CIR VS HENTEX
There was even no showing that the investigating officers were
In 1989, an informant informed the Counter-Intelligence Division of the Economic
Intelligence and Investigation Bureau that Hantex Trading Co., Inc. underdeclared
its importations in the year 1987. The said informant based its report from another
informant and the photocopied documents provided to him. The photocopies were
copies of Hantexs Consumption Entries for the year 1987 where it was stated that
Hantexs importations amounted to Php 115 M. Hantex only declared Php 45 M.
The original copies of Consumption Entries cannot be produced because the
copies in the possession of the Collection Division (official repository of said
records) were eaten by termites. Hantex did not want to produce the said records
because it alleged that it has been the subject of numerous investigations already
and if they will provide their records, there will be no end to the investigation.
As such, the Investigation Division, in determining Hantexs alleged tax deficiency,
relied on the photocopied (xerox) copies submitted to them by their informant. After
investigation, it was found that Hantexs importations amounted to Php 105 M.
Hantex contested the findings as it averred that the same was based on
incompetent evidence considering that it was based merely on xerox copies which
were not even authenticated or certified.
The Commissioner however argued that under the National Internal Revenue
Code, under the best evidence rule, if the taxpayer does not want to provide the
required documents for taxation purposes, the taxing authorities can rely on other
evidences, in this case, the xerox copies, to determine tax liabilities.
Hantex however averred that the best evidence rule was not complied with or was
erroneously availed of because the said xerox copies were not properly
authenticated. To this the Commissioner argued that the BIR is not bound by the
technical rules of evidence.
ISSUE: Whether or not it is proper to use the xerox copies of the Consumption
Entries of Hantex Trading Co., Inc. as proof of its tax liabilities.
HELD: No. It is true that the BIR is not bound by strict rules of evidence. It is also
true that the best evidence rule under the NIRC should not be equated to the best
evidence rule under the Rules of Court. That being, the best evidence rule under
the NIRC may even mean that the best evidence obtainable may consist of
hearsay evidence, such as the testimony of third parties or accounts or other
records of other taxpayers similarly circumstanced as the taxpayer subject of the
investigation which are inadmissible in a regular proceeding in the regular courts.
However in this case, the xerox copies are not the best evidence obtainable. The
official copies of the Consumption Entries are not solely kept in the Collection
Division (where such records were destroyed by termites). The NSO (National
Statistics Office) also keep such records. In fact, there are at least four copies of
such Consumption Entries. There was no showing that BIR tried to obtain the
copies held by NSO.
Further, it was not contested that Hantex was indeed subjected to various
investigations for its 1987 tax liabilities. And those tax investigations resulted to a
finding that Hantex was only liable for the minimum tax due. Such findings, done
by the BIR and the BOC (Bureau of Customs) themselves, are presumed to be
regularly done.
negligent.
In fine, then, the CIR acted arbitrarily and capriciously in relying on and giving
weight to the machine copies of the Consumption Entries in fixing the tax
deficiency assessments against Hantex.The rule is that in the absence of the
accounting records of a taxpayer, his tax liability may be determined by estimation.
CIR is not required to compute such tax liabilities with mathematical exactness.
Approximation in the calculation of the taxes due is justified. To hold otherwise
would be tantamount to holding that skillful concealment is an invincible barrier to
proof. However, the rule does not apply where the estimation is arrived at arbitrarily
and capriciously
G.R. No. 197590 November 24, 2014
BUREAU OF INTERNAL REVENUE, as represented by the COMMISSIONER
OF INTERNAL REVENUE, Petitioner,
vs.
COURT OF APPEALS, SPOUSES ANTONIO VILLAN MANLY, and RUBY ONG
MANLY, Respondents.
DECISION
DEL CASTILLO, J.:
There is grave abuse of discretion when the determination of probable cause is
exercised in an arbitrary or despotic manner, due to passion or personal hostility,
so patent and gross as to amount to an evasion of a positive duty or a virtual refusal
to perform a duty enjoined by law.1 This Petition for Certiorari2 under Rule 65 of
the Rules of Court assails the Decision3 dated October 28, 2010 and the
Resolution4 dated May 10, 2011 of the Court of Appeals (CA) in CA-G.R. SP No.
112479.
Factual Antecedents
Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive
Vice-President of Standard Realty Corporation, a family-owned corporation.5 He
is also engaged in rental business.6 His spouse, respondent Ruby Ong Manly, is
a housewife.7
On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued Letter of
Authority No. 2001 000123878 authorizing its revenue officers to investigate
respondent spouses internal revenue tax liabilities for taxable year 2003 and prior
years.
On June 6, 2005, petitioner issued a letter9 to respondent spouses requiring them
to submit documentary evidence to substantiate the source of their cash purchase
of a 256-square meter log cabin in Tagaytay City worth P17,511,010.00.
Respondent spouses, however, failedto comply with the letter.10
On June 23, 2005, the revenue officers executed a Joint Affidavit11 alleging that
respondent Antonios reported or declared annual income for the taxable years
1998-2003 are as follows:
Taxable
Compensation
Income Net Profit
Rental Business
(1169-73 G.
Masangkay St.,
Tondo, Manila Total sources
of Funds Tax Due/paid CASH
1998 [P]133,532.36 [P] 191,915.10 [P] 325,447.46 [P]55,834.00< [P] 269,613.46
1999 142,550.50 260,961.78 403,512.28 79,254.00 324,258.28
2000 141,450.00 213,740.67 355,190.67 64,757.21 290,433.46
2001 151,500.00 233,396.62 384,896.62 73,669.00 311,227.62
2002 148,500.00 186,106.62 334,606.62 58,581.00 276,025.62
2003 148,100.00 152,817.53 300.917.93 48,729.00 252,188.93
[Total]
P865,633.26
P1,238,938.32
P2,104,571.58
P380,824.21
P1,723,747.3712
and that despite his modestincome for the said years, respondent spouses were
able to purchase in cash the following properties:
1) a luxurious vacation house in Tagaytay City valuedat P17,511,010.0013 in the
year 2000, evidenced by a Deed of Absolute Sale14 dated October 24, 2000;
2) a Toyota RAV4 for P1,350,000.00 in the year 2001, evidenced by a Sales
Invoice15 dated June 28, 2001; and
3) a Toyota Prado for P2,000,000.00 in 2003, evidenced by a Deed of Sale16
dated July 9, 2003.17
Since respondent spouses failed to showthe source of their cash purchases, the
revenue officers concluded that respondent Antonios Income Tax Returns (ITRs)
for taxable years 2000, 2001,and 2003 were underdeclared.18 And since the
under declaration exceeded 30% of the reported or declared income, it was
considered a prima facie evidence of fraud with intent to evade the payment of
proper taxes due to the government.19 The revenue officers, thus, recommended
the filing of criminal cases against respondent spouses for failing to supply correct
and accurate information intheir ITRs for the years 2000, 2001, and 2003,
punishable under Sections 25420 and 25521 in relation to Section 248(B)22 of
Republic Act No. 8424 or the "Tax Reform Act of 1997," hereinafter referred to as
the National Internal Revenue Code (NIRC).23
Respondent spouses, in their Joint Counter-Affidavit,24 denied the accusations
hurled against them and alleged that they used their accumulated savings from
their earnings for the past24 years in purchasing the properties.25 They also
contended that the criminal complaint should be dismissed because petitioner
failed to issue a deficiency assessment against them.26
In response, the revenue officers executed a Joint Reply-Affidavit.27 Respondent
spouses, in turn, executed a Joint Rejoinder-Affidavit.28
Ruling of the State Prosecutor
On August 31, 2006, State ProsecutorMa. Cristina A. Montera-Barot issued a
Resolution29 in I.S. No. 2005-573 recommending the filing of criminal charges30
against respondent spouses, to wit:
WHEREFORE, premises considered, it is respectfully recommended that
[respondent] spouses ANTONIO VILLAN MANLY and RUBY ONG MANLY be
charged [with] the following:
(1) Three (3) counts of Violation of Section 254 Attempt to Evade or Defeat Tax
of the NIRC for taxable years 2000, 2001, and 2003;
(2) Three (3) counts for Violation of Section 255 of the NIRC Failure to Supply
Correct and Accurate Information for taxable years 2000, 2001 and 2003;
(3) Three counts of Violation ofSection 255 of the NIRC Failure to Pay, as a
consequence of [respondent spouses] failure to supply correct and accurate
information on their tax returns for taxable years 2000, 2001, and 2003.31
Respondent spouses moved for reconsideration32 but the State Prosecutor
denied the same in a Resolution33 dated November 29, 2007.
Ruling of the Secretary of Justice
On appeal to the Secretary of Justice via a Petition for Review,34 Acting Justice
Secretary Agnes VST Devanadera (Devanadera) reversed the Resolution of the
State Prosecutor. She found no willfulfailure to pay or attempt to evade or defeat
the tax on the part of respondent spouses as petitioner allegedly failed to specify
the amount of tax due and the likely source of income from which the same was
based.35 She also pointed out petitioners failure to issue a deficiency tax
assessment against respondentspouses which is a prerequisite to the filing of a
criminal case for tax evasion.36 The dispositive portion of the Resolution37 dated
July 27, 2009 reads:
WHEREFORE, the assailed Resolution is hereby REVERSED and SET ASIDE.
The Chief State Prosecutor ishereby directed to withdraw the Information filed
against [respondent spouses] Antonio Villan Manly and Ruby Ong Manly, if one
has been filed, and report the action taken thereon within ten (10) days from receipt
hereto.
SO ORDERED.38
Petitioner sought reconsideration39 but Acting Justice Secretary Devanadera
denied the same in a Resolution40 dated November 5, 2009.
Ruling of the Court of Appeals
Unfazed, petitioner filed a Petition for Certiorari41 with the CA imputing grave
abuse of discretion on the part of Acting Justice Secretary Devanadera in finding
no probable cause to indict respondent spouses for willfulattempt to evade or
defeat tax and willful failure to supply correct and accurate information for taxable
years 2000, 2001 and 2003.
On October 28, 2010, the CA rendered the assailed Decision42 dismissing the
Petition for Certiorari. Although it disagreed that anassessment is a condition sine
qua nonin filing a criminal case for tax evasion, the CA, nevertheless, ruled that
there was no probable cause to charge respondent spouses as petitioner allegedly
failed to state their exact tax liability and to show sufficient proof of their likely
source of income.43 The CA further said that before one could be prosecuted for
tax evasion,the fact that a tax is due must first be proved.44 Thus:
IN LIGHT OF ALL THE FOREGOING, the instant petition is hereby DENIED, and
the assailed Resolution of the Secretary of Justice dated July 27, 2009 dismissing
I.S. No. 2005-573 against private respondents, AFFIRMED. However, the
dismissal of the instant case is without prejudice to the refiling by the BIR of a
complaint sufficient in form and substance before the appropriate tribunal.
SO ORDERED.45
The CA likewise denied petitioners Motion for Reconsideration46 in its
Resolution47 dated May 10, 2011.
Issues
Hence, petitioner filed the instant Petition contending that the CA committed grave
abuse of discretion amounting to lackor excess of jurisdiction in holding that:
I. A CATEGORICAL FINDING OF THE EXACT AMOUNT OF TAX DUE FROM
THE PRIVATE RESPONDENT SHOULD BE SPECIFICALLY ALLEGED [AND
THAT] SINCE THE BIR FAILED TO MAKE SUCH FINDINGS
THEYCONSEQUENTLYFAILED TO BUILD A CASE FOR TAX EVASION
AGAINST [RESPONDENT SPOUSES] DESPITE THE WELL ESTABLISHED
DOCTRINE THAT IN TAX EVASION CASES, A PRECISE COMPUTATION OF
THE [TAX] DUE IS NOT NECESSARY.
II. THE BIR FAILED TO SHOW SUFFICIENT PROOF OF A LIKELY SOURCE OF
[RESPONDENT SPOUSES] INCOME DESPITE THE FACT THAT THE BIR WAS
SUFFICIENTLY ABLE TO SHOW PROOF OF SUCH INCOME.48
Petitioners Arguments
Petitioner imputes grave abuse of discretion on the part of the CA in affirming the
dismissal of the criminal cases against respondent spouses. Petitioner contends
that in filing a criminal case for tax evasion, a prior computation or assessment of
tax is not required because the crime is complete when the violator knowingly and
willfully filed a fraudulent return with intentto evade a part or all of the tax.49 In this
case, an analysis of respondent spouses income and expenditure shows that their
cash expenditure is grossly disproportionate to their reported or declared income,
leading petitioner to believe that they under declared their income.50 In computing
the unreported or undeclared income, which was likely sourced from respondent
Antonios rental business,51 petitioner used the expenditure method of
reconstructing income, a method used to determine a taxpayers income tax
liability when his records are inadequate or inaccurate.52 And since respondent
spouses failed to explain the alleged unreported or undeclared income, petitioner
asserts that criminal charges for tax evasion should be filed against them.
Respondent spouses Arguments
Respondent spouses, on the other hand, argue that the instant Petition should be
dismissed as petitioner availed of the wrong remedy in filing a Petition for Certiorari
under Rule 65 of the Rules of Court.53 And even if the Petition is given due course,
the same should still be dismissed because no grave abuse of discretion can be
attributed to the CA.54 They maintain that petitioner miserably failed to prove that
a tax is actually due.55 Neither was it able to show the source of the alleged
unreported or undeclared income as required by Revenue Memorandum Order
No. 15-95, Guidelines and Investigative Procedures in the Development of Tax
Fraud Cases for Internal Revenue Officers.56 As to the method used by petitioner,
they claim that it completely ignored their lifetime savings because it was limited
to the years 1998-2003.57
Our Ruling
The Petition is meritorious.
Before discussing the merits of thiscase, we shall first discuss the procedural
matter raised by respondent spouses that petitioner availed of the wrong remedy
in filing a Petition for Certiorari under Rule 65 of the Rules of Court, instead of a
Petition for Review on Certiorari under Rule 45.
Indeed, the remedy of a party aggrieved by a decision, final order, or resolution of
the CA is to file a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, which is a continuation of the appellate process over the original case.58
And as a rule, if the remedy of an appeal is available, an action for certiorari under
Rule 65 of the Rules of Court, which is anoriginal or independent action based on
grave abuse of discretion amounting to lack or excess of jurisdiction, will not
prosper59 because it is not a substitute for a lost appeal.60
There are, however, exceptions to this rule, to wit: 1) when public welfare and the
advancement of public policy dictate; 2) when the broader interest of justice so
requires; 3) when the writs issued are null and void; 4) when the questioned order
amounts to an oppressive exercise of judicial authority; 5) when, for persuasive
reasons, the rules may be relaxed to relieve a litigant of an injustice not
commensurate with his failure to comply with the prescribed procedure; 6) when
the judgment or order is attended by grave abuse of discretion; or 7) in other
meritorious cases.61
In this case, after considering the arguments raised by the parties, we find that
there is reason to give due course to the instant Petition for Certiorari as petitioner
was able to convincingly show that the CA committed grave abuse of discretion
when it affirmed the dismissal of the criminal charges against respondent spouses
despite the fact that there isprobable cause toindict them.
Although the Court has consistently adopted the policy of non-interference in the
conduct and determination of probable cause,62 which is exclusively within the
competence of the Executive Department, through the Secretary of Justice,63
judicial intrusion, in the form of judicial review, is allowed when there is proof that
the Executive Department gravely abused its discretion in making its determination
and in arriving atthe conclusion it reached.64
Grave abuse of discretion is defined as a capricious and whimsical exercise of
judgment tantamount to lack or excess of jurisdiction, a blatant abuse of authority
so grave and so severe as to deprive the court of its very power to dispense justice,
or an exercise of powerin an arbitrary and despotic manner, due to passion,
prejudice or personal hostility, sopatent and gross as to amount to an evasion or
to a unilateral refusal to perform the duty enjoined or to act in contemplation of the
law.65 Such is the situation in this case.
Having resolved the foregoing procedural matter, we shall now proceed to
determine the main issue in this case.
Sections 254 and 255 of the NIRC pertinently provide:
SEC. 254. Attempt to Evade or Defeat Tax. Any person who willfully attempts in
any manner to evade or defeat any tax imposed under this Code or the payment
thereof shall, in addition to other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Thirty thousand pesos (P30,000.00)
but not more than One hundred thousand pesos (P100,000.00) and suffer
imprisonment of not less than two (2) years but not more than four (4) years:
Provided, That the conviction or acquittal obtained under this Section shall not be
a bar to the filing of a civil suit for the collection of taxes.
SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay
Tax, Withhold and Remit Tax and Refund Excess Taxes Withheld on
Compensation. Any person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return, keep any record, or supply
correct and accurate information, who willfully fails to pay such tax, make such
return, keep such record, or supply such correct and accurate information, or
withhold or remit taxes withheld, or refund excess taxes withheld on compensation
at the time or times required by law or rules and regulations shall, in addition to
other penalties provided by law, upon conviction thereof, be punished by a fine of
not less than Ten thousand pesos (P10,000.00) and suffer imprisonment of not
less than one (1) year but not more than ten (10) years.
In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion is deemed complete when
the violator has knowingly and willfully filed a fraudulent return with intent to evade
and defeat a part or all of the tax.67 Corollarily, an assessment of the tax deficiency
is notrequired in a criminal prosecution for tax evasion.68 However, in
Commissioner of Internal Revenue v. Court of Appeals,69 we clarified that
although a deficiency assessment is not necessary, the fact that a tax is due must
first be proved before one can be prosecuted for tax evasion.70
In the case of income, for it to be taxable, there must be a gain realized or received
by the taxpayer, which is not excluded by law or treaty from taxation.71 The
government is allowed to resort to all evidence or resources available to determine
a taxpayers income and to use methods to reconstruct his income.72 A method
commonly used by the government isthe expenditure method, which is a method
of reconstructing a taxpayers income by deducting the aggregate yearly
expenditures from the declared yearly income.73 The theory of this method is that
when the amount of the money that a taxpayer spends during a given year exceeds
his reported or declared income and the source of such money is unexplained, it
may be inferred that such expenditures represent unreported or undeclared
income.74
In the case at bar, petitioner used this method to determine respondent spouses
tax liability.1wphi1 Petitioner deducted respondent spouses major cash
acquisitions from their available funds. Thus:
Cash Loans
(business) Withdrawal
of Capital Funds
available Major
Acquisitions Unexplained
Sources of Funds
1998 P 269,613.46 900,000.00 130,638.98 1,300,252.44
1999 324,258.28 (400,000.00) 39,281.87 1,263,792.59
2000 290,433.46 - 102,024.97 1,656,251.02 17,511,010.00 (15,854,758.98)
2001 311,227.62 - 406,309.70 717,537.32 1,350,000.00 (632,462.68)
2002 276,025.62 (100,000.00) 184,092.03 360,117.65
2003 252,188.93 - 245,167.97 857,474.55 2,000,000.00 (1,142,525.45)
[Total:] P1,723,747.37 20,861,010.00 (17,629,747.11) 75
2000 2001 2003
Unexplained funds under declaration [P]15,854,758.98 [P]632,462.68 [P]
1,142,525.45
Taxable income [P]15,854,758.98 [P]632,462.68 [P] 1,142,525.45
Income Tax due thereon:
First Php500,000.00 125,000.00 125,000.00 125,000.00
In excess of Php500,000.00 4,913,522.87 42,388.06 205,608.14
Total income tax due (net tax paid) 4,973,765.66 93,719.06 281,879.14
Add: 50% Surcharge 2,486,882.83 46,859.53 165,304.07
20% Interest (up to 5/31/2005) - 825 4,104,376.29 77,337.43 272,751.72
Total Tax Due inclusive of Increments
[P]11,565,024.79
[P]217,916.02
[P] 655,369.01
76
Particulars 2000 2001 2003
Unexplained Funds [Underdeclaration] [P]15,854,758.98 [P]632,462.68
[P]1,142,525.45
Sources of Funds as per Financial Statements as attached to the Income Tax
Return [P]1,656,251.02 [P]717,537.32 [P]817,474.55
Percentage of underdeclaration 957.27% 88.14% 133.24%77
And since the underdeclaration is more than 30%of respondent spouses reported
or declared income, which under Section 248(B) of the NIRC constitutes as prima
facie evidence of false or fraudulent return, petitioner recommended the filing of
criminal cases against respondent spouses under Sections 254 and 255, in
relation to Section 248(B) of the NIRC.
The CA, however, found no probable cause to indict respondent spouses for tax
evasion. It agreed with Acting Justice Secretary Devanadera that petitioner failed
to make "a categorical finding of the exact amount of tax due from [respondent
spouses]" and "to show sufficient proof of a likely source of [respondent spouses]
income that enabled them to purchase the real and personal properties adverted
to x x x."78 We find otherwise.
The amount of tax due from respondent spouses was specifically alleged in the
Complaint-Affidavit.79 The computation, as wellas the method used in determining
the tax liability, was also clearly explained. The revenue officers likewise showed
that the under declaration exceeded 30% of the reported or declared income.
The revenue officers alsoidentified the likely source of the unreported or
undeclared income intheir Reply-Affidavit. The pertinent portion reads:
7. x x x x
[Respondent spouses] are into rental business and the net profit for six (6) years
before tax summed only to P1,238,938.32 (an average of more or less
Php200,000.00 annually). We asked respondent [Antonio] if we can proceed to his
rented property to [appraise] the earning capacity of the building [for] lease/ rent,
but he declined our proposition. Due to such refusal made by the respondent,
[petitioner], thru its examiners,took pictures of the subject property and came up
with the findings that indeed the unexplained funds sought to have been used in
acquiring the valuable property in Tagaytay x x x came from the underdeclaration
of rental income.80
Apparently, the revenue officers considered respondent Antonios rental business
to be the likely source of their unreported or undeclared income due to his
unjustified refusal to allow the revenue officers to inspect the building.
Respondent spouses defense that they had sufficient savings to purchase the
properties remains self-serving at thispoint since they have not yet presented any
evidence to support this. And since there is no evidence yet to suggest that the
money they used to buy the properties was from an existing fund, it is safe to
assume that that money is income or a flowof wealth other than a mere return on
capital. It is a basic concept in taxation that income denotes a flow of wealth during
a definite period of time, while capital is a fund or property existing at one distinct
point in time.81
Moreover, by just looking at the tables presented by petitioner, there is a manifest
showing that respondent spouses had under declared their income. The huge
disparity between respondent Antonios reported or declared annual income for
the past several years and respondent spouses cash acquisitions for the years
2000, 2001, and 2003 cannot be ignored. Infact, it makes uswonder how they were
able to purchase the properties in cash given respondent Antonios meager
income.
In view of the foregoing,we are convinced that there is probable cause to indict
respondent spouses for tax evasion aspetitioner was able to show that a tax is due
from them. Probable cause, for purposes of filing a criminal information, is defined
as such facts that are sufficient to engender a well-founded belief that a crime has
been committed, that the accusedis probably guilty thereof, and that he should be
held for trial.82 It bears stressing that the determination of probable cause does
not require actual or absolute certainty, nor clear and convincing evidence of guilt;
it only requires reasonable belief or probability that more likely than not a crime
has been committed by the accused.83
In completely disregarding the evidence presented and in affirming the ruling of
the Acting Justice Secretary Devanadera that no probable cause exists, we find
that the CA committed grave abuse of discretion amounting to lack or excess of
jurisdiction. As we have said, ifthere is grave abuse of discretion, the court may
step in and proceed to make its own independent determination of probable cause
as judicial review is allowed to ensure that the Executive Department acts within
the permissible bounds of its authority or does not gravely abuse the same.84
We must make it clear, however, that we are only here to determine probable
cause.1wphi1 As to whether respondent spouses are guilty of tax evasion is an
issue that must be resolved during the trial of the criminal case, where the quantum
of proof required is proof beyond reasonable doubt.
Before we close, we must stress that our ruling in this case should not be
interpreted as an unbridled license for our tax officials to engage in fishing
expeditions and witch-hunting. They should not abuse their investigative powers,
instead they should exercise the same within the bounds of the law. They must
properly observe the guidelines in making assessments and investigative
procedures to ensure that the constitutional rights of the taxpayers are well
protected as we cannot allow the floodgates to be opened for frivolous and
malicious tax suits.
WHEREFORE, the Petition is hereby GRANTED. The Decision dated October 28,
2010 and the Resolution dated May 10, 2011 of the Court of Appeals in CA-G.R.
SP No. 112479 are hereby REVERSED and SET ASIDE. The Resolutions dated
August 31, 2006 and November 29, 2007 of State Prosecutor Ma. Cristina A.
Montera-Barot in LS. No. 2005-573 finding probable cause to indict respondent
spouses Antonio Villan Manly and Ruby Ong Manly for Violation of Sections 254
and 255 of the National Internal Revenue Code are hereby REINSTATED.
SO ORDERED.
ENRON POWER CORPORATION VS CIR
In 1997, Enron Subic Power Corporation received a pre-assessment notice from
the Bureau of Internal Revenue (BIR). Enron allegedly had a tax deficiency of P2.8
million for the year 1996. Enron filed a protest. In 1999, Enron received a final
assessment notice (FAN) from the BIR for the same amount of tax deficiency.
Enron however assailed the FAN because according to Enron the FAN is not
compliant with Section 228 of the National Internal Revenue Code (NIRC) which
provides that the legal and factual bases of the assessment must be contained in
the FAN. The FAN issued to Enron only contained the computation of its alleged
tax liability.
The Commissioner of Internal Revenue (CIR) admitted that the FAN did not
contain the legal and factual bases of the assessment however, the CIR insisted
that the same has been substantially complied with already because during the
pre-assessment stage, the representative of Enron has been advised of the said
factual and legal bases of the assessment.
ISSUE: Whether or not there is a valid final assessment notice issued to Enron.
HELD: No. The wording of Section 228 of the NIRC provides:
The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise the assessment shall be void.
The word shall is mandatory. The law requires that the legal and factual bases of
the assessment be stated in the formal letter of demand and assessment notice.
It cannot be substituted by other notices or advisories issued or delivered to the
taxpayer during the preliminary stage.
G.R. No. 197515 July 2, 2014
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
UNITED SALVAGE AND TOWAGE (PHILS.), INC., Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Revised
Rules of Court which seeks to review, reverse and set aside the Decision1 of the
Court of Tax Appeals En Banc (CTA En Banc), dated June 27, 2011, in the case
entitled Commissioner of Internal Revenue v. United Salvage and Towage (Phils.),
Inc. (USTP), docketed as C.T.A. EB No. 662. The facts as culled from the records:
Respondent is engaged in the business of sub-contracting work for service
contractors engaged in petroleum operations in the Philippines.2 During the
taxable years in question, it had entered into various contracts and/or sub-
contracts with several petroleum service contractors, such as Shell Philippines
Exploration, B.V. and Alorn Production Philippines for the supply of service
vessels.3
In the course of respondents operations, petitioner found respondent liable for
deficiency income tax, withholding tax, value-added tax (VAT) and documentary
stamp tax (DST) for taxable years 1992,1994, 1997 and 1998.4 Particularly,
petitioner, through BIR officials, issued demand letters with attached assessment
notices for withholding tax on compensation (WTC) and expanded withholding tax
(EWT) for taxable years 1992, 1994 and 1998,5 detailed as follows:
Assessment Notice No. Tax Covered Period Amount
25-1-000545-92 WTC 1992 P50,429.18
25-1-000546-92 EWT 1992 P14,079.45
034-14-000029-94 EWT 1994 P48,461.76
034-1-000080-98 EWT 1998 P22,437.016
On January 29, 1998 and October 24, 2001, USTP filed administrative protests
against the 1994 and 1998 EWT assessments, respectively.7
On February 21, 2003, USTP appealed by way of Petition for Review before the
Court in action (which was thereafter raffled to the CTA-Special First Division)
alleging, among others, that the Notices of Assessment are bereft of any facts,
law, rules and regulations or jurisprudence; thus, the assessments are void and
the right of the government to assess and collect deficiency taxes from it has
prescribed on account of the failure to issue a valid notice of assessment within
the applicable period.8
During the pendency of the proceedings, USTP moved to withdraw the aforesaid
Petition because it availed of the benefits of the Tax Amnesty Program under
Republic Act (R.A.) No. 9480.9 Having complied with all the requirements therefor,
the CTA-Special First Division partially granted the Motion to Withdraw and
declared the issues on income tax, VAT and DST deficiencies closed and
terminated in accordance with our pronouncement in Philippine Banking
Corporation v. Commissioner of Internal Revenue.10 Consequently, the case was
submitted for decision covering the remaining issue on deficiency EWT and WTC,
respectively, for taxable years 1992, 1994 and 1998.11
The CTA-Special First Division held that the Preliminary Assessment Notices
(PANs) for deficiency EWT for taxable years 1994 and 1998 were not formally
offered; hence, pursuant to Section 34, Rule 132 of the Revised Rules of Court,
the Court shall neither consider the same as evidence nor rule on their validity.12
As regards the Final Assessment Notices (FANs) for deficiency EWT for taxable
years 1994 and 1998, the CTA-Special First Division held that the same do not
show the law and the facts on which the assessments were based.13 Said
assessments were, therefore, declared void for failure to comply with Section 228
of the 1997 National Internal Revenue Code (Tax Code).14 From the foregoing,
the only remaining valid assessment is for taxable year 1992.15
Nevertheless, the CTA-Special First Division declared that the right of petitioner to
collect the deficiency EWT and WTC, respectively, for taxable year 1992 had
already lapsed pursuant to Section 203 of the Tax Code.16 Thus, in ruling for
USTP, the CTA-Special First Division cancelled Assessment Notice Nos. 25-1-
00546-92 and 25-1-000545-92, both dated January 9, 1996 and covering the
period of 1992, as declared in its Decision17 dated March 12, 2010, the dispositive
portion of which provides:
WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly,
Assessment Notice No. 25-1-00546-92 dated January 9, 1996 for deficiency
Expanded Withholding Tax and Assessment Notice No. 25-1-000545 dated
January 9, 1996 for deficiency Withholding Tax on Compensation are hereby
CANCELLED.
SO ORDERED.18
Dissatisfied, petitioner moved to reconsider the aforesaid ruling. However, in a
Resolution19 dated July 15, 2010, the CTA-Special First Division denied the same
for lack of merit.
On August 18, 2010, petitioner filed a Petition for Review with the CTA En Banc
praying that the Decision of the CTA-Special First Division, dated March 12,
2010,be set aside.20
On June 27, 2011, the CTA En Banc promulgated a Decision which affirmed with
modification the Decision dated March 12, 2010 and the Resolution dated July 15,
2010 of the CTA-Special First Division, the dispositive portion of which reads:
WHEREFORE, premises considered, the Petition is PARTLY GRANTED. The
Decision dated March 12, 2010 and the Resolution dated July 15, 2010 are
AFFIRMED with MODIFICATION upholding the 1998 EWT assessment. In
addition to the basic EWT deficiency of P14,496.79, USTP is ordered to pay
surcharge, annual deficiency interest, and annual delinquency interest from the
date due until full payment pursuant to Section 249 of the 1997 NIRC.
SO ORDERED.21
Hence, the instant petition raising the following issues:
1. Whether or not the Court of Tax Appeals is governed strictly by the technical
rules of evidence;
2. Whether or not the Expanded Withholding Tax Assessments issued by petitioner
against the respondent for taxable year 1994 was without any factual and legal
basis; and
3. Whether or not petitioners right to collect the creditable withholding tax and
expanded withholding tax for taxable year 1992 has already prescribed.22
After careful review of the records and evidence presented before us, we find no
basis to overturn the decision of the CTA En Banc.
On this score, our ruling in Compagnie Financiere Sucres Et Denrees v. CIR,23 is
enlightening, to wit:
We reiterate the well-established doctrine that as a matter of practice and principle,
[we] will not set aside the conclusion reached by an agency, like the CTA,
especially if affirmed by the [CA]. By the very nature of its function, it has dedicated
itself to the study and consideration of tax problems and has necessarily developed
an expertise on the subject, unless there has been an abuse or improvident
exercise of authority on its part, which is not present here.24
Now, to the first issue.
Petitioner implores unto this Court that technical rules of evidence should not be
strictly applied in the interest of substantial justice, considering that the mandate
of the CTA explicitly provides that its proceedings shall not be governed by the
technical rules of evidence.25 Relying thereon, petitioner avers that while it failed
to formally offer the PANs of EWTs for taxable years 1994and 1998, their existence
and due execution were duly tackled during the presentation of petitioners
witnesses, Ruleo Badilles and Carmelita Lynne de Guzman (for taxable year 1994)
and Susan Salcedo-De Castro and Edna A. Ortalla (for taxable year 1998).26
Petitioner further claims that although the PANs were not marked as exhibits, their
existence and value were properly established, since the BIR records for taxable
years 1994 and 1998 were forwarded by petitioner to the CTA in compliance with
the latters directive and were, in fact, made part of the CTA records.27
Under Section 828 of Republic Act (R.A.) No. 1125, the CTA is categorically
described as a court of record.29 As such, it shall have the power to promulgate
rules and regulations for the conduct of its business, and as may be needed, for
the uniformity of decisions within its jurisdiction.30 Moreover, as cases filed before
it are litigated de novo, party-litigants shall prove every minute aspect of their
cases.31 Thus, no evidentiary value can be given the pieces of evidence submitted
by the BIR, as the rules on documentary evidence require that these documents
must be formally offered before the CTA.32 Pertinent is Section 34, Rule 132 of
the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. The court shall consider no evidence which has not
been formally offered. The purpose for which the evidence is offered must be
specified.
Although in a long line of cases, we have relaxed the foregoing rule and allowed
evidence not formally offered to be admitted and considered by the trial court, we
exercised extreme caution in applying the exceptions to the rule, as pronounced
in Vda. de Oate v. Court of Appeals,33 thus:
From the foregoing provision, it is clear that for evidence to be considered, the
same must be formally offered. Corollarily, the mere fact that a particular document
is identified and marked as an exhibit does not mean that it has already been
offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles[186
SCRA 385, 388-389 (1990)], we had the occasion to make a distinction between
identification of documentary evidence and its formal offer as an exhibit. We said
that the first is done in the course of the trial and is accompanied by the marking
of the evidence as an exhibit while the second is done only when the party rests
its case and not before. A party, therefore, may opt to formally offer his evidence
if he believes that it will advance his cause or not to do so at all. In the event he
chooses to do the latter, the trial court is not authorized by the Rules to consider
the same.
However, in People v. Napat-a[179 SCRA 403 (1989)] citing People v. Mate[103
SCRA 484 (1980)], we relaxed the foregoing rule and allowed evidence not
formally offered to be admitted and considered by the trial court provided the
following requirements are present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the same must have been
incorporated in the records of the case.34
The evidence may, therefore, be admitted provided the following requirements are
present: (1) the same must have been duly identified by testimony duly recorded;
and (2) the same must have been incorporated in the records of the case. Being
an exception, the same may only be applied when there is strict compliance with
the requisites mentioned above; otherwise, the general rule in Section 34 of Rule
132 of the Rules of Court should prevail.35
In the case at bar, petitioner categorically admitted that it failed to formally offer the
PANs as evidence. Worse, it advanced no justifiable reason for such fatal
omission. Instead, it merely alleged that the existence and due execution of the
PANs were duly tackled by petitioners witnesses. We hold that such is not
sufficient to seek exception from the general rule requiring a formal offer of
evidence, since no evidence of positive identification of such PANs by petitioners
witnesses was presented. Hence, we agree with the CTA En Bancs observation
that the 1994 and 1998 PANs for EWT deficiencies were not duly identified by
testimony and were not incorporated in the records of the case, as required by
jurisprudence.
While we concur with petitioner that the CTA is not governed strictly by technical
rules of evidence, as rules of procedure are not ends in themselves but are
primarily intended as tools in the administration of justice,36 the presentation of
PANs as evidence of the taxpayers liability is not mere procedural technicality. It
is a means by which a taxpayer is informed of his liability for deficiency taxes. It
serves as basis for the taxpayer to answer the notices, present his case and
adduce supporting evidence.37 More so, the same is the only means by which the
CTA may ascertain and verify the truth of respondent's claims. We are, therefore,
constrained to apply our ruling in Heirs of Pedro Pasag v. Spouses Parocha,38
viz.:
x x x. A formal offer is necessary because judges are mandated to rest their
findings of facts and their judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial judge to know the purpose
or purposes for which the proponent is presenting the evidence. On the other hand,
this allows opposing parties to examine the evidence and object to its admissibility.
Moreover, it facilitates review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court in Constantino v.
Court of Appeals ruled that the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of time. It explained that the
court cannot admit an offer of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity if not non-compliance with
a court order which, in effect, would encourage needless delays and derail the
speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had
reasonable ground to consider that petitioners had waived their right to make a
formal offer of documentary or object evidence. Despite several extensions of time
to make their formal offer, petitioners failed to comply with their commitment and
allowed almost five months to lapse before finally submitting it. Petitioners' failure
to comply with the rule on admissibility of evidence is anathema to the efficient,
effective, and expeditious dispensation of justice. x x x.39
Anent the second issue, petitioner claims that the EWT assessment issued for
taxable year 1994 has factual and legal basis because at the time the PAN and
FAN were issued by petitioner to respondent on January 19, 1998, the provisions
of Revenue Regulation No. 12-9940 which governs the issuance of assessments
was not yet operative. Hence, its compliance with Revenue Regulation No. 12-
8541 was sufficient. In any case, petitioner argues that a scrutiny of the BIR
records of respondent for taxable year 1994 would show that the details of the
factual finding of EWT were itemized from the PAN issued by petitioner.42
In order to determine whether the requirement for a valid assessment is duly
complied with, it is important to ascertain the governing law, rules and regulations
and jurisprudence at the time the assessment was issued. In the instant case, the
PANs and FANs pertaining to the deficiency EWT for taxable years 1994 and 1998,
respectively, were issued on January 19, 1998, when the Tax Code was already
in effect, as correctly found by the CTA En Banc:
The date of issuance of the notice of assessment determines which law applies-
the 1997 NIRC or the old Tax Code. The case of Commissioner of Internal
Revenue v. Bank of Philippine Islands is instructive:
In merely notifying BPI of his findings, the CIR relied on the provisions of the former
Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform
Act of 1997). In CIR v. Reyes, we held that:
In the present case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made. She was merely notified of
the findings by the CIR, who had simply relied upon the provisions of former
Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax
Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR's
findings was changed in 1998to informing the taxpayer of not only the law, but also
of the facts on which an assessment would be made; otherwise, the assessment
itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued
against the estate. On April 22, 1998, the final estate tax assessment notice, as
well as demand letter, was also issued. During those dates, RA 8424 was already
in effect. The notice required under the old law was no longer sufficient under the
new law.(Emphasis ours.)
In the instant case, the 1997 NIRC covers the 1994 and 1998 EWT FANs because
there were issued on January 19, 1998 and September 21, 2001, respectively, at
the time of the effectivity of the 1997 NIRC. Clearly, the assessments are governed
by the law.43
Indeed, Section 228 of the Tax Code provides that the taxpayer shall be informed
in writing of the law and the facts on which the assessment is made. Otherwise,
the assessment is void. To implement the aforesaid provision, Revenue Regulation
No. 12-99was enacted by the BIR, of which Section 3.1.4 thereof reads:
3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayers deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. x x x44
It is clear from the foregoing that a taxpayer must be informed in writing of the legal
and factual bases of the tax assessment made against him. The use of the word
"shall" in these legal provisions indicates the mandatory nature of the requirements
laid down therein.
In the present case, a mere perusal of the FAN for the deficiency EWT for taxable
year 1994will show that other than a tabulation of the alleged deficiency taxes due,
no further detail regarding the assessment was provided by petitioner. Only the
resulting interest, surcharge and penalty were anchored with legal basis.45
Petitioner should have at least attached a detailed notice of discrepancy or stated
an explanation why the amount of P48,461.76 is collectible against respondent46
and how the same was arrived at. Any short-cuts to the prescribed content of the
assessment or the process thereof should not be countenanced, in consonance
with the ruling in Commissioner of Internal Revenue v. Enron Subic Power
Corporation47 to wit:
The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enrons representative of the tax deficiency, informed it of the proposed tax
deficiency assessment through a preliminary five-day letter and furnished Enron a
copy of the audit working paper allegedly showing in detail the legal and factual
bases of the assessment. The CIR argues that these steps sufficed to inform Enron
of the laws and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment.
These steps were mere perfunctory discharges of the CIRs duties incorrectly
assessing a taxpayer. The requirement for issuing a preliminary or final notice, as
the case may be, informing a taxpayer of the existence of a deficiency tax
assessment is markedly different from the requirement of what such notice must
contain. Just because the CIR issued an advice, a preliminary letter during the pre-
assessment stage and a final notice, in the order required by law, does not
necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.
The law requires that the legal and factual bases of the assessment be stated in
the formal letter of demand and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR
No. 12-99 would be rendered nugatory. The alleged "factual bases" in the advice,
preliminary letter and "audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment
be stated in writing in the formal letter of demand accompanying the assessment
notice.
We note that the old law merely required that the taxpayer be notified of the
assessment made by the CIR. This was changed in 1998 and the taxpayer must
now be informed not only of the law but also of the facts on which the assessment
is made. Such amendment is in keeping with the constitutional principle that no
person shall be deprived of property without due process. In view of the absence
of a fair opportunity for Enron to be informed of the legal and factual bases of the
assessment against it, the assessment in question was void. x x x.48
In the same vein, we have held in Commissioner of Internal Revenue v. Reyes,49
that:
Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for -- not to mention the insufficiency of -- the
gross figures and details of the itemized deductions indicated in the notice and the
letter. This Court cannot countenance an assessment based on estimates that
appear to have been arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection "should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself."50
Applying the aforequoted rulings to the case at bar, it is clear that the assailed
deficiency tax assessment for the EWT in 1994disregarded the provisions of
Section 228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue
Regulations No. 12-99 by not providing the legal and factual bases of the
assessment. Hence, the formal letter of demand and the notice of assessment
issued relative thereto are void.
In any case, we find no basis in petitioners claim that Revenue Regulation No. 12-
99 is not applicable at the time the PAN and FAN for the deficiency EWT for taxable
year 1994 were issued. Considering that such regulation merely implements the
law, and does not create or take away vested rights, the same may be applied
retroactively, as held in Reyes:
x x x x.
Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is
of no moment, considering that it merely implements the law.
A tax regulation is promulgated by the finance secretary to implement the
provisions of the Tax Code. While it is desirable for the government authority or
administrative agency to have one immediately issued after a law is passed, the
absence of the regulation does not automatically mean that the law itself would
become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424 already
stated that the taxpayer must be informed of both the law and facts on which the
assessment was based. Thus, the CIR should have required the assessment
officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the
new law. The old regulation governing the issuance of estate tax assessment
notices ran afoul of the rule that tax regulations-- old as they were -- should be in
harmony with, and not supplant or modify, the law.
It may be argued that the Tax Code provisions are not self- executory. It would be
too wide a stretch of the imagination, though, to still issue a regulation that would
simply require tax officials to inform the taxpayer, in any manner, of the law and
the facts on which an assessment was based. That requirement is neither difficult
to make nor its desired results hard to achieve. Moreover, an administrative rule
interpretive of a statute, and not declarative of certain rights and corresponding
obligations, is given retroactive effect as of the date of the effectivity of the statute.
RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code,
even if it was issued only on September 6, 1999, this regulation was to retroact to
January 1, 1998 -- a date prior to the issuance of the preliminary assessment notice
and demand letter.51
Indubitably, the disputed assessments for taxable year 1994 should have already
complied with the requirements laid down under Revenue Regulation No. 12-99.
Having failed so, the same produces no legal effect.
Notwithstanding the foregoing findings, we sustain the CTA En Bancs findings on
the deficiency EWT for taxable year 1998 considering that it complies with Section
228 of the Tax Code as well as Revenue Regulation No. 12-99, thus:
On the other hand, the 1998 EWT FAN reflected the following: a detailed factual
account why the basic EWT is P14,496.79 and the legal basis, Section 57 B of the
1997 NIRC supporting findings of EWT liability of P22,437.01. Thus, the EWT FAN
for 1998 is duly issued in accordance with the law.52
As to the last issue, petitioner avers that its right to collect the EWT for taxable
year 1992 has not yet prescribed. It argues that while the final assessment notice
and demand letter on EWT for taxable year 1992 were all issued on January 9,
1996, the five (5)-year prescriptive period to collect was interrupted when
respondent filed its request for reinvestigation on March 14, 1997 which was
granted by petitioner on January 22, 2001 through the issuance of Tax Verification
Notice No. 00165498 on even date.53 Thus, the period for tax collection should
have begun to run from the date of the reconsidered or modified assessment.54
This argument fails to persuade us.
The statute of limitations on assessment and collection of national internal revenue
taxes was shortened from five (5) years to three (3) years by virtue of Batas
Pambansa Blg. 700.55 Thus, petitioner has three (3) years from the date of actual
filing of the tax return to assess a national internal revenue tax or to commence
court proceedings for the collection thereof without an assessment.56 However,
when it validly issues an assessment within the three (3)-year period, it has another
three (3) years within which to collect the tax due by distraint, levy, or court
proceeding.57 The assessment of the tax is deemed made and the three (3)-year
period for collection of the assessed tax begins to run on the date the assessment
notice had been released, mailed or sent to the taxpayer.58
On this matter, we note the findings of the CTA-Special First Division that no
evidence was formally offered to prove when respondent filed its returns and paid
the corresponding EWT and WTC for taxable year 1992.59
Nevertheless, as correctly held by the CTA En Banc, the Preliminary Collection
Letter for deficiency taxes for taxable year 1992 was only issued on February 21,
2002, despite the fact that the FANs for the deficiency EWT and WTC for taxable
year 1992 was issued as early as January 9, 1996. Clearly, five (5) long years had
already lapsed, beyond the three (3)-year prescriptive period, before collection was
pursued by petitioner.
Further, while the request for reinvestigation was made on March 14, 1997, the
same was only acted upon by petitioner on January22, 2001, also beyond the three
(3) year statute of limitations reckoned from January 9, 1996, notwithstanding the
lack of impediment to rule upon such issue. We cannot countenance such inaction
by petitioner to the prejudice of respondent pursuant to our ruling in Commissioner
of Internal Revenue v. Philippine Global Communication, Inc.,60 to wit:
The assessment, in this case, was presumably issued on 14 April 1994 since the
respondent did not dispute the CIRs claim. Therefore, the BIR had until 13 April
1997. However, as there was no Warrant of Distraint and/or Levy served on the
respondents nor any judicial proceedings initiated by the BIR, the earliest attempt
of the BIR to collect the tax due based on this assessment was when it filed its
Answer in CTA Case No. 6568 on 9 January 2003, which was several years
beyond the three-year prescriptive period. Thus, the CIR is now prescribed from
collecting the assessed tax.61
Here, petitioner had ample time to make a factually and legally well-founded
assessment and implement collection pursuant thereto.1wphi1 Whatever
examination that petitioner may have conducted cannot possibly outlast the entire
three (3)-year prescriptive period provided by law to collect the assessed tax. Thus,
there is no reason to suspend the running of the statute of limitations in this case.
Moreover, in Bank of the Philippine Islands, citing earlier jurisprudence, we held
that the request for reinvestigation should be granted or at least acted upon in due
course before the suspension of the statute of limitations may set in, thus:
In BPI v. Commissioner of Internal Revenue, the Court emphasized the rule that
the CIR must first grant the request for reinvestigation as a requirement for the
suspension of the statute of limitations. The Court said:
In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco
requested for a thorough reinvestigation of the assessment against him and placed
at the disposal of the Collector of Internal Revenue all the evidences he had for
such purpose; yet, the Collector ignored the request, and the records and
documents were not at all examined. Considering the given facts, this Court
pronounced that
x x x The act of requesting a reinvestigation alone does not suspend the period.
The request should first be granted, in order to effect suspension. (Collector v.
Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the
Collector gave appellee until April 1, 1949, within which to submit his evidence,
which the latter did one day before. There were no impediments on the part of the
Collector to file the collection case from April 1, 1949
In Republic of the Philippines v. Acebedo, this Court similarly found that
x x x T]he defendant, after receiving the assessment notice of September 24, 1949,
asked for a reinvestigation thereof on October 11, 1949 (Exh. "A"). There is no
evidence that this request was considered or acted upon. In fact, on October 23,
1950 the then Collector of Internal Revenue issued a warrant of distraint and levy
for the full amount of the assessment (Exh. "D"), but there was follow-up of this
warrant. Consequently, the request for reinvestigation did not suspend the running
of the period for filing an action for collection.[Emphasis in the original]62 With
respect to petitioners argument that respondents act of elevating its protest to the
CTA has fortified the continuing interruption of petitioners prescriptive period to
collect under Section 223 of the Tax Code,63 the same is flawed at best because
respondent was merely exercising its right to resort to the proper Court, and does
not in any way deter petitioners right to collect taxes from respondent under
existing laws.
On the strength of the foregoing observations, we ought to reiterate our earlier
teachings that "in balancing the scales between the power of the State to tax and
its inherent right to prosecute perceived transgressors of the law on one side, and
the constitutional rights of a citizen to due process of law and the equal protection
of the laws on the other, the scales must tilt in favor of the individual, for a citizens
right is amply protected by the Bill of Rights under the Constitution."64 Thus, while
"taxes are the lifeblood of the government," the power to tax has its limits, in spite
of all its plenitude.65 Even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be exercised
reasonably and in accordance with the prescribed procedure.66
After all, the statute of limitations on the collection of taxes was also enacted to
benefit and protect the taxpayers, as elucidated in the case of Philippine Global
Communication, Inc.,67 thus:
x x x The report submitted by the tax commission clearly states that these
provisions on prescription should be enacted to benefit and protect taxpayers:
Under the former law, the right of the Government to collect the tax does not
prescribe.1wphi1 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 collections, 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).68
WHEREFORE, the petition is DENIED. The June 27, 2011 Decision of the Court
of Tax Appeals En Banc in C.T.A. EB No. 662 is hereby AFFIRMED.
SO ORDERED.
SAMAR-I ELECTRIC COOPERATIVE, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
VILLARAMA, JR., J.:
At bar is a petition for review on certiorari of the Decision1 of the Court of Tax
Appeals En Banc (CTA EB) dated March 11, 2010 and its Resolution2 dated July
28, 2010 in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697) affirming the May
27, 2008 Decision3 and the January 19, 2009 Amended Decision4 of the CTAs
First Division, and ordering petitioner to pay respondent Commissioner of Internal
Revenue (CIR) deficiency withholding tax on compensation in the aggregate
amount of P2,690,850.91, plus 20% interest starting September 30, 2002, until
fully paid, pursuant to Section 249(c) of the National Internal Revenue Code
(NIRC) of 1997.
The following facts are undisputed as found by the CTAs First Division and
adopted by the CTA EB:chanroblesvirtuallawlibrary
Samar-I Electric Cooperative, Inc. (Petitioner) is an electric cooperative, with
principal office at Barangay Carayman, Calbayog City. It was issued a Certificate
of Registration by the National Electrification Administration (NEA) on February 27,
1974 pursuant to Presidential Decree (PD) 269. Likewise, it was granted a
Certificate of Provisional Registration under Republic Act (RA) 6938, otherwise
known as the Cooperative Code of the Philippines on March 16, 1993, by the
Cooperative Development Authority (CDA).
Respondent Commissioner of Internal Revenue is a public officer authorized under
the National Internal Revenue Code (NIRC) to examine any taxpayer including
inter alia, the power to issue tax assessment, evaluate, and decide upon protests
relative thereto.
On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income tax
returns, respectively. Petitioner filed its 1997, 1998, and 1999 Annual Information
Return of Income Tax Withheld on Compensation, Expanded and Final
Withholding Taxes on February 17, 1998, February 1, 1999, and February 4, 2000,
in that order.
On November 13, 2000, respondent issued a duly signed Letter of Authority (LOA)
No. 1998 00023803; covering the examination of petitioners books of account and
other accounting records for income and withholding taxes for the period 1997 to
1999. The LOA was received by petitioner on November 14, 2000.
Petitioner cooperated in the audit and investigation conducted by the Special
Investigation Division of the BIR by submitting the required documents on
December 5, 2000.
On October 19, 2001, respondent sent a Notice for Informal Conference which was
received by petitioner in November 2001; indicating the allegedly income and
withholding tax liabilities of petitioner for 1997 to 1999. Attached to the letter is a
summary of the report, with an explanation of the findings of the investigators.
In response, petitioner sent a letter dated November 26, 2001 to respondent
maintaining its indifference to the latters findings and requesting details of the
assessment.
On December 13, 2001, petitioner executed a Waiver of the Defense of
Prescription under the Statute of Limitations, good until March 29, 2002.
On February 27, 2002, a letter was sent by petitioner to respondent requesting a
detailed computation of the alleged 1997, 1998 and 1999 deficiency withholding
tax on compensation.
On February 28, 2002, respondent issued a Preliminary Assessment Notice
(PAN). The PAN was received by petitioner on April 9, 2002, which was protested
on April 18, 2002. Respondents Reply dated May 27, 2002, contained the
explanation of the legal basis of the issuance of the questioned tax assessments.
However, on July 8, 2002, respondent dismissed petitioners protest and
recommended the issuance of a Final Assessment Notice.
Consequently, on September 15, 2002, petitioner received a demand letter and
assessments notices (Final Assessment Notices) for the alleged 1997, 1998, and
1999 deficiency withholding tax in the amount of [P]3,760,225.69, as well as
deficiency income tax covering the years 1998 to 1999 in the amount of
[P]440,545.71, or in the aggregate amount of [P]4,200,771.40.
Petitioner filed its protest and Supplemental Protest to the Final Assessment
Notices on October 14, 2002 and November 4, 2002, respectively. But on the Final
Decision on Disputed Assessment issued on April 10, 2003, petitioner was still
held liable for the alleged tax liabilities.5
The CTA EB narrates the following succeeding events:chanroblesvirtuallawlibrary
On May 29, 2003, the Petition for Review was filed by SAMELCO-I with the Court
in division.

On May 27, 2008, the assailed Decision partially granting SAMELCO-Is petition
was promulgated.
Dissatisfied, both parties sought reconsideration of the said decision. CIR filed the
Motion for Partial Reconsideration (Re: Decision dated 27 May 2008[)] on June
13, 2008. On the other hand, SAMELCO-Is Motion for Reconsideration was filed
on June 17, 2008.
On January 19, 2009, the Court in division promulgated its Amended Decision
which denied CIRs motion and partially granted SAMELCO-Is motion.
Thereafter, CIR and SAMELCO-I filed their Motion for Extension of Time to File
Petition for Review on February 6, 2009 and February 11, 2009, respectively. Both
motions were granted by the Court.6
The following issues were raised by the parties in their petitions for review before
the CTA EB. In C.T.A. EB 460, herein respondent CIR raised the following
grounds:chanroblesvirtuallawlibrary
I. Whether or not SAMELCO-I is entitled to tax privileges accorded
to members in accordance with Republic Act No. 6938, or the
Cooperative Code, or to privileges of Presidential Decree (PD)
No. 269.
II. Whether or not SAMELCO-I is liable for the minimum corporate
income tax (MCIT) for taxable years 1998 to 1999.
III. Whether or not SAMELCO-I is liable to pay the total deficiency
expanded withholding tax of [P]3,760,225.69 for taxable years
1997 to 1999.7
On the other hand, petitioner SAMELCO-I raised the following legal and factual
errors in C.T.A. EB No. 462, viz.:chanroblesvirtuallawlibrary
I. The Court in Division gravely erred in holding that the 1997 and
1998 assessments on withholding tax on compensation (received
by SAMELCO-I on September 15, 2002), have not prescribed
even if the waiver validly executed was good only until March 29,
2002.
II. The Court in Division erred in holding that CIR can validly assess
within the ten (10)-year prescriptive period even if the notice of
informal conference, PAN, formal letter of demand, and
assessment notice mention not a word that the BIR is invoking
Section 222 (a) of the 1997 Tax Code [then Sec. 223, NIRC], due
to alleged false withholding tax returns filed by [SAMELCO-I] as
the same assertions were mere afterthought to justify application
of the 10-year prescriptive period to assess.
III. The Court in Division failed to consider that CIR made no findings
as to SAMELCO-Is filing of a false return as clearly manifested
by the non-imposition of 50% surcharge on the 1997, 1998 and
1999 basic withholding tax deficiency in the PAN, demand notice
and even in the assessment notice other than interest charges.
IV. The Court in Division erred in not holding that given SAMELCO-
Is filing of its 1997, 1998, and 1999 withholding tax returns in
good faith, and in close consultation with the BIR personnel in
Calbayog City where SAMELCO-Is place of business is located,
the latter should no longer be imposed the incremental penalties
(surcharge and interest).
V. The Court in Division failed to rule that since there was no
substantial under remittance of 1998 withholding tax as the basic
deficiency tax per amended decision is less than 30% of the
computed total tax due per return, SAMELCO-I did not file a false
return.
VI. The Court in Division overlooked the fact that for taxable year
1999, [SAMELCO-I] remitted the amount of [P]844,958.00 as
withholding tax in compensation instead of [P]786,702.43 as
indicated in Page 8, Annex C of the CTA (1st Division) Decision.
VII. The Court in Division erred in failing to declare as void both the
formal letter of demand and assessment notice on withholding
tax on compensation for 1997 taxable year, given its non-
compliance with Section 3.1.4 of RR 12-99.8
On February 26, 2009, the CTA EB consolidated both cases. After the filing of the
respective Comments of both parties, the cases were deemed submitted for
decision. The CTA EB found that the issues and arguments raised by the parties
were mere reiterations of what have been considered and passed upon by the
Court in division in the assailed Decision and the Amended Decision.9 It ruled that
SAMELCO-I is exempted in the payment of the Minimum Corporate Income Tax
(MCIT); that due process was observed in the issuance of the assessments in
accordance with Section 228 of the Tax Code; and that the 1997 and 1998
assessments on deficiency withholding tax on compensation have not prescribed.
Finding no reversible error in the Decision and the Amended Decision, the CTA
EB ruled, viz.:chanroblesvirtuallawlibrary
WHEREFORE, premises considered, We deny the petitions for lack of merit.
Accordingly, We AFFIRM the May 27, 2008 Decision and the January 19, 2009
Amended Decision promulgated by the First Division of this Court.
SO ORDERED.10
Petitioner moved for reconsideration. In a Resolution dated July 28, 2010, the CTA
EB denied the motion. Petitioner now comes to this Court raising the following
assignment of errors:chanroblesvirtuallawlibrary
A. The Honorable CTA En Banc gravely erred in holding that respondent
sufficiently complied with the due process requirements mandated by Section 228
of the 1997 Tax Code in the issuance of 1997-1999 assessments to petitioner,
even if the details of discrepancies on which the assessments were factually and
legally based as required under Section 3.1.4 of Revenue Regulations (RR) No[.]
12-99, were not found in the Formal Letter of Demand and Final Assessment
Notice (FAN) sent to petitioner, in clear violation of the doctrine established in the
case of Commissioner of Internal Revenue vs. Enron Subic Power Corporation,
G.R. No. 166387, January 19, 2009, applying Section 3.1.4 of RR 12-99 in relation
to Section 228 NIRC.
B. The Honorable CTA En Banc erred in holding that respondent observed due
process notwithstanding the missing Annex A-1 that was meant to show Details
of Discrepancies and to be attached to BIRs Letter of Demand/Final Notice dated
September 15, 2002, which was not furnished to petitioner and worse, a file copy
of which is not even found in the BIR records as part of its Exhibit 16 and neither
is the same found in the CTA records.
C. In deciding that the 1997 and 1998 withholding tax assessments have not yet
prescribed, the Honorable CTA En Banc failed to consider the singular significance
of the Waiver of the Defense of Prescription validly agreed upon and executed by
the parties.
D. The Honorable CTA En Banc erred in holding that respondent can validly
assess within the ten (10)-year prescriptive period even if the Notice of Informal
Conference, PAN, and Final Letter of Demand (dated September 15, 2002),
mentioned not a word as to the falsity of the returns filed by petitioner, but as an
afterthought that was raised rather belatedly only in the Answer and during the
trial.
E. The Honorable CTA En Banc erred in holding as valid the 1997 deficiency
withholding tax assessment being anchored on RR 2-98 (as cited in Notice of
Informal Conference and PAN), as the said RR 2-98 governs compensation
income paid beginning January 1, 1998.11
We shall resolve the instant controversy by discussing the following two main
issues in seriatim: whether the 1997 and 1998 assessments on withholding tax on
compensation were issued within the prescriptive period provided by law; and
whether the assessments were issued in accordance with Section 228 of the NIRC
of 1997.
On the issue of prescription, petitioner contends that the subject 1997 and 1998
withholding tax assessments on compensation were issued beyond the
prescriptive period of three years under Section 203 of the NIRC of 1997. Under
this section, the government is allowed a period of only three years to assess the
correct tax liability of a taxpayer, viz.:chanroblesvirtuallawlibrary
SEC. 203. Period of Limitation Upon Assessment and Collection. Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return
is filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day.
Relying on Section 203, petitioner argues that the subject deficiency tax
assessments issued by respondent on September 15, 2002 was issued beyond
the three-year prescriptive period. Petitioner filed its Annual Information Return of
Income Tax Withheld on Compensation, Expanded and Final Withholding Taxes
on the following dates: on February 17, 1998 for the taxable year 1997; and on
February 1, 1999 for the year taxable 1998. Thus, if the period prescribed under
Section 203 of the NIRC of 1997 is to be followed, the three-year prescriptive
period to assess for the taxable years 1997 and 1998 should have ended on
February 16, 2001 and January 31, 2002, respectively.
We disagree.
While petitioner is correct that Section 203 sets the three-year prescriptive period
to assess, the following exceptions are provided under Section 222 of the NIRC of
1997, viz.:chanroblesvirtuallawlibrary
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of
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.
(b) If before the expiration of the time prescribed in Section 203 for the assessment
of the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time, the tax may be assessed within the period agreed
upon. The period so agreed upon may be extended by subsequent written
agreement made before the expiration of the period previously agreed upon.
(c) Any internal revenue tax which has been assessed within the period of limitation
as prescribed in paragraph (a) hereof may be collected by distraint or levy or by a
proceeding in court within five (5) years following the assessment of the tax.
(d) Any internal revenue tax, which has been assessed within the period agreed
upon as provided in paragraph (b) hereinabove, may be collected by distraint or
levy or by a proceeding in court within the period agreed upon in writing before the
expiration of the five (5)-year period. The period so agreed upon may be extended
by subsequent written agreements made before the expiration of the period
previously agreed upon.
(e) Provided, however, That nothing in the immediately preceding Section and
paragraph (a) hereof shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the provisions A careful examination of the evidence on record yields to no other conclusion but
of any tax amnesty law or decree. (Emphasis supplied.) that petitioner failed to withhold taxes from its employees 13th month pay and other
benefits in excess of thirty thousand pesos (P30,000.00) amounting to
In the case at bar, it was petitioners substantial underdeclaration of withholding
P2,690,850.91 for the taxable years 1997 to 1999 resulting to its filing of the
taxes in the amount of P2,690,850.91 which constituted the falsity in the subject
subject false returns. Petitioner failed to refute this finding, both in fact and in law,
returns giving respondent the benefit of the period under Section 222 of the NIRC
before the courts a quo.
of 1997 to assess the correct amount of tax at any time within ten (10) years after
the discovery of the falsity, fraud or omission.12
We quote the following portion of the assailed Decision of the CTA EB,
13 viz.:chanroblesvirtuallawlibrary
The case of Aznar v. Court of Tax Appeals discusses what acts or omissions
may constitute falsity, viz.:chanroblesvirtuallawlibrary It is noteworthy to mention that during the trial, the witness for the CIR testified that
SAMELCO-I did not file an accurate return, as follows:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to evade tax, while respondent ATTY. FRANCIA:
Commissioner of Internal Revenue insists contrariwise, with respondent Court of
Q: Did the petitioner file an accurate Return?
Tax Appeals concluding that the very substantial underdeclarations of income for
six consecutive years eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment of tax.
MS. RAPATAN:
To our minds we can dispense with these controversial arguments on facts, A: No.
although we do not deny that the findings of facts by the Court of Tax Appeals,
supported as they are by very substantial evidence, carry great weight, by resorting
to a proper interpretation of Section 332 of the NIRC. We believe that the proper ATTY. FRANCIA:
and reasonable interpretation of said provision should be that in the three different
cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to Q: Can you please explain?
file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within ten years after the
discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should MS. RAPATAN:
be interpreted to mean a separation of the three different situations of false return,
A: Because I based the computation of my deficiency withholding taxes on
fraudulent return with intent to evade tax, and failure to file a return is strengthened
declared taxable income per alpha list submitted then, I have extracted a data
immeasurably by the last portion of the provision which segregates the situations
from the Alpha List, particularly that of the manager and other officials, only
into three different classes, namely falsity, fraud and omission. That there is a
their basic salary and their overtime pay were declared but the other benefits
difference between false return and fraudulent return cannot be denied. While
were not actually subjected to withholding tax. So, the deficiency withholding
the first merely implies deviation from the truth, whether intentional or not, the
taxes from the taxes on the taxable 13th month pay and other benefits in excess
second implies intentional or deceitful entry with intent to evade the taxes due.
of the [P]12,000.00 for 1997 and for the taxable years 1998 and 1999, in
excess of the [P]30,000.00. I also noticed that the per diem of the Manager
The ordinary period of prescription of 5 years within which to assess tax liabilities
was not included in the withholding tax computation of SAMELCO[-]I.
under Sec. 331 of the NIRC should be applicable to normal circumstances, but
whenever the government is placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of ten ATTY. FRANCIA:
years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, Nothing further, your Honors.
fraud or omission even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of JUSTICE BAUTISTA:
the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess petitioners tax liability had Any re-cross?
not expired at the time said assessment was made.14
ATTY. NAPUTO:
15
No re-cross, your Honors.
We have consistently held that courts will not interfere in matters which are
addressed to the sound discretion of the government agency entrusted with the
regulation of activities coming under its special and technical training and
knowledge.16 The findings of fact of these quasi-judicial agencies are generally
accorded respect and even finality as long as they are supported by substantial
evidence in recognition of their expertise on the specific matters under their
consideration.17 In the case at bar, petitioner failed to proffer convincing argument
and evidence that would persuade us to disturb the factual findings of the CTA
First Division, as affirmed by the CTA EB. As such, we cannot but affirm the finding
of petitioners substantial underdeclaration of withholding taxes in the amount of
P2,690,850.91 which constituted the falsity in the subject returns.
Anent the issue of violation of due process in the issuance of the final notice of
assessment and letter of demand, Section 228 of the NIRC of 1997
provides:chanroblesvirtuallawlibrary
SEC. 228. Protesting of Assessment. x x x government itself. (Emphasis supplied; citations omitted)
x x x x
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made: otherwise, the assessment shall be void.
Petitioner contends that as the Final Demand Letter and Assessment Notices
(FAN) were silent as to the nature and basis of the assessments, it was denied
due process,18 and the assessments must be declared void. It likewise invokes
Revenue Regulations (RR) No. 12-99 which states,
viz.:chanroblesvirtuallawlibrary
3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayers deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void . The same shall
be sent to the taxpayer only by registered mail or by personal delivery. x x x
We uphold the assessments issued to petitioner.
Both Section 228 of the NIRC of 1997 and Section 3.1.4 of RR No. 12-99 clearly
require the written details on the nature, factual and legal bases of the subject
deficiency tax assessments. The reason for the mandatory nature of this
requirement is explained in the case of Commissioner of Internal Revenue v.
Reyes:19
A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence.
In the instant case, respondent has not been informed of the basis of the estate
tax liability. Without complying with the unequivocal mandate of first
informing the taxpayer of the governments claim, there can be no
deprivation of property, because no effective protest can be made. The
haphazard shot at slapping an assessment, supposedly based on estate taxations
general provisions that are expected to be known by the taxpayer, is utter
chicanery.
Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for not to mention the insufficiency of the
gross figures and details of the itemized deductions indicated in the notice and the
letter. This Court cannot countenance an assessment based on estimates
that appear to have been arbitrarily or capriciously arrived at. Although taxes
are the lifeblood of the government, their assessment and collection should be
made in accordance with law as any arbitrariness will negate the very reason for
In Commissioner of Internal Revenue v. Enron Subic Power Corporation,20 we held
that the law requires that the legal and factual bases of the assessment be stated
in the formal letter of demand and assessment notice, and that the alleged factual
bases in the advice, preliminary letter and audit working papers did not suffice.
Thus:chanroblesvirtuallawlibrary
Both the CTA and the CA concluded that the deficiency tax assessment merely
itemized the deductions disallowed and included these in the gross income. It also
imposed the preferential rate of 5% on some items categorized by Enron as costs.
The legal and factual bases were, however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
Enrons representative of the tax deficiency, informed it of the proposed tax
deficiency assessment through a preliminary five-day letter and furnished Enron a
copy of the audit working paper allegedly showing in detail the legal and factual
bases of the assessment. The CIR argues that these steps sufficed to inform Enron
of the laws and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee
of Enron, as well as the preliminary five-day letter, were not valid substitutes
for the mandatory notice in writing of the legal and factual bases of the
assessment. These steps were mere perfunctory discharges of the CIRs duties
in correctly assessing a taxpayer. The requirement for issuing a preliminary or final
notice, as the case may be, informing a taxpayer of the existence of a deficiency
tax assessment is markedly different from the requirement of what such notice
must contain. Just because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in the order required by
law, does not necessarily mean that Enron was informed of the law and facts
on which the deficiency tax assessment was made.21 (Emphasis supplied)
In this case, we agree with the respondent that petitioner was sufficiently apprised
of the nature, factual and legal bases, as well as how the deficiency taxes being
assessed against it were computed. Records reveal that on October 19, 2001, prior
to the conduct of an informal conference, petitioner was already informed of the
results and findings of the investigations made by the respondent, and was duly
furnished with a copy of the summary of the report submitted by Revenue Officer
Elisa G. Ponferrada-Rapatan of the Special Investigation Division. Said summary
report contained an explanation of Findings of Investigation stating the legal and
factual bases for the deficiency assessment. In a letter dated February 27, 2002
petitioner requested for copies of working papers indicating how the deficiency
withholding taxes were computed.22 Respondent promptly responded in a letter-
reply dated February 28, 2002 stating:chanroblesvirtuallawlibrary
please be informed that the cooperatives deficiency withholding taxes on
compensation were due to the failure of the cooperative to withhold taxes on the
taxable 13th month pay and other benefits in excess of P30,000.00 threshold
pursuant to Section 3 of Revenue Regulation No. 2-95 implementing Republic Act
No. 7833 and Section 2.78/1 B 11 of Revenue Regulation 2-98 implementing
Section 32 B e of Republic Act No. 8424. Further, we are providing you hereunder
the computational format on how deficiency withholding taxes were computed and
sample computation from our working papers, for your information and guidance.23
On April 9, 2002, petitioner received the PAN dated February 28, 2002 which
contained the computations of its deficiency income and withholding taxes.
Attached to the PAN was the detailed explanation of the particular provision of law
and revenue regulation violated, thus:chanroblesvirtuallawlibrary
DETAILS OF DISCREPANCIES
1. Deficiency income taxes for 1998 and 1999 respectively result
from non-payment of the minimum corporate income tax (MCIT)
imposed pursuant to Section 27(E) of the 1997 Tax Reform Act.
2. Deficiency Withholding Taxes on Compensation for 1997-1999
are the total withholding taxes on compensation of all employees
of SAMELCO[-]I resulting from failure of employer to withhold
taxes on the taxable 13th month pay and other benefits in excess
of [P]30,000.00 threshold pursuant to Revenue Regulation 2-
98.24
The above information provided to petitioner enabled it to protest the PAN by
questioning respondents interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and assessment of minimum
corporate income tax despite petitioners position that it remains exempt
therefrom.25 In its letter-reply dated May 27, 2002, respondent answered the
arguments raised by petitioner in its protest, and requested it to pay the assessed
deficiency on the date of payment stated in the PAN. A second protest letter dated
June 23, 2002 was sent by petitioner, to which respondent replied (letter dated
July 8, 2002) answering each of the two issues reiterated by petitioner: (1) validity
of EO 93 withdrawing the tax exemption privileges under PD 269; and (2)
retroactive application of RR No. 8-2000.26 The FAN was finally received by
petitioner on September 24, 2002, and protested by it in a letter dated October 14,
2002 which reiterated in lengthy arguments its earlier interpretation of the laws and
regulations upon which the assessments were based.27
Although the FAN and demand letter issued to petitioner were not accompanied
by a written explanation of the legal and factual bases of the deficiency taxes
assessed against the petitioner, the records showed that respondent in its letter
dated April 10, 2003 responded to petitioners October 14, 2002 letter-protest,
explaining at length the factual and legal bases of the deficiency tax assessments
and denying the protest.28
Considering the foregoing exchange of correspondence and documents between
the parties, we find that the requirement of Section 228 was substantially complied
with. Respondent had fully informed petitioner in writing of the factual and legal
bases of the deficiency taxes assessment, which enabled the latter to file an
effective protest, much unlike the taxpayers situation in Enron. Petitioners right
to due process was thus not violated.
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of
the Court of Tax Appeals En Banc dated March 11, 2010 and July 28, 2010,
respectively, in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697), are hereby
AFFIRMED and UPHELD.
With costs against the petitioner.
SO ORDERED.
ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the decision of the Court of Appeals in
CA-G.R. CV No. 09107, dated September 30, 2002,[1] which reversed the
November 19, 1995 Order of Regional Trial Court of Manila, Branch XXXVIII, in
Sp. Proc. No. R-82-6994, entitled Testate Estate of Juliana Diez Vda. De Gabriel.
The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel,
represented by Prudential Bank as its duly appointed and qualified Administrator.
As correctly summarized by the Court of Appeals, the relevant facts are as follows:
During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs
were managed by the Philippine Trust Company (Philtrust). The decedent died on
April 3, 1979. Two days after her death, Philtrust, through its Trust Officer, Atty.
Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not
indicate that the decedent had died.
On May 22, 1979, Philtrust also filed a verified petition for appointment as Special
Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed
as Sp. Proc. No. R-82-6994. The court a quo appointed one of the heirs as Special
Administrator. Philtrusts motion for reconsideration was denied by the probate
court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his
appointment, and appointed Antonio Lantin to take over as Special Administrator.
Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his appointment,
and Atty. Vicente Onosa was appointed in his stead.
In the meantime, the Bureau of Internal Revenue conducted an administrative
investigation on the decedents tax liability and found a deficiency income tax for
the year 1977 in the amount of P318,233.93. Thus, on November 18, 1982, the
BIR sent by registered mail a demand letter and Assessment Notice No. NARD-
78-82-00501 addressed to the decedent c/o Philippine Trust Company, Sta. Cruz,
Manila which was the address stated in her 1978 Income Tax Return. No response
was made by Philtrust. The BIR was not informed that the decedent had actually
passed away.
In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio
as the Commissioner and Auditor Tax Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants
of distraint and levy to enforce collection of the decedents deficiency income tax
liability, which were served upon her heir, Francisco Gabriel. On November 22,
1984, respondent filed a Motion for Allowance of Claim and for an Order of
Payment of Taxes with the court a quo. On January 7, 1985, Mr. Ambrosio filed a
letter of protest with the Litigation Division of the BIR, which was not acted upon
because the assessment notice had allegedly become final, executory and
incontestable.
On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio,
filed a formal opposition to the BIRs Motion for Allowance of Claim based on the
ground that there was no proper service of the assessment and that the filing of
the aforesaid claim had already prescribed. The BIR filed its Reply, contending that
service to Philippine Trust Company was sufficient service, and that the filing of
the claim against the Estate on November 22, 1984 was within the five-year
prescriptive period for assessment and collection of taxes under Section 318 of the
1977 National Internal Revenue Code (NIRC).
On November 19, 1985, the court a quo issued an Order denying respondents
claim against the Estate,[2] after finding that there was no notice of its tax
assessment on the proper party.[3]
On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed
as CA-G.R. CV No. 09107,[4] assailing the Order of the probate court dated
November 19, 1985. It was claimed that Philtrust, in filing the decedents 1978
income tax return on April 5, 1979, two days after the taxpayers death, had
constituted itself as the administrator of the estate of the deceased at least insofar
as said return is concerned.[5] Citing Basilan Estate Inc. v. Commissioner of
Internal Revenue,[6] respondent argued that the legal requirement of notice with
respect to tax assessments[7] requires merely that the Commissioner of Internal
Revenue release, mail and send the notice of the assessment to the taxpayer at
the address stated in the return filed, but not that the taxpayer actually receive said
assessment within the five-year prescriptive period.[8] Claiming that Philtrust had
been remiss in not notifying respondent of the decedents death, respondent
therefore argued that the deficiency tax assessment had already become final,
executory and incontestable, and that petitioner Estate was liable therefor.
On September 30, 2002, the Court of Appeals rendered a decision in favor of the
respondent. Although acknowledging that the bond of agency between Philtrust
and the decedent was severed upon the latters death, it was ruled that the
administrator of the Estate had failed in its legal duty to inform respondent of the
decedents death, pursuant to Section 104 of the National Internal Revenue Code
of 1977. Consequently, the BIRs service to Philtrust of the demand letter and
Notice of Assessment was binding upon the Estate, and, upon the lapse of the
statutory thirty-day period to question this claim, the assessment became final,
executory and incontestable. The dispositive portion of said decision reads:
WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED
AND SET ASIDE. Another one is entered ordering the Administrator of the Estate
to pay the Commissioner of Internal Revenue the following:
a. The amount of P318,223.93, representing the deficiency income tax liability for
the year 1978, plus 20% interest per annum from November 2, 1982 up to
November 2, 1985 and in addition thereto 10% surcharge on the basic tax of
P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended by
PD 69 and 1705; and
b. The costs of the suit.
SO ORDERED.[9]
Hence, the instant petition, raising the following issues:
1. Whether or not the Court of Appeals erred in holding that the service of
deficiency tax assessment against Juliana Diez Vda. de Gabriel through the
Philippine Trust Company was a valid service in order to bind the Estate;
2. Whether or not the Court of Appeals erred in holding that the deficiency tax
assessment and final demand was already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the
decedent after her death. As such, petitioner argues that there was no proper
notice of the assessment which, therefore, never became final, executory and
incontestable.[10] Petitioner further contends that respondents failure to file its
claim against the Estate within the proper period prescribed by the Rules of Court
is a fatal error, which forever bars its claim against the Estate.[11]
Respondent, on the other hand, claims that because Philtrust filed the decedents
income tax return subsequent to her death, Philtrust was the de facto administrator
of her Estate.[12] Consequently, when the Assessment Notice and demand letter
dated November 18, 1982 were sent to Philtrust, there was proper service on the
Estate.[13] Respondent further asserts that Philtrust had the legal obligation to
inform petitioner of the decedents death, which requirement is found in Section
104 of the NIRC of 1977.[14] Since Philtrust did not, respondent contends that
petitioner Estate should not be allowed to profit from this omission.[15] Respondent
further argues that Philtrusts failure to protest the aforementioned assessment
within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that
the assessment had already become final, executory and incontestable.[16]
The resolution of this case hinges on the legal relationship between Philtrust and
the decedent, and, by extension, between Philtrust and petitioner Estate.
Subsumed under this primary issue is the sub-issue of whether or not service on
Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was
valid service on petitioner, and the issue of whether Philtrusts inaction thereon
could bind petitioner. If both sub-issues are answered in the affirmative,
respondents contention as to the finality of Assessment Notice No. NARD-78-82-
00501 must be answered in the affirmative. This is because Section 319-A of the
NIRC of 1977 provides a clear 30-day period within which to protest an
assessment. Failure to file such a protest within said period means that the
assessment ipso jure becomes final and unappealable, as a consequence of which
legal proceedings may then be initiated for collection thereof.
We find in favor of the petitioner.
The first point to be considered is that the relationship between the decedent and
Philtrust was one of agency, which is a personal relationship between agent and
principal. Under Article 1919 (3) of the Civil Code, death of the agent or principal
automatically terminates the agency. In this instance, the death of the decedent on
April 3, 1979 automatically severed the legal relationship between her and
Philtrust, and such could not be revived by the mere fact that Philtrust continued
to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the
year 1978.
Since the relationship between Philtrust and the decedent was automatically
severed at the moment of the Taxpayers death, none of Philtrusts acts or
omissions could bind the estate of the Taxpayer. Service on Philtrust of the
demand letter and Assessment Notice No. NARD-78-82-00501 was improperly
done.
It must be noted that Philtrust was never appointed as the administrator of the
Estate of the decedent, and, indeed, that the court a quo twice rejected Philtrusts
motion to be thus appointed. As of November 18, 1982, the date of the demand
letter and Assessment Notice, the legal relationship between the decedent and
Philtrust had already been non-existent for three years.
Respondent claims that Section 104 of the National Internal Revenue Code of
1977 imposed the legal obligation on Philtrust to inform respondent of the
decedents death. The said Section reads:
SEC. 104. Notice of death to be filed. In all cases of transfers subject to tax or
where, though exempt from tax, the gross value of the estate exceeds three
thousand pesos, the executor, administrator, or any of the legal heirs, as the case
may be, within two months after the decedents death, or within a like period after
qualifying as such executor or administrator, shall give written notice thereof to the
Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter I of the National Internal Revenue
Code of 1977, or the chapter on Estate Tax, and pertains to all cases of transfers
subject to tax or where the gross value of the estate exceeds three thousand
pesos. It has absolutely no applicability to a case for deficiency income tax, such
as the case at bar. It further lacks applicability since Philtrust was never the
executor, administrator of the decedents estate, and, as such, never had the legal
obligation, based on the above provision, to inform respondent of her death.
Although the administrator of the estate may have been remiss in his legal
obligation to inform respondent of the decedents death, the consequences thereof,
as provided in Section 119 of the National Internal Revenue Code of 1977, merely
refer to the imposition of certain penal sanctions on the administrator. These do
not include the indefinite tolling of the prescriptive period for making deficiency tax
assessments, or the waiver of the notice requirement for such assessments.
Thus, as of November 18, 1982, the date of the demand letter and Assessment
Notice No. NARD-78-82-00501, there was absolutely no legal obligation on the
part of Philtrust to either (1) respond to the demand letter and assessment notice,
(2) inform respondent of the decedents death, or (3) inform petitioner that it had
received said demand letter and assessment notice. This lack of legal obligation
was implicitly recognized by the Court of Appeals, which, in fact, rendered its
assailed decision on grounds of equity.[17]
Since there was never any valid notice of this assessment, it could not have
become final, executory and incontestable, and, for failure to make the assessment
within the five-year period provided in Section 318 of the National Internal Revenue
Code of 1977, respondents claim against the petitioner Estate is barred. Said
Section 18 reads:
SEC. 318. 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.
Respondent argues that an assessment is deemed made for the purpose of giving
effect to such assessment when the notice is released, mailed or sent to the
taxpayer to effectuate the assessment, and there is no legal requirement that the
taxpayer actually receive said notice within the five-year period.[18] It must be
noted, however, that the foregoing rule requires that the notice be sent to the
taxpayer, and not merely to a disinterested party. Although there is no specific
requirement that the taxpayer should receive the notice within the said period, due
process requires at the very least that such notice actually be received. In
Commissioner of Internal Revenue v. Pascor Realty and Development
Corporation,[19] we had occasion to say:
deceased, or to her Estate. There was therefore no assessment served on the
Estate as to the alleged underpayment of tax. Absent this assessment, no
proceedings could be initiated in court for the collection of said tax,[21] and
respondents claim for collection, filed with the probate court only on November 22,
1984, was barred for having been made beyond the five-year prescriptive period
set by law.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in
CA-G.R. CV No. 09107, dated September 30, 2002, is REVERSED and SET
ASIDE. The Order of the Regional Trial Court of Manila, Branch XXXVIII, in Sp.
Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the
Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for
the deficiency income tax of the decedent for the year 1977 in the amount of
P318,223.93, is AFFIRMED.
No pronouncement as to costs.

An assessment contains not only a computation of tax liabilities, but also a demand SO ORDERED.
for payment within a prescribed period. It also signals the time when penalties and
interests begin to accrue against the taxpayer. To enable the taxpayer to determine
his remedies thereon, due process requires that it must be served on and received
by the taxpayer.

In Republic v. De le Rama,[20] we clarified that, when an estate is under

administration, notice must be sent to the administrator of the estate, since it is the
said administrator, as representative of the estate, who has the legal obligation to
pay and discharge all debts of the estate and to perform all orders of the court. In
that case, legal notice of the assessment was sent to two heirs, neither one of
whom had any authority to represent the estate. We said:

The notice was not sent to the taxpayer for the purpose of giving effect to the
assessment, and said notice could not produce any effect. In the case of Bautista
and Corrales Tan v. Collector of Internal Revenue this Court had occasion to state
that the assessment is deemed made when the notice to this effect is released,
mailed or sent to the taxpayer for the purpose of giving effect to said assessment.
It appearing that the person liable for the payment of the tax did not receive the
assessment, the assessment could not become final and executory. (Citations
omitted, emphasis supplied.)

In this case, the assessment was served not even on an heir of the Estate, but on
a completely disinterested third party. This improper service was clearly not
binding on the petitioner.

By arguing that (1) the demand letter and assessment notice were served on
Philtrust, (2) Philtrust was remiss in its obligation to respond to the demand letter
and assessment notice, (3) Philtrust was remiss in its obligation to inform
respondent of the decedents death, and (4) the assessment notice is therefore
binding on the Estate, respondent is arguing in circles. The most crucial point to
be remembered is that Philtrust had absolutely no legal relationship to the