G.R. No. 173854 - Commissioner of Internal Revenue vs. Far East Bank and Trust Company

On April 10, 1995, respondent Far East Bank & Trust Company filed two separate Corporate Annual Income Tax Returns for the taxable year ending December 31, 1994 – one for its Corporate Banking Unit (CBU) and another for its Foreign Currency Deposit Unit (FCDU).
The return for the CBU consolidated the overall income tax liability for 1994 and showed a refundable income tax computed at P12,682,864.00.
Detailed computations included gross income, deductions, net income, tax rates (35% for both units), and computations of quarterly tax payments from both CBU and FCDU operations.

On April 15, 1996, respondent filed its 1995 Annual Income Tax Return which reflected a total overpaid income tax of P17,443,133.00.
The return presented consolidated figures for both the CBU and the FCDU operations, taking into account prior year excess income tax credits and creditable taxes withheld.
Although the refundable amount was computed at P17,443,133.00, respondent sought a refund of only P13,645,109.00, opting to carry over the remaining P3,798,024.00 to the next taxable year.

Respondent filed a formal claim for refund with the Bureau of Internal Revenue (BIR) on May 17, 1996, due to the petitioner’s (Commissioner of Internal Revenue’s) inaction on the claim.
Faced with the lack of administrative resolution, respondent elevated the matter to the Court of Tax Appeals (CTA) by filing a Petition for Review on April 8, 1997 (CTA Case No. 5487).

In support of its refund claim, respondent submitted multiple documents including:

Corporate Annual Income Tax Returns for 1994 and 1995 for both the CBU and FCDU operations with the necessary attachments.
Certificates of Creditable Withholding Tax and Monthly Remittance Returns showing the amounts withheld by various withholding agents.
A letter claim for refund dated May 8, 1996, filed with the Revenue District Office.

Respondent relied on these documents to prove that the income derived from rentals and sales of real property (subject to withholding tax) was included in its gross income for the year 1994.

The Court of Tax Appeals (CTA) rendered a decision on October 4, 1999, denying respondent’s refund claim on the ground that the income derived from rentals and sales of real property, from which taxes were withheld, was not reflected in its 1994 Annual Income Tax Return.
A subsequent Motion for New Trial filed by respondent on October 20, 1999—citing excusable negligence to admit additional evidence—was denied by the CTA on December 16, 1999.
The Court of Appeals (CA) later reversed the CTA decision, finding that respondent had indeed included the income in its returns (albeit classified under “Other Income,” “Trust Income,” or “Interest Income”).
The Commissioner of Internal Revenue, who did not present contrary evidence during trial, maintained in its answer that the claimed refund was not illegally or erroneously collected.

The Supreme Court analyzed the conflicting factual findings between the CTA and the CA regarding whether the rental and sales income were included in the gross income as reflected in the returns.
Emphasizing that the burden of proof lies on the taxpayer to prove entitlement to a refund, the Supreme Court found that respondent failed to satisfactorily prove that the income subject to withholding was reported.
Consequently, the Supreme Court granted the petition by the petitioner (the Commissioner of Internal Revenue), reversed the CA’s decision, and reinstated the CTA ruling denying the refund claim.

Whether respondent Far East Bank & Trust Company sufficiently proved its entitlement to a refund of tax based on its claim that income from rentals and sales of real property (subject to creditable withholding tax) was included in its 1994 Annual Income Tax Return.
Whether the evidence submitted by respondent complied with the requisites mandated by the National Internal Revenue Code (NIRC) and Revenue Regulation No. 6-85 in establishing both the fact of withholding and the inclusion of such income in the taxable gross income.