Organizational Change Consultants International Center for Learning, Inc. v. Commissioner of Internal Revenue

SECOND DIVISION [C.T.A. CASE NO. 8625. February 10, 2017.] ORGANIZATIONAL CHANGE CONSULTANTS INTERNATIONAL CENTER FOR LEARNING, INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION CASANOVA , J p : This Petition for Review, filed by petitioner Organizational Change Consultants International Center for Learning, Inc.,prays for the cancellation and setting aside of the assessment notices issued by respondent Commissioner of Internal Revenue, for petitioner's alleged deficiency tax liabilities in the aggregate amount of P11,319,038.78 for taxable year (TY) 2009. 1 Petitioner is a domestic corporation duly organized and existing under and by virtue of Philippine laws, with principal place of business at 6th Floor Emerald Building, No. 24 F. Ortigas Jr. Road, San Antonio, Ortigas Center, Pasig City. 2 It is primarily engaged to establish and operate a center for learning which shall provide courses of study in vocational-technical curriculum and similar short-term activities such as but not limited to technical training and language skills for call center agents and the public in general. 3 Respondent is the duly appointed Commissioner of Internal Revenue vested by law to implement and enforce the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended, and other tax laws. 4 On April 15, 2010, petitioner submitted its Annual Income Tax Return (AITR) for TY 2009. 5 Petitioner also filed its 1st, 2nd, 3rd, and 4th Quarterly Value-Added Tax (VAT) Returns for TY 2009 on April 24, 2009, July 24, 2009, October 23, 2009, and January 25, 2010, respectively. 6 On September 15, 2010, respondent issued a Letter of Authority No. LOA-43-A-2010-00000261, which was received by petitioner on September 17, 2010, authorizing his revenue officers to examine petitioner's books of accounts and other accounting records for all internal revenue taxes covering the period from January 1, 2009 to December 31, 2009. 7 Accordingly, respondent requested that petitioner make available its pertinent records/documents for tax audit. 8 Respondent, likewise, asked petitioner, through the First Request for Presentation of Records 9 and Second and Final Request for Presentation of Records, 10 to submit its accounting records at Revenue District Office in East-Pasig City, 11 which petitioner received on October 6 12 and 20, 13 2010, respectively. CAIHTE Petitioner subsequently received a Notice for Informal Conference on March 21, 2011, containing a computation of its deficiency taxes for TY 2009. 14 Petitioner sent a Letter dated April 28, 2011 questioning the legal and factual bases of the said computations. 15 Then, respondent issued the Revenue Officer's Audit Reports on Documentary Stamp Tax (DST),Expanded Withholding Tax (EWT),Value-Added Tax (VAT),and Income Tax (IT). 16 Another Notice for Informal Conference was issued on March 1, 2012, which petitioner received on March 5, 2012. 17 On July 20, 2012, petitioner received a Preliminary Assessment Notice (PAN) dated July 13, 2012, assessing it for the following deficiency taxes (DST): 18 I. DEFICIENCY INCOME TAX Taxable income/loss per ITR P594,096.00 Add: Adjustments per investigation: Disallowed Expenses P7,503,175.00 Non-deductible representation expense 407,486.86 Rental expense not subjected to withholding 2,345,923.00 tax Salaries and wages not subjected to 911,544.38 withholding tax Undeclared sales 5,287,034.18 Unaccounted Source of Cash 1,206,119.50 17,661,282.92 Taxable income per investigation P18,255,378.92 ============ Income tax due thereon P5,476,613.68 Add: Disallowable tax credits/payments: Creditable Withholding tax P300,505.00 Tax Payments 107,839.00 Total P408,344.00 Less: Unsupported creditable withholding tax 300,505.00 Excess tax credits carried over to 232,705.00 124,866.00 succeeding period Deficiency Income Tax P5,601,479.68 Add: 20% Interest p.a. (04/16/2010 to 7/20/12) 2,535,245.05 TOTAL AMOUNT DUE P8,136,724.73 ============ II. DEFICIENCY VALUE ADDED TAX Taxable revenue/receipts per VAT returns P24,477,925.02 Add: Adjustment per Investigation Revenue not subjected to VAT P7,124,300.94 Unaccounted Source of Cash 1,206,119.50 8,330,420.44 Taxable sales/receipts per Investigation P32,808,345.46 ============ Output tax due thereon P3,937,001.46 Less: Allowed Tax Credits/Payments Input tax carried over from previous qtr. P110,390.42 Creditable VAT withheld 42,472.68 Input Tax 332,505.79 VAT Paid 1,937,957.72 2,423,326.61 Deficiency value added tax P1,513,674.84 Add: 20% Interest p.a. (01/26/2010 to 7/20/12) 751,446.25 TOTAL AMOUNT DUE P2,265,121.09 ============ III. DEFICIENCY EXPANDED WITHHOLDING TAX Amount EWT rate Amount due Payments subject to 15% P5,800,000.00 15% P870,000.00 Commission 1,288,800.00 10% 128,880.00 Rentals 4,068,923.00 5% 203,446.15 Total P1,202,326.15 Less: Remittances 803,490.88 Deficiency expanded withholding tax P398,835.27 Add: 20% Interest p.a. (01/16/2010 to 7/20/12) 200,182.52 TOTAL AMOUNT DUE P599,017.79 ============ IV. DEFICIENCY DOCUMENTARY STAMP TAX Amounts not subjected to DST P5,891,800.00 Rate 1/200 1/200 Documentary Stamp Tax 29,459.00 Add: 25% Surcharge P7,364.75 20% Interest p.a. (01/06/2010 to 7/20/12) 14,947.42 Compromise Penalty 6,000.00 28,312.17 Total Amount Due P57,771.17 ============ Thus, petitioner protested the PAN and Details of Discrepancies on August 2, 2012. 19 Respondent likewise served a Formal Letter of Demand (FLD) together with the Assessment Notices (FAN), 20 all dated August 21, 2012, which petitioner received on August 24, 2012, 21 assessing the latter as follows: I. DEFICIENCY INCOME TAX Taxable income/loss per ITR P594,096.00 Add: Adjustments per investigation: Disallowed Expenses P7,503,175.00 Non-deductible representation expense 407,486.86 Rental expense not subjected to withholding 2,345,923.00 tax Salaries and wages not subjected to 911,544.38 withholding tax Undeclared sales 5,287,034.18 Unaccounted Source of Cash 1,206,119.50 17,661,282.92 Taxable income per investigation P18,255,378.92 ============ Income tax due thereon P5,476,613.68 Add: Disallowable tax credits/payments: Creditable Withholding tax P300,505.00 Tax Payments 107,839.00 Total P408,344.00 Less: Unsupported creditable withholding 300,505.00 tax Excess tax credits carried over to 232,705.00 124,866.00 succeeding period Deficiency Income Tax P5,601,479.68 Add: 20% Interest p.a. (04/16/2010 to 9/21/12) 2,728,611.20 TOTAL AMOUNT DUE P8,330,090.88 ============ II. DEFICIENCY VALUE ADDED TAX Taxable revenue/receipts per VAT returns P24,477,925.02 Add: Adjustment per Investigation Revenue not subjected to VAT P7,124,300.94 8,330,420.44 Unaccounted Source of Cash 1,206,119.50 Taxable sales/receipts per Investigation P32,808,345.46 ============ Output tax due thereon P3,937,001.46 Less: Allowed Tax Credits/Payments Input tax carried over from previous qtr. P110,390.42 Creditable VAT withheld 42,472.68 Input Tax 332,505.79 VAT Paid 1,937,957.72 2,423,326.61 Deficiency value added tax P1,513,674.84 Add: 20% Interest p.a. (01/26/2010 to 9/21/12) 803,699.14 TOTAL AMOUNT DUE P2,317,373.98 ============ III. DEFICIENCY EXPANDED WITHHOLDING TAX Amount EWT rate Amount due Payments subject to 15% P5,800,000.00 15% P870,000.00 Commission 1,288,800.00 10% 128,880.00 Rentals 4,068,923.00 5% 203,446.15 Total P1,202,326.15 Less: Remittances 803,490.88 Deficiency expanded withholding tax P398,835.27 Add: 20% Interest p.a. (01/16/2010 to 9/21/12) 213,950.54 TOTAL AMOUNT DUE P612,785.81 ============ IV. DEFICIENCY DOCUMENTARY STAMP TAX Amounts not subjected to DST P5,891,800.00 Rate 1/200 1/200 Documentary Stamp Tax 29,459.00 Add: 25% Surcharge P7,364.75 20% Interest p.a. (01/06/2010 to 9/21/12) 15,964.36 23,329.11 Total Amount Due P52,788.11 ============ Petitioner disputed the FLD and FAN on September 17, 2012. 22 DETACa On February 27, 2013, petitioner received a Preliminary Collection Notice dated February 21, 2013. 23 Consequently, petitioner filed this Petition for Review 24 on April 1, 2013. Respondent issued a Final Notice before Seizure on June 20, 2013, which petitioner received on July 4, 2013. 25 Petitioner then informed respondent, through a Letter dated July 9, 2013, that a Petition for Review has already been filed questioning the subject assessment. 26 On May 17, 2013, respondent filed an Omnibus Motion, 27 praying for the amendment of the Petition for Review in order to comply with Section 2 (a), Rule 7 of the Revised Rules of Court, which the Court granted on July 10, 2013. 28 Accordingly, petitioner filed its Amended Petition for Review 29 on July 18, 2013. In the Answer 30 filed on July 29, 2013, respondent interposed the following special and affirmative defenses: "12. All presumptions are in favor of the correctness of the Assessment; 13. The Assessment/Demand Letter No. 043A-B056-09 dated 21 August 2012 for the year 2009 against the petitioner was issued in compliance with the provisions of Section 228 of the National Internal Revenue Code and in accordance to existing Revenue Rules and Regulations relative to the right of the taxpayer/petitioner to be informed of the factual and legal bases upon which the assessment was made. 14. The herein Petitioner was fully appraised of the facts and the law on which the Final Assessment was issued. The Final Assessment Notice, Demand Letter and Details of Discrepancies which were all together sent at the same time to the Petitioner, contained, in detail, the manner of computation, the facts on which the assessment was based and the provisions of the law used in arriving at such deficiency assessment. 15. Verification disclosed that the petitioner failed to properly support with valid documentary evidence certain expenses, hence disallowed as deductions from gross income pursuant to the provisions of Section 34(1)(B) of the National Internal Revenue Code, as amended. 16. Verification disclosed that representations claimed by petitioner per ITR/FS exceeds the statutory ceiling set forth under Revenue Regulations No. 10-2002, hence disallowed as deduction from gross income. 17. Verification disclosed that the petitioner failed to subject portion of rental expense and salaries and wages to withholding tax as required under RR No. 2-98 thus disallowed as deductions from gross income pursuant to Section 34(k) of the NIRC, as amended. 18. Verification disclosed that the sales reported per income tax return is understated by P5,287,034.18 as compared to sales reported per investigation thereby resulting to understatement of your taxable income. hence (sic) ,assessed pursuant to Section 31, in relation to Section 32. 19. Verification disclosed that portions of income payments of petitioner to prime subcontractor were not reported in the financial statement. The discrepancy was considered as unaccounted source of cash which led to the inference that part of the income of the petitioner has not been declared as enunciated in the case of Perez vs. CTA L10507 dated 30 May 1958. Therefore the amount is added to reported taxable income pursuant to Section 31 of the NIRC. 20. Verification disclosed that certain creditable withholding tax has not been supported with appropriate documentary evidence, hence disallowed and assessed pursuant to Revenue Regulations No. 4-2002. 21. Verification disclosed that petitioner failed to subject gross receipts to value added tax as determined during investigation, hence assessed pursuant to Sections 106 and 108 of the NIRC, as amended. 22. Verification disclosed that petitioner failed to subject portion of income payments to expanded withholding tax as required under Revenue Regulations No. 2-98. 23. Verification disclosed that petitioner failed to pay documentary stamp tax on transaction as listed in the Formal Demand Letter. DST was assessed pursuant to Section 179 of the NIRC, as amended. 24. The 20% interest per annum has been imposed pursuant to the provisions of Section 249 (B) of the NIRC. 25. The 25% surcharge must be impose (sic) pursuant to the provisions of Section 248 (A) of the NIRC." Pre-Trial Brief for the Respondent 31 and Pre-Trial Brief (For the Petitioner) 32 were, respectively, filed on October 24, 2013 and November 4, 2013. Then, the parties submitted their Joint Stipulations of Facts 33 on April 22, 2014, and consequently, the Court issued a Pre-Trial Order 34 on April 28, 2014. To prove its claim, petitioner presented its witnesses, namely: Ms. Ma. Soledad D. Lopez, and Ms. Hazel S. Maximo. Thereafter, petitioner formally offered its documentary exhibits which were admitted by the Court except Exhibits "P-16","P-19-G","P-20-A" to "P-20-J","P-21-A","P-21-B","P-23","P-33-B" to "P-33-E","P-34-E" to "P-34-G","P-34-J","P-34-K","P-34-L","P-36-B","P-38-A" to "P-38-L","P-39-C" to "P-39-F",and "P-198". 35 On the other hand, to refute petitioner's allegations, respondent presented the following witnesses: Ms. Gemina B. Salvador, Mr. Charlie de Leon, and Ms. Ma. Flor A. Lising. Respondent, likewise, formally offered his documentary evidence which the Court admitted on August 13, 2015. 36 On rebuttal, petitioner again presented Ms. Ma. Soledad D. Lopez and formally offered her testimony, as well as its documentary evidence, which were all admitted by the Court in a resolution 37 dated November 6, 2015. Considering, the manifestation of respondent's counsel that he would no longer present sur-rebuttal evidence, this Court granted the parties a period of thirty (30) days within which to submit their respective Memoranda. 38 aDSIHc Thus, on January 18, 2016, petitioner submitted its Memorandum, 39 while respondent, on the other hand, failed to submit his as per Records Verification 40 dated February 22, 2016. Accordingly, the instant case was deemed submitted for decision on March 1, 2016. 41 However, on March 18, 2016, respondent filed a Motion for Leave of Court to Admit Memorandum 42 seeking the kind indulgence of this Court to admit his Memorandum (for Respondent),as attached therein, to form part of the records of the case. In a Resolution 43 dated March 29, 2016, this Court granted respondent's Motion, thereby admitting his Memorandum. The parties stipulated the following issues 44 to be resolved by the Court: "1. Whether or not respondent CIR gravely erred in failing to provide some factual basis for the disallowances, thus rendering the preliminary collection notice void; 2. Whether or not respondent CIR gravely erred in assessing petitioner deficiency income tax in the principal amount of Php5,601,479.68 with interest of Php2,728,611.20 as a result of disallowing various expenses, subjecting rental expense to withholding tax, subjecting certain salaries and wages to withholding tax, considering undeclared sales and finding unaccounted source of cash; 3. Whether or not respondent CIR gravely erred in assessing petitioner Value-Added Tax (VAT) deficiency in the principal amount of Php1,513,674.84 with interest of Php803,699.14; 4. Whether or not respondent CIR gravely erred in assessing petitioner expanded withholding tax deficiency in the principal amount of Php398,835.27 with interest of Php213,950.54; 5. Whether or not respondent CIR gravely erred in assessing petitioner documentary stamp tax deficiency in the principal amount of Php29,459.00 with surcharges of Php7,364.76 and interest of Php15,964.36; 6. Whether or not respondent CIR gravely erred in assessing petitioner compromise penalty in the amount of Php6,000.00; and 7. Whether or not the Honorable Court has jurisdiction over the case considering the fact that the instant petition filed by petitioner pertains to preliminary collection letter and not to a final decision on disputed assessment." After careful scrutiny, the above-stated issues may be summarized into the following, to wit: Whether the Court has jurisdiction over the case considering the fact that the instant petition filed by petitioner pertains to preliminary collection letter, and not to a final decision on disputed assessment; Whether the FAN and FLD provide factual basis for the disallowances, rendering the preliminary collection notice void; and Whether respondent gravely erred in assessing petitioner for deficiency income tax, VAT, expanded withholding tax, documentary stamp tax, and compromise penalty. The Court shall resolve the first and second issues simultaneously. Petitioner contends that after it filed a request for reconsideration on FLD, respondent issued the Preliminary Collection Notice within the one hundred eighty days (180) on which he was supposed to act on the said request for reconsideration. In view of the foregoing, the alleged Preliminary Collection Notice is in effect a final demand letter reiterating the immediate payment of the tax deficiency; thus, the said notice is tantamount to a final decision on disputed assessment. Petitioner, likewise, claims that the Preliminary Collection Notice contained statement in a way denying its request for reconsideration. Respondent, on the other hand, alleges that the assessment became final, executory and demandable by reason of the failure of the petitioner to timely file the instant petition, pursuant to Section 228 of the Tax Code, as amended. Respondent points out that this petition is directed against the Preliminary Collection Letter issued by the BIR. As regards the factual basis of the assessment, petitioner argues that respondent was silent on how the assessment was made precluding the former from formulating a proper response in the protest of the same. Thus, the FAN and FLD are allegedly void. Respondent, however, insists that the Assessment/Demand Letter No. 043A-B056-79 contained the factual and legal bases upon which the same was made. Respondent avers that petitioner was fully apprised of the facts and the law on which the FAN was issued. Allegedly, the FAN and FLD with Details of Discrepancies contain in detail the manner of computation, the facts and the provisions of law on which the assessment was based. Section 228 of the NIRC of 1997, as amended, provides: "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: Provided, however ,That a preassessment notice shall not be required in the following cases: ETHIDa 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 on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable." Relative thereto are Sections 3.1.4 and 3.1.5 of Revenue Regulations No. 12-99 to implement the aforesaid provision, to wit: "3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void xxx. 3.1.5. Disputed Assessment. The taxpayer or his duly authorized representative may protest administratively against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt thereof. xxx. xxx xxx xxx In general, if the protest is denied, in whole or in part, by the Commissioner or duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision, otherwise, the assessment shall become final, executory and demandable; Provided, however, that if the taxpayer elevates his protest to the Commissioner within thirty (30) days from date of receipt of the final decision of the Commissioner's duly authorized representative, the latter's decision shall not be considered final, executory and demandable, in which case, the protest shall be decided by the Commissioner. If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period, otherwise, the assessment shall become final, executory and demandable." Based on the foregoing, petitioner has thirty days from receipt of respondent's final decision within which to appeal such final decision. In the instant case, petitioner received a Preliminary Collection Notice on February 27, 2013, instead of a final decision. As such, petitioner filed this Petition for Review on April 1, 2013. At this junction, the Court is now tasked to determine whether the Preliminary Collection Notice is a final decision as contemplated in the foregoing provisions. In the case of Oceanic Wireless Network, Inc. vs. Commissioner of Internal Revenue , 45 the Supreme Court held that the decision of the Commissioner of Internal Revenue (CIR) is final when it is indicated in a clear and unequivocal language that it is such, to wit: "A demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. The determination on whether or not a demand letter is final is conditioned upon the language used or the tenor of the letter being sent to the taxpayer. We laid down the rule that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment, thus: ...we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Sections 7 and 11 of Republic Act No. 1125, as amended. On the basis of his statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action." cSEDTC A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA). 46 After a careful evaluation of the Preliminary Collection Notice, 47 the Court finds that the same is a final decision. The aforesaid notice has reiterated the petitioner's tax liabilities and requested for the payment of the same to avoid accumulation of interest and surcharges. It is also indicated in the notice that if petitioner failed to pay the same, respondent would be constrained to serve and execute the Administrative Summary Remedies to enforce the collection of petitioner's tax liabilities, viz. : "Our records show that we sent you an assessment notice for the collection of your internal revenue tax liability/ies described hereunder which remain unpaid to date Kind of Basic Tax Surcharge Interest Compromise Total Due Tax IT 5,601,479.68 2,728,611.20 8,330,090.88 VT 1,513,674.84 803,699.14 2,317,373.98 EWT 398,835.27 213,950.54 612,785.81 DST 29,459.00 7,364.75 15,964.36 52,788.11 CP 6,000.00 6,000.00 TOTAL 11,319,038.78 =========== Ass./Demand No. 043A-B056-09 Taxable year 2009 Date Issued 9/21/2012 To avoid the accumulation of interest and surcharges, it is requested that you pay the aforesaid tax liability/ies within five (5) days from receipt hereof. However, if payment had already been made, please inform Revenue District Office No. 43A, East Pasig, Collection Section, 2nd Floor Rudgen Bldg.,Shaw Blvd. corner Meralco Ave.,Kapitolyo, Pasig City. Should we fail to hear from you within this period, this Office, much to our regret, will be constrained to serve and execute the Administrative Summary Remedies to enforce the collection of the account. Simultaneously, to protect the interest of the government, your case will be referred to the Legal Division for filing of the appropriate judicial action. " (Emphasis supplied) Thus, the Preliminary Collection Notice is deemed the final decision of respondent. The Supreme Court has already ruled in the case of Allied Banking Corporation vs. Commissioner of Internal Revenue n 48 that CIR must indicate clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a disputed assessment, to wit: "The key to effective communication is clarity. The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative must indicate clearly and unequivocally to the taxpayer whether an action constitutes a final determination on a disputed assessment. Words must be carefully chosen in order to avoid any confusion that could adversely affect the rights and interest of the taxpayer." As regards the contention that the assessment lacks factual basis, the Court finds it otherwise. Based on the above-stated provisions of laws and regulations, a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against the same. The use of the word "shall" in these legal provisions indicates the mandatory nature of the requirements laid down therein. The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. 49 After a thorough evaluation of the FAN and the FLD 50 with Details of Discrepancies, 51 the Court finds that they contained factual basis for petitioner's tax liabilities. Thus, they are compliant with the requirements laid down under Section 228 of the NIRC of 1997, as amended, and Section 3.1.4 of Revenue Regulations No. 12-99. An examination of petitioner's protest to the FLD shows that it was able to explain each and every item appearing in the assessment. The fact that petitioner was able to intelligently protest the assessment implies that it had substantial understanding of the factual and legal bases of the assessments. In a long line of cases decided by this Court, We consistently stressed that the requirement of the law to inform the taxpayer of the basis of the assessment should not be construed as limiting to the assessment notice itself. Upon a careful study of the law, it is noteworthy to emphasize that assessment notices need not be a full narration of the facts and laws on which the assessment is based. Further, the law mandates that the notice to acquaint the taxpayer the basis of his assessment must be in writing but it does not categorically state that the assessment itself must contain such information. It is enough that petitioner be substantially informed of the law and the facts on which the assessment for a tax liability is made in any other written document presented to the taxpayer. Thus, so long as the parties are notified and were given the opportunity to explain their side, the requirements of due process are satisfactorily complied with. 52 SDAaTC The Court shall now proceed to determine whether petitioner is liable for any deficiency taxes. Respondent issued to petitioner a Formal Letter of Demand (FLD) 53 with the schedule of Details of Discrepancies dated August 21, 2012, assessing petitioner of deficiency income tax, value-added tax, expanded withholding tax, documentary stamp tax and compromise penalty for the TY 2009 in the aggregate amount of P11,319,038.78, broken down as follows: Tax Type Basic 25% Interest Total Due Surcharge Income tax P5,601,479.68 P2,728,611.20 P8,330,090.88 Value-Added Tax 1,513,674.84 803,699.14 2,317,373.98 Expanded withholding tax 398,835.27 213,950.54 612,785.81 Documentary stamp tax 29,459.00 P7,364.75 15,964.36 52,788.11 Compromise penalty 6,000.00 6,000.00 Total P7,549,448.79 P7,364.75 P3,762,225.24 P11,319,038.78 =========== ======== =========== ============ I. Deficiency Income Tax P8,330,090.88 As per FLD, respondent computed the deficiency income tax for CY 2009 as follows: Taxable income/loss per ITR P594,096.00 Add: Adjustments per investigation Disallowed Expenses P7,503,175.00 Non-deductible representation expense 407,486.86 Rental expense not subjected to 2,345,923.00 withholding tax Salaries and wages not subjected to 911,544.38 withholding tax Undeclared sales 5,287,034.18 Unaccounted Source of Cash 1,206,119.50 17,661,282.92 Taxable income per investigation P18,255,378.92 ============ Income tax due thereon P5,476,613.68 Add: Disallowable tax credits/payments Creditable Withholding Tax P300,505.00 Tax Payments 107,839.00 Total P408,344.00 Less: Unsupported creditable withholding tax 300,505.00 Excess tax credits carried over to succeeding period 232,705.00 (124,866.00) Deficiency Income Tax 5,601,479.68 Add: 20% Interest p.a. (04/16/2010 to 9/21/12) 2,728,611.20 Total Amount Due P8,330,090.88 ============ The Court will scrutinize the validity of the above assessment by delving into the propriety of the income imputed as well as the expense deductions and tax credits disallowed by respondent, namely: A. Disallowed expenses P7,503,175.00 B. Non-deductible representation expenses 407,486.86 C. Rental expense not subjected to withholding tax 2,345,923.00 D. Salaries and wages not subjected to withholding tax 911,544.38 E. Undeclared sales 5,287,034.18 F. Unaccounted source of cash 1,206,119.50 G. Unsupported creditable withholding tax 300,505.00 H. Disallowed excess tax credits carried over to succeeding period 232,705.00 A. Disallowed Expenses P7,503,175.00 Respondent's verification disclosed that some of petitioner's expenses, as listed below, were not properly supported by valid documentary evidence, basically unsubstantiated, hence, disallowed as deduction from petitioner's gross income pursuant to the provision of Section 34 (1) (B) of the NIRC of 1997, as amended: Bad debts P251,547.00 Donations 162,828.00 Consultant 1,359,750.00 Commission 1,288,800.00 Professional fee 367,750.00 Facilitators Fee 4,072,500.00 Total Disallowed Expenses P7,503,175.00 =========== Petitioner, on the other hand, alleges that the (a) consultant fees; (b) commissions; (c) professional fees; and (d) facilitators (or educators) fees, in the total amount of P7,088,800.00, were duly covered by contracts of services, and their corresponding withholding taxes were remitted to the government. As such, the expenses are allegedly valid and legitimate. Petitioner's contention is untenable. Based on the service agreements, the following facilitators were engaged by petitioner to conduct and facilitate seminars, team building activities and other leadership programs offered by the latter to the general public, government institutions and private companies: acEHCD Service Agreement Facilitator Exhibit "P-181" Maria Belinda L. Villavicencio Exhibit "P-182" Benjamin T. Leogardo Exhibit "P-183" Carmen L. Santos Exhibit "P-184" Maria Soledad D. Lopez Exhibit "P-185" Claude Gregory M. Sta. Clara Exhibit "P-186" Ma. Wilhelmina M. Manalo While it is true that the service agreements had established the fact that petitioner entered into agreements with the facilitators named therein, the Court, however, cannot ascertain whether the disallowed expenses actually pertain to the fees received by the facilitators by virtue of the said service agreements. Based on the service agreements, the professional fees to be received by facilitators as remuneration for their services shall be P5,000.00 per day. However, given only with this information, the Court cannot determine how many days were rendered by each facilitators so as to determine the total fees actually incurred by petitioner during TY 2009. Moreover, even if the Court considers the Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307),issued by petitioner to its facilitators, the income payments reflected therein do not tally with the disallowed expenses, as shown below. Absent any reconciliation of the difference, the Court cannot ascertain whether the payments per Certificates form part of the disallowed expenses as to merit partial allowance. Exhibit Payee Management and Technical Consultancy (WI 050) Commissions (WI 515) Professional/Talent Fees (WI 010) "P-33-B"* Claude Gregory M. Sta. Clara P35,000.00 - - "P-33-C"* 35,000.00 - - "P-33-D"* 80,000.00 - - "P-33-E"* 130,000.00 - - "P-34-C" Maria Belinda L. Villavicencio 15,000.00 - - "P-34-D" - P7,000.00 - "P-34-E"* 109,000.00 - - "P-34-F"* 124,000.00 - - "P-34-G"* 2,500.00 - - "P-34-H" - - P34,000.00 "P-34-I" 10,000.00 - - "P-34-J"* - 40,200.00 - "P-34-K"* 272,500.00 - - "P-34-L"* - 20,400.00 - "P-34-M" 150,000.00 - - "P-34-N" 18,500.00 - - "P-35-C" Carmen L. Santos 40,000.00 - - "P-35-D" - 57,000.00 - "P-35-E" 102,000.00 - - "P-35-F" 269,000.00 - - "P-35-G" 10,000.00 - - "P-35-H" 13,000.00 - - "P-35-I" 168,000.00 - - "P-35-J" - 36,500.00 - "P-36-B"* Benjamin T. Leogardo 125,000.00 - - "P-36-C" 210,000.00 - - "P-36-D" 150,000.00 - - "P-36-E" 328,350.00 - - "P-37-C" Maria Soledad D. Lopez 3,000.00 - - "P-37-D" 69,000.00 - - "P-37-E" 28,500.00 - - "P-37-F" 84,500.00 - - "P-37-G" 190,500.00 - - "P-37-H" 25,500.00 - - "P-37-I" 130,000.00 - - "P-38-C"* Maximo S. Salazar 170,600.00 - - "P-38-D"* 15,000.00 - - "P-38-E"* 162,500.00 - - "P-38-F"* - 18,500.00 - "P-38-G"* 20,000.00 - - "P-38-H"* 309,500.00 - - "P-38-I"* - 99,000.00 - "P-38-J"* 15,000.00 - - "P-38-K"* 173,000.00 - - "P-38-L"* 52,500.00 - - "P-39-C"* Ma. Teresa S. Quiambao - 127,237.80 - "P-39-D"* - 148,096.00 - "P-39-E"* - 173,785.10 - "P-39-F"* - 180,000.00 - "P-40-B" Aquarius T. Juson 5,000.00 - - "P-40-C" 186,000.00 - - "P-40-D" 2,500.00 - - "P-40-E" 160,000.00 - - "P-40-F" 193,000.00 - - "P-40-G" - 12,000.00 - "P-40-H" 10,000.00 - - "P-40-I" - 91,600.00 - "P-40-J" 180,000.00 - - Total P4,582,450.00 P1,011,318.90 P34,000.00 Note: Exhibits denied as per this Court's Resolution dated October 30, 2014. Likewise, the Annual Income Tax Returns 54 of the above named facilitators do not substantiate petitioner's claimed expenses as the income received by the former may come not only from the petitioner but from other sources as well. As to the disallowed bad debts and donations in the respective amounts of P251,547.00 and P162,828.00, petitioner did not refute the examiner's findings nor offer any documentary evidence to substantiate the same. Thus, the disallowances shall be upheld, in line with the principle that tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor of the correctness of a tax assessment unless proven otherwise. 55 Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment. 56 Considering the foregoing, respondent's disallowance of the subject expenses shall be upheld. B. Non-Deductible Representation Expenses P407,486.86 Respondent's verification disclosed that the representation expenses claimed per Income Tax Return/Financial Statements (ITR/FS) exceeded the statutory ceiling set forth under Revenue Regulations (RR) No. 10-2002; hence, it was disallowed as deduction from gross income. Representation claimed per FS/ITR P644,394.00 Less: Statutory ceiling per RR No. 10-2002 Income per FS/ITR P23,690,714.00 Percentage of limitation for sale of services 1% 236,907.14 Non-Deductible Representation Expenses P407,486.86 ========== Same as bad debts and donations, the disallowance of representation expenses has not been contested by the petitioner. Thus, the same shall be upheld. C. Rental Expense Not Subjected to Withholding Tax P2,345,923.00 Upon verification of respondent, it was disclosed that petitioner failed to subject portion of its rental expenses to EWT, as required under RR No. 2-98, thus, disallowed as deduction from its gross income pursuant to Section 34 (K) of the NIRC of 1997, as amended, to wit: Rental expense per FS Venue rental P3,318,923.00 Office rental 750,000.00 P4,068,923.00 Rental expense per return 1,723,000.00 Rental Expense Not Subjected to Withholding Tax P2,345,923.00 ============ Petitioner contends that respondent failed to reclassify the venue rental and events subcontracting expenses which are both subject to different withholding tax rates. Thus, the following are the components of the venue and events subcontracting account, which have been subjected to withholding taxes duly remitted and paid to government: SDHTEC Venue rental (training center) P973,000.00 Events subcontracting 1,601,935.50 Purchase of chairs and tables for events 743,987.50 Total P3,318,923.00 =========== Petitioner's contention is partially correct. A perusal of the monthly remittance returns 57 shows that the rental expense per return amounting to P1,723,000.00 consists of rentals of the office and venue (training center) to Armstrong Realty Investments, Inc. in the amounts of P750,000.00 and P973,000.00, respectively. The said rentals are covered by a Memorandum of Agreement and Contracts of Lease. 58 Also, the same are accordingly subjected to 5% withholding tax. Based on the same returns and the Certificates of Creditable Tax Withheld (BIR Form No. 2307), 59 the events subcontracting expense in the amount of P1,601,935.50 was also subjected to withholding tax at the rate of 2%.Said expense pertains to the use of the venue of the MMLDC Foundation, Inc. (MMLDC). According to petitioner, it contracted MMLDC's services for the purpose of hosting the 2-day seminars which included, among others, provisions for food, venue and all amenities generally provided by events coordinators. 60 The monthly payments of the rental and events subcontracting expenses are detailed as follows: 61 Rental Service Taxable Month (Real Property) (Accommodation) January P135,000.00 P105,000.00 February 235,000.00 105,000.00 March - 105,000.00 April 135,000.00 158,123.00 May 170,000.00 100,000.00 June 208,000.00 143,815.50 July 140,000.00 105,000.00 August 140,000.00 105,000.00 September 140,000.00 145,003.00 October 140,000.00 132,498.50 November 140,000.00 264,997.00 December 140,000.00 132,498.50 Total P1,723,000.00 P1,601,935.50 =========== =========== As regards the purchase of chairs and tables for events in the amount of P743,987.50, petitioner's Vice President testified that this was part of the events subcontracting services provided by MMLDC; thus, it was subjected also to 2% tax. 62 However, the above table clearly shows that the said amount did not form part of the service (accommodation) subjected to withholding tax. Contrary to petitioner's contentions, the purchase of chairs and tables amounting to P743,987.50 has not yet been subject to tax. In fine, the assessment on rental expense with regard only to the purchase of chairs and tables, amounting to P743,987.50, shall be upheld. D. Salaries and Wages Not Subjected to Withholding Tax P911,544.18 Upon respondent's investigation, it showed that petitioner failed to subject portion of its salaries and wages to withholding tax, as required under RR No. 2-98, thus, disallowed as deduction from its gross income pursuant to Section 34 (K) of the NIRC of 1997, as amended, to wit: Salaries and wages per FS Salaries and wages P3,095,517.00 Employee's benefits 365,670.00 P3,461,187.00 Salaries and wages per alphalist Salaries and wages 2,222,832.57 13th Month pay 240,673.55 SSS, GSIS, PHIC, PAG-IBIG, etc. 86,136.50 2,549,642.62 Salaries and Wages Not Subjected to Withholding Tax P911,544.38 ========== Petitioner asserts that the salaries and wages per FS pertained to salaries and other benefits, while those per alphalist were purely salaries and wages. Allegedly, the difference of P911,544.38 is attributable to other benefits such as meals, transportation allowance, cash incentives and others, which are in the nature of de minimis benefits; thus, these benefits are not subject to withholding tax. The Court finds the same without merit. While the Court agrees with petitioner that de minimis benefits or facilities or privileges furnished or offered by an employer to his employees are not subject to withholding tax on compensation, pursuant to Section 2.78.1 (A) (3) and (6) (b) of RR No. 2-98, provided such facilities or privileges are of relatively small value and are offered or furnished by the employer merely as a means of promoting the health, goodwill, contentment, or efficiency of his employees, the Court holds that petitioner must present clear and convincing evidence to substantiate its allegations, for basic is the rule that mere allegations are not equivalent to proof. Considering that petitioner failed to present evidence to overturn respondent's assessment, the disallowance of the same as deduction from petitioner's gross income shall be upheld. AScHCD E. Undeclared Sales P5,287,034.18 Respondent's verification disclosed that the sales reported per income tax return is understated by P5,287,034.18 as compared to the result of the investigation. This resulted to the understatement of its taxable income, hence, assessed pursuant to Section 31, in relation to Section 32 of the NIRC of 1997, as amended: Total revenues Total amount per OR issued P31,602,225.96 Divided by 1.12 Net 28,216,273.18 Add: Trade receivables, end net of VAT 1,581,151.79 Less: Trade receivables, beg net of VAT 819,676.79 P28,977,748.18 Sales per ITR 23,690,714.00 Undeclared Sales P5,287,034.18 =========== Petitioner contends that some of the official receipts it issued pertained to cash received which do not involve sales transactions, such as: (i) payments made by stockholders as deposit for future stock subscriptions; (ii) return of unused/excess cash advances; and (iii) other miscellaneous income. Thus, respondent erroneously considered the foregoing ORs pertaining to sales transactions. The Court finds the same partially correct. An examination of the official receipts issued by petitioner in 2009 reveals that the transactions enumerated below, totaling to P1,009,239.80, pertain to stock subscriptions, liquidations of advances and reimbursements. The said transactions do not constitute sales or income, thus, not subject to tax: Exhibit OR No. Payor Date Amount "P-41" 15409 Ma. Teresa Quiambao 10-Dec-09 P10,000.00 "P-42" 15486 Carminda Pullantes 28-Dec-09 33,000.00 "P-43" 15392 Carminda Pullantes 11-Dec-09 11,000.00 "P-44" 12438 Carminda Pullantes 3-Nov-09 5,000.00 "P-45" 12493 Carminda Pullantes 11-Nov-09 18,000.00 "P-46" 15214 Carminda Pullantes 20-Nov-09 5,000.00 "P-47" 12183 Ma. Wilhelmina Manalo 2-Oct-09 27,000.00 "P-48" 12405 Ma. Wilhelmina Manalo 21-Oct-09 18,000.00 "P-50" 10207 William Ty 15-Jan-09 140,000.00 "P-67" 10353 Aquarius Juson 14-Jan-09 70,000.00 "P-68" 10590 Ma. Wilhelmina Manalo 26-Feb-09 9,000.00 "P-69" 10591 Dioscoro Baylon 26-Feb-09 9,000.00 "P-70" 10592 Dioscoro Baylon 26-Feb-09 2,700.00 "P-71" 10402 Dioscoro Baylon 3-Feb-09 13,500.00 "P-72" 10403 Ma. Wilhelmina Manalo 3-Feb-09 9,000.00 "P-73" 10985 Gener Mendoza 30-Apr-09 115,000.00 "P-74" 10806 Ma. Wilhelmina Manalo 2-Apr-09 9,000.00 "P-75" 11357 Lyvia Martinez 17-Jun-09 25,000.00 "P-76" 11254 Gener Mendoza 5-Jun-09 115,000.00 "P-77" 11214 Ma. Soledad Lopez 2-Jun-09 20,400.00 "P-78" 11215 Godofredo Eala 2-Jun-09 40,000.00 "P-79" 11216 Ma. Wilhelmina Manalo 3-Jun-09 9,000.00 "P-80" 11093 Benjamin Leogardo 2-Jun-09 70,000.00 "P-81" 11592 Ma. Wilhelmina Manalo 30-Jul-09 9,000.00 "P-82" 11442 Ma. Belinda Villavicencio 9-Jul-09 50,000.00 "P-83" 15492 Besol Lopez 29-Dec-09 203.00 "P-84" 15462 Cecile Mendoza 17-Dec-09 1,203.45 "P-85" 15463 Armin Pullantes 17-Dec-09 737.75 "P-86" 15328 Cecile Mendoza 8-Dec-09 1,948.50 "P-87" 15090 Cecile Mendoza 16-Nov-09 1,591.75 "P-88" 15095 Adel Agustin 16-Nov-09 318.00 "P-89" 12325 Carmen Santos 19-Oct-09 360.00 "P-90" 12261 Armin Pullantes 18-Oct-09 2,304.00 "P-91" 12298 Cecile Mendoza 15-Oct-09 1,462.75 "P-92" 10399 Armin Pullantes 4-Feb-09 1,622.95 "P-93" 10408 Shiela Dames 5-Feb-09 132.00 "P-94" 10409 Chona Santos 9-Feb-09 632.00 "P-95" 10487 Alvin Rex Caro 18-Feb-09 1,068.40 "P-96" 10733 Alvin Rex Caro 23-Mar-09 1,355.75 "P-97" 10665 Alvin Rex Caro 10-Mar-09 283.90 "P-98" 10664 Alvin Rex Caro 10-Mar-09 200.00 "P-99" 10633 Alvin Rex Caro 9-Mar-09 1,227.25 "P-100" 10634 Alvin Rex Caro 9-Mar-09 2,242.25 "P-101" 10807 Carmen Santos 3-Apr-09 1,200.00 "P-102" 11099 Armin Pullantes 9-Jun-09 4,698.85 "P-103" 11100 Cecile Mendoza 10-Jun-09 100.00 "P-104" 11534 Besol Lopez 29-Jul-09 40.00 "P-105" 11669 Cecile Mendoza 12-Aug-09 205.80 "P-106" 11747 Carmen Santos 26-Aug-09 492.00 "P-107" 12179 Carmen Santos 25-Sep-09 5,770.00 "P-108" 10204 Cecile Mendoza 15-Jan-09 1,977.37 "P-109" 10337 Binoy Caro 9-Jan-09 42.75 "P-110" 15484 Alvin Rex Caro 28-Dec-09 3,112.50 "P-111" 15319 Alvin Rex Caro 3-Dec-09 3,112.50 "P-112" 15030 Hazel Sabado 12-Nov-09 5,000.00 "P-113" 12342 Godofredo Eala 22-Oct-09 10,000.00 "P-114" 12346 Ma. Soledad Lopez 22-Oct-09 36,000.00 "P-115" 12345 Carmen Santos 23-Oct-09 63,814.33 "P-116" 12196 Jaypee Solano 5-Oct-09 1,000.00 "P-117" 11593 Godofredo Eala 30-Jul-09 7,500.00 "P-129" 12263 Ultra Seer 8-Oct-09 50.00 "P-130" 10534 Chona Santos 23-Feb-09 1,400.00 "P-131" 10734 PEZA c/o Rowena 24-Mar-09 830.00 Montes "P-134" 11597 BLSI 4-Aug-09 1,400.00 Total P1,009,239.80 =========== Other receipts, according to petitioner's Accountant/Bookkeeper, pertain to miscellaneous income. In her judicial affidavit, she has explained the nature of the transactions in this wise: For Exhibits "P-118" to "P-127". "As indicated in the receipts, the amounts received from the payee were in payment of FLEX manuals. FLEX manuals are part of the kits given to those attending seminars conducted by OCCI and are part of the seminars that they pay. As a matter of policy, the FLEX manuals are not sold separately. One has to attend the seminar to be able to get the FLEX manual. The problem however is that many of those who attended and completed the seminars would lose or misplace their FLEX manuals or sometimes, their FLEX manuals would be torn apart. Thus, they go to us for new copies. Once we are able to ascertain that they have attended and completed the seminars, we would give them copies of the FLEX manual." 63 For Exhibits "P-128" to "P-144". "These receipts were issued to acknowledge cash payments for various items." For Exhibits "P-145" to "P-169". "As indicated in the receipts, the money received were in payment of the book known as Rizal is my President. This is a project of OCCI Fullness of Life Foundation, Inc.,a separate and distinct company. OCCI would issue the receipt but would in turn remit the payment to OCCI Fullness of Life Foundation, Inc. In other words, this is money due the foundation and not of OCCI." 64 For Exhibits "P-170" to "P-178". "As indicated in the receipts, these were payments made in connection with the seminars conducted by OCCI." 65 For Exhibits "P-179" to "P-180". "As indicated in the receipts, these were payments for facilitation fees or for the seminars conducted by OCCI." 66 Contrary to petitioner's contention, miscellaneous income is subject to income tax. This is consistent with Section 32 of the NIRC of 1997, as amended which provides that gross income means all income derived from whatever source. Thus, the following receipts, totaling to P1,313,965.97, are subject to income tax: Exhibit OR No. Payor Date Amount "P-118" 15114 Larry 12-Nov-09 P75.00 "P-119" 15119 - 12-Nov-09 140.00 "P-120" 15091 - 16-Nov-09 1,360.00 "P-121" 12190 Maevie Ortiz 3-Oct-09 250.00 "P-122" 12189 Chicouy Estinosa 3-Oct-09 50.00 "P-123" 12350 Cash 26-Oct-09 70.00 "P-124" 10541 Cash 24-Feb-09 900.00 "P-125" 10663 - 9-Mar-09 150.00 "P-126" 10836 BLSI 6-Apr-09 8,140.00 "P-127" 11849 - 4-Sep-09 150.00 "P-128" 12188 The Knights of Rizal 2-Oct-09 20,000.00 "P-132" 10862 Linda Realizan 17-Apr-09 70.00 "P-133" 11530 Linda Realizan 27-Jul-09 70.00 "P-135" 11739 Arsenio Cruz 17-Aug-09 700.00 "P-136" 11740 Hazel Sabado 17-Aug-09 200.00 "P-137" 11741 Gil Dimaano 17-Aug-09 650.00 "P-138" 11748 Hazel Sabado 27-Aug-09 250.00 "P-139" 12080 - 17-Sep-09 100.00 "P-140" 15316 Godofredo Eala 3-Dec-09 11,930.45 "P-141" 15317 Ma. Soledad Lopez 3-Dec-09 1,142.70 "P-142" 12347 OCCI Fullness of Life (RIMP) 23-Oct-09 60,300.00 "P-143" 12432 Kobe David 30-Oct-09 1,081.00 "P-144" 11885 - 10-Sep-09 50.00 "P-145" 12299 Noemi Casio 19-Oct-09 1,000.00 "P-146" 12336 Fullness of Life Foundation, Inc. 21-Oct-09 6,500.00 "P-147" 10539 Clare Amador 24-Feb-09 350.00 "P-148" 10546 Seventh Day Adventist 24-Feb-09 350.00 "P-149" 10547 Godofredo Eala 24-Feb-09 900.00 "P-150" 10549 Various 25-Feb-09 9,450.00 "P-151" 10696 Uno Highschool 24-Feb-09 4,200.00 "P-152" 11351 Filcols 20-Feb-09 700.00 "P-153" 11353 The Knights of Rizal 24-Feb-09 30,000.00 "P-154" 11352 Roger Sipalay 20-Feb-09 350.00 "P-155" 10732 Manya Rogriguez 23-Mar-09 700.00 "P-156" 10699 Uno Highschool 18-Mar-09 3,500.00 "P-157" 10730 Abet Siopao 20-Mar-09 350.00 "P-158" 10690 Raymond Gonzales 17-Mar-09 350.00 "P-159" 10695 Chary Sollano 18-Mar-09 350.00 "P-160" 10859 Print Town, Inc. 17-Apr-09 350.00 "P-161" 10860 Charette Regala 17-Apr-09 350.00 "P-162" 10865 Ritchie Melu 20-Apr-09 350.00 "P-163" 10883 Davao 23-Apr-09 350.00 "P-164" 10925 - 27-Apr-09 1,750.00 "P-165" 10965 Rosalina Remolona 27-Apr-09 350.00 "P-166" 11571 DLSU 24-Jul-09 16,000.00 "P-167" 11595 - 3-Aug-09 1,500.00 "P-168" 11668 Getz Pharma 11-Aug-09 700.00 "P-169" 12198 OCCI Fullness of Life 6-Oct-09 400,000.00 "P-170" 10232 William/Michelle Ty 18-Jun-09 10,000.00 "P-171" 15225 OCCI Fullness of Life 25-Nov-09 100,000.00 "P-172" 10672 PEZA 13-Mar-09 168,000.00 "P-173" 11248 Jollibee Worldwide Services 15-Jun-09 63,905.89 "P-174" 11887 Jollibee Worldwide Services 11-Sep-09 63,905.89 "P-175" 11888 Jollibee Worldwide Services 11-Sep-09 63,905.89 "P-176" 12001 Myra Manibog 9-Sep-09 1,000.00 "P-177" 12184 Hazel Dee 2-Oct-09 12,636.00 "P-178" 12047 Dela Salle College 18-Sep-09 70,000.00 "P-179" 12418 Carmen Santos 28-Oct-09 4,000.00 "P-180" 15213 OCCI Fullness of Life 19-Nov-09 168,033.15 Total P1,313,965.97 =========== Further, the following receipts totaling P2,251,700.00, though pertaining to stock subscriptions, are dated not within the subject taxable period 2009; thus, the same cannot be given consideration: AcICHD Exhibit OR No. Payor Date Amount "P-49" 10216 Benjamin Leogardo 28-Dec-07 P188,900.00 "P-51" 10217 Ma. Soledad Lopez 28-Dec-07 188,800.00 "P-52" 10218 Maximo Salazar 28-Dec-07 188,900.00 "P-53" 10220 Cynthia Sico 28-Dec-07 188,900.00 "P-54" 10219 Carmen Santos 28-Dec-07 188,900.00 "P-55" 10222 Michelle Ty 28-Dec-07 188,900.00 "P-56" 10221 Claude Gregory Sta. Clara 28-Dec-07 188,900.00 "P-57" 10224 Ma. Belinda Villavicencio 28-Dec-07 188,900.00 "P-58" 10223 William Ty 28-Dec-07 188,900.00 "P-59" 10226 Ma. Soledad Lopez 23-Jun-08 20,400.00 "P-60" 10225 Cynthia Sico 27-Jun-08 20,000.00 "P-61" 10228 Juan Kanapi 26-Jun-08 90,000.00 "P-62" 10227 Godofredo Eala 23-Jun-08 90,000.00 "P-63" 10236 Aquarius Juson 18-Jun-08 100,000.00 "P-64" 10237 Benjamin Leogardo 24-Jun-08 71,100.00 "P-65" 10233 William/Michelle Ty 18-Jun-08 142,200.00 "P-66" 10234 Ma. Wilhelmina Manalo 24-Jun-08 18,000.00 Total P2,251,700.00 Considering the foregoing, petitioner has undeclared sales in the reduced amount of P4,277,794.38, as shown below: Undeclared sales per assessment P5,287,034.18 Less: Non-revenue items 1,009,239.80 Adjusted Undeclared Sales P4,277,794.38 =========== F. Unaccounted source of cash P1,206,119.50 Respondent's verification disclosed that portion of petitioner's income payments to prime/sub-contractor was not reported in the FS. The discrepancy was considered as unaccounted source of cash which led to the inference that part of its income has not been declared as enunciated by the Court in the case of Perez vs. CTA & CIR, G.R. No. L-10507, dated May 30, 1958 . Therefore, the amount is added to petitioner's reported taxable income, pursuant to Section 31 of the NIRC of 1997, as amended, to wit: Income payments to prime/sub-contractor per return P1,601,935.50 Income payments to prime/sub-contractor per FS Ads & promo P239,775.00 Repairs & maintenance 151,753.00 Janitorials 4,288.00 395,816.00 Unaccounted Source of Cash P1,206,119.50 =========== Petitioner contends that the gross amount of P1,601,935.50 pertained to the income payment to subcontractor, which was recorded under "Venue Rental and Events Subcontracting," the corresponding withholding tax of which was paid. Allegedly, the expenses such as ads and promo, repairs and maintenance pertain to advertising materials and maintenance supplies, which are not subject to 2% subcontractor's tax. The Court finds respondent's assessment devoid of merit. An examination of petitioner's Audited FS, 67 particularly its Notes 15 and 16, disclosed that petitioner incurred, among others, the following costs/expenses for TY 2009: Administrative Direct Costs Expenses Total Venue rental P3,318,923.00 - P3,318,923.00 Advertising & Promotions 134,325.00 P105,450.00 239,775.00 Repairs & Maintenance 30,687.00 121,066.00 151,753.00 Janitorial services - 4,288.00 4,288.00 The venue rental, as mentioned earlier, is comprised of the following items: 68 Venue rental (training center) P973,000.00 Events subcontracting 1,601,935.50 Purchase of chairs and tables for events 743,987.50 Total P3,318,923.00 =========== Based on the above table, the income payments of P1,601,935.50 pertain to events subcontracting that formed part of the venue rental account, another line item in the Notes. As discussed earlier, petitioner has properly withheld the tax on these income payments. Notably, respondent's assessment was anchored on his inference that the discrepancy in income payments to prime/sub-contractor was not declared as part of its income. Considering that the income payments to prime/sub-contractor per return amounting to P1,601,935.50 has, in fact, been declared in the FS as part of the Venue Rental Account of P3,318,923.00, respondent's assessment, therefore, is without basis. Accordingly, the assessment pertaining thereto shall be cancelled. TAIaHE G. Unsupported creditable withholding tax P300,505.00 Respondent's verification disclosed that petitioner's claimed creditable withholding tax (CWT) was not supported by appropriate documentary evidence; hence, the same was disallowed and assessed pursuant to RR No. 4-2002, as amended. Claimed creditable withholding tax per return P300,505.00 Attached tax credit certificate (BIR Form No. 2307) - Unsupported Creditable Withholding Tax P300,505.00 ========== Petitioner insists that its tax credit certificates (TCC) are always available upon request. According to petitioner, even after petitioner has presented the same to the respondent, the said TCCs have been ignored. The disallowance of petitioner's CWT is partially sustained. Contrary to respondent's assessment, petitioner's CWTs totaling to P300,506.32, 69 are supported by Certificates of Creditable Tax Withheld at Source (BIR Form No. 2307),as shown below: Income Exhibit Payor Payment Tax Withheld "P-17- La Sallian Educational Innovators Foundation A" (DLS-CSB),Inc. P6,250.00 P125.00 "P-17- La Sallian Educational Innovators Foundation 10,714.29 214.29 B" (DLS-CSB),Inc. "P-17- La Sallian Educational Innovators Foundation 17,857.14 357.14 C" (DLS-CSB),Inc. "P-17- La Sallian Educational Innovators Foundation 3,571.43 71.43 D" (DLS-CSB),Inc. "P-17- La Sallian Educational Innovators Foundation 18,750.00 375.00 E" (DLS-CSB),Inc. "P-17- La Sallian Educational Innovators Foundation 3,571.43 71.43 F" (DLS-CSB),Inc. "P-17- La Sallian Educational Innovators Foundation 3,571.43 71.43 G" (DLS-CSB),Inc. "P-17- Noritsu Philippines, Inc. 5,357.14 107.14 H" "P-17-I" Philippine International Convention Center 79,910.71 1,598.21 "P-17-J" Philippine International Convention Center 20,000.00 400.00 "P-17-" Dangerous Drugs Board 44,642.86 892.86 K" "P-17- Philippine Economic Zone Authority 179,200.00 3,200.00 L" "P-17- Philippine Economic Zone Authority 179,200.00 3,200.00 M" "P-17- Philippine Economic Zone Authority 179,200.00 3,200.00 N" "P-17- United Graphics Expression Corporation 89,600.00 1,600.00 O" Sub-Total 1st Quarter P841,396.43 P15,483.93 "P-18- La Sallian Educational Innovators Foundation P7,142.86 P142.86 A" (DLS-CSB),Inc. "P-18- La Sallian Educational Innovators Foundation 25,000.00 500.00 B" (DLS-CSB),Inc. "P-18- La Sallian Educational Innovators Foundation 6,250.00 125.00 C" (DLS-CSB),Inc. "P-18- Bank of the Philippine Islands 10,000.00 50.00 D" "P-18- Scan Livingston Graphics, Inc. 103,950.89 10,395.09 E" "P-18- Moog Controls Corporation-Philippine branch 90,000.00 1,800.00 F" "P-18- Yokohama Tire Philippines, Inc. 110,000.00 2,200.00 G" "P-18- Yokohama Tire Philippines, Inc. 290,816.33 5,816.33 H" "P-18-I" Matimco Incorporated 60,000.00 9,000.00 Sub-Total 2nd Quarter P703,160.08 P30,029.28 "P-19- La Sallian Educational Innovators Foundation P14,285.50 P285.71 A" (DLS-CSB),Inc. "P-19- La Sallian Educational Innovators Foundation B" (DLS-CSB),Inc. 3,571.50 71.43 "P-19- La Sallian Educational Innovators Foundation 893.00 17.86 C" (DLS-CSB),Inc. "P-19- La Sallian Educational Innovators Foundation 12,500.00 250.00 D" (DLS-CSB),Inc. "P-19- La Sallian Educational Innovators Foundation 3,571.50 71.43 E" (DLS-CSB),Inc. "P-19- La Sallian Educational Innovators Foundation 12,500.00 250.00 F" (DLS-CSB),Inc. "P-19- Cagayan Electric Power & Light Co.,Inc. 228,480.00 4,080.00 G" "P-19- Cagayan Electric Power & Light Co.,Inc. 182,358.57 3,300.00 H" "P-19-I" Scan Livingston Graphics, Inc. 56,160.71 5,616.07 "P-19-J" Ajinomoto Philippines Corporation 4,821.50 96.43 "P-19- Yokohama Tire Philippines, Inc. 234,693.88 4,693.88 K" "P-19- Banco de Oro Unibank, Inc. 77,926.00 389.63 L" "P-19- Philippine Economic Zone Authority 29,120.00 520.00 M" "P-19- Philippine Economic Zone Authority 36,400.00 650.00 N" "P-19- Philippine Economic Zone Authority 94,640.00 1,690.00 O" Sub-Total 3rd Quarter P991,922.16 P21,982.44 "P-20- La Sallian Educational Innovators Foundation A" (DLS-CSB),Inc. P3,571.50 P71.43 "P-20- Scan Livingston Graphics, Inc. 403,783.49 40,378.35 B" "P-20- Scan Livingston Graphics, Inc. 156,875.00 15,687.50 C" "P-20- Ajinomoto Philippines Corporation 7,232.00 144.64 D" "P-20- Globe Telecom, Inc. 240,000.00 36,000.00 E" "P-20- Globe Telecom, Inc. 275,000.00 41,250.00 F" "P-20- Globe Telecom, Inc. 660,000.00 99,000.00 G" "P-20- Banco de Oro Unibank, Inc. 54,750.00 273.75 H" "P-20-I" Banco de Oro Unibank, Inc. 14,000.00 70.00 "P-20-J" Banco de Oro Unibank, Inc. 27,000.00 135.00 Sub-Total 4th Quarter P1,842,211.99 P233,010.67 Grand Total P4,378,690.66 P300,506.32 =========== ========== However, the Court denied the admission of Exhibits "P-19-G" and "P-20-A" to "P-20-J" for failure of petitioner to submit the originals for comparison. 70 Accordingly, the disallowance of CWTs totaling to P237,090.67, supported by these denied exhibits, as detailed below, shall be sustained, and the remaining CWTs totaling to P63,415.65 (P300,506.32 less P237,090.67) shall be allowed: Exhibit Payor Income Tax Payment Withheld "P-19-G" Cagayan Electric Power & Light Co.,Inc. P228,480.00 P4,080.00 "P-20-A" La Sallian Educational Innovators Foundation 3,571.50 71.43 (DLS-CSB),Inc. "P-20-B" Scan Livingston Graphics, Inc. 403,783.49 40,378.35 "P-20-C" Scan Livingston Graphics, Inc. 156,875.00 15,687.50 "P-20-D" Ajinomoto Philippines Corporation 7,232.00 144.64 "P-20-E" Globe Telecom, Inc. 240,000.00 36,000.00 "P-20-F" Globe Telecom, Inc. 275,000.00 41,250.00 "P-20-G" Globe Telecom, Inc. 660,000.00 99,000.00 "P-20-H" Banco de Oro Unibank, Inc. 54,750.00 273.75 "P-20-I" Banco de Oro Unibank, Inc. 14,000.00 70.00 "P-20-J" Banco de Oro Unibank, Inc. 27,000.00 135.00 TOTAL P2,070,691.99 P237,090.67 =========== ========== H. Disallowed Excess Tax Credits Carried Over to Succeeding Period (P232,705.00) Respondent disallowed petitioner's excess tax credits for the TY 2009 amounting to P232,705.00, 71 but gave no explanation in the FLD in doing so. The Court can only surmise that the tax credits carried over to the succeeding year was disallowed in order to recapture the tax benefit realized by petitioner in carrying the said amount to the succeeding year. cDHAES However, the Court finds it improper for respondent to disallow the said excess tax credits because any tax benefit derived by petitioner from the carry-over of the said amount redounds to the succeeding year 2010. Since the tax benefit will be in the succeeding year, at most, petitioner may only be assessed in the said succeeding year. In sum, petitioner is liable for deficiency income tax amounting to P4,160,170.59, as computed below: Taxable income/loss per ITR P594,096.00 Add: Adjustments per investigation Disallowed expenses P7,503,175.00 Non-deductible representation expense 407,486.86 Rental expense not subjected to withholding tax 743,987.50 Salaries and wages not subjected to withholding tax 911,544.38 Undeclared sales 4,277,794.38 13,843,988.12 Taxable income per investigation P14,438,084.12 Income tax due thereon P4,331,425.24 Less: Tax credits Supported creditable withholding tax 63,415.65 Tax payments 107,839.00 171,254.65 Deficiency Income Tax P4,160,170.59 ============ II. Deficiency Value-Added Tax P2,317,373.98 Respondent computed the deficiency VAT for TY 2009 as follows: Taxable revenue/receipts per VAT returns P24,477,925.02 Add: Adjustment per investigation Revenue not subjected to VAT P7,124,300.94 Unaccounted source of cash 1,206,119.50 8,330,420.44 Taxable sales/receipts per investigation 32,808,345.46 Output tax due thereon 3,937,001.46 Less: Allowed tax credits/payments Input tax carried over from previous quarter 110,390.42 Creditable VAT withheld 42,472.68 Input tax 332,505.79 VAT paid 1,937,957.72 2,423,326.61 Deficiency value-added tax 1,513,674.8[5] Add: 20% interest p.a. (01/26/2010 to 9/21/12) 803,699.14 Total Amount Due P2,317,373.9[9] ============ A. Revenue Not Subjected to VAT P7,124,300.94 Respondent's verification disclosed that petitioner failed to fully subject its gross receipts to VAT, hence, the latter was assessed pursuant to Sections 106 and 108 of the NIRC of 1997, as amended, to wit: Total amount of revenue per ORs issued 72 P31,602,225.96 Taxable revenue declared per VAT 24,477,925.02 Revenue Not Subjected to VAT P7,124,300.94 ============ Following the respondent's computation for undeclared sales, the total amount of revenue per ORs still includes VAT. Thus, the revenue not subjected to VAT per assessment should amount only to P3,738,348.16, as determined below: Total amount of revenue per ORs issued P31,602,225.96 Divided by 1.12 Total revenue, net of VAT P28,216,273.18 Less: Taxable revenue declared per VAT 24,477,925.02 Revenue Not Subjected to VAT P3,738,348.16 ============ As discussed earlier, out of the P31,602,225.96 purportedly supported by ORs, the receipts totaling to P1,099,239.80 pertained to stock subscriptions, liquidations of advances and reimbursements. The same do not constitute sales or income, thus, not subject to tax. In view of the foregoing, petitioner is liable to pay VAT on the reduced revenue amount of P2,639,108.36, as computed below: Revenue not subjected to VAT P3,738,348.16 Less: Non-revenue items 1,009,239.80 Adjusted Revenue Not Subjected to VAT P2,729,108.36 =========== B. Unaccounted Source of Cash P1,206,119.50 In relation to the unaccounted source of cash in item I.(F.) above, it was likewise subjected by respondent to VAT pursuant to Sections 106 and 108 of the NIRC of 1997, as amended. ASEcHI As held earlier, petitioner has no unaccounted source of cash. Thus, respondent's assessment on the same shall be cancelled. In fine, petitioner is liable to pay deficiency VAT in the total amount of P830,717.40, computed as follows: Taxable revenue/receipts per VAT returns P24,477,925.02 Add: Revenue not subjected to VAT 2,729,108.36 Taxable sales/receipts per investigation P27,207,033.38 Output tax due thereon P3,264,844.01 Less: Allowed tax credits/payments Input tax carried over from previous quarter P110,390.42 Creditable VAT withheld 42,472.68 Input tax 332,505.79 VAT paid 1,937,957.72 2,423,326.61 Deficiency value-added tax P841,517.40 ========== III. Deficiency Expanded Withholding Tax P612,785.81 Respondent's verification disclosed that petitioner failed to subject portion of its income payments to EWT as required under RR No. 2-98, as amended, as shown below: Payments subject to 15% Facilitator's fee P4,072,500.00 Professional fee 367,750.00 Consultants 1,359,750.00 P5,800,000.00 P870,000.00 Commission (10%) 1,288,800.00 128,880.00 Rentals (5%) 4,068,923.00 203,446.15 Total P1,202,326.15 Less: Remittances 803,490.88 Deficiency EWT P398,835.27 =========== Petitioner argues that the corresponding withholding taxes were remitted to the government. As earlier discussed, out of the alleged rental of P4,068,923.00, the amount of P1,601,935.50 pertained to events subcontracting which was accordingly subjected to 2% withholding taxes of P32,038.71. Thus, the rentals subject to 5% withholding tax actually amounts to P2,466,987.50 (P4,068,923.00 less P1,601,935.50).However, records 73 show that only the rental of P1,723,000.00 was subjected to withholding tax of P86,150.00. Consequently, petitioner shall be liable for the deficiency EWT on rentals in the amount of P37,199.38. As to the EWT of P870,000.00 and P128,880.00 on payments subject to 15% and 10%,respectively, records show that only the EWTs of P581,762.78 and P103,539.39 were duly remitted to the BIR. Consequently, petitioner shall be liable for the deficiency EWT on the same in the amounts of P288,237.22 and P25,340.61. In sum, petitioner is liable to pay the basic deficiency EWT amounting to P350,777.21, as computed below: Tax Tax Deficiency Particulars Tax Base Rate Tax Due Withheld EWT Rentals P2,466,987.50 5% P123,349.38 P86,150.00 P37,199.38 Payments subject to 15% 5,800,000.00 15% 870,000.00 581,762.78 288,237.22 Payments subject to 10% 1,288,800.00 10% 128,880.00 103,539.39 25,340.61 Basic Deficiency EWT P350,777.21 ========== IV. Deficiency Documentary Stamp Tax P52,788.11 Respondent's verification disclosed that petitioner failed to pay DST on the following transactions listed below; hence, the corresponding DST was assessed pursuant to Section 179 of the NIRC of 1997, as amended. Capital stock P1,000,000.00 Deposit for future subscription 4,891,800.00 Total amount subject to DST 5,891,800.00 Amount subjected to DST - Amount Not Subjected to DST P5,891,800.00 =========== Petitioner avers that the DST on capital stock of P1 Million was previously paid. Thus, the respondent patently erred in assessing petitioner DST on the original issue. Section 174 of the NIRC of 1997, as amended, imposes DST on the original issue of shares of stock, to wit: "SEC. 174. Stamp Tax on Original Issue of Shares of Stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200),or fractional part thereof, of the par value, of such shares of stock: Provided ,That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further ,That in the case of stock dividends, on the actual value represented by each share." (Boldfacing supplied) A perusal of its Amended Articles of Incorporation 74 disclosed that petitioner has authorized capital stock of P1,000,000.00 divided into 100,000 shares with a par value of P10.00 each. Moreover, based on its Audited FS as of the end of taxable year 2008, petitioner's authorized capital stock amounts to P1,000,000.00, which means that the same had already been issued and paid in years prior to TY 2009. Whether the corresponding DST had already been paid or not is of no moment since the subject period of assessment covers only TY 2009. Consequently, the DST assessment pertaining to the capital stock of P1,000,000.00 shall be cancelled. As regards the remaining balance of P4,891,800.00, petitioner argues that the same pertained to stockholders' deposit for future stock subscription, which was the subject of an application for increase in capitalization filed with the Securities and Exchange Commission (SEC).The corresponding DST of which would be paid upon approval of such increase by the SEC. Thus, it was allegedly premature for the respondent to assess the deposit to any DST. Notably, respondent's Revenue Officer Charlie De Leon testified as follows: 75 "Q: Now as far as the documentary stamp tax on original issue of subscription, you would agree with me that upon issuance by the Securities and Exchange Commission of Certificate of Registration that would be the reckoning point of payment of documentary stamp tax? A: The payment of documentary stamp tax should be paid on or before the fifth of the following month. Q: But reckoned from the issuance of the Certificate of Registration, that is the original issue? A: Yes, sir. Q: How about the increase of capital stock, that will be reckoned from the issuance of the Certificate approving the increase of the SEC? A: Yes, sir. Q: So if there was no approval, the documentary stamp tax will not be issued, correct? A: Yes, sir." According to petitioner's President, "the company has put on hold the application for increase of the capital stock of OCCI." 76 She explained that "initially, the stockholders and Board of Directors saw the need to increase the capital stock of the company and so many of the stockholders even before we could complete and finalize all of the documentary requirements of the Securities and Exchange Commission wanted to pay their respective contribution for the increase. They said that they would rather pay in installments rather than be later asked to pay everything in lump sum. Thus, as we were preparing the documents, the stockholders would pay in installments. However, when they learned about the deficiency assessments made by the respondent on the company, they got concerned and worried. Thus, the consensus was for the company to put on hold the increase until the issue of the deficiency assessment is resolved.'' 77 cSaATC As alleged by petitioner, the increase of the capital stock of petitioner has not been approved by the SEC. Thus, the assessment of DST on future subscriptions is allegedly erroneous and without any legal basis. The Court finds for petitioner. In the case of Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc. , 78 the Supreme Court ruled that deposits on future subscription of shares of stock are not subject to DST for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation, to wit: "In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc. ,this Court explained that the DST attaches upon acceptance of the stockholders subscription in the corporations capital stock regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated Coconut Ind.,Inc. v. Collector of Internal Revenue ,the Court held: 'The documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. The crucial point therefore, in the case before Us is the proper interpretation of the word 'issue.' In other words, when is the certificate of stock deemed 'issued' for the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in whose name the stocks represented in the certificate appear as certified by the proper officials of the corporation),at the time they are released by the corporation, or at the time they are in the possession (actual or constructive) of the stockholders owning them? xxx xxx xxx Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended.' xxx xxx xxx Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate stock documentary stamp tax program. RMO 08-98 states that: '1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if applicable when DST is still due on the subscribed share issued by the corporation ,on or before the tenth day of the month following publication of this Order. xxx xxx xxx 3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made after the authorization ,on or before the tenth day of the month following the date of authorization.' (Boldfacing supplied) RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97),also states that what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and may exercise attributes of ownership over the stocks. As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same. xxx xxx xxx x x x [T]he deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc. ,we held: cHDAIS 'We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value for their owners. ' (Boldfacing supplied) x x x The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, respondent is not liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation." Moreover, in BIR Ruling No. 015-2003 dated November 17, 2003, the BIR, quoting this Court's ruling in the case of First Southern Philippines Enterprises, Inc. v. Commissioner of Internal Revenue , 79 ruled that deposit on stock subscription is not subject to the payment of documentary stamp tax. The BIR further explained in this wise: x x x [C]apital stock issued connotes permanence of funds flowing into a corporation which cannot be withdrawn. The phrase "issuance of shares of stock" upon which the documentary stamp tax is to be computed must likewise be viewed as permanent in character. It is considered as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Consequently, to be so categorized, all conditions and requirements, such as the execution of the subscription agreements, and approval by regulatory authorities must be secured to facilitate the issuance of the shares of stock. xxx xxx xxx Viewed from the foregoing, it can be inferred that future subscription to an increase in capital stock is not an original issue of shares of stock nor is it a sale or transfer of shares of stock contemplated under Sections 175 and 176 of the Tax Code of 1997, but it is a standard accounting term which refers to an amount of money transmitted by a stockholder to a corporation on deposit with the possibility of the same being later subscribed in the company's capital." Clearly, petitioner is not liable for the payment of DST on its deposits for future subscription. Thus, respondent's assessment shall be cancelled. V. Compromise Penalty P6,000.00 Respondent imposed compromise penalty of P6,000.00 for petitioner's alleged non/late filing of documentary stamp tax, pursuant to Sections 250 and 255 of the NIRC of 1997, as amended, with reference to Revenue Memorandum Order (RMO) No. 1-90, as amended. Under Revenue Memorandum Order No. 01-90, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. It is well-settled that the Court has no jurisdiction to compel a taxpayer to pay the compromise penalty because by its very nature, it implies a mutual agreement between the parties in respect to the thing or subject matter that is so compromised, and the choice of paying or not paying it distinctly belongs to the taxpayer. 80 Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized. 81 WHEREFORE ,premises considered, the assessments issued by respondent against petitioner for taxable year 2009 covering deficiency documentary stamp tax and compromise penalty are hereby CANCELLED .However, the assessments issued by respondent against petitioner for taxable year 2009 covering deficiency income tax, value-added tax and expanded withholding tax are hereby AFFIRMED but with modifications. Accordingly, petitioner is ordered to pay SIX MILLION SIX HUNDRED NINETY THOUSAND FIVE HUNDRED EIGHTY ONE AND 50/100 (P6,690,581.50) for the taxable year 2009, inclusive of the 25% surcharge imposed under Section 248 (A) (3) of the NIRC of 1997, as amended, computed as follows: Tax Type Basic 25% Total Due Surcharge Income tax P4,160,170.59 P1,040,042.65 P5,200,213.24 Value-Added Tax 841,517.40 210,379.35 1,051,896.75 Expanded withholding tax 350,777.21 87,694.30 438,471.51 Total P5,352,465.20 P1,338,116.30 P6,690,581.50 =========== =========== =========== In addition, petitioner is ordered to pay: (a) Deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency income tax, value added tax, and expanded withholding tax computed from the dates indicated below until full payment thereof pursuant to Section 249 (B) of the NIRC of 1997, as amended: Deficiency Interest Tax Type Basic Tax Computed from Income Tax P4,160,170.59 April 15, 2010 Value-Added Tax 841,517.40 January 25, 2010 Expanded Withholding Tax 350,777.21 January 15, 2010 (b) Delinquency interest at the rate of 20% per annum on the total amount of P6,690,581.50 and on the 20% deficiency interest which have accrued as aforestated in (a), computed from July 14, 2013 until full payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as amended. ISHCcT SO ORDERED. (SGD.) CAESAR A. CASANOVA Associate Justice Juanito C. Castaeda, Jr. and Catherine T. Manahan, JJ. ,concur. Footnotes 1. Par. I, Summary of the Case, Pre-Trial Order, Docket (Vol. II),p. 1136. 2. Par. 1.3, Joint Stipulation of Facts (JSF),Docket (Vol. II),pp. 1129 to 1130; Exhibit "P-199". 3. Exhibit "P-200". 4. Par. 1.4, JSF, Docket (Vol. II),p. 1130. 5. Exhibit "P-21". 6. Exhibits "P-24","P-25","P-26",and "P-27". 7. Pars. 1.8 and 1.9, JSF, Docket (Vol. II),p. 1130; Exhibit "P-1". 8. Exhibit "P-2". 9. Exhibit "P-3";Exhibit "R-3". 10. Exhibit "P-4";Exhibit "R-4". 11. Par. 1.10, JSF, Docket (Vol. II),p. 1131. 12. Exhibit "R-3-A". 13. Exhibit "R-4-A". 14. Par. 1.11, JSF, Docket (Vol. II),p. 1131; Exhibit "P-5";Exhibit "R-6". 15. Par. 1.12, JSF, Docket (Vol. II),p. 1131; Exhibit "P-6". 16. Exhibits "R-7","R-8","R-9",and "R-10". 17. Exhibit "R-12". 18. Par. 1.5, JSF, Docket (Vol. II),p. 1130; Exhibit "P-7";Exhibit "R-13". 19. Par. 1.12, JSF, Docket (Vol. II),p. 1131; Exhibit "P-9". 20. Exhibit "R-15". 21. Par. 1.5, JSF, Docket (Vol. II),p. 1130; Exhibits "P-10","P-10-A",and "P-10-B". 22. Exhibit "P-11". 23. Par. 1.7, JSF, Docket (Vol. II),p. 1130; Exhibit "P-12";Exhibit "R-18". 24. Docket (Vol. I),pp. 6-24. 25. Par. 1.13, JSF, Docket (Vol. II),p. 1131; Exhibit "P-14";Exhibit "R-20". 26. Exhibit "P-15". 27. Docket (Vol. I),pp. 61-63. 28. Resolution, Docket (Vol. I),pp. 70-72. 29. Docket, (Vol. I),pp. 75-94. 30. Docket, (Vol. I),pp. 97-101. 31. Docket (Vol. I),pp. 117-130. 32. Docket (Vol. I),pp. 132-144. 33. Docket (Vol. II),pp. 1129-1134. 34. Docket (Vol. II),pp. 1136-1171. 35. Resolutions dated July 2, 2014 and October 30, 2014, Docket (Vol. III),pp. 1605-1606, and pp. 1652-1658, respectively. 36. Resolution, Docket (Vol. IV),pp. 1785-1786. 37. Resolution dated November 6, Docket (Vol. IV),pp. 1831 to 1832. 38. Resolution dated December 7, 2015, Docket (Vol. IV),p. 1836. 39. Docket (Vol. IV),pp. 1837-1871. 40. Docket (Vol. IV),p. 1872. 41. Resolution, Docket (Vol. IV),p. 1873. 42. Docket (Vol. IV),pp. 1874-1877. 43. Docket (Vol. IV),p. 1884. 44. JSF, Docket (Vol. II),pp. 1131-1132. 45. G.R. No. 148380, December 9, 2005. 46. Commissioner of Internal Revenue vs. Isabela Cultural Corporation ,G.R. No. 135210, July 11, 2001. 47. Exhibit "P-12". 48. G.R. 175097, February 5, 2010. 49. Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc. ,G.R. No. 197515, July 2, 2014. 50. Exhibit "P-10-A". 51. Exhibit "P-10-B". 52. Southern Negros Development Corporation vs. Commissioner of Internal Revenue , CTA EB Case No. 162 (CTA Case No. 7075), August 8, 2006, citing the case Calma, et al. vs. Court of Appeals, et al. ,G.R. No. 122787, February 9, 1999. 53. Exhibits "P-10","P-10-A" and "P-10-B". 54. Exhibits "P-33","P-34","P-35","P-36","P-37","P-38","P-39",and "P-40". 55. Commissioner of Internal Revenue vs. Gonzales ,G.R. No. 177279, October 13, 2010. 56. Marcos II vs. Court of Appeals ,G.R. No. 120880, June 5, 1997. 57. BIR records, pp. 77-101. 58. Exhibits "P-187" to "P-189". 59. Exhibits "P-194" to "P-197". 60. A55, Judicial Affidavit of Ma. Soledad D. Lopez, Docket (Vol. I),p. 242. 61. BIR records, pp. 77-101. 62. A56, Judicial Affidavit of Ma. Soledad D. Lopez, Docket (Vol. I),p. 242. 63. Judicial Affidavit of Hazel S. Maximo, Docket (Vol. I),p. 215. 64. Judicial Affidavit of Hazel S. Maximo, Docket (Vol. I),pp. 219-220. 65. Judicial Affidavit of Hazel S. Maximo, Docket (Vol. I),p. 220. 66. Judicial Affidavit of Hazel S. Maximo, Docket (Vol. I),p. 221. 67. Exhibit "R-5". 68. Exhibit "P-11". 69. Difference is due to rounding. 70. Resolutions dated July 2, 2014 and October 30, 2014, respectively, Docket (Vol. III),pp. 1605-1606 and 1652-1658. 71. Exhibit "P-21",Line 31. 72. The total amount of revenue per ORs issued in the amount of P31,602,225.96 is correlated to the undeclared sales discussed under item I.E. ,above. 73. BIR records, pp. 77-101. 74. Exhibits "P-199" to "P-200". 75. TSN, March 11, 2015, pp. 14-15. 76. A7, Judicial Affidavit of Ma. Soledad D. Lopez (Rebuttal Evidence),Docket (Vol. IV),p. 1789. 77. A8, Judicial Affidavit of Ma. Soledad D. Lopez (Rebuttal Evidence),Docket (Vol. IV),p. 1790. 78. G.R. Nos. 172045-46, June 16, 2009. 79. CTA Case No. 5988, January 17, 2002. 80. The Philippines International Fair, Inc. vs. The Collector of Internal Revenue, et al. ,G.R. Nos. L-12928 and L-12932, March 31, 1962. 81. Commissioner of Internal Revenue vs. Lianga Bay Logging Co., Inc., et al. ,G.R. No. L-35266, January 21, 1991. n Note from the Publisher: Written as "Commissioner Internal Revenue" in the original document.