G.R. No. 177982, October 17, 2008
Fitness by Design, Inc. vs. Commissioner on Internal Revenue

FACTS

On March 17, 2004, the Commissioner on Internal Revenue (CIR) assessed Fitness by Design, Inc. (Fitness by Design) for deficiency income taxes for the tax year 1995 amounting to ₱10,647,529.69. Fitness by Design protested the assessment, arguing it was issued beyond the three-year prescriptive period under the Tax Code and that, having been incorporated only on May 30, 1995, there was no basis to assume it had earned income for that year. On February 1, 2005, the CIR issued a warrant of distraint and/or levy, prompting Fitness by Design to file a Petition for Review before the Court of Tax Appeals (CTA), docketed as CTA Case No. 7160. The CIR, in its Answer, alleged the right to assess had not prescribed under Section 222(a) of the 1997 Tax Code because Fitness by Design filed a false and fraudulent 1995 Income Tax Return by declaring it was in a pre-operation stage and failing to report sales of ₱7,156,336.08, and also failed to file a Value-Added Tax Return. The CIR contended the assessment could be made within ten years after discovery of the fraud or omission. The BIR also filed a criminal complaint against the officers and accountant of Fitness by Design before the Department of Justice. During a preliminary hearing at the CTA on the issue of prescription, Fitness by Design’s former bookkeeper testified that a former colleague, CPA Leonardo Sablan, illegally took custody of the company’s accounting records and turned them over to the BIR. Fitness by Design requested subpoenas for Sablan and for BIR officers, and submitted written interrogatories to them. The CTA, by Resolution dated January 15, 2007, denied the Motion for Issuance of Subpoenas and disallowed the written interrogatories, finding the testimony and documents sought irrelevant and that requiring Sablan to testify would violate laws protecting the identity of informers. Fitness by Design’s Motion for Reconsideration was denied, leading to this Petition for Certiorari alleging grave abuse of discretion by the CTA.

ISSUE

Whether the Court of Tax Appeals committed grave abuse of discretion in denying Fitness by Design’s requests for the issuance of subpoenas and written interrogatories to establish that the documents forming the basis of the tax assessment were illegally obtained, in relation to the issue of prescription and the alleged falsity or fraud of the tax return.

RULING

The Supreme Court dismissed the petition, finding no grave abuse of discretion by the CTA. The Court held that the testimonies, documents, and admissions sought by Fitness by Design were not relevant to the issues before the CTA, which were limited to whether the assessment had prescribed and whether the tax return was false or fraudulent. The Court agreed with the CTA that the subpoenas and interrogatories would violate Section 2 of Republic Act No. 2338, as implemented by Section 12 of Finance Department Order No. 46-66, which prohibits the revelation of the identities of informers of tax law violations. The Court noted that the written interrogatories were clearly intended to confirm that Sablan was the informer, which is prohibited. Furthermore, the Court ruled that the constitutional right of an accused to confront witnesses and to compulsory process does not apply in CTA Case No. 7160, which is a civil case, and even if related to the criminal complaint, the respondents there are the corporate officers, not the corporation itself. Finally, the Court stated that issuance of a subpoena duces tecum for the documents was unnecessary as the CTA had already ordered the CIR to certify and forward all records of the case, and any non-compliance could be addressed through contempt proceedings.