Tokio Marine Malayan Insurance Co., Inc. v. Commissioner of Internal Revenue

SPECIAL THIRD DIVISION [CA-G.R. SP No. 77639. June 29, 2004.] TOKIO MARINE MALAYAN INSURANCE COMPANY, INC., (Formerly Pan Malayan Insurance Corporation) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N ASUNCION, EJ ., * J p : Before Us is a petition for review under Rule 43 of the Rules of Civil Procedure assailing the January 13, 2003 Decision of the Court of Tax Appeals denying the petition for review filed by Tokio Marine Malayan Insurance Company, Incorporated. In 1996, 1998 and 1999, Tokio Marine Insurance Company Incorporated (Tokio) purchased Fixed Rate Treasury Notes (FXTN) issued by the Bureau of Treasury. From May 27, 1999 to November 29, 1999, Tokio received interest income from the FXTNs in the total amount of P8,867,250.00. The gross interest payments were subjected to final withholding tax of P1,773,450.00. Meanwhile, the Bureau of Internal Revenue (BIR) issued Ruling No. 166-99 excluding from taxable gross income subject to income tax in accordance with Section 32(B)(7)(g) of the Tax Code interest income, yield or gains derived from bonds, debentures and other certificates of indebtedness with maturity of more than five years. Believing that the interest income payment it received from its FXTNs is exempt from the 20% final withholding tax imposed under Section 27(D)(1) of the Tax Code , Tokio filed an application for tax refund or tax credit of the P1,773,450.00 tax withheld, relying on the BIR ruling. Tokio brought its case to the Court of Tax Appeals (CTA). The Commissioner of Internal Revenue sought the dismissal of the case. After trial, the CTA in its questioned January 13, 2003 Decision held that gains derived from sale of bonds, debentures and other certificates of indebtedness with maturity of more than five years which are exempted from income tax does not include interest income from said long-term investments. Said interest income is therefore not tax exempt. Dissatisfied, petitioner filed this petition on the sole assigned error that the Court of Tax Appeals erred in ruling that the term "gain" as used in Section 32(B)(7)(g) of the Tax Code does not include interest income. Petitioner argues that the legislative intent in providing for tax exemption to gains derived from sale of long-term securities was to encourage investments in long-term securities. It is then logical to include in the coverage of tax exemption, interest income derived from the same long-term deposits. We do not agree. Section 32(B)(7)(g) of the Tax Code reads: Section 32. Gross Income . xxx xxx xxx (B) Exclusions from Gross Income. The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items. xxx xxx xxx (g) Gains from Sale of Bonds, Debentures of other Certificate of Indebtedness. Gains realized from the sale or exchange or retirement of bonds, debentures or other certificates of indebtedness with a maturity of more than five (5) years. In interpreting this provision, the word "gain" must be understood in its meaning in relation to words to which it was associated. Thus, gains must not be interpreted in its generic sense as that referred to under Section 32(A) of the Tax Code but in the sense it was used under the specific provision of Section 32(B)(7)(g) of the same Tax Code . Since gain was specifically referred to as gains from sale, it cannot be construed as to include gains derived in any other manner than by sale. The rule in statutory construction is that words employed in a statute are interpreted in connection with, and their meaning is ascertained by reference to the words and the phrases with which they are associated or related ( Ang Bagong Bayani-OFW Labor Party vs. COMELEC , 359 SCRA 698). Gain has a general meaning. However, where there is a particular or special provision in the statute and also a general one, the special provision prevails in the sense that the general provisions cannot derogate from the special. . . ( Uy vs. Sandiganbayan , 354 SCRA 651). Hence, the meaning of "gain" as used in Section 32(B)(7)(g) of the Tax Code shall prevail over that of Section 32(A) . In this particular case, the "gains" referred to were those derived from the sale transaction, exchange or transfer of bonds or debentures with maturity of more than five years. Income or profit derived from sale is absolutely distinct from interest income. The former is ascertained by the difference of purchase price and selling price of the bond while the latter is a passive income which accrues as a profit from investment. Even if bonds and debentures with maturity of more than five years may be treated as deposit substitutes, this does not mean that the coverage of the tax exemption shall be extended as to include interest income because the law specifies the kind of gain. And it only contemplates gains derived from sale and not interest income. While both interest income and gains from sale stemmed from long-term investments, the nature of their acquisition is different. We agree with the CTA that if the concept of gains from sale includes interest income, then the two terms should not have been treated separately in the enumeration of gross income under Section 32(A) . In this regard, it has been the long standing policy and practice to respect conclusions arrived. at by quasi-judicial agencies, especially the court of Tax Appeals which, by the nature of its functions, is dedicated exclusively to the study and consideration of tax problems, and which has thus developed an expertise on the subject, unless an abuse or improvident exercise of its authority is shown ( Commissioner of Internal Revenue vs. CA , 303 SCRA 508). Petitioner asserts that if the gains from sale will be strictly interpreted, then it would not apply to primary sale. The intendment of the law was to encourage individuals to invest in long-term investments. In the case of primary sale, although the issuer of the bond or debenture is the seller, any profit he may earn does not fall within the coverage of gains derived from sale which should be exempted from tax because he is not then an investor. Hence, there is no gain from sale to speak of with regard to original issuance. It is indeed the buyer who is the investor who would gain therefrom. As such, primary sale cannot be placed in similar situation as in subsequent dealings of bonds and debentures with maturity of more than five years. Petitioner also contends that in this interpretation of the provision, the legislative intent would be frustrated because it would only tempt the investors to sell their bonds and debentures instead of keeping them. We are not persuaded. In the case before Us, it would still be in keeping with the legislative intent because the purpose is attained after the securities were bought. At any rate, investors were already enticed to engage in long-term investments. Subsequent sale of the bond and debentures would just be an option left to the investor. Even if the investor decides to sell his long-term securities, the fact remains that the said securities were already bought. A potential subsequent buyer of the bonds and debentures would be encouraged to engage in long-term investments because he knows well that gains derived from sale thereof will be exempted from tax. Lastly, petitioner maintains that the term "gain" should be construed in its generic sense and not in restrictive sense. We do not agree. As We have discussed above, the particular words, clauses and phrases in a law should not be studied as detached and isolated expressions, but on the whole and every part thereof must be considered in fixing the meaning of any of its parts and in order to produce a harmonious whole ( Yamaoka vs. Pescarich Manufacturing Corp. , 361 SCRA 672). WHEREFORE, premises considered, the petition is hereby DENIED. The January 13, 2003 Decision of the Court of Tax Appeals is AFFIRMED in its entirety. SO ORDERED. Del Castillo ** and Abdulwahid, JJ ., concur. Footnotes * Office Order No. 158-04-CG. ** Acting Senior Member.