CTA Case No. 3789 (Decision)

REPUBLIC OF THE PHI LIPP INES COURT OF TAX APPEALS QUEZON CITY PIER 8 ARRASTRE AND STEVEDORING SERVICES, INC., - ver sus - C.T.A. CASE NO. 3789 THE COMMISSIONER OF INTE RNAL REVENUE, )( - - - - - )( I D E C:: :I S :I Cl N This is an appea l by P ier a Arrastre and Stevedoring Se t7 vi c e s , I n c . fro � the denial of it s prot est ag a in st a de f ici e nc y a sses sm ent dat e d No ve mber 25 , 1983 for in come an d bu s iness taxe s for tax ye a r 19 78 as fo l l ows <inclusive of inter est s and charge s ) 1 Inco�u~ t-ax P2 , 261,420.98 Fixed t-ax 252. 77 Pet"'cent age tax 533 ,768.98 TOTAL AMOUNT ASSESSED P2, 795,442 .98 Petitioner prot e s t ed the assessment on Februa ry 2 1, 19 84 . Th e protest wa s denied by respondent on Marc h 29 , 19 84, wh ich d eni al was received by pet i tio ner on Apri l 25, 1984. He n c e, this petition for review was f i led on May 23, 1984. The deficiency busi ness taxes (fixed and percentage taxes) wer e c omprollli15ed pt.lt"' st.tant to EO 44, thereby leaving the inc ome tax deficiency

DECISION - CTA CASES NOS. 3789 2- assessment for this c o ur t's determination. The deficiency income t ax as sessrn~nt arose from the disallowance of cert a i n claimed deductions or por tion s thereof. In it s me mo r a ndu m, respondent co n tends th at petitioner i s estop pP. d from assa iling the assessment and is b a rred f ro m p ~' e s enti~g evidence to dispute the same or to s u b s tantiate the deductions claimed because of t h e latter's f ailur e to present evidence during the pre- assessment level <CTA records, pp. 255- 2 5 8> . Respondent points to a latter dated June 2, 19 80 <B IR t' ecot' ds, p. 53) sent by the Assistant Re ven u e Dis t r i c t Officet' wherein after informi ng pe t it ioner o f the pending investigation, the Assis t a nt Re v enue Ex a minet' requested petition er or its duly at..tthot"i zed representative to co me to the office to verify the details of a propo15ed a s sessment, and present its objec tions there t o, further s tating that failt..tr e to do so will be interpre ted as a waiver of such privilege and the tax assessment would then be finalized without any further notice to petitioner. Although petitioner indicated its desire to present its side relative to the proposed assess1nnt (Jt..tne 16, 1980, BIR recor d s , p. 56), respondent clai111s

DECISION CTA CASES NOS. 3789 - 3- the petitioner did not hing Hence, in accordance with the t erms of t he notice, SI..ICh inaction was considered a waiver of its pt"'ivilege to present evidence concommitant ly res ulting in an implied ad11ission of the cot"rectness of the assessment. It must be not ed t hat the t"'espondent allowed the case to go to tria l, pCI.t"' ticipc;~.ting thtn"'ein and letting petit i on er present its evidence consisting of more t han 2,000 exhibits without ob.jecting to the admission thereof <Respondent's "Manifestation " , Re cord s, p. 255) only to invoke the alleged los s of right to pt"es ent evidenc e in its memorand�Jm. This shows e ith er neg 1ect ot"' bad faith on respondent's par t such that the court could have exercised its discretion and disregarded such defenses entirely. B�Jt the COU'I'"t is we 11 aware that taxation is vital for the sustenance of government such that if the taxpayer is given every opportunity to defend hi111self fro11 the allegedly erroneous impositions of tax, then the court should also afford the government ev4n"'y leeway to defend Nevertheless, the Court di sagt"ees with respondent's contention. The admonition of waiver 2R.1

DECISION - CTA CASES NOB. 3789 - 4- 1n respondent' s letter dated June 2, 1980 is of no mom ent bec:au e it can not be said that the "propo !led assessment " made pm' Sllant to the investigation then being conducted by the respond ent's office became the f inal assessment !PJb.jec:t of this appeal for in fac:t the assessment made at that point wa s different fro� the November 1983 assessment as summarized below: N1t Incott dhelond by r1turn1 p (314,166.50) Lttll AlloKablt Dtductlons &Or Add'l lnco�t P.J. .~~g, ~~~J_Q Avt. Cash Crtdlt Bal. P 4821303.59 ~h.e~e, o.~~-~ Undlsclostd sourcts of cash 7051624.33 P..._U2s..~~-QQ ~ of rtprtstntatlon txptnst 371599.38 ~ of llsctllantous txptnst 771088,51 Exp not subjtcttd to w/h tax�� 1601031.00 Unrtporttd clai1s txptnst 781518.98 Incrtau in dtprtciation ____L_lOS.!.SO Total Adjustltnts Net Incolt ptr invtstlgation Tax Dut ��offict and equip1ent rental, ltgal and audit fl!ts and stcurity urvicu for Nov. & Dec. undtr the txpandl!d withholding tax provision. Pro{!gJtd__Uf~lllmt ~!L~h'-. .JQ:jt.~.LP.r.flh.in~r.Ll1~t~.Lcltl.t!L~.!P.~~___g~ l98l__".!.!L.thL.fJ!!..t\___nJf..U_U!!L~!~.!!f._~_,.QlL_g~_.--l~~h.L.fL.ntl IIIIIIIJ.!!.L!t�t t~.Jjov. ?~....J~_J.C.IR_~..t~1!Nt.J.LH...!.T.!!Lt:12JJ Ntt Loss ptr rtturn p (134,166.S8l Add1 Disallowances p 63,~3.55 9rati fication� 3,062,615.66 Balarits and wages 452,287.~ Eltrgtncy living allowanct 13th Month pay 148,360.72 114,360.72 Rtp1n &Mise txptnst 78,518.98 Clain txptnu 3,000.00 Allowanet - Board 111btrs

DECISION - CTA CASES NOB. 3789 - 5- Rental - tquipaent 154,800.00 Legal/Audit Rental - Office tpact 2,~.00 Stcutltv strvtces 1,800.00 Net tneo1e per review ____....mLQQ T111 Due theron p~l~..s1~!05 P31768,S70.47 P1 1 497,398.80 �tn the to-day prelilinary letter, tht gratifiC!ati on txpenst was not ineludtd. The r e b ing a diffe~ent ss ssment, petitioner can not b deni d of the opport �.mi ty to object to t hs "n w" t ts me nt. Furthermore, in petitione�..-�' s ~eply to the J'u ne 2, 1'380 letter, it specifica lly ~equest d fo~ a ~e investigati on where, judging from th e tenor of ~ id lett er, it would pt~esent the evi denee to sub tan t iate ,its elaimed deductions. In the absence f ny notice of th denia l thereof, petiti oner can safely . s ume that said request was favora bl y acted upon. More importantly, 8eoc tion 319- A of the 1977 Tax Code <whi ch was added by PD 1773, effective Jan. 14, 1981) la id down the procedLn~ e for c:onte~ting the asses sment. It is thet~ein stated that failure of the taxpayer to respond to the pre- assessment notic:e shall entitle the Commissioner of Internal Revenue to issue an assessment based on his findings. However, the taxpayer is still

DECISION - CTA CASES NOB. 3789 - 6- allowed to file a protest against the final assessment issued by filing request fat" reconsideration or reinvestigation and in case of an adver5e decision by the Commissionet" on said protest, petitioner has a further t"elaedy of c1!1ppeal to this court. Nowhere is it s tated that failure of the taxpayer to app ear a n d/ or t o pt"e se nt it s e v iden c e during the pre - as se s sm e nt 1 eve 1 , o t" ev e n d u t" in g the protest period, wo ul d mea n a waiver of it5 right to present any evidenc e to dispute said assessment. Thus in the 10-day prel i minary letter there is no admonition of waiver lik e that fo und in the June 2, 1980 1ett er. Neither is s uch failure equivalent to an implied admission of t he correctness of the tax assessment. Even in an ap peal to this court , there is only a pres1.1mpt i o n of the cot"t"ectness of sC!Iid assessment whi c h is e><act ly o v et"come by the introduction of e v i dence by the petitioner. Taxation being a powerful right of the government, unless it is palpably clear that there was willful and manifest intent to delay collection of the tax, the taxpayet" 111ust be given iovery opportunity to be heard in objection of the

DECISION - CTA CASES NOS. 3789 - 7- a111ount assessed. R�>publ ic Act No. 1125 creating the Court of Tax Appeals allows the taxpayer to dispute the correc tness or legality of an assessment both in the purely administrative level and in the said court <Republic v. Li� Tian Teng, 16 SCRA 585, March 3 1, 1 '366 ). �The Cout't of Tax Appeals was created to serve the i nt IH'Itst of the different tax collection agencies and to afford the taxpayer their day in court. It is in that forum Cthe CTAJ wpere a taxpayer can ventilate her defenses against the assessment Internal Revenue v. Vusay-Gonzales & CTA, 18 SCRA 757, Nov. 24, 1'366>. It is only by the failm'e of the taxpayer to fil e an ad mini s t rati ve protest upon receipt of the fin a l assessment ot' to appeal the denial of the protest made within the periods laid down by law would the assessMent become final, unappealable and executory thereby negating its right to present evidence precisely because the right to dispute the as sess 111ent has prescribed and the court can no longer acquire jurisdiction over the same. We now co111e to the 111ain issue in this case which is whether the deductions clai111ed by ~etitioner but disallowed by the respondent are in 287

DECISION - CTA CASES NOS. 3789 - 8- fact allowable. The a mounts clai ~ e d in the income tax return and the a mou nt s dis~l l ow e d i n the assessment, per item, a r e as fo l low5 : Gratification� Deductions A1ounh Salarits and .-ages prr Return dhalloMtd E1ergency living allowance 13th Month pay p 63,253.55 p 63,253.55 Rep'n & Mise expense 4,505,495. 91 3,062,615.66 Claiu txpenu Allowance - Bd. 111. & off. 665,246. 63 452,287. 25 Rental (tquipltntl 349,006. 77 148,360.72 Legal/Audit 165, 616.81 114,687. 89 Rental (Office 1~acel 78,318. 98 78,518.98 Security services 3,000.00 3,000. 00 642,910. 00 154,800.00 15,350.00 2,558.00 1,800.00 1,800.00 109,102.75 855.00 In its memo ra nd u m, howe ve r, petit i ontn" chose to limit the issue t o t h e sal ar ies and wages, emergency living allowance and 13th month pay, these being the larger amounts. Having chosen to �o limit the issue to these items, the other items in the deficiency assessment are deemed uncontested for where the taxpa yer ' s brief failed to mention a point which was reli ed on in his pt!tition, i t wa s assumed that the contention .had been abandoned and no further consideration will thus given by the Tax Court <9 Mertens, Law on Federal Taxation, Sec. ~0. 92, 1977). Deductions being a matter of legislative

DECISION - CTA CASES NOS. 3789 - 9- grace, the taxpayer m�H> t point to some specific provision of a stat �Jte allowing said de d ucti on . Petitioner claim s that salaries and wages, 13th Month Pay and Emergency Living Allowance a r e deductible s legitimate business expens e s under Section 30 Ca) of the Tax Code and to st.tbstan t itate the amounts claimed, it presented the originals of its paym nt vouchers, payroll sheets a nd petty cash � di~bursement r eeipts <Petitione r ' s Mem o randum, CTA r ec ords, p. 240> . But re spo ndent, in its answet" to th e p et ition, contends that t h e expenses were disallowed either for f ailure to dedt.tct th e eorreapon din g withhold i ng tax due thereon ot" for b eing e xce s s ive or f i ct i t i o �J s <Responden t' s 11 Answer", records, p . 39>. Section 30(1) of the 1977 Tax Code as a me nded a llows deduct ions business expenses which i ncludes "a reasonable allowance for sa l at"i es or other com pens t ion for person 1 services act Ltall y r ende red. " Emergency Living Allowance and 13 th Month� Pay were like wise deductible becaus e they were requir d by law <PO 525 as amended by P D 1123 and PD 851, re p ctively> to be given to employees who f all under the l aw's respective coverag e . With re gard to the 13th Month Pay, t h ere is no 2R9

DECISION - CTA CASES NOS. 3789 - 10 - evidence on record to show that this wa~ paid and who the recipients were . A mere allegation in the pleadings or statement in the ta~ return is insufficient to convince this col.trt that the said amount was indeed e xpend ed. As to the Emergency Living Allowance, payment vouche~s for the sa me were presented by th e petitioner but these were not �igned by the employees concerned (see E~hibits "AOC to "AOC-2", "AOB" to "AOB-5", and "AOJ" to "AOJ-22 "). Wh ile the taxpayer's records are relevant and competent evidence, they are self serving and this fact may be con5idered in determining the weight to be given to them <Richardson v. Co��issioner, 264 F 2d 400, 59-1 USTC 9292, 1959). Since said vouchers were unsigned, they can not serve as competent proof that the Emergency Living Allowance were indeed given. We now come to the bulk of the deductions in disp�Jte - the salaries and wages. Wi thol.tt doubt, �alaries and wages are business e~pense which can be deducted from the gross inco�e. However, PD 1351 (effective Ap ril 17, 1978) added Sec. 30<m> to the 1977 National Internal Revenue Code as followsc

DECISION - CTA CASES NOB. 3789 - 11 - (m) Additional Requirement for deduct- ibility of income payments - Any income payment which is othet"'- wise deductible fro� gross income under this section shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld has been pai d to the BIR in accordance with th is section, Sections 54 and 93 of this Code. Necessarily, onl y thos e who are t"' equh--ed to file income tax returns must have their taxes withheld because presumably, these are the persons who have taxabl' e incomes. Section 45(a) <U of the Tax Code states that individuals with a gross income of at least P1,800 per annum are required to file income tax r eturn s. Hence, the minimum annual income for the require ment on withholding to!\x to apply is P1, 800. But Section 45(a) (3) exempted from this requiremPnt individuals whose Qt"'O S S income is derived solely from salat"'ies, wages a nd other similar compensation for services re ndered which does not exceed P1,800 if .single, P3,000 if 111arri ed or a head of the fa111 i 1 y pl1..us the optional standard deduct io n to which he Ot"' she is entitled to claim under Section 30(k). There fore, a 1though the gross inco111e may be more than P1,800 per annum, the personal and additional ex emptio n to which an 27 .1.

DECISION - CTA CASES NOS. 3789 - 12 - individual income taxpayer is entitled may not subject the individual to incoMe tax and ther~fore put him beyond the ambit of the withholding tax on� wages provision. This is precise 1y the thrust of petitioner's defense against the assess~ent for it asserts that most of its workers and employees are not subject to withholding tax on wages because their "annual salaries were less than P1, 800 and considering the personal and additional exemption to wl;'lich they are entitled" <Petitionl!!r' s Memorandum, CTA records, pp. 240-241>. In the 10-day preliminary the! Accounting Chief requested the petitionl!!r to .submit the following� 1> Report on remittances of withholding tax on wages; and 2) List of income payments of P1,800 or above. Purportedly, responden t intended to determine which income payments should be subj ected to withholding tax and if it shou ld be, whether or not the withholding tax was indeed deducted and rl!!mittl!!d. Petitioner failed to sub111it th!!!se to the BIR for the latter's proper appraisal and evaluation. Neither were they submitted to this Court. In.�tead, petitioner s�.tbmitted to this Court the 27?.

DECISION - ' CTA CASES NOS. 3789 - 13 - payroll sheets and vouche rs for the whole yeat' of 1978 <nu111bering more than 2,000 exhibits> leaving r I to the Court the job of sifti ng through all of theM to dttter111ine which of petitioner's more than 600 I employees should have been subj ec ted to withholding tax and then to dete rmine the amou~t deductible as salaries and wages expe n se. As a result of the presumption in favor of the correctness of th e ass essment, when SllCh assessments ar~ assailed, the but'den of pt' oof is upon the taxpayer to clear ly show that the assessment was erroneo us in order to relieve himself from it. Whe re a taxpayet' invokes the jurisdiction of the Tax Court, he fmt ers the hearing burdened with the duty of establishing at least by a preponderance of evidence that the determination made by the Con1111i ~ sioner was erroneous <A�erican Pipe and Steel Corp. v. Co��issioner, 243 F 2d 125, 57-1 USTC 9590, 1957>. At the very least, the pe titioner should have submitted to this court a 1 i st of those workl!!rs whose income payments were IIIOt' l!! than P1,BOO attaching thereto copies of the exemption certificates required by the withholding tax on wa~es provision to be submitted by the employees to 27.1

DECISION - CTA CASES NOS. 3789 - 14 - entitle them to personal and additional exemptions for the purpose of checking verification. Though petitioner's exhibits were voluminous yet they are insuffi cient to overco me the presumption of correctness of th e asses sment. As stated, the exemption certificat es and th e wi thholding tax returns were not pr esented. Thet"' e is howevet", in the BIR records <p. 8>, a xerox copy of a document containing a list of employees sLtbjected to withholding ta~ on wage s in 1978. Presumably then, employees of petitioner not included in the 1 i st earned less than P1,800 or their personal and additional exe111ptions places them beyond the coverage of withholding tax on wages provision. At first glance, it could be believed that out of 600 plus employee s of peatitioner, only those i n the list of withheld income taxes <around 30) were earning more than P1,800 per annum considering that the bulk of its employees are stevedores and dockwork ers who, as petitioner stated, work on a system of rotation thereby rendet"ing service only for a maximum of 4 days a week for 8 hours a day. However, this court can not indulge in assumptions, speculations or inferences especially since there is a presumption of correctness of assessment in 27 �1

DECISION - CTA CASES NOS. 3789 - 15 - favor of the Commi toner. is not permitted to guess a t any fact in order to d ec ide a point or issue in favor of the p~n...ty who had the b urden of proving that fact, b�J t mu s t dec l i n e t o ma k e the deci sio n o r decide the other wa y unless it is ab l e to fi n d sat i factor y � proof o f S llCh e ssential f act in the record <Ti�es Tribun e vs. Co�� iss i oner, 20 TC 4 49, 1953 >� Th e f acts r e quired for the pr oper d ispo s ition of this c as e were available to t;he petit i oner, thus it s h o u ld h a ve endeavored to make the facts clear t�o this cout"'t � The obligation o f good f ai th a n d fa il'"' de alin g in carrying out i t s [tax a tion ' s J pt"ov is i o n s is reciprocal and, as t h e g o v ern ment s houl d never be o verr e achi n g or ty rannica l, nei th er s h ou l d the taxpa yer be p ermitted to escape pa ym ent b y the co n ceal me n t of materi a l facts <O' Laughl in v. --------._ Helvering, 81 F 2d 269, 1935 >. ~e thele 5s , le t it not be said that the court was dis s uaded f r om sift i ng through p etitioner's v o lumino us exhibits. But wh at th e c ourt found froM the exaMination thereof co u l d only be detrimental to petitioner' s cause . No t on ly were there d iscr e panc ies i n the a moun t i n dicated i n t he vduc h ers whe n c ompare d t o t he s ummation of th e 27S

DECISION - CTA CASES NOS. 3789 - 16 - entries in the corresponding payroll sheets <which tend to show padd i n g > but the payrolls revealed q ui t e a n u mber of employees who e .:n~ned mo't~e than P 1 , 800 <alm o st half by J�..tly) whose na 11e s we r e not i n cluded in the 1 ist of emplo y ees whose inco mes were s �Jbjected to withholding tax; As this c o m~ t a lready di.scu iiied , it can not b made to d't~a w on ln,erences as to th a moun ts of the ex em ption t hese e mp l oyees a:re antitled which wo uld have p u t them beyond the covar8g e o f t h e wi t h holdin g ta x on wages provision. Thus the pres u mption is that their � i ncomes !Should have b Pn subject ed to withho l d ing t ax. Tht..ts, having f iled t o sustain the burden of dem onstrating that th e r espondent was W't"Ong, the def i cienc y a ssessment is accordingly uph e ld . However, in goi n g over the deficiency assessment, the court f o und a discrepancy in the computation of the t a x due s uch that the amount of tax that should actual l y be a s ses s ed as of November 23, 1983 is P1, 992,951 . 95 arr ived at as follows: Net Loss per return (p. 331 BIR rec.l p 1134, 166. 58) Adda Di1allowed Deductions p 63,2S3.5S 1. Gratification� 2. Salaries and wages 3,062,61~.66 3, Ettrgtncy living allowanct 4~,287.2S 4. 13th Month pay 148,360.72 278

---- DECI SI ON - CTA CASES NOB. 3789 - 17 - S. Rtpresentation/Misc, expense 11~,360. 72 6. Clai1s e~penst 78,518.98 7, Allowance-Board 111bers/officer 3,000.00 8. Rtntal - equip1ent 1~,800.00 9. Legal/Audit 2,558.00 10. Rtntal - Office space 1,800.00 11, Stcurity strvicts -�----~-'-.29. Net lnco1e per review Ta~ Due theron1 First P1oo,ooo.oo ~ 25~ p 25,000.00 Excess of P3,6681570.47 x 35~ 1,283,999.66 Total P1 13081999.66 Adda Inhrnt 236, 710. 76 l~~ fr. ~/16/79 - 7/31/80 4~7,2~1.~ eo~ fr. 8/01/80 - ~/16/82 Total a1ount dut and collectible P1,992,9S1.96 WHEREFORE, petition er Pier 8 Arrastre a nd Stevedoring Co. is ordered to pay the res pondent Internal Revenue the su� of � P1,992,931.96 as defici ency inco�e tax due for t h e year 1978, plus 1 0~ surch arge and 20~ annual interest fro� date of assess�ent up to the date of pay�ent but not to exceed 3 years pur suant to Section 51 of the Tax Code. Wi t h c o sts against petitioner. SO ORDERED. Quezon . City, Metro Manila, Augt.lst 1, 1991. ~ ROAQUIN Jt.1dge 277

DECISION - CTA CASES NOS. 3789 - 18 - WE CONCURa ~- REYES Presiding Jud e (,~~.~ ~RNESTO D. ACOSTA Associ.~ate Judge C E RT I F I CAT I 0 N I hereby certify that this decision was reached a fter due consultation among the members of the Court of Tax Appeals in acc ordance with Section 13, Art icle VIII of the Consti tution. t~esiding Jl1dge Court of Tax Appeals 27~