Commissioner of Internal Revenue v. Court of Tax Appeals

THIRD DIVISION [CA-G.R. SP No. 20813. November 9, 1990.] (C.T.A. Case No. 2334) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . COURT OF TAX APPEALS and EMBROIDERY and GARMENTS INDUSTRIES (PHIL.) INC. , respondent . D E C I S I O N ORDOEZ-BENITEZ , J p : This is a petition for review of the decision of the Court of Tax Appeals CTA Case No. 2334, entitled "Embroidery and Garments Industries (Phil.) Inc. vs. The Commissioner of Internal Revenue", which absolved herein private respondent from liability for the payment of its assessed deficiency income and advance sales taxes covering the years 1959 to 1962 in the amount of P2,756,241.68 and P3,500,798.47, respectively, inclusive of surcharges and interests. Private respondent is a corporation organized in accordance with Philippine Laws, and duly, authorized by the Embroidery and Apparel Control and Inspection Board under R.A. No. 3137, otherwise known as Embroidery Law, to import textile fabrics and clothing materials tax-free on the condition that the same should be manufactured into finished and embroidered products to be re-exported to foreign suppliers within a period of two (2) years from the date of arrival of such materials and/or supplies. On September 22, 1964, on the basis of a sworn report furnished by an informer dated September 10, 1964, and armed with search warrants issued by the then Courts of First Instance of Manila and Bulacan, the agents of the then Anti-Technical Smuggling Unit of the Bureau of Internal Revenue raided and seized business records and documents from private respondents offices in Manila and Marulas, Valenzuela, Bulacan. As a consequence of the aforesaid seizures, petitioner, on January 4, 1966, assessed private respondent the sum of P436,846.44 representing advance sales tax for the years 1959 to 1961, inclusive of 75% surcharge and penalty, and later on March 23, 1966 petitioner was likewise assessed deficiency income tax for the years 1960 and 1961 in the sum of P4,799,641.95, inclusive of 50% surcharge and 1/2% monthly interest. Private respondent protected the aforesaid tax assessments and requested for the investigation thereof which was granted by petitioner. On December 9, 1970, petitioner issued to private respondent a revised assessment notice requiring the latter to pay the amount of P2,756,241.68 as deficiency income tax for the years 1959 to 1962 inclusive of 50% surcharge and 1/2% monthly interest, and on December 22, 1970, petitioner was also required to pay P3,500,798.47 as its advance sales tax for the same years. On January 7, 1971, private respondent filed its latter-protest disputing the revised assessments and requesting further investigation. Said letter-protest was denied by petitioner on the same date. On January 20, 1971, private respondent requested for reconsideration of the denial of its letter-protest. Said reconsideration was granted by petitioner on January 29, 1971 upon private respondent's execution of a waiver of the statute of limitations of the National Internal Revenue Code. The case was referred to the Regional Director of Revenue, Region No. 5, who designated a committee to reinvestigate the case. The said committee in its report dated June 1, 1971 recommended that the case be referred to the legal department for further evaluation and final disposition. Meanwhile, on January 7, 1971, warrants of distraint and levy issued against private respondent for the purpose of enforcing the summary collection of the advance sales tax in the amount of P3,500,798.47. And on June 17, 1971, petitioner issued notices of seizures and sale of private respondent's real property located at Marulas, Valenzuela, Bulacan, covered by TCT No. 10775, which property was subsequently put up for sale at public auction. But for lack of bidders, it was forfeited in favor of the government. The title thereof could not, however, be transferred in the name if the Republic of the Philippines for the reason that the forfeited property was subject to a first mortgage with the Government Service Insurance System (GSIS) on December 17, 1963, for a loan of P358,000.00. For failure of private respondent to pay its indebtedness with GSIS, the latter foreclosed the mortgage on March 15, 1974 and the same was sold to the Solid Industries Inc., being the highest bidder at the public auction. On September 14, 1971, petitioner denied private respondent's protest. Hence, it filed a petition for review with respondent Court of Tax Appeals assailing the tax assessment imposed by petitioner. On March 29, 1972, petitioner filed its Answer praying for the dismissal of the petition. After due hearings, respondent Court of Tax Appeals rendered its decision on January 15, 1990 finding private respondent not liable for the deficiency income and advance sales tax assessed against it. The Court of Tax Appeals accordingly reversed the decision of the BIR. Hence, the present recourse of petitioner. Petitioner ascribes the following errors allegedly committed by the respondent Court of Tax Appeals, to wit: "I THE TAX COURT ERRED IN RULING THAT PRIVATE RESPONDENT WAS NOT LIABLE FOR DEFICIENCY INCOME AND ADVANCE SALES TAXES FOR THE YEARS 1959 TO 1962 IN THE AMOUNT OF P2,756,341.68 AND P3,500,798.47, RESPECTIVELY; AND "II THE TAX COURT ERRED IN RULING THAT THE IMPOSITION OF THE 50% SURCHARGE FOR FRAUD AGAINST PRIVATE RESPONDENT WAS NOT LEGAL AND JUSTIFIED (p. 7, Petition for Review; p. 9, Rollo) With respect to the first assignment of error, petitioner asserts that the deficiency income tax assessment against private respondent came about in view of its failure to declare its income realized from the sales of its dollar quota rights to local Chinese textile dealers at a premium (overprice) of 70% to 80%, which dollar rights were allocated by the Central Bank of the Philippines to enable private respondent to import tax-free textile raw materials to be manufactured into finished products for re-export pursuant to the provisions of the Embroidery Law. To support its assertion, petitioner cited the sworn statement of the late Felix Villa Gareza with regards to the alleged sale of private respondent's dollar quota rights to local Chinese dealers and private respondent's tampering of its import/export invoices to in order to hide the illegal sales of its dollar quota rights. Petitioner adds that the sworn statement of the deceased Gareza was confirmed by the 1,118 import invoices seized from private respondent's offices in Manila and Valenzuela, Bulacan. As regards the deficiency advance sales tax, petitioner likewise insists that private respondent is liable thereon because of its failure to account that the imported textile raw materials have been manufactured into finish products and re-exported hence, it cannot claim tax exemption provided under R.A. No. 3137. We find that the Court of Tax Appeals did not erred in holding that private respondent is not liable for the deficiency income and advance sales taxes assessed against it. As noted by the Court of Tax Appeals, the tax assessments in question were mainly based on the information (sworn statement) furnished by an informer, the late Felix Villa Gareza, that private respondent allegedly sold its dollar quota rights to local Chinese textile dealers at an overprice. But said sworn statement of the deceased Felix Villa Gareza could not be given credit and importance because his competency as witness is put into serious doubt by his "double dealing" and "blackmailing activities" as revealed by his letters addressed to Ramon Chuanico, President of private respondent company. If only to emphasize and to be seen clearly that the late Felix Villa Gareza in "double dealing" and "blackmailing", his unchallenged to Ramon Chuanico, written after he had resigned from the company are hereunder reproduced in toto . Thus: "August 31, 1962 Mr. Ramon Chuanico (Confidential) Dear Monet : A group of informers approached me yesterday and brought to me for my study and comments several documents which they claim to belong to and covering various importations of embroidery materials of Embroidery & Garments Industries. The documents consist of import entries, suppliers invoices, packing lists, etc. How they manage to produce the documents I really don't know, although, I have my doubts about the genuineness of the documents . According to them they already consulted a close friend in the Bureau of Internal Revenue about their plan, but were advised that they need someone who can corroborate the correctness of the information against EGIP and you. Being the former Manager of EGIP, they feel that I am the most ideal and competent witness. I know that what the group has in mind will definitely depend upon my acceptance of their proposal. Only they don't know that I cannot bear false witness against you even if you did not during the past shown your appreciation for my services. At any rate, don't worry because I can persuade the group not to proceed with their bad intentions. So it is very important that we confer as soon as possible for your own good. Please don't delay because, this group right or wrong, can cause you and EGIP all sorts of trouble. They are very notorious and has all the proper connection in almost all the offices in the government . (Emphasis supplied) (Signed) F VILLA GAREZA (Exh. "D", p. 39, Folder No. 51, BIR Records) "September 12, 1963 Mr. Ramon Chuanico EGIP VERY PERSONAL Dear Monet : I would like to remind you again of the P50,000.00 to help me start an electronic business in Q. C. The business I assure you is most profitable. In fact I did not hesitate to invest all my savings and many more. If you wish, you can be a partner in the venture. If you will recall, I had been asking you for the P50,000.00 even when I was still with EGIP and if you cannot extent me the amount as gratuity pay, you may give it to me in the form of a loan payable in a years time. Kindly let me know where you can be reached outside your office so we can confer on the manner of repayment of the P50,000.00 and what security you would want. Also more important is the denunciation being prepared against EGIP or you by the same group I was mentioning to you. In fact I wrote you a note about this people sometime last year and in several occasions I kept on calling your attention about it. It seems that I can no longer stop this group anymore. They are trying their very best to prevail upon me to go along with them in clarifying certain documents they alleged to have in their possession and according to them they had already consulted certain people in the government. All they need is someone who can execute a sworn statement, preferably one who is connected with EGIP. Do you think I would be so foolish to be used as their tool? Besides, what they have in mind is without legal basis. I ought to know because as Manager of EGIP I did my very best to manage the business of EGIP in accordance with law and the investigation repeatedly conducted against EGIP such as, those conducted by the Finance Agents, CRC, Bureau of Customs, Central Bank, CIS and other agencies can best attest to the regularity of the business operations of EGIP. To me, all this amounts to intrigues, petty jealousies and an attempt to extort money from you . At any rate, you need not bother with the group. I can still take care of this group for you. In closing, please wait for my call at around 12:00 noon today in Valenzuela. It is very important that we arrange an appointment before it is too late.(Emphasis supplied) (Signed) F. Villa Gareza" (p. 38, Folder No. 51, BIR records) "November 10, 1963 Mr. Ramon Chuanico Valenzuela, Bulacan Dear Mr. Chuanico : Inspite of my efforts to assist you in your business and personal problems, you did not even bother to talk to me nor answer my letter. Worst of all, I lost my business and with it all my savings because you did not extend me even a single peso to help me with my business. I was very right when I was suspecting since the beginning that you really have no intention to help me with the capital I need. Whatever happen, henceforth, is all your fault. I had been talking to many of your business associates including certain people in your office to let you know what I think of you as an employer, as a friend and business associate. You don't deserve anything. All that is dear to you is money and nothing more. If I cannot ask you for help in friendly way, then I must do it the dirty way perhaps much more than P50,000.00 . (Emphasis supplied) (Signed) F. Villa Gareza" (Annex "C", Petition; pp. 18-21, Decision of the Court of Tax Appeals) Additionally, the sworn statement of Felix Villa Gareza cannot be solidly and mainly relied upon as no other competent, corroborating proofs have been presented. No less than the committee which conducted a reinvestigation of the case acknowledged the weakness of relying on Gareza's written declaration. Thus, the committee in its report stated: "In view of the foregoing, the committee has the strong belief that due to the character propensities of Mr. Gareza, exposed in his own writing, the government faces the weakness of relying on his written declaration, especially so that his declarations have not been properly corroborated by other competent evidence." (p. 21, CTA Decision, Annex "C", Petition). With respect to the advance sales tax assessed against private respondent, We also hold that the Court of Tax Appeals correctly held that, contrary to petitioner's claim, private respondent's importations were re-exported as shown by the letters of the Bureau of Customs informing private respondent of the cancellation of its warehouse bonds covering the 1,118 importations (Exhs. "Z-1" to "Z-93", BIR Folder No. 61 and Exhs. "V-1" to "V-12", Folder No. 52; Exhs. "Y-1" to "Y-5", Folder No. 60, BIR Record). We, therefore, give our stamp of approval on what the Court of Tax Appeals had held anent this issue, thus: "Under Republic Act No. 3137 the Embroidery Law, the rules and regulations governing the establishment, suspension, control and operation of bonded manufacturing warehouse with respect to the importation of embroidery and apparel raw materials to be processed and re-exported, provides for the liquidation of import entries as follows: 'Section 4. . . . Liquidation of import entries . When the manufacturer finds, through his records, that all the raw materials covered by any Import Entry has been manufactured and re-exported, he shall submit to the Board a 'Statement of Liquidation.' The statement shall contain a list of all export entries under which a particular Import Entry has been so liquidated and shall be accompanied by copies of as many "Certificate of Inspection' as there are export entries involved. The Customs official upon finding that the statement of liquidation submitted for any particular Import Entry is correct, he shall certify to the closing and liquidation of that particular entry on the face of the certificate. This certificate shall be submitted to the Collector of Customs as proof for the cancellation of the bond on that corresponding Import Entry.' (Emphasis supplied) "In line with the foregoing provision, the notification of the cancellation of the warehousing bond on an import entry by a Customs official evinces the manufacture and re-exportation of the materials covered by such import entry. "Respondent failed to controvert the veracity of the aforementioned letters from the Chief of the Law Division of the Bureau of Customs offered by petitioner to substantiate its stand. As official records, they are entitled to full weight and credence. 'Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specifically enjoined by law, are prima facie evidence of the facts therein stated. (Section 38, Rule 138, Rules of Court.) "The law reposes a particular confidence in public officers that it presumes they will discharge several thrusts with accuracy and fidelity; and, therefore, whatever acts they do in the discharge of their public duty may be given in evidence and shall be taken to be true under such degree of caution as the nature and circumstances of each case may appear to require. (Antillon v. Barcelon, 37 Phil. 148, 152.) There can be no question then, that as against the uncorroborated testimony of Gareza, the undisputed abovementioned official document should be upheld." (pp. 22, 23 & 24, CTA Decision; Annex "C", Petition) By and large, petitioner's first assignment of error is an issue that depends for its resolution on the determination of questions of facts based on an evaluation of the evidence presented before the Court of Tax Appeals. And the general rule is that the findings on facts of the Court of Tax Appeals, supported by substantial evidence, as in the case at bar, should not disturbed upon review of its decision (Sy Po vs. Court of Tax Appeals, 164 SCRA 524; Aznar vs. Court of Tax Appeals, 58 SCRA 519; Commissioner of Internal Revenue vs. Manila Machinery and Supply Company, 135 SCRA 8). Private respondent, not being liable to pay the questioned tax assessments, necessarily it cannot be held liable for any surcharge thereon. Accordingly, it is absurd to dwell on the second assignment of error. WHEREFORE, finding the appealed decision to be supported with substantial evidence, the same is hereby AFFIRMED. SO ORDERED. Kapunan and Cui JJ., concur.