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CIR v. CEBU HOLDINGS

FACTS:

The petitioner in this case is challenging the Decision and Resolution of the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 478, which affirmed the Decision and Resolution of the CTA First Division. The CTA First Division ordered the issuance of a tax credit certificate in the reduced amount of P2,083,878.07 in favor of respondent Cebu Holdings, Inc. (respondent). The respondent, a registered real estate developer, filed its Income Tax Return (ITR) for the year ending on December 31, 2002, claiming an alleged overpayment of P18,992,055.00. The respondent later filed an amended ITR also claiming the same amount. When the Bureau of Internal Revenue (BIR) failed to act upon the respondent's claim for a tax credit certificate, the respondent filed a Petition for Review with the CTA First Division on April 15, 2005. A Court-commissioned Independent Certified Public Accountant (CPA) filed a report stating the findings and observations on the amount of overpaid income tax/excess Creditable Withholding Taxes (CWTs). The CTA First Division agreed with the findings of the Independent CPA, except for the inclusion of P3,857.33 as part of the Creditable Withholding Taxes filed out of period. The CTA First Division held that only the amount of P2,083,878.07 should be issued as a tax credit certificate.

In this case, Cebu Holdings, Inc. (respondent) filed for a tax refund or tax credit in the amount of P15,877,961.02 for taxable year 2002. The Court of Tax Appeals (CTA) First Division disallowed certain creditable tax withholdings (CWTs) amounting to P3,114,093.89, as well as CWTs pertaining to a discrepancy in sales of real properties in the amount of P999.99 and management fees in the amount of P124,500.00. The CTA First Division also found that respondent failed to substantiate the claimed prior year's excess credits, except for the amount of P288,076.04. As a result, the CTA First Division granted respondent's petition for a tax credit certificate in the reduced amount of P2,083,878.07. Both petitioner (Commissioner of Internal Revenue) and respondent filed motions for partial reconsideration, which were denied by the CTA First Division. Respondent subsequently filed an urgent motion to withdraw the petition for review, stating that it would no longer pursue its claim for a tax credit certificate but would instead carry forward the excess creditable income taxes to the succeeding taxable quarters of the succeeding taxable years. The CTA First Division denied respondent's motion. Petitioner then filed a petition for review before the CTA En Banc, challenging the decision and resolution of the CTA First Division. The CTA En Banc affirmed the decision and resolution of the CTA First Division, holding that respondent is entitled only to a tax credit certificate in the amount of P2,083,878.07 for taxable year 2002.

ISSUES:

  1. Whether respondent is entitled to a tax credit certificate in the amount of P2,083,878.07, representing respondent's excess creditable taxes for taxable year 2002.

  2. Whether respondent is liable for deficiency income tax for taxable year 2003.

  3. Whether or not a pre-assessment notice is required in this case.

  4. Whether or not the taxpayer's protest should be granted.

RULING:

  1. The petition is partly meritorious.

  2. No pre-assessment notice is required in this case because the taxpayer carried over the prior year's excess credits which were already fully applied against its income tax liability for the previous year.

  3. The taxpayer's protest is partially granted. The Court orders the Commissioner to issue a tax credit certificate to the taxpayer for the excess creditable taxes for the previous year and to issue a final assessment notice and demand letter for the payment of the taxpayer's deficiency tax liability for the present year.

PRINCIPLES:

  • The requisites for claiming a refund of excess creditable withholding taxes are: (1) the claim for refund was filed within the two-year prescriptive period; (2) the fact of withholding is established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the amount of tax withheld therefrom; and (3) the income upon which the taxes were withheld was included in the income tax return of the recipient as part of the gross income.

  • A taxpayer is entitled to a refundable excess tax credits after deducting substantiated prior year's excess credits and substantiated withheld taxes from the total tax due.

  • Prior year's excess credits cannot be carried over to a succeeding taxable year if it is not substantiated and cannot be offset against the excess creditable taxes covered by a refund claim for a specific taxable year.

  • Taxpayers must substantiate their prior year's excess credits in order to apply them against their income tax liability for the current taxable year.

  • Once the prior year's excess credits have been fully applied against the income tax liability for the current taxable year, there is no remaining excess creditable tax that can be carried over and applied against the income tax due for the succeeding taxable year.

  • A taxpayer cannot carry over and apply unsubstantiated prior year's excess credits to the succeeding taxable year.

  • The tax authorities must issue a final assessment notice and demand letter for the payment of a taxpayer's deficiency tax liability.

  • A pre-assessment notice is generally required before imposing any deficiency tax assessment, except in certain cases provided by law.

  • Taxpayers must be informed in writing of the law and the facts on which an assessment is made, otherwise, the assessment is void.

  • Taxpayers have the right to protest an assessment, and the protest must be filed within the prescribed period and in the required form and manner.

  • If the protest is denied in whole or in part, or if it is not acted upon within the prescribed period, the taxpayer may appeal to the Court of Tax Appeals.