Commissioner of Internal Revenue v. Matling Industrial & Commercial Corp.

[CA-G.R. SP No. 30936. February 28, 1994.] (C.T.A. Case No. 4206) COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . MATLING INDUSTRIAL AND COMMERCIAL CORPORATION, and THE COURT OF TAX APPEALS , respondents . D E C I S I O N GALVEZ , J p : The bone of contention in this petition for review is whether or not the right of the Commissioner of Internal Revenue to assess Matling Industrial and Commercial Corporation for deficiency income tax for the year 1975 has already prescribed. The facts are substantially undisputed. (1) In 1975, Matling Industrial and Commercial Corporation (hereinafter referred to as Matling for purposes of brevity), a domestic corporation engaged in the production of cassava starch and copra, duly registered with the Board of Investments (BOI) and entitled to avail of incentives as a pioneer enterprises provided for under R.A. 5187 as amended, applied for an expansion reinvestment allowance of P1,143,000.00 pursuant to Section 7(h) of said Republic Act No. 5186. Its application was approved on October 28, 1975 but with proviso "without prejudice to subsequent readjustment in the event the Board, after review, determine such readjustment is meritorious." (2) On April 13, 1976, Matling filed its corporate Income Tax Return for calendar year ended December 31, 1975, claiming as a deduction the amount of P1,143,000.00 which represented Matling's alleged expansion reinvestment allowance it previously had applied for under R.A. 5186. (3) In January, 1983, however, the Governor of the Board of Investments wrote the Commissioner of Internal Revenue that it required Matling to pay the deficiency income tax in the amount of P989,190.00 representing the excess deduction claimed by Matling in its 1975 Corporate Income Tax Return, because a) Out of the amount of P1,143,000.00 which Matling claimed as its expansion reinvestment allowance in 1975, the BOI approved only the amount of P153,810.00 based on Matling' actual expenditures, thus leaving the excess of P989,190.00; b) Matling actually applied its expansion reinvestment allowance it claimed in its 1975 Corporate Income Tax Return only in 1981. (4) The Commissioner of Internal Revenue then caused the investigation of Matling's Income Tax Return, and, on October 15, 1985, the former wrote Matling requiring the latter to pay the amount of P491,626.72 representing its deficiency income tax liability for the year 1975; (5) On November 15, 1985, Matling wrote the Commissioner of Internal Revenue, protesting the assessment arguing that it was already barred by the Statute of Limitations under Section 318 of the Tax Code as amended, which protest was denied by the Commissioner in a letter dated September 30, 1987; (6) On December 27, 1987, Matling filed a petition for review with respondent Court of Tax Appeals assailing the Bureau of Internal Revenue for assessing it with the deficiency income tax concerned, arguing that said assessment had already prescribed, having been made beyond the five-year limitation provided in the Tax Code. (7) On March 30, 1992, the Court of Tax Appeals rendered decision upholding the stand of private respondent Matling and accordingly ordered the Commissioner of Internal Revenue: 1) To WITHDRAW and CANCEL his assessment noted as SARD-IT 75/85 928 issued against petitioner for being barred by the period of limitation provided in Section 318 of the National Internal Revenue Code of 1977; 2) To cease and desist from enforcing the aforesaid assessment and collection (sic) the tax for the reason above stated. (8) The Commissioner of Internal Revenue moved to reconsider the aforesaid decision, which was however denied by respondent Court of Tax Appeals, hence this present petition for review. We find no merit in the petition. Section 318 of the National Internal Revenue Code limits the assessment of a deficiency income tax "within five years after the return was filed and no proceedings in court without assessment for the collection of such taxes shall be began after the expiration of such period." The Commissioner of Internal Revenue however contends that said Section 318 is not applicable to the present case because there were intervening events which prevent the Commissioner from assessing Matling. Private respondent Matling applied its expansion reinvestment allowance for 1975 only on January 23, 1981, or more than five (5) years from the date it was approved by the BOI on October 28, 1975, and Matling's actual expenditures, as reported by the BOI to petitioner Commissioner of Internal Revenue in 1985, was only P153,810.00, and not P1,143,000.00 which Matling had claimed as a deduction in its 1975 Income Tax Return, thereby giving rise to a deficiency income tax of P989,190.00. It is the submission of petitioner that the five-year period provided of in Section 318 of the Tax Code was suspended and began to run on January 23, 1981 only, when Matling gave notice to BOI that it had ordered the machinery and equipment subject of its application for expansion reinvestment allowance for 1975. To buttress petitioner's stance, he invokes Art. 320 of the Tax Code which provides: "The running of the statute of limitations provided in Section 318 and 319 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency shall be suspended for the period during which the Commissioner, is prohibited from making the assessment or beginning of distraint or levy or a proceeding in Court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected; Provided, That if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when warrants of distraint and levy is duly served upon the taxpayer with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines." We do not share such view. Section 7(h) of R.A. 5186, on the strength of which Matling applied for an expansion reinvestment allowance of P1,143,000.00 in 1975, states: "Section 7. Incentives to Registered Enterprises . A registered enterprises, to the extent engaged in preferred area of investments, shall be granted the following incentives benefits: xxx xxx xxx "h) Deduction for Expansion Reinvestment . When a registered enterprise reinvests its undistributed profit or surplus, whether from registered operations or not, by actual transfer thereof to the capital stock of the corporation for procurement of machinery, equipment and spare parts previously approved by the Board under subsections "d" and "e" hereof or for expansion of machinery and equipment used production or for the Construction of the buildings, improvements or other facilities for the installation of the said machinery and equipment, the amount so reinvested, to the extent of 25%, 37 1/2, 50% in case of non-pioneer projects, and to the extent of 50%, 75%, 100% in the case of pioneer projects, the appropriate percentage to be determined by the Board for each industry taking into account the relative risk, technology transfer and fall-out, export potential, incremental labor, use of locally manufactured machinery and equipment and domestic raw materials, shall be allowed as a deduction from its taxable income in the year in which such reinvestment was made; Provided, (1) That prior approval of the Board of such reinvestment was obtained by the registered enterprise planning such reinvestment, and (2) That the registered enterprise does not reduce its capital stock represented by the reinvestment within seven (7) years from the date such reinvestment was made. In the event the registered enterprise does not order the machinery and equipment within two (2) years from the date the reinvestment was made or reduces its capital stock represented by the reinvestment within a period of seven (7) years from the date of reinvestment, a recomputation of the income tax liability therefore shall be made for the period when the deduction was made, and the proper taxes shall be assessed and paid with interest." Nowhere in the aforequoted provision does it say that the five-year period of limitation provided for in Section 318 of the Tax Code shall start to run only from the date the registered enterprise submits notice to BOI of its purchase order of machinery or equipment. If we were to adopt such view of petitioner, then the five-year prescriptive period provided for in Sec. 318 shall never start to run if the registered enterprise does not at all notify the BOI that it has ordered machinery and equipment. On the contrary, the petitioner is not prohibited from making his assessment upon Matling until after the latter shall have reported to BOI its purchase of equipment and machinery because Section 7(h) of R.A. No. 5186 hereinbefore quoted clearly states that "In the event that the registered enterprise does not order the equipment within two (2) years from the date the reinvestment was made . . . a recomputation of the income tax liability therefore shall be made for the period when the deduction was made, and the proper taxes shall be assessed and paid with interest." If at all, the period of limitation set forth in Section 318 of the Tax Code, insofar as it relates to applications for expansion reinvestment allowance under Section 7(h) of R.A. No. 5186, is only deemed suspended for a period of two years from the dated such deduction is claimed, during which period the registered enterprise is suppose to order its machinery and equipment. If the registered enterprise fails to do so within said two year period, it becomes the duty of the Bureau of Internal Revenue to recompute the income tax liability of the registered enterprise concerned. The five year period of limitation laid down in Section 318 of the Tax Code therefore, insofar as Matling is concerned, started to run on April 13, 1978 , or two years after Matling filed its income tax return for 1975, in which it claimed as a deduction the amount of P1,143,000.00 allegedly representing its expansion reinvestment allowance under R.A. 5186. The Commissioner of Internal Revenue however maintains that the task of recomputing respondent's Matling's income tax liability, should it fail to order the machinery and equipment within the two year period, is mandated by law upon said private respondent, for it alone knows when it will purchase said machinery and equipment. There is however nothing in Section 7(h) of R.A No. 5186 which spells out clearly that such duty devolves upon the registered enterprise. Section 25 (c) of said law states that in interpreting and applying the provisions of R.A. 5186, all doubts concerning the benefits and incentives granted the registered enterprises shall be resolved in favor of the latter. In the light of the foregoing therefore, and the ruling in British Traders Insurance Co., Ltd., vs. Commissioner of Internal Revenue, 13 SCRA 719, that the examination, verification, and audit of a taxpayer's income tax return after the filing, are to be carried out by the Commissioner of Internal Revenue himself who has the necessary facilities and personnel to conduct the same, petitioner cannot pass the buck, so to speak, to private respondent Matling to perform what the Commissioner is himself tasked to do. As for petitioner's claim that private respondent's Income Tax Return for 1975 is false and fraudulent, and that therefore, the prescriptive period applicable, is not be that laid down in Section 318, but in Section 319 of the Tax Code, which provides for a ten-year period from the discovery of the falsity, such issue was never raised by the petitioner in its answer filed with the Court of Tax Appeals in C.T.A. Case No. 4206 and is therefore deemed waived. Moreover, in support of petitioner's argument that Matling committed a falsity in its 1975 return, it claimed that the fact that Matling purchased its equipment and machinery only in 1981, or almost five years after it filed its 1975 return in 1976, is an indication that Matling had really no intention of actually applying the expansion reinvestment allowance it invoked as a deduction in its 1975 Income Tax Return. We however believe that such circumstance alone does not give rise to bad faith. Much more proof is required than this. Good faith is presumed. Bad faith must be proved. In recapitulation, since the period within which the petitioner was to assess private respondent's tax deficiency for 1975 in this case, commenced to run on April 13, 1978, it had until April 15, 1983, which to make the same. Considering that petitioner's assessment upon respondent Matling was made only on October 15, 1985, such assessment is therefore already barred by the period of limitation set forth in Section 318 of the Tax Code. IN VIEW OF THE FOREGOING, the petition for review is hereby denied due course and accordingly DISMISSED. SO ORDERED. Benipayo and Verzola, JJ ., concur.