G.R. No. 146749 & G.R. No. 147938; June 10, 2003
CHINA BANKING CORPORATION, Petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS, and COMMISSIONER OF INTERNAL REVENUE, Respondents. (Consolidated with COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. CHINA BANKING CORPORATION, Respondent.)

FACTS

China Banking Corporation (CBC), a universal bank, paid gross receipts tax for the second quarter of 1994. Subsequently, the Court of Tax Appeals (CTA) ruled in Asian Bank Corporation v. Commissioner of Internal Revenue that the 20% final withholding tax on a bank’s passive interest income does not form part of its taxable gross receipts. Relying on this precedent, CBC filed a claim for a tax refund or credit, arguing that the portion of its interest income withheld as final tax should be excluded from the gross receipts tax base. The Commissioner of Internal Revenue opposed, contending that “gross receipts” under the Tax Code means the entire receipt without deduction, and thus the withheld tax should be included.
The CTA partially granted CBC’s claim, ordering a refund but only for a portion of the amount sought, citing insufficiency of evidence for the remainder. Both parties appealed to the Court of Appeals, which affirmed the CTA’s decision. The Commissioner and CBC then elevated the case to the Supreme Court via consolidated petitions for review.

ISSUE

Whether the 20% final withholding tax on a bank’s passive interest income forms part of the taxable gross receipts for computing the gross receipts tax.

RULING

The Supreme Court ruled in favor of China Banking Corporation, affirming the decisions of the lower courts. The final withholding tax does not form part of the taxable gross receipts. The Court’s legal logic is anchored on the statutory definition and nature of “gross receipts” for tax purposes. Revenue Regulations explicitly state that the gross receipts tax shall be based on “all items of income actually received.” The 20% final withholding tax, while sourced from the interest income, is not actually received by the bank; it is directly remitted to the government. Therefore, it is logically excluded from the tax base.
This interpretation is consistent with the principle that gross receipts should not include sums specifically earmarked by law for the government, as established in Collector of Internal Revenue v. Manila Jockey Club. To include the withheld amount would be to tax the bank on income it never enjoyed or possessed, contravening the basic concept of a tax on actual receipts. The Court found the Commissioner’s broad interpretation—that gross receipts encompass the entire amount before any deduction—to be inapplicable here, as the withheld tax is not a deduction but an amount never received by the taxpayer. Consequently, CBC was entitled to a refund for the gross receipts tax erroneously paid on that portion of its income.