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Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 81446 August 18, 1988
BONIFACIA SY PO, petitioner,
vs.
HONORABLE COURT OF TAX APPEALS AND
HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents.
Basilio E. Duaban for petitioner.

SARMIENTO, J.:
This is an appeal from the decision 1 of the
respondent Court of Tax Appeals, dated
September 30,1987, which affirmed an earlier
decision of the correspondent Commissioner of
Internal Revenue in assessment letters dated
August 16, 1972 and September 26, 1972, which
ordered the payment by the petitioner of
deficiency income tax for 1966 to 1970 in the
amount of P7,154,685.16 and deficiency specific
tax for January 2, 1964 to January 19, 1972, in
the amount of P5,595,003.68.
We adopt the respondent court's finding of facts,
to wit:
Petitioner is the widow of the late
Mr. Po Bien Sing who died on
September 7, 1980. In the taxable
years 1964 to 1972, the deceased
Po Bien Sing was the sole
proprietor of Silver Cup Wine
Factory (Silver Cup for brevity),
Talisay, Cebu. He was engaged in
the business of manufacture and
sale of compounded liquors, using
alcohol and other ingredients as
raw materials.
On the basis of a denunciation
against Silver Cup allegedly "for
tax evasion amounting to millions
of pesos" the then Secretary of
Finance Cesar Virata directed the
Finance-BIR--NBI team constituted
under Finance Department Order
No. 13-70 dated February 19, 1971
(Exh- 3, pp. 532-553, Folder II, BIR
rec.) to conduct the corresponding
investigation in a memorandum
dated April 2, 1971 (p. 528, Folder
II, BIR rec.). Accordingly, a letter
and a subpoena duces tecum dated
April 13,1971 and May 3,1971,
respectively, were issued against

Silver Cup requesting production of


the accounting records and other
related documents for the
examination of the team. (Exh. 11,
pp. 525-526, Folder II, BIR rec.). Mr.
Po Bien Sing did not produce his
books of accounts as requested
(Affidavit dated December 24,
1971 of Mr. Generoso. Quinain of
the team, p. 525, Folder H, BIR
rec.). This prompted the team with
the assistance of the PC Company,
Cebu City, to enter the factory
bodega of Silver Cup and seized
different brands, consisting of
1,555 cases of alcohol products.
(Exh. 22, Memorandum Report of
the Team dated June 5, 1971, pp.
491-492, Folder II, BIR rec.). The
inventory lists of the seized alcohol
products are contained in Volumes
I, II, III, IV and V (Exhibits 14, 15,
16, 17, and 18, respectively, BIR
rec.). On the basis of the team's
report of investigation, the
respondent Commissioner of
Internal Revenue assessed Mr. Po
Bien Sing deficiency income tax for
1966 to 1970 in the amount of
P7,154,685.16 (Exh. 6 pp. 17-19,
Folder I, BIR rec.) and for deficiency
specific tax for January 2,1964 to
January 19, 1972 in the amount of
P5,595,003.68 (Exh. 8, p. 107,
Folder I, BIR rec.).
Petitioner protested the deficiency
assessments through letters dated
October 9 and October 30, 1972
(Exhs. 7 and 9, pp. 27-28; pp. 152159, respectively, BIR rec.), which
protests were referred for
reinvestigation. The corresponding
report dated August 13, 1981 (Exh.
1 0, pp. 355, Folder I, BIR rec.)
recommended the reiteration of the
assessments in view of the
taxpayer's persistent failure to
present the books of accounts for
examination (Exh. 8, p. 107, Folder
I, BIR rec.), compelling respondent
to issue warrants of distraint and
levy on September 10, 1981 (Exh.
11, p. 361, Folder I, BIR rec.).
The warrants were admittedly
received by petitioner on October
14, 1981 (Par. IX, Petition; admitted
par. 2, Answer), which petitioner
deemed respondent's decision
denying her protest on the subject
assessments. Hence, petitioner's
appeal on October 29,1981. 2

The petitioner assigns the following errors:


I
RESPONDENT INTENTIONALLY ERRED IN HOLDING
THAT PETITIONER HAS NOT PRESENTED ANY
EVIDENCE OF RELEVANCE AND COMPETENCE
REQUIRED TO BASH THE TROUBLING
DISCREPANCIES AND SQUARE THE ISSUE OF
ILLEGALITY POSITED ON THE SUBJECT
ASSESSMENTS.

In case a person fails to file a


required return or other document
at the time prescribed by law, or
willfully or otherwise, files a false or
fraudulent return or other
documents, the Commissioner shall
make or amend the return from his
own knowledge and from such
information as he can obtain
through testimony or otherwise,
which shall be prima facie correct
and sufficient for all legal purposes.

II
RESPONDENT COURT OF TAX APPEALS PALPABLY
ERRED IN DECIDING THE CASE IN A WAY
CONTRARY TO THE DOCTRINES ALREADY LAID
DOWN BY THIS COURT.
III
RESPONDENT COURT OF TAX APPEALS GRAVELY
ERRED IN FINDING PO BEEN SING TO HAVE
INCURRED THE ALLEGED DEFICIENCY TAXES IN
QUESTION. 3
We affirm.
Settled is the rule that the factual findings of the
Court of Tax Appeals are binding upon this
Honorable Court and can only be disturbed on
appeal if not supported by substantial evidence. 4
The assignments of errors boils down to a single
issue previously raised before the respondent
Court, i.e., whether or not the assessments have
valid and legal bases.
The applicable legal provision is Section 16(b) of
the National Internal Revenue Code of 1977 as
amended. It reads:
Sec. 16. Power of the
Commissioner of Internal Revenue
to make assessments.
xxx xxx xxx
(b) Failure to submit required
returns, statements, reports and
other documents. - When a report
required by law as a basis for the
assessment of an national internal
revenue tax shall not be
forthcoming within the time fixed
by law or regulation or when there
is reason to believe that any such
report is false, incomplete, or
erroneous, the Commissioner of
Internal Revenue shall assess the
proper tax on the best evidence
obtainable.

The law is specific and clear. The rule on the "best


evidence obtainable" applies when a tax report
required by law for the purpose of assessment is
not available or when the tax report is incomplete
or fraudulent.
In the instant case, the persistent failure of the
late Po Bien Sing and the herein petitioner to
present their books of accounts for examination
for the taxable years involved left the
Commissioner of Internal Revenue no other legal
option except to resort to the power conferred
upon him under Section 16 of the Tax Code.
The tax figures arrived at by the Commissioner of
Internal Revenue are by no means arbitrary. We
reproduce the respondent court's findings, to wit:
As thus shown, on the basis of the
quantity of bottles of wines seized
during the raid and the sworn
statements of former employees
Messrs. Nelson S. Po and Alfonso Po
taken on May 26, and 27,1971,
respectively, by the investigating
team in Cebu City (Exhs. 4 and 5,
pp. 514-517, pp. 511-513, Folder
11, BIR rec.), it was ascertained
that the Silver Cup for the years
1964 to 1970, inclusive, utilized
and consumed in the manufacture
of compounded liquours and other
products 20,105 drums of alcohol
as raw materials 81,288,787 proof
liters of alcohol. As determined, the
total specific tax liability of the
taxpayer for 1964 to 1971
amounted to P5,593,003.68 (Exh.
E, petition, p. 10, CTA rec.)
Likewise, the team found due from
Silver Cup deficiency income taxes
for the years 1966 to 1970
inclusive in the aggregate sum of
P7,154,685.16, as follows:
1966
P207,6
36.24

1967
645,33
5.04
1968
1,683,
588.48
1969
1,589,
622.48
1970
3,028,
502.92
Total
amoun
t due.
and
collecti
ble
P7,154
,685.1
6

The 50% surcharge has been imposed, pursuant


to Section 72 * of the Tax Code and tax 1/2%
monthly interest has likewise been imposed
pursuant to the provision of Section 51(d) ** of
the Tax Code (Exh. O, petition). 5
The petitioner assails these assessments as
wrong.
In the case of Collector of Internal Revenue vs.
Reyes, 6 we ruled:
Where the taxpayer is appealing to
the tax court on the ground that
the Collector's assessment is
erroneous, it is incumbent upon
him to prove there what is the
correct and just liability by a full
and fair disclosure of all pertinent
data in his possession. Otherwise, if
the taxpayer confines himself to
proving that the tax assessment is
wrong, the tax court proceedings
would settle nothing, and the way
would be left open for subsequent
assessments and appeals in
interminable succession.
Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has
the duty to prove otherwise. 7 In the absence of
proof of any irregularities in the performance of
duties, an assessment duly made by a Bureau of
Internal Revenue examiner and approved by his
superior officers will not be disturbed. 8 All

presumptions are in favor of the correctness of


tax assessments. 9
On the whole, we find that the fraudulent acts
detailed in the decision under review had not
been satisfactorily rebutted by the petitioner.
There are indeed clear indications on the part of
the taxpayer to deprive the Government of the
taxes due. The Assistant Factory Superintendent
of Silver Cup, Nelson Po gave the following
testimony:
Annexes "A", "A-1 " to "A-17" show
that from January to December
1970, Silver Cup had used in
production 189 drums of untaxed
distilled alcohol and 3,722 drums of
untaxed distilled alcohol. Can you
tell us how could this be possible
with the presence of a revenue
inspector in the premises of Silver
Cup during working hours?
Actually, the revenue
inspector or
storekeeper comes
around once a week
on the average.
Sometimes, when
the storekeeper is
around in the
morning and Po Bein
Sing wants to
operate with untaxed
alcohol as raw
materials, Po Bien
Sing tells the
storekeeper to go
home because the
factory is not going
to operate for the
day. After the
storekeeper leaves,
the illegal operation
then begins. Untaxed
alcohol is brought in
from Cebu Alcohol
Plant into the
compound of Silver
Cup sometimes at
about 6:00 A.M. or at
12:00 noon or in the
evening or even at
mid-night when the
storekeeper is not
around. When the
storekeeper comes,
he sees nothing
because untaxed
alcohol is brought
directly to, and
stored at, a secret
tunnel within the
bodega itself inside

the compound of
Silver Cup.
In the same vein, the factory
personnel manager testified that
false entries were entered in the
official register book: thus,
A As factory
personnel manager
and all-around handy
man of Po Bien Sing,
owner of Silver Cup,
these labels were
entrusted to me to
make the false
entries in the official
register book of
Silver Cup, which I
did under the
direction of Po Bien
Sing. (Sworn
statement, p. 512,
Folder II, BIR rec.) 10
(Emphasis ours)
The existence of fraud as found by the
respondents can not be lightly set aside absent
substantial evidence presented by the petitioner
to counteract such finding. The findings of fact of
the respondent Court of Tax Appeals are entitled
to the highest respect. 11 We do not find anything
in the questioned decision that should disturb this
long-established doctrine.
WHEREFORE, the Petition is DENIED. The Decision
of the respondent Court of Tax Appeals is hereby
AFFIRMED. Costs against the petitioner.

SECOND DIVISION

FITNESS BY DESIGN, INC.,

G.R. No. 17798

Petitioner,

SO ORDERED.

Present:

Melencio-Herrera, Paras and Padilla, JJ., concur.


QUISUMBING, J.,

CARPIO MORALES
- versus -

TINGA,

VELASCO, JR., an
BRION, JJ.

COMMISSIONER ON INTERNAL
REVENUE,

Promulgated:

Respondent.

October 17, 200

In his Answer,6[6] respondent alleged:

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

The
right
of
the
respondent to assess petitioner
for deficiency income tax, VAT
and Documentary Stamp Tax for
the
year
1995
has
not
prescribed pursuant to Section
222(a) of the 1997 Tax Code.
Petitioners 1995 Income Tax
Return (ITR) filed on April 11,
1996 was false and fraudulent
for its deliberate failure to
declare its true sales. Petitioner
declared in its 1995 Income Tax
Return that it was on its preoperation stage and has not
declared
its
income.
Investigation by the revenue
officers of the respondent,
however, disclosed that it has
been operating/doing business
and had sales operations for the
year 1995 in the total amount of
P7,156,336.08 which it failed to
report in its 1995 ITR. Thus, for
the year 1995, petitioner filed a
fraudulent annual income return
with intent to evade tax.
Likewise, petitioner failed to file
Value-Added Tax (VAT) Return
and reported the amount of
P7,156,336.08 as its gross sales
for the year 1995. Hence, for
failure to file a VAT return
and for filing a fraudulent
income tax return for the
year
1995,
the
corresponding taxes may be
assessed at any time within
ten (10) years after the
discovery of such omission
or fraud pursuant to Section
222(a) of the 1997 Tax Code.

DECISION

CARPIO MORALES, J.:

On March 17, 2004, the Commissioner on


Internal Revenue (respondent) assessed Fitness
by Design, Inc. (petitioner) for deficiency income
taxes for the tax year 1995 in the total amount of
P10,647,529.69.1[1]

Petitioner protested the

assessment on the ground that it was issued


beyond the three-year prescriptive period under
Section 203 of the Tax Code. 2[2]

Additionally,

petitioner claimed that since it was incorporated


only on May 30, 1995, there was no basis to
assume that it had already earned income for the
tax year 1995.3[3]

On February 1, 2005, respondent issued a


warrant

of

distraint

and/or

levy

against

petitioner, [4] drawing petitioner to file on March


1, 2005 a Petition for Review (with Motion to
Suspend Collection of Income Tax, Value Added

The subject deficiency


tax assessments have already
become final, executory and
demandable for failure of the
petitioner to file a protest within
the
reglementary
period
provided for by law.
The
alleged protest allegedly filed
on June 25, 2004 at the Legal
Division, Revenue Region No. 8,
Makati City is nowhere to be
found in the BIR Records nor
reflected in the Record Book of
the Legal Division as normally
done by our receiving clerk
when
she
receive[s]
any
document.
The respondent,
therefore, has legal basis to
collect the tax liability either by
distraint and levy or civil action.7

Tax, Documentary Stamp Tax and Surcharges and


Interests subject of this Petition)5[5] before the
Court of Tax Appeals (CTA) before which it
reiterated its defense

of prescription.

The

petition was docketed as CTA Case No. 7160.

1
2
3
4

[7] (Emphasis and underscoring


supplied)
On petitioners request, a subpoena ad
testificandum was issued to Sablan for the hearing
before the CTA scheduled on September 4, 2006
The aforecited Section 222(a)8[8] of the

but he failed to appear.12[12]

1997 Tax Code provides:

Petitioner thus requested for the issuance


of another subpoena ad testificandum to Sablan

In the case of a false or


fraudulent return with intent to
evade tax or of failure to file a
return, the tax may be assessed,
or a proceeding in court for the
collection of such tax may be
filed without assessment, at any
time within ten (10) years after
the discovery of the falsity,
fraud, or omission:
Provided,
That in a fraud assessment
which has become final and
executory, the fact of fraud shall
be judicially taken cognizance of
in the civil or criminal action for
the
collection
thereof.
(Underscoring supplied)

for the hearing scheduled on October 23, 2006, 13


[13] and of subpoena duces tecum to the chief of
the National Investigation Division of the BIR for
the production of the Affidavit of the Informer
bearing on the assessment in question. 14[14]
Petitioners requests were granted.15[15]

During the scheduled hearing of the case


on October 23, 2006, on respondents counsels
manifestation that he was not furnished a copy of
petitioners

motion

for

the

issuance

of

subpoenaes, the CTA ordered petitioner to file a


The Bureau of Internal Revenue (BIR) in

motion for the issuance of subpoenas and to

fact filed on March 10, 2005 a criminal complaint

furnish respondents counsel a copy thereof. 16[16]

before the Department of Justice against the

Petitioner complied with the CTA order.17[17]

officers and accountant of petitioner for violation


of

the

provisions

of

The

National

Internal

Revenue Code of 1977, as amended, [9] covering


the taxable year 1995.

In a related move, petitioner submitted

The criminal complaint

was docketed as I.S. No. 2005-203.

written interrogatories addressed to Sablan and to


Henry Sarmiento and Marinella German, revenue
officers of the National Investigation Division of

On motion of petitioner in CTA Case No.

the BIR.18[18]

7160, a preliminary hearing on the issue of


prescription10[10] was conducted during which
petitioners former bookkeeper attested that a
former colleague certified public accountant
Leonardo Sablan (Sablan) illegally took custody
of petitioners accounting records, invoices, and
official receipts and turned them over to the BIR. 11
[11]

12
13
14

15

16

10

17

11

18

Resolution19[19]

By

of

January

15,

2007, the CTA denied petitioners Motion for


Issuance

of

Subpoenas

and

disallowed

the

submission by petitioner of written interrogatories


to Sablan, who is not a party to the case, and the
revenue

officers,20[20]

it

finding

that

the

testimony, documents, and admissions sought are


not relevant.21[21] Besides, the CTA found that to
require Sablan to testify would violate Section 2 of
Republic Act No. 2338, as implemented by Section
12 of Finance Department Order No. 46-66,
proscribing the revelation of identities of informers
of violations of internal revenue laws, except when
the information is proven to be malicious or
false.22[22]

In any event, the CTA held that there was


no need to issue a subpoena duces tecum to
obtain the Affidavit of the Informer as the same
formed part of the BIR records of the case, the
production of which had been ordered by it.23[23]

Petitioners

Motion

for

x x x in holding that the legality


of the mode of acquiring the
documents which are the bases
of
the
above
discussed
deficiency tax assessments, the
subject matter of the Petition for
Review now pending in the
Honorable Second Division, is
not material and relevant to the
issue of prescription.
II.
x x x in holding that Mr.
Leonardo Sablans testimony, if
allowed, would violate RA 2338
which prohibits the BIR to reveal
the identity of the informer since
1) the purpose of the subpoena
is to elicit from him the
whereabouts of the original
accounting records, documents
and receipts owned by the
Petitioner and not to discover if
he is the informer since the
identity of the informer is not
relevant to the issues raised; 2)
RA 2338 cannot legally justify
violation of the Petitioners
property rights by a person,
whether he is an informer or
not, since such RA cannot allow
such invasion of property rights
otherwise RA 2338 would run
counter to the constitutional
mandate that no person shall
be deprive[d] of life, liberty or
property without due process of
law.

24

Reconsideration [24] of the CTA Resolution of


January 15, 2007 was denied,25[25]

hence, the

present Petition for Certiorari26[26] which imputes


grave abuse of discretion to the CTA

I.

III.
x x x in holding that the
issuance
of
subpoena
ad
testificandum would constitute a
violation of the prohibition to
reveal the identity of the
informer because compliance
with such prohibition has been
rendered moot and academic by
the voluntary admissions of the
Respondent himself.

19
20
21
22
23
24
25
26

IV.
x x x in holding that the
constitutional
right
of
an
accused to examine the witness
against him does not exist in
this case.
The Petitioners
liability
for
tax
deficiency
assessment which is the main
issue in the Petition for Review is
currently
pending
at
the
Honorable
Second
Division.
Therefore, it is a prejudicial
question raised in the criminal
case
filed
by
the
herein
Respondent against the officers
of the Petitioner with the
Department of Justice.
V.

x x x in dismissing the request


for subpoena ad testificandum
because the Opposition thereto
submitted by the Respondent
was not promptly filed as
provided by the Rules of Court
thus, it is respectfully submitted
that, Respondent has waived his
right to object thereto.
VI.
x x x when the Honorable Court
of Tax Appeals ruled that the
purpose of the Petitioner in
requesting
for
written
interrogatories is to annoy,
embarrass, or oppress the
witness because such ruling has
no
factual
basis
since
Respondent never alleged nor
proved that the witnesses to
whom the interrogatories are
addressed will be annoyed,
embarrassed
or
oppressed;
besides
the
only
obvious
purpose of the Petitioner is to
know
the
whereabouts
of
accounting
records
and
documents which are in the
possession of the witnesses to
whom the interrogatories are
directed and to ultimately get
possession thereof.
Granting
without admitting that there is
annoyance, embarrassment or
oppression; the same is not
unreasonable.
VII.
x x x when it failed to rule that
the BIR officers and employees
are
not
covered
by
the
prohibition under RA 2338 and
do not have the authority to
withhold from the taxpayer
documents owned by such
taxpayer.
VIII.
x x x when it required the clear
and
unequivocal
proof
of
relevance of the documents as a
condition precedent for the
issuance of subpoena duces
tecum.

Grave abuse of discretion implies such


capricious and whimsical exercise of judgment as
equivalent to lack of jurisdiction or, in other words,
when the power is exercised in an arbitrary or
despotic manner by reason of passion or personal
hostility, and it must be so patent and gross as to
amount to an evasion of positive duty or a virtual
refusal of duty enjoined or to act at all in
contemplation of law.28[28]

The Court finds that the issuance by the


CTA of the questioned resolutions was not tainted
by arbitrariness.

The fact that Sablan was not a party to the


case aside, the testimonies, documents, and
admissions sought by petitioner are not indeed
relevant to the issue before the CTA.

requesting the issuance of the subpoenas and the


submission of written interrogatories, petitioner
sought to establish that its accounting records and
related documents, invoices, and receipts which
were the bases of the assessment against it were
illegally obtained.

The only issues, however,

which surfaced during the preliminary hearing


before

the

CTA,

were

whether

respondents

issuance of assessment against petitioner had


prescribed and whether petitioners tax return was
false or fraudulent.

Besides, as the CTA held, the subpoenas


and answers to the written interrogatories would
violate Section 2 of Republic Act No. 2338 as
implemented

IX.
x x x when it quashed the
subpoena duces tecum as the
Honorable Court had issued an
outstanding
order
to
the
Respondent
to
certify
and
forward to the CTA all the
records of the case because up
to the date of this Petition the
BIR records have not been
submitted yet to the CTA.27[27]

For in

by

Section

12

of

Finance

Department Order No. 46-66.

Petitioner claims, however, that it only


intended to elicit information on the whereabouts
of the documents it needs in order to refute the
assessment, and not to disclose the identity of the
informer.29[29]

Petitioners position does not

persuade. The interrogatories addressed to Sablan

27

28

and the revenue officers show that they were


intended to confirm petitioners belief that Sablan
was the informer. Thus the questions for Sablan

1.

Where did you obtain the


documents, particularly
the invoices and official
receipts, which [were]
used by your office as
evidence and as basis of
the
assessment
for
deficiency income tax
and value added tax for
the tax year 1995 issued
against petitioner?

2.

Do
you
know
Mr.
Leonardo Sablan? Please
state
under
what
circumstance you came
to know Mr. Sablan?31[31]
(Underscoring supplied)

read:

1.

2.

3.

4.
5.

6.

7.

Under
what
circumstances do you
know
petitioner
corporation?
Please
state in what capacity,
the date or period you
obtained said knowledge.
Do you know a Ms.
Elnora Carpio, who from
1995 to the early part of
1996 was the book
keeper
of
petitioner?
Please state how you
came to know of Ms.
Carpio.
At the time that
Ms. Carpio was book
keeper of petitioner did
she consult you or show
any
accounting
documents and records
of petitioner?
What documents, if
any, did you obtain from
petitioner?
Were
these
documents
that
you
obtained from petitioner
submitted to the Bureau
of
Internal
Revenue
(BIR)?
Please describe
said
documents
and
under
what
circumstances the same
were submitted.
Was the consent of
the petitioner, its officers
or employees obtained
when the documents that
you
obtained
were
submitted to the BIR?
Please state when and
from whom the consent
was obtained.
Did you execute an
affidavit as an informer in
the assessment which
was issued by the BIR
against petitioner for the
tax year 1995 and other
years?30[30]
(Underscoring supplied)

Petitioner impugns the manner in which


the documents in question reached the BIR,
Sablan having allegedly submitted them to the
BIR without its (petitioners) consent. Petitioners
lack of consent does not, however, imply that the
BIR obtained them illegally or that the information
received is false or malicious. Nor does the lack of
consent

preclude

BIR

from

assessing

deficiency taxes on petitioner based on the


documents.

Thus Section 5 of the Tax Code

provides:

In
ascertaining
the
correctness of any return, or in
making a return when none has
been made, or in determining
the liability of any person for
any internal revenue tax, or in
collecting any such liability, or in
evaluating tax compliance, the
Commissioner is authorized:
(A)

(B)
while the questions for the revenue officers read:

29
30

the

31

To examine
any book, paper,
record or other
data which may
be relevant or
material to such
query;
To obtain on
a regular basis
from any person
other than the
person
whose
internal
revenue
tax

(C)

liability
is
subject to audit
or investigation,
or from any office
or officer of the
national and local
governments,
government
agencies
and
instrumentalities,
including
the
Bangko Sentral ng
Pilipinas
and
governmentowned
and

controlled
corporations, any
information such
as, but not limited
to,
costs
and
volume
of
production,
receipts or sales
and
gross
incomes
of
taxpayers,
and
the
names,
addresses,
and
financial
statements
of
corporations,
mutual
fund
companies,
insurance
companies,
regional operating
headquarters
of
multinational
companies, joint
accounts,
associations, joint
ventures
or
consortia
and
registered
partnerships and
their members;
To summon
the person liable
for tax or required
to file a return, or
any
officer
or
employee of such
person, or any
person
having
possession,
custody, or care
of the books of
accounts
and
other
accounting
records
containing
entries relating
to the business
of the person
liable for tax, or
any
other
person,
to
appear before the
Commissioner or
his
duly
authorized
representatives at
a time and place

(D)

(E)

specified in the
summons and to
produce
such
books,
papers,
records, or other
data, and to give
testimony;
To take such
testimony of the
person concerned,
under oath, as
may be relevant
or
material
to
such inquiry; and
To
cause
revenue
officers
and employees to
make a canvass
from time to time
of any revenue
district or region
and inquire after
and concerning all
persons
therein
who may be liable
to
pay
any
internal revenue
tax,
and
all
persons owning or
having the care,
management
or
possession of any
object
with
respect to which a
tax is imposed.

x x x x (Emphasis and
underscoring supplied)

The law thus allows the BIR access to all


relevant or material records and data in the
person of the taxpayer,32[32] and the BIR can
accept documents which cannot be admitted in a
judicial proceeding where the Rules of Court are
strictly observed.33[33] To require the consent of
the taxpayer would defeat the intent of the law to
help the BIR assess and collect the correct amount
of taxes.

Petitioners invocation of the rights of an


accused

in

criminal

prosecution

to

cross

examine the witness against him and to have


compulsory

process

issued

to

secure

the

attendance of witnesses and the production of

32
33

other evidence in his behalf does not lie.

CTA

SO ORDERED.

Case No. 7160 is not a criminal prosecution, and


even granting that it is related to I.S. No. 2005203, the respondents in the latter proceeding are
the

officers

and

accountant

corporation, not petitioner.

of

SECOND DIVISION

petitioner-

From the complaint

and supporting affidavits in I.S. No. 2005-203,

FITNESS BY DESIGN, INC.,


Petitioner,

Sablan does not even appear to be a witness


against the respondents therein.34[34]

CARPIO MORALES,
TINGA,

AT ALL EVENTS, issuance of subpoena


requested by the petitioner which documents

Present:

QUISUMBING, J., Ch
- versus -

duces tecum for the production of the documents

G.R. No. 177982

COMMISSIONER ON INTERNAL
REVENUE,

petitioner claims to be crucial to its defense 35[35]

Respondent.

is unnecessary in view of the CTA order for

October 17, 2008

respondent to certify and forward to it all the


records of the case.36[36]

If the order has not

been complied with, the CTA can enforce it by


citing respondent for indirect contempt.37[37]
x------------------------------------------------ x

WHEREFORE, in light of the foregoing


disquisition, the petition is DISMISSED.

Costs against petitioner.

34
35
36
37

DECISION
CARPIO MORALES, J.:

On March 17, 2004, the Commissioner on


Internal Revenue (respondent) assessed Fitness by
Design, Inc. (petitioner) for deficiency income taxes for
the tax year 1995 in the total amount of
P10,647,529.69.38[1]
Petitioner
protested
the
assessment on the ground that it was issued beyond
the three-year prescriptive period under Section 203 of
the Tax Code.39[2] Additionally, petitioner claimed that
since it was incorporated only on May 30, 1995, there
was no basis to assume that it had already earned
income for the tax year 1995.40[3]
On February 1, 2005, respondent issued a
warrant of distraint and/or levy against petitioner, 41[4]
drawing petitioner to file on March 1, 2005 a Petition
for Review (with Motion to Suspend Collection of
Income Tax, Value Added Tax, Documentary Stamp Tax
and Surcharges and Interests subject of this Petition) 42
[5] before the Court of Tax Appeals (CTA) before which
it reiterated its defense of prescription. The petition
was docketed as CTA Case No. 7160.

38
39
40
41
42

In his Answer,43[6] respondent alleged:


The right of the respondent
to assess petitioner for deficiency
income tax, VAT and Documentary
Stamp Tax for the year 1995 has not
prescribed pursuant to Section
222(a) of the 1997 Tax Code.
Petitioners 1995 Income Tax Return
(ITR) filed on April 11, 1996 was
false
and
fraudulent
for
its
deliberate failure to declare its true
sales.
Petitioner declared in its
1995 Income Tax Return that it was
on its pre-operation stage and has
not
declared
its
income.
Investigation by the revenue officers
of
the
respondent,
however,
disclosed
that
it
has
been
operating/doing business and had
sales operations for the year 1995
in
the
total
amount
of
P7,156,336.08 which it failed to
report in its 1995 ITR. Thus, for the
year 1995, petitioner filed a
fraudulent annual income return
with
intent
to
evade
tax.
Likewise, petitioner failed to file
Value-Added Tax (VAT) Return and
reported
the
amount
of
P7,156,336.08 as its gross sales for
the year 1995. Hence, for failure
to file a VAT return and for filing
a fraudulent income tax return
for
the
year
1995,
the
corresponding taxes may be
assessed at any time within ten
(10) years after the discovery of
such omission or fraud pursuant
to Section 222(a) of the 1997 Tax
Code.
The subject deficiency tax
assessments have already become
final, executory and demandable for
failure of the petitioner to file a
protest within the reglementary
period provided for by law. The
alleged protest allegedly filed on
June 25, 2004 at the Legal Division,
Revenue Region No. 8, Makati City is
nowhere to be found in the BIR
Records nor reflected in the Record
Book of the Legal Division as
normally done by our receiving clerk
when she receive[s] any document.
The respondent, therefore, has legal
basis to collect the tax liability
either by distraint and levy or civil
action.44[7]
(Emphasis
and
underscoring supplied)
The aforecited Section 222(a)45[8] of the 1997
Tax Code provides:
In the case of a false or
fraudulent return with intent to
evade tax or of failure to file a
return, the tax may be assessed, or
a proceeding in court for the

collection of such tax may be filed


without assessment, at any time
within ten (10) years after the
discovery of the falsity, fraud, or
omission: Provided, That in a fraud
assessment which has become final
and executory, the fact of fraud
shall be judicially taken cognizance
of in the civil or criminal action for
the
collection
thereof.
(Underscoring supplied)

The Bureau of Internal Revenue (BIR) in fact


filed on March 10, 2005 a criminal complaint before the
Department of Justice against the officers and
accountant of petitioner for violation of the provisions of
The National Internal Revenue Code of 1977, as
amended,46[9] covering the taxable year 1995.
The
criminal complaint was docketed as I.S. No. 2005-203.
On motion of petitioner in CTA Case No. 7160, a
preliminary hearing on the issue of prescription 47[10]
was conducted during which petitioners former
bookkeeper attested that a former colleague certified
public accountant Leonardo Sablan (Sablan) illegally
took custody of petitioners accounting records,
invoices, and official receipts and turned them over to
the BIR.48[11]
On petitioners request, a subpoena ad
testificandum was issued to Sablan for the hearing
before the CTA scheduled on September 4, 2006 but he
failed to appear.49[12]
Petitioner thus requested for the issuance of
another subpoena ad testificandum to Sablan for the
hearing scheduled on October 23, 2006,50[13] and of
subpoena duces tecum to the chief of the National
Investigation Division of the BIR for the production of
the Affidavit of the Informer bearing on the assessment
in question.51[14] Petitioners requests were granted. 52
[15]
During the scheduled hearing of the case on
October 23,
2006,
on respondents counsels
manifestation that he was not furnished a copy of
petitioners motion for the issuance of subpoenaes, the
CTA ordered petitioner to file a motion for the issuance
of subpoenas and to furnish respondents counsel a
copy thereof.53[16] Petitioner complied with the CTA
order.54[17]

46
47
48
49
50

43

51

44

52

45

53

In a related move, petitioner submitted written


interrogatories addressed to Sablan and to Henry
Sarmiento and Marinella German, revenue officers of
the National Investigation Division of the BIR.55[18
By Resolution56[19] of January 15, 2007, the
CTA denied petitioners Motion for Issuance of
Subpoenas and disallowed the submission by petitioner
of written interrogatories to Sablan, who is not a party
to the case, and the revenue officers,57[20] it finding
that the testimony, documents, and admissions sought
are not relevant.58[21] Besides, the CTA found that to
require Sablan to testify would violate Section 2 of
Republic Act No. 2338, as implemented by Section 12 of
Finance Department Order No. 46-66, proscribing the
revelation of identities of informers of violations of
internal revenue laws, except when the information is
proven to be malicious or false.59[22]
In any event, the CTA held that there was no
need to issue a subpoena duces tecum to obtain the
Affidavit of the Informer as the same formed part of the
BIR records of the case, the production of which had
been ordered by it.60[23]
Petitioners Motion for Reconsideration61[24] of
the CTA Resolution of January 15, 2007 was denied, 62
[25] hence, the present Petition for Certiorari63[26]
which imputes grave abuse of discretion to the CTA
I.
x x x in holding that the legality of
the
mode
of
acquiring
the
documents which are the bases of
the above discussed deficiency tax
assessments, the subject matter of
the Petition for Review now pending
in the Honorable Second Division, is
not material and relevant to the
issue of prescription.
II.
x x x in holding that Mr. Leonardo
Sablans testimony, if allowed,
would violate RA 2338 which
prohibits the BIR to reveal the
identity of the informer since 1) the
purpose of the subpoena is to elicit

54
55
56
57
58
59
60
61
62
63

from him the whereabouts of the


original
accounting
records,
documents and receipts owned by
the Petitioner and not to discover if
he is the informer since the identity
of the informer is not relevant to the
issues raised; 2) RA 2338 cannot
legally justify violation of the
Petitioners property rights by a
person, whether he is an informer or
not, since such RA cannot allow
such invasion of property rights
otherwise RA 2338 would run
counter
to
the
constitutional
mandate that no person shall be
deprive[d] of life, liberty or property
without due process of law.
III.
x x x in holding that the issuance of
subpoena ad testificandum would
constitute a violation of the
prohibition to reveal the identity of
the informer because compliance
with such prohibition has been
rendered moot and academic by the
voluntary
admissions
of
the
Respondent himself.

IV.
x x x in holding that the
constitutional right of an accused to
examine the witness against him
does not exist in this case. The
Petitioners
liability
for
tax
deficiency assessment which is the
main issue in the Petition for Review
is
currently
pending
at
the
Honorable
Second
Division.
Therefore, it is a prejudicial question
raised in the criminal case filed by
the herein Respondent against the
officers of the Petitioner with the
Department of Justice.
V.
x x x in dismissing the request for
subpoena ad testificandum because
the Opposition thereto submitted by
the Respondent was not promptly
filed as provided by the Rules of
Court thus, it is respectfully
submitted that, Respondent has
waived his right to object thereto.
VI.
x x x when the Honorable Court of
Tax Appeals ruled that the purpose
of the Petitioner in requesting for
written interrogatories is to annoy,
embarrass, or oppress the witness
because such ruling has no factual
basis since Respondent never
alleged nor proved that the
witnesses
to
whom
the
interrogatories are addressed will be
annoyed,
embarrassed
or
oppressed; besides the only obvious
purpose of the Petitioner is to know
the whereabouts of
accounting
records and documents which are in
the possession of the witnesses to
whom
the
interrogatories
are
directed and to ultimately get
possession
thereof.
Granting
without admitting that there is
annoyance,
embarrassment
or
oppression; the same is not
unreasonable.
VII.

x x x when it failed to rule that the


BIR officers and employees are not
covered by the prohibition under RA
2338 and do not have the authority
to withhold from the taxpayer
documents
owned
by
such
taxpayer.
VIII.
x x x when it required the clear and
unequivocal proof of relevance of
the documents as a condition
precedent for the issuance of
subpoena duces tecum.

2.

3.

IX.
x x x when it quashed the subpoena
duces tecum as the Honorable Court
had issued an outstanding order to
the Respondent to certify and
forward to the CTA all the records of
the case because up to the date of
this Petition the BIR records have
not been submitted yet to the CTA. 64
[27]

4.
5.

Grave abuse of discretion implies such


capricious and whimsical exercise of judgment as
equivalent to lack of jurisdiction or, in other words,
when the power is exercised in an arbitrary or despotic
manner by reason of passion or personal hostility, and it
must be so patent and gross as to amount to an evasion
of positive duty or a virtual refusal of duty enjoined or
to act at all in contemplation of law.65[28]

6.

The Court finds that the issuance by the CTA of


the questioned resolutions was not tainted by
arbitrariness.
The fact that Sablan was not a party to the case
aside, the testimonies, documents, and admissions
sought by petitioner are not indeed relevant to the issue
before the CTA. For in requesting the issuance of the
subpoenas
and
the
submission
of
written
interrogatories, petitioner sought to establish that its
accounting records and related documents, invoices,
and receipts which were the bases of the assessment
against it were illegally obtained. The only issues,
however, which surfaced during the preliminary hearing
before the CTA, were whether respondents issuance of
assessment against petitioner had prescribed and
whether petitioners tax return was false or fraudulent.

7.

petitioner
corporation?
Please
state
in
what
capacity, the date or period
you
obtained
said
knowledge.
Do you know a Ms.
Elnora Carpio, who from
1995 to the early part of
1996 was the book keeper
of petitioner? Please state
how you came to know of
Ms. Carpio.
At the time that Ms.
Carpio was book keeper of
petitioner did she consult
you or show any accounting
documents and records of
petitioner?
What documents, if
any, did you obtain from
petitioner?
Were these documents
that you obtained from
petitioner submitted to the
Bureau of Internal Revenue
(BIR)? Please describe said
documents and under what
circumstances the same
were submitted.
Was the consent of the
petitioner, its officers or
employees obtained when
the documents that you
obtained were submitted to
the BIR? Please state when
and from whom the consent
was obtained.
Did you execute an
affidavit as an informer in
the assessment which was
issued by the BIR against
petitioner for the tax year
1995 and other years?67[30]
(Underscoring supplied)

while the questions for the revenue officers read:


1.

Where did you obtain the


documents, particularly the
invoices
and
official
receipts, which [were] used
by your office as evidence
and
as
basis
of
the
assessment for deficiency
income tax and value added
tax for the tax year 1995
issued against petitioner?

2.

Do you know Mr. Leonardo


Sablan? Please state under
what
circumstance
you
came to know Mr. Sablan?68
[31]
(Underscoring
supplied)

Besides, as the CTA held, the subpoenas and


answers to the written interrogatories would violate
Section 2 of Republic Act No. 2338 as implemented by
Section 12 of Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended
to elicit information on the whereabouts of the
documents it needs in order to refute the assessment,
and not to disclose the identity of the informer. 66[29]
Petitioners
position
does
not
persuade.
The
interrogatories addressed to Sablan and the revenue
officers show that they were intended to confirm
petitioners belief that Sablan was the informer. Thus
the questions for Sablan read:

Petitioner impugns the manner in which the


documents in question reached the BIR, Sablan having

1.

Under
what
circumstances do you know

allegedly submitted them to the BIR without its


(petitioners) consent. Petitioners lack of consent does

64

not, however, imply that the BIR obtained them illegally

65

67

66

68

or that the information received is false or malicious.

of any object with respect to


which a tax is imposed.
x x x x (Emphasis and
underscoring supplied)

Nor does the lack of consent preclude the BIR from


assessing deficiency taxes on petitioner based on the
documents. Thus Section 5 of the Tax Code provides:

The law thus allows the BIR access to all


In
ascertaining
the
correctness of any return, or in
making a return when none has
been made, or in determining the
liability of any person for any
internal revenue tax, or in collecting
any such liability, or in evaluating
tax compliance, the Commissioner
is authorized:
(A) To examine any book, paper,
record or other data which may
be relevant or material to such
query;
(B)

To obtain on a regular
basis from any person other
than
the
person
whose
internal revenue tax liability
is
subject
to
audit
or
investigation, or from any
office or officer of the national
and
local
governments,
government
agencies
and
instrumentalities, including the
Bangko Sentral ng Pilipinas and
government-owned
and

controlled
corporations,
any
information such as, but not
limited to, costs and volume of
production, receipts or sales and
gross incomes of taxpayers, and
the names, addresses, and
financial
statements
of
corporations,
mutual
fund
companies,
insurance
companies, regional operating
headquarters of multinational
companies,
joint
accounts,
associations, joint ventures or
consortia
and
registered
partnerships and their members;
(C)
To summon the person
liable for tax or required to file a
return,
or
any
officer
or
employee of such person, or any
person having possession,
custody, or care of the books
of
accounts
and
other
accounting
records
containing entries relating to
the business of the person
liable for tax, or any other
person, to appear before the
Commissioner
or
his
duly
authorized representatives at a
time and place specified in the
summons and to produce such
books, papers, records, or other
data, and to give testimony;
(D) To take such testimony of the
person concerned, under oath, as
may be relevant or material to
such inquiry; and
(E) To cause revenue officers and
employees to make a canvass
from time to time of any revenue
district or region and inquire
after and concerning all persons
therein who may be liable to pay
any internal revenue tax, and all
persons owning or having the
care, management or possession

relevant or material records and data in the person of


the taxpayer,69[32] and the BIR can accept documents
which cannot be admitted in a judicial proceeding
where the Rules of Court are strictly observed. 70[33] To
require the consent of the taxpayer would defeat the
intent of the law to help the BIR assess and collect the
correct amount of taxes.
Petitioners invocation of the rights of an
accused in a criminal prosecution to cross examine the
witness against him and to have compulsory process
issued to secure the attendance of witnesses and the
production of other evidence in his behalf does not lie.
CTA Case No. 7160 is not a criminal prosecution, and
even granting that it is related to I.S. No. 2005-203, the
respondents in the latter proceeding are the officers
and accountant of petitioner-corporation, not petitioner.
From the complaint and supporting affidavits in I.S. No.
2005-203, Sablan does not even appear to be a witness
against the respondents therein.71[34]
AT ALL EVENTS, issuance of subpoena duces
tecum for the production of the documents requested
by the petitioner which documents petitioner claims to
be crucial to its defense72[35] is unnecessary in view
of the CTA order for respondent to certify and forward to
it all the records of the case. 73[36] If the order has not
been complied with, the CTA can enforce it by citing
respondent for indirect contempt.74[37]
WHEREFORE,

in

light

of

disquisition, the petition is DISMISSED.


Costs against petitioner.

69
70
71
72
73
74

the

foregoing

SO ORDERED.

In this connection, we wish to state that this


case is presently under reinvestigation as per
our request dated October 16, 1951, and your
letter to us dated October 17, 1951, and that
said tax liability being only a tentative
assessment, we are not as yet advised of the
results of the requested reinvestigation.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-14519

July 26, 1960

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
LUIS G. ABLAZA, defendant-appellee.
Assistant Solicitor General Jose P. Alejandro and Special
Attorneys Cirilio R. Francisco and Santiago M. Kapunan
for appellant.
Martin B. Istaro for appellee.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance
of Manila, Hon. Carmelino G. Alvendia, presiding,
dismissing an action instituted by the Government to
recover income taxes from the defendant-appellee
corresponding to the years 1945, 1946, 1947 and
1948.
The record discloses that on October 3, 1951, the
Collector of Internal Revenue assessed income taxes
for the years 1945, 1946, 1947 and 1948 on the
income tax returns of defendant-appellee Luis G.
Ablaza. The assessments total P5,254.70 (Exhibit "I").
On October 16, 1951, the accountants for Ablaza
requested a reinvestigation of Ablaza's tax liability, on
the ground that (1) the assessment is based on thirdparty information and (3) neither the taxpayer nor his
accountants were permitted to appear in person (Exh.
"J"). The petition for reinvestigation was granted in a
letter of the Collector of Internal Revenue, dated
October 17, 1951. On October 30, 1951, the
accountants for Ablaza again sent another letter to the
Collector of Internal Revenue submitting a copy of their
own computation (Exh. "L"). On October 23, 1952, said
accountants again submitted a supplemental
memorandum (Exh. "M"). On March 10, 1954, the
accountants for Ablaza sent a letter to the examiner of
accounts and collections of the Bureau of Internal
Revenue, stating:

In view thereof, we wish to request, in fairness


to the taxpayer concerned, that we be
furnished a copy of the detailed computation of
the alleged tax liability as soon as the
reinvestigation is terminated to enable us to
prove the veracity of the taxpayer's side of the
case, and if it is found out that said assessment
is proper and in order, we assure you of our
assistance in the speedy disposition of this
case. (Exh. "P")
On February 11, 1957, after the reinvestigation, the
Collector of Internal Revenue made a final assessment
of the income taxes of Ablaza, fixing said income taxes
for the years already mentioned at P2,066.56 (Exh.
"Q"). Notice of the said assessment was sent (Exhs.
"V", "W" and "X") and upon receipt thereof the
accountants of Ablaza sent a letter to the Collector of
Internal Revenue, dated May 8, 1957, protesting the
assessments, on the ground that the income taxes are
no longer collectible for the reason that they have
already prescribed. As the Collector did not agree to
the alleged claim of prescription, action was instituted
by him in the Court of First Instance to recover the
amount assessed. The Court of First Instance upheld
the contention of Ablaza that the action to collect the
said income taxes had prescribed. Against this decision
the case was brought here on appeal, where it is
claimed by the Government that the prescriptive
period has not fully run at the time of the assessment,
in view especially of the letter of the accountants of
Ablaza, dated March 10, 1954, pertinent provisions of
which are quoted above.
It is of course true on October 14, 1951, Ablaza's
accountants requested a reinvestigation of the
assessment of the income taxes against him, the
period of prescription of action to collect the taxes was
suspended. (Sec. 333, C. A. No. 466.) The provision of
law on prescription was adopted in our statute books
upon recommendation of the tax commissioner of the
Philippines which declares:
Under the former law, the right of the
Government to collect the tax does not
prescribe. However, in fairness to the taxpayer,
the Government should be estopped from
collecting the tax where it failed to make the
necessary investigation and assessment within
5 years after the filing of the return and where
it failed to collect the tax within 5 years from
the date of assessment thereof. just as the
government is interested in the stability of its
collection, so also are the taxpayers entitled to
an assurance that they will not be subjected to
further investigation for tax purposes after the
expiration of a reasonable period of time. (Vol.
II, Report of the Tax Commission of the
Philippines, pp. 321-322)
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 latter's
real liability, but to take advantage of every
opportunity to molest peaceful, law-abiding citizens.
Without such 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
beneficient purpose of affording protection to the
taxpayer within the contemplation of the Commission
which recommend the approval of the law.
The question in the case at bar boils down to the
interpretation of Exhibit "P", dated March 10, 1954,
quoted above. If said letter be interpreted as a request
for further investigation or a new investigation,
different and distinct from the investigation demanded
or prayed for in Ablaza's first letter, Exhibit "L", then
the period of prescription would continue to be
suspended thereby. but if the letter in question does
not ask for another investigation, the result would be
just the opposite. In our opinion the letter in question,
Exhibit "P", does not ask for another investigation. Its
first paragraph quoted above shows that the
reinvestigation then being conducted was by virtue of
its request of October 16, 1951. All that the letter asks
is that the taxpayer be furnished a copy of the
computation. The request may be explained in this
manner: As the reinvestigation was allowed on October
1, 1951 and on October 16, 1951, the taxpayer
supposed or expected that at the time, March, 1954
the reinvestigation was about to be finished and he
wanted a copy of the re-assessment in order to be
prepared to admit or contest it. Nowhere does the
letter imply a demand or request for a ready requested
and, therefore, the said letter may not be interpreted
to authorize or justify the continuance of the
suspension of the period of limitations.

Officer of Revenue District


No. 049 (Makati),

Petitioners,

Present:

SANDOVAL-GUTIERREZ,
-versusCORONA,

AZCUNA and

GARCIA, JJ.
PRIMETOWN PROPERTY
GROUP, INC.,
Respondent.
Promulgated:
August 28, 2007

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

DECISION

CORONA, J.:

We find the appeal without merit and we hereby affirm


the judgment of the lower court dismissing the action.
Without costs.
Paras, C. J., Bengzon, Montemayor, Bautista Angelo,
Concepcion, Reyes, J. B. L., Endencia, Barrera, and
Gutierrez David, JJ., concur.

This petition for review on certiorari 75[1] seeks to set


aside the August 1, 2003 decision 76[2] of the Court of Appeals
(CA) in CA-G.R. SP No. 64782 and its February 9, 2004
resolution denying reconsideration.77[3]

On March 11, 1999, Gilbert Yap, vice chair of respondent


Primetown Property Group, Inc., applied for the refund or
credit of income tax respondent paid in 1997. In Yap's letter to
petitioner revenue district officer Arturo V. Parcero of Revenue
COMMISSIONER OF INTERNAL

G.R. No. 162155

75

REVENUE and ARTURO V.


PARCERO in his official
capacity as Revenue District

76
77

District No. 049 (Makati) of the Bureau of Internal Revenue

been excessively or in any manner


wrongfully collected, until a claim for
refund or credit has been duly filed with
the Commissioner; but such suit or
proceeding may be maintained, whether
or not such tax, penalty, or sum has been
paid under protest or duress.

(BIR),78[4] he explained that the increase in the cost of labor


and materials and difficulty in obtaining financing for projects
and collecting receivables caused the real estate industry to
slowdown.79[5] As a consequence, while business was good

In any case, no such suit or proceeding


shall be filed after the expiration of
two (2) years from the date of
payment of the tax or penalty
regardless of any supervening cause
that may arise after payment:
Provided,
however,
That
the
Commissioner may, even without a claim
therefor, refund or credit any tax, where
on the face of the return upon which
payment was made, such payment
appears clearly to have been erroneously
paid. (emphasis supplied)

during the first quarter of 1997, respondent suffered losses


amounting to P71,879,228 that year.80[6]

According to Yap, because respondent suffered losses, it was


not liable for income taxes.81[7] Nevertheless, respondent paid
its quarterly corporate income tax and remitted creditable
withholding tax from real estate sales to the BIR in the total
amount of P26,318,398.32.82[8] Therefore, respondent was

The CTA found that respondent filed its final adjusted return

entitled to tax refund or tax credit.83[9]

on April 14, 1998. Thus, its right to claim a refund or credit


commenced on that date.87[13]

On May 13, 1999, revenue officer Elizabeth Y. Santos required


respondent to submit additional documents to support its

The tax court applied Article 13 of the Civil Code which states:

claim.84[10] Respondent complied but its claim was not acted


Art. 13. When the law speaks of years,
months, days or nights, it shall be
understood that years are of three
hundred sixty-five days each; months, of
thirty days; days, of twenty-four hours, and
nights from sunset to sunrise.

upon. Thus, on April 14, 2000, it filed a petition for


review85[11] in the Court of Tax Appeals (CTA).

On December 15, 2000, the CTA dismissed the petition as it

If the months are designated by their name,


they shall be computed by the number of
days which they respectively have.

was filed beyond the two-year prescriptive period for filing a


judicial claim for tax refund or tax credit. 86[12] It invoked

In computing a period, the first day shall be


excluded, and the last included. (emphasis
supplied)

Section 229 of the National Internal Revenue Code (NIRC):

Sec. 229. Recovery of Taxes Erroneously


or Illegally Collected. -No suit or
proceeding shall be maintained in any
court for the recovery of any national
internal revenue tax hereafter alleged to
have been erroneously or illegally
assessed or collected, or of any penalty
claimed to have been collected without
authority, or of any sum alleged to have

Thus, according to the CTA, the two-year prescriptive period


under Section 229 of the NIRC for the filing of judicial claims
was equivalent to 730 days. Because the year 2000 was a
leap

year,

respondent's

petition,

which

was

filed

731

88

days [14] after respondent filed its final adjusted return, was

78

filed beyond the reglementary period.89[15]

79

Respondent moved for reconsideration but it was denied.90


[16] Hence, it filed an appeal in the CA.91[17]

80
81
82

87

83

88

84

89

85

90

86

91

On August 1, 2003, the CA reversed and set aside the decision

As already quoted, Article 13 of the Civil Code provides that

of the CTA.92[18] It ruled that Article 13 of the Civil Code did

when the law speaks of a year, it is understood to be

not distinguish between a regular year and a leap year.

equivalent to 365 days. In National Marketing Corporation v.

According to the CA:

Tecson,99[25] we ruled that a year is equivalent to 365 days


regardless of whether it is a regular year or a leap year.100[26]

The rule that a year has 365 days applies,


notwithstanding the fact that a particular
year is a leap year.93[19]
In other words, even if the year 2000 was a leap year, the
periods covered by April 15, 1998 to April 14, 1999 and April

However, in 1987, EO101[27] 292 or the Administrative Code of


1987 was enacted. Section 31, Chapter VIII, Book I thereof
provides:

15, 1999 to April 14, 2000 should still be counted as 365 days
each or a total of 730 days. A statute which is clear and

Sec. 31. Legal Periods. Year shall be


understood to be twelve calendar
months; month of thirty days, unless it
refers to a specific calendar month in which
case it shall be computed according to the
number of days the specific month contains;
day, to a day of twenty-four hours and;
night from sunrise to sunset. (emphasis
supplied)

explicit shall be neither interpreted nor construed. 94[20]

Petitioners moved for reconsideration but it was denied. 95[21]


Thus, this appeal.

Petitioners contend that tax refunds, being in the nature of an


exemption, should be strictly construed against claimants.96
[22] Section 229 of the NIRC should be strictly applied against
respondent inasmuch as it has been consistently held that the
prescriptive period (for the filing of tax refunds and tax
credits) begins to run on the day claimants file their final
97

adjusted returns. [23] Hence, the claim should have been


filed on or before April 13, 2000 or within 730 days, reckoned
from the time respondent filed its final adjusted return.

The conclusion of the CA that respondent filed its petition for


review in the CTA within the two-year prescriptive period
provided in Section 229 of the NIRC is correct. Its basis,
however, is not.

The rule is that the two-year prescriptive period is


reckoned from the filing of the final adjusted return. 98[24] But
how should the two-year prescriptive period be computed?

A calendar month is a month designated in the calendar


without regard to the number of days it may contain. 102[28]
It is the period of time running from the beginning of a
certain

numbered

93
94
95
96
97
98

up

to,

but

not

including,

the

corresponding numbered day of the next month, and if there


is not a sufficient number of days in the next month, then up
to and including the last day of that month. 103[29] To
illustrate, one calendar month from December 31, 2007 will
be from January 1, 2008 to January 31, 2008; one calendar
month from January 31, 2008 will be from February 1, 2008
until February 29, 2008.104[30]

A law may be repealed expressly (by a categorical declaration


that the law is revoked and abrogated by another) or impliedly
(when the provisions of a more recent law cannot be
reasonably reconciled with the previous one). 105[31] Section
27, Book VII (Final Provisions) of the Administrative Code of
1987 states:

92

day

99
100
101
102
103
104
105

Sec. 27. Repealing clause. All laws,


decrees, orders, rules and regulation, or
portions thereof, inconsistent with this Code
are
hereby
repealed
or
modified
accordingly.
A repealing clause like Sec. 27 above is not an express
repealing clause because it fails to identify or designate the
laws to be abolished.106[32] Thus, the provision above only
impliedly
repealed
all
laws
inconsistent
with
the
Administrative Code of 1987.
Implied repeals, however, are not favored. An implied repeal
must have been clearly and unmistakably intended by the
legislature. The test is whether the subsequent law
encompasses entirely the subject matter of the former law
and they cannot be logically or reasonably reconciled.107[33]
Both Article 13 of the Civil Code and Section 31, Chapter VIII,
Book I of the Administrative Code of 1987 deal with the same
subject matter the computation of legal periods. Under the
Civil Code, a year is equivalent to 365 days whether it be a
regular year or a leap year. Under the Administrative Code of
1987, however, a year is composed of 12 calendar months.
Needless to state, under the Administrative Code of 1987, the
number of days is irrelevant.

6th

calendar
month

September 15,
1998

to

October 14,
1998

7th

calendar
month

October 15,
1998

to

November
14, 1998

8th

calendar
month

November 15,
1998

to

December
14, 1998

9th

calendar
month

December 15,
1998

to

January 14,
1999

10th

calendar
month

January 15,
1999

to

February 14,
1999

11th

calendar
month

February 15,
1999

to

March 14,
1999

12th

calendar
month

March 15, 1999

to

April 14, 1999

Year 13th
2

calendar
month

April 15, 1999

to

May 14, 1999

14th

calendar
month

May 15, 1999

to

June 14, 1999

15th

calendar
month

June 15, 1999

to

July 14, 1999

16th

calendar
month

July 15, 1999

to

August 14,
1999

17th

calendar
month

August 15, 1999

to

September
14, 1999

18th

calendar
month

September 15,
1999

to

October 14,
1999

19th

calendar
month

October 15,
1999

to

November
14, 1999

There obviously exists a manifest incompatibility in


the manner of computing legal periods under the Civil Code
and the Administrative Code of 1987. For this reason, we hold
that Section 31, Chapter VIII, Book I of the Administrative
Code of 1987, being the more recent law, governs the
computation of legal periods. Lex posteriori derogat priori.

Applying Section 31, Chapter VIII, Book I of the


Administrative Code of 1987 to this case, the two-year
prescriptive period (reckoned from the time respondent filed
its final adjusted return108[34] on April 14, 1998) consisted of
24 calendar months, computed as follows:

Year 1st
1

calendar
month

April 15, 1998

to

May 14, 1998

2nd

calendar
month

May 15, 1998

to

June 14, 1998

3rd

calendar
month

June 15, 1998

to

July 14, 1998

4th

calendar
month

July 15, 1998

to

August 14,
1998

20th

calendar
month

November 15,
1999

to

December
14, 1999

5th

calendar
month

August 15, 1998

to

September
14, 1998

21st

calendar
month

December 15,
1999

to

January 14,
2000

22nd

calendar
month

January 15,
2000

to

February 14,
2000

23rd

calendar
month

February 15,
2000

to

March 14,
2000

106
107
108

24th

calendar
month

March 15, 2000

to

April 14, 2000

We therefore hold that respondent's petition (filed on April 14,


2000) was filed on the last day of the 24 th calendar month
from the day respondent filed its final adjusted return. Hence,
it was filed within the reglementary period.
Accordingly, the petition is hereby DENIED. The
case is REMANDED to the Court of Tax Appeals which is
ordered to expeditiously proceed to hear C.T.A. Case No. 6113
entitled Primetown Property Group, Inc. v. Commissioner of
Internal Revenue and Arturo V. Parcero.

declared of no force and effect,


Without pronouncement as to
costs.
This Court's decision under reconsideration held
that the assessment made on February 21, 1961
by petitioner against respondent corporation (and
received by the latter on March 22, 1961) in the
sum of P758,687.04 on its surplus of
P2,758,442.37 for its fiscal year ending
September 30, 1955 fell under the five-year
prescriptive period provided in section 331 of the
National Internal Revenue Code and that the
assessment had, therefore, been made after the
expiration of the said five-year prescriptive period
and was of no binding force and effect .
Petitioner has urged that

No costs.
SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-29485 November 21, 1980
COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
AYALA SECURITIES CORPORATION and THE
HONORABLE COURT OF TAX APPEALS,
respondents.
TEEHANKEE, J.:
Before the Court is petitioner Commissioner of
Internal Revenue's motion for reconsideration of
the Court's decision of April 8, 1976 wherein the
Court affirmed in toto the appealed decision of
respondent Court of Tax Appeals, the dispositive
portion of which provides 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

A perusal of Sections 331 and 332(a) will


reveal that they refer to a tax, the basis of
which is required by law to be reported in a
return such as for example, income tax or
sales tax. However, the surtax imposed by
Section 25 of the Tax Code is not one such
tax. Accumulated surplus are never returned
for tax purposes, as there is no law requiring
that such surplus be reported in a return for
purposes of the 25% surtax. In fact, taxpayers
resort to all means and devices to cover up
the fact that they have unreasonably
accumulated surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file
returns of their accumulated surplus, it is
obvious that neither Section 33 nor Section
332(a) of the Tax Code applies in a case
involving the 25% surtax imposed by Section
25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in
the earlier case of United Equipment & Supply
Company vs. Commissioner of Internal Revenue
(CTA Case No. 1795, October 30, 1971) which
was appealed by petitioner taxpayer to this Court
in G. R. No. L-35653 bearing the same title, which
appeal was denied by this Court en banc for lack
of merit as per its Resolution of October 25, 1972,
In said case, the tax court squarely ruled that the
provisions of sections 331 and 332 of the National
Internal Revenue Code for prescriptive periods of
five 5 and ten (10) years after the filing of the
return do not apply to the tax on the taxpayer's
unreasonably accumulated surplus under section
25 of the Tax Code since no return is required to
be filed by law or by regulation on such unduly ac
cumulated surplus on earnings, reasoning as
follows:
In resisting the assessment amounting to
P10,864.26 as accumulated earnings tax for
1957, petitioner also invoked the defense of

prescription against the right of respondent to


assess the said tax. It is contended that since its
income tax return for 1957 was filed in 1958, and
with the clarification by respondent in his letter
dated May 14, 1963, that the amount sought to
be collected was petitioner's surtax liability under
Section 25 rather than deficiency corporate
income tax under Section 24 of the National
Internal Revenue Code, the assessment has
already prescribed under Section 331 of the same
Code.

surplus is in the nature of a penalty.


(Helvering v. National Grocery Co.,
304 U.S. 282). It would not be
proper for the law to compel a
corporation to report improper
accumulation of surplus.
Accordingly, Section 331 limiting
the right to assess internal revenue
taxes within five years from the
date the return was filed or was
due does not apply.

Section 331 of the Revenue Code


provides:

Neither does Section 332 apply.


Said Section provides:

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 purpose 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.

SEC. 332 Exceptions as to period of


limitation of assessment and
collection of taxes. (a) In the case
of a false or fraudulent return with
intent to evade tax or of 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.

Obviously, Section 331 applies to,


assessment of National Internal
Revenue Taxes which requires the
filing of returns. A return, the filing
of which is necessary to start the
running of tile five-year period for
making an assessment, must be
one which is required for the
particular tax. Consequently, it has
been held that the filing of an
income tax return does not start
the running of the statute of
limitation for assessment of the
sales tax. (Butuan Sawmill, Inc. v.
Court of Tax Appeals, G.R. No. L20601, Feb. 28, 1966, 16 SCRA
277).
Although petitioner filed an income
tax return, no return was filed
covering its surplus profits which
were improperly accumulated. In
fact, no return could have been
filed, and the law could not
possibly require, for obvious
reasons, the filing of a return
covering unreasonable
accumulation of corporate surplus
profits. A tax imposed upon
unreasonable accumulation of

(b) Where before the expiration of


the time prescribed in the
preceding section for the
assessment of the tax, both the
Commissioner of Internal Revenue
and the taxpayer have consented
in writing to its assessment after
such time, the tax may be
assessed at any time prior to the
expiration of the period agreed
upon. The period so agreed upon
may be extended by subsequent
agreements in writing made before
the expiration of the period
previously agreed upon.
(c) Where the assessment of any
internal revenue tax has been
made within the period of limitation
above-prescribed such tax may be
collected by distraint or levy by a
proceeding in court, but only if
begun (1) within five years after
the assessment of the tax, or (2)
prior to the expiration of any period
for collection agreed upon in
writing by the Commissioner of
Internal Revenue and the taxpayer
before the expiration of such fiveyear period. The period so agreed
upon may be extended by
subsequent agreements in writing
made before the expiration of the
period previously agreed upon.

It will be noted that Section 332


has reference to national internal
revenue taxes which require the
filing of returns. This is implied,
from the provision that the ten-year
period for assessment specified
therein treats of the filing of a false
or fraudulent return or of a failure
to file a return. There can be no
failure or omission to file a return
where no return is required to be
filed by law or by regulation. It is,
therefore, our opinion that the tenyear period for making in
assessment under Section 332
does not apply to internal revenue
taxes which do not require the
filing of a return.
It is well settled limitations upon
the right of the government to
assess and collect taxes will not be
presumed in the absence of clear
legislation to the contrary. The
existence of a time limit beyond
which the government may recover
unpaid taxes is purely dependent
upon some express statutory
provision, (51 Am. Jur. 867; 10
Mertens Law of Federal Income
Taxation, par. 57. 02.). It follows
that in the absence of express
statutory provision, the right of the
government to assess unpaid taxes
is imprescriptible. Since there is no
express statutory provision limiting
the right of the Commissioner of
Internal Revenue to assess the tax
on unreasonable accumulation of
surplus provided in Section 25 of
the Revenue Code, said tax may be
assessed at any time. (Emphasis
supplied)
Such ruling was in effect upheld by this Court en
banc upon its dismissal of the taxpayer's appeal
for lack of merit as above stated.
The Court is persuaded by the fundamental
principle invoked by petitioner that limitations
upon the right of the government to assess and
collect taxes will not be presumed in the absence
of clear legislation to the contrary and that where
the government has not by express statutory
provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its
decision under reconsideration that the right to
assess and collect the assessment in question
had prescribed after five years, and instead rules
that there is no such time limit on the right of the
Commissioner of Internal Revenue to assess the
25% tax on unreasonably accumulated surplus

provided in section 25 of the Tax Code, since


there is no express statutory provision limiting
such right or providing for its prescription. The
underlying purpose of the additional tax in
question on a corporation's improperly
accumulated profits or surplus is as set forth in
the text of section 25 of the Tax Code itself 1 to
avoid the situation where a corporation unduly
retains its surplus instead of declaring and paving
dividends to its shareholders or members who
would then have to pay the income tax due on
such dividends received by them. The record
amply shows that respondent corporation is a
mere holding company of its shareholders
through its mother company, a registered copartnership then set up by the individual
shareholders belonging to the same family and
that the prima facie evidence and presumption
set up by the Tax Code, therefore applied without
having been adequately rebutted by the
respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of
the corporation, testified before the court as
follows:
Atty. Garces
The investigation, Your Honor, shows that
for the year 1955, the Ayala Securities
Corporation had 175,000 outstanding
shares of stock and out of these shares of
Ayala Securities Corporation, the Ayala
and Company owned 174,996 shares of
stock.
Q. Is that right, Mr. Cabral?
Atty. Ong
Objection, Your Honor, on the materiality
of the question.
Judge Alvarez
What is the materiality of the question?
Atty. Garces
We want to prove to this honorable Court
that Ayala Securities Corporation is a
holding or investment company, the
parent company being Ayala and
Company.
Judge Alvarez
Witness may answer.
A. I think so; yes.
Q. And Ayala and Company's owned
almost wholly by the Zobel Family and the
Ayala Family?

Atty. Ong
If Your Honor please, objection again on
the materiality. What would counsel for
the respondent prove on this point?
Atty. Garces
Same purpose, Your If Honor to prove that
Ayala Securities corporation is a mere
investment or holding company
Atty. Ong
What is the materiality of the case if it is a
mere investment company. In fact, we are
here in court to prove the reasonableness
or unreasonableness of the accumulation
of profit. I think counsel for the respondent
is trying to harp on presumption; but
actually we will not be delving on
presumption but on actual facts proving
the reasonableness of the accumulation
based on actual evidence.
Judge Alvarez
In order to determine the reasonableness
or unreasonableness, there must be a
basis. witness will have to answer the
question.
A. Yes.
xxx xxx xxx
Q. As of September 30, 1955 when the
Ayala Securities Corporation tiled its
income tax return, were the officers of the
Ayala Securities Corporation and the Ayala
and Company housed in the same
building?
A. Yes, sir; they were.
Q. And also are the employees of the
Ayala Securities corporation and the Ayala
and Company the same - meaning that
the employees of the Ayala Securities
Corporation are also the employees of the
Ayala and Company?
A. At the time, if I remember right, Ayala
and Company was the operating company
and the employees were the employees of
the Ayala and Company; (t.s.n., pp. 3237).
Another witness, Mr. Salvador J. Lorayes the
Secretary and head of the Legal Department of
the corporation, also testified that:
Judge Alvarez questions

Q. May we know from you whether Ayala


Securities corporation is an affiliate of
Ayala and Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala
and Company is the mother corporation of
this affiliate?
A. That is correct.
Q. And that the policy of Ayala Securities
Corporation is practically governed by the
officers or partners of Ayala and company
A. They have a strong influence over the
policy of Ayala Securities Corporation.
Q. So that whatever is decided by the
partners of Ayala and Company for a
certain investment or project would also
be followed by Ayala Securities
Corporation?
A. If the project is assigned to Ayala
Securities Corporation it will be followed
by Ayala Securities Corporation; if to
another affiliate, no (t.s.n., pp. 149150). ...
Respondent corporation was therefore fully
shown to fall under Revenue Regulation No. 2
implementing the provisions of the income tax
law which provides on holding and investment
companies that
SEC. 20. Holding and Investment
Companies. A corporation having
practically no activities except holding
property, and collecting the income
therefrom or investing therein, shall be
considered a holding company within the
meaning of section 25.
Petitioner commissioner's plausible alternative
contention is that even if the 25% surtax were to
be deemed subject to prescription, computed
from the filing of the income tax return in 1955,
the intent to evade payment of the surtax is an
inherent quality of the violation and the return
filed must necessarily partake of a false and/or
fraudulent character which would make
applicable the 10-year prescriptive period
provided in section 332(a) of the Tax Code and
since the assessment was made in 1961 (the
sixth year), the assessment was clearly within the
10-year prescriptive period. The Court sees no
necessity, however, for ruling on this point in
view of its adherence to the ruling in the earlier
raise of United Equipment & Supply Co., supra,
holding that the 25% surtax is not subject to any
statutory prescriptive period.

ACCORDINGLY, the Court's decision of April 8,


1976 is set aside and in lieu thereof, judgment is
hereby rendered ordering respondent corporation
to pay the assessment in the sum of P758,687.04
as 25% surtax on its unreasonably accumulated
surplus, plus the 5% surcharge and 1% monthly
interest thereon, pursuant to section 51 (e) of the
National Internal Revenue Code, as amended by
R. A. 2343. With Costs.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20601

February 28, 1966

BUTUAN SAWMILL, INC., petitioner,


vs.
HON. COURT OF TAX APPEALS, ET AL.,
respondents.
David G. Nitafan for the petitioner.
Office of the Solicitor General for the
respondents.
REYES, J.B.L., J.:
Appeal from a decision of the Court of Tax
Appeals, in its CTA Case No. 965, ordering
petitioner herein, Butuan Sawmill, Inc., to pay
respondent Commissioner of Internal Revenue
the sum of P36,107.74 as deficiency sales tax
and surcharge due on its sales of logs to buyers
in Japan from January 31, 1951 to June 8, 1953.
The facts, as found and stated by the lower court
in its decision, are in full accord with the
evidences presented therein; hence, we quote
them hereunder:
. . . that during the period from January
31, 1951 to June 8, 1953, it sold logs to
Japanese firms at prices FOB Vessel
Magallanes, Agusan (in some cases FOB
Vessel, Nasipit, also in Agusan); that the
FOB prices included costs of loading,
wharfage stevedoring and other costs in
the Philippines; that the quality, quantity
and measurement specifications of the
logs were certified by the Bureau of
Forestry; that the freight was paid by the
Japanese buyers; and the payments of the
logs were effected by means of
irrevocable letters of credit in favor of
petitioner and payable through the
Philippine National Bank or any other bank
named by it.
Upon investigation by the Bureau of
Internal Revenue, it was ascertained that
no sales tax return was filed by the
petitioner and neither did it pay the

corresponding tax on the sales. On the


basis of agent Antonio Mole's report dated
September 17, 1957, respondent, on
August 27, 1958, determined against
petitioner the sum of P40,004.01
representing sales tax, surcharge and
compromise penalty on its sales [tax,
surcharge and compromise penalty on its
sales] of logs from January 1951 to June
1953 pursuant to Sections 183, 186 and
209 of the National Internal Revenue Code
(Exhibit "E", p. 14, CTA rec. & p. 14, BIR
rec.). And in consequence of a
reinvestigation, respondent, on November
6, 1958, amended the amount of the
previous assessment to P38,917.74 (Exh.
"F", p. 52, BIR rec.). Subsequent requests
for reconsideration of the amended
assessment having been denied (Exh. "G",
p. 55, BIR rec.; Exh. "H", pp. 75-76, BIR
rec.: Exh. "I", pp. 79-80, BIR rec.; Exh. "J",
p. 81, BIR rec.), petitioner filed the instant
petition for review on November 7, 1960.
On the bases of the above-quoted findings and
circumstances, the lower court upheld the legality
and correctness of the amended assessment of
the sales tax and surcharge, ruling that the sales
in question, in the light of our previous decisions 1,
were domestic or "local" sales, and, therefore,
subject to sales tax under the provision of section
186 of the Tax Code, as amended by Republic
Acts Nos. 558 and 594; and that the assessment
thereof was made well within the ten-year period
prescribed by Section 332(a) of the same Code,
since petitioner herein omitted to file its sales tax
returns for the years 1951, 1952 and 1953, and
this omission was discovered only on September
17, 1957. The imposition of the compromise
penalty was, however, eliminated therefrom for
want of agreement between the taxpayer and the
Collector (now Commissioner) of Internal
Revenue. A motion to reconsider said decision
having been denied, petitioner herein interposed
the present appeal before this Court.
The issues presented in this appeal are: whether
or not petitioner herein is liable to pay the 5%
sales tax as then prescribed by Section 186 of the
Tax Code on its sales of logs to the Japanese
buyers; and whether or not the assessment
thereof was made within the prescriptive period
provided by law therefor.1wph1.t
On the first issue, petitioner herein insists that
the circumstances enumerated in the above
finding, which this Court had, in previous
decisions (Cf. footnote [1]), considered as
determinative of the place of transfer of
ownership of the logs sold, for purposes of
taxation, are not in themselves evidentiary
indications to show that the parties intended the
title of the logs to pass to the Japanese buyers in
Japan. Thus, it points out that the "FOB" feature

of the sales contract was made only to fix its


price and not to fix the place of delivery; that the
requirement of certification of quality, quantity,
and measurement specifications of the logs by
local authorities was done to comply with local
laws, rules, and regulations, and was not a part of
the sales arrangement; that the payment of
freight by the Japanese buyers is not an
uncommon feature of "FOB" shipments; and that
the payment of prices by means of irrevocable
letters of credit is but a common established
business practice to secure payment of the price
to the seller. It also insists that, even assuming
that the "FOB" feature of the disputed sales
determines the situs of transfer of ownership, the
same is merely a prima facie presumption which
yields to contrary proof such as that the logs
were made deliverable to the "order of the
shipper" and the logs were shipped at the risk of
the shipper, which circumstances, if considered,
would negate the above implications. Hence,
petitioner herein contends that the disputed sales
were consummated in Japan, and, therefore, not
subject to the taxing jurisdiction of our
Government.
The above contentions of petitioner are devoid of
merit. In a decided case with practically identical
set of facts obtaining in the case at bar, this
Court declared:
. . . it is admitted that the agreed price
was "F.O.B. Agusan", thus indicating,
although prima facie, that the parties
intended the title to pass to the buyer
upon delivery of the logs in Agusan; on
board the vessels that took the goods to
Japan. Moreover, said prima facie proof
was bolstered up by the following
circumstances, namely:
1. Irrevocable letters of credit were
opened by the Japanese buyers in favor of
the petitioners.
2. Payment of freight charges of every
shipment by the Japanese buyers.
3. The Japanese buyers chartered the
ships that carried the logs they purchased
from the Philippines to Japan.
4. The Japanese buyers insured the
shipment of logs and collected the
insurance coverage in case of loss in
transit.

5. The petitioner collected the purchase


price of every shipment of logs by
surrendering the covering letter of credit,
bill of lading, which was indorsed in blank,
tally sheet, invoice and export entry, to
the corresponding bank in Manila of the
Japanese agent bank with whom the
Japanese buyers opened letters of credit.
6. In case of natural defects in logs
shipped to the buyers discovered in Japan,
instead of returning such defective logs,
accepted them, but were granted a
corresponding credit based on the
contract price.
7. The logs purchased by the Japanese
buyers were measured by a representative
of the Director of Forestry and such
measurement was final, thereby making
the Government of the Philippines a sort
of agent of the Japanese buyers.
Upon the foregoing facts and authority of Bislig
(Bay) Lumber Co., Inc. vs. Collector of Internal
Revenue, G.R. No. L-13186 (January 28, 1961),
Misamis Lumber Co., Inc. vs. Collector of Internal
Revenue (56 Off. Gaz. 517) and Western
Mindanao Lumber Development Co., Inc. vs.
Court of Tax Appeals, et al. (G.R. No. L-11710,
June 30, 1958), it is clear that said export sales
had been consummated in the Philippines and
were, accordingly, subject to sales tax therein."
(Taligaman Lumber Co., Inc. vs. Collector of
Internal Revenue, G.R. No. L-15716, March 31,
1962).
With respect to petitioner's contention that there
are proofs to rebut the prima facie finding and
circumstances that the disputed sales were
consummated here in the Philippines, we find
that the allegation is not borne out by the law or
the evidence.
That the specification in the bill of lading to the
effect that the goods are deliverable to the order
of the seller or his agent does not necessarily
negate the passing of title to the goods upon
delivery to the carrier is clear from the second
part of paragraph 2 of Article 1503 of the Civil
Code of the Philippines (which appellant's counsel
improperly omits from his citation):
Where goods are shipped, and by the bill
of lading the goods are deliverable to the
seller or his agent, or to the order of the
seller or of his agent, the seller thereby
reserves the ownership in the goods. But,
if except for the form of the bill of lading,
the ownership would have passed to the
buyer on shipment of the goods, the
sellers's property in the goods shall be
deemed to be only for the purpose of

securing performance by the buyer of his


obligations under the contract.
Moreover, it has been "a settled rule that in
petitions to review decisions of the Court of Tax
Appeals, only questions of law may be raised and
may be passed upon by this Court" (Gutierrez vs.
Court of Tax Appeals & Collector of Internal
Revenue vs. Gutierrez, G.R. Nos. L-7938 & L-9771,
May 21, 1957, cited in Sanchez vs. Commissioner
of Customs, G.R. No. L-8556, September 30,
1957); and it having been found that there is no
proof to substantiate the foregoing contention of
petitioner, the same should also be ruled as
devoid of merit.
On the second issue, petitioner avers that the
filing of its income tax returns, wherein the
proceeds of the disputed sales were declared, is
substantial compliance with the requirement of
filing a sales tax return, and, if there should be
deemed a return filed, Section 331, and not
Section 332(a), of the Tax Code providing for a
five-year prescriptive period within which to make
an assessment and collection of the tax in
question from the time the return was deemed
filed, should be applied to the case at bar. Since
petitioner filed its income tax returns for the
years 1951, 1952 and 1953, and the assessment
was made in 1957 only, it further contends that
the assessment of the sales tax corresponding to
the years 1951 and 1952 has already prescribed
for having been made outside the five-year
period prescribed in Section 331 of the Tax Code
and should, therefore, be deducted from the
assessment of the deficiency sales tax made by
respondent.
The above contention has already been raised
and rejected as not meritorious in a previous case
decided by this Court. Thus, we held that an
income tax return cannot be considered as a
return for compensating tax for purposes of
computing the period of prescription under
Section 331 of the Tax Code, and that the
taxpayer must file a return for the particular tax
required by law in order to avail himself of the
benefits of Section 331 of the Tax Code;
otherwise, if he does not file a return, an
assessment may be made within the time stated
in Section 332(a) of the same Code (Bisaya Land
Transportation Co., Inc. vs. Collector of Internal
Revenue & Collector of Internal Revenue vs.
Bisaya Land Transportation Co., Inc., G.R. Nos. L12100 & L-11812, May 29, 1959). The principle
enunciated in this last cited case is applicable by
analogy to the case at bar.
It being undisputed that petitioner failed to file a
return for the disputed sales corresponding to the
years 1951, 1952 and 1953, and this omission
was discovered only on September 17, 1957, and
that under Section 332(a) of the Tax Code
assessment thereof may be made within ten (10)

years from and after the discovery of the


omission to file the return, it is evident that the
lower court correctly held that the assessment
and collection of the sales tax in question has not
yet prescribed.
Wherefore, the decision appealed from should be,
as it is hereby affirmed, with costs against
petitioner.
Bengzon, C.J., Bautista Angelo, Concepcion,
Barrera, Dizon, Regala, Makalintal, Bengzon, J.P.,
Zaldivar and Sanchez, JJ., concur.

Republic of the Philippines


SUPREME COURT
Manila
EN BANC
G.R. No. L-19727

May 20, 1965

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
PHOENIX ASSURANCE CO., LTD., respondent.
----------------------------G.R. No. L-19903

May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Office of the Solicitor General for petitioner-respondent
Commissioner of Internal Revenue.
Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V.
Abela & J. M. Castillo for respondent-petitioner Phoenix
Assurance Co., Ltd.
BENGZON, J.P., J.:
From a judgment of the Court of Tax Appeals in C.T.A. Cases
Nos. 305 and 543, consolidated and jointly heard therein,
these two appeals were taken. Since they involve the same
facts and interrelated issues, the appeals are herein decided
together.
Phoenix Assurance Co., Ltd., a foreign insurance corporation
organized under the laws of Great Britain, is licensed to do
business in the Philippines with head office in London.
Through its head office, it entered in London into worldwide
reinsurance treaties with various foreign insurance
companies. It agree to cede a portion of premiums received
on original insurances underwritten by its head office,
subsidiaries, and branch offices throughout the world, in
consideration for assumption by the foreign insurance
companies of an equivalent portion of the liability from such
original insurances.1wph1.t

Pursuant to such reinsurance treaties, Phoenix Assurance Co.,


Ltd., ceded portions of the premiums it earned from its
underwriting business in the Philippines, as follows:
Year

On August 1, 1958 the Bureau of Internal Revenue released


the following assessment for deficiency income tax for the
years 1952 and 1954 against Phoenix Assurance Co., Ltd.:

Amount Ceded

1952

1952

P316,526.75

1953

P246,082.04

1954

P203,384.69

Net income per


audited return
Unallowable deduction & additional income:
Overclaimed Head Office expenses:

upon which the Commissioner of Internal Revenue, by letter of


May 6, 1958, assessed the following withholding tax:
Year

Withholding Tax

1952

P 75,966.42

1953

59,059.68

1954

48,812.32

Total

P183,838.42
=============

Amount
claimed . . . . . . . .
....

P 35,912.25

Amount
allowed . . . . . . . .
....

20,085.90

Net income per


investigation
Tax due thereon

====
1954

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its


Philippine income tax return for 1950, claiming therein,
among others, a deduction of P37,147.04 as net addition to
marine insurance reserve equivalent to 40% of the gross
marine insurance premiums received during the year. The
Commissioner of Internal Revenue disallowed P11,772.57 of
such claim for deduction and subsequently assessed against
Phoenix Assurance Co., Ltd. the sum of P1,884.00 as
deficiency income tax. The disallowance resulted from the
fixing by the Commissioner of the net addition to the marine
insurance reserve at 100% of the marine insurance premiums
received during the last three months of the year. The
Commissioner assumed that "ninety and third, days are
approximately the length of time required before shipments
reach their destination or before claims are received by the
insurance companies."
On April 1, 1953, Phoenix Assurance Co., Ltd. filed its
Philippine income tax return for 1952, declaring therein a
deduction from gross income of P35,912.25 as part of the
head office expenses incurred for its Philippine business,
computed at 5% on its gross Philippine income.
On August 30, 1955 it amended its income tax return for 1952
by excluding from its gross income the amount of
P316,526.75 representing reinsurance premiums ceded to
foreign reinsurers and further eliminating deductions
corresponding to the coded premiums. The amended return
showed an income tax due in the amount of P2,502.00. The
Commissioner of Internal Revenue disallowed P15,826.35 of
the claimed deduction for head office expenses and assessed
a deficiency tax of P5,667.00 on July 24, 1958.

Net income per


audited
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount
claimed . . . . . . . .
....

P29,624.73

Amount
allowed . . . . . . . .
....

19,455.50

Net income per


investigation
Tax due thereon
Less: amount already assessed
DEFICIENCY TAX DUE

====
The above assessment resulted from the disallowance of a
portion of the deduction claimed by Phoenix Assurance Co.,
Ltd. as head office expenses allocable to its business in the
Philippines fixed by the Commissioner at 5% of the net
Philippine income instead of 5% of the gross Philippine income
as claimed in the returns.

On April 30, 1954, Phoenix Assurance Co., Ltd. filed its


Philippine income tax return for 1953 and claimed therein a
deduction from gross income of P33,070.88 as head office
expenses allocable to its Philippine business, equivalent to
5%, of its gross Philippine income. On August 30, 1955 it
amended its 1953 income tax return to exclude from its gross
income the amount of P246,082.04 representing reinsurance
premiums ceded to foreign reinsurers. At the same time, it
requested the refund of P23,409.00 as overpaid income tax
for 1953. To avoid the prescriptive period provided for in
Section 306 of the Tax Code, it filed a petition for review on
April 11, 1956 in the Court of Tax Appeals praying for such
refund. After verification of the amended income tax return
the Commissioner of Internal Revenue disallowed P12,304.10
of the deduction representing head office expenses allocable
to Philippine business thereby reducing the refundable
amount to P20,180.00.

Phoenix Assurance Co., Ltd. protested against the aforesaid


assessments for withholding tax and deficiency income tax.
However, the Commissioner of Internal Revenue denied such
protest. Subsequently, Phoenix Assurance Co., Ltd. appealed
to the Court of Tax Appeals. In a decision dated February 14,
1962, the Court of Tax Appeals allowed in full the decision
claimed by Phoenix Assurance Co., Ltd. for 1950 as net
addition to marine insurance reserve; determined the
allowable head office expenses allocable to Philippine
business to be 5% of the net income in the Philippines;
declared the right of the Commissioner of Internal Revenue to
assess deficiency income tax for 1952 to have prescribed;
absolved Phoenix Assurance Co., Ltd. from payment of the
statutory penalties for non-filing of withholding tax return;
and, rendered the following judgment:

On April 29, 1955, Phoenix Assurance Co., Ltd. filed its


Philippine income tax return for 1954 claiming therein, among
others, a deduction from gross income of P99,624.75 as head
office expenses allocable to its Philippine business, computed
at 5% of its gross Philippine income. It also excluded from its
gross income the amount of P203,384.69 representing
reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines.

WHEREFORE, petitioner Phoenix Assurance


Company, Ltd. is hereby ordered to pay the
Commissioner of Internal Revenue the respective
amounts of P75,966.42, P59,059.68 and P48,812.32,
as withholding tax for the years 1952, 1953 and
1954, and P2,847.00 as income tax for 1954, or the
total sum of P186,685.42 within thirty (30) days from
the date this decision becomes final. Upon the other
hand, the respondent Commissioner is ordered to
refund to petitioner the sum of P20,180.00 as
overpaid income tax for 1953, which sum is to be

deducted from the total sum of P186,685.42 due as


taxes.
If any amount of the tax is not paid within the time
prescribed above, there shall be collected a
surcharge of 5% of the tax unpaid, plus interest at
the rate of 1% a month from the date of delinquency
to the date of payment, provided that the maximum
amount that may be collected as interest shall not
exceed the amount corresponding to a period of
three (3) years. Without pronouncement as to costs.
Phoenix Assurance Co., Ltd. and the Commissioner of Internal
Revenue have appealed to this Court raising the following
issues: (1) Whether or not reinsurance premiums ceded to
foreign reinsurers not doing business in the Philippines
pursuant to reinsurance contracts executed abroad are
subject to withholding tax; (2) Whether or not the right of the
Commissioner of Internal Revenue to assess deficiency
income tax for the year 1952 against Phoenix Assurance Co.,
Ltd., has prescribed; (3) Whether or not the deduction of
claimed by the Phoenix Assurance Co., Ltd.as net addition to
reserve for the year 1950 is excessive; (4) Whether or not the
deductions claimed by Phoenix Assurance Co., Ltd. for head
office expenses allocable to Philippine business for the years
1952, 1953 and 1954 are excessive.
The question of whether or not reinsurance premiums ceded
to foreign reinsurers not doing business in the Philippines
pursuant to contracts executed abroad are income from
sources within the Philippines subject to withholding tax under
Sections 53 and 54 of the Tax Code has already been resolved
in the affirmative in British Traders' Insurance Co., Ltd.v.
Commisioner of Internal Revenue, L-20501, April 30, 1965. 1
We come to the issue of prescription. Phoenix Assurance Co.,
Ltd. filed its income tax return for 1952 on April 1, 1953
showing a loss of P199,583.93. It amended said return on
August 30, 1955 reporting a tax liability of P2,502.00. On July
24, 1958, after examination of the amended return, the
Commissioner of Internal Revenue assessed deficiency
income tax in the sum of P5,667.00. The Court of Tax Appeals
found the right of the Commissioner of Internal Revenue
barred by prescription, the same having been exercised more
than five years from the date the original return was filed. On
the other hand, the Commissioner of Internal Revenue insists
that his right to issue the assessment has not prescribed
inasmuch as the same was availed of before the 5-year period
provided for in Section 331 of the Tax Code expired, counting
the running of the period from August 30, 1955, the date
when the amended return was filed.
Section 331 of the Tax Code, which limits the right of the
Commissioner of Internal Revenue to assess income tax within
five years from the Filipino of the income tax return, states:
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.
The question is: Should the running of the prescriptive period
commence from the filing of the original or amended return?
The Court of Tax Appears that the original return was a
complete return containing "information on various items of
income and deduction from which respondent may
intelligently compute and determine the tax liability of
petitioner, hence, the prescriptive period should be counted
from the filing of said original return. On the other hand, the
Commissioner of Internal Revenue maintains that:
"... the deficiency income tax in question could not
possibly be determined, or assessed, on the basis of
the original return filed on April 1, 1953, for
considering that the declared loss amounted to
P199,583.93, the mere disallowance of part of the
head office expenses could not probably result in
said loss being completely wiped out and Phoenix

being liable to deficiency tax. Not until the amended


return was filed on August 30, 1955 could the
Commissioner assess the deficiency income tax in
question."
Accordingly, he would wish to press for the counting of the
prescriptive period from the filing of the amended return.
To our mind, the Commissioner's view should be sustained.
The changes and alterations embodied in the amended
income tax return consisted of the exclusion of reinsurance
premiums received from domestic insurance companies by
Phoenix Assurance Co., Ltd.'s London head office, reinsurance
premiums ceded to foreign reinsurers not doing business in
the Philippines and various items of deduction attributable to
such excluded reinsurance premiums thereby substantially
modifying the original return. Furthermore, although the
deduction for head office expenses allocable to Philippine
business, whose disallowance gave rise to the deficiency tax,
was claimed also in the original return, the Commissioner
could not have possibly determined a deficiency tax
thereunder because Phoenix Assurance Co., Ltd. declared a
loss of P199,583.93 therein which would have more than
offset such disallowance of P15,826.35. Considering that the
deficiency assessment was based on the amended return
which, as aforestated, is substantially different from the
original return, the period of limitation of the right to issue the
same should be counted from the filing of the amended
income tax return. From August 30, 1955, when the amended
return was filed, to July 24, 1958, when the deficiency
assessment was issued, less than five years elapsed. The right
of the Commissioner to assess the deficiency tax on such
amended return has not prescribed.
To strengthen our opinion, we believe that to hold otherwise,
we would be paving the way for taxpayers to evade the
payment of taxes by simply reporting in their original return
heavy losses and amending the same more than five years
later when the Commissioner of Internal Revenue has lost his
authority to assess the proper tax thereunder. The object of
the Tax Code is to impose taxes for the needs of the
Government, not to enhance tax avoidance to its prejudice.
We next consider Phoenix Assurance Co., Ltd.'s claim for
deduction of P37,147.04 for 1950 representing net addition to
reserve computed at 40% of the marine insurance premiums
received during the year. Treating said said deduction to be
excessive, the Commissioner of Internal Revenue reduced the
same to P25,374.47 which is equivalent to 100% of all marine
insurance premiums received during the last months of the
year.
Paragraph (a) of Section 32 of the Tax Code states:
SEC. 32. Special provisions regarding income and
deductions of insurance companies, whether
domestic or foreign. (a) Special deductions
allowed to insurance companies. In the case of
insurance companies, except domestic life insurance
companies and foreign life insurance companies
doing business in the Philippines, the net additions, if
any, required by law to be made within the year to
reserve funds and the sums other than dividends
paid within the year on policy and annuity contracts
may be deducted from their gross income: Provided,
however, That the released reserve be treated as
income for the year of release.
Section 186 of the Insurance Law requires the setting up of
reserves for liability on marine insurance:
SEC. 186. ... Provided, That for marine risks the
insuring company shall be required to charge as the
liability for reinsurance fifty per centum of the
premiums written in the policies upon yearly risks,
and the full premiums written in the policies upon all
other marine risks not terminated (Emphasis
supplied.)
The reserve required for marine insurance is determined on
two bases: 50% of premiums under policies on yearly risks
and 100% of premiums under policies of marine risks not
terminated during the year. Section 32 (a) of the Tax Code
quoted above allows the full amount of such reserve to be
deducted from gross income.

It may be noteworthy to observe that the formulas for


determining the marine reserve employed by Phoenix
Assurance Co., Ltd. and the Commissioner of Internal Revenue
40% of premiums received during the year and 100% of
premiums received during the last three months of the year,
respectively do not comply with Section 186. Said
determination runs short of the requirement. For purposes of
the Insurance Law, this Court therefore cannot countenance
the same. The reserve called for in Section 186 is a safeguard
to the general public and should be strictly followed not only
because it is an express provision but also as a matter of
public policy. However, for income tax purposes a taxpayer is
free to deduct from its gross income a lesser amount, or not
to claim any deduction at all. What is prohibited by the
income tax law is to claim a deduction beyond the amount
authorized therein.
Phoenix Assurance Co., Ltd.'s claim for deduction of
P37,147.04 being less than the amount required in Section
186 of the Insurance Law, the same cannot be and is not
excessive, and should therefore be fully allowed. *
We come now to the controversy on the taxpayer's claim for
deduction on head office expenses incurred during 1952,
1953, and 1954 allocable to its Philippine business computed
at 5% of its gross income in the Philippines The Commissioner
of Internal Revenue redetermined such deduction at 5% on
Phoenix Assurance Co., Ltd's net income thereby partially
disallowing the latter's claim. The parties are agreed as to the
percentage 5% but differ as to the basis of computation.
Phoenix Assurance Co. Lt. insists that the 5% head office
expenses be determined from the gross income, while the
Commissioner wants the computation to be made on the net
income. What, therefore, needs to be resolved is: Should the
5% be computed on the gross or net income?
The record shows that the gross income of Phoenix Assurance
Co., Ltd. consists of income from its Philippine business as
well as reinsurance premiums received for its head office in
London and reinsurance premiums ceded to foreign
reinsurance. Since the items of income not belonging to its
Philippine business are not taxable to its Philippine branch,
they should be excluded in determining the head office
expenses allowable to said Philippine branch. This conclusion
finds support in paragraph 2, subsection (a), Section 30 of the
Tax Code, quoted hereunder:
(2) Expenses allowable to non-resident alien
individuals and foreign corporations. In the case of a
non-resident alien individual or a foreign corporation,
the expenses deductible are the, necessary expenses
paid or incurred in carrying on any business or trade
conducted within the Philippines exclusively.
(Emphasis supplied.)
Consequently, the deficiency assessments for 1952, 1953 and
1954, resulting from partial disallowance of deduction
representing head office expenses, are sustained.
Finally, the Commissioner of Internal Revenue assails the
dispositive portion of the Tax Court's decision limiting the
maximum amount of interest collectible for deliquency of an
amount corresponding to a period of three years. He contends
that since such limitation was incorporated into Section 51 of
the Tax Code by Republic Act 2343 which took effect only on
June 20, 1959, it must not be applied retroactively on
withholding tax for the years 1952, 1953 and 1954.
The imposition of interest on unpaid taxes is one of the
statutory penalties for tax delinquency, from the payments of
which the Court of Tax Appeals absolved the Phoenix
Assurance Co., Ltd. on the equitable ground that the latter's
failure to pay the withholding tax was due to the
Commissioner's opinion that no withholding tax was due.
Consequently, the taxpayer could be held liable for the
payment of statutory penalties only upon its failure to comply
with the Tax Court's judgment rendered on February 14. 1962,
after Republic Act 2343 took effect. This part of the ruling of
the lower court ought not to be disturbed.
WHEREFORE, the decision appealed from is modified, Phoenix
Assurance Co., Ltd. is hereby ordered to pay the
Commissioner, of Internal Revenue the amount of P75,966.42,
P59,059.68 and P48,812.32 as withholding tax for the years
1952, 1953 and 1954, respectively, and the sums of
P5,667.00 and P2,847.00 as income tax for 1952 and 1954 or
a total of P192,352.42. The Commissioner of Internal Revenue
is ordered to refund to Phoenix Assurance Co., Ltd. the

amount of P20,180.00 as overpaid income tax for 1953, which


should be deducted from the amount of P192,352.42.
If the amount of P192,352.42 or a portion thereof is not paid
within thirty (30) days from the date this judgment becomes
final, there should be collected a surcharge and interest as
provided for in Section 51(c) (2) of the Tax Code. No costs. It is
so ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L.,
Barrera, Paredes, Dizon, Regala, Makalintal and Zaldivar, JJ.,
concur.

Republic of the Philippines


SUPREME COURT
Manila

1/2 of Conjugal, 130 parcels


assessed at

P121,425.00

EN BANC
G.R. No. L-19495

November 24, 1966


Total

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
LILIA YUSAY GONZALES and THE COURT OF TAX
APPEALS, respondents.

The fair market value of the real properties was computed by


increasing the assessed value by forty percent.

Office of the Solicitor General for the petitioner.


Ramon A. Gonzales for respondent Lilia Yusay Gonzales.
BENGZON, J.P., J.:

Based on the above findings, the Bureau of Internal Revenue


assessed on October 29, 1953 estate and inheritance taxes in
the sums of P6,849.78 and P16,970.63, respectively.

Matias Yusay, a resident of Pototan, Iloilo, died intestate on


May 13, 1948, leaving two heirs, namely, Jose S. Yusay, a
legitimate child, and Lilia Yusay Gonzales, an acknowledged
natural child. Intestate proceedings for the settlement of his
estate were instituted in the Court of First Instance of Iloilo
(Special Proceedings No. 459). Jose S. Yusay was therein
appointed administrator.

On January 25, 1955 the Bureau of Internal Revenue increased


the assessment to P8,225.89 as estate tax and P22,117.10 as
inheritance tax plus delinquency interest and demanded
payment thereof on or before February 28, 1955. Meanwhile,
on February 16, 1955, the Court of First Instance of Iloilo
required Jose S. Yusay to show proof of payment of said estate
and inheritance taxes.

On May 11, 1949 Jose S. Yusay filed with the Bureau of


Internal Revenue an estate and inheritance tax return
declaring therein the following properties:

On March 3, 1955 Jose S. Yusay requested an extension of


time within which to pay the tax. He posted a surety bond to
guarantee payment of the taxes in question within one year.
The Commissioner of Internal Revenue however denied the
request. Then he issued a warrant of distraint and levy which
he transmitted to the Municipal Treasurer of Pototan for
execution. This warrant was not enforced because all the
personal properties subject to distraint were located in Iloilo
City.

Personal properties

Palay
Carabaos

On May 20, 1955 the Provincial Treasurer of Iloilo requested


the BIR Provincial Revenue Officer to furnish him copies of the
assessment notices to support a motion for payment of taxes
P7,444.00
which the Provincial Fiscal would file in Special Proceedings
No. 459 before the Court of First Instance of Iloilo. The papers
requested were sent by the Commissioner of Internal Revenue
to the Provincial Revenue Officer of Iloilo to be transmitted to
the Provincial Treasurer. The records do not however show
whether the Provincial Fiscal filed a claim with the Court of
First Instance for the taxes due.

P6,444.00
1,000.00

Real properties:
Capital, 74 parcels )

Conjugal 19 parcels)

On May 30, 1956 the commissioner appointed by the Court of


First Instance for the purpose, submitted a reamended project
of partition which listed the following properties:
P179,760.00

assessed at

Total gross estate

P187,204.00

The return mentioned no heir.


Upon investigation however the Bureau of Internal Revenue
found the following properties:

Personal properties:

Buick Sedan
Packard car
Aparadors
Cash in Bank (PNB)
Palay
Carabaos

P8,100.00
2,000.00
500.00
8,858.46
6,444.00
1,500.00

P27,402.46

P324,797.21
4,500.00

P329,297.21

Personal properties:
Real properties:

Palay
Carabaos
Packard Automobile
2 Aparadors

Real properties:
Capital, 25 parcels assessed at

P6,444.00
1,500.00
2,000.00
500.00

P87,715.32

Land, 174 parcels


assessed at
Buildings

Total

P356,699.67

More than a year later, particularly on July 12, 1957, an agent


of the Bureau of Internal Revenue apprised the Commissioner

of Internal Revenue of the existence of said reamended


project of partition. Whereupon, the Internal Revenue
Commissioner caused the estate of Matias Yusay to be
reinvestigated for estate and inheritance tax liability.
Accordingly, on February 13, 1958 he issued the following
assessment:

Estate tax

P16,246.04

5% surcharge

411.29

Delinquency
interest

11,868.90

Compromise
No notice of death
Late payment

P15.00
40.00

Total

Inheritance Tax

5% surcharge

55.00

P28,581.23

P38,178.12

1,105.86

who administered the remaining one-third, and her willingness


to pay the taxes corresponding to her share, and praying for
deferment of the resolution on the motion for the payment of
taxes until after a new assessment corresponding to her share
was issued.
On November 17, 1959 Lilia Yusay disputed the legality of the
assessment dated February 13, 1958. She claimed that the
right to make the same had prescribed inasmuch as more
than five years had elapsed since the filing of the estate and
inheritance tax return on May 11, 1949. She therefore
requested that the assessment be declared invalid and
without force and effect. This request was rejected by the
Commissioner in his letter dates January 20, 1960, received
by Lilia Yusay on March 14, 1960, for the reasons, namely, (1)
that the right to assess the taxes in question has not been lost
by prescription since the return which did not name the heirs
cannot be considered a true and complete return sufficient to
start the running of the period of limitations of five years
under Section 331 of the Tax Code and pursuant to Section
332 of the same Code he has ten years within which to make
the assessment counted from the discovery on September 24,
1953 of the identity of the heirs; and (2) that the estate's
administrator waived the defense of prescription when he filed
a surety bond on March 3, 1955 to guarantee payment of the
taxes in question and when he requested postponement of
the payment of the taxes pending determination of who the
heirs are by the settlement court.
On April 13, 1960 Lilia Yusay filed a petition for review in the
Court of Tax Appeals assailing the legality of the assessment
dated February 13, 1958. After hearing the parties, said Court
declared the right of the Commissioner of Internal Revenue to
assess the estate and inheritance taxes in question to have
prescribed and rendered the following judgment:
WHEREFORE, the decision of respondent assessing
against the estate of the late Matias Yusay estate and
inheritance taxes is hereby reversed. No costs.
The Commissioner of Internal Revenue appealed to this Court
and raises the following issues:
1. Was the petition for review in the Court of Tax Appeals
within the 30-day period provided for in Section 11 of Republic
Act 1125?

Delinquency
interest

28,808.75

Compromise for late payment

Total

Total estate and inheritance


taxes

50.00

P69,142.73

P97,723.96

Like in previous assessments, the fair market value of the real


properties was arrived at by adding 40% to the assessed
value.
In view of the demise of Jose S. Yusay, said assessment was
sent to his widow, Mrs. Florencia Piccio Vda. de Yusay, who
succeeded him in the administration of the estate of Matias
Yusay.
No payment having been made despite repeated demands,
the Commissioner of Internal Revenue filed a proof of claim
for the estate and inheritance taxes due and a motion for its
allowance with the settlement court in voting priority of lien
pursuant to Section 315 of the Tax Code.
On June 1, 1959, Lilia Yusay, through her counsel, Ramon
Gonzales, filed an answer to the proof of claim alleging nonreceipt of the assessment of February 13, 1958, the existence
of two administrators, namely Florencia Piccio Vda. de Yusay
who administered two-thirds of the estate, and Lilia Yusay,

2. Could the Court of Tax Appeals take cognizance of Lilia


Yusay's appeal despite the pendency of the "Proof of Claim"
and "Motion for Allowance of Claim and for an Order of
Payment of Taxes" filed by the Commissioner of Internal
Revenue in Special Proceedings No. 459 before the Court of
First Instance of Iloilo?
3. Has the right of the Commissioner of Internal Revenue to
assess the estate and inheritance taxes in question
prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the
assessment of February 13, 1958. On March 14, 1960 she
received the decision of the Commissioner of Internal Revenue
on the disputed assessment. On April 13, 1960 she filed her
petition for review in the Court of Tax Appeals. Said Court
correctly held that the appeal was seasonably interposed
pursuant to Section 11 of Republic Act 1125. We already ruled
in St. Stephen's Association v. Collector of Internal Revenue,1
that the counting of the thirty days within which to institute
an appeal in the Court of Tax Appeals should commence from
the date of receipt of the decision of the Commissioner on the
disputed assessment, not from the date the assessment was
issued.
Accordingly, the thirty-day period should begin running from
March 14, 1960, the date Lilia Yusay received the appealable
decision. From said date to April 13, 1960, when she filed her
appeal in the Court of Tax Appeals, is exactly thirty days.
Hence, the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the Court of
Tax Appeals to take cognizance of Lilia Yusay's appeal on the
ground of lis pendens. He maintains that the pendency of his
motion for allowance of claim and for order of payment of
taxes in the Court of First Instance of Iloilo would preclude the
Court of Tax Appeals from acquiring jurisdiction over Lilia
Yusay's appeal. This contention lacks merit.

Lilia Yusay's cause seeks to resist the legality of the


assessment in question. Should she maintain it in the
settlement court or should she elevate her cause to the Court
of Tax Appeals? We say, she acted correctly by appealing to
the latter court. An action involving a disputed assessment for
internal revenue taxes falls within the exclusive jurisdiction of
the Court of Tax Appeals.2 It is in that forum, to the exclusion
of the Court of First Instance,3 where she could ventilate her
defenses against the assessment.
Moreover, the settlement court, where the Commissioner
would wish Lilia Yusay to contest the assessment, is of limited
jurisdiction. And under the Rules,4 its authority relates only to
matters having to do with the settlement of estates and
probate of wills of deceased persons.5 Said court has no
jurisdiction to adjudicate the contentions in question, which
assuming they do not come exclusively under the Tax Court's
cognizance must be submitted to the Court of First Instance
in the exercise of its general jurisdiction.6
We now come to the issue of prescription. Lilia Yusay claims
that since the latest assessment was issued only on February
13, 1958 or eight years, nine months and two days from the
filing of the estate and inheritance tax return, the
Commissioner's right to make it has expired. She would rest
her stand on Section 331 of the Tax Code which limits the
right of the Commissioner to assess the tax within five years
from the filing of the return.
The Commissioner claims that fraud attended the filing of the
return; that this being so, Section 332(a) of the Tax Code
would apply.7 It may be well to note that the assessment letter
itself (Exhibit 22) did not impute fraud in the return with intent
to evade payment of tax. Precisely, no surcharge for fraud
was imposed. In his answer to the petition for review filed by
Lilia Yusay in the Court of Tax Appeals, the Commissioner
alleged no fraud. Instead, he broached the insufficiency of the
return as barring the commencement of the running of the
statute of limitations. He raised the point of fraud for the first
time in the proceedings, only in his memorandum filed with
the Tax Court subsequent to resting his case. Said Court
rejected the plea of fraud for lack of allegation and proof, and
ruled that the return, although not accurate, was sufficient to
start the period of prescription.
Fraud is a question of fact.8 The circumstances constituting it
must be alleged and proved in the court below. 9 And the
finding of said court as to its existence and non-existence is
final unless clearly shown to be erroneous.10 As the court a
quo found that no fraud was alleged and proved therein, We
see no reason to entertain the Commissioner's assertion that
the return was fraudulent.
The conclusion, however, that the return filed by Jose S. Yusay
was sufficient to commence the running of the prescriptive
period under Section 331 of the Tax Code rests on no solid
ground.
Paragraph (a) of Section 93 of the Tax Code lists the
requirements of a valid return. It states:
(a) Requirements.In all cases of inheritance or
transfers subject to either the estate tax or the
inheritance tax, or both, or where, though exempt
from both taxes, the gross value of the estate
exceeds three thousand pesos, the executor,
administrator, or anyone of the heirs, as the case
may be, shall file a return under oath in duplicate,
setting forth (1) the value of the gross estate of the
decedent at the time of his death, or, in case of a
nonresident not a citizen of the Philippines ; (2) the
deductions allowed from gross estate in determining
net estate as defined in section eighty-nine; (3) such
part of such information as may at the time be
ascertainable and such supplemental data as may be
necessary to establish the correct taxes.
A return need not be complete in all particulars. It is sufficient
if it complies substantially with the law. There is substantial
compliance (1) when the return is made in good faith and is
not false or fraudulent; (2) when it covers the entire period
involved; and (3) when it contains information as to the
various items of income, deduction and credit with such
definiteness as to permit the computation and assessment of
the tax.11

There is no question that the state and inheritance tax return


filed by Jose S. Yusay was substantially defective.
First, it was incomplete. It declared only ninety-three parcels
of land representing about 400 hectares and left out ninetytwo parcels covering 503 hectares. Said huge under
declaration could not have been the result of an over-sight or
mistake. As found in L-11378, supra note 7, Jose S. Yusay very
well knew of the existence of the ommited properties. Perhaps
his motive in under declaring the inventory of properties
attached to the return was to deprive Lilia Yusay from
inheriting her legal share in the hereditary estate, but
certainly not because he honestly believed that they did not
form part of the gross estate.
Second, the return mentioned no heir. Thus, no inheritance
tax could be assessed. As a matter of law, on the basis of the
return, there would be no occasion for the imposition of estate
and inheritance taxes. When there is no heir - the return
showed none - the intestate estate is escheated to the State. 12
The State taxes not itself.
In a case where the return was made on the wrong form, the
Supreme Court of the United States held that the filing thereof
did not start the running of the period of limitations.13 The
reason is that the return submitted did not contain the
necessary information required in the correct form. In this
jurisdiction, however, the Supreme Court refrained from
applying the said ruling of the United States Supreme Court in
Collector of Internal Revenue v. Central Azucarera de Tarlac,
L-11760-61, July 31, 1958, on the ground that the return was
complete in itself although inaccurate. To our mind, it would
not make much difference where a return is made on the
correct form prescribed by the Bureau of Internal Revenue if
the data therein required are not supplied by the taxpayer.
Just the same, the necessary information for the assessment
of the tax would be missing.
The return filed in this case was so deficient that it prevented
the Commissioner from computing the taxes due on the
estate. It was as though no return was made. The
Commissioner had to determine and assess the taxes on data
obtained, not from the return, but from other sources. We
therefore hold the view that the return in question was no
return at all as required in Section 93 of the Tax Code.
The law imposes upon the taxpayer the burden of supplying
by the return the information upon which an assessment
would be based.14 His duty complied with, the taxpayer is not
bound to do anything more than to wait for the Commissioner
to assess the tax. However, he is not required to wait forever.
Section 331 of the Tax Code gives the Commissioner five
years within which to make his assessment.15 Except, of
course, if the taxpayer failed to observe the law, in which case
Section 332 of the same Code grants the Commissioner a
longer period. Non-observance consists in filing a false or
fraudulent return with intent to evade the tax or in filing no
return at all.
Accordingly, for purposes of determining whether or not the
Commissioner's assessment of February 13, 1958 is barred by
prescription, Section 332(a) which is an exception to Section
331 of the Tax Code finds application.16 We quote Section
332(a):
SEC. 332. Exceptions as to period of limitation of
assessment and collection of taxes. (a) In the case
of a false or fraudulent return with intent to evade
tax or of 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.
As stated, the Commissioner came to know of the identity of
the heirs on September 24, 1953 and the huge
underdeclaration in the gross estate on July 12, 1957. From
the latter date, Section 94 of the Tax Code obligated him to
make a return or amend one already filed based on his own
knowledge and information obtained through testimony or
otherwise, and subsequently to assess thereon the taxes due.
The running of the period of limitations under Section 332(a)
of the Tax Code should therefore be reckoned from said date
for, as aforesaid, it is from that time that the Commissioner
was expected by law to make his return and assess the tax
due thereon. From July 12, 1957 to February 13, 1958, the
date of the assessment now in dispute, less than ten years

have elapsed. Hence, prescription did not abate the


Commissioner's right to issue said assessment.

Jose S. Yusay, a legitimate son, and Lilia Yusay, an


acknowledged natural child, (petitioner herein).

Anent the Commissioner's contention that Lilia Yusay is


estopped from raising the defense of prescription because she
failed to raise the same in her answer to the motion for
allowance of claim and for the payment of taxes filed in the
settlement court (Court of First Instance of Iloilo), suffice it to
state that it would be unjust to the taxpayer if We were to
sustain such a view. The Court of First Instance acting as a
settlement court is not the proper tribunal to pass upon such
defense, therefore it would be but futile to raise it therein.
Moreover, the Tax Code does not bar the right to contest the
legality of the tax after a taxpayer pays it. Under Section 306
thereof, he can pay the tax and claim a refund therefor. A
fortiori his willingness to pay the tax is no waiver to raise
defenses against the tax's legality.

Under the circumstances, we believe the return filed


on May 11, 1949 was false or fraudulent in the sense
that the value of the properties were underdeclared
and that the said return was also incomplete as the
heirs to the estate were not specified. Inasmuch as
the respondent was not furnished adequate data
upon which to base an assessment, the said return
cannot be considered a true and complete return
sufficient to start the running of the period of
limitations of five (5) years prescribed in Section 331
of the Tax Code.

WHEREFORE, the judgment appealed from is set aside and


another entered affirming the assessment of the
Commissioner of Internal Revenue dated February 13, 1958.
Lilia Yusay Gonzales, as administratrix of the intestate estate
of Matias Yusay, is hereby ordered to pay the sums of
P16,246.04 and P39,178.12 as estate and inheritance taxes,
respectively, plus interest and surcharge for delinquency in
accordance with Section 101 of the National Internal Revenue
Code, without prejudice to reimbursement from her coadministratrix, Florencia Piccio Vda. de Yusay for the latter's
corresponding tax liability. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala,
Makalintal, Sanchez and Castro, JJ., concur.
Zaldivar, J., took no part.

In the lower court the defense of the Commissioner of Internal


Revenue against Lilia Yusay Gonzales' plea of prescription,
centered on the insufficiency and fraudulence or falsity of the
return filed by Jose Yusay. The Court of Tax Appeals overruled
the Commissioner of Internal Revenue. Said the Tax Code:
The provision of Section 332(a) of the Tax Code
cannot be invoked in this case as it was neither
alleged in respondent's answer, nor proved during
the hearing that the return was false or fraudulent
with intent to evade the payment of tax. Moreover,
the failure of respondent to charge fraud and impose
the penalty thereof in the assessments made in
1953, 1955 and 1956 is an eloquent demonstration
that the filing of petitioner's transfer tax return was
not attended by falsity or fraud with intent to evade
tax.
xxx

RESOLUTION
April 24, 1967
BENGZON, J.P., J.:
Respondent Lilia Yusay Gonzales seeks reconsideration of our
decision holding her liable for the payment of P97,723.96 as
estate and inheritance taxes plus delinquency penalties as
administratrix of the intestate estate of Matias Yusay. The
grounds raised by her deserve this extended resolution.
Firstly, movant maintains that the issue of whether or not the
estate and inheritance tax return filed by Jose Yusay on May
13, 1949 was sufficient to start the running of the statute of
limitations on assessment, was neither raised in the Court of
Tax Appeals nor assigned as error before this Court. The
records in the Court of Tax Appeals however show the
contrary. Paragraph 2 of the answer filed by the Commissioner
of Internal Revenue states:
2. That he likewise admits, as alleged in paragraph 1
thereof having received the letter of the petitioner
dated November 27, 1959 (Annex "A" of the Petition
for Review), contesting the assessment of estate and
inheritance taxes levied against the Intestate Estate
of the late Matias Yusay, Special Proceedings No.
459, Court of First Instance of Iloilo, on the ground
that the said assessment has already prescribed, but
specifically denies the allegation that the assessment
have already prescribed, the truth of the matter
being that the returns filed on May 11, 1949 cannot
be considered as a true, and complete return
sufficient to start the running of the period of five (5)
years prescribed in Sec. 331 of the Tax Code;
This point was discussed in the memorandum of the
Commissioner of Internal Revenue, thus:
In the estate and inheritance tax return filed by Jose
S. Yusay (Exhibits B & 1, pp. 14-20, B.I.R. records) the
net value of the estate of the deceased was claimed
to be P203,354.00 and no inheritance tax was shown
as the heirs were not indicated. In the final
computation of the estate by an examiner of the
respondent, the net estate was found to be worth
P410,518.38 (p. 105, B.I.R. records) or about more
than twice the original amount declared in the return.
In the subsequent investigation of this case, it was
also determined that the heirs of the deceased were

xxx

xxx

But respondent urges upon us that the filing of the


return did not start the running of the five (5) year
period for the reason that the return did not disclose
the heirs of the deceased Matias Yusay, and
contained inadequate data regarding the value of the
estate. We believe that these mere omissions do not
require additional returns for the same. Altho
incomplete for being deficient on these matters, the
return cannot be regarded as a case of failure to file
a return where want of good faith and intent to evade
the tax on the part of petitioner are not charged. It
served as a sufficient notice to the Commissioner of
Internal Revenue to make his assessment and start
the running, of the period of limitation. In this
connection, it must be borne in mind that the
Commissioner is not confined to the taxpayer's
return in making assessment of the tax, and for this
purpose he may secure additional information from
other sources. As was done in the case at bar, he
sends investigators to examine the taxpayer's
records and other pertinent data. His assessment is
based upon the facts uncovered by the investigation
(Collector vs. Central Azucarera de Tarlac, G.R. Nos.
L-11760 and L-11761, July 31, 1958).
Furthermore, the failure to state the heirs in the
return can be attributed to the then unsettled conflict
raging before the probate court as to who are the
heirs of the estate. Such failure could not have been
a deliberate attempt to mislead the government in
the assessment of the correct taxes.
In his appeal, the Commissioner of Internal Revenue assigned
as third error of the Court of Tax Appeals the finding that the
assessment in question was "made beyond the five-year
statutory period provided in Section 332 (a) of the Tax Code,"
and that the right of the Commissioner of Internal Revenue to
assess the estate and inheritance taxes has already
prescribed. To sustain his side, the Commissioner ventilated in
his brief, fraud in the filing of the return, absence of certain
data from the return which prevented him from assessing
thereon the tax due and the pendency in this Court of L-11374
entitled "Intestate Estate of the late Matias Yusay, Jose C.
Yusay, Administrator vs. Lilia Yusay Gonzales" which allegedly
had the effect of suspending the running of the period of
limitations on assessment.
Clearly, therefore, it would be incorrect to say that the
question of whether or not the return filed by Jose Yusay was
sufficient to start the running of the statute of limitations to
assess the corresponding tax, was not raised by the
Commissioner in the Court of Tax Appeals and in this Court.

Second. Movant contend that contrary to Our ruling, the


return filed by Jose Yusay was sufficient to start the statute of
limitations on assessment. Inasmuch as this question was
amply discussed in Our decision sought to be reconsidered,
and no new argument was advanced, We deem it unnecessary
to pass upon the same. There is no reason for any change on
Our stand on this point.
Third. Movant insists that since she administers only one-third
of the estate of Matias Yusay, she should not be liable for the
whole tax. And she suggests that We hold the intestate estate
of Matias Yusay liable for said taxes, one-third to be paid by
Lilia Yusay Gonzales and two-thirds to be paid by Florencia P.
Vda. de Yusay.
The foregoing suggestion to require payment of two-thirds of
the total taxes by Florencia P. Vda. de Yusay is not acceptable,
for she (Florencia P. Vda. de Yusay) is not a party in this case.
It should be pointed out that Lilia Yusay Gonzales appealed
the whole assessment to the Court of Tax Appeals. Thereupon,
the Commissioner of Internal Revenue questioned her legal
capacity to institute the appeal on the ground that she
administered only one-third of the estate of Matias Yusay. In
opposition, she espoused the view, which was sustained by
the Tax Court, that in co-administration, the administratrices
are regarded as one person and the acts of one of them in
relation to the regular administration of the estate are
deemed to be the acts of all; hence, each administratrix can
represent the whole estate. In advancing such proposition,
Lilia Yusay Gonzales represented the whole estate and hoped
to benefit from the favorable outcome of the case. For the
same reason that she represented her co-administratrix and
the whole estate of Matias Yusay, she risked being ordered to
pay the whole assessment, should the assessment be
sustained.

Her change of stand adopted in the motion for reconsideration


to the effect that she should be made liable for only one-third
of the total tax, would negate her aforesaid proposition before
the Court of Tax Appeals. She is now estopped from denying
liability for the whole tax.
At any rate, estate and inheritance taxes are satisfied from
the estate and are to be paid by the executor or
administrator.1 Where there are two or more executors, all of
them are severally liable for the payment of the estate tax. 2
The inheritance tax, although charged against the account of
each beneficiary, should be paid by the executor or
administrator.3 Failure to pay the estate and inheritance taxes
before distribution of the estate would subject the executor or
administrator to criminal liability under Section 107(c) of the
Tax Code.
It is immaterial therefore that Lilia Yusay Gonzales administers
only one-third of the estate and will receive as her share only
said portion, for her right to the estate comes after taxes. 4 As
an administratrix, she is liable for the entire estate tax. As an
heir, she is liable for the entire inheritance tax although her
liability would not exceed the amount of her share in the
estate.5 The entire inheritance tax which amounts to
P39,178.12 excluding penalties is obviously much less than
her distributive share.
Motion for reconsideration denied.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal,
Sanchez and Castro, JJ., concur.
Zaldivar, J., took no part.