G.R. No.
128315 June 29, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY
AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO,
respondents.
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period. It also signals the time when
penalties and protests begin to accrue against the taxpayer. To enable the
taxpayer to determine his remedies thereon, due process requires that it must be
served on and received by the taxpayer. Accordingly, an affidavit, which was
executed by revenue officers stating the tax liabilities of a taxpayer and attached to
a criminal complaint for tax evasion, cannot be deemed an assessment that can be
questioned before the Court of Tax Appeals.
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules
of Court praying for the nullification of the October 30, 1996
Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which effectively
affirmed the January 25, 1996 Resolution 3 of the Court of Tax Appeals 4 CTA
Case No. 5271. The CTA disposed as follows:
WHEREFORE, finding [the herein petitioner's] "Motion to Dismiss" as
UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a
period of thirty (30) days from receipt hereof to file her answer.
Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of
Appeals denying reconsideration.
The Facts
As found by the Court of Appeals, the undisputed facts of the case are as follows:
It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner
Jose U. Ong authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and
Emmanuel M. Savellano to examine the books of accounts and other accounting
records of Pascor Realty and Development Corporation. (PRDC) for the years
ending 1986, 1987 and 1988. The said examination resulted in a recommendation
for the issuance of an assessment in the amounts of P7,498,434.65 and
P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue filed a criminal
complaint before the Department of Justice against the PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the
total amount of P10,513,671 .00. Private respondents PRDC, et. al. filed an Urgent
Request for Reconsideration/Reinvestigation disputing the tax assessment and tax
liability.
On March 23, 1995, private respondents received a subpoena from the DOJ in
connection with the criminal complaint filed by the Commissioner of Internal
Revenue (BIR) against them.1âwphi1.nêt
In a letter dated May 17, 1995, the CIR denied the urgent request for
reconsideration/reinvestigation of the private respondents on the ground that no
formal assessment of the has as yet been issued by the Commissioner.
Private respondents then elevated the Decision of the CIR dated May 17, 1995 to
the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271
on July 21, 1995. On September 6, 1995, the CIR filed a Motion to Dismiss the
petition on the ground that the CTA has no jurisdiction over the subject matter of
the petition, as there was no formal assessment issued against the petitioners. The
CTA denied the said motion to dismiss in a Resolution dated January 25, 1996 and
ordered the CIR to file an answer within thirty (30) days from receipt of said
resolution. The CIR received the resolution on January 31, 1996 but did not file an
answer nor did she move to reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:
Respondent Court of Tax Appeals acted with grave abuse of discretion and without
jurisdiction in considering the affidavit/report of the revenue officer and the
indorsement of said report to the secretary of justice as assessment which may be
appealed to the Court of Tax Appeals;
Respondent Court Tax Appeals acted with grave abuse of discretion in considering
the denial by petitioner of private respondents' Motion for Reconsideration as [a]
final decision which may be appealed to the Court of Tax Appeals.
In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:
We agree with petitioners' contentions, that the criminal complaint for tax evasion
is the assessment issued, and that the letter denial of May 17, 1995 is the decision
properly appealable to [u]s. Respondent's ground of denial, therefore, that there
was no formal assessment issued, is untenable.
1
It is the Court's honest belief, that the criminal case for tax evasion is already
anassessment. The complaint, more particularly, the Joint Affidavit of Revenue
Examiners Lagmay and Savellano attached thereto, contains the details of the
assessment like the kind and amount of tax due, and the period covered:
Petitioners are right, in claiming that the provisions of Republic Act No. 1125,
relating to exclusive appellate jurisdiction of this Court, do not, make any mention
of "formal assessment." The law merely states, that this Court has exclusive
appellate jurisdiction over decisions of the Commissioner of Internal Revenue on
disputed assessments, and other matters arising under the National Internal
Revenue Code, other law or part administered by the Bureau of Internal Revenue
Code.
As far as this Court is concerned, the amount and kind of tax due, and the period
covered, are sufficient details needed for an "assessment." These details are more
than complete, compared to the following definitions of the term as quoted
hereunder. Thus:
Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386,
387, 163 Tenn. 332. (Words and Phrases, Permanent Edition, Vol. 4, p. 446).
The word assessment when used in connection with taxation, may have more than
one meaning. The ultimate purpose of an assessment to such a connection is to
ascertain the amount that each taxpayer is to pay. More commonly, the word
"assessment" means the official valuation of a taxpayer's property for purpose of
taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325.
(Ibid. p. 445)
From the above, it can be gleaned that an assessment simply states how much tax
is due from a taxpayer. Thus, based on these definitions, the details of the tax as
given in the Joint Affidavit of respondent's examiners, which was attached to the
tax evasion complaint, more than suffice to qualify as an assessment. Therefore,
this assessment having been disputed by petitioners, and there being a denial of
their letter disputing such assessment, this Court unquestionably acquired
jurisdiction over the instant petition for review. 6
As earlier observed, the Court of Appeals sustained the CTA and dismissed the
petition.
Hence, this recourse to this Court. 7
Ruling of the Court of Appeals
2
The Court of Appeals held that the tax court committed no grave abuse of
discretion in ruling that the Criminal Complaint for tax evasion filed by the
Commissioner of Internal Revenue with the Department of Justice constituted an
"assessment" of the tax due, and that the said assessment could be the subject of
a protest. By definition, an assessment is simply the statement of the details and
the amount of tax due from a taxpayer. Based on this definition, the details of the
tax contained in the BIR examiners' Joint Affidavit, 8 which was attached to the
criminal Complaint, constituted an assessment. Since the assailed Order of the
CTA was merely interlocutory and devoid of grave abuse of discretion, a petition
for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court following issues:
(1) Whether or not the criminal complaint for tax evasion can be construed as an
assessment.
(2) Whether or not an assessment is necessary before criminal charges for tax
evasion may be instituted.
(3) Whether or not the CTA can take cognizance of the case in the absence of an
assessment.
In the main, the Court will resolve whether the revenue officers' Affidavit-Report,
which was attached to criminal revenue Complaint filed the Department of Justice,
constituted an assessment that could be questioned before the Court of Tax
Appeals.
The Court's Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the Department of
Justice cannot in any way be construed as a formal assessment of private
respondents' tax liabilities. This position is based on Section 205 of the National
Internal Revenue Code 10 (NIRC), which provides that remedies for the collection
of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites
Section 223(a) of the same Code, which states that in case of failure to file a
return, the tax may be assessed or a proceeding in court may be begun without
assessment.
Respondents, on the other hand, maintain that an assessment is not an action or
proceeding for the collection of taxes, but merely a notice that the amount stated
therein is due as tax and that the taxpayer is required to pay the same. Thus,
qualifying as an assessment was the BIR examiners' Joint Affidavit, which
contained the details of the supposed taxes due from respondent for taxable years
ending 1987 and 1988, and which was attached to the tax evasion Complaint filed
with the DOJ. Consequently, the denial by the BIR of private respondents' request
for reinvestigation of the disputed assessment is properly appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the regulations governing the
protest of assessments 11 provide a specific definition or form of an assessment.
However, the NIRC defines the specific functions and effects of an assessment. To
consider the affidavit attached to the Complaint as a proper assessment is to
subvert the nature of an assessment and to set a bad precedent that will prejudice
innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the
taxpayer that he or she has tax liabilities. But not all documents coming from the
BIR containing a computation of the tax liability can be deemed assessments.
To start with, an assessment must be sent to and received by a taxpayer, and
must demand payment of the taxes described therein within a specific period.
Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case
the taxpayer fails to pay deficiency tax within the time prescribed for its payment in
the notice of assessment. Likewise, an interest of 20 percent per annum, or such
higher rates as may be prescribed by rules and regulations, is to be collected form
the date prescribed for its payment until the full payment. 12
The issuance of an assessment is vital in determining, the period of limitation
regarding its proper issuance and the period within which to protest it. Section 203
13 of the NIRC provides that internal revenue taxes must be assessed within three
years from the last day within which to file the return. Section 222, 14 on the other
hand, specifies a period of ten years in case a fraudulent return with intent to
evade was submitted or in case of failure to file a return. Also, Section 228 15 of
the same law states that said assessment may be protested only within thirty days
from receipt thereof. Necessarily, the taxpayer must be certain that a specific
document constitutes an assessment. Otherwise, confusion would arise regarding
the period within which to make an assessment or to protest the same, or whether
interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the
taxpayer. Indeed, an assessment is deemed made only when the collector of
internal revenue releases, mails or sends such notice to the taxpayer. 16
3
In the present case, the revenue officers' Affidavit merely contained a computation
of respondents' tax liability. It did not state a demand or a period for payment.
Worse, it was addressed to the justice secretary, not to the taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply
understood' to mean:
A notice to the effect that the amount therein stated is due as tax and a demand for
payment thereof.
Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for
the proper presentation of tax rolls.
Even these definitions fail to advance private respondents' case. That the BIR
examiners' Joint Affidavit attached to the Criminal Complaint contained some
details of the tax liabilities of private respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be
a notice of the tax due and a demand to the private respondents for payment
thereof.
The fact that the Complaint itself was specifically directed and sent to the
Department of Justice and not to private respondents shows that the intent of the
commissioner was to file a criminal complaint for tax evasion, not to issue an
assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax evasion.
What private respondents received was a notice from the DOJ that a criminal case
for tax evasion had been filed against them, not a notice that the Bureau of Internal
Revenue had made an assessment.
In addition, what private respondents sent to the commissioner was a motion for a
reconsideration of the tax evasion charges filed, not of an assessment, as shown
thus:
This is to request for reconsideration of the tax evasion charges against my client,
PASCOR Realty and Development Corporation and for the same to be referred to
the Appellate Division in order to give my client the opportunity of a fair and
objective hearing. 19
Additional Issues: Assessment Not Necessary Before Filing of Criminal
Complaint
Private respondents maintain that the filing of a criminal complaint must be
preceded by an assessment. This is incorrect, because Section 222 of the NIRC
specifically states that in cases where a false or fraudulent return is submitted or in
cases of failure to file a return such as this case, proceedings in court may be
commenced without an assessment. Furthermore, Section 205 of the same Code
clearly mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi,20 petitioner therein sought the dismissal of the
criminal Complaints for being premature, since his protest to the CTA had not yet
been resolved. The Court held that such protests could not stop or suspend the
criminal action which was independent of the resolution of the protest in the CTA.
This was because the commissioner of internal revenue had, in such tax evasion
cases, discretion on whether to issue an assessment or to file a criminal case
against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section
255 of the NLRC, 21 which penalizes failure to file a return. They add that a tax
assessment should precede a criminal indictment. We disagree. To reiterate, said
Section 222 states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they
are entitled to an exception. Moreover, the criminal charge need only be supported
by a prima facie showing of failure to file a required return. This fact need not be
proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a
complaint. Before an assessment is issued, there is, by practice, a pre-assessment
notice sent to the taxpayer. The taxpayer is then given a chance to submit position
papers and documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him or her is then sent to
the taxpayer informing the latter specifically and clearly that an assessment has
been made against him or her. In contrast, the criminal charge need not go
through all these. The criminal charge is filed directly with the DOJ. Thereafter, the
taxpayer is notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but to penalize the taxpayer for
violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is
REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No
costs.
SO ORDERED.
4
G.R. No. 215957
COMMISSIONER OF INTERNAL REVENUE, Petitioner vs. FITNESS BY
DESIGN, INC., Respondent
DECISION
LEONEN, J.:
To avail of the extraordinary period of assessment in Section 222(a) of the
National Internal Revenue Code, the Commissioner of Internal Revenue should
show that the facts upon which the fraud' is based is communicated to the
taxpayer. The burden of proving that the facts exist in any subsequent proceeding
is with the Commissioner. Furthermore, the Final Assessment Notice is not valid if
it does not contain a definite due date for payment by the taxpayer.
This resolves a Petition for Review on Certiorari1 filed by the Commissioner of
Internal Revenue, which assails the Decision2 dated July 14, 2014 and
Resolution3 dated December 16, 2014 of the Court of Tax Appeals. The Court of
Tax Appeals En Banc affirmed the Decision of the First Division, which declared
the assessment issued against Fitness by Design, Inc. (Fitness) as invalid.4
On April 11, 1996, Fitness filed its Annual Income Tax Return for the taxable year
of 1995.5 According to Fitness, it was still in its pre-operating stage during the
covered period.6
On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated
March 17, 2004.7 The Final Assessment Notice was issued under Letter of
Authority No. 00002953.8 The Final Assessment Notice assessed that Fitness had
a tax deficiency in the amount of ₱10,647,529.69.9 It provides:
FINAL ASSESSMENT NOTICE
March 17, 2004
FITNESS BY DESIGN, INC
169 Aguirre St., BF Homes,
Paranaque City
Gentlemen:
Please be informed that after investigation of your Internal revenue Tax Liabilities
for the year 1995 pursuant to Letter of Authority No. 000029353 dated May 13,
2002, there has been found due deficiency taxes as shown hereunder:
 In view thereof, you are requested to pay your aforesaid deficiency internal
Assessment No. _____________ revenue taxes liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.10 (Emphasis in
Income Tax the original)

Taxable Income per return ₱ Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According
to Fitness, the Commissioner's period to assess had already prescribed. Further,
Add: Unreported Sales 7,156,336.08
the assessment was without basis since the company was only incorporated on
Taxable Income per audit 7,156,336.08 May 30, 1995.11
Tax Due (35%) 2,504,717.63 On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or Levy
Add: Surcharge (50%) ₱ 1,252,358.81 with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.12

Interest (20%/annum) until 4-15-04 4,508,491. 73 5, 760,850.54 Fitness filed before the First Division of the Court of Tax Appeals a Petition for
Deficiency Income Tax ₱ 8,265,568.17 Review (With Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005.13
Value Added Tax
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to
Unreported Sales ₱ 7,156,336.08
Fitness' Petition and raised special and affirmative defenses.14 The Commissioner
Output Tax (10%) 715,633.61 posited that the Warrant of Distraint and/or Levy was issued in accordance with
law.15 The Commissioner claimed that its right to assess had not yet prescribed
Add: Surcharge (50%) ₱ 357,816.80 under Section 222(a)16 of the National Internal Revenue Code.17 Because the
Interest (20%/ annum) until 4-15-04 1,303,823.60 1,661,640.41 1995 Income Tax ,Return filed by Fitness was false and fraudulent for its alleged
intentional failure to reflect its true sales, Fitness' respective taxes may be
Deficiency VAT ₱ 2,311,214.02 assessed at any time within 10 years from the discovery of fraud or omission.18
Documentary Stamp Tax
The Commissioner asserted further that the assessment already became final and
Subscribe Capital Stock ₱ 375,000.00 executory for Fitness' failure , to file a protest within the reglementary period.19
The Commissioner denied that there was a protest to the Final Assessment Notice
DST due (2/200) 3,750.00 filed by Fitness on June 25, 2004.20 According to the Commissioner, the alleged
Add: Surcharge (25%) 937.50 protest was "nowhere to be found in the [Bureau of Internal Revenue] Records nor
reflected in the Record Book of the Legal Division as normally done by [its]'
Deficiency DST ₱ 4,687.50 receiving clerk when she received [sic] any document."21 Therefore, the
Total Deficiency Taxes ₱ 10,647,529.69 Commissioner had sufficient basis to collect the tax deficiency through the Warrant
of Distraint and/or Levy.22

The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249(B) of the [National Internal Revenue Code], as amended.
Please note, however, that the interest and the total amount due will have to be
adjusted if paid prior or beyond April 15, 2004.
The alleged fraudulent return was discovered through a tip from a confidential
informant.23 The revenue officers' investigation revealed that Fitness had been
operating business with sales operations amounting to ₱7,156,336.08 in 1995,
which it neglected toreport in its income tax return.24 Fitness' failure to report its
income resulted in deficiencies to its income tax and value-added tax of
₱8,265,568.17 and ₱2,377,274.02 respectively, as well as the documentary stamp
tax with regard to capital stock subscription.25

5

Through the report, the revenue officers recommended the filing of a civil case for
collection of taxes and a criminal case for failure to declare Fitness' purported
sales in its 1995 Income Tax Return.26 Hence, a criminal complaint against
Fitness was filed before the Department of Justice.27
The Court of Tax Appeals First Division granted Fitness' Petition on the ground
that the assessment has already prescribed.28 It cancelled and set aside the Final
Assessment Notice dated March 1 7, 2004 as well as the Warrant of Distraint
and/or Levy issued by the Commissioner.29 It ruled that the Final Assessment
Notice is invalid for failure to comply with the requirements of Section 22830 of the
National Internal Revenue Code. The dispositive portion of the Decision reads:
WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner
Fitness by Design, Inc., is hereby GRANTED. Accordingly, the Final Assessment
Notice dated 'March 17, 2004, finding petitioner liable for deficiency income tax,
documentary stamp tax and value-added tax for taxable year 1995 in the total
amount of ₱10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant
of Distraint and Levy dated February 1, 2005 is 'likewise CANCELLED and SET
ASIDE.
SO ORDERED.31 (Emphasis in the original)
The Commissioner's Motion for Reconsideration and its Supplemental Motion for
Reconsideration were denied by the Court of Tax Appeals First Division.32
Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En
Banc.33 The Commissioner asserted ,that it had 10 years to make an assessment
due to the fraudulent income tax return filed by Fitness.34 It also claimed that the
assessment already attained finality due to Fitness' failure to file its protest within
the period provided by law.35
Fitness argued that the Final Assessment Notice issued to it could not be claimed
as a valid deficiency assessment that could justify the issuance of a warrant of
distraint and/or levy.36 It asserted that it was a mere request for payment as it did
not provide the period within which to pay the alleged liabilities.37
The Court of Tax Appeals En Banc ruled in favor of Fitness. It affirmed the
Decision of the Court of Tax Appeals First Division, thus:
WHEREFORE, the instant Petition for Review is DENIED for lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July
6
10, 2012 and November 21, 2012 respectively are AFFIRMED in toto.38
(Emphasis in the original)
The Commissioner's Motion for Reconsideration was denied by the Court of Tax
Appeals En Banc in the Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition for
Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether the
Final Assessment Notice issued against respondent Fitness by Design, Inc. is a
valid assessment under Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.40
Petitioner argues that the Final Assessment Notice issued to respondent is valid
since it complies with Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.41 The law states that the taxpayer shall be
informed in writing of the facts, jurisprudence, and law on which the assessment is
based.42 Nothing in the law provides that due date for payment is a substantive
requirement for the validity of a final assessment notice.43
Petitioner further claims that a perusal of the Final Assessment Notice shows that
April 15, 2004 is the due date for payment.44 The pertinent portion of the
assessment reads:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249(B) of the [National Internal Revenue Code], as amended.
Please note, however, that the interest and the total amount due will have to be
adjusted if paid prior or beyond April 15, 2004.45 (Emphasis supplied)
This Court, through the Resolution46 dated July 22, 2015, required respondent to
comment on the Petition for Review.
In its Comment,47 respondent argues that the Final Assessment Notice issued
was merely a request and not a demand for payment of tax liabilities.48 The Final
Assessment Notice cannot be considered as a final deficiency assessment
because it deprived respondent of due process when it failed to reflect its fixed tax
liabilities.49 Moreover, it also gave respondent an indefinite period to pay its tax
liabilities.50
Respondent points out that an assessment should strictly comply with the law for
its validity.51 Jurisprudence provides that "not all documents coming from the
[Bureau of Internal Revenue] containing a computation of the tax liability can be
deemed assessments[,] which can attain finality."52 Therefore, the Warrant of
Distraint and/or Levy cannot be enforced since it is based on an invalid
assessment.53
Respondent likewise claims that since the Final Assessment Notice was allegedly
based on fraud, it must show the details of the fraudulent acts imputed to it as part
of due process.54
I responsible for the "appropriate review and issuance of a deficiency tax
The Petition has no merit.
An assessment "refers to the determination of amounts due from a person
obligated to make payments."55 "In the context of national internal revenue
collection, it refers to the determination of the taxes due from a taxpayer under the
National Internal Revenue Code of 1997."56
The assessment process starts with the filing of tax return and payment of tax by
the taxpayer.57 The initial assessment evidenced by the tax return is a self-
assessment of the taxpayer.58 The tax is primarily computed and voluntarily paid
by the taxpayer without need of any demand from government.59 If tax obligations
are properly paid, the Bureau of Internal Revenue may dispense with its own
assessment.60
After filing a return, the Commissioner or his or her representative may allow the
examination of any taxpayer for assessment of proper tax liability.61 The failure of
a taxpayer to file his or her return will not hinder the Commissioner from permitting
the taxpayer's examination.62 The Commissioner can examine records or other
data relevant to his or her inquiry in order to verify the correctness of any return, or
to make a return in case of noncompliance, as well as to determine and collect tax
liability.63
The indispensability of affording taxpayers sufficient written notice of his or her tax
liability is a clear definite requirement.64 Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99, as amended, transparently
outline the procedure in tax assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation
regarding the due process requirement in the issuance of a deficiency tax
assessment, requires a notice for informal conference.67 The revenue officer who
audited the taxpayer's records shall state in his or her report whether the taxpayer
concurs with his or her findings of liability for deficiency taxes.68 If the taxpayer
7
does not agree, based on the revenue officer's report, the taxpayer shall be
informed in writing69 of the discrepancies in his or her payment of internal revenue
taxes for "Informal Conference."70 The informal conference gives the taxpayer an
opportunity to present his or her side of the case.71
The taxpayer is given 15 days from receipt of the notice of informal conference to
respond.72 If the taxpayer fails to respond, he or she will be considered in
default.73 The revenue officer74 endorses the case with the least possible delay to
the Assessment Division of the Revenue Regional Office or the Commissioner or
his or her authorized representative.75 The Assessment Division of the Revenue
Regional Office or the Commissioner or his or her authorized representative is
assessment, if warranted."76
If, after the review conducted, there exists sufficient basis to assess the taxpayer
with deficiency taxes, the officer 'shall issue a preliminary assessment notice
showing in detail the facts, jurisprudence, and law on which the assessment is
based.77 The taxpayer is given 15 days from receipt of the pre-assessment notice
to respond.78 If the taxpayer fails to respond, he or she will be considered in
default, and a formal letter of demand and assessment notice will be issued.79
The formal letter of demand and assessment notice shall state the facts,
jurisprudence, and law on which the assessment was based; otherwise, these
shall be void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and assessment notice within
30 days from receipt of the notice.81
II
The word "shall" in Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99 means the act of informing the taxpayer of both
the legal and factual bases of the assessment is mandatory.82 The law requires
that the bases be reflected in the formal letter of demand and assessment
notice.83 This cannot be presumed.84 Otherwise, the express mandate of Section
228 and Revenue Regulations No. 12-99 would be nugatory.85 The requirement
enables the taxpayer to make an effective protest or appeal of the assessment or
decision.86
The rationale behind the requirement that taxpayers should be informed of the
facts and the law on which the assessments are based conforms with the
constitutional mandate that no person shall be deprived of his or her property
without due process of law.87 Between the power of the State to tax and an
individual's right to due process, the scale favors the right of the taxpayer to due
process.88

The purpose of the written notice requirement is to aid the taxpayer in making a
reasonable protest, if necessary.89 Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough.90
Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91
held that a final assessment notice that only contained a table of taxes with no
other details was insufficient:
In the present case, a mere perusal of the [Final Assessment Notice] for the
deficiency EWT for taxable year 1994 will show that other than a tabulation of the
alleged deficiency taxes due, no further detail regarding the assessment was
provided by petitioner. Only the resulting interest, surcharge and penalty were
anchored with legal basis. Petitioner should have at least attached a detailed
notice of discrepancy or stated an explanation why the amount of P48,461.76 is
collectible against respondent and how the same was arrived at.92
Any deficiency to the mandated content of the assessment or its process will not
be tolerated.93 In Commissioner of Internal Revenue v. Enron,94 an advice of tax
deficiency from the Commissioner of Internal Revenue to an employee of Enron,
including the preliminary five (5)-day letter, were not considered valid substitutes
for the mandatory written notice of the legal and factual basis of the
assessment.95 The required issuance of deficiency tax assessment notice to the
taxpayer is different from the required contents of the notice.96 Thus:
The law requires that the legal and factual bases of the assessment be stated in
the formal letter of demand and assessment notice.1âwphi1 Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228 of the [National
Internal Revenue Code] and [Revenue Regulations] No. 12-99 would be rendered
nugatory. The alleged "factual bases" in the advice, preliminary letter and "audit
working papers" did not suffice. There was no going around the mandate of the law
that the legal and factual bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment notice.97 (Emphasis supplied)
However, the mandate of giving the taxpayer a notice of the facts and laws on
which the assessments are based should not be mechanically applied.98 To
emphasize, the purpose of this requirement is to sufficiently inform the taxpayer of
the bases for the assessment to enable him or her to make an intelligent protest.99
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100
substantial compliance with Section 228 of the National Internal Revenue Code is
allowed, provided that the taxpayer would be later apprised in writing of the factual
8
and legal bases of the assessment to enable him or her to prepare for an effective
protest.101 Thus:
Although the [Final Assessment Notice] and demand letter issued to petitioner
were not accompanied by a written explanation of the legal and factual bases of
the deficiency taxes assessed against the petitioner, the records showed that
respondent in its letter dated April 10, 2003 responded to petitioner's October 14,
2002 letter-protest, explaining at length the factual and legal bases of the
deficiency tax assessments and denying the protest.
Considering the foregoing exchange of correspondence and documents between
the parties, we find that the requirement of Section 228 was substantially complied
with. Respondent had fully informed petitioner in writing of the factual and legal
bases of the deficiency taxes assessment, which enabled the latter to file an
"effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right
to due process was thus not violated.102
A final assessment notice provides for the amount of tax due with a demand for
payment.103 This is to determine the amount of tax due to a taxpayer.104
However, due process requires that taxpayers be informed in writing of the facts
and law on which the assessment is based in order to aid the taxpayer in making a
reasonable protest.105 To immediately ensue with tax collection without initially
substantiating a valid assessment contravenes the principle in administrative
investigations "that taxpayers should be able to present their case and adduce
supporting evidence."106
Respondent filed its income tax return in 1995.107 Almost eight (8) years passed
before the disputed final assessment notice was issued. Respondent pleaded
prescription as its defense when it filed a protest to the Final Assessment Notice.
Petitioner claimed fraud assessment to justify the belated assessment made on
respondent.108 If fraud was indeed present, the period of assessment should be
within 10 years.109 It is incumbent upon petitioner to clearly state the allegations
of fraud committed by respondent to serve the purpose of an assessment notice to
aid respondent in filing an effective protest.
III
The prescriptive period in making an assessment depends upon whether a tax
return was filed or whether the tax return filed was either false or fraudulent. When
a tax return that is neither false nor fraudulent has been filed, the Bureau of
Internal Revenue may assess within three (3) years, reckoned from the date of
actual filing or from the last day prescribed by law for filing.110 However, in case of
a false or fraudulent return with intent to evade tax, Section 222(a) provides:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes. –
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to
file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be filed without assessment, at any time within ten (10) years after
the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action for the collection thereof.
(Emphasis supplied)
In Aznar v. Court of Tax Appeals, this Court interpreted Section 332 (now Section
222[a] of the National Internal Revenue Code) by dividing it in three (3) different
cases: first, in case of false return; second, in case of a fraudulent return with
intent to evade; and third, in case of failure to file a return. Thus:
Our stand that the law should be interpreted to mean a separation of the three
different situations of false return, fraudulent return with intent to evade tax and
failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
"falsity'', "fraud" and "omission."
This Court held that there is a difference between "false return" and a "fraudulent
return."115 A false return simply involves a "deviation from the truth, whether
intentional or not" while a fraudulent return "implies intentional or deceitful entry
with intent to evade the taxes due."
Fraud is a question of fact that should be alleged and duly proven.117 "The willful
neglect to file the required tax return or the fraudulent intent to evade the payment
of taxes, considering that the same is accompanied by legal consequences,
cannot be presumed." Fraud entails corresponding sanctions under the tax law.
Therefore, it is indispensable for the Commissioner of Internal Revenue to include
the basis for its allegations of fraud in the assessment notice.
During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr.
testified that respondent was, in its pre-operating stage in 1995.120 During that
period, respondent "imported equipment and distributed them for market testing in
the Philippines without earning any profit."121 He also confirmed that the Final
Assessment Notice and its attachments failed to substantiate the Commissioner's
allegations of fraud against respondent, thus:
9
More than three (3) years from the time petitioner filed its 1995 annual income tax
return on April 11, 1996, respondent issued to petitioner a [Final Assessment
Notice] dated March 17, 2004 for the year 1995, pursuant to the Letter of Authority
No. 00002953 dated May 13, 2002. The attached Details of discrepancy containing
the assessment for income tax (IT), value-added tax (VAT) and documentary
stamp tax (DST) as well as the Audit Result/ Assessment Notice do not impute
fraud on the part of petitioner. Moreover, it was obtained on information and
documents illegally obtained by a [Bureau of Internal Revenue] informant from
petitioner's accountant Elnora Carpio in 1996.122 (Emphasis supplied)
Petitioner did not refute respondent's allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent's tax liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them with respondent's list of
sales.124 He admitted125 that the gathered information did not show that
respondent deliberately failed to reflect its true income in 1995.
IV
The issuance of a valid formal assessment is a substantive prerequisite for
collection of taxes.127 Neither the National Internal Revenue Code nor the
revenue regulations provide for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its explicit functions and
effects."128 An assessment does not only include a computation of tax liabilities; it
also includes a demand for payment within a period prescribed. Its main purpose
is to determine the amount that a taxpayer is liable to pay.
A pre-assessment notice "do[es] not bear the gravity of a formal assessment
notice."131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue's findings against a taxpayer for an informal conference or a
clarificatory meeting.132
A final assessment is a notice "to the effect that the amount therein stated is due
as tax and a demand for payment thereof." This demand for payment signals the
time "when penalties and interests begin to accrue against the taxpayer and
enabling the latter to determine his remedies[.]" Thus, it must be "sent to and
received by the taxpayer, and must demand payment of the taxes described
therein within a specific period."
The disputed Final Assessment Notice is not a valid assessment.
First, it lacks the definite amount of tax liability for which respondent is
accountable. It does not purport to be a demand for payment of tax due, which a
final assessment notice should supposedly be. An assessment, in the context of
the National Internal Revenue Code, is a "written notice and demand made by the
[Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax
liability that is there: definitely set and fixed."136 Although the disputed notice
provides for the computations of respondent's tax liability, the amount remains
indefinite. It only provides that the tax due is still subject to modification, depending
on the date of payment. Thus:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of
this Notice. The 50% surcharge and 20% interest have been imposed pursuant to
Sections 248 and 249 (B) of the [National Internal Revenue Code], as amended.
Please note, however, that the interest and the total amount due will have to be
adjusted if prior or beyond April 15, 2004. (Emphasis Supplied)
documentary stamp tax amounting to ₱10,647,529.69, inclusive of surcharges and
interest"144 for lack of due process. Thus, the Warrant of Distraint and/or Levy is
void since an invalid assessment bears no valid effect.
Taxes are the lifeblood of government and should be collected without hindrance.
However, the collection of taxes should be exercised "reasonably and in
accordance with the prescribed procedure."
The essential nature of taxes for the existence of the State grants government with
vast remedies to ensure its collection. However, taxpayers are guaranteed their
fundamental right to due process of law, as articulated in various ways in the
process of tax assessment. After all, the State's purpose is to ensure the well-
being of its citizens, not simply to deprive them of their fundamental rights.

Second, there are no due dates in the Final Assessment Notice. This negates
petitioner's demand for payment.138 Petitioner's contention that April 15, 2004
should be regarded as the actual due date cannot be accepted. The last paragraph
of the Final Assessment Notice states that the due dates for payment were
supposedly reflected in the attached assessment:
WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax Appeals
En Banc dated July 14, 2014 and Resolution dated December 16, 2014 in CTA EB
Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.
SO ORDERED.

In view thereof, you are requested to pay your aforesaid deficiency internal
revenue tax liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice. (Emphasis in
the original)

However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.

Contrary to petitioner's view, April 15, 2004 was the reckoning date of accrual of
penalties and surcharges and not the due date for payment of tax
liabilities.1avvphi1 The total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and actual demand to pay.

Compliance with Section 228 of the National Internal Revenue Code is a

substantative requirement. It is not a mere formality.142 Providing the taxpayer
with the factual and legal bases for the assessment is crucial before proceeding
with tax collection. Tax collection should be premised on a valid assessment,
which would allow the taxpayer to present his or her case and produce evidence
for substantiation.

The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as
well as the Audit Result/Assessment Notice issued by petitioner to respondent for
the year 1995 covering the "alleged deficiency income tax, value-added tax and

10
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the Decision2
dated September 2, 2015 and Resolution3 dated January 29, 2016 of the Court of
Tax Appeals (CTA) en bane in CTA EB No. 1224, affirming with modification the
Decision4 dated June 5, 2014 and the Resolution5 dated September 15, 2014.in
CTA Case No. 7948 of the CTA Third Division, ordering petitioner Medicard
Philippines, Inc. (MEDICARD), to pay respondent Commissioner of Internal
Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of
₱220,234,609.48, plus 20% interest per annum starting January 25, 2007, until
fully paid, pursuant to Section 249(c)6 of the National Internal Revenue Code
(NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid
health and medical insurance coverage to its clients. Individuals enrolled in its
health care programs pay an annual membership fee and are entitled to various
preventive, diagnostic and curative medical services provided by duly licensed
physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or
accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and
October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January
25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns
(ITR) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice
(LN) No. 122-VT-06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary
Assessment Notice (PAN) against MEDICARD for deficiency VAT. A
Memorandum dated December 10, 2007 was likewise issued recommending the
11
issuance of a Formal Assessment Notice (FAN) against MEDICARD.9 On.
January 4, 2008, MEDICARD received CIR's FAN dated December' 10, 2007 for
alleged deficiency VAT for taxable year 2006 in the total amount of Pl
96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation
(RR) No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health
Care Providers, Inc., 12 the CIR argued that since MEDICARD. does not actually
provide medical and/or hospital services, but merely arranges for the same, its
services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals and/or
clinics but include actual and direct rendition of medical and laboratory services; in
fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory
facilities which it used in providing medical and laboratory services to its members;
(2) out of the ₱l .9 Billion membership fees, ₱319 Million was received from clients
that are registered with the Philippine Export Zone Authority (PEZA) and/or Bureau
of Investments; (3) the processing fees amounting to ₱l 1.5 Million should be
excluded from gross receipts because P5.6 Million of which represent advances
for professional fees due from clients which were paid by MEDICARD while the
remainder was already previously subjected to VAT; (4) the professional fees in
the amount of Pl 1 Million should also be excluded because it represents the
amount of medical services actually and directly rendered by MEDICARD and/or
its subsidiary company; and (5) even assuming that it is liable to pay for the VAT,
the 12% VAT rate should not be applied on the entire amount but only for the
period when the 12% VAT rate was already in effect, i.e., on February 1, 2006. It
should not also be held liable for surcharge and deficiency interest because it did
not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD's Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed
Assessment dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto
assessment of deficiency [VAT] in total sum of ₱196,614,476.99. It is requested
that you pay said deficiency taxes immediately. Should payment be made later,
adjustment has to be made to impose interest until date of payment. This is olir
final decision. If you disagree, you may take an appeal to the [CTA] within the
period provided by law, otherwise, said assessment shall become final, executory
and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT
A, reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with
modifications the CIR's deficiency VAT assessment covering taxable year 2006,
viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED
WITH MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the
amount of P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge
imposed under -Section 248(A)(3) of the NIRC of 1997, as amended, computed as
follows:
Basic Deficiency VAT ₱l78,538,566.68
Add: 25% Surcharge 44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis
deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007 until full
payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended;
and
b. Delinquency interest at the rate of twenty percent (20%) per annum on the total
amount of ₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68
and· 25% surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which
have accrued as afore-stated in (a), computed from June 19, 2009 until full
payment thereof pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not limited to
the issuance of Letter of Authority (LOA) alone as the CIR is granted vast powers
to perform examination and assessment functions; (2) in lieu of an LOA, an LN
12
was issued to MEDICARD informing it· of the discrepancies between its ITRs and
VAT Returns and this procedure is authorized under Revenue Memorandum Order
(RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning
the validity of the assessment on the ground of lack of LOA since the assessment
issued against MEDICARD contained the requisite legal and factual bases that put
MEDICARD on notice of the deficiencies and it in fact availed of the remedies
provided by law without questioning the nullity of the assessment; (4) the amounts
that MEDICARD earmarked , and eventually paid to doctors, hospitals and clinics
cannot be excluded from · the computation of its gross receipts under the
provisions of RR No. 4-2007 because the act of earmarking or allocation is by itself
an act of ownership and management over the funds by MEDICARD which is
beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross receipts because
the operation of these clinics and laboratory is merely an incident to MEDICARD's
main line of business as HMO and there is no evidence that MEDICARD
segregated the amounts pertaining to this at the time it received the premium from
its members; and (6) MEDICARD was not able to substantiate the amount
pertaining to its January 2006 income and therefore has no basis to impose a 10%
VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.
Hence, MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the
petition only insofar as the 10% VAT rate for January 2006 is concerned but
sustained the findings of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, the Decision date June 5, 2014 is hereby
MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount
of ₱220,234,609.48, inclusive of the 25% surcharge imposed under Section 248(A)
(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT ₱76,187,687.58
Add: 25% Surcharge 44,046,921.90

Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of
₱l 76,187,687.58 computed from January 25, 2007 until full payment thereof
pursuant to Section 249(B) of the NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount of
₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25%
surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued
as afore-stated in (a), computed from June 19, 2009 until full payment thereof
pursuant to Section 249(C) of the NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for
reconsideration but it was denied.23 Hence, MEDICARD now seeks recourse to
this Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND
EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL
FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to
perform assessment functions. It empowers or enables said revenue officer to
examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax. 25 An LOA is premised on the fact
that the examination of a taxpayer who has already filed his tax returns is a power
that statutorily belongs only to the CIR himself or his duly authorized
representatives. Section 6 of the NIRC clearly provides as follows:
13
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examinationof any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a
return shall not prevent the Commissioner from authorizing the examination of any
taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR
himself or by his duly authorized representative, through an LOA, an examination
of the taxpayer cannot ordinarily be undertaken. The circumstances contemplated
under Section 6 where the taxpayer may be assessed through best-evidence
obtainable, inventory-taking, or surveillance among others has nothing to do with
the LOA. These are simply methods of examining the taxpayer in order to arrive
at .the correct amount of taxes. Hence, unless undertaken by the CIR himself or
his duly authorized representatives, other tax agents may not validly conduct any
of these kinds of examinations without prior authority.
With the advances in information and communication technology, the Bureau of
Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies
and guidelines once its then incipient centralized Data Warehouse (DW) becomes
fully operational in conjunction with its Reconciliation of Listing for Enforcement
System (RELIEF System).26 This system can detect tax leaks by matching the
data available under the BIR's Integrated Tax System (ITS) with data gathered
from third-party sources. Through the consolidation and cross-referencing of third-
party information, discrepancy reports on sales and purchases can be generated
to uncover under declared income and over claimed purchases of Goods and
services.
Under this RMO, several offices of the BIR are tasked with specific functions
relative to the RELIEF System, particularly with regard to LNs. Thus, the Systems
Operations Division (SOD) under the Information Systems Group (ISG) is
responsible for: (1) coming up with the List of Taxpayers with discrepancies within
the threshold amount set by management for the issuance of LN and for the
system-generated LNs; and (2) sending the same to the taxpayer and to the Audit
Information, Tax Exemption and Incentives Division (AITEID). After receiving the
LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District
Office (RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and
Investigation Division (LTAID)]. At the level of these investigating offices, the
appropriate action on the LN s issued to taxpayers with RELIEF data discrepancy
would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the
"no-contact-audit approach" in the CIR's exercise of its ·power to authorize any
examination of taxpayer arid the assessment of the correct amount of tax. The no-
contact-audit approach includes the process of computerized matching of sales
and purchases data contained in the Schedules of Sales and Domestic Purchases
and Schedule of Importation submitted by VAT taxpayers under the RELIEF
System pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-
2002. This may also include the matching of data from other information or returns
filed by the taxpayers with the BIR such as Alphalist of Payees subject to Final or
Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's
books and records, if the computerized/manual matching of sales and
purchases/expenses appears to reveal discrepancies, the same shall be
communicated to the concerned taxpayer through the issuance of LN. The LN
shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal
Conference to the concerned taxpayer. Thus, under the RELIEF System, a
revenue officer may begin an examination of the taxpayer even prior to the
issuance of an LN or even in the absence of an LOA with the aid of a
computerized/manual matching of taxpayers': documents/records. Accordingly,
under the RELIEF System, the presumption that the tax returns are in accordance
with law and are presumed correct since these are filed under the penalty of
perjury27 are easily rebutted and the taxpayer becomes instantly burdened to
explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the
statutory requirement of an LOA before any investigation or examination of the
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is
merely similar to a Notice for Informal Conference. However, for a Notice of
Informal Conference, which generally precedes the issuance of an assessment
notice to be valid, the same presupposes that the revenue officer who issued the
same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine
tune existing procedures in handing assessments against taxpayers'· issued LNs
14
by reconciling various revenue issuances which conflict with the NIRC. Among the
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and
collection of deficiency taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the discrepancy
shown in the LN, the concerned taxpayer will be given an opportunity to reconcile
its records with those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN.
However, the subject taxpayer shall no longer be entitled to the abatement of
interest and penalties after the lapse of the sixty (60)-day period from the LN
issuance.
9. In case the above discrepancies remained unresolved at the end of the One
Hundred and Twenty (120)-day period, the revenue officer (RO) assigned to
handle the LN shall recommend the issuance of [LOA) to replace the LN. The head
of the concerned investigating office shall submit a summary list of LNs for
conversion to LAs (using the herein prescribed format in Annex "E" hereof) to the
OACIR-LTS I ORD for the preparation of the corresponding LAs with the notation
"This LA cancels LN_________ No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO
x x x prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the corresponding
LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly
accomplished/approved Summary List of LNs for conversion to LAs, to the
concerned investigating offices for the encoding of the required information x x x
and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty
(120) days from issuance thereof, prepare a summary list of said LN s for
conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a
PAN and FAN against MED ICARD. Therefore no LOA was also served on
MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even dispute
the applicability of the above provision of RMO 32-2005 in the present case which
is clear and unequivocal on the necessity of an LOA for the· assessment
proceeding to be valid. Hence, the CTA's disregard of MEDICARD's right to due
process warrant the reversal of the assailed decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the
Court said that:
Clearly, there must be a grant of authority before any revenue officer can conduct
an examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.30 (Emphasis and underlining
ours)
The Court cannot convert the LN into the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a
person found to have underreported sales/receipts per data generated under the
RELIEF system. Upon receipt of the LN, a taxpayer may avail of the BIR's
Voluntary Assessment and Abatement Program. If a taxpayer fails or refuses to
avail of the said program, the BIR may avail of administrative and
criminal .remedies, particularly closure, criminal action, or audit and investigation.
Since the law specifically requires an LOA and RMO No. 32-2005 requires the
15
conversion of the previously issued LN to an LOA, the absence thereof cannot be
simply swept under the rug, as the CIR would have it. In fact Revenue
Memorandum Circular No. 40-2003 considers an LN as a notice of audit or
investigation only for the purpose of disqualifying the taxpayer from amending his
returns.
The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and is
only for the purpose of notifying the taxpayer that a discrepancy is found based on
the BIR's RELIEF System. Second, an LOA is valid only for 30 days from date of
issue while an LN has no such limitation. Third, an LOA gives the revenue officer
only a period of 10days from receipt of LOA to conduct his examination of the
taxpayer whereas an LN does not contain such a limitation.31 Simply put, LN is
entirely different and serves a different purpose than an LOA. Due process
demands, as recognized under RMO No. 32-2005, that after an LN has serve its
purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner.
Unfortunarely, this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just
because none of the financial books or records being physically kept by
MEDICARD was examined. To begin with, Section 6 of the NIRC requires an
authority from the CIR or from his duly authorized representatives before an
examination "of a taxpayer" may be made. The requirement of authorization is
therefore not dependent on whether the taxpayer may be required to physically
open his books and financial records but only on whether a taxpayer is being
subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and
collection efforts much easier and faster. The ease by which the BIR's revenue
generating objectives is achieved is no excuse however for its non-compliance
with the statutory requirement under Section 6 and with its own administrative
issuance. In fact, apart from being a statutory requirement, an LOA is equally
needed even under the BIR's RELIEF System because the rationale of
requirement is the same whether or not the CIR conducts a physical examination
of the taxpayer's records: to prevent undue harassment of a taxpayer and level the
playing field between the government' s vast resources for tax assessment,
collection and enforcement, on one hand, and the solitary taxpayer's dual need to
prosecute its business while at the same time responding to the BIR exercise of its
statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is properly authorized in
the first place by those to whom the discretion to exercise the power of
examination is given by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside
the point because the issue of their lack of authority was only brought up during
the trial of the case. What is crucial is whether the proceedings that led to the
issuance of VAT deficiency assessment against MEDICARD had the prior
approval and authorization from the CIR or her duly authorized representatives.
Not having authority to examine MEDICARD in the first place, the assessment
issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court
still partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and eventually paid by MEDICARD to the medical
service providers do not form part of gross receipts for VAT purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of
the CT A Division that the gross receipts of an HMO for VAT purposes shall be the
total amount of money or its equivalent actually received from members
undiminished by any amount paid or payable to the owners/operators of hospitals,
clinics and medical and dental practitioners. MEDICARD explains that its business
as an HMO involves two different although interrelated contracts. One is between
a corporate client and MEDICARD, with the corporate client's employees being
considered as MEDICARD members; and the other is between the health care
institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members
under specific health related services for a specified period of time in exchange for
payment of a more or less fixed membership fee. Under its contract with its
corporate clients, MEDICARD expressly provides that 20% of the membership
fees per individual, regardless of the amount involved, already includes the VAT of
10%/20% excluding the remaining 80o/o because MED ICARD would earmark this
latter portion for medical utilization of its members. Lastly, MEDICARD also assails
CIR's inclusion in its gross receipts of its earnings from medical services which it
actually and directly rendered to its members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or
designated managed care services that are needed by plan holders/members for
fixed prepaid membership fees and for a specified period of time, then MEDICARD
is principally engaged in the sale of services. Its VAT base and corresponding
liability is, thus, determined under Section 108(A)32 of the Tax Code, as amended
by Republic Act No. 9337.
16
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
purposes as a dealer in securities whose gross receipts is the amount actually
received as contract price without allowing any deduction from the gross
receipts.33 This restrictive tenor changed under RR No. 16-2005. Under this RR,
an HMO's gross receipts and gross receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent
representing the service fee actually or constructively received during the taxable
period for the services performed or to be performed for another person, excluding
the value-added tax. The compensation for their services representing their service
fee, is presumed to be the total amount received as enrollment fee from their
members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or
royalty, including the amount charged for materials supplied with the services and
deposits applied as payments for services rendered, and advance payments
actually or constructively received during the taxable period for the services
performed or to be performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
including the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form
part of MEDICARD's gross receipts because the exclusions to the gross receipts
under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD
is the definition of gross receipts of an HMO under RR No. 16-2005 and not the
modified definition of gross receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No.
16-2005 merely presumed that the amount received by an HMO as membership
fee is the HMO's compensation for their services. As a mere presumption, an HMO
is, thus, allowed to establish that a portion of the amount it received as
membership fee does NOT actually compensate it but some other person, which in
this case are the medical service providers themselves. It is a well-settled principle
of legal hermeneutics that words of a statute will be interpreted in their natural,
plain and ordinary acceptation and signification, unless it is evident that the
legislature intended a technical or special legal meaning to those words. The Court
cannot read the word "presumed" in any other way.

It is notable in this regard that the term gross receipts as elsewhere mentioned as
the tax base under the NIRC does not contain any specific definition.36 Therefore,
absent a statutory definition, this Court has construed the term gross receipts in its
plain and ordinary meaning, that is, gross receipts is understood as comprising the
entire receipts without any deduction.37 Congress, under Section 108, could have
simply left the term gross receipts similarly undefined and its interpretation
subjected to ordinary acceptation,. Instead of doing so, Congress limited the scope
of the term gross receipts for VAT purposes only to the amount that the taxpayer
received for the services it performed or to the amount it received as advance
payment for the services it will render in the future for another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of
the services it rendered are not seriously disputed. As an HMO, MEDICARD
primarily acts as an intermediary between the purchaser of healthcare services (its
members) and the healthcare providers (the doctors, hospitals and clinics) for a
fee. By enrolling membership with MED ICARD, its members will be able to avail of
the pre-arranged medical services from its accredited healthcare providers without
the necessary protocol of posting cash bonds or deposits prior to being attended to
or admitted to hospitals or clinics, especially during emergencies, at any given
time. Apart from this, MEDICARD may also directly provide medical, hospital and
laboratory services, which depends upon its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail
of medical services from MEDICARD's accredited healthcare providers or directly
from MEDICARD. In the former, MEDICARD members obviously knew that
beyond the agreement to pre-arrange the healthcare needs of its ·members,
MEDICARD would not actually be providing the actual healthcare service. Thus,
based on industry practice, MEDICARD informs its would-be member beforehand
that 80% of the amount would be earmarked for medical utilization and only the
remaining 20% comprises its service fee. In the latter case, MEDICARD's sale of
its services is exempt from VAT under Section 109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section
108 of the NIRC that would extend the definition of gross receipts even to amounts
that do not only pertain to the services to be performed: by another person, other
than the taxpayer, but even to amounts that were indisputably utilized not by MED
ICARD itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and
17
nugatory. This principle is expressed in the maxim Ut magisvaleat quam pereat,
that is, we choose the interpretation which gives effect to the whole of the statute –
it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal
Revenue,38the Court adopted the principal object and purpose object in
determining whether the MEDICARD therein is engaged in the business of
insurance and therefore liable for documentary stamp tax. The Court held therein
that an HMO engaged in preventive, diagnostic and curative medical services is
not engaged in the business of an insurance, thus:
To summarize, the distinctive features of the cooperative are the rendering of
service, its extension, the bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, the substantial reduction
in cost by quantity purchasing in short, getting the medical job done and paid for;
not, except incidentally to these features, the indemnification for cost after .the
services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to stand its cost when or
after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance
company is that HMOs undertake to provide or arrange for the provision of medical
services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-
agreed limit. In the present case, the VAT is a tax on the value added by the
performance of the service by the taxpayer. It is, thus, this service and the value
charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership
fees to VAT.40 But the Court's task however is not to weigh these policy
considerations but to determine if these considerations in favor of taxation can
even be implied from the statute where the CIR purports to derive her authority.
This Court rules that they cannot because the language of the NIRC is pretty
straightforward and clear. As this Court previously ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in
the imposition of taxes, not the similar doctrine as applied to tax exemptions. The
rule in the interpretation of tax laws is that a statute will not be construed as
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax
cannot be imposed without clear and express words for that purpose. Accordingly,
the general rule of requiring adherence to the letter in construing statutes applies
with peculiar strictness to tax laws and the provisions of a taxing act are not to be
extended by implication. In answering the question of who is subject to tax
statutes, it is basic that in case of doubt, such statutes are to be construed most
strongly against the government and in favor of the subjects or citizens because
burdens are not to be imposed nor presumed to be imposed beyond what statutes
expressly and clearly import. As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws. 41 (Citation omitted and
emphasis and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without
exclusion, the authority should have been reasonably founded from the language
of the statute. That language is wanting in this case. In the scheme of judicial tax
administration, the need for certainty and predictability in the implementation of tax
laws is crucial. Our tax authorities fill in the details that Congress may not have the
opportunity or competence to provide. The regulations these authorities issue are
relied upon by taxpayers, who are certain that these will be followed by the courts.
Courts, however, will not uphold these authorities' interpretations when dearly
absurd, erroneous or improper.42 The CIR's interpretation of gross receipts in the
present case is patently erroneous for lack of both textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act
of ownership and management over the funds, the Court does not agree.1âwphi1
On the contrary, it is MEDICARD's act of earmarking or allocating 80% of the
amount it received as membership fee at the time of payment that weakens the
ownership imputed to it. By earmarking or allocating 80% of the amount,
MEDICARD unequivocally recognizes that its possession of the funds is not in the
concept of owner but as a mere administrator of the same. For this reason, at
most, MEDICARD's right in relation to these amounts is a mere inchoate owner
which would ripen into actual ownership if, and only if, there is underutilization of
the membership fees at the end of the fiscal year. Prior to that, MEDI CARD is
bound to pay from the amounts it had allocated as an administrator once its
members avail of the medical services of MEDICARD's healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether the
amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and
paid to the medical service providers should form part of its gross receipt for VAT
purposes, after having paid the VAT on the amount comprising the 20%. It is
significant to note in this regard that MEDICARD established that upon receipt of
payment of membership fee it actually issued two official receipts, one pertaining
to the VAT able portion, representing compensation for its services, and the other
represents the non-vatable portion pertaining to the amount earmarked for medical
utilization.: Therefore, the absence of an actual and physical segregation of the
amounts pertaining to two different kinds · of fees cannot arbitrarily disqualify
18
MEDICARD from rebutting the presumption under the law and from proving that
indeed services were rendered by its healthcare providers for which it paid the
amount it sought to be excluded from its gross receipts.
With the foregoing discussions on the nullity of the assessment on due process
grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of
the CIR's position on the computation of MEDICARD's gross receipts, the Court
finds it unnecessary, nay useless, to discuss the rest of the parties' arguments and
counter-arguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision
and resolution of the CTA en banc grounded as it is on due process violation. The
Court likewise rules that for purposes of determining the VAT liability of an HMO,
the amounts earmarked and actually spent for medical utilization of its members
should not be included in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is
hereby GRANTED. The Decision dated September 2, 2015 and Resolution dated
January 29, 2016 issued by the Court of Tax Appeals en bane in CTA EB No.
1224 are REVERSED and SET ASIDE. The definition of gross receipts under
Revenue Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of
the National Internal Revenue Code, as amended by Republic Act No. 9337, for
purposes of determining its Value-Added Tax liability, is hereby declared to
EXCLUDE the eighty percent (80%) of the amount of the contract price earmarked
as fiduciary funds for the medical utilization of its members. Further, the Value-
Added Tax deficiency assessment issued against Medicard Philippines, Inc. is
hereby declared unauthorized for having been issued without a Letter of Authority
by the Commissioner of Internal Revenue or his duly authorized representatives.
SO ORDERED.
G.R. No. 196596
COMMISSIONER OF INTERNAL REVENUE, Petitioner vs. DE LA SALLE
UNIVERSITY, INC., Respondent
DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:1
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue
(Commissioner) to assail the December 10, 2010 decision and March 29, 2011
resolution of the Court of Tax Appeals (CTA) in En Banc Case No. 622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June
8, 2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3
and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision
and October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303.
G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671
filed by DLSU to also challenge CTA Case No. 7303.
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's
books of accounts and other accounting records for all internal revenue taxes for
the period Fiscal Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand
assessed DLSU the following deficiency taxes: (1) income tax on rental earnings
from restaurants/canteens and bookstores operating within the campus; (2) value-
added tax (VAI) on business income; and (3) documentary stamp tax (DSI) on
loans and lease contracts. The BIR demanded the payment of ₱17,303,001.12,
inclusive of surcharge, interest and penalty for taxable years 2001, 2002 and
2003.7
19
DLSU protested the assessment. The Commissioner failed to act on the protest;
thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its
petition on Article XIV, Section 4 (3) of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income
tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years
2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
total amount due computed from September 30, 2004 until full payment thereof
pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further,
the compromise penalties imposed by [the Commissioner] were excluded, there
being no compromise agreement between the parties.
SO ORDERED.
Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
motion for reconsideration while it held in abeyance the resolution on DLSU's
motion for reconsideration.
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc
Case No. 622) arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption
coverage under the Constitution.
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces
of documentary evidence to prove that its rental income was used actually, directly
and exclusively for educational purposes. The Commissioner did not promptly
object to the formal offer of supplemental evidence despite notice.
On July 29, 2010, the CTA Division, in view of the supplemental evidence
submitted, reduced the amount of DLSU's tax deficiencies. The dispositive portion
of the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT
and DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total
adjusted amount of ₱5,506,456.71 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest
on the ... basic deficiency taxes ... until full payment thereof pursuant to Section
249(B) of the [National Internal Revenue Code] ... xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest
on the deficiency taxes, surcharge and deficiency interest which have accrued ...
from September 30, 2004 until fully paid.
Consequently, the Commissioner supplemented its petition with the CTA En Banc
and argued that the CTA Division erred in admitting DLSU's additional evidence.16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate
petition for review with the CTA En Banc (CTA En Banc Case No. 671) on the
following grounds: (1) the entire assessment should have been cancelled because
it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division
should still have cancelled the entire assessment because DLSU submitted
evidence similar to those submitted by Ateneo De Manila University (Ateneo) in a
separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the
CTA Division erred in finding that a portion of DLSU's rental income was not
proved to have been used actually, directly and exclusively for educational
purposes.18
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review and sustained
the findings of the CTA Division.
Tax on rental income
Relying on the findings of the court-commissioned Independent Certified Public
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to
prove that a portion of the assessed rental income was used actually, directly and
20
exclusively for educational purposes; hence, exempt from tax.20 The CTA En
Banc was satisfied with DLSU's supporting evidence confirming that part of its
rental income had indeed been used to pay the loan it obtained to build the
university's Physical Education – Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually,
directly and exclusively used for educational purposes, must be subjected to
income tax and VAT.22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU froved its remittance of the DST
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's
DST payments had been remitted to the BIR, evidenced by the stamp on the
documents made by a DST imprinting machine, which is allowed under Section
200 (D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of
Revenue Regulations (RR) No. 15-2001.25
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary evidence
were admissible even if DLSU formally offered them only when it moved for
reconsideration of the CTA Division's original decision. Notably, the law creating
the CTA provides that proceedings before it shall not be governed strictly by the
technical rules of evidence.26
The Commissioner moved but failed to obtain a reconsideration of the CTA En
Banc's December 10, 2010 decision.27 Thus, she came to this court for relief
through a petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further reduced
its tax liabilities to ₱2,554,825.47 inclusive of surcharge.28
On the validity of the Letter of Authority
The issue of the LOA' s validity was raised during trial;29 hence, the issue was
deemed properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one
taxable period and that the practice of issuing a LOA covering audit of unverified
prior years is prohibited.30 The prohibition is consistent with Revenue
Memorandum Order (RMO) No. 43-90, which provides that if the audit includes
more than one taxable period, the other periods or years shall be specifically
indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT
and DST for taxable years 2001 and 2002 are void, but the assessment for taxable
year 2003 is valid.32
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence,
and defenses.33
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It
held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the
Sports Complex, the rental income from other sources were not shown to have
been actually, directly and exclusively used for educational purposes.34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is derived,
used or disposed of.35 DLSU's operations of canteens and bookstores within its
campus even though exclusively serving the university community do not negate
income tax liability.36
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must
be harmonized with Section 30 (H) of the Tax Code, which states among others,
that the income of whatever kind and character of [a non-stock and non-profit
educational institution] from any of [its] properties, real or personal, or from any of
21
[its] activities conducted for profit regardless of the disposition made of such
income, shall be subject to tax imposed by this Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that
revenues however generated are covered by the constitutional exemption,
provided that, the revenues will be used for educational purposes or will be held in
reserve for such purposes.39
On the contrary, the Commissioner posits that a tax-exempt organization like
DLSU is exempt only from property tax but not from income tax on the rentals
earned from property.40 Thus, DLSU's income from the leases of its real
properties is not exempt from taxation even if the income would be used for
educational purposes.41
Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
Machine, which is available only to certain classes of taxpayers under RR No. 9-
2000.43
Finally, the Commissioner objects to the admission of DLSU's supplemental offer
of evidence. The belated submission of supplemental evidence reopened the case
for trial, and worse, DLSU offered the supplemental evidence only after it received
the unfavorable CTA Division's original decision.44 In any case, DLSU's
submission of supplemental documentary evidence was unnecessary since its
rental income was taxable regardless of its disposition.45
G.R. No. 198841
DLSU argues as that:
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of
unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void.46
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003
and Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001,
2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is
valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides
that:
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior Years."
Since the LOA issued to DLSU follows this format, then any assessment arising
from it must be entirely voided.48
Second, DLSU invokes the principle of uniformity in taxation, which mandates that
for similarly situated parties, the same set of evidence should be appreciated and
weighed in the same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to the pieces of evidence submitted by
Ateneo, also a non-stock, non-profit educational institution.50
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No. 198941
petition are exactly the same as those she raised in her: (1) petition docketed as
G.R. No. 196596 and (2) comment on DLSU's petition docketed as G.R. No.
198841.51
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the petition.52
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes
and duties.53
On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -
with the addition of non-stock, non-profit educational institutions to the list of tax-
exempt entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special
tax treatment on income of private educational institutions only emanates from
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption
22
from tax of all the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the
income of whatever kind and character of a non-stock and non-profit educational
institution from any of its properties, real or personal, or from any of its activities
conducted for profit regardless of the disposition made of such income, should be
declared without force and effect in view of the constitutionally granted tax
exemption on "all revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational purposes."57
DLSU further submits that it complies with the requirements enunciated in the
YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3) of
the Constitution, the taxpayer must prove that: (1) it falls under the classification
non-stock, non-profit educational institution; and (2) the income it seeks to be
exempted from taxation is used actually, directly and exclusively for educational
purposes.58 Unlike YMCA, which is not an educational institution, DLSU is
undisputedly a non-stock, non-profit educational institution. It had also submitted
evidence to prove that it actually, directly and exclusively used its income for
educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional Commission where
they recognized that the tax exemption was granted "to incentivize private
educational institutions to share with the State the responsibility of educating the
youth."60
Third, DLSU highlights that both the CTA En Banc and Division found that the
bank that handled DLSU' s loan and mortgage transactions had remitted to the
BIR the DST through an imprinting machine, a method allowed under RR No. 15-
2001.61 In any case, DLSU argues that it cannot be held liable for DST owing to
the exemption granted under the Constitution.62
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose
the formal offer of supplemental evidence. Because of the Commissioner's failure
to timely object, she became bound by the results of the submission of such
supplemental evidence.63
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the LOA's
validity because it failed to raise this issue in both the administrative and judicial
proceedings.64 That it was asked on cross-examination during the trial does not
make it an issue that the CTA could resolve.65 The Commissioner also maintains
that DLSU's rental income is not tax-exempt because an educational institution is
only exempt from property tax but not from tax on the income earned from the
property.66
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.67 In addition,
DLSU prays that the Court award attorney's fees in its favor because it was
constrained to unnecessarily retain the services of counsel in this separate
petition.68
Issues
Although the parties raised a number of issues, the Court shall decide only the
pivotal issues, which we summarize as follows:
I. Whether DLSU' s income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and
taxes;
II. Whether the entire assessment should be voided because of the defective LOA;
III. Whether the CTA correctly admitted DLSU's supplemental pieces of evidence;
and
IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence may be
disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, revenues and assets of non-stock, non-profit educational
institutions proved to have been used actually, directly and exclusively for
educational purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year
2003 is valid.
23
III. The CTA correctly admitted DLSU's formal offer of supplemental evidence; and
IV. The CTA's appreciation of evidence is conclusive unless the CTA is shown to
have manifestly overlooked certain relevant facts not disputed by the parties and
which, if properly considered, would justify a different conclusion.
The parties failed to convince the Court that the CTA overlooked or failed to
consider relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly and
exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting
machine.
I. The revenues and assets of non-stock, non-profit educational institutions
proved to have been used actually, directly, and exclusively for educational
purposes are exempt from duties and taxes.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which
reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. Upon the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by law
including restrictions on dividends and provisions for reinvestment. [underscoring
and emphasis supplied]
Before fully discussing the merits of the case, we observe that:
First, the constitutional provision refers to two kinds of educational institutions: (1)
non-stock, non-profit educational institutions and (2) proprietary educational
institutions.69
Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain
conditions to avail of the exemption. We discuss below the import of the
constitutional text vis-a-vis the Commissioner's counter-arguments.
Fourth, there is a marked distinction between the treatment of non-stock, non-profit
educational institutions and proprietary educational institutions. The tax exemption
granted to non-stock, non-profit educational institutions is conditioned only on the
actual, direct and exclusive use of their revenues and assets for educational
purposes. While tax exemptions may also be granted to proprietary educational
institutions, these exemptions may be subject to limitations imposed by Congress.
As we explain below, the marked distinction between a non-stock, non-profit and a
proprietary educational institution is crucial in determining the nature and extent of
the tax exemption granted to non-stock, non-profit educational institutions.
The Commissioner opposes DLSU's claim for tax exemption on the basis of
Section 30 (H) of the Tax Code. The relevant text reads:
The following organizations shall not be taxed under this Title [Tax on
Income] in respect to income received by them as such:
xxxx
(H) A non-stock and non-profit educational institution
xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition made of such income shall be subject to tax imposed
under this Code. [underscoring and emphasis supplied]
The Commissioner posits that the 1997 Tax Code qualified the tax exemption
granted to non-stock, non-profit educational institutions such that the revenues and
income they derived from their assets, or from any of their activities conducted for
profit, are taxable even if these revenues and income are used for educational
purposes.
Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions?
We answer in the negative.
24
While the present petition appears to be a case of first impression,71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property
owned by the YMCA, established as a "welfare, educational and charitable non-
profit corporation," was subject to income tax under the Tax Code and the
Constitution.72
The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is
not tax-exempt per se; " what is exempted is not the institution itself... those
exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes."74
The Court held that the exemption claimed by the YMCA is expressly disallowed
by the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties,
real or personal, are subject to the same tax imposed by the Tax Code, regardless
of how that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property.75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA
invoked the tax privilege granted under Article XIV, Section 4 (3) of the
Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that the term educational institution, when used in laws
granting tax exemptions, refers to the school system (synonymous with formal
education); it includes a college or an educational establishment; it refers to the
hierarchically structured and chronologically graded learnings organized and
provided by the formal school system.76
The Court then significantly laid down the requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely: (1) the taxpayer falls under the
classification non-stock, non-profit educational institution; and (2) the income it
seeks to be exempted from taxation is used actually, directly and exclusively for
educational purposes.77
We now adopt YMCA as precedent and hold that:
1. The last paragraph of Section 30 of the Tax Code is without force and effect with
respect to non-stock, non-profit educational institutions, provided, that the non-
stock, non-profit educational institutions prove that its assets and revenues are
used actually, directly and exclusively for educational purposes.
2. The tax-exemption constitutionally-granted to non-stock, non-profit educational
institutions, is not subject to limitations imposed by law.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and
exclusive use of their assets, revenues and income78 for educational
purposes.
We find that unlike Article VI, Section 28 (3) of the Constitution (pertaining to
charitable institutions, churches, parsonages or convents, mosques, and non-profit
cemeteries), which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes ... ," Article XIV, Section 4 (3) categorically states that "[a]ll
revenues and assets ... used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of
the Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission79 to provide broader tax
privilege to non-stock, non-profit educational institutions as recognition of their role
in assisting the State provide a public good. The tax exemption was seen as
beneficial to students who may otherwise be charged unreasonable tuition fees if
not for the tax exemption extended to all revenues and assets of non-stock, non-
profit educational institutions.80
Further, a plain reading of the Constitution would show that Article XIV, Section 4
(3) does not require that the revenues and income must have also been sourced
from educational activities or activities related to the purposes of an educational
institution. The phrase all revenues is unqualified by any reference to the source of
revenues. Thus, so long as the revenues and income are used actually, directly
and exclusively for educational purposes, then said revenues and income shall be
exempt from taxes and duties.81
We find it helpful to discuss at this point the taxation of revenues versus the
taxation of assets.
25
Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 It may refer to the sale of goods, rendition of services, or
the return of an investment. Revenue is a component of the tax base in income
tax,83 VAT,84 and local business tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in
the stocks of a corporation, inventory of goods, or any property from which the
person or entity may derive income or use to generate the same. In Philippine
taxation, the fair market value of real property is a component of the tax base in
real property tax (RPT).87 Also, the landed cost of imported goods is a component
of the tax base in VAT on importation88 and tariff duties.89
Thus, when a non-stock, non-profit educational institution proves that it uses its
revenues actually, directly, and exclusively for educational purposes, it shall be
exempted from income tax, VAT, and LBT. On the other hand, when it also shows
that it uses its assets in the form of real property for educational purposes, it shall
be exempted from RPT.
To be clear, proving the actual use of the taxable item will result in an exemption,
but the specific tax from which the entity shall be exempted from shall depend on
whether the item is an item of revenue or asset.
To illustrate, if a university leases a portion of its school building to a bookstore or
cafeteria, the leased portion is not actually, directly and exclusively used for
educational purposes, even if the bookstore or canteen caters only to university
students, faculty and staff.
The leased portion of the building may be subject to real property tax, as held in
Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of
exemption from taxation is the use of the property for purposes mentioned in the
Constitution. We also held that the exemption extends to facilities which are
incidental to and reasonably necessary for the accomplishment of the main
purposes.
In concrete terms, the lease of a portion of a school building for commercial
purposes, removes such asset from the property tax exemption granted under the
Constitution.91 There is no exemption because the asset is not used actually,
directly and exclusively for educational purposes. The commercial use of the
property is also not incidental to and reasonably necessary for the accomplishment
of the main purpose of a university, which is to educate its students.
However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
shall be exempt from taxes and duties. The tax exemption no longer hinges on the
use of the asset from which the revenues were earned, but on the actual, direct
and exclusive use of the revenues for educational purposes.
Parenthetically, income and revenues of non-stock, non-profit educational
institution not used actually, directly and exclusively for educational purposes are
not exempt from duties and taxes. To avail of the exemption, the taxpayer must
factually prove that it used actually, directly and exclusively for educational
purposes the revenues or income sought to be exempted.
The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately. But
so long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions, unlike the exemption that may be availed of by
proprietary educational institutions, is not subject to limitations imposed by
law.
That the Constitution treats non-stock, non-profit educational institutions differently
from proprietary educational institutions cannot be doubted. As discussed, the
privilege granted to the former is conditioned only on the actual, direct and
exclusive use of their revenues and assets for educational purposes. In clear
contrast, the tax privilege granted to the latter may be subject to limitations
imposed by law.
We spell out below the difference in treatment if only to highlight the privileged
status of non-stock, non-profit educational institutions compared with their
proprietary counterparts.
While a non-stock, non-profit educational institution is classified as a tax-exempt
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax
on Domestic Corporations).
To be specific, Section 30 provides that exempt organizations like non-stock, non-
profit educational institutions shall not be taxed on income received by them as
such.
Section 27 (B), on the other hand, states that "[p]roprietary educational
institutions ... which are nonprofit shall pay a tax of ten percent (10%) on their
26
taxable income .. . Provided, that if the gross income from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions ... [the regular corporate income tax of
30%] shall be imposed on the entire taxable income ... "92
By the Tax Code's clear terms, a proprietary educational institution is entitled only
to the reduced rate of 10% corporate income tax. The reduced rate is applicable
only if: (1) the proprietary educational institution is nonprofit and (2) its gross
income from unrelated trade, business or activity does not exceed 50% of its total
gross income.
Consistent with Article XIV, Section 4 (3) of the Constitution, these limitations do
not apply to non-stock, non-profit educational institutions.
Thus, we declare the last paragraph of Section 30 of the Tax Code without force
and effect for being contrary to the Constitution insofar as it subjects to tax the
income and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purpose. We make this declaration
in the exercise of and consistent with our duty93 to uphold the primacy of the
Constitution.94
Finally, we stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to
have been used actually, directly and exclusively for educational purposes are
exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable
year 2003 and insists that the entire LOA should be voided for being contrary to
RMO No. 43-90, which provides that if tax audit includes more than one taxable
period, the other periods or years shall be specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to examine the
books of account and other accounting records of the taxpayer in order to
determine the taxpayer's correct internal revenue liabilities95 and for the purpose
of collecting the correct amount of tax,96 in accordance with Section 5 of the Tax
Code, which gives the CIR the power to obtain information, to summon/examine,
and take testimony of persons. The LOA commences the audit process97 and
informs the taxpayer that it is under audit for possible deficiency tax assessment.
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA's findings of tax
deficiency for taxable year 2003?
We answer in the negative.
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of
which reads:
3. A Letter of Authority [LOA] should cover a taxable period not exceeding one
taxable year. The practice of issuing [LO As] covering audit of unverified prior
years is hereby prohibited. If the audit of a taxpayer shall include more than one
taxable period, the other periods or years shall be specifically indicated in the
[LOA].98
What this provision clearly prohibits is the practice of issuing LOAs covering audit
of unverified prior years. RMO 43-90 does not say that a LOA which contains
unverified prior years is void. It merely prescribes that if the audit includes more
than one taxable period, the other periods or years must be specified. The
provision read as a whole requires that if a taxpayer is audited for more than one
taxable year, the BIR must specify each taxable year or taxable period on separate
LOAs.
Read in this light, the requirement to specify the taxable period covered by the
LOA is simply to inform the taxpayer of the extent of the audit and the scope of the
revenue officer's authority. Without this rule, a revenue officer can unduly burden
the taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases of
fraud audit.99
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. The LOA does not strictly comply with RMO 43-90 because
it includes unverified prior years. This does not mean, however, that the entire LOA
is void.
As the CTA correctly held, the assessment for taxable year 2003 is valid because
this taxable period is specified in the LOA. DLSU was fully apprised that it was
being audited for taxable year 2003. Corollarily, the assessments for taxable years
2001 and 2002 are void for having been unspecified on separate LOAs as required
under RMO No. 43-90.
27
Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s
validity at the CTA Division, and thus, should not have been entertained on appeal,
is not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's validity came
up during the trial.100 DLSU then raised the issue in its memorandum and motion
for partial reconsideration with the CTA Division. DLSU raised it again on appeal to
the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity
of the LOA.101 Besides, the Commissioner had the opportunity to argue for the
validity of the LOA at the CTA En Banc but she chose not to file her comment and
memorandum despite notice.102
III. The CTA correctly admitted the supplemental evidence formally offered
by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's
supplemental pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its motion
for reconsideration with the CTA Division.103 The CTA Division admitted the
supplemental evidence, which proved that a portion of DLSU's rental income was
used actually, directly and exclusively for educational purposes. Consequently, the
CTA Division reduced DLSU's tax liabilities.
We uphold the CTA Division's admission of the supplemental evidence on distinct
but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely
object to the formal offer of supplemental evidence; and (2) the CTA is not
governed strictly by the technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the
court cannot, on its own, disregard such evidence.104
The Court has held that if a party desires the court to reject the evidence offered, it
must so state in the form of a timely objection and it cannot raise the objection to
the evidence for the first time on appeal.105 Because of a party's failure to timely
object, the evidence offered becomes part of the evidence in the case. As a
consequence, all the parties are considered bound by any outcome arising from
the offer of evidence properly presented.106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal
offer of evidence despite notice.107 The Commissioner objected to the admission
of the supplemental evidence only when the case was on appeal to the CTA En
Banc. By the time the Commissioner raised her objection, it was too late; the
formal offer, admission and evaluation of the supplemental evidence were all fait
accompli.
We clarify that while the Commissioner's failure to promptly object had no bearing
on the materiality or sufficiency of the supplemental evidence admitted, she was
bound by the outcome of the CTA Division's assessment of the evidence.108
Second, the CTA is not governed strictly by the technical rules of evidence. The
CTA Division's admission of the formal offer of supplemental evidence, without
prompt objection from the Commissioner, was thus justified.
Notably, this Court had in the past admitted and considered evidence attached to
the taxpayers' motion for reconsideration.1âwphi1
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund
claimant attached to its motion for reconsideration with the CT A its Final
Adjustment Return. The Commissioner, as in the present case, did not oppose the
taxpayer's motion for reconsideration and the admission of the Final Adjustment
Return.110 We thus admitted and gave weight to the Final Adjustment Return
although it was only submitted upon motion for reconsideration.
We held that while it is true that strict procedural rules generally frown upon the
submission of documents after the trial, the law creating the CTA specifically
provides that proceedings before it shall not be governed strictly by the technical
rules of evidence111 and that the paramount consideration remains the
ascertainment of truth. We ruled that procedural rules should not bar courts from
considering undisputed facts to arrive at a just determination of a controversy.112
We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue113 and Commissioner of
Internal Revenue v. PERF Realty Corporation,114 where the taxpayers also
submitted the supplemental supporting document only upon filing their motions for
reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the
strict application of the technical rules of evidence in the present tax assessment
case. If anything, the liberal application of the rules assumes greater force and
significance in the case of a taxpayer who claims a constitutionally granted tax
exemption. While the taxpayers in the cited cases claimed refund of excess tax
payments based on the Tax Code,115 DLSU is claiming tax exemption based on
the Constitution. If liberality is afforded to taxpayers who paid more than they
should have under a statute, then with more reason that we should allow a
taxpayer to prove its exemption from tax based on the Constitution.
28
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence
not only because the Commissioner failed to promptly object, but more so because
the strict application of the technical rules of evidence may defeat the intent of the
Constitution.
IV. The CTA's appreciation of evidence is generally binding on the Court
unless compelling reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has developed an expertise on the subject, unless
there has been an abuse or improvident exercise of authority.116 We thus accord
the findings of fact by the CTA with the highest respect. These findings of facts can
only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the CTA. In the absence
of any clear and convincing proof to the contrary, this Court must presume that the
CTA rendered a decision which is valid in every respect.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that
DLSU had used actually, directly and exclusively for educational purposes a
portion of its assessed income and that it had remitted the DST payments though
an online imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion
of its assessed income.
To see how the CTA arrived at its factual findings, we review the process
undertaken, from which it deduced that DLSU successfully proved that it used
actually, directly and exclusively for educational purposes a portion of its rental
income.
The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of
receipts, statement of disbursement and fund balance and statement of fund
changes.118
These documents showed that DLSU borrowed ₱93.86 Million,119 which was
used to build the university's Sports Complex. Based on these pieces of evidence,
the CTA found that DLSU' s rental income from its concessionaires were indeed
transmitted and used for the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct and
exclusive use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which
were allegedly deposited to a fund (CF-CPA Account),120 intended for the
university's capital projects, was not proved to have been used actually, directly
and exclusively for educational purposes. The CTA observed that "[DLSU] ... failed
to fully account for and substantiate all the disbursements from the [fund]." Thus,
the CTA "cannot ascertain whether rental income from the [other] concessionaires
was indeed used for educational purposes."121
To stress, the CTA's factual findings were based on and supported by the report of
the Independent CPA who reviewed, audited and examined the voluminous
documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a)
examination and verification of receipts, invoices, vouchers and other long
accounts; (b) reproduction of, and comparison of such reproduction with, and
certification that the same are faithful copies of original documents, and pre-
marking of documentary exhibits consisting of voluminous documents; (c)
preparation of schedules or summaries containing a chronological listing of the
numbers, dates and amounts covered by receipts or invoices or other relevant
documents and the amount(s) of taxes paid; (d) making findings as to compliance
with substantiation requirements under pertinent tax laws, regulations and
jurisprudence; (e) submission of a formal report with certification of authenticity
and veracity of findings and conclusions in the performance of the audit; (f)
testifying on such formal report; and (g) performing such other functions as the
CTA may direct.122
Based on the Independent CPA's report and on its own appreciation of the
evidence, the CTA held that only the portion of the rental income pertaining to the
substantiated disbursements (i.e., proved by receipts, vouchers, etc.) from the CF-
CPA Account was considered as used actually, directly and exclusively for
educational purposes. Consequently, the unaccounted and unsubstantiated
disbursements must be subjected to income tax and VAT.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments
for taxable years 2001 and 2002 due to the defective LOA.124
The Court finds that the above fact-finding process undertaken by the CTA shows
that it based its ruling on the evidence on record, which we reiterate, were
examined and verified by the Independent CPA. Thus, we see no persuasive
reason to deviate from these factual findings.
29
However, while we generally respect the factual findings of the CTA, it does not
mean that we are bound by its conclusions. In the present case, we do not agree
with the method used by the CTA to arrive at DLSU' s unsubstantiated rental
income (i.e., income not proved to have been actually, directly and exclusively
used for educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in
taxable year 2003.125 DLSU earned this income from leasing a portion of its
premises to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food
Corp., 5) Capri International, and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was expended, viz.: 1) ₱4,007,724.00127
used to pay the loan obtained by DLSU to build the Sports Complex; and 2)
₱6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the
₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA' findings,
DLSU was able to substantiate disbursements from the CF-CPA Account
amounting to ₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus,
subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130 The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food
Corp., Capri International and MTO Bookstore, which were transmitted to the CF-
CPA Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental
income derived therein were actually, directly and exclusively used for educational
purposes. Likewise, the findings of the Court-Commissioned Independent CPA
show that the disbursements from the CF-CPA Account for fiscal year 2003
amounts to ₱6,259,078.30 only. Hence, this portion of the rental income, being the
substantiated disbursements of the CF-CPA Account, was considered by the
Special First Division as used actually, directly and exclusively for educational
purposes. Since for fiscal year 2003, the total disbursements per voucher is
₱6,259,078.3 (Exhibit "LL-25-C"), and the total disbursements per subsidiary
ledger amounts to ₱23,463,543.02 (Exhibit "LL-29-C"), the ratio of substantiated
disbursements for fiscal year 2003 is 26.68% (₱6,259,078.30/₱23,463,543.02).
Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003,
arrived at by multiplying the ratio of 26.68% with the total rent income added to and
used in the CF-CPA Account in the amount of ₱6,602,655.00 is
₱1,761,588.35.131 (emphasis supplied)
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports
Complex (₱4,007,724.00) from the rental income (₱10,610,379.00) earned from
the abovementioned concessionaries. The difference (₱6,602,655.00) was the
portion claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income (₱4,841,066.65).132
3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was
derived by multiplying the rental income claimed to have been added to the CF-
CPA Account (₱6,602,655.00) by 26.68% or the ratio of substantiated
disbursements to total disbursements (₱23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements
from the CF-CPA Account as found by the Independent CPA (₱6,259,078.30) by
the total disbursements (₱23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect to
the constitutional grant of tax exemption to non-stock, non-profit educational
institutions. The CTA's reasoning is flawed because it required DLSU to
substantiate an amount that is greater than the rental income deposited in the CF-
CPA Account in 2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of ₱10.61 million)135
were used for educational purposes. This amount was divided into two parts: (a)
the ₱4.0l million, which was used to pay the loan obtained for the construction of
the Sports Complex; and (b) the ₱6.60 million,136 which was transferred to the
CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to
₱23 .46 million.137 These figures, read in light of the constitutional exemption,
raises the question: does DLSU claim that the whole total CF-CPA disbursement
30
of ₱23.46 million is tax-exempt so that it is required to prove that all these
disbursements had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements
of ₱23.46 million had been for educational purposes and should thus be tax-
exempt; DLSU only claimed ₱10.61 million for tax-exemption and should thus be
required to prove that this amount had been used as claimed.
Of this amount, ₱4.01 had been proven to have been used for educational
purposes, as confirmed by the Independent CPA. The amount in issue is therefore
the balance of ₱6.60 million which was transferred to the CF-CPA which in turn
made disbursements of ₱23.46 million for various general purposes, among them
the ₱6.60 million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made
disbursements for educational purposes in year 2003 in the amount ₱6.26 million.
Based on these given figures, the CT A concluded that the expenses for
educational purposes that had been coursed through the CF-CPA should be
prorated so that only the portion that ₱6.26 million bears to the total CF-CPA
disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-
exempt. As already mentioned above, DLSU is not claiming that the whole ₱23.46
million CF-CPA disbursement had been used for educational purposes; it only
claims that ₱6.60 million transferred to CF-CPA had been used for educational
purposes. This was what DLSU needed to prove to have actually and directly used
for educational purposes.
That this fund had been first deposited into a separate fund (the CF -CPA
established to fund capital projects) lends peculiarity to the facts of this case, but
does not detract from the fact that the deposited funds were DLSU revenue funds
that had been confirmed and proven to have been actually and directly used for
educational purposes via the CF-CPA. That the CF-CPA might have had other
sources of funding is irrelevant because the assessment in the present case
pertains only to the rental income which DLSU indisputably earned as revenue in
2003. That the proven CF-CPA funds used for educational purposes should not be
prorated as part of its total CF-CPA disbursements for purposes of crediting to
DLSU is also logical because no claim whatsoever had been made that the totality
of the CF-CPA disbursements had been for educational purposes. No prorating is
necessary; to state the obvious, exemption is based on actual and direct use and canteens, or other commercial enterprises within its campus, as condition for tax
this DLSU has indisputably proven. exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the
Based on these considerations, DLSU should therefore be liable only for the exemption.140
difference between what it claimed and what it has proven. In more concrete
terms, DLSU only had to prove that its rental income for taxable year 2003 Given the lack of complete identity of the issues involved, the CTA held that it had
(₱10,610,379.00) was used for educational purposes. Hence, while the total to evaluate the separate sets of evidence differently. The CTA likewise stressed
disbursements from the CF-CPA Account amounted to ₱23,463,543.02, DLSU that DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be
only had to substantiate its Pl0.6 million rental income, part of which was the equated on its decision on two different cases with two different issues."141
₱6,602,655.00 transferred to the CF-CPA account. Of this latter amount, ₱6.259
million was substantiated to have been used for educational purposes. DLSU disagrees with the CTA and argues that the entire assessment must be
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
To summarize, we thus revise the tax base for deficiency income tax and VAT for We reject DLSU's argument for being non sequitur. Its reliance on the concept of
taxable year 2003 as follows: uniformity of taxation is also incorrect.
CTA
Decision138 Revised First, even granting that Ateneo and DLSU submitted similar evidence, the
sufficiency and materiality of the evidence supporting their respective claims for tax
Rental income 10,610,379.0 exemption would necessarily differ because their attendant issues and facts differ.
10,610,379.00
0
4,007,724.00 4,007,724.00 To state the obvious, the amount of income received by DLSU and by Ateneo
Less: Rent income used in construction of during the taxable years they were assessed varied. The amount of tax
the Sports Complex assessment also varied. The amount of income proven to have been used for
educational purposes also varied because the amount substantiated varied.142
Thus, the amount of tax assessment cancelled by the CTA varied.
Rental income deposited to the CF-CPA
6,602,655.00 6,602,655.00
Account On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12
for taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed
1,761,588.35 6,259,078.30 Ateneo a total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU
Less: Substantiated portion of CF-CPA was assessed deficiency DST, while Ateneo was not.143
disbursements
Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
Tax base for deficiency income tax and
4,841,066.65 343.576.70 evidence, e.g., the testimony of their employees on the use of university revenues,
VAT
the report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its
On DLSU' s argument that the CTA should have appreciated its evidence in the income and revenues had indeed been used for educational purposes.
same way as it did with the evidence submitted by Ateneo in another separate
case, the CTA explained that the issue in the Ateneo case was not the same as The CTA significantly found that some documents that could have fully supported
the issue in the present case. DLSU's claim were not produced in court. Indeed, the Independent CPA testified
that some disbursements had not been proven to have been used actually, directly
The issue in the Ateneo case was whether or not Ateneo could be held liable to and exclusively for educational purposes.144
pay income taxes and VAT under certain BIR and Department of Finance
issuances139 that required the educational institution to own and operate the

31
The final nail on the question of evidence is DLSU's own admission that the
original of these documents had not in fact been produced before the CTA
although it claimed that there was no bad faith on its part.145 To our mind, this
admission is a good indicator of how the Ateneo and the DLSU cases varied,
resulting in DLSU's failure to substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised
Rules on Evidence, that the contents of the missing supporting documents were
proven by its recital in some other authentic documents on record,146 can no
longer be entertained at this late stage of the proceeding. The CTA did not rule on
this particular claim. The CTA also made no finding on DLSU' s assertion of lack of
bad faith. Besides, it is not our duty to go over these documents to test the
truthfulness of their contents, this Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.
Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate.147 A tax is uniform
when it operates with the same force and effect in every place where the subject of
it is found.148 The concept requires that all subjects of taxation similarly situated
should be treated alike and placed in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
them alike because their income proved to have been used actually, directly and
exclusively for educational purposes were exempted from taxes. The CTA equally
applied the requirements in the YMCA case to test if they indeed used their
revenues for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show
that, despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes.
That the DLSU secured a different result happened because it failed to fully prove
that it used actually, directly and exclusively for educational purposes its revenues
and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not
mean that subjects of taxation similarly situated are treated in literally the same
way in all and every occasion. The fact that the Ateneo and DLSU are both non-
stock, non-profit educational institutions, does not mean that the CTA or this Court
would similarly decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the sufficiency of
32
evidence. DLSU's evidence was wanting, thus, the CTA was correct in not fully
cancelling its tax liabilities.
b. DLSU proved its payment of the DST
The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank's On-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use
this method of paymen
t because an educational institution is excluded from the class of taxpayers who
can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in
both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and
paid for by the person making, signing, issuing, accepting, or transferring the
same.150 The Tax Code provides that whenever one party to the document enjoys
exemption from DST, the other party not exempt from DST shall be directly liable
for the tax. Thus, it is clear that DST shall be payable by any party to the
document, such that the payment and compliance by one shall mean the full
settlement of the DST due on the document.
In the present case, DLSU entered into mortgage and loan agreements with
banks. These agreements are subject to DST.151 For the purpose of showing that
the DST on the loan agreement has been paid, DLSU presented its agreements
bearing the imprint showing that DST on the document has been paid by the bank,
its counterparty. The imprint should be sufficient proof that DST has been paid.
Thus, DLSU cannot be further assessed for deficiency DST on the said
documents.
Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST
Imprinting Machine under RR No. 9-2000. As correctly held by the CTA, this is
irrelevant because it was not DLSU who used the On-Line Electronic DST
Imprinting Machine but the bank that handled its mortgage and loan transactions.
RR No. 9-2000 expressly includes banks in the class of taxpayers that can use the
On-Line Electronic DST Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment of
the assessed DST deficiency, except for the unpaid balance of
₱13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner
of Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010
decision and March 29, 2011 resolution of the Court of Tax Appeals En Banc in
CTA En Banc Case No. 622, except for the total amount of deficiency tax liabilities
of De La Salle University, Inc., which had been reduced.

We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the
Court of Tax Appeals En Banc in CTA En Banc Case No. 671, with the
MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.

SO ORDERED.

33
G.R. No. 127777 October 1, 1999
PETRONILA C. TUPAZ, petitioner, vs. HONORABLE BENEDICTO B. ULEP
Presiding Judge of RTC Quezon City, Branch 105, and PEOPLE OF THE
PHILIPPINES, respondents.
PARDO, J.:
The case before us is a special civil action for certiorari with application for
temporary restraining order seeking to enjoin respondent Judge Benedicto B. Ulep
of the Regional Trial Court, Quezon City, Branch 105, from trying Criminal Case
No. Q-91-17321, and to nullify respondent judge's order reviving the information
therein against petitioner, for violation of the Tax Code, as the offense charged has
prescribed or would expose petitioner to double jeopardy.1âwphi1.nêt
The facts are as follows:
On June 8, 1990, State Prosecutor (SP) Esteban A. Molon, Jr. filed with the
Metropolitan Trial Court (MeTC), Quezon City, Branch 33, an information against
accused Petronila C. Tupaz and her late husband Jose J. Tupaz, Jr., as corporate
officers of El Oro Engravers Corporation, for nonpayment of deficiency corporate
income tax for the year 1979, amounting to P2,369,085.46, in violation of Section
51 (b) in relation to Section 73 of the Tax Code of
1977. 1 On September 11, 1990, the MeTC dismissed the information for lack of
jurisdiction. On November 16, 1990, the trial court denied the prosecution's motion
for reconsideration.
On January 10, 1991, SP Molon filed with the Regional Trial Court, Quezon City,
two (2) informations, docketed as Criminal Case Nos. Q-91-17321 2 and Q-9l-
17322, 3 against accused and her late husband, for the same alleged nonpayment
of deficiency corporate income tax for the year 1979. Criminal Case No. Q-91-
17321 was raffled to Branch 105, 4 presided over by respondent Judge Benedicto
B. Ulep; Q-91-17322 was raffled to Branch 86, then presided over by Judge
Antonio P. Solano. The identical informations read as follows:
That in Quezon City, Metro Manila and within the jurisdiction of this Honorable
Court and upon verification and audit conducted by the Bureau of Internal
Revenue on the 1979 corporate annual income tax return and financial statements
of El Oro Engravers Corp., with office address at 809 Epifanio delos Santos
Avenue, Quezon City, Metro Manila, it was ascertained that said corporation was
found liable to pay the amount of P2,369,085.46, as deficiency corporate income
tax for the year 1979 and that, despite demand of the payment of the aforesaid
deficiency tax by the Bureau of Internal Revenue and received by said corporation,
which demand has already become final, said El Oro Engravers Corp., through
34
above-named accused, the responsible corporate-officers of said corporation,
failed and refused, despite repeated demands, and still fail and refuse to pay said
tax liability.
CONTRARY TO LAW.
On September 25, 1991, both accused posted bail bond in the sum of P1,000.00
each, for their provisional liberty.
On November 6, 1991, accused filed with the Regional Trial Court, Quezon City,
Branch 86, a motion to dismiss/quash 6 information (Q-91-17322) for the reason
that it was exactly the same as the information against the accused pending before
RTC, Quezon City, Branch 105 (Q-91-17321). However, on November 11, 1991,
Judge Solano denied the motion. 7
In the meantime, on July 25, 1993, Jose J. Tupaz, Jr. died in Quezon City.
Subsequently, accused Petronila C. Tupaz filed with the Regional Trial Court,
Quezon City, Branch 105, a petition for reinvestigation, which Judge Ulep granted
in an order dated August 30, 1994. 8
On September 5, 1994, Senior State Prosecutor Bernelito R. Fernandez stated
that no new issues were raised in the request for reinvestigation, and no cogent
reasons existed to alter, modify or reverse the findings of the investigating
prosecutor. He considered the reinvestigation as terminated, and recommended
the prompt arraignment and trial of the accused. 9
On September 20, 1994, the trial court (Branch No. 105) arraigned accused
Petronila C. Tupaz in Criminal Case No. Q-91-17321, and she pleaded not guilty to
the information therein.
On October 17, 1994, the prosecution filed with the Regional Trial Court, Quezon
City, Branch 105, a motion for leave to file amended information in Criminal Case
No. Q91-17321 to allege expressly the date of the commission of the offense, to
wit: on or about August 1984 or subsequently thereafter. Despite opposition of the
accused, on March 2, 1995, the trial court granted the motion and admitted the
amended information. 10 Petitioner was not re-arraigned on the amended
information. However, the amendment was only on a matter of form. 11 Hence,
there was no need to re-arraign the accused. 12
On December 5, 1995, accused filed with the Regional Trial Court, Quezon City,
Branch 105, a motion for leave to file and admit motion for reinvestigation. The trial
court granted the motion in its order dated December 13, 1995.
Prior to this, on October 18, 1995, Judge Ulep issued an order directing the
prosecution to withdraw the information in Criminal Case No. Q-91-17322, pending
before Regional Trial Court, Quezon City, Branch 86, after discovering that said
information was identical to the one filed with Regional Trial Court, Quezon City,
Branch 105. On April 16, 1996, State Prosecutor Alfredo P. Agcaoili filed with the
trial court a motion to withdraw information in Criminal Case No. Q-91-17321.
Prosecutor Agcaoili thought that accused was charged in Criminal Case No. Q-91-
17321, for nonpayment of deficiency contractor's tax, but found that accused was
exempted from paying said tax.
On May 15, 1996, Prosecutor Agcaoili filed with the Regional Trial Court, Quezon
City, Branch 86, a motion for consolidation of Criminal Case No. Q-91-17322 with
Criminal Case No. Q-91-17321 pending before the Regional Trial Court, Quezon
City, Branch 105. On the same date, the court 13 granted the motion for
consolidation.
On May 20, 1996, Judge Ulep of Regional Trial Court, Quezon City, Branch 105,
granted the motion for withdrawal of the information in Criminal Case No. Q-91-
17321 and dismissed the case, as prayed for by the prosecution.
On May 28, 1996, Prosecutor Agcaoili filed with the Regional Trial Court, Quezon
City, Branch 105, a motion to reinstate information in Criminal Case Q-91-17321,
14 stating that the motion to withdraw information was made through palpable
mistake, and was the result of excusable neglect. He thought that Criminal Case
No. Q-91-17321 was identical to Criminal Case No. Q-90-12896, wherein accused
was charged with nonpayment of deficiency contractor's tax, amounting to
P346,879.29.
Over the objections of accused, on August 6, 1996, the Regional Trial Court,
Quezon City, Branch 105, granted the motion and ordered information in Criminal
Case No. Q-91-17321 reinstated. 15 On September 24, 1996, accused filed with
the trial court a motion for reconsideration. On December 4, 1996, the trial court
denied the motion.
Hence, this petition.
On July 9, 1997, we required respondents to comment on the petition within ten
(10) days from notice. On October 10, 1997, the Solicitor General filed his
comment. 16
On October 26, 1998, the Court resolved to give due course to the petition and
required the parties to file their respective memoranda within twenty (20) days from
notice. The parties have complied.
35
Petitioner submits that respondent judge committed a grave abuse of discretion in
reinstating the information in Criminal Case No. Q-91-17321 because (a) the
offense has prescribed; or (b) it exposes her to double jeopardy.
As regards the issue of prescription, petitioner contends that: (a) the period of
assessment has prescribed, applying the three (3) year period provided under
Batas Pambansa No. 700; (b) the offense has prescribed since the complaint for
preliminary investigation was filed with the Department of Justice only on June 8,
1989, and the offense was committed in April 1980 when she filed the income tax
return covering taxable year 1979.
Petitioner was charged with nonpayment of deficiency corporate income tax for the
year 1979, which tax return was filed in April 1980. On July 16, 1984, the Bureau
of Internal Revenue (BIR) issued a notice of assessment. Petitioner contends that
the July 16, 1984 assessment was made out of time.
Petitioner avers that while Sections 318 and 319 of the NIRC of 1977 provide a
five (5) year period of limitation for the assessment and collection of internal
revenue taxes, Batas Pambansa Blg. 700, enacted on February 22, 1984,
amended the two sections and reduced the period to three (3) years. As provided
under B.P. Blg. 700, the BIR has three (3) years to assess the tax liability, counted
from the last day of filing the return, or from the date the return is filed, whichever
comes later. Since the tax return was filed in April 1980, the assessment made on
July 16, 1984 was beyond the three (3) year prescriptive period.
Petitioner submits that B.P. Blg. 700 must be given retroactive effect since it is
favorable to the accused. Petitioner argues that Article 22 of the Revised Penal
Code, regarding the allowance of retroactive application of penal laws when
favorable to the accused shall apply in this case.
The Solicitor General, in his comment, maintains that the prescriptive period for
assessment and collection of petitioner's deficiency corporate income tax was five
(5) years. The Solicitor General asserts that the shortened period of three (3) years
provided under B.P. Blg. 700 applies to assessments and collections of internal
revenue taxes beginning taxable year 1984. Since the deficiency corporate income
tax was for taxable year 1979, then petitioner was still covered by the five (5) year
period. Thus, the July 16, 1984 tax assessment was made within the prescribed
period.1âwphi1.nêt
At the outset, it must be stressed that "internal revenue taxes are self-assessing
and no further assessment by the government is required to create the tax liability.
An assessment, however, is not altogether inconsequential; it is relevant in the
proper pursuit of judicial and extra judicial remedies to enforce taxpayer liabilities
and certain matters that relate to it, such as the imposition of surcharges and
interest, and in the application of statues of limitations and in the establishment of
tax liens." 17
An assessment contains not only a computation of tax liabilities, but also a
demand for payment within a prescribed period. The ultimate purpose of
assessment is to ascertain the amount that each taxpayer is to pay. 18 An
assessment is a notice to the effect that the amount therein stated is due as tax
and a demand for payment thereof. 19 Assessments made beyond the prescribed
period would not be binding on the taxpayer. 20
We agree with the Solicitor General that the shortened period of three (3) years
prescribed under B.P. Blg. 700 is not applicable to petitioner. B.P. Blg. 700,
effective April 5, 1984, specifically states that the shortened period of three years
shall apply to assessments and collections of internal revenue taxes beginning
taxable year 1984. Assessments made on or after April 5, 1984 are governed by
the five-year period if the taxes assessed cover taxable years prior to January 1,
1984. 21 The deficiency income tax under consideration is for taxable year 1979.
Thus, the period of assessment is still five (5) years, under the old law. The income
tax return was filed in April 1980. Hence, the July 16, 1984 tax assessment was
issued within the prescribed period of five (5) years, from the last day of filing the
return, or from the date the return is filed, whichever comes later.
Art. 22 of the Revised Penal Code finds no application in this case for the simple
reason that the provisions on the period of assessment can not be considered as
penal in nature.
Petitioner also asserts that the offense has prescribed. Petitioner invokes Section
340 (now 281 of 1997 NIRC) of the Tax Code which provides that violations of any
provision of the Code prescribe in five (5) years. Petitioner asserts that in this
case, it began to run in 1979, when she failed to pay the correct corporate tax due
during that taxable year. Hence, when the BIR instituted criminal proceedings on
June 8, 1989, by filing a complaint for violation of the Tax Code with the
Department of Justice for preliminary investigation it was beyond the prescriptive
period of five (5) years. At most, the BIR had until 1984 to institute criminal
proceedings.
On the other hand, the Solicitor General avers that the information for violation of
the Tax Code was filed within the prescriptive period of five (5) years provided in
Section 340 (now 281 in 1997 NIRC) of the Code. It is only when the assessment
has become final and unappealable that the five (5) year period commences to
run. A notice of assessment was issued on July 16, 1984. When petitioner failed to
question or protest the deficiency assessment thirty (30) days therefrom, or on
36
August 16, 1984, it became final and unappealable. Consequently, it was from this
period that the prescriptive period of five (5) years commenced. Thus, the
complaint filed with the Department of Justice on June 8, 1989 was within the
prescribed period.
We agree with the Solicitor General that the offense has not prescribed. Petitioner
was charged with failure to pay deficiency income tax after repeated demands by
the taxing authority. In Lim, Sr. v. Court of Appeals, 22 we stated that by its nature
the violation could only be committed after service of notice and demand for
payment of the deficiency taxes upon the taxpayer. Hence, it cannot be said that
the offense has been committed as early as 1980, upon filing of the income tax
return. This is so because prior to the finality of the assessment, the taxpayer has
not committed any violation for nonpayment of the tax. The offense was committed
only after the finality of the assessment coupled with taxpayer's willful refusal to
pay the taxes within the allotted period. In this case, when the notice of
assessment was issued on July 16, 1984, the taxpayer still had thirty (30) days
from receipt thereof to protest or question the assessment. Otherwise, the
assessment would become final and unappealable. 23 As he did not protest, the
assessment became final and unappealable on August 16, 1984. Consequently,
when the complaint for preliminary investigation was filed with the Department of
Justice on June 8, 1989, the criminal action was instituted within the five (5) year
prescriptive period.
Petitioner contends that by reinstating the information, the trial court exposed her
to double jeopardy. Neither the prosecution nor the trial court obtained her
permission before the case was dismissed. She was placed in jeopardy for the first
time after she pleaded to a valid complaint filed before a competent court and the
case was dismissed without her express consent. When the trial court reinstated
the information charging the same offense, it placed her in double jeopardy.
Petitioner also asserts that the trial court gravely erred when, over her objections, it
admitted the amended information. She submits that the amendment is substantial
in nature, and would place her in double jeopardy.
On the other hand, the Solicitor General contends that reinstating the information
does not violate petitioner's right against double jeopardy. He asserts that
petitioner induced the dismissal of the complaint when she sought the
reinvestigation of her tax liabilities. By such inducement, petitioner waived or was
estopped from claiming her right against double jeopardy.
The Solicitor General further contends that, assuming arguendo that the case was
dismissed without petitioner's consent, there was no valid dismissal of the case
since Prosecutor Agcaoili was under a mistaken assumption that it was a charge of Not having been re-arraigned on the amended information, which validly
nonpayment of contractor's tax. supplanted the original information, the erroneous withdrawal of the information in
Criminal Case No. Q-91-17321 and its subsequent reinstatement cannot place the
We sustain petitioner's contention. The reinstatement of the information would petitioner in double jeopardy. Firstly, the withdrawal had no legal effect since the
expose her to double jeopardy. An accused is placed in double jeopardy if he is information was amended. Secondly, petitioner was not arraigned on the amended
again tried for an offense for which he has been convicted, acquitted or in another information. And, thirdly, petitioner is estopped on the matter since she had asked
manner in which the indictment against him was dismissed without his consent. In for a reinvestigation on the basis of the amended information.
the instant case, there was a valid complaint filed against petitioner to which she
pleaded not guilty. The court dismissed the case at the instance of the prosecution, I vote then to DENY this petition.
without asking for accused-petitioner's consent. This consent cannot be implied or
presumed. 24 Such consent must be expressed as to have no doubt as to the
accused's conformity. 25 As petitioner's consent was not expressly given, the
dismissal of the case must be regarded as final and with prejudice to the re-filing of
the case. 26 Consequently, the trial court committed grave abuse of discretion in
reinstating the information against petitioner in violation of her constitutionally
protected right against double jeopardy.

WHEREFORE, we GRANT the petition. We enjoin the lower court, the Regional
Trial Court of Quezon City, Branch 105, from trying Criminal Case No. Q-91-17321
and order its dismissal. Costs de oficio.

SO ORDERED.

DAVIDE, JR., C.J., dissenting opinion;

I am unable to agree with the conclusion in the ponencia that reinstating the
information in Criminal Case No. Q-91-17321 would expose petitioner to double
jeopardy.

As shown in the summary of facts in the ponencia petitioner entered a plea of not
guilty on 20 September 1994 to the information in Criminal Case No. Q-9-17321.
But, the information was amended by the prosecution to indicate therein the date
of the commission of the offense, to wit: "on or about August 1994 or subsequently
thereafter."

The amended information was admitted by public respondent Judge in the order of
2 March 1995.

There is at all no showing that petitioner was re-arraigned on the amended

information. On the contrary, on 5 December 1995 she filed a motion for leave to
file and admit motion for reinvestigation, which the trial court granted in its order of
13 December 1995.

37
G.R. No. 104171 February 24, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. B.F. GOODRICH
PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) and THE
COURT OF APPEALS, respondents.
PANGANIBAN, J.:
Notwithstanding the expiration of the five-year prescriptive period, may the Bureau
of Internal Revenue (BIR) still assess a taxpayer even after the latter has already
paid the tax due, on the ground that the previous assessment was insufficient or
based on a "false" return?
The Case
This is the main question raised before us in this Petition for Review on Certiorari
assailing the Decision 1 dated February 14, 1992, promulgated by the Court of
Appeals 2 in CA-GR SP No. 25100. The assailed Decision reversed the Court of
Tax Appeals (CTA) 3 which upheld the BIR commissioner's assessments made
beyond the five-year statute of limitations.
The Facts
The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime
Darby International Tire Co, Inc.), was an American-owned and controlled
corporation previous to July 3, 1974. As a condition for approving the manufacture
by private respondent of tires and other rubber products, the Central Bank of the
Philippines required that it should develop a rubber plantation. In compliance with
this requirement, private respondent purchased from the Philippine government in
1961, under the Public Land Act and the Parity Amendment to the 1935
Constitution, certain parcels of land located in Tumajubong, Basilan, and there
developed a rubber plantation.
More than a decade later, on August 2, 1973, the justice secretary rendered an
opinion stating that, upon the expiration of the Parity Amendment on July 3, 1974,
the ownership rights of Americans over public agricultural lands, including the right
to dispose or sell their real estate, would be lost. On the basis of this Opinion,
private respondent sold to Siltown Realty Philippines, Inc. on January 21, 1974, its
Basilan landholding for P500,000 payable in installments. In accord with the terms
of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land to
private respondent for a period of 25 years, with an extension of another 25 years
at the latter's option.
38
Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books
and accounts of private respondent were examined for the purpose of determining
its tax liability for taxable year 1974. The examination resulted in the April 23, 1975
assessment of private respondent for deficiency income tax in the amount of
P6,005.35, which it duly paid.
Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and
074421 RR and Memorandum Authority Reference No. 749157 for the purpose of
examining Siltown's business, income and tax liabilities. On the basis of this
examination, the BIR commissioner issued against private respondent on October
10, 1980, an assessment for deficiency in donor's tax in the amount of P1,020,850,
in relation to the previously mentioned sale of its Basilan landholdings to Siltown.
Apparently, the BIR deemed the consideration for the sale insufficient, and the
difference between the fair market value and the actual purchase price a taxable
donation.
In a letter dated November 24, 1980, private respondent contested this
assessment. On April 9, 1981, it received another assessment dated March 16,
1981, which increased to P 1,092,949 the amount demanded for the alleged
deficiency donor's tax, surcharge, interest and compromise penalty.
Private respondent appealed the correctness and the legality of these last two
assessments to the CTA. After trial in due course, the CTA rendered its Decision
dated March 29, 1991, the dispositive portion of which reads as follows:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing
petitioner deficiency gift tax is MODIFIED land petitioner is ordered to pay the
amount of P1,311,179.01 plus 10% surcharge and 20% annual interest from
March 16, 1981 until fully paid provided that the maximum amount that may be
collected as interest on delinquency shall in no case exceed an amount
corresponding to a period of three years pursuant to Section 130(b)(l) and (c) of
the 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August 1,
1980.
SO ORDERED.
Undaunted, private respondent elevated the matter to the Court of Appeals, which
reversed the CTA, as follows:
What is involved here is not a first assessment; nor is it one within the 5-year
period stated in Section 331 above. Since what is involved in this case is a multiple
assessment beyond the five-year period, the assessment must be based on the
grounds provided in Section 337, and not on Section 15 of the 1974 Tax Code.
Section 337 utilizes the very specific terms "fraud, irregularity, and mistake".
"Falsity does not appear to be included in this enumeration. Falsity suffices for an
assessment, which is a first assessment made within the five-year period. When it
is a subsequent assessment made beyond the five-year period, then, it may be
validly justified only by "fraud, irregularity and mistake" on the part of the
taxpayer.6
Hence, this Petition for Review under Rule 45 of the Rules of Court. 7
The Issues
Before us, petitioner raises the following issues:
I
Whether or not petitioner's right to assess herein deficiency donor's tax has indeed
prescribed as ruled by public respondent Court of Appeals
II
Whether or not the herein deficiency donor's tax assessment for 1974 is valid and
in accordance with law
Prescription is the crucial issue in the resolution of this case.
The Court's Ruling
The petition has no merit.
Main Issue: Prescription
The petitioner contends that the Court of Appeals erred in reversing the CTA on
the issue of prescription, because its ruling was based on factual findings that
should have been left undisturbed on appeal, in the absence of any showing that it
had been tainted with gross error or grave abuse of
discretion. 8 The Court is not persuaded.
True, the factual findings of the CTA are generally not disturbed on appeal when
supported by substantial evidence and in the absence of gross error or grave
abuse of discretion. However, the CTA's application of the law to the facts of this
controversy is an altogether different matter, for it involves a legal question. There
is a question of law when the issue is the application of the law to a given set of
facts. On the other hand, a question of fact involves the truth or falsehood of
alleged facts.9 In the present case, the Court of Appeals ruled not on the truth or
39
falsity of the facts found by the CTA, but on the latter's application of the law on
prescription.
Sec. 331 of the National Internal Revenue Code provides:
Sec. 331. Period of limitation upon assessment and collection. — Except as
provided in the succeeding section, internal-revenue taxes shall be assessed
within five years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after expiration of such
period. For the purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last
day: Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
Applying this provision of law to the facts at hand, it is clear that the October 16,
1980 and the March 1981 assessments were issued by the BIR beyond the five-
year statute of limitations. The Court has thoroughly studied the records of this
case and found no basis to disregard the five-year period of prescription. As
succinctly pronounced by the Court of Appeals:
The subsequent assessment made by the respondent Commissioner on October
40, 1980, modified by that of March 16, 1981, violates the law. Involved in this
petition is the income of the petitioner for the year 1974, the returns for which were
required to be filed on or before April 15 of the succeeding year. The returns for
the year 1974 were duly filed by the petitioner, and assessment of taxes due for
such year — including that on the transfer of properties on June 21, 1974 — was
made on April 13, 1975 and acknowledged by Letter of Confirmation No. 101155
terminating the examination on this subject. The subsequent assessment of
October 10, 1980 modified, by that of March 16, 1981, was made beyond the
period expressly set in Section 331 of the National Internal Revenue Code . . . . 10
Petitioner relies on the CTA ruling, the salient portion of which reads:
Falsity is what we have here, and for that matter, we hasten to add that the second
assessment (March 16, 1981) of the Commissioner was well-advised having been
made in contemplation of his power under Section 15 of the 1974 Code (now
Section 16, of NIRC) to assess the proper tax on the best evidence obtainable
"when there is reason to believe that a report of a taxpayer is false, incomplete or
erroneous. More, when there is falsity with intent to evade tax as in this case, the
ordinary period of limitation upon assessment and collection does not apply so that
contrary to the averment of petitioner, the right to assess respondent has not
prescribed.
What is the considered falsity? The transfer through sale of the parcels of land in
Tumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum of
P500,000.00 only whereas said lands had been sworn to under Presidential
Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 +
P207,700) (see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR
Record). 11
For the purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in the
collection of taxes. Thus, the law on prescription, being a remedial measure,
should be liberally construed in order to afford such protection. 12 As a corollary,
the exceptions to the law on prescription should perforce be strictly construed.
Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by
law as a basis for the assessment of any national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation, or when there is reason to
believe that any such report is false, incomplete, or erroneous, the Commissioner
of Internal Revenue shall assess the proper tax on the best evidence obtainable."
Clearly, Section 15 does not provide an exception to the statute of limitations on
the issuance of an assessment, by allowing the initial assessment to be made on
the basis of the best evidence available. Having made its initial assessment in the
manner prescribed, the commissioner could not have been authorized to issue,
beyond the five-year prescriptive period, the second and the third assessments
under consideration before us.
Nor is petitioner's claim of falsity sufficient to take the questioned assessments out
of the ambit of the statute of limitations. The relevant part of then Section 332 of
the NIRC, which enumerates the exceptions to the period of prescription, provides:
Sec. 332. Exceptions as to period of limitation of assessment and collection of
taxes. — (a) In the case of a false or fraudulent return with intent to evade a 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
years after the discovery of the falsity, fraud, or omission: . . . .
Petitioner insists that private respondent committed "falsity" when it sold the
property for a price lesser than its declared fair market value. This fact alone did
not constitute a false return which contains wrong information due to mistake,
carelessness or ignorance.13 It is possible that real property may be sold for less
than adequate consideration for a bona fide business purpose; in such event, the
sale remains an "arm's length" transaction. In the present case, the private
respondent was compelled to sell the property even at a price less than its market
value, because it would have lost all ownership rights over it upon the expiration of
40
the parity amendment. In other words, private respondent was attempting to
minimize its losses. At the same time, it was able to lease the property for 25
years, renewable for another 25. This can be regarded as another consideration
on the price.
Furthermore, the fact that private respondent sold its real property for a price less
than its declared fair market value did not by itself justify a finding of false return.
Indeed, private respondent declared the sale in its 1974 return submitted to the
BIR. 14 Within the five-year prescriptive period, the BIR could have issued the
questioned assessment, because the declared fair market value of said property
was of public record. This it did not do, however, during all those five years.
Moreover, the BIR failed to prove that respondent's 1974 return had been filed
fraudulently. Equally significant was its failure to prove respondent's intent to
evade the payment of the correct amount of tax.
Ineludibly, the BIR failed to show that private respondent's 1974 return was filed
fraudulently with intent to evade the payment of the correct amount of tax. 15
Moreover, even though a donor's tax, which is defined as "a tax on the privilege of
transmitting one's property or property rights to another or others without adequate
and full valuable consideration," 16 is different from capital gains tax, a tax on the
gain from the sale of the taxpayer's property forming part of capital assets, 17 the
tax return filed by private respondent to report its income for the year 1974 was
sufficient compliance with the legal requirement to file a return. In other words, the
fact that the sale transaction may have partly resulted in a donation does not
change the fact that private respondent already reported its income for 1974 by
filing an income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a
fraudulent return with the intent to evade tax, or that it had failed to file a return at
all, the period for assessments has obviously prescribed. Such instances of
negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace
of mind.
Based on the foregoing, a discussion of the validity and legality of the assailed
assessments has become moot and unnecessary.
WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the
Court of Appeals is AFFIRMED. No costs.
SO ORDERED.
G.R. No. L-22492 September 5, 1967
BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS, respondents.
BENGZON, J.P., J.:
A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc.,
with principal offices in Basilan City, filed on March 24, 1954 its income tax returns
for 1953 and paid an income tax of P8,028. On February 26, 1959, the
Commissioner of Internal Revenue, per examiners' report of February 19, 1959,
assessed Basilan Estates, Inc., a deficiency income tax of P3,912 for 1953 and
P86,876.85 as 25% surtax on unreasonably accumulated profits as of 1953
pursuant to Section 25 of the Tax Code. On non-payment of the assessed amount,
a warrant of distraint and levy was issued but the same was not executed because
Basilan Estates, Inc. succeeded in getting the Deputy Commissioner of Internal
Revenue to order the Director of the district in Zamboanga City to hold execution
and maintain constructive embargo instead. Because of its refusal to waive the
period of prescription, the corporation's request for reinvestigation was not given
due course, and on December 2, 1960, notice was served the corporation that the
warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals
a petition for review of the Commissioner's assessment, alleging prescription of the
period for assessment and collection; error in disallowing claimed depreciations,
travelling and miscellaneous expenses; and error in finding the existence of
unreasonably accumulated profits and the imposition of 25% surtax thereon. On
October 31, 1963, the Court of Tax Appeals found that there was no prescription
and affirmed the deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the
following issues:
1. Has the Commissioner's right to collect deficiency income tax prescribed?
2. Was the disallowance of items claimed as deductible proper?
3. Have there been unreasonably accumulated profits? If so, should the 25%
surtax be imposed on the balance of the entire surplus from 1947-1953, or only for
1953?
4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending
Section 25 of the Tax Code?
PRESCRIPTION
41
There is no dispute that the assessment of the deficiency tax was made on
February 26, 1959; but the petitioner claims that it never received notice of such
assessment or if it did, it received the notice beyond the five-year prescriptive
period. To show prescription, the annotation on the notice (Exhibit 10, No. 52,
ACR, p. 54-A of the BIR records) "No accompanying letter 11/25/" is advanced as
indicative of the fact that receipt of the notice was after March 24, 1959, the last
date of the five-year period within which to assess deficiency tax, since the original
returns were filed on March 24, 1954.
Although the evidence is not clear on this point, We cannot accept this
interpretation of the petitioner, considering the presence of circumstances that lead
Us to presume regularity in the performance of official functions. The notice of
assessment shows the assessment to have been made on February 26, 1959, well
within the five-year period. On the right side of the notice is also stamped "Feb. 26,
1959" — denoting the date of release, according to Bureau of Internal Revenue
practice. The Commissioner himself in his letter (Exh. H, p. 84 of BIR records)
answering petitioner's request to lift, the warrant of distraint and levy, asserts that
notice had been sent to petitioner. In the letter of the Regional Director forwarding
the case to the Chief of the Investigation Division which the latter received on
March 10, 1959 (p. 71 of the BIR records), notice of assessment was said to have
been sent to petitioner. Subsequently, the Chief of the Investigation Division
indorsed on March 18, 1959 (p. 24 of the BIR records) the case to the Chief of the
Law Division. There it was alleged that notice was already sent to petitioner on
February 26, 1959. These circumstances pointing to official performance of duty
must necessarily prevail over petitioner's contrary interpretation. Besides, even
granting that notice had been received by the petitioner late, as alleged, under
Section 331 of the Tax Code requiring five years within which to assess deficiency
taxes, the assessment is deemed made when notice to this effect is released,
mailed or sent by the Collector to the taxpayer and it is not required that the notice
be received by the taxpayer within the aforementioned five-year period.1
ASSESSMENT
The questioned assessment is as follows:
Net Income per return P40,142.90
Add: Over-claimed depreciation P10,500.49
Mis. expenses disallowed 6,759.17
Officer's travelling expenses
disallowed 2,300.40 19,560.06
 Net Income per Investigation
20% tax on P59,702.96
Less: Tax already assessed
Deficiency income tax
Add: Additional tax of 25% on P347,507.01
Tax Due & Collectible
The Commissioner disallowed:
Over-claimed depreciation
Miscellaneous expenses
Officer's travelling expenses
P59,702.96 The question for resolution therefore is whether depreciation shall be determined
11,940.00 on the acquisition cost or on the reappraised value of the assets.
8,028.00
Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. The term is also applied to
P3,912.00
amortization of the value of intangible assets, the use of which in the trade or
86,876.75
business is definitely limited in duration.2 Depreciation commences with the
acquisition of the property and its owner is not bound to see his property gradually
P90,788.75 waste, without making provision out of earnings for its replacement. It is entitled to
========= see that from earnings the value of the property invested is kept unimpaired, so
that at the end of any given term of years, the original investment remains as it
was in the beginning. It is not only the right of a company to make such a
provision, but it is its duty to its bond and stockholders, and, in the case of a public
P10,500.49 service corporation, at least, its plain duty to the public.3 Accordingly, the law
6,759.17 permits the taxpayer to recover gradually his capital investment in wasting assets
2,300.40 free from income tax.4 Precisely, Section 30 (f) (1) which states:

DEDUCTIONS
A. Depreciation. — Basilan Estates, Inc. claimed deductions for the depreciation of
its assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it
changed the depreciable value of said assets by increasing it to conform with the
increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted
from gross income the value of depreciation computed on the reappraised value.
(1)In general. — A reasonable allowance for deterioration of property arising out of
its use or employment in the business or trade, or out of its not being used:
Provided, That when the allowance authorized under this subsection shall equal
the capital invested by the taxpayer . . . no further allowance shall be made. . . .
allows a deduction from gross income for depreciation but limits the recovery to the
capital invested in the asset being depreciated.

In 1953, the year involved in this case, taxpayer claimed the following depreciation
deduction:
Reappraised assets P47,342.53
New assets consisting of hospital building and equipment 3,910.45
Total depreciation
P51,252.98
Upon investigation and examination of taxpayer's books and papers, the
Commissioner of Internal Revenue found that the reappraised assets depreciated
in 1953 were the same ones upon which depreciation was claimed in 1952. And
for the year 1952, the Commissioner had already determined, with taxpayer's
concurrence, the depreciation allowable on said assets to be P36,842.04,
computed on their acquisition cost at rates fixed by the taxpayer. Hence, the
Commissioner pegged the deductible depreciation for 1953 on the same old
assets at P36,842.04 and disallowed the excess thereof in the amount of
P10,500.49.
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed
and allowed. The reason is that deductions from gross income are privileges,5 not
matters of right.6 They are not created by implication but upon clear expression in
the law.7
Moreover, the recovery, free of income tax, of an amount more than the invested
capital in an asset will transgress the underlying purpose of a depreciation
allowance. For then what the taxpayer would recover will be, not only the
acquisition cost, but also some profit. Recovery in due time thru depreciation of
investment made is the philosophy behind depreciation allowance; the idea of
profit on the investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law. The determination, therefore, of the
Commissioner of Internal Revenue disallowing said amount, affirmed by the Court
of Tax Appeals, is sustained.

42

B. Expenses. — The next item involves disallowed expenses incurred in 1953,
broken as follows:
Miscellaneous expenses P6,759.17
Officer's travelling expenses 2,300.40
Total
P9,059.57
These were disallowed on the ground that the nature of these expenses could not
be satisfactorily explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses
credited to the account of the president of the corporation incurred in the interest of
the corporation during the president's trip to Manila (pp. 33-34 of TSN of Dec. 5,
1962); he stated that the P2,300.40 was the president's travelling expenses to and
from Manila as to the vouchers and receipts of these, he said the same were made
but got burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN).
Petitioner further argues that when it sent its records to Manila in February, 1959,
the papers in support of these miscellaneous and travelling expenses were not
included for the reason that by February 9, 1959, when the Bureau of Internal
Revenue decided to investigate, petitioner had no more obligation to keep the
same since five years had lapsed from the time these expenses were incurred (p.
41 of same TSN). On this ground, the petitioner may be sustained, for under
Section 337 of the Tax Code, receipts and papers supporting such expenses need
be kept by the taxpayer for a period of five years from the last entry. At the time of
the investigation, said five years had lapsed. Taxpayer's stand on this issue is
therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably
accumulated, provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or surplus
— (a) Imposition of tax. — If any corporation, except banks, insurance companies,
or personal holding companies, whether domestic or foreign, is formed or availed
of for the purpose of preventing the imposition of the tax upon its shareholders or
members or the shareholders or members of another corporation, through the
medium of permitting its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation, for each taxable
year, a tax equal to twenty-five per centum of the undistributed portion of its
accumulated profits or surplus which shall be in addition to the tax imposed by
section twenty-four, and shall be computed, collected and paid in the same
43
manner and subject to the same provisions of law, including penalties, as that
tax.1awphîl.nèt
The Commissioner found that in violation of the abovequoted section, petitioner
had unreasonably accumulated profits as of 1953 in the amount of P347,507.01,
based on the following circumstances (Examiner's Report pp. 62-68 of BIR
records):
1. Strong financial position of the petitioner as of December 31, 1953. Assets were
P388,617.00 while the liabilities amounted to only P61,117.31 or a ratio of 6:1.
2. As of 1953, the corporation had considerable capital adequate to meet the
reasonable needs of the business amounting to P327,499.69 (assets less
liabilities).
3. The P200,000 reserved for electrification of drier and mechanization and the
P50,000 reserved for malaria control were reverted to its surplus in 1953.
4. Withdrawal by shareholders, of large sums of money as personal loans.
5. Investment of undistributed earnings in assets having no proximate connection
with the business — as hospital building and equipment worth P59,794.72.
6. In 1953, with an increase of surplus amounting to P677,232.01, the capital stock
was increased to P500,000 although there was no need for such increase.
Petitioner tried to show that in considering the surplus, the examiner did not take
into account the possible expenses for cultivation, labor, fertilitation, drainage,
irrigation, repair, etc. (pp. 235-237 of TSN of Dec. 7, 1962). As aptly answered by
the examiner himself, however, they were already included as part of the working
capital (pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for
electrification of driers and mechanization and P50,000 for malaria control which
were reserved way back in 1948 (p. 67 of the BIR records) but reverted to the
general fund only in 1953. If there were any plans for these amounts to be used in
further expansion through projects, it did not appear in the records as was properly
indicated in 1948 when such amounts were reserved. Thus, while in 1948 it was
already clear that the money was intended to go to future projects, in 1953 upon
reversion to the general fund, no such intention was shown. Such reversion
therefore gave occasion for the Government to consider the same for tax
purposes. The P250,000 reverted to the general fund was sought to be explained
as later used elsewhere: "part of it in the Hilano Industries, Inc. in building the
factory site and buildings to house technical men . . . part of it was spent in the
facilities for the waterworks system and for industrialization of the coconut industry"
(p. 117 of TSN of Dec. 6, 1962). This is not sufficient explanation. Persuasive
jurisprudence on the matter such as those in the United States from where our tax
law was derived,8 has it that: "In order to determine whether profits were
accumulated for the reasonable needs of the business or to avoid the surtax upon
shareholders, the controlling intention of the taxpayer is that which is manifested at
the time of the accumulation, not subsequently declared intentions which are
merely the products of after-thought."9 The reversion here was made because the
reserved amount was not enough for the projects intended, without any intent to
channel the same to some particular future projects in mind.
Petitioner argues that since it has P560,717.44 as its expenses for the year 1953,
a surplus of P347,507.01 is not unreasonably accumulated. As rightly contended
by the Government, there is no need to have such a large amount at the beginning
of the following year because during the year, current assets are converted into
cash and with the income realized from the business as the year goes, these
expenses may well be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is
erroneous to say that the taxpayer is entitled to retain enough liquid net assets in
amounts approximately equal to current operating needs for the year to cover "cost
of goods sold and operating expenses" for "it excludes proper consideration of
funds generated by the collection of notes receivable as trade accounts during the
course of the year."10 In fact, just because the fatal accumulations are less than
70% of the annual operating expenses of the year, it does not mean that the
accumulations are reasonable as a matter of law."11
Petitioner tried to show that investments were made with Basilan Coconut
Producers Cooperative Association and Basilan Hospital (pp. 103-105 of TSN of
Dec. 6, 1962) totalling P59,794.72 as of December 31, 1953. This shows all the
more the unreasonable accumulation. As of December 31, 1953 already
P59,794.72 was spent — yet as of that date there was still a surplus of
P347,507.01.
Petitioner questions why the examiner covered the period from 1948-1953 when
the taxable year on review was 1953. The surplus of P347,507.01 was taken by
the examiner from the balance sheet of petitioner for 1953. To check the figure
arrived at, the examiner traced the accumulation process from 1947 until 1953,
and petitioner's figure stood out to be correct. There was no error in the process
applied, for previous accumulations should be considered in determining
unreasonable accumulations for the year concerned. "In determining whether
accumulations of earnings or profits in a particular year are within the reasonable
needs of a corporation, it is neccessary to take into account prior accumulations,
since accumulations prior to the year involved may have been sufficient to cover
44
the business needs and additional accumulations during the year involved would
not reasonably be necessary."12
Another factor that stands out to show unreasonable accumulation is the fact that
large amounts were withdrawn by or advanced to the stockholders. For the year
1953 alone these totalled P197,229.26. Yet the surplus of P347,507.01 was left as
of December 31, 1953. We find unacceptable petitioner's explanation that these
were advances made in furtherance of the business purposes of the petitioner. As
correctly held by the Court of Tax Appeals, while certain expenses of the
corporation were credited against these amounts, the unspent balance was
retained by the stockholders without refunding them to petitioner at the end of each
year. These advances were in fact indirect loans to the stockholders indicating the
unreasonable accumulation of surplus beyond the needs of the business.
ALLEGED EXEMPTION
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal
Revenue Code as amended by R.A. 1823, approved June 22, 1957, whereby
accumulated profits or surplus if invested in any dollar-producing or dollar-earning
industry or in the purchase of bonds issued by the Central Bank, may not be
subject to the 25% surtax. We have but to point out that the unreasonable
accumulation was in 1953. The exemption was by virtue of Republic Act 1823
which amended Sec. 25 only on June 22, 1957 — more than three years after the
period covered by the assessment.
In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax
and surtax for the year 1953 in the amount of P88,977.42, computed as follows:
Net Income per return P40,142.90
Add: Over-claimed depreciation 10,500.49
Net income per finding P50,643.39
20% tax on P50,643.39 P10,128.67
Less: Tax already assessed 8,028.00
Deficiency income tax P2,100.67
Add: 25% surtax on P347,507.01 86,876.75
Total tax due and collectible P88,977.42
===========
WHEREFORE, the judgment appealed from is modified to the extent that petitioner
is allowed its deductions for travelling and miscellaneous expenses, but affirmed
insofar as the petitioner is liable for P2,100.67 as deficiency income tax for 1953
and P86,876.75 as 25% surtax on the unreasonably accumulated profit of
P347,507.01. No costs. So ordered.

45
G.R. No. L-18956 April 27, 1972
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. MARSMAN
DEVELOPMENT COMPANY and/or F.H. BURGESS, in his capacity as
Liquidator of the Marsman Development Company, defendants-appellants.
BARREDO, J.:
Appeal from the decision of the Court of First Instance of Manila, the Honorable
Conrado, M. Vasquez, presiding, sentencing defendants-appellants to pay the
amounts of P44,134.35, P6,603.20 and P456.12, plus legal interest from August
26, 1959, on the first item, and, from September 5, 1958, on the later two,
representing sales taxes and forest charges, together with surcharges and
penalties.
As found by His Honor, the factual setting of the decision is as follows:
Defendant corporation was a timber licensee holding Timber Licensee Agreement
No. 37-A, with concessions in the Municipality of Basud and Mondazo, Camarines
Norte. Sometime before October 15, 1953 an investigation was conducted on the
business operation and activities of the corporation leading to the discovery that
certain taxes were due (from) it on logs produced from its concession. On October
15, 1953, the Deputy Collector of Internal Revenue demanded the payment of
P13,136.00 representing forest charges due from May 18, 1950 to September 30,
1953, and a surcharge of 25% (Exh. M). On September 13, 1954, after further
investigation another assessment was sent to the defendant corporation by the
Bureau of Internal Revenue demanding from it the total sum of P45,541.66
representing deficiency sales tax, forest charges, surcharges and penalties (Exh.
A). On November 8, 1954 another assessment was addressed to the defendant
corporation for the payment of P456.12 as 25% surcharge for discharging lumber
without permit (Exh. P). The three assessments totalling P59,133.78 are the
subject matter of the instant case for collection.
xxx xxx xxx
The-contention of the defendant that the assessment in question have not yet
become final and executory is not borne out by the record. The Bureau of Internal
Revenue made its first demand for the payment of P13,136.00 as forest charges
and surcharges in the letter dated October 15, 1953 (Exh. M). After further
investigation, a second assessment in the total amount of P45,541.66 was
demanded from the defendant corporation representing sales tax and surcharges,
and is contained in the letter dated September 13, 1954 (Exh. A). The third
assessment for the payment of P456.12 representing 25% surcharge for
discharging lumber without permit was made on November 8, 1954 (Exh. B).
46
The first acknowledgment by the defendant corporation of its receipt of
assessment contained in the letter of September 13, 1954, Exh. A, was the letter
of the defendant corporation under the signature of its counsel, Atty. Pedro L.
Moya dated December 28, 1954, wherein it is requested that said defendant be
furnished with an itemized statement of the said taxes and wherein notice is
served of its intention to question the validity and the legality of the assessments
and to appear before the Conference Staff of the Bureau of Internal Revenue in
connection with the said tax (Exhibit B). In reply to the letter, Exhibit B, the Bureau
of Internal Revenue wrote Atty. Moya a letter dated February 11, 1955 informing
him that before the case may be acted upon by the Conference Staff, it was
necessary that the defendant corporation comply within 10 days from date of said
letter, with the provisions of Dept. Order No. 213 dated November 2, 1954 which
required, among others, that requests for reinvestigation or reexamination of tax
assessments shall be made in writing under oath of the taxpayer concerned,
specifying the ground or grounds relied upon for the revision of the assessment
and accompanied by such documents and other documents relied upon in support
of the request; and that, as a general rule, the revision will be granted only upon
payment of one-half of the total assessments and upon filing of a bond to
guarantee the payment of the balance of the tax (Exhibit C). Acknowledgment of
Exhibit C was made by Atty. Moya in the latter's letter of February 23, 1955
wherein, for the reasons therein stated, he requested exemption from the
requirements contained in the letter Exhibit C (Exhibit D). In Reply to Exhibit D, the
Collector of Internal Revenue wrote Atty. Moya on May 3, 1955 informing him that
his request to exempt his client from the requirements contained in the letter dated
February 11, 1955, cannot be favorably considered and that in order that the
Conference Staff may be directed to hear the case on the merits, the said
requirements must be complied with within five days from receipt of said letter;
otherwise, the "assessment will be considered final" (Exhibit E). A follow-up letter
dated June 4, 1955, was addressed to Atty. Moya after discovering that the
requirements mentioned in the letters dated February 11, 1955 and March 3, 1955
have not been complied with inspite of the considerable length of time that had
already elapsed (Exhibit F). In the last paragraph of the said letter, Exhibit F, the
defendant corporation was warned that unless the aforementioned requirements
are complied with within five (5) days from receipt, the "case will be considered
abandoned and appropriate action will be taken in accordance with law". Again on
November 14, 1955, after discovering that the letters dated February 11, 1955,
March 3, 1955 and June 4, 1955 have remained unheeded by the defendant
corporation, the latter was given another chance of complying with the
requirements mentioned within five days from receipt of said letter otherwise, the
Bureau of Internal Revenue "will be constrained to enforce the immediate
collection of the deficiency percentage tax and forest charges due" (Exhibit G).
On April 27, 1956, the Bureau of Internal Revenue issued "final tax notices" to the
defendant corporation. Although the letters containing the "final tax notices" were
not presented in evidence, the defendants admit having received the same, as
shown by the contents of defendant corporation's letters dated May 10, 1956,
Exhibit H, and August 7, 1956, Exhibit J. In said Exhibit H defendant corporation
again protested the assessment of P45,541.66 and reiterated its request for
specification of the items disputing the assessment in question. It further requests
for a period of 30 days from the receipt of the specifications within which to
consider its tax liability, further reserving its right to contest the legality or validity of
the assessment or any particular items thereof within the said period of 30 days.
Defendant corporation also protested the sending of final notices and requested
that they be countermanded or withheld. Finding no merit in the protests of the
defendant corporation, a warrant of distraint and levy was issued against it by the
Bureau of Internal Revenue on July 3, 1956 (Exhibit O).
On August 3, 1956, defendant corporation again wrote the Collector of Internal
Revenue acknowledging the receipt of the warrant of distraint and levy served
upon it and reiterating its request for a specification of the different items of the
assessment, subject to the right to contest the legality and validity of the same
within 30 days after receipt of said specifications (Exh. J). The record does not
show what action was taken on the request contained in said letter on August 3,
1956. The next communication appearing in the record is that of the Commissioner
of Internal Revenue dated July 30, 1959, addressed to the defendant corporation
demanding on the letter the payment of the assessment of P45,541.66 which has
remained unpaid, and informing the said corporation that if they do not settle said
tax obligation within five days from receipt thereof, the Bureau of Internal Revenue
will be constrained to file an action in Court for the collection thereof without further
notice (Exhibit I). Defendant corporation replied to Exhibit I in a letter dated August
17, 1959 stating that it needed more time to go over the records and vouchers, and
requesting for an extension of 10 days (Exhibit E). In another letter of same date,
the defendant corporation reiterated its exception to the validity and legality of the
assessment against it in the sum of P45,541.66 and its request for a detailed
statement of the transactions involved (Exhibit L). [Record on Appeal pp. 188-189,
190-195.]
According to the Record on Appeal, and as additionally stated also by the trial
court, the original complaint filed on September 5, 1958 prayed for the payment of
only P13,695.96, and it was only in an amended complaint filed on August 26,
1959 and admitted on September 23, 1959 that, for the first time, the amount of
P59,133.78 was judicially demanded to be paid.
Upon these facts, appellants now complain that
47
I
THE LOWER COURT ERRED IN DECLARING THAT THE NOTICES OF THE
COMMISSIONER OF INTERNAL REVENUE DATED APRIL 27, 1956 WERE THE
"ASSESSMENTS" THAT BECAME FINAL AND EXECUTORY.
II
THE LOWER COURT ERRED IN DECLARING THAT THE GOVERNMENT'S
RIGHT TO ASSESS AND COLLECT THE TAXES FOR THE YEARS 1947 TO
SEPTEMBER 23, 1949 HAS NOT PRESCRIBED.
III
THE LOWER COURT LIKEWISE ERRED IN DECLARING THAT THE
GOVERNMENT'S RIGHT TO COLLECT THE SUM OF P45,541.66 HAS NOT
PRESCRIBED.
IV
THE LOWER COURT FURTHER ERRED IN NOT DECLARING THAT SUIT
AGAINST F.H. BURGESS IN HIS CAPACITY AS LIQUIDATOR OF MARSMAN
DEVELOPMENT COMPANY HAS PRESCRIBED AND IN ORDERING HIM TO
PAY THE SUMS CONTAINED IN ITS DECISION.
The Court does not agree.
Anent the first assignment of error, it may be stated that regardless of what might
have been alleged in appellee's pleadings and memoranda, the facts proven by
evidence, which are not alleged to have been objected to as varying supposed
judicial admissions, unmistakably show that when Atty. Pedro L. Moya
acknowledged receipt on December 28, 1954, on behalf of appellant corporation,
of the Bureau of Internal Revenue's assessments of September 13, 1954 and
November 8, 1954, requesting at the same time for a reinvestigation before the
Conference Staff, he was informed that his request for investigation would not be
given due course unless his client priorly complied within ten (10) days from
Februaxy 11, 1955, the date of the letter of the Bureau, with the provisions of
Department Order No. 213, dated November 2, 1954, which required inter alia,
that requests for reinvestigation or reexamination of tax assessments should be
made in writing and under oath of the taxpayer concerned, specifying the ground
or grounds relied upon for the requested revision and accompanied by the
documents relied upon, in support of the request, as well as by the payment of
one-half of the total assessments, plus a bond to guarantee payment of the
balance, but appellants failed to comply with said conditions: that in reply to Atty.
Moya's request for exemption from the Department order, on March 3, 1955 (not
May), the attorney was advised that his request was denied and that if the
corporation failed to comply therewith within five (5) days from receipt of the letter,
"the assessment (would) be considered final"; that on June 4, 1955, said Atty.
Moya was reminded in writing that the previous demands had not been properly
attended to, with the warning that should appellants further fail to comply with the
requirements in the letter of February 11, 1955, within five (5) days from receipt
thereof, the "case (would) be considered abandoned and appropriate action
(would) be taken in accordance with law"; that even as late as November 14, 1955,
the corporation was again advised to comply with the earlier communications of
February 11, 1955, March 3, 1955 and June 4, 1955, within five days, otherwise,
the Bureau of Internal Revenue would "be constrained to enforce immediate
collection of the deficiency percentage tax and forest charges due"; that as nothing
was done by it to comply with this last letter, the Bureau of Internal Revenue
issued, on April 27, 1956, "final tax notices" to it, and all that the latter did after
receipt thereof was to reiterate, by its letters of May 19, 1956 and August 7, 1956,
its request for specification of the items involved in the assessment and for another
period of 30 days within which to consider its tax liabilities, reserving once more its
right to contest the legality or validity of the assessment and to protest the
issuance of the "final tax notices"; that evidently tired of awaiting compliance by the
said appellant, the Bureau of Internal Revenue issued on July 3, 1956 a warrant of
distraint and levy against it, which it acknowledged on August 3, 1956, only to
reiterate again its position previously stated of asking for specification and
reserving its right to contest the validity of the assessment; that, finally, on July 30,
1959, after three years, the Commissioner of Internal Revenue made extrajudicial
demand for payment of the amounts in question within five (5) days, and since no
payment came, and instead, defendants asked for more time to go over the
records and, under separate cover, questioned for the nth time, the validity of the
assessment, the present action was filed.
Under these circumstances, it is plain that His Honor committed no error in holding
that the period to question the tax assessments herein involved had already
expired when the Commissioner of Internal Revenue initiated this suit against
defendants. Defendant corporation aknowledged receipt of the said assessments
way back on December 28, 1954, and, in fact, it requested for a reinvestigation
before the Conference Staff, but when the Bureau demanded compliance with the
prerequisites aforementioned of such reinvestigation, the corporation failed to
comply. The corporation did ask for exemption, but when this request was denied,
again there was no compliance. In view of such non-compliance, in its letter of
March 3, 1955, the Bureau unequivocally warned the corporation that should it fail
further to comply, within five days from receipt thereof, the "assessments (would)
be considered final". still no compliance came. Subsequent follow-up letters
brought no better results.
As it appears, therefore, appellant corporation, by its own omission, made it
impossible for the Bureau of Internal Revenue to act on its motion for
48
reconsideration. Not that it would have otherwise mattered, for it has been held
that the mere filing of such a motion does not suspend the running of the period for
the collection of the tax,1 which implies that any assessment made by the Bureau
is supposed to be final and executory, insofar as the taxpayer is concerned, unless
revised by the Bureau in accordance with law and regulations, but it is to be
emphasized that a taxpayer cannot delay the collection of taxes by the simple
expedient of barely asking for clarification or reconsideration, very often
unnecessary and unwarranted, without doing anything to comply with the statutory
and reglementary requirements for the reconsideration of the assessment made
against him. In any event, since appellant corporation did nothing from December,
1954 when it acknowledged receipt of the assessment now impugned to appeal
the same, if such an appeal was possible, to the Court of Tax Appeals, even after
it was warned by the Bureau of Internal Revenue that its failure to comply with the
requirements for reconsideration within five (5) days would result in its being
"considered" final, We find no merit in appellants' posture that the assessments
here in question has not yet become final and executory. Consequently, overruling
of appellants' first assignment of error is clearly in order.
In their second assignment of error, appellants raise the issue of prescription. They
point out that the Collector of Internal Revenue had only five years within which to
assess the percentage and forest charges herein involved. Since it does not
appear, however, that appellant corporation had filed any return in relation to the
taxes herein involved, and it was incumbent upon appellants to show that such a
return had been submitted,2 We find the following holding of His Honor to be fully
in accordance with law:
Defendants' contention that the right to assess the percentage and forest charges
for the period from 1947 to September 23, 1949 had already prescribed is based
on the provision of Section 231 of the Revenue Code which requires the Collector
of Internal Revenue to assess the tax within the period of five years. The Court
agrees with the plaintiff that said Section 231 is not applicable in this case
inasmuch as defendant corporation did not file returns for the taxes in question.
The pertinent provision applicable herein is Section 332 (a) which provides that "in
case of a false or fraudulent return or of a failure to file a return, the tax may be
assessed ... at anytime within ten years after the discovery of the falsity, fraud or
omission." The assessments made on October 15, 1953, September 13, 1954, and
November 3, 1954 were all within the aforecited 10-year period for the assessment
of the tax.
Even if the Court were to consider, as appellants suggest, the fact brought out in
their brief but not found by the trial court that what are being sought to be collected
are deficiency taxes, thereby implying a return must have been filed, nothing can
he gained by appellants, for in order that the filing of a return may serve as the
starting point of the period for the making of an assessment, the return must be as
substantive complete as to include the needed details on which the full
assessment may be made, and appellants have not shown that such was the
nature of the return they would infer had been filed by the corporation.3
Appellants' third assignment of error does not require any extended discussion.
The argument thereunder that the judicial action for the recovery of the bigger
amount of P45,541.66 was not filed within five (5) years from September 13, 1954,
the date of the earliest assessment, has neither factual nor legal basis. As aptly
explained by his Honor, such argument proceeds from the erroneous premises
that because the amended complaint in which the said amount was first alleged
and demanded was formally admitted by the court only on September 23, 1959
and that the filing of said amended complaint on August 26, 1959 is immaterial.
While in the procedural sense, especially in relation to the possible necessity of
and time for the filing of responsive and other corresponding pleadings, an
amended complaint is deemed filed only as of the date of its admission, nothing in
Breslin v. Luzon, 84 Phil. 625, relied upon by appellant, was intended to modify the
self-evident proposition that for practical reasons and to avoid the complications
that may rise from undue delays in the admission thereof, such an amended
complaint must be considered as filed, for the purposes of such a substantive
matter as prescription, on the date it is actually filed with the court, regardless of
when it is ultimately formally admitted by the court. After all, the only purpose of
requiring leave of and formal admission by the court of an amended pleading after
issues have already been joined as to the original ones is to prevent the injection
of other issues which might either to be considered as barred already or made the
subject of another proceeding, if they are not anyway indispensable for the
resolution of the original ones and no unnecessary multiplicity of suits would result;
so, when the court ultimately admits the amendment, the legal effect, for
substantive purposes, of such admission retroacts as a rule to the date of its actual
filing.
Appellants' last assignment of error was disposed of by the trial court this wise:
The defendants further contend that the present action is already barred under
section 77 of the Corporation Law, Act No. 1459, as amended, which allows the
corporate existence of a corporation to continue only for three years after its
dissolution, for the purpose of presenting or defending suits by or against it, and to
settle and close its affairs. They point out that inasmuch as the Marsman
Development Co. was extra-judicially dissolved on April 23, 1954, a fact admitted
in the amended complaint, the filing of both the original complaint on September 8,
1958 and the amended complaint on August 26, 1956 was beyond the aforesaid
three-year period.
49
The record shows that the filing of the amended complaint was intended, among
others, to include as a party defendant, in an alternative capacity, Mr. F.H.
Burgess, who is the liquidator of the Marsman Development Co. Although it is an
admitted fact that the defendant corporation was extrajudicially dissolved on April
23, 1954, there is no claim that the affairs of said corporation had already been
finally liquidated or settled. Evidently, Mr. F.H. Burgess is still continuing in his
aforesaid capacity as liquidator of the Marsman Development Co. While section 77
of the Corporation Law provides for a three-year period for the continuation of the
corporate existence of the corporation for purposes of liquidation, there is nothing
in said provision which bars an action for the recovery of the debts of the
corporation against the liquidator thereof, after the lapse of the said three-year
period.
We agree with His Honor. The stress given by appellants to the extinction of the
corporate and juridical personality as such of appellant corporation by virtue of its
extra-judicial dissolution which admittedly took place on April 23, 1954 is
misdirected. While Section 77 of the Corporation Law does provide that:
Every corporation whose charter expires by its own limitation or is annulled by
forfeiture or otherwise, or whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be continued as a body
corporate for three years after the time when it would have been so dissolved, for
the purpose of prosecuting and defending suits by or against it and of enabling it
gradually to settle and close its affairs, to dispose of and convey its property and to
divide its capital stock, but not for the purpose of continuing the business for which
it was established.
the next provision, Section 78, adds for clarification:
At any time during said three years said corporation is authorized and empowered
to convey all of its property to trustees for the benefit of members, stock-holders,
creditors, and others interested. From and after any such conveyance by the
corporation of its property in trust for the benefit of its members, stockholders,
creditors, and others in interest, all interest which the corporation had in the
property terminates, the legal interest vests in the trustee, and the beneficial
interest in the members, stockholders, creditors, or other persons in interest.
It is to be recalled that the assessments against appellant corporation for
deficiency taxes due for its operations since 1947 were made by the Bureau of
Internal Revenue on October 15, 1953, September 13, 1954 and November 8,
1954, such that the first was before its dissolution and the last two not later than
six months after such dissolution. Thus, in whatever way the matter may be
viewed, the Government became the creditor of the corporation before the
completion of its dissolution by the liquidation of its assets. Appellant F.H. Burgess,
whom it chose as liquidator, became in law the trustee of all its assets for the
benefit of all persons enumerated in Section 78, including its creditors, among
whom is the Government, for the taxes herein involved. To assume otherwise
would render the extra-judicial dissolution illegal and void, since, according to
Section 62 of the Corporation Law, such kind of dissolution is permitted only when
it "does not affect the rights of any creditor having a claim against the corporation."
It is immaterial that the present action was filed after the expiration of three years
after April 23, 1954, for at the very least, and assuming that judicial enforcement of
taxes may not be initiated after said three years despite the fact that the actual
liquidation has not been terminated and the one in charge thereof is still holding
the assets of the corporation, obviously for the benefit of all the creditors thereof,
the assessment aforementioned, made within the three years, definitely
established the Government as a creditor of the corporation for whom the
liquidator is supposed to hold assets of the corporation. And since the suit at bar is
only for the collection of taxes finally assessed against the corporation within the
three years invoked by appellants, their fourth assignment of error cannot be
sustained. As to the allegation that appellant Burgess has not in fact received any
property or asset of the corporation, that is a matter that can well be taken care of
in the execution of the judgment which may be rendered herein, albeit it seems
some kind of fraud would be perceptible, if the corporation had been dissolved
without leaving any assets whatsoever with the liquidator.

ACCORDINGLY, the judgment of the trial court is affirmed with costs against the
appellants.

50
G.R. No. L-20601 February 28, 1966
BUTUAN SAWMILL, INC., petitioner, vs. HON. COURT OF TAX APPEALS, ET
AL., respondents.
REYES, J.B.L., J.:
Appeal from a decision of the Court of Tax Appeals, in its CTA Case No. 965,
ordering petitioner herein, Butuan Sawmill, Inc., to pay respondent Commissioner
of Internal Revenue the sum of P36,107.74 as deficiency sales tax and surcharge
due on its sales of logs to buyers in Japan from January 31, 1951 to June 8, 1953.
The facts, as found and stated by the lower court in its decision, are in full accord
with the evidences presented therein; hence, we quote them hereunder:
. . . that during the period from January 31, 1951 to June 8, 1953, it sold logs to
Japanese firms at prices FOB Vessel Magallanes, Agusan (in some cases FOB
Vessel, Nasipit, also in Agusan); that the FOB prices included costs of loading,
wharfage stevedoring and other costs in the Philippines; that the quality, quantity
and measurement specifications of the logs were certified by the Bureau of
Forestry; that the freight was paid by the Japanese buyers; and the payments of
the logs were effected by means of irrevocable letters of credit in favor of petitioner
and payable through the Philippine National Bank or any other bank named by it.
Upon investigation by the Bureau of Internal Revenue, it was ascertained that no
sales tax return was filed by the petitioner and neither did it pay the corresponding
tax on the sales. On the basis of agent Antonio Mole's report dated September 17,
1957, respondent, on August 27, 1958, determined against petitioner the sum of
P40,004.01 representing sales tax, surcharge and compromise penalty on its sales
[tax, surcharge and compromise penalty on its sales] of logs from January 1951 to
June 1953 pursuant to Sections 183, 186 and 209 of the National Internal
Revenue Code (Exhibit "E", p. 14, CTA rec. & p. 14, BIR rec.). And in
consequence of a reinvestigation, respondent, on November 6, 1958, amended
the amount of the previous assessment to P38,917.74 (Exh. "F", p. 52, BIR rec.).
Subsequent requests for reconsideration of the amended assessment having been
denied (Exh. "G", p. 55, BIR rec.; Exh. "H", pp. 75-76, BIR rec.: Exh. "I", pp. 79-80,
BIR rec.; Exh. "J", p. 81, BIR rec.), petitioner filed the instant petition for review on
November 7, 1960.
On the bases of the above-quoted findings and circumstances, the lower court
upheld the legality and correctness of the amended assessment of the sales tax
and surcharge, ruling that the sales in question, in the light of our previous
decisions1, were domestic or "local" sales, and, therefore, subject to sales tax
under the provision of section 186 of the Tax Code, as amended by Republic Acts
51
Nos. 558 and 594; and that the assessment thereof was made well within the ten-
year period prescribed by Section 332(a) of the same Code, since petitioner herein
omitted to file its sales tax returns for the years 1951, 1952 and 1953, and this
omission was discovered only on September 17, 1957. The imposition of the
compromise penalty was, however, eliminated therefrom for want of agreement
between the taxpayer and the Collector (now Commissioner) of Internal Revenue.
A motion to reconsider said decision having been denied, petitioner herein
interposed the present appeal before this Court.
The issues presented in this appeal are: whether or not petitioner herein is liable to
pay the 5% sales tax as then prescribed by Section 186 of the Tax Code on its
sales of logs to the Japanese buyers; and whether or not the assessment thereof
was made within the prescriptive period provided by law therefor.1äwphï1.ñët
On the first issue, petitioner herein insists that the circumstances enumerated in
the above finding, which this Court had, in previous decisions (Cf. footnote [1]),
considered as determinative of the place of transfer of ownership of the logs sold,
for purposes of taxation, are not in themselves evidentiary indications to show that
the parties intended the title of the logs to pass to the Japanese buyers in Japan.
Thus, it points out that the "FOB" feature of the sales contract was made only to fix
its price and not to fix the place of delivery; that the requirement of certification of
quality, quantity, and measurement specifications of the logs by local authorities
was done to comply with local laws, rules, and regulations, and was not a part of
the sales arrangement; that the payment of freight by the Japanese buyers is not
an uncommon feature of "FOB" shipments; and that the payment of prices by
means of irrevocable letters of credit is but a common established business
practice to secure payment of the price to the seller. It also insists that, even
assuming that the "FOB" feature of the disputed sales determines the situs of
transfer of ownership, the same is merely a prima facie presumption which yields
to contrary proof such as that the logs were made deliverable to the "order of the
shipper" and the logs were shipped at the risk of the shipper, which circumstances,
if considered, would negate the above implications. Hence, petitioner herein
contends that the disputed sales were consummated in Japan, and, therefore, not
subject to the taxing jurisdiction of our Government.
The above contentions of petitioner are devoid of merit. In a decided case with
practically identical set of facts obtaining in the case at bar, this Court declared:
. . . it is admitted that the agreed price was "F.O.B. Agusan", thus indicating,
although prima facie, that the parties intended the title to pass to the buyer upon
delivery of the logs in Agusan; on board the vessels that took the goods to Japan.
Moreover, said prima facie proof was bolstered up by the following circumstances,
namely:
1. Irrevocable letters of credit were opened by the Japanese buyers in favor of the
petitioners.
2. Payment of freight charges of every shipment by the Japanese buyers.
3. The Japanese buyers chartered the ships that carried the logs they purchased
from the Philippines to Japan.
4. The Japanese buyers insured the shipment of logs and collected the insurance
coverage in case of loss in transit.
5. The petitioner collected the purchase price of every shipment of logs by
surrendering the covering letter of credit, bill of lading, which was indorsed in
blank, tally sheet, invoice and export entry, to the corresponding bank in Manila of
the Japanese agent bank with whom the Japanese buyers opened letters of credit.
6. In case of natural defects in logs shipped to the buyers discovered in Japan,
instead of returning such defective logs, accepted them, but were granted a
corresponding credit based on the contract price.
7. The logs purchased by the Japanese buyers were measured by a
representative of the Director of Forestry and such measurement was final,
thereby making the Government of the Philippines a sort of agent of the Japanese
buyers.
Upon the foregoing facts and authority of Bislig (Bay) Lumber Co., Inc. vs.
Collector of Internal Revenue, G.R. No. L-13186 (January 28, 1961), Misamis
Lumber Co., Inc. vs. Collector of Internal Revenue (56 Off. Gaz. 517) and Western
Mindanao Lumber Development Co., Inc. vs. Court of Tax Appeals, et al. (G.R. No.
L-11710, June 30, 1958), it is clear that said export sales had been consummated
in the Philippines and were, accordingly, subject to sales tax therein." (Taligaman
Lumber Co., Inc. vs. Collector of Internal Revenue, G.R. No. L-15716, March 31,
1962).
With respect to petitioner's contention that there are proofs to rebut the prima facie
finding and circumstances that the disputed sales were consummated here in the
Philippines, we find that the allegation is not borne out by the law or the evidence.
That the specification in the bill of lading to the effect that the goods are deliverable
to the order of the seller or his agent does not necessarily negate the passing of
title to the goods upon delivery to the carrier is clear from the second part of
paragraph 2 of Article 1503 of the Civil Code of the Philippines (which appellant's
counsel improperly omits from his citation):
52
Where goods are shipped, and by the bill of lading the goods are deliverable to the
seller or his agent, or to the order of the seller or of his agent, the seller thereby
reserves the ownership in the goods. But, if except for the form of the bill of lading,
the ownership would have passed to the buyer on shipment of the goods, the
sellers's property in the goods shall be deemed to be only for the purpose of
securing performance by the buyer of his obligations under the contract.
Moreover, it has been "a settled rule that in petitions to review decisions of the
Court of Tax Appeals, only questions of law may be raised and may be passed
upon by this Court" (Gutierrez vs. Court of Tax Appeals & Collector of Internal
Revenue vs. Gutierrez, G.R. Nos. L-7938 & L-9771, May 21, 1957, cited in
Sanchez vs. Commissioner of Customs, G.R. No. L-8556, September 30, 1957);
and it having been found that there is no proof to substantiate the foregoing
contention of petitioner, the same should also be ruled as devoid of merit.
On the second issue, petitioner avers that the filing of its income tax returns,
wherein the proceeds of the disputed sales were declared, is substantial
compliance with the requirement of filing a sales tax return, and, if there should be
deemed a return filed, Section 331, and not Section 332(a), of the Tax Code
providing for a five-year prescriptive period within which to make an assessment
and collection of the tax in question from the time the return was deemed filed,
should be applied to the case at bar. Since petitioner filed its income tax returns for
the years 1951, 1952 and 1953, and the assessment was made in 1957 only, it
further contends that the assessment of the sales tax corresponding to the years
1951 and 1952 has already prescribed for having been made outside the five-year
period prescribed in Section 331 of the Tax Code and should, therefore, be
deducted from the assessment of the deficiency sales tax made by respondent.
The above contention has already been raised and rejected as not meritorious in a
previous case decided by this Court. Thus, we held that an income tax return
cannot be considered as a return for compensating tax for purposes of computing
the period of prescription under Section 331 of the Tax Code, and that the
taxpayer must file a return for the particular tax required by law in order to avail
himself of the benefits of Section 331 of the Tax Code; otherwise, if he does not
file a return, an assessment may be made within the time stated in Section 332(a)
of the same Code (Bisaya Land Transportation Co., Inc. vs. Collector of Internal
Revenue & Collector of Internal Revenue vs. Bisaya Land Transportation Co., Inc.,
G.R. Nos. L-12100 & L-11812, May 29, 1959). The principle enunciated in this last
cited case is applicable by analogy to the case at bar.
It being undisputed that petitioner failed to file a return for the disputed sales
corresponding to the years 1951, 1952 and 1953, and this omission was
discovered only on September 17, 1957, and that under Section 332(a) of the Tax
Code assessment thereof may be made within ten (10) years from and after the
discovery of the omission to file the return, it is evident that the lower court
correctly held that the assessment and collection of the sales tax in question has
not yet prescribed.

Wherefore, the decision appealed from should be, as it is hereby affirmed, with
costs against petitioner.

53
G.R. No. L-29485 November 21, 1980
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AYALA
SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, respondents.
TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's motion for
reconsideration of the Court's decision of April 8, 1976 wherein the Court affirmed
in toto the appealed decision of respondent Court of Tax Appeals, the dispositive
portion of which provides as follows:
WHEREFORE, the decision of the respondent Commissioner of Internal Revenue
assessing petitioner the amount of P758,687.04 as 25% surtax and interest is
reversed. Accordingly, said assessment of respondent for 1955 is hereby
cancelled and declared of no force and effect, Without pronouncement as to costs.
This Court's decision under reconsideration held that the assessment made on
February 21, 1961 by petitioner against respondent corporation (and received by
the latter on March 22, 1961) in the sum of P758,687.04 on its surplus of
P2,758,442.37 for its fiscal year ending September 30, 1955 fell under the five-
year prescriptive period provided in section 331 of the National Internal Revenue
Code and that the assessment had, therefore, been made after the expiration of
the said five-year prescriptive period and was of no binding force and effect .
Petitioner has urged that
A perusal of Sections 331 and 332(a) will reveal that they refer to a tax, the basis
of which is required by law to be reported in a return such as for example, income
tax or sales tax. However, the surtax imposed by Section 25 of the Tax Code is not
one such tax. Accumulated surplus are never returned for tax purposes, as there is
no law requiring that such surplus be reported in a return for purposes of the 25%
surtax. In fact, taxpayers resort to all means and devices to cover up the fact that
they have unreasonably accumulated surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file returns of their accumulated surplus, it
is obvious that neither Section 33 nor Section 332(a) of the Tax Code applies in a
case involving the 25% surtax imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United
Equipment & Supply Company vs. Commissioner of Internal Revenue (CTA Case
54
No. 1795, October 30, 1971) which was appealed by petitioner taxpayer to this
Court in G. R. No. L-35653 bearing the same title, which appeal was denied by this
Court en banc for lack of merit as per its Resolution of October 25, 1972, In said
case, the tax court squarely ruled that the provisions of sections 331 and 332 of
the National Internal Revenue Code for prescriptive periods of five 5 and ten (10)
years after the filing of the return do not apply to the tax on the taxpayer's
unreasonably accumulated surplus under section 25 of the Tax Code since no
return is required to be filed by law or by regulation on such unduly ac cumulated
surplus on earnings, reasoning as follows:
In resisting the assessment amounting to P10,864.26 as accumulated earnings tax
for 1957, petitioner also invoked the defense of prescription against the right of
respondent to assess the said tax. It is contended that since its income tax return
for 1957 was filed in 1958, and with the clarification by respondent in his letter
dated May 14, 1963, that the amount sought to be collected was petitioner's surtax
liability under Section 25 rather than deficiency corporate income tax under
Section 24 of the National Internal Revenue Code, the assessment has already
prescribed under Section 331 of the same Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and collection. — Except as
provided in the succeeding section, internal revenue taxes shall be assessed
within five years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of
such period. For the purpose of this section a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last
day; Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National Internal Revenue Taxes
which requires the filing of returns. A return, the filing of which is necessary to start
the running of tile five-year period for making an assessment, must be one which is
required for the particular tax. Consequently, it has been held that the filing of an
income tax return does not start the running of the statute of limitation for
assessment of the sales tax. (Butuan Sawmill, Inc. v. Court of Tax Appeals, G.R.
No. L-20601, Feb. 28, 1966, 16 SCRA 277).
Although petitioner filed an income tax return, no return was filed covering its
surplus profits which were improperly accumulated. In fact, no return could have
been filed, and the law could not possibly require, for obvious reasons, the filing of
a return covering unreasonable accumulation of corporate surplus profits. A tax
imposed upon unreasonable accumulation of surplus is in the nature of a penalty.
(Helvering v. National Grocery Co., 304 U.S. 282). It would not be proper for the
law to compel a corporation to report improper accumulation of surplus.
Accordingly, Section 331 limiting the right to assess internal revenue taxes within
five years from the date the return was filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment and collection of
taxes.— (a) In the case of a false or fraudulent return with intent to evade tax or of
failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud, or omission.
(b) Where before the expiration of the time prescribed in the preceding section for
the assessment of the tax, both the Commissioner of Internal Revenue and the
taxpayer have consented in writing to its assessment after such time, the tax may
be assessed at any time prior to the expiration of the period agreed upon. The
period so agreed upon may be extended by subsequent agreements in writing
made before the expiration of the period previously agreed upon.
(c) Where the assessment of any internal revenue tax has been made within the
period of limitation above-prescribed such tax may be collected by distraint or levy
by a proceeding in court, but only if begun (1) within five years after the
assessment of the tax, or (2) prior to the expiration of any period for collection
agreed upon in writing by the Commissioner of Internal Revenue and the taxpayer
before the expiration of such five-year period. The period so agreed upon may be
extended by subsequent agreements in writing made before the expiration of the
period previously agreed upon.
It will be noted that Section 332 has reference to national internal revenue taxes
which require the filing of returns. This is implied, from the provision that the ten-
year period for assessment specified therein treats of the filing of a false or
fraudulent return or of a failure to file a return. There can be no failure or omission
to file a return where no return is required to be filed by law or by regulation. It is,
therefore, our opinion that the ten-year period for making in assessment under
Section 332 does not apply to internal revenue taxes which do not require the filing
of a return.
It is well settled limitations upon the right of the government to assess and collect
taxes will not be presumed in the absence of clear legislation to the contrary. The
existence of a time limit beyond which the government may recover unpaid taxes
is purely dependent upon some express statutory provision, (51 Am. Jur. 867; 10
Mertens Law of Federal Income Taxation, par. 57. 02.). It follows that in the
55
absence of express statutory provision, the right of the government to assess
unpaid taxes is imprescriptible. Since there is no express statutory provision
limiting the right of the Commissioner of Internal Revenue to assess the tax on
unreasonable accumulation of surplus provided in Section 25 of the Revenue
Code, said tax may be assessed at any time. (Emphasis supplied)
Such ruling was in effect upheld by this Court en banc upon its dismissal of the
taxpayer's appeal for lack of merit as above stated.
The Court is persuaded by the fundamental principle invoked by petitioner that
limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary and that where the
government has not by express statutory provision provided a limitation upon its
right to assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under reconsideration
that the right to assess and collect the assessment in question had prescribed after
five years, and instead rules that there is no such time limit on the right of the
Commissioner of Internal Revenue to assess the 25% tax on unreasonably
accumulated surplus provided in section 25 of the Tax Code, since there is no
express statutory provision limiting such right or providing for its prescription. The
underlying purpose of the additional tax in question on a corporation's improperly
accumulated profits or surplus is as set forth in the text of section 25 of the Tax
Code itself 1 to avoid the situation where a corporation unduly retains its surplus
instead of declaring and paving dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by them.
The record amply shows that respondent corporation is a mere holding company
of its shareholders through its mother company, a registered co-partnership then
set up by the individual shareholders belonging to the same family and that the
prima facie evidence and presumption set up by the Tax Code, therefore applied
without having been adequately rebutted by the respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before
the court as follows:
Atty. Garces
The investigation, Your Honor, shows that for the year 1955, the Ayala Securities
Corporation had 175,000 outstanding shares of stock and out of these shares of
Ayala Securities Corporation, the Ayala and Company owned 174,996 shares of
stock.
Q. Is that right, Mr. Cabral?
Atty. Ong
Objection, Your Honor, on the materiality of the question. A. Yes, sir; they were.
Q. And also are the employees of the Ayala Securities corporation and the Ayala
Judge Alvarez and Company the same - meaning that the employees of the Ayala Securities
What is the materiality of the question? Corporation are also the employees of the Ayala and Company?
A. At the time, if I remember right, Ayala and Company was the operating
Atty. Garces company and the employees were the employees of the Ayala and Company;
We want to prove to this honorable Court that Ayala Securities Corporation is a (t.s.n., pp. 32-37).
holding or investment company, the parent company being Ayala and Company.
Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal
Judge Alvarez Department of the corporation, also testified that:
Witness may answer.
Judge Alvarez questions
A. I think so; yes.
Q. May we know from you whether Ayala Securities corporation is an affiliate of
Q. And Ayala and Company's owned almost wholly by the Zobel Family and the Ayala and Company?
Ayala Family? A. Yes, Your honor.
Q. Do we understand from you that Ayala and Company is the mother corporation
Atty. Ong of this affiliate?
If Your Honor please, objection again on the materiality. What would counsel for A. That is correct.
the respondent prove on this point? Q. And that the policy of Ayala Securities Corporation is practically governed by
the officers or partners of Ayala and company
Atty. Garces A. They have a strong influence over the policy of Ayala Securities Corporation.
Same purpose, Your If Honor to prove that Ayala Securities corporation is a mere Q. So that whatever is decided by the partners of Ayala and Company for a certain
investment or holding company investment or project would also be followed by Ayala Securities Corporation?

Atty. Ong
What is the materiality of the case if it is a mere investment company. In fact, we
are here in court to prove the reasonableness or unreasonableness of the
accumulation of profit. I think counsel for the respondent is trying to harp on
presumption; but actually we will not be delving on presumption but on actual facts
proving the reasonableness of the accumulation based on actual evidence.
A. If the project is assigned to Ayala Securities Corporation it will be followed by
Ayala Securities Corporation; if to another affiliate, no (t.s.n., pp. 149-150). ...
Respondent corporation was therefore fully shown to fall under Revenue
Regulation No. 2 implementing the provisions of the income tax law which provides
on holding and investment companies that

Judge Alvarez
In order to determine the reasonableness or unreasonableness, there must be a
basis. witness will have to answer the question.
A. Yes.
xxx xxx xxx
Q. As of September 30, 1955 when the Ayala Securities Corporation tiled its
income tax return, were the officers of the Ayala Securities Corporation and the
Ayala and Company housed in the same building?
SEC. 20. Holding and Investment Companies. — A corporation having practically
no activities except holding property, and collecting the income therefrom or
investing therein, shall be considered a holding company within the meaning of
section 25.
Petitioner commissioner's plausible alternative contention is that even if the 25%
surtax were to be deemed subject to prescription, computed from the filing of the
income tax return in 1955, the intent to evade payment of the surtax is an inherent
quality of the violation and the return filed must necessarily partake of a false
and/or fraudulent character which would make applicable the 10-year prescriptive
period provided in section 332(a) of the Tax Code and since the assessment was

56
made in 1961 (the sixth year), the assessment was clearly within the 10-year
prescriptive period. The Court sees no necessity, however, for ruling on this point
in view of its adherence to the ruling in the earlier raise of United Equipment &
Supply Co., supra, holding that the 25% surtax is not subject to any statutory
prescriptive period.

ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu
thereof, judgment is hereby rendered ordering respondent corporation to pay the
assessment in the sum of P758,687.04 as 25% surtax on its unreasonably
accumulated surplus, plus the 5% surcharge and 1% monthly interest thereon,
pursuant to section 51 (e) of the National Internal Revenue Code, as amended by
R. A. 2343. With Costs.

57
G.R. No. L-20569 August 23, 1974
JOSE B. AZNAR, in his capacity as Administrator of the Estate of the
deceased, Matias H. Aznar, petitioner, vs. COURT OF TAX APPEALS and
COLLECTOR OF INTERNAL REVENUE, respondents.
ESGUERRA, J.:p
Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks
a review and nullification of the decision of the Court of Tax Appeals in C.T.A.
Case No. 109, modifying the decision of respondent Commissioner of Internal
Revenue and ordering the petitioner to pay the government the sum of
P227,691.77 representing deficiency income taxes for the years 1946 to 1951,
inclusive, with the condition that if the said amount is not paid within thirty days
from the date the decision becomes final, there shall be added to the unpaid
amount the surcharge of 5%, plus interest at the rate of 12% per annum from the
date of delinquency to the date of payment, in accordance with Section 51 of the
National Internal Revenue Code, plus costs against the petitioner.
It is established that the late Matias H. Aznar who died on May 18, 1958,
predecessor in interest of herein petitioner, during his lifetime as a resident of
Cebu City, filed his income tax returns on the cash and disbursement basis,
reporting therein the following:
Year Net Income Amount of Tax Paid Exhibit
1945 P12,822.00 P114.66 pp. 85-88
B.I.R. rec.
1951 6,800.0 none 43 (pp. 54-57
0 BIR rec.).
The Commissioner of Internal Revenue having his doubts on the veracity of the
reported income of one obviously wealthy, pursuant to the authority granted him by
Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner
Honorio Guerrero to ascertain the taxpayer's true income for said years by using
the net worth and expenditures method of tax investigation. The assets and
liabilities of the taxpayer during the above-mentioned years were ascertained and
it was discovered that from 1946 to 1951, his net worth had increased every year,
which increases in net worth was very much more than the income reported during
said years. The findings clearly indicated that the taxpayer did not declare correctly
the income reported in his income tax returns for the aforesaid years.
Based on the above findings of Examiner Guerrero, respondent Commissioner, in
his letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the
assessed tax delinquency to the amount of P723,032.66, plus compromise
penalty. The taxpayer requested a reinvestigation which was granted for the
purpose of verifying the merits of the various objections of the taxpayer to the
deficiency income tax assessment of November 28, 1952.
After the reinvestigation, another deficiency assessment to the reduced amount of
P381,096.07 dated February 16, 1955, superseded the previous assessment and
notice thereof was received by Matias H. Aznar on March 2, 1955.
The new deficiency assessment was based on the following computations:

1946 9,910.94 114.66 38-A (pp. 329- 1946

332 B.I.R rec.) Net income per return ........................ P9,910.94
Add: Under declared income .............. 22,559.94
Net income per investigation............... 32,470.45
1947 10,200.00 132.00 39 (pp. 75-78
B.I.R rec.) Deduct: Income tax liability
per return as assessed .................................................... 114.66
1948 9,148.34 68.90 40 (pp. 70-73 Balance of tax due ........................................................... P3,687.10
B.I.R. rec.) Add: 50% surcharge ........................................................ 1,843.55
DEFICIENCY INCOME TAX ...................................... P5,530.65
1949 8,990.66 59.72 41 (pp. 64-67
B.I.R. rec.) 1947
Net income per return ..................................................... P10,200.00
1950 8,364.50 28.22 42 (pp. 59-62, Add: Under declared income ............................................ 90,413.56
BIR rec.) Net income per reinvestigation ....................................... P100,613.56
Deduct: Personal and additional exemption ...................... 7,000.00

58
Amount of income subject to tax ...................................... P93,613.56 1951
Total tax liability ............................................................... P24,753.15 Net income per return ........................................................ P6,800.00
Deduct: Income tax liability per return as assessed ............ 132.00 Add: Under declared income ............................................... 33,355.80
Balance of tax due ........................................................... P24,621.15 Net income per reinvestigation ............................................ P40,155.80
Add: 50% surcharge ........................................................ 12,310.58 Deduct: Personal and additional exemptions ........................ 7,200.00
DEFICIENCY INCOME TAX ...................................... P36,931.73 Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
1948 Deduct: Income tax liability per return as assessed ............... -o-.
Net income per return ...................................................... P9,148.34 Balance of tax due .............................................................. P7,684.00
Add: Under declared income ............................................. 15,624.63 Add: 50% surcharge ........................................................... 3,842.00
Net income per reinvestigation .......................................... P24,772.97 DEFICIENCY INCOME TAX .......................................... P11,526.00
Deduct: Personal and additional exemptions ...................... 7,000.00
Amount of income subject to tax ....................................... P17,772.97 SUMMARY
Total tax liability ............................................................... 2,201.40 1946
.... P5,530.65
Deduct: Income tax liability per return as assessed ............ 68.90
Balance of tax due ........................................................... P2,132.500 1947 .... 36,931.73
Add: 50% surcharge ........................................................ 1,066.25
DEFICIENCY INCOME TAX ...................................... P3,198.75 1948 .... 3,198.75

1949 1949 .... 45,125.94

Net income per return ....................................................... P9,990.66
Add: Under declared income ............................................. 105,418.53 1950 .... 278,783.00
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00 1951 .... 11,526.00
Amount of income subject to tax ....................................... P107,409.19
Total .... P381,096.07
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96 In determining the unreported income, the respondent Commissioner of Internal
Add: 50% surcharge ......................................................... 15,041.98 Revenue resorted to the networth method which is based on the following
DEFICIENCY INCOME TAX ....................................... P45,125.94 computations:

1950 1945
Net income per return ....................................................... P8,364.50 Real estate inventory ................................ P64,738.00
Add: Under declared income ............................................. 365,578.76 Other assets ............................................. 37,606.87
Net income per reinvestigation .......................................... P373,943.26 Total assets ............................................ P102,344.87
Deduct: Personal and additional exemptions ...................... 7,800.00 Less: Depreciation allowed ...................... 2,027.00
Amount of income subject to tax ....................................... P366,143.26 Networth as of Dec. 31, 1945 ................ P100,316.97
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00 1946
Balance of tax due ............................................................ P185,855.00 Real estate inventory ................................. P86,944.18
Add: 50% surcharge ......................................................... 92,928.00 Other assets ............................................. 60,801.65
DEFICIENCY INCOME TAX ....................................... P278,783.00 Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41

59
Net assets ................................................ P142,870.42 Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Less: Liabilities .................. P17,000.00 Increase in networth .................................. P107,409.19
Net Worth as of Add: Estimated living expenses .................. 7,000.00
Jan. 1, 1946 ................... P100,316.97 P117,316.97 Net income ............................................... P114,409.19
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00 1950
Net income .............................................. P32,470.45 Real estate inventory .................................. P412,465.52
Investment in Schools and
1947 other colleges ................................ 193,460.99
Real estate inventory .................................. P237,824.18 October assets .......................................... 310,788.87
Other assets ............................................... 54,495.52 Total assets ............................................... P916,715.38
Total assets ............................................... P292,319.70 Less; Depreciation allowed ........................ 47,561.99
Less: Depreciation allowed ......................... 12,835.72 Net assets ................................................. P869,153.39
Net assets .................................................. 279,483.98 Less: Liabilities .................. P158,343.99
Less: Liabilities ................... P60,000.00 Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Networth as of Increase in networth ................................... P366,143.26
Jan. 1, 1947 ........................ 125,870.42 P185,870.42 Add: Estimated living expenses ................... 7,800.00
Increase in networth ................................... P93,613.56 Net income ................................................. P373,943.26
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P100,613.56 1951
Real estate inventory ................................... P412,465.52
1948 Investment in schools and other colleges ..... 214,016.21
Real estate inventory .................................. P244,824.18 Other assets ............................................... 320,209.40
Other assets .............................................. 118,720.60 Total assets ................................................ P946,691.13
Total assets ............................................... P363,544.78 Less: Depreciation allowed ......................... 62,466.90
Less: Depreciation allowed ........................ 20,936.03 Net assets .................................................. P884,224.23
Net assets ................................................. P342,608.75 Less: Liabilities ........................................... P140,459.03
Less: Liabilities ................... P105,351.80 Networth as of
Networth as of Jan. 1, 1951 ................ 710,809.40 P851,268.43
Jan. 1, 1948 ...................... 219,483.98 P324,835.78 Increase in networth .................................... P32,955.80
Increase in networth ................................... P17,772.97 Add: Estimated living expenses .................... 7,200.00
Add: Estimated living expenses ................... 7,000.00 Net income ................................................. P40,155.80
Net income ................................................ P24,772.97
(Exh. 45-B, BIR rec. p. 188)
1949
Real estate inventory ................................. P400,515.52 On February 20, 1953, respondent Commissioner of Internal Revenue, thru the
Investment in schools and other colleges .... 23,105.29 City Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint
Other assets ............................................. 70,311.00 and levy to secure payment of the deficiency income tax in question. Matias H.
Total assets ............................................... P493,931.81 Aznar filed his petition for review of the case with the Court of Tax Appeals on April
Less: Depreciation allowed ........................ 32,657.08 1, 1955, with a subsequent petition immediately thereafter to restrain respondent
Net assets ................................................. P461.274.73 from collecting the deficiency tax by summary method, the latter petition being
Less; Liabilities .................. P116,608.59 granted on February 8, 1956, per C.T.A. resolution, without requiring petitioner to
Networth as of file a bond. Upon review, this Court set aside the C.T.A. resolution and required

60
the petitioner to deposit with the Court of Tax Appeals the amount demanded by
the Commissioner of Internal Revenue for the years 1949 to 1951 or furnish a
surety bond for not more than double the amount.
On March 5, 1962, in a decision signed by the presiding judge and the two
associate judges of the Court of Tax Appeals, the lower court concluded that the
tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should
be P227,788.64 minus P96.87 representing the tax credit for 1945, or
P227,691.77, computed as follows:
1946
Net income per return .............................................. P9,910.94
Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65
1947
Net income per return ............................................ P10,200.00
Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57
1948
Net income per return .............................................. P9,148.34
Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
61
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15
1949
Net income per return ................................................. P8,990.66
Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27
1950
Net income per return .................................................. P6,800.00
Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00
1951
Net income per return ................................................... P8,364.50
Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00
SUMMARY
1946 P5,530.65
1947 19,932.57
1948 1,441.15
1949 13,378.27
1950 175,980.00
1951 11,526.00
P227,788.64.
I That there is a difference between "false return" and "fraudulent return" cannot be
The first vital issue to be decided here is whether or not the right of the
Commissioner of Internal Revenue to assess deficiency income taxes of the late
Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the
time the assessment was made on November 28, 1952.
Petitioner's contention is that the provision of law applicable to this case is the
period of five years limitation upon assessment and collection from the filing of the
returns provided for in See. 331 of the National Internal Revenue Code. He argues
that since the 1946 income tax return could be presumed filed before March 1,
1947 and the notice of final and last assessment was received by the taxpayer on
March 2, 1955, a period of about 8 years had elapsed and the five year period
provided by law (Sec. 331 of the National Internal Revenue Code) had already
expired. The same argument is advanced on the taxpayer's return for 1947, which
was filed on March 1, 1948, and the return for 1948, which was filed on February
28, 1949. Respondents, on the other hand, are of the firm belief that regarding the
prescriptive period for assessment of tax returns, Section 332 of the National
Internal Revenue Code should apply because, as in this case, "(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 years after the discovery of the
falsity, fraud or omission" (Sec. 332 (a) of the NIRC).
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to evade tax, while respondent
Commissioner of Internal Revenue insists contrariwise, with respondent Court of
Tax Appeals concluding that the very "substantial under declarations of income for
six consecutive years eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment of tax."
To our minds we can dispense with these controversial arguments on facts,
although we do not deny that the findings of facts by the Court of Tax Appeals,
supported as they are by very substantial evidence, carry great weight, by
resorting to a proper interpretation of Section 332 of the NIRC. We believe that the
proper and reasonable interpretation of said provision should be that in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3)
failure to file a return, the tax may be assessed, or a proceeding in court for the
62
collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that
the law should be interpreted to mean a separation of the three different situations
of false return, fraudulent return with intent to evade tax, and failure to file a return
is strengthened immeasurably by the last portion of the provision which segregates
the situations into three different classes, namely "falsity", "fraud" and "omission".
denied. While the first merely implies deviation from the truth, whether intentional
or not, the second implies intentional or deceitful entry with intent to evade the
taxes due.
The ordinary period of prescription of 5 years within which to assess tax liabilities
under Sec. 331 of the NIRC should be applicable to normal circumstances, but
whenever the government is placed at a disadvantage so as to prevent its lawful
agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of ten
years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the
falsity, fraud or omission even seems to be inadequate and should be the one
enforced.
There being undoubtedly false tax returns in this case, We affirm the conclusion of
the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess petitioner's tax liability had
not expired at the time said assessment was made.
II
As to the alleged errors committed by the Court of Tax Appeals in not deducting
from the alleged undeclared income of the taxpayer for 1946 the proceeds from
the sale of jewelries valued at P30,000; in not excluding from other schedules of
assets of the taxpayer (a) accounts receivable from customers in the amount of
P38,000 for 1948, P126,816.50 for 1950, and provisions for doubtful accounts in
the amount of P41,810.56 for 1950; (b) over valuation of hospital and dental
buildings for 1949 in the amount of P32,000 and P6,191.32 respectively; (c)
investment in hollow block business in the amount of P8,603.22 for 1949; (d) over
valuation of surplus goods in the amount of P23,000 for the year 1949; (e) various
lands and buildings included in the schedule of assets for the years 1950 and 1951
in the total amount of P243,717.42 for 1950 and P62,564.00 for 1951, these issues
would depend for their resolution on determination of questions of facts based on
an evaluation of evidence, and the general rule is that the findings of fact of the
Court of Tax Appeals supported by substantial evidence should not be disturbed
upon review of its decision (Section 2, Rule 44, Rules of Court).
On the question of the alleged sale of P30,000 worth of jewelries in 1946, which
amount petitioner contends should be deducted from the taxpayer's net worth as of
December 31, 1946, the record shows that Matias H. Aznar, when interviewed by
B.I.R. Examiner Guerrero, stated that at the beginning of 1945 he had P60,000
worth of jewelries inherited from his ancestors and were disposed off as follows:
1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000;
(Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).
During the hearing of this case in the Court of Tax Appeals, petitioner's accountant
testified that on January 1, 1945, Matias H. Aznar had jewelries worth P60,000
which were acquired by purchase during the Japanese occupation (World War II)
and sold on various occasions, as follows: 1945, P5,000 and 1946, P30,000. To
corroborate the testimony of the accountant, Mrs. Ramona Agustines testified that
she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a pair of
earrings for P30,000; and in 1947 a wrist watch with diamonds, together with
antique jewelries, for P15,000. Matias H. Aznar, on the other hand testified that in
1945, his wife sold to Sards Parino jewelries for P5,000 and question, Mr. Aznar
stated that his transaction with Sards Parino, with respect to the sale of jewelries,
amounted to P15,000.
The lower court did not err in finding material inconsistencies in the testimonies of
Matias H. Aznar and his witnesses with respect to the values of the jewelries
allegedly disposed off as stated by the witnesses. Thus, Mr. Aznar stated to the
B.I.R. examiner that jewelries worth P10,000 were sold in 1945, while his own
accountant testified that the same jewelries were sold for only P5,000. Mr. Aznar
also testified that Mrs. Agustines purchased from his wife jewelries for P35,000,
and yet Mrs. Agustines herself testified that she bought jewelries for P30,000 and
P15,000 on two occasions, or a total of P45,000.
We do not see any plausible reason to challenge the fundamentally sound basis
advanced by the Court of Tax Appeals in considering the inconsistencies of the
witnesses' testimony as material, in the following words:
We do not say that witnesses testifying on the same transaction should give
identical testimonies. Because of the frailties and the limitations of the human
mind, witnesses' statements are apt to be inconsistent in certain points, but usually
the inconsistencies refer to the minor phases of the transaction. It is the
insignificance of the detail of an occurrence that fails to impress the human mind.
When that same mind, made to recall what actually happened, the significant point
which it failed to take note is naturally left out. But it is otherwise as regards
significant matters, for they leave indelible imprints upon the human mind. Hence,
testimonial inconsistencies on the minor details of an occurrence are dismissed
lightly by the courts, while discrepancies on significant points are taken seriously
and weigh adversely to the party affected thereby.
63
There is no sound basis for deviating from the lower court's conclusion that:
"Taxwise in view of the aforesaid inconsistencies, which we deem material and
significant, we dismiss as without factual basis petitioner's allegation that jewelries
form part of his inventory of assets for the purpose of establishing his net worth at
the beginning of 1946."
As to the accounts receivable from the United States government for the amount of
P38,254.90, representing a claim for goods commandered by the U.S. Army during
World War II, and which amount petitioner claimed should be included in his net
worth as of January 1, 1946, the Court of Tax Appeals correctly concluded that the
uncontradicted evidence showed that "the collectible accounts of Mr. Aznar from
the U.S. Government in the sum of P38,254.90 should be added to his assets
(under accounts receivable) as of January 1, 1946. As of December 31, 1947, and
December 31, 1948, the years within which the accounts were paid to him, the
'accounts receivable shall decrease by P31,362.37 and P6,892.53, respectively."
Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which
was listed as an asset during the years 1945 and 1947 to 1951, but which was not
listed as an asset in 1946 because of a notation in the tax declaration that it was
reconstructed in 1947, the lower court correctly concluded that the reconstruction
of the property did not render it valueless during the time it was being
reconstructed and consequently it should be listed as an asset as of January 1,
1946, with the same valuation as in 1945, that is P1,500.
On the question of accounts receivable from customers in the amount of P38,000
for 1948, and P123,816.58 for the years 1950 and 1951, which were included in
the assets of Mr. Aznar for those years by the respondent Commissioner of
Internal Revenue, it is very clear that those figures were taken from the statements
(Exhs. 31 and 32) filed by Mr. Matias H. Aznar with the Philippine National Bank
when he was intending to obtain a loan. These statements were under oath and
the natural implication is that the information therein reflected must be the true and
accurate financial condition of the one who executed those statements. To believe
the petitioner's argument that the late Mr. Aznar included those figures in his sworn
statement only for the purpose of obtaining a bigger credit from the bank is to cast
suspicion on the character of a man who can no longer defend himself. It would be
as if pointing the finger of accusation on the late Mr. Aznar that he intentionally
falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were
non-existent accounts receivable just to increase his assets by fictitious entries so
that his credit with the Philippine National Bank could be enhanced. Besides, We
do not lose sight of the fact that those statements (Exhs. 31 and 32) were
executed before this tax controversy arose and the disputable presumptions that a
person is innocent of crime or wrong; that a person intends the ordinary
consequences of his voluntary act; that a person takes ordinary care of his
concerns; that private transaction have been fair and regular; that the ordinary
course of business has been followed; that things have happened according to the
ordinary course of nature and the ordinary habits of life; that the law has been
obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131 of the Rules of Court),
together with the conclusive presumption that "whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe a
particular thing true, and to act upon such belief, he cannot, in any litigation arising
out of such declaration, act or omission, be permitted to falsify it" (Sec. 3 (a), Rule
131, Rules of Court), convincingly indicate that the accounts receivable stated by
Mr. Aznar in Exhibits 31 and 32 were true, in existence, and accurate to the very
amounts mentioned.
There is no merit to petitioners argument that those statements were only for the
purpose of obtaining a bigger credit from the bank (impliedly stating that those
statements were false) and those accounts were allegedly back accounts of
students of the Southwestern Colleges and were worthless, and if collected, would
go to the funds of the school. The statement of the late Mr. Aznar that they were
accounts receivable from customers should prevail over the mere allegation of
petitioner, unsupported as they are by convincing evidence. There is no reason to
disturb the lower court's conclusion that the amounts of P38,000 and P123,816.58
were accounts receivable from customers and as such must be included as
petitioner's assets for the years indicated.
As to the questions of doubtful accounts (bad debts), for the amount of
P41,810.56, it is clear that said amount is taken from Exhibit 31, the sworn
statement of financial condition filed by Mr. Matias H. Aznar with the Philippine
National Bank. The lower court did not commit any error in again giving much
weight to the statement of Mr. Aznar and in concluding that inasmuch as this is an
item separate and apart from the taxpayer's accounts receivable and non-
deductible expense, it should be reverted to the accounts receivable and,
consequently, considered as an asset in 1950.
On the alleged over valuation of two buildings (hospital building which respondent
Commissioner of Internal Revenue listed as an asset from 1949-1951 at the basic
valuation of P130,000, and which petitioner claims to be over valued by P32,000;
dentistry building valued by respondent Commissioner of Internal Revenue at
P36,191.34, which petitioner claims to be over valued by P6,191.34), We find no
sufficient reason to alter the conclusion of respondent Court of Tax Appeals
sustaining the respondent Commissioner of Internal Revenue's valuation of both
properties.
Respondent Commissioner of Internal Revenue based his valuation of the hospital
building on the representation of Mr. Matias H. Aznar himself who, in his letter
(Exh. 35) to the Philippine National Bank dated September 5, 1949, stated that the
64
hospital building cost him P132,000. However in view of the effect of a typhoon in
1949 upon the building, the value allowed was P130,000. Exhibit 35, contrary to
petitioner's contention, should be given probative value because, although it is an
unsigned plain copy, that exhibit was taken by the investigating examiner of the
B.I.R. from the files of the Southwestern Colleges and formed part of his report of
investigation as a public official. The estimates of an architect and a civil engineer
who agreed that a value of P84,240 is fair for the hospital building, made years
after the building was constructed, cannot prevail over the petitioner's own
estimate of his property's value.
Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the
Dentistry Building is based on the letter of Mr. and Mrs. Matias H. Aznar to the
Southwestern Colleges, dated December 15, 1950, which is embodied in the
minutes of the meeting of the Board of Trustees of the Southwestern Colleges held
on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash book of the
Southwestern Colleges, this building was listed as of the same amount.
Petitioner's estimate of P30,000 for this building, based on Architect Paca's
opinion, cannot stand against the owner's estimate and that which appears in the
cash book of the Southwestern Colleges, if we take into consideration that the
owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding
was initiated, while architect Paca's estimate was made upon petitioner's request
solely for the purpose of evidence in this tax case.
In the inventory of assets of petitioner, respondent Commissioner of Internal
Revenue included the administrative building valued at P19,200 for the years 1947
and 1948, and P16,700 for the years 1949 to 1951; and a high school building
valued at P48,000 for 1947 and 1948, and P45,000 for 1949, 1950 and 1951. The
reduced valuation for the latter years are due to allowance for partial loss resulting
from the 1949 typhoon. Petitioner did not question the inclusion of these buildings
in the inventory for the years prior to 1950, but objected to their inclusion as assets
as of January 1, 1950, because both buildings were destroyed by a typhoon in
November of 1949. There is sufficient evidence (Exh. G-1, affidavit of Jesus S.
Intan, employee in the office of City Assessor of Cebu City, Exh. 18, Mr. Intan's
testimony, a copy of a letter of the City Assessor of Cebu City) to prove that the
two buildings were really destroyed by typhoon in 1949 and, therefore, should be
eliminated from the petitioner's inventory of assets beginning December 31, 1949.
On the issue of investment in the hollow blocks business, We see no compelling
reason to alter the lower court's conclusion that "whatever was spent in the hollow
blocks business is an investment, and being an investment, the same should be
treated as an asset. With respect to the amount representing the value of the
building, there is no duplication in the listing as the inventory of real property does
not include the building in question."

Respondent Commissioner of Internal Revenue included in the inventory, under
the heading of other asset, the amount of P8,663.22, treated as investment in the
hollow block business. Petitioner objects to the inclusion of P1,683.42 which was
spent on the building and in the business and of P674.35 which was spent for
labor, fuel, raw materials, office supplies etc., contending that the former amount is
a duplication of inventory (included among the list of properties) and the latter is a
business expense which should be eliminated from the list of assets.
The inclusion of expenses (labor and raw materials) as part of the hollow block
business is sanctioned in the inventory method of tax verification. It is a sound
accounting practice to include raw materials that will be used for future
manufacture. Inclusion of direct labor is also proper, as all these items are to be
embodied in a summary of assets (investment by the taxpayer credited to his
capital account as reflected in Exhibit 72-A, which is a working sheet with entries
taken from the journal of the petitioner concerning his hollow blocks business).
There is no evidence to show that there was duplication in the inclusion of the
building used for hollow blocks business as part of petitioner's investment as this
building was not included in the listing of real properties of petitioner (Exh. 45-C p.
187 B.I.R. rec.).
As to the question of the real value of the surplus goods purchased by Mr. Matias
H. Aznar from the U.S. Army, the best evidence, as observed correctly by the
lower court, is the statement of Mr. Matias H. Aznar, himself, as appearing Exh. 35
(copy of a letter dated September 5, 1949 to the Philippine National Bank), to the
effect "as part of my assets I have different merchandise from Warehouse 35,
Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than P20,000
at present market value." Petitioner's claim that the goods should be valued at only
P20,000 in accordance with an alleged invoice is not supported by evidence since
the invoice was not presented as exhibit. The lower court's act in giving more
credence to the statement of Mr. Aznar cannot be questioned in the light of clear
indications that it was never controverted and it was given at a time long before the
tax controversy arose.
The last issue on propriety of inclusion in petitioner's assets made by respondent
Commissioner of Internal Revenue concerns several buildings which were
included in the list of petitioner's assets as of December 31, 1950. Petitioner
contends that those buildings were conveyed and ceded to Southwestern Colleges
on December 15, 1950, in consideration of P100,723.99 to be paid in cash. The
value of the different buildings are listed as: hospital building, P130,000;
gymnasium, P43,000; dentistry building, P36,191.34; bodega 1, P781.18; bodega
2, P7,250; college of law, P10,950; laboratory building, P8,164; home economics,
P5,621; morgue, P2,400; science building, P23,600; faculty house, P5,760. It is
65
suggested that the value of the buildings be eliminated from the real estate
inventory and the sum of P100,723.99 be included as asset as of December 31,
1950.
The lower court could not find any evidence of said alleged transfer of ownership
from the taxpayer to the Southwestern Colleges as of December 15, 1950, an
allegation which if true could easily be proven. What is evident is that those
buildings were used by the Southwestern Colleges. It is true that Exhibit G-1
shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for
shares of stocks of the Southwestern Colleges, and Exhibit "G" which is the
minutes of the meeting of the Board of Trustees of the Southwestern Colleges held
on August 6, 1951, shows that Mr. Aznar was amenable to the value fixed by the
board of trustees and that he requested to be paid in cash instead of shares of
stock. But those are not sufficient evidence to prove that transfer of ownership
actually happened on December 15, 1950. Hence, the lower court did not commit
any error in sustaining the respondent Commissioner of Internal Revenue's act of
including those buildings as part of the assets of petitioner as of December 31,
1950.
Petitioner also contends that properties allegedly ceded to the Southwestern
Colleges in 1951 for P150,000 worth of shares of stocks, consisting of: land,
P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses
home, P4,100; nurses home, P2,080, should be excluded from the inventory of
assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows
that said properties were formally conveyed to the Southwestern Colleges only on
September 25, 1952. Undoubtedly, petitioner was the owner of those properties
prior to September 25, 1952 and said properties should form part of his assets as
of December 31, 1951.
The uncontested portions of the lower court's decision consisting of its conclusions
that library books valued at P7,041.03, appearing in a journal of the Southwestern
Colleges marked as' Exhibit 25-A, being an investment, should be treated as an
asset beginning December 31, 1950; that the expenses for construction to the
amount of P113,353.70, which were spent for the improvement of the buildings
appearing in Exhibit 24 are deemed absorbed in the increased value of the
buildings as appraised by respondent Commissioner of Internal Revenue at cost
after improvements were made, and should be taken out as additional assets; that
the amount receivable of P5,776 from a certain Benito Chan should be treated as
petitioner's asset but the amount of P5,776 representing the value of a house and
lot given as collateral to secure said loan should not be considered as an asset of
petitioner since to do so would result in a glaring duplication of items, are all
affirmed. There seems to be no controversy as to the rest of the items listed in the
inventory of assets.

III
The second issue which appears to be of vital importance in this case centers on
the lower court's imposition of the fraud penalty (surcharge of 50% authorized in
Section 72 of the Tax Code). The petitioner insists that there might have been
false returns by mistake filed by Mr. Matias H. Aznar as those returns were
prepared by his accountant employees, but there were no proven fraudulent
returns with intent to evade taxes that would justify the imposition of the 50%
surcharge authorized by law as fraud penalty.
The lower court based its conclusion that the 50% fraud penalty must be imposed
on the following reasoning: .
It appears that Matias H. Aznar declared net income of P9,910.94, P10,200,
P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948,
1949, 1950 and 1951, respectively. Using the net worth method of determining the
net income of a taxpayer, we find that he had net incomes of P32,470.45,
P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the
respective years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he
underdeclared his income by 227% for 1946, 564% for 1947, 95%, for 1948, 486%
for 1949, 2,946% for 1950 and 490% for 1951. These substantial under
declarations of income for six consecutive years eloquently demonstrate the falsity
or fraudulence of the income tax return with an intent to evade the payment of tax.
Hence, the imposition of the fraud penalty is proper (Perez vs. Court of Tax
Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)
As could be readily seen from the above rationalization of the lower court, no
distinction has been made between false returns (due to mistake, carelessness or
ignorance) and fraudulent returns (with intent to evade taxes). The lower court
based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on
the substantial difference between the amounts of net income on the face of the
returns as filed by him in the years 1946 to 1951 and the net income as
determined by the inventory method utilized by both respondents for the same
years. The lower court based its conclusion on a presumption that fraud can be
deduced from the very substantial disparity of incomes as reported and determined
by the inventory method and on the similarity of consecutive disparities for six
years. Such a basis for determining the existence of fraud (intent to evade
payment of tax) suffers from an inherent flaw when applied to this case. It is very
apparent here that the respondent Commissioner of Internal Revenue, when the
inventory method was resorted to in the first assessment, concluded that the
correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh. 1, B.I.R. rec. pp.
126-129). After a reinvestigation the same respondent, in another assessment
dated February 16, 1955, concluded that the tax liability should be reduced to
66
P381,096.07. This is a crystal-clear, indication that even the respondent
Commissioner of Internal Revenue with the use of the inventory method can
commit a glaring mistake in the assessment of petitioner's tax liability. When the
respondent Court of Tax Appeals reviewed this case on appeal, it concluded that
petitioner's tax liability should be only P227,788.64. The lower court in three
instances (elimination of two buildings in the list of petitioner's assets beginning
December 31, 1949, because they were destroyed by fire; elimination of expenses
for construction in petitioner's assets as duplication of increased value in buildings,
and elimination of value of house and lot in petitioner's assets because said
property was only given as collateral) supported petitioner's stand on the wrong
inclusions in his lists of assets made by the respondent Commissioner of Internal
Revenue, resulting in the very substantial reduction of petitioner's tax liability by
the lower court. The foregoing shows that it was not only Mr. Matias H. Aznar who
committed mistakes in his report of his income but also the respondent
Commissioner of Internal Revenue who committed mistakes in his use of the
inventory method to determine the petitioner's tax liability. The mistakes committed
by the Commissioner of Internal Revenue which also involve very substantial
amounts were also repeated yearly, and yet we cannot presume therefrom the
existence of any taint of official fraud.
From the above exposition of facts, we cannot but emphatically reiterate the well
established doctrine that fraud cannot be presumed but must be proven. As a
corollary thereto, we can also state that fraudulent intent could not be deduced
from mistakes however frequent they may be, especially if such mistakes emanate
from erroneous entries or erroneous classification of items in accounting methods
utilized for determination of tax liabilities The predecessor of the petitioner
undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax
returns were prepared for him by his accountant and employees. It also appears
that petitioner in his lifetime and during the investigation of his tax liabilities
cooperated readily with the B.I.R. and there is no indication in the record of any act
of bad faith committed by him.
The lower court's conclusion regarding the existence of fraudulent intent to evade
payment of taxes was based merely on a presumption and not on evidence
establishing a willful filing of false and fraudulent returns so as to warrant the
imposition of the fraud penalty. The fraud contemplated by law is actual and not
constructive. It must be intentional fraud, consisting of deception willfully and
deliberately done or resorted to in order to induce another to give up some legal
right. Negligence, whether slight or gross, is not equivalent to the fraud with intent
to evade the tax contemplated by the law. It must amount to intentional wrong-
doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making
entries in the returns and in the assessment, respectively, under the inventory
method of determining tax liability, it would be unfair to treat the mistakes of the
petitioner as tainted with fraud and those of the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72
of the Tax Code should not be imposed, but eliminated from the income tax
deficiency for each year from 1946 to 1951, inclusive. The tax liability of the
petitioner for each year should, therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10

The total sum of P151,859.10 should be decreased by P96.87 representing the tax
credit for 1945, thereby leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as

the imposition of the 50% fraud penalty is concerned, and affirmed in all other
respects. The petitioner is ordered to pay to the Commissioner of Internal
Revenue, or his duly authorized representative, the sum of P151,762.23,
representing deficiency income taxes for the years 1946 to 1951, inclusive, within
30 days from the date this decision becomes final. If the said amount is not paid
within said period, there shall be added to the unpaid amount the surcharge of 5%,
plus interest at the rate of 12% per annum from the date of delinquency to the date
of payment, in accordance with Section 51 of the National Internal Revenue Code.

With costs against the petitioner.

67
G.R. No. 162852 December 16, 2004
PHILIPPINE JOURNALISTS, INC., petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review filed by Philippine Journalists, Incorporated (PJI)
assailing the Decision1 of the Court of Appeals dated August 5, 2003,2 which
ordered petitioner to pay the assessed tax liability of P111,291,214.46 and the
Resolution3 dated March 31, 2004 which denied the Motion for Reconsideration.
The case arose from the Annual Income Tax Return filed by petitioner for the
calendar year ended December 31, 1994 which presented a net income of
P30,877,387.00 and the tax due of P10,807,086.00. After deducting tax credits for
the year, petitioner paid the amount of P10,247,384.00.
On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal
Revenue (BIR) issued Letter of Authority No. 871204 for Revenue Officer Federico
de Vera, Jr. and Group Supervisor Vivencio Gapasin to examine petitioner’s books
of account and other accounting records for internal revenue taxes for the period
January 1, 1994 to December 31, 1994.
From the examination, the petitioner was told that there were deficiency taxes,
inclusive of surcharges, interest and compromise penalty in the following amounts:
Value Added Tax P 229,527.90
Income Tax 125,002,892.95
Withholding Tax 2,748,012.35
Total P 127,980,433.20
In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion
invited petitioner to send a representative to an informal conference on September
15, 1997 for an opportunity to object and present documentary evidence relative to
the proposed assessment. On September 22, 1997, petitioner’s Comptroller,
Lorenza Tolentino, executed a "Waiver of the Statute of Limitation Under the
National Internal Revenue Code (NIRC)".5 The document "waive[d] the running of
the prescriptive period provided by Sections 223 and 224 and other relevant
provisions of the NIRC and consent[ed] to the assessment and collection of taxes
which may be found due after the examination at any time after the lapse of the
68
period of limitations fixed by said Sections 223 and 224 and other relevant
provisions of the NIRC, until the completion of the investigation".6
On July 2, 1998, Revenue Officer De Vera submitted his audit report
recommending the issuance of an assessment and finding that petitioner had
deficiency taxes in the total amount of P136,952,408.97. On October 5, 1998, the
Assessment Division of the BIR issued Pre-Assessment Notices which informed
petitioner of the results of the investigation. Thus, BIR Revenue Region No. 6,
Assessment Division/Billing Section, issued Assessment/Demand No. 33-1-
000757-947 on December 9, 1998 stating the following deficiency taxes, inclusive
of interest and compromise penalty:
Income Tax P108,743,694.88
Value Added Tax 184,299.20
Expanded Withholding Tax 2,363,220.38
Total P111,291,214.46
On March 16, 1999, a Preliminary Collection Letter was sent by Deputy
Commissioner Romeo S. Panganiban to the petitioner to pay the assessment
within ten (10) days from receipt of the letter. On November 10, 1999, a Final
Notice Before Seizure8 was issued by the same deputy commissioner giving the
petitioner ten (10) days from receipt to pay. Petitioner received a copy of the final
notice on November 24, 1999. By letters dated November 26, 1999, petitioner
asked to be clarified how the tax liability of P111,291,214.46 was reached and
requested an extension of thirty (30) days from receipt of the clarification within
which to reply.
The BIR received a follow-up letter from the petitioner asserting that its (PJI)
records do not show receipt of Tax Assessment/Demand No. 33-1-000757-94.10
Petitioner also contested that the assessment had no factual and legal basis. On
March 28, 2000, a Warrant of Distraint and/or Levy No. 33-06-04611 signed by
Deputy Commissioner Romeo Panganiban for the BIR was received by the
petitioner.
Petitioner filed a Petition for Review12 with the Court of Tax Appeals (CTA) which
was amended on May 12, 2000. Petitioner complains: (a) that no assessment or
demand was received from the BIR; (b) that the warrant of distraint and/or levy
was without factual and legal bases as its issuance was premature; (c) that the
assessment, having been made beyond the 3-year prescriptive period, is null and
void; (d) that the issuance of the warrant without being given the opportunity to
dispute the same violates its right to due process; and (e) that the grave prejudice
that will be sustained if the warrant is enforced is enough basis for the issuance of
the writ of preliminary injunction.
On May 14, 2002, the CTA rendered its decision,13 to wit:
As to whether or not the assessment notices were received by the petitioner, this
Court rules in the affirmative.
To disprove petitioner’s allegation of non-receipt of the aforesaid assessment
notices, respondent presented a certification issued by the Post Master of the
Central Post Office, Manila to the effect that Registered Letter No. 76134 sent by
the BIR, Region No. 6, Manila on December 15, 1998 addressed to Phil.
Journalists, Inc. at Journal Bldg., Railroad St., Manila was duly delivered to and
received by a certain Alfonso Sanchez, Jr. (Authorized Representative) on January
8, 1999. Respondent also showed proof that in claiming Registered Letter No.
76134, Mr. Sanchez presented three identification cards, one of which is his
company ID with herein petitioner.
… year 1994 are hereby declared CANCELLED, WITHDRAWN and WITH NO
However, as to whether or not the Waiver of the Statute of Limitations is valid and
binding on the petitioner is another question. Since the subject assessments were
issued beyond the three-year prescriptive period, it becomes imperative on our
part to rule first on the validity of the waiver allegedly executed on September 22,
1997, for if this court finds the same to be ineffective, then the assessments must
necessarily fail.
… denied by the CTA in a Resolution dated August 2, 2002, an appeal was filed with
After carefully examining the questioned Waiver of the Statute of Limitations, this
Court considers the same to be without any binding effect on the petitioner for the
following reasons:
The waiver is an unlimited waiver. It does not contain a definite expiration date.
Under RMO No. 20-90, the phrase indicating the expiry date of the period agreed
upon to assess/collect the tax after the regular three-year period of prescription
should be filled up…
… period are not appealable. Thus, the CTA should not have entertained the petition
Secondly, the waiver failed to state the date of acceptance by the Bureau which
under the aforequoted RMO should likewise be indicated…
… following reasons: (1) it does not indicate a definite expiration date; (2) it does not
Finally, petitioner was not furnished a copy of the waiver. It is to be noted that
under RMO No. 20-90, the waiver must be executed in three (3) copies, the
69
second copy of which is for the taxpayer. It is likewise required that the fact of
receipt by the taxpayer of his/her file copy be indicated in the original copy. Again,
respondent failed to comply.
It bears stressing that RMO No. 20-90 is directed to all concerned internal revenue
officers. The said RMO even provides that the procedures found therein should be
strictly followed, under pain of being administratively dealt with should non-
compliance result to prescription of the right to assess/collect…
Thus, finding the waiver executed by the petitioner on September 22, 1997 to be
suffering from legal infirmities, rendering the same invalid and ineffective, the Court
finds Assessment/Demand No. 33-1-000757-94 issued on December 5, 1998 to be
time-barred. Consequently, the Warrant of Distraint and/or Levy issued pursuant
thereto is considered null and void.
WHEREFORE, in view of all the foregoing, the instant Petition for Review is
hereby GRANTED. Accordingly, the deficiency income, value-added and
expanded withholding tax assessments issued by the respondent against the
petitioner on December 9, 1998, in the total amount of P111,291,214.46 for the
FORCE AND EFFECT. Likewise, Warrant of Distraint and/or Levy No. 33-06-046
is hereby declared NULL and VOID.
SO ORDERED.
After the motion for reconsideration of the Commissioner of Internal Revenue was
the Court of Appeals on August 12, 2002.
In its decision dated August 5, 2003, the Court of Appeals disagreed with the ruling
of the CTA, to wit:
… The petition for review filed on 26 April 2000 with CTA was neither timely filed
nor the proper remedy. Only decisions of the BIR, denying the request for
reconsideration or reinvestigation may be appealed to the CTA. Mere assessment
notices which have become final after the lapse of the thirty (30)-day reglementary
at all.
…
… [T]he CTA found the waiver executed by Phil. Journalists to be invalid for the
state the date of acceptance by the BIR; and (3) Phil. Journalist, the taxpayer, was
not furnished a copy of the waiver. These grounds are merely formal in nature. The
date of acceptance by the BIR does not categorically appear in the document but it
states at the bottom page that the BIR "accepted and agreed to:"…, followed by
the signature of the BIR’s authorized representative. Although the date of
acceptance was not stated, the document was dated 22 September 1997. This
date could reasonably be understood as the same date of acceptance by the BIR
since a different date was not otherwise indicated. As to the allegation that Phil.
Journalists was not furnished a copy of the waiver, this requirement appears
ridiculous. Phil. Journalists, through its comptroller, Lorenza Tolentino, signed the
waiver. Why would it need a copy of the document it knowingly executed when the
reason why copies are furnished to a party is to notify it of the existence of a
document, event or proceeding? …
As regards the need for a definite expiration date, this is the biggest flaw of the
decision. The period of prescription for the assessment of taxes may be extended
provided that the extension be made in writing and that it be made prior to the
expiration of the period of prescription. These are the requirements for a valid
extension of the prescriptive period. To these requirements provided by law, the
memorandum order adds that the length of the extension be specified by indicating
its expiration date. This requirement could be reasonably construed from the rule
on extension of the prescriptive period. But this requirement does not apply in the
instant case because what we have here is not an extension of the prescriptive
period but a waiver thereof. These are two (2) very different things. What Phil.
Journalists executed was a renunciation of its right to invoke the defense of
prescription. This is a valid waiver. When one waives the prescriptive period, it is
no longer necessary to indicate the length of the extension of the prescriptive
period since the person waiving may no longer use this defense.
WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision of the
CTA are hereby SET ASIDE. Respondent Phil. Journalists is ordered [to] pay its
assessed tax liability of P111,291,214.46.
SO ORDERED.
Petitioner’s Motion for Reconsideration was denied in a Resolution dated March
31, 2004. Hence, this appeal on the following assignment of errors:
I.
The Honorable Court of Appeals committed grave error in ruling that it is outside
the jurisdiction of the Court of Tax Appeals to entertain the Petition for Review filed
by the herein Petitioner at the CTA despite the fact that such case inevitably rests
upon the validity of the issuance by the BIR of warrants of distraint and levy
contrary to the provisions of Section 7(1) of Republic Act No. 1125.
70
II.
The Honorable Court of Appeals gravely erred when it ruled that failure to comply
with the provisions of Revenue Memorandum Order (RMO) No. 20-90 is merely a
formal defect that does not invalidate the waiver of the statute of limitations without
stating the legal justification for such conclusion. Such ruling totally disregarded
the mandatory requirements of Section 222(b) of the Tax Code and its
implementing regulation, RMO No. 20-90 which are substantive in nature. The
RMO provides that violation thereof subjects the erring officer to administrative
sanction. This directive shows that the RMO is not merely cover forms.
III.
The Honorable Court of Appeals gravely erred when it ruled that the assessment
notices became final and unappealable. The assessment issued is void and legally
non-existent because the BIR has no power to issue an assessment beyond the
three-year prescriptive period where there is no valid and binding waiver of the
statute of limitation.
IV.
The Honorable Court of Appeals gravely erred when it held that the assessment in
question has became final and executory due to the failure of the Petitioner to
protest the same. Respondent had no power to issue an assessment beyond the
three year period under the mandatory provisions of Section 203 of the NIRC.
Such assessment should be held void and non-existent, otherwise, Section 203,
an expression of a public policy, would be rendered useless and nugatory.
Besides, such right to assess cannot be validly granted after three years since it
would arise from a violation of the mandatory provisions of Section 203 and would
go against the vested right of the Petitioner to claim prescription of assessment.
V.
The Honorable Court of Appeals committed grave error when it HELD valid a
defective waiver by considering the latter a waiver of the right to invoke the
defense of prescription rather than an extension of the three year period of
prescription (to make an assessment) as provided under Section 222 in relation to
Section 203 of the Tax Code, an interpretation that is contrary to law, existing
jurisprudence and outside of the purpose and intent for which they were
enacted.16
We find merit in the appeal.
The first assigned error relates to the jurisdiction of the CTA over the issues in this
case. The Court of Appeals ruled that only decisions of the BIR denying a request
for reconsideration or reinvestigation may be appealed to the CTA. Since the
petitioner did not file a request for reinvestigation or reconsideration within thirty
(30) days, the assessment notices became final and unappealable. The petitioner
now argue that the case was brought to the CTA because the warrant of distraint
or levy was illegally issued and that no assessment was issued because it was
based on an invalid waiver of the statutes of limitations.
We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating
the Court of Tax Appeals, provides for the jurisdiction of that special court:
SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided –
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other laws or part of law administered by the Bureau of Internal
Revenue; (Emphasis supplied).
The appellate jurisdiction of the CTA is not limited to cases which involve decisions
of the Commissioner of Internal Revenue on matters relating to assessments or
refunds. The second part of the provision covers other cases that arise out of the
NIRC or related laws administered by the Bureau of Internal Revenue. The
wording of the provision is clear and simple. It gives the CTA the jurisdiction to
determine if the warrant of distraint and levy issued by the BIR is valid and to rule if
the Waiver of Statute of Limitations was validly effected.
This is not the first case where the CTA validly ruled on issues that did not relate
directly to a disputed assessment or a claim for refund. In Pantoja v. David,17 we
upheld the jurisdiction of the CTA to act on a petition to invalidate and annul the
distraint orders of the Commissioner of Internal Revenue. Also, in Commissioner of
Internal Revenue v. Court of Appeals,18 the decision of the CTA declaring several
waivers executed by the taxpayer as null and void, thus invalidating the
assessments issued by the BIR, was upheld by this Court.
The second and fifth assigned errors both focus on Revenue Memorandum
Circular No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the
statute of limitations. The Court of Appeals held that the requirements and
procedures laid down in the RMO are only formal in nature and did not invalidate
the waiver that was signed even if the requirements were not strictly observed.
The NIRC, under Sections 203 and 222,19 provides for a statute of limitations on
the assessment and collection of internal revenue taxes in order to safeguard the
interest of the taxpayer against unreasonable investigation.20 Unreasonable
investigation contemplates cases where the period for assessment extends
71
indefinitely because this deprives the taxpayer of the assurance that it will no
longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time. As was held in Republic of the Phils. v. Ablaza:21
The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because
tax officers would be obliged to act promptly in the making of assessment, and to
citizens because after the lapse of the period of prescription citizens would have a
feeling of security against unscrupulous tax agents who will always find an excuse
to inspect the books of taxpayers, not to determine the latter’s real liability, but to
take advantage of every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense taxpayers would furthermore be under obligation to
always keep their books and keep them open for inspection subject to harassment
by unscrupulous tax agents. The law on prescription being a remedial measure
should be interpreted in a way conducive to bringing about the beneficent purpose
of affording protection to the taxpayer within the contemplation of the Commission
which recommend the approval of the law. (Emphasis supplied)
RMO No. 20-90 implements these provisions of the NIRC relating to the period of
prescription for the assessment and collection of taxes. A cursory reading of the
Order supports petitioner’s argument that the RMO must be strictly followed, thus:
In the execution of said waiver, the following procedures should be followed:
1. The waiver must be in the form identified hereof. This form may be reproduced
by the Office concerned but there should be no deviation from such form. The
phrase "but not after __________ 19___" should be filled up…
2. …
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue or the revenue official authorized by him, as hereinafter provided, shall
sign the waiver indicating that the Bureau has accepted and agreed to the waiver.
The date of such acceptance by the Bureau should be indicated…
3. The following revenue officials are authorized to sign the waiver.
A. In the National Office
…
3. Commissioner
For tax cases involving more than P1M
B. In the Regional Offices
1. The Revenue District Officer with respect to tax cases still pending investigation
and the period to assess is about to prescribe regardless of amount.
…
5. The foregoing procedures shall be strictly followed. Any revenue official found
not to have complied with this Order resulting in prescription of the right to
assess/collect shall be administratively dealt with. (Emphasis supplied)22
A waiver of the statute of limitations under the NIRC, to a certain extent, is a
derogation of the taxpayers’ right to security against prolonged and unscrupulous
investigations and must therefore be carefully and strictly construed.23 The waiver
of the statute of limitations is not a waiver of the right to invoke the defense of
prescription as erroneously held by the Court of Appeals. It is an agreement
between the taxpayer and the BIR that the period to issue an assessment and
collect the taxes due is extended to a date certain. The waiver does not mean that
the taxpayer relinquishes the right to invoke prescription unequivocally particularly
where the language of the document is equivocal. For the purpose of safeguarding
taxpayers from any unreasonable examination, investigation or assessment, our
tax law provides a statute of limitations in the collection of taxes. Thus, the law on
prescription, being a remedial measure, should be liberally construed in order to
afford such protection. As a corollary, the exceptions to the law on prescription
should perforce be strictly construed.24 RMO No. 20-90 explains the rationale of a
waiver:
... The phrase "but not after _________ 19___" should be filled up. This indicates
the expiry date of the period agreed upon to assess/collect the tax after the regular
three-year period of prescription. The period agreed upon shall constitute the time
within which to effect the assessment/collection of the tax in addition to the
ordinary prescriptive period. (Emphasis supplied)
As found by the CTA, the Waiver of Statute of Limitations, signed by petitioner’s
comptroller on September 22, 1997 is not valid and binding because it does not
conform with the provisions of RMO No. 20-90. It did not specify a definite agreed
date between the BIR and petitioner, within which the former may assess and
collect revenue taxes. Thus, petitioner’s waiver became unlimited in time, violating
Section 222(b) of the NIRC.
The waiver is also defective from the government side because it was signed only
by a revenue district officer, not the Commissioner, as mandated by the NIRC and
RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but
is a bilateral agreement between two parties to extend the period to a date certain.
The conformity of the BIR must be made by either the Commissioner or the
Revenue District Officer. This case involves taxes amounting to more than One
72
Million Pesos (P1,000,000.00) and executed almost seven months before the
expiration of the three-year prescription period. For this, RMO No. 20-90 requires
the Commissioner of Internal Revenue to sign for the BIR.
The case of Commissioner of Internal Revenue v. Court of Appeals,25 dealt with
waivers that were not signed by the Commissioner but were argued to have been
given implied consent by the BIR. We invalidated the subject waivers and ruled:
Petitioner’s submission is inaccurate…
…
The Court of Appeals itself also passed upon the validity of the waivers executed
by Carnation, observing thus:
We cannot go along with the petitioner’s theory. Section 319 of the Tax Code
earlier quoted is clear and explicit that the waiver of the five-year26 prescriptive
period must be in writing and signed by both the BIR Commissioner and the
taxpayer.
Here, the three waivers signed by Carnation do not bear the written consent of the
BIR Commissioner as required by law.
We agree with the CTA in holding "these ‘waivers’ to be invalid and without any
binding effect on petitioner (Carnation) for the reason that there was no consent by
the respondent (Commissioner of Internal Revenue)."
…
For sure, no such written agreement concerning the said three waivers exists
between the petitioner and private respondent Carnation.
…
What is more, the waivers in question reveal that they are in no wise unequivocal,
and therefore necessitates for its binding effect the concurrence of the
Commissioner of Internal Revenue…. On this basis neither implied consent can be
presumed nor can it be contended that the waiver required under Sec. 319 of the
Tax Code is one which is unilateral nor can it be said that concurrence to such an
agreement is a mere formality because it is the very signatures of both the
Commissioner of Internal Revenue and the taxpayer which give birth to such a
valid agreement.27 (Emphasis supplied)
The other defect noted in this case is the date of acceptance which makes it
difficult to fix with certainty if the waiver was actually agreed before the expiration
of the three-year prescriptive period. The Court of Appeals held that the date of the
execution of the waiver on September 22, 1997 could reasonably be understood
as the same date of acceptance by the BIR. Petitioner points out however that
Revenue District Officer Sarmiento could not have accepted the waiver yet
because she was not the Revenue District Officer of RDO No. 33 on such date.
Ms. Sarmiento’s transfer and assignment to RDO No. 33 was only signed by the
BIR Commissioner on January 16, 1998 as shown by the Revenue Travel
Assignment Order No. 14-98.28 The Court of Tax Appeals noted in its decision
that it is unlikely as well that Ms. Sarmiento made the acceptance on January 16,
1998 because "Revenue Officials normally have to conduct first an inventory of
their pending papers and property responsibilities."29

Finally, the records show that petitioner was not furnished a copy of the waiver.
Under RMO No. 20-90, the waiver must be executed in three copies with the
second copy for the taxpayer. The Court of Appeals did not think this was
important because the petitioner need not have a copy of the document it
knowingly executed. It stated that the reason copies are furnished is for a party to
be notified of the existence of a document, event or proceeding.

The flaw in the appellate court’s reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
between the taxpayer and the BIR. When the petitioner’s comptroller signed the
waiver on September 22, 1997, it was not yet complete and final because the BIR
had not assented. There is compliance with the provision of RMO No. 20-90 only
after the taxpayer received a copy of the waiver accepted by the BIR. The
requirement to furnish the taxpayer with a copy of the waiver is not only to give
notice of the existence of the document but of the acceptance by the BIR and the
perfection of the agreement.

The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run until April 17,
1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued on
December 9, 1998 was invalid because it was issued beyond the three (3) year
period. In the same manner, Warrant of Distraint and/or Levy No. 33-06-046 which
petitioner received on March 28, 2000 is also null and void for having been issued
pursuant to an invalid assessment.

WHEREFORE, premises considered, the instant petition for review is GRANTED.

The Decision of the Court of Appeals dated August 5, 2003 and its Resolution
dated March 31, 2004 are REVERSED and SET ASIDE. The Decision of the Court
of Tax Appeals in CTA Case No. 6108 dated May 14, 2002, declaring Warrant of
Distraint and/or Levy No. 33-06-046 null and void, is REINSTATED.

SO ORDERED.

73
G.R. No. 212825, December 07, 2015 Third September 30, January Revenue
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. NEXT MOBILE, INC. January 18, 2005
Waiver 2005 12,2005 District Officer
(FORMERLY NEXTEL COMMUNICATIONS PHILS., INC.), Respondent.
Fourth September 30, Revenue
None May 3, 2005
DECISION Waiver 2005 District Officer
Fifth March 17, Revenue
VELASCO JR., J.: October 31, 2005 May 3, 2005
Waiver 2005 District Officer
This is a Petition for Review under Rule 45 of the Rules of Court seeking to On September 26, 2005, respondent received from the BIR a Preliminary
reverse and set aside the Decision of the Court of Tax Appeals En Banc affirming Assessment Notice dated September 16, 2005 to which it filed a Reply.
the earlier decision of its First Division in CTA Case No. 7965, cancelling and
withdrawing petitioner's formal letter of demand and assessment notices to On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and
respondent for having been issued beyond the prescriptive period provided by law. Assessment Notices/Demand No. 43-734 both dated October 17, 2005 from the
BIR, demanding payment of deficiency income tax, final withholding tax (FWT),
The Facts expanded withholding tax (EWT), increments for late remittance of taxes withheld,
and compromise penalty for failure to file returns/late filing/late remittance of taxes
On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR) its withheld, in the total amount of P313,339,610.42 for the taxable year ending
Annual Income Tax Return (ITR) for taxable year ending December 31, 2001. December 31, 2001.
Respondent also filed its Monthly Remittance Returns of Final Income Taxes
Withheld (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded On November 23, 2005, respondent filed its protest against the FLD and requested
Withholding Tax (BIR Form No. 1501-E) and its Monthly Remittance Return of the reinvestigation of the assessments. On July 28, 2009, respondent received a
Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for year ending letter from the BIR denying its protest. Thus, on August 27, 2009, respondent filed
December 31, 2001. a Petition for Review before the CTA docketed as CTA Case No. 7965.

On September 25, 2003, respondent received a copy of the Letter of Authority
dated September 8, 2003 signed by Regional Director Nestor S. Valeroso
authorizing Revenue Officer Nenita L. Crespo of Revenue District Office 43 to
examine respondent's books of accounts and other accounting records for income
and withholding taxes for the period covering January 1, 2001 to December 31,
2001.
Ruling of the CTA Former First Division
On December 11, 2012, the former First Division of the CTA (CTA First Division)
rendered a Decision granting respondent's Petition for Review and declared the
FLD dated October 17, 2005 and Assessment Notices/Demand No. 43-734 dated
October 17, 2005 cancelled and withdrawn for being issued beyond the three-year
prescriptive period provided by law.

Ma. Lida Sarmiento (Sarmiento), respondent's Director of Finance, subsequently It was held that based on the date of filing of respondent's Annual ITR as well as
executed several waivers of the statute of limitations to extend the prescriptive the dates of filing of its monthly BIR Form Nos. 1601-F, 1601-E and 1601-C, it is
period of assessment for taxes due in taxable year ending December 31, 2001 clear that the adverted FLD and the Final Assessment Notices both dated October
(Waivers), the details of which are summarized as follows: 17, 2005 were issued beyond the three-year prescriptive period provided under
Section 203 ot the 1997 National Internal Revenue Code (NIRC), as amended.
Extended Date Date of Date of BIR The tax court also rejected petitioner's claim that this case falls under the
Waiver
of Prescription Execution Acknowledgment Signatory exception as to the three-year prescriptive period for assessment and that the 10-
First August 26, Revenue year prescriptive period should apply on the ground of filing a false or fraudulent
March 30, 2005 August 30, 2004 return. Under Section 222(a) of the 1997 NIRC, as amended, in case a taxpayer
Waiver 2004 District Officer
filed a false or fraudulent return, the Commissioner of Internal Revenue (CIR) may
Second October 22, Revenue assess a taxpayer for deficiency tax within ten (10) years after the discovery of the
June 30, 2005 October 22, 2004
Waiver 2004 District Officer falsity or the fraud. The tax court explained that petitioner failed to substantiate its

74
allegation by clear and convincing proof that respondent filed a false or fraudulent
return.
Furthermore, the CTA First Division held that the Waivers executed by Sarmiento
did not validly extend the three-year prescriptive period to assess respondent for
deficiency income tax, FWT, EWT, increments for late remittance of tax withheld
and compromise penalty, for, as found, the Waivers were not properly executed
according to the procedure in Revenue Memorandum Order No. 20-90 (RMO 20-
90)1 and Revenue Delegation Authority Order No. 05-01 (RDAO 05-01).2
The tax court declared that, in this case, the Waivers have no binding effect on
respondent for the following reasons:
First, Sarmiento signed the Waivers without any notarized written authority from
respondent's Board of Directors. Petitioner's witness explicitly admitted that he did
not require Sarmiento to present any notarized written authority from the Board of
Directors of respondent, authorizing her to sign the Waivers. Petitioner's witness
also confirmed that Revenue District Officer Raul Vicente L. Recto (RDO Recto)
accepted the Waivers as submitted.
Second, even assuming that Sarmiento had the necessary board authority, the
Waivers are still invalid as the respective dates of their acceptance by RDO Recto
are not indicated therein.
Third, records of this case reveal additional irregularities in the subject Waivers:
(1) The fact of receipt by respondent of its copy of the Second Waiver was not
indicated on the face of the original Second Waiver;
(2) Respondent received its copy of the First and the Third Waivers on the same
day, May 23, 2005; and
(3) Respondent received its copy of the Fourth and the Fifth Waivers on the same
day, May 13, 2005.
Finally, the CTA held that estoppel does not apply in questioning the validity of a
waiver of the statute of limitations. It stated that the BIR cannot hide behind the
doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-
01.
Petitioner's Motion for Reconsideration was denied on March 14, 2013.
Petitioner filed a Petition for Review before the CTA En Banc.
On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for
Review and affirmed that of the former CTA First Division.
75
It held that the five (5) Waivers of the statute of limitations were not valid and
binding; thus, the three-year period of limitation within which to assess deficiency
taxes was not extended. It also held that the records belie the allegation that
respondent filed false and fraudulent tax returns; thus, the extension of the period
of limitation from three (3) to ten (10) years does not apply.
Issue
Petitioner has filed the instant petition on the issue of whether or not the CIR's right
to assess respondent's deficiency taxes had already prescribed.
Our Ruling
The petition has merit.
Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue
taxes within three years from the last day prescribed by law for the filing of the tax
return or the actual date of filing of such return, whichever comes later. Hence, an
assessment notice issued after the three-year prescriptive period is not valid and
effective. Exceptions to this rule are provided under Section 2224 of the NIRC.
Section 222(b) of the NIRC provides that the period to assess and collect taxes
may only be extended upon a written agreement between the CIR and the
taxpayer executed before the expiration of the three-year period. RMO 20-90
issued on April 4, 1990 and RDAO 05-015 issued on August 2, 2001 provide the
procedure for the proper execution of a waiver. RMO 20-90 reads:
April 4, 1990
REVENUE MEMORANDUM ORDER NO. 20-90
Subject: Proper Execution of the Waiver of the Statute of Limitations under the
National Internal Revenue Code
To: All Internal Revenue Officers and Others Concerned
Pursuant to Section 223 of the Tax Code, internal revenue taxes may be assessed
or collected after the ordinary prescriptive period, if before its expiration, both the
Commissioner and the taxpayer have agreed in writing to its assessment and/or
collection after said period. The period so agreed upon may be extended by
subsequent written agreement made before the expiration of the period previously
agreed upon. This written agreement between the Commissioner and the taxpayer
is the so-called Waiver of the Statute of Limitations. In the execution of said
waiver, the following procedures should be followed:
1. The waiver must be in the form identified hereof. This form may be reproduced
by the Office concerned but there should be no deviation from such form. The
phrase "but not after ______ 19____" should be filled up. This indicates the expiry
date of the period agreed upon to assess/collect the tax after the regular three-
year period of prescription. The period agreed upon shall constitute the time within
which to effect the assessment/collection of the tax in addition to the ordinary
prescriptive period.
2. The waiver shall be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of
its responsible officials.
Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
Revenue .or the revenue official authorized by him, as hereinafter provided, shall
sign the waiver indicating that the Bureau has accepted and agreed to the waiver.
The date of such acceptance by the Bureau should be indicated. Both the date of
execution by the taxpayer and date of acceptance by the Bureau should be before
the expiration of the period of prescription or before the lapse of the period agreed
upon in case a subsequent agreement is executed.
3. The following revenue officials are authorized to sign the waiver:
xxxx
4. The waiver must be executed in three (3) copies, the original copy to be
attached to the docket of the case, the second copy for the taxpayer and the third
copy for the Office accepting the waiver. The fact of receipt by the taxpayer of
his/her file copy shall be indicated in the original copy.
5. The foregoing procedures shall be strictly followed. Any revenue official found
not to have complied with this Order resulting in prescription of the right to
assess/collect shall be administratively dealt with.
This Revenue Memorandum Order shall take effect immediately.
(SGD.)JOSEU. ONG
Commissioner of Internal Revenue
The Court has consistently held that a waiver of the statute of limitations must
faithfully comply with the provisions of RMO No. 20-90 and RDAO 05-01 in order
to be valid and binding.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue6 the Court
declared the waiver executed by petitioner therein invalid because: (1) it did not
specify a definite agreed date between the BIR and petitioner within which the
former may assess and collect revenue taxes; (2) it was signed only by a revenue
district officer, not the Commissioner; (3) there was no date of acceptance; and (4)
petitioner was not furnished a copy of the waiver.
Philippine Journalists tells us that since a waiver of the statute of limitations is a
derogation of the taxpayer's right to security against prolonged and unscrupulous
investigations, waivers of this kind must be carefully and strictly construed.
76
Philippine Journalists also clarifies that a waiver of the statute of limitations is not a
waiver of the right to invoke the defense of prescription but rather an agreement
between the taxpayer and the BIR that the period to issue an assessment and
collect the taxes due is extended to a date certain. It is not a unilateral act by the
taxpayer of the BIR but is a bilateral agreement between two parties.
In Commissioner of Internal Revenue v. FMF Development Corporation7 the Court
found the waiver in question defective because: (1) it was not proved that
respondent therein was furnished a copy of the BIR-accepted waiver; (2) the
waiver was signed by a revenue district officer instead of the Commissioner as
mandated by the NIRC and RMO 20-90 considering that the case involved an
amount of more than P1,000,000.00, and the period to assess was not yet about to
prescribe; and (3) it did not contain the date of acceptance by the CIR. The Court
explained that the date of acceptance by the CIR is a requisite necessary to
determine whether the waiver was validly accepted before the expiration of the
original period.8
In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found
ineffective to extend the period to assess or collect taxes because: (1) the
accountant who executed the waivers had no notarized written board authority to
sign the waivers in behalf of respondent corporation; (2) there was no date of
acceptance indicated on the waivers; and (3) the fact of receipt by respondent of
its file copy was not indicated in the original copies of the waivers.
The Court rejected the CIR's argument that since it was the one who asked for
additional time, Kudos should be considered estopped from raising the defense of
prescription. The Court held that the BIR cannot hide behind the doctrine of
estoppel to cover its failure to comply with its RMO 20-90 and RDAO 05-01.
Having caused the defects in the waivers, the Court held that the BIR must bear
the consequence.10 Hence, the BIR assessments were found to be issued beyond
the three-year period and declared void.11 Further, the Court stressed that there is
compliance with RMO 20-90 only after the taxpayer receives a copy of the waiver
accepted by the BIR, viz:
The flaw in the appellate court's reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
between the taxpayer and the BIR. When the petitioner's comptroller signed the
waiver on September 22, 1997, it was not yet complete and final because the BIR
had not assented. There is compliance with the provision of RMO No. 20-90 only
after the taxpayer received a copy of the waiver accepted by the BIR. The
requirement to furnish the taxpayer with a copy of the waiver is not only to give
notice of the existence of the document but of the acceptance by the BIR and the
perfection of the agreement.

The deficiencies of the Waivers in this case are the same as the defects of the
waiver in Kudos. In the instant case, the CTA found the Waivers because of the
following flaws: (1) they were executed without a notarized board authority; (2) the
dates of acceptance by the BIR were not indicated therein; and (3) the fact of
receipt by respondent of its copy of the Second Waiver was not indicated on the
face of the original Second Waiver.
To be sure, both parties in this case are at fault.
Here, respondent, through Sarmiento, executed five Waivers in favor of petitioner.
However, her authority to sign these Waivers was not presented upon their
submission to the BIR. In fact, later on, her authority to sign was questioned by
respondent itself, the very same entity that caused her to sign such in the first
place. Thus, it is clear that respondent violated RMO No. 20-90 which states that in
case of a corporate taxpayer, the waiver must be signed by its responsible
officials13 and RDAO 01-05 which requires the presentation of a written and
notarized authority to the BIR.
Similarly, the BIR violated its own rules and was careless in performing its
functions with respect to these Waivers. It is very clear that under RDAO 05-01 it is
the duty of the authorized revenue official to ensure that the waiver is duly
accomplished and signed by the taxpayer or his authorized representative before
affixing his signature to signify acceptance of the same. It also instructs that in
case the authority is delegated by the taxpayer to a representative, the concerned
revenue official shall see to it that such delegation is in writing and duly notarized.
Furthermore, it mandates that the waiver should not be accepted by the concerned
BIR office and official unless duly notarized.
Vis-a-vis the five Waivers it received from respondent, the BIR has failed, for five
times, to perform its duties in relation thereto: to verify Ms. Sarmiento's authority to
execute them, demand the presentation of a notarized document evidencing the
same, refuse acceptance of the Waivers when no such document was presented,
affix the dates of its acceptance on each waiver, and indicate on the Second
Waiver the date of respondent's receipt thereof.
Both parties knew the infirmities of the Waivers yet they continued dealing with
each other on the strength of these documents without bothering to rectify these
infirmities. In fact, in its Letter Protest to the BIR, respondent did not even question
the validity of the Waivers or call attention to their alleged defects.
In this case, respondent, after deliberately executing defective waivers, raised the
very same deficiencies it caused to avoid the tax liability determined by the BIR
77
during the extended assessment period. It must be remembered that by virtue of
these Waivers, respondent was given the opportunity to gather and submit
documents to substantiate its claims before the CIR during investigation. It was
able to postpone the payment of taxes, as well as contest and negotiate the
assessment against it. Yet, after enjoying these benefits, respondent challenged
the validity of the Waivers when the consequences thereof were not in its favor. In
other words, respondent's act of impugning these Waivers after benefiting
therefrom and allowing petitioner to rely on the same is an act of bad faith.
On the other hand, the stringent requirements in RMO 20-90 and RDAO 05-01 are
in place precisely because the BIR put them there. Yet, instead of strictly enforcing
its provisions, the BIR defied the mandates of its very own issuances. Verily, if the
BIR was truly determined to validly assess and collect taxes from respondent after
the prescriptive period, it should have been prudent enough to make sure that all
the requirements for the effectivity of the Waivers were followed not only by its
revenue officers but also by respondent. The BIR stood to lose millions of pesos in
case the Waivers were declared void, as they eventually were by the CTA, but it
appears that it was too negligent to even comply with its most basic requirements.
The BIR's negligence in this case is so gross that it amounts to malice and bad
faith. Without doubt, the BIR knew that waivers should conform strictly to RMO 20-
90 and RDAO 05-01 in order to be valid. In fact, the mandatory nature of the
requirements, as ruled by this Court, has been recognized by the BIR itself in its
issuances such as Revenue Memorandum Circular No. 6-2005,16 among others.
Nevertheless, the BIR allowed respondent to submit, and it duly received, five
defective Waivers when it was its duty to exact compliance with RMO 20-90 and
RDAO 05-01 and follow the procedure dictated therein. It even openly admitted
that it did not require respondent to present any notarized authority to sign the
questioned Waivers.17 The BIR failed to demand respondent to follow the
requirements for the validity of the Waivers when it had the duty to do so, most
especially because it had the highest interest at stake. If it was serious in collecting
taxes, the BIR should have meticulously complied with the foregoing orders,
leaving no stone unturned.
The general rule is that when a waiver does not comply with the requisites for its
validity specified under RMO No. 20-90 and RDAO 01-05, it is invalid and
ineffective to extend the prescriptive period to assess taxes. However, due to its
peculiar circumstances, We shall treat this case as an exception to this rule and
find the Waivers valid for the reasons discussed below.
First, the parties in this case are in pari delicto or "in equal fault." In pari delicto
connotes that the two parties to a controversy are equally culpable or guilty and
they shall have no action against each other. However, although the parties are in
pari delicto, the Court may interfere and grant relief at the suit of one of them,
where public policy requires its intervention, even though the result may be that a
benefit will be derived by one party who is in equal guilt with the other.18
Here, to uphold the validity of the Waivers would be consistent with the public
policy embodied in the principle that taxes are the lifeblood of the government, and
their prompt and certain availability is an imperious need.19 Taxes are the nation's
lifeblood through which government agencies continue to operate and which the
State discharges its functions for the welfare of its constituents.20 As between the
parties, it would be more equitable if petitioner's lapses were allowed to pass and
consequently uphold the Waivers in order to support this principle and public
policy.
Second, the Court has repeatedly pronounced that parties must come to court with
clean hands.21 Parties who do not come to court with clean hands cannot be
allowed to benefit from their own wrongdoing.22 Following the foregoing principle,
respondent should not be allowed to benefit from the flaws in its own Waivers and
successfully insist on their invalidity in order to evade its responsibility to pay
taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While it
is true that the Court has repeatedly held that the doctrine of estoppel must be
sparingly applied as an exception to the statute of limitations for assessment of
taxes, the Court finds that the application of the doctrine is justified in this case.
Verily, the application of estoppel in this case would promote the administration of
the law, prevent injustice and avert the accomplishment of a wrong and undue
advantage. Respondent executed five Waivers and delivered them to petitioner,
one after the other. It allowed petitioner to rely on them and did not raise any
objection against their validity until petitioner assessed taxes and penalties against
it. Moreover, the application of estoppel is necessary to prevent the undue injury
that the government would suffer because of the cancellation of petitioner's
assessment of respondent's tax liabilities.
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the
taxpayer, on the one hand, after voluntarily executing waivers, insisted on their
invalidity by raising the very same defects it caused. On the other hand, the BIR
miserably failed to exact from respondent compliance with its rules. The BIR's
negligence in the performance of its duties was so gross that it amounted to malice
and bad faith. Moreover, the BIR was so lax such that it seemed that it consented
to the mistakes in the Waivers. Such a situation is dangerous and open to abuse
by unscrupulous taxpayers who intend to escape their responsibility to pay taxes
by mere expedient of hiding behind technicalities.
78
It is true that petitioner was also at fault here because it was careless in complying
with the requirements of RMO No. 20-90 and RDAO 01-05. Nevertheless,
petitioner's negligence may be addressed by enforcing the provisions imposing
administrative liabilities upon the officers responsible for these errors.23 The BIR's
right to assess and collect taxes should not be jeopardized merely because of the
mistakes and lapses of its officers, especially in cases like this where the taxpayer
is obviously in bad faith.24
As regards petitioner's claim that the 10-year period of limitation within which to
assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable
in this case as respondent allegedly filed false and fraudulent returns, there is no
reason to disturb the tax court's findings that records failed to establish, even by
prima facie evidence, that respondent Next Mobile filed false and fraudulent
returns on the ground of substantial underdeclaration of income in respondent
Next Mobile's Annual ITR for taxable year ending December 31, 2001.25cralawred
While the Court rules that the subject Waivers are valid, We, however, refer back
to the tax court the determination of the merits of respondent's petition seeking the
nullification of the BIR Formal Letter of Demand and Assessment Notices/Demand
No. 43-734.
WHEREFORE, premises considered, the Court resolves to GRANT the petition.
The Decision of the Court of Tax Appeals En Banc dated May 28, 2014 in CTA EB
Case No. 1001 is hereby REVERSED and SET ASIDE. Accordingly, let this case
be remanded to the Court of Tax Appeals for further proceedings in order to
determine and rule on the merits of respondent's petition seeking the nullification
of the BIR Formal Letter of Demand and Assessment Notices/Demand No. 43-734,
both dated October 17, 2005.
SO ORDERED.
G.R. No. 211289, January 14, 2019
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, v. LA FLOR DELA
ISABELA, INC., RESPONDENT.
DECISION
J. REYES, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to reverse and set aside the September 30, 2013 Decision1 and the
February 10, 2014 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA
EB No. 951, which affirmed the August 3, 2012 Decision3 and the October 5, 2012
Resolution of the CTA Third Division (CTA Division).
Factual background
Respondent La Flor dela Isabela, Inc. (La Flor) is a domestic corporation duly
organized and existing under Philippine Law. It filed monthly returns for the
Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC)
for calendar year 2005.4
On September 3, 2008, La Flor, through its president, executed a Waiver of the
Statute of Limitations (Waiver)5 in connection with its internal revenue liabilities for
the calendar year ending December 31, 2005. On February 16, 2009, it executed
another Waiver6 to extend the period of assessment until December 31, 2009.
On November 20, 2009, La Flor received a copy of the Preliminary Assessment
Notice for deficiency taxes for the taxable year 2005. Meanwhile, on December 2,
2009, it executed another Waiver.7
On January 7, 2010, La Flor received the following Formal Letter of Demand and
Final Assessment Notices (FANs): (1) LTEADI-II CP-05-00007 for penalties for late
filing and payment of WTC; (2) LTADI-II CP 05-00008 for penalties for late filing
and payment of EWT; (3) LTADI-II WE-05-00062 for deficiency assessment for
EWT; and (4) LTEADI-II WC-05-00038 for deficiency assessment for WTC. The
above-mentioned assessment notices were all dated December 17, 2009 and
covered the deficiency taxes for the taxable year 2005.8
On January 15, 2010, La Flor filed its Letter of Protest contesting the assessment
notices. On July 20, 2010, petitioner Commissioner of Internal Revenue (CIR)
issued the Final Decision on Disputed Assessment (FDDA) involving the alleged
deficiency withholding taxes in the aggregate amount of P6,835,994.76.
Aggrieved, it filed a petition for review before the CTA Division.
79
CTA Division Decision
In its August 3, 2012 Decision, the CTA Division ruled in favor of La Flor and
cancelled the deficiency tax assessments against it. It noted that based on the
dates La Flor had filed its returns for EWT and WTC, the CIR had until February
15, 2008 to March 1, 2009 to issue an assessment pursuant to the three-year
prescriptive period under Section 203 of the National Internal Revenue Code
(NIRC). The CTA Division pointed out that the assessment was issued beyond the
prescriptive period considering that the CIR issued the FANs only on December
17, 2009. Thus, it posited that the assessment was barred by prescription.
On the other hand, the CTA Division ruled that the Waivers entered into by the CIR
and La Flor did not effectively extend the prescriptive period for the issuance of the
tax assessments. It pointed out that only the February 16, 2009 Waiver was
stipulated upon and the Waivers dated September 3, 2008 and December 2, 2009
were never presented or offered in evidence. In addition, the CTA Division
highlighted that the Waiver dated February 16, 2009 did not comply with the
provisions of Revenue Memorandum Order (RMO) No. 20-90 because it failed to
state the nature and amount of the tax to be assessed.
Thus, it disposed:
WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the
Formal Letter of Demand, with Final Assessment Notices LTEADI-WC-05-00038,
LTEADI-WE-05-00062, LTEADI-CP-05-00007, LTEADI-CP-05-00008, all dated
December 17, 2009 are hereby CANCELLED and SET ASIDE.
SO ORDERED.9
The CIR moved for reconsideration but it was denied by the CTA Division in its
October 5, 2012 Resolution.10 Undeterred, it filed a Petition for Review11 before
the CTA En Banc.
CTA En Banc Decision
In its September 30, 2013 Decision, the CTA En Banc affirmed the Decision of the
CTA Division. The tax court agreed that the EWT and WTC assessments were
barred by prescription. It explained that the Waivers dated September 3, 2008 and
December 2, 2009 were inadmissible because they were never offered in
evidence. The CTA En Banc added that these documents were neither
incorporated in the records nor duly identified by testimony. It also elucidated that
the Waiver dated February 16, 2009 was defective because it failed to comply with
RMO No. 20-90 as it did not specify the kind and amount of tax involved. As such,
the CTA En Banc concluded that the prescriptive period for the assessment of
EWT and WTC for 2005 was not extended in view of the inadmissibility and
invalidity of the Waivers between the CIR and La Flor. Thus, it disposed:
WHEREFORE, premises considered, the assailed Decision dated August 3, 2012
and the Resolution dated October 5, 2012 are AFFIRMED. The Petition for Review
is hereby DISMISSED.
SO ORDERED.12
The CIR moved for reconsideration, but it was denied by the CTA En Banc in its
February 10, 2014 Resolution.
Hence, this present petition raising the following:
Issues
I paragraphs in pleadings.
WHETHER THE PRESCRIPTIVE PERIOD UNDER SECTION 203 OF THE NIRC
APPLIES TO EWT AND WTC ASSESSMENTS; and
II
WHETHER LA FLOR'S EWT AND WTC ASSESSMENTS FOR 2005 WERE
BARRED BY PRESCRIPTION.
The CIR argued that the prescriptive period under Section 203 of the NIRC does
not apply to withholding agents such as La Flor. It explained that the amount
collected from them is not the tax itself but rather a penalty. The CIR pointed out
that the provision of Section 203 of the NIRC only mentions assessment of taxes
as distinguished from assessment of penalties. It highlighted that La Flor was
made liable for EWT and WTC deficiencies in its capacity as a withholding agent
and not in its personality as a taxpayer.
On the other hand, the CIR maintained that even applying the periods set in
Section 203 of the NIRC, the EWT and WTC assessment of La Flor had not yet
prescribed. It pointed out that La Flor had executed three Waivers extending the
prescriptive period under the NIRC. The CIR lamented that the CTA erred in
disregarding them because evidence not formally offered may be considered if
they form part of the records. It noted that in the Answer it filed before the CTA
Division, the subject Waivers were included as annexes. In addition, the CIR
assailed that failure to comply with RMO No. 20-90 does not invalidate the
Waivers.
80
In its Comment13 dated August 15, 2014, La Flor countered that the CIR's petition
for review should be denied outright for procedural infirmities. It pointed out that
the petition failed to comply with Bar Matter (B.M.) No. 1922 because the date of
issue of the Mandatory Continuing Legal Education (MCLE) compliance of the
counsels of the CIR was not indicated. In addition, La Flor noted that the petition
for review did not observe Section 2, Rule 7 of the Rules of Court requiring the
paragraphs to be numbered. Further, it asserted that the assessment of the EWT
and WTC had prescribed because it went beyond the prescriptive period provided
under Section 203 of the NIRC. La Flor also assailed that the Waivers should not
be considered because they were neither offered in evidence nor complied with
the requirements under RMO No. 20-90.
In its Reply14 dated February 18, 2015, the CIR brushed aside the allegations of
procedural infirmities of its petition for review. It elucidated that failure to indicate
the date of issue of the MCLE compliance is no longer a ground for dismissal and
that it had stated the MCLE certificate compliance numbers of its counsels. The
CIR posited that the Rules of Court does not penalize the failure to number the
The Court's Ruling
Other than challenging the merits of the CIR's petition, La Flor believes that the
former's petition for review on certiorari should be dismissed outright on procedural
grounds. It points out that failure to include the date of issue of the MCLE
compliance number of a counsel in a pleading is a ground for dismissal. Further,
La Flor highlights that the paragraphs in the CIR's petition for review on certiorari
were not numbered.
In People v. Arrojado,15 the Court had already clarified that failure to indicate the
number and date of issue of the counsel's MCLE compliance will no longer result
in the dismissal of the case, to wit:
In any event, to avoid inordinate delays in the disposition of cases brought about
by a counsel's failure to indicate in his or her pleadings the number and date of
issue of his or her MCLE Certificate of Compliance, this Court issued an En Banc
Resolution, dated January 14, 2014 which amended B.M. No. 1922 by repealing
the phrase "Failure to disclose the required information would cause the dismissal
of the case and the expunction of the pleadings from the records" and replacing it
with "Failure to disclose the required information would subject the counsel to
appropriate penalty and disciplinary action." Thus, under the amendatory
Resolution, the failure of a lawyer to indicate in his or her pleadings the number
and date of issue of his or her MCLE Certificate of Compliance will no longer result
in the dismissal of the case and expunction of the pleadings from the records.
Nonetheless, such failure will subject the lawyer to the prescribed fine and/or
disciplinary action.
On the other hand, even La Flor recognizes that Section 2, Rule 7 of the Rules of
Court does not provide for any punishment for failure to number the paragraphs in
a pleading. In short, the perceived procedural irregularities in the petition for review
on certiorari do not justify its outright dismissal. Procedural rules are in place to
facilitate the adjudication of cases and avoid delay in the resolution of rival
claims.16 In addition, courts must strive to resolve cases on their merits, rather
than summarily dismiss them on technicalities.17 This is especially true when the
alleged procedural rules violated do not provide any sanction at all or when the
transgression thereof does not result in a dismissal of the action.
Nevertheless, the Court finds no reason to reverse the CTA in invalidating the
assessments against La Flor.
Withholding taxes are internal revenue taxes covered by Section 203 of the NIRC.
Section 203 of the NIRC provides for the ordinary prescriptive period for the
assessment and collection of taxes, to wit:
SEC. 203. Period of Limitation Upon Assessment and Collection. — Except as
provided in Section 222, internal revenue taxes shall be assessed within three (3)
years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in case where a return is
filed beyond the period prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes of this Section, a return
filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day. (Emphasis supplied)
On the other hand, Section 222(a)18 of the NIRC provides for instances where the
ordinary prescriptive period of three years for the assessment and collection of
taxes is extended to 10 years, i.e., false return, fraudulent returns, or failure to file
a return. In short, the relevant provisions in the NIRC concerning the prescriptive
period for the assessment of internal revenue taxes provide for an ordinary and
extraordinary period for assessment.
The CIR, however, forwards a novel theory that Section 203 is inapplicable in the
present assessment of EWT and WTC deficiency against La Flor. It argues that
withholding taxes are not contemplated under the said provision considering that
they are not internal revenue taxes but are penalties imposed on the withholding
agent should it fail to remit the proper amount of tax withheld.
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In Chamber of Real Estate and Builders' Associations, Inc. v. Hon. Executive
Secretary Romulo,19 the Court had succinctly explained the withholding tax
system observed in our jurisdiction, to wit:
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. 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. 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.
Under the existing withholding tax system, the withholding agent retains a portion
of the amount received by the income earner. In turn, the said amount is credited
to the total income tax payable in transactions covered by the EWT. On the other
hand, in cases of income payments subject to WTC and Final Withholding Tax, the
amount withheld is already the entire tax to be paid for the particular source of
income. Thus, it can readily be seen that the payee is the taxpayer, the person on
whom the tax is imposed, while the payor, a separate entity, acts as the
government's agent for the collection of the tax in order to ensure its payment.20
As a consequence of the withholding tax system, two distinct liabilities arise — one
for the income earner/payee and another for the withholding agent. In Rizal
Commercial Banking Corporation v. Commissioner of Internal Revenue,21 the
Court elaborated:
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, 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."
Based on the foregoing, the liability of the withholding agent is independent from
that of the taxpayer. 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. (Citations omitted)
It is true that withholding tax is a method of collecting tax in advance22 and that a
withholding tax on income necessarily implies that the amount of tax withheld
comes from the income earned by the taxpayer/payee.23 Nonetheless, the Court
does not agree with the CIR that withholding tax assessments are merely an
imposition of a penalty on the withholding agent, and thus, outside the coverage of
Section 203 of the NIRC.
The CIR cites National Development Company v. Commissioner of Internal
Revenue24 as basis that withholding taxes are only penalties imposed on the
withholding agent, to wit:
The petitioner also forgets that it is not the NDC that is being taxed. The tax was
due on the interests earned by the Japanese shipbuilders. It was the income of
these companies and not the Republic of the Philippines that was subject to the
tax the NDC did not withhold.
In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty
for its failure to withhold the same from the Japanese shipbuilders. Such liability is
imposed by Section 53(c) of the Tax Code, thus:
Section 53(c). Return and Payment. — Every person required to deduct and
withhold any tax under this section shall make return thereof, in duplicate, on or
before the fifteenth day of April of each year, and, on or before the time fixed by
law for the payment of the tax, shall pay the amount withheld to the officer of the
Government of the Philippines authorized to receive it. Every such person is made
personally liable for such tax, and is indemnified against the claims and demands
of any person for the amount of any payments made in accordance with the
provisions of this section. (As amended by Section 9, R.A. No. 2343.)
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In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the
Court of Tax Appeals, the Court quoted with approval the following regulation of
the BIR on the responsibilities of withholding agents:
In case of doubt, a withholding agent may always protect himself by withholding
the tax due, and promptly causing a query to be addressed to the Commissioner of
Internal Revenue for the determination whether or not the income paid to an
individual is not subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not subject to
withholding, the withholding agent may thereupon remit the amount of tax withheld.
(2nd par., Sec. 200, Income Tax Regulations).
"Strict observance of said steps is required of a withholding agent before he could
be released from liability," so said Justice Jose P. Bengson, who wrote the
decision. "Generally, the law frowns upon exemption from taxation; hence, an
exempting provision should be construed strictissimi juris."
The petitioner was remiss in the discharge of its obligation as the withholding
agent of the government and so should be held liable for its omission.
A careful analysis of the above-quoted decision, however, reveals that the Court
did not equate withholding tax assessments to the imposition of civil penalties
imposed on tax deficiencies. The word "penalty" was used to underscore the
dynamics in the withholding tax system that it is the income of the payee being
subjected to tax and not of the withholding agent. It was never meant to mean that
withholding taxes do not fall within the definition of internal revenue taxes,
especially considering that income taxes are the ones withheld by the withholding
agent. Withholding taxes do not cease to become income taxes just because it is
collected and paid by the withholding agent.
The liability of the withholding agent is distinct and separate from the tax liability of
the income earner. It is premised on its duty to withhold the taxes paid to the
payee. Should the withholding agent fail to deduct the required amount from its
payment to the payee, it is liable for deficiency taxes and applicable penalties. In
Commissioner of Internal Revenue v. Procter & Gamble Philippine Manufacturing
Corporation25 the Court explained:
It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and
demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of
the NIRC. The withholding agent, P&G-Phil., is directly and independently liable for
the correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been
withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." The terms "liable for tax" and "subject to tax" both
connote legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not
"subject to tax." By any reasonable standard, such a person should be regarded as
a party in interest, or as a person having sufficient legal interest, to bring a suit for
refund of taxes he believes were illegally collected from him. (Emphasis supplied)
Thus, withholding tax assessments such as EWT and WTC clearly contemplate
deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and
not merely to impose a penalty on the withholding agent for its failure to comply
with its statutory duty. Further, a holistic reading of the Tax Code reveals that the
CIR's interpretation of Section 203 is erroneous. Provisions of the NIRC itself
recognize that the tax assessment for withholding tax deficiency is different and
independent from possible penalties that may be imposed for the failure of
withholding agents to withhold and remit taxes. For one, Title X, Chapter I of the
NIRC provides for additions to the tax or deficiency tax and is applicable to all
taxes, fees and charges under the Tax Code.
In addition, Section 247(b) of the NIRC provides:
SEC. 247. General Provisions. —
xxxx
(b) If the withholding agent is the Government or any of its agencies, political
subdivisions or instrumentalities, or a government-owned or controlled corporation
the employee thereof responsible for the withholding and remittance of the tax
shall be personally liable for the additions to the tax prescribed herein.
On the other hand, Section 251 of the Tax Code reads:
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. — Any person
required to withhold, account for and remit any tax imposed by this Code or who
willfully fails to withhold such tax, or account for and remit such tax, or aids or
abets in any manner to evade any such tax or the payment thereof, shall, in
addition to other penalties provided for under this Chapter, be liable upon
83
conviction to a penalty equal to the total amount of the tax not withheld, or not
accounted for and remitted.
Based on the above-cited provisions, it is clear to see that the "penalties" are
amounts collected on top of the deficiency tax assessments including deficiency
withholding tax assessments. Thus, it was wrong for the CIR to restrict the EWT
and WTC assessments against La Floras only for the purpose of imposing
penalties and not for the collection of internal revenue taxes.
The CIR further argues that even if Section 203 of the NIRC was applicable, the
assessments against La Flor had yet to prescribe. It points out that La Flor had
executed three Waivers to extend the statutory prescriptive period. The CIR insists
that the Waivers should have been considered even if they were not offered in
evidence because the CTA is not strictly governed by technical rules of evidence.
It adds that the requirements under RMO No. 20-90 are not mandatory.
In Commissioner of Internal Revenue v. Systems Technology Institute, Inc.,26 the
Court had ruled that waivers extending the prescriptive period of tax assessments
must be compliant with RMO No. 20-90 and must indicate the nature and amount
of the tax due, to wit:
These requirements are mandatory and must strictly be followed. To be sure, in a
number of cases, this Court did not hesitate to strike down waivers which failed to
strictly comply with the provisions of RMO 20-90 and RDAO 05-01.
xxxx
The Court also invalidated the waivers executed by the taxpayer in the case of
Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1) they
were signed by Assistant Commissioner-Large Taxpayers Service and not by the
CIR; (2) the date of acceptance was not shown; (3) they did not specify the kind
and amount of the tax due; and (4) the waivers speak of a request for extension of
time within which to present additional documents and not for reinvestigation
and/or reconsideration of the pending internal revenue case as required under
RMO No. 20-90.
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the
Court cannot but agree with the CTA's finding that the waivers subject of this case
suffer from the following defects:
xxxx
3. Similar to Standard Chartered Bank, the waivers in this case did not specify the
kind of tax and the amount of tax due. It is established that a waiver of the statute
of limitations is a bilateral agreement between the taxpayer and the BIR to extend
the period to assess or collect deficiency taxes on a certain date. Logically, there
can be no agreement if the kind and amount of the taxes to be assessed or
collected were not indicated. Hence, specific information in the waiver is necessary
for its validity. (Emphasis supplied)

In the present case, the September 3, 2008, February 16, 2009 and December 2,
2009 Waivers failed to indicate the specific tax involved and the exact amount of
the tax to be assessed or collected. As above-mentioned, these details are
material as there can be no true and valid agreement between the taxpayer and
the CIR absent these information. Clearly, the Waivers did not effectively extend
the prescriptive period under Section 203 on account of their invalidity. The issue
on whether the CTA was correct in not admitting them as evidence becomes
immaterial since even if they were properly offered or considered by the CTA, the
same conclusion would be reached — the assessments had prescribed as there
was no valid waiver.

WHEREFORE, the petition is DENIED. The September 30, 2013 Decision and the
February 10, 2014 Resolution of the Court of Tax Appeals En Banc in CTA EB No.
951 are AFFIRMED.

SO ORDERED.

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