G.R. No. 121666; October 10, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. MANILA ELECTRIC COMPANY, Respondent.

FACTS

Manila Electric Company (MERALCO), a legislative franchise holder, was previously subject to a 2% franchise tax. Upon the effectivity of Executive Order No. 72 in 1987, it became liable for regular corporate income tax. For the taxable years 1987 and 1988, MERALCO filed its income tax returns, which reflected overpayments. It opted to carry over the 1987 excess as a tax credit to 1988. However, a portion remained unutilized, and for 1988, another overpayment arose. The aggregate unapplied overpayment claimed was P107,649,729.
MERALCO filed a claim for refund or tax credit for this amount with the Bureau of Internal Revenue (BIR). The BIR did not act on the claim, prompting MERALCO to file a judicial claim with the Court of Tax Appeals (CTA). The BIR, through a revenue officer, had issued a preliminary report indicating a deficiency income tax assessment against MERALCO for 1987, but this was protested by MERALCO, which sought to deduct any alleged deficiency from its refund claim.

ISSUE

Whether MERALCO has sufficiently proven its entitlement to a tax refund or credit for overpaid income taxes for the years 1987 and 1988.

RULING

Yes, MERALCO has sufficiently proven its claim. The Supreme Court affirmed the decisions of the CTA and the Court of Appeals. The Court held that the quarterly and annual income tax returns filed by MERALCO, which were submitted as evidence, constitute competent proof of its declared taxable income and the taxes it paid. These returns, being official documents filed under oath, enjoy the presumption of regularity.
The petitioner’s argument that MERALCO failed to substantiate its claim with other documentary evidence and that discrepancies existed between its quarterly and annual returns was unavailing. The Court found that the alleged discrepancies were adequately explained by MERALCO’s accounting adjustments made at year-end, which is a standard and permissible practice. The burden to prove the assessment, if contested, shifts to the BIR. In this case, the BIR’s preliminary finding of a deficiency was merely an initial report and not a final, incontrovertible assessment. It did not disprove MERALCO’s evidence of overpayment. A claim for tax refund, while construed strictly against the claimant, must be supported by evidence. Here, MERALCO presented its official tax returns, and the BIR failed to present clear and convincing evidence to overturn the presumption of correctness of those returns or to substantiate its counter-allegation of a tax deficiency. Therefore, MERALCO’s entitlement to the refund was duly established.