G.R. No.

159694 January 27, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AZUCENA T.
REYES, Respondent.
G.R. No. 163581 January 27, 2006
AZUCENA T. REYES, Petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
PANGANIBAN, CJ.:
Under the present provisions of the Tax Code and pursuant to elementary
due process, taxpayers must be informed in writing of the law and the
facts upon which a tax assessment is based; otherwise, the assessment is
void. Being invalid, the assessment cannot in turn be used as a basis for the
perfection of a tax compromise.
The Case
Before us are two consolidated
1
Petitions for Review
2
filed under Rule 45
of the Rules of Court, assailing the August 8, 2003 Decision
3
of the Court of
Appeals (CA) in CA-GR SP No. 71392. The dispositive portion of the assailed
Decision reads as follows:
"WHEREFORE, the petition is GRANTED. The assailed decision of the Court
of Tax Appeals is ANNULLED and SET ASIDE without prejudice to the action
of the National Evaluation Board on the proposed compromise settlement
of the Maria C. Tancinco estates tax liability."
4

The Facts
The CA narrated the facts as follows:
"On July 8, 1993, Maria C. Tancinco (or decedent) died, leaving a 1,292
square-meter residential lot and an old house thereon (or subject
property) located at 4931 Pasay Road, Dasmarias Village, Makati City.
"On the basis of a sworn information-for-reward filed on February 17, 1997
by a certain Raymond Abad (or Abad), Revenue District Office No. 50
(South Makati) conducted an investigation on the decedents estate (or
estate). Subsequently, it issued a Return Verification Order. But without
the required preliminary findings being submitted, it issued Letter of
Authority No. 132963 for the regular investigation of the estate tax case.
Azucena T. Reyes (or *Reyes+), one of the decedents heirs, received the
Letter of Authority on March 14, 1997.
"On February 12, 1998, the Chief, Assessment Division, Bureau of Internal
Revenue (or BIR), issued a preliminary assessment notice against the
estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the
decedent (or heirs) received a final estate tax assessment notice and a
demand letter, both dated April 22, 1998, for the amount
of P14,912,205.47, inclusive of surcharge and interest.
"On June 1, 1998, a certain Felix M. Sumbillo (or Sumbillo) protested the
assessment [o]n behalf of the heirs on the ground that the subject
property had already been sold by the decedent sometime in 1990.
"On November 12, 1998, the Commissioner of Internal Revenue (or *CIR+)
issued a preliminary collection letter to [Reyes], followed by a Final Notice
Before Seizure dated December 4, 1998.
"On January 5, 1999, a Warrant of Distraint and/or Levy was served upon
the estate, followed on February 11, 1999 by Notices of Levy on Real
Property and Tax Lien against it.
"On March 2, 1999, [Reyes] protested the notice of levy. However, on
March 11, 1999, the heirs proposed a compromise settlement
of P1,000,000.00.
"In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay
50% of the basic tax due, citing the heirs inability to pay the tax
assessment. On March 20, 2000, *the CIR+ rejected *Reyess+ offer, pointing
out that since the estate tax is a charge on the estate and not on the heirs,
the latters financial incapacity is immaterial as, in fact, the gross value of
the estate amounting to P32,420,360.00 is more than sufficient to settle
the tax liability. Thus, [the CIR] demanded payment of the amount
of P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of
sale of the subject property would be published.
"On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to
pay 100% of the basic tax due in the amount of P5,313,891.00. She
reiterated the proposal in a letter dated May 18, 2000.
"As the estate failed to pay its tax liability within the April 15, 2000
deadline, the Chief, Collection Enforcement Division, BIR, notified [Reyes]
on June 6, 2000 that the subject property would be sold at public auction
on August 8, 2000.
"On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division.
Assailing the scheduled auction sale, she asserted that x x x the
assessment, letter of demand[,] and the whole tax proceedings against the
estate are void ab initio. She offered to file the corresponding estate tax
return and pay the correct amount of tax without surcharge [or] interest.
"Without acting on *Reyess+ protest and offer, *the CIR+ instructed the
Collection Enforcement Division to proceed with the August 8, 2000
auction sale. Consequently, on June 28, 2000, [Reyes] filed a [P]etition for
*R+eview with the Court of Tax Appeals (or CTA), docketed as CTA Case
No. 6124.
"On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of
Preliminary Injunction or Status Quo Order, which was granted by the CTA
on July 26, 2000. Upon *Reyess+ filing of a surety bond in the amount
ofP27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000
ordering [the CIR] to desist and refrain from proceeding with the auction
sale of the subject property or from issuing a [W]arrant of [D]istraint or
[G]arnishment of [B]ank [A]ccount[,] pending determination of the case
and/or unless a contrary order is issued.
"[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that
the CTA no longer has jurisdiction over the case[,] because the assessment
against the estate is already final and executory; and (ii) that the petition
was filed out of time. In a [R]esolution dated November 23, 2000, the CTA
denied *the CIRs+ motion.
"During the pendency of the [P]etition for [R]eview with the CTA, however,
the BIR issued Revenue Regulation (or RR) No. 6-2000 and Revenue
Memorandum Order (or RMO) No. 42-2000 offering certain taxpayers
with delinquent accounts and disputed assessments an opportunity to
compromise their tax liability.
"On November 25, 2000, [Reyes] filed an application with the BIR for the
compromise settlement (or compromise) of the assessment against the
estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No.
6-2000 and RMO No. 42-2000.
"On December 26, 2000, [Reyes] filed an Ex-Parte Motion for
Postponement of the hearing before the CTA scheduled on January 9,
2001, citing her pending application for compromise with the BIR. The
motion was granted and the hearing was reset to February 6, 2001.
"On January 29, 2001, [Reyes] moved for postponement of the hearing set
on February 6, 2001, this time on the ground that she had already paid the
compromise amount of P1,062,778.20 but was still awaiting approval of
the National Evaluation Board (or NEB). The CTA granted the motion and
reset the hearing to February 27, 2001.
"On February 19, 2001, [Reyes] filed a Motion to Declare Application for
the Settlement of Disputed Assessment as a Perfected Compromise. In said
motion, she alleged that [the CIR] had not yet signed the compromise[,]
because of procedural red tape requiring the initials of four Deputy
Commissioners on relevant documents before the compromise is signed by
the [CIR]. [Reyes] posited that the absence of the requisite initials and
signature[s] on said documents does not vitiate the perfected compromise.
"Commenting on the motion, [the CIR] countered that[,] without the
approval of the NEB, *Reyess+ application for compromise with the BIR
cannot be considered a perfected or consummated compromise.
"On March 9, 2001, the CTA denied *Reyess+ motion, prompting her to file
a Motion for Reconsideration Ad Cautelam. In a [R]esolution dated April
10, 2001, the CTA denied the [M]otion for [R]econsideration with the
suggestion that[,] for an orderly presentation of her case and to prevent
piecemeal resolutions of different issues, [Reyes] should file a
[S]upplemental [P]etition for [R]eview[,] setting forth the new issue of
whether there was already a perfected compromise.
"On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the
CTA, followed on June 4, 2001 by its Amplificatory Arguments (for the
Supplemental Petition for Review), raising the following issues:
1. Whether or not an offer to compromise by the *CIR+, with the
acquiescence by the Secretary of Finance, of a tax liability pending in court,
that was accepted and paid by the taxpayer, is a perfected and
consummated compromise.
2. Whether this compromise is covered by the provisions of Section 204 of
the Tax Code (CTRP) that requires approval by the BIR *NEB+.
"Answering the Supplemental Petition, [the CIR] averred that an
application for compromise of a tax liability under RR No. 6-2000 and RMO
No. 42-2000 requires the evaluation and approval of either the NEB or the
Regional Evaluation Board (or REB), as the case may be.
"On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings;
the motion was granted on July 11, 2001. After submission of memoranda,
the case was submitted for [D]ecision.
"On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of
which pertinently reads:
WHEREFORE, in view of all the foregoing, the instant *P+etition for
[R]eview is hereby DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY
deficiency estate tax in the amount of Nineteen Million Five Hundred
Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,524,909.78),
computed as follows:
x x x x x x x x x
*Reyes] is likewise ORDERED to PAY 20% delinquency interest on
deficiency estate tax due of P17,934,382.13 from January 11, 2001 until
full payment thereof pursuant to Section 249(c) of the Tax Code, as
amended.
"In arriving at its decision, the CTA ratiocinated that there can only be a
perfected and consummated compromise of the estates tax liability*,+ if
the NEB has approved *Reyess+ application for compromise in accordance
with RR No. 6-2000, as implemented by RMO No. 42-2000.
"Anent the validity of the assessment notice and letter of demand against
the estate, the CTA stated that at the time the questioned assessment
notice and letter of demand were issued, the heirs knew very well the law
and the facts on which the same were based. It also observed that the
petition was not filed within the 30-day reglementary period provided
under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code."
5

Ruling of the Court of Appeals
In partly granting the Petition, the CA said that Section 228 of the Tax Code
and RR 12-99 were mandatory and unequivocal in their requirement. The
assessment notice and the demand letter should have stated the facts and
the law on which they were based; otherwise, they were deemed
void.
6
The appellate court held that while administrative agencies, like the
BIR, were not bound by procedural requirements, they were still required
by law and equity to observe substantive due process. The reason behind
this requirement, said the CA, was to ensure that taxpayers would be duly
apprised of -- and could effectively protest -- the basis of tax assessments
against them.
7
Since the assessment and the demand were void, the
proceedings emanating from them were likewise void, and any order
emanating from them could never attain finality.
The appellate court added, however, that it was premature to declare as
perfected and consummated the compromise of the estates tax liability. It
explained that, where the basic tax assessed exceeded P1 million, or where
the settlement offer was less than the prescribed minimum rates, the
National Evaluation Boards (NEB) prior evaluation and approval were the
conditio sine qua non to the perfection and consummation of any
compromise.
8
Besides, the CA pointed out, Section 204(A) of the Tax Code
applied to all compromises, whether government-initiated or not.
9
Where
the law did not distinguish, courts too should not distinguish.
Hence, this Petition.
10

The Issues
In GR No. 159694, petitioner raises the following issues for the Courts
consideration:
"I.
Whether petitioners assessment against the estate is valid.
"II.
Whether respondent can validly argue that she, as well as the other heirs,
was not aware of the facts and the law on which the assessment in
question is based, after she had opted to propose several compromises on
the estate tax due, and even prematurely acting on such proposal by
paying 20% of the basic estate tax due."
11

The foregoing issues can be simplified as follows: first, whether the
assessment against the estate is valid; and, second, whether the
compromise entered into is also valid.
The Courts Ruling
The Petition is unmeritorious.
First Issue:
Validity of the Assessment Against the Estate
The second paragraph of Section 228 of the Tax Code
12
is clear and
mandatory. It provides as follows:
"Sec. 228. Protesting of Assessment. --
x x x x x x x x x
"The taxpayers shall be informed in writing of the law and the facts on
which the assessment is made: otherwise, the assessment shall be void."
In the present case, Reyes was not informed in writing of the law and the
facts on which the assessment of estate taxes had been made. She was
merely notified of the findings by the CIR, who had simply relied upon the
provisions of former Section 229
13
prior to its amendment by Republic Act
(RA) No. 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on
protesting an assessment. The old requirement of merely notifying the
taxpayer of the CIRs findings was changed in 1998 to informing the
taxpayer of not only the law, but also of the facts on which an assessment
would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was
issued against the estate. On April 22, 1998, the final estate tax assessment
notice, as well as demand letter, was also issued. During those dates, RA
8424 was already in effect. The notice required under the old law was no
longer sufficient under the new law.
To be simply informed in writing of the investigation being conducted and
of the recommendation for the assessment of the estate taxes due is
nothing but a perfunctory discharge of the tax function of correctly
assessing a taxpayer. The act cannot be taken to mean that Reyes already
knew the law and the facts on which the assessment was based. It does
not at all conform to the compulsory requirement under Section 228.
Moreover, the Letter of Authority received by respondent on March 14,
1997 was for the sheer purpose of investigation and was not even the
requisite notice under the law.
The procedure for protesting an assessment under the Tax Code is found in
Chapter III of Title VIII, which deals with remedies. Being procedural in
nature, can its provision then be applied retroactively? The answer is yes.
The general rule is that statutes are prospective. However, statutes that
are remedial, or that do not create new or take away vested rights, do not
fall under the general rule against the retroactive operation of
statutes.
14
Clearly, Section 228 provides for the procedure in case an
assessment is protested. The provision does not create new or take away
vested rights. In both instances, it can surely be applied retroactively.
Moreover, RA 8424 does not state, either expressly or by necessary
implication, that pending actions are excepted from the operation of
Section 228, or that applying it to pending proceedings would impair
vested rights.
Second, the non-retroactive application of Revenue Regulation (RR) No. 12-
99 is of no moment, considering that it merely implements the law.
A tax regulation is promulgated by the finance secretary to implement the
provisions of the Tax Code.
15
While it is desirable for the government
authority or administrative agency to have one immediately issued after a
law is passed, the absence of the regulation does not automatically mean
that the law itself would become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424
already stated that the taxpayer must be informed of both the law and
facts on which the assessment was based. Thus, the CIR should have
required the assessment officers of the Bureau of Internal Revenue (BIR) to
follow the clear mandate of the new law. The old regulation governing the
issuance of estate tax assessment notices ran afoul of the rule that tax
regulations -- old as they were -- should be in harmony with, and not
supplant or modify, the law.
16

It may be argued that the Tax Code provisions are not self-executory. It
would be too wide a stretch of the imagination, though, to still issue a
regulation that would simply require tax officials to inform the taxpayer, in
any manner, of the law and the facts on which an assessment was based.
That requirement is neither difficult to make nor its desired results hard to
achieve.
Moreover, an administrative rule interpretive of a statute, and not
declarative of certain rights and corresponding obligations, is given
retroactive effect as of the date of the effectivity of the statute.
17
RR 12-99
is one such rule. Being interpretive of the provisions of the Tax Code, even
if it was issued only on September 6, 1999, this regulation was to retroact
to January 1, 1998 -- a date prior to the issuance of the preliminary
assessment notice and demand letter.
Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the
Tax Code.
No doubt, Section 228 has replaced Section 229. The provision on
protesting an assessment has been amended. Furthermore, in case of
discrepancy between the law as amended and its implementing but old
regulation, the former necessarily prevails.
18
Thus, between Section 228 of
the Tax Code and the pertinent provisions of RR 12-85, the latter cannot
stand because it cannot go beyond the provision of the law. The law must
still be followed, even though the existing tax regulation at that time
provided for a different procedure. The regulation then simply provided
that notice be sent to the respondent in the form prescribed, and that no
consequence would ensue for failure to comply with that form.
Fourth, petitioner violated the cardinal rule in administrative law that the
taxpayer be accorded due process. Not only was the law here disregarded,
but no valid notice was sent, either. A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To
proceed heedlessly with tax collection without first establishing a valid
assessment is evidently violative of the cardinal principle in administrative
investigations: that taxpayers should be able to present their case and
adduce supporting evidence.
19
In the instant case, respondent has not
been informed of the basis of the estate tax liability. Without complying
with the unequivocal mandate of first informing the taxpayer of the
governments claim, there can be no deprivation of property, because no
effective protest can be made.
20
The haphazard shot at slapping an
assessment, supposedly based on estate taxations general provisions that
are expected to be known by the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the
demand letter sent, reveals the lack of basis for -- not to mention the
insufficiency of -- the gross figures and details of the itemized deductions
indicated in the notice and the letter. This Court cannot countenance an
assessment based on estimates that appear to have been arbitrarily or
capriciously arrived at. Although taxes are the lifeblood of the government,
their assessment and collection "should be made in accordance with law as
any arbitrariness will negate the very reason for government itself."
21

Fifth, the rule against estoppel does not apply. Although the government
cannot be estopped by the negligence or omission of its agents, the
obligatory provision on protesting a tax assessment cannot be rendered
nugatory by a mere act of the CIR .
Tax laws are civil in nature.
22
Under our Civil Code, acts executed against
the mandatory provisions of law are void, except when the law itself
authorizes the validity of those acts.
23
Failure to comply with Section 228
does not only render the assessment void, but also finds no validation in
any provision in the Tax Code. We cannot condone errant or enterprising
tax officials, as they are expected to be vigilant and law-abiding.
Second Issue:
Validity of Compromise
It would be premature for this Court to declare that the compromise on
the estate tax liability has been perfected and consummated, considering
the earlier determination that the assessment against the estate was void.
Nothing has been settled or finalized. Under Section 204(A) of the Tax
Code, where the basic tax involved exceeds one million pesos or the
settlement offered is less than the prescribed minimum rates, the
compromise shall be subject to the approval of the NEB composed of the
petitioner and four deputy commissioners.
Finally, as correctly held by the appellate court, this provision applies to all
compromises, whether government-initiated or not. Ubi lex non distinguit,
nec nos distinguere debemos. Where the law does not distinguish, we
should not distinguish.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. L-19727 May 20, 1965
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs. PHOENIX ASSURANCE CO., LTD., respondent.
G.R. No. L-19903 May 20, 1965
PHOENIX ASSURANCE, CO., LTD., petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.
BENGZON, J.P., J.:
From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and
543, consolidated and jointly heard therein, these two appeals were taken.
Since they involve the same facts and interrelated issues, the appeals are
herein decided together.
Phoenix Assurance Co., Ltd., a foreign insurance corporation organized
under the laws of Great Britain, is licensed to do business in the Philippines
with head office in London. Through its head office, it entered in London
into worldwide reinsurance treaties with various foreign insurance
companies. It agree to cede a portion of premiums received on original
insurances underwritten by its head office, subsidiaries, and branch offices
throughout the world, in consideration for assumption by the foreign
insurance companies of an equivalent portion of the liability from such
original insurances.1wph1.t
Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded
portions of the premiums it earned from its underwriting business in the
Philippines, as follows:
Year Amount Ceded
1952 P316,526.75
1953 P246,082.04
1954 P203,384.69
upon which the Commissioner of Internal Revenue, by letter of May 6,
1958, assessed the following withholding tax:
Year Withholding Tax
1952 P 75,966.42
1953 59,059.68
1954 48,812.32
Total

P183,838.42
=============
On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1950, claiming therein, among others, a deduction of P37,147.04
as net addition to marine insurance reserve equivalent to 40% of the gross
marine insurance premiums received during the year. The Commissioner of
Internal Revenue disallowed P11,772.57 of such claim for deduction and
subsequently assessed against Phoenix Assurance Co., Ltd. the sum of
P1,884.00 as deficiency income tax. The disallowance resulted from the
fixing by the Commissioner of the net addition to the marine insurance
reserve at 100% of the marine insurance premiums received during the last
three months of the year. The Commissioner assumed that "ninety and
third, days are approximately the length of time required before shipments
reach their destination or before claims are received by the insurance
companies."
On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax
return for 1952, declaring therein a deduction from gross income of
P35,912.25 as part of the head office expenses incurred for its Philippine
business, computed at 5% on its gross Philippine income.
On August 30, 1955 it amended its income tax return for 1952 by excluding
from its gross income the amount of P316,526.75 representing reinsurance
premiums ceded to foreign reinsurers and further eliminating deductions
corresponding to the coded premiums. The amended return showed an
income tax due in the amount of P2,502.00. The Commissioner of Internal
Revenue disallowed P15,826.35 of the claimed deduction for head office
expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958.
On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income
tax return for 1953 and claimed therein a deduction from gross income of
P33,070.88 as head office expenses allocable to its Philippine business,
equivalent to 5%, of its gross Philippine income. On August 30, 1955 it
amended its 1953 income tax return to exclude from its gross income the
amount of P246,082.04 representing reinsurance premiums ceded to
foreign reinsurers. At the same time, it requested the refund of P23,409.00
as overpaid income tax for 1953. To avoid the prescriptive period provided
for in Section 306 of the Tax Code, it filed a petition for review on April 11,
1956 in the Court of Tax Appeals praying for such refund. After verification
of the amended income tax return the Commissioner of Internal Revenue
disallowed P12,304.10 of the deduction representing head office expenses
allocable to Philippine business thereby reducing the refundable amount
to P20,180.00.
On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income
tax return for 1954 claiming therein, among others, a deduction from gross
income of P99,624.75 as head office expenses allocable to its Philippine
business, computed at 5% of its gross Philippine income. It also excluded
from its gross income the amount of P203,384.69 representing reinsurance
premiums ceded to foreign reinsurers not doing business in the
Philippines.
On August 1, 1958 the Bureau of Internal Revenue released the following
assessment for deficiency income tax for the years 1952 and 1954 against
Phoenix Assurance Co., Ltd.:
1952
Net income per audited return P 12,511.61
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . . P 35,912.25

Amount allowed . . . . . . . . . . . . 20,085.90 P 15,826.35
Net income per investigation

P 28,337.96

Tax due thereon P 5,667.00
===========
1954
Net income per audited P160,320.21
Unallowable deduction & additional income:
Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . . . . P29,624.73

Amount allowed . . . . . . . . . . . . 19,455.50 10,16.23
Net income per investigation

P170,489.41

Tax due thereon P 39,737.00
Less: amount already assessed 36,890.00
DEFICIENCY TAX DUE

P 2,847.00
===========
The above assessment resulted from the disallowance of a portion of the
deduction claimed by Phoenix Assurance Co., Ltd. as head office expenses
allocable to its business in the Philippines fixed by the Commissioner at 5%
of the net Philippine income instead of 5% of the gross Philippine income
as claimed in the returns.
Phoenix Assurance Co., Ltd. protested against the aforesaid assessments
for withholding tax and deficiency income tax. However, the Commissioner
of Internal Revenue denied such protest. Subsequently, Phoenix Assurance
Co., Ltd. appealed to the Court of Tax Appeals. In a decision dated February
14, 1962, the Court of Tax Appeals allowed in full the decision claimed by
Phoenix Assurance Co., Ltd. for 1950 as net addition to marine insurance
reserve; determined the allowable head office expenses allocable to
Philippine business to be 5% of the net income in the Philippines; declared
the right of the Commissioner of Internal Revenue to assess deficiency
income tax for 1952 to have prescribed; absolved Phoenix Assurance Co.,
Ltd. from payment of the statutory penalties for non-filing of withholding
tax return; and, rendered the following judgment:
WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is
hereby ordered to pay the Commissioner of Internal Revenue
the respective amounts of P75,966.42, P59,059.68 and
P48,812.32, as withholding tax for the years 1952, 1953 and
1954, and P2,847.00 as income tax for 1954, or the total sum of
P186,685.42 within thirty (30) days from the date this decision
becomes final. Upon the other hand, the respondent
Commissioner is ordered to refund to petitioner the sum of
P20,180.00 as overpaid income tax for 1953, which sum is to be
deducted from the total sum of P186,685.42 due as taxes.
If any amount of the tax is not paid within the time prescribed
above, there shall be collected a surcharge of 5% of the tax
unpaid, plus interest at the rate of 1% a month from the date of
delinquency to the date of payment, provided that the
maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3)
years. Without pronouncement as to costs.
Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue
have appealed to this Court raising the following issues: (1) Whether or not
reinsurance premiums ceded to foreign reinsurers not doing business in
the Philippines pursuant to reinsurance contracts executed abroad are
subject to withholding tax; (2) Whether or not the right of the
Commissioner of Internal Revenue to assess deficiency income tax for the
year 1952 against Phoenix Assurance Co., Ltd., has prescribed; (3) Whether
or not the deduction of claimed by the Phoenix Assurance Co., Ltd.as net
addition to reserve for the year 1950 is excessive; (4) Whether or not the
deductions claimed by Phoenix Assurance Co., Ltd. for head office
expenses allocable to Philippine business for the years 1952, 1953 and
1954 are excessive.
The question of whether or not reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines pursuant to contracts
executed abroad are income from sources within the Philippines subject to
withholding tax under Sections 53 and 54 of the Tax Code has already been
resolved in the affirmative in British Traders' Insurance Co., Ltd.v.
Commisioner of Internal Revenue, L-20501, April 30, 1965.
1

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its
income tax return for 1952 on April 1, 1953 showing a loss of P199,583.93.
It amended said return on August 30, 1955 reporting a tax liability of
P2,502.00. On July 24, 1958, after examination of the amended return, the
Commissioner of Internal Revenue assessed deficiency income tax in the
sum of P5,667.00. The Court of Tax Appeals found the right of the
Commissioner of Internal Revenue barred by prescription, the same having
been exercised more than five years from the date the original return was
filed. On the other hand, the Commissioner of Internal Revenue insists that
his right to issue the assessment has not prescribed inasmuch as the same
was availed of before the 5-year period provided for in Section 331 of the
Tax Code expired, counting the running of the period from August 30,
1955, the date when the amended return was filed.
Section 331 of the Tax Code, which limits the right of the Commissioner of
Internal Revenue to assess income tax within five years from the Filipino of
the income tax return, states:
SEC. 331. Period of limitation upon assessment and collection.
Except as provided in the succeeding section internal
revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after
the expiration of such period. For the purposes of this section, a
return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day: Provided,
That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
The question is: Should the running of the prescriptive period commence
from the filing of the original or amended return?
The Court of Tax Appears that the original return was a complete return
containing "information on various items of income and deduction from
which respondent may intelligently compute and determine the tax
liability of petitioner, hence, the prescriptive period should be counted
from the filing of said original return. On the other hand, the
Commissioner of Internal Revenue maintains that:
"... the deficiency income tax in question could not possibly be
determined, or assessed, on the basis of the original return filed
on April 1, 1953, for considering that the declared loss
amounted to P199,583.93, the mere disallowance of part of the
head office expenses could not probably result in said loss being
completely wiped out and Phoenix being liable to deficiency
tax. Not until the amended return was filed on August 30, 1955
could the Commissioner assess the deficiency income tax in
question."
Accordingly, he would wish to press for the counting of the prescriptive
period from the filing of the amended return.
To our mind, the Commissioner's view should be sustained. The changes
and alterations embodied in the amended income tax return consisted of
the exclusion of reinsurance premiums received from domestic insurance
companies by Phoenix Assurance Co., Ltd.'s London head office,
reinsurance premiums ceded to foreign reinsurers not doing business in
the Philippines and various items of deduction attributable to such
excluded reinsurance premiums thereby substantially modifying the
original return. Furthermore, although the deduction for head office
expenses allocable to Philippine business, whose disallowance gave rise to
the deficiency tax, was claimed also in the original return, the
Commissioner could not have possibly determined a deficiency tax
thereunder because Phoenix Assurance Co., Ltd. declared a loss of
P199,583.93 therein which would have more than offset such disallowance
of P15,826.35. Considering that the deficiency assessment was based on
the amended return which, as aforestated, is substantially different from
the original return, the period of limitation of the right to issue the same
should be counted from the filing of the amended income tax return. From
August 30, 1955, when the amended return was filed, to July 24, 1958,
when the deficiency assessment was issued, less than five years elapsed.
The right of the Commissioner to assess the deficiency tax on such
amended return has not prescribed.
To strengthen our opinion, we believe that to hold otherwise, we would be
paving the way for taxpayers to evade the payment of taxes by simply
reporting in their original return heavy losses and amending the same
more than five years later when the Commissioner of Internal Revenue has
lost his authority to assess the proper tax thereunder. The object of the
Tax Code is to impose taxes for the needs of the Government, not to
enhance tax avoidance to its prejudice.
We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of
P37,147.04 for 1950 representing net addition to reserve computed at 40%
of the marine insurance premiums received during the year. Treating said
said deduction to be excessive, the Commissioner of Internal Revenue
reduced the same to P25,374.47 which is equivalent to 100% of all marine
insurance premiums received during the last months of the year.
Paragraph (a) of Section 32 of the Tax Code states:
SEC. 32. Special provisions regarding income and deductions of
insurance companies, whether domestic or foreign. (a)
Special deductions allowed to insurance companies. In the
case of insurance companies, except domestic life insurance
companies and foreign life insurance companies doing business
in the Philippines, the net additions, if any, required by law to
be made within the year to reserve funds and the sums other
than dividends paid within the year on policy and annuity
contracts may be deducted from their gross income: Provided,
however, That the released reserve be treated as income for
the year of release.
Section 186 of the Insurance Law requires the setting up of reserves for
liability on marine insurance:
SEC. 186. ... Provided, That for marine risks the insuring
company shall be required to charge as the liability for
reinsurance fifty per centum of the premiums written in the
policies upon yearly risks, and the full premiums written in the
policies upon all other marine risks not terminated (Emphasis
supplied.)
The reserve required for marine insurance is determined on two bases:
50% of premiums under policies on yearly risks and 100% of premiums
under policies of marine risks not terminated during the year. Section 32
(a) of the Tax Code quoted above allows the full amount of such reserve to
be deducted from gross income.
It may be noteworthy to observe that the formulas for determining the
marine reserve employed by Phoenix Assurance Co., Ltd. and the
Commissioner of Internal Revenue 40% of premiums received during
the year and 100% of premiums received during the last three months of
the year, respectively do not comply with Section 186. Said
determination runs short of the requirement. For purposes of the
Insurance Law, this Court therefore cannot countenance the same. The
reserve called for in Section 186 is a safeguard to the general public and
should be strictly followed not only because it is an express provision but
also as a matter of public policy. However, for income tax purposes a
taxpayer is free to deduct from its gross income a lesser amount, or not to
claim any deduction at all. What is prohibited by the income tax law is to
claim a deduction beyond the amount authorized therein.
Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less
than the amount required in Section 186 of the Insurance Law, the same
cannot be and is not excessive, and should therefore be fully allowed.
*

We come now to the controversy on the taxpayer's claim for deduction on
head office expenses incurred during 1952, 1953, and 1954 allocable to its
Philippine business computed at 5% of its gross income in the Philippines
The Commissioner of Internal Revenue redetermined such deduction at 5%
on Phoenix Assurance Co., Ltd's net income thereby partially disallowing
the latter's claim. The parties are agreed as to the percentage 5% but
differ as to the basis of computation. Phoenix Assurance Co. Lt. insists that
the 5% head office expenses be determined from the gross income, while
the Commissioner wants the computation to be made on the net income.
What, therefore, needs to be resolved is: Should the 5% be computed on
the gross or net income?
The record shows that the gross income of Phoenix Assurance Co., Ltd.
consists of income from its Philippine business as well as reinsurance
premiums received for its head office in London and reinsurance premiums
ceded to foreign reinsurance. Since the items of income not belonging to
its Philippine business are not taxable to its Philippine branch, they should
be excluded in determining the head office expenses allowable to said
Philippine branch. This conclusion finds support in paragraph 2, subsection
(a), Section 30 of the Tax Code, quoted hereunder:
(2) Expenses allowable to non-resident alien individuals and
foreign corporations. In the case of a non-resident alien
individual or a foreign corporation, the expenses deductible are
the, necessary expenses paid or incurred in carrying on any
business or trade conducted within the Philippines exclusively.
(Emphasis supplied.)
Consequently, the deficiency assessments for 1952, 1953 and 1954,
resulting from partial disallowance of deduction representing head office
expenses, are sustained.
Finally, the Commissioner of Internal Revenue assails the dispositive
portion of the Tax Court's decision limiting the maximum amount of
interest collectible for deliquency of an amount corresponding to a period
of three years. He contends that since such limitation was incorporated
into Section 51 of the Tax Code by Republic Act 2343 which took effect
only on June 20, 1959, it must not be applied retroactively on withholding
tax for the years 1952, 1953 and 1954.
The imposition of interest on unpaid taxes is one of the statutory penalties
for tax delinquency, from the payments of which the Court of Tax Appeals
absolved the Phoenix Assurance Co., Ltd. on the equitable ground that the
latter's failure to pay the withholding tax was due to the Commissioner's
opinion that no withholding tax was due. Consequently, the taxpayer could
be held liable for the payment of statutory penalties only upon its failure
to comply with the Tax Court's judgment rendered on February 14. 1962,
after Republic Act 2343 took effect. This part of the ruling of the lower
court ought not to be disturbed.
WHEREFORE, the decision appealed from is modified, Phoenix Assurance
Co., Ltd. is hereby ordered to pay the Commissioner, of Internal Revenue
the amount of P75,966.42, P59,059.68 and P48,812.32 as withholding tax
for the years 1952, 1953 and 1954, respectively, and the sums of P5,667.00
and P2,847.00 as income tax for 1952 and 1954 or a total of P192,352.42.
The Commissioner of Internal Revenue is ordered to refund to Phoenix
Assurance Co., Ltd. the amount of P20,180.00 as overpaid income tax for
1953, which should be deducted from the amount of P192,352.42.
If the amount of P192,352.42 or a portion thereof is not paid within thirty
(30) days from the date this judgment becomes final, there should be
collected a surcharge and interest as provided for in Section 51(c) (2) of the
Tax Code. No costs. It is so ordered.
[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.
D E C I S I O N
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 interests 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]
in CTA Case No. 5271. The CTA disposed as follows:
WHEREFORE, finding *the herein petitioners+ 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.
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 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 of 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. Respondents ground of
denial, therefore, that there was no formal assessment issued, is
untenable.
It is the Courts honest belief, that the criminal case for tax evasion is
already an assessment. 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
taxpayers 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 respondents 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
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 the 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.
[9]

In the main, the Court will resolve whether the revenue officers
Affidavit-Report, which was attached to the criminal Complaint filed with
the Department of Justice, constituted an assessment that could be
questioned before the Court of Tax Appeals.
The Courts 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 revenue
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 the 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 rate as may be
prescribed by rules and regulations, is to be collected from 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]

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.
[17]

Fixes the liability of the taxpayer and ascertains the facts and furnishes
the data for the proper presentation of tax rolls.
[18]

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 factomake 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 NIRC,
[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.
[G.R. No. 136975. March 31, 2005]
COMMISSION OF INTERNAL REVENUE, petitioner, vs. HANTEX TRADING
CO., INC., respondent.
D E C I S I O N
CALLEJO, SR., J.:
Before us is a petition for review of the Decision
[ 1 ]
of the Court of
Appeals (CA) which reversed the Decision
[ 2 ]
of the Court of Tax Appeals
(CTA) in CTA Case No. 5126, upholding the deficiency income and sales tax
assessments against respondent Hantex Trading Co., Inc.
The Antecedents
The respondent is a corporation duly organized and existing under
the laws of the Philippines. Being engaged in the sale of plastic products, it
imports synthetic resin and other chemicals for the manufacture of its
products. For this purpose, it is required to file an Import Entry and
Internal Revenue Declaration (Consumption Entry) with the Bureau of
Customs under Section 1301 of the Tariff and Customs Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of
Counter-Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information that the
respondent had imported synthetic resin amounting to P115,599,018.00
but only declared P45,538,694.57.
[ 3 ]
According to the informer, based on
photocopies of 77 Consumption Entries furnished by another informer, the
1987 importations of the respondent were understated in its accounting
records.
[ 4 ]
Amoto submitted a report to the EIIB Commissioner
recommending that an inventory audit of the respondent be conducted by
the Internal Inquiry and Prosecution Office (IIPO) of the EIIB.
[ 5 ]

Acting on the said report, Jose T. Almonte, then Commissioner of
the EIIB, issued Mission Order No. 398-89
[ 6 ]
dated November 14, 1989 for
the audit and investigation of the importations of Hantex for 1987. The
IIPO issued subpoena duces tecum and ad testificandum for the president
and general manager of the respondent to appear in a hearing and bring
the following:
1. Books of Accounts for the year 1987;
2. Record of Importations of Synthetic Resin and Calcium
Carbonate for the year 1987;
3. Income tax returns & attachments for 1987; and
4. Record of tax payments.
[ 7 ]

However, the respondents president and general manager refused
to comply with the subpoena, contending that its books of accounts and
records of importation of synthetic resin and calcium bicarbonate had
been investigated repeatedly by the Bureau of Internal Revenue (BIR) on
prior occasions.
[ 8 ]
The IIPO explained that despite such previous
investigations, the EIIB was still authorized to conduct an investigation
pursuant to Section 26-A of Executive Order No. 127. Still, the respondent
refused to comply with the subpoena issued by the IIPO. The latter
forthwith secured certified copies of the Profit and Loss Statements for
1987 filed by the respondent with the Securities and Exchange Commission
(SEC).
[ 9 ]
However, the IIPO failed to secure certified copies of the
respondents 1987 Consumption Entries from the Bureau of Customs since,
according to the custodian thereof, the original copies had been eaten by
termites.
[ 1 0 ]

In a Letter dated June 28, 1990, the IIPO requested the Chief of the
Collection Division, Manila International Container Port, and the Acting
Chief of the Collection Division, Port of Manila, to authenticate the
machine copies of the import entries supplied by the informer. However,
Chief of the Collection Division Merlita D. Tomas could not do so because
the Collection Division did not have the original copies of the
entries. Instead, she wrote the IIPO that, as gleaned from the records, the
following entries had been duly processed and released after the payment
of duties and taxes:
IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987
ENTRY NO. DATE RELEASED ENTRY NO. DATE RELEASED
03058-87 1-30-87 50265-87 12-09-87
09120-87 3-20-87 46427-87 11-27-87
18089-87 5-21-87 30764-87 8-21-87
19439-87 6-2-87 30833-87 8-20-87
19441-87 6-3-87 34690-87 9-16-87
11667-87 4-15-87 34722-87 9-11-87
23294-87 7-7-87 43234-87 11-2-87
45478-87 11-16-87 44850-87 11-16-87
45691-87 12-2-87 44851-87 11-16-87
25464-87 7-16-87 46461-87 11-19-87
26483-87 7-23-87 46467-87 11-18-87
29950-87 8-11-87 48091-87 11-27-87
[ 1 1 ]

Acting Chief of the Collection Division of the Bureau of Customs
Augusto S. Danganan could not authenticate the machine copies of the
import entries as well, since the original copies of the said entries filed
with the Bureau of Customs had apparently been eaten by
termites. However, he issued a certification that the following
enumerated entries were filed by the respondent which were processed
and released from the Port of Manila after payment of duties and taxes, to
wit:
Hantex Trading Co., Inc.
Entry No. Date Released Entry No. Date Released
03903 1-29-87 22869 4-8-87
04414 1-20-87 19441 3-31-87
10683 2-17-87 24189 4-21-87
12611 2-24-87 26431 4-20-87
12989 2-26-87 45478 7-3-87
17050 3-13-87 26796 4-23-87
17169 3-13-87 28827 4-30-87
18089 3-16-87 31617 5-14-87
19439 4-1-87 39068 6-5-87
21189 4-3-87 42581 6-21-87
43451 6-29-87 42793 6-23-87
42795 6-23-87 45477 7-3-87
35582 not received 85830 11-13-87
45691 7-3-87 86650 not received
46187 7-8-87 87647 11-18-87
46427 7-3-87 88829 11-23-87
57669 8-12-87 92293 12-3-87
62471 8-28-87 93292 12-7-87
63187 9-2-87 96357 12-16-87
66859 9-15-87 96822 12-15-87
67890 9-17-87 98823 not received
68115 9-15-87 99428 12-28-87
69974 9-24-87 99429 12-28-87
72213 10-2-87 99441 12-28-87
77688 10-16-87 101406 1-5-87
84253 11-10-87 101407 1-8-87
85534 11-11-87 03118 1-19-87
[ 1 2 ]

Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo
Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an
investigation. They relied on the certified copies of the respondents Profit
and Loss Statement for 1987 and 1988 on file with the SEC, the machine
copies of the Consumption Entries, Series of 1987, submitted by the
informer, as well as excerpts from the entries certified by Tomas and
Danganan.
Based on the documents/records on hand, inclusive of the machine
copies of the Consumption Entries, the EIIB found that for 1987, the
respondent had importations totaling P105,716,527.00 (inclusive of
advance sales tax). Compared with the declared sales based on the Profit
and Loss Statements filed with the SEC, the respondent had unreported
sales in the amount of P63,032,989.17, and its corresponding income tax
liability was P41,916,937.78, inclusive of penalty charge and interests.
EIIB Commissioner Almonte transmitted the entire docket of the
case to the BIR and recommended the collection of the total tax
assessment from the respondent.
[ 1 3 ]

On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a
Memorandum to the BIR Assistant Commissioner for Special Operations
Service, directing the latter to prepare a conference letter advising the
respondent of its deficiency taxes.
[ 1 4 ]

Meanwhile, as ordered by the Regional Director, Revenue
Enforcement Officers Saturnino D. Torres and Wilson Filamor conducted an
investigation on the 1987 importations of the respondent, in the light of
the records elevated by the EIIB to the BIR, inclusive of the photocopies of
the Consumption Entries. They were to ascertain the respondents liability
for deficiency sales and income taxes for 1987, if any. Per Torres and
Filamors Report dated March 6, 1991 which was based on the report of
the EIIB and the documents/records appended thereto, there was a prima
facie case of fraud against the respondent in filing its 1987 Consumption
Entry reports with the Bureau of Customs. They found that the
respondent had unrecorded importation in the total amount
of P70,661,694.00, and that the amount was not declared in its income tax
return for 1987. The District Revenue Officer and the Regional Director of
the BIR concurred with the report.
[ 1 5 ]

Based on the said report, the Acting Chief of the Special
Investigation Branch wrote the respondent and invited its representative
to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency
internal revenue taxes and to present whatever documentary and other
evidence to refute the same.
[ 1 6 ]
Appended to the letter was a
computation of the deficiency income and sales tax due from the
respondent, inclusive of increments:
B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00
50% Surcharge C1 x 50% 2,794,630.50
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
Total Due 17,783,395.03
Less: Advanced Sales Taxes Paid 11,636,352.00
Deficiency Sales Tax 6,147,043.03
50% Surcharge C2 x 50% 3,073,521.52
Interest to 2/28/91 5,532,338.73
Total 14,752,903.28
[ 1 7 ]

===========
The invitation was reiterated in a Letter dated March 15, 1991. In
his Reply dated March 15, 1991, Mariano O. Chua, the President and
General Manager of the respondent, requested that the report of Torres
and Filamor be set aside on the following claim:
*W+e had already been investigated by RDO No. 23 under Letters of
Authority Nos. 0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17,
1988 and 0347838 RR dated March 2, 1988, and re-investigated by the
Special Investigation Team on Aug. 17, 1988 under Letter of Authority No.
0357464 RR, and the Intelligence and Investigation Office on Sept. 27, 1988
under Letter of Authority No. 0020188 NA, all for income and business tax
liabilities for 1987. The Economic Intelligence and Investigation Bureau on
Nov. 20, 1989, likewise, confronted us on the same information for the
same year.
In all of these investigations, save your request for an informal conference,
we welcomed them and proved the contrary of the allegation. Now, with
your new inquiry, we think that there will be no end to the problem.
Madam, we had been subjected to so many investigations and re-
investigations for 1987 and nothing came out except the payment of
deficiency taxes as a result of oversight. Tax evasion through
underdeclaration of income had never been proven.
[ 1 8 ]

Invoking Section 235
[ 1 9 ]
of the 1977 National Internal Revenue
Code (NIRC), as amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through
Assistant Commissioner for Collection Jaime M. Maza, sent a Letter dated
April 15, 1991 to the respondent demanding payment of its deficiency
income tax of P13,414,226.40 and deficiency sales tax of P14,752,903.25,
inclusive of surcharge and interest.
[ 2 0 ]
Appended thereto were the
Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-
87-91-001655.
[ 2 1 ]

On February 12, 1992, the Chief of the Accounts Receivables/Billing
Division of the BIR sent a letter to the respondent demanding payment of
its tax liability due for 1987 within ten (10) days from notice, on pain of the
collection tax due via a warrant of distraint and levy and/or judicial
action.
[ 2 2 ]
The Warrant of Distraint and/or Levy
[ 2 3 ]
was actually served on
the respondent on January 21, 1992. On September 7, 1992, it wrote the
Commissioner of Internal Revenue protesting the assessment on the
following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS
LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF
OUR RECORDS WAS EVER MADE BY THE EIIB WHICH
RECOMMENDED ITS ISSUANCE.
[ 2 4 ]

II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR
PURCHASES FOR 1987 AMOUNTED TO P105,716,527.00
AS CLAIMED BY THE EIIB, THE ASSESSMENT OF A
DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT
FAILED TO CONSIDER OUR REAL PURCHASES
OF P45,538,694.57.
[ 2 5 ]

III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS
ALSO BASELESS AND UNFOUNDED CONSIDERING THAT
WE HAVE DUTIFULLY PAID THE SALES TAX DUE FROM
OUR BUSINESS.
[ 2 6 ]

In view of the impasse, administrative hearings were conducted on
the respondents protest to the assessment. During the hearing of August
20, 1993, the IIPO representative presented the photocopies of the
Consumption and Import Entries and the Certifications issued by Tomas
and Danganan of the Bureau of Customs. The IIPO representative testified
that the Bureau of Customs failed to furnish the EIIB with certified copies
of the Consumption and Import Entries; hence, the EIIB relied on the
machine copies from their informer.
[ 2 7 ]

The respondent wrote the BIR Commissioner on July 12, 1993
questioning the assessment on the ground that the EIIB representative
failed to present the original, or authenticated, or duly certified copies of
the Consumption and Import Entry Accounts, or excerpts thereof if the
original copies were not readily available; or, if the originals were in the
official custody of a public officer, certified copies thereof as provided for
in Section 12, Chapter 3, Book VII, Administrative Procedure,
Administrative Order of 1987. It stated that the only copies of the
Consumption Entries submitted to the Hearing Officer were mere machine
copies furnished by an informer of the EIIB. It asserted that the letters of
Tomas and Danganan were unreliable because of the following:
In the said letters, the two collection officers merely submitted a listing of
alleged import entry numbers and dates released of alleged importations
by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified
that the corresponding duties and taxes were paid after being processed in
their offices. In said letters, no amounts of the landed costs and advance
sales tax and duties were stated, and no particulars of the duties and taxes
paid per import entry document was presented.
The contents of the two letters failed to indicate the particulars of the
importations per entry number, and the said letters do not constitute as
evidence of the amounts of importations of Hantex Trading Co., Inc. in
1987.
[ 2 8 ]

The respondent cited the following findings of the Hearing Officer:
*T+hat the import entry documents do not constitute evidence only
indicate that the tax assessments in question have no factual basis, and
must, at this point in time, be withdrawn and cancelled. Any new findings
by the IIPO representative who attended the hearing could not be used as
evidence in this hearing, because all the issues on the tax assessments in
question have already been raised by the herein taxpayer.
[ 2 9 ]

The respondent requested anew that the income tax deficiency
assessment and the sales tax deficiency assessment be set aside for lack of
factual and legal basis.
The BIR Commissioner
[ 3 0 ]
wrote the respondent on December 10,
1993, denying its letter-request for the dismissal of the
assessments.
[ 3 1 ]
The BIR Commissioner admitted, in the said letter, the
possibility that the figures appearing in the photocopies of the
Consumption Entries had been tampered with. She averred, however, that
she was not proscribed from relying on other admissible evidence, namely,
the Letters of Torres and Filamor dated August 7 and 22, 1990 on their
investigation of the respondents tax liability. The Commissioner
emphasized that her decision was final.
[ 3 2 ]

The respondent forthwith filed a petition for review in the CTA of
the Commissioners Final Assessment Letter dated December 10, 1993 on
the following grounds:
First. The alleged 1987 deficiency income tax assessment (including
increments) and the alleged 1987 deficiency sales tax assessment
(including increments) are void ab initio, since under Sections 16(a) and
49(b) of the Tax Code, the Commissioner shall examine a return after it is
filed and, thereafter, assess the correct amount of tax. The following facts
obtaining in this case, however, are indicative of the incorrectness of the
tax assessments in question: the deficiency interests imposed in the
income and percentage tax deficiency assessment notices were computed
in violation of the provisions of Section 249(b) of the NIRC of 1977, as
amended; the percentage tax deficiency was computed on an annual basis
for the year 1987 in accordance with the provision of Section 193, which
should have been computed in accordance with Section 162 of the 1977
NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and the
BIR official who signed the deficiency tax assessments was the Assistant
Commissioner for Collection, who had no authority to sign the same under
the NIRC.
Second. Even granting arguendo that the deficiency taxes and
increments for 1987 against the respondent were correctly computed in
accordance with the provisions of the Tax Code, the facts indicate that the
above-stated assessments were based on alleged documents which are
inadmissible in either administrative or judicial proceedings. Moreover,
the alleged bases of the tax computations were anchored on mere
presumptions and not on actual facts. The alleged undeclared purchases
for 1987 were based on mere photocopies of alleged import entry
documents, not the original ones, and which had never been duly certified
by the public officer charged with the custody of such records in the
Bureau of Customs. According to the respondent, the alleged undeclared
sales were computed based on mere presumptions as to the alleged gross
profit contained in its 1987 financial statement. Moreover, even the
alleged financial statement of the respondent was a mere machine copy
and not an official copy of the 1987 income and business tax
returns. Finally, the respondent was following the accrual method of
accounting in 1987, yet, the BIR investigator who computed the 1987
income tax deficiency failed to allow as a deductible item the alleged sales
tax deficiency for 1987 as provided for under Section 30(c) of the NIRC of
1986.
[ 3 3 ]

The Commissioner did not adduce in evidence the original or
certified true copies of the 1987 Consumption Entries on file with the
Commission on Audit. Instead, she offered in evidence as proof of the
contents thereof, the photocopies of the Consumption Entries which the
respondent objected to for being inadmissible in evidence.
[ 3 4 ]
She also
failed to present any witness to prove the correct amount of tax due from
it. Nevertheless, the CTA provisionally admitted the said documents in
evidence, subject to its final evaluation of their relevancy and probative
weight to the issues involved.
[ 3 5 ]

On December 11, 1997, the CTA rendered a decision, the dispositive
portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered
DENYING the herein petition. Petitioner is hereby ORDERED TO PAY the
respondent Commissioner of Internal Revenue its deficiency income and
sales taxes for the year 1987 in the amounts of P11,182,350.26
and P12,660,382.46, respectively, plus 20% delinquency interest per
annum on both deficiency taxes from April 15, 1991 until fully paid
pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs against the
petitioner.
SO ORDERED.
[ 3 6 ]

The CTA ruled that the respondent was burdened to prove not only
that the assessment was erroneous, but also to adduce the correct taxes to
be paid by it. The CTA declared that the respondent failed to prove the
correct amount of taxes due to the BIR. It also ruled that the respondent
was burdened to adduce in evidence a certification from the Bureau of
Customs that the Consumption Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of
the CTA. The dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED
and the December 11, 1997 decision of the CTA in CTA Case No. 5162
affirming the 1987 deficiency income and sales tax assessments and the
increments thereof, issued by the BIR is hereby REVERSED. No costs.
[ 3 7 ]

The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency assessments
issued by the petitioner were unlawful and baseless since the copies of the
import entries relied upon in computing the deficiency tax of the
respondent were not duly authenticated by the public officer charged with
their custody, nor verified under oath by the EIIB and the BIR
investigators.
[ 3 8 ]
The CA also noted that the public officer charged with
the custody of the import entries was never presented in court to lend
credence to the alleged loss of the originals.
[ 3 9 ]
The CA pointed out that
an import entry is a public document which falls within the provisions of
Section 19, Rule 132 of the Rules of Court, and to be admissible for any
legal purpose, Section 24, Rule 132 of the Rules of Court should
apply.
[ 4 0 ]
Citing the ruling of this Court inCollector of Internal Revenue v.
Benipayo,
[ 4 1 ]
the CA ruled that the assessments were unlawful because
they were based on hearsay evidence. The CA also ruled that the
respondent was deprived of its right to due process of law.
The CA added that the CTA should not have just brushed aside the
legal requisites provided for under the pertinent provisions of the Rules of
Court in the matter of the admissibility of public documents, considering
that substantive rules of evidence should not be disregarded. It also ruled
that the certifications made by the two Customs Collection Chiefs under
the guise of supporting the respondents alleged tax deficiency
assessments invoking the best evidence obtainable rule under the Tax
Code should not be permitted to supplant the best evidence rule under
Section 7, Rule 130 of the Rules of Court.
Finally, the CA noted that the tax deficiency assessments were
computed without the tax returns. The CA opined that the use of the tax
returns is indispensable in the computation of a tax deficiency; hence, this
essential requirement must be complied with in the preparation and
issuance of valid tax deficiency assessments.
[ 4 2 ]

The Present Petition
The Commissioner of Internal Revenue, the petitioner herein, filed
the present petition for review under Rule 45 of the Rules of Court for the
reversal of the decision of the CA and for the reinstatement of the ruling of
the CTA.
As gleaned from the pleadings of the parties, the threshold issues
for resolution are the following: (a) whether the petition at bench is proper
and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b)
whether the December 10, 1991 final assessment of the petitioner against
the respondent for deficiency income tax and sales tax for the latters 1987
importation of resins and calcium bicarbonate is based on competent
evidence and the law; and (c) the total amount of deficiency taxes due
from the respondent for 1987, if any.
On the first issue, the respondent points out that the petition raises
both questions of facts and law which cannot be the subject of an appeal
by certiorari under Rule 45 of the Rules of Court. The respondent notes
that the petition is defective because the verification and the certification
against forum shopping were not signed by the petitioner herself, but only
by the Regional Director of the BIR. The respondent submits that the
petitioner should have filed a motion for reconsideration with the CA
before filing the instant petition for review.
[ 4 3 ]

We find and so rule that the petition is sufficient in form. A
verification and certification against forum shopping signed by the
Regional Director constitutes sufficient compliance with the requirements
of Sections 4 and 5, Rule 7 of the Rules of Court. Under Section 10 of the
NIRC of 1997,
[ 4 4 ]
the Regional Director has the power to administer and
enforce internal revenue laws, rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and
fees. Such power is broad enough to vest the Revenue Regional Director
with the authority to sign the verification and certification against forum
shopping in behalf of the Commissioner of Internal Revenue. There is no
other person in a better position to know the collection cases filed under
his jurisdiction than the Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-83,
[ 4 5 ]
the
Regional Director is authorized to sign all pleadings filed in connection with
cases referred to the Revenue Regions by the National Office which,
otherwise, require the signature of the petitioner.
We do not agree with the contention of the respondent that a
motion for reconsideration ought to have been filed before the filing of the
instant petition. A motion for reconsideration of the decision of the CA is
not a condition sine qua non for the filing of a petition for review under
Rule 45. As we held in Almora v. Court of Appeals:
[ 4 6 ]

Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:
A party may appeal by certiorari from a judgment of the Court of Appeals,
by filing with the Supreme Court a petition for certiorari within fifteen (15)
days from notice of judgment, or of the denial of his motion for
reconsideration filed in due time. (Emphasis supplied)
The conjunctive or clearly indicates that the 15-day reglementary period
for the filing of a petition for certiorari under Rule 45 commences either
from notice of the questioned judgment or from notice of denial of the
appellants motion for reconsideration. A prior motion for reconsideration
is not indispensable for a petition for review on certiorari under Rule 45 to
prosper.
[ 4 7 ]

While Rule 45 of the Rules of Court provides that only questions of
law may be raised by the petitioner and resolved by the Court, under
exceptional circumstances, the Court may take cognizance thereof and
resolve questions of fact. In this case, the findings and conclusion of the
CA are inconsistent with those of the CTA, not to mention those of the
Commissioner of Internal Revenue. The issues raised in this case relate to
the propriety and the correctness of the tax assessments made by the
petitioner against the respondent, as well as the propriety of the
application of Section 16, paragraph (b) of the 1977 NIRC, as amended by
Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in
relation to Section 3, Rule 132 of the Rules of Evidence. There is also an
imperative need for the Court to resolve the threshold factual issues to
give justice to the parties, and to determine whether the CA capriciously
ignored, misunderstood or misinterpreted cogent facts and circumstances
which, if considered, would change the outcome of the case.
On the second issue, the petitioner asserts that since the
respondent refused to cooperate and show its 1987 books of account and
other accounting records, it was proper for her to resort to the best
evidence obtainable the photocopies of the import entries in the Bureau
of Customs and the respondents financial statement filed with the
SEC.
[ 4 8 ]
The petitioner maintains that these import entries were
admissible as secondary evidence under the best evidence obtainable rule,
since they were duly authenticated by the Bureau of Customs officials who
processed the documents and released the cargoes after payment of the
duties and taxes due.
[ 4 9 ]
Further, the petitioner points out that under the
best evidence obtainable rule, the tax return is not important in computing
the tax deficiency.
[ 5 0 ]

The petitioner avers that the best evidence obtainable rule under
Section 16 of the 1977 NIRC, as amended, legally cannot be equated to the
best evidence rule under the Rules of Court; nor can the best evidence
rule, being procedural law, be made strictly operative in the interpretation
of the best evidence obtainable rule which is substantive in
character.
[ 5 1 ]
The petitioner posits that the CTA is not strictly bound by
technical rules of evidence, the reason being that the quantum of evidence
required in the said court is merely substantial evidence.
[ 5 2 ]

Finally, the petitioner avers that the respondent has the burden of
proof to show the correct assessments; otherwise, the presumption in
favor of the correctness of the assessments made by it stands.
[ 5 3 ]
Since
the respondent was allowed to explain its side, there was no violation of
due process.
[ 5 4 ]

The respondent, for its part, maintains that the resort to the best
evidence obtainable method was illegal. In the first place, the respondent
argues, the EIIB agents are not duly authorized to undertake examination
of the taxpayers accounting records for internal revenue tax
purposes. Hence, the respondents failure to accede to their demands to
show its books of accounts and other accounting records cannot justify
resort to the use of the best evidence obtainable method.
[ 5 5 ]
Secondly,
when a taxpayer fails to submit its tax records upon demand by the BIR
officer, the remedy is not to assess him and resort to the best evidence
obtainable rule, but to punish the taxpayer according to the provisions of
the Tax Code.
[ 5 6 ]

In any case, the respondent argues that the photocopies of import
entries cannot be used in making the assessment because they were not
properly authenticated, pursuant to the provisions of Sections 24
[ 5 7 ]
and
25
[ 5 8 ]
of Rule 132 of the Rules of Court. It avers that while the CTA is not
bound by the technical rules of evidence, it is bound by substantial
rules.
[ 5 9 ]
The respondent points out that the petitioner did not even
secure a certification of the fact of loss of the original documents from the
custodian of the import entries. It simply relied on the report of the EIIB
agents that the import entry documents were no longer available because
they were eaten by termites. The respondent posits that the two
collectors of the Bureau of Customs never authenticated the xerox copies
of the import entries; instead, they only issued certifications stating
therein the import entry numbers which were processed by their office
and the date the same were released.
[ 6 0 ]

The respondent argues that it was not necessary for it to show the
correct assessment, considering that it is questioning the assessments not
only because they are erroneous, but because they were issued without
factual basis and in patent violation of the assessment procedures laid
down in the NIRC of 1977, as amended.
[ 6 1 ]
It is also pointed out that the
petitioner failed to use the tax returns filed by the respondent in
computing the deficiency taxes which is contrary to law;
[ 6 2 ]
as such, the
deficiency assessments constituted deprivation of property without due
process of law.
[ 6 3 ]

Central to the second issue is Section 16 of the NIRC of 1977, as
amended,
[ 6 4 ]
which provides that the Commissioner of Internal Revenue
has the power to make assessments and prescribe additional requirements
for tax administration and enforcement. Among such powers are those
provided in paragraph (b) thereof, which we quote:
(b) Failure to submit required returns, statements, reports and other
documents. When a report required by law as a basis for the assessment
of any national internal revenue tax shall not be forthcoming within the
time fixed by law or regulation or when there is reason to believe that any
such report is false, incomplete or erroneous, the Commissioner shall assess
the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the
time prescribed by law, or willfully or otherwise files a false or fraudulent
return or other document, the Commissioner shall make or amend the
return from his own knowledge and from such information as he can obtain
through testimony or otherwise, which shall be prima facie correct and
sufficient for all legal purposes.
[ 6 5 ]

This provision applies when the Commissioner of Internal Revenue
undertakes to perform her administrative duty of assessing the proper tax
against a taxpayer, to make a return in case of a taxpayers failure to file
one, or to amend a return already filed in the BIR.
The petitioner may avail herself of the best evidence or other
information or testimony by exercising her power or authority under
paragraphs (1) to (4) of Section 7 of the NIRC:
(1) To examine any book, paper, record or other data which may be
relevant or material to such inquiry;
(2) To obtain information from any office or officer of the national and
local governments, government agencies or its instrumentalities, including
the Central Bank of the Philippines and government owned or controlled
corporations;
(3) To summon the person liable for tax or required to file a return, or
any officer or employee of such person, or any person having possession,
custody, or care of the books of accounts and other accounting records
containing entries relating to the business of the person liable for tax, or
any other person, to appear before the Commissioner or his duly
authorized representative at a time and place specified in the summons
and to produce such books, papers, records, or other data, and to give
testimony;
(4) To take such testimony of the person concerned, under oath, as may
be relevant or material to such inquiry;
[ 6 6 ]

The best evidence envisaged in Section 16 of the 1977 NIRC, as
amended, includes the corporate and accounting records of the taxpayer
who is the subject of the assessment process, the accounting records of
other taxpayers engaged in the same line of business, including their gross
profit and net profit sales.
[ 6 7 ]
Such evidence also includes data, record,
paper, document or any evidence gathered by internal revenue officers
from other taxpayers who had personal transactions or from whom the
subject taxpayer received any income; and record, data, document and
information secured from government offices or agencies, such as the SEC,
the Central Bank of the Philippines, the Bureau of Customs, and the Tariff
and Customs Commission.
The law allows the BIR access to all relevant or material records and
data in the person of the taxpayer. It places no limit or condition on the
type or form of the medium by which the record subject to the order of
the BIR is kept. The purpose of the law is to enable the BIR to get at the
taxpayers records in whatever form they may be kept. Such records
include computer tapes of the said records prepared by the taxpayer in the
course of business.
[ 6 8 ]
In this era of developing information-storage
technology, there is no valid reason to immunize companies with
computer-based, record-keeping capabilities from BIR scrutiny. The
standard is not the form of the record but where it might shed light on the
accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,
[ 6 9 ]
the United States (U.S.) Court of
Appeals (5th Circuit) declared that it is the duty of the Commissioner of
Internal Revenue to investigate any circumstance which led him to believe
that the taxpayer had taxable income larger than reported. Necessarily,
this inquiry would have to be outside of the books because they supported
the return as filed. He may take the sworn testimony of the taxpayer; he
may take the testimony of third parties; he may examine and subpoena, if
necessary, traders and brokers accounts and books and the taxpayers
book accounts. The Commissioner is not bound to follow any set of
patterns. The existence of unreported income may be shown by any
practicable proof that is available in the circumstances of the particular
situation. Citing its ruling in Kenney v. Commissioner,
[ 7 0 ]
the U.S. appellate
court declared that where the records of the taxpayer are manifestly
inaccurate and incomplete, the Commissioner may look to other sources of
information to establish income made by the taxpayer during the years in
question.
[ 7 1 ]

We agree with the contention of the petitioner that the best
evidence obtainable may consist of hearsay evidence, such as the
testimony of third parties or accounts or other records of other taxpayers
similarly circumstanced as the taxpayer subject of the investigation, hence,
inadmissible in a regular proceeding in the regular courts.
[ 7 2 ]
Moreover,
the general rule is that administrative agencies such as the BIR are not
bound by the technical rules of evidence. It can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are
strictly observed. It can choose to give weight or disregard such evidence,
depending on its trustworthiness.
However, the best evidence obtainable under Section 16 of the
1977 NIRC, as amended, does not include mere photocopies of
records/documents. The petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot anchor the said
assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if
offered as proof of the contents thereof. The reason for this is that such
copies are mere scraps of paper and are of no probative value as basis for
any deficiency income or business taxes against a taxpayer. Indeed,
in United States v. Davey,
[ 7 3 ]
the U.S. Court of Appeals (2nd Circuit) ruled
that where the accuracy of a taxpayers return is being checked, the
government is entitled to use the original records rather than be forced to
accept purported copies which present the risk of error or tampering.
[ 7 4 ]

In Collector of Internal Revenue v. Benipayo,
[ 7 5 ]
the Court ruled that
the assessment must be based on actual facts. The rule assumes more
importance in this case since the xerox copies of the Consumption Entries
furnished by the informer of the EIIB were furnished by yet another
informer. While the EIIB tried to secure certified copies of the said entries
from the Bureau of Customs, it was unable to do so because the said
entries were allegedly eaten by termites. The Court can only surmise why
the EIIB or the BIR, for that matter, failed to secure certified copies of the
said entries from the Tariff and Customs Commission or from the National
Statistics Office which also had copies thereof. It bears stressing that
under Section 1306 of the Tariff and Customs Code, the Consumption
Entries shall be the required number of copies as prescribed by
regulations.
[ 7 6 ]
The Consumption Entry is accomplished in sextuplicate
copies and quadruplicate copies in other places. In Manila, the six copies
are distributed to the Bureau of Customs, the Tariff and Customs
Commission, the Declarant (Importer), the Terminal Operator, and the
Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR
personnel ignored the copy of the Consumption Entries filed with the BIR
and relied on the photocopies supplied by the informer of the EIIB who
secured the same from another informer. The BIR, in preparing and issuing
its preliminary and final assessments against the respondent, even ignored
the records on the investigation made by the District Revenue officers on
the respondents importations for 1987.
The original copies of the Consumption Entries were of prime
importance to the BIR. This is so because such entries are under oath and
are presumed to be true and correct under penalty of falsification or
perjury. Admissions in the said entries of the importers documents are
admissions against interest and presumptively correct.
[ 7 7 ]

In fine, then, the petitioner acted arbitrarily and capriciously in
relying on and giving weight to the machine copies of the Consumption
Entries in fixing the tax deficiency assessments against the respondent.
The rule is that in the absence of the accounting records of a
taxpayer, his tax liability may be determined by estimation. The petitioner
is not required to compute such tax liabilities with mathematical
exactness. Approximation in the calculation of the taxes due is
justified. To hold otherwise would be tantamount to holding that skillful
concealment is an invincible barrier to proof.
[ 7 8 ]
However, the rule does
not apply where the estimation is arrived at arbitrarily and capriciously.
[ 7 9 ]

We agree with the contention of the petitioner that, as a general
rule, tax assessments by tax examiners are presumed correct and made in
good faith. All presumptions are in favor of the correctness of a tax
assessment. It is to be presumed, however, that such assessment was
based on sufficient evidence. Upon the introduction of the assessment in
evidence, a prima facie case of liability on the part of the taxpayer is
made.
[ 8 0 ]
If a taxpayer files a petition for review in the CTA and assails the
assessment, the prima facie presumption is that the assessment made by
the BIR is correct, and that in preparing the same, the BIR personnel
regularly performed their duties. This rule for tax initiated suits is
premised on several factors other than the normal evidentiary rule
imposing proof obligation on the petitioner-taxpayer: the presumption of
administrative regularity; the likelihood that the taxpayer will have access
to the relevant information; and the desirability of bolstering the record-
keeping requirements of the NIRC.
[ 8 1 ]

However, the prima facie correctness of a tax assessment does not
apply upon proof that an assessment is utterly without foundation,
meaning it is arbitrary and capricious. Where the BIR has come out with a
naked assessment, i.e., without any foundation character, the
determination of the tax due is without rational basis.
[ 8 2 ]
In such a
situation, the U.S. Court of Appeals ruled
[ 8 3 ]
that the determination of the
Commissioner contained in a deficiency notice disappears. Hence, the
determination by the CTA must rest on all the evidence introduced and its
ultimate determination must find support in credible evidence.
The issue that now comes to fore is whether the tax deficiency
assessment against the respondent based on the certified copies of the
Profit and Loss Statement submitted by the respondent to the SEC in 1987
and 1988, as well as certifications of Tomas and Danganan, is arbitrary,
capricious and illegal. The CTA ruled that the respondent failed to
overcome the prima facie correctness of the tax deficiency assessment
issued by the petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed to
rebut the validity or correctness of the aforementioned tax assessments. It
is incongruous for petitioner to prove its cause by simply drawing an
inference unfavorable to the respondent by attacking the source
documents (Consumption Entries) which were the bases of the assessment
and which were certified by the Chiefs of the Collection Division, Manila
International Container Port and the Port of Manila, as having been
processed and released in the name of the petitioner after payment of
duties and taxes and the duly certified copies of Financial Statements
secured from the Securities and Exchange Commission. Any such inference
cannot operate to relieve petitioner from bearing its burden of proof and
this Court has no warrant of absolution. The Court should have been
persuaded to grant the reliefs sought by the petitioner should it have
presented any evidence of relevance and competence required, like that of
a certification from the Bureau of Customs or from any other agencies,
attesting to the fact that those consumption entries did not really belong
to them.
The burden of proof is on the taxpayer contesting the validity or
correctness of an assessment to prove not only that the Commissioner of
Internal Revenue is wrong but the taxpayer is right (Tan Guan v. CTA, 19
SCRA 903), otherwise, the presumption in favor of the correctness of tax
assessment stands (Sy Po v. CTA, 164 SCRA 524). The burden of proving
the illegality of the assessment lies upon the petitioner alleging it to be
so. In the case at bar, petitioner miserably failed to discharge this duty.
[ 8 4 ]

We are not in full accord with the findings and ratiocination of the
CTA. Based on the letter of the petitioner to the respondent dated
December 10, 1993, the tax deficiency assessment in question was based
on (a) the findings of the agents of the EIIB which was based, in turn, on
the photocopies of the Consumption Entries; (b) the Profit and Loss
Statements of the respondent for 1987 and 1988; and (c) the certifications
of Tomas and Danganan dated August 7, 1990 and August 22, 1990:
In reply, please be informed that after a thorough evaluation of the
attending facts, as well as the laws and jurisprudence involved, this Office
holds that you are liable to the assessed deficiency taxes. The conclusion
was arrived at based on the findings of agents of the Economic Intelligence
& Investigation Bureau (EIIB) and of our own examiners who have
painstakingly examined the records furnished by the Bureau of Customs
and the Securities & Exchange Commission (SEC). The examination
conducted disclosed that while your actual sales for 1987 amounted
to P110,731,559.00, you declared for taxation purposes, as shown in the
Profit and Loss Statements, the sum ofP47,698,569.83 only. The
difference, therefore, of P63,032,989.17 constitutes as undeclared or
unrecorded sales which must be subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount
of underdeclared importations were lifted from uncertified or
unauthenticated xerox copies of consumption entries which are not
admissible in evidence. On this issue, it must be considered that in letters
dated August 7 and 22, 1990, the Chief and Acting Chief of the Collection
Division of the Manila International Container Port and Port of Manila,
respectively, certified that the enumerated consumption entries were
filed, processed and released from the port after payment of duties and
taxes. It is noted that the certification does not touch on the genuineness,
authenticity and correctness of the consumption entries which are all
xerox copies, wherein the figures therein appearing may have been
tampered which may render said documents inadmissible in evidence, but
for tax purposes, it has been held that the Commissioner is not required to
make his determination (assessment) on the basis of evidence legally
admissible in a formal proceeding in Court (Mertens, Vol. 9, p. 214,
citing Cohen v. Commissioner). A statutory notice may be based in whole
or in part upon admissible evidence (Llorente v. Commissioner, 74 TC 260
(1980); Weimerskirch v. Commissioner, 67 TC 672 (1977); and Rosano v.
Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v.
Commissioner (1977), the assessment was given due course in the
presence of admissible evidence as to how the Commissioner arrived at his
determination, although there was no admissible evidence with respect to
the substantial issue of whether the taxpayer had unreported or
undeclared income from narcotics sale.
[ 8 5 ]

Based on a Memorandum dated October 23, 1990 of the IIPO, the
source documents for the actual cost of importation of the respondent are
the machine copies of the Consumption Entries from the informer which
the IIPO claimed to have been certified by Tomas and Danganan:
The source documents for the total actual cost of importations,
abovementioned, were the different copies of Consumption Entries, Series
of 1987, filed by subject with the Bureau of Customs, marked Annexes F-
1 to F-68. The total cost of importations is the sum of the Landed Costs
and the Advance Sales Tax as shown in the annexed entries. These entries
were duly authenticated as having been processed and released, after
payment of the duties and taxes due thereon, by the Chief, Collection
Division, Manila International Container Port, dated August 7, 1990,
Annex-G, and the Port of Manila, dated August 22, 1990, Annex-H. So,
it was established that subject-importations, mostly resins, really belong to
HANTEX TRADING CO., INC.
[ 8 6 ]

It also appears on the worksheet of the IIPO, as culled from the
photocopies of the Consumption Entries from its informer, that the total
cost of the respondents importation for 1987 wasP105,761,527.00. Per
the report of Torres and Filamor, they also relied on the photocopies of the
said Consumption Entries:
The importations made by taxpayer verified by us from the records of the
Bureau of Customs and xerox copies of which are hereto attached shows
the big volume of importations made and not declared in the income tax
return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of
fraud exists in the herein transaction of the taxpayer, as a consequence of
which, said transaction has not been possibly entered into the books of
accounts of the subject taxpayer.
[ 8 7 ]

In fine, the petitioner based her finding that the 1987 importation of
the respondent was underdeclared in the amount of P105,761,527.00 on
the worthless machine copies of the Consumption Entries. Aside from
such copies, the petitioner has no other evidence to prove that the
respondent imported goods costing P105,761,527.00. The petitioner
cannot find solace on the certifications of Tomas and Danganan because
they did not authenticate the machine copies of the Consumption Entries,
and merely indicated therein the entry numbers of Consumption Entries
and the dates when the Bureau of Customs released the same. The
certifications of Tomas and Danganan do not even contain the landed costs
and the advance sales taxes paid by the importer, if any. Comparing the
certifications of Tomas and Danganan and the machine copies of the
Consumption Entries, only 36 of the entry numbers of such copies are
included in the said certifications; the entry numbers of the rest of the
machine copies of the Consumption Entries are not found therein.
Even if the Court would concede to the petitioners contention that
the certification of Tomas and Danganan authenticated the machine copies
of the Consumption Entries referred to in the certification, it appears that
the total cost of importations inclusive of advance sales tax is
only P64,324,953.00 far from the amount of P105,716,527.00 arrived at
by the EIIB and the BIR,
[ 8 8 ]
or even the amount ofP110,079,491.61 arrived
at by Deputy Commissioner Deoferio, Jr.
[ 8 9 ]
As gleaned from the
certifications of Tomas and Danganan, the goods covered by the
Consumption Entries were released by the Bureau of Customs, from which
it can be presumed that the respondent must have paid the taxes due on
the said importation. The petitioner did not adduce any documentary
evidence to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and
costs of the importations of the respondent in the amount
of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and
capricious. The petitioner cannot rely on the presumption that she and the
other employees of the BIR had regularly performed their duties. As the
Court held in Collector of Internal Revenue v. Benipayo,
[ 9 0 ]
in order to
stand judicial scrutiny, the assessment must be based on facts. The
presumption of the correctness of an assessment, being a mere
presumption, cannot be made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue
Office had repeatedly examined the 1987 books of accounts of the
respondent showing its importations, and found that the latter had
minimal business tax liability. In this case, the presumption that the
District Revenue officers performed their duties in accordance with law
shall apply. There is no evidence on record that the said officers neglected
to perform their duties as mandated by law; neither is there
evidence aliunde that the contents of the 1987 and 1988 Profit and Loss
Statements submitted by the respondent with the SEC are incorrect.
Admittedly, the respondent did not adduce evidence to prove its
correct tax liability. However, considering that it has been established that
the petitioners assessment is barren of factual basis, arbitrary and illegal,
such failure on the part of the respondent cannot serve as a basis for a
finding by the Court that it is liable for the amount contained in the said
assessment; otherwise, the Court would thereby be committing a travesty.
On the disposition of the case, the Court has two options, namely,
to deny the petition for lack of merit and affirm the decision of the CA,
without prejudice to the petitioners issuance of a new assessment against
the respondent based on credible evidence; or, to remand the case to the
CTA for further proceedings, to enable the petitioner to adduce in
evidence certified true copies or duplicate original copies of the
Consumption Entries for the respondents 1987 importations, if there be
any, and the correct tax deficiency assessment thereon, without prejudice
to the right of the respondent to adduce controverting evidence, so that
the matter may be resolved once and for all by the CTA. In the higher
interest of justice to both the parties, the Court has chosen the latter
option. After all, as the Tax Court of the United States emphasized
in Harbin v. Commissioner of Internal Revenue,
[ 9 1 ]
taxation is not only
practical; it is vital. The obligation of good faith and fair dealing in carrying
out its provision is reciprocal and, as the government should never be
over-reaching or tyrannical, neither should a taxpayer be permitted to
escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The
Decision of the Court of Appeals is SET ASIDE. The records are REMANDED
to the Court of Tax Appeals for further proceedings, conformably with the
decision of this Court. No costs.
COMMISSIONER OF INTERNAL G.R. No. 166387
REVENUE,
Petitioner,
- v e r s u s -


ENRON SUBIC POWER
CORPORATION,
Respondent. January 19, 2009
R E S O L U T I O N
CORONA, J.:


In this petition for review on certiorari under Rule 45 of the Rules of
Court, petitioner Commissioner of Internal Revenue (CIR) assails the
November 24, 2004 decision
[1]
of the Court of Appeals (CA) annulling the
formal assessment notice issued by the CIR against respondent Enron Subic
Power Corporation (Enron) for failure to state the legal and factual bases
for such assessment.
Enron, a domestic corporation registered with the Subic Bay
Metropolitan Authority as a freeport enterprise,
[2]
filed its annual income
tax return for the year 1996 on April 12, 1997. It indicated a net loss
of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a
preliminary five-day letter,
[3]
informed it of a proposed assessment of an
alleged P2,880,817.25 deficiency income tax.
[4]
Enron disputed the
proposed deficiency assessment in its first protest letter.
[5]


On May 26, 1999, Enron received from the CIR a formal
assessment notice
[6]
requiring it to pay the alleged deficiency income tax
of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency
tax assessment.
[7]


Due to the non-resolution of its protest within the 180-day
period, Enron filed a petition for review in the Court of Tax Appeals (CTA).
It argued that the deficiency tax assessment disregarded the provisions of
Section 228 of the National Internal Revenue Code (NIRC), as
amended,
[8]
and Section 3.1.4 of Revenue Regulations (RR) No. 12-99
[9]
by
not providing the legal and factual bases of the assessment. Enron likewise
questioned the substantive validity of the assessment.
[10]


In a decision dated September 12, 2001, the CTA granted
Enrons petition and ordered the cancellation of its deficiency tax
assessment for the year 1996. The CTA reasoned that the assessment
notice sent to Enron failed to comply with the requirements of a valid
written notice under Section 228 of the NIRC and RR No. 12-99. The CIRs
motion for reconsideration of the CTA decision was denied in a resolution
dated November 12, 2001.

The CIR appealed the CTA decision to the CA but the CA
affirmed it. The CA held that the audit working papers did not substantially
comply with Section 228 of the NIRC and RR No. 12-99 because they failed
to show the applicability of the cited law to the facts of the
assessment. The CIR filed a motion for reconsideration but this was
deemed abandoned when he filed a motion for extension to file a petition
for review in this Court.

The CIR now argues that respondent was informed of the legal
and factual bases of the deficiency assessment against it.

We adopt in toto the findings of fact of the CTA, as affirmed by the
CA. In Compagnie Financiere Sucres et Denrees v. CIR,
[11]
we held:

We reiterate the well-established doctrine that as a
matter of practice and principle, [we] will not set
aside the conclusion reached by an agency, like the
CTA, especially if affirmed by the [CA]. By the very
nature of its function, it has dedicated itself to the
study and consideration of tax problems and has
necessarily developed an expertise on the subject,
unless there has been an abuse or improvident
exercise of authority on its part, which is not present
here.


The CIR errs in insisting that the notice of assessment in
question complied with the requirements of the NIRC and RR No. 12-99.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a
[t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or
whose reply to the PAN was found to be without
merit. The Notice of Assessment shall inform the
[t]axpayer of this fact, and that the report of
investigation submitted by the Revenue Officer
conducting the audit shall be given due course.

The formal letter of demand calling for payment of
the taxpayers deficiency tax or taxes shall state the
fact, the law, rules and regulations or
jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the
notice of assessment shall be void. (emphasis
supplied)
[12]



Section 228 of the NIRC provides that the taxpayer shall be
informed in writing of the law and the facts on which the assessment is
made. Otherwise, the assessment is void. To implement the provisions of
Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the
revenue regulation reads:

3.1.4. Formal Letter of Demand and
Assessment Notice. The formal letter of demand
and assessment notice shall be issued by the
Commissioner or his duly authorized
representative. The letter of demand calling for
payment of the taxpayers deficiency tax or taxes
shall state the facts, the law, rules and regulations,
or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and
assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by
personal delivery. xxx (emphasis supplied)


It is clear from the foregoing that a taxpayer must be informed in
writing of the legal and factual bases of the tax assessment made against
him. The use of the word shall in these legal provisions indicates the
mandatory nature of the requirements laid down therein. We note the
CTAs findings:

In [this] case, [the CIR] merely issued a formal
assessment and indicated therein the supposed tax,
surcharge, interest and compromise penalty due
thereon. The Revenue Officers of the [the CIR] in the
issuance of the Final Assessment Notice did not
provide Enron with the written bases of the law and
facts on which the subject assessment is based. [The
CIR] did not bother to explain how it arrived at such
an assessment. Moreso, he failed to mention the
specific provision of the Tax Code or rules and
regulations which were not complied with by
Enron.
[13]


Both the CTA and the CA concluded that the deficiency tax
assessment merely itemized the deductions disallowed and included these
in the gross income. It also imposed the preferential rate of 5% on some
items categorized by Enron as costs. The legal and factual bases were,
however, not indicated.

The CIR insists that an examination of the facts shows that
Enron was properly apprised of its tax deficiency. During the pre-
assessment stage, the CIR advised Enrons representative of the tax
deficiency, informed it of the proposed tax deficiency assessment through
a preliminary five-day letter and furnished Enron a copy of the audit
working paper
[14]
allegedly showing in detail the legal and factual bases of
the assessment. The CIR argues that these steps sufficed to inform Enron
of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an
employee of Enron, as well as the preliminary five-day letter, were not
valid substitutes for the mandatory notice in writing of the legal and
factual bases of the assessment. These steps were mere perfunctory
discharges of the CIRs duties in correctly assessing a taxpayer.
[15]
The
requirement for issuing a preliminary or final notice, as the case may be,
informing a taxpayer of the existence of a deficiency tax assessment is
markedly different from the requirement of what such notice must
contain. Just because the CIR issued an advice, a preliminary letter during
the pre-assessment stage and a final notice, in the order required by law,
does not necessarily mean that Enron was informed of the law and facts on
which the deficiency tax assessment was made.

The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and assessment
notice. Thus, such cannot be presumed. Otherwise, the express provisions
of Article 228 of the NIRC and RR 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.

We note that the old law merely required that the taxpayer be
notified of the assessment made by the CIR. This was changed in 1998 and
the taxpayer must now be informed not only of the law but also of the
facts on which the assessment is made.
[16]
Such amendment is in keeping
with the constitutional principle that no person shall be deprived of
property without due process.
[17]
In view of the absence of a fair
opportunity for Enron to be informed of the legal and factual bases of the
assessment against it, the assessment in question was void. We reiterate
our ruling in Reyes v. Almanzor, et al.:
[18]


Verily, taxes are the lifeblood
of the Government and so should be
collected without unnecessary hindrance.
However, such collection should be made
in accordance with law as any
arbitrariness will negate the very reason
for the Government itself.
WHEREFORE, the petition is hereby DENIED. The November 24, 2004
decision of the Court of Appeals is AFFIRMED.

G.R. No. L-10010 October 31, 1957
Intestate Estate of Antonio Zuzuarregui. PILAR I. DE ZUZUARREGUI
administratrix, BEATRIZ Z. DE REYES, ET AL., , vs. ENRIQUE ZUZUARREGUI
ET AL., appellants.
BAUTISTA ANGELO, J.:
On March 3, 1953, a petition was filed in the Court of First Instance of
Quezon City by Pilar Ibaez de Zuzuarregui for the administration and
settlement of the estate of Antonio de Zuzuarregui who died intestate on
February 22, 1953. In said petition it was prayed that letters of
administration be issued in favor of Antonio de Zuzuarregui, Jr., but due to
the opposition of Beatriz de Zuzuarregui, the court appointed Pilar Ibaez,
the widow, as regular administratrix.
On August 25, 1954, Enrique de Zuzuarregui, brother of the deceased,
Maria Theresa San Mateo, Mercedes San Mateo and Jose San Mateo, half
sisters and half brother, respectively, of the deceased, filed their
opposition impugning the declaration of Beatriz, Antonio, Jr., Enrique and
Jose, all surnamed De Zuzuarregui, as heirs contending that they are not
related to the deceased either by affinity or by consanguinity. The latter
filed their reply and a motion to dismiss the opposition. This motion was
denied for lack of merit. Forthwith, an amended answer to the opposition
was filed by the alleged heirs, to which the oppositors filed a reply. After
the oppositors had made of record their opposition to the prosecution of
any evidence tending to show that the alleged heirs were related by
affinity or consanguinity to the deceased, the case was tried on the merits
during which the parties presented their evidence. On August 22, 1955, the
court rendered decision declaring Beatriz, Antonio, Jr., Enrique and Jose,
all surnamed De Zuzuarregui, as the illegitimate (spurious) children of the
deceased and heirs of his estate in conjunction with the widow Pilar Ibaez
to the exclusion of the collateral relatives. In due time, the oppositors took
the present appeal.
Antonio de Zuzuarregui died without a will in Quezon City, Philippines, on
February 22, 1953. On April 12, 1917, he contracted marriage with Pilar
Ibaez who did not bear him any issue. He is survived by his widow and the
herein claimants Beatriz, Antonio, Jr., Enrique and Jose, who claim to be his
illegitimate (spurious) children.
The evidence shows that Beatriz is the illegitimate (spurious) child of the
deceased had with a woman who was then his tenant; that when she was
born the widow took her from the custody of her mother and since then
she lived continuously in the family residence until she reached the age of
the majority when she got married and lived with her husband; that since
her childhood, Beatriz was considered as a member of the family, was
given the family name, was supported and sent to school at the expense of
the deceased. In the income tax returns submitted by the deceased. In the
income tax returns submitted by the deceased for the years 1938, 1947
and 1948, he declared under oath that Beatriz was one of his children
(Exhibits H, H-1, and I).
The evidence further shows that claimants Antonio Jr., Enrique and Jose,
all surnamed De Zuzuarregui, were the children of Pacita Javier had with
the deceased. Pacita Javier is a cousin of the widow Pilar Ibaez. When she
became orphan, the widow invited her and her mother to live them in the
conjugal residence sometime in 1930. While living with them she gave
birth to a baby boy on August 17, 1931 in a maternity hospital who was
given by the deceased the name of Antonio, Jr., and the family name of De
Zuzuarregui. This boy was reared and brought up as a member of the
family by the spouses. He was supported and educated by the deceased.
On May 5, 1948, Pacita also gave birth to a twin had with the deceased,
who arranged for their baptism and gave them the names of Jose and
Enrique and the family name of De Zuzuarregui. These twins also lived the
spouses in the conjugal dwelling and were always considered as members
of the family. In the baptismal certificate of Antonio de Zuzuarregui, Jr., the
deceased declared under his signature that he was his father (Exhibit A).
The same admission was made by the deceased into two public documents
executed by him before a notary public where he stated under his
signature that Antonio, Jr., was his son (Exhibits D and E). And in the
income tax returns the deceased submitted for the years 1937, 1938,
1946, 1947 and 1948 he likewise stated under oath that Antonio, Jr. was
his son. With regard to Jose and Enrique, the deceased also stated under
his signature in their certificates of birth that he was their father (Exhibits B
and C). Likewise, in the income tax returns the deceased submitted for
1949, 1950, 1951 and 1952, he stated under oath that he was the father of
said Jose and Enrique.
The question to be determined is whether the claimants can be considered
as heirs of the estate upon the claim that they are the legitimate (spurious)
children of the deceased.
Previous to the approval of the new Civil Code, illegitimate children who
did not have the status of natural, like spurious, were entitled to support
only. They were not entitled to succeed as compulsory heirs as were the
acknowledged natural children. Under the present law however, they are
not only given support but are, entitled to a certain share of the
inheritance, the law according to them the same liberal attitude accorded
to natural children. In introducing this innovation, the Code Commission
gives this justification. "The transgressions of social conventions
committed by the parents should not be the illegitimate children. The law
should not be too severe upon these illegitimate children, be they natural
or otherwise, because they do need the special protection of the State.
They are born with a social handicap and the law should help them to
surmount the disadvantages facing them through the misdeeds of their
parent." (Report of the Code Commission on the Proposed Civil Code of
the Philippines, p. 89.)
Thus, article 287 of the new Civil Code provides "Illegitimate children other
than natural in accordance with article 269 and other than natural children
by legal fiction are entitled to support and such successional rights as are
granted in this Code." And in article 887 these illegitimate children are
considered as compulsory heirs, although they come fifth in the order
therein mentioned.
It appearing from the overwhelming evidence submitted by the claimants
which was not in any way contradicted by the oppositors that from their
birth they had enjoyed the status of illegitimate (spurious) children of the
deceased, it is evident that the lower court did not err in declaring them as
heirs entitled to inherit from the deceased under the law.
Appellants, however, claim that before these illegitimate children may
inherit under the present law it is yet necessary that they establish that
they were recognized by their putative father, or that they had brought an
action for recognition has not been established and their action to
establish it has already prescribed, it is contended that they cannot now
claim any successional right under the law. This claim is disputed by
appellees who contended that, to establish their right to inherit, their
recognition is not necessary, it being sufficient that their filiation be
proved.
We find merit in this contention of appellees. There is nothing in the new
law from which we may infer that in order that an illegitimate child may
enjoy his successional right he must first bring an action for recognition
during the lifetime of the putative father as required by article 285 with
regard to natural children. Neither is there any provision which requires
that he be recognized as such before he can be accorded such successional
right. All what the law provides concerning recognition refers to natural
children (Chapter 4 Title VIII, new Civil Code.) On the other hand, article
887, when speaking of illegitimate children as compulsory heirs, contains
only the following condition: "their filiation must be duly proved." It does
not say that they must first be recognized by their putative parents. The
reason perhaps behind this liberal treatment is that, because they are
spurious or offsprings of illicit relations, it would be obnoxious to oblige
them to bring an action for recognition during the lifetime of their putative
parents, let alone the embarrassment and scandal that such action would
bring to all parties concerned.
That such interpretation is correct can be inferred from the following
comment of the Code Commission on the matter: "in the proposed Code,
illegitimate children other than natural may succeed as compulsory
heirs provided that their filiation is duly proved" (Report of the Code
Commission on the Proposed Civil Code of the Philippines, p. 113).
(Emphasis supplied.) And Mr. Arturo M. Tolentino, a former member of the
Code Commissioner makes this comment on the same point: "This article
merely allows investigation of paternity or maternity of the illegitimate
child, but does not require that these should be a recognition before such
child can claim his rights. Apparently, this places the illegitimate child in a
better position than a natural child. In reality, however, such difference
can hardly be said to exist, because the natural child can always bring a
complex action in which he asks both for recognition and for his rights,
either to support or to inheritance" (Tolentino, Civil Code of the
Philippines, Vol. I, p. 567). (Emphasis supplied.).
But, even if we uphold the theory that recognition still necessary to accord
to appellate the right to inherit, we may say that the evidence on record
more than sufficiently establishes that appellees had been recognized by
the deceased as his illegitimate children. As we have already stated
elsewhere, the deceased has in more than one occasion acknowledged
under oath declared under his signature in public or official documents
that appellees are his children. This evidence is sufficient to entitle them to
the successional rights granted by law.
Wherefore, the decision appealed from is affirmed, with costs against
appellants.
G.R. No. 183137 April 10, 2013
PELIZLOY REALTY CORPORATION, represented herein by its President,
GREGORY K. LOY, Petitioner, vs. THE PROVINCE OF
BENGUET, Respondent.
D E C I S I O N
LEONEN, J.:
The principal issue in this case is the scope of authority of a province to
impose an amusement tax.
This is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court praying that the December 10, 2007 decision of the Regional Trial
Court,- Branch 62, La Trinidad, Benguet in Civil Case No. 06-CV-2232 be
reversed and set aside and a new one issued in which: ( 1) respondent
Province of Benguet is declared as having no authority to levy amusement
taxes on admission fees for resorts, swimming pools, bath houses, hot
springs, tourist spots, and other places for recreation; (2) Section 59,
Article X of the Benguet Provincial Revenue Code of 2005 is declared null
and void; and (3) the respondent Province of Benguet is permanently
enjoined from enforcing Section 59, Article X of the Benguet Provincial
Revenue Code of 2005.
Petitioner Pelizloy Realty Corporation ("Pelizloy") owns Palm Grove Resort,
which is designed for recreation and which has facilities like swimming
pools, a spa and function halls. It is located at Asin, Angalisan, Municipality
of Tuba, Province of Benguet.
On December 8, 2005, the Provincial Board of the Province of Benguet
approved Provincial Tax Ordinance No. 05-107, otherwise known as the
Benguet Revenue Code of 2005 ("Tax Ordinance"). Section 59, Article X of
the Tax Ordinance levied a ten percent (10%) amusement tax on gross
receipts from admissions to "resorts, swimming pools, bath houses, hot
springs and tourist spots." Specifically, it provides the following:
Article Ten: Amusement Tax on Admission
Section 59. Imposition of Tax. There is hereby levied a tax to be collected
from the proprietors, lessees, or operators of theaters, cinemas, concert
halls, circuses, cockpits, dancing halls, dancing schools, night or day clubs,
and other places of amusement at the rate of thirty percent (30%) of the
gross receipts from admission fees; and
A tax of ten percent (10%) of gross receipts from admission fees for boxing,
resorts, swimming pools, bath houses, hot springs, and tourist spots is
likewise levied. [Emphasis and underscoring supplied]
Section 162 of the Tax Ordinance provided that the Tax Ordinance shall
take effect on January 1, 2006.
It was Pelizloy's position that the Tax Ordinance's imposition of a 10%
amusement tax on gross receipts from admission fees for resorts,
swimming pools, bath houses, hot springs, and tourist spots is an ultra
vires act on the part of the Province of Benguet. Thus, it filed an
appeal/petition before the Secretary of Justice on January 27, 2006.
The appeal/petition was filed within the thirty (30)-day period from the
effectivity of a tax ordinance allowed by Section 187 of Republic Act No.
7160, otherwise known as the Local Government Code (LGC).
1
The
appeal/petition was docketed as MSO-OSJ Case No. 03-2006.
Under Section 187 of the LGC, the Secretary of Justice has sixty (60) days
from receipt of the appeal to render a decision. After the lapse of which,
the aggrieved party may file appropriate proceedings with a court of
competent jurisdiction.
Treating the Secretary of Justice's failure to decide on its appeal/petition
within the sixty (60) days provided by Section 187 of the LGC as an implied
denial of such appeal/petition, Pelizloy filed a Petition for Declaratory
Relief and Injunction before the Regional Trial Court, Branch 62, La
Trinidad, Benguet. The petition was docketed as Civil Case No. 06-CV-2232.
Pelizloy argued that Section 59, Article X of the Tax Ordinance imposed a
percentage tax in violation of the limitation on the taxing powers of local
government units (LGUs) under Section 133 (i) of the LGC. Thus, it was null
and void ab initio. Section 133 (i) of the LGC provides:
Section 133. Common Limitations on the Taxing Powers of Local
Government Units. - Unless otherwise provided herein, the exercise of the
taxing powers of provinces, cities, municipalities, and barangays shall not
extend to the levy of the following:
x x x
(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided
herein
The Province of Benguet assailed the Petition for Declaratory Relief and
Injunction as an improper remedy. It alleged that once a tax liability has
attached, the only remedy of a taxpayer is to pay the tax and to sue for
recovery after exhausting administrative remedies.
2

On substantive grounds, the Province of Benguet argued that the phrase
other places of amusement in Section 140 (a) of the LGC
3
encompasses
resorts, swimming pools, bath houses, hot springs, and tourist spots since
"Article 220 (b) (sic)" of the LGC defines "amusement" as "pleasurable
diversion and entertainment x x x synonymous to relaxation, avocation,
pastime, or fun."
4
However, the Province of Benguet erroneously cited
Section 220 (b) of the LGC. Section 220 of the LGC refers to valuation of
real property for real estate tax purposes. Section 131 (b) of the LGC, the
provision which actually defines "amusement", states:
Section 131. Definition of Terms. - When used in this Title, the term:
x x x
(b) "Amusement" is a pleasurable diversion and entertainment. It is
synonymous to relaxation, avocation, pastime, or fun On December 10,
2007, the RTC rendered the assailed Decision dismissing the Petition for
Declaratory Relief and Injunction for lack of merit.
Procedurally, the RTC ruled that Declaratory Relief was a proper remedy.
On the validity of Section 59, Article X of the Tax Ordinance, the RTC noted
that, while Section 59, Article X imposes a percentage tax, Section 133 (i)
of the LGC itself allowed for exceptions. It noted that what the LGC
prohibits is not the imposition by LGUs of percentage taxes in general but
the "imposition and levy of percentage tax on sales, barters, etc., on goods
and services only."
5
It further gave credence to the Province of Benguet's
assertion that resorts, swimming pools, bath houses, hot springs, and
tourist spots are encompassed by the phrase other places of amusement
in Section 140 of the LGC.
On May 21, 2008, the RTC denied Pelizloys Motion for Reconsideration.
Aggrieved, Pelizloy filed the present petition on June 10, 2008 on pure
questions of law. It assailed the legality of Section 59, Article X of the Tax
Ordinance as being a (supposedly) prohibited percentage tax per Section
133 (i) of the LGC.
In its Comment, the Province of Benguet, erroneously citing Section 40 of
the LGC, argued that Section 59, Article X of the Tax Ordinance does not
levy a percentage tax "because the imposition is not based on the total
gross receipts of services of the petitioner but solely and actually limited
on the gross receipts of the admission fees collected."
6
In addition, it
argued that provinces can validly impose amusement taxes on resorts,
swimming pools, bath houses, hot springs, and tourist spots, these being
amusement places.
For resolution in this petition are the following issues:
1. Whether or not Section 59, Article X of Provincial Tax
Ordinance No. 05-107, otherwise known as the Benguet
Revenue Code of 2005, levies a percentage tax.
2. Whether or not provinces are authorized to impose
amusement taxes on admission fees to resorts, swimming
pools, bath houses, hot springs, and tourist spots for being
"amusement places" under the Local Government Code.
The power to tax "is an attribute of sovereignty,"
7
and as such, inheres in
the State. Such, however, is not true for provinces, cities, municipalities
and barangays as they are not the sovereign;
8
rather, they are mere
"territorial and political subdivisions of the Republic of the Philippines".
9

The rule governing the taxing power of provinces, cities, muncipalities and
barangays is summarized in Icard v. City Council of Baguio:
10

It is settled that a municipal corporation unlike a sovereign state is clothed
with no inherent power of taxation. The charter or statute must plainly
show an intent to confer that power or the municipality, cannot assume it.
And the power when granted is to be construed in strictissimi juris. Any
doubt or ambiguity arising out of the term used in granting that power
must be resolved against the municipality. Inferences, implications,
deductions all these have no place in the interpretation of the taxing
power of a municipal corporation.
11
[Underscoring supplied]
Therefore, the power of a province to tax is limited to the extent that such
power is delegated to it either by the Constitution or by statute. Section 5,
Article X of the 1987 Constitution is clear on this point:
Section 5. Each local government unit shall have the power to create its
own sources of revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may provide, consistent
with the basic policy of local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local governments. [Underscoring supplied]
Per Section 5, Article X of the 1987 Constitution, "the power to tax is no
longer vested exclusively on Congress; local legislative bodies are now
given direct authority to levy taxes, fees and other
charges."
12
Nevertheless, such authority is "subject to such guidelines and
limitations as the Congress may provide".
13

In conformity with Section 3, Article X of the 1987 Constitution,
14
Congress
enacted Republic Act No. 7160, otherwise known as the Local Government
Code of 1991. Book II of the LGC governs local taxation and fiscal matters.
Relevant provisions of Book II of the LGC establish the parameters of the
taxing powers of LGUS found below.
First, Section 130 provides for the following fundamental principles
governing the taxing powers of LGUs:
1. Taxation shall be uniform in each LGU.
2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the
taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or
confiscatory;
d. not be contrary to law, public policy, national
economic policy, or in the restraint of trade.
3. The collection of local taxes, fees, charges and other
impositions shall in no case be let to any private person.
4. The revenue collected pursuant to the provisions of the LGC
shall inure solely to the benefit of, and be subject to the
disposition by, the LGU levying the tax, fee, charge or other
imposition unless otherwise specifically provided by the LGC.
5. Each LGU shall, as far as practicable, evolve a progressive
system of taxation.
Second, Section 133 provides for the common limitations on the taxing
powers of LGUs. Specifically, Section 133 (i) prohibits the levy by LGUs of
percentage or value-added tax (VAT) on sales, barters or exchanges or
similar transactions on goods or services except as otherwise provided by
the LGC.
As it is Pelizloys contention that Section 59, Article X of the Tax Ordinance
levies a prohibited percentage tax, it is crucial to understand first the
concept of a percentage tax.
In Commissioner of Internal Revenue v. Citytrust Investment Phils.
Inc.,
15
the Supreme Court defined percentage tax as a "tax measured by a
certain percentage of the gross selling price or gross value in money of
goods sold, bartered or imported; or of the gross receipts or earnings
derived by any person engaged in the sale of services." Also, Republic Act
No. 8424, otherwise known as the National Internal Revenue Code (NIRC),
in Section 125, Title V,
16
lists amusement taxes as among the (other)
percentage taxes which are levied regardless of whether or not a taxpayer
is already liable to pay value-added tax (VAT).
Amusement taxes are fixed at a certain percentage of the gross receipts
incurred by certain specified establishments.
Thus, applying the definition in CIR v. Citytrust and drawing from the
treatment of amusement taxes by the NIRC, amusement taxes are
percentage taxes as correctly argued by Pelizloy.
However, provinces are not barred from levying amusement taxes even if
amusement taxes are a form of percentage taxes. Section 133 (i) of the
LGC prohibits the levy of percentage taxes "except as otherwise provided"
by the LGC.
Section 140 of the LGC provides:
SECTION 140. Amusement Tax - (a) The province may levy an amusement
tax to be collected from the proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross
receipts from admission fees.
(b) In the case of theaters of cinemas, the tax shall first be
deducted and withheld by their proprietors, lessees, or
operators and paid to the provincial treasurer before the gross
receipts are divided between said proprietors, lessees, or
operators and the distributors of the cinematographic films.
(c) The holding of operas, concerts, dramas, recitals, painting
and art exhibitions, flower shows, musical programs, literary
and oratorical presentations, except pop, rock, or similar
concerts shall be exempt from the payment of the tax herein
imposed.
(d) The Sangguniang Panlalawigan may prescribe the time,
manner, terms and conditions for the payment of tax. In case of
fraud or failure to pay the tax, the Sangguniang Panlalawigan
may impose such surcharges, interests and penalties.
(e) The proceeds from the amusement tax shall be shared
equally by the province and the municipality where such
amusement places are located. [Underscoring supplied]
Evidently, Section 140 of the LGC carves a clear exception to the general
rule in Section 133 (i). Section 140 expressly allows for the imposition by
provinces of amusement taxes on "the proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other places
of amusement."
However, resorts, swimming pools, bath houses, hot springs, and tourist
spots are not among those places expressly mentioned by Section 140 of
the LGC as being subject to amusement taxes. Thus, the determination of
whether amusement taxes may be levied on admissions to resorts,
swimming pools, bath houses, hot springs, and tourist spots hinges on
whether the phrase other places of amusement encompasses resorts,
swimming pools, bath houses, hot springs, and tourist spots.
Under the principle of ejusdem generis, "where a general word or phrase
follows an enumeration of particular and specific words of the same class
or where the latter follow the former, the general word or phrase is to be
construed to include, or to be restricted to persons, things or cases akin to,
resembling, or of the same kind or class as those specifically mentioned."
17

The purpose and rationale of the principle was explained by the Court in
National Power Corporation v. Angas
18
as follows:
The purpose of the rule on ejusdem generis is to give effect to both the
particular and general words, by treating the particular words as indicating
the class and the general words as including all that is embraced in said
class, although not specifically named by the particular words. This is
justified on the ground that if the lawmaking body intended the general
terms to be used in their unrestricted sense, it would have not made an
enumeration of particular subjects but would have used only general
terms. [2 Sutherland, Statutory Construction, 3rd ed., pp. 395-400].
19

In Philippine Basketball Association v. Court of Appeals,
20
the Supreme
Court had an opportunity to interpret a starkly similar provision or the
counterpart provision of Section 140 of the LGC in the Local Tax Code then
in effect. Petitioner Philippine Basketball Association (PBA) contended that
it was subject to the imposition by LGUs of amusement taxes (as opposed
to amusement taxes imposed by the national government).1wphi1 In
support of its contentions, it cited Section 13 of Presidential Decree No.
231, otherwise known as the Local Tax Code of 1973, (which is analogous
to Section 140 of the LGC) providing the following:
Section 13. Amusement tax on admission. - The province shall impose a tax
on admission to be collected from the proprietors, lessees, or operators of
theaters, cinematographs, concert halls, circuses and other places of
amusement xxx.
Applying the principle of ejusdem generis, the Supreme Court rejected
PBA's assertions and noted that:
In determining the meaning of the phrase 'other places of amusement',
one must refer to the prior enumeration of theaters, cinematographs,
concert halls and circuses with artistic expression as their common
characteristic. Professional basketball games do not fall under the same
category as theaters, cinematographs, concert halls and circuses as the
latter basically belong to artistic forms of entertainment while the former
caters to sports and gaming.
21
[Underscoring supplied]
However, even as the phrase other places of amusement was already
clarified in Philippine Basketball Association, Section 140 of the LGC adds
to the enumeration of 'places of amusement' which may properly be
subject to amusement tax. Section 140 specifically mentions 'boxing stadia'
in addition to "theaters, cinematographs, concert halls and circuses" which
were already mentioned in PD No. 231. Also, 'artistic expression' as a
characteristic does not pertain to 'boxing stadia'.
In the present case, the Court need not embark on a laborious effort at
statutory construction. Section 131 (c) of the LGC already provides a clear
definition of amusement places:
Section 131. Definition of Terms. - When used in this Title, the term:
x x x
(c) "Amusement Places" include theaters, cinemas, concert halls, circuses
and other places of amusement where one seeks admission to entertain
oneself by seeing or viewing the show or performances [Underscoring
supplied]
Indeed, theaters, cinemas, concert halls, circuses, and boxing stadia are
bound by a common typifying characteristic in that they are all venues
primarily for the staging of spectacles or the holding of public shows,
exhibitions, performances, and other events meant to be viewed by an
audience. Accordingly, other places of amusement must be interpreted in
light of the typifying characteristic of being venues "where one seeks
admission to entertain oneself by seeing or viewing the show or
performances" or being venues primarily used to stage spectacles or hold
public shows, exhibitions, performances, and other events meant to be
viewed by an audience.
As defined in The New Oxford American Dictionary,
22
show means "a
spectacle or display of something, typically an impressive one";
23
while
performance means "an act of staging or presenting a play, a concert, or
other form of entertainment."
24
As such, the ordinary definitions of the
words show and performance denote not only visual engagement (i.e.,
the seeing or viewing of things) but also active doing (e.g., displaying,
staging or presenting) such that actions are manifested to, and
(correspondingly) perceived by an audience.
Considering these, it is clear that resorts, swimming pools, bath houses,
hot springs and tourist spots cannot be considered venues primarily
"where one seeks admission to entertain oneself by seeing or viewing the
show or performances". While it is true that they may be venues where
people are visually engaged, they are not primarily venues for their
proprietors or operators to actively display, stage or present shows and/or
performances.
Thus, resorts, swimming pools, bath houses, hot springs and tourist spots
do not belong to the same category or class as theaters, cinemas, concert
halls, circuses, and boxing stadia. It follows that they cannot be considered
as among the other places of amusement contemplated by Section 140 of
the LGC and which may properly be subject to amusement taxes.
At this juncture, it is helpful to recall this Courts pronouncements in Icard:
The power to tax when granted to a province is to be construed in
strictissimi juris. Any doubt or ambiguity arising out of the term used in
granting that power must be resolved against the province. Inferences,
implications, deductions all these have no place in the interpretation of
the taxing power of a province.
25

In this case, the definition of' amusement places' in Section 131 (c) of the
LGC is a clear basis for determining what constitutes the 'other places of
amusement' which may properly be subject to amusement tax impositions
by provinces. There is no reason for going beyond such basis. To do
otherwise would be to countenance an arbitrary interpretation/application
of a tax law and to inflict an injustice on unassuming taxpayers.
The previous pronouncements notwithstanding, it will be noted that it is
only the second paragraph of Section 59, Article X of the Tax Ordinance
which imposes amusement taxes on "resorts, swimming pools, bath
houses, hot springs, and tourist spots". The first paragraph of Section 59,
Article X of the Tax Ordinance refers to "theaters, cinemas, concert halls,
circuses, cockpits, dancing halls, dancing schools, night or day clubs, and
other places of amusement".1wphi1 In any case, the issues raised by
Pelizloy are pertinent only with respect to the second paragraph of Section
59, Article X of the Tax Ordinance. Thus, there is no reason to invalidate
the first paragraph of Section 59, Article X of the Tax Ordinance. Any
declaration as to the Province of Benguet's lack of authority to levy
amusement taxes must be limited to admission fees to resorts, swimming
pools, bath houses, hot springs and tourist spots.
Moreover, the second paragraph of Section 59, Article X of the Tax
Ordinance is not limited to resorts, swimming pools, bath houses, hot
springs, and tourist spots but also covers admission fees for boxing. As
Section 140 of the LGC allows for the imposition of amusement taxes on
gross receipts from admission fees to boxing stadia, Section 59, Article X of
the Tax Ordinance must be sustained with respect to admission fees from
boxing stadia.
WHEREFORE, the petition for review on certiorari is GRANTED. The second
paragraph of Section 59, Article X of the Benguet Provincial Revenue Code
of 2005, in so far as it imposes amusement taxes on admission fees to
resorts, swimming pools, bath houses, hot springs and tourist spots, is
declared null and void. Respondent Province of Benguet is permanently
enjoined from enforcing the second paragraph of Section 59, Article X of
the Benguet Provincial Revenue Code of 2005 with respect to resorts,
swimming pools, bath houses, hot springs and tourist spots.
SO ORDERED.
G.R. No. L-15091 December 28, 1961
GENOVEVA CATALAN PAULINO, assisted by her husband FRANCISCO
NIETO vs.PAZ H. PAULINO, assisted by her husband DALMACIO AQUINO,
EUFEMIA H. PAULINO, assisted by her husband ALEJANDRO PARAISO,
PEREGRINO H. PAULINO and JUAN H. PAULINO
PADILLA, J.:
On 4 February 1958 Genoveva Catalan Paulino, assisted by her husband
Francisco Nieto, brought an action in the Court of First Instance of Laguna,
Third Branch, San Pablo City, against Paz, Eufemia, Peregrino and Juan, all
surnamed Paulino, to compel them to give her share of inheritance in the
state of the late Marcos Paulino, claiming and alleging that she is the
illegitimate (spurious) child of Marcos Paulino, begotten by him and
Rustica Catalan on 3 January 1916 in Los Baos, Laguna, while the former
was lawfully married to Dionisia Hernandez; that on 5 February 1951
Marcos Paulino died intestate in Manila at the Singian Clinic, leaving an
estate consisting of realties listed and described in paragraph 8 of the
complaint, the annual income of which was not less than P7,500; that no
proceedings for the settlement of the deceased's estate has been
commenced in Court; that on 5 February 1953, without the plaintiff's
knowledge and consent, the defendants, with the consent of the widow
who renounced in favor of the defendants her share in the estate of the
deceased, "inventoried, divided, partitioned, and distributed" among
themselves the said estate, without giving the plaintiff her share in it; that
her share is equivalent to 2/5 of the share of a legitimate child or /10 of
the whole estate; that the defendants had refused and failed to deliver to
the plaintiff her share in the estate of the deceased including her
proportionate share in the annual income of the estate amounting to
P7,500, and that the defendants, through Juan H. Paulino, taking
advantage of the plaintiff's ignorance, "deliberately, fraudulently and
maliciously convinced her to sign a contract of waiver, stating among other
things, that the herein plaintiff under the law has no right in the partition
of the properties of the deceased." The plaintiff prayed that the
defendants be ordered to deliver to her share in the estate of the
deceased consisting of /10 thereof and its income amounting to P7,500
annually from 5 February 1951 and to pay the costs of the suit, and for
other just and equitable relief (civil No. SP 140).
On 20 February 1958 the defendants moved for the dismissal of the
plaintiff's complaint on the ground that it states no cause of action and
that, even if it does, the same is barred. In support of their motion they
contend that the plaintiff's action does not lie because it is to establish her
filiation as an illegitimate (spurious) child of the deceased and brought
after the latter's death when she was already 35 years of age. On 19 March
1958 the defendants filed a "supplement to motion to dismiss," quoting an
excerpt from the minutes of the public hearing on the proposed Civil Code
conducted by the Joint Senate and House Code Committees of Congress
relative to article 289. On 31 March 1958 the plaintiff filed an objection to
the defendants' motion to dismiss and on 24 April 1958 the defendants, a
reply to the plaintiff's objection.
On 30 July 1958 the Court entered an order holding that the plaintiff's
action to establish her filiation as the illegitimate (spurious) child of the
deceased, brought after the latter's death, when she had reached the age
of 35 years, is already barred, and dismissing her complaint.
The plaintiff has appealed.
The appellant claims that she is the illegitimate (spurious) child of Marcos
Paulino and, relying on the majority opinion in the case of Zuzzuarregui vs.
Zuzuarregui, G.R. No. L-10010, 31 October 1957, contends that all she
should do to be able to inherit from her putative father is to prove her
filiation to him. It is not for her to show that in his lifetime she had brought
an action to compel recognition and obtained judgment in her favor. The
appellees contend otherwise and further claim that the appellant's action
to establish her filiation does not lie it having been brought after the death
of her putative father when she was already 35 years of age.
The Civil Code provides:
Art. 287. Illegitimate children other than natural in accordance
with article 269 and other than natural children by legal fiction
are entitled to support and such successional rights as are
granted in this code.
Art. 887. The following are compulsory heirs:
(1) Legitimate children and descendants, with respect to their
legitimate parents and ascendants;
(2) In default of the foregoing, legitimate parents and
ascendants, with respect to their legitimate children and
ascendants;
(3) The widow or widower;
(4) Acknowledged natural children referred to in article 287.
Compulsory heirs mentioned in Nos. 3, 4 and 5 are not excluded
by those in Nos. 1 and 2; neither do they exclude one another.
In all cases of illegitimate children, their filiation must be duly
proved.
The father or mother of illegitimate children of the three classes
mentioned shall inherit from them in the manner and to the
extent established by this Code (Emphasis supplied.)
All illegitimate (spurious) child to be entitled to support and successional
rights from his putative or presumed parents must prove his filiation to
them. Filiation may be established by the voluntary or compulsory
recognition of the illegitimate (spurious) child. Recognition is voluntary
when "made in the record of birth, a will, a statement before a court of
record, or in any authentic writing." 1 It is compulsory when by court
action the child brings about his recognition. Thus the Civil Code ordains:
Art. 283. In any of the following cases, the father is obliged to recognize
the child as his natural (or spurious) child:
(1) In case of rape, abduction or seduction, when the period of
the offense coincides more or less with that of the conception;
(2) When the child is in continuous possession of status of a
child of the alleged father by the direct acts of the latter or his
family;
(3) When the child was conceived during the time when the
mother cohabited with the supposed father;
(4) When the child has in his favor any evidence or proof that
the defendant is his father.
Art. 284. The mother is obliged to recognize her natural child:
(1) In any of the cases referred to in the preceding article, as
between the child and the mother;
(2) When the birth and the identity of the child are clearly
proved.
In her complaint the appellant alleges
(3) That the plaintiff is the illegitimate child Don Marcos
Paulino, having been born on January 3, 1916 at Los Baos,
Laguna out of the common-law relationship of her father with
Rustica Catalan who lived publicly as husband and wife at the
said place;
(4) That out of the common-law relationship of plaintiff's
parents, two other children were born, namely: Tomas and
Alejandro, born on September 3, 1917 and 1918, respectively,
and both having died on the year of their birth;
(5) That plaintiff's father Don Marcos Paulino, was married to
Dionisia Hernandez, even before his cohabiting with plaintiff's
mother;
(6) That on February 5, 1951, Don Marcos Paulino, plaintiff's
father, died in the Singian Clinic in the City of Manila without
any will or testament disposing of his estate;
(7) That Don Marcos Paulino is survived by his legal wife,
Dionisia Hernandez and his four legitimate children, namely,
Paz, Eufemia, Peregrino and Juan, all surnamed Paulino, and by
the plaintiff Genoveva Catalan Paulino by his common-law
relationship with Rustica Catalan;
(8) That at the time of his death, the deceased Don Marcos
Paulino left several properties, among which were his exclusive
and undivided one-half share, interest and right to and in the
properties and parcels of land hereinbelow described.
x x x x x x x x x
(9) That after the death of Marcos Paulino, there was no
intestate proceeding for the settlement of his estate;lawphil.net
(10) That the properties of the deceased in the said estate,
however, were inventoried, divided, partitioned, and
distributed among his alleged compulsory heirs pursuant to the
extra-judicial partition dated February 5, 1953, and registered
with the Register of Deeds of San Pablo City to the exclusion of
the herein plaintiff;
and prays that the appellees be ordered to deliver to her share in the
estate of the deceased consisting of /10 thereof and its income amounting
to P7,500 annually from 5 February 1951 and to pay the costs of the suit.
It is true that by their motion to dismiss the appellees are deemed to have
admitted that the appellant is the illegitimate spurious, not natural, child
of the deceased Marcos Paulino. Such an admission, however, does not
entitle her to inherit from her alleged putative father. It is necessary to
allege that her putative father had acknowledged and recognized her as
such. Such acknowledgment is essential and is the basis of her right to
inherit. There being no allegation of such acknowledgment the action
becomes one to compel recognition which can not be brought after the
death of the putative father.
The order appealed from is affirmed, with costs against the appellees.
[G.R. No. 197117, April 10, 2013]
FIRST LEPANTO TAISHO INSURANCE CORPORATION v. COMMISSIONER
OF INTERNAL REVENUE
D E C I S I O N
MENDOZA, J.:
Before the Court is a petition for review on certiorari
1
under Rule 45 of the
1997 Rules of Civil Procedure filed by First Lepanto Taisho
Corporation, now FLT Prime Insurance Corporation (petitioner), assailing
the March 1, 2011 Decision
2
and the May 27, 2011 Resolution
3
of the Court
of Tax Appeals (CTA) En Banc, in CTA E.B. No. 563, which affirmed the May
21, 2009 Decision of the CTA-Second Division.

The Facts:

Petitioner is a non-life insurance corporation and considered as a Large
Taxpayer under Revenue Regulations No. 6-85, as amended by Revenue
Regulations No. 12-94 effective 1994.
4
After submitting its corporate
income tax return for taxable year ending December 31, 1997, petitioner
received a Letter of Authority, dated October 30, 1998, from respondent
Commissioner of Internal Revenue (CIR) to allow it to examine their books
of account and other accounting records for 1997 and other unverified
prior years.

On December 29, 1999, CIR issued internal revenue tax assessments for
deficiency income, withholding, expanded withholding, final withholding,
value-added, and documentary stamp taxes for taxable year 1997.

On February 24, 2000, petitioner protested the said tax assessments.

During the pendency of the case, particularly on February 15, 2008,
petitioner filed its Motion for Partial Withdrawal of Petition for Review of
Assessment Notice Nos. ST-INC-97-0220-99; ST-VAT-97-0222-99 and ST-
DST-97-0217-00, in view of the tax amnesty program it had availed. The
CTA Second Division granted the said motion in a Resolution,
5
dated March
31, 2008.

Consequently, on May 21, 2009, the CTA Second Division partially granted
the petition.
6
It directed petitioner to pay CIR a reduced tax liability of
P1,994,390.86. The dispositive portion reads:chanroblesvirtuallawlibrary
WHEREFORE, in view of the foregoing considerations, the instant Petition
for Review is hereby PARTIALLY GRANTED. Accordingly, petitioner is
hereby ORDERED TO PAYdeficiency withholding tax on compensation,
expanded withholding tax and final tax in the reduced amount of
P1,994,390.86, computed as follows:

Basic Tax Surcharges Interest Total
Deficiency
Withholding
Tax on
Compensation
ST-WC-97-
0221-99
P774,200.55 P193,550.14 P312.227.34 P1,279,978.03
Deficiency
Expanded
Withholding
Tax ST-EWT-
97-0218-99
132,724.02 33,181.01 53,526.27 219,431.30
Deficiency
Final
Withholding
Tax ST-FT-97-
0219-99
299,391.84 74,847.96 120,741.73 494,981.53
TOTALS P1,206,316.41 P301,579.11 P486,495.34 P1,994,390.86


Petitioners Motion for Partial Reconsideration
7
was likewise denied by the
CTA Second Division in its October 29, 2009 Resolution.
8
cralawvllred

Unsatisfied, petitioner filed a Petition for Review before the CTA En
Banc.
9
cralawvllred

On March 1, 2011, the CTA En Banc affirmed the decision of the CTA
Second Division.
10
cralawvllred

Petitioner contended that it was not liable to pay Withholding Tax on
Compensation on the P500,000.00 Directors Bonus to their directors,
specifically, Rodolfo Bausa, Voltaire Gonzales, Felipe Yap, and Catalino
Macaraig, Jr., because they were not employees and the amount was
already subjected to Expanded Withholding Tax. The CTA En Banc,
however, ruled that Section 5 of Revenue Regulation No. 12-86 expressly
identified a director to be an employee.

As to transportation, subsistence and lodging, and representation
expenses, the expenses would not be subject to withholding tax only if the
same were reimbursement for actual expenses of the company. In the
present case, the CTA En Banc declared that petitioner failed to prove that
they were so.

As to deficiency expanded withholding taxes on compensation, petitioner
failed to substantiate that the commissions earned totaling P905,428.36,
came from reinsurance activities and should not be subject to withholding
tax. Petitioner likewise failed to prove its direct loss expense, occupancy
cost and service/contractors and purchases.

As to deficiency final withholding taxes, petitioner failed to present proof
of remittance to establish that it had remitted the final tax on dividends
paid as well as the payments for services rendered by the Malaysian
entity.
11
cralawvllred

As to the imposition of delinquency interest under Section 249 (c) (3) of
the 1997 National Internal Revenue Code (NIRC), records reveal that
petitioner failed to pay the deficiency taxes within thirty (30) days from
receipt of the demand letter, thus, delinquency interest accrued from such
non-payment.

Petitioner moved for partial reconsideration, but the CTA En Banc denied
the same in its May 27, 2011 Resolution.
12
cralawvllred

Hence, this petition.
13
cralawvllred

The principal issue in this case is whether the CTA En Banc erred in holding
petitioner liable for:
a. deficiency withholding taxes on compensation on directors
bonuses under Assessment No. ST-WC-97-0021-
99;cralawlibrary
b. deficiency expanded withholding taxes on transportation,
subsistence and lodging, and representation expense;
commission expense; direct loss expense; occupancy cost; and
service/contractor and purchases under Assessment No. ST-
EWT-97-0218-99;cralawlibrary
c. deficiency final withholding taxes on payment of dividends
and computerization expenses to foreign entities under
Assessment No. ST-FT-97-0219-99; and
d. delinquency interest under Section 249 (c) (3) of the NIRC.

The Court finds no merit in the petition.

For taxation purposes, a director is considered an employee under Section
5 of Revenue Regulation No. 12-86,
14
to wit:chanroblesvirtuallawlibrary
An individual, performing services for a corporation, whether as an officer
and director or merely as a director whose duties are confined to
attendance at and participation in the meetings of the Board of Directors,
is an employee.

The non-inclusion of the names of some of petitioners directors in the
companys Alpha List does notipso facto create a presumption that they
are not employees of the corporation, because the imposition of
withholding tax on compensation hinges upon the nature of work
performed by such individuals in the company. Moreover, contrary to
petitioners attestations, Revenue Regulation No. 2-98,
15
specifically,
Section 2.57.2. A (9) thereof,
16
cannot be applied to this case as the latter
is a later regulation while the accounting books examined were for taxable
year 1997.

As to the deficiency withholding tax assessment on transportation,
subsistence and lodging, and representation expense, commission
expense, direct loss expense, occupancy cost, service/contractor and
purchases, the Court finds no cogent reason to deviate from the findings of
the CTA En Banc. As correctly observed by the CTA Second Division and
the CTA En Banc, petitioner was not able to sufficiently establish that the
transportation expenses reflected in their books were reimbursement
from actual transportation expenses incurred by its employees in
connection with their duties as the only document presented was a
Schedule of Transportation Expenses without pertinent supporting
documents. Without said documents, such as but not limited to, receipts,
transportation-related vouchers and/or invoices, there is no way of
ascertaining whether the amounts reflected in the schedule of expenses
were disbursed for transportation.

With regard to commission expense, no additional documentary evidence,
like the reinsurance agreements contracts, was presented to support
petitioners allegation that the expenditure originated from reinsurance
activities that gave rise to reinsurance commissions, not subject to
withholding tax. As to occupancy costs, records reveal that petitioner
failed to compute the correct total occupancy cost that should be
subjected to withholding tax, hence, petitioner is liable for the deficiency.

As to service/contractors and purchases, petitioner contends that both
parties already stipulated that it correctly withheld the taxes due. Thus,
petitioner is of the belief that it is no longer required to present evidence
to prove the correct payment of taxes withheld. As correctly ruled by the
CTA Second Division and En Banc, however, stipulations cannot defeat the
right of the State to collect the correct taxes due on an individual or
juridical person because taxes are the lifeblood of our nation so its
collection should be actively pursued without unnecessary impediment.

As to the deficiency final withholding tax assessments for payments of
dividends and computerization expenses incurred by petitioner to foreign
entities, particularly Matsui Marine & Fire Insurance Co. Ltd.
(Matsui),
17
the Court agrees with CIR that petitioner failed to present
evidence to show the supposed remittance to Matsui.

The Court likewise holds the imposition of delinquency interest under
Section 249 (c) (3) of the 1997 NIRC to be proper, because failure to pay
the deficiency tax assessed within the time prescribed for its payment
justifies the imposition of interest at the rate of twenty percent (20%) per
annum, which interest shall be assessed and collected from the date
prescribed for its payment until full payment is made.

It is worthy to note that tax revenue statutes are not generally intended to
be liberally construed.
18
Moreover, the CTA being a highly specialized
court particularly created for the purpose of reviewing tax and customs
cases, it is settled that its findings and conclusions are accorded great
respect and are generally upheld by this Court, unless there is a clear
showing of a reversible error or an improvident exercise of
authority.
19
Absent such errors, the challenged decision should be
maintained.

WHEREFORE, the petition is DENIED. The March 1, 2011 Decision and the
May 27, 2011 Resolution of the Court of Tax Appeals En Banc, in CTA E.B.
No. 563, are AFFIRMED.

G.R. No. 197937 April 3, 2013
FILM DEVELOPMENT COUNCIL OF THE PHILIPPINES, Petitioner, vs. SM
PRIME HOLDINGS, INC., Respondent.
D E C I S I O N
VILLARAMA, JR., J.:
Petitioner appeals the Orders
1
dated February 21, 2011 and July 25, 2011
of the Regional Trial Court (RTC) of Pasig City, Branch 166 which granted
respondent's motion to dismiss on the ground of litis pendentia.
The factual antecedents:
Respondent SM Prime Holdings, Inc. is the owner and operator of cinema
houses at SM Cebu in Cebu City. Under Republic Act (R.A.) No. 7160
otherwise known as the Local Government Code of 1991, owners,
proprietors and lessees of theaters and cinema houses are subject to
amusement tax as provided in Section 140, Book II, Title One, which reads:
SECTION 140. Amusement Tax-
(a) The province may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas, concert halls,
circuses, boxing stadia, and other places of amusement at a rate of not
more than thirty percent (30%) of the gross receipts from admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or operators and paid to the
provincial treasurer before the gross receipts are divided between said
proprietors, lessees, or operators and the distributors of the
cinematographic films.
x x x x
(d) The sangguniang panlalawigan may prescribe the time, manner, terms
and conditions for the payment of tax. In case of fraud or failure to pay the
tax, the sangguniang panlalawigan may impose such surcharges, interest
and penalties as it may deem appropriate.
On June 21, 1993, the Sangguniang Panglunsod of Cebu City approved City
Tax Ordinance No. LXIX
2
pursuant to Section 140, in relation to Section
151
3
of the Local Government Code of 1991. Chapter XI of said ordinance
provides:
CHAPTER XI
Amusement Tax
SECTION 42. Rate of Tax. There shall be paid to the Office of the City
Treasurer by the proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia and other places of amusement an
amusement tax at the rate of thirty percent (30%) of the gross receipts
from admission fees.
SECTION 43. Manner of Payment. In the case of theaters or cinemas, the
tax shall first be deducted and withheld by their proprietors, lessee, or
operators and paid to the city treasurer before the gross receipts are
divided between said proprietors, lessee, operators and the distributors of
the cinematographic films.
x x x x
SECTION 45. Time of Payment. The tax shall be due and payable within
the first twenty (20) days of the succeeding month.
On June 7, 2002, Congress approved R.A. No. 9167
4
which created the Film
Development Council of the Philippines, herein petitioner. Petitioners
mandate includes the development and implementation of "an incentive
and reward system for the producers based on merit to encourage the
production of quality films."
5
The Cinema Evaluation Board (CEB) was
established to review and grade films in accordance with criteria and
standards and procedures it shall formulate subject to the approval of
petitioner.
Films reviewed and graded favorably by the CEB are given the following
privileges:
Section 13. Privileges of Graded Films. - Films which have obtained an "A"
or "B" grading from the Council pursuant to Sections 11 and 12 of this Act
shall be entitled to the following privileges:
a. Amusement tax reward. - A grade "A" or "B" film shall entitle its
producer to an incentive equivalent to the amusement tax imposed and
collected on the graded films by cities and municipalities in Metro Manila
and other highly urbanized and independent component cities in the
Philippines pursuant to Sections 140 and 151 of Republic Act No. 7160 at
the following rates:
1. For grade "A" films - 100% of the amusement tax collected on such films;
and
2. For grade "B" films. - 65% of the amusement tax collected on such films.
The remaining thirty-five (35%) shall accrue to the funds of the Council.
For the purpose of implementing the above incentive system, R.A. No.
9167 mandates the remittance of the proceeds of the amusement tax
collected by the local government units (LGUs) to petitioner.
Section 14. Amusement Tax Deduction and Remittances. - All revenue from
the amusement tax on the graded film which may otherwise accrue to the
cities and municipalities in Metropolitan Manila and highly urbanized and
independent component cities in the Philippines pursuant to Section 140
of Republic Act. No. 7160 during the period the graded film is exhibited,
shall be deducted and withheld by the proprietors, operators or lessees of
theaters or cinemas and remitted within thirty (30) days from the
termination of the exhibition to the Council which shall reward the
corresponding amusement tax to the producers of the graded film within
fifteen (15) days from receipt thereof.
Proprietors, operators and lessees of theaters or cinemas who fail to remit
the amusement tax proceeds within the prescribed period shall be liable to
a surcharge equivalent to five percent (5%) of the amount due for each
month of delinquency which shall be paid to the Council. (Emphasis
supplied.)
To ensure enforcement of the above provision, the law empowered
petitioner not only to impose administrative fines and penalties but also to
cause or initiate criminal or administrative prosecution to the violators.
6

On January 27, 2009, petitioner through the Office of the Solicitor General
(OSG) sent a demand letter to respondent for the payment of the sum
of P76,836,807.08 representing the amusement tax rewards due to
producers of 89 films graded "A" and "B" which were shown at SM cinemas
from September 11, 2003 to November 4, 2008.
7

Sometime in May 2009, the City of Cebu filed in the RTC of Cebu City (Cebu
City RTC) a petition
8
for declaratory relief with application for a writ of
preliminary injunction against the petitioner, docketed as Civil Case No.
CEB-35529. The City of Cebu sought to declare Section 14 of R.A. No. 9167
as invalid and unconstitutional on grounds that: (1) it violates the basic
policy on local autonomy; (2) it constitutes an undue limitation of the
taxing power of LGUs; (3) it unduly deprives LGUs of the revenue from the
amusement tax imposed on theatre owners and operators; and (4) it
amounts to technical malversation since revenue from the collection of
amusement taxes that would otherwise accrue to and form part of the
general fund of the LGU concerned would now be directly awarded to a
private entity the producers of graded films bypassing the budget
process of the LGU and without the proper appropriation ordinance from
the sanggunian.
9

A temporary restraining order (TRO) was issued by the Cebu City RTC
enjoining petitioner and its duly constituted agents from collecting the
amusement tax incentive award from the owners, proprietors or lessees of
theaters and cinema houses within the City of Cebu; imposing surcharge
on the unpaid amount; filing any case or suit of whatever kind or nature
due to or arising from the failure to deduct, withhold and remit the
amusement tax incentives award on the graded films of petitioner; and
initiating administrative or criminal prosecution against the said owners,
proprietors or lessees.
10

On October 16, 2009, petitioner sued the respondent for the payment
of P76,836,807.08 representing the unpaid amusement tax incentive
reward (with 5% surcharge for each month of delinquency) due to the
producers of 89 graded films which were shown at SM Cinemas in Cebu
City from September 11, 2003 to November 4, 2008, plus a 5% surcharge
for each month of delinquency until fully paid. Said collection suit was
docketed as Civil Case No. 72238 of the RTC of Pasig City (Pasig City RTC),
Branch 166.
11

Petitioner filed a Comment (In Lieu of Answer)
12
in Civil Case No. CEB-
35529 praying for the dismissal of the petition filed by the City of Cebu.
Meanwhile, respondent filed a Motion to Dismiss
13
in Civil Case No. 72238
arguing that petitioners complaint merits outright dismissal considering
that its claim had already been extinguished by respondents prior
payment or remittance of the subject amusement taxes to the City of
Cebu. Respondent called attention to Section 26 of the Implementing Rules
and Regulations (IRR) of R.A. No. 9167 which directed petitioner to execute
a Memorandum of Agreement (MOA) with proprietors, operators and
lessees of theaters and cinemas as well as movie producers, on the
systems and procedures to be followed for the collection, remittance and
monitoring of the amusement taxes withheld on graded films. In the
apparent absence of such MOA and the "general procedure/process" duly
adopted by all proprietors, operators and lessees of theaters or cinemas,
respondent has been withholding such taxes and remitting the same to the
City of Cebu pursuant to Cebu City Tax Ordinance No. LXIX, as shown by
the Certification
14
dated February 5, 2009 issued by the Office of the
Treasurer of Cebu City stating that respondent "had religiously remitted
their monthly amusement taxes due to the Cebu City Government."
Respondent pointed out that even the Cebu City Government recognizes
that when it receives the amusement taxes collected or withheld by the
owners, operators and proprietors of theaters and cinema houses on
graded films, it is mandated to forward the said taxes to petitioner.
In its Comment
15
on the motion to dismiss, petitioner argued that Section
14 of R.A. No. 9167 is valid and constitutional. As to respondents defense
of prior payment, petitioner asserted that the execution of a MOA with the
proprietors, owners and lessees of theaters and cinema houses is not a
condition sine qua non for a valid enforcement of the provisions of R.A.
No. 9167. The IRR cited by respondent cannot prevail over the clear import
of the law on which it is based, and hence respondent cannot invoke it to
excuse non-payment of the amusement tax incentive rewards due to the
producers of graded films which should have been remitted to petitioner
in accordance with Section 14 of R.A. No. 9167. Petitioner pointed out that
from the time R.A. No. 9167 took effect up to the present, all the cities and
municipalities in Metropolitan Manila and highly urbanized and
independent component cities in the Philippines, with the sole exception
of Cebu City and a number of theater establishments therein, have
unanimously acceded to and have faithfully complied with the mandate of
said law notwithstanding the absence of a MOA.
Respondent filed its Reply
16
to petitioners Comment maintaining that its
remittance of the amusement tax incentive reward to the City of Cebu
extinguished its obligation to petitioner, and arguing that the case should
be dismissed on the additional ground of litis pendentia.
On August 13, 2010, respondent filed in Civil Case No. CEB-35529 a Motion
for Leave to File and Admit Attached Comment-in-Intervention.
17
In its
Comment-in-Intervention With Interpleader, respondent prayed that the
judgment on the validity and constitutionality of Sections 13 and 14 of R.A.
No. 9167 include a pronouncement on its rights and duties as a
consequence of such judgment, as it clearly has a legal interest in the
success of either party in the case.
18
On October 21, 2010, the Cebu City
RTC granted respondents motion for intervention.
19

On February 21, 2011, the Pasig City RTC issued the assailed order granting
the motion to dismiss, holding that the action before the Cebu City RTC
(Civil Case No. CEB-35529) is the appropriate vehicle for litigating the
issues between the parties in Civil Case No. 72238. Moreover, said court
found all the elements of litis pendentia present and accordingly dismissed
the complaint. Petitioners motion for reconsideration was likewise denied.
In a direct recourse to this Court, petitioner advances the following
questions of law:
I THE RTC, BRANCH 166, OF PASIG CITY UTTERLY IGNORED AND
DISREGARDED THE WELL-SETTLED RULE THAT UNLESS AND UNTIL A
SPECIFIC PROVISION OF LAW IS DECLARED INVALID AND
UNCONSTITUTIONAL, THE SAME IS ENTITLED TO OBEDIENCE AND
RESPECT.
II THE RTC, BRANCH 166, OF PASIG CITY ERRED IN DISMISSING THE
COMPLAINT IN CIVIL CASE NO. 72238 ON THE GROUND OF LITIS
PENDENTIA.
20

Petitioner reiterates that every law has in its favor the presumption of
constitutionality, and unless and until a specific provision of law is declared
invalid and unconstitutional, the same is valid and binding for all intents
and purposes. In dismissing the complaint, the Pasig City RTC abdicated its
solemn duty and jurisdiction to rule on the constitutional issues raised by
respondent in Civil Case No. 72238 upon the mistaken assumption that
only the Cebu City RTC in Civil Case No. CEB-35529 can directly determine
the constitutionality of Sections 13 and 14 of R.A. No. 9167 and the
indispensability of a MOA in the remittance to petitioner of amusement
tax rewards due to the producers of graded films. Petitioner further
contends that, contrary to the ruling of the Pasig City RTC, the principle of
judicial courtesy is not applicable because a judgment in Civil Case No.
CEB-35529 will not result in rendering moot the issues brought before the
Pasig City RTC in Civil Case No. 72238.
The petition has no merit.
We do not subscribe to petitioners view that the dismissal of the
complaint in Civil Case No. 72238 amounts to an abdication of the Pasig
City RTCs concurrent jurisdiction to settle constitutional questions
involving a statute or its implementing rules. The 1997 Rules of Civil
Procedure, as amended, provides for specific grounds for the dismissal of
any complaint in civil cases including those where the trial court has
competence and authority to hear and decide the issues raised and relief
sought. One of these grounds is litis pendentia.
Litis pendentia, as a ground for the dismissal of a civil action, refers to a
situation where two actions are pending between the same parties for the
same cause of action, so that one of them becomes unnecessary and
vexatious.
21
It is based on the policy against multiplicity of suits
22
and
authorizes a court to dismiss a case motu proprio.
23

Section 1(e), Rule 16 of the 1997 Rules of Civil Procedure, as amended,
thus provides:
SECTION 1. Grounds.Within the time for but before filing the answer to
the complaint or pleading asserting a claim, a motion to dismiss may be
made on any of the following grounds:
x x x x
(e) That there is another action pending between the same parties for the
same cause.
The requisites in order that an action may be dismissed on the ground of
litis pendentia are: (a) the identity of parties, or at least such as
representing the same interest in both actions; (b) the identity of rights
asserted and relief prayed for, the relief being founded on the same facts,
and (c) the identity of the two cases such that judgment in one, regardless
of which party is successful, would amount to res judicata in the other.
24

Petitioner submits that while there is identity of parties in Civil Case Nos.
CEB-35529 and 72238, the second and third requisites are absent. It points
out that in the former, it is not claiming any monetary award but merely
prayed for the dismissal of the declaratory relief petition. Moreover, since
the issues raised in the former case are purely legal, petitioner is not
necessarily called upon to present testimonial or documentary evidence to
prove factual matters. Petitioner thus concludes that the judgment in
former case would not amount to res judicata in the latter case. Petitioner
further notes that when a judgment dismissing the former case is appealed
and the assailed provisions of R.A. No. 9167 are declared constitutional by
this Court, petitioner will not be automatically awarded the unpaid
amusement taxes it is claiming against respondent in Civil Case No. 72238.
Petitioners submissions fail to persuade.
The underlying principle of litis pendentia is the theory that a party is not
allowed to vex another more than once regarding the same subject matter
and for the same cause of action. This theory is founded on the public
policy that the same subject matter should not be the subject of
controversy in courts more than once, in order that possible conflicting
judgments may be avoided for the sake of the stability of the rights and
status of persons,
25
and also to avoid the costs and expenses incident to
numerous suits.
26

Among the several tests resorted to in ascertaining whether two suits
relate to a single or common cause of action are: (1) whether the same
evidence would support and sustain both the first and second causes of
action; and (2) whether the defenses in one case may be used to
substantiate the complaint in the other.
27

The determination of whether there is an identity of causes of action for
purposes of litis pendentia is inextricably linked with that of res judicata,
each constituting an element of the other. In either case, both relate to the
sound practice of including, in a single litigation, the disposition of all
issues relating to a cause of action that is before a court.
28

In this case, what petitioner failed to take into account is that the Cebu
City RTC allowed respondent to intervene in Civil Case No. CEB-35529 by
way of an interpleader action as to which government entity whether
petitioner or the Cebu City Government should have remitted the
amusement taxes it collected from the admission fees of graded films
shown in respondents cinemas in Cebu City. It must be noted that since
1993 when City Tax Ordinance No. LXIX was enforced, respondent had
been faithfully remitting amusement taxes to the City of Cebu and because
of the collection suit filed by petitioner, such defense of prior payment and
evidence to prove it which respondent could have presented at the trial in
Civil Case No. 72238 would be the same defense and evidence necessary
to sustain respondents interpleader action in Civil Case No. CEB-35529
before the Cebu City RTC. Also, in both cases, respondent had raised the
matter of conflicting provisions of R.A. No. 9167 and Local Government
Code of 1991, while petitioner pleaded and argued the constitutionality
and validity of Sections 13 and 14 of R.A. No. 9167.
The interpleader action of respondent/intervenor, anchored on its defense
of prior payment, would be considered by the Cebu City RTC in its final
determination of the parties rights and interests as it resolves the legal
questions. The Pasig City RTC is likewise confronted with the legal and
constitutional issues in the collection suit, alongside with respondents
defense of prior payment. It is evident that petitioners claim against the
respondent hinges on the correct interpretation of the conflicting
provisions of the Local Government Code of 1991 and R.A. No. 9167. There
could be no doubt that a judgment in either case would constitute res
judicata to the other. Sound practice thus dictates that the common
factual and legal issues be resolved in a single proceeding.
We also find no reversible error in the Pasig City RTCs ruling that Civil Case
No. CEB-35529 is the appropriate vehicle for litigating the issues raised by
petitioner and respondent in Civil Case No. 72238.
Under the established jurisprudence on litis pendentia, the following
considerations predominate in the ascending order of importance in
determining which action should prevail: (1) the date of filing, with
preference generally given to the first action filed to be retained; (2)
whether the action sought to be dismissed was filed merely to preempt
the later action or to anticipate its filing and lay the basis for its dismissal;
and (3) whether the action is the appropriate vehicle for litigating the
issues between the parties.
29

Moreover, considering the predicament of respondent, we also find
relevant the criterion of the consideration of the interest of justice we
enunciated in Roa v. Magsaysay.
30
In applying this standard, what was
asked was which court would be "in a better position to serve the interests
of justice," taking into account (a) the nature of the controversy, (b) the
comparative accessibility of the court to the parties and (c) other similar
factors.
31

In this case, all things considered, there can be no doubt Civil Case No.
CEB-35529 is the appropriate vehicle to determine the rights of petitioner
and respondent. In that declaratory relief case instituted by the City of
Cebu, to which respondent had been remitting the subject amusement
taxes being claimed by petitioner in Civil Case No. 72238, the issue of
validity or constitutionality of Sections 13 and 14 of R.A. No. 9167 was
directly pleaded and argued between petitioner and the City of Cebu, with
subsequent inclusion of respondent as intervenor. Moreover, the presence
of City of Cebu as party plaintiff would afford proper relief to respondent
in the event the Cebu City R TC renders judgment sustaining the validity of
the said provisions. Respondent had vigorously asserted in both courts that
it had remitted the amusement taxes in good faith to the City of Cebu
which had threatened sanctions for non-compliance with City Tax
Ordinance No. LXIX, and that it should not be made to pay once again the
same taxes to petitioner. As equally dire consequences for non-compliance
with the demand for payment having been made by petitioner, such
defense of good faith is best ventilated in Civil Case No. CEB-35529 where
the City of Cebu is a party.
Petitioner's insistence that the Pasig City RTC proceed with trial
notwithstanding the pendency of Civil Case No. CEB-35529 before the
Cebu City RTC is thus untenable. To allow the parties to litigate the same
issues upon the same evidence and defenses will only defeat the public
policy reasons behind litis pendentia, which, like the rule on forum
shopping, aims to prevent the unnecessary burdening of our courts and
undue taxing of the manpower and financial resources of the judiciary; to
avoid the situation where co-equal courts issue conflicting decisions over
the same cause; and to preclude one party from harassing the other party
through the filing of an unnecessary or vexatious suit.
32

WHEREFORE, the petition for review on certiorari is DENIED. The Orders
dated February 21, 2011 and July 25, 2011 of the Regional Trial Court of
Pasig City, Branch 166 are hereby AFFIRMED.