Title
Commissioner of Internal Revenue vs. Bank of Commerce
Case
G.R. No. 149636
Decision Date
Jun 8, 2005
Bank of Commerce overpaid GRT, claimed refund arguing final withholding tax excluded from gross receipts; Supreme Court ruled the tax is part of gross receipts, refund denied.
final withholding tax
taxable gross receipts
gross receipts tax
A

Case Summary (G.R. No. 149636)

Factual Background

In 1994 and 1995, Bank of Commerce received passive income from investments in government securities and private commercial papers. The bank paid the 5% gross receipts tax on its quarterly returns and included passive income amounting to PHP 85,384,254.51 that had been subjected to a 20% final withholding tax at source. The bank claimed that the 20% final tax should not form part of taxable gross receipts for computation of the 5% gross receipts tax.

Administrative Claim and CTA Filing

Following the CTA decision in Asia Bank Corporation v. Commissioner of Internal Revenue, CTA Case No. 4720 (January 30, 1996), which held that the 20% final withholding tax on bank interest did not form part of gross receipts for GRT purposes, Bank of Commerce filed an administrative claim for refund on July 19, 1996 seeking PHP 853,842.54 as overpayment. To preserve its rights under the two-year prescription rule of Section 230 of the Tax Code (now Section 229), the bank filed a petition for review with the Court of Tax Appeals before the Commissioner resolved the administrative claim.

Issues Presented

The CTA framed the issues as whether the 20% final income tax withheld should form part of the taxpayer’s gross receipts for the 5% gross receipts tax and whether Bank of Commerce was entitled to a refund of PHP 853,842.54. The Commissioner asserted multiple defenses including that the taxes were paid pursuant to law and regulations; that the bank must prove inclusion of the income in its gross income; that exclusions must be allowable under law and supported by evidence; and that claims for refund are strictly construed against the taxpayer.

Parties’ Contentions

Bank of Commerce contended that the final withholding tax did not form part of gross receipts for GRT computation, relying on the CTA’s Asia Bank ruling and on Section 4(e) of Rev. Reg. No. 12-80. The Commissioner of Internal Revenue argued that no law excluded the 20% final tax from computation of the 5% gross receipts tax; that the Manila Jockey Club precedent defining “gross receipts” did not apply to a banking institution; and that later regulations, particularly Rev. Reg. No. 17-84, treated interest income of financial institutions subject to withholding as included in gross receipts.

Court of Tax Appeals Decision

By a majority decision dated April 27, 1999, the Court of Tax Appeals partially granted the bank’s petition and ordered refund of PHP 355,258.99. The CTA relied on Collector of Internal Revenue v. Manila Jockey Club, Inc., and on Section 4(e) of Rev. Reg. No. 12‑80, reasoning that amounts earmarked by law or regulation for the government do not form part of a taxpayer’s gross receipts. The CTA found the petitioner’s claim within the prescriptive period and substantiated by evidence and applied Section 204(3) of the NIRC.

Court of Appeals Decision

The Court of Appeals dismissed the Commissioner’s petition on August 14, 2001. Citing Sections 51 and 58(A) of the NIRC, Section 4(e) of Rev. Reg. No. 12‑80, and Manila Jockey Club, the CA held that the PHP 17,076,850.90 representing the final withholding tax derived from passive investments was a trust fund for the government and therefore did not constitute the bank’s gross receipts for imposition of the 5% gross receipts tax. The CA concluded that including that amount would constitute double taxation because the legal ownership of the withheld amount had vested in the government and the bank did not benefit from it.

Petition to the Supreme Court

The Commissioner of Internal Revenue elevated the matter to the Supreme Court under Rule 43, contending that the 20% final withholding tax was properly part of gross receipts for computation of the 5% gross receipts tax; that reliance on Rev. Reg. No. 12‑80 was misplaced because it had been superseded by Rev. Reg. No. 17‑84; and that constructive receipt sufficed to include the income in the taxable base, relying on CA rulings and prior decisions.

Legal Analysis by the Supreme Court

The Supreme Court found the petition meritorious. The Court reviewed applicable provisions, notably Section 27(D)(1) imposing a 20% final tax on certain interest income, Section 57(A)(B) authorizing withholding at source and treating withheld tax as a special fund in trust for the government, and Section 121 prescribing gross receipts tax rates for banks. The Court emphasized that the Tax Code does not define “gross receipts,” and that, absent a statutory definition, the term must be given its common and ordinary meaning as the whole amount received without deduction. The Court analyzed precedents and regulatory provisions, distinguishing the Manila Jockey Club factual matrix where statutes expressly apportioned receipts so that material portions were held in trust and never belonged to the casino operator. The Court explained that Section 4(e) of Rev. Reg. No. 12‑80 did not authorize exclusion of the tax withheld from gross receipts but merely addressed when accrual-basis items become taxable upon actual or constructive receipt. The Court endorsed the principle that constructive receipt occurs when the payee has the right to the amount even if a withholding agent remits the tax to the government. The Court relied on its own prior rulings in China Banking Corporation v. Court of Appeals and CIR v. Solidbank Corporation to hold that the final withholding tax represents income earned by the taxpayer and, absent an express statutory exclusion, must be included in gross receipts for GRT computation.

Ruling and Disposition

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