THE COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. PHOENIX ASSURANCE CO., LTD., RESPONDENT; PHOENIX ASSURANCE CO., LTD., PETITIONER VS. COMMISSIONER OF INTERNAL REVENUE, RESP…

From a judgment of the Court of Tax Appeals in C.T. A. Cases Nos. 305 and
543, consolidated and jointly heard therein, these two appeals were taken. Since
they involve the same facts and interrelated issues, the appeals are herein
decided together.

Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under
the laws of Great Britain, is licensed to do business in the Philippines with
head office in London. Through its head office it entered, in London, into
worldwide reinsurance treaties with various foreign insurance companies. It
agreed to cede a portion of premiums received on original insurances
underwritten by its head office, subsidiaries, and branch offices throughout the
world, in consideration for assumption by the foreign insurance companies of an
equivalent portion of the liability from such original insurances.

Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd. ceded
portions of the premiums it earned from its underwriting business in the
Philippines, as follows:

upon which the Commissioner of Internal Revenue, by
letter of May 6, 1958, assessed the following withholding tax:

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1950, claiming therein, among others, a deduction of P37.147.04 as
net addition to marine insurance reserve equivalent to 40% of the gross marine
insurance premiums received during the year. The Commissioner of Internal
Revenue disallowed P11,772.57 of such claim for
deduction and subsequently assessed against Phoenix Assurance Co., Ltd. the sum
of Pl,884.00 as deficiency income tax. The disallowance resulted from the fixing
by the Commissioner of the net addition to the marine insurance reserve at 100%
of the marine insurance premiums received during the last three months of the
year. The Commissioner assumed that “ninety and thirty days are approximately
the length of time required before shipments reach their destination or before
claims are received by the insurance companies.

On April 1, 1953 Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1952, declaring therein a deduction from gross income of P35,912.25 as part of the head office expenses incurred for its
Philippine business, computed at 5% on its gross Philippine income.

On August 30, 1055 it amended its income tax return for 1952 by excluding
from its’ gross income the amount of P316,526.75 representing reinsurance
premiums ceded to foreign reinsurers and further
eliminating deductions corresponding to the ceded premiums. The amended return
showed an income tax due in the amount of P2,502.00.
The Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction for head office expenses and
assessed a deficiency tax of P5, 667.00 on July 24,1958.

On April 30, 1954 Phoenix
Assurance Co., Ltd. filed its Philippine income tax return for 1953 and claimed
therein a deduction from gross income of P33,070.88 as
head office expenses allocable to its Philippine business, equivalent to 5% of
its gross Philippine income. On August
30, 1955 it amended its 1953 income tax return to exclude from its
gross income the amount of P246,082.04 representing
reinsurance premiums ceded to foreign reinsurers. At
the same time it requested the refund of P23,409.00 as
overpaid income tax for 1953. To avoid the prescriptive period provided for in
Section 306 of the Tax Code, it filed a petition for review on August 11, 1956 in the Court of Tax
Appeals praying for such refund. After verification of the amended income lax
return the Commissioner of Internal Revenue disallowed P12.304.10 of the
deduction representing head office expenses allocable to Philippine business
thereby reducing the refundable amount to P20,180.00.

On April 29, 1955 Phoenix
Assurance Co., Ltd. filed Philippine income tax return for 1954 claiming
therein, among others, a deduction from gross income of P29,624.75 as head office expenses allocable to its Philippine
Business, computed at 5% of its gross Philippine income. It also excluded from
its gross income the amount of P203,384.69 representing
reinsurance premiums ceded to foreign reinsurers not
doing business in the
Philippines.

On August 1, 1958 the
Bureau of Internal Revenue released the following assessment for deficiency
income tax for the years 1952 and 1954 against Phoenix Assurance Co., Ltd.

The above assessment resulted from the disallowance of a portion of the
deduction claimed by Phoenix Assurance Co., Ltd. as head office expenses
allocable to its business in the
Philippines
fixed by the Commissioner at 5% of the net Philippine income instead of 5% of
the gross Philippine income as claimed in the returns.

Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for
withholding tax and deficiency income tax. However, the Commissioner of Internal
Revenue denied such protest. Subsequently, Phoenix Assurance Co., Ltd. appealed
to the Court of Tax Appeals. In a decision dated February 14, 1962, the Court of
Tax Appeals allowed in full the deduction claimed by Phoenix Assurance Co., Ltd.
for 1950 as net addition to marine insurance reserve; determined the allowable
head office expenses allocable to Philippine business to be 5% of the net income
in the Philippines; declared the right of the Commissioner of Internal Revenue
to assess deficiency income tax for 1952 to have prescribed; absolved Phoenix
Assurance Co., Ltd. from payment of the statutory penalties for non-filing of
withholding tax return; and, rendered the following judgment:

“Wherefore, petitioner Phoenix Assurance Company, Ltd., is hereby ordered to
pay the Commissioner of Internal Revenue the respective amounts of P75.966.42,
P59,059.68 and P48,812.32, as withholding tax for the
years 1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total
sum of P186,685.42 within thirty (30) days from the date his decision become
final. Upon the other hand, the respondent Commissioner is ordered to refund to
petitioner the sum of P20,180.00 as overpaid income tax for 1953, which sum is
to he deducted from the total sum of P186,685.42 due as taxes.

“If any amount of the tax is not paid within the time prescribed above, there
shall be collected a surcharge of 5% of the tax unpaid, plus interest at the
rate of 1% a month from the date of delinquency to the dote of payment, provided
that the maximum amount that may be collected as interest shall not exceed the
amount corresponding to a period of three (3) years. Without
pronouncement as to costs”.

Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have
appealed to this Court raising the following issues: (1) Whether or not
reinsurance premiums to ceded to foreign reinsurance not doing business in the
Philippines pursuant to reinsurance contracts executed abroad are subject to
withholding tax; (2) Whether or not the right of the Commissioner of Internal
Revenue assess deficiency income tax for the year 1952 against Phoenix Assurance
Co., Ltd. has prescribed; (3) Whether not the deduction claimed by Phoenix
Assurance Co., as net addition to reserve for The year 1950 is excessive; (4)
Whether or not the deductions claimed by Phoenix Assurance Co., Ltd. for head
office expenses allocable to Philippine business for the years 1952, 1953 and
1954 are excessive.

The question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to
contracts executed abroad are income from sources within the Philippines subject
to withholding tax under Section 53 and 54 of the Tax Code has already been
resolved in the affirmative in British Traders’ Insurance Co., Ltd. vs.
Commissioner of Internal Revenue, L-20501, April 30, 1965.^[1]

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its
income tax return for 1952 on April 1,
1953 showing a loss of P199,583.93. It
amended said return on August 30,
1955 reporting a tax liability of P2,502.00.
On July 24, 1958, after
examination of the amended return, the Commissioner of Internal Revenue assessed
deficiency income tax in the sum of P5,667.00. The
Court of Tax Appeals found the right of the Commissioner of Internal Revenue
barred by prescription, the same having been exercised more than live years from
the date the original return was filed. On the other hand, the Commissioner of
Internal Revenue insists that his right to issue the assessment has not
prescribed inasmuch as the same was availed of before the 5-year period provided
for in Section 331 of the Tax Code expired, counting the running of the period
from August 30, 1955, the date when the amended return was filed.

Section 331 of the Tax Code, which limits the right of the Commissioner of
Internal Revenue to assess income tax within five years from the filing of the
income tax return, states:

“SEC. 331. Period of limitation upon assessment
and collection.— Except as provided in the
succeeding section, internal-revenue taxes shall be assessed within five years
after the return was filed, and no proceeding in court without assessment for
the collection of such taxes shall be begun after the expiration of such period.
For the purposes of thin section a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day:
Provided, That this limitation shall not apply to cases
already investigated prior to the approval of this Code.”

The question is: Should the running of the prescriptive period commence from
the filing of the original or amended return?

The Court of Tax Appeals ruled that the original return was a complete return
containing “information on various items of income and deduction from which
respondent may intelligently compute and determine the tax liability of
petitioner”, hence, the .prescriptive period should be counted from the filing
of said original return. On the other hand, the Commissioner of Internal Revenue
maintains that:

“* * * the deficiency income tax in question could not possibly he
determined, or assessed, on the basis of the original return filed on April 1,
1953, for considering that the declared loss amounted to P199,583.93, the mere disallowance of part of the head office
expense could not possibly result in said loss being completely wiped out and
Phoenix being liable to deficiency tax. Not until the amended return was filed
on August 30, 1955 could the
Commissioner assess the deficiency income tax in question.”

Accordingly, he would wish to press for the counting of the prescriptive
period from the filing of the amended return.

To our mind, the Commissioner’s view should he sustained. The changes and
alterations embodied in the amended income tax return consisted of the exclusion
of reinsurance premiums received from domestic insurance companies by Phoenix
Assurance Co., Ltd.’s London head office, reinsurance
premiums ceded to foreign reinsurers not doing
business in the Philippines and various items of deduction attributable to such
excluded reinsurance premiums, thereby substantially modifying the original
return. Furthermore, although the deduction for head office expenses allocable
to Philippine business, whose disallowance gave rise to the deficiency tax, was
claimed also in the original return, the Commissioner could not have possibly
determined a deficiency tax thereunder because Phoenix
Assurance Co., Ltd. declared a loss of P199,583.93
therein which would have more than offset such disallowance of P15,826.35.
Considering that the deficiency assessment was based on the amended return
which, as afore-stated, is substantially different from the original return, the
period of limitation of the right to issue the same should be counted from the
filing of the amended income tax return. From August 30, 1955, when the amended
return was filed, to July 24, 1958, when the deficiency assessment was issued,
less than five years elapsed. The right of .the Commissioner to assess the
deficiency tax on such amended return has not prescribed.

To strengthen our opinion, we believe that to hold otherwise, we would be
paving the way for taxpayers to evade the payment of taxes by simply reporting
in their original return heavy losses and amending the same more than five years
later when the Commissioner of Internal Revenue has lost his authority to assess
the proper tax thereunder. The object of the Tax Code
is to impose taxes for the needs of the Government, not to enhance tax avoidance
to its prejudice.

We next consider Phoenix Assurance Co., Ltd.’s
claim for deduction of P37,147.04 for 1950 representing
net addition to reserve computed at 40% of the marine insurance premiums
received during the year. Treating said deduction to be excessive, the
Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent to 100% of all marine insurance
premiums received during the last three months of the year.

Paragraph (a) of Section 32 of the Tax Code states:

“SEC. 32. Special provisions regarding income and
deductions of insurance companies, whether domestic or foreign.—(a) Special
deduction allowed to insurance companies.—In the case of insurance
companies, whether domestic or foreign, the net additions, if any, required by
law to be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be deducted
from, their grogs income.”

Section 186 of the Insurance Law requires the setting up of reserves for
liability on marine insurance:

“Section 186. “* * * Provided, That for marine
risks the insuring company shall be required to charge as the liability for
reinsurance fifty per centum of the premiums written in the policies upon yearly
risks, and the full premiums written in the policies upon alt other marine risks
not terminated.” (Italics supplied.)

The reserve required for marine insurance is determined on two bases: 50% of
premiums under policies on yearly risks and 100 % of premiums under policies of
marine risks not terminated during the year.^* Section 32 (a) of the Tax Code quoted above
allows the full amount of such reserve to be deducted from gross income.

It may be noteworthy to observe that the formulas for determining the marine
reserve employed by Phoenix Assurance Co., Ltd. and the Commissioner of Internal
Revenue—40% of premiums received during the year and 100% of premiums received
during the last three months of the year, respectively—do not comply with
Section 186. Said determinations run short of the requirement. For purposes of
the Insurance Law, this Court therefore cannot countenance the same. The reserve
called for in Section 186 is a safeguard to the general public and should be
strictly followed not only because it is an express provision but also as a
matter of public policy. However, for income tax purposes a taxpayer is free to
deduct from its gross income a lesser amount, or not to claim any deduction at
all. What is prohibited by the income tax law is to claim a deduction beyond the
amount authorized therein.

Phoenix Assurance Co., Ltd/s claim for deduction of P37,147.01 being less than the amount required in Section 186 of
the Insurance Law, the same cannot be and is not excessive, and should therefore
be fully allowed.

We come now to the controversy on the taxpayer’s claim for deduction on head
office expenses incurred during 1952, 1953 and 1954 allocable to its Philippine
business computed at 5% on its gross income in the Philippines. The
Commissioner of Internal Revenue redetermined such
deduction at 5% on Phoenix Assurance Co., Ltd.’s
net income thereby partially disallowing the latter’s claim. The parties
are agreed as to the percentage—5%—but differ as to the basis of computation.
Phoenix Assurance Co., Ltd. insists that the 5% head office expenses be
determined from the gross income, while the Commissioner wants the
computation to be made on the net income. What, therefore, needs to be
resolved is: Should the 5% be computed on the gross or net income?

The record shows that the gross income of Phoenix Assurance Co., Ltd.
consists of income from its Philippic business as well as reinsurance premiums
received for its head office in London and reinsurance premiums c to foreign
reinsurers. Since the items of income belonging to its
Philippine business are not taxable to Philippine branch, they should be
excluded in the head office expenses allocable to said Philippine branch. This
conclusion finds support in paragraph 2, subsection (a), Section 30 of the Tax
Code, quoted hereunder:

“(2) Expenses allowable to non-resident alien individual and foreign
corporations.—In thee case of a non-resident alien individual or a foreign
corporation, the expenses deductible are the n expenses paid or incurred in
carrying on any business or trade conducted within the Philippines exclusively.”
(Italics supplied.)

Consequently, the deficiency assessments for 1952,1953 and 1954, resulting from partial disallowance of
deduction representing head office expenses, are sustained.

Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax Court’s decision limiting the
maximum amount of interest collectible for delinquency to an account
corresponding to a period of .throe years. He contends that since such
limitation we incorporated into Section 51 of the Tax Code by Republic Act 2343
which took effect only on June 20, 1959, it must not be applied retroactively on
withholding tax for the years 1952, 1953 and 1954.

The imposition of interest on unpaid taxes is one of the statutory penalties
for tax delinquency, from the payments of which the Court of Tax Appeals
absolved the Phoenix Assurance Co., Ltd. on the equitable ground that the
latter’s failure to pay the withholding tax was due to the Commissioner’s
opinion that no withholding tax was due. Consequently, the taxpayer could be
liable for the payment of statutory penalties only upon its failure to comply
with the. Tax Court’s judgment rendered on February 14, 1962, after Republic Act
2343 took effect. This part of the ruling of the court ought not to be
disturbed.

Wherefore, the decision appealed from is modified. Phoenix Assurance Co.,
Ltd. is hereby ordered to pay the Commissioner of Internal Revenue the amount of
p75,966.42, P59,059.68 and P48,812.32 as withholding tax for the years 1952,
1953 and 1954, respectively, and the sums of P5,667.00 and P2,847.00 as income
tax for 1952 and 1954 or a total of P192,352.42. The Commissioner of Internal
Revenue is ordered to refund to Phoenix Assurance Co., Ltd. the amount of
P20,180.00 as overpaid income tax for 1953, which
should be deducted from the amount of P192,352.42.

If the amount of P192,352.42 or a portion thereof is
not paid within thirty (30) days from the date this judgment becomes final,
there shall be collected a surcharge and interest as provided for in Section 51
(e) (2) of the Tax Code. No costs. It is so ordered.

Bengzon, C. J., Bautista Angelo, Concepcion, Reyes, J. B. L., Barrera, Paredes, Dizon, Regala, Makalintal and Zaldivar, JJ.,
concur.

^[1] See also Alexander
Howden & Co., Ltd. vs. Commissioner of Internal
Revenue, L-19392, April 14, 1965; Philippine Guaranty Co., Inc. vs. Commissioner
of Internal Revenue, L-22074, April 30, 1965.

^* See Maryland Casualty Co. vs. U.S.,
251 U.S. 342 64, L. ed. 297; State Farm Mutual Automotive Insurance Company vs.
Duel, 324 U.S. 154, 89 L ed. 812; Insurance Company of North America vs. McCoach, D. C. Pa, 218 F. 905; City of Newark vs. State
Board of Equalization of Taxes, 79 A. 343, 81 N. J. L. 416; interpreting charges
for liability on insurance contracts as reserves.