AR REALTY HOLDINGS CO., INC. v. COMMISSIONER OF INTERNAL REVENUE

Republic of the Philippines COURT OFTAX APPEALS Quezon City SECOND DIVISION AR REALTY HOLDINGS CO., INC., CTA Case No. 8239 Petitioner, -versus- Members: CASTANEDA, JR., Chairperson CASANOVA, and COTANGCO-MANALASTAS, JJ. COMMISSIONER OF INTERNAL Promulgated: REVENUE, APR 0 1 2014 / Respondent. ;7 y:_J ~ ! .;vi. X-----------------------------------------------------------------------------------------X DECISION CASANOVA, L.: This is a Petition for Reviewl, filed by petitioner AR Realty Holdings Co., Inc., appealing the Final Decision on Disputed Assessment2 dated February 8, 2011 and seeking for the cancellation of the deficiency internal revenue tax assessment, for the taxable year 2006, in the amount of One Million Thirty- Three Thousand One Hundred Fifty-Six Pesos and 74/100 (P1,033,156. 74), allegedly representing deficiency income tax, Value Added Tax (VAT) and Expanded Withholding Tax (EWT). The facts of the case, as culled from the records, are briefly narrated as follows~ 1 Petition for Review (PFR), Docket, pp. 000004-000018. 2 Final Decision on Disputed Assessment (FDDA), Annex" A", Petition for Review, Id., p. 000019- 000020 .

DECISION CTA CASE NO. 8239 Petitioner is a domestic corporation duly organized and existing under and by the virtue of the laws of the Republic of the Philippines, with principal office at Unit 1810 Cityland 10 Tower 1, 6815 H.V. Dela Costa, Ayala Avenue, Makati City and primarily engaged in realty operations. It may be served with notices, and processes of this Honorable Court through the undersigned Firm. Petitioner is duly registered with the Bureau of Internal Revenue - Revenue District Office No. 50 of Revenue Region No.8 (BIR), South Makati City, Philippines.3 Respondent Commissioner of Internal Revenue (CIR) is the chief of the BIR, the government agency officially responsible for the assessment and collection of all national internal revenue taxes, fees and charges and the enforcement of all forfeitures, penalties and fines connected with such taxes. Respondent may be served with summons, notices and other legal processes of this Honorable Court at the 4th Floor, BIR National Office Building, Agham Road, Diliman, Quezon City, Metro Manila.4 Respondent issued a Tax Verification Notice No. 00050126 dated July 20, 2007, authorizing Revenue Officer (RO) JERRY C. ANGELES under the supervision of Group Supervisor (GS) LUCY ABRASIA of Revenue District Office No. 50 - Revenue Region No. 8 to examine/ audit petitioner's internal revenue taxes covering the taxable year 2006.5 After the Revenue Officer conducted his examinations of the records of the Petitioner, which include but is not limited to the duly filed tax returns, books and other accounting records of Petitioner, he submitted his findings through an undated Post Reporting Notice received by petitioner on February 27, 2008 with an alleged deficiency internal revenue taxes for the taxable year 2006 in the total amount of Pl,071,623.30, including increments, to wit: 6~ 3 Par. 1 , "Statement of Facts", Petition for Review, Ibid. p . 000005. 4 Par. 2., "Statement of Facts", Petition for Review, Id., p. 000005. 5 Par. 3, "Stipulation of Facts", Joint Stipulation of Facts and Simplification of Issues, (JSFI), Id., pp. 000123 . 6 Par. 4, "Stipulation of Facts", JSFI, Jd., p . 000123.

DECISION CTA CASE NO. 8239 Tax Type Basic Surcharge Interest Compromise TOTAL Income Tax p 153,776.15 - p 1,055,371.474 EWT p 901,595.60 - Documentary 896.36 - 4,959.64 Stamp Tax 4,063 .28 - 1,599.42 11,291.92 TOTAL p 1,000.00 6,954.00 p 1,738.50 Pl,071,623.30 On July 24, 2008, petitioner received an undated Revised Post- Reporting Notice of the respondent with the revised assessment of the alleged deficiency internal revenue taxes in the amount of P2,670,277.42, including increments as follows: 7 Tax Type Basic Surcharge Interest Compromise TOTAL Income Tax p 260,985.87 p 57,416.89 - p 318,402.76 EWT - - Documentary 4,063.28 1,097.09 5,160.37 Stamp Tax 7,925. 00 - 2,139.75 p 2,000.00 14,046.00 Value Added p 1,981 .25 Tax 1,881,184.11 2,332,668.29 TOTAL 451,484.19 P2,670,277.42 After a series of informal discussions, respondent issued a Preliminary Assessment Notice dated March 18, 2009 (hereinafter referred to as "PAN") with an alleged deficiency taxes, inclusive of interest and compromise penalties, in the total amount of P892,857.90 broken down as follows: s Tax Type Amount Income Tax p 364,322.86 Value-Added Tax 511,578.02 EWT Doc. Stamp Tax 5,877.84 11,079.18 TOTAL p 892,857.90 On April 3, 2009, petitioner duly filed a protest to the PAN, contesting the factual and legal bases of the respondent's assessment. ~ 7 Par. 5 "Stipulation of Facts", (JSFI), Id. , pp. 000123=000124. 8 Par. 6, "Stipulation of Facts", (JSFI), Id., p. 000124. 9 Par. 9, "Statement of Facts", Petition for Review, Id. p. 000007.

DECISION CTA CASE NO. 8239 Respondent issued an Assessment Notice-Formal Assessment Notice (AN-FAN) on AprilS, 2009, which was received by petitioner on May 12, 2009, reiterating the alleged deficiency internal revenue taxes a follows: 1o Tax Type Assessment No. Amount Income Tax IT -50126-06-09-0253 p 369,751.98 Value-Added Tax VT -50126-06-09-0253 EWT WE-50126-06-09-0253 518,969.64 Doc. Stamp Tax DS-50126-06-09-0253 5,962.45 TOTAL 11,238.05 p 905,922.12 On April 30, 2009, respondent issued a letter alleging respondent's failure to file a timely protest to PAN and considered the protest to PAN as protest to FAN, and requesting for the payment of the undisputed documentary stamp tax amounting to P11,183.70 allegedly not contested and included in the protest.11 On May 12, 2009, petitioner filed an administrative protest on the AN-FAN on the grounds of lack of legal and factual bases.12 On May 14, 2009, petitioner paid the undisputed Documentary Stamp Tax amounting to P11,217.15, including the interest until the time of payment.13 On June 24, 2009, petitioner received a letter from the respondent dated June 18, 2009 informing petitioner that due and by reason of the protest to AN-FAN, the docket of the case is being forwarded to Revenue District No. 50, South Makati, and further acknowledging petitioner's payment of P11,217.15.14 On February 11, 2011, petitioner received an Amended Assessment Notice under Assessment No. IT-TVN147716-06-11- 0290 dated February 8, 2011 (Amended AN-FAN) directing th~ 10 Par. 10 , "Statement of Facts" , Petition for Review, Id. p . 000007. 11 Par. 7, "Joint Stipulation of Facts and Simplification of Issues", (JSFI), l d., p . 000124. 12 Par. 12, "Statement of Facts", Petition for Review, Id. p . 000008. 13 Par. 8, "Joint Stipulation of Facts and Simplificati on of Issues", (JSFI), l d., p . 000124. 14 Par. 9, "Joint Stipulation of Facts and Simplification of Issues", (JSFI), Id., pp. 000124-000125.

DECISION CTA CASE NO. 8239 payment of P377,980.91 or file a protest in writing to the CIR within 30 days from receipt or February 11, 2011.15 Attached to said Amended AN-FAN is the Final Decision on Disputed Assessment dated February 8, 2011 of respondent, through Jaime B. Santiago, CESO V, Regional Director of Revenue Region No. 8, finally denying the protest letter dated May 12, 2009 of herein Petitioner thereby reiterating the alleged assessment for internal revenue taxes contained in AN-FAN, except for some modification on unsupported expenses in the Income Tax and Documentary Stamp Tax already paid, and requesting herein petitioner to settle the same, otherwise, Petitioner may opt to appeal with this Honorable Court of Tax Appeals within thirty (30) days from receipt or until March 13, 2011.16 Hence, the instant petition filed pursuant to Section 22817 of the National Internal Revenue Code of 1997.~ 15 Par. 15, "Statement of Facts", Petition for Review, Id. p. 000008. 16 Par. I0, "Joint Stipulation of Facts and Simplification of Issues", (JSFI), !d. , p. 000125 . 17 Sec. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on exciseable articles has not been paid; or (e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as

DECISION CTA CASE NO. 8239 On April18, 2011, respondent filed her Answer18, via registered mail, averring the following Special and Affirmative Defenses: "SPECIAL AND AFFIRMATIVE DEFENSES 7. Investigation of the Petitioner's taxable income for 2006 disclosed that its taxable income for 2006 is P4,726,760.91 but the income as declared by the Petitioner in its Income Tax Return is only P4,443,886.00 or a difference of P282,874.91. Petitioner avers that the Accounts Receivable taken into account by the Respondent in the computation of the under declared income includes Trade Receivables, Advances to Clients, and other Receivables. However, records disclosed that in the Audited Financial Statement, no breakdown was presented regarding the beginning and ending of Accounts Receivable and no documents were presented to support the Petitioner's claim. 8. Reinvestigation on the Petitioner's unsupported expenses of P147,176.00 disclosed that the water payments in the amount of P 15,950.00 were supported by invalid invoices and that the transportation expenses in the amount of P131,226.00 were supported by invoices not named after the company. 9. Investigation disclosed that the Petitioner failed to withhold and remit the corresponding expanded withholding tax on income payments for professional fee and contracted repairs and maintenance amounting to P6,696.00 and P204,134.00, respectively or a total of P176,380.00, in violation of Section 2.57.2 of Revenue Regulations (RR) No. 2-98, as amended. Hence, the same were disallowed as deduction from gross income pursuant to Section 34 ~ may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the pro test, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. 18 Docket, pp. 000093-000101.

DECISION CTA CASE NO. 8239 Page 7 of45 (K) of the Tax Code. Petitioner avers that the professional fees recorded in its books refers to fees paid to its external auditors, which is a general professional partnership and that the repairs and maintenance are expenses attributable to the purchase of supplies and materials for repairs and not for contracted services. However, no supporting documents were presented to substantiate the Petitioner's claim. 10. Investigation disclosed that Petitioner declared net operating loss in the amount of P220,761.00 for the taxable year 2006, which shall be carried over in the succeeding taxable year(s) pursuant to the provision of Section 34(D)(3) of the Tax Code. However, no proofs were presented to show that the same has not been carried over and not deducted against the taxable income for taxable years 2007, 2008, and 2009. Hence, it is appropriate that such loss should be taken into account in computing the correct income tax liability in order to recapture the income tax benefit realized in the following year because of such carry over. Furthermore, to allow the Petitioner to carry over the net operating loss and at the same time be benefited thereof in the year the loss was incurred by offsetting from said loss the findings per investigation would result to double benefits which was never been the intent of the provision. 11. Investigation disclosed that MCIT payment in the amount of Pl2,658.56 was not credited against the deficiency income tax since the same shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years pursuant to Section 27 (E)(2) of the Tax Code. When the MCIT payment is carried over in the succeeding year, it may be credited against the normal income tax due of the said succeeding years, thereby giving benefit/ credit to the taxpayer. The disallowance is made in order to recapture such benefit. To allow Petitioner to carry over the MCIT payment and credit it in the succeeding years and at the same time be credited in the year the MCIT is paid off by offsetting the same to its deficiency income tax would result to double benefit which is not the intent of the legal r provision.

DECISION CTA CASE NO. 8239 12. Verification disclosed that the excess tax credit carried over to succeeding period/ year in the amount P837,589.42 was deducted from the total allowable tax credit considering that the said amount has been credited against the estimated quarterly income tax liabilities for the taxable quarter of the succeeding taxable years pursuant to Section 76 of the Tax Code. When the excess tax credits is carried over in the succeeding year, it may be credited against the normal income tax due of the said succeeding years, thereby giving benefit/ credit to the taxpayer. The disallowance is made in order to recapture such benefit. To allow Petitioner to carry over excess tax credit and credit it in the succeeding years and at the same time be credited in 2006 by offsetting the same to its deficiency income tax would result to double benefit which is not the intent of the legal provision. 13. Investigation disclosed that the output tax due from Petitioner's receipts m the amount of P4,018,500.65 is P467,694.16 and not P465,824.67 as what was declared in the VAT returns. In its defense, Petitioner avers that the deficiency is mainly due to the changes in the rate used as a result of the timing difference of the collection of the rental income. However, no proofs were presented to substantiate Petitioner's claim. 14. Investigation disclosed that Petitioner failed to submit the required official receipts/ sales invoice in support of its claim for input tax in the amount of P325,847.50. Moreover, despite the ample time given to Petitioner to present the supporting documents, it still failed to submit the same. Hence, the Respondent's assessment on unsupported input tax amounting to P325,847.50 is reiterated. 15. Records disclosed that Petitioner has claimed advance payments in the amount of P199,877.28 (quarterly amount of P49,969.32). However, verification from the VAT returns and the Integrated Tax Systems (ITS) showed that P22,693.96 has only been paid. Accordingly, the difference of P177,183.32 (P199,877.28 less P22,693.96) representing the unsupported claimed payment which is disallowed. Moreover, no documents were presented relative to ~

DECISION CTA CASE NO. 8239 the disallowed advance payments claimed per VAT returns. 16. Verification disclosed that the excess input tax credit carried over to succeeding quarter/ year in the amount of P1,598,841.31 was deducted from the allowable tax credits in computing the basic deficiency Value Added Tax considering that the tax benefit has already been forwarded to succeeding period. Such deduction was made in order to recapture the benefit which the Petitioner derived from such carry-over. 17. Investigation disclosed that Petitioner failed to withhold and remit the required expanded withholding tax on professional fee and contracted repairs and maintenance in the total amount of P 4,063.28. Accordingly, since Petitioner has not paid the corresponding expanded withholding tax due on professional fee and contracted repairs and maintenance in the total amount of P4,063.28 and it failed to present documents that will support its allegation that the said income payments should not be taxable, assessment thereof is reiterated. 18. Assessment are prima facie presumed to be correct and made in good faith. The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of official duties, an assessment will not be disturbed. (Aban, Law of Basic Taxation in the Philippines, 151 Edition, p. 109); 19. On the imposition of interest, the Tax Code clearly provides: SEC. 249. Interest. - (A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. (B) Deficiency Interest. - Any deficiency in the tax due, as the term is defined in this Code, shall b~

DECISION CTA CASE NO. 8239 subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest.- In case of failure to pay: (1) The amount of the tax due on any return required to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. In Aguinaldo Industries Corp. vs. CIR, G.R. No. L- 29790, February 25, 1982, the Supreme Court held: 'The rule as to when the interest and surcharges on delinquency tax payments become chargeable is well settled and the respondent Court applied it correctly. Construing the same provisions of the old Section 51 (e) and the Section 51 (d) of the Tax Code, as amended by Republic Act 2343, this Court held that the interest and surcharges on deficiency taxes are imposable upon failure of the taxpayer to pay the tax on the date fixed in the law for the payment thereof, which was, under the unamended Section 51 of the Tax Code, the fifteenth day of the fifth month following the close of the fiscal year in the case of taxpayers whose tax returns were made on the basis of fiscal years. [Commissioner of Internal Revenue vs. Connel Bros. Co. (Phil), 40 SCRA 416.] The rule has to be so because a deficiency tax indicates non-payment of the correct tax, and such deficiency exists not only from the assessment thereof but from the very time the taxpayer failed to pay the correct amount of tax when it should have been paid (Ibid.) and the imposition thereof is mandatory even in the absence of fraud or wilful failure to pay the tax is full. (sic)~

DECISION CTA CASE NO. 8239 As regards interest, the reason is ---- The imposition of 1% monthly is but a just compensation to the State for the delay in paying the tax and for the concomitant use by the taxpayers of funds that rightfully should be in the government s hands. (U.S. vs. Goldstein, 189 F (2d) 752; Ross vs. U.S. 148 Fed. Supp. 330; U.S. vs. Joffray 97 Fed. (2d) 488.) The fact that the interest charged is made proportionate to the period of delay constitutes the best evidence that such interest is not penal but compensatory (Castro vs. Collector of Internal Revenue, G.R. L-12174, December 28, 1662, Resolution on Motion for Reconsideration.)' 20. Finally, Petitioner should be reminded that taxes are important because it is the lifeblood of the government and so should be calculated without unnecessary hindrance (Commissioner vs. Algue, Inc. L- 28896, 17 February 1988). Taxes are enforced proportional contribution from persons and property levied by the state, thus, no one is considered entitled to recover that which he must give up to another- Non videtur quisquam id capere quod ei necesse est alii res ti tu tere." Respondent filed her Respondent's Pre-Trial Brief19 on May 18, 2011 while petitioner filed its Pre-Trial Brief (for petitioner)20 on May 23, 2011. On June 21, 2011, the parties filed their Joint Stipulation of Facts and Simplification of Issues (JSFI)21, which was approved by this Court in a Resolution22 dated June 28, 2011. As jointly stipulated by the parties, the issues23 to be resolved in the case at bench are as follows: WHETHER OR NOT THE FORMAL ASSESSMENT NOTICE ISSUED AGAINST PETITIONER FOR THE TAXABLE YEAR 2006 IS VALID. c;;;- 19 Id. , pp. 000103-107. 2o Id., pp. 000108-000115. 21 Id., pp. 000122-000127. 22 Id. , pp. 000130. 23 JSFI, Docket, p. 000126.

DECISION CTA CASE NO. 8239 WHETHER OR NOT PETITIONER IS LIABLE FOR DEFICIENCY INCOME TAX IN THE AMOUNT OF P377,980.91, VALUE ADDED TAX IN THE AMOUNT OF P647,739.47 AND EXPANDED WITHHOLDING TAX IN THE AMOUNT OF P7,436.36, ALL FOR TAXABLE YEAR 2006 AND INCLUSIVE OF INTEREST UNTIL MARCH 12,2011. On August 5, 2011, petitioner filed a Motion to Commission an Independent Certified Public Accountant (ICPA), which was granted in open court in the hearing24 of August 24, 2011. On November 10, 2011, the Court received the ICPA Report, which it noted in the Resolution25 dated November 16, 2011. During trial, both parties presented their respective documentary and testimonial evidence. Petitioner filed its Formal Offer of Evidence26 on March 13, 2012, with respondent's Comment (To Petitioner's Formal Offer of Evidence)27 filed on March 20, 2012. Respondent filed her Formal Offer of Evidence28 on December 4, 2012, with petitioner's Comment (to Respondent's Formal Offer of Evidence dated December 3, 2012)29 filed on December 12, 2012. On March 14, 2013, petitioner filed its Memorandum3o dated March 12, 2013. On the same day, respondent filed her Memorandum31 via registered mail, which was received by this Honorable Court on March 26, 2013. In a Resolution32 dated April 3, 2013, the instant petition was submitted for decision.#- 24 Id., pp. 000147. zs Id., pp. 000208. 26 Id., pp. 000216-000223. 27 Id., pp. 000279-000280. 2s Id., pp. 00371-00375. 29 Id., pp. 00417-00418. 3o Id., pp. 000429-000444. 31 Id., pp. 000445-000451. 32 Id., pp. 000453.

DECISION CTA CASE NO. 8239 Page 13 of45 After a careful and thorough evaluation of the arguments of both parties as well as the evidence they presented to support their respective position, this Court finds the present petition partly meritorious. The Honorable Court shall discuss the Issues submitted In seriatim. Whether or not the Formal Assessment Notice issued against petitioner for the taxable year 2006 is valid. Petitioner contends that the BIR examiner simply compared the 2006 duly filed BIR forms with its 2006 Audited Financial Statements without the benefit of actual and real audit. This leads to petitioner's position that the Formal Assessment Notice is null and void for failure to state in detail the facts and the law.33 Petitioner's assertion is bereft of merit. The Preliminary Assessment Notice (PAN) with Details of Discrepancies dated March 18, 2009 was received by petitioner on March 19, 2009.34 Pursuant to Section 3(3.1.2)35 of Revenue Regulations No. 12-99, petitioner has fifteen (15) days from receipt thereof, or until April 3, 2009, to respond to the PAN. However, petitioner filed its letter of protest36 to the PAN on April 7, 2009. Hence, respondent's Bureau, through Regional Director Alfredo VJ:;iiil-- 33 Mem orandum for Petitioner, Docket, pp. 000434-000435. 34 Exhibit "E", Docket, pp. 235-239 and Am1exes "E" - "E.4" of Petition for Review, Docket, pp. 32-36. 35 3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by regis tered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, sh owing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in w hich case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 36 Exhibit "F", Docket, pp. 000241-000245.

DECISION CTA CASE NO. 8239 Misajon, replied in a letter37 dated April 30, 2009 that a Formal Assessment Notice (FAN) dated April 8, 2009 has been issued and the petitioner's protest has been considered. Examination of the assailed FAN with attached Details of Discrepancies3s reveals that it contains the factual and legal bases of the assessments, thus complying with Section 228 of the National Internal Revenue Code (NIRC) of 1997, as amended. Further, it is worthy of emphasis that" in the long line of cases, the Supreme Court has ruled that the requirement of the law to inform the taxpayer of the basis of the assessment does not necessarily mean that it be a full narration of the facts and laws on which the assessment is based. The purpose of the assessment is to enable the taxpayer to know the law and the facts on which the assessment is made, and to afford him his right to due process once it is served and received. Thus, so long as the parties are notified and given the opportunity to explain their side, the requirements of due process are satisfactorily complied with."39 (Emphasis supplied) Whether or not petitioner is liable for deficiency income tax in the amount of P377,980.91, value- added tax in the amount of P647,739.47 and expanded withholding tax in the amount of P7,436.36, all for taxable year 2006 and inclusive of interest until March 12, 2011. ~ 37 Exhibit "H " , Docket, pp. 000255-000256. 38 Exhibit" G" , Docket, pp. 000246-000254. 39 Hermano (San) Miguel Febres Cordero Medical Education Fou ndation (De La Salle- Health Sciences In stitute), In c. vs. CIR, CTA Case No. 8194, January 9, 2012, citing Calma et. al. vs. Court of Appeals, et. al., G.R. No. 122787, February 9, 1999.

DECISION CTA CASE NO. 8239 I. Deficiency Income Tax Respondent assessed petitioner of deficiency income tax for taxable year 2006 in the amount of P377,980.91, computed as follows: 40 Taxable Income (Loss) per ITR p (220,761 .00) Add: Discrepancies per investigation Under declared income p 282,874.91 147,176.00 Unsupported expenses 176,380.00 Income payments not subjected to withholding tax 606,430.91 p 385,669.91 Taxable Income per 220,761.00 investigation p 606,430.91 Add: NOLCO p 212,250.82 Total taxable income per investigation Tax Due @ 35 % Less: Tax credits and payments Excess tax credit from prior p 649,245.32 year(s) 201,002.66 p 850,247.98 Creditable tax withheld 12,658.56 Total 837,589.42 Less: MCIT Payment Excess tax credit carried over to succeeding year - p 212,250.82 Basic Tax Still Due 165,730.09 Add: Interest (04-16-07 to 03- p 377,980.91 11-11) Total Amount Due and Collectible As can be seen from the above computation, the assessment arose from the following items: a. Undeclared income p 282,874.91 b. Unsupported expenses 147,176.00 c. Income payments not subjected to 176,380.00 withholding tax 220,761 .00 d. NOLCO 40 Exhibit "A", Docket, p. 000225.

DECISION CTA CASE NO. 8239 e. MCIT Payments 12,658.56 f. Excess tax credit carried over to succeeding 837,589.42 year The Court shall discuss the validity of the said assessment by looking into the propriety of each item. a. Undeclared Income-P282,874.91 Respondent computed the alleged undeclared income of P282,874.91 by taking into account the balances of petitioner's Accounts Receivable, beginning and ending, as shown below: Receipts per VAT Returns p 4,018,500.65 Add: Accounts Receivable - end (net of VAT) 1,351, 935.71 Total p 5,370,436.36 Less: Accounts Receivable - beg. (net of VAT) 643,675.45 Total Income per investigation p 4,726,760.91 Less: Income declared per ITR Undeclared Income 4,443,886.00 p 282,874.91 In its protest letter, petitioner counter argues that the Accounts Receivable account comprises of Trade Receivables, Advances to Clients and Other Receivables, and that only Trade Receivables should be considered in the reconstruction of sales/revenue subject to income tax from sales reported per VAT returns.41 The Court-commissioned Independent CPA (ICPA), Mr. Sonny S. Bonilla, observed that the income declared per petitioner's AITR amounting to P4,443,886.00 used by respondent in the computation of the undeclared income, consisted of the following: Rental Income p 4,439,108.00 Dividend income 700.00 Miscellaneous income Total 4,078.00 p 4,443,886.00 41 Exhibit "F", Docket, p . 000242.

DECISION CTA CASE NO. 8239 Further, Mr. Bonilla stated that per his examination of petitioner's Annual Income Tax Return42, all income earned were subjected to income tax of 35%, even the dividend income earned from a domestic corporation which should not have been subjected to income tax. The Court agrees with the ICPA that the total income of P4,443,886.00, reflected per petitioner's Annual Income Tax Return for the year 2006, included the dividend income of P700.0043. This is confirmed by the Audited Statement of Income44 of petitioner for the same year. However, such dividend income of P700.00 was not subjected to 35% income tax, contrary to the ICPA's finding, because petitioner reflected a net loss of P220,761 .0045. Thus, petitioner paid 2% Minimum Corporate Income Tax (MCIT) of P12,658.5646 on its gross income from operation of P632,928.0047, which was arrived at by deducting its cost of services of P3,806,180.0048 from its rental income of P4,439,108.0049. The ICPA likewise found that part of the Trade Accounts Receivable account in the amount of P325,549.15 (Exhibit "0") were reimbursements for the electric bills charged to Affable Trading Corporation and the same were excluded as part of the light, water and power expense of petitioner. As such, said reimbursements should not be considered as trade receivable.so Further, Mr. Bonilla noted that there was an overdeclaration of income amounting to P18,142.70 after the exclusion of the alleged reimbursement for electric bill charge and considering only the rental income declared per ITR, as shown below:sl Receipts per official receipts p 4,003,373.82 Add: Accounts Receivable - end 1,061,266.93 (net of VAT)* - 5,064,640.75 ~ Total p 42 Exhibit "M" . 43 Exhibit "M", line 17C (included in Non-Operating & Other Income of P4,778.00). 44 Exhibit "N". 45 Exhibit "M", line 20B. 46 Exhbit "M", line 25. 47 Exhibit "M", line 16C. 48 Exhibit "M", line 15C. 49 Exhibit "M", line 14C. 50 Exhibit" AA" p. 3, Docket, p. 000261. 51 Exhibit" AA", pp. 4-5, Docket, pp. 000262-000263.

DECISION CTA CASE NO. 8239 Less: Accounts Receivable - beg. 643,675.45 (net of VAT) p 4,420,965.30 Total Income per investigation Less: Income declared per ITR 4,439,108.00 (rental income) p (18,142.70) Over declared Income *Computed as: p 1,514,168.11 325,549.15 Accounts Receivable - End Less: Other receivables p 1,188,618.96 112% Value-added tax p 1,061,266.93 This Court finds petitioner's assertion untenable. Petitioner's Audited Financial Statements for the year 200652 do not disclose that its Accounts Receivable included advances to clients, other receivables or reimbursements amounting to P325,549.15. Further, the general journal submitted to support said reimbursements is insufficient. Based on the foregoing, petitioner's undeclared income for taxable year 2006 mnounts to P283,574.91, computed as follows: Receipts per VAT Returns p 4,018,500.65 Add: Accounts Receivable - end (net of VAT) 1,351,935.71 Total p 5,370,436.36 Less: Accounts Receivable- beg. (net of VAT) 643,675.45 Total Income per investigation p 4,726,760. 91 Less: Income declared per ITR (net of dividend income) 4,443,186.00 Undeclared Income p 283,574.91 b. Unsupported Expenses- P147,176.00 Respondent's examiner found that the following expenses were not duly substantiated:S~ 52 Exhibit "N". 53 Exhibit "A", Annex A, Docket, p. 227.

DECISION CTA CASE NO. 8239 Expenses Original Amount Substantiated Disallowed p 43,465.0054 Taxes and Licenses p 43,465.00 p - 28,491.0055 Light, water and 131,226.0056 power 12,541.00 15,950.00 63,164 .0057 Transportation 19,373. 0058 p 285,719.00 Expense - 131,226.00 Telephone and Telegraph 63,164.00 - 19,373.00 - Insurance Expense p 138,543.00 P147,176.00 Total Petitioner asserts that the alleged unsupported expenses were properly documented and recorded in its books.s9 Anent petitioner's light, water and power expense amounting to P28,491.00, the ICPA was able to validate in the supporting documents only the amount of P23,633.33 and found that there was an allocation to Affable Trading Corporation in the amount of P9,307.91 which was deducted from the light, water and power account,6o but no clear explanation and documentation were provided for the same. Meanwhile, only P103,242.81 of the P131,226.00 petitioner's transportation expense was validated by the ICPA. After careful scrutiny of the receipts and invoices61 presented by petitioner, this Court finds that petitioner was able to substantiate its light, water, power and transportation expenses only in the respective amounts of P2,965.99 and P97,308.76. The remaining claimed light, water, power and transportation expenses shall be disallowed for failure to meet the substantiation requirements under Section 34(A)(l) (b) of the NIRC of 1997, as amended: Light, Water and Power Journal Entry Reason for disallowance Date Number Debit Exhibits Allowed Disallowed 54 Ex hibit "N", Notes to Financial Statements for the years 2006 and 2005, under Note 10. 55 Exhibit "N", Notes to Financial Statements for the years 2006 and 2005 , under Note 10. 56 Exhibit "N" , Notes to Financial Statements for the years 2006 and 2005, under Note 11. 57 Exhibit "N", Notes to Financial Statements for the years 2006 and 2005, under Note 11. 58 Exhibit "N", Notes to Financial Statements for the years 2006 and 2005, under Note 11. 59 Exhibit "F", Docket, p. 243. 60 Exhibit " AA", pp. 6-7, Docket, pp. 264-265. 61 Exhibits Q-1 to Q-29.1 .A

DECISION CTA CASE NO. 8239 Supported by petty cash vouchers/ pieces Q-1 to Q- of paper dated 600.00 1.1 .A2 1/ 10/ 2006 CD664 600.00 2005 Supported by invoice dated 2005 and not in the name and Q-2 to Q- address of 1,649.13 2.1.A 1/ 20/ 2006 CD675 1,649.13 petitioner Q-3 to Q- 752.32 3.1 MERALCO bill Q-4 to Q- not in the name 958.58 4.1 .A.3 and address of 1/26/2006 CD681 752.32 _Eetitioner MERALCO bill not in the name and address of 2/9/ 2006 CD693 58.58 petitioner Supported only by petty cash vouchers / pieces of paper or dated 900.00 2005 Statement of account not in the name and Q-5 to Q- address of 587.00 5.1 .A 2/9/2006 CD695 587.00 petitioner Q-6 to Q- 817.00 6.1 MERALCO bill Q-7 to Q- not in the name 600.00 7.1.A.2 and address of Q-8 to Q- 2/ 23/ 2006 CD705 1,500.00 8.1.A .3 817.00 _Eetitioner Q-9 to Q- Supported by 424.67 9.1.A petty cash Q-10 to Q- 447.06 10.1.A vouchers/ pieces 3/7/ 2006 CD715 Q-11 to Q- 600.00 of paper only 2,037.50 11 .1.A.3 Supported by petty cash vouchers/ pieces 3/27/2006 CD728 1,500.00 of p~er only 3/31/2006 GJ724 3/31/2006 GJ275 Statement of account partly 424.67 unreadable Statement of account partly 447.06 unreadable MERALCO bill not in the name 4/7/2006 CD739 and address of 837.50 petitioner Supported by p e tty cash vouchers/ pieces 1,200.00 ofpaper only MERALCO bill 4/27/2006 CD747 Q-12 to Q- not in the name 833.30 12.1 833.30 and address of

DECISION CTA CASE NO. 8239 petitioner 4/30/2006 GJ277 Q-13 to Q- 984.06 - 984.06 13.1.A 880.40 1,500.00 Supported by petty cash Q-14 to Q- vouchers/pieces 14.1 .A.3 5/22/2006 CD762 1,500.00 Q-15 to Q- of___t>_~er only 5/31/2006 GJ291 880.40 15.1 - MERALCO bill not in the name Q-16 to Q- and address of 1,679.83 16.1.A.3 6/5/2006 CD769 479.83 jJetitioner Supported by petty cash vouchers/ pieces 1,200.00 of paper only MERALCO bill not in the name Q-17 to Q- and address of 1,490.12 17.1.A.4 6/26/2006 CD787 290.12 petitioner Q-18 to Q- 1,141.66 18.1 Supported by Q-19 to Q- petty cash 900.00 19.1.A.2 vouchers/ pieces Q-20 to Q- 470.01 20.1 1,200.00 of__I>_~er only Q-21 to Q- Supported only 1,844.18 21.1.B by a statement of Q-22 to Q- 7/1/2006 GJ312 600.00 22.1.A.1 1,141.66 account Q-23 to Q- Supported by 1,913.13 23.2 petty cash Q-24 to Q- 600.00 24.1.A vouchers/ pieces 7/19/2006 CD805 Q-25 to Q- 900.00 of__E_a_r_er only 2,704.27 25.1.D MERALCO bill not in the name and address of 7/24/2006 CD806 470.01 petitioner 8/1/2006 GJ313 Supported only by a statement of 1,844.18 account Supported only by petty cash vouchersI pieces 8/15/2006 CD834 600.00 of paper 9/1/2006 GJ318 Supported only by statements of 1,913.13 account Supported only by petty cash vouchers/ pieces 9/30/2006 GJ327 600.00 of paper MERALCO bills not in the name 10/26/2006 CD877 and address of 1,804.27 petitioner Supported only 900.00 by ___Eelty cash

DECISION CTA CASE NO. 8239 1112412006 CD901 Q-26 to Q- 1,003.05 vouchersI pieces 2,704.27 26.1 .0 1,200.00 of paper 1112412006 CD902 571.22 Q-27 to Q- 571.22 1212112006 CD929 1,101.53 27.1 MERALCO bill Q-28 to Q- not in the name 28.1 and address of petitioner Supported only by petty cash vouchersI pieces of paper Supported only by a statement of account 1,101.53 - 1212812006 GJ338 Q-29 to Q- 650.00 Supported only 650.00 29.1.A by petty cash 32,440.02 voucherI piece of 9,307.91 23,132.11 paper Total 2,965.99 29,474.03 Less: Allocated to Affable 2,965.99 Trading Corp. 29,474.03 Transportation Expense Journal Entry Reason for Date number Debit Exhibits Allowed Disallowed Disallowance 1,363.64 5,934.05 Supported by gas receipts and petty cash R-1 toR- vouchers dated 1.1.J.1 111012006 CD664 7,297.69 R-2 toR- 2005 1131/2006 GJ244 45.00 2.1 21112006 GJ249 R-3 toR- 45.00 21912006 CD693 1,887.80 3.1 31712006 CD715 6,889.90 R-4 toR- 1,887.80 312712006 CD728 6,426.94 4.G.1 41712006 CD739 6,125.27 R-5 toR- 6,889.90 51312006 CD752 6,554.94 5.1 .G.1 512212006 CD762 6,274.96 R-6 toR- 6,426.94 61512006 CD769 6,625.55 6.1.G 612612006 CD787 6,441.98 R-7 toR- 6,125.27 7.1.H R-8 toR- 6,554.94 8 .1.F .1 R-9 toR- 6,274.96 9.1.F R-10 toR- 6,625.55 10.1.G 6,441.98 R-11 toR- 1--a.

DECISION CTA CASE NO. 8239 6,893.37 11.1.H 6,893.37 6,754.11 7/ 19/2006 CD805 6,754.11 R-12 toR- 6,411.00 8/2/2006 CD814 6,411.00 12.1.G.1 5,504.12 8/15/2006 CD834 5,504.12 R-13 toR- 8,311.13 9/1/2006 CD846 8,311.13 13.1.F 6,603.17 9/29/2006 CD860 6,603.17 R-14 toR- 10/26/2006 CD877 14.1.E 117.00 12/6/2006 CD912 117.00 R-15 toR- 7,929.88 12/28/2006 CD938 7,929.88 15.1 .F.1 12/28/2006 GJ338 R-16 toR- 118.00 118.00 16.1.F 31.00 31. 00 R-17 toR- 17.1 97,308.76 R-18 toR- 18.1.F.1 R-19 toR- 19.1 R-20 toR- 20.1 I 103,242.81 I 5,934.05 In the light of the foregoing, petitioner's unsupported expenses amounted to P59,442.25, computed as follows: Original Amount Substantiated Disallowed Light, water and power p 28,491.00 p 2,965.99 p 25,525.01 Transportation Expense 33,917.24 Total 131,226.00 97,308.76 p 159,717.00 p 100,274.75 p 59,442.25 c. Income payments not subjected to withholding tax- P176,380.00 Respondent's investigation disclosed that petitioner failed to withhold and remit the corresponding expanded withholding tax on its income payments for professional fee and repairs and maintenance in the amounts of P6,696.00 and P169,684.00, respectively, in violation of Section 2.57.2 of Revenue Regulations No. 02-98, as amended. Hence, the same were disallowed as deduction from petitioner's gross income pursuant to Section 34(K) of the NIRC. Below is the computation of the disallowance of P176,380.00:6~ 62 Exhibit " A", Annex A, Docket, p. 228.

DECISION CTA CASE NO. 8239 Nature of Income payments Per Audit Per Alphalist Not Professional Fee subjected to Contracted Repairs & p 6,696.0063 p - Withholding Maintenance Total 204,134 .00 64 34,450.00 Tax p 210,830.00 p 34,450.00 p 6,696.00 169,684.00 p 176,380.00 In its protest letter, petitioner contends that repairs and maintenance were expenses attributable to the purchase of supplies and materials for repairs and that the taxes on income payments pertaining to contracted services for repairs were religiously withheld. On the other hand, professional fees are not subject to expanded withholding tax because these pertain to income payments to its external auditor, which is a general professional partnership.65 Petitioner's argument regarding the non-withholding of tax on income payments made to their external auditor is supported by an official receipt issued by Mangay-ayam, Lim & Co. in the amount of P7,500.0066 in connection with the audit and certification of petitioner's financial statements for the year 2005.67 Moreover, the ICPA reported that said firm is, upon verification from the Security and Exchange Commission (SEC)68, a general professional partnership upon verification with the Securities and Exchange Commission (SEC). As such, Mangay-ayam, Lim & Co. is exempt from income tax and consequently from EWT pursuant to Section 26 of the NIRC of 1997 in relation to Section 2.57.5(B) of RR No. 2-98, as amended by Section 4 of RR No. 14-02, which are all quoted herein below: "SEC. 26. Tax Liability of Members of General Professional Partnerships. - A general professional partnership as su ch shall not be subject to the in come tax imposed under this Chapter . Persons en gaging in business as partners in a genera~ 63 Exhibit " N", N otes to Financial Statem ents fo r the years 2006 and 2005, under Note 11. 64 Exhibit "N" , N otes to Financial Statements for the years 2006 and 2005, under N ote 10. 65 Exhibit "F", Docket, pp. 242-243. 66 Inclusive of VAT; Am ount exclusive of VAT is P6,696.43. 67 Exhibit "S". 68 Exhibit "AA", page 9; Docket, p .267.

DECISION CTA CASE NO. 8239 professional partnership shall be liable for income tax only in their separate and individual capacities. 11For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. 11Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. (Emphasis supplied) Sec. 2.57.5 Exemption from Withholding - The withholding of creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) XXX XXX XXX (B) Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: (1) XXX XXX XXX XXX (2) XXX XXX XXX (3) XXX XXX partnerships (4) General professional (Emphasis supplied)" Anent its claimed deduction for repairs and maintenance in the amount of P204,134.00, petitioner was able to submit supporting documents showing payments amounting to P179,685.81, detailed as follows: Tax Date Ref Exh. Particulars Amount withheld Supplier Date Exh. Edper Pest 6-Dec- 5-Dec-06 COB 910 T-20 Pest Control 25,000 .00 500.00 Control 06 T-20.1 Labor - 400.00 Global City 17-Aug-06 COB 835 T-12 vehicle repair 2,800.00 Auto Sales 17-Aug- Labor- 10-Aug-06 COB 828 T-10 vehicle repair 8.00 Inc. 06 T-12.1.A Global City 10-Aug- - 56.00 Auto Sales 06 T-10 .1.A

DECISION CTA CASE NO. 8239 Labor- 6,250 .00 Inc. 30-Nov- 12-Dec-06 CDB 920 T-21 vehicle repair 34,450.00 06 T-21.1 .A Citimotors Already subjected to EWT per Alphalist 125.00 Inc 689.00 10-Jan-06 CDB 664 T-1 Faucet 727.27 J. CASIM 22-Dec- T-1 .1.A.1 Consh�uctio 05 T-1.1 .B.1.A 10-Jan-06 CDB 664 T-1 Lavatory hose 90.91 n Supplies T-1 .1.B.1.A Golden 2-Jan-05 10-Jan-06 CDB 664 T-1 Teflon Tape 9.09 Hill Not within the taxable period of assessment 827.27 Lumber & 2-Jan-05 Hardware Golden Hill Lumber & Hardware 10-Jan-06 CDB 664 T-1 Angle Valve 75.00 Nissan 2-Jan-06 T-1.1 .B.1.D 9-Jun-06 CDB 775 T-8 Bulb 210.56 Constructio 26-May- n Supply Citimotors 06 T-8.3 Inc 29-Sep-06 CDB 860 T-15 Change Tire 50.00 Magallanes 9-Sep- 957.95 Manageme 06 T-15.1.A.1 28-Dec-06 GJ 338 Cleaning 519.90 nt Corp- T-23 Materials Maya 12-Dec- SM 06 T-23.1.B Cleaning Supermark 2-Aug-06 CDB 814 T-9 Materials et 20-Jul- Robinsons 06 T-9.1.A.1 Supennark 29-Sep-06 CDB 860 T-15 Cool Guard 267.86 et 13-Sep- T-15 .1.C.1 Electrical 395.00 Magallanes 06 T-18.1.B 288.00 Manageme T-11.1.C.3 26-0ct-06 CDB 877 T-18 supplies nt Corp- 26-0ct- Maya 06 15-Aug-06 CDB 834 T-11 Materials Sold to "C" 24-Jul- 06 Pio Cantiga 30-Sep-06 GJ 326 T-16 Materials 480.00 James 11-Jul- 21-Nov-06 CDB 895 T-19 Materials 3,434.54 Paolo 06 T-16.1 .A 12-Dec-06 CDB 920 T-21 Materials Bergal 9-Jun-06 CDB 775 T-8 Materials 431 .09 Enterprises 18-Nov- 15-Aug-06 CDB834 T-11 Mattings 4,015.63 Citimotors 06 T-19.1.A 30-Sep-06 GJ 326 T-16 Mattings Inc 100.00 Citimotors 30-Nov- 50 .00 Inc 06 T-21 .1.A Citimotors Inc 17-May- 06 T-8.6 Bautista 11-Aug- 06 T-11 .1.A.1 14-Jul- 06 T-16.1 .C j-

DECISION CTA CASE NO. 8239 Mighty 66.52 Handy 20-Jul- T-9.1 .A.2 Bond/Elasto 209.82 Man Do It 06 T-9.1.B 2-Aug-06 COB 814 T-9 Seal Center T-11.1.C.4 48.00 26-Jul- 2-Aug-06 COB 814 T-9 Motor Oil New Royal 06 Plumbing 15-Aug-06 COB 834 T-11 Nails & 14-Jul- Hardware 06 Handy Nylon Blade 89.28 Man Do It 25-May- 30-May-06 COB 764 T-7 Yellow String Center 06 T-7.1 Global City 7-Mar-06 COB 715 T-4 Paints / Brush 143.30 Auto Sales 8-Feb-06 T-4.1.A.2 Inc. 10-Aug-06 COB 828 T-10 Parts 8,865.99 10-Aug- T-10.1.A 17-Aug-06 COB 836 T-13 Parts 49,107.14 Rapide 06 T-13.1/T- Magallanes 13.1.A Manageme 26-Jul- nt Corp- 06 Maya 1-Sep-06 COB 846 T-14 Parts 267.86 Citimotors 28-Aug- T- 21-Nov-06 COB 895 T-19 Parts 674.87 Inc 06 14.1.A.1/T- 12-Dec-06 COB 920 T-21 Parts 11,197.79 Citimotors 14.1.A.1.A Inc 20-Nov- Global City 06 T-19.1.B Auto Sales Inc. 30-Nov- T-21.1.B Citim otors 06 Inc 28-Feb-06 GJ 250 T-3 Parts 9,141.56 Global City 23-Feb- T-3.1 8,395.19 Auto Sales 06 T-8.7 9-Jun-06 COB 775 T-8 Parts 3,068.50 Inc. 2,367.76 Global City 17-May- Auto Sales 06 Inc. Parts & Taurus 17-Aug- 17-Aug-06 COB 835 T-12 Supplies A u to 06 T-12.1.A Parts & s~ 16-Dec- T- 27-Dec-06 COB 932 T-22 Supplies 06 22.1.A.1.A Citimotors 9-Feb-06 COB 693 T-2 Radiator Hose 169.64 Inc 6-Feb-06 T-2.1 .B.1 9-Jun-06 COB 775 T-8 Rod, Antenna 2,235.60 R&E 18-May- T-8.5 9-Feb-06 COB 693 T-2 Tire Black Battery T-2.1.A.1 145.45 Philippine 06 Allied 30-Jan- E n te r p r is e s 06 31-Mar-06 GJ 257 T-5 Tires 10,928.03 27-Feb- Purchases of materials, supplies and vehicle 118,349.60 06 T-5.1.A.1 parts Emission R3 Motor 11-Aug- 15-Aug-06 COB 834 T-11 Testing Vehicle 300.00 Emission 06 T-11.1.B.1 b. Testin g & Car Care Cen ter

DECISION CTA CASE NO. 8239 Company Labor - 630.00 Citimotors 18-Nov- 21-Nov-06 CDB 895 T-19 vehicle repair Inc 06 T-19.1.A 1,320.00 Global City Labor - Auto Sales 16-Dec- T- 27-Dec-06 CDB 932 T-22 vehicle repair 1,600.00 Inc. 06 22.1 .A.l.A 803.57 Global City 28-Feb-06 GJ 250 T-3 Labor - Auto Sales 23-Feb- T-3.1 9-Jun-06 CDB 775 T-8 vehicle repair 17,094.29 Inc. 06 T-8.2 9-Jun-06 CDB 775 T-8 Labor - 120.00 Citimotors T-8.6 9-Jun-06 CDB 775 T-8 vehicle repair Inc 27-May- T-8.1 9-Jun-06 CDB 775 T-8 Labor - 1,140.00 Citimotors 06 T-8.4 15-Aug-06 CDB 834 T-11 vehicle repair 400.00 Inc T-11.1.C.1 30-Sep-06 GJ 326 T-16 Labor - 300.00 Citimotors 17-May- T-16.1.B 30-Sep-06 GJ 327 T-17 vehicle repair 400.00 Inc 06 T-17.1 .A 26-0ct-06 CDB 877 T-18 Labor - 500.00 Citimotors T-18 .1.A 28-Dec-06 GJ338 T-23 vehicle repair 250.00 Inc 26-May- 7-Mar-06 CDB 715 T-4 Maintenance 200.00 Joven 06 fee Cordero 10-Jan-06 CDB 664 T-1 Maintenance 150.00 Joven 18-May- fee Cordero 06 Maintenance Joven fee Cordero 25-Jul- Maintenance Joven 06 fee Cordero Maintenance 14-Jul- fee 06 Maintenance fee 14-Jul- Maintenance 06 fee/ repair of lavatory 24-Sep- 06 Pio Cantiga 11-?-06 T-23.1.A Pio Cantiga 9-Feb-06 T-4.1.A.1 Chirs E. 2-Jan-06 T-1.1 .B Magallanes 1-Sep-06 CDB 846 T-14 Service 116.07 Manageme T- nt Corp- 28-Aug- 14.1.A.1/T- Maya Boy a 06 14.1.A.1.A Motorcycle 15-Aug-06 CDB 834 T-11 Vulcanization 90 .00 parts 7-Aug- Boy a 06 T-11 .1.A.1 Motorcycle 29-Sep-06 CDB 860 T-15 Vulcanization 180.00 parts 11-Sep- Boy a 06 T-15.1.B.1 Motorcycle 22-May-06 CDB 762 T-6 Vulcanization 170.00 parts 10-May- Petron 06 T-6.1.A.1 service 22-May-06 CDB 762 T-6 Vulcanization 95.00 Station 3-May- T-6.1.B.1 06 T-11.1 .C.2 15-Aug-06 CDB 834 T-11 Welding 200.00 Bautista Payment for labor- vehicle repair, maintenance 29-Jul- fees, welding, vulcanization, emission testing 26,058.94 06 179,685.81 Total :::;>"---

DECISION CTA CASE NO. 8239 The above repairs and maintenance expenses of P179,685.81 included the amount of P827.27 pertaining to the year 2005, which is outside the period of assessment, and the amount of P34,450.00 found by the respondent to have been subjected to EWT per petitioner's 2006 alphalist. Thus, out of the repairs and maintenance expenses of P169,684.00, subject of the assess1nent, petitioner was able to provide supporting documents in the amount of P144,408.54 (P179,685.81less P34,450.00 less P827.27). A scrutiny of the documents presented revealed that the amount of P144,408.54 represents payments for vehicle repair, lavatory repair, maintenance fees, welding, vulcanization and emission testing as well as purchases of the related materials, supplies and vehicle parts which are not subject to expanded withholding tax under RR No. 2-98, as amended by RR No. 17-03. However, since petitioner did not provide supporting documents for the repairs and maintenance expense of P25,275.46 (P169,684.00 less P144,408.54), the actual nature thereof cannot be ascertained. Consequently, the income payments in the amount of P25,275.46 shall be considered as subject to 2% expanded withholding tax pursuant to Section 2.57.2(E) of RR No. 2-98, as amended by Section 3 of RR No. 17-03 in line with the rule that tax assessments by tax examiners are presumed correct and made in good faith, with the taxpayer having the burden of proving otherwise. Failure to present proof of error in the assessment will justify the judicial affirmance of said assessmenf:69. Therefore, the amount of P25,275.46 shall be disallowed from petitioner's claimed deduction for repairs and maintenance expenses pursuant to Section 34(K) of the NIRC of 1997, as amended, which states that: "(K) Additional Requirements for Deductibility of Certain Payments.-Any amount paid or payable which is otherwise deductible fron1., or taken into account in computing gross income or for which depreciation or amortization may be allowed under this Section, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue in ~ 69 Marcos II vs . Co ur t of A ppvals, l't d t., C R N o. '120880, Junc 5, F >97.

DECISION CTA CASE NO. 8239 accordance with this Section, sections 58 and 81 of this Code. d. Net Operating Loss Carry-Over (NOLCO)-P220,761.00 Petitioner contends that it properly reported its revenues and expenses which resulted to a net loss and that it is allowed to carry over the same to the succeeding taxable year pursuant to Section 34(D)(3) of the NIRC_?O On the other hand, respondent asseverates in her Final Decision on Disputed Assessment (FDDA)71 that the NOLCO in the amount of P220,761.00 was added back to taxable income considering that the tax benefit thereof has already been forwarded to succeeding period as provided for under Section 34 (D) (3) of NIRC. Respondent further states that to allow petitioner to carry over the NOLCO and at the same time be benefited therefrom in the year the loss was incurred by offsetting from said loss the findings per investigation, would result to double benefit which was never the intent of the provision. Based on petitioner's A1u1.ual Income Tax Returns for taxable years 2007, 2008 and 2009,72 the alleged Net Operating Loss was not carried over as deduction from gross income of the succeeding years. Further, said NOLCO is beyond the scope of the present assessment; it can only be the subject of assessment on the taxable year when it is claimed as a deduction. As held in the case of Philippine Aerospace Development Corporation vs. Commissioner of Internal Revenue:73 "xxx Granting, for the sake of argument, that petitioner actually deducted its 2003 net loss as NOLCO in the succeeding year 2004 and the said deduction was not proper as petitioner did not incur net loss, the same can only be the subject of assessment, when it was claimed as deduction in the year 2004 and not in the year 2003, for such is beyond the scope of the present assessment. Hence, adding back the net loss amount of P4,555,067.00 to petitioner's taxable income for the year 2003 is erroneous." (Emphasis supplied)~ 70 Docket, p. 243, Exhibit "F" . 71 Docket, p. 228, Exhibit "A", Annex A. n Exhibits "U", "V", and "W" . 73 CTA Case No. 7830, December 11,2012.

DECISION CTA CASE NO. 8239 Thus, adding back net loss In the amount of P220,761.00 Is erroneous. e. Minimum Corporate Income Tax (MCIT) - Pl2,658.56 Respondent avers that the MCIT payment in the amount of P12,658.56 was not credited against the deficiency income tax since the same shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years pursuant to Section 27(E)(2) of the NIRC, as amended .74 Considering that the MCIT will be credited against the normal income tax for the three (3) immediately succeeding taxable years, its benefit will redound on the succeeding years and as such, petitioner may only be assessed in the year it would be credited. Further, petitioner's Annual Income Tax Returns showed that it incurred losses in the years 2007, 2008 and 2009;75 thus, it did not enjoy the privilege of crediting the MCIT payment against its normal income tax. Hence, respondent erred in not crediting petitioner's MCIT payment in computing petitioner's income tax liability for the year 2006. f. Excess Tax Carried Over to Succeeding Year- P837,589.42 Respondent contends that the excess tax credit carried over to the succeeding year in the amount of P837,589.42 should be disallowed in order to recapture the benefit derived in crediting the same. Respondent further states that "to allow you to carry-over the excess tax credit and the MCIT and credit it in the succeeding years and of the same time be credited in the year the MCIT was paid by offsetting the same from deficiency income tax would result to double benefit."76# - 74 Docket, p . 228, Exhibit " A", Annex A. 75 Exhibits "U", "V", and "W". 76 Exhibit" A" , Annex A, Docket, p. 228.

DECISION CTA CASE NO. 8239 Page 32 of45 As previously discussed, the benefit of excess tax carry-over will redound to the succeeding year. It is inappropriate to disallow the same for such is beyond the scope of the present assessment. In fine, notwithstanding that petitioner had undeclared income of P283,574.91, unsupported expenses of P59,442.25 and income payments of P25,275.46 not subjected to EWT, the income tax due thereon shall be offset against petitioner's total tax credits in the amount of P850,247.98. Thus, petitioner would not be liable for any deficiency income tax for taxable year 2006, as computed below: Taxable Income (Loss) per ITR p (220,761.00) Add: Discrepancies per Investigation p 283,574.91 Undeclared income 59,442.25 Unsupported expenses Income payments not subjected to 25,275.46 368,292.62 withholding tax p 147,531.62 Adjusted Taxable Income p 51,636.07 Tax Due @ 35% Less: Tax credits and payments p 649,245.32 850,247.98 201,002.66 p 798,611.91 Excess tax credit from prior year(s) Creditable tax withheld Excess Tax Credits II. Deficiency Value-Added Tax (VAT) Petitioner was assessed of deficiency VAT for taxable year 2006 in the amount of P647,739.47, computed as follows:77 Receipts subjected to VAT per return p 4,018,500.65 Output tax due thereon @10% and 12% p 467,694.16 Less: Tax Credits p 1,688,849.16 112,701.81 Excess input tax from previous 325,847.50 quarter of prior year 199,877.28 Current input tax Payment p 2,214,573.94 Total 325,847.50 Less: Unsupported input tax 177,183.32 Unsupported payments 1,598,841.31 Excess tax credit carried 77 Exhibit" A", Docket, p. 226.

DECISION CTA CASE NO. 8239 over to succeeding period p 354,992.35 Basic tax still due 292,747.12 Add: Interest (01-26-07 to 03-11-11) Total amount due and collectible p 647,739.47 The deficiency VAT assessment resulted from the following items: a. Output tax due p 467,694.16 b. Unsupported input tax 325,847.50 c. Unsupported payments 177,183.32 Excess input tax carried over to 1,598,841.31 d. succeeding quarter/ year The propriety of each item shall be discussed hereafter. a. Output tax due- P467,694.16 Respondent found that there is a discrepancy between the output tax declared per VAT returns and the result of their investigation in the amount of Pl,869.49, to wit:78 Output tax due @receipts of Per Investigation Per VAT Returns P4,018,500.65 p 131,536.17 p 131,536.17 1st Quarter (P1,217,184.09 @ 10% & 12 %) 103,981.98 103,981.98 2nd Quarter (P866,516.47 @12%) 3rd Quarter (P950,464.36 @12%) 114,055.72 112,186.25 4th Quarter (!>984,335.73 @12%) 118,120.29 118,120.27 Total p 467,694.16 p 465,824.67 Petitioner contends that the minimal deficiency is mainly due to the changes in the VAT rate used as a result of the timing difference of the collection of the rental income_79 The ICPA reported that petitioner's cash receipts books for the month of August 2006 included collections made for rental service~ 78 Exhibit" A", Annex A, Docket, p. 228. 79 Memorandum for the Petitioner, Docket, p. 441.

DECISION CTA CASE NO. 8239 rendered for the month of January 2006 when the prevailing VAT rate was 10% as shown below.so OR Date Payor Rent Output per Output per Discrepancy Exh. No. Income VAT returns BIR Audit p 1,482.25 (101Yt,) (12%) P-51 277 Biolife P74,112.50 p 7,411.25 p 8,893.50 8/30/06 Management Corp. P-53 279 La Place de Cheri 10,285.00 1,028.50 1,234.20 205 .70 8/30/06 Salon P-54 280 Afable Trading 9,075.00 907.50 1,089.00 181.50 8/30/06 Corp. P93,472.50 p p 1,869.45 TOTAL 9,347.25 p 11,216.70 The Court finds respondent's assessment to be well-grounded. Section 108(A) of the NIRC of 1997, as amended by Republic Act (RA) No. 933781, authorized the President of the Philippines upon the recommendation of the Secretary of Finance to raise the VAT imposed on the sale of services and use or lease of properties from 10% to 12% after meeting certain conditions, thus: "SEC. 108. Value-added Tnx on Sale of Semices and Use or Lease of Properties.- (A) Rate and Base of Tax.- There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: 11 (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or 11 (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (11/2%).#- 80 Exhibit" AA", Docket, p. 271. 81 RA 9337 was implemented on November 1, 2005.

DECISION CTA CASE NO. 8239 Through Revenue Memorandum Circular (RMC) No. 07-06 dated January 31, 2006, the BIR published the full text of the Memorandum from Executive Secretary Eduardo Ermita dated January 31, 2006 announcing that the President has approved the recommendation of the Secretary of Finance to increase the VAT rate from 10% to 12% effective February 1, 2006 pursuant to Section 4 of RA No. 9337. The 12% VAT on the sale of services and use or lease of properties is computed based on gross receipts, which is defined under Section 108 (a) of the 1997 NIRC, as amended, as follows: "The term 'gross receipts' means the total amount of money or its equivalent representing the contract price, compensation, service fee, rental or royalty, including the amount charged for materials supplied with the services and deposits and advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person, excluding value- added tax." (Emphasis supplied) Thus, although collections in the month of August 2006 included rental income for the month of January 2006, the same should be subjected to 12% VAT, which was the prevailing rate for the month of August 2006 when the rental payments were received. Hence, this Court finds respondent's findings meritorious. b. Unsupported input tax- P325,847.50 Respondent disallowed the input tax in the amount of P325,847.50 for failure of petitioner to substantiate the same. However, petitioner insists that subject input taxes were duly supported by invoices and receipts. The ICPA examined petitioner's cash disbursements book and the related invoices and receipts supporting the input taxes o~

DECISION CTA CASE NO. 8239 P256,951.25.82 A review of the said documents showed the following findings: 83 Findings Input Tax 1. Input taxes on purchase of goods and services p 4,312.00 properly supported by VAT invoices and official 11,864.92 receipts (ORs). 22,113.96 2. Input taxes on purchase of goods and services supported by cash register machine tapes. 138,577.17 3. Input taxes on purchase of goods and services 65,074.51 supported by VAT invoices and ORs but input 11,822.16 taxes are not separately shown. 3,000.00 4. Input taxes on purchase of goods and services 20.36 amounting to more than Pl,OOO supported by VAT invoices and ORs but address and TIN of p 256,785.08 purchaser are not indicated in the VAT invoices or ORs. 5. Input taxes on purchase of goods not supported by VAT invoices and purchase of services not supported by VAT ORs. 6. Input taxes on purchase of goods and services supported by VAT invoices and ORs dated outside the taxable year 2006 7. Input tax on purchase of services supported by a non-VAT OR. 8. Input tax on purchase of goods supported by a VAT invoice issued not in the name of petitioner. TOTAL It should be noted that petitioner did not submit supporting documents for input taxes amounting to P69,062.42 (P325,847.50 less P256,785.08). Thus, only input taxes in the amount of P4,312.00 should be allowed for complying with the invoicing requirements under Section 113 of the NIRC of 1997, as amended, which provides: "Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. - ~ 82 Exhibit " AA", Docket, pp. 272-273 and Exhibits "Y-1" to "Y-77.1" . 83 See details in Annex A of this report.

DECISION CTA CASE NO. 8239 (A )Invoicing Requirements. - A VAT-Registered person shall issu e: (1) A VAT invoice for every sale, barter or exchange of goods or properties; and (2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or exchange of services. (B) Information Con tnined in the VAT Invoice or VAT Official Receipt. - The following inform ation shall be indicated in the VAT invoice or VAT official receipt: (1) A statem ent that the seller is a VAT-registered person, fo llowed by his taxpayer's identification n umber (TIN); (2) The total am ount w hich the purchaser pays or is obligated to p ay to the seller w ith the indication that such am oun t includes the value-added tax; Provided, that: a) The amount of the tax shall be shown as a separate item in the invoice or receipt; b) XXX XXX XXX C) XXX XXX XXX XXX d) XXX XXX (3) The date of transaction, quantity, unit cost and descrip tion of the goods or properties or nature of the service; and (4) In the case of sales in the amount of one thousand pesos (Pl,OOO) or more where the sale or transfer is made to a VAT-registered person, the name, business style, if any, address and Taxpayer Identification Number (TIN) of the purchaser, customer or client." (Emphasis supplied) Anent the cash register machine tapes submitted, Section 4.110- 8 of Revenue Regulations No. 16-2005 provid es: "A cash register machine tape issu ed to a registered buyer shall constitute valid proof of su bstantiation of tax credit only if it shows th~

DECISION CTA CASE NO. 8239 information required under Sees. 113 and 237 of the Tax Code." In the present case, all of the cash register machine tapes failed to comply with the substantiation requirements under Sees. 113 and 237 of the Tax Code and, thus, do not support a valid claim for input tax credit. On the basis of the foregoing, petitioner's unsupported input tax Is In the reduced amount of P321,535.50 (P325,847.50 less P4,312.00). c. Unsupported payments- P177,183.32 Respondent alleges that petitioner claimed advance payments for the year 2006 in the amount of P199,877.28 (quarterly amount of P49,969.32) but the latter's VAT returns and the respondent's Integrated Tax System (ITS) showed that petitioner only paid P22,693.96. Thus, the difference of P177,183.32 (P199,877.28 less P22,693.96) representing unsupported claimed payment was disallowed by respondent.84 Petitioner avers that they are entitled to carry forward the said payments as part of excess input tax credits because they were erroneous but honestly made. The same resulted from errors in the presentation of monthly VAT Returns when there were excess input taxes carried over from previous period resulting to total VAT payables instead of overpayment,ss to wit: Exhibit BIR Period Covered Amount Paid FORM Z-1 2550M November 2005 p 8,189.49 Z-2 2550Q 4th Quarter 2005 Z-3 2550M 19,085.87 Z-4 2550M January 2006 TOTAL February 2006 14,317.16 8,376.80 p 49,969.32 84 Exhibit " A", Annex A, Docket, p . 229. 85 Exhibit " F", Docket, p. 244.

DECISION CTA CASE NO. 8239 When the quarterly VAT return for the first quarter of 2006 was amended, said payments in the total amount of P49,969.32 were erroneously presented as advance payments (Item 26C of BIR Form No. 2550Q).86 A perusal of the documents supporting such payments shows no reason to claim the same as tax credit. In fact, petitioner's payments made in November and December 2005 and January and February 2006 were in order. Section 110(B) of the NIRC of 1997, as amended by Republic Act No. 9337 and implemented by Section 4.110-7(b) of Revenue Regulations No. 16-2005, provides: "Sec. 110. Tax Credits. (A) XXX XXX XXX (B) Excess Output or Input Tax. -If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, That the input tax inclusive of input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT: Provided, however, that any input tax ath�ibutable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112." (Emphasis supplied) From the foregoing provision, every VAT taxpayer will end up paying at least 30% of the output tax even if it accumulated a substantial amount of input tax. In the instant case, petitioner's total payments of P49,969.32 were actually 30% of its reported output tax due for the subject period, to wit: Nov-05 4th Qtr Jan-06 Feb-06 (Exh. Z-1) 2005 P27,298 .27 (Exh. Z-3) (Exh. Z-4) Total (Exh. Z-2) Output tax due p 90,917.88 p 47,723.88 P27,922.67 86 Exhibit "X-3" .

DECISION CTA CASE NO. 8239 70%-30% cap 30% 30 % 30% 30% VAT Payable f> 8,189.48 Less: Monthly p 27,275.36 p 14,317.16 p 8,376.80 - VAT p 8,189.48 8,189.48 - - payments P19,085.88 P14,317.16 p 8,376.80 P49,969.33 TOTAL Thus, petitioner erred when it presented the payments in the aggregate amount of P49,969.32 as advance payments in its Quarterly VAT Returns for the four quarters of the taxable year 2006 because there were no advance payments made. For the first quarter of 2006, petitioner should have reported only the amount of P22,693.96 (the sum of its VAT payments for the months of January and February 2006)87 as "Monthly VAT Payments-previous two months" in Item 26A of BIR Form No. 2550Q. It should be noted that the effectivity of the 70% cap as previously cited is from July 1, 2005 to December 13, 2006 when the NIRC of 1997 was amended by Republic Act No. 9361, the pertinent portion of which reads: "Sec. 110. Tax Credits. (A) XXX XXX XXX (B) Excess Output or Input Tnx.- If at the end of any taxable quarter the output tax exceeds the input tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters: Provided, however, that any input tax attributable to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other internal revenue taxes, subject to the provisions of Section 112." (Emphasis supplied) The taxable year covered by the subject assessment is 2006; hence, if petitioner's input tax exceeded its output tax, petitioner was liable to pay VAT equivalent to 30% of its output tax. For the period March to November 2006, petitioner's input tax exceeded its outpu~ 87 Pl4,317.16 plus P8,376.80.

DECISION CTA CASE NO. 8239 tax but did not pay any VAT as evidenced by its monthly and quarterly VAT returns.ss It was inappropriate for the petitioner to claim payments of P49,969.32 as tax credit when in fact it was supposed to pay at least 30% of the output tax as required by law. d. Excess input tax carried over to succeeding quarter/year- P1,598,841.31 Respondent deducted the excess input tax carried over to succeeding quarter/year from the total tax credit in order to recapture the benefit derived from such carry-over. As discussed previously, the benefit of the excess input tax carried over to succeeding quarter/ year redounds to the succeeding quarter/year; hence, it is inappropriate to deduct the same for it is beyond the scope of the assessment at hand. In fine, pursuant to Section 110(B) of the NIRC of 1997, petitioner can only credit input taxes (including input taxes carried over from the previous quarter) up to 70% of its output taxes if total input taxes exceed the output taxes. For the period January to November 2006, petitioner had output taxes and input taxes in the total amounts of P441,341.67 and P1,693,161.16, respectively, as shown below: Period Covered Exhibit in 2006 Output taxes Input taxes89 p 1,688,849.16 Carried over from previous quarter or prior yerzr - X-3 1st Qtr f> 131,536.17 31.02 4,200.00 X-6 2nd Qtr 103,981.98 - X-9 3rd Qtr 114,055.70 90 80.98 p 1,693,161.16 X-10 October 46,754.29 X-11 November 45,013.53 TOTAL p 441,341.67 88 Exhibits X-3, X-6, X-9, X-10 and X-11 . 89 Includes only the properly substantiated input taxes from current transactions in the total amount of N,312.00. 90 Adjusted to include difference in VAT rate applied on rental incom e for the month of January 2006 but collected in August 2006.

DECISION CTA CASE NO. 8239 On the basis of the foregoing, petitioner is liable for deficiency VAT for taxable year 2006 in the amount of P109,708.54, computed as follows: Exhibit Period 70%- VAT Less: Tax still Covered Output tax 30% Cap Payable Monthly X-3 Payments , payable X-6 (2006) , 39,460.85 X-9 , 131,536.17 30 % , 22,693.96 16,766.89 X-10 1st Qtr 103,981.98 30 % 31,194.59 - 31,194 .59 X-11 2nd Qtr 114,055.70 30 % 34,216.71 - 34,216.71 3rd Qtr 46,754.29 30 % 14,026.29 - 14,026.29 October 45,013.53 30 % 13,504.06 - 13,504.06 November TOTAL P441,341.67 P132,402.50 P22,693.96 P109,708.54 For the month of December 2006 when the 70% cap was removed, if the input tax exceeds the output tax, the excess shall be carried over to the succeeding quarter or quarters and petitioner need not pay 30% of its output tax. III. Deficiency Expanded Withholding Tax (EWT) Based on the finding that petitioner failed to withhold and remit the EWT on income payments made for professional fee and repairs and maintenance in the amounts of P6,696.00 and P169,684.00, respectively, in violation of Section 2.57.2 of Revenue Regulations 02- 98, as amended, as discussed under the deficiency income tax assessment (see discussion in item I.e above), respondent assessed petitioner of deficiency EWT in the amount of P4,063.28, computed as follows: Nature of Not subjected to Income Per Tax , , payments Withholding Rate ,Tax Due Per Audit Alphalist 10 % 669.60 , Tax Professional Fee 6,696.00 - 6,696.00 2% 3,393.68 p 4,063.28 Contracted 169,684.00 p 176,380.00 Repairs & Maintenance 204,134.00 34,450.00 Total P210,830.00 p 34,450.00

DECISION CTA CASE NO. 8239 As stated earlier, petitioner failed to prove that the taxes related to the income payments for repairs and maintenance in the amount of P25,275.46 were withheld and remitted. Thus, pursuant to Section 2.57.2(E) of RR No. 2-98, as amended, petitioner is liable to pay basic deficiency EWT in the amount of P505.51, computed as follows: Income payments not subjected to p 25,275.46 EWT Multiply by EWT rate 0.02 Basic Deficiency EWT p 505.51 In view of the foregoing, this Court partially grants the instant Petition for Review. The assessment issued by respondent against petitioner covering deficiency income tax for taxable year 2006 in the amount of P377,980.91 is hereby cancelled and/ or withdrawn. However, the assessments on deficiency VAT and EWT for taxable year 2006 is hereby upheld but in the adjusted aggregate amount of P137,767.57, inclusive of the 25% surcharge imposed under Section 248(3) of the NIRC of 1997, computed as follows: Basic deficiency tax VAT EWT Total Add: 25% Surcharge p 109,708.54 p 505.51 p 110,214.05 TOTAL 27,427.14 126.38 27,553.52 P137,135.68 p 631.89 P137,767.57 In addition, petitioner is liable to pay: (a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT and EWT computed from the dates indicated below until full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended: Tax Type Deficiency Interest computed from Value-added tax January 25, 2007 Expanded withholding tax January 15, 2007

DECISION CTA CASE NO. 8239 (b) Delinquency interest at the rate of 20% per annum on the total amount of P137,767.57 and on the deficiency interest w hich has accrued as stated above in (a) computed from March 10, 2011 until full payment thereof, pursu ant to Section 249 (C) of the NIRC of 1997, as amended. WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ordered to CANCEL AND SET ASIDE Assessment Notice No. IT-TVN147716-06-411-0290 for the alleged deficiency income tax liability of petitioner. Finally, petitioner is hereby ordered to settle the deficiency VAT and EWT liabilities, including surcharges and interests. SO ORDERED. CAESA~SANOVA Associate Justice WE CONCUR: ~~~oc . Qd-~~~ . JffANITO C. CASTANEDA, JR. Associate Justice ~r~ /. /Y;�_4~ AMELIA R. COTANGCO-MANALASTAS Associate Justice

DECISION CTA CASE NO. 8239 ATTESTATION I attest that the conclusions in the above Decision were reached 1n consultation before the case was assigned to the writer of the opinion of the Court's Division. ~!?> c_ . GY-~ I Q JUANITO c. CASTANEIM~ jR. Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. Presiding Justice

CTA Case No. 8239 Al'41'4 t.J\. A AR Realty Holdings Company, Inc. vs. CIR INPUT TAXES FOR THE YEAR 2006 Inv.fOR Exhibit ORjlnv. No. Date Supplier Amt. Input Tax 1. Input taxes on purchase ofgoods and seroices properly supported by VAT invoices and ORs Y-36.2 24578 5/25/2006 New Royal Plumbing & Hardware 100.00 10.72 189.48 20.30 Y-38.1 .C 502694 5/26/2006 Citimotors Makati 39,200.00 4,200.00 755.85 80.98 Y-51.1.A 11631 8/4/2006 RCC Marketing Corporation 4,312.00 1,500.00 Y-68.1.B 510083 11/20/2006 Citimotors Makati 1,500.00 136.37 1,500.00 136.37 Sub-total 1,500.00 136.37 136.37 2. Input taxes on purchase ofgoods and seroices supported by cash register machine tapes 1,500.00 1,500.00 136.36 Y-1.1.A.1 12/13/2005 Magallanes Management Corp. 1,500.00 136.36 1,500.00 136.37 Y-1 .1.B.1 00526952 12/14/2005 Magallanes Management Corp. 1,400.00 136.36 1,500.00 127.27 Y-1.1.C.1 832870 12/19/2005 Magallanes Management Corp. 1,200.00 160.72 1,500.00 128.59 Y-1.1.D.1 12/23/2005 Magallanes Management Corp. 160.72 160.50 17.20 E&R Legaspi Industries & Development 1,500.00 160.7~ Y-1.1.E.1 1/6/2006 Corp. Y-11.1 .A.1 1857839 1/9/2006 Diwal Balintawak Gas Station Y-11.1.B.1 177779 1/18/2006 *not legible* Y-11.1 .D.1 00553224 1/23/2006 Magallanes Management Corp. Y-11.1.E.1 00624486 1/30/2006 Magallanes Management Corp. Y-11.1 .F.1 00630534 2/3/2006 Magallanes Management Corp. Y-20.1.A.1 00563337 2/7/2006 Magallanes Management Corp. Y-20.1.B.1 007476 2/15/2006 Magallanes Management Corp. Y-20.1.C.1 008403000205 2/8/2006 Handyman Do It Center Y-20.1.E.1 2/21/2006 Magallanes Management Corp.

CTA Case No. 8239 AI'! 1'11 1:.1\ A AR Realty Holdings Company, Inc. vs. CIR Exhibit ORflnv. No. Date Supplier lnv.fOR Input Tax Amt. Y-20.1.F.1 1331714 3/3/2006 Magallanes Management Corp. 160.72 Y-20.1.G .1 00583139 3/7/2006 Magallanes Management Corp. 1,500.00 139.29 Y-24.1.A.1 1337078 3/7/2006 Magallanes Management Corp. 1,300.00 160.72 Y-24.1 .B.1 00680944 3/13/2006 Magallanes Management Corp. 1,500.00 214.29 Y-24.1 .C.1 00587782 3/14/2006 Magallanes Management Corp. 2,000.00 150.00 Y-24.1.D.1 3/3/2006 Ace Hardware 1,400.00 Y-24.1.D.2 53786 SM Supermarket 15.48 Y-24.1.E.1 8876 3/21/2006 Magallanes Management Corp. 144.50 37.05 Y-26.1.A.1 00592811 3/23/2006 E&R Legaspi Industries & Development C 345.75 160.72 Y-26.1.C.1 541130 3/31/2006 Diwal Balintawak Gas Station 1,500.00 107.16 Y-26 .1.D.1 1049626 3/31/2006 Magallanes Management Corp. 1,000.00 160.72 Y-26.1 .E.1 00600318 4/4/2006 Magallanes Management Corp. 1,500.00 160.72 Y-26 .1.F.1 00602907 4/4/2006 Magallanes Management Corp. 1,500.00 160.72 Y-31.1.A.1 01375757 4/27/2006 Diwal Balintawak Gas Station 1,500.00 160.72 Y-31 .1.B.1 1063616 4/9/2006 Diwal Balintawak Gas Station 1,500.00 160.72 Y-31.1.C.1 1517910 4/17/2006 Magallanes Management Corp. 1,500.00 107.15 Y-31.1.D.1 00610309 4/21/2006 Cash & Carry Wholesale Commodity 1,000.00 160.71 Y-31 .1.E.1 3/27/2006 Magallanes Management Corp. 1,500.00 Y-34.1 .A.1 00701267 5/2/2006 Magallanes Management Corp. 9.53 Y-34 .1.B .1 00745637 5/3/2006 Magallanes Management Corp. 88.95 160.72 Y-34.1.C.1 00622355 4/26/2006 SM Supermarket 1,500.00 171.45 Y-34.1 .D.1 5/10/2006 Magallanes Management Corp. 1,600.00 160.72 Y-34.1.E.1 9408 5/17/2006 Magallanes Management Corp. 1,500.00 Y-37.1.A.1 00628197 5/22/2006 Magallanes Management Corp. 50.52 Y-37.1.B.1 00632948 5/22/2006 Magallanes Management Corp. 471.50 160.71 Y-37.1.C.1 01443342 5/28/2006 Motorists1 House, Inc. 1,500.00 128.57 00770183 1,200.00 160.73 00942233 1,500.00 214.30 2,000.00 53.56~ 500.00

CTA Case No. ~23~ AI'II'IE:I\ A AR Realty Holdings Company, Inc. vs. CIR Inv/OR Exhibit ORflnv. No. Date Supplier Amt. Input Tax Y-37.1.D.1 00641515 5/29/2006 Magallanes Management Corp. 1,500.00 160.71 Y-37.1.E.1 00779665 5/29/2006 Magallanes Management Corp. 1,500.00 160.71 Y-43.1.A.1 966926 6/2/2006 Pasong Tamo Select & Gas Station 1,000.00 107.17 Y-43.1.B.1 00647129 6/5/2006 Magallanes Management Corp. 2,000.00 214.29 Y-43 .1 .C.1 00790266 6/6/2006 Magallanes Management Corp. 1,500.00 160.71 Y-43.1.D .1 6/9/2006 Pasong Tamo Select & Gas Station 1,500.00 160.73 Y-43.1.E.1 00807589 6/19/2006 Magallanes Management Corp. 1,500.00 160.73 Y-45.1.A.1 00667525 7/3/2006 Magallanes Management Corp. 2,000.00 214.29 Y-45.1.B.1 00983206 6/26/2006 Magallanes Management Corp. 2,000.00 214.30 Y-45.1.C.1 00896374 7/11/2006 Therese & Ivansons Gasoline Station Y-45.1.D.1 00676557 7/17/2006 Magallanes Management Corp. 400.00 42.88 Y-45 .1.E.1 00672817 7/11/2006 Magallanes Management Corp. 1,500.00 160.71 Y-49.1.A.1 00679768 7/20/2006 Magallanes Management Corp. 1,500.00 160.71 Y-49.1 .B.1 00680843 7/21/2006 Magallanes Management Corp. 1,500.00 160.71 Y-49.1.C.1 7/20/2006 Robinsons Supermarket 2,000.00 214.29 Y-49.1.C.2 00684853 7/20/2006 Handyman Do It Center Y-49.1 .D.1 00685647 7/27/2006 Magallanes Management Corp. 582.25 62.35 Y-49.1.E.1 00864514 7/28/2006 Magallanes Management Corp. 74.50 7.98 Y-53 .1.A.1 00690998 8/3/2006 Magallanes Management Corp. 160.71 Y-53.1.B.1 00872213 8/4/2006 Magallanes Management Corp. 1,500.00 214.29 Y-53 .1.C.1 8/9/2006 Magallanes Management Corp. 2,000.00 160.71 Y-53 .1.D.1 00885510 8/14/2006 Magallanes Management Corp. 1,500.00 214.29 Y-59.1.A.1 00708196 8/15/2006 Magallanes Management Corp. 2,000.00 214.29 Y-59 .1 .B.1 8/19/2006 Magallanes Management Corp. 2,000.00 53.59 Y-59.1.C.1 9001 8/22/2006 Magallanes Management Corp. 160.72 Y-59.1.D.1 8/28/2006 Magallanes Management Corp. 500.00 158.63 1,500.00 211 .34 1,480.50 46.0.k-- 1,972.50 430.00

CTA Case No. 8239 Al'll'lt:A A AR Realty Holdings Company, Inc. vs. CIR Inv.fOR Exhibit ORflnv. No. Date Supplier Amt. Input Tax Y-59.1.E.1 01577896 8/27/2006 Magallanes Management Corp. 1,000.00 107.15 Y-59.1.F.1 01978858 8/30/2006 Diwal EDSA Buendia Service... 1,500.00 160.74 Y-59.1.G.1 00711689 9/1/2006 Magallanes Management Corp. 1,776.00 190.29 Y-61.1.A.1 0725920 9/20/2006 Magallanes Management Corp. 1,874.00 200.79 Y-61.1.B.1 00764582 9/13/2006 Genesis Shell Station II 1,400.00 149.98 Y-61.1.C.1 004728 9/13/2006 Magallanes Management Corp. 300.00 32.14 Y-61.1.D.1 00720314 9/13/2006 Magallanes Management Corp. 1,973.00 211.40 Y-61.1.E.1 00716991 9/8/2006 Magallanes Management Corp. 1,973.50 211.45 Y-73.1.A.1 00754545 11/7/2006 Magallanes Management Corp. 1,955.00 209.47 Y-73.1.B.1 00761238 11/17/2006 Magallanes Management Corp. 1,955.00 209.48 Y-73 .1.C.1 01008527 11/23/2006 Magallanes Management Corp. 1,466.25 157.10 Y-73.1.D .1 00769614 11/30/2006 Magallanes Management Corp. 1,466.25 157.13 Y-73 .1.E.1 00771577 12/5/2006 Magallanes Management Corp. 1,955.00 209.47 Y-76.1 .B.1 00775425 12/11/2006 Magallanes Management Corp. 1,955.00 209.47 Y-76.1.C.1 00775688 12/11/2006 Magallanes Management Corp. 1,466.25 157.10 Sub-total 11,864.92 3. Input taxes on purchase ofgoods and seroices supporte by VAT invoices and 0 Rs but input taxes are not separately shown Y-2.1 459 1/12/2006 Oni Properties, Inc. 24,134.35 2,298.50 Y-3 .1 460 1/12/2006 Oni Properties, Inc. 21,200.00 2,019.05 Y-4.1 458 1/12/2006 Oni Properties, Inc. 2,185.00 209.09 Y-10.1 468 1/31/2006 Oni Properties, Inc. 63,369.86 6,010.30 Y-11 .1.E.2 21267 1/30/2006 R&E Battery & Parts 160.00 14.55 Y-19.1 SS7849 2/23/2006 Global City Auto Sales 12,030.54 1,288.98 Y-20.1.D.1 7409 2/21/2006 Print Lane Printing Press 270.00 28.93 Y-52.1 SS10472 8/10/2006 Global City Auto Sales 13,065.90 1,399.91 Y-54 .1 17008 8/17/2006 Global City Auto Sales 3,876.72 416.22~

CTA Case No. 8239 AI'41'4~A A AR Realty Holdings Company, Inc. vs. CIR Exhibit ORflnv. No. Date Supplier lnv.fOR Input Tax Amt. Y-55.1 1807 7/26/2006 Rapide Auto Service Center 55,000.00 5,892.86 Y-58.1 0429 8/28/2006 Mangay-ayam, Lim & Co. 7,500.00 803.57 Y-68.1 808717 11/21/2006 Citimotors Makati 4,552.28 487.74 Y-74.1 810006 12/4/2006 Citimotors Makati 7,482.82 801.73 Y-76.1.�.1 22467 12/16/2006 Citimotors Makati 4,130.29 442.53 Sub-total 22,113.96 4. Input taxes on purchase ofgoods and services amounting to more than P1,000 supporte by VAT invoices and ORs but Y-7.1 3210 1/26/2006 GF & P Corporation 114,421.12 9,847.25 Y-13.1 29547 3/1/2006 Asalus Corporation 1,621.84 36.84 Y-21.1 3238 3/9/2006 GF & P Corporation 228,842.25 19,694.50 Y-25.1 1_88 2/27/2006 Philippine Allied Enterprises Corp. 12,239.40 1,311.36 Y-32.1 3262 5/11/2006 GF & P Corporation 232,079.42 22,389.74 Y-33.1 33114 5/18/2006 Asalus Corporation 1,571.84 36.84 Y-36.1 23377 5/25/2006 New Royal Plumbing & Hardware 11,200.00 1,200.00 Y-42.1 3310 7/5/2006 GF & P Corporation 233,765.20 23,633.40 Y-50.1 3330 8/9/2006 GF & P Corporation 233,661.54 23,633.40 Y-63.1 3382 10/20/2006 GF & P Corporation 354,100.70 35,450.10 Y-74.1.B 510546 11/30/2006 Citimotors Makati 12,541.53 1,343.74 Sub-total 138,577.17 5. Input taxes on purchase ofgoods not supported by VAT invoices and purchase ofservices not supported by VAT ORs Y-5.1 48001886694 12/4/2005 PLDT 1,936.43 176.04 Y-6.1 1/26/2006 Globe Telecom 2,206.46 200.59 Y-8.1 2236011769891 1/16/2006 Meralco 827.55 66.85 Y-9.1 3136011970477 1/17/2006 Meralco 22,275.90 1,869.30 Y-12.1 2/13/2006 Globe Telecom 1,949.63 177.24 Y-14.1 2236021797552 2/15/2006 Meralco 884.10 67.1~

CTA Case No. 8239 AI'II'I~J\ A AR Realty Holdings Company, Inc. vs. CIR lnv/OR Exhibit ORflnv. No. Date Supplier Amt. Input Tax Y-15.1 48001946014 2/4/2006 PLDT 1,673.32 181.53 Y-16.1 1/12/2006 Sky Cable 800.00 72.73 Y-17.1 3136022001774 2/12/2006 Sky Cable 864.00 92.57 Y-18.1 2/16/2006 Meralco Y-22.1 3136031978346 3/22/2006 Globe Telecom 24,406.05 1,867.95 Y-23.1 2236031784081 3/18/2006 Meralco 2,224.55 226.63 Y-26.1.B.1 3136041984524 3/17/2006 Meralco 29,760.80 Y-27.1 2236041772306 4/17/2006 Meralco 2,424.74 Y-28.1 4/16/2006 Meralco 910.85 73.35 Y-29.1 48002006276 3/4/2006 Globe Telecom 27,011.50 Y-30.1 3136051983337 5/4/2006 PLDT 2,372.76 Y-35.1 2236051781625 5/18/2006 Meralco 911.65 78.35 Y-37.1.F.1 5/17/2006 Meralco 5,314.23 Y-38.1 .A 440719 5/26/2006 Citimotors Makati 1,735.54 560.98 Y-38 .1.B 441049 5/27/2006 Citimotors Makati 30,788.45 185.95 Y-38.1.D 440459 5/18/2006 Citimotors Makati 2,730.90 Y-38.1.E 502579 5/18/2006 Citimotors Makati 524.00 Y-38.1.F 440424 5/17/2006 Citimotors Makati 134.40 44.17 Y-38 .1 .G 502566 5/17/2006 Citimotors Makati 900.00 14.40 Y-39 .1 3136061983427 6/17/2006 Meralco 1,276.80 96.43 Y-40 .1 48002067250 6/28/2006 PLDT 2,503.87 136.80 Y-41.1 SUB424318 7/6/2006 Sky Cable 23,643.12 268.27 Y-43.1.F.1 2236061783337 6/16/2006 Meralco 9,402.61 2,533.19 Y-44.1 Globe Telecom 30,199.80 1,007.42 Y-46 .1 2236071784558 7/17/2006 Meralco 1,788.94 2,762.77 Y-47.1 3136071989542 7/18/2006 Meralco 3,342.00 205.88 316.15 358.07 4,384.13 26.03 515.55 466.19 32,072.35 45.54 2,969 .3~

CTA Case No. 8239 Al'41'4tJ\ A AR Realty Holdings Company, Inc. vs. CIR

CTA Case No. 8239 ANNtXA AR Realty Holdings Company, Inc. vs. CIR Exhibit ORflnv. No. Date Supplier Inv.jOR Input Tax Amt. 8. Input tax on purchase ofgoods supported by a VAT invoice issued not in the name ofpetitioner Y-ll.l.G.l 633878B 2/6/2006 Taurus Auto Supply 190.00 20.36 20.36 Sub-total TOTAL 256,785.08 :�?--