Perf Realty Corp. v. Commissioner of Internal Revenue

NINTH DIVISION [CA-G.R. SP No. 70471. July 18, 2003.] PERF REALTY CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N AMBULWAHID , J p : This is a petition for review filed in the above-entitled case by PERF Realty Corporation (PERF, for brevity) under Rule 43 of the 1997 Rules of Civil Procedure as amended, seeking the reversal of the decision of the Court of Tax Appeals (CTA, for brevity) that denied the petitioner's claim for tax refund. The antecedent facts are undisputed. Petitioner PERF is a domestic corporation engaged in the business of leasing real properties to various tenants, among them, Philippine American Life and General Insurance Company (PhilamLife, for brevity) and Read-Rite Philippines, Inc. (Read-Rite, for brevity). 1 On April 14, 1998, the petitioner filed its annual income tax return for the year 1997, declaring that it had a net taxable income of P6,430,345.00 and that the tax due was P2,250,621.00. 2 For the year 1997, its tenants PhilamLife and Read-Rite paid and remitted to the Bureau of Internal Revenue (BIR, for brevity) the taxes withheld from the petitioner's income for the said period amounting to P3,429,780.30 and P101,344.78, respectively. 3 Hence, deducting the creditable income tax withheld by PhilamLife and Read-Rite from the corresponding tax due, the petitioner had an overpayment of income tax amounting to P1,280,504.00 for the year 1997. 4 On November 4, 1999, the petitioner filed with the BIR a written administrative claim for refund. 5 Because the BIR did not act on its claim, the petitioner filed a petition for review before the CTA seeking the refund of P1,280,504.00. 6 On December 20, 2001, the CTA dismissed the petition because the petitioner did not indicate in its 1997 Annual Corporate Income Tax Return the option to either claim the excess income tax as a refund or tax credit. Further, the CTA ruled that the petitioner failed to present its 1998 Annual Corporate Income Tax Return; hence, there was no way for the CTA to determine with certainty whether the said tax credits were utilized in 1998. 7 To the motion for reconsideration, the petitioner attached its Annual Income Tax Return for the year 1998. 8 Nevertheless, its motion for reconsideration was likewise denied. 9 The question posed upon us by the petitioner is: Is the petitioner entitled to the refund? A perusal of the CTA's decision seems to point out that it is. In fact, the CTA even ruled that the petitioner complied with all the requisites for the claim of refund. 10 Thus, the CTA said: To be entitled to a refund, thing requirements must be complied with: 1) That the claim for refund was filed within the two (2) year period as prescribed under Section 230 of the National Internal Revenue Code; 2) That the income upon which the taxes were withheld were included in the return of the recipient; 3) That the fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom. xxx xxx xxx After a conscientious review of the records, this Court learned that Petitioner complied with requirement number 1. The administrative and judicial claims for refund were filed on November 3, 1999 and December 3, 1999, respectively, and when counted from the time Petitioner filed its Annual corporate Income Tax Return for 1997 on April 14, 1998, the said claims were filed within the two-year prescriptive period under Section 230 of the Tax Code (now Section 229). Records also reveal that Petitioner presented Certificates of Creditable Withholding tax at Source reflecting creditable withholding taxes in the amount of P4,153,604.18 withheld from Petitioner's rental income of P83,072,076.81 (Exhibits B, C, D, E, and H). In addition, Petitioner submitted in evidence the Monthly Remittance Returns of its withholding agents to prove the fact of remittance of said taxes to the BIR. It is to be noted that while the Certificates of Creditable Withholding Tax at Source for 1997 reflected a total amount of P4,153,604.18 corresponding to the rental income of P83,072,076.81. Petitioner however is claiming only the amount of P3,531,125.00 pertaining to a rental income of only P70,813,079.00 (see Exhibits A-8). The amount of P3,531,125.00 less the income tax due of Petitioner of P2,250,621.00 leaves the refundable amount of P1,280,504.00. The foregoing discussion point out Petitioner's compliance with the three (3) aforementioned requisites, however in spite of this fact, the Court cannot grant the claim for refund due to one peculiar flaw in the evidence presented. The Court noted that Petitioner did not indicate in its 1997 Annual Corporate Income Tax Return the option it has taken regarding its excess income taxes. (see Exhibit A). Section 69 (now 76) of the National Internal Revenue Code provides, viz: Section 69. Final Adjustment Return. Every corporation liable to pay tax under Section 24 shall file a final adjustment return covering the total net income for the preceding calendar year or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of that year the corporation shall either: (a) Pay the tax still due; or (b) Be refunded the excess amount paid, as the case may be. In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. The aforementioned provision of the Tax Code clearly provides that in case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. It is therefore incumbent upon the Petitioner corporation to signify in its Annual Corporate Income Tax Return its intention to either request for a refund of its excess creditable withholding taxes as an automatic tax credit or claim it in the succeeding taxable year. These remedies, however, are in the alternative, and the choice of one precludes the other. Moreover, this Court likewise found out that Petitioner failed to submit its 1998 Annual Corporate Income Tax Return, a vital document, which may be favorably considered in determining the propriety of its claim. Failure of Petitioner to signify its option on whether to refund or opt for an automatic tax credit and to present its 1998 Annual Corporate Income Tax Return, left the Court with no way to determine with certainty whether or not Petitioner has applied or credited the refundable amount sought for in its administrative and judicial claims for refund. Following well-established precedent previously laid down in several cases decided by this Court, the presentation of Petitioner's 1998 Annual Income Tax Return is necessary in order that a verification may be made to ensure that it no longer carried over the 1997 excess income taxes being claimed for refund. . . . Failure on the part of Petitioner to present its 1998 Annual Corporate Income Tax Return is fatal to its claim for refund as the Court cannot determine with certainty whether or not the aforementioned tax credits were actually utilized or applied against its 1998 income tax liability. WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby DENIED due to insufficiency of evidence. As can be gleaned from the foregoing ruling of the CTA, the bases for the denial of the tax refund are: (1) failure of the petitioner to indicate in its income tax return whether it would avail of the tax refund or tax credit, and (2) insufficiency of evidence for the petitioner's failure to present its 1998 Annual Corporate Income Tax Return. The petitioner argues that having complied with the requisites to establish its claim for tax refund, it is therefore undisputable that it is entitled to the refund representing its overpaid and unapplied creditable income tax for 1997; and that the CTA erred by denying its claim for the tax refund on a technical rule that is not among the legally mandated requirements. 11 It further argues that its failure to indicate its option to avail either of the tax refund or the tax credit is not fatal to its claim; 12 that as early as November 3, 1999, the petitioner filed an administrative claim with the BIR for a tax refund as embodied in the joint stipulation of facts and issues dated March 14, 2000; 13 hence, the CTA erred in holding that the petitioner's failure to signify its option in its income tax return did not establish its intention to claim for a refund. 14 As to the petitioner's failure to present the income tax return for the succeeding year, it argued that the required income tax return for the succeeding year is only applicable whenever the taxpayer signified its intention to apply its creditable withholding tax to the succeeding year; that in the case of the petitioner, the presentation of the income tax return for the succeeding year is not applicable since it did not signify the option to avail of tax credit, and that in any case, the petitioner attached to its motion for reconsideration its income tax return for 1998, hence, the CTA should have considered this pursuant to the rule on the liberal construction of the rules of procedure to obtain just, speedy and inexpensive determination of every action and proceeding. 15 Respondent Commissioner of Internal Revenue through the Solicitor General, however, argues that it is incumbent upon the petitioner to signify in its income tax return its option to avail of either cash refund or tax credit; hence, the remedies are in the alternative and the choice of one precludes the other. 16 He further argues that the petitioner should have submitted the income tax return for the succeeding year to establish to the CTA that it (the petitioner) did not apply its overpaid income tax for the year 1997 as tax credit to the succeeding year; and that for failure to do so, the CTA cannot consider the evidence that has not been formally offered. 17 The petitioner's arguments are well-taken. The settled rule in our jurisdiction is that tax refunds are in the nature of tax exemptions, that is, they are regarded as derogation of sovereign authority; hence, they are construed strictly against the taxpayer claiming for the exemption. 18 It is incumbent upon the taxpayer to prove by clear and convincing evidence that it is entitled to such exemption. The law governing claims for tax refund or tax credit is embodied in Section 229 of Republic Act No. 8424, known as the Tax Reform Act of 1997, to wit: SEC. 229. Recovery of Tax Erroneously or Illegally Collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner ; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (emphasis supplied.) It is clear from the above provision that to claim for a tax refund or tax credit, the taxpayer must file a written claim with the Commissioner of Internal Revenue. Hence, regardless of the failure of the taxpayer to indicate its option to avail of either a (1) tax refund, (2) tax credit to be carried over in the next year or (3) to be issued a tax credit certificate, by checking the appropriate box in its income tax return in case of overpayment of its taxes, the taxpayer must still file a written claim within two years from the filing of the annual adjustment or annual income tax return and final payment of income tax. 19 The reason is obvious: tax refund, or tax credits are not automatic. In San Carlos Milling v. CIR, G.R. No. 103379, November 23, 1993, the Supreme Court ruled that though the taxpayer has indicated its option to avail of a tax refund or automatic tax credit scheme, it still does not ipso facto mean that it is entitled to either; rather, the Commissioner must be given an opportunity to investigate and confirm the veracity of the claim, hence, the need for a written claim therefore. In this case, therefore, it is logical to conclude that the petitioner's failure to indicate its option in the annual income tax return to avail of either tax refund or tax credit is not fatal since the option may still be availed of within the two-year reglementary period. As to the failure of the petitioner to present its 1998 income tax return, we find that there is no need to rule on the issue of its admissibility. The CTA had already ruled that the petitioner had complied with the requisites in applying for a tax refund, which ruling this Court affirms, to wit: 20 1) That the claim for refund was filed within the two (2) year period as prescribed under Section 230 of the National Internal Revenue Code; 2) That the income upon which the taxes were withheld were included in the return of the recipient; 3) That the fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld therefrom. Hence, the sole purpose of requiring the presentation of the petitioner's 1998 income tax return is to verify whether or not the petitioner had carried over the 1997 excess income taxes claimed for refund in the year 1998. 21 Yet, the verification process is not incumbent upon the petitioner; rather, it is the BIR's duty to verify if the petitioner's excess income taxes in 1997 were carried over to the succeeding year by going through its records and disprove the petitioner's claim. As the Supreme Court ruled in BPI-Family Savings Bank, Inc. v. Court of Tax Appeals, et al. , (330 SCRA 507 [2000]), the "BIR ought to know the tax records of all taxpayers." WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated November 20, 2001, and Resolution March 26, 2002 of the Court of Tax Appeals are SET ASIDE. The Commissioner of Internal Revenue is ordered to REFUND to the petitioner the amount of P1,280,504.00 as creditable withholding tax for the year 1997. SO ORDERED. De la Cruz and Sabio, Jr . , JJ . , concur. Footnotes 1. Rollo, p. 3. 2. Rollo, p. 4. 3. Rollo, p. 5. 4. Ibid. ; and Rollo , p. 19. Computation of the overpaid tax summarized as follows: Error! Not a valid link . See Exhibit "A-1" ( Rollo, p. 19). 5. Rollo, pp. 4 and 19. Exhibit "D" and "D-1" ( rollo , pp. 42 and 43). 6. Rollo, pp. 5 and 19. 7. Decision (CTA), pp. 67. Rollo , pp. 2324. 8. Rollo, p. 46. 9. Rollo, pp. 2527. 10. Decision (CTA), pp. 37. Rollo, pp. 2024. 11. Rollo , p. 7. 12. Rollo , p. 89. 13. Rollo , pp. 910 and 4445. 14. Rollo , p. 10. 15. Rollo , pp. 1213. 16. Rollo , p. 67. 17. Rollo , pp. 6869. 18. Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc., et al. , G.R. No. 127105 (July 25, 1999). 19. Commissioner of Internal Revenue v. Court of Tax Appeals, et al. , G.R. No. 117254, January 21, 1999. 20. Decision (CTA), p. 3. Rollo , p. 20. 21. Ibid , p. 6. Rollo , p. 23.