Republic of the Philippines

Supreme Court
Manila
THIRD DIVISION
ERICSSON
TELECOMMUNIG.R. NO. 176667
CATIONS, INC.,
Petitioner,
Present:

- versus -

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

CITY OF PASIG, represented by

its City Mayor, Hon. Vicente P.
Eusebio, et al.*
Promulgated:
Respondent.
November 22, 2007
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
AUSTRIA-MARTINEZ, J.:

Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City, is
engaged in the design, engineering, and marketing of telecommunication facilities/system.

In an

Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner was
assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and
P4,993,682.00, respectively, based on its gross revenues as reported in its audited financial statements
for the years 1997 and 1998. Petitioner filed a Protest dated December 21, 2000, claiming that the
computation of the local business tax should be based on gross receipts and not on gross revenue.
The City of Pasig (respondent) issued another Notice of Assessment to petitioner on November

19, 2001, this time based on business tax deficiencies for the years 2000 and 2001, amounting to
P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for the years 1999 and 2000.
Again, petitioner filed a Protest on January 21, 2002, reiterating its position that the local business tax
should be based on gross receipts and not gross revenue.
Respondent denied petitioners protest and gave the latter 30 days within which to appeal the
denial. This prompted petitioner to file a petition for review [1] with the Regional Trial Court (RTC) of
Pasig, Branch 168, praying for the annulment and cancellation of petitioners deficiency local business
taxes totaling P17,262,205.66.
Respondent and its City Treasurer filed a motion to dismiss on the grounds that the court had no
jurisdiction over the subject matter and that petitioner had no legal capacity to sue. The RTC denied the
motion in an Order dated December 3, 2002 due to respondents failure to include a notice of hearing.
Thereafter, the RTC declared respondents in default and allowed petitioner to present evidence ex- parte.
In a Decision[2] dated March 8, 2004, the RTC canceled and set aside the assessments made by
respondent and its City Treasurer. The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and ordering defendants to CANCEL and SET ASIDE Assessment Notice dated
October 25, 2000 and Notice of Assessment dated November 19, 2001.
SO ORDERED.[3]
On appeal, the Court of Appeals (CA) rendered its Decision [4] dated November 20, 2006, the
dispositive portion of which reads:
WHEREFORE, the decision appealed from is hereby ordered SET ASIDE and a
new one entered DISMISSING the plaintiff/appellees complaint WITHOUT
PREJUDICE.
SO ORDERED.[5]
The CA sustained respondents claim that the petition filed with the RTC should have been
dismissed due to petitioners failure to show that Atty. Maria Theresa B. Ramos (Atty. Ramos),

petitioners Manager for Tax and Legal Affairs and the person who signed the Verification and
Certification of Non-Forum Shopping, was duly authorized by the Board of Directors.
Its motion for reconsideration having been denied in a Resolution [6] dated February 9, 2007,
petitioner now comes before the Court via a Petition for Review on Certiorariunder Rule 45 of the
Rules of Court, on the following grounds:
(1) THE COURT OF APPEALS ERRED IN DISMISSING THE CASE FOR LACK OF
SHOWING
THAT THE
SIGNATORY OF
THE
VERIFICATION/
CERTIFICATION IS NOT SPECIFICALLY AUTHORIZED FOR AND IN
BEHALF OF PETITIONER.
(2) THE COURT OF APPEALS ERRED IN GIVING DUE COURSE TO
RESPONDENTS APPEAL, CONSIDERING THAT IT HAS NO JURISDICTION
OVER THE SAME, THE MATTERS TO BE RESOLVED BEING PURE
QUESTIONS OF LAW, JURISDICTION OVER WHICH IS VESTED ONLY
WITH THIS HONORABLE COURT.
(3)

ASSUMING THE COURT OF APPEALS HAS JURISDICTION OVER

RESPONDENTS APPEAL, SAID COURT ERRED IN NOT DECIDING ON THE
MERITS OF THE CASE FOR THE SPEEDY DISPOSITION THEREOF,
CONSIDERING THAT THE DEFICIENCY LOCAL BUSINESS TAX
ASSESSMENTS ISSUED BY RESPONDENT ARE CLEARLY INVALID AND
CONTRARY TO THE PROVISIONS OF THE PASIG REVENUE CODE AND
THE LOCAL GOVERNMENT CODE.[7]

After receipt by the Court of respondents complaint and petitioners reply, the petition is given
due course and considered ready for decision without the need of memoranda from the parties.
The Court grants the petition.
First, the complaint filed by petitioner with the RTC was erroneously dismissed by the CA for
failure of petitioner to show that its Manager for Tax and Legal Affairs, Atty. Ramos, was authorized by
the Board of Directors to sign the Verification and Certification of Non-Forum Shopping in behalf of the
petitioner corporation.
Time and again, the Court, under special circumstances and for compelling reasons, sanctioned

substantial compliance with the rule on the submission of verification and certification against nonforum shopping.[8]
In General Milling Corporation v. National Labor Relations Commission,[9] the Court deemed as
substantial compliance the belated attempt of the petitioner to attach to the motion for reconsideration
the board resolution/secretarys certificate, stating that there was no attempt on the part of the petitioner
to ignore the prescribed procedural requirements.
In Shipside Incorporated v. Court of Appeals,[10] the authority of the petitioners resident manager
to sign the certification against forum shopping was submitted to the CA only after the latter dismissed
the petition. The Court considered the merits of the case and the fact that the petitioner subsequently
submitted a secretarys certificate, as special circumstances or compelling reasons that justify tempering
the requirements in regard to the certificate of non-forum shopping.[11]
There were also cases where there was complete non-compliance with the rule on certification
against forum shopping and yet the Court proceeded to decide the case on the merits in order to serve
the ends of substantial justice.[12]
In the present case, petitioner submitted a Secretarys Certificate signed on May 6, 2002, whereby
Atty. Ramos was authorized to file a protest at the local government level and to sign, execute and
deliver any and all papers, documents and pleadings relative to the said protest and to do and perform all
such acts and things as may be necessary to effect the foregoing.[13]
Applying the foregoing jurisprudence, the subsequent submission of the Secretarys Certificate
and the substantial merits of the petition, which will be shown forthwith, justify a relaxation of the rule.
Second, the CA should have dismissed the appeal of respondent as it has no jurisdiction over the
case since the appeal involves a pure question of law. The CA seriously erred in ruling that the appeal
involves a mixed question of law and fact necessitating an examination and evaluation of the audited
financial statements and other documents in order to determine petitioners tax base.

There is a question of law when the doubt or difference is on what the law is on a certain state of
facts. On the other hand, there is a question of fact when the doubt or difference is on the truth or falsity
of the facts alleged.[14] For a question to be one of law, the same must not involve an examination of the
probative value of the evidence presented by the litigants or any of them. The resolution of the issue
must rest solely on what the law provides on the given set of circumstances. Once it is clear that the
issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of
whether a question is one of law or of fact is not the appellation given to suchquestion by the party
raising the same; rather, it is whether the appellate court can determine the issue raised without
reviewing or evaluating the evidence, in which case, it is aquestion of law; otherwise it is a question of
fact.[15]
There is no dispute as to the veracity of the facts involved in the present case. While there is an
issue as to the correct amount of local business tax to be paid by petitioner, its determination will not
involve a look into petitioners audited financial statements or documents, as these are not disputed;
rather, petitioners correct tax liability will be ascertained through an interpretation of the pertinent tax
laws, i.e., whether the local business tax, as imposed by the Pasig City Revenue Code (Ordinance No.
25-92) and the Local Government Code of 1991, should be based on gross receipts, and not on gross
revenue which respondent relied on in computing petitioners local business tax deficiency. This, clearly,
is a question of law, and beyond the jurisdiction of the CA.
Section 2(c), Rule 41 of the Rules of Court provides that in all cases where questions of law are
raised or involved, the appeal shall be to this Court by petition for review on certiorari under Rule 45.
Thus, as correctly pointed out by petitioner, the appeal before the CA should have been
dismissed, pursuant to Section 5(f), Rule 56 of the Rules of Court, which provides:
Sec. 5. Grounds for dismissal of appeal.- The appeal may be dismissed motu
proprio or on motion of the respondent on the following grounds:
xxxx
(f) Error in the choice or mode of appeal.

xxxx
Third, the dismissal of the appeal, in effect, would have sustained the RTC Decision ordering
respondent to cancel the Assessment Notices issued by respondent, and therefore, would have rendered
moot and academic the issue of whether the local business tax on contractors should be based on gross
receipts or gross revenues.
However, the higher interest of substantial justice dictates that this Court should resolve the same,
to evade further repetition of erroneous interpretation of the law,[16] for the guidance of the bench and
bar.
As earlier stated, the substantive issue in this case is whether the local business tax on contractors
should be based on gross receipts or gross revenue.
Respondent assessed deficiency local business taxes on petitioner based on the latters gross
revenue as reported in its financial statements, arguing that gross receipts is synonymous with gross
earnings/revenue, which, in turn, includes uncollected earnings. Petitioner, however, contends that only
the portion of the revenues which were actually and constructively received should be considered in
determining its tax base.
Respondent is authorized to levy business taxes under Section 143 in relation to Section 151 of the
Local Government Code.
Insofar as petitioner is concerned, the applicable provision is subsection (e), Section 143 of the
same Code covering contractors and other independent contractors, to wit:
SEC. 143. Tax on Business. - The municipality may impose taxes on the following
businesses:
xxxx
(e) On contractors and other independent contractors, in accordance with the
following schedule:

With gross receipts for the

preceding calendar year in the
amount of:

Amount of Tax
Per Annum

xxxx
(Emphasis supplied)

The above provision specifically refers to gross receipts which is defined under Section 131 of the
Local Government Code, as follows:
xxxx
(n) Gross Sales or Receipts include the total amount of money or its equivalent
representing the contract price, compensation or service fee, including the amount
charged or materials supplied with the services and the deposits or advance payments
actually or constructively received during the taxable quarter for the services performed
or to be performed for another person excluding discounts if determinable at the time of
sales, sales return, excise tax, and value-added tax (VAT);
xxxx
The law is clear. Gross receipts include money or its equivalent actually or constructively
received in consideration of services rendered or articles sold, exchanged or leased, whether actual or
constructive.
In Commissioner of Internal Revenue v. Bank of Commerce,[17] the Court interpreted gross receipts
as including those which were actually or constructively received, viz.:
Actual receipt of interest income is not limited to physical receipt. Actual
receipt may either be physical receipt or constructive receipt. When the depository
bank withholds the final tax to pay the tax liability of the lending bank, there is prior to
the withholding a constructive receipt by the lending bank of the amount withheld. From
the amount constructively received by the lending bank, the depository bank deducts the
final withholding tax and remits it to the government for the account of the lending bank.
Thus, the interest income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies
that the amount of the tax withheld comes from the income earned by the taxpayer. Since

the amount of the tax withheld constitutes income earned by the taxpayer, then that
amount manifestly forms part of the taxpayers gross receipts. Because the amount
withheld belongs to the taxpayer, he can transfer its ownership to the government in
payment of his tax liability. The amount withheld indubitably comes from income of the
taxpayer, and thus forms part of his gross receipts. (Emphasis supplied)
Further elaboration was made by the Court in Commissioner of Internal Revenue v. Bank of the
Philippine Islands,[18] in this wise:
Receipt of income may be actual or constructive. We have held that the withholding
process results in the taxpayers constructive receipt of the income withheld, to wit:
By analogy, we apply to the receipt of income the rules on actual and constructive
possession provided in Articles 531 and 532 of our Civil Code.
Under Article 531:
Possession is acquired by the material occupation of a thing or the
exercise of a right, or by the fact that it is subject to the action of our will, or by
the proper acts and legal formalities established for acquiring such right.
Article 532 states:
Possession may be acquired by the same person who is to enjoy it, by his
legal representative, by his agent, or by any person without any power whatever;
but in the last case, the possession shall not be considered as acquired until the
person in whose name the act of possession was executed has ratified the same,
without prejudice to the juridical consequences of negotiorum gestio in a proper
case.
The last means of acquiring possession under Article 531 refers to
juridical actsthe acquisition of possession by sufficient titleto which the law
gives the force of acts of possession. Respondent argues that only items of income
actually received should be included in its gross receipts. It claims that since the
amount had already been withheld at source, it did not have actualreceipt thereof.
We clarify. Article 531 of the Civil Code clearly provides that the
acquisition of the right of possession is through the proper acts and legal
formalities established therefor. The withholding process is one such act. There
may not be actual receipt of the income withheld; however, as provided for in
Article 532, possession by any person without any power whatsoever shall be
considered as acquired when ratified by the person in whose name the act of
possession is executed.

In our withholding tax system, possession is acquired by the payor as the

withholding agent of the government, because the taxpayer ratifies the very act of
possession for the government. There is thus constructive receipt. The processes
of bookkeeping and accounting for interest on deposits and yield on deposit
substitutes that are subjected to FWT are indeedfor legal purposestantamount
to delivery, receipt or remittance.[19]
Revenue Regulations No. 16-2005 dated September 1, 2005[20] defined and gave examples of
constructive receipt, to wit:
SEC. 4. 108-4. Definition of Gross Receipts. -- x x x
Constructive receipt occurs when the money consideration or its equivalent is
placed at the control of the person who rendered the service without restrictions by the
payor. The following are examples of constructive receipts:
(1) deposit in banks which are made available to the seller of services without
restrictions;
(2) issuance by the debtor of a notice to offset any debt or obligation and
acceptance thereof by the seller as payment for services rendered; and
(3) transfer of the amounts retained by the payor to the account of the contractor.
There is, therefore, constructive receipt, when the consideration for the articles sold, exchanged or
leased, or the services rendered has already been placed under the control of the person who sold the
goods or rendered the services without any restriction by the payor.
In contrast, gross revenue covers money or its equivalent actually or constructively received,
including the value of services rendered or articles sold, exchanged or leased, the payment of
which is yet to be received.

This is in consonance with the International Financial Reporting

Standards,[21] which defines revenue as the gross inflow of economic benefits (cash, receivables, and
other assets) arising from the ordinary operating activities of an enterprise (such as sales of goods, sales
of services, interest, royalties, and dividends), [22] which is measured at the fair value of the consideration
received or receivable.[23]
As aptly stated by the RTC:

[R]evenue from services rendered is recognized when services have been performed
and are billable. It is recorded at the amount received or expected to be received.
(Section E [17] of the Statements of Financial Accounting Standards No. 1).[24]
In petitioners case, its audited financial statements reflect income or revenue which accrued to it
during the taxable period although not yet actually or constructively received or paid. This is because
petitioner uses the accrual method of accounting, where income is reportable when all the events have
occurred that fix the taxpayers right to receive the income, and the amount can be determined with
reasonable accuracy; the right to receive income, and not the actual receipt, determines when to include
the amount in gross income.[25]
The imposition of local business tax based on petitioners gross revenue will inevitably result in
the constitutionally proscribed double taxation taxing of the same person twice by the same
jurisdiction for the same thing[26] inasmuch as petitioners revenue or income for a taxable year will
definitely include its gross receipts already reported during the previous year and for which local
business tax has already been paid.
Thus, respondent committed a palpable error when it assessed petitioners local business tax based
on its gross revenue as reported in its audited financial statements, as Section 143 of the Local
Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be
computed based on gross receipts.
WHEREFORE, the petition is GRANTED. The Decision dated November 20, 2006 and
Resolution dated February 9, 2007 issued by the Court of Appeals are SET ASIDE, and the Decision
dated March 8, 2004 rendered by the Regional Trial Court of Pasig, Branch 168 is REINSTATED.
SO ORDERED.

FIRST DIVISION

[G.R. No. 147188. September 14, 2004]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P.

TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza
Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a
corporation constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision [1] of the Court of Appeals of 31 January 2001 in
CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision [2] of the Court of Tax Appeals (CTA) in
C.T.A. Case No. 5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for
the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for
the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner
of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal
Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial
building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which
the building stands for an amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These
two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same
notary public.[5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return [7] for the year 1989, declaring,
among other things, its gain from the sale of real property in the amount ofP75,728.021. After crediting
withholding taxes of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million,
as evidenced by a Deed of Sale of Shares of Stocks. [9] Three and a half years later, or on 16 January
1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and demand
letter to the CIC for deficiency income tax for the year 1989 in the amount ofP79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against
the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders;
moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax

liabilities for the fiscal years 1987-1989.[11]

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators
Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment [12] dated 9 January 1995 from
the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of
P79,099,999.22, computed as follows:
Income Tax 1989
Net Income per return
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M)
Total Net Taxable Income
per investigation
Tax Due thereof at 35%

P75,987,725.00

100,000,000.00
P175,987,725.00
P 61,595,703.75

Less: Payment already made

1. Per return
P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga
10,000,000.00
Balance of tax due
Add: 50% Surcharge
25% Surcharge
Total
Add: Interest 20% from
4/16/90-4/30/94 (.808)
TOTAL AMT. DUE & COLLECTIBLE

36,595,704.00
P 24,999,999.75
12,499,999.88
6,249,999.94
P 43,749,999.57
35,349,999.65
P 79,099,999.22
============

The Estate thereafter filed a letter of protest.[13]

In the letter dated 19 October 1995, [14] the Commissioner dismissed the protest, stating that a
fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by
covering up the additional gain of P100 million, which resulted in the change in the income structure of
the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains,
thus evading the higher corporate income tax rate of 35%.
On 15 February 1996, the Estate filed a petition for review [15] with the CTA alleging that the
Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of
the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed.

In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions
actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer
of the property from CIC nor the seller of the same property to RMI. The additional gain of P100
million (the difference between the second simulated sale for P200 million and the first simulated sale
for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of
Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by
CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or
fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was
well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code
of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or
fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be
disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial
owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should
be held liable for the deficiency income tax, especially because the gains realized from the sale were
withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his
estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a preconceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion.
There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that
prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law
for the filing of the return. Thus, the governments right to assess CIC prescribed on 15 April 1993. The
assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere
ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for
piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable
for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment
issued by the Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned
by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter
was a representative, dummy, and a close business associate of the former, having held his office in a
property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by
Toda for representation services rendered. The CTA denied [20] the motion for reconsideration, prompting
the Commissioner to file a petition for review[21] with the Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in
matters of taxation, is better situated to determine the correctness, propriety, and legality of the income
tax assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition
invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED
NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE
PROPERTIES OF CIBELES INSURANCE CORPORATION.
II.

THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE

CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF
PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE
YEAR 1989 HAD PRESCRIBED.
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by
CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially
incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud
in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of
Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and
Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91,
Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the
same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the
declaration of cash dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return
of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1.

Is this a case of tax evasion or tax avoidance?

2.

Has the period for assessment of deficiency income tax for the year 1989 prescribed? and

3.

Can respondent Estate be held liable for the deficiency income tax of CIC for the year
1989, if any?

We shall discuss these questions in seriatim.

Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from
taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should
be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme
used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of
less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a
tax is due; (2) an accompanying state of mind which is described as being evil, in bad faith,
willfull,or deliberate and not accidental; and (3) a course of action or failure of action which is
unlawful.[24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989,

prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received
P40 million from RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected in
its trial balance[26] as other inv. Cibeles Bldg. Also, as of 31 July 1989, another P40 million was
debited and reflected in RMIs trial balance as other inv. Cibeles Bldg. This would show that the
real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and
one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto,
the assistant accountant of CIC and an old timer in the company. [27] But Mr. Prieto did not testify on this
matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not
verified either, since the letter-request for investigation of Altonaga was unserved, [28] Altonaga having
left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit
finds support in the admission of respondent Estate that the sale to him was part of the tax planning
scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate
declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one
hundred percent. But isnt this precisely the definition of tax planning? Change the structure of the funds
and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property
for stock, changing the structure of the property and the tax to be paid. As long as it is done legally,
changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely
allowed.
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot
be faulted for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate
tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all
acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly
reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is
taken of another.[30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be
paid especially that the transfer from him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax. Altonagas sole purpose of acquiring and
transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never
controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him
was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the
execution of the two sales was calculated to mislead the BIR with the end in view of reducing the
consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on
the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.[31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated.[32] The incidence of taxation depends upon the substance of a transaction. The tax

consequences arising from gains from a sale of property are not finally to be determined solely by the
means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step
from the commencement of negotiations to the consummation of the sale is relevant. A sale by one
person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit
through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration
of the tax policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and
distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our
tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes. [34] The two sale
transactions should be treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as
amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed
upon the taxable net income received during each taxable year from all sources by every corporation
organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or
organized but not including general professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred
thousand pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand
pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual
capital gains tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D)
(1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax
issued by the BIR must be upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Sec. 269. 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 after 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: 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 collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to assess tax is ten years from discovery of the fraud,

falsification or omission, as the case may be.

It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of
the BIR on the tax consequence of the two sale transactions. [36] Thus, the BIR was amply informed of the
transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently,
the two sales were openly made with the execution of public documents and the declaration of taxes for
1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those
two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find
that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual
amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or
reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten
years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity
thereof was claimed to have been discovered only on 8 March 1991. [37] The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct
assessment for deficiency income tax was well within the prescriptive period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or
composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer
for the liabilities of a corporation and vice versa. There are, however, certain instances in which
personal liability may arise. It has been held in a number of cases that personal liability of a corporate
director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross
negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the
corporation, its stockholders, or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly
and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years
1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or
obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those
reported in its audited financial statement as of December 31, 1989, attached hereto as Annex B and
made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all

applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and
Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and
1989.[39][Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held
himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CICs
deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its
obligation arose from Todas contractual undertaking, as contained in the Deed of Sale of Shares of
Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of
the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE,
and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay
P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal
interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17962

April 30, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
BLAS GONZALES, defendant-appellant.
Office of the Solicitor General for plaintiff-appellee.

Cesar C. Cruz for defendant-appellant.

REGALA, J.:
This is an appeal from the decision of the Court of First Instance of Manila under Civil Case No. 42912
the dispositive portion of which provided:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against
the defendant, ordering said defendant to pay plaintiff the sums of P106,226.75 and P37,849.58 as
deficiency income taxes for the years 1946 and 1947, respectively, (each inclusive of the 50%
surcharge) plus the 50% surcharge and 1% monthly interest on the aforesaid amount from June 15,
1957 until the whole amount is fully paid, and costs of this suit.
The records of this case disclose that since 1946, the defendant-appellant, Blas Gonzales, has been a
private concessionaire in the U.S. Military Base at Clark Field, Angeles City: He was engaged in the
manufacture of furniture and, per agreement with base authorities, supplied them with his manufactured
articles.
On March 1, 1947 and March 1, 1948, the appellant filed his income tax returns for the years 1946 and
1947, respectively, with the then Municipal Treasurer of Angeles, Pampanga. In the return for 1946, he
declared a net income of P9,352.84 and income tax liability of P111.17 while for the year 1947, he
declared as net income the amount of P16,829.10 and a tax liability therefor in the sum of P1,395.95. In
the above two returns, he declared the sums of P80,459.75 and P1,707,355.57 as his total sales for the
said two years, respectively, or an aggregate sales of P1,787,848.32 for both years.
Upon investigation, however, the Bureau of Internal Revenue discovered that for the years 1946 and
1947, the appellant had been paid a total of P2,199,920.50 for furniture delivered by him to the base
authorities. The appellant do not deny the above amount which, for the record, was furnished by the
Purchasing Officer of the Clark Field Air Base on the Bureau of Internal Revenue's representation.
Compared against the sales figure provided by the base authorities, therefore, the amount of
P1,787,848.32 declared by the appellant as his total sales for the two tax years in question was short or
underdeclared by some P412,072.18. Accordingly, the appellee considered this last mentioned amount as
unreported item of income of the appellant for 1946. Further investigation into the appellant's 1946
profit and loss statement disclosed "local sales," that is, sales to persons other than the United States
Army, in the amount of P124,510.43. As a result, the appellee likewise considered the said amount as
unreported income for the said year. The full amount of P124,510.43 was considered as taxable income
because the appellant could not produce the books of account on the same upon which any deduction
could be based.
Adding up the above two items considered as unreported income the appellee assessed the appellant the
total sum of P340,179.84, broken down as follows:
Net income as per return
Add: Sales, US

P9,352.84
P492,531.93

Army
Local Sales

124,510.43

Net income as per investigation

Less: Personal & additional
exemptions

536,582.61
545,935.45
4,500.00

Net taxable income

P541,435.45

Tax due thereon

P226,897.73

Less: Tax already assessed

Deficiency tax due
50% surcharge
TOTAL AMOUNT DUE &
COLLECTIBLE

111.17
P226,786.56
113,393.28
P340,179.84
=========
=

On November 14, 1953, the Bureau of Internal Revenue sent a letter of demand to the appellant for the
above amount as deficiency income tax, the sum of P300.00 as compromise for his failure to keep the
required journal and ledger, and finally, the sum of P153.75 as additional residence tax, all for the year
1946.
On March 31, 1954, on request of the appellant, the Bureau of Internal Revenue reinvestigated the case.
At the end of this new inquest, however, the appellee, thru, the then Collector of Internal Revenue,
insisted on the payment of the original assessment of P340,179.84. It suggested, though, that if the
appellant disagreed with the said finding he could submit the same for study, review and decision by the
Conference Staff of the Bureau of Internal Revenue. In due time, the above assessment was heard before
the said body which, subsequently, recommended a reduction of the same to P249,289.26, as deficiency
income tax for the year 1946. After the recommendation was approved by the Bureau, the corresponding
assessment notice for the sum of P249,289.26 as deficiency income tax and 50% surcharge for the year
1946 and 1% monthly interest and penalty incident to delinquency was forthwith issued to the appellant.
On May 21, 1957, the above assessment was further revised by segregating the appellant's tax liability
for the two years in question. Pursuant to a memorandum of the BIR Regional Director of San Fernando,
Pampanga, another demand was made upon the appellant for the payment of P106,226.75 and
P37,849.58 as income taxes due from him for the years 1946 and 1947, respectively, or a total of
P144,076.33.
When the appellant failed to pay the above demand, the appellee instituted the present suit on April 7,
1960. The appellant filed his answer on July 7, 1960 and amended it on July 19, 1960.

Prior to the trial of the case, the appellant filed with the court below a motion to dismiss grounded on
prescription and lack of jurisdiction. The same was, however, denied by the lower court as
unmeritorious. Moreover, for failure of the appellant or his counsel to appear at the scheduled hearing,
the defendant-appellant was declared in default. The motion for reconsideration of this last order
declaring the appellant in default for failure to appear was also denied by the trial court for lack of merit.
On November 7, 1960, after the appellee had presented its documentary evidence against the appellant,
the lower court rendered the decision under appeal.
The appellant ascribes several errors to the decision of the court a quo, the more fundamental of which
is the claim that as a concessionaire in an American Air Base, he is not subject to Philippine tax laws
pursuant to the United States-Philippine Military Bases Agreement. In support of the claim, the
following provision of the above Bases Agreement is invoked:
ARTICLE XVIII.Sales and Services within the Bases
1. It is mutually agreed that the United States shall have the right to establish on bases, free of all
license; fees; sales excise or other taxes or imposts; Government agencies including concessions,
such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the
United States military forces and authorized civilian personnel and their families. The merchandise
or services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the
Philippine authorities. Administrative measures shall be taken by the appropriate authorities of the
United States to prevent the sale of goods which are sold under the provisions of this Article to
persons not entitled to buy goods at such agencies, and, generally, to prevent abuse of the privileges
granted under this Article. There shall be cooperation between such authorities and the Philippines
to this end.
2. Except as may be provided in any other agreements, no persons shall habitually render any
professional services in a base except to or for the United States or to or for the persons mentioned
in the preceding paragraph. No business shall be established in a base, it being understood that the
Government agencies mentioned in the preceding paragraph shall not be regarded as businesses for
the purpose of this Article.
The contention is clearly unmeritorious.
The above provision of the Military Bases Agreement has already been interpreted by this Court in at
least two cases, namely: Canlas v. Republic, G.R. No. 1,11035, May 31, 1958 and Naguiat v. J. A.
Araneta, G.R. No. L-11594, December 22, 1958. In the latter case this Court said:
The provision relied upon by the appellant plainly contemplates limiting the exemption from the
licenses, fees and taxes enumerated therein to the right to establish Government agencies, including
concessions, and to the merchandise or services sold or dispensed by such agencies. The income tax,
which is certainly not on the right to establish agencies or on the merchandise or services sold or
dispensed thereby, but on the owner or operator of such agencies, is logically excluded. The
payment by the latter of the income tax is perfectly content with and would not frustrate the obvious
objective of the agreement, namely, to enable the members of the United States Military Forces and

authorized civilian personnel and their families to procure merchandise or services within the bases
at reduced prices. This construction is unmistakably borne out by the fact that, in dealing
particularly with the matter of income tax, the Military Bases Agreement provides as follows:
INTERNAL REVENUE TAX EXEMPTION
1. No member of the United States armed forces, except Filipino citizens, serving in the
Philippines in connection with the bases and residing in the Philippines by reason only of such
services, or his dependents, shall be liable to pay income tax in the Philippines except in respect
of income derived from Philippine sources.
It is urged for the applicant that no opposition has been registered against his petition on the
issues above-discussed. Absence of opposition, however, does not preclude the scanning of the
whole record by the appellate court, with a view to preventing the conferment of citizenship to
persons not fully qualified therefor (Lee Ng Len vs. Republic, G.R. No. L-20151, March 31,
1965). The applicant's complaint of unfairness could have some weight if the objections on
appeal had been on points not previously passed upon. But the deficiencies here in question are
not new but well-known, having been ruled upon repeatedly by this Court, and we see no
excuse for failing to take them into account.1wph1.t
2. No national of the United State serving or employed in the Philippines in connection with the
maintenance, operation or defense of the bases and residing in the Philippines by reason only of
such employment, or his spouse, and minor children and dependent parents of either spouses,
shall be liable to pay income tax in the Philippines except in respect of income derived from
Philippine source or sources than the United States source.
3. No persons referred to in paragraphs 1 and 2 of this article shall be liable to pay the
Government or local authorities of the Philippines any poll or residence tax, or any import or
export duty, or any other tax on personal property imported for his own use; provided that
privately ovned vehicles shall be subject to the payment of the following only, when certified as
being used for military purposes by appropriate United States authorities, the normal license
plate and registration fees.
4. No national of the United States, or corporation organized under the laws of the United
States, resident in the United States, shall be liable to pay income tax in the Philippines in
respect to any profits derived under a contract made in the United States in connection with the
construction, maintenance, operation and defense of the bases, or any tax in the nature of a
license in respect of any service or work for the United States in connection with the
construction, maintenance, operation and defense of the bases.
None of the above-quoted covenants shields a concessionaire, like the appellant, from the payment of
the income tax. For one thing, even the exemption in favor of members of the United States Armed
Forces and nationals of the United States does not include income derived from Philippine sources.
The appellant cannot seek refuge in the use of "excise" or "other taxes or imposts" in paragraph 1 of
Article XVIII of the Military Bases Agreement, because, as already stated, said terms are employed with

specific application to the right to establish agencies and concessions within the bases and to the
merchandise or services sold or dispensed by such agencies or concessions.
The same conclusion was reached in the case of Canlas v. Republic, supra.
The appellant maintains, however, that the rulings in the above two cases are inapplicable to the suit at
bar because the said cases involved the income of public utility operators in the Air Base who were not
"concessionaires" like him.
The above contention is as unmeritorious as it is untrue. In the case of Araneta v. Manila Pencil
Company Ins.,G.R. No. L-8182, June 29, 1957, this Court already ruled that operators of freight and bus
services are within the meaning of the word "concession" appearing in the Military Bases agreement.
Thus, in the Canlas case above, We said:
There is no dispute as to the fact that defendant Manila Pencil Company, as successor-in-interest of
the Philippine Consolidated Freight Lines, Inc., was engaged in and duly licensed by the U.S.
Military authorities to operate a freight and bus service within the Clark Field Air Base, a military
reservation established in conformity with the agreement concluded between the Government of the
Philippines and the United States on March 14, 1947 (43 O.G. No. 3, p. 1020). And as such grantee
of a franchise, which this Court was held to be embraced within the meaning of the word
"concession" appearing in the treaty and was declared exempted from the payment of the
contractor's tax (Araneta v. Manila Pencil Company, G.R. No. L-10507, May 30, 1958) ... .
It is very clear, therefore, that the rulings of this Court in the two cases above cited are applicable to this
appeal under consideration.
The other point raised by the appellant on this appeal pertains to the refusal of the trial court to
reconsider its order declaring him in default for the failure of his counsel to appear at the scheduled trial
despite due notice. He complains that when the trial proceeded in his absence, he was denied his day in
court. In the premises, his counsel insists that this absence then was for a good and reasonable cause.
Suffice it to say in regard to the above that the matter complained of is beyond this Court to disturb. The
matter of adjournments, postponements, continuances and reconsideration of orders of default lies
within the discretion of courts and will not be interfered with either by mandamus or appeal (Samson v.
Naval, 41 Phil. 838) unless a showing of grave abuse can be made against said courts. Moreover, where
the absence of a party from the trial was due to his own fault, he should not be heard to complain that he
was deprived of his day in court. (Sandejas v. Robles, 81 Phil. 421; Siojo v. Tecson, 88 Phil. 531)
The-counsel's excuse for his absence at the trial was alleged "lack of transportation facilities in his place
of residence at Gagalangin, Tondo, Manila, on that morning of August 8, when torrential rain poured
down in his locality." The lower court did not deem this as a sufficiently valid explanation because it
observed that despite such torrential rain, the counsel for the plaintiff-appellee, a lady attorney who was
then a resident of a usually inundated area of Sampaloc, Manila, somehow made it to the court. Under
these circumstances, the trial court's ruling can hardly be considered as an abuse of his discretion.
Finally, the appellant disputes the lower court's finding of fraud against him in this incident. He argues

that the facts invoked by the lower court do not sufficiently establish the same.
As rightly argued by the Solicitor General's office, since fraud is a state of mind, it need not be proved
by direct evidence but may be inferred from the circumstances of the case. The failure of the appellant to
declare for taxation purposes his true and actual income derived from his furniture business at the Clark
Field Air Base for two consecutive years is an indication of his fraudulent intent to cheat the
Government of its due taxes.
The substantial undeclaration of income in the income tax returns of the appellant for four
consecutive years, coupled with his intentional overstatement of deductions made the imposition of
the fraud penalty proper. (Eugenio Perez v. Court of Tax Appeals and Collector of Internal Revenue,
G. R. No. L-10507, May 30, 1958.)
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered affirming in full the decision here
appealed from, with costs against the defendant-appellant. So ordered.
Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Makalintal,
Bengzon, J.P., and Zaldivar, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,
vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.

GUTIERREZ, JR., J.:

The petitioners question the decision of the Intermediate Appellate Court which sustained the private
respondent's contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco
conveyed a parcel of land to Delpher Trades Corporation in exchange for 2,500 shares of stock was
actually a deed of sale which violated a right of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square
meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo
(now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer
Certificate of Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the
same property and providing that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the same to the lessee and the letter
has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6
inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title,
as per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter
the leased property (TCT No.T-4240) together with another parcel of land also located in
Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of
defendant corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 4445, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in
the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for
reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades
Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion
of the decision reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the
defendants and all persons deriving rights therefrom to convey the said property to plaintiff who
may offer to acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095
whose area is 27,169 square meters only. Without pronouncement as to attorney's fees and
costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)

The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate
court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying
the petition and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from
petitioners a parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located
right after the Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total
of P380,366, although the prevailing value thereof is approximately P300/sq. meter or P8.1
Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked
by private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed
by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a
contract of sale which, in effect, prejudiced the private respondent's right of first refusal over the leased
property included in the "deed of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that
Delpher Trades Corporation is a family corporation; that the corporation was organized by the children
of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and
Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to
perpetuate their control over the property through the corporation and to avoid taxes; that in order to
accomplish this end, two pieces of real estate, including Lot No. 1095 which had been leased to Hydro
Pipes Philippines, were transferred to the corporation; that the leased property was transferred to the
corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia
and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority
in the corporation because the other owners only owned 2,000 shares; and that at the time of
incorporation, he knew all about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the
petitioners' motion for reconsideration, they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of
the subject parcel of land since the Pachecos remained in control of the property. Thus, the petitioners

allege: "Considering that the beneficial ownership and control of petitioner corporation remained in the
hands of the original co-owners, there was no transfer of actual ownership interests over the land when
the same was transferred to petitioner corporation in exchange for the latter's shares of stock. The
transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner
corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the coowners should be deemed to be the same, there being in substance and in effect an Identity of interest."
(p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale
and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is
not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a
price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when
one thing is given in consideration of another thing (Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity
separate and distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades
Corporation is the Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having treated
Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may
allege that this separate corporate existence should be disregarded. It maintains that there was actual
transfer of ownership interests over the leased property when the same was transferred to Delpher
Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock
directly from the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47
Phil, 649, citing Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their properties,
the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades
Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The
essence of the stock subscription is an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is significant
that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the
capital stock measured by value, but only an aliquot part of the whole number of such shares of
the issuing corporation. The holder of no-par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But this character of proportionate
interest is not hidden beneath a false appearance of a given sum in money, as in the case of par
value shares. The capital stock of a corporation issuing only no-par value shares is not set forth
by a stated amount of money, but instead is expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested
in the financial condition of a corporation is focused upon the value of assets and the amount of
its debts. (Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the

Philippines, Vol. III, 1980 Edition, p. 107).

Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at
P300.00 a square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control
of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong
to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did
was to invest their properties and change the nature of their ownership from unincorporated to
incorporated form by organizing Delpher Trades Corporation to take control of their properties and at
the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of exchange on
the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the spouses of
this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of taxation in
entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free from

income tax and acquire a corporation.

Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-par. (2)
Exceptions regarding the provision which I quote: "No gain or loss shall also be
recognized if a person exchanges his property for stock in a corporation of which as a
result of such exchange said person alone or together with others not exceeding four
persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed of
exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par value share
in the defendant corporation was for the purpose of flexibility. Can you explain
flexibility in connection with the ownership of the property in question?
A There is flexibility in using no par value shares as the value is determined by the
board of directors in increasing capitalization. The board can fix the value of the shares
equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is held
by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular
person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)

The records do not point to anything wrong or objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted."
(Liddell & Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293
U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be
considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a
third party. The Pacheco family merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light
of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the
then Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil
Case No. 885-V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN PHILIPPINE LIFE
INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE COMPANY, INC.)
and THE COURT OF APPEALS, respondents.
DECISION
KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on Internal Revenue of the
decision of the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed
in part the decision of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance
Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and
engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind
of life insurance policy known as the Junior Estate Builder Policy, the distinguishing feature of which
is a clause providing for an automatic increase in the amount of life insurance coverage upon attainment
of a certain age by the insured without the need of issuing a new policy. The clause was to take effect in
the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only on the initial
sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of
P100.00 per share or a total par value of P5,000,000.00. The actual value of said shares, represented by
its book value, was P19,307,500.00. Documentary stamp taxes were paid based only on the par value of
P5,000,000.00 and not on the book value.
Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in
the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum assured
on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in excess of the

par value of the stock dividends. The computation of the deficiency documentary stamp taxes is as
follows:
On Policies Issued:
Total policy issued during the year

P1,360,054,000.00

Documentary stamp tax due thereon

(P1,360,054,000.00 divided by
P200.00 multiplied by P0.35)
Less:

Payment

Deficiency

2,380,094.50

1,915,495.75

464,598.75

Add: Compromise Penalty

300.00
-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition
filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment
on the stock dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision
reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76 and
P78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent Commissioner
of Internal Revenue is ordered to desist from collecting said deficiency documentary stamp taxes for the
same are considered withdrawn.
SO ORDERED.[1]
Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court
of Appeals promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency
assessment on the insurance policy, but reversing the same with regard to the deficiency assessment on
the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the stock
dividends is the actual value or book value represented by the shares. The dispositive portion of the
Court of Appeals decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect
to the deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment
on the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the

sum of P78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs
pronouncement.
SO ORDERED.[2]
A motion for reconsideration of the decision having been denied,[3] both the Commissioner of
Internal Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R.
No. 119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of
Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The
Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the
Court of Appeals decision which invalidated the deficiency assessment on the insurance policy,
attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A
SINGLE AGREEMENT EMBODIED IN THE POLICY AND THAT THE AUTOMATIC
INCREASE CLAUSE IS NOT A SEPARATE AGREEMENT, CONTRARY TO SECTION 49
OF THE INSURANCE CODE AND SECTION 183 OF THE REVENUE CODE THAT A
RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT
OF TAX ON THE TOTAL VALUE OF THE INSURANCE ASSURED IN THE POLICY
INCLUDING THE ADDITIONAL INCREASE ASSURED BY THE AUTOMATIC
INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE
AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION.[4]
Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, loan
agreements, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right
or property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction
so had or accomplished, the corresponding documentary stamp taxes prescribed in the following section
of this Title, by the person making, signing, issuing, accepting, or transferring the same wherever the
document is made, signed, issued, accepted, or transferred when the obligation or right arises from
Philippine sources or the property is situated in the Philippines, and at the same time such act is done or
transaction had: Provided, That whenever one party to the taxable document enjoys exemption from the
tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax.
(As amended by PD No. 1994) The basis for the value of documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National Internal Revenue Code which states in part:
The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section
183 of the National Internal Revenue Code which states in part:
Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments by
whatever name the same may be called, whereby any insurance shall be made or renewed upon any life
or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each Two
hundred pesos per fractional part thereof, of the amount insured by any such policy.

Petitioner claims that the automatic increase clause in the subject insurance policy is separate and
distinct from the main agreement and involves another transaction; and that, while no new policy was
issued, the original policy was essentially re-issued when the additional obligation was assumed upon
the effectivity of this automatic increase clause in 1984; hence, a deficiency assessment based on the
additional insurance not covered in the main policy is in order.
The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the
issuance of the insurance policy and that the automatic increase clause is an integral part of that
policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in
which a contract of insurance is set forth.[5] Section 50 of the same Code provides that the policy,
which is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol,
signature, number, or word necessary to complete the contract of insurance.[6] It is thus clear that any
rider, clause, warranty or endorsement pasted or attached to the policy is considered part of such policy
or contract of insurance.
The subject insurance policy at the time it was issued contained an automatic increase clause.
Although the clause was to take effect only in 1984, it was written into the policy at the time of its
issuance. The distinctive feature of the junior estate builder policy called the automatic increase
clause already formed part and parcel of the insurance contract, hence, there was no need for an
execution of a separate agreement for the increase in the coverage that took effect in 1984 when the
assured reached a certain age.
It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act
is done or transaction had and the tax base for the computation of documentary stamp taxes on life
insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person
insured is susceptible of exact pecuniary measurement.[7] What then is the amount fixed in the policy?
Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever
increases will take effect in the future by reason of the automatic increase clause embodied in the
policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance coverage was to take effect
later on, the date of its effectivity, as well as the amount of the increase, was already definite at the time
of the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance
necessarily included the additional sum covered by the automatic increase clause because it was already
determinable at the time the transaction was entered into and formed part of the policy.
The automatic increase clause in the policy is in the nature of a conditional obligation under
Article 1181,[8] by which the increase of the insurance coverage shall depend upon the happening of
the event which constitutes the obligation. In the instant case, the additional insurance that took effect in
1984 was an obligation subject to a suspensive obligation,[9] but still a part of the insurance sold to
which private respondent was liable for the payment of the documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured upon the effectivity
of the Junior Estate Builder Policy.
Finally, it should be emphasized that while tax avoidance schemes and arrangements are not

prohibited,[10] tax laws cannot be circumvented in order to evade the payment of just taxes. In the case
at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not be included in the computation of the
documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax be
computed on the basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals
is SET ASIDE insofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency
stamp tax assessment petitioner imposed on private respondent in the amount of P464,898.75
corresponding to the increase in 1984 of the sum under the policy issued by respondent.
SO ORDERED.
Davide, Jr., C.J., (Chairman), and Ynares-Santiago, J., concur.
Puno, J., on official leave.