The SCs 3rd Division, in a 19-page decision penned by Associate Justice Consuelo Ynares-Santiago, denied the petition of Philex Mining Corporation and affirmed the decision of the Court of Appeals (CA) dated June 30, 2000.
The CA's earlier decision affirmed the decision of the Court of Tax Appeals (CTA) against Philex.
The company was ordered by the SC to pay deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20 percent delinquency interest computed from February 10, 1995, which is the due date given for the payment of the deficiency income tax, up to the actual date of payment.
Philexs tax bills could reached up to P220 million.
Associate Justices Conchita Carpio Morales, Minita V. Chico-Nazario and Antonio Eduardo B. Nachura concurred.
In 1971 Philex entered into an agreement with Baguio Gold Mining Company for the former to manage and operate the latters mining claim, known as the Sto. Nino mine located in Atok and Tublay, Benguet Province .
In the course of managing and operating the project, Philex Mining made advances of cash and property in accordance with the agreement with Baguio Gold.
However, the mine suffered heavy losses over the years which resulted to Philexs withdrawal as manager of themine on Jan. 28, 1982 and in the eventual cessation of operations on Feb. 20, 1982.
On Sept. 27, 1982, the parties executed a Compromise with Dation in Payment wherein Baguio Gold admitted an indebtedness to Philex in the amount of P179,394,000 and agreed to pay the same in three segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds equitable title in its Philodrill assets and settling the remaining liability through properties that Baguio Gold may acquire in the future.
On Dec. 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment where the parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245, which sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor.
These liabilities pertained to long-term loans amounting to USD 11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA and Citibank N.A.
This time, Baguio Gold undertook to pay Philex in two segments by first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets for P16,302,426.00.
The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00.
Subsequently, Philex wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio Gold by charging P112,136,000 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations.
In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as a loss on settlement of receivables from Baguio Gold against reserves and allowances.
The Bureau of Internal Revenue (BIR) however disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.
Philex protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied.
The firm emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold.
The bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed part of Baguio Golds pecuniary obligations to petitioner. It also included payments made by petitioner as guarantor of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the rights of the original creditor.
Philex also said that due to Baguio Golds irreversible losses, it became evident that it would not be able to recover the advances and payments it had made in behalf of Baguio Gold.
On Oct. 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid fifty percent of the projects net profit.
Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment against Philex Mining and sided with the BIR.
The CTA among other things said the Power of Attorney between Philex and Baguio Gold was actually a partnership agreement and since the advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from petitioners gross income.
The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in default since its loans were not yet due and demandable. What petitioner did was to pre-pay the loans as evidenced by the notice sent by Bank of America showing that it was merely demanding payment of the installment and interests due. Moreover, Citibank imposed and collected a pre-termination penalty for the pre-payment.
The CA affirmed the decision of the CTA prompting the parties to take the case to the SC.
Ruling against the firm the high court explained that Philex cannot claim the advances as a bad debt deduction from its gross income since 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 claims.
In this case, petitioner (Philex) failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction, the SC said.
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