Commissioner of Internal Revenue v. Court of Tax Appeals

TWELFTH DIVISION [CA-G.R. SP No. 20490. November 29, 1993.] (C.T.A. Case No. 2275) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HON. COURT OF TAX APPEALS and MARIETTA KALAW, INC. , respondents . D E C I S I O N MARTIN , JR ., J p : This petition for review was originally filed with the Supreme Court where it was docketed as G.R. No. 57247 but was later transferred to this Court for disposition pursuant to a resolution dated March 21, 1990 (p, 166, Rollo). Assailed in this petition for review under Rule 45 of the Revised Rules of Court is the decision of the Court of Tax Appeals in C.T.A. Case No. 2275 entitled "Marietta Kalaw, Inc., petitioner, versus, The Commissioner of Internal Revenue, respondent", the pertinent portions of which read as follows: "For all the foregoing, the computation of the amount refundable to petitioner for the year 1968 is as follows: Net income per amended return P45,159.50 Add: Unallowable deduction: Gains from sale of property other than capital assets P13,783.08 Net taxable income P58,942.58 ======== Tax due thereon P41,745.00 Amount already paid 41,072.00 BALANCE REFUNDABLE P26,237.00 ======== Accordingly, respondent Commissioner of Internal Revenue is hereby ordered to refund to or grant a tax credit in favor of petitioner Marietta Kalaw, Inc. the amount of P26,237.00 as overpaid income tax for 1968. WHEREFORE, the decision assessing petitioner for deficiency income tax is hereby modified as indicated in the above opinion of the Court and the assessment for personal holding company income declared null and void. Without pronouncement as to costs. SO ORDERED." (pp. 12-13, CTA Decision; pp. 45-46, Rollo; p. 129, Original Records) The material operative facts which gave rise to the instant petition are as follows: Marietta Kalaw, Incorporated (MKI for brevity) is a domestic corporation duly registered with the Securities and Exchange Commission and engaged in the real estate business with principal office at 1200 J. Bocobo Street, Ermita, Manila (Exhibit D; p. 2, Petition; p. 10, Rollo; Annex D; p. 75, Rollo). On April 14, 1969, MKI filed its income tax return for the calendar year ending Dec. 31, 1968 with the Bureau of Internal Revenue (BIR for short) declaring a net taxable income of P154,066.20 and paid the income tax due thereon in the total amount of P41,072.00 covered by two (2) installments as evidenced by O.R. No. A-0519577 dated April 14, 1969 in the sum of P20,536.00 and O.R. No. A-0519629 dated July 15, 1969 in the amount of P20,536.00, respectively (p. 2, Petition; Exhibit A, Petitioner's Envelope; Exhibit 9; p. 140, BIR Records-Folder I; Exhibits E and E-1, Petitioner's Envelope). After the BIR thru its examiner-in-charge conducted the necessary investigation of the aforesaid tax returns, it notified the MKI in a letter dated September 30, 1970 of its deficiency income tax under section 24 of the Tax Code in the amount of P12,022.00 and additional tax as personal holding company pursuant to Section 63 of the Tax Code in the sum of P74,206.44, respectively, subject to such objections that MKI may raise therein (Exhibit 1; p. 141, BIR Records-Folder I; Exhibit 8; p. 150, BIR Records-Folder I). MKI decided instead to file an amended income tax return on February 16, 1971 reporting a net taxable income in the amount of P45,150.50 which resulted in a tax liability of only P10,610.00 contrary to its original payment of P41,072.00, thereby showing an overpayment of P30,462.00 (pp. 2-3, CTA Decision; pp. 35-36, Rollo; Annex B, Comments of the Respondents; p. 70, Rollo; p. 152, BIR Records-Folder I; Exhibit C and 12; pp. 168-179, BIR Records-Folder I). Accordingly. MKI filed with the BIR on April 15, 1971 a claim for refund of the amount of P30,462.00 alleging that the difference was due to the reporting of the gains from sales or exchange of capital assets in the amount of P221,134.68 instead of P89,624.68 actually received in the taxable year 1968. The amount of P221,134.68 was mistakenly entered on the basis of the realization of the full income it had been adopting a cash basis method of reporting income (p. 3, CTA Decision; Exhibit F; p. 40, BIR Records-Folder II). In the meantime that its claim for refund was still pending resolution by the BIR, MKI appealed the case before the court a quo alleging inter alia that the preparation of its income tax return for the calendar year ending December 31, 1968 reported gains from the sale of stocks it owned although full payment for such sale should have been made only in the taxable year 1969; that the sum of P131,151.00 which is the difference between the amount of P221,134.88 as reported in its 1968 original income tax return and the sum of P89,624.68 indicated in the amended income tax return would result in a refundable amount of P30,462.00; that said difference was later on carried over in the tax year 1969; that the amendments made in the 1968 and 1969 income tax returns reflected the true and fair report of its respective income; and that in view of the foregoing, MKI prayed for the refund of P30,462.00 representing the overpaid income tax for the taxable year 1968 (pp. 1-4, CTA Records; p. 3, CTA Decision; P. 36, Rollo). After the contending parties presented their documentary and testimonial evidences, the court a quo found out that the BIR finally assessed the MKI as per its formal letter dated December 27, 1973 the total amount of P88,490.13 representing the payment of deficiency income tax for 1968 in the sum of P14,185.96 broken down as follows: "ACR-36-4-800594-73/68 Net income per return P154,066.20 Add: Unallowable deductions: 1. Interest expense P22,549.30 2. Loss on sale of fixed assets 14,408.35 37,022.65 Net income per investigation P191,068.85 Tax due thereon 53,094.00 Less: Amount already Assessed 41,072.00 Balance P12,022.00 Add: % mo. int. fr. 4-16-69 to 4-16-72 2,163.96 TOTAL AMOUNT DUE & COLLECTIBLE P14,185.96" ========= (p. 4, CTA Decision; Annex C, Comments of the Respondent; p. 72, Rollo; Exhibit 14; pp. 309-310, BIR Records-Folder I) and a 45% personal holding company tax for the same year in the amount of P74,304.17, the details of which are as follows: "Total amount subject to tax P139,932.55 45% personal holding company tax due thereon P62,696.64 Add: mo. int. fr. 4-16-69 to 4-16-72 11,334.53 TOTAL AMOUNT DUE & COLLECTIBLE P74,304.17" ========= (p. 5, CTA Decision; Annex C, Comments of the Respondent; p. 72, Rollo; Exhibit 14; pp. 309-310, BIR Records-Folder I) despite the result stated in the investigative report dated January 18, 1972 verified by BIR revenue examiner Pastor Oscaya who recommended to the Chief of the Real Estate and Transfer Taxes Division that the overpayment of income tax for taxable year 1968 in the amount of P29,785.00 must be refunded to MKI (p. 4, CTA Decision; Exhibits B-3, B-3-A; pp. 47, 48, BIR Records-Folder II). Unable to accept the foregoing assessments, MKI thru its external auditor filed a letter of protest contesting the validity of the assessments and claiming that the aforementioned assessments were based solely on the original income tax return filed on April 14, 1969 and disregarded completely the facts contained in the amended income tax return filed on February 16, 1971; that the amount of P89,642.86 was actually received by the company in 1968 instead of the reported amount of P211,134.68 leaving difference of P131,510.00 which was only realized and actually received in 1969; that because of readjustment made in the amended income tax return, the difference was carried over in the 1969 income tax return considering that it was only that year when the same was paid and received by the MKI; that under these factual circumstances, the assessment for the deficiency income tax was rendered moot and academic precisely because of the amended income tax return which showed that an overpayment of P30,462.00 exists; that the changes caused by such amendment with the difference in the amount of P131,510.00 in the original income tax return reflected the total gross income in the year 1968 in the amount of P311,518.38 (erroneously stated as P443,028.38), out of which only P147,026.83 constituted as personal holding income which therefore disqualified the MKI from availing of the 45% additional tax on its undistributed net income; and that in view of the foregoing, the MKI should be entitled to a refund and the imposition of the personal holding company tax amounting to P74,304.17 was without legal basis (Annex C, Comments of the Respondents; pp. 74-81; pp. 237-246, BIR Records-Folder I). After trial on the merits, the court a quo handed down its decision as earlier adverted to. Dissatisfied, the CIR interposed the instant petition ascribing the following assignment of errors, to wit: I THAT THE RESPONDENT COURT OF TAX APPEALS ERRED IN HOLDING THAT RESPONDENT TAXPAYER MKI CAN VALIDLY CHANGE DURING THE PERIOD COVERED BY HEREIN TAX ASSESSMENTS ITS METHOD OF ACCOUNTING WITHOUT PRIOR NOTICE AND PERMISSION FROM PETITIONER CIR. II THAT THE RESPONDENT COURT OF TAX APPEALS ERRED IN HOLDING THAT RESPONDENT TAXPAYER MKI IS NOT LIABLE TO THE HEREIN TAX ASSESSMENTS; AND III THAT THE RESPONDENT COURT OF TAX APPEALS ERRED IN HOLDING THAT RESPONDENT TAXPAYER MKI IS ENTITLED TO A P266,237.00 TAX REFUND AND/OR TAX CREDIT. This instant petition is not impressed with merit. Because of their inextricable interrelation, the assigned errors will be discussed together. Petitioner CIR argues that respondent MKI violated the provisions set forth in Section 168 of Revenue Regulations No. 2, which require the latter to secure first the consent of the former for purposes of changing its method of accounting in keeping books by filing an application to that effect within ninety (90) days after the beginning of the taxable year with a statement specifying all amounts which would be duplicated or entirely omitted as a result of the proposed change subject to the condition that both parties should agree to the terms and conditions under which the change will be affected. We do not subscribe to this line of reasoning. While it may be true that the foregoing provision of said revenue regulation appears mandatory, the same cannot be strictly applied in the case at bar because the respondent MKI did not actually shift from the regular cash method to the accrual shift of accounting. Evidence on record showed that signed the incorporation of the respondent MKI on May 25, 1958, it has consistently adopted the cash method of accounting (Exhibits A to A-13; pp. 83-84; pp. 80-100, BIR Records-Folder I) which was fully explained by its external auditor in its letter of protest dated April 15, 1974 addressed to the petitioner CIR after the latter sent its final assessment dated December 27, 1973 (Annex D, Comments of the Respondent; pp. 74-81, Rollo). This fact is borne by the testimony of respondent's accountant (Zenaida Diaz) who confirmed the regular cash method used by the company in reporting its income, to wit: "Q. As the accountant of the petitioner, do you know of any accounting method which is being used by the petitioner for the reporting its income, for tax purposes? A. We use the cash basis method of accounting in reporting our income . Q. Under this cash basis method, what income do you report for income tax purposes? A. We report as income, for income tax purposes, the actual receipts of income . Q. Would or, could you remember an instance wherein petitioner has reported income which was not actually received? A. Yes, I can recall in the year 1968 there was a report of income for the sale of investments in the amount of P221,134.68 which was reported as gain on sale of investments. But we found out later in 1971, out of this P221,134.68 only P89,624.68 was actually received in 1968, and the difference of P131,510.00 was actually received in 1969. That is why the petitioner filed an amended return to reflect the true income of the petitioner for the year 1968 and filed it . Also the amended income tax return for the year 1969, to reflect the true income of 1969. Q. As a result of this, what resulted from there amendments of the 1968 and 1969 income tax returns which you mentioned? A. It resulted to overpayment of income tax of P30,462.00 because the income tax due should have been only P10,610.00." (Emphasis Supplied; pp. 5-7, TSN, February 23, 1979; p. 155, Rollo) It must be emphasized that the error made by respondent MKI was subsequently rectified with the filing of its 1968 amended income tax return. The petitioner CIR cannot just presume that respondent MKI devised such scheme to avoid the payment of the tax because there in nothing in the records which will show that respondent MKI acted in bad faith when it decided to correct its mistake in its 1968 amended income tax return. Indeed, oral and documentary evidences disclose the fact that the aforementioned difference of P131,150.00 was already carried over in the 1969 income tax before the petitioner made the final assessment of the tax liabilities of the respondent MKI (p. 2, Hearing dated August 1974; p. 310, BIR Records-Folder I; Annex D, Comments of the Respondent; p. 78, Rollo). There is still another cogent reason why the petitioner's position against the change of accounting method must fail. Pertinent provisions of the then Tax Code declare: "SEC. 46. Corporation returns . (a) Requirement . Every corporation subject to the tax herein imposed, shall render, in duplicate, a true and accurate return of its annual net income in the manner and form prescribed by the Commissioner of Internal Revenue with the approval of the Secretary of Finance, and containing such facts, data, and information as are appropriate and in the opinion of the Commissioner of Internal Revenue necessary to determine the correctness of the net income returned and to carry out the provisions of this Title. The return shall be filed by the president, vice-president, or other principal officer, and shall be sworn to by such officer and by the treasurer or assistant treasurer." (p. 168, NIRC by Montejo) There is nothing in the law which precludes respondent MKI from filing an amended income tax return even after a proposed assessment is made, or for that matter even after an assessment on the original return has been issued. In other words, amended income tax may be filed within a reasonable time as the law does not specify a particular time frame. It cannot even be said that the period of five (5) years for purposes of assessment already lapsed considering that respondent MKI filed its 1968 amended income tax return only after two (2) years from the time the 1968 original only after two (2) years from the time the 1968 original income tax return was filed on April 14, 1969. After all, the CIR is not preclude from making a deficiency assessment based on the taxpayer's amended return since the prescriptive period of five (5) years to assess is counted from the filing of the amended income tax return (Phoenix Assurance Company vs. CIR, 14 SCRA 52). To Our mind, the petitioner CIR should have revised its initial assessment (Exhibit 8; p. 150, BIR Records-Folder I) after having received the respondent's amended income tax return on February 16, 1971 in order to arrive at a more accurate revised assessment and for the purpose of prescription, the period will be counted from the last revised assessment should the amended return be substantially different from the original income tax return (Republic vs. Acebedo, 22 SCRA 1356, Republic vs. Lopez, 7 SCRA 566; CIR vs. Sison, 7 SCRA 884). Petitioner CIR failed to do so and instead predicated its final assessment solely on the basis of the 1968 original income tax return without considering the corrected amount of P89,624.68 indicated in the 1968 amended income tax return. We may venture to say that by allowing the filing of an amended income tax return within a reasonable time, the government would not be prejudiced at all in its tax collection. There is nothing in the law which would preclude the petitioner CIR from ordering an assessment on the original income tax return even after an amended income tax return is filed. What the petitioner CIR should have done was to adjust the income tax due on the basis of the amendment. In the event of an overpayment, it could authorize a refund. On the other hand, if there was a deficiency, then the petitioner CIR should prepare its amendment of the correct taxes plus penalties. Anent the contention the respondent MKI was qualified as a personal holding company and as such was liable to a forty-five (45) percent tax of its undistributed net income pursuant to Section 63 of the then Tax Code, the argument deserves scant consideration. The applicable provisions * on the matter are reproduced in full as follows: "SEC. 63. Tax on personal holding companies . There shall be levied, collected, and paid, for each taxable year, upon the undistributed net income of every personal holding company, in addition to the tax imposed by section twenty-four a tax equal to forty-five per centum of the undistributed net income of such personal holding company. xxx xxx xxx SEC. 64. Definition of personal holding company . (a) General rule. For purposes of this Title, the term "personal holding company" means any cooperation, as defined in section eighty-four if (1) Gross income requirement . At least eighty per centum of its gross income for the taxable year is personal holding company income as defined in section sixty-five, but if the corporation is a personal holding company with respect to any taxable year beginning after December thirty-first, nineteen hundred and thirty-eight, then, for each subsequent taxable year, the minimum percentage shall be seventy per centum in lieu of eighty, and it shall continue to be considered as a personal holding company until in a taxable year, during the whole of the last half of which, the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than seventy per centum of the gross income in personal holding company income; and (2) Stock ownership requirement . At any time during the last half of the taxable year more than fifty per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. xxx xxx xxx" Respondent court, applying the afore-quoted provisions, made the following finding and conclusions which are borne by the evidence on record, and we quote with approval thus: "There is not quarrel between the parties that for the purposes of the income tax law pertinent to this case, "personal holding company" is any corporation other than, firm or association exempt from taxation under Section 27 of the Revenue Code, a bank duly license to do business as such in the Philippines, a life insurance company, or a foreign personal holding company as defined in Section 67 of the same Code, if (1) at least 80% of its gross income for the taxable year is a personal holding company income as defined in Section 65 thereof; and (2) at any time during the last half of the taxable year more than 50% in value of its outstanding stock is owned, directly or indirectly, by any or for not more than 5 individuals. (See Sec. 64(a) and (b) of the Revenue Code.) The income tax regulations define "personal holding company" as any corporation which for the taxable year meets (a) the gross income requirement, and (b) the stock ownership requirement. Both requirements must be satisfied and both must be met with respect to each taxable year. (Sec. 219, Rev. Regs. No. 2.) The conflict however, arose when on the basis of the original return, respondent determined that petitioner has a gross income of P469,966.73 and a personal holding company income of P421,544.00 as shown in the worksheet of the Revenue Examiner. In other words, respondent contends that at least 80% of petitioner's gross income is personal holding company income. Respondent also contends that petitioner is 100% owned by related family, so that both the gross income and stock ownership requirements of the law have been met; therefore, petitioner is a personal holding company. We disagree with respondent. We have found earlier that petitioner has amended its return for 1968 on February 16, 1971. The figures indicated therein should therefore be the basis of determining whether the statutory condition with respect to the gross income requirement had been satisfied. As shown in the amended return, the gross income of petitioner is P311,518.38, broken down as follows: Gains or Losses Sales or Exchange of Property other than Capital Assets (P13,783.08) Gains or Losses from Sales or Exchange of Capital Assets P89,624.68 Rentals & Royalties 164,691.55 Dividends 8,979.45 Others Sources 62,205.78 TOTAL GROSS INCOME P311,518.38' ========= (Exhs. C & 12 supra.) Even a cursory examination of the above figures, with the disallowance of that amount of P13,783.08 claimed as losses from sale or exchange of property other than capital assets, immediately reveals that the rentals amounts to P164,491.55 constitute more than 50% of the gross income of petitioner. And, because of the provision of Section 65(h) of the Revenue Code in relation to Section 64 of the same Code, said amount of P164,491.55 inspite of being rentals can not be considered as personally holding company income. Moreover, assuming arguendo that all the items other than rents considered personal holding company income, the sum total thereof would only amount to P174,592.99 which is less than 80% of the total gross income of P339,184.54. Clearly therefore, the gross income requirement of Section 64(a) (1) of the Revenue Code has not been satisfied. With this conclusion, we need not discuss the argument of respondent with respect to the stock ownership requirement." (pp. 10-12, CTA Decision) We deem it proper to state at this point that the amount of P174,592.99 was arrived at after having included the reported loss of P13,783.08 in the respondent's 1968 amended income tax return, which is an unallowable deduction pursuant to the then Section 31 of the Tax Code, and the same would only constitute 51.49% of the total gross income of P339,084.54 instead of P339,184.54 as typographically reported in the respondent court's decision. Clearly, therefore, the respondent MKI is no longer considered a personal holding company which should be liable for the alleged additional tax of P74,304.17. It is settled jurisprudence that findings of facts and conclusions of the tax court are entitled to respect in the absence of showing of gross error or an abuse or improvident exercise of its authority (Commissioner vs. Ayala Securities Corporation and C.T.A. 70 SCRA 204; Nasaid and Lozada vs. Court of Tax Appeals, 61 SCRA 238, 244) and can only be disturbed on appeal if not supported by substantial evidence (Parag. No. 8, Supreme Court Circular 1-91; CIR vs. Cadwallader Pacific Company, 73 SCRA 59, 75). From all the preceding disquisition, We hold that the findings of respondent court that MKI is entitled to a refund or a tax credit in the amount of P26,237.00 on the basis of its 1968 amended income tax return are amply supported by the evidence on record. WHEREFORE, finding no error of fact or law committed by the respondent court that will warrant a reversal or modification of the decision sought to be reviewed, the petition for review is DENIED DUE COURSE and is DISMISSED for lack of merit. No pronouncement as to costs. SO ORDERED. Chua , and Guerrero, JJ., concur. Footnotes * Section 61 to 69 of the National Internal Revenue Code on personal holding companies were repealed by Executive Order No. 37 dated July 31, 1986.