Isabela Cultural Corp. v. Commissioner of Internal Revenue

[C.T.A. CASE NO. 5211. February 26, 2003.] ISABELA CULTURAL CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N This is a remanded case involving an assessment for deficiency income tax of P333,196.86 and deficiency expanded withholding tax of P4,897.79, inclusive of surcharge and interest, for the taxable year ended December 31, 1986. Petitioner is a corporation sole duly organized and existing under the laws of the Philippines with office address at Xavier House, 2307 Pedro Gil Street, Sta. Ana, Manila. On February 23, 1990, petitioner received an assessment letter dated February 9, 1990, assessing it of deficiency income tax in the amount of P333,196.86 ( Exhibit 3 ) and deficiency expanded withholding tax of P4,897.79 ( Exhibit 5 ), inclusive of surcharge and interest, for the taxable period from January 1 to December 31, 1986. On March 23, 1990, petitioner protested the said deficiency assessments and filed a request for reconsideration with the Bureau of Internal Revenue (BIR). 1 In support of its request for reconsideration, petitioner sent additional documents to the BIR on April 18, 1990. 2 On February 9, 1995, petitioner received a Final Notice Before Seizure from the respondent dated November 10, 1994, demanding petitioner to pay, under threat of collection through summary remedies, the assessed sum of P338,094.65 for the taxable year 1986 ( Exhibits ZZ; 6 ). Petitioner claims that respondent's right to collect the subject deficiency taxes has already prescribed since more than three (3) years had lapsed from April 5, 1991, the date of expiration indicated in the Waiver of the Statute of Limitations. 3 Petitioner likewise considered said final notice as the final decision of the Commissioner of Internal Revenue on its protest filed on March 23, 1990. Consequently, it filed a Petition for Review with this court on March 9, 1995. In a decision promulgated on December 15, 1997, this court concurred with respondent's stance that the Final Notice Before Seizure could not be considered as the final decision of the Commissioner of Internal Revenue which is appealable to the Court of Tax Appeals (CTA) because it was merely signed by the Assistant Chief of the Accounts Receivable Division of the BIR and it did not state that it was the final decision appealable to this court. On appeal to the Court of Appeals, 4 the appellate court did not agree with the ruling of the Tax Court for the following reasons, among others: First . The subject final notice before seizure renders hopeless petitioner's request for reconsideration of respondent CIR's assessment. Such being the case, the issuance thereof is tantamount to denial of the petitioner's request for reconsideration of said assessment. Second . It is a long-settled tax jurisprudence that a demand letter reiterating the payment of tax deficiency amounts to a decision on a disputed or protested assessment. In sum, the Court of Appeals held that respondent's Final Notice Before Seizure, dated November 10, 1994, constitutes a decision appealable to the CTA. Accordingly, the assailed decision was reversed and set aside and remanded to the CTA for proper disposition. 5 The Commissioner of Internal Revenue then filed a Petition for Review on Certiorari with the Supreme Court 6 alleging that the Court of Appeals erroneously concluded that the Final Notice Before Seizure issued by the Acting Chief Revenue Collection Officer for Revenue Region No. 6 is the CIR decision appealable to the CTA. According to the petitioner-Commissioner, there is nothing in the said notice that it was the Commissioner's final determination of the disputed assessment. The notice was merely a demand for the payment of assessment, with a warning that failure to pay would constrain the regional district office of the BIR to collect assessment through summary remedies. Further, it was not even signed by the Commissioner, or signed for and in his behalf. The Supreme Court settled the matter on July 11, 2001 by declaring that "a final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. . . . In the instant case, the second notice received by private respondent verily indicated its nature that it was final ." It is the view of the High Tribunal that: "Indisputably, respondent received an assessment letter dated February 9, 1990, stating that it had delinquent taxes due; and it subsequently filed its motion for reconsideration on March 23, 1990. In support of its request for reconsideration, it sent to the CIR additional documents on April 18, 1990. The next communication respondent received was already the Final Notice Before Seizure dated November 10, 1994. In the light of the above facts, the Final Notice Before Seizure cannot but be considered as the commissioner's decision disposing of the request for reconsideration filed by respondent, who received no other response to its request. Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIR's final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that respondent was being given "this LAST OPPORTUNITY" to pay; otherwise, its properties would be subjected to distraint and levy. How then could it have been made to believe that its request for reconsideration was still pending determination, despite the actual threat of seizure of its properties?" The decision of the Supreme Court became final and executory on August 22, 2001. 7 On July 17, 2002, Isabela Cultural Corporation filed a motion with this court to set the case for further proceeding. In the hearing of September 2, 2002, counsel for the petitioner submitted the case for decision based on the Court of Appeals decision as affirmed by the Supreme Court. Counsel for the respondent joined in its motion. 8 For proper disposition of this case, the issues that need to be resolved are: (1) Whether or not respondent's right to collect the subject deficiency taxes has already prescribed; and (2) Whether or not the assessment issued against petitioner was valid. Petitioner posits that respondent's right to collect the alleged deficiency taxes for taxable year 1986 has already prescribed for the simple reason that when petitioner received the Final Notice Before Seizure on February 9, 1995, more than three years had lapsed from April 5, 1991, the last day agreed upon on the Waiver. We do not agree. Section 203 of the then Tax Code provides: SEC. 203. Period of limitation upon assessment and collection . Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided , That in a case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. In relation thereto, Section 223(c) provides that "any internal revenue tax which has been assessed within the period of limitation above-described may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax." Petitioner filed its corporate annual income tax return for 1986 on April 15, 1987 ( Exhibit A-2 ). In ordinary circumstances, respondent should have three years therefrom or until April 14, 1990 (1988 being a leap year) within which to assess petitioner's internal revenue taxes for the year 1986. However, by virtue of a Waiver of the Statute of Limitations ( Annex "D", Petition for Review ), petitioner stood firm that respondent's right to assess had been extended up to April 5, 1991. But respondent denies the validity of the said waiver. In fact, as one of his Special and Affirmative Defenses, respondent categorically stated, viz : EDATSI The Waiver of the Statute of Limitations presented and signed by the petitioner was not accepted by respondent, hence, of no legal force and affect (sic) whatsoever and will not, in any way, bind the respondent. We concur with the respondent. Section 223(b) [now Section 222(b)] which provides for exceptions as to the period of limitation of assessment and collection of taxes, is clear, thus: (b) If before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time , the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon (emphasis supplied). Based on the allegation of the respondent and the document in question, the waiver was indeed not accepted by the Commissioner of Internal Revenue. There was no signature nor initials of the Commissioner or even that of an authorized representative signing for and in behalf of the Commissioner. Since the law is quite explicit that such agreement to extend the period to assess must be agreed in writing by both the Commissioner and the taxpayer, the waiver submitted by the petitioner has no force and binding effect. Be that as it may, respondent's right to collect the alleged deficiency taxes has not prescribed because the running of the statute of limitations for collection was suspended when petitioner requested for a reconsideration in a letter dated March 22, 1990 ( Annex "B", Petition for Review ). Section 224 [now Section 223] of the Tax Code provides some instances wherein the statute of limitations to assess and collect are being suspended, to wit: SEC. 224. Suspension of running of statute . The running of the statute of limitation provided in Section 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner ; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided , That, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines (emphasis ours). Prescinding from the above, the running of the statute of limitation is tolled when a taxpayer requests for a reinvestigation which is granted by the Commissioner. In the instant case, petitioner's request for reconsideration was granted in a sense that a reinvestigation or re-examination of petitioner's case was presumably made since petitioner did not receive any communication from the respondent until the Final Notice Before Seizure. Besides, the Supreme Court already settled this matter when it held that: "In the present case, petitioner does not deny receipt of private respondent's protest letter. As a matter of fact, it categorically relates the following in its "Statement of Relevant Facts": "3. On March 23, 1990, respondent ICC wrote the CIR requesting for a reconsideration of the assessment on the ground that there was an error committed in the computation of interest and that there were expenses which were disallowed. 4. On April 2, 1990, respondent ICC sent the CIR additional documents in support of its protest/reconsideration. The letter was received by the BIR on April 18, 1990. Respondent ICC further executed a Waiver of Statute of Limitation (dated April 17, 1990) whereby it consented to the BIR to assess and collect any taxes that may be discovered in the process of reinvestigation, until April 3, 1991). Having admitted as a fact private respondent's request for reconsideration, petitioner must have passed upon it prior to the issuance of the Final Notice Before Seizure ." (Emphasis supplied.) Stated otherwise, in view of the request for reconsideration filed by the petitioner herein which was granted by the respondent Commissioner, the period to collect from petitioner was suspended. The suspension of said period ended when petitioner received the Final Notice Before Seizure on February 9, 1995. As already discussed, the subject final notice had already been held by the appellate court and affirmed by the Supreme Court as the final decision rejecting petitioner's request for reconsideration and which is appealable to this court. From the foregoing, it is definite and evident that the government's right to collect the alleged deficiency taxes has not yet prescribed. As to the second issue, petitioner asserts that the assessment issued against it was without legal and factual basis. The alleged deficiency income tax of P333,196.86 resulted from: a) the alleged understatement of P429,187.47 on petitioner's interest income from the three promissory notes due from Realty Investments, Inc. arising from petitioner's sale of parcels of land to the latter; and (b) the disallowance of petitioner's claimed expense deductions for professional fees and security services in the amounts of P496,409.77 and P41,814.00, respectively, or a total amount of P538,223.77, on the basis that the same were allegedly prior year's (1985) expenses. The deficiency expanded withholding tax of P4,897.79 arose from the alleged failure of petitioner to withhold 1% expanded withholding tax in the amount of P2,448.90 on its claimed deductions for security services amounting to P244,890.00. Respondent, however, counters that: a) The assessment is valid and correct and the taxpayer has the burden of proof to impugn its validity (Behn Meyer & Co. v. Collector of Internal Revenue, 27 Phil. 647). Petitioner miserably failed to present concrete evidence to overcome the presumption of validity and correctness attached to the assessment; b) The assessment was made in accordance with law based on facts, as a result of the investigation conducted by the revenue officers of the respondent. From the BIR records, the following is an itemized schedule of petitioner's deficiency assessment: 8a Taxable income (loss) per return P(114,345.00) Add: Additional Taxable Income (1) Interest income P429,187.47 (2) Other income Rent income 9,169.64 Investment service income 23,725.36 (3) Disallowance of prior year's expenses (a) Professional fees (1985) 496,409.77 (b) Security services (1985) 41,814.00 1,000,306.24 Net Taxable Income per investigation P885,961.24 Tax due thereon P310,086.43 Less: Tax Paid 143,488.00 Balance P166,598.43 Add: 25% Surcharge 41,649.61 Sub-total P208,248.04 Add: 60% Interest 124,948.82 Total Amount Due and Collectible P333,196.86 =========== Expanded Withholding Tax Security Services P2,448.90 Add: 25% Surcharge 612.22 Sub-total P3,061.12 Add: 60% Interest 1,836.67 Total Amount Due and Collectible P4,897.79 =========== In a letter dated February 5, 1990, petitioner agreed on the taxability of rent income and investment service income, thus: 9 "1. Our client agrees to pay the deficiency income tax due on account of the taxability of the following items: Rent Income 9,169.64 Investment service income 23,725.36 Total 32,895.00 Tax (35%) 11,513.25 Surcharge (25%) 2,878.31 Interest (20%) 15 April 1987 to 15 Feb. 1990 8,154.26 Tax Payable 22,545.82 ======== The above admitted tax liabilities for rent income and investment service income were paid by petitioner on February 23, 1990 as evidenced by Payment Order Nos. C7160681 and C7160680 ( Exhibits XX-1 and YY-1 ) and Confirmation Receipt Nos. B18470505 and B18470506 ( Exhibits XX and YY ). However, with respect to petitioner's liability for deficiency income tax, more particularly, the deficiency income tax arising from interest income in the amount of P429,187.47 and the disallowance of claimed expense deductions for professional fees and security services in the sum of P538,223.77, petitioner disagreed with respondent's findings. Moreover, petitioner questioned the deficiency expanded withholding tax of P4,897.79 arising from the alleged failure by petitioner to withhold 1% expanded withholding tax of P2,448.90 on its claimed deductions for security services amounting to P244,890.00. Petitioner contends that its accrued interest income should not be computed by compounding interest. Instead, it should be based on simple interest following the manifest intention of the contracting parties and in the absence of a contractual stipulation to the contrary. Petitioner asseverates that BIR Examiner Rachel Gina G. Vergara arrived at additional interest income of P429,187.47 through the following computation ( BIR Records, page 114 ): Particulars Principal Interest Income PN No. 1 6.30.78 12% P3,463,265.00 P415,591.80 PN No. 2 4.12.84 14% 6,025,107.00 843,514.98 PN No. 3 8.21.84 14% 3,813,445.00 533,882.30 P13,301,817.00 Per Investigation P1,792,989.08 Per Schedule 1,363,801.61 Difference P429,187.47 =========== (Taxable Income) It is the averment of the petitioner that the principal in the total amount of P13,301,817.00 which was used as basis in computing for the additional accrued interest income for 1986 was determined by compounding accrued interest receivable with the remaining balance of principal, as follows: Accrued Interest Remaining Balance Receivable of Principal Principal PN No. 1 P607,833.94 P2,855,430.94 P3,463,265.00 PN No. 2 1,616,586.67 4,408,520.00 6,025,107.00 PN No. 3 1,158,045.40 225,400.00 * 3,813,445.00 P3,382,466.01 P9,919,350.94 13,301,817.00 =========== According to the petitioner, respondent's method of computing interest income (by multiplying the interest rate by the sum of the accrued interest receivable and the remaining balance of the principal) is erroneous for being contrary to the manifest intention of the parties and the contractual stipulation between them. Hence, contrary to law. Respondent, on the other hand, manifests that the computation of interest per investigation was made in accordance with the contract. 10 We agree with the petitioner. As a general rule, accrued interest (interest due and unpaid) shall not earn interest except (a) when stipulated by the parties ( Article 1959, New Civil Code ) and (b) when judicially demanded on the obligation consisting in the payment of money and the debtor incurs in delay ( Article 2212, New Civil Code ). In the case at bar, records reveal that the computation made by the respondent on petitioner's interest income is not in accordance with the law or contract. As can be gleaned from petitioner's "T-Account of Accrued Interest Receivable, Long-term Notes Receivable and Accrued Interest Income" ( Exhibits K, L & M ) and as noted in petitioner's 1986 Financial Statements ( Exhibit A-7 ), the amounts used by the respondent as "Principal" in computing petitioner's interest income represent the sum of the accrued interest receivable and the remaining balance of the principal. Apparently, the total interest income of P1,792,989.08 as computed by the respondent comprises compounded interest, i.e., interest on the sum of the unpaid interest and principal. A careful perusal of the Deeds of Sale with Mortgage ( Exhibits E, G & I ) shows that the three promissory notes executed by Realty Investments, Inc. in favor of petitioner ( Exhibits F, H & J ) arose from the sale of petitioner's parcels of land to the former. Nowhere is it stated in the said documents that the interest to be paid by Realty Investments, Inc. shall be compounded interest nor is it shown that Realty Investments, Inc. was in default and that there was a judicial demand from the petitioner for the payment of the obligation already due. In other words, petitioner committed no error in determining the interest income for 1986 by applying the stipulated interest rates only on the remaining balance of the principal, as follows: Particulars Principal Interest Income PN No. 1 6.30.78 12% P2,855,430.94 P342,651.71 PN No. 2 4.12.84 14% 4,408,520.00 617,192.80 PN No. 3 8.21.84 14% 2,655,400.00 371,756.00 P9,919,350.94 Interest income for PNs P1,331,600.51 Other interest income 32,201.10 Interest Income per books P1,363,801.61 =========== Hence, the alleged underdeclaration of petitioner's income in the amount of P429,187.47 is without legal and factual basis and should be cancelled. As to the disallowance of claimed expense deductions for professional fees and security services in the sum of P538,223.77, petitioner maintains that it should be allowed to claim as deductible expenses, payments for services billed and paid in the same taxable year (1986). This is because its obligation to pay or expend money which constituted deductible loss did not occur until it received a demand to pay a definite and fixed amount. However, respondent argues that the professional and security fees paid by petitioner in 1986 are not allowable as deductible expenses for the taxable year 1986 because said expenses accrued or were prior year's expenses. The expenses of P538,223.77 were disallowed by the respondent solely because the same were prior year's (1985) expenses. A fortiori , it can be inferred that the respondent found such expenses as ordinary and necessary. An examination of the various billings and official receipts covering the said expenses ( Exhibits O to JJ ) reveals that the same were actually incurred, billed and paid in 1986. While some of the services rendered as indicated in some of the billings pertained to prior years, nevertheless, petitioner could not have possibly accrued the said expenses during those years because the amounts were not determinable at the time. Accordingly, the expenses in the amount of P538,223.77 are properly deductible in taxable year 1986. Therefore, the deficiency income tax of P333,196.86 should likewise be cancelled. Finally, to prove that petitioner actually withheld and remitted to the BIR expanded withholding taxes on payments for security services, it submitted various payment orders and confirmation receipts and the monthly remittance returns of income taxes withheld. A scrutiny of these documents reveals that petitioner withheld and remitted a total amount of P2,808.20 expanded withholding taxes, detailed hereunder: Period Date Payment Confirmation Exhibit Covered Remitted Order No. Receipt No. Amount LL, LL-3, LL-4 Jan-86 2/10/86 B7163761 B8273270 P83.35 MM, MM-3, MM-4 Feb-86 3/6/86 B7375743 B8079942 253.72 NN, NN-3, NN-4 Mar-86 4/3/86 B7616403 B7876612 248.72 OO, OO-3, OO-4 Apr-86 5/8/86 B7885998 B9017192 289.47 PP, PP-3, PP-4 May-86 6/5/86 B8222121 B7949425 472.29 QQ, QQ-3, QQ-4 Jun-86 7/7/86 B8415805 B9033882 44.65 RR, RR-3, RR-4 Jul-86 8/6/86 B8737422 B9043558 289.82 SS, SS-3, SS-4 Aug-86 9/8/86 C8828454 B9857207 488.99 TT, TT-3, TT-4 Sep-86 10/7/86 B9000090 B9909765 258.92 UU, UU-3, UU-4 Oct-86 11/5/86 B9241110 B9067928 79.75 VV, VV-3, VV-4 Nov-86 12/5/86 B9372641 B10496598 279.92 WW, WW-3, WW-4 Dec-86 1/7/87 B9416200 B10024630 18.60 P2,808.20 ======= In petitioner's Annual Return of Creditable Tax Withheld (Expanded Withholding Tax System) ( Exhibit KK ), the above total expanded withholding tax of P2,808.20 was broken down per the following income recipients: Nature of Gross Amount Income Amount of Tax Payment of Income Withheld El Tigre Security & Investigation Agency Contractor P229,977.00 P2,299.77 Gen. Elevator & Escalator Contractor 5,500.00 55.00 Paredes Security & Watchman Agency Contractor 35,820.00 358.20 Universal Termite Control Contractor 600.00 2.00 Vargas, Rodel Contractor 25,109.00 256.90 P2,971.87 ======= It must be pointed out that although there is a discrepancy between the expanded withholding taxes as remitted to the BIR and as reported in the annual return, petitioner was able to prove that it withheld and remitted the corresponding 1% withholding tax on its claimed deduction for security services in the sum of P244,890.00. If we are to deduct the amounts withheld by petitioner from Gen. Elevator and Escalator, Universal Termite Control and Rodel Vargas totalling P313.90 from the withholding tax remittance of P2,808.20 ( as they do not pertain to security services ), there still remains a balance of P2,494.30 corresponding to the security service payments made to El Tigre Security & Investigation Agency and Paredes Security and Watchman Agency. It is noteworthy that this amount of P2,494.30 is even higher than the supposed withholding tax of P2,448.90 on petitioner's 1986 claimed deduction for security service amounting to P244,890.00. Clearly, the alleged deficiency expanded withholding tax of P4,897.79 has no factual basis and must be cancelled. WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86 and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, both for taxable year 1986, are hereby CANCELLED and SET ASIDE. SO ORDERED. STHAaD (SGD.) JUANITO C. CASTAEDA, JR. Associate Judge WE CONCUR: (SGD.) ERNESTO D. ACOSTA Presiding Judge (SGD.) LOVELL R. BAUTISTA Associate Judge Footnotes 1. Annex "B", Petition for Review. 2. Annex "C", Petition for Review. 3. Annex "D", Petition for Review. 4. CA-G.R. SP No. 46383. 5. Promulgated on August 19, 1998. 6. Entitled CIR vs. Isabela Cultural Corp., G.R. No. 135210. 7. CTA Records, page 1073. 8. Id ., page 1106. 8a. Pages 359-360. 9. BIR Records, pages 208-209. 10. Exhibit 1, pages 187-188, BIR Records.