COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. CAPITOL SUBDIVISION, INC., RESPONDENT.

This is an appear from the decision of the Court of Tax Appeals (in CTA
Case No. 711) reversing the decision of petitioner Commissioner of
Internal Revenue which held respondent Capitol Subdivision, Inc. liable
for deficiency income taxes for 1948, 1949, 1950, and 1951 in the
amounts of P2,927.69, P3,952.12, P5,927.00 and P14,406.00 respectively,
or a total of P27,212.88.

The case was submitted for decision to the Court of Tax Appeals, on the following stipulation of facts:

“1. That petitioner is a corporation, engaged in the business of
purchase, sale, barter and exchange of urban estates, and their
improvement and subdivision into residential lots for resale to public,
* * *.

“2. That petitioner filed its income tax returns
for the years 1948, 1949, 1950, and 1951, on February 28, 1949, March
31, 1950, March 31, 1951, and March 1, 1952, respectively, and the
amounts assessed thereon as per return, were promptly paid.

“3. That in an investigation conducted by an examiner of the
respondent, it was recommended in the memorandum report dated June 30,
1952 of the examiner, that petitioner should pay the following
deficiency income tax, as follows:

For the year ended Dec. 31, 1948	…………………………..	P2,927.60
For the year ended Dec. 31, 1949	…………………………..	3,952.19
For the year ended Dec. 81, 1950	…………………………..	5,927.00
For the year ended Dec. 31, 1951	…………………………..	14,406.00

“4.
That respondent sent income tax assessment notices dated April 8, 1953,
requesting payment of the aforesaid amounts due and collectible; the
said taxes being based on disallowed deductions and overclaimed
depreciations, as shown on pages 12, 19, 39, and 45, BIR records.

“5. That petitioner, upon receipt of the said
Income Tax Assessment Notices, on May 30, 1953, requested for the
breakdown of the amounts reflected under the heading “General Expenses”
in the said notices, * * *.

“6. That on June 21, 1955,
respondent sent petitioner circular letters making inquiry, as to
whether payment was already made on Assessment No. 35-5-125329-48-2,
No. 35-5-125371-49-2, No. 35-5-125346-50-2, No. 35-5-52-51-2 for the
years 1948, 1949, 1950 and 1951; * * *.

“7. That on July
1, 1955, petitioner in reply to above circular letters of respondent,
reiterated its quest of May 30, 1953 * * *.

“8. That on
September 20, 1955, respondent replied to petitioner’s letter dated
July 1, 1955, and at the same time reiterated his demand for payment of
the income tax assessments for the years 1948, 1949, 1950, and 1951,
plus a surcharge of 5%, 1% monthly interest and compromise fees of
P20.00 each for the years 1948, 1949, 1950, and P40.00 for 1951 * * *.

“9. That petitioner in the letter dated October 15, 1955 to respondent,
explained the disallowed items and requested for re-investigation * * *.

“10. That after re-investigation, the examiner in a memorandum report
dated October 26, 1955 submitted to the Acting Provincial Revenue
Officer reiterated his findings and recommended that the previous
assessments be affirmed.

“11. That in a letter dated
September 2, 1959, respondent demanded of petitioner the payment of the
said deficiency income taxes for the years 1948, 1949, 1950, and 1951,
respectively * * *.

“12. That in its letter dated
September 16, 1959, * * * petitioner invoked the defense of
proscription, and on that ground, denied liability for the deficiency
income taxes for the aforesaid years.

“13. That in the
respondent’s letter dated October 13, 1959, the original of which was
received by petitioner on October 21, 1959, respondent denied the
request for cancellation, alleging that the 5-year period was suspended
by the various requests for re-investigation filed with respondent and
demanded the payment of the deficiency income tax assessments from 1948
to 1951 * * *.

* * * * * * *

On the basis of the foregoing stipulation of facts, the Court of Tax
Appeals rendered the decision above adverted to, in part stating:

“It appearing” that the deficiency assessments in question were made on
April 8, 1953 and the respondent’s answer to the instant petition for
review, which is tantamount to a judicial action for collection
(Collector vs. Solano, et al., supra; Collector vs. Clement, et al., 105 Phil. 51; Collector vs.
Pineda, supra), was filed on December 29, 1959, or 6 years, 8 months
and 21 days thereafter, it follows that the right of respondent
Commissioner to collect said deficiencies has already prescribed.”

The only question to be determined in this appeal is whether
petitioner’s right to collect respondent’s deficiency income tax
assessments in question has already prescribed under Section 332 (c) of
the National Internal Revenue Code, which reads:

“SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes.—* * *

“(c)
Where the assessment of any internal revenue tax has been made within
the period of limitation above prescribed, such tax may be collected by
distraint or levy or by a proceeding in court, but only if begun (1) within five years after the assessment of the tax,
or (2) prior to the expiration of any period for collection agreed upon
in writing by the Collector of Internal Revenue and the taxpayer before
the expiration of such five-year period. The period so agreed upon may
be extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.” (Italics supplied.)

It is not disputed that on April 8, 1953, petitioner demanded from
respondent payment of deficiency income taxes for 1948-1951. On May 30,
1953 respondent requested for a breakdown of the amounts reflected
under the heading “General Expenses” in a letter reading as follows:

“This will acknowledge receipt of the Income Tax Assessment Notices for the years 1948, 1949, 1950 and 1951.

“In going over the items disallowed, we noted under the heading General Expenses, the following:—

1948	…………………………………………	P695.00—35-ACR-125329-52/48
1949	…………………………………………	1,615.00—36-ACR-125371-52/49
1950	…………………………………………	2,075.30—S5-ACR-125S46-62/60
1951	…………………………………………	4,219.50—35-ACR-52-52/51

“We
have no way of determining the items composing above and we kindly
request that we be furnished with an itemized information of the same
for our study with the assurance that should we find them satisfactory,
we will be much obliged to make initial payments, otherwise, we will
give you our own explanation on the subject matter.”

On June 21, 1955, petitioner sent respondent circular letters inquiring
whether it has already paid said assessments. In reply to said letters,
respondent, on July 1, 1955, reiterated its request of May 30, 1953.
Petitioner replied to said letter on September 20, 1955 reiterating the
demand for payment from respondent. Respondent, in its letter of
October 15, 1955, explained the disallowed items in detail, and stated
in closing:

“In view of the foregoing circumstances and reasons, we beg you to
reconsider your stand and consider the above items as proper and
ordinary expenses of the business. If necessary, we request re-investigation of the items under General Expenses to convince you of its reasonableness as expenses of the business.” (Italics supplied.)

Whether a formal re-investigation pursuant to respondent’s request was
actually made by petitioner, is not shown by the records. It appears,
however, that on October 26, 1955, BIR Examiner 103, submitted to the
Acting Provincial Revenue Examiner, Bacolod City, a Memorandum, which
in part states:

“The undersigned is submitting hereunder his comments on the
disallowances he made on the income tax case of the Capitol
Subdivision, Incorporated which is herein being contested.

“1. General Expenses disallowed consist of contributions and gifts to
various persons, are not ordinary and necessary expenses of the company
in carrying out their real estate business.”

* * * * * * *

On September 2, 1959, petitioner made another demand on respondent for
payment of the deficiency income tax assessment, with the warning that
should the aforesaid obligation remain unsettled in 10 days, judicial
action for collection thereof will be instituted immediately without
further notice. On September 16, 1959, respondent taxpayer asked the
Commissioner of Internal Revenue for the cancellation of the assessment
in a letter in part reading as follows:

* * * * * * *

“Please be informed that from
the time we received your deficiency assessments all dated April 8,
1953, we have contested the correctness of same, insisting all the time
that the items being disallowed are ordinary, necessary, and legitimate
expenses of the business. This stand of ours have been reiterated
to various men from your office who called on us to collect. No action
was taken by your office to dispute our contention, thus making us
believe you subscribe to our stand.

“From April 8, 3953 to
date, more than six years have already lapsed, and we therefore submit
that under Sections 331 and 333 C of the Internal Revenue Code your
right to collect has already prescribed. This is in line with the
decisions rendered in the cases of Santiago Gancayco vs. Collector of Internal Revenue, CTA Case No. 287, November 14, 1957; Manuel Pineda vs. The Collector of Internal Revenue, CTA Case No. 364, August 80, 1958; and Collector of Internal Revenue vs. Florencio Solano, G.R. No. L-11475, July 31, 1958 to mention a few.

“In view of the above, we respectfully request that your assessment be cancelled.” (Italics supplied.)

Upon its denial, said respondent initiated the instant proceeding in the Court of Tax Appeals.

The right to enforce collection of the disputed assessment has not yet
been lost. There is no question that the period commenced to run on
April 8, 1953 when the assessment was made. The same, however, was
interrupted when the respondent taxpayer, by letter of May 30, 1963,
requested for an itemized information on the disallowed items. While it
is true that the said letter did not specifically use the words
“review” or “reconsideration”, the request itself for an explanation of
the disallowances made in the assessment in effect was an exception to
the correctness thereof. That the taxpayer actually assailed the
correctness of such assessment “from the start” was specifically
admitted in the aforequoted letter of September 16, 1959. This request
for reconsideration or review of the assessment was denied when
petitioner demanded for payment of the alleged deficiency tax on June
21, 1955. The period for collection then started to run again, but it
was tolled when the taxpayer reiterated its request for explanation of
the disallowances on July 1, 1955 or after 10 days. This request was
denied on September 20, 1955, and a span of 25 days elapsed until
October 15, 1955 when the taxpayer explained the disallowed items and
requested for a re-investigation of the same. On September 2, 1959,
petitioner denies the request for re-investigation when it reiterated
its demand for collection of the alleged deficiency tax. From this date
until December 28, 1959, when the answer to the taxpayer’s petition was
filed in the Court of Tax Appeals, only 3 months and 26 days had
passed. Clearly, although the assessment was sent on April 8, 1958, by
respondent taxpayer’s own requests for review or reconsideration of the
disputed assessment, the period for collection thereof had been
interrupted. Therefore, deducting from the total period from April 8,
1953 (date of the deficiency assessment) to December 29, 1959 (date of
answer which is tantamount to a judicial action), or a total of 8
years, 8 months and 21 days, the period of interruption, from May 30,
1953 (when respondent filed its petition for clarification amounting to
reconsideration or review of the assessment) to June 21, 1955 (when the
petitioner in effect denied the petition by reiterating its demand for
payment), or a total of 2 years and 21 days, there is left a period of
4 years and 8 months within which judicial collection may be effected.
Since the law allows 5 years for this purpose, the collection herein
sought by the petitioner is still timely.

IN VIEW OF THE FOREGOING CONSIDERATIONS, the decision of the Court of
Tax Appeals is hereby set aside and the taxpayer’s petition to declare
null and void the deficiency income tax assessments for 1948, 1949, and
1950, is dismissed. Without costs.

SO ORDERED.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, and Makalintal, JJ., concur.