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REPUBLIC OF THE PHILIPPINES

COURT OFT AX APPEALS
QUEZON CITY

ENBANC

MILWAUKEE INDUSTRIES
CORPORATION,
Petitioner,
C.T.A. EB NO. 486
(C.T.A. Case No. 6202)

Present:
-versus-
Acosta, P.J.
Castaneda, Jr.
Bautista,
Uy,
Casanova, and
Palanca-Enriquez,
Fabon- Victorino,
Mindaro-Grulla,
Cotangco-Manalastas, JJ.
COMMISSIONER OF INTERNAL
REVENUE,
Respondent.
Promulgated:
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DECISION

BAUTISTA,[.:

The Case

Before the Court En Bane is a Petition for Reviewl filed by Milwaukee

Industries Corporation on May 20, 2009 pursuant to Section 18 of Republic Act No.

1125, as amended by Republic Act No. 9282, praying for the Court En Bane to give

1 Rollo, C.T.A. EB No. 486 (C.T.A. Case No. 6202), pp. 27-221, with Annexes.
)
1 • 6 4A
~ DECISION
E.B. No. 486 (C .TA Case No. 6202 )
Page 2 of 29

due course to this Petition for Review En Bane and set aside the Amended Decision 2

promulgated by the Second Division of the Court ("Court in Division") on April 14,

2009, for having been rendered moot and academic in view of petitioner's availment

and full compliance with all the requirements of the Tax Amnesty Act of 2007

granting it immunity from payment of all internal revenue tax liabilities for 2005; or

in the alternative, to order the withdrawal and/ or cancellation of petitioner's

remaining liabilities, particularly:

a) the deficiency income tax in the reduced amount of P16,706,973.96;

b) the deficiency value-added tax ("VAT") in the reduced amount of

P46,280,162.38; and

c) the imposition of twenty percent (20 %) delinquency interest per

annum on the total amount of P67,637.59, computed from January

21, 2000 until full payment thereof.

Antecedent Facts

The relevant antecedents are succinctly recited by the Court in Division in its

Decision dated January 16, 2008 as follows:

Milwaukee Industries Corporation (Petitioner) is a domestic

corporation duly organized and existing under the laws of the Republic of
the Philippines.

On the other hand, the Commissioner of Internal Revenue

(Respondent) is the public officer authorized under the National Internal
Revenue Code of 1997 (Tax Code) to examine and to assess any taxpayer
the correct amount of internal revenue tax .

2Penned by Associate Justice Erlinda P. Uy, with Associate Justices Juanita C. Castaneda, Jr. and Olga
Palanca-Enriquez, concurring. ~

16 S
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 3 of 29

In July 1998, respondent served Letter of Authority No. 000018418

on petitioner to examine the latter's books of accounts and other
accounting records for " all internal revenue taxes" for "1997 & unverified
prior years." In the course of the examination, petitioner submitted the
documents requested by respondent and became part of the BIR records.

On January 21, 2000, petitioner received three (3) undated

assessment notices with an accompanying demand letter and details of
discrepancies. The deficiency income, expanded withholding, and value-
added taxes in the aggregate amount of P173,063,711 .58, inclusive of
increments, were computed as follows:

Compromise
Basic Tax Interest Total
Penalty
Deficiency Income
Tax ST-Income-97-
0093-2000 p 43,114,980.66 P20 ,264,040.91 25,000.00 P63,404,021.57
Deficiency Expanded
Withholding Tax ST-
EWT-97-0092-2000 19,438.95 9,284.23 1,000.00 29,723.18
Deficiency Val ue-
Added Tax ST-VAT-
97-0091-2000 72,108,530.81 37,496,436.02 25,000.00 109,629,966.83
TOTALS Pl15,242,950.42 P57,769,761.16 P51,000.00 P173,063,711.58

On February 21, 2000, petitioner through counsel protested the

assessment by requesting reconsideration thereof. On April 24, 2000,
petitioner submitted all relevant documents in support of the protest and
manifested that its protest dated February 21, 2000 and the documents
previously submitted to the BIR examiners which formed part of the BIR
records, constituted as relevant supporting documents of the protest in
compliance with Section 228 of the Tax Code.

To date, no d ecision has been made by respondent on the protest,

notwithstanding that one hundred eighty (180) days had passed since the
submission of the documents on April24, 2000. Consequently, in order to
comply with the thirty (30)-day period for filing an appeal with the Court
of Tax Appeals counted from the 180-day period given to respondent to
decide the protest, the Petition for Review was filed on November 20,
2000 for the purpose of having the assessment cancelled and/ or
withdrawn.

On January 16, 2001, respondent through counsel filed an Answer

and asserted the following Special and Affirmative Defenses:

"5. Investigation conducted revealed that

petitioner realized a gross profit in the amount of
P90,713,406.43 as a result of a consummated sale between
Petitioner and Littlegiant Steel Pipe Corporation, an
I DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 4 of 29

affiliate, but was not recorded in petitioner's books as

purchases in 1997 although payments thereof in domestic
Letters of Credit have been recorded in the books as loans.

6. Verification disclosed that the claim that the

merchandise were forthwith returned and Littlegiant
issued checks to reimburse Petitioner for drawings against
LCs and subsequently deposited with RCBC is negated by
the following:

6.1. The dates of the checks issued by

Littlegiant per Certification under oath of
Mr. Benson Hari-Ong, Vice-President,
RCBC are the dates when the LCS were
opened/ granted. Hence, when the same
were deposited with RCBC, Milwaukee's
liability under the LCS was extinguished.
However, the Debit Advices issued by
RCBC to Milwaukee for drawings of
Littlegiant on the LCs spanned a period
from September 26, 1997 to January 26,
1998 with corresponding bank charges and
interest of P10,025,576.94, per available
documents, which were in turn claimed by
Milwaukee as deduction in its 1997 Income
Tax Returns. However, Milwaukee failed
to record in its books of accounts its
liability to RCBC.

6.2. The checks mentioned above allegedly

issued by Littlegiant were not recorded in
its books of accounts.

7. Petitioner did not intend to report the sale by

Littlegiant in its 1997 Income Tax Return as shown by the
following facts:

7.1. Only Pro-Forma Invoices were issued to

cover the same instead of regular sales
mvmces;

7.2. Delivery receipts issued do not belong to

the series used during 1997;

16 7
' DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 5 of 29

7.3. The sales, whether aborted or

consummated, were not recorded in the
books of accounts of Littlegiant for 1997.

8. Interest and Bank charges amounting to

P18,128,498.26 were disallowed for the following reasons:

8.1 Only the interest expenses on the Prime

Currency (US Dollar) loan from PBC and
the interests and bank charges on the
repurchase of the assigned Prime Currency
(US Dollar) with PBC Capital and
Investment Corporation (PBCCAP) were
recorded in petitioner's 1997 books of
accounts and not the liability. Said
interests and bank charges were
subsequently claimed as deduction m
Petitioner's 1997 Income Tax return.

8.2 Petitioner did not receive the proceeds of,

neither did it benefit from, the Prime
Currency loan and its reassignment with
PBCCAP because the bank accounts used
(Milwaukee's Account No. 1041-01768-6
and Prime Currency Savings Account No.
2-534-00391-1, both with PBC) are not
recorded in the Petitioner's books of
accounts.

9. The purchases of scrap materials from junk

shops in the amount of P9,040,701.37 in 1997 are not
properly documented. Said purchases are too substantial
to be considered as 'marginal economic activity' on the part
of junk shops so as to exempt them from the requirement of
issuing official receipts in their sale or transfer of
merchandise .

10. Miscellaneous expenses consisting of petty

cash charged to expense and foreign exchange losses
(P4,429,982.42) were not properly documented.

11. Unrecorded sales amounting to

P283,745,406.43 traceable to unaccounted purchases of raw
materials (21,448.0 metric tons of hot rolled steel) from
Littlegiant Steel Pipe Corporation resulted to a deficiency
value-added tax. I 16 8
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 6 of 29

12. Petitioner failed to subject to expanded

withholding tax some of its income payments representing
freight and delivery as well as professional fees, hence, the
deficiency EWT.

13. The assessments were issued in accordance

with law and regulations;

14. All presumptions are m favor of the

correctness of tax assessments."

Trial proceeded and both parties presented their respective

testimonial and documentary evidence. The case was submitted for
decision on January 18, 2007 after considering petitioner's Memorandum
sans respondent's Memorandum.3

The Ruling of the Court in Division

The following issues were stipulated by the parties for resolution by the Court

in Division:

1. Whether the assessment for deficiency income tax in the amount of

¥163,404,021.57 inclusive of increments, has basis in fact and in law.
Such assessment is broken down as follows:

1.1 . Whether there are alleged unrecorded sales of

¥190,713,406.43 from Littlegiant Steel Pipes
Corporation.

1 .2. Whether the interest and bank charges

amounting to ¥118,128,498 .26 are proper d eductions.

1 .3. Whether purchases of scrap materials from junk

shops in the amount of ¥19,040,701 .37 are proper
deductions.

3 Rollo, pp. 66-70.

16 9
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 7 of 29

1.5. Whether the 13th month pay and cost of

subsistence of Petitioner's employees should be
allowed as proper deductions.

2. Whether the assessment for deficiency value-added tax in the

amount of ~109,629,966.83, inclusive of increments, has basis in fact
and in law. Such assessment is broken down, as follows:

2.1 . Whether there are alleged unrecorded purchases

from Littlegiant Steel Pipes Corp. amounting to
~283,749,406.43 which should be subject to VAT.

2.2. Whether sales discounts by the Petitioner are

allowable deductions from the gross selling price.

2.3. Whether the sales to Ciriaco Corporation, being a

domestic corporation enjoying tax exemption
privileges are subject to VAT.

2.4. Whether the input VAT by the petitioner should

be allowed as deductions from the gross VATable
sales.

3. Whether the assessment for deficiency expanded withholding tax in

the amount of ~29,723.18 is valid.4

Deficiency Income Tax- P63,404,021.57

On respondent's disallowance of petitioner's interest expense in the amount

of Pl8,128,498.26, the Court in Division ruled that petitioner failed to show proof of

actual utilization of the proceeds of the subject loans pursuant to Section 29(b) of the

National Internal Revenue Code of 1977 ("1977 Tax Code"), as amended. Albeit the

Court-commissioned Independent Certified Public Accountant ("CPA") Edgardo S.

Licuanan, Jr. rendered a report stating that the claimed interest expense and bank

charges were necessary business expense, the records are bereft of evidence that

indeed the proceeds of the loans were used by petitioner in connection with the

4 Id., at pp. 71-72.

I 170
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 8 of 29

carrying on of its business. The interest paid by petitioner thereon in the amount of

P18,128,498.26 cannot qualify for deduction against its 1997 taxable income. Thus,

the Court in Division affirmed the disallowance made by the respondent.

As to the untaxed gross profit of unrecorded purchase from an affiliate in the

amount of P90,713,406.43, the Court in Division held that the documentary evidence

of petitioner was sufficient to support its claim that there were no unrecorded

purchases since all the hot rolled steel coils were returned and the sales by

Little giant were cancelled. It also cited the Decision of the Court's First Division in

another but similar case entitled Littlegiant Steel Pipe Corp. v. Commissioner of Internal

Revenue, C.T.A. Case No. 6203, July 18, 2005, which involved the very same

transaction where sales of petitioner of hot rolled steel coils were cancelled.

Consequently, the Court in Division pronounced that respondent's allegation that

petitioner had gross profit on sales traceable to unrecorded purchases from

Littlegiant amounting to P90,713,406.43 was without basis.

On respondent's disallowance of petitioner's unsupported purchases in the

amount of P9,040,701.37, the Court in Division emphasized that BIR Ruling No. 085-

94 dated April 6, 1994, which exempts junk shops from the requirement of issuing

official receipts in their sale or transfer of merchandise refers only to those raw

materials bought from small-time or "backyard" scraps or junk vendors who trade

their junks by means of push-carts and who are in the same category as the

"magdidiyaryo-bote", and hence, considered as people conducting "marginal

economic activity." Considering the amount involved for each voucher, the same

can hardly be considered as purchases from small-time vendors who cannot issue
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 9 of 29

the required invoice and/ or receipt in their sales or transfer or merchandise

pursuant to Section 238 of the 1977 Tax Code, as amended. Further, Chapter IV of

Revenue Regulations No. V-1, as amended, which provides that the Commissioner

of Internal Revenue may exempt certain groups of persons from the requirement of

issuing official receipts on their sale of merchandise, does not, however, include junk

shops. Thus, respondent is correct in disallowing the scrap materials purchased by

petitioner from various junk shops.

On respondent's disallowance of unsupported miscellaneous expenses in the

amount of P4,429,982.42, the Court in Division held that a Joss which is the result of

a foreign exchange fluctuation, ascertained and realized during the taxable period,

and not compensated by insurance or otherwise, except those provided in Section

29(d) of the 1977 Tax Code, is deductible from gross income of the said taxable

period, albeit it may relate to transaction of prior years. It likewise ruled that to

ascertain actual or transactional loss realized, petitioner must show proof of

historical cost of liability at the time of availment as compared to the actual or

prevailing exchange at the time of termination of debt. However, petitioner merely

submitted documents establishing its actual payment of the amount of

P39,140,375.25. Hence, for failure to submit loan documents establishing its trust

receipts payable balance of P34,710,392.33, petitioner's claimed foreign exchange loss

in the amount of P4,429,982.42 was properly disallowed as deduction from its 1997

I
taxable gross income.

: 7·~')
.i.
DECISION
E.B. No. 48 6 (C .T.A . Case No. 6202)
Page 10 of 29

Finally, as to the claimed creditable withholding taxes in the amount of

P1,532,443. 97, the Court in Division upheld the denial made by respondent for the

failure of petitioner to refute respondent's findings that said claim was unsupported.

In sum, petitioner' s 1997 deficiency income tax amounted to Pl6,706,973.96,

computed as follows:

Taxable net income p er return p 873,070.55

Add: Adjus tments to ta xa ble net income
Interes t Expense p 18,128,498. 26
Unsupported Purch ases 9,040,701 .37
Unsupported Miscellaneous Expense 4,429,982.42 31,599,182.05
Total ta xable n et income per inves tigation p 32,472,252.60

Income tax due thereon p 11,365,288.41

Less: Inco me ta x paid per return p

Unsupported Creditable Withholding Taxes

Total
Deficiency inco me tax due p 11,365,288.41
Add : Interest 5,341,685.55
Total deficiency incom e tax payable Pl6,706,973.96

The compromise penalty of P25,000.00 was, however, not imposed due to the

absence of mutual agreement between the parties.

Value-Added Tax- P109,629,966.83

As regards the unreported sales traceable to unrecorded purchases from

Littlegiant Steel Pipe Construction in the amount of P283,745,406.43, the Court in

Division confirmed its earlier findings of cancellation of the unrecorded purchases;

hence, there was no taxable transaction.

On the discrepancy in the net sales in the amount of P155,163.56, the Court in

Division ruled that by virtue of Certificate of Tax Exemption No. 97-25 issued by

Clark Special Economic Zone in favor of Ciriaco Corporation, the latter is exempt

/ J
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 11 of 29

from VAT pursuant to Section 15 of Republic Act No. 7227 /Executive Order No. 62,

Section 5 of Executive Order No. SO/Proclamation No. 163, BIR Revenue Regulation

No. 1-95 and further confirmed by BIR Ruling No. 946-95 dated March 3, 1995.

Thus, petitioner's sales to Ciriaco Corporation are effectively zero-rated for VAT

purposes in accordance with Section 100(a)(2)(C) of the 1977 Tax Code, as amended,

and Section 4.100-2(c) of Revenue Regulations No. 7-95. It stressed, however, that

petitioner must substantiate its effectively zero-rated sales to Ciriaco Corporation in

the amount of P155,163.56 by proper VAT invoices as provided in Section 108(a) of

the 1977 Tax Code, as amended. However, the Court in Division found that the

invoice covering the sales amount of P155,163.56 failed to reflect that the said sales is

VAT-zero-rated for the word "zero-rated" was not imprinted thereon.

Consequently, the sales to Ciriaco Corporation are taxable and petitioner is liable to

pay the VAT thereon.

On the disallowance of input VAT, the Court in Division ascertained that the

input VAT with no supporting papers available in the amount of P1,550,495.91 must

be denied outright, as well as the input VAT carry-over from the previous year in the

amount of P21,560,097.46 for petitioner's failure to prove its existence through VAT

invoices, receipts, and quarterly VAT returns of the previous year. As to the input

VAT of P28,662,239.99, a part thereof in the amount of P5,061,208.22 without

supporting documents was disallowed. From the P23,601,031.77 remaining input

VAT with supporting documents, the amount of P5,118,015 .35 was disallowed for it

was not properly substantiated with VAT invoices/receipts and only the amount of

P18,483,016.42 represents petitioner's valid input VAT pursuant to the invoicing

;(74
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 12 of 29

requirements under Section 108(a), in relation to Section 104(a)(2) of the 1977 Tax

Code, and Section 4.104-5 of Revenue Regulations No. 7-95. Thus, the input VAT

amount of P18,483,016.42 was applied against petitioner's output tax in computing

the amount of VAT still due and payable.

In sum, petitioner's 1997 deficiency value-added tax is the reduced amount of

P49,490,793.79, computed as follows:

Sales declared per VAT returns p 519,323,448.20

Add: Adjushnents to vatable sales per investigation:
Sa les to Ciriaco Company 155,163.56
Total Sales subject to 10 % VAT p 519.478.611 .76

VAT due thereon p 51,947,861 .18

Less: VAT paid per return p 905,112.00
Allowable input tax (See details per Annex A) 18,483,016.42
Total 19,388,128.42
Deficiency VAT due p 32,559,732.76
Add: Interest 16,931,061.03
Total deficiency VAT payable p 49 490 7 .79

The compromise penalty of P25,000.00 was, likewise, not imposed m the

absence of mutual agreement between the parties.

Expanded Withholding Tax- P29,723.18

The Court in Division stated that since the assessment notices were issued on

January 21, 2000, the 1997 Tax Code applies. Thus, the demand letter and

assessment notices for taxable year 1997, sent by respondent to petitioner,

particularly the attached Final Decision on Disputed Assessment, failed to indicate

how respondent's examiner arrived at the alleged deficiency expanded withholding

tax and the legal basis for such assessment, in violation of Section 228 of the 1997 Tax

Code. Accordingly, the deficiency expanded withholding tax assessment is invalid.

;475
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 13 of 29

With that the Court in Division disposed of the case as follows:

WHEREFORE, the instant Petition for Review is hereby

PARTIALLY GRANTED. The deficiency expanded withholding tax
assessment in the amount of P29,723.18 is hereby CANCELLED and
WITHDRAWN. However, the deficiency income tax and value-added
tax assessments are hereby AFFIRMED but in the reduced amounts of
P16,706,973.96 and P49,490,793.79, respectively, or in the total amount of
P66,197,767.75.

Accordingly, petitioner is hereby ORDERED to PAY the following

deficiency assessments:

Basic Interest To tal

Deficiency Income Tax P11,365,288.41 p 5,341,685.55 P16,706,973.96
Deficiency Value-Added Tax 32,559,732.75 16,931,061 .03 49,490,793.79
Totals P43,925,021.16 P22,272,746.58 P66,197,767.75

In addition, petitioner is ORDERED TO PAY 20% delinquency

interest per annum on the total amount of P66,197,767.75 computed from
January 21, 2000 until full payment thereof, pursuant to Section 249(C) of
the 1997 Tax Code.

SO ORDERED.

Aggrieved, petitioner filed a Motion for Partial Reconsideration on February

8, 2008, and a Supplemental Motion for Partial Reconsideration on March 28, 2008;

on the other hand, respondent filed a Motion for Partial Reconsideration on

February 12, 2008.

On April 14, 2009, the Court in Division promulgated an Amended Decision

with the following pronouncement:

WHEREFORE, premises considered, respondent's MOTION FOR

PARTIAL RECONSIDERATION is hereby DENIED for lack of merit;
w hile petitioner's MOTION FOR PARTIAL RECONSIDERATION and
SUPPLEMENTAL MOTION FOR PARTIAL RECONSIDERATION are
hereby PARTIALLY GRANTED. This Court's Decision dated January
16, 2008 is hereby MODIFIED. Accordingly, petitioner is hereby
ORDERED TO PAY respondent, its deficiency income tax and value-

I 17 G
DECISION
E. B. No. 486 (C .T.A . Case No. 6202)
Page 14 of 29

added tax in. the reduced amount of P16,706,973.96 and P46,280,162.38,

respectively, or in the total amount of P62,987,136.34.

In addition, petitioner is hereby ORDERED to PAY twenty percent

(20 %) delinquency interest per annum on the total amount of
P62,987,136.34, computed from January 21, 2000 until full payment
thereof, pursuant to Section 249(c) of the NIRC of 1997, as amended.

SO ORDERED.

The Issues

Hence, the instant Petition for Review filed on May 20, 2009, where petitioner

alleges the following:

a. THE HONORABLE SECOND DIVISION OF THE CTA ERRED IN

UPHOLDING THE DISALLOWANCE OF INTEREST AND BANK
CHARGES, DESPITE LACK OF FACTUAL BASIS THEREFOR AND
IN INSISTING, DESPITE COMPLIANCE WITH ALL THE
REQUISITES OF DEDUCTIBILITY, THAT ACTUAL UTILIZATION
OF THE PROCEEDS OF THE LOAN IS FATAL TO ITS CLAIM OF
DEDUCTION.

b. THE HONORABLE SECOND DIVISION OF THE CTA ERRED IN

UPHOLDING THE DISALLOWANCE OF FOREIGN EXCHANGE
LOSSES IN THE AMOUNT OF P4,429,982.42 ON THE GROUND
THAT IT DID NOT SUBMIT DOCUMENTS PROVING THE
ACTUAL FOREIGN EXCHANGE RATES USED AT THE TIME IT
OBTAINED SAID LOANS.s

Petitioner's Arguments

Petitioner asseverates that it has fully complied with all the requisites for the

deductibility of its interest expense . It contends that neither law nor jurisprudence

requires that actual utilization of the proceeds of the loan is mandatory considering

that it only becam.e material based on the findings of the respondent that the loan

was not recorded in the 1997 books of accounts, leading to an assumption that

petitioner did not receive nor benefit from the proceeds of the loan. Petitioner posits

s Id., at p. 43.

. 7 ,.,{ .
l
DECISION
E.B. No. 486 (C.TA Ca se No. 6202)
Page 15 of 29

that so long as the indebtedness was contracted in furtherance of the business, trade

or profession of the taxpay er, the actual utilization of the proceeds is immaterial.

Hence, the fact that the proceeds of the loan are made available for the need of the

business, specified, contingent or otherwise, is enough to establish the requisite that

the indebtedness must be connected with the business, trade or profession of the

taxpayer.

Petitioner also asserts that the 1997loans were but a continuation of the loans

made in 1996. It points out that the Audited Financial Statements for the year 1997

would show that even in 1996, petitioner was already in the state of illiquidity. It

being undisputed that petitioner's financial position in 1996 is not much better than

in 1997, the purpose of obtaining the loans applies with equal force to its 1996 as well

as 1997loans.

Petitioner likewise argues that it complied with all the requisites for the

deductibility of losses. It avers that no jurisprudence requires proof of historical cost

of liability at the time of availment as compared to the actual or prevailing rate at the

time of termination of the debt in order to ascertain actual or transactional loss

incurred . It claims that it offered in evidence the relevant Debit Advices reflecting

the source loan documents/letters of credit and the Partial Report of Mr. Edgardo S.

Licuanan, Jr., the Court-commissioned Independent CPA, dated March 19, 2002,

which contained the Summary of Foreign Exchange Losses on Trust Receipts

Payable for the Year 1997 clearly showing the balance of the Trust Receipts.

Considering that the Independent CPA affirmatively stated that verifications were

conducted on the propriety and accuracy of the voluminous documents and papers

1 178
 DECISION
1 ~ E.B. No. 486 (C .T.A. Case No. 6202)
Page 16 of 29

which were used by petitioner to support its claims; thus, the same comprises

competent evidence establishing that it had a trust receipts payable balance in the

amount of P34,710,392.33.

Finally, petitioner claims that on September 21, 2007, it availed of the tax

amnesty under Republic Act No. 9480, otherwise known as the "Tax Amnesty Act of

2007." Pursuant thereto, it submits the following: (a) Notice of Availment of Tax

Amnesty;6 (b) Balance Sheet/ Statement of Assets, Liabilities and Networth

("SALN") as of December 31, 2005; 7 (c) Tax Amnesty Return (BIR Form No. 2116); 8

(d) Tax Amnesty Payment Form/ Acceptance of Payment Form (BIR Form No.

0617);9 and (e) Land Bank of the Philippines BIR Tax Payment Deposit Slip dated

September 21, 2007.10

However, due to Revenue Memorandum Circular ("RMC") No. 69-2007,

dated November 7, 2007, which prescribes that only companies reflecting positive

networth can avail of the tax amnesty law, petitioner filed an Amended Notice of

Availment of Tax Amnesty 11 on December 14, 2007, with the following attachments:

Second Amended SALN as of December 31, 2005;12 Amended Tax Amnesty Return

(BIR Form No. 2116);13 Tax Amnesty Payment Form/ Acceptance of Payment Form

6 Id., at p. 195.
I
7 Id. , at pp. 196-206.
s Id. , at p. 207.
9 Id. , at p. 208.
1o Id., at p. 209.
11 Id., at p . 210.
12Jd., at p . 211 .
13 Id ., at p. 212.

173
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 17 of 29

(BIR Form No. 0617);14 and Philippine National Bank BIR Payment Slip dated

December 13, 2007.15

On December 18, 2007, the BIR issued RMC No. 90-2007 stating that

companies in a deficit position can likewise avail of the tax amnesty provided that

amendments to the balance sheet shall be made resulting to a reduction in the

reported deficit. In view of the availment of the tax amnesty and the immunities and

privileges granted under Section 6 of the Tax Amnesty Act of 2007, petitioner claims

that the issues subject of the Amended Decision are deemed moot and academic.

The Ruling of the Court En Bane

Petitioner anchored its claim on Section 34(A)(1) of the NIRC of 1997, as

amended, which provides:

(A) Expenses. -

(1) Ordinary and Necessary Trade, Business or Professional

Expenses.-

(a) In General. -There shall be allowed as deduction from gross

income all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are directly attributable
to, the development, management, operation and/ or conduct of the
trade, business or exercise of a profession, xxx:

Petitioner insists that the actual utilization of the proceeds of the debt before

an interest expense becomes deductible is neither intended nor contemplated by the

above-quoted provision.

Inasmuch as the interest and bank charges amounting to P18,128,498.26

claimed by petitioner as deduction from its gross income was incurred for the

14

IS
Id., at p. 213.
Id., at p. 214.
I 180
' DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 18 of 29

taxable year 1997, and Republic Act No. 8424, entitled "An Act Amending the

National Internal Revenue Code, as amended" or the Tax Reform Act of 1997, took

effect only on January 1, 1998, then the applicable provision is Section 29(b) of the

1977 Tax Code, as amended, which provides as follows:

SEC. 29. Deductions from gross income. - xxx

XXX XXX XXX

(b) Interest. (1) In general. - The amount of interest paid

or accrued within a taxable year on indebtedness in connection with
the taxpayer's profession, trade or business, except on indebtedness
incurred or continued to purchase or carry obligation the interest upon
which is exempt from taxation as income under this Title.

Pursuant thereto, the requisites to validly claim deductibility of interest

expense are the following :

1. there must be an indebtedness;

2. the indebtedness must be that of the taxpayer;
3. the indebtedness must be connected with the business, trade or
profession of the taxpayer;
4. the interest must have been paid or accrued during the taxable
year; and
5. the interest must have been stipulated in writing.I6

The Court in Division succinctly held that there is no question as to

petitioner's compliance with the first, second, fourth and fifth requisites, considering

that respondent does not dispute that petitioner paid interests and bank charges in

the amount of P18,128,498.26 in 1997 on loans obtained from Philippine Banking

Corporation ("PBC" ) and on repurchase of assigned accounts with PBC Capital and

Investment Corporation; and that said loans from PBC were covered by promissory

notes, which indicated the stipulated interest rates.

16

CA-G.R SPNo. 25308, Ap,il7, 1992. I

Delfin Ma. V. Cruz, Jr., v . The Court of Tax Appeals and The Commission er of Internal Revenue,

18 1
DECISION
E.B. No. 486 (C .T.A . Case No. 6202)
Page 19 of 29

The issue, however, is petitioner's compliance with the third requisite, and

that is whether the loans were used in connection with its business.

Albeit in the Report dated May 23, 2003, the Court-commissioned

Independent CPA made a finding that the claimed interest and bank charges of

P18,128,498.26 were necessary business expenses, the records are bereft of proof that

the proceeds of the subject loans were used in connection with the carrying on of its

business.

Petitioner contends, however, that so long as the indebtedness was contracted

m furtherance of the business, h·ade or profession of the taxpayer, the actual

utilization of the proceeds is immaterial.

The Court En Bane does not agree.

As correctly explained by the Court in Division, the third requisite for the

deductibility of interest expense requires that there must be sufficient and relevant

relationship between the taxpayer's incurrence of the loans and the taxpayer's

business, which can only be established through the presentation of proof showing

actual utilization of the proceeds of the loans upon which the claimed deduction for

interest expense was paid or incurred.

Well-settled is the rule that the claimant has the burden of proving the factual

and legal bases of its claim, hence, the argument that the debt is presumed to have

been contracted in furtherance of or in connection with petitioner's business

deserves scant consideration.

It may not be amiss to note further that while petitioner claims that the

interest and bank charges which originated from loans from Philbank and PBC

I 18 2
DECISION
E.B. No. 486 (C .TA Case No. 6202)
Page 20 of 29

Capital were recorded in its 1997 books of account, it claims in its protest letter and

Memorandum that the Hability from which the interest charges arose was not

recorded in 1997 because the loan was obtained in 1996.

Petitioner failed to justify its inconsistencies but rather discussed in length

that it was in a state of illiquidity whereby its 1997 loans were but a continuation of

the loans made in 1996.

It bears stressing, however, that to allow a litigant to assume a different

posture when he comes before the court and challenge the position he had accepted

at the administrative level would be to sanction a procedure whereby the court -

which is supposed to review administrative determinations - would not review, but

determine and decide for the first time, a question not raised at the administrative

forum.17 Well-settled is the principle that a party is bound by the theory he adopts

and by the cause of action he stands on and cannot be permitted after having lost

thereon to repudiate his theory and cause of action and adopt another and seek to re-

litigate the matter anew either in the same forum or on appeal.lS

Anent the disallowance of the foreign exchange losses in the amount of

P4,429,982.42, petitioner founded its claim on Sections 29, 37 and 39 of the 1977 Tax

Code, to wit:

SEC. 29. Deductions from gross income.

(D) Losses. -

17 Aguinaldo Industries Corporation v. Commissioner of Internal Revenue, G.R. No. L-29790,

February 25,1982,112 SCRA 136.
18 Arroyo v. House of Representative Electoral Tribunal, G.R. No. 118597, July 14, 1995, 246 SCRA 284,

citing Bashier v. COMELEC, 43 SCRA 238. j

1s3
DECISION
E.B. No. 486 (C.TA Case No. 6202)
Page 21 of 29

(2) By corporation. - In the case of a corporation, all losses

actually sustained and charged off within the taxable year and not
compensated for by insurance or otherwise.

XXX XXX XXX

SEC. 37. General rule. -The net income shall be computed upon
the basis of the taxpayer's annual accounting period (fiscal year or
calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer;
but if no such method of accounting has been employed, or if the
method employed does not clearly reflect the income, the computation
shall be made in accordance with such method as in the opinion of the
Commissioner of Internal Revenue does clearly reflect the income. If
the taxpayer's am1ual accounting period is other than a fiscal year, as
defined in section twenty or if the taxpayer has no annual accounting
period, or does not keep books, or if the taxpayer is an individual, the
net income shall be computed on the basis of the calendar year.

XXX XXX XXX

SEC. 39. Period for which deductions and credits taken. - The
deductions provided for in this Title shall be taken for the taxable year
in which "paid or accrued" or "paid or incurred", dependent upon the
method of accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the income the deductions
should be taken as of a different period.

To prove its compliance, petitioner cites the Partial Report of the Court-

commissioned Independent CPA dated March 19, 2002, which classified its foreign

exchange losses as Miscellaneous Expenses in its book for the year 1997, summarized

as follows:

TRUST TRUST DEDUCTIBLE

REFERENCE RECEIPTS RECEIPTS EXPENSES FOREIGN
BALANCE PAYMENTS EXCHANGE LOSSES
171-008426 P15,750,000.00 P15,822,650.00 p 72,650.00
FXOC96-068 C 10,001,250.00 12,969,464.00 2,968,214.00
B0096-5027 3,207,983.63 4,075,666.82 867,683.19
BFX109LC96-006429 3,156,600.00 3,162,200.00 5,600.00
B0096-6297 968,024.00 1,293,520.00 325,496.00
FOREIGN EXCHANGE
P34,71 0,392.33 P39,140,375.25 P4,429,982.42
LOSSES

18 4
DECISION
E.B. No. 486 (C .T.A . Case No. 6202)
Page 22 of 29

The table readily shows the amount of trust receipts balance as compared to

the amount of trust receipts payments, with the resulting difference in the aggregate

amount of P4,429,982.42 due to foreign exchange fluctuations.

However, the Court En Bane still finds the same insufficient.

The documents submitted by petitioner such as bank debit advices and cash

vouchers to support the Report of the Court-commissioned Independent CPA

established the actual payment of the amount of P39,140,375.25 . However, petitioner

failed to submit the documents substantiating the amount of P34,710,392.33 which

pertains to the summary of trust receipts payable balance.

Section 1 of Rule 13 of the Revised Rules of the Court of Tax Appeals allows a

party desiring to present voluminous documents in evidence to secure the services ·

of an independent Certified Public Accountant, who shall be commissioned as an

officer of the Court solely for the purpose of performing such audit functions, as

may be directed.

Corollary thereto, CTA Circular No. 1-95, as amended by CTA Circular No.

10-97, provides:

1. The party who desires to introduce as evidence such

voluminous documents must present: (a) a Summary containing the
total amount/ s of the tax account or tax paid for the period involved
and a chronological or numerical list of the numbers, dates and
amounts covered by the invoices or receipts; and (b) a Certification of
an independent Certified Public Accountant attesting to the correctness
of the contents of the summary after making an examination and
evaluation of the voluminous receipts and invoices. Such summary
and certification must properly be identified by a competent wih1ess
from the accounting firm.

2. The method of individual presentation of each and every

receipt or invoice or other documents for marking, identification and
comparison with the originals thereof need not be done before the

1 18 '1
DECISION
E.B. No. 486 (C.TA Case No. 6202)
Page 23 of 29

Court or the Commissioner anymore after the introduction of the

summary and CPA certification. It is enough that the receipts, invoices
and other documents covering the said accounts or payments must be
pre-marked by the party concerned and submitted to the Court in
order to be made accessible to the adverse party whenever he/ she
desires to check and verify the correch1ess of the summary and CPA
certification. However, the originals of the said receipts, invoices or
documents should be ready for verification and comparison in case of
doubt on the authenticity of the particular documents presented is
raised during the hearing of the case. (Boldfacing supplied)

In the case of Commissioner of Internal Revenue v. Manila Mining Corporation, 19

the Supreme Court enunciated that there is nothing, however, in CTA Circular No.

1-95, as amended by CTA Circular No. 10-97, which either expressly or impliedly

suggests that summaries and schedules, even if certified by an independent CPA,

suffice as evidence. The circular, in the interest of speedy administration of justice,

was promulgated to avoid the time-consuming procedure of presenting, identifying

and marking of documents before the Court. It does not relieve the claimant of its

imperative task of pre-marking photocopies and submitting the same to the court

after the independent CPA shall have examined and compared them with the

originals.

In the case at bar, petitioner failed to support the summaries made by the

Independent CPA. For lack of evidence proving the payable amount of

P34,710,392.33, the Court En Bane cannot verify the authenticity and veracity of the

independent auditor's conclusions; hence, the claimed foreign exchange loss in the

amount of P4,429,982.42 cannot be allowed as deduction from petitioner's 1997

taxable gross income.

I
19 G.R. No. 153204, August 31, 2005, 468 SCRA 571 .

18 G
DECISION
E.B. No. 486 (C .T.A . Case No. 6202)
Page 24 of 29

Furthermore, the Court En Bane objects to petitioner's stance that it was not

given an opportunity to present the loan documents establishing its trust receipts

payable. Petitioner was given an opportunity to present its rebuttal evidence. In

fact, in the Resolution20 dated June 1, 2006, the Court in Division noted that it was

petitioner who asked for several postponements of trial and commissioner's hearing

which led to an issuance of final warnings on October 26, 2005, January 16, 2006 and

January 30, 2006. Petitioner cannot now shift the blame to the Court in Division

since it was given sufficient opportunity therefor.

The other issues not being raised will stand as ruled by the Court in Division.

In sum, petitioner is liable to pay the deficiency income tax and value-added tax in

the reduced amount of P16,706,973.96 and P46,280,162.38, respectively, or in the total

amount of P62,987,136.34,. plus the twenty percent (20 %) delinquency interest per

annum, computed from January 21, 2000 until full payment thereof, pursuant to

Section 249(c) of the NIRC of 1997, as amended.

However, the Court En Bane takes note of petitioner's availment of the Tax

Amnesty Program under Republic Act No. 9480 ("R.A. No. 9480").

A tax amnesty is a general pardon or the intentional overlooking by the State

of its authority to impose penalties on persons otherwise guilty of violation of a tax

law. It partakes of an absolute waiver by the government of its right to collect what

is due it and to give tax evaders who wish to relent a chance to start with a clean

slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in

}
zo Records, pp. 1060-1062.
18 7
DECISION
E.B. No. 486 (C .T.A . Case No. 6202)
Page 25 of 29

law. The grant of a tax amnesty, similar to a tax exemption, must be construed

strictly against the taxpayer and liberally in favor of the taxing authority. 21

Sections 1 and 8 of R.A. No. 9480, entitled "An Act Enhancing Revenue

Administration and Collection by Granting an Amnesty on All Unpaid Internal

Revenue Taxes Imposed by the National Government for Taxable Year 2005 and

Prior Years," provide as follows:

SEC. 1. Coverage. - There is hereby authorized and

granted a tax amnesty which shall cover all national internal revenue
taxes for the taxable year 2005 and prior years, with or without
assessments duly issued therefor, that have remained unpaid as of
December 31, 2005: Provided, however, That the amnesty hereby
authorized and granted shall not cover persons or cases enumerated
under Section 8 hereof.

XXX XXX XXX

SEC. 8. Exceptions. - The tax amnesty provided in Section

5 hereof shall not extend to the following persons or cases existing as of
the effectivity of this Act:

(a) Withholding agents with respect to their withholding

tax liabilities;
(b) Those with pending cases falling under the jurisdiction
of the Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and
Corrupt Practices Act;
(d) Those with pending cases filed in court involving
violation of the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion and
other criminal offenses under Chapter II of Title X of the
National Internal Revenue Code of 1997, as amended,
and the felonies of frauds, illegal exactions and
transactions, and malversation of public funds and
property under Chapters III and IV of Title VII of the
Revised Penal Code; and

21 Commissioner of Internal Revenue v. Marubeni Corporation, G.R. No. 137377, December 18, 2001,

372 SCRA 588.

/1as
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 26 of 29

(f) Tax cases subject of final and executory judgment by the

courts.

From the above-quoted provisions, mcome tax and value added tax are

covered by the Tax Amnesty Program; likewise, petitioner, not falling within any of

the exceptions enumerated, is qualified to avail the tax amnesty benefits under

Section 6 of RA No. 9480, to wit:

SEC. 6. Immunities and Privileges. - Those who availed themselves of

the tax amnesty under Section 5 hereof, and have fully complied with
all its conditions shall be entitled to the following immunities and
privileges:

1. The taxpayer shall be immune from the payment of taxes,

as well as additions thereto, and the appurtenant civil,
criminal or administrative penalties under the National
Internal Revenue Code of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable
year 2005 and prior years.

Petitioner submitted the following documents, stamped "certified machine

copy from the documents on file" by OIC-Assistant Revenue District Officer Fritz S.

Buendia:

a) Notice of Availment of Tax Amnesty filed on September 21, 2007; 22

b) Balance Sheet/Statement of Assets, Liabilities and Networth

("SALN") as of December 31, 2005;23

c) Tax Amnesty Return (BIR Form No. 2116);24

d) Tax Amnesty Payment Form/ Acceptance of Payment Form (BIR

Form No. 0617) in the amount of P1,040,411 .70;25

22 Rollo, p. 195.
23 Id., at pp. 196-206.
24 Id., at p. 207.
I
25 Id., at p. 208.

18 9
DECISION
E.B. No. 486 (C .T.A. Case No. 6202)
Page 27 of 29

e) Land Bank of the Philippines BIR Tax Payment Deposit Slip dated

September 21, 2007 in the amount of P1,040,411.70; 26

f) Amended Notice of Availment of Tax Amnesty filed on December

14, 2007; 27

g) Second Amended SALN as of December 31, 2005;28

h) Amended Tax Amnesty Return (BIR Form No. 2116); 29

i) Tax Amnesty Payment Form/ Acceptance of Payment Form (BIR

Form No. 0617) in the amount of P9,835,230.39;30 and

j) Philippine National Bank BIR Payment Slip dated December 13,

2007 in the amount of P9,835,230.39.31

Upon perusal of the documents submitted by petitioner, the Court En Bane

finds that petitioner has fully complied with the requirements of R.A . No. 9480. The

Court En Bane has previously resolved that taxpayers found to have fully complied

with the documentation requirements of R.A . No. 9480 are entitled to the immunities

as found under Section 6 thereo£.32 More importantly, in the case of Philippine

Banking Corporation (Now: Global Business Bank, Inc.) v. Commissioner of Internal

Revenue,33 the Supreme Court declared that the completion of these requirements

shall be deemed full compliance with the tax amnesty program, and the law

mandates that the taxpayer shall thereafter be immune from payment of taxes, and

26 Id., at p. 209.
27 Id., at p. 210.
28 Id., at p. 211.

29 Id., at p. 212.

3° Id., at p . 213.
31 Id., at p. 214.
32 Metropolitan Bank and Trust Company v. Commissioner of Internal Revenue, C.T.A. EB No. 354
(C.T.A. Case No. 7154), August 29, 2008; Commissioner of Internal Revenue v. PILMICO Foods
Corporation, C.T.A. EB No. 430 (C.T.A. Case No. 6868), March 31, 2009. ~
33 G.R. No. 170574, January 30, 2009, 597 SCRA 366.

180
DECISION
E.B. No. 486 (C .T.A . Case No. 6202)
Page 28 of 29

additions thereto, as well as the appurtenant civil, criminal or administrative

penalties under the NIRC of 1997, as amended, arising from failure to pay any and

all internal revenue taxes for taxable year 2005 and prior years.

Petitioner availed of the Tax Amnesty Program on September 21, 2007 and

December 14, 2007. Section 4 of R.A. No. 9480 provides:

SEC. 4. Presumption of Correctness of the SALN. - The SALN as

of December 31, 2005 shall be considered as true and correct except
where the amount of declared networth is understated to the extent of
thirty percent (30 %) or more as may be established in proceedings
initiated by, or at the instance of, parties other than the BIR or its
agents: Provided, That such proceedings must be initiated within one
year following the date of the filing of the tax amnesty return and the
SALN. Findings of or admission in congressional hearings, other
administrative agencies of government, and/or courts shall be
admissible to prove a thirty percent (30%) under-declaration.
(Boldfacing supplied)

The one-year period stated in the aforequoted provision for the investigation

or audit of the documents and/ or representations made by taxpayer in connection

with the availment of the tax amnesty benefit had already lapsed. To date, there is

nothing in the records which would show that proceedings have been filed under

the said section.

In fine, petitioner duly complied with the requisites enumerated under R.A .

No. 9480.

WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly,

the subject income and VAT deficiencies against petitioner are hereby CANCELLED

and the case is CLOSED and TERMINATED, pursuant to R.A. No. 9480.

SO ORDERED .

• 9 .t.~
.1.
 DEC ISION
E.B. No. 486 (C .TA Case No. 6202)
Page 29 of 29

~ WE CONCUR:

~'Tb~TA
Presiding Justice

»-~c - ~
JffANITO C. CASTANEDK,'(jR.
Associate Justice
.Cl. .
ER~.UY
Associate Justice

~~~
CAESAR A. CASANOVA OLGJPALANCA-~~
Associate Justice Associate Justice

~ N. ~~~~- GvJ-L...
ESPERA CIELITO N. MINDARO-GRULLA
Associate Justice

AMELIA R. COTANGCO-MANALASTAS
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is h ereby certified that the
above Decision has been reached in consultation with the members of the Cou rt En
Bane before the case was assigned to the writer of the opinion of this Cou rt.

~(a· t~
ERNESTO D. A COST A
Presiding Justice

19 2