Commissioner of Internal Revenue v. Spouses Go

FOURTH DIVISION [CA-G.R. SP No. 57148. September 19, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . SPOUSES FRANCIS GO and EDNA SAN GABRIEL GO , respondents . R E S O L U T I O N CRUZ , J p : Spouses Francis Go and Edna San Gabriel Go (or "respondents") were the registered owners of a house and lot (or "subject property") situated at Xavierville Subdivision, Loyola Heights, Quezon City, which they mortgaged to Equitable Banking Corporation (or "Equitable") to secure an obligation. Because of default in their obligation, Equitable extrajudicially foreclosed the mortgage. The extrajudicial foreclosure sale was held on January 13, 1998. Being the highest bidder, a certificate of sale of even date was issued to Equitable and the same was registered on May 13, 1998. On June 3, 1998, respondents redeemed the subject property. Included in the redemption price were the amounts of P1,075,056.75 and P268,770.00 representing the capital gains tax and documentary stamp tax, respectively, paid by Equitable to the Bureau of Internal Revenue (or "BIR") an February 5, 1998. On January 26, 1999, respondents filed a claim with the BIR for refund of the capital gains and documentary stamp taxes they remitted to Equitable as part of the redemption price. Without awaiting the reply of the Commissioner of Internal Revenue (or "petitioner"), respondents elevated their case to the Court of Tax Appeals (or "CTA") on April 26, 1999. On May 31, 1999, however, they received a letter from petitioner under date of February 15, 1999 advising that their claim for refund had been denied with finality. In a decision dated December 1, 1999, the CTA ruled in favor of respondents, viz : "WHEREFORE, in view of all the foregoing, the instant Petition for Review is GRANTED. [Petitioner] is hereby ORDERED to REFUND to the [respondents] the amount of P1,075,056.75 and P268,770.00 representing capital gains tax and documentary stamp tax, respectively, paid on the foreclosure sale of the subject properties immediately." Hence, this petition for review, faulting the CTA for allowing respondents' claim for refund on the basis of Revenue Regulation No 4-99 (or "RR 4-99") dated March 9, 1999. Petitioner asserts that at the time of the extrajudicial foreclosure sale (on January 13, 1998), the governing rule on capital gains and documentary stamp taxes was Revenue Memorandum Order No. 6-92 dated January 15, 1992 (or "RMO 6-92"); and that, consequently, RMO 6-92 not RR 4-99 should apply. In support of his claim that RR 4-99 cannot be given retroactive effect, petitioner cites Revenue Memorandum Circular No. 55-99 (or "RMC 55-99") which provides that "no tax credit or refund of payments made prior to RR 4-99 either of capital gains or documentary stamp taxes on covered transactions, may be entertained, allowed or granted." On the other hand, respondents contend that no capital gains tax was due as they earned no income nor derived capital gain from the extrajudicial foreclosure sale of the subject property; and that RMO 6-92 is in conflict with petitioner's prior issuances, i.e., RMO 16-88 and 27-89, as well as RR 4-99, which provide that capital gains tax on extrajudicial foreclosure sales becomes due only upon expiration of the one-year period provided for in Act No. 3135, as amended, without redemption being made. The petition is devoid a merit. RMO 6-92 pertinently reads: "Considering that in extra-judicial foreclosure sales under Act No. 3 135 as amended by Act No. 4 118, the creditor-financial institution (bank, finance and insurance companies) is the statutory seller, representing the owner-mortgagor of the real property, the said financial institution becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. The bank, finance and insurance companies, however, may get a reimbursement or recover the capital gains tax paid, if the right of redemption is exercised by the debtor-mortgagor or when the property is sold to any party whatsoever." On the other hand, RR 4-99, in part, provides: "Sec. 3. Capital Gains Tax . (1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale a transfer of real property was realized. . . . Sec. 4. Documentary Stamp Tax . (1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration." Petitioner contends that tax rules and regulations, such as RR 4-99, may not be given retroactive effect. The contention is not entirely correct. Sec. 246 as the National Internal Revenue Code (or "NIRC") of 1997, provides: "Sec. 246. Non-Retroactivity of Rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers , except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his return or any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith." (Emphasis supplied) Retroactive application of RR 4-99 will benefit, rather than prejudice, respondents because, under said regulation, they would be entitled to a refund which is unavailable under RMO 6-92. Moreover, respondents do not fall under any of the exceptions enumerated in Sec. 246, NIRC. Consequently, the non-retroactivity rule cannot be invoked in the instant case. The case at bench is similar to Commissioner of Internal Revenue vs. Burroughs Limited (142 SCRA 324) where a subsequent revenue ruling revoked and/or repealed an earlier one. In the cited case, however, the subsequent ruling was not retroactively applied because it would have required the taxpayer to pay more in branch profit remittance taxes. Worth noting is that RR 4-99 is in the nature of a curative statute because it clarified the rules on payment of capital gains and documentary stamp taxes in extrajudicial foreclosure sale of capital assets initiated by financial institutions. And settled is the rule that curative statutes may be applied retroactively to pending actions (Manantan vs. Court of Appeals, G.R. No. 107125, January 29, 2001). To illustrate, under RMO 6-92, the foreclosing bank is treated as a "statutory seller", making the transaction a sale involving the transfer of title over the foreclosed property. However, under Sec. 63 of Pres. Decree No. 1529, otherwise known as the Property Registration Decree, "[w]here the right of redemption exists, the certificate of title of the mortgagor shall not be cancelled , but the certificate of sale and the order confirming the sale shall be registered by a brief memorandum thereof made by the Register of Deeds upon the certificate of title" (Emphasis supplied). Thus, to clarify the rule laid down in RMO No 6-92, then Secretary of Finance Edgardo B. Espiritu issued RR 4-99, Sec. 2 of which pertinently reads: "Sec. 2. FORECLOSURE OF MORTGAGE PROVISION UNDER PRESIDENTIAL DE CREE NO. 15 29, OTHERWISE KNOWN AS 'PROPER TY REGISTRATION DE CREE. . . . It is clear . . . that where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet even if the property had already been subjected to foreclosure sale, BUT INSTEAD only a brief memorandum shall be annotated at the back of the certificate of title, and the cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor shall redeem or not the mortgaged property within one year from the issuance of the certificate of sale. Thus, no transfer of title to the highest bidder can be effected yet until and after the lapse of the one-year period from the issuance of the said certificate of sale. " (Emphasis supplied) Finally, respondents' entitlement to a refund of the subject taxes can not be nullified by RMC 55-99 which provides for the prospective application of RR 4-99. Basic is the rule that administrative or executive acts, orders and regulations shall be valid only when not contrary to law or the Constitution (Eastern Shipping Lines, Inc. vs. Court of Appeals, 291 SCRA 485). Since RMC No. 55-99 runs counter to the policy laid down in Sec. 246 of the NIRC, i.e., a rule modifying a previous one may be retroactively applied if beneficial to the taxpayer, said Circular does not operate in the case at bench. WHEREFORE, for lack of merit, the petition is DISMISSED while the assailed decision of the Court of Tax Appeals is AFFIRMED en toto. No pronouncement as to costs. SO ORDERED. Mabutas, Jr. and Barrios, JJ . , concur.