China Banking Corporation vs. CA

[G.R. No. 125508. July 19, 2000]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Petitioner China Banking Corp made an equity investment in the First CBC Capital, a HongKong subsidiary engaged in financing and investment with “deposit-taking” function.

A regular examination by Bangko Sentral on petitioner financial book and investment portfolio shows that First CBC Capital has become insolvent. With approval of Bangko Sentral, petitioner wrote off as being worthless in its investment in First CBC in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.  Respondent CIR disallowed the deduction and assessed petitioner for income deficiency, inclusive of surcharge, interest and compromise penalty.

Issue: WON petitioner is allowed to claim for the deductions?

Held:

NO.

The disallowance of the deduction was made on the ground that the investment should not be classified as being “worthless” and that, although the HongKong Banking Commissioner had revoked the license of First CBC Capital as a “deposit-taking company” it can still exercise its financing investments.  Also, it should be classifies as capital loss and not as a bad debts expense there being no indebtedness to speak petitioner and its subsidiary.