First Kimex Trade, Inc. v. Commissioner of Internal Revenue

SIXTEENTH DIVISION [CA-G.R. SP No. 84485. November 21, 2005.] FIRST KIMEX TRADE, INC . petitioner, vs . THE COMMISSIONER OF INTERNAL REVENUE , respondent . D E C I S I O N SABIO, J. L., JR ., J p : Sought to be annulled and set aside in this petition for review under Rule 43 of the 1997 Rules of Civil Procedure are the December 23, 2003 Decision 1 and May 11, 2004 Resolution 2 of the Court of Tax Appeals (CTA) in CTA Case No. 6148. The material antecedents: Pursuant to a Letter of Authority dated August 11, 1995 issued by Revenue District Officer (RDO) Mamerto Silangcruz, Jr. of Revenue District No. 50, South Makati, the examiners of the Bureau of Internal Revenue (BIR) conducted an examination of the books of accounts and other accounting records of petitioner First Kimex Trade, Inc. (FKTI) for income and other taxes covering the year 1994. Upon conclusion of the examination, petitioner FKTI was found to have corporate income tax deficiency of P9,985,149.06 and value-added. tax deficiency of P3,084,959.49 for the calendar year 1994. As a result thereof, petitioner was served with Pre-Assessment Notice/Letter No. 154-156 3 dated May 18, 1998 containing the above deficiency assessments. In a letter 4 dated November 10, 1998, petitioner contested and sought the cancellation of the assessment on the ground of prescription of the government's right to make such assessment and collection. On March 15, 2000, the BIR issued to petitioner Assessment Notice No. 000162-94-00-590 5 informing petitioner that after investigation, it was found to be liable for deficiency income and value added taxes in the amounts of P12,534,007.50 and P3,682,039.59, respectively, for the same calendar year 1994. SHaATC This assessment notice was contested by petitioner in a protest letter 6 dated April 15, 2000, seeking its cancellation, raising the same issue of prescription. Acting on the said protest, the Commissioner issued a Final Decision on Disputed Assessment 7 dated May 3, 2000 denying petitioner's protest on the ground of lack of factual and legal basis. Aggrieved by the ruling of the Commissioner, petitioner elevated the case before the Court of Tax Appeals via a petition for review raising the twin issues of (1) prescription of the government's right to collect the deficiency corporate income and value added taxes, and (2) denial of its right to due process by the failure of respondent to follow certain procedural requirements on tax assessment. On December 23, 2003, the Court of Tax Appeals rendered a Decision denying the petition, thereby upholding the deficiency assessment issued by the respondent Commission. The dispositive portion of the assailed Decision reads: "WHEREFORE, in view of the foregoing, herein petition is DENIED and petitioner is ordered to pay the amounts of P12,534,007.50 and P3,682,039.60, as deficiency income tax and value added tax, respectively, for calendar year 1994, plus 20% delinquent interest from April 18, 2000 until fully paid pursuant to Section 249 (c) of the old Tax Code. SO ORDERED." Not satisfied with the above-quoted decision of the tax court, petitioner filed a motion for reconsideration on February 6, 2004, but the same was likewise denied by the CTA in a Resolution issued on May 11, 2004, to wit: "Considering that the arguments raised by petitioner in its Motion for Reconsideration filed on December 23, 2003, are mere reiteration of its previous allegations which have already been passed upon and considered in the assailed Decision dated February 6, 2004, the Court hereby RESOLVES to DENY the said Motion for lack of merit. SO ORDERED. Thus the present recourse, with petitioner ascribing to the tax court the following errors in its decision: I THE COURT OF TAX APPEALS ERRED IN FINDING IN EFFECT THAT PETITIONER HAD SALES/REVENUES AMOUNTING TO P9,917,089.73 II THE COURT OF TAX APPEALS ERRED IN FINDING IN EFFECT THAT PETITIONER WAS ENTITLED TO ALLOWABLE DEDUCTIONS OF ONLY ONE-HALF OF THE EXPENSES III THE COURT OF TAX APPEALS ERRED IN FINDING THAT PETITIONER HAD AN UNDERDECLARATION OF SALES REVENUES WHICH WAS VERY SUBSTANTIAL IN AMOUNT PER SE IV THE COURT OF TAX APPEALS ERRED IN CONCLUDING THAT PETITIONER COMMITTED FRAUD WITH INTENT TO EVADE THE TAX OR THAT THE RETURN FILED BY PETITIONER WAS A FALSE RETURN V THE COURT OF TAX APPEALS ERRED IN CONCLUDING THAT THE RIGHT OF THE GOVERNMENT TO ASSESS PETITIONER FOR DEFICIENCY TAXES HAS NOT PRESCRIBED At the outset, it should be emphasized that the only issues raised by the herein petitioner before the Court of Tax Appeals are: (1) whether or not the right of the Bureau of Internal Revenue to issue the disputed March 15, 2000 has already prescribed; and that (2) whether or not there has been infringement of its right to due process in the issuance of the subject assessment dated March 15, 2000. No other issues were raised. Hence, fair play, justice and due process dictate that this Court cannot now, for the first time on appeal, pass upon these questions. Matters not taken up below cannot be raised for the first time on appeal. They must be raised seasonably in the proceedings before the lower courts. Questions raised on appeal must be within the issues framed by the parties; consequently, issues not raised before the trial court cannot be raised for the first time on appeal. 8 We are thus constrained to resolve the present controversy focusing on the very issues contested by the parties before the Court of Tax Appeals. However, since in the present recourse, petitioner merely raised the question of prescription, We will limit ourselves to the resolution of this lone issue. Petitioner contends that the CTA conclusion to the effect that the government's right to make an assessment of the deficiency taxes has not prescribed is based on its erroneous or wrong premise that petitioner filed a false or fraudulent return with intent to evade the tax. Petitioner submits that the CTA's finding of false or fraudulent return with intent to evade the payment of tax has not been established or proven by the evidence actually presented and formally offered by respondent BIR, contrary to the provisions of Section 203 of the Tax Code. We do not agree. CITaSA Section 203 of the Tax Code gives the Bureau of Internal Revenue a period of three (3) years within which to make a tax assessment and collection, thus: Section 203. Period of 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 a case where a return is filed beyond the period prescribed by law, the three-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. This provision however should be read in conjunction with Section 222 of the Tax Code, thus: "Section 222. Exceptions as to the 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 of 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 anytime within ten (10) years after the discovery of the falsity, fraud or omission: 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. . ." Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be. 9 In this case, after examination and investigation of the books of accounts of the petitioner corporation, the revenue officers found petitioner to have failed to declare income and value added tax return sales/revenues amounting to P9,917,089.73 and consequently failed to pay the corresponding corporate income and value added tax due thereon. The revenue officers likewise found that only half of its expenses as declared in its financial statements are allowable as deductions. This underdeclaration gave rise to the presumption of the filing of a false return or that fraud was committed by the petitioner with the ultimate intention of evading the payment of taxes due. While the terms "false return" and "fraudulent return" are distinct from each other, the first merely implying a deviation from the truth, whether intentional or not, and the second connoting intentional or deceitful entry with intent to evade the taxes due 10 , the extraordinary period of assessment of ten years applies in both instances. And even assuming arguendo that there was no fraud, we find that the income tax return filed by petitioner for the year 1994 was false as it did not reflect the true or actual income of the corporation for the year 1994. Obviously, such was done with intent to evade or reduce tax liability. The ordinary period of prescription of 3 years within which to assess tax liabilities under Sec. 203 should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 222, from the time of the discovery of the falsity, fraud or omission should be the one enforced. There being undoubtedly false tax returns in this case, We affirm the conclusion of the Court of Tax Appeals that Sec. 222 of the Tax Code should apply and that the period of ten years within which to assess petitioner's tax liability had not expired at the time said assessment was made. As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on April 15, 1995, while the falsity thereof may be deemed to have been discovered upon the examination of petitioner's books of accounts on the strength of the Letter of Authority issued by the RDO. The Pre-Assessment Notice/Letter for the year 1994 deficiency income and value added tax was issued on May 18, 1998. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period of ten years. Having thus established the filing of the false return by petitioner, the period of prescription under Section 222 of the Tax Code was rightly found applicable by the CTA. WHEREFORE, finding no error in the assailed Decision and Resolution of the Court of Tax Appeals, the same are hereby AFFIRMED. Costs against petitioner. SO ORDERED. Mendoza and Tayag, JJ., concur. Footnotes 1. Rollo , p. 97. 2. Rollo , p. 114. 3. Rollo , p. 55. 4. Rollo , p. 62. 5. Rollo , pp. 63-72. 6. Rollo , p. 73. 7. Rollo , pp. 75-76. 8. Lolita R. Ayson vs. Marina Enriquez vda. de Carpio , G.R. No. 152438. June 17, 2004. 9. Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda, Jr . Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, G.R. No. 147188. September 14, 2004. 10. Aznar vs. Court of Appeals , 58 SCRA 519.