Commissioner of Internal Revenue v. Panay Island Water Crystal Storage Corp.

TWENTIETH DIVISION [CA-G.R. SP No. 68179. June 15, 2004.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . PANAY ISLAND WATER CRYSTAL STORAGE CORP. , respondent . D E C I S I O N DICDICAN , J p : Is the owner/mortgagor of a property liable for capital gains tax and documentary stamp tax on the foreclosure sale of such property when, subsequent to the sale, the property was redeemed by the owner/mortgagor within the one year period allowed by law to owners/mortgagors? Shall the revenue regulation issued by the Secretary of Finance in the exercise of his rule-making power, in particular Revenue Regulation No. 4-99, be given retroactive effect? In the petition for review now before us of the decision of the Court of Tax Appeals which allowed the refund of the capital gains tax and documentary stamp tax to the respondent by the petitioner, we answer the first question in the negative while we answer the second question in the positive. The antecedent facts of this case as found by the Court of Tax Appeals are as follows: On November 11, 1996, Panay Island Water Crystal Storage Corp. (PIWCSC for brevity) executed a real estate mortgage and a chattel mortgage covering a parcel of land and some properties used in its business in favor of Metropolitan Bank and Trust Company (bank for brevity). Unable to pay its obligation, the mortgages of said properties were foreclosed and a corresponding certificate of sale was issued on July 14, 1998. As a consequence of the extra-judicial foreclosure sale, the bank being the highest bidder, paid on September 18, 1998 the 6% capital gains tax on the gain presumed to have been realized from the said sale and the corresponding documentary stamp tax in the total amount of P689,569.80. On April 20, 1999, within one year from the issuance of the Certificate of Sale, PIWCSC was able to redeem the aforementioned properties in the amount of P7,587,184.14 which includes the said amount of P689,569.80 representing capital gains tax and documentary stamp tax paid by the bank to the Commissioner of Internal Revenue (Commissioner for brevity). Believing, as it does, that payment of capital gains tax and documentary stamp tax in consequence of the extra-judicial foreclosure sale is erroneous and has no legal and factual basis, PIWCSC filed an administrative claim for refund thereof with the Commissioner on May 12,1999. Unable to obtain an affirmative relief from the Commissioner, PIWCSC filed a petition for review with the Court of Tax Appeals on September 15, 2000 ( Rollo , pp. 2324). On October 2, 2001, the Court of Tax Appeals rendered the questioned decision in favor of PIWCSC which dispositively reads: "WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFUND the amount of P689,569.86 in favor of the Petitioner, representing erroneously paid capital gains tax and documentary stamp tax paid by the latter on September 22, 1998. SO ORDERED." Not in agreement with the said decision, petitioner has come to us in this petition for review. A reading of the petition reveals that the arguments raised by the petitioner are substantially the same arguments raised before the Court of Tax Appeals except the issue of whether or not the revenue regulation issued by the Secretary of Finance can be given retroactive effect. As to the first issue involving the liability of a seller/mortgagor for capital gains tax and documentary stamp tax on the foreclosure sale of the mortgaged properties which were subsequently redeemed within the one-year period provided by law, we adopt the findings of the Court of Tax Appeals. As found by the said court: "Central to the dispute of the contending parties is( sic ) the provision(sic) of Section 24(D)(1) of the Tax Reform Act of 1997: '(D) Capital Gains from Sale of Real Property. '(1) In General. The provisions of Section 39(B) not withstanding a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts . . . . "A cursory review of the attending circumstances reveals that the vortex of the controversy lies on the different interpretations of the parties as to the effects of the redemption of the foreclosed properties. xxx xxx xxx "While it is true that under the aforequoted Section 24(D)(1) of the Tax Code, conditional sale of real property includes foreclosure sale, this is subject to the condition that transfer of interest or ownership to the properties is effected. And well-settled is the rule that in a foreclosure sale, transfer of ownership ensues only upon expiration of the redemption period as provided in Section 6 of Act. No. 3135 as amended to wit: `Section 6. In all cases in which an extra-judicial sale is made under the special power herein before referred to, the debtor, his successors in interest or any judicial creditor or judgment creditor, or any person having a lien on the property subsequent to the deed of mortgage or trust under which the property is sold, may redeem the same within the term of one year from and after the date of the sale. "Clearly from the above, the debtor/mortgagor is granted the opportunity to reacquire ownership of his foreclosed property within one year( sic ) counted from the date of registration of the Certificate of Sale as provided under Section 33 of Rule 39 of the 1997 Rules of Civil Procedure which provides, thus: Rule 39 xxx xxx xxx (sic) Section 33. If no redemption be made within one (1) year from the date of registration of the certificate of sale, the purchaser is entitled to a conveyance or possession of the property . . . . It must be borne in mind that what is being subjected to 6% capital gains tax is not the transfer of ownership per se but the profit or gain that was presumed to have been realized by the seller/mortgagor( sic ) arising from the transfer. It bears stressing that capital gains tax is an income tax and( sic ) the concept of income implies gain, profit or flow of wealth ( Madrigal vs. Rafferty , 38 Phil. 414). "Prescinding from the above, it is necessary that the Petitioner (herein respondent) should have profited, materially or otherwise, from the foreclosure sale where the properties were redeemed within the specified period under Act No. 3135. It appearing that Petitioner (herein respondent) did not earn any income from the sale of the foreclosed properties, hence, it( sic ) should not be made liable to pay the capital gains tax and documentary stamp tax. "In BIR Ruling No. 006-92, the Respondent (herein petitioner) acknowledged the inequity of collecting the capital gains tax before the expiration of the redemption period and provided for the solution of refunding the same in case the right of redemption is exercised to wit: `In foreclosure sales of mortgaged properties, the creditor-bank is the statutory seller, representing the owner-mortgagor of the property, so that said bank becomes liable for the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. However, said bank could get reimbursement or recovery of the capital gains tax payment, if the right of redemption is exercised by the debtor-mortgagor or when the property is sold to any party whatsoever. "On March 9, 1999, the Secretary of Finance issued Revenue Regulation No. 4-99, in order to prevent the inequity that will arise if the capital gains tax is collected before the expiration of the redemption period. Section 3(1) of the Revenue Regulation No. 4-99 provides, thus: 'In case the mortgagor exercises his right of redemption within one (1) 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 or transfer of real property was realized. "It is in view of the above categorical declaration of the Secretary of Finance that makes Us inclined to grant the claim for refund of the Petitioner (herein respondent). As no capital gains have been derived by the Petitioner (herein respondent) in the foreclosure sale, hence the imposition of the corresponding capital gains tax is not warranted. "In the recently decided case involving an identical issue, this Court ruled in this wise: 'It bears stressing that it is not the transfer of ownership per se that subjects the sale of the 5% capital gains tax but the profit or gain that was presumed to have been realized by the seller/mortgagor by means of said transfer as can be clearly seen from the provisions of Section 21(e) of the Tax Code ( supra ). Let us not forget that the capital gains tax is an income tax defined as a tax on a person's income, wages, salary, commissions, emoluments, profits and the like (Black's Law Dictionary, 6th Edition). The concept of income implies gain, profit or flow of wealth ( Madrigal vs. Rafferty , 38 Phil. 414). The question that should be asked at this point is: did the Petitioners profit or gain anything from( sic ) the foreclosure sale where the properties were redeemed within the specified redemption period? The answer is obvious. Petitioner did not earn any income from the sale of these foreclosed properties, hence they should not be made liable to pay the capital gains tax. xxx xxx xxx As said RR 4-99 states, no capital gains having been derived by the mortgagor (Petitioners in the instant case), then no capital gains tax shall be imposed. It will be unjust to deprive the Petitioners their right to refund the capital gains tax which they already paid on the foreclosure sale of their properties when the facts show that they redeemed these properties within the period specified by the law. ( Spouses Arturo Soriano and Virginia T. Soriano vs. Hon. Liwayway Vinzons-Chato as Commissioner of Internal Revenue , CTA Case No. 5563, promulgated on June 22, 1999, with Entry of Judgment dated August 13, 1999) "Anent the issue of documentary stamp tax imposed on the foreclosure sale, We find that the transaction is subject only to P15.00 documentary stamp tax pursuant to Section 4 of Revenue Regulations No. 4-99 which provides, thus: Section 4. Documentary Stamp Tax (1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Section 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration." We find the foregoing finding to be sound and correct. They harmonize the provisions of the National Internal Revenue Code and Act 3135 as to form a coherent and intelligible system regarding taxation of foreclosure sales. It is now clear that foreclosures sales of properties are not subject to 6% capital gains tax where there is a subsequent redemption of said properties within the one-year period as provided by law. As to the second issue, the petitioner cites Article 4 of the Civil Code of the Philippines which provides that laws shall have no retroactive effect, unless the contrary is provided. Petitioner argues that since the foreclosure sale occurred in 1998 prior to the issuance of Revenue Regulation No. 4-99 on March 9, 1999, such regulation can not apply to the foreclosure sale. The petitioner further argues that tax refunds are in the nature of tax exemptions and as such, are regarded as in derogation of sovereign authority and should be construed strictissimi juris against the person or entity claiming the exemption. The taxpayer has the burden of proof that he is covered by the exemption under the clearest grant of organic or statutory law. Thus, exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and explicit; it cannot be made to rest on vague implication. Furthermore, when tax exemption is claimed, it must be shown indubitably to exist for every presumption is against it, and a well-founded doubt is fatal to the claim ( Rollo , pp. 1718). On the other hand, the respondent contends that Section 327 of the Tax Code is applicable in the instant case and considering that the modification of the BIR Ruling No. 006-92 is beneficial to Respondent, RR No. 4-99 will apply favorably to it. Respondent further alleges that its redemption of the foreclosed properties was exercised as a matter of right and not to escape from the burden of taxation. We find the respondent's contention to be meritorious. It is well-settled that the National Internal Revenue Code of 1997 is the primary law on taxation and it is also basic that, where the law is clear and categorical, there is no room for construction, only application ( NTC vs. Court of Appeals , 311 SCRA 508). Section 246 of the Tax Code is very clear on the retroactivity of rules and regulations as it provides as follows: "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 in any document required of him by the Bureau of Internal Revenue; or (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 (Italics is provided for emphasis). By the language of Sec. 246, revocation, modification or reversal of rules and regulations shall not be given retroactive application if such will be prejudicial to the taxpayer. In the same vein, revocation, modification or reversal of rules and regulations shall be given retroactive application if such will not be prejudicial to the taxpayer. Revenue Regulation No. 4-99 which was issued on March 9, 1999 by the Secretary of Finance pursuant to his rule-making power in the enforcement of tax laws clearly provides that no capital gains tax shall be imposed on the mortgagor who exercises his right of redemption within one year from the issuance of the certificate of sale. This regulation prevents the inequity that would result from the application of BIR Ruling 006-92 in the event that there is redemption of foreclosed property by the owner/mortgagor within the one-year period granted by law. It is worth noting that Revenue Regulation No. 4-99, if made applicable to taxpayer PIWCSC, will exempt PIWCSC from coverage of the capital gains tax on the particular foreclosure sale of its properties done on July 14, 1998. Taking into account Section 246 of the Tax Code and Revenue Regulation No. 4-99, there is no doubt that retroactive application of Revenue Regulation No. 4-99 will indeed be beneficial and not prejudicial to PIWCSC for it will operate to make PIWCSC not liable for capital gains tax on that particular foreclosure sale. Since the records of the case do not contain any fact or evidence making PIWCSC fall within the exceptions enumerated in Section 246 of the Tax Code, there is no other equitable and just recourse but to give Revenue Regulation No. 4-99 retroactive application to the particular foreclosure sale of July 14, 1998. While we recognize the need of the State to raise revenues to defray the expenses of government within the bounds of law, we must not forget that taxpayers must be protected too from erroneously collected taxes. WHEREFORE, in view of all the foregoing premises, the petition is hereby DENIED and the decision of the Court of Tax Appeals is hereby AFFIRMED. SO ORDERED. Perlas-Bernabe and Bato, Jr. * , JJ ., concur. Footnotes * BATO, JR., J.J. * Acting third member