MT. BLANC MOTORS, INC., petitioner, vs.

CIR, respondent
CTA Case No. 8588

Respondent moves for the reconsideration of the Court’s decision based on the following grounds:

1. The court erred in cancelling the deficiency income tax on the alleged additional taxable income
of PhP282,515.26.
2. The court erred in cancelling the deficiency income tax assessment arising from petitioner’s
alleged undeclared income from unaccounted source of cash of PhP23,123.55.
3. The court erred in cancelling the deficiency income tax assessment arising from the
disallowance of the excess tax credits of PhP292,551.60.
4. The court erred in cancelling the deficiency VAT arising from the underdeclared sales and
unaccounted source of cash.

I. Deficiency Income Tax

A. Additional taxable income

A finding of under-declaration of purchase does not by itself a result in the imposition of income tax
and VAT. (CIR vs. Agrinurture, Inc.)

Three elements in the imposition of income tax are:

1. There must be gain or profit;
2. The gain or profit is realized or received, actually or constructively; and
3. It is not exempted by law or treaty from income tax.

It is not when there is an under-declared purchase, but only when there is an income, and such
income was received or realized by the taxpayer, that an imposition or assessment of income tax is
proper.

Respondent’s assessment was not based on undeclared income actually received by petitioner.

B. Unaccounted source of cash

Respondents conclusion is untenable. Apart from the comparison of the alphalist with the ITR and
FS, respondent has no other basis to support his conclusion that petitioner has an unaccounted
source of cash or undeclared income in the amount of PhP23,123.55. Indeed, the amount claimed
by respondent as petitioner’s undeclared income would be offset by deducting the same amount, as
it corresponds to income payments reflected in the alphalist. This results in no taxable income.

While it is axiomatic that all presumptions are in favor of the correctness of tax assessments, the
assessment itself should not be based on presumptions no matter how logical the presumption
might be. In order to stand the test of judicial scrutiny, the assessment must be based on actual
facts.
 II. Deficiency value-added tax

A. Additional taxable sales

What is critical in the imposition or assessment of VaT in the sale of goods or properties is that
the taxpayer is paid or ought to be paid in an amount of money or its equivalent, in
consideration of such sale, and not when said taxpayer purchases or disburses an amount of
money to purchase goods or properties. Simply put, the VAT is imposed when one sells, not
when one purchases.

B. Unaccounted source of cash

The assessment is bereft of merit as it was based merely on respondent’s inference that the
difference between the expenses reflected per petitioner’s alphalist vis-à-vis the amounts
reported in its ITR and FS represents petitioner’s alleged undeclared income.

Even if these alleged unaccounted expenses/costs are to be treated as unaccounted sources of

income which are subject to output VAT, the same will be offset by recording the equivalent
payments as expenses or purchases from which input tax credits may be claimed.

Hence, no additional VAT will result from the said transactions.

III. Disallowance of the excess tax credits

Respondent disallowed the excess tax credits of P292,551.60 reflected in petitioner's 2008
Annual ITR. Respondent, however, did not explain the basis for the disallowance of the excess
tax credit, thus, pursuant to Section 228 of the NIRC of 1997, as amended, this item of
assessment shall be considered void.

Furthermore, it was improper for respondent to disallow the said excess tax credits because any
tax benefit derived by petitioner from the carry-over of the said amounts redounds to the
succeeding year 2009. Since the tax benefit will be in the succeeding year, at most, petitioner
may only be assessed in the said succeeding year.

In fine, petitioner is not liable for any deficiency income tax.

In Shangri-La International Hotel Management, Ltd., et al vs. Developers Group of Companies, Inc. the
Supreme Court denied the MR for being mere reiteration of previous arguments and for failure to raise
any new matters that will justify the consideration sought.

The Court finds respondent’s motion to be without merit, as not being of sufficient weight to warrant a
modification of the assailed decision.
CIR AND PERFECTO L. ARANAS, Regional Director of Revenue
Region No., 19, Davao City, petitioners, vs. ELRIC AUXILIARY SERVICES
CORPORATION/SACRED HEART GAS STATION, respondent
CTA EB No. 1174 (CTA Case No. 8315)

Facts:
Petition for review for the court en banc under Rule 4, Section 2(a)(1), in relation to Rule 8, Section 4(b)
of the 2005 Revised Rules of the Court of Tax Appeals (RRCTA), as amended, of the Decision dated Feb.
17, 2014, rendered by the Second Division.

ELRIC received on June 1, 2011 the 48-Hour Notice dated May 26, 2011. The 48-Hour Notice alleged that
CIR, et.al, conducted a ten-day surveillance from April 16, 2010 to April 25, 2010 of the gas station
located at Cogan, Digos City, Davao del Sur. As a result of the said ten-day surveillance, found ELRIC
liable for alleged deficiency VAT amounting to P1,196,583.13.

On June 3, 2011, ELRIC filed its explanation under oath arguing and declaring that it is not liable for the
alleged VAT deficiency ofP1,196,583.13. On June 21, 2011, they received the 5-Day VCN dated June 9,
2011 reiterating the demand for payment of the alleged deficiency VAT.

On June 24, 2011, ELRIC, through counsel, sent a follow-up letter requesting a response to their letter
explanation under oath dated June 1, 2011. On July 5, 2011, ELRIC received letter-response dated June
28, 2011 denying their plea and holding them liable for the alleged deficiency VAT of P1,196,583. 13.
Counting thirty (30) days from July 5, 2011, the date of receipt of the letter-response, ELRIC filed this
Petition for Review with the Court of Tax Appeals on August 4, 2011.

Issues:
1) The Honorable Second Division erred in ruling that it has jurisdiction over the case.
2) The Honorable Second Division erred in ruling that the 48-hour notice and 5-day VCN are null and
void.

Ruling:

The CTA’s jurisdiction is not limited to a decision, ruling or inaction of the CIR on disputed assessment.
The Court has jurisdiction to determine if the 48-hour notice and 5-day VAT Compliance Notice issued by
the BIR are valid.

The court has also jurisdiction in other cases that arise out of the NIRC or related laws administered by
the BIR pursuant to Section 7(a)(1) of RA 1125, An Act Creating the Court of Tax Appeals, as amended, as
well as Rule 4, Section 3(a)(1), in relation to Rule 8, Section 4(a), of the Revised Rules of the Court of Tax
Appeals (RRCTA).

The 48-Hour Notice and 5-Day VAT Compliance Notice have no factual bases. Other than a statement
that the result of the surveillance resulted in a VAT liability, the basis thereof must likewise be disclosed.
Petitioners in their 48-Hour Notice and 5-Day VAT Compliance Notice, claimed that the surveillance
resulted in sales in various dates and amounts but failed to indicate the basis thereof.

Section 6(C) of the NIRC of 1997, as amended, to wit:

"Sec. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for
Tax Administration and Enforcement. –
XXX
(C) Authority to Conduct Inventory-taking, Surveillance and to Prescribe Presumptive Gross Sales and
Receipts.- The Commissioner may, at any time during the taxable year, order inventory-taking of goods
of any taxpayer as a basis for determining his internal revenue tax liabilities, or may place the business
operations of any person, natural or juridical, under observation or surveillance if there is reason to
believe that such person is not declaring his correct income, sales or receipts for internal revenue tax
purposes. The findings may be used as the basis for assessing the taxes for the other months or quarters
of the same or different taxable years and such assessment shall be deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation of the requirements
of Section 113 and 237 of this Code, or when there is reason to believe that the books of accounts or
other records do not correctly reflect the declarations made or to be made in a return required to be
filed under the provisions of this Code, the Commissioner, after taking into account the sales, receipts,
income or other taxable base of other persons engaged in similar businesses under similar situations or
circumstances or after considering other relevant information may prescribe a minimum amount of such
gross receipts, sales and taxable base, and such amount so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax liabilities of such person.

This Court cannot determine the basis of respondents' findings regarding the sales amounts during the
surveillance period. Respondents did not describe how the surveillance was conducted nor did they
explain the methods used in arriving at their estimates. There is no way for this Court to determine the
factual basis used by respondents, and whether the same gives rise to a reasonable estimate. Without
such information, the sales amounts used by respondent cannot be considered as prima facie valid as
they appear to have been arrived at without any basis. Absent any explanation regarding the factual
basis of the results of the surveillance, the taxpayer cannot be deemed to be sufficiently informed about
the basis for the assessment of the VAT liability, in order to adequately respond to or specifically refute
the computed VAT liability.

The results of surveillance cannot be the basis of the assessment for the other quarters of different
taxable years. It is true that Section 6(C) of the NIRC of 1997, as amended, specifically states that the
"findings may be used as the basis for assessing the taxes for the other months or quarters of the same
or different taxable years." However, such assessment must still comply with the test of reasonableness,
and must not be arbitrary and capricious.

In balancing the scales between the power of the State to tax and its inherent right to prosecute
perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process
of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual,
for a citizen’s right is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are
the lifeblood of the government, the power to tax has its limits, in spite of all its plenitude.
https://www.pwc.com/ph/en/taxwise-or-otherwise/2018/unlocking-the-bir-oplan-kandado-
program.html

UNLOCKING THE BIR’S “OPLAN KANDADO” PROGRAM

Given the drastic measures employed by the program, how can taxpayers defend themselves when
faced with Oplan Kandado findings? Consider the following steps:

1. Make sure that there is a valid Mission Order authorizing the revenue officers to conduct the
surveillance.
2. Once a 48-hour notice is issued, ensure that the written reply is duly notarized and properly
addressed the findings stated in the notice.
3. If a five-day VCN is issued, check if it contains the details of the findings of the investigating
officer and if it states the particular provision of the Tax Code that was violated and for which
rectification should be done.
4. Respond to the five-day VCN within two days from receipt, and/or comply with the terms of the
VCN showing blatant violations (e.g. comply with the registration requirements in case of failure
to register as VAT taxpayer).

NEXT MOBILE, INC., petitioner vs, CIR, respondent

CTA Case No. 7970

This is a petition for review filed by Next Mobile seeking the nullification of the Final Decision of the BIR
that found it liable for deficiency VAT for taxable year 2005.

Facts:

Respondent issued a Formal Letter of Demand with Final Assessment Notices (FAN) for the deficiency
VAT and expanded withholding tax against petitioner for taxable year 2005. Petitioner formally
protested the assessment.

Petitioner received the decision of the BIR on its protest which reduced the deficiency VAT payable,
Thus, this Petition for Review.

Issues:

1. Whether the FAN was issued within the 3-year prescriptive period.
2. Whether Next Mobile is liable for deficiency VAT for taxable year 2005.
3. Whether Next Mobile is liable for 20% interest on the alleged deficiency VAT.
4. Whether Next Mobile is liable for compromise penalty.
5. Whether Next Mobile filed false VAT returns for taxable year that will warrant the application of
the 10-year prescriptive period.

Ruling:
The three-year period to assess commences from the date of actual filing of the return or from the last
as prescribed by law for the filing of such return, whichever comes later. In the case of VAT, the filing of
the Quarterly VAT Return must be made within twenty-five (25) days after the close of the taxable
quarter. Hence, if the return was filed earlier than the last day allowed by law, the period to assess shall
still be counted from the last day prescribed by law for filing of the return. However, if the return was
filed beyond the period prescribed by law, the three-year period shall be counted from the day the
return was filed.

There are three exceptions to the period of limitation of assessment, namely; ( 1) filing of false return,
(2) filing of fraudulent return with intent to evade tax, and (3) failure to file a return. The tax may be
assessed or a proceeding in court for the collection of such tax may be begun without assessment at any
time within ten (10) years after the discovery of the falsity, fraud or omission.

Aznar vs. Court of Tax Appeals and Collector of Internal Revenue, there is a difference between ‘false
return’ and ‘fraudulent return’. While the first merely implies deviation from the truth, whether
intentional or not, the second implies intentional or deceitful entry with intent to evade taxes due.

CIR vs. The Estate of Benigno P. Toda, Jr. et al, the High Court ruled that even assuming that the return
merely failed to reflect the true or actual amount without fraud on the part of the taxpayer, in other
word, there is mere falsity in the return, the prescriptive period to assess the correct taxes is ten (10)
years from the discovery of the falsity.

In this case, the understatement in petitioner’s VATable sales collections in 2005 makes petitioner’s VAT
returns for the said year false. Accordingly the ten-year prescriptive period applies not the three-year
prescriptive period as alleged by petitioner.

The existence of sufficient unutilized input VAT and the matter having the same credited against or
subtracted from the subject deficiency VAT assessment, can only be viewed by this Court, at most, as a
probable mode by which the subject deficiency VAT assessment can be paid/ settled; but it is not a valid
ground that would warrant the nullification or cancellation of the subject FAN and Final Decision.

After a conscientious study of the relevant laws, rules, and jurisprudence applicable in this instance , the
Court is constrained to rule that petitioner may not credit or offset the 2005 input VAT of
P255,847,304.73 reflected in the PAN and FAN against the subject deficiency VAT assessment to pay
for/settle its tax liability.

NIRC of 1997, specifically Section 110, the rule is that any input tax shall be creditable against the output
tax only if it is evidenced by a VAT invoice or official receipt.

Section 4.110-8 of Revenue Regulations No. 16-2005, otherwise known as the "Consolidated Value-
Added Tax Regulations of 2005, viz:

"SEC. 4.1 1 0 -8 Substantiation of Input Tax Credits.

(a ) Input taxes for the importation of goods or the domestic purchase of goods, properties or services is
made in the course of trade or business, whether such input taxes shall be credited against zero-rated
sale, non -zerorated sales, or subjected lo the Final Withholding VAT, must be substantiated and
supported by the following documents, and must be reported in the information returns required to be
submitted to the Bureau:
(1) XXX
(2) For domestic purchase of goods and properties - invoice showing the information required under
Sees. 113 and 237 of the Tax Code
(3) For the · purchase of real properly - public instrument i.e ., deed of absolute sale, deed of conditional
sale, contract/agreement to sell, etc., together with VAT invoice issued by the seller.
(4) For the purchase of services - official receipt showing the information required under Sees. 113 and
237 of the Tax Code.

Petitioner failed to present and offer in evidence any VAT invoice or official receipt to support the
claimed excess and unutilized input VAT which petitioner seeks to be credited or charged against its
deficiency VAT liability. A cardinal rule in statutory construction is that when the law is clear and free
from any doubt or ambiguity, there is no room for construction or interpretation. There is only room for
application.

Petitioner's input VAT, not being supported by any VAT invoice or official receipt, cannot be credited or
charged against its deficiency VAT liability.

The imposition of deficiency interest is in order pursuant to Sec. 249 (B) of the .1997 NIRC. Section 249
(B) is clear on the imposition of deficiency interest in the event that the taxpayer is held liable for
deficiency taxes, viz:

"SEC. 249. lnterest. –

(A) In General. - There shall be assessed and collected on any unpaid amount of tax, interest at the
rate of twenty (20%) per annum, or such higher rate as may be prescribed by rules and
regulations, from the date prescribed for payment until the amount is fully paid.
(B) Deficiency Interest. – Any deficiency in the tax due, as the term is defined in this Code, shall be
subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.

Petition for Review filed by Next Mobile, Inc., is DENIED.

WELLFORM TRADING CORP., petitioner, vs. CIR, respondent

CTA Case No. 9086

Facts:

Respondent CIR assessed Petitioner Wellform Trading Corporation for, among others, deficiency VAT for
January to June, 2012, alleging it had sales not subjected to VAT amounting to nearly P100 Million. The
CIR computed Wellform’s sales by comparing its gross sales based on the industry benchmark rate under
Revenue Memorandum Order 5-2012 with the sales reported per VAT returns. The CIR averred that the
assessment was based on best evidence obtainable as Wellform failed and refused to submit records
despite the issuance of a subpoena duces tecum.

Wellform opposed the computation and argued that the industry benchmark cannot be used as the best
evidence to support an assessment of a deficiency tax.
Issues:

1. Can the BIR use the benchmark rate in computing the VAT liability of Wellform?
2. Is the use of the benchmark rate justified under the power of the CIR to use the best evidence
obtainable in assessing tax deficiency?

Rulings:

1. No. The purpose of the BIR’s benchmarking program is mainly to establish measurement or a set of
standards to be used to monitor the performance or compliance of taxpayers in a particular industry
and improve voluntary tax compliance. There is nothing in the benchmarking program under RMO 5-
2012 to show that the benchmark rate should be used in computing the tax liability of a taxpayer.

While the benchmarking program may be used in recommending enforcement actions such as the
immediate issuance of a Letter of Authority for the BIR to audit a taxpayer, conduct of post-evaluation of
cash register machines/point of sales machines, placing the establishment under surveillance, or
conduct of inventory stock taking, audit activities and processes under Revenue Regulations 12-99
should still be complied with in coming up with an assessment notice.

The use of the benchmark rate in computing Wellform’s VAT liability has no legal basis. The CTA held
that the BIR should have assessed based on its own investigation pursuant to the electronic Letter of
Authority issued, and not merely used the benchmark rate in arriving at the alleged computed VATable
sales.

2. No. Although the CTA recognized the BIR’s power to assess based on the best evidence obtainable,
the approximation in the calculation of the taxes due should not be arrived at arbitrarily and
capriciously. In the instant case, there was no showing on how the benchmark rate was derived and
merely assumed that the VATable sale of other wholesaling companies is the same with the VATable
sales of Wellform.

Wellform Trading Corporation v. Commissioner of Internal Revenue

CTA EB No. 1827; 24 September 2019

In determining the validity of the assessment and the liability on the alleged deficiency value-added tax,
the proper allowance or disallowance of claimed input tax other than those cited in the FAN are related
issued necessary to achieve an orderly disposition of the case. Being a court of record, cases filed are
litigate de novo and party litigants should prove every minute of their case.

Sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount or
quantity of goods sold and their selling price and taken collectively are the best means to prove the
input VAT payments. Thus, Petitioner’s submission if mere supporting documents or substantial
compliance with the invoicing requirements cannot be considered as “proper substantiation” as
required by law.
Commissioner of Internal Revenue v. Alpha245, Incorporated
(Formerly, Arc Worldwide Philippines Co. Inc.)
CTA EB No. 1875; 1 October 2019

As a general rule, there is a prima facie presumption is that the assessment made by the BIR is correct,
and that in preparing the same, the BIR personnel regularly performed their duties. However, the prima
facie correctness of a tax assessment does not apply upon proof that a 10 assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked
assessment" i.e., without any foundation character, the determination of the tax due is without rational
basis.

In this case, the BIR imputes an undeclared income on the part of respondent, i.e. deficiency income tax,
based on a mere presumption that since there are undeclared expenses, there are corresponding
undeclared sources of income. Here, the CTA ruled that the assessment itself should not be based on
presumptions no matter how logical the presumption might be. In order to stand the test of judicial
scrutiny, the assessment must be based on actual facts.

Titanium Corporation v. Commission of Internal Revenue

CTA Case No. 9515; 2 October 2019

While it is a settled rule that all presumptions are in favor of correctness of tax assessments, tax
assessments should not be based on mere presumptions no matter how reasonable or logical said
presumptions may be, and in order to stand the test of judicial scrutiny, such assessments must be
based on actual facts.

Here, there was no factual basis to support the assessment that the alleged unaccounted expenses
arising from the excess payments found in petitioner’s Alphalist as compared to its FS/ITR, translate to
undeclared income on the part of petitioner. As stated in the Details of Discrepancies attached to the
FDDA, the assessment was based merely on the inference that undeclared expenses reflect undeclared
sources of income.

For income to be taxable, the following requisites must exist: (a) there must be gain; (b) the gain must
be realized or received; and, (c) the gain must not be excluded by law or treaty from taxation. These
requisites were not met in this case as respondent was not able to show that there was any gain actually
or constructively realized or received by petitioner. Moreover, any claim of undeclared income is offset
by the corresponding expense payment. Respondent merely presumed that there was a gain on the part
of petitioner as a result of unaccounted expenses.

Lanao Del Norte Electric Cooperative v. Commissioner of Internal Revenue Kim S. Jacinto-Henaras
CTA Case No. 8769; 11 October 2019

Assessments are presumed correct and made in good faith. The taxpayer has the duty of proving
otherwise. In the absence of proof of any irregularities in the performance of official duties, an
assessment will not be disturbed.

In this case, Petitioner was informed of the factual and legal bases of the assessment. The Preliminary
Assessment Notice, Formal Letter of Demand and Final Decision on Disputed Assessment indicated not
only the deficiency tax involved and interest due thereon, but also sufficiently stated the facts, the law,
rules and regulations on which the assessment is based.

CRU Concepts, Inc. v. Commissioner of Internal Revenue

CTA Case No. 9389; 15 October 2019

The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove
not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right. Otherwise the
presumption of correctness of tax assessment stands.

In this case, the CTA observed that most of petitioner's documentary evidence was denied admission
due to failure to submit the duly marked exhibits. The Court also finds that there is no evidence
presented to prove that the items pertained in the assessment is erroneously subjected to tax by the
respondent. Hence the petitioner was not able to show proof to prove that the CIR’s assessment is
wrong.