Tuesday, October 07, 2008 Tax notes: Evidence need for deductibility of bad debts
A BANK'S claim for bad debts as expense, although approved by the Bangko Sentral ng Pilipinas (BSP), was disallowed by the Bureau of Internal Revenue (BIR) on the ground that the accounts could not be ascertained to be worthless pursuant to Section 34(E) of the Tax Code of 1997, which enumerates the following requisites for deductibility of bad debts:
1. There must be an existing indebtedness;
2. The debt must be ascertained to be worthless, as when the debtor is insolvent;
3. It must be actually charged off within the taxable year; and
4. The debt must be connected to one’s profession, trade, or business.
The bank presented before the Court of Tax Appeals (CTA) as evidence a schedule of accounts for write-off, which shows the name of the borrowers, booking unit, collateral, date turned past due, amount requested for write-off and justification for write-off. These documents, however, are not sufficient to establish that there is an existing indebtedness due to the bank that is connected to its trade or business.
Other pieces of evidence presented were a schedule of accounts, a Secretary’s Certificate approving the write-off of various accounts and a letter informing the BSP of its write-off of certain accounts, none of which provide proof that notices and/or demand letter were sent and/or actions were instituted against the account. The evidence presented also failed to establish the worthlessness of the debt in the taxable year when the bad debts were claimed as expense.
Although the BSP ascertained that the accounts are worthless and cannot be collected, and authorizing its writing off, the CTA held that the approval of the BSP is not one of the requirements for the deductibility of bad debts. The taxpayer must point to a certain event or events occurring within the taxable year that evidences the worthlessness of the debt. (Philippine Bank of Communications versus Commissioner of Internal Revenue, CTA Case No. 6177, June 30, 2008)
Considering the failure of the bank to comply with the prescribed requisites for the deductibility of bad debts, the accounts written off as expense were disallowed by the CTA. (Source: Punongbayan & Araullo)
