Far East Bank and Trust Co. v. Commissioner of Internal Revenue

SPECIAL FORMER SECOND DIVISION [CA-G.R. SP No. 69693. June 16, 2003.] FAR EAST BANK AND TRUST COMPANY now merged with and into the Bank of the Philippine Islands , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N COSICO , J p : On appeal via petition for review under Rule 43 of the 1997 Rules of Civil Procedure is the Decision, dated November 16, 2001, of the Court of Tax Appeals (CTA), rendered in CTA Case No. 5763. Under the said ruling the CTA dismissed the petitioner Far East Bank and Trust Company's petition for review, thereby denying the petitioner's claim for refund or tax credit filed with the office of the respondent Commissioner of Internal Revenue. Records show that in 1997, petitioner, a domestic banking corporation, filed its Quarterly Percentage Tax Returns with the Bureau of Internal Revenue and paid its Gross Receipts Tax for each quarter. For the four quarters of 1997, petitioner alleged that it reported and included as part of its Cross Receipts Tax base, its total Interest Income, that had been subject to 20% final income tax and paid the corresponding Gross Receipts Tax thereon totaling P19,480,920.00. It is this P19,480,920.00 gross receipts tax paid by petitioner on its Interest Income, which petitioner sought to recover from the Bureau of Internal Revenue by filing a claim for refund or tax credit with said office on January 11, 1999. When petitioner's claim remained unacted upon, and the two-year prescriptive period was about to expire, petitioner filed a petition for review with the Court below, which petition became CTA Case No. 5763. Petitioner essentially advanced that the 20% final withholding tax taken on the petitioner's Passive (Interest) Income should not form part of the petitioner's taxable gross receipts for the purpose of computing its Gross Receipts Tax due. Respondent, for its part, challenged the legal basis used by petitioner in advancing its claim for refund/credit. There is no provision in the Tax Code or any special law that excludes the 20% final income tax withheld from the base upon which the Gross Receipts Tax is computed. On the contrary, Section 8(c) of Revenue Regulation No. 12-80, dated November 7, 1980, as amended by Section 7(c) of Revenue Regulation No. 17-84, dated October 12, 1984, provides that if the recipient of Income (on Interests on Deposits and Yield on Deposit Substitutes) are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed. This means that the Interest Income subjected to 20% final withholding tax should be included as part of the gross receipts for purposes of computing the gross receipts tax. AIHECa Eventually, the CTA, in its decision dated November 16, 2001, ruled against the petitioner's claim. The CTA essentially upheld the view that a taxpayer's gross receipts, upon which its Gross Receipts Tax liability, under Section 121 of the National Internal Revenue Code, is imposed, legally includes the income on interests that was made subject of the 20% final income tax withheld from the taxpayer. The ruling takes cue from the ruling of the Court of Appeals in one case ( Commissioner of Internal Revenue v. Asianbank Corporation , CA-G.R. SP No. 51248, November 22, 1999) to the effect that the 20% final income tax was constructively received by a tax payer, although the amount is effectively withheld and paid to the government, for the benefit of the taxpayer. Such amount is therefore actually part of the gross receipts of the taxpayer, and so should be included in the tax base for the computation of the gross receipts tax. "Gross receipts'", after all, should be interpreted to mean as the whole amount received without deductions, otherwise, it will be considered as "net receipts". As held by the CTA: WHEREFORE, in view of the foregoing, the Petition for Review to hereby DENIED for lack of merit." (p. 84, Rollo ) Hence this appeal. It is essentially advanced that the 20% final withholding tax on a bank's interest income should not form part of a bank's taxable receipts, for the purpose of computing its Gross Receipts Tax. This is because the 20% final withholding tax was not actually received by the petitioner-taxpayer, but by the government through the internal revenue bureau. This was the ruling of the CTA itself in a previous case, but the CTA, inexplicably, reversed itself, with its decision in the instant case. After due study, the Court finds no cogent reason to reverse the ruling of the CTA below. Tax refunds are in the nature of tax exemptions, and as such, they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. ( Commissioner of Internal Revenue v. S.C. Johnson and Sons, Inc ., 309 SCRA 87 [1999]) Exemptions from taxation are highly disfavored in law and he who claims tax exemption must be able to justify his claim or right. ( Afisco Insurance Corporation v. Court of Appeals , 302 SCRA 1 [1999]) In this particular case, statutory and jurisprudential authorities are not in favor of the petitioner in his quest for a tax refund/credit. Section 7(c) of Revenue Regulation No. 17-84, issued by the internal revenue bureau to govern the taxation of interest income derived from deposit and deposit substitutes, clearly provides that if the recipient of such interest income are financial institutions, the same shall be included as part of the tax base upon which the gross receipts tax is imposed. The opinion or ruling of the Commissioner of Internal Revenue, the agency tasked with the enforcement of tax laws, is accorded much weight and even finality, when there is no showing that it is patently wrong. ( Afisco Insurance Corporation v. Court of Appeals , supra ) Furthermore, this Court already had occasion to rule on the issue of whether the 20% tax payable on interest income should be made part of a bank's gross receipts subject to the 5% gross receipts tax required under Section 119 (now section 121) of the National Internal Revenue Code. ASDTEa In Commissioner of Internal Revenue v. Asianbank Corporation , (CA-G.R. SP No. 51248, November 22, 1999) it was the Court's considered view on the issue that the 20% final tax on interest income remains part of the gross receipts of a banking institution, because it is income that has been constructively received. It is simply withheld from the bank and paid to the government, for the bank's benefit. Thus, the 20% income tax withheld from the interest income is, in fact, money of the taxpayer bank but paid by the payor to the government in satisfaction of the bank's obligation to pay the tax on interest earned. It is the bank's obligation to pay the tax, hence, the withholding of said tax and its payment to the government is for its benefit. This ruling was echoed by the CTA in its decision below, ruling on the very same issue: "The exclusion of 20% FWT (Final Withholding Tax) would seriously erode the GRT base. In effect it would reduce by 20% the tax on gross receipts under Sections 121 (Tax on Banks and Non-bank Financial Intermediaries) and 122 (Tax on Finance Companies). Tax exemptions are strictly construed against the taxpayer. In the absence of any clear provisions of law excluding the 20% FWT from the tax base for GRT purposes, we cannot conclude that such 20% FWT should be excluded for purposes of GRT computation." (p. 84, Rollo ) It has been the long standing policy and practice of courts to respect the conclusions of quasi-judicial agencies such as the Court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of its authority. ( Afisco Insurance Corporation v. Court of Appeals , supra ) Petitioner, which has the burden to discredit the validity of the above ruling has failed to sufficiently do so, and the Court has no alternative but to dismiss its present remedy. WHEREFORE, premises considered, the instant petition for review is hereby DISMISSED. SO ORDERED. Dacudao * and Tria Tirona, JJ ., concur. Footnotes * Per Office Order No. 127-03-CG dated June 6, 2003.