G.R. No. 173854 March 15, 2010
COMMISSIONER OF INTERNAL REVENUE, vs. FAR EAST BANK & TRUST COMPANY (NOW BANK OF THE PHILIPPINE ISLANDS)

FACTS

On April 10, 1995, respondent Far East Bank & Trust Company filed its 1994 Corporate Annual Income Tax Returns for its Corporate Banking Unit (CBU) and Foreign Currency Deposit Unit (FCDU). The CBU return consolidated the overall income tax liability for 1994, reflecting a refundable income tax of ₱12,682,864.00. This amount was carried over and applied against the 1995 income tax liability pursuant to Section 69 of the old National Internal Revenue Code (NIRC). On April 15, 1996, respondent filed its 1995 Annual Income Tax Return, showing a total overpaid income tax of ₱17,443,133.00. Out of this, respondent sought a refund of ₱13,645,109.00, filing an administrative claim with the BIR on May 17, 1996. Due to the inaction of the Commissioner of Internal Revenue (CIR), respondent filed a Petition for Review with the Court of Tax Appeals (CTA). To prove its claim, respondent presented its 1994 and 1995 Income Tax Returns, Certificates of Creditable Withholding Tax, Monthly Remittance Returns of Income Taxes Withheld, and its letter-claim for refund. The CIR presented no evidence. The CTA denied the claim, finding that respondent failed to show that the income derived from rentals and sale of real property, from which the taxes were withheld, were reflected in its 1994 Annual Income Tax Return. The Court of Appeals reversed the CTA, prompting the CIR to elevate the case to the Supreme Court.

ISSUE

Whether respondent has proven its entitlement to the tax refund.

RULING

No. The Supreme Court granted the petition and reinstated the CTA decision, holding that respondent failed to prove its entitlement to the refund. A taxpayer claiming a refund of creditable withholding tax must prove: (1) the claim was filed with the CIR within the two-year period from tax payment; (2) the income received was declared as part of the gross income in the return; and (3) the fact of withholding is established by a copy of the statement (BIR Form No. 1743.1) issued by the payer. While respondent timely filed its claim, it failed to satisfy the second and third requisites. The Supreme Court agreed with the CTA’s finding that in respondent’s 1994 Annual Income Tax Return, the spaces for rent, sale of real property, and trust income were marked “NOT APPLICABLE,” indicating that the income from rentals and sales of real property was not included in the gross income. Furthermore, respondent failed to submit the required Certificates of Creditable Tax Withheld at Source (BIR Form No. 1743.1) for the claimed creditable taxes; the submitted certifications and monthly remittance returns were insufficient to establish the fact of withholding. Entitlement to a tax refund is strictly construed against the taxpayer, who bears the burden of proof. Respondent’s failure to present the necessary documentary evidence to substantiate its claim warranted the denial of the refund.