CTA Case No. 5006 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY MAERSK-TADACALERA SHIPPING C.T.A. CASE NO. 5006 AGENCY (FILIPINAS)~ INC., Petttioner~t THE C01911SSJONER OF INTERNAL REVENUE~ RPspondeont. X- - - - - - DECISION PreosPnteod be-fore- this Court is a pPtition for the- rPviPw of re-sponde-nt's de-cision de-nying pPtitioneor's and t..lphol d:i ng the- assPSSIIIPnt issuPd deoficipncy inco�eo taxe-s for the- taxable- yPar 1986 in the- total a111ount of P798,252.00. Pe-titione-r is a corporation organize-d and Pxisting unde-r and by virtue- of the- laws of the Philippines and is .- �PngagPd in busine-ss as a shipping agent. lt is allege-d in thP petition that on April 19, 1990, the-ir corporation re-ceived an asseoss�ent issue-d by re-sponde-nt demanding the- payme-nt of de-ficie-ncy of P798, 252. 00 COYE'J~i ng thp 301

'! ') l DECISION - C.T.A. CASE NO. 5006 - 2- taxable 1986 <see Annex UA"'' p. 7, CTA of this case as well as the adaissjons �ade by respondent in hel~ answel~ show that a pl~otest letter was subsequently filed by the petitioner on May 7, 1990 supple11ented thereafter by a more detailed protest dated August 9, 1990 <Annexes "B" and "C" >. RE>spondE>nt deniE>d the pl~otE>st in a lettE>l~ datE>d Decembel~ 7, 19'92 and ..-..- received by thE" petit i onel~ on June c:c.' 1993. This promptE>d pE>titionpr to PlE>vatP its case to this Court in a pE>tition for review filE>d on July 9, 1993, WE'll-within the thirty (30> day prescriptive period providE>d by law. made by the petit i onel~ in its s1.1ppl e11ent a l 11erely reiterated in the present pE>tition, foremost among which is the issue of lt is petitioner's contention that the ( assessment issued by respondent is barred by prescription \1 r fol~ having been mai 1 ed beyond the thl~Pe-yeal~ pl~escri pt i ve l period provided by law thus no longer binding and must be cancellE>d. As a back-up argu�Pnt in the event that the issue of prescription be resolved in favor of respondent, pE>titioner firaly assE>rts that thE> assess�ent lacks legal and factual bases as the EDP expenses were dE>ductE>d from 302

DECISION - C.T.A. CASE NO. 5006 - 3- its inco�e in accordance with law, being categorized as ordinary and necessary business expenses. Respondent addt~essed the arguments by first directing its defense on the issue of presct~i pt ion .. Respondent asserts that the right of the assess petitioner has not because the running of the statute of li�itations is suspended for the period when the taxpayer requests for a t~ei nvest i gat ion and the by the Co��issionel~ in accoJ~dance with Section 22-4 of the Tax Code .. Respondent goes further to state that as early as May 7, 1988, petitioner was already questioning the deficiency assess�ent under consideration and on April 1o, 1990, petitioner, through its accountant, q1.1est i oned the non-deductibility of the EDP expense .. This, according to the respondent, a�ounts to a request for reinvestigation which had the effect of suspending the running of the prescriptive period. Respondent cited the Supre~ae CoJ..n~t decision ent it 1 ed Coaai ssi oner of' Internal Revenue vs .. Wyeth Suaco Laboratories, lnc.. , 202 SCRA 125, to support its argument. On the �erits of the assess�ent issued, respondent justifies the disallowance of the EDP expense on the ground that these expenses were not substantiated by the appropriate proof citing as its 303

DECISION - C.T.A. CASE NO. 5006 - 4- Eastern, lnc. vs. Co��issioner of Internal Revenue, 175 SCRA 149. Fro� the foregoing, thus: 1. Whether or not the respondent's right to assess the petitioner on its 198& incoae tax deficiency has already prescribed; 2. 1 f the answe�~ to the fo�~egoi ng is in the negative, whet he�~ ol~ not the EDP expenses deducted by the petitioner froa its incoae rests on fira legal and factual bases. This Court finds it wise to first resolve the issue deterainative of whether or not we are in a position to dispose of the other issues presented. Petitioner derived its theory on prescription on Revenue Meaorandua Circular No. 48-90 signed by the then Coaaissioner of Internal Revenue, Jose U. Ong, all concerned that the three <3> for the issuance of assessaents as well Distraint, Levy and Garnishaent, shall have an aggregate nuaber of 1,095 days corresponding to 3&5 days aultiplied by 3 years regardless of the fact that within such ~- 304

DECISION - C.T.A. CASE NO. 5006 - 5- a lPap ypar which is 3&& days. PPtitionPr thPn appliPd this principlP by coaputing thP pPriod fro� April 15, 1987, thP last day for thP filing of thP final corporatP incomP tax rPturn for 198& up to 1990, thP datP whPn thP assPssmPnt lPttPr was mailPd by rPspondPnt as PVidPncPd by thP rPgistPrPd aail stamp of thP Burpau of Post shown as Exhibit "A-1". PPtitionPr furthPr avPrs that an aggrPgatP pPriod of 1,097 days bPtwppn thP 2 datps ' had alrPady lapsPd aaking thP assPssaPnt 2 days latP, hPncP prPscription had sPt in. To clarify its point, pPtitionPr in its protPst lPttPr, prPsPntPd its coaputation in dPtail, thus: 1987 Months No. of Days l Rp,~i 1e. - 30 15 31 May 30 JunP 31 July 31 R11.agust 30 31 SPptPabPJ~ 30 OctobPJ~ __JJ_ NovPabPr 260 DPcPabPJ~ 1988 Januat"y Dece~aber .366 1989 Januat'Y .365 1990 January December Febt't.Aat'Y .31 Mar'ch 28 Apt'i 1 16 .Jl 16 1! 097 days Following the tenor of RMC No. 48-90, the assess�ent should have been �ailed on April 14, 1990 which is the 1,095th day fro� Ap,'il 15, 305

90� DECISION - C.T.A. CASE NO. 5006 - &- 1987. As it was, the assess�ent was issued and �ailed on April 1&, 1990, the 1,907th day fro� April 15, 1987. Hence, the assess�ent was two (2) days late. lt is incontestable that subject assess�ent has already prescribed. Respondent, in an effort to avoid clashing with the detai 1 s of the com put at ion of the presc�~i pt i ve pe��i od, evaded it al t ogethel~ and proceeded to center discourse on the assertion that continued requests �ade by petitioner for reinvestigation stopped the running of the prescriptive period. without going into the particulars of the length of ti�e the aspect of reinvestigation suspended the period of prescription, respondent categorically declared that the right of the government to assess petitioner's 198& tax deficiencies, has not yet prescribed. We rule in favor of the petitioner and so hold that having been �ade beyond the three-year period provided by law. The applicable provision of the law is found in Section 203 of the Tax Code, thus: Section 203. Period o~ li�itation upon assess�ent and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in com~t without assess�ent for the collection of such taxes shall be begun after the expiration of such pel~i od: Provided'~~ That in a case

DECISION - C.T.A. CASE NO. 5006 - 7- where a return is filed beyond the period prescribed by law, the three year period shall be counted fro� the day the return was filed. For the 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 1ast day. <As a�ended by BP 700) The abovecited law is explicit as it declares in no uncertain ter�s that the prescriptive period for the assess�ent of taxes is three-years counted fro� the ti�e the return is filed or the last day prescribed by law for. the filing thereof, whichever is later. To erase all doubts as to the nu�ber of days constituting the three-year period, the then Co��issioner of 1nt e�~nal Revenue, Jose U. Ong, issued RMC No. 48-90 declaring that the period shall have an aggregate nu�ber of 1,095 days <3&5 days x 3 years = 1,095 days>, thus: Accordingly, in order to have a correct understanding of the procedure in deter�ining the period of limitation upon assess�ent and collection when the period covers a leap year, it shall be understood that years are of 3&5 days each as provided in Article 13 of the New Civil Code. Consequently, a 3-year prescriptive period for assess�ent or collection purposes prescribed under Sections 203 and 223(c) of the Tax Code shall have an aggl~egate nu�bel~ of !,.095 days (365 days x 3 years = 1,095 days>, reckoned fro� the date of filing of the return or, fro� the issuance of the assess�ent, as the case �ay be. ln other words, the 3-year prescriptive period expires on the 1,095th day, notwithstanding the fact that within the period, there is a leap year which is 3&& days. 307

DEClSION - C.T.A. CASE NO. 5006 - 8- Records show that petitioner fi 1ed its final corporate inco�e tax return for 198& on April 14, 1987 <Exhibit "8") which �akes thP last day fDl~ filing on April 15, 1987, the date when the period starts to run. It is a wPll-sPttled rule that an assPss�ent is dPP�Pd �ade when notice to this effpct is released, �ailPd or sent <Basi1an Estates, Inc. vs. CIR, 21 SCRA 17; Co11 ector of I nt erna1 Revenue vs. Bautista, L-1225() and L-12259, "ay 27, 1959). Fro� thP PvidPnce gathPrPd, it was shown that the asspss�Pnt lPtter was �ailPd only on Apt~i 1 1&, 1990 <Exhibit "A-1") or 1,097 days fl~o� Apl~il 15, 1987 making the issuancP of such assess�Pnt two days late froa the last day prescribPd by law for �aking an A rPviPw of the calendars of thP years covered, disclose that the co�putation presentPd by thP petitionpr as to the nu�bPr of days containPd in each yPar covPring the period 1987 to 1990 is corrPct. ThP fact that the last day for thP issuance of thP assess�Pnt wh i ch i s on Ap�~ i 1 14, 198& fPll on a Saturday doPs not changP the conclusion of this Com~t as the SuprP�P Court cases considPrs Saturday as an ordinary business day. In the casP of Bank of A�erica NT and SA vs. thus: 308

DECISION - C.T.A. CASE NO. 5006 - 9- "The prevailing rule even then was that if the last day to appeal fell on a Saturday, the act was still due on that day and not the next succeeding business day." ln Lucero vs. NLRC, 203 SCRA 218, it was si�ilarly .~ul ed, th1.1s: "However we noted in these cases the fact that Saturday unless declared a holiday, is considered a business day and therefore, if the last day to appeal falls on a Saturday, the act is due on that day and not on the ne~t succeeding business day." ln 01 acao vs. NLRC, 177 SCRA 38, the Sup�~e�e Com~t again declared, thus: "lt �ay be that private respondent's appeal was filed on the 12th day contrary to Al~ticle 223 of the Labol~ Code pl~esc�~ibing ten (10) calenda�~ days as the �~egla�ental~y pel~iod of appeal. Pl~ivate respondent's clai� that this lOth day fell on a Saturday when the offices of the NLRC were allegedly closed so that their last day to appeal falls on a Saturday, the act is still due on that day." Respondent presents the defense that the requests of petitioner for reinvestigation of the assess�ent suspended the running of the prescriptive period pm~suant to Section 224 of the Ta~ Code. Thus, without going into the particulars of the length of ti�e the aspect of reinvestigation suspended the running of the period, 309

DECISION - C.T.A. CASE NO. 5006 - 10 - respondent categorically declared that the assess�ent We find the argu�ent of respondent �isleading on several points. First, respondent asserts that requests for reinvestigation of the assess�ent petitioner as early as May 7, 1988. presupposes that there was an assess�ent issued earlier than that issued in a letter dated Apl~i l Eo, 1990 pl~esented as e>ehibit "A" and �ailed on Ap�~il lEo, 1990. Records of this case prove this to be untrue. and other docu�ents that were issued by the respondent prior to the final assess�ent letter <E>�hibit "A") �ere notices infor�ing the petitioner of the results of the investigation of the BJR e>ea�iners which included an invitation to the petitioner for <see E>ehibit "3", p. 284, BlR records>. Moreover, E>ehibit "4" shows the �e�orandu� dated Dece�ber 7, 1988 and issued by Deputy Vi ct OJ~ DeofeJ"'i o, l~equest i ng petitioner to e>eplain its nonpay�ent of withholding ta>ees on EDP, janitorial, security and office rents, all of which cannot be considered as the final assess�ent because they do not set a definite a�ount as to the ta>e r deficiencies of petitioner for 1986 as co�pared to that which is contained in the lette�~ dated Apl~il e., 1990 310

DECISION - C.T.A. CASE NO. 5006 - 11 - <Exhibit "A">. how can respondent that as early as 1988 there was already an assess11ent which petitioner was allegedly contesting, when the pre- assess�ent notice was issued only on March 27, 1990 (p. 3&7, BIR records>? Contrary to the view of the respondent, Section 224 of the Tax Code does not apply to the instant case as was allegedly asking for a reinvestigation. Fo�.. purposes of discussion, Section 224 of the Tax Code is quoted Section 224. Suspension o' running o' statute. The ,.. unning of the statute of li�itations provided in Section 203 and 223 on the �aking of assess�ent and the beginning of distraint or levy or proceeding in court for collection, in respect of any deficiency, shall be suspended for the period dm.. ing which the Co��issioner is prohibited fro� �aking the assess11ent or beginning distraint or levy or a proceeding in court and for sixty days t he�.. eaft e�.. ; when the taxpaye�.. ,..eq ...test s f o�.. a \re-investigation which is granted by the ,/Co1111issionet"'; when the taxpaye�.. cannot be located in the address given by hill in the retm..n filed upon which a tax is being assessed o�.. collected. Provided~ That if the taxpaye�.. info�..�s the Co1111issione�.. of a.JlY change in address, the statute will not be suspended; when the warrant of distraint and ~evy is duly served upon the taxpayer, his authorized representative, or a 11e11ber of his household with sufficient discretion, and no property could be located, and when the taxpayer is out of the Philippines. 311

DECISION - C.T.A. CASE NO. 5006 - 12 - cas.es., ,~eq ...aests fo,~ ,~ei nvest i gat ion which had the effect of sus.pending the period of li�itation refers to reinves-tigation of a pl~io�~ assess.�ent paving the way fo�~ a new or revised assess�ent. s.pent reinves.tigating is the total pel~i od pres.cribed by law. In the case of Coaaissioner of Internal Revenue vs. Sison, 7 SCRA 884, the Supre�e Court declared: The five-yea,~ period of prescl~iption fixed by Section 332<c> of the NIRC is. to be counted fro� the last revised ass.es.s�ent res.ulting from a reinvestigation asked for by the ta~payer. The time employed in reinvestigating should be deducted from the total period of limitation. (Underscoring supplied) Si�ilarly,. in the cas.e entitled Ouerol VS.. Collector of Internal Revenue, Court ruled, thus.: Jt is true that the Collector revis.ed the 'original as.s.ess�ent on February 9, 1955; and Appellant avers. that this revision was invalid in that it was not �ade within the five-year pres.cl~iptive pe,~iod fixed by law ��� xxx. B...at the fact is that the revis.ed as.s.ess.aent was aerely a result of petitioner Duerol's requests~ for reconsideration of the original assessment, contained in his letters. of Dece�ber 14, 1951 and May 25, 1953. xxxx. xxxx Cons-equently, the period between the petition for recons-ideration and the revised as.s.es.s.�ent s.hould be s-ubtracted fro� the total pres-criptive period <Republic vs. Ablaza, L-14519, 2& .July 19&()). 312

DECISION - C.T.A. CASE NO. 5006 - 13 - RPliancP o f .~..-spond..-nt on thP cas�> PntitlPd of' lnt..-rnal R..-v..-nup vs. WyPth-Suaco LaboratoriPs, Inc., 202 SCRA 125, thP instant cas�>. Com~ rulPd that rPquPsts for rPinv..-stigation of thP assPssa..-nt had thP pffpct of susp..-nding thP pPriod for the collection of taxes Which is also COYPred by 5Pction 224 of th..- Tax Cod..-, hPncP not applicablP to thP instant cas�> whPJ~P the issue is concerned with thP pt~Psc�~iptivP pPriod for the issuance of the assessa..-nt. At this point, it aight be w�>11 to PaphasizP thP purposP bPhind th..- liaitation of actions for collPction of taxPs Pm..mci at Pd by thP Sup�~..- a..- Court in R..-publ ic of' thP PhilippinPs vs. Luis 6. Ablaza, 1()8 Phil. 1105, which ,~; could YPl~y w..-11 apply to thP actions for the issuancP of / ThP law prPscribing a liaitation of actions for thP collection of the incoae tax is bPnPficial both to the 6ovPrn�Pnt and to its citizPns; to the Govern�ent bPcausP tax officPrs would bP obligPd to act proaptly in thP aaking of ass..-ssa..-nt, and to citizPns bPcausP aftPr thP laps�> of thP pPriod of prescription, citizPns would have a fPPling of secm~ity against \.tnsct~lltpulous tax ag..-nts who will always find an PHCUSP to insp..-ct thP books of taxpay..-rs, not to d..-t..-rainP the latt..-r's rPal liability, but to takP advantagP of' PYPry opportunity_ to aol..-st p..-acef\.tl, law-abiding citiz..-ns. Without such a 1..-gal dPfPns..-, 313

DECISION - C.T.A. CASE NO. 5006 - 14 - taHpayers would further�ore be under obligation to always keep their books and keep the� open for inspection subject to harass�ent by unscrupulous taH agents. The law on prescription being a re�edial �easure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taHpayer within the conte�plation of the Co��ission which reco��end the approval of the law. The right of the govern�ent to assess petitioner's taH deficiencies for 198& having prescribed, we dee� it unnecessary to delve on the other issues presented in this case. WI-EREFORE, in view of the foregoing, is rendered in favor of petitioner. ACCORDJNiLY, the Co1u1issione�~ of lntel~nal Reven1,.1e is hereby ORDERED to WITHDRAW and CANCEL the assess�ent issued against petitioner for its 198& taH deficiencies, for having been barred by prescription. SO ORDERED. ~-t,Q.~ ERNESTO D. ACOSTA Pl~esidi ng Judge GRUBA Judge 314

DECISION - C.T.A. CASE NO. 5006 - 15 - CERTJ:FJ:CATJ:ON I hereby certify that this decision was reached after due consultation a�ong the �e�bers of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~�Q,Q.~ ERNESTO D. ACOSTA p,~ps i ding .h.tdgP Court of TaH Appl"als 315 j