CHEVRON PHILIPPINES, INC. v.

COMMISSIONER OF INTERNAL REVENUE

G.R. No. 210836, SEPTEMBER 1, 2015, BERSAMIN, J., EN BANC*

Excise tax on petroleum products is essentially a tax on property, the direct liability for which pertains
to the statutory taxpayer (i.e., manufacturer, producer or importer). Any excise tax paid by the
statutory taxpayer on petroleum products sold to any of the entities or agencies named in Section 135
of the National Internal Revenue Code (NIRC) exempt from excise tax is deemed illegal or erroneous,
and should be credited or refunded to the payor pursuant to Section 204 of the NIRC. This is because
the exemption granted under Section 135 of the NIRC must be construed in favor of the property itself,
that is, the petroleum products.

Taxation; Excise Taxes; Under Section 129 of the National Internal Revenue Code (NIRC), as amended,
excise taxes are imposed on two (2) kinds of goods, namely: (a) goods manufactured or produced in
the Philippines for domestic sales or consumption or for any other disposition; and (b) things
imported.—Under Section 129 of the NIRC, as amended, excise taxes are imposed on two kinds of
goods, namely: (a) goods manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition; and (b) things imported. Undoubtedly, the excise tax
imposed under Section 129 of the NIRC is a tax on property. With respect to imported things,
Section 131 of the NIRC declares that excise taxes on imported things shall be paid by the owner
or importer to the Customs officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customs house, unless the imported things
are exempt from excise taxes and the person found to be in possession of the same is other than
those legally entitled to such tax exemption. For this purpose, the statutory taxpayer is the importer
of the things subject to excise tax.

Same; Same; Petroleum Products; Pursuant to Section 135(c) of the National Internal Revenue Code
(NIRC), petroleum products sold to entities that are by law exempt from direct and indirect taxes are
exempt from excise tax.—Pursuant to Section 135(c), supra, petroleum products sold to entities that
are by law exempt from direct and indirect taxes are exempt from excise tax. The phrase which are
by law exempt from direct and indirect taxes describes the entities to whom the petroleum
products must be sold in order to render the exemption operative. Section 135(c) should thus be
construed as an exemption in favor of the petroleum products on which the excise tax was levied in
the first place. The exemption cannot be granted to the buyers — that is, the entities that are by law
exempt from direct and indirect taxes — because they are not under any legal duty to pay the excise
tax.

Same; Same; The statutory taxpayer may shift the economic burden of the excise tax payment to
another — usually the buyer.—It is noteworthy that excise taxes are considered as a kind of indirect
tax, the liability for the payment of which may fall on a person other than whoever actually bears
the burden of the tax. Simply put, the statutory taxpayer may shift the economic burden of the
excise tax payment to another — usually the buyer.

Same; Same; Petroleum Products; In cases involving excise tax exemptions on petroleum products
under Section 135 of the National Internal Revenue Code (NIRC), the Supreme Court (SC) has
consistently held that it is the statutory taxpayer, not the party who only bears the economic burden,
who is entitled to claim the tax refund or tax credit.—In cases involving excise tax exemptions on
petroleum products under Section 135 of the NIRC, the Court has consistently held that it is the
statutory taxpayer, not the party who only bears the economic burden, who is entitled to claim the
tax refund or tax credit. But the Court has also made clear that this rule does not apply where the
law grants the party to whom the economic burden of the tax is shifted by virtue of an exemption
from both direct and indirect taxes. In which case, such party must be allowed to claim the tax
refund or tax credit even if it is not considered as the statutory taxpayer under the law.

FACTS

Chevron sold and delivered petroleum products to CDC in the period from August 2007 to
December 2007. Chevron did not pass on to CDC the excise taxes paid on the importation of the
petroleum products sold to CDC in taxable year 2007; hence, on June 26, 2009, it filed an
administrative claim for tax refund or issuance of tax credit certificate in the amount of
P6,542,400.00. Considering that CIR did not act on the administrative claim for tax refund or tax
credit, Chevron elevated its claim to the CTA by petition for review.

The CTA First Division denied Chevron’s judicial claim for tax refund or tax credit. The CTA En Banc
affirmed the ruling of the CTA First Division, stating that there was nothing in Section 135 (c) of the
NIRC that explicitly exempted Chevron as the seller of the imported petroleum products from the
payment of the excise taxes; and holding that because it did not fall under any of the categories
exempted from paying excise tax, Chevron was not entitled to the tax refund or tax credit.

Chevron appealed to the Court, but the Court (Second Division) denied the petition for review on
certiorari for failure to show any reversible error on the part of the CTA En Banc.

Hence, Chevron has filed the Motion for Reconsideration, submitting that it was entitled to the tax
refund or tax credit because ruling promulgated on April 25, 2012 in Pilipinas Shell, on which the
CTA En Banc had based its denial of the claim of Chevron, was meanwhile reconsidered by the
Court’s First Division on February 19, 2014.

ISSUE

WON Chevron was entitled to the tax refund or the tax credit for the excise taxes paid on the
importation of petroleum products that it had sold to CDC in 2007.

RULING

YES. The excise tax is a tax is a tax on property; hence, the exemption from the excise tax expressly
granted under Section 135 of the NIRC must be construed in favor of the petroleum products on
which the excise tax was initially imposed.

Accordingly, the excise taxes that Chevron paid on its importation of petroleum products
subsequently sold to CDC were illegal and erroneous, and should be credited or refunded to
Chevron in accordance with Section 204 of the NIRC.

Under Section 129 of the NIRC, as amended, excise taxes are imposed on two kinds of goods,
namely: (a) goods manufactured or produced in the Philippines for domestic sales or consumption
or for any other disposition; and (b) things imported. Undoubtedly, the excise tax imposed under
Section 129 of the NIRC is a tax on property.

With respect to imported things, Section 131 of the NIRC declares that excise taxes on imported
things shall be paid by the owner or importer to the Customs officers, conformably with the
regulations of the Department of Finance and before the release of such articles from the customs
house, unless the imported things are exempt from excise taxes and the person found to be in
possession of the same is other than those legally entitled to such tax exemption. For this purpose,
the statutory taxpayer is the importer of the things subject to excise tax.

Chevron, being the statutory taxpayer, paid the excise taxes on its importation of the petroleum
products.

Pursuant to Section 135(c), petroleum products sold to entities that are by law exempt from
direct and indirect taxes are exempt from excise tax. The phrase which are by law exempt
from direct and indirect taxes describes the entities to whom the petroleum products must
be sold in order to render the exemption operative. Section 135(c) should thus be construed
as an exemption in favor of the petroleum products on which the excise tax was levied in the
first place. The exemption cannot be granted to the buyers — that is, the entities that are by
law exempt from direct and indirect taxes — because they are not under any legal duty to
pay the excise tax.

CDC was created to be the implementing and operating arm of the Bases Conversion and
Development Authority to manage the Clark Special Economic Zone (CSEZ). As a duly-registered
enterprise in the CSEZ, CDC has been exempt from paying direct and indirect taxes pursuant to
Section 24 of Republic Act No. 7916 (The Special Economic Zone Act of 1995), in relation to Section
15 of Republic Act No. 9400 (Amending Republic Act No. 7227, otherwise known as the Bases
Conversion Development Act of 1992).

Inasmuch as its liability for the payment of the excise taxes accrued immediately upon
importation and prior to the removal of the petroleum products from the customs house, Chevron
was bound to pay, and actually paid such taxes. But the status of the petroleum products as exempt
from the excise taxes would be confirmed only upon their sale to CDC in 2007 (or, for that matter,
to any of the other entities or agencies listed in Section 135 of the NIRC). Before then, Chevron did
not have any legal basis to claim the tax refund or the tax credit as to the petroleum products.

Consequently, the payment of the excise taxes by Chevron upon its importation of petroleum
products was deemed illegal and erroneous upon the sale of the petroleum products to CDC. Section
204 of the NIRC explicitly allowed Chevron as the statutory taxpayer to claim the refund or the
credit of the excise taxes thereby paid.

It is noteworthy that excise taxes are considered as a kind of indirect tax, the liability for the
payment of which may fall on a person other than whoever actually bears the burden of the tax.
Simply put, the statutory taxpayer may shift the economic burden of the excise tax payment to
another — usually the buyer.

In cases involving excise tax exemptions on petroleum products under Section 135 of the NIRC, the
Court has consistently held that it is the statutory taxpayer, not the party who only bears the
economic burden, who is entitled to claim the tax refund or tax credit. But the Court has also made
clear that this rule does not apply where the law grants the party to whom the economic burden of
the tax is shifted by virtue of an exemption from both direct and indirect taxes. In which case, such
party must be allowed to claim the tax refund or tax credit even if it is not considered as the
statutory taxpayer under the law.

The general rule applies here because Chevron did not pass on to CDC the excise taxes paid on the
importation of the petroleum products, the latter being exempt from indirect taxes by virtue of
Section 24 of Republic Act No. 7916, in relation to Section 15 of Republic Act No. 9400, not because
Section 135(c) of the NIRC exempted CDC from the payment of excise tax.

AGRIEX CO., LTD., petitioner, vs. HON. TITUS B. VILLANUEVA, Commissioner, Bureau of
Customs (now replaced by HON. ANTONIO M. BERNARDO), and HON. BILLY C. BIBIT,
Collector of Customs, Port of Subic (now replaced by HON. EMELITO VILLARUZ),
respondents.
G.R. No. 158150 September 10, 2014, FIRST DIVISION, BERSAMIN, J.

The Court affirms the exclusive jurisdiction of the Bureau of Customs over seizure cases within the
Subic Freeport Zone.

Subic Special Economic Zone; Subic Bay Metropolitan Authority; The Subic Special Economic Zone, or
the Subic Bay Freeport (SBF), was established pursuant to Section 12 of Republic Act (RA) No. 7227
(The Bases Conversion and Development Act of 1992), to be operated and managed as a special
customs territory. On the other hand, the Subic Bay Metropolitan Authority (SBMA) was created under
Section 13 of RA No. 7227 to serve “as an operating and implementing arm of the Conversion
Authority” within the SBF.

Collector of Customs; Warrant of Seizure and Detention; The Collector of Customs was authorized to
institute seizure proceedings and to issue Warrant of Seizure and Detentions (WSDs) in the Subic Bay
Freeport (SBF), subject to the review by the Commissioner of Customs.—Accordingly, the proper
remedy to question the order or resolution of the Commissioner of Customs was an appeal to the
CTA, not to the CA.

Administrative Agencies; Bureau of Customs; Jurisdiction; Subic Bay Metropolitan Authority; Both the
Subic Bay Metropolitan Authority (SBMA) and the Bureau of Customs (BOC) have the power to seize
and forfeit goods or articles entering the Subic Bay Freeport (SBF), except that SBMA’s authority to
seize and forfeit goods or articles entering the SBF has been limited only to cases involving violations
of Republic Act (RA) No. 7227 or its Implementing Rules and Regulations (IRR).— There is no
question therefore, that the authority of the Bureau of Customs is larger in scope because it covers
cases concerning violations of the customs laws. The authority of the Bureau of Customs to seize
and forfeit goods and articles entering the Subic Bay Freeport does not contravene the nature of the
Subic Bay Freeport as a separate customs authority. Indeed, the investors can generally and freely
engage in any kind of business as well as import into and export out goods with minimum
interference from the Government.

Same; Same; Same; Tariff and Customs Code; Section 602 of the Tariff and Customs Code vests
exclusive original jurisdiction in the Bureau of Customs (BOC) over seizure and forfeiture cases in the
enforcement of the tariff and customs laws.—The treatment of the Subic Bay Freeport as a separate
customs territory cannot completely divest the Government of its right to intervene in the
operations and management of the Subic Bay Freeport, especially when patent violations of the
customs and tax laws are discovered. After all, Section 602 of the Tariff and Customs Code vests
exclusive original jurisdiction in the Bureau of Customs over seizure and forfeiture cases in the
enforcement of the tariff and customs laws.

FACTS:
Petitioner, a foreign corporation whose principal office was in Bangkok, Thailand, entered into a
contract of sale with PT. Gloria Mitra Niagatama International of Surabaya, Indonesia (PT. Gloria
Mitra) for 180,000 bags (or 9,000 metric tons) of Thai white rice. After the unloading, transfer and
storage of the rice shipment at SBMA’s warehouse, Collector Bibit issued Warrant of Seizure and
Detention (WSD) to cover the 180,000 bags of Thai white rice intended for transshipment upon
discovery that the consignees of the 180,000 bags of rice in Indonesia were nonexistent, and the
consignee in the Fiji Islands denied being involved in the importation of rice. Thereafter, Collector
Bibit issued a Notice of Sale of the seized rice.

Petitioner instituted the petition for certiorari and prohibition in the CA alleging grave abuse of
discretion on the part of the respondents for issuing the Notice of Sale. Petitioner alleged that Subic
Bay Freeport is a separate customs territory and hence Bureau of Customs had no jurisdiction over
the 180,000 bags of Thai white rice intended for transshipment to other countries. CA denied the
petition.

ISSUE:

Whether the Collector of Customs has power to seize and forfeit goods or articles enetering the
Subic Bay Freeport.

RULING:

Both the SBMA and the Bureau of Customs have the power to seize and forfeit goods or articles
entering the Subic Bay Freeport, except that SBMA’s authority to seize and forfeit goods or articles
entering the Subic Bay Freeport has been limited only to cases involving violations of RA No. 7227
or its IRR. There is no question therefore, that the authority of the Bureau of Customs is larger in
scope because it covers cases concerning violations of the customs laws.

The authority of the Bureau of Customs to seize and forfeit goods and articles entering the Subic
Bay Freeport does not contravene the nature of the Subic Bay Freeport as a separate customs
authority. Indeed, the investors can generally and freely engage in any kind of business as well as
import into and export out goods with minimum interference from the Government. Yet, the
treatment of the Subic Bay Freeport as a separate customs territory cannot completely divest the
Government of its right to intervene in the operations and management of the Subic Bay Freeport,
especially when patent violations of the customs and tax laws are discovered. After all, Section 602
of the Tariff and Customs Code vests exclusive original jurisdiction in the Bureau of Customs over
seizure and forfeiture cases in the enforcement of the tariff and customs laws.

The discovery of nonexistent and false consignees constitutes sufficient probable cause, as required
by Section 2535 of the Tariff and Customs Code, that violations of the customs laws, particularly
Section 102(k) and Section 2530(a), (f) and (l), pars. 3, 4, and 5 of the Tariff and Customs Code, had
been committed. For that reason, the institution of the seizure proceedings and the issuance of WSD
by the Collector of Customs were well within the jurisdiction of the Bureau of Customs.

The CA is also correct in denying the petition since the proper remedy to question the order or
resolution of the Commissioner of Customs was an appeal to the CTA, not to the CA.
NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER, INC.; H&B, INC.;
SUPPLIES STATION, INC.; and HARDWARE WORKSHOP, INC. v. ANTHONY ACEVEDO, in his
capacity as THE TREASURER OF MANILA; and THE CITY OF MANILA
G.R. No. 180651, July 30, 2014, BERSAMIN, J.:

The issue here concerns double taxation. There is double taxation when the same taxpayer is taxed
twice when he should be taxed only once for the same purpose by the same taxing authority within the
same jurisdiction during the same taxing period, and the taxes are of the same kind or character.
Double taxation is obnoxious.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being
imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for
the same purpose – to make persons conducting business within the City of Manila contribute to city
revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within the same taxing
jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods –
per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales
or receipts of the business.

FACTS:

The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section
15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue
Code of Manila. At the same time, the City of Manila imposed additional taxes upon the petitioners
pursuant to Section 21 of the Revenue Code of Manila, as amended, as a condition for the renewal of
their respective business licenses for the year 1999.

To comply with the City of Manila’s assessment of taxes under Section 21, the petitioners paid
under protest corresponding to the first quarter of 1999.

The petitioners formally requested the Office of the City Treasurer for the tax credit or refund of the
local business taxes paid under protest. However, then City Treasurer denied the request.
Consequently, the petitioners filed their respective petitions for certiorari in the RTC of Manila.

The RTC perceives no proscribed double taxation in the strict, narrow, or obnoxious sense. On
appeal to the CA, the latter denied the petitioners’ appeal.

ISSUE:

Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as amended,
constitutes double taxation (YES)

RULING:

The appeal is meritorious. The collection of taxes pursuant to Section 21 of the Revenue Code of
Manila constituted double taxation.

Double taxation means taxing the same property twice when it should be taxed only once;
Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same
subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction,
during the same taxing period; and the taxes must be of the same kind or character.

Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is
subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are
being imposed: (1) on the same subject matter – the privilege of doing business in the City of
Manila; (2) for the same purpose – to make persons conducting business within the City of Manila
contribute to city revenues; (3) by the same taxing authority – petitioner City of Manila; (4) within
the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the
same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax
imposed on gross sales or receipts of the business.

The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities
to impose a local business tax, and to which any local business tax imposed by petitioner City of
Manila must conform. It is apparent from a perusal thereof that when a municipality or city has
already imposed a business tax on manufacturers, etc. of liquors, distilled spirits, wines, and any
other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no
longer subject the same manufacturers, etc. to a business tax under Section 143(h) of the same
Code. In the same way, businesses such as respondent’s, already subject to a local business tax
under Section 14 of Tax Ordinance No. 7794 can no longer be made liable for local business tax
under Section 21 of the same Tax Ordinance.

Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section
21 of the Manila Revenue Code for the fourth quarter of 2001, considering that it had already been
paying local business tax under Section 14 of the same ordinance. Hence, payments made under
Section 21 must be refunded in favor of petitioner.

LUZON HYDRO CORPORATION v. COMMISSION ON INTERNAL REVENUE

G.R. No. 188260; November 13, 2013, J. Bersamin

Even though the sale of electricity by a power generation company is subject to zero-rated VAT, its
claim for refund or tax credit cannot be granted where no VAT official receipts and VAT returns have
been presented to prove that it actually made zero-rated sales of electricity. An entity claiming for
refund or tax credit carries with it the burden of proving that not only is it entitled under the
substantive law to the allowance of its claim for refund or tax credit but also that it met all the
requirements for evidentiary substantiation of its claim before the administrative official concerned.

FACTS:

Luzon Hydro Corporation (LHC) is a corporation duly organized under the laws of the Philippines,
has been registered with the Bureau of Internal Revenue (BIR) as a VAT taxpayer. LHC entered into
a Power Purchase Agreement with National Power Corporation (NPC) wherein the electricity
produced by the former from its operation of the Bakun Hydroelectric Power Plant was to be sold
exclusively to the latter. Relative to its sale to NPC, Luzon Hydro was granted by the BIR a certificate
for Zero Rate for VAT purposes from January 1, 2000 to December 31, 2000 and January 2, 2001 to
December 31, 2001. Subsequently, LHC incurred an input VAT in the amount of P9,795,427.89 on
its domestic purchases of goods and services used in its generation and sales of electricity to NPC in
the four quarters of 2001, and it declared the input VAT of P9,795,427.89 in its amended VAT
returns for the four quarters on 2001.
Later on, LHC filed a written claim for refund or tax credit relative to its unutilized input VAT. After
an investigation, BIR made a recommendation in its report favorable to LHC’s claim. However,
despite the favorable recommendation, the CIR did not act on the claim. Hence, the LHC filed its
petition for review in the CTA praying for the refund or tax credit certificate corresponding to the
unutilized input VAT. The CTA Division promulgated its decision in favor of CIR and denied the
petition for review for lack of merit on the ground that LHC did not comply with the requirement of
proving that it had effectively zero-rated sales for the quarters of 2001. After the denial of its
motion for reconsideration, LHC elevated the case to CTA En Banc, which promulgated a decision
affirming the Division and denying the claim for refund or tax credit.

ISSUE:

Whether or not Luzon Hydro Corporation is entitled to a refund or tax credit.

RULING:

Petition Denied.

A claim for refund or tax credit for unutilized input VAT may be allowed only if the following
requisites concur, namely: (a) the taxpayer is VAT-registered; (b) the taxpayer is engaged in zero-
rated or effectively zero-rated sales; (c) the input taxes are due or paid; (d) the input taxes are not
transitional input taxes; (e) the input taxes have not been applied against output taxes during and
in the succeeding quarters; (f) the input taxes claimed are attributable to zero-rated or effectively
zero-rated sales; (g) for zero-rated sales under Section 106(A)(2)(1) and (2); 106(B); and
108(B)(1) and (2), the acceptable foreign currency exchange proceeds have been duly accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas; (h) where there
are both zero-rated or effectively zero-rated sales and taxable or exempt sales, and the input taxes
cannot be directly and entirely attributable to any of these sales, the input taxes shall be
proportionately allocated on the basis of sales volume; and (i) the claim is filed within two years
after the close of the taxable quarter when such sales were made.

LHC did not competently establish its claim for refund or tax credit. The Court agrees with the CTA
En Banc that the petitioner did not produce evidence showing that it had zero-rated sales for the
four quarters of taxable year 2001. As the CTA En Banc precisely found, LHC did not reflect any
zero-rated sales from its power generation in its four quarterly VAT returns, which indicated that it
had not made any sale of electricity. Had there been zero-rated sales, it would have reported them
in the returns. Indeed, it carried the burden not only that it was entitled under the substantive law
to the allowance of its claim for refund or tax credit but also that it met all the requirements for
evidentiary substantiation of its claim before the administrative official concerned, or in the de
novo litigation before the CTA in Division.

Although LHC has correctly contended here that the sale of electricity by a power generation
company like it should be subject to zero-rated VAT under Republic Act No. 9136, its assertion that
it need not prove its having actually made zero-rated sales of electricity by presenting the VAT
official receipts and VAT returns cannot be upheld. It ought to be reminded that it could not be
permitted to substitute such vital and material documents with secondary evidence like financial
statements.
 H. TAMBUNTING PAWNSHOP, INC., VS COMMISSIONER OF INTERNAL REVENUE
G.R. No. 173373, FIRST DIVISION, July 29, 2013, BERSAMIN, J.

To be entitled to claim a tax deduction, the taxpayer must competently establish the factual and
documentary bases of its claim.

Taxation; Tax Deductions; The rule that tax deductions, being in the nature of tax exemptions,
are to be construed in strictissimi juris against the taxpayer is well settled.― Corollary to this
rule is the principle that when a taxpayer claims a deduction, he must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that
he is entitled to the deduction which the law allows. An item of expenditure, therefore, must
fall squarely within the language of the law in order to be deductible. A mere averment that
the taxpayer has incurred a loss does not automatically warrant a deduction from its gross
income.

Same; Same; Requisites for the Deductibility of Ordinary and Necessary Trade or Business
Expenses, Like Those Paid for Security and Janitorial Services, Management and Professional
Fees, and Rental Expenses.―The requisites for the deductibility of ordinary and necessary trade
or business expenses, like those paid for security and janitorial services, management and
professional fees, and rental expenses, are that: (a) the expenses must be ordinary and
necessary; (b) they must have been paid or incurred during the taxable year; (c) they must
have been paid or incurred in carrying on the trade or business of the taxpayer; and (d)
they must be supported by receipts, records or other pertinent papers.

Same; Same; The law required Tambunting to support its claim for deduction with the
corresponding official receipts issued by the service providers concerned.―To reiterate,
deductions for income tax purposes partake of the nature of tax exemptions and are strictly
construed against the taxpayer, who must prove by convincing evidence that he is entitled to
the deduction claimed. Tambunting did not discharge its burden of substantiating its claim for
deductions due to the inadequacy of its documentary support of its claim. Its reliance on
withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease was
futile because such documents had scant probative value. As the CTA En Banc succinctly put
it, the law required Tambunting to support its claim for deductions with the corresponding
official receipts issued by the service providers concerned.

FACTS:

On June 26, 2000, the BIR issued assessment notices and demand letters assessing Tambunting for
deficiency percentage tax, income tax and compromise penalties for taxable year 1997. On July 26,
2000, Tambunting instituted an administrative protest against the assessment notices and demand
letters with the Commissioner of Internal Revenue.

On February 21, 2001, Tambunting brought a petition for review in the CTA, pursuant to Section
228 of the National Internal Revenue Code of 1997, citing the inaction of the Commissioner of
Internal Revenue on its protest within the 180-day period prescribed by law.

On October 8, 2004, the CTA First Division rendered a decision ordering petitioner to PAY the
respondent the amount representing deficiency income tax for the year 1997, plus 20%
delinquency interest pursuant to Section 249 (C) of the National Internal Revenue Code. After its
motion for reconsideration was denied for lack of merit, Tambunting filed a petition for review in
the CTA En Banc, arguing that the First Division erred in disallowing its deductions on the ground
that it had not substantiated them by sufficient evidence. The CTA En Banc denied Tambunting’s
petition for review. The CTA En Banc also denied Tambunting’s motion for reconsideration for its
lack of merit. Hence, this appeal by petition for review on certiorari.

Tambunting argues that the CTA should have allowed its deductions because it had been able to
point out the provisions of law authorizing the deductions; that it proved its entitlement to the
deductions through all the documentary and testimonial evidence presented in court; that the
provisions of Section 34 (A)(1)(b) of the 1997 National Internal Revenue Code, governing the types
of evidence to prove a claim for deduction of expenses, were applicable because the law took effect
during the pendency of the case in the CTA; that the CTA had allowed deductions for ordinary and
necessary expenses on the basis of cash vouchers issued by the taxpayer or certifications issued by
the payees evidencing receipt of interest on loans as well as agreements relating to the imposition
of interest; that it had thus shown beyond doubt that it had incurred the losses in its auction sales;
and that it substantially complied with the requirements of Revenue Regulations No. 12-77 on the
deductibility of its losses.

ISSUE:

WON Tambunting competently established the factual and documentary bases of its claim for
deductions.

RULING:

NO.

The Court agrees with the CTA En Banc that because this case involved assessments relating to
transactions incurred by Tambunting prior to the effectivity of Republic Act No. 8424 (National
Internal Revenue Code of 1997, or NIRC of 1997), the provisions governing the propriety of the
deductions was Presidential Decree 1158 (NIRC of 1977).

We affirm the aforequoted ruling of the CTA En Banc.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed in
strictissimi juris against the taxpayer is well settled. Corollary to this rule is the principle that when
a taxpayer claims a deduction, he must point to some specific provision of the statute in
which that deduction is authorized and must be able to prove that he is entitled to the
deduction which the law allows. An item of expenditure, therefore, must fall squarely within the
language of the law in order to be deductible. A mere averment that the taxpayer has incurred a loss
does not automatically warrant a deduction from its gross income.

As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The
subasta books it presented were not the proper evidence of such losses from the auctions because
they did not reflect the true amounts of the proceeds of the auctions due to certain items having
been left unsold after the auctions. The rematado books did not also prove the amounts of capital
because the figures reflected therein were only the amounts given to the pawnees. It is interesting
to note, too, that the amounts received by the pawnees were not the actual values of the pawned
articles but were only fractions of the real values.
The requisites for the deductibility of ordinary and necessary trade or business expenses, like those
paid for security and janitorial services, management and professional fees, and rental expenses,
are that: (a) the expenses must be ordinary and necessary; (b) they must have been paid or
incurred during the taxable year; (c) they must have been paid or incurred in carrying on the trade
or business of the taxpayer; and (d) they must be supported by receipts, records or other pertinent
papers.

In denying Tambunting’s claim for deduction of its security and janitorial expenses, management
and professional fees, and its rental expenses, the CTA En Banc explained that contrary to
petitioner’s contention, the security/janitorial expenses paid to Pathfinder Investigation were not
duly substantiated. The certification issued by Mr. Balisado was not the proper document required
by law to substantiate its expenses. Petitioner should have presented the official receipts or
invoices to prove its claim as provided for under Section 238 of the National Internal Revenue Code
of 1977.

With regard to the misclassified items of expenses, petitioner's statements were self-serving,
likewise it failed to substantiate its allegations by clear and convincing evidence as provided under
the foregoing provision of law.

Bearing in mind the principle in taxation that deductions from gross income partake the nature of
tax exemptions which are construed in strictissimi juris against the taxpayer, the Court en banc is
not inclined to believe the self-serving statements of petitioner regarding the misclassified items of
office supplies, advertising and rent expenses.

Among the expenses allegedly incurred, courts may consider only those supported by credible
evidence and which appear to have been genuinely incurred in connection with the trade or
business of the taxpayer.

As previously discussed, the proper substantiation requirement for an expense to be allowed is the
official receipt or invoice. While the rental payments were subjected to the applicable expanded
withholding taxes, such returns are not the documents required by law to substantiate the rental
expense. Petitioner should have submitted official receipts to support its claim.

Moreover, the issue on the submission of cash vouchers as evidence to prove expenses incurred has
been addressed by this Court in the assailed Resolution.

To reiterate, deductions for income tax purposes partake of the nature of tax exemptions and
are strictly construed against the taxpayer, who must prove by convincing evidence that he
is entitled to the deduction claimed. Tambunting did not discharge its burden of substantiating
its claim for deductions due to the inadequacy of its documentary support of its claim. Its reliance
on withholding tax returns, cash vouchers, lessor’s certifications, and the contracts of lease was
futile because such documents had scant probative value. As the CTA En Banc succinctly put it, the
law required Tambunting to support its claim for deductions with the corresponding official
receipts issued by the service providers concerned.

The CTA En Banc aptly rejected Tambunting's claim for deductions due to losses from fire and theft.
The documents it had submitted to support the claim, namely: (a) the certification from the Bureau
of Fire Protection in Malolos; (b) the certification from the Police Station in Malolos; (c) the
accounting entry for the losses; and (d) the list of properties lost, were not enough. What were
required were for Tambunting to submit the sworn declaration of loss mandated by Revenue
Regulations 12-77. Its failure to do so was prejudicial to the claim because the sworn declaration of
loss was necessary to forewarn the BIR that it had suffered a loss whose extent it would be claiming
as a deduction of its tax liability, and thus enable the BIR to conduct its own investigation of the
incident leading to the loss. Indeed, the documents Tambunting submitted to the BIR could not
serve the purpose of their submission without the sworn declaration of loss.