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TENTH DIVISION

[CA-G.R. SP No. 44039. October 10, 2001.]


COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF TAX APPEALS AND
ORANBO REALTY CORPORATION, respondents.
DECISION
CARPIO MORALES, J p:
Before Us is a petition for review seeking to set aside the January 16, 1997 Decision
of public respondent Court of Tax Appeals in C.T.A. Case No. 5038, "Oranbo Realty
Corporation vs. Commissioner of Internal Revenue", and the April 7, 1997 Resolution
denying reconsideration thereof.
In its annual income tax return filed on April 15, 1992 for taxable year 1991. Oranbo
Realty Corporation (Oranbo) posted a total rental income of P19,766,498.00 but
with total deductions amounting to P19,621,440.00, the taxable income was
P145,058.00. Tax liability was thus computed at P50,770.00. TcDHSI
Oranbo, however, declared a creditable tax withheld at source in the amount of
P973,081.00 and applied the same for the payment of its aforementioned tax
liability. This left an overpaid and refundable income tax of P922,311.00 in favor of
Oranbo which lodged with the Commissioner of Internal Revenue (petitioner) a
written claim for refund or tax credit on April 28, 1993.
Petitioner did not act, however, on Oranbo's claim, prompting it to file a petition for
review with the Court of Tax Appeals (the CTA) on March 28, 1994.
On November 21, 1994, petitioner through a revenue officer released a report
finding that Oranbo was not entitled to tax refund or credit. The CTA held, however,
that Oranbo was entitled to tax refund or credit and accordingly disposed as follows:
"WHEREFORE, in view of the (sic) all the foregoing, respondent is hereby ORDERED
to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of
petitioner the sum of P922,311.00, representing overpaid income tax for the year
1991."
Hence, the present petition for review, petitioner contending that Oranbo is not
entitled to any refund or credit since the alleged overpaid income tax resulted from
improper deductions of Oranbo's supposed interest expense arising from a P40
million loan from the Bank of the Philippine Islands (BPI) and a P27 million loan from
the United Coconut Planters Bank (UCPB) against its gross rental income for the
1991 taxable year. cHATSI
With respect to the BPI loan, petitioner argues that interests thereon are not
deductible for the loan itself greatly exceeded Oranbo's capital stock so that the

loan, coupled with its concomitant interests, should have been treated as the
lender's capital investment and not a deductible expense on the part of the
borrower Oranbo.
As for the UCPB loan, petitioner argues that interests thereon could not likewise
qualify as deductible expense. Oranbo, which is in realty business, having utilized
the loan for the purchase of land, thus amounting to acquisition of capital asset and,
therefore, all attendant expenses including interest payments on the incurred loan
are deemed capital expenditures and not deductible business expenses.
The petition fails. IEaHSD
It has been established, even implicitly admitted by petitioner, that Oranbo
contracted loans from BPI and UCPB in 1989 and 1990, respectively in the course of
and relative to its business operations for which it paid interests thereon.
The general rule is that interest expenses are deductible against gross income, and
it certainly includes interest paid under loans incurred in relation to the carrying on
of the taxpayer's business (Paper Industries Corporation of the Philippines v. Court
of Appeals, 250 SCRA 434, 1995). Thus, under Section 29 (b) of then existing 1997
Tax Code, now section 34 (B-1) of the Tax Reform Act of 1997, the interests paid or
incurred within a taxable year on indebtedness in connection with the taxpayer's
profession, trade or business may be deducted against gross income.
The records of the present case provide no reason why Oranbo's interest payments
should not fall under the said rule, such interest payments having been made for
loans obtained in connection with Oranbo's business.
Petitioner's argument that the BPI loan suspiciously exceed Oranbo's capital stock
and so must be considered, together with the interests thereon, as the lender's
capital investment deserves scant consideration. No proof had been adduced that
the loan was actually the consideration for BPI's acquisition of shares of stock in
Oranbo. Petitioner's claim was mere speculation. The loan thus stands as it is an
indebtedness incurred by Oranbo for which it paid interests.
Petitioner's argument that the UCPB loan the proceeds of which Oranbo used to
purchase land is really capital expenditure and so are the interests thereon likewise
deserves scant consideration. The Tax Code clearly requires that for interest to be
deductible, it must be on business debts (The Law on Income Taxation, Teodoro and
De Leon p. 107) or "on indebtedness in connection with the taxpayer's profession,
trade or business." As earlier indicated, Oranbo is engaged in the realty business
and the loan with which it acquired land or real property is unmistakably a business
debt for which interest payments thereon are plainly deductible. TCDcSE
In line, as a matter of principle the conclusion reached by an agency such as the
CTA will not be set aside, it being by the nature of its function, dedicated exclusively

to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise of
authority (Commissioner of Internal Revenue v. Court of Appeals, 303 SCRA 614,
1999) none of which is present in the case at bench.
WHEREFORE, the assailed decision is hereby AFFIRMED.
SO ORDERED.
Rivera and De Guia-Salvador, JJ ., concur.