CASES HOMEWORK

Philippine Journalists Inc. vs. CIR, G.R. No. 162852, Dec. 16, 2004

FIRST DIVISION
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PHILIPPINE JOURNALISTS, INC., G.R. No. 162852

Petitioner,
Present:

Davide, Jr., C.J. (Chairman),

- versus - Quisumbing,
Ynares-Santiago,
Carpio, and
Azcuna, JJ.
COMMISSIONER OF INTERNAL
REVENUE, Promulgated:
Respondent.
December 16, 2004
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review filed by Philippine Journalists, Incorporated (PJI) assailing
the Decision[1] of the Court of Appeals dated August 5, 2003,[2] which ordered petitioner
to pay the assessed tax liability of P111,291,214.46 and the Resolution[3] dated March 31,
2004 which denied the Motion for Reconsideration.

The case arose from the Annual Income Tax Return filed by petitioner for the
calendar year ended December 31, 1994 which presented a net income of
P30,877,387.00 and the tax due of P10,807,086.00. After deducting tax credits for the
year, petitioner paid the amount of P10,247,384.00.
 On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal Revenue
(BIR) issued Letter of Authority No. 87120[4] for Revenue Officer Federico de Vera, Jr. and
Group Supervisor Vivencio Gapasin to examine petitioners books of account and other
accounting records for internal revenue taxes for the period January 1, 1994 to
December 31, 1994.

From the examination, the petitioner was told that there were deficiency taxes,
inclusive of surcharges, interest and compromise penalty in the following amounts:

Value Added Tax P 229,527.90

Income Tax 125,002,892.95
Withholding Tax 2,748,012.35
_______________
Total P 127,980,433.20

In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion
invited petitioner to send a representative to an informal conference on September 15,
1997 for an opportunity to object and present documentary evidence relative to the
proposed assessment. On September 22, 1997, petitioners Comptroller, Lorenza
Tolentino, executed a Waiver of the Statute of Limitation Under the National Internal
Revenue Code (NIRC).[5] The document waive[d] the running of the prescriptive period
provided by Sections 223 and 224 and other relevant provisions of the NIRC and
consent[ed] to the assessment and collection of taxes which may be found due after
the examination at any time after the lapse of the period of limitations fixed by said
Sections 223 and 224 and other relevant provisions of the NIRC, until the completion of
the investigation.[6]

On July 2, 1998, Revenue Officer De Vera submitted his audit report recommending
the issuance of an assessment and finding that petitioner had deficiency taxes in the
total amount of P136,952,408.97. On October 5, 1998, the Assessment Division of the BIR
issued Pre-Assessment Notices which informed petitioner of the results of the
investigation. Thus, BIR Revenue Region No. 6, Assessment Division/Billing Section, issued
Assessment/Demand No. 33-1-000757-94[7] on December 9, 1998 stating the following
deficiency taxes, inclusive of interest and compromise penalty:

Income Tax P108,743,694.88

 Value Added Tax 184,299.20
Expanded Withholding Tax 2,363,220.38
______________
Total P111,291,214.46

On March 16, 1999, a Preliminary Collection Letter was sent by Deputy

Commissioner Romeo S. Panganiban to the petitioner to pay the assessment within ten
(10) days from receipt of the letter. On November 10, 1999, a Final Notice Before
Seizure[8] was issued by the same deputy commissioner giving the petitioner ten (10) days
from receipt to pay. Petitioner received a copy of the final notice on November 24,
1999. By letters dated November 26, 1999, petitioner asked to be clarified how the tax
liability of P111,291,214.46 was reached and requested an extension of thirty (30) days
from receipt of the clarification within which to reply.[9]

The BIR received a follow-up letter from the petitioner asserting that its (PJI) records
do not show receipt of Tax Assessment/Demand No. 33-1-000757-94.[10] Petitioner also
contested that the assessment had no factual and legal basis. On March 28, 2000, a
Warrant of Distraint and/or Levy No. 33-06-046[11] signed by Deputy Commissioner Romeo
Panganiban for the BIR was received by the petitioner.

Petitioner filed a Petition for Review[12] with the Court of Tax Appeals (CTA) which
was amended on May 12, 2000. Petitioner complains: (a) that no assessment or demand
was received from the BIR; (b) that the warrant of distraint and/or levy was without
factual and legal bases as its issuance was premature; (c) that the assessment, having
been made beyond the 3-year prescriptive period, is null and void; (d) that the issuance
of the warrant without being given the opportunity to dispute the same violates its right
to due process; and (e) that the grave prejudice that will be sustained if the warrant is
enforced is enough basis for the issuance of the writ of preliminary injunction.

On May 14, 2002, the CTA rendered its decision,[13] to wit:

As to whether or not the assessment notices were received by the

petitioner, this Court rules in the affirmative.

To disprove petitioners allegation of non-receipt of the aforesaid

assessment notices, respondent presented a certification issued by the Post
Master of the Central Post Office, Manila to the effect that Registered Letter
No. 76134 sent by the BIR, Region No. 6, Manila on December 15, 1998
addressed to Phil. Journalists, Inc. at Journal Bldg., Railroad St., Manila was
duly delivered to and received by a certain Alfonso Sanchez, Jr.
(Authorized Representative) on January 8, 1999. Respondent also showed
proof that in claiming Registered Letter No. 76134, Mr. Sanchez presented
three identification cards, one of which is his company ID with herein
petitioner.

However, as to whether or not the Waiver of the Statute of Limitations

is valid and binding on the petitioner is another question. Since the subject
assessments were issued beyond the three-year prescriptive period, it
becomes imperative on our part to rule first on the validity of the waiver
allegedly executed on September 22, 1997, for if this court finds the same
to be ineffective, then the assessments must necessarily fail.

After carefully examining the questioned Waiver of the Statute of

Limitations, this Court considers the same to be without any binding effect
on the petitioner for the following reasons:

The waiver is an unlimited waiver. It does not contain a definite

expiration date. Under RMO No. 20-90, the phrase indicating the expiry
date of the period agreed upon to assess/collect the tax after the regular
three-year period of prescription should be filled up

Secondly, the waiver failed to state the date of acceptance by the

Bureau which under the aforequoted RMO should likewise be indicated

Finally, petitioner was not furnished a copy of the waiver. It is to be

noted that under RMO No. 20-90, the waiver must be executed in three (3)
copies, the second copy of which is for the taxpayer. It is likewise required
that the fact of receipt by the taxpayer of his/her file copy be indicated in
the original copy. Again, respondent failed to comply.

It bears stressing that RMO No. 20-90 is directed to all concerned

internal revenue officers. The said RMO even provides that the procedures
found therein should be strictly followed, under pain of being
administratively dealt with should non-compliance result to prescription of
the right to assess/collect

Thus, finding the waiver executed by the petitioner on September

22, 1997 to be suffering from legal infirmities, rendering the same invalid and
ineffective, the Court finds Assessment/Demand No. 33-1-000757-94 issued
on December 5, 1998 to be time-barred. Consequently, the Warrant of
Distraint and/or Levy issued pursuant thereto is considered null and void.
 WHEREFORE, in view of all the foregoing, the instant Petition for
Review is hereby GRANTED. Accordingly, the deficiency income, value-
added and expanded withholding tax assessments issued by the
respondent against the petitioner on December 9, 1998, in the total amount
of P111,291,214.46 for the year 1994 are hereby declared CANCELLED,
WITHDRAWN and WITH NO FORCE AND EFFECT. Likewise, Warrant of Distraint
and/or Levy No. 33-06-046 is hereby declared NULL and VOID.

SO ORDERED.[14]

After the motion for reconsideration of the Commissioner of Internal Revenue was
denied by the CTA in a Resolution dated August 2, 2002, an appeal was filed with the
Court of Appeals on August 12, 2002.

In its decision dated August 5, 2003, the Court of Appeals disagreed with the ruling
of the CTA, to wit:

The petition for review filed on 26 April 2000 with CTA was neither timely filed
nor the proper remedy. Only decisions of the BIR, denying the request for
reconsideration or reinvestigation may be appealed to the CTA. Mere
assessment notices which have become final after the lapse of the thirty
(30)-day reglementary period are not appealable. Thus, the CTA should
not have entertained the petition at all.

[T]he CTA found the waiver executed by Phil. Journalists to be invalid for the
following reasons: (1) it does not indicate a definite expiration date; (2) it
does not state the date of acceptance by the BIR; and (3) Phil. Journalist,
the taxpayer, was not furnished a copy of the waiver. These grounds are
merely formal in nature. The date of acceptance by the BIR does not
categorically appear in the document but it states at the bottom page
that the BIR accepted and agreed to:, followed by the signature of the BIRs
authorized representative. Although the date of acceptance was not
stated, the document was dated 22 September 1997. This date could
reasonably be understood as the same date of acceptance by the BIR
since a different date was not otherwise indicated. As to the allegation that
Phil. Journalists was not furnished a copy of the waiver, this requirement
appears ridiculous. Phil. Journalists, through its comptroller, Lorenza
Tolentino, signed the waiver. Why would it need a copy of the document
it knowingly executed when the reason why copies are furnished to a party
is to notify it of the existence of a document, event or proceeding?
 As regards the need for a definite expiration date, this is the biggest
flaw of the decision. The period of prescription for the assessment of taxes
may be extended provided that the extension be made in writing and that
it be made prior to the expiration of the period of prescription. These are
the requirements for a valid extension of the prescriptive period. To these
requirements provided by law, the memorandum order adds that the
length of the extension be specified by indicating its expiration date. This
requirement could be reasonably construed from the rule on extension of
the prescriptive period. But this requirement does not apply in the instant
case because what we have here is not an extension of the prescriptive
period but a waiver thereof. These are two (2) very different things. What
Phil. Journalists executed was a renunciation of its right to invoke the
defense of prescription. This is a valid waiver. When one waives the
prescriptive period, it is no longer necessary to indicate the length of the
extension of the prescriptive period since the person waiving may no longer
use this defense.

WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision

of the CTA are hereby SET ASIDE. Respondent Phil. Journalists is ordered [to]
pay its assessed tax liability of P111,291,214.46.

SO ORDERED.[15]

Petitioners Motion for Reconsideration was denied in a Resolution dated March

31, 2004. Hence, this appeal on the following assignment of errors:

I.
The Honorable Court of Appeals committed grave error in ruling that it is
outside the jurisdiction of the Court of Tax Appeals to entertain the Petition
for Review filed by the herein Petitioner at the CTA despite the fact that
such case inevitably rests upon the validity of the issuance by the BIR of
warrants of distraint and levy contrary to the provisions of Section 7(1) of
Republic Act No. 1125.

II.
The Honorable Court of Appeals gravely erred when it ruled that failure to
comply with the provisions of Revenue Memorandum Order (RMO) No. 20-
90 is merely a formal defect that does not invalidate the waiver of the
statute of limitations without stating the legal justification for such
conclusion. Such ruling totally disregarded the mandatory requirements of
Section 222(b) of the Tax Code and its implementing regulation, RMO No.
20-90 which are substantive in nature. The RMO provides that violation
thereof subjects the erring officer to administrative sanction. This directive
shows that the RMO is not merely cover forms.

III.
 The Honorable Court of Appeals gravely erred when it ruled that the
assessment notices became final and unappealable. The assessment
issued is void and legally non-existent because the BIR has no power to issue
an assessment beyond the three-year prescriptive period where there is no
valid and binding waiver of the statute of limitation.

IV.
The Honorable Court of Appeals gravely erred when it held that the
assessment in question has became final and executory due to the failure
of the Petitioner to protest the same. Respondent had no power to issue
an assessment beyond the three year period under the mandatory
provisions of Section 203 of the NIRC. Such assessment should be held void
and non-existent, otherwise, Section 203, an expression of a public policy,
would be rendered useless and nugatory. Besides, such right to assess
cannot be validly granted after three years since it would arise from a
violation of the mandatory provisions of Section 203 and would go against
the vested right of the Petitioner to claim prescription of assessment.

V.
The Honorable Court of Appeals committed grave error when it HELD valid
a defective waiver by considering the latter a waiver of the right to invoke
the defense of prescription rather than an extension of the three year
period of prescription (to make an assessment) as provided under Section
222 in relation to Section 203 of the Tax Code, an interpretation that is
contrary to law, existing jurisprudence and outside of the purpose and
intent for which they were enacted.[16]

We find merit in the appeal.

The first assigned error relates to the jurisdiction of the CTA over the issues in this
case. The Court of Appeals ruled that only decisions of the BIR denying a request for
reconsideration or reinvestigation may be appealed to the CTA. Since the petitioner did
not file a request for reinvestigation or reconsideration within thirty (30) days, the
assessment notices became final and unappealable. The petitioner now argue that the
case was brought to the CTA because the warrant of distraint or levy was illegally issued
and that no assessment was issued because it was based on an invalid waiver of the
statutes of limitations.

We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating
the Court of Tax Appeals, provides for the jurisdiction of that special court:

SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive

appellate jurisdiction to review by appeal, as herein provided
 (1) Decisions of the 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 National Internal Revenue Code or other laws or part of
law administered by the Bureau of Internal Revenue; (Emphasis supplied).

The appellate jurisdiction of the CTA is not limited to cases which involve decisions
of the Commissioner of Internal Revenue on matters relating to assessments or
refunds. The second part of the provision covers other cases that arise out of the NIRC or
related laws administered by the Bureau of Internal Revenue. The wording of the
provision is clear and simple. It gives the CTA the jurisdiction to determine if the warrant
of distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of
Limitations was validly effected.

This is not the first case where the CTA validly ruled on issues that did not relate
directly to a disputed assessment or a claim for refund. In Pantoja v. David,[17] we upheld
the jurisdiction of the CTA to act on a petition to invalidate and annul the distraint orders
of the Commissioner of Internal Revenue. Also, in Commissioner of Internal Revenue v.
Court of Appeals,[18] the decision of the CTA declaring several waivers executed by the
taxpayer as null and void, thus invalidating the assessments issued by the BIR, was upheld
by this Court.

The second and fifth assigned errors both focus on Revenue Memorandum Circular
No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the statute of
limitations. The Court of Appeals held that the requirements and procedures laid down
in the RMO are only formal in nature and did not invalidate the waiver that was signed
even if the requirements were not strictly observed.

The NIRC, under Sections 203 and 222,[19] provides for a statute of limitations on the
assessment and collection of internal revenue taxes in order to safeguard the interest of
the taxpayer against unreasonable investigation.[20] Unreasonable investigation
contemplates cases where the period for assessment extends indefinitely because this
deprives the taxpayer of the assurance that it will no longer be subjected to further
investigation for taxes after the expiration of a reasonable period of time. As was held
in Republic of the Phils. v. Ablaza:[21]

The law prescribing a limitation of actions for the collection of the

income tax is beneficial both to the Government and to its citizens; to the
Government because tax officers would be obliged to act promptly in the
making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latters real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding
citizens. Without such a legal defense taxpayers would furthermore be
under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be interpreted in a way
conducive to bringing about the beneficent purpose of affording protection
to the taxpayer within the contemplation of the Commission which
recommend the approval of the law. (Emphasis supplied)

RMO No. 20-90 implements these provisions of the NIRC relating to the period of
prescription for the assessment and collection of taxes. A cursory reading of the Order
supports petitioners argument that the RMO must be strictly followed, thus:

In the execution of said waiver, the following procedures should be

followed:

1. The waiver must be in the form identified hereof. This form may be
reproduced by the Office concerned but there should be no
deviation from such form. The phrase but not after __________ 19___
should be filled up

2.

Soon after the waiver is signed by the taxpayer, the Commissioner of

Internal Revenue or the revenue official authorized by him, as
hereinafter provided, shall sign the waiver indicating that the Bureau
has accepted and agreed to the waiver. The date of such
acceptance by the Bureau should be indicated

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

 3. Commissioner For tax cases involving
more than P1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases

still pending investigation and the period to assess is
about to prescribe regardless of amount.

5. The foregoing procedures shall be strictly

followed. Any revenue official found not to have
complied with this Order resulting in prescription of the
right to assess/collect shall be administratively dealt
with. (Emphasis supplied)[22]

A waiver of the statute of limitations under the NIRC, to a certain extent, is a

derogation of the taxpayers right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed.[23] The waiver of the
statute of limitations is not a waiver of the right to invoke the defense of prescription as
erroneously held by the Court of Appeals. It is an agreement between the taxpayer and
the BIR that the period to issue an assessment and collect the taxes due is extended to a
date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke
prescription unequivocally particularly where the language of the document is
equivocal. For the purpose of safeguarding taxpayers from any unreasonable
examination, investigation or assessment, our tax law provides a statute of limitations in
the collection of taxes. Thus, the law on prescription, being a remedial measure, should
be liberally construed in order to afford such protection. As a corollary, the exceptions
to the law on prescription should perforce be strictly construed.[24] RMO No. 20-90
explains the rationale of a waiver:

... The phrase but not after _________ 19___ should be filled up. This indicates
the expiry date of the period agreed upon to assess/collect the tax after
the regular three-year period of prescription. The period agreed upon shall
constitute the time within which to effect the assessment/collection of the
tax in addition to the ordinary prescriptive period. (Emphasis supplied)

As found by the CTA, the Waiver of Statute of Limitations, signed by petitioners

comptroller on September 22, 1997 is not valid and binding because it does not conform
with the provisions of RMO No. 20-90. It did not specify a definite agreed date between
the BIR and petitioner, within which the former may assess and collect revenue
taxes. Thus, petitioners waiver became unlimited in time, violating Section 222(b) of the
NIRC.

The waiver is also defective from the government side because it was signed only
by a revenue district officer, not the Commissioner, as mandated by the NIRC and RMO
No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a bilateral
agreement between two parties to extend the period to a date certain. The conformity
of the BIR must be made by either the Commissioner or the Revenue District Officer. This
case involves taxes amounting to more than One Million Pesos (P1,000,000.00) and
executed almost seven months before the expiration of the three-year prescription
period. For this, RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for
the BIR.

The case of Commissioner of Internal Revenue v. Court of Appeals,[25] dealt with

waivers that were not signed by the Commissioner but were argued to have been given
implied consent by the BIR. We invalidated the subject waivers and ruled:

Petitioners submission is inaccurate

The Court of Appeals itself also passed upon the validity of the
waivers executed by Carnation, observing thus:

We cannot go along with the petitioners theory.

Section 319 of the Tax Code earlier quoted is clear and
explicit that the waiver of the five-year[26] prescriptive period
must be in writing and signed by both the BIR Commissioner
and the taxpayer.

Here, the three waivers signed by Carnation do not

bear the written consent of the BIR Commissioner as required
by law.

We agree with the CTA in holding these waivers to be

invalid and without any binding effect on petitioner
(Carnation) for the reason that there was no consent by the
respondent (Commissioner of Internal Revenue).
 For sure, no such written agreement concerning the
said three waivers exists between the petitioner and private
respondent Carnation.

What is more, the waivers in question reveal that they are in no wise
unequivocal, and therefore necessitates for its binding effect the
concurrence of the Commissioner of Internal Revenue. On this basis neither
implied consent can be presumed nor can it be contended that the waiver
required under Sec. 319 of the Tax Code is one which is unilateral nor can
it be said that concurrence to such an agreement is a mere formality
because it is the very signatures of both the Commissioner of Internal
Revenue and the taxpayer which give birth to such a valid
agreement.[27] (Emphasis supplied)

The other defect noted in this case is the date of acceptance which makes it
difficult to fix with certainty if the waiver was actually agreed before the expiration of the
three-year prescriptive period. The Court of Appeals held that the date of the execution
of the waiver on September 22, 1997 could reasonably be understood as the same date
of acceptance by the BIR. Petitioner points out however that Revenue District Officer
Sarmiento could not have accepted the waiver yet because she was not the Revenue
District Officer of RDO No. 33 on such date. Ms. Sarmientos transfer and assignment to
RDO No. 33 was only signed by the BIR Commissioner on January 16, 1998 as shown by
the Revenue Travel Assignment Order No. 14-98.[28] The Court of Tax Appeals noted in its
decision that it is unlikely as well that Ms. Sarmiento made the acceptance on January
16, 1998 because Revenue Officials normally have to conduct first an inventory of their
pending papers and property responsibilities.[29]

Finally, the records show that petitioner was not furnished a copy of the
waiver. Under RMO No. 20-90, the waiver must be executed in three copies with the
second copy for the taxpayer. The Court of Appeals did not think this was important
because the petitioner need not have a copy of the document it knowingly executed. It
stated that the reason copies are furnished is for a party to be notified of the existence
of a document, event or proceeding.

The flaw in the appellate courts reasoning stems from its assumption that the waiver
is a unilateral act of the taxpayer when it is in fact and in law an agreement between
the taxpayer and the BIR. When the petitioners comptroller signed the waiver on
September 22, 1997, it was not yet complete and final because the BIR had not
assented. There is compliance with the provision of RMO No. 20-90 only after the
taxpayer received a copy of the waiver accepted by the BIR. The requirement to furnish
the taxpayer with a copy of the waiver is not only to give notice of the existence of the
document but of the acceptance by the BIR and the perfection of the agreement.

The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run until April 17,
1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued on December
9, 1998 was invalid because it was issued beyond the three (3) year period. In the same
manner, Warrant of Distraint and/or Levy No. 33-06-046 which petitioner received on
March 28, 2000 is also null and void for having been issued pursuant to an invalid
assessment.

WHEREFORE, premises considered, the instant petition for review is GRANTED. The
Decision of the Court of Appeals dated August 5, 2003 and its Resolution dated March
31, 2004 are REVERSED and SET ASIDE. The Decision of the Court of Tax Appeals in CTA
Case No. 6108 dated May 14, 2002, declaring Warrant of Distraint and/or Levy No. 33-06-
046 null and void, is REINSTATED.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

HILARIO G. DAVIDE, JR.

Chief Justice

LEONARDO A. QUISUMBING ANTONIO T. CARPIO

Associate Justice Associate Justice
 ADOLFO S. AZCUNA
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.

HILARIO G. DAVIDE, JR.

Chief Justice

CIR v. Union Shipping Corp., 185 SCRA 547

G.R. No. L-66160 May 21, 1990

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
UNION SHIPPING CORPORATION and THE COURT OF TAX APPEALS, respondents.

Artemio M. Lobrin for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the December 9, 1983 decision * of the Court
of Tax Appeals in CTA Case No. 2989 reversing the Commissioner of Internal Revenue.
In a letter dated December 27, 1974 (Exhibit "A") herein petitioner Commissioner of
Internal Revenue assessed against Yee Fong Hong, Ltd. and/or herein private
respondent Union Shipping Corporation, the total sum of P583,155.22 as deficiency
income taxes due for the years 1971 and 1972. Said letter was received on January 4,
1975, and in a letter dated January 10, 1975 (Exhibit "B"), received by petitioner on
January 13, 1975, private respondent protested the assessment.

Petitioner, without ruling on the protest, issued a Warrant of Distraint and Levy (Exhibit
"C"), which was served on private respondent's counsel, Clemente Celso, on November
25, 1976.

In a letter dated November 27, 1976 (Exhibit "D"), received by petitioner on November
29, 1976 (Exhibit "D-1") private respondent reiterated its request for reinvestigation of the
assessment and for the reconsideration of the summary collection thru the Warrant of
Distraint and Levy.

Petitioner, again, without acting on the request for reinvestigation and reconsideration
of the Warrant of Distraint and Levy, filed a collection suit before Branch XXI of the then
Court of First Instance of Manila and docketed as Civil Case No. 120459 against private
respondent. Summons (Exhibit "E") in the said collection case was issued to private
respondent on December 28, 1978.

On January 10, 1979, private respondent filed with respondent court its Petition for
Review of the petitioner's assessment of its deficiency income taxes in a letter dated
December 27, 1974, docketed therein as CTA Case No. 2989 (Rollo, pp. 44-49), wherein
it prays that after hearing, judgment be rendered holding that it is not liable for the
payment of the income tax herein involved, or which may be due from foreign
shipowner Yee Fong Hong, Ltd.; to which petitioner filed his answer on March 29, 1979
(Rollo, pp. 50-53).

Respondent Tax Court, in a decision dated December 9, 1983, ruled in favor of private
respondent —

WHEREFORE, the decision of the Commissioner of Internal Revenue

appealed from, assessing against and demanding from petitioner the
payment of deficiency income tax, inclusive of 50% surcharge, interest
and compromise penalties, in the amounts of P73,958.76 and P583,155.22
for the years 1971 and 1972, respectively, is reversed.

Hence, the instant petition.

The Second Division of this Court, after the filing of the required pleadings, in a resolution
dated January 28, 1985, resolved to give due course to the petition, and directed
petitioner therein, to file his brief (Rollo, p. 145). In compliance, petitioner filed his brief
on May 10, 1985 (Rollo, p. 151). Respondents, on the other hand, filed their brief on June
6, 1985 (Rollo, p. 156).
The main issues in this case are: (a) on the procedural aspect, whether or not the Court
of Tax Appeals has jurisdiction over this case and (b) on the merits, whether or not Union
Shipping Corporation acting as a mere "husbanding agent" of Yee Fong Hong Ltd. is
liable for payment of taxes on the gross receipts or earnings of the latter.

The main thrust of this petition is that the issuance of a warrant of distraint and levy is
proof of the finality of an assessment because it is the most drastic action of all media
of enforcing the collection of tax, and is tantamount to an outright denial of a motion
for reconsideration of an assessment. Among others, petitioner contends that the
warrant of distraint and levy was issued after respondent corporation filed a request for
reconsideration of subject assessment, thus constituting petitioner's final decision in the
disputed assessments (Brief for petitioner, pp. 9 and 12).

Petitioner argues therefore that the period to appeal to the Court of Tax Appeals
commenced to run from receipt of said warrant on November 25, 1976, so that on
January 10, 1979 when respondent corporation sought redress from the Tax Court,
petitioner's decision has long become final and executory.

On this issue, this Court had already laid down the dictum that the Commissioner should
always indicate to the taxpayer in clear and unequivocal language what constitutes
his final determination of the disputed assessment.

Specifically, this Court ruled:

. . . we deem it appropriate to state that the Commissioner of Internal

Revenue 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 Republic Act 1125, as amended.
On the basis of this 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. This 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 Commissioner, 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 Commissioner 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. (Surigao Electric Co., Inc. v. C.T.A., 57
SCRA 523, 528, [1974]).
There appears to be no dispute that petitioner did not rule on private respondent's
motion for reconsideration but contrary to the above ruling of this Court, left private
respondent in the dark as to which action of the Commissioner is the decision
appealable to the Court of Tax Appeals. Had he categorically stated that he denies
private respondent's motion for reconsideration and that his action constitutes his final
determination on the disputed assessment, private respondent without needless
difficulty would have been able to determine when his right to appeal accrues and the
resulting confusion would have been avoided.

Much later, this Court reiterated the above-mentioned dictum in a ruling applicable on
all fours to the issue in the case at bar, that the reviewable decision of the Bureau of
Internal Revenue is that contained in the letter of its Commissioner, that such constitutes
the final decision on the matter which may be appealed to the Court of Tax Appeals
and not the warrants of distraint (Advertising Associates, Inc. v. Court of Appeals, 133
SCRA 769 [1984] emphasis supplied). It was likewise stressed that the procedure
enunciated is demanded by the pressing need for fair play, regularity and orderliness in
administrative action.

Under the circumstances, the Commissioner of Internal Revenue, not having clearly
signified his final action on the disputed assessment, legally the period to appeal has
not commenced to run. Thus, it was only when private respondent received the
summons on the civil suit for collection of deficiency income on December 28, 1978
that the period to appeal commenced to run.

The request for reinvestigation and reconsideration was in effect considered denied by
petitioner when the latter filed a civil suit for collection of deficiency income. So. that on
January 10, 1979 when private respondent filed the appeal with the Court of Tax
Appeals, it consumed a total of only thirteen (13) days well within the thirty day period
to appeal pursuant to Section 11 of R.A. 1125.

On the merits, it was found fully substantiated by the Court of Tax Appeals that,
respondent corporation is the husbanding agent of the vessel Yee Fong Hong, Ltd. as
follows:

Coming to the second issue, petitioner contended and was substantiated

by satisfactory uncontradicted testimonies of Clemente Celso, Certified
Public Accountant, and Rodolfo C. Cabalquinto, President and General
Manager, of petitioner that it is actually and legally the husbanding agent
of the vessel of Yee Fong Hong, Ltd. as (1) it neither performed nor
transacted any shipping business, for and in representation, of Yee Fong
Hong, Ltd. or its vessels or otherwise negotiated or procured cargo to be
loaded in the vessels of Yee Fong Hong, Ltd. (p. 21, t.s.n., July 16, 1980); (2)
it never solicited or procured cargo or freight in the Philippines or
elsewhere for loading in said vessels of Yee Fong Hong, Ltd. (pp. 21 &
38, ibid.); (3) it had not collected any freight income or receipts for the
said Yee Fong Hong, Ltd. (pp. 22 & 38, ibid; pp. 46 & 48, t.s.n., Nov. 14,
1980.); (4) it never had possession or control, actual or constructive, over
 the funds representing payment by Philippine shippers for cargo loaded
on said vessels (pp. 21 & 38, ibid; p. 48, ibid); petitioner never remitted to
Yee Fong Hong, Ltd. any sum of money representing freight incomes of
Yee Fong Hong, Ltd. (p. 21, ibid.; p. 48, ibid); and (5) that the freight
payments made for cargo loaded in the Philippines for foreign destination
were actually paid directly by the shippers to the said Yee Fong Hong, Ltd.
upon arrival of the goods in the foreign ports. (Rollo, pp. 58-59).

On the same issue, the Commissioner of Internal Revenue Misael P. Vera, on query of
respondent's counsel, opined that respondent corporation being merely a husbanding
agent is not liable for the payment of the income taxes due from the foreign ship
owners loading cargoes in the Philippines (Rollo, p. 63; Exhibit "I", Rollo, pp. 64-66).

Neither can private respondent be liable for withholding tax under Section 53 of the
Internal Revenue Code since it is not in possession, custody or control of the funds
received by and remitted to Yee Fong Hong, Ltd., a non-resident taxpayer. As correctly
ruled by the Court of Tax Appeals, "if an individual or corporation like the petitioner in
this case, is not in the actual possession, custody, or control of the funds, it can neither
be physically nor legally liable or obligated to pay the so-called withholding tax on
income claimed by Yee Fong Hong, Ltd." (Rollo, p. 67).

Finally, it must be stated that factual findings of the Court of Tax Appeals are binding on
this Court (Industrial Textiles Manufacturing Company of the Phil., Inc. (ITEMCOP) v.
Commissioner of Internal Revenue, et al. (136 SCRA 549 [1985]). It is well-settled that in
passing upon petitions for review of the decisions of the Court of Tax Appeals, this Court
is generally confined to questions of law. The findings of fact of said Court are not to be
disturbed unless clearly shown to be unsupported by substantial evidence
(Commissioner of Internal Revenue v. Manila Machinery & Supply Company, 135 SCRA
8 [1985]).

A careful scrutiny of the records reveals no cogent reason to disturb the findings of the
Court of Tax Appeals.

PREMISES CONSIDERED, the instant petition is hereby DISMISSED and the assailed
decision of the Court of Tax Appeals is hereby AFFIRMED.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

CIR v. Algue, Inc., 158 SCRA 9 (1988)


G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as
legitimate business expenses in its income tax returns. The corollary issue is whether or
not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic
corporation engaged in engineering, construction and other allied activities, received
a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency
income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp received on the same
day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy
was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr.,
who refused to receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy
and gave a photostat to BIR agent Ramon Reyes, who deferred service of the
warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not
taking any action on the protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served.5 Sixteen days later, on April 23, 1965,
Algue filed a petition for review of the decision of the Commissioner of Internal Revenue
with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep.
Act No. 1125, the appeal may be made within thirty days after receipt of the decision
or ruling challenged.7 It is true that as a rule the warrant of distraint and levy is "proof of
the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said
request deemed rejected." 10 But there is a special circumstance in the case at bar that
prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's
notice of assessment, it filed its letter of protest. This was apparently not taken into
account before the warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty. Guevara gave the
BIR a copy of the protest that it was, if at all, considered by the tax authorities. During
the intervening period, the warrant was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent
was not pro forma and was based on strong legal considerations. It thus had the effect
of suspending on January 18, 1965, when it was filed, the reglementary period which
started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely
informed of the implied rejection of the said protest and the warrant was finally served
on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the
reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly
disallowed because it was not an ordinary reasonable or necessary business expense.
The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the
said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil Investment Corporation of
the Philippines and its subsequent purchase of the properties of the Philippine Sugar
Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these
promotional fees to be personal holding company income 12 but later conformed to
the decision of the respondent court rejecting this assertion.13 In fact, as the said court
found, the amount was earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar Estate Development
Company had earlier appointed Algue as its agent, authorizing it to sell its land,
factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara,
Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for
the formation of the Vegetable Oil Investment Corporation, inducing other persons to
invest in it.14 Ultimately, after its incorporation largely through the promotion of the said
persons, this new corporation purchased the PSEDC properties.15 For this sale, Algue
received as agent a commission of P126,000.00, and it was from this commission that
the P75,000.00 promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in
their income tax returns and paid the corresponding taxes thereon.17 The Court of Tax
Appeals also found, after examining the evidence, that no distribution of dividends was
involved.18

The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was
made as to how such payments were made, whether by check or in cash, and there is
not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary
deduction.

We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the
payments were not made in one lump sum but periodically and in different amounts as
each payee's need arose. 19 It should be remembered that this was a family
corporation where strict business procedures were not applied and immediate issuance
of receipts was not required. Even so, at the end of the year, when the books were to
be closed, each payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This
arrangement was understandable, however, in view of the close relationship among
the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not
excessive. The total commission paid by the Philippine Sugar Estate Development Co. to
the private respondent was P125,000.00. 21After deducting the said fees, Algue still had
a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00
was 60% of the total commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties. This
finding of the respondent court is in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there
shall be allowed as deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred

during the taxable year in carrying on any trade or business, including a
reasonable allowance for salaries or other compensation for personal
services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and

necessary expenses paid or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries or other
compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are
 reasonable and are, in fact, payments purely for service. This test and
deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its
practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the
purchase price of services, is not deductible. (a) An ostensible salary paid
by a corporation may be a distribution of a dividend on stock. This is likely
to occur in the case of a corporation having few stockholders, Practically
all of whom draw salaries. If in such a case the salaries are in excess of
those ordinarily paid for similar services, and the excessive payment
correspond or bear a close relationship to the stockholdings of the officers
of employees, it would seem likely that the salaries are not paid wholly for
services rendered, but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18,
325.)

It is worth noting at this point that most of the payees were not in the regular employ of
Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to
prove the validity of the claimed deduction. In the present case, however, we find that
the onus has been discharged satisfactorily. The private respondent has proved that
the payment of the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new business requiring millions
of pesos. This was no mean feat and should be, as it was, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one's hard earned income
to the taxing authorities, every person who is able to must contribute his share in the
running of the government. The government for its part, is expected to respond in the
form of tangible and intangible benefits intended to improve the lives of the people
and enhance their moral and material values. This symbiotic relationship is the rationale
of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a

requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome power of the
tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it
has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner
was filed on time with the respondent court in accordance with Rep. Act No. 1125. And
we also find that the claimed deduction by the private respondent was permitted
under the Internal Revenue Code and should therefore not have been disallowed by
the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in

toto, without costs.

SO ORDERED.

Teehankee, C.J., Narvasa, Gancayco and Griño-Aquino, JJ., concur.

CIR v. Isabela Cultural Corp., 361 SCRA 71 (2001)

[G.R. No. 135210. July 11, 2001]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ISABELA CULTURAL

CORPORATION, respondent.

DECISION
PANGANIBAN, J.:

A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer
the immediate payment of a tax deficiency assessment previously made, is tantamount
to a denial of the taxpayers request for reconsideration. Such letter amounts to a final
decision on a disputed assessment and is thus appealable to the Court of Tax Appeals
(CTA).

The Case

Before this Court is a Petition for Review on Certiorari[1] pursuant to Rule 45 of the Rules
of Court, seeking to set aside the August 19, 1998 Decision[2] of the Court of
Appeals[3] (CA) in CA-GR SP No. 46383 and ultimately to affirm the dismissal of CTA Case
No. 5211. The dispositive portion of the assailed Decision reads as follows:

WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly, judgment is
hereby rendered REMANDING the case to the CTA for proper disposition.[4]
 The Facts

The facts are undisputed. The Court of Appeals quoted the summary of the CTA as
follows:

As succinctly summarized by the Court of Tax appeals (CTA for brevity), the antecedent
facts are as follows:

In an investigation conducted on the 1986 books of account of [respondent, petitioner]

had the preliminary [finding] that [respondent] incurred a total income tax deficiency
of P9,985,392.15, inclusive of increments. Upon protest by [respondents] counsel, the
said preliminary assessment was reduced to the amount of P325,869.44, a breakdown
of which follows:

Deficiency Income Tax P321,022.68

Deficiency Expanded
Withholding Tax 4,846.76
___________
Total P325,869.44

==========

(pp. 187-189, BIR records)

On February 23, 1990, [respondent] received from [petitioner] an assessment letter,

dated February 9, 1990, demanding payment of the amounts of P333,196.86 and
P4,897.79 as deficiency income tax and expanded withholding tax inclusive of
surcharge and interest, respectively, for the taxable period from January 1, 1986 to
December 31, 1986. (pp. 204 and 205, BIR rec.)

In a letter, dated March 22, 1990, filed with the [petitioners] office on March 23, 1990
(pp. 296-311, BIR rec.), [respondent] requested x x x a reconsideration of the subject
assessment.

Supplemental to its protest was a letter, dated April 2, 1990, filed with the [petitioners]
office on April 18, 1990 (pp. 224 & 225, BIR rec.), to which x x x were attached certain
documents supportive of its protest, as well as a Waiver of Statute of Limitation, dated
April 17, 1990, where it was indicated that [petitioner] would only have until April 5, 1991
within which to asses and collect the taxes that may be found due from [respondent]
after the re-investigation.

On February 9, 1995, [respondent] received from [petitioner] a Final Notice Before

Seizure, dated December 22, 1994 (p. 340, BIR rec.). In said letter, [petitioner]
demanded payment of the subject assessment within ten (10) days from receipt
thereof. Otherwise, failure on its part would constrain [petitioner] to collect the subject
assessment through summary remedies.
[Respondent] considered said final notice of seizure as [petitioners] final decision.
Hence, the instant petition for review filed with this Court on March 9, 1995.

The CTA having rendered judgment dismissing the petition, [respondent] filed the
instant petition anchored on the argument that [petitioners] issuance of the Final Notice
Before Seizure constitutes [its] decision on [respondents] request for reinvestigation,
which the [respondent] may appeal to the CTA.[5]

Ruling of the Court of Appeals

In its Decision, the Court of Appeals reversed the Court of Tax Appeals. The CA
considered the final notice sent by petitioner as the latters decision, which was
appealable to the CTA. The appellate court reasoned that the final Notice before seizure
had effectively denied petitioners request for a reconsideration of the commissioners
assessment. The CA relied on the long-settled tax jurisprudence that a demand letter
reiterating payment of delinquent taxes amounted to a decision on a disputed
assessment.
Hence, this recourse.[6]

Issues

In his Memorandum,[7] petitioner presents for this Courts consideration a solitary issue:

Whether or not the Final Notice Before Seizure dated February 9, 1995 signed by Acting
Chief Revenue Collection Officer Milagros Acevedo against ICC constitutes the final
decision of the CIR appealable to the CTA.[8]

The Courts Ruling

The Petition is not meritorious.

Sole Issue: The Nature of the Final Notice Before Seizure

The Final Notice Before Seizure sent by the Bureau of Internal Revenue (BIR) to
respondent reads as follows:

On Feb.9, 1990, [this] Office sent you a letter requesting you to settle the above-
captioned assessment. To date, however, despite the lapse of a considerable length of
time, we have not been honored with a reply from you.
In this connection, we are giving you this LAST OPPORTUNITY to settle the adverted
assessment within ten (10) days after receipt hereof. Should you again fail, and refuse to
pay, this Office will be constrained to enforce its collection by summary remedies of
Warrant of Levy of Road Property, Distraint of Personal Property or Warrant of
Garnishment, and/or simultaneous court action.

Please give this matter your preferential attention.

Very truly yours,

ISIDRO B. TECSON, JR.

Revenue District Officer

By:

(Signed)
MILAGROS M. ACEVEDO
Actg. Chief Revenue Collection Officer[9]

Petitioner maintains that this Final Notice was a mere reiteration of the delinquent
taxpayers obligation to pay the taxes due. It was supposedly a mere demand that should
not have been mistaken for a decision on a protested assessment. Such decision, the
commissioner contends, must unequivocably indicate that it is the resolution of the
taxpayers request for reconsideration and must likewise state the reason therefor.
Respondent, on the other hand, points out that the Final Notice Before Seizure should
be considered as a denial of its request for reconsideration of the disputed
assessment. The Notice should be deemed as petitioners last act, since failure to comply
with it would lead to the distraint and levy of respondents properties, as indicated therein.
We agree with respondent. In the normal course, the revenue district officer sends
the taxpayer a notice of delinquent taxes, indicating the period covered, the amount
due including interest, and the reason for the delinquency. If the taxpayer disagrees with
or wishes to protest the assessment, it sends a letter to the BIR indicating its protest, stating
the reasons therefor, and submitting such proof as may be necessary. That letter is
considered as the taxpayers request for reconsideration of the delinquent
assessment. After the request is filed and received by the BIR, the assessment becomes
a disputed assessment on which it must render a decision. That decision is appealable to
the Court of Tax Appeals for review.
Prior to the decision on a disputed assessment, there may still be exchanges between
the commissioner of internal revenue (CIR) and the taxpayer. The former may ask
clarificatory questions or require the latter to submit additional evidence. However, the
CIRs position regarding the disputed assessment must be indicated in the final decision. It
is this decision that is properly appealable to the CTA for review.
Indisputably, respondent received an assessment letter dated February 9, 1990,
stating that it had delinquent taxes due; and it subsequently filed its motion for
reconsideration on March 23, 1990. In support of its request for reconsideration, it sent to
the CIR additional documents on April 18, 1990. The next communication respondent
received was already the Final Notice Before Seizure dated November 10, 1994.
In the light of the above facts, the Final Notice Before Seizure cannot but be
considered as the commissioners decision disposing of the request for reconsideration
filed by respondent, who received no other response to its request. Not only was the
Notice the only response received; its content and tenor supported the theory that it was
the CIRs final act regarding the request for reconsideration. The very title expressly
indicated that it was a final notice prior to seizure of property. The letter itself clearly
stated that respondent was being given this LAST OPPORTUNITY to pay; otherwise, its
properties would be subjected to distraint and levy. How then could it have been made
to believe that its request for reconsideration was still pending determination, despite the
actual threat of seizure of its properties?
Furthermore, Section 228 of the National Internal Revenue Code states that a
delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its
request for reconsideration remains unacted upon 180 days after submission thereof. We
quote:

Sec. 228. Protesting an Assessment. x x x

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.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation within thirty (30) days from receipt of the assessment
in such form and manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all relevant supporting
documents shall have become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax Appeals within (30) days from
receipt of the said decision, or from the lapse of the one hundred eighty (180)-day
period; otherwise the decision shall become final, executory and demandable.[10]

In this case, the said period of 180 days had already lapsed when respondent filed
its request for reconsideration on March 23, 1990, without any action on the part of the
CIR.
Lastly, jurisprudence dictates that a final demand letter for payment of delinquent
taxes may be considered a decision on a disputed or protested
assessment. In Commissioner of Internal Revenue v. Ayala Securities Corporation, this
Court held:

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or [respondent corporations] x x x protest o[f] the
assessment made by the petitioner, considering that the said letter [was] in itself a
reiteration of the demand by the Bureau of Internal Revenue for the settlement of the
assessment already made, and for the immediate payment of the sum of P758,687.04 in
spite of the vehement protest of the respondent corporation on April 21, 1961. This
certainly is a clear indication of the firm stand of petitioner against the reconsideration
of the disputed assessment, in view of the continued refusal of the respondent
corporation to execute the waiver of the period of limitation upon the assessment in
question.

This being so, the said letter amount[ed] to a decision on a disputed or protested
assessment and, there, the court a quo did not err in taking cognizance of this case.[11]

Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals[12] and again in CIR v.
Union Shipping Corp.,[13] we ruled:

x x x. The letter of demand dated April 29, 1963 unquestionably constitutes the final
action taken by the commissioner on the petitioners several requests for reconsideration
and recomputation. In this letter the commissioner not only in effect demanded that
the petitioner pay the amount of P11,533.53 but also gave warning that in the event it
failed to pay, the said commissioner would be constrained to enforce the collection
thereof by means of the remedies provided by law. The tenor of the letter, specifically
the statement regarding the resort to legal remedies, unmistakably indicate[d] the final
nature of the determination made by the commissioner of the petitioners deficiency
franchise tax liability.

As in CIR v. Union Shipping,[14] petitioner failed to rule on the Motion for

Reconsideration filed by private respondent, but simply continued to demand payment
of the latters alleged tax delinquency.Thus, the Court reiterated the dictum that the BIR
should always indicate to the taxpayer in clear and unequivocal language what
constitutes final action on a disputed assessment. The object of this policy is to avoid
repeated requests for reconsideration by the taxpayer, thereby delaying the finality of
the assessment and, consequently, the collection of the taxes due. Furthermore, the
taxpayer would not be groping in the dark, speculating as to which communication or
action of the BIR may be the decision appealable to the tax court.[15]
In the instant case, the second notice received by private respondent verily
indicated its nature that it was final. Unequivocably, therefore, it was tantamount to a
rejection of the request for reconsideration.
Commissioner v. Algue[16] is not in point here. In that case, the Warrant of Distraint
and Levy, issued to the taxpayer without any categorical ruling on its request for
reconsideration, was not deemed equivalent to a denial of the request. Because such
request could not in fact be found in its records, the BIR cannot be presumed to have
taken it into consideration. The request was considered only when the taxpayer gave a
copy of it, duly stamp-received by the BIR. Hence, the Warrant was deemed premature.
In the present case, petitioner does not deny receipt of private respondents protest
letter. As a matter of fact, it categorically relates the following in its Statement of Relevant
Facts:[17]
3. On March 23, 1990, respondent ICC wrote the CIR requesting for a reconsideration of
the assessment on the ground that there was an error committed in the computation of
interest and that there were expenses which were disallowed (Ibid., pp. 296-311).

4. On April 2, 1990, respondent ICC sent the CIR additional documents in support of its
protest/reconsideration. The letter was received by the BIR on April 18,
1990. Respondent ICC further executed a Waiver of Statute of Limitation (dated April
17, 1990) whereby it consented to the BIR to assess and collect any taxes that may be
discovered in the process of reinvestigation, until April 3, 1991 (Ibid., pp. 296-311). A
copy of the waiver is hereto attached as Annex C.

Having admitted as a fact private respondents request for reconsideration,

petitioner must have passed upon it prior to the issuance of the Final Notice Before
Seizure.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED.
SO ORDERED.
Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur.
Gonzaga-Reyes, J., on leave.

CIR v. Ayala Securities Corp., G.R. No. L-29485, March 31, 1976

G.R. No. L-29485 March 31, 1976

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, respondents.

Solicitor General Felix V. Makasiar, Assistant Solicitor General Isidro C. Borromeo, Solicitor
Lolita O. Gal-lang and Special Attorney Salvador D. David for petitioner.

B. V. Abela M. C. Gutierrez, J. U. Ong and F.J. Malate, Jr. for respondents.

ESGUERRA, J.:

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA
Case No. 1346, cancelling and declaring of no force and effect the assessment made
by the petitioner, Commissioner of Internal Revenue, against the accumulated surplus
of the respondent, Ayala Securities Corporation.
The factual background of the case is as follows:

On November 29, 1955, respondent Ayala Securities Corporation, a domestic

corporation organized and existing under the laws of the Philippines, filed its income tax
returns with the office of the petitioner for its fiscal year which ended on September 30,
1955. Attached to its income tax return was the audited financial statements of the
respondent corporation as of September 30, 1955, showing a surplus of P2,758,442.37.
The income tax due on the return of the respondent corporation was duly paid for
within the time prescribed by law.

In a letter dated February 21, 1961, petitioner advised the respondent corporation of
the assessment of P758.687.04 on its accumulated surplus reflected on its income tax
return for the fiscal year which ended September 30, 1955 (Exit. D). The respondent
corporation, on the other hand, in a letter dated April 19, 1961, protested against the
assessment on its retained and accumulated surplus pertaining to the taxable year 1955
and sought reconsideration thereof for the reasons (1) that the accumulation of the
surplus was for a bona fide business purpose and not to avoid the imposition of income
tax on the individual shareholders, and (2) that the said assessment was issued beyond
the five-year prescriptive period (Exh. E).

On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting
firm with the "advise that your request for reconsideration will be the subject matter of
further reinvestigation and a thorough analysis of the issues involved conditioned,
however, upon the execution of your client of the enclosed form for waiver of the
defense of prescription". (Exh. F) However, respondent corporation did not execute the
requested waiver of the statute of limitations, considering its claim that the assessment
in question had already prescribed.

On February 21, 1963, respondent corporation received a letter dated February 18,
1963, from the Chief, Manila Examiners, of the Office of the herein petitioner, calling the
attention of the respondent corporation to its outstanding and unpaid tax in the
amount of P708,687.04 and thereby requesting for the payment of the said amount
within five (5) days from receipt of the said letter (Exh. G). Believing the aforesaid letter
to be a denial of its protest, the herein respondent corporation filed with the Court of
Tax Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.

Respondent corporation in its Petition for Review alleges that the assessment made by
petitioner Commissioner of Internal Revenue is illegal and invalid considering that (1)
the assessment in question, having been issued only on February 21, 1961, and received
by the respondent corporation on March 22, 1961, the same was issued beyond the
five-year period from the date of the filing of respondent corporations income tax
return November 29, 1955, and, therefore, petitioner's right to make the assessment has
already prescribed, pursuant to the provision of Section 331 of the National Internal
Revenue Code; and (2) the respondent corporation's accumulation of surplus for the
taxable year 1955 was not improper, considering that the retention of such surplus was
intended for legitimate business purposes and was not availed of by the corporation to
prevent the imposition of the income tax upon its shareholders.
Petitioner in his answer alleged that the assessment made by his office on the
accumulated surplus of the corporation as reflected on its income tax return for the
taxable year 1955 has not as yet prescribed and, further, that the respondent
corporation's accumulation of surplus for the taxable year 1955 was improper as the
retention of such surplus was availed of by the corporation to prevent the imposition of
the income tax upon the individual shareholders or members of the said corporation.

After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive
portion of which is as follows:

WHEREFORE, the decision of the respondent Commissioner of Internal

Revenue assessing petitioner the amount of P758,687.04 as 25 surtax and
interest is reversed. Accordingly, said assessment of respondent for 1955 is
hereby cancelled and declared of no force and effect. Without
pronouncement as to costs.

From this decision, the Commissioner of Internal Revenue interposed this appeal.

Petitioner maintains that respondent Court of Tax Appeals erred in holding that the
letter dated February 18, 1963, (Exh. G) is a denial of the private respondent
corporation's protest against the assessment, and as such, is a decision contemplated
under the provisions of Sections 7 and 11 of Republic Act No. 1125. Petitioner contends
that the letter dated February 18, 1963, is merely an ordinary office letter designed to
remind delinquent taxpayers of their obligations to pay their taxes to the Government
and, certainly, not a decision on a disputed or protested assessment contemplated
under Section 7(1) of R.A. 1125.

Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding
that the assessment of P758,687.04 as surtax on private respondent corporation's
unreasonably accumulated profits or surplus had already prescribed. Petitioner further
contends that the applicable provision of law to this case is Section 332 (a) of the
National Internal Revenue Code which provides for a ten (10) year prescriptive period
of assessment, and not Section 331 thereof as held by the Tax Court which provides a
period of limitation of assessment for five (5) years only after the filing of the return.
Petitioner's theory, therefore, is to the effect that since the Corporate income tax return
in question was filed on, November 29, 1955, and the assessment thereto was issued on
February 21, 1961, said assessment is not barred by prescription as the same was made
very well within the ten (10) year period allowed by law.

Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding
the issue as to whether or not the accumulated profits or surplus is indispensable to the
business operations of the private respondent corporation. It is the contention of the
petitioner that the accumulation of profits or surplus was resorted to by the respondent
corporation in order to avoid the payment of taxes by its stockholders or members, and
was not availed of in order to meet the reasonable needs of its business operations.
The legal issues for resolution by this Court in this case are: (1) Whether or not the instant
case falls within the jurisdiction of the respondent Court of Tax Appeals; (2) Whether or
not the applicable provision of law to this case is Section 331 of the National Internal
Revenue Code, which provides for a five-year period of prescription of assessment from
the filing of the return, or Section 332(a) of the same Code which provides for a ten-
year period of limitation for the same purpose; and (3) Whether or not the respondent
Court of Tax Appeals committed a reversible error in not making any ruling on the
reasonableness or unreasonableness of the accumulated profits or surplus in question of
the private respondent corporation.

It is to be noted that the respondent Court of Tax Appeals is a court of special

appellate jurisdiction created under R. A. No. 1125. Thus under Section 7 (1), R. A. 1125,
the Court of Tax Appeals exercises exclusive appellate jurisdiction to review by appeal
"decisions of the Collector 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 National Internal Revenue Code or other law
or part of law administered by the Bureau of Internal Revenue".

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or protest of the respondent corporation on the
assessment made by the petitioner, considering that the said letter is in itself a
reiteration of the demand by the Bureau of Internal Revenue for the settlement of the
assessment already made, and for the immediate payment of the sum of P758, 687.04
in spite of the vehement protest of the respondent corporation on April 21, 1961. This
certainly is a clear indication of the firm stand of petitioner against the reconsideration
of the disputed assessment in view of the continued refusal of the respondent
corporation to execute the waiver of the period of limitation upon the assessment in
question.

This being so, the said letter amounts to a decision on a disputed or protested
assessment and, therefore, the court a quo did not err in taking cognizance of this case.

II

On the issue of whether Sec. 331 or See. 332(a) of the National Internal Revenue Code
should apply to this case, there is no iota of evidence presented by the petitioner as to
any fraud or falsity on the return with intent to evade payment of tax, not even in the
income tax assessment (Exh. 5) nor in the letter-decision of February 18, 1963 (Exh. G),
nor in his answer to the petition for review. Petitioner merely relies on the provisions of
Sec 25 of the National Internal Revenue Code, violation of which, according to
Petitioner, presupposes the existence of fraud. But this is begging the question and We
do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged
and proved in the court below. The finding of the trial court as to its existence and non-
existence is final and cannot be reviewed here unless clearly shown to be erroneous
(Republic of the Philippines vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA
207; Commissioner of Internal Revenue vs. Lilia Yusay Gonzales and the Court of Tax
Appeals,
L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because it is
serious charge (Yutivo Sons Hardware Company vs. Court of Tax Appeals and Collector
of Internal Revenue, L-13203, January 28,1961, 1 SCRA 160).

The applicable provision of law in this case is Section 331 of the National Internal
Revenue Code, to wit:

SEC. 331. Period of limitation upon assessment and collection. — Except as

provided in the succeeding section, internal revenue taxes shall be
assessed within five years after the return was filed, and no proceeding in
court without assessment for the collection of such taxes shall be begun
after the expiration of such period. For the 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: Provided, That this limitation shall
not apply to cases already investigated prior to the approval of this Code.

Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities
Corporation designated September 30, 1955, as the last day of the closing of its fiscal
year, and under Section 46(b) the income tax returns for the said corporation shall be
filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of
its fiscal year. The Ayala Securities Corporation could, therefore, file its income tax
returns on or before January 15, 1956. The assessment by the Commissioner of Internal
Revenue shall be made within five (5) years from January 15, 1956, or not later than
January 15, 1961, in accordance with Section 331 of the National Internal Revenue
Code herein above-quoted. As the assessment issued on February 21, 1961, which was
received by the Ayala Securities Corporation on March 22, 1961, was made beyond
the five-year period prescribed under Section 331 of said Code, the same was made
after the prescriptive period had expired and, therefore, was no longer binding on the
Ayala Securities Corporation.

This Court is of the opinion that the respondent court committed no reversible error in
not making any ruling on the reasonableness or unreasonableness of the accumulated
profits or surplus of the respondent corporation. For this reason, We are of the view that
after reaching the conclusion that the right of the Commissioner of Internal Revenue to
assess the 25% surtax had already prescribed under Section 331 of the National Internal
Revenue Code, to delve further into the reasonableness or unreasonableness of the
accumulated profits or surplus of the respondent corporation for the fiscal year ending
September 30, 1955, will only be an exercise in futility.

WHEREFORE, the decision appealed from is hereby affirmed in toto.

Without special pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Muñoz Palma and Martin, JJ., concur.

Advertising Associates, Inc. v. CA, 133 SCRA 765 (1984)

G.R. No. L-59758 December 26, 1984

ADVERTISING ASSOCIATES, INC., petitioner,

vs.
COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.

Bito, Misa & Lozada Law Office for petitioner.

The Solicitor General for respondents.

AQUINO, J.:

This case is about the liability of Advertising Associates, lnc. for P382,700.16 as 3%
contractor's percentage tax on its rental income from the lease of neon signs and
billboards imposed by section 191 of the Tax Code (as amended by Republic Acts Nos.
1612 and 6110) on business agents and independent contractors. Parenthetically, it
may be noted that Presidential Decree No. 69, effective November 24, 1972, added
paragraph 17 to section 191 by taxing lessors of personal property.

Section 191 defines an independent contractor as including all persons whose activity
consists essentially of the sale of all kinds of services for a fee. Section 194(v) of the Tax
Code defines a business agent as including persons who conduct advertising agencies.

It should be noted that in Advertising Associates, Inc. vs. Collector of Internal Revenue,
97 Phil. 636, the taxpayer was held liable as a manufacturer for the.90% sales tax on its
sales of neon-tube signs under section 185(k) of the Tax Code as amended. It paid
P11,986.18 as sales tax for the 4th quarter of 1948 to 1951.

This Court rejected the taxpayer's contention that it was only a contractor of neon-tube
signs and that it should pay only the 3% contractor's tax under section 191 of the Tax
Code.
In the instant case, Advertising Associates alleged that it sold in 1949 its advertising
agency business to Philippine Advertising Counsellors, that its business is limited to the
making, construction and installation of billboards and electric signs and making and
printing of posters, signs, handbills, etc. (101 tsn). It contends that it is a media company,
not an advertising company,

It paid sales taxes for selling billboards, electric signs, calendars, posters, etc., realty
dealer's tax for leasing billboards and electric signs and 3% contractor's tax for repairing
electric signs.

The billboards and electric signs manufactured by it are either sold or leased, As
already stated, the Commissioner of Internal Revenue subjected to 3% contractor's tax
its rental income from billboards and electric signs (p. 10, Appellant's brief ).

The Commissioner required Advertising Associates to pay P297,927.06 and P84,773.10 as

contractor's tax for 1967-1971 and 1972, respectively, including 25% surcharge (the
latter amount includes interest) on its income from billboards and neon signs.

The basis of the assessment is the fact that the taxpayer's articles of incorporation
provide that its primary purpose is to engage in general advertising business. Its income
tax returns indicate that its business was advertising (Exh. 14 and 15, etc.).

It is supposed "to conduct a general advertising business, both as principal and agent,
including the preparation and arrangements of advertising devices and novelties; to
erect, construct, purchase, lease or otherwise acquire fences, billboards, signboards,
buildings and other structures suitable for advertising purposes; to carry on the business
of printers, publishers, binders, and decorators in connection with advertising business
and to make and carry out contracts of every kind and character that may be
necessary or conducive to the accomplishment of any of the purposes of the
company; to engage in and carry on a general advertising business by the circulation
and distribution and the display of cards, signs, posters, dodgers, handbills, programs,
banners and flags to be placed in and on railroad cars, street cars, steam boats, cabs,
hacks, omnibuses, stages and any and all kinds of conveyances used for passengers or
for any other purposes; to display moveable or changeable signs, cards, pictures,
designs, mottoes, etc., operated by clockwork, electricity or any other power; to use,
place and display the same in depots, hotels, halls, and other public places, to
advertise in the air by airplanes, streamers, skywriting and other similar or dissimilar
operation." (Exh. 14-A, pp. 48-49, BIR Records, Vol. I).

Advertising Associates contested the assessments in its 'letters of June 25, 1973 (for the
1967-71 deficiency taxes) and March 7, 1974 (for the 1972 deficiency). The
Commissioner reiterated the assessments in his letters of July 12 and September 16,1974
(p. 3, Rollo).

The taxpayer requested the cancellation of the assessments in its letters of September
13 and November 21, 1974 (p. 3, Rollo). Inexplicably, for about four years there was no
movement in the case. Then, on March 31, 1978, the Commissioner resorted to the
summary remedy of issuing two warrants of distraint, directing the collection
enforcement division to levy on the taxpayer's personal properties as would be
sufficient to satisfy the deficiency taxes (pp. 4, 29 and 30, Rollo). The warrants were
served upon the taxpayer on April 18 and May 25, 1978.

More than a year later, Acting Commissioner Efren I. Plana wrote a letter dated May 23,
1979 in answer to the requests of the taxpayer for the cancellation of the assessments
and the withdrawal of the warrants of distraint(Annex C of Petition, pp. 31-32, Rollo).

He justified the assessments by stating that the rental income of Advertising Associates
from billboards and neon signs constituted fees or compensation for its advertising
services. He requested the taxpayer to pay the deficiency taxes within ten days from
receipt of the demand; otherwise, the Bureau would enforce the warrants of distraint.
He closed his demand letter with this paragraph:

This constitutes our final decision on the matter. If you are not agreeable,
you may appeal to the Court of Tax Appeals within 30 days from receipt
of this letter.

Advertising Associates received that letter on June 18, 1979. Nineteen days later or on
July 7, it filed its petition for review. In its resolution of August 28, 1979, the Tax
Court enjoined the enforcement of the warrants of distraint.

The Tax Court did not resolve the case on the merits. It ruled that the warrants of
distraint were the Commissioner's appealable decisions. Since Advertising Associates
appealed from the decision of May 23, 1979, the petition for review was filed out of
time. It was dismissed. The taxpayer appealed to this Court.

We hold that the petition for review was filed on time. The reviewable decision is that
contained in Commissioner Plana's letter of May 23, 1979 and not the warrants of
distraint.

No amount of quibbling or sophistry can blink the fact that said letter, as its tenor shows,
embodies the Commissioner's final decision within the meaning of section 7 of Republic
Act No. 1125. The Commissioner said so. He even directed the taxpayer to appeal it to
the Tax Court. That was the same situation in St. Stephen's Association and St. Stephen's
Chinese Girl's School vs. Collector of Internal Revenue, 104 Phil. 314, 317-318.

The directive is in consonance with this Court's dictum that the Commissioner should
always indicate to the taxpayer in clear and unequivocal language what constitutes
his final determination of the disputed assessment. That procedure is demanded by the
pressing need for fair play, regularity and orderliness in administrative action (Surigao
Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523).

On the merits of the case, the petitioner relies on the Collector's rulings dated
September 12, 1960 and June 20, 1967 that it is neither an independent contractor nor
a business agent (Exh. G and H).
As already stated, it considers itself a media company, like a newspaper or a radio
broadcasting company, but not an advertising agency in spite of the purpose stated in
its articles of incorporation. It argues that its act of leasing its neon signs and billboards
does not make it a business agent or an independent contractor. It stresses that it is a
mere lessor of neon signs and billboards and does not perform advertising services.

But the undeniable fact is that neon signs and billboards are primarily designed for
advertising. We hold that the petitioner is a business agent and an independent
contractor as contemplated in sections 191 and 194(v).

However, in view of the prior rulings that the taxpayer is not a business agent nor an
independent contractor and in view of the controversial nature of the deficiency
assessments, the 25% surcharge should be eliminated (C. M. Hoskins & Co., Inc. vs.
Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519; Imus
Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1084).

Petitioner's last contention is that the collection of the tax had already prescribed.
Section 332 of the 1939 Tax Code, now section 319 of the 1977 Tax Code, Presidential
Decree No. 1158, effective on June 3, 1977, provides that the tax may be collected by
distraint or levy or by a judicial proceeding begun 'within five years after the assessment
of the tax".

The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments
herein. The warrants of distraint were served upon it on April 18 and may 25,1978 or
within five years after the assessment of the tax. Obviously, the warrants were issued to
interrupt the five-year prescriptive period. Its enforcement was not implemented
because of the pending protests of the taxpayer and its requests for withdrawal of the
warrants which were eventually resolved in Commissioner Plana's letter of May 23, 1979.

It should be noted that the Commissioner did not institute any judicial proceeding to
collect the tax. He relied on the warrants of distraint to interrupt the running of the
statute of limitations. He gave the taxpayer ample opportunity to contest the
assessments but at the same time safeguarded the Government's interest by means of
the warrants of distraint.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The
Commissioner's deficiency assessments are modified by requiring the petitioner to pay
the tax proper and eliminating the 25% surcharge, interest and penalty. In case of non-
payment, the warrants of distrant should be implemented. The preliminary injunction
issued by the Tax Court on August 28, 1979 restraining the enforcement of said warrants
is lifted. No costs.

SO ORDERED.

Makasiar (Chairman), Concepcion, Jr., Abad Santos, Escolin and Cuevas, JJ., concur.
 RCBC v. CIR, G.R. No. 168498, April 24, 2007

G.R. No. 168498 April 24, 2007

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

YNARES-SANTIAGO, J.:

For resolution is petitioner’s Motion for Reconsideration of our Decision1 dated June 16,
2006 affirming the Decision of the Court of Tax Appeals En Banc dated June 7, 2005 in
C.T.A. EB No. 50, which affirmed the Resolutions of the Court of Tax Appeals Second
Division dated May 3, 2004 and November 5, 2004 in C.T.A. Case No. 6475, denying
petitioner’s Petition for Relief from Judgment and Motion for Reconsideration,
respectively.

Petitioner reiterates its claim that its former counsel’s failure to file petition for review with
the Court of Tax Appeals within the period set by Section 228 of the National Internal
Revenue Code of 1997 (NIRC) was excusable and raised the following issues for
resolution:

A.

THE DENIAL OF PETITIONER’S PETITION FOR RELIEF FROM JUDGMENT WILL RESULT IN THE
DENIAL OF SUBSTANTIVE JUSTICE TO PETITIONER, CONTRARY TO ESTABLISHED DECISIONS
OF THIS HONORABLE COURT BECAUSE THE ASSESSMENT SOUGHT TO BE CANCELLED HAS
ALREADY PRESCRIBED – A FACT NOT DENIED BY THE RESPONDENT IN ITS ANSWER.

B.

CONTRARY TO THIS HONORABLE COURT’S DECISION, AND FOLLOWING THE LASCONA

DECISION, AS WELL AS THE 2005 REVISED RULES OF THE COURT OF TAX APPEALS,
PETITIONER TIMELY FILED ITS PETITION FOR REVIEW BEFORE THE COURT OF TAX APPEALS;
THUS, THE COURT OF TAX APPEALS HAD JURISDICTION OVER THE CASE.

C.

CONSIDERING THAT THE SUBJECT ASSESSMENT INVOLVES AN INDUSTRY ISSUE, THAT IS, A
DEFICIENCY ASSESSMENT FOR DOCUMENTARY STAMP TAX ON SPECIAL SAVINGS
ACCOUNTS AND GROSS ONSHORE TAX, PETITIONER IN THE INTEREST OF SUBSTANTIVE
JUSTICE AND UNIFORMITY OF TAXATION, SHOULD BE ALLOWED TO FULLY LITIGATE THE
ISSUE BEFORE THE COURT OF TAX APPEALS.2
Petitioner’s motion for reconsideration is denied for lack of merit.

Other than the issue of prescription, which is raised herein for the first time, the issues
presented are a mere rehash of petitioner’s previous arguments, all of which have been
considered and found without merit in our Decision dated June 16, 2006.

Petitioner maintains that its counsel’s neglect in not filing the petition for review within
the reglementary period was excusable. It alleges that the counsel’s secretary
misplaced the Resolution hence the counsel was not aware of its issuance and that it
had become final and executory.

We are not persuaded.

In our Decision, we held that:

Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the
neglect of petitioner’s counsel. Otherwise, all that a losing party would do to salvage his
case would be to invoke neglect or mistake of his counsel as a ground for reversing or
setting aside the adverse judgment, thereby putting no end to litigation.

Negligence to be "excusable" must be one which ordinary diligence and prudence

could not have guarded against and by reason of which the rights of an aggrieved
party have probably been impaired. Petitioner’s former counsel’s omission could hardly
be characterized as excusable, much less unavoidable.

The Court has repeatedly admonished lawyers to adopt a system whereby they can
always receive promptly judicial notices and pleadings intended for them. Apparently,
petitioner’s counsel was not only remiss in complying with this admonition but he also
failed to check periodically, as an act of prudence and diligence, the status of the
pending case before the CTA Second Division. The fact that counsel allegedly had not
renewed the employment of his secretary, thereby making the latter no longer
attentive or focused on her work, did not relieve him of his responsibilities to his client. It
is a problem personal to him which should not in any manner interfere with his
professional commitments.3

Petitioner also argues that, in the interest of substantial justice, the instant case should
be re-opened considering that it was allegedly not accorded its day in court when the
Court of Tax Appeals dismissed its petition for review for late filing. It claims that rules of
procedure are intended to help secure, not override, substantial justice.

Petitioner’s arguments fail to persuade us.

As correctly observed by the Court of Tax Appeals in its Decision dated June 7, 2005:

If indeed there was negligence, this is obviously on the part of petitioner’s own counsel
whose prudence in handling the case fell short of that required under the
circumstances. He was well aware of the motion filed by the respondent for the Court
to resolve first the issue of this Court’s jurisdiction on July 15, 2003, that a hearing was
conducted thereon on August 15, 2003 where both counsels were present and at said
hearing the motion was submitted for resolution. Petitioner’s counsel apparently did not
show enthusiasm in the case he was handling as he should have been vigilant of the
outcome of said motion and be prepared for the necessary action to take whatever
the outcome may have been. Such kind of negligence cannot support petitioner’s
claim for relief from judgment.

Besides, tax assessments by tax examiners are presumed correct and made in good
faith, and all presumptions are in favor of the correctness of a tax assessment unless
proven otherwise.4 Also, petitioner’s failure to file a petition for review with the Court of
Tax Appeals within the statutory period rendered the disputed assessment final,
executory and demandable, thereby precluding it from interposing the defenses of
legality or validity of the assessment and prescription of the Government’s right to
assess.5

The Court of Tax Appeals is a court of special jurisdiction and can only take cognizance
of such matters as are clearly within its jurisdiction. Section 7 of Republic Act (R.A.) No.
9282, amending R.A. No. 1125, otherwise known as the Law Creating the Court of Tax
Appeals, provides:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code provides
a specific period of action, in which case the inaction shall be deemed a
denial;

Also, Section 3, Rule 4 and Section 3(a), Rule 8 of the Revised Rules of the Court of Tax
Appeals6 state:

RULE 4
Jurisdiction of the Court

xxxx
SECTION 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in Divisions
shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving

disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau
of Internal Revenue, where the National Internal Revenue Code or other
applicable law provides a specific period for action: Provided, that in
case of disputed assessments, the inaction of the Commissioner of Internal
Revenue within the one hundred eighty day-period under Section 228 of
the National Internal Revenue Code shall be deemed a denial for
purposes of allowing the taxpayer to appeal his case to the Court and
does not necessarily constitute a formal decision of the Commissioner of
Internal Revenue on the tax case; Provided, further, that should the
taxpayer opt to await the final decision of the Commissioner of Internal
Revenue on the disputed assessments beyond the one hundred eighty
day-period abovementioned, the taxpayer may appeal such final
decision to the Court under Section 3(a), Rule 8 of these Rules; and
Provided, still further, that in the case of claims for refund of taxes
erroneously or illegally collected, the taxpayer must file a petition for
review with the Court prior to the expiration of the two-year period under
Section 229 of the National Internal Revenue Code;

xxxx

RULE 8
Procedure in Civil Cases

xxxx

SECTION 3. Who May Appeal; Period to File Petition. — (a) A party adversely affected
by a decision, ruling or the inaction of the Commissioner of Internal Revenue on
disputed assessments or claims for refund of internal revenue taxes, or by a decision or
ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade
and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its
original jurisdiction may appeal to the Court by petition for review filed within thirty days
after receipt of a copy of such decision or ruling, or expiration of the period fixed by law
for the Commissioner of Internal Revenue to act on the disputed assessments. In case of
inaction of the Commissioner of Internal Revenue on claims for refund of internal
revenue taxes erroneously or illegally collected, the taxpayer must file a petition for
review within the two-year period prescribed by law from payment or collection of the
taxes. (n)

From the foregoing, it is clear that the jurisdiction of the Court of Tax Appeals has been
expanded to include not only decisions or rulings but inaction as well of the
Commissioner of Internal Revenue. The decisions, rulings or inaction of the Commissioner
are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the
appeal, provided it is filed within 30 days after the receipt of such decision or ruling, or
within 30 days after the expiration of the 180-day period fixed by law for the
Commissioner to act on the disputed assessments. This 30-day period within which to file
an appeal is jurisdictional and failure to comply therewith would bar the appeal and
deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the
correctness of the assessments. Such period is not merely directory but mandatory and
it is beyond the power of the courts to extend the same.7

In case the Commissioner failed to act on the disputed assessment within the 180-day
period from date of submission of documents, a taxpayer can either: 1) file a petition
for review with the Court of Tax Appeals within 30 days after the expiration of the 180-
day period; or 2) await the final decision of the Commissioner on the disputed
assessments and appeal such final decision to the Court of Tax Appeals within 30 days
after receipt of a copy of such decision. However, these options are mutually exclusive,
and resort to one bars the application of the other.

In the instant case, the Commissioner failed to act on the disputed assessment within
180 days from date of submission of documents. Thus, petitioner opted to file a petition
for review before the Court of Tax Appeals. Unfortunately, the petition for review was
filed out of time, i.e., it was filed more than 30 days after the lapse of the 180-day
period. Consequently, it was dismissed by the Court of Tax Appeals for late filing.
Petitioner did not file a motion for reconsideration or make an appeal; hence, the
disputed assessment became final, demandable and executory.

Based on the foregoing, petitioner can not now claim that the disputed assessment is
not yet final as it remained unacted upon by the Commissioner; that it can still await
the final decision of the Commissioner and thereafter appeal the same to the Court of
Tax Appeals. This legal maneuver cannot be countenanced. After availing the first
option, i.e., filing a petition for review which was however filed out of time, petitioner
can not successfully resort to the second option, i.e., awaiting the final decision of the
Commissioner and appealing the same to the Court of Tax Appeals, on the pretext that
there is yet no final decision on the disputed assessment because of the Commissioner’s
inaction.

Lastly, we note that petitioner is raising the issue of prescription for the first time in the
instant motion for reconsideration. Although the same was raised in the petition for
review, it was dismissed for late filing. No motion for reconsideration was filed hence the
disputed assessment became final, demandable and executory. Thereafter, petitioner
filed with the Court of Tax Appeals a petition for relief from judgment. However, it failed
to raise the issue of prescription therein. After its petition for relief from judgment was
denied by the Court of Tax Appeals for lack of merit, petitioner filed a petition for review
before this Court without raising the issue of prescription. It is only in the instant motion
for reconsideration that petitioner raised the issue of prescription which is not allowed.
The rule is well-settled that points of law, theories, issues and arguments not adequately
brought to the attention of the lower court need not be considered by the reviewing
court as they cannot be raised for the first time on appeal,8 much more in a motion for
reconsideration as in this case, because this would be offensive to the basic rules of fair
play, justice and due process.9 This last ditch effort to shift to a new theory and raise a
new matter in the hope of a favorable result is a pernicious practice that has
consistently been rejected.

WHEREFORE, in view of the foregoing, petitioner’s motion for reconsideration is DENIED.

SO ORDERED.

CONSUELO YNARES-SANTIAGO
Associate Justice

WE CONCUR:

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

ROMEO J. CALLEJO, SR. MINITA V. CHICO-NAZARIO

Associate Justice Asscociate Justice

ANTONIO EDUARDO B. NACHURA

Associate Justice

ATTESTATION

I attest that the conclusions in the above resolution were reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson’s
Attestation, it is hereby certified that the conclusions in the above Resolution were
reached in consultation before the case was assigned to the writer of the opinion of the
Court’s Division.
REYNATO S. PUNO
Chief Justice

BPI v. Trinidad, G.R. No. L-16014, October 4, 1921

G.R. No. L-16014 October 4, 1921

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellant,

vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee.

Yeager and Armstrong for appellant.

No appearance for appellee.

JOHNSON, J.:

There is a practically no dispute about the facts in this case. They are as follows:

On the 13th day of July, 1916, the defendant Collector of Internal Revenue, through his
duly authorized agent at Zamboanga, seized and distrained certain personal property,
consisting of machinery for sawing lumber which is particularly enumerated and
described in paragraph 3 of the complaint, and advertised the same for sale, to realize
the sum of P2,159.79, alleged to be due to the Government of the Philippine Islands
from Pujalte and Co., as forestry charges. The defendant claimed that said personality
belonged to the said company, was used in the business on which the taxes were due,
and was liable to seizure to cover said taxes. On the other hand, the plaintiff claimed to
be the owner of said property, and demanded its release. The demand being denied,
the plaintiff paid to the defendant the said sum of P2,159.79 under protest to prevent
the sale of said property, and immediately brought the present action in the Court of
First Instance of Zamboanga to recover the said sum of P2,159.78 together with interest
and costs. The lower court, after due trial, dismissed the plaintiff's complaint and
absolved the defendant from all liability thereunder. From that judgment the plaintiff
appealed to this court.

The property in question formerly belonged to the Taba Saw Mill Co., a copartnership
formed by Pujalte and Co. and one Ramon Murga. In April, 1914, Ramon Murga sold all
his rights, title, and interest in and to the said copartnership to Pujalte and Co., which
thereby became the sole owner of the concern.

It appears from plaintiff's Exhibit AA, which was admitted in evidence without objection
on the part of the defendant, that on the 26th day of September, 1912, the said Taba
Saw Mill Co. conveyed to the plaintiff bank, by way of chattel mortgage, the property
here in question together with other personalities, as security for the payment to said
bank of two certain promissory notes for the sum of P180,000. Said chattel mortgage
was duly registered in the office of the register of deeds of Zamboanga on the 26th day
of December, 1912. On that date the property in question was free from all tax liens; at
least, the plaintiff mortgagee had no notice thereof. On the 13th day of July, 1916,
when the amount here in question was found to be due to the Government from
Pujalte and Co. as forestry charges, and when the property in question was seized by
the defendant, the said chattel mortgage was still subsisting. It is admitted that at the
time of its seizure the said property was being used in the sawmill of Pujalte and Co.

Upon the foregoing facts the lower court absolved the defendant from all liability under
the plaintiff's complaint, for the following reasons:

1. That the party who was liable to pay the taxes for which the property in question was
distrained was not the plaintiff but Pujalte and Co.; and that the plaintiff having
"voluntarily and spontaneously" paid the debt of the latter, had no cause of action
against the defendant collector, and could only recover the sum so paid by it from
Pujalte and Co., under article 1158 of the Civil Code (p. 15, B. of E.); that the plaintiff
should have proceeded under section 141 of Act No. 2339 (now sec. 1580 of Act No.
2711), and not under section 140 of the said Act (sec. 1579 of Act No. 2711).

2. That "even supposing for a moment" that the plaintiff had a right of action against the
defendant to recover the sum paid by it to the latter, yet this action must fail because
the property in question, having been used by Pujalte and Co. in its business of cutting
and sawing lumber, was liable to seizure and distraint under section 149 of Act No. 2339.

We are of the opinion that neither of the foregoing reasons is sound, and that the
judgment of the lower court should be revoked.

First. There is absolutely no basis for the finding of the trial court that "the plaintiff bank
had voluntarily and spontaneously paid the debt of a third party, that is, that of the firm
of Pujalte and Co." (p. 15, B. of E.). Paragraph 7 of the plaintiff's complaint alleges: "That
thereupon, involuntarily and under due protest in writing, the plaintiff bank made
payment of the required sum of P2,159.79 in order to secure the release of its seized
property." These allegations were specially admitted by the defendant (par. 5,
stipulation, Plaintiff's Exhibit G).

Section 140 of the Internal Revenue Law (Act No. 2339 provides as follows:

SEC. 140. Recovery of tax paid under protest. — When the validity of any tax in
questioned, or amount disputed, or other question raised as to liability therefor,
the person against whom or against whose property the same is sought to be
enforced shall pay the tax under instant protest, or upon protest within ten days,
and shall thereupon request the decision of the Collector of Internal Revenue. If
the decision of the Collector of Internal Revenue is adverse, or if no decision is
made by him within six months from the date when his decision was requested,
the taxpayer may proceed, at any time within two years after the payment of
the tax, to bring an action against the Collector of Internal Revenue for the
 recovery of the sum alleged to have been illegally collected, the process to be
served upon him, upon the provincial treasurer, or upon the officer collecting the
tax.

Section 141 of the same Act provides:

SEC. 141. Action to contest forfeiture of chatted. — In case of the seizure of

personal property under claim of forfeiture the owner, desiring to contest the
validity of the forfeiture, may at any time before sale or destruction of the
property bring an action against the person seizing the property or having
possession thereof to recover the same, and upon giving proper bond may
enjoin the sale; or after the sale and within six months he may bring an action to
recover the net proceeds realized at the sale.

The lower court was of the opinion that the plaintiff should have proceeded under the
latter section above quoted and not under the former. It cannot be maintained that
the personal property here in question was seized by the defendant "under claim of
forfeiture;" nor could it have been legally seized under claim of forfeiture. It was seized
to enforce an alleged tax lien, under section 149 of Act No. 2339 (sec. 1588, Act No.
2711), which was quoted by the lower court in its decision (p. 19 B. of E.) and which in
no way provides for the forfeiture of the property on which such a lien attaches.
Forfeiture is "the divestiture of property without compensation, in consequence of an
offense. The effect of such forfeiture is to transfer the title to the specific thing from the
owner to the sovereign power." (12 R. C. L., 124.) There is a great difference between a
seizure under forfeiture and a seizure to enforce a tax lien. In the former all the
proceeds derived from the sale of the thing forfeited are turned over to the Collector of
Internal Revenue (sec. 148, Act No. 2339) in the latter the residue of such proceeds over
and above what is required to pay the tax sought to be realized, including expenses, is
returned to the owner of the property (second paragraph, sec. 152, Act No. 2339).
Clearly, the remedy applicable to the present case is that provided for in section 140,
above quoted, and which the plaintiff invoked. (See Hongkong and Shanghai Banking
Corporation vs. Rafferty, 39 Phil., 145, 147.)

Second. At the time of the seizure of the property here in question, the plaintiff held a
valid and subsisting chattel mortgage on the same, duly registered in the registry of
deeds. "A chattel mortgage is a conditional sale of personal property as security for the
payment of a debt, or the performance of some other obligation specified therein, the
condition being that the sale shall be void upon the seller paying the purchaser a sum
of money or doing some other act named." (Sec. 3, Act No. 1508.) "Therefore, so long as
the mortgage exists, the dominion with respect to the mortgaged personal
property rests with the creditor-pledgee from the time of the inscription of the mortgage
in the registry, and the furniture ceases to be the property of the debtor for the reason
that it has become the property of the creditor, in like manner as the domination of a
thing sold is transferred to the purchaser and ceases to belong to the vendor from the
moment of the delivery thereof, as a result of the sale." (Meyers vs. Thein, 15 Phil., 303,
303-309; see also Bachrach vs. Mantel, 25 Phil., 410; In re Du Tec Chuan, 34 Phil., 488,
490.) 1awph!l.net
The chattel mortgage in question was registered in the registry of deeds on the 26th
day of December, 1912. Theforest charges sought to be collected by the defendant
were found to be due from Pujalte and Co. on the 13th day of July, 1916, and on that
date the property covered by said chattel mortgage was seized by the defendant to
enforce the payment of said forest charges. It is clear from these facts and from the
legal provisions and jurisprudence above quoted that the plaintiff-mortgagee, and not
Pujalte and Co., the mortgagor, was, and had been for more than three years, the
legal owner of the property in question at the time the same was seized by the
defendant. And even granting, without deciding, that the forest charges are
a tax on business or occupation within the meaning of section 149 of Act No. 2339 (sec.
1588, Act No. 2711), yet we are of the opinion and so decide that the mere fact that
said property was used in the business of Pujalte and Co. could not and did not make
such property liable for the payment of taxes due from said company, said property
belonging as it did to an innocent third party. "The property used in the business or
occupation," referred to in said section 149, can only mean property belonging to the
owner of the business or occupation. Any other construction would be unwarranted
and unjust.

For the foregoing reasons the judgment appealed from is hereby revoked, and it is
hereby ordered and decreed that a judgment be entered in favor of the plaintiff and
against the defendant, ordering the latter to refund to the former the sum of P2,159.79,
with interest thereon at the legal rate from the 13th day of July, 1916, until paid, and
without any finding as to costs. So ordered.

Araullo, Avanceña and Villamor, JJ., concur.

Separate Opinions

STREET, J., concurring:

I concur on the ground that the language used in section 1588 of the Administrative
Code (1917), creating a line upon property used in any business or occupation subject
to an internal revenue tax, cannot be interpreted as fixing a lien upon a sawmill used in
sawing timber on which the forest charges have not been paid. The lien created by
that section was evidently intended to apply to property used in relation with a business
or occupation subject to some form or other of the privilege taxes recognized in the
Internal Revenue Law; and the language used is clearly expressed to this effect. The
forest charges for timber taken from the public forests do not constitute a privilege tax
on a business or occupation in any sense, and hence the lien does not attach to a
sawmill in which the timber is cut into lumber.

In this view of the case it is a matter of indifference whether the sawmill in question was
owned by Pujalte and Company or by the bank.

CIR v. Pascor Realty, G.R. No. 128315, June 29, 1999

[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.

DECISION
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
interests 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] in CTA Case No. 5271. The CTA disposed as
follows:

WHEREFORE, finding [the herein petitioners] 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.

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 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 of 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.Respondents ground of denial, therefore, that there was no formal
assessment issued, is untenable.

It is the Courts honest belief, that the criminal case for tax evasion is already an
assessment. 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 taxpayers 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 respondents 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 the 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 the criminal Complaint filed with the Department of Justice,
constituted an assessment that could be questioned before the Court of Tax Appeals.

The Courts 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 revenue 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
the 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 rate as may be
prescribed by rules and regulations, is to be collected from 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 NIRC,[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 (Chairman), J., abroad on official business.

Aznar vs. CTA, G.R. No. L-20569 (August 23, 1974)

G.R. No. L-20569 August 23, 1974

JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H.
Aznar, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sato, Enad Garcia for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and
Special Attorney Librada R. Natividad for respondents.

ESGUERRA, J.:p

Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a

review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case No.
109, modifying the decision of respondent Commissioner of Internal Revenue and
ordering the petitioner to pay the government the sum of P227,691.77 representing
deficiency income taxes for the years 1946 to 1951, inclusive, with the condition that if
the said amount is not paid within thirty days from the date the decision becomes final,
there shall be added to the unpaid amount the surcharge of 5%, plus interest at the
rate of 12% per annum from the date of delinquency to the date of payment, in
accordance with Section 51 of the National Internal Revenue Code, plus costs against
the petitioner.

It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in
interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his
income tax returns on the cash and disbursement basis, reporting therein the following:

Ye Net Amou Exhib

ar Income nt of it
Tax
Paid

194 P12,822.0 P114.6 pp.

5 0 6 85-88
B.I.R.
rec.

194 9,910.94 114.66 38-A

6 (pp.
329-
332
B.I.R
rec.)

194 10,200.00 132.00 39

7 (pp.
75-78
B.I.R
rec.)

194 9,148.34 68.90 40

8 (pp.
70-73
B.I.R.
rec.)

194 8,990.66 59.72 41

9 (pp.
64-67
B.I.R.
rec.)
 195 8,364.50 28.22 42
0 (pp.
59-
62,
BIR
rec.)

195 6,800.00 none 43

1 (pp.
54-57
BIR
rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported
income of one obviously wealthy, pursuant to the authority granted him by Section 38
of the National Internal Revenue Code, caused B.I.R. Examiner Honorio Guerrero to
ascertain the taxpayer's true income for said years by using the net worth and
expenditures method of tax investigation. The assets and liabilities of the taxpayer
during the above-mentioned years were ascertained and it was discovered that from
1946 to 1951, his net worth had increased every year, which increases in net worth was
very much more than the income reported during said years. The findings clearly
indicated that the taxpayer did not declare correctly the income reported in his
income tax returns for the aforesaid years.

Based on the above findings of Examiner Guerrero, respondent Commissioner, in his

letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed
tax delinquency to the amount of P723,032.66, plus compromise penalty. The taxpayer
requested a reinvestigation which was granted for the purpose of verifying the merits of
the various objections of the taxpayer to the deficiency income tax assessment of
November 28, 1952.

After the reinvestigation, another deficiency assessment to the reduced amount of

P381,096.07 dated February 16, 1955, superseded the previous assessment and notice
thereof was received by Matias H. Aznar on March 2, 1955.

The new deficiency assessment was based on the following computations:

1946

Net income per return ........................ P9,910.94

Add: Under declared income .............. 22,559.94
Net income per investigation............... 32,470.45

Deduct: Income tax liability

per return as assessed ...................................................... 114.66
Balance of tax due ........................................................... P3,687.10
Add: 50% surcharge ........................................................ 1,843.55
DEFICIENCY INCOME TAX ...................................... P5,530.65

1947

Net income per return ..................................................... P10,200.00

Add: Under declared income ............................................ 90,413.56
Net income per reinvestigation ....................................... P100,613.56
Deduct: Personal and additional exemption ...................... 7,000.00
Amount of income subject to tax ...................................... P93,613.56
Total tax liability ............................................................... P24,753.15
Deduct: Income tax liability per return as assessed ............ 132.00
Balance of tax due ........................................................... P24,621.15
Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME
TAX ...................................... P36,931.73

1948

Net income per return ...................................................... P9,148.34

Add: Under declared income ............................................. 15,624.63
Net income per reinvestigation .......................................... P24,772.97
Deduct: Personal and additional exemptions ...................... 7,000.00
Amount of income subject to tax ....................................... P17,772.97
Total tax liability ............................................................... 2,201.40
Deduct: Income tax liability per return as assessed ............ 68.90
Balance of tax due ........................................................... P2,132.500
Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME TAX
...................................... P3,198.75

1949

Net income per return ....................................................... P9,990.66

Add: Under declared income ............................................. 105,418.53
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME
TAX ....................................... P45,125.94

1950

Net income per return ....................................................... P8,364.50

Add: Under declared income ............................................. 365,578.76
Net income per reinvestigation .......................................... P373,943.26
Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME
TAX ....................................... P278,783.00

1951

Net income per return ........................................................ P6,800.00

Add: Under declared income ............................................... 33,355.80
Net income per reinvestigation ............................................ P40,155.80
Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME
TAX .......................................... P11,526.00

SUMMARY

1946 .... P5,530.65

1947 .... 36,931.73

1948 .... 3,198.75

1949 .... 45,125.94

1950 .... 278,783.00

1951 .... 11,526.00

Total .... P381,096.07

In determining the unreported income, the respondent Commissioner of Internal

Revenue resorted to the networth method which is based on the following
computations:

1945

Real estate inventory ................................ P64,738.00

Other assets ............................................. 37,606.87
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97
1946

Real estate inventory ................................. P86,944.18

Other assets ............................................. 60,801.65
Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41
Net assets ................................................ P142,870.42
Less: Liabilities .................. P17,000.00
Net Worth as of
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45

1947

Real estate inventory .................................. P237,824.18

Other assets ............................................... 54,495.52
Total assets ............................................... P292,319.70
Less: Depreciation allowed ......................... 12,835.72
Net assets .................................................. 279,483.98
Less: Liabilities ................... P60,000.00
Networth as of
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
Net income ................................................P100,613.56

1948

Real estate inventory .................................. P244,824.18

Other assets .............................................. 118,720.60
Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
Net assets ................................................. P342,608.75
Less: Liabilities ................... P105,351.80
Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97

1949

Real estate inventory ................................. P400,515.52

Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Net assets ................................................. P461.274.73
Less; Liabilities .................. P116,608.59
Networth as of
Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Increase in networth .................................. P107,409.19
Add: Estimated living expenses .................. 7,000.00
Net income ............................................... P114,409.19

1950

Real estate inventory .................................. P412,465.52

Investment in Schools and
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Total assets ............................................... P916,715.38
Less; Depreciation allowed ........................ 47,561.99
Net assets ................................................. P869,153.39
Less: Liabilities .................. P158,343.99
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Increase in networth ................................... P366,143.26
Add: Estimated living expenses ................... 7,800.00
Net income ................................................. P373,943.26

1951

Real estate inventory ................................... P412,465.52

Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40
Total assets ................................................ P946,691.13
Less: Depreciation allowed ......................... 62,466.90
Net assets .................................................. P884,224.23
Less: Liabilities ........................................... P140,459.03
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43
Increase in networth .................................... P32,955.80
Add: Estimated living expenses .................... 7,200.00
Net income ................................................. P40,155.80

(Exh. 45-B, BIR rec. p. 188)

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City
Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and levy to
secure payment of the deficiency income tax in question. Matias H. Aznar filed his
petition for review of the case with the Court of Tax Appeals on April 1, 1955, with a
subsequent petition immediately thereafter to restrain respondent from collecting the
deficiency tax by summary method, the latter petition being granted on February 8,
1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review, this
Court set aside the C.T.A. resolution and required the petitioner to deposit with the
Court of Tax Appeals the amount demanded by the Commissioner of Internal Revenue
for the years 1949 to 1951 or furnish a surety bond for not more than double the amount.

On March 5, 1962, in a decision signed by the presiding judge and the two associate
judges of the Court of Tax Appeals, the lower court concluded that the tax liability of
the late Matias H. Aznar for the year 1946 to 1951, inclusive should be P227,788.64 minus
P96.87 representing the tax credit for 1945, or P227,691.77, computed as follows:

1946

Net income per return .............................................. P9,910.94

Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65

1947

Net income per return ............................................ P10,200.00

Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57

1948

Net income per return .............................................. P9,148.34

Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15

1949

Net income per return ................................................. P8,990.66

Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27

1950

Net income per return .................................................. P6,800.00

Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00

1951

Net income per return ................................................... P8,364.50

Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00

SUMMARY

1946 P5,530.65

1947 19,932.57
 1948 1,441.15

1949 13,378.27

1950 175,980.00

1951 11,526.00

P227,788.64.

The first vital issue to be decided here is whether or not the right of the Commissioner of
Internal Revenue to assess deficiency income taxes of the late Matias H. Aznar for the
years 1946, 1947, and 1948 had already prescribed at the time the assessment was
made on November 28, 1952.

Petitioner's contention is that the provision of law applicable to this case is the period of
five years limitation upon assessment and collection from the filing of the returns
provided for in See. 331 of the National Internal Revenue Code. He argues that since
the 1946 income tax return could be presumed filed before March 1, 1947 and the
notice of final and last assessment was received by the taxpayer on March 2, 1955, a
period of about 8 years had elapsed and the five year period provided by law (Sec.
331 of the National Internal Revenue Code) had already expired. The same argument is
advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the
return for 1948, which was filed on February 28, 1949. Respondents, on the other hand,
are of the firm belief that regarding the prescriptive period for assessment of tax returns,
Section 332 of the National Internal Revenue Code should apply because, as in this
case, "(a) In the case of a false or fraudulent return with intent to evade tax or of a
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten years
after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC).

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did
not file false and fraudulent returns with intent to evade tax, while respondent
Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax
Appeals concluding that the very "substantial under declarations of income for six
consecutive years eloquently demonstrate the falsity or fraudulence of the income tax
returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we
do not deny that the findings of facts by the Court of Tax Appeals, supported as they
are by very substantial evidence, carry great weight, by resorting to a proper
interpretation of Section 332 of the NIRC. We believe that the proper and reasonable
interpretation of said provision should be that in the three different cases of (1) false
return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be begun
without assessment, at any time within ten years after the discovery of the (1) falsity, (2)
fraud, (3) omission. Our stand that the law should be interpreted to mean a separation
of the three different situations of false return, fraudulent return with intent to evade tax,
and failure to file a return is strengthened immeasurably by the last portion of the
provision which segregates the situations into three different classes, namely "falsity",
"fraud" and "omission". That there is a difference between "false return" and "fraudulent
return" cannot be denied. While the first merely implies deviation from the truth, whether
intentional or not, the second implies intentional or deceitful entry with intent to evade
the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under
Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the
government is placed at a disadvantage so as to prevent its lawful agents from proper
assessment of tax liabilities due to false returns, fraudulent return intended to evade
payment of tax or failure to file returns, the period of ten years provided for in Sec. 332
(a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to
be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the
respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that
the period of ten years within which to assess petitioner's tax liability had not expired at
the time said assessment was made.

II

As to the alleged errors committed by the Court of Tax Appeals in not deducting from
the alleged undeclared income of the taxpayer for 1946 the proceeds from the sale of
jewelries valued at P30,000; in not excluding from other schedules of assets of the
taxpayer (a) accounts receivable from customers in the amount of P38,000 for 1948,
P126,816.50 for 1950, and provisions for doubtful accounts in the amount of P41,810.56
for 1950; (b) over valuation of hospital and dental buildings for 1949 in the amount of
P32,000 and P6,191.32 respectively; (c) investment in hollow block business in the
amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the amount of
P23,000 for the year 1949; (e) various lands and buildings included in the schedule of
assets for the years 1950 and 1951 in the total amount of P243,717.42 for 1950 and
P62,564.00 for 1951, these issues would depend for their resolution on determination of
questions of facts based on an evaluation of evidence, and the general rule is that the
findings of fact of the Court of Tax Appeals supported by substantial evidence should
not be disturbed upon review of its decision (Section 2, Rule 44, Rules of Court).

On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount
petitioner contends should be deducted from the taxpayer's net worth as of December
31, 1946, the record shows that Matias H. Aznar, when interviewed by B.I.R. Examiner
Guerrero, stated that at the beginning of 1945 he had P60,000 worth of jewelries
inherited from his ancestors and were disposed off as follows: 1945, P10,000; 1946,
P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000; (Report of B.I.R. Examiner Guerrero,
B.I.R. rec. pp. 90-94).
During the hearing of this case in the Court of Tax Appeals, petitioner's accountant
testified that on January 1, 1945, Matias H. Aznar had jewelries worth P60,000 which
were acquired by purchase during the Japanese occupation (World War II) and sold
on various occasions, as follows: 1945, P5,000 and 1946, P30,000. To corroborate the
testimony of the accountant, Mrs. Ramona Agustines testified that she bought from the
wife of Matias H. Aznar in 1946 a diamond ring and a pair of earrings for P30,000; and in
1947 a wrist watch with diamonds, together with antique jewelries, for P15,000. Matias H.
Aznar, on the other hand testified that in 1945, his wife sold to Sards Parino jewelries for
P5,000 and question, Mr. Aznar stated that his transaction with Sards Parino, with respect
to the sale of jewelries, amounted to P15,000.

The lower court did not err in finding material inconsistencies in the testimonies of Matias
H. Aznar and his witnesses with respect to the values of the jewelries allegedly disposed
off as stated by the witnesses. Thus, Mr. Aznar stated to the B.I.R. examiner that jewelries
worth P10,000 were sold in 1945, while his own accountant testified that the same
jewelries were sold for only P5,000. Mr. Aznar also testified that Mrs. Agustines purchased
from his wife jewelries for P35,000, and yet Mrs. Agustines herself testified that she
bought jewelries for P30,000 and P15,000 on two occasions, or a total of P45,000.

We do not see any plausible reason to challenge the fundamentally sound basis
advanced by the Court of Tax Appeals in considering the inconsistencies of the
witnesses' testimony as material, in the following words:

We do not say that witnesses testifying on the same transaction should

give identical testimonies. Because of the frailties and the limitations of the
human mind, witnesses' statements are apt to be inconsistent in certain
points, but usually the inconsistencies refer to the minor phases of the
transaction. It is the insignificance of the detail of an occurrence that fails
to impress the human mind. When that same mind, made to recall what
actually happened, the significant point which it failed to take note is
naturally left out. But it is otherwise as regards significant matters, for they
leave indelible imprints upon the human mind. Hence, testimonial
inconsistencies on the minor details of an occurrence are dismissed lightly
by the courts, while discrepancies on significant points are taken seriously
and weigh adversely to the party affected thereby.

There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in
view of the aforesaid inconsistencies, which we deem material and significant, we
dismiss as without factual basis petitioner's allegation that jewelries form part of his
inventory of assets for the purpose of establishing his net worth at the beginning of
1946."

As to the accounts receivable from the United States government for the amount of
P38,254.90, representing a claim for goods commandered by the U.S. Army during
World War II, and which amount petitioner claimed should be included in his net worth
as of January 1, 1946, the Court of Tax Appeals correctly concluded that the
uncontradicted evidence showed that "the collectible accounts of Mr. Aznar from the
U.S. Government in the sum of P38,254.90 should be added to his assets (under
accounts receivable) as of January 1, 1946. As of December 31, 1947, and December
31, 1948, the years within which the accounts were paid to him, the 'accounts
receivable shall decrease by P31,362.37 and P6,892.53, respectively."

Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was
listed as an asset during the years 1945 and 1947 to 1951, but which was not listed as an
asset in 1946 because of a notation in the tax declaration that it was reconstructed in
1947, the lower court correctly concluded that the reconstruction of the property did
not render it valueless during the time it was being reconstructed and consequently it
should be listed as an asset as of January 1, 1946, with the same valuation as in 1945,
that is P1,500.

On the question of accounts receivable from customers in the amount of P38,000 for
1948, and P123,816.58 for the years 1950 and 1951, which were included in the assets of
Mr. Aznar for those years by the respondent Commissioner of Internal Revenue, it is very
clear that those figures were taken from the statements (Exhs. 31 and 32) filed by Mr.
Matias H. Aznar with the Philippine National Bank when he was intending to obtain a
loan. These statements were under oath and the natural implication is that the
information therein reflected must be the true and accurate financial condition of the
one who executed those statements. To believe the petitioner's argument that the late
Mr. Aznar included those figures in his sworn statement only for the purpose of obtaining
a bigger credit from the bank is to cast suspicion on the character of a man who can
no longer defend himself. It would be as if pointing the finger of accusation on the late
Mr. Aznar that he intentionally falsified his sworn statements (Exhs. 31 and 32) to make it
appear that there were non-existent accounts receivable just to increase his assets by
fictitious entries so that his credit with the Philippine National Bank could be enhanced.
Besides, We do not lose sight of the fact that those statements (Exhs. 31 and 32) were
executed before this tax controversy arose and the disputable presumptions that a
person is innocent of crime or wrong; that a person intends the ordinary consequences
of his voluntary act; that a person takes ordinary care of his concerns; that private
transaction have been fair and regular; that the ordinary course of business has been
followed; that things have happened according to the ordinary course of nature and
the ordinary habits of life; that the law has been obeyed (Sec. 5, (a), (c), (d), (p), (q),
(z), (ff), Rule 131 of the Rules of Court), together with the conclusive presumption that
"whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing true, and to act upon such belief,
he cannot, in any litigation arising out of such declaration, act or omission, be
permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court), convincingly indicate that
the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were true, in
existence, and accurate to the very amounts mentioned.

There is no merit to petitioners argument that those statements were only for the
purpose of obtaining a bigger credit from the bank (impliedly stating that those
statements were false) and those accounts were allegedly back accounts of students
of the Southwestern Colleges and were worthless, and if collected, would go to the
funds of the school. The statement of the late Mr. Aznar that they were accounts
receivable from customers should prevail over the mere allegation of petitioner,
unsupported as they are by convincing evidence. There is no reason to disturb the
lower court's conclusion that the amounts of P38,000 and P123,816.58 were accounts
receivable from customers and as such must be included as petitioner's assets for the
years indicated.

As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is
clear that said amount is taken from Exhibit 31, the sworn statement of financial
condition filed by Mr. Matias H. Aznar with the Philippine National Bank. The lower court
did not commit any error in again giving much weight to the statement of Mr. Aznar
and in concluding that inasmuch as this is an item separate and apart from the
taxpayer's accounts receivable and non-deductible expense, it should be reverted to
the accounts receivable and, consequently, considered as an asset in 1950.

On the alleged over valuation of two buildings (hospital building which respondent
Commissioner of Internal Revenue listed as an asset from 1949-1951 at the basic
valuation of P130,000, and which petitioner claims to be over valued by P32,000;
dentistry building valued by respondent Commissioner of Internal Revenue at
P36,191.34, which petitioner claims to be over valued by P6,191.34), We find no
sufficient reason to alter the conclusion of respondent Court of Tax Appeals sustaining
the respondent Commissioner of Internal Revenue's valuation of both properties.

Respondent Commissioner of Internal Revenue based his valuation of the hospital

building on the representation of Mr. Matias H. Aznar himself who, in his letter (Exh. 35) to
the Philippine National Bank dated September 5, 1949, stated that the hospital building
cost him P132,000. However in view of the effect of a typhoon in 1949 upon the
building, the value allowed was P130,000. Exhibit 35, contrary to petitioner's contention,
should be given probative value because, although it is an unsigned plain copy, that
exhibit was taken by the investigating examiner of the B.I.R. from the files of the
Southwestern Colleges and formed part of his report of investigation as a public official.
The estimates of an architect and a civil engineer who agreed that a value of P84,240 is
fair for the hospital building, made years after the building was constructed, cannot
prevail over the petitioner's own estimate of his property's value.

Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry

Building is based on the letter of Mr. and Mrs. Matias H. Aznar to the Southwestern
Colleges, dated December 15, 1950, which is embodied in the minutes of the meeting
of the Board of Trustees of the Southwestern Colleges held on May 7, 1951 (Exhibit G-1).
In Exhibit 26 A, which is the cash book of the Southwestern Colleges, this building was
listed as of the same amount. Petitioner's estimate of P30,000 for this building, based on
Architect Paca's opinion, cannot stand against the owner's estimate and that which
appears in the cash book of the Southwestern Colleges, if we take into consideration
that the owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding
was initiated, while architect Paca's estimate was made upon petitioner's request solely
for the purpose of evidence in this tax case.
In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue
included the administrative building valued at P19,200 for the years 1947 and 1948, and
P16,700 for the years 1949 to 1951; and a high school building valued at P48,000 for 1947
and 1948, and P45,000 for 1949, 1950 and 1951. The reduced valuation for the latter
years are due to allowance for partial loss resulting from the 1949 typhoon. Petitioner
did not question the inclusion of these buildings in the inventory for the years prior to
1950, but objected to their inclusion as assets as of January 1, 1950, because both
buildings were destroyed by a typhoon in November of 1949. There is sufficient
evidence (Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of
Cebu City, Exh. 18, Mr. Intan's testimony, a copy of a letter of the City Assessor of Cebu
City) to prove that the two buildings were really destroyed by typhoon in 1949 and,
therefore, should be eliminated from the petitioner's inventory of assets beginning
December 31, 1949.

On the issue of investment in the hollow blocks business, We see no compelling reason
to alter the lower court's conclusion that "whatever was spent in the hollow blocks
business is an investment, and being an investment, the same should be treated as an
asset. With respect to the amount representing the value of the building, there is no
duplication in the listing as the inventory of real property does not include the building
in question."

Respondent Commissioner of Internal Revenue included in the inventory, under the

heading of other asset, the amount of P8,663.22, treated as investment in the hollow
block business. Petitioner objects to the inclusion of P1,683.42 which was spent on the
building and in the business and of P674.35 which was spent for labor, fuel, raw
materials, office supplies etc., contending that the former amount is a duplication of
inventory (included among the list of properties) and the latter is a business expense
which should be eliminated from the list of assets.

The inclusion of expenses (labor and raw materials) as part of the hollow block business
is sanctioned in the inventory method of tax verification. It is a sound accounting
practice to include raw materials that will be used for future manufacture. Inclusion of
direct labor is also proper, as all these items are to be embodied in a summary of assets
(investment by the taxpayer credited to his capital account as reflected in Exhibit 72-A,
which is a working sheet with entries taken from the journal of the petitioner concerning
his hollow blocks business). There is no evidence to show that there was duplication in
the inclusion of the building used for hollow blocks business as part of petitioner's
investment as this building was not included in the listing of real properties of petitioner
(Exh. 45-C p. 187 B.I.R. rec.).

As to the question of the real value of the surplus goods purchased by Mr. Matias H.
Aznar from the U.S. Army, the best evidence, as observed correctly by the lower court,
is the statement of Mr. Matias H. Aznar, himself, as appearing Exh. 35 (copy of a letter
dated September 5, 1949 to the Philippine National Bank), to the effect "as part of my
assets I have different merchandise from Warehouse 35, Tacloban, Leyte at a total cost
of P43,000.00 and valued at no less than P20,000 at present market value." Petitioner's
claim that the goods should be valued at only P20,000 in accordance with an alleged
invoice is not supported by evidence since the invoice was not presented as exhibit.
The lower court's act in giving more credence to the statement of Mr. Aznar cannot be
questioned in the light of clear indications that it was never controverted and it was
given at a time long before the tax controversy arose.

The last issue on propriety of inclusion in petitioner's assets made by respondent

Commissioner of Internal Revenue concerns several buildings which were included in
the list of petitioner's assets as of December 31, 1950. Petitioner contends that those
buildings were conveyed and ceded to Southwestern Colleges on December 15, 1950,
in consideration of P100,723.99 to be paid in cash. The value of the different buildings
are listed as: hospital building, P130,000; gymnasium, P43,000; dentistry building,
P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law, P10,950; laboratory
building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600;
faculty house, P5,760. It is suggested that the value of the buildings be eliminated from
the real estate inventory and the sum of P100,723.99 be included as asset as of
December 31, 1950.

The lower court could not find any evidence of said alleged transfer of ownership from
the taxpayer to the Southwestern Colleges as of December 15, 1950, an allegation
which if true could easily be proven. What is evident is that those buildings were used
by the Southwestern Colleges. It is true that Exhibit G-1 shows that Mr. and Mrs. Matias H.
Aznar offered those properties in exchange for shares of stocks of the Southwestern
Colleges, and Exhibit "G" which is the minutes of the meeting of the Board of Trustees of
the Southwestern Colleges held on August 6, 1951, shows that Mr. Aznar was amenable
to the value fixed by the board of trustees and that he requested to be paid in cash
instead of shares of stock. But those are not sufficient evidence to prove that transfer of
ownership actually happened on December 15, 1950. Hence, the lower court did not
commit any error in sustaining the respondent Commissioner of Internal Revenue's act
of including those buildings as part of the assets of petitioner as of December 31, 1950.

Petitioner also contends that properties allegedly ceded to the Southwestern Colleges
in 1951 for P150,000 worth of shares of stocks, consisting of: land, P22,684; house,
P13,700; group of houses, P8,000; building, P12,000; nurses home, P4,100; nurses home,
P2,080, should be excluded from the inventory of assets as of December 31, 1951. The
evidence (Exh. H), however, clearly shows that said properties were formally conveyed
to the Southwestern Colleges only on September 25, 1952. Undoubtedly, petitioner was
the owner of those properties prior to September 25, 1952 and said properties should
form part of his assets as of December 31, 1951.

The uncontested portions of the lower court's decision consisting of its conclusions that
library books valued at P7,041.03, appearing in a journal of the Southwestern Colleges
marked as' Exhibit 25-A, being an investment, should be treated as an asset beginning
December 31, 1950; that the expenses for construction to the amount of P113,353.70,
which were spent for the improvement of the buildings appearing in Exhibit 24 are
deemed absorbed in the increased value of the buildings as appraised by respondent
Commissioner of Internal Revenue at cost after improvements were made, and should
be taken out as additional assets; that the amount receivable of P5,776 from a certain
Benito Chan should be treated as petitioner's asset but the amount of P5,776
representing the value of a house and lot given as collateral to secure said loan should
not be considered as an asset of petitioner since to do so would result in a glaring
duplication of items, are all affirmed. There seems to be no controversy as to the rest of
the items listed in the inventory of assets.

III

The second issue which appears to be of vital importance in this case centers on the
lower court's imposition of the fraud penalty (surcharge of 50% authorized in Section 72
of the Tax Code). The petitioner insists that there might have been false returns by
mistake filed by Mr. Matias H. Aznar as those returns were prepared by his accountant
employees, but there were no proven fraudulent returns with intent to evade taxes that
would justify the imposition of the 50% surcharge authorized by law as fraud penalty.

The lower court based its conclusion that the 50% fraud penalty must be imposed on
the following reasoning: .

It appears that Matias H. Aznar declared net income of P9,910.94,

P10,200, P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946,
1947, 1948, 1949, 1950 and 1951, respectively. Using the net worth method
of determining the net income of a taxpayer, we find that he had net
incomes of P32,470.45, P67,751.19, P17,880.44, P52,709.11, P254,813.56 and
P40,155.80 during the respective years 1946, 1947, 1948, 1949, 1950, and
1951. In consequence, he underdeclared his income by 227% for 1946,
564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for
1951. These substantial under declarations of income for six consecutive
years eloquently demonstrate the falsity or fraudulence of the income tax
return with an intent to evade the payment of tax. Hence, the imposition
of the fraud penalty is proper (Perez vs. Court of Tax Appeals, G.R. No. L-
10507, May 30, 1958). (Emphasis supplied)

As could be readily seen from the above rationalization of the lower court, no
distinction has been made between false returns (due to mistake, carelessness or
ignorance) and fraudulent returns (with intent to evade taxes). The lower court based
its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the
substantial difference between the amounts of net income on the face of the returns as
filed by him in the years 1946 to 1951 and the net income as determined by the
inventory method utilized by both respondents for the same years. The lower court
based its conclusion on a presumption that fraud can be deduced from the very
substantial disparity of incomes as reported and determined by the inventory method
and on the similarity of consecutive disparities for six years. Such a basis for determining
the existence of fraud (intent to evade payment of tax) suffers from an inherent flaw
when applied to this case. It is very apparent here that the respondent Commissioner of
Internal Revenue, when the inventory method was resorted to in the first assessment,
concluded that the correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh. 1,
B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in another
assessment dated February 16, 1955, concluded that the tax liability should be reduced
to P381,096.07. This is a crystal-clear, indication that even the respondent Commissioner
of Internal Revenue with the use of the inventory method can commit a glaring mistake
in the assessment of petitioner's tax liability. When the respondent Court of Tax Appeals
reviewed this case on appeal, it concluded that petitioner's tax liability should be only
P227,788.64. The lower court in three instances (elimination of two buildings in the list of
petitioner's assets beginning December 31, 1949, because they were destroyed by fire;
elimination of expenses for construction in petitioner's assets as duplication of increased
value in buildings, and elimination of value of house and lot in petitioner's assets
because said property was only given as collateral) supported petitioner's stand on the
wrong inclusions in his lists of assets made by the respondent Commissioner of Internal
Revenue, resulting in the very substantial reduction of petitioner's tax liability by the
lower court. The foregoing shows that it was not only Mr. Matias H. Aznar who
committed mistakes in his report of his income but also the respondent Commissioner of
Internal Revenue who committed mistakes in his use of the inventory method to
determine the petitioner's tax liability. The mistakes committed by the Commissioner of
Internal Revenue which also involve very substantial amounts were also repeated
yearly, and yet we cannot presume therefrom the existence of any taint of official
fraud.

From the above exposition of facts, we cannot but emphatically reiterate the well
established doctrine that fraud cannot be presumed but must be proven. As a corollary
thereto, we can also state that fraudulent intent could not be deduced from mistakes
however frequent they may be, especially if such mistakes emanate from erroneous
entries or erroneous classification of items in accounting methods utilized for
determination of tax liabilities The predecessor of the petitioner undoubtedly filed his
income tax returns for "the years 1946 to 1951 and those tax returns were prepared for
him by his accountant and employees. It also appears that petitioner in his lifetime and
during the investigation of his tax liabilities cooperated readily with the B.I.R. and there is
no indication in the record of any act of bad faith committed by him.

The lower court's conclusion regarding the existence of fraudulent intent to evade
payment of taxes was based merely on a presumption and not on evidence
establishing a willful filing of false and fraudulent returns so as to warrant the imposition
of the fraud penalty. The fraud contemplated by law is actual and not constructive. It
must be intentional fraud, consisting of deception willfully and deliberately done or
resorted to in order to induce another to give up some legal right. Negligence, whether
slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated
by the law. It must amount to intentional wrong-doing with the sole object of avoiding
the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent
intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment, respectively,
under the inventory method of determining tax liability, it would be unfair to treat the
mistakes of the petitioner as tainted with fraud and those of the respondent as made in
good faith.
We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of
the Tax Code should not be imposed, but eliminated from the income tax deficiency
for each year from 1946 to 1951, inclusive. The tax liability of the petitioner for each year
should, therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10

The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit
for 1945, thereby leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the
imposition of the 50% fraud penalty is concerned, and affirmed in all other respects. The
petitioner is ordered to pay to the Commissioner of Internal Revenue, or his duly
authorized representative, the sum of P151,762.23, representing deficiency income
taxes for the years 1946 to 1951, inclusive, within 30 days from the date this decision
becomes final. If the said amount is not paid within said period, there shall be added to
the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from
the date of delinquency to the date of payment, in accordance with Section 51 of the
National Internal Revenue Code.

With costs against the petitioner.

Makalintal, C.J, Castro, Teehankee, Makasiar and Muñoz Palma, JJ., concur.

CIR vs. Tokyo Shipping Co. Ltd., G.R. No. L-68252, May 26, 1995

G.R. No. L-68252 May 26, 1995

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
TOKYO SHIPPING CO. LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and
COURT OF TAX APPEALS, respondents.

PUNO, J.:

For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to
a refund or tax credit for amounts representing pre-payment of income and common
carrier's taxes under the National Internal Revenue Code, section 24 (b) (2), as
amended.1

Private respondent is a foreign corporation represented in the Philippines by Soriamont

Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia.
In December 1980, NASUTRA2 chartered M/V Gardenia to load 16,500 metric tons of
raw sugar in the Philippines.3 On December 23, 1980, Mr. Edilberto Lising, the operations
supervisor of Soriamont Agency,4 paid the required income and common carrier's taxes
in the respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS and
SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX HUNDRED
NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN THOUSAND ONE
HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) based on the
expected gross receipts of the vessel.5 Upon arriving, however, at Guimaras Port of
Iloilo, the vessel found no sugar for loading. On January 10, 1981, NASUTRA and private
respondent's agent mutually agreed to have the vessel sail for Japan without any
cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since
no receipt was realized from the charter agreement, private respondent instituted a
claim for tax credit or refund of the sum ONE HUNDRED SEVEN THOUSAND ONE
HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before
petitioner Commissioner of Internal Revenue on March 23, 1981. Petitioner failed to act
promptly on the claim, hence, on May 14, 1981, private respondent filed a petition for
review6 before public respondent Court of Tax Appeals.

Petitioner contested the petition. As special and affirmative defenses, it alleged the
following: that taxes are presumed to have been collected in accordance with law;
that in an action for refund, the burden of proof is upon the taxpayer to show that taxes
are erroneously or illegally collected, and the taxpayer's failure to sustain said burden is
fatal to the action for refund; and that claims for refund are construed strictly against
tax claimants.7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the
mentioned statutory requirement by having filed a written claim for refund
 within the two-year period from date of payment; 2) the respondent has
not issued any deficiency assessment nor disputed the correctness of the
tax returns and the corresponding amounts of prepaid income and
percentage taxes; and 3) the chartered vessel sailed out of the Philippine
port with absolutely no cargo laden on board as cleared and certified by
the Customs authorities; nonetheless 4) respondent's apparent bit of
reluctance in validating the legal merit of the claim, by and large, is
tacked upon the "examiner who is investigating petitioner's claim for
refund which is the subject matter of this case has not yet submitted his
report. Whether or not respondent will present his evidence will depend
on the said report of the examiner." (Respondent's Manifestation and
Motion dated September 7, 1982). Be that as it may the case was
submitted for decision by respondent on the basis of the pleadings and
records and by petitioner on the evidence presented by counsel sans the
respective memorandum.

An examination of the records satisfies us that the case presents no

dispute as to relatively simple material facts. The circumstances obtaining
amply justify petitioner's righteous indignation to a more expeditious
action. Respondent has offered no reason nor made effort to submit any
controverting documents to bash that patina of legitimacy over the
claim. But as might well be, towards the end of some two and a half years
of seeming impotent anguish over the pendency, the respondent
Commissioner of Internal Revenue would furnish the satisfaction of
ultimate solution by manifesting that "it is now his turn to present evidence,
however, the Appellate Division of the BIR has already recommended the
approval of petitioner's claim for refund subject matter of this petition. The
examiner who examined this case has also recommended the refund of
petitioner's claim. Without prejudice to withdrawing this case after the
final approval of petitioner's claim, the Court ordered the resetting to
September 7, 1983." (Minutes of June 9, 1983 Session of the Court) We
need not fashion any further issue into an apparently settled legal
situation as far be it from a comedy of errors it would be too much of a
stretch to hold and deny the refund of the amount of prepaid income
and common carrier's taxes for which petitioner could no longer be made
accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration,

hence, this petition for review on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its
claim of refund; (2) it failed to prove that it did not realize any receipt from its charter
agreement; and (3) it suppressed evidence when it did not present its charter
agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National
Internal Revenue Code which at that time provides as follows:

A corporation organized, authorized, or existing under the laws of any

foreign country, engaged in trade or business within the Philippines, shall
be taxable as provided in subsection (a) of this section upon the total net
income derived in the preceding taxable year from all sources within the
Philippines: Provided, however, That international carriers shall pay a tax of
two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross
Philippine Billings" include gross revenue realized from uplifts anywhere in
the world by any international carrier doing business in the Philippines of
passage documents sold therein, whether for passenger, excess baggage
or mail, provided the cargo or mail originates from the Philippines. The
gross revenue realized from the said cargo or mail include the gross freight
charge up to final destination. Gross revenue from chartered flights
originating from the Philippines shall likewise form part of "Gross Philippine
Billings" regardless of the place or payment of the passage documents . . .
..

Pursuant to this provision, a resident foreign corporation engaged in the transport of

cargo is liable for taxes depending on the amount of income it derives from sources
within the Philippines. Thus, before such a tax liability can be enforced the taxpayer
must be shown to have earned income sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for
exemption8 and should be construed in strictissimi juris against the taxpayer.9 Likewise,
there can be no disagreement with petitioner's stance that private respondent has the
burden of proof to establish the factual basis of its claim for tax refund.

The pivotal issue involves a question of fact — whether or not the private respondent
was able to prove that it derived no receipts from its charter agreement, and hence is
entitled to a refund of the taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private
respondent proving that it derived no receipt from its charter agreement with NASUTRA.
This finding of fact rests on a rational basis, and hence must be sustained. Exhibits "E", "F,"
and "G" positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on
January 10, 1981 but found no raw sugar to load and returned to Japan without any
cargo laden on board. Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the
District Collector of Customs, Port of Iloilo while Exhibit "F" is the Certification by the
Officer-in-Charge, Export Division of the Bureau of Customs Iloilo. The correctness of the
contents of these documents regularly issued by officials of the Bureau of Customs
cannot be doubted as indeed, they have not been contested by the petitioner. The
records also reveal that in the course of the proceedings in the court a quo, petitioner
hedged and hawed when its turn came to present evidence. At one point, its counsel
manifested that the BIR examiner and the appellate division of the BIR have both
recommended the approval of private respondent's claim for refund. The same counsel
even represented that the government would withdraw its opposition to the petition
after final approval of private respondents' claim. The case dragged on but petitioner
never withdrew its opposition to the petition even if it did not present evidence at all.
The insincerity of petitioner's stance drew the sharp rebuke of respondent court in its
Decision and for good reason. Taxpayers owe honesty to government just as
government owes fairness to taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent,
petitioner contends that private respondent suppressed evidence when it did not
present its charter agreement with NASUTRA. The contention cannot succeed. It
presupposes without any basis that the charter agreement is prejudicial evidence
against the private respondent. 10 Allegedly, it will show that private respondent earned
a charter fee with or without transporting its supposed cargo from Iloilo to Japan. The
allegation simply remained an allegation and no court of justice will regard it as truth.
Moreover, the charter agreement could have been presented by petitioner itself thru
the proper use of a subpoena duces tecum. It never did either because of neglect or
because it knew it would be of no help to bolster its position. 11 For whatever reason, the
petitioner cannot take to task the private respondent for not presenting what it
mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to
refund the sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS
AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private respondent.
The tax was paid way back in 1980 and despite the clear showing that it was
erroneously paid, the government succeeded in delaying its refund for fifteen (15)
years. After fifteen (15) long years and the expenses of litigation, the money that will be
finally refunded to the private respondent is just worth a damaged nickel. This is not,
however, the kind of success the government, especially the BIR, needs to increase its
collection of taxes. Fair deal is expected by our taxpayers from the BIR and the duty
demands that BIR should refund without any unreasonable delay what it has
erroneously collected. Our ruling in Roxas v. Court of Tax Appeals 12 is apropos to recall:

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." And,
in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated
September 15, 1983, is AFFIRMED in toto. No costs.

SO ORDERED.

Narvasa, C.J., Regalado and Mendoza, JJ., concur.

 United Airlines, Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010

UNITED AIRLINES, INC., G.R. No. 178788

Petitioner, Present:

CARPIO MORALES, J.,

Chairperson,

- versus - BRION,

BERSAMIN,

VILLARAMA, JR., and

SERENO, JJ.

COMMISSIONER OF INTERNAL REVENUE, Promulgated:

Respondent.

September 29, 2010

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, of the Decision[1] dated July 5, 2007 of the Court of Tax
Appeals En Banc (CTA En Banc) in C.T.A. EB No. 227 denying petitioners claim for tax
refund of P5.03 million.

The undisputed facts are as follows:

Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the
laws of the State of Delaware, U.S.A., engaged in the international airline business.
Petitioner used to be an online international carrier of passenger and cargo, i.e., it used
to operate passenger and cargo flights originating in the Philippines. Upon cessation of
its passenger flights in and out of the Philippines beginning February 21, 1998, petitioner
appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an independent general
sales agent acting as such for several international airline companies.[2] Petitioner
continued operating cargo flights from the Philippines until January 31, 2001.[3]

On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax
refund, pursuant to Section 28(A)(3)(a)[4] of the National Internal Revenue Code of
1997 (NIRC) in relation to Article 4(7)[5] of the Convention between the Government of
the Republic of the Philippines and the Government of the United States of America with
respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total amount
of P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo
revenues for the taxable years 1999 to 2001, which included the amount of P5,028,813.23
allegedly representing income taxes paid in 1999 on passenger revenue from tickets sold
in the Philippines, the uplifts of which did not originate in the Philippines. Citing the
change in definition of Gross Philippine Billings (GPB) in the NIRC, petitioner argued that
since it no longer operated passenger flights originating from the Philippines beginning
February 21, 1998, its passenger revenue for 1999, 2000 and 2001 cannot be considered
as income from sources within the Philippines, and hence should not be subject to
Philippine income tax under Article 9[6] of the RP-US Tax Treaty.[7]

As no resolution on its claim for refund had yet been made by the respondent and in
view of the two (2)-year prescriptive period (from the time of filing the Final Adjustment
Return for the taxable year 1999) which was about to expire on April 15, 2002, petitioner
filed on said date a petition for review with the Court of Tax Appeals (CTA).[8]

Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article
4(7) of the RP-US Tax Treaty, Philippine tax authorities have jurisdiction to tax only the gross
revenue derived by US air and shipping carriers from outgoing traffic in the
Philippines. Since the Bureau of Internal Revenue (BIR) erroneously imposed and
collected income tax in 1999 based on petitioners gross passenger revenue, as beginning
1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is
entitled to a refund of such erroneously collected income tax in the amount
of P5,028,813.23.[9]
In its Decision[10] dated May 18, 2006, the CTAs First Division[11] ruled that no excess or
erroneously paid tax may be refunded to petitioner because the income tax on GPB under
Section 28(A)(3)(a) of the NIRC applies as well to gross revenue from carriage of cargoes
originating from the Philippines. It agreed that petitioner cannot be taxed on its 1999
passenger revenue from flights originating outside the Philippines. However, in reporting a
cargo revenue of P740.33 million in 1999, it was found that petitioner deducted two (2)
items from its gross cargo revenue of P2.84 billion: P141.79 million as commission and P1.98
billion as other incentives of its agent. These deductions were erroneous because the gross
revenue referred to in Section 28(A)(3)(a) of the NIRC was total revenue before any
deduction of commission and incentives. Petitioners gross cargo revenue in 1999,
being P2.84 billion, the GPB tax thereon was P42.54 million and not P11.1 million, the
amount petitioner paid for the reported net cargo revenue of P740.33 million. The CTA First
Division further noted that petitioner even underpaid its taxes on cargo revenue by P31.43
million, which amount was much higher than the P5.03 million it asked to be refunded.

A motion for reconsideration was filed by petitioner but the First Division denied the
same. It held that petitioners claim for tax refund was not offset with its tax liability; that
petitioners tax deficiency was due to erroneous deductions from its gross cargo revenue;
that it did not make an assessment against petitioner; and that it merely determined if
petitioner was entitled to a refund based on the undisputed facts and whether petitioner
had paid the correct amount of tax.[12]

Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First
Division.

Hence, this petition anchored on the following grounds:

I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONERS

CLAIM FOR REFUND OF ERRONEOUSLY PAID INCOME TAX ON GROSS
PHILIPPINE BILLINGS [GPB] BASED ON ITS FINDING THAT PETITIONERS
UNDERPAYMENT OF [P31.43 MILLION] GPB TAX ON CARGO REVENUES IS
A LOT HIGHER THAN THE GPB TAX OF [P5.03 MILLION] ON PASSENGER
REVENUES, WHICH IS THE SUBJECT OF THE INSTANT CLAIM FOR REFUND.
THE DENIAL OF PETITIONERS CLAIM ON SUCH GROUND CLEARLY
AMOUNTS TO AN OFF-SETTING OF TAX LIABILITIES, CONTRARY TO WELL-
SETTLED JURISPRUDENCE.
 II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS RIGHT TO
DUE PROCESS.

III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING

PETITIONERS CLAIM FOR REFUND OF ERRONEOUSLY PAID INCOME TAX
ON GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING THAT PETITIONER
UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [P31.43
MILLION] FOR THE TAXABLE YEAR 1999.

IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY
ASSESSMENTS FOR DEFICIENCY TAXES. THE AUTHORITY TO MAKE
ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL REVENUE TAXES IS
VESTED BY THE 1997 NIRC UPON RESPONDENT.

V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX

FOR THE TAXABLE YEAR 1999 IS ALREADY BARRED BY PRESCRIPTION.[13]

The main issue to be resolved is whether the petitioner is entitled to a refund of the
amount of P5,028,813.23 it paid as income tax on its passenger revenues in 1999.

Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line
passenger revenues cannot be denied based on the finding of the CTA that petitioner
allegedly underpaid the GPB tax on cargo revenues by P31,431,171.09, which
underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger
revenues, the amount of the instant claim. The denial of petitioners claim for refund on
such ground is tantamount to an offsetting of petitioners claim for refund of erroneously
paid GPB against its alleged tax liability. Petitioner thus cites the well-entrenched rule in
taxation cases that internal revenue taxes cannot be the subject of set-off or
compensation.[14]

According to petitioner, the offsetting of the liabilities is very clear in the instant
case because the amount of petitioners claim for refund of erroneously paid GPB tax
of P5,028,813.23 for the taxable year 1999 is being offset against petitioners alleged
deficiency GPB tax liability on cargo revenues for the same year, which was not even the
subject of an investigation nor any valid assessment issued by respondent against the
petitioner. Under Section 228[15] of the NIRC, 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. This administrative process of issuing an assessment is part of procedural due
process enshrined in the 1987 Constitution. Records do not show that petitioner has been
assessed by the BIR for any deficiency GBP tax for 1999, nor was there any finding or
investigation being conducted by respondent of any liability of petitioner for GPB tax for
the said taxable period. Clearly, petitioners right to due process was violated.[16]

Petitioner further argues that the CTA acted in excess of its jurisdiction because the
exclusive appellate jurisdiction of the CTA covers only decisions or inactions of the
respondent in cases involving disputed assessments. The CTA has effectively assessed
petitioner with a P31.43 million tax deficiency when it concluded that petitioner
underpaid its GPB tax on cargo revenue. Since respondent did not issue an assessment
for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot
be considered a disputed assessment that may be passed upon by the CTA. Petitioner
stresses that the authority to issue an assessment for deficiency internal revenue taxes is
vested by law on respondent, not with the CTA.[17]

Lastly, petitioner argues that any assessment against it for deficiency income tax for
taxable year 1999 is barred by prescription. Petitioner claims that the prescriptive period
within which an assessment for deficiency income tax may be made has prescribed on
April 17, 2003, three (3) years after it filed its 1999 tax return.[18]

Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying
petitioners claim for tax refund. It points out that the objective of the CTAs determination
of whether petitioner correctly paid its GPB tax for the taxable year 1999 was to ascertain
the latters entitlement to the claimed refund and not for the purpose of imposing any
deficiency tax. Hence, petitioners arguments regarding the propriety of the CTAs
determination of its deficiency tax on its GPB for gross cargo revenues for 1999 are clearly
misplaced.[19]

The petition has no merit.

As correctly pointed out by petitioner, inasmuch as it ceased operating passenger

flights to or from the Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the
NIRC for gross passenger revenues. This much was also found by the CTA. In South African
Airways v. Commissioner of Internal Revenue,[20] we ruled that the correct interpretation
of the said provisions is that, if an international air carrier maintains flights to and from the
Philippines, it shall be taxed at the rate of 2% of its GPB, while international air carriers that
do not have flights to and from the Philippines but nonetheless earn income from other
activities in the country will be taxed at the rate of 32% of such income.

Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable
year 1999 at the time when petitioner was still operating cargo flights originating from the
Philippines although it had ceased passenger flight operations. The CTA found that
petitioner had underpaid its GPB tax for 1999 because petitioner had made deductions
from its gross cargo revenues in the income tax return it filed for the taxable year 1999,
the amount of underpayment even greater than the refund sought for erroneously paid
GPB tax on passenger revenues for the same taxable period. Hence, the CTA ruled
petitioner is not entitled to a tax refund.

Petitioners arguments regarding the propriety of such determination by the CTA are
misplaced.

Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner
made erroneous deductions on its gross cargo revenue; that because of the erroneous
deductions, petitioner reported a lower cargo revenue and paid a lower income tax
thereon; and that petitioner's underpayment of the income tax on cargo revenue is even
higher than the income tax it paid on passenger revenue subject of the claim for refund,
such that the refund cannot be granted.

Section 72 of the NIRC reads:

SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. -

When an assessment is made in case of any list, statement or return, which
in the opinion of the Commissioner was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suit, unless it is proved that the said
list, statement or return was not false nor fraudulent and did not contain any
understatement or undervaluation; but this provision shall not apply to
statements or returns made or to be made in good faith regarding annual
depreciation of oil or gas wells and mines.

In the afore-cited case of South African Airways, this Court rejected similar arguments on
the denial of claim for tax refund, as follows:
 Precisely, petitioner questions the offsetting of its payment of the tax
under Sec. 28(A)(3)(a) with their liability under Sec. 28(A)(1), considering
that there has not yet been any assessment of their obligation under the
latter provision. Petitioner argues that such offsetting is in the nature of legal
compensation, which cannot be applied under the circumstances present
in this case.

Article 1279 of the Civil Code contains the elements of legal

compensation, to wit:

Art. 1279. In order that compensation may be proper, it is

necessary:

(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things

due are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or

controversy, commenced by third persons and communicated in
due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of

Internal Revenue, thus:

In several instances prior to the instant case, we have already

made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the
Government in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. We find no cogent reason to
deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate

Appellate Court, we categorically held that taxes cannot be subject
to set-off or compensation, thus:

We have consistently ruled that there can be no off-

setting of taxes against the claims that the taxpayer may
have against the government. A person cannot refuse to pay
 a tax on the ground that the government owes him an
amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit
against the government.

The ruling in Francia has been applied to the subsequent

case of Caltex Philippines, Inc. v. Commission on Audit, which
reiterated that:

. . . a taxpayer may not offset taxes due from the claims

that he may have against the government. Taxes cannot be
the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each
other and a claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off.

Verily, petitioners argument is correct that the offsetting of its tax

refund with its alleged tax deficiency is unavailing under Art. 1279 of the
Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals, however,

granted the offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals

erred in denying petitioners supplemental motion for reconsideration
alleging bringing to said courts attention the existence of the
deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and
inextricably intertwined with the right of respondent bank to claim
for a tax refund for the same year. To award such refund despite the
existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax deficiency
assessment for the same year.

The grant of a refund is founded on the assumption that the

tax return is valid, that is, the facts stated therein are true and correct.
The deficiency assessment, although not yet final, created a doubt
as to and constitutes a challenge against the truth and accuracy of
the facts stated in said return which, by itself and without
unquestionable evidence, cannot be the basis for the grant of the
refund.

Section 82, Chapter IX of the National Internal Revenue Code

of 1977, which was the applicable law when the claim of Citytrust
was filed, provides that (w)hen an assessment is made in case of any
 list, statement, or return, which in the opinion of the Commissioner of
Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such
assessment shall be recovered by any suits unless it is proved that the
said list, statement, or return was not false nor fraudulent and did not
contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in good
faith regarding annual depreciation of oil or gas wells and mines.

Moreover, to grant the refund without determination of the

proper assessment and the tax due would inevitably result in
multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to
institute anew a proceeding for the recovery of erroneously
refunded taxes which recourse must be filed within the prescriptive
period of ten years after discovery of the falsity, fraud or omission in
the false or fraudulent return involved. This would necessarily require
and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds,
and impede or delay the collection of much-needed revenue for
governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties

or expenses, it is both logically necessary and legally appropriate
that the issue of the deficiency tax assessment against Citytrust be
resolved jointly with its claim for tax refund, to determine once and
for all in a single proceeding the true and correct amount of tax due
or refundable.

In fact, as the Court of Tax Appeals itself has heretofore

conceded, it would be only just and fair that the taxpayer and the
Government alike be given equal opportunities to avail of remedies
under the law to defeat each others claim and to determine all
matters of dispute between them in one single case. It is important
to note that in determining whether or not petitioner is entitled to the
refund of the amount paid, it would [be] necessary to determine
how much the Government is entitled to collect as taxes. This would
necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would
constitute res judicata on both parties as to all the matters subject
thereof or necessarily involved therein. (Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI
of the 1997 NIRC. The above pronouncements are, therefore, still
applicable today.
 Here, petitioners similar tax refund claim assumes that the tax return
that it filed was correct. Given, however, the finding of the CTA that
petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is
liable under Sec. 28(A)(1), the correctness of the return filed by petitioner is
now put in doubt. As such, we cannot grant the prayer for a
refund.[21] (Additional emphasis supplied.)

In the case at bar, the CTA explained that it merely determined whether petitioner is
entitled to a refund based on the facts. On the assumption that petitioner filed a correct
return, it had the right to file a claim for refund of GPB tax on passenger revenues it paid
in 1999 when it was not operating passenger flights to and from the Philippines.However,
upon examination by the CTA, petitioners return was found erroneous as it understated
its gross cargo revenue for the same taxable year due to deductions of two (2)
items consisting of commission and other incentives of its agent. Having underpaid the
GPB tax due on its cargo revenues for 1999, petitioner is not entitled to a refund of its GPB
tax on its passenger revenue, the amount of the former being even much higher (P31.43
million) than the tax refund sought (P5.2 million). The CTA therefore correctly denied the
claim for tax refund after determining the proper assessment and the tax
due. Obviously, the matter of prescription raised by petitioner is a non-issue. The
prescriptive periods under Sections 203[22] and 222[23] of the NIRC find no application in
this case.

We must emphasize that tax refunds, like tax exemptions, are construed strictly against
the taxpayer and liberally in favor of the taxing authority.[24] In any event, petitioner has
not discharged its burden of proof in establishing the factual basis for its claim for a refund
and we find no reason to disturb the ruling of the CTA. It has been a long-standing policy
and practice of the Court to respect the conclusions of quasi-judicial agencies such as
the CTA, a highly specialized body specifically created for the purpose of reviewing tax
cases.[25]

WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5,
2007 of the Court of Tax Appeals En Banc in C.T.A. EB No. 227.

With costs against the petitioner.

SO ORDERED.
MARTIN S. VILLARAMA, JR.

Associate Justice

WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice

Chairperson

ARTURO D. BRION LUCAS P. BERSAMIN

Associate Justice Associate Justice

MARIA LOURDES P. A. SERENO

Associate Justice

ATTESTATION

I attest 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.

CONCHITA CARPIO MORALES

Associate Justice

Chairperson, Third Division

 CERTIFICATION

Pursuant to Section 13, Article VIII of the 1987 Constitution and the Division Chairpersons
Attestation, 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.

RENATO C. CORONA

Chief Justice

CIR v. CA, Citytrust and CTA, G.R. No. 106611 July 21, 1994

G.R. No. 106611 July 21, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
COURT OF APPEALS, CITYTRUST BANKING CORPORATION and COURT OF TAX
APPEALS, respondents.

The Solicitor General for petitioner.

Palaez, Adriano & Gregorio for private respondent.

REGALADO, J.:

The judicial proceedings over the present controversy commenced with CTA Case No.
4099, wherein the Court of Tax Appeals ordered herein petitioner Commissioner of
Internal Revenue to grant a refund to herein private respondent Citytrust Banking
Corporation (Citytrust) in the amount of P13,314,506.14, representing its overpaid
income taxes for 1984 and 1985, but denied its claim for the alleged refundable
amount reflected in its 1983 income tax return on the ground of prescription.1 That
judgment of the tax court was affirmed by respondent Court of Appeals in its judgment
in CA-G.R. SP
No. 26839.2 The case was then elevated to us in the present petition for review
on certiorari wherein the latter judgment is impugned and sought to be nullified and/or
set aside.

It appears that in a letter dated August 26, 1986, herein private respondent corporation
filed a claim for refund with the Bureau of Internal Revenue (BIR) in the amount of
P19,971,745.00 representing the alleged aggregate of the excess of its carried-over
total quarterly payments over the actual income tax due, plus carried-over withholding
tax payments on government securities and rental income, as computed in its final
income tax return for the calendar year ending December 31, 1985.3

Two days later, or on August 28, 1986, in order to interrupt the running of the prescriptive
period, Citytrust filed a petition with the Court of Tax Appeals, docketed therein as CTA
Case No. 4099, claiming the refund of its income tax overpayments for the years 1983,
1984 and 1985 in the total amount of P19,971,745.00.4

In the answer filed by the Office of the Solicitor General, for and in behalf of therein
respondent commissioner, it was asserted that the mere averment that Citytrust
incurred a net loss in 1985 does not ipso facto merit a refund; that the amounts of
P6,611,223.00, P1,959,514.00 and P28,238.00 claimed by Citytrust as 1983 income tax
overpayment, taxes withheld on proceeds of government securities investments, as well
as on rental income, respectively, are not properly documented; that
assuming arguendo that petitioner is entitled to refund, the right to claim the same has
prescribed
with respect to income tax payments prior to August 28, 1984, pursuant to Sections 292
and 295 of the National Internal Revenue Code of 1977, as amended, since the petition
was filed only on August 28, 1986.5

On February 20, 1991, the case was submitted for decision based solely on the
pleadings and evidence submitted by herein private respondent Citytrust. Herein
petitioner could not present any evidence by reason of the repeated failure of the Tax
Credit/Refund Division of the BIR to transmit the records of the case, as well as the
investigation report thereon, to the Solicitor General.6

However, on June 24, 1991, herein petitioner filed with the tax court a manifestation
and motion praying for the suspension of the proceedings in the said case on the
ground that the claim of Citytrust for tax refund in the amount of P19,971,745.00 was
already being processed by the Tax Credit/Refund Division of the BIR, and that said
bureau was only awaiting the submission by Citytrust of the required confirmation
receipts which would show whether or not the aforestated amount was actually paid
and remitted to the BIR.7

Citytrust filed an opposition thereto, contending that since the Court of Tax Appeals
already acquired jurisdiction over the case, it could no longer be divested of the same;
and, further, that the proceedings therein could not be suspended by the mere fact
that the claim for refund was being administratively processed, especially where the
case had already been submitted for decision.
It also argued that the BIR had already conducted an audit, citing therefor Exhibits Y, Y-
1, Y-2 and Y-3 adduced in the case, which clearly showed that there was an
overpayment of income taxes and for which a tax credit or refund was due to Citytrust.
The Foregoing exhibits are allegedly conclusive proof of and an admission by herein
petitioner that there had been an overpayment of income taxes.8

The tax court denied the motion to suspend proceedings on the ground that the case
had already been submitted for decision since February 20, 1991.9

Thereafter, said court rendered its decision in the case, the decretal portion of which
declares:

WHEREFORE, in view of the foregoing, petitioner is entitled to a refund but

only for the overpaid taxes incurred in 1984 and 1985. The refundable
amount as shown in its 1983 income tax return is hereby denied on the
ground of prescription. Respondent is hereby ordered to grant a refund to
petitioner Citytrust Banking Corp. in the amount of P13,314,506.14
representing the overpaid income taxes for 1984 and 1985, recomputed
as follows:

1984 Income tax due P 4,715,533.00

Less: 1984 Quarterly payments P 16,214,599.00*
1984 Tax Credits —
W/T on int. on gov't. sec. 1,921,245.37*
W/T on rental inc. 26,604.30* 18,162,448.67
——————— ———————
Tax Overpayment (13,446,915.67)
Less: FCDU payable 150,252.00
———————
Amount refundable for 1984 P (13,296,663.67)

1985 Income tax due (loss) P — 0 —

Less: W/T on rentals 36,716.47*
———————
Tax Overpayment (36,716.47)*
Less: FCDU payable 18,874.00
———————
Amount Refundable for 1985 P (17,842.47)

* Note:

These credits are smaller than the claimed amount because

only the above figures are well supported by the various
exhibits presented during the hearing.

No pronouncement as to costs.

SO ORDERED.10
The order for refund was based on the following findings of the Court of Tax Appeals: (1)
the fact of withholding has been established by the statements and certificates of
withholding taxes accomplished by herein private respondent's withholding agents, the
authenticity of which were neither disputed nor controverted by herein petitioner; (2)
no evidence was presented which could effectively dispute the correctness of the
income tax return filed by herein respondent corporation and other material facts
stated therein; (3) no deficiency assessment was issued by herein petitioner; and (4)
there was an audit report submitted by the BIR Assessment Branch, recommending the
refund of overpaid taxes for the years concerned (Exhibits Y to Y-3), which enjoys the
presumption of regularity in the performance of official duty.11

A motion for the reconsideration of said decision was initially filed by the Solicitor
General on the sole ground that the statements and certificates of taxes allegedly
withheld are not conclusive evidence of actual payment and remittance of the taxes
withheld to the BIR.12 A supplemental motion for reconsideration was thereafter filed,
wherein it was contended for the first time that herein private respondent had
outstanding unpaid deficiency income taxes. Petitioner alleged that through an inter-
office memorandum of the Tax Credit/Refund Division, dated August 8, 1991, he came
to know only lately that Citytrust had outstanding tax liabilities for 1984 in the amount of
P56,588,740.91 representing deficiency income and business taxes covered by
Demand/Assessment Notice No. FAS-1-84-003291-003296.13

Oppositions to both the basic and supplemental motions for reconsideration were filed
by private respondent Citytrust.14 Thereafter, the Court of Tax Appeals issued a
resolution denying both motions for the reason that Section 52 (b) of the Tax Code, as
implemented by Revenue Regulation
6-85, only requires that the claim for tax credit or refund must show that the income
received was declared as part of the gross income, and that the fact of withholding
was duly established. Moreover, with regard to the argument raised in the
supplemental motion for reconsideration anent the deficiency tax assessment against
herein petitioner, the tax court ruled that since that matter was not raised in the
pleadings, the same cannot be considered, invoking therefor the salutary purpose of
the omnibus motion rule which is to obviate multiplicity of motions and to discourage
dilatory pleadings.15

As indicated at the outset, a petition for review was filed by herein petitioner with
respondent Court of Appeals which in due course promulgated its decision affirming
the judgment of the Court of Tax Appeals. Petitioner eventually elevated the case to
this Court, maintaining that said respondent court erred in affirming the grant of the
claim for refund of Citytrust, considering that, firstly, said private respondent failed to
prove and substantiate its claim for such refund; and, secondly, the bureau's findings of
deficiency income and business tax liabilities against private respondent for the year
1984 bars such payment.16

After a careful review of the records, we find that under the peculiar circumstances of
this case, the ends of substantial justice and public interest would be better subserved
by the remand of this case to the Court of Tax Appeals for further proceedings.
It is the sense of this Court that the BIR, represented herein by petitioner Commissioner of
Internal Revenue, was denied its day in court by reason of the mistakes and/or
negligence of its officials and employees. It can readily be gleaned from the records
that when it was herein petitioner's turn to present evidence, several postponements
were sought by its counsel, the Solicitor General, due to the unavailability of the
necessary records which were not transmitted by the Refund Audit Division of the BIR to
said counsel, as well as the investigation report made by the Banks/Financing and
Insurance Division of the said bureau/ despite repeated requests.17 It was under such a
predicament and in deference to the tax court that ultimately, said records being still
unavailable, herein petitioner's counsel was constrained to submit the case for decision
on February 20, 1991 without presenting any evidence.

For that matter, the BIR officials and/or employees concerned also failed to heed the
order of the Court of Tax Appeals to remand the records to it pursuant to Section 2, Rule
7 of the Rules of the Court of Tax Appeals which provides that the Commissioner of
Internal Revenue and the Commissioner of Customs shall certify and forward to the
Court of Tax Appeals, within ten days after filing his answer, all the records of the case in
his possession, with the pages duly numbered, and if the records are in separate folders,
then the folders shall also be numbered.

The aforestated impassé came about due to the fact that, despite the filing of the
aforementioned initiatory petition in CTA Case No. 4099 with the Court of Tax Appeals,
the Tax Refund Division of the BIR still continued to act administratively on the claim for
refund previously filed therein, instead of forwarding the records of the case to the
Court of Tax Appeals as ordered.18

It is a long and firmly settled rule of law that the Government is not bound by the errors
committed by its agents.19 In the performance of its governmental functions, the State
cannot be estopped by the neglect of its agent and officers. Although the
Government may generally be estopped through the affirmative acts of public officers
acting within their authority, their neglect or omission of public duties as exemplified in
this case will not and should not produce that effect.

Nowhere is the aforestated rule more true than in the field of taxation.20 It is axiomatic
that the Government cannot and must not be estopped particularly in matters
involving taxes. Taxes are the lifeblood of the nation through which the government
agencies continue to operate and with which the State effects its functions for the
welfare of its constituents.21 The errors of certain administrative officers should never be
allowed to jeopardize the Government's financial position,22 especially in the case at
bar where the amount involves millions of pesos the collection whereof, if justified,
stands to be prejudiced just because of bureaucratic lethargy.

Further, it is also worth nothing that the Court of Tax Appeals erred in denying
petitioner's supplemental motion for reconsideration alleging bringing to said court's
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same
year. To award such refund despite the existence of that deficiency assessment is an
absurdity and a polarity in conceptual effects. Herein private respondent cannot be
entitled to refund and at the same time be liable for a tax deficiency assessment for the
same year.

The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not
yet final, created a doubt as to and constitutes a challenge against the truth and
accuracy of the facts stated in said return which, by itself and without unquestionable
evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that "(w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse
must be filed within the prescriptive period of ten years after discovery of the falsity,
fraud or omission in the false or fraudulent return involved.23 This would necessarily
require and entail additional efforts and expenses on the part of the Government,
impose a burden on and a drain of government funds, and impede or delay the
collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both

logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to determine
once and for all in a single proceeding the true and correct amount of tax due or
refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, 24 it would be only
just and fair that the taxpayer and the Government alike be given equal opportunities
to avail of remedies under the law to defeat each other's claim and to determine all
matters of dispute between them in one single case. It is important to note that in
determining whether or not petitioner is entitled to the refund of the amount paid, it
would necessary to determine how much the Government is entitled to collect as
taxes. This would necessarily include the determination of the correct liability of the
taxpayer and, certainly, a determination of this case would constitute res judicata on
both parties as to all the matters subject thereof or necessarily involved therein.
The Court cannot end this adjudication without observing that what caused the
Government to lose its case in the tax court may hopefully be ascribed merely to the
ennui or ineptitude of officialdom, and not to syndicated intent or corruption. The
evidential cul-de-sac in which the Solicitor General found himself once again gives
substance to the public perception and suspicion that it is another proverbial tip in the
iceberg of venality in a government bureau which is pejoratively rated over the years.
What is so distressing, aside from the financial losses to the Government, is the erosion of
trust in a vital institution wherein the reputations of so many honest and dedicated
workers are besmirched by the acts or omissions of a few. Hence, the liberal view we
have here taken pro hac vice, which may give some degree of assurance that this
Court will unhesitatingly react to any bane in the government service, with a replication
of such response being likewise expected by the people from the executive authorities.

WHEREFORE, the judgment of respondent Court of Appeals in CA-G.R. SP No. 26839 is

hereby SET ASIDE and the case at bar is REMANDED to the Court of Tax Appeals for
further proceedings and appropriate action, more particularly, the reception of
evidence for petitioner and the corresponding disposition of CTA Case No. 4099 not
otherwise inconsistent with our adjudgment herein.

SO ORDERED.

Narvasa, C.J., Padilla, Puno and Mendoza, JJ., concur.

Protector’s Services, Inc. vs. CA, G.R. No. 118176 (April 12, 2000)

PROTECTOR'S SERVICES, INC., petitioner, vs. COURT OF APPEALS AND COMMISSIONER OF

INTERNAL REVENUE, respondents. Korte

DECISION

QUISUMBING, J.:

Assailed in this petition for review is the Decision[1] of the Court of Appeals dated
November 28, 1994, in CA-G.R. SP No.31825. It affirmed the judgment of the Court of Tax
Appeals which had dismissed the petition for review of assessments made by the
Commissioner of Internal Revenue imposing deficiency percentage taxes on petitioner
for the years 1983, 1984 and 1985. The dispositive portion of the CTA's decision states:

"WHEREFORE, in all the foregoing, this case is hereby DISMISSED for lack of
jurisdiction--the subject assessments having become final and
unappealable."[2]

The facts are as follows:

Petitioner Protector's Services, Inc. (PSI) is a contractor engaged in recruiting security
guards for clients. After an audit investigation conducted by the Bureau of Internal
Revenue (BIR), petitioner was assessed for deficiency percentage taxes including
surcharges, penalties and interests thereon, as follows:

YEAR..........AMOUNT..........DEMAND LETTER NO.

1983..........P503,564.59..........18-452-83B-87-B2

1984........... 831,464.30..........18-451-84B-87-B2

1985..........P1,514,047.86.......18-450-85B-87-B2

On December 7, 1987, respondent Commissioner sent by registered mail, demand

letters for payment of the aforesaid assessments. However, petitioner alleged that on
December 10, 1987, it only received Demand Letter Nos. 18-452-83B-87 -B2 and 18-451-
84B-87 -B2 for the years 1983 and 1984, respectively. It denied receiving any notice of
deficiency percentage tax for the year 1985.

Petitioner sent a protest letter dated January 02, 1988, to the BIR regarding the 1983
and 1984 assessments. The petitioner claimed that its gross receipts subject to
percentage taxes should exclude the salaries of the security guards as well as the
corresponding employer's share of Social Security System (SSS), State Insurance Fund
(SIP) and Medicare contributions. Sclaw

Without formally acting on the petitioner's protest, the BIR sent a follow-up letter dated
July 12, 1988, ordering the settlement of taxes based on its computation. Additional
documentary stamp taxes of two thousand twenty-five (P2,025.00) pesos on petitioner's
capitalization for 1983 and 1984, and seven hundred three pesos and forty-one
centavos (P703.41) as deficiency expanded withholding tax were included in the
amount demanded. The total unsettled tax amounted to two million, eight hundred
fifty-one thousand, eight hundred five pesos and sixteen centavos (P2,851,805.16).

On July 21, 1988, petitioner paid the P2,025.00 documentary stamp tax and the P703.41
deficiency expanded withholding tax. On the following day, July 22, 1988, petitioner
filed its second protest on the 1983 and 1984 percentage taxes, and included, for the
first time, its protest against the 1985 assessment.

On November 9, 1990, BIR Deputy Commissioner Eufracio Santos sent a letter to the
petitioner which denied with finality the latter's protests against the subject assessments,
stating thus:

"...[T]hat the salaries paid to the security guards form part of your taxable
gross receipts in the determination of the 3% and 4% contractor's tax
imposed under Section 191 of the Tax Code prior to its amendment by the
provision of Executive Order No.273.
 Considering that the security guards are actually your employees and not
that of your clients, the salaries corresponding to the services rendered by
your employees form part of your taxable receipts. This contention finds
support in the case of Avecilla Building Corporation versus Commissioner,
et al., G.R. L-42395, 17 January 1985 and Resty Arbon Singh versus
Commissioner, CTA Case No.1901, 5 December 1970."[3]

On December 5, 1990, petitioner filed a petition for review before the CTA contending
that:

1).....Assessments for documentary stamp tax and expanded withholding

tax are without basis since they were paid on July 22, 1988.

2).....The period for collection of the 1985 percentage tax had prescribed,
because PSI denied having received any assessment letter for the same
year. Sc lex

3).....Percentage taxes for the three quarters of 1984 were filed as follows:
1st Qtr. -April 23, 1984; 2nd Qtr. -July 20, 1984, and; 3rd Qtr. - October 19,
1984. The three-year prescriptive period to collect percentage taxes for
the 1st, 2nd and 3rd quarters had prescribed because the BIR sent an
assessment letter only on December 10, 1987.

4).....The base amount for computing percentage tax was erroneous

because the BIR included in the taxable amount, the salaries of the
security guards and the employer's corresponding remittances to SSS, SIF,
and Medicare, which amounts were earmarked for other persons, and
should not form part of PSIs receipts.

The CTA dismissed the petition on the following grounds: (1) The three-year period of
limitation for assessment of taxes in 1984 commenced from the date of filing the final
return on January 20, 1985, hence assessment made on December 10, 1987, was within
said period. (2) Petitioner could not deny receipt of the 1985 assessment on the same
date, December 10, 1987, for as supported by testimony of the BIR personnel, all the
assessment letters for the years 1983, 1984, and 1985 were included in one envelope
and mailed together. (3) Petitioner's protest letter dated January 2, 1988, was filed on
January 12, 1988, or thirty-three days from December 10, 1987, hence, the request for
reinvestigation was filed out of time.

Petitioner appealed to the Court of Appeals, which affirmed the decision of the CTA.
Hence, the present petition, wherein petitioner raises the following issues:

"I. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON THE
PETITION FOR REVIEW FILED BEFORE IT.
 II. WHETHER THE ASSESSMENTS AGAINST THE PETITIONER FOR DEFICIENCY
PERCENTAGE TAX FOR TAXABLE YEARS 1983 AND 1984 WERE MADE AFTER
THE LAPSE OF THE PRESCRIPTIVE PERIOD.

III. WHETHER THE PERIOD FOR THE COLLECTION OF TAXES FOR TAXABLE
YEARS 1983,1984, AND 1985 HAS ALREADY PRESCRIBED.

IV. WHETHER THE ASSESSMENTS ARE CORRECT."[4]

As to the first issue, petitioner maintains that the assessments only became final on
November 9, 1990, when the CIR denied the request for reconsideration. Consequently,
the CTA had jurisdiction over the appeal filed by the petitioner on December 5, 1990.
Furthermore, the CTA resolved that the assessments became final after thirty days from
receipt of demand letters by the petitioner, without the latter interposing a
reconsideration. x law

The pertinent provision of the National Internal Revenue Code of 1977 (NIRC 1977),
concerning the period within which to file a protest before the CIR, reads:

"Section 270. Protesting of assessment. --When the Commissioner of

Internal Revenue 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 Commissioner shall issue an assessment based on his
findings.

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 Court of Tax Appeals within thirty (30) days from receipt of
the said decision; otherwise, the decision shall become final, executory
and demandable."

We note that indeed on December 10, 1987, petitioner received the BIR's assessment
notices. On January 12, 1988, petitioner protested the 1983 and 1984 assessments and
requested for a reinvestigation. From December 10, 1987 to January 12, 1988, thirty-
three days had lapsed. Thereafter petitioner may no longer dispute the correctness of
the assessments. Hence, in our view, the CTA correctly dismissed the appeal for lack of
jurisdiction.
On the second issue, petitioner argues that the government's right to assess and collect
the 1983, 1984 and 1985 taxes had already prescribed. Relying on Batas Parnbansa (BP)
Blg. 700, which reduced the period of limitation for assessment and collection of internal
revenue taxes from five to three years, petitioner asserts that the government was
barred from reviewing the 1983 tax starting December 10, 1987, the expiry date of the
three-year limit. Petitioner insists that the reckoning period of prescription should start
from the date when the quarterly percentage taxes were paid and not when the Final
Annual Percentage Tax Return for the year was filed. Moreover, he denies having
received the 1985 tax assessment.

Petitioner's contentions lack merit. Sections one and three of BP 700, "An Act Amending
Sections 318 and 319 of the National Internal Revenue Code, which reduced the period
of limitation for assessment and collection of internal revenue taxes from five to three
years," provides: Sc

"Sec. 1, Section 318 of the National Internal Revenue Code, as amended,

is hereby amended to read as follows:

Sec. 318. Period of limitation upon assessment and

collection. --Except as provided in the succeeding sections,
internal revenue taxes shall be assessed within three 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-year period shall be counted from the day the return
was filed. For the 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.

xxx

"Sec. 3. The period of limitation herein prescribed shall apply to

assessments of internal revenue taxes beginning taxable year 1984."

B.P. 700 was approved on April 5, 1984. The three-year prescriptive period for
assessment and collection of revenue taxes applied to taxes paid beginning 1984.
Clearly, the tax assessment made on December 10, 1987, for the year 1983 was still
covered by the five-year statutory prescriptive period. This rule was emphasized in
Revenue Memorandum Circular (RMC) No. 33-84, published on November 12, 1984,
which defined the salient features of the application of BP 700, to wit:

"B. Effectivity of Prescriptive Periods of Assessment and Collection

1......Assessment made on or after April 5, 1984 (date, of approval of BP

700) will still be governed by the original five-year period if the taxes
 assessed thereby cover taxable years prior to January 1, 1984. (emphasis
supplied) Scmis

Corollarily, assessments made before April 5, 1984 shall still be governed by

the original five-year period.

However, assessments made on or April 5, 1984 covering taxable years

beginning January 1, 1984 shall be under the new three-year period."

Should the three-year limitation be reckoned at the time of the quarterly payment of
contractor's tax or at the due date of the final annual tax?

Section 2 of Revenue Regulation No.6-81, states:

"Sec. 2. Percentage tax. --In general, unless otherwise specifically

provided in the Tax Code, every person conducting business on which a
percentage tax is imposed under Chapter II Title V of the Tax Code must
render quarterly declaration on cumulative basis of the amount of his
sales, receipts or earnings or gross value of output actually removed from
the factory or near warehouse, compute and pay the tax due thereon.

(a) Quarterly Percentage Return.--

For each of the first three quarters of the

taxable year, the tax so computed shall be
decreased by the amount of tax previously
paid and by the sum of the tax credits allowed
under this Title for the preceding current
quarters. The tax due shall be paid not later
than twenty (20) days following the close of
each of the first three quarters of the taxable
year.

(b) Final Annual Percentage Tax Return --

On or before the twentieth day of the second

month following the close of the taxable year,
a final percentage tax return shall be filed
under BIR Form No. __ covering the entire
taxable year. If the sum of the total quarterly
percentage tax payments made for the first
three quarters and total tax credit allowable
for the taxable year are not equal to the total
tax due on the entire gross sales, receipts or
earnings or gross value of the output for that
taxable year, the taxpayer shall either:
 (1) Pay the tax still due; or Mis sc

(2) Credit to the extent allowable under this

Title, the amount of excess tax credits shown in
the final adjustment return against the
quarterly percentage tax liabilities for the
succeeding taxable quarters."

Only recently in G.R. No.115712, Commission of Internal Revenue vs. Court of Appeals,
February 25, 1999, we held, that the three-year prescriptive period of tax assessment of
contractors tax should be computed at the time of the filing of the "final annual
percentage tax return,"[5] when it can be finally ascertained if the taxpayer still has an
unpaid tax, and not from the tentative quarterly payments.

Turning now to petitioner's denial that he received the 1985 assessment, we agree with
the factual findings of the CTA that the assessment letter may be presumed to have
been received by petitioner. The CTA found as follows: Mis spped

"The 1985 assessment which petitioner denied as having been received

was negated when the respondent introduced documentary evidence
showing that it was mailed by registered mail. It was further buttressed by
the testimony of witness Mr. Arnold C. Larroza, Chief Administrative Branch
Mailing Section, Rev. Region No. 4B-1, Quezon City that the 1983, 1984
and 1985 assessments were placed in one envelope when it was mailed
by registered mail. Presumably, it was received in the regular course of the
mail. ... 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 mails. Such being the case, this Court
cannot be made to believe that the 1985 assessment which incidentally
has a substantially greater amount involved, was not received by the
petitioner. Hence, the same assessment is also considered final and
unappealable for failure of the petitioner to protest the same within the
reglementary period provided by law."[6]

In reviewing administrative decisions, the reviewing court cannot re-examine the

factual basis and sufficiency of the evidence.[7] The findings of fact must be respected,
so long as they are supported by substantial evidence.[8]

As a subsidiary defense, petitioner interposes the third issue claiming that since the CIR
failed, until now, to commence the collection of the 1983, 1984, and 1985 deficiency
tax, the right to collect had, likewise, prescribed. Petitioner urges us to consider that for
the government's failure to institute collection remedies either by judicial action or by
distraint and levy, the right to collect the same has prescribed pursuant to Section 219
of the NIRC. Note, however, that Section 271 of the 1986 Tax Code provides for the
suspension of running of the statute of limitation of tax collection, as follows: Spped
 "Sec. 271. Suspension of running of statute. -- The running of the statute of
limitations provided in Sections 268 and 269 on the making of assessment
and the beginning of distraint or levy or a proceeding in court for
collection, in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the assessment
or beginning distraint or levy or a proceeding in court and for sixty days
thereafter; when the taxpayer request for a reinvestigation which is
granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being
assessed or collected: Provided, That, if the taxpayer informs the
Commissioner of any change in address, the running of the statute of
limitation will not be suspended; when the warrant of distraint and levy is
duly served upon the taxpayer, his authorized representative, or a
member of his household with sufficient discretion, and no property could
be located; and when the taxpayer is out of the Philippines." (Emphasis
supplied.)

In the instant case, PSI filed a petition before the CTA to prevent the collection of the
assessed deficiency tax. When the CTA dismissed the case, petitioner elevated the
case before us, hoping for a review in its favor. The actions taken by the petitioner
before the CTA and now before us, suspended the running of the statute of limitation. In
the old case of Republic of thePhilippines vs. Ker and Company, Ltd.,[9] we held:

"Under Section 333 (renumbered to 271 during the instant case) of the Tax
Code the running of the prescriptive period to collect deficiency taxes
shall be suspended for the period during which the Commissioner of
Internal Revenue is prohibited from beginning a distraint and levy or
instituting a proceeding in court, and for sixty days thereafter. In the case
at bar, the pendency of the taxpayer's appeal in the Court of Tax
Appeals and in the Supreme Court had the effect of temporarily staying
the hands of the said Commissioner. If the taxpayer's stand that the
pendency of the appeal did not stop the running of the period because
the Court of Tax Appeals did not have jurisdiction over the case of taxes is
upheld, taxpayers would be encouraged to delay the payment of taxes
in the hope of ultimately avoiding the same. Under the circumstances, the
running of the prescriptive period was suspended."[10] Jo spped

Finally, petitioner contends that the assessments made by the respondent CIR were
erroneous because they included in the gross receipts subject to the contractor's tax
the salaries of the security guards and the employer's share in the SSS, SIF and
Medicare. Petitioner claims that it did not benefit from those amounts earmarked for
other persons or institutions, hence, they must not be taxable.

Contractors tax on gross receipts imposed on business agents including private

detective watchman agencies,[11] was a tax on the sale of services or labor, imposed
on the exercise of a privilege.[12] The term "gross receipts" means all amounts
received by the prime or principal contractor as the total price, undiminished by the
amount paid to the subcontractor under a subcontract arrangement.[13] Hence, gross
receipts could not be diminished by employer's SSS, SIF and Medicare
contributions.[14] Furthermore, it has been consistently ruled by the BIR that the salaries
paid to security guards should form part of the gross receipts, subject to tax, to wit:

"...This Office has consistently ruled that salaries of security guards form
part of the taxable gross receipts of a security agency for purposes of the
4% [formerly 3%] contractors tax under Section 205 of the Tax Code, as
amended. The reason is that the salaries of the security guards are
actually the liability of the agency and that the guards are considered
their employees; hence, for percentage tax purposes, the salaries of the
security guards are includible in its gross receipts. (BIR Ruling No.271-81
citing BIR Ruling No. 69-002)"[15]

These rulings were made by the CIR in the exercise of his power to "make judgments or
opinions in connection with the implementation of the provisions of the internal revenue
code." The opinions and rulings of officials of the government called upon to execute or
implement administrative laws, command respect and weight.[16] We see no
compelling reason in this case to rule otherwise. Spped jo

WHEREFORE, the assailed decision of the Court of Appeals, in CA- G.R. SP 31825, is
AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur. 6/5/00 3:14 PM

Meralco Sec. Corp. v. Savellano, G.R. No. L.36181, Oct. 23, 1982

G.R. No. L-36181 October 23, 1982

MERALCO SECURITIES CORPORATION (now FIRST PHILIPPINE HOLDINGS

CORPORATION), petitioner,
vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs
of the late Juan G. Maniago, respondents.

G.R. No. L-36748 October 23, 1982

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs
of the late Juan G. Maniago, respondents.
G.R. No. L-36181

San Juan, Africa, Gonzales & San Agustin for petitioner.

Ramon A. Gonzales for respondents.

TEEHANKEE, J.:

These are original actions for certiorari to set aside and annul the writ of mandamus
issued by Judge Victorino A. Savellano of the Court of First Instance of Manila in Civil
Case No. 80830 ordering petitioner Meralco Securities Corporation (now First Philippine
Holdings Corporation) to pay, and petitioner Commissioner of Internal Revenue to
collect from the former, the amount of P51,840,612.00, by way of alleged deficiency
corporate income tax, plus interests and surcharges due thereon and to pay private
respondents 25% of the total amount collectible as informer's reward.

On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his
wife and children) submitted to petitioner Commissioner of Internal Revenue
confidential denunciation against the Meralco Securities Corporation for tax evasion for
having paid income tax only on 25 % of the dividends it received from the Manila
Electric Co. for the years 1962-1966, thereby allegedly shortchanging the government
of income tax due from 75% of the said dividends.

Petitioner Commissioner of Internal Revenue caused the investigation of the

denunciation after which he found and held that no deficiency corporate income tax
was due from the Meralco Securities Corporation on the dividends it received from the
Manila Electric Co., since under the law then prevailing (section 24[a] of the National
Internal Revenue Code) "in the case of dividends received by a domestic or foreign
resident corporation liable to (corporate income) tax under this Chapter . . . .only
twenty-five per centum thereof shall be returnable for the purposes of the tax imposed
under this section." The Commissioner accordingly rejected Maniago's contention that
the Meralco from whom the dividends were received is "not a domestic corporation
liable to tax under this Chapter." In a letter dated April 5, 1968, the Commissioner
informed Maniago of his findings and ruling and therefore denied Maniago's claim for
informer's reward on a non-existent deficiency. This action of the Commissioner was
sustained by the Secretary of Finance in a 4th Indorsement dated May 11, 1971.

On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an
amended petition for mandamus, in the Court of First Instance of Manila, docketed
therein as Civil Case No. 80830, against the Commissioner of Internal Revenue and the
Meralco Securities Corporation to compel the Commissioner to impose the alleged
deficiency tax assessment on the Meralco Securities Corporation and to award to him
the corresponding informer's reward under the provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to dismiss, arguing that since in
matters of issuance and non-issuance of assessments, he is clothed under the National
Internal Revenue Code and existing rules and regulations with discretionary power in
evaluating the facts of a case and since mandamus win not lie to compel the
performance of a discretionary power, he cannot be compelled to impose the alleged
tax deficiency assessment against the Meralco Securities Corporation. He further
argued that mandamus may not lie against him for that would be tantamount to a
usurpation of executive powers, since the Office of the Commissioner of Internal
Revenue is undeniably under the control of the executive department.

On the other hand, the Meralco Securities Corporation filed its answer, dated January
15, 1971, interposing as special and/or affirmative defenses that the petition states no
cause of action, that the action is premature, that mandamus win not lie to compel the
Commissioner of Internal Revenue to make an assessment and/or effect the collection
of taxes upon a taxpayer, that since no taxes have actually been recovered and/or
collected, Maniago has no right to recover the reward prayed for, that the action of
petitioner had already prescribed and that respondent court has no jurisdiction over
the subject matter as set forth in the petition, the same being cognizable only by the
Court of Tax Appeals.

On January 10, 1973, the respondent judge rendered a decision granting the writ
prayed for and ordering the Commissioner of Internal Revenue to assess and collect
from the Meralco Securities Corporation the sum of P51,840,612.00 as deficiency
corporate income tax for the period 1962 to 1969 plus interests and surcharges due
thereon and to pay 25% thereof to Maniago as informer's reward.

All parties filed motions for reconsideration of the decision but the same were denied
by respondent judge in his order dated April 6, 1973, with respondent judge denying
respondents' claim for attorneys fees and for execution of the decision pending
appeal.

Hence, the Commissioner filed a separate petition with this Court, docketed as G.R. No.
L-36748 praying that the decision of respondent judge dated January 10, 1973 and his
order dated April 6, 1973 be reconsidered for respondent judge has no jurisdiction over
the subject matter of the case and that the issuance or non-issuance of a deficiency
assessment is a prerogative of the Commissioner of Internal Revenue not reviewable by
mandamus.

The Meralco Securities Corporation (now First Philippine Holdings Corporation) likewise
appealed the same decision of respondent judge in G.R. No. L-36181 and in the Court's
resolution dated June 13, 1973, the two cases were ordered consolidated.

We grant the petitions.

Respondent judge has no jurisdiction to take cognizance of the case because the
subject matter thereof clearly falls within the scope of cases now exclusively within the
jurisdiction of the Court of Tax Appeals. Section 7 of Republic Act No. 1125, enacted
June 16, 1954, granted to the Court of Tax Appeals exclusive appellate jurisdiction to
review by appeal, among others, decisions of the 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
National Internal Revenue Code or other law or part of law administered by the Bureau
of Internal Revenue. The law transferred to the Court of Tax Appeals jurisdiction over all
cases involving said assessments previously cognizable by courts of first instance, and
even those already pending in said courts. 1 The question of whether or not to impose a
deficiency tax assessment on Meralco Securities Corporation undoubtedly comes
within the purview of the words "disputed assessments" or of "other matters arising under
the National Internal Revenue Code . . . .In the case of Blaquera vs. Rodriguez, et
al, 2 this Court ruled that "the determination of the correctness or incorrectness of a tax
assessment to which the taxpayer is not agreeable, falls within the jurisdiction of the
Court of Tax Appeals and not of the Court of First Instance, for under the provisions of
Section 7 of Republic Act No. 1125, the Court of Tax Appeals has exclusive appellate
jurisdiction to review, on appeal, any decision of the Collector of Internal Revenue in
cases involving disputed assessments and other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of
Internal Revenue."

Thus, even assuming arguendo that the right granted the taxpayers affected to
question and appeal disputed assessments, under section 7 of Republic Act No. 1125,
may be availed of by strangers or informers like the late Maniago, the most that he
could have done was to appeal to the Court of Tax Appeals the ruling of petitioner
Commissioner of Internal Revenue within thirty (30) days from receipt thereof pursuant
to section 11 of Republic Act No. 1125. 3 He failed to take such an appeal to the tax
court. The ruling is clearly final and no longer subject to review by the courts. 4

It is furthermore a well-recognized rule that mandamus only lies to enforce the

performance of a ministerial act or duty 5 and not to control the performance of a
discretionary power. 6 Purely administrative and discretionary functions may not be
interfered with by the courts. 7 Discretion, as thus intended, means the power or right
conferred upon the office by law of acting officially under certain circumstances
according to the dictates of his own judgment and conscience and not controlled by
the judgment or conscience of others. 8 mandamus may not be resorted to so as to
interfere with the manner in which the discretion shall be exercised or to influence or
coerce a particular determination. 9

In an analogous case, where a petitioner sought to compel the Rehabilitation Finance

Corporation to accept payment of the balance of his indebtedness with his backpay
certificates, the Court ruled that "mandamus does not compel the Rehabilitation
Finance Corporation to accept backpay certificates in payment of outstanding loans.
Although there is no provision expressly authorizing such acceptance, nor is there one
prohibiting it, yet the duty imposed by the Backpay Law upon said corporation as to
the acceptance or discount of backpay certificates is neither clear nor ministerial, but
discretionary merely, and such special civil action does not issue to control the exercise
of discretion of a public officer." 10 Likewise, we have held that courts have no power to
order the Commissioner of Customs to confiscate goods imported in violation of the
Import Control Law, R.A. 426, as said forfeiture is subject to the discretion of the said
official, 11 nor may courts control the determination of whether or not an applicant for a
visa has a non-immigrant status or whether his entry into this country would be contrary
to public safety for it is not a simple ministerial function but an exercise of discretion. 12

Moreover, since the office of the Commissioner of Internal Revenue is charged with the
administration of revenue laws, which is the primary responsibility of the executive
branch of the government, mandamus may not he against the Commissioner to
compel him to impose a tax assessment not found by him to be due or proper for that
would be tantamount to a usurpation of executive functions. As we held in the case
of Commissioner of Immigration vs. Arca 13 anent this principle, "the administration of
immigration laws is the primary responsibility of the executive branch of the
government. Extensions of stay of aliens are discretionary on the part of immigration
authorities, and neither a petition for mandamus nor one for certiorari can compel the
Commissioner of Immigration to extend the stay of an alien whose period to stay has
expired.

Such discretionary power vested in the proper executive official, in the absence of
arbitrariness or grave abuse so as to go beyond the statutory authority, is not subject to
the contrary judgment or control of others. " "Discretion," when applied to public
functionaries, means a power or right conferred upon them by law of acting officially,
under certain circumstances, uncontrolled by the judgment or consciences of others. A
purely ministerial act or duty in contradiction to a discretional act is one which an
officer or tribunal performs in a given state of facts, in a prescribed manner, in
obedience to the mandate of a legal authority, without regard to or the exercise of his
own judgment upon the propriety or impropriety of the act done. If the law imposes a
duty upon a public officer and gives him the right to decide how or when the duty shall
be performed, such duty is discretionary and not ministerial. The duty is ministerial only
when the discharge of the same requires neither the exercise of official discretion or
judgment." 14

Thus, after the Commissioner who is specifically charged by law with the task of
enforcing and implementing the tax laws and the collection of taxes had after a
mature and thorough study rendered his decision or ruling that no tax is due or
collectible, and his decision is sustained by the Secretary, now Minister of Finance
(whose act is that of the President unless reprobated), such decision or ruling is a valid
exercise of discretion in the performance of official duty and cannot be controlled
much less reversed by mandamus. A contrary view, whereby any stranger or informer
would be allowed to usurp and control the official functions of the Commissioner of
Internal Revenue would create disorder and confusion, if not chaos and total disruption
of the operations of the government.

Considering then that respondent judge may not order by mandamus the
Commissioner to issue the assessment against Meralco Securities Corporation when no
such assessment has been found to be due, no deficiency taxes may therefore be
assessed and collected against the said corporation. Since no taxes are to be
collected, no informer's reward is due to private respondents as the informer's heirs.
Informer's reward is contingent upon the payment and collection of unpaid or
deficiency taxes. An informer is entitled by way of reward only to a percentage of the
taxes actually assessed and collected. Since no assessment, much less any collection,
has been made in the instant case, respondent judge's writ for the Commissioner to pay
respondents 25% informer's reward is gross error and without factual nor legal basis.

WHEREFORE, the petitions are hereby granted and the questioned decision of
respondent judge dated January 10, 1973 and order dated April 6, 1973 are hereby
reversed and set aside. With costs against private respondents.

Melencio-Herrera, Plana, Vasquez and Relova, JJ., concur.

Gutierrez, Jr., J., took no part.