CTA Case No. 4206

DECISION

-· 2 -· application was approved by the BOI on October 28, 1975 <Exh.

"E", p.

54 C.T.A.

Recm~d>.

Thr.ts, when petitioner filed orr April 13, 1976 its Cc•t~pc•rate Income Tax Return for calendar year ended December 31' 1975, it claimed as a deduction from its taxable i I"ICC•me the amourrt P1, 143,000.00 reinvested for expansion. The decisiorr of resporrderrt relies chiefly on the poirrts uporr which the BOI had earlier decided the cc·r·rtrc•versy orr the availmerrt c•f petitioner of incentives under R.A. 5186, to wit= "a) Avai lmerrt of irrcent ives by BO I ·-registered firms at~ e not covered by the Statute of limitations provided in Section 318 of the Tax Code; and b) Everr asst.trn i r.g wit hc•ut adm ]. t t i rrg t t1at ava i 1 meYrt s of i Yrcerrt ]. ves by BO I - re gist ered firm s are covered by the Statute of limitations provided in Section 318 of the Tax Code, the period of l.im].tatir.ms r.tpoYr assessrnent arrd collection of th e abovementioned deficiency tax for 1975 from Mat 1 ing IYrdustrial Cot~porat iorr has not prescribed yet because the five (5) year peric•d was susperrded and started to r~u n on January 23, 1981 OY'rly, wherr the firm submitted its Yrotice c•f the date of ordering of the machinery and equipment s ubject of the application for expansion reirrvestrneY'rt allowarrce for 1975." Petitiorrer, on the other haY'rd, cc•rrterrds that the assessrneY'rt of responderrt havirrg beeY'r received 174 ... 3 -- years from date of filing of taxpayer's return on April 13, 1976 carmr.:•t be errfot•ced as it vir.:olates the five - year peri od of limitation provided for in Sect i r.:orr 318 of the Nat i r.:ona 1 I rrt err·r.'l l Reverfl.te Cr.:ode

( N I RC) •

Sectir.:on 318 prr.:ovides: "Pet•ir.:•d c•f 1 irnitat ic•n upr.:on assessment and collectir.:on. - Exsept as pt'c•vided in the succeeding section, i nterrra 1 reverr•.te taxes shall be assessed within five years after the retr.wrr was filed r.:md no proceedi ng in court without assessment for the collection of such t a xes shall be begun aft~r the e><pi.rEi\t i.c•r·r of s r.tch peric•d. For the pr.tt' pose •:•f this sect i orr, a ret ut·r, filed before the last day preset' i bed by 1 aw sh a J. J.

be considered as filed on such day; Provided that this limitati on shall not apply to cases already investigated prior to the approval ~·f this Code."

pet it i r.:•ner ,\1\lterrrat ively co:::•nter,ds that respondent erred in assessing it of the the five (5) yeii!\r period started tc• t't..m orrly on J.:mr.1ary 21, 1981, the date it submitted rrr:::•tice of ordering of the machinery and equipment subject of the Ci\ppl icti\t ir.m ii!\llowance for 1975. e><parrsic•n rei r.ves t merrt Thi s contention is grounded on 1 ,_, ( i.)

petiti..::mer's readir.g of Sectic•r• 7 <h> of R.A.

No.

5195 which allegedly r.ei ther ir1dicates insinuates that the reckoning period, assuming that the five year period of 1 imitat ic•r• is s•.lsper.ded, is the date of the notice of ordering of equipment. Section 7 (h) of R.A. No. 5185 provides: "h) Deduc tic•n fot' E><par.sior, Reinvestment.

When a registered enterprise reinvests its undistributed profit or surplus , whet t1et' from registered c•pet' at i or.s or r•c•t, by actual trar.sfer thereof tc• the capital s tocH.

c•f th e corporation for procurement of machine r y, equipment and spare part s previous ly approved by the Bc•ard ur.det' subsections "d" ar1d "e" hereof or for expansion of machi nery and equipment used in prcoduc tic•r• ot' fot' the cc•r•strl.lctior, of th e buildir.gs, imprc•vemer.ts ot' other facilities for the ir.sta.llatior. c•f the said mac hir,et'Y and equipment , the amount so reir.vested, to the e><tent of 25'1- , 37 112 , 50Y. ir• case of r•C•r•- pior.eet' project s, and to the extent of 50'1-, 75'1-, 100'1- iY'I th e case c:•f pir.meet' projects, the appropriate percentage to be determined by the Board for each industry taking into account the relative risk, technology transfer and fall - out, export potenti al , incremental labor, use of l c•ca lly manufactured machinery and equipment and domestic raw materials, shall be allowed as a deduction fro m its taxable income in the year in which s uch reinvestment was mad e ;

Provided, ( 1 > That prior approval of the E«c•ard of such t"eir.vestmer.t was o btained by the registered enterprise planning such 178 ..... 5 .....

reinvestment, and <2> That the registered enterprise does not reduce its capital s tock represented by the reir.vestmer.t within seven (7) years from the date such reinve•tment was made.

In the event the registered enterpt~ise dc•es r.ot ordet~ the r.1ach i r.et~ y ar·.d eq •.1 i pr11er1t with i. r, two:• (2 ) years from the date reivestment was made or reduces capital stock represented by reinvestment within a period sever, <7> years ft~c•m the date of reinvestment, a recomputation of the ir.cml1e tax 1 iabi 1 ity thet~ efm~e s hall be made fc:•t~ the peri c•d whem the deduction was made, and the proper taxes shall be assessed and paid with interest.

the its the C:•f The answer to the question of prescription of the assessment lies on the relative effect that may be d i scr.:.vered Sect i c•r• 7 <h) of R. A.

No .

51 9G may have upon Section 319 of the NIRC. As this is a matter of interpret a tion, Section 25 (c) •::tf R. A.

No.

5196 w i. 11 set~ve c•t.n~ purpc•se as it provides:

"Sec.

25.

Applicability and Interpretat ion.

In interpreting and applying the provisions of this Act, the followir·•g shall .

be observed:

(c) Resctl.vi.r•g Doubts.

All doubts cor.c errlir·~~ the ber.efit s and ir.cer•t ives grar,ted er.terprises ar1d 177 .

investors by thas Act shall be resoived in tavor of investors and renistered investors.

Un the manner of the application of the law preseribinn a neriod of limitation for collection of internal revenue taxes. the case (Reoublic v. Ablaza, 108 Fhil. 110%, L108, {C1960]) cited bv petitioner 2r18 noteworthy as the Supreme Court Guides us in this wises “the law orescribinng a limitation ot actions for the collection of the income tax is beneficial both to the Government and to 1ts citizens: to the Government becanse tax officers would be oblinoed to act oromotiy in the making of ABSesanent, and to citizens because after the lapse of the period ef orescrintion citizens wokkd Have a feelinn of security anainat unscrupulous tax anents who wilt alwavs find an excuse ta insnect the hooks af taxpayers. not to determine the l@tter’s real liability. but to take advantane of every onportunity to molest peaceful, law-abidinna citizens. Without such a leaal defense tanoavers would furthermore be under oblinatian to alwavs keep their books and keep them oven for inspection subject to harassment ty unscrupulous tax anents,. the law on prescription being a remedial measure should be. interoreted in. a wav conclusive to bringing... about. the beneficient ouroose of affording protection to the taxpayer within 178 the contemplation of the Commissicr which recommended the. approval of the law." (Underscering supplied).

We de not see any statement in Section 7 (h) which will lead us to agree with the pasition af the Commissioner that the availment af brewriel vee under R.A. Ne. S186 is net covered by the periad of limitation in Section 318 of the NIRC, ner that the five (5) year period in Section 318 as applied ta said availment of incentives is counted oar starts to run only from the date the registered enterprise submits netice af order of equipmert. The significant phrase in Section 7 (h) reads ~ "In the event. the registered enterprise does net order the machinery and. equipment. within two (2) years from the....date.the reinvestment owas made xxx, a recomputation of the ircome tax liability therefore shall bei made for the peried when the deduction was made, and the proper taxes shall be assessed and paid with interest." This presupposes a case where the tax incentive through a deduction for expansion reinvestment is availed, which incentive works in this mariners "When a registered enterprise reinvests its undistributed profit er surplus, xxx by actual transfer thereof ta the capital stock of the ecarpoarat lor far procuremert of machinery, equipment and spare parts “KK or for expansion af 179 -· 8 ...

m<.:\ct1 i net'Y a r1d eq u i pr11er1t >< x x t 11 ~ amount so reinves ted, xxx to the e><t smt c•f 5 0Y., 75'1., t OOY. i r, case r:rf pi r:meet' prc•j ect ;, x x >< sh a 11 be allowed as a deduction f r om it s taxable income in t h e year in which such t'e i r.vest ment was made: >< >< ><" S imply put therefore, when a deduction for e><par.sion t'einvestmer.t is c laime d ar1d allowed , t he r e gistered enterprise in t he case of procurement or ex par.s i or• c•f mach i. r•et'Y ar•d eq 1.1 i. pment i s ~J i ver. a maximum of two (2) years within which t o order t he mact1 i r.ery and Fa il. i r•g in this requirement, a recomput at ion of the income tax 1 i.abi.l ity fot' s•.tch pet'iod that the ded•.1c t ic•r• was made shall be done and proper t axes s hall be assessed.

Section 7 <h> s peaks o f assessment, negating the first theory of respondent on the no n- applicability of Section 3 18 of the NIRC. Section 318 i s the bas ic law Con the pet' i cod Crf lirnitati C•Y'I for assessment of int ernal revenue taxes and t h ~re is no provision in R.A. No. 5186 made to substitute t h i s t' 1.11 e • We see, t1owever, ar• i r.t emt ic•n in R. A. No. 5186 to s uspend the application of the rule on limitati c•n c•f actior.s fot' collectior• pt'ovided in Sect ic•r• 318 of the N I RC. That is, the five <5> year period c•f 1 i mit a t i or• is s •.lsper.ded ar1d is r.ot 180

- 9 - applied fot' the two (2) yeat'S th a t the t' e~Ji s tet' e d enterprise is given to order the machinery and equi prnent and only aft et' said pet' i od wi 11 recomputation and assess ment of proper taxes be made.

The suspension of the application of Section 318 of the NIRC for two years is but conducive to the O:•f R. A.

No.

5185 pt' OV i d i Y"1g benefits and incentives to pioneer and non- pioneer enterprises under its scope. We car-.not discet'n ar-.y conternplat io::•n of R. A.

No.

5185, aft et' pet' usal of its pt'ovisions, to suspend the application of Sect ior-1 318 of the NIRC for as long as the registered enterpri s e has not submitted notice of order of the mach inery and equipment.

does not the mach i net'Y and eq u i pmer-.t • Respc•r-,dent, ir-1 fut i 1 ity, has go:•ne as fat' as arg u ing that the duty belongs to the petitioner to recompute its tax liability ( p.

5 Respor-.dent' s Memc•t'andum, p.

8 1 CTA, Recot'd).

The Co rnmissionet' cannot pas s on t h is duty for as held by the Supreme 181

- 10 - ,· Cour~ t in a case '<British Traders' Insurance Co., Ltd. v. Commissioner of Interna l Revenue, 13 SCRA 719, 72G

U9G5J >

"xxx the e><ami nation, ver~ifica tior. ar•d audit of petitioner~ 's ir.ceor.le tax r~etur~r. s af ter~ this filing (wh ich ) lawfully belor.g s to the Commissioner of Internal Revenue who has the

r. ecessat~ y f ac i 1 it i es and pet~s or.n e 1 to conduct the same".

Moreover, respondent in so arguing for t h is duty on petitionet~ h as t~ aise d fot~ the fi t~s t time the issue of fraud or fa l sity, a c:lefer.se r.ot pleaded previ ous ly in hi s Answer. Thi s defe nse is Rule 9 of the Ru l es of Court , thus should be deemed to have been waived by respondent. Thi s c h a r.ge i r• peos it i r:•r• by a l so goes against the princ iple enunciated in the case of Agui naldo Industries Corporation v. Commissioner of Internal Revenue (11 2 Sera 13G, 140 [1982J> , th a t on ap peal a pat~ ty may r.ot be p et~ m itted · to assume a diffet'ent than that he had assumed the review, but determine and decide for the first time a questi on not raised in the a dmini strative forum. In this case, pet it i onet~ t~ ef l e cted the deduction of Pi , 143, 000. 00 reinvested for expansion in it s Inco me Tax Retu r n for the calendar year 1975 182

- PT} -

filed on April 13, 1976. (Exh. "A'). Respondent, therefore, reckoning the two (2) - year suspension period ard the five (3) ~ year period a limitation, had until April 15, 1983 ta make the assessment. Since the assessment was made emily om Deteber 15, 1985 (Exh. "B"), it is barred by the period of limitation imposed under Sectian 318 of the NIRC.

WHEREFORE, judgment is rendered in favor of petitioner.

The Commissioner of Internal Revenue is hereby ordered a) To WITHDRAW and CANCEL his assessment noted as SARD-IT 73/85 1928 issued against petitioner for being barred by the period of limitation provided in Section 318 of the National Internal Revenue Code of 1977.

b) To cease and desist from enforcing the aforesaid assessment and collection the tax for the reason above stated.

I CONCUR:

Gus Ce CQ.

ERNESTO D. ACOSTA Presiding Juctqe CERTIFICATION I hereby certify that this decision was reached after due consultation between the members of the Court of Tax Appeals in accordance with Bection 13, Article VIII of the Constitution, oreo D. AOSTA Presidinn Jude Court of Tax Anneals