Republic v.

Gonzales and penalty incident to delinquency was forthwith issued to the

appellant.
Facts  The assessment was further revised by segregating the appellant's
 Since 1946, the defendant-appellant, Blas Gonzales, has been a tax liability for the two years in question. Pursuant to a memorandum
private concessionaire in the U.S. Military Base at Clark Field, of the BIR Regional Director of San Fernando, Pampanga, another
Angeles City. He was engaged in the manufacture of furniture and, demand was made upon the appellant for the payment of income
per agreement with base authorities, supplied them with his taxes due from him for the years 1946 and 1947.
manufactured articles.  When the appellant failed to pay the above demand, the appellee
 On March 1, 1947 and March 1, 1948, the appellant filed his income instituted the present suit.
tax returns for the years 1946 and 1947, respectively, with the then  The appellant filed with the lower court a motion to dismiss on the
Municipal Treasurer of Angeles, Pampanga. grounds of prescription and lack of jurisdiction. The motion was
 Upon investigation, however, the Bureau of Internal Revenue denied. Also, for failure of the appellant or his counsel to appear at
discovered that for the years 1946 and 1947, the appellant had been the scheduled hearing, the defendant-appellant was declared in
paid a total of P2,199,920.50 for furniture delivered by him to the default. The motion for reconsideration of this order was also denied.
base authorities. The appellant did not deny the amount.  The lower court ruled in favor of the appellee.
 Compared against the sales figure provided by the base authorities,
therefore, the amount of P1,787,848.32 declared by the appellant as Issues
his total sales for the two tax years in question was short or 1. WoN the appellant is subject to Philippine tax laws
underdeclared by some P412,072.18. Accordingly, the appellee  YES
considered this last mentioned amount as unreported item of income  Appellant claims that as he is a concessionaire in an American Air
of the appellant for 1946. Base, he is not subject to Philippine tax laws pursuant to the United
 Further investigation into the appellant's 1946 profit and loss States-Philippine Military Bases Agreement. In support of the claim,
statement disclosed "local sales," that is, sales to persons other than the following provision of the above Bases Agreement is invoked:
the United States Army, in the amount of P124,510.43. As a result,
the appellee likewise considered the said amount as unreported ARTICLE XVIII.—Sales and Services within the Bases
income for the said year. The full amount of P124,510.43 was 1. It is mutually agreed that the United States shall have the right to
considered as taxable income because the appellant could not establish on bases, free of all license; fees; sales excise or other
produce the books of account on the same upon which any taxes or imposts; Government agencies including concessions, such
deduction could be based. as sales commissaries and post exchanges, messes and social
 Adding up the above two items considered as unreported income the clubs, for the exclusive use of the United States military forces and
appellee assessed the appellant the total sum of P340,179.84. authorized civilian personnel and their families. The merchandise or
 BIR sent a letter of demand to the appellant for the above amount as services sold or dispensed by such agencies shall be free of all
deficiency income tax, the sum of P300.00 as compromise for his taxes, duties and inspection by the Philippine authorities.
failure to keep the required journal and ledger, and finally, the sum of Administrative measures shall be taken by the appropriate
P153.75 as additional residence tax, all for the year 1946. authorities of the United States to prevent the sale of goods which
 On request of the appellant, BIR reinvestigated the case. However, are sold under the provisions of this Article to persons not entitled to
the appellee, through the CIR, insisted on the payment of the original buy goods at such agencies, and, generally, to prevent abuse of the
assessment of P340,179.84. It suggested, though, that if the privileges granted under this Article. There shall be cooperation
appellant disagreed with the said finding he could submit the same between such authorities and the Philippines to this end.
for study, review and decision by the Conference Staff of the BIR. 2. Except as may be provided in any other agreements, no persons
 In due time, the above assessment was heard before the said body shall habitually render any professional services in a base except to
which, subsequently, recommended a reduction of the same to or for the United States or to or for the persons mentioned in the
P249,289.26, as deficiency income tax for the year 1946. After the preceding paragraph. No business shall be established in a base, it
recommendation was approved by the Bureau, the corresponding being understood that the Government agencies mentioned in the
assessment notice for the sum of P249,289.26 as deficiency income preceding paragraph shall not be regarded as businesses for the
tax and 50% surcharge for the year 1946 and 1% monthly interest purpose of this Article.
 The provision of the Military Bases Agreement has already been Agreement, because, as already stated, said terms are employed
interpreted by the Court in previous cases. It stated that: with specific application to the right to establish agencies and
o The provision plainly contemplates limiting the exemption concessions within the bases and to the merchandise or services
from the licenses, fees and taxes enumerated therein to the sold or dispensed by such agencies or concessions.
right to establish Government agencies, including
concessions, and to the merchandise or services sold or 2. WoN the appellant is guilty of fraud
dispensed by such agencies.  YES
o The income tax, which is certainly not on the right to  Appellant argues that the facts invoked by the lower court do not
establish agencies or on the merchandise or services sold or sufficiently establish fraud.
dispensed thereby, but on the owner or operator of such  As rightly argued by the Solicitor General's office, since fraud is a
agencies, is logically excluded. state of mind, it need not be proved by direct evidence but may be
o The payment of the income tax is perfectly content with and inferred from the circumstances of the case. The failure of the
would not frustrate the obvious objective of the agreement, appellant to declare for taxation purposes his true and actual income
namely, to enable the members of the United States Military derived from his furniture business at the Clark Field Air Base for two
Forces and authorized civilian personnel and their families to consecutive years is an indication of his fraudulent intent to cheat the
procure merchandise or services within the bases at reduced Government of its due taxes.
prices.  The substantial undeclaration of income in the income tax returns of
 Even the exemption in favor of members of the United States Armed the appellant for four consecutive years, coupled with his intentional
Forces and nationals of the United States does not include income overstatement of deductions made the imposition of the fraud
derived from Philippine sources. penalty proper.
 The appellant cannot seek refuge in the use of "excise" or "other
taxes or imposts" in paragraph 1 of Article XVIII of the Military Bases