The Supreme Court ruled that taxpayers seeking a tax refund must definitively prove that the income related to the withheld taxes was declared in their income tax return. It is not the government’s responsibility to disprove a taxpayer’s claim for refund; instead, the taxpayer bears the burden of establishing the factual basis for the refund. The Court emphasized that tax refunds are construed strictissimi juris against the taxpayer, meaning that all evidence must be strictly scrutinized and duly proven. Failure to demonstrate that the income was included in the return, or to provide complete Certificates of Creditable Tax Withheld at Source, will result in the denial of the refund claim. This ruling highlights the importance of accurate and comprehensive tax reporting for those seeking refunds.

Taxpayer’s Burden: Unpacking the Requirements for a Valid Tax Refund Claim

The case of Commissioner of Internal Revenue v. Far East Bank & Trust Company (now Bank of the Philippine Islands), docketed as G.R. No. 173854, delves into the requisites for claiming a tax refund, specifically focusing on the taxpayer’s burden of proof. The central issue revolves around whether Far East Bank & Trust Company (FEBTC) sufficiently demonstrated its entitlement to a tax refund. This case serves as a reminder that claiming a tax refund is not merely a procedural formality, but a right that must be substantiated with concrete evidence.

To claim a tax refund, a taxpayer must comply with specific requisites outlined in both the National Internal Revenue Code (NIRC) and Revenue Regulations. These requirements ensure that only those who have legitimately overpaid their taxes are granted a refund. The Supreme Court reiterated the three key requirements for a valid tax refund claim:

1) The claim must be filed with the CIR within the two-year period from the date of payment of the tax;
2) It must be shown on the return that the income received was declared as part of the gross income; and
3) The fact of withholding must be established by a copy of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld.^[12]

The two-year period is based on Section 229 of the NIRC of 1997, which sets the time limit for filing a refund claim. The second and third requirements are based on Section 10 of Revenue Regulation No. 6-85, which necessitates proof that the income payment was declared as part of the gross income and that the fact of withholding is established by a statement from the payor.

In this case, it was undisputed that FEBTC filed its administrative and judicial claims for refund within the prescribed two-year period. However, the Commissioner of Internal Revenue (CIR) contested whether FEBTC had adequately proven the second and third requirements. The CIR argued that FEBTC failed to demonstrate that the income derived from rentals and sales of real property, from which taxes were withheld, was included in its 1994 Annual Income Tax Return.

The Court of Tax Appeals (CTA) initially ruled against FEBTC, finding that the income derived from rentals and sales of real property was not reflected in the 1994 Annual Income Tax Return. The CTA noted that the phrase “NOT APPLICABLE” was printed on the spaces provided for rent, sale of real property, and trust income in the return. The CTA also stated that certifications issued by FEBTC could not be considered without the Certificates of Creditable Tax Withheld at Source.

On appeal, the Court of Appeals (CA) reversed the CTA’s decision, ruling that FEBTC had proven that the income derived from rentals and sales of real property was included in the return as part of the gross income. The CA relied on the argument that the BIR examined FEBTC’s Corporate Annual Income Tax Returns for the years 1994 and 1995 and presumably found no false declarations, since it did not allege any false declaration in its answer. The CA further noted that the CIR failed to present any evidence to support its denial of the claim.

However, the Supreme Court sided with the CTA’s original assessment. The Court emphasized that the burden of proving entitlement to a tax refund lies with the taxpayer, and the government is not obligated to disprove the claim. The Court found that FEBTC had not presented sufficient evidence to demonstrate that the income derived from rentals and sales of real property was included in its gross income, as reflected in its return.

The Supreme Court highlighted that FEBTC’s 1994 Annual Income Tax Return indicated that the gross income was derived solely from sales of services, and the phrase “NOT APPLICABLE” was printed on the schedules pertaining to rent, sale of real property, and trust income. Therefore, the income from rentals and sales of real property, upon which the creditable taxes were withheld, was not included in FEBTC’s gross income, as reflected in its return. Since no income was reported, it follows that no tax was withheld.

The Court also dismissed FEBTC’s explanation that its income derived from rentals and sales of real properties were included in the gross income but classified as “Other Earnings” in its Schedule of Income. The Court found that there was no evidence to support this assertion. No documentary or testimonial evidence was presented by FEBTC to prove that the income under the heading “Other Earnings” included income from rentals and sales of real property.

The Supreme Court also noted that FEBTC failed to present all the Certificates of Creditable Tax Withheld at Source, as required by Section 10 of Revenue Regulation No. 6-85. The Court emphasized that the CA failed to verify whether the fact of withholding was established by the Certificates of Creditable Tax Withheld at Source before granting the refund.

The Court emphasized that the failure of the CIR to present any evidence or refute the evidence presented by FEBTC does not automatically entitle FEBTC to a tax refund. The burden of establishing the factual basis of a claim for a refund rests on the taxpayer. Tax refunds partake of the nature of tax exemptions, which are construed strictissimi juris against the taxpayer. Evidence in support of a claim must be strictly scrutinized and duly proven.

FAQs

What was the key issue in this case?	The key issue was whether the taxpayer, Far East Bank & Trust Company, sufficiently proved its entitlement to a tax refund, specifically demonstrating that the income related to the withheld taxes was declared in its income tax return.
What are the three requisites for claiming a tax refund?	The three requisites are: filing the claim within two years from the date of payment, showing on the return that the income was declared as part of gross income, and establishing the fact of withholding with a statement from the payor.
Who has the burden of proof in a tax refund case?	The taxpayer has the burden of proof in a tax refund case. It is the taxpayer’s responsibility to provide sufficient evidence to support their claim, not the government’s duty to disprove it.
What did the Court of Tax Appeals initially rule?	The Court of Tax Appeals initially ruled against FEBTC, finding that the income from rentals and sales of real property was not reflected in the 1994 Annual Income Tax Return, and therefore, the refund was denied.
How did the Court of Appeals rule on the case?	The Court of Appeals reversed the CTA’s decision, stating that FEBTC had proven that the income was included in the return as part of the gross income and that the BIR had not disputed the accuracy of the return.
What was the Supreme Court’s final decision?	The Supreme Court sided with the CTA, reversing the Court of Appeals’ decision and denying FEBTC’s claim for a tax refund, emphasizing that FEBTC failed to provide sufficient evidence to support its claim.
What evidence did FEBTC fail to provide?	FEBTC failed to provide evidence that the income from rentals and sales of real property was included in its gross income. FEBTC also failed to present all the Certificates of Creditable Tax Withheld at Source.
What does strictissimi juris mean in the context of tax refunds?	Strictissimi juris means that tax refunds are construed strictly against the taxpayer, requiring that evidence supporting the claim must be rigorously scrutinized and duly proven.

This case underscores the critical importance of meticulous record-keeping and accurate reporting in tax matters. Taxpayers must ensure that all income is properly declared and that all supporting documents are complete and verifiable. By adhering to these requirements, taxpayers can safeguard their rights and avoid potential disputes with the BIR. The ruling serves as a clear reminder that claiming a tax refund is not a mere formality, but a process that demands thorough documentation and compliance with established legal standards.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue vs. Far East Bank & Trust Company, G.R. No. 173854, March 15, 2010