G.R. No. 12401. October 31, 1960
MARCELO STEEL CORPORATION, PETITIONER, VS. COLLECTOR OF INTERNAL REVENUE, RESPONDENT.
PADILLA, J.:
This is a petition to review under section 18, Republic Act No. 1125, a
judgment of the Court of Tax Appeals upholding the assessment made by the
respondent for income tax due during the yearn 1952 and 1953 from the petitioner
(C.T.A. Case No. 172).
The parties have entered into a stipulation of facts, which the Court
summarized as follows:
The petitioner is a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with offices at Malabon, Rizal. It is
engaged in three (3) industrial activities, namely, (1) manufacture of wire
fence, (2) manufacture of nails, and (3) manufacture of steel bars, rods and
other allied steel products. During the years 1952 and 1953, the last two
mentioned industrial operations, more specifically, the manufacture of nails and
the manufacture of steel bars, rods and other allied steel products, enjoyed the
benefits of tax exemption under Republic Act No. 35.On May 21, 1953, the petitioner filed an income tax return for the year 1952,
reflecting a net income of P34,386.58 realized solely from its business of
manufacturing wire fence, an activity which is not tax exempt, and on March 31,
1954, it filed its income tax return for the year 1953, showing a net income of
P58,329.00 realized from the same sources, i.e., the manufacture of wire
fence.On the basis of the said income tax returns filed by the petitioner for the
years 1952 and 1953 which did not reflect the financial results of its tax
exempt business activities, the respondent assessed the total sum of P12,750.00.
Accordingly, the petitioner paid the said amount assessed against it on the
following dates;
On October 1, 1954, the petitioner filed amended income tax returns for
taxable years 1952 and 1953, showing that it suffered a net loss of P871,407.37
in 1952, and f!04,956.29 in 1953. The said losses were arrived at by
consolidating the gross income and expenses and/or deductions of the petitioner
in all its business activities, as follows:
For the year 1952 Net income, taxable industry: Wire fence ………………………………… Net loss, tax exempt industries: Nails ………………………… Steel bars ………………….
For the year 1953 Net income, taxable industry: Wire fence ………………………………… Net loss, tax exempt industries: Nails ………………………… Steel bars …………………. On October 1, 1954, the petitioner, claiming1 that instead of earning1 the
net income shown in its original income tax returns for 1952 and 1953, it
sustained the losses shown in its amended income tax returns for the same years,
filed its request for refund of the income taxes for the said years amounting to
P12,750.00 which it allegedly erroneously paid to the respondent.After more than ten months of waiting without any action being taken by the
respondent on the claim for refund, and in order to protect its rights under
Section 306 of the National Internal Revenue Code, the petitioner, on August 13,
1955, filed with this Court the instant petition for review.There are two issues to be resolved in this case, namely, (1) whether or not
the petitioner may be allowed to deduct from the profits realized from its
taxable business activities, the losses sustained by its tax exempt industries,
and (2) whether or not the action for refund, with regard to the sum of
P3,458.50 which was paid on May 30, 1953, has already prescribed under Section
306 of the Tax Code.
The Court of Tax Appeals held that “the petitioner cannot deduct from the
profits realized from its taxable industries, the losses sustained by its tax
exempt business activities,* * *.”
The duration of the petitioner’s tax exemption with respect to the
manufacture of nails is from 25 June 1949 to 25 June 1953 (Exhibit 7), later
adjusted to be from 11 August 1949 to 11 August 1953, and with respect to the
manufacture of steel bars, rods and other allied steel products, is from 16
March 1951 to 16 March 1955 (Exhibit 6). The exemption refers to the following
internal revenue taxes: the fixed and privilege tax on business, the percentage
tax on the sales of manufactured products, in respect to which exemption was
granted, the compensating tax on the articles, goods or materials exclusively
used in the new and necessary industry, the documentary stamp tax and the income
tax with respect to the net income derived from the exempt industry (Exhibits 6
and 7).
The petitioner’s theory is that since it is a corporation organized with a
single capital that answers for all its financial obligations including those
incurred in the tax-exempt industries, the gross income derived from both its
taxable or non-exempt and tax-exempt industries, and the allowable deductions
from said incomes, should be consolidated and its income tax liability should be
based on the difference between the consolidated gross incomes and the
consolidated allowable deductions. It relies on the provisions of section 24,
Commonwealth Act No. 466, as amended, providing that “There shall be levied,
assessed, collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized
in, or existing under the laws of the Philippines.” a graduated tax
(Italics supplied), and of section 30, subsection (d), paragraph (2),
of the same Act providing that in computing the net income of a corporation, all
losses actually sustained by it and charged off within the taxable year and not
compensated for by insurance or otherwise, are allowed as deductions.
Republic Act No. 35, the law under which the petitioner was granted tax
exemption for the manufacture of nails and steel bars, rods and other allied
steel products, provides:
Section 1. Any person, partnership, company, or corporation who or which
shall engage in a new and necessary industry shall, for a period of four years
from the date of the organization of such industry, be entitled to exemption
from the payment of all internal revenue taxes directly payable by such person,
partnership, company, or corporation in respect to said industry.Sec. 2. The President of the Philippines, shall, upon recommendation of the
Secretary of Finance, periodically determine the qualifications that the
industries should possess to be entitled to the benefits of this Act.Sec. 3. This Act shall take effect upon its approval.
(Approved, September 30, 1946.)
The purpose or aim of Republic Act No. 35 is to encourage the establishment
or exploitation of new and necessary industries to promote the economic growth
of the country. It is a form of subsidy granted by the Government to courageous
entrepreneurs staking their capital in an unknown venture. An entrepreneur
engaging in a new and necessary industry faces uncertainty and assumes a risk
bigger than one engaging in a venture already known and developed. Like a
settler in an unexplored land who is just blazing a trail in a virgin forest, he
needs all the encouragement and assistance from the Government. He needs capital
to buy his implements, to pay his laborers and to sustain him and his family.
Comparable to the farmer who has just planted the seeds of fruit bearing trees
in his orchard, he does not expect an immediate return on his investment.
Usually loss is incurred rather than profit made. It is for these reasons that
the law grants him tax exemption-to lighten onerous financial burdens and reduce
losses. However these may be, Republic Act No. 35 has confined the privilege of
tax exemption only to new and necessary industries. It did not intend to grant
the tax exemption benefit to an entrepreneur engaged at the same time in a
taxable or non-exempt industry and a new and necessary industry, by allowing him
to deduct his gains or profits derived from the operation of the first from the
losses incurred in the operation of the second. Unlike a new and necessary
industry, a taxable or non-exempt industry is already a going concern, deriving
profits from its operation, and deserving no subsidy from the Government. It is
but fair that it be required to give to the (Government a share in its profits
in the form of taxes.
The fact that the petitioner is a corporation organized with a single capital
that answers for all its financial obligations including those incurred in the
tax exempt industries is of no moment. The intent of the law is to treat taxable
or non-exempt industries as separate and distinct from new and necessary
industries which are tax-exempt for purposes of taxation. Section 7, Executive
Order No. 341, series of 1950, issued by the President of the Philippines
pursuant to section 2, Republic Act No. 35, provides:
Any industry granted tax exemption tinder the provisions of Republic Act No.
35 shall report to the Secretary of Finance at the end of every fiscal year a
complete list and a correct Valuation of all real and personal property of its
industrial plant or factory; shall file a separate income tax return; shall keep
separately this accounting records relative to the industry declared -exempt;
shall keep such records and submit such sworn statements as may be prescribed
from time to time by the Secretary of finance;[1] (Italics supplied.)
And when Congress revised the provisions of Republic Act No. 35 by enacting
into law Republic Act No. 901 it incorporated similar provisions and provided
that “Any industry granted tax exemption under the provisions of Republic Act
No. 35” shall “file a separate income tax return.”[2]
The petitioner states that it is not liable to pay income tax on its
industries of manufacturing nails and steel bars, rods and other allied steel
products for the reason that it had incurred loss in their operation and not
because it is exempt under the provision of Republic Act No. 35. It argues that
by being allowed to deduct its gains derived from the operation of its taxable
or non-exempt industry of manufacturing wire fence, from the losses incurred in
the operation of its tax-exempt industries of manufacturing nails and steels
bars, rods and other allied steel products, it would not receive the benefit of
double exemption. While the purpose of tax exemption under Republic Act No. 35
is to lighten the onerous financial burdens and reduce the losses of the
entrepreneur, yet it is not designed to assure him of a return on his capital
invested. As already stated, the law intended to treat taxable or non-exempt
industry as separate and distinct from new and necessary industry, which is tax
exempt, and did not mean to grant an enterpreneur, engaged at the same time in a
taxable or non-exempt industry and a new and necessary industry, the benefit or
privilege of deducting his gains or profit derived from the operation of the
first from the losses incurred in the operation of the second. Moreover, aside
from its exemption from the payment of income tax on its profits derived from
the operation of new and necessary industries, the petitioner is exempt from the
payment of other internal revenue taxes directly payable by it, such as the
fixed and privilege tax on business, the percentage tax on the sales of
manufactured products, in respect to which exemption is granted, the
compensating tax on the articles, goods or materials exclusively used in the new
and necessary industry, and the documentary stamp tax (Exhibits 6 and 7). These
exemptions alone are enough to lighten its onerous financial burdens and reduce
losses.
The petitioner claims that unlike the United States Internal Revenue Code
which expressly forbids the deduction of-
Any amount otherwise allowable as a deduction which is allocable to one or
more classes of income jpther than interest (whether or not any amount of income
of that class or classes is received or accrued) wholly exempt from the taxes
imposed by this chapter. [(Section 24 (a) (5)]
our National Internal Revenue Code does not contain a similar prohibition.
When in 1939 Commonwealth Act No. 466, the National Internal Revenue Code, was
enacted into law, the idea of granting tax exemption to new and necessary
industries in the Philippines had not yet been thought of because there were no
new and necessary industries being established or exploited. It was only in
1946, after the last World War, and after the Philippines became a sovereign
nation, that the establishment or exploitation of new and necessary industries
was stimulated. Hence the absence of a similar provision in our National
Internal Revenue Code. This absence, however, cannot be capitalized upon by the
petitioner in support of its theory. For, as already stated, when Congress
enacted Republic Act No. 35 into law, it intended to segregate income derived
from the operation of new and necessary industries from that derived from the
operation of taxable or non-exempt industries.
For the foregoing reasons, the judgment under review is affirmed, with costs
against the petitioner.
Paras, C.J., Bengzon, Bautista Angelo, Labrador, Reyes, J. B. L.,
Barrera, Gutierrez David, Paredes, and Dizon, JJ., concur.
Decision affirmed.
[1] 46 Off. Gaz. 3527, 3529.
[2] Section 7.