V. Commissioner of Internal Revenue, Respondent

Case No.
9
SMI-ED PHILIPPINES TECHNOLOGY, INC., Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
G.R. No. 175410, November 12, 2014
Facts: SMI-Ed Philippines is a PEZA-registered corporation supposed to be

engaged in manufacturing ultra-high-density microprocessor unit package.
Upon its registration in 1998, it constructed buildings and purchased
machineries and equipment amounting to P3,150,925,917. However, it failed
to commence operations. It sold its machineries and equipment for
P893,550,000.
In its quarterly income tax return for year 2000, SMI-Ed subjected the entire
gross sales of its properties to 5% final tax on PEZA-registered corporations. It
paid taxes amounting to P44,677,500. It also alleged having incurred losses of
P2,233,464,538. In February 2001, petitioner filed an administrative claim for
the refund of P44,677,500 with the BIR. The latter, however did not act on the
claim which prompted petitioner to file a petition for review before the CTA.
The CTA subjected the sale of petitioner’s assets to 6% capital gains tax
amounting to P53,613,000. Thus, petitioner still needed to pay the amount of
P8,935,500 as deficiency tax.
Respondent: SMI-Ed is not entitled to fiscal incentives given to PEZA-

registered enterprises as it never commenced operations.
Petitioner: The amount of P44,677,500 was erroneously paid. The CTA

erroneously assessed the 6% capital gains tax on the sale of its properties.
The CTA cannot make an assessment at the first instance. Even if it can, the
period to make an assessment has prescribed.
The CTA denied petitioner’s MR. Hence, this petition.
Issues: Whether or not:

1. Petitioner’s sale of its properties is subject to capital gains tax.
2. Petitioner was entitled for a refund.
Respondent: The CTA’s determination of petitioner’s liability for capital gains

tax was not an assessment. And since petitioner’s machineries and equipment
are classified as capital assets, their sales should be subject to capital gains
tax.
Petitioner: The CTA also erroneously subjected petitioner’s machineries to 6%
capital gains tax which applies only on the sale of lands and buildings. It has
no jurisdiction to subject its properties to capital gains tax because it has not
power to make an assessment since its jurisdiction is merely appellate. The
power to make an assessment had already prescribed.
Ruling:
1. Petitioner’s machineries and equipment are not subject to capital gains
tax. Only its gains in the sale of its land and building.
For petitioner’s properties to be subjected to capital gains tax, said

properties must form part of petitioner’s capital assets. Such assets refer
to taxpayer’s property NOT any of: (1) stock in trade; (2) property that
should be included in taxpayers’ inventory at the close of the taxable
year; (3) property held for sale in the ordinary course of the taxpayer’s
business; depreciable property used in the trade or business; and (5) real
property used in the trade or business.
The properties involved in this case are petitioner’s buildings, equipment,

and machineries. They are not among the exclusions enumerated in the
NIRC 1997.
Capital gains of individuals and corporations from the sale of real

properties are taxed differently. Domestic corporations are imposed a 6%
capital gains tax only on the presumed gain realized from the sale of
lands and/or buildings. It does not impose 6% capital gains tax on the
gains realized from the sale of machineries and equipment.
Therefore, only the presumed gain from the sale of petitioner’s land
and/or building may be subjected to the 6% capital gains tax. The income
from the sale of petitioner’s machineries and equipment is subject to the
provisions on normal corporate income tax.
2. YES. To determine if petitioner is entitled to refund, the amount of capital

gains tax for the sold land and/or building of petitioner and the amount of
corporate income tax for the sale of petitioner’s machineries and
equipment should be deducted from the total final tax paid.
Petitioner also indicated that it suffered a net loss of P2,233,464,538.

Since petitioner was not able to start its operations, it was not also
subject to the minimum corporate income tax of 2% on gross income.
Therefore, petitioner is not liable for any income tax.
The Court ordered the BIR to refund petitioner the amount of 5% final tax
paid to the BIR, less than the 6% capital gains tax on the sale of its land
and building.
Personal and End Notes:
1. In case of doubt in determining who is subject to tax, tax statutes are to

be construed most strongly against the government and in favor of the
subjects or citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws.
2. The law on prescription should be interpreted in a way conducive to

bringing about the beneficent purpose of affording protection to the
taxpayer within the contemplation of the Commission which
recommended the approval of the law. To the Government, its tax officers
are obliged to act promptly in the making of assessment so that
taxpayers, after the lapse of the period of prescription, would have a
feeling of security against unscrupulous tax agents who will always try to
find an excuse to inspect the books of taxpayers, not to determine the
latter’s real liability, but to take advantage of a possible opportunity to
harass even law-abiding businessmen.

V. Commissioner of Internal Revenue, Respondent

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V. Commissioner of Internal Revenue, Respondent

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Case No.

G.R. No. 175410, November 12, 2014

Facts: SMI-Ed Philippines is a PEZA-registered corporation supposed to be

Respondent: SMI-Ed is not entitled to fiscal incentives given to PEZA-

Petitioner: The amount of P44,677,500 was erroneously paid. The CTA

The CTA denied petitioner’s MR. Hence, this petition.

Issues: Whether or not:

Respondent: The CTA’s determination of petitioner’s liability for capital gains

For petitioner’s properties to be subjected to capital gains tax, said

The properties involved in this case are petitioner’s buildings, equipment,

Capital gains of individuals and corporations from the sale of real

2. YES. To determine if petitioner is entitled to refund, the amount of capital

Petitioner also indicated that it suffered a net loss of P2,233,464,538.

Personal and End Notes:

1. In case of doubt in determining who is subject to tax, tax statutes are to

2. The law on prescription should be interpreted in a way conducive to

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