624 Phil.

650

DEL CASTILLO, J.:

The clashing interests of the State and the taxpayers are again pitted against each other. Two
basic principles, the State's inherent power of taxation and its declared policy of fostering the
creation and growth of cooperatives come into play. However, the one that embodies the
spirit of the law and the true intent of the legislature prevails.

This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No. 9282,[1] in
relation to Rule 45 of the Rules of Court, seeks to set aside the December 18, 2007
Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, pursuant to Section 24(B)(1) of the National Internal Revenue Code of
1997 (NIRC), as well as the delinquency interest of 20% per annum under Section 249(C) of
the same Code. It also assails the April 11, 2008 Resolution [3] denying petitioner's Motion for
Reconsideration.

Factual Antecedents

Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative duly

registered with and regulated by the Cooperative Development Authority (CDA). [4] It was
established on February 17, 1968[5] with the following objectives and purposes: (1) to increase
the income and purchasing power of the members; (2) to pool the resources of the members
by encouraging savings and promoting thrift to mobilize capital formation for development
activities; and (3) to extend loans to members for provident and productive purposes. [6] It
has the power (1) to draw, make, accept, endorse, guarantee, execute, and issue promissory
notes, mortgages, bills of exchange, drafts, warrants, certificates and all kinds of obligations
and instruments in connection with and in furtherance of its business operations; and (2) to
issue bonds, debentures, and other obligations; to contract indebtedness; and to secure the
same with a mortgage or deed of trust, or pledge or lien on any or all of its real and personal
properties.[7]

On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group Deputy
Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223,
authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12,
Bacolod City, to examine petitioner's books of accounts and other accounting records for all
internal revenue taxes for the taxable years 1999 and 2000.[8]

Proceedings before the BIR Regional Office

On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner on
July 23, 2002.[9] Thereafter, on October 16, 2002, petitioner received two other Pre-
Assessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000.
[10]
 The deficiency withholding taxes cover the payments of the honorarium of the Board of
Directors, security and janitorial services, legal and professional fees, and interest on savings
and time deposits of its members.

On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that it
would only pay the deficiency withholding taxes corresponding to the honorarium of the
Board of Directors, security and janitorial services, legal and professional fees for the year
1999 in the amount of P87,977.86, excluding penalties and interest. [11]

In another letter dated November 8, 2002, petitioner also informed the BIR Assistant
Regional Director, Rogelio B. Zambarrano, that it would pay the withholding taxes due on
the honorarium and per diems of the Board of Directors, security and janitorial services,
commissions and legal & professional fees for the year 2000 in the amount of P119,889.37,
excluding penalties and interest, and that it would avail of the Voluntary Assessment and
Abatement Program (VAAP) of the BIR under Revenue Regulations No. 17-2002. [12]

On November 29, 2002, petitioner availed of the VAAP and paid the amounts of P105,574.62
and P143,867.24[13] corresponding to the withholding taxes on the payments for the
compensation, honorarium of the Board of Directors, security and janitorial services, and
legal and professional services, for the years 1999 and 2000, respectively.

On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L. Flores,
Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of
Assessment and Audit Results/Assessment Notices, ordering petitioner to pay the deficiency
withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of
P1,489,065.30 and P1,462,644.90, respectively.[14]

Proceedings before the Commissioner of Internal Revenue

On May 9, 2003, petitioner protested the Letters of Demand and Assessment Notices with
the Commissioner of Internal Revenue (CIR).[15] However, the latter failed to act on the
protest within the prescribed 180-day period. Hence, on December 3, 2003, petitioner filed a
Petition for Review before the CTA, docketed as C.T.A. Case No. 6827. [16]

Proceedings before the CTA First Division

The case was raffled to the First Division of the CTA which rendered its Decision on February
6, 2007, disposing of the case in this wise:

IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby PARTIALLY
GRANTED. Assessment Notice Nos. 00026-2003 and 00027-2003 are hereby MODIFIED
and the assessment for deficiency withholding taxes on the honorarium and per diems of
petitioner's Board of Directors, security and janitorial services, commissions and legal and
professional fees are hereby CANCELLED. However, the assessments for deficiency
withholding taxes on interests are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent the respective amounts of

P1,280,145.89 and P1,357,881.14 representing deficiency withholding taxes on interests from
savings and time deposits of its members for the taxable years 1999 and 2000. In addition,
petitioner is ordered to pay the 20% delinquency interest from May 26, 2003 until the
amount of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the Tax
Code.

SO ORDERED.[17]

Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the First
Division in its Resolution dated May 29, 2007.[18]

Proceedings before the CTA En Banc

On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc,[19] interposing
the lone issue of whether or not petitioner is liable to pay the deficiency withholding taxes on
interest from savings and time deposits of its members for taxable years 1999 and 2000, and
the consequent delinquency interest of 20% per annum.[20]
Finding no reversible error in the Decision dated February 6, 2007 and the Resolution dated
May 29, 2007 of the CTA First Division, the CTA En Banc denied the Petition for
Review[21] as well as petitioner's Motion for Reconsideration. [22]

The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax at source.
Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the income
payments subject to final withholding tax, among which is "interest from any peso bank
deposit and yield, or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements x x x". According to the CTA En Banc, petitioner's business
falls under the phrase "similar arrangements;" as such, it should have withheld the
corresponding 20% final tax on the interest from the deposits of its members.

Issue

Hence, the present recourse, where petitioner raises the issue of whether or not it is liable to
pay the deficiency withholding taxes on interest from savings and time deposits of its
members for the taxable years 1999 and 2000, as well as the delinquency interest of 20% per
annum.

Petitioner's Arguments

Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:

SECTION 24. Income Tax Rates. --

xxxx

(B) Rate of Tax on Certain Passive Income: --

(1) Interests, Royalties, Prizes, and Other Winnings. -- A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest from any currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements; x x x

applies only to banks and not to cooperatives, since the phrase "similar arrangements" is
preceded by terms referring to banking transactions that have deposit peculiarities.
Petitioner thus posits that the savings and time deposits of members of cooperatives are not
included in the enumeration, and thus not subject to the 20% final tax. To bolster its
position, petitioner cites BIR Ruling No. 551-888[23] and BIR Ruling [DA-591-2006][24] where
the BIR ruled that interests from deposits maintained by members of cooperative are not
subject to withholding tax under Section 24(B)(1) of the NIRC. Petitioner further contends
that pursuant to Article XII, Section 15 of the Constitution [25] and Article 2 of Republic Act
No. 6938 (RA 6938) or the Cooperative Code of the Philippines,[26] cooperatives enjoy a
preferential tax treatment which exempts their members from the application of Section
24(B)(1) of the NIRC.

Respondent's Arguments

As a counter-argument, respondent invokes the legal maxim "Ubi lex non distinguit nec nos
distinguere debemos" (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to
cooperatives as the phrase "similar arrangements" is not limited to banks, but includes
cooperatives that are depositaries of their members. Regarding the exemption relied upon by
petitioner, respondent adverts to the jurisprudential rule that tax exemptions are highly
disfavored and construed strictissimi juris against the taxpayer and liberally in favor of the
taxing power. In this connection, respondent likewise points out that the deficiency tax
assessments were issued against petitioner not as a taxpayer but as a withholding agent.

Our Ruling

The petition has merit.

Petitioner's invocation of BIR

Ruling No. 551-888, reiterated in
BIR Ruling [DA-591-2006], is proper.

On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that cooperatives are
not required to withhold taxes on interest from savings and time deposits of their members.
The pertinent BIR Ruling reads:

November 16, 1988

BIR RULING NO. 551-888
24 369-88 551-888

Gentlemen:

This refers to your letter dated September 5, 1988 stating that you are a corporation
established under P.D. No. 175 and duly registered with the Bureau of Cooperatives
Development as full fledged cooperative of good standing with Certificate of Registration No.
FF 563-RR dated August 8, 1985; and that one of your objectives is to provide and
strengthen cooperative endeavor and extend assistance to members and non-members
through credit scheme both in cash and in kind.

Based on the foregoing representations, you now request in effect a ruling as to whether or
not you are exempt from the following:

1. Payment of sales tax

2. Filing and payment of income tax
3. Withholding taxes from compensation of employees and savings account and time
deposits of members. (Underscoring ours)

In reply, please be informed that Executive Order No. 93 which took effect on March 10,
1987 withdrew all tax exemptions and preferential privileges e.g., income tax and sales tax,
granted to cooperatives under P.D. No. 175 which were previously withdrawn by P.D. No.
1955 effective October 15, 1984 and restored by P.D. No. 2008 effective January 8, 1986.
However, implementation of said Executive Order insofar as electric, agricultural, irrigation
and waterworks cooperatives are concerned was suspended until June 30, 1987.
(Memorandum Order No. 65 dated January 21, 1987 of the President) Accordingly, your tax
exemption privilege expired as of June 30, 1987. Such being the case, you are now subject to
income and sales taxes.

Moreover, under Section 72(a) of the Tax Code, as amended, every employer making
payment of wages shall deduct and withhold upon such wages a tax at the rates prescribed by
Section 21(a) in relation to section 71, Chapter X, Title II, of the same Code as amended by
Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82 as amended.
Accordingly, as an employer you are required to withhold the corresponding tax due from
the compensation of your employees.

Furthermore, under Section 50(a) of the Tax Code, as amended, the tax imposed or
prescribed by Section 21(c) of the same Code on specified items of income shall be withheld
by payor-corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 51 of the Tax Code, as amended. Such being the case, and
since interest from any Philippine currency bank deposit and yield or any other monetary
benefit from deposit substitutes are paid by banks, you are not the party required to withhold
the corresponding tax on the aforesaid savings account and time deposits of your members.
(Underscoring ours)

Very truly yours,

(SGD.) BIENVENIDO A. TAN, JR.
Commissioner

The CTA First Division, however, disregarded the above quoted ruling in determining
whether petitioner is liable to pay the deficiency withholding taxes on interest from the
deposits of its members. It ratiocinated in this wise:

This Court does not agree. As correctly pointed out by respondent in his Memorandum,
nothing in the above quoted resolution will give the conclusion that savings account and time
deposits of members of a cooperative are tax-exempt. What is entirely clear is the opinion of
the Commissioner that the proper party to withhold the corresponding taxes on certain
specified items of income is the payor-corporation and/or person. In the same way, in the
case of interests earned from Philippine currency deposits made in a bank, then it is the bank
which is liable to withhold the corresponding taxes considering that the bank is the payor-
corporation. Thus, the ruling that a cooperative is not the proper party to withhold the
corresponding taxes on the aforementioned accounts is correct. However, this ruling does
not hold true if the savings and time deposits are being maintained in the cooperative, for in
this case, it is the cooperative which becomes the payor-corporation, a separate entity acting
no more than an agent of the government for the collection of taxes, liable to withhold the
corresponding taxes on the interests earned. [27] (Underscoring ours)

The CTA En Banc affirmed the above-quoted Decision and found petitioner's invocation of
BIR Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR Ruling was based
on the premise that the savings and time deposits were placed by the members of the
cooperative in the bank.[28] Consequently, it ruled that the BIR Ruling does not apply when
the deposits are maintained in the cooperative such as the instant case.

We disagree.

There is nothing in the ruling to suggest that it applies only when deposits are maintained in
a bank. Rather, the ruling clearly states, without any qualification, that since interest from
any Philippine currency bank deposit and yield or any other monetary benefit from deposit
substitutes are paid by banks, cooperatives are not required to withhold the corresponding
tax on the interest from savings and time deposits of their members. This interpretation was
reiterated in BIR Ruling [DA-591-2006] dated October 5, 2006, which was issued by
Assistant Commissioner James H. Roldan upon the request of the cooperatives for a
confirmatory ruling on several issues, among which is the alleged exemption of interest
income on members' deposit (over and above the share capital holdings) from the 20% final
withholding tax. In the said ruling, the BIR opined that:
xxxx

3. Exemption of interest income on members' deposit (over and above the share capital
holdings) from the 20% Final Withholding Tax.

The National Internal Revenue Code states that a "final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest on currency bank deposit and yield or
any other monetary benefit from the deposit substitutes and from trust funds and similar
arrangement x x x" for individuals under Section 24(B)(1) and for domestic corporations
under Section 27(D)(1). Considering the members' deposits with the cooperatives are not
currency bank deposits nor deposit substitutes, Section 24(B)(1) and Section 27(D)(1),
therefore, do not apply to members of cooperatives and to deposits of primaries with
federations, respectively.

It bears stressing that interpretations of administrative agencies in charge of enforcing a law

are entitled to great weight and consideration by the courts, unless such interpretations are
in a sharp conflict with the governing statute or the Constitution and other laws. [29] In this
case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in perfect harmony with
the Constitution and the laws they seek to implement. Accordingly, the interpretation in BIR
Ruling No. 551-888 that cooperatives are not required to withhold the corresponding tax on
the interest from savings and time deposits of their members, which was reiterated in BIR
Ruling [DA-591-2006], applies to the instant case.

Members of cooperatives deserve

a preferential tax treatment
pursuant to RA 6938, as amended
by RA 9520.

Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA
6938, as amended by RA 9520.

Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to

foster the creation and growth of cooperatives as a practical vehicle for promoting self-
reliance and harnessing people power towards the attainment of economic development and
social justice. Thus, to encourage the formation of cooperatives and to create an atmosphere
conducive to their growth and development, the State extends all forms of assistance to
them, one of which is providing cooperatives a preferential tax treatment.

The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938, which read:

ART. 61. Tax Treatment of Cooperatives. -- Duly registered cooperatives under this Code
which do not transact any business with non-members or the general public shall not be
subject to any government taxes and fees imposed under the Internal Revenue Laws and
other tax laws. Cooperatives not falling under this article shall be governed by the succeeding
section.

ART. 62. Tax and Other Exemptions. -- Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to members.
Notwithstanding the provision of any law or regulation to the contrary, such cooperatives
dealing with nonmembers shall enjoy the following tax exemptions; x x x.

This exemption extends to members of cooperatives. It must be emphasized that

cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity.[30] Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a
credit cooperative. Extending the exemption to members of cooperatives, on the other hand,
would be consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the members, pursuant to Article
126 of RA 6938, which provides:

ART. 126. Interpretation and Construction. - In case of doubt as to the meaning of any

provision of this Code or the regulations issued in pursuance thereof, the same shall be
resolved liberally in favor of the cooperatives and their members.

We need not belabor that what is within the spirit is within the law even if it is not within the
letter of the law because the spirit prevails over the letter. [31] Apropos is the ruling in the case
of Alonzo v. Intermediate Appellate Court,[32] to wit:

But as has also been aptly observed, we test a law by its results; and likewise, we may add, by
its purposes. It is a cardinal rule that, in seeking the meaning of the law, the first concern of
the judge should be to discover in its provisions the intent of the lawmaker. Unquestionably,
the law should never be interpreted in such a way as to cause injustice as this is never within
the legislative intent. An indispensable part of that intent, in fact, for we presume the good
motives of the legislature, is to render justice.

Thus, we interpret and apply the law not independently of but in consonance with justice.
Law and justice are inseparable, and we must keep them so. To be sure, there are some laws
that, while generally valid, may seem arbitrary when applied in a particular case because of
its peculiar circumstances. In such a situation, we are not bound, because only of our nature
and functions, to apply them just the same, [is] slavish obedience to their language. What we
do instead is find a balance between the word and the will, that justice may be done even as
the law is obeyed.

As judges, we are not automatons. We do not and must not unfeelingly apply the law as it is
worded, yielding like robots to the literal command without regard to its cause and
consequence. "Courts are apt to err by sticking too closely to the words of a law," so we are
warned, by Justice Holmes again, "where these words import a policy that goes beyond
them." While we admittedly may not legislate, we nevertheless have the power to interpret
the law in such a way as to reflect the will of the legislature. While we may not read into the
law a purpose that is not there, we nevertheless have the right to read out of it the reason for
its enactment. In doing so, we defer not to "the letter that killeth" but to "the spirit that
vivifieth," to give effect to the lawmaker's will.

The spirit, rather than the letter of a statute determines its construction, hence, a statute
must be read according to its spirit or intent. For what is within the spirit is within the
statute although it is not within the letter thereof, and that which is within the letter but not
within the spirit is not within the statute. Stated differently, a thing which is within the intent
of the lawmaker is as much within the statute as if within the letter; and a thing which is
within the letter of the statute is not within the statute unless within the intent of the
lawmakers. (Underscoring ours)

It is also worthy to note that the tax exemption in RA 6938 was retained in RA 9520. The
only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly
states that transactions of members with the cooperatives are not subject to any taxes and
fees. Thus:

ART. 61. Tax and Other Exemptions. Cooperatives transacting business with both members
and non-members shall not be subjected to tax on their transactions with members. In
relation to this, the transactions of members with the cooperative shall not be subject to any
taxes and fees, including but not limited to final taxes on members' deposits and
documentary tax. Notwithstanding the provisions of any law or regulation to the contrary,
such cooperatives dealing with nonmembers shall enjoy the following tax exemptions:
(Underscoring ours)

xxxx

This amendment in Article 61 of RA 9520, specifically providing that members of

cooperatives are not subject to final taxes on their deposits, affirms the interpretation of the
BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that such
ruling carries out the legislative intent. Under the principle of legislative approval of
administrative interpretation by reenactment, the reenactment of a statute substantially
unchanged is persuasive indication of the adoption by Congress of a prior executive
construction.[33]

Moreover, no less than our Constitution guarantees the protection of cooperatives. Section
15, Article XII of the Constitution considers cooperatives as instruments for social justice and
economic development. At the same time, Section 10 of Article II of the Constitution declares
that it is a policy of the State to promote social justice in all phases of national development.
In relation thereto, Section 2 of Article XIII of the Constitution states that the promotion of
social justice shall include the commitment to create economic opportunities based on
freedom of initiative and self-reliance. Bearing in mind the foregoing provisions, we find that
an interpretation exempting the members of cooperatives from the imposition of the final tax
under Section 24(B)(1) of the NIRC is more in keeping with the letter and spirit of our
Constitution.

All told, we hold that petitioner is not liable to pay the assessed deficiency withholding taxes
on interest from the savings and time deposits of its members, as well as the delinquency
interest of 20% per annum.

In closing, cooperatives, including their members, deserve a preferential tax treatment

because of the vital role they play in the attainment of economic development and social
justice. Thus, although taxes are the lifeblood of the government, the State's power to tax
must give way to foster the creation and growth of cooperatives. To borrow the words of
Justice Isagani A. Cruz: "The power of taxation, while indispensable, is not absolute and may
be subordinated to the demands of social justice."[34]

WHEREFORE, the Petition is hereby GRANTED. The assailed December 18, 2007

Decision of the Court of Tax Appeals and the April 11, 2008 Resolution
are REVERSED and SET ASIDE. Accordingly, the assessments for deficiency withholding
taxes on interest from the savings and time deposits of petitioner's members for the taxable
years 1999 and 2000 as well as the delinquency interest of 20% per annum are
hereby CANCELLED.

SO ORDERED.