Rpuljur. OF.LLL E I'Iiiljpp!Nii ~ Court of Taj~ Appeals Quilzon City Radio Communications of the Philippines, I Nc vs. The Commissioner of Internal Revenue

DECISION -

- 2 - liable thereto, the correctness of the deficiency ·income tax assessment in the amount of ~295,284.16, inclusive of interest .

Petitione r also questions the right of the Government to assess the deficiency income tax on the ground of pr escription.

Inasmuch as petitioner raised the defense of pres- cription, the pivotal issue therefore to be resolved in this proceeding, befor e going into the me rits of the controversy, is whether or not the right of respondent Commissioner of Internal Revenue to assess the deficiency income tax from January 1 to June 17, 1964 had already prescribed on the ground that the revised deficiency income tax assessment under review had been issued beyond the five-year period fixed under the then Section 331 (now Section . 318) of the National Internal Reve nue Code. The records reveal that on June 15, 1965 petitioner filed its income tax return for the taxable year 1964 in blank form without reporting any income but merely stating thereon that it is "TAX EXEMPT UNDER R.A. 4054". (Exhs. "A"; "1", p. 50, BIR records.)

Pursuant to an

authority to investigate da~ed December 9, 1969 (p. 88, BIR records), revenue examiner Jaime Q. Concepcion examined the books of accounts of herein petitioner for income and business tax purposes.

As a result thereof, respondent issued a tax assessment dated June 11, 1970

- 3 - against petitioner in the amount of P566,410. 32 as· deficiency income tax from January l to June 17 , 1964, the details of which are as follows: (Exhs . "B" & "5", pp. 68-70, BIR records.)

l 9 6 4 Net income per return • • • • • • • • ~

Add:

(l) Undeclared income for the period from January 1 to June 17, 1964 , net of expenses • • • • . • • • 914,010.26

(2) Special messenger fees 236,485 .17 Net income per investigation •••• ~1,150,495.43 Tax due thereon • • • • • • • • • .

337 ,149.00

Add:

50% surcharge . • • • . . • • 168,57 4 . 50 Deficiency interest (18%) • • • 60 ,686 . 82

AMOUNT DUE AND COLLECTIBLE

.•. ~ 556,410~32 In a letter ~ated July 10, 197 0 petitioner protested the assessment raising the defenses of prescription and tax exemption , and asked for its cancellation and with- drawal on the basis of the legal and factual arguments stated therein.

(Exhs. "C" & "6", pp . 72-86, BIR records .) After petitioner filed, however , to execute a waiver of the statute of l imitations before its request for can- cellation and withdrawal maybe given due cour se (Exh. "4", p, 52, BIR records), respondent , on February 23 , 1971 issued against petitioner warrants of distraint o f personal property and levy on real property to enforce collection of the deficiency income tax and surcharge assessed against it (Exhs. "8" & "8-l", pp. 93 & 94,

- 4 - BIR records.)

In a letter dated March 25, 1971 petitioner prayed for the lifting of the warrants of distraint and levy pending resolution of its protest against the assessment (p. 99, BIR records), a nd accommodating petitioner, respondent suspended temporarily the collection of the deficiency income tax and surcharge cover e d therein (Exh.

11 9", p. 103, BIR records).

The protested deficiency income tax assessment was set by respondent for conference on July 14, 1972. (p.

116, BIR records.)

However, petitioner requ e sted its resetting on July 24, .1972 at 9:00 0 11Clock in the morning.

(p. 117, BIR records.)

Strangely enough, petitioner failed to appear on the date and at the time designated by it.

Believing that petitioner was only employing dilatory tactics (p. 120, BIR records), respondent re- investigated the income tax case of petitioner on the basis of existing records, and by allowing certain claims for deductions, reduced the deficiency income tax from P566,410.32 to P295,284.16. (See letter-decision of respondent dated April 8, 1974, Exhs. "D 11 & 11 11 11 , pp. 145-146, BIR records.)

The reduced deficiency income tax assessment was computed as follows: Gross income per investigation •

Less:

Deductible expenses:

From J anuary 1 to June 17, 1964 ••• Pl,284,932.19

One-half

(~) of total disallowances of Pl06,415.10 • 53,207.55

Net Taxable Income

• • • • . • • • Income tax due thereon • • • • • •

Add:

18% maximum deficiency interest TOTAL AMOUNT DUE AND COLLECTIBLE • . P2,198,943.45 1,338,139.74 p 860,802.71 250,240.81 45,043.35 p 295,284.16

- 5 - Petitioner again protested said decision of respondent on the disputed assessment in a letter dated June 14, 1974, claiming, just like in its protest of the ori- ginal assessment of June 11, 1970, lack of factual or legal basis to stand on.

On August 12, 1974 petitioner submitted a supplemental memorandum, contending, among others, that since the reduced assessment has the effect of superseding the original assessment, the revised assessment has already prescribed and the tax can no longer be collected.

(Exh. "E", pp. 178-191, BIR records.)

Respondent denied this protest in his letter dated December 9, 1974, but presumably to prevent another round of request for reconsideration, blandly told petitioner to come to this Court by filing a petition for review.

(Exhs. "F" & "14", pp. 203-205, BIR records.) It is obvious from the foregoing that petitioner has been protesting the deficiency income tax assessment of respondent and asking for its cancellation and with- drawal basically for the purpose of de laying the collection of the tax so that it can invoke the technical ground of prescription.

Petitioner's income tax return for taxable year 1964, without such facts, data or information as are appropriate to determine the correctness of its net income as required by law, was filed by it on June 15, 1965.

After the deficiency income tax was determined

- 6 - through investigation of its books of accounts because its income tax return was blank, and the assessment dated June 11, 1970 was issued by respondent, petitioner irnrne- diately raised the defense of prescription in its con- .

testing letter of July 10, 1970 when the five-year period within which respondent may assess the tax has not yet expired .

Without deciding the request of petitioner for reconsideration of the assessme nt, respondent sought to enforce collection of the tax assessed by him by means of distraint and levy .

Such action of respondent was of course a denial of the request for reconsideration and withdrawal of the assessment and petitioner may appeal therefrom.

(Philippine Planters Investment Co., Inc . vs . Acting Commissioner of Internal Revenue, CTA Case No. 1266, November ll, 1962; Frederick L. Hahn vs. Corn- missioner of Internal Revenue, CTA Case No. 1987, April 30, 1969.)

Instead of appealing to this Court, however , petitioner asked for the lifting of said warrants pending resolution of its protest and re s pondent, strangely enough, temporarily postponed collection of the tax.

To give petitioner its "day in court", the protested assessment was set for conference by respondent but the former requested the resetting of the hearing, specifying ~ () v~

- 7 - the date and time thereof.

Indicating an apparent ·lack of interest in the disposition of the case, petitioner failed to appear on the date and at the time fixed by it, compelling respondent to decide the case on the basis of existing records.

After respondent reduced the deficiency income tax assessment in his letter-decision of April 8, 19 74 , petitioner again protested said decision, claiming, just like in its request for recon- sideration of the original assessment, lack of factual or legal basis to stand on; and after delaying the col- lection of the tax , that the revised assessment had already prescribed and the deficiency income tax could

I

no longer be collected because the reduced ass e ssment had the effect of superseding the original asses s ment. It seems crystal clear, in the light of the above, that respondent refrained from collecting the deficiency income tax due to the several requests of petitioner to which respondent yielded to give it every opportunity to prove that the assessment has no legal or factual basis to stand on , as contended by it.

After inducing respondent to delay collection as petitioner in fact did, it would be most unfair for the latter to now take advantage of such desistance to elude its deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription.

(Collector of

- 8 - Internal Revenue vs . Suyoc Consolidated Mining Company, L-11527, November 25, 1958, 104 Phil. 819.) As observed by the Supreme Court in the Suyoc Consolidated (104 Phil. 823-824):

While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limi- tation for in such case there is need of a written agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Gover nmen t .

And when such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or behavior should not be countenanced if only to protect the interest of the Government. This case has no precedent in this juris- diction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said:

"The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect "this is your own act, and there- fore you are not damnified."

"(R.H. Stearns Co. vs. u.s., 78 L. ed., 647) .

Or, as was aptly said, "The tax could have been collected, but the government withheld action at the spe- cific request of the plaintiff.

The plaintiff is now estopped and should not be permitted to raise the defense of the Statute of Limitations." LNewport Co. vs. U.S., (DC-WIS) , 34 F. Supp. 58~/.

c 1

- 9 - The revised assessment of respondent dated April 8, 1974 is not therefore barred by prescription. Coming to the issue of:

Whether petitioner is entitled to income tax exemption for the whole year 1964 , or only from June 18, 1964, the date of the effectivity of Republic Act No. 4054 exempting it from income taxation, Petitioner is of the contention that it was exempt from income tax for the whole taxable year of 1964 in accordance with the principle of "status-at-the -end- of-the-taxable-year" which was applied by the Supreme Court in Commissioner of Internal Revenue vs. Carlos Ledesma, L-17509 , January 30, 1970, 31 SCRA 95.

Peti-

tioner thus insists that the income realized by it during the year 1964 is not liable to income tax inasmuch as its "status-at-the-end-of-the-taxable -year" was that of a corporation exempt from income tax . Respondent , on the other hand, maintains that peti- tioner's contention is not tenable since the "status-at- the-end-of-the-taxable-year" refers to the tax status of a class of partnership, either as registered or unregistered at the end of a taxable year, for purposes of imposing the corporate income tax under Section 24 of the Tax Code.

He asserts that what is involved in the present case is tax exemption and not tax status which can be given retroactive effect.

- 1 0 - The l aw i nvolved is Republ ic Act No . 4054, amending Republic Act No . 2036 , the pertinent sec tions of which read:

X X X

X X X

SEC . 2.

Section fourteen of t he same Act is hereby r epealed and in lieu thereo f a ne w section is hereby in s e rted to read as follows: ''SEC. 14.

In consideration of the franchi se a nd rights hereby granted and any provision of law to the contrary notwithstanding, the grante e shall pay the same taxes as are now or may he re- afte r be r equired by l aw from other individuals, c opartne rships, private, public or quasi-public associations, corporations , or joint stock companies, on real estate, buildings a nd other personal property exc ept radio equip- ment, machinery and spare parts needed in connection with the business o f t he g rantee , wh i ch shall be exemp t from c ustoms du ties , tari ffs a nd other taxes, a s well as those propertie s declared exempt i n thi s s ection .

In consideration of the franchise, a tax equa l to one and one-half ~£ centum of all gross receipts from the busine s s t ransacted unde r this franchise by the gran tee shal l be paid to the Treasurer of the Ph ilippine s each year , within ten days after the audit and approval of the accounts as prescribed i n th is Act .

Said tax shall be in lieu of any and all taxe s of any kind, nature ~ or description levied, established or collected by any authority whatsoever, municipal, provincial or nati onal, from which taxes the grantee is hereby expressly exempted.

X X X

X X X

X X X

"SEC . 3.

This Act shal l tak e effect upon its approval .

"Approved, June 18, 1964. "

C3

DECISION -

CTA CASE NO . 2667 - 11 - Referring to the insertion into the franchis~ of petitioner of Section 1 4 of Republ ic Act No . 405 4 which provides that the f r anchise tax payable by it o f l - l/2% "shall be in lieu of any and a l l taxe s of any kind , nature or d e scription levied, established or collected by any authority whatsoever, municipal, provincial or national, from which taxes the grantee is hereby expressly exempted", it is ver y clear and spec i fic that the income tax exemption of pet i tioner took effect on June 18 , 19 64. The sta tute speci f ically and expressly provides that "This Act shall tak e e ffect upon its approval", woch is - "Approved, June 18, 1964" - without more.

Nothing

there said speaks of '' status-at-the-end-of-the-taxable- year " determining the income tax exemption of petitioner. The law is very speci f ic and mandatory. There is no room for inte rpretation.

It is well-settled that a statute, free from any constitutional infirmity , must be enforced as written.

No j ustification whatsoever can be found for giving petitioner herein preferential treatment by readi ng into its franchise its status at the e nd of the taxable year 1964 determining i t s exemption f r om income tax for the ' entire year when the applicable law expressly p r ovides that its tax exemption took effect o n June 18, 1964, which is not the end o f i ts taxa b l e year. I f it had c ·l

DECIS I ON -

CTA CASE NO. 266 7 - 12 - been the legislat ive in t e n t to exemp t petitione r f Tom pay i ng income tax f o r the e ntire year 196 4 , the leg i s - lative body could have easily done so by p r oviding tha t the tax exemption s hall apply to income earned foL the entire ye ar 1964, or the act shall take effec t on December 31, 196 4.

We c annot ignore the bas i c and we l l-settled p r inciple that exemption from taxation is no t favored a nd is never presumed, so tha t if granted it must be str ictly construed against the taxpayer . Affi r matively p ut, the law frowns on exemption fr om taxation , hence , an exempt i ng provision should be c onstrued strict issimi j uris.

(Cathol ic Church v s .

Bastings, 5 Phil .

70 1~ Esso Standard Easte r n, Inc. vs . Act i ng Commissioner of Customs , L-21841 , October 28 , 1966 , 18 SCRA 488 .

See al s o Government vs. Monte de Piedad , 35 Phil .

42 ~ Asiatic Petroleum Co. v s . Llanes , 49 Phil .

4 66 ~ Ho use vs . Posadas, 53 Phil . 338; Phi l . Tel. and Tel . Co. vs . Collector, 58 Ph i l . 6 3 9 ~ Greenfie l d vs . Meer , 77 Phil . 394 ; Collector of I nte rnal Revenue vs . Manila Jockey Clu b , 98 Phil. 67 0; Ph i l. Guaran ty Co., Inc. vs. Commissione r of Inter nal Revenue, L-22 074 1 September 8, 196 5 , 15 SCRA l ; Abad vs . Court o f Ta x Appea l s, L-208 34 , Oc t obe r 19, 1966, 18 SCRA 374. ) In this c a se, it canno t be denied that Section 1 4 of Republ ic Ac t No. 2036 was repealed and in l ieu

DECISION -

CTA CASE NO . 2667 - 13 - ther eo f a new Sect i on 14 was inserted by Republic ~ct No. 4054 into the franchise of petitioner precisely to grant tax exemption to petitioner.

Since Republic

Act No. 4054 specifically commands that such tax exemption shall take effect on June 18, 1964, the terms of the l aw provide the safest guide as to t he effectivity of the income tax exemption of petitioner, to which obedience is due and from which deviation should not be allowed .

Accordingly, we ru l e that petitioner is subj ect to income tax from Januar y 1 to June 17, 19 64. Having reached the result that petitioner is subject to income t ax from January 1 to June 17, 1964, we come to the question of cor rectness of certain expenses allowed by respondent as deductions from gross income in arriving at the taxable income of petitioner. At the outset, it s hould be observed, as stated earlier, that petitioner's income tax return for calendar year ended December 31, 1964, which cove r s the period in question, was in blank except for the words "TAX EXEMPT UNDER R.A. 4054" .

While the return was accompanied with audited fi nancial statements, it was not a true and accurate return of its annual net income in the manner prescribed and containing such facts, data and information as were appropriate and necessary to determine the correctness of the ne t income retur ned

CG

DECIS ION -

CTA CASE NO. 266 7 - 14 - and to car r y out the provisions of the Income Tax Law . (Sec. 46, National Inte rnal Revenue Code.)

Respondent

therefore as sessed the proper tax on the best evide nce obtainable.

It was only after the deficienc y i ncome tax assessmen t had been issued and served on peti tioner that it s tarted questioning the cor rectness of the deductions al lowed by respondent when during the investigat ion o f its books of accounts a nd o ther accounti ng recor ds , pe titioner did not presen t , whe n reques t ed, t he s upporting documents , such as payrolls , invoices , vouchers a nd other primary evidence , for purposes of verifyi ng and substantiating expenses or deduc tions, con tending that the same could no long e r be produced because the exumination took place beyond the period during which i t was duty bound under Section 337 of the National I n t ernal Revenue Code to keep a nd p reser ve its records .

Under Section 33 7 (now Section 324) of the National Internal Revenue Code, books o f accounts and other accounting r ecords should be preserved for a pe r i od of at ~ east five years from the date of the last entry in each book.

Since petit ioner was on the calendar year ba sis, i t argues t ha t the last entries i n its 1964 book s were made on December 31, 19 64 . Af ter five yea r s from December 31 , 1964, or December 31, 1969 , peti tioner r·~ t; I

DECISION -

CTA CASE NO . 266 7 - 15 - could therefore d ispose of i t s payrolls , invoices, · vouche r s and other supporting papers if no tax i nves- t igation was yet conducted as of that date . The explanat i on for t he absence of supporting invoices, vouchers, payrolls and other papers can hardly be accepted.

The reco r ds s how that the inves- tig a tion of petitioner ' s income tax liability f o r 1964 was started on December 9, 1969 when the letter o f authority of revenue examiner Jaime Q. Concepcion to examine the books of accounts and other accounting records fo r income tax and business tax purposes for the years 1968 and prior years was served on petitioner . (p . 88, BI R records " ) While the actual examination a nd inspect ion mighthave been done i n the early part of 1970, after the five -year p e riod, petitioner upon receip t of t he letter of authority was duty bound to keep intact its invoices, vouchers , payrolls and other suppo r ting papers because it was already notifi e d that an examination and inspection of its books a nd accounting records was to be conducted.

For all intents a nd purposes, the tax inves tigat ion o f petitioner was commenced on Decembe r 9, 1969, which was well within the five-year per i od fr om the last entr y in its books of accounts on De c ember 31, 1964.

In disposing its payrolls, invoice , vouchers and other support ing r0 u0

- 16 - documents i mmediately after the five-year period, upon receipt of the letter of authority to examine its books of accounts and other accounting r ecords, if petitioner were to be believed, the Court feels that it did not act with i ntegrity and good faith.

The extraordinary haste of petitioner in getting rid of i ts primary docu- ments , which i s not in accordance with ordinary business policies, inevitably provokessuspicion that it was done to frustrate its forthcoming tax examination . Ironically, petitioner deprived itself of the adequate means needed to support its claimed deductions. The revenue regulations require that any claim for deduction must be substantiated, when requir e d by the Commissione r of Internal Revenue, !2.Y_record s howing in detail the amount and natur e of the ex2enses incurred. (Sec. 66 , Revenue Regulations No. 2 .) While a reason- able determination of the amount claimed as deduction may be permitted provided that there is proper basis for some allowance, a taxpayer is not relieved from the burden of substantiating his claimed deductions. Disallowing amounts claimed for deduction merely because there is no available documentar y evidence which will establish the precise amount beyond a reasonable doubt ignores commonly recognized business practices as well as the fact tha t proof may be establ ished by other }

DECISION -

CTA CASE

0. 266 7 - 17 -- credible ev idence.

Nevertheless , where there is evidence t hat t he taxpayer has actually incurred expense s , ·and there i s no credible proof o the amount actually spent, the Comm i ssioner o f Internal Reve nue may mak e as close an approximation as he c a n , bear ing he avily i f he chooses upon the taxpayer whose inexact i tude is of his own making. (See Visayan Ce bu Terminal vs. Collector of Interna l Revenue, L-12798, May 30 , 1960, 108 Phil . 320; Gancayco vs . Collector o f I n ternal Revenue , L-13325, Apr il 20, 1961 , 1 SCRA 980; Zamora vs. Collector of Internal Revenue, L-1528 0 & L-15 289-90 , May 31, 1963, 8 SCRA 16 3.)

In situations like the present case, r espondent could therefore mak e as close a n approximation a s he can , bearing heavily, if he choose s , upon peti tioner whose inexactness in destroying its primary and sup- porting documents i mmediately upon receipt of the letter of authori ty t o e xamine its books of accounts and other r ecords is of its own making.

(Exh. "10", pp. 133-140;

Exhs . " 14" & "F ", pp . 203-205, BIR records .) Accordingly, the Cou r t finds the revised assessment issued by respondent on April 8, 1974 against petit ioner in t he amount of El29 5,28 4 . 16 as deficiency income tax, i n- elusive of in t eres t , for the period from January 1 to June 17 , 1964 , in accordance with law. Pet itioner Rad i o Communication s of the Philippines, Inc., is t herefore ordered to pay the amount of ~295,284 .16 to

- 18 - respondent Commissioner of Internal Revenue as deficiency income tax and interest for the period from January 1 to June 1 7 , 1964, plus the surcharges and interest which have accrued thereon incident to delinquency , pursuant . to Section 5l(e) of the National Internal Revenue Code, as amended.

WHEREFORE, the decision appealed from is ~ ereby affirmed at petitioner's costs.

I CGNCUR:

~~-~t..'uV -~

AMANTE ~~LER

Acting Presiding Judge

l"i ~

I

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