CTA Case No. 4301 (Decision)

- ... - REPUBLIC Of THE PUILIPP1NES COURT OF TRH APPEALS QUEZON CITY PHILIPPINE BULK CORPORATION, C.T .A. CASE NO. 4301 Petitioner. - versus - COMMISSIONER OF INTERNAL REVENUE. Re sp ondent. X- - - - - ~ - - - - - - - - - - - - - X DECISION Is respor11jent required to condone the 25 ~~ surtax on accutn ulated surpl u::: profits upon paqrnent of the 30% cornpt-orni:::e settlernent of petitioner's deficiency incorne tfli< in 1979 pur :::u flnt to the pro �..�i si on:: of Executive Order No. 44? If in the negati\1e.: i s petitione r li atde to pe~d tr1e alleged deficiency surt a~~ f or 1979 in the arnount of P 1,573,561.23? Th ese are the que:::t.io rr3 r l3i serj in thi s pe titio n, for revie\�V . The undisputed fects are sirnple . Petitioner is 13 ,jultd oq_J?:mize ,j domestic corporfltion with principfll offfce locat.e:j in F'ulup anrjan. Negro s Occident ol. I t is en~}:: ,~ e ,j in the business of trul k !itmdling and \�v aret!ou sing in Pulupe:n,j ;:m, Negro::: Occidenta l. It also operBtes ~:~nd rneintain . .78 5

- ... DECISION C_T_A_ Case Ho_ 4301 - Page 2 - On Fet,ruary 13, 1985_. petitioner- r-eceived a letter, dated .January 24, 1985 ( E :~~tl. A) , frorn BIR Deputy Commi ss ioner Romulo Villa, informing petitioner U1at the follo\'ving amount s are due frorn it: P52,528.69as Deficiencq Income Ta x for 1979, inclusive of interest; and P 1,573 ,561 .23 as Deficiency Surtax (on accurnulated earning s) for the yeer 1979, inclusive of interest, pursuant to Section _25(a) of the Nationa1 Internal Revenue Code (NlRC) . In a Jetter, addressed t o responrjent, dated October 22, 1986 (E>dl. K), pet iti oner e:,;pressed its desire to effect a cornprornise by pay ing 30% of the basic deficiency income ta>~ -' involved (P33,197 .56) pursuant to tt1e provision of Section 1 of E:-;ecut i ve Order No. 44 (E .O. 44 for short). On October 23, 1986, petitioner paid the Bureau of Internal Revenue U1e arnount of P9 ,959 .27, representing 30% of P3 3,197.56 . The pa~~rnent i s evidence,j by BIR Confirmation Re cei pt No. B 7374346 (Extl. L) and Pa~~ment Onjer No. 8 9 128723 (E~dl . L-1 ). . I In a letter dated February 8, 1988 (Exh. M}, l'lr. Eduardo P. Parnitten, BIR Chief of U1e Re ceivable Accounts Division , acting for U1e Cornrnissioner, informed petitioner that it s offer to cornprornise its 1979 defic iency income ta ;'{ and surtax liabilities involving the total amount of P1,626,089.92 has been denied t~~~ hit~her authorities. This con<:::tituted re spondent's final request for petitioner to settle its account. Other��..vi se, v�tarran~s of di straint and levy s~1BJ1 be issued tD enfQrce collection thereof. 786

DECISION C. T . A. Ca3e Ko. 1301 - Paqe 3 - On February 16, 1988 (Exh. N), petiti oner protested respondent's denial of its offer to compromise. Petitioner contended that it 'Nas ent it1ed as a matter of right to cornpromise its tax liability upon payment of 30% of the basic ta x a ~; sesse d after having availed of the priv11ege under E.O. 44. Respondent is, tt-reref ore, 1ega11 y mandated to condone the correspornjing interest and penalties on such basic ta :~ pursuant to Sec. 1 of E.O. 44. Petitioner sought for the cancellation of the 1979 deficiency incorne and surta :~ assessments issued against in the sum of. P 1,6.26.089.92. On September 2, �j988, pet iti oner received respondent's de ci sion (Exh . 0) sta tinq that its request for the cancellation of the assessment had been granted insofar as the amount of P5 2,528 .69, representing the deficiency income tax is concerned. Ho wever, vv ith respect to the reque st for cancellation of the amount of P 1,573,561 .23 , as alleged deficiency surtax, the same vy�as denied on the ground that the "interest and penalties" condoned under Sec . 1 of E.O. 44 "refe r only to the addltions to the ta:~ arisin g from failure to file a return and/or pay ~e tax on tirne, " and "do not include the 25% surtax." Respondent stressed ) trr et. tlie 25% surta:r: as sesse d on petHioner's accumulated profit s, pursuant. t.o Sec. 25(a) NIRC, is not an administrative penalty w hich can be condoned by the availment of th e benefits of Sec . 1 of E.O. 44. nn Sep tember 23, 1988, peti tioner filed the in st ant petition 'Nith thi s Court. The i ssue s raised are: 78 7

DECIS I ON C . T .A. Case Ho . 4 301 - Paqe 4 - ( 1) whether or not re spond ent erred in not condoning petition er 's alleged 1979 Deficiency Surtax l iability (in the emo11nt of P 1,573,56 1.23) upon payment of 30% of the basi c ) inc-ome ta x 1i ebi 1ity for th e year 1979 pursuant to Sec . 1 of E.O. 44; end (2) whether or not petitioner had improperly accumulated profit s betdond the r:easonable needs of its busi ness making i t li able t o pay the alleged Deficiency Surtax for 1979. The case was submitted to Us for deci sion by respondent on a pure l y l egal Question based on the pleadings and the CTA record s of the case . Petitioner presented documentary and te stimonial evidence to prove es a matter of fact thet it did not improperly eccumulate profits fo r it to be subjected to the surta:-< . Executive Order No. 44 (effective Sept. 4, 1986) with its pertinent provisions read as fo l lows: [82 O.G. Supp . No. 39, 4635 (Sept., 1986)) I EXECUT I \IE ORDER NO . 44 AUTHORIZING THE BUREAU OF INTERNAL REVENUE TO ACCEPT COMPRO MISE PAYMENTS ON DELINQUENT ACC OUNTS AND DISPUTED ASSESSMENTS PENDING AS OF DECEMBER 3 1 1985 1 XXX XXX X X X. SECTION 1. The Comrni ss ioner of Internal A Revenue or h1 s duly authorized representatives may _ compmrni se any disputed assessment or- delinquent ..,or decoun t pending as December 3 1, 1985, upon the/ ...

DECISION C. T . A. Case Bo . 4301 - Paqe 5 - payment of an amount equal to thirty percent (30%) of the basic tm-: assessed . In such cases, the Commiss ioner� of Internal Revenue or his duly euthori ze d repre sentatives shal l c on don e th e corres pond i ng i nterests and pe nal t i es. (Emphasis supp 1i ed .) XXX XXX XXX. SEC. 4. Sec tion 246 of the National Internal Revenue Code,- as am. ended, is hereb\.1 suspended w1 th ~ r espect to the di sputed ass essme nts end delinquent eccounts referred to herein for the duration of the ef f ec tl vi ty 11ere'of. . X;~ X .. XXX X X X." ) The pertinent provi sion of the National Interna l Revenue Code ( 1977) provides : "SEC . 25. Addit ional ta x on corporo t i ons i mproperly occumulo t i ng profits or surpl us . - (a) Imposit ion of tox- If eny corporation, except bank s, insurance companies, or personal holding companies, whether domestic or foreign, is formed or� availed of for the purpose of prevent.i ng the i rnposit ion of the tax upon Ats shareholders or members of the shareholders or members of anott-1er corporation, through the rne1jiurn of permitting its gai ns and profit s to accurnul ate in stead of being di vided or distributed, tt1ere i s 1evied and assessed agai nst such corpo ration, for esch ta )<Bb le yet:tr, a tBx equal to t. '�Nenty-fi ve per centt;mof the und�i stri but ed portion of its accumulated profits or surplus w hi ch shall be 1n oddHi on t o t he ta x i mpose d by Section 2 4 , ond sho11 be comput ed , co ll ec ted and po i d in the some man ner and su bje c t to the some pr ov isions of low , i ncl udi ng penaltie s, a s~ thottox. ., ~ 789

) DlCISIOH C.T.A . Case Ho _ 4301 - Page 6 - (b) Prirfia�lecie evidence.- The fact that any corporatio n is a mere ho 1ding company sha 11 be pntno fooe eviden ce of a purpose to av01d the tax upon its shareho lders or members. Similar pre sumption 'IV ill li e in the case of an investment cornpany vvhere at any ti rne during the taxable year more than fifty per cenl11m in value of its outstanding sto ck is owned, directly or indirectly, bl..l one person . (c) Evidence determ/1781iva of ptlrpose. - The fa ct that the earnings or profit s of a corporation are permif.te,j t o eccurnulete be'JOnd tile rea sonab le need s of the busine ss sllall be determi nl'lti ve of the purpose to avoid the tax upon its shareholders or member unless ._ the corporation, by clear preponderance of - evidence, shal l prove the contrary ." On the nrst issue, petitioner contends that the payment of at lea ::: t 30% of the basic deficiency income tax for 1979 extingui sr1es it s liability to pay the tax on accumulated profit (surta x) under Sec . 25(a) of the NIRC. According to petitioner, the surtax 1s 1n the nature of a penalty imposed upon the ta x pa1~er for t1av1ng unreasonablld acc umulated surplus . Being a I penalty, it i s deemed corujoned upon payment of the 30% basic income tax liabilit'd as prescribed in Sec . 1 of E.O. 44. F-~es pondent stressed that the law states "the Cornrni ssi oner of Internel Revenue or his duly authorized representa ti ves shall condone the corresponding interest and pen alties" This refers to the a1jditions to the tax arising from fflil ure to file fl return aruj/or pay the tax on time or to the part1 cular ts :o< being a:;sessed. .. 790

DECISION C. T . A. Ca3e Ho . 4301 - Page 7 - Please note U;at in this par-u clar the deficiency assessments for- 1979 cons titut es hvo count s: One , the defi cien cy incorne ta x in the total amount (including surcharge and interest) of P52,5 28.69 and Two the surtax f or unjust accumulation of surp lus in the to tal amoun t of P 1,573,56 1.23 (i nc ludin g surcharge and interest). The flrst assessment i s under Sec tion 24 whi l e tlie latter is under Section 25 of the old T8X Code . Petitioner � applied only for 30% compromis e settlemen t to basic tax on the first assessmen t in the amount of P33, 197 .56 . It does not i n any case include the 25% surtax or tax on accumulated profits. �~urthermore, the 25% surta x is imposed "in addition to the tax imposed under Sec . 24 of the NIRC". The surt8>: "shall be computed. collected and paid in the same manner and subj ect to the same provisions of Jaw. including penal ties. as Ui8l tax." Con trary to the opinion of petitioner, the 25% surt ax, oth en�vise knov�m as the acc umul ated earnings tax, is not the penalty envisioned i n Sec . 1 of E.O. 44, rather "the accumulated earnings ta:~ under Section 25 of the Tax Code is -a ta x on obno:~ i ous hoarding as distinguished from harmless accumulation ." [The Manila Wine Merchants, Inc_ Y. The Commissioner of In ternal Revenue, CTA Case No _ 1415, February 28, 1966.) "As a pra ctical matter, liabll ity for the t a:-:: under Section 25 of tlie Ta x Co de hinges on �vvhether the corporation t;as accurnulated tile earnings in exce ss of the reasonattle needs of the business." (supra.) �- ' 79 1

DECI SIO N C . T . A. Case No . 1301 - Page 8 - The Supreme Court in the ca se of The Mani Ia Wine Merchrmts, Inc. v. The Commissioner of Internal Revenue, G.R. No . l-26145, February 20. 1984, (127 SCRA 483) , affirmed in toto this Court's decision in CTA Case No. 14 15, involving the same parties, where ~t was held: "A prerequisite to the imposition of the tox has beerr that. _ t.he corporation be forme d or avai 1ed of for- t he purpose of avoi ding the inc orne ta ~~ (or surta x) on its shareholders, or on t he shareho 1ders of ~ n y other corporation by permitti ng U1e earnin gs an d pro fit s of the corporation to eccumulat.e insteod of dividing them among or distributing thern - to the shareholders. If the earnings and profits w ere distributed, the sharehoJ �jers w oul�j be required to pay an income t ax u�,ereon whereas, H the distribution were not mode to them. they would incur no tax in respect to H1e undistributed earni ngs fiQd profits of the corporation _ The touchstone of liabi 1ity i s the purpose behind the ac cun1ul flti on of the income find not the consequences of the accumul fit ion. x x x... !Emphasis Ours .) It is thus clear f rom t he very wordings of Sec . 2_? of the NIRC that U1e 25% surtax i s an odditionol tax on corpora tions improperly accumulating pro fit s or surplus . The legislative purpo se or the surt ax w as t o integra t e properly the tax upon corpo r ation s improperly accumu l ating surplus. [7 La w of Federal Income Ta xation Sec . 40.0 2, 334] Th i s w ill compel corporations I to di stribute as di vidend s th e corporate earnings not ne cess ary in til e t�u siness, so that the dividends rnay be pro perl y taxed in the t�,;:md ::; of the sto ckholders. !1 ARANAS, ANNOTATI ONS AND ~92

DECISION C_T_A _ Case Ho_ 4301 - Page 9 - .JUPISPPUDENCE ON THE NATIONAL INTERNAL REVENUE CODE OF 1977, 92 (4th ed., 1978)I. u-, In 1i ne vvi respondent's reasoning, the 25% surtax is a tax b~d itself imposerj in addition to the corporate income tax (under Sec . 24). It shall be computed, collected and paid in the sarne rnanner and subject to tt1e same provisions of law, including penalties, as that tax . (Sec. 25(a), NIRC.] Section 1 of E.D. 44 wou ld not tlave include1j the 25% surt8x in the term "corre sponding interests and penalties" . By itself the surtax is an addiUonal tax other .ti'H:ln the income tax. It is subject to the pen a1t i es similar to that .of the income tax . Petitioner further adds that the 25% surtax under Sec. 25 ha s been repealed by Sec . 6 of E.O. 37 (July 31, 1986). \ovith the subsequent repeal of the accumulated profits tax all r ights to le vy sa id ta:~ are put to an end even if already. begun. Therefore, petitioner should no longer be held liable to pay the surtax. Vo/e disagree with petitioner. It is an elementary rule in st atutory construction that "in the absence of such words indi cative of the extent of U1e statute's operation, t he; general rule i s that a statute will be con strued prospectively unless the legi slat.ive intent that it be given a re trospecUve operation clearly appears by necessary or unavoidable implication." [t1ARTIN , STATUTORY' CONSTRUCTION 56 (rev. ed., 1972); citing, In re Davis Estate, 330 t1ich ., p. 647.1 A statute should be prospectively enforced, V�lhether it enacts, amends, or repeal a lav�t, unless the language of that statute states in very clear language U1at it shall have retroactive effec t.. [lorenzo v_

DECISION C.T.A . Case Ho_ 4301 - Page 10 - Posodos, 64 PhiL 366-36 7 _) The repeal of Sec . 25 by Sec. 6 of E.O. 37 ( 1986) had no retroactive application there being no mention to that effect. In fa ct, the pro spe c tive .application of repealing statute was upheld in the case of Co v . Co1L of lnternoJ Revenue, 100 PhiL 464 (Nov. 29, 1956), cit ed by petitioner, where it �vva s there ruled : "Regarding the effects of repea ling statutes, tt�Jt? ergument hes been edvanced, that taxes essesse d (but not collected) under the low before it s repeal , rriay not be collected oft er suer, repeal - e;"<cep t , al��Nays, pro�!i sions to the co ntrary. But the courts permit such collec tion . "The rul e favo ring a prospective con3truction of statutes is applicable to statutes vihich repeal tax la\o/3. Accordingly it is held that �.�t here s uch st~Jtute is not m~Jde retroactive a tax assessed before the repeal is coll~cti ble aftervards; and �.,, here taxes are levied under a lavt 'vt hi ch is repeal ed by a subsequent act, unless it appear3 cle8rl y that the legi slature intended the repeal to \�lOrk retro3pee:tively, 1t \�Jill be assumed that it intended the taxes to be collected according to the Ia\�/ in force \:/hen t he y 'h'ere levied." (Coole'J, Taxation Section 538 Vol. 2.) ,� So , if ta xes ass es sed rnsy st i 1I be demanded efter tt�1e repeal Of u-,e l cl'�N, it follOWS that ta xes el re 13d'd co ll ecte,j mey /Je ar11j should L~e retained aft er the repeal. Un 1ess of course the repea l1 ng statute pro vi des otherwi se ... Respondent was correc t in not condoning the 25% surtex since petitioner paid only 30% of th e bB si c income ta x liebility for 1979 . Petitioner' s failure to compromise and pey 30% of the 79 4

DECISION C. T . A. Ca3e Ho . 13 01 - Page 11 - for SIJ r t a:-: . Thu s, re spondent cann ot cond one the surta x pl us the interes t and penalti es co r res pond i ng t her eto. Anent. U1e secon d i ssue, petitioner maint ains th at it is not li abl e f or su rt ax f or the year 1979 because it did not impr operl y accumu l at e any sur pl us beyond t he r eas onabl e needs of it s bu siness . To prove it s poi nt, petiti oner offered as evidence t he f oll ovrinq docurnen t s: a. Excer pt s of th e ,t�1i nutes of t1eetlngs of the Board of Di rectors from 1975 �t o 1985 [Exhs. B and C} showing tha t th e surplus earnings of the ..corporati on we re r et ained f or expansion purposes: such as , 'the con struction of additiona1 warehouses; purchase of additional handling equipment, payloader, dr edgi ng rnachine _; to defray expenses f or dredgi ng the loadi ng area (the v�t hsrf an,j berthing area) of t he Terminal ; and to r-epl ace the Fender Pile Clusters to ensure the safe ty of docking vess el s and l oadi ng in sta ll ation. Li kew i se, the corp orati on through it s BoBrd of Directors al so dec l ared stock di vi dends in 1977, 1978 , 198 1 an d 1984. b. The Ana l ysis of Fixed Assets for the years ) 975 to 1979 {Exh. D} an d 1979 t o 1989 [Exh. D-2 1, show i ng t he pur chases of equi pment , fu rn iture' s and fi xt ures, f ender clusters, co st of buil ding improvements and i nsta ll ati on of l oader gears etc . all added to t he Fi xed Asse t s. c. The Memorandum Register sho wing the pur chase of a second h8nd pay loader i n 1980 costing P 150 ,000.00 {E xh. D-5]. d. Tile Journ al Voucher entries r eco rding as capital expenditure t he r epairs and i mprovement of buildin gs~ - 795

DECISION C . T . A. . Case Ro. 1301 - Pag e 12 - structures [Exhs . E, J - 4, J-5 and J-6} and that of bul k htJndling i nsta llati on [Exhs . F, J-2 and .J-3}. e. The Certificates of Sale showing petitioner as the hi ghest bidder and purchaser of railroad rail s [Exh. G), peyloader [E xtl . H}, second hand bulldozer-caterpillar [Exh. 1], second hand mosl er vault [Exh. J}, end a second hand di ebold vault [Exh. J-1 }. r�.teanwhile, the circumstances re lied upon by the examiner as indicating petitioner's intent to improperly accumu late surplus profits are �manifested by the following acts, to wit: !f�lemorandum Report, , dated June 29, 1984, pp. 76-77, BIR reco rd .] "( 1) In the �secretary's Certificate� (Signed J t1y : Betty B. Pi zan a, Asst. Secretary) the Minutes of c::.. ... -.-�- the Special Meeting of the Board of Directors held on April 20 , 1976, wrich resolvetj that the surplus profits of the cornpen~d as of December:. 31, 1975 be appropriated for plant er.:p ansion, however, in the serne year the corpo ration made cash advances in the amount of P520,000.00 to its officers - employees taken up under the Hem of 'Advanc es to Ernp 1oyees - Cubao ,' 1t emi zed in the ''rlork i ng Sheet, ~;chedule H.' As of December 3 1, 1979 the above - s t t~ ted cash ad vence::: ewe still outstanding and hdve not earned interest incorne from 1975 to 1979. (2) Another importtmt point that should be considered 'Nhich was in contravention to Hs projected expansion were the advances to a ss oci~.:~ted corpon:~tions/companies owned and/or controlled by Don J . Amado Araneta and family, un,jer- the item of 'OTHER ASSETS ', the b~:~lances of wh icll sho'vved stead'J subs ta ntial increases from 1975 to 1979, es follolf�ls : 1975 1978 1979 P16,312 ,884 P17,274 , 1~ - 79

DECISION C_T_ A. Case No_ 4301 - Pa.qe 13 - Include,j in the 'OTHER ASSETS' for 1979 is the item of 'Advances to Subscribers� in the amount of P930,000 .00, which ere deemed indirect loans to stockholders. According to t1r. Menuel A. Ferriols , Supervising Interne! Auditor of the subject corporation, when asked abou t the substantial edvsnces to associsted corporatio ns/companies owned or controlled by Don J. Amado Araneta and family, he revealed that majority of these associated corporations/companies are losing and therefore need new funding in their operations. Si nr;e, such Y.tas the case, the st:~id cash advt.mces must be retained by them for an unreasonably length of time and possibly might not even be repaid at all, therefore it cannot be reasoned out that the same is for the reasonable needs of the business. (3) The sa id advances 'OT HER ASSETS ' are not e. rning interest , wh ile Philippine Bulk Corporation claimed an intere st 8)<pense deduction for 1978 fmd 1979 in the amounts of P468 , 118.00 and P558,6 i 6.00, re specti ve1y. Without� these cash advances to associate,j corporations/companies the texpayer need not heve to resort to borrowing because there wi ll be sufficient funds for its operations and � therefore wo uld not be paytng interest expenses from its loans, re sulting in bigger profits. / (4) No reserve for plant expansion were teken up in the financial statement s and notes to financial statements for 1978 and 1979. (5) t1r. Araneta failed to comment to Number (8) of my memorandum report deled Jenuery 25, 1984, neither did other representatives of the co rporati on, to the effect that no expansion has been underteken up to December 3 1, 1979. He el so failed to comment and/or object to the disallowance of 'Administration expenses' (unsupported) disallowed. there fore, the same is ..., r�1ereby re1 terated. 79 7

DECISION C_T _A_ Case Ho _ 4301 - Page 14 - (6) If the corporation was really in need for additional funds for plant expansion, etc. the declaration of stock dividends of P612,900.00 and P7 ,966,206 .00 out of the surplus profits in I 977 and 1978, re spectively, and it seems that said dividends declaration are not necessary, but instead a 'Reserve for Plant Expansion� should have been made ." V.J hil e it is~ true that respondent's assessm ent is . pre sump tively correc t, the Court also recognises that once the burden of proof has been overcome upon presentation of evidence to the contrary then the presumption of correctness disappears. �- In this case, Y./e think the petitioner was able to sub!::tantiate the burden placed upon it by law. As validly support ed t1y the evidence, sometime i n 1975- 1976 the Board of Direc tors of petitioner decided to expand its business operation by ttle construction of add itional warehouses (costing P4,000,000.00) a~1d the purchase of additional handling equiprnent s which projects have an estimated cost of P 1:2.000,000.00. [Exh. B.) The corporati on decided to appropriate } P 12,000,000.00 from its surplus earnings as of December 31, 1975 f or this purpo se . [p . 70, BIR rec ord.] The earned surplus of P9,75B,4 18.00 as of December 31, 1977 wa s cons idered insuffi cien t to meet the need for additional fund s to improve it s operations: to build additional storage fa ci lities and to purchase ad diti onal handling equipments . Thus, from 1977 to 1978, petitioner decla red stock dividends i nstead of cash dividends. [p. 71, BIR records .) .. 79

DECISION C.T.A. Case Ho . 4301 - Pa.ye 15 - Then sometime in September, 1979, the Board of Directors appropriated the f o11 owing amounts from surp 1us profits: a P30,000 .00 to cover expen ses for dredging (Exh. B]; b. P 115,924.80 as cost for replacements of Fender Pile Clusters IE xh. B); and c. P 150,000.QO as co st of a sec ond hand payloader (Exhs. C and D- 51. , For the period 1975 to 1979, petitioner also purchased fi xed as sets � in the total amount of P728,677.00 [Exh. D-3]. Subsequent 1y, other handling equi pments were purchased by petitioner in line vvith its plan of expans ion as reflected in the Certificates of Sales [E>~hs . G to J-1, inclusive]. Thereafter, other equipments and improvements were capitalized as fixed assets from 1980 to 1989 in the sum of P3, 178,741.00. [Exh. D- 1.] It w as the accurnulated surplus as found by the examiner for 1979 in the amount of P3 ,977,893 .83, that have been treated as . been accumulated beyond the reasonable ne~/ d of the hav1ng busines s of petitioner. However, petitioner has proven that in it s desire t o improve its fa cilitie s an expansion program, \North alrnost P 16,000,000.00, Y-tas necessary. The retained earnings as of December 31 , 1979 amounting on1y to P3, 934,752 .00 [p. 31, BIR re cor-d) was not even enough to shoulder the P 12,000,000.00 e;-:pansi on program of the corporation in 1975. The plan was, ho v�tever, partially implemented in 1979 and extended up to 1989. .., 79 9

DECISION C _T _A_ Case Bo . 4301 - Page 16 - In the direct exemination of petitioner's witness, his testirnony will show that the expansion project was extended from 1979 om�vards, thus: [T .s.n., Merch 8, 1990, pp. 20-211 "f) . Oks~d - Now r1r. dels Cruz, why were they spread in succeeding years and not in 1979 alone when you commenced the . program of expansion by buying the payloader initially? A. The operation of Pulupandan is dependent more on sugar productions and starting way back in 1977 there was an economic and financial difficulties on suger industry and besides we have also not secured the necessary loans to finance the project considering the effects or considering tt1e business situatl on on the area �vvhi ch is the sugar productions . Q. Novv', what are the other factors that you can attribute in spreeding the implernentetion of the program ori gi nall y set in 1974 to 1975 and 1979? A. The main factor that contributed to this is the 1ow production of sugor. Q. And that is the reason why there was no ass'et acquisition for the years 1982, 1983, 1984 up to 1985, is that correct? A. Ves, sir. Q. Now, are there any other reasons why they were only irnplemented after 1979, the progrems of expansion? A. 'v'�/ell, for some otlier reasons was, for the implementation even though in the years 1982-83, . ,1983-84, 6nd 1984-85 w~ 80 0

DECISION C.T. A. Case Ho . 4301 - Paqe 17 - minimal but in 19f17-198S we are hopinq that sugar industry wi ll improve t hat's wl"ly we have spent a little amount, more amount in I 987-1988 end 1988- 1989." Pet itioner have success fully dispu t ed t he defici ency surtax assessment for 1979 by preponderance of evidence, show i ng the purpose for vvhich the surplus accumulated during u-,e year are to be used for expansion of its business. The only objection s raise d by res ponden t to petitioner's evidence was th at the evidence marked as Exhs. B to J -6, incl usive, L and L-1 are ~;el f- serving . It must be observed that the Certifi cates of :=;e I es are pub1i c document s i ssued by the Sheriff of t he Department of Labor and Employmen t. Therefore, not hear say evidence. The t��hnutes of l'leetings of the Board of Di rectors of petitioner corporat ion as well as the Journal Vouchers and the Analy sis of Fixed Assets Statements w ere prepared in the ordinary cours e of business. \1"11e n i t was respondent's turn to pre sent hi s evidence, he waived his right to pre se nt any ev idence. He al so / failed to subrni t a rnernonmdurn f or t he guidence of t he Court even when he was required to do so. He merely submitted the case f or decision on a purely legal question base d on the pleading s and the CT A record s. Unfortunately, thi s case involves both l egal and factual i ssues. Settled is the rule that one who prays f or judgment on the pleadings without offerin g proof as to the truth of his own all eqations must be understood to admit the truth of all the _. , material and relevant allegations of the opposing party, an~- 801

, DECISION C.T.A. Case Ho_ 4301 - Page 18 - rest his motion for judgment on those allegations taken together with such as his ov�m as are admitted in the pleadings _ f (Bouermonn v_ Cosas. et. aL. 10 Phils. 386; Evangelista v _ De Ja Rosa, 76 PhiL 115.1 Respondent may be considered to have not questioned seriously the evidence presented by petitioner proving that the purpose and reason for the accumulation of surplus profits for 1979 was within the � reasonable needs of the business of petitioner. Moreso, the evidence of petitioner clearly establishes that there was no accumulation of profits beyond the needs of its business. WHEREFORE, the decision of respondent ordering petitioner to pay the sum of P 1,573,561.23, representing 25% surta x on improper accumulation of surplus profits for the year 1979, is hereby reversed . The deficiency surtax assessment for 1979 is cance 11 ed. No costs. SO ORDERED. Quezon City, tvletro Manila, August 10, 1993. .., 80 2

DECISION C . T . A. Case Ho . 4301 - Page 19 - WE CONCUR: ~Q.~ ERNESTO 0 . ACOSTA Pres iding Judge PL--L 1 I hvv A ON 0 . OE VEYRjA Assoc iate Judge I CERTIFICATION I 11ereb1..1 c e r tifl.....l that the above dec ision was reached after ~ due consultetlon among th e members of the Court of Tax Appea ls in accordance wit h Section 13 Arti cl e V III of the Constitution. ~-~Q.~ ERNESTO 0 . ACOSTA Presiding Judge Court of Ta x Appeals ., 80 ~