Hantex Trading Co., Inc. v. Commissioner of Internal Revenue

THIRD DIVISION [CA-G.R. SP No. 47172. September 30, 1998.] HANTEX TRADING CO., INC. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N AMIN , O. , J p : For Our determination is the main issue involving the validity and correctness of the 1987 deficiency income tax and sales tax assessments, and the increments thereof, amounting to P11,182,350.26 and P12,660,382.46, respectively, which were assessed by the Bureau of Internal Revenue (BIR) and affirmed by the Court of Tax Appeals (CTA) in its Decision of December 11, 1997 in C.T.A. Case No. 5126 (Annex "D", Rollo ). prLL Culled from the records forwarded to Us by the CTA, it appears that: On November 14, 1989, an unnamed tax informer furnished the agents of the Economic Intelligence and Investigation Bureau (EIIB) photocopies of consumption entry (import entry) documents purportedly belonging to petitioner for the year 1987. Relying on the photocopies of said documents, the EIIB agents conducted an investigation of the alleged undeclared importations of the petitioner. The EIIB agents secured letter certifications from the Collection Officer of the Bureau of Customs of the Manila International Container Port (Annex "F"), and from the Collection Officer of the Port of Manila (Annex "G") who stated in their respective letters that import entries of the petitioner for 1987 were duly processed and released from their post after payment of duties and taxes. The EIIB also through the Chief of the Investigation Division. Bienvenido Flores attempted to obtain from the Bureau of Customs the original copies of the consumption entries but the same could not be produced because they have been destroyed, disposed of, and were eaten by termites (p. 20, TSN, May 3, 1995). Hence, the photocopies of the consumption entries and the certifications of the Bureau of Customs officials were the only evidence obtainable under the circumstances as basis of the EIIB investigation, which the respondent alleged to have been the basis likewise for the tax assessments. On October 26, 1990, the EIIB through then Commissioner Jose T. Almonte recommended the assessment and collection from the petitioner of the following tax liabilities for 1987, viz : 35% for income tax P22,061,546.20 50% for fraud 11,030,773.10 40% for delinquency interest 1988 & 1989 8,824,618.48 Total P41,916,937.78 =========== He then transmitted the entire docket of the case to the respondent BIR Commissioner (Exh. "L", Rollo , pp. 32-33). On April 15, 1991, the BIR Assistant Commissioner for Collection Jaime Maza issued a demand letter to the petitioner for the payment of a deficiency income tax and sales tax for 1987 in the amount of P13,414,226.40 and P14,752,903.28, respectively (Exh. "C"). On the same date, Assessment Notices Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655 were issued against petitioner, requiring the latter to pay the amount of P13,414,226.40 (interest being increased from P3,213,825.08 to P5,030,334.90) and P14,742,903.28 as its deficiency income and sales taxes, respectively, for 1987 (Exhs. "D" & "E"). Upon receipt of the notices and sales tax deficiency assessments for 1987, the petitioner filed its protest with the Appellate Division of the BIR. The respondent BIR Commissioner, on December 10, 1993, denied the protest (Annex "M"). A Petition for Review of the Decision of the respondent BIR Commissioner was seasonably filed by the petitioner with the CTA. In view of the foregoing decision, the petitioner filed a Motion for Reconsideration within the reglementary period, and by leave of court subsequently filed an amended Motion for Reconsideration. The CTA denied both Motions, hence, this petition for review. The petitioner set the following Assignment of Errors against the CTA ruling, to wit: I PUBLIC RESPONDENT COURT OF TAX APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT AFFIRMED A BASELESS AND UNLAWFUL TAX DEFICIENCY ASSESSMENT AGAINST HANTEX TRADING CO. INC., IN VIOLATION OF THE FUNDAMENTAL GUARANTEE TO DUE PROCESS PROVIDED FOR IN ARTICLE III, SECTION I, BILL OF RIGHTS OF THE CONSTITUTION. II PUBLIC RESPONDENT COURT OF TAX APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT AFFIRMED THE TAX DEFICIENCY ASSESSMENTS AGAINST HANTEX TRADING CO. INC. RELYING SOLELY ON THE BASIS OF THE FINDINGS OF THE INVESTIGATION CONDUCTED BY THE ECONOMIC INTELLIGENCE AND INVESTIGATION BUREAU (EIIB) AGENTS, CONTRARY TO THE PROVISIONS OF SECTION 7, 16 AND 235 OF THE NATIONAL INTERNAL REVENUE CODE. III PUBLIC RESPONDENT COURT OF TAX APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT AFFIRMED THE TAX DEFICIENCY ASSESSMENT COMPUTATIONS BASED ON FIGURES SHOWN ON UNAUTHENTICATED COPIES OF ALLEGED CONSUMPTION ENTRY DOCUMENTS FOR BEING CONTRARY TO SECTIONS 24 AND 25 OF RULE 132 OF THE RULES OF COURT. IV PUBLIC RESPONDENT COURT OF TAX APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OF OR EXCESS OF JURISDICTION WHEN IT RULED THAT HANTEX TRADING CO., INC. HAD THE BURDEN OF PROOF TO SHOW THAT THE ALLEGED TAX DEFICIENCY ASSESSMENTS ARE NOT VALID HAVING BEEN COMPUTED ON THE BASIS OF PHOTOCOPIES OF ALLEGED CONSUMPTION ENTRY DOCUMENTS, CONTRARY TO SECTION 1, RULE 131 OF THE RULES OF COURT. V PUBLIC RESPONDENT COURT OF TAX APPEALS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN IT PREPARED A MODIFIED 1987 TAX DEFICIENCY ASSESSMENTS AGAINST HANTEX TRADING CO., SETTING ASIDE THE DEFICIENCY TAX ASSESSMENTS SUBMITTED TO THE COURT FOR REVIEW, CONTRARY TO THE PROVISIONS OF SECTIONS 16, 49, 203 AND 235 OF THE NATIONAL INTERNAL REVENUE CODE, VESTING SUCH POWER TO ASSESS INTERNAL REVENUE TAXES ON THE COMMISSIONER OF INTERNAL REVENUE." The foregoing assigned errors (issues) against the CTA Decision could be indispensably lumped up into one main consolidated issue for Our determination, i . e ., the validity and correctness of the 1987 deficiency income and sales tax assessments amounting to P11,182,350.26 and P12,660,382.46, respectively, for 1987, plus the delinquency interest per annum. We are in full accord with the clear observations of the petitioner that the CTA has inescapably committed grave abuse of discretion amounting to lack or excess of jurisdiction in the case at bench. The income and sales tax deficiency assessments made by the respondent BIR Commissioner against the petitioner were unlawful and baseless. Unlawful, because it violates the fundamental rights of the petitioner guaranteed under Section 1, Article III of the Bill of Rights of the Philippine Constitution, which significantly provides thus: "Section 1. No person shall be deprived of life, liberty, or property without due process of law, nor shall any person be denied the equal protection of the laws." dctai Baseless, because the deficiency tax assessments issued and imposed upon by the BIR against the petitioner were basically computed and based from data secured in 1987 from photocopies (xerox) of the alleged consumption entry documents purportedly in the name of the petitioner in 1987. It should be noted that the xerox/photocopies consisting of sixty (68) pages (Exhs. "F-1" to "F-68") while otherwise uncontested and uncontroverted by the respondent BIR Commissioner were never authenticated nor verified under oath by the EIIB and the BIR investigators and their officials. In fact, the respondent BIR Commissioner, miserably failed to adduce any proof/evidence prima facie or a probable cause to establish correctness and sufficiency of his information obtained through testimony or otherwise in order to formulate his own belief and knowledge. There is .nothing in the record whatsoever to show that respondent complied with the pertinent provision of Section 16(b) of National Internal Revenue Code (NIRC) of 1977, which provides, inter alia, "that 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 purposes . " In the instant case, no proof was presented that in the preparation of the tax deficiency assessments in question, the Commissioner ever made or amended the income and sales tax returns of the petitioner for the year 1987. This lends support to a well-settled rule in our jurisprudence that: "In order to stand the test of judicial scrutiny the assessment must be based on actual facts . The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption." ( Commissioner of Internal Revenue vs . Benipayo , L-13656, and SCRA 182, emphasis ours) The respondent claims that he has the power to make assessments on the basis of information he can obtain, citing the same provision of Section 16(b) of the Tax Code. In other words, the respondent submits that under the "best evidence obtainable" method of assessing taxes, he issued the deficiency assessments based only on the information obtained from the EIIB. Respondent's premise is wrong. His argument should have been based on the "best evidence" rule stating that the original document must be produced. If it could not be produced, secondary evidence must be adduced. This is the rationale of Rule 130 of the Revised Rules of Court on the admissibility of documentary evidence. The respondent's contention that the original copies of the consumption entries could no longer be produced in court, because they have already been destroyed and eaten by termites gathered from the testimony of the Chief of the Investigation Division of the EIIB, would not at all suffice to satisfy with the requirements of Rule 130 on the Best Evidence Rule and the Secondary Evidence Rule (Section 2 in relation to Section 4 thereof), of the same Rules. In the instant case, significant is the fact that the public officer charged with the custody of the consumption entry documents was never presented in court (CTA) to lend credence to the alleged loss of the originals. Chief Flores' testimony, if at all, is merely hearsay in character, and therefore, inadmissible in evidence. "The assessment cannot be based on hearsay evidence" ( In re : Estate of Guillette, 58 Phil . 8731 ) Respondent also tries to justify that the certifications of the Chief Collector of the Manila International Container Port and the Chief Collector of the Port of Manila would amount to an authentication of the contents of the photocopies of the consumption entry documents while the import entries of the petitioner were duly processed and released from their ports after payment of duties and taxes. We do not agree. Their certifications do not serve as authentication and verification. There was no showing that these Collection Chiefs of the ports of the Bureau of Customs are the public officers charged with the legal custody of the consumption entry documents. What their letters would purport are merely enumerated entry numbers and dates of release and payments without simply identifying any of the sixty-eight (68) consumption entry documents. Specifically, the certifications made by the two Customs Collection Chiefs under the guise of supporting the petitioner's alleged tax deficiency assessments invoking the "best evidence obtainable" should not be permitted to supplant the "Best Evidence Rule", more particularly under Section 7, Rule 130 of the Rules of Court, which states, thus: "Sec. 7. When the original of a document is in the custody of a public officer or is recorded in a public office, its contents may be proved by a certified copy issued by the public office in custody thereof." The respondent invokes the provisions of Section 8 of RA 1125 which states that the CTA shall not be strictly bound by the technical rules of evidence, and, therefore, the letter-certifications of the Customs Collection Officers amount to an authentication of the contents of the sixty-eight (68) photocopies of the consumption entry documents. As We have previously stated in reference to Section 1, Article III of the Bill of Rights of the 1987 Constitution, a fortiori . Mr. Justice Jose P. Laurel has time and again, reminded Us in the leading case of Ang Tibay, et al . vs . CIR, et al ., 69 Phil. 695, that a tax assessment unsupported by unsubstantial evidence amounts to deprivation of property without due process of law. Another landmark decision rendered by the High Court which is applicable to the case at bench is that of the Commissioner of Internal Revenue vs . Algue, Inc ., 158 SCRA 9 which relates to the exercise of the BIR to collect taxes. The Algue ruling emphasized that compliance with strict procedural requirements must be followed to effectively avoid a collision course between the State's power to tax and the individual's recognized rights. Thus, it was held: "Taxes are the lifeblood of the government and should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and taxpayers so that the real purpose of the taxation which is the promotion of the common good, may be achieved. xxx xxx xxx "It is said that the taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing authorities every person who is able to must contribute his share in the running of the government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous action that it is an arbitrary method of exaction by those in the seat of power. But even as we conceded the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has not been observed." LibLex Similarly , in the case of the Commissioner of Internal Revenue vs . Court of Appeals, et al ., 257 SCRA 206, it was ruled: ". . . we cannot avoid balancing on the scales the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other. Obviously, the scales must tilt in favor of the individual: for a citizen's right to comply is protected by the Bill of Rights of the Constitution. Thus, while taxes are the lifeblood of the Government, the power to tax has also its limits in spite of all plenitude. . ." In the present case, the records show that the BIR did not conduct its own separate investigation when the docket of the case was transmitted to it by the EIIB. It simply and solely relied on the findings and report made by the EIIB agents. The deficiency income and sales taxes for 1987 against the petitioner were computed at the Office of BIR Deputy Commissioner Victor A. Deferio (Annex "L") which should indicate that the deficiency tax computations were anchored on the report of the EIIB. The BIR has therefore no factual basis to determine the tax liabilities of the petitioner because it is merely hearsay evidence to utilize the contents of the unauthenticated and unverified photocopies of the consumption entries in its computations of the 1987 deficiency tax assessments against the petitioner. A consumption entry document is a government form accomplished by our importer or his representative, which is ultimately submitted to the proper office at the Bureau of Customs, as a basis for inspection of the importations of an importer and for the computations of the correct customs duties and internal revenue taxes due on importations. As this form is a public document, the consumption entry document falls therefore within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply. This circumstance was seasonably objected to by the petitioner before the CTA but unfortunately, it was admitted subject to its "final evaluation of their purpose, materiality, relevancy and probative value to the issue involved in this case" (Annex "P", Rollo ). Nevertheless, despite CTA's admission of the unauthenticated and unverified photocopies of the consumption entry documents, such evidence would not in effect have any probative value. The Supreme Court has laid down the doctrine, thus: ". . . The lack of objection may make any incompetent evidence admissible. But admissibility of evidence should not equated with weight of evidence. Hearsay evidence whether objected to or not has no probative value." (People vs. Valero, L-45283-84, March 19, 1982, 112 SCRA 675). The CTA should not just brush aside the legal requisites provided for under the pertinent provisions of the Rules of Court in the matter of the admissibility of public documents. Substantive rules of evidence should not be disregarded by the CTA. Thus, it has been held: ". . . As there is no showing of any specific rules governing the presentation of evidence in the Court of Tax Appeals, the general rules or procedure concerning the order of trial outlined in the Rules of Court shall prevail." ( Perez vs . Court of Appeals, G.R. No. L-91933, May 26, 1957) Whereof, We subscribe with petitioner's position that the use of its financial statements secured by the EIIB agents from the SEC as basis for the computation of the tax deficiency assessments should not be made to substitute and violate the essential requirements of the National Internal Revenue Code of 1977 (NIRC). Thus, in the computation of deficiency taxes, the deficiency shall be arrived at by the difference between the amount shown in the returns as against the amount determine per investigation (Section 16 and 49(4)(b) of the NIRC of 1977). The CTA failed to take judicial notice that the tax deficiency assessments in dispute were computed without the tax returns in patent violation of the pertinent provisions of the Tax Code (emphasis ours). The use of the tax returns is indispensably required and needed in the computation of a tax deficiency. This essential requirement must be complied with in the preparation and issuance of valid tax deficiency assessments. Thus, it is noteworthy to mention the pertinent provisions of the Tax Code which mandates the use of tax returns in the computation of a tax deficiency. "Section 16. Power of the Commissioner to make assessments . a) Examination of the returns and determination of tax. After a return is filed as required under the provisions of this Code, the Commissioner shall examine it and assess the correct amount of the tax. The tax deficiency so assessed shall be paid upon notice and demand from the Commissioner. . ." "Section 49. Payments and assessment of income tax for individuals and corporations : "(a) . . . (b) . . . Assessment and payment of deficiency tax. After the return is filed, the Commissioner of Internal Revenue shall examine it and assess the correct amount of tax. The tax or deficiency income tax shall be paid upon notice and demand from the Commissioner. As used in this chapter, in respect of a tax imposed in this title, the term 'deficiency' means: The amount in which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return. . ." (emphasis supplied) Respondent's failure to discharge the foregoing responsibility is indicative of the vacuity of the disputed deficiency tax assessments. FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 of the CTA Decision Case No. 5126 affirming the 1987 deficiency income and sales tax assessments and the increments thereof, issued by the BIR is hereby REVERSED. No costs. SO ORDERED. Imperial and Hofilena, JJ . , concur.