G.R. No. L-11875. December 28, 1963
WILLIAM LI YAO, PETITIONER, VS. COLLECTOR OF INTERNAL REVENUE, RESPONDENT.
LABRADOR, J.:
Li Yao for the review of a decision of the Court of Tax Appeals in C.T.A. Case
No. 30, entitled “William Li Yao, petitioner vs. Collector of Internal
Revenue, respondent.” The record discloses that petitioner is a
naturalized Filipino of Chinese parents, the eldest son of a prosperous local
businessman by the name of Li Chay Too, who died sometime in 1948. In 1945
petitioner organized the Li Yao & Company and made himself managing
partner; from 1948 to February 1955 he was president of, and owned shares in,
the Li Chay Too & Sons, Inc.; and in 1950 he organized a corporation known
as the Far East Realty & Investment Co. (known as FERIN for short) of which
he was also stock- holder and president. Petitioner filed his income tax re-
turns for the years 1945 to 1951, paying the following taxes:
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In 1948 a verification of his
income tax returns for the years 1945 to 1947 was made and a deficiency income
tax in the amount of P5,470.98 was assessed against him, which he paid.
In 1952 the Collector of Internal
Revenue, believing that petitioner had not reported his true incomes for the
previous years, appointed a team to examine his books, and on July 30, 1952 an
additional assessment of P898,794.02 was made against for the years 1945 to
1951, inclusive. A second team of investigators was appointed and on June
30, 1953
this team recommended a deficiency income tax assessment of P2,722,030.33. This
team employed what is known as the net worth or inventory method. A third team was
appointed, headed by BIR Examiner Quesada. This team recommended an assessment
of P1,505,768.54 against petitioner; the inventory method was also used in
making this assessment. Demand was made for the collection of said assessment
on August 10, 1954, so petitioner herein presented a petition with the
Court of Tax Appeals for the review of the said assessment.
After hearing: the Court of Tax
Appeals, after revising the various items contained in the assessment of BIR
Examiner Quesada, made various findings of fact on the issues presented by the
parties and thereafter rendered a decision in which it found that the amount of
the income tax deficiency due from petitioner is P424,536.77. The resume of the
assessment made in the decision of the Court of Tax Appeals is as follows:
1945
Assets admitted by parties
P41,538.50
Add assets established at trial:
Funds held in trust by father, Li
Chay Too
143,910.89
____________
Net Worth as of December 31, 1945
P185,449.39
Less Net Worth as of January
1, 1945;
Assets admitted by Parties
P500.00
Add assets proven at trial
Funds held in trust by father, Li Chay Too
159,910.89
160,410.89
____________
Increase in net worth 1945
P25,038.50
Add non-deductible expenditures:
Personal living and family expenses
3,500.00
Net income
P28,538.50
Less personal exemptions
3,500.00
____________
Amount subject to tax
25,038.50
____________
Tax due thereon
1,082.31
Less tax already paid
1,111.74
____________
No deficiency tax due
(29.43)
============
1946
Assets admitted by parties
P148,326.77
Add assets established at trial:
Cash fuds from loans
90,032.43
____________
Total assets
238,359.20
Liabilities established at trial:
100,000.00
____________
Net Worth as of December 31, 1946
P138,359.20
Less Net Worth as of January 1, 1946
185,449.39
____________
Decrease in net worth in 1946
(P47,090.19)
Add: non-deductible expenditures Personal living and family expenses
3,500.00
Income tax paid in previous year
918.91
____________
Net loss
(P42,671.88)
============
1947
Assets admitted by parties
P184,453.45
Add assets established at trial:
Cash fuds from loans
78,036.52
____________
Total assets
P262,489.97
Liabilities established at trial:
100,000.00
____________ Net Worth as of December 31, 1947
P162,489.97
Less Net Worth as of January 1, 1947
138,359.20
____________
Increase in net worth in 1947
P24,130.77
Add: non-deductible expenditures:
Personal living and family expenses
3,500.00
Income tax paid in previous year
1,393.42
____________
Net income
P29,024.19
Less personal exemptions
3,500.00
____________
Amount subject to tax
25,524.19
____________
Tax due thereon
3,795.32
Less tax already paid
10,055.78
____________
No deficiency tax due
(P6,260.46)
============
1948
Assets admitted by parties
P176,933.76
Add assets established at trial:
Cash fuds from loans
50,384.93
Investments in Tan Pee Cu Yek Chim & Co.
30,000.00
____________
Total assets
P257,318.69
Less liabilities established at trial:
100,000.00
____________
Net Worth as of December 31, 1948
P157,318.69
Less Net Worth as of January 1, 1948
162,489.97
____________
Decrease in net worth in 1948
(P 5,171.28)
Add: non-deductible expenditures:
Personal living and family expenses
20,000.00
Income tax paid in previous year
11,394.55
____________
Net income
P26,223.27
Less personal exemptions
3,500.00
____________
Amount subject to tax
P22,723.27
____________
Tax due thereon
P3,179.11
Less tax already paid
700.00
____________
Deficiency tax
P2,478.77
Add: 50% surcharge
1,239.38
____________
Total tax due
P3,718.15
============
1949
Assets admitted by parties
P435,405.83
Add assets established at trial:
China Banking Corporation Time Deposit
60,000.00
Investments in Tan Pee Cu Yek Chim & Co.
30,000.00
____________
Total assets
P525,405.83
Liabilities established at trial:
163,000.00
____________
Net Worth as of December 31, 1949
P362,405.83
Less Net Worth as of January 1, 1949
157,318.69
____________
Increase in net worth in 1949
P205,087.14
Add: non-deductible expenditures
Personal living and family expenses
20,000.00
Income tax paid in previous year
700.34
____________ Net income
P225,787.48 Less personal exemptions
3,500.00
____________
Net income before deduction of inheritance
P222,287.48
Less inheritance
72,392.91
____________
Amount subject to tax
149,894.57
____________
Tax due thereon
47,137.82
Less tax already paid
538.07
____________
Deficiency tax
P46,599.75
Add: 50% surcharge
23,299,.87
____________
Total tax due
P69,899,.62
============
1950
Assets admitted by parties
P842,273.50
Add assets established at trial:
Investments in Tan Pee Cu Yek Chim & Co.
30,000.00
Investments in FERIN through others
170,000.00
Race Horses
11,500.00
____________
Total assets
1,053,773.50
Liabilities established at trial:
445,500.00
____________
Net Worth as of December 31, 1950
608,273.50
Less Net Worth as of January 1, 1950
362,405.83
____________
Increase in net worth in 1950
P245,868.67
Add: non-deductible expenditures
Personal living and family expenses
20,000.00
Income tax paid in previous year
538.07
____________
Net income
266,405.74
Less personal exemptions
4,200.00
____________
Amount subject to tax
P262,205.74
____________
Tax due thereon
125,977.00
Less tax already paid
3,837.00
____________
Deficiency tax
P122,140.00
Add: 50% surcharge
61,070.00
____________
Total tax due
P183,210.00
============
1951
Assets admitted by parties
P1,630,658.94
Add assets established at trial:
Investments in Tan Pee Cu Yek Chim & Co.
30,000.00
Investments in FERIN through others
200,000.00
____________
Race Horses
11,500.00
____________
Total assets
1,872,158.94
Liabilities established at trial:
1,040,500.00
____________
Net Worth as of December 31, 1951
831,658.94
Less Net Worth as of January 1, 1951
608,273.50
____________
Increase in net worth in 1951
223,385.44
Add: non-deductible expenditures
Personal living and family expenses
20,000.00
Income tax paid in previous year
3,839.00
____________
Net income
P247,222.44
Less personal exemptions
4,800.00
____________
Amount subject to tax
P242,422.44
____________
Tax due thereon
P114,777.00
Less tax already paid
2,971.00
____________
Deficiency tax
P111,806.00
Add: 50% surcharge
55,903.00
____________
Total tax due
P167,709.00
============
Summary of Tax Due
1945
None
1946
None
1947
None
1948
P 3,718.15
1949
69,899.62
1950
183,210.00
1951
167,709.00
____________
Total Tax due
P424,536.77
============
Petitioner Li Yao sought to
reconsider the decision and the assessment, alleging that the sum of P5,470.98
paid by him as additional tax for the years 1945 to 1947 should be credited,
against his deficiency income taxes, so that instead of P424,536.77 the sum due
should be only rtll,294,12, following the decision in the case of University of
Santo Tomas vs. Collector of Internal Revenue, C.T.A. Case No. 10, dated June
4, 1956, in which the doctrine of equitable recoupment was applied provided the
two requirements for its applicability are met. The court approved this
petition for recoupment and reduced the assessment to P411,293.80.
Both petitioner and respondent
appealed from the decision of the Court of Tax Appeals—petitioner’s
appeal is the within case, G.R. No. L-11875 and the respondent’s appeal is case
G.R. No. L-11861. This decision deals with Li Yao’s appeal. Two principal
questions are raised by petitioner Li Yao before Us, the first of which
questions the validity of the net worth method of inventory used against him,
and the second assails the Court of Tax Appeals refusal to grant petitioner’s
request that the deficiency income assessed be distributed evenly over the
taxable years. We will leave these questions for the present until after we
have decided the appeal raised against various items of the assessment.
The first issue relates to the
disapproval of various items, claimed by petitioner to be his obligations,
which are as follows:
J. Crisostomo Chavez
P100,000.00
Li Chiok Eng
50,000.00
Ong Tiao Seng
20,000.00
Li Chiu Ka
20,000.00
Li Tong Na
20,000.00
Ko Chiu Seng
10,000.00
Carlos M. Go
10,000.00
Dee Mong & Lim Sing
25,000.00
Arturo Mercado
10,000.00
Go Hoc
20,000.00
Ong Chin
30,000.00
____________
TOTAL
P315,000.00
============
The procedure adopted by the Court
of Tax Appeals in passing upon the first of these alleged obligations is as
follows:
“* * * that when a taxpayer
claims he owes money to another for the purpose of reducing his tax liability,
particularly when the Net Worth Expenditure (Inventory) Method of investigation
is employed against him, his admission (claim) must be corroborated by other
evidence independent of the admission itself. For example, the promissory note,
if there be any, should be produced for the inspection of the Court and
government counsel. The alleged creditor must be produced in Court to confirm
the taxpayer’s admission and to give government’s counsel an opportunity to
cross-examine him, unless he is dead, outside of the Philippines, or unable to testify for one
reason or another. If the taxpayer is in business, his books as required of him
by the National Internal Revenue Code should be produced showing the
corresponding entry or entries of his alleged liabilities. If for one reason or
another the alleged creditor is not available as a witness, his financial
capacity to extend the loan should at least be established.”
Attacking the above procedure
counsel for petitioner argues that in the inventory method the burden of proof
lies with the Government; that the taxpayer completes his obligation if he
furnishes the lead by presenting the evidence of the obligation, and it is
thereafter incumbent upon the Government to follow the lead to determine if the
alleged liabilities actually or really existed.
We find no merit or sense in the
above contention. The taxpayer has the means of proving the existence of the
obligation and it is he that must produce such proof. The procedure followed by
the Court of Tax Appeals is that laid down by the rules on evidence; that is,
that the taxpayer who alleges that an obligation still exists must prove the
existence thereof by preponderance of evidence. This rule is not only a legal
one. In the nature of things, the obligor or taxpayer has the means of proving
that the obligation does not exist or has been paid; the Government collecting
the tax cannot be expected to find the evidence itself, because it is natural
that the taxpayer would try to suppress such evidence as may prove that the
obligation still exists. The court below ruled, in relation to the obligation
or the supposed loan given by Crisostomo Chavez, as follows:
“Although this loan is
evidenced by a duplicate promissory note, Exhibit JJJJ, we find the explanation
of petitioner regarding the reproduction of the original note marked Exhibit
55-A from which Exhibit JJJJ was taken, to be highly fantastic. This alleged
creditor was seen by the Court on several occasions loitering in the Court
premises during the early stages of the trial of this case. However, when his
turn came to testify as witness for the respondent, he could not be served with
a summons. He was cited by respondent’s counsel precisely to confirm or
repudiate the contents of an affidavit which he executed dated July
6, 1955
denying having made such a loan. Considering the past criminal record of this
alleged creditor, his failure to testify before “this Court upon being
cited to do so and the explanation of petitioner regarding the two
controversial promissory notes, Exhlbits’55-A and JJJJ, which we believe to be
much too strained and fantastic, we cannot give credit to the alleged liability
of petitioner.”
We agree with the court below; the
supposed duplicate of the promissory note could well have been fabricated.
“Furthermore, the supposed creditor had denied the existence of the loan
in an affidavit and the taxpayer failed to produce him in evidence. Lastly the
taxpayer suppressed the evidence to show that the obligation still exists and
if he did so it is because the same would be unfavorable to his claim.
In connection with the loans of Ong
Tiao Seng for P20,000.00, Li Chiu Ka for P20,000.00, Li Tong Na for P20,000.00,
Ko Chiu Seng for P10,000.00, Carlos M. Go for P10,000.00 and Lim Siong for
P25,000.00, We also agree with the court below that as petitioner had not
presented the supposed creditors to confirm the existence of the loans, and no
explanation had been given for such failure to present them, the existence of
these loans cannot be considered as proved. The petitioner suppressed evidence
which should favor him, and his suppression of such evidence proves that said
evidence would be unfavorable to him if produced. As to the other loans that
had been disapproved for the same reason, We find the-ruling of the court below
correct.
One of the items subject of the
appeal is the P30.000.00 investment in the Tan Pee, Cu Yek Chim & Co.,
Inc.. The said amount represents shares of stocks issued in the name of Li Yao,
petitioner now contending that Tan Pee transferred the shares to Li Yao in 1948
as he felt ill and was in danger of death, and that when ha recovered in the
year 1952 he decided to recall the shares and so requested Li Yao to endorse
the certificates of stock back to Mm, which Li Yao did. Thereafter the shares
were again placed in the name of Tan Pee. After analyzing the evidence
‘Submitted to support the claim Of petitioner that Tan Pee did not intend ultimately
to transfer his stocks to his son-in-law Li Yao, the court below declared that
the explanation was not sufficient to refute the presumption that the transfer
of said stocks was made a valid consideration, in the ordinary course of
business, so that it considered the item an unreported asset of petitioner for
the years 1948 to 1951. After reading the arguments presented by petitioner and
considering that the witnesses for petitioner herein are his father-in-law and
his wife and their testimonies failed to convince the judges of the court
below, this Court finds no potent reason why the findings of the court below
that heard the evidence should be disturbed.
Another item subject of the appeal
is the amount of P60,000.00 deposited with the China Banking Corporation in the
name of petitioner as of the end of the year 1949. Petitioner claims that one
by the name of James Li, a friend of his, came to the Philippines from Hongkong
in 1949 bringing with him $30,000.0 in cash which he intended to invest in the
local textile business, so petitioner alleges he deposited this sum with the
China Banking Corporation in his name; that the sum was withdrawn in 1949 upon
instruction of James Li and delivered to an emissary of the later by the name
of Chen Heng. As the supposed owner of the fund, James Li, was not presented to
corroborate petitioner’s claim that he owned the money, nor any other
circumstances proved to corroborate petitioner’s explanation, the court below
held that the evidence was insufficient and declared the sum as an asset of the
petitioner. We also find no reason for disturbing the conclusion of fact and of
law made by the court below. It is strange that no evidence of any kind was
ever presented to corroborate the story that the sum belonged to petitioner’s
friend James Li, no written or testimonial evidence was also presented to prove
that the amount, after it was withdrawn from the bank, was actually sent to the
supposed owner. Counsel for petitioner contends that there is no prima facie
presumption in favor of the correctness of the assessment made by the
respondent. This is true, but the question now involved is not the correctness
of the assessment but whether or not the amount of P60,000.00 deposited with
the China Banking Corporation belongs to Li Yao, petitioner herein. There being
no credible evidence presented that the said amount belongs to James Li and not
to Li Yao, then the only reasonable inference is that the money must belong to
petitioner. The Court of Tax Appeals therefore correctly included it among the
assets of the petitioner.
The next items also disallowed by
the Court of Tax Appeals are the amount of P100,000.00 each, belonging to
taxpayers Vicente Duazo and Delfin Fulay. The findings of the Court of Tax
Appeals on these items are as follows:
“Of the five, Gloria Pineda
and Delfin Fulay are the two persona upon whom suspicion could rest because of
their close association with petitioner. As we have said, Gloria Pineda is the
private secretary and accountant of petitioner and Delfin Fulay is his driver
and bodyguard. However, with respect to Gloria Pineda who is single, her income
tax returns Exhibits 68, 69, 60, 61 and 62 for 1946 to 1951, inclusive, show
that she had a total net income of P25,299.50 during those years. From these
returns, it is quite apparent that the investment of P25.000.00 attributed to
her in 1950 which was increased to P40,000.00 in 1951 is not far beyond her
reach. The relationship of employer and employee between petitioner and Gloria
Pineda cannot be considered, therefore, as a decisive factor in determining
whether she could well afford to invest P40,000.00 in the corporation headed by
her employer.“The case of Delfin Fulay, who
is admittedly a bodyguard and driver of petitioner, is quite different. The
books of FERIN show that Delfin Fulay invested P85,000.00 in said corporation
in 1950, which he increased to P100.000.00 in 1961. His income tax return, for
the years 1949, Exhibit 66, and his return for 1951, Exhibit 67, show that he
had a total net income of only P8,500.00 during “those two years. Could it
be possible for a mere hireling like Delfin Fulay, with such a moderate income,
to have invested such an enormous amount as Pl00,00.00 in FERIN? The investment
of Fulay in FEIUN is so highly disproportionate to his income that we find it
impossible to believe the investment to be his own. And if the investment did
not come from his own personal funds with his meager salary as driver and
bodyguard, from who else could it have come but petitioner, considering the
latter’s admission that he purposely saw to it that the incorporators of FERIN
were his close friends and persons whom, he could trust. From all appearances,
the petitioner could not have chosen a person more trustworthy than Delfin
Fulay, the ”Man Friday” entrusted with the protection of his life and
limb.“The case of Vicente Duazo,
who is admittedly a body guard and driver of petitioner’s mother would seem at
first blush to be entirely different from that of Delfin Fulay as far as
relationship with petitioner is concerned. It appears from the evidence for the
respondent that Vicente Duazo declared a net income in his return for 1948,
Exhibit 63, the amount of P2,345.00; for 1949, Exhibit 64, the amount of
P1,640.00 and for 1950, Exhibit 65, the amount of P3,480.00 or a total of
P7,465.00. His investment in FERIN in 1950 was P854,000.00 and in 1951 it was
increased to P100,000.00. It will be noted that the net income of Vicente Duazo
for, three years (1948, 1949, 1950) is much leas than that of Delftn Fulay for
two years (1949, 1951). Yet, far from being just a mere coincidence, they
invested P25,000.00 each in FERIN on August 25, 1950. * * * This striking
similarity in the amounts invested at the same time, let alone the disparity in
the amounts of their respective incomes, has led us to the conclusion that the
investments of these two persons in said corporation came from only one source.
And the evidence on record indubitably point to petitioner as the source
considering his admission that after the death, of his father, he was entrusted
“with the business affairs of his family he being the eldest son and
favorite of the deceased.”
We find no flaw in the facts and in
the conclusion arrived at that the two supposed stockholders in FERIN, Duazo
and Fulay, are mere dummies and said facts and conclusion are hereby affirmed.
The last item questioned by
petitioner is the sum of P30,000.00 alleged to be his obligation to one Ong
Chiu. To support petitioner’s claim is a copy of a complaint in court against
petitioner for the amount. Respondent found one Benjamin Ong Chiu, who was
presented by respondent to show that he had no claim or had filed no such
action against petitioner for P30,000.00. Petitioner claimed at the trial that
his creditor is not the one that respondent presented at the trial, but
petitioner did not present the one whom he: claims to be the1 real creditor.
Assuming-for the sake of argument that the one presented by respondent is not
the real creditor, why did not petitioner present the supposed real creditor?
If there are nine Ong Chiu’s well may he have conceived of presenting
fictitious action in court in the name of one of them. The case is the same as
the other cases above explained—one where petitioner has failed to
present corroborative evidence, or the real creditor, to prove the existence of
the debt in dispute. Failure to adduce the proof required, the petitioner’s own
testimony may not be held sufficient in law to prove his claim of the existence
of the obligation.
We next come to the question of the
use of the inventory method in assessing” the income taxes due from
petitioner. The use of the inventory method is authorized under Section 15 of
the National Internal Revenue Code (Com. Act No. 466), as amended, which
authorizes the Collector of Internal Revenue to assess taxes due a taxpayer from
any other available fact or evidence. If a taxpayer commits a violation of
the law, hiding his income to evade payment of taxes, the Government must be
permitted to resort to all evidence or , sources available, to determine his
said income, so that the tax may be collected for public purposes. “There
is and there should be a presumption of regularity accorded this action of the
Collector of Internal Revenue in assessing the tax on the best evidence
obtainable, otherwise it would be impossible to assess taxes due from a
dishonest taxpayer.
This form of assessment has also
been adopted by the Collector of Internal Revenue with the approval of this
Court in three cases, Perez vs. Collector, G.R. No. L-10507, May 30, 1958;
Collector vs. A.P. Reyes, G.R. Nos. L-11534 & L-11558 Nov. 25, 19GS; and
Avelino vs. Collector, G.R. No. L-17715, July 31, 1963. In the case at bar the
existence of assets or properties appearing” in the name of the taxpayer
or in the name of his dummies or friends, without the taxpayer being able to
give a definite reasonable explanation for their existence justifies the Court
of Tax Appeals and this Court to resort; to the inventory method of assessment,
such being necessary and at the same time just and equitable.
The last important legal question
raised is petitioner’s claim that the unreported incomes which appeared during
the last years of the period of assessment should not be considered as having
been earned during the years in which said incomes appeared, but should be
spread throughout the whole period covered by the assessment, that is, from
1945. to 1951. As authority for this claim the case of U.S. vs: Ridley, 120
Fed. Supp. 530 is cited. In the said case Claude Ridley was assessed for the
years 1942 through 1951, including taxes, penalties and interest amounting to
$106,674.37. The spouses Claude Ridley were a frugal couple, living in a small
farm in which they resided and kept a small store. No records were kept of the
amount of income earned and of the business transactions entered into from time
to time, and it was impossible to determine accurately not only the amount of
income received by Claude Ridley, but also to determine accurately the years in
which such income was received. The purchases and expenditures made by the
spouses appeared through the years 1937 to 1951, without any specific amount
for any particular year. The District Court held that inasmuch as the oral
testimony as well as the oral circumstances indicate that the investment
purchases were made from accumulated savings rather than from current income
and there being no evidence to indicate greater income in one year than in
another, the income should be distributed evenly through the years 1937 and
1951, inclusive.
The above decision, does not
sustain the argument adduced by counsel for petitioner. The facts found in the
case at bar do not justify the petitioner’s claim. Petitioner does not claim
that the amounts appearing in the last period of the assessment were acquired
through savings or accumulated savings or any slow and continuous process, such
that the income cannot be distributed to any particular year of the period of
assessment.
On the other hand, Section 39 of
the National Internal Revenue Code requires the taxpayer to report yearly to
the Collector of Internal Revenue the income that he gets during the year from
whatever source and include the same in the taxable year in which the income
was received by him. It is to be presumed that the income was earned at the
time that it appeared in the possession or control of the taxpayer, in
accordance with the rule that the law has been followed. [Rule 123, Section 69
(q), Rules of Court] Were we to sanction the use of the spreading method claimed,
We would be tolerating a violation of the law or rule that the taxpayer must
report his income in the year it is earned. Under the practice advocated, a
taxpayer would be encouraged to hide his income because in any case, if his
unreported income would be discovered afterwards the said income, although
appearing in one year, would be distributed over a period of years. In other
words, we will have a rule, as advocated by petitioner’s counsel that would not
discourage the hiding of taxable income because any discovery of any unreported
income could always be allowed to be distributed over a period of years. In the
case at bar, the distribution over a period of years demanded by petitioner
would bring about a reduction of the tax assessed by the Court of Tax Appeals
from P424,536,77 to P232,416.59 (see computation attached to Motion For
Reconsideration, Annex K of Petition For Review), or about one-half of the
assessment made by the Court of Tax Appeals. We are not prepared to permit such
un-authorized reduction in public taxes favorable to a dishonest taxpayer and
prejudicial to the interests of the State.
Wherefore, finding no merit in the various
supposed errors attributed to the Court of Tax Appeals in its decision, We
hereby find that the decision is justified by law and the evidence. Wherefore,
the decision appealed from is hereby affirmed, with costs against the petitioner. It is so ordered.
Bengzon, C.J., Padilla, Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and Makalintal, JJ.,
concur.