Mendoza v. Commissioner of Internal Revenue

FIRST DIVISION [C.T.A. CASE NO. 10089. February 1, 2023.] JOSE LUIS BATO BATO MENDOZA , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION MANAHAN , J p : This is a Petition for Review filed by Jose Luis Bato Bato Mendoza praying that a judgment be rendered declaring as void the following: 1. Letter of Authority (LOA) issued by Revenue Region No. 7, 2. Tax Assessment issued by Revenue Region No. 7, 3. Formal Letter of Demand (FLD) issued by Revenue Region No. 7, 4. Warrant of Distraint and/or Levy (WDL) issued by Revenue Region No. 7, and 5. Warrant of Garnishment (WOG) issued by Revenue Region No. 7. 1 THE PARTIES Petitioner is engaged in the business of retail sale of hardware, paint, and glass and it is located at 53 Urbano Velasco Ave., Pinagbuhatan, Pasig City 1602. 2 It is duly registered with the Bureau of Internal Revenue (BIR) under Certificate of Registration OCN 3RC0000468065 issued by Revenue Region No. 43B of Pasig City. Respondent Commissioner of Internal Revenue (CIR) is the government official duly designated to collect all taxes, grant refunds, issue and abate tax assessments, among such other duties and responsibilities. He may be served with summons at his principal office located at the 5th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City. 3 FACTS On March 21, 2019, petitioner was informed by Security Bank-Pasig, Mercedes Ave. Branch, where he maintains an account, that his bank account was garnished by the BIR. 4 He was then furnished with a copy of the WOG dated August 8, 2018. 5 On the same date, petitioner received a WDL dated March 21, 2019 issued by Ms. Marivic G. Tulio, Chief of Collection Division of Revenue Region No. 7. 6 On March 27, 2019, petitioner's counsel filed a handwritten letter with the BIR-Revenue Region No. 7, requesting that petitioner be given copies of the Assessment No. 043B-B032-12, together with Notices of Assessment, Demand Letters, and other supporting documents. 7 The BIR furnished petitioner with a copy of the LOA dated July 31, 2015, 8 FLD dated September 27, 2016, 9 and Assessment Notices 10 (FAN) No. 43B-B032-12 dated September 27, 2016, for deficiency income tax and value-added tax (VAT) for taxable year 2012. Petitioner then filed a protest dated April 5, 2019 on April 12, 2019. 11 Thereafter, on May 10, 2019, a letter dated April 25, 2019 was issued by Ms. Marivic G. Tulio, Chief of Collection Division of Revenue Region No. 7, informing petitioner's counsel that the BIR finds no justifiable reason to grant the said protest, since the assessment in question had long become final and executory for failure to file a protest. 12 On June 4, 2019, petitioner filed the present Petition for Review. 13 Respondent filed his Answer to the Petition for Review on September 19, 2019. 14 The Pre-Trial Conference was set and held on November 28, 2019. 15 Prior thereto, petitioner's Pre-Trial Brief was filed on November 22, 2019, 16 and respondent's Pre-Trial Brief was submitted on November 26, 2019. 17 During the said conference, the Court directed the parties to proceed to the Philippine Mediation Center-Court of Tax Appeals (PMC-CTA) for possible mediation. 18 Subsequently, on January 29, 2020, the mediator of the PMC-CTA submitted to the Court a Request for Extension until March 8, 2020, 19 to give the parties additional time to reach an amicable settlement, which was granted by the Court in the Resolution dated February 11, 2020. 20 Meanwhile, for failure of the parties to submit a Joint Stipulation of Facts and Issues (JSFI) within the given period, 21 the Court, in the Resolution dated February 28, 2020, 22 ruled that the right to submit the same was deemed waived. A Joint Manifestation and Motion to Extend Mediation Proceedings was filed by the parties on March 6, 2020, 23 stating that they are in the process of finalizing a compromise settlement of petitioner's internal revenue tax liabilities, and praying for an extension of the mediation proceedings until April 9, 2020. In the Resolution dated June 15, 2020, 24 the Court granted the said Joint Manifestation and Motion. In the meantime, a Pre-Trial Order dated March 12, 2020 was issued by the Court, 25 stating the facts and issues stipulated by the parties, and deeming the termination of the pre-trial. Despite several approved extensions, respondent failed to submit the judicial affidavit of her witness. 26 Thus, the Court, in the Resolution dated July 1, 2020, 27 ruled that the presentation by respondent's counsel of said proposed witness was deemed waived. On July 3, 2020, respondent filed a Motion for Reconsideration and for Suspension of Proceedings, 28 praying that the Pre-Trial Order be reconsidered, and further proceedings be suspended until the resolution and approval of the offer of compromise. In reply to the said motion, petitioner submitted his Comments to the Motion for Reconsideration and for Suspension of Proceedings on August 6, 2020, 29 manifesting that he may not be able to comply with the terms of the compromise settlement agreement. On October 6, 2020, the Court received the Mediator's Report of even date from the PMC-CTA, 30 indicating therein that mediation was unsuccessful. In the Resolution dated October 7, 2020, 31 the Court denied respondent's Motion for Reconsideration and for Suspension of Proceedings. As trial ensued, petitioner presented his testimonial and documentary evidence. He offered his testimony by way of a Judicial Affidavit in lieu of a direct testimony. 32 As respondent's counsel failed to appear during the hearing held on November 10, 2020, the Court granted petitioner's motion to have respondent's right to cross-examine the witness be deemed waived. 33 On November 18, 2020, petitioner's Formal Offer of Evidence was filed. 34 Respondent failed to file a comment thereon. 35 In the Resolution dated January 27, 2021, 36 the Court admitted all of petitioner's offered exhibits, except for Exhibits "P-3", "P-3-A", "P-4", "P-5", "P-7", "P-8", "P-8-A", and "P-9", for failure to present their originals for comparison. Petitioner filed a Motion for (Partial) Reconsideration on February 22, 2021, 37 praying for the partial reconsideration of the denied exhibits, or in the alternative, to attach or made of record as Tender of Excluded Evidence. In the Resolution dated September 22, 2021, 38 the Court granted petitioner's Motion, and admitted Exhibits "P-3", "P-3-A", "P-4", "P-5", "P-7", "P-8", "P-8-A", and "P-9". Petitioner filed his Memorandum on December 10, 2021. 39 Respondent, however, failed to file a memorandum. 40 This case was submitted for decision on March 16, 2022. 41 THE ISSUES As stipulated by the parties, the issues for the Court's resolution are as follows: "1. Whether or not the assessment against Petitioner has become final and executory, thereby depriving this Court of jurisdiction over the case, 2. Whether or not petitioner is liable to pay deficiency income tax (IT) and deficiency value-added tax (VAT) in the amounts of P4,297,761.27 and P1,797,178.53, respectively, for the year 2012, and 3. Whether or not the purported WDL and WOG allegedly issued to collect the assessed deficiency taxes against petitioner are valid and may be enforced." 42 Petitioner's arguments Petitioner first lays down the premise that his residential address is at No. 6 Mimosa St., Greenwoods Executive Village, Pinagbuhatan, Pasig City and his registered business address is located at No. 53 Urbano Velasco Ave., Pinagbuhatan, Pasig City as seen in his Certificate of Registration issued by the BIR. He alleges that the LOA dated July 31, 2015 was issued by the Regional Director Alfredo V. Misajon of Revenue Region No. 7 of Quezon City, who has no jurisdiction over his person or his business as he is under the jurisdiction of Pasig Revenue Region. The LOA is therefore invalid and without any force and effect. Petitioner also denies ever having received the Preliminary Assessment Notice (PAN) and the FAN/FLD for taxable year 2012 and maintains that the assessments are null and void for failure of respondent to prove that these were indeed sent and received by him. Respondent's counter-argument Respondent's sole contention against the Petition for Review is the Court's lack of jurisdiction over the case as the tax deficiency assessments have long become final, executory and demandable for failure of petitioner to file a timely protest in accordance with Section 228 of the 1997 National Internal Revenue Code (NIRC), as amended, as implemented by the relevant administrative regulations. THE COURT'S RULING We find merit in petitioner's arguments and accept them at face value as respondent was remiss in exerting sufficient efforts to rebut them in the course of the trial. This seemingly lackadaisical attitude of respondent's counsel is evidenced by her failure to submit the Judicial Affidavit of respondent's sole witness, Revenue Officer Angelita Jordan, despite a direct Order from the Court for its submission and several extensions granted by the Court to submit the same. 43 This resulted to the imposition of a fine and a waiver to present the aforenamed witness in Court 44 and consequently to a waiver to present any evidence to dispute the allegations of petitioner. No motion for reconsideration was filed by respondent's counsel on this Resolution. Further, respondent also failed to file a memorandum after having been given the opportunity by the Court before the case was submitted for decision. 45 Considering that there were important factual issues raised in the Petition for Review, e.g. , non-receipt of the PAN and the FAN/FLD, the silence of respondent was fatal to its cause and only served to bolster the veracity of petitioner's arguments. It is also in this light, that the Court holds that it has the requisite jurisdiction to take cognizance of the instant Petition for Review contrary to the unsubstantiated claim of respondent and which issue is inextricably linked to the conclusions which the Court will heretofore address. An astute examination of the records of this case reveals that there is no indication that the LOA issued on July 31, 2015 was served to petitioner, 46 prior to the audit conducted by the revenue officers (ROs) of the BIR. Correspondingly, the authority given to the concerned ROs did not take effect. In other words, the said ROs had no authority to examine and assess petitioner. Such being the case, the examination of petitioner was in violation of its right to due process, hence, rendering the resulting assessments void and without any effect. The case of AFP General Insurance Corporation vs. Commissioner of Internal Revenue , 47 is illustrative, and we quote as follows: "The power to assess necessarily includes the authority to examine any taxpayer for purposes of determining the correct amount of tax due from him. Verily the law vests the BIR with general powers in relation to the 'assessment and collection of all national internal revenue taxes. However certainly not all BIR personnel may motu proprio proceed to audit a taxpayer. Only 'the CIR or his duly authorized representative may authorize the examination of any taxpayer ' and issue an assessment against him . That a representative has in fact been authorized to audit a taxpayer is evidenced by the LOA which 'empowers a designated [r]evenue [o]fficer to examine verify, and scrutinize a taxpayer's books and records in relation to his internal revenue tax liabilities for a particular period. In cases where the BIR conducts an audit without a valid LOA or in excess of the authority duly provided therefor the resulting assessment shall be void and ineffectual x x x. xxx xxx xxx The LOA commences the audit process and informs the taxpayer that he shall be investigated for possible deficiency tax assessment x x x. xxx xxx xxx In the exercise of the power to assess and collect taxes, the BIR has the commensurate duty to uphold a taxpayer's fundamental right to due process. Thus, its authority must be understood to take effect only after the CIR or his duly authorized representative issues an LOA and the designated revenue officer serves it upon the intended taxpayer. That a LOA remains unserved signifies that the tax authorities have yet to formally apprise the taxpayer and, consequently, have not commenced actual audit. " (Emphasis supplied) Based on the foregoing jurisprudential pronouncements, it is clear that the power to assess necessarily includes the authority to examine any taxpayer for purposes of determining the correct amount of tax due from the said taxpayer, that such authority is evidenced by the LOA, and that the same authority must be understood to take effect only after respondent or the latter's duly authorized representative issues an LOA, and the designated revenue officer serves it upon the intended taxpayer. In addition to the non-service of the LOA to petitioner, this Court finds it equally significant that the records do not show that the PAN and the FAN/FLD dated September 27, 2016 were duly served to petitioner prior to the issuance of the WDL and the WOG. The contention of non-receipt of these official notices remain unrebutted by respondent for failure to present any witness to shed light on the veracity of petitioner's allegations. Petitioner's right to due process is violated as he has the right to be informed of the factual and legal basis of his alleged tax deficiencies prior to tax collection, as provided under Section 228 of the 1997 NIRC, as amended, which reads: "SEC. 228. Protesting of Assessment . When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings x x x. xxx xxx xxx The taxpayers shall be informed in writing of the law and the facts on which the assessment is made, otherwise, the assessment shall be void . Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond the Commissioner or his duly authorized representative shall issue an assessment based his findings. xxx xxx xxx." (Emphasis supplied) Implementing the foregoing provision, Section 311 of Revenue Regulations (RR) No. 12-99, 48 as amended by RR No. 18-2013, 49 also provides as follows, to wit: "SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment . 3.1. Mode of procedure in the issuance of a deficiency tax assessment 3.1.1. Preliminary Assessment Notice (PAN) If after review and evaluation by the Commissioner or his duly authorized representative, as the case may be it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer a Preliminary Assessment Notice (PAN) for the proposed assessment. It shall show in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based . (see illustration in ANNEX A hereof) If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a Formal Letter of Demand and Final Assessment Notice (FLD/FAN) shall be issued calling for payment of the taxpayer's deficiency tax liability inclusive of the applicable penalties. (Emphasis supplied) An essential part of the due process requirement in the issuance of tax assessments is that the concerned taxpayer be informed in writing of the law and the facts upon which the assessment was made, and that the same taxpayer be given the opportunity to respond and contest the PAN. Moreover, the date of receipt of the PAN is highly significant since it is only upon the lapse of fifteen (15) days from such date will the concerned taxpayer be considered in default, warranting the subsequent issuance of the FLD/FAN. Thus, the indispensability of affording taxpayers sufficient written notice of his or her tax liability is a clear definite requirement. 50 Furthermore, in Commissioner of Internal Revenue vs. Avon Products Manufacturing, Inc., et seq. , 51 the Supreme Court said: " Tax assessments issued in violation of the due process rights of a taxpayer are null and void . While the government has an interest in the swift collection of taxes, the Bureau of Internal Revenue and its officers and agents cannot be overreaching in their efforts, but must perform their duties in accordance with law, with their own rules of procedure, and always with regard to the basic tenets of due process . xxx xxx xxx The Bureau of Internal Revenue is the primary agency tasked to assess and collect proper taxes, and to administer and enforce the Tax Code. To perform its functions of tax assessment and collection properly, it is given ample powers under the Tax Code such as the power to examine tax returns and books of accounts to issue a subpoena and to assess based on the best evidence obtainable, among others. However these powers must 'be exercised reasonably and [under] the prescribed procedure.' The Commissioner and revenue officers must strictly comply with the requirements of the law, with the Bureau of Internal Revenue's own rules, and with due regard to taxpayer's constitutional rights . xxx xxx xxx In carrying out these quasi-judicial functions, the Commissioner is required to 'investigate facts or ascertain the existence of facts, hold hearings weigh evidence and draw conclusions from them as basis for their official action and exercise of discretion in a judicial nature.' Tax investigation and assessment necessarily demand the observance of due process because they affect the proprietary rights of specific persons . xxx xxx xxx Administrative due process is anchored on fairness and equity in procedure . It is satisfied if the party is properly notified of the charge against it and is given a fair and reasonable opportunity to explain or defend itself. Moreover, it demands that the party's defenses be considered by the administrative body in making its conclusions, and that the party be sufficiently informed of the reasons for its conclusions . xxx xxx xxx The importance of providing taxpayer with adequate written notice of his or her tax liability is undeniable . Under Section 228, it is explicitly required that the taxpayer be informed in writing of the law and of the facts on which the assessment is made, otherwise, the assessment shall be void. Section 312 52 of Revenue Regulations No. 12-99 requires the Preliminary Assessment Notice to show in detail the facts and law, rules and regulations, or jurisprudence on which the proposed assessment is based x x x. 'The use of the word 'shall' in Section 228 of the [National Internal Revenue Code] and in [Revenue Regulations] No. 12-99 indicates that the requirement of informing the taxpayer of the legal and factual bases of the assessment and the decision made against him [or her] is mandatory.' This is an essential requirement of due process and applies to the Preliminary Assessment Notice , Final Letter of Demand with the Final Assessment Notices, and the Final Decision on Disputed Assessment. xxx xxx xxx The Commissioner's total disregard of due process rendered the identical Preliminary Assessment Notice , Final Assessment Notices, and Collection Letter null and void, and of no force and effect .' (Emphasis supplied) It is worthy to emphasize that tax collection must be preceded by a valid assessment to allow the taxpayer to protest the assessment, present their case and adduce supporting evidence. 53 Glaringly, the subject tax collection was not preceded by a valid assessment, as it is clear that petitioner was made aware of the existence of the assessments for taxable year 2012 only after the BIR had already initiated the civil remedies for the collection of alleged deficiency taxes via the issuance of the WOG dated August 8, 2018 and WDL dated March 21, 2019. In other words the said tax assessments were received by petitioner only after the tax collection phase had already begun. A classic case of the cart proceeding before the horse. These are clear indications that the BIR or respondent proceeded heedlessly with tax collection without first establishing a valid assessment which is evidently violative of the cardinal rule in administrative law that the taxpayer must be accorded due process. 54 To stress, tax assessments issued in violation of the due process rights of a taxpayer are null and void, 55 and a void assessment bears no valid fruit. 56 Such being the case, the subject tax assessments, and the fruits thereof, i.e. , the WOG dated August 8, 2018, and the WDL dated March 21, 2019, cannot be validly enforced against petitioner. Moreover, for being void, the subject tax assessments could not have attained finality, so as to have the effect of depriving this Court of jurisdiction to entertain the present case. Verily, it becomes unnecessary to address the remaining issues and arguments raised by the parties. WHEREFORE , in light of the foregoing considerations, the present Petition for Review is GRANTED . Accordingly, the BIR's WOG dated August 8, 2018, WDL dated March 21, 2019, FLD dated September 27, 2016, and FAN No. 43B-B032-12 dated September 27, 2016, for deficiency income tax and VAT for taxable year 2012, all issued against petitioner, are CANCELLED and SET ASIDE . Consequently, respondent is ENJOINED and PROHIBITED from collecting the alleged tax deficiencies embodied in the FAN/FLD issued against petitioner. SO ORDERED. (SGD.) CATHERINE T. MANAHAN Associate Justice Roman G. del Rosario, P.J. and Marian Ivy F. Reyes-Fajardo, J. , concur. Footnotes 1. Statement of the Case, Pre-Trial Order dated March 12, 2020, Docket, p. 200. 2. Refer to pars. 2, 3 and 4 Facts Admitted Pre-Trial Order dated March 12, 2020, Docket, p. 201. 3. Par. 1, Id. 4. Refer to Exhibit "P-11" (Q&A Nos. 24 to 33), Docket, p. 143. 5. Id. and Exhibit "P-3", Docket, p. 272. Refer also to Par. 2, Answer Docket, p. 83. 6. Refer to Exhibit "P-11" (Q&A No. 38), Docket, p. 144 and Exhibit "P-4", Docket, p. 273. Refer also to Par. 2, Answer Docket, p. 83. 7. Refer to Exhibit "P-11" (Q&A Nos. 47 to 49), Docket, p. 145; and Exhibit "P-5", Docket, p. 274. 8. Exhibit "P-7", Docket, p. 290. Refer also to Par. 2, Answer, Docket, p. 83. 9. Exhibit "P-9", Docket, pp. 293-296. Refer also to Par. 2, Answer, Docket, p. 83. 10. Exhibits "P-8" and "P-8-A", Docket, pp. 291 and 292, respectively. 11. Refer to Exhibit "P-11" (Q&A No. 71), Docket, p. 148 and Exhibit "P-6", Docket, pp. 275 to 282. 12. Refer to Exhibit "P-11" (Q&A No. 76), Docket, p. 148 and Exhibit "P-1", Docket, pp. 30 to 31. 13. Docket, pp. 12 to 29. 14. Docket, pp. 83 to 87. 15. Notice of Pre-trial Conference dated October 23, 2019, Docket, pp. 88 to 89. Minutes of the hearing held on and Order dated November 28, 2019, Docket, pp. 153 to 162. 16. Docket, pp. 92 to 99. 17. Docket, pp. 150 to 152. 18. Refer to the Minutes of the hearing held on, and Order dated November 28, 2019, Docket, pp. 153 to 162. 19. Docket, p. 174. 20. Docket, pp. 192 to 193. 21. Records Verification dated February 10, 2020 issued by this Court's Judicial Records Division, Docket, p. 178. 22. Resolution dated February 28, 2020, Docket, pp. 196 to 197. 23. Docket, p. 198. 24. Docket, pp. 211 to 212. 25. Docket, pp. 200 to 207. 26. Refer to respondents Motion for Additional Time to File Judicial Affidavit dated December 13, 2019 and February 7, 2020, Docket, pp. 169 to 170 and 175 to 176, respectively Resolutions dated January 17, 2020 and February 28, 2020, Docket, pp. 173 to 174, and 196 to 197, respectively; and Records Verification dated June 4, 2020, issued by this Court's Judicial Records Division, Docket, p. 208. 27. Docket, pp. 218 to 219. 28. Docket, pp. 220 to 221. 29. Docket, pp. 236 to 237. 30. Docket, p. 243. 31. Docket, pp. 251 to 252. 32. Exhibit "P-11", Docket, pp. 139 to 149. Minutes of the hearing held on and Order dated November 10, 2020, Docket, pp. 256 to 259. 33. Refer to the Transcript of Stenographic Notes (TSN) taken at the hearing held on November 10, 2020. 34. Docket, pp. 265 to 268. 35. Records Verification dated December 9, 2020 issued by this Court's Judicial Records Division, Docket, p. 320. 36. Docket, pp. 326 to 327. 37. Docket, pp. 328 to 336. 38. Docket, pp. 346 to 352. 39. Docket, pp. 353 to 372. 40. Records Verification dated March 1, 2022 issued by this Court's Judicial Records Division, Docket, p. 375. 41. Resolution dated March 16, 2022, Docket, p. 377. 42. Issues, Pre-Trial Order dated March 12, 2020, Docket, p. 202. 43. Court Resolution dated February 28, 2020, Court Docket, pp. 196-197. 44. Court Resolution dated July, 2020, Court Docket, page 18. 45. Records Verification Report dated March 1, 2022, Court Docket, page 375. 46. Exhibit "P-7", Docket, p. 290. Refer also to Par. 2, Answer , Docket, p. 83. 47. G.R. No. 222133, November 4, 2020. 48. SUBJECT: Implementing the Provisions of the National Internal Revenue Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties and Interest and the Extra-Judicial Settlement of a Taxpayer's Criminal Violation of the Code Through Payment of a Suggested Compromise Penalty. 49. SUBJECT: Amending Certain Sections of Revenue Regulations No. 12-99 Relative to the Due Process Requirement in the Issuance of a Deficiency Tax Assessment. 50. Commissioner of Internal Revenue vs. Fitness By Design, Inc. , G.R. No. 215957, November 9, 2016. 51. G.R. Nos. 201398-99 and 201418-19, October 3, 2018. 52. Now Section 3.1.1 of RR No. 12-99, as amended by RR No. 18-2013. 53. Commissioner of Internal Revenue vs. Unioil Corporation , G.R. No. 204405, August 4, 2021. 54. Refer to Commissioner of Internal Revenue vs. Reyes, et seq. , G.R. Nos. 159694 and 163581, January 27, 2006. 55. Commissioner of Internal Revenue vs. Avon Products Manufacturing, Inc., et seq. , G.R. Nos. 201398-99 and 201418-19, October 3, 2018. 56. Samar-I Electric Cooperative vs. Commissioner of Internal Revenue , G.R. No. 193100, December 10, 2014.