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) Decision 2 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 "A"
addressed to the Commissioner of Internal Revenue
informing the latter of the special proceedings for the
settlement of the estate (p. 126, BIR records);
2. Petition for the probate of the will and issuance of letter of "B" & "B-1"
administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108,
BIR records);
3. Pleading entitled "Compliance" filed with the probate Court "C"
submitting the final inventory of all the properties of the
deceased (p. 106, BIR records);
4. Attachment to Exh. "C" which is the detailed and complete "C-1" to "C-17"
listing of the properties of the deceased (pp. 89-105, BIR
rec.);
5. Claims against the estate filed by Equitable Banking Corp. "D" to "D-24"
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);
6. Claim filed by Banque de L' Indochine et de Suez with the "E" to "E-3"
probate Court in the amount of US $4,828,905.90 as of
January 31, 1988 (pp. 262-265, BIR records);
7. Claim of the Manila Banking Corporation (MBC) which as of "F" to "F-3"
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);
 8. Demand letter of Manila Banking Corporation prepared by "G" & "G-1"
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);
9. Claim of State Investment House, Inc. filed with the RTC, "H" to "H-16"
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);
10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed "I"
to Atty. Jesus M. Gonzales, (p. 184, BIR records);
11. Letter dated April 17, 1990 from J.M. Gonzales addressed to "J"
the Regional Director of BIR in San Pablo City (p. 183, BIR
records);
12. Estate Tax Return filed by the estate of the late Jose P. "K" to "K-5"
Fernandez through its authorized representative, Atty. Jesus
M. Gonzales, for Arsenio P. Dizon, with attachments (pp.
177-182, BIR records);
13. Certified true copy of the Letter of Administration issued by "L"
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
14. Certification of Payment of estate taxes Nos. 2052 and "M" to "M-5"
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.).
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. -do-
appearing at the lower Portion of Exh. "1";
3. Memorandum for the Commissioner, dated July 19, 1991, pp. 143-144
prepared by revenue examiners, Ma. Anabella A. Abuloc,
Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by
Maximino V. Tagle
4. Signature of Alberto S. Enriquez appearing at the lower -do-
portion on p. 2 of Exh. "2";
5. Signature of Ma. Anabella A. Abuloc appearing at the lower -do-
portion on p. 2 of Exh. "2";
6. Signature of Raymund S. Gallardo appearing at the Lower -do-
portion on p. 2 of Exh. "2";
7. Signature of Maximino V. Tagle also appearing on p. 2 of -do-
Exh. "2";
8. Summary of revenue Enforcement Officers Audit Report, p. 139
 dated July 19, 1991;
9. Signature of Alberto Enriquez at the lower portion of Exh. -do-
"3";
10. Signature of Ma. Anabella A. Abuloc at the lower portion of -do-
Exh. "3";
11. Signature of Raymond S. Gallardo at the lower portion of -do-
Exh. "3";
12. Signature of Maximino V. Tagle at the lower portion of Exh. -do-
"3";
13. Demand letter (FAS-E-87-91-00), signed by the Asst. p. 169
Commissioner for Collection for the Commissioner of
Internal Revenue, demanding payment of the amount
of P66,973,985.40; and
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 evidence 48 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

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 motion 23 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 Court 36 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.

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 Appeals 12 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.
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.

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
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.

ESGUERRA, J.:
Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA Case 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.
The factual background of the case is as follows:
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 (Exit. 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 P708,687.04 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 corporations income tax return 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:
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.
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 R.A. 1125.
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 See. 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 Sec 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
vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of Internal
Revenue vs. 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 serious charge (Yutivo Sons Hardware
Company vs. 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:
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.
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 an
exercise in futility.
WHEREFORE, the decision appealed from is hereby affirmed in toto.
Without special pronouncement as to costs.

G.R. No. 166134               June 29, 2010

ANGELES CITY, Petitioner,
vs.
ANGELES CITY ELECTRIC CORPORATION and REGIONAL TRIAL COURT BRANCH 57, ANGELES
CITY, Respondents.
DECISION
DEL CASTILLO, J.:
The prohibition on the issuance of a writ of injunction to enjoin the collection of taxes applies
only to national internal revenue taxes, and not to local taxes.
This Petition1 for Certiorari under Rule 65 of the Rules of Court seeks to set aside the Writ of
Preliminary Injunction issued by the Regional Trial Court (RTC) of Angeles City, Branch 57, in Civil
Case No. 11401, enjoining Angeles City and its City Treasurer from levying, seizing, disposing and
selling at public auction the properties owned by Angeles Electric Corporation (AEC).
Factual Antecedents
On June 18, 1964, AEC was granted a legislative franchise under Republic Act No. (RA) 4079 2 to
construct, maintain and operate an electric light, heat, and power system for the purpose of
generating and distributing electric light, heat and power for sale in Angeles City, Pampanga.
Pursuant to Section 3-A thereof,3 AEC’s payment of franchise tax for gross earnings from electric
current sold was in lieu of all taxes, fees and assessments.
On September 11, 1974, Presidential Decree No. (PD) 551 reduced the franchise tax of electric
franchise holders. Section 1 of PD 551 provided that:
SECTION 1. Any provision of law or local ordinance to the contrary notwithstanding, the
franchise tax payable by all grantees of franchises to generate, distribute and sell electric
current for light, heat and power shall be two percent (2%) of their gross receipts received from
the sale of electric current and from transactions incident to the generation, distribution and
sale of electric current.
Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly
authorized representative on or before the twentieth day of the month following the end of
each calendar quarter or month as may be provided in the respective franchise or pertinent
municipal regulation and shall, any provision of the Local Tax Code or any other law to the
contrary notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by
any national or local authority on earnings, receipts, income and privilege of generation,
distribution and sale of electric current.
On January 1, 1992, RA 7160 or the Local Government Code (LGC) of 1991 was passed into law,
conferring upon provinces and cities the power, among others, to impose tax on businesses
enjoying franchise.4 In accordance with the LGC, the Sangguniang Panlungsod of Angeles City
enacted on December 23, 1993 Tax Ordinance No. 33, S-93, otherwise known as the Revised
Revenue Code of Angeles City (RRCAC).
On February 7, 1994, a petition seeking the reduction of the tax rates and a review of the
provisions of the RRCAC was filed with the Sangguniang Panlungsod by Metro Angeles Chamber
of Commerce and Industry Inc. (MACCI) of which AEC is a member. There being no action taken
by the Sangguniang Panlungsod on the matter, MACCI elevated the petition5 to the Department
of Finance, which referred the same to the Bureau of Local Government Finance (BLGF). In the
petition, MACCI alleged that the RRCAC is oppressive, excessive, unjust and confiscatory; that it
was published only once, simultaneously on January 22, 1994; and that no public hearings were
conducted prior to its enactment. Acting on the petition, the BLGF issued a First Indorsement 6 to
the City Treasurer of Angeles City, instructing the latter to make representations with
the Sangguniang Panlungsod for the appropriate amendment of the RRCAC in order to ensure
compliance with the provisions of the LGC, and to make a report on the action taken within five
days.
Thereafter, starting July 1995, AEC has been paying the local franchise tax to the Office of the
City Treasurer on a quarterly basis, in addition to the national franchise tax it pays every quarter
to the Bureau of Internal Revenue (BIR).
Proceedings before the City Treasurer
On January 22, 2004, the City Treasurer issued a Notice of Assessment 7 to AEC for payment of
business tax, license fee and other charges for the period 1993 to 2004 in the total amount of
₱94,861,194.10. Within the period prescribed by law, AEC protested the assessment claiming
that:
(a) pursuant to RA 4079, it is exempt from paying local business tax;
(b) since it is already paying franchise tax on business, the payment of business tax would result
in double taxation;
(c) the period to assess had prescribed because under the LGC, taxes and fees can only be
assessed and collected within five (5) years from the date they become due; and
(d) the assessment and collection of taxes under the RRCAC cannot be made retroactive to 1993
or prior to its effectivity.8
On February 17, 2004, the City Treasurer denied the protest for lack of merit and requested AEC
to settle its tax liabilities.9
Proceedings before the RTC
Aggrieved, AEC appealed the denial of its protest to the RTC of Angeles City via a Petition for
Declaratory Relief,10 docketed as Civil Case No. 11401.
On April 5, 2004, the City Treasurer levied on the real properties of AEC.11 A Notice of Auction
Sale12 was published and posted announcing that a public auction of the levied properties of AEC
would be held on May 7, 2004.
This prompted AEC to file with the RTC, where the petition for declaratory relief was pending, an
Urgent Motion for Issuance of Temporary Restraining Order and/or Writ of Preliminary
Injunction13 to enjoin Angeles City and its City Treasurer from levying, annotating the levy,
seizing, confiscating, garnishing, selling and disposing at public auction the properties of AEC.
Meanwhile, in response to the petition for declaratory relief filed by AEC, Angeles City and its
City Treasurer filed an Answer with Counterclaim14 to which AEC filed a Reply.15
After due notice and hearing, the RTC issued a Temporary Restraining Order (TRO) 16 on May 4,
2004, followed by an Order17 dated May 24, 2004 granting the issuance of a Writ of Preliminary
Injunction, conditioned upon the filing of a bond in the amount of ₱10,000,000.00. Upon AEC’s
posting of the required bond, the RTC issued a Writ of Preliminary Injunction on May 28,
2004,18 which was amended on May 31, 2004 due to some clerical errors.19
On August 5, 2004, Angeles City and its City Treasurer filed a "Motion for Dissolution of
Preliminary Injunction and Motion for Reconsideration of the Order dated May 24,
2004,"20 which was opposed by AEC.21
Finding no compelling reason to disturb and reconsider its previous findings, the RTC denied the
joint motion on October 14, 2004.22
Issue
Being a special civil action for certiorari, the issue in the instant case is limited to the
determination of whether the RTC gravely abused its discretion in issuing the writ of preliminary
injunction enjoining Angeles City and its City Treasurer from levying, selling, and disposing the
properties of AEC. All other matters pertaining to the validity of the tax assessment and AEC’s
tax exemption must therefore be left for the determination of the RTC where the main case is
pending decision.
Petitioner’s Arguments
Petitioner’s main argument is that the collection of taxes cannot be enjoined by the RTC,
citing Valley Trading Co., Inc. v. Court of First Instance of Isabela, Branch II, 23  wherein the lower
court’s denial of a motion for the issuance of a writ of preliminary injunction to enjoin the
collection of a local tax was upheld. Petitioner further reasons that since the levy and auction of
the properties of a delinquent taxpayer are proper and lawful acts specifically allowed by the
LGC, these cannot be the subject of an injunctive writ. Petitioner likewise insists that AEC must
first pay the tax before it can protest the assessment. Finally, petitioner contends that the tax
exemption claimed by AEC has no legal basis because RA 4079 has been expressly repealed by
the LGC.
Private respondent’s Arguments
Private respondent AEC on the other hand asserts that there was no grave abuse of discretion
on the part of the RTC in issuing the writ of preliminary injunction because it was issued after
due notice and hearing, and was necessary to prevent the petition from becoming moot. In
addition, AEC claims that the issuance of the writ of injunction was proper since the tax
assessment issued by the City Treasurer is not yet final, having been seasonably appealed
pursuant to Section 19524 of the LGC. AEC likewise points out that following the case of Pantoja
v. David,25 proceedings to invalidate a warrant of distraint and levy to restrain the collection of
taxes do not violate the prohibition against injunction to restrain the collection of taxes because
the proceedings are directed at the right of the City Treasurer to collect the tax by distraint or
levy. As to its tax liability, AEC maintains that it is exempt from paying local business tax. In any
case, AEC counters that the issue of whether it is liable to pay the assessed local business tax is a
factual issue that should be determined by the RTC and not by the Supreme Court via a petition
for certiorari under Rule 65 of the Rules of Court.
Our Ruling
We find the petition bereft of merit.
The LGC does not specifically prohibit an injunction enjoining the collection of taxes
A principle deeply embedded in our jurisprudence is that taxes being the lifeblood of the
government should be collected promptly,26 without unnecessary hindrance27 or delay.28 In line
with this principle, the National Internal Revenue Code of 1997 (NIRC) expressly provides that
no court shall have the authority to grant an injunction to restrain the collection of any national
internal revenue tax, fee or charge imposed by the code.29 An exception to this rule obtains only
when in the opinion of the Court of Tax Appeals (CTA) the collection thereof may jeopardize the
interest of the government and/or the taxpayer.30
The situation, however, is different in the case of the collection of local taxes as there is no
express provision in the LGC prohibiting courts from issuing an injunction to restrain local
governments from collecting taxes. Thus, in the case of Valley Trading Co., Inc. v. Court of First
Instance of Isabela, Branch II,  cited by the petitioner, we ruled that:
Unlike the National Internal Revenue Code, the Local Tax Code31 does not contain any specific
provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or
intent, however it may be viewed, may have allowed preliminary injunction where local taxes
are involved but cannot negate the procedural rules and requirements under Rule 58.32
In light of the foregoing, petitioner’s reliance on the above-cited case to support its view that
the collection of taxes cannot be enjoined is misplaced. The lower court’s denial of the motion
for the issuance of a writ of preliminary injunction to enjoin the collection of the local tax was
upheld in that case, not because courts are prohibited from granting such injunction, but
because the circumstances required for the issuance of writ of injunction were not present.
Nevertheless, it must be emphasized that although there is no express prohibition in the LGC,
injunctions enjoining the collection of local taxes are frowned upon. Courts therefore should
exercise extreme caution in issuing such injunctions.
No grave abuse of discretion was committed by the RTC
Section 3, Rule 58, of the Rules of Court lays down the requirements for the issuance of a writ of
preliminary injunction, viz:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the acts complained of, or in the
performance of an act or acts, either for a limited period or perpetually;
(b) That the commission, continuance or non-performance of the act or acts complained of
during the litigation would probably work injustice to the applicant; or
(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and tending to render the
judgment ineffectual.
Two requisites must exist to warrant the issuance of a writ of preliminary injunction, namely: (1)
the existence of a clear and unmistakable right that must be protected; and (2) an urgent and
paramount necessity for the writ to prevent serious damage.33
In issuing the injunction, the RTC ratiocinated that:
It is very evident on record that petitioner34 resorted and filed an urgent motion for issuance of a
temporary restraining order and preliminary injunction to stop the scheduled auction sale only
when a warrant of levy was issued and published in the newspaper setting the auction sale of
petitioner’s property by the City Treasurer, merely few weeks after the petition for declaratory
relief has been filed, because if the respondent will not be restrained, it will render this petition
moot and academic. To the mind of the Court, since there is no other plain, speedy and
adequate remedy available to the petitioner in the ordinary course of law except this application
for a temporary restraining order and/or writ of preliminary injunction to stop the auction sale
and/or to enjoin and/or restrain respondents from levying, annotating the levy, seizing,
confiscating, garnishing, selling and disposing at public auction the properties of petitioner, or
otherwise exercising other administrative remedies against the petitioner and its properties, this
alone justifies the move of the petitioner in seeking the injunctive reliefs sought for.
Petitioner in its petition is questioning the assessment or the ruling of the City Treasurer on the
business tax and fees, and not the local ordinance concerned. This being the case, the Court
opines that notice is not required to the Solicitor General since what is involved is just a
violation of a private right involving the right of ownership and possession of petitioner’s
properties. Petitioner, therefore, need not comply with Section 4, Rule 63 requiring such notice
to the Office of the Solicitor General.
The Court is fully aware of the Supreme Court pronouncement that injunction is not proper to
restrain the collection of taxes. The issue here as of the moment is the restraining of the
respondent from pursuing its auction sale of the petitioner’s properties. The right of ownership
and possession of the petitioner over the properties subject of the auction sale is at stake.
Respondents assert that not one of the witnesses presented by the petitioner have proven what
kind of right has been violated by the respondent, but merely mentioned of an injury which is
only a scenario based on speculation because of petitioner’s claim that electric power may be
disrupted.
Engr. Abordo’s testimony reveals and even his Affidavit Exhibit "S" showed that if the auction
sale will push thru, petitioner will not only lose control and operation of its facility, but its
employees will also be denied access to equipments vital to petitioner’s operations, and since
only the petitioner has the capability to operate Petersville sub station, there will be a massive
power failure or blackout which will adversely affect business and economy, if not lives and
properties in Angeles City and surrounding communities.
Petitioner, thru its witnesses, in the hearing of the temporary restraining order, presented
sufficient and convincing evidence proving irreparable damages and injury which were already
elaborated in the temporary restraining order although the same may be realized only if the
auction sale will proceed. And unless prevented, restrained, and enjoined, grave and irreparable
damage will be suffered not only by the petitioner but all its electric consumers in Angeles,
Clark, Dau and Bacolor, Pampanga.
The purpose of injunction is to prevent injury and damage from being incurred, otherwise, it will
render any judgment in this case ineffectual.
"As an extraordinary remedy, injunction is calculated to preserve or maintain the status quo of
things and is generally availed of to prevent actual or threatened acts, until the merits of the
case can be heard" (Cagayan de Oro City Landless Res. Assn. Inc. vs. CA, 254 SCRA 220)
It appearing that the two essential requisites of an injunction have been satisfied, as there exists
a right on the part of the petitioner to be protected, its right[s] of ownership and possession of
the properties subject of the auction sale, and that the acts (conducting an auction sale) against
which the injunction is to be directed, are violative of the said rights of the petitioner, the Court
has no other recourse but to grant the prayer for the issuance of a writ of preliminary injunction
considering that if the respondent will not be restrained from doing the acts complained of, it
will preempt the Court from properly adjudicating on the merits the various issues between the
parties, and will render moot and academic the proceedings before this court.35
As a rule, the issuance of a preliminary injunction rests entirely within the discretion of the court
taking cognizance of the case and will not be interfered with, except where there is grave abuse
of discretion committed by the court.36 For grave abuse of discretion to prosper as a ground
for certiorari, it must be demonstrated that the lower court or tribunal has exercised its power
in an arbitrary and despotic manner, by reason of passion or personal hostility, and it must be
patent and gross as would amount to an evasion or to a unilateral refusal to perform the duty
enjoined or to act in contemplation of law.37 In other words, mere abuse of discretion is not
enough.381avvph!1
Guided by the foregoing, we find no grave abuse of discretion on the part of the RTC in issuing
the writ of injunction. Petitioner, who has the burden to prove grave abuse of discretion,39 failed
to show that the RTC acted arbitrarily and capriciously in granting the injunction. Neither was
petitioner able to prove that the injunction was issued without any factual or legal justification.
In assailing the injunction, petitioner primarily relied on the prohibition on the issuance of a writ
of injunction to restrain the collection of taxes. But as we have already said, there is no such
prohibition in the case of local taxes. Records also show that before issuing the injunction, the
RTC conducted a hearing where both parties were given the opportunity to present their
arguments. During the hearing, AEC was able to show that it had a clear and unmistakable legal
right over the properties to be levied and that it would sustain serious damage if these
properties, which are vital to its operations, would be sold at public auction. As we see it then,
the writ of injunction was properly issued.
A final note. While we are mindful that the damage to a taxpayer’s property rights generally
takes a back seat to the paramount need of the State for funds to sustain governmental
functions,40 this rule finds no application in the instant case where the disputed tax assessment
is not yet due and demandable. Considering that AEC was able to appeal the denial of its protest
within the period prescribed under Section 195 of the LGC, the collection of business
taxes41 through levy at this time is, to our mind, hasty, if not premature. 42 The issues of tax
exemption, double taxation, prescription and the alleged retroactive application of the RRCAC,
raised in the protest of AEC now pending with the RTC, must first be resolved before the
properties of AEC can be levied. In the meantime, AEC’s rights of ownership and possession
must be respected.
WHEREFORE, the petition is hereby DISMISSED.

G.R. No. 173854               March 15, 2010

COMMISSIONER OF INTERNAL REVENUE,
vs.
FAR EAST BANK & TRUST COMPANY (NOW BANK OF THE PHILIPPINE ISLANDS), Respondent.
DECISION
DEL CASTILLO, J.:
Entitlement to a tax refund is for the taxpayer to prove and not for the government to disprove.
This Petition for Review on Certiorari assails the January 31, 2006 Decision 1 of the Court of
Appeals (CA) in CA-G.R. SP No. 56773 which reversed and set aside the October 4, 1999
Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5487. Also assailed is the July 19,
2006 Resolution3 of the CA denying the motion for reconsideration.
The CTA found that respondent Far East Bank & Trust Company failed to prove that the income
derived from rentals and sale of real property from which the taxes were withheld were
reflected in its 1994 Annual Income Tax Return. The CA found otherwise.
Factual Antecedents
On April 10, 1995, respondent filed with the Bureau of Internal Revenue (BIR) two Corporate
Annual Income Tax Returns, one for its Corporate Banking Unit (CBU) 4 and another for its
Foreign Currency Deposit Unit (FCDU),5 for the taxable year ending December 31, 1994. The
return for the CBU consolidated the respondent’s overall income tax liability for 1994, which
reflected a refundable income tax of ₱12,682,864.00, computed as follows:
  FCDU CBU
Gross Income ₱13,319,068 5,348,080,630
Less: Deductions 1,397,157 5,432,828,719
     
Net Income 11,921,911 [84,748,089]
Tax Rate 35% 35%
     
Income Tax Due Thereon 4,172,669 NIL
     
Consolidated Tax Due for
Both CBU and FCDU Operations ₱ 4,172,669  

     
Less:    
     
Quarterly Income Tax Payments    
CBU -1st Quarter 633,085  
-2nd Quarter 11,844,333  
FCDU -1st Quarter 955, 280  
-2nd Quarter 1,104,942  
     
Less:    
Creditable Taxes 2,317,893  
Withheld at Source    
Refundable Income Tax [₱12,682,864]6  

Pursuant to Section 697 of the old National Internal Revenue Code (NIRC),
the amount of ₱12,682,864.00 was carried over and applied against respondent’s income tax
liability for the taxable year ending December 31, 1995. On April 15, 1996, respondent filed its
1995 Annual Income Tax Return, which showed a total overpaid income tax in the amount of
₱17,443,133.00, detailed as follows:
  FCDU CBU
Gross Income ₱16,531,038 7,076,497,628
Less: Deductions 1,327,549 7,086,821,354
     
Net Income 15,203,539 [10,423,728]
Tax Rate 35% 35%
Income Tax Due Thereon 5,321,239 NIL
     
Consolidated Tax Due for
Both CBU and FCDU Operations ₱ 5,321,239  

     
Less:    
Prior year’s (1994) excess 12,682,864  
income tax credit
Additional prior year’s excess 6,283,484  
income tax credit
Creditable Taxes    
Withheld at Source 3,798,024  
Refundable Income Tax [₱17,443,133]8  

Out of the ₱17,433,133.00 refundable income tax, only ₱13,645,109.00 was sought to be
refunded by respondent. As to the remaining ₱3,798,024.00, respondent opted to carry it over
to the next taxable year.
On May 17, 1996, respondent filed a claim for refund of the amount of ₱13,645,109.00 with the
BIR. Due to the failure of petitioner Commissioner of Internal Revenue (CIR) to act on the claim
for refund, respondent was compelled to bring the matter to the CTA on April 8, 1997 via  a
Petition for Review docketed as CTA Case No. 5487.
After the filing of petitioner’s Answer, trial ensued.
To prove its entitlement to a refund, respondent presented the following documents:
Exhibits Nature and Description
A Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended
December 31, 1994 together with attachments
B Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year
ended December 31, 1994 together with attachments
C Corporate Annual Income Tax Return covering income of respondent’s CBU for the year ended
December 31, 1995 together with attachments
D Corporate Annual Income Tax Return covering income of respondent’s FCDU for the year
ended December 31, 1995 together with attachments
N to Z; Certificates of Creditable
AA to UU Withholding Tax and Monthly Remittance Returns of Income Taxes Withheld issued by
various withholding agents for the year ended December 31, 1994
VV Letter claim for refund dated May 8, 1996 filed with the Revenue District Office No. 33 on
May 17, 19969
Petitioner, on the other hand, did not present any evidence.
Ruling of the Court of Tax Appeals
On October 4, 1999, the CTA rendered a Decision denying respondent’s claim for refund on the
ground that respondent failed to show that the income derived from rentals and sale of real
property from which the taxes were withheld were reflected in its 1994 Annual Income Tax
Return.
On October 20, 1999, respondent filed a Motion for New Trial based on excusable negligence. It
prayed that it be allowed to present additional evidence to support its claim for refund.
However, the motion was denied on December 16, 1999 by the CTA. It reasoned, thus:
[Respondent] is reminded that this case was originally submitted for decision as early as
September 22, 1998 (p. 497, CTA Records). In view, however, of the Urgent Motion to Admit
Memorandum filed on April 27, 1999 by Atty. Louella Martinez, who entered her appearance as
collaborating counsel of Atty. Manuel Salvador allegedly due to the latter counsel’s absences,
this Court set aside its resolution of September 22, 1998 and considered this case submitted for
decision as of May 7, 1999. Nonetheless, it took [respondent] another five months after it was
represented by a new counsel and after a decision unfavorable to it was rendered before
[respondent] realized that an additional material documentary evidence has to be presented by
way of a new trial, this time initiated by a third counsel coming from the same law firm. x x x
Furthermore, in ascertaining whether or not the income upon which the taxes were withheld
were included in the returns of the [respondent], this Court based its findings on the income tax
returns and their supporting schedules prepared and reviewed by the [respondent] itself and
which, to Us, are enough to support the conclusion reached.1avvphi1
WHEREFORE, in view of the foregoing, [respondent’s] Motion for New Trial is hereby DENIED for
lack of merit.
SO ORDERED.10
Ruling of the Court of Appeals
On appeal, the CA reversed the Decision of the CTA. The CA found that respondent has duly
proven that the income derived from rentals and sale of real property upon which the taxes
were withheld were included in the return as part of the gross income.
Hence, this present recourse.
Issue
The lone issue presented in this petition is whether respondent has proven its entitlement to
the refund.11
Our Ruling
We find that the respondent miserably failed to prove its entitlement to the refund. Therefore,
we grant the petition filed by the petitioner CIR for being meritorious.
A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with the
following requisites:
1) The claim must be filed with the CIR within the two-year period from the date of payment of
the tax;
2) It must be shown on the return that the income received was declared as part of the gross
income; and
3) The fact of withholding must be established by a copy of a statement duly issued by the payor
to the payee showing the amount paid and the amount of the tax withheld.12
The two-year period requirement is based on Section 229 of the NIRC of 1997 which provides
that:
SECTION 229. Recovery of Tax Erroneously or Illegally Collected. — No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to
have been collected without authority, or of any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid. (Formerly Section 230 of
the old NIRC)
While the second and third requirements are found under Section 10 of Revenue Regulation No.
6-85, as amended, which reads:
Section 10. Claims for tax credit or refund. — Claims for tax credit or refund of income tax
deducted and withheld on income payments shall be given due course only when it is shown on
the return that the income payment received was declared as part of the gross income and the
fact of withholding is established by a copy of the statement duly issued by the payer to the
payee (BIR Form No. 1743.1) showing the amount paid and the amount of tax withheld
therefrom.
Respondent timely filed its claim for refund.
There is no dispute that respondent complied with the first requirement. The filing of
respondent’s administrative claim for refund on May 17, 1996 and judicial claim for refund on
April 8, 1997 were well within the two-year period from the date of the filing of the return on
April 10, 1995.13
Respondent failed to prove that the income derived from rentals and sale of real property were
included in the gross income as reflected in its return.
However, as to the second and third requirements, the tax court and the appellate court arrived
at different factual findings.
The CTA ruled that the income derived from rentals and sales of real property were not included
in respondent’s gross income. It noted that in respondent’s 1994 Annual Income Tax Return, the
phrase "NOT APPLICABLE" was printed on the space provided for rent, sale of real property and
trust income. The CTA also declared that the certifications issued by respondent cannot be
considered in the absence of the Certificates of Creditable Tax Withheld at Source. The CTA
ruled that:
x x x the Certificates of Creditable Tax Withheld at Source submitted by [respondent] pertain to
rentals of real property while the Monthly Remittance Returns of Income Taxes Withheld refer
to sales of real property. But, if we are to look at Schedules 3, 4, and 5 of the Annual Income Tax
Return of [respondent] for 1994 (Exhibit "A"), there was no showing that the Rental Income and
Income from Sale of Real Property were included as part of the gross income appearing in
Section A of the said return. In fact, under the said schedules, the phrase "NOT APPLICABLE" was
printed by [respondent]. Verily, the income of [respondent] coming from rent and sale of real
property upon which the creditable taxes withheld were based were not duly reflected. As to
the certifications issued by the [respondent] (Exh. UU), the same cannot be considered in the
absence of the requisite Certificates of Creditable Tax Withheld at Source.
Based on the foregoing, [respondent] has failed to comply with two essential requirements for a
valid claim for refund. Consequently, the same cannot be given due course. 14 (Emphasis
supplied)
On the other hand, the CA found thus:
We disagree with x x x CTA’s findings. In the case of Citibank, N.A. vs. Court of Appeals (280
SCRA 459), the Supreme Court held that:
"a refund claimant is required to prove the inclusion of the income payments which were the
basis of the withholding taxes and the fact of withholding. However, a detailed proof of the
truthfulness of each and every item in the income tax return is not required. x x x
x x x The grant of a refund is founded on the assumption that the tax return is valid; that is, the
facts stated therein are true and correct. x x x"
In the case at bench, the BIR examined [respondent] Bank’s Corporate Annual Income Tax
Returns for the years 1994 and 1995 when they were filed on April 10, 1995 and April 15, 1996,
respectively. Presumably, the BIR found no false declaration in them because it did not allege
any false declaration thereof in its Answer (to the petition for review) filed before x x x CTA.
Nowhere in the Answer, did the BIR dispute the amount of tax refund being claimed by
[respondent] Bank as inaccurate or erroneous. In fact, the reason given by the BIR (in its Answer
to the petition for review) why the claimed tax refund should be denied was that "x x x the
amount of ₱13,645,109.00 was not illegally or erroneously collected, hence, the petition for
review has no basis" [see Record, p. 32]. The amount of ₱17,433,133.00 reflected as refundable
income tax in [respondent] Bank’s Corporate Annual Income Tax Return for the year 1995 was
not disputed by the BIR to be inaccurate because there were certain income not included in the
return of the [respondent]. Verily, this leads Us to a conclusion that [respondent] Bank’s
Corporate Annual Income Tax Returns submitted were accepted as regular and even accurate by
the BIR.
Incidentally, under Sec. 16 of the NIRC, the Commissioner of the BIR is tasked to make an
examination of returns and assess the correct amount of tax, to wit:
"Sec. 16. Power of the Commissioner to make assessment and prescribe additional
requirements for tax administration and enforcement.
(a) After a return is filed as required under the provision of this Code, the Commissioner shall
examine it and assess the correct amount of tax. x x x"
which the [petitioner] Commissioner undeniably failed to do. Moreover, noteworthy is the fact
that during the hearing of the petition for review before the CTA, [petitioner] Commissioner of
the BIR submitted the case for decision "in view of the fact that he has no evidence to present
nor records to submit relative to the case" x x x
Thus, although it is a fact that [respondent] failed to indicate said income payments under the
appropriate Schedules 3, 4, and 5 of Section C of its 1994 Annual Income Tax Return (Exhibit
"A"), however, We give credence to [respondent] Bank’s assertion that it reported the said
income payments as part of its gross income when it included the same as part of the "Other
Income," "Trust Income," and "Interest Income" stated in the Schedule of Income (referred to as
an attachment in Section C of Exhibit "A", x x x and in the 1994 audited Financial Statements (FS)
supporting [respondent’s] 1994 Annual Corporate Income Tax Return. The reason why the
phrase "NOT APPLICABLE" was indicated in schedules 3, 4, and 5 of Section C of [respondent’s]
1994 Annual Income Tax Return is due to the fact that [respondent] Bank already reported the
subject rental income and income from sale of real property in the Schedule of Income under
the headings "Other Income/Earnings," "Trust Income" and "Interest Income." Therefore,
[respondent] Bank still complied with the second requirement that the income upon which the
taxes were withheld are included in the return as part of the gross income.
xxxx
[Respondent] Bank’s various documentary evidence showing that it had satisfied all
requirements under the Tax Code vis-à-vis the Bureau of Internal Revenue’s failure to adduce
any evidence in support of their denial of the claim, [respondent] Bank should, therefore, be
granted the present claim for refund.15 (Emphasis supplied)
Between the decision of the CTA and the CA, it is the former’s that is based on the evidence and
in accordance with the applicable law and jurisprudence.
To establish the fact of withholding, respondent submitted Certificates of Creditable Tax
Withheld at Source and Monthly Remittance Returns of Income Taxes Withheld, which pertain
to rentals and sales of real property, respectively. However, a perusal of respondent’s 1994
Annual Income Tax Return shows that the gross income was derived solely from sales of
services. In fact, the phrase "NOT APPLICABLE" was printed on the schedules pertaining to rent,
sale of real property, and trust income.16 Thus, based on the entries in the return, the income
derived from rentals and sales of real property upon which the creditable taxes were withheld
were not included in respondent’s gross income as reflected in its return. Since no income was
reported, it follows that no tax was withheld. To reiterate, it is incumbent upon the taxpayer to
reflect in his return the income upon which any creditable tax is required to be withheld at the
source.17
Respondent’s explanation that its income derived from rentals and sales of real properties were
included in the gross income but were classified as "Other Earnings" in its Schedule of
Income18 attached to the return is not supported by the evidence. There is nothing in the
Schedule of Income to show that the income under the heading "Other Earnings" includes
income from rentals and sales of real property. No documentary or testimonial evidence was
presented by respondent to prove this. In fact, respondent, upon realizing its omission, filed a
motion for new trial on the ground of excusable negligence with the CTA. Respondent knew that
it had to present additional evidence showing the breakdown of the "Other Earnings" reported
in its Schedule of Income attached to the return to prove that the income from rentals and sales
of real property were actually included under the heading "Other Earnings." 19 Unfortunately, the
CTA was not convinced that there was excusable negligence to justify the granting of a new trial.
Accordingly, the CA erred in ruling that respondent complied with the second requirement.
Respondent failed to present all the Certificates of Creditable Tax Withheld at Source.
The CA likewise failed to consider in its Decision the absence of several Certificates of Creditable
Tax Withheld at Source. It immediately granted the refund without first verifying whether the
fact of withholding was established by the Certificates of Creditable Tax Withheld at Source as
required under Section 10 of Revenue Regulation No. 6-85. As correctly pointed out by the CTA,
the certifications (Exhibit UU)  issued by respondent cannot be considered in the absence of the
required Certificates of Creditable Tax Withheld at Source.
The burden is on the taxpayer to prove its entitlement to the refund.
Moreover, the fact that the petitioner failed to present any evidence or to
refute the evidence presented by respondent does not ipso facto entitle the respondent to a tax
refund. It is not the duty of the government to disprove a taxpayer’s claim for refund. Rather,
the burden of establishing the factual basis of a claim for a refund rests on the taxpayer.20
And while the petitioner has the power to make an examination of the returns and to assess the
correct amount of tax, his failure to exercise such powers does not create a presumption in
favor of the correctness of the returns. The taxpayer must still present substantial evidence to
prove his claim for refund. As we have said, there is no automatic grant of a tax refund.21
Hence, for failing to prove its entitlement to a tax refund, respondent’s claim must be denied.
Since tax refunds partake of the nature of tax exemptions, which are construed strictissimi
juris against the taxpayer, evidence in support of a claim must likewise be strictissimi  scrutinized
and duly proven.22
WHEREFORE, the petition is GRANTED. The assailed January 31, 2006 Decision of the Court of
Appeals in CA-G.R. SP No. 56773 and its July 19, 2006 Resolution are REVERSED and SET ASIDE.
The October 4, 1999 Decision of the Court of Tax Appeals denying respondent’s claim for tax
refund for failure to prove that the income derived from rentals and sale of real property from
which the taxes were withheld were reflected in its 1994 Annual Income Tax Return, is
REINSTATED and AFFIRMED.

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 under declaration 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.

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. (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.

G.R. No. 185371               December 8, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
METRO STAR SUPERAMA, INC., Respondent.
DECISION
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner
Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16,
2008 Decision1 of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its
November 18, 2008 Resolution2 denying petitioner’s motion for reconsideration.
The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in
CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed
respondent Metro Star Superama, Inc. (Metro Star) of deficiency value-added tax and
withholding tax for the taxable year 1999.
Based on a Joint Stipulation of Facts and Issues3 of the parties, the CTA Second Division
summarized the factual and procedural antecedents of the case, the pertinent portions of which
read:
Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the
Republic of the Philippines, x x x.
On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter
of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioner’s books
of accounts and other accounting records for income tax and other internal revenue taxes for
the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional
Director Leonardo Sacamos.
For petitioner’s failure to comply with several requests for the presentation of records and
Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September
26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed
with the investigation based on the best evidence obtainable preparatory to the issuance of
assessment notice.
On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a Preliminary
15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post
audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from petitioner in the amount of ₱ 292,874.16.
On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from
Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety
Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (₱292,874.16.) for
deficiency value-added and withholding taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX

Gross Sales ₱1,697,718.90

Output Tax ₱ 154,338.08
Less: Input Tax _____________
VAT Payable ₱ 154,338.08
Add: 25% Surcharge ₱ 38,584.54
20% Interest 79,746.49
Compromise Penalty
Late Payment ₱16,000.00
Failure to File VAT returns 2,400.00 18,400.00 136,731.01
TOTAL ₱ 291,069.09
WITHHOLDING TAX
Compensation 2,772.91
 Expanded 110,103.92
Total Tax Due ₱ 112,876.83
Less: Tax Withheld 111,848.27
Deficiency Withholding Tax ₱ 1,028.56
Add: 20% Interest p.a. 576.51
Compromise Penalty 200.00
TOTAL ₱ 1,805.07
*Expanded Withholding Tax ₱1,949,334.25 x 5% 97,466.71
Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00
Rental Expense 41,272.73 x 1% 412.73
Security Service 156,142.01 x 1% 1,561.42
Service Contractor ₱ 110,103.92
Total
SUMMARIES OF DEFICIENCIES
VALUE ADDED TAX ₱ 291,069.09
WITHHOLDING TAX 1,805.07
TOTAL ₱ 292,874.16
Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated
May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to
settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise
respondent BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy
and Garnishment to enforce collection.
On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of
Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency
value-added tax and withholding tax payment in the amount of ₱292,874.16.
On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for
Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99.
On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue
Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying petitioner’s
Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18,
2005.
x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not
accorded due process, Metro Star filed a petition for review4 with the CTA. The parties then
stipulated on the following issues to be decided by the tax court:
1. Whether the respondent complied with the due process requirement as provided under the
National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance
of a deficiency tax assessment;
1.1 Whether petitioner is liable for the respective amounts of ₱291,069.09 and ₱1,805.07 as
deficiency VAT and withholding tax for the year 1999;
1.2. Whether the assessment has become final and executory and demandable for failure of
petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002,
pursuant to Section 228 of the National Internal Revenue Code;
2. Whether the deficiency assessments issued by the respondent are void for failure to state the
law and/or facts upon which they are based.
2.2 Whether petitioner was informed of the law and facts on which the assessment is made in
compliance with Section 228 of the National Internal Revenue Code;
3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on
sales of services under Section 108(A) of the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section
6(b) of the National Internal Revenue Code.
The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007,
rendered a decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the
assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and respondent is
ORDERED TO DESIST from collecting the subject taxes against petitioner.
The CTA-Second Division opined that "[w]hile there [is] a disputable presumption that a mailed
letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the
receipt of mail shifts the burden upon the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee."5 It also found that there was no clear
showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant
of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.6
The CIR sought reconsideration7 of the decision of the CTA-Second Division, but the motion was
denied in the latter’s July 24, 2007 Resolution.8
Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc, but the petition was
dismissed after a determination that no new matters were raised. The CTA-En Banc disposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for
lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA
Second Division in CTA Case No. 7169 entitled, "Metro Star Superama, Inc., petitioner vs.
Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto.
SO ORDERED.
The motion for reconsideration10 filed by the CIR was likewise denied by the CTA-En Banc in its
November 18, 2008 Resolution.11
The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due
process was served nonetheless because the latter received the Final Assessment Notice (FAN),
comes now before this Court with the sole issue of whether or not Metro Star was denied due
process.
The general rule is that the Court will not lightly set aside the conclusions reached by the CTA
which, by the very nature of its functions, has accordingly developed an exclusive expertise on
the resolution unless there has been an abuse or improvident exercise of authority.12 In
Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal
Revenue,13 the Court wrote:
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  [G.R. No. 122605, 30 April 2001,
357 SCRA 441, 445-446], 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. 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.
On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is
instructive, viz:
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 vs.
Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs.
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 vs.
Sunlife Assurance of Canada, 41 Phil 269)."
x x x. 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. vs. 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 vs. CIR, 13 SCRA 104, January 30, 1965).
x x x.
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. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence
to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply
presented the registry receipt or the certification from the postmaster that it mailed the PAN,
but failed. Neither did it offer any explanation on why it failed to comply with the requirement
of service of the PAN. It merely accepted the letter of Metro Star’s chairman dated April 29,
2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he
was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some
matters with the hope of lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice requirements
prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue
Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the
requirements of due process satisfied if only the FAN stating the computation of tax liabilities
and a demand to pay within the prescribed period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax Code which
reads:
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 exciseable articles has not been paid; or
(e) When the 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 taxpayers 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 one hundred eighty (180)-day period; otherwise, the decision shall become
final, executory and demandable. (Emphasis supplied).
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the
facts and the law upon which the assessment is made. 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.14
This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:
SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. —
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records
shall, among others, state in his report whether or not the taxpayer agrees with his findings that
the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the
said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the
Revenue District Office or by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National
Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue
taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an
opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15)
days from date of receipt of the notice for informal conference, he shall be considered in
default, in which case, the Revenue District Officer or the Chief of the Special Investigation
Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the
case may be, shall endorse the case with the least possible delay to the Assessment Division of
the Revenue Regional Office or to the Commissioner or his duly authorized representative, as
the case may be, for appropriate review and issuance of a deficiency tax assessment, if
warranted.
3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment
Division or by the Commissioner or his duly authorized representative, as the case may be, it is
determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or
taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary
Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is based (see
illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from
date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of
demand and assessment notice shall be caused to be issued by the said Office, calling for
payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.
3.1.3 Exceptions to Prior Notice of the Assessment. — The notice for informal conference and
the preliminary assessment notice shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax
liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in the computation
of the tax appearing on the face of the tax return filed by the taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or
(iii) 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
(iv) When the excise tax due on excisable articles has not been paid; or
(v) 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.
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 (see illustration in
ANNEX B hereof).
The same shall be sent to the taxpayer only by registered mail or by personal delivery.
If sent by personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the
following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of
the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d)
date of receipt thereof.
x x x.
From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him
of the assessment made is but part of the "due process requirement in the issuance of a
deficiency tax assessment," the absence of which renders nugatory any assessment made by the
tax authorities. The use of the word "shall" in subsection 3.1.2 describes the mandatory nature
of the service of a PAN. The persuasiveness of the right to due process reaches both substantial
and procedural rights and the failure of the CIR to strictly comply with the requirements laid
down by law and its own rules is a denial of Metro Star’s right to due process.15 Thus, for its
failure to send the PAN stating the facts and the law on which the assessment was made as
required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito 16 cited by the CIR in support of its argument that only the non-
service of the FAN is fatal to the validity of an assessment, cannot apply to this case because the
issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought to
interpret Section 229 of the old tax law. RA No. 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.17 The regulation then, on the other hand, simply provided that a notice be sent to the
respondent in the form prescribed, and that no consequence would ensue for failure to comply
with that form.1avvphi1
The Court need not belabor to discuss the matter of Metro Star’s failure to file its protest, for it
is well-settled that a void assessment bears no fruit.18
It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of
property without due process of law.19 In balancing the scales between the power of the State
to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the
constitutional rights of a citizen to due process of law and the equal protection of the laws on
the other, the scales must tilt in favor of the individual, for a citizen’s right is amply protected by
the Bill of Rights under the Constitution. Thus, while "taxes are the lifeblood of the
government," the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner
of Internal Revenue v. Algue, Inc.,20 it was said –
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.
x x x           x x x          x x x
It is said that taxes are what we pay for civilized society. Without taxes, the government would
be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one’s hard-earned income to taxing authorities, every
person who is able to must contribute his share in the running of the government. The
government for its part is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a requirement in
all democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to
his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if
the taxpayer can demonstrate x x x that the law has not been observed.21 (Emphasis supplied).
WHEREFORE, the petition is DENIED.

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 Decision 5 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 letter 12 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) 9282 15 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 Decision 17 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 11 21 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 Decision 23 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:
I
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.

G. R. No. 157064 August 7, 2006

BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.) Petitioner,
vs.
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:
I
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.
V
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 vs.
Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs.
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 vs.
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. vs. 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 vs. CIR, 13 SCRA 104, January 30, 1965).
xxxx
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. vs. 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. vs. 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.

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 Decision 1 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.
x x x           x x x          x x x
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.
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 Appeals 4 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
I
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.

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 Decision 1 of the Court of Tax Appeals En Banc
(CTA EB) dated March 11, 2010 and it,s Resolution 2 dated July 28, 2010 in C.T.A. EB Nos. 460 and
462 (C.T.A. Case No. 6697) affirming the May 27, 2008 Decision 3 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 Internal Revenue is a public officer authorized under the National
Internal Revenue Code (NIRC) to examine any taxpayer including inter alia, the power to issue
tax assessment, evaluate, and decide upon protests relative thereto.
On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income tax returns,
respectively. Petitioner filed its 1997, 1998, and 1999 Annual Information Return of Income Tax
Withheld on Compensation, Expanded and Final Withholding Taxes on February 17, 1998,
February 1, 1999, and February 4, 2000, in that order.
On November 13, 2000, respondent issued a duly signed Letter of Authority (LOA) No. 1998
00023803; covering the examination of 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 or levy or by a proceeding
in court within the period agreed upon in writing before the expiration of the five (5)-year
period. The period so agreed upon may be extended by subsequent written agreements made
before the expiration of the period previously agreed upon.
(e) Provided, however, That nothing in the immediately preceding Section and paragraph (a)
hereof shall be construed to authorize the examination and investigation or inquiry into any tax
return filed in accordance with the provisions 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 of income for six consecutive years eloquently demonstrate the
falsity or fraudulence of the income tax returns with an intent to evade the payment of tax."
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 in
excess 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 is explained in the case of
Commissioner of Internal Revenue v. Reyes:19
A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the cardinal
principle in administrative investigations: that taxpayers should be able to present their case
and adduce supporting evidence. In the instant case, respondent has not been informed of the
basis of the estate tax liability. Without complying with the unequivocal mandate of first
informing the taxpayer of the 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

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 229 13 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.

G.R. No. 178697               November 17, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
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 Banc1 (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). 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 ₱1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the amount of ₱1,269, 593.90.3
THE FACTS:
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:
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 P 3,157,314.41    
Compromise   25,000.00   3,182,314.41
Deficiency VAT Due     P 11,141,014.41
         
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)        
(Assessment No. ST-EWT-97-0125-2000)        
Basic Tax Due     P 1,416,976.90
 Add: Penalties        
Interest up to 3-31-2000 P 550,485.82    
Compromise   25,000.00   575,485.82
Deficiency EWT Due     P 1,992,462.72
         
DEFICIENCY OF VAT ON ROYALTY PAYMENTS        
(Assessment No. ST-LR1-97-0126-2000)        
Basic Tax Due     P  
Add: Penalties        
Surcharge P 359,177.80    
Interest up to 3-31-2000   87,580.34    
Compromise   16,000.00   462,758.14
Penalties Due     P 462,758.14
         
LATE REMITTANCE OF FINAL WITHHOLDING TAX        
(Assessment No. ST-LR2-97-0127-2000)        
Basic Tax Due     P  
Add: Penalties        
Surcharge P 1,729,690.71    
Interest up to 3-31-2000   508,783.07    
Compromise   50,000.00   2,288,473.78
Penalties Due     P 2,288,473.78
         
LATE REMITTANCE OF INCOME PAYMENTS        
(Assessment No. ST-LR3-97-0128-2000)        
Basic Tax Due     P  
Add: Penalties        
25 % Surcharge P 8,865.34    
Interest up to 3-31-2000   58.29    
Compromise   2,000.00   10,923.60
Penalties Due     P 10,923.60
         
       
GRAND TOTAL     P 15,895,632.655
         
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
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
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 ₱10,523,821.99 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:
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 ₱1,035,879.70 and the following penalties for late remittance of internal
revenue taxes in the sum of ₱1,269,593.90:
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
The CIR sought a reconsideration of the above decision and submitted the following grounds in
support thereof:
A. The Honorable Court committed reversible error in holding that petitioner is not liable for the
deficiency VAT in the amount of ₱11,141,014.41;
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
₱10,523,821.99 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
On April 28, 2005, the CTA-First Division denied the motion for
reconsideration.1avvphi1 Unfazed, the CIR filed a petition for review with the CTA-EB raising
identical issues:
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 ₱2,894,797.00 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 ₱10,523,821.99 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
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:
GROUNDS FOR THE ALLOWANCE OF THE PETITION
I
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:
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
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
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]
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:
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]
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
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 11019 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:
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
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:
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 Regulations No. 6-85 which provides:
(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%).25
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First
Division, held:
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
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 ₱10,523,821.99 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 328 of Revenue Regulations No. 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:
(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
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.