THIRD DIVISION 2006, July 25, 2006 and October 20, 2006, respectively, and its Fourth
Quarterly VAT Return on January 25, 2007.8
April 5, 2017
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the
Decision2 dated September 2, 2015 and Resolution3 dated January 29,
2016 of the Court of Tax Appeals (CTA) en bane in CTA EB No. 1224,
affirming with modification the Decision4 dated June 5, 2014 and the
Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the
CTA Third Division, ordering petitioner Medicard Philippines, Inc.
(MEDICARD), to pay respondent Commissioner of Internal Revenue
(CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25,
2007, until fully paid, pursuant to Section 249(c)6 of the National
Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides
prepaid health and medical insurance coverage to its clients.
Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and
curative medical services provided by duly licensed physicians,
specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned,
operated or accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns
through Electronic Filing and Payment System (EFPS) on April 20,
Upon finding some discrepancies between MEDICARD's Income Tax
Returns (ITR) and VAT Returns, the CIR informed MEDICARD and
issued a Letter Notice (LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued
recommending the issuance of a Formal Assessment Notice (FAN)
against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's
FAN dated December' 10, 2007 for alleged deficiency VAT for taxable
year 2006 in the total amount of Pl 96,614,476.69,10 inclusive of
penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is
its gross receipts without any deduction under Section 4.108.3(k) of
Revenue Regulation (RR) No. 16-2005. Citing Commissioner of
Internal Revenue v. Philippine Health Care Providers, Inc., 12 the CIR
argued that since MEDICARD. does not actually provide medical
and/or hospital services, but merely arranges for the same, its services
are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely
to arranging for the provision of medical and/or hospital services by
hospitals and/or clinics but include actual and direct rendition of
medical and laboratory services; in fact, its 2006 audited balance sheet
shows that it owns x-ray and laboratory facilities which it used in
providing medical and laboratory services to its members; (2) out of the
₱l .9 Billion membership fees, ₱319 Million was received from clients
that are registered with the Philippine Export Zone Authority (PEZA)
and/or Bureau of Investments; (3) the processing fees amounting to ₱l
1.5 Million should be excluded from gross receipts because P5.6
Million of which represent advances for professional fees due from
clients which were paid by MEDICARD while the remainder was
already previously subjected to VAT; (4) the professional fees in the
amount of Pl 1 Million should also be excluded because it represents
the amount of medical services actually and directly rendered by
MEDICARD and/or its subsidiary company; and (5) even assuming that
it is liable to pay for the VAT, the 12% VAT rate should not be applied
1
on the entire amount but only for the period when the 12% VAT rate
was already in effect, i.e., on February 1, 2006. It should not also be
held liable for surcharge and deficiency interest because it did not pass
on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice
authorizing Revenue Officer Romualdo Plocios to verify the supporting
documents of MEDICARD's Protest. MEDICARD also submitted
additional supporting documentary evidence in aid of its Protest thru a
letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on
Disputed Assessment dated May 15, 2009, denying MEDICARD's
protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in
toto assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It
is requested that you pay said deficiency taxes immediately. Should
payment be made later, adjustment has to be made to impose interest
until date of payment. This is olir final decision. If you disagree, you
may take an appeal to the [CTA] within the period provided by law,
otherwise, said assessment shall become final, executory and
demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review
before the CT A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with
modifications the CIR's deficiency VAT assessment covering taxable
year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment
issued by [CIR] against [MEDICARD] covering taxable year 2006 ·is
hereby AFFIRMED WITH MODIFICATIONS. Accordingly,
[MEDICARD] is ordered to pay [CIR] the amount of P223,l 73,208.35,
inclusive of the twenty-five percent (25%) surcharge imposed under
-Section 248(A)(3) of the NIRC of 1997, as amended, computed as
follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per
annum on the basis deficiency VAT of Pl 78,538,566.68
computed from January 25, 2007 until full payment thereof
pursuant to Section 249(B) of the NIRC of 1997, as amended;
and
b. Delinquency interest at the rate of twenty percent (20%) per
annum on the total amount of ₱223,173,208.35 representing
basic deficiency VAT of ₱l78,538,566.68 and· 25% surcharge
of ₱44,634,64 l .67 and on the 20% deficiency interest which
have accrued as afore-stated in (a), computed from June 19,
2009 until full payment thereof pursuant to Section 249(C) of
the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is
not limited to the issuance of Letter of Authority (LOA) alone as the CIR
is granted vast powers to perform examination and assessment
functions; (2) in lieu of an LOA, an LN was issued to MEDICARD
informing it· of the discrepancies between its ITRs and VAT Returns
and this procedure is authorized under Revenue Memorandum Order
(RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from
questioning the validity of the assessment on the ground of lack of LOA
since the assessment issued against MEDICARD contained the
requisite legal and factual bases that put MEDICARD on notice of the
deficiencies and it in fact availed of the remedies provided by law
without questioning the nullity of the assessment; (4) the amounts that
MEDICARD earmarked , and eventually paid to doctors, hospitals and
clinics cannot be excluded from · the computation of its gross receipts
under the provisions of RR No. 4-2007 because the act of earmarking
or allocation is by itself an act of ownership and management over the
funds by MEDICARD which is beyond the contemplation of RR No. 4-
2
2007; (5) MEDICARD's earnings from its clinics and laboratory facilities
cannot be excluded from its gross receipts because the operation of
these clinics and laboratory is merely an incident to MEDICARD's main
line of business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the
premium from its members; and (6) MEDICARD was not able to
substantiate the amount pertaining to its January 2006 income and
therefore has no basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was
denied. Hence, MEDICARD elevated the matter to the CTA en banc.
21
In a Decision  dated September 2, 2015, the CTA en banc partially
granted the petition only insofar as the 10% VAT rate for January 2006
is concerned but sustained the findings of the CTA Division in all other
matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is
hereby PARTIALLY GRANTED. Accordingly, the Decision date June
5, 2014 is hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment
issued by [CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR]
the amount of ₱220,234,609.48, inclusive of the 25% surcharge
imposed under Section 248(A)(3) of the NIRC of 1997, as amended,
computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the
basic deficiency VAT of ₱l 76,187,687.58 computed from
January 25, 2007 until full payment thereof pursuant to Section
249(B) of the NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the
total amount of ₱220,234,609.48 (representing basic deficiency
VAT of ₱l76,187,687.58 and 25% surcharge of
₱44,046,921.90) and on the deficiency interest which have
accrued as afore-stated in (a), computed from June 19, 2009
until full payment thereof pursuant to Section 249(C) of the
NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a
motion for reconsideration but it was denied.23 Hence, MEDICARD now
seeks recourse to this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD
EARMARKED AND EVENTUALLY PAID TO THE MEDICAL
SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS
GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An 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. 25 An LOA is premised on the fact that the
examination of a taxpayer who has already filed his tax returns is a
power that statutorily belongs only to the CIR himself or his duly
3
authorized representatives. Section 6 of the NIRC clearly provides as
follows:
SEC. 6. Power of the Commissioner to Make Assessments and
Prescribe Additional Requirements for Tax Administration and
Enforcement. –
(A) Examination of Return 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 examinationof 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 x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized
by the CIR himself or by his duly authorized representative, through an
LOA, an examination of the taxpayer cannot ordinarily be undertaken.
The circumstances contemplated under Section 6 where the taxpayer
may be assessed through best-evidence obtainable, inventory-taking,
or surveillance among others has nothing to do with the LOA. These
are simply methods of examining the taxpayer in order to arrive at .the
correct amount of taxes. Hence, unless undertaken by the CIR himself
or his duly authorized representatives, other tax agents may not validly
conduct any of these kinds of examinations without prior authority.
With the advances in information and communication technology, the
Bureau of Internal Revenue (BIR) promulgated RMO No. 30-2003 to
lay down the policies and guidelines once its then incipient centralized
Data Warehouse (DW) becomes fully operational in conjunction with its
Reconciliation of Listing for Enforcement System (RELIEF
System).26 This system can detect tax leaks by matching the data
available under the BIR's Integrated Tax System (ITS) with data
gathered from third-party sources. Through the consolidation and
cross-referencing of third-party information, discrepancy reports on
sales and purchases can be generated to uncover under declared
income and over claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific
functions relative to the RELIEF System, particularly with regard to
LNs. Thus, the Systems Operations Division (SOD) under the
Information Systems Group (ISG) is responsible for: (1) coming up with
the List of Taxpayers with discrepancies within the threshold amount
set by management for the issuance of LN and for the system-
generated LNs; and (2) sending the same to the taxpayer and to the
Audit Information, Tax Exemption and Incentives Division (AITEID).
After receiving the LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the ISG,
shall be responsible for transmitting the LNs to the investigating offices
[Revenue District Office (RDO)/Large Taxpayers District Office
(LTDO)/Large Taxpayers Audit and Investigation Division (LTAID)]. At
the level of these investigating offices, the appropriate action on the LN
s issued to taxpayers with RELIEF data discrepancy would be
determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid
down the "no-contact-audit approach" in the CIR's exercise of its
·power to authorize any examination of taxpayer arid the assessment
of the correct amount of tax. The no-contact-audit approach includes
the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases and
Schedule of Importation submitted by VAT taxpayers under the
RELIEF System pursuant to RR No. 7-95, as amended by RR Nos. 13-
97, 7-99 and 8-2002. This may also include the matching of data from
other information or returns filed by the taxpayers with the BIR such as
Alphalist of Payees subject to Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of
taxpayer's books and records, if the computerized/manual matching of
sales and purchases/expenses appears to reveal discrepancies, the
same shall be communicated to the concerned taxpayer through the
issuance of LN. The LN shall serve as a discrepancy notice to taxpayer
similar to a Notice for Informal Conference to the concerned taxpayer.
Thus, under the RELIEF System, a revenue officer may begin an
examination of the taxpayer even prior to the issuance of an LN or
even in the absence of an LOA with the aid of a computerized/manual
matching of taxpayers': documents/records. Accordingly, under the
RELIEF System, the presumption that the tax returns are in
4
accordance with law and are presumed correct since these are filed
under the penalty of perjury27 are easily rebutted and the taxpayer
becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent
on the statutory requirement of an LOA before any investigation or
examination of the taxpayer may be conducted. As provided in the
RMO No. 42-2003, the LN is merely similar to a Notice for Informal
Conference. However, for a Notice of Informal Conference, which
generally precedes the issuance of an assessment notice to be valid,
the same presupposes that the revenue officer who issued the same is
properly authorized in the first place.
investigating office shall submit a summary list of LNs for conversion to
LAs (using the herein prescribed format in Annex "E" hereof) to the
OACIR-LTS I ORD for the preparation of the corresponding LAs with
the notation "This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service

With this apparent lacuna in the RMOs, in November 2005, RMO No. xxxx
30-2003, as supplemented by RMO No. 42-2003, was amended by
RMO No. 32-2005 to fine tune existing procedures in handing 7. Evaluate the Summary List of LNs for Conversion to LAs submitted
assessments against taxpayers'· issued LNs by reconciling various by the RDO x x x prior to approval.
revenue issuances which conflict with the NIRC. Among the objectives
in the issuance of RMO No. 32-2005 is to prescribe procedure in the
8. Upon approval of the above list, prepare/accomplish and sign the
resolution of LN discrepancies, conversion of LNs to LOAs and
corresponding LAs.
assessment and collection of deficiency taxes.
xxxx

Decision 11 G.R. No. 222743

IV. POLICIES AND GUIDELINES
xxxx
xxxx
10. Transmit the approved/signed LAs, together with the duly
8. In the event a taxpayer who has been issued an LN refutes the
accomplished/approved Summary List of LNs for conversion to LAs, to
discrepancy shown in the LN, the concerned taxpayer will be given
the concerned investigating offices for the encoding of the required
an opportunity to reconcile its records with those of the BIR within
information x x x and for service to the concerned taxpayers.
One Hundred and Twenty (120) days from the date of the issuance of
xxxx
the LN. However, the subject taxpayer shall no longer be entitled to the
abatement of interest and penalties after the lapse of the sixty (60)-day
period from the LN issuance. C. At the RDO x x x

9. In case the above discrepancies remained unresolved at the xxxx

end of the One Hundred and Twenty (120)-day period, the revenue
officer (RO) assigned to handle the LN shall recommend the
issuance of [LOA) to replace the LN. The head of the concerned
5
11. If the LN discrepancies remained unresolved within One Hundred
and Twenty (120) days from issuance thereof, prepare a summary list
of said LN s for conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned
taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the
issuance of a PAN and FAN against MED ICARD. Therefore no LOA
was also served on MEDICARD. The LN that was issued earlier was
also not converted into an LOA contrary to the above quoted provision.
Surprisingly, the CIR did not even dispute the applicability of the above
provision of RMO 32-2005 in the present case which is clear and
unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's
right to due process warrant the reversal of the assailed decision and
resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines,
Inc. ,29 the Court said that:
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.30 (Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law
even if the same was issued by the CIR himself. Under RR No. 12-
2002, LN is issued to a person found to have underreported
sales/receipts per data generated under the RELIEF system. Upon
receipt of the LN, a taxpayer may avail of the BIR's Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and
criminal .remedies, particularly closure, criminal action, or audit and
investigation. Since the law specifically requires an LOA and RMO No.
32-2005 requires the conversion of the previously issued LN to an
LOA, the absence thereof cannot be simply swept under the rug, as
the CIR would have it. In fact Revenue Memorandum Circular No. 40-
2003 considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an
LOA addressed to a revenue officer is specifically required under the
NIRC before an examination of a taxpayer may be had while an LN is
not found in the NIRC and is only for the purpose of notifying the
taxpayer that a discrepancy is found based on the BIR's RELIEF
System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue
officer only a period of 10days from receipt of LOA to conduct his
examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different
purpose than an LOA. Due process demands, as recognized under
RMO No. 32-2005, that after an LN has serve its purpose, the revenue
officer should have properly secured an LOA before proceeding with
the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be
dispensed with just because none of the financial books or records
being physically kept by MEDICARD was examined. To begin with,
Section 6 of the NIRC requires an authority from the CIR or from his
duly authorized representatives before an examination "of a taxpayer"
may be made. The requirement of authorization is therefore not
dependent on whether the taxpayer may be required to physically open
his books and financial records but only on whether a taxpayer is being
subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment
and collection efforts much easier and faster. The ease by which the
BIR's revenue generating objectives is achieved is no excuse however
for its non-compliance with the statutory requirement under Section 6
and with its own administrative issuance. In fact, apart from being a
statutory requirement, an LOA is equally needed even under the BIR's
RELIEF System because the rationale of requirement is the same
whether or not the CIR conducts a physical examination of the
taxpayer's records: to prevent undue harassment of a taxpayer and
level the playing field between the government' s vast resources for tax
assessment, collection and enforcement, on one hand, and the solitary
taxpayer's dual need to prosecute its business while at the same time
6
responding to the BIR exercise of its statutory powers. The balance
between these is achieved by ensuring that any examination of the
taxpayer by the BIR' s revenue officers is properly authorized in the
first place by those to whom the discretion to exercise the power of
examination is given by the statute.
That the BIR officials herein were not shown to have acted
unreasonably is beside the point because the issue of their lack of
authority was only brought up during the trial of the case. What is
crucial is whether the proceedings that led to the issuance of VAT
deficiency assessment against MEDICARD had the prior approval and
authorization from the CIR or her duly authorized representatives. Not
having authority to examine MEDICARD in the first place, the
assessment issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not
fatal, the Court still partially finds merit in MEDICARD's substantive
arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming
the ruling of the CT A Division that the gross receipts of an HMO for
VAT purposes shall be the total amount of money or its equivalent
actually received from members undiminished by any amount paid or
payable to the owners/operators of hospitals, clinics and medical and
dental practitioners. MEDICARD explains that its business as an HMO
involves two different although interrelated contracts. One is between a
corporate client and MEDICARD, with the corporate client's employees
being considered as MEDICARD members; and the other is between
the health care institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with
healthcare institutions/healthcare professionals for the coverage of
MEDICARD members under specific health related services for a
specified period of time in exchange for payment of a more or less
fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per
individual, regardless of the amount involved, already includes the VAT
of 10%/20% excluding the remaining 80o/o because MED ICARD
would earmark this latter portion for medical utilization of its members.
Lastly, MEDICARD also assails CIR's inclusion in its gross receipts of
its earnings from medical services which it actually and directly
rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for
coverage or designated managed care services that are needed by
plan holders/members for fixed prepaid membership fees and for a
specified period of time, then MEDICARD is principally engaged in the
sale of services. Its VAT base and corresponding liability is, thus,
determined under Section 108(A)32 of the Tax Code, as amended by
Republic Act No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated
for VAT purposes as a dealer in securities whose gross receipts is the
amount actually received as contract price without allowing any
deduction from the gross receipts.33 This restrictive tenor changed
under RR No. 16-2005. Under this RR, an HMO's gross receipts and
gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its
equivalent representing the service fee actually or constructively
received during the taxable period for the services performed or to be
performed for another person, excluding the value-added tax. The
compensation for their services representing their service fee, is
presumed to be the total amount received as enrollment fee from
their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of
money or its equivalent representing the contract price, compensation,
service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits applied as payments
for services rendered, and advance payments actually or
constructively received during the taxable period for the services
7
performed or to be performed for another person, excluding the
VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No.
16-2005, including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees
should form part of MEDICARD's gross receipts because the
exclusions to the gross receipts under RR No. 4-2007 does not apply
to MEDICARD. What applies to MEDICARD is the definition of gross
receipts of an HMO under RR No. 16-2005 and not the modified
definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts
under. RR No. 16-2005 merely presumed that the amount received by
an HMO as membership fee is the HMO's compensation for their
services. As a mere presumption, an HMO is, thus, allowed to establish
that a portion of the amount it received as membership fee does NOT
actually compensate it but some other person, which in this case are
the medical service providers themselves. It is a well-settled principle
of legal hermeneutics that words of a statute will be interpreted in their
natural, plain and ordinary acceptation and signification, unless it is
evident that the legislature intended a technical or special legal
meaning to those words. The Court cannot read the word "presumed"
in any other way.
It is notable in this regard that the term gross receipts as elsewhere
mentioned as the tax base under the NIRC does not contain any
specific definition.36 Therefore, absent a statutory definition, this Court
has construed the term gross receipts in its plain and ordinary
meaning, that is, gross receipts is understood as comprising the entire
receipts without any deduction.37 Congress, under Section 108, could
have simply left the term gross receipts similarly undefined and its
interpretation subjected to ordinary acceptation,. Instead of doing so,
Congress limited the scope of the term gross receipts for VAT
purposes only to the amount that the taxpayer received for the services
it performed or to the amount it received as advance payment for the
services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and
the extent of the services it rendered are not seriously disputed. As an
HMO, MEDICARD primarily acts as an intermediary between the
purchaser of healthcare services (its members) and the healthcare
providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the
pre-arranged medical services from its accredited healthcare providers
without the necessary protocol of posting cash bonds or deposits prior
to being attended to or admitted to hospitals or clinics, especially
during emergencies, at any given time. Apart from this, MEDICARD
may also directly provide medical, hospital and laboratory services,
which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can
either avail of medical services from MEDICARD's accredited
healthcare providers or directly from MEDICARD. In the former,
MEDICARD members obviously knew that beyond the agreement to
pre-arrange the healthcare needs of its ·members, MEDICARD would
not actually be providing the actual healthcare service. Thus, based on
industry practice, MEDICARD informs its would-be member
beforehand that 80% of the amount would be earmarked for medical
utilization and only the remaining 20% comprises its service fee. In the
latter case, MEDICARD's sale of its services is exempt from VAT under
Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion
of Section 108 of the NIRC that would extend the definition of gross
receipts even to amounts that do not only pertain to the services to be
performed: by another person, other than the taxpayer, but even to
amounts that were indisputably utilized not by MED ICARD itself but by
the medical service providers.
It is a cardinal rule in statutory construction that no word, clause,
sentence, provision or part of a statute shall be considered surplusage
or superfluous, meaningless, void and insignificant. To this end, a
construction which renders every word operative is preferred over that
which makes some words idle and nugatory. This principle is
expressed in the maxim Ut magisvaleat quam pereat, that is, we
choose the interpretation which gives effect to the whole of the statute
– it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue,38the Court adopted the principal object and purpose object in
8
determining whether the MEDICARD therein is engaged in the
business of insurance and therefore liable for documentary stamp tax.
The Court held therein that an HMO engaged in preventive, diagnostic
and curative medical services is not engaged in the business of an
insurance, thus:
To summarize, the distinctive features of the cooperative are the
rendering of service, its extension, the bringing of physician and
patient together, the preventive features, the regularization of
service as well as payment, the substantial reduction in cost by
quantity purchasing in short, getting the medical job done and
paid for; not, except incidentally to these features, the
indemnification for cost after .the services is rendered. Except the
last, these are not distinctive or generally characteristic of the
insurance arrangement. There is, therefore, a substantial difference
between contracting in this way for the rendering of service, even on
the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid
an insurance company is that HMOs undertake to provide or arrange
for the provision of medical services through participating physicians
while insurance companies simply undertake to indemnify the insured
for medical expenses incurred up to a pre-agreed limit. In the present
case, the VAT is a tax on the value added by the performance of the
service by the taxpayer. It is, thus, this service and the value charged
thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT.40 But the Court's task however is not to
weigh these policy considerations but to determine if these
considerations in favor of taxation can even be implied from the statute
where the CIR purports to derive her authority. This Court rules that
they cannot because the language of the NIRC is pretty straightforward
and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict
interpretation in the imposition of taxes, not the similar doctrine as
applied to tax exemptions. The rule in the interpretation of tax laws is
that a statute will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing
statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In
answering the question of who is subject to tax statutes, it is basic that
in case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond
what statutes expressly and clearly import. As burdens, taxes should
not be unduly exacted nor assumed beyond the plain meaning of the
tax laws. 41 (Citation omitted and emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross
receipts without exclusion, the authority should have been reasonably
founded from the language of the statute. That language is wanting in
this case. In the scheme of judicial tax administration, the need for
certainty and predictability in the implementation of tax laws is crucial.
Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide. The regulations these authorities
issue are relied upon by taxpayers, who are certain that these will be
followed by the courts. Courts, however, will not uphold these
authorities' interpretations when dearly absurd, erroneous or
improper.42 The CIR's interpretation of gross receipts in the present
case is patently erroneous for lack of both textual and non-textual
support.
As to the CIR's argument that the act of earmarking or allocation is by
itself an act of ownership and management over the funds, the Court
does not agree.1âwphi1 On the contrary, it is MEDICARD's act of
earmarking or allocating 80% of the amount it received as membership
fee at the time of payment that weakens the ownership imputed to it.
By earmarking or allocating 80% of the amount, MEDICARD
unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this
reason, at most, MEDICARD's right in relation to these amounts is a
mere inchoate owner which would ripen into actual ownership if, and
only if, there is underutilization of the membership fees at the end of
the fiscal year. Prior to that, MEDI CARD is bound to pay from the
amounts it had allocated as an administrator once its members avail of
the medical services of MEDICARD's healthcare providers.
9
Before the Court, the parties were one in submitting the legal issue of issued against Medicard Philippines, Inc. is hereby declared
whether the amounts MEDICARD earmarked, corresponding to 80% of unauthorized for having been issued without a Letter of Authority by the
its enrollment fees, and paid to the medical service providers should Commissioner of Internal Revenue or his duly authorized
form part of its gross receipt for VAT purposes, after having paid the representatives.
VAT on the amount comprising the 20%. It is significant to note in this
regard that MEDICARD established that upon receipt of payment of SO ORDERED.
membership fee it actually issued two official receipts, one pertaining to
the VAT able portion, representing compensation for its services, and BIENVENID L. REYES,
the other represents the non-vatable portion pertaining to the amount Associate Justice
earmarked for medical utilization.: Therefore, the absence of an actual
and physical segregation of the amounts pertaining to two different
kinds · of fees cannot arbitrarily disqualify MEDICARD from rebutting
the presumption under the law and from proving that indeed services
were rendered by its healthcare providers for which it paid the amount
it sought to be excluded from its gross receipts.

With the foregoing discussions on the nullity of the assessment on due

process grounds and violation of the NIRC, on one hand, and the utter
lack of legal basis of the CIR's position on the computation of
MEDICARD's gross receipts, the Court finds it unnecessary, nay
useless, to discuss the rest of the parties' arguments and counter-
arguments.

In fine, the foregoing discussion suffices for the reversal of the assailed
decision and resolution of the CTA en banc grounded as it is on due
process violation. The Court likewise rules that for purposes of
determining the VAT liability of an HMO, the amounts earmarked and
actually spent for medical utilization of its members should not be
included in the computation of its gross receipts.

WHEREFORE, in consideration of the foregoing disquisitions, the

petition is hereby GRANTED. The Decision dated September 2, 2015
and Resolution dated January 29, 2016 issued by the Court of Tax
Appeals en bane in CTA EB No. 1224 are REVERSED and SET
ASIDE. The definition of gross receipts under Revenue Regulations
Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National
Internal Revenue Code, as amended by Republic Act No. 9337, for
purposes of determining its Value-Added Tax liability, is hereby
declared to EXCLUDE the eighty percent (80%) of the amount of the
contract price earmarked as fiduciary funds for the medical utilization of
its members. Further, the Value-Added Tax deficiency assessment

10
 SECOND DIVISION
July 12, 2017
G.R. No. 183408
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
LANCASTER PHILIPPINES, INC., Respondent
DECISION
MARTIRES, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules
of Court seeking to reverse and set aside the 30 April 2008
Decision2 and 24 June 2008 Resolution3 of the Court of Tax
Appeals (CTA) En Banc in CTA EB No. 352.
The assailed decision and resolution affirmed the 12 September 2007
Decision4 and 12 December 2007 Resolution5 of the CTA First
Division (CTA Division) in CTA Case No. 6753.
THE FACTS
The facts6 are undisputed.
Petitioner Commissioner of Internal Revenue (CIR) is authorized by
law, among others, to investigate or examine and, if necessary, issue
assessments for deficiency taxes.
On the other hand, respondent Lancaster Philippines,
Inc. (Lancaster) is a domestic corporation established in 1963 and is
engaged in the production, processing, and marketing of tobacco.
In 1999, the Bureau of Internal Revenue (BIR) issued Letter of
Authority (LOA) No. 00012289 authorizing its revenue officers to
examine Lancaster's books of accounts and other accounting records
for all internal revenue taxes due from taxable year 1998 to an
unspecified date. The LOA reads:
SEPT. 30 1999
LETTER OF AUTHORITY
LANCASTER PHILS. INC.
11th Flr. Metro Bank Plaza
Makati City
SIRJMADAM/GENTLEMEN:
The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be
Supervise by GH Catalina_Leny Barrion of the Special Team created
pursuant to RSO 770-99 is/are authorized to examine your books of
accounts and other accounting records for a11 internal revenue taxes
for the period from example year, 1998 to ______, 19___. He is/[t]hey
are provided with the necessary identification card(s) which shall be
presented to you upon request.
It is requested that all facilities be extended to the Revenue Officer(s)
in order to expedite the examination.
You will be duly informed of the results of the examination upon
approval of the report submitted by the aforementioned Revenue
Officer(s).7
After the conduct of an examination pursuant to the LOA, the BIR
issued a Preliminary Assessment Notice (PAN)8 which cited Lancaster
for:
1) overstatement of its purchases for the fiscal year April
1998 to March1999; and 2) noncompliance with the generally accepted
accountingprinciple of proper matching of cost and revenue.9 More
concretely, the BIR disallowed the purchases of tobacco from farmers
covered by Purchase Invoice Vouchers (PIVs) for the months
of February and March 1998 as deductions against income for
the fiscal year April 1998 to March 1999. The computation of
Lancaster's tax deficiency, with the details of discrepancies, is
reproduced below:
11
 INCOME TAX: with the generally accepted principle of proper matching of cost and
revenue.10
Taxable Income per ITR -0-
Add: Adjustments-Disallowed purchases 11,496,770.18 Lancaster replied11 to the PAN contending, among other things, that for
the past decades, it has used an entire 'tobacco-cropping season' to
Adjusted Taxable Income per determine its total purchases covering a one-year period from 1
₱11,496,770.18
Investigation October up to 30 September of the followingyear (as against its fiscal
year which is from 1 April up to 31 March of the followingyear); that it
INCOME TAX DUE-Basic has been adopting the 6~month timing difference to conform to the
April 1 - December 31, 1998 matching concept (of cost and revenue); and that this has long been
(9/12x ₱l1,496,770.18 x 34%) ₱2,913,676.4 installed as part of the company's system and consistently applied in its
accounting books.12
January 1 - March 31, 1999
(3/12x ₱l1,496,770.18 x 33%) 948,483.54 Invoking the same provisions of the law cited in the
Income tax still due per investigation ₱3,880,159.94 assessment, i.e., Sections 4313 and 4514 of the National Internal
Revenue Code (NJRC), in conjunction with Section 4515 of Revenue
Interest (6/15/99 to 10115/02) .66 2,560,905.56 Regulation No. 2, as amended, Lancaster argued that the February
Compromise Penalty 25,000 and March 1998 purchases should not have been disallowed. It
maintained that the situation of farmers engaged in producing tobacco,
TOTAL DEFlCIENCY INCOME TAX ₱6,466,065.50 like Lancaster, is unique in that the costs, i.e., purchases, are taken as
of a different period and posted in the year in which the gross income
DETAILS OF DISCREPANCIES from the crop is realized. Lancaster concluded that it correctly posted
Assessment No. LTAID II-98-00007 the subject purchases in the fiscal year ending March 1999 as it was
only in this year that the gross income from the crop was realized.
A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers April
1998 to March 1999. Verification of the books of accounts and Subsequently on 6 November 2002, Lancaster received from the BIR a
pertinent documents disclosed that there was an overstatement of final assessment notice (FAN),16 captioned Formal Letter of Demand
purchases for the year. Purchase Invoice Vouchers (PIVs) for February andAudit Result/Assessment .Notice LTAID II IT-98-00007, dated 11
and March 1998 purchases amounting to ₱ll,496,770.18 were included October2002, which assessed Lancaster's deficiency income tax
as part of purchases for taxable year 1998 in violation of Section 45 of amounting to Pl l,496,770.18, as a consequence of the disallowance of
the National Internal Revenue Code in relation to Section 43 of the purchases claimed for the taxable year ending199931. March 1999.
same and Revenue Regulations No. 2 which states that the Crop-Basis
method of reporting income may be used by a farmer engaged in Lancaster duly protested17 the FAN. There being no action taken by the
producing crops which take more than one (1) year from the time of Commissioner on its protest, Lancaster filed on 21 August 2003 a
planting to the time of gathering and disposing of crop, in such a case, petition for review18 before the CTA Division.
the entire cost of producing the crop must be taken as deduction in the
year in which the gross income from the crop is realized and that the The Proceedings before the CTA
taxable income should be computed upon the basis of the taxpayer's
annual accounting period, (fiscal or calendar year, as the case may be) In its petition before the CTA Division, Lancaster essentially reiterated
in accordance with the method of accounting regularly employed in its arguments in the protest against the assessment, maintaining that
keeping with the books of the taxpayer. Furthermore, it did not comply
12
the tobacco purchases in February and March 1998 are deductible in
its fiscal year ending 31 March 1999.
The issues19 raised by the parties for the resolution of the CTA Division
were:
I
WHETHER OR NOT PETITIONER COMPLIED WITH THE
GENERALLY ACCEPTED ACCOUNTING PRINCIPLE OF PROPER
MATCHING OF COST AND REVENUE;
II
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT
AGAINST PETITIONER FOR THE TAXABLE YEAR 1998 IN THE
AGGREGATE AMOUNT OF ₱6,466,065.50 SHOULD BE CANCEILED
AND WITHDRAWN BY RESPONDENT.
After trial, the CTA Division granted the petition of Lancaster, disposing
as follows;
IN VIEW OF THE FOREGOING, the subject Petition for Review is
hereby GRANTED. Accordingly, respondent is ORDERED to CANCEL
and WITHDRAW the deficiency income tax assessment issued against
petitioner under Formal l;etter of Demand and Audit
Result/Assessment Notice No. L TAID II IT-98-00007 dated October
11, 2002, in the amount of ₱6,466,065.50, covering the fiscal year from
April l, 1998 to March 31, 1999.20
The CIR move21 but failed to obtain reconsideration of the CTA Division
ruling.22
Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a
reversal of the decision and the resolution of the CTA Division.
However, the CTA En Banc found no reversible error in the CTA
Division's ruling, thus, it affirmed the cancellation of the assessment
against Lancaster. The dispositive portion of the decision of the CTA
En Banc states:
WHEREFORE, premises considered, the present Petition for Review is
hereby DENIED DUE COURSE, and, accordingly DISMISSED for lack
of merit.24
The CTA En Banc likewise denied25 the motion for reconsideration from
its Decision.
Hence, this petition.
The CIR assigns the following errors as committed by the CTA En
Banc:
I.
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING
THAT PETITIONER'S REVENUE OFFICERS EXCEEDED THEIR
AUTHORITY TO INVESTIGATE THE PERJOD NOT COVERED BY
THEIR LETTER OF AUTHORITY.
II.
THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING
PETITIONER TO CANCEL AND WITHDRAW THE DEFICIENCY
ASSESSMENT ISSUED AGAINST RESPONDENT.26
THE COURT'S RULING
We deny the petition.
The CTA En Banc did not err when it ruled
that the BIR revenue officers had
exceeded their authority.
To support its first assignment of error, the CIR argues that the
revenue officers did not exceed their authority when, upon examination
(of the Lancaster's books of accounts and other accounting records),
they verified that Lancaster made purchases for February and March of
1998, which purchases were not declared in the latter's fiscal year from
1 April 1997 to 31 March 1998. Additionally, the CIR posits that
Lancaster did not raise the issue on the scope of authority of the
13
revenue examiners at any stage of the proceedings before the CTA
and, consequently, the CTA had no jurisdiction to rule on said issue.
On both counts, the CIR is mistaken.
A. The Jurisdiction of the CTA
Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue
of the scope of authority of the revenue officers to conduct the
examination of Lancaster's books of accounts and accounting records.
The law vesting unto the CTA its jurisdiction is Section 7 of Republic
Act No. 1125 (R.A. No. 1125),27 which in part provides:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise
exclusive appellate jurisdiction to review by appeal, as herein provided:
(1) 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; x x x. (emphasis
supplied)
Under the aforecited provision, the jurisdiction of the CTA is not limited
only to cases which involve decisions or inactions of the CIR on
matters relating to assessments or :refunds but also includes other
cases arising from the NIRC o:r related laws administered by the
BIR. 28 Thus, for instance, we had once held that the question of
whether or not to impose a deficiency tax assessment comes within the
purview of the words "othermatters arising under the National Internal
Revenue Code."[[29]
The jurisdiction of the CTA on such other matters arising under
theNIRC was retained under the amendments introduced by R.A No.
9282.30Under R.A. No. 9282, Section 7 now reads:
Sec. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein
provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue
Code provides a specific period of action. in which case the inaction
shall be deemed a denial; x x x." (emphasis supplied)
Is the question on the authority of revenue officers to examine the
books and records of any person cognizable by the CTA?
It must be stressed that the assessment of inten1al revenue taxes is
one of the duties of the BIR. Section 2 of the NIRC states:
Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The
Bureau of Internal Revenue shall be under the supervision and control
of the Department of Fin[:l.11ce and its powers: and duties shall
comprehend the assessment and collection of all national internal
revenue taxes, fees, andcharges, and the enforcement of all
forfeitures, penalties, and fines connected therewith, including the
execution of judgments in all cases decided in its favor by the Court of
Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and
police powers conferred to it by this Code or other laws. (emphasis
supplied)
In connection therewith, the CIR may authorize the examination of any
taxpayer and correspondingly make an assessment whenever
necessary.31 Thus, to give more teeth to such power of the CIR, to
make an assessment, the NIRC authorizes the CIR to examine any
book, paper, record, or data of any person.32 The powers granted by
law to the CIR are intended, among other things, to determine the
liability of any person for any national internal revenue tax.
14
It is pursuant to such pertinent provisions of the NIRC conferring the
powers to the CIR that the petitioner (CIR) had, in this case, authorized
its revenue officers to conduct an examination of the books of account
and accounting records of Lancaster, and eventually issue a deficiency
assessment against it.
From the foregoing, it is clear that the issue on whether the revenue
officers who had conducted the examination on Lancaster exceeded
their authority pursuant to LOA No. 00012289 may be considered as
covered by the terms "other matters" under Section 7 of R.A. No. 1125
or its amendment, R.A. No. 9282. The authority to make an
examination or assessment, being a matter provided for by the NIRC,
is well within the exclusive and appellate jurisdiction of the CTA.
On whether the CTA can resolve an issue which was not raised by the
parties, we rule in the affirmative.
Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised
Rules of the Court of Tax Appeals,33 the CT A is not bound by the
issues specifically raised by the parties but may also rule upon related
issues necessary to achieve an orderly disposition of the case. The text
of the provision reads:
SECTION 1. Rendition of judgment. - x xx
In deciding the case, the Court may not limit itself to the issues
stipulated by the parties but may also rule upon related issues
necessary to achieve an orderly disposition of the case.
The above section is clearly worded. On the basis thereof, the CTA
Division was, therefore, well within its authority to consider in its
decision the question on the scope of authority of the revenue officers
who were named in the LOA even though the parties had not raised
the same in their pleadings or memoranda. The CTA En Banc was
likewise correct in sustaining the CTA Division's view concerning such
matter.
B. The Scope of the Authority
of the Examining Officers
In the assailed decision of the CTA Division, the trial court observed
that LOA No. 00012289 authorized the BIR officers to examine the
books of account of Lancaster for the taxable year 1998 only or, since
Lancaster adopted a fiscal year (FY), for the
period 1April1997 to 31March1998. However, the deficiency income
tax assessment which the BIR eventually issued against Lancaster was
based on the disallowance of expenses reported in FY 1999, or for the
period 1 April 1998 to 31March1999. The CTA concluded that the
revenue examiners had exceeded their authority when they issued the
assessment against Lancaster and, consequently, declared such
assessment to be without force and effect.
We agree.
The audit process normally commences with the issuance by the CIR
of a Letter of Authority. The LOA gives notice to the taxpayer that it is
under investigation for possible deficiency tax assessment; at the same
time it authorizes or empowers a designated revenue officer to
examine, verify, and scrutinize a taxpayer's books and records, in
relation to internal revenue tax liabilities for a particular period.34
In this case, a perusal of LOA No. 00012289 indeed shows that the
period of examination is the taxable year 1998. For better clarity, the
pertinent portion of the LOA is again reproduced, thus:
The bearer(s) hereof x x x is/are authorized to examine your books of
accounts and other accounting records for all internal revenue taxes for
the period from taxable year, 1998 to __, 19_. x x x." (emphasis
supplied)
Even though the date after the words "taxable year 1998 to" is
unstated, it is not at all difficult to discern that the period of examination
is the whole taxable year 1998. This means that the examination of
Lancaster must cover the FY period from 1April1997 to 31March1998.
It could not have contemplated a longer period. The examination for
the full taxable year 1998 only is consistent with the guideline in
Revenue Memorandum Order (RMO) No. 43-90, dated 20 September
1990, that the LOA shall cover a taxable period not exceeding one
taxable year.35 In other words, absent any other valid cause, the LOA
issued in this case is valid in all respects.
15
Nonetheless, a valid LOA does not necessarily clothe validity to an January 1-March 31, 1999
assessment issued on it, as when the revenue officers designated in (3/12xPl1,496,770.18 x 33%) 948,483.54
the LOA act in excess or outside of the authority granted them under
said LOA. Recently in CIR v. De La Salle University, Inc.36 we accorded Income tax still due per investigation ₱3,880,159.94
validity to the LOA authorizing the examination of DLSU for "Fiscal
Interest (6/15/99 to 10/15/02) .66 2,560,905.56
Year Ending 2003and Unverified Prior Years" and correspondingly
held the assessment fortaxable year 2003 as valid because this Compromise Penalty 25,000
taxable period is specified in the LOA. However, we declared void the
assessments for taxable years 2001 and 2002 for having TOTAL DEFICIENCY INCOME TAX ₱6,466,065.50
been unspecified on separate LOAs as required under RMO No. 43-90. (emphasis supplied)

Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed
the cancellation of a deficiency VAT assessment because, while the
LOA covered "the period 1997and unverified prior years, " the said
deficiency was arrived at based on the records of a later year,
from January to March 1998, or using the fiscal year which ended on
31March1998. We explainedthat the CIR knew which period should be
covered by the investigation and that if the CIR wanted or intended the
investigation to include the year 1998, it would have done so by
including it in the LOA or by issuing another LOA.38
The present case is no different from Sony in that the subject LOA
specified that the examination should be for the taxable year 1998 only
but the subsequent assessment issued against Lancaster involved
disallowed expenses covering the next fiscal year, or the period ending
31 March 1999. This much is clear from the notice of assessment, the
relevant portion of which we again restate as follows:
1âwphi1
INCOME TAX:
Taxable Income per ITR -0-
Add: Adjustments-Disallowed purchases 11,496, 770.18
Adjusted Taxable Income per
₱l 1,496,770.18
Investigation
INCOME TAX DUE-Basic
April 1 -December 31, 1998 ₱2,913,676.4
(9/12xPl1,496,770.18 x 34%)
The taxable year covered by the assessment being outside of the
period specified in the LOA in this case, the assessment issued against
Lancaster is, therefore, void.
This point alone would have sufficed to invalidate the subject deficiency
income tax assessment, thus, obviating any further necessity to resolve
the issue on whether Lancaster erroneously claimed the February and
March 1998 expenses as deductions against income for FY 1999.
But, as the CTA did, we shall discuss the issue on the disallowance for
the proper guidance not only of the parties, but the bench and the bar
as well.
II.
The CTA En Banc correctly sustained the
order cancelling and withdrawing
the deficiency tax assessment.
To recall, the assessment against Lancaster for deficiency income tax
stemmed from the disallowance of its February and March 1998
purchases which Lancaster posted in its fiscal year ending on 31
March 1999 (FY 1999) instead of the fiscal year ending on
31March1998 (FY 1998).
On the one hand, the BIR insists that the purchases in question should
have been reported in FY 1998 in order to conform to the generally
accepted accounting principle of proper matching of cost and revenue.
Thus, when

16
Lancaster reported the said purchases in FY 1999, this resulted in
overstatement of expenses warranting their disallowance and, by
consequence, resulting in the deficiency in the payment of its income
tax for FY 1999.
Upon the other hand, Lancaster justifies the inclusion of the February
and March 1998 purchases in its FY 1999 considering that they
coincided with its crop year covering the period of October 1997 to
September 1998. Consistent with Revenue Audit
Memorandum (RAM) No. 2-95,39 Lancaster argues that its purchases
in February and March 1998 were properly posted in FY 1999, or the
year in which its gross income from the crop was realized. Lancaster
concludes that by doing so, it had complied with the matching concept
that was also relied upon by the BIR in its assessment.
The issue essentially boils down to the proper timing when
Lancaster should recognize its purchases in computing its
taxable income. Such issue directly correlates to the fact that
Lancaster's 'crop year ' does not exactly coincide with its fiscal year for
tax purposes.
Noticeably, the records of this case are rife with terms and concepts in
accounting. As a science, accounting 40 pervades many aspects of
financial planning, forecasting, and decision making in business. Its
reach, however, has also permeated tax practice.
To put it into perspective, although the foundations of accounting were
built principally to analyze finances and assist businesses, many of its
principles have since been adopted for purposes of taxation.41 In our
jurisdiction, the concepts in business accounting, including certain
generally accepted accounting principles (GAAP), embedded in the
NIRC comprise the rules on tax accounting.
To be clear, the principles under financial or business accounting, in
theory and application, are not necessarily interchangeable with those
in tax accounting. Thus, although closely related, tax and business
accounting had invariably produced concepts that at some point
diverge in understanding or usage. For instance, two of such important
concepts are taxable income and business income (or accounting
income). Much of the difference can be attributed to the distinct
purposes or objectives that the concepts of tax and business
accounting are aimed at. Chief Justice Querube Makalintal made an
apt observation on the nature of such difference. In Consolidated
Mines, Inc. v. CTA,42he noted:
While taxable income is based on the method of accounting used by
the taxpayer, it will almost always differ from accounting income. This
is so because of a fundamental difference in the ends the two concepts
serve. Accounting attempts to match cost against revenue. Tax law is
aimed at collecting revenue. It is quick to treat an item as income, slow
to recognize deductions or losses. Thus, the tax law will not recognize
deductions for contingent future losses except in very limited situations.
Good accounting, on the other hand, requires their recognition. Once
this fundamental difference in approach is accepted, income tax
accounting methods can be understood more easily.43 (emphasis
supplied)
While there may be differences between tax and accounting,44 it cannot
be said that the two mutually exclude each other. As already made
clear, tax laws borrowed concepts that had origins from accounting. In
truth, tax cannot do away with accounting. It relies upon approved
accounting methods and practices to effectively carry out its objective
of collecting the proper amount of taxes from the taxpayers. Thus, an
important mechanism established in many tax systems is the
requirement for taxpayers to make a return of their true
income.45 Maintaining accounting books and records, among other
important considerations, would in turn assist the taxpayers in
complying with their obligation to file their income tax returns. At the
same time, such books and records provide vital information and
possible bases for the government, after appropriate audit, to make an
assessment for deficiency tax whenever so warranted under the
circumstances.
The NIRC, just like the tax laws in other jurisdictions, recognizes the
important facility provided by generally accepted accounting principles
and methods to the primary aim of tax laws to collect the correct
amount of taxes. The NIRC even devoted a whole chapter on
accounting periods and methods of accounting, some relevant
provisions of which we cite here for more emphasis:
CHAPTER VIII
17
 ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Sec. 43. General Rule. - The taxable income shall be computed upon
the basis of the taxpayer's annual accounting period (fiscal year or
calendar year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer;
but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation
shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income.
If the taxpayer's annual accounting period is other than a fiscal year, as
defined in Section 22(Q), or if the taxpayer has no annual accounting
period, or does not keep books, or if the taxpayer is an individual, the
taxable income shall be computed on the basis of the calendar year.
Sec. 44. Period in which Items of Gross Income Included. - The
amount of all items of gross income shall be included in the gross
income for the taxable year in which received by the taxpayer, unless,
under methods of accounting permitted under Section 43, any such
amounts are to be properly accounted for as of a different period.
In the case of the death of a taxpayer, there shall be included in
computing taxable income for the taxable period in which falls the date
of his death, amounts accrued up to the date of his death if not
otherwise properly includible in respect of such period or a prior period.
Sec. 45. Period/or which Deductions and Credits Taken. - The
deductions provided for in this Title shall be taken for the taxable year
in which 'paid or accrued' or 'paid or incurred,' dependent upon the
method of accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the income, the deductions
should be taken as of a different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the taxable period in
which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly allowable in respect of such period or a
prior period.
Sec. 46. Change of Accounting Period. - If a taxpayer, other than an
individual, changes his accounting period from fiscal year to calendar
year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Commissioner,
be computed on the basis of such new accounting period, subject to
the provisions of Section 47.
xxxx
Sec. 48. Accounting for Long-term Contracts. - Income from long-
term contracts shall be repo1ied for tax purposes in the manner as
provided in this Section.
As used herein, the term 'long-term contracts' means building,
installation or construction contracts covering a period in excess of one
(1) year.
Persons whose gross income is derived in whole or in part from such
contracts shall report such income upon the basis of percentage of
completion.1âwphi1
The return should be accompanied by a return certificate of architects
or engineers showing the percentage of completion during the taxable
year of the entire work performed under contract.
There should be deducted from such gross income all expenditures
made during the taxable year on account of the contract, account being
taken of the material and supplies on hand at the beginning and end of
the taxable period for use in connection with the work under the
contract but not yet so applied.
If upon completion of a contract, it is found that the taxable net income
arising thereunder has not been clearly reflected for any year or years,
the Commissioner may permit or require an amended return.
Sec. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and
regulations prescribed by the Secretary of Finance, upon
18
recommendation of the Commissioner, a person who regularly sells or
otherwise disposes of personal property on the installment plan may
return as income therefrom in any taxable year that proportion of the
installment payments actually received in that year, which the gross
profit realized or to be realized when payment is completed, bears to
the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case
(1) of a casual sale or other casual disposition of personal property
(other than property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year),
for a price exceeding One thousand pesos (₱1,000), or (2) of a sale or
other disposition of real prope1iy, if in either case the initial payments
do not exceed twenty-five percent (25%) of the selling price, the
income may, under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, be
returned on the basis and in the manner above prescribed in this
Section.
As used in this Section, the term 'initial payments' means the
payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the
sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by
Individuals. - An individual who sells or disposes of real property,
considered as capital asset, and is otherwise qualified to report the
gain therefrom under Subsection (B) may pay the capital gains tax in
installments under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to
the benefits of Subsection (A) elects for any taxable year to report his
taxable income on the installment basis, then in computing his income
for the year of change or any subsequent year, amounts actually
received during any such year on account of sales or other dispositions
of property made in any prior year shall not be excluded." (emphasis in
the original)
We now proceed to the matter respecting the accounting method
employed by Lancaster.
An accounting method is a "set of rules for determining when and how
to report income and deductions."46 The provisions under Chapter VIII,
Title II of the NIRC cited above enumerate the methods of accounting
that the law expressly recognizes, to wit:
(1) Cash basis method;47
(2) Accrual method;48
(3) Installment method;49
(4) Percentage of completion method;50 and
(5) Other accounting methods.
Any of the foregoing methods may be employed by any taxpayer so
long as it reflects its income properly and such method is used
regularly. The peculiarities of the business or occupation engaged in by
a taxpayer would largely determine how it would report incomes and
expenses in its accounting books or records. The NIRC does not
prescribe a uniform, or even specific, method of accounting.
Too, other methods approved by the CIR, even when not expressly
mentioned in the NIRC, may be adopted if such method would enable
the taxpayer to properly reflect its income. Section 43 of the NIRC
authorizes the CIR to allow the use of a method of accounting that in its
opinion would clearly reflect the income of the taxpayer. An example of
such method not expressly mentioned in the NIRC, but duly approved
by the CIR, is the 'crop method of accounting' authorized under
RAM No. 2-95. The pertinent provision reads:
II. Accounting Methods
xxxx
F. Crop Year Basis is a method applicable only to farmers engaged in
the production of crops which take more than a year from the time of
planting to the process of gathering and disposal. Expenses paid or
incurred are deductible in the year the gross income from the sale of
the crops are realized.
19
The crop method recognizes that the harvesting and selling of crops do
not fall within the same year that they are planted or grown. This
method is especially relevant to farmers, or those engaged in the
business of producing crops who, pursuant to RAM No. 2-95, would
then be able to compute their taxable income on the basis of their crop
year. On when to recognize expenses as deductions against income,
the governing rule is found in the second sentence of Subsection F
cited above. The rule enjoins the recognition of the expense (or the
deduction of the cost) of crop production in the year that the crops
are sold (when income is realized).
In the present case, we find it wholly justifiable for Lancaster, as a
business engaged in the production and marketing of tobacco, to adopt
the crop method of accounting. A taxpayer is authorized to employ
what it finds suitable for its purpose so long as it consistently does so,
and in this case, Lancaster does appear to have utilized the method
regularly for many decades already. Considering that the crop year of
Lancaster starts from October up to September of the following year, it
follows that all of its expenses in the crop production made within the
crop year starting from October 1997 to September 1998, including the
February and March 1998 purchases covered by purchase invoice
vouchers, are rightfully deductible for income tax purposes in the year
when the gross income from the crops are realized. Pertinently,
nothing from the pleadings or memoranda of the parties, or even from
their testimonies before the CT A, would support a finding that the
gross income from the crops (to which the subject expenses refer) was
actually realized by the end of March 1998, or the closing of
Lancaster's fiscal year for 1998. Instead, the records show that the
February and March 1998 purchases were recorded by Lancaster
as advances and later taken up as purchases by the close of the crop
year in September 1998, or as stated very clearly above, within the
fiscal year 1999.51On this point, we quote with approval the ruling of the
CT A En Banc, thus:
Considering that [Lancaster] is engaged in the production oftobacco, it
applied the crop year basis in determining its total purchases for each
fiscal year. Thus, [Lancaster's] total cost for the production of its crops,
which includes its purchases, must be taken as a deduction in the year
in which the gross income is realized. Thus, We agree with the
following ratiocination of the First Division:
Evident from the foregoing, the crop year basis is one unusual method
of accounting wherein the entire cost of producing the crops (including
purchases) must be taken as a deduction in the year in which the gross
income from the crop is realized. Since the petitioner's crop year starts
in October and ends in September of the following year, the same does
not coincide with petitioner's fiscal year which starts in April and ends
in March of the following year. However, the law and regulations
consider this peculiar situation and allow the costs to be taken up at the
time the gross income from the crop is realized, as in the instant case.
[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On
the other hand, its crop year is from October 1, 1997 to September 1,
1998. Accordingly, in applying the crop year method, all the purchases
made by the respondent for October 1, 1997 to September 1, 1998
should be deducted from the fiscal year ending March 31, 1999, since
it is the time when the gross income from the crops is realized.52
The matching principle
Both petitioner CIR and respondent Lancaster, it must be noted, rely
upon the concept of matching cost against revenue to buttress their
respective theories. Also, both parties cite RAM 2-95 in referencing the
crop method of accounting.
We are tasked to determine which view is legally sound.
In essence, the matching concept, which is one of the generally
accepted accounting principles, directs that the expenses are to be
reported in the same period that related revenues are earned. It
attempts to match revenue with expenses that helped earn it.
The CIR posits that Lancaster should not have recognized in FY 1999
the purchases for February and March 1998.53 Apparent from the
reasoning of the CIR is that such expenses ought to have been
deducted in FY 1998, when they were supposed to be paid or incurred
by Lancaster. In other words, the CIR is of the view that the subject
purchases match with revenues in 1998, not in 1999
A reading of RAM No. 2-95, however, clearly evinces that it conforms
with the concept that the expenses paid or incurred be deducted in the
year in which gross income from the sale of the crops is realized. Put
20
in another way, the expenses are matched with the related incomes
which are eventually earned. Nothing from the provision is it strictly
required that for the expense to be deductible, the income to which
such expense is related to be realized in the same year that it
is paid or incurred. As noted by the CTA,54 the crop method is an
unusual method of accounting, unlike other recognized accounting
methods that, by mandate of Sec. 45 of the NIRC, strictly require
expenses be taken in the same taxable year when the income
is 'paid or incurred, ' or 'paid or accrued, ' depending upon the method
of accounting employed by the taxpayer.
Even if we were to accept the notion that applying the 1998 purchases
as deductions in the fiscal year 1998 conforms with the generally
accepted principle of matching cost against revenue, the same would
still not lend any comfort to the CIR. Revenue Memorandum
Circular (RMC) No. 22-04, entitled "Supplement to Revenue
Memorandum Circular No. 44-2002 on Accounting Methods to be
Used by Taxpayers for Internal Revenue Tax Purposes"55dated 12 April
2004, commands that where there is conflict between the provisions of
the Tax Code (NIRC), including its implementing rules and regulations,
on accounting methods and the generally accepted accounting
principles, the former shall prevail. The relevant portion of RMC 22-04
reads:
over any GAAP, including the matching concept as applied in financial
or business accounting.
In sum, and considering the foregoing premises, we find no cogent
reason to overturn the assailed decision and resolution of the CT A. As
the CTA decreed, Assessment Notice LTAID II IT-98-00007, dated 11
October 2002, in the amount of ₱6,466,065.50 for deficiency income
tax should be cancelled and set aside. The assessment is void for
being issued without valid authority. Furthermore, there is no legal
justification for the disallowance of Lancaster's expenses for the
purchase of tobacco in February and March 1998.
WHEREFORE, the petition is DENIED. The assailed 30 April 2008
Decision and 24 June 2008 Resolution of the Court of Tax Appeals En
Banc are AFFIRMED. No cost
SO ORDERED.
SAMUEL R. MARTIRES
Associate Justice

II. Provisions of the Tax Code Shall Prevail.

All returns required to be filed by the Tax Code shall be prepared

always in conformity with the provisions of the Tax Code, and the rules
and regulations implementing said Tax Code. Taxability of income and
deductibility of expenses shall be determined strictly in accordance with
the provisions of the Tax Code and the rules and regulations issued
implementing said Tax Code. In case of difference between the
provisions of the Tax Code and the rules and regulations implementing
the Tax Code, on one hand, and the general(v accepted accounting
principles (GAAP) and the generally accepted accounting standards SECOND DIVISION
(GAAS), on the other hand, the provisions of the Tax Code and the
rules and regulations issued implementing said Tax Code shall G.R. No. 136975             March 31, 2005
prevail. (italics supplied)
COMMISSION OF INTERNAL REVENUE, Petitioner,
RAM No. 2-95 is clear-cut on the rule on when to recognize deductions vs.
for taxpayers using the crop method of accounting. The rule prevails HANTEX TRADING CO., INC., respondent.
21
 DECISION 3. Income tax returns & attachments for 1987; and

CALLEJO, SR., J.: 4. Record of tax payments.7

Before us is a petition for review of the Decision1 of the Court of However, the respondent’s president and general manager refused to
Appeals (CA) which reversed the Decision2 of the Court of Tax Appeals comply with the subpoena, contending that its books of accounts and
(CTA) in CTA Case No. 5126, upholding the deficiency income and records of importation of synthetic resin and calcium bicarbonate had
sales tax assessments against respondent Hantex Trading Co., Inc. been investigated repeatedly by the Bureau of Internal Revenue (BIR)
on prior occasions.8 The IIPO explained that despite such previous
The Antecedents investigations, the EIIB was still authorized to conduct an investigation
pursuant to Section 26-A of Executive Order No. 127. Still, the
The respondent is a corporation duly organized and existing under the respondent refused to comply with the subpoena issued by the IIPO.
laws of the Philippines. Being engaged in the sale of plastic products, it The latter forthwith secured certified copies of the Profit and Loss
imports synthetic resin and other chemicals for the manufacture of its Statements for 1987 filed by the respondent with the Securities and
products. For this purpose, it is required to file an Import Entry and Exchange Commission (SEC).9 However, the IIPO failed to secure
Internal Revenue Declaration (Consumption Entry) with the Bureau of certified copies of the respondent’s 1987 Consumption Entries from the
Customs under Section 1301 of the Tariff and Customs Code. Bureau of Customs since, according to the custodian thereof, the
original copies had been eaten by termites.10
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-
Intelligence Division of the Economic Intelligence and Investigation In a Letter dated June 28, 1990, the IIPO requested the Chief of the
Bureau (EIIB), received confidential information that the respondent Collection Division, Manila International Container Port, and the Acting
had imported synthetic resin amounting to P115,599,018.00 but only Chief of the Collection Division, Port of Manila, to authenticate the
declared P45,538,694.57.3 According to the informer, based on machine copies of the import entries supplied by the informer.
photocopies of 77 Consumption Entries furnished by another informer, However, Chief of the Collection Division Merlita D. Tomas could not
the 1987 importations of the respondent were understated in its do so because the Collection Division did not have the original copies
accounting records.4 Amoto submitted a report to the EIIB of the entries. Instead, she wrote the IIPO that, as gleaned from the
Commissioner recommending that an inventory audit of the respondent records, the following entries had been duly processed and released
be conducted by the Internal Inquiry and Prosecution Office (IIPO) of after the payment of duties and taxes:
the EIIB.5
IMPORTER – HANTEX TRADING CO., INC. – SERIES OF
Acting on the said report, Jose T. Almonte, then Commissioner of the 1987
EIIB, issued Mission Order No. 398-896 dated November 14, 1989 for ENTRY NO. DATE ENTRY NO. DATE
the audit and investigation of the importations of Hantex for 1987. The RELEASED RELEASED
IIPO issued subpoena duces tecum and ad testificandum for the 03058-87 1/30/87 50265-87 12/9/87
president and general manager of the respondent to appear in a
hearing and bring the following: 09120-87 3/20/87 46427-87 11/27/87
18089-87 5/21/87 30764-87 8/21/87
1. Books of Accounts for the year 1987; 19439-87 6/2/87 30833-87 8/20/87
19441-87 6/3/87 34690-87 9/16/87
2. Record of Importations of Synthetic Resin and Calcium 11667-87 4/15/87 34722-87 9/11/87
Carbonate for the year 1987;
22
 23294-87 7/7/87 43234-87 11/2/87 62471 8/28/87 93292 12/7/87
45478-87 11/16/87 44850-87 11/16/87 63187 9/2/87 96357 12/16/87
45691-87 12/2/87 44851-87 11/16/87 66859 9/15/87 96822 12/15/87
25464-87 7/16/87 46461-87 11/19/87 67890 9/17/87 98823 not received
26483-87 7/23/87 46467-87 11/18/87 68115 9/15/87 99428 12/28/87
29950-87 8/11/87 48091-87 11-27-8711 69974 9/24/87 99429 12/28/87
72213 10/2/87 99441 12/28/87
Acting Chief of the Collection Division of the Bureau of Customs 77688 10/16/87 101406 1/5/87
Augusto S. Danganan could not authenticate the machine copies of the
84253 11/10/87 101407 1/8/87
import entries as well, since the original copies of the said entries filed
with the Bureau of Customs had apparently been eaten by termites. 85534 11/11/87 3118 1-19-8712
However, he issued a certification that the following enumerated
entries were filed by the respondent which were processed and Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo
released from the Port of Manila after payment of duties and taxes, to Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an
wit: 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
Hantex Trading Co., Inc. machine copies of the Consumption Entries, Series of 1987, submitted
by the informer, as well as excerpts from the entries certified by Tomas
Entry No. Date Released Entry No. Date Released
and Danganan.
3903 1/29/87 22869 4/8/87
4414 1/20/87 19441 3/31/87 Based on the documents/records on hand, inclusive of the machine
10683 2/17/87 24189 4/21/87 copies of the Consumption Entries, the EIIB found that for 1987, the
12611 2/24/87 26431 4/20/87 respondent had importations totaling P105,716,527.00 (inclusive of
advance sales tax). Compared with the declared sales based on the
12989 2/26/87 45478 7/3/87 Profit and Loss Statements filed with the SEC, the respondent had
17050 3/13/87 26796 4/23/87 unreported sales in the amount of P63,032,989.17, and its
17169 3/13/87 28827 4/30/87 corresponding income tax liability was P41,916,937.78, inclusive of
18089 3/16/87 31617 5/14/87 penalty charge and interests.
19439 4/1/87 39068 6/5/87
EIIB Commissioner Almonte transmitted the entire docket of the case
21189 4/3/87 42581 6/21/87 to the BIR and recommended the collection of the total tax assessment
43451 6/29/87 42793 6/23/87 from the respondent.13
42795 6/23/87 45477 7/3/87
35582 not received 85830 11/13/87 On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a
Memorandum to the BIR Assistant Commissioner for Special
45691 7/3/87 86650 not received
Operations Service, directing the latter to prepare a conference letter
46187 7/8/87 87647 11/18/87 advising the respondent of its deficiency taxes.14
46427 7/3/87 88829 11/23/87
57669 8/12/87 92293 12/3/87 Meanwhile, as ordered by the Regional Director, Revenue
Enforcement Officers Saturnino D. Torres and Wilson Filamor
23
conducted an investigation on the 1987 importations of the respondent, 50% Surcharge C2 x 50% 3,073,521.52
in the light of the records elevated by the EIIB to the BIR, inclusive of Interest to 2/28/91 5,532,338.73
the photocopies of the Consumption Entries. They were to ascertain
the respondent’s liability for deficiency sales and income taxes for Total 14,752,903.2817
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 The invitation was reiterated in a Letter dated March 15, 1991. In his
appended thereto, there was a prima facie case of fraud against the Reply dated March 15, 1991, Mariano O. Chua, the President and
respondent in filing its 1987 Consumption Entry reports with the General Manager of the respondent, requested that the report of
Bureau of Customs. They found that the respondent had unrecorded Torres and Filamor be set aside on the following claim:
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 … [W]e had already been investigated by RDO No. 23 under
Revenue Officer and the Regional Director of the BIR concurred with Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987,
the report.15 0393561 RR dated Aug. 17, 1988 and 0347838 RR dated
March 2, 1988, and re-investigated by the Special Investigation
Based on the said report, the Acting Chief of the Special Investigation Team on Aug. 17, 1988 under Letter of Authority No. 0357464
Branch wrote the respondent and invited its representative to a RR, and the Intelligence and Investigation Office on Sept. 27,
conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency 1988 under Letter of Authority No. 0020188 NA, all for income
internal revenue taxes and to present whatever documentary and other and business tax liabilities for 1987. The Economic Intelligence
evidence to refute the same.16 Appended to the letter was a and Investigation Bureau on Nov. 20, 1989, likewise, confronted
computation of the deficiency income and sales tax due from the us on the same information for the same year.
respondent, inclusive of increments:
In all of these investigations, save your request for an informal
B. Computations: conference, we welcomed them and proved the contrary of the
allegation. Now, with your new inquiry, we think that there will
1. Cost of Sales Ratio A2/A1 85.492923%
be no end to the problem.
2. Undeclared Sales – Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61 Madam, we had been subjected to so many investigations and
C. Deficiency Taxes Due: re-investigations for 1987 and nothing came out except the
1. Deficiency Income Tax B3 x 35% 5,589,261.00 payment of deficiency taxes as a result of oversight. Tax
evasion through underdeclaration of income had never been
50% Surcharge C1 x 50% 2,794,630.50 proven.18
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58 Invoking Section 23519 of the 1977 National Internal Revenue Code
2. Deficiency Sales Tax (NIRC), as amended, Chua requested that the inquiry be set aside.
at 10% 7,290,082.72
The petitioner, the Commissioner of Internal Revenue, through
at 20% 10,493,312.31 Assistant Commissioner for Collection Jaime M. Maza, sent a Letter
Total Due 17,783,395.03 dated April 15, 1991 to the respondent demanding payment of its
Less: Advanced Sales Taxes 11,636,352.00 deficiency income tax of P13,414,226.40 and deficiency sales tax
Paid of P14,752,903.25, inclusive of surcharge and interest.20 Appended
Deficiency Sales Tax 6,147,043.03
24
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
25
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
26
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
27
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
28
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;
29
 (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
30
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
31
 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,
32
 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
33
assessment; otherwise, the Court would thereby be committing a VISAYAN CEBU TERMINAL CO., INC., petitioner-appellant,
travesty. vs.
COLLECTOR OF INTERNAL REVENUE, respondent-appellee.
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, Duterte and Rodriguez for petitioner.
without prejudice to the petitioner’s issuance of a new assessment Assistant Solicitor General Jose P. Alejandro and Atty. Sixto J. Javier
against the respondent based on credible evidence; or, to remand the for respondent.
case to the CTA for further proceedings, to enable the petitioner to
adduce in evidence certified true copies or duplicate original copies of CONCEPCION, J.:
the Consumption Entries for the respondent’s 1987 importations, if
there be any, and the correct tax deficiency assessment thereon, Petitioner Visayan Cebu Terminal Co., Inc., seeks a review of the
without prejudice to the right of the respondent to adduce controverting decision of the Court of Tax Appeals in the above entitled case. The
evidence, so that the matter may be resolved once and for all by the dispositive part of said decision reads as follows:
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 FOR THE FOREGOING CONSIDERATIONS, the decision
emphasized in Harbin v. Commissioner of Internal Revenue,91 taxation appealed from is hereby modified, and appellant is hereby
is not only practical; it is vital. The obligation of good faith and fair ordered to pay the Collector of Internal Revenue, within a
dealing in carrying out its provision is reciprocal and, as the reasonable period to be fixed by the latter, the sum of
government should never be over-reaching or tyrannical, neither P15,517.00, computed below:
should a taxpayer be permitted to escape payment by the concealment
of material facts. Net income per return P41,596.45
Disallowances:
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The (1) Salaries 500.00
Decision of the Court of Appeals is SET ASIDE. The records are (2) Representation Expenses:
REMANDED to the Court of Tax Appeals for further proceedings, As claimed by appellant 75,855.88
conformably with the decision of this Court. No costs. Allowed 10,000.00 65,855.88
(3) Miscellaneous expenses 5,768.00
SO ORDERED. ————
Net income subject to tax P113,720.33
Tax due on P113,720.33:
P100,000.00 at 20% P20,000.00
Republic of the Philippines P13,720.00 at 28% 3,842.00 P23,842.00
SUPREME COURT Less tax previously assessed and paid 8,325.00
Manila ————
Deficiency tax P15,517.00
EN BANC
With costs against appellant.
G.R. No. L-12798             May 30, 1960
The facts, which are not disputed, are set forth in the aforementioned
decision, from which we quote:

34
"The appellant, Visayan Terminal Co. Inc., is a corporation organized letter of the Collector dated March 26, 1955, and is reproduced
for the purpose of handling arrastre operations in the port of Cebu. It below:
was awarded the contract for the said arrastre operations by the
Bureau of Customs, pursuant to Act No. 3002, as amended. Net income as per return P41.596.45
Disallowances:
"On March 1, 1952, appellant filed its income tax return for 1951 per investigation:
reporting a gross income of P420,633.40 and claimed deductions salaries of officers P 2,375.00
amounting to P379,036.95, leaving a net income of P41,596.45 on allowed per reaudit 1,875.00 500.00
which it paid income tax in the sum of P8,319.20. The sum of per investigation and reaudit,
P379,036.95 claimed as deductions consisted of various items, among representation expenses 75,855.88
which were the following: per investigation, miscellaneous
expenses 6,300.00
1. Salaries — allowed per reaudit 532.00 5,768.00
(a) Salary and bonus of Juan ——— ————
Eugenio Lo P1,875.00 Net income subject to tax per
(b) Salary of Felix Go Chan 250.00 reaudit P123,720.33
(c) Salary of Teomino Tiu Tax due on P123,720.33:
Tiam 250.00 P 2,375.00 P100,000.00 at 20% P20,000.00
2. Representation expenses 75,855.88 P23,720.00 at 28% 6,642.00 P26,642.00
3. Miscellaneous expenses ————
(a) Christmas bonus given to Less tax previously assessed and paid 8,325.00
various persons P1,500.00 —————
(b) Tips to ships' officers 4,800.00 6,300.00 Deficiency tax P18,317.00
TOTAL P84,530.88 Add: 5% surcharge 915.85
1% monthly interest from
The said sums of P2,375.00, P75,855.88 and P6,300.00, 5/31/53 to 4/30/55 4,212.91
representing salaries, representation expenses and Compromise for late payment 40.00
miscellaneous expenses, respectively, or a total of P84,530.88, —————
were disallowed by the Collector of Internal Revenue, thus Total amount due on April 30,1955 P23,485.76
giving rise to a deficiency assessment of P18,991.00.
Appellant has agreed to the disallowance of the sum P500.00
xxx     xxx     xxx representing the salaries of Felix Go Chan and Teotimo Tiu
Tiam at P250.00 each, and the sum of P5,768.00, representing
Upon request for reconsideration, the Collector modified the miscellaneous expenses. The only issue raised in this appeal
deficiency income tax assessment by allowing the deduction relates to the deductibility of the sum of P75,855.88 as
from appellant's gross income of the salary of Juan Eugenio Lo representation expenses.
in the sum of P1,875.00 and miscellaneous expenses
amounting to P532.00, at the same time maintaining the Passing upon said issue, which is, also, the only one raised in this
disallowance of the full amount of P75,855.88 as representation appeal, the lower court held that "representation ... expenses fall under
expenses. The revised deficiency assessment is itemized in the the category of business expenses which" are allowable deductions
from gross income if they meet the conditions prescribed by law",

35
particularly section 30(a) (1) of the National Internal Revenue Code;
that, to be deductible, said business expenses must "ordinary and
necessary expenses paid or incurred in carrying on any trade or
business"; that those expenses "must also, meet the further test of
reasonableness in amount", this test being "inherent in the phase
`ordinary and necessary'"; that some of the representation expenses
claimed by appellant had been evidenced by vouchers or chits, but
others were reimbursed "without presentation of supporting papers;
that the aforementioned vouchers or chits were allegedly "destroyed
when the house of Buenaventura M. Veloso, treasurer of appellant,
where the records were kept was burned"; that, accordingly, "it is not
possible to determine the actual amount covered by supporting papers
and the amount without supporting papers"; that the court should,
therefore, "determine from all available data the amount properly
deductible as representation expenses"; that "during the period of four
(4) years from 1949 to 1952, appellant had gross income, net income,
net profits and claimed representation expenses as follows:
Year Gross Income Net Profit Representation
Expenses
1949 P722,135.42 P61,257.53 P83,703.54
1950 451,303.21 33,023.78 10,424.39
1951 420,479.39 41,596.45 75,855.88
1952 425,326.86 34,207.31 63,618.64
and that "from the above figures, we may infer that the sum of
P10,000 may be considered reasonably necessary for
entertainment expenses of appellant in 1951, it having claimed
a little over the amount in 1950, when its gross income was
more than its gross income in 1951 and 1952", and because "it
allegedly spent for entertainment purposes in 1948 the sum of
P500.00 only." Hence, the lower court modified the assessment
of the taxes due from appellant herein the manner set forth in
the beginning of this decision.
In its brief, appellant does not assail any of the premises upon
which the aforementioned conclusion of the lower court was
predicated. What is more, it relied upon, and, even, quoted
some of the views expressed in the decision appealed from.
Appellant, however, maintains that said court had acted
arbitrarily in considering the representation expenses in 1950,
not those incurred in 1949 and 1952, in fixing the amount
deductible in 1951. This pretense is clearly untenable. It
appears: (a) that part of the alleged representation expenses
had never had any supporting paper; (b) that the vouchers and
chits covering other representation expenses had been
allegedly destroyed; (c) that there is no documentary evidence
on record of any of the representation expenses in question; (d)
that no testimonial evidence has been introduced on any
specific item of said alleged expenses; (e) that there is no more
than oral proof to the effect that payments had been made to
appellant's officers for representation expenses allegedly made
by the latter and about the general nature of such alleged
expenses; (f) that the gross income in 1950 exceeded the gross
income in 1951 and 1952, and (g) that the representation
expenses in 1948 amounted to P500 only. Under these
circumstances, the lower court was fully justified in concluding
that the representation expenses in 1951 should be slightly less
than those incurred in 1950.
Upon the other hand, appellant has not even tried to show why
its representation expenses in 1951 should be deemed bigger
than the amount allowed by the lower court. In fact, the latter
had been patently fair and reasonable, if not rather liberal, in
allowing appellant to deduct P10,000.00 as representation
expenses for 1951, there being absolutely no concrete
evidence of the sums then actually spent for purposes of
representation. It may not be amiss to note that the explanation
to the effect that the supporting paper of some of those
expenses had been destroyed when the house of the treasurer
was burned, can hardly be regarded as satisfactory, for
appellant's records are supposed to be kept in its offices, not in
the residence of one of its officers.
Being in accordance with the facts and the law, the decision
appealed from is hereby affirmed, with costs against petitioner-
appellant, Visayan Cebu Terminal Co., Inc. It is so ordered.
Paras, C J., Bengzon, Montemayor, Bautista Angelo, Labrador,
Barrera, and Gutierrez David JJ., concur.
36
 Republic of the Philippines revalidated on August 10, 2001 by Regional Director Leonardo
SUPREME COURT Sacamos.
Manila
For petitioner’s failure to comply with several requests for the
SECOND DIVISION presentation of records and Subpoena Duces Tecum, [the] OIC of BIR
Legal Division issued an Indorsement dated September 26, 2001
G.R. No. 185371               December 8, 2010 informing Revenue District Officer of Revenue Region No. 67, Legazpi
City to proceed with the investigation based on the best evidence
COMMISSIONER OF INTERNAL REVENUE, Petitioner, obtainable preparatory to the issuance of assessment notice.
vs.
METRO STAR SUPERAMA, INC., Respondent. On November 8, 2001, Revenue District Officer Socorro O. Ramos-
Lafuente issued a Preliminary 15-day Letter, which petitioner received
DECISION 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
MENDOZA, J.: and withholding taxes due from petitioner in the amount of ₱
292,874.16.
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 On April 11, 2002, petitioner received a Formal Letter of Demand dated
reverse and set aside the 1] September 16, 2008 Decision1 of the April 3, 2002 from Revenue District No. 67, Legazpi City, assessing
Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 petitioner the amount of Two Hundred Ninety Two Thousand Eight
and 2] its November 18, 2008 Resolution2 denying petitioner’s motion Hundred Seventy Four Pesos and Sixteen Centavos (₱292,874.16.) for
for reconsideration. deficiency value-added and withholding taxes for the taxable year
1999, computed as follows:
The CTA-En Banc affirmed in toto the decision of its Second
Division (CTA-Second Division) in CTA Case No. 7169 reversing the ASSESSMENT NOTICE NO. 067-99-003-579-072
February 8, 2005 Decision of the CIR which assessed respondent
Metro Star Superama, Inc. (Metro Star) of deficiency value-added tax VALUE ADDED TAX
and withholding tax for the taxable year 1999.
Gross Sales ₱1,697,718.90
Based on a Joint Stipulation of Facts and Issues3 of the parties, the
CTA Second Division summarized the factual and procedural Output Tax ₱ 154,338.08
antecedents of the case, the pertinent portions of which read:
Less: Input Tax _____________
Petitioner is a domestic corporation duly organized and existing by VAT Payable ₱ 154,338.08
virtue of the laws of the Republic of the Philippines, x x x.
₱
Add: 25% Surcharge
38,584.54
On January 26, 2001, the Regional Director of Revenue Region No.
10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue 20% Interest 79,746.49
Officer Daisy G. Justiniana to examine petitioner’s books of accounts
and other accounting records for income tax and other internal revenue Compromise Penalty
taxes for the taxable year 1999. Said Letter of Authority was
37
Late Payment ₱16,000.00 Subsequently, Revenue District Office No. 67 sent a copy of the Final
Notice of Seizure dated May 12, 2003, which petitioner received on
Failure to File May 15, 2003, giving the latter last opportunity to settle its deficiency
2,400.00 18,400.00 136,731.01
VAT returns tax liabilities within ten (10) [days] from receipt thereof, otherwise
respondent BIR shall be constrained to serve and execute the
TOTAL ₱ 291,069.09
Warrants of Distraint and/or Levy and Garnishment to enforce
WITHHOLDING TAX collection.
Compensation 2,772.91 On February 6, 2004, petitioner received from Revenue District Office
Expanded 110,103.92 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
Total Tax Due ₱ 112,876.83 withholding tax payment in the amount of ₱292,874.16.
Less: Tax Withheld 111,848.27
On July 30, 2004, petitioner filed with the Office of respondent
Deficiency Withholding Tax ₱ 1,028.56 Commissioner a Motion for Reconsideration pursuant to Section 3.1.5
Add: 20% Interest p.a. 576.51 of Revenue Regulations No. 12-99.

Compromise Penalty 200.00 On February 8, 2005, respondent Commissioner, through its

authorized representative, Revenue Regional Director of Revenue
TOTAL ₱ 1,805.07
Region 10, Legaspi City, issued a Decision denying petitioner’s Motion
*Expanded for Reconsideration. Petitioner, through counsel received said Decision
Withholding ₱1,949,334.25 x 5% 97,466.71 on February 18, 2005.
Tax
x x x.
Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00 Denying that it received a Preliminary Assessment Notice (PAN) and
claiming that it was not accorded due process, Metro Star filed a
Rental petition for review4 with the CTA. The parties then stipulated on the
41,272.73 x 1% 412.73
Expense following issues to be decided by the tax court:
Security
156,142.01 x 1% 1,561.42 1. Whether the respondent complied with the due process
Service
requirement as provided under the National Internal Revenue
Service Contractor ₱ 110,103.92 Code and Revenue Regulations No. 12-99 with regard to the
Total issuance of a deficiency tax assessment;

SUMMARIES OF DEFICIENCIES 1.1 Whether petitioner is liable for the respective

VALUE ADDED TAX ₱ 291,069.09 amounts of ₱291,069.09 and ₱1,805.07 as deficiency
VAT and withholding tax for the year 1999;
WITHHOLDING TAX 1,805.07
1.2. Whether the assessment has become final and
TOTAL ₱ 292,874.16
executory and demandable for failure of petitioner to
38
 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
39
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
40
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
41
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
42
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. Menguito16 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).
43
WHEREFORE, the petition is DENIED. Estoppel applies against a taxpayer who did not only raise at the
earliest opportunity its representative's lack of authority to execute two
SO ORDERED. (2) waivers of defense of prescription, but was also accorded, through
these waivers, more time to comply with the audit requirements of the
JOSE CATRAL MENDOZA Bureau of Internal Revenue. Nonetheless, a tax assessment served
Associate Justice beyond the extended period is void.

This Petition for Review on Certiorari1 seeks to nullify and set aside the
June 7, 2016 Decision2 and September 26, 2016 Resolution3 of the
Court of Tax Appeals En Banc in CTA EB No. 1251. The Court of Tax
Appeals En Banc affirmed its First Division's September 1, 2014
Decision,4 cancelling the deficiency assessments against Transitions
Optical Philippines, Inc. (Transitions Optical).

On April 28, 2006, Transitions Optical received Letter of Authority No.

00098746 dated March 23, 2006 from Revenue Region No. 9, San
Pablo City, of the Bureau of Internal Revenue. It was signed by then
Officer-in-Charge- Regional Director Corazon C. Pangcog and it
authorized Revenue Officers Jocelyn Santos and Levi Visaya to
examine Transition Optical's books of accounts for internal revenue tax
purposes for taxable year 2004.5

On October 9, 2007, the parties allegedly executed a Waiver of the

Defense of Prescription (First Waiver).6 In this supposed First Waiver,
the prescriptive period for the assessment of Transition Optical's
internal revenue taxes for the year 2004 was extended to June 20,
THIRD DIVISION 2008.7 The document was signed by Transitions Optical's Finance
Manager, Pamela Theresa D. Abad, and by Bureau of Internal
November 22, 2017 Revenue's Revenue District Officer; Myrna S. Leonida.8

G.R. No. 227544 This was followed by another supposed Waiver of the Defense of
Prescription (Second Waiver) dated June 2, 2008. This time, the
COMMISSIONER OF INTERNAL REVENUE, Petitioner prescriptive period was supposedly extended to November 30, 2008.9
vs.
TRANSITIONS OPTICAL PHILIPPINES, INC., Respondent Thereafter, the Commissioner of Inte1nal Revenue, through Regional
Director Jaime B. Santiago (Director Santiago), issued a Preliminary
DECISION Assessment Notice (PAN) dated November 11, 2008, assessing
Transitions Optical for its deficiency taxes for taxable year 2004.
Transitions Optical filed a written protest on November 26, 2008.10
LEONEN, J.:

44
The Commissioner of Internal Revenue, again through Director
Santiago, subsequently issued against Transitions Optical a Final
Assessment Notice (FAN) and a Formal Letter of Demand (FLD) dated
November 28, 2008 for deficiency income tax, value-added tax,
expanded withholding tax, and final tax for taxable year 2004
amounting to ₱l 9, 701,849.68.11
In its Protest Letter dated December 8, 2008 against the FAN,
Transitions Optical alleged that the demand for deficiency taxes had
already prescribed at the time the FAN was mailed on December 2,
2008. In its Supplemental Protest, Transitions Optical pointed out that
the FAN was void because the FAN indicated 2006 as the return
period, but the assessment covered calendar year 2004.12
Years later, the Commissioner of Internal Revenue, through Regional
Director Jose N. Tan, issued a Final Decision on the Disputed
Assessment dated January 24, 2012, holding Transitions Optical liable
for deficiency taxes in the total amount of ₱l9,701,849.68 for taxable
year 2004, broken down as follows;
Tax Amount
Income Tax ₱3,153,371.04
Value-Added Tax 1,231,393.4 7
Expanded Withholding Tax 175,339.51
Final Tax on Royalty 14,026,247.90
Final Tax on Interest Income 1,115,497. 76
Total ₱19,701,849.6813
On March 16, 2012, Transitions Optical filed a Petition for Review
before the Court of Tax Appeals.14
In her Answer, the Commissioner of Internal Revenue interposed that
Transitions Optical's claim of prescription was inappropriate because
the executed Waiver of the Defense of Prescription extended the
assessment period. She added that the posting of the FAN and FLD
was within San Pablo City Post Office's exclusive control. She averred
that she could not be faulted if the FAN and FLD were posted for
mailing only on December 2, 20081 since November 28, 2008 fell on a
Friday and the next supposed working day, December 1, 2008, was
declared a Special Holiday.15
After trial and upon submission of the parties' memoranda, the First
Division of the Court of Tax Appeals (First Division) rendered a
Decision on September 1, 2014.16 It held:
In summary therefore, the Court hereby finds the subject Waivers to be
defective and therefore void. Nevertheless, granting for the sake of
argument that the subject Waivers were validly executed, for failure of
respondent however to present adequate supporting evidence to prove
that it issued the FAN and the FLD within the extended period agreed
upon in the 2nd Waiver, the subject assessment must be cancelled for
being issued beyond the prescriptive period provided by law to assess.
WHEREFORE, in light of the foregoing considerations, the instant
Petition for Review is hereby GRANTED. Accordingly, the Final
Assessment Notice, Formal Letter of Demand and Final Decision on
Disputed Assessment finding petitioner Transitions Optical Philippines,
Inc. liable for deficiency income tax, deficiency expanded withholding
tax, deficiency value-added tax and deficiency final tax for taxable year
2004 in the total amount of ₱19,701,849.68 are hereby CANCELLEU
and SET ASIDE.
SO ORDER.ED.17 (Emphasis in the original)
The Commissioner of Internal Revenue filed a Motion for
Reconsideration, which was denied by the First Division in its
Resolution18 dated November 7, 2014.
The Court of Tax Appeals En Banc affirmed the First Division
Decision19 and subsequently denied the Commissioner of Internal
Revenue's Motion for Reconsideration.20
Hence, this Petition was filed before this Court. Transitions Optical filed
its Comment.21
Petitioner contends that "[t]he two Waivers executed by the parties on
October 9, 2007 and June 2, 2008 substantially complied with the
45
requirements of Sections 203 and 222 of the [National Internal
Revenue Code]."22 She adds that technical rules of procedure of
administrative bodies, such as those provided in Revenue
Memorandum Order (RMO) No. 20-90 issued on April 4, 1990 and
Revenue Delegation Authority Order (RDAO) No. 05-01 issued on
August 2, 2001, must be liberally applied to promote justice.23 At any
rate, petitioner maintains that respondent is estopped from questioning
the validity of the waivers since their execution was caused by the
delay occasioned by respondent's own failure to comply with the orders
of the Bureau of Internal Revenue to submit documents for audit and
examination.24
Furthermore, petitioner argues that the assessment required to be
issued within the three (3)-year period provided in Sections 203 and
222 of the National Internal Revenue Code refer to petitioner's actual
issuance of the notice of assessment to the taxpayer or what is usually
known as PAN, and not the FAN issued in case the taxpayer files a
protest.25
On the other hand, respondent contends that the Court of Tax Appeals
properly found the waivers defective, and therefore, void. It adds that
the three (3)-year prescriptive period for tax assessment primarily
benefits the taxpayer, and any waiver of this period must be strictly
scrutinized in light of the requirements of the laws and
rules.26 Respondent posits that the requirements for valid waivers are
not mere technical rules of procedure that can be set aside.27
Respondent further asserts that it is not estopped from questioning the
validity of the waivers as it raised its objections at the earliest
opportunity.28 Besides, the duty to ensure compliance with the
requirements of RMO No. 20-90 and RDAO No. 05-01, including
proper authorization of the taxpayer's representative, fell primarily on
petitioner and her revenue officers. Thus, petitioner came to court with
unclean hands and cannot be permitted to invoke the doctrine of
estoppel.29 Respondent insists that there was no clear showing that the
signatories in the waivers were duly sanctioned to act on its behalf.30
Even assuming that the waivers were valid, respondent argues that the
assessment would still be void as the FAN was served only on
December 4, 2008, beyond the extended period of November 30,
2008.31 Contrary to petitioner's stance, respondent counters that the
assessment required to be served within the three (3)-year prescriptive
period is the FAN and FLD, not just the PAN.32 According to
respondent, ''it is the FAN and FLD that formally notifly] the taxpayer,
and categorica1ly [demand] from him, that a deficiency tax is due."33
The issues for this Court's resolution are:
First, whether or not the two (2) Waivers of the Defense of Prescription
entered into by the parties on October 9, 2007 and June 2, 2008 were
valid; and
Second, whether or not the assessment of deficiency taxes against
respondent Transitions Optical Philippines, Inc. for taxable year 2004
had prescribed.
This Court denies the Petition. The Court of Tax Appeals committed no
reversible error in cancelling the deficiency tax assessments.
I
As a general rule, petitioner has three (3) years to assess taxpayers
from the filing of the return. Section 203 of the National Internal
Revenue Code provides:
Section 203. Period of Limitation Upon Assessment m1d 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.
An exception to the rule of prescription is found in Section 222(b) and
(d) of this Code, viz:
Section 222. Exceptions as to Period of Limitation of Assessment and
Collection of Taxes. -
46
....
(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.
....
(d) Any internal revenue tax, which has been assessed within the
period agreed upon as provided in paragraph (b) hereinabove, may be
collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the five (5) - year
period. The period so agreed upon may be extended by subsequent
written agreements made before the expiration of the period previously
agreed upon.
Thus, the period to assess and collect taxes may be extended upon
the Commissioner of Internal Revenue and the taxpayer's written
agreement, executed before the expiration of the three (3)-year period.
In this case, two (2) waivers were supposedly executed by the parties
extending the prescriptive periods for assessment of income tax, value-
added tax, and expanded and final withholding taxes to June 20, 2008,
and then to November 30, 2008.
The Court of Tax Appeals, both its First Division and En Banc, declared
as defective and void the two (2) Waivers of the Defense of
Prescription for non-compliance with the requirements for the proper
execution of a waiver as provided in RMO No. 20-90 and RDAO No.
05-01. Specifically, the Court of Tax Appeals found that these Waivers
were not accompanied by a notarized written authority from
respondent, authorizing the so-called representatives to act on its
behalf. Likewise, neither the Revenue District Office's acceptance date
nor respondent's receipt of the Bureau of Internal Revenue's
acceptance was indicated in either document.34
However, Presiding Justice Roman G. Del Rosario (Justice Del
Rosario) in his Separate Concurring Opinion35 in the Court of Tax
Appeals June 7, 2016 Decision, found that respondent is estopped
from claiming that the waivers were invalid by reason of its own
actions, which persuaded the government to postpone the issuance of
the assessment. He discussed:
In the case at bar, respondent performed acts that induced the BIR to
defer the issuance of the assessment. Records reveal that to extend
the BIR's prescriptive period to assess respondent for deficiency taxes
for taxable year 2004, respondent executed two (2) waivers. The first
Waiver dated October 2007 extended the period to assess until June
20, 2008, while the second Waiver, which was executed on June 2,
2008, extended the period to assess the taxes until November 30,
2008. As a consequence of the issuance of said waivers, petitioner
delayed the issuance of the assessment.
Notably, when respondent filed its protest on November 26, 2008
against the Preliminary Assessment Notice dated November 11, 2008,
it merely argued that it is not liable for the assessed deficiency taxes
and did not raise as an issue the invalidity of the waiver and the
prescription of petitioner's right to assess the deficiency taxes. In its
protest dated December 8, 2008 against the FAN, respondent argued
that the year being audited in the FAN has already prescribed at the
time such FAN was mailed on December 2, 2008. Respondent even
stated in that protest that it received the letter (referring to the FAN
dated November 28, 2008) on December 5, 2008, which accordingly is
five (5) days after the waiver it issued had prescribed. The foregoing
narration plainly does not suggest that respondent has any objection to
its previously executed waivers. By the principle of estoppel,
respondent should not be allowed to question the validity of the
waivers.36
In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly
Nextel Communications Phils., lnc.),37 this Comi recognized the
doctrine of estoppel and upheld the waivers when both the taxpayer
and the Bureau of Internal Revenue were in part de lie to. The
taxpayer's act of impugning its waivers after benefitting from them was
considered an act of bad faith:
In this case, respondent, after deliberately executing defective waivers,
raised the very same deficiencies it caused to avoid the tax liability
determined by the BIR during the extended assessment period. It must
47
be remembered that by virtue of these Waivers, respondent was given
the opportunity to gather and submit documents to substantiate its
claims before the [Commissioner of Internal Revenue] during
investigation. It was able to postpone the payment of taxes, as well as
contest and negotiate the assessment against it. Yet, after enjoying
these benefits, respondent challenged the validity of the Waivers when
the consequences thereof were not in its favor. In other words,
respondent's act of impugning these Waivers after benefiting therefrom
and allowing petitioner to rely on the same is an act of bad faith.38
This Court found the taxpayer estopped from questioning the validity of
its waivers:
Respondent executed five Waivers and delivered them to petitioner,
one after the other. It allowed petitioner to rely on them and did not
raise any objection against their validity until petitioner assessed taxes
and penalties against it. Moreover, the application of estoppel is
necessary to prevent the undue injury that the government would suffer
because of the cancellation of petitioner's assessment of respondent's
tax liabilities.39 (Emphasis in the original)
Parenthetically, this Court stated that when both parties continued to
deal with each other in spite of knowing and without rectifying the
defects of the waivers, their situation is "dangerous and open to abuse
by unscrupulous taxpayers who intend to escape their responsibility to
pay taxes by mere expedient of hiding behind technicalities."40
Estoppel similarly applies in this case.
Indeed, the Bureau of Internal Revenue was at fault when it accepted
respondent's Waivers despite their non-compliance with the
requirements of RMO No. 20-90 and RDAO No. 05-01.
Nonetheless, respondent's acts also show its implied admission of the
validity of the waivers. First, respondent never raised the invalidity of
the Waivers at the earliest opportunity, either in its Protest to the PAN,
Protest to the FAN, or Supplemental Protest to the FAN.41 It thereby
impliedly recognized these Waivers' validity and its representatives'
authority to execute them. Respondent only raised the issue of these
Waivers' validity in its Petition for Review filed with the Court of Tax
Appeals.42 In fact, as pointed out by Justice Del Rosario, respondent's
Protest to the FAN clearly recognized the validity of the
Waivers,43 when it stated:
This has reference to the Final Assessment Notice ("[F]AN") issued by
your office, dated November 28, 2008. The said letter was received by
Transitions Optical Philippines[,] Inc. (TOPI) on December 5, 2008, five
days after the waiver we issued which was valid until November 30,
2008 had prescribed.44 (Emphasis supplied)
Second, respondent does not dispute petitioner's assertion45 that
respondent repeatedly failed to comply with petitioner's notices,
directing it to submit its books of accounts and related records for
examination by the Bureau of Internal Revenue. Respondent also
ignored the Bureau of Internal Revenue's request for an Informal
Conference to discuss other "discrepancies" found in the partial
documents submitted. The Waivers were necessary to give respondent
time to fully comply with the Bureau of Internal Revenue notices for
audit examination and to respond to its Informal Conference request to
discuss the discrepancies.46 Thus, having benefitted from the Waivers
executed at its instance, respondent is estopped from claiming that
they were invalid and that prescription had set in.
II
But, even as respondent is estopped from questioning the validity of
the Waivers, the assessment is nonetheless void because it was
served beyond the supposedly extended period.
The First Division of the Court of Tax Appeals found that "the date
indicated in the envelope/mail matter containing the FAN and the FLD
is December 4, 2008, which is considered as the date of their
mailing."47 Since the validity period of the second Waiver is only until
November 30, 2008, prescription had already set in at the time the FAN
and the FLD were actually mailed on December 4, 2008.
For lack of adequate supp01ting evidence, the Court of Tax Appeals
rejected petitioner's claim that the FAN and the FLD were already
delivered to the post office for mailing on November 28, 2008 but were
actually processed by the post office on December 2, 2008, since
December 1, 2008 was declared a Special Holiday.48 The testimony of
petitioner's witness, Dario A. Consignado, Jr., that he brought the mail
48
matter containing the FAN and the FLD to the post office on November
28, 2008 was considered self-serving, uncorroborated by any other
evidence. Additionally, the Certification presented by petitioner
certifying that the FAN issued to respondent was delivered to its
Administrative Division for mailing on November 28, 2008 was found
insufficient to prove that the actual date of mailing was November 28,
2008.
This Court finds no clear and convincing reason to overturn these
factual findings of the Court of Tax Appeals.1âwphi1
in the notice of assessment.53 Likewise, an interest of 20% per annum,
or such higher rate as may be prescribed by rules and regulations, is to
be collected from the date prescribed for payment until the amount is
fully paid.54 Failure to file an administrative protest within 30 days from
receipt of the FAN will render the assessment final, executory, and
demandable.
WHEREFORE, the Petition is DENIED. The June 7, 2016 Decision and
September 26, 2016 Resolution of the Court of Tax Appeals En Banc
in CTAEB No. 1251 are AFFIRMED.

Finally, petitioner's contention that the assessment required to be SO ORDERED.

issued within the three (3)-year or extended period provided in
Sections 203 and 222 of the National Internal Revenue Code refers to MARVIC M.V.F. LEONEN
the PAN is untenable. Associate Justice

Considering the functions and effects of a PAN vis a vis a FAN, it is

clear that the assessment contemplated in Sections 203 and 222 of the
National Internal Revenue Code refers to the service of the FAN upon
the taxpayer.

A PAN merely informs the taxpayer of the initial findings of the Bureau
of Internal Revenue.49 It contains the proposed assessment, and the
facts, law, rules, and regulations or jurisprudence on which the
proposed assessment is based.50 It does not contain a demand for
payment but usually requires the taxpayer to reply within 15 days from
receipt. Otherwise, the Commissioner of Internal Revenue will finalize
an assessment and issue a FAN.

The PAN is a part of due process.51 It gives both the taxpayer and the
Commissioner of Internal Revenue the opportunity to settle the case at
the earliest possible time without the need for the issuance of a FAN.

On the other hand, a FAN contains not only a computation of tax

liabilities but also a demand for payment within a prescribed
period.52 As soon as it is served, an obligation arises on the part of the
taxpayer concerned to pay the amount assessed and demanded. It
also signals the time when penalties and interests begin to accrue
against the taxpayer. Thus, the National Internal Revenue Code
imposes a 25% penalty, in addition to the tax due, in case the taxpayer
fails to pay the deficiency tax within the time prescribed for its payment
49