Village Green Hog Farm, Inc. v. Commissioner of Internal Revenue

EN BANC [C.T.A. EB CASE NO. 1252. May 17, 2016.] (C.T.A. Case No. 8375) VILLAGE GREEN HOG FARM, INC. , petitioner , vs. COMMISSIONER OF INTERNAL REVENUE , respondent . DECISION UY , J p : Before Us is a Petition for Review filed on December 19, 2014 by Village Green Hog Farm, Inc. against the Commissioner of Internal Revenue, assailing the Decision dated August 1, 2014 1 and Resolution dated November 14, 2014, 2 both rendered by the Second Division of this Court (Court in Division) in CTA Case No. 8375 entitled "Village-Green Hog Farm, Inc., Petitioner, versus Com. Kim S. Jacinto-Henares, Commissioner of Internal Revenue, Respondent" ,insofar as it sustained the application of the fifty percent disallowance rule. The dispositive portions of said Decision and Resolution respectively read: Decision dated August 1, 2014 : " WHEREFORE ,in view of the foregoing, the assessments issued by respondent against petitioner covering deficiency income and EWT for taxable year 2007 is hereby AFFIRMED with some modifications. Accordingly, petitioner [is] ORDERED TO PAY respondent the amount of P5,982,990.40 representing deficiency income tax and EWT for taxable year 2007, inclusive of the 25% surcharge imposed under Section 248(3) of the NIRC of 1997, computed as follows: Basic Tax 25% Surcharge Total Deficiency Income Tax P4,763,258.28 P1,190,814.57 P5,954,072.85 Deficiency EWT 23,134.04 5,783.51 28,917.55 Total P4,786,392.32 P1,196,598.08 P5,982,990.40 =========== =========== =========== In addition, petitioner is ORDERED TO PAY the following: a) Deficiency interest at the rate of 20% per annum on the basic deficiency income tax of P4,763,258.28 computed from April 15, 2008 and on the basic deficiency EWT of P23,134.04 computed from January 15, 2008 until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; b) Delinquency interest at the rate of 20% per annum on the total amount of P5,982,990.40 and on the 20% deficiency interest which have accrued as aforestated in (a), computed from June 21, 2010 until full payment thereof pursuant to Section 249 (C) of the NIRC of 1997, as amended. TAIaHE SO ORDERED. " Resolution dated November 14, 2014 : " WHEREFORE ,premises considered, petitioner's Motion for Partial Reconsideration is hereby DENIED for lack of merit. SO ORDERED. " THE FACTS Petitioner Village Green Hog Farm, Inc. (VGHFI) is a corporation organized and existing under Philippine laws with address at 12 Samar Avenue, South Triangle, Diliman, Quezon City. Respondent is the duly appointed Commissioner of Internal Revenue vested with authority to exercise the functions of said office, including inter alia ,the power to abate or cancel a tax liability when the tax or any portion thereof appears to be unjustly or excessively assessed, and holding office at the BIR National Office Building, Diliman, Quezon City. On July 21, 2008, petitioner received the Letter of Authority (LOA) No. 00039501 dated July 18, 2008, authorizing revenue officers to examine petitioner's books of accounts and other accounting records for taxable year 2007. Along with the LOA is a First Request for Presentation of Records dated July 21, 2008 (collectively referred to herein as "LOA"). In the letter dated July 23, 2008, petitioner acknowledged the LOA but did not heed to respondent's request for presentation of records, arguing that their 2006 ongoing audit has not been completed. Thus, on August 15, 2008, petitioner received the Second Request for Presentation of Records dated August 12, 2008. Petitioner acknowledged the second request and reiterated that the company's 2006 audit is ongoing. On September 1, 2008, petitioner received a Final Request for Presentation of Records dated August 28, 2008. Petitioner reiterated in its letter dated September 2, 2008 that its 2006 audit is yet to be concluded, but nevertheless undertook to perform partial compliance on October 2008. In the letter dated October 27, 2008, petitioner submitted photocopies of some of the documents in partial compliance to respondent's request for documents, and assured that other required documents will be submitted as soon as the ongoing 2006 audit is completed. Respondent issued a Subpoena Duces Tecum on March 3, 2009, commanding petitioner to appear on March 23, 2009, and to bring and submit books of accounts and other accounting records for 2007, i.e. ,General Special Journals, General Subsidiary Ledgers, Sales Invoices & Official Receipts, Expense Vouchers & Purchase Invoices. On March 23, 2009, petitioner's representative appeared without the required documents subject of the subpoena before Atty. Geraldine Llaguno of the Legal Division of Revenue Region No. 7, Bureau of Internal Revenue (BIR),Quezon City, explaining that petitioner had been submitting documents to the BIR and have undertaken to make full compliance upon completion of the 2006 audit; petitioner's representative likewise explained that the books and records are available for inspection in their office until March 24, 2009 to bring the subpoenaed documents. Petitioner claims to have submitted for inspection the documents subject of the subpoena, except for the Expense Vouchers and Purchase Invoices, during the meeting on March 24, 2009. It declared that it did not leave any of the documents subject of the subpoena in BIR's custody; this is due to a prior occurrence where petitioner's records were allegedly lost by the BIR. However, the transmittal letter dated March 24, 2009, which contains the list of documents for inspection, was not received by the respondent, and petitioner claims that Atty. Llaguno refused to receive the said letter. The letter dated April 2, 2009 was posted by petitioner to the Chief of the Legal Division for BIR Quezon City stating its invitation to the BIR to examine petitioner's books anytime during office hours from Monday to Friday. The BIR filed a criminal complaint against petitioner for failure to obey summons, in violation of Sections 5 and 14, penalized under Section 266, in relation to Sections 253 and 256 of the 1997 National Internal Revenue Code (NIRC). The Post Reporting Notice dated June 2, 2009 was issued by the BIR inviting petitioner to an informal conference where petitioner may present its objections and submit other documentary evidence in support of its claims. During the informal conference held on June 25, 2009, petitioner, through its representative, mentioned that the 2006 audit is still ongoing; that it had been communicating with the BIR and complying with the request for documents. Respondent's revenue officer, Cesar Cabrera, manifested his willingness to visit the company to inspect petitioner's books of accounts as soon as the hearings on the criminal complaint were concluded. Meanwhile, on August 10, 2009, a Resolution was issued by the City Prosecutor of Quezon City, recommending the dismissal of the criminal complaint filed by respondent against petitioner due to insufficiency of evidence. On April 27, 2010, petitioner received the Preliminary Assessment Notice (PAN) dated April 20, 2010, assessing petitioner for deficiency income tax and expanded withholding tax (EWT) for the calendar year December 31, 2007. Petitioner protested the PAN through the letter dated May 13, 2010. cDHAES On June 1, 2010, petitioner received the Formal Letter of Demand (FLD) dated May 21, 2010, with the attached copies of Details of Discrepancies and Assessment Notices (Demand No. 39-B-25-07) for deficiency income tax amounting to P7,039,866.37, and for deficiency EWT amounting to P41,270.63, all dated May 21, 2010 covering taxable year 2007 (hereinafter collectively referred to as "FAN"). On June 9, 2010, petitioner filed its protest letter dated June 4, 2010 against the assessments issued by respondent and requested for the cancellation of the assessments. Tax Verification Notice (TVN) No. 00198789 was issued on July 21, 2010, authorizing Revenue Officer Warren Cris Mores to conduct a reinvestigation relative to petitioner's protest of the FAN. Revenue Officer Mores notified petitioner, through the letter dated November 8, 2010, that he will be conducting an audit investigation on November 17, 2010 and advised petitioner to prepare all the listed documentary requirements to facilitate his investigation. On November 17, 2010 and January 6, 2011, Revenue Officer Mores appeared at petitioner's office to conduct examination of books of accounts and other accounting records of petitioner, pursuant to TVN No. 00198789. On October 12, 2011, petitioner received the FINAL DECISION of respondent on its protest, reiterating the assessments issued against petitioner for their alleged failure to submit documents in support of their protest. This prompted petitioner to file a Petition for Review before the Court in Division on November 11, 2011 docketed as CTA Case No. 8375. In her Answer in CTA Case No. 8475 filed on January 2, 2012, respondent interposed special and affirmative defenses, the relevant portions of which are quoted below: "5. The assessments for calendar year 2007 in the amounts of P7,039,866.37 and P41,270.63 for deficiency income and expanded withholding taxes, respectively, were issued in compliance with the provisions of Section 228 of the National Internal Revenue Code (NIRC) and in accordance with existing Revenue Rules and Regulations relative to the right of the petitioner to be informed of the factual and legal bases upon which the assessments were made. The factual and legal bases of the assessments are stated in the accompanying Schedule '1' or Detail of Discrepancies; 6. The disallowance of various business expense is due to the fact that petitioner failed to produce the required books of accounts and other accounting records thereby failing to substantiate with sufficient evidence the amount of expenses being claimed and their direct connection or relation to the development, management, operation and/or conduct of the trade and business of the taxpayer; 7. For the reason that petitioner did not comply with the mandate of the Subpoena Duces Tecum validly issued against it, Respondent was constrained to resort to the Best Evidence Obtainable Rule pursuant to Revenue Memorandum Circular No. 23-2000, under which 50% of petitioner's claimed deductions was disallowed; 8. Tax assessments by tax examiners are presumed correct and made in good faith. ..." After the pre-trial proceedings held on March 14, 2012 in CTA Case No. 8375, the parties filed their Joint Stipulation of Facts and Issues on March 29, 2012 which was later approved in the Resolution dated April 3, 2012. In the same Resolution, the pre-trial was considered terminated. Thereafter, trial proceeded, giving both parties the opportunity to present and formally offer their respective documentary and testimonial evidence in support of their claims and contentions. The case was submitted for decision on August 13, 2013, taking into consideration petitioner's Memorandum submitted on August 1, 2013 and respondent's Memorandum filed on August 5, 2013. In the assailed Decision, 3 the Court in Division affirmed with modifications the deficiency income tax and deficiency EWT assessments issued by respondent against petitioner for taxable year 2007. In addition, the Court in Division imposed a 25% surcharge, and deficiency interest and delinquency interest, pursuant to Section 248 (3), and Section 249 (B) and (C), both of the NIRC of 1997, respectively. On August 19, 2014, petitioner filed its Motion for Partial Reconsideration of the said Decision. 4 Subsequently, respondent filed her Comment/Opposition to Petitioner's Motion for Partial Reconsideration (of the Decision dated August 1, 2014) on September 18, 2014. 5 On November 14, 2014, the Court in Division issued the assailed Resolution, denying petitioner's Motion for Partial Reconsideration for lack of merit. 6 Undaunted, petitioner filed a Motion for Extension of Time to File Petition for Review on December 3, 2014, 7 praying for a period of fifteen (15) days from December 4, 2014, or until December 19, 2014, within which to file the Petition for Review. The Court En Banc granted petitioner a final and non-extendible period of fifteen (15) days from December 4, 2014 or until December 19, 2014, within which to file its Petition for Review. 8 On December 19, 2014, the instant Petition for Review was filed by petitioner, praying that the assailed Decision and Resolution be reversed and set aside, insofar as it sustained the application of the fifty percent (50%) disallowance rule. ASEcHI In the Resolution dated January 29, 2015, 9 the Court En Banc ordered respondent to file her comment within ten (10) days from receipt thereof. Thus, on February 23, 2015, respondent filed her Comment/Opposition to Petitioner's "Petition for Review" (filed on December 19, 2014). 10 Subsequently, the Court En Banc ,through the Resolution dated March 11, 2015, 11 directed the parties to file their memoranda within a non-extendible period of thirty (30) days from receipt thereof. On May 6, 2015, petitioner filed its Memorandum . 12 Respondent, however, failed to file her memorandum. 13 In the Resolution dated June 9, 2015, 14 the instant case was deemed submitted for decision. Hence, this Decision. THE ISSUES Petitioner raises the following issues for the Court En Banc 's resolution, to wit: "I. WHETHER OR NOT RESPONDENT COMMISSIONER ACTED BEYOND HER AUTHORITY WHEN IT DISALLOWED FIFTY PERCENT OF PETITIONER'S COST OF SALES. THERE WAS NO UTTER REFUSAL ON THE PART OF PETITIONER TO SUBMIT ITS RECORDS. THE USE OF THE BEST EVIDENCE OBTAINABLE RULE IS, THEREFORE, INAPPROPRIATE. II. IN THE EVENT THAT PETITIONER IS FOUND LIABLE FOR ANY DEFICIENCY TAX, WHETHER OR NOT IT SHOULD NOT BE HELD LIABLE FOR DEFICIENCY AND DELINQUENCY INTEREST." 15 Petitioner's arguments: Petitioner argues that there was no utter refusal on its part to present its records to substantiate its expenses. Nonetheless, according to petitioner, there may be hesitation and wariness in submitting its records, but such hesitation is not without reason, and certainly not utter refusal. According to petitioner, its wariness stemmed from an unfortunate experience in the hands of respondent, when its records submitted pertaining to another taxable year were lost with nary an explanation from respondent. It insists that it has always been upfront with such circumspection and respondent was aware of this. Furthermore, petitioner avers that from the time petitioner informed respondent that it will not be submitting original copies of its records, not only because of its previous experience in the hands of respondent, the latter's stance against petitioner became tough and harsh, including the filing of a criminal complaint before the Office of the City Prosecutor of Quezon City for allegedly refusing to produce books of accounts and other accounting records for the year 2007. Moreover, petitioner submits that the acts of respondent's agents effectively made it impossible to comply with the Subpoena Duces Tecum. It is also the submission of petitioner that while the findings of the Office of the City Prosecutor, in dismissing the criminal complaint against petitioner's President, are not controlling upon this Court, their findings, however, have persuasive effect to disprove the finding that petitioner's reticence in submitting its records was willful, intentional and deliberate. As to the finding of the Court in Division that it was incumbent on the petitioner to prepare and present the documents required, petitioner contends that it was, in fact, primed to do that if only Revenue Officer Mores stayed and allowed petitioner to do so; but said Revenue Officer only stayed for an hour because he was complaining that it was too hot in petitioner's office. According to petitioner, with this kind of approach and mindset, there was no way for petitioner to present all of the required documents to Revenue Officer Mores. Finally, petitioner asserts that the imposition of deficiency and delinquency interest is likewise unjustified. According to petitioner, it has always acted in good faith in dealing with respondent; and while its hesitation to submit its records to the BIR has caused delay in payment of taxes, if any, such hesitation was not whimsical or capricious but based on valid grounds. Respondent's counter-arguments: For her part, respondent contends that petitioner cannot insist that the non-submission of its 2007 books of accounts as required by the Subpoena Duces Tecum issued is because its 2007 records were lost by respondent. According to respondent, the 2006 tax investigation and the loss of petitioner's 2006 records do not have any bearing on its 2007 tax investigation and do not bar respondent from being provided with the books of accounts and other commercial records of petitioner, more so pursuant to a legal process of Subpoena Duces Tecum wherein petitioner was commanded to appear and present/submit the books and records requested. THE COURT EN BANC 'S RULING The instant Petition lacks merit. There was refusal on the part of petitioner to present its records for the BIR's examination and inspection. Petitioner strongly denies that there is utter refusal on its part to present its records to substantiate its expenses. ITAaHc The Court En Banc does not believe so. In this case, it is undisputed that the BIR has sent, and petitioner has received, three (3) requests for the submission of certain documents/schedules, and the presentation of books of accounts/accounting records to be checked or examined, for taxable year 2007. 16 The said books of accounts/accounting records are enumerated as follows: "A. General Ledger; B. Sales and Purchase Books; C. Subsidiary Sales and Purchase Journals; D. Cash Receipts and Disbursement Books; E. Cash and Journal vouchers, Delivery Receipts and Bank Statements; F. Purchase Invoices, Sales Invoices and Official Receipts; G. Other Related Accounting Records." Worthy of note is that it is only after receipt of the third request (denominated as Final Request for Presentation of Documents dated August 28, 2008) that petitioner begin to adhere to said requests by submitting only some of the documents/schedules requested, and none of the above-enumerated books of accounts/accounting records. 17 At this point, petitioner's refusal to completely present its books of accounts/accounting records is already manifest. The Court En Banc cannot accept petitioner's reasons for refusing to present the documents requested, i.e. , that the 2006 tax audit of petitioner has not been completed, and that the BIR lost its original records in the past. This must be so because the BIR has been given the duty to examine and inspect petitioner's books of accounts, including subsidiary books and other accounting records for each taxable year, in accordance with Section 235 of the NIRC of 1997, to wit: "SEC. 235. Preservation of Books of Accounts and Other Accounting Records. All the books of accounts, including the subsidiary books and other accounting records of corporations, partnerships, or persons, shall be preserved by them for a period beginning from the last entry in each book until the last day prescribed by Section 203 within which the Commissioner is authorized to make an assessment. The said books and records shall be subject to examination and inspection by internal revenue officers: Provided, That for income tax purposes, such examination and inspection shall be made only once in a taxable year ,except in the following cases: (a) Fraud, irregularity or mistake, as determined by the Commissioner; (b) The taxpayer requests reinvestigation; (c) Verification of compliance with withholding tax laws and regulations; (d) Verification of capital gains tax liabilities; and (e) In the exercise of the Commissioner's power under Section 5(B) to obtain information from other persons in which case, another or separate examination and inspection may be made. Examination and inspection of books of accounts and other accounting records shall be done in the taxpayer's office or place of business or in the office of the Bureau of Internal Revenue. ...." (Emphases and underscoring supplied) Based on the foregoing, the examination and inspection of the BIR should be made at least once in a taxable year, except in certain cases. Thus, the BIR's duty to look into the books of account and other accounting records of taxpayers accrue for each taxable year. Such being the case, neither the completion of the 2006 tax audit on petitioner is required for, nor its previous experience of losing its records a valid reason to prevent, the commencement of the 2007 tax audit. In the instant case, the BIR treated petitioner's partial compliance as no compliance at all. Consequently, the BIR, through the Chief of the Legal Division, issued the Subpoena Duces Tecum dated March 3, 2009 addressed to the President of petitioner, 18 directing him to submit the following documents on March 23, 2009, to wit: 1. General & Special Journals; 2. General & Subsidiary Ledgers; 3. Sales Invoices & Official Receipts; and 4. Expense Vouchers & Purchase Invoices. Relative thereto, it is established that while petitioner was able to bring the first three (3) items stated in the said Subpoena Duces Tecum to the BIR's Legal Division, petitioner did not bring the Expense Vouchers & Purchase Invoices. In other words, petitioner again failed to present all the documents which are required to be brought in violation of and pursuant to the same Subpoena Duces Tecum. Correspondingly, the BIR issued the PAN dated April 20, 2010, 19 assessing petitioner in the amount of P6,876,086.11, including interest, the great portion of which is attributable to the 50% disallowance of petitioner's expenses, as shown below: Taxable Income per ITR P120,375.00 Add: Adjustments per investigation: Income payment not subjected to withholding tax P1,388,111.00 Disallowed expenses (50% rule) 12,525,469.00 Unaccounted source of cash 86,372.19 13,999,952.19 Taxable income per investigation P14,120,327.19 Income tax due thereon P4,942,114.52 Less: Allowable tax credits/payments: Payments 42,131.25 Deficiency Income Tax P4,899,983.27 Add: 20% Interest p.a. (04.16.08 to 04.21.10) 1,976,102.84 Total Amount Due P6,876,086.11 ============ The said finding of Disallowed expense in the amount of P12,525,469.00 was restated in the FLD dated May 21, 2010, 20 assessing petitioner the same basic income tax due in the amount of P4,942,114.52. CHTAIc Petitioner protested the said FLD in its letter dated June 4, 2010. 21 As a consequence, the BIR sent the letter dated July 6, 2010, 22 informing petitioner that the case was for forwarded to RDO No. 39-South Quezon City. Subsequently, the BIR issued TVN No. 2003-00198789 dated July 21, 2010 addressed to petitioner, 23 informing the latter that Revenue Officer Mores, was authorized to verify the supporting documents and/or records relative to taxable year 2007 for reinvestigation. Thereafter, on November 17, 2010, Revenue Officer Mores appeared before petitioner to conduct examination of its books of accounts and other accounting records and documents. 24 It was, however, noted that petitioner still failed to present the same. 25 With all the foregoing circumstances, it is clear that there was refusal on the part of petitioner to present its books of accounts and accounting records, especially in relation to its expenses and purchases. Moreover, We are still not convinced that petitioner intended to present the said books of accounts and accounting records, even upon the assumption that the following allegations by petitioner are true, to wit: "3.29 On 06 January 2011, RO Mores again visited petitioner's offices where he checked the sales invoices and official receipts only. RO Mores also requested for a summary of operating expenses. Petitioner's bookkeeper, however, stated that the summary of operating expenses was already submitted to the BIR. RO Mores also did not ask to look at petitioner's check vouchers for the support of the expenses. 3.30 RO Mores informed petitioner's bookkeeper that a Waiver of the Defense of Prescription be signed first in order for him to continue his audit. The said Waiver, however, was not approved by the Company's Board of Directors. RO Mores only stayed for one hour in petitioner offices. " 26 (Emphasis supplied) This is so because if petitioner had all the intention to present its books of accounts and accounting records, it could have easily executed the said Waiver of the Defense of Prescription in order to extend the period of limitation for respondent to assess or collect the subject taxes. 27 By executing the said Waiver, petitioner would have been given ample opportunity to present all the necessary records to satisfy the BIR requirements within the extended period. However, petitioner opted not to execute the Waiver, and it failed to present its books of accounts and accounting records. Moreover, to the mind of the Court, the alleged one (1) hour supposed stay of Revenue Officer Mores in petitioner's office is not sufficient excuse to justify petitioner's non-production of the required documents, as one (1) hour is sufficient time for petitioner to present its Expense Vouchers & Purchase Invoices. Thus, We see no error in the finding of the Court in Division that there was refusal on the part of petitioner to present its books of accounts and accounting records. The BIR's application of the best evidence obtainable rule is justified in this case. The "best evidence obtainable" rule is anchored on Section 6 (B) of the NIRC of 1997, which provides as follows: "SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax Administration and Enforcement. xxx xxx xxx (B) Failure to Submit Required Returns, Statements, Reports and other Documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by laws or rules and regulations or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. " The law is clear and specific. The rule on the "best evidence obtainable" applies when a tax report required by law for the purpose of assessment is not available or when the tax report is incomplete or fraudulent. 28 There is and there should be a presumption of regularity accorded this action of the Commissioner of Internal Revenue in assessing the tax on the best evidence obtainable, otherwise it would be impossible to assess taxes due from a dishonest taxpayer. 29 Pertinent portions of Revenue Memorandum Circular No. 23-00 30 implement the "best evidence obtainable" rule, to wit: "SECTION 2. Prescribed Revenue Procedures. xxx xxx xxx 2.3 Assessment Based on Best Evidence Obtainable. An assessment based on best evidence obtainable is justified when any of the grounds provided by law is clearly established viz. : EATCcI 1. The report or records requested from the taxpayer are not forthcoming i.e. ,the records are lost; refusal of the taxpayer to submit such records ; 2. The reports submitted are false, incomplete or erroneous. In every case where a taxpayer is ordered to be examined and he refuses or fails to submit his records giving rise to the issuance of a subpoena duces tecum pursuant to RMO No. 35-90, the assessment shall only be issued after a criminal case has been instituted for failure to obey summons. After filing of the complaint against the taxpayer for violation of the Subpoena Duces Tecum , the Legal Division/Prosecution Division shall immediately return the docket of the case to the concerned Revenue Officer. The Revenue Officer shall, upon receipt of the docket, immediately proceed to determine the taxpayer's deficiency internal revenue tax liability in accordance with the 'Best Evidence Obtainable.' 2.4 Existing Revenue Procedures and Jurisprudence Governing Assessment Based on the Best Evidence Obtainable. Provided hereunder are the existing revenue procedures and jurisprudence governing issuance of a deficiency tax assessment based on the best evidence obtainable: xxx xxx xxx (c) Assessment Based on Estimate; 50% Rule, in the Absence of Receipts to Prove Actual Amount of Expense Deduction. The Court held in the Mariano Zamora case 31 that, if there is a showing that expenses have been incurred but the exact amount thereof cannot be ascertained due to absence of documentary evidence ,it is the duty of the BIR to make an estimate of the deduction that may be allowable in computing the taxpayer's taxable income, bearing heavily against the taxpayer whose inexactitude is of his own making. That disallowance of 50% of the taxpayer's claimed deduction is valid. " (Emphases supplied) In relation thereto, Section 34 (A) (1) (b) of the NIRC of 1997, as amended, emphasizes the importance of substantiating the taxpayer's expenses or deductions from gross income. It provides: "SEC. 34. Deductions from Gross Income. Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section other than under Subsection (M) hereof, in computing taxable income subject to income tax under Sections 24(A);25(A);26; 27(A),(B) and (C);and 28(A)(1),there shall be allowed the following deductions from gross income: (A) Expenses. (1) Ordinary and Necessary Trade, Business or Professional Expenses. xxx xxx xxx (b) Substantiation Requirements. No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. " (Emphasis supplied) Moreover, in Commissioner of Internal Revenue vs. General Foods (Phils.), Inc. , 32 the Supreme Court said: "It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications. Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed, then deductions must also be strictly construed. " (Emphasis supplied) In this case, since there is a clear showing that there was refusal on the part of petitioner to present its books of accounts and other accounting records, particularly its Expense Vouchers & Purchase Invoices ,the BIR is justified in disallowing 50% of petitioner's claimed deduction. The imposition of deficiency and delinquency interest is justified. Petitioner asserts that the imposition of deficiency and delinquency interest is unjustified. According to petitioner, it has always acted in good faith in dealing with respondent; and while its hesitation to submit its records to the BIR has caused delay in payment of taxes, if any, such hesitation was not whimsical or capricious but based on valid grounds. We do not agree. The imposition of interest is a just compensation to the state for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that rightfully should be in the government's hands. 33 In this case, the subject income tax was not immediately paid by petitioner. Thus, the deficiency and delinquency interests are validly imposed. DHITCc Anent its claim of good faith in dealing with respondent, the same is untenable. Petitioner has not shown that it acted in good faith in dealing with the BIR, particularly in the non-presentation of its Expense Vouchers & Purchase Invoices .As pointed out earlier, petitioner has not provided a good reason and legal justification in not providing the said documents. And even granting that petitioner indeed acted in good faith, such good faith alone is not sufficient. In Tambunting Pawnshop, Inc. vs. Commissioner of Internal Revenue , 34 the Supreme Court said: "It is settled that good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law are sufficient justification to delete the imposition of surcharges and interest." (Emphasis supplied) Thus, surcharges and interests may be deleted only if there is "good faith and honest belief that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law" .In other words, the "good faith and honest belief" is dependent on the fact "that one is not subject to tax on the basis of previous interpretations of government agencies tasked to implement the tax law" .In this case, the alleged "good faith" of petitioner does not rest on such fact. WHEREFORE ,all the foregoing considered, the instant Petition for Review is DENIED for lack of merit. Accordingly, the Decision dated August 1, 2014 and Resolution dated November 14, 2014, both rendered by the Court in Division in CTA Case No. 8375 are AFFIRMED. SO ORDERED. (SGD.) ERLINDA P. UY Associate Justice Roman G. del Rosario, P.J.,Juanito C. Castaeda, Jr.,Lovell R. Bautista, Caesar A. Casanova, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla, Amelia R. Cotangco-Manalastas and Ma. Belen M. Ringpis-Liban, JJ., concur. Footnotes 1. EB Docket, pp. 33 to 82 (including Annex A of the Decision);Penned by Associate Justice Amelia R. Cotangco-Manalastas, and concurred by Associate Justice Juanito C. Castaeda, Jr. and Associate Justice Caesar A. Casanova. 2. EB Docket, pp. 84 to 90. 3. EB Docket pp. 33 to 82 (including Annex A of the Decision);Division Docket (CTA Case No. 8375) Vol. III, pp. 913 to 962. 4. Division Docket (CTA Case No. 8375) Vol. III, pp. 1109 to 1127. 5. Division Docket (CTA Case No. 8375) Vol. III, pp. 1253 to 1259. 6. EB Docket, pp. 84 to 90; Division Docket (CTA Case No. 8375) Vol. III, pp. 1261 to 1267. 7. EB Docket, pp. 1 to 5. 8. Minute Resolution dated December 10, 2014, EB Docket, p. 6. 9. EB Docket, pp. 232 to 233. 10. EB Docket, pp. 234 to 239. 11. EB Docket, pp. 241 to 242. 12. EB Docket, pp. 243 to 265. 13. Records Verification dated May 25, 2015. 14. EB Docket, pp. 269 to 270. 15. EB Docket, p. 252. 16. Exhibits "E","G",and "I";Refer also to BIR Records, pp. 36, 42, and 52. 17. Exhibit "K";and BIR Records, p. 56. 18. Exhibit "L";and Exhibit "4",BIR Records, p. 99. 19. Exhibit "Z";and Exhibit "11",BIR Records, pp. 159 to 162. 20. Exhibit "BB";and Exhibit "12-b",BIR Records, pp. 177 to 180. 21. Exhibit "CC";and Exhibit "14",BIR Records, pp. 187 to 188. 22. Exhibit "DD";and BIR Records, p. 193. 23. Exhibit "EE";and Exhibit "15",BIR Records, p. 196. 24. Exhibit "16-a",BIR Records, p. 245. 25. Supra. 26. Petitioner's Memorandum, EB Docket, p. 260. 27. A waiver of the statute of limitations defined as "an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain." ( Philippine Journalists, Inc. vs. Commissioner of Internal Revenue , G.R. No. 162852, December 16, 2004). 28. Sy Po vs. Court of Tax Appeals, et al. ,G.R. No. 81446, August 18, 1988. 29. Li Yao vs. Collector of Internal Revenue ,G.R. No. L-11875, December 28, 1963. 30. SUBJECT: Existing Revenue Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on the "Best Evidence Obtainable". 31. Referring to the case of Mariano Zamora vs. Collector of Internal Revenue, et al., etseq. ,G.R. Nos. L-15290, L-15280, L-15289, L-15281, May 31, 1963. 32. G.R. No. 143672, April 24, 2003. 33. Central Azucarera Don Pedro vs. Court of Tax Appeals, et al. ,G.R. Nos. L-23236 & L-23254, May 31, 1967. 34. G.R. No. 179085, January 21, 2010.