G.R. No. 157264 ; January 31, 2008
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

FACTS

Petitioner PLDT terminated several employees in 1995 due to redundancy and paid them separation benefits. As a withholding agent, PLDT deducted and remitted withholding taxes totaling P23,707,909.20 to the BIR. Invoking Section 28(b)(7)(B) of the 1977 National Internal Revenue Code, which excludes from gross income amounts received due to separation for causes beyond the employee’s control, PLDT filed a claim for tax credit or refund with the BIR on November 20, 1997. As the BIR took no action, PLDT sought judicial refund before the Court of Tax Appeals (CTA), later reducing its claim to P16,439,777.61 after some employees opted to file individual claims.
PLDT engaged SGV & Co. to audit its records and moved to present the auditor’s certification in lieu of voluminous documents under CTA Circular No. 1-95. The CTA appointed the SGV auditor as a commissioner. The audit report adjusted the refund claim to P6,679,167.72. The CTA denied the claim, finding PLDT failed to sufficiently prove that the terminated employees received the separation pay and that taxes were withheld and remitted. PLDT moved for new trial, alleging newly discovered receipts and quitclaims were previously misplaced. The CTA denied the motion, and the Court of Appeals affirmed the dismissal.

ISSUE

Whether the Court of Appeals committed grave abuse of discretion in affirming the denial of PLDT’s claim for tax refund.

RULING

The Supreme Court denied the petition. Tax refunds are construed strictly against the taxpayer, who bears the burden of proof. Under Section 28(b)(7)(B) of the 1977 Tax Code (now Section 32(B)(6)(b) of the 1997 NIRC), the exclusion of separation pay from gross income requires the claimant to prove two essential facts: first, that the income recipient (the employee) actually received the payment, and second, that the withholding agent (PLDT) withheld and remitted the corresponding tax. PLDT’s argument that proving actual receipt is unnecessary and is a labor issue is erroneous. For a valid refund claim on behalf of the employees, PLDT must demonstrate that each employee declared the separation pay in their own income tax return and that the fact of withholding is established, typically by the withholding tax certificate (BIR Form 1743.1). PLDT failed to present such evidence.
The Court also found no error in disregarding the SGV audit report, as it was based on incomplete documents and did not substantiate the actual receipt of payments by the employees. Furthermore, the denial of the motion for new trial was proper, as PLDT’s claim of newly discovered evidence due to misplaced files constituted negligence, not excusable mistake. The requirements for a tax refund are stringent, and PLDT did not discharge its burden of proving the factual basis for its claim.