CTA Case No. 3097 (Decision)

K ~. ~� u l:H. l <. u � � � � COUll! OF TAX APP�A.I_} �ma.w mT'i' PRIMITIVO SI ASAT, . Pet.i tioner, / - versus - C.T.A. CASE NO. 3097 THE COMMISSIONER OF INTERNAL REVENUE, Respondent . X .- - - .- - .- - - .- .- _X DE C I S I 0 N On the ,basis of a let.ter dated March 10 , 1975 of one Pablo de Jesus Tan-gatue, proprietor of the International Flag House, in f orming respondent Com- missioner ot: Internal Revenue that peti t:ione�r Primit ive Siasat had sold Philippine flags to the Department:. {now Minist-ry) of Educat.i on and Culture worth i=i939,960.00, r.evenue examiners. Jose de la Pena and Emilio Bergant.inos of respon~lent's special investigation division were authoriz-ed to conduct an investigation of petitioner's business trans- actions in 1974. And from petitioner's 1974 income tax return and worksheet, said examiners ascertaine-d that petitioner disburse d more money in 1974 than his return showed was ava i lable to h im as income, which was considered by them a s undec lared income 35 :1

DECISION - CTA CASE NO. 3097 - 2- from othe::rr: sources, prompting respondent to issue a deficiency income .tax assessment against petitioner. As alleged in the petition for review and admitted in the answer., the an t:eceden t:s. of the case are as follows: 1. Pet.i t .ioner is of le91al age, with postal address at 819 Ilaya Street, Manila. 2. In 1974 he was eng,aged, among othe�rs, in the manufacture and sale of Philippine flags under the: name and style of United Flag Indus.tr ies, a single prop,x:ietorship of petitioner. 3. Within the period prescribed by law, peti;.. tioner. filed his income tax return for taxable year 1974 decla~ ing, the. amount of ll45�, 060.00 as ne:t income and' paid the tax due thereon. 4. On August 16, 1979, petitioner received a letter and assessment:. notice both dated. July 21, 1979 requiring him to pay the amount. of P309,700.58 as allegie.d deficiency income tax for 1974., inclusive of interest, details of which are as follows: 1974 Net income per ret:.urn - -:- -:- - - - -:- -:- - - -:- - ll45,060.25 Add: Addit:ional i ncome Excess of cash disbursements over receipts considered incare from other sources Cash disbursements (January to September 1974) - - - P703,300 . 90 3 5 :}

DECISION - CTA CASE NO. 3097 - 3- Cash receipts (January to September 1974 inclusive �of beg.� balance) 356,825.13 346�,475. 77 Net. income per invest:.ig,ation - :- - - - ~ ~ ~ . 391,536.02 Less: personal exemption - - ~ - ~ ~ - ~ - - 3,000.00 Aroc>unt:.. subject:.. to tax - - - ~ ~ ~ ~ ~ :- ~ :- �1388,536.02 Incone: tax due thereon-- - - - - - - - - - 228,44.4.00 Incane t:.ax already paid :... :... ~ ~ ~ ~ :... ~ - - _1.0 ,345�.00 B a 1 a n c e - :- ~ ~ ~ ~ ~ ~ ~ ~ - :- ~ - ~ ~218,099 . 00 Add: 14% int.� p.a. fr . 4:-16-75 to 4:-16-78 91,601.5-8 'IDI'AL AMJUNT DUE & COLLECTIBLE - - ~ ~ - ~ - !2._Q_9, 700. 5B 5. The basis of the assessment. is t:.he sum of �1346,475.77 allegedly realized by petitioner which he failed to declare for income tax purposes. 6. By let.ter dated Aug,ust:. 27, 1979, petitioner protested t:.}?e assessment:.., but. t:.he protest was denied by respondent:. in a letter dated November 6, 1979, which was received by said petitioner on May ~0, 1980. Hence'� the present peti t .ion fo r review fi l ed on May 22, 1980. Contending. that t.he assessment. has no factual basis fotr herein petitioner has reported his. income for the year 1974 and pai d the tax due thereon, peti- tioner also avers that he has already been previously investig,ated for income and bus-iness tax liabilities for t:.he same year by an examiner of t he Regional Office, Manila, of the Bureau of Internal Revenue, an~ 4fter paying the deficiency income tax per inves- t.igat.ion , Letter of Confirmation No. 684306 dated J uly 3, 1975 was issued by respondent relieving him of further t:.ax 1 iabil i ty. To invest:.iga t:.e and assess

DECISION - CTA CASE NO. 3097 - 4- again petitioner for deficiency i ncome tax for the same year would therefore be a vi olation of Revenue Memorandum Circular No. 35-76 dated July 28, 1976, prohibi t .ing the examination and inspect.ion of the taxpayer's books of accounts and other accounting records more than once in one taxable year. As special and affirmative defense, however, respondent states, among others, that. he is not precluded to reinvestigate tax cases if, as obtains in this case, there are mistakes or irregularities committed in. the original investigation. Moreover, estoppel will not operate against the State in the �, collection of correct taxes. Respondent also contends that the li~itation does not apply where there is an erroneous treatment of account or where the taxpayer omits or misstates facts in his return, as in the instant case, such that a loss of revenue on the part of the government results. Accordi ng tb respondent, the revenue examiner who first investigated petitioner's books of accounts failed to analyze cash transactions reflected in petitioner's income tax return. Since the records show that petitioner disbursed the amount of P356,475.77, much more tha n his available cash for the months of January, February, March, May, Augus t and September, 1974, and this was discove r ed .35 G

DECISION - CTA CASE NO. 3097 - 5- only in the second inveetig,ation spawned by the let.t.er-denunciat.ion dated March .10, 1975,, respondent maintains that. he acted within his authority when he caused the second investigation of petitioner's records and other pextinent data, and issued an assessment. based on facts uncovered by t:.he second inves t.ig a t:.ion. (pp. 130-131, CTA records.) The first. quest..ion to be resolved therefore�, as posed by the parties, is whether or not the defi- ciency income tax assessment under consideration was issued in violat.ion of Revenue Memorandum Circular No. 36-76, which provides that.. taxpayers' books of accounts and other accounting records shall be: subject to examinat4on only once in a taxable year. Section 337 (now Section 324.) _of. the National Internal Revenue Code requires that books of accounts and other account.ing records must be preserved for at least five year.s from the date of the last entry, and are subject. to examination and inspection at any time by internal revenue officers. However, examination and inspection may be made only once in a taxable year during the five-year period they are required to 'be preserved, except in cases of fraud, irregularity or mistake, or unless the taxpayer requests otherwise. In implementing. the p rovision of the law, Revenue 35 7

DECISION - CTA CASE NO. 3097 - 6- Memorandum Circular No. 35-76 dated July 28, 1976, insofar as pertinent hereto, provides that: "Section 337 of the Tax Code provides that the books of accounts and other. records of taxpayers shall be subject- to examination and inspection only once in a taxable year, except in cases of (a) fraud; (b) irregularity; (c) mistake; �and (d) when the taxpayer reqriest for reinvestigation_of his case. In other words, in such cases, a re- investigation is authorized and con- sequently, the aforesaid limitat-ion on the examination and inspection of books of accounts and records of taxpayers concerned will not apply." In ordering the re-investigation of petd tioner, we notice, a's stat-ed. earlier, that respondent acted on a lette.r �elat-ed March 10, 1975 of one Pablo de Jesus Tan-gatue, proprietor of the Int-ernational Flag House, informing (or denouncing to) him that the United Flag Industries of which peti t .ioner is the owner sold Philippine flags to the Department (now Ministry) of Education and Culture worth P939,960.00. (Exh. "1", pp. 4-5, BIR records)~ Enclosed therewith are xerox copies of Requisition for Equipment or Supplies No. 375568 dated September 27, 1974 and No. 375586 dat.ed October 18, 1974 with a stamp that they have already beE�n paid. (pp. 2-3, BIR records.) Since the informer wanted to know if the corresponding sales and other taxes for these transactions had been paid by the

DECISION - CTA CASE NO. 3097 -7 - reg,istered owner of the busine-ss, petitioner herein, respondent caused a re-investigation of petitioner's business transactions in 1974. However, in re- investigating, the tax liabilities of pet..itioner, respondent.' s examiners did not conduct. an examination and inspection of petitioner's books of accounts and other accounting records. They merely analy.z.ed the 1974 income t:.ax return and worksheet of petitioner on file with the office of respondent and forming part of his official records, xerox copies of which were furnished them by the Regional Office, Manila. And from sucp analysis, the examiners ascertained that petit.ioner disbursed more than his available cash in t:.he .amount of ~956,475.77, which was considered by t::hem as undeclared income, and which, in turn, was the basis of the deficiency income tax assessment under consideration~ (Exhs. "3", "4", "4-A" & "4-b" ' . pp. 11, 20, 21, 22 and 23, BIR records.) It seems clear therefore that when respondent issued t:.he deficiency income tax assessment under consideration, petitioner's books of accounts and . other accounting records were not subjected to examinati6n � and inspection for a second time in the s~me year. Analyzing an income tax return on file with t:.he office of respondent, which is the 35 ~

DI.:CISION - CTA CASE NO. 3097 - 8- official record of the Bureau of Internal Revenue, cannot. by any stretch of the imaginat.ion be considered as an examination an11l inspection o f the books of accounts and other accounting records of taxpayers which are kept. in their place of business or residence. It seems we:ll-settled. that if, in assessing; income tax upon the r eturn of a taxpayer, an error is made with the result that. the tax is underassesse�d, the Commissioner of Internal Revenue has the power to reassess and collect any additional tax due upon such return, . provided it:. is done within the� prescrip- tive period. Since the deficiency income tax assess- ment i n question was issued on the basis of the 1974 income tax return and worksheet of petitioner on file with the Bureau of Int:. -e rnal Revenue, and not on the� basis of a second examination and inspection of peti- t .ioner 1 s books of accounts and other accounting, records, its issuance was not in violation of Revenue Memorandum Circular No. 35-76. This brings us to the second issue pr:esented by the par ties as to whether or not. the deficiency income tax assessment has legal and factual basis. As <;tlready stated, respondent's deficiency asses.s- ment. is based on his. revenue examiners 1 findings. that petiti oner disbursed more than his available cash for 3G O

DECISION - CTA CASE NO. 3097 - 9- the motil.ths of January to September, 1974, so that the highest credit balance for: the: month of September was considered taxable income from other sources. (Examiners' report, Exh. "6", p. 34, BIR records.) Two investigations of petitioner's 1974 business transact-ions were au thor ized by respondent in 1975. The first (Exh. "I", p. 58, CTA records.)'� which was conducted by revenue examiner Perfecto Lacues.ta in June, 1975, was terminated on July 3, 1975, and a letter of confirmation was issued accordingly. (Exh. "I-1" ,. p. 59, CTA records.) The second inv.es- t-:~� ga t� "~o n (E ~h � "J" , p � 60, CTA records) _was made by revenue examiners Jose de la Pe~a and Emilio Berganti~os in July, 1975, as a result of which petitioner was assessed deficiency income tax for 1974 in the amount of Ei309,700.58. (Exh. "7", p. 39, BIR records.) In the course of the first examination of peti- tioner's books of accounts and accounting records, petitioner's bookkeeper, Magno Magugat, submitted a worksheet (Exh. "10", pp. 13-15, BI R records) to examiner Lacuesta showing the 1974 monthly totals of the accounts. The xerox copy of this worksheet, together -with petitioner's income tax return (pp. 13-19, BIR records )'� was the sole basis of respondent's sec:ond set of examiners' determination of the deficiency 3G

DECISION - CTA CASE NO. 3097 - 10 - income tax against. pet.it:ioner. (t.s.n. pp. 1 1-12, hearing of October 2, 1981.) 'rhey were unable to examine the 1974 books of accounts and other account- ing records of petitioner as all of these books and records were attested to by petitioner and his accountant Narciso Maturgo as having been burned in the fire which gutted the office of the latte r on December 14, 1975. (Exhs. "A", 11 A-1" to "A-4", pp. 42-45, CTA records; t.s.n. pp. 40-44, hear i ng of July 10, 1981.) Revenue examiners Berganti~os and de la Pena contend that there is no showing in the balanc.e sheet attached to petitioner's return that the taxpayer is on the acc rual method of accounting because there is no separ ate account for accounts payable reflected in his balance sheet (p. 17, BIR records)~ in which case, all of his purchases were in cash. (t.s.n. p. 14, hearing of October 2, 1981.) On this premise, they arrived at the deficiency income tax assess.ed ag;ainst. pet:i tioner by adding all the "purchases" in petitioner's worksheet to all other disbursements per month, which resulted in cash credit balances for the months of January to September. (See examiners' worksheet, Exh. 11 5", p. 31, BIR records.) The highest credit balance of cash for the month of September, 1974, 3 G~!

DECISION - CTA CASE NO. 3097 - 11 - was then considered by them as income unaccounted for, and assessed peti t .ioner acc.ording,ly. (Exh. "~", p. 34, BIR record~.) Petitioner's bookkeeper, in his testimony before the Court, avers that these transactions on c:redit were recorded in the books of accounts, but since respondent's examiners did not see the books, they concluded that all purchases made by petitioner from January to September wer:e in cash when ac tually some were on credit. (t.s.n. pp. 10-11, hearing of May 12, 1981; pp. 32-39, hearing of October 2 , 1981.) To prove his claim, petitioner's bookkeeper prepared a breakdown of the cash disbursements and purchases monthly tot.als, which is found in Exhibit "10" (xerox copies of the worksheet were submi tted to first examiner, pp. 14-15, BIR records)'� reflecting the purchases on account and the cash purchases. (EXh S�. "M" & "M- 1", pp. 72-73, CTA records. ) And in support thereof, petitioner produced in Court cer tifications from his suppliers on credit and their subsidiary ledgers evidencing these payables. (Exhs. "C" to "G-6", inclusive; "N", "N - 1" to "N-4", pp. 4 7-56; p. 64, CTA records.) As corroborating evidence, peti- t .ioner also presented, as witn esses the following bookkeepers of his suppliers who testified on the 3G 3

DECISION - CTA CASE NO. 3097 - 12 - various credit purchases recorded in their respect.ive subsidiary ledgers and the subse.quent:. payments thereof: (t.s.n. pp. 1-54, hearing of July 27, 1981; t.s.n. pp. 1-21, hearing of Augus~ 20, 1981.) 1. Remedios de Guzman for the Society Mfg,. Co.; 2. Nila de Guzman for the Kundiman Enterprises; 3. Leonardo Alcala for the Balboa's Enterprises and J.D. Textiles; and 4. Filma Madrid for the Wonder Textiles. Respondent, however, disputes the evidentiary value of these subsidiary ledgers for lack of corrob- orative evidence presented, such as copies of the invoices and official receipts, although the numbers of which were entered in the ledgers. It is argued that "standing alone, the subsidiary and envelope ledgers are insufficient to overcome the presumption of correctness of respondent's assessment." (Res- pendent's memo., p. 135, CTA records.) Respondent's stand is not well t.aken. The sub- sidiary ledgers, together with the certifications of petitioner's suppliers and the testimonies of their bookkeepers, have sufficiently established the exist- ence of petitioner's credit purchases in 1974, even without the introduction of the copies of the offic:ial receipts and the invoices. The above-mentioned oral 3G �'l

DECISION - CTA CASE NO. 3097 - 13 - and documentary evidence offered by petitioner served to confirm the purchases on credit appearing in peti- tioner 's worksheet.s. (Exhs. "M" & "M-1", pp. 72-73, CTA records.) These worksheets, which were recons- txucted by petitioner ' s bookkeeper from the records of the Court and petitioner's suppliers showing the breakdown of the cash disbursements and purchases monthly tot.als in Exhibit "10" (pp . 14-15, BIR records)'� reflect the purchases on credit in 1974 and their pay- ments during the year. A careful scrutiny of the worksheets will readily show tha~ the figures appearing there in, r.epresenting these purchases on credit, recon- �, cile with those in the suppliers' subsidiary ledg,ers. The fact that no accounts payable appear in petitioner's balance sheet. is of no consequence, as petitioner's bookke:eper has satisfactorily explained that. all pur- chases on account were liquidated by the end of the year, hence, they would no lc11ger be reflected in the financial statements. (t.s.n. pp. 44-47, hearing of October 2, 1981.) Respondent has failed to impugn the correctness of the purchases on credit and the cash account of petitioner as reconstructed by his bookkeeper. Neither was he able to impeach the credibility of the testimonies of petitioner's witnesses. Although respondent's 3G5

DECISION - CTA CASE NO. 3097 - 14 - assessment is based on petitioner's own worksheet, nevertheless respondent's determination is founded on an assumption which petitioner has sat.isfactor ily proven to be erroneous. Accordingly, the decision of respondent dated November 6, 1979 holding peti- tioner Primitive Siasat liable for deficiency income tax for the year 1974 in the amount of P309,700 . 58, inclusive of interest, cannot be sustained. WHEREFORE, the judgment under review should be as it is hereby reversed. SO ORDERED. Quezon City, Metro Manila, August 30, 1982. ~~~ AMANTE Presiding Judge WE CONCUR: / ,.- CONSTANTE C. ROAQUIN Associate Judge / ~~ 1tssoc1ate Judge 3G G