Commissioner of Internal Revenue v. Bank of the Philippine Islands

SIXTH DIVISION [CA-G.R. SP No. 59483. February 28, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . BANK OF THE PHILIPPINE ISLANDS , respondent . D E C I S I O N CRUZ , J p : It appears that for each quarter of the year 1996, the Bank of Philippine Islands (or "respondent") paid gross receipts tax to the Bureau of Internal Revenue (or "BIR"). The tax was computed on the basis of respondent's gross receipts, inclusive of the 20% final tax withheld and paid to the BIR by clients of respondent on its (respondent) interest and other passive income. Asserting overpayment of the gross receipts tax for the entire year of 1996 on the theory that the 20% final tax withheld on a bank's passive income does not form part of taxable gross receipts, as laid down by the Court of Tax Appeals (or "CTA") in CTA Case No. 4720, entitled "Asian bank Corporation vs. Commissioner of Internal Revenue", respondent filed a claim with the BIR for refund of the asserted overpayment. As the BIR did not act on respondent's claim, the latter filed a petition with the CTA against the Commissioner of Internal Revenue (or "petitioner") for refund of the sum of P6,278,856.58, representing alleged overpaid gross receipts tax for the fourth quarter of 1996. Respondent no longer asked for a similar refund for the first three quarters of 1996, the same having been barred by prescription. Adhering to the Asian Bank doctrine, the CTA rendered a decision dated June 16, 2000, the decretal portion of which reads: "WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering the Respondent to REFUND or ISSUE a Tax Credit Certificate in the reduced amount of P692,172.78 representing overpaid gross receipts tax for the fourth quarter of 1996. The remaining amount claimed is DENIED for insufficiency of evidence." SO ORDERED." Dissatisfied, petitioners appealed the CTA decision to this Court. The sole issue presented in this appeal is whether the 20% final withholding income tax on passive income should form part of the gross receipts in computing the gross receipts tax. Petitioner asserts that there is no law excluding the 20% final income tax withheld under Sec. 50(a) of the National Internal Revenue Code (or "Tax Code") in the computation of the 5% gross receipts tax. It argues that the Asian Bank doctrine was based on a superseded regulation, specifically Sec. 4(e) of Revenue Regulations (or "RR") No. 12-80 dated November 7, 1980, which provides that "(t)he rates of taxes to be imposed on the gross receipts of (banks) shall be based on all items of income actually received." Espousing the dissenting opinion of Associate Judge Amancio Q. Saga, petitioner submits that the applicable provision is Sec. 8(c) of RR No. 12-80 (which became Sec. 7[c] of RR No. 17-84 dated October 12, 1984) providing that "(i)f the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed." Petitioner concludes that the gross receipts referred to in Sec. 7(c) of RR No. 17-84 include the final withholding income tax. Petitioner likewise maintains that the CTA erroneously applied the decision in Commissioner of Internal Revenue vs. Manila Jockey Club (108 Phil. 821) where the Supreme Court interpreted the term "gross receipts" to mean all receipts of the taxpayer but excluding those specially earmarked by law or regulation for the government or some person other than the taxpayer. Petitioner contends that the ruling in the Manila Jockey Club case is inapplicable in the case at bench because the factual settings of the two cases are different, apart from the fact that the taxpayer in the Manila Jockey Club case was an amusement place, whereas respondent is a banking institution. Petitioner further contends that Sec. 119 of the Tax Code, upon which respondent's tax liability is based, speaks of "gross receipts derived from sources within the Philippines"; and that the term "gross receipts" includes all items of income, whether or not allocated or earmarked for a specific purpose. Finally, petitioner argues that Sec. 2.57 of RR No. 2-98 (implementing Rep. Act No. 8424) likewise provides that the base at the 5% gross receipt tax includes the 20% final withholding income tax deducted at source. On the other hand, respondent contends that the issue raised in the appeal is no longer novel because in a similar case (CA-G.R. SP No. 52707, entitled "Commissioner of Internal Revenue vs. Citytrust Investment Phil., Inc."), this Court, in a decision promulgated on August 17, 1999, upheld the Asian Bank doctrine. Aside from adopting the reasoning of this Court in that case, respondent asserts that petitioner's theory would result in double taxation. The petition is devoid of merit. The Supreme Court has ruled that "gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies or receipts within the meaning of gross receipts under the Tax Code." (Commissioner of Internal Revenue vs. Tours Specialists, Inc., 183 SCRA 402) Since passive income, net of the 20% final withholding income tax, is the amount actually received by respondent, it should be the basis of the gross receipts tax. It would be unjust and confiscatory to include the withheld 20% final tax in the tax base for purposes of computing the gross receipts tax since the amount corresponding to said 20% final tax was not received by the taxpayer and the latter derived no benefit therefrom. On the other hand, Sec. 50(a) of the Tax Code refers to tax withheld on passive income for purposes of income tax, whereas Sec. 119 (now Sec. 121) thereof treats of gross receipts tax. the tax base of income tax is different from that of gross receipts tax. Interest and other passive income are subjected to both income tax and gross receipts tax, but the tax base of one is different from the other. Contrary to petitioner's contention, Sec. 4(e) of RR NO. 12-80, which deals on the computation of the tax base for gross receipts tax on banks, etc. was not superseded by RR No. 17-84. RR No. 12-80 refers to taxation of income derived from banking activities, whereas RR No. 17-84 treats of income taxation of interest derived from bank deposits and yield from deposit substitutes. Although RR No. 17-84 amended RR. No. 12-80, it did not supersede all its provisions (De Leon, The National In ternal Revenue Co de Annotated, 5th Ed. 1994, pp. 832-835). Indeed, RR No. 17-84 contains no provision inconsistent with Sec. 4(e) of RR No. 12-80. Considering that in issue was gross receipts tax, the CTA correctly applied Sec. 4(e) of RR No. 12-80 which treats of such tax. On the other hand, Sec. 2.57 of RR No. 2-98 provides that "the finality of the withholding tax is limited only to the payee's income tax liability on the particular income. It does not extend to the payee's other tax liability on said income, such as when the said income is further subject to a percentage tax." However, it cannot be inferred from said section that the 20% final withholding income tax forms part of gross receipts. Said section simply means that, given the underlying differences between income tax and gross receipts tax, an income subjected to income tax may still be subjected to gross receipts tax, but the tax base of the former would be different from that of the latter. Finally, settled is the rule that in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. (Lincoln Philippine Life Insurance Company, Inc. vs. Court of Appeals, 293 SCRA 92) WHEREFORE, the petition is DISMISSED while the decision of the Court of Tax Appeals dated June 16, 2000 is AFFIRMED. SO ORDERED. Mabutas, Jr . and Barrios, JJ . , concur.