CTA Case No. 2667 (Decision)

R[PUlJUr. OF .lll E I'IIILJPP!NII ~ COURT OF TAJ~ APPEALS QUILZON CITY RADIO COMMUNICATIONS OF THE PHILIPPINES, I NC., Petitione r, - versus - C.T .A . CASE NO. 2667 THE COMMISSIONER OF INTERNAL RE VENUE , Respondent. X- - - - -------X DEC I S I 0 N Peti tioner Radio Communications of the Philippines, Inc ., is a cor pora tion duly o r ganized and existing under and by vi rtue of the laws of the Philippines with prin- cipal place o f business at New York Str eet a n d Epifanio de los Santos Avenue, Cubao , Quezon City . Pursuant to Rep u blic Act No . 2 03 6 , as ame n ded by Rep ub lic Act No_ 4054, petitioner wa s granted a f r anchise to establish radio stations for the re ception and tran s mi ssion of wireless messages on radio t elegraphy and/or radio telepho n y , including coastal and ma rin e telecommuni- cat ions t hroughout the Philipp ines . In this appe al to this Court, petitioner challenges the validity of the decision of respondent Commissioner of Internal Revenue i n subjecting it t o income t ax from J anu ary 1 to Jun e 17 , 1 96 4 ; and assu ming t hat it is

DECISION - CTA CAS E NO. 2667 - 2- liable thereto, the correctness of the deficiency �income tax assessment in the amount of ~295,284.16, inclusive of interest . Petitione r also questions the right of the Government to assess the deficiency income tax on the ground of pr escription. Inasmuch as petitioner raised the defense of pres- cription, the pivotal issue therefore to be resolved in this proceeding, befor e going into the me rits of the controversy, is whether or not the right of respondent Commissioner of Internal Revenue to assess the deficiency income tax from January 1 to June 17, 1964 had already prescribed on the ground that the revised deficiency income tax assessment under review had been issued beyond the five-year period fixed under the then Section 331 (now Section . 318) of the National Internal Reve nue Code. The records reveal that on June 15, 1965 petitioner filed its income tax return for the taxable year 1964 in blank form without reporting any income but merely stating thereon that it is "TAX EXEMPT UNDER R.A. 4054". (Exhs. "A"; "1", p. 50, BIR records.) Pursuant to an authority to investigate da~ed December 9, 1969 (p. 88, BIR records), revenue examiner Jaime Q. Concepcion examined the books of accounts of herein petitioner for income and business tax purposes. As a result thereof, respondent issued a tax assessment dated June 11, 1970

DECISION - CTA CASE NO. 2667 - 3- against petitioner in the amount of P566,410. 32 as� deficiency inc ome tax from January l to June 17 , 1964, the details of which are as follows: (Exhs . "B" & "5", pp. 68-70, BIR records.) l 964 Net income per return � � � � � � � � ~ Add: (l) Undec lared income for the period from January 1 to June 17, 1964 , net of expen ses ����. ��� 914,010.26 (2) Special messenger fees 23 6,4 85 .17 Net income per investigation � � � � ~1,150,495.43 Tax due thereon � � � � � � � � � . 337 ,149.00 168,57 4 . 50 Add: 50% surcharge . � � � . . � � 60 ,6 86 . 82 Deficiency interest (18%) � � � 556,410~32 AMOUNT DUE AND COLLECTIBLE .�. ~ In a letter ~ated July 10, 197 0 petitioner protested the assessment raising the defenses of prescription and tax exemption , and asked for its cancellation and with- drawal on the basis of the legal and factual arguments stated therein. (Exhs. "C" & "6", pp . 72-86, BIR records .) After petitioner filed, however , to execute a waiver of the statute of l imitations before its request for can- cellation and withdrawal maybe given due cour se (Exh. "4", p, 52, BIR records), respondent , on February 23 , 1971 issued against petitioner warrants of distraint o f personal property and levy on real property to enforce collection of the deficiency income tax and surcharge assessed against it (Exhs. "8" & "8-l ", pp. 93 & 94,

DECISION - CTA CASE NO. 2667 - 4- BIR records.) In a letter dated March 25, 1971 petitioner prayed for the lifting of the warrants of distraint and levy pending resolution of its protest against the assessment (p. 99, BIR records), a nd accommodating petitioner, respondent suspended temporarily the collection of the deficiency income tax and surcharge cover ed therein (Exh. 11 9", p. 103, BIR records). The protested deficiency income tax assessment was set by respondent for conference on July 14, 1972. (p. 116, BIR records.) However, petitioner requ e sted its resetting on July 24, . 1972 at 9:00 0 11 Clock in the morning. (p. 117, BIR records.) Strangely enough, petitioner failed to appear on the date and at the time designated by it. Believing that petitioner was only employing dilatory tactics (p. 120, BIR records), respondent re- investigated the income tax case of petitioner on the basis of existing records, and by allowing certain claims for deductions, reduced the deficiency income tax from P566,410.32 to P295,284.16. (See letter-decision of respondent dated April 8, 1974, Exhs. "D 11 & 11 11 11 , pp. 145-146, BIR records.) The reduced deficiency income tax assessment was computed as follows: Gross income per investigation � P2,198,943.45 Less: Deductible expenses: From J a nuary 1 to June 17, 1964 ��� Pl,284,932.19 One-half (~) of total disallowances of Pl06,415.10 � 53,207.55 1,338,139.74 Net Taxable Income � � � � . � � � p 860,802.71 Income tax due thereon � � � � � � 250,240.81 Add: 18% maximum deficiency interest 45,043.35 TOTAL AMOUNT DUE AND COLLECTIBLE � . p 295,284.16

DECISION - CTA CASE NO. 2667 - 5- Petitioner again protested said decision of respondent on the disputed assessment in a letter dated June 14, 1974, claiming, just like in its protest of the ori- ginal assessment of June 11, 1970, lack of factual or legal basis to stand on. On August 12, 1974 petitioner submitted a supplemental memorandum, contending, among others, that since the reduced assessment has the effect of superseding the original assessment, the revised assessment has already prescribed and the tax can no longer be collected. (Exh. "E", pp. 178-191, BIR records.) Respondent denied this protest in his letter dated December 9, 1974, but presumably to prevent another round of request for reconsideration, blandly told petitioner to come to this Court by filing a petition for review. (Exhs. "F" & "14", pp. 203-205, BIR records.) It is obvious from the foregoing that petitioner has been protesting the deficiency income tax assessment of respondent and asking for its cancellation and with- drawal basically for the purpose of de laying the collection of the tax so that it can invoke the technical ground of prescription. Petitioner's income tax return for taxable year 1964, without such facts, data or information as are appropriate to determine the correctness of its net income as required by law, was filed by it on June 15, 1965. After the deficiency income tax was determined

DECISION - CTA CASE NO. 2667 - 6- through investigation of its books of accounts because its income tax return was blank, and the assessment dated June 11, 1970 was issued by respondent, petitioner irnrne- diately raised the defense of prescription in its con- . testing letter of July 10, 1970 when the five-year period within which respondent may assess the tax has not yet expired . Without deciding the request of petitioner for reconsideration of the assessme nt, respondent sought to enforce collection of the tax assessed by him by means of distraint and levy . Such action of respondent was of course a denial of the request for reconsideration and withdrawal of the assessment and petitioner may appeal therefrom. (Philippine Planters Investment Co., Inc . vs . Acting Commissioner of Internal Revenue, CTA Case No. 1266, November ll, 1962; Frederick L. Hahn vs. Corn- missioner of Internal Revenue, CTA Case No. 1987, April 30, 1969.) Instead of appealing to this Court, however , petitioner asked for the lifting of said warrants pending resolution of its protest and re s pondent, strangely enough, temporarily postponed collection of the tax. To give petitioner its "day in court", the protested assessment was set for conference by respondent but the former requested the resetting of the hearing, specifying ~ () v~

DECISION - CTA CASE NO. 2667 - 7- the date and time thereof. Indicating an apparent �lack of interest in the disposition of the case, petitioner failed to appear on the date and at the time fixed by it, compelling respondent to decide the case on the basis of existing records. After respondent reduced the deficiency income tax assessment in his letter-decision of April 8, 19 74 , petitioner again protested said decision, claiming, just like in its request for recon- sideration of the original assessment, lack of factual or legal basis to stand on; and after delaying the col- lection of the tax , that the revised assessment had already prescribed and the deficiency income tax c ould I no longer be collected because the reduced asse ssment had the effect of superseding the original asses s ment. It seems crystal clear, in the light of the above, that respondent refrained from collecting the deficiency income tax due to the several requests of petitioner to which respondent yielded to give it every opportunity to prove that the assessment has no legal or factual basis to stand on , as contended by it. After inducing respondent to delay collection as petitioner in fact did, it would be most unfair for the latter to now take advantage of such desistance to elude its deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription. (Collector of

DECISION - CTA CASE NO. 2 667 - 8- Internal Revenue vs . Suyoc Consolidated Mining Company, L-11527, November 25, 1958, 104 Phil. 819.) As observed by the Supreme Court in the Suyoc Consolidated (104 Phil. 823-824): While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limi- tation for in such case there is need of a written agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone colle ction to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Gover nmen t . And when such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or behavior should not be countenanced if only to protect the interest of the Government. This case has no precedent in this juris- diction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The applicable principle is fundamental and unquestioned. 'He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect "this is your own act, and there- fore you are not damnified." "(R.H. Stearns Co. vs. u.s., 78 L. ed., 647) . Or, as was aptly said, "The tax could have been collected, but the government withheld action at the spe- cific request of the plaintiff. The plaintiff is now estopped and should not be permitted to raise the defense of the Statute of Limitations." LNewport Co. vs. U.S., (DC -WIS) , 34 F. Supp. 58~/. c1

DECISION - CTA CASE NO. 2667 - 9- The revised assessment of respondent dated April 8, 1974 is not therefore barred by prescription. Coming to the issue of: Whether petitioner is entitled to income tax exemption for the whole year 1964 , or only from June 18, 1964, the date of the effectivity of Republic Act No. 4054 exempting it from income taxation, Petitioner is of the contention that it was exempt from income tax for the whole taxable year of 1964 in accordance with the principle of "status-at-the -end- of-the-taxable-year" which was applied by the Supreme Court in Commissioner of Internal Revenue vs. Carlos Ledesma, L-17509 , January 30, 1970, 31 SCRA 95. Peti- tioner thus insists that the income realized by it during the year 1964 is not liable to income tax inasmuch as its "status-at-the -end-of-the-taxable -year" was that of a corporation exempt from income tax . Respondent , on the other hand, maintains that peti- tioner's contention is not tenable since the "status-at- the-end-of-the-taxable-year" refers to the tax status of a class of partnership, either as registered or unregistered at the end of a taxable year, for purposes of imposing the corporate income tax under Section 24 of the Tax Code. He asserts that what is involved in the present case is tax exemption and not tax status which can be given retroactive effect.

DECISION - CTA CASE NO. 2667 - 10 - The l a w i nvolv ed is Republ ic Act No . 4054, amending Republi c Act No . 2 036 , the pertinent sec tions of which read: XXX XXX SEC . 2. Secti o n fourteen of t he same Act is hereby r epealed and in lieu thereof a ne w section is hereby in s e rted to read as fo llows: ''SEC . 14. In con si deration of the franchi se a nd rights hereby granted and any provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are n ow or may h e re- afte r be r equired by l aw from other individuals, c opartne rships, private, public or qu asi-public associa tions, corporations , or joint stock companies, on real estate, buildings a nd other personal property exc ept radio equip- ment, machinery and spare parts needed in connection with the business o f t he g rantee , wh i ch shall be exemp t from c ustoms du ties , tari ffs a nd other taxes, a s well as those properties declared exempt i n thi s s ection . In consider ation of the franchise, a tax equa l to one and one-half ~� centum of all gr oss receipts from the busine s s t ransacted unde r this fra nchi se by the gran tee shal l be paid to the Treasurer of the Ph ilipp ine s each year , within ten days after the audit and approval of the accounts as prescribed i n th is Act . Said tax shall be in lieu of any and all taxe s of any kind, nature ~ or descrip ti on levied, es tablished or collected by any authority whatsoever, municipal, provincial or national, from which taxes the grantee is hereby expressly exempted. XXX XXX XXX "SEC . 3. This Act shal l tak e effect upon its approval . "Approved, June 18, 19 64. " C3

DECISI ON - CTA CASE NO . 2667 - 11 - Re ferring to the insertion into the franchis~ of petitioner of Section 1 4 of Repub l ic Act No . 405 4 which provides that the f r anchise tax payable by it o f l - l/2% "shall be in lieu of any and a l l taxe s of any kind , nature or de scription levied, established or collected by any authority whats oever, municipal, provincial or national, from which taxes the grantee is hereby expressly exempted ", it is ver y clear and spec i fic that the income tax exemption of pet i tioner took effect on June 18 , 19 64. The sta tute speci f ically and expressly provides that "This Act shall tak e e ffect upon its approval", woch is - "Approved, June 18, 1964" - without more. Nothing there said speaks of '' status-at-the-end-of-the -taxable- year " determining the income tax exemption of petitioner. The law is very speci f ic and mandatory. There is no room for inte rpretation. It is well-settled that a statute, free from any con stitutional infirmity , must be enforced as written. No j ustification whatsoever can be found for giving petitioner herein p referential treatment by readi ng into its franchise its status at the e nd of the taxable year 1964 determining i t s exemption f r om income tax for the ' entire year when the applicable law e xpressly p r ovides that its tax exemption took effect o n June 18, 1964, which is not the end o f i ts taxa bl e year. I f it had c �l

DECIS I ON - CTA CASE NO. 266 7 - 12 - bee n the legis lat ive in t e n t to exemp t petition e r f Tom pay i ng income tax f o r the e n tire year 196 4 , the leg i s - lative body could have easily done so by p r ov iding tha t the tax exemption s h all apply to income earned foL the entire ye ar 19 64, or the act shall take effec t on Dec e mber 31, 1 96 4. We c annot ignore the bas i c an d we l l-settled p r incip le that exemption from taxati on is no t favored a nd is never presumed, so tha t if gran ted it must be str ict ly construed against the taxpayer . Affi r matively p u t, th e la w frowns on exempti on fr o m taxation , hence , an exempt i ng provision should be c onstrued strict issimi j uri s. (Cathol ic Church vs . Bastings, 5 Phil . 70 1~ Esso Standard East e r n, Inc. vs . Act i ng Co mmissi on er of Customs , L-21841 , Octo b er 28 , 1966 , 18 SCRA 488 . See al s o Go v ern me nt vs. Mont e d e Piedad , 35 Phil . 42 ~ Asi ati c Petrole um Co. v s . Llan es , 49 Phil . 4 66 ~ Ho u se vs . Po sadas, 53 Phil . 338; Phi l . Tel. and Tel . Co. vs . Coll ector, 58 Ph i l . 6 3 9 ~ Gree n fie l d vs . Meer , 77 Ph il . 39 4 ; Collector of I nte rnal Reven ue vs . Manila Jockey Clu b , 98 Phil. 67 0; Ph i l. Gu ara n ty Co., Inc. vs. Commi ssio n e r of Inter n al Reve nu e, L-22 074 1 September 8, 1 96 5 , 15 SCRA l ; Aba d vs . Co u rt o f Ta x Appea l s, L-208 34 , Oc t o be r 19, 1 9 66, 18 SCRA 374. ) In this c a se, it canno t be denied that Section 14 of Repub l ic Ac t No. 2 0 3 6 was repealed and in l ieu

DECISION - CTA CASE NO . 2667 - 13 - ther e o f a new Sect i on 14 was inserted by Republic ~ct No. 4054 into the franchise of petitioner precisely to grant tax exemption to petitioner. Since Republic Act No. 4054 speci fically commands that such tax exemption shall take effect on June 18, 1964, the terms of the l aw provide the safest guide as to t h e effectivity of the income tax exemption of petitioner, to which obedience is due and from which deviation should not be allowed . Accordingly, we ru l e that petitioner is subj e ct to income tax from Januar y 1 to June 17, 19 64. Having reached the result that petitioner is subject to income t ax from January 1 to June 17, 1964, we come to the question of cor rectness of certain expenses allowed by respondent as deductions from gross income in arriving at the taxable income of petitioner. At the outset, it s hould be observed, as stated earlier, that petitioner's income tax return for calendar year ended December 31, 1964, which cove r s the period in question, was in blank except for the words "TAX EXEMPT UNDER R.A. 4054" . While the return was accompanied with audited fi nancial statements, it was not a true and accurate return of its annual net income in the manner prescribed and containing such facts, data and information as were appropriate and necessary to determine the correctness of the ne t income retur ned CG

DECIS ION - CTA CASE NO. 2 66 7 - 14 - and to car r y out the provisions of the In come Tax Law . (Sec. 46, Nati onal Int e rnal Revenue Code.) Respondent therefore as sessed the proper tax on the best e vide nce obtainable. It was only after the deficienc y i ncome tax assessmen t had been issued and served on peti tioner that it s tarted questioning the cor rectness of the deductions al lowed by responde nt whe n during the investigat ion o f its books of accoun ts a nd o ther accounti ng recor ds , pe tition er did not prese n t , wh e n reques t e d, t he s upporting documents , such as payrolls , invoices , vouchers a nd other primary evidence , for purposes of verifyi ng and su bstantiating expen ses or deduc tions, con tending that the same could no lo ng e r be produced because the exumination took place beyond the period during which i t was duty bound under Sec tion 337 of the National I n t ernal Revenue Code to keep a nd p re ser ve its records . Under Section 33 7 (now Section 324) of the National Interna l Reven ue Cod e, books o f accounts and other accounting r ecords should be preserved for a pe r i od of at ~ east five years fro m the date of the last e ntry in each book. Since pet it ioner was on the cale ndar year ba sis, i t argues t ha t the last entries i n its 1964 book s were made on December 31, 19 64 . Af ter five yea r s fro m December 31 , 196 4, or Dec em ber 31, 1969 , peti tioner r�~ t; I

DECISION - CTA CASE NO . 2 66 7 - 15 - could therefore d ispose of i t s payrolls , invoices, � vouche r s and other supporting papers if no tax i nves- t igation was yet conducted as of that date . The explanat i on for t he absence of supporting invoices, vouche rs, payrolls and other papers can hardl y be accepted. The reco r ds s how that the inves- tig a tion of petitioner ' s income tax liability f o r 1964 was started on De cember 9, 1969 when the let ter o f authority of revenue examiner Jaime Q. Concepcion to examine the books of accounts and other accounting records fo r income tax and business tax purposes for the years 1968 and p rior years was served on petitioner . (p . 88, BI R records " ) Whil e the act u al examination a nd inspect ion mighthave been done i n the ea rly part of 1970, after the five -year pe riod, petitioner upon receip t of t he letter of authority was duty bound to keep intact its invoices, vouchers , payrolls and other suppor ting papers because it was already notifi e d that an examination and inspection of its books a nd accounting records was to be conducted. For all inte nts a nd purposes, the tax inves tigat ion o f petitioner was commenced on Dec e mb e r 9, 19 69, whi ch was well within the five-year per i od fr om th e last ent r y in its books of accounts on De c e mber 31, 1964. In disposing its payroll s, invoice , vouchers and other support ing r0 u0

DECISION - CTA CASE NO. 2667 - 16 - documents i mm ediately after the five-year period, upon receipt of the letter of authority to examine its books of accounts and other accounting r e cords, if petitioner were to be believed, the Court feels that it did not act with i ntegrity and good faith. The extraordinary haste of petitioner in getting rid of i ts primary docu- ments , which i s not in accordance with ordinary business policies, inevitably provokessuspicion that it was done to frustrate its forthcoming tax examination . Ironically, petitioner deprived itself of the adequate means needed to support its claimed deductions. The revenue regulations require that any claim for deduction must be substantiated, when requir e d by the Commissione r of Internal Revenue, !2.Y_record s howing in detail the amount and natur e of the ex2enses incurred. (Sec. 66 , Revenue Regulations No. 2 .) While a reason- able determination of the amount claimed as deduction may be permitted provided that there is proper basis for some allowance, a taxpayer is not relieved from the burden of substantiating his claimed deductions. Disallowing amounts claimed for deduction merely because there is no available documentar y evidence which will establish the precise amount beyond a reasonable doubt ignores commonly recognized business practices as well as the fact tha t proof may be establ ished by other }

DECISION - CTA CASE 0. 2 66 7 - 17 -- credible ev iden ce. Ne vert heless , where there is evidence t hat t he taxpayer has actual ly incurred expense s , �and there i s no credible proof o the amount actually spent, th e Comm i ssioner o f Intern al Re v e nue ma y mak e as close an approximation as he c a n , bear ing he avily i f he chooses upon th e taxpayer whose inexact i tude is of his own making. (S ee Visaya n Ce bu Termi nal vs. Colle ctor of Intern a l Revenue, L- 12798, May 30 , 1960, 1 08 Phil . 320; Gancayco vs . Coll e ctor o f I n ternal Reve n ue , L-13325, Apr il 20, 196 1 , 1 SCRA 980; Zamo ra vs. Co ll ecto r of Interna l Re v enue, L-1528 0 & L-15 289 -90 , May 31, 1963, 8 SC RA 16 3.) In situations like the present case, r espondent could ther ef ore mak e as close a n approximation a s he can , bearing heavily, if he choose s , upon peti tioner whose inexactness in destroying its primary and sup- porting documents i mmediately upon receipt of the letter of authori ty t o e xamine its books of accoun ts and other r e cords is of it s own making. (Exh. "1 0", pp. 133-140; Exhs . " 14" & "F ", pp . 20 3-205, BI R re cords .) Accordingly, the Cou r t finds the revised assessment issued by respondent on April 8, 1974 against petit ioner in t he amo u nt of El29 5,28 4 . 16 as deficiency income tax, i n - elusive of in t eres t , for the period from January 1 to Jun e 1 7 , 1964 , in accordance with law. Pet itioner Rad i o Communication s of the Philippines, Inc., is t h erefore ordered to pay the amount of ~295,284 .16 to

DECISION - CTA CASE NO. 2667 - 18 - respondent Commissioner of Internal Revenue as deficiency income tax and interest for the period from January 1 to June 1 7 , 1964, plus the surcharges and interest which have accrued thereon incident to delinquency , pursuant . to Section 5l(e) of the National Internal Revenue Co de, as amended. WHEREFORE, the decision appealed from is ~ ereby affirmed at petitioner's costs. SO ORDERED. Quezon City, Metro Manila, February 27, 198 0. ~~-~t..'uV -~ AMANTE ~~LER Acting Presiding Judge I CGNCUR: l"i ~ Il