G.R. No. L-11578 - Avecilla vs. Yatco

Case Summary (G.R. No. L-11578)

Procedural History

On 28 December 2001 the CIR, through Acting Regional Director Ruperto P. Somera, issued four assessment notices against respondent for deficiency income tax (with compromise penalty), deficiency VAT (with compromise penalty), deficiency DST on deposit on subscription, and deficiency DST on pawn tickets. Respondent received the notices on 3 January 2002 and filed a written protest on 1 February 2002. After petitioner did not act within 180 days, respondent filed a petition with the CTA on 28 August 2002. The CTA First Division issued a decision on 24 September 2004 cancelling the DST assessments but affirming the VAT assessment (minus compromise penalty). Both parties sought reconsideration; the First Division denied them. They then filed petitions for review to the CTA En Banc. On 24 March 2006 the CTA En Banc affirmed respondent’s liability for VAT and DST on pawn tickets but held that the deposit on subscription was not subject to DST. The CIR then filed the present petition before the Supreme Court seeking to reverse the CTA En Banc’s ruling on the DST for deposit on subscription.

Facts Relevant to Tax Assessments

Assessments issued: (1) Income tax deficiency P20,712.58 (plus compromise P3,000); (2) VAT deficiency P601,220.18 (plus compromise P16,000); (3) DST deficiency P12,328.45 on deposit on subscription (plus compromise P2,000); (4) DST deficiency P62,128.87 on pawn tickets (plus compromise P8,500). Respondent paid P27,744.88 on 1 July 2003 for deficiency income tax inclusive of interest. Respondent maintained that deposits on subscription were advances from stockholders for possible future subscriptions with no issued shares, and therefore not subject to DST; it also argued that pawnshops are not VATable lenders. Petitioner relied on statutory provisions, BIR rulings (including BIR Ruling No. 221-91), and the presumption of regularity for assessments.

Legal Issue Presented

Whether the CTA erred as a matter of law in finding that the assessment for DST on deposit on subscription had not become final and unassailable under Section 228 of the National Internal Revenue Code (Tax Code), thereby determining that the respondent was not liable to pay P12,328.45 as DST on deposit on subscription of capital stock.

Statutory and Regulatory Framework

Primary statutes and issuances relied upon in the decision: the 1987 Philippine Constitution (governing legal backdrop), National Internal Revenue Code (Tax Code) provisions — notably Sections 175 (DST on original issue of shares), 176 (DST on transfers and agreements to sell shares), 180 (DST on bonds, loan agreements, promissory notes), 195 (DST on mortgages and pledges), and Section 228 (protesting of assessment) — and implementing Revenue Regulations (Revenue Regulations No. 12-99) and Revenue Memoranda (RMO 08-98, RMC 47-97) concerning documentary stamp tax on stock and procedures on assessment and protest.

Relevant Jurisprudence and Administrative Rulings Cited

The decision cites several authorities: First Southern Philippines Enterprises, Inc. (CTA), Commissioner of Internal Revenue v. Construction Resources of Asia, Inc., Philippine Consolidated Coconut Industries, Inc., Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue, Standard Chartered Bank-Philippine Branches v. CIR, and administrative rulings such as BIR Ruling No. 015-2003 and RMO 08-98. These authorities address when DST attaches on stock issuance or transfers and the characterization of deposits on subscription.

Taxable Event for Documentary Stamp Tax on Shares

Sections 175 and 176 impose DST on the original issue of shares and on sales/transfers/agreements to sell shares, respectively. DST is treated as an excise levied on the privilege of issuing shares or of effecting transfers/agreements. Jurisprudence interprets “issue” to mean the time when the stockholder acquires attributes of ownership that yield practical value (e.g., rights to dividends, voting, transferability). For Section 176, transfers or agreements evidencing a future transfer are taxable when they amount to sales or arrangements that secure future transfer or convey beneficial interest.

Characterization of Deposit on Subscription

A deposit on subscription is an advance paid by a prospective subscriber that is in the nature of a liability of the corporation until there is a subscription agreement and issuance of shares. The CTA and the Supreme Court relied on the principle that DST on original issue of shares attaches when a subscription agreement exists and when shares are issued in a manner that confers ownership attributes. Absent an agreement to subscribe, issuance of shares, or evidence that certificates were issued or that the deposit functioned as an issued subscription, the deposit remains a potential future payment and not the taxable event under Section 175.

Evidentiary Findings Made by the CTA and Accepted by the Court

Respondent’s balance sheet for 1998 showed Authorized Capital P2,000,000; Paid-up Capital P250,000; Deposit on Subscription P800,000; and no corresponding increase in Subscribed Capital on the General Information Sheet (GIS), which listed Subscribed Capital as P500,000. Testimony by respondent’s external auditor Miguel Rosario, Jr. confirmed that the P800,000 was a deposit for future subscription, no shares were issued in respect of that amount, and that the subscribed and paid-up capital figures did not include the assessed P800,000. On this basis, the CTA found — and the Supreme Court agreed — that there was no subscription agreement or issuance of shares that would trigger DST under Section 175.

Application of Section 228 (Protesting of Assessment)

Section 228 requires that a taxpayer file a protest within 30 days from receipt of assessment and submit all relevant supporting documents within 60 days from filing the protest; failure to submit such documents renders the assessment final. Here, respondent filed a timely protest on 1 February 2002 and concurrently submitted its GIS and financial statements, which showed the deposit on subscription and the absence of issued shares. Petitioner requested proof of DST payment by letter dated 12 March 2002; respondent replied it could not produce such proof because none existed. Petitioner did not otherwise act on the protest within the 180-day period. The CTA and the Supreme Court interpreted “relevant supporting documents” as those documents necessary to support the taxpayer’s legal position and held that respondent had submitted relevant documents a

Case Syllabus (G.R. No. L-11578)

Procedural Posture and Overview

Petition for Review filed by the Commissioner of Internal Revenue under Rule 45 seeking reversal of the Court of Tax Appeals (CTA) En Banc Decision dated 24 March 2006 in consolidated C.T.A. EB Nos. 60 and 62.
The CTA En Banc decision partially reconsidered the CTA First Division Decision dated 24 September 2004.
The Supreme Court decision in this matter was penned by Justice Carpio. The petition was denied and the CTA En Banc Decision of 24 March 2006 was affirmed.
The denial of the petition disposes of petitioner’s challenge that the CTA erred in disregarding the finality rule of assessments under Section 228 of the Tax Code and petitioner’s claim that respondent is liable to pay documentary stamp tax (DST) of P12,328.45 on deposit on subscription.

Facts — Assessments, Dates, and Administrative Steps

On 28 December 2001, Acting Regional Director Ruperto P. Somera of Revenue Region 6 Manila issued four assessment notices against First Express Pawnshop Company, Inc. as follows:
- Assessment No. 31-1-98: deficiency income tax P20,712.58 with compromise penalty P3,000.
- Assessment No. 31-14-000053-98: deficiency value-added tax (VAT) P601,220.18 with compromise penalty P16,000.
- Assessment No. 31-14-000053-98: deficiency documentary stamp tax (DST) P12,328.45 on deposit on subscription with compromise penalty P2,000.
- Assessment No. 31-1-000053-98: deficiency DST P62,128.87 on pawn tickets with compromise penalty P8,500.
Respondent received these assessment notices on 3 January 2002.
Respondent filed a written protest on 1 February 2002, attaching documents including the General Information Sheet (GIS) and the Balance Sheet as of 31 December 1998.
Because the Bureau of Internal Revenue (BIR) did not act on the protest within 180 days, respondent filed a petition before the Court of Tax Appeals on 28 August 2002.
On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest.

Respondent’s Contentions before the CTA

The Commissioner did not consider supporting documents on interest expenses and donations that affected the deficiency income tax assessment.
Pawnshops are not lending institutions whose services are subject to VAT; therefore, respondent disputed liability for VAT.
No deficiency DST was due on deposit on subscription because Section 180 of the Tax Code does not cover documents or transactions pertaining to respondent’s situation.
Issuance of a pawn ticket did not constitute a pledge under Section 195 of the Tax Code, contesting DST liability on pawn tickets.
Respondent’s attached GIS and Balance Sheet demonstrated that the P800,000 entry was a deposit on subscription for future subscription, with no corresponding issuance of shares or subscription agreement.

Petitioner’s Contentions before the CTA and at the Supreme Court

The assessment notices were valid and correct; the taxpayer bore the burden of proof to impugn their validity or correctness.
Respondent was subject to 10% VAT based on gross receipts under Republic Act No. 7716 (Expanded VAT Law).
BIR Ruling No. 221-91 supports the position that pawnshop tickets are subject to DST.
At the Supreme Court stage, petitioner argued Section 228’s finality rule: respondent failed to submit supporting documents within 60 days from filing the protest, rendering the assessment (including the P12,328.45 DST on deposit on subscription) final, unassailable, and demandable.
Petitioner invoked the presumption of regularity afforded to revenue officers and the deference to administrative expertise and findings of fact.

CTA First Division Ruling (24 September 2004) — Disposition

The petition was partially granted.
Assessment for deficiency DST of P62,128.87 on pawn tickets (Assessment No. 31-1-000053-98) and DST on deposits on subscription of P12,328.45 (Assessment No. 31-14-000053-98) were cancelled and set aside.
The VAT assessment (Assessment No. 31-14-000053-98 for P601,220.18) was affirmed, except for the imposition of compromise penalty which was not sustained for lack of showing of petitioner’s consent thereto.
The respondent was ordered to pay the deficiency VAT of P601,220.18 inclusive of deficiency interest, plus 25% surcharge and 20% delinquency interest per annum from 12 February 2002 until fully paid, pursuant to Sections 248 and 249 of the 1997 Tax Code.
Motions for Reconsideration by both parties were denied by the CTA First Division.

CTA En Banc Ruling (24 March 2006) — Disposition and Findings

The CTA En Banc affirmed respondent’s liability to pay VAT.
The CTA En Banc ordered respondent to pay DST on its pawnshop tickets.
The CTA En Banc found that respondent’s deposit on subscription was not subject to DST and accordingly did not sustain the DST assessment of P12,328.45 on deposit on subscription.
Petitioner elevated only the issue concerning the DST on deposit on subscription to the Supreme Court.

Legal Framework — Documentary Stamp Tax (DST) and Relevant Tax Code Provisions

DST is an excise tax on documents, instruments, loan agreements, and papers evidencing acceptance, sale, transfer, or assignment of obligations, rights or properties incident thereto; it is imposed on the transaction and the privilege of executing specified instruments.
Section 175 (Stamp Tax on Original Issue of Shares of Stock):
- Imposes DST on every original issue of shares of stock at P2.00 per P200 or fractional part thereof of par value; for no-par stocks, DST based on actual consideration.
- DST is premised on issuance of shares and the privilege of issuing shares of stock.
Section 176 (Stamp Tax on Sales, Agreements to Sell, Transfers of Certificates of Stock):
- Imposes DST on sales, agreements to sell, memoranda of sales, deliveries or transfers of stock certificates, due-bills, certificates of obligation, and related instruments at P1.50 per P200 or fractional part thereof.
- Includes transfers by assignment in blank, delivery, or other evidences of transfer even when a certificate is not issued.
Section 195 (Stamp Tax on Mortgages, Pledges and Deeds of Trust):
- Imposes DST on documents evidencing mortgages, pledges, or deeds of trust made as security for payment of definite sums of money, with graduated schedule and rules for fluctuating accounts and future advances.
Section 180 (Stamp Tax on Bonds, Loan Agreements, Promissory Notes, etc.):
- Imposes DST for specified loan and debt instruments at P0.30 per P200 or fractional part thereof, subject to certain exemptions.
Section 228 (Protesting of Assessment):
- Outlines administrative protest procedure: 30 days to file protest from receipt of assessment; within 60 days from filing of the protest, submission of all relevant supporting documents; failure to submit within 60 days renders the assessment final.
- If the protest is denied or not acted upon within 180 days from submis