COMMISSION OF INTERNAL REVENUE, PETITIONER, VS. HANTEX TRADING CO., INC., RESPONDENT.

Hantex Trading versus Commissioner of Internal Revenue

The Case

This is a petition for review brought by the Commissioner of Internal Revenue against Hantex Trading Company, Incorporated, a corporation engaged in the sale of plastic products that imports synthetic resin and other chemicals for manufacture. The Commissioner seeks to reverse the decision of the Court of Appeals, which had set aside the deficiency income and sales tax assessments for the year 1987 and reversed the Court of Tax Appeals. The case matters because it fixes the evidentiary standard a tax assessment must meet: an assessment resting on unauthenticated machine copies and hearsay cannot stand, and the best evidence obtainable rule cannot be used to supplant the best evidence rule.

Procedural History

The Commissioner issued a final assessment letter dated December 10, 1993 denying Hantex's protest. Hantex filed a petition for review in the Court of Tax Appeals. On December 11, 1997, the Court of Tax Appeals denied the petition and ordered Hantex to pay deficiency income and sales taxes for 1987, with delinquency interest, holding that the taxpayer bore the burden of proving the correct taxes due. Hantex appealed to the Court of Appeals, which granted the petition and reversed the tax court, ruling the assessments unlawful and baseless because they rested on import entries not duly authenticated by the public officer charged with their custody. The Commissioner then filed the present petition for review under Rule 45 of the Rules of Court, seeking reinstatement of the tax court's ruling.

Facts

In October 1989, an officer of the Economic Intelligence and Investigation Bureau received confidential information that Hantex had imported synthetic resin worth 115,599,018 pesos but declared only 45,538,694 pesos and 57 centavos. Acting on a mission order dated November 14, 1989, the Bureau's Internal Inquiry and Prosecution Office issued a subpoena for Hantex's books and import records for 1987. Hantex refused to comply, saying its records had been investigated repeatedly by the Bureau of Internal Revenue. The investigators then secured certified copies of Hantex's profit and loss statements from the Securities and Exchange Commission, but could not obtain certified copies of the 1987 consumption entries from the Bureau of Customs because the originals had reportedly been eaten by termites.

The customs collection chiefs could not authenticate the machine copies supplied by an informer; they instead issued certifications listing entry numbers and release dates, without stating landed costs or the taxes paid per entry. Relying on the profit and loss statements, the machine copies of the consumption entries, and those certifications, the investigators computed unreported sales and corresponding deficiency taxes. Revenue enforcement officers later conducted their own investigation and reported a prima facie case of fraud, finding unrecorded importations of 70,661,694 pesos.

The Commissioner demanded deficiency income tax of 13,414,226 pesos and 40 centavos and deficiency sales tax of 14,752,903 pesos and 25 centavos, inclusive of surcharge and interest. Hantex protested, and administrative hearings followed. The Bureau representative testified that the Bureau of Customs never furnished certified copies of the entries, so the Bureau relied on machine copies from its informer. The Commissioner admitted the possibility that the figures in the photocopies had been tampered with, but insisted she could rely on other admissible evidence and declared her decision final. Before the tax court, the Commissioner offered only the photocopies, which Hantex objected to, and presented no witness to prove the correct amount of tax due.

Issues

• Whether or not the petition for review is sufficient in form, given that the verification and certification against forum shopping were signed by the Regional Director rather than the Commissioner, and that no motion for reconsideration was filed with the Court of Appeals.
• Whether or not the final assessment for deficiency income and sales tax for 1987 is based on competent evidence and the law.
• Whether or not the Court of Appeals erred in reversing the tax court and setting aside the assessments.

Applicable Provisions

Section 10 of the National Internal Revenue Code of 1997 provides:

The Regional Director shall have the power to administer and enforce internal revenue laws, rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees.

This provision supplies the authority of the Regional Director to sign the verification and certification against forum shopping on behalf of the Commissioner.

Section 19, Rule 132 of the Rules of Court, on public documents, provides:

Public documents are: (a) The written official acts, or records of the official acts of the sovereign authority, official bodies and tribunals, and public officers, whether of the Philippines, or of a foreign country; (b) Documents acknowledged before a notary public except last wills and testaments; and (c) Documents that are considered public documents under treaties and conventions which are in force between the Philippines and the country of source.

An import entry is a public document, so its admissibility is governed by the rules on public documents.

Section 24, Rule 132 of the Rules of Court provides:

A record of a public officer made in his official capacity, or a certified copy of such record, may be received in evidence without further proof.

This is the standard the machine copies of the consumption entries failed to meet.

Section 7, Rule 130 of the Rules of Court, the best evidence rule, provides:

When the subject of inquiry is the contents of a document, no evidence shall be admissible other than the original document itself.

The Court held that the best evidence obtainable rule under the Tax Code cannot supplant this rule.

Ruling

On the first issue, the Court ruled that the petition is sufficient in form. A verification and certification against forum shopping signed by the Regional Director constitutes sufficient compliance with the Rules of Court, because the Regional Director has the power to administer and enforce internal revenue laws and is in the best position to know the collection cases filed under his jurisdiction. The Court also held that a motion for reconsideration of a Court of Appeals decision is not a condition sine qua non, meaning not an indispensable prerequisite, for filing a petition for review under Rule 45.

On the second issue, the Court ruled that the assessment is not based on competent evidence. The import entries are public documents, and the machine copies offered by the Commissioner were neither authenticated by the public officer charged with their custody nor verified under oath by the investigators. The customs certifications listed entry numbers and release dates but stated no landed costs and no particulars of duties and taxes paid per entry, so they could not prove the amounts of importations. The Commissioner herself admitted the possibility that the figures in the photocopies had been tampered with, and she presented no witness to prove the correct tax due. The assessments were therefore based on hearsay and could not stand.

On the third issue, the Court upheld the Court of Appeals. The best evidence obtainable rule under the Tax Code cannot be invoked to supplant the best evidence rule, and substantive rules of evidence may not be disregarded. The Court affirmed that the taxpayer was not shown to owe the assessed deficiencies on competent proof.

Doctrine

A tax assessment must rest on competent and admissible evidence. Where the assessment is computed from import entries, which are public documents, the Commissioner must present the originals or certified copies, or authenticate the copies under the rules on public documents; unauthenticated machine copies supplied by an informer are inadmissible. The best evidence obtainable rule under the Tax Code cannot supplant the best evidence rule under Section 7, Rule 130 of the Rules of Court. A verification and certification against forum shopping signed by the Regional Director is sufficient compliance with the Rules of Court, and a motion for reconsideration is not a condition sine qua non for a petition for review under Rule 45.

Disposition

The Court denied the petition and affirmed the decision of the Court of Appeals, setting aside the deficiency income and sales tax assessments against Hantex Trading Company, Incorporated.

Remember This

The single line to memorize: the best evidence obtainable rule cannot supplant the best evidence rule, so an assessment built on unauthenticated machine copies is void for want of competent evidence. Examiners use this case in tax procedure and evidence questions on the quantum of proof required to sustain a deficiency assessment.