CENTRAL AZUCARERA DON PEDRO, PETITIONER, VS. COURT OF TAX APPEALS, ET AL., RESPONDENTS.

The
“Central Azucarera Don Pedro”, a domestic sugar milling corporation,
applied for review of a decision of the Court of Tax Appeals (in C.T.A.
Case No. 645), dated February 25, 1965, affirming an assessment of the
Collector of Internal Revenue against said corporation for P40,522.86
as deficiency sales tax, plus surcharges, on denatured alcohol sales
from October 1, 1947 to October 31, 1952.

The case is stated in the Tax Court’s decision under review to be as follows:

“It
appears that during the period in question, petitioner removed from its
distillery and sold 4,218,749 liters of denatured alcohol on which it
paid the specific tax pursuant to Section 142 (d) of the National
Internal Revenue Code. Upon investigation of the books and records of
petitioners by agents of the Bureau of Internal Revenue, respondent
determined that the said alcohol was removed from petitioner’s
distillery not for motive power but for industrial purposes and,
therefore, it is exempt from the specific tax. However, sales of such
alcohol are subject to the sales tax under Section 186 of the Revenue
Code. Accordingly, an assessment was made against petitioner for
deficiency sales tax, plus the corresponding surcharge, after crediting
the specific tax paid against the sales tax due on sales of said
alcohol.

On the other hand, petitioner insists that said
alcohol was denatured and sold for motive power which is subject to the
specific tax and not to the sales tax. At any rate, it is alleged that
the right of respondent to assess the deficiency sales tax has already
prescribed.

Section 133 of the Revenue Code imposes a
specific tax on distilled spirits (alcohol). Where alcohol is denatured
for motive power, it is subject to a lesser amount of specific tax
under Section 142 (d). In the case of alcohol not taxable under Section
133 or Section 142(d), such as denatured alcohol for industrial uses
(Sec. 128, Rev. Code) it is subject to the sales tax under Section 186.^[1]

The
evidence submitted for the Commissioner of Internal Revenue consisted
in the testimony of former revenue investigator Marcelo Insilay, to the
effect that he investigated and reported on the denatured alcohol sales
of petitioner Central. His report (Exhibit “1”) states the following:

“The undersigned has conducted the verification of the books and
records of the distillery by segregating the denatured alcohol produced
with gasoline as the ingredient denaturant from those produced without
gasoline. The latter class is considered as produced for industrial
purposes and as such, its sales are subject to percentage tax as
provided for in Section 186 of the National Internal Revenue Code, as
amended.”

The working sheets show that,
conformably to the report of Insilay, he had separately listed the
sales of alcohol denatured with gasoline from sale of alcohol mixed
with other denaturants, giving dates, customers and amounts; that the
former were captioned “Sales of Alcohol for Motive Power” (Exhibit
“1-A) and the latter “Sales of Alcohol for industrial Purposes”
(Exhibit “3”). And the question is whether this evidence suffices to
rebut the presumption established in section 142 (d), in fine, of the Internal Revenue Code, as amended, viz.:

“SEC. 142. Specific tax on manufactured oils and other fuels.—On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes:

(a) x x x x x x x x x x x x x x;
(b) x x x x x x x x x x x x x x;
(c) x x x x x x x x x x x x x x;

(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo; Provided,
That if the denatured alcohol is mixed with gasoline, the specific tax
on which has already been paid, only the alcohol content shall be
subject to the tax herein prescribed. For the purposes of this
subsection, the removal of denatured alcohol of not less than one
hundred eighty degrees proof (ninety per centum absolute
alcohol) shall be deemed to have been removed for motive power, unless
shown to the contrary. (As amended by Republic Acts Nos. 56 &
1435).”

It is uncontested that all the
denatured alcohol listed as sold in Exhibits “1-A” and “3” was of “not
less than 180 degrees proof (90% absolute alcohol)”.

The Tax
Court held the evidence sufficient to overcome the statutory
presumption that removal of denatured alcohol of 180° proof or more
shall be deemed to have been removed for motive power.

We are
unable to assent to this finding. There is no proof whatsoever of the
purposes to which the alcohol denatured with substances other than
gasoline was actually devoted, other than the labels in the lists made
by revenue investigator Insilay. That such alcohol was “used for
industrial purposes” is merely the investigator’s own conclusion,
which, of course, is not fact, and can not bind the taxpayer unless
supported by other proof. Such proof is wanting on the record, for
there is no evidence to show in any way that only the alcohol denatured
with gasoline was, or can be, used for motive power. From the fact that
gasoline-denatured alcohol can be used for motive power, it does not
necessarily follow that alcohol denatured with other substances is
unfit for such use. In fact, there is no showing what other substances,
besides gasoline, were used by the Central for denaturing purposes.

Examination
of section 142 (d) of the Internal Revenue Code reveals that specific
reference is made to alcohol denatured with gasoline exclusively to
prescribe that only the alcohol content (i.e., excluding the volume of
gasoline) is subject to the tax. But in establishing the presumption of
use for motive power, the law makes no mention of the kind of
denaturant mixed with the alcohol, the only requirement being that the
product be not less than 180 degrees proof (or 90% absolute alcohol),
which, in the case at bar, is not disputed.

The conclusion of the tax court, that it behooved the taxpayer to show for what purposes the alcohol not
denatured with gasoline was devoted, is not warranted by the statute.
On the contrary, it is manifest therefrom that the burden is laid by
law upon the Internal Revenue authorities to prove that the taxed
alcohol was actually removed for uses other than motive power. And we
see nothing in the evidence from which to infer for what purposes the
alcohol in question was actually put. Yet the revenue officers
possessed in Insilay’s report the names and addresses of the
purchasers. Why then was none of them produced to support the thesis of
the government?

The government’s failure of proof is all the
more inexcusable in view of the second indorsemenc, Hay 26, 1958, of
the Revenue Operations Executive (Legal) pointing to this particular
deficiency (B. I. R. Record, C. T. A. 645, pp. 144-145), which is
marked Exhibit “D”:

“Section 142 (d) of the
Tax Code imposes the specific tax at the rate of one-half centavo per
liter of volume capacity on denatured alcohol to be used for motive
power. However, if the denatured alcohol is mixed with gasoline, the
specific tax on which has been paid, only the alcohol content shall be
subject to the specific tax of one-half centavo per liter. From this
provision, it can be concluded that denatured alcohol when mixed with
gasoline is not the only instance wherein said alcohol is to be used
for motive power. In other words, denatured alcohol may be removed from
the distillery to be used for motive power, without being mixed with
gasoline. As a matter of fact, the same section 142 (d) provides that
the removal of denatured alcohol of not less than one hundred eighty
degrees proof (ninety per centum absolute alcohol) shall be deemed to
have been removed for motive power, unless shown to the contrary.

In view thereof, it is requested that the investigating agent be instructed to make specific findings as to the purposes
for which the denatured alcohol upon which the sales tax is being
imposed was removed. Said purposes should be described in detail. If the denatured alcohol, although not mixed tilth gasoline, was removed
for motive power, then it is subject to the specific tax imposed under
section 142 (d) of the Tax Code. However, if the denatured alcohol in
question was removed for the purposes mentioned in section 128 of the Tax Code, before its amendment by Republic Act 1608,
then it is subject to the sales tax. As this case may possibly reach
the Court of Tax Appeals, the said findings are necessary in order to
strengthen our case against the taxpayer. Likewise, it is requested
that the report of the investigating agent be submitted with the least
possible delay.”

The same observation is
made on the insilay report by the Chief of the Legal Department on June
16, 1955 (B. I. R. record, p. 148).

Contrary to these
recommendations of the legal division of the revenue bureau, the report
of Insilay (upon which the state relies) contains no specific findings in detail
as to the purposes for which the non-gasoline denatured alcohol was
withdrawn other than the segregation of sales of gasoline denatured
alcohol from those of alcohol mixed with other substances. The
description of the latter as alcohol removed for industrial purposes is
conjecture pure and simple, no data being given bow the same was
arrived at. And since conjecture is not evidence, the Tax Court
committed an error of law in holding that the presumption in favor of
removal of the alcohol for motive power has been overcome.

The
Solicitor General laid stress on the part of the Insilay report that
the Central officials “averred that they were not duly advised of the
existing sales tax law and regulation on the sales of denatured alcohol
sold for industrial purposes”, but does not attempt to establish how
such ignorance could prove that the alcohol not denatured with gasoline
was not withdrawn for motive power, as the law presumes.

In view of the foregoing, the decision of the Court of Tax Appeals is reversed, and the
petitioner Central Azucarera Don Pedro absolved from the disputed
assessment for sales taxes and surcharge. No costs.

Bengzon, C.J., Bautista Angelo, Concepcion, Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., and Sanchez, JJ., concur.

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^[1] See Sec. 188 (a), Revenue
Code, which exempts from sales tax articles subject to specific tax.
Conversely, articles which are exempt from specific tax are subject to
the sales tax.