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5931 June 26, 2002

NATURE Petition for review FACTS -Unique Dyeworks (UD), a domestic corporation duly organized and existing under RP laws was informed in a POST REPORTING NOTICE that it was liable for deficiency income tax of P3,256,031.57. -01/08/99: UD requested for a reconsideration/reinvestigation -02/04/99: Assessment Notice No. 56-24-000110-95 was sent to UD, affirming the said assessment which is inclusive of surcharge, interest and compromise penalty -03/02/99: UD fiiled a letter protesting said assessment and requested that the assessment be withdrawn as they believed they did not commit any omissions/violations of any law that would justify the assessment -08/04/99: Regional Director Buenaventura used Sec.203, Tax Code (Period of Limitation upon assessment) to refuse consideration to the request. (UD was said to have requested for compromise on the ground of financial incapacity after this letter) -filed this petition -arguments of BIR (as arguments of UD in the issues): (1) UD failed to comply with S228, NIRC of 1997: assessment issued for deficiency income tax for 1995 already final by operation of law for failure to submit all relevant supporting documents within 60 days from filing the protest; if not deemed final (2) already rendered a decision in 08/04 letter (3) UD was informed of the law and the facts on which assessment was made (4) Under-declarations based on the difference of the gross sales of petitioner in the annual corporate income tax (which ended December 31, 1995) and VAT Returns (for 1st to 4th quarter, 1995) (5) Sec.29(b)(1) business expense deductible: But UD failed to prove requisites cost of goods should be included in petitioners gross sales for 1995 ISSUES

2. 3. 4. 5.

WON CIR should inform petitioner of law and facts on which assessment is made WON petitioner undeclared its sales for 1995 WON the revenue examiner erred in arriving at 1995 assessment by not considering cost of sales and corresponding allowable expenses as deductions from gross sales in computing taxable income WON CIR has rendered decision on UDs protest WON failure to submit all relevant supporting documents within 60 days from filing protest made assessment final

HELD 1. YES, and CIR sufficiently complied with the requirements provided for by law Ratio. S228 has the operative word SHALL, so non-observance of said provision would entirely affect validity of assessment. The purpose of informing the petitioner the law and facts on which assessment is made is to give the taxpayer the opportunity to refute the findings of the examiner and give a more accurate and detailed explanation regarding proposed assessment. Reasoning. UD was informed of the law and the facts on which assessment was made. UD clearly understood the nature of the assessment issued and knew that the assessment was brought about by the alleged underdeclaration of gross sales in annual corporate income tax return 2. YES -UD argues that it should not declare the sales in 1995 because it was still in the pre-opening stage during the period of March 1 to November 5. Questioned sales were generated during the test runs which should be considered mere incidental revenues allowed under law to be capitalized and off set -HOWEVER, CTA not convinced that UD only started on November 1995 as they have INVOICE NO. 311 (the number on the invoice indicates the number of prior invoices issued by UD. Issuance of sales invoice is an indication that an organized corporation has started its commercial operations. 3. YES. As questioned sales are to be included as part of gross income, the cost of sales and expenses should likewise be considered as deductions. GROSS INCOME FROM BUSINESS = total sales cost of goods sold + income derived from other sources 4. NO. BIRs letter reply to the protest cant be considered the final decision. It is bereft of tenor of finality: doesnt indicate in clear and unequivocal language that the action on protest letter constitutes final determination by the BIR and no final determination by the CIR -UD filed petition for review with CTA within the 180-day period under Section 228 and 36-day period mandated by law 5. NO. Even before formal assessment isused, UD already submitted all relevant documents to the BIR. UD made certain that all their book of accounts and financial records were made available to the BIR for inspection Ratio. Petitioner is not required to submit other evidence which he feels will be unnecessary to his protest. In cases where BIR finds that additional documents must be submitted, it should inform the tax payer to submit the documents, or else it is remiss in informing the latter. Disposition. Petition GRANTED. Assessment notice CANCELLED and SET ASIDE.