G.R. No.

78780               July 23, 1987

DAVID G. NITAFAN, WENCESLAO M. POLO, and MAXIMO A. SAVELLANO, JR., petitioners, 
vs.
COMMISSIONER OF INTERNAL REVENUE and THE FINANCIAL OFFICER, SUPREME COURT OF THE
PHILIPPINES, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
Petitioners, the duly appointed and qualified Judges presiding over Branches 52, 19 and 53, respectively, of the
Regional Trial Court, National Capital Judicial Region, all with stations in Manila, seek to prohibit and/or perpetually
enjoin respondents, the Commissioner of Internal Revenue and the Financial Officer of the Supreme Court, from
making any deduction of withholding taxes from their salaries.
In a nutshell, they submit that "any tax withheld from their emoluments or compensation as judicial officers
constitutes a decrease or diminution of their salaries, contrary to the provision of Section 10, Article VIII of
the 1987 Constitution mandating that "(d)uring their continuance in office, their salary shall not be
decreased," even as it is anathema to the Ideal of an independent judiciary envisioned in and by said
Constitution."
It may be pointed out that, early on, the Court had dealt with the matter administratively in response to
representations that the Court direct its Finance Officer to discontinue the withholding of taxes from salaries of
members of the Bench. Thus, on June 4, 1987, the Court en banc had reaffirmed the Chief Justice's directive as
follows:
RE: Question of exemption from income taxation. — The Court REAFFIRMED the Chief Justice's previous
and standing directive to the Fiscal Management and Budget Office of this Court to continue with the
deduction of the withholding taxes from the salaries of the Justices of the Supreme Court as well as from the
salaries of all other members of the judiciary.
That should have resolved the question. However, with the filing of this petition, the Court has deemed it best to
settle the legal issue raised through this judicial pronouncement. As will be shown hereinafter, the clear intent of
the Constitutional Commission was to delete the proposed express grant of exemption from payment of
income tax to members of the Judiciary, so as to "give substance to equality among the three branches of
Government" in the words of Commissioner Rigos. In the course of the deliberations, it was further expressly
made clear, specially with regard to Commissioner Joaquin F. Bernas' accepted amendment to the amendment of
Commissioner Rigos, that the salaries of members of the Judiciary would be subject to the general income tax
applied to all taxpayers.
This intent was somehow and inadvertently not clearly set forth in the final text of the Constitution as approved and
ratified in February, 1987 (infra, pp. 7-8). Although the intent may have been obscured by the failure to include in the
General Provisions a proscription against exemption of any public officer or employee, including constitutional
officers, from payment of income tax, the Court since then has authorized the continuation of the deduction of the
withholding tax from the salaries of the members of the Supreme Court, as well as from the salaries of all other
members of the Judiciary. The Court hereby makes of record that it had then discarded the ruling in Perfecto vs.
Meer and Endencia vs. David, infra, that declared the salaries of members of the Judiciary exempt from payment of
the income tax and considered such payment as a diminution of their salaries during their continuance in office. The
Court hereby reiterates that the salaries of Justices and Judges are properly subject to a general income tax law
applicable to all income earners and that the payment of such income tax by Justices and Judges does not fall
within the constitutional protection against decrease of their salaries during their continuance in office.
A comparison of the Constitutional provisions involved is called for. The 1935 Constitution provided:
... (The members of the Supreme Court and all judges of inferior courts) shall receive such compensation as
may be fixed by law, which shall not be diminished during their continuance in office ...  (Emphasis
1 

supplied).
Under the 1973 Constitution, the same provision read:
The salary of the Chief Justice and of the Associate Justices of the Supreme court, and of judges of inferior
courts shall be fixed by law, which shall not be decreased during their continuance in office. ...  (Emphasis
2 

ours).
And in respect of income tax exemption, another provision in the same 1973 Constitution specifically stipulated:
No salary or any form of emolument of any public officer or employee, including constitutional officers, shall
be exempt from payment of income tax.  3 

The provision in the 1987 Constitution, which petitioners rely on, reads:
 The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower
courts shall be fixed by law. During their continuance in office, their salary shall not
be decreased.  (Emphasis supplied).
4 

The 1987 Constitution does not contain a provision similar to Section 6, Article XV of the 1973 Constitution, for
which reason, petitioners claim that the intent of the framers is to revert to the original concept of "non-
diminution "of salaries of judicial officers.
The deliberations of the 1986 Constitutional Commission relevant to Section 10, Article VIII, negate such contention.
The draft proposal of Section 10, Article VIII, of the 1987 Constitution read:
Section 13. The salary of the Chief Justice and the Associate Justices of the Supreme Court and of judges
of the lower courts shall be fixed by law. During their continuance in office, their salary shall not be
diminished nor subjected to income tax. Until the National Assembly shall provide otherwise, the Chief
Justice shall receive an annual salary of _____________ and each Associate Justice ______________
pesos.  (Emphasis ours)
5 

During the debates on the draft Article (Committee Report No. 18), two Commissioners presented their objections to
the provision on tax exemption, thus:
MS. AQUINO. Finally, on the matter of exemption from tax of the salary of justices, does this not violate the
principle of the uniformity of taxation and the principle of equal protection of the law? After all, tax is levied
not on the salary but on the combined income, such that when the judge receives a salary and it is
comingled with the other income, we tax the income, not the salary. Why do we have to give special
privileges to the salary of justices?
MR. CONCEPCION. It is the independence of the judiciary. We prohibit the increase or decrease of their
salary during their term. This is an indirect way of decreasing their salary and affecting the
independence of the judges.
MS. AQUINO. I appreciate that to be in the nature of a clause to respect tenure, but the special privilege on
taxation might, in effect, be a violation of the principle of uniformity in taxation and the equal protection
clause.  6 

x x x           x x x          x x x
MR. OPLE. x x x
Of course, we share deeply the concern expressed by the sponsor, Commissioner Roberto Concepcion, for
whom we have the highest respect, to surround the Supreme Court and the judicial system as a whole with
the whole armor of defense against the executive and legislative invasion of their independence. But in so
doing, some of the citizens outside, especially the humble government employees, might say that in trying to
erect a bastion of justice, we might end up with the fortress of privileges, an island of extra territoriality under
the Republic of the Philippines, because a good number of powers and rights accorded to the Judiciary here
may not be enjoyed in the remotest degree by other employees of the government.
An example is the exception from income tax, which is a kind of economic immunity, which is, of course,
denied to the entire executive department and the legislative.  7 

And during the period of amendments on the draft Article, on July 14, 1986, Commissioner Cirilo A. Rigos proposed
that the term "diminished" be changed to "decreased" and that the words "nor subjected to income tax" be deleted
so as to "give substance to equality among the three branches in the government.
Commissioner Florenz D. Regalado, on behalf of the Committee on the Judiciary, defended the original draft and
referred to the ruling of this Court in Perfecto vs. Meer  that "the independence of the judges is of far greater
8 

importance than any revenue that could come from taxing their salaries." Commissioner Rigos then moved that the
matter be put to a vote. Commissioner Joaquin G. Bernas stood up "in support of an amendment to the amendment
with the request for a modification of the amendment," as follows:
FR. BERNAS. Yes. I am going to propose an amendment to the amendment saying that it is not enough to
drop the phrase "shall not be subjected to income tax," because if that is all that the Gentleman will do, then
he will just fall back on the decision in Perfecto vs. Meer and in Dencia vs. David [should be Endencia and
Jugo vs. David, etc., 93 Phil. 696[ which excludes them from income tax, but rather I would propose that the
statement will read: "During their continuance in office, their salary shall not be diminished BUT MAY BE
SUBJECT TO GENERAL INCOME TAX."IN support of this position, I would say that the argument seems to
be that the justice and judges should not be subjected to income tax because they already gave up the
income from their practice. That is true also of Cabinet members and all other employees. And I know right
now, for instance, there are many people who have accepted employment in the government involving a
reduction of income and yet are still subject to income tax. So, they are not the only citizens whose income
is reduced by accepting service in government.
Commissioner Rigos accepted the proposed amendment to the amendment. Commissioner Rustico F. de los
Reyes, Jr. then moved for a suspension of the session. Upon resumption, Commissioner Bernas announced:
During the suspension, we came to an understanding with the original proponent, Commissioner Rigos, that
his amendment on page 6,. line 4 would read: "During their continuance in office, their salary shall not be
DECREASED."But this is on the understanding that there will be a provision in the Constitution similar to
Section 6 of Article XV, the General Provisions of the 1973 Constitution, which says:
No salary or any form of emolument of any public officer or employee, including constitutional
officers, shall be exempt from payment of income tax.
So, we put a period (.) after "DECREASED" on the understanding that the salary of justices is subject to tax.
When queried about the specific Article in the General Provisions on non-exemption from tax of salaries of public
officers, Commissioner Bernas replied:
FR BERNAS. Yes, I do not know if such an article will be found in the General Provisions. But at any rate,
when we put a period (.) after "DECREASED," it is on the understanding that the doctrine in Perfecto vs.
Meer and Dencia vs. David will not apply anymore.
The amendment to the original draft, as discussed and understood, was finally approved without objection.
THE PRESIDING OFFICER (Mr. Bengzon). The understanding, therefore, is that there will be a provision
under the Article on General Provisions. Could Commissioner Rosario Braid kindly take note that the
salaries of officials of the government including constitutional officers shall not be exempt from income tax?
The amendment proposed herein and accepted by the Committee now reads as follows: "During their
continuance in office, their salary shall not be DECREASED"; and the phrase "nor subjected to income tax"
is deleted.9
The debates, interpellations and opinions expressed regarding the constitutional provision in question until it was
finally approved by the Commission disclosed that the true intent of the framers of the 1987 Constitution, in adopting
it, was to make the salaries of members of the Judiciary taxable. The ascertainment of that intent is but in keeping
with the fundamental principle of constitutional construction that the intent of the framers of the organic law and
of the people adopting it should be given effect. The primary task in constitutional construction is to ascertain
10 

and thereafter assure the realization of the purpose of the framers and of the people in the adoption of the
Constitution. it may also be safely assumed that the people in ratifying the Constitution were guided mainly by the
11 

explanation offered by the framers. 12 

1avvphi1

Besides, construing Section 10, Articles VIII, of the 1987 Constitution, which, for clarity, is again reproduced
hereunder:
The salary of the Chief Justice and of the Associate Justices of the Supreme Court, and of judges of lower
courts shall be fixed by law. During their continuance in office, their salary shall not be decreased.
(Emphasis supplied).
it is plain that the Constitution authorizes Congress to pass a law fixing another rate of compensation of Justices
and Judges but such rate must be higher than that which they are receiving at the time of enactment, or if lower, it
would be applicable only to those appointed after its approval. It would be a strained construction to read into the
provision an exemption from taxation in the light of the discussion in the Constitutional Commission.
With the foregoing interpretation, and as stated heretofore, the ruling that "the imposition of income tax upon the
salary of judges is a dimunition thereof, and so violates the Constitution" in Perfecto vs. Meer, as affirmed
13 

in Endencia vs. David  must be declared discarded. The framers of the fundamental law, as the alter ego of the
14 

people, have expressed in clear and unmistakable terms the meaning and import of Section 10, Article VIII, of the
1987 Constitution that they have adopted
Stated otherwise, we accord due respect to the intent of the people, through the discussions and
deliberations of their representatives, in the spirit that all citizens should bear their aliquot part of the cost
of maintaining the government and should share the burden of general income taxation equitably.
WHEREFORE, the instant petition for Prohibition is hereby dismissed.
Teehankee, C.J., Fernan, Narvasa, Gutierrez, Jr., Cruz, Paras, Feliciano, Gancayco, Padilla, Bidin, Sarmiento and
Cortes, JJ., concur.
Yap, J., is on leave.
United States Supreme Court
SMIETANKA v. FIRST TRUST & SAV BANK(1922)
No. 540
Argued: January 19, 1922
Decided: February 27, 1922
[257 U.S. 602, 603]   Mr. Assistant Attorney General Ottinger, for petitioner.
Mr. John P. Wilson, of Chicago, Ill., for respondent.
Mr. Chief Justice TAFT delivered the opinion of the Court.

The question presented for decision is whether, under the Income Tax Law of 1913, income held and accumulated by a
trustee for the benefit of unborn and unascertained persons was taxable. The accumulations of income were $789,905.65
for the years 1913, 1914, and 1915, and the tax collected by the petitioner as collector, and paid under protest by the
trustee, the respondent, amounted to $36,638.69. Respondent brought suit for this sum against the petitioner in the
District Court for the Northern District of Illinois, and judgment was rendered against it on demurrer to the declaration.
The [257 U.S. 602, 604]   judgment was reversed by the Circuit Court of Appeals. First Trust & Savings Bank v.
Smietanka, 268 Fed. 230. The District Court then overruled the demurrer and, the petitioner electing not to plead further,
rendered a judgment against him, which was affirmed by the court below on a second appeal. As this case arises under
the revenue laws and the judgment of the Circuit Court of Appeals is final (section 128 of the Judicial Code [Comp. St.
1120]), certiorari issued under section 240 of the Code (Comp. St. 1217).
The income tax here in question was provided for in 'an act to reduce tariff duties and to provide revenue for the
government and for other purposes,' enacted October 3, 1913 (38 Stat. 114), and is embodied in section II of that act
(page 166 et seq.). The tax is imposed by paragraph A, subd. 1. It levies a normal tax of 1 per cent. upon the entire yearly
net income arising from all sources accruing to every citizen of the United States and to every person in the United States
residing there. In subdivision 2, an additional or surtax is levied on the net income of every individual. Under paragraph G,
the normal tax imposed on individuals is extended to corporations. Paragraph B defines the net income of individuals and
specifies the deductions. Paragraph D makes provision for returns by persons and then says:
'Guardians, trustees, executors, administrators, agents, receivers, conservators, and all persons, ... or associations acting
in a fiduciary capacity, shall make and render a return of the net income of the person for whom they act, subject to this
tax, coming into their custody or control and management, and be subject to all the provisions of this section which apply
to individuals.'
Paragraph E provides that, among others, all lessees or mortgagors of real or personal property, trustees acting in any
trust capacity, executors, administrators, agents, receivers, conservators, having control, receipt, custody, disposal or
payment of annual gains, profits and income [257 U.S. 602, 605]   of another person, exceeding $3,000 for any taxable
year, who are required to make return in behalf of another, shall deduct the normal tax on the income and pay it to the
United States, and they are each made personally liable for such tax. It is further declared that these payments of the tax
at the source shall only apply to the normal tax thereinbefore imposed on individuals.
It is obvious from a reading of the statute, the relevant provisions of which we have summarized, that Congress was
seeking to require fiduciaries to make return and pay the normal tax due from persons subject to the tax on such income
as the fiduciaries were receiving for such persons. There was nowhere in the act a payment required of the fiduciary of a
tax upon the income of the estate or trust property, the income from which he collects, except as it is to inure to the benefit
of a person or an individual from whose income he is authorized and required to deduct the normal tax thereon. There
must have been a taxable person for whom the fiduciary was acting to make the provisions relied upon by the government
applicable. There was no provision for the payment 'at the source' by the fiduciary of anything but the normal tax. It was
intended that the additional or surtax should be paid by the cestui que trust. Here there was no cestui que trust to pay a
surtax.
No language in the act included a tax on income received by a trustee by him to be accumulated for unborn or
unascertained beneticiaries. There was indicated in the taxing paragraph A the congressional intention to tax citizens
everywhere, and noncitizens, resident in the United States, including persons, natural and corporate, on incom from every
source less allowed deductions. But nowhere were words used which can be stretched to include unborn beneficiaries for
whom income may be accumulating. It may be that Congress had a general [257 U.S. 602, 606]   intention to tax all
incomes whether for the benefit of persons living or unborn, but a general intention of this kind must be carried into
language which can be reasonably construed to effect it. Otherwise the intention cannot be enforced by the courts. The
provisions of such acts are not to be extended by implication. Treat v. White, 181 U.S. 264, 267 , 21 S. Sup. Ct. 611;
United States v. Field, 255 U.S. 257 , 41 Sup. Ct. 256; Gould v. Gould, 245 U.S. 151, 153 , 38 S. Sup. Ct. 53.
The Treasury Department did not attempt, for two years, to collect tax on income of this character. This was in accord with
the ruling of Deputy Commissioner of Internal Revenue Speer, dated February 9, 1915, published by the Department
(Corporation Trust Co. Income Tax service 1915, p. 426). He held that--
'The income tax can be levied only on such income as is payable to some natural or artificial person subject to the
provisions of the law.'
Subsequently this ruling was changed and the Commissioner of Internal Revenue held that--
'when the beneficiary is not in esse and the income of the estate is retained by the fiduciary, such income will be taxable
to the estate as for an individual, and the fiduciary will pay the tax both normal and additional.'
This seems to us to graft something on the statute that is not there. It is an amendment, and not a construction, and such
an amendment was made in subsequent income tax laws as we shall see.
Counsel for the government cite the case of Merchants' Loan & Trust Co. V. Smietanka, 255 U.S. 509 , 41 Sup. Ct. 386,
15 A. L. R. 1305, to support their contention. It does not do so because it deals with an amendment of the provision here
under discussion. The issue there was the legality of an income tax levied against a trustee for income received by him
under a testamentary trust to pay the net income to the widow for life and afterwards to the children. [257 U.S. 602,
607]   It was held that the trustee was a taxable person under the Act of October 2, 1917, 40 Stat. 331 (Comp. St. 1918,
6336h), which required trustees to render a return of the income for the person, trust or estate for whom or which they act.
The Act of September 8, 1916, 39 Stat. 757 (Comp. St. 1918, 6336b) specifically declared that the income accumulated in
trust for the benefit of unborn or unascertained persons should be taxed and assessed to the trustee. It is obvious that in
the acts subsequent to that of 1913, Congress sought to make specific provision for the casus omissus in the earlier act.
This case is not unlike that of United States v. Field, 255 U.S. 257 , 41 Sup. Ct. 256. The Revenue Act of 1916 imposed a
tax on the estate of a decedent at the time of his death. The government sought to tax property passing under a
decedent's testamentary execution of a general power of appointment. It was held that while in equity property passing
under such a power might be treated as assets of the donee for the use of his creditors if executed in favor of a volunteer,
it was not subject to distribution as part of the estate of the donee and was not taxable. In the latter act, such property was
expressly included. This was thought by the court to show at least a legislative doubt whether the earlier act included such
property. This court said ( 255 U.S. 264 , 41 Sup. Ct. 256) that it would have been easy for Congress to express a
purpose to tax such property but it had not done so. In the Act of 1913, it would have been easy to require a trustee to pay
an income tax on income received by him for unborn beneficiaries or for the trust or the estate. But Congress did not do
so. In the next act, it did so. We cannot supply the omission in the earlier act.
The judgment of the Circuit Court of Appeals is affirmed.

G.R. Nos. 134587 & 134588 July 8, 2005

COMMISSIONER OF INTERNAL REVENUE, Petitioners, 
vs.
BENGUET CORPORATION, Respondent.
D E C I S I O N 
Tinga, J.:
This is a petition for the review of a consolidated Decision of the Former Fourteenth Division of the Court of
Appeals1  ordering the Commissioner of Internal Revenue to award tax credits to Benguet Corporation in the amount
corresponding to the input value added taxes that the latter had incurred in relation to its sale of gold to the
Central Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue ("petitioner") acting in his official capacity as head of the Bureau of
Internal Revenue (BIR), an attached agency of the Department of Finance, 2 with the authority, inter alia, to determine
claims for refunds or tax credits as provided by law.3
Respondent Benguet Corporation ("respondent") is a domestic corporation organized and existing by virtue of Philippine
laws, engaged in the exploration, development and operation of mineral resources, and the sale or marketing thereof to
various entities.4 Respondent is a value added tax (VAT) registered enterprise.5
The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of the National Internal
Revenue Code (NIRC),6 as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any person who, in the
course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar transactions and
any person who imports goods is liable for output VAT at rates of either 10% or 0% ("zero-rated") depending on the
classification of the transaction under Sec. 100 of the NIRC. Persons registered under the VAT system7 are allowed to
recognize input VAT, or the VAT due from or paid by it in the course of its trade or business on importation of goods or
local purchases of goods or service, including lease or use of properties, from a VAT-registered person.8
In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold to Central
Bank.9 On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT Ruling No. 3788-
88, which declared that "[t]he sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to
Section 100[10] of the Tax Code, as amended by Executive Order No. 273." The BIR came out with at least six (6) other
issuances11 reiterating the zero-rating of sale of gold to the Central Bank, the latest of which is VAT Ruling No. 036-90
dated 14 February 1990.12
Relying on its zero-rated status and the above issuances, respondent sold gold to the Central Bank during the period of 1
August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in relation to the subject
sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT for the amounts 13 of
₱46,177,861.12,14 
₱19,218,738.44,15 and ₱84,909,247.96.16 Respondent’s applications were either unacted upon or expressly disallowed by
petitioner.17 In addition, petitioner issued a deficiency assessment against respondent when, after applying respondent’s
creditable input VAT costs against the retroactive 10% VAT levy, there resulted a balance of excess output VAT.18
The express disallowance of respondent’s application for refunds/credits and the issuance of deficiency assessments
against it were based on a BIR ruling-BIR VAT Ruling No. 008-92 dated 23 January 1992-that was issued subsequent to
the consummation of the subject sales of gold to the Central Bank which provides that sales of gold to the Central Bank
shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92
withdrew, modified, and superseded all inconsistent BIR issuances. The relevant portions of the ruling provides, thus: 
1. In general, for purposes of the term "export sales" only direct export sales and foreign currency denominated
sales, shall be qualified for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty Law considers sales of
gold to the Central Bank of the Philippines, as export sale). This transaction shall not be considered as export sale for
VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn, modified or
superseded." (Emphasis supplied)
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which
decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining
companies and, thus, could be applied retroactively.19
Respondent filed three separate petitions for review with the Court of Tax Appeals (CTA), docketed as CTA Case No.
4945, CTA Case No. 4627, and the consolidated cases of CTA Case Nos. 4686 and 4829. 
In the three cases, respondent argued that a retroactive application of BIR VAT Ruling No. 008-92 would violate Sec. 246
of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the Commissioner of Internal Revenue
that would operate to prejudice the taxpayer. Respondent then discussed in detail the manner and extent by which it was
prejudiced by this retroactive application.20 Petitioner on the other hand, maintained that BIR VAT Ruling No. 008-92 is,
firstly, not void and entitled to great respect, having been issued by the body charged with the duty of administering the
VAT law, and secondly, it may validly be given retroactive effect since it was not prejudicial to respondent. 
In three separate decisions,21 the CTA dismissed respondent’s respective petitions. It held, with Presiding Judge Ernesto
D. Acosta dissenting, that no prejudice had befallen respondent by virtue of the retroactive application of BIR VAT Ruling
No. 008-92, and that, consequently, the application did not violate Sec. 246 of the NIRC.22
The CTA decisions were appealed by respondent to the Court of Appeals. The cases were docketed therein as CA-G.R.
SP Nos. 37205, 38958, and 39435, and thereafter consolidated. The Court of Appeals, after evaluating the arguments of
the parties, rendered the questioned Decision reversing the Court of Tax Appeals insofar as the latter had ruled that BIR
VAT Ruling No. 008-92 did not prejudice the respondent and that the same could be given retroactive effect. 
In its Decision, the appellate court held that respondent suffered financial damage equivalent to the sum of the
disapproved claims. It stated that had respondent known that such sales were subject to 10% VAT, which rate was not the
prevailing rate at the time of the transactions, respondent would have passed on the cost of the input taxes to the Central
Bank. It also ruled that the remedies which the CTA supposed would eliminate any resultant prejudice to respondent were
not sufficient palliatives as the monetary values provided in the supposed remedies do not approximate the monetary
values of the tax credits that respondent lost after the implementation of the VAT ruling in question. It cited 
Manila Mining Corporation v. Commissioner of Internal Revenue,23 in which the Court of Appeals held24 that BIR VAT
Ruling No. 008-92 cannot be given retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the "The New
Expanded VAT Law," reveals the intent of the lawmakers with regard to the treatment of sale of gold to the Central Bank
since the amended version therein of Sec. 100 of the NIRC expressly provides that the sale of gold to the Bangko
Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The appellate court thus allowed respondent’s claims,
decreeing in its dispositive portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of Internal Revenue is
ordered to award the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 – ₱49,611,914.00
2) in CA-G.R. SP No. 38958 - ₱19,218,738.44
3) in CA-G.R. SP No. 39435 - ₱84,909,247.9625
Dissatisfied with the above ruling, petitioner filed the instant Petition for Review questioning the determination of the Court
of Appeals that the retroactive application of the subject issuance was prejudicial to respondent and could not be applied
retroactively. 
Apart from the central issue on the validity of the retroactive application of VAT Ruling No. 008-92, the question of the
validity of the issuance itself has been touched upon in the pleadings, including a reference made by respondent to a
Court of Appeals Decision  holding that the VAT Ruling had no legal basis.26 For its part, as the party that raised this issue,
petitioner spiritedly defends the validity of the issuance.27 Effectively, however, the question is a non-issue and delving into
it would be a needless exercise for, as respondent emphatically pointed out in its Comment, "unlike petitioner’s
formulation of the issues, the only real issue in this case is whether VAT Ruling No. 008-92 which revoked previous
rulings of the petitioner which respondent heavily relied upon . . . may be legally applied retroactively to
respondent."28 This Court need not invalidate the BIR issuances, which have the force and effect of law, unless the issue
of validity is so crucially at the heart of the controversy that the Court cannot resolve the case without having to strike
down the issuances. Clearly, whether the subject VAT ruling may validly be given retrospective effect is the lis mota in the
case. Put in another but specific fashion, the sole issue to be addressed is whether respondent’s sale of gold to the
Central Bank during the period when such was classified by BIR issuances as zero-rated could be taxed validly at a 10%
rate after the consummation of the transactions involved. 
In a long line of cases,29 this Court has affirmed that the rulings, circular, rules and regulations promulgated by the
Commissioner of Internal Revenue would have no retroactive application if to so apply them would be prejudicial to the
taxpayers. In fact, both petitioner30 and respondent31 agree that the retroactive application of VAT Ruling No. 008-92 is
valid only if such application would not be prejudicial to the respondent– pursuant to the explicit mandate under Sec. 246
of the NIRC, thus:

Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding Section or any of the rulings or circulars promulgated by the Commissioner
shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the
taxpayers except in the following cases: (a) where the taxpayer deliberately misstates or omits material facts from his
return on any document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently gathered by
the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; or (c) where the
taxpayer acted in bad faith. (Emphasis supplied)

In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application; respondent
maintains the contrary. Consequently, the determination of the issue of retroactivity hinges on whether respondent would
suffer prejudice from the retroactive application of VAT Ruling No. 008-92. 
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an established rule
that in the exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the exercise of the
Supreme Court’s power of review, the findings of facts of the Court of Appeals are conclusive and binding on the Supreme
Court.32 An exception to this rule is when the findings of fact a quo are conflicting,33as is in this case.
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or lease of
goods or properties and rendition of services in the course of trade or business, or the importation of goods.34 It is an
indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or services. 35However, the
party directly liable for the payment of the tax is the seller.36
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds the input VAT,
the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess would be carried
over to VAT liabilities for the succeeding quarter or quarters. 37 On the other hand, transactions which are taxed at zero-
rate do not result in any output tax. Input VAT attributable to zero-rated sales could be refunded or credited against other
internal revenue taxes at the option of the taxpayer.38
To illustrate, in a zero-rated transaction, when a VAT-registered person ("taxpayer") purchases materials from his supplier
at ₱80.00, ₱7.3039 of which was passed on to him by his supplier as the latter’s 10% output VAT, the taxpayer is allowed
to recover ₱7.30 from the BIR, in addition to other input VAT he had incurred in relation to the zero-rated transaction,
through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated transaction, say, for ₱110.00,
he is not required to pay any output VAT thereon. In the case of a transaction subject to 10% VAT, the taxpayer is allowed
to recover both the input VAT of ₱7.30 which he paid to his supplier and his output VAT of ₱2.70 (10% the ₱30.00 value
he has added to the ₱80.00 material) by passing on both costs to the buyer. Thus, the buyer pays the total 10% VAT cost,
in this case ₱10.00 on the product. 
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated transaction, the
taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10% rated VAT, the taxpayer
is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental similarity between the two types
of VAT ratings in that the taxpayer has the option not to take on any VAT payment for his transactions by simply
exercising his right to pass on the VAT costs in the manner discussed above. 
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of gold to the
Central Bank from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass on its VAT costs
to the Central Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92 unilaterally forfeited or
withdrew this option of respondent. The adverse effect is that respondent became the unexpected and unwilling debtor to
the BIR of the amount equivalent to the total VAT cost of its product, a liability it previously could have recovered from the
BIR in a zero-rated scenario or at least passed on to the Central Bank had it known it would have been taxed at a 10%
rate. Thus, it is clear that respondent suffered economic prejudice when its consummated sales of gold to the Central
Bank were taken out of the zero-rated category. The change in the VAT rating of respondent’s transactions with the
Central Bank resulted in the twin loss of its exemption from payment of output VAT and its opportunity to recover input
VAT, and at the same time subjected it to the 10% VAT sans the option to pass on this cost to the Central Bank, with the
total prejudice in money terms being equivalent to the 10% VAT levied on its sales of gold to the Central Bank. 
Petitioner had made its position hopelessly untenable by arguing that "the deficiency 10% that may be assessable will
only be equal to 1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short, [respondent] may only
be charged based on the tax amount actually and technically passed on to the [Central Bank] as part of the invoiced
price."40 To the Court, the aforequoted statement is a clear recognition that respondent would suffer prejudice in the
"amount actually and technically passed on to the [Central Bank] as part of the invoiced price." In determining the
prejudice suffered by respondent, it matters little how the amount charged against respondent is computed,41 the point is
that the amount (equal to 1/11th of the amount billed to the Central Bank) was charged against respondent, resulting in
damage to the latter. 
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial effect when
viewed in relation to several available options to recoup whatever liabilities respondent may have incurred, i.e.,
respondent’s input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central Bank or on its
output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29 of the Tax Code.42
On petitioner’s first suggested recoupment modality, respondent counters that its other sales subject to 10% VAT are so
minimal that this mode is of little value. Indeed, what use would a credit be where there is nothing to set it off against?
Moreover, respondent points out that after having been imposed with 10% VAT sans the opportunity to pass on the same
to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits were not enough to
offset the retroactive 10% output VAT. The prejudice then experienced by respondent lies in the fact that the tax
refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output VAT liability against
which petitioner had offset the expected refund/credit. Additionally, the prejudice to respondent would not simply
disappear, as petitioner claims, when a liability (which liability was not there to begin with) is imposed concurrently with an
opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to petitioner’s suggestion, respondent’s
net income still decreased corresponding to the amount it expected as its refunds/credits and the deficiency assessments
against it, which when summed up would be the total cost of the 10% retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years, the input VAT
cost that respondent had paid to its suppliers was not treated by respondent as part of its cost of goods sold, which is
deductible from gross income for income tax purposes, but as an asset which could be refunded or applied as payment
for other internal revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing Guidelines), requires input VAT
to be recorded not as part of the cost of materials or inventory purchased but as a separate entry called "input taxes,"
which may then be applied against output VAT, other internal revenue taxes, or refunded as the case may be.43 In being
denied the opportunity to deduct the input VAT from its gross income, respondent’s net income was overstated by the
amount of its input VAT. This overstatement was assessed tax at the 32% corporate income tax rate, resulting in
respondent’s overpayment of income taxes in the corresponding amount. Thus, respondent not only lost its right to refund/
credit its input VAT and became liable for deficiency VAT, it also overpaid its income tax in the amount of 32% of its input
VAT.
This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to respondent as a
consequence of giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that granting that respondent
has no other sale subject to 10% VAT against which its input taxes may be used in payment, then respondent is
constituted as the final entity against which the costs of the tax passes-on shall legally stop; hence, the input taxes may
be converted as costs available as deduction for income tax purposes.44
Even assuming that the right to recover respondent’s excess payment of income tax has not yet prescribed, this relief
would only address respondent’s overpayment of income tax but not the other burdens discussed above. Verily, this
remedy is not a feasible option for respondent because the very reason why it was issued a deficiency tax assessment is
that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to go through an
unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing left to claim as a
deduction from income taxes. 
From the foregoing it is clear that petitioner’s suggested options by which prejudice would be eliminated from a retroactive
application of VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by respondent
ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC in relation to Sec.
2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered export and therefore
shall be subject to the export and premium duties. In coming out with this interpretation, the BIR also considered Sec. 169
of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are considered 
constructive exports.45 Respondent should not be faulted for relying on the BIR’s interpretation of the said laws and
regulations.46 While it is true, as petitioner alleges, that government is not estopped from collecting taxes which remain
unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right arising from an
erroneous interpretation of law, these principles must give way to exceptions based on and in keeping with the interest of
justice and fairplay, as has been done in the instant matter. For, it is primordial that every person must, in the exercise of
his rights and in the performance of his duties, act with justice, give everyone his due, and observe honesty and good
faith.47
The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals 48 involved a similar factual milieu. There the
Commissioner of Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for being
"erroneous for lack of legal basis." When the prior circular was still in effect, petitioner therein relied on it and
consummated its transactions on the basis thereof. We held, thus: 
. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because it had already remitted
all film rentals and no longer had any control over them when the new Circular was issued. . . . 
. . . . 
This Court is not unaware of the well-entrenched principle that the [g]overnment is never estopped from collecting taxes
because of mistakes or errors on the part of its agents. But, like other principles of law, this also admits of exceptions in
the interest of justice and fairplay. . . .In fact, in the United States, . . . it has been held that the Commissioner [of Internal
Revenue] is precluded from adopting a position inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the taxpayer.49
Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before respondent was
entitled to tax refunds or credits based on petitioner’s own issuances. Then suddenly, it found itself instead being made to
pay deficiency taxes with petitioner’s retroactive change in the VAT categorization of respondent’s transactions with the
Central Bank. This is the sort of unjust treatment of a taxpayer which the law in Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
DANTE O. TINGA Associate Justice

G.R. No. 160756               March 9, 2010

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner, 
vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING SECRETARY OF FINANCE JUANITA
D. AMATONG, and THE HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO,
JR., Respondents.
DECISION
CORONA, J.:

In this original petition for certiorari and mandamus,1 petitioner Chamber of Real Estate and Builders’ Associations, Inc. is
questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424 2 and the revenue regulations (RRs) issued by
the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes.3
Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal
Revenue Guillermo Parayno, Jr. as respondents.
Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.
Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner argues
that the MCIT violates the due process clause because it levies income tax even if there is no realized gain. 
Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real
properties categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second,
respondent Secretary of Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price
or fair market value of the real properties classified as ordinary assets.
Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined.
They contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not
on other business enterprises, more particularly those in the manufacturing sector.
The issues to be resolved are as follows:
(1) whether or not this Court should take cognizance of the present case; 
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and 
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under RRs
2-98, 6-2001 and 7-2003, is unconstitutional.
Overview of the Assailed Provisions
Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its gross
income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).4 If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax
shall be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
Section 27(E) of RA 8424 provides:
Section 27 (E). [MCIT] on Domestic Corporations. - 
(1) Imposition of Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the taxable year.
(2) Carry Forward of Excess Minimum Tax. – Any excess of the [MCIT] over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
(3) Relief from the [MCIT] under certain conditions. – The Secretary of Finance is hereby authorized to suspend the
imposition of the [MCIT] on any corporation which suffers losses on account of prolonged labor dispute, or because
of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary
rules and regulations that shall define the terms and conditions under which he may suspend the imposition of the [MCIT]
in a meritorious case.
(4) Gross Income Defined. – For purposes of applying the [MCIT] provided under Subsection (E) hereof, the term ‘gross
income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold"
shall include all business expenses directly incurred to produce the merchandise to bring them to their present location
and use.
For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods
are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other
costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and expenses necessarily
incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of
personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing
the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that in the case of
banks, "cost of services" shall include interest expense.
On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).5 The pertinent portions thereof read:
Sec. 2.27(E) [MCIT] on Domestic Corporations. –
(1) Imposition of the Tax. – A [MCIT] of two percent (2%) of the gross income as of the end of the taxable year (whether
calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation
beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.
For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec.
27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and thereafter.
x x x           x x x          x x x
(2) Carry forward of excess [MCIT]. – Any excess of the [MCIT] over the normal income tax as computed under Sec.
27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
x x x           x x x          x x x
Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes.6 Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
x x x           x x x          x x x
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of. – Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension
fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule –

Those which are exempt from a Exempt

 withholding tax at source as
prescribed in Sec. 2.57.5 of these
regulations.

With a selling price of five hundred 1.5%

thousand pesos (₱500,000.00) or
less.

With a selling price of more than five 3.0%

hundred thousand pesos
(₱500,000.00) but not more than two
million pesos (₱2,000,000.00).

With selling price of more than two 5.0%

million pesos (₱2,000,000.00) 

x x x           x x x          x x x
Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax Regulations shall be used.
Where the consideration or part thereof is payable on installment, no withholding tax is required to be made on the
periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the
applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid
to the seller.
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and
withheld by the buyer on every installment.
This provision was amended by RR 6-2001 on July 31, 2001: 
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
x x x           x x x          x x x
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or
transfer of real property classified as ordinary asset. - A [CWT] based on the gross selling price/total amount of
consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid
to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:
Where the seller/transferor is exempt from [CWT] in Exempt
accordance with Sec. 2.57.5 of these regulations. 
Upon the following values of real property, where the  
seller/transferor is habitually engaged in the real estate
business.
With a selling price of Five Hundred Thousand Pesos 1.5% 
(₱500,000.00) or less. 
With a selling price of more than Five Hundred Thousand 3.0%
Pesos (₱500,000.00) but not more than Two Million Pesos
(₱2,000,000.00).
With a selling price of more than two Million Pesos 5.0%
(₱2,000,000.00).
x x x           x x x          x x x
Gross selling price shall remain the consideration stated in the sales document or the fair market value determined in
accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange shall be considered as the consideration.
x x x           x x x          x x x
However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not exceed 25% of the
selling price), the tax shall be deducted and withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the installment plan" (that is,
payments in the year of sale exceed 25% of the selling price), the buyer shall withhold the tax based on the gross selling
price or fair market value of the property, whichever is higher, on the first installment.
In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT] due on the sale,
transfer or exchange of real property other than capital asset has been fully paid. (Underlined amendments in the original)
Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to
the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances
have been reported and the taxes thereof have been duly paid:7
Sec. 2.58.2. Registration with the Register of Deeds. – Deeds of conveyances of land or land and building/improvement
thereon arising from sales, barters, or exchanges subject to the creditable expanded withholding tax shall not be recorded
by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such transfers and
conveyances have been reported and the expanded withholding tax, inclusive of the documentary stamp tax, due thereon
have been fully paid xxxx.
On February 11, 2003, RR No. 7-20038 was promulgated, providing for the guidelines in determining whether a particular
real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent portions
thereof state:
Section 4. Applicable taxes on sale, exchange or other disposition of real property. -  Gains/Income derived from sale,
exchange, or other disposition of real properties shall, unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;
a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;
x x x           x x x          x x x
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or current fair market value
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary
income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
x x x           x x x          x x x
c. In the case of domestic corporations. –
x x x           x x x          x x x
(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may become subject to
the [MCIT] under Sec. 27(E) of the Code, whichever is applicable.
x x x           x x x          x x x
We shall now tackle the issues raised.
Existence of a Justiciable Controversy
Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1) there
must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis
mota of the case.9
Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case calling
for the exercise of judicial power and it is not yet ripe for adjudication because
[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by the BIR for the
payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its members have shut down their
businesses as a result of the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited that the assailed law and revenue regulations
have actually and adversely affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.
Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not really settle legal issues.10
An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute. 11 On the other
hand, a question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the
individual challenging it.12
Contrary to respondents’ assertion, we do not have to wait until petitioner’s members have shut down their operations as
a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio Earth-
Savers’ Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:13
By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said to have ripened
into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the
law is enough to awaken judicial duty.14
If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once
and for all.
Respondents next argue that petitioner has no legal standing to sue:
Petitioner is an association of some of the real estate developers and builders in the Philippines. Petitioners did not allege
that [it] itself is in the real estate business. It did not allege any material interest or any wrong that it may suffer from the
enforcement of [the assailed provisions].15
Legal standing or locus standi is a party’s personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged.16 In Holy Spirit Homeowners Association, Inc. v.
Defensor,17 we held that the association had legal standing because its members stood to be injured by the enforcement
of the assailed provisions:
Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that the individual
members of petitioner association are residents of the NGC. As such they are covered and stand to be either benefited or
injured by the enforcement of the IRR, particularly as regards the selection process of beneficiaries and lot allocation to
qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR which it believes to be
unfavorable to the rights of its members. xxx Certainly, petitioner and its members have sustained direct injury arising
from the enforcement of the IRR in that they have been disqualified and eliminated from the selection process.18
In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved.19 The questioned MCIT and CWT
affect not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of
the issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.20
Concept and Rationale of the MCIT
The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It came
about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.21 It was devised as a relatively simple and effective revenue-raising instrument compared to the normal
income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum
contribution to the support of the public sector. The congressional deliberations on this are illuminating:
Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting constantly a loss in
their operations to avoid the payment of taxes, and thus avoid sharing in the cost of government. In this regard, the Tax
Reform Act introduces for the first time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax
manipulation in the country and for administrative convenience. … This will go a long way in ensuring that corporations
will pay their just share in supporting our public life and our economic advancement.22
Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or
negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income
or over-deduction of expenses otherwise called tax shelters.23
Mr. Javier (E.) … [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the [MCIT].
Because from experience too, you have corporations which have been losing year in and year out and paid no tax. So, if
the corporation has been losing for the past five years to ten years, then that corporation has no business to be in
business. It is dead. Why continue if you are losing year in and year out? So, we have this provision to avoid this type of
tax shelters, Your Honor.24
The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of a
corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For
sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a
cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was
broader, the tax rate was lowered. 
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the
imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation
commenced its operations.25 This grace period allows a new business to stabilize first and make its ventures viable before
it is subjected to the MCIT.26
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years.27
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to
suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and
legitimate business reverses.28
Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries,
particularly Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the
committee hearings:
[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for underdeclaration of
gross receipts have this same form of safeguards.
In the case of Thailand, half a percent (0.5%), there’s a minimum of income tax of half a percent (0.5%) of gross
assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course the different
countries have different basis for that minimum income tax.
The other thing you’ll notice is the preponderance of Latin American countries that employed this method. Okay, those are
additional Latin American countries.29
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of
the MCIT.30
MCIT Is Not Violative of Due Process 
Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross
income as defined under said provision only considers the cost of goods sold and other direct expenses; other major
expenditures, such as administrative and interest expenses which are equally necessary to produce gross income, were
not taken into account.31 Thus, pegging the tax base of the MCIT to a corporation’s gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain."32
We disagree.
Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise of
taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.33
Taxation is an inherent attribute of sovereignty. 34 It is a power that is purely legislative. 35 Essentially, this means that in the
legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage (subjects)
and situs (place) of taxation.36 It has the authority to prescribe a certain tax at a specific rate for a particular public purpose
on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall be
imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.
As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so that
the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to
its constituency who are to pay it.37 Nevertheless, it is circumscribed by constitutional limitations. At the same time, like
any other statute, tax legislation carries a presumption of constitutionality.
The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life, liberty or property
without due process of law." In Sison, Jr. v. Ancheta, et al.,38 we held that the due process clause may properly be
invoked to invalidate, in appropriate cases, a revenue measure39 when it amounts to a confiscation of property.40 But in the
same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of
the due process clause) on the mere allegation of arbitrariness by the taxpayer.41 There must be a factual foundation to
such an unconstitutional taint.42 This merely adheres to the authoritative doctrine that, where the due process clause is
invoked, considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive
character.43
Petitioner is correct in saying that income is distinct from capital. 44 Income means all the wealth which flows into the
taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time.45 Income is gain derived and severed from capital.46 For
income to be taxable, the following requisites must exist:
(1) there must be gain; 
(2) the gain must be realized or received and 
(3) the gain must not be excluded by law or treaty from taxation.47
Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.
The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its
goods, i.e., the cost of goods48 and other direct expenses from gross sales. Clearly, the capital is not being taxed.
Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.49
Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in many jurisdictions.
Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with
interstate commerce or violates the requirement as to uniformity of taxation.50
The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax
rate but a broader tax base.51 Since our income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws.52 Although our MCIT is not exactly the same
as the AMT, the policy behind them and the procedure of their implementation are comparable. On the question of the
AMT’s constitutionality, the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:53
In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing from large
numbers of taxpayers with large incomes who were yet paying no taxes.
x x x           x x x          x x x
We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational means of
obtaining a broad-based tax, and therefore is constitutional.54
The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum
amount of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.55
American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax.56 This is because deductions are a matter of legislative grace.57
Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.
Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.
In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and confiscatory.
The Court cannot strike down a law as unconstitutional simply because of its yokes.58 Taxation is necessarily burdensome
because, by its nature, it adversely affects property rights. 59 The party alleging the law’s unconstitutionality has the burden
to demonstrate the supposed violations in understandable terms.60
RR 9-98 Merely Clarifies Section 27(E) of RA 8424
Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being imposed
and collected even when there is actually a loss, or a zero or negative taxable income: 
Sec. 2.27(E) [MCIT] on Domestic Corporations. —
(1) Imposition of the Tax. — xxx The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of [MCIT] is greater than the normal income tax due from such corporation. (Emphasis
supplied) 
RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business
operations or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income.
This is consistent with the law which imposes the MCIT on gross income notwithstanding the amount of the net income.
But the law also states that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well
be the case that the MCIT would be less than the net income of the corporation which posts a zero or negative taxable
income. 
We now proceed to the issues involving the CWT. 
The withholding tax system is a procedure through which taxes (including income taxes) are collected. 61 Under Section 57
of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final tax on
certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned with
the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.
Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that Sections
2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated "with grave abuse of
discretion amounting to lack of jurisdiction" and "patently in contravention of law" 62 because they ignore such distinctions.
Petitioner’s conclusion is based on the following premises: (a) the revenue regulations use gross selling price (GSP) or
fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified as
ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of
the sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable period.63
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot disregard
the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income from
the sale of capital and ordinary assets.
Petitioner’s arguments have no merit.
Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property Considered as
Ordinary Assets
The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules and
regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and
implement.64 It is well-settled that an administrative agency cannot amend an act of Congress.65
We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.66 The withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve
the government’s cash flow.67 This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.68
Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:
SEC. 57. Withholding of Tax at Source. –
x x x           x x x          x x x
(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-two
percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the
income payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.
Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real Estate
Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business’ income tax from
net income to GSP or FMV of the property sold.
Petitioner is wrong.
The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation. 69 They are installments on the annual tax which may be due at the end of the taxable year.70
Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entity’s net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to
Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax
payable by the taxpayer at the end of the taxable year.71 Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that
the tax base for the sale of real property classified as ordinary assets remains to be the net taxable income:
Section 4. – Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income derived from sale,
exchange, or other disposition of real properties shall unless otherwise exempt, be subject to applicable taxes imposed
under the Code, depending on whether the subject properties are classified as capital assets or ordinary assets;
x x x           x x x          x x x
a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens engaged in trade
or business in the Philippines;
x x x           x x x          x x x
(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to the [CWT]
(expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV] as determined in
accordance with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income tax imposed
under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.
x x x           x x x          x x x
c. In the case of domestic corporations.
The sale of land and/or building classified as ordinary asset and other real property (other than land and/or building
treated as capital asset), regardless of the classification thereof, all of which are located in the Philippines, shall
be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to theordinary
income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations may
become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by the
withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net income.
The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy
to, how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding
agent’s knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis
can only be the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the
performance of his duties as a withholding agent.
No Blurring of Distinctions Between Ordinary Assets and Capital Assets
RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to
be realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.72
The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income

 the withholding agent is constituted as a payments are intended to equal or at
full and final payment of the income tax least approximate the tax due of the
due from the payee on the said income. payee on said income.

b)The liability for payment of the tax rests
primarily on the payor as a withholding
agent.
b) Payee of income is required to report
the income and/or pay the difference
between the tax withheld and the tax due
on the income. The payee also has the
right to ask for a refund if the tax withheld
is more than the tax due.

c) The payee is not required to file an c) The income recipient is still required to
income tax return for the particular file an income tax return, as prescribed in
income.73 Sec. 51 and Sec. 52 of the NIRC, as
amended.74

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioner’s contention that
ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.
Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions of
RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary
assets.75
The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as capital
gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding agent/buyer’s
act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the essence of
the withholding tax method of tax collection.
No Rule that Only Passive 
Incomes Can Be Subject to CWT
Petitioner submits that only passive income can be subjected to withholding tax, whether final or creditable. According to
petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The enumeration in Section
57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should also be limited to
passive income:
SEC. 57. Withholding of Tax at Source. —
(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations, the [Secretary] may promulgate,
upon the recommendation of the [CIR], requiring the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)
(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be
withheld by payor-corporation and/or person and paid in the same manner and subject to the same conditions as provided
in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. — The [Secretary] may, upon the recommendation of the [CIR], require the
withholding of a tax on the items of income payable to natural or juridical persons, residing in the Philippines, by
payor-corporation/persons as provided for by law, at the rate of not less than one percent (1%) but not more than thirty-
two percent (32%) thereof, which shall be credited against the income tax liability of the taxpayer for the taxable year.
(Emphasis supplied)
This line of reasoning is non sequitur.
Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as passive
income. The BIR defines passive income by stating what it is not: 
…if the income is generated in the active pursuit and performance of the corporation’s primary purposes, the same is not
passive income…76
It is income generated by the taxpayer’s assets. These assets can be in the form of real properties that return rental
income, shares of stock in a corporation that earn dividends or interest income received from savings.
On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to natural or juridical
persons, residing in the Philippines." There is no requirement that this income be passive income. If that were the intent of
Congress, it could have easily said so.
Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former
covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in
57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.
To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR 2-
98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does
not require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable
method to carry out its functions.77 Similarly, considering that the law uses the general term "income," the Secretary and
CIR may specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and
regulations ordinarily deserve to be given weight and respect by the courts 78 in view of the rule-making authority given to
those who formulate them and their specific expertise in their respective fields. 
No Deprivation of Property Without Due Process
Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its members
of their property without due process of law because, in their line of business, gain is never assured by mere receipt of the
selling price. As a result, the government is collecting tax from net income not yet gained or earned. 
Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is
not due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly,
the due process requirement applies to the power to tax. 79 The CWT does not impose new taxes nor does it increase
taxes.80 It relates entirely to the method and time of payment. 
Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund.81 This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.1avvphi1
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing
considerable interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least
20 government agencies.82
Petitioner’s lamentations will not support its attack on the constitutionality of the CWT. Petitioner’s complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the
CWT is applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are
taxed on a per-installment basis.83 Petitioner’s desire to utilize for its operational and capital expenses money earmarked
for the payment of taxes may be a practical business option but it is not a fundamental right which can be demanded from
the court or from the government. 
No Violation of Equal Protection
Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied
only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed
a CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise.
Like a manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs
and expenditures on a regular basis. The only difference is that "goods" produced by the real estate business are house
and lot units.84
Again, we disagree.
The equal protection clause under the Constitution means that "no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances."85 Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the
guaranty of the equal protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be
limited to existing conditions only and (4) apply equally to all members of the same class.86
The taxing power has the authority to make reasonable classifications for purposes of taxation.87 Inequalities which result
from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.88The real estate
industry is, by itself, a class and can be validly treated differently from other business enterprises.
Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is
not their production processes but the prices of their goods sold and the number of transactions involved. The income
from the sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the
parties to comply with the withholding tax scheme.
On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax
system.
Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT. 89As
already discussed, the Secretary may adopt any reasonable method to carry out its functions.90 Under Section 57(B), it
may choose what to subject to CWT. 
A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner’s argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for
their transactions with said 5,000 corporations.91
Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424
Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax
has been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT
is unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as
Section 58(E) of RA 8424 and is unquestionably in accordance with it:
Sec. 58. Returns and Payment of Taxes Withheld at Source. –
(E) Registration with Register of Deeds. - No registration of any document transferring real property shall be
effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified that such
transfer has been reported, and the capital gains or [CWT], if any, has been paid : xxxx any violation of this provision
by the Register of Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis supplied)
Conclusion
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to understand is the
income tax."92 When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einstein’s observation but also with the vast and well-established jurisprudence in support of the plenary powers of
Congress to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the
imposition of MCIT and CWT is unconstitutional.
WHEREFORE, the petition is hereby DISMISSED.
Costs against petitioner.
SO ORDERED.
RENATO C. CORONA
Associate Justice

G.R. Nos. 156637/162004 December 14, 2005

PHILAM ASSET MANAGEMENT, INC., Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PANGANIBAN, J.:
Under Section 76 of the National Internal Revenue Code, a taxable corporation with excess quarterly income tax
payments may apply for either a tax refund  or a tax credit, but not both. The choice of one precludes the other.
Failure to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen by the
taxpayer later on.
The Case
Before us are two consolidated Petitions for Review 1 under Rule 45 of the Rules of Court, seeking to review and reverse
the December 19, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 69197 and its January 30, 2004
Decision3 in CA-GR SP No. 70882.
The dispositive portion of the assailed December 19, 2002 Decision, on the one hand, reads as follows:
"WHEREFORE, the petition is hereby DENIED. The assailed decision and resolution of the Court of Tax Appeals
are AFFIRMED."4 
That of the assailed January 30, 2004 Decision, on the other hand, was similarly worded, except that it referred to the May
2, 2002 Decision of the Court of Tax Appeals (CTA).5 
The Facts
In GR No. 156637, the CA adopted the CTA’s narration of the facts as follows:
"Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation duly organized and existing under the laws
of the Republic of the Philippines. It acts as the investment manager of both Philippine Fund, Inc. (PFI) and Philam Bond
Fund, Inc. (PBFI), which are open-end investment companies[,] in the sale of their shares of stocks and in the investment
of the proceeds of these sales into a diversified portfolio of debt and equity securities. Being an investment manager,
[p]etitioner provides management and technical services to PFI and PBFI. Petitioner is, likewise, PFI’s and PBFI’s
principal distributor which takes charge of the sales of said companies’ shares to prospective investors. Pursuant to the
separate [m]anagement and [d]istribution agreements between the [p]etitioner and PFI and PBFI, both PFI and PBFI
[agree] to pay the [p]etitioner, by way of compensation for the latter’s services and facilities, a monthly management fee
from which PFI and PBFI withhold the amount equivalent to [a] five percent (5%) creditable tax[,] pursuant to the
Expanded Withholding Tax Regulations.
"On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome [t]ax [r]eturn for the taxable year 1997 representing a
net loss of ₱2,689,242.00. Consequently, it failed to utilize the creditable tax withheld in the amount of Five Hundred
Twenty-Two Thousand Ninety-Two Pesos (₱522,092.00) representing [the] tax withheld by [p]etitioner’s withholding
agents, PFI and PBFI[,] on professional fees.
"The creditable tax withheld by PFI and PBFI in the amount of ₱522,092.00 is broken down as follows:
PFI ₱496,702.05
PBFI 25,389.66_
Total ₱522,091.71
"On September 11, 1998, [p]etitioner filed an administrative claim for refund with the [Bureau of Internal Revenue (BIR)] --
Appellate Division in the amount of ₱522,092.00 representing unutilized excess tax credits for calendar year 1997.
Thereafter, on July 28, 1999, a written request was filed with the same division for the early resolution of [p]etitioner’s
claim for refund.
"Respondent did not act on [p]etitioner’s claim for refund[;] hence, a Petition for Review was filed with this Court 6 on
November 29, 1999 to toll the running of the two-year prescriptive period."7 
On October 9, 2001, the CTA rendered a Decision denying petitioner’s Petition for Review. Its Motion for Reconsideration
was likewise denied in a Resolution dated January 29, 2002.
In GR No. 162004, the antecedents are narrated by the CA in this wise:
"On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR] for the taxable year 1998 declaring a net
loss of ₱1,504,951.00. Thus, there was no tax due against [petitioner] for the taxable year 1998. Likewise, [petitioner] had
an unapplied creditable withholding tax in the amount of ₱459,756.07, which amount had been previously withheld in that
year by petitioner’s withholding agents[,] namely x x x [PFI], x x x [PBFI], and Philam Strategic Growth Fund, Inc. (PSGFI).
"In the next succeeding year, [petitioner] had a tax due in the amount of ₱80,042.00, and a creditable withholding tax in
the amount of ₱915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount of ₱459,756.07, which
represents its prior excess credit for taxable year 1998.
"Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District Office No. 50, Revenue Region No. 8, a
written administrative claim for refund with respect to the unapplied creditable withholding tax of ₱459,756.07. According
to [petitioner,] the amount of ₱80,042.00, representing the tax due for the taxable year 1999 has been credited from its
₱915,995.00 creditable withholding tax for taxable year 1999, thus leaving its 1998 creditable withholding tax in the
amount of ₱459,756.07 still unapplied.
"The claim for refund yielded no action on the part of the BIR. [Petitioner] then filed a Petition for Review before the CTA
on December 26, 2000, asserting that it is entitled [to] the refund [of ₱459,756.07,] since said amount has not been
applied against its tax liabilities in the taxable year 1998.
"On May 2, 2002, the CTA rendered [a] x x x decision denying [petitioner’s] Petition for Review. x x x."8 
Ruling of the Court of Appeals
The CA denied the claim of petitioner for a refund of the latter’s excess creditable taxes withheld for the years
1997 and 1998, despite compliance with the basic requirements of Revenue Regulations (RR) No. 12-94. The appellate
court pointed out that, in the respective Income Tax Returns (ITRs) for both years, petitioner did not indicate its
option to have the amounts either refunded or carried over and applied to the succeeding year. It was held that to
request for either a refund or a credit of income tax paid, a corporation must signify its intention by marking the
corresponding option box on its annual corporate adjustment return.
The CA further held in GR No. 156637 that the failure to present the 1998 ITR was fatal to the claim for a refund, because
there was no way to verify if the tax credit for 1997 could not have been applied against the 1998 tax liabilities of
petitioner.
In GR No. 162004, however, the subsequent acts of petitioner demonstrated its option to carry over its tax credit for 1998,
even if it again failed to tick the appropriate box for that option in its 1998 ITR. Under RR 12-94, its failure to indicate that
option resulted in the automatic carry-over of any excess tax credit for the prior year. The appellate court said that
the government would not be unjustly enriched by denying a refund, because there would be no forfeiture of the amount in
its favor. The amount claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable
years.
Hence, these Petitions.9 
The Issues
Petitioner raises two issues in GR No. 156637 for the Court’s consideration:
"A.
"Whether or not the failure of the [p]etitioner to indicate in its [a]nnual [i]ncome [t]ax [r]eturn the option to refund its
creditable withholding tax is fatal to its claim for refund.
"B.
"Whether or not the presentation in evidence of the [p]etitioner’s [a]nnual [i]ncome [t]ax [r]eturn for the succeeding
calendar year is a legal requisite in a claim for refund of unapplied creditable withholding tax."10 
In GR No. 162004, petitioner raises one question only:
"Whether or not the petitioner is entitled to the refund of its unutilized creditable withholding tax in the taxable year
1998 in the amount of ₱459,756.07."11 
In both cases, a simple issue needs to be resolved: whether petitioner is entitled to a refund of its creditable taxes
withheld for taxable years 1997 and 1998.
The Court’s Ruling
The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.
Main Issue:
Entitlement to Refund
The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential Decree (PD) No.
1158, otherwise known as the "National Internal Revenue Code of 1977."12 On August 1, 1980, this provision was restated
as Section 8613 in PD 1705.14 
On November 5, 1985, all prior amendments and those introduced by PD 199415 were codified16 into the National Internal
Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered17 as Section 79.18 
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all "net income" phrases appearing in Title II of the
NIRC of 1977 to "taxable income." Section 79 of the NIRC of 1985,19 however, was not amended.
On July 25, 1987, EO 27320 renumbered21 Section 86 of the NIRC22 as Section 76,23 which was also rearranged24 to fall
under Chapter 10 of Title II of the NIRC. Section 79, which had earlier been renumbered by PD 1994, remained
unchanged.
Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 under PD
1994;25 then, as Section 76 under EO 273.26 Finally, after being renumbered and reduced to the chaff of a grain, Section
69 was repealed by EO 37.
Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:
"Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall file a final adjustment return
covering the total net income27 for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable net income28 of that year the corporation
shall either:
"(a) Pay the excess tax still due; or 
"(b) Be refunded the excess amount paid, as the case may be.
"In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount
shown on its final adjustment return may be credited against the estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable year."
GR No. 156637
This section applies to the first case before the Court. Differently numbered in 1977 but similarly worded 20 years later
(1997), Section 76 offers two options to a taxable corporation whose total quarterly income tax payments in a given
taxable year exceeds its 
total income tax due. These options are (1) filing for a tax refund or (2) availing of a tax credit.
The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be
refunded, provided that a taxpayer properly applies for the refund.
The second option works by applying the refundable amount, as shown on the FAR of a given taxable year, against the
estimated quarterly income tax liabilities of the succeeding taxable year.
These two options under Section 76 are alternative in nature.29 The choice of one precludes the other. Indeed,
in Philippine Bank of Communications v. Commissioner of Internal Revenue,30 the Court ruled that a corporation must
signify its intention -- whether to request a tax refund or claim a tax credit -- by marking the corresponding option box
provided in the FAR.31 While a taxpayer is required to mark its choice in the form provided by the BIR, this
requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify
one’s intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this
option later on. A tax credit should be construed merely as an alternative remedy to a tax refund under Section 76, subject
to prior verification and approval by respondent.32 
The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, 33 particularly the
self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus
demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference
and hence shows simple negligence or plain oversight.
In the present case, respondent denied the claim of petitioner for a refund of excess taxes withheld in 1997, because the
latter 
(1) had not indicated in its ITR for that year whether it was opting for a credit or a refund; and (2) had not submitted as
evidence its 1998 ITR, which could have been the basis for determining whether its claimed 1997 tax credit had not been
applied against its 1998 tax liabilities.
Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has no basis
in law and jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for the preceding --
not the succeeding -- taxable year. Indeed, any refundable amount indicated in the FAR of the preceding taxable year
may be credited against the estimated income tax liabilities for the taxable quarters of the succeeding taxable year.
However, nowhere is there even a tinge of a hint in any of the provisions of the Tax Code that the FAR of the taxable year
following the period to which the tax credits are originally being applied should also be presented to the BIR.
Second, Section 534 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for the refund of
income taxes deducted and withheld from income payments shall be given due course only (1) when it is shown on the
ITR that the income payment received is being declared part of the taxpayer’s gross income; and (2) when the fact of
withholding is established by a copy of the withholding tax statement, duly issued by the payor to the payee, showing the
amount paid and the income tax withheld from that amount.35 
Undisputedly, the records do not show that the income payments received by petitioner have not been declared as part of
its gross income, or that the fact of withholding has not been established. According to the CTA, "[p]etitioner substantially
complied with the x x x requirements" of RR 12-94 "[t]hat the fact of withholding is established by a copy of a statement
duly issued by the payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld
therefrom; and x x x [t]hat the income upon which the taxes were withheld were included in the return of the recipient."36 
The established procedure is that a taxpayer that wants a cash refund shall make a written request for it, and the ITR
showing the excess expanded withholding tax credits shall then be examined by the BIR. For the grant of refund, RRs 12-
94 and 6-85 state that all 
pertinent accounting records should be submitted by the taxpayer. These records, however, actually refer only to (1) the
withholding tax statements; (2) the ITR of the present quarter to which the excess withholding tax credits are being
applied; and (3) the ITR of the quarter for the previous taxable year in which the excess credits arose. 37 To stress, these
regulations implementing the law do not require the proffer of the FAR for the taxable year following the period to which
the tax credits are being applied.
Third, there is no automatic grant of a tax refund. As a matter of procedure, the BIR should be given the opportunity "to
investigate and confirm the veracity"38 of a taxpayer’s claim, before it grants the refund. Exercising the option for a tax
refund or a tax credit does not ipso facto confer upon a taxpayer the right to an immediate availment of the choice made.
Neither does it impose a duty on the government to allow tax collection to be at the sole control of a taxpayer.39 
Fourth, the BIR ought to have on file its own copies of petitioner’s FAR for the succeeding year, on the basis of
which it could rebut the assertion that there was a subsequent credit of the excess income tax payments for the
previous year. Its failure to present this vital document to support its contention against the grant of a tax
refund to petitioner is certainly fatal.
Fifth, the CTA should have taken judicial notice40 of the fact of filing and the pendency of petitioner’s subsequent claim for
a refund of excess creditable taxes withheld for 1998. The existence of the claim ought to be known by reason of its
judicial functions. Furthermore, it is decisive to and will easily resolve the material issue in this case. If only judicial notice
were taken earlier, the fact that there was no carry-over of the excess creditable taxes withheld for 1997 would have
already been crystal clear.
Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two years after
payment of the taxes erroneously received by the BIR. 41 Despite the failure of petitioner 
to make the appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression
of its choice to request a tax refund, instead of a tax credit. To assert that any future claim for a tax refund will be
instantly hindered by a failure to signify one’s intention in the FAR is to render nugatory the clear provision that allows for
a two-year prescriptive period.
In fact, in BPI-Family Savings Bank v. CA,42 this Court even ordered the refund of a taxpayer’s excess creditable taxes,
despite the express declaration in the FAR to apply the excess to the succeeding year. 43 When circumstances show that a
choice of tax credit has been made, it should be respected. But when indubitable circumstances clearly show that another
choice -- a tax refund -- is in order, it should be granted. "Technicalities and legalisms, however exalted, should not be
misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding
citizens."44 
In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it perform any act
indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an administrative claim for the refund
of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply the excess creditable taxes.
Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess tax credits in the amount of ₱522,092.
GR No. 162004
As to the second case, Section 76 also applies. Amended by Republic Act (RA) No. 8424, otherwise known as the "Tax
Reform Act of 1997," it now states:
"SEC. 76. Final Adjustment Return. -- Every corporation liable to tax under Section 27 shall file a final adjustment return
covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall
either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
"In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the excess amount shown on its final adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-
over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit certificate shall be allowed therefor."
The carry-over option under Section 76 is permissive. A corporation that is entitled to a tax refund or a tax credit for
excess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a given taxable year
against the estimated income tax liabilities of the succeeding quarters. Once chosen, the carry-over option shall be
considered irrevocable45 for that taxable period, and no application for a tax refund or issuance of a tax credit
certificate shall then be allowed.
According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR. 46 As this option was not
chosen, it seems that there is nothing that can be considered irrevocable. In other words, petitioner argues that it is still
entitled to a refund of its 1998 excess income tax payments.
This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively chosen the carry-over
option.
First, the fact that it filled out the portion "Prior Year’s Excess Credits" in its 1999 FAR means that it categorically availed
itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states "Less: Tax
Credits/Payments." The contention that it merely filled out that portion because it was a requirement -- and that to have
done otherwise would have been tantamount to falsifying the FAR -- is a long shot.
The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found the
itemization and summary of additions to and deductions from income taxes due. These entries are not without rhyme or
reason. They are required, because they facilitate the tax administration process.
Failure to indicate the amount of "prior year’s excess credits" does not mean falsification by a taxpayer of its current year’s
FAR. On the contrary, if an application for a tax refund has been -- or will be -- filed, then that portion of the BIR form
should necessarily be blank, even if the FAR of the previous taxable year already shows an overpayment in taxes.
Second, the resulting redundancy in the claim of petitioner for a refund of its 1998 excess tax credits on November 14,
200047 cannot be countenanced. It cannot be allowed to avail itself of a tax refund and a tax credit at the same time for
the same excess income taxes paid. Besides, disallowing it from getting a tax refund of those excess tax credits will not
enervate the two-year prescriptive period under the Tax Code. That period will apply if the carry-over option has not been
chosen.
Besides, "tax refunds x x x are construed strictly against the taxpayer." 48 Petitioner has failed to meet the burden of proof
required in order to establish the factual basis of its claim for a tax refund.
Third, the "first-in first-out" (FIFO) principle enunciated by the CTA49 does not apply.50 Money is fungible property.51 The
amount to be applied against the ₱80,042 income tax due in the 1998 FAR 52 of petitioner may be taken from its excess
credits in 1997 or from those withheld in 1998 or from both. Whichever of these the amount will be taken from will not
make a difference.
Even if the FIFO principle were to be applied, the tax credits would have to be in consonance with the usual and normal
course of events. In fact, the FAR is cumulative in nature. 53 Following a natural sequence, the prior year’s excess tax
credits will have to be reduced first to answer for any current tax liabilities before the current year’s withheld amounts can
be applied. Otherwise, there will be no sense in requiring a taxpayer to fill out the line items in the FAR to segregate its
sources of tax credits.
Whether the FIFO principle is applied or not, Section 76 remains clear and unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998 creditable
withholding taxes. Thus, it is no longer entitled to a tax refund of ₱459,756.07, which corresponds to its 1998 excess tax
credit. Nonetheless, the amount will not be forfeited in the government’s favor, because it may be claimed by petitioner as
tax credits in the succeeding taxable years.
WHEREFORE, the Petition in GR No. 156637 is GRANTED and the assailed December 19, 2002
Decision REVERSED and SET ASIDE. No pronouncement as to costs. 
The Petition in GR No. 162004 is, however, DENIED and the assailed January 30, 2004 Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
ARTEMIO V. PANGANIBAN

G.R. No. 151135             July 2, 2004

CONTEX CORPORATION, petitioner, 
vs.
HON. COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION

QUISUMBING, J.:
For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed
and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the
Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-
added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate
court’s Resolution,3 dated December 19, 2001, denying the motion for reconsideration.
Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other
hospital supplies for export. Petitioner’s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered
with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of
Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue
taxes except for the preferential tax provided for in Section 12 (c)5 of Rep. Act No. 7227. Petitioner also registered with the
Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-
000133.
From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the
conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the
purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and
1998, respectively.6 
Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227,
petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer
of BIR RDO No. 19, denied the first application letter, dated December 29, 1998.
Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty.
Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a
tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1,
1997 to November 30, 1998.
When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of
Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A) 7 if read in
relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b)9 and (c) of Rep.
Act No. 7227 would show that it was not liable in any way for any value-added tax.
In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly
construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its
compliance with the rules on tax refund as provided for in Sections 204 10 and 22911 of the Tax Code, its claim should be
denied, according to the BIR.
On October 13, 2000, the CTA decided CTA Case No. 5895 as follows:
WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby
ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum
of P683,061.90, representing erroneously paid input VAT.
SO ORDERED.12 
In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The
tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-
rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of
Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay
Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.
Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and
materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the
Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a
5% preferential tax.
The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-
year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT
paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck
down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies
shipped or delivered to the petitioner’s Makati and Pasay City offices.
Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of
Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct
taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very
nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability
for the tax lies with the suppliers and not Contex.
Finding merit in the CIR’s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus:
WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex’s claim for
refund of erroneously paid taxes is DENIED accordingly.
SO ORDERED.13 
In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw
materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules
covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no
way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an
additional costs of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of
importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The appellate court applied
the principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed out that under
the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is
qualified as pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative
intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be
liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their
goods and services.
Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied.
Hence, the instant petition raising as issues for our resolution the following:
A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES
PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY
FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS.
B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A
TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE
YEARS 1997 AND 1998.16 
Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that
the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of
the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court’s restrictive interpretation of petitioner’s VAT exemption as
limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the
provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed
upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention to regulations
issued by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act No.
7227 includes exemption from the imposition of VAT on purchases of supplies and materials.
The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant
is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable.
Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller.
At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods,
properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the
buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individual’s ability to pay
based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain
transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures.
Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As
earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in
such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the
seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate
buyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally
liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately
bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not
directly and legally liable for the payment thereof, ultimately bears the burden of the tax.19 

Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can
have preferential treatment in the following ways:

(a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of
properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of
the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because
the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt
goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the
issuance of a VAT invoice or receipt.21 

(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is
not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.22 

Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the
VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firm’s
business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and
exemption in designating a value-added tax.23 

Apropos, the petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is
founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from all national and local
internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24 

On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In
fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is
exempt from VAT on all its sales and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its
claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund.

The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on
to it by its suppliers.

While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since
such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund.

Section 4.100-2 of BIR’s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations"
provide:

Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT
purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services
related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.

The following sales by VAT-registered persons shall be subject to 0%:

(a) Export Sales
"Export Sales" shall mean
...
(5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus
Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion
and Development Act of 1992.
...
(c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited
enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916,
Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian Development Bank (ADB),
International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to
zero-rate."

Since the transaction is deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no
corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner.

On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and
thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid.
In fine, even if we are to assume that exemption from the burden of VAT on petitioner’s purchases did exist, petitioner is
still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.
Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and accordingly refund the
petitioner of the VAT erroneously passed on to the latter.
Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner’s VAT
exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim
any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in
CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

G.R. No. 170257               September 7, 2011

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner, 
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005 Decision1 and October 26,
2005 Resolution2 of the Court of Tax Appeals En Banc (CTA-En Banc) in C.T.A. E.B. No. 83 entitled "Rizal Commercial
Banking Corporation v. Commissioner of Internal Revenue."
THE FACTS
Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general banking operations. It
seasonably filed its Corporation Annual Income Tax Returns for Foreign Currency Deposit Unit for the calendar years
1994 and 1995.3
On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then Commissioner of Internal
Revenue (CIR) Liwayway Vinzons-Chato, authorizing a special audit team to examine the books of accounts and other
accounting records for all internal revenue taxes from January 1, 1994 to December 31, 1995.4
On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the Statute of Limitations of the
National Internal Revenue Code covering the internal revenue taxes due for the years 1994 and 1995, effectively
extending the period of the Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.5
Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with Assessment Notices from
the BIR for the following deficiency tax assessments:6
Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (ST-INC-95-0199-2000) ₱ 252,150,988.01 ₱ 191,496,585.96 ₱ 25,000.00 ₱ 443,672,573.97
1994 (ST-INC-94-0200-2000) 216,478,397.90 207,819,261.99 25,000.00 424,322,659.89
Deficiency Gross Receipts Tax
1995 (ST-GRT-95-0201-2000) 13,697,083.68 12,428,696.21 2,819,745.52 28,945,525.41
1994 (ST-GRT-94-0202-2000) 2,488,462.38 2,755,716.42 25,000.00 5,269,178.80
Deficiency Final Withholding Tax
1995 (ST-EWT-95-0203-2000) 64,365,610.12 58,757,866.78 25,000.00 123,148,477.15
1994 (ST-EWT-94-0204-2000) 53,058,075.25 59,047,096.34 25,000.00 112,130,171.59
Deficiency Final Tax on FCDU Onshore Income
1995 (ST-OT-95-0205-2000) 81,508,718.20 61,901,963,.52 25,000.00 143,435,681.72
1994 (ST-OT-94-0206-2000) 34,429,503.10 33,052,322.98 25,000.00 67,506,826.08
Deficiency Expanded Withholding Tax
1995 (ST-EWT-95-0207-2000) 5,051,415.22 4,583,640.33 113,000.00 9,748,055.55
1994 (ST-EWT-94-0208-2000) 4,482,740.35 4,067,626.31 78,200.00 8,628,566.66
Deficiency Documentary Stamp Tax
1995 (ST-DST1-95-0209-2000) 351,900,539.39 315,804,946.26 250,000.00 667,955,485.65
1995 (ST-DST2-95-0210-2000) 367,207,105.29 331,535,844.68 300,000.00 699,042,949.97
1994 (ST-DST3-94-0211-2000) 460,370,640.05 512,193,460.02 300,000.00 972,864,100.07
1994 (ST-DST4-94-0212-2000) 223,037,675.89 240,050,706.09 300,000.00 463,388,381.98

TOTALS ₱2,130,226,954.83 ₱2,035,495,733.89 ₱4,335,945.52 ₱4,170,058,634.49

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000 and later submitted the
relevant documentary evidence to support it. Much later on November 20, 2000, it filed a petition for review before the
CTA, pursuant to Section 228 of the 1997 Tax Code.7
On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment Notices dated October 20,
2000, following the reinvestigation it requested, which drastically reduced the original amount of deficiency taxes to the
following:8
Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (INC-95-000003) ₱ 374,348.45 ₱ 346,656.92   ₱ 721,005.37
1994 (INC-94-000002) 1,392,366.28 1,568,605.52   2,960,971.80
Deficiency Gross Receipts Tax
1995 (GRT-95-000004) 2,000,926.96 3,322,589.63 ₱ 1,367,222.04 6,690,738.63
1994 (GRT-94-000003) 138,368.61 161,872.32   300,240.93
Deficiency Final Withholding Tax
1995 (FT-95-000005) 362,203.47 351,287.75   713,491.22
1994 (FT-94-000004) 188,746.43 220,807.47   409,553.90
Deficiency Final Tax on FCDU Onshore Income
1995 (OT-95-000006) 81,508,718.20 79,052,291.08   160,561,009.28
1994 (OT-94-000005) 34,429,503.10 40,277,802.26   74,707,305.36
Deficiency Expanded Withholding Tax
1995 (EWT-95-000004) 520,869.72 505,171.80 25,000.00 1,051,041.03
1994 (EWT-94-000003) 297,949.95 348,560.63 25,000.00 671,510.58
Deficiency Documentary Stamp Tax
1995 (DST-95-000006) 599,890.72   149,972.68 749,863.40
1995 (DST2-95-000002) 24,953,842.46   6,238,460.62 31,192,303.08
1994 (DST-94-000005) 905,064.74   226,266.18 1,131,330.92
1994 (DST2-94-000001) 17,040,104.84   4,260,026.21 21,300,131.05

TOTALS ₱ 164,712,903.44 ₱ 126,155,645.38 ₱ 12,291,947.73 ₱ 303,160,496.55

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:9
Particulars 1994 1995 Total

Deficiency Income Tax ₱ 2,965,549.44 ₱ 722,236.11 ₱ 3,687,785.55

Deficiency Gross Receipts Tax 300,695.84 6,701,893.17 7,002,589.01

Deficiency Final Withholding Tax 410,174.44 714,682.02 1,124,856.46

Deficiency Expanded Withholding Tax 672,490.14 1,052,753.48 1,725,243.62

Deficiency Documentary Stamp Tax 1,131,330.92 749,863.40 1,881,194.32

TOTALS ₱ 5,480,240.78 ₱ 9,941,428.18 ₱ 15,421,668.96

RCBC, however, refused to pay the following assessments for deficiency onshore tax and documentary stamp tax which
remained to be the subjects of its petition for review:10
Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income

Basic  ₱ 34,429,503.10 ₱ 81,508,718.20 ₱ 115,938,221.30

Interest 40,277,802.26 79,052,291.08 119,330,093.34

Sub Total ₱ 74,707,305.36 ₱ 160,561,009.28 ₱ 235,268,314.64

Deficiency Documentary Stamp Tax

Basic  ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30

Surcharge 4,260,026.21 6,238,460.62 10,498,486.83

Sub Total ₱ 21,300,131.05 ₱ 31,192,303.08 ₱ 52,492,434.13

 TOTALS ₱ 96,007,436.41 ₱ 191,753,312.36 ₱ 287,760,748.77
RCBC argued that the waivers of the Statute of Limitations which it executed on January 23, 1997 were not valid because
the same were not signed or conformed to by the respondent CIR as required under Section 222(b) of the Tax Code. 11 As
regards the deficiency FCDU onshore tax, RCBC contended that because the onshore tax was collected in the form of a
final withholding tax, it was the borrower, constituted by law as the withholding agent, that was primarily liable for the
remittance of the said tax.12

On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First Division) promulgated its
Decision13which partially granted the petition for review. It considered as closed and terminated the assessments for
deficiency income tax, deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded withholding tax,
and deficiency documentary stamp tax (not an industry issue) for 1994 and 1995. 14 It, however, upheld the assessment for
deficiency final tax on FCDU onshore income and deficiency documentary stamp tax for 1994 and 1995 and ordered
RCBC to pay the following amounts plus 20% delinquency tax:15
Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income

Basic  ₱ 22,356,324.43 ₱ 16,067,952.86 ₱ 115,938, 221.30

Interest  26,153,837.08 15,583,713.19 119,330,093.34

Sub Total 48,510,161.51 31,651,666.05 119,330,093.34

Deficiency Documentary Stamp Tax (Industry Issue)

Basic  ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30

Surcharge 4,260,026.21 6,238,460.62 10,498,486.83

Sub Total 21,300,131.05 31,192,303.08 52,492,434.13

TOTALS ₱ 69,810,292.56 ₱ 62,843,969.13 ₱ 171,822,527.47

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1) the CTA erred in its addition
of the total amount of deficiency taxes and the correct amount should only be ₱ 132,654,261.69 and not ₱
171,822,527.47; (2) the CTA erred in holding that RCBC was estopped from questioning the validity of the waivers; (3) it
was the payor-borrower as withholding tax agent, and not RCBC, who was liable to pay the final tax on FCDU, and (4)
RCBC’s special savings account was not subject to documentary stamp tax.16
In its Resolution17 dated April 11, 2005, the CTA-First Division substantially upheld its earlier ruling, except for its
inadvertence in the addition of the total amount of deficiency taxes. As such, it modified its earlier decision and ordered
RCBC to pay the amount of ₱ 132,654,261.69 plus 20% delinquency tax.18
RCBC elevated the case to the CTA-En Banc where it raised the following issues:
I.
Whether or not the right of the respondent to assess deficiency onshore tax and documentary stamp tax for
taxable year 1994 and 1995 had already prescribed when it issued the formal letter of demand and assessment
notices for the said taxable years.
II.
Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and 1995.
III.
Whether or not petitioner’s special savings account is subject to documentary stamp tax under then Section 180
of the 1993 Tax Code.19
The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by receiving, accepting and
paying portions of the reduced assessment, RCBC bound itself to the new assessment, implying that it recognized the
validity of the waivers.20 RCBC could not assail the validity of the waivers after it had received and accepted certain
benefits as a result of the execution of the said waivers.21 As to the deficiency onshore tax, it held that because the payor-
borrower was merely designated by law to withhold and remit the said tax, it would then follow that the tax should be
imposed on RCBC as the payee-bank.22 Finally, in relation to the assessment of the deficiency documentary stamp tax on
petitioner’s special savings account, it held that petitioner’s special savings account was a certificate of deposit and, as
such, was subject to documentary stamp tax.23
Hence, this petition.
While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009, informing the Court that this
petition, relative to the DST deficiency assessment, had been rendered moot and academic by its payment of the tax
deficiencies on Documentary Stamp Tax (DST) on Special Savings Account (SSA) for taxable years 1994 and 1995 after
the BIR approved its applications for tax abatement.24
In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only remaining issues raised in the
present petition were those pertaining to RCBC’s deficiency tax on FCDU Onshore Income for taxable years 1994 and
1995 in the aggregate amount of ₱ 80,161,827.56 plus 20% delinquency interest per annum. The CIR prayed that RCBC
be considered to have withdrawn its appeal with respect to the CTA-En Banc ruling on its DST on SSA deficiency for
taxable years 1994 and 1995 and that the questioned CTA decision regarding RCBC’s deficiency tax on FCDU Onshore
Income for the same period be affirmed.25
THE ISSUES
Thus, only the following issues remain to be resolved by this Court:
Whether petitioner, by paying the other tax assessment covered by the waivers of the statute of limitations, is
rendered estopped from questioning the validity of the said waivers with respect to the assessment of deficiency
onshore tax.26
and
Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is mandated by law to be
collected at source in the form of a final withholding tax. 27

THE COURT’S RULING

Petitioner is estopped from
questioning the validity of the waivers
RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely
attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the
CIR, as required under Section 223 (b) of the 1977 Tax Code. 28 RCBC further argues that the principle of estoppel cannot
be applied against it because its payment of the other tax assessments does not signify a clear intention on its part to give
up its right to question the validity of the waivers.29
The Court disagrees.
Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that "an admission or representation
is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying
thereon." A party is precluded from denying his own acts, admissions or representations to the prejudice of the other party
in order to prevent fraud and falsehood.30
Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued
within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers. Had
petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the prescriptive
period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s subsequent
action effectively belies its insistence that the waivers are invalid. The records show that on December 6, 2000, upon
receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC is estopped
from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or deny rights
which it had previously recognized would run counter to the principle of equity which this institution holds dear.31

Liability for Deficiency

Onshore Withholding Tax
RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for the payment of onshore
tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which states:
(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the income tax due from the payee on the said income. The liability for
payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold the
tax or in case of under withholding, the deficiency tax shall be collected from the payor/withholding agent.   The
payee is not required to file an income tax return for the particular income. (Emphasis supplied)
The petitioner is mistaken.
Before any further discussion, it should be pointed out that RCBC erred in citing the abovementioned Revenue
Regulations No. 2-98 because the same governs collection at source on income paid only on or after January 1, 1998.
The deficiency withholding tax subject of this petition was supposed to have been withheld on income paid during the
taxable years of 1994 and 1995. Hence, Revenue Regulations No. 2-98 obviously does not apply in this case.
In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive Secretary,32 the Court has explained that the
purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax
liability; (2) to ensure the collection of tax, and (3) to improve the government’s cashflow. Under the withholding tax
system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or a
collector of the government to ensure the collection of taxes.33 1avvphi1
It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this
Court in the case of Commissioner of Internal Revenue v. Court of Appeals,34 to wit:
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than an
agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer – he is the
person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is
merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still
imposed on and due from the latter. The agent is not liable for the tax as no wealth flowed into him – he earned
no income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to
withhold as distinguished from its duty to pay tax since:
"the government’s cause of action against the withholding agent is not for the collection of income tax, but for
the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on
the withholding agent and not upon the taxpayer."35 (Emphases supplied)
Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer.1âwphi1 The former
cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax. The
withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to the
government. The liability for the tax, however, remains with the taxpayer because the gain was realized and received by
him.
While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of tax
due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable for
the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the
withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.
RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the withholding
agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans,
pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993:
Sec. 24. Rates of tax on domestic corporations.
xxxx
(e) Tax on certain incomes derived by domestic corporations
xxxx
(3) Tax on income derived under the Expanded Foreign Currency Deposit System. – Income derived by a depository bank
under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by
the Central Bank to transact business with foreign currency depository system units and other depository banks under the
expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such transactions
as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be subject to the usual
income tax payable by banks: Provided, That interest income from foreign currency loans granted by such
depository banks under said expanded system to residents (other than offshore banking units in the Philippines
or other depository banks under the expanded system) shall be subject to a 10% tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and conclusions of the CTA shall be accorded the highest
respect and shall be presumed valid, in the absence of any clear and convincing proof to the contrary. 36 The CTA, as a
specialized court dedicated exclusively to the study and resolution of tax problems, has developed an expertise on the
subject of taxation.37 As such, its decisions shall not be lightly set aside on appeal, unless this Court finds that the
questioned decision is not supported by substantial evidence or there is a showing of abuse or improvident exercise of
authority on the part of the Tax Court.38
WHEREFORE, the petition is DENIED.
SO ORDERED.
JOSE CATRAL MENDOZA
Associate Justice

G.R. No. 120880 June 5, 1997

FERDINAND R. MARCOS II, petitioner, 
vs.
COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE and HERMINIA D. DE
GUZMAN, respondents.

TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the
basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision 1 of the Court of
Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:
In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already
final and (u)nappealable-and-the subsequent levy of real properties is a tax remedy resorted to by the government,
sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is distinct and
separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not affected or precluded
by the pendency of any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for
Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED.
More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the
Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still unresolved,
the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of
the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting
through the summary remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate and
properties of his father, despite the pendency of the proceedings on probate of the will of the late president, which is
docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for
writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to —
I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by
respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the
real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision 2 on November 29, 1994, ruling that
the deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased President
Marcos have already become final and unappealable, and may thus be enforced by the summary remedy of levying upon
the properties of the late President, as was done by the respondent Commissioner of Internal Revenue.
WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for
Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED.
Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as
errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO
BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL
PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS
PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE
PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER
COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX
ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE,
THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF
WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT
TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE
ENFORCED BY RESPONDENTS COMMISSIONER AND DE GUZMAN. THUS, RESPONDENT COURT SHOULD
HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular
No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties
(both personal and real) make the total value of his estate, and the consequent estate tax due, incapable of exact
pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of
Levy and Sale are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the
Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an opportunity
to contest the Notices in violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN
RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO
RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE
ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities
and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team concluded its
investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses failed to file a
written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax returns covering the
years 1982 to 1986, — all in violation of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for
violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252 — a & b) of the
National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate
of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax
Returns of petitioner Ferdinand "Bongbong" Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against
the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax
assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-91-002451 (against the
Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40 representing deficiency
income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-002460 to FAC-1-85-
91-002463 (against petitioner Ferdinand "Bongbong" Marcos II in the amounts of P258.70 pesos; P9,386.40 Pesos;
P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all
personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her
caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes "D" and "E" of the
Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand "Bongbong" Marcos II
were also personally and constructively served upon him (through his caretaker) on September 12, 1991, at his last
known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes "J" and "J-1" of the
Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at
his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer inviting Mrs.
Marcos (or her duly authorized representative or counsel), to a conference, was furnished the counsel of Mrs. Marcos,
Dean Antonio Coronel — but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late
president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of
land owned by the Marcoses — to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency
income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were
resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of
the BIR and requesting that they be duly notified of any action taken by the BIR affecting the interest of their client
Ferdinand "Bongbong" Marcos II, as well as the interest of the late president — copies of the aforesaid notices were,
served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their counsel of record, "De
Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office".
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public
auction for the sale of the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were
declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand "Bongbong" Marcos II filed the instant petition for certiorariand prohibition under
Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction.
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of
paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be
collected without unnecessary hindrance. However, 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. 3
Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent
Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos
effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon the
estate of the deceased. The case of Domingo vs. Garlitos 4 is specifically cited to bolster the argument that "the ordinary
procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in an inheritance
(estate) tax, is for the claimant to present a claim before the probate court so that said court may order the administrator
to pay the amount therefor." This remedy is allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for
the immediate payment of taxes, and should order the payment of the same only within the period fixed by the probate
court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal
Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:
The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by
the petitioner-appellant is good authority on the proposition that the court having control over the administration
proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to order the
administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due and collectible.
And the rule laid down in that case must be understood in relation to the case of Collector of Customs
vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of
the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased person a
claim for taxes is presented by the government, the court has the authority to order payment by the administrator; but, in
the same way that it has authority to order payment or satisfaction, it also has the negative authority to deny the same.
While there are cases where courts are required to perform certain duties mandatory and ministerial in character, the
function of the court in a case of the present character is not one of them; and here, the court cannot be an organism
endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another
direction.
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus,
the pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection,
through summary remedies, of estate taxes over the same. According to the respondent, claims for payment of estate and
income taxes due and assessed after the death of the decedent need not be presented in the form of a claim against the
estate. These can and should be paid immediately. The probate court is not the government agency to decide whether an
estate is liable for payment of estate of income taxes. Well-settled is the rule that the probate court is a court with special
and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate
of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot be treated
with indifference nor should it be ignored with impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of
a deceased person by his prospective heirs before final adjudication; 5 to determine who are the heirs of the
decedent; 6 the recognition of a natural child; 7 the status of a woman claiming to be the legal wife of the decedent; 8 the
legality of disinheritance of an heir by the testator; 9 and to pass upon the validity of a waiver of hereditary rights. 10
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by
the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies, without the
cognition and authority of the court sitting in probate over the supposed will of the deceased.
The nature of the process of estate tax collection has been described as follows:
Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate,
although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the
duty of the probate court to make the amount of the inheritance tax a part of the final decree of distribution of the estate. It
is not against the property of decedent, nor is it a claim against the estate as such, but it is against the interest or property
right which the heir, legatee, devisee, etc., has in the property formerly held by decedent. Further, under some statutes, it
has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding between the state
and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and
determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding
has been held to be necessarily a proceeding in rem. 11
In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has
seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code attests
to this:
Sec. 3. Powers and duties of the Bureau. — The powers and duties of the Bureau of Internal Revenue shall comprehend
the assessment and collection of all national internal revenue taxes, fees, and charges, 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. Said Bureau shall also give effect to and administer the supervisory
and police power conferred to it by this Code or other laws.
Thus, it was in Vera vs. Fernandez 12 that the court recognized the liberal treatment of claims for taxes charged against
the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this
is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae — taxes are the sinews of the state.
Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the
committee on claims in the ordinary course of administration. In the exercise of its control over the administrator, the court
may direct the payment of such taxes upon motion showing that the taxes have been assessed against the estate.
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the
enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.
Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after
the distribution of the properties of the decedent. They are exempted from the application of the statute of non-claims. The
heirs shall be liable therefor, in proportion to their share in the inheritance. 13
Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting
from each one of them the amount of the tax proportionate to the inheritance received. Another remedy, pursuant to the
lien created by Section 315 of the Tax Code upon all property and rights to property belong to the taxpayer for unpaid
income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the
tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax
Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President, on the
ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the probate or estate settlement court's approval of the state's claim for estate
taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the
executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the
estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid.
This provision disproves the petitioner's contention that it is the probate court which approves the assessment and
collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued
through the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
Sec. 229. Protesting of assessment. — When the Commissioner of Internal Revenue or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form
and manner as may be prescribed by implementing regulations within (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on
the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise, the
decision shall become final, executory and demandable. (As inserted by P.D. 1773)
Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the
other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting
the BIR to collect the said taxes by levying upon the properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government,
collection thereof may have been done in violation of the law. Thus, the manner and method in which the latter is enforced
may be questioned separately, and irrespective of the finality of the former, because the Government does not have the
unbridled discretion to enforce collection without regard to the clear provision of law." 14
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the
old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed
period, and are therefore null and void:
. . . the Notices of Levy on Real Property (Annexes O to NN of Annex C of this Petition) in satisfaction of said
assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular No.
38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen (17)
months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of distraint of
personal property were first issued by respondents, the latter should have complied with Revenue Memorandum Circular
No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12
September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth
month) within which to issue these Notices of Levy. The Notices of Levy, having been issued beyond the period allowed
by law, are thus void and of no effect. 15
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance
with the provisions of the present Tax Code. The deficiency tax assessment, having already become final, executory, and
demandable, the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205 of
the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this
instance is Article 223 of the NIRC, which pertinently provides:
Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes. — (a) In the case of a false or
fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court
for the collection of such tax may be begun without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and executory, the fact of
fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
xxx xxx xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected
by distraint or levy or by a proceeding in court within three years following the assessment of the tax.
xxx xxx xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR
is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may be
assessed at any time within ten years after the omission, and any tax so assessed may be collected by levy upon real
property within three years following the assessment of the tax. Since the estate tax assessment had become final and
unappealable by the petitioner's default as regards protesting the validity of the said assessment, there is now no reason
why the BIR cannot continue with the collection of the said tax. Any objection against the assessment should have been
pursued following the avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in
several properties (both real and personal) make the total value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their
issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan
Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership and interests of the
late President in real and personal properties located within and outside the Philippines. Petitioner, however, omits to
allege whether the properties levied upon by the BIR in the collection of estate taxes upon the decedent's estate were
among those involved in the said cases pending in the Sandiganbayan. Indeed, the court is at a loss as to how these
cases are relevant to the matter at issue. The mere fact that the decedent has pending cases involving ill-gotten wealth
does not affect the enforcement of tax assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating
that this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its resolution of 20
September 1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the total value of
the estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final
and unappealable.
It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the
subject estate, but the Bureau of Internal Revenue, 16 whose determinations and assessments are presumed correct and
made in good faith. 17 The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the
performance of official duties, an assessment will not be disturbed. Even an assessment based on estimates is  prima
facie valid and lawful where it does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is
upon the complaining party to show clearly that the assessment is erroneous. Failure to present proof of error in the
assessment will justify the judicial affirmance of said assessment. 18 In this instance, petitioner has not pointed out one
single provision in the Memorandum of the Special Audit Team which gave rise to the questioned assessment, which
bears a trace of falsity. Indeed, the petitioner's attack on the assessment bears mainly on the alleged improbable and
unconscionable amount of the taxes charged. But mere rhetoric cannot supply the basis for the charge of impropriety of
the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the
taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken
by the petitioner reflects his disregard or even repugnance of the established institutions for governance in the scheme of
a well-ordered society. The subject tax assessments having become final, executory and enforceable, the same can no
longer be contested by means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost
appeal or remedy. 19 This judicial policy becomes more pronounced in view of the absence of sufficient attack against the
actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's
pronouncements sound and resilient to petitioner's attacks.
Anent grounds 3(b) and (B) — both alleging/claiming lack of notice — We find, after considering the facts and
circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy and
sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last
known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally given to
the caretaker of petitioner also at his last known address on September 12, 1991 — the subsequent notices given
thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the Philippines, and
at a place where said notices would surely be called to petitioner's attention, and received by responsible persons of
sufficient age and discretion.
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office,
House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a
conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos — Dean Antonio Coronel (Annex "B", p.
211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their counsel "De
Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993. Despite all of these
Notices, petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties were
based), nor appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously
ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to the Court of Tax
Appeals, — the tax assessments subject of this case, upon which the levy and sale of properties were based, could no
longer be contested (directly or indirectly) via this instant petition for certiorari. 20
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly
serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an interest in the
subject estate, and notices of levy upon its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the
Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in
the matter of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it
follows that service of notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law,
as under Section 213 of the NIRC, which pertinently states:
xxx xxx xxx
. . . Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the
same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city where
the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent or the
manager of the business in respect to which the liability arose, or if there be none, to the occupant of the property in
question.
xxx xxx xxx
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the
counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the
Batasang Pambansa. 21 We cannot therefore, countenance petitioner's insistence that he was denied due process. Where
there was an opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable
reason, the party claiming oppression then becomes the oppressor of the orderly functions of government. He who comes
to court must come with clean hands. Otherwise, he not only taints his name, but ridicules the very structure of
established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated
November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.

G.R. No. L-23611             April 24, 1967

THE GUAGUA ELECTRIC LIGHT PLANT COMPANY, INC., petitioner, 
vs.
THE COLLECTOR OF INTERNAL REVENUE and THE HONORABLE COURT OF TAX APPEALS, respondents.
Eligio Lagman for petitioner.
Office of the Solicitor General for respondents.
BENGZON, J.P., J.:
Guagua Electric Light Plant Co. (hereinafter called Guagua Electric Company for short), a grantee of municipal franchise
by the municipal council of Guagua, Pampanga under Resolution No. 42 dated December 13, 1927 and by the municipal
council of Sexmoan, Pampanga under Resolution No. 48 dated November 15, 1928 pursuant to Act 667, as amended,
realized and reported a gross income in the sum of P1,133,003.44 during the period from January 1, 1947 to November
1956 and paid thereon a franchise tax in the amount of P56,664.97 computed at 5% thereof in accordance with Section
259 of the National Internal Revenue Code. 
Believing that it should pay franchise tax at the lower rates provided for in its franchises1 instead of 5% fixed by Section
259 of the Tax Code, it filed on March 25, 1957 a claim for refund for allegedly overpaid franchise tax amounting to
P35,593.98 on its gross receipts realized from January 1, 1947 to November 1956. The Commissioner of Internal
Revenue denied refund of franchise tax corresponding to the period prior to the fourth quarter of 1951 on the ground that
the right to its refund had prescribed. 2 He however granted refund of the following amounts:
Period Sum Refunded
4th
quarter
, 1951
P7,482.17
to 3rd
quarter
, 1953
1st
quarter
, 1955
P8,232.39
to
Sept.
1956
Oct. 879.31
and
Nov.
1956

TOTAL P16,593.87
============
Not satisfied with the determination of the Commissioner, Guagua Electric appealed to the Court of Tax Appeals.
However, its appeal, docketed as C.T.A. Case No. 508 was dismissed upon motion of the Commissioner of Internal
Revenue, interposed before filing his answer to the petition for review on the ground that the same was instituted beyond
the 30-days, period provided for in Section 11 of Republic Act 1125.
Subsequently, this Court held in Hoa Hin Co., Inc. vs. David3 that electric franchise holders under Act 567 are liable for
franchise tax at the rate fixed by Section 259 of the Tax Code, that is, 5% of the gross receipts. Accordingly, on March 2,
1961 the Commissioner of Internal Revenue assessed against Guagua Electric deficiency franchise tax computed thus:
1. Gross
receipts,
Guagua
and
Sexmoan, P1,116,138.01
Oct. 1,
1952 to
June 30,
1959

Gross
receipts,
Sexmoan
July 1, 5,543.25
1959 to
Oct. 31,
1959

Gross
receipts,
Guagua,
July 1, 181,354.57
1959 to
June 30,
1960

Total gross
receipts P1,303,035.81

5%
franchise 65,151.79
tax due

Less:
amount 43,941.64
paid

Tax still due 21,210.15

Less: 181.71
Overpayme
nt,
Sexmoan,
Nov. 1,
1959 to
June 30,
1960
 Deficiency
tax 21,028.44

Add: 25%
3,257.11
surcharge

2 Add:
Amount 16,593.87
refunded

Total tax
42,879.42
due
============
Guagua Electric contested the deficiency assessment in its letter dated March 30, 1961 contending that the same is
violative of its franchises; that the computation of the gross receipts is contrary to rules; and that the right to assess and/or
collect the tax has prescribed. On August 21, 1961 the appellate division of the Bureau of Internal Revenue recommended
that the right to assess and collect the tax corresponding to the period prior to January 1, 1956 has prescribed.
Consequently, the Commissioner issued the following revised assessment eliminating therefrom the deficiency tax for the
period prior to January 1, 1956, as recommended:
Gross
receipts,
Jan. 1,
P858,070.67
1956 to
June 30,
1962

5%
franchise
tax and
3%
42,662.71
percenta
ge tax
due
thereon

Less:
Tax
22,724.59
already
paid

Balance
still due P19,938.12

Add:
25%
4,984.53
surcharg
e

Amount
16,593.87
refunded

Total tax
P41,516.52
due
=============
Guagua Electric appealed from the aforesaid Commissioner's decision to the Court of Tax Appeals which in turn affirmed
the same. Still not satisfied, it elevated the case to Us and submitted the following propositions:
1. The application of the rate of 5% as provided for in Section 259 of the Tax Code, instead of 1% or 2% as provided for in
its franchises granted under Act 667, impairs the obligation of contract and is therefore unconstitutional.
2. The government is precluded from recovering the sum of P16,593.87 representing the amount refunded to it on
grounds of prescription and failure to set up as counterclaim in C.T.A. Case No. 508.
The constitutionality of collecting franchise tax at the rate of 5% of the gross receipts as provided for in Section 259 of the
Tax Code instead of at the lower rates fixed by the franchise granted under Act 667, has already been settled in several
cases.4 Guagua Electric, whose franchises were similarly granted under Act 667, being similarly situated as the
taxpayers-franchise holders in those cases already decided by Us, shall likewise be subject to the 5% rate imposed in
Section 259 of the Tax Code.
The Commissioner of Internal Revenue seeks the recovery of the amount of P16,593.87 allegedly erroneously refunded
to Guagua Electric. Said amount represents the difference between the tax computed at 5% pursuant to Section 259 of
the Tax Code and the tax at 1% or 2% under its franchises covering the period from September 1951 through November
1956. This, in effect, is an assessment for deficiency franchise tax.
It should be noted that the deficiency assessment of P19,638.12 in this case for the difference between the franchise tax
paid at 1% or 2% under taxpayer's franchises and the tax computed at 5% pursuant to Section 259 of the Tax Code
covers the period from January 1, 1956 to June 30, 1962. Obviously, if Guagua Electric were required to pay P16,593.87
in addition to the sum of P19,938.12, it would be paying twice for the same deficiency tax for the period from January 1 to
November 30, 1956.
As afore-stated, moreover, the Commissioner of Internal Revenue revised his first deficiency assessment dated March 2,
1961 by eliminating therefrom the deficiency tax for the period prior to January 1, 1956 because the right to assess the
same has prescribed. By insisting on the payment of the amount of P16,593.87 (which covers the period from September
1951 to November 1956), he is, in fact, trying to collect the same deficiency tax, the right to assess the same he had
found to have been lost by prescription.
The Court of Tax Appeals however stated in its decision that Guagua Electric did not raise the issue of prescription of the
right of the Government to assess and collect the sum of P16,593.87. This finding of the lower court is not supported by
the pleadings. In its letter dated March 30, 1961 contesting the first assessment dated March 2, 1961 Guagua Electric
assailed the right to assess and/or collect the tax on grounds of prescription. In paragraph 20 of its petition for review
(C.T.A. Rec. p. 4), it raised the defense of prescription of the Commissioner's right to assess and collect the tax.
Anent the contention of the Commissioner of Internal Revenue that Guagua Electric failed to adduce evidence to prove
prescription of his right to assess and collect the P16.593.87, suffice it to state that in paragraph 10 of the Commissioner's
answer he admitted the allegations in paragraph 13 of the petition for review. Paragraph 13 alleged the facts, supported
by annexes, constituting prescription. There was therefore no need for the taxpayer to present further evidence in the
point.
The Commissioner of Internal Revenue further maintains that the prescription of his right to recover the amount of
P16,593.87 is governed by Article 1145(2) in relation to Articles 1154 and 1155 of the Civil Code. Hence, prescription will
set in only after the expiration of six years from 1957 and 1959, the dates refunds were granted. Since the petition for
review and answer thereto were filed in the Court of Tax Appeals on February 14, and May 4, 1962, he concludes that the
prescriptive period of six years has not expired.1äwphï1.ñët
As stated above, the demand on the taxpayer to pay the sum of P16,593.87 is in effect an assessment for deficiency
franchise tax. And being so, the right to assess or collect the same is governed by Section 331 of the Tax Code 5 rather
than by Article 1145 of the Civil Code. A special law (Tax Code) shall prevail over a general law (Civil Code).6
Our above conclusion absolving Guagua Electric from the payment of the sum of P16,593.87 has removed the necessity
of discussing Guagua Electric's assertion that the Government is precluded from recovering the said sum because it failed
to set it up as a counterclaim in C.T.A. Case No. 508.
With regard to the 25% surcharge in the amount of P4,984.53, it is patently unfair on the part of the Government to require
its payment inasmuch as the taxpayer acted in good faith in paying the franchise tax at the lower rates fixed by its
franchises. As a matter of fact, the Bureau of Internal Revenue shared with the taxpayer the view that Section 259 of the
Tax Code does not apply. Guagua Electric should not therefore be made to pay the 25% surcharge.7Wherefore, the
judgment appealed from is affirmed with the modification that the amount of P16,593.87 representing franchise tax
allegedly refunded erroneously and the 25% surcharge imposed on petitioner should be, and are eliminated, thereby
reducing the tax from a total of P41,516.52 to P19,938.12. No costs. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ., concur.