Commissioner of Internal Revenue v. Romualdez

FORMER FOURTEENTH DIVISION [CA-G.R. SP No. 45388. * May 31, 2000.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ARMANDO T. ROMUALDEZ , respondent . D E C I S I O N AUSTRIA-MARTINEZ , J p : Within the prescribed period, the Commissioner of Internal Revenue has the authority to assess and collect the proper taxes when there is reason to believe that the taxpayer's tax return is false, incomplete or erroneous. On June 27, 1990, the Bureau of Internal Revenue (BIR) through Assistant Commissioner Domingo Paz formed a Special Tax Audit Team (STAT) specially tasked to ascertain and investigate the income and estate liability of Armando Romualdez. The BIR STAT Team based its examination on the "best evidence obtainable" rule. On December 23, 1991, the Commissioner of the Internal Revenue Jose U. Ong, approved the BIR-STAT investigation results showing a total assessment of P27,590,926.19 income tax deficiency of Armando Romualdez for the period 1980-1985, as follows: Year Assessment No. 1980 P5,978,620.90 FAC-1-80-92-002781 1981 415,339.00 FAC-1-81-92-002782 1982 1983 104,028.44 FAC-1-83-92-002783 1984 5,163,839.24 FAC-1-84-92-002779 1985 15,929,098.61 FAC-1-85-92-002780 Total P27,590,926.19 which include the taxes due for his undeclared taxable assets, to wit: 1. Dio Land Resort Inc. 2. Romson Realty Inc. 3. New Majestic Exchange Trading & Development Corporation 4. Rockshield Trading Co., Inc. 5. Chrysanthemum Realty & Development Corp. 6. Homarts Trading and Realty Inc. 7. Fidelity Management Inc. 8. R and S Transport Co. Inc. 9. Bacolod Real Estate and Development Corp. 10. Commercial Restaurant/Resort 11. Poultry House 12. Romus Realty (Annex "C", BIR Folder I) 13. TCT No.-571 located at Mamburao, Occidental Mindoro 14. TCT No.-570 located at Mamburao, Occidental Mindoro 15. TCT No.-466 located at Mamburao, Occidental Mindoro 16. TCT No.-972 located at Mamburao, Occidental Mindoro 17. TCT No.-971 located at Mamburao, Occidental Mindoro 18. TCT No.-2641 located at Mamburao, Occidental Mindoro 19. TCT No.-2018 located at Mamburao, Occidental Mindoro 20. TCT No.-3073 located at Mamburao, Occidental Mindoro 21. TCT No.-625 located at Mamburao, Occidental Mindoro 22. TCT No.-11638 located at Mamburao, Occidental Mindoro 23. TCT No.-11640 located at Mamburao, Occidental Mindoro 24. TCT No. 11656 located at Mamburao, Occidental Mindoro 25. TCT No. 11657 located at Mamburao, Occidental Mindoro 26. TCT No.-11658 located at Mamburao, Occidental Mindoro 27. TCT No.-11659 located at Mamburao, Occidental Mindoro 28. TCT No.-11660 located at Mamburao, Occidental Mindoro 29. TCT No.-11661 located at Mamburao, Occidental Mindoro 30. TCT No.-13218 located at Mamburao, Occidental Mindoro 31. TCT No.-13219 located at Mamburao, Occidental Mindoro 32. TCT No.-14406 located at Mamburao, Occidental Mindoro 33. Tax Declaration No. 04-0161 Mamburao, Occidental Mindoro 34. Tax Declaration No. 01-0286 Mamburao, Occidental Mindoro 35. Tax Declaration No. 01-0370 Mamburao, Occidental Mindoro 36. TCT No. 1260 Abra de Ilog, Occidental Mindoro 37. TCT No. 1234 Abra de Ilog, Occidental Mindoro 38. TCT No. 412 Abra de Ilog, Occidental Mindoro 39. TCT No. 13217 Abra de Ilog, Occidental Mindoro 40. TCT No. 11623 Abra de Ilog, Occidental Mindoro 41. TCT No. 11624 Abra de Ilog, Occidental Mindoro 42. TCT No. 11637 Abra de Ilog, Occidental Mindoro (Annex "D", id .) 43. Cattle Ranch at Alegre, Isabela, Region II 44. Animals Cattle (200 Heads) at Brg. Alegre, Sta. Maria, Isabela 45. Animals Cattle (300 Heads) at Brg. Lumabao, Tumauini, Isabela 46. Animal-Horse "Sammy" at Manila Polo Club, Mckinley Road, Forbes Park, Makati 47. Calpi and Deagan Ranches at Deagan Island, Masbate, Region V 48. Tambo Ranch at Pamplona, Camarines Sur 49. Triple A Ranches at Masbate, Region V 50. Equipment-CAT-D-7 Bulldozer 51. Equipment-CAT-D-8 Bulldozer 52. Equipment-CAT-D-8 Tractor 53. Equipment D-7 3-T-SER-20028 54. Equipment D-7 3-T-SER-8165 55. Equipment-D-8 H36A794 56. Equipment-D-8-H46A1750 57. Equipment-D-7 3-T-SER-7367 58. Aircraft Hughes 500-D 4 seater S.N. 870183 59. Mooney Aircraft M20 S.N.24-1209 Fixed Wing 60. R.P.-C1140 Aero Commander 500 61. R.P.-C2316 Cessna U 206 Station Air 62. R.P.-C293 Hughes 500 63. R.P.-C470 Piper PA-18-150 Super Club 64. S-34 Helicopter 4 seater 65. Tumauini, Isabela Beach Resort/Club 66. Metrobank Account under name Patricio Reduble Account No. 293-04827-2 S/A (Annex "E", id .) 67. Shares of stocks worth P150,000.00 with Highway Builders, Inc. 68. Shares of stocks worth P2,950,100.00 with Golden Country Farms and 69. Shares of stocks worth P312,500.00 with Maconacon Airways (Annex "F", id . ) On June 8, 1992, an assessment notice and demand for the payment of the aforesaid deficiency tax assessments was sent to Armando Romualdez. On June 10, 1992, Armando Romualdez sent a letter of explanation and reply to the assessment notice denying ownership over the twelve (12) corporations (Item Nos. 1-12), the shares of stocks worth P2,950,100.00 with Golden Country Farms, Inc. (Item No. 68), the real properties located at Mamburao, Mindoro Occidental (Item Nos. 13 to 35), ranches at Isabela and Masbate (Item Nos. 43, 47 and 49), cattles (Item Nos. 44 and 45) and beach resorts at Tumauini, Isabela (Item No. 65), Aircraft Cessna U206 RPC 2316 (Item No. 61) and the eight (8) CAT Bulldozers/equipment/facilities (Item Nos. 50 to 57). In the same letter, he admitted ownership of the following properties: "1. Shares of Stock of: a) Highway Builders P150,000 (Item No. 67) b) Maconacon Airways Inc. P312,000 (Item No. 69) 2. Tambo Ranch (Item No. 48) 3. Aircrafts a) Hughes 500 D helicopters RPC 293 (Highway Builder Inc.) (Item No. 62) b) Mooney M. 20 J RPC 1140 (Maconacon Airways Inc.) (Item No. 59) c) Horse "Sammy" (Item No. 46) (p.184, BIR Folder II) and prayed that inasmuch as the above properties, subject of the deficiency tax assessments, are included in Civil Case No. 0019 entitled "Republic of the Philippines, Plaintiff, versus Armando Romualdez, et al., Defendants," for reconveyance, reversion accounting and damages, pending before the Sandiganbayan and sequestered by the Philippine Commission on Good Government (PCGG), assessment and collection of taxes against him should be deferred (p.183, ibid .). On June 29, 1992, Armando Romualdez filed his formal protest and request for reconsideration of the deficiency tax assessments reiterating therein that the sequestered properties are not taxable. On July 14, 1993, a Warrant of Distraint and/or Levy No. N-A-1003-93 was issued by the Commissioner of Internal Revenue to satisfy the P27,590,926.19 tax deficiency assessment against Armando Romualdez (Exhibit "C", p. 26, Original Records). Armando Romualdez wrote a letter addressed to the BIR Collection Head Herminia de Guzman for the cancellation of the aforesaid warrant of distraint and/or levy on the ground that the tax deficiency assessments are not yet final and executory considering his pending and unresolved protest and/or request for reconsideration. On July 28, 1993, in addition to the said letter, he informed the BIR collection Head de Guzman that all the properties subject of the tax deficiency assessments are not in custodia legis in Civil Case No. 0019. On July 29, 1993, Writs of Garnishment were served on AsiaTrust Development Bank, Philippine Trust Bank, Philippine Commercial International Bank, BPI Family Bank, Boston Bank of the Philippines, Allied Banking Corporation, International Corporate Bank, Monte de Piedad Savings Bank, Prudential Bank, Planters Development Bank, Bank of America, Producers Bank and Metropolitan Bank and Trust Company against any account of Armando Romualdez (Exhibits "B", "B-1" to "B-12", pp. 84-96, Original Records). On August 25, 1993, Armando Romualdez filed a petition for review with request for a restraining order with the Court of Tax Appeals (CTA) which was docketed as C.T.A. Case No. 5022 insisting that the Warrant of Distraint and Levy is illegal and erroneous (pp. 6-7, id .) On August 22, 1993, Romualdez filed a Motion to Suspend Collection of Tax considering the sequestration of the subject properties (pp. 44-45, id .). The Commissioner of Internal Revenue, in answer to the petition averred that: "8. Petitioner's having consistently underdeclared his income for the period under review makes him liable for fraud pursuant to Section 51(b) of the Tax Code, as amended. Hence, the imposition of 50% fraud penalty is proper and legal: xxx xxx xxx "10. For failure of the petitioner to pay his aforestated deficiency income tax liabilities after proper demand for payment thereof, respondent was left with no other alternative but to issue warrants of distraint and levy as provided for under Section 205 in relation to Sections 207 and 213 of the Tax Code, as amended. . . ." xxx xxx xxx "13. As stated earlier, based on the investigation conducted, it was ascertained that petitioner has consistently underdeclared his taxable income for the years 1980 to 1990 thereby rendering his returns filed therefor false and fraudulent, pursuant to Section 50(sic)(b) of the 1977 Tax Code, as amended. Thus, the respondent has within ten (10) years from the date of discovery of fraud and/or petitioner's underdeclaration of his taxable income within which to assess the corresponding deficiency income taxes. Since the discovery of the fraud committed by herein petitioner was only in 1991, the issuance of petitioner's deficiency income tax for the year 1980-1990 on December 25(sic) 1991 was well within the prescriptive period as provided for under Section 223 (then 319) of the Tax Code, as amended." (pp. 56-57, Original Records). On February 4, 1994, the CTA issued a Resolution, thus: "ACCORDINGLY, during the pendency of the case, Commissioner is hereby ENJOINED from collecting the tax herein involved subject to the filing by the petitioner within fifteen (15) days from receipt of this resolution of a surety bond in the amount of P27,990,926.19 issued by a surety company of good standing as certified by the Supreme Court and the Insurance Commission, otherwise to distraint and levy the real properties of the petitioner as listed in the records of the case or against all those properties which are suspected to be owned by him and to hold the same in trust for this Court, to guaranty, in the event that petitioner loses his appeal, payment to the government of the taxes, surcharges, interests and penalties that may be adjudged in the case. Failure on the part of the Petitioner to put up the required bond, the Court has no alternative but to maintain all warrants of distraints over all personal properties to safeguard the interest of the Government. However, in the interest of justice and to allow the petitioner to pursue his business and daily livelihood, We likewise hereby resolve to lift the warrants of garnishment over the petitioner's bank accounts without the necessity of filing a bond. "Inasmuch as the properties concerned are under custodia legis respondent is also ordered to notify the Sandiganbayan of the issuance of the Warrants of Distraint and/or Levy pursuant to Rule 57 Sec. 7 of the Rules of Court. "SO ORDERED." (pp. 447-448, id .) Both parties were ordered to submit their respective memoranda. However, only Romualdez submitted a memorandum. On July 15, 1997, the CTA rendered its Decision, pertinent portions of which read: "In fine, the presumption of corrections enjoyed by the assessments has been succinctly controverted with respondent's own admission above and failure to make any attempt to demolish petitioner's material evidence. In such regard, respondent's allegation of 'consistent underdeclaration' as amounting to fraud has no leg to stand on in the light of fact that it was mainly based on the PCGG list of properties that were not duly proven before this Court to be owned by the petitioner. "We thus arrive at the conclusions that fraud was not simply established in this particular case by reason of respondent's failure to prove fraud and at least disprove petitioner's proofs. "On second issue, therefore, there being no fraud, the ten (10) year prescriptive period for the issuance of assessment is not applicable and instead, the five (5) or three (3) year prescriptive period, supra, applies. The respondent only assessed the petitioner on June 8, 1992 (Exhibit 'A', petitioner's folder of exhibits). Evidently, the power of the respondent to assess has prescribed, as follows: "Income Tax Date Years elapsed Prescriptive Result Return Filed of Assessment from filing of period (ITR) ITR to Assessment 4/15/80 6/8/92 12 years 5 years Prescribed 4/15/81 6/8/92 11 years 5 years Prescribed 4/15/83 6/8/92 9 years 5 years Prescribed 4/15/84 6/8/92 8 years 3 years Prescribed 4/15/85 6/8/92 7 years 3 years Prescribed "With respect to the third issue, petitioner has also invoked other errors, aside from those mentioned and discussed in the issuance of the assessments by way of the net worth method, which respondent again failed to controvert, namely: that the assessments are inadmissible in evidence; that there was wrong valuation of the properties; that there was double counting of the properties; that there was wrong period of application of property assessed; and lastly, the opening net worth of 1980 and increased net worth were wrong (Petitioner's memorandum, pp. 13-26; pp. 635-648, CTA records). "Prescindingly, however, We opt not to dwell anymore into the merit of the above propositions due to the prescribed nature of the subject assessments. "WHEREFORE, in view of the foregoing premises, the instant Petition for Review is hereby GRANTED. Accordingly, the assessments involved in the case at bar are hereby CANCELLED and SET ASIDE. No costs. "SO ORDERED." (pp. 669-671, Original Records). On September 2, 1997, the CTA denied respondent's Motion for Reconsideration. Hence, this petition filed by the Commissioner of Internal Revenue raising the lone issue: "WHETHER OR NOT PETITIONER'S RIGHT TO ISSUE THE DISPUTED DEFICIENCY INCOME TAX ASSESSMENTS HAS ALREADY PRESCRIBED AND/OR IS BARRED BY LACHES." (pp. 11-12, Rollo ) Petitioner's submission is that the CTA's interpretation of the statute of limitations regarding tax assessments as provided for under Section 223 is erroneous. We agree with the petitioner. Section 223 of the National Internal Revenue Code (NIRC) (now Section 222 of the Tax Reform Act of 1997) provides: "Sec. 223. Exceptions as to period of limitation of assessment and collection of taxes . "(a) In the case of a false or fraudulent return with intent to evade or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which had become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection. (emphasis ours) The Supreme Court ruled in Aznar vs. CTA, 58 SCRA 519, 531-532, thus: "Petitioner argues that Sec. 332 of the NIRC (Sec. 223 of the NIRC, as amended) does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very 'substantial underdeclaration of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax. "To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3)omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situation into three different classes, namely 'falsity', 'fraud' and 'omission.' That there is a difference between 'false return' and 'fraudulent return' cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due. "The ordinary period of prescription of 5 years (now 3 years) within which to assess tax liabilities under Sec. 331 of the NIRC (Sec. 203, NIRC, as amended) should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced." (emphasis ours) Petitioner's argument centers on the theory that fraud was committed by Armando Romualdez in filing his income tax returns. Fraud refers to all kinds of deception, whether insidious machination, manipulation, concealment or misrepresentation to lead another party into error (Article 1338, Civil Code of the Philippines). The deception must be serious and sufficient to mislead an ordinary prudent person (p. 514, Civil Code of the Philippines, Vol. IV, Tolentino, 1995 ed.). Respondent Armando Romualdez's income tax returns consistently misled the agents of the Bureau of Internal Revenue. Records reveal that Armando Romualdez's sworn declaration reflect a fixed annual gross compensation income for four (4) years (1981-1984) of P120,000.00 for his allowances as a corporate officer of Highway Builders, Inc. (Annexes "C-1," "C-2", "C-4", "C-5", Respondent's Letter dated June 10, 1992, pp. 170-178, BIR Folder II). Romualdez's pleadings and its annexes further reveal that he was also a corporate officer of Maconacon Airways (Exhibits "S", "S-2", pp. 317, 324, Original Records), Golden Country Farms, Inc. (Director's Certificate, p. 350, Folder of Exhibits; Exhibits "BB-4", p. 325, id ., Exhibits "BB-14", pp. 212-218, id .; Exhibit "F-12", Petition for Review, p. 149, Original Records) and Dipudo Industries, Inc. (pp. 77-78, BIR Folder II). Moreover, apart from Romualdez's declared allowances as a corporate officer of Highway Builders, Inc., we find no declaration of his income or benefits received from his other stockholdings or investments in Maconacon Airways, Golden Country Farms, Inc. and Dipudo Industries or that the same were reported to the BIR. By his own allegations, respondent Romualdez owns shares of stocks not only with Highway Builders, Inc. but also with Maconacon Airways and Golden Country Farms, Inc. (pp. 4-5, Decision). Hence, Romualdez's failure to disclose his true income for the period 1980-1985 is fatal to his cause. Failure to disclose said facts and declaring income for four (4) years (1981-1984) representing only a small fraction of an actual income constitute fraud (Avelino vs. Collector of Internal Revenue, 8 SCRA 572; Article 1339, Civil Code). Filing of deficient returns which prevent the Commissioner of Internal Revenue from computing the proper taxes is as though no return was made (Commissioner of Internal Revenue vs. Gonzales, 18 SCRA 757, 767). Section 16 of the NIRC provides: "SEC. 16. . . . "xxx xxx xxx "(b) Failure to submit the required returns, statements, reports and other documents . When a report required by law as a basis for the amusement of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable. "In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purpose." The CIR through the BIR-Special Tax Audit discovered the false and fraudulent return of respondent Romualdez only on December 23, 1991. Hence, the deficiency income tax assessments made on the same date were well-within the ten (10) year period prescribed by law. Under the "best evidence obtainable" rule, the Commissioner is authorized to make assessments according to his own discretion on the basis of any available relevant documents and items, whether reported or not. Such tax assessments are presumed correct and made in good faith. Hence, it is the respondent's duty to prove otherwise (Commissioner of Internal Revenue vs. Construction Resources of Asia, 145 SCRA 671). This, the respondent had failed to do. Respondent's claim for exemption from taxation on the ground that he has availed of the condonation of taxes pursuant to the Tax Amnesty Law (P.D. 1840) is untenable. The immunity granted under Section 2 of the Tax Amnesty (P.D. 1840) of 1981 is subject to the following conditions: "a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974-1980; b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon; c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required under Section 6 hereof." (emphasis ours) that only upon compliance therewith would the taxpayer be exempt from taxation. We find no evidence supporting respondent's claim. Respondent has not complied with paragraph b requirement. His required Tax Amnesty Return (BIR Form No. 1745-H) (Exhibit "9") neither bear the BIR stamp of receipt nor indicate when it was filed. What appears on said form is the date December 1, 1981, one (1) day late from the deadline set for its filing. Thus, even on the sole ground of failure of the respondent to file the required return on time, his claim for exemption has to be rejected. Tax amnesty condoning tax liability is equivalent to and is in the nature of tax exemption. Being so, it must be strictly construed against the tax payer (Magsaysay Lines, Inc. vs. Court of Appeals, 260 SCRA 513; People vs. Castaeda, 165 SCRA 327). Assuming for the sake of argument that the questioned assessments were not based on fraud, still the prescription did not abate the Commissioner's right to issue the questioned assessments as there was no substantial compliance with the requirement that the taxpayers "shall set forth specifically the gross amount of income from all sources" (Section 44, NIRC). The mere fact that the respondent's ownership of the subject properties is questioned in a separate case does not affect the authority of the CIR to enforce the questioned tax assessments. The basis of income tax assessments is not the ownership of the taxpayer of any property but his aggregate income, either as payment for services interest or profits, received from sources within the Philippines for a given period (Section 37, NIRC; Conwi vs. Court of Appeals, 213 SCRA 83). Based on all the foregoing, we find that the CTA committed a reversible error in cancelling the deficiency tax assessments of P27,590,926.19 against herein respondent on ground of prescription. Whether or not the deficiency income tax assessment of P27,590,926.19 is correct; whether the assessments are inadmissible in evidence, whether or not there was a wrong valuation of the properties or double counting of the properties; and whether or not the opening net worth of 1980 and increased net worth were wrong, and the determination of such other material data necessary for a correct tax deficiency assessment, are matters that should be first be resolved by the CTA, pursuant to section 7 of R.A. 1125 (the Court of Tax Appeals), to wit: "SEC. 7. Jurisdiction . The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided (1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. xxx xxx xxx" WHEREFORE, the appealed Decision of the CTA dated July 15, 1997 as well as its Resolution dated September 2, 1997 are hereby REVERSED and SET ASIDE. Let the original records of the case be remanded to the CTA for the ascertainment of the correct deficiency income tax assessment against private respondent Armando T. Romualdez. SO ORDERED. Brawner and Villarama, Jr ., JJ ., concur. Footnotes * Replacement case from now retired Justice Emeterio C. Cui pursuant to Section 2 (c), Rule 8 of the Revised Internal Rules of the Court of Appeals (RIRCA).