University of the Philippines College of Law

D2021

Case No. G.R. No. L-13912 / Sept. 30, 1960

Case Name CIR v De Prieto
Ponente Gutierrez David

RELEVANT FACTS

1. The following is an appeal from the decision of the CTA which reversed the decision of the CIR. The latter held De Prieto
liable for the payment of deficiency income tax with penalties and interest.

2. Respondent De Prieto conveyed by way of gifts to her 4 children real property with an assessed value of P892K.

3. CIR appraised the real property donated for gift tax purposes at P1.2M and assessed the sum of P117K as donor's gift tax

4. Of the sum paid by the respondent (P117K), the sum of P55K represents the total interest on account of delinquency

5. The respondent claimed the sum of P55K as deduction in her income tax return

6. Petitioner disallowed such deduction, and further assessed the sum of P21K as deficiency income tax on the amount claimed
as a deduction, including interest, surcharge, and compromise for late payment.

RATIO DECIDENDI
Issue

WON the subject amount herein YES.

can be deductible as interest?
Under the law, for interest to be deductible, it must be shown that there be an
indebtedness, that there should be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued within the year.

In this case, the interest was paid by the respondent as a consequence of late payment
of her donor's tax, and that the same was paid within the year it is sought to be
declared. The only issue is whether such interest was paid upon an indebtedness.

Sec. 30 of the Tax Code provides..

SEC. 30 Deductions from gross income. — In computing net income there

shall be allowed as deductions —

(b) Interest:

(1) In general. — The amount of interest paid within the taxable year on
indebtedness, except on indebtedness incurred or continued to purchase or
carry obligations the interest upon which is exempt from taxation as income
under this Title.

The term "indebtedness" as used in the Tax Code of the United States containing
similar provisions as in the above-quoted section has been defined as an unconditional
and legally enforceable obligation for the payment of money. Within the meaning of
that definition, it is apparent that a tax may be considered an indebtedness.

In Santiago v CTA

Although taxes already due have not, strictly speaking, the same concept as
debts, they are, however, obligations that may be considered as such.
 University of the Philippines College of Law
D2021

The term "debt" is properly used in a comprehensive sense as embracing not

merely money due by contract but whatever one is bound to render to
another, either for contract, or the requirement of the law.

Where statute imposes a personal liability for a tax, the tax becomes, at least
in a broad sense, a debt.

A tax is a debt for which a creditor's bill may be brought in a proper case.

Under Sec. 23(b) of the Internal Revenue Code of 1939, interest on taxes is interest on
indebtedness and is deductible.

As the interest herein was paid upon an indebtedness, the same is deductible from her
gross income under the provision of the tax code mentioned above.

RULING
In view of the foregoing, the decision sought to be reviewed is affirmed, without pronouncement as to costs.