EAST ASIA POWER vs. CIR (Tax 2)

EAST ASIA POWER RESOURCES, CORP. -versus- COMMISSIONER OF INTERNAL REVENUE CTA CASE No. 8182 

FACTS:

On April 27, 2007, petitioner filed its income tax return for calendar year 2006 with the BIR  reporting a total tax overpayment of P26, 105,588.00.

On October 1, 2007, petitioner received Letter of Authority (LOA) No. After examination of books of account. Petitioner received from respondent, Notice of Informal Conference. On December 14, 2009, petitioner received a Pre-Assessment Notice (PAN) dated November 20, 2009 informing the former of the deficiency tax findings for calendar year 2006 on income tax, value-added tax (VAT), expanded withholding tax (EWT), and compromise penalty in the amount of P27,788,313.00, P2,631 ,826.23, P493, 182.22, and P25,000.00, inclusive of interest as of November 18, 2009. On January 12, 2010, petitioner received, through registered mail, Formal Letter of Demand assessing petitioner for alleged deficiency income tax in the amount of P28,400,036.96, deficiency VAT of P2,689,762.50, and deficiency EWT of P503,693.79 inclusive of interests as of January 15, 2010 and compromise penalty of P25,000.00, or a total of P31 ,618,493.25 for calendar year 2006.

Petitioner sent a letter of protest disputing the assessments and praying for reconsideration thereof, however denied.

ISSUE:

Whether or not petitioner is liable to pay the aggregate amount of P31 ,618,493.25 inclusive of interest and compromise penalty, representing deficiency income tax, VAT and EWT for taxable year 2006.

RULING:

Compromise penalty - No. Under Revenue Memorandum Order No. 01-90, compromise penalties are only amounts suggested in settlement of criminal liability, and may not be imposed or exacted on the taxpayer in the event that a taxpayer refuses to pay the same. Absent a showing that herein petitioner consented to the compromise penalty, its imposition should be deleted. The imposition of the same without the conformity of the taxpayer is illegal and unauthorized.

Deficiency income tax -  No. The various sales invoices issued by petitioner as well as the journal voucher and official receipt related to the sale of petitioner's fixed asset for taxable year 2006 show that petitioner reports its income on accrual basis of accounting both for income tax and VAT 

purposes. 

Under the accrual method, income is recognized in the period it is earned regardless of whether it has been received or not. The employment of such method of accounting, or any method for that matter, as long as it clearly reflects income, is  recognized for income tax purposes in Section 43 of the NIRC of 1997.

Thus, petitioner has fully accounted for its sales of managerial services for the year 2006 based on the sales invoices it issued for the said year whether or not payments have been received for the said services. 

Likewise, pursuant to Section 32(A)(2) of the NIRC of 1997, petitioner properly reported the gain derived from its sale of fixed asset for the year 2006 part of its "Non-Operating and Other Income."

Evidently, the deficiency income tax assessment on the alleged undeclared sales of P15,293,127.92 was a mere result of respondent's erroneous comparison of the income per petitioner's VAT returns against its collections for the year 2006.