Commissioner of Internal Revenue v. De San Jose

FIFTEENTH DIVISION [CA-G.R. SP No. 33625. October 12, 1994.] (C.T.A. Case No. 4 66 0) 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 TORRES , JR ., J p : A petition for review instituted by petitioner Commissioner of Internal Revenue assailing the decision dated December 24, 1993 of the Court of Tax Appeals in C.T.A. Case No. 4660 entitled "Hospicio de San Jose vs. Commissioner of Internal Revenue", the dispositive portion of which reads: 1 "WHEREFORE, in view of all the foregoing, petitioner is ordered to pay the amounts of P266,668.72, P172,042.09 and P223,721.02 as deficiency income tax for taxable years 1981, 1982, and 1983, respectively or a total of P662,432.83. SO ORDERED." The antecedents appearing on record are as follows: On April 16, 1987, petitioner Commissioner of Internal Revenue assessed Hospicio de San Jose the total amount of P1,209,801.08 representing deficiency income and expanded withholding taxes including increments thereon, for the years 1981, 1982 and 1983. 2 On May 26, 1987, private respondent filed a protest on the ground that the same has no legal or factual basis. 3 On July 29, 1991, petitioner made a reassessment of private respondent's tax deficiency in the amounts of P434,330.75 (1981), P282,928.14 (1982) and P365,233.63 (1983) respectively. 4 Accordingly, on October 23, 1991, private respondent filed a petition for review docketed as C.T.A. Case No. 4660 against petitioner before the Court of Tax Appeals. 5 On January 15, 1992, petitioner filed an answer thereto. 6 On December 24, 1993, the respondent court rendered the impugned decision, the pertinent portion of which reads: 7 "Clearly under said regulation, if the proper withholding tax is paid during the period of original audit and investigation, the amount claimed as deduction shall be allowed. The records of the case will show that the deficiency expanded withholding tax in the amounts of P1,407.63 for 1981, P1,317.90 for 1982 and P1,229.14 for 1983, were paid by the petitioner on August 19, 1985 inclusive of interest, surcharge and compromise penalties under Confirmation Receipt (C.R.) Nos. 7280780, 7280781, 7280783 and 7280784 for 1981, C.R. Nos. 7280785, 7280787, 7280789 and 7280783 for 1982 and C.R. Nos. 7280793, 7280794, 72808795 and 7280796. Said payments were made during the progress of the investigation. Accordingly, the foregoing assessments should be recomputed by excluding therefrom the expenses for professional fees and security guard services as well as the interest imposed on the basic income tax. Petitioner's tax liabilities for the years in question should therefore be recomputed as follows: Recomputation of Deficiency Income Tax 1981 1982 1983 Net Income/loss per return P2,003,927.18 (189,792.33) (586.971.28) Add: Net loss on exempt operations 1,938,610.88 2,021,001.71 2,094,324.22 Net income per court computation 3,942,538.06 1,191,289.38 1,507,352.94 Less: Income subject to final tax: Dividend 138,509.76 325,140.24 486,649.18 Interest 2,961.466.80 286,733.10 290,294.22 Total 3,099,976.56 611,873.34 776,943.40 Adjusted Net Income P842,561.50 P579,416.04 P730,409.54 Tax Due P284,896.52 P192,795.61 P245,643.34 Less: Taxes withheld 18,227.80 20,753.52 21,922.32 Deficiency income tax P266,668.72 P172,072.09 P223,721.02 On February 2, 1994, petitioner filed a motion for reconsideration 8 which was denied by the respondent court in its resolution dated March 8, 1994. 9 Hence, this petition for review. The sole issue raised by the petitioner is: "Whether or not the respondent court erred in allowing private respondent's claimed deductions for professional fees and security guard services in the total amount of P40,960.00 for the years 1981, 1982 and 1983 as deductible expenses from gross income in spite of the failure to pay the taxes on time?" Petitioner maintains that the private respondent, as withholding agent, is under obligation to pay within twenty (20) days after the end of the month in which the withholding is made pursuant to Section 3 of the Revenue Regulations No. 13-78. Inasmuch as private respondent's payment and remittance of the creditable expanded withholding taxes for the years 1981, 1982 and 1983 were made only on August 19, 1985, the disallowance of the deduction of the expenses for professional fees and payments to security agency claimed by private respondent as deductible expenses is legal and proper, the same being pursuant to the provisions of Revenue Regulations No. 13-78, as amended by Revenue Regulations No. 6-79, implementing then Sections 53 (f) (now Section 50 [b]) of the Tax Code. Hence, petitioner prays that the deductions for professional fees and security guard services in the total amount of P40,960.00 for the years 1981, 1982 and 1983 as deductible expenses from gross income for failure to withhold taxes on time be reversed. On the other hand, private respondent postulates that the deduction of the expenses for professional fee should be allowed it appearing that the correct taxes to be withheld were paid, although belatedly, together with the corresponding surcharge, interest, and compromise penalty. The decisive issue at bench is "whether or not the expenses for professional fees and security guard services in the amount of P40,960.00 deductible from gross income in spite of belated payment?" In the instant case, petitioner disallowed the deduction of the expenses for professional fees and security guard services for the reason that private respondent failed to pay the withholding tax on time as mandated by Section 3 of Revenue Regulations Nos. 13-78, as amended by Revenue Regulations No. 6-79, which is mandatory in character. The applicable provisions of the Tax Code are as follows: "SEC. 30. Deductions from gross income . In computing net income there shall be allowed as deductions (a). Expenses: (1) In general . All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered: . . . and Revenue Regulations No. 2, Section 70 (1) reading as follows: SEC. 70. Compensation for personal services . Among the ordinary and necessary expenses paid or incurred in carrying or any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in case of compensation payment is whether they are reasonable and are, in fact, payments purely for services. . . ." There is no question that professional fees and security guard services are deductible expenses. For disallowing said expenses, the Commissioner of Internal Revenue relied on Section 29 (j) of the National Internal Revenue Code which provides: SEC. 29. National Internal Revenue Code . "(j) Additional requirement for deductibility of certain payments . Any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income or for which depreciation or amortization may be allowed under this section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in accordance with this Section Sections 51 and 74 of this Code." Section 29 (j) provides only that withheld tax has been paid to the Bureau of Internal Revenue, which, the private respondent did albeit belatedly. In the assailed decision, the respondent court noted that "the deficiency expanded tax in amounts of P1,407.53 for 1981, P1,317.90 for 1982 and P1,229.14 for 1983, were paid by the petitioner (private respondents herein) on August 19, 1985 inclusive of interest, surcharge and compromise penalties as evidenced by the confirmation receipts submitted, during the progress of the investigation. As it is, pursuant to Revenue Memorandum Order No. 38-83 dated November 14, 1983, the withholding tax paid during the audit and/or investigation, and claimed as deduction shall be allowed. Further, on May 21, 1986, the Bureau of Internal Revenue issued Revenue Audit Memorandum Order No. 5-86 which provided guidelines for applying Section 30 (1) (now Section 29) to wit: (a). Non withholding/erroneous withholding . An amount claimed as deduction on which a tax is supposed to have been withheld under Section 52 and 84 shall not be allowed if in the course of audit/investigation, the examiner discovers that: (1). No withholding of creditable or final tax was made, unless the payee reported the income, and the withholding agent/taxpayer pays during the original audit/investigation, the surcharges, interest and penalties incident to the failure to withhold the tax . (2). No withholding of creditable or final tax was made and the recipient-payee failed to report that income on due date thereof unless the withholding agent pays during the original audit/investigation the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to the failure to withhold . (3). The withholding agent erroneously under withheld the tax, unless he pays during the original audit and investigation the difference in the amount supposed to have been withheld, inclusive of surcharges, interest and penalties incident to such error ." It is clear from the foregoing that the withholding of professional fees and security guard services (expenses) which were remitted and paid during the investigation together with surcharges and interest, must be allowed as deductible expense. Thus, We find no cogent or compelling reason to disturb the respondent court's factual findings in this regard. As a matter of policy, it is not advisable for the Appellate Court to set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of its authority. 10 Finding the decision of the Court of Tax Appeals to be in accordance with law and the evidence the same will not be disturbed on appeal. IN VIEW OF THE FOREGOING, the decision appealed from dated December 24, 1993 is hereby AFFIRMED in all respects. No pronouncement as to costs. IT IS SO ORDERED. Pardo and Morales , JJ ., concur. Footnotes 1. Decision, Rollo, pages 42-52. 2. Assessment, Rollo, pages 24-26. 3. Letter-Protest, Rollo, pages 27-28. 4. Letter, Rollo, pages 29-36. 5. Petition, Rollo, pages 21-83. 6. Answer, Rollo, pages 37-41. 7. Decision, Rollo, pages 42-52. 8. Motion, Rollo, pages 53-57. 9. Resolution, Rollo, page 58. 10. Commissioner of Internal Revenue vs. Court of Tax Appeals, G.R. No. 61509, April 19, 1988; Commissioner of Customs vs. Court of Tax Appeals, G.R. No. 82618, March 16, 1989.