CTA Case No. 4801 (Decision)

Republic of the Philippines COURT OF TAX APPEALS Quezon City FREEDOM TO BUILD,INC., C.T.A. CASE NO. 4801 Petitioner, - versus - COMMISSIONER OF INTERNAL REVENUE, Respondent. X- - - - This is a petition �or review �iled by petitioner seeking the reversal o� the decision o� respondent Commissioner o� Internal Revenue dated December 9~ 1991, denying petitioner's protest o� an assessment issued by respondent �or alleged de�iciency income taxes totalling ~145,592.00 for the taxable year 1983. The facts are as follows: Petitioner is a non-stock, non-profit civic organization duly ~egistered as such with the Securities and Exchange Commission. Its articles of incorporation state that its primary purpose is "to work for the upliftment o� the masses, specifically the settlers in the slum areas and in the resettlement areas, and to this end, to assist and encourage them in the improvement and/or construction of their own homes on a sel�-help basis by providing them with the necessary

DECISION - C.T.A. CASE NO. 4801 - -2- construction materials on credit and at a minimum price, and with whatever technical assistance they may need in this matter; to encourage cooperation among said settlers so they may help each other in the improvement and/or building of their respective homes; and to make available to these same settlers, by sale to them or otherwise, such other goods and/or services as may serve their needs or improve their living conditions. In a letter dated Hay 8, 1980 respondent confirms the tax exempt status of the petitioner through then Assistant Commissioner Romulo Villa. The pertinent ~xemption provision of the letter states in part as follows: "In view thereof, this Office is of the opinion that the Freedom to Build, Inc. is a corporation not organized for profit but operated exclusively for the promotion of social welfare as contemplated under Section 27<g> of the National Internal Revenue Code. Accordingly. it is exempt from the payment of income tax in respect of income received ~ it ~ such organization, and therefore need not file ~ income tax return concerning such income. However, pursuant to Section 27 of the Tax Code, as amended by P.O. No. 1457, which took effect on August 5, 1978, it is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code on its income derived from any of its properties, real or personal, or any activity conducted for profit, regardless of the dispositions thereof, which income should be returned for taxation <Revenue Memorandum Circular No. 80-78 dated August 15, 1978). Moreover, it is required to file on or before April 15 of each year a profit and loss statement and balance sheet with the annual 444

DECISION - C.T.A. CASE NO. 4801 - -3- iniormation return under oath, stating its gross income and expenses incurred during the year and a certiiicate showing that there has not been any change in its By-Laws, Articles oi Incorporation, manner OI operation and activities as well as sources and disposition oi income." <Underscoring supplied> On September 30, 1988, petitioner received a pre- assessment notice Irom the BIR notiiying it that it had been assessed deiiciency income tax Ior the year 1983 in the amount OI P145,592.00 computed as follows: Ret inco.e per investigation p 288, 556. 69 lncoae tax due thereon 90,994.84 Add: 201 Interest per annua (aaxiaual 54,596.94 TOTAL AIIOOIT DUE AID COLLECTIBLE p 145,592.00 ============= On October 13, 1988 petitioner protested the assessment on the ground that as a non-profit, non-stock civic organization, it was exempt Irom payment OI income taxes pursuant to the exemption certiiicate issued in its Iavor by the BIR. Thereaiter, on November 2, 1988, petitioner received the formal assessment notice issued by the BIR. In a letter dated December 9, 1991 then BIR Commissioner Jose Ong wrote petitioner a letter denying its protest OI the November 2, 1988 assessment. Said letter states in part as Iollows: 445

DECISION - C.T.A. CASE NO. 4801 - - 4- "In reply, please be in�ormed that under the last paragraph o� then Section 27 o� the Tax Code, as amended by P.O. No. 1457, the income o� whatever kind and character o� the �oregoing organizations, which includes organizations not organized �or pro�it but operated exclusively �or the promotion o� social wel�are, as in your case and as contemplated under then Section 27<g> o� the Tax Code, �rom any o� their properties, real or personal, or �rom any o� their activities conducted �or pro�it, regardless o� the disposition made o� such income, shall be subject to the tax imposed under the Tax Code. Accordingly, and since the de�iciency income tax assessment issued against you arise �rom your sale o� low-cost housing units the income you derived there�rom are there�ore, subject to the corporate income tax imposed under then Section 24 o� the Tax Code notwithstanding the income tax exemption issued by this O��ice in your �avor on May 9, 1980. In view thereo�, you are hereby requested to pay the amount o� P145,592.00 as settlement of your aforementioned deficiency income tax liability for the year 1983 within 15 days from your receipt hereof. Otherwise, this Office will be constrained to enforce collection thereof through the summary remedies prescribed by law. This constitutes the final decision of this Office on the matter. " On May 5, 1992, within the reglementary period for filing a petition for review, petitioner filed the instant petition questioning the aforesaid decision of respondent Commissioner of Internal Revenue. Petitioner averred that upon approval of P.O. No. 1457, the BIR allegedly granted to the petitioner on 446

DECISION - C.T.A. CASE NO. 4801 - -5- May 9, 1980, income tax exemption under a letter issued by then Assistant Commissioner Romulo Villa. That the construction and sale of low cost housing units conducted by the petitioner allegedly is not for profit but for the purpose of achieving its social welfare goals in accordance with its Articles of Incorporation and the Constitution; that in 1983 it has not yet sold low-cost housing to the public. Furthermore, it maintains that due to its construction and sale of low cost housing units it suffered losses for the years 1984, 1985, 1986, 1987 and 1988. Respondent on the other hand alleged among others that: 1. > Petitioner sold low-cost housing units and derived income therefrom and that no income tax was paid there for by the petitioner as mandated by Section 24 of the Tax Code. 2. > Petitioner's exemption from payment of income tax under the ruling issued in its favor by then Assistant Commissioner Romulo M. Villa on May 9, 1990 does not cover or include income from real or personal properties, or from any of its activities conducted for profit regardless of the di~position made of such income. 3. > He who claims exemption from taxation must point to a specific provision of law granting the same on the ground that it cannot be made to exist upon vague implications. 447

DECISION - C.T.A. CASE NO. 4801 - -6- 4. > The herein tax assessments is prima �acie presumed correct and it behooves petitioner to prove the contrary, citing the �allowing cases Interprovincial Autobus Co. Inc., ' v. Collector of Internal Revenue, G. R. No. L-6741, Jan. 31, 1959, 98 Phil. 290; Commissioner of Internal Revenue vs. Avelino, G.R. No. L-17715. July 31, 1963, 85 SCRA 572; Nindanao Bus Co. vs. L-14078, Feb.24, 1961, 1 SCRA 538). 5. > Lastly, respondent held that it has the authority to revokem repeal or abrogate the rulings o� his predecessors in o��ice because the interpretation o� a statute by those who administer it is not binding on his successors i�, therea�ter, the latter becomes satis�ied that a di��erent construction should be given. The only issue involved in this case is whether or not petitioner has sold low-cost housing units and derived income there�rom in 1983 �or which no income tax was paid. We hold �or petitioner. The disputed assessment was based on the �inding by the examiners o� the BIR that petitioner had sold low-cost housing units in 1983 and derived pro�it there�rom. This �inding is, however, bere�t o� any support in the evidence on record. The undisputed evidence on record clearly shows that while petitioner acquired the lot in 11arikina �rom the Ateneo de 11anila in 1982, it did not develop the same into a low-cost housing �acility known as the Del a 448

DECISION - C.T.A. CASE NO. 4801 - -7- Costa Low-Cost Housing Project until 1984. The ground- breaking ceremonies �or said project was held only on December 18, 1983, and it was not until March 1984 that petitioner obtained a loan �rom the Monte de Piedad & Savings Bank to �inance the project. Therea�ter, on March 29, 1984, petitioner entered into an agreement with the Master Builders, Inc. whereby the latter undertook the actual development and administration of the housing project. Then, in April 1984, petitioner completed its arrangements with the Manila Electric Co. �or the installation o� lighting �acilities in the project. It was only on July 19, 1984, that petitioner was issued by the Human Settlements Regulatory Commission a license to sell subdivision lots in the Dela Costa Low Cost Housing Project. The foregoing� pieces o� documentary evidence are supported by the testimony o� petitioner's witness William Keyes, who testi�ied as �allows: Q: Mr. Keyes, could you please tell this Honorable Court when �or the �irst time your corporation became an owner of a parcel o� real property in the Philippines? A: There is an ambiguity. The �irst property we owned came as a donation �rom the Ateneo de Manila. It consist o� 5.2 hectares. The deed o� donation was signed in 1982, but the actual use o� the property was several years ago. The deed o� 449

DECISION - C.T.A. CASE NO. 4801 - -8 - donation was signed in December 29, 1982 but by the time we got it into our name and usability was years later. Q: What did you do with this particular land that was donated to you by Ateneo de Hanila? A: We develop a social housing project. for low income families. Hany of them squatters. Q: Could you please tell this Honorable Court who develop this particular subdivision? A: Freedom to Build Incorporated was the developer but we hired Haster Builders as contractor. :>t :>t X :>t X X ATTY. BENITO: Your Honor please, this document is a public document. I would like to request that this document dated March 29, 1984 be marked' as our Exhibit I for the petitioner consisting of 8 pages. Q: Hr. Keyes, in order to be able to sell subdivision lots in the Philippines, did you apply for a license to sell from the Human Settlements Regulatory Commission at that time? A: Yes. Q: Do you have any document to substantiate this testimony? A: Yes. Q: Could you please show it to me now. 450

DECISION - C.T.A. CASE NO. 4801- -9- ATTY. BENITO Witness is presenting to this representation the original of a license to sell dated July 9, 1984 issued by the Human Settlements Regulatory Commission. We would like to request that the xerox copy of the same be marked as Exhibit J X X X. Q: Could you please tell this Honorable Court, when did you start inaugurating the project at Barangka Marikina, regarding this particular housing project donated to you by Ateneo de Manila. A: We have a ground breaking ceremony on December 18, 1983 which was very publicly attended. The bulldozers were there al~eady but work did not begin in earnest until after the Christmas vacation on ground breaking and in housing followed that. <TSN, October 9, 1992, pp. 14- 21> X >t X XXX XXX Q: According to the letter of Commissioner Ong which was earlier marked as Exhibit F, you are liable �against tax assessment issued against your corporation arising from the sale of low cost housing units in 1983. What can you say to this? A: It is not correct, we began to offer proof that is not correct in� the last hearing. We presented to contract with the builder we signed in 1984. Our groundbreaking ceremonies took place just before Christmas in 1983. I can offer additional proof this morning. Our building permits were only granted in 1984. 451

DECISION - C.T.A. CASE NO. 4801 - - 10 - XXX XXX XXX Q: Where did your corporation get the money far these projects that you have bought in Dasmarinas and Barangka, Marikina? A: The project was funded by special program of the Philippine government entitled Private Cities and Service Project Office of the National Home Mortgage Finance Corporation, a special incentive program to encourage developers to take up development funding at 9 and 12 percent i~terest if they would do social housing. We avail of that one and the loan was not released until 1984. Secondly, for additional funding, we borrowed from Monte de Piedad bank in the amount of 4 million which again was not released until 1984. Our comparative financial statements for 1983 and 1984, allow me to read just 2 or 3 figures for brevity. Total Assets in 1983 was 1 million, in 1984 it was 12.9 million. Our total accounts receivable in 1983 was 21,000 in 1984 it was 4,651,000, all of these inventories in the Pag- ibig Fund for houses built in 1984. Well, there was no similar activity in 1983. The same balance sheet show liabilities loans payable in 1983 there were none. Loans payable in 1984 there was 6,676,000. So in summary, we are making statement that we did not have the financial resources and built and sell houses in 1983 at all. The funding, the permits, the license to sell, the contract, all these events took place in 1984 not 1983 x x x x. <TSN, November 17, 1992 pp. 7-10>. 452

DECISION - C.T.A. CASE NO. 4801 - - 11 - The foregoing documentary and testimonial evidence clearly belie respondent's claim that petitioner actually sold low-cost housing units in 1983, for � which it should be held liable to pay deficiency income taxes. No less than respondent's sole witness. Crisostomo Ibarra, categorically admitted that the BIR had no evidence directly showing that the sale of housing units took place in 1983. Thus: JUDGE ACOSTA: Anyway, what is the source of that figure gathered by the examiner? A: This represent income from real and personal properties of the taxpayer. JUDGE ACOSTA: Were you able to pinpoint what particular activities of the petitioner was or where derived it? they A: No, Your: Honor, I am not around to pinpoint the . JUDGE ACOSTA: So you just assessed on the basis of the financial statement? A: And the report of the examiners. <TSN September 9, 1993, pp. 28-29> 453

DECISION C.T.A. CASE NO. 4801 - - 12 - Even the examiners report reveals crystal clear, that it entertains some doubts as to the taxability of the petitioner that is why he is endorsing it to the Law Division for the ruling. The Examiners report is herein quoted in full: May 19, 1988 MEMORANDUM FOR: The Chief, Government and Tax-Exempt Corporation Division Subject: Freedo� to Bui1d, Inc. This refers to the investigation conducted by the undersigned on the 1986 and unverified prior year internal revenue tax liabilities of the abovenamed taxpayer and the result of such investigation is hereby reported pursuant to Letter of Authority No. 0009828 NA. Subject taxpayer is a non-stock, non- profit organization created and existing under .the laws of the Republic of the Philippines, with its goal of building a low cost housing unit and which are for sale to the general public. That during the years under audit the following assessment.s and collection were made: 1982 1983 1984 1985 1986 Expanded Withholding Tax 885.81 1,888.21 3,423.49 5,028.99 4,685.&2 lnco~~e Tax 1983 145,591.&9 454

DECISION - C.T.A. CASE NO. 4801 - - 13 - The above assessment and collection resulted from non-withholding on income payments which must be subjected to Expanded Withholding Tax under the Expanded Tax Law and income tax under Sec. 24 of the N.I.R.C. The taxpayer believed that they are exempt from the payment of income tax, however, considering that the.ir line of business deals ~ Q.!l ~ of houses (low cost>, the undersigned is at the opinion that .!! thorough evaluation of its taxability be reviewed ki_ t.he Law Division of this Bureau and upon proper:. evaluation .!! ruling be issued to effect the veracity of the assessment. On the Expanded Withholding Ta~ot assessment th~ taxpayer paid the corresponding liabilities, as evidenced by the hereto attached Payment Order and Confirmation Receipts. In view of the foregoing, it is respectfully recommended that this docket be forwarded to the Law Division for comment on the taxability of the taxpayer's income during 1983 and after proper evaluation considered this case closed, terminated and filed for future reference. ADELAIDO V. RAPSING, ANACLETO A. VILLAMOR, MARIA G. SINGAYAN Revenue Enforcement Officers Respectfully forwarded: CRISOSTOMO N. IBARRA Section Chief 455

DECISION - C.T.A. CASE NO. 4801 - - 14 - The so-called exam~ner's report ~s, however, rebutted by the clear and uncontroverted documentary evidence on record showing that petitioner could not have made any sales of housing units ~n 1983 for the simple reason that said units were not yet even existing at that time, construction thereof having been commenced only in 1984 after the funds and the requ~site licenses and permits therefor had been obtained by petitioner. The ineluctable conclusion flowing from the foregoing disqu~s~t~on is that the disputed assessment was erroneously issued and must, perforce, be stricken down. We cannot let this case pass without a word of admonition for the respondent. Time and aga~n, We abhor this <mal>practice by the respondent of wantonly issuing assessments to innocent taxpayers without even an iota of basis as in the case at bar. Verily, it is refreshing to note that taxpayers harassed by the BIR can still seek refuge in this Court thereby helping restore their faith in the judiciary. We, therefore, admonish the respondent that cases of similar nature in the future will receive the same treatment and cannot expect any sympathy from this court. Hence, the respondent should see to it that only meritorious cases reach this court thereby helping in the declogging of dockets and in the process saving for the government the 456

DECISION - C.T.A. CASE NO. 4801 - - 15 - much needed resources, financial or otherwise. WllEREF'OREr the petition is hereby GRANTED, the assessment for alleged deficiency income tax totalling F145,592.00 for taxable year 1983 is hereby CANCELLED. Malayan Insurance Co. Inc. MICO Board No. 29849 in the amriunt of ~150,000.00 filed by the petitioner to l i f t the warrant of Distraint/Levy issued by the respondent is likewise ordered cancelled. No pronouncement as to costs. 50 ORDERED. GRUBA Judge WE CONCUR: ca~ STU D~ AGOSTA �esiding Judge o!'D~ ( RAm' Associate J~~A / / / I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. c;;:, &;:-~ ~ ERHESTO D~ ACOSTA Presiding ~ludge Court of Tax Appeals 457