Commissioner of Internal Revenue v. Exquisite Pawnshop and Jewelry, Inc.

FIRST DIVISION [CA-G.R. SP No. 59401. September 30, 2002.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs .EXQUISITE PAWNSHOP AND JEWELRY, INC. , respondent . D E C I S I O N ABESAMIS , J p : This is a Petition for Review of the Decision of the Court of Tax Appeals, dated April 24, 2000, in CTA Case No. 5741, canceling the assessment issued against the respondent for the 5% deficiency lending investor's tax in the amount of P649,255.49 for the year 1995 and from the Resolution dated June 9, 2000, denying the petitioner's motion for reconsideration. The pertinent facts as aptly summarized by the Tax Court are as follows: "On March 11, 1991 and May 27, 1991, the then Commissioner of Internal Revenue Jose U. Ong issued Revenue Memorandum Order (RMO) No. 15-91 and Revenue Memorandum Circular No. 43-91 subjecting all pawnshop to a five (5%) percent lending investor's tax applying Section 116 of the Tax Code which provides, thus: "Sec. 116. Percentage tax on dealers in securities; lending investors . ...Lending Investors shall pay a tax equivalent to five (5%) per cent of their gross income.' Pursuant to the said RMO 15-91 and RMC 43-91, Respondent Revenue Regional Director for Revenue Region No. 13, through its Assessment Division, issued to petitioner a Pre-Assessment Notice dated April 2, 1998, with an attached Computation of Business' Tax Deficiency for the year 1995 representing the five (5%) percent lending investors' tax. On May 25, 1998, petitioner received Assessment Notice No. 80-PT-13-96-98-5-0, together with a letter showing the details of the assessment dated April 20, 1998, demanding payment of the sum of P649,255.49, inclusive of interest and surcharge. Petitioner then filed a formal protest on June 17, 1998 contesting said assessment, thus: xxx xxx xxx 'Your letter mentions about a Court of Appeals case. Please take administrative notice that the case you are referring to is entitled and docketed as " Commissioner of Internal Revenue vs. Hon. Andres B. Reyes, Jr.,et al., CA-G.R. SP No. 28824," Court of Appeals Metro Manila. It is correct to state that in such Decision of the Court of Appeals ruled that a Pawnshop is not a Lending Investor and a Pawn Ticket is not liable to pay documentary stamp tax. On the basis of such ruling, RMO No. 15-91 and RMC No. 43-91 providing liabilities for payment of these taxes were considered null and void. This Formal Tax Protest is made therefore on the basis of the arguments submitted by the aggrieved taxpayer in that case as well as the findings of facts and law cited in such Decision. Our client adopts substantially all arguments presented thereat, to wit: 1. Lending Investor specified and defined under the tax code is not a pawnshop. Neither is a pawnshop defined to include a Lending Investor. This fact is clearly established in Section 192 of the National Internal Revenue Code, as amended by Presidential Decree No. 1739 where a Lending Investor is treated separately from Pawnshop in the assessment of "Other Fixed Taxes". It is undisputed that Pawnshops are not mentioned under Section 209 of the NIRC, as amended by President (sic) Decree No. 1739, when said proviso imposed Percentage Taxes on Dealers in Securities and Lending Investors. Not being mentioned, Pawnshops are therefore not subject to percentage taxes now sought to be collected in the aforecited Assessment Notice and Demand. The reason that Pawnshop is treated differently from a Lending Investor certainly lies on the fact that Pawnshop Operations are refulated (sic), monitored and supervised strictly by the Central Bank pursuant to Pawnshop Regulatory Act which is Presidential Decree No. 114. What surely prompted the law to hold a tight protective grip on the lending public from pawnshop operations could be the fact that mostly only small borrowers are the clients of these pawnshops. Conversely, there is no law applicable at the moment governing Lending Investors. Lending Investors' rates of interests are not fixed or pegged by the Central Bank and their transactions enjoy so much freedom and flexibility. 2. The Internal Revenue Commission has no authority to create and impose whatever taxes. Only the Legislative Branch of the Government is empowered to do so. If the Commission does so, it usurps an authority which belongs to another instrumentality of the government. BIR Circulars are supposed to be issued to implement and enforce and these ONLY tax laws duly mandated by Congress. Unfortunately, Revenue Circulars Nos. 15-91 and 43-91 no longer simply enforce or implement a tax law. These questioned Circulars actually have illegally created a New and/or Additional Tax Law imposing tax liabilities on Pawnshops. 3. That decision in the case of " Commissioner of Internal Revenue vs. Honorable Reyes ", supra ,being a Decision rendered by the Court of Appeals a collegiate or superior court partakes of the nature of a law of the land. Thus, said decision, unless reversed by the Supreme Court, has the effect of nullifying the questioned Revenue Memorandum Circulars under which the Bureau is imposing due tax. Respondent Revenue Regional Director, in a letter dated February 3, 1999, and received by the Petitioner on February 10, 1999, denied the protest and upheld the propriety of the assessment of the 5% lending investors' tax by stating that in BIR Ruling No. 221-91 dated October 30, 1991, the definition of the term "Lending Investor" under Section 194(u) [should be Section 157(u)] includes "all persons who make a practice of lending money for themselves or others at interest," hence, encompasses the activity of a pawnshop operator. On March 12, 1999, the instant petition was filed by Petitioner and raised the following arguments: 1) There is no specific provision in either the Tax Code or the VAT law which expressly imposes on pawnshops the 5% tax on its gross income. 2) Pawnshops are widely different from lending investors which are subject to 5% tax on gross income under the specific provisions of law. 3) The law is clear that a pawn ticket is not subject to documentary stamp tax. 4) RMO No. 15-91 and RMC No. 43-91 are null and void, for the following reasons: a) RMO No. 15-91 and RMC No. 43-91 are not enforcing any particular provision of the internal revenue laws, but is legislating a new and additional tax measure on pawnshops. b) The Commissioner of Internal Revenue (CIR),in the guise of regulation through the issuance of RMO No. 15-91 and RMC 43-91, has usurped the power conferred only upon Congress, thereby making said issuances null and void. 5) The enforcement/implementation of RMO No. 15-91 and RMC No. 43-91, must be held in abeyance pending the decision of the Supreme Court in CIR vs. Court of Appeals, et al. ,G.R. No. 113459. On the other hand, Respondent claimed, by way of Special and Affirmative Defenses, that: DTEIaC xxx xxx xxx 7) Under the Tax Code, the Commissioner of Internal Revenue is empowered 'to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, thus: 'Sec. 245. Authority of the Secretary of Finance to promulgate rules and regulations . The Secretary of Finance upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for the effective enforcement of the provisions of this Code. The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate of sales tax under certain category enumerated in Sections 163 and 165 of this Code shall be without prejudice to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the implementation of the provisions of internal revenue laws, including rulings on the classification of articles for sales and similar purposes.' 8) Previous BIR rulings that pawnshops are not subject to the 5% lending investor's tax and that a pawn ticket is not subject to documentary stamp tax, are rules interpreting the provisions of the Tax Code, RMO 15-91 and RMC 43-91 which expressly revoked said rulings are rules interpreting the very same provisions of the Tax Code. They are not new and additional tax measures but new rulings or opinions. The revocation of rulings is authorized under Section 246 of the Tax Code, thus: 'Sec. 246. Non-retroactivity of rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application ...' 9) It has been held that the incumbent is not bound by the previous ruling of his predecessor if he is satisfied that a different construction of the statute should be given ( Hilado v. Collector of Internal Revenue, 100 Phil. 288, 294 (1956). 10) The legal definition of "lending investor" is broad enough to cover pawnshop operators. As defined by law, "lending investor" includes all persons who make a practice of lending money for themselves or others at interest (Sec. 157(u), Tax Code). On the other hand, Section 3 of Presidential Decree No. 114 defines a "pawnshop", thus: 'Pawnshop' shall refer to 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 pawn broker or pawn brokerage.' Since the principal business activity of a pawnshop is lending money at interest, it easily falls under the definition of 'lending investor'.From the definition of 'lending investor',the liability of pawnshops to the 5% lending investor's tax is explicit. 11) Pawnshops lend money on the security of personal property, that is, a pledge. The pledge is evidenced by a pawn ticket, hence, the pawn ticket is the logical document subject to the documentary stamp tax on pledges under Section 195 of the Tax Code which provides: 'Sec. 195. Stamp tax on mortgages, pledges, and deeds of trust . On every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid being payable, and on any conveyance of land, estate or property whatsoever, in trust or to be sold, or otherwise converted into money there shall be collected a documentary stamp tax with the following rates; ...' (12) The assessment in question was issued in accordance with law and pertinent regulations. (13) All presumptions are in favor of the correctness of tax assessments ( CIR vs. Construction Resources of Asia, Inc.,145 SCRA 671 ) and the burden of proof to prove otherwise is upon petitioner." 1 On April 24, 2000, the Tax Court rendered its Decision, the dispositive portion of which states: "WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED. Revenue Memorandum Circular No. 43-91 and Revenue Memorandum Order No. 15-91, insofar as they classify pawnshops as lending investors subject to 5% lending investor's tax under Section 116 of the Tax Code, as amended, are hereby declared NULL and VOID. Accordingly, Assessment Notice No. 80-PT-13-96-98-5-0, dated April 20, 1998, is hereby declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT". 2 On May 17, 2000, 3 petitioner moved for a reconsideration of the decision dated April 24, 2000, which was denied in a Resolution 4 dated June 09, 2000. Hence, this petition for review. The issue before Us is: "WHETHER OR NOT PETITIONER IS LIABLE FOR THE AMOUNT OF P649,255.49 AS DEFICIENCY 5% LENDING INVESTOR'S TAX FOR THE YEAR 1995, THUS THE TAX COURT ERRED IN HOLDING THAT PAWNSHOPS ARE NOT SUBJECT TO THE 5% LENDING INVESTOR'S TAX UNDER THEN SECTION 116 OF THE TAX CODE." 5 There is merit in the petition. Then Section 116 of the Tax Code provided: "Sec. 116. Percentage tax on dealers in securities; lending investors . Dealers in securities shall pay a tax equivalent to six (6%) per cent of their gross income. Lending investors shall pay a tax equivalent to five (5%) per cent of their gross income." 6 Thus, lending investors are subject to 5% percentage tax on their gross income. Then Section 157(u) of the Tax Code (before amendment by E.O. No. 273) which defined "lending investors" in this wise: "(u) Lending investors include all persons who make a practice of lending money for themselves or others at interest." 7 The legal definition of "lending investors" is broad enough to include pawnshop operators. Section 3 of Presidential Decree No. 144 defines a "pawnshop" thus: "Pawnshop shall refer to 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 pawn brokerage." 8 As gleaned from the aforesaid definition, since the principal business activity of a pawnshop is lending money at interest, it easily falls under the legal definition of "lending investors." Its accepting a pawn of personal property as security for the loan is merely incidental thereto. Revenue Memorandum Order No. 15-91 dated March 11, 1991 states: "A restudy of P.D. 114 shows that the principal activity of pawnshops is lending money at interest and incidentally accepting a 'pawn' of personal property delivered by the pawner to the pawnee as security for the loan. (Sec. 3, ibid .) Clearly, this makes pawnshop business akin to lending investor's business activity which is broad enough to encompass the business of lending money at interest by any person whether natural or juridical. Such being the case, pawnshops shall be subject to the 5% lending investor's tax based on their gross income pursuant to Section 116 of the Tax Code, as amended." 9 RMO No. 15-91 is a ruling expressly revoking previous rulings implementing Sections 116 and 157(u) of the Tax Code and not a new tax measure. In the implementation of then Sections 116 and 157(u) of the Tax Code, the Bureau of Internal Revenue has issued several rulings affecting the coverage of pawnshops under the 5% lending investor's tax. The first of such rulings was an unnumbered BIR Ruling dated March 2, 1968 wherein it was ruled that lending investors as contemplated in then Section 194(u) of the Tax Code do not include persons engaged in pawnshop business. This ruling was reiterated in, among others, BIR Ruling No. 135-83 dated April 22, 1982, BIR Ruling No. 001 dated January 3, 1983 and BIR Ruling No. 06-90 dated January 23, 1990. On March 11, 1991, petitioner issued RMO No. 15-91. In the said RMO, it is stated that according to BIR Ruling No. 06-90, VAT Ruling Nos. 067-90, 022-90 and 226-90, pawnshops are not subject to any business tax, i.e.,value-added tax, lending investor's tax, or percentage tax imposed on non-bank financial intermediary for the reasons stated therein, one of which is as follows: "Pawnshops are not subject to the 5% lending investor's tax under Sec. 116 of the Tax Code because, citing BIR Ruling dated March 2, 1968 and 135-82 dated April 22, 1982, lending investors, as contemplated under then Section 194(u) of the Tax Code, do not include persons engaged in pawnshop business." 10 Subsequently, on May 27, 1991, petitioner issued Revenue Memorandum Circular No. 43-91 clarifying, among others, RMO No. 15-91, as follows: "1. RMO 15-91 dated March 11, 1991: This Circular subjects to the 5% lending investor's tax the gross income of pawnshops pursuant to Section 116 of the Tax Code, and it thus revokes BIR Ruling Nos. 6-90, and VAT Ruling Nos. 22-90 and 67-90. 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 Tax Code, pawnshop owners or operators shall become liable to the lending investor's tax on their gross income beginning January 1, 1991. Since the deadline for the filing of percentage tax return (BIR Form No. 2529A-O) and the payment of the tax on lending investors covering the first calendar quarter of 1991 has already lapsed, taxpayers are given up to June 30, 1991 within which to pay the said tax without penalty. If the tax is paid after June 30, 1991, the corresponding penalties shall be assessed and computed from April 21, 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 Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is hereby revoked." 11 In effect, RMO 15-91 and RMC 43-91 expressly revoked previous BIR rulings that pawnshops are not subject to the 5% lending investor's tax. In addition, RMC 43-91 revoked BIR Ruling No. 325-88 dated July 13, 1988 wherein it was ruled that a pawn ticket is not subject to the documentary stamp tax. The revocation of rulings is authorized under Section 246 of the Tax Code, as follows: "Sec. 246. Non-retroactivity of rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application ..." 12 It has been held that the incumbent is not bound by the previous ruling of his predecessor if he is satisfied that a different construction of the statute should be adopted. (Hilado v. Collector of Internal Revenue, 100 Phil. 288; 294 (1956) ,citing Association of Clerical Employees vs. Brotherhood of Railroad & Steamship Clerks, 85F(2d) 152, 109, A.L.R. 345 ). It is clear, therefore, that previous BIR rulings that pawnshops are not subject to the 5% lending investor's tax and that a pawn ticket is not subject to documentary stamp tax, are rules implementing the provisions of the Tax Code. Likewise, RMO 15-91 and RMC 43-91 revoking said rulings are rules implementing the very same provisions of the Tax Code. They are not new and additional tax measures but new rulings or opinions. In a similar case with the same facts and nature, this Court thru Special Fourteenth Division, 13 held thus: "It should be ever borne in mind that taxes are what we pay for civilized society: taxes, indeed, are the lifeblood of the nation. Not much unlike an army, which, to borrow the picturesque prose of Napoleon, marches on its stomach, the prosperity and economic well-being of the country rises or falls on the effectiveness or lack of it of the tax collection efforts of the Government. Which explains why, as a matter of policy, the law frowns against exemptions in taxes. So much so that, statutes granting tax exemptions have been held to be strictissimi juris against taxpayer, and liberally in favor of the taxing authority, viz .,the State, or its instrumentality or agencies. 14 About the only exemption to this rule (that the tax exemption may be withdrawn at the pleasure of the taxing authority) is where the exemption was granted to private parties based on material considerations of a mutual nature, in which event it becomes contractual, and is thus protected by the non-impairment clause of the Constitution. 15 Indeed, it is the constant teaching of unrelenting case law that rules for the allowance of tax creditors, as well as claims for tax exemptions, must expressly granted in a statute, and couched or stated in language too plain to be misunderstood or mistaken. 16 Here, respondent pawnshop cannot point to any specific provision in P.D. 114, from which it draws its breath of life, that explicitly exempts it from the coverage of RMO No. 15-91 and RMC No. 43-91." 17 Thus, it is clear from the foregoing discussions that, as a pawnshop operator, respondent is subject to the 5% lending investor's tax and, hence, liable for the amount of P649,255.49 as 5% deficiency lending investor's tax for the year 1995. WHEREFORE, premises considered, the instant petition for review is GIVEN DUE COURSE and hereby GRANTED. The Decision of the Court of Tax Appeals dated April 24, 2000 and Resolution dated June 9, 2000 of the Tax Court are hereby REVERSED and SET ASIDE. Respondent is hereby ordered to pay the amount of P649,255.49 as 5% deficiency lending investor's tax for the year 1995, plus 25% surcharge and 20% annual interest from June 24, 1998 until fully paid pursuant to Sections 248 and 249 of the Tax Code. SO ORDERED. DacTEH Garcia and De Guia-Salvador, JJ . , concur. Footnotes 1. Rollo ,Annex "A" pp. 2328. 2. Rollo ,p. 35. 3. Rollo ,Annex "E",pp. 8489. 4. Rollo ,Annex "B",p. 36. 5. Rollo ,p. 15. 6. Title V, Chapter II on Tax on Business of the Tax Code as amended (1986). 7. Title V, Chapter I on Definitions of the Tax Code, as amended (1986). 8. Otherwise known as the "Pawnshop Regulation Act", issued by President Ferdinand E. Marcos, January 29, 1973. 9. Rollo ,Annex "B",p. 60. 10. Ibid .,p. 59. 11. Rollo ,Annex "C",p. 61. 12. Title IX, Chapter III, The National Internal Revenue Code Annotated (P.D. No. 1158, as amended up to R.A. No. 8761), Hector S. De Leon, p. 912. 13. Rollo ,Annex "A",pp. 134143 (Associate Justice Renato C. Dacudao, Associate Justice Bienvenido L. Reyes and Associate Justice Perlita J. Tria Tirona, in their acting capacity) 14. Mactan Cebu International Airport Authority vs. Marcos ,261 SCRA 667. 15. Op. cit.,p. 281, citing Sinco, V.G.,Philippine Political Law, 1951 Ed.,p. 587. 16. Magsaysay Lines, Inc. vs. Court of Appeals , 260 SCRA 513; Citibank, NA vs. Court of Appeals , 280 SCRA 159; Commissioner of Internal Revenue vs. Court of Appeals 298 SCRA 83; Afisco Insurance Corp. vs. Court of Appeals ,302 SCRA 1. 17. Rollo ,p. 142.