CTA Case No. 2775 (Decision)

aaPU.UC O'f Tint PRtUPPI!fta COURT OF TAX APPEALS QI:&ZON CiTY CARMEL CORPORATION, Pe t itioner, - versus - C.T.A. CASE NO. 2775 THE HONORABLE EFREN I. PLANA, as Acting Com- missioner of Internal Revenue, Respondent. X- - - - - - - - - - X DE C I S I 0 N In a letter-assessment dated March 30, 1970, respondent Commissioner of I'nternal Revenue informed pe titioner Carmel Corporation that upon investigation t here has been found due from it deficiency income tax for the year 1964 in JP~ amount of ~37,205.40, de ta i ls of which are as follows: Net income per return - - - - - - - - - - ~ 42,294.26 Add: Unallowable deductions: 1. Additional interest income-~19,621.35 2. Miscellaneous expenses 8,507.01 3. Transportation expenses 8,304.73 4. Representation expenses 14,107.91 5. Salaries ~ - - - 16,500.00 6. IQsurance - - - - - - - 3,1~2.80 7. Commissions -- - -- - 30,266.00 8. Bonus - - - --- - - - - - - 20,000.00 120,489.80 Net income per investigation - - - - - - ~162,784;06 Tax due t he reon - - - - - - - - - - - ~ 40,835.00 Less: Amount already asqessed - - - - 9,305.00 Ba 1 a n c e - - - - - - ~ - - - - ~ 31,530.00 Add: ~% mo. int. fr. 4-20-65 to 4-20-68 - 5,675.40 TOTAL AMOUNT DUE & COLLECTIBE - - - - - - ~=~z~~Q~~~Q Petitioner was therefore requested by respondent to ..'.....',8

DECISION CTA CASE NO. 2775 - 2- pay the said deficiency tax to his collection agent promptly upon the receipt thereof. (p. 40, BIR records.) To enforce collection of the alleged deficiency i ncome tax liability, which apparently was not paid pr omptly by petitioner, warrants of distraint and of levy were served on petitioner on January 4, 1971. (pp . 58 & 61, BIR records.) While certain personal p roperties of petitioner were placed under construe- tive distraint, the execution of the warrants of d istraint and of levy was however suspended because the request f or re-investigation of the case dated January 19, 1971 of petitioner was granted by respon- dent, and petitioner had already submitted pn April 13, 1970 a waiver of the defense of prescription. (pp~44, 62, 68 & 69, BIR records.) In his demand-letter of December 21, 1971, respondent however reiterated, because of failure of petitioner to present substantial proof or evidence to negate the findings of his office , the original assessmen t. (p. 83, BIR records.) After adding thereto the increments inci6ent to delinquency ~nd compromise penalty for late payment, the deficiency income tax liability of petitioner for the year 1964 had been increased to ~46,645.03, computed as follows:

DECISION - CTA CASE NO. 2775 - .3 - (p. 83, BIR records) 1964 deficiency income tax due (23-ACR-500215-69/64) ������� P37,205.40 Add: 5% sur6harge 6n P31;530.00. � � � 1,576.50 1% mo. int. on ~37,205.40 from 3-21-70 to 12-21-71 � � � 7,813.13 Compromise for late payment � 50.00 TOTAL AMOUNT DUE & COLLECTIBLE � � � � ~~g~g~~~~~ In asking for the cancellation and withdrawal of the aoresaid assessment of P46,645.03, petitioner, i n his letter of October 31, 1972 to respondent, explained, but unaccompanied by adequate evidence, the nature o f its disallowed claimed deductions, and requested that pending consideration of its protest and so as not to prejudice its business, the warrants of distraint and of levy against its property and right to prope rty be lifted. (pp. 104-108, BIR r e cords.) . Sur prisingly, notwithstanding the i s suance or re-issuance o f warrants of distraint and of levy against petiti oner's properties to enforce collection of its deficiency income tax "liability for 1964, the said de f iciency income tax remained unpaid, for on September 15 1 1975 respondent in a form-~etter to pe titioner inv ited its attention to "the President's Letter of In st ructions No. 308, issued August 22, 1975, whi c h author izes th e Commissioner of Internal Re v enue to review and evaluate and to exercise his authority to make compromise as a mode of settling expeditioDsly 000

DECISION - CTA CASE NO. 2775 - 4- all delinquent tax liabilities." Should petitioner desire .to ta ke advantage of Letter of Instructions � No. 308 1 respondent suggested that petitioner would apply in wri t ing for compromise settlement, stating t he reasons or grounds to be considered and to per- s onally or by representative appear and confer with the chief of the appellate division of the Bureau o f Internal Re venue. (p. 119 1 BIR records.) . By its le tter of October 14 1 1975, petitioner advised respondent however that it had availed of the tax amnesty under Presidential Decree No. 23. (p . 120, BIR records.) . In reply t hereto, respondent informed petitioner that he could not cancel the deficiency income tax liability for 1964 in the amount of ~4 6, 645.03 for the reason that "the afore- said liability is not affected by the availmen t of the tax amnes ty under Presidential Decree No. 23 since it was a ssessed on December 21, 1971 or prior to the effectivity on October 20, 197 2 of Revenue Reg ulations No . 8-72, which implements the provisions of Pre siden tia l Decree No . 23." In view thereof, dema nd was made by respondent for the payment of the defic iency income tax for 1964, but if petitioner was not satisfied with such decision, it could appeal to this Court within thirty days from receipt thereof. (pp. 121-122, BIR records.) s1

DECISION - CTA CASE NO. 2775 - 5- Hence t he instant appeal filed on February 6, 1976. ;~A fter t h e issues were joined with the filing b y res ponden t on May 5, 1976 of his answer to the petition for review, the case was set for trial on t he merits. However, the trial was postponed for no less than seven times mainly upon request of counsel for petitioner allegedly because he had to p repare for t rial, get in touch with his witness or had to attend other court hearings. Then on February 27, 1979 pet i tioner filed an amended petition for r e vie w stating for the first time that "the alleged i ncome tax de f iciencies assessed against petitioner refer s to a dd itional interest income, miscellaneous expe nses , r epr esen t ation expense s , salaries, insurance / c ommis sions and bonus, plus surcharges and pena lties th er e on'' {p. 4 0, CTA records)~ wh e n all the time the d isallowance of the se items, which resulted in the def ici e ncy inc ome tax assessment in question, had all be en s pe ci fi c al l y e nume rated, together with their respe c tive amount, in the d e f ic i ency assessment re c e i ved by pe titione r and had been contested by it item by i tem i n its letter of October 31, 1972 on the basis o f which petitioner requested that the asse s sment s hould be cancelled and withdrawn (pp. 104- 10 8 , BI R rec o rd s) �.

DECISION CTA CAS E NO. 2775 - 6- Under paragraph VI of his answer to the amended petition for review, respondent specifically denied t hese allegat ions of petitioner for being . erroneous conclusions of fact and/or law, and stated in this connection t hat petitioner's protest on the deficiency t a x ass e ssme nt involving fue afor e said items was denied by him in his letter-decision date d December 21, 1971. Res p on d en t fur th e r alleged that s aid decision not h aving be e n appe aled to this Cour t within thirty days f rom r eceipt t hereof as mandated by Sect ions 7 and 11 of Re p u b lic Act No. 1125, the same had already become fi n a l and e xe cutor y . (p. 56, CTA records.) The c as e was again set for t rial on the merits, but af ter peti tioner had marked a few documents fou nd in the r ecords of the Bureau of Internal Revenue bearing on t hi s proceed ing, which were never pr esented a nd a dmitted by the Court, petitioner requested for the re s e tting o f the case . For no le s s than three times , pet it ioner again requested for the postponement and/or c a ncella t i on o f the trial, until the Court warned pet i tione r that if petitioner and/or counsel failed t o a ppear in the next hearing, the case would be d i smissed f or f ailure b prosecute. (Minutes of t he session of the Court on June 18, 1980, p . 65, CTA r e cords.) . During the hearing o f this case o n

DECISION - CTA CASE NO. 2775 - 7- July 29, 1980, because of failure of petitioner and/or counsel to appear, respondent submitted the case for deci s ion, as agreed upon in the last hearing, on the basis of the records of the case and the pleadings . (Minutes of the session on July 29, 1960, p. 66, CTA records.) . In fairness to petitioner, however, the Court issued the following order, copy of which was received by petitioner on January 16, 1 981: (pp. 67-68, CTA records.) "O R D E R Confirming the order given in open court on July 29, 1980, granting respon- dent'~ manifestation to submit this case for decision based on the pleadings and recor ds, inasmuch as petitioner's counsel failed again to appear despite propsr notice and warning by this Court, this case is hereby considered submitted for decision on the basis of the pleadings and records of the Bureau of Internal Revenue. SO ORDERED. Quezon City, December 12, 1980." The dec is ive question is whether or not the fo llowing claimed deductions: 1. Additional interest income il 19,621.35 - 2. Miscellaneous expenses - 8,507.01 - - 3. Transpo rtation expenses - 8,304.73 - - - 4. Repr e sentation expenses 14,107.91 - 5. Salaries -- - - - 16,500 o00 6. Insurance - - - - - - - - 3,182.80 s .J

DECISION - CTA CASE NO. 2775 - 8- 7. Commi ssions - - - - - - - P 30,266.00 8. Bonus 20,000.00 Total - - - .~~~R~~~~~~Q the disallowance of which by respondent resulted in t he deficiency income tax liability of petitioner f or the ye ar 1964, are allowable deductions under Section 30 o f the National Internal Revenue Code. At the ou tset, it should be stated that tax a ssessments ar e pr e sumed to be correct unless the contrary is shown, and the burden of proof rests upon the taxpayer to overcome th i s presumption. As a matter of fact, the burden of the taxpayer contest- ing the validi ty or correctness o f an assessment is t o prove not only that the Commi ss ioner of Internal Re v e nu e is wro ng but that he (taxpayer) is right. (L i n o Guti e r re z v s . Collector o f Internal Revenue, CTA Case No. 504, January 28, 19 6 2; Esso Standard Fertilize r & Agricultural Chemical Co., Inc. (Philip- pine s) _vs. Comm issioner of Internal Revenue, CTA Cases No s . 1862 , 1 87 9, 1888, 1 8 93 & 1896, Ma y 30, 1980; Au gu s to L . Guan zon vs . Efr e n I. Plana, Commissioner of In te r n al Re ve nu e , CTA Case No. 2821, August 27, 1980; Tan Guan vs. Cour t of Tax Appeals, L-23676, April 27, 1967, 19 SCRA 903.) And if the taxpayer f a ils to appear and present evidence or proof in ss

DECISION - CTA CASE NO. 2775 - 9- support of his allegations in his petition for review or ame nded petition for review, conformably to the doctrine of the presumption in favor of the correctness of the tax assessment (Inter-provincial Auto-bus �co., Inc. vs. Collector of Internal Revenue, L-6741, Jan uary 31, 1956, 98 Phil. 290~ Collector of Internal Re venue vs. Bohol Land Transportation Co., L-13099 and 13462, April 29, 1960, 107 Philo 905) ~ the Court of Tax Appeals will merely sustain the assessment against the taxpayer. (Esso Standard Fertilizer & Agricultural Chemical Co., Inc. (Philip- pines) .vs. Commissioner of Internal Revenue, supra.) Even mo re , where deduction for expenses is disallowed by the Commissioner of Internal Revenue, it is incumbent upon the taxpayer to prove that the expense is allowable under the law. The taxpayer must show that the amount allegedly spent was actually spent and that it is an ordinary and necessary expense in carrying on the trade or business of the taxpayer. And if the deduction represents compensation for services, the law further requires that (1) ~ayment must be for services actually rendered and (2) .the compensation paid must be reasonable in amount. (Sec. 70, Revenue Regulations No. 2; Sec. 30, National Internal Revenue Code.) . Furthermore, any claim for

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DECISION - CTA CASE NO. 2775 - 11 - "The principle is recognized that when a taxpayer cairns a deduction, he must point to some specific provision of the statute in which that deduction is autho- rized and must be able to prove that he is entitled to the deduction which the law allows. As previously adverted to, the law allowing expenses as deduction from gross i nc ome f or purposes of the income tax is Section 30(a) (1) of the National Internal Revenue which allows a deduction of "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." An item of expenditure, in order to be deductible under this section of the statute, must fall squarely within its language. We come, then, to the statutory test of deductibility where it is axiomatic that to be deductible as a business expense, three conditions are imposed, namely: (1) the expense must be 0rdinary and necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid or incurred in carrying 1n a trade or bu s ine ss. In addition, not only must the ta xpayer mee�t the business test, he must substantially prove by evidence or records the deductions claimed under the � law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary and necessary does not justify its ded~ction. Here in the case at bar, as narrated above, while petitioner dur ing the hearing on October 18, 1979, af t er several pos tponements of the trial, had already sta rted ma r king a f ew documents, i.e., income tax re t urn f or 19 64, financial r eport as of December 31, 1964, memorandum report of the revenue examiner and letter of counsel dated October 3, 1972 to the Bureau ss

DECISION - CTA CASE NO . 2775 - ,12 - of Internal Revenue, the same were never presented and offered for admission by the Court as evidence of petitioner. (Minutes of the session on October 18, 1979, p. 59, CTA records.) After that petitioner merely requested the resetting of the case, but on the scheduled dates of hearing, i t only asked for postponement in order to have more time, allegedly, to locate its records. Then after several postpone- ments of the trial, all upon the request of petitioner, r espondent, during the hearing on July 29, 1980, but not after the Court had warned petitioner that it would dismiss the case for failure to prosecute, s ubmitted the case for decision based on the records and p leadings. (Minutes of the session on July 29, 1 980, p. 66, CTA records.} Petitioner failed not only to prove that ' the Commissioner of Internal Revenue is wrong and that petitioner is correct but it did not even bother to enter into tLial and present evidence in support of the ma t eri al and r ele vant allegations in its petition for review or amended petition for review, all of which were spe cifically denied by respondent. As a matter of fact, petitioner did not take the trouble, even in its contesting letter to the Bureau of Internal Revenue dated October 31, 1972 (pp. 104-

DECISION - CTA CASE NO. 2775 - .13 - 108, BIR records)~ to point to the specific provi- sions of the statute in which its claimed deductions are authorized, and that petitioner is entitled t o the deductions which the law allows. No record or evidence whatsoever was presented by petitioner to support its claimed deductions. The law requires that any claim for deduction must be properly sub- stantiated, when required by the Commissioner of Internal Revenue, by record showing in detail the amount and nature of the expenses incurred (Sec. 66, Revenue Regulations No � . 2) ~ and the bare statement of a taxpayer that an item of expense is ordinary and necessary, unaccompanied by adequate evidence, has no weight with the Commissioner or with the courts. Petitioner having ' failed to comply with the se basic principles governing deductions from gross income, its claimed deductions under consider- a tion, which were disallowed.by respondent Commissioner of Internal Revenue, can not be allowed as deductions under Section 30 of the Tax Code. Not much need be said on petitioner's allegation in its petition and amended petition for review that its availment of the tax amnesty under Presidential Decree No. 23, issued on October 16, 1972, entitled it to the immunity provided for therein. Asid e f r om the fact that this was specifically denied by respon- dent in his answers and no evidence whatsoever was 90

DECISION - CTA CASE NO. 2775 - 14 - presented by petitioner to prove this point, peti- . tioner's income tax liability for 1964 in the amount of ~46,645.03 is not affected by the availment of the tax amnes ty under Presidential Decree No. 23, as aptly stated by respondent Commissioner of Internal Re venue, because it was assessed on December 21, 1971 o r prior to the effectivity on October 20, 1972 of Reve nue Regulations No. 8-72, which implements the p rovisions of Presidential Decree No. 23. To quote Section 4 thereof: "Section 4, Who may not avail of the amnesty. - All taxpayers, natur al or juridical, against whom a valid information under Republic Act No. 2338 has been filed or a notice of deficiency assessment has been issued by the Bureau of Internal Revenue prior to the effec- tivity. of Revenue Regulations No . 8-72, as amended, may not avail of the immunity provided for in Presidential Decree No. 67." (Section 4, Revenue Regulations No. 15-72, December 11, 1972) ~ The compromise penalty for late payment in the amount of P50.00 sugg~sted by res pondent in his assessment should not however be imposed or collected without the agreeme nt and conformity of petitioner. And it does not appear that peti tioner accepted the imposition o f the compromise amount. (Wonder Mech- an ical Engineering Corporation vs. Court of Tax Appeals , L-2 28 05 & 27856, June 30, 1975, 64 SCRA 555; See also Collector o f Inte rnal Revenue vs. University

DECISION - CTA CASE NO. 2775 - 15 - o f Santo Tomas, L-11274 & 11280, November 28, 1958, Fair, Inc. vs. Collector of Internal Revenue, L-12928 & 12932, March 31, 1962, 4 SCRA 174.) Accordingly, petitioner Carmel Corporation is her ~ by ordered to pay to respondent Commissioner of Int~r nal Revenue the amount of P46 1 595.03 as defi- ciency income tax for the year 1964, plus the sur- charges and interest which have accrued thereon incident to delinquency pursuant to Section 5l(e) of th e National Inte rnal Revenue Code, as amended. WHEREFORE, the decision appealed from is hereby mod ifi ed in the sense that the compromise penalty should not be imposed and is aff irmed in all other respects. With costs against pe t itioner. SO ORDERED. Quezon City, Metro Manila, J anuary 30, 1981. ~~ AI-!ANTE FI LER Presiding Judge WE CONCUR: cm~ArnE � ROAQU I N tssociate Judge ~~REYES Associate Judge