H. TAMBUNTING PAWNSHOP, INC. vs.

CIR  

G.R. No. 173373. July 29, 2013.

Bersamin: To be entitled to claim a tax deduction, the taxpayer must competently establish the
factual and documentary bases of its claim.

FACTS:

Tambunting Pawnshop (petitioner), appeals the adverse decision of CTA En Banc ordering it to
pay deficiency taxes .

BIR assessed Tambunting for deficient percentage tax, income tax and compromise penalties
for taxable year 1997.

Tambunting instituted an administrative protest against the assessment notices and demand
letters.

CTA First Division rendered a decision disallowing its deductions on the ground that it had not
substantiated them by sufficient evidence.

ISSUE:

WON CTA erred in disallowing the deductions.

RULING:

No. The CA did not err.

At the outset, the Court agrees with the CTA En Banc that because this case involved
assessments relating to transactions incurred by Tambunting prior to the effectivity of Republic
Act No. 8424 (National Internal Revenue Code of 1997, or NIRC of 1997), the provisions
governing the propriety of the deductions was Presidential Decree 1158 (NIRC of 1977).

In that regard, the pertinent provisions of Section 29 (d) (2) & (3) of the NIRC of 1977 state:

xxx xxx xxx

(2) By corporation. — In the case of a corporation, all losses actually sustained and charged off
within the taxable year and not compensated for by insurance or otherwise.

(3) Proof of loss. — In the case of a non-resident alien individual or foreign corporation, the
losses deductible are those actually sustained during the year incurred in business or trade
conducted within the Philippines, and losses actually sustained during the year in transactions
entered into for profit in the Philippines although not connected with their business or trade,
when such losses are not compensated for by insurance or otherwise. The Secretary of
Finance, upon recommendation of the Commissioner of Internal Revenue, is hereby authorized
to promulgate rules and regulations prescribing, among other things, the time and manner by
which the taxpayer shall submit a declaration of loss sustained from casualty or from robbery,
theft, or embezzlement during the taxable year: Provided, That the time to be so prescribed in
the regulations shall not be less than 30 days nor more than 90 days from the date of the
occurrence of the casualty or robbery, theft, or embezzlement giving rise to the loss.

As correctly held by the Court's Division in the assailed decision, and We quote:

. . . The remaining evidence is neither conclusive to sustain its claim of loss on auction sale in
the aggregate amount of P4,915,967.50. While it appears that the basis of respondent is not
strong, petitioner, nevertheless, should not rely on the weakness of such evidence but on the
strength of its own documents. The facts essential for the proper disposition of the said
controversy were available to the petitioner. Petitioner should have endeavored to make the
facts clear to this court. Sad to say, it failed to dispute the same with clear and convincing proof.
...

SC affirms the aforequoted ruling of the CTA En Banc.

The rule that tax deductions, being in the nature of tax exemptions, are to be construed
in strictissimi juris against the taxpayer is well settled. Corollary to this rule is the principle
that when a taxpayer claims a deduction, he must point to some specific provision of the statute
in which that deduction is authorized and must be able to prove that he is entitled to the
deduction which the law allows. An item of expenditure, therefore, must fall squarely within the
language of the law in order to be deductible. A mere averment that the taxpayer has incurred a
loss does not automatically warrant a deduction from its gross income.

As the CTA En Banc held, Tambunting did not properly prove that it had incurred losses. The
subasta books it presented were not the proper evidence of such losses from the auctions
because they did not reflect the true amounts of the proceeds of the auctions due to certain
items having been left unsold after the auctions. The rematado books did not also prove the
amounts of capital because the figures reflected therein were only the amounts given to the
pawnees. It is interesting to note, too, that the amounts received by the pawnees were not the
actual values of the pawned articles but were only fractions of the real values.

The requisites for the deductibility of ordinary and necessary trade or business expenses, like
those paid for security and janitorial services, management and professional fees, and rental
expenses, are that: (a) the expenses must be ordinary and necessary; (b) they must have been
paid or incurred during the taxable year; (c) they must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) they must be supported by receipts, records or
other pertinent papers.

Again, we affirm the foregoing holding of the CTA En Banc for the reasons therein stated. To
reiterate, deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed. Tambunting did not discharge its burden of substantiating its
claim for deductions due to the inadequacy of its documentary support of its claim. Its reliance
on withholding tax returns, cash vouchers, lessor's certifications, and the contracts of lease was
futile because such documents had scant probative value. As the CTA En Banc succinctly put it,
the law required Tambunting to support its claim for deductions with the corresponding official
receipts issued by the service providers concerned.

In the context of the foregoing rules, the CTA En Banc aptly rejected Tambunting's claim for
deductions due to losses from fire and theft. The documents it had submitted to support the
claim, namely: (a) the certification from the Bureau of Fire Protection in Malolos; (b) the
certification from the Police Station in Malolos; (c) the accounting entry for the losses; and (d)
the list of properties lost, were not enough. What were required were for Tambunting to submit
the sworn declaration of loss mandated by Revenue Regulations 12-77. Its failure to do so was
prejudicial to the claim because the sworn declaration of loss was necessary to forewarn the
BIR that it had suffered a loss whose extent it would be claiming as a deduction of its tax
liability, and thus enable the BIR to conduct its own investigation of the incident leading to the
loss. Indeed, the documents Tambunting submitted to the BIR could not serve the purpose of
their submission without the sworn declaration of loss.

WHEREFORE, the Court AFFIRMS the decision promulgated on April 24, 2006; and ORDERS
petitioner to pay the costs of suit.