Commissioner of Internal Revenue v. Marily Development
MODIFICATIONFacts
The Antecedents: On June 8, 2011, the Commissioner of Internal Revenue (CIR) issued a Formal Assessment Notice (FAN) to Marily Development Corporation (MDC) for deficiency income tax, Value-Added Tax (VAT), Expanded Withholding Tax (EWT), and Withholding Tax on Compensation (WTC) for calendar year 2006, totaling PHP 8,104,781.30. MDC protested this assessment. On December 29, 2017, MDC received a Preliminary Collection Letter regarding these alleged deficiency taxes. Procedural History: On January 25, 2018, MDC filed a Petition for Review with the Court of Tax Appeals (CTA) Division. During the trial, the CIR manifested that it would not present any evidence or witnesses. The CTA Second Division, in its September 10, 2020 Decision, cancelled the assessment, finding no evidence of a Letter of Authority (LoA) authorizing the examination of MDC's books and ruling that the assessments had prescribed under the three-year period of Section 203 of the Tax Code, as the CIR failed to prove fraud for the 10-year period under Section 222. The CIR filed a Motion for Reconsideration and/or New Trial, arguing the LoA issue was not raised and attaching LOA No. 2000-000158676. The CTA Division denied the motion on February 11, 2021, holding that the CIR waived its right to present evidence and the LoA was not properly introduced. The CIR then elevated the matter to the CTA En Banc. On May 31, 2022, the CTA En Banc affirmed the CTA Division, ruling that the CTA could delve into the LoA's validity motu proprio and that the presumption of regularity did not apply without proof of a valid LoA. It also reiterated that the 10-year prescriptive period would not apply without clear and convincing factual basis of fraud or failure to file, which the CIR failed to prove. Presiding Justice Roman G. del Rosario dissented, arguing for the presumption of regularity and that MDC failed to prove prescription by not presenting its tax returns. The CIR's Motion for Reconsideration was denied by the CTA En Banc on October 12, 2022. The Petition: The Commissioner of Internal Revenue (CIR) filed a Petition for Review before the Supreme Court, reasserting that the existence or non-existence of the Letter of Authority (LoA) was never put in issue by Marily Development Corporation (MDC) during trial, and that MDC's failure to question the revenue officers' authority amounted to an implied admission of a valid LoA. The CIR also argued that it enjoys the presumption of regularity in the discharge of its functions, and that the Formal Assessment Notice (FAN) and Preliminary Collection Letter, which referenced LOA No. 158676, were admitted by MDC in the Joint Stipulation of Facts and Issues. Regarding prescription, the CIR reiterated that MDC did not file its Income Tax, VAT, and Withholding Tax Returns for 2006, thus the reckoning date for the three-year period could not be determined, and consequently, the 10-year prescriptive period under Section 222(a) of the Tax Code should apply.
Issue(s)
Whether the Court of Tax Appeals (CTA) En Banc and Division erred in ruling on the validity of the Letter of Authority (LoA) when it was not raised as an issue by the parties. Whether the CTA En Banc and Division erred in ruling that the deficiency tax assessments against Marily Development Corporation (MDC) for taxable year 2006 had prescribed.
Ruling
ACCORDINGLY, the Petition for Review is PARTIALLY GRANTED. The Decision dated May 31, 2022 and Resolution dated October 12, 2022 of the Court of Tax Appeals En Banc in CTA EB No. 2450 are REVERSED. CTA Case No. 9756 is REMANDED to the Court of Tax Appeals Second Division to determine Marily Development Corporation's tax liabilities for the calendar year 2006, following this Decision. The Court of Tax Appeals Second Division is DIRECTED to conduct the proceedings with reasonable dispatch.
Ratio Decidendi
On Issue 1: The Supreme Court held that while the Court of Tax Appeals (CTA) has authority to rule on issues not raised by the parties, this authority is not unbridled and is subject to two conditions: the issue must be necessary for an orderly disposition, and its resolution must not require additional evidence, relying solely on matters of record. Citing Prime Steel Mill, Inc. v. Commissioner of Internal Revenue, the Court emphasized that raising an issue for the first time on appeal or motion for reconsideration is objectionable if it deprives the other party of the opportunity to rebut or present evidence. In this case, the Commissioner of Internal Revenue (CIR) was deprived of the opportunity to present the Letter of Authority (LoA) during trial because its existence was not initially challenged. The Court found that the CTA Division and En Banc erroneously passed upon the validity of the assessment based on the LoA's absence when it was not put in issue, thus violating the CIR's right to refute allegations as to its invalidity. Furthermore, the Court ruled that the CTA Division should have acted on the CIR's Motion for Reconsideration and/or New Trial to allow the presentation of the LoA, given that the CTA is not strictly governed by technical rules of evidence and the ascertainment of truth is paramount. The Court reiterated that a valid LoA is a jurisdictional requirement for a valid audit and assessment, as held in Commissioner of Internal Revenue v. Mcdonald's Philippines Realty Corp., and its absence renders the assessment void and ineffectual, but the CIR must be given the opportunity to present it. On Issue 2: The Supreme Court reversed the CTA's finding of prescription, adopting the observations of Presiding Justice Del Rosario's Dissenting Opinion. The Court emphasized that to determine the commencement and end of the three-year prescriptive period under Section 203 of the National Internal Revenue Code (NIRC) of 1997, as amended, the dates of filing of the taxpayer's returns are relevant and indispensable. Without proof of the filing dates, there is no basis for the Court to make a categorical ruling on prescription. Unlike the Commissioner of Internal Revenue (CIR), who enjoys the presumption of regularity, the taxpayer, Marily Development Corporation (MDC), does not have the presumption that it filed its tax returns within the deadlines set forth by law; thus, MDC had the burden to prove the date of filing of its tax returns. Since MDC did not offer its Annual Income Tax Return and VAT returns for 2006 as evidence, it cannot avail itself of the defense of prescription, leading to the conclusion that no such returns were filed. In such a case of failure to file a return, the 10-year prescriptive period under Section 222(a) of the Tax Code applies, allowing the Bureau of Internal Revenue (BIR) to make the assessment within 10 years from the discovery of the omission. The Court also noted that for certain EWT and WTC returns, the filing dates were unreadable, and some assessments were indeed issued beyond the three-year period, but a full determination requires remand.
Main Doctrine
The Supreme Court clarifies the unbridled authority of the Court of Tax Appeals (CTA) to rule on issues not raised by the parties, stating that such issues must be necessary for orderly disposition and not require additional evidence. It reiterates that a valid Letter of Authority (LoA) is a jurisdictional requirement for a tax assessment, emphasizing the taxpayer's right to due process. Furthermore, the Court affirms that prescription of tax assessment is a matter of defense, with the burden on the taxpayer to prove the expiration of the limitation period, and that the 10-year prescriptive period for failure to file a return applies when the taxpayer fails to present proof of filing.