Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 140944 April 30, 2008

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the Estate
of the deceased JOSE P. FERNANDEZ, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of
Civil Procedure seeking the reversal of the Court of Appeals (CA) Decision2 dated April
30, 1999 which affirmed the Decision3 of the Court of Tax Appeals (CTA) dated June
17, 1997.4

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the
probate of his will5 was filed with Branch 51 of the Regional Trial Court (RTC) of Manila
(probate court).[6] The probate court then appointed retired Supreme Court Justice
Arsenio P. Dizon (Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon
(petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of
Jose (Estate). In a letter7 dated October 13, 1988, Justice Dizon informed respondent
Commissioner of the Bureau of Internal Revenue (BIR) of the special proceedings for
the Estate.

Petitioner alleged that several requests for extension of the period to file the required
estate tax return were granted by the BIR since the assets of the estate, as well as the
claims against it, had yet to be collated, determined and identified. Thus, in a letter8
dated March 14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty.
Gonzales) to sign and file on behalf of the Estate the required estate tax return and to
represent the same in securing a Certificate of Tax Clearance. Eventually, on April 17,
1990, Atty. Gonzales wrote a letter9 addressed to the BIR Regional Director for San
Pablo City and filed the estate tax return10 with the same BIR Regional Office, showing
therein a NIL estate tax liability, computed as follows:

COMPUTATION OF TAX
Conjugal Real Property (Sch. 1)

P10,855,020.00

Conjugal Personal Property (Sch.2)

3,460,591.34

Taxable Transfer (Sch. 3)

Gross Conjugal Estate

14,315,611.34

Less: Deductions (Sch. 4)

187,822,576.06

Net Conjugal Estate

NIL

Less: Share of Surviving Spouse

NIL.

Net Share in Conjugal Estate

NIL

xxx

Net Taxable Estate

NIL.

Estate Tax Due

NIL.11

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued
Certification Nos. 2052[12] and 2053[13] stating that the taxes due on the transfer of
real and personal properties[14] of Jose had been fully paid and said properties may be
transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus,
on October 22, 1990, the probate court appointed petitioner as the administrator of the
Estate.15
Petitioner requested the probate court's authority to sell several properties forming part
of the Estate, for the purpose of paying its creditors, namely: Equitable Banking
Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90
as of January 31, 1988), Manila Banking Corporation (P84,199,160.46 as of February
28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner manifested that
Manila Bank, a major creditor of the Estate was not included, as it did not file a claim
with the probate court since it had security over several real estate properties forming
part of the Estate.16

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR,
Themistocles Montalban, issued Estate Tax Assessment Notice No. FAS-E-87-91-
003269,17 demanding the payment of P66,973,985.40 as deficiency estate tax,
itemized as follows:

Deficiency Estate Tax- 1987

Estate tax

P31,868,414.48

25% surcharge- late filing

7,967,103.62

late payment

7,967,103.62

Interest

19,121,048.68

Compromise-non filing

25,000.00

non payment

25,000.00

no notice of death

15.00

no CPA Certificate
300.00

Total amount due & collectible

P66,973,985.4018

In his letter19 dated December 12, 1991, Atty. Gonzales moved for the reconsideration
of the said estate tax assessment. However, in her letter20 dated April 12, 1994, the
BIR Commissioner denied the request and reiterated that the estate is liable for the
payment of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner
received the letter of denial. On June 2, 1994, petitioner filed a petition for review21
before respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence,
to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely
documentary evidence consisting of the following:

Nature of Document (sic)

Exhibits

1.

Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of
Internal Revenue informing the latter of the special proceedings for the settlement of the
estate (p. 126, BIR records);

"A"

2.

Petition for the probate of the will and issuance of letter of administration filed with the
Regional Trial Court (RTC) of Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-
108, BIR records);

"B" & "B-1"

3.

Pleading entitled "Compliance" filed with the probate Court submitting the final inventory
of all the properties of the deceased (p. 106, BIR records);

"C"
4.

Attachment to Exh. "C" which is the detailed and complete listing of the properties of the
deceased (pp. 89-105, BIR rec.);

"C-1" to "C-17"

5.

Claims against the estate filed by Equitable Banking Corp. with the probate Court in the
amount of P19,756,428.31 as of March 31, 1988, together with the Annexes to the claim
(pp. 64-88, BIR records);

"D" to "D-24"

6.

Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount
of US $4,828,905.90 as of January 31, 1988 (pp. 262-265, BIR records);

"E" to "E-3"

7.

Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987

amounts to P65,158,023.54, but recomputed as of February 28, 1989 at a total amount
of P84,199,160.46; together with the demand letter from MBC's lawyer (pp. 194-197,
BIR records);

"F" to "F-3"

8.

Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and

Associates Law Offices addressed to Fernandez Hermanos, Inc., represented by Jose
P. Fernandez, as mortgagors, in the total amount of P240,479,693.17 as of February
28, 1989 (pp. 186-187, BIR records);

"G" & "G-1"

9.

Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila,
docketed as Civil Case No. 86-38599 entitled "State Investment House, Inc., Plaintiff,
versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez, Defendants," (pp.
200-215, BIR records);

"H" to "H-16"

10.

Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales,
(p. 184, BIR records);

"I"

11.

Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of
BIR in San Pablo City (p. 183, BIR records);

"J"

12.

Estate Tax Return filed by the estate of the late Jose P. Fernandez through its
authorized representative, Atty. Jesus M. Gonzales, for Arsenio P. Dizon, with
attachments (pp. 177-182, BIR records);

"K" to "K-5"

13.

Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in
Sp. Proc. No. 87-42980 appointing Atty. Rafael S. Dizon as Judicial Administrator of the
estate of Jose P. Fernandez; (p. 102, CTA records) and

"L"

14.

Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990,
issued by the Office of the Regional Director, Revenue Region No. 4-C, San Pablo City,
with attachments (pp. 103-104, CTA records.).

"M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of
Alberto Enriquez, who was one of the revenue examiners who conducted the
investigation on the estate tax case of the late Jose P. Fernandez. In the course of the
direct examination of the witness, he identified the following:

Documents/Signatures

BIR Record

1.

Estate Tax Return prepared by the BIR;

p. 138

2.

Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower
Portion of Exh. "1";

-do-

3.

Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue
examiners, Ma. Anabella A. Abuloc, Alberto S. Enriquez and Raymund S. Gallardo;
Reviewed by Maximino V. Tagle

pp. 143-144

4.

Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2";

-do-

5.

Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2";

-do-

6.

Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of Exh. "2";

-do-
7.

Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2";

-do-

8.

Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991;

p. 139

9.

Signature of Alberto Enriquez at the lower portion of Exh. "3";

-do-

10.

Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3";

-do-

11.

Signature of Raymond S. Gallardo at the lower portion of Exh. "3";

-do-

12.

Signature of Maximino V. Tagle at the lower portion of Exh. "3";

-do-

13.

Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for
the Commissioner of Internal Revenue, demanding payment of the amount of
P66,973,985.40; and

p. 169

14.
Assessment Notice FAS-E-87-91-00

pp. 169-17022

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling
in Vda. de Oñate v. Court of Appeals,23 the CTA opined that the aforementioned pieces
of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:

Although the above-mentioned documents were not formally offered as evidence for
respondent, considering that respondent has been declared to have waived the
presentation thereof during the hearing on March 20, 1996, still they could be
considered as evidence for respondent since they were properly identified during the
presentation of respondent's witness, whose testimony was duly recorded as part of the
records of this case. Besides, the documents marked as respondent's exhibits formed
part of the BIR records of the case.24

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came
up with its own computation of the deficiency estate tax, to wit:

Conjugal Real Property

P 5,062,016.00

Conjugal Personal Prop.

33,021,999.93

Gross Conjugal Estate

38,084,015.93

Less: Deductions

26,250,000.00

Net Conjugal Estate

P 11,834,015.93

Less: Share of Surviving Spouse

5,917,007.96

Net Share in Conjugal Estate

P 5,917,007.96

Add: Capital/Paraphernal

Properties – P44,652,813.66

Less: Capital/Paraphernal Deductions

44,652,813.66

Net Taxable Estate

P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing

7,483,835.74

Add: Penalties for-No notice of death

15.00

No CPA certificate

300.00

Total deficiency estate tax

P 37,419,493.71
============

exclusive of 20% interest from due date of its payment until full payment thereof

[Sec. 283 (b), Tax Code of 1987].25

Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious
and denies the same. Petitioner and/or the heirs of Jose P. Fernandez are hereby
ordered to pay to respondent the amount of P37,419,493.71 plus 20% interest from the
due date of its payment until full payment thereof as estate tax liability of the estate of
Jose P. Fernandez who died on November 7, 1987.

SO ORDERED.26

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review.27

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings,
the CA ruled that the petitioner's act of filing an estate tax return with the BIR and the
issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner
of her authority to re-examine or re-assess the said return filed on behalf of the
Estate.28

On May 31, 1999, petitioner filed a Motion for Reconsideration29 which the CA denied
in its Resolution30 dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the
respondent BIR by the Court of Tax Appeals which was subsequently upheld by the
Court of Appeals is contrary to the Rules of Court and rulings of this Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
recognizing/considering the estate tax return prepared and filed by respondent BIR
knowing that the probate court appointed administrator of the estate of Jose P.
Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052
and 2053 had been issued in the estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in
disallowing the valid and enforceable claims of creditors against the estate, as lawful
deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating
erroneous double imputation of values on the very same estate properties in the estate
tax return it prepared and filed which effectively bloated the estate's assets.31

The petitioner claims that in as much as the valid claims of creditors against the Estate
are in excess of the gross estate, no estate tax was due; that the lack of a formal offer
of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oñate has
already been abandoned in a long line of cases in which the Court held that evidence
not formally offered is without any weight or value; that Section 34 of Rule 132 of the
Rules on Evidence requiring a formal offer of evidence is mandatory in character; that,
while BIR's witness Alberto Enriquez (Alberto) in his testimony before the CTA identified
the pieces of evidence aforementioned such that the same were marked, BIR's failure to
formally offer said pieces of evidence and depriving petitioner the opportunity to cross-
examine Alberto, render the same inadmissible in evidence; that assuming arguendo
that the ruling in Vda. de Oñate is still applicable, BIR failed to comply with the
doctrine's requisites because the documents herein remained simply part of the BIR
records and were not duly incorporated in the court records; that the BIR failed to
consider that although the actual payments made to the Estate creditors were lower
than their respective claims, such were compromise agreements reached long after the
Estate's liability had been settled by the filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that the reckoning date of the claims against
the Estate and the settlement of the estate tax due should be at the time the estate tax
return was filed by the judicial administrator and the issuance of said BIR Certifications
and not at the time the aforementioned Compromise Agreements were entered into with
the Estate's creditors.32

On the other hand, respondent counters that the documents, being part of the records
of the case and duly identified in a duly recorded testimony are considered evidence
even if the same were not formally offered; that the filing of the estate tax return by the
Estate and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the
BIR of its authority to examine the return and assess the estate tax; and that the factual
findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a
petition for review.33

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the
pieces of evidence which were not formally offered by the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of
the deficiency estate tax imposed against the Estate.

The Court’s Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As

cases filed before it are litigated de novo, party-litigants shall prove every minute aspect
of their cases. Indubitably, 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.34 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.
The CTA and the CA rely solely on the case of Vda. de Oñate, which reiterated this
Court's previous rulings in People v. Napat-a35 and People v. Mate36 on the admission
and consideration of exhibits which were not formally offered during the trial. Although in
a long line of cases many of which were decided after Vda. de Oñate, we held that
courts cannot consider evidence which has not been formally offered,37 nevertheless,
petitioner cannot validly assume that the doctrine laid down in Vda. de Oñate has
already been abandoned. Recently, in Ramos v. Dizon,38 this Court, applying the said
doctrine, ruled that the trial court judge therein committed no error when he admitted
and considered the respondents' exhibits in the resolution of the case, notwithstanding
the fact that the same were not formally offered. Likewise, in Far East Bank & Trust
Company v. Commissioner of Internal Revenue,39 the Court made reference to said
doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De
Oñate still subsists in this jurisdiction. In Vda. de Oñate, we held that:

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], 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] citing People v. Mate [103 SCRA 484],
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.40

From the foregoing declaration, however, it is clear that Vda. de Oñate is merely an
exception to the general rule. Being an exception, it may be applied only when there is
strict compliance with the requisites mentioned therein; otherwise, the general rule in
Section 34 of Rule 132 of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed
pieces of evidence were presented and marked during the trial particularly when Alberto
took the witness stand. Alberto identified these pieces of evidence in his direct
testimony.41 He was also subjected to cross-examination and re-cross examination by
petitioner.42 But Alberto’s account and the exchanges between Alberto and petitioner
did not sufficiently describe the contents of the said pieces of evidence presented by the
BIR. In fact, petitioner sought that the lead examiner, one Ma. Anabella A. Abuloc, be
summoned to testify, inasmuch as Alberto was incompetent to answer questions
relative to the working papers.43 The lead examiner never testified. Moreover, while
Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR
documents themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oñate and Ramos that does not exist at all in
the instant case. In the aforementioned cases, the exhibits were marked at the pre-trial
proceedings to warrant the pronouncement that the same were duly incorporated in the
records of the case. Thus, we held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The
exhibits in question were presented and marked during the pre-trial of the case thus,
they have been incorporated into the records. Further, Elpidio himself explained the
contents of these exhibits when he was interrogated by respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits
were marked and admitted during the pre-trial stage as shown by the Pre-Trial Order
quoted earlier.44

While the CTA is not governed strictly by technical rules of evidence,45 as rules of
procedure are not ends in themselves and are primarily intended as tools in the
administration of justice, the presentation of the BIR's evidence is not a mere procedural
technicality which may be disregarded considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's claims against the Estate.46 The BIR's
failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its
cause.47 Such failure is aggravated by the fact that not even a single reason was
advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence48 in the
hearing of February 21, 1996, but BIR's counsel failed to appear.49 The CTA denied
petitioner's motion to consider BIR's presentation of evidence as waived, with a warning
to BIR that such presentation would be considered waived if BIR's evidence would not
be presented at the next hearing. Again, in the hearing of March 20, 1996, BIR's
counsel failed to appear.50 Thus, in its Resolution51 dated March 21, 1996, the CTA
considered the BIR to have waived presentation of its evidence. In the same Resolution,
the parties were directed to file their respective memorandum. Petitioner complied but
BIR failed to do so.52 In all of these proceedings, BIR was duly notified. Hence, in this
case, we are constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:53

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.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of
the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect
and will not be disturbed on appeal unless it is shown that the lower courts committed
gross error in the appreciation of facts.54 In this case, however, we find the decision of
the CA affirming that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been
condoned. As a mode of extinguishing an obligation,55 condonation or remission of
debt56 is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor
renounces the enforcement of the obligation, which is extinguished in its entirety or in
that part or aspect of the same to which the remission refers. It is an essential
characteristic of remission that it be gratuitous, that there is no equivalent received for
the benefit given; once such equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives a thing different from that
stipulated; or novation, when the object or principal conditions of the obligation should
be changed; or compromise, when the matter renounced is in litigation or dispute and in
exchange of some concession which the creditor receives.57

Verily, the second issue in this case involves the construction of Section 7958 of the
National Internal Revenue Code59 (Tax Code) which provides for the allowable
deductions from the gross estate of the decedent. The specific question is whether the
actual claims of the aforementioned creditors may be fully allowed as deductions from
the gross estate of Jose despite the fact that the said claims were reduced or condoned
through compromise agreements entered into by the Estate with its creditors.
"Claims against the estate," as allowable deductions from the gross estate under
Section 79 of the Tax Code, are basically a reproduction of the deductions allowed
under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise
known as the National Internal Revenue Code of 1939, and which was the first
codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal
tax laws of the United States. Thus, pursuant to established rules of statutory
construction, the decisions of American courts construing the federal tax code are
entitled to great weight in the interpretation of our own tax laws.60

It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death
which is the general rule, or the same should be adjusted to reflect post-death
developments, such as where a settlement between the parties results in the reduction
of the amount actually paid.61 On one hand, the U.S. court ruled that the appropriate
deduction is the "value" that the claim had at the date of the decedent's death.62 Also,
as held in Propstra v. U.S., 63 where a lien claimed against the estate was certain and
enforceable on the date of the decedent's death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting the entire amount
of the claim for estate tax purposes. These pronouncements essentially confirm the
general principle that post-death developments are not material in determining the
amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a
deduction only to the extent of the amount actually paid.64 Recognizing the dispute, the
Service released Proposed Regulations in 2007 mandating that the deduction would be
limited to the actual amount paid.65

In announcing its agreement with Propstra,66 the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the
Ithaca Trust date-of-death valuation principle to enforceable claims against the estate.
As we interpret Ithaca Trust, when the Supreme Court announced the date-of-death
valuation principle, it was making a judgment about the nature of the federal estate tax
specifically, that it is a tax imposed on the act of transferring property by will or intestacy
and, because the act on which the tax is levied occurs at a discrete time, i.e., the
instance of death, the net value of the property transferred should be ascertained, as
nearly as possible, as of that time. This analysis supports broad application of the date-
of-death valuation rule.67

We express our agreement with the date-of-death valuation rule, made pursuant to the
ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States.68 First. There is
no law, nor do we discern any legislative intent in our tax laws, which disregards the
date-of-death valuation principle and particularly provides that post-death developments
must be considered in determining the net value of the estate. It bears emphasis that
tax burdens are not to be imposed, nor presumed to be imposed, beyond what the
statute expressly and clearly imports, tax statutes being construed strictissimi juris
against the government.69 Any doubt on whether a person, article or activity is taxable
is generally resolved against taxation.70 Second. Such construction finds relevance and
consistency in our Rules on Special Proceedings wherein the term "claims" required to
be presented against a decedent's estate is generally construed to mean debts or
demands of a pecuniary nature which could have been enforced against the deceased
in his lifetime, or liability contracted by the deceased before his death.71 Therefore, the
claims existing at the time of death are significant to, and should be made the basis of,
the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision

dated April 30, 1999 and the Resolution dated November 3, 1999 of the Court of
Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of
Internal Revenue's deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

SECOND DIVISION

G.R. No. 203403, November 14, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. COURT OF TAX APPEALS,

THIRD DIVISION AND WINTELECOM, INC., Respondents.

DECISION

A. REYES, JR., J.:

Before the Court is a Petition for Certiorari,1 filed by the Commissioner of Internal
Revenue (petitioner) under Rule 65 of the 1997 Rules of Civil Procedure, seeking the
nullification of the Resolution2 dated July 30, 2012 rendered by the Court of Tax
Appeals (CTA), Third Division, which denied the petitioner's "Motion for Partial
Reconsideration (Re: Decision dated June 7, 2012) and For Leave to Re-Open Case"3
(subject motion) in CTA Case No. 7056.
The Antecedent Facts

The petitioner is a duly appointed official of the Republic of the Philippines charged with
the duty of assessing and collecting national and internal revenue taxes while private
respondent Wintelecom, Inc. (Wintelecom) is a duly organized domestic corporation
engaged in the sale and repair of mobile phones.4

Following an investigation and a pre-assessment notice of its internal revenue tax

liabilities for taxable years 2001 and 2000, Wintelecom received a Final Assessment
Notice (FAN) on March 10, 2004 for the alleged deficiency with discrepancies in the
total amount of Php 553,344,468.98. It filed a corresponding protest to the FAN on April
6, 2004 which was eventually denied by the petitioner on August 20, 2004.5

On September 22, 2004, Wintelecom filed a Petition for Review against the petitioner
with the CTA in Division docketed as CTA Case No. 7056.6

Thereafter, the petitioner filed a series of Motions for Extension of Time to File Answer
on October 14, 2004, October 27, 2004, and November 16, 2004, respectively. The
CTA, in turn, granted the motions in its respective Orders dated October 20, 2004,
November 2, 2004, and November 17, 2004, with the last order warning the petitioner of
its final extension.7

Notwithstanding, the petitioner filed a fourth, and eventually, a fifth Motion for Extension
of Time to File Answer. In its Resolution dated December 17, 2004, the CTA denied the
petitioner's fifth motion for extension. Prior to her receipt of the said resolution on
January 5, 2005, the petitioner belatedly filed her Answer on December 20, 2004.8

On January 13, 2005, the petitioner moved for reconsideration of the Resolution dated
December 17, 2004. In a Resolution dated May 20, 2005, the CTA denied the
petitioner's motion for reconsideration and set the case for the ex parte presentation of
evidence for Wintelecom. In turn, the petitioner questioned the said resolution via a
petition with the Court of Appeals, but the same was dismissed. A subsequent appeal
before this Court was likewise denied.9

After the termination of the ex parte presentation of evidence for Wintelecom, the CTA
rendered a Decision dated February 20, 2008. Thereafter, the petitioner filed a Motion
for Reconsideration with Motion to Admit Answer and Set Aside All Evidence Presented
which was denied by the CTA in a Resolution dated August 5, 2008.10

In turn, the petitioner filed a Petition for Review with the CTA en banc docketed as CTA
EB No. 417, assailing the Resolution dated May 20, 2005, Decision dated February 20,
2008, and Resolution dated August 5, 2008. Principally, the petitioner questioned the
CTA in Division in ordering the ex parte presentation of evidence for Wintelecom without
any motion from the latter to declare her in default, without a hearing on such motion,
without an order declaring her in default, and in rendering judgment thereon.11
In its Decision dated May 21, 2009, the CTA en banc held that while it does not
countenance the petitioner's repeated motions for extension, the declaration of default
against the petitioner was tainted with procedural defects.12 Thus, the CTA en banc
granted the petitioner's Petition for Review. Accordingly, it annulled the above-
mentioned CTA resolutions and decision, admitted the petitioner's Answer, and
remanded CTA Case No. 7056 to the CTA in Division for further proceedings.
Wintelecom moved for reconsideration, but the same was denied.13

Hence, the case concerning Wintelecom's Petition for Review was remanded back to
the CTA in Division where the petitioner's Answer was admitted.

In her Answer, the petitioner alleged that pursuant to the provisions of the National
Internal Revenue Code (NIRC) of 1997 she has the power to assess the proper tax on
any taxpayer based on the best evidence obtainable and such evidence shall be prima
facie correct and sufficient for all legal purposes. The petitioner claimed that for taxable
year 2000, Wintelecom under declared sales in the latter's Income Tax Return (ITR) in
the amount of Php 150,153,394.00. For taxable year 2001, Wintelecom declared its
sales amounting to Php 113,570,076.00, but in its amended ITR, it declared sales
amounting to Php 2,221,499,968.00. The petitioner further alleged that based on third-
party information, reconciliation of purchases per unreported books, and verification
from the Information Systems Operations Service Data Center of the Bureau of Internal
Revenue (BIR), Wintelecom incurred tax deficiencies for taxable years 2000 and 2001.
She further asserted that all presumptions are in favor of the correctness of tax
assessments.14

In turn, Wintelecom presented its testimonial and documentary evidence, which were all
admitted by the CTA.15

On April 4, 2011, the petitioner moved for the resetting of the scheduled initial
presentation of her evidence which was granted by the CTA with a warning. Despite
this, the petitioner moved for resetting again on May 2, 2011. The CTA granted the said
motion with a final warning to the petitioner's counsel. On June 1, 2011, the petitioner
filed an Urgent Motion to Reset Hearing, alleging that she will not be able to present her
evidence on June 6, 2011 due to the heavy volume of work and that she has yet to
communicate with her witnesses, who are revenue examiners mostly doing field
work.16

The petitioner failed to attend the scheduled hearing on June 6, 2011. Thus, upon
motion of Wintelecom's counsel and considering that a final warning had already been
issued against the petitioner against any further resetting, the petitioner was deemed to
have waived the right to present evidence in a Resolution dated June 17, 2011 issued
by the CTA. The petitioner moved for reconsideration, but the same was denied for lack
of merit in CTA Resolution dated August 23, 2011.17
Thereafter, both parties were ordered to file their simultaneous memoranda within 30
days from notice. While Wintelecom filed its Memorandum, the petitioner failed to file
the same despite notice. Subsequently, the case was deemed submitted for decision.18

Meanwhile, in a Petition for Certiorari filed before this Court on October 26, 2011 and
docketed as G.R. No. 199071, the petitioner assailed the CTA Resolutions dated June
17, 2011 and August 23, 2011. Therein, the petitioner prayed that the declaration
deeming her to have waived her right to present evidence be set aside and that she be
allowed to present evidence in the case. On December 12, 2011, the Court issued a
Resolution denying the said petition for having been filed out of time. The petitioner
moved for reconsideration, but the same was denied with finality in a Resolution by the
Court dated March 19, 2012. Consequently, an Entry of Judgment was made in that
case on June 7, 2012.19

On June 7, 2012, the CTA, Third Division rendered its Decision20 in the main case, the
dispositive portion of which reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTLY
GRANTED, as follows:

1. The assessments for deficiency income tax for taxable years 2000 and 2001 – are
hereby CANCELLED and SET ASIDE;

2. As regards the assessments for deficiency VAT, withholding tax on compensation,

expanded withholding tax and final withholding tax on fringe benefits for the years 2001
and 2000, [Wintelecom] is hereby ORDERED TO PAY [the petitioner] the reduced
amount of FIVE MILLION NINE HUNDRED FORTY[-]NINE [sic] THOUSAND EIGHT
HUNDRED FORTY[-]SIX PESOS AND EIGHTY[-]EIGHT CENTAVOS (P5,949,846.88),
computed as follows:

YEAR 2001
YEAR 2000
TOTAL
Deficiency VAT
P553,177.65
P2,898,767.65
P3,451,945.30
Deficiency Withholding Taxes

Compensation
27,540.25
26,056.73
53,596.98
Expanded Withholding Tax
1,203,728.18
39,512.76
1,243,240.94
Final Withholding Tax ---

Fringe Benefits
1,201,063.66
---
1,201,063.66

P2,985,509.74
P2,964,337.14
P5,949,846.88
3. In addition, [Wintelecom] is hereby ORDERED TO PAY an additional 20%
delinquency interest on the total amount of P5,949,846.88 computed from August 23,
2004 until fully paid, pursuant to Section 249 (C) of the NIRC of 1997, as amended.

SO ORDERED.21

Finding against the petitioner's assessments for deficiency income tax, the CTA found
that there were no factual and legal bases to support such claim as the petitioner failed
to present evidence thereof.22

On June 26, 2012, the petitioner filed the subject motion23 claiming she did not intend
to waive her right to present evidence as the delay in presenting her evidence-in-chief
was due to the massive demands of government on her limited pool of lawyers.24 She
then prayed that the Decision dated June 7, 2012 be set aside, the case be re-opened,
and she be allowed to present its evidence in the interest of substantial justice.25 In the
assailed Resolution26 dated July 30, 2012, the CTA denied the petitioner's motion in
this wise:

WHEREFORE, premises considered, [the petitioner's] "Motion for Partial

Reconsideration (Re: Decision dated June 7, 2012) and For Leave to Re-Open Case" is
hereby DENIED for lack of merit.

SO ORDERED.27

On September 4, 2012, the CTA issued an Entry of Judgment in CTA Case No. 7056.28
Hence, this petition.

The Issue
WHETHER OR NOT THE CTA, THIRD DIVISION GRAVELY ABUSED ITS
DISCRETION WHEN IT DENIED THE PETITIONER'S MOTION FOR PARTIAL
RECONSIDERATION AND FOR LEAVE TO RE-OPEN THE CASE.

In denying the subject motion, the CTA held that the petitioner's excuses of heavy
volume of work and non-availability of witnesses are not acceptable considering that the
case is already a re-trial. Hence, the petitioner must have already developed a system
and notified her witnesses in advance in order not to further delay the proceedings. The
CTA also found that there is no provision in the Rules of Court that contemplates the re-
opening of a case and that the grounds relied upon by the petitioner do not fall within
those prescribed for a motion for new trial.

The petitioner argues that the CTA's denial of the subject motion amounts to grave
abuse of discretion because it will result in apparent miscarriage of justice as it deprives
the petitioner a chance to fully prove her case against Wintelecom and recover alleged
deficiency taxes. She contends that a liberal stance in the matter of procedural
technicalities should have been adopted by the CTA considering the assessment
involves a sizeable amount in alleged deficiency taxes and the supposed existence and
availability of the third party information which will prove the basis of the said
assessment. Lastly, the petitioner insists that in the performance of government
functions, the State is not bound by the neglect of its agents and officers.

Meanwhile, apart from agreeing with the CTA, Wintelecom questions the propriety of
the instant petition and further claims that the petitioner is guilty of forum shopping. It
points out that in the Verification and Certification of Non-Forum Shopping, the
petitioner admitted that at the time the petition was filed, there was a "Motion to Admit
Motion for Reconsideration" pending before this Court in G.R. No. 199071. Wintelecom
likewise contends that the issue of whether or not the petitioner can still present
evidence has been ruled upon with finality by the Court in G.R. No. 199071 and is, thus,
moot and academic. Moreover, Wintelecom argues that there is no admissible evidence
for the petitioner which warrants a re-opening of the case as no third-party information
was identified and pre-marked during pre-trial before the CTA.

Ruling of the Court

The petition must fail.

Prefatorily, the Court first discusses the procedural matters raised by Wintelecom.

The petitioner did not engage in

forum shopping.

As previously mentioned, prior to filing the instant petition, the petitioner filed an earlier
Petition for Certiorari before this Court in G.R. No. 199071 assailing the Resolution
dated June 17, 2011, which declared her to have waived her right to present evidence.
Premised on practically the same facts as the petition at bench, the petitioner prayed
that the said resolution be reversed and she be allowed to present her evidence-in-
chief. The Court denied the earlier petition for certiorari on December 12, 2011 for
having been filed out of time. The Court likewise denied the petitioner’s eventual motion
for reconsideration with finality per Resolution dated March 19, 2012. Notwithstanding,
the Entry of Judgment on June 8, 2012, the petitioner filed a Motion to Admit Motion for
Reconsideration before this Court on June 21, 2012. As admitted by the petitioner in her
Verification and Certification of Non-Forum Shopping, the said motion was pending
before this Court when she filed the present petition, which now seeks to re-open CTA
Case No. 7056 and one again, for the petitioner to be allowed to present evidence.

Forum shopping is the act of instituting two or more actions or proceedings involving the
same parties for the same causes of action, either simultaneously or successively, on
the supposition that one or the other court would make a favorable disposition. It is
resorted to by any party against whom an adverse judgment or order has been issued in
one forum, in an attempt to seek a favorable opinion in another, other than by appeal or
a special civil action for certiorari.29

Applying the foregoing definition in the case at bar, this Court finds no forum shopping
was committed by the petitioner as the instant petition was neither simultaneously nor
successively filed with the earlier petition for certiorari, the latter having been filed on
October 26, 2011 and the former almost one year later on October 1, 2012. In fact, at
the time this petition was filed, an Entry of Judgment was already made in G.R. No.
199071. It is also worthy to note that the petitions assail two different resolutions. The
earlier petition assailed the CTA Resolution dated June 17, 2011 which declared the
petitioner to have waived the right to present evidence, while the instant petition assails
the Resolution dated July 30, 2012 which denied her motion for partial reconsideration
of the Decision dated June 7, 2012.

The petitioner improperly resorted to

certiorari under Rule 65 of the Rules
of Court.

The foregoing notwithstanding, the Court finds the petitioner's recourse in filing this
petition for certiorari improper.

The assailed resolution denied the petitioner's Motion for Partial Reconsideration in
connection with the June 7, 2012, which completely disposed of CTA Case No. 7065 on
the merits. As such, the petitioner's remedy was to file an appeal before the CTA en
banc by way of a petition for review under Rule 43 of the Rules of Court, pursuant to
Sections 3(b) and 4(b), Rule 8 of the Revised Rules of the CTA (RRCTA), which states:

SEC. 3. Who may appeal; period to file petition. — x x x.

(b) A party adversely affected by a decision, or resolution of a Division of the Court on a

motion for reconsideration or new trial may appeal to the Court by filing before it a
petition for review within fifteen days from receipt of a copy of the questioned decision
or resolution. x x x.

xxxx

SEC. 4. Where to appeal; mode of appeal. x x x.

(b) An appeal from a decision or resolution of the Court in Division on a motion for
reconsideration or new trial shall be taken to the Court by petition for review as provided
in Rule 43 of the Rules of Court. The Court en banc shall act on the appeal. (Emphasis
Ours)

Having received a copy of the Resolution on August 1, 2012,30 the petitioner had fifteen
(15) days or until August 16, 2012 to file an appeal before the CTA en banc. Instead,
the petitioner filed the instant petition for certiorari under Rule 65 of the Rules of Court
only on October 1, 2012. Notably, the Decision dated December 7, 2012 became final
and executory on August 19, 2012 without any appeal being taken thereon.31

It is evident that the petitioner resorted to the instant petition because she failed to take
an appeal within the prescribed reglementary period. Such a recourse cannot be done.

In the case of Government Service Insurance System Board of Trustees and Cristina V.
Astudillo v. The Hon. Court of Appeals-Cebu City and Former Judge Ma. Lorna P.
Demonteverde32 citing Butuan Development Corporation (BDC) v. The Twenty-First
Division of the Honorable Court of Appeals (Mindanao Station), Max Arriola, Jr., De Oro
Resources, Inc., (DORI) and Louie A. Libarios,33 the Court reiterated the well-
entrenched rule that the special civil action of certiorari under Rule 65 of the Rules of
Court cannot be allowed when a party fails to file an appeal despite availability of that
remedy:

A special civil action under Rule 65 of the Rules of Court will not be a cure for failure to
timely file an appeal under Rule 43 of the Rules of Court. Rule 65 is an independent
action that cannot be availed of as a substitute for the lost remedy of an ordinary
appeal, especially if such loss or lapse was occasioned by one's own neglect or error in
the choice of remedies. As this Court held in Butuan Development Corporation v. CA:

A party cannot substitute the special civil action of certiorari under Rule 65 of the Rules
of Court for the remedy of appeal. The existence and availability of the right of appeal
are antithetical to the availability of the special civil action of certiorari. Remedies of
appeal (including petitions for review) and certiorari are mutually exclusive, not
alternative or successive. Hence, certiorari is not and cannot be a substitute for an
appeal, especially if one's own negligence or error in one's choice of remedy
occasioned such loss or lapse. One of the requisites of certiorari is that there be no
available appeal or any plain, speedy and adequate remedy. Where an appeal is
available, certiorari will not prosper, even if the ground therefor is grave abuse of
discretion.34 (Citation omitted and emphasis and underscoring Ours)
Neither can it be averred that the only question raised in this case is a jurisdictional
question. As already mentioned, certiorari lies only where there is no appeal nor any
plain, speedy, and adequate remedy in the ordinary course of law. There is no reason
why the issue of grave abuse of discretion could not have been raised on appeal.35

The CTA, Third Division did not commit grave abuse of discretion in denying the
petitioner's Motion for Partial Reconsideration and for Leave to Re-Open Case
Even if we are to give due course to the present petition, the same is still dismissible for
lack of merit.

A petition for certiorari under Rule 65 of the Rules of Court36 is the proper remedy in
assailing that a tribunal exercising judicial functions committed grave abuse of discretion
amounting to lack or excess of jurisdiction. In this regard, the Court has expounded on
the meaning of the term "grave abuse of discretion" in Yu v. Judge Reyes-Carpio, et
al.,37 to wit:

The term grave abuse of discretion has a specific meaning. An act of a court or tribunal
can only be considered as with grave abuse of discretion when such act is done in a
capricious or whimsical exercise of judgment as is equivalent to lack of jurisdiction. The
abuse of discretion must be so patent and gross as to amount to an evasion of a
positive duty or to a virtual refusal to perform a duty enjoined by law, or to act at all in
contemplation of law, as where the power is exercised in an arbitrary and despotic
manner by reason of passion and hostility. Furthermore, the use of a petition for
certiorari is restricted only to truly extraordinary cases wherein the act of the lower court
or quasi-judicial body is wholly void. From the foregoing definition, it is clear that the
special civil action of certiorari under Rule 65 can only strike an act down for having
been done with grave abuse of discretion if the petitioner could manifestly show that
such act was patent and gross.38 (Emphases Ours)

The Court has likewise held that there is grave abuse of discretion when an act is (1)
done contrary to the Constitution, the law or jurisprudence, or (2) executed whimsically,
capriciously or arbitrarily out of malice, ill will or personal bias.39

In the case before the Court, the petitioner has failed to show that the CTA's act in
denying the subject motion was so patent and gross that would warrant striking it down
through petition for certiorari. Apart from sweeping allegations in the instant petition, the
petitioner failed to substantiate her imputation of grave abuse of discretion on the part of
the CTA. Neither did the petitioner advance any argument showing that the CTA
exercised its judgment capriciously, whimsically, arbitrarily or despotically out of ill will,
hostility, or personal bias.

Quite the contrary a careful review of the CTA, Third Division's assailed resolution
reveals that its denial of the subject motion was based on applicable provisions of the
RRCTA, the Rules of Court, and prevailing jurisprudence.
In the subject motion, the petitioner submitted that she did not intend to waive her right
to present evidence as the delays were due to the massive demands of the Government
on her limited pool of lawyers. She likewise beseeched the CTA for the liberal
construction of its rules in re-opening the instant case where she would be allowed to
present her evidence anew in the interest of substantial justice.

First, a reading of the subject motion readily shows that the petitioner is not seeking a
partial reconsideration but a new trial of CTA Case No. 7056 or, at the very least, a re-
opening of the case.

On this score, the CTA appropriately noted that the rules of procedure do not provide for
a manner to re-open a case under the circumstances of the present case. What the
RRCTA, in reference to the Rules of Court which applies suppletorily, specifies is the
remedy of a motion for reconsideration or new trial under Rule 15 thereof, Sections 1
and 5 particularly states:

SEC. 1. Who may and when to file motion. – Any aggrieved party may seek a
reconsideration or new trial of any decision, resolution or order of the Court. x x x.

SEC. 5. Grounds of motion for new trial. – A motion for new trial may be based on one
or more of the following causes materially affecting the substantial rights of the movant:

(a) Fraud, accident, mistake or excusable negligence which ordinary prudence could not
have guarded against and by reason of which such aggrieved party has probably been
impaired in his rights; or

(b) Newly discovered evidence, which he could not, with reasonable diligence, have
discovered and produced at the trial and, which, if presented, would probably alter the
result.

Here, the petitioner's failure to appear during the scheduled hearing for the presentation
of her evidence, despite two postponements and strong warnings from the court, was
not due to instances of fraud, accident, or excusable negligence. Neither did the
petitioner seek the presentation of newly discovered evidence which could not have
been discovered and produced during trial.

In addition to the foregoing, the CTA likewise observed that the subject motion was not
supported by the required affidavits of merits or affidavits of witnesses as indicated in
Section 6, Rule 15 of the RRCTA.40

Second, the CTA correctly found the petitioner's submissions unjustifiable.

Jurisprudence is replete with pronouncements that the heavy workload of a lawyer is an
insufficient reason to justify the relaxation of procedural rules,41 the same being relative
and often self-serving.42 If the failure of the petitioner's counsel to cope with his heavy
workload would be considered a valid justification to disregard procedural rules, there
would be no end to litigations so long as counsel had not been sufficiently diligent or
experienced.43

It bears stressing that the petitioner's failure to appear and present her evidence-in-chief
during the scheduled hearing on June 6, 2011 was not the only time she failed to
comply with procedural rules and court orders. Records reveal that the petitioner initially
filed a series of Motions for Extension of Time to File Answer to Wintelecom's Petition
for Review on five (5) separate occasions. The CTA in Division granted the petitioner's
first and second motions while it expressed stern warnings against the petitioner when it
granted the third and fourth motions for extension. Understandably, the CTA denied the
petitioner's fifth motion. Eventually, the case was elevated before the CTA en banc
where it was ultimately remanded back to the CTA in Division and the petitioner was
afforded another opportunity to present her case and evidence-in-chief.

Notwithstanding, the petitioner moved for resetting of the scheduled hearings on April 4,
2011 and May 2, 2011, respectively. In both occasions, the CTA granted the petitioner's
motions with a firm warning. Yet on June 1, 2011, the petitioner filed an Urgent Motion
to Reset Hearing, citing inability to present evidence due to heavy workload and failure
to communicate with witnesses. When the CTA, Third Division declared her to have
waived her right to present evidence and denied her subsequent motion for
reconsideration, the petitioner belatedly elevated the case before this Court via Petition
for Certiorari in G.R. No. 199071.

In an attempt to seek a third trial of the instant case because she failed to present her
evidence-in-chief, the petitioner invoked the liberal application of the rules as set forth in
Section 2, Rule 1 of the RRCTA.44 It is the petitioner's contention that the CTA should
not be governed strictly by technicalities and resolve the case on the merits. However,
considering the above-mentioned circumstances and that the case before the CTA was
already on its second trial, such is a dangerous proposition that this Court cannot
countenance.

To agree with the petitioner's contention would give rise to an unjustifiable precedent in
that there would be no end to the proceedings before the CTA. Whenever a party is
deemed to have waived its right to present evidence and is subsequently aggrieved by
the tax court's decision, he can have the trial set aside in complete disregard of
procedural rules and court processes. While a litigation is not a game of technicalities,
this does not mean that the procedural rules may be ignored at will and at random to the
prejudice of the orderly presentation and assessment of the issues and their just
resolution.45

Indeed, the Court agrees with the CTA's finding that the petitioner's repeated failure to
present her evidence is tantamount to inexcusable neglect. As such, the petitioner
cannot be allowed to harp on the policy of liberal application of the rules.46

To the mind of this Court and contrary to the petitioner's contentions, the CTA had
already extended immense liberality and leniency towards the petitioner in allowing her
repeated motions for extension and motions for resetting of scheduled hearings. In light
of the such circumstances, a liberal application of the rules to accommodate the
petitioner's purpose, regardless of her evident inexcusable neglect, would clearly pave
the way for injustice as it would be rewarding an act of negligence with undeserved
tolerance.47

Finally and in view of the discussions herein, the Court does not agree that the
petitioner can seek the disregard of our rules on the argument that the State is not
bound by the neglect of its agents and officers for "[t]he rule on non-estoppel of the
government is not designed to perpetrate an injustice."48 While it is recognized that the
State cannot be put in estoppel by the mistakes or errors of its agents and officials, such
general rule admits of exceptions as the Court has established in Republic v. CA:49

Estoppels against the public are little favored. They should not be invoked except in rare
and unusual circumstances, and may not be invoked where they would operate to
defeat the effective operation of a policy adopted to protect the public. They must be
applied with circumspection and should be applied only in those special cases where
the interests of justice clearly require it. Nevertheless, the government must not be
allowed to deal dishonorably or capriciously with its citizens, and must not play an
ignoble part or do a shabby thing; and subject to limitations x x x the doctrine of
equitable estoppel may be invoked against public authorities as well as against private
individuals.50 (Emphases Ours)

All told, the Court finds no grave abuse of discretion on the part of the CTA, Third
Division in denying the petitioner's Motion for Partial Reconsideration and for Leave to
Re-Open Case.

WHEREFORE, premises considered, the petition for certiorari is hereby DISMISSED for
lack of merit.

SO ORDERED.

Carpio (Chairperson), Perlas-Bernabe, Caguioa, and J. Reyes, Jr.,*JJ., concur.

G.R. No. 135210 July 11, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ISABELA CULTURAL CORPORATION, respondent.

PANGANIBAN, J.:

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

The Case

Before this Court is a Petition for Review on Certiorari1 pursuant to Rule 45 of the Rules
of Court, seeking to set aside the August 19, 1998 Decision2 of the Court of Appeals3
(CA) in CA-GR SP No. 46383 and ultimately to affirm the dismissal of CTA Case No.
5211. The dispositive portion of the assailed Decision reads as follows:

"WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly,

judgment is hereby rendered REMANDING the case to the CTA for proper
disposition."4

The Facts

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

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

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

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

Deficiency Income Tax

P321,022.68

Deficiency Expanded Withholding Tax

4,846.76
Total

P325,869.44

(pp. 187-189, BIR records)'

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

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

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

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

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

Seizure, dated December 22, 1994 (p. 340, BIR rec.). In said letter, [petitioner]
demanded payment of the subject assessment within ten (10) days from receipt thereof.
Otherwise, failure on its part would constrain [petitioner] to collect the subject
assessment through summary remedies.

[Respondent] considered said final notice of seizure as [petitioner's] final decision.

Hence, the instant petition for review filed with this Court on March 9, 1995.

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

Ruling of the Court of Appeals

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

Hence, this recourse.6

Issues

In his Memorandum,7 petitioner presents for this Court's consideration a solitary issue:

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

The Court's Ruling

The Petition is not meritorious.

Sole Issue:
The Nature of the Final Notice Before Seizure

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

"On Feb. 9, 1990, [this] Office sent you a letter requesting you to settle the above-
captioned assessment. To date, however, despite the lapse of a considerable length of
time, we have not been honored with a reply from you.

In this connection, we are giving you this LAST OPPORTUNITY to settle the adverted
assessment within ten (10) days after receipt hereof. Should you again fail, and refuse
to pay, this Office will be constrained to enforce its collection by summary remedies of
Warrant of Levy of Road Property, Distraint of Personal Property or Warrant of
Garnishment, and/or simultaneous court action.

Please give this matter your preferential attention.

Very truly yours,

ISIDRO B. TECSON, JR.

Revenue District Officer

By:

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

Petitioner maintains that this Final Notice was a mere reiteration of the delinquent
taxpayer's obligation to pay the taxes due. It was supposedly a mere demand that
should not have been mistaken for a decision on a protested assessment. Such
decision, the commissioner contends, must unequivocably indicate that it is the
resolution of the taxpayer's request for reconsideration and must likewise state the
reason therefor.

Respondent, on the other hand, points out that the Final Notice Before Seizure should
be considered as a denial of its request for reconsideration of the disputed assessment.
The Notice should be deemed as petitioner's last act, since failure to comply with it
would lead to the distraint and levy of respondent's properties, as indicated therein.

We agree with respondent. In the normal course, the revenue district officer sends the
taxpayer a notice of delinquent taxes, indicating the period covered, the amount due
including interest, and the reason for the delinquency. If the taxpayer disagrees with or
wishes to protest the assessment, it sends a letter to the BIR indicating its protest,
stating the reasons therefor, and submitting such proof as may be necessary. That letter
is considered as the taxpayer's request for reconsideration of the delinquent
assessment. After the request is filed and received by the BIR, the assessment
becomes a disputed assessment on which it must render a decision. That decision is
appealable to the Court of Tax Appeals for review.

Prior to the decision on a disputed assessment, there may still be exchanges between
the commissioner of internal revenue (CIR) and the taxpayer. The former may ask
clarificatory questions or require the latter to submit additional evidence. However, the
CIR's position regarding the disputed assessment must be indicated in the final
decision. It is this decision that is properly appealable to the CTA for review.

Indisputably, respondent received an assessment letter dated February 9, 1990, stating

that it had delinquent taxes due; and it subsequently filed its motion for reconsideration
on March 23, 1990. In support of its request for reconsideration, it sent to the CIR
additional documents on April 18, 1990. The next communication respondent received
was already the Final Notice Before Seizure dated November 10, 1994.

In the light of the above facts, the Final Notice Before Seizure cannot but be considered
as the commissioner's decision disposing of the request for reconsideration filed by
respondent, who received no other response to its request. Not only was the Notice the
only response received; its content and tenor supported the theory that it was the CIR's
final act regarding the request for reconsideration. The very title expressly indicated that
it was a final notice prior to seizure of property. The letter itself clearly stated that
respondent was being given "this LAST OPPORTUNITY" to pay; otherwise, its
properties would be subjected to distraint and levy. How then could it have been made
to believe that its request for reconsideration was still pending determination, despite
the actual threat of seizure of its properties?
Furthermore, Section 228 of the National Internal Revenue Code states that a
delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its
request for reconsideration remains unacted upon 180 days after submission thereof.
We quote:

"Sec. 228. Protesting an Assessment. – x x x

Within a period to be prescribed by implementing rules and regulations, the taxpayer

shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based
on his findings.

Such assessment may be protested administratively by filing a request for

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

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

In this case, the said period of 180 days had already lapsed when respondent filed its
request for reconsideration on March 23, 1990, without any action on the part of the
CIR.

Lastly, jurisprudence dictates that a final demand letter for payment of delinquent taxes
may be considered a decision on a disputed or protested assessment. In Commissioner
of Internal Revenue v. Ayala Securities Corporation, this Court held:

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

This being so, the said letter amount[ed] to a decision on a disputed or protested
assessment and, there, the court a quo did not err in taking cognizance of this case."11
Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals12 and again in CIR v.
Union Shipping Corp.,13 we ruled:

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

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

Reconsideration filed by private respondent, but simply continued to demand payment
of the latter's alleged tax delinquency. Thus, the Court reiterated the dictum that the BIR
should always indicate to the taxpayer in clear and unequivocal language what
constitutes final action on a disputed assessment. The object of this policy is to avoid
repeated requests for reconsideration by the taxpayer, thereby delaying the finality of
the assessment and, consequently, the collection of the taxes due. Furthermore, the
taxpayer would not be groping in the dark, speculating as to which communication or
action of the BIR may be the decision appealable to the tax court.15

In the instant case, the second notice received by private respondent verily indicated its
nature – that it was final. Unequivocably, therefore, it was tantamount to a rejection of
the request for reconsideration.

Commissioner v. Algue16 is not in point here. In that case, the Warrant of Distraint and
Levy, issued to the taxpayer without any categorical ruling on its request for
reconsideration, was not deemed equivalent to a denial of the request. Because such
request could not in fact be found in its records, the BIR cannot be presumed to have
taken it into consideration. The request was considered only when the taxpayer gave a
copy of it, duly stamp-received by the BIR. Hence, the Warrant was deemed
premature.1âwphi1.nêt

In the present case, petitioner does not deny receipt of private respondent's protest
letter. As a matter of fact, it categorically relates the following in its "Statement of
Relevant Facts":17

"3. On March 23, 1990, respondent ICC wrote the CIR requesting for a reconsideration
of the assessment on the ground that there was an error committed in the computation
of interest and that there were expenses which were disallowed (Ibid., pp. 296-311).

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

Having admitted as a fact private respondent's request for reconsideration, petitioner

must have passed upon it prior to the issuance of the Final Notice Before Seizure.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED.

SO ORDERED.

Melo, Vitug, Sandoval-Gutierrez, JJ., concur.

Gonzaga-Reyes, on leave.

FIRST DIVISION

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

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AYALA SECURITIES

CORPORATION and THE HONORABLE COURT OF TAX APPEALS, Respondents.

Solicitor General Felix V . Makasiar, Assistant Solicitor General Isidro C . Borromeo,

Solicitor Lolita O. Gal-lang and Special Attorney Salvador D. David for Petitioner.

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

SYNOPSIS

On November 29, 1955, respondent corporation filed its income tax returns for the fiscal
year which ended September 30, 1955, attaching therewith its audited financial
statements showing a surplus of P2,758,442.37. The tax due thereon was paid within
the time prescribed by law. Subsequently however, it was advised of an assessment of
P758,687.04 on its accumulated surplus after which, in a letter dated April 19, 1961, it
protested against the same and sought reconsideration thereof claiming that the
accumulation was for a bona fide business purpose and not to avoid the imposition of
income tax on the individual shareholders, and that the said assessment was issued
beyond the five-year prescriptive period. In a letter dated February 18, 1963, received
by respondent corporation three days later, the Chief, Manila Examiners, of the Office of
petitioner Commissioner of Internal Revenue called attention to its outstanding and
unpaid tax and requested payment of the amount within five days from receipt of the
letter. Believing that the same constituted a denial of its protest the respondent
corporation filed with the Court of Tax Appeals a petition for review of the assessment.
The Court of Tax Appeals rendered a decision cancelling and declaring of no force and
effect the assessment of petitioner.

The Supreme Court held that the tax court did not err in taking cognizance of the case;
that the assessment is not binding on respondent corporation as it was made after the
prescriptive period therefor had expired; and that consequently, a ruling on the
reasonableness or unreasonableness of respondent corporation’s accumulated profits
or surplus was unnecessary.

Judgment affirmed.

SYLLABUS

1. COURT OF TAX APPEALS; JURISDICTION. — The Court of Tax Appeals is a

court of special appellate jurisdiction created under R.A. No. 1125. Under Section 7(1)
thereof, it exercises exclusive appellate jurisdiction to review by appeal "decisions of the
Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation there to, or
other matters arising under the National Internal Revenue Code or other law or part of
law administered by the Bureau of Internal Revenue."cralaw virtua1aw library

2. ID.; ID.; REVIEW OF DECISIONS ON DISPUTED ASSESSMENTS; INSTANT

CASE WITHIN JURISDICTION OF RESPONDENT COURT. — The letter of February
18, 1963 was tantamount to a denial of the reconsideration or protest of the respondent
corporation on the assessment made by the petitioner, considering that the said letter
was in itself a reiteration of the demand by the Bureau of Internal Revenue for the
settlement of the assessment already made, and for the immediate payment of the sum
of P758,687.04 in spite of the vehement protest of the respondent corporation on April
21, 1961. This was a clear indication of the disputed assessment, in view of the
continued refusal of the respondent corporation to execute the waiver of the period of
limitation upon the assessment in question. This being so, the letter amounted to a
decision on a disputed or protested assessment and, therefore, the respondent court
did not err in taking cognizance of the case.

3. TAXATION; INCOME ASSESSMENT AND COLLECTION; SECTION 331 OF

THE NATIONAL INTERNAL REVENUE CODE APPLICABLE TO INSTANT CASE. —
Under Section 46(d) of the Tax Code, the respondent corporation designated
September 30, 1955 as the last day of the closing of its fiscal year, and under Section
46(b) the income tax returns for the said corporation shall be filed on or before the
fifteenth day of the fourth month following the close of its fiscal year. Respondent
corporation could, therefore, file its income tax returns on or before January 15, 1956.
The assessment by the Commissioner of Internal Revenue shall be made within five
years from January 15, 1956, or not later than January 15, 1956, in accordance with
Section 331 of the Tax Code. As the assessment issued on February 21, 1961 which
was received by the respondent corporation on May 22, 1961, was made beyond the
five-year period prescribed under Section 331 of said Code, the same was made after
the prescriptive period had expired and, therefore was no longer binding on the
respondent corporation.

4. ID.; ID.; ID.; NO RULING ON THE REASONABLENESS OR

UNREASONABLENESS OF ACCUMULATED PROFITS OR SURPLUS NECESSARY
WHERE RIGHT TO ASSESS SURTAX HAS ALREADY PRESCRIBED. — Where the
right of the Commissioner of Internal Revenue to assess the 25% surtax has already
prescribed under Section 331 of the National Internal Revenue Code, to delve further
into the reasonableness or unreasonableness of the accumulated profits or surplus of
the respondent corporation for the fiscal year ending September 30, 1955, will only be
an exercise in futility.

DECISION

ESGUERRA, J.:

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA
No. 1346, cancelling and declaring of no force and effect the assessment made by the
petitioner, Commissioner of Internal Revenue, against the accumulated surplus of the
respondent, Ayala Securities Corporation.chanroblesvirtuallawlibrary

The factual background of the case is as follows:chanrob1es virtual 1aw library

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

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

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

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

On February 21, 1963, respondent corporation received a letter dated February 18,
1963, from the Chief, Manila Examiners, of the Office of the herein petitioner, calling the
attention of the respondent corporation to its outstanding and unpaid tax in the amount
of P758,687.04 and thereby requesting for the payment of the said amount within five
(5) days from receipt of the said letter (Exh. G). Believing the aforesaid letter to be a
denial of its protest, the herein respondent corporation filed with the Court of Tax
Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.

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

Petitioner in his answer alleged that the assessment made by his office on the
accumulated surplus of the corporation as reflected on its income tax return for the
taxable year 1955 has not as yet prescribed and, further, that the respondent
corporation’s accumulation of surplus for the taxable year 1955 was improper as the
retention of such surplus was availed of by the corporation to prevent the imposition of
the income tax upon the individual shareholders or members of the said corporation.

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

"WHEREFORE, the decision of the respondent Commissioner of Internal Revenue

assessing petitioner the amount of P758,687.04 as 25% surtax and interest is reversed.
Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared
of no force and effect. Without pronouncement as to costs."cralaw virtua1aw library

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

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

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

Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding
the issue as to whether or not the accumulated profits or surplus is indispensable to the
business operations of the private respondent corporation. It is the contention of the
petitioner that the accumulation of profits or surplus was resorted to by the respondent
corporation in order to avoid the payment of taxes by its stockholders or members, and
was not availed of in order to meet the reasonable needs of its business operations.

The legal issues for resolution by this Court in this case are: (1) Whether or not the
instant case falls within the jurisdiction of the respondent Court of Tax Appeals; (2)
Whether or not the applicable provision of law to this case is Section 331 of the National
Internal Revenue Code, which provides for a five-year period of prescription of
assessment from the filing of the return, or Section 332(a) of the same Code which
provides for a ten-year period of limitation for the same purpose; and (3) Whether or not
the respondent Court of Tax Appeals committed a reversible error in not making any
ruling on the reasonableness or unreasonableness of the accumulated profits or surplus
in question of the private respondent corporation.

I
It is to be noted that the respondent Court of Tax Appeals is a court of special appellate
jurisdiction created under R.A. No. 1125. Thus under Section 7(1), R.A. 1125, the Court
of Tax Appeals exercises exclusive appellate jurisdiction to review by appeal "decisions
of the Collector of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties imposed in relation thereto,
or other matters arising under the National Internal Revenue Code or other law or part
of law administered by the Bureau of Internal Revenue."

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

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

II

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

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

The applicable provision of law in this case is Section 331 of the National Internal
Revenue Code, to wit:jgc:chanrobles.com.ph
"SEC. 331. Period of limitation upon assessment and collection. — Except as
provided in the succeeding section, internal revenue taxes shall be assessed within five
years after the return was filed, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period. For the
purposes of this section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day: Provided, That this limitation shall
not apply to cases already investigated prior to the approval of this Code." cdi

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

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

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

Without special pronouncement as to costs.

SO ORDERED.

Teehankee, Makasiar, Muñoz Palma and Martin, JJ., concur.

G.R. No. 136975 March 31, 2005

COMMISSION OF INTERNAL REVENUE, Petitioner,
vs.
HANTEX TRADING CO., INC., respondent.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision1 of the Court of Appeals (CA) which
reversed the Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5126,
upholding the deficiency income and sales tax assessments against respondent Hantex
Trading Co., Inc.

The Antecedents

The respondent is a corporation duly organized and existing under the laws of the
Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and
other chemicals for the manufacture of its products. For this purpose, it is required to file
an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau
of Customs under Section 1301 of the Tariff and Customs Code.

Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence

Division of the Economic Intelligence and Investigation Bureau (EIIB), received
confidential information that the respondent had imported synthetic resin amounting to
P115,599,018.00 but only declared P45,538,694.57.3 According to the informer, based
on photocopies of 77 Consumption Entries furnished by another informer, the 1987
importations of the respondent were understated in its accounting records.4 Amoto
submitted a report to the EIIB Commissioner recommending that an inventory audit of
the respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the
EIIB.5

Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued
Mission Order No. 398-896 dated November 14, 1989 for the audit and investigation of
the importations of Hantex for 1987. The IIPO issued subpoena duces tecum and ad
testificandum for the president and general manager of the respondent to appear in a
hearing and bring the following:

1. Books of Accounts for the year 1987;

2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987;

3. Income tax returns & attachments for 1987; and

4. Record of tax payments.7

However, the respondent’s president and general manager refused to comply with the
subpoena, contending that its books of accounts and records of importation of synthetic
resin and calcium bicarbonate had been investigated repeatedly by the Bureau of
Internal Revenue (BIR) on prior occasions.8 The IIPO explained that despite such
previous investigations, the EIIB was still authorized to conduct an investigation
pursuant to Section 26-A of Executive Order No. 127. Still, the respondent refused to
comply with the subpoena issued by the IIPO. The latter forthwith secured certified
copies of the Profit and Loss Statements for 1987 filed by the respondent with the
Securities and Exchange Commission (SEC).9 However, the IIPO failed to secure
certified copies of the respondent’s 1987 Consumption Entries from the Bureau of
Customs since, according to the custodian thereof, the original copies had been eaten
by termites.10

In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division,
Manila International Container Port, and the Acting Chief of the Collection Division, Port
of Manila, to authenticate the machine copies of the import entries supplied by the
informer. However, Chief of the Collection Division Merlita D. Tomas could not do so
because the Collection Division did not have the original copies of the entries. Instead,
she wrote the IIPO that, as gleaned from the records, the following entries had been
duly processed and released after the payment of duties and taxes:

IMPORTER – HANTEX TRADING CO., INC. – SERIES OF 1987

ENTRY NO.

DATE RELEASED

ENTRY NO.

DATE RELEASED

03058-87

1/30/87

50265-87

12/9/87

09120-87

3/20/87

46427-87

11/27/87
18089-87

5/21/87

30764-87

8/21/87

19439-87

6/2/87

30833-87

8/20/87

19441-87

6/3/87

34690-87

9/16/87

11667-87

4/15/87

34722-87

9/11/87

23294-87

7/7/87

43234-87

11/2/87

45478-87

11/16/87

44850-87
11/16/87

45691-87

12/2/87

44851-87

11/16/87

25464-87

7/16/87

46461-87

11/19/87

26483-87

7/23/87

46467-87

11/18/87

29950-87

8/11/87

48091-87

11-27-8711

Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan
could not authenticate the machine copies of the import entries as well, since the
original copies of the said entries filed with the Bureau of Customs had apparently been
eaten by termites. However, he issued a certification that the following enumerated
entries were filed by the respondent which were processed and released from the Port
of Manila after payment of duties and taxes, to wit:

Hantex Trading Co., Inc.

Entry No.
Date Released

Entry No.

Date Released

3903

1/29/87

22869

4/8/87

4414

1/20/87

19441

3/31/87

10683

2/17/87

24189

4/21/87

12611

2/24/87

26431

4/20/87

12989

2/26/87

45478

7/3/87
17050

3/13/87

26796

4/23/87

17169

3/13/87

28827

4/30/87

18089

3/16/87

31617

5/14/87

19439

4/1/87

39068

6/5/87

21189

4/3/87

42581

6/21/87

43451

6/29/87

42793
6/23/87

42795

6/23/87

45477

7/3/87

35582

not received

85830

11/13/87

45691

7/3/87

86650

not received

46187

7/8/87

87647

11/18/87

46427

7/3/87

88829

11/23/87

57669

8/12/87
92293

12/3/87

62471

8/28/87

93292

12/7/87

63187

9/2/87

96357

12/16/87

66859

9/15/87

96822

12/15/87

67890

9/17/87

98823

not received

68115

9/15/87

99428

12/28/87

69974
9/24/87

99429

12/28/87

72213

10/2/87

99441

12/28/87

77688

10/16/87

101406

1/5/87

84253

11/10/87

101407

1/8/87

85534

11/11/87

3118

1-19-8712

Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt.
Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation. They relied on
the certified copies of the respondent’s Profit and Loss Statement for 1987 and 1988 on
file with the SEC, the machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the entries certified by Tomas and
Danganan.
Based on the documents/records on hand, inclusive of the machine copies of the
Consumption Entries, the EIIB found that for 1987, the respondent had importations
totaling P105,716,527.00 (inclusive of advance sales tax). Compared with the declared
sales based on the Profit and Loss Statements filed with the SEC, the respondent had
unreported sales in the amount of P63,032,989.17, and its corresponding income tax
liability was P41,916,937.78, inclusive of penalty charge and interests.

EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and
recommended the collection of the total tax assessment from the respondent.13

On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to

the BIR Assistant Commissioner for Special Operations Service, directing the latter to
prepare a conference letter advising the respondent of its deficiency taxes.14

Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers

Saturnino D. Torres and Wilson Filamor conducted an investigation on the 1987
importations of the respondent, in the light of the records elevated by the EIIB to the
BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain
the respondent’s liability for deficiency sales and income taxes for 1987, if any. Per
Torres’ and Filamor’s Report dated March 6, 1991 which was based on the report of the
EIIB and the documents/records appended thereto, there was a prima facie case of
fraud against the respondent in filing its 1987 Consumption Entry reports with the
Bureau of Customs. They found that the respondent had unrecorded importation in the
total amount of P70,661,694.00, and that the amount was not declared in its income tax
return for 1987. The District Revenue Officer and the Regional Director of the BIR
concurred with the report.15

Based on the said report, the Acting Chief of the Special Investigation Branch wrote the
respondent and invited its representative to a conference at 10:00 a.m. of March 14,
1991 to discuss its deficiency internal revenue taxes and to present whatever
documentary and other evidence to refute the same.16 Appended to the letter was a
computation of the deficiency income and sales tax due from the respondent, inclusive
of increments:

B. Computations:

1. Cost of Sales Ratio

A2/A1

85.492923%

2. Undeclared Sales – Imported

A3/B1
110,079,491.61

3. Undeclared Gross Profit

B2-A3

15,969,316.61

C. Deficiency Taxes Due:

1. Deficiency Income Tax

B3 x 35%

5,589,261.00

50% Surcharge

C1 x 50%

2,794,630.50

Interest to 2/28/91

C1 x 57.5%

3,213,825.08

Total

11,597,825.58

2. Deficiency Sales Tax

at 10%

7,290,082.72

at 20%

10,493,312.31

Total Due

17,783,395.03
Less: Advanced Sales Taxes Paid

11,636,352.00

Deficiency Sales Tax

6,147,043.03

50% Surcharge

C2 x 50%

3,073,521.52

Interest to 2/28/91

5,532,338.73

Total

14,752,903.2817

The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March
15, 1991, Mariano O. Chua, the President and General Manager of the respondent,
requested that the report of Torres and Filamor be set aside on the following claim:

… [W]e had already been investigated by RDO No. 23 under Letters of Authority Nos.
0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and 0347838 RR
dated March 2, 1988, and re-investigated by the Special Investigation Team on Aug. 17,
1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation
Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all for income and
business tax liabilities for 1987. The Economic Intelligence and Investigation Bureau on
Nov. 20, 1989, likewise, confronted us on the same information for the same year.

In all of these investigations, save your request for an informal conference, we

welcomed them and proved the contrary of the allegation. Now, with your new inquiry,
we think that there will be no end to the problem.

Madam, we had been subjected to so many investigations and re-investigations for

1987 and nothing came out except the payment of deficiency taxes as a result of
oversight. Tax evasion through underdeclaration of income had never been proven.18

Invoking Section 23519 of the 1977 National Internal Revenue Code (NIRC), as
amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner
for Collection Jaime M. Maza, sent a Letter dated April 15, 1991 to the respondent
demanding payment of its deficiency income tax of P13,414,226.40 and deficiency
sales tax of P14,752,903.25, inclusive of surcharge and interest.20 Appended thereto
were the Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-
87-91-001655.21

On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR
sent a letter to the respondent demanding payment of its tax liability due for 1987 within
ten (10) days from notice, on pain of the collection tax due via a warrant of distraint and
levy and/or judicial action.22 The Warrant of Distraint and/or Levy23 was actually
served on the respondent on January 21, 1992. On September 7, 1992, it wrote the
Commissioner of Internal Revenue protesting the assessment on the following grounds:

I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE

FACT THAT NO INVESTIGATION OF OUR RECORDS WAS EVER MADE BY THE
EIIB WHICH RECOMMENDED ITS ISSUANCE.24

II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR
1987 AMOUNTED TO P105,716,527.00 AS CLAIMED BY THE EIIB, THE
ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT
FAILED TO CONSIDER OUR REAL PURCHASES OF P45,538,694.57.25

III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS

AND UNFOUNDED CONSIDERING THAT WE HAVE DUTIFULLY PAID THE SALES
TAX DUE FROM OUR BUSINESS.26

In view of the impasse, administrative hearings were conducted on the respondent’s

protest to the assessment. During the hearing of August 20, 1993, the IIPO
representative presented the photocopies of the Consumption and Import Entries and
the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO
representative testified that the Bureau of Customs failed to furnish the EIIB with
certified copies of the Consumption and Import Entries; hence, the EIIB relied on the
machine copies from their informer.27

The respondent wrote the BIR Commissioner on July 12, 1993 questioning the
assessment on the ground that the EIIB representative failed to present the original, or
authenticated, or duly certified copies of the Consumption and Import Entry Accounts, or
excerpts thereof if the original copies were not readily available; or, if the originals were
in the official custody of a public officer, certified copies thereof as provided for in
Section 12, Chapter 3, Book VII, Administrative Procedure, Administrative Order of
1987. It stated that the only copies of the Consumption Entries submitted to the Hearing
Officer were mere machine copies furnished by an informer of the EIIB. It asserted that
the letters of Tomas and Danganan were unreliable because of the following:
In the said letters, the two collection officers merely submitted a listing of alleged import
entry numbers and dates released of alleged importations by Hantex Trading Co., Inc.
of merchandise in 1987, for which they certified that the corresponding duties and taxes
were paid after being processed in their offices. In said letters, no amounts of the
landed costs and advance sales tax and duties were stated, and no particulars of the
duties and taxes paid per import entry document was presented.

The contents of the two letters failed to indicate the particulars of the importations per
entry number, and the said letters do not constitute as evidence of the amounts of
importations of Hantex Trading Co., Inc. in 1987.28

The respondent cited the following findings of the Hearing Officer:

… [T]hat the import entry documents do not constitute evidence only indicate that the
tax assessments in question have no factual basis, and must, at this point in time, be
withdrawn and cancelled. Any new findings by the IIPO representative who attended the
hearing could not be used as evidence in this hearing, because all the issues on the tax
assessments in question have already been raised by the herein taxpayer.29

The respondent requested anew that the income tax deficiency assessment and the
sales tax deficiency assessment be set aside for lack of factual and legal basis.

The BIR Commissioner30 wrote the respondent on December 10, 1993, denying its
letter-request for the dismissal of the assessments.31 The BIR Commissioner admitted,
in the said letter, the possibility that the figures appearing in the photocopies of the
Consumption Entries had been tampered with. She averred, however, that she was not
proscribed from relying on other admissible evidence, namely, the Letters of Torres and
Filamor dated August 7 and 22, 1990 on their investigation of the respondent’s tax
liability. The Commissioner emphasized that her decision was final.32

The respondent forthwith filed a petition for review in the CTA of the Commissioner’s
Final Assessment Letter dated December 10, 1993 on the following grounds:

First. The alleged 1987 deficiency income tax assessment (including increments) and
the alleged 1987 deficiency sales tax assessment (including increments) are void ab
initio, since under Sections 16(a) and 49(b) of the Tax Code, the Commissioner shall
examine a return after it is filed and, thereafter, assess the correct amount of tax. The
following facts obtaining in this case, however, are indicative of the incorrectness of the
tax assessments in question: the deficiency interests imposed in the income and
percentage tax deficiency assessment notices were computed in violation of the
provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax
deficiency was computed on an annual basis for the year 1987 in accordance with the
provision of Section 193, which should have been computed in accordance with Section
162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and
the BIR official who signed the deficiency tax assessments was the Assistant
Commissioner for Collection, who had no authority to sign the same under the NIRC.
Second. Even granting arguendo that the deficiency taxes and increments for 1987
against the respondent were correctly computed in accordance with the provisions of
the Tax Code, the facts indicate that the above-stated assessments were based on
alleged documents which are inadmissible in either administrative or judicial
proceedings. Moreover, the alleged bases of the tax computations were anchored on
mere presumptions and not on actual facts. The alleged undeclared purchases for 1987
were based on mere photocopies of alleged import entry documents, not the original
ones, and which had never been duly certified by the public officer charged with the
custody of such records in the Bureau of Customs. According to the respondent, the
alleged undeclared sales were computed based on mere presumptions as to the
alleged gross profit contained in its 1987 financial statement. Moreover, even the
alleged financial statement of the respondent was a mere machine copy and not an
official copy of the 1987 income and business tax returns. Finally, the respondent was
following the accrual method of accounting in 1987, yet, the BIR investigator who
computed the 1987 income tax deficiency failed to allow as a deductible item the
alleged sales tax deficiency for 1987 as provided for under Section 30(c) of the NIRC of
1986.33

The Commissioner did not adduce in evidence the original or certified true copies of the
1987 Consumption Entries on file with the Commission on Audit. Instead, she offered in
evidence as proof of the contents thereof, the photocopies of the Consumption Entries
which the respondent objected to for being inadmissible in evidence.34 She also failed
to present any witness to prove the correct amount of tax due from it. Nevertheless, the
CTA provisionally admitted the said documents in evidence, subject to its final
evaluation of their relevancy and probative weight to the issues involved.35

On December 11, 1997, the CTA rendered a decision, the dispositive portion of which
reads:

IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the
herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner
of Internal Revenue its deficiency income and sales taxes for the year 1987 in the
amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency
interest per annum on both deficiency taxes from April 15, 1991 until fully paid pursuant
to Section 283(c)(3) of the 1987 Tax Code, with costs against the petitioner.

SO ORDERED.36

The CTA ruled that the respondent was burdened to prove not only that the assessment
was erroneous, but also to adduce the correct taxes to be paid by it. The CTA declared
that the respondent failed to prove the correct amount of taxes due to the BIR. It also
ruled that the respondent was burdened to adduce in evidence a certification from the
Bureau of Customs that the Consumption Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the CTA. The
dispositive portion of the decision reads:

FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the
December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming the 1987
deficiency income and sales tax assessments and the increments thereof, issued by the
BIR is hereby REVERSED. No costs.37

The Ruling of the Court of Appeals

The CA held that the income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import entries relied upon
in computing the deficiency tax of the respondent were not duly authenticated by the
public officer charged with their custody, nor verified under oath by the EIIB and the BIR
investigators.38 The CA also noted that the public officer charged with the custody of
the import entries was never presented in court to lend credence to the alleged loss of
the originals.39 The CA pointed out that an import entry is a public document which falls
within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible
for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply.40 Citing
the ruling of this Court in Collector of Internal Revenue v. Benipayo,41 the CA ruled that
the assessments were unlawful because they were based on hearsay evidence. The
CA also ruled that the respondent was deprived of its right to due process of law.

The CA added that the CTA should not have just brushed aside the legal requisites
provided for under the pertinent provisions of the Rules of Court in the matter of the
admissibility of public documents, considering that substantive rules of evidence should
not be disregarded. It also ruled that the certifications made by the two Customs
Collection Chiefs under the guise of supporting the respondent’s alleged tax deficiency
assessments invoking the best evidence obtainable rule under the Tax Code should not
be permitted to supplant the best evidence rule under Section 7, Rule 130 of the Rules
of Court.

Finally, the CA noted that the tax deficiency assessments were computed without the
tax returns. The CA opined that the use of the tax returns is indispensable in the
computation of a tax deficiency; hence, this essential requirement must be complied
with in the preparation and issuance of valid tax deficiency assessments.42

The Present Petition

The Commissioner of Internal Revenue, the petitioner herein, filed the present petition
for review under Rule 45 of the Rules of Court for the reversal of the decision of the CA
and for the reinstatement of the ruling of the CTA.

As gleaned from the pleadings of the parties, the threshold issues for resolution are the
following: (a) whether the petition at bench is proper and complies with Sections 4 and
5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991 final assessment of
the petitioner against the respondent for deficiency income tax and sales tax for the
latter’s 1987 importation of resins and calcium bicarbonate is based on competent
evidence and the law; and (c) the total amount of deficiency taxes due from the
respondent for 1987, if any.

On the first issue, the respondent points out that the petition raises both questions of
facts and law which cannot be the subject of an appeal by certiorari under Rule 45 of
the Rules of Court. The respondent notes that the petition is defective because the
verification and the certification against forum shopping were not signed by the
petitioner herself, but only by the Regional Director of the BIR. The respondent submits
that the petitioner should have filed a motion for reconsideration with the CA before
filing the instant petition for review.43

We find and so rule that the petition is sufficient in form. A verification and certification
against forum shopping signed by the Regional Director constitutes sufficient
compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of Court.
Under Section 10 of the NIRC of 1997,44 the Regional Director has the power to
administer and enforce internal revenue laws, rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and fees. Such power
is broad enough to vest the Revenue Regional Director with the authority to sign the
verification and certification against forum shopping in behalf of the Commissioner of
Internal Revenue. There is no other person in a better position to know the collection
cases filed under his jurisdiction than the Revenue Regional Director.

Moreover, under Revenue Administrative Order No. 5-83,45 the Regional Director is
authorized to sign all pleadings filed in connection with cases referred to the Revenue
Regions by the National Office which, otherwise, require the signature of the petitioner.

We do not agree with the contention of the respondent that a motion for reconsideration
ought to have been filed before the filing of the instant petition. A motion for
reconsideration of the decision of the CA is not a condition sine qua non for the filing of
a petition for review under Rule 45. As we held in Almora v. Court of Appeals:46

Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:

A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with
the Supreme Court a petition for certiorari within fifteen (15) days from notice of
judgment, or of the denial of his motion for reconsideration filed in due time. (Emphasis
supplied)

The conjunctive "or" clearly indicates that the 15-day reglementary period for the filing of
a petition for certiorari under Rule 45 commences either from notice of the questioned
judgment or from notice of denial of the appellant’s motion for reconsideration. A prior
motion for reconsideration is not indispensable for a petition for review on certiorari
under Rule 45 to prosper. …47
While Rule 45 of the Rules of Court provides that only questions of law may be raised
by the petitioner and resolved by the Court, under exceptional circumstances, the Court
may take cognizance thereof and resolve questions of fact. In this case, the findings
and conclusion of the CA are inconsistent with those of the CTA, not to mention those of
the Commissioner of Internal Revenue. The issues raised in this case relate to the
propriety and the correctness of the tax assessments made by the petitioner against the
respondent, as well as the propriety of the application of Section 16, paragraph (b) of
the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive
Order No. 273, in relation to Section 3, Rule 132 of the Rules of Evidence. There is also
an imperative need for the Court to resolve the threshold factual issues to give justice to
the parties, and to determine whether the CA capriciously ignored, misunderstood or
misinterpreted cogent facts and circumstances which, if considered, would change the
outcome of the case.

On the second issue, the petitioner asserts that since the respondent refused to
cooperate and show its 1987 books of account and other accounting records, it was
proper for her to resort to the best evidence obtainable – the photocopies of the import
entries in the Bureau of Customs and the respondent’s financial statement filed with the
SEC.48 The petitioner maintains that these import entries were admissible as
secondary evidence under the best evidence obtainable rule, since they were duly
authenticated by the Bureau of Customs officials who processed the documents and
released the cargoes after payment of the duties and taxes due.49 Further, the
petitioner points out that under the best evidence obtainable rule, the tax return is not
important in computing the tax deficiency.50

The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977
NIRC, as amended, legally cannot be equated to the best evidence rule under the Rules
of Court; nor can the best evidence rule, being procedural law, be made strictly
operative in the interpretation of the best evidence obtainable rule which is substantive
in character.51 The petitioner posits that the CTA is not strictly bound by technical rules
of evidence, the reason being that the quantum of evidence required in the said court is
merely substantial evidence.52

Finally, the petitioner avers that the respondent has the burden of proof to show the
correct assessments; otherwise, the presumption in favor of the correctness of the
assessments made by it stands.53 Since the respondent was allowed to explain its
side, there was no violation of due process.54

The respondent, for its part, maintains that the resort to the best evidence obtainable
method was illegal. In the first place, the respondent argues, the EIIB agents are not
duly authorized to undertake examination of the taxpayer’s accounting records for
internal revenue tax purposes. Hence, the respondent’s failure to accede to their
demands to show its books of accounts and other accounting records cannot justify
resort to the use of the best evidence obtainable method.55 Secondly, when a taxpayer
fails to submit its tax records upon demand by the BIR officer, the remedy is not to
assess him and resort to the best evidence obtainable rule, but to punish the taxpayer
according to the provisions of the Tax Code.56

In any case, the respondent argues that the photocopies of import entries cannot be
used in making the assessment because they were not properly authenticated, pursuant
to the provisions of Sections 2457 and 2558 of Rule 132 of the Rules of Court. It avers
that while the CTA is not bound by the technical rules of evidence, it is bound by
substantial rules.59 The respondent points out that the petitioner did not even secure a
certification of the fact of loss of the original documents from the custodian of the import
entries. It simply relied on the report of the EIIB agents that the import entry documents
were no longer available because they were eaten by termites. The respondent posits
that the two collectors of the Bureau of Customs never authenticated the xerox copies
of the import entries; instead, they only issued certifications stating therein the import
entry numbers which were processed by their office and the date the same were
released.60

The respondent argues that it was not necessary for it to show the correct assessment,
considering that it is questioning the assessments not only because they are erroneous,
but because they were issued without factual basis and in patent violation of the
assessment procedures laid down in the NIRC of 1977, as amended.61 It is also
pointed out that the petitioner failed to use the tax returns filed by the respondent in
computing the deficiency taxes which is contrary to law;62 as such, the deficiency
assessments constituted deprivation of property without due process of law.63

Central to the second issue is Section 16 of the NIRC of 1977, as amended,64 which
provides that the Commissioner of Internal Revenue has the power to make
assessments and prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in paragraph (b) thereof, which
we quote:

(b) Failure to submit required returns, statements, reports and other documents. –
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by law or regulation or when
there is reason to believe that any such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence obtainable.

In case a person fails to file a required return or other document at the time prescribed
by law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.65

This provision applies when the Commissioner of Internal Revenue undertakes to

perform her administrative duty of assessing the proper tax against a taxpayer, to make
a return in case of a taxpayer’s failure to file one, or to amend a return already filed in
the BIR.
The petitioner may avail herself of the best evidence or other information or testimony
by exercising her power or authority under paragraphs (1) to (4) of Section 7 of the
NIRC:

(1) To examine any book, paper, record or other data which may be relevant or material
to such inquiry;

(2) To obtain information from any office or officer of the national and local
governments, government agencies or its instrumentalities, including the Central Bank
of the Philippines and government owned or controlled corporations;

(3) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or other data, and to give
testimony;

(4) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; …66

The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes
the corporate and accounting records of the taxpayer who is the subject of the
assessment process, the accounting records of other taxpayers engaged in the same
line of business, including their gross profit and net profit sales.67 Such evidence also
includes data, record, paper, document or any evidence gathered by internal revenue
officers from other taxpayers who had personal transactions or from whom the subject
taxpayer received any income; and record, data, document and information secured
from government offices or agencies, such as the SEC, the Central Bank of the
Philippines, the Bureau of Customs, and the Tariff and Customs Commission.

The law allows the BIR access to all relevant or material records and data in the person
of the taxpayer. It places no limit or condition on the type or form of the medium by
which the record subject to the order of the BIR is kept. The purpose of the law is to
enable the BIR to get at the taxpayer’s records in whatever form they may be kept.
Such records include computer tapes of the said records prepared by the taxpayer in
the course of business.68 In this era of developing information-storage technology,
there is no valid reason to immunize companies with computer-based, record-keeping
capabilities from BIR scrutiny. The standard is not the form of the record but where it
might shed light on the accuracy of the taxpayer’s return.

In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of Appeals (5th Circuit)
declared that it is the duty of the Commissioner of Internal Revenue to investigate any
circumstance which led him to believe that the taxpayer had taxable income larger than
reported. Necessarily, this inquiry would have to be outside of the books because they
supported the return as filed. He may take the sworn testimony of the taxpayer; he may
take the testimony of third parties; he may examine and subpoena, if necessary,
traders’ and brokers’ accounts and books and the taxpayer’s book accounts. The
Commissioner is not bound to follow any set of patterns. The existence of unreported
income may be shown by any practicable proof that is available in the circumstances of
the particular situation. Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate
court declared that where the records of the taxpayer are manifestly inaccurate and
incomplete, the Commissioner may look to other sources of information to establish
income made by the taxpayer during the years in question.71

We agree with the contention of the petitioner 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, hence, inadmissible in a regular proceeding in the regular courts.72
Moreover, the general rule is that administrative agencies such as the BIR are not
bound by the technical rules of evidence. It can accept documents which cannot be
admitted in a judicial proceeding where the Rules of Court are strictly observed. It can
choose to give weight or disregard such evidence, depending on its trustworthiness.

However, the best evidence obtainable under Section 16 of the 1977 NIRC, as
amended, does not include mere photocopies of records/documents. The petitioner, in
making a preliminary and final tax deficiency assessment against a taxpayer, cannot
anchor the said assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if offered as proof of
the contents thereof. The reason for this is that such copies are mere scraps of paper
and are of no probative value as basis for any deficiency income or business taxes
against a taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of Appeals (2nd
Circuit) ruled that where the accuracy of a taxpayer’s return is being checked, the
government is entitled to use the original records rather than be forced to accept
purported copies which present the risk of error or tampering.74

In Collector of Internal Revenue v. Benipayo,75 the Court ruled that the assessment
must be based on actual facts. The rule assumes more importance in this case since
the xerox copies of the Consumption Entries furnished by the informer of the EIIB were
furnished by yet another informer. While the EIIB tried to secure certified copies of the
said entries from the Bureau of Customs, it was unable to do so because the said
entries were allegedly eaten by termites. The Court can only surmise why the EIIB or
the BIR, for that matter, failed to secure certified copies of the said entries from the
Tariff and Customs Commission or from the National Statistics Office which also had
copies thereof. It bears stressing that under Section 1306 of the Tariff and Customs
Code, the Consumption Entries shall be the required number of copies as prescribed by
regulations.76 The Consumption Entry is accomplished in sextuplicate copies and
quadruplicate copies in other places. In Manila, the six copies are distributed to the
Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the
Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner
and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR
and relied on the photocopies supplied by the informer of the EIIB who secured the
same from another informer. The BIR, in preparing and issuing its preliminary and final
assessments against the respondent, even ignored the records on the investigation
made by the District Revenue officers on the respondent’s importations for 1987.

The original copies of the Consumption Entries were of prime importance to the BIR.
This is so because such entries are under oath and are presumed to be true and correct
under penalty of falsification or perjury. Admissions in the said entries of the importers’
documents are admissions against interest and presumptively correct.77

In fine, then, the petitioner 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 the respondent.

The rule is that in the absence of the accounting records of a taxpayer, his tax liability
may be determined by estimation. The petitioner 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.78 However, the rule does not apply where the estimation
is arrived at arbitrarily and capriciously.79

We agree with the contention of the petitioner that, as a general rule, tax assessments
by tax examiners are presumed correct and made in good faith. All presumptions are in
favor of the correctness of a tax assessment. It is to be presumed, however, that such
assessment was based on sufficient evidence. Upon the introduction of the assessment
in evidence, a prima facie case of liability on the part of the taxpayer is made.80 If a
taxpayer files a petition for review in the CTA and assails the assessment, the prima
facie presumption is that the assessment made by the BIR is correct, and that in
preparing the same, the BIR personnel regularly performed their duties. This rule for tax
initiated suits is premised on several factors other than the normal evidentiary rule
imposing proof obligation on the petitioner-taxpayer: the presumption of administrative
regularity; the likelihood that the taxpayer will have access to the relevant information;
and the desirability of bolstering the record-keeping requirements of the NIRC.81

However, the prima facie correctness of a tax assessment does not apply upon proof
that an assessment is utterly without foundation, meaning it is arbitrary and capricious.
Where the BIR has come out with a "naked assessment," i.e., without any foundation
character, the determination of the tax due is without rational basis.82 In such a
situation, the U.S. Court of Appeals ruled83 that the determination of the Commissioner
contained in a deficiency notice disappears. Hence, the determination by the CTA must
rest on all the evidence introduced and its ultimate determination must find support in
credible evidence.

The issue that now comes to fore is whether the tax deficiency assessment against the
respondent based on the certified copies of the Profit and Loss Statement submitted by
the respondent to the SEC in 1987 and 1988, as well as certifications of Tomas and
Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed
to overcome the prima facie correctness of the tax deficiency assessment issued by the
petitioner, to wit:

The issue should be ruled in the affirmative as petitioner has failed to rebut the validity
or correctness of the aforementioned tax assessments. It is incongruous for petitioner to
prove its cause by simply drawing an inference unfavorable to the respondent by
attacking the source documents (Consumption Entries) which were the bases of the
assessment and which were certified by the Chiefs of the Collection Division, Manila
International Container Port and the Port of Manila, as having been processed and
released in the name of the petitioner after payment of duties and taxes and the duly
certified copies of Financial Statements secured from the Securities and Exchange
Commission. Any such inference cannot operate to relieve petitioner from bearing its
burden of proof and this Court has no warrant of absolution. The Court should have
been persuaded to grant the reliefs sought by the petitioner should it have presented
any evidence of relevance and competence required, like that of a certification from the
Bureau of Customs or from any other agencies, attesting to the fact that those
consumption entries did not really belong to them.

The burden of proof is on the taxpayer contesting the validity or correctness of an

assessment to prove not only that the Commissioner of Internal Revenue is wrong but
the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption in
favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The
burden of proving the illegality of the assessment lies upon the petitioner alleging it to
be so. In the case at bar, petitioner miserably failed to discharge this duty.84

We are not in full accord with the findings and ratiocination of the CTA. Based on the
letter of the petitioner to the respondent dated December 10, 1993, the tax deficiency
assessment in question was based on (a) the findings of the agents of the EIIB which
was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and
Loss Statements of the respondent for 1987 and 1988; and (c) the certifications of
Tomas and Danganan dated August 7, 1990 and August 22, 1990:

In reply, please be informed that after a thorough evaluation of the attending facts, as
well as the laws and jurisprudence involved, this Office holds that you are liable to the
assessed deficiency taxes. The conclusion was arrived at based on the findings of
agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own
examiners who have painstakingly examined the records furnished by the Bureau of
Customs and the Securities & Exchange Commission (SEC). The examination
conducted disclosed that while your actual sales for 1987 amounted to
P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss
Statements, the sum of P47,698,569.83 only. The difference, therefore, of
P63,032,989.17 constitutes as undeclared or unrecorded sales which must be
subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of
underdeclared importations were lifted from uncertified or unauthenticated xerox copies
of consumption entries which are not admissible in evidence. On this issue, it must be
considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the
Collection Division of the Manila International Container Port and Port of Manila,
respectively, certified that the enumerated consumption entries were filed, processed
and released from the port after payment of duties and taxes. It is noted that the
certification does not touch on the genuineness, authenticity and correctness of the
consumption entries which are all xerox copies, wherein the figures therein appearing
may have been tampered which may render said documents inadmissible in evidence,
but for tax purposes, it has been held that the Commissioner is not required to make his
determination (assessment) on the basis of evidence legally admissible in a formal
proceeding in Court (Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory
notice may be based in whole or in part upon admissible evidence (Llorente v.
Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977);
and Rosano v. Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v.
Commissioner (1977), the assessment was given due course in the presence of
admissible evidence as to how the Commissioner arrived at his determination, although
there was no admissible evidence with respect to the substantial issue of whether the
taxpayer had unreported or undeclared income from narcotics sale. …85

Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents
for the actual cost of importation of the respondent are the machine copies of the
Consumption Entries from the informer which the IIPO claimed to have been certified by
Tomas and Danganan:

The source documents for the total actual cost of importations, abovementioned, were
the different copies of Consumption Entries, Series of 1987, filed by subject with the
Bureau of Customs, marked Annexes "F-1" to "F-68." The total cost of importations is
the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed
entries. These entries were duly authenticated as having been processed and released,
after payment of the duties and taxes due thereon, by the Chief, Collection Division,
Manila International Container Port, dated August 7, 1990, "Annex-G," and the Port of
Manila, dated August 22, 1990, "Annex-H." So, it was established that subject-
importations, mostly resins, really belong to HANTEX TRADING CO., INC.86

It also appears on the worksheet of the IIPO, as culled from the photocopies of the
Consumption Entries from its informer, that the total cost of the respondent’s importation
for 1987 was P105,761,527.00. Per the report of Torres and Filamor, they also relied on
the photocopies of the said Consumption Entries:

The importations made by taxpayer verified by us from the records of the Bureau of
Customs and xerox copies of which are hereto attached shows the big volume of
importations made and not declared in the income tax return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud exists in
the herein transaction of the taxpayer, as a consequence of which, said transaction has
not been possibly entered into the books of accounts of the subject taxpayer.87

In fine, the petitioner based her finding that the 1987 importation of the respondent was
underdeclared in the amount of P105,761,527.00 on the worthless machine copies of
the Consumption Entries. Aside from such copies, the petitioner has no other evidence
to prove that the respondent imported goods costing P105,761,527.00. The petitioner
cannot find solace on the certifications of Tomas and Danganan because they did not
authenticate the machine copies of the Consumption Entries, and merely indicated
therein the entry numbers of Consumption Entries and the dates when the Bureau of
Customs released the same. The certifications of Tomas and Danganan do not even
contain the landed costs and the advance sales taxes paid by the importer, if any.
Comparing the certifications of Tomas and Danganan and the machine copies of the
Consumption Entries, only 36 of the entry numbers of such copies are included in the
said certifications; the entry numbers of the rest of the machine copies of the
Consumption Entries are not found therein.

Even if the Court would concede to the petitioner’s contention that the certification of
Tomas and Danganan authenticated the machine copies of the Consumption Entries
referred to in the certification, it appears that the total cost of importations inclusive of
advance sales tax is only P64,324,953.00 – far from the amount of P105,716,527.00
arrived at by the EIIB and the BIR,88 or even the amount of P110,079,491.61 arrived at
by Deputy Commissioner Deoferio, Jr.89 As gleaned from the certifications of Tomas
and Danganan, the goods covered by the Consumption Entries were released by the
Bureau of Customs, from which it can be presumed that the respondent must have paid
the taxes due on the said importation. The petitioner did not adduce any documentary
evidence to prove otherwise.

Thus, the computations of the EIIB and the BIR on the quantity and costs of the
importations of the respondent in the amount of P105,761,527.00 for 1987 have no
factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the
presumption that she and the other employees of the BIR had regularly performed their
duties. As the Court held in Collector of Internal Revenue v. Benipayo,90 in order to
stand judicial scrutiny, the assessment must be based on facts. The presumption of the
correctness of an assessment, being a mere presumption, cannot be made to rest on
another presumption.

Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly
examined the 1987 books of accounts of the respondent showing its importations, and
found that the latter had minimal business tax liability. In this case, the presumption that
the District Revenue officers performed their duties in accordance with law shall apply.
There is no evidence on record that the said officers neglected to perform their duties as
mandated by law; neither is there evidence aliunde that the contents of the 1987 and
1988 Profit and Loss Statements submitted by the respondent with the SEC are
incorrect.
Admittedly, the respondent did not adduce evidence to prove its correct tax liability.
However, considering that it has been established that the petitioner’s assessment is
barren of factual basis, arbitrary and illegal, such failure on the part of the respondent
cannot serve as a basis for a finding by the Court that it is liable for the amount
contained in the said assessment; otherwise, the Court would thereby be committing a
travesty.

On the disposition of the case, the Court has two options, namely, to deny the petition
for lack of merit and affirm the decision of the CA, without prejudice to the petitioner’s
issuance of a new assessment against the respondent based on credible evidence; or,
to remand the case to the CTA for further proceedings, to enable the petitioner to
adduce in evidence certified true copies or duplicate original copies of the Consumption
Entries for the respondent’s 1987 importations, if there be any, and the correct tax
deficiency assessment thereon, without prejudice to the right of the respondent to
adduce controverting evidence, so that the matter may be resolved once and for all by
the CTA. In the higher interest of justice to both the parties, the Court has chosen the
latter option. After all, as the Tax Court of the United States emphasized in Harbin v.
Commissioner of Internal Revenue,91 taxation is not only practical; it is vital. The
obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as
the government should never be over-reaching or tyrannical, neither should a taxpayer
be permitted to escape payment by the concealment of material facts.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the
Court of Appeals is SET ASIDE. The records are REMANDED to the Court of Tax
Appeals for further proceedings, conformably with the decision of this Court. No costs.

SO ORDERED.

Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

G.R. Nos. 172045-46 June 16, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FIRST EXPRESS PAWNSHOP COMPANY, INC., Respondent.

DECISION
CARPIO, J.:

The Case

The Commissioner of Internal Revenue (petitioner) filed this Petition for Review1 to
reverse the Court of Tax Appeals’ Decision2 dated 24 March 2006 in the consolidated
cases of C.T.A. EB Nos. 60 and 62. In the assailed decision, the Court of Tax Appeals
(CTA) En Banc partially reconsidered the CTA First Division’s Decision3 dated 24
September 2004.

The Facts

On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera

of Revenue Region 6 Manila, issued the following assessment notices against First
Express Pawnshop Company, Inc. (respondent):

a. Assessment No. 31-1-984 for deficiency income tax of ₱20,712.58 with compromise
penalty of ₱3,000;

b. Assessment No. 31-14-000053-985 for deficiency value-added tax (VAT) of

₱601,220.18 with compromise penalty of ₱16,000;

c. Assessment No. 31-14-000053-986 for deficiency documentary stamp tax (DST) of

₱12,328.45 on deposit on subscription with compromise penalty of ₱2,000; and

d. Assessment No. 31-1-000053-987 for deficiency DST of ₱62,128.87 on pawn tickets

with compromise penalty of ₱8,500.

Respondent received the assessment notices on 3 January 2002. On 1 February 2002,

respondent filed its written protest on the above assessments. Since petitioner did not
act on the protest during the 180-day period,8 respondent filed a petition before the
CTA on 28 August 2002.9

Respondent contended that petitioner did not consider the supporting documents on the
interest expenses and donations which resulted in the deficiency income tax.10
Respondent maintained that pawnshops are not lending investors whose services are
subject to VAT, hence it was not liable for deficiency VAT.11 Respondent also alleged
that no deficiency DST was due because Section 18012 of the National Internal
Revenue Code (Tax Code) does not cover any document or transaction which relates to
respondent. Respondent also argued that the issuance of a pawn ticket did not
constitute a pledge under Section 19513 of the Tax Code.14

In its Answer filed before the CTA, petitioner alleged that the assessment was valid and
correct and the taxpayer had the burden of proof to impugn its validity or correctness.
Petitioner maintained that respondent is subject to 10% VAT based on its gross receipts
pursuant to Republic Act No. 7716, or the Expanded Value-Added Tax Law (EVAT).
Petitioner also cited BIR Ruling No. 221-91 which provides that pawnshop tickets are
subject to DST. 15

On 1 July 2003, respondent paid ₱27,744.88 as deficiency income tax inclusive of

interest.16

After trial on the merits, the CTA First Division ruled, thus:

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY

GRANTED. Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in
the amount of Sixty-Two Thousand One Hundred Twenty-Eight Pesos and 87/100
(₱62,128.87) and Assessment No. 31-14-000053-98 for deficiency documentary stamp
tax on deposits on subscription in the amount of Twelve Thousand Three Hundred
Twenty-Eight Pesos and 45/100 (₱12,328.45) are CANCELLED and SET ASIDE.
However, Assessment No. 31-14-000053-98 is hereby AFFIRMED except the
imposition of compromise penalty in the absence of showing that petitioner consented
thereto (UST vs. Collector, 104 SCRA 1062; Exquisite Pawnshop Jewelry, Inc. vs.
Jaime B. Santiago, et al., supra).

Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the
amount of Six Hundred One Thousand Two Hundred Twenty Pesos and 18/100
(₱601,220.18) inclusive of deficiency interest for the year 1998. In addition, petitioner is
ORDERED to PAY 25% surcharge and 20% delinquency interest per annum from
February 12, 2002 until fully paid pursuant to Sections 248 and 249 of the 1997 Tax
Code.

SO ORDERED.17 (Boldfacing in the original)

Both parties filed their Motions for Reconsideration which were denied by the CTA First
Division for lack of merit. Thereafter, both parties filed their respective Petitions for
Review under Section 11 of Republic Act No. 9282 (RA 9282) with the CTA En Banc.18

On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondent’s

liability to pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the
CTA En Banc found that respondent’s deposit on subscription was not subject to
DST.19

Aggrieved by the CTA En Banc’s Decision which ruled that respondent’s deposit on
subscription was not subject to DST, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

On the taxability of deposit on subscription, the CTA, citing First Southern Philippines
Enterprises, Inc. v. Commissioner of Internal Revenue,20 pointed out that deposit on
subscription is not subject to DST in the absence of proof that an equivalent amount of
shares was subscribed or issued in consideration for the deposit. Expressed otherwise,
deposit on stock subscription is not subject to DST if: (1) there is no agreement to
subscribe; (2) there are no shares issued or any additional subscription in the
restructuring plan; and (3) there is no proof that the issued shares can be considered as
issued certificates of stock.21

The CTA ruled that Section 17522 of the Tax Code contemplates a subscription
agreement. The CTA explained that there can be subscription only with reference to
shares of stock which have been unissued, in the following cases: (a) the original
issuance from authorized capital stock at the time of incorporation; (b) the opening,
during the life of the corporation, of the portion of the original authorized capital stock
previously unissued; or (c) the increase of authorized capital stock achieved through a
formal amendment of the articles of incorporation and registration of the articles of
incorporation with the Securities and Exchange Commission.23

The CTA held that in this case, there was no subscription or any contract for the
acquisition of unissued stock for ₱800,000 in the taxable year assessed. The General
Information Sheet (GIS) of respondent showed only a capital structure of ₱500,000 as
Subscribed Capital Stock and ₱250,000 as Paid-up Capital Stock and did not include
the assessed amount. Mere reliance on the presumption that the assessment was
correct and done in good faith was unavailing vis-à-vis the evidence presented by
respondent. Thus, the CTA ruled that the assessment for deficiency DST on deposit on
subscription has not become final.24

The Issue

Petitioner submits this sole issue for our consideration: whether the CTA erred on a
question of law in disregarding the rule on finality of assessments prescribed under
Section 228 of the Tax Code. Corollarily, petitioner raises the issue on whether
respondent is liable to pay ₱12,328.45 as DST on deposit on subscription of capital
stock.

The Ruling of the Court

Petitioner contends that the CTA erred in disregarding the rule on the finality of
assessments prescribed under Section 228 of the Tax Code.25 Petitioner asserts that
even if respondent filed a protest, it did not offer evidence to prove its claim that the
deposit on subscription was an "advance" made by respondent’s stockholders.26
Petitioner alleges that respondent’s failure to submit supporting documents within 60
days from the filing of its protest as required under Section 228 of the Tax Code caused
the assessment of ₱12,328.45 for deposit on subscription to become final and
unassailable.27

Petitioner alleges that revenue officers are afforded the presumption of regularity in the
performance of their official functions, since they have the distinct opportunity, aside
from competence, to peruse records of the assessments. Petitioner invokes the
principle that by reason of the expertise of administrative agencies over matters falling
under their jurisdiction, they are in a better position to pass judgment thereon; thus, their
findings of fact are generally accorded great respect, if not finality, by the courts. Hence,
without the supporting documents to establish the non-inclusion from DST of the deposit
on subscription, petitioner’s assessment pursuant to Section 228 of the Tax Code had
become final and unassailable.28

Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of

Internal Revenue,29 asserts that the submission of all the relevant supporting
documents within the 60-day period from filing of the protest is directory.

Respondent claims that petitioner requested for additional documents in petitioner’s

letter dated 12 March 2002, to wit: (1) loan agreement from lender banks; (2) official
receipts of interest payments issued to respondent; (3) documentary evidence to
substantiate donations claimed; and (4) proof of payment of DST on subscription.30 It
must be noted that the only document requested in connection with respondent’s DST
assessment on deposit on subscription is proof of DST payment. However, respondent
could not produce any proof of DST payment because it was not required to pay the
same under the law considering that the deposit on subscription was an advance made
by its stockholders for future subscription, and no stock certificates were issued.31
Respondent insists that petitioner could have issued a subpoena requiring respondent
to submit other documents to determine if the latter is liable for DST on deposit on
subscription pursuant to Section 5(c) of the Tax Code.32

Respondent argues that deposit on future subscription is not subject to DST under
Section 175 of the Tax Code. Respondent explains:

It must be noted that deposits on subscription represent advances made by the

stockholders and are in the nature of liabilities for which stocks may be issued in the
future. Absent any express agreement between the stockholders and petitioner to
convert said advances/deposits to capital stock, either through a subscription
agreement or any other document, these deposits remain as liabilities owed by
respondent to its stockholders. For these deposits to be subject to DST, it is necessary
that a conversion/subscription agreement be made by First Express and its
stockholders. Absent such conversion, no DST can be imposed on said deposits under
Section 175 of the Tax Code.33 (Underscoring in the original)

Respondent contends that by presenting its GIS and financial statements, it had already
sufficiently proved that the amount sought to be taxed is deposit on future subscription,
which is not subject to DST.34 Respondent claims that it cannot be required to submit
proof of DST payment on subscription because such payment is non-existent. Thus, the
burden of proving that there was an agreement to subscribe and that certificates of
stock were issued for the deposit on subscription rests on petitioner and his examiners.
Respondent states that absent any proof, the deficiency assessment has no basis and
should be cancelled.35

On the Taxability of Deposit on Stock Subscription

DST is a tax on documents, instruments, loan agreements, and papers evidencing the
acceptance, assignment, sale or transfer of an obligation, right or property incident
thereto. DST is actually an excise tax because it is imposed on the transaction rather
than on the document.36 DST is also levied on the exercise by persons of certain
privileges conferred by law for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments.37 The Tax Code provisions
on DST relating to shares or certificates of stock state:

Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue,
whether on organization, reorganization or for any lawful purpose, of shares of stock by
any association, company or corporation, there shall be collected a documentary stamp
tax of Two pesos (₱2.00) on each Two hundred pesos (₱200), or fractional part thereof,
of the par value, of such shares of stock: Provided, That in the case of the original issue
of shares of stock without par value the amount of the documentary stamp tax herein
prescribed shall be based upon the actual consideration for the issuance of such shares
of stock: Provided, further, That in the case of stock dividends, on the actual value
represented by each share.38

Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries
or Transfer of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock. -
On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of
due-bills, certificates of obligation, or shares or certificates of stock in any association,
company or corporation, or transfer of such securities by assignment in blank, or by
delivery, or by any paper or agreement, or memorandum or other evidences of transfer
or sale whether entitling the holder in any manner to the benefit of such due-bills,
certificates of obligation or stock, or to secure the future payment of money, or for the
future transfer of any due-bill, certificate of obligation or stock, there shall be collected a
documentary stamp tax of One peso and fifty centavos (₱1.50) on each Two hundred
pesos (₱200), or fractional part thereof, of the par value of such due-bill, certificate of
obligation or stock: Provided, That only one tax shall be collected on each sale or
transfer of stock or securities from one person to another, regardless of whether or not a
certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such
sale or transfer: And provided, further, That in the case of stock without par value the
amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-
five percent (25%) of the documentary stamp tax paid upon the original issue of said
stock.39

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock.
The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility
of issuing shares of stock. In Commissioner of Internal Revenue v. Construction
Resources of Asia, Inc.,40 this Court explained that the DST attaches upon acceptance
of the stockholder’s subscription in the corporation’s capital stock regardless of actual or
constructive delivery of the certificates of stock. Citing Philippine Consolidated Coconut
Ind., Inc. v. Collector of Internal Revenue,41 the Court held:
The documentary stamp tax under this provision of the law may be levied only once,
that is upon the original issue of the certificate. The crucial point therefore, in the case
before Us is the proper interpretation of the word ‘issue.’ In other words, when is the
certificate of stock deemed ‘issued’ for the purpose of imposing the documentary stamp
tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in
whose name the stocks represented in the certificate appear as certified by the proper
officials of the corporation), at the time they are released by the corporation, or at the
time they are in the possession (actual or constructive) of the stockholders owning
them?

xxx

Ordinarily, when a corporation issues a certificate of stock (representing the ownership

of stocks in the corporation to fully paid subscription) the certificate of stock can be
utilized for the exercise of the attributes of ownership over the stocks mentioned on its
face. The stocks can be alienated; the dividends or fruits derived therefrom can be
enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued
by the corporation, irrespective of whether or not it is in the actual or constructive
possession of the stockholder, is considered issued because it is with value and hence
the documentary stamp tax must be paid as imposed by Section 212 of the National
Internal Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell,
memoranda of sales, deliveries or transfer of shares or certificates of stock in any
association, company, or corporation, or transfer of such securities by assignment in
blank, or by delivery, or by any paper or agreement, or memorandum or other
evidences of transfer or sale whether entitling the holder in any manner to the benefit of
such certificates of stock, or to secure the future payment of money, or for the future
transfer of certificates of stock. In Compagnie Financiere Sucres et Denrees v.
Commissioner of Internal Revenue, this Court held that under Section 176 of the Tax
Code, sales to secure the future transfer of due-bills, certificates of obligation or
certificates of stock are subject to documentary stamp tax.42

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the
corporate stock documentary stamp tax program. RMO 08-98 states that:

1. All existing corporations shall file the Corporation Stock DST Declaration, and the
DST Return, if applicable when DST is still due on the subscribed share issued by the
corporation, on or before the tenth day of the month following publication of this Order.

xxx

3. All existing corporations with authorization for increased capital stock shall file their
Corporate Stock DST Declaration, together with the DST Return, if applicable when
DST is due on subscriptions made after the authorization, on or before the tenth day of
the month following the date of authorization. (Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also
states that what is being taxed is the privilege of issuing shares of stock, and, therefore,
the taxes accrue at the time the shares are issued. RMC 47-97 also defines issuance as
the point in which the stockholder acquires and may exercise attributes of ownership
over the stocks.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a
subscription agreement in order for a taxpayer to be liable to pay the DST. A
subscription contract is defined as any contract for the acquisition of unissued stocks in
an existing corporation or a corporation still to be formed.43 A stock subscription is a
contract by which the subscriber agrees to take a certain number of shares of the
capital stock of a corporation, paying for the same or expressly or impliedly promising to
pay for the same.44

In this case, respondent’s Stockholders’ Equity section of its Balance Sheet as of 31

December 199845 shows:

Stockholders’ Equity 1998 1997

Authorized Capital Stock ₱ 2,000,000.00 ₱ 2,000,000.00
Paid-up Capital Stock 250,000.00 250,000.00
Deposit on Subscription 800,000.00
Retained Earnings 62,820.34 209,607.20
Net Income (858,498.38) (146,786.86)
Total ₱ 254,321.96 ₱ 312,820.34
The GIS submitted to the Securities and Exchange Commission on 31 March 1999
shows the following Capital Structure:46

B. Financial Profile

1. Capital Structure :

AUTHORIZED - ₱2,000,000.00
SUBSCRIBED - 500,000.00
PAID-UP - 250,000.00
These entries were explained by Miguel Rosario, Jr. (Rosario), respondent’s external
auditor, during the hearing before the CTA on 11 June 2003. Rosario testified in this
wise:

Atty. Napiza

Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998
particularly the entry of deposit on subscription in the amount of ₱800 thousand, will you
please tell us what is (sic) this entry represents?

Mr. Rosario Jr.

A. This amount of ₱800 thousand represents the case given by the stockholders to the
company but does not necessarily made (sic) payment to subscribed portion.

Atty. Napiza

Q. What is (sic) that payment stands for?

Mr. Rosario Jr.

A. This payment stands as (sic) for the deposit for future subscription.

Atty. Napiza

Q. Would you know if First Express issued corresponding shares pertinent to the
amount being deposited?

Mr. Rosario Jr.

A. No.

Atty. Napiza

Q. What do you mean by no? Did they or they did not?

Mr. Rosario Jr.

A. They did not issue any shares because that is not the payment of subscription. That
is just a mere deposit.

Atty. Napiza

Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express
Pawnshop?

Mr. Rosario Jr.

A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998
is ₱500 thousand.

Atty. Napiza

Q. How about the Paid Up Capital?

Mr. Rosario Jr.

A. The Paid Up Capital is ₱250 thousand.

Atty. Napiza

Q. Are (sic) all those figures appear in the balance sheet?

Mr. Rosario Jr.

A. The Paid Up Capital appeared here but the Subscribed Portion was not stated.
(Boldfacing supplied)

Based on Rosario’s testimony and respondent’s financial statements as of 1998, there

was no agreement to subscribe to the unissued shares. Here, the deposit on stock
subscription refers to an amount of money received by the corporation as a deposit with
the possibility of applying the same as payment for the future issuance of capital
stock.47 In Commissioner of Internal Revenue v. Construction Resources of Asia,
Inc.,48 we held:

We are firmly convinced that the Government stands to lose nothing in imposing the
documentary stamp tax only on those stock certificates duly issued, or wherein the
stockholders can freely exercise the attributes of ownership and with value at the time
they are originally issued. As regards those certificates of stocks temporarily subject to
suspensive conditions they shall be liable for said tax only when released from said
conditions, for then and only then shall they truly acquire any practical value for their
owners.lavvphil (Boldfacing supplied)

Clearly, the deposit on stock subscription as reflected in respondent’s Balance Sheet as

of 1998 is not a subscription agreement subject to the payment of DST. There is no
₱800,000 worth of subscribed capital stock that is reflected in respondent’s GIS. The
deposit on stock subscription is merely an amount of money received by a corporation
with a view of applying the same as payment for additional issuance of shares in the
future, an event which may or may not happen. The person making a deposit on stock
subscription does not have the standing of a stockholder and he is not entitled to
dividends, voting rights or other prerogatives and attributes of a stockholder. Hence,
respondent is not liable for the payment of DST on its deposit on subscription for the
reason that there is yet no subscription that creates rights and obligations between the
subscriber and the corporation.

On the Finality of Assessment as Prescribed

under Section 228 of the Tax Code

Section 228 of the Tax Code provides:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings: Provided, however, That a preassessment notice shall not be
required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities for
the taxable quarter or quarters of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been sold,
traded or transferred to non-exempt persons.

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.

Within a period to be prescribed by implementing rules and regulations, the taxpayer

shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based
on his findings.

Such assessment may be protested administratively by filing a request for

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

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

Section 228 of the Tax Code49 provides the remedy to dispute a tax assessment within
a certain period of time. It states that an assessment may be protested by filing a
request for reconsideration or reinvestigation within 30 days from receipt of the
assessment by the taxpayer. Within 60 days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.

In this case, respondent received the tax assessment on 3 January 2002 and it had until
2 February 2002 to submit its protest. On 1 February 2002, respondent submitted its
protest and attached the GIS and Balance Sheet as of 31 December 1998. Respondent
explained that it received ₱800,000 as a deposit with the possibility of applying the
same as payment for the future issuance of capital stock.

Within 60 days from the filing of protest or until 2 April 2002, respondent should submit
relevant supporting documents. Respondent, having submitted the supporting
documents together with its protest, did not present additional documents anymore.

In a letter dated 12 March 2002, petitioner requested respondent to present proof of

payment of DST on subscription. In a letter-reply, respondent stated that it could not
produce any proof of DST payment because it was not required to pay DST under the
law considering that the deposit on subscription was an advance made by its
stockholders for future subscription, and no stock certificates were issued.

Since respondent has not allegedly submitted any relevant supporting documents,
petitioner now claims that the assessment has become final, executory and
demandable, hence, unappealable.

We reject petitioner’s view that the assessment has become final and unappealable. It
cannot be said that respondent failed to submit relevant supporting documents that
would render the assessment final because when respondent submitted its protest,
respondent attached the GIS and Balance Sheet. Further, petitioner cannot insist on the
submission of proof of DST payment because such document does not exist as
respondent claims that it is not liable to pay, and has not paid, the DST on the deposit
on subscription.

The term "relevant supporting documents" should be understood as those documents

necessary to support the legal basis in disputing a tax assessment as determined by the
taxpayer. The BIR can only inform the taxpayer to submit additional documents. The
BIR cannot demand what type of supporting documents should be submitted.
Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production
of documents that a taxpayer cannot submit.1awphi1

After respondent submitted its letter-reply stating that it could not comply with the
presentation of the proof of DST payment, no reply was received from petitioner.

Section 228 states that if the protest is not acted upon within 180 days from submission
of documents, the taxpayer adversely affected by the inaction may appeal to the CTA
within 30 days from the lapse of the 180-day period. Respondent, having submitted its
supporting documents on the same day the protest was filed, had until 31 July 2002 to
wait for petitioner’s reply to its protest. On 28 August 2002 or within 30 days after the
lapse of the 180-day period counted from the filing of the protest as the supporting
documents were simultaneously filed, respondent filed a petition before the CTA.

Respondent has complied with the requisites in disputing an assessment pursuant to

Section 228 of the Tax Code. Hence, the tax assessment cannot be considered as final,
executory and demandable. Further, respondent’s deposit on subscription is not subject
to the payment of DST. Consequently, respondent is not liable to pay the deficiency
DST of ₱12,328.45.

Wherefore, we DENY the petition. We AFFIRM the Court of Tax Appeals’ Decision
dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.

SO ORDERED.

ANTONIO T. CARPIO
Associate Justice

G.R. No. 172598 December 21, 2007

PILIPINAS SHELL PETROLEUM CORPORATION, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VELASCO, JR., J.:

The Case

Before us is a Petition for Review on Certiorari under Rule 45 assailing the April 28,
2006 Decision1 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 64, which
upheld respondent’s assessment against petitioner for deficiency excise taxes for the
taxable years 1992 and 1994 to 1997. Said En Banc decision reversed and set aside
the August 2, 2004 Decision2 and January 20, 2005 Resolution3 of the CTA Division in
CTA Case No. 6003 entitled Pilipinas Shell Petroleum Corporation v. Commissioner of
Internal Revenue, which ordered the withdrawal of the April 22, 1998 collection letter of
respondent and enjoined him from collecting said deficiency excise taxes.

The Facts

Petitioner Pilipinas Shell Petroleum Corporation (PSPC) is the Philippine subsidiary of

the international petroleum giant Shell, and is engaged in the importation, refining and
sale of petroleum products in the country.

From 1988 to 1997, PSPC paid part of its excise tax liabilities with Tax Credit
Certificates (TCCs) which it acquired through the Department of Finance (DOF) One
Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (Center) from other
Board of Investment (BOI)-registered companies. The Center is a composite body run
by four government agencies, namely: the DOF, Bureau of Internal Revenue (BIR),
Bureau of Customs (BOC), and BOI.

Through the Center, PSPC acquired for value various Center-issued TCCs which were
correspondingly transferred to it by other BOI-registered companies through Center-
approved Deeds of Assignments. Subsequently, when PSPC signified its intent to use
the TCCs to pay part of its excise tax liabilities, said payments were duly approved by
the Center through the issuance of Tax Debit Memoranda (TDM), and the BIR likewise
accepted as payments the TCCs by issuing its own TDM covering said TCCs, and the
corresponding Authorities to Accept Payment for Excise Taxes (ATAPETs).

However, on April 22, 1998, the BIR sent a collection letter4 to PSPC for alleged
deficiency excise tax liabilities of PhP 1,705,028,008.06 for the taxable years 1992 and
1994 to 1997, inclusive of delinquency surcharges and interest. As basis for the
collection letter, the BIR alleged that PSPC is not a qualified transferee of the TCCs it
acquired from other BOI-registered companies. These alleged excise tax deficiencies
covered by the collection letter were already paid by PSPC with TCCs acquired through,
and issued and duly authorized by the Center, and duly covered by TDMs of both the
Center and BIR, with the latter also issuing the corresponding ATAPETs.

PSPC protested the April 22, 1998 collection letter, but the protest was denied by the
BIR through the Regional Director of Revenue Region No. 8. PSPC filed its motion for
reconsideration. However, due to respondent’s inaction on the motion, on February 2,
1999, PSPC filed a petition for review before the CTA, docketed as CTA Case No.
5728.

On July 23, 1999, the CTA rendered a Decision5 in CTA Case No. 5728 ruling, inter
alia, that the use by PSPC of the TCCs was legal and valid, and that respondent’s
attempt to collect alleged delinquent taxes and penalties from PSPC without an
assessment constitutes denial of due process. The dispositive portion of the July 23,
1999 CTA Decision reads:
[T]he instant petition for review is GRANTED. The collection letter issued by the
Respondent dated April 22, 1998 is considered withdrawn and he is ENJOINED from
any attempts to collect from petitioner the specific tax, surcharge and interest subject of
this petition.6

Respondent elevated the July 23, 1999 CTA Decision in CTA Case No. 5728 to the
Court of Appeals (CA) through a petition for review7 docketed as CA-G.R. SP No.
55329. This case was subsequently consolidated with the similarly situated case of
Petron Corporation under CA-G.R. SP No. 55330. To date, these consolidated cases
are still pending resolution before the CA.

Meanwhile, in late 1999, and despite the pendency of CA-G.R. SP No. 55329, the
Center sent several letters to PSPC dated August 31, 1999,8 September 1, 1999,9 and
October 18, 1999.10 The first required PSPC to submit copies of pertinent sales
invoices and delivery receipts covering sale transactions of PSPC products to the TCC
assignors/transferors purportedly in connection with an ongoing post audit. The second
letter similarly required submission of the same documents covering PSPC Industrial
Fuel Oil (IFO) deliveries to Spintex International, Inc. The third letter is in reply to the
September 29, 1999 letter sent by PSPC requesting a list of the serial numbers of the
TCCs assigned or transferred to it by various BOI-registered companies, either
assignors or transferors.

In its letter dated October 29, 1999 and received by the Center on November 3, 1999,
PSPC emphasized that the required submission of these documents had no legal basis,
for the applicable rules and regulations on the matter only require that both the assignor
and assignee of TCCs be BOI-registered entities.11 On November 3, 1999, the Center
informed PSPC of the cancellation of the first batch of TCCs transferred to PSPC and
the TDM covering PSPC’s use of these TCCs as well as the corresponding TCC
assignments. PSPC’s motion for reconsideration was not acted upon.

On November 22, 1999, PSPC received the November 15, 1999 assessment letter12
from respondent for excise tax deficiencies, surcharges, and interest based on the first
batch of cancelled TCCs and TDM covering PSPC’s use of the TCCs. All these
cancelled TDM and TCCs were also part of the subject matter in CTA Case No. 5728,
now pending before the CA in CA-G.R. SP No. 55329.

PSPC protested13 the assessment letter, but the protest was denied by the BIR,
constraining it to file another petition for review14 before the CTA, docketed as CTA
Case No. 6003.

Parenthetically, on March 30, 2004, Republic Act No. (RA) 928215 was promulgated
amending RA 1125,16 expanding the jurisdiction of the CTA and enlarging its
membership. It became effective on April 23, 2004 after its due publication. Thus, CTA
Case No. 6003 was heard and decided by a CTA Division.

The Ruling of the Court of Tax Appeals Division

(CTA Case No. 6003)

On August 2, 2004, the CTA Division rendered a Decision17 granting the PSPC’s
petition for review. The dispositive portion reads:

[T]he instant petition is hereby GRANTED. Accordingly, the assessment issued by the
respondent dated November 15, 1999 against petitioner is hereby CANCELLED and
SET ASIDE.18

In granting PSPC’s petition for review, the CTA Division held that respondent failed to
prove with convincing evidence that the TCCs transferred to PSPC were fraudulently
issued as respondent’s finding of alleged fraud was merely speculative. The CTA
Division found that neither the respondent nor the Center could state what sales figures
were used as basis for the TCCs to issue, as they merely based their conclusions on
the audited financial statements of the transferors which did not clearly show the actual
export sales of transactions from which the TCCs were issued.

In the same vein, the CTA Division held that the machinery and equipment cannot be
the basis in concluding that transferor could not have produced the volume of products
indicated in its BOI registration. It further ruled that the Center erroneously based its
findings of fraud on two possibilities: either the transferor did not declare its export sales
or underdeclare them. Thus, no specific fraudulent acts were identified or proven. The
CTA Division concluded that the TCCs transferred to PSPC were not fraudulently
issued.

On the issue of whether a TCC transferee should be a supplier of either capital

equipment, materials, or supplies, the CTA Division ruled in the negative as the
Memorandum of Agreement (MOA)19 between the DOF and BOI executed on August
29, 1989 specifying such requirement was not incorporated in the Implementing Rules
and Regulations (IRR) of Executive Order No. (EO) 226.20 The CTA Division found that
only the October 5, 1982 MOA between the then Ministry of Finance (MOF) and BOI
was incorporated in the IRR of EO 226. It held that while the August 29, 1989 MOA
indeed amended the October 5, 1982 MOA still it was not incorporated in the IRR.
Moreover, according to the CTA Division, even if the August 29, 1989 MOA was
elevated or incorporated in the IRR of EO 226, still, it is ineffective and could not bind
nor prejudice third parties as it was never published.

Anent the affidavits of former Officers or General Managers of transferors attesting that
no IFO deliveries were made by PSPC, the CTA Division ruled that such cannot be
given probative value as the affiants were not presented during trial of the case.
However, the CTA Division said that the November 15, 1999 assessment was not
precluded by the prior CTA Case No. 5728 as the latter concerned the validity of the
transfer of the TCCs, while CTA Case No. 6003 involved alleged fraudulent
procurement and transfer of the TCCs.
Respondent forthwith filed his motion for reconsideration of the above decision which
was rejected on January 20, 2005. And, pursuant to Section 1121 of RA 9282,
respondent appealed the above decision through a petition for review22 before the CTA
En Banc.

The Ruling of the Court of Tax Appeals En Banc

(CTA EB No. 64)

The CTA En Banc, however, rendered the assailed April 28, 2006 Decision23 setting
aside the August 2, 2004 Decision and the January 20, 2005 Resolution of the CTA
Division. The fallo reads:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. The
assailed Decision and Resolution dated August 2, 2004 and January 20, 2005,
respectively, are hereby SET ASIDE and a new one entered dismissing respondent
Pilipinas Shell Petroleum Corporation’s Petition for Review filed in C.T.A. Case No.
6003 for lack of merit. Accordingly, respondent is ORDERED TO PAY the petitioner the
amount of P570,577,401.61 as deficiency excise tax for the taxable years 1992 and
1994 to 1997, inclusive of 25% surcharge and 20% interest, computed as follows:

Basic Tax P285,766,987.00

Add:

Surcharge (25%) 71,441,746.75

Interest (20%) 213,368,667.86

Total Tax Due P570,577,401.61

In addition, respondent is hereby ORDERED TO PAY 20% delinquency interest thereon

per annum computed from December 4, 1999 until full payment thereof, pursuant to
Sections 248 and 249 of the NIRC of 1997.

SO ORDERED.24

The CTA En Banc resolved respondent’s appeal by holding that PSPC was liable to pay
the alleged excise tax deficiencies arising from the cancellation of the TDM issued
against its TCCs which were used to pay some of its excise tax liabilities for the years
1992 and 1994 to 1997. It ratiocinated in this wise, to wit:

First, the finding of the DOF that the TCCs had no monetary value was undisputed.
Consequently, there was a non-payment of excise taxes corresponding to the value of
the TCCs used for payment. Since it was PSPC which acquired the subject TCCs from
a third party and utilized the same to discharge its own obligations, then it must bear the
loss.

Second, the TCCs carry a suspensive condition, that is, their issuance was subject to
post audit in order to determine if the holder is indeed qualified to use it. Thus, until final
determination of the holder’s right to the issuance of the TCCs, there is no obligation on
the part of the DOF or BIR to recognize the rights of the holder or assignee. And,
considering that the subject TCCs were canceled after the DOF’s finding of fraud in its
issuance, the assignees must bear the consequence of such cancellation.

Third, PSPC was not an innocent purchaser for value of the TCCs as they contained
liability clauses expressly stipulating that the transferees are solidarily liable with the
transferors for any fraudulent act or violation of pertinent laws, rules, or regulations
relating to the transfer of the TCC.

Fourth, the BIR was not barred by estoppel as it is a settled rule that in the performance
of its governmental functions, the State cannot be estopped by the neglect of its agents
and officers. Although the TCCs were confirmed to be valid in view of the TDM, the
subsequent finding on post audit by the Center declaring the TCCs to be fraudulently
issued is entitled to the presumption of regularity. Thus, the cancellation of the TCCs
was legal and valid.

Fifth, the BIR’s assessment did not prescribe considering that no payment took effect as
the subject TCCs were canceled upon post audit. Consequently, the filing of the tax
return sans payment due to the cancellation of the TCCs resulted in the falsity and/or
omission in the filing of the tax return which put them in the ambit of the applicability of
the 10-year prescriptive period from the discovery of falsity, fraud, or omission.

Finally, however, the CTA En Banc applied Aznar v. Court of Tax Appeals,25 where this
Court held that without proof that the taxpayer participated in the fraud, the 50% fraud
surcharge is not imposed, but the 25% late payment and the 20% interest per annum
are applicable.

Thus, PSPC filed this petition with the following issues:

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN

ORDERING PETITIONER PSPC TO PAY THE AMOUNT OF TWO HUNDRED
EIGHTY FIVE MILLION SEVEN HUNDRED SIXTY SIX THOUSAND NINE HUNDRED
EIGHTY SEVEN PESOS (P285,766,987.00), AS ALLEGED DEFICIENCY EXCISE
TAXES, FOR THE TAXABLE YEARS, 1992 AND 1994 TO 1997.

II
WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN ISSUING
THE QUESTIONED DECISION DATED 28 APRIL 2006 UPHOLDING THE
CANCELLATION OF THE TAX CREDIT CERTIFICATES UTILIZED BY PETITIONER
PSPC IN PAYING ITS EXCISE TAX LIABILITIES.

III

WHETHER OR NOT THE COURT OF TAX APPEALS GRAVELY ERRED IN

IMPOSING SURCHARGES AND INTERESTS ON THE ALLEGED DEFICIENCY
EXCISE TAX OF PETITIONER PSPC.

IV

WHETHER OR NOT THE ASSESSMENT DATED 15 NOVEMBER 1999 IS VOID

CONSIDERING THAT IT FAILED TO COMPLY WITH THE STATUTORY AS WELL AS
REGULATORY REQUIREMENTS IN THE ISSUANCE OF ASSESSMENTS.26

The Court’s Ruling

The petition is meritorious.

First Issue: Assessment of excise tax deficiencies

PSPC contends that respondent had no basis in issuing the November 15, 1999
assessment as PSPC had no pending unpaid excise tax liabilities. PSPC argues that
under the IRR of EO 226, it is allowed to use TCCs transferred from other BOI-
registered entities. On one hand, relative to the validity of the transferred TCCs, PSPC
asserts that the TCCs are not subject to a suspensive condition; that the post-audit of a
transferred TCC refers only to computational discrepancy; that the solidary liability of
the transferor and transferee refers to computational discrepancy resulting from the
transfer and not from the issuance of the TCC; that a post-audit cannot affect the
validity and effectivity of a TCC after it has been utilized by the transferee; and that the
BIR duly acknowledged the use of the subject TCCs, accepting them as payment for the
excise tax liabilities of PSPC. On the other hand, PSPC maintains that if there was
indeed fraud in the issuance of the subject TCCs, of which it had no knowledge nor
participation, the Center’s remedy is to go after the transferor for the value of the TCCs
the Center may have erroneously issued.

PSPC likewise assails the BIR assessment on prescription for having been issued
beyond the three-year prescriptive period under Sec. 203 of the National Internal
Revenue Code (NIRC); and neither can the BIR use the 10-year prescriptive period
under Sec. 222(a) of the NIRC, as PSPC has neither failed to file a return nor filed a
false or fraudulent return with intent to evade taxes.

Respondent, on the other hand, counters that petitioner is liable for the tax liabilities
adjudged by the CTA En Banc since PSPC, as transferee of the subject TCCs, is bound
by the liability clause found at the dorsal side of the TCCs which subjects the
genuineness, validity, and value of the TCCs to the outcome of the post-audit to be
conducted by the Center. He relies on the CTA En Banc’s finding of the presence of a
suspensive condition in the issuance of the TCCs. Thus, according to him, with the
finding by the Center that the TCCs were fraudulently procured the subsequent
cancellation of the TCCs resulted in the non-payment by PSPC of its excise tax
liabilities equivalent to the value of the canceled TCCs.

Respondent likewise posits that the Center erred in approving the transfer and issuance
of the TDM, and of the TDM and ATAPETs issued by the BIR in accepting the utilization
by PSPC of the subject TCCs, as payments for excise taxes cannot prejudice the BIR
from assessing the tax deficiencies of PSPC resulting from the non-payment of the
deficiencies after due cancellation by the Center of the subject TCCs and corresponding
TDM.

Respondent concludes that due to the fraudulent procurement of the subject TCCs, his
right to assess has not yet prescribed. He relies on the finding of the Center that the
fraud was discovered only after the post-audit was conducted; hence, Sec. 222(a) of the
NIRC applies, reckoned from October 24, 1999 or the date of the post-audit report. In
fine, he points that what is at issue is the resulting non-payment of PSPC’s excise tax
liabilities from the cancellation of subject TCCs and not the amount of deficiency taxes
due from PSPC, as what was properly assessed on November 15, 1999 was the
amount of tax declared and found in PSPC’s excise tax returns covered by the subject
TCCs.

We find for PSPC.

The CTA En Banc upheld respondent’s theory by holding that the Center has the
authority to do a post-audit on the TCCs it issued; the TCCs are subject to the results of
the post-audit since their issuance is subject to a suspensive condition; the transferees
of the TCCs are solidarily liable with the transferors on the result of the post-audit; and
the cancellation of the subject TCCs resulted in PSPC having to bear the loss anchored
on its solidary liability with the transferor of the subject TCCs.

We can neither sustain respondent’s theory nor that of the CTA En Banc.

First, in overturning the August 2, 2004 Decision of the CTA Division, the CTA En Banc
applied Article 1181 of the Civil Code in this manner:

To completely understand the matter presented before Us, it is worth emphasizing that
the statement on the subject certificate stating that it is issued subject to post-audit is in
the nature of a suspensive condition under Article 1181 of the Civil Code, which is
quoted hereunder for ready reference, to wit:
‘In conditional obligations, the acquisition of rights, as well as the extinguishment or loss
of those already acquired, shall depend upon the happening of the event which
constitutes the condition.’

The above-quoted article speaks of obligations. ‘These conditions affect obligations in

diametrically opposed ways. If the suspensive condition happens, the obligation arises;
in other words, if the condition does not happen, the obligation does not come into
existence. On the other hand, the resolutory condition extinguishes rights and
obligations already existing; in other words, the obligations and rights already exist, but
under the threat of extinction upon the happening of the resolutory condition’. (8
Manresa 130-131, cited on page 140, Civil Code of the Philippines, Tolentino, 1962 ed.,
Vol. IV).

In adopting the foregoing provision of law, this Court rules that the issuance of the tax
credit certificate is subject to the condition that a post-audit will subsequently be
conducted in order to determine if the holder is indeed qualified for its issuance. As
stated earlier, the holder takes the same subject to the outcome of the post-audit. Thus,
unless and until there is a final determination of the holder’s right to the issuance of the
certificate, there exists no obligation on the part of the DOF or the BIR to recognize the
rights of then holder or transferee. x x x

xxxx

The validity and propriety of the TCC to effectively constitute payment of taxes to the
government are still subject to the outcome of the post-audit. In other words, when the
issuing authority (DOF) finds, as in the case at bar, circumstances which may warrant
the cancellation of the certificate, the holder is inevitably bound by the outcome by the
virtue of the express provisions of the TCCs.27

The CTA En Banc is incorrect.

Art.1181 tells us that the condition is suspensive when the acquisition of rights or
demandability of the obligation must await the occurrence of the condition.28 However,
Art. 1181 does not apply to the present case since the parties did NOT agree to a
suspensive condition. Rather, specific laws, rules, and regulations govern the subject
TCCs, not the general provisions of the Civil Code. Among the applicable laws that
cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions
No. 1355, EO 765, RP-US Military Agreement, Sec. 106(c) of the Tariff and Customs
Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in
the aforementioned laws does the post-audit become necessary for the validity or
effectivity of the TCCs. Nowhere in the aforementioned laws is it provided that a TCC is
issued subject to a suspensive condition.

The CTA En Banc’s holding of the presence of a suspensive condition is untenable as

the subject TCCs duly issued by the Center are immediately effective and valid. The
suspensive condition as ratiocinated by the CTA En Banc is one where the transfer
contract was duly effected on the day it was executed between the transferee and the
transferor but the TCC cannot be enforced until after the post-audit has been
conducted. In short, under the ruling of the CTA En Banc, even if the TCC has been
issued, the real and true application of the tax credit happens only after the post-audit
confirms the TCC’s validity and not before the confirmation; thus, the TCC can still be
canceled even if it has already been ostensibly applied to specific internal revenue tax
liabilities.

We are not convinced.

We cannot subscribe to the CTA En Banc’s holding that the suspensive condition
suspends the effectivity of the TCCs as payment until after the post-audit. This strains
the very nature of a TCC.

A tax credit is not specifically defined in our Tax Code,29 but Art. 21 of EO 226 defines
a tax credit as "any of the credits against taxes and/or duties equal to those actually
paid or would have been paid to evidence which a tax credit certificate shall be issued
by the Secretary of Finance or his representative, or the Board (of Investments), if so
delegated by the Secretary of Finance." Tax credits were granted under EO 226 as
incentives to encourage investments in certain businesses. A tax credit generally refers
to an amount that may be "subtracted directly from one’s total tax liability."30 It is
therefore an "allowance against the tax itself"31 or "a deduction from what is owed"32
by a taxpayer to the government. In RR 5-2000,33 a tax credit is defined as "the amount
due to a taxpayer resulting from an overpayment of a tax liability or erroneous payment
of a tax due."34

A TCC is

a certification, duly issued to the taxpayer named therein, by the Commissioner or his
duly authorized representative, reduced in a BIR Accountable Form in accordance with
the prescribed formalities, acknowledging that the grantee-taxpayer named therein is
legally entitled a tax credit, the money value of which may be used in payment or in
satisfaction of any of his internal revenue tax liability (except those excluded), or may be
converted as a cash refund, or may otherwise be disposed of in the manner and in
accordance with the limitations, if any, as may be prescribed by the provisions of these
Regulations.35

From the above definitions, it is clear that a TCC is an undertaking by the government
through the BIR or DOF, acknowledging that a taxpayer is entitled to a certain amount
of tax credit from either an overpayment of income taxes, a direct benefit granted by law
or other sources and instances granted by law such as on specific unused input taxes
and excise taxes on certain goods. As such, tax credit is transferable in accordance with
pertinent laws, rules, and regulations.
Therefore, the TCCs are immediately valid and effective after their issuance. As aptly
pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from
the Guidelines and Instructions found at the back of each TCC, which provide:

1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit
against taxes and duties until the amount is fully utilized, in accordance with the
pertinent tax and customs laws, rules and regulations.

xxxx

4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall

issue the corresponding Tax Debit Memo (TDM) to the grantee.

The authorized Revenue Officer/Customs Collector to which payment/utilization was

made shall accomplish the Application of Tax Credit portion at the back of the certificate
and affix his signature on the column provided. (Emphasis supplied.)

The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to
pay or settle tax liabilities of the grantee or transferee, as they do not make the
effectivity and validity of the TCC dependent on the outcome of a post-audit. In fact, if
we are to sustain the appellate tax court, it would be absurd to make the effectivity of
the payment of a TCC dependent on a post-audit since there is no contemplation of the
situation wherein there is no post-audit. Does the payment made become effective if no
post-audit is conducted? Or does the so-called suspensive condition still apply as no
law, rule, or regulation specifies a period when a post-audit should or could be
conducted with a prescriptive period? Clearly, a tax payment through a TCC cannot be
both effective when made and dependent on a future event for its effectivity. Our system
of laws and procedures abhors ambiguity.

Moreover, if the TCCs are considered to be subject to post-audit as a suspensive

condition, the very purpose of the TCC would be defeated as there would be no
guarantee that the TCC would be honored by the government as payment for taxes. No
investor would take the risk of utilizing TCCs if these were subject to a post-audit that
may invalidate them, without prescribed grounds or limits as to the exercise of said
post-audit.

The inescapable conclusion is that the TCCs are not subject to post-audit as a
suspensive condition, and are thus valid and effective from their issuance. As such, in
the present case, if the TCCs have already been applied as partial payment for the tax
liability of PSPC, a post-audit of the TCCs cannot simply annul them and the tax
payment made through said TCCs. Payment has already been made and is as valid
and effective as the issued TCCs. The subsequent post-audit cannot void the TCCs and
allow the respondent to declare that utilizing canceled TCCs results in nonpayment on
the part of PSPC. As will be discussed, respondent and the Center expressly recognize
the TCCs as valid payment of PSPC’s tax liability.
Second, the only conditions the TCCs are subjected to are those found on its face. And
these are:

1. Post-audit and subsequent adjustment in the event of computational discrepancy;

2. A reduction for any outstanding account/obligation of herein claimant with the BIR
and/or BOC; and

3. Revalidation with the Center in case the TCC is not utilized or applied within one (1)
year from date of issuance/date of last utilization.

The above conditions clearly show that the post-audit contemplated in the TCCs does
not pertain to their genuineness or validity, but on computational discrepancies that may
have resulted from the transfer and utilization of the TCC.

This is shown by a close reading of the first and second conditions above; the third
condition is self explanatory. Since a tax credit partakes of what is owed by the State to
a taxpayer, if the taxpayer has an outstanding liability with the BIR or the BOC, the
money value of the tax credit covered by the TCC is primarily applied to such internal
revenue liabilities of the holder as provided under condition number two. Elsewise put,
the TCC issued to a claimant is applied first and foremost to any outstanding liability the
claimant may have with the government. Thus, it may happen that upon post-audit, a
TCC of a taxpayer may be reduced for whatever liability the taxpayer may have with the
BIR which remains unpaid due to inadvertence or computational errors, and such
reduction necessarily affects the balance of the monetary value of the tax credit of the
TCC.

For example, Company A has been granted a TCC in the amount of PhP 500,000
through its export transactions, but it has an outstanding excise tax liability of PhP
250,000 which due to inadvertence was erroneously assessed and paid at PhP
225,000. On post-audit, with the finding of a deficiency of PhP 25,000, the utilization of
the TCC is accordingly corrected and the tax credit remaining in the TCC
correspondingly reduced by PhP 25,000. This is a concrete example of a computational
discrepancy which comes to light after a post-audit is conducted on the utilization of the
TCC. The same holds true for a transferee’s use of the TCC in paying its outstanding
internal revenue tax liabilities.

Other examples of computational errors would include the utilization of a single TCC to
settle several internal revenue tax liabilities of the taxpayer or transferee, where errors
committed in the reduction of the credit tax running balance are discovered in the post-
audit resulting in the adjustment of the TCC utilization and remaining tax credit balance.

Third, the post-audit the Center conducted on the transferred TCCs, delving into their
issuance and validity on alleged violations by PSPC of the August 29, 1989 MOA
between the DOF and BOI, is completely misplaced. As may be recalled, the Center
required PSPC to submit copies of pertinent sales invoices and delivery receipts
covering sale transactions of PSPC products to the TCC assignors/transferors
purportedly in connection with an ongoing post audit. As correctly protested by PSPC
but which was completely ignored by the Center, PSPC is not required by law to be a
capital equipment provider or a supplier of raw material and/or component supplier to
the transferors. What the law requires is that the transferee be a BOI-registered
company similar to the BOI-registered transferors.

The IRR of EO 226, which incorporated the October 5, 1982 MOA between the MOF
and BOI, pertinently provides for the guidelines concerning the transferability of TCCs:

[T]he MOF and the BOI, through their respective representatives, have agreed on the
following guidelines to govern the transferability of tax credit certificates:

1) All tax credit certificates issued to BOI-registered enterprises under P.D. 1789 may
be transferred under conditions provided herein;

2) The transferee should be a BOI-registered firm;

3) The transferee may apply such tax credit certificates for payment of taxes, duties,
charges or fees directly due to the national government for as long as it enjoys
incentives under P.D. 1789. (Emphasis supplied.)

The above requirement has not been amended or repealed during the unfolding of the
instant controversy. Thus, it is clear from the above proviso that it is only required that a
TCC transferee be BOI-registered. In requiring PSPC to submit sales documents for its
purported post-audit of the TCCs, the Center gravely abused its discretion as these are
not required of the transferee PSPC by law and by the rules.

While the October 5, 1982 MOA appears to have been amended by the August 29,
1989 MOA between the DOF and BOI, such may not operate to prejudice transferees
like PSPC. For one, the August 29, 1989 MOA remains only an internal agreement as it
has neither been elevated to the level of nor incorporated as an amendment in the IRR
of EO 226. As aptly put by the CTA Division:

If the 1989 MOA has validly amended the 1982 MOA, it would have been incorporated
either expressly or by reference in Rule VII of the Implementing Rules and Regulations
(IRRs) of E.O. 226. To date, said Rule VII has not been repealed, amended or
otherwise modified. It is noteworthy that the 1999 edition of the official publication by the
BOI of E.O. 226 and its IRRs (Exhibit R) which is the latest version, as amended, has
not mentioned expressly or by reference [sic] 1989 MOA. The MOA mentioned therein
is still the 1982 MOA.

The 1982 MOA, although executed as a mere agreement between the DOF and the
BOI was elevated to the status of a rule and regulation applicable to the general public
by reason of its having been expressly incorporated in Rule VII of the IRRs. On the
other hand, the 1989 MOA which purportedly amended the 1982 MOA, remained a
mere agreement between the DOF and the BOI because, unlike the 1982 MOA, it was
never incorporated either expressly or by reference to any amendment or revision of the
said IRRs. Thus, it cannot be the basis of any invalidation of the transfers of TCCs to
petitioner nor of any other sanction against petitioner.36

For another, even if the August 29, 1989 MOA has indeed amended the IRR, which it
has not, still, it is ineffective and cannot prejudice third parties for lack of publication as
mandatorily required under Chapter 2 of Book VII, EO 292, otherwise known as the
Administrative Code of 1987, which pertinently provides:

Section 3. Filing.––(1) Every agency shall file with the University of the Philippines Law
Center three (3) certified copies of every rule adopted by it. Rules in force on the date of
effectivity of this Code which are not filed within three (3) months from the date shall not
thereafter be the basis of any sanction against any party or person.

(2) The records officer of the agency, or his equivalent functionary, shall carry out the
requirements of this section under pain of disciplinary action.

(3) A permanent register of all rules shall be kept by the issuing agency and shall be
open to public inspection.

Section 4. Effectivity.––In addition to other rule-making requirement provided by law not

inconsistent with this Book, each rule shall become effective fifteen (15) days from the
date of filing as above provided unless a different date is fixed by law, or specified in the
rule in cases of imminent danger to public health, safety and welfare, the existence of
which must be expressed in a statement accompanying the rule. The agency shall take
appropriate measures to make emergency rules known to persons who may be affected
by them.

Section 5. x x x x

(2) Every rule establishing an offense or defining an act which pursuant to law, is
punishable as a crime or subject to a penalty shall in all cases be published in full text.

It is clear that the Center or DOF cannot compel PSPC to submit sales documents for
the purported post-audit, as PSPC has duly complied with the requirements of the law
and rules to be a qualified transferee of the subject TCCs.

Fourth, we likewise fail to see the liability clause at the dorsal portion of the TCCs to be
a suspensive condition relative to the result of the post-audit. Said liability clause
indicates:

LIABILITY CLAUSE
Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for
any fraudulent act or violation of the pertinent laws, rules and regulations relating to the
transfer of this TAX CREDIT CERTIFICATE. (Emphasis supplied.)

The above clause to our mind clearly provides only for the solidary liability relative to the
transfer of the TCCs from the original grantee to a transferee. There is nothing in the
above clause that provides for the liability of the transferee in the event that the validity
of the TCC issued to the original grantee by the Center is impugned or where the TCC
is declared to have been fraudulently procured by the said original grantee. Thus, the
solidary liability, if any, applies only to the sale of the TCC to the transferee by the
original grantee. Any fraud or breach of law or rule relating to the issuance of the TCC
by the Center to the transferor or the original grantee is the latter’s responsibility and
liability. The transferee in good faith and for value may not be unjustly prejudiced by the
fraud committed by the claimant or transferor in the procurement or issuance of the
TCC from the Center. It is not only unjust but well-nigh violative of the constitutional
right not to be deprived of one’s property without due process of law. Thus, a re-
assessment of tax liabilities previously paid through TCCs by a transferee in good faith
and for value is utterly confiscatory, more so when surcharges and interests are likewise
assessed.

A transferee in good faith and for value of a TCC who has relied on the Center’s
representation of the genuineness and validity of the TCC transferred to it may not be
legally required to pay again the tax covered by the TCC which has been belatedly
declared null and void, that is, after the TCCs have been fully utilized through settlement
of internal revenue tax liabilities. Conversely, when the transferee is party to the fraud
as when it did not obtain the TCC for value or was a party to or has knowledge of its
fraudulent issuance, said transferee is liable for the taxes and for the fraud committed
as provided for by law.

In the instant case, a close review of the factual milieu and the records reveals that
PSPC is a transferee in good faith and for value. No evidence was adduced that PSPC
participated in any way in the issuance of the subject TCCs to the corporations who in
turn conveyed the same to PSPC. It has likewise been shown that PSPC was not
involved in the processing for the approval of the transfers of the subject TCCs from the
various BOI-registered transferors.

Respondent, through the Center, made much of the alleged non-payment through non-
delivery by PSPC of the IFOs it purportedly sold to the transferors covered by supply
agreements which were allegedly the basis of the Center for the approval of the
transfers. Respondent points to the requirement under the August 29, 1989 MOA
between the DOF and BOI, specifying the requirement that "[t]he transferee should be a
BOI-registered firm which is a domestic capital equipment supplier, or a raw material
and/or component supplier of the transferor."37

As discussed above, the above amendment to the October 5, 1982 MOA between BOI
and MOF cannot prejudice any transferee, like PSPC, as it was neither incorporated nor
elevated to the IRR of EO 226, and for lack of due publication. The pro-forma supply
agreements allegedly executed by PSPC and the transferors covering the sale of IFOs
to the transferors have been specifically denied by PSPC. Moreover, the above-quoted
requirement is not required under the IRR of EO 226. Therefore, it is incumbent for
respondent to present said supply agreements to prove participation by PSPC in the
approval of the transfers of the subject TCCs. Respondent failed to do this.

PSPC claims to be a transferee in good faith of the subject TCCs. It believed that its tax
obligations for 1992 and 1994 to 1997 had in fact been paid when it applied the subject
TCCs, considering that all the necessary authorizations and approvals attendant to the
transfer and utilization of the TCCs were present. It is undisputed that the transfers of
the TCCs from the original holders to PSPC were duly approved by the Center, which is
composed of a number of government agencies, including the BIR. Such approval was
annotated on the reverse side of the TCCs, and the Center even issued TDM which is
proof of its approval for PSPC to apply the TCCs as payment for the tax liabilities. The
BIR issued its own TDM, also signifying approval of the TCCs as payment for PSPC’s
tax liabilities. The BIR also issued ATAPETs covering the aforementioned BIR-issued
TDM, further proving its acceptance of the TCCs as valid tax payments, which formed
part of PSPC’s total tax payments along with checks duly acknowledged and received
by BIR’s authorized agent banks.

Several approvals were secured by PSPC before it utilized the transferred TCCs, and it
relied on the verification of the various government agencies concerned of the
genuineness and authenticity of the TCCs as well as the validity of their issuances.
Furthermore, the parties stipulated in open court that the BIR-issued ATAPETs for the
taxes covered by the subject TCCs confirm the correctness of the amount of excise
taxes paid by PSPC during the tax years in question.

Thus, it is clear that PSPC is a transferee in good faith and for value of the subject
TCCs and may not be prejudiced with a re-assessment of excise tax liabilities it has
already settled when due with the use of the subject TCCs. Logically, therefore, the
excise tax returns filed by PSPC duly covered by the TDM and ATAPETs issued by the
BIR confirming the full payment and satisfaction of the excise tax liabilities of PSPC,
have not been fraudulently filed. Consequently, as PSPC is a transferee in good faith
and for value, Sec. 222(a) of the NIRC does not apply in the instant case as PSPC has
neither been shown nor proven to have committed any fraudulent act in the transfer and
utilization of the subject TCCs. With more reason, therefore, that the three-year
prescriptive period for assessment under Art. 203 of the NIRC has already set in and
bars respondent from assessing anew PSPC for the excise taxes already paid in 1992
and 1994 to 1997. Besides, even if the period for assessment has not prescribed, still,
there is no valid ground for the assessment as the excise tax liabilities of PSPC have
been duly settled and paid.

Fifth, PSPC cannot be blamed for relying on the Center’s approval for the transfers of
the subject TCCs and the Center’s acceptance of the TCCs for the payment of its
excise tax liabilities. Likewise, PSPC cannot be faulted in relying on the BIR’s
acceptance of the subject TCCs as payment for its excise tax liabilities. This reliance is
supported by the fact that the subject TCCs have passed through stringent reviews
starting from the claims of the transferors, their issuance by the Center, the Center’s
approval for their transfer to PSPC, the Center’s acceptance of the TCCs to pay PSPC’s
excise tax liabilities through the issuance of the Center’s TDM, and finally the
acceptance by the BIR of the subject TCCs as payment through the issuance of its own
TDM and ATAPETs.

Therefore, PSPC cannot be prejudiced by the Center’s turnaround in assailing the

validity of the subject TCCs which it issued in due course.

Sixth, we are of the view that the subject TCCs cannot be canceled by the Center as
these had already been canceled after their application to PSPC’s excise tax liabilities.
PSPC contends they are already functus officio, not quite in the sense of being no
longer effective, but in the sense that they have been used up. When the subject TCCs
were accepted by the BIR through the latter’s issuance of TDM and the ATAPETs, the
subject TCCs were duly canceled.

The tax credit of a taxpayer evidenced by a TCC is used up or, in accounting parlance,
debited when applied to the taxpayer’s internal revenue tax liability, and the TCC
canceled after the tax credit it represented is fully debited or used up. A credit is a
payable or a liability. A tax credit, therefore, is a liability of the government evidenced by
a TCC. Thus, the tax credit of a taxpayer evidenced by a TCC is debited by the BIR
through a TDM, not only evidencing the payment of the tax by the taxpayer, but likewise
deducting or debiting the existing tax credit with the amount of the tax paid.

For example, a transferee or the tax claimant has a TCC of PhP 1 million, which was
used to pay income tax liability of PhP 500,000, documentary stamp tax liability of PhP
100,000, and value-added tax liability of PhP 350,000, for an aggregate internal
revenue tax liability of PhP 950,000. After the payments through the PhP 1 million TCC
have been approved and accepted by the BIR through the issuance of corresponding
TDM, the TCC money value is reduced to only PhP 50,000, that is, a credit balance of
PhP 50,000. In this sense, the tax credit of the TCC has been canceled or used up in
the amount of PhP 950,000. Now, let us say the transferee or taxpayer has excise tax
liability of PhP 250,000, s/he only has the remaining PhP 50,000 tax credit in the TCC to
pay part of said excise tax. When the transferee or taxpayer applies such payment, the
TCC is canceled as the money value of the tax credit it represented has been fully
debited or used up. In short, there is no more tax credit available for the taxpayer to
settle his/her other tax liabilities.

In the instant case, with due application, approval, and acceptance of the payment by
PSPC of the subject TCCs for its then outstanding excise tax liabilities in 1992 and 1994
to 1997, the subject TCCs have been canceled as the money value of the tax credits
these represented have been used up. Therefore, the DOF through the Center may not
now cancel the subject TCCs as these have already been canceled and used up after
their acceptance as payment for PSPC’s excise tax liabilities. What has been used up,
debited, and canceled cannot anymore be declared to be void, ineffective, and canceled
anew.

Besides, it is indubitable that with the issuance of the corresponding TDM, not only is
the TCC canceled when fully utilized, but the payment is also final subject only to a
post-audit on computational errors. Under RR 5-2000, a TDM is

a certification, duly issued by the Commissioner or his duly authorized representative,

reduced in a BIR Accountable Form in accordance with the prescribed formalities,
acknowledging that the taxpayer named therein has duly paid his internal revenue tax
liability in the form of and through the use of a Tax Credit Certificate, duly issued and
existing in accordance with the provisions of these Regulations. The Tax Debit Memo
shall serve as the official receipt from the BIR evidencing a taxpayer’s payment or
satisfaction of his tax obligation. The amount shown therein shall be charged against
and deducted from the credit balance of the aforesaid Tax Credit Certificate.

Thus, with the due issuance of TDM by the Center and TDM by the BIR, the payments
made by PSPC with the use of the subject TCCs have been effected and consummated
as the TDMs serve as the official receipts evidencing PSPC’s payment or satisfaction of
its tax obligation. Moreover, the BIR not only issued the corresponding TDM, but it also
issued ATAPETs which doubly show the payment of the subject excise taxes of PSPC.

Based on the above discussion, we hold that respondent erroneously and without
factual and legal basis levied the assessment. Consequently, the CTA En Banc erred in
sustaining respondent’s assessment.

Second Issue: Cancellation of TCCs

PSPC argues that the CTA En Banc erred in upholding the cancellation by the Center of
the subject TCCs it used in paying some of its excise tax liabilities as the subject TCCs
were genuine and authentic, having been subjected to thorough and stringent
procedures, and approvals by the Center. Moreover, PSPC posits that both the CTA’s
Division and En Banc duly found that PSPC had neither knowledge, involvement, nor
participation in the alleged fraudulent issuance of the subject TCCs, and, thus, as a
transferee in good faith and for value, it cannot be held solidarily liable for any fraud
attendant to the issuance of the subject TCCs. PSPC further asserts that the Center has
no authority to cancel the subject TCCs as such authority is lodged exclusively with the
BOI. Lastly, PSPC said that the Center’s Excom Resolution No. 03-05-99 which the
Center relied upon as basis for the cancellation is defective, ineffective, and cannot
prejudice third parties for lack of publication.

As we have explained above, the subject TCCs after being fully utilized in the
settlement of PSPC’s excise tax liabilities have been canceled, and thus cannot be
canceled anymore. For being immediately effective and valid when issued, the subject
TCCs have been duly utilized by transferee PSPC which is a transferee in good faith
and for value.
On the issue of the fraudulent procurement of the TCCs, it has been asseverated that
fraud was committed by the TCC claimants who were the transferors of the subject
TCCs. We see no need to rule on this issue in view of our finding that the real issue in
this petition does not dwell on the validity of the TCCs procured by the transferor from
the Center but on whether fraud or breach of law attended the transfer of said TCCs by
the transferor to the transferee.

The finding of the CTA En Banc that there was fraud in the procurement of the subject
TCCs is, therefore, irrelevant and immaterial to the instant petition. Moreover, there are
pending criminal cases arising from the alleged fraud. We leave the matter to the anti-
graft court especially considering the failure of the affiants to the affidavits to appear,
making these hearsay evidence.

We note in passing that PSPC and its officers were not involved in any fraudulent act
that may have been undertaken by the transferors of subject TCCs, supported by the
finding of the Ombudsman Special Prosecutor Leonardo P. Tamayo that Pacifico R.
Cruz, PSPC General Manager of the Treasury and Taxation Department, who was
earlier indicted as accused in OMB-0-99-2012 to 2034 for violation of Sec. 3(e) and (j)
of RA 3019, as amended, otherwise known as the "Anti-Graft and Corrupt Practices
Act," for allegedly conspiring with other accused in defrauding and causing undue injury
to the government,38 did not in any way participate in alleged fraudulent activities
relative to the transfer and use of the subject TCCs.

In a Memorandum39 addressed to then Ombudsman Aniano A. Desierto, the Special

Prosecutor Leonardo P. Tamayo recommended dropping Pacifico Cruz as accused in
Criminal Case Nos. 25940-25962 entitled People of the Philippines v. Antonio P.
Belicena, et al., pending before the Sandiganbayan Fifth Division for lack of probable
cause. Special

Prosecutor Tamayo found that Cruz’s involvement in the transfers of the subject TCCs
came after the applications for the transfers had been duly processed and approved;
and that Cruz could not have been part of the conspiracy as he cannot be presumed to
have knowledge of the irregularity, because the 1989 MOA, which prescribed the
additional requirement that the transferee of a TCC should be a supplier of the
transferor, was not yet published and made known to private parties at the time the
subject TCCs were transferred to PSPC. The Memorandum of Special Prosecutor
Tamayo was duly approved by then Ombudsman Desierto. Consequently, on May 31,
2000, the Sandiganbayan Fifth Division, hearing Criminal Case Nos. 25940-25962,
dropped Cruz as accused.40

But even assuming that fraud attended the procurement of the subject TCCs, it cannot
prejudice PSPC’s rights as earlier explained since PSPC has not been shown or proven
to have participated in the perpetration of the fraudulent acts, nor is it shown that PSPC
committed fraud in the transfer and utilization of the subject TCCs.
On the issue of the authority to cancel duly issued TCCs, we agree with respondent that
the Center has concurrent authority with the BIR and BOC to cancel the TCCs it issued.
The Center was created under Administrative Order No. (AO) 266 in relation to EO 226.
A scrutiny of said executive issuances clearly shows that the Center was granted the
authority to issue TCCs pursuant to its mandate under AO 266. Sec. 5 of AO 266
provides:

SECTION 5. Issuance of Tax Credit Certificates and/or Duty Drawback.—The Secretary

of Finance shall designate his representatives who shall, upon the recommendation of
the CENTER, issue tax credit certificates within thirty (30) working days from
acceptance of applications for the enjoyment thereof. (Emphasis supplied.)

On the other hand, it is undisputed that the BIR under the NIRC and related statutes
has the authority to both issue and cancel TCCs it has issued and even those issued by
the Center, either upon full utilization in the settlement of internal revenue tax liabilities
or upon conversion into a tax refund of unutilized TCCs in specific cases under the
conditions provided.41 AO 266 however is silent on whether or not the Center has
authority to cancel a TCC it itself issued. Sec. 3 of AO 266 reveals:

SECTION 3. Powers, Duties and Functions.—The Center shall have the following
powers, duties and functions:

a. To promulgate the necessary rules and regulations and/or guidelines for the effective
implementation of this administrative order;

xxxx

g. To enforce compliance with tax credit/duty drawback policy and procedural

guidelines;

xxxx

l. To perform such other functions/duties as may be necessary or incidental in the

furtherance of the purpose for which it has been established. (Emphasis supplied.)

Sec. 3, letter l. of AO 266, in relation to letters a. and g., does give ample authority to
the Center to cancel the TCCs it issued. Evidently, the Center cannot carry out its
mandate if it cannot cancel the TCCs it may have erroneously issued or those that were
fraudulently issued. It is axiomatic that when the law and its implementing rules are
silent on the matter of cancellation while granting explicit authority to issue, an inherent
and incidental power resides on the issuing authority to cancel that which was issued. A
caveat however is required in that while the Center has authority to do so, it must bear
in mind the nature of the TCC’s immediate effectiveness and validity for which
cancellation may only be exercised before a transferred TCC has been fully utilized or
canceled by the BIR after due application of the available tax credit to the internal
revenue tax liabilities of an innocent transferee for value, unless of course the claimant
or transferee was involved in the perpetration of the fraud in the TCC’s issuance,
transfer, or utilization. The utilization of the TCC will not shield a guilty party from the
consequences of the fraud committed.

While we agree with respondent that the State in the performance of governmental
function is not estopped by the neglect or omission of its agents, and nowhere is this
truer than in the field of taxation,42 yet this principle cannot be applied to work injustice
against an innocent party. In the case at bar, PSPC’s rights as an innocent transferee
for value must be protected. Therefore, the remedy for respondent is to go after the
claimant companies who allegedly perpetrated the fraud. This is now the subject of a
criminal prosecution before the Sandiganbayan docketed as Criminal Case Nos. 25940-
25962 for violation of RA 3019.

On the issue of the publication of the Center’s Excom Resolution No. 03-05-99
providing for the "Guidelines and Procedures for the Cancellation, Recall and Recovery
of Fraudulently Issued Tax Credit Certificates," we find that the resolution is invalid and
unenforceable. It authorizes the cancellation of TCCs and TDM which are found to have
been granted without legal basis or based on fraudulent documents. The cancellation of
the TCCs and TDM is covered by a penal provision of the assailed resolution. Such
being the case, it should have been published and filed with the National Administrative
Register of the U.P. Law Center in accordance with Secs. 3, 4, and 5, Chapter 2 of
Book VII, EO 292 or the Administrative Code of 1987.

We explained in People v. Que Po Lay43 that a rule which carries a penal sanction will
bind the public if the public is officially and specifically informed of the contents and
penalties prescribed for the breach of the rule. Since Excom Resolution No. 03-05-99
was neither registered with the U.P.

Law Center nor published, it is ineffective and unenforceable. Even if the resolution
need not be published, the punishment for any alleged fraudulent act in the
procurement of the TCCs must not be visited on PSPC, an innocent transferee for
value, which has not been shown to have participated in the fraud. Respondent must go
after the perpetrators of the fraud.

Third Issue: Imposition of surcharges and interests

PSPC claims that having no deficiency excise tax liabilities, it may not be liable for the
late payment surcharges and annual interests.

This issue has been mooted by our disquisition above resolving the first issue in that
PSPC has duly settled its excise tax liabilities for 1992 and 1994 to 1997. Consequently,
there is no basis for the imposition of a late payment surcharges and for interests, and
no need for further discussion on the matter.

Fourth Issue: Non-compliance with statutory and

procedural due process
Finally, PSPC avers that its statutory and procedural right to due process was violated
by respondent in the issuance of the assessment. PSPC claims respondent violated RR
12-99 since no pre-assessment notice was issued to PSPC before the November 15,
1999 assessment. Moreover, PSPC argues that the November 15, 1999 assessment
effectively deprived it of its statutory right to protest the pre-assessment within 30 days
from receipt of the disputed assessment letter.

While this has likewise been mooted by our discussion above, it would not be amiss to
state that PSPC’s rights to substantive and procedural due process have indeed been
violated. The facts show that PSPC was not accorded due process before the
assessment was levied on it. The Center required PSPC to submit certain sales
documents relative to supposed delivery of IFOs by PSPC to the TCC transferors.
PSPC contends that it could not submit these documents as the transfer of the subject
TCCs did not require that it be a supplier of materials and/or component supplies to the
transferors in a letter dated October 29, 1999 which was received by the Center on
November 3, 1999. On the same day, the Center informed PSPC of the cancellation of
the subject TCCs and the TDM covering the application of the TCCs to PSPC’s excise
tax liabilities. The objections of PSPC were brushed aside by the Center and the
assessment was issued by respondent on November 15, 1999, without following the
statutory and procedural requirements clearly provided under the NIRC and applicable
regulations.

What is applicable is RR 12-99, which superseded RR 12-85, pursuant to Sec. 244 in

relation to Sec. 245 of the NIRC implementing Secs. 6, 7, 204, 228, 247, 248, and 249
on the assessment of national internal revenue taxes, fees, and charges. The
procedures delineated in the said statutory provisos and RR 12-99 were not followed by
respondent, depriving PSPC of due process in contesting the formal assessment levied
against it. Respondent ignored RR 12-99 and did not issue PSPC a notice for informal
conference44 and a preliminary assessment notice, as required.45 PSPC’s November
4, 1999 motion for reconsideration of the purported Center findings and cancellation of
the subject TCCs and the TDM was not even acted upon.1âwphi1

PSPC was merely informed that it is liable for the amount of excise taxes it declared in
its excise tax returns for 1992 and 1994 to 1997 covered by the subject TCCs via the
formal letter of demand and assessment notice. For being formally defective, the
November 15, 1999 formal letter of demand and assessment notice is void. Paragraph
3.1.4 of Sec. 3, RR 12-99 pertinently provides:

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 taxpayer’s 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 (Emphasis supplied.)
In short, respondent merely relied on the findings of the Center which did not give PSPC
ample opportunity to air its side. While PSPC indeed protested the formal assessment,
such does not denigrate the fact that it was deprived of statutory and procedural due
process to contest the assessment before it was issued. Respondent must be more
circumspect in the exercise of his functions, as this Court aptly held in Roxas v. Court of
Tax Appeals:

The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that
lays the golden egg." And, in the order to maintain the general public’s trust and
confidence in the Government this power must be used justly and not treacherously.46

WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En Banc Decision in
CTA EB No. 64 is hereby REVERSED and SET ASIDE, and the August 2, 2004 CTA
Decision in CTA Case No. 6003 disallowing the assessment is hereby REINSTATED.
The assessment of respondent for deficiency excise taxes against petitioner for 1992
and 1994 to 1997 inclusive contained in the April 22, 1998 letter of respondent is
canceled and declared without force and effect for lack of legal basis. No
pronouncement as to costs.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

FIRST DIVISION

[G.R. NO. 157064 : August 7, 2006]

BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.)

Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION
CHICO-NAZARIO, J.:

This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking
to set aside the Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11
July 2002, 1 ordering the petitioner to pay the Government the amount of P826,698.31
as deficiency income tax for the year 1987 plus 25% surcharge and 20% interest per
annum. The Court of Appeals, in its assailed Decision, reversed the Decision of the
Court of Tax Appeals (CTA) dated 17 May 2000 2 in C.T.A. Case No. 5662.

Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is a
corporation engaged in the trading of securities. On 14 April 1988, petitioner filed its
Annual Income Tax Return for taxable year 1987. After an audit investigation conducted
by the Bureau of Internal Revenue (BIR), respondent Commissioner of Internal
Revenue (CIR) issued an assessment for deficiency income tax in the amount of
P826,698.31 arising from the disallowance of the item on salaries, bonuses and
allowances in the amount of P1,219,093,93 as part of the deductible business expense
since petitioner failed to subject the salaries, bonuses and allowances to withholding
taxes. This assessment was covered by Formal Assessment Notice No. FAN-1-87-91-
000649 dated 1 February 1991, which, respondent alleges, was sent to petitioner
through registered mail on 6 February 1991. However, petitioner denies receiving the
formal assessment notice.3

On 17 March 1992, petitioner was served with a Warrant of Distraint and/or Levy to
enforce collection of the deficiency income tax for the year 1987. Petitioner filed a
formal protest, dated 25 March 1992, against the Warrant of Distraint and/or Levy,
requesting for its cancellation. On 3 July 1998, petitioner received a letter dated 30 April
1998 from the respondent denying the protest with finality.4

On 31 July 1998, petitioner filed a Petition for Review with the CTA. After due notice
and hearing, the CTA rendered a decision in favor of petitioner on 17 May 2000. The
CTA ruled on the primary issue of prescription and found it unnecessary to decide the
issues on the validity and propriety of the assessment. It maintained that while a mailed
letter is deemed received by the addressee in the course of mail, this is merely a
disputable presumption. It reasoned that the direct denial of the petitioner shifts the
burden of proof to the respondent that the mailed letter was actually received by the
petitioner. The CTA found the BIR records submitted by the respondent immaterial, self-
serving, and therefore insufficient to prove that the assessment notice was mailed and
duly received by the petitioner.5 The dispositive portion of this decision reads:

WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment against
petitioner is hereby CANCELLED. Respondent is hereby ORDERED TO DESIST from
collecting said deficiency tax. No pronouncement as to costs.6

On 6 June 2000, respondent moved for reconsideration of the aforesaid decision but
was denied by the CTA in a Resolution dated 25 July 2000. Thereafter, respondent
appealed to the Court of Appeals on 31 August 2001. In reversing the CTA decision, the
Court of Appeals found the evidence presented by the respondent to be sufficient proof
that the tax assessment notice was mailed to the petitioner, therefore the legal
presumption that it was received should apply.7 Thus, the Court of Appeals ruled that:

WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000 as
well as the Resolution dated July 25, 2000 are hereby REVERSED and SET ASIDE,
and a new on entered ordering the respondent to pay the amount of P826,698.31 as
deficiency income tax for the year 1987 plus 25% surcharge and 20% interest per
annum from February 6, 1991 until fully paid pursuant to Sections 248 and 249 of the
Tax Code.8

Petitioner moved for reconsideration of the said decision but the same was denied by
the Court of Appeals in its assailed Resolution dated 30 January 2003.9

Hence, this Petition for Review on Certiorari raising the following issues:

WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS'

FINDING THAT THE COURT OF TAX APPEALS COMMITTED "GROSS ERROR IN
THE APPRECIATION OF FACTS."

II

WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN REVERSING

THE SUBJECT DECISION OF THE COURT OF TAX APPEALS.

III

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO

ASSESS PETITIONER FOR ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS
PRESCRIBED.

IV

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE TO

COLLECT THE SUBJECT ALLEGED DEFICIENCY INCOME TAX FOR 1987 HAS
PRESCRIBED.

WHETHER OR NOT PETITIONER IS LIABLE FOR THE ALLEGED DEFICIENCY

INCOME TAX ASSESSMENT FOR 1987.

VI
WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT
OF PETITIONER TO DUE PROCESS.10

This Court finds the instant Petition meritorious.

The core issue in this case is whether or not respondent's right to assess petitioner's
alleged deficiency income tax is barred by prescription, the resolution of which depends
on reviewing the findings of fact of the Court of Appeals and the CTA.

While the general rule is that factual findings of the Court of Appeals are binding on this
Court, there are, however, recognized exceptions 11 thereto, such as when the findings
are contrary to those of the trial court or, in this case, the CTA.12

In its Decision, the CTA resolved the issues raised by the parties thus:

Jurisprudence is replete with cases holding that if the taxpayer denies ever having
received an assessment from the BIR, it is incumbent upon the latter to prove by
competent evidence that such notice was indeed received by the addressee. The onus
probandi was shifted to respondent to prove by contrary evidence that the Petitioner
received the assessment in the due course of mail. The Supreme Court has consistently
held that while a mailed letter is deemed received by the addressee in the course of
mail, this is merely a disputable presumption subject to controversion and a direct denial
thereof shifts the burden to the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee (Republic v. Court of Appeals, 149
SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava v. Commissioner
of Internal Revenue, 13 SCRA 104, January 30, 1965:

"The facts to be proved to raise this presumption are (a) that the letter was properly
addressed with postage prepaid, and (b) that it was mailed. Once these facts are
proved, the presumption is that the letter was received by the addressee as soon as it
could have been transmitted to him in the ordinary course of the mail. But if one of the
said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the
Rules of Court, 1963 ed, 56-57 citing Enriquez v. Sunlife Assurance of Canada, 41 Phil
269)."

In the instant case, Respondent utterly failed to discharge this duty. No substantial
evidence was ever presented to prove that the assessment notice No. FAN-1-87-91-
000649 or other supposed notices subsequent thereto were in fact issued or sent to the
taxpayer. As a matter of fact, it only submitted the BIR record book which allegedly
contains the list of taxpayer's names, the reference number, the year, the nature of tax,
the city/municipality and the amount (see Exh. 5-a for the Respondent). Purportedly,
Respondent intended to show to this Court that all assessments made are entered into
a record book in chronological order outlining the details of the assessment and the
taxpayer liable thereon. However, as can be gleaned from the face of the exhibit, all
entries thereon appears to be immaterial and impertinent in proving that the assessment
notice was mailed and duly received by Petitioner. Nothing indicates therein all essential
facts that could sustain the burden of proof being shifted to the Respondent. What is
essential to prove the fact of mailing is the registry receipt issued by the Bureau of
Posts or the Registry return card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be located, Respondent at the
very least, should have submitted to the Court a certification issued by the Bureau of
Posts and any other pertinent document which is executed with the intervention of the
Bureau of Posts. This Court does not put much credence to the self serving
documentations made by the BIR personnel especially if they are unsupported by
substantial evidence establishing the fact of mailing. Thus:

"While we have held that an assessment is made when sent within the prescribed
period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. v. Bautista,
L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the
release, mailing or sending of the notice be clearly and satisfactorily proved. Mere
notations made without the taxpayer's intervention, notice or control, without adequate
supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of
the revenue offices, without adequate protection or defense." (Nava v. CIR, 13 SCRA
104, January 30, 1965).

xxx

The failure of the respondent to prove receipt of the assessment by the Petitioner leads
to the conclusion that no assessment was issued. Consequently, the government's right
to issue an assessment for the said period has already prescribed. (Industrial Textile
Manufacturing Co. of the Phils., Inc. v. CIR CTA Case 4885, August 22, 1996).13

Jurisprudence has consistently shown that this Court accords the findings of fact by the
CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals 14 this
Court recognizes that the Court of Tax Appeals, which by the very nature of its function
is dedicated exclusively to the consideration of tax problems, has necessarily developed
an expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be disturbed
on appeal if they are not supported by substantial evidence or there is a showing of
gross error or abuse on the part of the Tax Court.15 In the absence of any clear and
convincing proof to the contrary, this Court must presume that the CTA rendered a
decision which is valid in every respect.

Under Section 203 16 of the National Internal Revenue Code (NIRC), respondent had
three (3) years from the last day for the filing of the return to send an assessment notice
to petitioner. In the case of Collector of Internal Revenue v. Bautista, 17 this Court held
that an assessment is made within the prescriptive period if notice to this effect is
released, mailed or sent by the CIR to the taxpayer within said period. Receipt thereof
by the taxpayer within the prescriptive period is not necessary. At this point, it should be
clarified that the rule does not dispense with the requirement that the taxpayer should
actually receive, even beyond the prescriptive period, the assessment notice which was
timely released, mailed and sent.

In the present case, records show that petitioner filed its Annual Income Tax Return for
taxable year 1987 on 14 April 1988.18 The last day for filing by petitioner of its return
was on 15 April 1988, 19 thus, giving respondent until 15 April 1991 within which to
send an assessment notice. While respondent avers that it sent the assessment notice
dated 1 February 1991 on 6 February 1991, within the three (3)-year period prescribed
by law, petitioner denies having received an assessment notice from respondent.
Petitioner alleges that it came to know of the deficiency tax assessment only on 17
March 1992 when it was served with the Warrant of Distraint and Levy.20

In Protector's Services, Inc. v. Court of Appeals, 21 this Court ruled that when a mail
matter is sent by registered mail, there exists a presumption, set forth under Section
3(v), Rule 131 of the Rules of Court, 22 that it was received in the regular course of
mail. The facts to be proved in order to raise this presumption are: (a) that the letter was
properly addressed with postage prepaid; and (b) that it was mailed. While a mailed
letter is deemed received by the addressee in the ordinary course of mail, this is still
merely a disputable presumption subject to controversion, and a direct denial of the
receipt thereof shifts the burden upon the party favored by the presumption to prove that
the mailed letter was indeed received by the addressee.23

In the present case, petitioner denies receiving the assessment notice, and the
respondent was unable to present substantial evidence that such notice was, indeed,
mailed or sent by the respondent before the BIR's right to assess had prescribed and
that said notice was received by the petitioner. The respondent presented the BIR
record book where the name of the taxpayer, the kind of tax assessed, the registry
receipt number and the date of mailing were noted. The BIR records custodian, Ingrid
Versola, also testified that she made the entries therein. Respondent offered the entry in
the BIR record book and the testimony of its record custodian as entries in official
records in accordance with Section 44, Rule 130 of the Rules of Court, 24 which states
that:

Section 44. Entries in official records. - Entries in official records made in the
performance of his duty by a public officer of the Philippines, or by a person in the
performance of a duty specially enjoined by law, are prima facie evidence of the facts
therein stated.

The foregoing rule on evidence, however, must be read in accordance with this Court's
pronouncement in Africa v. Caltex (Phil.), Inc., 25 where it has been held that an entrant
must have personal knowledge of the facts stated by him or such facts were acquired
by him from reports made by persons under a legal duty to submit the same.

There are three requisites for admissibility under the rule just mentioned: (a) that the
entry was made by a public officer, or by another person specially enjoined by law to do
so; (b) that it was made by the public officer in the performance of his duties, or by such
other person in the performance of a duty specially enjoined by law; and (c) that the
public officer or other person had sufficient knowledge of the facts by him stated, which
must have been acquired by him personally or through official information x x x.

In this case, the entries made by Ingrid Versola were not based on her personal
knowledge as she did not attest to the fact that she personally prepared and mailed the
assessment notice. Nor was it stated in the transcript of stenographic notes 26 how and
from whom she obtained the pertinent information. Moreover, she did not attest to the
fact that she acquired the reports from persons under a legal duty to submit the same.
Hence, Rule 130, Section 44 finds no application in the present case. Thus, the
evidence offered by respondent does not qualify as an exception to the rule against
hearsay evidence.

Furthermore, independent evidence, such as the registry receipt of the assessment

notice, or a certification from the Bureau of Posts, could have easily been obtained. Yet
respondent failed to present such evidence.

In the case of Nava v. Commissioner of Internal Revenue, 27 this Court stressed on the
importance of proving the release, mailing or sending of the notice.

While we have held that an assessment is made when sent within the prescribed
period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. v. Bautista,
L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the
release, mailing, or sending of the notice be clearly and satisfactorily proved. Mere
notations made without the taxpayer's intervention, notice, or control, without adequate
supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of
the revenue offices, without adequate protection or defense.

In the present case, the evidence offered by the respondent fails to convince this Court
that Formal Assessment Notice No. FAN-1-87-91-000649 was released, mailed, or sent
before 15 April 1991, or before the lapse of the period of limitation upon assessment
and collection prescribed by Section 203 of the NIRC. Such evidence, therefore, is
insufficient to give rise to the presumption that the assessment notice was received in
the regular course of mail. Consequently, the right of the government to assess and
collect the alleged deficiency tax is barred by prescription.

IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed

Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, is
hereby REVERSED and SET ASIDE, and the Decision of the Court of Tax Appeals in
C.T.A. Case No. 5662, dated 17 May 2000, cancelling the 1988 Deficiency Tax
Assessment against Barcelon, Roxas Securitites, Inc. (now known as UPB Securities,
Inc.) for being barred by prescription, is hereby REINSTATED. No costs.

SO ORDERED.
SECOND DIVISION

G.R. No. 118176 April 12, 2000

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

QUISUMBING, J.:

Assailed in this petition for review is the Decision1 of the Court of Appeals dated
November 28, 1994, in CA-G.R. SP No.31825. It affirmed the judgment of the Court of
Tax Appeals which had dismissed the petition for review of assessments made by the
Commissioner of Internal Revenue imposing deficiency percentage taxes on petitioner
for the years 1983, 1984 and 1985. The dispositive portion of the CTA's decision states:

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

The facts are as follows:

Petitioner Protector's Services, Inc. (PSI) is a contractor engaged in recruiting security

guards for clients. After an audit investigation conducted by the Bureau of Internal
Revenue (BIR), petitioner was assessed for deficiency percentage taxes including
surcharges, penalties and interests thereon, as follows:

YEAR AMOUNT DEMAND LETTER NO.

1983 P503,564.59 18-452-83B-87-B2
1984 831,464.30 18-451-84B-87-B2
1985 1,514,047.86 18-450-85B-87-B2
On December 7, 1987, respondent Commissioner sent by registered mail, demand
letters for payment of the aforesaid assessments. However, petitioner alleged that on
December 10, 1987, it only received Demand Letter Nos. 18-452-83B-87-B2 and 18-
451-84B-87-B2 for the years 1983 and 1984, respectively. It denied receiving any notice
of deficiency percentage tax for the year 1985.

Petitioner sent a protest letter dated January 02, 1988, to the BIR regarding the 1983
and 1984 assessments. The petitioner claimed that its gross receipts subject to
percentage taxes should exclude the salaries of the security guards as well as the
corresponding employer's share of Social Security System (SSS), State Insurance Fund
(SIF) and Medicare contributions.1âwphi1.nêt
Without formally acting on the petitioner's protest, the BIR sent a follow-up letter dated
July 12, 1988, ordering the settlement of taxes based on its computation. Additional
documentary stamp taxes of two thousand twenty-five (P2,025.00) pesos on petitioner's
capitalization for 1983 and 1984, and seven hundred three pesos and forty-one
centavos (P703.41) as deficiency expanded withholding tax were included in the
amount demanded. The total unsettled tax amounted to two million, eight hundred fifty-
one thousand, eight hundred five pesos and sixteen centavos (P2,851,805.16).

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

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

. . . [T]hat the salaries paid to the security guards form part of your taxable gross
receipts in the determination of the 3% and 4% contractor's tax imposed under Section
191 of the Tax Code prior to its amendment by the provision of Executive Order No.
273.

Considering that the security guards are actually your employees and not that of your
clients, the salaries corresponding to the services rendered by your employees form
part of your taxable receipts. This contention finds support in the case of Avecilla
Building Corporation versus Commissioner, et al., G.R. L-42395, 17 January 1985 and
Resty Arbon Singh versus Commissioner, CTA Case No. 1901, 5 December 1970.3

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

1) Assessments for documentary stamp tax and expanded withholding tax are without
basis since they were paid on July 22, 1988.

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

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

4) The base amount for computing percentage tax was erroneous because the BIR
included in the taxable amount, the salaries of the security guards and the employer's
corresponding remittances to SSS, SIF, and Medicare, which amounts were earmarked
for other persons, and should not form part of PSI's receipts.
The CTA dismissed the petition on the following grounds: (1) The three-year period of
limitation for assessment of taxes in 1984 commenced from the date of filing the final
return on January 20, 1985, hence assessment made on December 10, 1987, was
within said period. (2) Petitioner could not deny receipt of the 1985 assessment on the
same date, December 10, 1987, for as supported by testimony of the BIR personnel, all
the assessment letters for the years 1983, 1984, and 1985 were included in one
envelope and mailed together. (3) Petitioner's protest letter dated January 2, 1988, was
filed on January 12, 1988, or thirty-three days from December 10, 1987, hence, the
request for reinvestigation was filed out of time.

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

I. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON THE

PETITION FOR REVIEW FILED BEFORE IT.

II. WHETHER THE ASSESSMENTS AGAINST THE PETITIONER FOR DEFICIENCY

PERCENTAGE TAX FOR TAXABLE YEARS 1983 AND 1984 WERE MADE AFTER
THE LAPSE OF THE PRESCRIPTIVE PERIOD.

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

IV. WHETHER THE ASSESSMENTS ARE CORRECT.4

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

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

Sec. 270. Protesting of assessment. — When the Commissioner of Internal Revenue or

his duly authorized representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails
to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for

reconsideration or reinvestigation in such form and manner as may be prescribed by the
implementing regulations within thirty (30) days from receipt of the assessment;
otherwise, the assessment shall become final, and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation
adversely affected by the decision on the protest may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said decision; otherwise, the decision
shall become final, executory and demandable.

We note that indeed on December 10, 1987, petitioner received the BIR's assessment
notices. On January 12, 1988, petitioner protested the 1983 and 1984 assessments and
requested for a reinvestigation. From December 10, 1987 to January 12, 1988, thirty-
three days had lapsed. Thereafter petitioner may no longer dispute the correctness of
the assessments. Hence, in our view, the CTA correctly dismissed the appeal for lack of
jurisdiction.

On the second issue, petitioner argues that the government's right to assess and collect
the 1983, 1984 and 1985 taxes had already prescribed. Relying on Batas Pambansa
(BP) Blg. 700, which reduced the period of limitation for assessment and collection of
internal revenue taxes from five to three years, petitioner asserts that the government
was barred from reviewing the 1983 tax starting December 10, 1987, the expiry date of
the three-year limit. Petitioner insists that the reckoning period of prescription should
start from the date when the quarterly percentage taxes were paid and not when the
Final Annual Percentage Tax Return for the year was filed. Moreover, he denies having
received the 1985 tax assessment.

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

Sec. 1. Section 318 of the National Internal Revenue Code, as amended, is hereby
amended to read as follows:

Sec. 318. Period of limitation upon assessment and collection. — Except as provided in
the succeeding sections, internal revenue taxes shall be assessed within three years
after the last day prescribed by law for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration of
such period: Provided, That in a case where a return is filed beyond the period
prescribed by law, the three-year period shall be counted from the day the return was
filed. For the purposes of this section, a return filed before the last day prescribed by
law for the filing thereof shall be considered as filed on such last day.

xxx xxx xxx

Sec. 3. The period of limitation herein prescribed shall apply to assessments of internal
revenue taxes beginning taxable year 1984.
B.P. 700 was approved on April 5, 1984. The three-year prescriptive period for
assessment and collection of revenue taxes applied to taxes paid beginning 1984.
Clearly, the tax assessment made on December 10, 1987, for the year 1983 was still
covered by the five-year statutory prescriptive period. This rule was emphasized in
Revenue Memorandum Circular (RMC) No. 33-84, published on November 12, 1984,
which defined the salient features of the application of BP 700, to wit:

B. Effectivity of Prescriptive Periods of Assessment and Collection

1 Assessment made on or after April 5, 1984 (date, of approval of BP 700) will still be
governed by the original five-year period if the taxes assessed thereby cover taxable
years prior to January 1, 1984. (emphasis supplied)

Corollarily, assessments made before April 5, 1984 shall still be governed by the
original five-year period.

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

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

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

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

Sec. 2. Percentage tax. — In general, unless otherwise specifically provided in the Tax
Code, every person conducting business on which a percentage tax is imposed under
Chapter II Title V of the Tax Code must render quarterly declaration on cumulative basis
of the amount of his sales, receipts or earnings or gross value of output actually
removed from the factory or near warehouse, compute and pay the tax due thereon.

(a) Quarterly Percentage Return. —

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

(b) Final Annual Percentage Tax Return —

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

(2) Credit to the extent allowable under this Title, the amount of excess tax credits
shown in the final adjustment return against the quarterly percentage tax liabilities for
the succeeding taxable quarters.

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

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

The 1985 assessment which petitioner denied as having been received was negated
when the respondent introduced documentary evidence showing that it was mailed by
registered mail. It was further buttressed by the testimony of witness Mr. Arnold C.
Larroza, Chief Administrative Branch Mailing Section, Rev. Region No. 4B-1, Quezon
City that the 1983, 1984 and 1985 assessments were placed in one envelope when it
was mailed by registered mail. Presumably, it was received in the regular course of the
mail. . . . The facts to be proved to raise this presumption are (a) that the letter was
properly addressed with postage prepaid; and (b) that it was mailed. Once these facts
are proved, the presumption is that the letter was received by the addressee as soon as
it could have been transmitted to him in the ordinary course of the mails. Such being the
case, this Court cannot be made to believe that the 1985 assessment which incidentally
has a substantially greater amount involved, was not received by the petitioner. Hence,
the same assessment is also considered final and unappealable for failure of the
petitioner to protest the same within the reglementary period provided by law.6

In reviewing administrative decisions, the reviewing court cannot re-examine the factual
basis and sufficiency of the evidence.7 The findings of fact must be respected, so long
as they are supported by substantial evidence.8

As a subsidiary defense, petitioner interposes the third issue claiming that since the CIR
failed, until now, to commence the collection of the 1983, 1984, and 1985 deficiency tax,
the right to collect had, likewise, prescribed. Petitioner urges us to consider that for the
government's failure to institute collection remedies either by judicial action or by
distraint and levy, the right to collect the same has prescribed pursuant to Section 219
of the NIRC. Note, however, that Section 271 of the 1986 Tax Code provides for the
suspension of running of the statute of limitation of tax collection, as follows:

Sec. 271. Suspension of running of statute. — The running of the statute of limitations
provided in Sections 268 and 269 on the making of assessment and the beginning of
distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall
be suspended for the period during which the Commissioner is prohibited from making
the assessment or beginning distraint or levy or a proceeding in court and for sixty days
thereafter; when the taxpayer request for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address given by him in the
return filed upon which a tax is being assessed or collected: Provided, That, if the
taxpayer informs the Commissioner of any change in address, the running of the statute
of limitation will not be suspended; when the warrant of distraint and levy is duly served
upon the taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the taxpayer is out of
the Philippines. (Emphasis supplied.)

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

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

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

Contractor's tax on gross receipts imposed on business agents including private

detective watchman agencies, 11 was a tax on the sale of services or labor, imposed on
the exercise of a privilege. 12 The term "gross receipts" means all amounts received by
the prime or principal contractor as the total price, undiminished by the amount paid to
the subcontractor under a subcontract arrangement. 13 Hence, gross receipts could not
be diminished by employer's SSS, SIF and Medicare contributions. 14 Furthermore, it
has been consistently ruled by the BIR that the salaries paid to security guards should
form part of the gross receipts, subject to tax, to wit:
. . . This Office has consistently ruled that salaries of security guards form part of the
taxable gross receipts of a security agency for purposes of the 4% [formerly 3%]
contractors tax under Section 205 of the Tax Code, as amended. The reason is that the
salaries of the security guards are actually the liability of the agency and that the guards
are considered their employees; hence, for percentage tax purposes, the salaries of the
security guards are includible in its gross receipts. (BIR Ruling No.271-81 citing BIR
Ruling No. 69-002). 15

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

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

SO ORDERED.

Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.

FIRST DIVISION

G.R. No. 148380 December 9, 2005

OCEANIC WIRELESS NETWORK, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, THE COURT OF TAX APPEALS, and
THE COURT OF APPEALS, Respondents.

DECISION

AZCUNA, J.:

This is a Petition for Review on Certiorari seeking to reverse and set aside the Decision
of the Court of Appeals dated October 31, 2000, and its Resolution dated May 3, 2001,
in "Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue" docketed as
CA-G.R. SP No. 35581, upholding the Decision of the Court of Tax Appeals dismissing
the Petition for Review in CTA Case No. 4668 for lack of jurisdiction.

Petitioner Oceanic Wireless Network, Inc. challenges the authority of the Chief of the
Accounts Receivable and Billing Division of the Bureau of Internal Revenue (BIR)
National Office to decide and/or act with finality on behalf of the Commissioner of
Internal Revenue (CIR) on protests against disputed tax deficiency assessments.

The facts of the case are as follows:

On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR)
deficiency tax assessments for the taxable year 1984 in the total amount of
₱8,644,998.71, broken down as follows:

Kind of Tax Assessment No. Amount

Deficiency Income Tax FAR-4-1984-88-001130 ₱8,381,354.00

Penalties for late payment FAR-4-1984-88-001131 3,000.00

of income and failure to

file quarterly returns

Deficiency Contractor’s FAR-4-1984-88-001132 29,849.06

Tax

Deficiency Fixed Tax FAR-4--88-001133 12,083.65

Deficiency Franchise Tax FAR-4—84-88-001134 ___227,712.00

T o t a l -------- ₱8,644,998.71

Petitioner filed its protest against the tax assessments and requested a reconsideration
or cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988.

Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable
and Billing Division, Mr. Severino B. Buot, reiterated the tax assessments while denying
petitioner’s request for reinvestigation in a letter 1 dated January 24, 1991, thus:

"Note: Your request for re-investigation has been denied for failure to submit the
necessary supporting papers as per endorsement letter from the office of the Special
Operation Service dated 12-12-90."
Said letter likewise requested petitioner to pay the total amount of ₱8,644,998.71 within
ten (10) days from receipt thereof, otherwise the case shall be referred to the Collection
Enforcement Division of the BIR National Office for the issuance of a warrant of distraint
and levy without further notice.

Upon petitioner’s failure to pay the subject tax assessments within the prescribed
period, the Assistant Commissioner for Collection, acting for the Commissioner of
Internal Revenue, issued the corresponding warrants of distraint and/or levy and
garnishment. These were served on petitioner on October 10, 1991 and October 17,
1991, respectively.2

On November 8, 1991, petitioner filed a Petition for Review with the Court of Tax
Appeals (CTA) to contest the issuance of the warrants to enforce the collection of the
tax assessments. This was docketed as CTA Case No. 4668.

The CTA dismissed the petition for lack of jurisdiction in a decision dated September 16,
1994, declaring that said petition was filed beyond the thirty (30)-day period reckoned
from the time when the demand letter of January 24, 1991 by the Chief of the BIR
Accounts Receivable and Billing Division was presumably received by petitioner, i.e.,
"within a reasonable time from said date in the regular course of mail pursuant to
Section 2(v) of Rule 131 of the Rules of Court."3

The decision cited Surigao Electric Co., Inc. v. Court of Tax Appeals4 wherein this Court
considered a mere demand letter sent to the taxpayer after his protest of the
assessment notice as the final decision of the Commissioner of Internal Revenue on the
protest. Hence, the filing of the petition on November 8, 1991 was held clearly beyond
the reglementary period.5

The court a quo likewise stated that the finality of the denial of the protest by petitioner
against the tax deficiency assessments was bolstered by the subsequent issuance of
the warrants of distraint and/or levy and garnishment to enforce the collection of the
deficiency taxes. The issuance was not barred by prescription because the mere filing
of the letter of protest by petitioner which was given due course by the Bureau of
Internal Revenue suspended the running of the prescription period as expressly
provided under the then Section 224 of the Tax Code:

SEC. 224. Suspension of Running of the Statute of Limitations. – The running of the
Statute of Limitations provided in Section 203 and 223 on the making of assessment
and the beginning of distraint or levy or a proceeding in court for collection, in respect of
any deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding in
court and for sixty (60) days thereafter; when the taxpayer requests for a reinvestigation
which is granted by the Commissioner; when the taxpayer cannot be located in the
address given by him in the return files upon which a tax is being assessed or collected:
Provided, That if the taxpayer inform the Commissioner of any change of address, the
running of the statute of limitations will not be suspended; when the warrant of distraint
and levy is duly served upon the taxpayer, his authorized representative, or a member
of his household with sufficient discretion, and no property could located; and when the
taxpayer is out of the Philippines. 6 (Underscoring supplied.)

Petitioner filed a Motion for Reconsideration arguing that the demand letter of January
24, 1991 cannot be considered as the final decision of the Commissioner of Internal
Revenue on its protest because the same was signed by a mere subordinate and not by
the Commissioner himself.7

With the denial of its motion for reconsideration, petitioner consequently filed a Petition
for Review with the Court of Appeals contending that there was no final decision to
speak of because the Commissioner had yet to make a personal determination as
regards the merits of petitioner’s case.8

The Court of Appeals denied the petition in a decision dated October 31, 2000, the
dispositive portion of which reads:

"WHEREFORE, the petition is DISMISSED for lack of merit.

SO ORDERED."

Petitioner’s Motion for Reconsideration was likewise denied in a resolution dated May 3,
2001.

Hence, this petition with the following assignment of errors:9

THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT THE DEMAND

LETTER ISSUED BY THE (THEN) ACCOUNTS RECEIVABLE/BILLING DIVISION OF
THE BIR NATIONAL OFFICE WAS THE FINAL DECISION OF THE RESPONDENT
CIR ON THE DISPUTED ASSESSMENTS, AND HENCE CONSTITUTED THE
DECISION APPEALABLE TO THE HONORABLE RESPONDENT CTA; AND,

II

THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT THE DENIAL

OF THE PROTEST OF THE SUBJECT ALLEGED DEFICIENCY TAX ASSESSMENTS
HAD LONG BECOME FINAL AND EXECUTORY FOR FAILURE OF THE PETITIONER
TO INSTITUTE THE APPEAL FROM THE DEMAND LETTER OF THE CHIEF OF THE
ACCOUNTS RECEIVABLE/BILLING DIVISION, BIR NATIONAL OFFICE, TO THE
HONORABLE RESPONDENT CTA, WITHIN THIRTY (30) DAYS FROM RECEIPT
THEREOF.

Thus, the main issue is whether or not a demand letter for tax deficiency assessments
issued and signed by a subordinate officer who was acting in behalf of the
Commissioner of Internal Revenue, is deemed final and executory and subject to an
appeal to the Court of Tax Appeals.

We rule in the affirmative.

A demand letter for payment of delinquent taxes may be considered a decision on a

disputed or protested assessment. The determination on whether or not a demand letter
is final is conditioned upon the language used or the tenor of the letter being sent to the
taxpayer.

We laid down the rule that the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language what constitutes his final
determination of the disputed assessment, thus:

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

always indicate to the taxpayer in clear and unequivocal language whenever his action
on an assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of Republic Act No. 1125,
as amended. On the basis of his statement indubitably showing that the
Commissioner’s communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able to
determine when his right to appeal to the tax court accrues.

The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment – and, consequently, the
collection of the amount demanded as taxes – by repeated requests for recomputation
and reconsideration. On the part of the Commissioner, this would encourage his office
to conduct a careful and thorough study of every questioned assessment and render a
correct and definite decision thereon in the first instance. This would also deter the
Commissioner from unfairly making the taxpayer grope in the dark and speculate as to
which action constitutes the decision appealable to the tax court. Of greater import, this
rule of conduct would meet a pressing need for fair play, regularity, and orderliness in
administrative action.10

In this case, the letter of demand dated January 24, 1991, unquestionably constitutes
the final action taken by the Bureau of Internal Revenue on petitioner’s request for
reconsideration when it reiterated the tax deficiency assessments due from petitioner,
and requested its payment. Failure to do so would result in the "issuance of a warrant of
distraint and levy to enforce its collection without further notice."11 In addition, the letter
contained a notation indicating that petitioner’s request for reconsideration had been
denied for lack of supporting documents.

The above conclusion finds support in Commissioner of Internal Revenue v. Ayala

Securities Corporation,12 where we held:
The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or [respondent corporation’s]…protest o[f] the assessment
made by the petitioner, considering that the said letter [was] in itself a reiteration of the
demand by the Bureau of Internal Revenue for the settlement of the assessment
already made, and for the immediate payment of the sum of P758,687.04 in spite of the
vehement protest of the respondent corporation on April 21, 1961. This certainly is a
clear indication of the firm stand of petitioner against the reconsideration of the disputed
assessment…This being so, the said letter amount[ed] to a decision on a disputed or
protested assessment, and, there, the court a quo did not err in taking cognizance of
this case.

Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,13 and in CIR v. Union
Shipping Corporation,14 we held:

". . . In this letter, the commissioner not only in effect demanded that the petitioner pay
the amount of ₱11,533.53 but also gave warning that in the event it failed to pay, the
said commissioner would be constrained to enforce the collection thereof by means of
the remedies provided by law. The tenor of the letter, specifically the statement
regarding the resort to legal remedies, unmistakably indicate[d] the final nature of the
determination made by the commissioner of the petitioner’s deficiency franchise tax
liability."

The demand letter received by petitioner verily signified a character of finality.

Therefore, it was tantamount to a rejection of the request for reconsideration. As
correctly held by the Court of Tax Appeals, "while the denial of the protest was in the
form of a demand letter, the notation in the said letter making reference to the protest
filed by petitioner clearly shows the intention of the respondent to make it as [his] final
decision."15

This now brings us to the crux of the matter as to whether said demand letter indeed
attained finality despite the fact that it was issued and signed by the Chief of the
Accounts Receivable and Billing Division instead of the BIR Commissioner.

The general rule is that the Commissioner of Internal Revenue may delegate any power
vested upon him by law to Division Chiefs or to officials of higher rank. He cannot,
however, delegate the four powers granted to him under the National Internal Revenue
Code (NIRC) enumerated in Section 7.

As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of
the Code to any subordinate official with the rank equivalent to a division chief or higher,
except the following:

(a) The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;

(c) The power to compromise or abate under Section 204(A) and (B) of this Code, any
tax deficiency: Provided, however, that assessments issued by the Regional Offices
involving basic deficiency taxes of five hundred thousand pesos (P500,000) or less, and
minor criminal violations as may be determined by rules and regulations to be
promulgated by the Secretary of Finance, upon the recommendation of the
Commissioner, discovered by regional and district officials, may be compromised by a
regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal, Assessment and
Collection Divisions and the Revenue District Officer having jurisdiction over the
taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.

It is clear from the above provision that the act of issuance of the demand letter by the
Chief of the Accounts Receivable and Billing Division does not fall under any of the
exceptions that have been mentioned as non-delegable.

Section 6 of the Code further provides:

"SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional

Requirements for Tax Administration and Enforcement. –

(A) Examination of Returns and Determination of Tax Due. - After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax; Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from
the Commissioner or from his duly authorized representative. . . ." (Emphasis supplied)

Thus, the authority to make tax assessments may be delegated to subordinate officers.
Said assessment has the same force and effect as that issued by the Commissioner
himself, if not reviewed or revised by the latter such as in this case.16

A request for reconsideration must be made within thirty (30) days from the taxpayer’s
receipt of the tax deficiency assessment, otherwise, the decision becomes final,
unappealable and therefore, demandable. A tax assessment that has become final,
executory and enforceable for failure of the taxpayer to assail the same as provided in
Section 228 can no longer be contested, thus:
"SEC. 228. Protesting of Assessment. – When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings…Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules and
regulations. Within sixty (60) days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the assessment shall become final.

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

Here, petitioner failed to avail of its right to bring the matter before the Court of Tax
Appeals within the reglementary period upon the receipt of the demand letter reiterating
the assessed delinquent taxes and denying its request for reconsideration which
constituted the final determination by the Bureau of Internal Revenue on petitioner’s
protest. Being a final disposition by said agency, the same would have been a proper
subject for appeal to the Court of Tax Appeals.

The rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment must
first be disputed by the taxpayer and ruled upon by the Commissioner of Internal
Revenue to warrant a decision from which a petition for review may be taken to the
Court of Tax Appeals. Where an adverse ruling has been rendered by the
Commissioner of Internal Revenue with reference to a disputed assessment or a claim
for refund or credit, the taxpayer may appeal the same within thirty (30) days after
receipt thereof.17

We agree with the factual findings of the Court of Tax Appeals that the demand letter
may be presumed to have been duly directed, mailed and was received by petitioner in
the regular course of the mail in the absence of evidence to the contrary. This is in
accordance with Section 2(v), Rule 131 of the Rules of Court, and in this case, since the
period to appeal has commenced to run from the time the letter of demand was
presumably received by petitioner within a reasonable time after January 24, 1991, the
period of thirty (30) days to appeal the adverse decision on the request for
reconsideration had already lapsed when the petition was filed with the Court of Tax
Appeals only on November 8, 1991. Hence, the Court of Tax Appeals properly
dismissed the petition as the tax delinquency assessment had long become final and
executory.

WHEREFORE, premises considered, the Decision of the Court of Appeals dated

October 31, 2000 and its Resolution dated May 3, 2001 in CA-G.R. SP No. 35581 are
hereby AFFIRMED. The petition is accordingly DENIED for lack of merit.

SO ORDERED.
THIRD DIVISION

G.R. No. 193100 December 10, 2014

SAMAR-I ELECTRIC COOPERATIVE, Petitioner,

vs.
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 it,s 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 CTA's First Division,
and ordering petitioner to pay respondent Commissioner of Internal Revenue (CIR)
deficiency withholding tax on compensation in the aggregate amount of ₱2,690,850.91,
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 CTA's First Division and adopted by
the CTA EB:

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 InternalRevenue 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 petitioner’s 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 findingsof the investigators.

In response, petitioner sent a letter dated November 26, 2001 to respondent

maintaining its indifference to the latter’s 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. Respondent’s 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 petitioner’s 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:

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-I’s 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, SAMELCOI’s "Motion for Reconsideration" was filed on June
17, 2008.

On January 19, 2009, the Court in division promulgated its Amended Decision which
denied CIR’s motion and partially granted SAMELCO-I’s 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
motionswere 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:

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.:

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 Divisionerred 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-
I’s 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 innot holding that given SAMELCOI’s 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-I’s 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.:

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:
A. The Honorable CTA En Banc gravely erred in holding that respondent sufficiently
complied withthe 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 BIR’s 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 Bancerred 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 anafter thought that was raised
rather belatedly only in the Answer and during the trial.

E. The Honorable CTA En Bancerred 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.:

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 Taxeson 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.:

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 factof 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) herein above, may be collected by distraint orlevy or by a
proceeding incourt 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 of any tax amnesty
law or decree. (Emphasis supplied.)

In the case at bar, it was petitioner’s substantial under declaration of withholding taxes
in the amount of ₱2,690,850.91 which constituted the "falsity" in the subject returns –
giving respondent the benefit of the period under Section 222 of the NIRC 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 The case of Aznar v. Court of Tax Appeals13
discusses what acts or omissions may constitute falsity, viz.:

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

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

The ordinary period of prescription of 5 years within which to assess tax liabilities under
Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the
government is placed at a disadvantage so as to prevent its lawful agents fromproper
assessment of tax liabilities due to false returns, fraudulent return intended to evade
payment of tax or failure to file returns, the period of ten years provided for in Sec. 332
(a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to
be inadequate and should be the one enforced. There being undoubtedly false tax
returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals
that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which
to assess petitioner’s tax liability had not expired at the time said assessment was
made.14

A careful examination of the evidence on record yields to no other conclusion but that
petitioner failed to withhold taxes from its employees’ 13th month pay and other benefits
inexcess of thirty thousand pesos (₱30,000.00) amounting to ₱2,690,850.91for the
taxable years 1997 to 1999 – resulting to its filing of the subject false returns. Petitioner
failed to refute this finding, both in fact and in law, before the courts a quo.

We quote the following portion of the assailed Decision of the CTA EB, viz.:

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:

ATTY. FRANCIA:

Q: Did the petitioner file an accurate Return?

MS. RAPATAN:

A: No.

ATTY. FRANCIA:

Q: Can you please explain?

MS. RAPATAN:

A: Because I based the computation of my deficiency withholding taxes on declared

taxable income per alpha list submitted then, I have extracted a data from the Alpha
List, particularly that of the manager and other officials, only their basic salary and their
overtime pay were declared but the other benefits were not actually subjected to
withholding tax. So, the deficiency withholding taxes from the taxes on the taxable 13th
month pay and other benefits in excess 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 was not included in the withholding tax computation of SAMELCO[-]I.

ATTY. FRANCIA:

Nothing further, your Honors.

JUSTICE BAUTISTA:

Any re-cross?

ATTY. NAPUTO:
No re-cross, your Honors.15

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 quasijudicial 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 petitioner’s substantial under declaration of withholding
taxes in the amount of ₱2,690,850.91 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:

SEC. 228. Protesting of Assessment. – x x x

xxxx

The taxpayers shall be informed in writing of the law and the factson 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.:

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 taxpayer’s 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 isexplained 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
government’s 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 taxation’s 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 government itself." (Emphasis
supplied; citations omitted)

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:

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
Enron’s 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 CIR’s 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:

please be informed that the cooperative’s 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 ₱30,000.00 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.1âwphi1 Attached to
the PAN was the detailed explanation of the particular provision of law and revenue
regulation violated, thus: 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
failureof 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 respondent's interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and assessment of minimum corporate
income tax despite petitioner's 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 petitioner's 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 taxpayer's situation in Enron. Petitioner's 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.

MARTIN S. VILLARAMA, JR.

Associate Justice

FIRST DIVISION

G.R. No. 159694 January 27, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
AZUCENA T. REYES, Respondent.

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

G.R. No. 163581 January 27, 2006

AZUCENA T. REYES, Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PANGANIBAN, CJ.:

Under the present provisions of the Tax Code and pursuant to elementary due process,
taxpayers must be informed in writing of the law and the facts upon which a tax
assessment is based; otherwise, the assessment is void. Being invalid, the assessment
cannot in turn be used as a basis for the perfection of a tax compromise.

The Case

Before us are two consolidated1 Petitions for Review2 filed under Rule 45 of the Rules
of Court, assailing the August 8, 2003 Decision3 of the Court of Appeals (CA) in CA-GR
SP No. 71392. The dispositive portion of the assailed Decision reads as follows:

"WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax
Appeals is ANNULLED and SET ASIDE without prejudice to the action of the National
Evaluation Board on the proposed compromise settlement of the Maria C. Tancinco
estate’s tax liability."4

The Facts

The CA narrated the facts as follows:

"On July 8, 1993, Maria C. Tancinco (or ‘decedent’) died, leaving a 1,292 square-meter
residential lot and an old house thereon (or ‘subject property’) located at 4931 Pasay
Road, Dasmariñas Village, Makati City.

"On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain
Raymond Abad (or ‘Abad’), Revenue District Office No. 50 (South Makati) conducted an
investigation on the decedent’s estate (or ‘estate’). Subsequently, it issued a Return
Verification Order. But without the required preliminary findings being submitted, it
issued Letter of Authority No. 132963 for the regular investigation of the estate tax case.
Azucena T. Reyes (or ‘[Reyes]’), one of the decedent’s heirs, received the Letter of
Authority on March 14, 1997.

"On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or
‘BIR’), issued a preliminary assessment notice against the estate in the amount of
P14,580,618.67. On May 10, 1998, the heirs of the decedent (or ‘heirs’) received a final
estate tax assessment notice and a demand letter, both dated April 22, 1998, for the
amount of P14,912,205.47, inclusive of surcharge and interest.

"On June 1, 1998, a certain Felix M. Sumbillo (or ‘Sumbillo’) protested the assessment
[o]n behalf of the heirs on the ground that the subject property had already been sold by
the decedent sometime in 1990.

"On November 12, 1998, the Commissioner of Internal Revenue (or ‘[CIR]’) issued a
preliminary collection letter to [Reyes], followed by a Final Notice Before Seizure dated
December 4, 1998.

"On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate,
followed on February 11, 1999 by Notices of Levy on Real Property and Tax Lien
against it.

"On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999,
the heirs proposed a compromise settlement of P1,000,000.00.

"In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the
basic tax due, citing the heirs’ inability to pay the tax assessment. On March 20, 2000,
[the CIR] rejected [Reyes’s] offer, pointing out that since the estate tax is a charge on
the estate and not on the heirs, the latter’s financial incapacity is immaterial as, in fact,
the gross value of the estate amounting to P32,420,360.00 is more than sufficient to
settle the tax liability. Thus, [the CIR] demanded payment of the amount of
P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of the subject
property would be published.

"On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of
the basic tax due in the amount of P5,313,891.00. She reiterated the proposal in a letter
dated May 18, 2000.

"As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief,
Collection Enforcement Division, BIR, notified [Reyes] on June 6, 2000 that the subject
property would be sold at public auction on August 8, 2000.

"On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the
scheduled auction sale, she asserted that x x x the assessment, letter of demand[,] and
the whole tax proceedings against the estate are void ab initio. She offered to file the
corresponding estate tax return and pay the correct amount of tax without surcharge [or]
interest.
"Without acting on [Reyes’s] protest and offer, [the CIR] instructed the Collection
Enforcement Division to proceed with the August 8, 2000 auction sale. Consequently,
on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the Court of Tax Appeals
(or ‘CTA’), docketed as CTA Case No. 6124.

"On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary
Injunction or Status Quo Order, which was granted by the CTA on July 26, 2000. Upon
[Reyes’s] filing of a surety bond in the amount of P27,000,000.00, the CTA issued a
[R]esolution dated August 16, 2000 ordering [the CIR] to desist and refrain from
proceeding with the auction sale of the subject property or from issuing a [W]arrant of
[D]istraint or [G]arnishment of [B]ank [A]ccount[,] pending determination of the case
and/or unless a contrary order is issued.

"[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no
longer has jurisdiction over the case[,] because the assessment against the estate is
already final and executory; and (ii) that the petition was filed out of time. In a
[R]esolution dated November 23, 2000, the CTA denied [the CIR’s] motion.

"During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR
issued Revenue Regulation (or ‘RR’) No. 6-2000 and Revenue Memorandum Order (or
‘RMO’) No. 42-2000 offering certain taxpayers with delinquent accounts and disputed
assessments an opportunity to compromise their tax liability.

"On November 25, 2000, [Reyes] filed an application with the BIR for the compromise
settlement (or ‘compromise’) of the assessment against the estate pursuant to Sec.
204(A) of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000.

"On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the
hearing before the CTA scheduled on January 9, 2001, citing her pending application
for compromise with the BIR. The motion was granted and the hearing was reset to
February 6, 2001.

"On January 29, 2001, [Reyes] moved for postponement of the hearing set on February
6, 2001, this time on the ground that she had already paid the compromise amount of
P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or
‘NEB’). The CTA granted the motion and reset the hearing to February 27, 2001.

"On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement
of Disputed Assessment as a Perfected Compromise. In said motion, she alleged that
[the CIR] had not yet signed the compromise[,] because of procedural red tape requiring
the initials of four Deputy Commissioners on relevant documents before the
compromise is signed by the [CIR]. [Reyes] posited that the absence of the requisite
initials and signature[s] on said documents does not vitiate the perfected compromise.
"Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB,
[Reyes’s] application for compromise with the BIR cannot be considered a perfected or
consummated compromise.

"On March 9, 2001, the CTA denied [Reyes’s] motion, prompting her to file a Motion for
Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied
the [M]otion for [R]econsideration with the suggestion that[,] for an orderly presentation
of her case and to prevent piecemeal resolutions of different issues, [Reyes] should file
a [S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there
was already a perfected compromise.

"On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA,
followed on June 4, 2001 by its Amplificatory Arguments (for the Supplemental Petition
for Review), raising the following issues:

‘1. Whether or not an offer to compromise by the [CIR], with the acquiescence by the
Secretary of Finance, of a tax liability pending in court, that was accepted and paid by
the taxpayer, is a perfected and consummated compromise.

‘2. Whether this compromise is covered by the provisions of Section 204 of the Tax
Code (CTRP) that requires approval by the BIR [NEB].’

"Answering the Supplemental Petition, [the CIR] averred that an application for
compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000 requires the
evaluation and approval of either the NEB or the Regional Evaluation Board (or ‘REB’),
as the case may be.

"On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion
was granted on July 11, 2001. After submission of memoranda, the case was submitted
for [D]ecision.

"On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which
pertinently reads:

‘WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is hereby
DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY deficiency estate tax in the
amount of Nineteen Million Five Hundred Twenty Four Thousand Nine Hundred Nine
and 78/100 (P19,524,909.78), computed as follows:

xxxxxxxxx

‘[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate

tax due of P17,934,382.13 from January 11, 2001 until full payment thereof pursuant to
Section 249(c) of the Tax Code, as amended.’
"In arriving at its decision, the CTA ratiocinated that there can only be a perfected and
consummated compromise of the estate’s tax liability[,] if the NEB has approved
[Reyes’s] application for compromise in accordance with RR No. 6-2000, as
implemented by RMO No. 42-2000.

"Anent the validity of the assessment notice and letter of demand against the estate, the
CTA stated that ‘at the time the questioned assessment notice and letter of demand
were issued, the heirs knew very well the law and the facts on which the same were
based.’ It also observed that the petition was not filed within the 30-day reglementary
period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code."5

Ruling of the Court of Appeals

In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-
99 were mandatory and unequivocal in their requirement. The assessment notice and
the demand letter should have stated the facts and the law on which they were based;
otherwise, they were deemed void.6 The appellate court held that while administrative
agencies, like the BIR, were not bound by procedural requirements, they were still
required by law and equity to observe substantive due process. The reason behind this
requirement, said the CA, was to ensure that taxpayers would be duly apprised of -- and
could effectively protest -- the basis of tax assessments against them.7 Since the
assessment and the demand were void, the proceedings emanating from them were
likewise void, and any order emanating from them could never attain finality.

The appellate court added, however, that it was premature to declare as perfected and
consummated the compromise of the estate’s tax liability. It explained that, where the
basic tax assessed exceeded P1 million, or where the settlement offer was less than the
prescribed minimum rates, the National Evaluation Board’s (NEB) prior evaluation and
approval were the conditio sine qua non to the perfection and consummation of any
compromise.8 Besides, the CA pointed out, Section 204(A) of the Tax Code applied to
all compromises, whether government-initiated or not.9 Where the law did not
distinguish, courts too should not distinguish.

Hence, this Petition.10

The Issues

In GR No. 159694, petitioner raises the following issues for the Court’s consideration:

"I.

Whether petitioner’s assessment against the estate is valid.

"II.
Whether respondent can validly argue that she, as well as the other heirs, was not
aware of the facts and the law on which the assessment in question is based, after she
had opted to propose several compromises on the estate tax due, and even
prematurely acting on such proposal by paying 20% of the basic estate tax due."11

The foregoing issues can be simplified as follows: first, whether the assessment against
the estate is valid; and, second, whether the compromise entered into is also valid.

The Court’s Ruling

The Petition is unmeritorious.

First Issue:

Validity of the Assessment Against the Estate

The second paragraph of Section 228 of the Tax Code12 is clear and mandatory. It
provides as follows:

"Sec. 228. Protesting of Assessment. --

xxxxxxxxx

"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."

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 22913 prior to
its amendment by Republic Act (RA) No. 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 1998 to 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.

To be simply informed in writing of the investigation being conducted and of the

recommendation for the assessment of the estate taxes due is nothing but a perfunctory
discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken
to mean that Reyes already knew the law and the facts on which the assessment was
based. It does not at all conform to the compulsory requirement under Section 228.
Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the
sheer purpose of investigation and was not even the requisite notice under the law.

The procedure for protesting an assessment under the Tax Code is found in Chapter III
of Title VIII, which deals with remedies. Being procedural in nature, can its provision
then be applied retroactively? The answer is yes.

The general rule is that statutes are prospective. However, statutes that are remedial, or
that do not create new or take away vested rights, do not fall under the general rule
against the retroactive operation of statutes.14 Clearly, Section 228 provides for the
procedure in case an assessment is protested. The provision does not create new or
take away vested rights. In both instances, it can surely be applied retroactively.
Moreover, RA 8424 does not state, either expressly or by necessary implication, that
pending actions are excepted from the operation of Section 228, or that applying it to
pending proceedings would impair vested rights.

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.15 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.16

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.17 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.
Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.

No doubt, Section 228 has replaced Section 229. The provision on protesting an
assessment has been amended. Furthermore, in case of discrepancy between the law
as amended and its implementing but old regulation, the former necessarily prevails.18
Thus, between Section 228 of the Tax Code and the pertinent provisions of RR 12-85,
the latter cannot stand because it cannot go beyond the provision of the law. The law
must still be followed, even though the existing tax regulation at that time provided for a
different procedure. The regulation then simply provided that notice be sent to the
respondent in the form prescribed, and that no consequence would ensue for failure to
comply with that form.

Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be
accorded due process. Not only was the law here disregarded, but no valid notice was
sent, either. 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.19 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
government’s claim, there can be no deprivation of property, because no effective
protest can be made.20 The haphazard shot at slapping an assessment, supposedly
based on estate taxation’s 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 government itself."21

Fifth, the rule against estoppel does not apply. Although the government cannot be
estopped by the negligence or omission of its agents, the obligatory provision on
protesting a tax assessment cannot be rendered nugatory by a mere act of the CIR .

Tax laws are civil in nature.22 Under our Civil Code, acts executed against the
mandatory provisions of law are void, except when the law itself authorizes the validity
of those acts.23 Failure to comply with Section 228 does not only render the
assessment void, but also finds no validation in any provision in the Tax Code. We
cannot condone errant or enterprising tax officials, as they are expected to be vigilant
and law-abiding.
Second Issue:

Validity of Compromise

It would be premature for this Court to declare that the compromise on the estate tax
liability has been perfected and consummated, considering the earlier determination
that the assessment against the estate was void. Nothing has been settled or finalized.
Under Section 204(A) of the Tax Code, where the basic tax involved exceeds one
million pesos or the settlement offered is less than the prescribed minimum rates, the
compromise shall be subject to the approval of the NEB composed of the petitioner and
four deputy commissioners.

Finally, as correctly held by the appellate court, this provision applies to all
compromises, whether government-initiated or not. Ubi lex non distinguit, nec nos
distinguere debemos. Where the law does not distinguish, we should not distinguish.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED.
No pronouncement as to costs.

SO ORDERED.

ARTEMIO V. PANGANIBAN
Chief Justice
Chairperson, First Division

SECOND DIVISION

G.R. No. 178697 : November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. SONY PHILIPPINES, INC.,

Respondent.

DECISION
MENDOZA, J.:

This petition for review on Certiorari seeks to set aside the May 17, 2007 Decision and
the July 5, 2007 Resolution of the Court of Tax Appeals – En Banc[1] (CTA-EB), in
C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First Division[2]
which, in turn, partially granted the petition for review of respondent Sony Philippines,
Inc. (Sony).cra The CTA-First Division decision cancelled the deficiency assessment
issued by petitioner Commissioner of Internal Revenue (CIR) against Sony for Value
Added Tax (VAT) but upheld the deficiency assessment for expanded withholding tax
(EWT) in the amount of P1,035,879.70 and the penalties for late remittance of internal
revenue taxes in the amount of P1,269, 593.90.[3]cralaw

THE FACTS:chanroblesvirtuallawlibrary

On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA 19734)
authorizing certain revenue officers to examine Sony’s books of accounts and other
accounting records regarding revenue taxes for “the period 1997 and unverified prior
years.” On December 6, 1999, a preliminary assessment for 1997 deficiency taxes and
penalties was issued by the CIR which Sony protested. Thereafter, acting on the
protest, the CIR issued final assessment notices, the formal letter of demand and the
details of discrepancies.[4] Said details of the deficiency taxes and penalties for late
remittance of internal revenue taxes are as follows:chanroblesvirtuallawlibrary

DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)

Basic Tax Due

P

7,958,700.00

Add: Penalties

Interest up to 3-31-2000

3,157,314.41

Compromise

25,000.00

3,182,314.41

Deficiency VAT Due

11,141,014.41
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)

Basic Tax Due

1,416,976.90

Add: Penalties
Interest up to 3-31-2000

550,485.82

Compromise

25,000.00

575,485.82

Deficiency EWT Due

1,992,462.72

DEFICIENCY OF VAT ON ROYALTY PAYMENTS

(Assessment No. ST-LR1-97-0126-2000)

Basic Tax Due

Add: Penalties

Surcharge

359,177.80
Interest up to 3-31-2000

87,580.34

Compromise

16,000.00

462,758.14

Penalties Due

462,758.14

LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

Basic Tax Due

Add: Penalties

Surcharge

1,729,690.71
Interest up to 3-31-2000

508,783.07

Compromise

50,000.00

2,288,473.78

Penalties Due

2,288,473.78

LATE REMITTANCE OF INCOME PAYMENTS

(Assessment No. ST-LR3-97-0128-2000)

Basic Tax Due

Add: Penalties

25 % Surcharge

8,865.34

Interest up to 3-31-2000
58.29

Compromise

2,000.00

10,923.60

Penalties Due

10,923.60

GRAND TOTAL

P
15,895,632.65[5]

Sony sought re-evaluation of the aforementioned assessment by filing a protest on

February 2, 2000. Sony submitted relevant documents in support of its protest on the
16th of that same month.[6]cralaw

On October 24, 2000, within 30 days after the lapse of 180 days from submission of the
said supporting documents to the CIR, Sony filed a petition for review before the
CTA.[7]cralaw

After trial, the CTA-First Division disallowed the deficiency VAT assessment because
the subsidized advertising expense paid by Sony which was duly covered by a VAT
invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Division
maintained the deficiency EWT assessment on Sony’s motor vehicles and on
professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to
Section 1(g) of Revenue Regulations No. 6-85. The CTA-First Division, however,
disallowed the EWT assessment on rental expense since it found that the total rental
deposit of P10,523,821.99 was incurred from January to March 1998 which was again
beyond the coverage of LOA 19734. Except for the compromise penalties, the CTA-
First Division also upheld the penalties for the late payment of VAT on royalties, for late
remittance of final withholding tax on royalty as of December 1997 and for the late
remittance of EWT by some of Sony’s branches.[8] In sum, the CTA-First Division partly
granted Sony’s petition by cancelling the deficiency VAT assessment but upheld a
modified deficiency EWT assessment as well as the penalties. Thus, the dispositive
portion reads:chanroblesvirtuallawlibrary

WHEREFORE, the petition for review is hereby PARTIALLY GRANTED. Respondent is

ORDERED to CANCEL and WITHDRAW the deficiency assessment for value-added
tax for 1997 for lack of merit. However, the deficiency assessments for expanded
withholding tax and penalties for late remittance of internal revenue taxes are UPHELD.

Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency expanded

withholding tax in the amount of P1,035,879.70 and the following penalties for late
remittance of internal revenue taxes in the sum of
P1,269,593.90:chanroblesvirtuallawlibrary

1. VAT on Royalty P 429,242.07

2. Withholding Tax on Royalty 831,428.20

3. EWT of Petitioner’s Branches 8,923.63

Total P 1,269,593.90
Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to Section
249(C)(3) of the 1997 Tax Code.

SO ORDERED.[9]cralaw

The CIR sought a reconsideration of the above decision and submitted the following
grounds in support thereof:chanroblesvirtuallawlibrary

A. The Honorable Court committed reversible error in holding that petitioner is not liable
for the deficiency VAT in the amount of P11,141,014.41;

B. The Honorable court committed reversible error in holding that the commission
expense in the amount of P2,894,797.00 should be subjected to 5% withholding tax
instead of the 10% tax rate;

C. The Honorable Court committed a reversible error in holding that the withholding tax
assessment with respect to the 5% withholding tax on rental deposit in the amount of
P10,523,821.99 should be cancelled; and

D. The Honorable Court committed reversible error in holding that the remittance of final
withholding tax on royalties covering the period January to March 1998 was filed on
time.[10]cralaw

On April 28, 2005, the CTA-First Division denied the motion for reconsideration.
Unfazed, the CIR filed a petition for review with the CTA-EB raising identical
issues:chanroblesvirtuallawlibrary

1. Whether or not respondent (Sony) is liable for the deficiency VAT in the amount of
P11,141,014.41;

2. Whether or not the commission expense in the amount of P2,894,797.00 should be

subjected to 10% withholding tax instead of the 5% tax rate;

3. Whether or not the withholding assessment with respect to the 5% withholding tax on
rental deposit in the amount of P10,523,821.99 is proper; and

4. Whether or not the remittance of final withholding tax on royalties covering the period
January to March 1998 was filed outside of time.[11]cralaw

Finding no cogent reason to reverse the decision of the CTA-First Division, the CTA-EB
dismissed CIR’s petition on May 17, 2007. CIR’s motion for reconsideration was denied
by the CTA-EB on July 5, 2007.

The CIR is now before this Court via this petition for review relying on the very same
grounds it raised before the CTA-First Division and the CTA-EB. The said grounds are
reproduced below:chanroblesvirtuallawlibrary
GROUNDS FOR THE ALLOWANCE OF THE PETITION

THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT LIABLE FOR
DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.

II

AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN THE

AMOUNT OF PHP1,992,462.72:chanroblesvirtuallawlibrary

A. THE CTA EN BANC ERRED IN RULING THAT THE COMMISSION EXPENSE IN

THE AMOUNT OF PHP2,894,797.00 SHOULD BE SUBJECTED TO A WITHHOLDING
TAX OF 5% INSTEAD OF THE 10% TAX RATE.

B. THE CTA EN BANC ERRED IN RULING THAT THE ASSESSMENT WITH

RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL DEPOSIT IN THE AMOUNT
OF PHP10,523,821.99 IS NOT PROPER.

III

THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING TAX ON
ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998 WAS FILED ON
TIME.[12]cralaw

Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto. The
CIR subsequently filed a manifestation informing the Court that it would no longer file a
reply. Thus, on December 3, 2008, the Court resolved to give due course to the petition
and to decide the case on the basis of the pleadings filed.[13]cralaw

The Court finds no merit in the petition.

The CIR insists that LOA 19734, although it states “the period 1997 and unverified prior
years,” should be understood to mean the fiscal year ending in March 31, 1998.[14] The
Court cannot agree.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given
to the appropriate revenue officer assigned to perform assessment functions. It
empowers or enables said revenue officer to examine the books of account and other
accounting records of a taxpayer for the purpose of collecting the correct amount of
tax.[15] The very provision of the Tax Code that the CIR relies on is unequivocal with
regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –

(A)Examination of Returns and Determination of tax Due. – After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of
the correct amount of tax: Provided, however, That failure to file a return shall not
prevent the Commissioner from authorizing the examination of any taxpayer. x x x
[Emphases supplied]cralaw

Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so authorized
must not go beyond the authority given. In the absence of such an authority, the
assessment or examination is a nullity.

As earlier stated, LOA 19734 covered “the period 1997 and unverified prior years.” For
said reason, the CIR acting through its revenue officers went beyond the scope of their
authority because the deficiency VAT assessment they arrived at was based on records
from January to March 1998 or using the fiscal year which ended in March 31, 1998. As
pointed out by the CTA-First Division in its April 28, 2005 Resolution, the CIR knew
which period should be covered by the investigation. Thus, if CIR wanted or intended
the investigation to include the year 1998, it should have done so by including it in the
LOA or issuing another LOA.

Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the
phrase “and unverified prior years,” violated Section C of Revenue Memorandum Order
No. 43-90 dated September 20, 1990, the pertinent portion of which
reads:chanroblesvirtuallawlibrary

3. A Letter of Authority should cover a taxable period not exceeding one taxable year.
The practice of issuing L/As covering audit of “unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.[16] [Emphasis
supplied]cralaw

On this point alone, the deficiency VAT assessment should have been disallowed. Be
that as it may, the CIR’s argument, that Sony’s advertising expense could not be
considered as an input VAT credit because the same was eventually reimbursed by
Sony International Singapore (SIS), is also erroneous.

The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the
former never incurred any advertising expense. As a result, Sony is not entitled to a tax
credit. At most, the CIR continues, the said advertising expense should be for the
account of SIS, and not Sony.[17]cralaw
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed
by the CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s
disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.[18] It is evident under Section 110[19] of the 1997 Tax
Code that an advertising expense duly covered by a VAT invoice is a legitimate
business expense. This is confirmed by no less than CIR’s own witness, Revenue
Officer Antonio Aluquin.[20] There is also no denying that Sony incurred advertising
expense. Aluquin testified that advertising companies issued invoices in the name of
Sony and the latter paid for the same.[21] Indubitably, Sony incurred and paid for
advertising expense/ services. Where the money came from is another matter all
together but will definitely not change said fact.

The CIR further argues that Sony itself admitted that the reimbursement from SIS was
income and, thus, taxable. In support of this, the CIR cited a portion of Sony’s protest
filed before it:chanroblesvirtuallawlibrary

The fact that due to adverse economic conditions, Sony-Singapore has granted to our
client a subsidy equivalent to the latter’s advertising expenses will not affect the validity
of the input taxes from such expenses. Thus, at the most, this is an additional income of
our client subject to income tax. We submit further that our client is not subject to VAT
on the subsidy income as this was not derived from the sale of goods or
services.[22]cralaw

Insofar as the above-mentioned subsidy may be considered as income and, therefore,

subject to income tax, the Court agrees. However, the Court does not agree that the
same subsidy should be subject to the 10% VAT. To begin with, the said subsidy
termed by the CIR as reimbursement was not even exclusively earmarked for Sony’s
advertising expense for it was but an assistance or aid in view of Sony’s dire or adverse
economic conditions, and was only “equivalent to the latter’s (Sony’s) advertising
expenses.”

Section 106 of the Tax Code explains when VAT may be imposed or exacted.
Thus:chanroblesvirtuallawlibrary

SEC. 106. Value-added Tax on Sale of Goods or Properties. –

(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every
sale, barter or exchange of goods or properties, value-added tax equivalent to ten
percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or transferor.

Thus, there must be a sale, barter or exchange of goods or properties before any VAT
may be levied. Certainly, there was no such sale, barter or exchange in the subsidy
given by SIS to Sony. It was but a dole out by SIS and not in payment for goods or
properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),[23] the Court had the occasion to rule that
services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the
present case. In that case, COMASERCO rendered service to its affiliates and, in turn,
the affiliates paid the former reimbursement-on-cost which means that it was paid the
cost or expense that it incurred although without profit. This is not true in the present
case. Sony did not render any service to SIS at all. The services rendered by the
advertising companies, paid for by Sony using SIS dole-out, were for Sony and not SIS.
SIS just gave assistance to Sony in the amount equivalent to the latter’s advertising
expense but never received any goods, properties or service from Sony.

Regarding the deficiency EWT assessment, more particularly Sony’s commission

expense, the CIR insists that said deficiency EWT assessment is subject to the ten
percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98
dated April 17, 1998.[24] The said revenue regulation provides that the 10% rate is
applied when the recipient of the commission income is a natural person. According to
the CIR, Sony’s schedule of Selling, General and Administrative expenses shows the
commission expense as “commission/dealer salesman incentive,” emphasizing the
word salesman.

On the other hand, the application of the five percent (5%) rate by the CTA-First
Division is based on Section 1(g) of Revenue RegulationsNo. 6-85 which
provides:chanroblesvirtuallawlibrary

(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs,
insurance, real estate and commercial brokers and agents of professional entertainers –
five per centum (5%).cra[25]cralaw

In denying the very same argument of the CIR in its motion for reconsideration, the
CTA-First Division, held:chanroblesvirtuallawlibrary

x x x, commission expense is indeed subject to 10% withholding tax but payments

made to broker is subject to 5% withholding tax pursuant to Section 1(g) of Revenue
Regulations No. 6-85. While the commission expense in the schedule of Selling,
General and Administrative expenses submitted by petitioner (SPI) to the BIR is
captioned as “commission/dealer salesman incentive” the same does not justify the
automatic imposition of flat 10% rate. As itemized by Petitioner, such expense is
composed of “Commission Expense” in the amount of P10,200.00 and ‘Broker Dealer’
of P2,894,797.00.[26]cralaw

The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision.
Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended by Revenue
Regulations No. 12-94, which was the applicable rule during the subject period of
examination and assessment as specified in the LOA. Revenue Regulations No. 2-98,
cited by the CIR, was only adopted in April 1998 and, therefore, cannot be applied in the
present case. Besides, the withholding tax on brokers and agents was only increased to
10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001.[27]
Until then, the rate was only 5%.

The Court also affirms the findings of both the CTA-First Division and the CTA-EB on
the deficiency EWT assessment on the rental deposit. According to their findings, Sony
incurred the subject rental deposit in the amount of P10,523,821.99 only from January
to March 1998. As stated earlier, in the absence of the appropriate LOA specifying the
coverage, the CIR’s deficiency EWT assessment from January to March 1998, is not
valid and must be disallowed.

Finally, the Court now proceeds to the third ground relied upon by the CIR.

The CIR initially assessed Sony to be liable for penalties for belated remittance of its
FWT on royalties (i) as of December 1997; and (ii) for the period from January to March
1998. Again, the Court agrees with the CTA-First Division when it upheld the CIR with
respect to the royalties for December 1997 but cancelled that from January to March
1998.

The CIR insists that under Section 3[28] of Revenue RegulationsNo. 5-82 and Sections
2.57.4 and 2.58(A)(2)(a)[29] of Revenue Regulations No. 2-98, Sony should also be
made liable for the FWT on royalties from January to March of 1998. At the same time,
it downplays the relevance of the Manufacturing License Agreement (MLA) between
Sony and Sony-Japan, particularly in the payment of royalties.

The above revenue regulations provide the manner of withholding remittance as well as
the payment of final tax on royalty. Based on the same, Sony is required to deduct and
withhold final taxes on royalty payments when the royalty is paid or is payable. After
which, the corresponding return and remittance must be made within 10 days after the
end of each month. The question now is when does the royalty become payable?

Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of
royalty payments were agreed upon:chanroblesvirtuallawlibrary

(5)Within two (2) months following each semi-annual period ending June 30 and
December 31, the LICENSEE shall furnish to the LICENSOR a statement, certified by
an officer of the LICENSEE, showing quantities of the MODELS sold, leased or
otherwise disposed of by the LICENSEE during such respective semi-annual period and
amount of royalty due pursuant this ARTICLE X therefore, and the LICENSEE shall pay
the royalty hereunder to the LICENSOR concurrently with the furnishing of the above
statement.[30]cralaw

Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-
annual period which ends in June 30 and December 31. However, the CTA-First
Division found that there was accrual of royalty by the end of December 1997 as well as
by the end of June 1998. Given this, the FWTs should have been paid or remitted by
Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the
CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from January
to March 1998 was seasonably filed. Although the royalty from January to March 1998
was well within the semi-annual period ending June 30, which meant that the royalty
may be payable until August 1998 pursuant to the MLA, the FWT for said royalty had to
be paid on or before July 10, 1998 or 10 days from its accrual at the end of June 1998.
Thus, when Sony remitted the same on July 8, 1998, it was not yet late.

In view of the foregoing, the Court finds no reason to disturb the findings of the CTA-EB.

WHEREFORE, the petition is DENIED.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice