OCEAN STAR REALTY INC. v. COMMISSIONER OF INTERNAL REVENUE

REPUBUC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY FIRST DIVISION ************* OCEAN STAR REALTY, INC., Petitioner, C.T.A. CASE NO. 7123 -versus- Members: ACOSTA, Chairperson BAUTISTA, and CASANOVA, JJ. COMMISSIONER OF INTERNAL REVENUE, Promulgated: u Respondent. iJ L 18 2007� j'. ~->PM 1 P- ---- x - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- - - - - - -- - - - - - - - -x DECISION BAUTISTA, J.:: Before this Court is a Petition for Review with prayers for the cancellation of respondent's Assessment Notice No. 6779-Q0-04-730 dated April 14, 2004 against petitioner; and for this Court to grant petitioner's request for refund and order respondent to pay petitioner the amount of NINETY SIX THOUSAND EIGHT HUNDRED NINETY SIX PESOS AND SEVENTY CENTAVOS (P96,896.70) allegedly representing excess creditable withholding taxes for the years 2000 and 2001.

DECISION C.T.A. Case No. 7123 Page 2 Petitioner is a duly registered taxpayer with the Bureau f:X Internal Revenue (''BIR'') and is engaged in realty business.1 On the other hand, respondent is vested by law with the a power to decide, approve and grant claims for refund or tax credit internal revenue taxes; and holds office at the Bureau of Internal Revenue, National Office Building, Agham Road, Diliman, Quezon City. On April 5, 2001, petitioner filed its Annual Income Tax Return for the taxable year 2000,2 with the following details: Sales/Revenue/Receipts/Fees 1' 167,273.00 Less: Cost of Sales/Services 721 ,740.00 Gross Income from Operation 445,533.00 Add: Non-Operating & other Income 5,882.00 Total Gross Income 451 ,415.00 Less: Deductions 941 ,011 .00 Taxable Income 489,596.00 Tax Rate 32% Income Tax MC IT - Aggregate Income Tax Due Less: Tax Credits/Payments 9,718.40 Creditable Tax Withheld for the First Three Quarters 9,718.40 Creditable Tax Withheld Per SIR Form No. 2307 for the Fourth Quarter 162,859.00 Tax Payable/Overpayment Total Amount Payable 38,909.12 19,454.56 (221 ,222.68) (211 ,504.04) On April 9, 2002, petitioner filed its Annual Income Tax Return for the taxable year 2001 and reflected therein the following:3 Sales/Revenue/Receipts/Fees 1,167,272.76 Less: Cost of Sales/Services 667,913.80 Gross Income from Operation 499,358.96 Add : Non-Operating & other Income 6,254.14 Total Gross Income 505,613.10 Less: Deductions 916,487. 12 Taxable Income Tax Rate (410 ,874 .02 ) Income Tax 32% MC IT N/A Tax on transactions under Regular Rate (Normal Income Tax or MCIT, 10,112.26 wh ichever is higher) 10,112.26 1 Paragraph 1 of the parties' .JointStipuliltion ofFacts andSinplification oFIssues; rollo, p.80. 2 Exhibit A; rollo, p. 116. 3 Exh ibit H; rollo, p. 136.

DECISION C.T.A. Case No. 7123 Page 3 Balance 10,112.26 Aggregate Income Tax Due Less: Tax Credits/Payments 10,112.26 Prior Year's Excess Credits 211 ,504.04 Creditable Tax Withheld for the First Three Quarters 43,772.76 Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter 14,590.92 Total Tax Credits/Payments Tax Payable/Overpayment 269,867.96 Total Amount Payable (259,755.70) (259,755 .70 ) On November 14, 2002, petitioner filed with respondent, through Revenue District Office (''ROO'') No. 48, a request for refund of income taxes paid in the amount of P96,896.70 allegedly representing excess creditable withholding tax for taxable years 2000 and 2001.4 On May 6, 2003, petitioner amended its Income Tax Return for the year 2000 to reflect the following: 5 Sales/Revenue/Receipts/Fees 1, 167,273.00 Less: Cost of Sales/Services 721 ,740.00 Gross Income from Operation 445,533.00 Add : Non-Operating & other Income 5,882.00 Total Gross Income 451 ,415.00 Less: Deductions 941 ,011 .00 Taxable Income 489,596.00 Tax Rate 32% Income Tax MCIT - Aggregate Income Tax Due Less: Tax Credits/Payments 9,718.40 Creditable Tax Withheld for the First Three Quarters 9,718.40 Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter Total Tax Credits/Payments - Tax Payable/Overpayment Total Gross Income 38,909.12 19,454.56 (58,363.68) (48,645.28) (48,645.28) Petitioner also marked "X" the option "To be refunded" in its amended ITR for the year 2000. 4 Exhibit C; roUo. p.125. 5 Paragraph 3 of the parties' Joint Stipulation of Facts, rollo. p.81; Exhibit B, rollo. p.120.

DECISION C.T.A. Case No. 7123 Page 4 On January 30, 2004, respondent issued a Post Reporting Notice and found petitioner liable for defidency Expanded Withholding Tax in the amount of P129,366.01, inclusive of surcharge, interest and compromise penalty.6 On February 19, 2004, petitioner sent respondent a letter explaining that ''the amount of P57,486.57 represents over remittances by [petitioner] of its expanded withholding taxes for the year 1999, which [petitioner] has applied against its withholding taxes for the year 2000."7 On March 12, 2004, respondent issued a Preliminary Assessment Notice ("PAN'') finding petitioner liable for defidency Income Tax in the amount of P165,221.15 and deficiency Final Withholding Tax in the amount of P122,606.52.8 On March 29, 2004, petitioner filed a protest to the PAN raising as ground that the assessment lacks legal and factual basis. Petitioner also requested a reconsideration of the findings and the PAN to be recalled.9 On April 14, 2004, respondent issued Formal Assessment Notice (''FAN''), with Details of Discrepandes, finding petitioner liable for Deficiency Income Tax in the amount of P262,619. 79 and Deficiency Final Withholding Tax in the amount of P124,270. 74. 10 On April 27, 2004, petitioner filed an administrative protest to the said FAN raising as ground that the assessment lacks legal and factual basis.11 On December 6, 2004, respondent issued his Final Decision on Disputed Assessment (''FDDA'') and found petitioner liable for defiCiency Income Tax in the amount of P280,497.54 and deficiency Final Withholding Tax in the amount of Pl31,557.62, the details of which are as follows: 12 6 BIR Records, p. 154. I 7 Exhibit D; rollo, pp. 125-126. 8 BIR Records, pp. 186-187. 9 BIR Records, pp. 201-203. 10 Exhibits 18, 19, 20 and 20-b; BIR Records, pp. 222-227. 11 Exhibit E; rollo. pp. 127-129. u Exhibit F; roHo. pp. 13D-131.

DECISION C.T.A. Case No. 7123 Page 5 DEFJCJEN:Y INDME TAX Taxable Income(Loss) per Return p (489, 596.00) add: adjustments 37,650.00 325�082.85 287�432.85 (164,513.15) Outside Services not subjected to EWT p 489�596.00 p 325,082.85 Interest Expense not subjected to Final Tax p 104,026.51 Adjusted Taxable Income 162,859.00 ~58,363.682 add: Net Operating Loss Carry Over 162,859.00 162,390.19 162,859.00 118,107.35 Taxable Income per Audit 221,222.68 280,497.54 Tax Due p less: Tax Payments/Credits Prior year's excess credit p Creditable tax withheld p 58,363.68 58,363.68 less: Disallowed-opted to refund Total add: Tax paid (MCIT) Total less: Excess tax credit carried forward Deficiency Income Tax add: 20% Interest (4.16.01-1.05-05) Total Amount Due DEfJCIEfC'( FINAL W1THHOI.DJNi TAX: Interest payments p 640,445.35 20% x Rate p 128,089.07 57,486.57 128,089.07 Tax Due p 28,743.29 70,602.50 less: Tax Credits/Payments 45,327.77 57,486.57 p Per Return 74,071.06 131,557.63 less: Dsallowed-1999 excess creditable tax withheld Deficiency Tax add: 50% Surcharge 20% Interest (1.26.01 to 1.05.05) Amount still due The Details of Discrepandes, attached to the Final Decision on Disputed Assessment, averred that the tax liabilities arose from the following: 13 "Deficiency Income Tax: 1) Outside Services not subjected to EWT CP37.650.00) - Verification disclosed that outside services of P37,650.00 claimed was not subjected to expanded withholding tax pursuant to Section 58 of the 1997 Tax Code as implemented by Revenue Regulation 2-98, hence the same was disallowed as imposed under Section 34(K) c:l the same Code. 13 Exhibit f-.1; rollo. pp.132- 133.

DECISION C.T.A. Case No. 7123 Page 6 2) Interest exoense not subjected to Ff (P287.432.85) - Verification disclosed that 20% was withheld on interest payment of P640,445.35 or the equivalent of P128,089.07 tax due as implemented by RR 2-98, Section 2.57-1(G)(1). However from the total tax due, only P70,602.50 was remitted to the government, hence in view of your failure to remit in full the tax withheld pursuant to Section 58 of the 1997 Tax Code as implemented by Revenue Regulation 2-98, the said amount was disallowed as deduction from gross income as imposed under Section 34(K) of the same Code. Computation:P128,089.07-P70,602.50 = P57.486.57=P287.432.85 20% 20% 3) Net Ooeratina Loss carrv Over (P489,596.00)- Verification disclosed that you had carried over the net operating loss incurred during the year in the subsequent year, in conformity with the provision of Section 34 (D)(3) of the National Internal Revenue Code. It is appropriate that such loss should be taken into consideration in computing the correct income tax liability for the current year in order to recapture the income tax benefit realized in the following year because rl such carry over. 4) Creditable Tax Withheld (PS8,36.68) - Verification disclosed that you opted to refund excess of the creditable tax withheld for the year 2000 per letter request dated November 14, 2002, hence excess credits claimed were disallowed as tax credit against computed defidency income tax pursuant to Section 204 of the 1997 NIRC as implemented by RR-2- 98, Section 2.58.3(C). 5) Minimum Corporate Income Tax (P9,718.40)- Payment was not applied against the computation of defidency income tax because this shall be carried forward and credited against your normal corporate income tax for the three (3) immediately succeeding taxable years pursuant to Section 27(E)(2) of the 1997 Tax Code. 6) Excess Tax Credit carried Forward (P221.222.68) - Verification disclosed that your final income tax return filed resulted to excess tax credit of P221,222.68. This excess amount cannot be considered in the computation of income tax deficiency because it had been automatically carried over to the next taxable year period. Deficiency Final Withholding Tax: Unremitted Tax Withheld (P57,486.57) - Verification disclosed that the amount of P57,486.57 excess income tax credit of your company for 1999 and prior years was credited/used as payment against Final Withholding tax remittance. The Legal Division, this Region, opined that no automatic offsetting of the amount daimed by the taxpayer as tax credit or refund against any tax liability can be allowed citing the case of Republic vs. Mambulao Lumber Co., and Domingo vs. Garliton, correspondent to existing BIR Rulings." /

DEOSION C.TA Case No. 7123 Page 7 On January 7, 2005, petitioner filed this Petition for Review before this Court assailing respondent's assessment for deficiency Income Tax in the amount of Two Hundred Eighty Thousand Four Hundred Ninety Seven Pesos and Fifty Four Centavos (P280,497.54) and deficiency Final Withholding Tax in the amount of One Hundred Thirty One Thousand Five Hundred Fifty Seven Pesos and Sixty Two Centavos (P131,557.62). In his Answer to the Petition, filed on April 22, 2005, respondent alleged the following special and affirmative defenses: "A) Deficiency Income Tax: L Disallowed Outside Services: 9) The Tax Code provides that any amount paid or payable which is otherwise deductible from, or taken into account in computing gross income shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid (Section 34{K] NIRC); 10) Verification of the BIR records of this case showed that Petitioner's outide services in the amount of P37,650.00 was not subjected to withholding tax pursuant to Section 58 of the 1997 Tax Code, hence, the same was disallowed as deduction in accordance with the above-cited rule; 11) Petitioner's daim that the outside services is not subject to withholding tax as the same were paid to general professional partnership is bereft or merit as they were not able to substantiate the same; IL Disallowed Interest Expense: 12) Further, Petitioner's interest expense in the amount of P640,445.35 is subject to 20% final withholding tax pursuant to Section 2.57- 1(G)(1) of Revenue Regulations (RR) 2-98; 13) However, verification disclosed that only the amount of P70,602 or less than 12% was remitted to the government; 14) Hence, the interest expense of P287,432.85 representing the amount not subjected to 20% final withholding tax was disallowed as deduction pursuant to Section 34(K) of the 1997 Tax Code; IlL Disallowed Tax Credit: 15) Under RR 2-98, a corporate taxpayer's excess expanded withholding tax credits for the taxable quarter/year shall automatically be allowed as credit against his income tax due for the taxable quarter/years immediately succeeding the taxable quarterly/years in which the excess credit arose provided he has not opted for a cash refund [Section 2.58.3(C)]; 16) Verification disclosed that Petitioner has opted to refund the excess of the creditable tax withheld for the year 2000, hence, the same was I

DECISION C.T.A. Case No. 7123 Page 8 disallowed as tax credit against its computed defiCiency income tax pursuant to the preceding paragraph; IV. Deficiency Final Withholding Tax. 17) As mentioned in paragraph 12 of this Answer, Petitioner's interest expense is subject to 20% final withholding tax under Section 2.57- 1(G)(1) of RR 2-98; 18) However, verification disclosed that Petitioner only remitted P70,602.50 from its interest expense of P640,445.35, thus, it is still liable for P57,486.57; 19) Further, Petitioner cannot set off its excess creditable tax payments for 1999 that it remitted to the SIR as payments for its final withholding tax liability for 2000 inasmuch as taxes are not debts, consequently, it is not susceptible ci set elf (Republic v. Mambulao Lumber, 4 SCRA 67Z); 20) Moreover, Section 248(8) of the 1997 Tax Code imposes a penalty equivalent to 50% of the deficiency tax in case of a false or fraudulent return; 21) In this case, verification disclosed that Petitioner willfully made an under-remittance in its withholding tax returns for taxable year 2000, thus, making the same false or fraudulent and subject to a penalty of 50% of the deficiency tax; 22) Petitioner's Protest Letters dated 29 March 2004 and 27 April 2004 to the Preliminary Assessment Notice and Formal Assessment Notice, respectively, did not raised the issue of alleged prescription, hence, the same cannot be raised for the first time on appeal (MD Transit and Taxi Co., Inc. v. Estrella, 30 March 198Z); 23) At any rate, considering that this case involves a false or fraudulent return, the period of prescription for assessment that would apply is 10 years from the discovery of the fraud or falsity (Section 222, 1997 NIRC); 24) All presumptions are in favor of tax assessments (Interprovincial Autobus Co., Inc. v. Collector, 98 Phil 290; Cecilia Teodoro Dayrit v. Mon. Fernando Cruz and Commissioner, L-39910, 26 September 1988; Bonifactio Sy Po v. CTA & Commissioner, G.R. No. 81446, 18 August 1988)." After both parties presented their respective documentary and testimonial evidence; and after petitioner filed its Memorandum on November 23, 2005, this Court issued a Resolution dated January 15, 2007 considering the present case as deemed submitted for decision. 14 The parties stipulated on the following issues for the Court's resolution: /

DECISION C.T.A. Case No. 7123 Page 9 "1. Whether or not petitioner is entitled for refund as a matter of right in the amount of P96,896. 70. 2. Whether or not petitioner is liable for the alleged deficiency income tax and final withholding tax in the amount of P280,497.54 and P131,557.62 respectively for the taxable year 2000. 3. Whether petitioner's Outside Services in the amount of P37,650.00 was subjected to withholding tax; 4. Whether petitioner's Interest Expense in the amount of P287,432.85 was subjected to 20% final withholding tax; s. Whether petitioner can set off its excess creditable tax payments for 1999 as payments for its final withholding tax liability for 2000; 6. Whether petitioner can utilize as tax credit its excess creditable withholding tax in the amount of PS8,363.68 for taxable year 2000, which it opted to refund; 7. Whether petitioner can alleged for the first time on appeal that the excess creditable withholding tax in the amount of P58,363.68 was never totally applied against its income tax due; 8. Whether petitioner made false or fraudulent return by willful under-declaration of its withholding tax return for taxable year 2000; 9. Whether the issue of prescription can be raised on the first time on appeal; 10. Whether petitioner's income tax assessments have become final and executory for its failure to submit all relevant supporting documents; 11. Whether for taxable year 2000, petitioner incurred the following tax liabilities: xxx a) Deficiency Income Tax covered by Assessment Notice No. IT-6779-00-04-730 dated 14 April 2004 in the amount of P262,619.79, and b) Deficiency Final withholding Tax covered by Assessment Notice No. WF-6779-00-04-730 dated 14 April 2004 in the amount of P124,270.74. "15 As regards the first issue, this Court rules in the negative. Section 76 of the 1997 National Internal Revenue Code (''NIRC'') reads: "SEC. 76. Final Adjustment Return - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly 14 Rollo, p. 241. 15 Joint Stipulation of Issues; rolo,. pp. 81-82.

DECISION C.T.A. Case No. 7123 Page 10 tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the oPtion to cany-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been ma<le. such oPtion $hall be considered irrevocable for that taxable Deriod and no aoolication for cash refund or issuance of a tax credit certificate $hall be allowed theref9re.w (Emphasis and underscoring supplied.) In several cases,16 this Court has ruled that once the option to carry-over has been made and the excess quarterly income tax was already applied against the income tax due for the taxable quarters of the succeeding taxable years, such option shall be considered irrevocable and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore. A scrutiny of the evidence presented to this Court revealed that the composition of the subject claim for refund amounting to P96,896. 70 were as follows: Excess Tax Credits for the year 2000 - P48,645.28 and Excess Tax Credits for the year 2001 - P48,251.42. As to the excess tax credits for the year 2000 amounting to P48,645.28, a perusal of the evidence revealed that it was carried-over by the petitioner in the year 2001. Petitioner's original 2000 ITR showed the following information: MCIT 9,718.40 Aggregate Income Tax Due Less: Tax Credits/Payments 9,718.40 162,859.00 Creditable Tax Wrthheld for the First Three Quarters Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter 38,909.12 Tax Payable/Overpayment 19,454.56 Total Amount Payable (221 ,222.68) (211 ,504.04) 16 Subic Bay Distributbn, Inc. ~. The Commissioner ofInternal Revenue, CTA EB No. n , May 23, 2006; Bank ofthe Phiippine Islands ~. Commissioner of Internal Revenue, CTA Case No. 6276, March 12, 2003; Phi/am Asset Management, Inc. ~. Commissioner ofInternal Revenue, CTA Case No. 6210, dated May 2, 2002.

DEOSION C.T.A. Case No. 7123 Page 11 The total amount of overpayment amounting to Jl211,504.04, as shown above, was carried-over by the petitioner to its 2001 ITR as Prior Year's Excess Credits.17 Said amount included the subject claim for refund in the amount of P48,645.28 computed as follows: Creditable Tax Withheld for the First Three Quarters P 38,909.12 Creditable Tax Withheld per BIR Form No. 2307 for P _ _ _..;:19::.<'..:.:45:._4;.:.:.5:..:;6_ the Fou1h Quarter Total Tax a-edits/Payments P 58,363.68 Less: MCIT for the year 2001 P ------:~(9"-"'::'-:71=8"=.4'-::'0L..) Total Amow1t Payable (OVerpayment) P===48==,Ci=i41=5.=28= As to the remaining subject claim for refund in the amount of 1248,251.42, which pertains to the year 2001, a scrutiny of the evidence revealed that it was also carried-over by the petitioner in the year 2002. Petitioner's original 2001 ITR showed the following information: Prior Year's Excess Credits 211,504 .04 Creditable Tax Withheld for the First Three Quarters 43,772.76 Creditable Tax Withheld Per SIR Form No. 2307 for the Fourth Quarter 14,590.92 Total Tax Credits/Payments Tax Payable/Overpayment 269,867.96 Total Amount Payable (259,755.70) (259, 755.70) The total amount of overpayment amounting to Jl259,755.70, as shown above, was carried-over by the petitioner to its 2002 ITR as Prior Year's Excess Credits.18 Said amount included the subject claim for refund in the amount of Jl48,251.42, computed as follows: Creditable Tax Withheld for the First Three Quarters P 43,n2.76 Creditable Tax Withheld per BIR Form No. 2307 for P _ _ _ _14_..,_5_90_9._2_ the Fourth Quarter Total Tax a-edits/Payments P 58,363.68 Less: MCIT for the year 2001 Total AmDW'It Payable (OVerpayment) P _ _____.:C..::1=..t.0,..:.;11=:2::..:.2:.::6'-) P====-=48~,25==1.=4=2= Clearly, the amount being claimed for refund, which is Jl96,896. 70, the sum of P48,645.28 and Jl48,251.42 for the year 2000, were already covered by the irrevocability 17 Une 26A of Exhibit H; rollo. p. 136.

DECISION C.T.A. Case No. 7123 Page 12 rule set forth in Section 76 of the NIRC. Again, once the option to carry-over has been made, the same becomes irrevocable and no application for cash refund or issuance of a tax credit shall be allowed for that taxable period.19 The subsequent amendments done by petitioner on its 2000 and 2001 ITRs did not result to the exclusion of the same on the abovementioned rule. Hence, petitioner's claim for refund is without merit. DEFICIENCY FINAL WITHHOLDING TAX The deficiency final withholding tax was brought about by the disallowance of the amount of P57,486.57. Based on petitioner's Annual Information Return of Creditable Income Taxes Withheld (Expand~) [BIR Form 1604-E]20 for the year 1999, it has P57,486.57 excess tax remitted, computed by d~ucting ''Taxes Withheld" in the amount of P125,746.47 from ''Total Amount Remitted" of P183,233.04.21 The following year, petitioner offset the amount of P57,486.57 against the taxes requir~ to be remitted; and the nature of income payment was describ~ by petitioner as "Interest Expense" in its BIR Forms 1601-E starting July 2000, illustrated as follows: Month Tax Required "CNerpayment Tax Still [)Je 011ered to be Wrtttleld 1999" (Overremittance) Exhibit 9 July 10,340.99 (57,486.57) (47,145.58) Exhibit 10 August 10,031.12 (47,145.58) (37,114.46) Exhibit 11 10,117.36 (37,114.'16) (26,997.10) Exhibit 12 Se~mber 10,765.81 (26,997.10) (16,231.29) Exhibit 13 10,536.48 (16,231.29) (5,694.81) Exhibit 15 October 11,576.82 (5,694.81) rt>vember 5,882.01 December 18 Une 26 of Exhibit I, Rollo. p. 140. 19 Paseo Realty and Development Corporation liS. Court of Appeals, Coutt of Tax Appeals and Commissioner of Internal Revenue, 440 SCRA 235 (2004); Comsys Phi/ipp;,es, Inc. liS. The Commissioner ofInternal Revenue, CTA Case No. 6651, April or 28, 2005; Permanent Homes, Inc. liS. Commissioner Internal Revenue, CTA Case No. 6441, September 7, 2004; Family or Medicare Services, Inc. liS. Commissioner Internal Revenue, CTA Case No. 6453, June 7, 2004. 20 Exhibit G; rollo. pp. 134-135. /

DEOSION C.T.A. Case No. 7123 Page 13 Based on the above, it is clear that petitioner did not pay the amount of P57,486.57 for the year 2000 because of the offsetting. Nonetheless, petitioner, filed monthly returns from July to December of that year showing the offsetting. The last payment/remittance of withholding taxes for the year 2000 made by the petitioner was on January 23, 2001, as evidenced by Philippine Veterans Bank's Official Receipt No. 399758A for the amount of P5,882.01. 22 Section 2.58 (A) (2) of Revenue Regulations 2-98, which specifies the period for the filing of monthly returns and remittance of taxes withheld, provides: 23 "Sec. 2.58. Returns and Payment of Taxes Withheld at Source. (A) XXX (2) WHEN TO FILE - (a) The withholding tax return, whether creditable or final, shall be filed and payments should be made within ten (10) days after the end of each month except for taxes withheld for December which shall be filed on or before January 25 of the following year. (b) For large taxpayers, the filing of the return and the payment of tax shall be made within twenty five (25) days after the end ci each month. (c) The return for final withholding taxes on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements shall be filed and the payment made within twenty five (25) days from the close of each calendar guarter." Apparently, the three (3) year period within which respondent has to assess petitioner of creditable expanded withholding tax or final withholding tax shall be counted from the last day required by law for filing a monthly remittance return, which is on or before January 25 of the following year or within twenty five days from the close of each calendar quarter. 21 Part II, Schedule 1 of Exhibit G. 22 SIR Records, p. 19. 23 ~Implementing Republic Act No. 8424, 'An Act Amending The National Internal Revenue Code, As Amended, Relative To The Withholding On Income Subject To The Expanded Withholding Tax And Fnal Withholding Tax, Withholding Of Income Tax On Compensation, Withholding Of Creditable Value-Added Tax And Other Percentage Taxes."

DECISION C.T.A. Case No. 7123 Page 14 Respondent posits that the applicable prescriptive period for the subject assessment is ten (10) years because he claims that this case involves false or fraudulent returns under Section 222 of the Tax Code. This Court does not agree. False or fraudulent return, as exceptions to the period of limitation of assessment and collection of taxes provided in Section 222 of the NIRC of 1997, as amended, must be actual not constructive. It must be intentional, consisting of deception willfully and deliberately done or resorted to. Fraud must be proven by clear and convindng evidence amounting to more than mere preponderance. It cannot be justified by mere speculation. This is because fraud is never lightly to be presumed.24 In order to render a return made by a taxpayer a "false return" within the meaning rl Section 222 of the NIRC, there must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake that is not culpable in respect rl its value would not constitute a false return. 25 This Court finds that petitioner's acts do not constitute bad faith and the returns filed cannot be considered as false or fraudulent. Petitioner's act of offsetting its excess tax credits for the year 1999 to its taxes to be remitted for the year 2000 is not allowed because it is tantamount to the non-remittance of the respective withholding taxes for the months affected. However, on the face rl the returns,26 it is clear that it was done in good faith, considering that the amounts from the year 1999 being charged against the amount to be remitted for the year 2000 were clearly typewritten on the faces of petitioner's BIR Forms 1601-E as "Balance of Overpayment for 1999." Hence, the three (3)-year prescriptive period 27 should apply. 2~ Yutivo Sons Hardware Corrpny .s. Court of Tax Appeals and Collector ofInternal Revenue, 1 SCRA 160. 25 Commissioner ofInternal Revenue .s. Ayala Hotels, Inc., CA-G.R. SP No. 70025, Apr~ 19, 2004. 26 Exhibits 9, 10, 11, 12, 13 and 15. 27 Section 203 d 1997 NIRC.

DECISION C.T.A. Case No. 7123 Page 15 The last day prescribed by law for filing of the return (BIR Form 1601-E) in the instant case was January 25, 2001. Consequently, respondent has until January 26, 2004 within which to issue his assessment notice.28 In the case at bar, the right to assess had prescribed as respondent issued his Assessment Notice No. 6779-0Q-04-730 on April 14, 2004.29 Therefore, respondent's Assessment Notice No. 6779-00-04-730 issued for petitioner's Final Withholding Tax for the year 2000 is void. As for the deficiency Income Tax, petitioner filed its 2000 ITR on April 14, 2001 and the last day ci filing for petitioner's 2000 ITR was on April 17, 2001.30 As the last day for respondent to assess the same was on April17, 2004, the assessment issued by respondent on April14, 2004 was within the prescribed period. DEFICIENCY INCOME TAX Petitioner is held liable for deficiency income tax due to the disallowance of the following items: 1. Outside Services not subjected to Expanded Withholding Tax - P37,650.00 2. Interest Expense not subjected to Final Tax- P287,432.85 3. Creditable Tax Withheld (for refund)- P58,363.68 Outside Services The amount of P37,650.00 was disallowed by respondent as petitioner's deduction because ci non-withholding ci taxes therein. Petitioner counters that the amount was paid to a General Professional Partnership. Hence, it is not required to withheld tax. Section 26 of the 1997 NIRC, states that: "Sec. 26. Tax Uability ci Members ci General Prcfessional Partnerships.- A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business 28 January 25, 2004 was a Sunday. / 29 Exhibit 19, Rollo. p.226. 30 April15, 2001 was a Saturday.

DECISION C.T.A. Case No. 7123 Page 16 as partners in a general professional partnership shall be liable for income tax only in their separate and individual capadties. XXX XXX xxx." Also, Section 2.57.5 ci Revenue Regulation 2-98 states: "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; (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: xxx." Thus, payment made to a general professional partnership is not subject to the withholding ci taxes. The composition of the disallowed amount of P37,650.00 is as follows: Reference Payee Amount Tax Wittileld and Remitted u Exhibit and lJ-1 OR. No. 2159 R.S. Bernaldo & Associates 15,000.00 none Bill No. 7223 Exhibit V and V-1 OR. No. 1757 R.S. Bernaldo & Associates 10,000.00 none ExhibitW Bill No. 6668 Receipt date Velicaria, Vibar, Santiago, 650.00 none 27-Dec-00 Palana & Egenias Law Office Exhibit X Check Voucher Nardssus L Duran 12,000.00 1,200.00 with Check No. 148439 37!650.00 1!200.00 Based on the above, the amount of P25,650.00 pertains to the payments made by petitioner to a general professional partnership not subject to withholding tax. 31 As the dates in the documentary evidence are not disputed by the parties, this Court shall consider the same as pertaining to the subject taxable year. I 31 Total of Exhibits U, U-1, V, V-1 and W.

DECISION C.T.A. case No. 7123 Page 17 The remaining amount of P12,000.00 is not a payment to general professional partnership. Thus, said amount is not exempt from the withholding of tax due. However, evidence shows that petitioner complied with the withholding requirement; and withheld the amount of P1,200.00 and remitted the same to respondent as evidenced by its BIR Form 1601-E return for December 2000.32 Therefore, the amount of P37,650.00 must be allowed as a deduction. Interest Expense not subjected to Rnal Tax Based on the evidence presented, respondent was correct when he disallowed the deduction of the amount of P287,432.85. Petitioner is not allowed to use it as a deduction because by off-setting the excess taxes amounting to P57,486.57 in 1999 against the Final Taxes due for the months of July to December 2000, it resulted to the non-payment of Final Withholding Taxes due on the aforementioned months. It also violated Section 2.57-1 (G)(l) of Revenue Regulation No. 2-98. Creditable Tax Withheld Respondent argues that since petitioner applied for the refund of the amount of P58,363.68, it is not allowed to use the same as tax credit for the year 2000. This Court does not agree. Petitioner's claim for refund in the amount of P96,896.70 was disallowed because petitioner carried over and applied the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable year. The amount carried over includes the Creditable Tax Withheld disallowed by respondent in the amount of P58,363.68 for the year 2000. However, only P48,645.28 out of P58,363.68 will be allowed as tax credit 32 Exhibit Y; rollo. p. 170.

DECISION C.T.A. Case No. 7123 Page 18 after deducting the MCIT for the year 2000 amounting to P9,718.40. Petitioner has prior year's excess credits in the amount of P-162,859.00 for the year 2000 and an additional amount of P48,645.28. Hence, petitioner has a a total tax credit or overpayment of P-211,504.28 for the year 2000. According to the Final Decision on the Disputed Assessment, the amount of "Taxable Income (Loss) per Return" in the amount of P-(489,596.00) was added back to the "Adjusted Taxable Income" by the respondent "in order to recapture the income tax benefit realized in the following year." However, respondent did not specify what year and what amount did petitioner carry over the same. Furthermore, verification disclosed that no carry over of that amount was apparent on petitioner's 2001 ITRs, both original and amended. Even if the amount was carried forward to the subsequent year, it was supposed to be on the subsequent year (2001) that the amount of P-(489,596.00) should be added back and not on the year the Net Operating Loss carry Over (''NOLCO'') was incurred (in 2000) as it was in the year 2001 that petitioner will obtain tax benefrt: from such deduction from its gross income. The respondent's assessment for deficiency Income Tax should be recomputed as follows: PffiQFM"Y JNX)ME TAX p (489,596.00) Taxable Income(Loss) per Return 287,432.85 325,082.85 add: adjustments (164,513.15) Interest Expense not subjected to Final Tax p 9,718.40 Taxable Income p 162,859.00 221,222.68 Tax Due 32% 58,363.68 MCIT (211,504.28) less: Tax Payments/Credits Prior year's excess credit Creditable tax withheld Total Total Amount Payable (Overpayment) I

DECISION C.T.A. Case No. 7123 Page 19 Although respondent was correct in disallowing petitioner's Interest Expense not subjected to Final Tax in the amount r:i P287,432.85; nonetheless, petitioner has no tax liability for the year 2000. Petitioner incurred a loss in the amount of P164,513.15. Also, after applying the amount of P9,718.40 MOT against the total tax credit of P221,222.68, it appears that there was an overpayment of taxes in the amount r:i P211,504.28 for the year 2000. Hence, petitioner is not liable for deficiency Income Tax. As to the issue on the non-submission of all relevant documents within the sixty (60)-day period, it must be emphasized that respondent is not the proper party to decide whether or not the documents submitted are essential and complete to support the protest of the taxpayer. It is up to the taxpayer to decide. This is to prevent respondent from abusing the exercise r:i his otherwise unlimited power to tax the petitioner.33 WHEREFORE, the Petition for Review is PARTIALLY GRANTED. Respondent's assessments for defidency Income Tax and Final Withholding Tax for the taxable year 2000, in the amount of Two Hundred Eighty Thousand Four Hundred Ninety Seven and 54/100 Pesos (P280,497.54) and One Hundred Thirty One Thousand Five Hundred Fifty Seven and 62/100 Pesos (P131,557.62), respectively, are hereby CANCELLED and SET ASIDE. However, petitioner's request for refund in the amount of Ninety Six Thousand Eight Hundred Ninety Six and 70/100 Pesos (P96,896.70) is hereby DENIED for lack of merit. SO ORDERED. 33 The Commissioner oFInternal Revenue 1!5". Harukil Enterprises, Inc., CTA EB No. 105, June 1, 2006.

DECISION C.T.A. Case No. 7123 Page 20 WE CONCUR: L~ ERNEST~ . ACOSTA Presiding Justice (On Leave) CAESAR A. CASANOVA Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, 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 ci the Court's Division. ~ ERNESTO D. ACOSTA Presiding Justice Chairperson, First Division