Filinvest Development Corp. v. Commissioner of Internal Revenue

FIRST DIVISION [CA-G.R. SP No. 72998. May 31, 2004.] FILINVEST DEVELOPMENT CORP. , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N REYES , JR. , A.B ., J p : This is a Petition for Review under Rule 43 of the Rules of Court on the 16 May 2002 Decision and the 29 August 2002 Revolution of the Court of Tax Appeals in CTA Case No. 6055 entitled " Filinvest Development Corporation vs. Commissioner of Internal Revenue ," dispositive portions of the same read as follows: "WHEREFORE, in the (sic) view of the foregoing, the instant petition for review is hereby PARTIALLY GRANTED. Respondent is ORDERED to REFUND or in the alternative, ISSUE A TAX CREDIT CERTIFICATE in favor of petitioner in the amount of P4,734,416.37, representing overpaid income taxes for the year 1997. SO ORDERED." 1 "WHEREFORE, in view of the foregoing, the 'Omnibus Motion for Reconsideration and New Trial' filed by petitioner is hereby DENIED for lack of merit. SO ORDERED." 2 The facts of the case, as laid out in the assailed Decision, are as follows: "xxx xxx xxx. Petitioner is a corporation duly organized and existing under the laws of the Republic of the Philippines with principal office located at 173 P. Gomez St., San Juan, Metro Manila (par. 1, Joint Stipulation of Facts, p. 66, CTA Records). On April 15, 1998, petitioner filed its 1997 Corporation Annual Income Tax Return reflecting a net loss from operations in the sum of P83,308,762.00 but with a refundable income tax payment in the amount of P11,373,434.00 resulting from the payments of creditable income taxes withheld on management services and lease of real properties, computed as follows: (Exhibit C, inclusive of submarkings) Income : Schedule 1 Sale of Goods (P1,360,847.00) Schedule 2 Management Fee 73,376,572.00 Schedule 3 Interest Income P47,360,567.00 Rent Income 21,639,511.00 Miscellaneous 150,881,188.00 219,881,286.00 Schedule 4 Sale of Property & 298,665.00 Equipment Total P292,195,676.00 Less Deductions (Section D) 375,504,438.00 Net Loss (P83,308,762.00) ============== Tax Due NIL Less: Tax Credits/Payments (Section E) a) Prior year's excess credit b) Quarterly excess credits 2,523,549.00 c) Creditable tax withheld 8,849,785.00 P11,374,434.00 Total Amount Refundable P11,373,434.00 Petitioner indicated in its 1997 income tax return its intention to carry over as an automatic tax credit the total amount refundable of P11,373,434.00. On April 15, 1999, petitioner filed its 1998 Corporation Annual Income Tax Return reflecting an income tax due in the amount of P385,687.00 but with an income tax refundable of P11,907,902.00 (Exhibit G). In its 1998 return, petitioner opted to refund its alleged 1997 as income tax payment in the amount of P11,373,434.00 and the balance in the sum of P534,468.00, representing the 1998 unutilized creditable taxes withheld, to be carried over as tax credit to the succeeding taxable year. On April 30, 1999, petitioner amended its 1998 final adjustment return (Exhibit H). The original overpaid income tax as of December 31, 1998, in the amount of P11,907,902.00 was reduced to P9,384,253.00 due to the decrease in the amount of prior year's excess credits from P11,373,434.00 to P8,849,785.00. According to petitioner, after a review of its creditable withholding taxes, it was found out that the cash amount of P2,523,549.00 under Section E of its 1997 ITR was an error for it was not actually paid to the BIR. Consequently the amount to be refunded for the year 1987 was also lowered to P8,849,785.00. On May 4, 1999, petitioner filed with RDO No. 42 of the BIR a letter request for the cash refund of its excess creditable withholding taxes for the taxable year 1997 in the sum of P8,849,785.00 in accordance with Section 69 (now Sec. 76) of the Tax Code, as amended (Exhibit A, inclusive of submarkings). As there was no action on the part of the respondent, petitioner filed the instant Petition for Review on April 7, 2000 in order to toll the running of two-year prescriptive period under Section 230 of the Tax Code, as amended. In his Answer filed on May 15, 2000, respondent advanced the following Special and Affirmative Defenses: '4. The claim for refund is subject to investigation by the Bureau of Internal Revenue; 5. Taxes paid and collected are presumed to have been made in accordance with laws and regulations, hence, not refundable. Claims for tax refund are construed in strictissimi juris against the claimant as they partake of the nature of an exemption from tax ( Commissioner of Internal vs. Ledesma , G.R. No. L-13509, January 30, 1979, 31 SCRA 95) and it is incumbent upon the petitioner to prove that it is entitled thereto under the law ( Western Minolco Corp. vs. Commissioner of Internal Revenue , 124 SCRA 121) and he who claims exemption must be able to justify his claim by the clearest grant of organic or statutory law; 6. Petitioner's allegation that it erroneously and excessively paid the tax during the year under review does not ipso facto warrant the refund/credit; and 7. Moreover, petitioner must prove that it has complied with the governing rules with reference to tax recovery or refund, which are found in Sections 204 (c) and 229 of the Tax Code, as amended, which are quoted as follows: "Sec. 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes . The Commissioner may . . . . (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit of refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax penalty: Provided, however, That a return filed showing an overpayment shall be considered a written claim for credit or refund." Section 229. Recovery of tax erroneously or illegally collected . No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed (sic) after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided, however, That the Commissioner may, even without written claim therefor, refund or credit any tax, where on the face of the return upon which payments was made, such payments appears (sic) clearly to have been erroneously paid.' To prove its entitlement to the claim for refund, petitioner presented its letter-claim for refund with the BIR dated April 26, 1999 (Exhibit A, inclusive of submarkings), Secretary's Certificates dated September 12, 2000 and October 12, 2000 (Exhibits B, B-1, and II), the original Corporation Annual Income Tax Returns for the calendar years 1996, 1997 and 1999, and the original and amended Corporation Annual Income Tax Return for the year 1998 (Exhibits JJ, C, L, G and H, respectively), Corporation Quarterly Income Tax Returns for the years 1997 and 1998 (Exhibits D, E, F, I, J and K), various Certificates of Creditable Tax Withheld at Source (Exhibits M to Z, AA and BB, inclusive of submarkings), pre-marked documents examined by the commissioned independent CPA (Exhibits CC-1 to CC-86, DD-1 to DD-23, EE-1 to EE-16, FF-1 to FF-35, and GG-1 to GG-26), and the report of the commissioned independent auditing firm, R.S. Bernaldo & Associates (Exhibits HH to HH-8). All these exhibits were admitted by the Court in its Resolution dated May 3, 2001. On October 1, 2001, this case was submitted for decision sans the evidence and memorandum of the respondent." Thereafter, the assailed 16 May 2002 Decision was rendered by the Court of Tax Appeals. Dissatisfied, petitioner filed an Omnibus Motion for Reconsideration and New Trial insofar as the assailed Decision denies petitioner's claim to the extent of P3,813,163.32. The Court of Tax Appeals issued the assailed 29 August 2002 Resolution denying petitioner's Omnibus Motion. Aggrieved, petitioner came to this Court via this Petition for Review, raising the following issues: A. WHETHER OR NOT THE CTA ERRED IN PARTIALLY DENYING FILINVEST'S CLAIM FOR REFUND ON THE GROUND THAT THE INCOME RECEIVED FROM DAVAO SUGAR AND FILINVEST ALABANG WERE NOT REPORTED AS INCOME IN THE 1997 ITR, SINCE FILINVEST REPORTS INCOME USING THE ACCRUAL BASIS AS ITS METHOD OF ACCOUNTING. B. WHETHER OR NOT THE OMISSION TO OFFER IN EVIDENCE FILINVEST'S 1995 AND 1996 ITRS WAS DUE TO MISTAKE AND EXCUSABLE NEGLIGENCE, TAKING INTO CONSIDERATION THE RULING IN BPI-FAMILY SAVINGS BANK VS. COURT OF APPEALS, 330 SCRA 507 . To start, We are cognizant of the rule that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer. Revenue Regulation No. 12-94, specifically Section 10 thereof provides for the following rules: " Claim for Tax Credit or Refund . (a) Claims for Tax Credit or Refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received has been declared as part of the gross income and the fact of withholding is established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing the amount paid and the amount of tax withheld therefrom . (b) Excess Credits. A taxpayer's excess expanded withholding tax credits for the taxable quarter/taxable year shall automatically be allowed as a credit for purposes of filing his income tax return for the taxable quarter/taxable year immediately succeeding the taxable quarter/taxable year in which the aforesaid excess credit arose, provided, however, he submits with his income tax return a copy of his income tax return for the aforesaid previous taxable period showing the amount of his aforementioned excess withholding tax credits." (Emphasis ours) HIACEa In this case, petitioner sought the refund of its excess creditable withholding taxes in the amount of P8,849,785.00 (after various adjustments) 3 but the Court of Tax Appeals (CTA) only allowed the amount of P4,734,416.37. According to the CTA, petitioner was able to establish the amount of unutilized creditable withholding taxes for 1997 through the presentation of various certificates of creditable tax withheld at source. However, petitioner fell short in proving that the income, specifically the management fee and rental income in the amounts of P160,817,022.60 and P17,026,461.00, respectively, upon which the aforesaid creditable taxes were withheld were all reported in its 1997 income tax return. 4 Upon the other hand, petitioner argued that: it rendered management services in favor of Davao Sugar Central Co. Inc., and Filinvest Alabang, Inc. for the years 1995 and 1996, respectively; considering that it reports its income on an accrual basis 5 , petitioner reported the management fees due from Davao Sugar Central and Filinvest Alabang, Inc. in its 1995 and 1996 Income Tax Returns, respectively, although payments for which were received in 1997; and the 1996 ITR 6 was presented in evidence during trial and marked as Exhibit "JJ" 7 while the 1995 ITR 8 is attached to the Omnibus Motion for Reconsideration and New Trial, pursuant to the ruling of the Supreme Court in BPI-Family Savings Bank, Inc. vs. C.A. et al . 9 Not persuaded, the CTA denied petitioner's Omnibus Motion mainly on the ground that the CTA cannot easily determine or verify from the 1995 and the 1996 ITRs the inclusion of the management fees referred to above on the gross income of the petitioner reported for those years. Prescinding from the foregoing disquisitions, the question that now persists upon Us is: Whether or not it is incumbent upon the refund claimant to show a detailed proof of each and every item in the income tax returns which were the basis of the withholding taxes and the fact of their withholding? In resolving this query, the pronouncements of the Supreme Court in Citibank N.A. vs. Court of Appeals and Commissioner of Internal Revenue 10 finds relevance to this case, thus: "A refund claimant is required to prove the inclusion of the income payments which were the basis of the withholding taxes and the fact of withholding. However, detailed proof of the truthfulness of each and every item in the income tax return is not required. That function is lodged in the commissioner of internal revenue by the NIRC which requires the commissioner to assess internal revenue taxes within three years after the last day prescribed by law for the filing of the return. In San Carlos Milling Co., Inc. vs. Commissioner of Internal Revenue , the Court held that the internal revenue branch of government must investigate and confirm the claims for tax refund or credit before taxpayers may avail themselves of this option. The grant of a refund is founded on the assumption that the tax return is valid; that is, the facts stated therein are true and correct. In fact, even without petitioners tax claim, the commissioner can proceed to examine the books, records of the petitioner-bank, or any data which may be relevant or material in accordance with Section 16 of the present NIRC. " (Emphasis ours) Taking into account the above cited pronouncements, it bears remembering that on 28 April 1999, petitioner filed with the Bureau of Internal Revenue, RDO No. 42 its claim for cash refund of excess creditable withholding taxes for the taxable year ended 1997 in the amount of P8,849,785.00. 11 In support of such claim, petitioner submitted the following documents, to wit: (i) Annual income tax return for the taxable year ended 31 December 1997; (ii) Quarterly income tax returns for the first, second and third quarters of 1997; (iii) Certificates of Creditable Income Tax Withheld at Source for 1997; and (iv) Annual income tax return for the taxable year ended 31 December 1998. Unfortunately, respondent BIR did not act on the said claim for refund. It neither denied nor granted the same. Apprehensive that the two year prescriptive period 12 within which to claim the refund might expire, petitioner filed the Petition for Review with the CTA. Necessarily, it was only during the trial with the CTA that all the supporting documents were examined and evaluated. Respondent BIR's inaction on the written claim for refund is not without any consequences because there was a failure, at that administrative level, to examine petitioner's income tax returns showing the excess withholding tax credits. Despite the submission of petitioner's pertinent records, the BIR failed to determine the veracity or the falsity thereof considering that it ought to know the tax records of the petitioners. While it may be conceded that it may be difficult for the CTA to ascertain the truthfulness of petitioner's claim that the questioned management fees were already included in its 1995 and 1996 returns following the accrual basis of accounting, We, however, find it extremely unfair for the petitioner to bear, at this stage, the brunt of respondent BIR's inaction, if not its negligence to perform its function. To repeat, if only the BIR made an examination of petitioner's tax records, it would have been able to thresh out the question of whether or not the questioned management fees were in fact reported by the petitioner in its 1995 and 1996 returns. Considering the foregoing, We find it unacceptable for the CTA to outrightly rule out petitioner's entitlement to the full amount of creditable withholding taxes sought to be refunded. For one, there was no determination either by the BIR or the CTA that petitioner is not entitled thereto. Most importantly, as pronounced in Citibank N.A. vs. Court of Tax Appeals, supra , it is not incumbent upon the petitioner to show a detailed proof of the veracity of each and every item in the income tax returns since this function is lodged with the Commissioner of Internal Revenue. However, We do not postulate the view that the CTA should have solely relied on petitioner's claim that the management fees upon which the excess creditable withholding taxes are based are included in its 1995 and 1996 returns, absent any verifiable supporting documents thereto. Indeed, the said returns merely provided summarized data without the supporting schedular notes that will apprise the CTA as to the detailed items included therein. Weighing all these considerations, we find it more in accord with prudence and equity that this case be brought back to the CTA for further reception of evidence, e.g. audited financial statements with accompanying notes specifically showing the composition of the revenue items included in the 1995 and 1996 Returns. Further, consistent with the pronouncement of the Supreme Court in BPI-Family Savings Bank, Inc. vs. Court of Appeals, et al. 13 where it was stressed that the rationale of the rules of procedure is to secure a just determination of every action and that they are tools designed to facilitate the attainment of justice, We rule to grant petitioner's Motion for New Trial seeking the presentation of its 1995 income tax return. WHEREFORE, premises considered, the assailed Decision and Revolution are hereby VACATED and SET ASIDE. This case is REMANDED to the Court of Tax Appeals for further trial and reception of evidence. SO ORDERED. Garcia and Bersamin, JJ . , concur . Footnotes 1. Rollo , p. 111 2. Ibid , p. 142 3. Rollo , p. 101 4. Ibid , pp. 108, 110 5. A method of accounting where the effects of transactions and other events are recognized when they occur (and not when cash or its equivalent is actually received or paid) and there are recorded and reported in the financial statements of the periods of which they relate. ( Rollo , p. 18) 6. where the management fees of P18,696,887.40 from Filinvest Alabang, Inc. was reported 7. Rollo , p. 129 8. where the management fees of P58,456,707.00 from Davao Sugar was reported 9. [G.R. No. 122480, April 12, 2000] 10. [G.R. Nos. 107434, October 10, 1997] 11. Rollo , pp. 39, 40 12. Section 204, National Internal Revenue (NIRC) 13. [G.R. No. 122480, April 12, 2000]