FMF Development Corp. v. Commissioner of Internal Revenue

SEVENTH DIVISION [CA-G.R. SP No. 73973. February 23, 2004.] FMF DEVELOPMENT CORPORATION , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N TIJAM , J p : In this Petition for Review , petitioner assails the Court of tax Appeals' Resolutions 1 dated June 20, 2002 and October 24, 2002 in CTA Case No. 6403, dismissing its Petition for Review which sought the nullification of respondent's deficiency income tax assessment. The facts are as follows: On September 18, 1992, petitioner filed its Corporate Annual Income Tax Return 2 for the fiscal year ended June 30, 1992 showing an overpayment of tax in the amount of P220,909.00. On July 10, 2000, petitioner received from respondent an Income Tax Pre-Assessment Notice 3 dated June 26, 2000 for the taxable year 1992 reflecting a deficiency income tax of P2,295,859.91. On July 27, 2000, petitioner received from respondent a Demand Letter 4 and Assessment Notice 5 dated July 19, 2000 assessing and demanding the payment of deficiency income tax in the amount of P2,295,859.91, plus interest of P3,605,647.99, or a total P5,901,507.90. On November 14, 2001, petitioner received from respondent a Final Notice Before Seizure 6 dated October 1, 2001 demanding payment of P5,926,507.90 representing the deficiency income tax of P2,595,859.91, interest of P3,605,647.99 and compromise penalty of P25,000.00. On December 11, 2001, petitioner filed with respondent a letter 7 dated December 10, 2001 protesting the Final Notice Before Seizure on the grounds that: (i) respondent's right to assess petitioner for alleged deficiency income tax for the year ended June 30, 1992 has prescribed; and (ii) the alleged deficiency income tax assessment has no factual or legal basis. On January 31, 2002, respondent issued a Warrant of Distraint and/or Levy 8 against petitioner for its failure and refusal to pay the alleged deficiency income tax. Petitioner considered the Warrant Distraint and/or Levy as respondent's denial of its protest. Thus, on March 4, 2002, petitioner filed a Petition for Review 9 with the Court of Tax Appeals. TADaES After filing an Answer, 10 respondent filed a Motion to Dismiss 11 the petition for lack of jurisdiction. Respondent argued that only disputed assessments may challenged before the Court of Tax Appeals. Since petitioner did not protest its assessment within the 30-day reglementary period, the same became final and executory pursuant to Section 228 of the National Internal Revenue Code (NIRC). Therefore, there is no disputed assessment which could be appealed to the Tax Court. Petitioner countered 12 that the 30-day period to file a protest under Section 228 of the NIRC presupposes that an assessment was issued within the 3-year prescriptive period, which was not so in this case. Petitioner argued that the jurisdiction of the Court of Tax Appeals under Section 7(1) of the NIRC is not limited to decisions of respondent involving disputed assessments, but includes "other matters arising under the National Internal Revenue Code". On June 20, 2002, the Court of Tax Appeals issued the assailed Resolution dated June 20, 2002 dismissing the Petition for Review for lack of jurisdiction. According to the Tax Court, petitioner could no longer contest the assessment beyond the 30-day prescriptive period because the same already became final executory. Its Motion for Reconsideration 13 having been denied in the assailed Resolution dated October 24, 2002, petitioner comes to this Court via a Petition for Review . We find merit in the petition . Section 2003 of the NIRC provides: "Sec. 203. P eriod of Limitation Upon Assessment and Collection . Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return , and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For 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." (Emphasis supplied.) It is not disputed that for the fiscal year ended June 30, 1992, the date of filing of the final adjustment return for income tax was on or before October 15, 1992. Petitioner filed its Corporate Annual Income Tax Return on September 18, 1992. Thus, respondent had 3 years from October 15, 1992 of until October 15, 1995 within which to assess petitioner's income taxes. Respondent, however, gave its assessment notice to petitioner only on July 27, 2000, or nearly 8 years after the last day for filing the final adjustment return. Respondent has not shown, much less alleged, any of the exceptions to the 3-year prescriptive period under Section 222 14 of the NIRC . Respondent's right to assess, therefore, has long prescribed. Verily, respondent's assessment notice is void. 15 A void assessment cannot give rise to an obligation to pay deficiency taxes. It likewise divests the taxing authority of the right to collect them. Indeed, under Article 1106 of the Civil Code , "(b)y prescription, one acquires ownership and other real rights through the lapse of time in the manner and under the conditions laid down by law. In the same way, rights and actions are lost by prescription ." Said the Supreme Court in Republic vs. Ablaza 16 ". . . The provision of law on prescription was adopted in our statute books upon recommendation of the tax commissioner of the Philippines which declares: 'Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time .' (Vol. II, Report of the Tax Commission of the Philippines, pp. 321322) The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because of tax officers would be obliged to act promptly in the making of assessment , and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens . Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law." (Emphasis supplied.) Moreover, in CIR vs. B.G. Goodrich Phils., Inc . 17 , the Supreme Court held: "For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment , our tax law provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be strictly construed." xxx xxx xxx Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to evade tax, of that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely intended to give them peace of mind ." (Emphasis supplied) Even assuming arguendo that the assessment was seasonably made by respondent, the same must still fail because it failed to state the facts and the law upon which it was based. Section 228 of the NIRC provides: "Sec. 228. Protesting of Assessment . When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer should be assessed, he shall first notify the taxpayer of his findings: . . . xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. " (Emphasis supplied.) Furthermore, Section 3.1.4 of Revenue Regulations No. 12-99 requires: "Sec. 3.1.4 Formal Letter of Demand and Assessment Notice . The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void . The same shall be sent to the taxpayer only by registered mail or by personal delivery. . . ." (Emphasis supplied.) ETIDaH Respondent's Demand Letter and Assessment Notice did not state the facts and the law upon which they were issued. Respondent's assessment, therefore, is void. Petitioner's alleged failure to protest the questioned assessment within the 30-day period provided under Section 228 18 of the NIRC will not remove it from the Tax Court's jurisdiction on the ground that only seasonably "disputed" assessments may be reviewed by said court under Republic Act No. 1125, Section 7 of the said law provides: "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 laws or part of law administered by the Bureau of Internal Revenue , . . . (Emphasis supplied.) The phrase " other matters arising under the National Internal Revenue Code " is broad and encompassing enough to include the issue of prescription raised by petitioner. Besides, before the appellate courts, there is no other better or more competent forum before which petitioner can challenge the questioned assessment, other than the Court of Tax Appeals which has developed the expertise 19 to pass upon tax matters. WHEREFORE, the petition is hereby GRANTED. The assailed Resolutions of the Court of Tax Appeals dated June 20, 2002 and October 24, 2002 are hereby REVERSED AND SET ASIDE. Respondent's assessment is hereby declared void for having prescribed and for failure to state the facts and law upon which it was based. SO ORDERED. Reyes and Cruz, JJ ., concur. Footnotes 1. Rollo, pp. 4652. 2. Rollo, pp. 8889. 3. Rollo, p. 118. 4. Rollo, p. 120. 5. Rollo, p. 121. 6. Rollo, p. 122. 7. Rollo, pp. 123131. 8. Rollo, p. 132. 9. Rollo, pp. 8287. 10. Rollo, pp. 133137. 11. Rollo, pp. 148151. 12. Petitioner's Memorandum (on the Motion to Dismiss: Rollo 99. 152161) 13. Rollo, pp. 7379. 14. Section 222 of the NIRC provides "Sec. 222. Exception 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 tax or failure to file a return, the tax may be assessed or a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after the discovery of the falsity, fraud or emission 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) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to the assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereinabove, may be collected by distraint or levy by a proceeding in court within five (5) years following the assessment of the tax. (d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of the tax amnesty law or decree." 15. In Tan Guan vs. Court of Tax Appeals , G.R. No. L-23676, April 27, 1967, the Supreme Court held that unless the income tax return was false or fraudulent, an assessment made beyond the period to assess shall be considered as having prescribed and is, therefore, void. 16. G.R. No. L-14519; July 26, 1960. 17. 303 SCRA 546, 554, 557 (1999). 18. Section 228 of the NIRC in part provides. ". . . Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such from as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been admitted, otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable 19. Cyanamid Philippines, Inc. vs. Court of Appeals, et al , 332 SCRA 639, 651 (2000)