Commissioner of Internal Revenue v. De San Jose

SPECIAL SIXTH DIVISION [CA-G.R. SP No. 25356. July 2, 1992.] (C.T.A. Case No. 4224) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . HOSPICIO DE SAN JOSE and THE COURT OF TAX APPEALS , respondents . D E C I S I O N CAMPOS , JR ., J p : This case is a Petition for Review filed before this Court pursuant to Section 9 of Batas Pambansa Bilang 129 which grants exclusive appellate jurisdiction to the Court of Appeals to review final judgments and decrees of the Court of Tax Appeals (CTA). Particularly, it seeks to question that part of the decision of the CTA in CTA Case No. 4224 entitled "Hospicio de San Jose vs. Commissioner of Internal Revenue" which eliminated the 20% interest in the amount of P128,657.69 imposed by the Commissioner of Internal Revenue (Commissioner) of the 1980 deficiency income tax assessed against private respondent in the amount of P244,429.48. In eliminating the said interest, the CTA held: "For all the foregoing, We hold the petitioner liable for deficiency income tax for the year 1980. However, in our opinion the additional requirement of 20% interest in the sum of P128,657.69 imposed by respondent should be eliminated because the petitioner relied in good faith upon the ruling rendered by no less than a Deputy Commissioner of the Bureau of Internal Revenue. [ABS-CBN Broadcasting Corporation vs. Courts of Tax Appeals and the Commissioner of Internal Revenue, 108 SCRA 142 (1981); Tuason, Jr. vs. Lingad, 58 SCRA 170 (1974); Connel Bros. Co. (Phil.) vs. Collector of Internal Revenue, 10 SCRA 470 (1964)]. ( Rollo , pp. 58-59.) We adopt the finding of facts of the CTA which is as follows" ". . . petitioner is a non-stock, non-profit, charitable organization duly registered with the Securities and Exchange Commission. As such, petitioner falls within the purview of an exempt organization under Section 27(e) [now 26 (e)] of the National InternalRevenueCode. Petitioner's income consisting of donations and miscellaneous contributions are exempt from income tax while the income derived from its real and personal properties, such as rentals, interests, and dividends are subject to income tax pursuant to the provisions of Section 27 (now 26) of the TaxCode. The 1980 Income Tax Return filed by petitioner reflected a net loss of P29,988.88 on its taxable operation due to the offsetting of the loss incurred in its non-taxable operation against the income from the taxable operation. (pp. 48 & 52, BIR records). Upon investigation of petitioner's internal revenue tax liabilities for 1980, respondent disallowed as a deduction from petitioner's taxable income, the amount of P671,215.97 representing the said loss incurred by petitioner from its charitable and educational operations. As a consequence, in a letter dated April 7, 1986, respondent assessed petitioner for deficiency income tax in the amount of P343,087.17 for the year 1980, as follows: (Annex A, p. 3, CTA records) Deficiency Income Tax 1980 Net taxable income P641,227.09 ========= Income tax due P214,429.48 Add: 20% int. fr. 4/16/81 to 4/16/84 128,657.69 TOTAL AMOUNT DUE AND COLLECTIBLE P343,087.17 ========= On April 25, 1986, petitioner protested the assessment, which protest was denied by respondent in a letter dated October 20, 1987." ( Rollo , pp. 44-45). Petitioner (private respondent herein) based its protest on Section 30 (d)(1)(A) of the Tax Code which allowed a corporation to deduct from gross income "all losses actually sustained and charged off within the taxable year and not compensated for by insurance or otherwise" and on a ruling by the then Acting Commissioner of Internal Revenue Ambrosio M. Lina dated December 15, 1966 which ruled that: ". . . after a careful study of the facts and the law on the subject, this Office has decided and hereby holds that in reporting net income, any deficit in the exempt income of said taxpayer, incurred in its exempt operations as an educational and charitable institution, may be deducted from its taxable income in the form of rents, dividends and interest." If, petitioner alleged, the above ruling is revoked, the revocation should however be prospective and not given a retroactive effect. Upon the denial of its protest, the petitioner brought the case before the CTA on January 16, 1988. In addressing the points raised by petitioner in defense of its petition, the CTA firsts of all explained that as a non-stock, non-profit charitable organization, petitioner's tax exemption is governed by Section 27 (now Section 26) of the National Internal Revenue Code, the last paragraph of which reads as follows: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit, regardless of the disposition made of such income, shall be subject to the tax imposed under this Code. According to the Tax Code, the original phraseology of the above provision was amended to make it appear, as it now stands, in order to include the phrase "regardless of the disposition made of such income" the legislative intent being that the taxable income of non-profit, non-stock charitable institutions should be treated as separate and distinct from their tax-exempt income for purposes of taxation. In which case, the decision stated, the deficit incurred in the tax-exempt operations cannot be set off against the income from taxable operations. The decision went on to state that " . . . The subsequent deletion of the subject provision from subsection (e) of Section 27 by Presidential Decree No. 1457 which took effect on June 11, 1976 and the transposition of the same as the last paragraph of the same Section to cover all exempt organizations under that Section, lends support to our conclusion. . . ." ( Rollo , p. 49). Anent the December 15, 1966 ruling relied upon by petitioner, the CTA had this to say: ". . . Since the December 15, 1966 ruling issued ti petitioner by respondent's predecessor is an erroneous interpretation of the law and therefore a nullity which could not give rise to a vested right that can be invoked by petitioner, the government is not precluded from collecting such tax which is legally due it." ( Rollo , p. 57). Finally, the CTA did not consider the assessment as a retroactive revocation of the December 15, 1966 ruling on the ground that the government is never estopped, by the errors of its agents, from collecting taxes. It further held that "Assuming for the sake of argument that there is such a retroactive revocation, petitioner has failed, however, to prove that injustice would result to it therefrom. Under Section 327, rulings or circulars promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to taxpayer. In the present case, no such prejudice was shown. On the contrary, petitioner had profited from the ruling of December 15, 1966 for as revealed by the record, petitioner did not pay income taxes on its taxable income for the years 1978 and 1979 due to its having deducted therefrom, the losses incurred in its exempt operation, pursuant to the aforestated ruling issued to it. . . . " ( Rollo , p. 58). Thus the decision of the Commissioner was modified on February 28, 1991 by eliminating the 20% interest on the deficiency income tax for the year 1980. Both parties moved for a reconsideration of the February 28, 1991 decision but both motions were denied through a Resolution issued by the CTA on June 14, 1991. On June 28, 1991, the Commissioner filed a Notice of Appeal to question that part of the CTA decision which eliminated the 20% interest imposed on the deficiency income tax as assessed against petitioner. Petitioner did not appeal. On August 8, 1991, the Commissioner filed his Brief to which the Hospicio de San Jose filed an Answer on November 25, 1991. It appears that this case was originally raffled to the Honorable Venancio Aldecoa as ponente on July 9, 1991 but was reraffled to the Honorable Filemon Mendoza on January 8, 1992 upon the retirement of the former. Since the Honorable Filemon Mendoza likewise himself retired in March 1992, the undersigned was tasked on April 21, 1992 to be the ponente pursuant to the Revised Internal Rules of this Court. Since the Hospicio de San Jose did not appeal, the only question to be resolved in this Petition for Review is the validity of that part of the decision of the CTA which eliminated the 20% interest on the deficiency income tax assessed against the Hospicio de San Jose. The Commissioner, herein petitioner, anchored his appeal on Section 51 (d) and (e) (i) (2) [ now Section 249 (b) (c)] of the Tax Code which states: "Sec. 51. Payment and Assessment of Income Tax . (a) Payment of tax . . . . (b) Assessment and payment of deficiency tax . . . . (c) Definition of deficiency . . . . (d) Interest on deficiency . Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be collected as part of the tax at the rate of twenty per centum per annum from the date prescribed for the payment of the tax, (or if the tax is paid in installment) to the date the deficiency is assessed: Provided, that the maximum amount that may be collected as interest on the deficiency shall in no case exceed the amount corresponding to a period of three years, the present provision regarding prescription to the contrary notwithstanding. (Now Section 249 (b). (e) Additions to the tax in case of nonpayment . (1) Tax shown on the return. here the amount determined by the taxpayer as the tax imposed by this Title or any installment thereof, or any part of such amount or installments, is not paid on or before the date prescribed for its payment, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of twenty per centum per annum from the date prescribed for its payment until it is paid ; Provided, That the maximum amount that may be collected shall in no case exceed the amount corresponding to a period of three years, the present provisions regarding prescription to the contrary notwithstanding. (Emphasis supplied). [Now Section 249 (c)]. (2) Deficiency. Where a deficiency, or any interest assessed in connection therewith under paragraph (d) of this Section, or any addition to the taxes provided for in Section 72 of this Code is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount as part of the tax, interest at the rate of twenty per centum per annum from the date of such notice and demand until it is paid: Provided, that the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions regarding prescription to the contrary notwithstanding." (Emphasis supplied) and on the cases of Central Azucarera de Don Pedro vs. CA (G.R. Nos. L-23236 and 23253, May 31, 1967) and Aguinaldo Industries Corporation vs. CIR (G.R. No. L-23749, February 25, 1982). We do not find merit in the Commissioner's argument. In fact, we find Section 53 (a) (e) (1) (2) and Section 249 (b) (c) and the cases cited by him to be inapplicable. In these cases, the High Court held that interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on the date fixed in the law for the payment thereof. More importantly, the payment of the tax in these cases was undisputed. In the case at bar, the delay in the payment was with reference to the deficiency income tax assessment owing to a controversy as to the applicability and correctness of the December 15, 1966 ruling issued by this Commissioner's predecessor-in-interest in private respondent's favor. As far as private respondent was concerned, at the time it filed its returns, the same was not erroneous nor fraudulent and the same was based on the December 15, 1966 ruling. There was therefore good faith in the preparation of said returns. "This Court is not unaware of the well-entrenched principle that the government is never estopped from collecting taxes because of mistakes or errors on the part of its agents. . . . But like other principles of law, this also admits of exceptions in the interest of justice and fair play. . . . it has been held that the Commissioner is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, or where there has been a misrepresentation to the taxpayer." (ABS-CBN Broadcasting Corporation v. CTA No. L-52306, October 12, 1981). WHEREFORE, the decision of the Court of Tax Appeals is hereby AFFIRMED in toto . No costs. IT IS SO ORDERED. Chua * and Vailoces, JJ ., concur. Footnotes * vice Justice Alfredo M. Marigomen.