In this case, the tax authorities had issued an assessment to Yi Wine Club, Inc. where interest on an interest free loan extended to its affiliates had been imputed and added to the taxable income, pursuant to Section 50 of the National Internal Revenue Code.
Judgement of the Tax Court
The Court decided in favour of Yi Wine Club and set aside the tax assessment. The court referred to the previous Supreme Court case of Commissioner of Internal
Revenue vs. Filinvest Development Corporation.
Excerpts from the Filinvest case:
“Indeed, in the afore-cited Filinvest case, the Supreme Court ruled with finality that the CIR’s powers of distribution, apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue Regulations No. 2 do not include the power to impute ‘theoretical interests’ to the controlled taxpayer’s transactions.”
More so, when it is borne in mind that, pursuant to Article 1956 of the Civil Code of the Philippines, no interest shall be due unless it has been expressly stipulated in writing. Considering that taxes, being burdens, are not to be presumed beyond what the applicable statute expressly and clearly declares, the rule is likewise settled that tax statutes must be construed strictly against the government and liberally in favor of the taxpayer. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. While it is true that taxes are the lifeblood of the government, it has been held that their assessment and collection should be in accordance with law as any arbitrariness will negate the very reason for government itself.‘
In the present case, there was no evidence on record showing any agreement on interest between Yi Wine Club, Inc. and its affiliates as to the former’s loans or advances to the latter. Neither did the tax authorities show that Yi Wine Club, Inc. had received cash from the alleged interest as it merely based its assessment on the account description and amount presented in Yi Wine Club, Inc.’s audited balance sheet and nothing else.
On that basis the Court found that the imputation of interest income on Yi Wine Club, Inc.’s non-interest bearing loans to affiliates lacked legal and factual bases and must be removed from the tax assessment.