Commissioner of Internal Revenue v. VJ Properties, Inc.

FIFTEENTH DIVISION [CA-G.R. SP NO. 77529. April 10, 2008.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . VJ PROPERTIES INCORPORATED , respondent . D E C I S I O N GUARIA III , J p : VJ Properties Inc., a real estate developer, received on April 20, 1999 the following assessment notices from the Bureau of Internal Revenue along with format demands to pay the amounts due, for a total of P2,884,842.71 not later than May 14, 1999, to wit: Assessment Notice 137576-96-99-502 Deficiency Income Tax (for the year 1996) Tax Due (@35% tax rate) 871,381.73 Less: CWT (5%) 1996 (480,690.00) Creditable Withholding Tax Clinman Court Corp. (24,363.61) Basic Income Tax Deficiency P366,328.12 25% Surcharge 91,582.03 20% Interest 183,164.06 Compromise Penalty 25,000.00 Total Income Tax Deficiency Per Review P666,074.21 ========== Assessment Notice 137576-95-99-502 1 Deficiency Income Tax (for the year 1995) Tax Due (@35% tax rate) P2,055,032.49 Less CWT (7.5%) 1995 (1,143,328.90) 1994 excess creditable tax (41,366.64) Basic Income Tax Deficiency 870,366.95 25% Surcharge 217,591.74 20% Interest 652,775.21 Compromise Penalty 25,000.00 Total Income Tax Deficiency Per Review P1,765,733.90 =========== Assessment Notice 137576-95-99-502 2 25% Surcharge P100,714.02 20% Interest 327,320.58 Compromise Penalty 25,000.00 Total 453,034.60 ======== Based on the records of the BIR, 3 a creditable tax of P1,143,328.90 was withheld from the aggregate selling price of P12,299,880 for 7 townhouse units in 1995 and P480,690 from the sale of 4 units for P9,613,800 in 1996. The BIR prepared a paper entitled Details of Discrepancies 4 in which it gave a detailed computation of the tax deficiencies. As reviewed by the Court of Tax Appeals, the tax deficiencies had resulted from these discrepancies: aCATSI 1. An overstatement of the cost of sales in 1995 by P2,706,399.90. The ITR reported a cost of P7,906,364.40 as against the computation of the examiner of P5,199,975.50. 2. Disallowance of the operating expenses in 1995 of P1,626,297.20. 3. An increment of P453,034.60 on the deficiency creditable withholding tax due on the sale of the 7 townhouse units in 1995. 4. An overstatement of the cost of sales in 1996 of P4,431,820.76. The ITR reported a cost of P6,868,553.65 as against the examiner's computation of P2,436,732.89. 5. Disallowed interest expense of P612,245.60 in 1996. 6. P873,981.83 was recorded in 1996 as VAT instead of Sales. VJ Properties contested the deficiency assessments in a letter filed with the BIR on May 10, 1999 5 giving its own explanations of the figures. Specifically it stated that: (1) the cost of the units sold in 1995 based on the total actual cost of P19,700,152.33 and following the method of computation of the BIR, would be P10,402,603.44, which is higher by P2,496,239.04; (2) the disallowed expenses of P1,626,297.20 represents 56% of the total operating expenses of the company so that it behooves the BIR to itemize the expenses to enable it to respond with the necessary papers for verification; and (3) the increments on deficiency CWT of P453,034.60 should be charged to the buyers. When the BIR failed to act on its protest the company filed a petition with the CTA to review the assessments of the BIR. 6 On October 1, 2002 the CTA rendered a decision in favor of VJ Properties. It decreed "Wherefore, in the light of all the foregoing, the court finds the instant petition meritorious and in accordance with law. Accordingly, the assessments issued by the respondent 7 against petitioner 8 for deficiency income tax of P1,765,733.90 and deficiency increments on creditable withholding tax of P453,034.60 for taxable year 1995 and deficiency income tax of P666,074.21 for taxable year 1996, in the total amount of P2,884,842.71 are hereby ordered cancelled and withdrawn. 9 The Commissioner of Internal Revenue has filed with us in turn a petition for review to reverse the CTA. He prays that respondent VJ properties be ordered to pay the aggregate amount of P2,884,842.71 as deficiency income tax and increments on creditable withholding tax for taxable years 1995 and 1996 plus the 25% surcharge for late payment and 20% interest per annum from April 20, 1999 until fully paid pursuant to the provisions of Sections 248 and 249 of the Tax Code, as amended. He grounds his recourse on two issues first : the tax court erred in holding that the total contract price of P9,613,800 received by respondent in 1996 from its buyers of real properties was inclusive of the 10% VAT in the amount of P873,981.82; and second, the tax court erred in holding that the petitioner failed to inform the respondent in writing the basis for the disallowance of the claimed operating expense in the amount of P1,626,297 for taxable year 1995. Simply put the first issue asks the question is the total contract price of the respondent to its buyers VAT-inclusive or VAT-exclusive? VAT is the acronym for the value-added tax which under Section 105 of the National Internal Revenue Code of 1997 10 is imposed on any person who in the course of trade or business sells properties. It is an indirect tax that the seller is expressly allowed to shift or pass on to the buyer. ACETSa The Commissioner is of the view that the total contract price of P9,613,800 does not include the 10% VAT so that what should be reported as sales is the amount of P9,613,800, not P8,739,818.18, which is the difference between P9,613,800 and the VAT of P873,981.82. He reasons that under the Tax Code and revenue regulations, 11 the VAT shall be based on the gross selling price which is either the selling price in the sales document or the zonal value of the property sold whichever is higher, and the gross selling price, as the amount that the buyer pays, to the seller, shall exclude the VAT. Since it is without dispute that what the petitioner received from its buyers in 1996 was P9,613,800, it must be deemed exclusive of VAT. This conclusion is found to be underpinned by a stipulation in the sales contracts that the seller shall pay the capital gains tax as well as the value-added tax. The CTA observed, however, that the issue of the inclusion of the VAT in the contract price had already been resolved by it in a separate case involving the petitioner's claim for refund of excess creditable withholding tax for 1995 and 1996. 12 It took the position that the stipulation in the sales contracts that the seller shall pay the VAT does not mean that the VAT may not be passed on to the buyers, or that the amount of P9,613,800 was not inclusive of VAT. The tax base for VAT is determined in the revenue regulations 13 to be the selling price indicated in the sales document, and it is computed by multiplying the selling price by the fraction 1/11. It would thus appear that the selling price of P9,513.800 when multiplied by 1/11 would yield exactly a VAT of P873,981.82. The whole disquisition comes down to the proposition upheld by the CTA that the gross sales income of the petitioner for 1996 is not P9,613,800, but P8,739,818.18 after deducting the VAT of P873,981.82. Verily, the documents of sale showing a total selling price of P9,613,800 do not indicate that the VAT is included. What they only say is that the petitioner, as the seller, shall pay the VAT. Be that as it may, the petitioner's tax records 14 confirm that it had passed on the VAT to the buyers resulting in the declaration of sales income that is lower than the contract price. Although the total figure in the contracts is P9,613,800, the petitioner only declared P8,739,818.18 as its sales, setting aside the amount of P873,981.82 as VAT. In a word, it included the VAT in the selling price. By so doing, the petitioner has ingeniously reduced its income tax base. Instead of owning up to a gross sales income of P9,613,800, it presents a reduced sales of only P8,739,818.18 which is prejudicial to the government because it will result in a lower income tax. Since the method by which it arrives at its reduced tax base violates the 1997 Tax Code that the selling price in the sales contracts does not include VAT, 15 it follow that the computation of its income tax liability is wrong. We are compelled to agree with the Commissioner that a deficiency income tax exists. It must be recomputed in accordance with the pronouncements of our decision. CDAEHS The second issue needs no extended discussion. As pointed out by the CTA, Section 228 of the Tax Code provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment is void. The notice requirement is a paean to the due process clause of the constitution which governs every conceivable action of the state against the citizen. We subscribe to this principle without hesitation. The CTA correctly observed that despite the request of the respondent for information necessary to apprise it of the substance and details of the disallowance, it does not appear that the BIR had shown how it reached this conclusion. 16 The disallowance must therefore be declared invalid. The duty of the tax authorities to inform the taxpayer of the law and the facts on which an assessment is made is a substantive one. In Commissioner of Internal Revenue vs. Reyes, 480 SCRA 382, the Supreme Court judiciously held that to proceed heedlessly with tax collection without establishing a valid assessment violates a cardinal principle in administrative investigations that the taxpayer must be allowed to present its case and adduce supporting evidence. The respondent was denied this right when the BIR failed to act on its request for the details of the disallowance. IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is modified in that the petitioner is directed to cause the re-computation and collection of the deficiency income tax for 1996 of the respondent in accordance with our disposition. SO ORDERED. Dimaampao and Barza, JJ., concur. Footnotes 1. Exh. I, J. 2. Exh. J, K. 3. Records, at 290. 4. Exh. L. 5. Exh. M. 6. The case was docketed as CTA case 5970. 7. Commissioner of Internal Revenue. IaSCTE 8. VJ Properties Inc. 9. Records, at 289-302. The motion for reconsideration was denied on April 28, 2003, Ibid. , at 318-320. 10. R.A. No. 8424. 11. Cited are Sections 105 and 106 of the 1997 Tax Code and Revenue Memorandum Circular 3-96. 12. This is said to be VJ Properties Inc. vs. Commissioner of Internal Revenue, CTA Case No. 5810 dated March 7, 2002. 13. Section 4,100-6 of Revenue Regulations No. 7-95 is quoted. 14. Exh. f, dorsal side; Exh. C-1, AA-2, BB-4, BB-5. 15. See discussion accompanying note 11. 16. See note 6.