CTA Case No. 4128 (Decision)

� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY EDWARD POTENCIANO, Petitioner, - versus - 1fi C.T.A. CASE NO. 4128 COMMISSIONER OF INTERNAL ProFmEBulg2a0ted19:95 , .. REVENUE, Hespondent. --�--------------7 X -� -- .... -�� - - - - - - - - - - - - - t -� DEc I sI 0 N This is a petition for� t'evier,.J of the decision of respondent Commissioner� of IntenHll Hevenue dated November 11, 1986, holding petitioner liable for alleged deficiency income tax and penalties in the amount of P1,332,431.87 and deficiency percentage tax and penalties in the amount of P503,702.00 for the taxable year 1979. Petitioner was the proprietor of a NACIDA registered metalcraft: business under� the business style of "Mccoy Metalcr�aft" registered in 1979, besides r��unning a small tailoring/dress shop located in Binan, Laguna. Sometime in 1984, petitioner was subjected to an investigation by 329

DECISION CTA CASE NO. 4128 - 2- the Bur�eau of Intet"nal HevPnue in San Pablo Ci1:y under" Letter of Authority No. 0073779 dated May 24, 1984. As a result of said investiqation, petitioner was assessed the afot"ernentioned deficiency irrcorrrP and pPt"centage trn<es and penalties for 1979, which assessment was received by him o n F e b t' u a r� y 11 , 1 9 8 '::1 � On Mar�ch 1, 1985, said assessment was formally protested by petitioner through counsel in a letter dated February 26, 1985. On December" 8, 1986, he t"eceived a letter� �fr�om the Commissioner of Inter�nal R e v e n u e d a t e d N o v f:HTt b e r� 11 , 1 9 8 6 t" e i t e r a t i n g t h e d ern a n d for payment of the said deficiency taxes in the amounts of P1, 332,431.87 and P503,712.00, thus, in effect, denying petitioner's administrative protest. l�lence, this appPaJ by �.,Jay of petition for" review filed '""ith this Court on January 6, 1987. T h e a f o t" e s a i d fa c t s a t" e t" e c i t e d i n t h e b o d y o f t h e petition fot" r--eviet,.J under the beading "jurisdictional allegations" and are admitted by the r��espondent in bis i'Hlso,Jer. In his petition, petitioner ar�gues that respondent has no legal, factual and equitable basis for assessing the subject deficiency income and percentage taxes as the irnputation by r�espondent of petitioner"' s annual gross sales amounting to P1,400,000.00 for tbe year in question 330

DECISION - 3- CTA CASE NO. 4128 � was not based on actual and ver�ified volume of business done for the year but was simply arrived at on the basis of mere conjectur�e or-- speculation, if not extt"apolation of respondent's revenue examiner. Petitioner alleges that he not manufactur�er ~:>ubject to 10% manufacturer�' s sales ta>< as contemplated by Section 199 of the Tax Code. On the contrat�y, his metalcraft business was a tax exempt entity engaged in cottage industry r--egistered under the NACIOA Law and had not exceeded the volume limit pt�escr�ibed by said law which w o u 1 d '"'a r t' a n t the losing of its tax exempt status. Moreover�, petitioner asset"ts that t"espondent's t"ight to assess the deficiency taxes in question has already pr--escribed; that the alleged sale of property by T.H. Quimio to petitioner was never consummated; and U1at petitioner did not actually receive any rental income that could be subject t:o income tax; and lastly, that petitioner has availed of the tax amnesty under Executive Ot"det" No. 41. Respondent, for his par� t, denies all the above allegations of petitioner and, by way of special and affinnative de�fenses, alleged that the subject assessments t.Je t" e at after a BIH examiner's investigation and finding that petitioner had 331

� DECISION CTA CASE NO. 4128 4 manufactured passenger jeepneys as princip~l product for the year in question and sold an average of two (2) units of jeepney per mo~th with an estimated cost of P60,000.00 p e I" unit or a yearly gross sales of P1,440,000.00. Accordingly, assessments for deficiency pen~entage and income taxes were issued as follows: COMPUTATION OF DEFICIENCY BUSINESS TAX FOR YEAR 1979 Gross Receipt (Meta1craft) P1,440,000.00 144,000.00 10% Tax Due Thereon Less: Tax credits/Payments Made p 144,000.00 Deficiency Sales Tax Add: 50% Fraud penalty 72,000.00 ~?5% sur"charg(f!> 54,000.00 14% Interest 4-20-79 to 71,712.00 7--31.-80 (21> .. '56%) p 1.62,000.00 20% Interest 8-01-80 to ........................................5............0............:.......3 .............,......7............1............2....................0 ............0 ........... 1 0�--23-84 ( 60%) TOTAL AMOUNT DUE & CO~LECT!BLE COMPUTATION OF DEFICIENCY INCOME TAX FOR THE YEAR 1979 Net income per return 18,505.81 .1\dd: 1 ' ,6 8 3 ' 4 5 1 � 1 9 1,701,957.00 1. Unexplained source 6,000.00 ('f income 243,451.19 1 '695 '957_. 00 2. Unreported income '540,759.95 1,292.00 from sale of 24 units ot passenger jeepneys 1,440,000.00 Net Income per investigation Les5: Exempt:ion5 Net Taxable Income Tax [)LJe Thereon Less: Paid per return 332

DECISION CTA CASE NO. 4128 - 5- Deficiency Income Tax p 539,467.95 Addr SO% Fraud penalty ~!69,733.97 14% Intere5t 4-16-80 to 7-81-�80 (4.f>6%) 485,521.15 20% lntere5t 7-31-80 to ....P............l..............,......3..............3..............2............,........4............3..............1.....................8..............7............ 10-23-84 (60%) TOTAL AMOUNT DUE & COLLECTIBLE t~OTE; to Exh. 2) P400,000.00 Purchase of Commercial building (Refer 1S6,.S48 .. 81 Ca5h on hand as of Dec. 31, 1979 Lc>an5 Payable PNB 16,548.81 140,000.00 UNEXPLAINED SOURCE OF INCOME P243,45l..19 :::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: Respondent also argues that his ,.. ight to assess and collect the instant deficiency taxes It as not yet prescribed; that the 50% fraud penalty was imposed due to substantial undetAdecl.atAation of income by the petitioner and that the assessment was issued in accordance 1.-Jith law. The relevant issues for resolution by the court are as follows: ( 1) !,.!he thetA 0 'A not the right of respondent to assess the de�ficiency inc orne arid percentage taxes in question has already prescribed; (2) Whether or not the availment of the tax amnesty by the petitioner would relieve it of the said deficiency taxes assessed by respondent; (3) t-Jhether or not the deficiency assessment has factual and legal basis; 333

DECISI-ON CTA CASE NO. 4128 - 6- (4) Whether or not the petitioner may be classified as a manufactur�er and rnay no longer� qualify as a tax-� exempt person or entity under the NACIDA Law; (5) Whether or not the imposition of the 50% fraud penalty is correct. On the first issue, the facts of the case are clear. The income tax return of petitioner� was filed on April 15, 1980 and the asses$ment was received by petitioner 1 s counsel on Februar�y 11, 1985. Therefore, the five---year pr�escr�iptive per�iod then provided under� Section 318 of the Tax Code (effective in 1979) has not yet prescribed, counted from the �filing of petitioner 1 s return on April 15' 1980. On the other hand, for purposes of the per�centage tax, petitioner �failed to shoi,J that f1e has filed the cor�r�esponding business tax return. Moreover, per the BIR records, petitioner had executed a waiver of the statute of limitations pr�escribed pursuant to the National Internal Revenue Code (p. 232, BIR records). As t� e g a r d s t h e s e c o n d i s s u e , t h i s c o u r t f i n d s t h e availment of the tax amnesty under Executive order No. 41 a "�-"� not valid insofar� as the subject assessment is concerned because petitioner is disqualified under Section 4 (e) of the said Executive more particularly relative to the inhibitions therein stating: 334

DECISION CTA CASE NO. 4128 - 7- "those with tax cases pending investigation by the Bureau of Intel~nal Hevenue arising from valid information furnished under Section 316 of the Tax Code, as amended". �The BIH l'ecot�ds (pages 76 and 91) show that the tax investigation p1�ecipitated by an information furnished the Bureau of Internal Hevenue by Danilo Garcia, Dr. Huben Yatco, Lucila Mondez and Lilia Alcantara on the 28th of October, 1983 and 12th of March 1984 for purposes of claiming the informer's reward under Section 316 of the Tax Code and under nepublic Act No. 2338. Having I"Uled that the assessment is not yet barred by prescription and that the petitioner is disqualified from availing the tax amnesty in relation to the subject assessments, we shall now come to the third issue. assessment pl~incipally arose out of the allegation of respondent's examiner that for the year in question, petitioner admitted having manufactured and sold an average of two (2) units of jeepney per month at an estimatt':ld cost of P60,000.00 p e I' unit and that petitioner had an unexplained acquisition of a nine-door apal"tment in the amount of P400,000.00. Unfortunately, t h e 8 I H I" e c o I' d s f a i 1 e d to show any factual basis to suppol"t: U1e findings of the Hevenue Examiner that 335

DECISION CTA CASE NO. 4128 - 8- petltJ.cHHH' t,.Jas pt�oducing in 1979 an average of t\,.JO (2) units of jeepney per month at a cost of P60,000.00 per unit. The examiner's allegation that petitioner had admitted the fact found by him was denied by the petitioner, and even the alleged BLT, Cabuyao Agency list of motor vehicles does not show any sale of jeepney units in 1979 by petitioner. The list only stlO\,.Js a sale made by petitioner of t.:~.;.Jo (2) units in 1992. Suct1 being the case , we are inc 1 in e d to be 1 i eve petition e ,. ' s a 11 ega t ion that the basis of the assessment was a mere product of the imagination ot� conjecture of the Hevenue Examiner or probably based on mere hearsay or� bar�e assumption and therefore said assessment is clearly contrary to the ruling of the Supt�eme Cout�t in the case of Collector of Internal Hevenue vs. Benipayo, 4 SCRA 182: "xxx. An assessment fixes and determines the tax. liability of a ta><payer. As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount assessed and demanded. Hence, assessments should not be based on mere presumptions no matter how reasonable or logical said presumptions may be. xxx. "In order to stand the test of judicial scrutiny, the assessment must be based on actual facts. The presumption of correctness of assessment being a mere presumption cannot be made to rest on another� presumption xxx." 336

DECISION CTA CASE NO. 4128 - 9- However, the court finds valid basis in the finding of respondent that: pEd:itioner� has an "unexplained source o f i n c om e " f o I'' t h e y e a I' i n q u e s t i o n i n t h e am o u n t o f P243,451.19 must be taxed. Petitione1� has justified the purchase price of his apartment in the amount of P400,000.00 only fl-om a cash on hand of Pl6,548.81 and proceeds of his loan from PNB in the amount of P140,000.00. This is in fact shown in his 1979 income tax retu1�n and financial statement. However, as to other loans allegedly pr�ocured from othe1- per�sons to augment his resources to be able to raise the total purchase price of P400,000.00, the same are unsupported by a n y e v i d e n c e '"'I h a t s o eve 1� , and the1-�efore, cannot be admitti':Hl by this court. The fact that the sale of the said nine door apartment was later on cancelled is of no significance to the r�esolution of the tax liability of petitioner. Anent the othel" issue on whether or not petitioner may be classified as a manufacturer� and thus m.:1y or may not be qualified as a tax--exempt individual o1� entity under the NACIDA Law, the same has been rendered moot and academic by OUI" preceding opinion that no factual basis exists to justify that petitionel" was ic1 manufacturer of jeepneys in 1979. Furthermore, on the NACIDA tax 337

DECISION CTA CASE NO. 4128 - 10 - exemption incentives, it appears from petitioner's income tax return and financial statement that he never actually engaged in said metalcraft industry and, in fact, did not claim a tax exemption privilege in his income tax return. As testified to by petitioner's �,.,1itness, Mr�. Fernando Mar-celiana, the accountant of petitioner, the metalcraft business income v.Jas negligible (p. 24, TSN, August 26, 1992). The bulk of petitioner's income for said year was ' derived from motor vehicles repair service. As to the 50% fraud penalty, the aforementioned facts do not necessarily show fraudulent acts on the part of the petiti.oner' that v.Jould justify the imposition of said penalty. The fact that this court sustains a portion of the subject BIR assessment does not mean that petitioner is guilty of fraud. Such finding merely r-esults fr�om petitioner's failur-e to fully substantiate the purchase price of his apartment with sufficient proof or evidence. Fraud is never presumed but must be proven with substantial and positive evidence (Collector vs. Benipayo, supra.). WHEREFORE, the decision appealed from is hereby modified. The assessment for deficiency percentage tax and penal ties in the amount of P503. 702.00 is hereby nullified, while that covering the income tax liability is recomputed and reduced as follows: 338 )

DECISION CTA CASE NO. 4128 - 11 - Net income per return P 18.505.81 Add unexp1ained source of income: 243,451.19 261,957.00 Purchase of commercial. 6,000.00 buil.ding P4oo.ooo.oo P255.957.00 Less: a) cash on hand. ����������������:::::::::::::::::::::::::::::::::::��������������� 12/31/79 P16,548.81 b) 1oans payab1e -PNB 140.000.00 156.548.81 Net income per court computation Less personal. exemptions Net taxab1e income Tax due thereon P138,731.19 Less tax paid per return 1,292.00 Deficiency income tax P137.439.19 Add: a) interest on deficiency 5,640.65 under Sec. 51(d) maximum of 3 years 74.405.43 80,046.08 14% [4~16-80 t o 7 - 3 1 - 8 0 ] 20% interest [8-1-80 to P217.485.27* :::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::: 4-15-83] TOTAL AMOUNT DUE AND COLLECTIBLE (*Plus interest and surcharge pursuant to Section 51(e) and (3) of the 1979 Tax Code uhich shall be computed as the time of payment of subject tax liability.) SO ORDERED. <(~.~ ERNESTO D. ACOSTA Pt'esiding Judge GRUBA 4J:(.Judge M-~ RAMON 0. D YA Assoc1ate Ju .e 339

-- ..... DECISION CTA CASE NO. 4128 - 12 - CERTIFICATION I hereby certify that this decision was reached after due consultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. <C~Q~ ERNESTO D. ACOSTA Pt"esiding Judge Court of Tax Appeals 340