VICTORIAS FOODS CORPORATION v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY SECOND DIVISION VICTORIAS FOODS CTA CASE NO. 8668 CORPORATION, Members: Petitioner, -versus- Castaneda, Jr., Chairperson, Casanova, and Cotangco-Manalastas, JJ. COMMISSIONER OF Promulgated: INTERNAL REVENUE, MAY z0 2016 ~ Respondent. ~ 1: 1 / 2-o f'�� x----------------------------------------------------------------------------------x DECISION CASTANEDA, JR., J.: STATEMENT OF THE CASE This is a Petition for Review filed by Victorias Food Corporation seeking the cancellation of deficiency income, value-added, and expanded withholding tax assessments for the fiscal year ending August 31, 2009 in the amount of P10,131,843.31, including increments, detailed as follows: 1 Basic Income Tax VAT EWT Total Interest p 5 394 439.64 p 1 082 892.71 p 73 173.21 p 6 550 505.56 Compromise penalty 2 831 465.00 616 606.03 42 266.72 3 490 337.75 TOTAL 50 000.00 25 000.00 16 000.00 91,000.00 P8,275 904.64 Pl 724,498.74 P131,439.93 P10,131 843.31 1 Formal Letter of Demand dated July 4, 2012 issued by the Bureau of Internal Revenue, Revenue Region No. 12, Bacolod City, Exhibit "A-1", Docket Vol. II, pp. 272-273.

DECISION erA case No. 8668 STATEMENT OF FACTS Petitioner Victorias Food Corporation (VFC) is a domestic corporation organized in accordance with the laws of the Republic of the Philippines, with office address at the VMC Compound, Victorias City, Negros Occidental, Philippines. 2 VFC is principally engaged in the business of acqu1nng or owning factories and other manufacturing facilities by lease, purchase or otherwise and to operate the same for the processing, preservation and packaging of food products and to sell the same at wholesale. 3 Respondent is the duly appointed Commissioner of the Bureau of Internal Revenue (BIR), who is responsible for the assessment and collection of all national internal revenue taxes, fees and charges and the enforcement of all forfeitures, penalties and fines connected with such taxes. She holds office at the BIR National Office Building, Agham Road, Diliman, Quezon City.4 In a Letter of Authority (LOA) dated February 18, 2011,5 which was received by VFC on March 2, 2011/ Respondent authorized its revenue officers to examine VFC's books of account and other accounting records for Calendar Year (CY) ended December 31, 2009. In a letter dated March 2, 2011, petitioner acknowledged the receipt of the LOA and requested for clarification whether the respondent would like to examine records for CY ended December 31, 2009 or for Fiscal Year (FY) ended August 31, 2009.7 Thereafter, in three transmittal letters, VFC submitted several documents to comply with the examination.8 f.z- 2 Par. 1, Joint Stipulation of Facts and Issues (JSFI), Docket Vol. IV, p. 2064; Respondent's Formal Offer of Evidence, Exhibit R-6, Docket Vol. IV, p. 2255; BIR Records, p. 599. 3 Articles of Incorporation, Exhibit C, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 4 Par. 2, JSFI, Docket Vol. IV, p. 2064. 5 Letter of Authority SN eLA201000024127 I LOA-076-2011-00000045, Exhibit B, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 6 Letter of Authority SN eLA201000024127 I LOA-076-2011-00000045, Exhibit B, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 7 Letter dated March 2, 2011, Exhibit D, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 8 Letter dated March 11, 2011 (Exhibit D-1) transmitting unaudited books of account, Articles of Incorporation and By-Laws, and other supporting documents; undated letter (Exhibit D-2) transmitting BIR withholding tax returns or BIR Forms 1601 and 1604; and letter dated April 7, 2011 (Exhibit D-3) transmitting original check vouchers for Fiscal Year (FY) 2008-2009 and Certificates of Creditable Tax Withheld at Source.

DECISION CTA Case No. 8668 In a LOA dated March 23, 20119 and in reply to petitioner's letter dated March 2, 2011, 10 respondent amended the period covered by the examination to FY ended August 31, 2009. Subsequently, in a Notice of Informal Conference dated December 1, 2011 with attached Computation of Tax Deficiency, Summary of Disallowed Deduction, Summary of Disallowed Deduction, Summary of Disallowed Salaries, Wages and Other Employee Benefits and Details of Discrepancy, respondent invited VFC to discuss the foregoing findings of the examiners and to present evidence to refute the same. 11 The Notice of Informal Conference with the computation, summaries and details, which was received by VFC on December 2, 2011, 12 informed the petitioner of its alleged tax income, value-added and expanded withholding tax deficiencies for FY ended August 31, 2009 amounting to P9,634,172.07, 13 computed as follows: 14 Basic Income Tax VAT EWT Total Interest p 5 691 827.91 p 1 082 892.71 p 73 173.21 p 6 847 893.83 TOTAL 2 276 731.16 Php476 472.79 33 074.29 3 490 337.75 p 7,968 559.07 p 1559 365.50 p 106 247.50 p 9 634,172.07 Thereafter, respondent issued a Preliminary Assessment Notice (PAN) dated February 13, 201215 with attached Details of Discrepancy, assessing VFC of the total amount of P10,007,436.0116 as the alleged deficiency income, value-added, and expanded withholding taxes, computed as follows: 17 Basic Income Tax VAT EWT Total Interest p 5 691 827.91 p 1 082 892.71 p 73 173.21 p 6 847 893.83 Compromise Penalties TOTAL 2 507 250.19 525 202.96 36 089.03 3 068 542.18 91 000.00 P8 199,078.10 P1,608 095.67 p 109,262.24 p 10 007,436.01 9 Letter of Authority dated March 23, 2011, SN eLA201000024141 1 LOA -076-2011-00000060, Exhibit E, Petitioner's Formal Offer of Evidence, Docket Vol. IV, pp. 2160-2161. 10 Letter dated March 2, 2011, Exhibit D, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 11 Exhibit F, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 12 Exhibit F, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 13 Par. 3, JSFI, docket, p. 2064. 14 Notice of Informal Conference dated December 1, 2011 with Computation of Tax Deficiency, Summary of Disallowed Deduction, Summary of Disallowed Salaries, Wages and Other Employee Benefits and Details of Discrepancy, Exhibit F, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 15 Exhibit G, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161; Respondent's Formal Offer of Evidence, Exhibit R-8, BIR Records, pp. 640-641. 16 Par. 4, JSFI, Docket Vol. IV, p. 2064-2065. 17 Preliminary Assessment Notice dated February 13, 2012, Exhibit G, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161.

DECISION CTA case No. 8668 In a letter dated March 14, 2012, VFC acknowledged receipt of the PAN on February 23, 2009 and stated in detail the grounds for its Protestl8 and enclosed therein supporting documents.19 In a letter dated May 8, 2012,2� respondent acknowledged receipt of VFC's March 14, 2012 protest letter and its photocopied documents. The May 8, 2012 letter also informed VFC that the docket of the case including the Protest letter and the supporting documents enclosed with the same will be "forwarded to Revenue District No. 76, Victorias City, for reinvestigation." Finally, the May 8, 2012 letter requested VFC to submit the original copies of the supporting documents to the District Office on or before May 31, 2012. In a letter dated May 14, 2012,21 respondent again requested VFC to submit the original copies of the documents supporting its rebuttal of the PAN on or before May 31, 2012. In a letter dated May 27, 2012,22 referring to respondent's May 14, 2012 letter, VFC requested that the examination of the original documents be conducted in its office premises to facilitate the retrieval process and to prevent the loss of said originals. In a letter dated May 29, 2012,23 respondent denied VFC's request and insisted on the "physical submission" of the documents to the office premises of the BIR. In a Memorandum dated June 5, 2012,24 respondent's examiners stated that as of report date (June 5, 2012), VFC failed to submit the required documents despite written notices to comply on or before May 31, 2012. Accordingly, the Memorandum addressed to the Regional Director recommended that the case be forwarded to the Assessment Division for issuance of Final Assessment Notice and Demand Letter. In a transmittal letter dated June 13, 2012,25 VFC submitted original documents consisting of Check Vouchers, Journal Vouchers and other documents to comply with the May 29, 2012 letter of the respondent. ~ 18 Exhibit H, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 19 May 8, 2012 letter of the BIR, Exhibit I, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 20 Exhibit I, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 21 Exhibit I-1, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161. 22 Exhibit J, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2161-2162. 23 Exhibit K., Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2162. 24 Exhibit R-12, Respondent's Formal Offer of Evidence, Docket Vol. IV, p. 2257; BIR Records, p. 852. 25 Exhibit L, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2162.

DECISION CTA Case No. 8668 In a letter dated July 4, 2012/6 which was mailed on July 6, 2012/7 Regional Director Perfecto L. Aranas upheld the assessment against the Petitioner and demanded payment for the amount of P10,131,843.31 as deficiency income, value-added, and expanded withholding taxes. 28 Said July 4, 2012 letter enclosed the Final Assessment Notices (FAN), the Formal Letter of Demand (FLD), Details of Discrepancy and Computation of Tax Liabilities summarized as follows. 29 Basic Income Tax VAT EWT Total Interest p 5,394 439.64 p 1082 892.71 p 73 173.21 p 6550 505.56 Subtotal 2831 465.00 616 606.03 42 266.72 3490 337.75 Compromise Penalties p 8 225,904.64 p 1,699,498.74 p 115,439.93 p 10,040 843.31 TOTAL 91 000.00 p 10,131 843.31 On July 11, 2012/0 petitioner received the July 4, 2012 letter, the FAN, FLD, Details of Discrepancy and Computation of Tax Liabilities. In a letter dated August 9, 2012/1 VFC filed its protest against the FAN, which was denied by Regional Director Perfecto Aranas in a letter dated October 1, 2012?2 Thereafter, VFC sought for reconsideration of the October 1, 2012 denial in a letter dated December 6, 2012 addressed to Commissioner Kim S. Jacinto- Henares.33 On July 4, 2013, the Petitioner filed the Petition for Review with the Court?4 Respondent filed her Answer by registered mail on September 25, 2013.35 Thereafter the case was set for pre-trial conference on 7'- November 7, 2013.36 26 Exhibit A, A-1, and A-2, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2159-2160; Exhibit R-13, Respondent's Formal Offer of Evidence, Docket Vol. IV, p. 2257-2258; BIR Records, pp. 859-868. 27 Exhibit R-13, Respondent's Formal Offer of Evidence, Docket Vol. IV, p. 2257-2258; ; BIR Records, pp. 859-868. 28 Annex B-1, Petition for Review, Docket Vol. I, p. 56; par. 5, JSFI, docket, p. 2065. 29 Annex B-2, Petition for Review, Docket Vol. I, p. 57; par. 5, JSFI, docket, p. 2065. 30 Annex B, Petition for Review, Docket Vol. I, p. 37; Exhibit M, Letter Protest addressed to Regional Director Perfecto L. Aranas dated August 9, 2012, stating that "VFC received 11 July 2012 the following formal deficiency tax assessments for taxable year 2009"; Petitioner's Formal Offer of Evidence; Docket Vol. IV, pp. 2159-2160. 31 Exhibit M, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2162-2163. 32 Exhibit N, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2160. 33 Exhibit 0, Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2164. 34 Petition for Review, Docket Vol. I, pp. 6-124. 35 Answer, Docket Vol. I, pp. 138-152. 36 Notice of Pre-Trial Conference, Docket Vol. I, p. 154.

DECISION CTA case No. 8668 Accordingly, petitioner and respondent submitted their Pre-Trial Briefs on December 10, 201337 and November 4, 2013/8 respectively. On February 17, 2014, the parties submitted their Joint Stipulation of Facts and Issues.39 Accordingly, the case was set for presentation of evidence. Petitioner presented as its witnesses, Jefferson V. Yu,40 Head of Accounting, and, Richard S. Querido,41 the Independent Certified Public Accountant, who was commissioned by the Court. Petitioner filed its Formal Offer of Evidence on August 11, 201442 and submitted the hard and soft copies of its list of exhibits in its Compliance on August 13, 2014. In a Resolution dated September 26, 2014, the Court admitted all of Petitioner's exhibits, except Exhibits C-1, D-1, D-2, K, T, U and W and Z-1 to Z-255.43 Upon Motion for Partial Reconsideration, the Court admitted Exhibits Z-1 to Z-255.44 Respondent presented two witnesses, namely, Revenue Officers Irene D. Poblacion and Allan B. Arreglado.45 Subsequently, respondent filed her Formal Offer of Evidence on November 6, 2014.46 In the Resolution dated January 20, 2015, the Court admitted respondent's exhibits.47 On February 4, 2015, petitioner filed the Judicial Affidavit of Nelson Sotomil, General Manager of VFC, as additional/rebuttal witness. 48 In a Manifestation dated June 9, 2015, respondent stated that in lieu of filing the Memorandum, she is adopting her Answer as her Memorandum.49 Petitioner, likewise filed a similar Manifestation dated July 15, 2015 stating that it is adopting its Petition for Review as its Final Memorandum. ~ 37 Docket Vol. II, pp. 250-254. 38 Docket Vol. I, pp. 156-162. 39 JSFI, Docket Vol. IV, pp. 2064-2069. 40 Judicial Affidavit of Jefferson V. Yu, Docket Vol. II, pp. 256-270. 41 Judicial Affidavit of Richard S. Querido with attached Independent CPA report (Exhibit WW), Docket Vol. IV, pp. 2134-2151. 42 Docket Vol. IV, pp. 2159-2192. 43 Docket Vol. IV, pp. 2226-2227. 44 Resolution dated May 8, 2015, Docket Vol. IV, 2318-2319. 45 Judicial Affidavit of Allan B. Arreglado, Exhibit R-15 and Judicial Affidavit of Irene D. Poblacion, Exhibit R- 16, Respondent's Formal Offer of Evidence, Docket Vol. IV, pp. 2258-2259. 46 Docket Vol. IV, pp. 2253-2262. 47 Docket Vol. IV, pp. 2282-2283. 48 Docket Vol. IV, pp. 2287-2292. 49 Docket Vol. IV, pp.2320.

DECISION CTA Case No. 8668 Accordingly, in a Resolution dated July 20, 2015, the Court considered the case submitted for decision. 5� ISSUE The sole issue the parties stipulated for resolution of the Court is whether Petitioner is liable to pay the total amount of Php10,131,843.31 as deficiency income, value-added and expanded withholding taxes for the FY ending August 31, 2009.51 RULING Prescription In its Petition for Review,52 Petitioner asserts that respondent's right to assess deficiency taxes has prescribed pursuant to Section 203 of the National Internal Revenue Code of 1997 (NIRC), as amended, which provides: SEC. 203. Period of Limitation Upon Assessment and Co/lection.-Except as provided in Section 222, internal revenue taxes shall be assessed within three (3} years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. (Emphasis supplied) Respondent argues otherwise, noting that when petitioner protested the Preliminary Assessment Notice (PAN), it essentially requested for a reinvestigation since some photocopied documents were submitted and the protest letter mentioned that petitioner is "still compiling supporting documents to substantiate the remaining tax findings." The same request was granted by respondent, hence, the running of the prescriptive period on making an assessment and ,9<--- 50 Docket Vol. IV, pp. 2330. 51 Simplification of Issues, JSFI, Docket Vol. IV, p. 2065. 52 Petition for Review, Docket Vol. I, pp. 9-16.

DECISION CTA case No. 8668 collection of taxes was suspended53 in accordance with Section 223 of the NIRC of 1997, as amended, which is quoted hereafter: SEC. 223. Suspension of Running of Statute of Limitations.-The running of the Statute of Limitations provided in Sections 203 and 222 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the running of the Statute of Limitations will not be suspended; when the warrant of distraint or levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. (Emphasis supplied.) Reckoned from the last day of the filing of tax returns and the dates when petitioner's returns were actually filed, the last days of the 3-year prescriptive period are the following dates: Exhibit Period Date Filed Last Day of Filinc:a Last day of 3-year period INCOME TAX 12/15/2009 12/15/2009 12/15/2012 "T-1" FY 2009 12/15/2008 12/25/2008 12/25/2011 3/19/2009 3/25/2009 3/25/2012 VAT 6/19/2009 6/25/2009 6/25/2012 9/18/2009 9/25/2009 9/25/2012 "Q" 1st 10/10/2008 10/10/2008 10/10/2011 "Q-1" 2nd 11/12/2008 11/12/2008 11/12/2011 12/9/2008 12/10/2008 12/10/2011 "0-2" 3rd 1/13/2009 l/15/2009 1/15/2012 2/11/2009 2/11/2009 2/11/2012 "Q-3" 4th 3/11/2009 3/11/2009 3/11/2012 EWT "R" Sep-08 "R-1" Oct-08 "R-2" Nov-08 "R-3" Dec-08 "R-4" Jan-09 "R-5" Feb-09 53 Paragraph 8.3.1 of Respondent's Answer, Docket Vol. I, p. 144.

DECISION CTA case No. 8668 "R-6" Mar-09 4/7/2009 4/10/2009 4/10/2012 "R-7" Apr-09 5/11/2009 5/11/2009 5/11/2012 "R-8" May-09 6/9/2009 6/10/2009 6/10/2012 "R-9" Jun-09 7/9/2009 7/10/2009 7/10/2012 "R-10" Jul-09 8/6/2009 8/10/2009 8/10/2012 "R-11" Aug-09 9/9/2009 9/10/2009 9/10/2012 An examination of the records shows that the letter dated July 4, 2012 which was accompanied by the FAN, FLD, Details of Discrepancy and Computation of Tax Liabilities was mailed by respondent on July 6, 201254 and was received by petitioner on July 11, 2012.55 Clearly since the FAN, FLD and other details of assessment were issued only on July 6, 2011 respondent's right to assess value- added taxes for the first to the third fiscal quarters and expanded withholding tax for the months of September 2008 to May 2009 have already prescribed. We now proceed to discuss the remaining items of respondent's deficiency income tax, VAT, and expanded withholding tax assessments for FY ended August 31, 2009. Deficiency Income Tax and Deficiency Expanded Withholding Tax Petitioner was assessed of deficiency income tax including interest for the fiscal year ended August 31, 2009 in the amount of P8,225,904.64 as follows: 56 Net taxable income per return , - Add/Deduct: , 941 522.00 Overstatement of NOLCO for 2008 Unsupported impairment losses 1 499.00 Disallowed purchases 10 294 175.24 Disallowed expenses due to non-withholdinq 3 469 585.85 Unsupported Rental/Tolling Fees 193 790.00 Overstatement of salaries and waoes 2 045 314.87 Unreported purchases of food inqredients 52,403.52 Total amount subject to income tax , 16 998 290.48 Tax Rate 31.67% 54 Exhibit R-13, Respondent's Formal Offer of Evidence, Docket Vol. IV, p. 2257-2258; BIR Records, pp. 859- 868. 55 Exhibits A and P to P-3, Docket Vol. II, pp. 271 and 377 to 380; Exhibit M, Letter Protest addressed to Regional Director Perfecto L. Aranas dated August 9, 2012, stating that "VFC received 11 July 2012 the following formal deficiency tax assessments for taxable year 2009"; Petitioner's Formal Offer of Evidence, Docket Vol. IV, p. 2162. 56 Exhibit A-1, Docket Vol. II, p. 272.

DECISION CTA case No. 8668 Income tax due p 5 383 358.60 Add: Unsupported creditable tax withheld 11,081.04 Total income tax deficiency Add: Interest from 12.16.2009 to 7.31.2012 (0.52489) p 5 394 439.64 TOTAL INCOME TAX DEFICIENCY 2 831 465.00 PS_L_225 904.64 a. Overstatement of NOLCO for 2008-P941,522.00 Respondent's examiner found that for the taxable year 2008, petitioner's General and Administrative Expenses is understated57 while Depreciation Expense is overstated,58 resulting to an overstatement of NOLCO in the amount of P941,522.00, computed thus: 59 Understatement of General and Administrative Expenses p 326 090.00 Overstatement of Depreciation Expense 1,267,612.00 Undeclared sales/income p 941,522.00 Petitioner avers that deductions reported in its Income Tax Return (ITR) for the fiscal year 2008 which was "filed on December 15, 2008 cannot be questioned anymore by the BIR since the same has already prescribed on December 15, 2011.'160 Respondent, on the other hand, argues that the "overstatement of NOLCO for the taxable year 2008 was the result of the adjustments made on certain expense accounts for said year which were adjusted to the taxable income for taxable year 2009 per Final Income Tax Return and the Audited Financial Statements attached thereto. This matter is still within the scope of the year under audit since the NOLCO carried over was overstated.'161 Examination of petitioner's ITR for the fiscal year 2008 disclosed that petitioner incurred net loss amounting to P2,410,161.00.62 The same amount was reported in its ITR for the fiscal year 2009 as Net Operating Loss Carry Over (NOLCO). Petitioner utilized NOLCO in the fiscal year 2009 amounting to fe-- P1,915,014.00, broken down as follows: 63 57 Note 19, Audited Financial Statements, BIR Records p. 53. 58 Note 9, Audited Financial Statements, BIR Records p. 59. 59 Exhibit A-2, Docket Vol. II, p. 274. 60 Petition for Review, Page 13, Docket Vol. I, p. 18. 61 Respondent's Answer, Par. 9.1, Docket Vol. I, p. 145. 62 Exhibit T, Docket Vol. II, pp. 583 to 585. 63 Exhibit T-1, Schedule 58, Docket Vol. II, pp. 592 to 594.

DECISION CfA case No. 8668 Net Operating Loss Net Operating Loss Carrv Over Net Operating Loss Year Applied Applied Current (Uncgmliedl Incurred Amount Previous Year Year Expired p 1 976 744.00 2006 P1 084 240.00 - p (1 084 240.00) - 2007 397 357.00 - (397 357.00) - 2008 2 410 161.00 - (433 417.00) - TOTAL P(1,915 014.00) As correctly pointed out by petitioner, even if the net operating loss for the fiscal year 2008 would be adjusted to reflect the overstatement in allowable deductions, the amount of NOLCO applied in the succeeding fiscal year will not be affected considering that only P433,417.00 was utilized, as shown hereafter:64 NOLCO for 2008 p 2,410,161.00 Deduct: SIR alleged overstatement of NOLCO 941,522.00 Total Available NOLCO for 2008 2008 NOLCO applied in 2009 p 1,468,639.00 Balance 433,417.00 Pl,035,222.00 Further, the undersigned found that petitioner made several adjustments to its net loss for the fiscal year 2008, not just the understatement of general and administrative expenses and overstatement of depreciation expenses. Perusal of the notes to petitioner's audited financial statements attached to the annual income tax return for the fiscal year 2009 shows thus: 65 A reconciliation of the net loss, as previously reported, to the restated net loss for the year ended August 31, 2008 follows: Note 2008 (P4 233 871) Net loss as previously reported Adjustments on the: 9 1 267 612 8 19 (1 236,871) Miscomputation of depreciation expense for fiscal year 2008 17. 19 20 Worthless input taxes reported in fiscal year 2008 (304 56lll Salaries waqes and benefits for fiscal vear 2008 23 85 343 Deferred tax effect of the restated retirement benefit obliqation 18 19 236 Interest income recognized in fiscal year 2008 17. 19 11 314 Various other expenses in fiscal year 2008 (157 931)_ Net loss as restated (P4,391,805) Based on the foregoing, petitioner's net loss for the fiscal year increased from P4,233,871.00 to P4,391,805.00 after all the adjustments, which is contrary to respondent's findings. Apparently, 0-- 64 Petition for Review, Page 12, Docket Vol. I, p. 17. 65 Exhibit T, Notes to the Financial Statements, Note 25.

DECISION CTA Case No. 8668 there were adjustments not considered by respondent's examiner resulting to the assessment of deficiency income tax. All of the adjustments should have been taken into consideration, not just a selected few. Hence, respondent's deficiency income tax assessment due to the disallowance of petitioner's NOLCO in the amount of P941,522.00 should be cancelled being bereft of factual basis. b. Unsupported impairment losses-P1,499.00 Respondent's examiner found that petitioner claimed impairment losses in the amount of P1,499.00 but the same was not supported by pertinent documents.66 In its protest to the Preliminary Assessment Notice (PAN)67 and Formal Letter of Demand (FLD)/8 even in the Petition for Review,69 petitioner made no mention of this item of assessment. For petitioner's failure to disprove the findings, the disallowed impairment losses are hereby affirmed. c. Disallowed purchases-P10,294,175.24 Respondent's examiner found that petitioner reported purchases which are subjected to presumptive input tax in its Quarterly VAT Returns for the fiscal year 2009/0 thus: Exhibit Period Amount p 1 252 118.87 Q 1st Quarter 1 919 438.40 Q-1 2nd Quarter 3 354 915.36 3 767 702.62 0-2 3'd Quarter P10,294 175.25 Q-3 4th Quarter TOTAL It is likewise found that the above-mentioned purchases are not properly supported. Petitioner asserts that the said purchases pertain to primary agricultural products and it has submitted the supporting documents thereof consisting of invoices/receipts, journal vouchers, check vouchers and cash vouchers. Further, petitioner avers that these Jk- 66 Exhibit R-7, SIR Records pp. 617-625. 67 Exhibit H, Docket Vol. II, pp. 321-324. 68 Exhibit M, Docket Vol. II, pp. 336-354. 69 Docket Vol. I, pp. 6-30. 70 Line 20D of SIR Form No. 2550Q Quarterly Value-Added Tax Return.

DECISION CTA Case No. 8668 products were bought from fishermen who do not issue sales invoices because they are not registered with the BIR. Petitioner maintains that even so, the purchases are allowable pursuant to BIR Ruling DA-206-08 dated March 28, 2008.71 The independent CPA72 commissioned by the Court reports: 73 The total purchases with presumptive input tax for the taxable year 2009 per Quarterly VAT Return versus the amount of purchases with presumptive input tax per "Schedule of Purchases with Presumptive Input Tax" resulted to an unaccounted difference of P1,500.36. Table 1: Remarks Annexes Amount With supportinq documents A-1 p 9 983 466.34 Without supporting documents A-2 Total 309,208.55 Total Quarterly VAT Returns p 10 292 674.89 Difference 10 294 175.25 p 1500.36 It should be noted that petitioner declared the gross amount of purchases subject to presumptive input tax in its Quarterly VAT returns, while it records the same purchases net of presumptive input tax in its books of accounts. Examination of the supporting documents submitted by petitioner shows that the foregoing amounts include presumptive input tax claimed by petitioner. Without the presumptive input tax, the adjusted computation yields an unaccounted difference of P412,267.01, as shown hereafter: Remarks Annexes Amount With supporting documents A-1 p 9 576 902.36 Without supporting documents A-2 Total 305,005.88 Total Quarterly VAT Returns p 9 881908.24 Unaccounted Difference 10,294 175.25 p 412 267.01 Further, after scrutiny of the documents submitted to the Court, the undersigned found the following: ~ 71 Petition for Review, pp. 13-15, Docket Vol. I, pp. 18-20. 72 Mr. Richard S. Querido of Mendoza Querido & Co. 73 Exhibit WW, p. 3.

DECISION CTA Case No. 8668 OR/ Amount per Amount in Invoice schedule (net of Supporting Exh. No. Date Supplier VAT) Document 1. Supported by invoices and/or official receipts and duly registered cash slips and receipts with delivery slips and order slips X-4B 186 10/14/2008 Victorias Leather Products & Food ~ 9,792.00 ~ 15,640.00 Caterer X-8B 187 10/17/2008 Victorias Leather Products & Food 26,259.84 21,914.00 Caterer X-9C 319 11/28/2008 Asia Pacific Aquamarine Inc. 323 381.76 333 487.44 X-10C 128 11/27/2008 Resilyn Y. Debayde 258 816.00 269,600.00 X-168 130 12/2/2008 Resilyn Y. Debayde 257,725.44 268 464.00 X-22B 015 1/l2f_2009 Resilvn Y. Debavde 113 558.40 118 290.00 X-26B 0202 1/26/2009 RPJ Mall 36 161.28 20 387.34 X-29C 5753 2/28/2009 Gidor Fishing Corporation 214,839.84 58 881.00 X-29D 5751 2/26/2009 Gidor Fishing Corporation 44 821.00 X-29E 5752 2/27/2009 Gidor Fishing Corporation 120 089.50 X-35C 4342 3/26/2009 Mardal Corporation 59 655.36 62 141.00 X-36B 5754 3/3/2009 Gidor Fishing Corporation 244,589.28 59,783.50 X-36C 5755 3/4/2009 Gidor Fishing Corporation 194 997.00 X-37B 051 3/10/2009 Asia Pacific Aquamarine Inc. 247 411.20 257 720.00 X-40B 3887 3/13/2009 Mardal Corporation 61 396.80 63 955.00 X-41B 052 3/14/2009 Asia Pacific Aquamarine Inc. 191 520.96 199 501.00 11,614.08 12,098.00 X-42B 188 3/17/2009 Victorias Leather Products & Food Caterer X-46C 457 4/27/2009 Southern Negros Ace Fishing Corp. 39 617.28 41 268.00 X-47C 458 4/28/2009 Southern Negros Ace Fishing Corp. 152 659.68 159 020.50 X-48C 0722 5/5/2009 Sherwin A. Sy 121 018.75 134 330.81 X-51B 124 4/3/2009 J. Santibafiez Enteq~rises 35 124.00 36,221.62 X-528 562 4/8/2009 Technopacer Engineering Services X-58B 565 5/8/2009 Technopacer Engineering Services 172 663.10 178 058.83 X-598 0101 5/4/2009 Yuseq Agro Industrial Trading_ 177,510.14 183 057.34 X-63B 054 5/25/2009 Asia Pacific Aquamarine Inc. 309 355.10 322 244.90 X-64B 0102 5/24/2009 Yuseq Agro Industrial Trading 209 223.74 217 941.40 X-65B 0103 5/23/2009 Adonis Abellar Poultry Farm 203 321.09 211 792.80 X-678 0104 6/16/2009 Yuseq Agro Industrial Trading 268 093.44 279 264.00 X-69B 9601 6/18/2009 119,734.56 124 723.50 X-69C 9602 6/l9jJ009 Roberto L. Sanson Aqua Farm 48 272.00 X-70B 8467 6/21/2009 Roberto L. Sanson Agua Farm 193,465.92 153 255.00 X-71B 053 6/22/2009 Amodia Glassware & Sari-sari Store X-72B 053 6/24JJ009 24 988.80 26 030.00 X-74C 1529 6/15/2009 Vamda Fishing Corporation 212 794.56 221 661.00 Asia Pacific Aquamarine Inc. 211 553.28 220 368.00 X-75B 052 7/8/2009 New Victorias Ice Plant & Cold Storage, X-768 051 7/8/2009 714.29 792.86 X-78B 1695 5/18/2009 Inc. X-SOB 4907 6/19/2009 Vamda Fishing Corporation 87 759.36 91 416.00 X-82B 127 7/3/2009 Vamda Fishing Corporation 96 152.00 X-83B 9607 7/1/2009 Freddie J. Yap 9~305.92 201 067.50 X-85B 009 7/6/2009 Mardal Corporation 62 740.00 242 7/6/2009 J. Santibafiez Enterprises 193 024.80 143 744.00 X-86B 237 7/6/2009 Roberto L. Sanson Aqua Farm 60 230.40 222,429.00 Res~yn Y. Debayde 260 792.00 J. Santibafiez Enterprises 137 994.24 49 872.00 J. Santibafiez Enterprises 213 531.84 42 304.00 250 360.32 88,488.96

DECISION CTA Case No. 8668 X-878 2573 7/8/2009 J'Aifred Grill & Restobar 31 788.48 33 113.00 X-888 804 7/28/2009 Alrac Inc. 121 616.64 125 417.16 X-898 0869 8/19/2009 RPJ Mall 70 755.84 72 966.96 112,700.16 116,222.04 X-908 0203 8/26/2009 RPJ Mall PS. 969116.93 Pfi 198,308.00 Subtotal 2. Supported by official receipt dated outside the fiscal period X-958 805 9/2/2009 Alrac Inc. p 127 057.73 p 131 028.28 p 127. 057.73 p 131,028.28 Subtotal 3. Supported by cash slips or receipts which are not duly registered with the BIR X-318 0001 2/11/2009 Jose Maria Mendezona p 67 050.24 p 69,145.56 65 426.88 67 927.17 X-328 0002 2jl8/2009 Jose Maria Mendezona 161,126.40 100 720.00 X-688 6/20/2009 Ely Olvido 67 120.00 X-68C 6/22/2009 Ely Olvido 166 763.52 173 712.00 X-818 7/1/2009 Ely Olvido p 460,367.04 p 478,624.73 Subtotal 4. Supported by bank fund transfer application form X-15A 211309 11/6/2008 Victorias Millinq Company, Inc. p 458 757.00 p 473 123.15 497 637.00 513,218.15 X-25A 211319 1/22/2009 Victorias Milling Company, Inc. 607 996.53 627 026.42 X-66A 211334 6/8/2009 Victorias Milling Company, Inc. 1'1,564 390.53 1'1,613,367.72 Subtotal 5. Supported by delivery receipts X-498 0401 4/1/2009 F-C Seafoods Dealer p 59 372.16 p 61 846.00 X-SOB 0402 4/2/2009 F-C Seafoods Dealer 53 733.60 55 972.50 X-548 0403 4/7/2009 F-C Seafoods Dealer 23 990.40 24 990.00 Subtotal p 137.096.16 p 142808.50 P8 258,028.39 P8,564,137 .23 TOTAL Purchases under Item 2, 3, 4 and 5 should be disallowed for not being properly supported. These purchases are from individuals and juridical entities registered with the BIR, contrary to petitioner's allegation that they are individuals who are not registered with the BIR. In the check vouchers submitted, petitioner even withheld creditable taxes from these suppliers. Section 237 of the NIRC of 1997, as amended, provides: SEC. 237. Issuance of Receipts or Sales or Commercial Invoices.-AII persons subject to an internal revenue tax shall, for each sale and transfer of merchandise or for services rendered valued at Twenty-five pesos {P25.00) or more, issue duly registered receipts or sale or commercial invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise or nature or service: Provided, however, That where the receipt is issued to cover payment made as rentals, comm1ss1ons, compensation or fees, receipts or invoices shall be issued which shall show the name, business style, if any, and address of the purchaser, customer or client. (Emphasis supplied.) ~

DECISION CTA Case No. 8668 It is likewise noteworthy that Item No. 3 is comprised of purchases from Victorias Milling Company, Inc., petitioner's parent company, but are not supported by duly registered invoices/official receipts. Thus, out of the purchases declared in petitioner's VAT Returns in the aggregate amount of P10,294,175.24, only P5,969,116.93 is substantiated "with sufficient evidence, such as official receipts or other adequate records," pursuant to Section 34(A)(1)(b) of the NIRC of 1997, as amended, computed as follows: Total purchases per VAT Returns ~ 305 005.88 ~ 10 294 175.25 Less: Disallowances 412,267.01 a) Per !CPA findings: 4,325 058.32 ~ 717 272.89 P5,969 116.93 1. Without supporting documents (net of VAT) ~1 318 873.97 2. Unaccounted difference - adjusted 127 057.73 460 367.04 Total disallowanceper !CPA findings 1 564 390.53 bl Per Court's findings: ~ 576 902.36 137 096.16 8 258 028.39 1. Without supporting documents: ~3 607 785.43 Purchases with supporting documents per !CPA report Purchases with supporting documents per Court's findings 2. Supported by official receipt dated outside the fiscal period 3. Supported by cash slips or receipts which are not duly registered with the BIR 4. Supported by bank transfer application form 5. Supported by delivery receipts Total disallowance per Court's findings Total disallowances Purchases substantiated with sufficient evidence Consequently, the unsubstantiated purchases of P4,325,058.32 may be disallowed as deductible expenses or cost of goods sold for income tax purposes. Nevertheless, respondent failed to show that the subject purchases were reported as cost of goods sold in petitioner's books and was deducted from sales thereby reducing petitioner's income tax liability for the fiscal year 2009. It should be noted that purchases of raw materials are recorded as part of inventory, not as an expense. Even though some of these raw materials form part of the cost of goods processed and sold, some of them undeniably remain in petitioner's inventory as canned goods. Thus, respondent's computation and disallowance of purchases for the computation of deficiency income tax are flawed, and the Court is constrained to cancel the same. p

DECISION CTA Case No. 8668 d. Disallowed expenses due to non-withholding- P3,469,585.85 The examiners compared petitioner's expenses as recorded in its books with the alphalist and found the following discrepancies: 74 Per Books Per Al~halist Difference 1. Exoenses subiect to 2% WT p 3 801 369.84 P3 829 393.00 p 1 849 737.84 Services-Summary List 323 445.00 Tolling fee-VMC 508 330.00 Security services 241 605.00 Travel & communication-G&A 46 548.00 Repairs & maintenance-G&A 1 499.00 Freight & handling-G&A 465 725.00 Freiqht & handlinq-sellinq 138 909.00 Advertising & promotion 103 607.00 Travel & communication-sellinq 46 754.00 Repairs & maintenance-sellinq 1 339.00 Insurance-selling p 5. 679130.84 Subtotal 2. Expenses subject to 10% WT p S07.769.00 285 769.30 221 999.70 Professional fees P10 294 175.25 23 396 133.00 1 397 848.31 3. Exoenses subject to 1% WT 12 690 540.22 P3,469 585.85 1 599 714.84 Purchases/Presumptive 125 195.00 Purchases other than capital goods 21 430.00 Other purchases not qualified for input 8 232.00 Stationery & supplies-G&A 1 583.00 Representation & entertainment 2 637.00 Subscription 19,107.00 Packaging & other materials-G&A 3 256.00 Miscellaneous-G&A 28 111.00 Packaging & other materials-selling Stationerv & supplies-selling p24 793 981.31 Miscellaneous-sellinq Subtotal TOTAL The amounts of expenses for Services-Summary List, Purchases/Presumptive, Purchases Other Than Capital Goods and Other Purchases Not Qualified for Input are the aggregate amounts per petitioner's Quarterly VAT Returns as summarized by the examiner.75 The rest of the expenses are based on the amounts declared by petitioner in its annual income tax return for the fiscal year 2009.76 pv 74 Schedule 1, Exhibit R-7, BIR Records p. 597. 75 BIR Records, p. 590. 76 Exhibit T-1, Docket Vol. II, pp. 592-594.

DECISION CTA Case No. 8668 Contrary to petitioner's allegation and the findings of the ICPA that tolling fees in the amount of P323,445.00 cannot be ascertained/7 the undersigned found that the same amount was reported in the notes to petitioner's audited financial statements for the fiscal year 2009. 78 It should be noted that the amounts taken up by the respondent's examiner to be from the alphalise9 actually pertain to the total amount of payments subjected to expanded withholding tax for the fiscal year ending August 31, 2009 per petitioner's Monthly Remittance Returns of Creditable Income Taxes Withheld (Expanded) (BIR Form No. 1601-E). 80 Petitioner avers that in the computation of the disallowed expenses due to non-withholding, respondent's examiner did not consider petitioner's casual purchases and those which are exempt or not subject to withholding tax. But in order to overthrow the disallowance of the subject expenses, petitioner has to substantiate and prove that the amounts reported per Audited Financial Statements and Quarterly VAT Returns are either already subjected to expanded withholding tax or not subject to withholding tax under the pertinent laws and regulations. As regards the substantiation of the foregoing expenses, the ICPA found the following: 81 Table 4 Per Schedule Per Amended Difference Services P3 796,064.49 Quarterlv VAT Returns p 5 305.35 Purchases with presumptive input tax 10 292 674.89 10 484 688.26 p 3 801369.84 1 500.36 Purchases other than capital goods 10 294 175.25 2 205 851.96 Other purchases not qualified for input 748 157.05 12 690 540.22 851 557.79 tax 1 599 714.84 P3,064 215.46 TOTAL Table 5 Per Schedule Per Audited Difference Security services p 514 364.82 Financial Statements p (6 034.8~) Travel and communication - G&A 281 455.97 Repairs and maintenance - G&A 45 508.10 p 508 330.00 (39 850.97) Freight and handling - G&A 1 498.97 241605.00 1 039.90 Freight and handling - Selling 465,202.86 46 548.00 0.03 Advertising and promotion 121 000.00 1499.00 522.14 465 725.00 138 909.00 17 909.00 77 Exhibit WW, p. 6. 78 Exhibit T-1, Audited Financial Statements attached to Annual Income Tax Return for the Fiscal Year ending August 31, 2009, Note 14 Related Party Transactions, Notes to the Financial Statements, p. 19. 79 BIR Records, p. 593. 80 Exhibits R to R-11, Docket Vol. II, pp. 482-580. 81 Exhibit WW, p. 6.

DECISION CTA case No. 8668 Travel and communication - Selling 99 433.80 103 607.00 4 173.20 Repairs and maintenance - Sellinq 45 485.68 46 754.00 1 268.32 Insurance - Sellinq Professional Fees 1 339.29 1 339.00 (0.29) Packaging and other materials - G&A 479 852.56 507 769.00 27 916.44 Stationery and supplies - G&A Representation and entertainment 1 573.97 1 583.00 9.03 Subscription 118 654.88 125 195.00 6 540.12 Miscellaneous- G&A 20 526.30 21430.00 Packaqinq and other materials - Selling 903.70 Stationery and supplies- Selling 8 288.00 8 232.00 (56.00) Miscellaneous - Sellinq 4 810.89 2 637.00 (2,173.89) TOTAL 1 648.22 19 107.00 17 458.78 2 379.22 3 256.00 876.78 24 810.00 28 111.00 3 301.00 p 33,802.47 The differences of P3,064,215.46 and P33,802.47 are unaccounted. 82 Even so, the Court would like to call attention to the following items taken up from petitioner's Quarterly VAT Returns, which are included in respondent's computation of disallowed expenses due to non-withholding creditable tax: 1. Purchase of services 2. Purchase of goods other than capital goods 3. Purchases not qualified for input tax 4. Purchases with presumptive input tax Respondent's disallowance of petitioner's expenses and the deficiency income tax assessment arising therefrom in the amount of P3,469,585.85 is bereft of factual basis. By including the purchase amounts per Quarterly VAT Returns in the computation, respondent failed to consider the fact that these purchases can be recorded as . expenses or assets in petitioner's financial statements. So that, for example, some items under purchases of services are also listed under repairs and maintenance or professional fees. On the other hand, some items under purchases with presumptive input tax are also recorded as inventory. By doing so, respondent merely relied on the assumption, without obtaining any evidence corroborating such findings, that the purchases per Quarterly VAT Returns are different from the expenses reported in petitioner's financial statements. This is contrary to the doctrine laid down by the Supreme Court in Collector of Internal Revenue vs. Benipayo,83 wherein it was held that:~ 82 Exhibit WW, p. 6. 83 G.R. No. L-13656, January 31, 1962.

DECISION CTA case No. 8668 "xxx An assessment fixes and determines the tax liability of a taxpayer. 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" (Emphasis supplied.) Likewise, the deficiency expanded withholding tax assessment pertaining to the same disallowed expenses in the amount of P73,173.21 should be cancelled for lack of factual basis. e) Unsupported Rental/Tolling Fees-P193,790.00 Respondent found that petitioner recorded tolling fees amounting to P193,790.00 in its Cost of Goods Sold - Direct Materials but failed to support the same with official receipts. 84 Petitioner counters that "tolling fees, which were paid for tolling refined sugar were subjected to withholding tax of 5�/o under RR 2-98 as amended by RR 14-02....Documents evidencing these transactions were already submitted to the BIR."85 Examination of the said supporting documents show that the tolling fees were supported only by check vouchers and bank fund transfer application forms. 86 It is noteworthy that the beneficiary of the bank transfer application is Victorias Milling Corporation, petitioner's parent company. The requirement of proper substantiation is clearly provided in Section 34(A)(b) of the NIRC of 1997, as amended: SEC. 34. Deductions from Gross Income. -xxx XXX XXX XXX (A) Expenses.- (a) In General.-xxx XXX XXX XXX ~ 84 Exhibit A-2, Docket Vol. II, p. 274. 85 Exhibit M, Docket Vol. II, p. 344. 86 Annex D-1 of Exhibit WW and Exhibits AA-1 to AA-3, including sub-markings.

DECISION CTA case No. 8668 (b) Substantiation Requirements.-No deduction from gross income shall be allowed under Subsection (A) hereof unless the taxpayer shall substantiate with sufficient evidence, such as official receipts or other adequate records: (i) the amount of the expense being deducted, and (ii) the direct connection or relation of the expense being deducted to the development, management, operation and/or conduct of the trade, business or profession of the taxpayer. (Emphasis supplied) Thus, for failure to substantiate its tolling fees with official receipts, the same should not be allowed as deduction from petitioner's gross income. f. Overstatement of salaries and wages-P2,045,314.87 By comparing petitioner's financial statements and the related books of accounts, respondent found a discrepancy in the salaries, wages and other employees benefits account, thus: Salaries, wages and other employees benefits Per Financial Statements p 8,516,978.00 Per Books of Accounts 6 471663.13 Difference P2 045,314.87 Petitioner argues that "the amounts in the financial statements and the trial balance reflect similar amounts. It is believed that any difference is due to the classifications used by the Company.'187 The ICPA examined a total of P8,362,795.20, and found that only P6,967,168.73 is with supporting documents, to wit: 88 Remarks Annexes Amount With supporting documents C-1 p 6 967 168.73 Without supporting documents C-2 Total 1,395,626.47 p 8,362,795.20 Based on the foregoing, the Court is constrained to uphold the disallowance of the overstated salaries and wages in the adjusted amount of P1,549,809.27, computed thus: Salaries & wages per financial statements p 8 516 978.00 Substantiated salaries & waqes per !CPA report 6 967 168.73 Disallowed salaries and wages P1,549,809.27 87 Petition for Review, Docket Vol. I, p. 21. 88 Annex C of Exhibit WW.

DECISION CTA Case No. 8668 g. Unreported purchases of food ingredients-P52,403.52 Per Details of Discrepancy attached to the Formal Letter of Demand, respondent alleged that petitioner has unreported purchases of food ingredients from Jose de los Santos amounting to P52,403.52, which is verified with the Summary List of Purchases.89 Petitioner counters that it cannot find anything under the subject name of supplier despite efforts exerted to check the Summary List of Purchases or other sources. No basis for reference was provided by the BIR as to the source of this assessment.90 Scrutiny of the BIR Records shows the following report on the details of discrepancy by respondent's examiner: 91 "10. Purchase of Food ingredients from Jose de los Santos in the total amount of P52,403.52 was not Verification disclosed that the afore-stated supplier is not among the suppliers listed in the quarterly list of suppliers submitted to this office. The said purchases is considered income on your part and be included in the computation of income tax (Preaz v. CTA & CIR L-10507 dated 5/30/58)." (sic) The Court finds for the petitioner. If the name of the supplier Jose de los Santos is not included in the list of suppliers submitted to respondent's Bureau, it begs the question of where the name of the supplier and amount of purchases were found. For failure to state the basis of its assessment, the same should be cancelled. h. Unsupported creditable tax withheld-P11,081.04 In its Annual ITR for the fiscal year ended August 31, 2009, petitioner reported creditable tax withheld for the first three Quarters in the amount of P88,060.00.92 Respondent, however, found that Pll,081.04 of the creditable tax withheld are unsupported. Petitioner did not contest the disallowance, hence the same F should be upheld. 89 Exhibit A-2, Docket Vol. II, p. 274. 90 Exhibit M, Docket Vol. II, p. 345. 91 BIR Records, p. 595. 92 Exhibit T-1, Line 28C, Docket Vol. II, p. 592.

DECISION CTA case No. 8668 In fine, petitioner's deficiency income tax liability is P563,695.49, computed as follows: Net taxable income per return ~ - Add/Deduct: ~ 1499.00 Unsupported impairment losses Unsupported Rentai[Tolling Fees 193 790.00 Overstatement of salaries and wages Total amount subject to income tax 1,549,809.27 Tax Rate Income tax due ~ 1 745 098.27 Add: Unsupported creditable tax withheld Deficiency income tax 31.67% ~ 552 614.45 11 081.04 p 563 695.49 Deficiency Value-Added Tax Upon examination of petitioner's records, respondent's examiner found the following deficiency value-added tax:93 Gross taxable sales per audit ~ 31 607 410.00 Output tax 3 792 889.20 Less: Creditable input tax 1 760 543.06 VAT due 2 032,346.14 Less: Value-added tax payments/withheld 949,453.43 Value added tax deficiency p 1 082,892.71 It is represented that zero-rated sales in the amount of P2,044,224.00 was not supported by sales invoices, thus subjected to VAT. Further, presumptive input tax of P411,767.01 was disallowed for failure to support the purchases of primary agricultural products which were used as inputs for production.94 Petitioner argues that there is no basis for the computation of the deficiency VAT. Moreover, as discussed previously, respondent's right to assess deficiency VAT the first to the third quarters has prescribed. Thus, the Court will only consider the deficiency VAT assessment for the Fourth Quarter of the FY ended August 31, 2009. Per its Quarterly VAT Returns, petitioner declared total sales for the fiscal year ending August 31, 2009 in the aggregate amount of P35,529,939.01, broken down as follows: ft- 93 Exhibit A-1, Docket Vol. II, p. 272. 94 Exhibit A-2, Docket Vol. II, p. 274.

DECISION CTA Case No. 8668 Exhibit Period VATable Sales Exempt Sales Zero-rated Total Sales 1st Qtr p 5 517 513.84 p 1182 278.32 Sales p 7 124 880.16 "Q" Sep-Nov 08 2"d Qtr 7 906 768.58 949 400.91 p 425 088.00 8,856 169.49 "Q-1" Dec 08-Feb 09 10 896 649.08 "Q-2" 3rc1 Qtr 8 753 638.85 940 418.23 - "Q-3" Mar-May 09 8 652 240.28 4th Qtr 7 385 264.73 850 431.55 1 202 592.00 Jun-Aug 09 P35,529,939.01 P29,563 186.00 P3,922,529.01 416 544.00 TOTAL P2,044 224.00 Petitioner likewise reported the following input taxes and VAT payments in its VAT Returns for the same taxable period: Exhibit Period Input tax Presumptive Total Input VAT Payments95 "Q" l 5t Qtr from purchase of Input tax Taxes "Q-1" Sep-Nov 08 goods &. services "Q-2" 2"d Qtr p 50 084.72 p 303 707.38 p 350 964.10 "Q-3" Dec 08-Feb 09 p 253 622.66 3'd Qtr Mar-May 09 610 576.77 76 777.54 687 354.31 191 286.02 4th Qtr 627 526.49 134 196.63 761 723.12 270 795.24 Jun-Aug 09 487 303.27 150 708.10 638 011.37 146 408.07 TOTAL p 1,979,029.19 P411,766.99 P2,390,796.18 p 959,453.43 Taking into consideration the prescribed portion of the assessment, the adjusted deficiency VAT assessment is as follows: Gross taxable sales per audit p 7 801 808.73 Output tax p 936 217.05 Less: Input tax attributable to taxable sales96 VAT due 439 406.07 Less: VAT payments p 496 810.98 Value added tax deficiency 146,408.07 p 350,402.91 Respondent found that petitioner's zero-rated sales are not properly substantiated, thus included in its taxable sales. Moreover, petitioner's presumptive input taxes, which were found to be unsubstantiated, were not included in the input taxes used to offset the output tax due. In response, petitioner submitted its zero-rated sales invoices for the first and third quarters97 but failed to submit the invoice for /c- the fourth quarter. Anent its purchases subject to presumptive input 95 BIR Records, pp. 293-324 and 590. 96 Computed as: Input tax attributable to taxable sales = (Total taxable sales/Total sales) x Total input taxes P439,406.07 = (P7,801,808.73/P8,652,240.28) x P487,303.27 97 Exhibits V and V-1.

DECISION CTA Case No. 8668 tax, the same has been discussed previously under the deficiency income tax assessment. Considering only the portion not barred by prescription, the presumptive input tax for the Fourth Quarter amounting to P150,708.10 should be properly supported. However, documents submitted only accounted for P91,439.30 of the presumptive input tax for the quarter: Presumptive Exhibit Date Supplier Purchases Input Tax X-67B 6/16/2009 Yuseq Agro Industrial Trading p 124 723.50 X-69B 6/18/2009 Roberto L. Sanson Aqua Farm p 4 988.94 X-69C 6/19/2009 Roberto L. Sanson Aqua Farm 48 272.00 X-70B 6/21/2009 Amodia Glassware & Sari-sari Store 153 255.00 1 930.88 X-71B 6/22/2009 Vamda Fishing Corporation X-72B 6/24/2009 Asia Pacific Aquamarine, Inc. 26 030.00 6 130.20 New Victorias Ice Plant & Cold 221 661.00 X-74C 6/15/2009 Storage Inc. 220 368.00 1L041.20 Vamda Fishing_ Corporation X-75B 7/8/2009 Vamda Fishing_ Corporation 8 866.44 X-76B 7/8/2009 Mardal Corporation X-SOB 6/19/2009 Ely Olvido 8,814.72 X-81B 7/1/2009 J. Santibaiiez Enterprises X-82B 7/3/2009 Roberto L. Sanson Aqua Farm 792.86 31.71 X-83B 7/1/2009 Resilyn Y. Debayde X-85B 7/6/2009 J. Santibaiiez Enterprises 91 416.00 3 656.64 7/6/2009 J. Santibaiiez Enterprises X-86B 7/6/2009 J'Aifred Grill & Restobar 96 152.00 3 846.08 7/8/2009 Alrac Inc. X-87B 7/28/2009 RPJ Mall 62 740.00 2 509.60 X-88B 8/19/2009 RPJ Mall X-89B 8/26/2009 173 712.00 6 948.48 X-90B TOTAL 143 744.00 5,749.76 222 429.00 8 897.16 260 792.00 10 431.68 49 872.00 1 994.88 42 304.00 1 692.16 33 113.00 1 324.52 125 417.16 5,016.69 72 966.96 2 918.68 116 222.04 4,648.88 p 2,285,982.52 p 91,439.30 Hence, petitioner still has deficiency VAT liability in the reduced amount of P267,851.21, computed as follows: Gross taxable sales per audit p 7,801,808.73 Output tax p 936,217.05 Less: Input tax attributable to taxable sales98 VAT due 521 857.77 Less: VAT payments p 414 359.28 Value added tax deficiency 146,408.07 p 267,951.21 Compromise Penalty ~ 98 Computed as: = Input tax attributable to taxable sales (Total taxable sales/Total sales) x Total input taxes P521,857.77 = (P7,801,808.73/P8,652,240.28) x (P487,303.27 + M1,439.30)

DECISION CTA case No. 8668 In connection with the subject assessments, respondent suggested the following compromise penalties: a) For failure to pay the correct income tax due (Sec. 255 of the NIRC, as amended) fil 50 000.00 25 000.00 b) For failure to pay the correct value-added tax due (Sec. 255 of the NIRC, as 16 000.00 amended) p 91,000.00 c) For failure to withhold and remit expanded withholding tax on income payments (Sec. 255 of the NIRC as amended) Total Pursuant to Revenue Memorandum Order (RMO) No. 01-90, as amended by RMO No. 19-07, compromise penalties are only suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. Thus, compromise penalties imply mutual agreement between the taxpayer, on one hand, and the CIR, on the other. Absent any showing that petitioner consented to the compromise penalties, the same should not be imposed. Seeing that petitioner has sought relief by filing a Petition for Review before this Court, it is clear that it did not consent to the assessments and the suggested compromise penalties. CONCLUSION To recapitulate, Petitioner's total basic deficiency tax liability amounts to P831,646.70, broken down as follows: Tax Type Basic Deficien~cy- Income tax fil 563 695.49 Value-added tax 267 951.21 TOTAL p 831,646.70 WHEREFORE, premises considered, the Petition for Review is PARTIALLY GRANTED. Accordingly, Petitioner is ORDERED TO PAY the Respondent basic deficiency income and value-added tax for the fiscal year ending August 31, 2009 in the amount of One Million Thirty Nine Thousand Five Hundred Fifty Eight and 37/100 Pesos (P1,039,558.37), inclusive of 25�/o surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows: J.c_

DECISION Basic Deficiency Surcharge Total GA Case No. 8668 p 563 695.49 (25%) p 704,619.36 267 951.21 Page 27 of 28 p 140 923.87 334 939.01 p 831,646.70 Tax Type 66 987.80 P1,039 558.37 Income tax VAT p 207 911.67 TOTAL In addition, petitioner is likewise ORDERED TO PAY: (a) 20�/o per annum deficiency interest pursuant to Section 249(8) of the NIRC of 1997, as amended, on the basic deficiency income tax, and value-added tax computed from December 15, 2009 and September 25, 2009, respectively, until full payment thereof; and (b) 20�/o per annum delinquency interest on the total amounts of P704,619.36 and P334,939.01 deficiency income tax and value-added tax, respectively, and on the deficiency interest which have accrued as stated in (a) computed from July 31, 201297 until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997, as amended. SO ORDERED. l~ juAkNIT>O C c. C-AS~ TAN~ED~,~JR. Associate Justice WE CONCUR: ~� ~/.~/-- CAESAR A. CASANOVA AMELIA R. COTANGCO-MANALASTAS Associate Justice Associate Justice 97 Formal Letter of Demand, Exhibit "A-1", Docket Vol. II, pp. 272-273.

DECISION CTA Case No. 8668 ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. ~~C-~~a4 tfQR_ : .:fiJANITO C. CASTANEDA; Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and Division Chairperson's Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ROMAN G. DEL ROSARIO Presiding Justice