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CIR v. FAR EAST BANK

FACTS:

This case involves a claim for tax refund filed by respondent Far East Bank & Trust Company with the Bureau of Internal Revenue (BIR) for the taxable year ending December 31, 1994. Respondent filed two Corporate Annual Income Tax Returns, one for its Corporate Banking Unit (CBU) and another for its Foreign Currency Deposit Unit (FCDU). The return for the CBU showed a refundable income tax of P12,682,864.00. Respondent carried this amount over and applied it against its income tax liability for the taxable year ending December 31, 1995. On April 15, 1996, respondent filed its 1995 Annual Income Tax Return showing a total overpaid income tax of P17,443,133.00. Respondent sought to be refunded the amount of P13,645,109.00, while the remaining P3,798,024.00 was carried over to the next taxable year. Due to the failure of petitioner Commissioner of Internal Revenue (CIR) to act on the claim for refund, respondent filed a Petition for Review before the Court of Tax Appeals (CTA). The CTA denied respondent's claim for refund, finding that respondent failed to show that the income from rentals and sale of real property, from which taxes were withheld, were reflected in its 1994 Annual Income Tax Return. On appeal, the Court of Appeals (CA) reversed the decision of the CTA, finding that respondent has proven that the income was included in the return as part of the gross income. The lone issue in this case is whether respondent has proven its entitlement to the tax refund.

ISSUES:

  1. Whether the respondent complied with the requirement of including the income upon which creditable taxes were withheld in its gross income as reflected in its return.

  2. Whether the respondent presented all the required Certificates of Creditable Tax Withheld at Source.

RULING:

  1. The Court of Appeals erred in ruling that the respondent complied with the second requirement. The income derived from rentals and sales of real property, upon which creditable taxes were withheld, were not included in the respondent's gross income as reflected in its return. The explanation of the respondent that these income were included under the heading "Other Earnings" in the Schedule of Income attached to the return was not supported by evidence.

  2. The Certificates of Creditable Tax Withheld at Source presented by the respondent cannot be considered without the required Certificates of Creditable Tax Withheld at Source.

PRINCIPLES:

  • A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with the following requisites: (a) the claim must be filed within the two-year period from the date of payment of the tax; (b) it must be shown on the return that the income received was declared as part of the gross income; and (c) 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.

  • The grant of a refund is based on the assumption that the tax return is valid and the facts stated therein are true and correct. Detailed proof of the truthfulness of each item in the income tax return is not required, but the inclusion of the income payments and the fact of withholding must be proven.

  • It is incumbent upon the taxpayer to reflect in the return the income upon which any creditable tax is required to be withheld at the source.

  • The burden is on the taxpayer to prove its entitlement to the refund.

  • Burden of proof: The burden of establishing the factual basis of a claim for refund rests on the taxpayer.

  • Correctness of returns: Failure to exercise the power to examine returns does not create a presumption in favor of the correctness of the returns.

  • Substantial evidence: The taxpayer must present substantial evidence to prove a claim for refund.

  • Strict construction: Tax refunds, like tax exemptions, are construed strictly against the taxpayer.