CTA Case No. 695 (Decision)

1\KPUBLIC OF THE PHIUPP'lN tl OOU.RT OF TAX A'PPE.AlJI QUEZON CITY FELI X l�~ONTENEGRO, I NC. , etitioner, - versus - C. T.A. CASE NO . 695 COHHI SS IONER OF I NTERNAL REVENUE , Respondent . x- - - - - - - - -x DECI S I 0 N This is an appeal interposed by petitioner from a decision of respondent finding the former li~ble for a deficiency income tax in the amount of i<2 ,179. 00 for the fiscal year ending June 30, 1953 . Petitioner is a domestic corporation duly organ- ized under the lavlS of the Philippines , with principal place of business at Bais , Negros Oriental . On October 28 , 1953 , petitioner filed its income tax return for the fiscal year ending June 30 , 1953, reflecting there- in a net income of ~70 , 653 . 29, on whi ch the amount of r-14,131. 65 was paid as income tax. After at1 investigation , the Provincial Revenue Of- ficer of Negros Oriental issued assessment No . 36-1- AC- 53, dated October 28 , 1958 a nd received by petitioner on October 28 , 1958, together with a notice and clos- ing agreement , for deficiency income tax in the amount of ~' 4 , 179 . ~0 . Petitioner protested the aforesaid as- sessment in its letter dated November 4, 1958 and re- ceived by respondent on November 18 , 1958 , on the

DECISION - CTA CASE No . 695 2 ground that the requirements of Sec . 7 of the Internal Revenue Hanual were not compli ed vlith in the making of the questioned assessment . � In a letter of respond- e.nt dated April 16, 1959 and received by petitioner on April 27, 1959 , the former denied the protest . Not satisfied with the aforesaid denial , peti- tioner ' s counsel wrote a lette~dated April 30 , 1959 and received by respondent on the same date, request- ing again a reconsideration for the reasons that : 11 (a) the investigation and verification procedures taken by the internal revenue officers of the 1953 income tax return of the taxpayer were in gross viola- tio.n of the pertinent law, and the rules and regula- tions issued by the Commissioner (then Collector) of Internal Revenue and approved by the Secretary of Fi- nance; (b) the items disallowed by the investigating examiner are deductible under section 30, and allied provisions , of the National Internal Revenue Code ; and (.c) the assessment of alleged 1953 deficiency in- come �tax against our client is barred by prescription . II This requ.est was denied by respondent cbn his letter dated August 26 , 1959 aad received by . petitioner on September 7, 1959 . On September 8, 1959 , petitioner interposed this appeal to this Court . The issues to be resolved are as follows : fl

.� DECISION - CTA CASE No. 695 3 (1) Whether or not this Court has jurisdiction to entertain the instant appeal; ( 2) \'ihether or not the right of the respondent to assess the tax in this case has already pre~cribed ; (3) 1iihether or not the assessment by respondent is null and void because of defects in pro- cedure; and (4) Whether or not the disallovJance of t he items claimed by peti- tioner from its 1953- income tax � return is justified. The issue of juri.sdiction \vas raised by respond:.. ent only in his memorandum submitted to this Court . Sin,ce this issue inay be raised at any stage of the proceeding , we must therefore resolve it . It should be noted that th.e assess ment dated October 24- , 1958 was received by petitioner on October 28 , 1958 . The aforesaid assessment was protested by . it in a letter dated November 4, 1958 . This protest was denied by res pondent in his letter. dated �April 16, 1959 and received by petitioner on April 27 , 1959. 'l1his letter of April 16 , 1959 is the decision of the respondent that is appealable to this court because it is the decision on a . disputed assessment . (Com- missioner of Internal Revenue vs Leonardo s . Villa and The Court of Tax App eals , G. R. No. 1-23988 , Jan- uary 2, 1968 . ) The receipt , t herefore, of the said

DECISION - CTA CASE No. 695 4 letter by petitioner on April 27, 1959, marked the start of the statutory thirty (30) day ~eriod pro- vided in Section 11 of Republic Act No . 1125. In a letter of petitioner dated April 30 , 1959 and received by respondent on the same date , the form- er requested a reconsideration of the decision of the latter requiring petitioner to pay the sum of i2,179 . 00 as deficiency income tax for the year 1953 . From April 27 , 1959 to April 30 , 1959 , only three (3) days haM�: been consumed by petitioner . The statutory period resumed its flight on September 7, 1959 when petitioner received the denial of respondent dated August 26, 1969. This petition was filed on September 8, 1959 . From September 7 , 1959 to the date of the filing of the appeal on September 8 , 1959 , petitioner used another one (1) day . Thus only four days of the thirty- day period for appeal had been consumed by pe- titioner when d.t interposed the present appeal which is necessarily on time . We find no merit in respondent ' s contention that the letter of petitioner dated ipril 30 , 1959 , was pro forma and did not interrupt the thirty- day period to appeal . A reading of petitioner ' s letter dated April 30 , 1959, discloses that the second request for reconsideration v1as based on the additional grounds of prescription and deductibility of the disallowed

.. DECISION - CTA CASE No. 695 5 items which had not been raised before.. The afore- said reconsideration v.Jas obviously not pro foriDc'l.. viith respect to the issue of prescription .of' the assessment, the law applicable reads as follows: 11Sec . 331.- Period of limitation uuon assessment and collection.- Except as provided in the succeeding section, internal-revenue taxes ~~1~ be assessed within five_xears Rlter the return was filed, and no proceeding in court -vli tb.- out assessment for the collsction of such taxes shall be begun after the ex- piration of such period. For the pur- poses of this section a return filed before the last day prescribed by lavl for filing thereof shall be considered as filed on such last day; Provided, That this limitation shall not apply ro-cases already investigated prior to the approv- al of this Code.u ( National Internal Revenue Code . Underlining supplied.) .It is not disputed that the income tax return of petitioner for the fiscal year ending Jur;,e 30 , 1953 was filed by it on Octooer 28, 1953 and the deficien- cy assessment dated October 24 , 1958 vJas received by petitioner on October 28, 1958, or exactly five (5) years from the date of filin g the return. vJe use � the date of receipt because there is no evidence as to the date of mailing. Clearly, the assessment had not prescrib�::;d when it was made . \!J'i th regards to the third issue, petitioner con- tends that. the assessment is illegal because it was issued by a provincial revenue officer who had no authority to rnake and issue the same. ~'Ie find this contention to be devoid of merit. It should be noted

DECISION - CTA CASE No. 695 6 that the assessment was made and issued by a provin- cial revenue officer on behalf of the Regional Direct- or . A provincial revenue officer is authorized by the Regional Directors to sign t heir .names in those cases where an assessment is about to prescribe. This is a standard procedure adopted in the Bureau of In- .. ternal Revenue . An assessment thus made is, therefore, as valid. as if it W.e'na personally made by either a Regional Director or the Commissioner of Internal Revenue himself . Petitioner contends further that the assessment is illegal because the procedure set forth in the In- ternal Revenu�e Nanual on 1.- udit and Investigation was not followed by respondent in arriving at the afore- said assess ment . 1~le find this contention equally un- . meritorious . The Internal Revenue Hanual on Audit and Investigation is a set of rules and regulations for the performance of auditing and investigative func - tions , and such being the case, it is only for the in- ternal administration of t he office , a guide to the employees or subordinate officers for the efficient operat~on of the office . A violation thereof may have repercussions on the subordinate officers but will not affec t the legality of the assessment . They are not jurisdictional matters and deviations from the afore- said procedure do not render an assessment invalid or illegal .

DECISION - CTA CASE No. 695 7 With respect to the last issue, we s hall first take up the disallowed salaries of some officers and employees . of petitioner corporation . Respondent reduced the salar.ies of the manager of lumber concession, sugar farm superintendent and clerk in the lumber yard, in the total amount of �4- , 600 . 00 because this sum is allegedly profits of the corporation distributed in the gu.ise of salaries . This contention is premised on the allegations that Baid officers are also stockholders of t he corpora- tion and t~2t t heir sala!ies are excessive compared to those of officers of other corporations holding similar positions and doing the same volume of business. The general rule is tha t the employer is given a wide l atitude of discretion in t he amount of salaries paid to t he employees . A corporation has the right to fix the comp ensation of its employees (Ledesma vs Col- lector of Interna l Revenue , 4-2 Phil . 912) . A breakdown of the reduction is perl~ps enough to show tha t the reduction is without f oundation . Respondent reduced the salary of the sugar farm manager from �19,600 . 00 to ~18 , ooo . oo , and that of a clerk in the lumber yard who works seven days a week , including Sundays , from ~3 , 600 . 00 to i 3,00o . oo , because they are allegedly ex- cessive compared to salaries of officers or employees of other corporations similarly situated and thus the excess is a disguised distribution of profit . Respond- ent reduced the salary of petitioner ' s manager of lum- ber concession from i~9 , 600 . 00 to ~7 , 200 . 00 , represent - ing a c ut of ~2 , 4-0o . oo , for the same reasQn . (I

DECISION - CTA CASE No. 695 8 There is no comparative study of the profits of the two enterprises in relation to other concerns similarly situated . Neither is t here any comparative study of the peculiar situation of the two enterprises in relation to other concerns , nor .is there a comparison of the nature and volume of the work performed by the officers in- volved . Since no two business enterprises are exactly in the same situation, negl.igible differences in sala- ries cannot reasonably show that the �� salary is excessive or that profits are cr~nneled to the stockholders thru salaries . Respondent ' s reduct.ion would rather appear as arbitrary spec.ially in the light of' the fact t ha t peti- � tioner reported a net income of i:70,653 . 29 and i lt , 6oo . oo is , in a manner of speaking, but a mere drop in the bucket with respect to profits~ Petitioner clai~s that the value of medicines in the total sum of �i.tlt, 278 . llt is deductible as loss on the ground that the aforesaid medicines were no longer fit for sale as the dates of t heir efficacy have expired (~ pp . 2lt- 26, t . s . n. , Hay 13 , 1963) � .Aside from self- serving testimonial evidence, no other evidence was pre- sented to substantiate this claim of petitioner� � There is not even a list of th~ medicines, their value, and their expiry dates . Under the circumstance, we are con- strained to . sustain the disallowa nce of this alleged loss. Respondent disallowed the deduction of the amount of 1<1 , 000 . 00 \vhich petitioner contributed for the candi- dacy of Congressman Lorenzo Teves (~ PPo 31-33, t.s . n., 1�1ay 13, 1963) . Amounts expended for political campaign

... DECISION - CTA CASE ~o . 695 9 purposes or payments to campaign funds are not deduct- ible eit�her as business expenses or as contribution (Nertens, Law of Federal Income Taxation , 1960 Ed . , Vol . 4, Chap . 25, pp . 384-388) . Lastly , t he miscellaneous expenses in the total amount of ~1 , 018 . 58 , claimed by petitioner as deduc- tion , were properly disallowed by respondent . It appears that t he aforesaid miscellaneous expenses are not� sup- _ported by receipts or by any other documentary evidence . The mere testimony of petitioner ' s Vice Presi~ent is not enough to warra nt t heii deduction . Under the foregoing premises , p etition~r ' s tax liability is ~1 , 259 . 00 , computed as follows: Net income per return ���������� � ������� Add: Unallowable deductions - Loss in the reduction of merchandise inventory to market ���������������� i:4 , 278 . 14 Contribution to the candi- dacy of Congressman Lo- renz o Teves ��� � �� �� �� l,ooo . oo Hiscellaneous expenses classified personal & _ no supporting receipts .� 1 , 018 . 58 Net income per investigation �� ��� ��. �.� Less : Personal & additional exemptions Ne t income subject to tax ������������� Tax due ���������.�����.��������������� Less: Tax already assessed ������������ Balance still due �������� � ������������ ~�JHEREFO~E , the dec.ision appealed from is hereby modified . Petitioner is hereby ordered to pay re- spondent the amount of i'l,259 . 00 a s deficiency income tax for the fiscal year ending June 30 , 1953 . � If the deficiency tax is not pa~d in full within thirty (30) I

/< DECISION - CTA :~ASE No. 695 10 days from the date t his decision becomes final and execut ory , petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount plus interest at the rate of one per cent (1%) a month, computed from the date this decision becomes final until paid , provided that the max.imum amount that may be collected as interest shall not exceed t he amount corresponding to a period of three (3) years . itiith costs against petitioner. S0 ORD:&"'iED � Quezon City, April 30 , 1969 . L 1 ~� RAt'-10N 1 . ).VAJ: CE�1 1. Associate Jud ge HONJ-1.N ~1 . ffi1!ALI Pres id ing Judge @Zr ~ rZ:_ ,I;.S.L_.&AO_,R. ~ALVAREZ Associate Judge I