CTA Case No. 4648 (Decision)

HEPUHLJG OF THE PHILIPPI NES COURT 0~ TAX APPE ALS WIJEZUN CITY SANTlAGU S. UNG and V I:HGINlA T. UNG, Petitioner, - versus - C.T.A. CASE NU . 4648 CUMrHSSllJNEH UF lNTEHNAL HEVENUE , Hesponc:lent. X - - -� --- ---X L-:>J::::.:C I S I CJN Petitiorier spouses herein seek for the cancellation of the aE.:ses.srnent issued .by t .h e respondent assessing them for defi ciency incowe tax for the year 1 98b, inclusive of . iitcrernents in the total arnount of f-'180 , 4 34 .65 . The petitioners herein are engaged in business as dealers in grains ~rice and palay> and real properties . � They availed of thE' ta;-c amnesty under Executive Order No . 41 (�0 41) coverin<;;~ unpaid income ta ;.tes for the year-s HOW E' Vel, respondent, on t he basis of conficlentiaJ in�ormation that petitioners had acquired sev.-:�ra l prior to 1986, conducted � an examination on the books and records o� the petitioners 57 3

DEGlSHlN C.T.A. Cuue No. 'lb1B - :l - The inves~igation resulte d into a finding that the petitioners are liable ior deficiency taxes computed as follows: Ne t Income Per Return-- p b~:. , 1 5b . 88 Add: 1 > Overstated cost o:l sales arising from overstai..ernent of beginning merchandise P :ro, ooo. oo inventory p 49,510.00 2> Real property holdings p 17!:�! oou. 00 not incl uded in the p 2541510.00 p 319, 666.88 Statement of Assets , p 2 11000.00 p 2'3.8r 666. 88 Liab. & Net. wo'rth filed pursuant to EU # 41 herein treated in accordance with ~ec . 7 o1 t ..he E:aid Ta;.! AmnE�sty Law 3) Income disguised as liab ilities no substantial reference as to naturE� and character and unsupported T "U TAL Net Incomr~ Per rnvestiqation LESS : Personal & Additional exemptions Nr:;d : Ta;.:a b 1�? 1 nco me Income TaJ�: LJue thereon p 6:3,788.00 Less: Tax paid per return 3,699.00 Deficiency ln come Tax A.rld: ;,n'l. s urcharge p 60, 089 .00 30, 044 . 50 25% surcharge 15,022 . 25 interest - 4/16/87 to 11115 /90 75, 278.90 TUT AL AMOUNT DUE & COLLECTll:lL~ p 180,434.65 After the petitioners h ad filed their protest on the sRirl assPs~mPnt. the respo nd e n t , on November 7 , 1990, issued hi s fina l decision on the matter, sustaining his findi n gs. Thus. this instant petition. 574

DECISION -- C. T. A. Case No. 4646 - :J - The is:sues: to be re s olved in t .his case are 1 ) wh et h er or not th e p eti tioners are liable for the deficie n cy t a:�ces assessed b y the res pond ent., and 2 > wh et her o r not the imposition of the !::�ll/. fraud penal t .y was pr ope�r . The p etit:io i�er E: contend �that t !J e l indings ctf th e r E:�spondent. holding th ern liable defi ciency income t a;-:c?s d u e to the overstated cost of sales amounting to P :.:IU, UUU . OU Ct'ITI IJC�t be� s u E:tai ned for lailu :ce on �the part o:f th e respondent to present any evidence tending to prove the same , pa rt icu larly the s tatement o:f networ-th which they file d pursuarJt t .o t .he req u ire ment.s o:f EO 41. Such cnnissic�n , ac cor�dirq;r t o the petitioners , is due to Sec . 8 o:f EU 41 which prohibits any officer or employee o:f the Bureau o:f lnt.er nal Re venue to inquire, question or a tempt to inqu ire into th e t .a:x amnesty declaration filed b y the ta.:payer . How e vE�r , a mere peru!:::al of the Petition for Review filed by th e hereiiJ petitioners reveals the fol lowing alle gat.ions= n a .. ~!n__t.]~le t:t �ver sta + ed c~ost c1� s ales of� P3Ct , (tOO: Thi:-1 represents the difference between the a mount oi invent ories as of Dec. 31, 1'385 n ?f l ect�-o> d in U n? Net \'lorth s tat e me nt t-iled under EU 41 , as ag ainst the beqinning inve nt ories d ec l ar e d by the Petitione rs in t hei r t 9 /Jb in c om e t ::n: r e t u.1 �n. Thus: 575

DEGI.SllJN - C.T.A. Case No. ~648 Md s . I nv e ntory, Be ginning, p e r & Pr o~i t L oss St a t e me nt 8l:. c h d . to 1. '38b i n co nH? t a x r e tu r n o f Petit i oners <Ann e)t C) f-'186,744.50 tlds. lnventa :r�y, Ending, P1!56 , 744.50 p 30,000. 00 Dec . 3 1,1 9 8 5 per S tatement of Ne t Worth, at c hd. to Ta)c Amne s ty Retu r n, und er EO 41 <Anne:-: D --2 ) V :::~ria n c e 1'1Jis d iscrepancy, rhicll had the effect o.f overstatiny the cost o .t � sal.es and c:onsequentl.y understating the gross pro.fi.t o.f t!Je 1986 i .ncome o:f tbe Petition ers, ras obviously a cause o.:t� oversigiJ t on the part o.f the Petitioner's bool< - k eep er, and that there was no deliber a t e in t �::> n t i on o f t h e Petitio n ers to defraud th e r e v e nues. Al -th ough the Petitioners do not dispute the rnt:?ri t o:f" the discrepancy o.f P30, 000. 00, the P e tition er availed o~ the tax amnesty law under th e p ro vi s i o u s o f E U4.1 , and Petitioners now � wish t eo i nvol~ e th e i r immun i ty and privilege for the BlR not to use as evidence their <Petitipners) declaration in EU 41 of an item i n the Stateme n t of t he Ne t Worth under EO 41 c omputing a defi c ien c y tax. x x x" <Italics supp Li e d>. From the ~ or e ~1oing averments , the petitioners � themselves h a d admitt e d the fact that there is a disc r e pan c y i n their balance oi merchandise inventory i n th e ye a rs l'.:IB b which had an effect 0~ uoder�s t a ting theix� gross Jn�o :f i �t in 1986 in the total su m of P :.-. 10, UUO. OU . Con se q u en t ly, t .he p e t .i t i oners had l ilte wise , i n e f fec t, adr~il.te d that i t was not abl e to pay t he co r :c ec t a nd :fu l l RIIILtunt o f the income tax to which th e y are .L iable . 5 76

DECISION -- G.T.A . l:aBe No. 'lbiJH - 5- Mule 1~~ ol the Hevised Rules of Court provides : "SEC. 1. Judicial Admissions An adrni s t:~ � � ttn , vei �bal or written , made by a party in the co urse of the proceedings in the same case, does not r eq uire proof. The admission may be co n tt-adicted o nJ y by showing that i t was mad e Lh1�ough pAlpable mista~e or that no such admission was made." <Underscoring supplied> ln ac c ordancP with the abovequoted rule, judicial admis= i on s , v e rbal or written. made by the parties in the pl eadings or i n tht::> course of the trial or other proceedings are conc.lusive, n o evidence being required to prove the same <Phil ippi ne American General Insurance, lnc. vs. S weet Lines Inc. , 212 SGRA 1'34) . Hence, by vi r� tue of such admissions , the respondent or this Court n eed not look or inquire into the tax amnesty declaration of the petitioners confirm their liability for deficiency income Lax . Wh at Sec . 6 of EO 41 pr o hibits is the inquiry or admission as evidence of the tal'. amnest y dec laration i t.self. It does not preclude this Court how e v er , from using as evidence the taxpayers' own declarations or admission::; whic l1 are binding and conclusive upon th em , even if they involve matters that ar e subjec t o� their amnes ty d e c larations. With r e-:::p e c t tu the pe titioners ' real property f' 0 J ri i CHJS P4':3,5tU . UO which they failed to rr::-pt_)rt. :in thsi_r oJ networth. the respondent J.HU t."}r~�i~ � mu s t b e treated as 57 7

DECIS1UN � C.T.A. Case No. 4b4U -6 - income in accordance with Sec. 7 of Ell 41 , which provides : "SEC. '/. Treatment o:f unexplained .1..ncrease:� in net ;,�ort h a:[t.er December 31 , 1985. The networth of the ta>cpayer as declared in the statement filed by him pursuant to Section 2(a) hereof s hall b~ considered as his true networth as ctf January 1, l'::!e6 for purposes o:f d eterminin g hi s future tax liabilities . Any un e;-: pla i ued in cre a E:e� in his networth aft.er January 1, 1 '::!Bb shRll be considered t .axa ble income in the year wh e n such increase was establi st1ed or di E:c6ve :n-? d." The pet i t i o ners had likewis~ made an admission that holdings were "inadvertently " UlniLled i n their st.a t .e men t o1 networt.h . However, they made �Lhe f 01 _lOW iil�1 CtiTI LE�n �l i OTI S : "b. 0 I'L_ ..l.h.f_l _r e al__-"'p'-"r'-'o::..z:p'-'e=-r,__,t::..Yl--.---'}'�-l!_,O:..:l"-d==-=:"i-'r:C!.l.l;;JQL::S"--__.n, ~ot included in t _lle Statement o� Net Worth under EO .1.1._____L~t _d a t:: unciE�cl ared income in accordance with Sec. 7 of said tax amnesty law- P4~,510 The :re is no legal basis for the BlR to consider as income any property which the _t .axpayer f!lay have }_I~C!.d.Y.?~nUx l _�>ft .J;WJ;. in his Statement of Net Worth filed under EO 41. What Section 'l considers as income is the unexplained increase in his net worth after January 1, 19e6, in the year when such increase had b een established or discovered. The real property holdings which the Petitioners had inadveJ tently leit out from their statement of net. w(l rl !J und e r EU 4.1 were established to have .bee !l j n e J<ti:::"L e�rJce in 1 <:-IB ~J and not a:!. t.er January 1, 1<:-IB . F urth ~r more , real proper ty holdings are asset�: 11 d tt tE.' Y ax�? nCJt ttH? ne �t worth of the Pa+itic.:nr:>r�. ALE ~�ctrtb iE: the remainder after the dPd\1{ t i (I 1 rtf : i al.ti l'i ti es from asE:ets. And t:::1~1crJ i. c- t �oiJ::::J ��� ~ 'd. t. tH?. real and perso11al pr OJter �I .� PS 0 J. "J JI'''I fl(.'tl . ., 578

DEC l. S llJN. - C.T.A. Case No . 4648 -7- Whi l e it ma y .b E� t r ue t h a t real prope r ties are c o nsider e d a s assets , t h e p eti tioner s must bear in mind t .t.1a t th es e pr o perties o r a sset s are impo r tant variables in th e co mputat i on o f n e t wo rth. The :formula :for co mput in g n et wo r t .h is Asset s less Liabilities . Mat h e ma t ica ll y with liabilities being c o n s tant , an i ncr E�ase i n asse t s is accompani e d b y an i nc r ease i n n et wo rt h. Thus , �ta l~ in g int o a ccount peti t .i oner s ' u nde rv a lu e d a s set s i n t h e i r s t ate me nt of networth , i t can e a s i l y be seen h o w t he d iscove ry of the additional and undec l a red assets con sistinq of real pr oper ty holdings amo u n t i n9 �to P49 , 510 . 0U r e s u l ted i n t o an in c r ease in t h e ir n e tw o_r th a:t t .er th e y av a i led o:t the tax amnesty un der EU 41 . And accordin g to th~ sa i d law, such i ncrease is cons i d ere d as t axa bl e i ncome. l n :tact , by vi r t u e of the admissions made by the pe t i t i o ner s i n th e i r pl eadings, they had also in effect ad mitte d t h at they p a id an amnesty tax less than what the y should have actually paid. Anen t p et.i -L i oners' liability account of P 75, 0 00 . 00 which wa s t -reated by the res p o ndent as i nc o me , We fi nd that p et.it.i otH?rs have fully s 1 �si.a.n t .i. a t etl t h at. tllt." amo unt. cd P l !:10 , 000.00 i s indeed , a 1 i <lb.i. lit y a n d nut i !JC(JffiE', ' Thi s c onstitutes t he 5?9

.. DEC I SION - C. T.A . Cas e No . 4 618 -8- outstanding balan c e of the l oan th ey obta i ned :f r om the Philippine Commercial and Industria l Bank as evide n ced by a He al dated Fe bru ary 15, 1 984 " F " ) and a certifi c ati on dat e d Ja nua ry 18,1 991 issued b y the s a id �bank (see p. 144 of BJ R rec ord s >. Other than th e manif es t a t i o n o.L their C::o un se l, no e vid ence , d ctc u rn en t a r y or t es timoni a l, was e v er pr esent e d by th e p e t i t ioners t o e s t a b l i s h �L.h at t h e ~emaining balanc e of f' 2~, , OUU. OU t r uly r e p re s e nt s t h eir l iabil i t i es t .o various s upp l ier s . F i nally , wi th regar d to the l as t issue , we hold that thE> re s p o ndent. had failed to s ub s tant ia t e h is cl ai m t h at the p e t i ticmer E: h ad :frau dul F?nt ly at.t .emp te d to evade their ta x l i a .lt i lj.t ie s . F t aud i s n e ver pr es umed. Co urts never su s tain fi n ding s o:f f r a u d upon c i rc u ms t ances whi c h create only sta o: picio n s and ev e n th e u n d e rs tatem e nt cd a t a x is n cd ., .b y i t E:e 1 :f pr oo f of fr a ud for pu r p os e s of ta ;.c evas i on < Cctmmi E:!Si on r:>r ctf 1 n t .e :l"n a .L Hev e n u e v s . Javier J r . , 199 B 2 4 >. We ar e th er efore / i n c lined to adopt the a dmi ss i on an d ex pJ. a na tin n of the peti tion ers t h at the ir liabi.lity :for d ef i ci e n c y incctrne t a xes a r o se f r�� om mere o ver s i ght a nd in adv ert e nce . ..b e .f o r ego ing discussion , we .fin d th e p e-t J t i o ners Ji a l!l E:> f or income ta x deficienci e s amo u nt i ng t o P 2 7 , 0 7 0 . Ub , c om pu t e d a s follows : 58 0"

DEC.lSlON - C.T.A. Case No. 4648 -9- Add; 1) Clv er .s:t at ed cost of s:-oJ .te s a �c :i.sirq,J from over s:t a t .. ernen t of beu inn i n ~1 mE�r cll <HH.ii se i n v e n t.o r y P30, 000.00 2) Rea1 property ho.ldinqs not included in the Statement of Assets, Liab. & Netwo:rth filed pursuant to EU # 41 h ere in t r eated in acc o rdan ce wi th Sec . 7 ol the E:ai cl T a>t Amnesty Law 49 , 510 . 00 ~) Incom e disguised as l ia bilities no substantial reference as to nature and character and UB S \1 ppO T t eel 25 , CillO . 00 104 1 ~~1 0. 00 Net Income p e r Co urt p 16'3, 566.88 LE::JS: Personal & Acldi tional eJ�:e mptions 21, 000. 00 Net Taxable lncome 141:3 , 566.88 ln co me:~ Tax Due thereon 25, :355 . 05 LE SS : Tax paid per r e turn 3 , 59'3. 00 Deficiency I'ncorne Tax 21,556.05 Add: Addition s to �1�a x 25 % s urcharge 5, 414. 01 Amuunt Du.e & Culll:?cti bl t:.' 27, 070.06 WHEHEFURE, judgment is hereby rendered ordering the p0 titioners to pay the respondent Commissioner of Internal Revenue the a mount o � P2 7 , 070.06 representing d e :ti c.ie n r.::y .i.ncome t <:n:e s fur the year 1'386, p lus 201. i n t e r es t per <3nnum fr o m April u ; , 1987 until fully paid . SO ORDERED. IJu e z oJJ Cit y, Me t 1 u J'la n i l a , July 20, ~� 1J-l~ r RAMON 0. DE V~R A Associate J u oge 581

.... DECIS llJN - C.T.A. Case No. 464H �- 10 - WE CONCUf~ : @.._x-o . ~ ERNE S TU D. ACLJST A Presiding Judge Associ at~:-: c; E: 1~ "I" IF" .1.: L; A � r I C J N 1 hereby certiL y that t h e decis ion was reac h ed after due consul tation amo ng th e members of the Cour t of Tax Appeals i n accordance with Sec tion 13, Artic le VIII of the co nstJtution. Q_,.=z-Q.~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals 58 2