Commissioner of Internal Revenue vs. Hantex Trading Co., Inc.

A tax deficiency assessment cannot be anchored on mere photocopies of documents lacking probative weight and unauthenticated by the public officer charged with their custody; such an assessment is arbitrary and capricious and divests the assessment of its prima facie presumption of correctness.

Hantex Trading Co., Inc., a corporation engaged in the sale of plastic products, imports synthetic resin and chemicals, requiring the filing of Import Entry and Internal Revenue Declarations (Consumption Entries) with the Bureau of Customs. In October 1989, the Economic Intelligence and Investigation Bureau (EIIB) received confidential information that Hantex had understated its 1987 importations, declaring only ₱45,538,694.57 out of ₱115,599,018.00. The EIIB issued a subpoena duces tecum for Hantex's 1987 books of accounts and tax records, but the corporate president refused to comply, citing repeated prior investigations by the Bureau of Internal Revenue (BIR). Unable to secure certified copies of the Consumption Entries from the Bureau of Customs—whose custodian claimed the originals were eaten by termites—the EIIB relied on photocopies of the entries furnished by an informer, certified copies of Hantex's Profit and Loss Statements from the Securities and Exchange Commission (SEC), and certifications from Customs Collection Chiefs listing entry numbers processed and released. Based on these documents, the BIR assessed Hantex for deficiency income and sales taxes.

• EIIB Investigation: Acting on confidential information that Hantex understated its 1987 importations, the EIIB issued Mission Order No. 398-89 and a subpoena duces tecum for Hantex's 1987 books of accounts, importation records, and tax returns. Hantex's president refused to comply, asserting that the BIR had repeatedly investigated the same records and found no tax evasion.
• Gathering Evidence: The EIIB secured certified copies of Hantex's 1987 and 1988 Profit and Loss Statements from the SEC. The EIIB also obtained photocopies of 77 Consumption Entries from an informer.
• Customs Certifications: The EIIB requested the Bureau of Customs to authenticate the photocopies. Customs officials Merlita D. Tomas and Augusto S. Danganan could not authenticate the photocopies because the original entries had allegedly been eaten by termites. Instead, they issued certifications listing the entry numbers and release dates of Hantex's importations, but omitted the landed costs and advance sales taxes.
• BIR Assessment: Relying on the EIIB's findings, the photocopies of the Consumption Entries, and the SEC-filed Profit and Loss Statements, BIR investigators computed Hantex's unrecorded importations at ₱105,716,527.00. On April 15, 1991, the BIR issued a final assessment demanding deficiency income tax of ₱13,414,226.40 and deficiency sales tax of ₱14,752,903.25, inclusive of surcharges and interest.
• Protest and Denial: Hantex protested the assessment, arguing the photocopies were inadmissible and the Customs certifications lacked specific amounts. The BIR Commissioner denied the protest, admitting the possibility that figures in the photocopies had been tampered with, but maintaining that the Commissioner was not proscribed from relying on the best evidence obtainable.

• Best Evidence Obtainable Rule: Petitioner argued that because Hantex refused to show its books, resort to the best evidence obtainable—photocopies of import entries and SEC-filed financial statements—was proper under Section 16(b) of the NIRC. This rule legally permits the use of hearsay evidence inadmissible in regular courts.
• Authentication: Petitioner maintained that the photocopies were authenticated by Customs officials who processed and released the cargoes.
• Presumption of Correctness: Petitioner averred that tax assessments are presumed correct and made in good faith. Because Hantex failed to prove the correct taxes due, the presumption in favor of the assessment stands.
• Procedural Propriety: Petitioner asserted that the Regional Director was authorized to sign the verification and certification against forum shopping, and that a motion for reconsideration before the CA is not a condition sine qua non for a Rule 45 petition.

• Invalid Resort to Best Evidence Obtainable: Respondent countered that EIIB agents were unauthorized to examine tax records; thus, Hantex's refusal to submit to them could not trigger the best evidence obtainable rule. The proper remedy for failure to submit records is penal sanction, not estimation.
• Inadmissibility of Photocopies: Respondent argued that the photocopies of the Consumption Entries were inadmissible because they were not authenticated by the custodian under Sections 24 and 25 of Rule 132 of the Rules of Court. The Customs certifications only listed entry numbers and dates, not amounts.
• Lack of Proof of Loss: Respondent pointed out that the BIR failed to secure a certification of the fact of loss of the original documents from the Bureau of Customs custodian.
• Arbitrariness and Due Process: Respondent contended that the assessments were issued without factual basis, computed without using Hantex's tax returns, and thus constituted a deprivation of property without due process.

• Procedural Propriety: Whether the petition for review complies with the Rules of Court regarding verification, certification against forum shopping, and the necessity of a motion for reconsideration.
• Evidentiary Basis of Assessment: Whether the deficiency tax assessment is based on competent evidence and the law, specifically concerning the use of mere photocopies of consumption entries under the "best evidence obtainable" rule.
• Tax Liability: Whether Hantex is liable for the assessed deficiency taxes.

• Procedural Propriety: The petition was deemed sufficient in form. A Revenue Regional Director is vested under Section 10 of the 1997 NIRC and Revenue Administrative Order No. 5-83 with the authority to sign pleadings and the certification against forum shopping on behalf of the Commissioner. A motion for reconsideration is not indispensable for a Rule 45 petition to prosper. Furthermore, questions of fact may be resolved due to inconsistent findings between the CA and the CTA.
• Evidentiary Basis of Assessment: The assessment was arbitrary and capricious. While the "best evidence obtainable" rule under Section 16(b) of the NIRC allows the use of hearsay or non-judicially admissible evidence, it does not include mere photocopies of records devoid of probative weight. Mere photocopies of Consumption Entries have no probative value, especially when the originals are public documents and no proper authentication or proof of loss was adduced. The Customs certifications did not authenticate the photocopies or state the landed costs. The BIR inexplicably ignored the copy of the Consumption Entries filed with it and the findings of District Revenue Officers who previously examined Hantex.
• Tax Liability: Because the assessment was anchored on worthless photocopies, it constituted a "naked assessment" devoid of factual basis, thereby stripping it of its prima facie presumption of correctness. The presumption of correctness cannot rest on another presumption. Hantex's failure to adduce evidence of its correct tax liability cannot serve as a basis for affirming an arbitrary assessment. The case was remanded to the CTA for further proceedings.

• Best Evidence Obtainable Rule (Tax Assessment) — Under Section 16(b) of the NIRC, when a required report is not filed or is false, incomplete, or erroneous, the CIR may assess the proper tax based on the best evidence obtainable. This includes corporate and accounting records of the taxpayer, records of similarly circumstanced taxpayers, and data from government agencies. It may even include hearsay evidence inadmissible in regular courts. However, it does not include mere photocopies of records or documents, which have no probative weight and present a risk of error or tampering.
• Presumption of Correctness of Tax Assessments — Tax assessments by examiners are presumed correct and made in good faith, and a prima facie case of liability is made upon the assessment's introduction in evidence. However, this presumption does not apply when the assessment is utterly without foundation, arbitrary, or capricious (a "naked assessment"). The presumption of correctness, being a mere presumption, cannot be made to rest on another presumption.

• "The best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof."
• "The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof. However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously."
• "The prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a 'naked assessment,' i.e., without any foundation character, the determination of the tax due is without rational basis."

• Collector of Internal Revenue v. Benipayo, 4 SCRA 182 (1962) — Followed. An assessment must be based on actual facts; the presumption of correctness of an assessment cannot be made to rest on another presumption.
• Almora v. Court of Appeals, G.R. No. 116151 (1999) — Followed. A motion for reconsideration is not a condition sine qua non for the filing of a petition for review on certiorari under Rule 45.
• United States v. Davey, 543 F.2d 996 (1976) — Cited with approval. Where the accuracy of a taxpayer’s return is being checked, the government is entitled to use original records rather than be forced to accept purported copies which present the risk of error or tampering.
• Campbell, Jr. v. Guetersloh, 287 F.2d 878 (1961) — Cited with approval. The CIR may look to other sources of information to establish income when the records of the taxpayer are manifestly inaccurate and incomplete.
• Clark and Clark v. Commissioner of Internal Revenue, 266 F.2d 698 (1959) — Cited with approval. Where an assessment is utterly without foundation, the determination contained in a deficiency notice disappears.

• Section 16(b), 1977 NIRC (as amended) — Authorizes the CIR to assess the proper tax on the "best evidence obtainable" when a report is false, incomplete, or erroneous. Applied to determine that while the rule allows estimation and hearsay, it does not authorize the use of mere unauthenticated photocopies as the sole basis for assessment.
• Section 7, 1977 NIRC — Enumerates the powers of the CIR to obtain information, including examining books, obtaining information from government offices, and summoning persons. Cited as the statutory basis enabling the BIR to access records from which the "best evidence" may be drawn.
• Section 10, 1997 NIRC — Outlines the powers of the Revenue Regional Director, including the administration and enforcement of internal revenue laws. Applied to vest the Regional Director with the authority to sign the verification and certification against forum shopping on behalf of the CIR.
• Section 1306, Tariff and Customs Code — Prescribes the forms and contents of import entries, requiring multiple copies. Cited to highlight that the BIR inexplicably ignored the copy of the Consumption Entries filed with it and could have secured certified copies from other agencies like the Tariff and Customs Commission.

Puno (Chairman), Austria-Martinez, Tinga, and Chico-Nazario.