COMMISSIONER OF INTERNAL   G.R. No. 173854

REVENUE,    
Petitioner,   Present:
     
    CARPIO, J., Chairperson,
- versus -   BRION,
    DEL CASTILLO,
    ABAD, and
FAR EAST BANK & TRUST   PEREZ, JJ.
COMPANY (NOW BANK OF    
THE PHILIPPINE ISLANDS),   Promulgated:
Respondent.   March 15, 2010
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
 
DECISION
 
DEL CASTILLO, J.:
Entitlement to a tax refund is for the taxpayer to prove and not for the government
to disprove.
 
This Petition for Review on Certiorari assails the January 31, 2006 Decision[1] of
the Court of Appeals (CA) in CA-G.R. SP No. 56773 which reversed and set aside the
October 4, 1999 Decision[2] of the Court of Tax Appeals (CTA) in CTA Case No.
5487. Also assailed is the July 19, 2006 Resolution[3] of the CA denying the motion for
reconsideration.
 
The CTA found that respondent Far East Bank & Trust Company failed to prove
that the income derived from rentals and sale of real property from which the taxes were
withheld were reflected in its 1994 Annual Income Tax Return.The CA found otherwise.
 
Factual Antecedents
 
On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR)
two Corporate Annual Income Tax Returns, one for its Corporate Banking Unit (CBU)
[4]
 and another for its Foreign Currency Deposit Unit (FCDU),[5]for the taxable year
ending December 31, 1994. The return for the CBU consolidated the respondents overall
income tax liability for 1994, which reflected a refundable income tax
of P12,682,864.00, computed as follows:
  FCDU CBU
Gross Income P13,319,068 5,348,080,630
Less: Deductions 1,397,157 5,432,828,719
     
Net Income 11,921,911 [84,748,089]
Tax Rate 35% 35%
     
Income Tax Due Thereon 4,172,669 NIL
     
Consolidated Tax Due for _______________________________________

Both CBU and FCDU Operations P 4,172,669  

     
Less:    
     
Quarterly Income Tax Payments    
CBU -1st Quarter 633,085  
-2nd Quarter 11,844,333  
FCDU -1st Quarter 955, 280  
-2nd Quarter 1,104,942  
     
Less:    
Creditable Taxes 2,317,893  
Withheld at Source    
Refundable Income Tax [P12,682,864][6]  
 
Pursuant to Section 69[7] of the old National Internal Revenue Code (NIRC),
the amount of P12,682,864.00 was carried over and applied against respondents income
tax liability for the taxable year ending December 31, 1995. On April 15, 1996,
respondent filed its 1995 Annual Income Tax Return, which showed a total overpaid
income tax in the amount of P17,443,133.00, detailed as follows:
  FCDU CBU
Gross Income P16,531,038 7,076,497,628
Less: Deductions 1,327,549 7,086,821,354
     
Net Income 15,203,539 [10,423,728]
Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 NIL
     
Consolidated Tax Due for _______________________________________

Both CBU and FCDU Operations P 5,321,239  

      
Less:    
Prior years (1994) excess    
income tax credit 12,682,864
Additional prior years excess    
income tax credit 6,283,484
Creditable Taxes    
Withheld at Source 3,798,024  
Refundable Income Tax [P17,443,133][8]  
 
Out of the P17,433,133.00 refundable income tax, only P13,645,109.00 was
sought to be refunded by respondent. As to the remaining P3,798,024.00, respondent
opted to carry it over to the next taxable year.
 
On May 17, 1996, respondent filed a claim for refund of the amount
of P13,645,109.00 with the BIR. Due to the failure of petitioner Commissioner of
Internal Revenue (CIR) to act on the claim for refund, respondent was compelled to bring
the matter to the CTA on April 8, 1997 via a Petition for Review docketed as CTA Case
No. 5487.
 
After the filing of petitioners Answer, trial ensued.
 
To prove its entitlement to a refund, respondent presented the following documents:
 
Exhibits Nature and Description
 
A Corporate Annual Income Tax Return covering income of respondents CBU for
the year ended December 31, 1994 together
with attachments
 
B Corporate Annual Income Tax Return covering income of respondents FCDU for
the year ended December 31, 1994 together
with attachments
 
C Corporate Annual Income Tax Return covering income of respondents CBU for
the year ended December 31, 1995 together
with attachments
 
D Corporate Annual Income Tax Return covering income of respondents FCDU for
the year ended December 31, 1995 together
with attachments
 
 N to Z; Certificates of Creditable
AA to UU Withholding Tax and Monthly Remittance Returns of Income Taxes
Withheld issued by various withholding agents
for the year ended December 31, 1994
 
VV Letter claim for refund dated May 8, 1996 filed with the Revenue District Office
No. 33 on May 17, 1996[9]
 
Petitioner, on the other hand, did not present any evidence.
 
 
Ruling of the Court of Tax Appeals
 
On October 4, 1999, the CTA rendered a Decision denying respondents claim for refund
on the ground that respondent failed to show that the income derived from rentals and
sale of real property from which the taxes were withheld were reflected in its 1994
Annual Income Tax Return.
 
On October 20, 1999, respondent filed a Motion for New Trial based on excusable
negligence. It prayed that it be allowed to present additional evidence to support its claim
for refund.
 
However, the motion was denied on December 16, 1999 by the CTA. It reasoned,
thus:
 
[Respondent] is reminded that this case was originally submitted for decision as
early as September 22, 1998 (p. 497, CTA Records). In view, however, of the Urgent
Motion to Admit Memorandum filed on April 27, 1999 by Atty. Louella Martinez, who
entered her appearance as collaborating counsel of Atty. Manuel Salvador allegedly due
to the latter counsels absences, this Court set aside its resolution of September 22, 1998
and considered this case submitted for decision as of May 7, 1999. Nonetheless, it took
[respondent] another five months after it was represented by a new counsel and after a
decision unfavorable to it was rendered before [respondent] realized that an additional
material documentary evidence has to be presented by way of a new trial, this time
initiated by a third counsel coming from the same law firm. x x x
 
Furthermore, in ascertaining whether or not the income upon which the taxes
were withheld were included in the returns of the [respondent], this Court based its
findings on the income tax returns and their supporting schedules prepared and reviewed
by the [respondent] itself and which, to Us, are enough to support the conclusion
reached.
  
WHEREFORE, in view of the foregoing, [respondents] Motion for New Trial
is hereby DENIED for lack of merit.
 
SO ORDERED.[10]

 
Ruling of the Court of Appeals
 
On appeal, the CA reversed the Decision of the CTA. The CA found that
respondent has duly proven that the income derived from rentals and sale of real property
upon which the taxes were withheld were included in the return as part of the gross
income.
 
Hence, this present recourse.
Issue
 
The lone issue presented in this petition is whether respondent has proven its
entitlement to the refund.[11]
 
Our Ruling
 
We find that the respondent miserably failed to prove its entitlement to the
refund. Therefore, we grant the petition filed by the petitioner CIR for being meritorious.
 
A taxpayer claiming for a tax credit or refund of creditable withholding tax must
comply with the following requisites:
 
1) The claim must be filed with the CIR within the two-year period from the date
of payment of the tax;
 
2) It must be shown on the return that the income received was declared as part of
the gross income; and
 
3) The fact of withholding must be established by a copy of a statement duly
issued by the payor to the payee showing the amount paid and the amount
of the tax withheld.[12]
 
The two-year period requirement is based on Section 229 of the NIRC of 1997 which
provides that:
 
SECTION 229. Recovery of Tax Erroneously or Illegally Collected. No suit or
proceeding shall be maintained in any court for the recovery of any national internal
revenue tax hereafter alleged to have been erroneously or illegally assessed or collected,
or of any penalty claimed to have been collected without authority, or of any sum alleged
to have been excessive or in any manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
 
In any case, no such suit or proceeding shall be filed after the expiration of two
(2) years from the date of payment of the tax or penalty regardless of any supervening
cause that may arise after payment: Provided, however, That the Commissioner may,
even without a written claim therefor, refund or credit any tax, where on the face of the
return upon which payment was made, such payment appears clearly to have been
erroneously paid. (Formerly Section 230 of the old NIRC)
 
While the second and third requirements are found under Section 10 of Revenue
Regulation No. 6-85, as amended, which reads:
 
Section 10. Claims for tax credit or refund. Claims for tax credit or refund of
income tax deducted and withheld on income payments shall be given due course only
when it is shown on the return that the income payment received was declared as part of
the gross income and the fact of withholding is established by a copy of the statement
duly issued by the payer to the payee (BIR Form No. 1743.1) showing the amount paid
and the amount of tax withheld therefrom.
 
 
Respondent timely filed its claim for refund.
 
 
There is no dispute that respondent complied with the first requirement. The filing of
respondents administrative claim for refund on May 17, 1996 and judicial claim for
refund on April 8, 1997 were well within the two-year period from the date of the filing
of the return on April 10, 1995.[13]
 
Respondent failed to prove that the income
derived from rentals and sale of real property
were included in the gross income as reflected
in its return.
 
 
However, as to the second and third requirements, the tax court and the appellate
court arrived at different factual findings.
 
The CTA ruled that the income derived from rentals and sales of real property
were not included in respondents gross income. It noted that in respondents 1994 Annual
Income Tax Return, the phrase NOT APPLICABLE was printed on the space provided
for rent, sale of real property and trust income. The CTA also declared that the
certifications issued by respondent cannot be considered in the absence of the Certificates
of Creditable Tax Withheld at Source. The CTA ruled that:
 
x x x the Certificates of Creditable Tax Withheld at Source submitted by [respondent]
pertain to rentals of real property while the Monthly Remittance Returns of Income
Taxes Withheld refer to sales of real property. But, if we are to look at Schedules 3, 4,
and 5 of the Annual Income Tax Return of [respondent] for 1994 (Exhibit A), there was
no showing that the Rental Income and Income from Sale of Real Property were
included as part of the gross income appearing in Section A of the said return. In
fact, under the said schedules, the phrase NOT APPLICABLE was printed by
[respondent]. Verily, the income of [respondent] coming from rent and sale of real
property upon which the creditable taxes withheld were based were not duly
reflected. As to the certifications issued by the [respondent] (Exh. UU), the same
cannot be considered in the absence of the requisite Certificates of Creditable Tax
Withheld at Source.
 
Based on the foregoing, [respondent] has failed to comply with two essential
requirements for a valid claim for refund. Consequently, the same cannot be given
due course. [14] (Emphasis supplied)
 
 
On the other hand, the CA found thus:
 
 
We disagree with x x x CTAs findings. In the case of Citibank, N.A. vs. Court of
Appeals (280 SCRA 459), the Supreme Court held that:
 
a refund claimant is required to prove the inclusion of the
income payments which were the basis of the withholding taxes and
the fact of withholding. However, a detailed proof of the truthfulness of
each and every item in the income tax return is not required. x x x
  
x x x The grant of a refund is founded on the assumption that the tax
return is valid; that is, the facts stated therein are true and correct. x x x
In the case at bench, the BIR examined [respondent] Banks Corporate Annual
Income Tax Returns for the years 1994 and 1995 when they were filed on April 10,
1995 and April 15, 1996, respectively. Presumably, the BIR found no false declaration in
them because it did not allege any false declaration thereof in its Answer (to the petition
for review) filed before x x x CTA. Nowhere in the Answer, did the BIR dispute the
amount of tax refund being claimed by [respondent] Bank as inaccurate or erroneous. In
fact, the reason given by the BIR (in its Answer to the petition for review) why the
claimed tax refund should be denied was that x x x the amount of P13,645,109.00 was
not illegally or erroneously collected, hence, the petition for review has no basis [see
Record, p. 32]. The amount of P17,433,133.00 reflected as refundable income tax in
[respondent] Banks Corporate Annual Income Tax Return for the year 1995 was not
disputed by the BIR to be inaccurate because there were certain income not included in
the return of the [respondent].Verily, this leads Us to a conclusion that [respondent]
Banks Corporate Annual Income Tax Returns submitted were accepted as regular and
even accurate by the BIR.
 
Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked
to make an examination of returns and assess the correct amount of tax, to wit:
 
Sec. 16. Power of the Commissioner to make assessment and
prescribe additional requirements for tax administration and
enforcement.
 
(a) After a return is filed as required under the provision of this
Code, the Commissioner shall examine it and assess the correct amount
of tax. x x x
 
which the [petitioner] Commissioner undeniably failed to do. Moreover, noteworthy
is the fact that during the hearing of the petition for review before the CTA, [petitioner]
Commissioner of the BIR submitted the case for decision in view of the fact that he has
no evidence to present nor records to submit relative to the case x x x
 
Thus, although it is a fact that [respondent] failed to indicate said income payments under
the appropriate Schedules 3, 4, and 5 of Section C of its 1994 Annual Income Tax Return
(Exhibit A), however, We give credence to [respondent] Banks assertion that it
reported the said income payments as part of its gross income when it included the
same as part of the Other Income, Trust Income, and Interest Income stated in the
Schedule of Income (referred to as an attachment in Section C of Exhibit A, x x x and in
the 1994 audited Financial Statements (FS) supporting [respondents] 1994 Annual
Corporate Income Tax Return. The reason why the phrase NOT APPLICABLE was
indicated in schedules 3, 4, and 5 of Section C of [respondents] 1994 Annual Income Tax
Return is due to the fact that [respondent] Bank already reported the subject rental
income and income from sale of real property in the Schedule of Income under the
 headings Other Income/Earnings, Trust Income and Interest Income. Therefore,
[respondent] Bank still complied with the second requirement that the income upon
which the taxes were withheld are included in the return as part of the gross income.
 
xxxx
 
[Respondent] Banks various documentary evidence showing that it had satisfied all
requirements under the Tax Code vis--vis the Bureau of Internal Revenues failure to
adduce any evidence in support of their denial of the claim, [respondent] Bank
should, therefore, be granted the present claim for refund.[15] (Emphasis supplied)
Between the decision of the CTA and the CA, it is the formers that is based on the
evidence and in accordance with the applicable law and jurisprudence.
 
To establish the fact of withholding, respondent submitted Certificates of
Creditable Tax Withheld at Source and Monthly Remittance Returns of Income Taxes
Withheld, which pertain to rentals and sales of real property, respectively. However, a
perusal of respondents 1994 Annual Income Tax Return shows that the gross income
was derived solely from sales of services. In fact, the phrase NOT APPLICABLE was
printed on the schedules pertaining to rent, sale of real property, and trust income.
[16]
 Thus, based on the entries in the return, the income derived from rentals and sales of
real property upon which the creditable taxes were withheld were not included in
respondents gross income as reflected in its return. Since no income was reported, it
follows that no tax was withheld. To reiterate, it is incumbent upon the taxpayer to reflect
in his return the income upon which any creditable tax is required to be withheld at the
source.[17]
 
Respondents explanation that its income derived from rentals and sales of real
properties were included in the gross income but were classified as Other Earnings in its
Schedule of Income[18] attached to the return is not supported by the evidence. There is
nothing in the Schedule of Income to show that the income under the heading Other
Earnings includes income from rentals and sales of real property. No documentary or
testimonial evidence was presented by respondent to prove this. In fact, respondent, upon
realizing its omission, filed a motion for new trial on the ground of excusable negligence
with the CTA. Respondent knew that it had to present additional evidence showing the
breakdown of the Other Earnings reported in its Schedule of Income attached to the
return to prove that the income from rentals and sales of real property were actually
included under the heading Other Earnings.[19] Unfortunately, the CTA was not
convinced that there was excusable negligence to justify the granting of a new trial.
  
Accordingly, the CA erred in ruling that respondent complied with the second
requirement.
 
Respondent failed to present all the
Certificates of Creditable Tax Withheld at
Source.
 
 
The CA likewise failed to consider in its Decision the absence of several
Certificates of Creditable Tax Withheld at Source. It immediately granted the refund
without first verifying whether the fact of withholding was established by the Certificates
of Creditable Tax Withheld at Source as required under Section 10 of Revenue
Regulation No. 6-85. As correctly pointed out by the CTA, the certifications (Exhibit
UU) issued by respondent cannot be considered in the absence of the required
Certificates of Creditable Tax Withheld at Source.
 
The burden is on the taxpayer to prove its
entitlement to the refund.
 
 
Moreover, the fact that the petitioner failed to present any evidence or to
refute the evidence presented by respondent does not ipso facto entitle the respondent to
a tax refund. It is not the duty of the government to disprove a taxpayers claim for
refund. Rather, the burden of establishing the factual basis of a claim for a refund rests on
the taxpayer.[20]
 
And while the petitioner has the power to make an examination of the returns and
to assess the correct amount of tax, his failure to exercise such powers does not create a
presumption in favor of the correctness of the returns. The taxpayer must still present
substantial evidence to prove his claim for refund. As we have said, there is no automatic
grant of a tax refund.[21]
 
Hence, for failing to prove its entitlement to a tax refund, respondents claim must
be denied. Since tax refunds partake of the nature of tax exemptions, which are
construed strictissimi juris against the taxpayer, evidence in support of a claim must
likewise be strictissimi scrutinized and duly proven.[22]
 
WHEREFORE, the petition is GRANTED. The assailed January 31,
2006 Decision of the Court of Appeals in CA-G.R. SP No. 56773 and its July 19, 2006
Resolution are REVERSED and SET ASIDE. The October 4, 1999 Decision of the
Court of Tax Appeals denying respondents claim for tax refund for failure to prove that
the income derived from rentals and sale of real property from which the taxes were
withheld were reflected in its 1994 Annual Income Tax
Return, is REINSTATED and AFFIRMED.
 
SO ORDERED.
 
MARIANO C. DEL CASTILLO
Associate Justice
WE CONCUR:
 
 
 
ANTONIO T. CARPIO
Associate Justice
Chairperson
 
 
 
ARTURO D. BRION ROBERTO A. ABAD
Associate Justice Associate Justice
 
 
JOSE PORTUGAL PEREZ
Associate Justice
 
 
 
ATTESTATION
 
I attest that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Courts Division.
 
 
ANTONIO T. CARPIO
Associate Justice
Chairperson, Second Division
 
 
 
 
CERTIFICATION
 
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons attestation, it is hereby certified that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
 
 
REYNATO S. PUNO
Chief Justice

[1]
 Rollo, pp. 127-139; penned by Associate Justice Edgardo F. Sundiam and concurred in by Associate Justices
Martin S. Villarama, Jr. (now a Member of this Court) and Japar B. Dimaampao.
[2]
 Id. at 142-151; penned by Associate Justice Amancio Q. Saga and concurred in by Presiding Justice Ernesto D.
Acosta and Associate Justice Ramon O. De Veyra.
[3]
 Id. at 140-141.
[4]
 Id. at 154-155.
[5]
 Id. at 178.
[6]
 Id. at 143.
[7]
 Section 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final adjustment
return covering the total net income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:
(a) Pay the excess still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable year. (Now Section 76 of the NIRC of 1997).
[8]
 Rollo, p. 143.
[9]
 Id. at 147-148.
[10]
 Id. at 152-153.
[11]
 Id. at 111.
[12]
 Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R. No. 155682, March 27, 2007, 519 SCRA
93, 96.
[13]
 Rollo, p. 149.
[14]
 Id. at 150.
[15]
 Id. at 136 to 138.
[16]
 Id. at 155.
[17]
 Far East Bank and Trust Company v. Court of Appeals, G.R. No. 129130, December 9, 2005, 477 SCRA 49, 54.
[18]
 Rollo, p. 173.
[19]
 CA rollo, pp. 17-18.
[20]
 Philippine Long Distance Telephone Company v. Commissioner of Internal Revenue, G.R. No. 157264, January
31, 2008, 543 SCRA 329, 335.
[21]
 Philam Asset Management, Inc. v. Commissioner of Internal Revenue, G.R. Nos. 156637 and 162004, December
14, 2005, 477 SCRA 761, 775.
[22]
 Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, G.R. No.
159490, February 18, 2008, 546 SCRA 150, 163.