CTA Case No. 5003 (Decision)

- - �.� ---.-- J REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE COMMERCIAL C.T.A. CASE NO. 5003 INTERNATIONAL BANK, Pro�ulgated: as successor-in-interest FEB 04 1997 of Insular Bank of Asia & ------�-x America, Petitioner, - ve�r~sus COMMISSIONER OF INTERNAL REVENUE, Respondent. X -- - -�� ......... DECISION Befot''f? Us is a petition for review of the decision of the Commissionel~ o f Inte;-..�nal Revenue denying petitionf~l�'' s protest against its deficiency income tax assessment amounting to P67,688,476.65 for the year 1984. Petitioner is a domestic corporation organized and exist i nq t.mde�r� and by virtue of the laws of the Phi 1 i ppi nP ;~. It is authorized to engage in business as a pt~ivate unive-r~sal bank. On Novembey� i?.5, 1985, in a mer��g e�,~ t .n l. \'llf:! en Insular Bank of Asia and America ( IBAA> and Ph1 I ippine Commer~c:i.al International Bank <PCIBank>, petition�."� ,..,as designated as sul�~v:i.ving corporation with all tht:: r� i ght s, pr~ i v :i. 1 e g e s , immunities, franchises,

..... ., .. DECISION -- 2 - C.T.A. CASE NO. 5003 of each of the con"t ituei�,t li<1bilit.ies l'ij;;��� y c: Dr"'por�at ions. �.\ J m :i 1�I] Th i ~; r f:.> p r�� ~: ''� P n t :i. ll ~.J l~::i% incomP. "I ''.\ :o-~ v11 t r�,h r:� .I d on :inc-olllf) t1 I'' ,... i V F� cl u fr��o m o v P r~n mt:c�nt: s f?C\ll' �it i c� c�omp��.tr>U ,,,,,,. fol.l.c�htoo.: O::r�� BIF< ) I?C.} PCIB~n~ (for 1986) p;::-. 4 .1 '."i ') 3il 7. lt ~:; IBAA (for 1982 to 19eS> . l, 03'~}, lit'/. 07 Tot a .I E:;.h::! ~:~{ 'J lt " �. ,i ,;~ Cl"'Pd it � t:hpr��p I. he f ('; 1 l ow 1 n q not P to thv "7. PRIClP PERIOD iYOJU~�TI�IFNT:~; The nf �..-�et,:,:;,:i.nPd Pa.�r��nJ.nqco DE�I :��3m he,�� 3l ' 1 �.::~.~;.~ '" h::~,: be(~l'i ���~ :st d'\; f.:t�l from �'\IIJOIIl'lt ~5 pl�"�f> v :i. 01.1 <;.l y i'epo~��t fld to r�ef l n� t r ~~l!'�r.act:lvo <:� �r�� e <. I :i. l. '�'� inr" tht� tollowing: Heversal of the capitalized intnrest anrl penalttes on l o ;~' n ~".. .,... P ~'' t l' l.tc t 1.1"' '" d .in .l'::JH3 ~:::..nd l(~fl<t HE'V.:\luation of FCDU 2\CC 0 t.t.nt 5 Revaluation of the principal amount of forward contracts in 1984 Accretion of discount in

.. DECISION - 3- C.T.A. CASE NO. 5003 90,998 bonds in 1984 Accrual and revaluation of 9,883,815 the anticipated interest on forward contracts in ( 15, i.~i=:4, 625) 1984 P78,652,591 Adjustments to restate undivided profits at histm-�ic~al r a t e s Provision for probable losses on real and other properties owned or acquired and loans outstanding in 1984 Net income for this year would have been inct~eased or dect~eased by the same amount." On account of this finding, respondent, in a letter dated October 13, 1988 (pp. 381-382, BIR rec. >, requested PCIBank for evidences of income tax payments for the additional net in :l984 amounting to P78,652,591.00 as disclosed in the 1985 Notes to Financial Statements (see Note No. 7). Petitioner was also advised that its failure to submit the same within ten (10) days from the receipt of soilid lettet�� will be understood that corresponding internal revenue taxes due therefrom had not been paid (pp. 3e1-382, BIR rec.>. Respondent, not having received any reply from the petitionet~, sent a lettet~, dated J�arnt.:n��y E,, 1r:389 <Exh. 2, pp. 383-384, BIR rec.) informing PCIBank of the following findings:

DECISION C. T. A. CASE NO. 5003 - 4- "COMPUTATION OF INCOME TAX DEFICIENCY FOR 1984 Net Income per 1984 Return p 1,213,513.00 Add: Additional "Net Eat~nings in 1984" disclosed in 1985 Financial Statement P78,652,591.00 Add back-provision for losses 15,224,625.00 93,877,216.00 Net Income per review Neglect P95,090,729.00 Income Tax Due Thereon 33,271,755.00 Less: Additional Tax Credit 1,039,147.07 198i.~-1985 P32, 232, 607. '33 Deficiency Income Tax .16, 116,303.96 50% Surcharge for Intentional 19,339,564.76 Interest <60% Maximum) P67,688,476.65 TOTAL On the same letter, petitioner was also invited to an informal conference within ten C10) days from receipt of said letter in order that it can present its side of the casf?. In a memot~andum, dated Apt~il 6, 1.989 <Exh. 4, pp. 394-396, BIR rec.) issued by Pedro S. Acu~a, Officer-in-- Ch.:n~ge (National Assessment Office), addressed to the Commissioner of Internal Revenue, it was alleged that petitioner never seriously sat down to discuss the issue or submit any position paper on the matter, except the simple allegation that said income is for financial purposes on 1 y. The same memOl�"andum averted the following:

DECISION C. T. A. CASE NO. 5003 -5 "The above note is a clear admission that certain income for the year 1984 was not declared during said year. This net earning was adjusted in the Retained Earnings to correctly reflect the value of the capital resources of the bank necessary in concluding the merger of PCIBank and IBAA on November 25, 1 98~.5. With the amount so huge in proportion to the r~eport ed income for 1984, it was in�~scapable to conclude that the failure to amend the 1984 income tax return and paid corresponding tax due thereon is purely intentional and fraudulent subject to fraud pen<:1lty." 1989, respondent issued a letter <Ext-�,. 6, p. 399, BIR rec.) and Assessment Notice No. FAN 1-84- 89--000648 <Exh. 5, P� 402, BIR rec.) for~ the amount of P68,688,476.65, representing deficiency income tax for the yeay�� 1984. Petitioner received the assessment letter' on Apri 1 1'3, 1989 <Exh. CTA >. r~ec. Through its external auditor, SGU and Co., petitioner filed on May 9, 198'3 a letter-protest against the assessment <Exh. B, P� 10-14, CTA r~ec. ) � This was denied by the pp. c, respondent in a lette'r~, dated Mi::n~ch 10, 19':33 <Exh. 15����18, CHi r~ec. ). Hence, this petition which raises two main issues, namely: (1) whether or not the Bureau of Internal Revenue's right to assess has prescribed, and if in the negative; whether~ or~ not petit i OIH?l~ is liable for~ deficiency income tax for the year 1984.

DECISION C.T.A. CASE NO. 5003 - 6- Anent the first issue, petitioner stated that the d.ght of the government; to assess petitioner deficiency income tax for the year 1984 was only up to 15, 1988 <three years from filing of return on April 15, 1985) but the assessment notice was mailed only on April 15, 1989 or 365 days after the lapse of the reglementary period. Section 318 (now 203> of the T<ax Code, as amended by Batas Pambansa Blg. 700, pl"~ov ides that: "SEC. 318. Period or li�itation upon assess�ent and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three 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 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 the 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." (Undet~scot~ing r.;upplied) Respondent does not dispute that the assessment was issued beyond the three-year period to assess but it contended that the instant case is not covered by the abovementioned section but by Section 319(a) [now 223(a)J of the same Code which states that:

DECISION C. T. A. CASE NO. 5003 - 7- "'SEC. 319. ENceptions as to pt~riod li�it�tion oF ���ess�ent and coll�ction taJtes. (a) In t.he c.;ue of a false fraudulent return with intent to evade tax or of a failure to file a return, the taM may be asse~sed, or a proceeding in court for the collection of such tax may be begun without assessment, at anytiMe within ten years after the discovery of the falsity, fraud or nmi':;.,�.�ion: Provided, That in ~� fl''c"'t..td ar.~sess.ment wl��,�.ich has. bPcomP f:in,c'l.l i�!llid ~><Pc��.ltc�r��y, tht.? fi':\Ct <:. f h � .�" .\ d s h .�;d l b "' J IJ d i c i a 1 1 y t ,,:d, P n co g n i z "ii n c e of ., r, ,�., c ' v :1 l P, C'r'' i m i n :,:, �! .. , � : I 1 ', '' f rq��� t: h P C:i.�\ }i�<.ttnn ti")F~l~!~n1'' .. '' Thi' , ''"�f.''OildPnt I �. n mm :i '"� " 1 one , , �. � c , i. r- d it omi<>�~.trJn of d�.or.� ("'\ T ,:;, i. '! ... ;��� p t: f) .,.. , .� I '' '�,. Ti" "' '-.../ ~��� r< � � �. ! '' .:\ t. 1 on of ol t.:..<nt.~;mo�.tr�+� i:n fr~.::~��d. r h '�' "' , 1 ,. � '~ t " �1J . , f ':\mend i n g i t ~:; 1�.��1' ,(,Jc� net: incol'ilt' i� I JTr' 1 n r� foy� f,-,,� nHt !. 0 -,:,. '" of pr��J or� .:�. ctd :i 1: i e<1, �! r'~ct. tl)��n IA,IC�l.1 I d pt) 1 nt <,�d t l h (1 [ I '/ <� �= i. mpl<.,. .\�'Pn r.n j nt ent to .. .,. r ..

DECISION C.T.A. CASE NO. 5003 -8- defraud the government, IBAA's 1984 Income Tax Return was fadse since it deviated ft~om the truth, whether intentional or not. It is enough that there was deviation from the tr~uth as distinguished from fraudulent return <Aznar vs. Court of Tax Appeals, 58 SCRA 519). The ten-year period to assess is the one applicable. After a thorough evaluation of the evidence presented by both parties and the testimonies of their witnesses, this Court finds the contention of the respondent Commissioner unmeritorious. Fr~aud must be proved to exist by clear and convincing �>Vidence amounting to more than mere preponderance, and cannot be justified by a mere speculation because fraud is never lightly to be presumed <Vitelli and Sons vs. U.S., 250 u.s. 355; Duffin vs. Lucas, 55 F <2d> 786; Budd vs. Co���, 43 F<2d) 509; Arroyo vs. Granada, et al., 18 Phil 484). There is no evidence on record that the petitioner purposely sought to report the alleged income as pr�'ior year adjustment in the 1985 Financial Statements of IBAA C to evade the payment of income tax. The said revaluation of fo��ward contracts to the agreement between IBAA and the Central Bank to exchange different currencies at a specified exchange rate at an agreed-upon future date) was made by the

l DECISION C.T.A. CASE NO. 5003 - 9- petitioner to reflect the true financial condition of IBAA due to the appreciation of the US dollar as against I the Philippine Peso in 1'384. This was done in \ I the merger of IBAA and PCIBank. Petitioner's tA~itness, Ms. Mina Tablanza <Auditor of SGV>, explained that at the time these forward contracts were acquired from the Central Bank to pay off its foreign debts, the exchange rate between the US Dollar and the Philippine Peso was much lower as against the exchange rate in 1'384. Thus, as of December 31, 1'382, one US Dollar was equivalent to P9.1710 Philippine Pesos <Exh. H-1, p. 57, CTA rec.>, as compared in December 28, 1'384, where one US Dollar was equivalent to P1'3.787500 Philippine Pesos <Exh. G-1, P� 56, Since there was a dept~eciation of the peso f'l-~om 19BE~ to 1.'384, i t s auditors adjusted the books of IBAA in 1'385 to reflect the true value thereof CTSN, 8��-'3) � And because of a foreign debt moratorium in 1'383 <Exh. E, P� 54, CTA t~ec. ) , the foreign contracts were only Central Bank CExhs. D delivered sometime in 1'386 by the and D-1, p. 53, CTA t~t?c. ) � When the transactions on these forward contracts, which comprises the bulk of the alleged undeclared income, were realized and completed in 1'386, the corresponding income thereon was reported in the petitioner's 1986 Financial Statements CExh. J, pp.

DECISION C.T.A. CASE NO. 5003 - 10 - 6<::::��-76, CTA >. -r~ec. increase in value of the foreign currency prior to its realization Cor receipt) cannot be conside-r~ed as :i.ncom~ It is also significant to note that the imposition of a 50~ surcha-r~ge was fo�r- "intentional neglect" and not fraud. Unde-..~ Section 7i~~ [now 248] of the Tax Code, as amended, quoted hereunder, to wit: "SEC. 72. Surcharges for failure to render returns; for rendering false and fraudulent returns; and for failure to file inco�e taM returns in the proper revenue office. In case of willful neglect to file the retu-r-�n ot~ l:i.!':-t r���ecp.lit~ed under-� this Titll�? within the time prescribed by law, or in case a false or fraudulent return or list is willfully made, the Commis-sionp�,~ of Intel�~nal Revenue shall add to the tax or to the deficiency tax, in case any payment hAs been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty per centum of the amount of such tax or defjciency tax. x x x." It is an apparent indication that, the outset, respondent Commissioner was not convinced that petitioner's return was fl�~aud ul ent. It 1.-JC:\S only when petitioner raised the issue of respondent belatedly claimed the existence of fraud. Even more revealing of the unsupported allegation of by the respondent is the hasty issuance of the transcript of assessment which was merely based lln the Memorandum of Pedro S. Acu~a, dated March 29, 1989 <Ex h.

DECISION C.T.A. CASE NO. 5003 - 11 - 3)' addressed to the Chief of National Audit Review Division <NARD> which stated that: "Since we could not think and conceive of any income of banks that will fit the above category of income and considering that the prescriptive period to assess the corresponding tax due thet�'eon is fast appr--oaching, let us issue the transcript of assessment thereof by tht:� Collect ion Ser�'vice." This fc.;,.ct was confirmed by the witness for the respondent, Abelardo T. Quindo, the Revenue Enforcement Officer who signed the transcript of assessment issued to when he testified before this Court. A pot~t:ion of his testimony <TSN, Octobet�� 20, 1994 He.:n~ing, pp. 30-31) is quoted hereunder: "Ci. Based on t h i s 1 e t t f:n�� 't'OI.t immedi.::o~.tely pl~epared the transcript of assessment? A. Yes, based on the mf~mo of Mr. Acuna or~deri ng NAFm to the transcript of assessment because the case is Bbout to prescribe. q You are referring to the memo dated Mar~ch 1.>� � ~:::o, 1'3!39 pt��eviously mar��ked as Exhibit "3" for~ the l''espondent �:; G!. was the specific instruction of Acur-;a in that memo? A. To issue transcript of assessment. Q. What was the reason given by Mr. Acuna?

DECISION C.T.A. CASE NO. 5003 - 12 - Q. So this period covered calendar year 1984? A. Yes." Both Pedro Acu~a and Abelardo T. Quindo, Officers of the Bureau of Internal Revenue mistakenly thought the prescriptive period ex pi ,--e on 1989 since the alleged undeclared income for 1984 was found as pl-�icn-� per~ioc:l adjustment: in petitione�r"' s 1985 Financial Statemf.mts filed on Apr-�il :l~:i, :1.986. This Cottr't is verily convinced that the assessment was issued for fea�r~ of prescription and that no fraudulent act was discovered as having been committed by the petitioner'. Ne :i. t h e�r'' t-Ji'" s ther"E' falsity in the preparation or filing of the 1984 Income Tax Ret1.11'n of IBAA. Had petitioner concealed this information, then it would not have had reported it in H~;>ncc->, the applicable prescriptive per1od is three years (3) years as pl-�ovided under' Sect ion 318 [now 203J of the Tax Code, as amended, and not ten (1.0) 1.1nder Section 31'3(a) of tt-�.e Code. Respondent's disputed assessment is by WHEREFORE, in v:iP\.'J of all the foregoing, this petition is het"eby GRANTED. Accordingly, the deficiency income tax assessment in the amount of P67,688,476.65

DECISION C.T.A. CASE NO. 5003 - 13 - i S!Hted against the pr:�t it.: i. onpy� year' or��dt::r'FJd CANCELLED. SO ORDERED. I CONCUR: I ~.~ I ERNESTO D. ACOSTA p,.., e �; i din~-~ J �.Hi q p CERTIFICATION l tit'.�� ' ��.��.:'hc�d a f't Pi" c"ltJ <�o' ' \ l' j ' 1 r1 '"' c: c: o ;� cl , !t ,... � �, ' ' \ \. h c; c� 1 t i � , , \} l J i of tli~:> CtHJ�;;i:: .i 1; ut: 1 on. c. ....c-I.Q.~ ERNESTO D. ACOSTA p,., .. , ;d:i.nq J�.1d~!' L:c1�t.����i. nf �r:�.>< n1�;��� �i. I�.:.