G.R. No. 118794. May 8, 1996.
PHILIPPINE REFINING COMPANY (now UNILEVER PHILIPPINES [PRC], INC.), petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS, and THE COMMISSIONER OF INTERNAL REVENUE, respondents.

FACTS

Petitioner Philippine Refining Company (PRC) was assessed a deficiency income tax for 1985. The Commissioner of Internal Revenue disallowed deductions claimed for bad debts and interest expenses. PRC protested, but after the Commissioner issued a warrant of garnishment, PRC filed a petition with the Court of Tax Appeals (CTA). The CTA modified the assessment, allowing the interest expense deduction but disallowing P395,324.27 in bad debt deductions for thirteen specific debtor accounts. The CTA held that PRC failed to prove these debts were worthless and uncollectible. The Court of Appeals affirmed the CTA’s decision.
PRC argued before the Supreme Court that the debts were properly written off as bad debts in 1985. For accounts like Remoblas Store and CM Variety Store, PRC claimed uncollectibility due to fires that destroyed the debtors’ stores, but presented no documentary evidence such as police reports or affidavits to substantiate the fires or the debtors’ insolvency. For other accounts, PRC relied solely on the testimony of its financial accountant, Guia D. Masagana, without supporting documents like collection letters, legal referrals, or investigative reports.

ISSUE

Whether the Court of Appeals erred in affirming the CTA’s disallowance of PRC’s claimed bad debt deductions for lack of sufficient proof of worthlessness.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. The legal logic is anchored on the strict requirements for deducting bad debts under tax law. For a debt to be deductible as worthless, the taxpayer must prove: (1) a valid and subsisting debt; (2) the debt was ascertained to be worthless and uncollectible during the taxable year; (3) it was charged off within that year; and (4) it arose from the taxpayer’s business. Crucially, worthlessness requires a showing that the debt is uncollectible now and in the future, supported by diligent collection efforts such as sending statements, collection letters, referring the matter to legal counsel, or filing a court case.
The Court held that PRC failed to meet this burden of proof for the thirteen disallowed accounts. Mere allegations by its accountant, without corroborating documentary evidence, are self-serving and lack probative value. The absence of any documentary proof—such as collection letters, field reports, legal referrals, or evidence of calamities like fire—rendered the claim of worthlessness unsubstantiated. Tax deductions are construed strictly against the taxpayer, who must justify them with clear evidence. PRC’s failure to provide such evidence justified the disallowance. The penalties for delinquency were also upheld as compensatory, intended to discourage delay in tax payments.