Commissioner of Internal Revenue v. A. Soriano Corp.

SIXTEENTH DIVISION [CA-G.R. SP No. 45525. October 9, 1998.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . A. SORIANO CORPORATION , respondent . D E C I S I O N GUERRERO , J p : Petitioner for review from the Decision dated 19 June 1998 1 of the Court of Tax Appeals (hereafter, "CTA") in C.T.A. Case No. 4976 entitled "A. Soriano Corporation, Petitioner, versus The Commissioner of Internal Revenue, Respondent", the dispositive portion of which reads: "WHEREFORE, in view of the foregoing, respondent is hereby ORDERED to REFUND to petitioner the amount of P3,380,106.85 as overpaid creditable withholding tax for the taxable years 1990 and 1991." 2 The undisputed facts are as follows: A substantial portion of respondent's income comes from the activity of leasing its realties to several entities who in turn withhold taxes from the rentals they pay to respondent corporation. For the taxable year 1990, respondent filed with the Bureau of Internal Revenue its final corporate income tax return 3 on 15 April 1991, showing a net loss of P84,827,684.00 with an excess creditable withholding income tax of P7,372,547.00, detailed as follows. For the taxable year 1991, respondent's final corporate income tax return 4 , likewise showed a net loss this time amounting to P151,599,423.00 with an excess creditable withholding income tax of P9,193,477.00 which included the prior years' excess creditable withholding income tax. On 27 September 1991, a Letter of Authority was issued to the BIR Revenue Officer Dolores Matias for her to conduct an examination of respondent's books of accounts and other accounting records for the taxable year 1990. On 02 April 1993, respondent filed an administrative written claim for refund in the total amount of P9,193,477.00 covering the alleged excess, unutilized creditable income taxes for the years 1990 and 1991. 5 On 14 April 1993, without waiting for the action of petitioner, respondent filed a petition for review with the Court of Tax Appeals docketed thereat as CTA Case No. 4976. Per the Memorandum Report dated 19 September 1994 submitted by Revenue Officer Matias, for the year 1990 respondent had in an income deficiency of P1,852,330.38. For 1990, it had a total revenue of P510,112,343.00 but its corporate annual income tax return reflected a taxable income of only P118,307,483.00; of the P117,644,691.00 interest expense claimed by respondent, P87,445,293.00 was disallowed. Thus, assessment notice dated 27 December 1994 was issued for respondent's 1990 tax deficiencies in the total amount of P2,001,247.16 inclusive of surcharge, interest, and compromise penalty. LexLib On 19 June 1997, the CTA promulgated the assailed decision. The motion for reconsideration filed by the Commissioner of Internal Revenue (hereafter, "petitioner-appellant") was denied. Thus, this appeal, petitioner-appellant presenting the following issue: "WHETHER THE COURT OF TAX APPEALS ERRED IN PARTIALLY GRANTING RESPONDENTS CLAIM FOR REFUND DESPITE THE EXISTENCE OF A DEFICIENCY ASSESSMENT AGAINST RESPONDENT FOR THE TAXABLE YEAR 1990." 6 The issue is whether or not a deficiency assessment for a particular tax year issued beyond the 3-year period provided in Section 203 of the NIRC could be the basis for denying a claim for alleged overpaid creditable withholding tax for the same taxable year. LLjur PETITIONER-APPELLANTS ARGUMENTS 7 Section 203 of the National Internal Revenue Code (hereafter, "NIRC") cited by the CTA in the assailed decision must be read together with Section 223 of the same law. Section 203 is entitled "Period of limitation upon assessment and collection", while Section 223 is entitled "Exceptions as to a period of limitation of assessment and collection of taxes". Based on the memorandum report made by RO Matias, the BIR found that despite having a total revenue P510,112,343.00 for 1990, the A. Soriano Co. (hereafter, "respondent-appellee") reported a taxable income of only P118,307,483.00. Further, P87,445,293.00 of the P117,664,691.00 interest expense claimed by respondent-appellee was disallowed, resulting in an income tax deficiency of P1,852,330.38 for the taxable year 1990. The Supreme Court has held that although the ordinary period of prescription of 5 years within which to assess tax liabilities under Section 331 of the NIRC is applicable to normal circumstances, when the government is placed at a disadvantage, as when fraudulent returns are filed or when returns are not filed at all, the period of 10 years from the time of discovery of the falsity, fraud or omission, as provided in Section 332 (a) of the NIRC, seems to be adequate. Since petitioner-appellant has challenged the veracity of respondent-appellee's tax return, Section 65 of the NIRC is applicable. Thus, the grant of refund despite the existence of the deficiency assessment is absurd. The grant of refund is based on the tax return's validity. While the deficiency assessment is not yet final, it cannot be the basis for the grant of refund. Finally, to uphold the CTA's ruling would result in multiplicity of suits. In a Resolution dated 12 November 1997 8 , respondent-appellee was given ten (10) days within which to file Comment. No Comment was, however, filed. 9 COURTS RULING : The petition is without merit. A deficiency assessment for the tax year 1990 issued more than 3 years after a tax return is filed cannot be made the basis for denying a claim for alleged overpaid creditable withholding tax for the tax year 1990. cdll Section 203 of the NIRC is the general rule and limits to three years the period within which an assessment can be made. It provides, thus: "Section 203. Period of limitation upon assessment and collection . Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the return was filed, and no proceedings in court without assessment for the collection of such taxes shall be begun after expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day." On the other hand, Section 223 of the NIRC is the exception to the 3-year rule. It provides: "Section 223. Exceptions as to a period of limitation of assessment and collection of taxes. "(a) In the case of a false or fraudulent return with intent to evade tax 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 has become final, and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. "(b) . . . "(c) . . . "(d) . . . "(e) . . ." The circumstances herein indicate that Section 203 and not Section 223 is applicable. Section 223 applies only in any of three instances, to wit: 1) false return; 2) fraudulent return with intent to evade tax; 3) failure to file a return. It was stated in the Memorandum dated 19 September 1994 issued by REO Matias of the BIR 10 that the "procedure taken by subject taxpayer is considered erroneous and grossly detrimental to the interest of the Government". Thus, none of the three circumstances in Section 223 exists herein. Respondent filed a tax return. It was not false nor fraudulent. It was not the return that was being questioned by Matias, but the procedure taken by respondent in computing of the tax due. Thus, We apply Section 203 aforequoted. Respondent filed its tax return on 15 April 1990. Under Section 203, the government had 3 years from this date within which to assess the return. The notice of assessment dated 27 December 1994 11 was clearly issued beyond the three-year period. Hence, as correctly ruled by the CTA, this assessment of respondent's tax liabilities for 1990 does not serve as a bar to respondent's claim for refund of the overpaid creditable withholding tax for the tax year 1990. The Case of Commissioner of Internal Revenue v. CTA 12 cited by petitioner is, therefore, not availing. Therein, there was an assessment made within the period provided in the law. Hence, it was ruled that a party is not entitled to refund and at the same time be liable for a tax deficiency assessment for the same year. As already stated, in the case before Us the assessment for deficiency taxes was made beyond the three-year period provided in Section 203 of the NIRC. Therefore, the CTA did not err when it granted the tax refund prayed for by respondent. LexLib WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED in toto . SO ORDERED. Alio-Hormachuelos and Villarama, Jr . , JJ . , concur. Footnotes 1. Rollo , p. 21 2. Decision, Rollo , p. 21, at p. 29 3. Exhibit B, pp. 91-92, CTA Records 4. Exhibit C, pp. 108-109, Id. 5. Exhibit A-1, pp. 88-90, CTA Records 6. Petition for Review, Rollo , p 6, at p. 10 7. Id . 8. Rollo , p. 74 9. See Rollo , back of p. 73 10. Rollo , p. 64 11. Rollo , p. 68 12. 234 SCRA 348 [1994]