Unnumbered BIR Ruling

October 7, 1996 MEMORANDUM FOR: The Commissioner This refers to the protested tax case of AGRICULTURAL INVESTORS, INC. (All for brevity) involving the amount of P805,222,690.00 as deficiency income tax for the year 1983, inclusive of surcharge and interest. LLcd STATEMENT OF FACTS Agricultural Investors, Inc. (All) is a domestic corporation. On November 20, 1976, it entered into a Memorandum Agreement with the National Investment and Development Corporation (NIDC) whereby the latter, pursuant to its mandate under Presidential Decree No. 582 of administering and utilizing the funds constituting the Coconut Industry Development Fund (CIDF) by among others, financing the establishment, operation and maintenance of a hybrid coconut seednut farm and procuring all the coconut seednuts produced from the seed garden for distribution to the coconut farmers in the Philippines, bound itself to pay to All part of the costs of putting up the seedbank in the aggregate amount of P84,514,000.00 (See Whereas Clause No. 1, Articles I and V of the Memorandum Agreement in pp. 192, 193, 188 of the Docket) and any excess cost thereof, and to purchase each hybrid coconut seed delivered to it by All at P6.00 (See Section 6.3 of Art. VI of Agreement, p. 185 of Docket), which was adjusted, on the basis of Section 6.4 of Article VI of the Agreement (p. 184, Docket), to a unit cost of P10.00 (pp. 17, 34 of Docket). All, for its part, agreed that during the entire duration of the hereinbefore stated Agreement, it shall pay to NIDC 25% of the gross purchase price of the hybrid coconut seednuts sold and delivered by it to NIDC in consideration of the latter's obligation to pay part of the expenses in the establishment, operation and maintenance of the seed garden (Section 7.1 of Art. VII, p. 183 of Docket). In August of 1982, the then Pres. Ferdinand Marcos totally lifted the collection of the coconut levy upon the recommendation of then Minister Juan Ponce Enrile, in his capacity as chairman of the Board of UNICOM (p. 29, Docket; COA Report). As a consequence of such lifting, the United Coconut Planters Bank (UCPB), which was substituted for NIDC as administrator of CIDF under PD 1468 and as party to the Agreement with All had to discontinue the financing of the seedgarden's replanting program and the purchase of the seednuts from All (pp. 28-29, Docket). On November 24, 1982, All disputed UCPB's right to terminate the contract and it demanded that all payments by the NIDC and later by the UCPB out of the CIDF, as contribution to the cost of the seed garden, in the amount of P426,264,000.00 be forfeited, and further, that All be paid the stipulated liquidated damages of P958,650.000.00 (p. 28, Docket). On January 10, 1983, in accordance with the Arbitration Clause of the Agreement (p. 177, Docket), a Board of Arbitrators, chaired by Atty. Bartolome Carale, was created. Subsequently, on March 29, 1983, the Board of Arbitrators rendered a decision which was judicially confirmed on April 18, 1983, in favor of All (p. 27, Docket). Considering, however, that All waived its right under the Agreement to the cumulative remedy of forfeiture, it was awarded only the total amount of P958,650,000.00 as liquidated damages. This being so, the total CIDF contribution in the amount of P426,261,646.00 was deducted from the arbitration award such that only the balance of P532,388,354.00 was due and collectible from UCPB, as administrator of the CIDF, as of the date of the arbitration award (p. 25, Docket). Meanwhile, on October 18, 1984, a request for a ruling was submitted by All's counsel to Hon. Ruben Ancheta, as the Commissioner of the Bureau of Internal Revenue, to the effect that the liquidated damages due and payable to All by virtue of the arbitral award do not constitute taxable income to it. As a result, BIR Ruling No. 29-000-00-169-84, dated October 31, 1984 was issued, pertinent portion of which reads as follows: ". . . damages from a breach of contract constitute taxable income to the recipient thereof in the year received only to the extent that such damages constitute a loss of anticipated profits and non-taxable to the extent that the same represent a return of capital or investment (BIR Ruling dated September 8, 1954). Amount received as a return of capital or of investment do not constitute income which may be subject to tax (par. 5.06, vol. I, Mertens, Law of Federal Income Taxation). Considering that the stipulated liquidated damages and the aforesaid share in the expenses, agreed upon by the parties and awarded by the Court to Investor, were actually invested in the seed garden, the same constitute a mere return of capital and, therefore, not subject to income tax." On May 15, 1991, Confidential Information No. 2535 was furnished the Bureau of Internal Revenue to the effect that All profited by P840 Million from the Coconut Industry Development Fund administered by the UCPB. The said amount was not declared as income for income tax purposes. Further, the above amount represents the forfeited/condoned liability (P426 Million) of All from CIDF and the liquidated damages (P414 Million) received. All therefore evaded the payment of income tax by P300 Million. As a result of such confidential information, the taxpayer was assessed on September 30, 1992 of a deficiency income tax of P805,222,690.99 on the basis of the finding that the award of liquidated damages to All was actually premised on the adjudged violation of the contractual obligations of UCPB and that for tax purposes, the basis determinative of the liquidated damages in the present case represents the estimated foregone income for a period of five (5) years, and that it does not represent the lost cost of investment expended due to the project (p. 206, 214, Docket). The assessment was however, timely protested based on the following grounds: (a) The assessment is without basis considering that the arbitration award has been adjudged and ruled as a non-taxable income pursuant to BIR Ruling No. 29-000-00-169-84, dated October 31, 1984; (b) The period within which the Commissioner of Internal Revenue may assess has already prescribed; (c) The present assessment proceeding must be suspended pending resolution of Civil Case No. 0033 filed with the Sandiganbayan and the preliminary investigation being conducted by the Office of the Ombudsman where the arbitration award which forms as the tax base of this protested assessment is sought to be recovered or forfeited in its favor by the Government; (d) The 1983 Income Tax Return of the taxpayer has already been subjected to audit and examination by examiners of the BIR, hence, the case should now be considered as closed; and finally, (e) There was no compliance with the procedure for the issuance of the assessment notice prescribed in Revenue Regulations No. 12-85, so much so that the assessment issued against herein taxpayer must be recalled and the procedure complied with. DISCUSSION A. THE ASSESSMENT IS WITHOUT BASIS CONSIDERING THAT THE ARBITRATION AWARD HAS BEEN ADJUDGED AND RULED AS A NON-TAXABLE INCOME PURSUANT TO BIR RULING NO . 29-000-00-169-84, DATED OCTOBER 31 1984 : Contrary to the view advanced by the examiners of the Special Task Audit Team (STAT) that the liquidated damages awarded in favor of All constitute loss of realizable profit, the BIR through the then Commissioner Ruben B. Ancheta issued a ruling to the effect that the stipulated liquidated damages and the forfeited share in the expenses were actually invested in the seed garden, hence, the same constitute a mere return of capital, that is not subject to the income tax (BIR Ruling No. 29-000-00-169-84 dated October 31, 1984). The ruling was issued based on facts exactly similar with the facts that form as basis of the present assessment. In fact, a copy of the Memorandum Agreement between All and The National Investment and Development Corporation (NIDC) which provides for the awarding of liquidated damages in case of breach of contract was also attached with the query in answer to which the aforesaid ruling was issued. In other words, there was no misstatement, concealment of facts, misrepresentation or bad faith involved here. All that could be said is that the taxpayer laid its cards on the table and the present assessment is the result of the divergence of opinion between a former Commissioner of Internal Revenue and members of the STAT as to the treatment to be given on the awarded liquidated damages. When the assessment was issued, the ruling was still effective and even up to the present, the same has not yet been revoked, modified or reversed. If we may therefore, proceed with the assessment which was issued on September 30, 1992, and treat it as a revocation of BIR Ruling No. 29-000-00-169-84 dated October 31, 1984, then we will have a clear case of a revocation whose effectivity is made to retroact to transactions made more than eight (8) years from the date of revocation contrary to the well established rule that the revocation, modification, or reversal of rulings, circulars or memorandum shall not be given retroactive effect if the revocation, modification or reversal will prejudice the taxpayer. As held in ABS-CBN Broadcasting Corp. vs. CTA, 108 SCRA 142; "In fact, in the United States, . . . it has been held that the Commissioner . . . is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom, where there had been no misrepresentation of the taxpayer" (See also CIR vs. Burroughs Ltd., et al. G.R. No. 66653 June 19, 1986; 142 SCRA 324 and Section 246, Tax Code). There are only three (3) instances wherein the revocation of a ruling may be given retroactive effect, namely; (a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the BIR; (b) where the facts subsequently gathered by the BIR are materially different from the facts on which the ruling is based; or (c) where the taxpayer acted in bad faith. As earlier stated, the facts upon which the ruling was based are precisely the same facts upon which the assessment was issued. In no case therefore, could we say that the taxpayer will fall under any of the three (3) exceptions wherein the revocation of a ruling may be given retroactive effect so much so, that if we are to consider our assessment as a revocation of the ruling, then we could not make it apply on the taxpayer who will be greatly prejudiced by such retroactive application. B. THE PERIOD WITHIN WHICH THE CIR MAY ASSESS HAS ALREADY PRESCRIBED : In resolving this issue on prescription, it must first be considered that All had duly filed its income tax return for the taxable year 1983, last April 1984. The counting then of the prescriptive period within which to assess must start from April 15, 1984. Considering that Assessment Notice No. FAC-1-83-92-004029 was issued only on September 30, 1992, it could be said that eight years, five months, and fifteen days had already lapsed before said assessment was issued. Pursuant to the then Section 318 (now Section 203) of the Tax Code, internal revenue taxes shall be assessed within five (5) years after the return was filed. (See RMC No. 33-84) It is only in cases of false or fraudulent return with intent to evade tax or of failure to file a return that the tax may be assessed or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission (See Section 223, Tax Code). In the case of All, it is unquestionable that if filed its income tax return for 1983 on time, declaring therein their taxable income. It did not hide the fact that it received the alleged liquidated damages from the NIDC for it even filed a request with the Law Division of the BIR for a ruling as to whether or not said arbitral award constitutes taxable income. If ever All did not declare for income tax purposes the liquidated damages awarded in its favor, it is due to the ruling issued by the BIR to the effect that the subject liquidated damages and the share in the expenses were actually invested in the seed garden and that the same constitute a mere return of capital that are not subject to income tax. It is the feeling of this Division that had the Bureau declared otherwise, All could have declared the liquidated damages as part of their taxable income for 1983. To put it bluntly, All in not declaring the liquidated damages for income tax purposes merely followed the declaration/ruling made by the BIR, it being the sole agency entrusted by the Government to interpret and implement tax laws. With the circumstances at hand, it is believed that there is no fraud, falsity or omission involved in this case. Necessarily, the five year prescriptive period shall apply here and since eight years, five months and fifteen days had passed before the present assessment was issued, it is clear that the same was issued out of time and is no longer binding on the taxpayer (See CIR vs. Ayala Securities Corporation and the CTA, L-229485, March 31, 1976). cdta C. THE PRESENT ASSESSMENT PROCEEDINGS MUST BE SUSPENDED PENDING RESOLUTION OF CIVIL CASE NO . 0033 FILED WITH THE SANDIGANBAYAN AND THE PRELIMINARY INVESTIGATION BEING CONDUCTED BY THE OFFICE OF THE OMBUDSMAN WHERE THE ARBITRATION AWARD WHICH FORMS AS THE TAX BASE OF THIS PROTESTED ASSESSMENT IS SOUGHT TO BE RECOVERED OR FORFEITED IN ITS FAVOR BY THE GOVERNMENT ; D. THE 1983 INCOME TAX RETURN OF THE TAXPAYER HAS ALREADY BEEN SUBJECTED TO AUDIT AND EXAMINATION BY EXAMINERS OF THE BIR, HENCE, THE CASE SHOULD NOW BE CONSIDERED AS CLOSED ; E. THERE WAS NO COMPLIANCE WITH THE PROCEDURE FOR THE ISSUANCE OF THE ASSESSMENT NOTICE PRESCRIBED IN REVENUE REGULATIONS NO . 12-85, SO MUCH SO THAT THE ASSESSMENT ISSUED AGAINST HEREIN TAXPAYER MUST BE RECALLED AND THE PROCEDURE COMPLIED WITH . This Division believes that there is no more need to delve further into the minor defenses numbered C, D and E, considering that with the first two (2) defenses (No. A & B), the taxpayer has shown with convincing clarity that our assessment has no leg to stand on. In passing however, it has to be stated here that it is most inappropriate for the taxpayer to say that the case should now be considered closed since the 1983 income tax return of All has already been subjected to audit and examination by examiners of the BIR. For purposes of re-assessment, a taxpayer's books and accounting records may be re-examined in case there should be an error or an under-assessment committed, because the Government is not estopped by the error or mistake of its agents. (See Phil. American Drug Co. vs. Collector, L-13032, August 31, 1959). The procedure for the issuance of the assessment notice prescribed in Rev. Regulations No. 12-85 is not mandatory in nature. It is merely directory and any defect (if ever we have to call it a defect), in the assessment caused by the non-compliance of any such procedure could well be cured by the hearing afforded in the Appellate Division, wherein the taxpayer may confront the investigating examiners regarding their findings which form as basis of the assessment. There is merit in the contention that pending resolution of Civil Case No. 0033 and the preliminary investigation being conducted by the office of the Ombudsman where the arbitration award is sought to be recovered or forfeited in its favor by the Government, the present assessment proceedings must be suspended for if finally the Sandiganbayan will decide in favor of the Government, then such decision has the effect of nullifying the granting of the liquidated damages to All. In the eyes of the law, it is as if All has not come into ownership of the questioned liquidated damages. Since All has not been the owner or beneficiary of the liquidated damages, we could not impose income tax on it for no one could be held liable to income tax on property or income that does not belong to him. The suspension however of the present proceedings would lose any significance in the face of the apparent reality that the taxpayer would be greatly prejudiced and would continuously suffer sleepless nights if we would let this groundless assessment keep on hanging like a sword of Damocles over its head. With this in mind, this Division believes it would be more in line with prudence to continue with the proceedings and speedily give the taxpayer its just due, for as the saying goes, "justice delayed is justice denied." CONCLUSION/RECOMMENDATION Based on all the foregoing discussions, this Division is of the considered opinion that our assessment is not anchored on strong factual and legal moorings and could not withstand judicial scrutiny. In view thereof, it is recommended that said assessment be withdrawn and cancelled and this case considered closed and terminated. LLcd Respectfully submitted: (SGD.) RODULFO L. SALAZAR Chief, Appellate Division I CONCUR: (SGD.) ALICIA P. CLEMENO Assistant Commissioner Legal Service Recommendation APPROVED: (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue