CTA Case No. 895 (Decision)

llF.I'tllH .tC OF TilE PntLT!'PlNitS lco\JRT OF TAX APPEALS Ot:K7.0N CITY NERCY I s INC . ' Petitioner , I - versus - C.T.A. CASE NO. 895 COMHISSIONER OF TIJTERNAL REVENUE, Respondent . X- - - - - - - - - - - X HERCY ALHONIDOVAR DE VERA and J1J.AN A. DE VERA, Petitioners, - versus - C. T.A. CASE NO . 896 COHHISSIONER OF I NTERNl1L REVENUE, Respondent. X- - -------X DE CI S I 0 N These are separate but jointly beard appeals from the decisions of respondent :tolding peti- tioners liable for deficiency incone taxes for the years 1953 to 1956 ~ Involving, as they do, identical tax years and allied issues, this court promulgates in these tvJO (2) cases this joint decision. It appears that petitioner, Mercy's Inco, /

- DECISION - CTA CASES NOSo 895 & 896 - 2- in C.T.A. Case No. 895, is a corporation regis- tered i:Jith the Securities & Exchange Commission, \v ith principal office at 1735 Azcarraga, Hanila, 1.Vhile _petiLLoners , Hercy Almonidovar de Vera and Juan Ae de Vera~ are husband and wife residing in the same addrcsso After investigation of their tax liabilities by exa:-:'lj_ners from the Bureau of Internal Revenue, the respondent Commissioner of Internal Revenue assessed deficiency income tax against Hercy 1 s Inc., for the years 1953 to 1956 in the total amount of_�20,674 .00; including 5o;; surcharge and compromise penalty, as follows: Net income per investigation o o P12 , ~26.10 Tax d1.ie thereon � o o o ��� P 2, 85.oo Add: 505b surcharge � � � � � � � 1, 293.00 Com~romise for non -filing of return � o ���� o _ 50 .00 TOTAL .lu�;omTT DUE & COLLECTIBLE � P 3-;92"8 oOO Net j_ncome per investigat_Lnn � o P12,726o10 Tax due ther�eon �o � � � p 2' )"Lt-) . 00 Add: 5o;; surchm~ge � ~ � � � � " 1 ' 273 .oo Compromise for non-filing or return � � � � � � � 50.00 TOTAL .AHOtNT Dl'E & COLLECTIBLE � F 3,868 oOO

-- DECISION - CTA CASES NOS . 895 & 896 - 3- Net income per investigation �� P16,466.10 Tax due thereon � � � �' � � � P 3, 293 oOO Add: 50% surcharge � � � � � � � 1,647o00 Compromise for non-filing of return � � � � � � � 50.00 TOTAL J\NOUNT DUE & COLLECTIBLE � ~~~ Ne t in come per investir;ation � � P26,126.10 Tax due thereon � � � � � o � P 5,225.00 Add: 50% surcharge � � � � � � � 2,613 . 00 Compromise for non-filing ~o.oo of rettrrn � � � � � � � TOTAL .AHOUET DrE & COLLECTIBLE � P 7,8 8.00 (Exh. 9, pp. 25-36, BIR rec., CTA No. 895) and against Hercy Almonidovar de Vera for the same years in the aggregate amount of P51,923.00 (Exh. 22, Vol. I, BIR rec., pp. 145-147, CTA N~ . 896) including 507~ surcharge and compromise p~nalty, as follows: Undeclared rental income from Mercy Bldgo ��� �� o �� P 8,100.00 Rental income fror.1 advertisement 6 ,000o00 Gross undeclared income ���� F14, 100 .00 Deduct: Rent to Bureau of Lands � � � � � � � � 8 , 620 .00 Net income per investigation �� F 5,~"80. 00 Less: Personal exer.1ption � � � � 3, ooo .oo Amount of income subject to t~~ � � � � � � � � � p 2,480.00 Tax due thereon � ~ ������ P 89.00 . 2 fi 8

DECISION - CTA CASES NO S. 895 & 896 -4- Add: 50% surcharge � � � � � � � P 44 . 50 Compromise for non-fili..r1g of return � � � � � � � :J:o . oo DEFICIENCY TAX DUE � � � � � � � F 183-.JQ Undeclared rental income from Hercy Bldg. � ���.� ��� P57,150.00 Rental incom e fr om advertise- ment � � � � � � � � � � 6,000oCO Gross undeclared income ���� �63,15D:-oo Deduct: Depreciation of Hercy Elctg .. � � P4-,444.ll-4 Lease rental expense to Bureau of Lands � � � � 8,620 .00 13 ,064.44 Net income per investigation � � P5o,oB).5b Less: Personal exemption � � � 3,000. 00 Amour:t of income subject to tax. P47_, o8).5b Tax due thereon � � � � � � � � P1 3,o 54-:0o Add: 50% surcharge � � � � � � � 6,527.00 Compromise for non-filing of return o � � � � � � 300.00 DEFICIEl'JCY 1'AX DUE � � � � � .. !:.1.2. ~ 881 .00 90- EAR-24468-22/32 Ne t loss disclosed by the return as audited �� �� ��� c .(p 8 , 532 .67) Unallowable deductions & add- i t.ional in come~ Undeclared rental income from Mercy Bldg. f76,265.00 Advertisement rental income � � � � � 6, 000.00 Gross undeclared incomeP82,265.oo Deduct: Depreciation on Mercy Bldg .P8,888.88

--- - DECISION - CTA CASES NOS . 895 & 896 - 5- Le as e rental exp(-Jnse to Bureau of 17,508.8 ~ 64,756.12 Lands � � 8,620.00 Net income per investigation � � � � ~56,223 .11-5 Less: Personal exemption � � � � � 3,000.00 ~~1~??; ~'i)7a � 4i Amotm t of income subject to tax 0 � Tax due thereon ���� ���� .oo � � Add: 50% surcharge � � � � . � � � P 7,787.00 Compromise for filing fraudulent return � � � � � � ~O.Q_. O.Q DEFI CIENCY T.AX DUE � � � � � � � ~23,661 . 00 90-EAR- 112045-59/i� Net income disclosed by the return as audited � � � � � � � � � j P 5,261 . 68 Unallmvable deductions & additional. income: Undecl ared rental income from Mercy Dldg. P 7,463.00 Adve r tisement rent~l � � � � 6,650.00 J.ncome Overclaimed depreci- ~ t ion on Mercy Bldg. 11,111.12 Leas rental expense to Bureau of Lands cli sall mJed � � � � -~ 80 . 00 P32t~q-:-t:BQ6)4.1.f1c25 Net income per investieation � � ., � t_3~3:]_060i_J9?..0Q0. Less : Personal exemption ����� :; ,762362) . 00 Amoun t of in come S1Jbject to tax �� 2 .50 ��� t Tax due thereon � � ��� �� ��� Add: 505~ surcha rge ��� �� Comrromise for filin g 300.00 fraudu1ent return � � � � � DEFI CIEECY 'rA.X Dl!E � � � � � � � . P 8 , 12,0_50 The deficiency income tax a ssessn:cmt a r;ainst Mercy's Inc. is premised on its failure to file returns for the years �r1 question. Wit~ respect .2G O

-- - - DECISION - CTA CASES NOS. 895 & 896 - 6- to Hercy Almonidoyar de Vera, the assessment is anchored on her failure to file income returns for 1953 and 1954 and the filing of false and fraudulent retvrns for 19)5 and 1956. Mercy Almonidovar de Vera as general manager of Hercy' s Inc. and in her 0\\rrl behalf, j_n sepa- rate letters on different dates, disputed the aforesaid assessments and re~uested reconsider- ation on the grounds that the investigation vras condv.cted vTi thout due process and tr. ere vrere mis- takes li1 the computation of respondent . (Exh. 11, p. 39, BIR rec., CTA No. 895; Exh. 23, PP� 149-150, Vol. I, BIR rec . , CTA No. 396) . Both request were,however, denied and respondent -rei- terated the demand for payment of the deficiency income tax as0 essed. (Exh. 12, p. 58, BIR rec., CTA No. 89); Exh. 24, p. 158, BIR rec., Vol. I, CTA No. 896). No t satisfied with the decisions of respon- dent, petitioners appealed to this Court. In answers to the petitions for review, re- spondent prayed for affirmance of tte assessments involved. 2G l

-.... - - ._ DECISION - CTA CASES NOS. 895 & 8'96 - 7- These cases present a co~~on issue, i .e. whether or not the deficiency income tax sssess- ments issued aeainst petitioners are legal, and the additional question raised in CTA Case Noo 896, which is whether or not the assessment for 1953 has already prescribed. At the outset, it can be stated that the records of these cases clearly show that respon- dent's assessments are primarily based on the examiners reports which are not well founded. Respondent 1 s examiners v1ho investigated peti- tioners tax liabilities did not conduct a tho- rough investigation. They did not secure or sh ow any evidence to prove that Mercy Building is owned by Hercy's Inc. They did not verify where the income of said building really go during the years covered by the assessment. They cannot really say that petitioners intended to evade payment of the tax; and the fact that two assessments were issued, one against Hercy Bldg., and the other against Hercy Almonidovar de Vera, computed on the basis of tax on individual, vlhich remained unexplained. /

DECISION - CTA CASES NOS. 895 & 896 - 8- Respondent makes much of the circumstance that Hercy Almonidovar de Vera and Hercy' s Inc. refus ed examination of her books and that of Mercy's Inc., despite repeated demands and duly issued subpoena duces tecL~. These circumstances cannot justify an inference that the taxpayer committed certain violations ur1der the Revenue Code. In connection with CTA Case No. 895 , it must be noted that respondent's assessment is based on the report of the examiners alleging failure �of Mercy 's Inc. to file returns fr om 1953 to 1956 inspite of the receipt of income from Mercy Building it supposedly own. In �other words, the assessment rests on the alleged own- ership of Mercy Building by Hercy' s Inc. This basis, hovrever, is belied by the very same re- port \vhich states t hat Mercy Almonidovar de Vera is the reeiste.red ovrner of said building . Needless to say, the income therefrom cannot be considered as income of Hercy's Inc. Respondent could have check f r um the return of Nercy Al.mo- nidovar whether the ir.l.come from said building 2G ~

DECISION - CTA CASES NOS. 895& '896 - 9- was included in her return. And, respondent could have explained \vhy the assessment against Mercy's Inc. was computed on the bcsis of the tax on individuals. We are convinced by the explanation offered by petitioners during trial that the taxpayer's mistake -in not consolidating all her income is committ ed in good r~th and evidence showed that she did include the income from Nercy Building in her return. Moreover, in the absence of any indication that Hercy Inc. received income during the years in question, its failure to file income tax return for those years, were of no conse- quence. Considering therefore, the surrounding cir- cmnstances, the assessment a ga inst Mercy's Inc. is not proper .. \lfe now come to CTA Case No. 896. In this case, the returns of petitioners for 19 53 , 19 54, 1955 and 1956 were due for filin g on March 1, 1954, 1955, 1956 and 1957, respectively. It is now urged that respondent's right to assess the deficiency income tax. for 1953 has already pres- 2 G:!

'.. DECISION - CTA CASES NOS. 895 & 896 - 10 - cribed. Petitioners argue that since the return for 1953 was filed on Harch 1, 195'4 and notice of the assessment �Has only received on September 22, 1959, the five year period for assessment pro - vided in Section 331 of the Revenue Code has al- ready elapsed. Respondent on�the other hand, maintains that the ten year period provided in Section 332, for assessment should apply because petitioners failed to file the returns for 1953 and 195'4. Respondent, obviously overlooked Section 45 of the s�ame Code, then applicable to the case at bar, the pertinent provisi.on of which states : 11Sec. 45. Individual returns. x x x. (b) Where to fileo- The return shall be filed with the Commissioner of Internal Revenue, provincial re- venue agent, or treasurer of the province, city, or municipality in which such person has his legal re- sidence or principal place of busi- ness in the Philippines, then vlith the Commissioner of Internal Revenue in .Hanila." XXX XXX X X Xo Evidence reveals that the taxpayer has complied vTith the requirements of the law by filing the

HECISION - CTA CASES NOS. 895 & "896 - 11 - return for 1953 with the Office of the City Trea- surer Qf Manila as shown by the duplicate copy, stamped by said office Harch 1,' 1954. (Exh. A, pp. 63-64, CTA rec., CTA No. 895). Evidence also shows that a copy of the income tax return of Hercy Almonidovar de Vera Y.Thich reflect rental income of F60,200.00 (Vet. Hm1ter's Bldg.) for 1954 viaS received by the Income Tax Division of the Bureau of Internal Revenue on Harch 1, 1955. (Exh. B, pp. 65-68, CTA rec., CTA No. 895). We also noted that respondent merely stood pat on his argument that petitioners failed to file returns for 1953 and 1954. In short, petitioners' returns were disregarded. In this light, we are of the persuasion that respondent's right to assess the deficiency income tax for 1953 has already prescribed. So, we now come to the question of the legality of the ass- essment against petitioners for 1954 to 1956. For these years, respondent asserts that there are sufficient evidence to establish a pr:iJ!l.J! fe. ~ie case of tax evasion against Mercy 2G G

DECISION - CTA CASES NOS. 895 & 896 - 12 - Almonidovar de Vera. Said assessment could have been sustained had respondent made proper veri- fication from all sources and established that petitioners really evaded the payment of tax, but, as indicated earlier, respondent's assess- ments are not well founded. � While we are of the opinion that the evi- dence on record does not justify the assess- ment in question, we believe that some of pe- titioners returns need revision. With respect to 1953, nothing justify re- vision of the return because respondent's right to assess has already prescribed. Hith respect to 1954, respondent asserts that petitioners have m1declared rental income of P57 ,150.00 from Hercy Building and P6,ooo . oo rental income from advertisement. The return filed however, reflected the amoLmt of P60 7200 . 00 as rental in come (Exh. B, supra.) and petitioners' witness, testifying in open court, explained that the advertisement income of P6,ooo. oo was in- cluded in the rental income reported. (See pp. 14-16, t . s .n., Hearing of .June 3, 1963). To 2G7

DECISION - CTA CASES HOSe. 895 & 896 - 13 - our mind, therefore, there is no undeclared rental income for 1954. Be that as it may, petitioners deducted among others, rental expense in the amount of P1 5,460o00 and depreciation on (Vet. Hunter's Bldg.) Mercy Inc. Building in the amoun"b of P10, 500.00. On the rental expenses, Hhat may only be considered deductible is P8,620.00 which is duly supported by the lease contract between Mercy Almonidovar de Vera and the Bureau of Lands. (Exh. 25, pp. 21-23, Vol. II, BIR reco, CTA Noo 896).� As regards the depreciation, contrary to petitioners pretension, it appears that respon- dent applied consistent rates. (See Exh, 21, pp. 9-16, Vol. II, BIR rec., CTA No. 896)o Hence, petitioners return for 1954 should be revised accordingly and to take into consider- a tion the other i terns of deduction vlhich re- spondent did not controvert. \�ii th respect to 1955 , one thing that strikes us is that petitioner s ret1..1.rn shm..,red a gross ren- tal income of P99,072.00, as against respondent's � finding of only P82~265.00 (See Exh. E, p. 79, 2G S

DECI SION - CTA CASES NOS .. 895 & 896 - 14 - CTA rec .. , CTA No. 895 and Exh. 22, SU�ra.) Even the amount of P97,105.oo as rental income indicated in the exar.1iners 1 worksheet, (Exh. 21, supra.) is less than that declared in pe- titioners return. This notvrithstanding, �,._,e believe that pe- titioners return for 1955 needs revision to the effect that as in 1954, they should not only be allovJed depreciat ion of P4,473 .90 on Hercy Inc. Bldg .; P8,888.88 on Hercy Bldg.; and reB- tal expen se of P8,620.00; and also the other items not disputed by respondent. With r e spect to 1956, it appears that pe- titi oner Hercy Almonidovar de Vera filed �her return on 1-larch 27, 1957 (pp. 67-68, Vol. I, BIR rec., CTA No. 896)o This VJas subsequently amended on October 29, 1957. (Exh. D, pp. 68, CTA rec., CTA No. 896). The original as \vell as the amended return r epo r ted a gross rental income of P101,642.00. Respondent, however, insists that petitioners realized a gross rental income of P109,10 5.co. 2G !)

- DECISION - CTA CASES -lJOS. 895 & 896 - 15 - After evaluating the evidence on record in relation to the 1956 return, we are convinced that the undeclared rental income averred by respondent has already been included in the return and the . overclaimed depreciation and rental expense \v Ol:tld not in any way alter the result because ma.l1y i terns deducted by petitioners Here never disputed by respondent. Hence, there is no necessity of re- vising petitioners returnsQ In fine, the deficiency income tax liability of petitioners for 19 ~ and 1955 is ccmputed as follows: Gross i ncome per return � a � � � � p 68,660.50 Deduct: Rent to the Bureau of Lands ����� p 8,620.00 28,618:1t ft 10,042.1 Depreciation on 3,ooo.oo Hercy Inc. ~ z,oY:2 .1 b Bldg. � � � � � � � 4,473.90 p 66z.oo Depreciation on 4,444.44 Nercy Bldge n��s Other deductio not disputed �� 41,080.00 Net income � Less personal e�xe�m�pt�ion� � � � � � � � � � Amount subject to tax � � � � � � � � � � DEFICIENCY TAX DUE � � � � � � � � .27 0

.'' - �' DECISION - CTA CASES NOS. 895 .& 896 - 16 - Gross income per return ������ P99,072.00 Deduct: Rent to the Bureau of Lands ����� P 8,620.00 Depreciation on Hercy Inc. Bldg. !������� 4,473.90 depreciation on Mercy Bldg. �� 8,888.88 Other deductions not disputed �� 40,282.88 62,265.66 Net income � � � � � � � � � � � � P36,8o~ Less personal exemption � � � � � 3,000.00 Amount subject to tax � � � � � � P33,806.3~ DEFICIENCY TAX DUE � � � � � � � � P 7,990 .00 As regards the 50% fraud penalty for all the years in c1uestion, it is the well established rule that fraud is not to be prcsu.rned, and it is in- cu.rnbent upon respondent to prove its existence to justify its imposition. (Hilliam Li Yao v. Coll., CTA Case No. 30, July 31, 1956; Marguerite Wolfson v . Coll., CTA Case No . 273, July 16, 1958; Anti- gua v. Coll., CTA Case No . 579, Nov. 2, 1959; Tumarnbing v. Coll., CTA Case No. 69, July 12, 1961). Moreover, fraud is a serious charge and to be sustained, it must be supported by clear and convincing proof. (Araneta v. Comm., CTA Case No. 1699 , Nov. 6, 1970). Anent the eompr.omise penalty , suffice it to f . 27 1.

� �- .. --- - �' DECISION - CTA CASES NOS. 895 &'896 - 17 - state that respondent is not authorized to impose the same without the taxpayers consent. (Coll. v. U.S. T. et al., 104 Phil. 1962; Coll. v. Bautista, 774). WHEREFORE, the appealed decision in CTA Case No. 895 is hereby declared illegal and improper and, therefore, set aside. The appealed decision in CTA Case No. 896 is hereby modified and petitioners Hercy Almonidovar de Vera and Juan A. de Vera are ordered to pay respondent Commissioner of Internal Revenue the aggregate amoQ~t of �8,657.00 representing defi- ciency income tax for the years 1954 and 1955 as computed above plus 5% surcharge and 1~& monthly interest that have accrued thereon from November 1, 1959, provided the maxlinum amount that may be collected as interest on the deficiency shall in no case exceed the &~ount corresponding to a pe- riod of three (3) years pursuant to Section 51 (e) of the Tax Code, as amended by Republic Act Hithout pronouncement as to costs.

, � DECISION - CTA CASES NO S. 895 & 896 - 18 - SO ORDERED . Qu ezon City, Hay 11, 1982o I CONCUR: l~67~ ft(i) JICI/{' ALEX z. ~S . Associate .Tude;e 27 ~