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By William B. Depasupil, Reporter
AFTER twenty-six years of tax litigation, a
mining firm was ordered by the Supreme Court to pay the Bureau of
Internal Revenue (BIR) not only its original backtaxes of P62
million but also a 20-percent interest for delinquency, totaling
more than P220 million.
In a 19-page decision penned by Associate
Justice Consuelo Yñares-Santiago, the High Court’s Third Division
ordered Philex Mining Corp. to pay its backtaxes, and in the process
affirmed earlier decisions of the Court of Appeals and the Court of
Tax Appeals.
Associate Justices Conchita Carpio Morales,
Minita Chico-Nazario and Antonio Eduardo Nachura concurred with the
decision.
The High Court explained that “Philex cannot
claim the advances [it made] as a bad debt deduction from its gross
income,” because “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 High Court added.
With that ruling, Philex has to pay its tax
deficiency on its 1982 income amounting to P62.81 million, 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.”
Records show that in 1971, Philex entered into
an agreement with Baguio Gold Mining Co. to manage and operate the
latter’s mining claim, known as the Sto. Niño mine, located in
Atok and Tublay, Benguet Province.
In the course of managing and operating the
project, Philex made advances of cash and property in accordance
with its agreement with Baguio Gold.
But heavy losses forced Philex’s withdrawal as
manager of the mine on Jan. 28, 1982, followed by the cessation of
the mining 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 amounting to P179.40 million, and the
latter agreed to pay the same in three segments by first assigning
its tangible assets to the petitioner, and to transfer to Philex its
equitable title in its Philodrill assets, and settling the remaining
liability through properties that it 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 Gold’s indebtedness to petitioner
actually amounted to P259.14 million, which included liabilities of
Baguio Gold to other creditors that petitioner had assumed as
guarantor.
Said liabilities pertained to long-term loans
amounting to $11 million contracted by Baguio Gold from the Bank of
America and Citibank N.A.
Bigger debt load from Baguio Gold
This time, Baguio Gold undertook to pay Philex
in two segments, by first assigning its tangible assets for P127.84
million, and then transferring its equitable title in its Philodrill
assets for P16.30 million. The parties then ascertained that Baguio
Gold had remaining outstanding indebtedness to petitioner amounting
to almost P115 million.
Subsequently, Philex wrote off in its 1982 books
of account the remaining outstanding indebtedness of Baguio Gold by
charging P112.14 million to allowances and reserves that were set up
in 1981, and P2.86 million to the 1982 operations.
In its 1982 annual income tax return, petitioner
deducted from its gross income the amount of P112.13 million, as
“a loss on settlement of receivables from Baguio Gold against
reserves and allowances.”
The BIR, however, disallowed the amount as
deduction for bad debts, and assessed petitioner a deficiency income
tax of P62.81 million. Philex protested this, arguing, among others,
that the deduction must be allowed since all requisites for a bad
debt deduction were satisfied.
On Oct. 28, 1994, the BIR denied petitioner’s
protest for lack of legal and factual basis.
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