1. CIR vs.

PASCOR309 SCRA 402

GR No. 128315 June 29, 1999

"An assessment is not necessary before a criminal charge can be filed."

FACTS:

The BIR examined the books of account of Pascor Realty and Devt Corp for years 1986, 1987 and 1988,
from which a tax liability of 10.5 Million Pesos was found. Based on the recommendations of the
examiners, the CIR filed an information with the DOJ for tax evasion against the officers of Pascor. Upon
receipt of the subpoena, the latter filed an urgent request for reconsideration/reinvestigation with the
CIR, which was immediately denied upon the ground that no formal assessment has yet been issued by
the Commisioner. Pascor elevated the CIR's decision to the CTA on a petition for review. The CIR filed a
Motion to Dismiss on the ground of lack of jurisdiction of CTA as there was no formal assessment made
against the respondents. The CTA dismissed the motion, hence this petition.

ISSUE: Is a formal assessment necessary in the filing of a criminal complaint?

HELD: No. Section 222 of the NIRC states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they are entitled to an
exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to
file a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is
then given a chance to submit position papers and documents to prove that the assessment is
unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the
taxpayer informing the latter specifically and clearly that an assessment has been made against him or
her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly
with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not
that the commissioner has issued an assessment. It must be stressed that a criminal complaint is
instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

2. PNOC vs CA

FACTS:

The Petitions before this Court originated from a sworn statement submitted by
private respondent Tirso B. Savellano (Savellano) to the Bureau of Internal Revenue (BIR)
on 24 June 1986. Through his sworn statement, private respondent Savellano informed the
BIR that PNB had failed to withhold the 15% 8nal tax on interest earnings and/or yields
from the money placements of PNOC with the said bank, in violation of Presidential Decree
(P.D.) No. 1931. P.D. No. 1931, which took effect on 11 June 1984, withdrew all tax
exemptions of government-owned and controlled corporations.

In a letter, dated 08 August 1986, the BIR requested PNOC to settle its liability for
taxes on the interests earned by its money placements with PNB and which PNB did not
withhold. 6 PNOC wrote the BIR on 25 September 1986, and made an offer to compromise
its tax liability.This was not accepted by the BIR

PNOC made another compromise agreement. Then BIR Commissioner Bienvenido A. Tan, in a letter,
dated 22 June 1987, accepted the compromise.

Private respondent Savellano, through four installments, was paid the informer's
reward in the total amount of P14,093,321.89, representing 15% of the P93,955,479.12 tax
collected by the BIR from PNOC and PNB. He received the last installment on 01
December 1987.

Savellano, through his legal counsel wrote the BIR to demand payment of the alance of his informer's
reward. Savellano also questioned the legality of the compromise agreement enteredinto by the BIR and
PNOC and claimed that the tax liability should have been collected in full.

The CTA later on declared the compromise agreement entered into between the BIR and PNOC as
without any force and effect and that upon payment by PNOC, Savellano was entitled to the balance of
his informer’s reward.

ISSUE:

1. Jurisdiction of the CTA

2. Whether or not the compromise agreement between the BIR and PNOC is valid

3. Whether or not the the finding that the deficiency withholding tax assessment against PNB was
already final and unappealble and unenforceable valid

4. Whether or not Savellano is entitled to his additional informer’s reward

Ruling:
 The main argument of PNB in assailing the jurisdiction of the CTA in CTA Case No.
4249 is that the BIR demand letter, dated 16 January 1991, 53 should be considered as a
new assessment against PNB. As a new assessment, it gave rise to a new dispute and
controversy solely between the BIR and PNB that should be administratively settled or
adjudicated, as provided in P.D. No. 242.

This argument is without merit. The issuance by the BIR of the demand letter, dated
16 January 1991, was merely a development in the continuing effort of the BIR to collect
the tax assessed against PNOC and PNB way back in 1986.

It is clear from the foregoing that the BIR demand letter, dated 16 January 1991,
could not stand alone as a new assessment. It should always be considered in the factual
context summarized above.

In fact, the demand letter, dated 16 January 1991, actually referred to the
withholding tax assessment 8rst issued in 1986 and its eventual settlement through a
compromise agreement. In addition, the computation of the de8ciency withholding tax
was based on the 8gures from the 1986 assessments against PNOC and PNB, and BIR no
longer conducted a new audit or investigation of either PNOC and PNB before it issued the
demand letter on 16 January 1991.

II
A. PNOC could not apply for a compromise under E.O. No. 44 because its tax liability
was not a delinquent account or a disputed assessment as of 31 December
1985.

PNOC's tax liability could not be considered a delinquent account since (1) it was
not self-assessed, because the BIR conducted an investigation and assessment of PNOC
and PNB after obtaining information regarding the non-withholding of tax from private
respondent Savellano; and (2) the demand letter, issued against it on 08 August 1986,
could not have been a de8ciency assessment that became 8nal and executory by 31
December 1985.

B. The tax liability of PNB as withholding agent also did not qualify for compromise
under E.O. No. 44.

Before proceeding any further, this Court reconsiders the conclusion made by BIR
Commissioner Ong in his demand letter, dated 16 January 1991, that the compromise
settlement executed between the BIR and PNOC was without legal basis because
withholding taxes were not actually taxes that could be compromised, but a penalty for
PNB's failure to withhold and for which it was made personally liable.

E.O. No. 44 covers disputed or delinquency cases where the person assessed was
himself the taxpayer rather than a mere agent. 72 RMO No. 39-86 expressly allows a
withholding agent, who failed to withhold the required tax because of neglect, ignorance of
the law, or his belief that he was not required by law to withhold tax, to apply for a
compromise settlement of his withholding tax liability under E.O. No. 44. A withholding
agent, in such a situation, may compromise the withholding tax assessment against him
precisely because he is being held directly accountable for the tax.

The general requirement of E.O. No. 44 still applies to withholding agents

— that the withholding tax liability must either be a delinquent account or a disputed
assessment as of 31 December 1985 to qualify for compromise settlement. The demand
letter against PNB, which also served as its assessment notice, had been issued on 08
October 1986 or two months later than PNOC's. PNB's withholding tax liability could not
be considered a delinquent account or a disputed assessment, as de8ned under RR No.
17-86, for the same reasons that PNOC's tax liability did not constitute as such. The tax
liability of PNB, therefore, was also not eligible for compromise settlement under E.O. No.
44.

The CTA may set aside a compromise agreement that is contrary to law and public
policy.

Although the general rule is that compromises are to be favored, and that
compromises entered into in good faith cannot be set aside, 89 this rule is not without
quali8cation. A court may still reject a compromise or settlement when it is repugnant to
law, morals, good customs, public order, or public policy.

The compromise agreement between the BIR and PNOC was contrary to law having
been entered into by BIR Commissioner Tan in excess or in abuse of the authority granted
to him by legislation. E.O. No. 44 and the NIRC of 1977, as amended, had identi8ed the
situations wherein the BIR Commissioner may compromise tax liabilities, and none of
these situations existed in this case.
The compromise, moreover, was contrary to public policy. The primary duty of the
BIR is to collect taxes, since taxes are the lifeblood of the Government and their prompt
and certain availability are imperious needs. 91 In the present case, however, BIR
Commissioner Tan, by entering into the compromise agreement that was bereft of any
legal basis, would have caused the Government to lose almost P300 million in tax
revenues and would have deprived the Government of much needed monetary resources.

III
The assessment against PNB had become 8nal and unappealable, and therefore,
enforceable.

The CTA and the Court of Appeals declared as 8nal and unappealable, and thus,
enforceable, the assessment against PNB, dated 16 January 1991, since PNB failed to
protest said assessment within the 30-day prescribed period. This Court, though, 8nds
that the signi8cant BIR assessment, as far as this case is concerned, should be the one
issued by the BIR against PNB on 08 October 1986.

IV
Private respondent Savellano is entitled to additional informer's reward since the BIR
had already collected the full amount of the tax assessment against PNB.

Since the BIR had already collected P294,958,450.73 from PNB through the
execution of the writ of garnishment over PNB's deposit with the Central Bank, then private
respondent Savellano should be awarded 15% thereof as reward since the said collection
could still be traced to the information he had given.

WHEREFORE, in view of the foregoing, the Petitions of PNOC and PNB in G.R. No.
109976 and G.R. No. 112800, respectively, are hereby DENIED. This Court AFFIRMS the
assailed Decisions of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No.
29526, which aCrmed the decision of the CTA in CTA Case No. 4249, with modi8cations,
to wit:
(1) The compromise agreement between PNOC and the BIR, dated 22 June
1987, is declared void for being contrary to law and public policy, and
is without force and effect;

(2) Paragraph 2 of RMO No. 39-86 remains a valid provision of the

regulation;

(3) The withholding tax assessment against PNB, dated 08 October 1986,
had become 8nal and unappealable. The BIR Commissioner is
ordered to enforce the said assessment and collect the amount of
P294,958,450.73, the balance of tax assessed after crediting the
previous payment made by PNOC pursuant to the compromise
agreement, dated 22 June 1987; and

(4) Private respondent Savellano shall be paid the remainder of his

informer's reward, equivalent to 15% of the de8ciency withholding tax
ordered collected herein, or P44,243,767.61.

3. Philippine Journalists, Inc. v. Commissioner of Internal Revenue, G.R. No. 162852, 16 December
2004

[YNARES-SANTIAGO, J.]

FACTS

The Revenue District Office of the Bureau of Internal Revenue (BIR) issued Letter of Authority for
Revenue Officer Federico de Vera, Jr. and Group Supervisor Vivencio Gapasin to examine petitioner’s
books of account and other accounting records for internal revenue taxes. Revenue District Officer
Jaime Concepcion invited petitioner to send a representative to an informal conference for an
opportunity to object and present documentary evidence relative to the proposed assessment.
Petitioner’s Comptroller, LorenzaTolentino, executed a “Waiver of the Statute of Limitation Under the
National Internal Revenue Code (NIRC)”. Records show that, it did not bear the date of acceptance, that
petitioner was not furnished a copy of the waiver, and the waiver was signed only by the Revenue
District Officer. The tax liability exceeds One Million Pesos (P1,000,000.00).

ISSUE

Whether the waiver is in accordance with RMO No. 20-90 to validly extend the three-year prescriptive
period under the NIRC.
HELD

NO.

The waiver document is incomplete and defective and thus the three-year prescriptive period was not
tolled or extended and continued to run. Consequently, the Assessment/Demand was invalid because it
was issued beyond the three (3) year period. In the same manner, Warrant of Distraint and/or Levy
which petitioner received thereafter is also null and void for having been issued pursuant to an invalid
assessment.

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

A waiver of the statute of limitations under the NIRC, to a certain extent, is a derogation of the
taxpayers’ right to security against prolonged and unscrupulous investigations and must therefore be
carefully and strictly construed. xxx Thus, the law on prescription, being a remedial measure, should be
liberally construed in order to afford such protection.

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

4.COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE

GLOBAL COMMUNICATION, INC., respondent.

FACTS:

This involves a case of prescription so that the narration of specific dates on every action taken is
indispensable for a proper understanding thereof. The relevant dates are as follows:

• April 15, 1991 - respondent filed its ITR for income earned in 1990.

• April 22, 1994 - Formal Assessment Notice was made assessing the taxpayer for deficiency
income tax in the total amount of 118M

• May 6, 1994 - filed a formal protest letter against the assessment.

 • May 23, 1994 - other protest was filed. The previous and present protest asked for the
cancellation of the assessment for being invalid for lack of factual and legal basis.

• October 16, 2002- more than eight years after the assessment was issued -taxpayer received a
final decision, dated October 8, 2002, from the Commissioner denying the protest.

• November 15, 2002 - respondent filed a petition for review with the CTA invoking
prescriptionas a defense.

• June 9, 2004 - CTA rendered a decision in favor of the respondent. After the filing a motion for
reconsideration the CTA en banc affirmed

ISSUE:

Will the fling of the timely protest by the taxpayer toll the running of the prescriptive period
tocollect the assessed deficiency income tax

RULING:

The SC ruled in the negative. The running of the prescriptive period, by express provision of
SECTION 223, can be suspended ;when the taxpayer requests for a reinvestigation which isgranted by
the Commissioner."

RR No. 12-85, defined what is a request for reinvestigation on one hand and a request for
reconsideration on the other. The main difference between these two types of protests lies in the
records or evidence to be examined by internal revenue officers, whether these are existing records or
newly discovered oradditional evidence. A reevaluation of existing records which results fro#ma request
for reconsideration does not toll therunning of the prescription period for the collection of an assessed
tax.

While it is true that the provisions of Section 223 of the NIRC is clear, the ruling of the SC in the case of
Wyeth set a different tonewhen the court ruled that the prescriptive period provided by law to take a
collection is interrupted once a taxpayer requests for reinvestigation or reconsideration of the
assessment.

In the case of BPI vs CIR, the SC took occasion to examine carefully the Wyeth decision and found out
that there are inconsistencies with the law. The provision of Section 223 is clear that a request for
reinvestigation (not reconsideration) which is granted by the Commissioner can suspend the running of
theprescriptive period to collect

5. COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR

REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and

VIRGINIA S. DIO, respondents.

An assessment contains not only a computation of tax liabilities, but also a demand
for payment within a prescribed period. It also signals the time when penalties and
interests begin to accrue against the taxpayer. To enable the taxpayer to determine his
remedies thereon, due process requires that it must be served on and received by the
taxpayer. Accordingly, an a<davit, which was executed by revenue o<cers stating the tax
liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be
deemed an assessment that can be questioned before the Court of Tax Appeals.

FACTS:

By virtue of Letter of Authority No. 001198, Commissioner Jose U. Ong authorized Revenue
Officers Thomas T. Que, Sonia T.Estorco and Emmanuel M. Savellano to examine the books of accounts
and other accounting records of Pascor Realty and Development Corporation, (PRDC) for the years
ending 1986, 1987 and 1988.

Commissioner of Internal Revenue 6led a criminal complaint against the PRDC, alleging evasion
of taxes in the total amount of P10,513,671.00. Private respondents PRDC, et al., 6led an Urgent
Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

CIR denied the urgent request

ISSUE:

"(1) Whether or not the criminal complaint for tax evasion can be construed as an
assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax
evasion may be instituted.

RULING:
Neither the NIRC nor the revenue regulations governing the
protest of assessments 11 provide a speci6c de6nition or form of an assessment.
However, the NIRC de6nes the speci6c functions and effects of an assessment. To
consider the affidavit attached to the Complaint as a proper assessment is to subvert the
nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.

An assessment must be sent to and received by a taxpayer, and must

demand payment of the taxes described therein within a specific period.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of internal
revenue releases, mails or sends such notice to the taxpayer.

In the present case, the revenue officers Affidavit merely contained a computation
of respondents' tax liability. It did not state a demand or a period for payment. Worse, it
was addressed to the justice secretary, not to the taxpayers.

II

Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted
or in cases of failure to file a return such as this case, proceedings in court may be commenced without
an assessment.

6.

7.

8.

9.CIR v. PHILIPPINE DAILY INQUIRER, GR No. 213943, 2017-03-22

Facts:

Before the Court is a petition for review[1] as

PDI is a corporation engaged in the business of newspaper publication.

On 15 April 2005, it filed its Annual Income Tax Return for taxable year 2004.

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers' Service
of BTR

BIR alleged that based on the computerized matching it conducted on the information and data
provided by third party sources against PDI's declaration on its VAT Returns for taxable year 2004, there
was an underdeclaration of domestic purchases from its suppliers amounting to P317,705,610.52.

In response, PDI submitted reconciliation reports, attached to its letters dated 22 August 2006 and 19
December 2006, to BIR-LTAID. On 21 March 2007, PDI executed a Waiver of the Statute of Limitation
(First Waiver) consenting to the assessment and/or collection of taxes for the year 2004 which may be
found due after the investigation, at any time before or after the lapse of the period of limitations fixed
by Sections 203 and 222 of the National Internal Revenue Code (NIRC) but not later than 30 June 2007.

In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the BIR-LTAID, PDI was
assessed for alleged deficiency income tax and VAT for taxable year 2004
PDI sought reconsideration of the PAN and expressed its willingness to execute another Waiver (Third
Waiver), which it did on the same date, thus extending BIR's right to assess and/or collect from it until
30 April 2008.

PDI received a Formal Letter of Demand dated 11 March 2008 and an Audit Result/Assessment Notice
from the BIR, demanding for the payment of alleged deficiency VAT and income tax

On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition for Review against the
Commissioner of Internal Revenue (CIR) alleging that the 180-day period within which the BIR should act
on its protest had already lapsed.

On the basis of the consolidation and cross-referencing of third party information, discrepancy reports
on sales and purchases were generated to uncover under-declared income and over-claimed purchases
(goods and services).

Section 222 of the NIRC provides the exceptions as regards to the provisions laid down under Section
203. In particular, as shown under Section (1) thereof, the three (3) [year] period of limitation in making
assessment shall not apply in cases where it involves false or fraudulent return or in cases where there is
failure to file a return [by] the person obliged to file such return.

Such being the case, the three (3) [year] period of limitation for the assessment of internal revenue tax
liabilities reckoned from the last day prescribed by law for the filing of the return shall not apply in the
case at hand for the simple reason that petitioner falsely filed the return for taxable year 2004.

Petitioner emphasized that it is a service company deriving its main source of income from newspaper
and advertising sales, thus any understatement of expenses or purchases (also mostly from services)
does not mean it understated its sales.

The CTA First Division further ruled that Section 222(b) of the NIRC authorizes the extension of the
original three-year prescriptive period by the execution of a valid waiver upon the agreement in writing
between the taxpayer and the BIR, provided: (1) the agreement was made before the expiration of the
three-year period and (2) the guidelines in the proper execution of the waiver are strictly followed.

the CIR filed a petition for review on certiorari before this Court.

Issues:

The CTA En Banc erred in ruling that respondent is not estopped from raising the defense of
prescription.

Ruling:

The CIR alleges that PDI filed a false or fraudulent return.

The CIR argues that the ten-year period starts from the time of the issuance of its Letter Notice on 10
August 2006. As such, the assessment made through the Formal Letter of Demand dated 11 March 2008
is within the prescriptive period.We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject
to the exceptions provided under Section 222 of the NIRC.

this Court ruled that fraud is never imputed. The Court stated that it will not sustain findings of fraud
upon circumstances which, at most, create only suspicion.[25] The Court added that the mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion.

The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not equivalent to fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the
tax.

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was
intentional and done with intent to evade the taxes due, the filing of a false return can be intentional or
due to honest mistake.

In this case, we do not find enough evidence to prove fraud or intentional falsity on the part of PDLSince
the case does not fall under the exceptions, Section 203 of the NIRC should apply.

Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by conforming to or
by disagreeing with the extension. A waiver of the statute of limitations, whether on assessment or
collection, should not be construed as a waiver of the right to invoke the defense of prescription but,
rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within
which the latter could still assess or collect taxes due. The waiver does not imply that the taxpayer
relinquishes the right to invoke prescription unequivocally.

Since the three Waivers in this case are defective, they do not produce any effect and did not suspend
the three-year prescriptive period under Section 203 of the NIRC.

10. COMMISSIONER OF INTERNAL REVENUE vs. KUDOS METAL CORPORATION- Waiver of the Statute
of Limitations

FACTS:

CIR assessed Kudos Metal Corporation for taxable year 1998. A Waiver of the Statute of Limitations was
executed on December 2001. The CTA issued a Resolution canceling the assessment notices issued
against Petitioner for having been issued beyond the prescriptive period as the waiver purportedly failed
to (a) have the valid officer execute the same (i.e., only the Assistant Commissioner signed it and not the
CIR); (b) the date of acceptance was not indicated; (c) the fact of receipt by the taxpayer was not
indicated in the original copy.

ISSUE:

Has the CIR’s right to assess prescribed?

HELD:

YES. The requirements for a valid waiver as laid down in RMO 20-90 and RDAO No. 5-01 are mandatory
to give effect to Section 222 of the Tax Code. Specifically, the flaws in the waiver executed by Kudos
Metal were as follows: (a) there was no notarized written authority in favor of the signatory for the
company; (b) there is no stated date of acceptance by the Commissioner or his representative; and (c)
the fact of the receipt of the copy was not indicated in the original waivers.

Neither can it be said that by merely executing the waiver the taxpayer is already estopped from
disputing an action by the CIR beyond the statutory 3-year period since the exception under the Suyoc
case (i.e., when the delays were due to taxpayer’s acts) does not apply.

Note: Requisites of a valid waiver: (i) acceptance date; (ii) expiry date; (iii) signed by authorized officer of
taxpayer and BIR; (iv) notarized; (v) fact of receipt must be indicated in the copies

11. CIR v. NEXT MOBILE, INC. GR No. 212825. December 7, 2015

FACTS:

Respondent filed with the BIR taxes for 2001. Respondent, through Sarmiento, their director of Finance,
executed several waivers of the statute of limitations to extend the prescriptive perios of assessment for
taxes.

On 2005, respondent received from the BIR a PAN and a formal letter of demand to pay deficiency
income tax. The BIR denied respondent's protest.

With the CTA, it was held that the demand was beyond the three year prescription period under the
NIRC. That the case does not apply the 10 year prescripton period as there was not false return by the
respondent. Also, the waivers did not validly extend the prescription because of irregularities.

ISSUE: Whether the period to pay has prescribed.

RULING:

NO.

The SC held that a waiver of the statute of limitations must faithfully comply with RMO No. 20-90 and
RDAO 05-01 in order to be valid. Sarmiento failed to show her authority to the BIR to sign the waivers.

The BIR were also at fault having to neglect their ministerial duties.

Both parties knew the infirmities of the waivers but still continued. Respondents were held in bad faith
as after having benefited by the waivers by giving them more time to pay, they used the waivers they
made themselves when the consequences were not in their favor.

The BIR's negligence amounts to malice and bad faith as they also knew the waivers did not conform
with RMO 20-90 and RDAO 05-01.

As both parties are in bad faith, the SC granted the petition on the issue of the nullification of the formal
letter of demand to the CTA.

12. CIR v. LANCASTER PHILIPPINES, GR No. 183408, 2017-07-12

Facts:

Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others, to investigate or
examine and, if necessary, issue assessments for deficiency taxes . On the other hand, respondent
Lancaster Philippines, Inc. (Lancaster) is a domestic corporation established in 1963 and is engaged in
the production, processing, and marketing of tobacco. In 1999, the Bureau of Internal Revenue (BIR)
issued Letter of Authority (LOA) No. 00012289 authorizing its revenue officers to examine Lancaster's
books of accounts and other accounting records for all internal revenue taxes due from taxable year
1998 to an unspecified date.

After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary Assessment
Notice (PAN)[8] which cited Lancaster for: 1) overstatement of its purchases for the fiscal year April
1998 to March 1999; and 2) noncompliance with the generally accepted accounting principle of proper
matching of cost and revenue.[9] More concretely, the BIR disallowed the purchases of tobacco from
farmers covered by Purchase Invoice Vouchers (PIVs) for the months of February and March 1998 as
deductions against income for the fiscal year April 1998 to March 1999.

Lancaster replied[11] to the PAN contending, among other things, that for the past decades, it has used
an entire 'tobacco-cropping season' to determine its total purchases covering a one-year period from 1
October up to 30 September of the following year (as against its fiscal year which is from 1 April up to 31
March of the following year); that it has been adopting the 6-month timing difference to conform to the
matching concept (of cost and revenue); and that this has long been installed as part of the company's
system and consistently applied in its accounting books.[12] Invoking the same provisions of the law
cited in the assessment, i.e., Sections 43[13] and 45[14] of the National Internal Revenue Code (NIRC), in
conjunctio... n with Section 45[15] of Revenue Regulation No. 2, as amended, Lancaster argued that the
February and March 1998 purchases should not have been disallowed. It maintained that the situation
of farmers engaged in producing tobacco, like Lancaster, is unique in that the costs, i.e., purchases, are
taken as of a different period and posted in the year in which the gross income from the crop is realized.
Lancaster concluded that it correctly posted the subject purchases in the fiscal year ending March 1999
as it was only in this year that the gross income from the crop was realized. Subsequently on 6
November 2002, Lancaster received from the BIR a final assessment notice (FAN),[16] captioned Formal
Letter of Demand and Audit Result/Assessment Notice LTAID II IT-98-00007, dated 11 October 2002,
which assessed Lancaster's deficiency income tax amounting to P11,496,770.18, as a consequence of
the disallowance of purchases claimed for the taxable year ending 31 March 1999. Lancaster duly
proteste... d[17] the FAN. There being no action taken by the Commissioner on its protest, Lancaster
filed on 21 August 2003 a petition for review[18] before the CTA Division.

Issues:

THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S REVENUE OFFICERS
EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE PERIOD NOT COVERED BY THEIR LETTER OF
AUTHORITY. II. THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO CANCEL AND
WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST RESPONDENT.[26]

Ruling:

We deny the petition. I. The CTA EN BANC did not err when it ruled that the BIR revenue officers had
exceeded their authority. To support its first assignment of error, the CIR argues that the revenue
officers did not exceed their authority when, upon examination (of the Lancaster's books of accounts
and other accounting records), they verified that Lancaster made purchases for February and March of
1998, which purchases were not declared in the latter’s fiscal year from 1 April 1997 to 31 March 1998.
Additionally, the CIR posits that Lancaster did not raise the issue on the scope of authority of the
revenue examiners at any stage of the proceedings before the CTA and, consequently, the CTA had no
jurisdiction to rule on said issue. On both counts, the CIR is mistaken.

Under the aforecited provision, the jurisdiction of the CTA is not limited only to cases which involve
decisions or inactions of the CIR on matters relating to assessments or refunds but also includes other
cases arising from the NIRC or related laws administered by the BIR.[28] Thus, for instance, we had once
held that the question of whether or not to impose a deficiency tax assessment comes within the
purview of the words "other matters arising under the National Internal Revenue Code. "[29]The
jurisdiction of the CTA on such other matters arising under the NIRC was retained under the
amendments introduced by R.A No. 9282.

Is the question on the authority of revenue officers to examine the books and records of any person
cognizable by the CTA? It must be stressed that the assessment of internal revenue taxes is one of the
duties of the BIR.

In connection therewith, the CIR may authorize the examination of any taxpayer and correspondingly
make an assessment whenever necessary.[31] Thus, to give more teeth to such power of the CIR, to
make an assessment, the NIRC authorizes the CIR to examine any book, paper, record, or data of any
person.[32] The powers granted by law to the CIR are intended, among other things, to determine the
liability of any person for any national internal revenue tax. It is pursuant to such pertinent provisions of
the NIRC conferring the powers to the CIR that the petitioner (CIR) had, in this case, authorized its
revenue officers to conduct an examination of the books of account and accounting records of
Lancaster, and eventually issue a deficiency assessment against it. From the foregoing, it is clear that the
issue on whether the revenue officers who had conducted the examination on Lancaster exceeded their
authority pursuant to LOA No. 00012289 may be considered as covered by the terms "other matters"
under Section 7 of R.A. No. 1125 or its amendment, R.A. No. 9282. The authority to make an
examination or assessment, being a matter provided for by the NIRC, is well within the exclusive and
appellate jurisdiction of the CTA. On whether the CTA can resolve an issue which was not raised by the
parties, we rule in the affirmative.

the CTA Division was, therefore, well within its authority to consider in its decision the question on the
scope of authority of the revenue officers who were named in the LOA even though the parties had not
raised the same in their pleadings or memoranda, The CTA En Banc was likewise correct in sustaining
the CTA Division's view concerning such matter. B. The Scope of the Authority of the Examining Officers
In the assailed decision of the CTA Division, the trial court observed that LOA No. 00012289 authorized
the BIR officers to examine the books of account of Lancaster for the taxable year 1998 only or, since
Lancaster adopted a fiscal year (FY), for the period 1 April 1997 to 31 March 1998. However, the
deficiency income tax assessment which the BIR eventually issued against Lancaster was based on the
disallowance of expenses reported in FY 1999, or for the period 1 April 1998 to 31 March 1999. The CTA
concluded that the revenue examiners had exceeded their authority when they issued the assessment
against Lancaster and, consequently, declared such assessment to be without force and effect. We
agree. The audit process normally commences with the issuance by the CIR of a Letter of Authority. The
LOA gives notice to the taxpayer that it is under investigation for possible deficiency tax assessment; at
the same time it authorizes or empowers a designated revenue officer to examine, verify, and scrutinize
a taxpayer's books and records, in relation to internal revenue tax liabilities for a particular period.[34]
Even though the date after the words "taxable year 1998 to" is unstated, it is not at all difficult to
discern that the period of examination is the whole taxable year 1998. This means that the examination
of Lancaster must cover the FY period from 1 April 1997 to 31 March 1998. It could not have
contemplated a longer period. The examination for the full taxable year 1998 only is consistent with the
guideline in Revenue Memorandum Order (RMO) No. 43-90, dated 20 September 1990, that the LOA
shall cover a taxable period not exceeding one taxable year.[35] In other words, absent any other valid
cause, the LOA issued in this case is valid in all respects. Nonetheless, a valid LOA does not necessarily
clothe validity to an assessment issued on it, as when the revenue officers designated in the LOA act in
excess or outside of the authority granted them under said LOA. Recently in CIR v. De La Salle University,
Inc.[36] we accorded validity to the LOA authorizing the examination of DLSU for "Fiscal Year Ending
2003 and Unverified Prior Years" and correspondingly held the assessment for taxable year 2003 as valid
because this taxable period is specified in the LOA. However, we declared void the assessments for
taxable years 2001 and 2002 for having been unspecified on separate LOAs as required under RMO No.
43-90. Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,[37] we affirmed the cancellation of a
deficiency VAT assessment because, while the LOA covered "the period 1997 and unverified prior years,
" the said deficiency was arrived at based on the records of a later year, from January to March 1998, or
using the fiscal year which ended on 31 March 1998. We explained that the CIR knew which period
should be covered by the investigation and that if the CIR wanted or intended the investigation to
include the year 1998, it would have done so by including it in the LOA or by issuing another LOA.[38]
The present case is no different from Sony in that the subject LOA specified that the examination should
be for the taxable year 1998 only but the subsequent assessment issued against Lancaster involved
disallowed expenses covering the next fiscal year, or the period ending 31 March 1999.

The taxable year covered by the assessment being outside of the period specified in the LOA in this case,
the assessment issued against Lancaster is, therefore, void. This point alone would have sufficed to
invalidate the subject deficiency income tax assessment, thus, obviating any further necessity to resolve
the issue on whether Lancaster erroneously claimed the February and March 1998 expenses as
deductions against income for FY 1999. But, as the CTA did, we shall discuss the issue on the
disallowance for the proper guidance not only of the parties, but the bench and the bar as well. II. The
CTA En Banc correctly sustained the order cancelling and withdrawing the deficiency tax assessment. To
recall, the assessment against Lancaster for deficiency income tax stemmed from the disallowance of its
February and March 1998 purchases which Lancaster posted in its fiscal year ending on 31 March 1999
(FY 1999) instead of the fiscal year ending on 31 March 1998 (FY 1998). On the one hand, the BIR insists
that the purchases in question should have been reported in FY 1998 in order to conform to the
generally accepted accounting principle of proper matching of cost and revenue. Thus, when Lancaster
reported the said purchases in FY 1999, this resulted in overstatement of expenses warranting their
disallowance and, by consequence, resulting in the deficiency in the payment of its income tax for FY
1999. Upon the other hand, Lancaster justifies the inclusion of the February and March 1998 purchases
in its FY 1999 considering that they coincided with its crop year covering the period of October 1997 to
September 1998. Consistent with Revenue Audit Memorandum (RAM) No. 2-95,[39] Lancaster argues
that its purchases in February and March 1998 were properly posted in FY 1999, or the year in which its
gross income from the crop was realized. Lancaster concludes that by doing so, it had complied with the
matching concept that was also relied upon by the BIR in its assessment. The issue essentially boils down
to the proper timing when Lancaster should recognize its purchases in computing its taxable income.
Such issue directly correlates to the fact that Lancaster's 'crop year' does not exactly coincide with its
fiscal year for tax purposes. Noticeably, the records of this case are rife with terms and concepts in
accounting. As a science, accounting[40] pervades many aspects of financial planning, forecasting, and
decision making in business. Its reach, however, has also permeated tax practice. To put it into
perspective, although the foundations of accounting were built principally to analyze finances and assist
businesses, many of its principles have since been adopted for purposes of taxation.[41] In our
jurisdiction, the concepts in business accounting, including certain generally accepted accounting
principles (GAAP), embedded in the NIRC comprise the rules on tax accounting. To be clear, the
principles under financial or business accounting, in theory and application, are not necessarily
interchangeable with those in tax accounting. Thus, although closely related, tax and business
accounting had invariably produced concepts that at some point diverge in understanding or usage. For
instance, two of such important concepts are taxable income and business income (or accounting
income). Much of the difference can be attributed to the distinct purposes or objectives that the
concepts of tax and business accounting are aimed at. Chief Justice Querube Makalintal made an apt
observation on the nature of such difference. In Consolidated Mines, Inc. v. CTA,... While there may be
differences between tax and accounting,[44] it cannot be said that the two mutually exclude each other.
As already made clear, tax laws borrowed concepts that had origins from accounting. In truth, tax
cannot do away with accounting. It relies upon approved accounting methods and practices to
effectively carry out its objective of collecting the proper amount of taxes from the taxpayers. Thus, an
important mechanism established in many tax systems is the requirement for taxpayers to make a
return of their true income.[45] Maintaining accounting books and records, among other important
considerations, would in turn assist the taxpayers in complying with their obligation to file their income
tax returns. At the same time, such books and records provide vital information and possible bases for
the government, after appropriate audit, to make an assessment for deficiency tax whenever so
warranted under the circumstances.

We now proceed to the matter respecting the accounting method employed by Lancaster. An
accounting method is a "set of rules for determining when and how to report income and
deductions."[46] The provisions under Chapter VIII, Title II of the NIRC cited above enumerate the
methods of accounting that the law expressly recognizes, to wit: (1) Cash basis method;[47] (2) Accrual
method;[48] (3) Installment method;[49] (4) Percentage of completion method;[50] and (5) Other
accounting methods. Any of the foregoing methods may be employed by any taxpayer so long as it
reflects its income properly and such method is used regularly. The peculiarities of the business or
occupation engaged in by a taxpayer would largely determine how it would report incomes and
expenses in its accounting books or records. The NIRC does not prescribe a uniform, or even specific,
method of accounting. Too, other methods approved by the CIR, even when not expressly mentioned in
the NIRC, may be adopted if such method would enable the taxpayer to properly reflect its income.
Section 43 of the NIRC authorizes the CIR to allow the use of a method of accounting that in its opinion
would clearly reflect the income of the taxpayer. An example of such method not expressly mentioned
in the NIRC, but duly approved by the CIR, is the 'crop method of accounting' authorized under RAM No.
2-95.

In the present case, we find it wholly justifiable for Lancaster, as a business engaged in the production
and marketing of tobacco, to adopt the crop method of accounting. A taxpayer is authorized to employ
what it finds suitable for its purpose so long as it consistently does so, and in this case, Lancaster does
appear to have utilized the method regularly for many decades already. Considering that the crop year
of Lancaster starts from October up to September of the following year, it follows that all of its expenses
in the crop production made within the crop year starting from October 1997 to September 1998,
including the February and March 1998 purchases covered by purchase invoice vouchers, are rightfully
deductible for income tax purposes in the year when the gross income from the crops are realized.
Pertinently, nothing from the pleadings or memoranda of the parties, or even from their testimonies
before the CTA, would support a finding that the gross income from the crops (to which the subject
expenses refer) was actually realized by the end of March 1998, or the closing of Lancaster's fiscal year
for 1998. Instead, the records show that the February and March 1998 purchases were recorded by
Lancaster as advances and later taken up as purchases by the close of the crop year in September 1998,
or as stated very clearly above, within the fiscal year 1999[

Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of matching cost
against revenue to buttress their respective theories. Also, both parties cite RAM 2-95 in referencing the
crop method of accounting. We are tasked to determine which view is legally sound. In essence, the
matching concept, which is one of the generally accepted accounting principles, directs that the
expenses are to be reported in the same period that related revenues are earned. It attempts to match
revenue with expenses that helped earn it. The CIR posits that Lancaster should not have recognized in
FY 1999 the purchases for February and March 1998.[53] Apparent from the reasoning of the CIR is that
such expenses ought to have been deducted in FY 1998, when they were supposed to be paid or
incurred by Lancaster. In other words, the CIR is of the view that the subject purchases match with
revenues in 1998, not in 1999. A reading of RAM No. 2-95, however, clearly evinces that it conforms
with the concept that the expenses paid or incurred be deducted in the year in which gross income from
the sale of the crops is realized. Put in another way, the expenses are matched with the related incomes
which are eventually earned. Nothing from the provision is it strictly required that for the expense to be
deductible, the income to which such expense is related to be realized in the same year that it is paid or
incurred. As noted by the CTA,[54] the crop method is an unusual method of accounting, unlike other
recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly require expenses be
taken in the same taxable year when the income is 'paid or incurred,' or 'paid or accrued,' depending
upon the method of accounting employed by the taxpayer. Even if we were to accept the notion that
applying the 1998 purchases as deductions in the fiscal year 1998 conforms with the generally accepted
principle of matching cost against revenue, the same would still not lend any comfort to the CIR.
Revenue Memorandum Circular (RMC) No. 22-04, entitled "Supplement to Revenue Memorandum
Circular No. 44-2002 on Accounting Methods to be Used by Taxpayers for Internal Revenue Tax
Purposes"[55] dated 12 April 2004, commands that where there is conflict between the provisions of the
Tax Code (NIRC), including its implementing rules and regulations, on accounting methods and the
generally accepted accounting principles, the former shall prevail.

In sum, and considering the foregoing premises, we find no cogent reason to overturn the assailed
decision and resolution of the CTA. As the CTA decreed, Assessment Notice LTAID II IT-98-00007, dated
11 October 2002, in the amount of P6,466,065.50 for deficiency income tax should be cancelled and set
aside. The assessment is void for being issued without valid authority. Furthermore, there is no legal
justification for the disallowance of Lancaster's expenses for the purchase of tobacco in February and
March 1998. WHEREFORE, the petition is DENIED.