQUIREMENTS SET BY THE RESPONDENT COURT IN CASES OF SIMILAR NATURE; AND II. WHETHER OR NOT THE RESPONDENT COURT OF TAX APPEALS ERRED IN DENYING PETITIONER'S MOTION FOR NEW TRIAL DESPITE THE PARAMOUNT INTEREST OF JUSTICE AND EQUITY ATTENDING PETITIONER'S CASE" [ Rollo, p. 8 ]. We find the petition meritorious. There is no dispute that tax refunds are in the nature of tax exemptions and as such, they are to be construed strictissimi juris against the person or entity claiming the exemption. In other words, the burden of proof rests upon the taxpayer, and in this case, petitioner Bank, to established by sufficient and competent evidence its entitlement to the claim for refund. In resolving the issues at hand, We will not depart from such principle. The mechanics of a tax refund are laid down in Section 8 of Rev. Regulation No. 13-78, which expressly provides that: "Section 8. Claims for tax credit or refund . Claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement, duly issued by the payor to the payee (BIR Form No. 1743-A) showing the amount paid and the amount of tax withheld therefrom." And in Section 204 (3) of the National Internal Revenue Code (NIRC), it is additionally provided that: "Sec. 204. Authority of the Commissioner to compromise, abate, and refund/credit taxes . The Commissioner may xxx xxx xxx (3) Credit or refund taxes erroneously or illegally received, penalties imposed without authority, . . . . No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner claim for credit or refund within the two (2) years after the payment of the tax or penalty ." Prescinding from the foregoing, certain requisites have to be met in order for a taxpayer to be entitled to the tax refund being claimed, to wit: 1. that the claim for refund was filed within the two (2) year period prescribed under Section 204 (3) of the National Internal Revenue Code; 2. that the income upon which the taxes were withheld were included in the return of the recipient and declared as part of the gross income; and 3. that the fact of withholding is established by a copy of statement (BIR form 1743.1) duly issued by the payor to the payee, showing the amount paid and the amount of tax withheld therefrom. In its assailed Decision, dated October 4, 1999, respondent CTA denied petitioner's claim for refund for having failed to show " that the income upon which these taxes were withheld were not included in the return of the petitioner " [ see Decision, Rollo, p. 30 ]. Respondent CTA specifically pointed out that the rental income and income from sale of real property by petitioner Bank were not included as part of the gross income appearing in Section A of the return. DaTICE While respondent CTA, in its assailed Decision, acknowledged that petitioner Bank timely filed the present claim for refund within the prescribed two (2) year period, however, the various certificates of Creditable Tax Withheld at source as well as the Monthly Remittance Returns [ see Exhibits "N" to "TT-65", Record, pp. 185-455 ] presented by petitioner Bank to establish the fact of withholding were disregarded and proceeded to state that petitioner has failed to comply with the two essential requisites for a valid claim for refund. We disagree with respondent's CTA's findings. In the case of Citibank, N.A. vs. Court of Appeals , (280 SCRA 459) , the Supreme Court held that: "a refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding taxes and the fact of withholding. However, a detailed proof of the truthfulness of each and every item in the income tax return is not required. That function is lodged in the commissioner of internal revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return . . . . . . . The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts stated therein are true and correct . In fact, even without petitioner's tax claim, the commissioner can proceed to examine the books, records of petitioner-bank, or any data which may be relevant or material in accordance with Section 16 of the present NIRC" [Emphasis supplied]. In the case at bench, the BIR examined petitioner Bank's Corporate Annual Income Tax Returns for the years 1994 and 1995 when they were filed on April 10, 1995 and April 15, 1996 respectively. Presumably, the BIR found no false declaration in them because it did not allege any false declaration thereof in its Answer (to the petition for review) filed before respondent CTA. Nowhere in the Answer, did the BIR dispute the amount of tax refund being claimed by petitioner Bank as inaccurate or erroneous. In fact, the reason given by the BIR (in its Answer to the petition for review) why the claimed tax refund should be denied was that ". . . the amount of P13,645,109.00 was not illegally or erroneously collected, hence, the petition for review has no basis " [ see Record, p. 32 ]. The amount of P17,443,133 reflected as refundable income tax in petitioner Bank's Corporate Annual Income Tax Return for the year 1995 was not disputed by the BIR to be inaccurate because there were certain income not included in the return of the petitioner. Verily, this leads Us to a conclusion that petitioner Bank's Corporate Annual Income Tax Returns submitted were accepted as regular and even accurate by the BIR. Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked to make an examination of returns and assess the correct amount of tax, to wit: "Sec. 16. Power of the Commissioner to make assessment and prescribe additional requirements for tax administration and enforcement. (a) After a return is filed as required under the provisions of this Code, the Commissioner shall examine it and assess the correct amount of tax . . . ." which the respondent Commissioner undeniably failed to do. Moreover, noteworthy is the fact that during the hearing of the petition for review before the CTA, respondent Commissioner of the BIR submitted the case for decision "in view of the fact that he has no evidence to present nor records to submit relative to the case" [ see Rollo, p. 28 ]. In the case of Commissioner of Internal Revenue vs. TMX Sales, Inc., (205 SCRA 184) , the Supreme Court also held that: "Furthermore, Section 321 (now Section 232) of the National Internal Revenue Code requires that books of account of companies or persons with gross quarterly sales or earnings exceeding Twenty Five Thousand Pesos (P25,000.00) be audited and examined yearly by an independent Certified Public Accountant and their income tax returns be accompanied by certified balance sheets, profit and loss statements, schedules listing income producing properties and the corresponding incomes therefrom and other related statements . It is generally recognized that before an accountant can make a certification on the financial statements or render an auditor's opinion, an audit of the books of accounts has to be conducted in accordance with generally accepted auditing standards. Since the audit, as required by Section 321 (now Section 232) of the Tax Code is to be conducted yearly, then it the Final Adjustment Return, where the figures of the gross receipts and deductions have been audited and adjusted, that is truly reflective of the results of the operations of a business enterprise" [Emphasis supplied]. Thus, although it is a fact that petitioner Bank failed to indicate the said income payments under the appropriate Schedules 3, 4 and 5 of Section C of its 1994 Annual Income Tax Return (Exhibit "A"), however, We give credence to petitioner Bank's assertion that it reported the said income payments as part of its gross income when it included the same as part of the "Other Income", "Trust Income", and "Interest Income" stated in the Schedule of Income (referred to as an attachment in Section C of Exhibit "A", see Record, pp. 87; 101) and in the 1994 audited Financial Statements (FS) supporting Petitioner's 1994 Annual Corporate Income Tax Return. The reason why the phrase "NOT APPLICABLE" was indicated in schedules 3, 4 and 5 of Section C of Petitioner's 1994 Annual Income Tax Return is due to the fact that petitioner Bank already reported the subject rental income and income from sale of real property in the Schedule of Income under the headings "Other Income/Earnings", "Trust Income" and "Interest Income." Therefore, petitioner Bank still complied with the second requirement that the income upon which the taxes were withheld are included in the return as part of the gross income. Parenthetically, the Tax Code does not prohibit the taxpayer from classifying the income from sale of real properties, rental income, and trust income as "Other Income" for purposes of reporting the said income in the Annual Income Tax Return. What is only required is that the taxpayer must report it as part of its gross income for the year which petitioner Bank did. Furthermore, the 1994 Financial Statements submitted as an attachment to the 1994 Corporate Annual Income Tax Return and thereby forming as an integral part thereof is duly audited by an independent Certified Public Accountant ( see Record, pp. 85, 107 ). Hence, petitioner Bank should not be penalized by denying its present claim merely due to the fact that it failed to indicate the questioned income payments in the appropriate schedules provided in Exhibit "A" (Corporate annual Income Tax Return). Especially when petitioner Bank had established the fact of withholding and remittance to the BIR of the creditable withholding taxes sought to be refunded ( see Exhibits "N" to "TT", Record, pp. 185-390 ). Petitioner Bank's various documentary evidences showing that it had satisfied all the requirements under the Tax Code vis--vis the Bureau of Internal Revenue's failure to adduce any evidence in support of their denial of the claim, petitioner Bank should, therefore, be granted the present claim for refund. Having ruled that petitioner Bank had established its right to claimed tax refund, We need not dwell on the second issue for having been rendered moot and academic. In conclusion, We deem it appropriate to quote Mr. Justice (now Chief Justice) Artemio Panganiban in the case of BPI-Family Savings Bank, Inc. vs. CA, (330 SCRA 507) when he said that: "Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms, however, exalted, should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so it must apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness." WHEREFORE, premises considered, the petition is hereby GRANTED, and the assailed CTA Decision is hereby REVERSED and SET-ASIDE. caTIDE SO ORDERED. Villarama, Jr. and Dimaampao, JJ., concur.