lara and de leon

8/2/2019 Lara and de Leon

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G.R. No. L-9456

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.

DOMINGO DE LARA, as ancilliary administrator of the estate of HUGO H.

MILLER (Deceased), and the COURT OF TAX APPEALS, respondents.

Allison J. Gibbs, Zafra, De Leon and Veneracion for Domingo E. de Lara.

Assistant Solicitor General Ramon L. Avancena and Cezar L. Kierulf for the Collector

of Internal Revenue.

Montemayor, J.:

These are two separate appeals, one by the Collector of Internal Revenue, later on

referred to as the Collector, and the other by Domingo de Lara as Ancilliary

Administrator of the estate of Hugo H. Miller, from the decision of the Court of Tax

Appeals of June 25, 1955, with the following dispositive part:

WHEREFORE, respondent's assessment for estate and inheritance taxes upon the

estate of the decedent Hugo H. Miller is hereby modified in accordance with the

computation attached as Annex "A" of this decision. Petitioner is hereby ordered to

pay the amount of P2,047.22 representing estate taxes due, together with the

interests and other increments. In case of failure to pay the amount of P2,047.22

within thirty (30) days from the time this decision has become final, the 5 per cent

surcharge and the corresponding interest due thereon shall be paid as a part of the

tax.

The facts in the case gathered from the record and as found by the Court of Tax

Appeals may be briefly stated as follows: Hugo H. Miller, an American citizen, was

born in Santa Cruz, California, U.S.A., in 1883. In 1905, he came to the Philippines.

From 1906 to 1917, he was connected with the public school system, first as a

teacher and later as a division superintendent of schools, later retiring under the

Osmeiia Retirement Act. After his retirement, Miller accepted an executive position

in the local branch of Ginn & Co., book publishers with principal offices in New York

and Boston, U.S.A., up to the outbreak of the Pacific War. From 1922 up to

December 7, 1941, he was stationed in the Philippines as Oriental representative of

Ginn & Co., covering not only the Philippines, but also China and Japan. His

principal work was selling books specially written for Philippine schools. In or about

the year 1922, Miller lived at the Manila Hotel. His wife remained at their home in

Ben-Lomond, Santa Cruz, California, but she used to come to the Philippines for

brief visits with Miller, staying three or four months. Miller also used to visit his wife

in California. He never lived in any residential house in the Philippines. After the

death of his wife in 1931, he transferred from the Manila Hotel to the Army and


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Navy Club, where he was staying at the outbreak of the Pacific War. On January 17,

1941, Miller executed his last will and testament in Santa Cruz, California, in which

he declared that he was "of Santa Cruz, California". On December 7, 1941, because

of the Pacific War, the office of Ginn & Co. was closed, and Miller joined the Board

of Censors of the United States Navy. During the war, he was taken prisoner by the

Japanese forces in Leyte, and in January, 1944, he was transferred to Catbalogan,

Samar, where he was reported to have been executed by said forces on March 11,

1944, and since then, nothing has been heard from him. At the time of his death in

1944, Miller owned the following properties:

Real Property situated in Ben-Lomond, Santa Cruz, California valued at

......................................................................

P 5,000.00

Real property situated in Burlingame, San Mateo, California valued at

........................................................................................

16,200.00

Tangible Personal property, worth.............................................

2,140.00

Cash in the banks in the United States....................................

21,178.20

Accounts Receivable from various persons in the United States including notes

...............................................................

36,062.74


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Stocks in U.S. Corporations and U.S. Savings Bonds, valued at

........................................................................................

123,637.16

Shares of stock in Philippine Corporations, valued at ..........

51,906.45

Testate proceedings were instituted before the Court of California in Santa Cruz

County, in the course of which Miller's will of January 17, 1941 was admitted to

probate on May 10, 1946. Said court subsequently issued an order and decree of

settlement of final account and final distribution, wherein it found that Miller was a

"resident of the County of Santa Cruz, State of California" at the time of his death

in 1944. Thereafter ancilliary proceedings were filed by the executors of the will

before the Court of First Instance of Manila, which court by order of November 21,

1946, admitted to probate the will of Miller was probated in the California court,

also found that Miller was a resident of Santa Cruz, California, at the time of his

death. On July 29, 1949, the Bank of America, National Trust and Savings

Association of San Francisco California, co-executor named in Miller's will, filed an

estate and inheritance tax return with the Collector, covering only the shares of

stock issued by Philippines corporations, reporting a liability of P269.43 for taxes

and P230.27 for inheritance taxes. After due investigation, the Collector assessed

estate and inheritance taxes, which was received by the said executor on April 3,

1950. The estate of Miller protested the assessment of the liability for estate and

inheritance taxes, including penalties and other increments at P77,300.92, as of

January 16, 1954. This assessment was appealed by De Lara as Ancilliary

Administrator before the Board of Tax Appeals, which appeal was later heard and

decided by the Court of Tax Appeals.

In determining the "gross estate" of a decedent, under Section 122 in relation to

section 88 of our Tax Code, it is first necessary to decide whether the decedent was

a resident or a non-resident of the Philippines at the time of his death. The

Collector maintains that under the tax laws, residence and domicile have different

meanings; that tax laws on estate and inheritance taxes only mention resident and

non-resident, and no reference whatsoever is made to domicile except in Section 93

(d) of the Tax Code; that Miller during his long stay in the Philippines had required


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a "residence" in this country, and was a resident thereof at the time of his death,

and consequently, his intangible personal properties situated here as well as in the

United States were subject to said taxes. The Ancilliary Administrator, however,

equally maintains that for estate and inheritance tax purposes, the term "residence"

is synonymous with the term domicile.

We agree with the Court of Tax Appeals that at the time that The National Internal

Revenue Code was promulgated in 1939, the prevailing construction given by the

courts to the "residence" was synonymous with domicile. and that the two were

used intercnangeabiy. Cases were cited in support of this view, paricularly that of

Velilla vs. Posadas, 62 Phil. 624, wherein this Tribunal used the terms "residence"

and "domicile" interchangeably and without distinction, the case involving the

application of the term residence employed in the inheritance tax law at the time

(section 1536- 1548 of the Revised Administrative Code), and that consequently, it

will be presumed that in using the term residence or resident in the meaning as

construed and interpreted by the Court. Moreover, there is reason to believe that

the Legislature adopted the American (Federal and State) estate and inheritance

tax system (see e.g. Report to the Tax Commision of the Philippines, Vol. II, pages

122-124, cited in I Dalupan, National Internal Revenue Code Annotated, p. 469-

470). In the United States, for estate tax purposes, a resident is considered one

who at the time of his death had his domicile in the United States, and in American

jurisprudence, for purposes of estate and taxation, "residence" is interpreted as

synonymous with domicile, and that

The incidence of estate and succession has historically been determined by domicile

and situsand not by the fact of actual residence. (Bowring vs. Bowers, (1928) 24 F

2d 918, at 921, 6 AFTR 7498, cert. den (1928) 272 U.S.608).

We also agree with the Court of Tax Appeals that at the time of his death, Miller

had his residence or domicile in Santa Cruz, California. During his country, Miller

never acquired a house for residential purposes for he stayed at the Manila Hotel

and later on at the Army and Navy Club. Except this wife never stayed in the

Philippines. The bulk of his savings and properties were in the United States. To his

home in California, he had been sending souvenirs, such as carvings, curios and

other similar collections from the Philippines and the Far East. In November, 1940,

Miller took out a property insurance policy and indicated therein his address as

Santa Cruz, California, this aside from the fact that Miller, as already stated,

executed his will in Santa Cruz, California, wherein he stated that he was "of Santa

Cruz, California". From the foregoing, it is clear that as a non-resident of the

Philippines, the only properties of his estate subject to estate and inheritance taxes

are those shares of stock issued by Philippines corporations, valued at P51,906.45.

It is true, as stated by the Tax Court, that while it may be the general rule that


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personal property, like shares of stock in the Philippines, is taxable at the domicile

of the owner (Miller) under the doctrine of mobilia secuuntur persona, nevertheless,

when he during his life time,

. . . extended his activities with respect to his intangibles, so as to avail himself of

the protection and benefits of the laws of the Philippines, in such a way as to bring

his person or property within the reach of the Philippines, the reason for a single

place of taxation no longer obtains- protection, benefit, and power over the subject

matter are no longer confined to California, but also to the Philippines (Wells Fargo

Bank & Union Trust Co. vs. Collector (1940), 70 Phil. 325). In the instant case, the

actual situs of the shares of stock is in the Philippines, the corporation being

domiciled herein: and besides, the right to vote the certificates at stockholders'

meetings, the right to collect dividends, and the right to dispose of the shares

including the transmission and acquisition thereof by succession, all enjoy the

protection of the Philippines, so that the right to collect the estate and inheritance

taxes cannot be questioned (Wells Fargo Bank & Union Trust Co. vs.

Collector supra). It is recognized that the state may, consistently with due process,

impose a tax upon transfer by death of shares of stock in a domestic corporation

owned by a decedent whose domicile was outside of the state (Burnett vs. Brooks,

288 U.S. 378; State Commission vs. Aldrich, (1942) 316 U.S. 174, 86 L. Ed. 1358,

62 ALR 1008)." (Brief for the Petitioner, p. 79-80).

The Ancilliary Administrator for purposes of exemption invokes the proviso in

Section 122 of the Tax Code, which provides as follows:

. . ."And Provided, however, That no tax shall be collected under this Title in

respect of intangible personal property (a) if the decedent at the time of his death

was a resident of a foreign country which at the time of his death did not impose a

transfer tax or death tax of any character in respect of intangible personal property

of citizens of the Philippines not residing in that country, or (b) if the laws of the

foreign country of which the decedent was resident at the tune of his death allow a

similar exemption from transfer taxes or death taxes of every character in respect

of intangible personal property owned by citizen, of the Philippine not residing in

that foreign country.

The Ancilliary Administrator bases his claim of exemption on (a) the exemption of

non-residents from the California inheritance taxes with respect to intangibles, and

(b) the exemption by way of reduction of P4,000 from the estates of non-residents,

under the United States Federal Estate Tax Law. Section 6 of the California

Inheritance Tax Act of 1935, now reenacted as Section 13851, California Revenue

and Taxation Code, reads as follows:


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SEC. 6. The following exemption from the tax are hereby allowed:

xxx xxx xxx.

(7) The tax imposed by this act in respect of intangible personal property shall not

be payable if decedent is a resident of a State or Territory of the United States or a

foreign state or country which at the time of his death imposed a legacy, succession

of death tax in respect of intangible personal property within the State or Territory

or foreign state or country of residents of the States or Territory or foreign state or

country of residence of the decedent at the time of his death contained a reciprocal

provision under which non-residents were exempted from legacy or succession

taxes or death taxes of every character in respect of intangible personal property

providing the State or Territory or foreign state or country of residence of such non-

residents allowed a similar exemption to residents of the State, Territory or foreign

state or country of residence of such decedent.

Considering the State of California as a foreign country in relation to section 122 of

Our Tax Code we beleive and hold, as did the Tax Court, that the Ancilliary

Administrator is entitled to exemption from the tax on the intangible personal

property found in the Philippines. Incidentally, this exemption granted to non-

residents under the provision of Section 122 of our Tax Code, was to reduce the

burden of multiple taxation, which otherwise would subject a decedent's intangible

personal property to the inheritance tax, both in his place of residence and domicile

and the place where those properties are found. As regards the exemption or

reduction of P4,000 based on the reduction under the Federal Tax Law in the

amount of $2,000, we agree with the Tax Court that the amount of $2,000 allowed

under the Federal Estate Tax Law is in the nature of deduction and not of an

exemption. Besides, as the Tax Court observes--.

. . . this exemption is allowed on all gross estate of non-residents of the United

States, who are not citizens thereof, irrespective of whether there is a

corresponding or similar exemption from transfer or death taxes of non-residents of

the Philippines, who are citizens of the United States; and thirdly, because this

exemption is allowed on all gross estates of non-residents irrespective of whether it

involves tangible or intangible, real or personal property; so that for these reasons

petitioner cannot claim a reciprocity. . .

Furthermore, in the Philippines, there is already a reduction on gross estate tax in

the amount of P3,000 under section 85 of the Tax Code, before it was amended,

which in part provides as follows:

SEC. 85. Rates of estate tax.There shall be levied, assessed, collected, and paid


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upon the transfer of the net estate of every decedent, whether a resident or non-

resident of the Philippines, a tax equal to the sum of the following percentages of

the value of the net estate determined as provided in sections 88 and 89:

One per centrum of the amount by which the net estate exceeds three thousand

pesos and does not exceed ten thousand pesos;. . .

It will be noticed from the dispositive part of the appealed decision of the Tax Court

that the Ancilliary Administrator was ordered to pay the amount of P2,047.22,

representing estate taxes due, together with interest and other increments. Said

Ancilliary Administrator invokes the provisions of Republic Act No. 1253, which was

passed for the benefit of veterans, guerrillas or victims of Japanese atrocities who

died during the Japanese occupation. The provisions of this Act could not be

invoked during the hearing before the Tax Court for the reason that said Republic

Act was approved only on June 10, 1955. We are satisfied that inasmuch as Miller,

not only suffered deprivation of the war, but was killed by the Japanese military

forces, his estate is entitled to the benefits of this Act. Consequently, the interests

and other increments provided in the appealed judgment should not be paid by his

estate.

With the above modification, the appealed decision of the Court of Tax Appeals is

hereby affirmed. We deem it unnecessary to pass upon the other points raised in

the appeal. No costs 7jqNQ1TZV.

Bengzon, Paras, C.J., Padilla, Reyes, A., Bautista Angelo, Labrador, Concepcion,

Reyes, J.B.L., Endencia, and Felix, JJ., concur. .

G.R. No. L-24756 October 31, 1968

CITY OF BAGUIO, plaintiff-appellee,vs.FORTUNATO DE LEON, defendant-appellant.

The City Attorney for plaintiff-appellee.Fortunato de Leon for and in his own behalf as defendant-appellant.

FERNANDO, J.:

In this appeal, a lower court decision upholding the validity of an ordinance1 of the Cityof Baguio imposing a license fee on any person, firm, entity or corporation doingbusiness in the City of Baguio is assailed by defendant-appellant Fortunato de Leon. Hewas held liable as a real estate dealer with a property therein worth more than P10,000,but not in excess of P50,000, and therefore obligated to pay under such ordinance the


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P50 annual fee. That is the principal question. In addition, there has been a firm andunyielding insistence by defendant-appellant of the lack of jurisdiction of the City Courtof Baguio, where the suit originated, a complaint having been filed against him by theCity Attorney of Baguio for his failure to pay the amount of P300 as license fee coveringthe period from the first quarter of 1958 to the fourth quarter of 1962, allegedly, inspite

of repeated demands. Nor was defendant-appellant agreeable to such a suit beinginstituted by the City Treasurer without the consent of the Mayor, which for him wasindispensable. The lower court was of a different mind.

In its decision of December 19, 1964, it declared the above ordinance as amended,valid and subsisting, and held defendant-appellant liable for the fees therein prescribedas a real estate dealer. Hence, this appeal. Assume the validity of such ordinance, andthere would be no question about the liability of defendant-appellant for the abovelicense fee, it being shown in the partial stipulation of facts, that he was "engaged in therental of his property in Baguio" deriving income therefrom during the period covered bythe first quarter of 1958 to the fourth quarter of 1962.

The source of authority for the challenged ordinance is supplied by Republic Act No.329, amending the city charter of Baguio2 empowering it to fix the license fee andregulate "businesses, trades and occupations as may be established or practiced in theCity."

Unless it can be shown then that such a grant of authority is not broad enough to justifythe enactment of the ordinance now assailed, the decision appealed from must beaffirmed. The task confronting defendant-appellant, therefore, was far from easy. Whyhe failed is understandable, considering that even a cursory reading of the aboveamendment readily discloses that the enactment of the ordinance in question finds

support in the power thus conferred.

Nor is the question raised by him as to the validity thereof novel in character. In Medinav. City of Baguio,3 the effect of the amendatory section insofar as it would expand theprevious power vested by the city charter was clarified in these terms: "Appellantsapparently have in mind section 2553, paragraph (c) of the Revised AdministrativeCode, which empowers the City of Baguio merely to impose a license fee for thepurpose of rating the business that may be established in the city. The power as thusconferred is indeed limited, as it does not include the power to levy a tax. But on July15, 1948, Republic Act No. 329 was enacted amending the charter of said city andadding to its power to license the power to tax and to regulate. And it is precisely havingin view this amendment that Ordinance No. 99 was approved in order to increase therevenues of the city. In our opinion, the amendment above adverted to empowers thecity council not only to impose a license fee but also to levy a tax for purposes ofrevenue, more so when in amending section 2553 (b), the phrase 'as provided by law'has been removed by section 2 of Republic Act No. 329. The city council of Baguio,therefore, has now the power to tax, to license and to regulate provided that thesubjects affected be one of those included in the charter. In this sense, the ordinance


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under consideration cannot be considered ultra vireswhether its purpose be to levy atax or impose a license fee. The terminology used is of no consequence."

It would be an undue and unwarranted emasculation of the above power thus granted ifdefendant-appellant were to be sustained in his contention that no such statutory

authority for the enactment of the challenged ordinance could be discerned from thelanguage used in the amendatory act. That is about all that needs to be said inupholding the lower court, considering that the City of Baguio was not devoid ofauthority in enacting this particular ordinance. As mentioned at the outset, however,defendant-appellant likewise alleged procedural missteps and asserted that thechallenged ordinance suffered from certain constitutional infirmities. To such pointsraised by him, we shall now turn.

1. Defendant-appellant makes much of the alleged lack of jurisdiction of the City Courtof Baguio in the suit for the collection of the real estate dealer's fee from him in theamount of P300. He contended before the lower court, and it is his contention now, that

while the amount of P300 sought was within the jurisdiction of the City Court of Baguiowhere this action originated, since the principal issue was the legality andconstitutionality of the challenged ordinance, it is not such City Court but the Court ofFirst Instance that has original jurisdiction.

There is here a misapprehension of the Judiciary Act. The City Court has jurisdiction.Only recently, on September 7, 1968 to be exact, we rejected a contention similar incharacter in Nemenzo v. Sabillano.4 The plaintiff in that case filed a claim for thepayment of his salary before the Justice of the Peace Court of Pagadian, Zamboangadel Sur. The question of jurisdiction was raised; the defendant Mayor asserted that whatwas in issue was the enforcement of the decision of the Commission of Civil Service;

the Justice of the Peace Court was thus without jurisdiction to try the case. The aboveplea was curtly dismissed by Us, as what was involved was "an ordinary money claim"and therefore "within the original jurisdiction of the Justice of the Peace Court where itwas filed, considering the amount involved." Such is likewise the situation here.

Moreover, in City of Manila v. Bugsuk Lumber Co.,5 a suit to collect from a defendantthis license fee corresponding to the years 1951 and 1952 was filed with the MunicipalCourt of Manila, in view of the amount involved. The thought that the municipal courtlacked jurisdiction apparently was not even in the minds of the parties and did notreceive any consideration by this Court.

Evidently, the fear is entertained by defendant-appellant that whenever a constitutionalquestion is raised, it is the Court of First Instance that should have original jurisdictionon the matter. It does not admit of doubt, however, that what confers jurisdiction is theamount set forth in the complaint. Here, the sum sought to be recovered was clearlywithin the jurisdiction of the City Court of Baguio.

Nor could it be plausibly maintained that the validity of such ordinance being open toquestion as a defense against its enforcement from one adversely affected, the matter


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should be elevated to the Court of First Instance. For the City Court could rely on thepresumption of the validity of such ordinance,6 and the mere fact, however, that in theanswer to such a complaint a constitutional question was raised did not suffice to oustthe City Court of its jurisdiction. The suit remains one for collection, the lack of validitybeing only a defense to such an attempt at recovery. Since the City Court is possessed

of judicial power and it is likewise axiomatic that the judicial power embraces theascertainment of facts and the application of the law, the Constitution as the highest lawsuperseding any statute or ordinance in conflict therewith, it cannot be said that a CityCourt is bereft of competence to proceed on the matter. In the exercise of such delicatepower, however, the admonition of Cooley on inferior tribunals is well worthremembering. Thus: "It must be evident to any one that the power to declare alegislative enactment void is one which the judge, conscious of the fallibility of thehuman judgment, will shrink from exercising in any case where he can conscientiouslyand with due regard to duty and official oath decline the responsibility."7 While it remainsundoubted that such a power to pass on the validity of an ordinance alleged to infringecertain constitutional rights of a litigant exists, still it should be exercised with due care

and circumspection, considering not only the presumption of validity but also therelatively modest rank of a city court in the judicial hierarchy.

2. To repeat the challenged ordinance cannot be considered ultra viresas there is morethan ample statutory authority for the enactment thereof. Nonetheless, its validity onconstitutional grounds is challenged because of the allegation that it imposed doubletaxation, which is repugnant to the due process clause, and that it violated therequirement of uniformity. We do not view the matter thus.

As to why double taxation is not violative of due process, Justice Holmes made clear inthis language: "The objection to the taxation as double may be laid down on one side. ...

The 14th Amendment [the due process clause] no more forbids double taxation than itdoes doubling the amount of a tax, short of confiscation or proceedings unconstitutionalon other grounds."8With that decision rendered at a time when American sovereignty inthe Philippines was recognized, it possesses more than just a persuasive effect. Tosome, it delivered the coup de graceto the bogey of double taxation as a constitutionalbar to the exercise of the taxing power. It would seem though that in the United States,as with us, its ghost as noted by an eminent critic, still stalks the juridical state. In a1947 decision, however,9 we quoted with approval this excerpt from a leading Americandecision:10 "Where, as here, Congress has clearly expressed its intention, the statutemust be sustained even though double taxation results."

At any rate, it has been expressly affirmed by us that such an "argument against doubletaxation may not be invoked where one tax is imposed by the state and the other isimposed by the city ..., it being widely recognized that there is nothing inherentlyobnoxious in the requirement that license fees or taxes be exacted with respect to thesame occupation, calling or activity by both the state and the political subdivisionsthereof."11


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The above would clearly indicate how lacking in merit is this argument based on doubletaxation.

Now, as to the claim that there was a violation of the rule of uniformity established bythe constitution. According to the challenged ordinance, a real estate dealer who leases

property worth P50,000 or above must pay an annual fee of P100. If the property isworth P10,000 but not over P50,000, then he pays P50 and P24 if the value is less thanP10,000. On its face, therefore, the above ordinance cannot be assailed as violative ofthe constitutional requirement of uniformity. In Philippine Trust Company v.Yatco,12 Justice Laurel, speaking for the Court, stated: "A tax is considered uniformwhen it operates with the same force and effect in every place where the subject maybe found."

There was no occasion in that case to consider the possible effect on such aconstitutional requirement where there is a classification. The opportunity camein Eastern Theatrical Co. v. Alfonso.13 Thus: "Equality and uniformity in taxation means

that all taxable articles or kinds of property of the same class shall be taxed at the samerate. The taxing power has the authority to make reasonable and natural classificationsfor purposes of taxation; ..." About two years later, Justice Tuason, speaking for thisCourt in Manila Race Horses Trainers Assn. v. De la Fuente14 incorporated the aboveexcerpt in his opinion and continued: "Taking everything into account, the differentiationagainst which the plaintiffs complain conforms to the practical dictates of justice andequity and is not discriminatory within the meaning of the Constitution."

To satisfy this requirement then, all that is needed as held in another case decided twoyears later, 15 is that the statute or ordinance in question "applies equally to all persons,firms and corporations placed in similar situation." This Court is on record as accepting

the view in a leading American case

16

that "inequalities which result from a singling outof one particular class for taxation or exemption infringe no constitutional limitation." 17

It is thus apparent from the above that in much the same way that the plea of doubletaxation is unavailing, the allegation that there was a violation of the principle ofuniformity is inherently lacking in persuasiveness. There is no need to pass upon theother allegations to assail the validity of the above ordinance, it being maintained thatthe license fees therein imposed "is excessive, unreasonable and oppressive" and thatthere is a failure to observe the mandate of equal protection. A reading of the ordinancewill readily disclose their inherent lack of plausibility.

3. That would dispose of all the errors assigned, except the last two, which wouldpredicate a grievance on the complaint having been started by the City Treasurer ratherthan the City Mayor of Baguio. These alleged errors, as was the case with the othersassigned, lack merit.

In much the same way that an act of a department head of the national government,performed within the limits of his authority, is presumptively the act of the Presidentunless reprobated or disapproved,18 similarly the act of the City Treasurer, whose


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position is roughly analogous, may be assumed to carry the seal of approval of the CityMayor unless repudiated or set aside. This should be the case considering that suchcity official is called upon to see to it that revenues due the City are collected. Whenadministrative steps are futile and unavailing, given the stubbornness and obduracy of ataxpayer, convinced in good faith that no tax was due, judicial remedy may be resorted

to by him. It would be a reflection on the state of the law if such fidelity to duty would bemet by condemnation rather than commendation.

So, much for the analytical approach. The conclusion thus reached has a reinforcementthat comes to it from the functional and pragmatic test. If a city treasurer has to awaitthe nod from the city mayor before a municipal ordinance is enforced, then opportunityexists for favoritism and undue discrimination to come into play. Whatever valid reasonmay exist as to why one taxpayer is to be accorded a treatment denied another, thesuspicion is unavoidable that such a manifestation of official favor could have beeninduced by unnamed but not unknown consideration. It would not be going too far toassert that even defendant-appellant would find no satisfaction in such a sad state of

affairs. The more desirable legal doctrine therefore, on the assumption that a choiceexists, is one that would do away with such temptation on the part of both taxpayer andpublic official alike.

WHEREFORE, the lower court decision of December 19, 1964, is hereby affirmed.Costs against defendant-appellant.

[G.R. No. 146749. June 10, 2003]

CHINA BANKING CORPORATION, petitioner, vs. COURT OFAPPEALS, COURT OF TAX APPEALS, and COMMISSIONER OFINTERNAL REVENUE, respondents.

[G.R. No. 147938. June 10, 2003]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CHINABANKING CORPORATION, respondent.

D E C I S I O N

CARPIO, J.:


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The Case

Before the Court are the consolidated petitions for review[1]

assailing theDecisions

[2]of 16 October 2000 and 15 November 2000, and the Resolutions

of 25 April 2001 and 8 January 2001 of the Court of Appeals in CA-G.R. SPNo. 50790 and in CA-G.R. SP No. 50839, respectively. The Court of Appealsaffirmed the Decision

[3]of 30 September 1998 and the Resolution of 15

January 1999 of the Court of Tax Appeals in CTA Case No. 5405. The Courtof Tax Appeals granted China Banking Corporation (CBC) a tax refund orcredit of P123,278.73 but denied due to insufficiency of evidence theremainder of CBCs claim forP1,140,623.82.

Antecedent Facts

CBC is a universal banking corporation organized and existing underPhilippine law. On 20 July 1994, CBC paid P12,354,933.00 as gross receiptstax on its income from interests on loan investments, commissions, services,collection charges, foreign exchange profits and other operating earningsduring the second quarter of 1994.

On 30 January 1996, the Court of Tax Appeals in Asian BankCorporation v. Commissioner of Internal Revenue

[4]ruled that the 20%

final withholding tax on a banks passive interest income does not form part ofits taxable gross receipts.

[5]

On 19 July 1996, CBC filed with the Commissioner of Internal Revenue(Commissioner) a formal claim for tax refund or credit ofP1,140,623.82 fromthe P12,354,933.00 gross receipts tax that CBC paid for the second quarter of1994. To ensure that it filed its claim within the two-year prescriptiveperiod,

[6]CBC also filed on the same day a petition for review with the Court of

Tax Appeals. Citing Asian Bank,CBC argued that it was not liable for thegross receipts tax - amounting to P1,140,623.82 - on the sums withheld by

the Bangko Sentral ng Pilipinasas final withholding tax on CBCs passiveinterest income

[7]in 1994.

Disputing CBCs claim, the Commissioner asserted that CBC paid thegross receipts tax pursuant to Section 119 (now Section 121) of the NationalInternal Revenue Code (Tax Code) and pertinent Bureau of InternalRevenue (BIR) regulations. The Commissioner argued that the finalwithholding tax on a banks interest income forms part of its gross receipts in
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computing the gross receipts tax.[8]

The Commissioner contended that theterm gross receipts means the entire income or receipt, without anydeduction.

The Ruling of the Court of Tax Appeals

The Court of Tax Appeals ruled in favor of CBC and held that the 20%final withholding tax on interest income does not form part of CBCs taxablegross receipts. The tax court based its decision mainly on its earlier rulingin Asian Bank

[9]which the tax court quoted extensively, as follows:

That petitioner is liable for gross receipts tax is not disputed. The question that is now

left for our determination is the basis of the said tax which issue has already been

settled in the case cited by petitioner, Asian Bank Corporation vs. Commissioner ofInternal Revenue, supra. In said case, this Court held:

We agree with the petitioner that the 20% final withholding tax on its interest income

should not form part of its taxable gross receipts.

Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain Income

Derived from Banking Activities provides that the rates of tax to be imposed on the

gross receipts of such financial institution shall be based on all items on income

actually received, thus:

SEC. 4. xxx

(e) Gross receipts tax on banks, non-bank financial intermediaries,

financing companies, and other non-bank financial intermediaries not

performing quasi-banking activities. - The rates of taxes to be imposed

on the gross receipts of such financial institutions shall be based on all

items of income actually received. Mere accrual shall not be considered,

but once payment is received on such accrual or in cases of prepayment,

then the amount actually received shall be included in the tax base of such

financial institutions, as provided hereunder. (Underscoring supplied)

From the foregoing, it is but logical to infer that the final tax, not having been

received by the petitioner but instead went to the coffers of the government, should no

longer form part of its gross receipts for the purpose of computing the GRT. This

conclusion is in accord with the interpretation of the Supreme Court in the case

entitled Collector of Internal Revenue vs. Manila Jockey Club, 108 Phil. 821, as

quoted by this Court in disposing of a similar issue in the case entitledCompania
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Maritima vs. Acting Commissioner of Internal Revenue, CTA Case No. 1426

dated November 14, 1966, thus:

In the second place, the highest tribunal of the land interpreted the term gross

receipts to mean all receipts of a taxpayer excluding those which have been

especially earmarked by law or regulation for the government or some person otherthan the taxpayer. Thus, it was held:

xxx xx. The Government could not have meant to tax as gross receipts of the Manila

Jockey Club the % which it directs same Club to turn over to the Board of

Races. The latter being a Government institution, there would be double taxation,

which should be avoided unless the statute admits of no other interpretation. In the

same manner, the Government could not have intended to consider as gross receipts

the portion of the funds which it directed the Club to give, or know the Club would

give, to winning horses and Jockeysadmitted 5%. It is true that the law says that

out of the total wager funds 12 % shall be set aside as the commission of the trackowners but the law itself takes official notice, and virtually approves or directs

payment of the portion that goes to owners of horses as prizes and bonuses of jockeys,

which portion is admittedly 5% out of the 12 % commission. As it did not at that

time contemplate the application of gross receipts revenue principle, the law inmaking a distribution of the total wager funds, took no trouble of separating one item

from the other; and for convenience, grouped three items under one common

denomination.

Needless to say, gross receipts of the proprietor of the amusement place should not

include any money which although delivered to the amusement place has been

especially earmarked by law or regulation for some person other than the proprietor.(The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc., G.R. Nos. L-

13890 & L-13887, June 30, 1960)

It is to be noted that, under Section 260 of the Tax Code, a racetrack is subject to an

amusement tax of 20% of its gross receipts and the term gross receipts embraces all

the receipts of the proprietor, lessee, or operator of the amusement place.Notwithstanding the broad and all-embracing definition of the term gross receipts

found in our amusement tax law, our Supreme Court did not adopt a literal

interpretation of the said term in the case of the Manila Jockey Club, Inc., x x x.[10]

Thus, the Court of Tax Appeals granted CBC a partial refundof P123,778.73 since the tax court found that the evidence of CBC wassufficient only to support the payment of the gross receipts tax on its mediumterm investments. The dispositive portion of the tax courts Decision of 30September 1998 states as follows:
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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 P123,778.73 representing the overpaid GRT payments for the second quarter of

1994. The remaining amount claimed by petitioner is DENIED for insufficiency of

evidence.

SO ORDERED.[11]

However, Associate Judge Amancio Q. Saga dissented to the exclusion ofthe final withholding tax from the banks taxable gross receipts. He opinedthat: (1) Section 4(e) of Revenue Regulations No. 12-80 did not prescribe themanner of computing the tax base for the gross receipts tax but merelyauthorized the cash basis as the method of accounting in reporting theinterest income; (2) the exclusion was effectively an exemption from tax, andthere is no specific provision of law clearly granting such exemption; (3) no

law or regulation specifically earmarked the final withholding tax for someother person than CBC, thus the Supreme Court decisions cited in AsianBank are not applicable; and (4) there is no double taxation if the lawimposes different taxes on the same income.

Both CBC and the Commissioner filed motions for reconsideration fromthe tax courts decision. CBC argued that the tax court should have givenproper weight to the testimony of the witnesses that CBC presented on thecomputation and payment of its gross receipts tax. CBC pointed out that theCommissioner did not controvert such testimony. On the other hand, the

Commissioner maintained that the final withholding tax forms part of thetaxable gross receipts. However, the tax court dismissed both motions in itsResolution of 15 January 1999.

[12]

The CBC and the Commissioner both filed petitions for review under Rule43 of the Rules of Court, appealing the tax courts decision and resolution tothe Court of Appeals.

The Ruling of the Court of Appeals

The Court of Appeals did not consolidate the petitions for review filed byCBC and the Commissioner. The parties apparently failed to move for theconsolidation of the two petitions. The 14

thDivision of the Court of Appeals, in

its Decision of 15 November 2000[13]

in CA-G.R. SP No. 50839, affirmed thetax courts ruling on the ground that substantial evidence supported the factualfindings of the tax court. The 13

thDivision of the Court of Appeals, in its
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Decision of 16 October 2000[14]

in CA-G.R. SP No. 50790, also affirmed thetax courts ruling on the ground that the 20% final withholding tax does notform part of CBCs taxable gross receipts.

The 14thDivision of the appellate court denied CBCs subsequent motion

for reconsideration in its Resolution of 8 January 2001.[15]

Likewise, the13thDivision of the appellate court denied the Commissioners motion for

reconsideration in its Resolution of 25 April 2001.[16]

On 6 February 2001, CBC filed with the Court a petition for reviewassailing the decision of the Court of Appeals in CA-G.R. SP No. 50839, andprayed that the Court render a decision awarding CBCs full claim for therefund of P1,140,623.82. CBC claimed that since it did not actually receivethe final withholding tax, the same should not form part of its taxable grossreceipts. CBC also asserted that it had presented sufficient evidence to proveits overpayment of the gross receipts tax, and that it had a right to a refund ofthe full P1,140,623.82 overpayment.

On 25 June 2001, the Commissioner filed with the Court a petition forreview questioning the decision of the Court of Appeals in CA-G.R. SP No.50790, and prayed that the Court deny CBCs claim for refund. TheCommissioner pointed out that the Court of Appeals had already reversedthe Asian Bankdecision of the Court of Tax Appeals in Commissioner ofInternal Revenue v. Asian Bank Corporation,

[17]promulgated by the Court

of Appeals earlier on 22 November 1999. The Commissioner furthermanifested that the Court of Tax Appeals subsequently rendered two

decisions reversing its ruling in Asian Bank. In Far East Bank and TrustCo. v. Commissioner of Internal Revenue

[18]and Standard Chartered

Bank v. Commissioner of Internal Revenue,[19]the tax court ruled[20]that

the 20% final withholding tax on a banks interest income forms part of itsgross receipts in computing the gross receipts tax.

During the oral arguments of this case on 21 April 2003, the Court orderedthe consolidation[21]of the petition filed by CBC in G.R. No. 146749 and thepetition filed by the Commissioner in G.R. No. 147938.

The Issues

The consolidated petitions raise the following issues:

1. Whether the 20% final withholding tax on interest income should formpart of CBCs gross receipts in computing the gross receipts tax onbanks;
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2. Whether CBC has established by sufficient evidence its right to claimthe full refund of P1,140,623.82 representing alleged overpayment ofthe gross receipts tax.

The Ruling of the Court

We rule that the amount of interest income withheld in payment of the 20%final withholding tax forms part of CBCs gross receipts in computing the grossreceipts tax on banks.

Section 121[22]

of the Tax Code provides as follows:

Sec. 121. Tax on Banks and Non-bank Financial Intermediaries.There shall be

collected a tax on gross receipts derived from sources within the Philippines by all

banks and non-bank financial intermediaries in accordance with the followingschedule:

(a) On interest, commissions and discounts from lending activities as well as income

from financial leasing, on the basis of remaining maturities on instruments from

which such receipts are derived.

Short-term maturity

(not in excess of two [2] years).. 5%Medium-term maturity

(over two [2] years but notexceeding four [4] years). 3%

Long-term maturity

(i) over four (4) years but not exceeding

seven (7) years .. 1%(ii) over seven (7) years) . 0%

(b) On dividends . 0%(c) On royalties, rentals of property, real or personal, profits from exchange

and all other items treated as gross income under Section 32 of this Code

..... 5%;

Provided, however, That in case the maturity period referred to in paragraph(a) is shortened thru pretermination, then the maturity period shall be

reckoned to end as of the date of pretermination for purposes of classifying

the transaction as short, medium or long term and the correct rate of tax shall

be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing the same tax

herein provided on persons performing similar banking activities.
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The gross receipts tax on banks was first imposed on 1 October 1946 byRepublic Act No. 39 (RA No. 39) which amended Section 249

[23]of the Tax

Code of 1939. Interest income of banks, without any deduction, formed partof their taxable gross receipts. From October 1946 to June 1977, there wasno withholding tax on interest income from bank deposits.

On 3 June 1977, Presidential Decree No. 1156 required the withholding atsource of a 15% tax on interest on bank deposits. This tax was a creditable,not a final withholding tax. Despite the withholding of the 15% tax, the entireinterest income, without any deduction, formed part of the banks taxablegross receipts. On 17 September 1980, Presidential Decree No. 1739 madethe withholding tax on interest a final tax at the rate of 15% on savingsaccount, and 20% on time deposits.

[24]Still, from 1980 until the Court of Tax

Appeals decision in Asian Bankon 30 January 1996, banks included theentire interest income, without any deduction, in their taxable gross receipts.

In Asian Bank, the Court of Tax Appeals held that the final withholding taxis not part of the banks taxable gross receipts. The tax court anchored itsruling on Section 4(e) of Revenue Regulations No. 12-80,

[25]which stated that

the gross receipts shall be based on all items actually received by the bank.The tax court ruled that the bank does not actually receive the finalwithholding tax. As authority, the tax court citedCollector of InternalRevenue v. Manila Jockey Club,

[26]which held that gross receipts of the

proprietor should not include any money which although delivered to theamusement place has been especially earmarked by law or regulation for

some person other than the proprietor. In effect, the tax court consideredSection 4(e) of Revenue Regulations No. 12-80 as earmarking by regulationthe final withholding tax in favor of the government. This earmarking,according to the tax court, prevented the final withholding tax from beingactually received by the bank. The tax court adopted the AsianBankruling in succeeding cases involving the same issue.

[27]

Subsequently, the Court of Tax Appeals reversed its ruling in AsianBank. InFar East Bank & Trust Co. v. Commissioner

[28]andStandardChartered Bank v. Commissioner,

[29]both promulgated on 16 November

2001, the tax court ruled that the final withholding tax forms part of the banks

gross receipts in computing the gross receipts tax. The tax court held thatSection 4(e) of Revenue Regulations No. 12-80 did not prescribe thecomputation of the gross receipts but merely authorized the determination ofthe amount of gross receipts on the basis of the method of accounting beingused by the taxpayer.
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The tax court also held in Far East Bankand Standard CharteredBank that the exclusion of the final withholding tax from gross receiptsoperates as a tax exemption which the law must expressly grant. No lawprovides for such exemption. In addition, the tax court pointed out thatSection 7(c) of Revenue Regulations No. 17-84 had already supersededSection 4(e) of Revenue Regulations No. 12-80. Section 7(c) of RevenueRegulations No. 17-84, the existing applicable regulation, states:

Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit

Substitutes -

x x x

(c) If the recipient of the above-mentioned items of income are financial institutions,

the same shall be includedas part of the tax base upon which the gross receipts tax is

imposed. (Emphasis supplied)

The items of income referred to in Section 7(c) are interest on bank depositsand yield from deposit substitutes.

There are two related legal concepts that come into play in the resolutionof the first issue raised in the instant case. First is the meaning of the termgross receipts. Second is the determination of the circumstance wheninterest income becomes part of gross receipts for tax purposes.

The Tax Code does not define the term gross receipts for purposes ofthe gross receipts tax on banks. Since 1 October 1946 when RA No. 39 firstimposed the gross receipts tax on banks until the present, there has been nostatutory definition of the term gross receipts. Absent a statutory definition,the BIR has applied the term in its plain and ordinary meaning.

On 12 July 1952, four years after RA No. 39 imposed the gross receiptstax on banks, the defunct Board of Tax Appeals [30]had occasion to interpretthe term gross receipts. InNational City Bank v. Collector of InternalRevenue,

[31]the bank contended that the amortized premium costs in buyingU.S. Government bonds should be deducted from the interest income fromthe bonds in computing the banks gross receipts tax. On the other hand, theCollector of Internal Revenue argued that gross receipts should be

interpreted as the whole amount received as interests without deductions,otherwise, if deductions are made from gross receipts, it will be considered asnet receipts. The Board of Tax Appeals agreed with the Collector, ruling that

Conceding that the premiums amortized form part of the capital invested by the

petitioner, to deduct same from the accrued interests of the bonds would result in the
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realization of the net interests and not the gross receipts on the interests earned by the

petitioner in its investments as provided for in Section 249 of the Tax Code. The

denial, therefore, of the respondent in allowing the deduction of the amortized

premium in the amount of P239,678.41 from the accrued interest of the bonds, is in

order.

The National City Bankruling remained unchallenged from 1952 untilJanuary 1996 when the Court of Tax Appeals rendered its decision inAsianBank. In November 2001, however, the same tax court, citing National CityBankamong other authorities, reversed Asian Bankin the twin cases of FarEast Bankand Standard CharteredBank.

As commonly understood, the term gross receipts means the entirereceipts without any deduction. Deducting any amount from the grossreceipts changes the result, and the meaning, to net receipts. Any deduction

from gross receipts is inconsistent with a law that mandates a tax on grossreceipts, unless the law itself makes an exception. As explained by theSupreme Court of Pennsylvania in Commonwealth of Pennsylvania v.Koppers Company, Inc.,[32]-

Highly refined and technical tax concepts have been developed by the accountant and

legal technician primarily because of the impact of federal income tax legislation.

However, this in no way should affect or control the normal usage of words in the

construction of our statutes; and we see nothing that would require us not to include

the proceeds here in question in the gross receipts allocation unless statutorily such

inclusion is prohibited. Under the ordinary basic methods of handling accounts, theterm gross receipts, in the absence of any statutory definition of the term, must betaken to include the whole total gross receipts without any deductions. x x

x. [Citations omitted] (Emphasis supplied)

Likewise, in Laclede Gas Co. v. City of St. Louis,[33]

the Supreme Courtof Missouri held:

The word gross appearing in the term gross receipts, as used in the ordinance,must have been and was there used as the direct antithesis of the word net.In its

usual and ordinary meaning gross receipts of a business is the whole and entireamount of the receipts without deduction. x x x On the contrary net receiptsusually are the receipts which remain after deductions are made from the gross

amount thereof of the expenses and cost of doing business, including fixed charges

and depreciation. Gross receipts become net receipts after certain proper deductions

are made from the gross. And in the use of the words gross receipts, the instantordinance, of course, precluded plaintiff from first deducting its costs and expenses of
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doing business, etc., in arriving at the higher base figure upon which it must pay the

5% tax under this ordinance. (Emphasis supplied)

Absent a statutory definition, the term gross receipts is understood in itsplain and ordinary meaning. Words in a statute are taken in their usual and

familiar signification, with due regard to their general and popular use.[34]TheSupreme Court of Hawaii held in Bishop Trust Company v. Burns

[35]that -

x x x It is fundamental that in construing or interpreting a statute, in order to

ascertain the intent of the legislature, the language used therein is to be taken in the

generally accepted and usual sense. Courts will presume that the words in a statute

were used to express their meaning in common usage. This principle is equally

applicable to a tax statute. [Citations omitted] (Emphasis supplied)

The Tax Code does not also define the term gross receipts for purposes

of the common carriers tax,[36]the international carriers tax,[37]the tax on radioand television franchises,

[38]and the tax on finance companies.

[39]All these

business taxes under Title V of the Tax Code are based on grossreceipts. Despite the absence of a statutory definition, these taxes have beencollected in this country for over half a century on the general and commonunderstanding that they are based on all receipts without any deduction.

Since 1 October 1946 when RA No. 39 first imposed the gross receipts taxon banks under Section 249 of the Tax Code, the legislature has re-enactedseveral times this section of the Tax Code. On 24 December 1972,

Presidential Decree No. 69, which enacted into law theOmnibus Tax Bill of1972, re-enacted Section 249 of the Tax Code. Then on 11 June 1977,Presidential Decree No. 1158, otherwise known as the NationalInternalRevenue Code of 1977, re-enacted Section 249 as Section 119 of the TaxCode. Finally on 11 December 1997, Republic Act No. 8424, otherwiseknown as the Tax Reform Act of 1997, re-enacted Section 119 as thepresent Section 121 of the Tax Code. Throughout these re-enactments, thelegislature has not provided a statutory definition of the term gross receiptsfor purposes of the gross receipts tax on banks, common carriers,international carriers, radio and television operators, and finance companies.

Under Revenue Regulations Nos. 12-80 and 17-84, as well as in severalnumbered rulings,

[40]the BIR has consistently ruled that the term gross

receipts does not admit of any deduction. This interpretation has remainedunchanged throughout the various re-enactments of the present Section 121of the Tax Code. The only conclusion that can be drawn is that the legislaturehas adopted the BIRs interpretation, following the principle of legislative
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approval by re-enactment. In Inte-provincial Autobus Co., Inc. v. Collectorof Internal Revenue,

[41]the Court declared:

Another reason for sustaining the validity of the regulation may be found in the

principle of legislative approval by re-enactment. The regulations were approved on

September 16, 1924. When the National Internal Revenue Code was approved onFebruary 18, 1939, the same provisions on stamp tax, bills of lading and receipts were

reenacted. There is a presumption that the Legislature reenacted the law on the tax

with full knowledge of the contents of the regulations then in force regarding bills of

lading and receipts, and that it approved or confirmed them because they carry out the

legislative purpose.

The presumption is that the legislature is familiar with thecontemporaneous interpretation of a statute given by the administrativeagency tasked to enforce the statute.

[42]The subsequent re-enactments of the

present Section 121 of the Tax Code, without changes on the term interpretedby the BIR, confirm that the BIRs interpretation carries out the legislativepurpose.

However, for the amusement tax, which is also a business tax under thesame Title V, the Tax Code makes a special definition of the term grossreceipts. The term gross receipts for amusement tax purposes embracesall receipts of the proprietor, lessee or operator of the amusementplace.

[43]The Tax Code further adds that [s]aid gross receipts also include

income from television, radio and motion picture rights, if any.[44]

This

definition merely confirms that the term gross receipts embraces the entirereceipts without any deduction or exclusion, as the term is generally andcommonly understood.

Even without a statutory definition, the term gross receipts will have toexclude any deduction of the withholding tax. Otherwise, other items ofincome in Section 121 would also be subject to deductions despite theabsence of a specific provision of law excluding any portion of such items ofincome from taxable gross receipts. Section 121 refers not only to interestincome, but also to dividends, x x xrentals of property, real or personal,

profits from exchange and all other items treated as gross income underSection 32 of this Code.

Under Revenue Regulations No. 13-78,[45]

rental income received by abank is subject to a creditable withholding tax. Under Section 121, such rentalincome, without any deduction of the withholding tax, forms part of the bankstaxable gross receipts. The amount of the creditable withholding tax isindubitably part of the banks rental income. The creditable withholding tax is
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merely an advance payment by the bank of its tax on the rental income. Theamount of the withholding tax comes from the banks rental income and itspayment extinguishes the banks tax liability. The amount deducted by thepayor-lessee and remitted to the government, representing the creditablewithholding tax, is money the bank owns that is used to pay the banks tax

liability. The amount deducted and remitted as creditable withholding taxpatently comes from the banks rental income, and correctly forms part of thebanks gross receipts.

In the same manner, the amount of the final withholding tax on interestincome should not be deducted from the banks interest income for purposes of the gross receipts tax. The final withholding tax on interest, like thecreditable withholding tax on rentals, comes from the banks income and ismoney the bank owns that is used to pay the banks tax liability. The finalwithholding tax and the creditable withholding tax constitute payment by the

bank to extinguish a tax obligation to the government. The bank can only paywith money it owns, or with money it is authorized to spend. In either case,such money comes from the banks revenues or receipts, and certainly notfrom the governments coffers.

CBCs argument will create tax exemptions where none exist. If theamount of the final withholding tax is excluded from taxable gross receipts,then the amount of the creditable withholding tax should also be excludedfrom taxable gross receipts. For that matter, any withholding tax should beexcluded from taxable gross receipts because such withholding would qualify

as earmarking by regulation. Under Section 57(B) of the Tax Code, theCommissioner, with the approval of the Secretary of Finance, may byregulation impose a withholding tax on other items of income to facilitate thecollection of the income tax. Every time the Commissioner expands thewithholding tax, he will create tax exemptions where the law provides fornone. Obviously, the Court cannot allow this.

Under Section 27(D)(4) of the Tax Code, dividends received by a domesticcorporation from another corporation are not subject to the corporate incometax. Such intracorporate dividends are some of the passive incomes that aresubject to the 20% final tax, just like interest on bank deposits. Intracorporate

dividends, being already subject to the final tax on income, no longer form partof the banks gross income under Section 32 of the Tax Code for purposes ofthe corporate income tax. However, Section 121 expressly states thatdividends shall form part of the banks gross receipts for purposes of the grossreceipts tax on banks. This is the same treatment given to the banks interestincome that is subject to the final withholding tax. Such interest income, beingalready subject to the final tax, no longer forms part of the banks gross


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income for purposes of the corporate income tax. Section 121, however,expressly includes such interest income as part of the banks gross receiptsfor purposes of the gross receipts tax.

Whether an item of income is excluded from gross income or is subject to

the final withholding tax has no bearing on its inclusion in gross receipts ifSection 121 expressly includes such income as part of gross receipts. Asheld in Commonwealth of Pennsylvania, [t]he exemption of dividends andinterest from taxation, through their exclusion from net income to be allocated,does not also exclude those items from the gross receipts from businessactivity of the corporation.

[46]

There is a policy objective why no deductions, exemptions or exclusionsare normally allowed in a gross receipts tax. The gross receipts tax, asopposed to the income tax, was devised to maintain simplicityin taxcollection and to assure a steady sourceof state revenue even duringperiods of economic slowdown.[47]Such a policy frowns upon erosion of thetax base. Deductions, exemptions or exclusions complicate the tax systemand lessen the tax collection. By its nature, a gross receipts tax applies to theentire receipts without any deduction, exemption or exclusion, unless the lawclearly provides otherwise.

CBC cites Collector of Internal Revenue v. Manila JockeyClub[48]

asauthority that the final withholding tax on interest income does not form part ofa banks gross receipts because the final tax is earmarked by regulation forthe government. CBCs reliance on theManila Jockey Clubis misplaced. In

this case the Court stated that Republic Act No. 309 and Executive Order No.320 apportioned the total amount of the bets in horse races as follows:

87 1/2% as dividends to holders of winning tickets; 12 % as commission of theManila Jockey Club, of which % was assigned to the Board of Races and 5% was

distributed as prizes for owners of winning horses and authorized bonuses for

jockeys.[49]

A subsequent law, Republic Act No. 1933 (RA No. 1933), amended thesharing by ordering the distribution of the bets as follows:

Sec. 19. Distribution of receipts.The total wager funds or gross receipts fromthe sale of pari-mutuel tickets shall beapportioned as follows: eighty-seven and one-

half per centum shall be distributed in the form of dividends among the holders of

win, place and show horses, as the case may be, in the regular races; six and one-

half per centum shall be set aside as the commission of the person, racetrack,racing club, or any other entity conducting the races; five and one-half per centum
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shall be set aside for the payment of stakes or prizes for win, place and show horses

and authorized bonuses for jockeys; and one-half per centum shall be paid to a

special fund to be used by the Games and Amusements Board to cover its expenses

and such other purposes authorized under this Act. x x x. (Emphasis supplied)

Under the distribution of receipts expressly mandated in Section 19 of RANo. 1933, the gross receipts apportioned to Manila Jockey Club referredonly to its own 6 % commission. There is no dispute that the 51/2% share ofthe horse-owners and jockeys, and the % share of the Games andAmusement Board, do not form part of Manila Jockey Clubs gross receipts.RA No. 1933 took effect on 22 June 1957, three years before the Courtdecided Manila Jockey Clubon 30 June 1960.

Even under the earlier law, Manila Jockey Club did not own the entire12 % commission. Manila Jockey Club owned, and could keep and use,

only 7% of the total bets. Manila Jockey Club merely held in trust the balanceof 5 % for the benefit of the Board of Races and the winning horse ownersand jockeys, the real owners of the 5 % share.

The Court in Manila Jockey Clubquoted with approval the followingOpinion of the Secretary of Justice made priorto RA No. 1933:

There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] ofthe total bets registered by the Totalizer. This portion represents its share or

commission in the total amount of money it handles and goes to the funds thereof as

its own property which it may legally disburse for its own purposes. The 5% [sic]

does not belong to the club. It is merely held in trust for distribution as prizes to theowners of winning horses. It is destined for no other object than the payment of

prizes and the club cannot otherwise appropriate this portion without incurring

liability to the owners of winning horses. It can not be considered as an item of

expense because the sum used for the payment of prizes is not taken from the funds of

the club but from a certain portion of the total bets especially earmarked for that

purpose.[50] (Emphasis supplied)

Consequently, the Court ruled that the 5 % balance of the commission, notbeing owned by Manila Jockey Club, did not form part of its gross receipts forpurposes of the amusement tax. Manila Jockey Club correctly paid theamusement tax based only on its own 7% commission under RA No. 309 andExecutive Order No. 320.

Manila Jockey Clubdoes not support CBCs contention but rather theCommissioners position. The Court ruled in Manila Jockey Clubthatreceipts not owned by the Manila Jockey Club but merely held by it in trust did


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not form part of Manila Jockey Clubs gross receipts. Conversely, receiptsowned by the Manila Jockey Club would form part of its gross receipts.

In the instant case, CBC owns the interest income which is the source ofpayment of the final withholding tax. The government subsequently becomes

the owner of the money constituting the final tax when CBC pays the finalwithholding tax to extinguish its obligation to the government. This is theconsideration for the transfer of ownership of the money from CBC to thegovernment. Thus, the amount constituting the final tax,being originallyowned by CBC as part of its interest income, should form part of its taxablegross receipts.

In Commissioner v. Tours Specialists, Inc.,[51]

the Court excluded fromgross receipts money entrusted by foreign tour operators to Tours Specialiststo pay the hotel accommodation of tourists booked in various localhotels. The Court declared that Tours Specialists did not own suchentrusted funds and thus the funds were not subject to the 3% contractorstax payable by Tours Specialists. The Court held:

x x x [G]ross 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 taxpayers benefit; and it is not necessary that there must be a law or regulation

which would exempt such monies and receipts within the meaning of gross receipts

under the Tax Code.

x x x [T]he room charges entrusted by the foreign travel agencies to the private

respondent do not form part of its gross receipts within the definition of the Tax

Code. The said receipts never belonged to the private respondent. The private

respondent never benefited from their payment to the local hotels. x x x [T]his

arrangement was only to accommodate the foreign travel agencies. (Emphasis

supplied)

Unless otherwise provided by law, ownershipis essential in determiningwhether interest income forms part of taxable gross receipts. Ownership is thecircumstance that makes interest income part of the taxable gross receipts ofthe taxpayer. When the taxpayer acquires ownership of money representinginterest, the money constitutes income or receipt of the taxpayer.

In contrast, the trustee or agent does not own the money received in trustand such money does not constitute income or receipt for which the trustee oragent is taxable. This is a fundamental concept in taxation. Thus, fundsreceived by a money remittance agency for transfer and delivery to thebeneficiary do not constitute income or gross receipts of the money remittance


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agency. Similarly, a travel agency that collects ticket fares for an airline doesnot include the ticket fare in its gross income or receipts. In these cases, themoney remittance agency or travel agency does not acquire ownership of thefunds received.

Moreover, when Section 121 of the Tax Code includes interest as part ofgross receipts, it refers to the entire interest earned and owned by the bankwithout any deduction. Interest means the gross amount paid by theborrower to the lender as consideration for the use of the lendersmoney. Section 2(h) of Revenue Regulations No. 12-80, now Section 2(i) ofRevenue Regulations No. 17-84, defines the term interest as the amountwhich a depository bank (borrower) may pay on savings and time deposit inaccordance with rates authorized by the Central Bank of the Philippines. Thisdefinition does not allow any deduction. The entire interest paid by thedepository bank, without any deduction, is what forms part of the lending

banks gross receipts.To illustrate, assume that the gross amount of the interest income

is P100. The lending bank owns this entire P100 since this is the amount thedepository bank pays the lending bank for use of the lenders money. In itsbooks the depository bank records an interest expense of P100 and claims adeduction for interest expense of P100. The 20% final withholding tax

[52]on

this interest income is P20, which the law requires the depository bank towithhold and remit directly to the government. The depository bank withholdsthe final tax in trust for the government which then becomes the owner of

the P20. The final tax is the legal liability of the lending bank as recipient ofthe interest income. The payment of theP20 final tax extinguishes the taxliability of the lending bank. The interest income that the depository bankturns over physically to the lending bank is P80, the net receipt after deductingthe P20 final tax. Still, the interest income that forms part of the lending banksgross receipts for purposes of the gross receipts tax is P100 because the totalamount earned by the lending bank from its passive investment is P100,not P80.

Stated differently, the lending bank paid P20 as final tax which is 20% ofthe interest income it received. Logically, the lending

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