Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 77154 June 30, 1987 JESUS DEL ROSARIO, petitioner, vs. HON. JAIME HAMOY, Presiding Judge, RTC, Branch XV, Region IX, Zamboanga City, and WILEADO DE LEON, DOMINGO DE LEON, CRISTINO DE LEON, HENCIANO DE LEON, MARCIANO AIZON, and EPIFANIA DE LEON, respondents. SARMIENTO, J.: For want of a one-peso documentary stamp in a special power of attorney for pre-trial purposes, in lieu of the personal appearance of the plaintiff, the petitioner in this case, the respondent Judge declared him non-suited and dismissed the complaint "for failure of the plaintiff to appear for pre-trial conference. 1 We do not agree. The respondent Judge manifestly erred. He acted with indecent haste. He could have easily required the counsel for the plaintiff to buy the required one-peso documentary stamp outside the court room and affix the same to the special power of attorney and that respite would not have taken ten minutes. Had he been less technical and more sensible, the present proceedings and the consequent waste of time of this Court and of his own would have been avoided. The respondent trial Judge had three chances to rectify his grave error but he missed all of them. He was adamant. By such rigidity he denied the petitioner substantial justice. (1) He procrastinated when the plaintiff and his counsel immediately after the hearing on the same morning of July 25, 1986, made oral representations with him inside his chamber for the reconsideration of his order declaring the plaintiff non-suited and dismissing the complaint. The plaintiff, through his counsel, explained that he was actually inside the court room while his lawyer and the defendants' counsel, were arguing, but he (plaintiff) was too timorous to interrupt the proceedings and make known his presence to his counsel or to the court. Despite the immediacy of the representations and the plausibility of this explanation considering the plaintiff's nescience, being merely an agricultural tenant and can hardly write his name, the respondent Judge still required him to file a written motion and set it for hearing "in accordance with the Rules of Court." (2) Complying, the plaintiff's counsel forthwith filed the written motion, 2 duly supported by an Affidavit of Merit of the plaintiff, on the same day, July 25, 1986, and set it for hearing as ordered by the respondent Judge. This motion for reconsideration was denied "for lack of merit" on August 29, 1986. 3 The order of denial states in part: xxx xxx xxx A judicious appraisal of the facts alleged in the motion for reconsideration and in the accompanying affidavit of merit fail to convince the Court to reconsider the Order. As admitted by the plaintiff, he was inside the Court room when the case was caned for pre-trial conference and when his counsel, Atty. Alejandro Saavedra and defendants' counsel Atty. Navarro Belar Navarro were arguing about the insufficiency of the special power of attorney, but he never made known his presence to the Court or to his counsel or to the defendants. He approached his counsel and presented himself to him when they were already outside the Courtroom and after the case was already dismissed. To the mind of the Court, the foregoing circumstances detailed by the plaintiff do not constitute excusable negligence or mistake. 4 xxx xxx xxx (3) Undaunted, seven days later, on September 5, 1986, the petitioner filed a second motion for reconsideration 5 verified by his counsel, setting it for hearing on September 19, 1986, which was promptly denied on the same day of the hearing. And, on October 7, 1986, as a coup de grace, an over-kill to be sure, the respondent Judge issued a court order which reads: xxx xxx xxx The Court having denied the second motion for reconsideration for not being allowed by Section 4 of the Interim Rules as per Order entered on September 19, 1986, the case at bar is therefore considered closed and terminated. SO ORDERED. 6 xxx xxx xxx

The respondent Judge lost sight of the fact that even the Rules of Court themselves, fortified by jurisprudence, mandate a liberal construction of the rules and the pleadings in order to effect substantial justice. 7 After an, "[O]verriding all the foregoing technical considerations is the trend of the rulings of this Court to afford every party-litigant the amplest opportunity for the proper and just determination of his cause, freed from the constraints of technicalities. 8 In a recent case 9 where the trial court, as in this instance, declared the petitioner non-suited for failure to appear at the pre-trial conference, and consequently dismissed the complaint, this Court reiterated the doctrine of liberality in the construction of the rules of procedure to be followed by all courts. While it is true under Section 1, Rule 20 of the Rules of Court, it is mandatory for the parties and their counsel to appear at the pretrial to consider inter-alia "the possibility of an amicable settlement, the simplification of the issues, the possibility of obtaining stipulations or admission of facts, totally or partially, and such other matters as may aid in the prompt disposition of the action," and that a party who fails to appear at the pre-trial may be non-suited or considered as in default, this rule was by no means intended as an implacable bludgeon but as a tool to assist the trial courts in the orderly and expeditious conduct of trials. Time and again WE have emphasized that the rule should be liberally construed in order to promote their object and assist the parties in obtaining not only speedy, but more importantly, just and inexpensive determination of every action and proceeding. 10 Practically on all fours with this case is Gabucan vs. Hon. Judge Luis D. Manta, et al., 11 in which the petition for the probate of a notarial will was dismissed on the sole ground that the will did not bear a thirty-centavo documentary stamp, and, hence, according to the respondent Judge, it was not admissible in evidence, citing section 238 of the Tax Code, now section 250 of the 1977 Tax Code, which reads: xxx xxx xxx SEC. 238. Effect of failure to stamp taxable document. An instrument, document, or paper which is required by law to be stamped and which has been signed, issued, accepted, or transferred without being duly stamped, shall not be recorded, nor shall it or any copy thereof or any record of transfer of the same be admitted or used in evidence in any court until the requisite stamp or stamps shall have been affixed thereto and cancelled. No notary public or other officer authorized to administer oaths shall add his jurat or acknowledgment to any document subject to documentary stamp tax unless the proper documentary stamps are affixed thereto and cancelled. 12 In reversing the interpretation of the provisions of sections 238 and 250 of the old Tax Codes above copied which are Identical to those of section 214 of the National Internal Code of 1986, as amended, the law now obtaining, this Court held: xxx xxx xxx What the probate court should have done was to require the petitioner or proponent to affix the requisite thirtycentavo documentary stamp to the notarial acknowledgment of the will which is the taxable portion of that document. That procedure may be implied from the provision of section 238 that the non-admissibility of the document, which does not bear the requisite documentary stamp, subsists only "until the requisite stamp or stamps shall have been affixed thereto and cancelled." Thus, it was held that the documentary stamp may be affixed at the time the taxable document is presented in evidence (Del Castillo vs. Madrilena, 49 Phil. 749). If the promissory note does not bear a documentary stamp, the court should have allowed plaintiff's tender of a stamp of supply the deficiency. (Rodriguez vs. Martinez, 5 Phil. 67, 71. Note the holding in Azarraga vs. Rodriguez, 9 Phil. 637, that the lack of the documentary stamp on a document does not invalidate such document. See Cia. General de Tabacos vs. Jeanjaquet, 12 Phil. 195, 201-2 and Delgado and Figueroa vs. Amenabar, 16 Phil. 403, 405-6.) 13 This is as it should be because the quality of justice is not strained. WHEREFORE, the orders of the trial court complained of the first dated July 25, 1986 declaring the petitioner non-suited and dismissing his complaint, and those dated August 29, 1986 and October 7, 1986, denying the petitioner's motions for reconsideration are hereby ANNULLED and SET ASIDE. Civil Case No. 3331 is hereby remanded to the respondent trial court for further proceedings. No costs. Let a copy of this Decision be attached to the personal record of the respondent judge. SO ORDERED.

Yap (Chairman), Narvasa, Melencio-Herrera, Cruz, Feliciano and Gancayco, JJ., concur. Footnotes
1 Rollo, 17-18. 2 Id., 15. 3 Id, 13. 4 Id., 19. 5 Id., 10-11. 6 Id, 20. 7 Maturan vs. Araula, No. L-57392, January 30, 1982, 111 SCRA 615 (1982). 8 De Mesa Abad vs. Court of Appeals, No. L-42225. July 9, 1985, 137 SCRA 416 (1985); citing Rodriguez vs. Court of Appeals, No. L-37522, November 28, 1975, 68 SCRA 262 (1975); See also, Sigueriza vs. Court of Appeals, No. L-44050, July 16, 1985, 137 SCRA 570 (1985). 9 Tejero vs. Rosete, No. L-55102, June 19, 1985, 137 SCRA 69 (1985). 10 Tejero vs. Rosete, supra, 74. 11 No. L-51546, January 28, 1980, 95 SCRA 751(1980). 12 Supra, 753. 13 Supra, 754.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 118043 July 23, 1998 LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMG LIFE INSURANCE CO. INC.), petitioner, vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. MENDOZA, J.: This is a petition for review on certiorari of the decision rendered on November 18, 1994 by the Court of Appeals 1 reversing, in part, the decision of the Court of Tax Appeals in C.T.A. Case No. 4583. The facts are not in dispute. 2 Petitioner, now the Jardine-CMG Life Insurance Company, Inc., is a domestic corporation engaged in the life insurance business. In 1984, it issued 50,000 shares of stock as stock dividends, with a par value of P100 or a total of P5 million. Petitioner paid documentary stamp taxes on each certificate on the basis of its par value. The question in this case is whether in determining the amount to be paid as documentary stamp tax, it is the par value of the certificates of stock or the book value of the shares which should be considered. The pertinent provision of law, as it stood at the time of the questioned transaction, reads as follows: Sec. 224. Stamp tax on original issues of certificates of stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of certificates of stock by any association, company or corporation, there shall be collected a documentary stamp tax of one peso and ten centavos on each two hundred pesos, or fractional part thereof, of the par value of such certificates: Provided, That in the case of the original issue of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration received by the association, company, or corporation for the issuance of such stock, and in the case of stock dividends on the actual value represented by each share. 3 The Commissioner of Internal Revenue took the view that the book value of the shares, amounting to P19,307,500.00, should be used as basis for determining the amount of the documentary stamp tax. Accordingly, respondent Internal Revenue Commissioner issued a deficiency documentary stamp tax assessment in the amount of P78,991.25 in excess of the par value of the stock dividends. Together with another documentary stamp tax assessment which it also questioned, petitioner appealed the Commissioner's ruling to the Court of Tax Appeals. On March 30, 1993, the CTA rendered its decision holding that the amount of the documentary stamp tax should be based on the par value stated on each certificate of stock. The dispositive portion of its decision reads: WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn. SO ORDERED. In turn, respondent Commissioner of Internal Revenue appealed to the Court of Appeals which, on November 18, 1994, reversed the CTA's decision and held that, in assessing the tax in question, the basis should be the actual value represented by the subject shares on the assumption that stock dividends, being a distinct class of shares, are not subject to the qualification in the law as to the type of certificate of stock used (with or without par value). The appellate court, therefore, ordered: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement. SO ORDERED. Hence, this petition with the following assignment of error: RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT STOCK DIVIDENDS INVOLVING SHARES WITH PAR VALUE ARE SUBJECT TO DOCUMENTARY STAMP TAX BASED ON THE BOOK VALUE OF SAID

SHARES WHICH RULING IS CONTRARY TO WHAT IS CLEARLY PROVIDED FOR BY SECTION 224 (NOW SECTION 175) OF THE TAX CODE. The petition has merit. First. In ruling that the book value of the shares should be considered in assessing the documentary stamp tax, the Court of Appeals stated: There are three (3) classes of stocks referred to in Section 224 (now 175) of the Internal Revenue Code: (a) Certificate of Stocks with par value, (b) Certificate of Stock with no par value and (c) stock dividends. The first two (2) mentioned are original issuances of the corporation, association or company while the third ones are taken by the corporation, association or company out of or from their unissued shares of stock, hence are also originals. Undoubtedly, all the three classifications are subject to the documentary stamp tax. Conformably, in the case of stock certificates with par value, the documentary stamp tax is based on the par value of the stock; for stock certificates without par value, the same tax is computed from the actual consideration received by the corporation, association or company; but for stock dividends, documentary stamp tax is to be paid "on the actual value represented by each share." Since in dividends, no consideration is technically received by the corporation, petitioner is correct in basing the assessment on the book value thereof rejecting the principles enunciated in Commissioner of Internal Revenue vs. Heald Lumber Co. (10 SCRA 372) as the said case refers to purchases of no-par certificates of stocks and not to stock dividends. 4 Apparently, the Court of Appeals treats stock dividends as distinct from ordinary shares of stock for purposes of the then 224 of the National Internal Revenue Code. There is, however, no basis for considering stock dividends as a distinct class from ordinary shares of stock since under this provision only certificates of stock are required to be distinguished (into either one with par value or one without) rather than the classes of shares themselves. Indeed, a reading of the then 224 of the NIRC as quoted earlier, starting from its heading, will show that the documentary stamp tax is not levied upon the shares of stock per se but rather on the privilege of issuing certificates of stock. A stock certificate is merely evidence of a share of stock and not the share itself. This distinction is clear in the Corporation Code, to wit: Sec. 63. Certificate of stock and transfer of shares. The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. 5 Stock dividends are in the nature of shares of stock, the consideration for which is the amount of unrestricted retained earnings converted into equity in the corporation's books. 6 Thus, A "stock dividend'' is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of stock instead of cash, and is properly payable only out of surplus profits. So, a stock dividend is actually two things: (1) a dividend and (2) the enforced use of the dividend money to purchase additional shares of stock at par . . . 7 From the foregoing, it is clear that stock dividends are shares of stock and not certificates or stock which merely represent them. There is, therefore, no reason for determining the actual value of such dividends for purposes of the documentary stamp tax if the certificates representing them indicate a par value. The Solicitor General himself says that, based on the then 224, there are only two bases for determining the amount of the documentary stamp tax: An examination of the structure of the main provision of Sec. [224] of the NIRC will show that it intends to classify the tax bases into two, either the par value, or the actual consideration or actual value. It specifies in the first part that the

basis for the imposition of the documentary stamp tax on shares of stocks belonging to the first category, discussed in the early part of this comment, shall be the face value. In contradistinction, the provision specifies in the proviso that for the second and third categories, the basis for the tax shall not be the face value. Rather, the basis is either the actual consideration received by the corporation for the share or the actual value of the share. 8 Apparently, the former tax code sought to distinguish between stock dividends without par value and other transactions involving ordinary shares of stock without par value in the second clause of the then 224 in order to prevent claims that the former are exempt from documentary stamp taxes as, unlike in the case of ordinary shares, corporations actually receive nothing from their stockholders in exchange for such stock dividends. Hence the provision that, in the case of stock dividends, the amount of the documentary stamp tax must be based on the actual value of each share. This is the only purpose for the distinction in the second clause of the subject provision. Second. It is error for the Solicitor General to contend that, under the then 224 of the NIRC, the basis for assessment is the actual value of the business transaction that is the source of the original issuance of stock certificates. 9 To the contrary, the documentary stamp tax here is not levied upon the specific transaction which gives rise to such original issuance but on the privilege of issuing certificates of stock. As we have held in several cases: A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. It is an excise upon the facilities used in the transaction of the business separate and apart from the business itself. (Du Pont v. U.S., 300 U.S. 150; Thomas v. U.S., 192 U.S., 363; Nicol v. Ames, 173 U.S. 509). With respect to stock certificates, it is levied upon the privilege of issuing them; not on the money or property received by the issuing company for such certificates. Neither is it imposed upon the share of stock. As Justice Learned Hand pointed out in one case, documentary stamp tax is levied on the document and not on the property which it described, (Empire Trust Co. v. Hoey, 103 F 2d. 430). . . . 10 Third. Settled is the rule that, in case of doubt, tax laws must be construed strictly against the State and liberally in favor of the taxpayer. This is because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. 11 That such strict construction is necessary in this case is evidenced by the change in the subject provision as presently worded, which now expressly levies the said tax on shares of stock as against the privilege of issuing certificates of stock as formerly provided: Sec. 175. Stamp Tax on Original Issue of Shares of Stock. On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on the actual value represented by each share. 12 WHEREFORE, the decision of the Court of Appeals is REVERSED insofar as the deficiency tax assessment on stock dividends is concerned and the decision of the Court of Tax Appeals is reinstated. SO ORDERED. Regalado, Melo, Puno and Martinez, JJ., concur.
# Footnotes 1 Per Justice Conrado M. Vasquez, Jr. and concurred in by Justices Jaime M. Lantin and Ma. Alicia Austria-Martinez. 2 Rollo, pp. 2-5, 83-84. 3 P.D. No. 1158, 224 (1977) (emphasis added). 4 Rollo, pp. 31-32 (emphasis appellate court's). 5 Batas Pambansa Blg. 68, 63 (1980). 6 CORPORATION CODE, 62 (5). 7 Nielson & Company, Inc. v. Lepanto Consolidated Mining Company, 26 SCRA 540, 568 (1968). 8 Rollo, p. 153.

9 Id, pp. 87-92. 10 Commissioner of Internal Revenue v. Heald Lumber Co., 10 SCRA 372, 376 (1964); reiterated in Philippine Consolidated Coconut Industries, Inc. v. Collector of Internal Revenue, 70 SCRA 22 (1976); Commissioner of Internal Revenue v. Construction Resources of Asia, Inc., 145 SCRA 671 (1986). 11 Commissioner of Internal Revenue v. Fireman's Fund Insurance Company, 148 SCRA 315 (1987); Collector of Internal Revenue v. La Tondea, Inc., 5 SCRA 665 (1962); Manila Railroad Co. v. Collector of Customs, 52 Phil. 950 ( 1929). 12 P.D. No. 1158, 175, as amended by R.A. No. 8424 (1997) (emphasis added).

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. L-68230 November 25, 1986 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CONSTRUCTION RESOURCES OF ASIA, INC., and THE COURT OF TAX APPEAL, respondents. The Solicitor General for petitioner. Marcelino C. Catris for respondents. GUTIERREZ, JR., J.: This is a petition for review of the decision of the respondent Court of Tax Appeals dated November 25, 1983, cancelling forlack of sufficient basis the assessment by the Commissioner of Internal Revenue of documentary and science stamps taxesagainst the private respondent in the amount of P89,400.00. Petitioner likewise appeals the resolution of the respondentcourt denying its motion for reconsideration. The facts as found by the respondent court are not disputed: Petitioner is a domestic corporation, duly registered with the Overseas Construction Board as an overseas contractor (pars. I and II, Petition). In July, 1977, it entered into a contract with the Malaysian government for the construction of a road at Sabah (par. II, Petition). In connection therewith, petitioner incurred foreign loans in the amount of $3,900,000.00 at 9-1/16% interest per annum (p. 73, B.I.R.rec.) For the period from December 7, 1977 to June 5, 1978, petitioner paid the sum of $179,156.25 to the foreign creditors as interest on its loan (lbid). In an investigation conducted by respondent's examiners, it was ascertained that petitioner failed to file withholding tax return and to withhold 15% tax on interest on foreign loans remitted abroad (pp. 72-73, BIR rec.). It was also ascertained that petitioner failed to purchase and affix the corresponding documentary and science stamps on the stock certificates issued by it covering P17,880,000.00 worth of shares pursuant to Sections 222 and 224 of the Tax Code. (p59, BIR rec.) Thus, in a demand letter dated January 25, 1980 (pp 86-87, BIR rec.), respondent sought payment of withholding taxat-source in the amount of P300,170.46, computed as follows: 4th quarter 1977 ..................................... P42,742.91 1st quarter (Jan.-March 1978) .............. 149,976.82 2nd quarter (Apr.-June 1978) ............... 107,450.73 Total withholding tax with interest & penalties ............ P300,170.46 In a letter dated March 5, 1980, respondent demanded payment of petitioner's documentary and science stamps tax liability in the sum of P89,400.00, computation of which follows: P17,880,000.00 .50 doc. P44,700.00 200 =P89,400.00 x .50 sci. = 44,700.00 Total .....................P89,400.00

Petitioner, in letters dated November 7, 1979 and February 15, 1980, protested the assessment for withholding taxat-source, stating that the actual payment of interest was made only on June 5, 1978 and, therefore, it had nothing yet to withhold in 1977. Petitioner seas contractor, it is exempt from the withholding tax-at-source provisions of the Tax Code (par IV, Petition). As regards its documentary and science stamps tax liability, petitioner contends that up to the date of the filing of its petition with this Honorable Court, no actual transfer of ownership of shares has been effected. Per investigation of respondent's examiners, however, it was ascertained that the shares have been duly issued and, therefore, the corresponding amount of documentary and science stamps should have been properly affixed and paid. Consequently, in a letter dated April 30, 1981 (p. 109 BIR rec.) respondent denied petitioner's protest. xxx xxx xxx On apeal, the Court of Tax Appeals affirmed the assessment by the petitioner of the withholding tax-at-source for the fourth quarter of 1977 and the first and second quarters of 1978 in the amount of P299,720.16, plus delinquency penalties on the interest payments remitted abroad. The respondent court, however, denied the assessment for documentary and science stamps taxes on the ground that "there is absolutely nothing in the records which will show or indicate that the stock certificates on the paid-in-capital of P17,880,000.00 were issued or delivered, actually or constructively, to the stockholders, granting that such paid-in-capital was originally issued." It ruled that the bare statement of the petitioner's examiners that the paid-in-capital of P17,880,000.00 which was originally issued was not subjected to documentary and science stamps taxes, unaccompanied by inadequate evidence, does not constitute sufficient basis to sustain the imposition of the said taxes in the amount of P89,700.00. The petitioner filed a motion for reconsideration but the same was denied. Hence, he filed this petition raising the issue of whether or not the liability to pay documentary and science stamps taxes attaches upon the issuance of certificates of stocks or upon delivery thereof. The petitioner maintains that the documentary and science stamps taxes are taxes on the privilege to issue shares of stocks and that they accrue at the time the shares of sstocks are issued because that is the transaction that is subject to the tax. Therefore, delivery to the stockholders of the certificate evidencing the issuance of shares is not essential to the accrual of the tax. Furthermore, the petitioner argues that the respondent court should have given more weight to the examiners' findings that the private respondent had a paid-incapital of P17,880,000.00 and that the corresponding certificates os stocks issued were not taxes, rather than the certification of the acting Corporate Secretary of the private respondent explaining the alleged difficulty of the transfer of ownership over the capital equipment contributed by some stockholders. Onthe other hand, the private respondent contends that the documentary and science stamps taxes are not levied or collected upon the transaction or on the business itself but on thedocument evidencing the transaction; and that the respondent:court took into consideration in its decision not only the non-delivery of the certificate of stocks but the fact as well that theshares of stocks of the private respondent have not yet beenfully paid for by its stockholders and thus, the certificates inquestion cannot as yet be issued and be levied upon by thepetitioner. On the question of whether or not the certificate of stocks,to be taxable, must be delivered to their respective stock-holders, we rule that delivery either actual or constructive, is not necessary. Section 224 of the National Internal Revenue Code provides: Stamp tax on original issue of certiftcates of stock. On everyoriginal issue, whether on organization, reorganization, or for anylawful purpose, of certificates of stock by any association, company,or corporation, there shall be collected a documentary stamp tax ofone peso and ten centavos on each two hundred pesos, or fractionalpart thereof, of the par value of such certificates: Provided, that in the case of the original issue of stock without par value the amount ofthe documentary stamp tax herein prescribed shall be based upon theactual consideration received by the association, company, or cor-poration for the issuance of such stock, and in the case of stockdividends, on the actual value represented by each share. (As amend-ed by PD No. 1457). It is clear from the above-quoted provision that for theaforestated tax to attach, the certificates of stocks only needto be issued but not delivered. As to the what the word "issue"contemplates in the context of Section 224, we cite the case of Philippine Consolidated Coconut Ind, Inc. v. Coll. of Int. Rev.(70 SCRA 22, 26-28), wherein we ruled: A cursory perusal of the above provision clearly shows that the documentary stamp tax is imposed on every original issue of a certificate of stock (the document evidencing ownership of shares of stock in the corporation), and that a documentary stamp tax is in the nature of an excise tax because it is levied upon the privilege, the opportunity and the facility of issuing certificates of stock. It being a levy on the original issue of a certificate of stock (sic). The documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. The crucial point therefore, in the case before Us is the proper interpretation of the word "issue." In other words, when is the certificate of stock deemed "issued" for the purpose of imposing the documentary stamp tax? Is it

at the time the certificates of stock are printed, at the time they are filled up (in whose name the stocks represented in the certificate appear as certified by the proper officials of the corporation),at the time they are released by the corporation, or at the time theyare in the possession (actual or constructive) of the stockholders owning them? xxx xxx xxx Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face.The stocks can be alienated; the dividends or fruits derived there from can be enjoyed, and they can be conveyed, pledged or encumbered.The certificate as issued by the corporation, irrespective of whetheror not it is in the actual or constructive possession of the stockholder,is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended. xxx xxx xxx Predicated on the above reasons, We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein thestockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value fortheir owners. The delivery of the certificates of stocks to the private respondent's stockholders whether actual or constructive, is not essential for the documentary and science stamps taxes to attach. What is taxed is the privilege of issuing shares of stockand, therefore, the taxes accrue at the time the shares are issued. The only question before us is whether or not said private respondents issued the certificates of stock covering the paid-in-capital of P17,880,000.00. When the private respondent first received the petitioner's letter of assessments, it only disputed the withholding tax-at-source assessment. In its letter dated November 7, 1979, it did not dispute or question the assessment on documentary and science stamps taxes. Likewise, in its letter of February 15, 1980, the private respondent only requested for a reinvestigation with regard to the assessment of the interests and surcharges on its foreign loan and the surcharges and penalties thereof. Even in its appeal before the respondent court, the private respondent merely stated that "due to the difficulty inthe formal transfer of the contributed capital of the stockholders to the petitioner corporation, the bulk of them being in capital equipment and capital assets, the petitioner (now private respondent) is unable up to the present to issue thecorresponding certificates of stocks; consequently, the corresponding documentary and science stamps taxes have not as yet been affixed on the certificates of stocks;" and in its prayer, the private respondent only asked for further time to be allowed to settle the documentary and science stamps taxes as it is now undertaking the speedy transfer of the ownershipof the assets to its capital base. In other words, the private respondent never disputed the amount of the documentary and science stamps taxes assessment but only asked that it be given more time to be able to pay them after it had formally transferred in its favor the contributed capital of its stockholders. It has also not denied, until now, that it received a paid-in-capital in the amount of P17,880,000.00. This belated denial of the private respondent and the fact that it did not initially dispute either the amount of assessment or the act of levy itself lend more credence to the report of petitioner's examiners that upon investigation, they found that the private respondent received a paid-in-capital of P17,880,000.00 for which certificates of stock were issued but that the documentary and science stamps taxes thereof were not paid. Furthermore, we agree with the petitioner that the respondent court should have given more weight to the findings and assessments of the petitioner's examiners rather than the mere certification of the acting corporate secretary of the private respondent that it has not issued the certificates of stocks yet because of the difficulty in the formal transfer of the contributed capital of its stockholders to its corporate assets. In the case of Collector of Internal Revenue v. Bohol LandTrans. Co. (1 07 Phil. 965, 974), this Court stated that: Since no evidence was presented to substantiate the errors that are claimed to have been committed by the Collector in making the assessments for the years 1948, 1949 and 1950, the trial court had no other alternative than to resort to the legal truism that "all presumptions are in favor of the correctness of tax assessments." The burden of proof is on the taxpayer to show the contrary. This the company failed to do. This action finds support in the followingauthorities: All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the state in the various counties who have to do with the assessment of property for taxation will knowingly violate the duties imposed upon them by law. As a logical out growth of the presumption in favor of the validity of assessments, when such assessments are assailed, the burden of proof is upon the complaining party. It is incumbent upon the property owner clearly to show that the assessment was erroneous, in order to relieve himself from it. (51 AM. Jur, pages 620-621)." (Interprovincial Autobus Co., Inc. v. Collector of InternalRevenue, 98 Phil., 290; 52 Off. Gaz., [2]791.)

We accordingly rule that the private respondent is liable for the documentary and science stamps taxes in the amount of P89,400.00 covering the paid-in-capital of Pl7,880,000.00. WHEREFORE, the petition is hereby GRANTED and thedecision of the respondent Court of Tax Appeals dated November 25, 1983 is ANNULLED and SET ASIDE. The private respondent is ordered to pay the petitioner the amount of EIGHTY NINE THOUSAND FOUR HUNDRED PESOS (P89,400.00). SO ORDERED. Feria (Chairman), Fernan, Alampay, and Paras, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 119176

March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.) and THE COURT OF APPEALS, respondents. KAPUNAN, J.: This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583. The facts of the case are undisputed. Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial sum assured. In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares, represented by its book value, was P19,307,500.00. Documentary stamp taxes were paid based only on the par value of P5,000,000.00 and not on the book value.1wphi1.nt Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as follows:
On Policies Issued: Total policy issued during the year Documentary stamp tax due thereon (P1,360,054,000.00 divided by P200.00 multiplied by P0.35) Less: Payment Deficiency Add: Compromise Penalty P1,360,054,000.00

P 2,380,094.50 P 1,915,495.75 P 464,598.75 300.00 -----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No. 4583. On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision reads: WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the same are considered withdrawn.

SO ORDERED.1 Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of Appeals promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock dividends is the actual value or book value represented by the shares. The dispositive portion of the Court of Appeals decision states: IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs pronouncement. SO ORDERED.2 A motion for reconsideration of the decision having been denied,3 both the Commissioner of Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the Court of Appeals decision which invalidated the deficiency assessment on the insurance policy, attributing the following errors: THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY. THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.4 Section 173 of the National Internal Revenue Code on documentary stamp taxes provides: Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the document is made, signed, issued, accepted, or transferred when the obligation or right arises from Philippine sources or the property is situated in the Philippines, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National Internal Revenue Code which states in part: Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by whatever name the same may be called, whereby any insurance shall be made or renewed upon any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two hundred pesos per fractional part thereof, of the amount insured by any such policy. Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and distinct from the main agreement and involves another transaction; and that, while no new policy was issued, the original policy was essentially re-issued when the additional obligation was assumed upon the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on the additional insurance not covered in the main policy is in order. The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the issuance of the insurance policy and that the "automatic increase clause" is an integral part of that policy. The petition is impressed with merit. Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy, which is required to be in printed form, may contain any word, phrase,

clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or contract of insurance. The subject insurance policy at the time it was issued contained an "automatic increase clause." Although the clause was to take effect only in 1984, it was written into the policy at the time of its issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase clause" already formed part and parcel of the insurance contract, hence, there was no need for an execution of a separate agreement for the increase in the coverage that took effect in 1984 when the assured reached a certain age. It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act is done or transaction had and the tax base for the computation of documentary stamp taxes on life insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person insured is susceptible of exact pecuniary measurement.7 What then is the amount fixed in the policy? Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever increases will take effect in the future by reason of the "automatic increase clause" embodied in the policy without the need of another contract. Here, although the automatic increase in the amount of life insurance coverage was to take effect later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance necessarily included the additional sum covered by the automatic increase clause because it was already determinable at the time the transaction was entered into and formed part of the policy. The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article 1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984 was an obligation subject to a suspensive obligation,9 but still a part of the insurance sold to which private respondent was liable for the payment of the documentary stamp tax. The deficiency of documentary stamp tax imposed on private respondent is definitely not on the amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity of the "Junior Estate Builder Policy." Finally, it should be emphasized that while tax avoidance schemes and arrangements are not prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the case at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause incorporated into the policy at the time of issuance) should not be included in the computation of the documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be computed on the basis of the amount insured by the policy. WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the sum under the policy issued by respondent.1wphi1.nt SO ORDERED. Davide, Jr., C.J. and Ynares-Santiago, J., concur. Puno, J., on official leave.
Footnote
1

Court of Appeals (CA) Rollo. p. 16, Annex "B." Rollo, p. 47. CA Rollo, p. 218. Rollo, p. 19. SEC. 49. The written instrument in which a contract of insurance is set forth, is called a policy of insurance.

SEC. 50. The policy shall be in printed form which may contain blank spaces; and any word, phrase, clause, mark, sign, symbol, signature, number, or word necessary to complete the contract of insurance shall be written on the blank spaces provided therein. Any rider, clause, warranty or endorsement purporting to be part of the contract of insurance and which is pasted or attached to said policy is not binding on the insured, unless the descriptive title or name of the rider, clause, warranty, or endorsement is also mentioned and written on the blank spaces provided in the policy. Unless applied for by the insured or owner, any rider, clause, warranty or endorsement issued after the original policy shall be countersigned by the insured or owner, which counter-signature shall be taken as his agreement to the contents of such rider, clause, warranty or endorsement.

Group insurance and group annuity policies, however, may be typewritten and need not be in printed form.
7

Sec. 183. Insurance Code of the Phils. Unless the interest of a person insured is capable of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy.
8

Art. 1181. In conditional obligations, the acquisition of rights, as well as the extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the condition.
9

Article 18 of the Civil Code provides that "on matters which are governed by the Code of Commerce and special laws, their deficiency shall be supplied by the provision of this Code."
10

Delpher Trades Corporation vs. Intermediate Appellate Court, 157 SCRA 349 (1988).

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 171266

April 4, 2007

INTERNATIONAL EXCHANGE BANK, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION CARPIO MORALES, J.: Is a Savings Account-Fixed Savings Deposit (FSD) evidenced by a passbook issued by International Exchange Bank (petitioner) subject to documentary stamp tax (DST) for the years 1996 and 1997? Petitioner, a banking institution duly organized and existing under the laws of the Philippines, was on April 13, 1999 served Letter of Authority No. 0000205351 by the Commissioner of Internal Revenue (respondent) directing the examination by a "Special Team created pursuant to RSO 797-98" (Special Team) of petitioners books of accounts and other accounting records for the year 1997 and "unverified prior years." An examination of said documents was in fact conducted. Petitioner subsequently received on November 16, 1999 a "Notice to Taxpayer"2 from the Assistant Commissioner, Enforcement Service of the Bureau of Internal Revenue, notifying it of the results of the examination conducted by the Special Team regarding its tax liabilities, which amounted to P465,158,118.31 for 1996 and P17,033,311,974.23 for 1997, and requesting it to appear for an informal conference to present its side. Between November3 and December4 1999, petitioners representatives met with the Special Team to discuss and/or dispute portions of the Special Teams audit findings. Eventually, the parties resolved issues relating to transactions involving payment of final withholding and gross receipts taxes.5 On January 6, 2000, petitioner was personally served with an undated Pre-Assessment Notice6 (PAN) assessing it of deficiency on its purchases of securities from the Bangko Sentral ng Pilipinas or Government Securities Purchased-Reverse Repurchase Agreement (RRPA) and its FSD for the taxable years 1996 and 1997, viz: Details of Discrepancies (Taxable Year 1996) INDUSTRY ISSUES 1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and Savings Deposits - SD totaling P25,180,492.15. Government Securities Purchased-RRP amounting to P3,584,098,013.35 is subject to DST under Section 180 of the NIRC, as amended, since this falls under the classification of Deposits Substitutes as defined by RR 3-97. Savings Deposit-FSD amounting to P9,845,497,800.27 should be treated as time deposits considering that its features are very much the same as time deposits (interest rates; terms). In substance, these are certificate[s] of deposits subject to Documentary Stamp Tax under Section 180 of the NIRC which provides among others that certificate[s] of deposits bearing interest and others not payable on sight or demand are subject to DST.7 Details of Discrepancies (Taxable Year 1997) INDUSTRY ISSUES 1. DOCUMENTARY STAMP TAX (DST) On Government Securities Purchased-RRPA and Savings Deposits-FSD totaling P75,383,751.55. Government Securities Purchased-RRP amounting to P12,180.427,820.44 is subject to DST under Sec. 180 of the NIRC, as amended, since this falls under the classification of Deposit Substitutes as defined by RR 3-97.

Savings Deposits-FSD amounting to P28,024,239,673.35 should be treated as time deposits considering that its features are very much the same as time deposits (interest rates; terms). In substance, these are certificates of deposit subject to Documentary Stamp Tax under Section 180 of the NIRC which provides among others that certificate[s] of deposit bearing interest and others not payable on sight or demand are subject to DST.8 (Underscoring in the original) The PAN advised petitioner that in case it was not agreeable to the above-quoted findings, it may "see the Assistant CommissionerEnforcement Service to clarify issues arising from the investigation and/or review," and its failure to do so within 15 days from receipt of the PAN would mean that it was agreeable.9 On January 12, 2000, petitioner received a Formal Assessment Notice10 (FAN) for deficiency DST on its RRPA and FSD, including surcharges, in the amounts of P25,180,492.15 for 1996 and P75,383,751.55 for 1997, and an accompanying demand letter11 requesting payment thereof within 30 days. Acting on the FAN, petitioner filed on February 11, 2000 a protest letter12 alleging that the assessments should be reconsidered on the grounds that: (1) the assessments are null and void for having been issued without any authority and due process, and were made beyond the prescribed period for making assessments; (2) there is no law imposing DST on RRPA, and assuming that DST was payable, it is the Bangko Sentral ng Pilipinas which is liable therefor; (3) there is no law imposing DST on its FSD; and (4) assuming the deficiency assessments for DST were proper, the imposition of surcharges was patently without legal authority. Respondent failed to act on the protest, prompting petitioner to file a petition for review before the Court of Tax Appeals (CTA). By Decision13 of October 26, 2004, the First Division of the CTA (CTA Division) disposed as follows: WHEREFORE, petitioners deficiency assessments pertaining to the reverse purchase agreements in the amounts of P6,720,183.77 and P22,838,302.16 inclusive of surcharges, for the years 1996 and 1997, respectively, are hereby CANCELLED and WITHDRAWN. However, the deficiency assessments pertaining to savings deposits-FSD are hereby UPHELD and petitioner is ORDERED to PAY the respondent the amount of P71,005,757.77 representing deficiency documentary stamp tax for the years 1996 and 1997. In addition thereto, petitioner is ORDERED to PAY respondent 20% delinquency interest from February 12, 2000 until fully paid pursuant to Section 249 of the 1997 NIRC.14 (Emphasis and underscoring supplied) Petitioner moved for reconsideration of the CTA Division decision. Respondent moved too for a partial review of the decision. Petitioner argued that its FSD is not subject to DST since it was not one of the documents enumerated either under the 1977 Tax Code (Tax Code) or the 1997 National Internal Revenue Code (NIRC). Respondent on the other hand argued that petitioner should be liable not only for DST on its FSD but also on its RRPA. For lack of merit, the CTA Division, by Resolution15 of April 20, 2005, denied petitioners motion for reconsideration and respondents motion for partial reconsideration. Only petitioner appealed to the CTA En Banc before which it proffered that its FSD cannot be considered a certificate of deposit subject to DST under Section 180 of the Tax Code for, unlike a certificate of deposit which is a negotiable instrument, the passbook it issued for its FSD was not payable to the order of the depositor or to some other person as the deposit could only be withdrawn by the depositor or by a duly authorized representative.16 Petitioner likewise proffered that the legislative deliberations on the bill that was to become Republic Act No. (R.A.) 924317 showed that the definition of certificates of deposit was amended to include "other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date" in order to plug a revenue loophole caused by the term "certificates of deposit" provided under the Tax Code and the NIRC.18 Furthermore, petitioner argued that a "deposits [sic] evidenced by a passbook [which] have features akin to a time deposit," such as petitioners FSD, is not subject to DST under the Tax Code and the NIRC.19 Finally, petitioner argued that the FAN for 1996 and 1997 were issued in violation of its right to due process, they having been issued even before it could respond to the PAN; and that the 1996 assessment is null and void for having been issued beyond the 3-year prescriptive period. By Decision20 of January 30, 2006, the CTA En Banc affirmed the decision of the CTA Division finding petitioner liable for payment of deficiency DST for its FSD. In affirming the CTA Division Decision, the CTA En Banc held that a time deposit is a type of a certificate of deposit drawing interest, and petitioners FSD has the same nature and characteristics as those of a time deposit; that the requirement of due process had been substantially complied with; and the 1996 assessment was not barred by prescription because there was no requirement for the filing of a DST return under the Tax Code.

Hence, the present petition for review on certiorari, petitioner reiterating the same grounds advanced before the CTA En Banc. The issue, in the main, is whether petitioners FSD is subject to DST for the years assessed. The applicable provision is Section 180 of the Tax Code, as amended by R.A. 7660,21 which reads: Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. - On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: Provided, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan, whichever will yield a higher tax: Provided, however, That loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this section. (Emphasis and underscoring supplied) Petitioner posits that based on this Courts definition of a certificate of deposit in Far East Bank and Trust Company v. Querimit, 22 viz: A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. . . .23 its FSD is not a certificate of deposit since there is nothing in the terms and conditions printed on the passbook evidencing it that can be construed to mean that the bank or banker acknowledges the receipt of a sum of money on deposit.24 Petitioner moreover posits that the FSD, unlike a certificate of deposit, is not negotiable or payable to the order of some other person or his order but is "only withdrawable by the depositor or his authorized representative."25 Petitioners position does not lie. As correctly found by the CTA En Banc, a passbook representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest.26 A document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor.27 What is important and controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount.28 Contrary to petitioners claim, not all certificates of deposit are negotiable. A certificate of deposit may or may not be negotiable as gathered from the use of the conjunction or, instead of and, in its definition. A certificate of deposit may be payable to the depositor, to the order of the depositor, or to some other person or his order. In any event, the negotiable character of any and all documents under Section 180 is immaterial for purposes of imposing DST. Orders for the payment of sum of money payable at sight or on demand are of course explicitly exempted from the payment of DST. Thus, a regular savings account with a passbook which is withdrawable at any time is not subject to DST, unlike a time deposit which is payable on a fixed maturity date. As for petitioners argument that its FSD is similar to a regular savings deposit because it is evidenced by a passbook,29 and that based on the legislative deliberations on the bill which was to become R.A. 9243 which amended Section 180 of the NIRC (which is to a large extent the same as Section 180 of the Tax Code, as amended by R.A. 7660), Congress admitted that deposits evidenced by passbooks which have features akin to time deposits are not subject to DST,30 the same does not lie. The FSD, like a time deposit, provides for a higher interest rate when the deposit is not withdrawn within the required fixed period; otherwise, it earns interest pertaining to a regular savings deposit. Having a fixed term and the reduction of interest rates in case of pretermination are essential features of a time deposit. Thus explains the CTA En Banc: It is well-settled that certificates of time deposit are subject to the DST and that a certificate of time deposit is but a type of a certificate of deposit drawing interest. Thus, in resolving the issue before Us, it is necessary to determine whether petitioners Savings Account-

Fixed Savings Deposit (SA-FSD) has the same nature and characteristics as a time deposit. In this regard, the findings of fact stated in the assailed Decision [of the CTA Division] are as follows: "In this case, a depositor of a savings deposit-FSD is required to keep the money with the bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise, the deposit earns interest pertaining only to a regular savings deposit. The same feature is present in a time deposit. A depositor is allowed to withdraw his time deposit even before its maturity subject to bank charges on its pre[-]termination and the depositor loses his entitlement to earn the interest rate corresponding to the time deposit. Instead, he earns interest pertaining only to a regular savings deposit. Thus, petitioners argument that the savings deposit-FSD is withdrawable anytime as opposed to a time deposit which has a maturity date, is not tenable. In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a lower rate of interest. The only difference lies on the evidence of deposit, a savings deposit-FSD is evidenced by a passbook, while a time deposit is evidenced by a certificate of time deposit." In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of deposit must be maintained for a fixed period. Such being the case, We agree with the finding that the SA-FSD is a deposit account with a fixed term. Withdrawal before the expiration of said fixed term results in the reduction of the interest rate. Having a fixed term and reduction of interest rate in case of pretermination are essentially the features of a time deposit. Hence, this Court concurs with the conclusion reached in the assailed Decision that petitioners SA-FSD and time deposit are substantially the same. . . .31 (Italics in the original; underscoring supplied) The findings and conclusions reached by the CTA which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, and unless there has been an abuse or improvident exercise of authority,32 and none has been shown in the present case, deserves respect. It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments.33 It is an excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business.34 While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. 35 To claim that time deposits evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing interest.36 The further amendment of Section 180 of the NIRC and its renumbering as Section 179 by R.A. 9243, which was approved on February 17, 2004, viz: SEC. 5. Section 180 of the National Internal Revenue Code of 1997, as amended, is hereby renumbered as Section 179 and further amended to read as follows: SEC. 179. Stamp Tax on All Debt Instruments. On every original issue of debt instruments, there shall be collected a documentary stamp tax of One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan. For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation." (Underscoring supplied), does not mean that as proffered, prior to its further amendment on said date, Section 180 of the Tax Code and the NIRC time deposits for which passbooks were issued were exempted from payment of DST. If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. This is reflected from the following exchanges between Mr. Miguel Andaya of the Bankers Association of the Philippines and Senator Ralph Recto, Senate Chairman of the Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually became R.A. 9243: MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit at the present time is not subject to DST.

THE CHAIRMAN. Thats right. MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to encourage deposits, whether savings or time THE CHAIRMAN. Uh-huh. MR. ANDAYA. . .its questionable whether we should tax it with DST at all, even the question of imposing final withholding tax has been raised as an issue. THE CHAIRMAN. If I had it my way, Ill cut it by half. MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the industry itself right now is not pushing in that direction, but in the long term, when most of us in this room are gone, we hope that DST will disappear from the face of this earth, no. Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other evidence of indebtedness," it just removed ambiguity. When we testified earlier in the House on this very same bull, we did not interpose any objections if only for the sake of avoiding further ambiguity in the implementation of DST on deposits. Because of what has happened so far is, we dont know whether the examiner is gonna come in and say, "This savings deposit is not savings but its time deposit." So, I think what DOF has done is to eliminate any confusion. They said that a deposit that has a maturity. . . THE CHAIRMAN. Uh-huh. MR. ANDAYA. . . . which is time, in effect, regardless of what form it takes should be subject to DST. THE CHAIRMAN. Would that include savings deposit now? MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed maturity . . . THE CHAIRMAN. Uh-huh. MR. ANDAYA. . . that would fall under the purview.37 (Underscoring supplied) Finally, as the records show, contrary to petitioners claim, it had been afforded the opportunity to protest the assessment notices as in fact it even requested for a re-investigation which is, given the nature of the present case, the essence of due process.38 WHEREFORE, the petition is DENIED. SO ORDERED. CONCHITA CARPIO MORALES Associate Justice WE CONCUR: LEONARDO A. QUISUMBING Associate Justice Chairperson ANTONIO T. CARPIO Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. DANTE O. TINGA Asscociate Justice

LEONARDO A. QUISUMBING Associate Justice Chairperson CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice Footnotes
1

Bureau of Internal Revenue (BIR) records, p. 626. The BIR records are paginated from 658-1. Id. at 445-444. Id. at 447-446. Court of Tax Appeals (CTA) Division rollo, p. 73. Ibid. BIR records, pp. 619-617. Id. at 618. Id. at 617. Id. at 619. Id. at 631-629. Id. at 629. Id. at 651-632. CTA Division rollo, pp. 226-251. Id. at 250. Id. at 315-318. CTA En Banc rollo, pp. 20-21.

10

11

12

13

14

15

16

17

An Act Rationalizing The Provisions of the Documentary Stamp Tax of the National Internal Revenue Code Of 1997, As Amended, and for Other Purposes.
18

CTA En Banc rollo, p. 37. Ibid.

19

20

Id. at 157-180. The decision was penned by Associate Justice Juanito C. Castaeda, Jr., and concurred in by Associate Justices Ernesto D. Acosta, Novell R. Bautista, Erlinda P. Uy, and Olga Palanca-Enriquez. Associate Justice Caesar A. Casanova dissented from the majority decision.

21

An Act Rationalizing Further the Structure and Administration of the Documentary Stamp Tax, Amending for the Purpose Certain Provisions of the National Internal Revenue Code, as Amended, Allocating Funds for Specific Programs, and for Other Purposes.
22

424 Phil. 723 (2002). Id. at 730. Rollo, p. 51. Id. at 51-52. CTA En Banc rollo, p. 172. Ibid. China Banking Corporation v. Commissioner of Internal Revenue, C.T.A. Case No. 6400, January 3, 2006. CTA Division rollo, p. 246. Rollo, p. 62. CTA En Banc rollo, pp. 172-173.

23

24

25

26

27

28

29

30

31

32

Commissioner of Internal Revenue v. Citytrust Banking Corporation, G.R. No. 150812, August 22, 2006, 499 SCRA 477, 483 citing Sea-Land Service, Inc. v. Court of Appeals, G.R. No. 122605, April 30, 2001, 357 SCRA 441, 445-446.
33

Phil. Home Assurance Corp. v. Court of Appeals, 361 Phil. 368, 372-373 (1999). Id. at 368, 373 (1999) citing Du Pont v. United States, 300 U.S. 150, 153 (1936). Com. of Internal Revenue v. Lincoln Phil. Life Ins. Co., Inc., 429 Phil. 154 (2002). China Banking Corporation v. Commissioner of Internal Revenue, C.T.A. Case No. 6400, January 3, 2006. Transcript of Stenographic Notes, Deliberations of the Senate Committee on Ways and Means, pp. 2-3, August 14, 2002. Marcos II v. CA, 339 Phil. 253 (1997).

34

35

36

37

38

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 166786

May 3, 2006

MICHEL J. LHUILLER Pawnshop, Inc. Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION YNARES-SANTIAGO, J.: Assailed in this petition for review on certiorari is the June 29, 2004 Decision1 of the Court of Appeals in CA-G.R. SP No. 67667, which reversed the October 24, 2001 Decision2 of the Court Tax Appeals and ordered petitioner Michel J. Lhuillier Pawnshop, Inc., to pay (1) P19,961,636.09 as deficiency Value Added Tax (VAT); and (2) P3,142,986.02 as deficiency Documentary Stamp Tax (DST), for the year 1997. The facts show that petitioner, a corporation engaged in the pawnshop business, received Assessment Notice Nos. 81-VAT-13-97-9912-118 and 81-DST-13-97-99-12-119, issued by the Chief Assessment Division, Revenue Region No. 13, Cebu City, for deficiency VAT in the amount of P19,961,636.09 and deficiency DST in the amount of P13,142,986.02, for the year 1997. Petitioner filed a motion for reconsideration of said assessment notices but was denied by respondent Commissioner of Internal Revenue (CIR). On petition for review with the Court of Tax Appeals, the latter rendered decision in favor of petitioner setting aside the assessment notices issued by the CIR. It ruled, inter alia, that the subject of a DST under Section 195 of the National Internal Revenue Code (NIRC) is the document evidencing the covered transaction. Holding that a pawn ticket is neither a security nor a printed evidence of indebtedness, the tax court concluded that such pawn ticket cannot be the subject of a DST. The dispositive portion thereof, states: WHEREFORE, in view of all the foregoing, the instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notices Nos. 81-VAT-13-97-99-12-118 and 81-DST-13-97-99-11-119 are hereby CANCELLED and SET ASIDE. SO ORDERED.3 Respondent filed a petition for review with the Court of Appeals which reversed the CTA decision and sustained the assessments against petitioner. It ratiocinated, among others, that a pawn ticket, per se, is not subject to DST; rather, it is the transaction involved, which in this case is pledge, that is being taxed. Hence, petitioner was properly assessed to pay DST. The decretal portion thereof, provides: WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Tax Appeals dated October 24, 2001 is REVERSED and SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop, Inc., is ORDERED TO PAY: (1) P19,961636.09, as deficiency Value-Added Tax, inclusive of surcharge and interest; and (2) P3,142,986.02, as deficiency Documentary Stamp Tax, inclusive of surcharge and interest, for the year 1997. No pronouncement as to cost. SO ORDERED.4 Respondent filed a motion for partial reconsideration praying that petitioner be ordered to pay deficiency interest of 20% per annum for failure to pay the same on January 2, 2000, as indicated in the notices. On December 29, 2004, the Court of Appeals granted the motion and modified the June 29, 2004 decision as follows: WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Tax Appeals dated October 24, 2001 is REVERSED and SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop, Inc., is ORDERED TO PAY: (1) 19,961,636.09, as deficiency Value-Added Tax, inclusive of surcharge and interest; (2) P3,142,986.02, as deficiency Documentary Stamp Tax, inclusive of surcharge and interest, for the year 1997; and (3) Delinquency Interest at the rate of 20% per annum from January 2, 2000, until the deficiency assessment are fully paid, pursuant to Section 249 of the National Internal Revenue Code. No pronouncement as to costs. SO ORDERED.5 On January 25, 2005, petitioner elevated the case to this Court. Subsequently, it filed a motion to withdraw the petition with respect to the issue of VAT.6 Petitioner manifested that the Chamber of Pawnbrokers of the Philippines, where it is a member, entered into a Memorandum of Agreement7 with the Bureau of Internal Revenue (BIR) allowing the pawnshop industry to compromise the issue of

VAT on pawnshops. Considering that petitioner already paid the agreed amount of settlement, it prayed that the case be decided solely on the issue of DST. On September 28, 2005, the Court granted petitioners partial withdrawal of the petition.8 Hence, the lone question to be resolved in the present petition is whether petitioners pawnshop transactions are subject to DST. The Court rules in the affirmative. Sections 173 and 195 of the NIRC, state: SEC. 173. Stamp Taxes Upon Documents, Loan Agreements, Instruments, and Papers. Upon documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes x x x. (Emphasis supplied) SEC. 195. Stamp Tax on Mortgages, Pledges, and Deeds of Trust. On every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid, being payable and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates: "(a) When the amount secured does not exceed Five thousand pesos (P5,000), Twenty pesos (P20).1avvphil.net (b) On each Five thousand pesos (P5,000), or fractional part thereof in excess of Five thousand pesos (P5,000), an additional tax of Ten pesos (10.00). x x x x. (Emphasis supplied) It is clear from the foregoing provisions that the subject of a DST is not limited to the document embodying the enumerated transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of Appeals,9 it was held that: In general, documentary stamp taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. Examples of such privileges, the exercise of which, as effected through the issuance of particular documents, are subject to the payment of documentary stamp taxes are leases of lands, mortgages, pledges and trusts, and conveyances of real property. (Emphasis added) Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the creditor or to a third person movable property as security for the performance of the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall be returned to the debtor or to the third person.10 This is essentially the business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal property delivered as security for loans. Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For Pawnshops11 issued by the Central Bank12 to implement the Act, require every pawnshop or pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed by the pawnbroker and containing the following details: (1) name and residence of the pawner; (2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8) signature or thumb mark of pawner or his authorized agent; and (9) such other terms and conditions as may be agreed upon between the pawnbroker and the pawner. In addition, Central Bank Circular No. 445,13 prescribed a standard form of pawn tickets with entries for the required details on its face and the mandated terms and conditions of the pledge at the dorsal portion thereof. Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows: "Pawn ticket" is the pawnbrokers receipt for a pawn. It is neither a security nor a printed evidence of indebtedness." True, the law does not consider said ticket as an evidence of security or indebtedness. However, for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshops obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is therefore no basis in petitioners assertion that a DST is literally a tax on a document and that no tax may be imposed on a pawn ticket.

The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against the government; and that a tax cannot be imposed without clear and express words for that purpose.14 Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section 195 unqualifiedly subjects all pledges to DST. It states that "[o]n every x x x pledge x x x there shall be collected a documentary stamp tax x x x." It is clear, categorical, and needs no further interpretation or construction. The explicit tenor thereof requires hardly anything than a simple application.15 The onus of proving that pawnshops are not subject to DST is thus shifted to petitioner. In establishing tax exemptions, it should be borne in mind that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. One who claims an exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.16 In the instant case, there is no law specifically and expressly exempting pledges entered into by pawnshops from the payment of DST. Section 19917 of the NIRC enumerated certain documents which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioners nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference.18 Exemption from taxation is never presumed. For tax exemption to be recognized, the grant must be clear and express; it cannot be made to rest on doubtful implications.19 The Court notes that BIR Ruling No. 305-87,20 and BIR Ruling No. 018-88,21 which held that a pawn ticket is subject to DST because it is an evidence of a pledge transaction, had been revoked by BIR Ruling No. 325-88.22 In the latter ruling, the BIR held that DST is a tax on the document; and since a pawn ticket is not an evidence of indebtedness, it cannot be subject to DST. Nevertheless, this interpretation is not consistent with the provisions of Section 195 of the NIRC which categorically taxes the privilege to enter into a contract of pledge. Indeed, administrative issuances must not override, supplant or modify the law but must be consistent with the law they intend to carry out.23 Finally, petitioner invokes the declaration of nullity of Revenue Memorandum Circular (RMC) No. 43-91 in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.24 Said case, however, is not applicable to the present controversy. RMC No. 43-91 is actually a clarification of Revenue Memorandum Order No. 15-91 which classified pawnshops as "lending investors" and imposed upon them a 5% lending investors tax. While RMC No. 43-91 declared in addition that pawnshops are subject to DST, such was never an issue in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., because nowhere was it mentioned therein that the pawnshop involved was directed to pay DST. Otherwise stated, the declaration of nullity of RMC No. 43-91 was the Courts finding, among others, that pawnshops cannot be classified as lending investors; and certainly not because pawnshops are not subject to DST. The invocation of said ruling is therefore misplaced. WHEREFORE, the petition is DENIED and the June 29, 2004 Decision of the Court of Appeals, as modified on December 29, 2004, in CA-G.R. SP No. 67667, is AFFIRMED. SO ORDERED. CONSUELO YNARES-SANTIAGO Associate Justice WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairperson MA. ALICIA AUSTRIA-MARTINEZ Associate Justice MINITA V. CHICO-NAZARIO Associate Justice CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice Footnotes ROMEO J. CALLEJO, SR. Asscociate Justice

Rollo, pp. 56-62. Penned by Associate Justice Hakim S. Abdulwahid and concurred in by Associate Justices Elvi John S. Asuncion and Mariano C. Del Castillo.
2

Id. at 65-74. Id. at 73. Id. at 61. Id. at 112. Id. at 172-175. Id. at 176-183. Id. at 186. 361 Phil. 368, 372-373 (1999). See Articles 2085, 2087 and 2093 of the Civil Code. Central Bank Circular No. 374, dated July 13, 1973.

10

11

12

Section 17 of the Pawnshop Regulation Act vests on the Central Bank the authority to issue rules regulating the business of pawnshops, to exercise visitorial powers and impose administrative sanctions whenever necessary.
13

Dated January 20, 1975. Commissioner of Internal Revenue v. Court of Appeals, 338 Phil. 322, 330 (1997). Commissioner of Internal Revenue v. Court of Appeals, 310 Phil. 392, 397 (1995).

14

15

16

Commissioner of Internal Revenue v. Philippine Long Distance Company, G.R. No. 140230, December 15, 2005; Commissioner of Internal Revenue v. Mitsubishi Metal Corporation, G.R. Nos. 54908 & 80041, January 22, 1990, 181 SCRA 214, 223-224.
17

Section 199. Documents and Papers not Subject to Stamp Tax. The provisions of Section 173 to the contrary notwithstanding, the following instruments, documents, and papers shall be exempt from the documentary stamp tax: (a) Policies of insurance or annuities made or granted by a fraternal or beneficiary society, order, association, or cooperative company, operated on the lodge system or local cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit of each member and not for profit. (b) Certificates of oaths administered to any government official in his official capacity or of acknowledgment by any government official in the performance of his official duties, written appearance in any court by any government official, in his official capacity; certificates of the administration of oaths to any person as to the authenticity of any paper required to be filed in court by any person or party thereto, whether the proceedings be civil or criminal; papers and documents filed in courts by or for the national, provincial, city or municipal governments; affidavits of poor persons for the purpose of proving poverty; statements and other compulsory information required of persons or corporations by the rules and regulations of the national, provincial, city or municipal governments exclusively for statistical purposes and which are wholly for the use of the bureau or office in which they are filed, and not at the instance or for the use or benefit of the person filing them; certified copies and other certificates placed upon documents, instruments, and papers for the national, provincial, city or municipal governments, made at the instance and for the sole use of some other branch of the national, provincial, city or municipal governments; and certificates of the assessed value of lands, not exceeding Two hundred pesos (P200) in value assessed, furnished by the provincial, city or municipal Treasurer to applicants for registration of title to land. (c) Borrowing and lending of securities executed under the Securities Borrowing and Lending Program of a registered exchange, or in accordance with regulations prescribed by the appropriate regulatory authority: Provided, however, That any borrowing or lending of securities agreement as contemplated hereof shall be duly covered by a master securities borrowing and lending agreement acceptable to the appropriate regulatory authority, and which agreement is duly registered and approved by the Bureau of Internal Revenue (BIR).

(d) Loan agreements or promissory notes, the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000), or any such amount as may be determined by the Secretary of Finance, executed by an individual for his purchase on installment for his personal use or that of his family and not for business or resale, barter or hire of a house, lot, motor vehicle, appliance or furniture: Provided, however, That the amount to be set by Secretary of Finance shall be in accordance with a relevant price index but not to exceed ten percent (10%) of the current amount and shall remain in force at least for three (3) years. (e) Sale, barter or exchange of shares of stock listed and traded through the local stock exchange for a period of five (5) years from the effectivity of this act. (f) Assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness, if there is no change in the maturity date or remaining period of coverage from that of the original instrument. (g) Fixed income and other securities traded in the secondary market or through an exchange. (h) Derivatives: Provided, That for purpose of this exemption, repurchases agreements and reverse repurchase agreements shall be treated similarity as derivatives. (i) Interbranch or interdepartmental advances within the same legal entity. (j) All forbearances arising from sales or service contracts including credit card and trade receivables: Provided, That the exemption be limited to those executed by the seller or service provider itself. (k) Bank deposit accounts without a fixed term or maturity. (l) All contracts, deeds, documents and transactions related to the conduct of business of the Bangko Sentral ng Pilipinas. (m) Transfer of property pursuant to Section 40(c)(2) of the National Internal Revenue Code of 1997, as amended. (n) Interbank call loans with maturity of not more than seven (7) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks. (As amended by Republic Act No. 9243)
18

Commissioner of Internal Revenue v. Philippine Long Distance Company, supra note 16. Insular Lumber Company v. Court of Tax Appeals, 192 Phil. 221, 231 (1981). Dated September 24, 1987. Dated February 1, 1988. Dated July 13, 1988. Commissioner of Internal Revenue v. Court of Appeals, supra note 15. 453 Phil. 1043 (2003).

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21

22

23

24

Republic of the Philippines SUPREME COURT Manila

SECOND DIVISION

G.R. No. 130838 August 22, 2006 SECURITY BANK CORPORATION (formerly SECURITY BANK AND TRUST COMPANY), Petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION GARCIA, J.: Before us is this petition for review on certiorari to reverse, annul and/or nullify the Decision 1 dated August 29, 1997 of the Court of Appeals (CA) which affirmed the January 12, 1996 Decision 2 and May 21, 1996 Resolution 3 of the Court of Tax Appeals (CTA) in CTA Case No. 4784 adjudging herein petitioner Security Bank Corporation (SBC) liable for deficiency documentary stamp tax (DST) on its 1983 sales of securities under repurchase agreements. The facts are undisputed: Sometime before March 19, 1987, SBC, a registered commercial bank and a member of the Bankers Association of the Philippines (BAP), received a Pre-Assessment Notice dated March 6, 1987 from the Bureau of Internal Revenue (BIR) for deficiency DST containing the following details: 1983 Deficiency Documentary Stamp Tax 4 A. On Promissory Notes Issued Promissory notes issued during the year P926,385,255.00 Documentary stamp tax due thereon: P926,385,255.00 P 0.65 P 3,010,752.08 P200.00 B. On Sale of Securities under Repurchase Agreement Securities sold during the year P3,022,803,857.63 Documentary stamp tax due thereon: P3,022,803,857.63 P 0.25 P 3,778,504.82 P200.00 ______________ T o t a l P6,789,256.90 Add: Compromise penalty 600.00 ______________ TOTAL AMOUNT DUE AND COLLECTIBLE P6,789,856.90. In its letter dated March 19, 1987, SBC protested the above-quoted pre-assessment notice on the following grounds: (1) promissory notes issued by SBC prior to October 15, 1984 or specifically in 1983, were non-negotiable and, therefore, not subject to documentary stamp tax; and

(2) sale of securities under Repurchase Agreement is not subject to DST. Instead of answering the letter-protest, the BIR sent SBC an assessment letter 5 dated May 29, 1987. The letter was a reiteration of the pre-assessment notice previously received, but SBC nevertheless sent a written reply to the assessment notice, clarifying that its answer thereto was already contained in its previous letter-protest of March 19, 1987. On April 8, 1988, the BIR, through former Commissioner Bienvenido A. Tan, Jr., entered into a general compromise agreement 6 with the BAP concerning the DST assessment of the various member banks relating to non-negotiable promissory notes, whereby the BAP members agreed to pay THREE AND ONE-FOURTH CENTAVOS (P0.0325) per P200 of the total issuances of non-negotiable promissory notes issued prior to October 15, 1984. Pursuant to said compromise agreement, SBC signed its own compromise agreement 7 with the BIR on August 15, 1988 by paying the amount of P641,743.23 as full settlement of its 1983 deficiency DST, computed as follows: Promissory notes issued during the year 1983 P 926,385,255.00 Add: Securities sold under Repurchase Agreement 3,022,803,857.63 _________________ P3,949,189,112.63 Compromise Base P 0.0325 200 = P 3,949,189,112.63 P 0.0325 200 = P641,743.23 compromised amount paid under P.O. ========= No. C3252171 and C.R. No. 814457384 both dated March 31, 1988. Despite its availment of the compromise agreement, SBC still received a letter from the BIR demanding payment of the amount of P3,287,399.20 as DST on securities sold under repurchase agreements in 1983, to wit: 1983 Deficiency Documentary Stamp Tax On Sale of Securities Under Repurchase Agreement 8 Securities Sold During the Year P3,022,803,857.63 Documentary Stamp Tax Due Thereon P3,022,803,857.63 P 0.25 = P 3,778,604. 82 P200.00 Less: Partial Payment P3,022,803,857.63 P 0.0325 = P 491,205.62 P200.00 _______________ TOTAL AMOUNT STILL DUE AND COLLECTIBLE P3,287,399.20. ==============

Through a letter dated August 23, 1989, SBC informed the BIR that the assessment sought to be collected was already the subject of a compromise agreement. On June 17, 1991, SBC filed a protest with the BIRs Appellate Division disputing the reassessment of the DST on sale of securities with repurchase agreements. The BIR Commissioner denied said protest in a letter 9 dated January 29, 1992, copy of which was received by SBC on March 11, 1992. On March 17, 1992, SBC filed a request for reconsideration, which remained unresolved despite BIRs receipt thereof. Eventually, SBC filed a petition for review 10 with the CTA questioning the reassessment. On June 19, 1992, the BIR filed its answer alleging the following special and affirmative defenses: 1. The 1988 BIR-BAP DST Compromise Agreement covers only tax assessments involving documentary stamp tax on all types of promissory notes issued prior to October 15, 1984; 2. SBCs sale of securities under a Repurchase Agreement is not included or placed within the scope of the Compromise Agreement. The law is specific that the subject of a compromise comprises only those matters which are definitely stated therein (Article 2036, New Civil Code); 3. SBC, knowing fully well that documentary stamp taxes on sales of securities under Repurchase Agreement were not within the scope of the BIR-BAP DST Compromise Agreement, induced the BIR to enter into a compromise settlement thereof. A compromise in which there is a mistake, fraud, violence, intimidation, undue influence or falsity of documents may be rescinded or invalidated (Article 2038 in relation to Article 1330 of the New Civil Code); and 4. The assessment is in accordance with law and regulation. Issues having been joined, SBC presented documentary and testimonial evidence supportive of its cause. After SBC rested its case, the BIR presented and offered only documentary evidence consisting of BIR records. No further testimonial evidence was presented by it. On January 12, 1996, the CTA rendered its decision, the decretal portion of which reads: WHEREFORE, in view of all the foregoing, instant petition for review is found to be without merit and the same is hereby DISMISSED. ACCORDINGLY, petitioner is hereby ORDERED to PAY to respondent the amount of P3,287,399.82, without any surcharge and interest thereon, as deficiency documentary stamp tax due on petitioners sale of securities under repurchase agreement for the year 1983. SO ORDERED. In time, SBC filed a motion for reconsideration, which the CTA denied in its Resolution of May 21, 1996. Therefrom, SBC went to the CA on a petition for review. In the herein assailed Decision 11 dated August 29, 1997, the CA dismissed SBCs petition, thus: WHEREFORE, the instant petition for review is hereby DISMISSED by this Court for lack of merit. The appealed decision of the Court of Tax Appeals in C.T.A. Case No. 4784 is Affirmed. Costs against petitioner. SO ORDERED. Hence, SBCs present recourse on the following assigned errors: I. THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT THERE ARE FACTUAL AND LEGAL BASES FOR THE HONORABLE COURT OF TAX APPEALS TO HAVE FOUND PETITIONER LIABLE TO PAY RESPONDENT COMMISSIONER OF INTERNAL REVENUE THE AMOUNT OF P3,287,399.82, WITHOUT ANY SURCHARGE AND INTEREST THEREON, AS DEFICIENCY DOCUMENTARY STAMP TAX DUE ON PETITIONERS SALE OF SECURITIES UNDER REPURCHASE AGREEMENT FOR THE YEAR 1983. II.

THERE WAS ERROR IN FINDING THAT THE TERMS AND CONDITIONS OF THE COMPROMISE AGREEMENT (BETWEEN PETITIONER AND FORMER COMMISSIONER BIENVENIDO TAN), DID NOT INCLUDE/COVER THE WHOLE DST ASSESSMENT ON THE DOCUMENTS OF SALES OF SECURITIES IN 1983 OR THAT MISTAKE WAS COMMITTED BY THE BUREAU OF INTERNAL REVENUE WITH REGARD TO THE OFFER AND ACCEPTANCE OF THE TAX BASE OF THE COMPROMISE SETTLEMENT. The recourse has no merit. Relative to the first issue, SBC claims that the BIRs DST assessment on its sales of securities with repurchase agreements lacks factual and legal bases. While it never disputed the amount of P3,022,803,857.63 used by the BIR as tax base for its assessment, which constitutes as the factual basis for the DST assessment on sales of securities under repurchase agreements, SBC claimed that these conveyances are instruments covered under Section 229 (now Section 180) of the National Internal Revenue Code (NIRC) that are not subject to DST imposed by Section 225 (now 176) of the NIRC. We do not agree. The NIRC levies DST upon documents, instruments and papers as follows: SEC. 173. 12 Stamp taxes upon documents, instruments, and papers Upon documents, instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding documentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same, and at the same time such act is done or transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party to thereto who is not exempt shall be the one directly liable for the tax. (Emphasis supplied.) Particularly covering sales of securities, which SBC has been assessed by the BIR in this case, and the corresponding DST rates due thereon at the time the said tax accrued, the former Section 225 (now Section 176) of the NIRC provides: SEC. 225. Stamp tax on sales, agreements to sell, memorandum of sales, deliveries or transfer of bonds, due-bills, certificates of obligations, or shares or certificates of stocks On all sales, or agreements to sell or memorandum of sales, or deliveries, or transfer of bonds, due-bills, certificates of obligation, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such bond, due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any bond, due-bill, certificates of obligation or stock, there shall be collected a documentary stamp tax of twenty-five centavos on each two hundred pesos, or fractional part thereof, of the par value of such bond, due-bill, certificates of obligation or stock; Provided, That only one tax shall be collected of each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer; and provided, further, That in case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percentum of the documentary stamp tax paid upon the original issue of said stock. It is clear from the plain language of the law that all sales of securities, without making any distinction as to the nature or type of the sale, i.e., whether it be with a repurchase agreement or not, are taxable. On the other hand, all securities consisting of bonds, due-bills, certificates of obligation, or shares or certificates of stock in any association, company or corporation, of whatever type or nature are within the scope of this section. SBC contends, however, that the sales of securities being levied upon are not covered by Section 225 (now Section 176), but instead fall under Section 229 (now Section 180) of the Tax Code. In this respect, SBC invokes Revenue Memorandum Circulars No. 13-87 13 and No. 33-86 14 and BIR Ruling No. 119-91. 15 We are not persuaded for the simple reason that the BIR circulars and ruling relied upon were all issued after 1983, the tax period involved in this case. Those circulars and ruling cannot prevail over the clear and plain language of the Tax Code. 16 Moreover, the Court has no basis to rule in the present petition for review on certiorari, which by its very nature is limited to questions of law and not of facts, whether the securities subject of the tax assessment in this case in fact fall within the ambit of said revenue memorandum circulars. This Court is bound by the factual findings by the CTA, which did not rule that the subject securities, because of what type these were, fall under Section 229 (now Section 180) instead of 225 (now Section 176) of the NIRC. In Commissioner of Internal Revenue v. Court of Appeals, 17 the Court ruled: x x x the Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. Through its expertise, it is undeniably competent to determine the issue of whether. x x x Consequently, as a matter of principle, this Court will not set aside the conclusion reached by the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily developed an expertise on the subject unless there has been an abuse or improvident exercise of authority. This point becomes more evident in the case before us where the unanimous findings and

conclusions of both the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. On this point, the Court finds the decision of the CA affirming that of the CTA free from any palpable or reversible error. Relative to the second issue, SBC claims that based on the terms and conditions of the compromise agreement between it and then BIR Commissioner Tan, the whole DST assessment for 1983, including that on sales of securities, is deemed included thereunder. SBC further claims that the contemporaneous and subsequent acts of revenue officials in accepting its offer of payment, using the entire 1983 DST deficiency assessment, clearly including the sales of securities with repurchase agreement for the year 1983 in the amount of P3,022,803,857.63 as the tax base, were indicative of the fact that the DST due on said sales of securities for the year 1983 has been duly settled pursuant to the said compromise agreement of August 15, 1988. Again, we disagree. There is nothing clearer from the plain reading of the first paragraph of the subject compromise agreement than the fact that the only subject matter thereof is the "assessment relating to Non-negotiable Promissory Notes issued prior to October 15, 1984." 18 To emphasize the limited scope thereof, the same compromise agreement expressly reiterated, in its Section VI, the exclusions thereto as follows: VI. EXCLUSIONS: Other issues raised in the tax assessments or which may be raised for open and assessed/pre-assessed years respectively, not involving documentary stamp tax on all types of promissory notes issued prior to Oct. 15, 1984 are not included in, nor affected by this compromise, 19 (Emphasis supplied). The issue of DST assessment on sales of securities with repurchase agreement, which was the subject of the reassessment being questioned in this case, is definitely not within the scope of the compromise agreement, being limited as it is to DST on promissory notes issued prior to October 15, 1984. The DST assessed on the former arises from the act of "selling" securities (presently taxed under Section 176), while the DST assessed in the latter is on the act of "issuing" promissory notes (taxed under Section 180). It is evident from the separate provisions governing the two that the law treats these two instruments differently. This Court simply cannot agree with SBC that securities and promissory notes for purposes of the subject Compromise Agreement are one and the same thing. Besides, even assuming, in gratia argumenti, that promissory notes may be included under the generic term "securities," securities cannot be included under the specific term "promissory notes" so as to be deemed within the scope of the same compromise agreement. To be sure, the term "promissory note" has a definite meaning under the negotiable instruments law, which does not include "securities," and this definite meaning is what is deemed incorporated in the compromise agreement entered into by and between SBC and the BIR, unless a different definition is therein expressly agreed upon, which is not the case. Finally, as regards SBCs contention that the BIR, through its various officials, accepted its offer to settle its entire DST deficiency assessment for 1983 which included the DST assessment for securities with repurchase agreement in the tax base for purposes of the computation of the DST due and collectible, suffice it to say that such acceptance and approval were not made by the BIR Commissioner himself, who, under Section 204 of the NIRC, has the sole power and authority to compromise taxes. Neither was there any showing that the BIR Commissioner specifically authorized those revenue officials, who purportedly accepted and approved SBCs offer of payment, to compromise the DST on sale of securities, which, to stress, were not included in the Compromise Agreement of August 15, 1988 by delegating his power to compromise said DST assessment on securities. This ultra vires act of those revenue officials cannot have any valid and binding legal effect upon the BIR, so as to proscribe the latter from issuing the assailed reassessment of unpaid DST on the sales of securities under repurchase agreements for the year 1983. WHEREFORE, the petition is DENIED and the assailed CA Decision dated August 29, 1997 is AFFIRMED in toto. Costs against petitioner.
SO ORDERED. CANCIO C. GARCIA Associate Justice WE CONCUR: REYNATO S. PUNO Associate Justice Chairperson ANGELINA SANDOVAL-GUTIERREZ Associate Justice RENATO C. CORONA Associate Justice

ADOLFO S. AZCUNA Associate Justice ATTESTATION I attest that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Associate Justice Chairperson, Second Division CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairperson's Attestation, it is hereby certified that the conclusions in the above decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. ARTEMIO V. PANGANIBAN Chief Justice
Footnotes
1

Penned by Associate Justice Lourdes Tayag-Jaguros, with then Associate Justice Antonio M. Martinez (who became a member of this Court) and Associate Justice Salvador J. Valdez, Jr., concurring; Rollo, pp. 38-50.
2

Id. at 148-149. Id. at 117-132. Id. at 55. Id. at 56. Id. at 59-66. Id. at 67-69. Id. at 75. Id. at 81-84. Id. at 111-116. Supra note 1. Formerly Section 222 of the Tax Code. Id. at 201-202. Id. at 205-206. Id. at 207-208.

10

11

12

13

14

15

16

See: Republic v. Sunlife Assurance Company of Canada, G.R. No.158085, October 14, 2005, 473 SCRA 129, per then Associate Justice, now Chief Justice Artemio V. Panganiban.
17

G.R. No. 115349, April 18, 1997, 271 SCRA 605. Annex F-1, Rollo, p. 67. Id. at 67. Republic of the Philippines SUPREME COURT Manila

18

19

SPECIAL FIRST DIVISION

G.R. No. 167330

September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. RESOLUTION CORONA, J.: ARTICLE II Declaration of Principles and State Policies Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among them. ARTICLE XIII Social Justice and Human Rights Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers.1 For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.2 We recall the facts of this case, as follows: Petitioner is a domestic corporation whose primary purpose is "[t]o establish, maintain, conduct and operate a prepaid group practice health care delivery system or a health maintenance organization to take care of the sick and disabled persons enrolled in the health care plan and to provide for the administrative, legal, and financial responsibilities of the organization." Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it. xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code. On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a non-life insurance contract subject to DST. WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case. xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioners contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business. Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments: (a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company. (b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition that health care services are not in the nature of an insurance business. (c) Section 185 should be strictly construed. (d) Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002. (e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated under Section 185. (f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered by Section 185. (g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185. (h) The June 12, 2008 decision should only apply prospectively. (i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered moot and academic.6 Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009. In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 94807 (also known as the "Tax Amnesty Act of 2007") by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.8 We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987.9 It is engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it: Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on diet, exercise and other healthy habits, and immunization; Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like and Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an injury or sickness on the part of the enrolled member.10 Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services are to be provided only by petitioner's physicians, i.e. those directly employed by it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care.13 If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for the services rendered, at pre-agreed rates.14 To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time. Health Maintenance Organizations Are Not Engaged In The Insurance Business We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the transaction of the business.15 Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements.16 A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious. Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied) It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and nugatory.17 This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every word.18 From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of indemnity and (2) the maker should be transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance). Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium."19 The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not. Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance business" or "transacting an insurance business:" a) making or proposing to make, as insurer, any insurance contract; b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business. Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,21 have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance. Applying the "principal object and purpose test,"22 there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business. The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk. xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies . The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.24 (Emphasis supplied) In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing the plan of operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and purpose. Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order and not indemnity.26 (Emphasis supplied) American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point: The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy. xxx xxx xxx

The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporations plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided , but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws. A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider.28 (Emphasis supplied) Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services as needed, with payment made directly to the provider of these services.29 In short, even if petitioner assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business. By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object. In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep members from developing medical conditions or diseases.30 As an HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.31 Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of petitioners business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business. It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose of determining what "doing an insurance business" means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be actually engaged in insurance activities.32 Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not supervised by the Insurance Commission but by the Department of Health.33 In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34

The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,35 the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret.36 A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997 Section 185 states that DST is imposed on "all policies of insurance or obligations of the nature of indemnity for loss, damage, or liability." In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are therefore insurance contracts: It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury. Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.37 We reconsider. We shall quote once again the pertinent portion of Section 185: Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied) In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing authority.38 This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.39 Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.40 We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: 1. The insured has an insurable interest; 2. The insured is subject to a risk of loss by the happening of the designed peril; 3. The insurer assumes the risk; 4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and 5. In consideration of the insurers promise, the insured pays a premium.41

Do the agreements between petitioner and its members possess all these elements? They do not. First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance: It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract . For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice.42 (Emphasis supplied) Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms "indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements. Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part. Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury. In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration of prepayment for such services."44 Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.45 However, assuming that petitioners commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer. In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code. There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189

(otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2, 1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit: ARTICLE XI Stamp Taxes on Specified Objects Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following: xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied) On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained. On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917. Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same. Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.1avvphi1 Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became Section 185. On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax. Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 924348 but Section 185 was untouched. On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2 million.49 We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO. 50 Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who is to pay it.51 So potent indeed is the power that it was once opined that "the power to tax involves the power to destroy."52 Petitioner claims that the assessed DST to date which amounts to P376 million53 is way beyond its net worth of P259 million.54 Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57 The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg."58 Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counterproductive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the majority of our people.59 Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840 Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and academic60 when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.61 Far from disagreeing with petitioner, respondent manifested in its memorandum: Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years. In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner . This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.62 (Emphasis supplied) Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.63 There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480. Is The Court Bound By A Minute Resolution In Another Case? Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the CA64 in CIR v. Philippine National Bank65 that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST. In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract. It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has already become final.67 When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive requirements, the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained.68 But what is its effect on other cases? With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata.69 However, if other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v. Baier-Nickel71 involving the same parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the

CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable years.72 Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73 Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice. Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the fact that petitioners health care agreements are not subject to DST. A Final Note Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage. It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services), including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services. The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.74 Its imposition will elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs. WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax. No costs. SO ORDERED. RENATO C. CORONA Associate Justice WE CONCUR: REYNATO S. PUNO Chief Justice Chairperson MINITA V. CHICO-NAZARIO* Associate Justice TERESITA J. LEONARDO-DE CASTRO Associate Justice LUCAS P. BERSAMIN** Associate Justice CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above resolution had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

Footnotes
*

Per Special Order No. 698 dated September 4, 2009. Additional member per raffle list of 13 April 2009. 1987 Constitution. Now known as Maxicare Healthcare Corp. Rollo, p. 293. G.R. No. 169737, 12 February 2008, 544 SCRA 580. 429 Phil. 82 (2002). Republic Act. Rollo, pp. 257-258.

**

Entitled "An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005 and Prior Years."
8

Rollo, p. 288. Id., p. 591. Id., pp. 592, 613. This is called the Staff Model, i.e., the HMO employs salaried health care professionals to provide health care services. (Id., pp. 268, 271.)

10

11

12

This is referred to as the Group Practice Model wherein the HMO contracts with a private practice group to provide health services to its members. (Id., pp. 268, 271, 592.) Thus, it is both a service provider and a service contractor. It is a service provider when it directly provides the health care services through its salaried employees. It is a service contractor when it contracts with third parties for the delivery of health services to its members.
13

Id., p. 102. Id., p. 280. Decision, p. 422. Rollo, p. 265.

14

15

16

17

Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, 16 January 1998, 284 SCRA 327, 367, citing Shimonek v. Tillanan, 1 P. 2d., 154.
18

Inding v. Sandiganbayan, G.R. No. 143047, 14 July 2004, 434 SCRA 388, 403. Section 4 (o) (3) thereof. Under this law, it is one of the classes of a "health care provider." Presidential Decree.

19

20

21

Our Insurance Code was based on California and New York laws. When a statute has been adopted from some other state or country and said statute has previously been construed by the courts of such state or country, the statute is deemed to have been adopted with the construction given. (Prudential Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc., G.R. No. 151890, 20 June 2006, 491 SCRA 411, 439; Constantino v. Asia Life Inc. Co., 87 Phil. 248, 251 [1950]; Gercio v. Sun Life Assurance Co. of Canada, 48 Phil. 53, 59 [1925]; Cerezo v. Atlantic, Gulf & Pacific Co., 33 Phil. 425, 428-429 [1916]).
22

H. S. de Leon, The Insurance Code of the Philippines Annotated, p. 56 (2002 ed.).

23

107 F.2d 239 (D.C. App. 1939). This is a seminal case which had been reiterated in succeeding cases, e.g. Smith v. Reserve Nat'l Ins. Co., 370 So. 2d 186 ( La. Ct. App. 3d Cir. 1979); Transportation Guarantee Co. v. Jellins, 29 Cal.2d 242, 174 P.2d 625 (1946); State v. Anderson,

195 Kan. 649, 408 P.2d 864 (1966); Commissioner of Banking and Insurance v. Community Health Service, 129 N.J.L. 427, 30 A.2d 44 (1943).
24

Id., pp. 247-248. 28 Cal. 2d 790 (1946). Id., p. 809. 345 N.J. Super. 410, 785 A.2d 457 (2001);< http://lawlibrary.rutgers.edu/courts/appellate/a1562-00.opn.html> (visited July 14, 2009). Id., citing Group Health Ins. of N.J. v. Howell, 40 N.J. 436, 451 (1963). L.R. Russ and S.F. Segalla, 1 Couch on Ins. 1:46 (3rd ed., December 2008).

25

26

27

28

29

30

This involves the determination of a medical condition (such as a disease) by physical examination or by study of its symptoms ( Rollo, p. 613, citing Blacks Law Dictionary, p. 484 [8th ed.]).
31

Rollo, pp. 612-613.

32

One such decision of the United States Supreme Court is Rush Prudential HMO, Inc. v. Moran (536 U.S. 355 [2002]). In that case, the Court recognized that HMOs provide both insurance and health care services and that Congress has understood the insurance aspects of HMOs since the passage of the HMO Act of 1973. This case is not applicable here. Firstly, this was not a tax case. Secondly, the Court stated that Congress expressly understood and viewed HMOs as insurers. It is not the same here in the Philippines. As will be discussed below, there is no showing that the Philippine Congress had demonstrated an awareness of HMOs as insurers.
33

See Executive Order No. 119 (1987) and Administrative Order (AO) No. 34 (1994), as amended by AO No. 36 (1996). G.R. No. 86738, 13 November 1991, 203 SCRA 504. 140 Phil. 20 (1969). Supra note 34, pp. 510-511. Decision, pp. 420-421.

34

35

36

37

38

Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, 25 November 2003, 416 SCRA 436, citing Miller v. Illinois Cent. R Co., Ill. So. 559, 28 February 1927.
39

Paseo Realty & Development Corporation v. Court of Appeals, G.R. No. 119286, 13 October 2004, 440 SCRA 235, 251. Collector of Int. Rev. v. La Tondea, Inc. and CTA, 115 Phil. 841, 846 (1963). Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No. 156167, 16 May 2005, 458 SCRA 550, 566, citations omitted. M. C. L. Campos, Insurance, pp. 17-18 (1983), citing Physicians Defense Co. v. OBrien, 100 Minn. 490, 111 N.W. 397 (1907). 438 N.W.2d 350. (Mich. Ct. App. 1989). Id., p. 354. Rollo, p. 702, citing Phillip, Booth et al., Modern Actuarial Theory and Practice (2005). Entitled "An Act to Provide for the Support of the Insular, Provincial and Municipal Governments, by Internal Taxation." Executive Order No. An Act Rationalizing the Provisions of the DST of the NIRC of 1997, as amended, and for other purposes.

40

41

42

43

44

45

46

47

48

49

Rollo, pp. 589, 591, citing <http://www.rmaf.org.ph/Awardees/Biography/ Biography BengzonAlf.htm>; <http://doktorko.com/_blog/index.php?mod=blog_article&a=80&md=897>; <http://www.hmi.com.ph/prof.html> (visited July 15, 2009).
50

Id., p. 592.

51

MCIAA v. Marcos, 330 Phil. 392, 404 (1996). United States Chief Justice Marshall in McCulloch v. Maryland, 17 U.S. 316, 4 Wheat, 316, 4 L ed. 579, 607 (1819). Inclusive of penalties. Rollo, p. 589. Manila Railroad Company v. A. L. Ammen Transportation Co., Inc., 48 Phil. 900, 907 (1926). Constitution, Section 3, Article XIII on Social Justice and Human Rights reads as follows: Section 3. xxx The State shall regulate the relations between workers and employers, recognizing the right of labor to its just share in the fruits of production and the right of enterprises to reasonable return on investments, and to expansion and growth . (Emphasis supplied)

52

53

54

55

56

57

131 Phil. 773 (1968). Id., pp. 780-781. Manatad v. Philippine Telegraph and Telephone Corporation, G.R. No. 172363, 7 March 2008, 548 SCRA 64, 80. Rollo, p. 661. Id., pp. 260-261. Id., p. 742. Philippine Banking Corporation v. CIR, G.R. No. 170574, 30 January 2009. CA-G.R. SP No. 53301, 18 June 2001. G.R. No. 148680. The dismissal was due to the failure of petitioner therein to attach a certified true copy of the assailed decision. Del Rosario v. Sandiganbayan, G.R. No. 143419, 22 June 2006, 492 SCRA 170, 177.

58

59

60

61

62

63

64

65

66

67

68

Complaint of Mr. Aurelio Indencia Arrienda Against SC Justices Puno, Kapunan, Pardo, Ynares-Santiago, et al. , A.M. No. 03-11-30-SC, 9 June 2005, 460 SCRA 1, 14, citing Tan v. Nitafan, G.R. No. 76965, 11 March 1994, 231 SCRA 129; Republic v. CA, 381 Phil. 558, 565 (2000), citing Bernarte, et al. v. Court of Appeals, et al., 331 Phil. 643, 659 (1996).
69

See Bernarte, et al. v. Court of Appeals, et al., id., p. 567. G.R. No. 153793, 29 August 2006, 500 SCRA 87. Extended Resolution, G.R. No. 156305, 17 February 2003.

70

71

72

Supra note 70, p. 102. G.R. No. 156305 referred to the income of Baier-Nickel for taxable year 1994 while G.R. No. 153793 pertained to Baier-Nickels income in 1995.
73

Section 4. xxx (3) Cases or matters heard by a Division shall be decided or resolved with the concurrence of a majority of the members who actually took part in the deliberation on the issues in the case and voted thereon, and in no case, without the concurrence of at least three of such members. When the required number is not obtained, the case shall be decided En Banc: Provided, that no doctrine or principle of law laid down by the Court in a decision rendered En Banc or in Division may be modified or reversed except by the Court sitting En Banc. (Emphasis supplied)

74

That is, fifty centavos (P0.50) on each four pesos (P4.00), or a fractional part thereof, of the premium charged.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G. R. No. 157064 August 7, 2006 BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.) Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION CHICO-NAZARIO, J.: This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, 1 ordering the petitioner to pay the Government the amount of P826,698.31 as deficiency income tax for the year 1987 plus 25% surcharge and 20% interest per annum. The Court of Appeals, in its assailed Decision, reversed the Decision of the Court of Tax Appeals (CTA) dated 17 May 2000 2 in C.T.A. Case No. 5662. Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is a corporation engaged in the trading of securities. On 14 April 1988, petitioner filed its Annual Income Tax Return for taxable year 1987. After an audit investigation conducted by the Bureau of Internal Revenue (BIR), respondent Commissioner of Internal Revenue (CIR) issued an assessment for deficiency income tax in the amount of P826,698.31 arising from the disallowance of the item on salaries, bonuses and allowances in the amount of P1,219,093,93 as part of the deductible business expense since petitioner failed to subject the salaries, bonuses and allowances to withholding taxes. This assessment was covered by Formal Assessment Notice No. FAN-1-87-91-000649 dated 1 February 1991, which, respondent alleges, was sent to petitioner through registered mail on 6 February 1991. However, petitioner denies receiving the formal assessment notice. 3 On 17 March 1992, petitioner was served with a Warrant of Distraint and/or Levy to enforce collection of the deficiency income tax for the year 1987. Petitioner filed a formal protest, dated 25 March 1992, against the Warrant of Distraint and/or Levy, requesting for its cancellation. On 3 July 1998, petitioner received a letter dated 30 April 1998 from the respondent denying the protest with finality. 4 On 31 July 1998, petitioner filed a petition for review with the CTA. After due notice and hearing, the CTA rendered a decision in favor of petitioner on 17 May 2000. The CTA ruled on the primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of the assessment. It maintained that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption. It reasoned that the direct denial of the petitioner shifts the burden of proof to the respondent that the mailed letter was actually received by the petitioner. The CTA found the BIR records submitted by the respondent immaterial, self-serving, and therefore insufficient to prove that the assessment notice was mailed and duly received by the petitioner. 5 The dispositive portion of this decision reads: WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment against petitioner is hereby CANCELLED. Respondent is hereby ORDERED TO DESIST from collecting said deficiency tax. No pronouncement as to costs. 6 On 6 June 2000, respondent moved for reconsideration of the aforesaid decision but was denied by the CTA in a Resolution dated 25 July 2000. Thereafter, respondent appealed to the Court of Appeals on 31 August 2001. In reversing the CTA decision, the Court of Appeals found the evidence presented by the respondent to be sufficient proof that the tax assessment notice was mailed to the petitioner, therefore the legal presumption that it was received should apply. 7 Thus, the Court of Appeals ruled that: WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000 as well as the Resolution dated July 25, 2000 are hereby REVERSED and SET ASIDE, and a new on entered ordering the respondent to pay the amount of P826,698.31 as deficiency income tax for the year 1987 plus 25% surcharge and 20% interest per annum from February 6, 1991 until fully paid pursuant to Sections 248 and 249 of the Tax Code. 8 Petitioner moved for reconsideration of the said decision but the same was denied by the Court of Appeals in its assailed Resolution dated 30 January 2003. 9 Hence, this Petition for Review on Certiorari raising the following issues: I WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS FINDING THAT THE COURT OF TAX APPEALS COMMITTED "GROSS ERROR IN THE APPRECIATION OF FACTS."

II WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN REVERSING THE SUBJECT DECISION OF THE COURT OF TAX APPEALS. III WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO ASSESS PETITIONER FOR ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS PRESCRIBED. IV WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO COLLECT THE SUBJECT ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS PRESCRIBED. V WHETHER OR NOT PETITIONER IS LIABLE FOR THE ALLEGED DEFICIENCY INCOME TAX ASSESSMENT FOR 1987. VI WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT OF PETITIONER TO DUE PROCESS. This Court finds the instant Petition meritorious. The core issue in this case is whether or not respondents right to assess petitioners alleged deficiency income tax is barred by prescription, the resolution of which depends on reviewing the findings of fact of the Court of Appeals and the CTA. While the general rule is that factual findings of the Court of Appeals are binding on this Court, there are, however, recognized exceptions 11 thereto, such as when the findings are contrary to those of the trial court or, in this case, the CTA. 12 In its Decision, the CTA resolved the issues raised by the parties thus: Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965: "The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)." In the instant case, Respondent utterly failed to discharge this duty. No substantial evidence was ever presented to prove that the assessment notice No. FAN-1-87-91-000649 or other supposed notices subsequent thereto were in fact issued or sent to the taxpayer. As a matter of fact, it only submitted the BIR record book which allegedly contains the list of taxpayers names, the reference number, the year, the nature of tax, the city/municipality and the amount (see Exh. 5-a for the Respondent). Purportedly, Respondent intended to show to this Court that all assessments made are entered into a record book in chronological order outlining the details of the assessment and the taxpayer liable thereon. However, as can be gleaned from the face of the exhibit, all entries thereon appears to be immaterial and impertinent in proving that the assessment notice was mailed and duly received by Petitioner. Nothing indicates therein all essential facts that could sustain the burden of proof being shifted to the Respondent. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus: "While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers intervention, notice or
10

control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965). xxxx The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued. Consequently, the governments right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). 13 Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals 14 this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the Tax Court. 15 In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect. Under Section 203 16 of the National Internal Revenue Code (NIRC), respondent had three (3) years from the last day for the filing of the return to send an assessment notice to petitioner. In the case of Collector of Internal Revenue v. Bautista, 17 this Court held that an assessment is made within the prescriptive period if notice to this effect is released, mailed or sent by the CIR to the taxpayer within said period. Receipt thereof by the taxpayer within the prescriptive period is not necessary. At this point, it should be clarified that the rule does not dispense with the requirement that the taxpayer should actually receive, even beyond the prescriptive period, the assessment notice which was timely released, mailed and sent. In the present case, records show that petitioner filed its Annual Income Tax Return for taxable year 1987 on 14 April 1988. 18 The last day for filing by petitioner of its return was on 15 April 1988, 19 thus, giving respondent until 15 April 1991 within which to send an assessment notice. While respondent avers that it sent the assessment notice dated 1 February 1991 on 6 February 1991, within the three (3)-year period prescribed by law, petitioner denies having received an assessment notice from respondent. Petitioner alleges that it came to know of the deficiency tax assessment only on 17 March 1992 when it was served with the Warrant of Distraint and Levy. 20 In Protectors Services, Inc. v. Court of Appeals, 21 this Court ruled that when a mail matter is sent by registered mail, there exists a presumption, set forth under Section 3(v), Rule 131 of the Rules of Court, 22 that it was received in the regular course of mail. The facts to be proved in order to raise this presumption are: (a) that the letter was properly addressed with postage prepaid; and (b) that it was mailed. While a mailed letter is deemed received by the addressee in the ordinary course of mail, this is still merely a disputable presumption subject to controversion, and a direct denial of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee. 23 In the present case, petitioner denies receiving the assessment notice, and the respondent was unable to present substantial evidence that such notice was, indeed, mailed or sent by the respondent before the BIRs right to assess had prescribed and that said notice was received by the petitioner. The respondent presented the BIR record book where the name of the taxpayer, the kind of tax assessed, the registry receipt number and the date of mailing were noted. The BIR records custodian, Ingrid Versola, also testified that she made the entries therein. Respondent offered the entry in the BIR record book and the testimony of its record custodian as entries in official records in accordance with Section 44, Rule 130 of the Rules of Court, 24 which states that: Section 44. Entries in official records. - Entries in official records made in the performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specially enjoined by law, are prima facie evidence of the facts therein stated. The foregoing rule on evidence, however, must be read in accordance with this Courts pronouncement in Africa v. Caltex (Phil.), Inc., 25 where it has been held that an entrant must have personal knowledge of the facts stated by him or such facts were acquired by him from reports made by persons under a legal duty to submit the same. There are three requisites for admissibility under the rule just mentioned: (a) that the entry was made by a public officer, or by another person specially enjoined by law to do so; (b) that it was made by the public officer in the performance of his duties, or by such other person in the performance of a duty specially enjoined by law; and (c) that the public officer or other person had sufficient knowledge of the facts by him stated, which must have been acquired by him personally or through official information x x x. In this case, the entries made by Ingrid Versola were not based on her personal knowledge as she did not attest to the fact that she personally prepared and mailed the assessment notice. Nor was it stated in the transcript of stenographic notes 26 how and from whom she obtained the pertinent information. Moreover, she did not attest to the fact that she acquired the reports from persons under a legal duty to submit the same. Hence, Rule 130, Section 44 finds no application in the present case. Thus, the evidence offered by respondent does not qualify as an exception to the rule against hearsay evidence. Furthermore, independent evidence, such as the registry receipt of the assessment notice, or a certification from the Bureau of Posts, could have easily been obtained. Yet respondent failed to present such evidence.

In the case of Nava v. Commissioner of Internal Revenue, 27 this Court stressed on the importance of proving the release, mailing or sending of the notice. While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers intervention, notice, or control, without adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense. In the present case, the evidence offered by the respondent fails to convince this Court that Formal Assessment Notice No. FAN-1-8791-000649 was released, mailed, or sent before 15 April 1991, or before the lapse of the period of limitation upon assessment and collection prescribed by Section 203 of the NIRC. Such evidence, therefore, is insufficient to give rise to the presumption that the assessment notice was received in the regular course of mail. Consequently, the right of the government to assess and collect the alleged deficiency tax is barred by prescription. IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, is hereby REVERSED and SET ASIDE, and the Decision of the Court of Tax Appeals in C.T.A. Case No. 5662, dated 17 May 2000, cancelling the 1988 Deficiency Tax Assessment against Barcelon, Roxas Securitites, Inc. (now known as UPB Securities, Inc.) for being barred by prescription, is hereby REINSTATED. No costs. SO ORDERED.
MINITA V. CHICO-NAZARIO Associate Justice WE CONCUR: ARTEMIO V. PANGANIBAN Chief Justice Chairman CONSUELO YNARES-SANTIAGO Associate Justice MA. ALICIA AUSTRIA-MARTINEZ Associate Justice

ROMEO J. CALLEJO, SR. Associate Justice CERTIFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice

Footnotes
1

Penned by Associate Justice Delilah Vidallon-Magtolis with Associate Justice Candido Rivera and Associate Justice Sergio Pestao, concurring. Rollo, pp. 12-17.
2

Id. at 18-28. Id. at 18. Id. at 18-19. Id. at 22-27. Id. at 27.

Id. at 16-17. Id. at 17. CA rollo, p. 147. Rollo, pp. 55-56.

10

11

Instances when the findings of fact of the trial court and/or Court of Appeals may be reviewed by the Supreme Court are (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) where there is a grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) the findings of the Court of Appeals are contrary to those of the trial court; (8) when the findings of fact are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondents; and (10) the finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is contradicted by the evidence on record. (Misa v. Court of Appeals, G.R. No. 97291, 5 August 1992, 212 SCRA 217, 221-222)
12

Metro Construction, Inc. v. Chatham Properties, Inc., 418 Phil. 176, 206 (2001). Rollo, pp. 24-27. G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446. Commissioner of Internal Revenue v. Mitsubishi Metal Corp., G.R. Nos. 54908 and 80041, 22 January 1990, 181 SCRA 214, 220.

13

14

15

16

Section 203. Period of Limitation Upon Assessment and Collection. Except as provided in the Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after expiration of such period: Provided, that in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.
17

105 Phil. 1326, 1327 (1959). Rollo, pp. 14 and 24. Section 77 (B) of the NIRC states that:

18

19

(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.
20

Rollo, pp. 53-54. 386 Phil. 611, 623 (2000). Section 3(v), Rule 131, of the 1997 Rules of Court provides:

21

22

Sec. 3. Disputable presumptions. The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence: xxxx (v) That a letter duly directed and mailed was received in the regular course of the mail;
23

Republic v. Court of Appeals, G.R. No. L-38540, 30 April 1987, 149 SCRA 351, 355. Rollo, p. 56. 123 Phil. 272, 277 (1966).

24

25

26

Transcript of Stenographic Notes, Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue, CTA Case No. 5662, 25 August 1998, pp. 1-13.
27

121 Phil. 117, 123-124 (1965).

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 81446 August 18, 1988 BONIFACIA SY PO, petitioner, vs. HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF INTERNAL REVENUE, respondents. Basilio E. Duaban for petitioner. SARMIENTO, J.: This is an appeal from the decision 1 of the respondent Court of Tax Appeals, dated September 30,1987, which affirmed an earlier decision of the correspondent Commissioner of Internal Revenue in assessment letters dated August 16, 1972 and September 26, 1972, which ordered the payment by the petitioner of deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 and deficiency specific tax for January 2, 1964 to January 19, 1972, in the amount of P5,595,003.68. We adopt the respondent court's finding of facts, to wit: Petitioner is the widow of the late Mr. Po Bien Sing who died on September 7, 1980. In the taxable years 1964 to 1972, the deceased Po Bien Sing was the sole proprietor of Silver Cup Wine Factory (Silver Cup for brevity), Talisay, Cebu. He was engaged in the business of manufacture and sale of compounded liquors, using alcohol and other ingredients as raw materials. On the basis of a denunciation against Silver Cup allegedly "for tax evasion amounting to millions of pesos" the then Secretary of Finance Cesar Virata directed the Finance-BIR--NBI team constituted under Finance Department Order No. 13-70 dated February 19, 1971 (Exh- 3, pp. 532-553, Folder II, BIR rec.) to conduct the corresponding investigation in a memorandum dated April 2, 1971 (p. 528, Folder II, BIR rec.). Accordingly, a letter and a subpoena duces tecum dated April 13,1971 and May 3,1971, respectively, were issued against Silver Cup requesting production of the accounting records and other related documents for the examination of the team. (Exh. 11, pp. 525526, Folder II, BIR rec.). Mr. Po Bien Sing did not produce his books of accounts as requested (Affidavit dated December 24, 1971 of Mr. Generoso. Quinain of the team, p. 525, Folder H, BIR rec.). This prompted the team with the assistance of the PC Company, Cebu City, to enter the factory bodega of Silver Cup and seized different brands, consisting of 1,555 cases of alcohol products. (Exh. 22, Memorandum Report of the Team dated June 5, 1971, pp. 491-492, Folder II, BIR rec.). The inventory lists of the seized alcohol products are contained in Volumes I, II, III, IV and V (Exhibits 14, 15, 16, 17, and 18, respectively, BIR rec.). On the basis of the team's report of investigation, the respondent Commissioner of Internal Revenue assessed Mr. Po Bien Sing deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 (Exh. 6 pp. 17-19, Folder I, BIR rec.) and for deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR rec.). Petitioner protested the deficiency assessments through letters dated October 9 and October 30, 1972 (Exhs. 7 and 9, pp. 27-28; pp. 152-159, respectively, BIR rec.), which protests were referred for reinvestigation. The corresponding report dated August 13, 1981 (Exh. 1 0, pp. 355, Folder I, BIR rec.) recommended the reiteration of the assessments in view of the taxpayer's persistent failure to present the books of accounts for examination (Exh. 8, p. 107, Folder I, BIR rec.), compelling respondent to issue warrants of distraint and levy on September 10, 1981 (Exh. 11, p. 361, Folder I, BIR rec.). The warrants were admittedly received by petitioner on October 14, 1981 (Par. IX, Petition; admitted par. 2, Answer), which petitioner deemed respondent's decision denying her protest on the subject assessments. Hence, petitioner's appeal on October 29,1981. 2 The petitioner assigns the following errors: I RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT PETITIONER HAS NOT PRESENTED ANY EVIDENCE OF RELEVANCE AND COMPETENCE REQUIRED TO BASH THE TROUBLING DISCREPANCIES AND SQUARE THE ISSUE OF ILLEGALITY POSITED ON THE SUBJECT ASSESSMENTS. II

RESPONDENT COURT OF TAX APPEALS PALPABLY ERRED IN DECIDING THE CASE IN A WAY CONTRARY TO THE DOCTRINES ALREADY LAID DOWN BY THIS COURT. III RESPONDENT COURT OF TAX APPEALS GRAVELY ERRED IN FINDING PO BEEN SING TO HAVE INCURRED THE ALLEGED DEFICIENCY TAXES IN QUESTION. 3 We affirm. Settled is the rule that the factual findings of the Court of Tax Appeals are binding upon this Honorable Court and can only be disturbed on appeal if not supported by substantial evidence. 4 The assignments of errors boils down to a single issue previously raised before the respondent Court, i.e., whether or not the assessments have valid and legal bases. The applicable legal provision is Section 16(b) of the National Internal Revenue Code of 1977 as amended. It reads: Sec. 16. Power of the Commissioner of Internal Revenue to make assessments. xxx xxx xxx (b) Failure to submit required returns, statements, reports and other documents. - When a report required by law as a basis for the assessment of an national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable. In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise, files a false or fraudulent return or other documents, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes. The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report required by law for the purpose of assessment is not available or when the tax report is incomplete or fraudulent. In the instant case, the persistent failure of the late Po Bien Sing and the herein petitioner to present their books of accounts for examination for the taxable years involved left the Commissioner of Internal Revenue no other legal option except to resort to the power conferred upon him under Section 16 of the Tax Code. The tax figures arrived at by the Commissioner of Internal Revenue are by no means arbitrary. We reproduce the respondent court's findings, to wit: As thus shown, on the basis of the quantity of bottles of wines seized during the raid and the sworn statements of former employees Messrs. Nelson S. Po and Alfonso Po taken on May 26, and 27,1971, respectively, by the investigating team in Cebu City (Exhs. 4 and 5, pp. 514-517, pp. 511-513, Folder 11, BIR rec.), it was ascertained that the Silver Cup for the years 1964 to 1970, inclusive, utilized and consumed in the manufacture of compounded liquours and other products 20,105 drums of alcohol as raw materials 81,288,787 proof liters of alcohol. As determined, the total specific tax liability of the taxpayer for 1964 to 1971 amounted to P5,593,003.68 (Exh. E, petition, p. 10, CTA rec.) Likewise, the team found due from Silver Cup deficiency income taxes for the years 1966 to 1970 inclusive in the aggregate sum of P7,154,685.16, as follows: 1966 P207,636.24 1967 645,335.04 1968 1,683,588.48 1969 1,589,622.48 1970 3,028,502.92

Total amount due. and collectible P7,154,685.16

The 50% surcharge has been imposed, pursuant to Section 72 * of the Tax Code and tax 1/2% monthly interest has likewise been imposed pursuant to the provision of Section 51(d) ** of the Tax Code (Exh. O, petition). 5 The petitioner assails these assessments as wrong. In the case of Collector of Internal Revenue vs. Reyes, 6 we ruled: Where the taxpayer is appealing to the tax court on the ground that the Collector's assessment is erroneous, it is incumbent upon him to prove there what is the correct and just liability by a full and fair disclosure of all pertinent data in his possession. Otherwise, if the taxpayer confines himself to proving that the tax assessment is wrong, the tax court proceedings would settle nothing, and the way would be left open for subsequent assessments and appeals in interminable succession. Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. 7 In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. 8 All presumptions are in favor of the correctness of tax assessments. 9 On the whole, we find that the fraudulent acts detailed in the decision under review had not been satisfactorily rebutted by the petitioner. There are indeed clear indications on the part of the taxpayer to deprive the Government of the taxes due. The Assistant Factory Superintendent of Silver Cup, Nelson Po gave the following testimony: Annexes "A", "A-1 " to "A-17" show that from January to December 1970, Silver Cup had used in production 189 drums of untaxed distilled alcohol and 3,722 drums of untaxed distilled alcohol. Can you tell us how could this be possible with the presence of a revenue inspector in the premises of Silver Cup during working hours? Actually, the revenue inspector or storekeeper comes around once a week on the average. Sometimes, when the storekeeper is around in the morning and Po Bein Sing wants to operate with untaxed alcohol as raw materials, Po Bien Sing tells the storekeeper to go home because the factory is not going to operate for the day. After the storekeeper leaves, the illegal operation then begins. Untaxed alcohol is brought in from Cebu Alcohol Plant into the compound of Silver Cup sometimes at about 6:00 A.M. or at 12:00 noon or in the evening or even at mid-night when the storekeeper is not around. When the storekeeper comes, he sees nothing because untaxed alcohol is brought directly to, and stored at, a secret tunnel within the bodega itself inside the compound of Silver Cup. In the same vein, the factory personnel manager testified that false entries were entered in the official register book: thus, A As factory personnel manager and all-around handy man of Po Bien Sing, owner of Silver Cup, these labels were entrusted to me to make the false entries in the official register book of Silver Cup, which I did under the direction of Po Bien Sing. (Sworn statement, p. 512, Folder II, BIR rec.) 10 (Emphasis ours) The existence of fraud as found by the respondents can not be lightly set aside absent substantial evidence presented by the petitioner to counteract such finding. The findings of fact of the respondent Court of Tax Appeals are entitled to the highest respect. 11 We do not find anything in the questioned decision that should disturb this long-established doctrine. WHEREFORE, the Petition is DENIED. The Decision of the respondent Court of Tax Appeals is hereby AFFIRMED. Costs against the petitioner. SO ORDERED. Melencio-Herrera, Paras and Padilla, JJ., concur.
Footnotes

1 Penned by Associate Judge Alex Z. Reyes and concurred in by Presiding Judge Amante Filler; Associate Judge Constante C. Roaquin was on leave. 2 Rollo, Decision, 10-13. 3 Id., Petition, 3; Rollo, 4. 4 Aznar vs. CTA, L-20569, August 23,1974,58 SCRA 51 9; Manila Wine Merchants vs. Commissioner of Internal Revenue, I,26145, February 20, 1984, 127 SCRA 483; La Suerte Cigar and Cigarette Factory vs. Court of Tax Appeals, L-36130 and Alhambra Industries va. Court of Tax Appeals, L-36131, January 17,1985,134 SCRA 29. * Old rule, Section 72 of the National Internal Revenue Code otherwise known as Commonwealth Act No. 466: Surcharges for failure to render returns and for rendering false and fraudulent returns.-The Commissioner of Internal Revenue shall assess all income taxes. In case of willful neglect to file the return or list within the time prescribed by law, or in case a false or fraudulent return or list is willingly made, the Commissioner of Internal Revenue shall add to the tax or to the deficiency fax, in case any payment has been made on the basis of such return before the discovery of the falsity of fraud, a surcharge of fifty per centum of the amount of such tax or deficiency.... Now Section 248(b) of the National Internal Revenue Code of 1977 as amended: In case of willful neglect to file the return within the period prescribed by this Code or regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposes shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud. ** Old Rule, Section 51(d) of the National Internal Revenue Code otherwise known as Commonwealth Act No. 466: Interest on deficiency.Interest upon the amount determined as a deficiency shall be assessed at the same time as the deficiency and shall be paid upon notice and demand from the Commissioner, of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in installments, from the date prescribed for the payment of the first installment) to the date of the deficiency is assessed: Provided, That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years, the present provisions regarding prescription to the contrary notwithstanding. Now Section 249(a) of the National Internal Revenue Code of 1977 as amended: In generalThere shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed for payment until the amount is fully paid. 5 Rollo, 14-15. 6 104 Phil. 1061 (1958) Unrep., Nos. L-11534 and L-11558, November 25, 1958. 7 Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc., L-68230, November 25, 1986, 145 SCRA 671. 8 Gutierrez vs. Villegas, L-17117, July 31, 1963, 8 SCRA 527. 9 Collector of Internal Revenue vs. Bohol Land Transportation Co., L-13099 and L-13462, April 29,1960,58 O.G. 2407. 10 Rollo, Decision, 15-16. 11 Raymundo vs. Joya, L-27733, December 3, 1980, 101 SCRA 495; Sanchez vs. Commissioner, 102 Phil. 37 (1957); Commissioner vs. Priscilla Estate, 120 Phil. 125 (1964); Commissioner of Internal Revenue vs. Ayala Securities Corporation, L29485, March 31, 1976, 70 SCRA 204.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 106913 May 10, 1994 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. HON. COURT OF APPEALS and ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION, respondents. The Solicitor General for petitioner. M.L. Gadioma Law Office for private respondent. DAVIDE, JR., J.: The petitioner seeks the modification of the 19 February 1992 Decision 1 of the Court of Appeals in CA-G.R. SP No. 20005 2 which affirmed the decision of the Court of Tax Appeals granting the claims of private respondent Atlas Consolidated Mining and Development Corporation (Atlas) for tax refund under Section 5 of R.A. No. 1435. 3 The facts of the case are summarized by the respondent Court of Appeals as follows: It appears that petitioner mining corporation, organized and existing under and by virtue of the laws of the Philippines, operates a concession in Toledo City, Cebu. It actually used and/or consumed tax paid extra gasoline and diesel fuel for the mining operation purchased on various dates from Mobil Oil Philippines as follows: PERIOD SPECIFIC TAXES 25% July-Dec. P1,008,648.15 P252,162.04 1976 Jan.-Dec. P1,834,357.27 P458,589.32 1977 Jan.-May P798,573.60 P199,643.49 1978 P3,641.579.02 P910,349.76 On July 19, 1978 (pp. 9-10, CTA rec.) petitioner filed with the respondent [Commissioner of Internal Revenue] a written claim for tax credit of the total amount of P910,394.76 representing 25% of the specifictaxes paid on said fuel oils pursuant to Sec. 5 of Republic Act No. 1435, infra, in relation to Sec. 142 and 145 of the Tax Code There being no action taken on its claim for refund on July 21, 1978, petitioner filed the instant judicial claim for refund.' (CTA Decision, pp. 68-69, Rollo). On November 28, 1986, the Court of Tax Appeals rendered its decision, stating to wit: WHEREFORE, finding the judicial claim for refund by petitioner well-taken, it is hereby GRANTED. The Commissioner of Internal Revenue is hereby ordered to refund and/or credit petitioner in the amount of P910,394.76 No pronouncement as to costs. SO ORDERED.' (CTA Decision, p. 78, Rollo). 4 From the decision of the Court of Tax Appeals, petitioner Commissioner of Internal Revenue appealed to the Court of Appeals raising the question of whether or not the privilege of a partial refund for specific tax paid on oils used in mining operations as provided under Section 5 of R.A. No. 1435 still subsists.

The petitioner argued before the Court of Appeals that private respondent Atlas is not entitled to the tax refund because no additional tax was imposed on it under any city or municipal ordinance as provided under Section 4 of R.A. No. 1435. It further contended that tax refunds provided to concessionaires under Section 5 of R.A. No. 1435 were deemed repealed by: (1) P.D. No. 314 issued on 20 October 1973, (2) the Local Tax Code effective 1 July 1973, (3) P.D. No. 426 effective 30 March 1974, (4) Local Tax Regulations No. 174 issued on 18 April 1974, (5) P.D. No. 711 effective 1 July 1975, and (6) P.D. Nos. 1158 and 1158-A issued on 3 June 1977. In its Decision of 19 February 1992, the Court of Appeals affirmed the decision of the Court of Tax Appeals and disregarded the petitioner's theory of repeal. It held that there is no evident conflict between R.A. No. 1435 and subsequent legislations. It decreed, however, that the claim for refund of specific taxes paid before 21 July 1976 had already prescribed. Thus: We disagree with the contention of the petitioner-appellant that the privilege granted by R.A. 1435 was subsequently abrogated by the issuance of the previously enumerated decrees. The refund privilege, expressly provided by law, can not be presumed to have been repealed by other subsequent legislations when there was no evident conflict between them and R.A. 1435; implied repeal cannot be construed herein. Neither do We agree that the promulgation of P.D. No. 231, as amended by P.D. 426, or the Local Tax Code had affected the refund privilege granted by R.A. 1435 for this Act does not involve the imposition by any local government of any separate specific tax on manufactured oils. R.A. 1435 itself, had provided the imposition of additional specific tax on manufactured oils being purchased so as to realize an increased highway fund. The Act is separate and distinct from the Local Tax Code. The refund on the specific tax paid prior to July 21, 1976 for the amount of P779,283.89 has already prescribed. The claim for refund should be made within two years from the date of payment of the tax sought to be refunded. The enactment of P.D. 69 in 1973 disregards the supervening cause rule hence the two year period is reckoned from the time of payment of the said tax. Consequently, payments made by the Atlas Mining Corporation two years prior to the commencement of its claim for refund or before July 21, 1976, has already prescribed. The refund that can be availed of are those that accrued from the payments made after July 21, 1976, which, in this case, amounted to P910,394.76. Premises considered, the decision of the Court of Tax Appeals granting the refund and/or tax credit in favor of Atlas Consolidated Mining and Development Corporation for the sum of P910,394.76 is hereby AFFIRMED and the instant petition is DISMISSED. SO ORDERED. 5 The petitioner moved for the reconsideration of the above decision 6 and brought to the attention of the Court of Appeals our Decision of 30 September 1991 in Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation 7 wherein we held that the tax refunds under Section 5 of R.A. No. 1435 claimed by a mining firm for specific taxes paid in the purchase of manufactured oils were no longer allowed because of the repeal of such privilege by P.D. No. 711. He alternatively argued: 8. Assuming arguendo that private respondent is entitled to the refund, the whole amount of P910,394.76 is not refundable. This Honorable Court ruled that the claim for refund should be made within two years from the date of payment of the tax sought to be refunded and that, consequently, payments made by private respondent before July 21, 1976 has already prescribed (Decision, page 4). This is because the petition seeking the refund was filed with the Tax Court on July 21, 1978. 9. In the petition for review (page 30), we pointed out that the following payments were made before July 21, 1976: O.R. No. Date Amount Payment
1. Exh. "E" 2950387 July 1, 1976 P838,221.71 2. Exh. "E-1" 2950384 June 25, 1976 779,283.89 3. Exh. "E-2" 2950394 July 1, 1976 209,600.00 4. Exh. "E-3" 2950393 July 1, 1976 717,522.59 5. Exh. "E-4" 2950411 July 12, 1976 293,500.00 6. Exh. "E-5" 2950401 July 7, 1976 712,569.93 7. Exh. "E-7 2951271 July 19, 1976 267,600.00

Since the amount of P910,394.76 sought to be refunded includes specific tax payments made before July 21, 1976 as indicated above, the entire amount of P910,394.76 is not refundable. 8 The Court of Appeals denied the motion in its Resolution of 4 September 1992. 9 On 19 October 1992, the petitioner filed the instant petition. He concedes therein that Atlas is entitled to a tax refund of 25% of the specific taxes paid for manufactured oils or fuel oils it purchased for its mining operations as provided under Section 5 of R.A. No. 1435 and pursuant to our 25 March 1992 Resolution in the Rio Tuba case 10 which modified our original decision therein of 30 September 1991 by declaring that the "Highway Special Fund continued its existence up to 1985" and that, accordingly, "mining and logging companies are entitled to the refund privilege granted by R.A. No. 1435 on specific taxes paid up to 1985 on manufactured and diesel

fuel oils." The petitioner contends, however, that the refund should be based on the tax rates fixed under Sections 1 and 2 of R.A. No. 1435 and not on the increased rates prescribed thereafter under various decrees, particularly Sections 153 and 156 of the 1977 Tax Code. In its Comment 11 filed on 18 March 1993, Atlas opposed the petition on the following grounds: (1) the petitioner cannot raise for the first time a novel theory based on our aforesaid Resolution of 25 March 1992 in Rio Tuba in a petition for review on certiorari; 2) the facts and issues in Rio Tuba are not similar to the instant case; and 3) Atlas is entitled to a refund, consistent with the ruling of 12 November 1990 in G.R. No. 93631 entitled Commissioner of Internal Revenue vs. Atlas Consolidated Mining and Development Corporation. The petitioner filed on 21 June 1993 a Reply 12 to the Comment alleging therein that the "novel" issue was raised for the first time because Rio Tuba is "of recent vintage"; moreover, the rule that no new issue may be raised on appeal is not absolute. On 12 July 1993, we gave due course to the petition. The parties then filed their respective memoranda. This petition is meritorious. Our Resolution of 25 March 1992 13 modifying our 30 September 1991 Decision 14 in the Rio Tuba case sets forth the controlling doctrine. In that Resolution, we stated: It is not clear why the Highway Special Fund was maintained for 10 years after the effectivity of P.D. No. 711 or why it was abolished in 1986. The stark fact remains that it retained its status as a special fund up to 1985. We, therefore, modify our decision in this case and rule that mining and logging companies are entitled to the refund privilege granted by R.A. No. 1435 on specific taxes paid up to 1985 on manufactured and diesel fuel oils. Since the private respondent's claim for refund covers specific taxes paid from 1980 to July 1983 then we find that the private respondent is entitled to a refund. It should be made clear, however, that Rio Tuba is not entitled to the whole amount it claims as refund. The specific taxes on oils which Rio Tuba paid for the aforesaid period were no longer based on the rates specified by Sections 1 and 2 of R.A. No. 1435 but on the increased rates mandated under Sections 153 and 156 of the National Internal Revenue Code of 1977. We note, however, that the latter law does not specifically provide for a refund to these mining and lumber companies of specific taxes paid on manufactured and diesel fuel oils. In Insular Lumber Co. v. Court of Tax Appeals, (104 SCRA 710 [1981]), the Court held that the authorized partial refund under section 5 of R.A. No. 1435 partakes of the nature of a tax exemption and therefore cannot be allowed unless granted in the most explicit and categorical language. Since the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund shall be the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435. ACCORDINGLY, the decision in G.R. Nos. 83583-84 is hereby MODIFIED. The private respondent's CLAIM for REFUND is GRANTED, computed on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. No. 1435, without interest. 15 We rule, therefore, that since Atlas's claims for refund cover specific taxes paid before 1985, it should be granted the refund based on the rates specified by Sections 1 and 2 of R.A. No. 1435 and not on the increased rates under Sections 153 and 156 of the Tax Code of 1977, provided the claims are not yet barred by prescription. The claim for refund on the specific tax paid prior to 21 July 1976 had already prescribed because claims for refund should be made within two years from the date of payment of the tax sought to be refunded 16 and Atlas' judicial claim for refund was made only on 21 July 1978. We cannot subscribe to the view of Atlas that the petitioner cannot raise the new theory in its petition that the 25% tax refund should be based on the rates prescribed in Section 1 and 2 of R.A. No. 1435 and not on the increased rates prescribed under Sections 153 and 156 of the Tax Code of 1977. The petitioner merely asks us to consider and apply the rule enunciated in the Resolution of 25 March 1992 in Rio Tuba that modified the 30 September 1991 Decision therein, which decision the petitioner had invoked in his motion to reconsider the judgment of the Court of Appeals. Since the modification took place after the filing of the motion for reconsideration and it was likely that the Court of Appeals was unaware of such modification when it promulgated on 4 September 1992 its resolution denying the motion for reconsideration, it is by no means improper for the petitioner to subsequently invoke that modificatory resolution. Furthermore, even if it be conceded ex gratia that the theory is new, the rule invoked by Atlas is not without exceptions. The Supreme Court may review such matters as may be necessary to serve the interest of justice; 17 it has ample authority to review and resolve matters not specifically raised or assigned as error by the parties if it finds that the consideration and determination of the same is necessary in arriving at a just resolution of a case. 18 Where the issues already raised also rest on other issues not specifically

presented, as long as the latter issues bear relevance and close relation to the former and as long as they arise from matters on record, the Court has the authority to include them in its discussion of the controversy as well as to pass upon them. 19 WHEREFORE, the petition is GRANTED. The challenged decision of the Court of Appeals in CA-G.R. SP No. 20005 is MODIFIED. As modified, the tax refund to be granted to private respondent Atlas Consolidated Mining and Development Corporation in C.T.A. Case No. 2964 shall be computed on the basis of the rates prescribed under Sections 1 and 2 of R.A. No. 1435 and shall be limited to the payments made by it prior to 21 July 1976. The petitioner shall forthwith revise the computation of the refundable amount which shall be remitted, without interest, to the private respondent within sixty (60) days from the finality of this decision. No pronouncements as to costs. SO ORDERED. Cruz, J., Bellosillo, Quiason and Kapunan, JJ., concurs.
#

Footnotes 1 Annex "B" of Petition; Rollo, 34-38. Per Associate Justice Antonio M. Martinez, concurred in by Associate Jutices Asaali S. Isnani and Regina G. Ordeez-Benitez. 2 Entitled "Commissioner of Internal Revenue vs. Atlas Consolidated Mining and Development Corporation and the Court of Tax Appeals." 3 "An Act to Provide Means of Increasing the Highway Special Fund." 4 Rollo, 34-35. 5 Rollo, 37-38. 6 Annex "C" of Petition; Id., 39-49. 7 202 SCRA 137 [1991]. 8 Rollo, 47-48. 9 Id., 51. 10 207 SCRA 549 [1992]. 11 Rollo, 64-69. 12 Id., 73-78. 13 Supra footnote no. 10. 14 Supra footnote no. 7. 15 Supra footnote no. 10, at 551-553. 16 Section 230, National Internal Revenue Code. 17 De Leon vs. Court of Appeals, 205 SCRA 612 [1992]; Asset Privatization Trust vs. Court of Appeals, 214 SCRA 400 [1992]. 18 Sociedad Europea de Financiacion S.A. vs. Court of Appeals, 193 SCRA 105 [1991]. 19 Insular Life Assurance Co., Ltd. Employees Association vs. Insular Life Assurance Co., Ltd., 76 SCRA 50 [1977].

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 128315 June 29, 1999 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO, respondents. PANGANIBAN, J.: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals. Statement of the Case Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for the nullification of the October 30, 1996 Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which effectively affirmed the January 25, 1996 Resolution 3 of the Court of Tax Appeals 4 CTA Case No. 5271. The CTA disposed as follows: WHEREFORE, finding [the herein petitioner's] "Motion to Dismiss" as UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file her answer. Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of Appeals denying reconsideration. The Facts As found by the Court of Appeals, the undisputed facts of the case are as follows: It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to examine the books of accounts and other accounting records of Pascor Realty and Development Corporation. (PRDC) for the years ending 1986, 1987 and 1988. The said examination resulted in a recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively. On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the Department of Justice against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of P10,513,671 .00. Private respondents PRDC, et. al. filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability. On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them.1wphi1.nt In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation of the private respondents on the ground that no formal assessment of the has as yet been issued by the Commissioner. Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6, 1995, the CIR filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss in a Resolution dated January 25, 1996 and ordered the CIR to file an answer within thirty (30) days from receipt of said resolution. The CIR received the resolution on January 31, 1996 but did not file an answer nor did she move to reconsider the resolution. Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in considering the affidavit/report of the revenue officer and the indorsement of said report to the secretary of justice as assessment which may be appealed to the Court of Tax Appeals; Respondent Court Tax Appeals acted with grave abuse of discretion in considering the denial by petitioner of private respondents' Motion for Reconsideration as [a] final decision which may be appealed to the Court of Tax Appeals. In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated: We agree with petitioners' contentions, that the criminal complaint for tax evasion is the assessment issued, and that the letter denial of May 17, 1995 is the decision properly appealable to [u]s. Respondent's ground of denial, therefore, that there was no formal assessment issued, is untenable. It is the Court's honest belief, that the criminal case for tax evasion is already anassessment. The complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached thereto, contains the details of the assessment like the kind and amount of tax due, and the period covered: Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive appellate jurisdiction of this Court, do not, make any mention of "formal assessment." The law merely states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, and other matters arising under the National Internal Revenue Code, other law or part administered by the Bureau of Internal Revenue Code. As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient details needed for an "assessment." These details are more than complete, compared to the following definitions of the term as quoted hereunder. Thus: Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332. (Words and Phrases, Permanent Edition, Vol. 4, p. 446). The word assessment when used in connection with taxation, may have more than one meaning. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. More commonly, the word "assessment" means the official valuation of a taxpayer's property for purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p. 445) From the above, it can be gleaned that an assessment simply states how much tax is due from a taxpayer. Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of respondent's examiners, which was attached to the tax evasion complaint, more than suffice to qualify as an assessment. Therefore, this assessment having been disputed by petitioners, and there being a denial of their letter disputing such assessment, this Court unquestionably acquired jurisdiction over the instant petition for review. 6 As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition. Hence, this recourse to this Court. 7 Ruling of the Court of Appeals The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the Department of Justice constituted an "assessment" of the tax due, and that the said assessment could be the subject of a protest. By definition, an assessment is simply the statement of the details and the amount of tax due from a taxpayer. Based on this definition, the details of the tax contained in the BIR examiners' Joint Affidavit, 8 which was attached to the criminal Complaint, constituted an assessment. Since the assailed Order of the CTA was merely interlocutory and devoid of grave abuse of discretion, a petition for certiorari did not lie. Issues Petitioners submit for the consideration of this Court following issues: (1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted. (3) Whether or not the CTA can take cognizance of the case in the absence of an assessment.
9

In the main, the Court will resolve whether the revenue officers' Affidavit-Report, which was attached to criminal revenue Complaint filed the Department of Justice, constituted an assessment that could be questioned before the Court of Tax Appeals. The Court's Ruling The petition is meritorious. Main Issue: Assessment Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any way be construed as a formal assessment of private respondents' tax liabilities. This position is based on Section 205 of the National Internal Revenue Code 10 (NIRC), which provides that remedies for the collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites Section 223(a) of the same Code, which states that in case of failure to file a return, the tax may be assessed or a proceeding in court may be begun without assessment. Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the collection of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer is required to pay the same. Thus, qualifying as an assessment was the BIR examiners' Joint Affidavit, which contained the details of the supposed taxes due from respondent for taxable years ending 1987 and 1988, and which was attached to the tax evasion Complaint filed with the DOJ. Consequently, the denial by the BIR of private respondents' request for reinvestigation of the disputed assessment is properly appealable to the CTA. We agree with petitioner. Neither the NIRC nor the regulations governing the protest of assessments 11 provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers. True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rates as may be prescribed by rules and regulations, is to be collected form the date prescribed for its payment until the full payment. 12 The issuance of an assessment is vital in determining, the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 13 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, 14 on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 15 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. 16 In the present case, the revenue officers' Affidavit merely contained a computation of respondents' tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. Respondents maintain that an assessment, in relation to taxation, is simply understood' to mean: A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. 17 Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls. 18 Even these definitions fail to advance private respondents' case. That the BIR examiners' Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose

of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof. The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment. In addition, what private respondents sent to the commissioner was a motion for a reconsideration of the tax evasion charges filed, not of an assessment, as shown thus: This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty and Development Corporation and for the same to be referred to the Appellate Division in order to give my client the opportunity of a fair and objective hearing. 19 Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi, 20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both. Private respondents insist that Section 222 should be read in relation to Section 255 of the NLRC, 21 which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs. SO ORDERED. Vitug, Purisima and Gonzaga-Reyes, JJ., concur. Romero, J., abroad on official business.
Footnotes 1 Rollo, pp. 37-41. 2 Fifteenth Division, composed of J. Salome A. Montoya, chairman and ponente; and JJ. Godardo A. Jacinto and Maximiano C. Asuncion, members, concurring. 3 Rollo, pp. 56-62.

4 Composed of Ernesto D. Acosta, presiding judge; and Ramon O. De Veyra and Manuel K. Gruba, associate judges. 5 Rollo, p. 42. 6 Assailed Decision, pp. 1-4; rollo, pp. 37-40. 7 The case was deemed submitted for resolution on October 5, 1998, upon receipt by this Court of the petitioner's Memorandum. Respondent's Memorandum was received on September 29, 1998. 8 Annex "C" and "C-1" of respondent's Comment; rollo, pp. 100-101. 9 Memorandum for Petitioner, p. 4; rollo, p. 225. 10 Sec. 205. Remedies for the Collection of Delinquent Taxes. The civil remedies for the collection of internal revenue, fees, or charges, and increment thereto resulting from delinquency shall be: (a) By distraint of goods, chattels, or effects, and other personal property of whatever character, including stocks and other securities, debts, credits, bank accounts, and interest in and rights to personal property, and by levy upon real property and interest in or rights to real property; and (b) By civil or criminal action. Either of these remedies or both simultaneously may be pursued in the discretion of the authorities charged with the collection of such taxes: Provided, however, That the remedies of distraint and levy shall not: be availed of where the amount of tax involved is not more than One hundred pesos (P100). The judgment in the criminal case shall not only impose the penalty but shall also order payment of the taxes subject of the criminal case as finally decided by the Commissioner. The Bureau of Internal Revenue shall advance the amounts needed to defray costs of collection by means of civil or criminal action, including the preservation or transportation of personal property distrained and the advertisement and sale thereof, as well as of real property and improvements thereon. 11 Revenue Regulation 12-85. 12 Sec. 249 (b). 13 Sec. 203. Period of Limitation Upon Assessment and Collection. Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from the day the return was filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day. 14 Sec. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of the failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at: any time. within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years following the assessment of the tax.(d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy or by a proceeding in court within the period agreed upon writing before the expiration of the five (5)-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding and Section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax return filed in accordance with the provisions of any tax amnesty law or decree. Sec. 228. Protesting of Assessment. When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on excisable articles has not been paid; or (e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayer shall be informed in writing of the law and the faces on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. 16 Basilan Estates v. Commissioner of Internal Revenue, 21 SCRA 17, September 5, 1967. 17 Citing Philippine Law Dictionary, 2nd ed., p. 49. 18 Citing Black's Law Dictionary, 5th ed., p. 107. 19 Urgent Request, for Reconsideration, p. 1; rollo, p. 110. 20 97 SCRA 877, May 30, 1980. 21 Sec. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on Compensation. Any person required under this Code or by rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply correct and accurate any information, who willfully fails to pay such tax, make such accurate information, or withhold or remit taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less than one (1) year but not more than ten (10) years.1wphi1.nt Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or actually files a return or statement and subsequently withdraws the same return or statement after securing the official receiving seal or stamp of receipt of an internal revenue office wherein the same was actually filed shall, upon conviction therefor, be punished by a fine of not less than Ten thousand pesos (P10,000) but not more than Twenty thousand (P20,000) and suffer imprisonment of not less than one (1) year but not more than three (3) years.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 134062

April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. BANK OF THE PHILIPPINE ISLANDS, Respondent. DECISION CORONA, J.: This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision3 and resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No. 4715. In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63: 1986 Deficiency Percentage Tax Deficiency percentage tax Add: 25% surcharge 20% interest from 1-21-87 to 10-28-88 Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE 1986 Deficiency Documentary Stamp Tax Deficiency percentage tax Add: 25% surcharge Compromise penalty TOTAL AMOUNT DUE AND COLLECTIBLE Both notices of assessment contained the following note: Please be informed that your [percentage and documentary stamp taxes have] been assessed as shown above. Said assessment has been based on return (filed by you) (as verified) (made by this Office) (pending investigation) (after investigation). You are requested to pay the above amount to this Office or to our Collection Agent in the Office of the City or Deputy Provincial Treasurer of xxx6 In a letter dated December 10, 1988, BPI, through counsel, replied as follows: 1. Your "deficiency assessments" are no assessments at all. The taxpayer is not informed, even in the vaguest terms, why it is being assessed a deficiency. The very purpose of a deficiency assessment is to inform taxpayer why he has incurred a deficiency so that he can make an intelligent decision on whether to pay or to protest the assessment. This is all the more so when the assessment involves astronomical amounts, as in this case. We therefore request that the examiner concerned be required to state, even in the briefest form, why he believes the taxpayer has a deficiency documentary and percentage taxes, and as to the percentage tax, it is important that the taxpayer be informed also as to what particular percentage tax the assessment refers to. P93,723,372.40 23,430,843.10 15,000.00 P117,169,215.50.5 P 7, 270,892.88 1,817,723.22 3,215,825.03 15,000.00 P12,319,441.13

2. As to the alleged deficiency documentary stamp tax, you are aware of the compromise forged between your office and the Bankers Association of the Philippines [BAP] on this issue and of BPIs submission of its computations under this compromise. There is therefore no basis whatsoever for this assessment, assuming it is on the subject of the BAP compromise. On the other hand, if it relates to documentary stamp tax on some other issue, we should like to be informed about what those issues are. 3. As to the alleged deficiency percentage tax, we are completely at a loss on how such assessment may be protested since your letter does not even tell the taxpayer what particular percentage tax is involved and how your examiner arrived at the deficiency. As soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment.7 On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that: although in all respects, your letter failed to qualify as a protest under Revenue Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no valid issue was raised against the validity of our assessment still we obliged to explain the basis of the assessments. xxx xxx xxx this constitutes the final decision of this office on the matter.8 On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs May 8, 1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI on January 21, 1992.10 On February 18, 1992, BPI filed a petition for review in the CTA.11 In a decision dated November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject assessments had become final and unappealable. The CTA ruled that BPI failed to protest on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section 7 in relation to Section 11 of RA 1125.12 It denied reconsideration in a resolution dated May 27, 1996.13 On appeal, the CA reversed the tax courts decision and resolution and remanded the case to the CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices were not valid assessments because they did not inform the taxpayer of the legal and factual bases therefor. It declared that the proper assessments were those contained in the May 8, 1991 letter which provided the reasons for the claimed deficiencies.16 Thus, it held that BPI filed the petition for review in the CTA on time.17 The CIR elevated the case to this Court. This petition raises the following issues: 1) whether or not the assessments issued to BPI for deficiency percentage and documentary stamp taxes for 1986 had already become final and unappealable and 2) whether or not BPI was liable for the said taxes. The former Section 27018 (now renumbered as Section 228) of the NIRC stated: Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the [CIR] shall issue an assessment based on his findings. xxx xxx xxx (emphasis supplied) Were the October 28, 1988 Notices Valid Assessments? The first issue for our resolution is whether or not the October 28, 1988 notices19 were valid assessments. If they were not, as held by the CA, then the correct assessments were in the May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a reconsideration of the findings which the CIR denied in his December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the petition for review filed by BPI in the CTA on February 18, 1992 would be well within the 30-day period provided by law.20 The CIR argues that the CA erred in holding that the October 28, 1988 notices were invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November 1964) which was designed for the precise purpose of notifying taxpayers of the assessed amounts due and demanding payment thereof.21 He contends that there was no law or jurisprudence then that required notices to state the reasons for assessing deficiency tax liabilities.22

BPI counters that due process demanded that the facts, data and law upon which the assessments were based be provided to the taxpayer. It insists that the NIRC, as worded now (referring to Section 228), specifically provides that: "[t]he taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void." According to BPI, this is declaratory of what sound tax procedure is and a confirmation of what due process requires even under the former Section 270. BPIs contention has no merit. The present Section 228 of the NIRC provides: Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: xxx xxx xxx The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. xxx xxx xxx (emphasis supplied) Admittedly, the CIR did not inform BPI in writing of the law and facts on which the assessments of the deficiency taxes were made. He merely notified BPI of his findings, consisting only of the computation of the tax liabilities and a demand for payment thereof within 30 days after receipt. In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of 1997).23 In CIR v. Reyes,24 we held that: In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997. First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law. 25 (emphasis supplied; italics in the original) Accordingly, when the assessments were made pursuant to the former Section 270, the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings." Nothing in the old law required a written statement to the taxpayer of the law and facts on which the assessments were based. The Court cannot read into the law what obviously was not intended by Congress. That would be judicial legislation, nothing less. Jurisprudence, on the other hand, simply required that the assessments contain a computation of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a prescribed period.26 Everything considered, there was no doubt the October 28, 1988 notices sufficiently met the requirements of a valid assessment under the old law and jurisprudence. The sentence [t]he taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void was not in the old Section 270 but was only later on inserted in the renumbered Section 228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by inserting the aforequoted sentence.27 The fact that the amendment was necessary showed that, prior to the introduction of the amendment, the statute had an entirely different meaning.28 Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228 was not an affirmation of what the law required under the former Section 270. The amendment introduced by RA 8424 was an innovation and could not be reasonably inferred from the old law.29 Clearly, the legislature intended to insert a new provision regarding the form and substance of assessments issued by the CIR.30

In ruling that the October 28, 1988 notices were not valid assessments, the CA explained: xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform [BPI] of the legal and factual basis of the formers decision to charge the latter for deficiency documentary stamp and gross receipts taxes.31 In other words, the CAs theory was that BPI was deprived of due process when the CIR failed to inform it in writing of the factual and legal bases of the assessments even if these were not called for under the old law. We disagree. Indeed, the underlying reason for the law was the basic constitutional requirement that "no person shall be deprived of his property without due process of law."32 We note, however, what the CTA had to say: xxx xxx xxx From the foregoing testimony, it can be safely adduced that not only was [BPI] given the opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we talk to them and we try to [thresh] out the issues, present evidences as to what they need." Now, how can [BPI] and/or its counsel honestly tell this Court that they did not know anything about the assessments? Not only that. To further buttress the fact that [BPI] indeed knew beforehand the assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified to the fact that he prepared worksheets which contain his analysis regarding the findings of the [CIRs] examiner, Mr. San Pedro and that the same worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI]. xxx xxx xxx From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of the nature and basis of the assessments, and was given all the opportunity to contest the same but ignored it despite the notice conspicuously written on the assessments which states that "this ASSESSMENT becomes final and unappealable if not protested within 30 days after receipt." Counsel resorted to dilatory tactics and dangerously played with time. Unfortunately, such strategy proved fatal to the cause of his client.33 The CA never disputed these findings of fact by the CTA: [T]his Court recognizes that the [CTA], which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the [CTA].34 Under the former Section 270, there were two instances when an assessment became final and unappealable: (1) when it was not protested within 30 days from receipt and (2) when the adverse decision on the protest was not appealed to the CTA within 30 days from receipt of the final decision:35 Sec. 270. Protesting of assessment.1a\^/phi1.net xxx xxx xxx Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be prescribed by the implementing regulations within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become final and unappealable. If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal to the [CTA] within thirty (30) days from receipt of the said decision; otherwise, the decision shall become final, executory and demandable. Implications Of A Valid Assessment Considering that the October 28, 1988 notices were valid assessments, BPI should have protested the same within 30 days from receipt thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as this is explained and clarified in a proper letter of assessment, we shall inform you of the taxpayers decision on whether to pay or protest the assessment."36 Hence, by its own declaration, BPI did not regard this letter as a protest against the assessments. As a matter of fact, BPI never deemed this a protest since it did not even consider the October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPIs failure to protest the assessments within the 30-day period provided in the former Section 270 meant that they became final and unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from then on, barred from disputing the correctness of the assessments or invoking any defense that would reopen the question of its liability on the merits.37 Not only that. There arose a presumption of correctness when BPI failed to protest the assessments: Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments.38 Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless be deemed to have failed to appeal the CIRs final decision regarding the disputed assessments within the 30-day period provided by law. The CIR, in his May 8, 1991 response, stated that it was his "final decision on the matter." BPI therefore had 30 days from the time it received the decision on June 27, 1991 to appeal but it did not. Instead it filed a request for reconsideration and lodged its appeal in the CTA only on February 18, 1992, way beyond the reglementary period. BPI must now suffer the repercussions of its omission. We have already declared that: the [CIR] should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA 1125], as amended. On the basis of his statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. The rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the [CIR], this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the [CIR] from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action.39 (emphasis supplied) Either way (whether or not a protest was made), we cannot absolve BPI of its liability under the subject tax assessments. We realize that these assessments (which have been pending for almost 20 years) involve a considerable amount of money. Be that as it may, we cannot legally presume the existence of something which was never there. The state will be deprived of the taxes validly due it and the public will suffer if taxpayers will not be held liable for the proper taxes assessed against them: Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives its source from the very existence of the state whose social contract with its citizens obliges it to promote public interest and common good. The theory behind the exercise of the power to tax emanates from necessity; without taxes, government cannot fulfill its mandate of promoting the general welfare and well-being of the people.40 WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court of Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE. SO ORDERED. RENATO C. CORONA Associate Justice WE CONCUR: REYNATO S. PUNO Chief Justice Chairperson ANGELINA SANDOVAL-GUTIERREZ Associate Justice CANCIO C. GARCIA Associate Justice CERTIFICATION ADOLFO S. AZCUNA Asscociate Justice

Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice
Footnotes
1

Under Rule 45 of the Rules of Court.

Penned by Associate Justice Emeterio C. Cui (retired) and concurred in by Associate Justices Ramon U. Mabutas, Jr. (retired) and Hilarion L. Aquino (retired) of the Second Division of the Court of Appeals; rollo, pp. 40-46. Under RA 9282, effective April 23, 2004, decisions of the reconstituted CTA are no longer appealable to the CA but directly to the SC.
3

Penned by Associate Judge Ramon O. De Veyra (retired) and concurred in by Presiding Judge Ernesto D. Acosta and Associate Judge Manuel K. Gruba (deceased) of the old CTA; id., pp. 47-69.
4

Id., pp. 70-71. Id., pp. 47-48, 72. Id., p. 72. Id., pp. 41, 90. Id., pp. 12, 48. Id., p. 41. Id., p. 49. Id., p. 41. Id., pp. 67-68. These sections state: Sec. 7. Jurisdiction The [CTA] shall exercise exclusive appellate jurisdiction to review by appeal as herein provided (1) Decisions of the Collector (now Commissioner) of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the [NIRC] or other law or part of law administered by the Bureau of Internal Revenue; xxx Sec. 11. Who may appeal; effect of appeal. Any person, association or corporation adversely affected by a decision or ruling of the Collector (now Commissioner) of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the [CTA] within thirty days after the receipt of such decision or ruling.

10

11

12

13

Id., pp. 70-71. Id., p. 45. Id. Id., p. 43. Id., p. 44. People v. Sandiganbayan (G.R. No. 152532, 16 August 2005) contains a legislative history of this provision in its footnote no. 9: "Sec. 229 was originally found in the [National Internal Revenue Code (NIRC)] of 1977, which was codified by and made an integral part of Presidential Decree (PD) No. 1158, otherwise known as A Decree to Consolidate and Codify all the Internal Revenue Laws of the Philippines. When the NIRC of 1977 was amended by PD 1705 on August 1, 1980, Sec. 229 was restated as Sec. 16(d). On January 16, 1981, PD 1773 further amended Sec. 16 by eliminating paragraph (d) and inserting its contents between Secs. 319 and 320 as a new Sec. 319-A. PD 1994 then renumbered Sec. 319-A as Sec. 270 on January 1, 1986; and on January 1, 1988, Sec. 270 was again

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16

17

18

renumbered as Sec. 229 and rearranged to fall under Chapter 3 of Title VIII of the NIRC by Executive Order (EO) No. 273, otherwise known as Adopting a Value-Added Tax, Amending for this Purpose Certain Provisions of the [NIRC], and for other purposes. At present, Sec. 229 has been amended as Sec. 228 by RA 8424, otherwise known as the Tax Reform Act of 1997."
19

FAS-4-86-88-003209 and FAS-5-86-88-003210; id., p. 72. Id., pp. 43-44. Id., pp. 163-164. Id., p. 164. Sec. 270 was renumbered Sec. 229 before it was amended and became Sec. 228; supra note 18. G.R. No. 159694, 27 January 2006, 480 SCRA 382. Id., p. 393. Tupaz v. Ulep, G.R. No. 127777, 1 October 1999, 316 SCRA 118, 126. See Commissioner v. Court of Tax Appeals, G.R. Nos. L-48886-88, 21 July 1993, 224 SCRA 665, 671. Palanca v. City of Manila and Trinidad, 41 Phil. 125, 131 (1920); R. Agpalo, Statutory Construction 308 (3rd ed., 1995). See Pioneer Texturizing Corp. v. NLRC, 345 Phil. 1057, 1072 (1997). Id. Rollo, p. 43. Constitution, Art. III, Sec. 1. Rollo, pp. 62-65, citations omitted.

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21

22

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25

26

27

28

29

30

31

32

33

34

Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue , G.R. No. 157064, 7 August 2006, 498 SCRA 126.
35

Rollo, pp. 51-52. Supra note 7. Republic v. Court of Appeals, G.R. No. L-38540, 30 April 1987, 149 SCRA 351, 357, citation omitted. Sy Po v. Court of Appeals, G.R. No. L-81446, 18 August 1988, 164 SCRA 524, 530, citations omitted.

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39

Oceanic Wireless Network, Inc. v. Commission of Internal Revenue, G.R. No. 148380, 9 December 2005, 477 SCRA 205, 211-212, citing Surigao Electric Co., Inc. v. Court of Tax Appeals, G.R. No. L-25289, 28 June 1974, 57 SCRA 523.
40

National Power Corporation v. City of Cabanatuan, G.R. No. 149110, 9 April 2003, 401 SCRA 259, 269-270, citations omitted.