Commissioner of Internal Revenue v. Trustworthy Pawnshop, Inc.

ELEVENTH DIVISION [CA-G.R. SP No. 59250. August 29, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . TRUSTWORTHY PAWNSHOP, INC. , respondent . D E C I S I O N VELASCO , JR. , J p : This is an appeal taken from the decision dated March 7, 2000 1 of the Court of Tax Appeals in C.T.A. Case No. 5691, entitled Trustworthy Pawnshop, Inc. versus Commissioner of Internal Revenue cancelling the assessment issued by the Chief of the Assessment Division, Revenue Region No. 7, Cebu City, against the respondent for deficiency percentage tax in the amount of P2,108,335.19 for the year 1994; and from the Resolution dated May 24, 2000 2 denying petitioner's Motion for Reconsideration thereto. The facts as found by the Tax Court are as follows: "Petitioner is a domestic corporation duly engaged in the business of pawnshop business. By virtue of Revenue Memorandum Order (RMO) N o. 1 5-91 dated March 11, 1991 and Revenue Memorandum Circul ar (RMC) 4 3-91 dated May 27, 1991, which provide that "the pawnshop business is akin to the lending Investor's business activity" and should therefore be assessed the 5% percentage taxes being imposed upon Lending Investors", a demand letter and assessment notice bearing number 81-PT-13-94-97-6-073 were issued by the Chief of the Assessment Division of Revenue Region No. 7 of Cebu City assessing Petitioner for deficiency percentage tax in the amount of P2,108,335.19, inclusive of the surcharges and interest, covering the year 1994. In addition to said amount was a compromise penalty of P93,000.00. Consequently, petitioner filed an administrative protest and/or motion for reconsideration on July 4, 1997 on the grounds that: I. There is no specific provision in either the Ta x Code or the VA T Law which expressly imposes on pawnshops the 5% tax on its gross income; II. Pawnshops are widely different from lending investors which are subject to the 5% tax on gross income under the specific provision of the Tax law; III. Revenue Memorandum Order No. 1 5-91 (RMO 1 5-91) dated March 11, 1991 is no(sic) implementing any particular provision of the internal revenue laws, but is in fact a new and additional tax measure on pawnshops which only Congress may enact; IV. RMO N o. 1 5-91 is a taxation by implication that impliedly amends the T ax L aw and which is prescribed by law; and V. RMO N o. 1 5-91 which singles out pawnshops among other lending and financial operations partakes of a "class legislation". 3 Said protest has remained unacted upon, the petitioner brought up the issue to the Commissioner of Internal Revenue on March 16, 1998. On October 12, 1998, the Commissioner of Internal Revenue issued a warrant of distraint and/or levy which according to the resolution dated March 26, 1999 of the Tax Court, constituted the final decision of denial of respondent's protest. On November 11, 1998, 4 respondent filed with the tax Court a petition for review, to which petitioner filed an answer on April 14, 1999. 5 On March 7, 2000, the Tax Court rendered a decision, the dispositive portion of which reads: WHEREFORE, in view of all the foregoing, the instant petition for review is hereby GRANTED. Revenue Memorandum Order N o. 1 5-91 and Revenue Memorandum Circular N o. 4 3-91, insofar as they classify pawnshops as lending investors subject to 5% lending investor's tax is hereby declared NULL and VOID for being contrary to law and the constitution. Accordingly, Assessment Notice No. 81-PT-13-94-97-6-73, dated June 3, 1997, is likewise, hereby CANCELLED and SET ASIDE. SO ORDERED." 6 The Motion for Reconsideration filed by petitioner on March 24, 2000 to which respondent herein filed an opposition on April 4, 2000, was denied by the Tax Court on May 24, 2000, 7 hence, the filing of this petition for review. The lone issue raised by the petitioner is whether the respondent is liable for the amount of P2,108,335.19 as deficiency percentage tax for the year 1994 while the sole ground supporting the petition is that the tax court erred in holding that pawnshops are not subject to the lending investor's tax under then section 116 of the Tax Code. Petitioner contends that the tax court erred in holding that pawnshops are not subject to the lending investor's tax under then Section 116 of the Tax Code, arguing that because pawnshops "make the practice of lending money for themselves or others at interest," they are akin to lending investors as defined in Section 157 (u) of the Tax Code (before amendment by E.O. No. 273), hence they must be subjected to the percentage tax equivalent to 5% of their gross income. Such contention has no basis. Pawnshops are not subject to the lending investor's tax of 5% because they cannot be considered lending investors under Section 157 (u) of the Tax Code. Pawnshops cannot be treated as lending investors for the following reasons, viz: 1. Under the said Tax Code, prior to its amendment by Executive Order No. 273, and prior to the issuance of RMO 15-91, pawnshops and lending investors were subjected to different tax treatments. The reason why they were subjected to different tax treatments is because of the different nature of their respective businesses. 2. By their definitions alone, the two can be distinguished from each other, Section 157 (u) of the Tax Code defines a "Lending Investor" as one which includes all persons who make a practice of lending money for themselves or others at interest. 8 Section 3 of Presidential Decree No. 114 (Pawnshop Regulatory Act) defines "Pawnshop" as "a person or entity engaged in the business of lending money on personal property delivered as security for loans and shall be synonymous and may be used interchangeably, with pawnbroker or pawnbrokerage." 9 "Lending Investors" lend money at interest without provision as to the security for the loan, meaning, the transaction could either be secured or unsecured, while "pawnshops" lend money on personal property delivered as security for the loans. So, the two are different, one is secured and the other unsecured. 3. The two entities are both subjected to fixed but different tax rates. paragraph 3(dd) and (ff) of section 161 provides for the tax rates as follows: (dd) Lending Investors 1. In chartered cities and first class municipalities, one thousand pesos; 2. In second and third class municipalities, five hundred pesos; 3. In fourth and fifth class municipalities and municipal districts, two hundred pesos; Provided that lending investors who do business as such in more than one province shall pay a tax of one thousand pesos. xxx xxx xxx (ff) pawnshops, one thousand pesos." But in addition to the fixed rates, "lending investors shall also pay a tax equivalent to five per centum on their gross income ." 9-a Lending investors were imposed a graduated type of fixed taxes depending on the class of the city or municipality where they have their business, while pawnshops were differently levied a flat amount of tax. 4. The charges and interest of pawnshops are regularly by the Central Bank pursuant to P.D. 114 while the charges and interests that lending investors charge their clients are flexible and are not pegged by the Central Bank. Although as claimed by petitioner that by definition, "lending investors" and "pawnshops" being both engaged in the business of lending money, and therefore, just like the lending investors, pawnshops must be subjected to the five per cent tax on their gross incomes, it admitted though that despite repeated questions asked regarding the issue, the Commissioner of Internal Revenue in past several BIR rulings had time and again ruled that "lending investors as contemplated in Section 157(u) do not include persons engaged in pawnshop business. Hence, in order to subject the gross income of pawnshops to the 5% lending investor's tax, the BIR issued on March 11, 1991, RMO 15-91. Said circular provides: "This Circular subjects to the 5% lending investor's tax the gross income of pawnshops pursuant to Section 116 of the Ta x Co de, and it thus revokes BIR Ruling N os. 6-9 0, and VAT Ruling Nos. 22-9 0 and 6 7-90. In order to have a uniform cut-off date, avoid unfairness on the part of taxpayers if they are required to pay the tax on past transactions, and so as to give meaning to the express provisions of Section 246 of the Ta x Co de, pawnshop owners or operators shall become liable to the lending investor's tax on their gross income beginning January 1, 1991. . . . Since pawnshops are considered as lending investors effective January 1, 1991, they also become subject to documentary stamp taxes prescribed in Title VII of the Ta x Co de. BIR Ruling N o. 3 25-88 dated July 13, 1998 is hereby revoked." 10 Thus, through the issuance of the said RMO 15-91, and relying on its authority under Sections 245 and 246 of the Tax Code, as amended, "to make rulings or opinions in connection with the implementation of the Tax Code provisions, and to revoke, modify or reverse the same," the BIR revoked BIR Ruling No. 06-90, VAT Ruling Nos. 067-90 and 022-90 all of which exempted pawnshops from the 5% lending investor's tax and instead, subjected pawnshops to the lending investor's tax of 5% on their gross income. We just cannot agree with petitioner. To repeat, pawnshops are not subjected to the lending investor's 5% tax on their gross income as they are not lending investors. After a review of the pleadings and decisions on hand, the Court accords great respect and weight to the findings of the tax court, thus: "We are in a situation where to adopt the literal import of the provisions of Section 157(u) in relation to Section 116 of the Ta x Co de, as amended, would lead to plain absurdity, injustice, contradictions and impairment of Constitutional limitations. . . . If We go by the contention that pawnshops are lending investors, then Congress would have been mistaken in treating the two separately under paragraphs (dd) and (ff) of Section 161 of the T ax Co de, as amended, supra. Logic simply dictates that if by prior definition under Section 157(u) of said Code pawnshops and lending investors are of the same class, then there is no rational basis for differentiating them under one heading later, except for the fact that they are dissimilar as tax subjects. Further analyzing said Section 161, supra, it appears that lending investors were imposed a graduated type of fixed rates depending on the class of the city or municipality involved while pawnshops were differently levied a flat amount of tax. This particular observation bolster (sic) Our position that pawnshops are not similarly situated as lending investors. Congress would not have intended otherwise, because the act of segregating and imposing upon them unequal amount of taxes would transgress the fundamental rule on taxation on uniformity or equality enshrined under par. 1. Section 28 of Article VI of our Constitution. The "rule requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities (Juan Luna Subdivision vs. Sarmiento, 91 Phil. 371). It has also been interpreted to mean that all taxable articles or kinds of property of the same class shall be taxed at the same rate. (City of Baguio vs. de Leon, 25 SCRA 938). Verily, Congress is presumed to have acted in full knowledge of this particular constitutional limitation when it classified pawnshops apart from lending investors. In the same vein, We take note of the fact that there are additional provisions of the Ta x Co de, as amended, which treats of other persons or entities also engaged in the practice of lending money at interest differently from a lending investor. We are referring to banks, non-bank financial intermediaries and finance companies who are in the lending business earning interest too, yet, are classified separately and imposed a graduated type of rate of taxes (5%, 3% and 0%) under Section 119 and 120 of said Code. Again, if We go by definition and the rule on uniformity, banks, non-bank financial intermediaries and finance companies are supposed to be simply imposed a tax rate of 5% on their gross income because they do meet the criteria of what a lending investor should be. The fact shows, however, that they are treated differently. Moreover, both Section 119 and 120 of the T ax Co de, as amended, carry a proviso granting the Commissioner of the Bureau of Internal Revenue of the right to impose the same taxes on persons performing similar banking or financing activities, as the case may be, while Section 116 of the same Code governing lending investors has none of the same. If the legislature intended to include other persons entities engaged in similar lending activities, such as pawnshops, under the term "lending investors", it would have conveniently added to the same proviso. In the absence of such proviso, it would seem thus that lending investors are persons or entities of their own class, without any need for the Commissioner to classify other persons or entities engaged in similar lending activities. What We have presented so far in the preceding discussion succinctly demonstrates the erroneous decision reached by Respondent Commissioner in classifying pawnshops as lending investors subject to the 5% lending investor's tax. Inevitably, We reach the conclusion that the term "lending investor" as defined in Section 157(u) should be taken in isolation and should serve no other purpose than to simply clarify what a "lending investor" is all about. Indeed, as pointed out by the Petitioner, there is no special law governing lending investors. Without any legal or dictionary meaning of what a lending investor is, this lexicological vacuum could have very well been the sole justification for the existence of said definition. Even if We assume for the sake of argument that the stance of Respondent Commissioner has come support in fact and in law. Our pronouncements herein would still leave so much doubt when the same is put to the crucible of judicial scrutiny. In this light, the correct interpretation should still be in favor of the Petitioner. As was held in the case of Commissioner of Internal Re venue vs. Fi reman's Fund Insurance Company, 148 SCRA 315, citing the case of Manila Railr oad Co. vs. Col lector of Customs, 52 Phil. 950 (1929), to wit: "It is a general rule in the interpretation of statutes levying taxes or duties, that in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens, because burdens are not to be imposed, nor presumed to be imposed beyond what statutes expressly and clearly import." 11 The aforequoted ruling is even reinforced by an earlier Decision of this Court in the case of Commissioner of Internal Revenue versus Hon. Andres B. Reyes, Jr., et al., CA-G.R. SP No. 28824, promulgated on December 23, 1993, wherein it was ruled: ". . . Revenue Circulars Nos. 1 5-91 and 4 3-91 not implementing rules but are new and additional measures which only congress is empowered to impose. Section 245 of the T ax Co de has limited or confined petitioner's power to issuing rules and regulations to implement or carry into effect the provision of the Code in the enforcement of taxes provided therein, and petitioner cannot impose additional taxes not provided therein. Under the Constitution, the power to tax is solely vested in Congress. In issuing subject Revenue Circulars imposing new taxes against pawnshop, petitioner arrogated unto himself legislative powers, with grave abuse of discretion and in excess of jurisdiction. . . . Contrary to petitioner's posture, a pawnshop is not a lending investor, and therefore it is not subject to percentage tax. Pawnshops and their operation are strictly regulated by the Central Bank, pursuant to P. D. 1 14. the charges and interest rates imposed by pawnshops are prescribed by the Central bank to protect client's title. On the other hand, there is no law governing lending investors and the charges and interest they impose are flexible, not pegged by the Central Bank. In this case, petitioner seeks to justify the Revenue Circulars in questions on the ground that the business of lending money by the pawnshop is akin to a lending investor who are subject to percentage tax, hence, the pawnshop should also be subjected to percentage tax. This is taxation by implication which is legally prescribed. . . . " 12 The findings of the Court of Tax Appeals, being a highly specialized body specifically created for the purpose of receiving tax cases, will not ordinarily be reviewed absent a showing of gross error or abuse on its part. (Philippine Refining Company vs. Court of Appeals, 256 SCRA 667) Sans any error or grave abuse of discretion on its part, the assailed decision of the tax Court must be upheld. WHEREFORE, the Petition for Review is DISMISSED for lack of merit. SO ORDERED. Reyes and Enriquez, Jr., JJ ., concur. Footnotes 1. Rollo , pp. 23-33. 2. Rollo, p. 34. 3. Rollo, pp. 10-11. 4. Rollo, p. 35. 5. Rollo, p. 45. 6. Rollo, p. 33. 7. Rollo, p. 34. 8. Section 157(u) NIRC (1986). 9. Section 3, P.D. 114. 9-a. Section 209, as amended by P.D. 1739. 10. RMO 15-91. 11. Decision, pp. 6-9, Rollo, pp. 28-31. 12. CTA Decision, p. 10, Rollo, p. 32.