Manila Genesis Entertainment & Management, Inc. v. Jacinto-Henares

SECOND DIVISION [C.T.A. CASE NO. 9259. August 31, 2018.] MANILA GENESIS ENTERTAINMENT & MANAGEMENT, INC. , petitioner , vs. HON. KIM JACINTO-HENARES, in her capacity as Commissioner of the Bureau of Internal Revenue, THE BUREAU OF INTERNAL REVENUE , respondent . DECISION CASTAEDA, JR. , J p : THE CASE This is a Petition for Review 1 filed by Manila Genesis Entertainment & Management, Inc. pursuant to Section 3 (a), Rule 8 of the Revised Rules of the Court of Tax Appeals (RRCTA), praying that judgment be rendered ordering the setting aside of the Commissioner of Internal Revenue's (CIR) Decision dated January 7, 2016 and the reversal and setting aside of the deficiency income tax, value-added tax (VAT), expanded withholding tax (EWT), and final withholding tax (FWT) assessments against petitioner for taxable year 2008 in the aggregate amount of NINE MILLION NINE HUNDRED NINE THOUSAND THREE HUNDRED SEVEN PESOS AND 60/100 (P9,909,307.60) ,inclusive of surcharges, interests, and penalties. DcHSEa THE FACTS Petitioner Manila Genesis Entertainment & Management, Inc. is allegedly a domestic corporation organized and existing under and by virtue [of the laws of] the Republic of the Philippines, with present office address at Unit 906 AIC Burgundy Empire Tower, ADB Avenue cor. Sapphire and Garnet Road, Ortigas Center, [Pasig City]. 2 Respondent Commissioner of Internal Revenue (CIR) is the head of the BIR, vested under the appropriate laws with the authority to carry out the functions, duties and responsibilities of said office including, inter alia ,the power to decide disputed assessments and to cancel and abate tax liabilities, pursuant to the pertinent provisions of the National Internal Revenue Code (NIRC) of 1997, as amended, and other tax laws, rules and regulations. She holds office at the BIR National Office Building, BIR Road, Diliman, Quezon City. On January 16, 2012, petitioner received a copy of a Formal Letter of Demand (FLD) dated January 13, 2012. 3 The Regional Director gave the following details of discrepancies on each particular deficiency, thus: 4 SaCIDT "A. On Deficiency Income Tax a. Non-deductible Donations and Contributions (P1,289,663.00) 'Verification disclosed that the company was net loss at the end of the taxable year wherein no Donations and Contributions can be claimed deductible for income tax purposes x x x.' b. Unaccounted salaries, wages and other benefits (P270,116.06) 'Verification disclosed the discrepancy of salaries, wages and other benefits per Alphalist and those declared in the financial statements x x x wherein the total difference is considered as unaccounted source of cash that led to the inference that part of your income have not been declared x x x.' c. Income payments not subjected to (expanded) withholding tax (P663,858.82) The Regional Director came up with a purported 'discrepancy' from the amount reflected as Professional Fees in the Alphalist to the amount in petitioner's Financial Statements equivalent to P663,858.82 which it derived from a formula that MANILA GENESIS had never seen before, when the truth of the matter is that the amount of Professional Fees reflected in both records are actually the same. d. Disallowed Depreciation Expense (P140,651.00) The Regional Director disallowed this for the reason that it was failed to have been proven (sic) . e. Disallowed Expenses (P175,712.06) The Regional Director found that the Real Property Tax payment (P1,314.06) and Gas & Oil expenses (P174,398.00) were not business-related. f. Royalty Expense not subject to Final Withholding [T]ax (P10,000.00) g. Unaccounted Advances from Affiliate and Accounts Payable (P7,216,639.00) The Regional Director considered all these advances and accounts payable as income saying that these, including the accounts payables were not supported by necessary documents which led to the inference that part of the income of MANILA GENESIS is underdeclared. h. Disallowed Creditable Withholding Tax (P1,589,551.00) The Regional Director stated that MANILA GENESIS failed to submit appropriate documents to validate the claimed Creditable Withholding Tax and hence disallowed all withheld taxes actually paid by MANILA GENESIS at source without as much as a bat of an eyelash. B. On Deficiency Value-Added Tax The Regional Director considered the Income in the Financial Statements amounting to P2,476,367.33 as Income that should have been subjected to the 12% VAT, even as it was clearly indicated in the Financial [S]tatements that this was a dollar denominated sale of service performed outside of the Philippines, which is zero-rated, and thus should have been subjected to a zero-percent VAT rate." SCaITA On February 14, 2012, petitioner filed a protest letter dated February 3, 2012 against the FLD. 5 In response, Regional Director Jonas DP. Amora (RD Amora),of BIR Revenue Region No. 7 wrote a letter to petitioner dated March 30, 2012 stated, among others, as follows: 6 "x x x Please be informed that this case will be forwarded to the Revenue District Office No. 43, Pasig City, for appropriate action. Please address succeeding communications to the said office." On April 20, 2012, petitioner received a letter from Revenue District Officer Florante R. Aninag (RDO Aninag) of BIR Revenue District Office (RDO) No. 43A-Pasig City informing petitioner that they have authorized Revenue Officer Edilberto Nacnac (RO Nacnac) under the supervision of Antonino Ilagan to continue the audit and investigation of petitioner's all internal revenue taxes for the year 2008 pursuant to Letter of Authority No. 000030934 dated June 23, 2009. 7 On June 3, 2014, petitioner received a final decision dated June 2, 2014 issued by RD Amora. 8 On July 2, 2014, a Motion for Reconsideration was filed by petitioner before the Commission[er] of Internal Revenue. 9 On January 14, 2016, petitioner received the Final Decision of the Commissioner of Internal Revenue dated January 7, 2016 denying petitioner's protest. 10 On February 15, 2016, petitioner filed the present Petition for Review. On March 14, 2016, respondent filed a Motion to Direct Petitioner to Amend Petition for Review and for Extension of Time to File Answer. 11 In a Resolution 12 dated March 18, 2016, this Court ordered petitioner to comment on respondent's Motion to Direct Petitioner to Amend Petition for Review and for Extension of Time to File Answer. On March 22, 2016, petitioner filed a Manifestation with attached Amended Petition for Review. 13 In a Resolution 14 dated April 18, 2016, this Court granted respondent's Motion to Direct Petitioner to Amend Petition for Review and for Extension of Time to File Answer, noted petitioner's Manifestation, and admitted petitioner's Amended Petition for Review. Within the extended time granted by the Court, respondent filed his Answer. 15 cHECAS Pre-trial conference for the case was held on July 7, 2016. 16 Petitioner filed its Pre-Trial Brief 17 on July 4, 2016 while respondent filed his Pre-Trial Brief 18 on July 7, 2016. On August 1, 2016, the parties filed their Joint Stipulation of Facts and Issues, 19 which this Court approved and adopted in the Pre-Trial Order 20 dated August 9, 2016. During trial, petitioner presented the following as its witnesses: (1) Ms. Maria Gina T. Lucena, petitioner's Accounting Manager; 21 and (2) Ms. Sarah T. Fontamillas, petitioner's external auditor. 22 In a Resolution dated March 14, 2017, 23 petitioner was deemed to have waived its right to formally offer its exhibits and to have rested its case, considering the report of the Records Division of this Court dated March 9, 2017, 24 stating that petitioner's counsel failed to comply with the Order of this Court dated February 6, 2017. On March 24, 2017, petitioner filed an Omnibus Motion (Motion for Reconsideration and Motion for Additional Settings for Commissioner's Hearing).This Motion was granted by this Court in a Resolution dated May 12, 2017. 25 On July 12, 2017, petitioner filed its Formal Offer of Exhibits. 26 On September 8, 2017, this Court issued a Resolution 27 admitting, as petitioner's evidence, Exhibits "P-1","P-1-A","P-1-B","P-1-C","P-1-D","P-1-E","P-1-F","P-2","P-3","P-4","P-5","P-6","P-8","P-8-A","P-8-A-1" to "P-8-A-31","P-8-A-33","P-8-A-35","P-8-A-37","P-8-A-39","P-8-A-41","P-8-A-43","P-8-A-45","P-8-A-47","P-8-A-49","P-8-A-51","P-8-A-53","P-8-A-55","P-8-A-57","P-8-A-59","P-8-A-61","P-8-A-63","P-8-A-65","P-8-A-67","P-8-A-69","P-8-A-71","P-8-A-73","P-8-A-74","P-8-A-76","P-8-A-78","P-8-A-80","P-8-A-82","P-8-A-84","P-8-A-86","P-8-A-88","P-8-A-90","P-8-A-92","P-8-A-93","P-11-1" to "P-11-5","P-11-7" to "P-11-15","P-11-19","P-11-21","P-11-22","P-11-24","P-11-25","P-11-26","P-11-27","P-11-28","P-11-30","P-11-31","P-11-32","P-11-33","P-11-35","P-11-37","P-11-39","P-11-41","P-11-43","P-11-44","P-11-45","P-11-47","P-11-49","P-11-51","P-11-53","P-11-54","P-11-55","P-11-56","P-11-58","P-11-59","P-11-60","P-11-62" to "P-11-67","P-11-69","P-11-72","P-11-79","P-11-80","P-15","P-15-A","P-16","P-16-A","P-20" and "P-20-A",subject to the Court's final evaluation and/or appreciation of their purposes, materiality, relevancy, and probative value to the issues involved in this case. On the other hand, this Court denied the admission of Exhibits "P-7","P-7-A","P-7-B","P-7-C","P-9","P-9-A","P-10","P-10-A","P-10-B","P-10-C","P-10-D","P-11","P-11-A","P-11-B","P-11-C","P-11-D","P-11-16","P-11-17","P-11-18","P-11-20","P-11-23","P-11-29","P-11-36","P-11-38","P-11-40","P-11-48","P-11-50","P-11-57","P-11-61","P-11-70","P-11-71","P-11-73","P-11-74","P-11-75","P-12","P-12-A","P-12-B","P-12-C","P-13","P-13-A" to "P-13-N","P-17","P-18",and "P-19",for failure to present the originals for comparison. Respondent presented as his sole witnesses, Mr. Edilberto R. Nacnac, Revenue Officer III of the BIR Revenue District Office No. 38-North Quezon City. 28 aTHCSE On November 16, 2017, respondent filed his Formal Offer of Evidence. 29 In a Resolution 30 dated January 5, 2018, the Court admitted Exhibits "R-1","R-2","R-3","R-4","R-5","R-6","R-7","R-8","R-9","R-10","R-11",and "R-11-A",subject to the Court's final evaluation and/or appreciation of their purposes, materiality, relevancy, and probative value to the issues involved in this case. In the same Resolution, the Court granted the parties a period of thirty (30) days within which to file their memoranda. Within the extended period granted by this Court, petitioner filed its Memorandum on March 26, 2018. 31 Respondent, on the other hand, filed his Memorandum on March 28, 2018. 32 Accordingly, the present case was considered submitted for decision in a Resolution dated April 5, 2018. 33 THE ISSUES The parties agreed that the main issues to be resolved by this Court are the following: 34 "I. WHETHER OR NOT THE DONATIONS MADE BY PETITIONER TO SHINING LIGHT FOUNDATION, INC[.],SHOULD BE DISALLOWED. II. WHETHER OR NOT THERE IS BASIS FOR DISALLOWING PETITIONER'S DEPRECIATION EXPENSE. III. WHETHER OR NOT GAS AND OIL EXPENSES MAY BE APPRECIATED IN FAVOR OF PETITIONER. IV. WHETHER OR NOT THERE IS BASIS FOR DISALLOWING CREDITABLE WITHHOLDING TAXES OF PETITIONER. V. WHETHER OR NOT ADVANCES INTENDED FOR CONCERT PRODUCTION MAY BE CONSIDERED AS INCOME SUBJECT TO INCOME TAX. VI. WHETHER OR NOT THERE IS BASIS IN IMPOSING THE 12% VAT ON ZERO[-]RATED SALE OF SERVICES RENDERED ABROAD. VII. WHETHER OR NOT IT IS CORRECT TO CONSIDER THE SALARIES, WAGES, AND OTHER BENEFITS IN THE AMOUNT OF P270,116.06 AS UNACCOUNTED. AHDacC VIII. WHETHER OR NOT THE FORMULA USED BY RESPONDENT IN COMPUTING THE PROFESSIONAL FEE WAS CORRECT." THE COURT'S RULING I. Deficiency Income Tax Based on Formal Letter of Demand (FLD) received by petitioner on January 16, 2012, 35 respondent assessed petitioner of deficiency income tax liability in the amount of P5,007,874.98, computed as follows: Taxable income (loss) per ITR P- Add: Adjustments per investigation Non-deductible donations and contributions P1,289,663.00 Unaccounted salaries, wages and other benefits 270,116.06 Income payments not subjected to withholding tax 663,858.82 Disallowed depreciation expense 140,651.00 Disallowed expenses 175,712.06 Royalty expenses not subjected to final withholding tax 10,000.00 Unaccounted advances from affiliate and accounts payable 7,216,639.00 9,766,639.94 Taxable income per investigation P9,766,639.94 Income tax due thereon (MCIT) P3,418,323.98 Add: Disallowed tax credit/payments Prior year's excess credit other than MCIT P5,306,967.00 Creditable withholding tax claimed 1,589,551.00 Total P6,896,518.00 Less: Excess MCIT over NIT carried over to the next period P175,141.00 Excess tax credit to be carried over to the next period 6,721,377.00 Disallowed creditable tax withheld 1,589,551.00 8,486,069.00 1,589,551.00 Deficiency Income Tax P5,007,874.98 ========== The foregoing arose from the following items found by respondent's examiner, which shall be discussed hereafter: A. Non-deductible donations and contributions P1,289,663.00 B. Unaccounted salaries, wages and other benefits 270,116.06 C. Income payments not subjected to withholding tax 663,858.82 D. Disallowed depreciation expense 140,651.00 E. Disallowed expenses 175,712.06 F. Royalty expenses not subjected to final withholding tax 10,000.00 G. Unaccounted advances from affiliate and accounts payable 7,216,639.00 H. Disallowed creditable tax withheld 1,589,551.00 I. Excess MCIT over NIT carried over to the next period 175,141.00 J. Excess tax credit to be carried over to the next period 6,721,377.00 A. Non-deductible donations and contributions P1,289,663.00 Respondent disallowed petitioner's donations and contributions claimed amounting to P1,289,663.00 for the reason that the latter showed a net loss for the taxable year 2008, hence no donations and contributions can be claimed for income tax purposes pursuant to Section 34 (H) of the NIRC of 1997, as amended, to wit: Section 34. Deductions from Gross Income . x x x cAaDHT xxx xxx xxx (H) Charitable and Other Contributions . (1) In General . Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporation or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations, in accordance with rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner, no part of the net income of which inures to the benefit of any private stockholder or individual in an amount not in excess of ten percent (10%) in the case of an individual, and five percent (5%) in the case of a corporation, of the taxpayer's taxable income derived from trade, business or profession as computed without the benefit of this and the following subparagraphs. (2) Contributions Deductible in Full . Notwithstanding the provisions of the preceding subparagraph, donations to the following institutions or entities shall be deductible in full: (a) Donations to the Government . Donations to the Government of the Philippines or to any of its agencies or political subdivisions, including fully-owned government corporations, exclusively to finance, to provide for, or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture, and in economic development according to a National Priority Plan determined by the National Economic and Development Authority (NEDA),in consultation with appropriate government agencies, including its regional development councils and private philanthropic persons and institutions: Provided ,That any donation which is made to the Government or to any of its agencies or political subdivisions not in accordance with the said annual priority plan shall be subject to the limitations prescribed in paragraph (1) of this Subsection; (b) Donations to Certain Foreign Institutions or International Organizations . Donations to foreign institutions or international organizations which are fully deductible in pursuance of or in compliance with agreements, treaties, or commitments entered into by the Government of the Philippines and the foreign institutions or international organizations or in pursuance of special laws; IDSEAH (c) Donations to Accredited Nongovernment Organizations . The term 'nongovernment organization' means a non-profit domestic corporation: (1) Organized and operated exclusively for scientific, research, educational, character-building and youth and sports development, health, social welfare, cultural or charitable purposes, or a combination thereof, no part of the net income of which inures to the benefit of any private individual; (2) Which, not later than the 15th day of the third month after the close of the accredited nongovernment organizations taxable year in which contributions are received, makes utilization directly for the active conduct of the activities constituting the purpose or function for which it is organized and operated, unless an extended period is granted by the Secretary of Finance in accordance with the rules and regulations to be promulgated, upon recommendation of the Commissioner; (3) The level of administrative expense of which shall, on an annual basis, conform with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner, but in no case to exceed thirty percent (30%) of the total expenses; and (4) The assets of which, in the event of dissolution, would be distributed to another nonprofit domestic corporation organized for similar purpose or purposes, or to the state for public purpose, or would be distributed by a court to another organization to be used in such manner as in the judgment of said court shall best accomplish the general purpose for which the dissolved organization was organized. Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the term 'utilization' means: (i) Any amount in cash or in kind (including administrative expenses) paid or utilized to accomplish one or more purposes for which the accredited non-government organization was created or organized. (ii) Any amount paid to acquire an asset used (or held for use) directly in carrying out one or more purposes for which the accredited nongovernment organization was created or organized. HCaDIS An amount set aside for a specific project which comes within one or more purposes of the accredited nongovernment organization may be treated as a utilization, but only if at the time such amount is set aside, the accredited nongovernment organization has established to the satisfaction of the Commissioner that the amount will be paid for the specific project within a period to be prescribed in rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner, but not to exceed five (5) years, and the project is one which can be better accomplished by setting aside such amount than by immediate payment of funds. (3) Valuation . The amount of any charitable contribution of property other than money shall be based on the acquisition cost of said property. (4) Proof of Deductions . Contributions or gifts shall be allowable as deductions only if verified under the rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner. The subject donations of P1,289,663.00 were made to Shining Light Foundation (SLF),broken down as follows: 36 Month Amount January P128,735.00 February 76,816.00 March 240,234.00 April 106,163.71 May 63,245.00 June 91,829.00 July 165,826.00 August 100,183.00 September 132,239.00 October 78,652.00 37 November 65,715.00 December 40,025.00 TOTAL P1,289,662.71 =========== Petitioner avers that SLF is an accredited nongovernment organization for the upliftment of the marginalized and vulnerable sector of the society. However, the certifications issued by the Philippine Council for NGO Certification (PCNC),the Bureau of Internal Revenue (BIR) and the Department of Social Welfare and Development (DSWD) 38 were denied admission as evidence by the Court for failure to present their originals for comparison in a Resolution dated September 8, 2017. 39 Consequently, petitioner's donations to SLF would fall under Section 34 (H) (1),which limits deductible donations to 5% of petitioner's taxable income as computed without the benefit of the said deduction. aCIHcD Although petitioner submitted BIR Forms No. 2322 Certifications of Donation 40 to substantiate its charitable contributions to SLF, the Court cannot determine the amount of deductible donations since petitioner's amended annual income tax return and the accompanying audited financial statements for the year 2008 41 were not admitted as evidence for failure to present the originals thereof. 42 Thus, the Court is constrained to uphold the disallowance of petitioner's donations and contributions to SLF in the amount of P1,289,663.00. B. Unaccounted salaries, wages and other benefits P270,116.06 Respondent alleged that petitioner has an unaccounted source of cash when the comparison of the salaries and wages account per financial statements and alphalist yields a difference of P270,116.06, computed as follows: 43 Salaries, wages and other benefits: Per Alphalist P7,498,800.06 Per FS 7,228,684.00 Difference P270,116.06 =========== Petitioner argues that the foregoing lacks factual basis. The breakdown of the foregoing computation shows: 44 Accounts FS Alphalist Difference Salaries & wages P6,694,982.00 P6,694,982.76 P0.76 13th month pay 516,486.00 516,486.65 0.65 SSS, PHIC, HDMF contribution 287,330.65 287,330.65 Employee benefits 17,216.00 (17,216.00) TOTAL P7,228,684.00 P7,498,800.06 P270,116.06 =========== =========== =========== It is noted that respondent's examiner failed to include in the computation the SSS, PHIC and HDMF contributions as reflected in petitioner's financial statements. However, the Court cannot determine the correct amount of salaries, wages and other benefits per financial statements because petitioner's audited financial statements are not admitted as evidence. 45 While it is true that the same documents could be found in the BIR Records 46 they still cannot be considered into evidence because they were not formally offered as evidence. On this point, the following ruling of the Supreme Court in Pilipinas Shell Petroleum Corporation v. Commissioner of Customs 47 is, mutatis mutandis ,instructive: " As a matter of fact, even if the aforesaid documentary evidence was included as part of the BOC Records submitted before the CTA in compliance with a lawful order of the court, this does not permit the trial court to consider the same in view of the fact that the Rules prohibit it .The reasoning forwarded by the CTA in Division in its Resolution dated 24 February 2009, that the apparent purpose of transmittal of the records is to enable it to appreciate and properly review the proceedings and findings before an administrative agency, is misplaced. Unless any of the party formally offered in evidence said Memorandum, and accordingly, admitted by the court a quo ,it cannot be considered as among the legal and factual bases in resolving the controversy presented before it ." (Emphasis supplied and citations omitted) Thus, respondent's findings of unaccounted source of cash resulting from the difference of salaries, wages and other benefits between petitioner's financial statements and alphalist is upheld. AHCETa C. Income payments not subjected to withholding tax P663,858.82, and Deficiency Expanded Withholding Tax P89,334.65 Respondent disallowed income payments amounting to P663,858.82 that were allegedly not subjected to withholding tax, thus: 48 Per FS Per Alphalist Difference Professional fees P1,277,060.00 Talent fees 1,093,594.00 Total P2,370,654.00 P1,787,134.69 P583,519.31 Honorarium & Commission 145,956.00 143,456.49 2,499.51 Advertising & Promotions 77,840.00 - 77,840.00 Income payments not subjected to WT P663,858.82 ========= The amount of P1,787,134.69 is computed as follows: 49 Professional fees subjected to 10% P175,151.40 Divide by should be tax rate 15% Professional fees deemed subjected to withholding P1,167,676.00 Professional fees subjected to 15% 619,458.69 Professional fees per [alphalist] P1,787,134.69 ========== Petitioner counters that the foregoing formula is misleading as there are actual figures reported in the financial statements and that the amounts appearing in the alphalist as professional fees and talent fees are equal to the amount reported in the financial statements. 50 cHaCAS However, the subject financial statements 51 and alphalist 52 were not admitted as evidence by the Court for petitioner's failure to submit the original documents for comparison. 53 Thus, the Court affirms the disallowance of P663,858.82 due to non-withholding. Consequently, petitioner is liable for deficiency expanded withholding tax in the amount of P89,334.65, computed as follows: Professional fees P583,519.31 15% P87,527.90 Honorarium & commission 2,499.51 10% 249.95 Advertising & promotions 77,840.00 2% 1,556.80 Deficiency expanded withholding tax P89,334.65 ========= D. Disallowed depreciation expense P140,651.00 Petitioner's depreciation expense of P140,651.00 is disallowed by respondent for the former's alleged failure to prove that it is a valid deduction. Section 34 (F) of the NIRC of 1997, as amended, clearly provides for the depreciation deduction of a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. However, like other deductions from gross income, it must be substantiated. 54 But then again, the Court upholds the disallowance of petitioner's depreciation expense amounting to P140,651.00 for the reason that the Court cannot ascertain whether or not petitioner's claim is valid because there is no admitted evidence to prove the claim. E. Disallowed expenses P175,712.06 Respondent disallowed the following expenses for being not business related: 55 Real property tax Cainta P1,314.06 Gas and oil 174,398.00 Disallowed expense P175,712.06 ========== Petitioner avers that the disallowance has no basis. It is represented that gas and oil expenses will have to be incurred in the furtherance of petitioner's primary purpose "to engage in the business of television, commercial, live performance, concert or other entertainment productions x x x." Petitioner cited the requisites for the deductibility of ordinary and necessary expenses as enumerated in the case of Commissioner of Internal Revenue v. Isabela Cultural Corporation , 56 thus: ScHADI (a) the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. 57 Further, Ma. Gina T. Lucena, petitioner's accounting manager, testified: 58 " 23. Q: Going back to the Assessment, what can you [sic] about the disallowed gas and oil expenses for 2008? A: We do not agree. We claimed a total amount P174,389.00 for one year or about Php14,532.41 per month or an average of Php484/day. We believe these are reasonable amounts considering that the company owns an automobile which is reflected in the 2008 Audited Financial Statements and we have receipts to back up the claim." However, petitioner did not submit the receipts to prove that it complied with the previously mentioned requisites and its audited financial statements were denied admission. Thus, the disallowance should be maintained. F. Royalty expenses not subjected to final withholding tax P10,000.00 and Deficiency Final Withholding Tax P2,000.00 This particular disallowance of royalty expense is unrefuted by petitioner. Hence, the Court should not disturb the same. Accordingly, the Court likewise upholds the deficiency final withholding tax assessment amounting to P2,000.00 (P10,000.00 x 20%). With regard to the compromise penalty of P700.00 imposed by respondent, the Court finds it proper to cancel the imposition thereof. Pursuant to Revenue Memorandum Order (RMO) No. 01-90, as amended by RMO No. 19-07, compromise penalties are only 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. Such penalties imply mutual agreement between the taxpayer and the respondent. Without the taxpayer's consent to the payment of compromise penalties, the same should not be imposed. In the case of De San Agustin v. Commissioner of Internal Revenue , 59 the Supreme Court held that: "The Court of Tax Appeals correctly held that the compromise penalty of P20,000.00 could not be imposed on petitioner, a compromise being, by its nature, mutual in essence. The payment made under protest by petitioner could only signify that there was no agreement that had effectively been reached between the parties ." (Emphasis supplied) G. Unaccounted advances from affiliate and accounts payable P7,216,639.00 Respondent's examiner found that the following are not supported by necessary documents, which is assessed as undeclared income: 60 DACcIH Advances from Affiliate P2,044,113.00 Accounts Payable 5,172,526.00 Unaccounted Advances from Affiliate and Accounts Payable P7,216,639.00 =========== Petitioner argues that the foregoing cannot be considered income and should not be subject to income tax pursuant the basic concept of income and jurisprudence, citing the doctrine of ownership, the flow of wealth test, economic benefit principle and the claim of right doctrine. 61 Petitioner's accounting manager thus explained: 62 " 24. Q. What can you say about the accounts payable that was allegedly unsubstantiated per BIR investigation in the total amount of Php7,216,639 [sic] which were treated as income and had been subjected to VAT? A: That is not true. In Manila Genesis' 2008 Financial Statements, the accounts payables in the amount of P5,172,526.00 were referred to as "liabilities" to pay for goods or services that have been received or supplied but have not been paid, invoices or formally agreed with the suppliers. We have presented an itemized summary of accounts payable with the BIR. 25. Q: What can you say about the account Advances from Affiliates amounting to PHp2,044,113 [sic] which were disallowed and treated as income subjected to VAT? A: These are Advances from Affiliates amounting to P2,044,113.00 were likewise defined as advances for operating fund and capital expenditures, and these advances to Manila Genesis made by its officers were intended for concert production in pursuit of its business. We have limited capital and we need to source funds from other affiliates like G.V. Productions, Inc. which were more liquid, to finance the operations." However, no supporting documents were submitted to substantiate the foregoing allegations. The Court is constrained to uphold the assessment. H. Disallowed creditable tax withheld P1,589,551.00 Petitioner's creditable withholding taxes of P1,589,551.00 for the taxable year 2008 are disallowed by respondent for petitioner's alleged failure to validate the claimed CWT. aICcHA To refute the said findings, petitioner submitted its Schedules of Withholding Tax Credits and Certificates of Creditable Tax Withheld at Source (BIR Forms No. 2307).However, some of these documents are denied admission for petitioner's failure to present the originals for comparison. 63 Thus, only creditable taxes withheld in the amount of P997,957.37 are considered: 64 Exh. Period Covered Payor CWT P-11-1 7/22/2008 7/22/2008 AB Food & Beverages Phils.,Inc. P158,823.53 P-11-2 12/1/2008 12/31/2008 ABC Development Corp. 784.31 P-11-3 11/1/2008 11/30/2008 ABC Development Corp. 1,176.47 P-11-4 1/1/2008 12/31/2008 ABS-CBN Broadcasting Corp. 341,801.35 P-11-5 1/1/2008 12/31/2008 ABS-CBN Film Productions, Inc. 15,454.83 P-11-7 1/1/2008 3/31/2008 Ace Saatchi & Saatchi Advertising, Inc. 29,117.65 P-11-8 1/1/2008 3/31/2008 Aquas de Marco Unlimited, Inc. 14,117.65 P-11-9 7/1/2008 7/31/2008 Avon Cosmetics 1,411.77 P-11-10 1/1/2008 12/31/2008 Axantis Productions, Inc. 2,117.65 P-11-11 4/1/2008 6/30/2008 Banco de Oro Unibank, Inc. 1,666.66 P-11-12 7/1/2008 9/30/2008 Bloomworks, Inc. 17,647.06 P-11-13 9/23/2008 9/23/2008 BPI Family Savings Bank 2,823.53 P-11-14 4/1/2008 4/30/2008 Bell Pepper, Inc. 5,000.00 P-11-15 4/30/2008 4/30/2008 BPI Family Savings Bank 1,764.71 P-11-19 1/1/2008 12/31/2008 Creative Programs, Inc. 22,276.87 P-11-21 1/1/2008 12/31/2008 Donita Rose Cavett 1,511.90 P-11-22 2/7/2008 2/7/2008 Enav Logistics Mgt. Services, Inc. 392.16 P-11-24 3/1/2008 3/31/2008 Ever Bilena Cosmetics, Inc. 2,222.22 P-11-25 1/1/2008 3/31/2008 Fortune Medicare, Inc. 2,142.86 P-11-26 4/1/2008 6/30/2008 GE Money Bank, Inc. 1,000.00 P-11-27 1/1/2008 12/31/2008 GMA Network, Inc. 60,602.15 P-11-28 1/1/2008 10/31/2008 Golden ABC, Inc. 17,647.06 P-11-30 1/1/2008 3/31/2008 Golden ABC, Inc. 36,317.65 P-11-31 7/1/2008 9/30/2008 Golden ABC, Inc. 35,435.30 P-11-32 1/1/2008 1/31/2008 Hewlett Packard Phils. Corp. 20,840.25 P-11-33 1/1/2008 12/31/2008 Harrison Communications, Inc. 9,705.88 P-11-35 1/1/2008 12/31/2008 In-Depth Direct Marketing Consultancy, Inc. 14,117.65 P-11-37 1/1/2008 12/31/2008 Jericho Rosales 11,845.24 P-11-39 9/1/2008 9/30/2008 Henares, Victoria 10,000.00 P-11-41 4/1/2008 6/30/2008 Kumon Philippines, Inc. 2,470.60 P-11-43 10/1/2008 10/31/2008 Lyceum of the Philippines University 4,419.64 P-11-44 1/1/2008 12/31/2008 Manila Alpha Genesis Publishing Company 2,343.75 P-11-45 1/1/2008 12/31/2008 Manna Entertainment Productions, Inc. 7,589.29 P-11-47 1/31/2008 12/31/2008 Maverick Films, Inc. 12,352.94 P-11-49 2/1/2008 2/29/2008 Megaworld Corporation 160.71 P-11-51 9/1/2008 9/30/2008 Omniessence, Incorporated 517.86 P-11-53 3/1/2008 3/31/2008 PAGCOR-CF-Pavilion 3,705.88 P-11-54 6/1/2008 6/30/2008 PAGCOR 1,666.67 P-11-55 6/1/2008 6/21/2008 PAGCOR 3,777.77 P-11-56 1/1/2008 3/31/2008 PAGCOR 1,333.33 P-11-58 4/1/2008 6/30/2008 PLDT 1,785.71 P-11-59 11/1/2008 11/30/2008 Prince of Peace Entertainment Co.,Inc. 2,823.53 P-11-60 4/1/2008 6/30/2008 Red Events & Communications, Inc. 2,823.52 P-11-62 10/1/2008 12/31/2008 RFM Corporation 20,294.11 P-11-63 9/1/2008 9/30/2008 Select Media, Inc. 4,235.29 P-11-64 7/1/2008 7/31/2008 Strategic Works, Inc. 2,888.89 P-11-65 1/1/2008 12/31/2008 Television and Production Exponents, Inc. 2,888.88 P-11-66 4/1/2008 6/30/2008 Unilever Philippines, Inc. 21,176.47 P-11-67 10/1/2008 12/31/2008 Unilever Foods Philippines, Inc. 4,235.29 P-11-69 10/1/2008 12/31/2008 United Laboratories, Inc. 17,110.35 P-11-72 10/1/2008 12/31/2008 Viva Communications, Inc. 37,592.53 TOTAL P997,957.37 ========= Hence, the disallowed creditable taxes withheld is adjusted to the amount of P591,593.63 (P1,589,551.00 less P997,957.37). HSCATc At this point, it is worthy to note the citation made by the Supreme Court in the case of Commissioner of Internal Revenue v. Hon. Raul M. Gonzalez, Secretary of Justice, L. M. Camus Engineering Corporation (Represented by Luis M. Camus and Lino D. Mendoza) , 65 which reads: "As we held in Marcos II v. Court of Appeals : 'The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessment .x x x'" (Emphasis supplied) Petitioner contends that the basis of the Court's evaluation should be the BIR Records which have been submitted to the Court. "While [it] failed to present original copies of some of the material documents to prove its claim as they have been transmitted to the BIR as per testimony of its Accounting Manager Ma. Gina T. Lucena, petitioner was able to establish by testimonial evidence and other related exhibits that have been admitted." 66 It should be emphasized that cases filed before the CTA are litigated de novo .The Supreme Court ruled: 67 Under Section 8 of RA 1125, the CTA is described as a court of record. As cases filed before it are litigated de novo , party litigants should prove every minute aspect of their cases. No evidentiary value can be given the purchase invoices and receipts submitted to the BIR as the rules on documentary evidence require that these documents must be formally offered before the CTA . (Emphasis supplied) Thus, petitioner's contention is untenable. EHaASD I. Excess MCIT over NIT carried over to the next period P175,141.00 J. Excess tax credit to be carried over to the next period P6,721,377.00 Respondent's Details of Discrepancies attached to the FLD 68 does not show any explanation why the foregoing excess MCIT over NIT and excess tax credit carried over to the next period are disallowed. This Court can only surmise that the disallowance must be to recapture the benefit of the tax credit against the income tax liability for the succeeding taxable period. However, any tax benefit from the said carry-over redounds to the succeeding year, which is beyond the scope of respondent's Letter of Authority (LOA) that covers the year 2008 only. This is pursuant to Revenue Memorandum Order No. 19-2009 which states: II. COVERAGE The 2009 Audit Program shall cover the audit/investigation of 2008 internal revenue tax returns, including tax returns of fiscal period taxpayers whose taxable year ended on July 31, 2008 up to June 30, 2009. xxx xxx xxx IV. POLICIES AND PROCEDURES xxx xxx xxx 1. The policy on the simultaneous investigation of all liabilities of the taxpayer shall be followed. One LA/TVN shall be issued for each taxable year or period to include all internal revenue tax liabilities of the taxpayer and shall remain to be valid and enforceable even without the mark of the BIR dry seal as long as the LA/TVN is authentic and duly issued by the authorized revenue official. (Emphasis supplied) Hence, the exclusion of petitioner's excess MCIT over NIT and excess tax credit carried over to the next period in the amounts of P175,141.00 and P6,721,377.00, respectively, is not in order. Nevertheless, petitioner is not liable for deficiency income tax for the year 2008 as shown hereafter: Taxable income (loss) per ITR P- Add: Adjustments per investigation Non-deductible donations and contributions P1,289,663.00 Unaccounted salaries, wages and other benefits 270,116.06 Income payments not subjected to withholding tax 663,858.82 Disallowed depreciation expense 140,651.00 Disallowed expenses 175,712.06 Royalty expenses not subjected to final withholding tax 10,000.00 Unaccounted advances from affiliate and accounts payable 7,216,639.00 9,766,639.94 Taxable income per investigation P9,766,639.94 Income tax due thereon (MCIT) P3,418,323.98 Add: Disallowed tax credit/payments Prior year's excess credit other than MCIT P5,306,967.00 Creditable withholding tax claimed 1,589,551.00 Total P6,896,518.00 Less: Disallowed creditable tax withheld 591,593.63 6,304,924.37 Deficiency Income Tax P(2,886,600.39) II. Deficiency Value-Added Tax Respondent found that petitioner has deficiency VAT for the taxable year 2008 amounting to P1,224,818.41, computed thus: IDTSEH Sales/Receipts per VAT returns P14,787,332.67 Add: Adjustment per investigation Sales/Receipts not subjected to VAT P2,476,367.33 Unaccounted Salaries, wages and other benefits 270,116.06 Unaccounted Advances from affiliate and accounts payable 7,216,639.00 9,963,122.39 Taxable sales per investigation P24,750,455.06 Output tax due thereon P2,970,054.61 Less: Allowable credits/payments Input tax claimed P579,921.95 Payments 1,194,557.97 Total P1,774,479.92 Less: Disallowed input 29,243.72 1,745,236.20 Deficiency Value Added Tax P1,224,818.41 =========== The deficiency VAT assessment arose from the following items, which will be discussed hereafter: A. Sales/Receipts not subjected to VAT P2,476,367.33 B. Unaccounted Salaries, wages and other benefits 270,116.06 C. Unaccounted Advances from affiliate and accounts payable 7,216,639.00 D. Disallowed input 29,243.72 A. Sales/Receipts not subjected to VAT P2,476,367.33 To arrive at the alleged sales/receipts not subjected to VAT, respondent's examiner compared petitioner's sales/receipts per financial statements/ITR with the VAT returns, to wit: 69 DaIAcC Sales/receipts per financial statements/ITR (including other income) P17,263,700.00 Sales/receipts per VAT returns 14,787,332.67 Sales/receipts not subjected to value-added tax P2,476,367.33 =========== Petitioner countered that P2,086,172.00 of its sales/receipts were dollar-denominated sale of services done abroad and were not subjected to VAT as professed by its accounting manager, to wit: 70 " 26. Q: What can you say about the VAT assessment of Php2,476,367.33? A: This is wrong because the management fees in the amount of P2,086,172.00 that have not been subjected to VAT was a dollar-denominated sale of services done abroad, and thus, must be zero-rated in output VAT." Corollary thereto, petitioner's external auditor stated: 71 " 23. Q: What can you say about the VAT assessment of Php2,476,367.33? A: We know for a fact that Manila Genesis had booked income earned from abroad which were paid in dollars. Hence, there should no VAT [sic] from these income." However, aside from the foregoing testimonies, petitioner did not submit supporting documents to prove its allegation that the subject sales/receipts qualify for zero-rating under Section 108 (B) (2) of the NIRC of 1997, as amended. Thus, the Court is constrained to uphold respondent's assessment. B. Unaccounted Salaries, wages and other benefits P270,116.06 C. Unaccounted Advances from affiliate and accounts payable P7,216,639.00 As discussed previously in the income tax assessment, it is found that petitioner failed to substantiate these items and thereby overturn the assessment. Likewise, the Court finds no reason to cancel the assessment pertaining to VAT. D. Disallowed input P29,243.72 Petitioner did not dispute this disallowance of input taxes, hence, the same should be maintained. In sum, petitioner should be liable for deficiency VAT as assessed by respondent in the amount of P1,224,818.41. SICDAa WHEREFORE ,the present Petition for Review is PARTIALLY GRANTED .Accordingly, the deficiency income tax assessment issued against petitioner for taxable year 2008 is CANCELLED and SET ASIDE . However, the deficiency VAT, EWT, and FWT assessments issued against petitioner for taxable year 2008 are UPHELD .Accordingly, petitioner is ORDERED TO PAY deficiency VAT, EWT and FWT for the taxable year 2008 in the aggregate amount of P8,703,966.21, inclusive of 25% surcharge imposed under Section 248 (A) of the NIRC of 1997, as amended, and deficiency and delinquency interest imposed under Section 249 (B) and (C) of the NIRC of 1997, as amended, until December 31, 2017, computed as follows: VAT EWT FWT Total Basic P1,224,818.41 P89,334.65 P2,000.00 P1,316,153.06 Surcharge 306,204.60 22,333.66 500.00 329,038.27 TOTAL P1,531,023.01 P111,668.31 P2,500.00 P1,645,191.33 Deficiency Interest From 1/25/2009 72 to 12/31/2017 (P1,224,818.41 x 20% x 8.9370 yrs.) 2,189,240.43 2,352,992.49 From 1/15/2009 73 to 12/31/2017 (P89,334.65 x 20% x 8.9644 yrs.) 160,166.31 From 1/15/2009 74 to 12/31/2017 (P2,000.00 x 20% x 8.9644 yrs.) 3,585.76 Subtotal P3,720,263.44 P271,834.62 P6,085.76 P3,998,183.82 Delinquency Interest From 2/13/2012 75 to 12/31/2017 (P3,720,263.44 x 20% x 5.8849 yrs.) 4,378,675.66 4,705,782.39 From 2/13/2012 76 to 12/31/2017 (P271,834.62 x 20% x 5.8849 yrs.) 319,943.91 From 2/13/2012 77 to 12/31/2017 (P6,085.76 x 20% x 5.8849 yrs.) 7,162.82 TOTAL P8,098,939.10 P591,778.53 P13,248.58 P8,703,966.21 =========== =========== =========== =========== In addition, petitioner is ORDERED TO PAY delinquency interest at the rate of 12%,which is double the legal interest rate for loans or forbearance of any money, on the total unpaid amount including basic deficiency VAT, expanded withholding tax and final withholding tax, surcharge and deficiency interest as computed above in the aggregate amount of P3,998,183.82, computed from January 1, 2018 78 until full payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as amended by Republic Act No. 10963, also known as Tax Reform for Acceleration and Inclusion (TRAIN). SO ORDERED. (SGD.) JUANITO C. CASTAEDA, JR. Associate Justice Caesar A. Casanova and Catherine T. Manahan, JJ. ,concur. Footnotes 1. Docket, Vol. I, pp. 10-32. 2. Petition for Review, Docket, Vol. I, pp. 10-11. 3. Par. 2, Stipulation of Facts, Joint Stipulation of Facts and Issues (JSFI),Docket, Vol. II, p. 783. 4. Par. 3, Stipulation of Facts, JSFI, Docket, Vol. II, pp. 783-785. 5. Par. 4, Stipulation of Facts, JSFI, Docket, Vol. II, p. 785. 6. Id. 7. Par. 5, Stipulation of Facts, JSFI, Docket, Vol. II, p. 785. 8. Par. 6, Stipulation of Facts, JSFI, Docket, Vol. II, p. 785. 9. Par. 7, Stipulation of Facts, JSFI, Docket, Vol. II, p. 785. 10. Par. 8, Stipulation of Facts, JSFI, Docket, Vol. II, p. 786. 11. Docket, Vol. I, pp. 253-256. 12. Id. ,p. 258. 13. Id. ,pp. 259-285. 14. Id. ,pp. 489-490. 15. Id. ,pp. 495-501. 16. Minutes of the Hearing dated July 7, 2016, Docket, Vol. I, p. 523. 17. Docket, Vol. I, pp. 504-514. 18. Id. ,pp. 515-521. 19. Docket, Vol. II, pp. 783-787. 20. Id. ,pp. 792-796. 21. Minutes of the Hearing dated August 22, 2016, Docket, Vol. II, p. 809; Minutes of the Hearing dated February 6, 2017, Docket, Vol. II, p. 862. 22. Minutes of the Hearing dated October 19, 2016, Docket, Vol. II, p. 837. 23. Docket, Vol. II, p. 871. 24. Id. ,p. 869. 25. Id. ,pp. 883-885. 26. Id. ,pp. 903-944. 27. Id. ,pp. 1186-1188. 28. Minutes of the Hearing dated October 30, 2017, Docket, Vol. III, p. 1221. 29. Docket, Vol. III, pp. 1225-1228. 30. Id. ,pp. 1237-1238. 31. Docket, Vol. III, pp. 1247-1275. 32. Id. ,pp. 1276-1285. 33. Id. ,p. 1286. 34. Stipulation of the Issues, JSFI, Docket, Vol. II, p. 786. 35. Exhibit "P-1-F",Docket, Vol. II, pp. 951-954. 36. Exhibit "P-8",Docket, Vol. II, p. 984. 37. Includes a donation in the amount of P5,000.00 to Ma. Victoria Dalanon. 38. Exhibits "P-7-A","P-7" and "P-7-C, Docket, Vol. II, pp. 980-981 & 983. 39. Docket, Vol. II, pp. 1186-1188. 40. Exhibits "P-8-A" to "P-8-A-93",Docket, Vol. II, pp. 985-1049. 41. Exhibits "P-9" and "P-9-A",Docket, Vol. II, pp. 1050-1073. 42. See Note 38. 43. Exhibit "P-1-F",Docket, Vol. II, p. 953. 44. Petition for Review, Docket, Vol. I, p. 29. 45. See Notes 38 and 39. 46. BIR Records, pp. 142-166. 47. G.R. No. 195876, December 5, 2016, 812 SCRA 1, 47-48. 48. Exhibit "P-1-F",Docket, Vol. II, p. 953. 49. Id. 50. Petition for Review, Docket, Vol. I, p. 30. 51. Exhibit "P-9-A",Docket, Vol. II, pp. 1051-1073. 52. Exhibits "P-13" to "P-13-N",Docket, Vol. II, pp. 1159-1173. 53. See Note 38. 54. Section 34 (A) (1) (b) of the NIRC of 1997, as amended. 55. Exhibit "P-1-F",Docket, Vol. II, p. 953. 56. G.R. No. 172231, February 12, 2007, citing Commissioner of Internal Revenue v. General Foods (Phils.), Inc. ,G.R. No. 143672, April 24, 2003, 401 SCRA 545, 551. 57. Paragraph 36, Memorandum for the Petitioner, Docket, Vol. III, pp. 1264-1265. 58. Exhibit "P-15",Docket, Vol. II, p. 803. 59. G.R. No. 138485, September 10, 2001, 364 SCRA 802, 811. 60. Exhibit "P-1-F",Docket, Vol. II, p. 954. 61. Petition for Review, Docket, Vol. I, pp. 26-27. 62. Exhibit "P-15",Docket, Vol. II, pp. 803-804. 63. Resolution dated September 8, 2017, Docket, Vol. II, pp. 1186-1188. 64. Docket, Vol. II, pp. 1084-1154; Exhibits "P-11-79" and "P-11-80" are duplicates of Exhibits "P-11-4" and "P-11-5",respectively. 65. G.R. No. 177279, October 13, 2010, 633 SCRA 139, 171. 66. Paragraph 60, Memorandum for the Petitioner, Docket, Vol. III, pp. 1273-1274. 67. Commissioner of Internal Revenue vs. Manila Mining Corporation , G.R. No. 153204, August 31, 2005, 468 SCRA 571, 588-589. 68. Exhibit "P-1-F",Docket, Vol. II, pp. 951-954. 69. Exhibit "P-1-F",Docket, Vol. II, p. 954. 70. Exhibit "P-15",Docket, Vol. II, p. 804. 71. Exhibit "P-16",Docket, Vol. II, pp. 540-541. 72. Sec. 4.114-1 (A) of Revenue Regulations No. 16-2005. 73. Sec. 2.58 of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 17-03. 74. Id. 75. Exhibit "P-1-A",Docket, Vol. II, p. 946. 76. Exhibit "P-1-E",Docket, Vol. II, p. 950. 77. Exhibit "P-1-B",Docket, Vol. II, p. 947. 78. Republic Act No. 10963, Section 87.