G.R. No. L-17962; April 30, 1965
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. BLAS GONZALES, defendant-appellant.

FACTS

Defendant-appellant Blas Gonzales was a private concessionaire manufacturing and supplying furniture to the U.S. Military Base at Clark Field, Angeles City, since 1946. For the years 1946 and 1947, he filed income tax returns declaring net incomes of P9,352.84 and P16,829.10, respectively, with corresponding tax liabilities. He declared total sales of P1,787,848.32 for both years. An investigation by the Bureau of Internal Revenue (BIR) revealed that the base authorities had actually paid him a total of P2,199,920.50 for furniture delivered during those years, resulting in an underdeclaration of sales by P412,072.18. Further investigation uncovered unreported “local sales” of P124,510.43 for 1946. The BIR considered these amounts as unreported income, leading to a deficiency tax assessment. After reinvestigations and revisions, the BIR ultimately demanded payment of P106,226.75 and P37,849.58 as deficiency income taxes for 1946 and 1947, respectively. Upon Gonzales’s failure to pay, the Republic filed a suit. The lower court declared Gonzales in default for his counsel’s failure to appear at the scheduled hearing and, after the plaintiff presented evidence, rendered a decision ordering him to pay the deficiency taxes plus surcharges and interest.

ISSUE

The primary issue is whether Blas Gonzales, as a private concessionaire within a U.S. Military Base, is exempt from Philippine income tax laws under the United States-Philippine Military Bases Agreement. Secondary issues pertain to the trial court’s denial of his motion to dismiss on grounds of prescription and lack of jurisdiction, its refusal to lift the order of default, and its finding of fraud warranting the imposition of surcharges.

RULING

The Supreme Court affirmed the lower court’s decision. On the main issue, the Court held that the Military Bases Agreement does not exempt private concessionaires like Gonzales from paying Philippine income tax. The tax exemption under Article XVIII of the Agreement applies only to the right to establish government agencies (like concessions) and to the merchandise or services sold by such agencies, not to the income of the concessionaire. The Agreement’s specific provisions on income tax exemption (Article XIII) apply only to members of the U.S. armed forces, certain U.S. nationals, and corporations, not to Philippine concessionaires. Therefore, Gonzales was subject to Philippine income tax laws. The Court also found no merit in Gonzales’s procedural objections, holding that the matter of default and reconsideration lies within the trial court’s discretion, and his counsel’s excuse for absence was insufficient. Finally, the Court upheld the finding of fraud, as the substantial underdeclaration of income for consecutive years indicated a fraudulent intent to evade taxes, justifying the imposition of the 50% surcharge.