G.R. No. 150947 . July 15, 2003.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MICHEL J. LHUILLIER PAWNSHOP, INC., respondent.

FACTS

On March 11, 1991, the Commissioner of Internal Revenue (CIR) issued Revenue Memorandum Order (RMO) No. 15-91, imposing a 5% lending investor’s tax on pawnshops based on their gross income pursuant to Section 116 of the National Internal Revenue Code (NIRC) of 1977, as amended. This was clarified by Revenue Memorandum Circular (RMC) No. 43-91 dated May 27, 1991. Pursuant to these issuances, the Bureau of Internal Revenue (BIR) issued an Assessment Notice against respondent Michel J. Lhuillier Pawnshop, Inc. on September 11, 1997, demanding payment of a deficiency percentage tax for 1994. The respondent filed an administrative protest, arguing that pawnshops are not expressly subject to the 5% tax under the Tax Code, that the RMO constituted an invalid new tax measure, and that it was a form of class legislation. The protest remained unacted upon. The respondent elevated the matter to the Court of Tax Appeals (CTA), which cancelled the assessment and declared RMO No. 15-91 and RMC No. 43-91 null and void insofar as they classified pawnshops as lending investors. The Court of Appeals affirmed the CTA decision. The CIR filed the instant petition, arguing that the legal definition of “lending investors” is broad enough to include pawnshop operators.

ISSUE

Are pawnshops included in the term “lending investors” for the purpose of imposing the 5% percentage tax under then Section 116 of the National Internal Revenue Code of 1977, as amended?

RULING

No. The Supreme Court affirmed the decisions of the Court of Tax Appeals and the Court of Appeals. Pawnshops are not included within the term “lending investors” subject to the 5% percentage tax under Section 116 of the NIRC. The Court held that the term “lending investors,” as used in the Tax Code, refers to persons or entities engaged in the business of lending money at interest, with the term “investors” implying a placement of capital or fund in a business or venture for profit. Pawnshops, while engaged in lending, are governed by a special law, Presidential Decree No. 114 (The Pawnshop Regulation Act), and are distinct from ordinary lending investors. The legislative history and the consistent interpretation by the BIR itself prior to 1991 showed that pawnshops were not considered lending investors for tax purposes. Revenue Memorandum Order No. 15-91 and Revenue Memorandum Circular No. 43-91, which sought to subject pawnshops to the tax, were invalid as they effectively imposed a new tax or expanded the scope of the law, which is beyond the rule-making power of the CIR. Such an imposition requires a legislative act. The assessment issued against the respondent was therefore correctly cancelled.