Commissioner of Internal Revenue v. Santos

EIGHTH DIVISION [CA-G.R. SP No. 48441. May 7, 2001.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ANTONIO S. SANTOS , respondent . D E C I S I O N DE LOS SANTOS , J p : In this petition for review under Rule 43 of the 1997 Rules of Civil Procedure, the petitioner assails the decision and resolution of the Court of Tax Appeals, promulgated on April 15, 1998 and July 8, 1998, respectively, in CTA Case No. 5157, entitled "Antonio S. Santos, Petitioner versus Commissioner of Internal Revenue, Respondent", for being contrary to law and the facts adduced. From the records of the petitioner, it is not disputed that the respondent, for taxable years 1987 and 1988, reported net taxable incomes of P116,132.30 and P170,588.20, with income taxes of P12,180.00 and P24,856.00 duo thereon and paid, respectively. On April 14, 1991, the National Bureau of Investigation, on the strength of Search Warrant No. 24-91/12-91 issued by the then RTC Judge Bernardo Pardo of Manila, seized from the respondent 146 pages of documents, photocopies of which were forwarded to the Bureau of Internal Revenue on June 27, 1991. These became the basis for the deficiency income tax assessments against respondent for the aforesaid fiscal years. Thereafter, by virtue of Special Order No. 37-91 issued by the petitioner, the respondent was found to have failed to report his income derived from illegal gambling operations, thus: In 1987, the respondent earned P27,134,030.75 in net income from illegal gambling operations and P7,545,000.00 in cash dividends from gambling investments; while in 1988, the respondent earned P37,238,141.60 net income from gambling operations and P2,647,500.00 in cash dividends from gambling investments. The respondent was later advised on July 2, 1991 of the preliminary assessment of a basic deficiency income tax of P12,122,402.00 and P13,933,599.00 for 1987 and 1988, respectively. On July 14, 1991, the respondent asked for a reconsideration. On September 12, 1991, the petitioner issued Assessment Notices Nos. FAS-1-87-91-002648 and FA-1-88-91-002649 in the amounts of P36,064,145.95 and P36,575,697.37 against the respondent. Petitioner further asserts that the said notices were mailed to respondent on September 24, 1991 and that in due course of mail they must be presumed to have been received by him. The respondent, by way of exception, now claims he never received the said notices, and that therefore he was denied due process and a chance to refute them. About a year later, on August 25, 1992, a warrant of distraint and/or levy was issued by the petitioner against the respondent. Also, warrants of garnishment were served on the managers of the branches of Bank of the Philippine Island (BPI) and Metropolitan Bank and Trust Company where the respondent maintained deposit accounts. Acting on the respondent's motion for reconsideration, petitioner on July 8, 1994 rendered a decision ordering the respondent to pay the aggregate amount of P87,873,977.80 as deficiency income taxes for 1987 and 1988, which respondent failed to pay. The respondent appealed by way of petition for review to the Court of Tax Appeals. Said court rendered its decision dated April 15, 1998 ordering the cancellation of the deficiency tax assessments against respondent (Petition, annex A, p. 10). It held that the petitioner failed to show how she arrived at the assessment or that the assessment notices were received by respondent, hence, he was denied due process of law (Annex A, pp. 8, 10). On July 8, 1998, the tax court denied petitioner's motion for reconsideration (Annex B). Hence, this petition for review, where the petitioner submits the following issues for resolution: I. WHETHER OR NOT THE AMOUNTS OF INCOME FROM GAMBLING OPERATIONS AND CASH DIVIDENDS FROM GAMBLING INVESTMENTS IN 1987 AND 1988, RESPECTIVELY, AS DETERMINED BY THE COMMISSIONER OF INTERNAL REVENUE, ARE BASED ON ACTUAL FINDINGS OR ARE MERE UNSUBSTANTIATED CONJECTURES. II. WHETHER OR NOT THE 1987 AND 1988 DEFICIENCY INCOME TAX ASSESSMENT NOTICES WERE PREPARED IN ACCORDANCE WITH THE MANDATORY PRECEPTS AS PROVIDED FOR UNDER SECTION 229 OF THE INTERNAL REVENUE CODE AND ITS IMPLEMENTING REGULATIONS, REVENUE REGULATION NO. 12-85. On the first issue, the petitioner insists that the respondent, Antonio S. Santos, was a known gambling operator, and he was implicated in a series of raids conducted by the NBI. Then she would have the Court of Tax Appeals, and necessarily also this Court, take judicial notice of this "fact". In particular, the raid on respondent's residence on April 14, 1991, was certified to have been lawfully conducted. It is significant to note that no proofs were presented concerning the claimed raids. Petitioner goes on to argue that since the Philippine system of income taxation is self-assessing, it must be given latitude in the use of investigation techniques as the circumstances afford, and thus, "the Tax Code allows petitioner to obtain information from any office of the government for the purpose of determining, among other things, the liability of any person for an internal revenue tax". Yet, as testified to by its own witness, Mr. Colocado, before the BIR hearing officer, the special team created to investigate gambling operators did not in fact any independent investigation whatsoever but relied solely on some documents supplied by the NBI. In particular, the team relied almost solely on the so-called financial statements of respondent for 1987 and 1988 found on pages 100 and 122 (Minutes of May 11, 1993 Conference Hearing, pp. 6-7; rollo, pp. 101-102). The respondent insists that the petitioner failed to show that it conducted any investigation, or employed any investigative techniques, but relied solely on the xeroxed copies of documents seized from his residence. It did not bother to present adequate corroborative proof that it pertained to his supposed gambling activities. Judge Jerry Gonzales of the Metropolitan Trial Court of Marikina, Branch LXXVI, in his decision in Crim. Case 91-25172, acquitting the respondent of illegal gambling, ruled that respondent's constitutional rights were violated when he was made to affix his signatures on the seized documents by the raiding team when they were seized, without being informed that he could refuse to do so and that his said signature could be used against him (Rollo, pp. 149-150). We add that his signature so secured did not necessarily make him the owner, much less source, of the documents seized. At best, it merely signified that they were seized from his premises, which covered two adjacent lots numbered 33 and 35 of Sparrow St., Marikina City. The said court held that the admissibility of the seized documents was constitutionally infirmed. We further note that other than the mere allegation that the respondent was implicated in several police raids, no proof was shown of any actual activity he conducted that would constitute illegal gambling. Petitioner insists that it should be allowed to use the xeroxed copies of the documents seized by NBI agents from respondent on April 14, 1991, as the basis for assessing respondent of his deficiency income taxes for the years 1987 and 1988, because the originals of the 146 pieces of documents were returned to respondent pursuant to the order of the MTC of Marikina City (Exhibit "C", p. 10 of the Decision in Criminal Case No. 91-25172), consistent with Section 3(b) and Section 6 of Rule 130, Rules of Court authorizing the use of secondary evidence where the originals are in the custody and control of the party against whom the evidence is offered. We observe, however, that petitioner failed to utilize the means allowed by the rules for securing the originals in the supposed custody of the respondent, and therefore could not insist on using the photocopies as "secondary" evidence. Still, this really begs the question, for in the very first place, the petitioner failed to make any significant connection between the respondent and any alleged gambling activities, nor to show that the seized documents actually correctly detailed the actual financial results of his said activities. The assessments issued were almost solely based on the summary financial statements on pages 100 and 122 of the seized documents, without any supporting documents or schedules, yet nowhere on these two pages is the signature of respondent found, nor any other indication purporting them to be his voluntary statement "against interest" of his illegal gambling operations. It boggles the mind that an assessment worth close of more than 87 million pesos should be made to depend almost entirely on two unacknowledged pages of paper which could not be adjudged as documentary admissions against interest. Indeed, the findings of petitioner are mere unsubstantiated conjectures. They are not based on actual findings made after an independent investigation but only on photocopies of the seized documents submitted by the NBI to the Bureau of Internal Revenue. They did not even bother to explain the so-called "investigation techniques" petitioner employed, if any, in making the assessments. As the Tax Court held, a tax assessment cannot be made to depend upon a presumption which is itself based on a mere presumption, but on proven facts: "Petitioner presents the (following) propositions as reasons of the petition for review that the assessments for 1987 & 1988 issued by the respondent against him are void and of no legal effect on grounds that: (1) it (sic) never received the aforementioned assessment notices dated September 12, 1991 which did not contain the signature of Deputy Commissioner Eufracio Santos that were allegedly sent by respondent on September 24, 1991, (2) it (sic) was deprived of the opportunity to contest the findings of the revenue investigations, by reason of his failure to receive the alleged deficiency income tax assessment, thus, his constitutional right to due process was violated as provided in Sec. 229 of the Tax Code, (3) the photocopies of two (2) financial statements covering 1987 and 1988 which were made the basis of the tax assessment for said periods against the petitioner (pages 110 & 122 of the BIR Records) did not contain the name of the herein petitioner, (4) the respondent did not conduct any tax investigation on petitioner's alleged unreported income from gambling operations, but merely relied on the xerox copies of documents transmitted to the BIR by the NBI, and, (5) that it (sic) never engaged in illegal gambling, and this fact was actually confirmed by the hearing judge who presided over the criminal case (Illegal Gambling) that was filed by the NBI against the petitioner. On the other hand, respondent raises the herein special and affirmative defenses, in her answer to the petition for review, and we quote in toto , thus: (1) the taxpayer is deemed to have received, in due course of mail, the assessment notices that were issued by the BIR, (2) under Sec. 7 of the Tax Code, the Commissioner of Internal Revenue may obtain information on potential taxpayers from government offices or agencies, (3) all income from whatever source derived by an individual taxpayer during each taxable year is subject to income tax under the Sec. 21(a) of the Tax Code, and (4) the burden of proof is on the taxpayer to rebut the findings of the Commissioner of Internal Revenue. The decisive issue that comes to fore for our determination is: whether or not petitioner is liable for the amounts of P43,153,475.71 and P44,720,502.19 as deficiency income taxes on its (sic) income derived from his illegal gambling activities for the years 1987 and 1988. Settled is the rule that assessments are prima facie presumed correct and made in good faith. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. ( Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 104151, March 10, 1995). Likewise, it is settled that for an assessment to stand the test of judicial scrutiny, it must be based on actual facts and not on mere presumption no matter how reasonable or logical said presumption may be . The presumption of correctness of assessment being a mere presumption cannot be made to rest on another presumption ( Commissioner of Internal Revenue vs. Island Garment Manufacturing Corp . , 153 SCRA 665; Collector vs. Benipayo, 4 SCRA 182). The assessment cannot be based on hearsay evidence. ( In re Estate of Guilette, 58 Phil. 813). (Emphasis supplied) In the case at bar, the Court finds that indeed respondent based the subject assessments on the documents indorsed by the NBI to her, particularly pages 100 and 122 of the BIR records. Records of the case clearly show no data as to what method of income determination was employed by the respondent in arriving the subject assessment. When respondent's witness, Mr. Jesus Duque, testified on May 5, 1997, he professed no knowledge of the assessment and pointed to his men as the ones who conducted the examination. Not one of those men who conducted the examination was even presented by respondent. It was not established by the respondent that petitioner has indeed earned income from gambling for the years in question. It was found by the Metropolitan Trial Court Judge of Marikina that herein petitioner was not guilty of the crime of illegal gambling. The acquittal of the petitioner and the fact that respondent did not present any evidence that will convince this Court that petitioner indeed earned the amounts of P34,729,030.75 and P39,885,641 for the years 1987 and 1988 from illegal gambling, were sufficient to rebut the presumption of the correctness of the assessment. The Court cannot place any probative value to the financial statements for 1987 and 1988 (pages 100 & 122 of BIR records), which did not contain the name of herein petitioner and which were not signed by any auditor or any person who prepared the same . Neither were the originals of those documents presented to this Court. While there is a truism to the contention of the respondent that all income from whatever source derived by an individual taxpayer is subject to income tax under Sec. 21(a) of the Tax Code, it is a fallacy to apply the same in the case at bar because, as it was earlier mentioned, the alleged income derived by the petitioner from gambling operations for years in question was not properly proven by the respondent. Thus, to agree with respondent's assessments without sufficient factual basis, will make the petitioner liable to pay more than what is due and demandable from him." ( Rollo , pp. 48-52; emphasis Ours) What is clear is that the respondent never claimed or admitted that pages 100 and 122 of the seized documents represented his unreported gambling income for 1987 and 1988. The petitioner has still the duty to prove that fact, and it failed dismally to do so. The presumption of validity of her assessment has been rebutted and the burden to prove their correctness shifts back to her. The respondent's accountant repeatedly denied that he was involved in "jueteng", and this made the burden of proof of petitioner all the more needful The sheer magnitude of the assessments for respondent's income from gambling operations in the country for the year 1987 and 1988, minus the interest after 1991, surely renders the petitioner's said duty indispensable: 1987 1988 Net Income Per Return P 116,132.30 P 170,588.20 Add: Income from gambling Operations 34,729,030.75 39,885,641.60 Net Income Per Investigation P 34,845,163.05 P 40,056,229.80 Less: Personal and Additional Exemption 24,000.00 24,000.00 Taxable Net Income P 34,821,163.05 P 40,032,229.80 Income Tax Due Thereon P 12,134,582.00 P 13,958,455.00 Less: Tax Payment 12,180.00 24,856.00 Deficiency Income Tax 12,122,402.00 13,933,599.00 Add: 50% Surcharge 6,061,201.00 6,966,799.50 25% Surcharge 3,030,600.00 3,483,399.75 Sub-total P 21,214,203.50 P 24,383,798.25 Add: Interest Up to 10/10/91 14,849,942.45 12,191,899.12 Total Amount Due and Collectible P 136,064,145.95 P 36,575,697.37 =============== =============== Petitioner also disallowed deductions of expenses which the respondent supposedly incurred, per the seized documents, during the taxable years involved. It was reasoned that "This was done because there was no evidence to establish a reasonable proximate relation between the expenses and the ordinary conduct of respondent's business. Absent substantial proof, the expenses reflected in respondent's income statements for the years 1987 and 1988 were disallowed." But this statement is at best gratuitous and self-serving. Its implications are grossly disadvantageous to the taxpayers. For it is equally clear that neither has the petitioner presented any proof that the revenue figures shown in the seized documents, particularly the financial statements for 1987 and 1988 found on pages 100 and 122, represented respondent's actual illegal gambling income and expenses. We also note that in her assessment, the petitioner also imposed 50% surcharge for fraud in addition to the 25% surcharge for the late payment or delinquency in the payment of the income tax, as well as the interest and surcharge on deficiency tax upon failure of the taxpayer to pay the tax on the date fixed by law for payment thereof, that is, on or before April after the close of the taxable calendar year (Section 249, in relation to Section 44 of the Tax Code, as amended). We quote from the decision of Judge Gonzales of the Marikina City Metropolitan Trial Court dismissing the evidence presented against the respondent, which we find to be more than persuasive: "The evidence on record is clear, not any of the papers seized can be considered as 'lottery list (cotejos, paper or other matter containing letters, figures, signs or symbols pertaining to or in any manner used in the games of jueteng, . . ., and similar games of lotteries and numbers which have taken place or are about to take place.' None of the items in the inventory list (Exhibit "B") pertain to or are actually used like the tickets and lists (cotejos) in the game proper as described in the Palma case, though they may be regarded as an accounting record of some sort of 1989 and 1990 vintage. The monies contained in the five envelopes cannot be considered gambling money because no gambling happened, neither can it be considered as collected bets because there is no jueteng list or cotejos to corroborate it. In fact Agent Cabading under cross-examination, testified that the source of the money could not be determined except that it was taken form the premises. (pp. 22-24, TSN of August 5, 1991). But, even if granting arguendo that the items in Exhibit "B" from where the prosecution lifted the words Cabu, bulahan, rebisador, etc. were considered as falling within the ambit of Sec. 1 (d) of P.D. No. 1602, the fact that they were not taken physically from accused's person, as he was then sleeping at the time of the raid, but in the premises, it then becomes the duty of the prosecution to further establish that the said items were being used in a game held or to be held on the date of the raid, or immediately prior to or after said date. ( People vs. Tan Chin Hing, G.R. 2162-R, August 28, 1948). This the prosecution failed to do. In fact prosecution witness NBI Agent Atty. Cabading testified that the raid was peaceful and orderly (p. 43, TSN of May 27, 1991) and no gambling existed prior to, during or thereafter. (pp. 66 to 67, TSN of August 5, 1991). "The cited case of Encarnacion is not applicable here. There, accused was found in actual physical possession of jueteng list (cotejos) which is not so in this case at bar, no such list was taken from accused, neither is there any jueteng list on the seized items. "From the above, the Court finds it difficult to collate sufficient and convincing evidence to link the accused, Antonio Santos, with the commission of the crime of Violation of P.D. 1602, Sec. 1 (d) as charged in the Information. The evidence of the prosecution is not conclusive, it clearly did not establish accused guilt(y), it is not absolutely convincing, the evidence did not overcome that presumption of innocence principle in favor of the accused deeply rooted in our system of procedure. For if the law convicts, it is upon the supposition that the prosecution fully established the crime as a fact. It does not convict the accused without evidence or by reason of his silence. It convicts accused when the facts which constitute the crime defined in the article charge have been proven. "Furthermore, it appears that at the start of his custodial investigation and this is from the moment that the search warrant was served in the early morning of April 14, 1991 upon accused, the raiding team did not follow the correct procedure after effecting service of the search warrant; they never informed accused (as it is the raiding team's duty) of his constitutional rights to remain silent and to counsel, and that any statement he might make could be used against him (this including the mechanical act of affixing one's signature on any document). The person arrested shall have the right to communicate with his lawyer, a relative, or anyone he chooses by the most expedient means by telephone if possible or by letter, or messenger. It shall be the responsibility of the arresting officer to see to it that this is accomplished. No custodial investigation shall be conducted unless it be in the presence of counsel engaged by the person arrested, by any person on his behalf, or appointed by the court upon petition either of the detainee himself or by anyone on his behalf. The right to counsel may be waived but the waiver shall not be valid unless made with the assistance of counsel. Any statement obtained in violation of the procedure herein laid down, whether exculpatory or inculpatory, in whole or in part, shall be inadmissible in evidence. (People vs. Galit, 135 Phil. 465). "This is significant because in prosecution's desire to establish possession by accused of the items listed in the inventory (Exhibit "B"), the raiding team had him sign the said items and presented said signatures as evidence against him, but said evidences (are) rendered inadmissible by virtue of the apparent violation of his constitutional rights. ( Galit, id .) So, it is the prosecution's duty to establish the fact that the investigating officer complied with his said obligation. Unless such fact is affirmatively established, a person's admission, or confession during custodial investigation cannot be admitted in evidence ( People vs. Nicandro, G.R. 59378, 11 Feb. '86; People vs. Duhan, G.R. 65189, 28 May '86). The investigator must painstakingly explain to the suspect his rights so that he can understand their nature and significance. ( People vs. Opida, G.R. 546272, 13 June '86). "It is therefore the conclusion of this Court, that the evidence adduced by the prosecution do not produced in an unprejudiced mind that degree of moral certainty of guilt of the accused beyond reasonable doubt. "Every circumstance favorable to the accuse should be duly taken into account. The evidence against him must survive the test of reason. The strongest suspicion must not be allowed to sway judgment." ( Sacay vs. Sandiganbayan, G.R. 66497-98, 10 July '86)." (Records, pp. 122-124) (Emphasis supplied) IECcaA As to the second issue, the petitioner maintains that the respondent is deemed to have received in due course of mail the assessment notices that were issued on September 12, 1991. We agree. Petitioner points out that respondent's income tax returns for the years 1987 and 1988, respectively, showed his address as No. 5 E. Rodriguez Avenue, Marikina. So the notice of preliminary assessment dated July 2, 1991, which was acknowledged to have been received on July 23, 1991, was sent to that address. It is the duty of the respondent to inform the BIR of any changes in his address. The agents of the NBI found respondent and his wife asleep at his presumably other residence at 33 and 35 Sparrow St., Marikina City, when they raided the same. It may be that this is now the new address of the respondent, which may explain his non-receipt of the assessments. Still the petitioner cannot be presumed to know of his change of address without his informing the Bureau of this fact. Petitioner claims that the respondent has not informed her of any change of address. Consequently, when Assessment Notices Nos. FAS-1-87-91-002648 and FAS-1-88-91-002649 were sent to him at No. 5 E. Rodriguez Avenue, Marikina City, on September 24, 1991, it must be presumed that the notices were received by him in the regular course of mail (Rules of Court, Rule 131, Section 3 [v]). After all, the respondent also received the preliminary assessments by the same route at his first address. Furthermore, Ingrid Versola, an employee at the General Services Division of the Bureau of Internal Revenue assigned to mail assessment notices, testified and presented a certified photocopy of page 85 of the BIR Mailing Record Book (Exhibit 6) wherein the name of Antonio Santos was indicated as the No. 304-A addressee to whom the assessment notices were sent by mail. She also testified that the assessment notices were never returned to her office. Clearly, the respondent was given every opportunity to protest, seek a reinvestigation and be heard and present his evidence, accounting books, and other documents to support his defense. He was represented by counsel at the BIR investigation, he moved for reconsideration of the preliminary assessment, he filed a petition for review with the tax court, and did every other act for his adequate defense against the tax assessment. It could not be reasonably maintained that he was denied due process of law. Be that as it may, a favorable ruling cannot be returned for the petitioner on the foregoing ground alone. We have found that the petitioner failed to support its tax assessments with sufficient adequate independent and credible evidence of the participation in, and actual taxable income of the respondent from, illegal gambling activities other than his supposed annual income statements for 1987 and 1988. It has not discharged its burden to prove the accuracy and validity of the income tax assessments against the respondent, and We find nothing to sustain the same. WHEREFORE, premises considered, the petition for review is hereby DENIED for lack of merit. SO ORDERED. Jacinto and Abesamis, JJ . , concur.