Commissioner of Internal Revenue v. Isabela Cultural Corp.

SPECIAL FORMER SIXTH DIVISION [CA-G.R. SP No. 78426. September 30, 2005.] COMMISSIONER OF INTERNAL REVENUE , petitioner , vs . ISABELA CULTURAL CORPORATION , respondent . D E C I S I O N VIDALLON-MAGTOLIS, J p : In this petition for review, the petitioner seeks the reversal of the decision 1 dated February 26, 2003 of the Court of Tax Appeals (CTA) which cancelled and set aside Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86 and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79, both for taxable year 1986 issued by the petitioner against respondent Isabela Cultural Corporation, as well as its resolution 2 dated July 18, 2003, denying petitioners' motion for reconsideration. 3 of the aforesaid decision. FACTUAL ANTECEDENTS The respondent is a domestic corporation duly organized and existing under the laws of the Philippines. On February 28, 1990, the respondent received from the petitioner an assessment letter dated February 9, 1990 demanding payment of the amounts of P333,196.86 and P4,897.79, as deficiency income tax and expanded withholding tax, inclusive of surcharge and interest, respectively, for the taxable period from January 1, 1986 to December 21, 1986. 4 On March 23, 1990, the respondent filed a letter-protest 5 dated March 22, 1990 with the petitioner requesting for a reconsideration of the subject assessment. In support of the letter-protest, the respondent sent a letter dated April 2, 1990 6 attaching thereto additional documents including a waiver of the statute of limitations dated April 17, 1990, indicating therein that the petitioner has until April 5, 1991 within which to assess and collect the taxes that may be found due from the respondent after the reinvestigation. 7 On February 9, 1995, the petitioner received a final notice before seizure from the respondent dated November 10, 1994, demanding payment under threat of collection through summary remedies, the assessed sum of P338,094.65 for the taxable year 1986. 8 The respondent considered the said final notice before seizure as the petitioner's final decision; hence, it filed a petition for review 9 Isabela Cultural Corporation versus Court of Appeals and Commissioner of Internal Revenue ." Upon filing of their respective pleadings, 14 this Court's Former Second Division rendered a decision 15 on August 19, 1998 granting the respondent's petition and ordering the reversal and setting aside of the CTA decision dated December 15, 1997. The decretal portion of the said decision reads: "WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly, judgment is hereby rendered REMANDING the case to the CTA for proper disposition. SO ORDERED." 16 In disagreeing with the CTA, this Court reasoned out that: "First. The subject final notice before seizure renders hopeless petitioner's request for reconsideration of respondent CIR's assessment. Such being the case, the issuance thereof is tantamount to denial of the petitioner's request for reconsideration of said assessment. . . . "Second. It is a long-settled tax jurisprudence that a demand letter reiterating the payment of tax deficiency amounts to a decision on a disputed or protested assessment. . . ." 17 Aggrieved, the petitioner appealed the said decision to the Supreme Court via a petition for review on certiorari docketed as G.R. No. 135210. 18 The petition sought the reversal and setting aside of this Court's decision dated August 19, 1998 and the affirmance of the dismissal of CTA Case No. 5211. On July 11, 2001, the High Tribunal promulgated a decision 19 denying the petitioner's petition and affirming the decision dated August 19, 1998 of this Court. The High Court finally settled the issue in this wise: "A final demand letter from the Bureau of Internal Revenue reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayer's request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA). xxx xxx xxx "Indisputably, respondent received an assessment letter dated February 9, 1990, stating that it had delinquent taxes due; and it subsequently filed its motion for reconsideration on March 23, 1990. In support of its request for reconsideration, it sent to the CIR additional documents on April 18, 1990. The next communication respondent received was already the Final Notice Before Seizure dated November 10, 1994. "In the light of the above facts, the Final Notice Before Seizure cannot but be considered as the commissioner's decision disposing of the request for reconsideration filed by respondent, who received no other response to its request. Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIR's final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that respondent was being given "this LAST OPPORTUNITY" to pay; otherwise, its properties would be subjected to distraint and levy. How then could it have been made to believe that its request for reconsideration was still pending determination, despite the actual threat of seizure of its properties? "Furthermore, Section 228 of the National Internal Revenue Code states that a delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its request for reconsideration remains unacted upon 180 days after submission thereof. . . . "In this case, the said period of 180 days had already lapsed when respondent filed its request for reconsideration on March 23, 1990, without any action on the part of the CIR. "Lastly, jurisprudence dictates that a final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. . . . "In the instant case, the second notice received by private respondent verily indicated its nature that it was final . Unequivocably, therefore, it was tantamount to a rejection of the request for reconsideration. . . ." 20 The Supreme Court decision became final on August 22, 2001. 21 Consequently, the respondent filed on July 17, 2002, a motion to set case for further proceedings with the CTA. 22 On February 26, 2003, the tax court rendered the assailed decision 23 cancelling and setting aside the 1986 deficiency income and expanded withholding tax assessments issued by the petitioner against the respondent amounting to P333,196.86 under Assessment Notice No. FAS-1-86-90-000680 and P4,897.79, under Assessment Notice No. FAS-1-86-90-000681. The petitioner's motion for reconsideration 24 was denied in the second assailed resolution. 25 Hence, this petition. ASSIGNMENTS OF ERROR The petitioner imputes the following errors to the tax court: I THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR OF LAW IN ALLOWING THE 1985 PROFESSIONAL AND SECURITY SERVICES OF P496,409.77 AND P41,814.00 AS DEDUCTIBLE EXPENSES OF RESPONDENT FOR TAXABLE YEAR 1986 DESPITE THE LATTER'S ADOPTION OF ACCRUAL METHOD OF ACCOUNTING. II THE COURT OF TAX APPEALS COMMITTED SERIOUS ERROR OF LAW IN CANCELLING AND SETTING ASIDE THE 1986 DEFICIENCY INCOME TAX AND EXPANDED WITHHOLDING TAX ASSESSMENTS. PETITIONER'S ARGUMENTS The petitioner avers that under the accrual method of accounting, expenses not claimed as deductions in the previous year, when they were actually incurred, cannot be claimed later as a deduction from its income for the succeeding year. And since the respondent adopted the accrual method of accounting, expenses are accounted for in the period in which they are incurred and not in the period in which they are paid. Thus, the professional fees and security services amounting to P496,409.77 and P41,814.00, respectively, should be disallowed because they were incurred in 1984 and 1985. Likewise, contrary to the respondent's contention, the questioned professional fees for the services rendered in the years 1984 or 1985 by the law firm Bengzon Narciso Cudala Jimenez Gonzales Liwanag (BNCJGLB) to the respondent were actually determinable in those years and could have been deducted as respondent's expenses in the same years had the respondent observed due diligence in verifying its accounts payable for these professional services. And even assuming that the questioned professional expenses were actually billed in 1986 after respondent's verification, the respondent could have filed its amended return for taxable year/s 1984 or 1985 and made the necessary adjustment to include the said deductible expense. However, the respondent failed to do this. It is thus erroneous and a blatant disregard of the principle of accrual method of accounting for the CTA to allow the professional services rendered in 1984 or 1985 to be deductible as professional expenses in 1986 as they were actually incurred, billed and paid in 1986. Especially so that even the respondent's testimonial evidence overwhelmingly shows that these professional services were indeed rendered and/or incurred in 1984 or 1985. The petitioner further insists that the revenue examiner is presumed to have regularly performed his duties in the investigation of the respondent's records and that the assessment made therefor is likewise presumed to be correct. It is therefore the respondent who has the burden to show lack of liability for any deficiency tax for taxable year 1986 and to prove that the deficiency tax assessments under attack is devoid of any legal and factual bases. RESPONDENT'S ARGUMENTS According to the respondent, its adoption of an accrual method of accounting entitles and justifies deduction of the subject expenses from its income for the taxable year 1986 since the said expenses were only incurred, billed and paid in 1986. The various billings and official receipts covering the aforesaid expenses, after a close examination and scrutiny of the petitioner and the tax court, were found to refer to the 1986 expenses of the respondent. While these billings and official receipts may have pertained to prior years, the respondent could not have possibly accrued the same during those prior years because the said expenses were not yet determinable at that time. Thus, the obligation to pay or expend money did not occur nor accrue until it has received its billings in 1986. The respondent also argues that the deficiency tax and expanded withholding tax assessments made by the petitioner against the respondent was without basis inasmuch as the interests income computed by the petitioner to have been allegedly earned by the respondent was not in accordance with the contract that the respondent executed with its borrower, nor with the law. THE COURT'S RULING At the outset it must be stressed that the questioned deficiency income tax in the amount of P333,196.86 resulted from: (a) the alleged understatement of P429,187.47 on respondent's interest income from the three promissory notes due from Realty Investments, Inc. arising from the respondent's sale of parcels of land to the latter; and (b) the disallowance of the respondent's claimed expense deductions for professional fees and security services in the amounts of P496,409.77 and P41,814.00, respectively. The deficiency expanded withholding tax of P4,897.79, on the other hand, arose from the alleged failure of the respondent to withhold 1% expanded withholding tax on its claimed deductions for security services amounting to P244,890.00. Under the accrual basis method of accounting, income is accrued or earned in the year in which the taxpayer's right thereto becomes fixed and definite, even though it may not be actually received until a later year; while a deduction for a liability is to be accrued or incurred and taken when the liability becomes fixed and certain, even though it may not be actually paid until later. 26 Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in gross income, 27 and expenses are allowed as deductions when incurred although not yet paid. 28 A close scrutiny of the questioned itemized professional auditing and legal services, as well as the security services 29 would disclose that the same were billed by the respondent's auditors, lawyers and security agencies in the taxable year 1986, and paid by the respondent in the same taxable year. Although it would appear that some of these professional services were rendered by the respondent's auditors and lawyers in 1984 or 1985, as correctly pointed out by the tax court, the same were not yet determinable at the time these services were rendered. Hence, the respondent's liability became fixed and certain only when it received the billing statements from their auditors and lawyers sometime in 1986. Such professional and security services fees were properly considered deductible expenses from the respondent's taxable income in the 1986 taxable year. On the alleged understatement of the respondent's interest income, we agree with the CTA court in its finding that the compounded interest rate should not have been imputed to the interest-bearing promissory notes as the same is contrary to the manifest intention of the parties to the contract. As found by the tax court, there was no stipulation in the promissory notes 30 executed by Realty Investments, Inc. in favor of the respondent that the interest to be paid by the latter for the purchase of the former's parcels of land shall be compounded. Such being the case, simple interest computation should be applied on the remaining balance of the principal pursuant to Article 1959 31 of the New Civil Code. Thus, the interest income should be computed as follows: Particulars Principal Interest Income PN No. 1 6.30.78 12% P2,855,430.94 P342,651.71 PN No. 2 4.12.84 14% 4,408,520.00 617,192.80 PN No. 3 8.21.84 14% 2,655,400.00 371,756.00 P9,919,350.94 =========== Interest income for PNs P1,331,600.51 Other interest income 32,201.10 Interest income P1,363,801.61 The tax court therefore correctly declared that there was no factual and legal bases for the petitioner's deficiency assessment of respondent's interest income. The expanded withholding taxes on payments for the security services for the taxable year 1986 in the amount of P2,448.90 appear to have also been withheld and properly remitted to the BIR as shown by the following schedule of payment order receipt no. and confirmation receipt no. Date Date Amount Payment Confirmation Withheld Remitted Receipt No. Receipt No. Jan 6 01-09-86 P29.85 B7163761 B8273270 7 -do- 209.07 -do- -do 31 02-10-86 29.85 -do- -do- Feb 11 03-06-86 209.07 B7375743 B8079942 Mar 3 03-06-86 29.85 B7616403 B7876612 13 04-03-86 209.07 -do- -do- 26 04-03-86 29.85 -do- -do- Apr 30 05-08-00 29.85 B7885997 B9017192 May 9 06-05-86 209.07 B8222121 B7949425 30 06-05-86 209.07 -do- -do June 3 06-05-86 29.85 -do- -do- July 3 07-07-86 29.85 B903382 B8415805 14 08-06-86 209.07 B8737422 B9043558 29 08-06-86 29.85 -do- -do- Aug 8 09-08-86 209.07 C8828454 B9857207 Sept 1 09-08-86 29.85 -do- -do- 3 09-08-86 209.07 -do- -do- 29 10-07-86 29.85 B9000090 B9909765 Oct 1 10-07-86 209.07 B9241110 B9067927 30 11-05-86 29.85 -do- -do- Nov 6 12-05-86 209.07 B9372641 B10496598 Dec 4 12-05-86 29.95 B9416200 B10024630 TOTAL 2,448.90" 32 At this point, it is stressed that under our tax system, the CTA acts as a highly specialized body specifically created for the purpose of reviewing tax cases. Because of its recognized expertise, its findings of fact will ordinarily not be reviewed, absent any showing of gross error or abuse on its part. 33 In this case, we find no strong reasons to depart from this rule. WHEREFORE, the petition is hereby DISMISSED for lack of merit and the decision appealed from is hereby AFFIRMED. SO ORDERED. Reyes and Guevara-Salonga, JJ. , concur. Footnotes *. Vice Justice Vicente per Office Order No. 08-05-GJ. 1. Rollo , p. 38. 2. Id . at p. 56. 3. Id . at p. 190. 4. Id . at pp. 16 & 64. 5. Id . at pp. 65-80. 6. Id . at p. 81. 7. Id . at pp. 16-17. 8. Id . at p. 60. 9. Id . at p. 59. 10. Id . at p. 82. 11. Id . at pp. 87 & 95. 12. Id . at p. 116. 13. Id . at p. 125. 14. Id . at pp. 137 & 144. 15. Id . at pp. 151-159. 16. Id . at p. 158. 17. Id . at pp. 156-157. 18. Id . at p. 160-172. 19. Id . at pp. 174-189. 20. Id . at pp. 180-182 & 184. 21. Id . at p. 188. 22. Id . at pp. 187. 23. Id . at p. 38. 24. Id . at pp. 190-193. 25. Id . at pp. 56-58. 26. Commissioner of Internal Revenue vs. Solidbank Corporation , 416 SCRA 436, 452. 27. Filipinas Synthetic Fiber Corp. vs. Court of Appeals , 316 SCRA 480, 486. 28. Hector De Leon, The National Internal Revenue Code Annotated , 1994 ed., p. 231. 29. Rollo pp. 75-77. 30. Id . at pp. 70-72. 31. Article 1959, New Civil Code: "Without prejudice to the provisions of Article 2212, interest due and unpaid shall not earn interest. However, the contracting parties may by stipulation capitalize the interest due and unpaid, which as added principal, shall earn new interest." 32. Rollo , p. 79. 33. Commissioner of Internal Revenue vs. Solidbank Corporation, supra at pp. 460-461.