Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J.:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution
1
of the Court of Appeals reversing the
decision
2
of the Court of Tax Appeals which in turn denied the protest filed by respondent General Foods (Phils.), Inc.,
regarding the assessment made against the latter for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the manufacture of beverages such as
"Tang," "Calumet" and "Kool-Aid," filed its income tax return for the fiscal year ending February 28, 1985. In said tax return,
respondent corporation claimed as deduction, among other business expenses, the amount of P9,461,246 for media
advertising for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by respondent corporation.
Consequently, respondent corporation was assessed deficiency income taxes in the amount of P2,635, 141.42. The latter filed a
motion for reconsideration but the same was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even excludes "other advertising
and promotions" expenses, we are not prepared to accept that such amount is reasonable "to stimulate the current
sale of merchandise" regardless of Petitioners explanation that such expense "does not connote unreasonableness
considering the grave economic situation taking place after the Aquino assassination characterized by capital fight,
strong deterioration of the purchasing power of the Philippine peso and the slacking demand for consumer products"
(Petitioners Memorandum, CTA Records, p. 273). We are not convinced with such an explanation. The staggering
expense led us to believe that such expenditure was incurred "to create or maintain some form of good will for the
taxpayers trade or business or for the industry or profession of which the taxpayer is a member." The term "good
will" can hardly be said to have any precise signification; it is generally used to denote the benefit arising from
connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart vs. Loagan, 86 III. App. 294). As held in
the case of Welch vs. Helvering, efforts to establish reputation are akin to acquisition of capital assets and, therefore,
expenses related thereto are not business expenses but capital expenditures. (Atlas Mining and Development Corp. vs.
Commissioner of Internal Revenue, supra). For sure such expenditure was meant not only to generate present sales but
more for future and prospective benefits. Hence, "abnormally large expenditures for advertising are usually to be
spread over the period of years during which the benefits of the expenditures are received" (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we hereby RESOLVE to DISMISS the
instant petition for lack of merit and ORDER the Petitioner to pay the respondent Commissioner the assessed amount
of P2,635,141.42 representing its deficiency income tax liability for the fiscal year ended February 28, 1985."
3

Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which rendered a decision reversing and
setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is excessive, the same should be
allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby GRANTED. Accordingly, the
Decision, dated 8 February 1994 of respondent Court of Tax Appeals is REVERSED and SET ASIDE and the letter,
dated 31 May 1988 of respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.
4

Thus, the instant petition, wherein the Commissioner presents for the Courts consideration a lone issue: whether or not the
subject media advertising expense for "Tang" incurred by respondent corporation was an ordinary and necessary expense
fully deductible under the National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority;
5
and he who claims an exemption must be able to justify his claim by the clearest
grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague implications.
6

Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax exemptions are strictly construed,
then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising expense for "Tang" paid or
incurred by respondent corporation for the fiscal year ending February 28, 1985 "necessary and ordinary," hence, fully
deductible under the NIRC? Or was it a capital expenditure, paid in order to create "goodwill and reputation" for respondent
corporation and/or its products, which should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all ordinary and necessary expenses
paid or incurred during the taxable year in carrying on, or which are directly attributable to, the development,
management, operation and/or conduct of the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply with the following requisites: (a)
the expense must be ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers.
7

The parties are in agreement that the subject advertising expense was paid or incurred within the corresponding taxable year
and was incurred in carrying on a trade or business. Hence, it was necessary. However, their views conflict as to whether or
not it was ordinary. To be deductible, an advertising expense should not only be necessary but also ordinary. These two
requirements must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the ground that it failed the two
conditions set by U.S. jurisprudence: first, "reasonableness" of the amount incurred and second, the amount incurred must not
be a capital outlay to create "goodwill" for the product and/or private respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an advertising expense. There being
no hard and fast rule on the matter, the right to a deduction depends on a number of factors such as but not limited to: the type
and size of business in which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic conditions. It is the interplay of these, among other
factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was almost one-half of its total claim
for "marketing expenses." Aside from that, respondent-corporation also claimed P2,678,328 as "other advertising and
promotions expense" and another P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double the amount of respondent
corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large. Therefore, even if it is
necessary, it cannot be considered an ordinary expense deductible under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of merchandise or use of services and (2)
advertising designed to stimulate the future sale of merchandise or use of services. The second type involves expenditures
incurred, in whole or in part, to create or maintain some form of goodwill for the taxpayers trade or business or for the
industry or profession of which the taxpayer is a member. If the expenditures are for the advertising of the first kind, then,
except as to the question of the reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then normally they should be spread out over a
reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second kind. Not only was the amount
staggering; the respondent corporation itself also admitted, in its letter protest
8
to the Commissioner of Internal Revenues
assessment, that the subject media expense was incurred in order to protect respondent corporations brand franchise, a
critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones property. This is a capital
expenditure which should be spread out over a reasonable period of time.
9

Respondent corporations venture to protect its brand franchise was tantamount to efforts to establish a reputation. This was
akin to the acquisition of capital assets and therefore expenses related thereto were not to be considered as business expenses
but as capital expenditures.
10

True, it is the taxpayers prerogative to determine the amount of advertising expenses it will incur and where to apply
them.
11
Said prerogative, however, is subject to certain considerations. The first relates to the extent to which the expenditures
are actually capital outlays; this necessitates an inquiry into the nature or purpose of such expenditures.
12
The second, which
must be applied in harmony with the first, relates to whether the expenditures are ordinary and necessary. Concomitantly, for
an expense to be considered ordinary, it must be reasonable in amount. The Court of Tax Appeals ruled that respondent
corporation failed to meet the two foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising expense in order to protect its
brand franchise. We consider this as a capital outlay since it created goodwill for its business and/or product. The P9,461,246
media advertising expense for the promotion of a single product, almost one-half of petitioner corporations entire claim for
marketing expenses for that year under review, inclusive of other advertising and promotion expenses of P2,678,328 and
P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies such as the
Court of Tax Appeals, a highly specialized body specifically created for the purpose of reviewing tax cases. The CTA, by the
nature of its functions, is dedicated exclusively to the study and consideration of tax problems. It has necessarily developed an
expertise on the subject. We extend due consideration to its opinion unless there is an abuse or improvident exercise of
authority.
13
Since there is none in the case at bar, the Court adheres to the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the subject media advertising
expense to be deductible as an ordinary and necessary expense on the ground that "it has not been established that the item
being claimed as deduction is excessive." It is not incumbent upon the taxing authority to prove that the amount of items being
claimed is unreasonable. The burden of proof to establish the validity of claimed deductions is on the taxpayer.
14
In the present
case, that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision of the Court of Appeals is hereby
REVERSED and SET ASIDE. Pursuant to Sections 248 and 249 of the Tax Code, respondent General Foods (Phils.), Inc. is hereby
ordered to pay its deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment and 20% annual
interest computed from August 25, 1989, the date of the denial of its protest, until the same is fully paid.
SO ORDERED.

THIRD DIVISION


COMMISSIONER OF INTERNAL G.R. No. 172231
REVENUE,
Petitioner,
Present:

- versus - Ynares-Santiago, J. (Chairperson),
Austria-Martinez,
Callejo, Sr.,
Chico-Nazario, and
Nachura, JJ.
ISABELA CULTURAL
CORPORATION, Promulgated:
Respondent.
February 12, 2007
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:


Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision
[1]
of the Court of Appeals
in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision
[2]
of the Court of Tax Appeals (CTA) in CTA Case No. 5211,
which cancelled and set aside the Assessment Notices for deficiency income tax and expanded withholding tax issued by the
Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment Notice No.
FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,
[3]
for the year ending December 31, 1985;
[4]


(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.
[5]


(c) Expense for security services of El Tigre Security & Investigation Agency for the months of
April and May 1986.
[6]


(2) The alleged understatement of ICCs interest income on the three promissory notes due from
Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly due to the
failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction for security services.
[7]


On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995, however, it
received a final notice before seizure demanding payment of the amounts stated in the said notices. Hence, it brought the case
to the CTA which held that the petition is premature because the final notice of assessment cannot be considered as a final
decision appealable to the tax court. This was reversed by the Court of Appeals holding that a demand letter of the BIR
reiterating the payment of deficiency tax, amounts to a final decision on the protested assessment and may therefore be
questioned before the CTA. This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210.
[8]
The case was
thus remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices issued against
ICC. It held that the claimed deductions for professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC. Hence, even if some of these professional
services were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the amount
thereof could not be determined at that time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found that it was
the BIR which made an overstatement of said income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the application of compounded
interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction for security
services as shown by the various payment orders and confirmation receipts it presented as evidence. The dispositive portion
of the CTAs Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency
expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.
[9]


Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA decision,
[10]
holding that
although the professional services (legal and auditing services) were rendered to ICC in 1984 and 1985, the cost of the
services was not yet determinable at that time, hence, it could be considered as deductible expenses only in 1986 when ICC
received the billing statements for said services. It further ruled that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security
services for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that since ICC is
using the accrual method of accounting, the expenses for the professional services that accrued in 1984 and 1985, should have
been declared as deductions from income during the said years and the failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986. As to the alleged deficiency interest income and failure to withhold
expanded withholding tax assessment, petitioner invoked the presumption that the assessment notices issued by the BIR are
valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the expenses for
professional and security services from ICCs gross income; and (2) held that ICC did not understate its interest income from
the promissory notes of Realty Investment, Inc; and that ICC withheld the required 1% withholding tax from the deductions
for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like expenses
paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade or business of the taxpayer;
and (d) it must be supported by receipts, records or other pertinent papers.
[11]


The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the
National Internal Revenue Code (NIRC) which states that: [t]he deduction provided for in this Title shall be taken for the
taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon the basis of
which the net income is computed x x x.

Accounting methods for tax purposes comprise a set of rules for determining when and how to report income and
deductions.
[12]
In the instant case, the accounting method used by ICC is the accrual method.

Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting, expenses not
being claimed as deductions by a taxpayer in the current year when they are incurred cannot be claimed as deduction from
income for the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses and other allowable
deductions for the current year but failed to do so cannot deduct the same for the next year.
[13]


The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to
actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the right to
receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
[14]


For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in such
a manner that the taxpayer must recognize income or expense? The accrual of income and expense is permitted when the all-
events test has been met. This test requires: (1) fixing of a right to income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be known
absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with reasonable
accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the taxable year. The amount of liability
does not have to be determined exactly; it must be determined with reasonable accuracy. Accordingly, the term
reasonable accuracy implies something less than an exact or completely accurate amount.
[15]


The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected
to have known, at the closing of its books for the taxable year.
[16]
Accrual method of accounting presents largely a
question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.
[17]


Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the same by
the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed.
[18]


In the instant case, the expenses for professional fees consist of expenses for legal and auditing services. The
expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection with ICCs tax problems
for the year 1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960s.
[19]
From the nature of
the claimed deductions and the span of time during which the firm was retained, ICC can be expected to have reasonably
known the retainer fees charged by the firm as well as the compensation for its legal services. The failure to determine the
exact amount of the expense during the taxable year when they could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have
inquired into the amount of their obligation to the firm, especially so that it is using the accrual method of accounting. For
another, it could have reasonably determined the amount of legal and retainer fees owing to its familiarity with the rates
charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the burden of
establishing the accrual of an expense or income. However, ICC failed to discharge this burden. As to when the firms
performance of its services in connection with the 1984 tax problems were completed, or whether ICC exercised reasonable
diligence to inquire about the amount of its liability, or whether it does or does not possess the information necessary to
compute the amount of said liability with reasonable accuracy, are questions of fact which ICC never established. It simply
relied on the defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to
exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing that even
with only reasonable accuracy, as the standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional services
were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in 1986
[20]
and
could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty Investment, Inc., we
sustain the findings of the CTA and the Court of Appeals that no such understatement exists and that only simple interest
computation and not a compounded one should have been applied by the BIR. There is indeed no stipulation between the
latter and ICC on the application of compounded interest.
[21]
Under Article 1959 of the Civil Code, unless there is a stipulation
to the contrary, interest due should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required withholding tax from
its claimed deductions for security services and remitted the same to the BIR is supported by payment order and confirmation
receipts.
[22]
Hence, the Assessment Notice for deficiency expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income tax should
be cancelled and set aside but only insofar as the claimed deductions of ICC for security services. Said Assessment is valid as
to the BIRs disallowance of ICCs expenses for professional services. The Court of Appeals cancellation of Assessment Notice
No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision

of the Court of Appeals in CA-
G.R. SP No. 78426, is AFFIRMED with theMODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security services, is declared valid only insofar as
the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under Assessment
Notice No. FAS-1-86-90-000680.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 78953 July 31, 1991
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents.
Elison G. Natividad for accused-appellant.
SARMIENTO, J.:p
Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income tax return
that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not
declare it as income is liable to pay the 50% penalty for filing a fraudulent return.
This question is the subject of the petition for review before the Court of the portion of the Decision
1
dated July 27, 1983 of
the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as
Commissioner of Internal Revenue," which orders the deletion of the 50% surcharge from Javier's deficiency income tax
assessment on his income for 1977.
The respondent CTA in a Resolution
2
dated May 25, 1987, denied the Commissioner's Motion for Reconsideration
3
and
Motion for New Trial
4
on the deletion of the 50% surcharge assessment or imposition.
The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and incorporated in the
assailed decision now under review, read as follows:
xxx xxx xxx
2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein),
received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted
by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank,
N.A.
3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal
(now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent
herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error
and should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned
on the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the
clear, immediate, and continuing duty to return the said amount from the moment it was received.
4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit
Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his
wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own
personal use and benefit the amount of US$999,000.00 which they received under an implied trust for the
benefit of Mellon Bank and as a result of the mistake in the remittance by the latter.
5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the
taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in the
footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed
to be a gift but turned out to be an error and is now subject of litigation."
6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the
acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment
notices for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before
December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976
and 1977 respectively. . . .
7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal
Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any
undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final
court decision on the case filed against him for filing an allegedly fraudulent return. . . .
8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting
Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his
December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were
able to dispose, is definitely taxable." . . .
5

The Commissioner also imposed a 50% fraud penalty against Javier.
Disagreeing, Javier filed an appeal
6
before the respondent Court of Tax Appeals on December 10, 1981.
The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding portion:
We note that in the deficiency income tax assessment under consideration, respondent (petitioner here)
further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of
the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since
petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was
imposed, in all probability, by respondent (petitioner) because he considered the return filed false or
fraudulent. This additional requirement, to our mind, is much less called for because petitioner (private
respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some
money received from abroad which he presumed to be gift but turned out to be an error and is now subject of
litigation."
From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully
and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to
give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its
lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23,
1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for respondent to examine.
Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides,
Section 29 is not too plain and simple to understand. Since the question involved in this case is of first
impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency
assessment should be deleted.
7

The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us, by the
present petition, raising the main issue as to:
WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY?
8

On the other hand, Javier candidly stated in his Memorandum,
9
that he "did not appeal the decision which held him liable for
the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted in the
same memorandum"that the issue may be raised in the case not for the purpose of correcting or setting aside the decision
which held him liable for deficiency income tax, but only to show that there is no basis for the imposition of the surcharge."
This subsequent disavowal therefore renders moot and academic the posturings articulated in as Comment
10
on the non-
taxability of the amount he erroneously received and the bulk of which he had already disbursed. In any event, an appeal at
that time (of the filing of the Comments) would have been already too late to be seasonable. The petitioner, through the office
of the Solicitor General, stresses that:
xxx xxx xxx
The record however is not ambivalent, as the record clearly shows that private respondent is self-convinced,
and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way, the studied
insinuation that private respondent may not be the beneficial owner of the money or income flowing to him
as enhanced by the studied claim that the amount is "subject of litigation" is belied by the record and clearly
exposed as a fraudulent ploy, as witness what transpired upon receipt of the amount.
Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of
private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the
amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven (11)
electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said
dollar account in the sum of $975,000.00 or P7,020,000.00. . . .
11

In reply, the private respondent argues:
xxx xxx xxx
The petitioner contends that the private respondent committed fraud by not declaring the "mistaken
remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was the
recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now
subject of litigation." It is respectfully submitted that the said return was not fraudulent. The footnote was
practically an invitation to the petitioner to make an investigation, and to make the proper assessment.
The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782),
that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain a
judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A. Neddas,
40 BTA 672). The following circumstances attendant to the case at bar show that in filing the questioned
return, the private respondent was guided, not by that "willful and deliberate intent to prevent the
Government from making a proper assessment" which constitute fraud, but by an honest doubt as to whether
or not the "mistaken remittance" was subject to tax.
First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given
very, very wide publicity by media; and only one who is not in his right mind would have entertained the idea
that the BIR would not make an assessment if the amount in question was indeed subject to the income tax.
Second, as the respondent Court ruled, "the question involved in this case is of first impression in this
jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not
unanimous in holding that similar receipts are subject to the income tax. It should be noted that the decision
in the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one out of three
Judges of the respondent Court was of the opinion that the amount in question is not taxable. Thus, even
without the footnote, the failure to declare the "mistaken remittance" is not fraudulent.
Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the
Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa committed
allegedly by his failure to return the money and by converting it to his personal benefit. The basic tax
amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using part of the
mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in his income
tax return that the amount received was still under litigation. If he had paid the tax, would that not constitute
estafa for using the funds for his own personal benefit? and would the Government refund it to him if the
courts ordered him to refund the money to the Mellon Bank?
12

xxx xxx xxx
Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a taxpayer who files
a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has
been made on the basis of the return filed before the discovery of the falsity or fraud.
We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and
agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978
thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error
and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was
practically an invitation for investigation and that Javier had literally "laid his cards on the table."
13

In Aznar v. Court of Tax Appeals,
14
fraud in relation to the filing of income tax return was discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated
by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily
follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat
the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only
suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion.
15

A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v. U.S.,
App. D.C., 161 F. 2d 897, 898.
16

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government
agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give
up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities
because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from
the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not
justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money
he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received
an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted.
WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED. No costs.
SO ORDERED.

EN BANC

CHAMBER OF REAL G.R. No. 160756
ESTATE AND BUILDERS
ASSOCIATIONS, INC.,
Petitioner, Present:

PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.

THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO,
THE HON. ACTING SECRETARY OF
FINANCE JUANITA D. AMATONG,
and THE HON. COMMISSIONER OF
INTERNAL REVENUE GUILLERMO
PARAYNO, JR.,
Respondents. Promulgated:

March 9, 2010



x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
D E C I S I O N

CORONA, J.:

In this original petition for certiorari and mandamus,
[1]
petitioner Chamber of Real Estate and Builders Associations, Inc.
is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424
[2]
and the revenue regulations (RRs) issued by
the Bureau of Internal Revenue (BIR) to implement said provision and those involving creditable withholding taxes.
[3]


Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former Executive
Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then Commissioner of Internal Revenue
Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on corporations and creditable
withholding tax (CWT) on sales of real properties classified as ordinary assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98. Petitioner
argues that the MCIT violates the due process clause because it levies income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and Section 4(a)(ii)
and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection of CWT on the sale of real properties
categorized as ordinary assets. Petitioner contends that these revenue regulations are contrary to law for two reasons: first,
they ignore the different treatment by RA 8424 of ordinary assets and capital assets and second, respondent Secretary of
Finance has no authority to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real
properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the due process clause
because, like the MCIT, the government collects income tax even when the net income has not yet been determined. They
contravene the equal protection clause as well because the CWT is being levied upon real estate enterprises but not on other
business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;
(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary assets under
RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of 2% of its
gross income when such MCIT is greater than the normal corporate income tax imposed under Section 27(A).
[4]
If the regular
income tax is higher than the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal tax shall
be carried forward and credited against the normal income tax for the three immediately succeeding taxable years. Section
27(E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the normal income tax
as computed under Subsection (A) of this Section shall be carried forward and credited against
the normal income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is hereby
authorized to suspend the imposition of the [MCIT] on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of legitimate
business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of
the Commissioner, the necessary rules and regulations that shall define the terms and
conditions under which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under Subsection (E)
hereof, the term gross income shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold. Cost of goods sold shall include all business expenses
directly incurred to produce the merchandise to bring them to their present location and use.

For trading or merchandising concern, cost of goods sold shall include the invoice cost
of the goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the
raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means gross
receipts less sales returns, allowances, discounts and cost of services. Cost of services shall
mean all direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (A) salaries and employee benefits of personnel, consultants
and specialists directly rendering the service and (B) cost of facilities directly utilized in
providing the service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, that in the case of banks, cost of services shall include interest
expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the Commissioner of
Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).
[5]
The pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the end of the
taxable year (whether calendar or fiscal year, depending on the accounting period employed) is
hereby imposed upon any domestic corporation beginning the fourth (4
th
) taxable year
immediately following the taxable year in which such corporation commenced its business
operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable
income or whenever the amount of minimum corporate income tax is greater than the normal
income tax due from such corporation.

For purposes of these Regulations, the term, normal income tax means the income tax
rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1,
2000 and thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal income tax as
computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and
credited against the normal income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR, promulgated RR 2-98
implementing certain provisions of RA 8424 involving the withholding of taxes.
[6]
Under Section 2.57.2(J) of RR No. 2-98,
income payments from the sale, exchange or transfer of real property, other than capital assets, by persons residing in the
Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for
the sale, exchange or transfer of. Real property, other than capital assets, sold by an individual, corporation,
estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate
business in accordance with the following schedule
Those which are exempt from a
withholding tax at source as prescribed
in Sec. 2.57.5 of these regulations.



Exempt

With a selling price of five hundred
thousand pesos (P500,000.00) or less.



1.5%

With a selling price of more than five
hundred thousand pesos (P500,000.00)
but not more than two million pesos
(P2,000,000.00).





3.0%

With selling price of more than two
million pesos




xxx
xxx xxx

Gross selling price shall mean the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an exchange,
the fair market value of the property received in exchange, as determined in the Income Tax Regulations shall
be used.

Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the
last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall
be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:
xxx xxx xxx
(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner
for the sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based
on the gross selling price/total amount of consideration or the fair market value determined in
accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the
sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the
withholding agent,/buyer, in accordance with the following schedule:

Where the seller/transferor is exempt from [CWT]
in accordance with Sec. 2.57.5 of these
regulations.


Exempt

Upon the following values of real property, where the
seller/transferor is habitually engaged in the real
estate business.


With a selling price of Five Hundred Thousand Pesos
(P500,000.00) or less.


1.5%

With a selling price of more than Five Hundred
Thousand Pesos (P500,000.00) but not more than
Two Million Pesos (P2,000,000.00).




3.0%

With a selling price of more than two Million
Pesos (P2,000,000.00).


5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market
value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these
rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of
sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the
buyer on every installment.
(P2,000,000.00) 5.0%


(ii) If, on the other hand, the sale is on a cash basis or is a deferred-payment sale not on
the installment plan (that is, payments in the year of sale exceed 25% of the selling price),
the buyer shall withhold the tax based on the gross selling price or fair market value of the
property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the
[CWT] due on the sale, transfer or exchange of real property other than capital asset has been fully
paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or exchange subject to
the CWT will not be recorded by the Registry of Deeds until the CIR has certified that such transfers and conveyances have
been reported and the taxes thereof have been duly paid:
[7]


Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable expanded
withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfers and conveyances have been reported and the expanded
withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid xxxx.

On February 11, 2003, RR No. 7-2003
[8]
was promulgated, providing for the guidelines in determining whether a
particular real property is a capital or an ordinary asset for purposes of imposing the MCIT, among others. The pertinent
portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. -
Gains/Income derived from sale, exchange, or other disposition of real properties shall, unless
otherwise exempt, be subject to applicable taxes imposed under the Code, depending on whether
the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-
resident aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as
amended, based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or
25(A)(1) of the Code, as the case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.

xxx xxx xxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following requisites are satisfied: (1)
there must be an actual case calling for the exercise of judicial review; (2) the question before the court must be ripe for
adjudication; (3) the person challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of constitutionality must be the very lis
mota of the case.
[9]


Respondents aver that the first three requisites are absent in this case. According to them, there is no actual case
calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed by
the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege that its
members have shut down their businesses as a result of the payment of the MCIT or CWT. Petitioner has
raised concerns in mere abstract and hypothetical form without any actual, specific and concrete instances
cited that the assailed law and revenue regulations have actually and adversely affected it. Lacking empirical
data on which to base any conclusion, any discussion on the constitutionality of the MCIT or CWT on sales of
real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that does
not really settle legal issues.
[10]


An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims which is
susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or dispute.
[11]
On the other hand, a
question is considered ripe for adjudication when the act being challenged has a direct adverse effect on the individual
challenging it.
[12]


Contrary to respondents assertion, we do not have to wait until petitioners members have shut down their
operations as a result of the MCIT or CWT. The assailed provisions are already being implemented. As we stated in Didipio
Earth-Savers Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:
[13]


By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation
of the Constitution and/or the law is enough to awaken judicial duty.
[14]


If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle such question once and
for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not allege any
material interest or any wrong that it may suffer from the enforcement of [the assailed provisions].
[15]


Legal standing or locus standi is a partys personal and substantial interest in a case such that it has sustained or will
sustain direct injury as a result of the governmental act being challenged.
[16]
In Holy Spirit Homeowners Association, Inc. v.
Defensor,
[17]
we held that the association had legal standing because its members stood to be injured by the enforcement of the
assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute
that the individual members of petitioner association are residents of the NGC. As such they are covered and
stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the selection
process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner association may assail
those provisions in the IRR which it believes to be unfavorable to the rights of its members. xxx Certainly,
petitioner and its members have sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.
[18]


In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the requirements of an
actual case, ripeness or legal standing when paramount public interest is involved.
[19]
The questioned MCIT and CWT affect
not only petitioners but practically all domestic corporate taxpayers in our country. The transcendental importance of the
issues raised and their overreaching significance to society make it proper for us to take cognizance of this petition.
[20]


CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation system. It
came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.
[21]
It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income
tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution
to the support of the public sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the [MCIT]
so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for administrative
convenience. This will go a long way in ensuring that corporations will pay their just share in supporting
our public life and our economic advancement.
[22]


Domestic corporations owe their corporate existence and their privilege to do business to the government. They also
benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate. It is
therefore fair for the government to require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal
or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or
over-deduction of expenses otherwise called tax shelters.
[23]


Mr. Javier (E.) [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year out and
paid no tax. So, if the corporation has been losing for the past five years to ten years, then that corporation
has no business to be in business. It is dead. Why continue if you are losing year in and year out? So, we have
this provision to avoid this type of tax shelters, Your Honor.
[24]


The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after operations of
a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect. For
sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put a cap
on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures,
the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the
corporation commenced its operations.
[25]
This grace period allows a new business to stabilize first and make its ventures
viable before it is subjected to the MCIT.
[26]


Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be
credited against the normal income tax for the three immediately succeeding years.
[27]


Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance
to suspend the imposition of MCIT if a corporation suffers losses due to prolonged labor dispute, force majeure and legitimate
business reverses.
[28]


Even before the legislature introduced the MCIT to the Philippine taxation system, several other countries already had
their own system of minimum corporate income taxation. Our lawmakers noted that most developing countries, particularly
Latin American and Asian countries, have the same form of safeguards as we do. As pointed out during the committee
hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), theres a minimum of income tax of half a percent (0.5%)
of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of course
the different countries have different basis for that minimum income tax.

The other thing youll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.
[29]


At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their own versions of the
MCIT.
[30]


MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly oppressive,
arbitrary and confiscatory which amounts to deprivation of property without due process of law. It explains that gross income
as defined under said provision only considers the cost of goods sold and other direct expenses; other major expenditures,
such as administrative and interest expenses which are equally necessary to produce gross income, were not taken into
account.
[31]
Thus, pegging the tax base of the MCIT to a corporations gross income is tantamount to a confiscation of capital
because gross income, unlike net income, is not realized gain.
[32]


We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure. The exercise
of taxing power derives its source from the very existence of the State whose social contract with its citizens obliges it to
promote public interest and the common good.
[33]


Taxation is an inherent attribute of sovereignty.
[34]
It is a power that is purely legislative.
[35]
Essentially, this means
that in the legislature primarily lies the discretion to determine the nature (kind), object (purpose), extent (rate), coverage
(subjects) and situs (place) of taxation.
[36]
It has the authority to prescribe a certain tax at a specific rate for a particular public
purpose on persons or things within its jurisdiction. In other words, the legislature wields the power to define what tax shall
be imposed, why it should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and where
it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature no limits, so
that the principal check against its abuse is to be found only in the responsibility of the legislature (which imposes the tax) to
its constituency who are to pay it.
[37]
Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat [no] person shall be deprived of life, liberty or
property without due process of law. In Sison, Jr. v. Ancheta, et al.,
[38]
we held that the due process clause may properly be
invoked to invalidate, in appropriate cases, a revenue measure
[39]
when it amounts to a confiscation of property.
[40]
But in the
same case, we also explained that we will not strike down a revenue measure as unconstitutional (for being violative of the
due process clause) on the mere allegation of arbitrariness by the taxpayer.
[41]
There must be a factual foundation to such an
unconstitutional taint.
[42]
This merely adheres to the authoritative doctrine that, where the due process clause is invoked,
considering that it is not a fixed rule but rather a broad standard, there is a need for proof of such persuasive character.
[43]


Petitioner is correct in saying that income is distinct from capital.
[44]
Income means all the wealth which flows into
the taxpayer other than a mere return on capital. Capital is a fund or property existing at one distinct point in time while
income denotes a flow of wealth during a definite period of time.
[45]
Income is gain derived and severed from capital.
[46]
For
income to be taxable, the following requisites must exist:

(1) there must be gain;
(2) the gain must be realized or received and
(3) the gain must not be excluded by law or treaty from
taxation.
[47]


Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In other words, it is
income, not capital, which is subject to income tax. However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of
its goods, i.e., the cost of goods
[48]
and other direct expenses from gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income tax, and only if
the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and uses as the base the corporations gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the
same time reducing the applicable tax rate.
[49]


Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found
in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of
taxation.
[50]


The United States has a similar alternative minimum tax (AMT) system which is generally characterized by a lower tax
rate but a broader tax base.
[51]
Since our income tax laws are of American origin, interpretations by American courts of our
parallel tax laws have persuasive effect on the interpretation of these laws.
[52]
Although our MCIT is not exactly the same as
the AMT, the policy behind them and the procedure of their implementation are comparable. On the question of the AMTs
constitutionality, the United States Court of Appeals for the Ninth Circuit stated inOkin v. Commissioner:
[53]


In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system growing
from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a rational
means of obtaining a broad-based tax, and therefore is constitutional.
[54]


The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would contribute a minimum amount
of taxes was a legitimate governmental end to which the AMT bore a reasonable relation.
[55]


American courts have also emphasized that Congress has the power to condition, limit or deny deductions from gross
income in order to arrive at the net that it chooses to tax.
[56]
This is because deductions are a matter of legislative grace.
[57]


Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base of the MCIT,
taken with the reduction of the tax rate from 32% to 2%, is not constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its members nor does it
present empirical data to show that the implementation of the MCIT resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary and
confiscatory. The Court cannot strike down a law as unconstitutional simply because of its yokes.
[58]
Taxation is necessarily
burdensome because, by its nature, it adversely affects property rights.
[59]
The party alleging the laws unconstitutionality has
the burden to demonstrate the supposed violations in understandable terms.
[60]


RR 9-98 MERELY CLARIFIES
SECTION 27(E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT is being
imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due from
such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative taxable income,
merely defines the coverage of Section 27(E). This means that even if a corporation incurs a net loss in its business operations
or reports zero income after deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is consistent
with the law which imposes the MCIT on gross income notwithstanding the amount of the net income. But the law also states
that the MCIT is to be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are collected.
[61]
Under
Section 57 of RA 8424, the types of income subject to withholding tax are divided into three categories: (a) withholding of final
tax on certain incomes; (b) withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is concerned
with the second category (CWT) and maintains that the revenue regulations on the collection of CWT on sale of real estate
categorized as ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424, contends that
Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were promulgated with grave abuse of
discretion amounting to lack of jurisdiction and patently in contravention of law
[62]
because they ignore such
distinctions. Petitioners conclusion is based on the following premises: (a) the revenue regulations use gross selling price
(GSP) or fair market value (FMV) of the real estate as basis for determining the income tax for the sale of real estate classified
as ordinary assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon consummation of the
sale via the CWT, contrary to RA 8424 which calls for the payment of the net income at the end of the taxable period.
[63]

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents cannot
disregard the distinctions set by the legislators as regards the tax base, modes of collection and payment of taxes on income
from the sale of capital and ordinary assets.

Petitioners arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE
COLLECTION OF CWT ON SALES OF REAL PROPERTY CONSIDERED
AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the necessary rules
and regulations for the effective enforcement of the provisions of the law. Such authority is subject to the limitation that the
rules and regulations must not override, but must remain consistent and in harmony with, the law they seek to apply and
implement.
[64]
It is well-settled that an administrative agency cannot amend an act of Congress.
[65]


We have long recognized that the method of withholding tax at source is a procedure of collecting income tax which is
sanctioned by our tax laws.
[66]
The withholding tax system was devised for three primary reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax which
can otherwise be lost or substantially reduced through failure to file the corresponding returns and third, to improve the
governments cash flow.
[67]
This results in administrative savings, prompt and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort to collect taxes through more complicated means and remedies.
[68]


Respondent Secretary has the authority to require the withholding of a tax on items of income payable to any person,
national or juridical, residing in the Philippines. Such authority is derived from Section 57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical
persons, residing in the Philippines, by payor-corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B) to the
Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is imposed on the income
payable and the tax is creditable against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF
INDIVIDUALS OR CORPORATIONS ENGAGED IN THE REAL ESTATE
BUSINESS

Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business income tax from
net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its possible tax
obligation.
[69]
They are installments on the annual tax which may be due at the end of the taxable year.
[70]


Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets remains to be
the entitys net income imposed under Section 24 (resident individuals) or Section 27 (domestic corporations) in relation to
Section 31 of RA 8424, i.e. gross income less allowable deductions. The CWT is to be deducted from the net income tax payable
by the taxpayer at the end of the taxable year.
[71]
Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base
for the sale of real property classified as ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be subject
to applicable taxes imposed under the Code, depending on whether the subject properties are classified as
capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident
aliens engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject
to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current [FMV]
as determined in accordance with Section 6(E) of the Code, whichever is higher, and consequently,
to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may
be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land and/or
building treated as capital asset), regardless of the classification thereof, all of which are located in the
Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended, and
consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the ordinary income tax,
however, domestic corporations may become subject to the [MCIT] under Sec. 27(E) of the same Code,
whichever is applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the taxes withheld (by
the withholding agent/buyer) against its tax due. If the tax due is greater than the tax withheld, then the taxpayer shall pay the
difference. If, on the other hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of practicality and
convenience. Obviously, the withholding agent/buyer who is obligated to withhold the tax does not know, nor is he privy to,
how much the taxpayer/seller will have as its net income at the end of the taxable year. Instead, said withholding agents
knowledge and privity are limited only to the particular transaction in which he is a party. In such a case, his basis can only be
the GSP or FMV as these are the only factors reasonably known or knowable by him in connection with the performance of his
duties as a withholding agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND
CAPITAL ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized as ordinary
assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6% on the gain presumed to be
realized from the sale of a capital asset based on its GSP or FMV. This final tax is also withheld at source.
[72]


The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary assets are not
treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are distinguished as follows:


FWT CWT
a) The amount of income tax
withheld by the withholding agent is
constituted as a full and final payment
of the income tax due from the payee
on the said income.

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

c) The payee is not required to file an
income tax return for the particular
income.
[73]


c) The income recipient is still required
to file an income tax return, as
prescribed in Sec. 51 and Sec. 52 of the
NIRC, as amended.
[74]


As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed on the sale of
ordinary assets. The inherent and substantial differences between FWT and CWT disprove petitioners contention that
ordinary assets are being lumped together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to the provisions
of RA 8424 on the manner and time of filing of the return, payment and assessment of income tax involving ordinary assets.
[75]


The fact that the tax is withheld at source does not automatically mean that it is treated exactly the same way as
capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the CWT. The withholding
agent/buyers act of collecting the tax at the time of the transaction by withholding the tax due from the income payable is the
essence of the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE
INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on passive income. The
enumeration in Section 57(A) refers to passive income being subjected to FWT. It follows that Section 57(B) on CWT should
also be limited to passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1);
25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a),
28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of income shall be withheld by
payor-corporation and/or person and paid in the same manner and subject to the same conditions as
provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited against
the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates these as
passive income. The BIR defines passive income by stating what it is not:

if the income is generated in the active pursuit and performance of the corporations primary
purposes, the same is not passive income
[76]


It is income generated by the taxpayers assets. These assets can be in the form of real properties that return rental income,
shares of stock in a corporation that earn dividends or interest income received from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on income payable to natural or
juridical persons, residing in the Philippines. There is no requirement that this income be passive income. If that were the
intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to CWT. The former
covers the kinds of passive income enumerated therein and the latter encompasses any income other than those listed in
57(A). Since the law itself makes distinctions, it is wrong to regard 57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of Section 57(B). RR
2-98 merely implements the law by specifying what income is subject to CWT. It has been held that, where a statute does not
require any particular procedure to be followed by an administrative agency, the agency may adopt any reasonable method to
carry out its functions.
[77]
Similarly, considering that the law uses the general term income, the Secretary and CIR may
specify the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules and regulations
ordinarily deserve to be given weight and respect by the courts
[78]
in view of the rule-making authority given to those who
formulate them and their specific expertise in their respective fields.

NO DEPRIVATION OF PROPERTY
WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets deprives its
members of their property without due process of law because, in their line of business, gain is never assured by mere receipt
of the selling price. As a result, the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the end of the taxable
year. The seller will be able to claim a tax refund if its net income is less than the taxes withheld. Nothing is taken that is not
due so there is no confiscation of property repugnant to the constitutional guarantee of due process. More importantly, the
due process requirement applies to the power to tax.
[79]
The CWT does not impose new taxes nor does it increase taxes.
[80]
It
relates entirely to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers have to wait
years and may even resort to litigation before they are granted a refund.
[81]
This argument is misleading. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.

Petitioner complains that the amount withheld would have otherwise been used by the enterprise to pay labor wages,
materials, cost of money and other expenses which can then save the entity from having to obtain loans entailing considerable
interest expense. Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the realty
industry: huge investments and borrowings; long gestation period; sudden and unpredictable interest rate surges;
continually spiraling development/construction costs; heavy taxes and prohibitive up-front regulatory fees from at least 20
government agencies.
[82]


Petitioners lamentations will not support its attack on the constitutionality of the CWT. Petitioners complaints are
essentially matters of policy best addressed to the executive and legislative branches of the government. Besides, the CWT is
applied only on the amounts actually received or receivable by the real estate entity. Sales on installment are taxed on a per-
installment basis.
[83]
Petitioners desire to utilize for its operational and capital expenses money earmarked for the payment of
taxes may be a practical business option but it is not a fundamental right which can be demanded from the court or from the
government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause because the CWT is being levied
only on real estate enterprises. Specifically, petitioner points out that manufacturing enterprises are not similarly imposed a
CWT on their sales, even if their manner of doing business is not much different from that of a real estate enterprise. Like a
manufacturing concern, a real estate business is involved in a continuous process of production and it incurs costs and
expenditures on a regular basis. The only difference is that goods produced by the real estate business are house and lot
units.
[84]


Again, we disagree.

The equal protection clause under the Constitution means that no person or class of persons shall be deprived of the
same protection of laws which is enjoyed by other persons or other classes in the same place and in like
circumstances.
[85]
Stated differently, all persons belonging to the same class shall be taxed alike. It follows that the guaranty
of the equal protection of the laws is not violated by legislation based on a reasonable classification. Classification, to be valid,
must (1) rest on substantial distinctions; (2) be germane to the purpose of the law; (3) not be limited to existing conditions
only and (4) apply equally to all members of the same class.
[86]


The taxing power has the authority to make reasonable classifications for purposes of taxation.
[87]
Inequalities which
result from a singling out of one particular class for taxation, or exemption, infringe no constitutional limitation.
[88]
The real
estate industry is, by itself, a class and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to realize that what
distinguishes the real estate business from other manufacturing enterprises, for purposes of the imposition of the CWT, is not
their production processes but the prices of their goods sold and the number of transactions involved. The income from the
sale of a real property is bigger and its frequency of transaction limited, making it less cumbersome for the parties to comply
with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with several thousand
customers every month involving both minimal and substantial amounts. To require the customers of manufacturing
enterprises, at present, to withhold the taxes on each of their transactions with their tens or hundreds of suppliers may result
in an inefficient and unmanageable system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently, e.g. heavy
equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly subjected to the CWT.
[89]
As
already discussed, the Secretary may adopt any reasonable method to carry out its functions.
[90]
Under Section 57(B), it may
choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioners argument is not accurate. The sales of
manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are also subject to CWT for their
transactions with said 5,000 corporations.
[91]


SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS
SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not effect the
regisration of any document transferring real property unless a certification is issued by the CIR that the withholding tax has
been paid. Petitioner proffers hardly any reason to strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost exactly the same wording as Section
58(E) of RA 8424 and is unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. - No registration of any document transferring real
property shall be effected by the Register of Deeds unless the [CIR] or his duly authorized
representative has certified that such transfer has been reported, and the capital gains or [CWT], if
any, has been paid: xxxx any violation of this provision by the Register of Deeds shall be subject to the
penalties imposed under Section 269 of this Code. (Emphasis supplied)

CONCLUSION

The renowned genius Albert Einstein was once quoted as saying [the] hardest thing in the world to understand is the
income tax.
[92]
When a party questions the constitutionality of an income tax measure, it has to contend not only with
Einsteins observation but also with the vast and well-established jurisprudence in support of the plenary powers of Congress
to impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court that the imposition of MCIT
and CWT is unconstitutional. WHEREFORE, the petition is hereby DISMISSED. Costs against petitioner. SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 95022 March 23, 1992
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, THE COURT OF TAX APPEALS, GCL RETIREMENT PLAN, represented by its Trustee-
Director, respondents.
MELENCIO-HERRERA, J.:
This case is said to be precedent setting. While the amount involved is insignificant, the Solicitor General avers that there are
about 85 claims of the same nature pending in the Court of Tax Appeals and Bureau of Internal Revenue totalling
approximately P120M.
Petitioner, the Commissioner of Internal Revenue, seeks a reversal of the Decision of respondent Court of Appeals, dated
August 27, 1990, in CA-G.R. SP No. 20426, entitled "Commissioner of Internal Revenue vs. GCL Retirement Plan, represented
by its Trustee-Director and the Court of Tax Appeals," which affirmed the Decision of the latter Court, dated 15 December
1986, in Case No. 3888, ordering a refund, in the sum of P11,302.19, to the GCL Retirement Plan representing the withholding
tax on income from money market placements and purchase of treasury bills, imposed pursuant to Presidential Decree No.
1959.
There is no dispute with respect to the facts. Private Respondent, GCL Retirement Plan (GCL, for brevity) is an employees' trust
maintained by the employer, GCL Inc., to provide retirement, pension, disability and death benefits to its employees. The Plan
as submitted was approved and qualified as exempt from income tax by Petitioner Commissioner of Internal Revenue in
accordance with Rep. Act No. 4917.
1

In 1984, Respondent GCL made investsments and earned therefrom interest income from which was witheld the fifteen per
centum (15%) final witholding tax imposed by Pres. Decree No. 1959,
2
which took effect on 15 October 1984, to wit:
Date Kind of Investment Principal Income Earned 15% Tax
ACIC
12/05/84 Market Placement P236,515.32 P8,751.96 P1,312.66
10/22/84 234,632.75 9,815.89 1,472.38
11/19/84 225,886.51 10,629.22 1,594.38
11/23/84 344,448.64 17,313.33 2,597.00
12/05/84 324,633.81 15,077.44 2,261.52
COMBANK Treasury Bills 2,064.15

P11,302.19
On 15 January 1985, Respondent GCL filed with Petitioner a claim for refund in the amounts of P1,312.66 withheld by Anscor
Capital and Investment Corp., and P2,064.15 by Commercial Bank of Manila. On 12 February 1985, it filed a second claim for
refund of the amount of P7,925.00 withheld by Anscor, stating in both letters that it disagreed with the collection of the 15%
final withholding tax from the interest income as it is an entity fully exempt from income tax asprovided under Rep. Act No.
4917 in relation to Section 56 (b)
3
of the Tax Code.
The refund requested having been denied, Respondent GCL elevated the matter to respondent Court of Tax Appeals (CTA). The
latter ruled in favor of GCL, holding that employees' trusts are exempt from the 15% final withholding tax on interest income
and ordering a refund of the tax withheld. Upon appeal, originally to this Court, but referred to respondent Court of Appeals,
the latter upheld the CTA Decision. Before us now, Petitioner assails that disposition.
It appears that under Rep. Act No. 1983, which took effect on 22 June 1957, amending Sec. 56 (b) of the National Internal
Revenue Code (Tax Code, for brevity), employees' trusts were exempt from income tax. That law provided:
Sec. 56 Imposition of tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employees' trust which forms a part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his employees (1)
if contributions are made to trust by such employer, or employees, or both, for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in accordance with such
plan, . . .
On 3 June 1977, Pres. Decree No. 1156 provided, for the first time, for the withholding from the interest on bank deposits at the
source of a tax of fifteen per cent (15%) of said interest. However, it also allowed a specific exemption in its Section 53, as
follows:
Sec. 53. Withholding of tax at source.
xxx xxx xxx
(c) Withholding tax on interest on bank deposits. (1) Rate of withholding tax. Every bank or banking
institution shall deduct and withhold from the interest on bank deposits (except interest paid or credited to
non-resident alien individuals and foreign corporations), a tax equal to fifteen per cent of the said
interest:Provided, however, That no withholding of tax shall be made if the aggregate amount of the interest
on all deposit accounts maintained by a depositor alone or together with another in any one bank at any time
during the taxable period does not exceed three hundred fifty pesos a year or eighty-seven pesos and fifty
centavos per quarter. For this purpose, interest on a deposit account maintained by two persons shall be
deemed to be equally owned by them.
(2) Treatment of bank deposit interest. The interest income shall be included in the gross income in
computing the depositor's income tax liability in according with existing law.
(3) Depositors enjoying tax exemption privileges or preferential tax treatment. In all cases where the
depositor is tax-exempt or is enjoying preferential income tax treatment under existing laws, the withholding
tax imposed in this paragraph shall be refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor is a tax-exempt entity or enjoys a
preferential income tax treatment.
xxx xxx xxx
This exemption and preferential tax treatment were carried over in Pres. Decree No. 1739, effective on 17 September 1980,
which law also subjected interest from bank deposits and yield from deposit substitutes to a final tax of twenty per cent
(20%). The pertinent provisions read:
Sec. 2. Section 21 of the same Code is hereby amended by adding a new paragraph to read as follows:
Sec. 21. Rates of tax on citizens or residents.
xxx xxx xxx
Interest from Philippine Currency bank deposits and yield from deposit substitutes whether
received by citizens of the Philippines or by resident alien individuals, shall be subject to the
final tax as follows: (a) 15% of the interest on savings deposits, and (b) 20% of the interest
on time deposits and yield from deposit substitutes, which shall be collected and paid as
provided in Sections 53 and 54 of this Code. Provided, That no tax shall be imposed if the
aggregate amount of the interest on all Philippine Currency deposit accounts maintained by
a depositor alone or together with another in any one bank at any time during the taxable
period does not exceed Eight Hundred Pesos (P800.00) a year or Two Hundred Pesos
(P200.00) per quarter.Provided, further, That if the recipient of such interest is exempt from
income taxation, no tax shall be imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so provided shall be imposed (Emphasis
supplied).
Sec. 3. Section 24 of the same Code is hereby amended by adding a new subsection (cc) between subsections
(c) and (d) to read as follows:
(cc) Rates of tax on interest from deposits and yield from deposit substitutes. Interest on
Philippine Currency bank deposits and yield from deposit substitutes received by domestic
or resident foreign corporations shall be subject to a final tax on the total amount thereof as
follows: (a) 15% of the interest on savings deposits; and (b) 20% of the interest on time
deposits and yield from deposit substitutes which shall be collected and paid as provided in
Sections 53 and 54 of this Code. Provided, That if the recipient of such interest is exempt from
income taxation, no tax shall be imposed and that, if the recipient is enjoying preferential
income tax treatment, then the preferential tax rates so provided shall be imposed (Emphasis
supplied).
Sec. 9. Section 53(e) of the same Code is hereby amended to read as follows:
Se. 53(e) Withholding of final tax on interest on bank deposits and yield from deposit
substitutes.
(1) Withholding of final tax. Every bank or non-bank financial intermediary shall deduct
and withhold from the interest on bank deposits or yield from deposit substitutes a final tax
equal to fifteen (15%) per cent of the interest on savings deposits and twenty (20%) per
cent of the interest on time deposits or yield from deposit substitutes: Provided, however,
That no withholding tax shall be made if the aggregate amount of the interest on all deposit
accounts maintained by a depositor alone or together with another in any one bank at any
time during the taxable period does not exceed Eight Hundred Pesos a year or Two Hundred
Pesos per quarter. For this purpose, interest on a deposit account maintained by two
persons shall be deemed to be equally owned by them.
(2) Depositors or placers/investors enjoying tax exemption privileges or preferential tax
treatment. In all cases where the depositor or placer/investor is tax exempt or is enjoying
preferential income tax treatment under existing laws, the withholding tax imposed in this
paragraph shall be refunded or credited as the case may be upon submission to the
Commissioner of Internal Revenue of proof that the said depositor, or placer/investor is a
tax exempt entity or enjoys a preferential income tax treatment.
Subsequently, however, on 15 October 1984, Pres. Decree No. 1959 was issued, amending the aforestated provisions to read:
Sec. 2. Section 21(d) of this Code, as amended, is hereby further amended to read as follows:
(d) On interest from bank deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. Interest from Philippine
Currency Bank deposits and yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements whether received by citizens of the
Philippines, or by residentalien individuals, shall be subject to a 15% final tax to be collected
and paid as provided in Sections 53 and 54 of this Code.
Sec. 3. Section 24(cc) of this Code, as amended, is hereby further amended to read as follows:
(cc) Rates of tax on interest from deposits and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements. Interest on Philippine Currency
Bank deposits and yield or any other monetary benefit from deposit substitutes and from
trust fund and similar arrangements received by domestic or resident foreign corporations
shall be subject to a 15% final tax to be collected and paid as provided in Section 53 and 54 of
this Code.
Sec. 4. Section 53 (d) (1) of this code is hereby amended to read as follows:
Sec. 53 (d) (1). Withholding of Final Tax. Every bank or non-bank financial intermediary
or commercial. industrial, finance companies, and other non-financial companies authorized
by the Securities and Exchange Commission to issue deposit substitutes shall deduct and
withhold from the interest on bank deposits or yield or any other monetary benefit from
deposit substitutes a final tax equal to fifteen per centum (15%) of the interest on deposits or
yield or any other monetary benefit from deposit substitutes and from trust fund and similar
arrangements.
It is to be noted that the exemption from withholding tax on interest on bank deposits previously extended by Pres. Decree No.
1739 if the recipient (individual or corporation) of the interest income is exempt from income taxation, and the imposition of
the preferential tax rates if the recipient of the income is enjoying preferential income tax treatment, were both abolished by
Pres. Decree No. 1959. Petitioner thus submits that the deletion of the exempting and preferential tax treatment provisions
under the old law is a clear manifestation that the single 15% (now 20%) rate is impossible on all interest incomes from
deposits, deposit substitutes, trust funds and similar arrangements, regardless of the tax status or character of the recipients
thereof. In short, petitioner's position is that from 15 October 1984 when Pres. Decree No. 1959 was promulgated, employees'
trusts ceased to be exempt and thereafter became subject to the final withholding tax.
Upon the other hand, GCL contends that the tax exempt status of the employees' trusts applies to all kinds of taxes, including
the final withholding tax on interest income. That exemption, according to GCL, is derived from Section 56(b) and not from
Section 21 (d) or 24 (cc) of the Tax Code, as argued by Petitioner.
The sole issue for determination is whether or not the GCL Plan is exempt from the final withholding tax on interest income
from money placements and purchase of treasury bills required by Pres. Decree No. 1959.
We uphold the exemption.
To begin with, it is significant to note that the GCL Plan was qualified as exempt from income tax by the Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917 approved on 17 June 1967. This law specifically provided:
Sec. 1. Any provision of law to the contrary notwithstanding, the retirement benefits received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all taxes and shall not be liable to attachment, levy or
seizure by or under any legal or equitable process whatsoever except to pay a debt of the official or employee
concerned to the private benefit plan or that arising from liability imposed in a criminal action; . . . (emphasis
ours).
In so far as employees' trusts are concerned, the foregoing provision should be taken in relation to then Section 56(b) (now
53[b]) of the Tax Code, as amended by Rep. Act No. 1983, supra, which took effect on 22 June 1957. This provision specifically
exempted employee's trusts from income tax and is repeated hereunder for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's trust which forms part of a
pension, stock bonus or profit-sharing plan of an employer for the benefit of some or all of his
employees . . .
The tax-exemption privilege of employees' trusts, as distinguished from any other kind of property held in trust, springs from
the foregoing provision. It is unambiguous. Manifest therefrom is that the tax law has singled out employees' trusts for tax
exemption.
And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts. Employees' trusts or benefit plans
normally provide economic assistance to employees upon the occurrence of certain contingencies, particularly, old age
retirement, death, sickness, or disability. It provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working group. What is more, it is established for
their exclusive benefit and for no other purpose.
The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage the formation and establishment
of such private Plans for the benefit of laborers and employees outside of the Social Security Act. Enlightening is a portion of
the explanatory note to H.B. No. 6503, now R.A. 1983, reading:
Considering that under Section 17 of the social Security Act, all contributions collected and payments of
sickness, unemployment, retirement, disability and death benefits made thereunder together with the income
of the pension trust are exempt from any tax, assessment, fee, or charge, it is proposed that a similar system
providing for retirement, etc. benefits for employees outside the Social Security Act be exempted from income
taxes. (Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3, 1957; cited in
Commissioner of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-22611, 27 May 1968, 23 SCRA
715); emphasis supplied.
It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust. Otherwise, taxation of those
earnings would result in a diminution accumulated income and reduce whatever the trust beneficiaries would receive out of
the trust fund. This would run afoul of the very intendment of the law.
The deletion in Pres. Decree No. 1959 of the provisos regarding tax exemption and preferential tax rates under the old law,
therefore, can not be deemed to extent to employees' trusts. Said Decree, being a general law, can not repeal by implication a
specific provision, Section 56(b) now 53 [b]) in relation to Rep. Act No. 4917 granting exemption from income tax to
employees' trusts. Rep. Act 1983, which excepted employees' trusts in its Section 56 (b) was effective on 22 June 1957 while
Rep. Act No. 4917 was enacted on 17 June 1967, long before the issuance of Pres. Decree No. 1959 on 15 October 1984. A
subsequent statute, general in character as to its terms and application, is not to be construed as repealing a special or specific
enactment, unless the legislative purpose to do so is manifested. This is so even if the provisions of the latter are sufficiently
comprehensive to include what was set forth in the special act (Villegas v. Subido, G.R. No. L-31711, 30 September 1971, 41
SCRA 190).
Notably, too, all the tax provisions herein treated of come under Title II of the Tax Code on "Income Tax." Section 21 (d), as
amended by Rep. Act No. 1959, refers to the final tax on individuals and falls under Chapter II; Section 24 (cc) to the final tax
on corporations under Chapter III; Section 53 on withholding of final tax to Returns and Payment of Tax under Chapter VI; and
Section 56 (b) to tax on Estates and Trusts covered by Chapter VII, Section 56 (b), taken in conjunction with Section 56
(a), supra, explicitly excepts employees' trusts from "the taxes imposed by this Title." Since the final tax and the withholding
thereof are embraced within the title on "Income Tax," it follows that said trust must be deemed exempt therefrom. Otherwise,
the exception becomes meaningless.
There can be no denying either that the final withholding tax is collected from income in respect of which employees' trusts are
declared exempt (Sec. 56 [b], now 53 [b], Tax Code). The application of the withholdings system to interest on bank deposits
or yield from deposit substitutes is essentially to maximize and expedite the collection of income taxes by requiring its
payment at the source. If an employees' trust like the GCL enjoys a tax-exempt status from income, we see no logic in
withholding a certain percentage of that income which it is not supposed to pay in the first place.
Petitioner also relies on Revenue Memorandum Circular 31-84, dated 30 October 1984, and Bureau of Internal Revenue Ruling
No. 027-e-000-00-005-85, dated 14 January 1985, as authorities for the argument that Pres. Decree No. 1959 withdrew the
exemption of employees' trusts from the withholding of the final tax on interest income. Said Circular and Ruling pronounced
that the deletion of the exempting and preferential tax treatment provisions by Pres. Decree No. 1959 is a clear manifestation
that the single 15% tax rate is imposable on all interest income regardless of the tax status or character of the recipient
thereof. But since we herein rule that Pres. Decree No. 1959 did not have the effect of revoking the tax exemption enjoyed by
employees' trusts, reliance on those authorities is now misplaced.
WHEREFORE, the Writ of Certiorari prayed for is DENIED. The judgment of respondent Court of Appeals, affirming that of the
Court of Tax Appeals is UPHELD. No costs.
SO ORDERED.


Republic of the Philippines
Supreme Court
Manila


THIRD DIVISION


BANCO FILIPINO G.R. No. 155682
SAVINGS and
MORTGAGE BANK, Present:
Petitioner,
YNARES-SANTIAGO, J.,
- versus - Chairperson,
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
COURT OF APPEALS, CHICO-NAZARIO, and
COURT OF TAX APPEALS NACHURA, JJ.
and COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondents. March 27, 2007
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Herein Petition for Review on Certiorari under Rule 45 of the Rules of Court assails the May 28, 2002 Decision
[1]
and
October 16, 2002 Resolution
[2]
of the Court of Appeals (CA) in CA-G.R. SP No. 55470
[3]
which affirmed the October 5, 1999
Decision
[4]
of the Court of Tax Appeals (CTA) in CTA Case No. 5611.

The facts are as stated by the CTA.
[5]


In its Bureau of Internal Revenue (BIR) Form No. 1702 or Corporation/Partnership Annual Income Tax Return
[6]
for
fiscal year 1995, Banco Filipino Savings and Mortgage Bank (petitioner) declared a net operating loss of P211,476,241.00 and
total tax credit of P13,103,918.00, representing the prior years excess tax credit of P11,481,342.00 and creditable withholding
taxes ofP1,622,576.00.
[7]


On February 4, 1998, petitioner filed with the Commissioner of Internal Revenue (CIR) an administrative claim
[8]
for
refund of creditable taxes withheld for the year 1995 in the amount ofP1,622,576.00.

As the CIR failed to act on its claim, petitioner filed a Petition for Review
[9]
with the CTA on April 13, 1998. It attached
to its Petition several documents, including: 1) Certificate of Income Tax Withheld on Compensation (BIR Form No. W-2) for
the Year 1995 executed by Oscar Lozano covering P720.00 as tax withheld on rental income paid to petitioner (Exhibit
II);
[10]
and 2) Monthly Remittance Return of Income Taxes Withheld under BIR Form No. 1743W issued by petitioner,
indicating various amounts it withheld and remitted to the BIR (Exhibits C through Z).
[11]


In his Answer,
[12]
respondent CIR interposed special and afirmative defenses, specifically that petitioners claim is not
properly documented.

The CTA issued the October 5, 1999 Decision granting only a portion of petitioners claim for refund, thus:

WHEREFORE, in view of all the foregoing, Respondent is hereby ORDERED to REFUND or in the
alternative to ISSUE a Tax Credit Certificate in the amount of EIGHTEEN THOUSAND EIGHT HUNDRED
EIGHTY FOUR PESOS AND FORTY CENTAVOS (P18,884.40) in favor of the Petitioner, representing overpaid
income tax for the year 1995.

SO ORDERED.
[13]


The CTA allowed the P18,884.40-portion of petitioners claim for refund as these are covered by Exhibits AA
through HH,
[14]
which are all in BIR Form No. 1743-750 (Certificate of Creditable Tax Withheld at Source) issued by various
payors and reflecting taxes deducted and withheld on petitioner-payees income from the rental of its real properties. On the
other hand, the CTA disallowed the P1,603,691.60-portion of petitioners claim for tax refund on the ground that its Exhibit
II and Exhibits C through Z lack probative value as these are not in BIR Form No. 1743.1,
[15]
the form required under
Revenue Regulations No. 6-85 (as amended by Revenue Regulation No. 12-94), to support a claim for refund.
[16]


Petitioner filed a Petition for Review
[17]
with the CA but the CA dismissed the same in the May 28, 2002 Decision
assailed herein. Its Motion for Reconsideration was also denied.
[18]


Hence, herein Petition where the issues may be condensed into one: whether the CA erred in affirming the
disallowance by the CTA of P1,603,691.60 of petitioners claim for tax refund on the ground that the latters Exhibit II and
Exhibits C through Z lack probative value.
The CA committed no error.

There are three conditions for the grant of a claim for refund of creditable withholding tax: 1) the claim is filed with the
CIR within the two-year period from the date of payment of the tax;
[19]
2) it is shown on the return of the recipient that the
income payment received was declared as part of the gross income;
[20]
and, 3) the fact of withholding is established by a copy
of a statement duly issued by the payor to the payee showing the amount paid and the amount of the tax withheld
therefrom.

The third condition is specifically imposed under Section 10 of Revenue Regulation No. 6-85 (as amended), thus:

Sec. 10. Claim for tax credit or refund. (a) Claims for Tax Credit or Refund of income tax deducted
and withheld on income payments shall be given due course only when it is shown on the return that the
income payment received has been declared as part of the gross income and the fact of withholding is
established by a copy of the Withholding Tax Statement duly issued by the payor to the payee showing
the amount paid and the amount of tax withheld therefrom xxx. (Emphasis supplied)

There is no doubt that petitioner complied with the first two requirements in that the claim it filed on January 30, 1998
was well within the two-year prescriptive period counted from the date of filing of its annual income tax return (Exhibit A)
on April 12, 1996; and that said return reflects the amount of P1,622,576.00 subject of the claim.
[21]


The question is whether it complied with the third condition by presenting merely a Certificate of Income Tax
Withheld on Compensation or BIR Form No. W-2 (Exhibit II) and Monthly Remittance Return of Income Taxes Withheld
under BIR Form No. 1743W (Exhibits C through Z).
Petititioner argues that its Exhibit II and Exhibits C through Z should be accorded the same probative value as a
BIR Form No. 1743.1, for said documents are also official BIR forms and they reflect the fact that taxes were actually withheld
and remitted.

It appeals for liberality considering that its annual return clearly shows that it is entitled to creditable
withholding tax.
[22]


The Court rejected a similar plea for liberality just recently in Far East Bank and Trust Company v. Court of
Appeals.
[23]
In that case, Far East Bank and Trust Company (FEBTC), acting as the surviving entity from a merger with Cavite
Development Bank (CDB), filed a claim for refund of creditable taxes withheld by CDB from the sale of its acquired assets.
FEBTC attached to its claim: a) confirmation receipts, payment orders and official receipts issued by the Central Bank and the
BIR; b) Income Tax Returns supported by financial statements filed by FEBTC with the BIR; and c) a schedule prepared by
FEBTC Accounting Department of the creditable withholding taxes of CDB. FEBTC did not, however, attach any BIR Form No.
1743.1. The CTA and CA disallowed FEBTCs claim for refund. The Court affirmed the CTA and CA, thus:

As mentioned, petitioner relies heavily on the confirmation receipts with the corresponding official
receipts and payment orders to support its case. Standing alone, however, these documents only establish
that CDB withheld certain amounts in 1990 and 1991. It does not follow that the payments reflected in
the confirmation receipts relate to the creditable withholding taxes arising from the sale of the acquired
properties. The claim that CDB had excess creditable withholding taxes can only be upheld if it were clearly
and positively shown that the amounts on the various confirmation receipts were the amounts withheld by
virtue of the sale of the acquired assets. On this point, the CA correctly pronounced:

The confirmation receipts alone, by themselves, will not suffice to prove that the taxes
reflected in the income tax returns are the same taxes withheld from CDBs income
payments from the sale of its acquired assets. This is because a cursory examination of the
said Confirmation Receipts, Payment Orders and Official Receipts will show that what
are reflected therein are merely the names of the payors and the amount of tax. The
nature of the tax paid, or at the very least, the income payments from which the taxes
paid were withheld are not reflected therein. If these are the only entries that are found on
these proferred documents, We cannot begrudge the Respondent Court from nurturing
veritable doubts on the nature and identity of the taxes withheld, when it declared, in part, in
its Decision (Annex A of the Petition) that, It can not well be said that the amounts paid and
remitted to the BIR were for CDBs account and not for the other possible payees of
withholding taxes which CDB may also be liable to remit as a withholding agent x x
x.
[24]
(Emphasis ours)

As to what evidence would establish the nature of the tax withheld and the income payment from which it was deducted, the
Court held:

Petitioner also asserts that the confusion or difficulty in the implementation of Revenue
Memorandum Circular 7-90 was the reason why CDB took upon itself the task of withholding the taxes
arising from the sale, to ensure accuracy. Assuming this were true, CDB should have, nevertheless,
accomplished the necessary returns to clearly identify the nature of the payments made and file the
same with the BIR. Section 2 of the circular clearly provides that the amount of withholding tax paid by
a corporation to the BIR during the quarter on sales or exchanges of property and which are creditable
against the corporations tax liability are evidenced by Confirmation/Official Receipts and covered by
BIR Form Nos. 1743W and 1743-B. On the other hand, Revenue Regulation 6-85 states that BIR Form No.
1743.1 establishes the fact of withholding. Since no competent evidence was adduced by petitioner, the
failure to offer these returns as evidence of the amount of petitioners entitlement during the trial phase of
this case is fatal to its cause. x x x.
[25]
(Emphasis supplied)


In fine, the document which may be accepted as evidence of the third condition, that is, the fact of withholding, must
emanate from the payor itself, and not merely from the payee, and must indicate the name of the payor, the income payment
basis of the tax withheld, the amount of the tax withheld and the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes from the sale of acquired assets
can be found in BIR Form No. 1743.1. As described in Section 6
[26]
of Revenue Regulations No. 6-85,
[27]
BIR Form No. 1743.1 is
a written statement issued by the payor as withholding agent showing the income or other payments made by the said
withholding agent during a quarter or year and the amount of the tax deducted and withheld therefrom. It readily identifies
the payor, the income payment and the tax withheld. It is complete in the relevant details which would aid the courts in the
evaluation of any claim for refund of creditable withholding taxes.

In relation to withholding taxes from rental income, the requisite information can be found in BIR Form No. 1743-
750. Petitioner is well aware of this for its own Exhibits AA through HH are all in BIR Form No. 1743-750. As earlier
stated, the CTA approved petitioners claim for refund to the extent of P18,884.40, which is the portion of its claim supported
by its Exhibits AA through HH.

In the present case, the disputed portions of petitioners claim for refund is supported merely by Exhibits C through
Z and Exhibit II. Exhibits C through Z were issued by petitioner as payee purportedly acting as withholding agent, and
not by the alleged payors in the transactions covered by the documents. Moreover, the documents do not identify the payors
involved or the nature of their transaction. They do not indicate the amount and nature of the income payments upon which
the tax was computed or the nature of the transactions from which the income payments were derived, specifically whether it
resulted from the sale of petitioners acquired assets.

As to petitioners Exhibit II, while it was issued by a payor, the document does not state the amount and nature of
the income payment. Hence, it cannot be verified from the document if the tax withheld is correct.

Perhaps aware of the deficiencies in its evidence, petitioner also presented Exhibit B
[28]
which is a list of
Miscellaneous Assets it sold to various persons. However, Exhibit B was prepared by petitioners own real estate
department, and is therefore of doubtful credence.
[29]
Furthermore, there is nothing in Exhibit B which would link the the
transactions described therein to the taxes reflected in Exhibit II and Exhibits C through Z.

For all its deficiencies, therefore, petitioners Exhibits C through Z cannot take the place of BIR Form No. 1743.1
and its Exhibit II, of BIR Form No. 1743-750. Petitioner cannot fault the CA and CTA for finding said evidence insufficient to
support its claim for tax refund. Such finding of both courts, obviously grounded on evidence, will not be so lightly
discarded by this Court,
[30]
not even on a plea for liberality of which petitioner, by its own negligence, is undeserving.
[31]


WHEREFORE, the petition is DENIED for lack of merit.

No costs.

SO ORDERED.

Republic of the Philippines
Supreme Court
Manila

THIRD DIVISION

COMMISSIONER OF G.R. No. 163345
INTERNAL REVENUE,
Petitioner, Present:

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.

Promulgated:
PERF REALTY CORPORATION,
Respondent. July 4, 2008

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

REYES, R.T., J.:

FOR Our review on certiorari is the Decision
[1]
of the Court of Appeals (CA) granting the claim for refund of
respondent PERF Realty Corporation (PERF) for creditable withholding tax for the year 1997.

Facts

Petitioner Commissioner is the head of the Bureau of Internal Revenue (BIR) whose principal duty is to assess and
collect internal revenue taxes. Respondent PERF is a domestic corporation engaged in the business of leasing properties to
various clients including the Philippine American Life and General Insurance Company (Philamlife) and Read-Rite Philippines
(Read-Rite).

On April 14, 1998, PERF filed its Annual Income Tax Return (ITR) for the year 1997 showing a net taxable income in
the amount of P6,430,345.00 and income tax due of P2,250,621.00.

For the year 1997, its tenants, Philamlife and Read-Rite, withheld and subsequently remitted creditable withholding
taxes in the total amount of P3,531,125.00.

After deducting creditable withholding taxes in the total amount of P3,531,125.00 from its total income tax due
of P2,250,621.00, PERF showed in its 1997 ITR an overpayment of income taxes in the amount of P1,280,504.00.

On November 3, 1999, PERF filed an administrative claim with the appellate division of the BIR for refund of overpaid
income taxes in the amount of P1,280,504.00.

On December 3, 1999, due to the inaction of the BIR, PERF filed a petition for review with the Court of Tax Appeals
(CTA) seeking for the refund of the overpaid income taxes in the amount of P1,280,504.00.

CTA Disposition

In a Decision dated November 20, 2001, the CTA denied the petition of PERF on the ground of insufficiency of
evidence. The CTA noted that PERF did not indicate in its 1997 ITR the option to either claim the excess income tax as a
refund or tax credit pursuant to Section 69
[2]
(now 76) of the National Internal Revenue Code (NIRC)

Further, the CTA likewise found that PERF failed to present in evidence its 1998 annual ITR. It held that the failure
of PERF to signify its option on whether to claim for refund or opt for an automatic tax credit and to present its 1998 ITR left
the Court with no way to determine with certainty whether or not PERF has applied or credited the refundable amount sought
for in its administrative and judicial claims for refund.

PERF moved for reconsideration attaching to its motion its 1998 ITR. The motion was, however, denied by the CTA in its
Resolution dated March 26, 2002.

Aggrieved by the decision of the CTA, PERF filed a petition for review with the CA under Rule 43 of the Rules of Court.

CA Disposition

In a Decision dated July 18, 2003, the CA ruled in favor of PERF, disposing as follows:

WHEREFORE, the petition is hereby GRANTED. The assailed Decision dated November 20, 2001, and
Resolution of March 26, 2002 of the Court of Tax Appeals are SET ASIDE. The Commissioner of Internal
Revenue is ordered to REFUND to the petitioner the amount of P1,280,504.00 as creditable withholding tax
for the year 1997.

SO ORDERED.
[3]



According to the appellate court, even if the taxpayer has indicated its option for refund or tax credit in its ITR, it does
not mean that it will automatically be entitled to either option since the Commissioner of Internal Revenue (CIR) must be
given the opportunity to investigate and confirm the veracity of the claim. Thus, there is still a need to file a claim for refund.

As to the failure of PERF to present its 1998 ITR, the CA observed that there is no need to rule on its admissibility
since the CTA already held that PERF had complied with the requisites for applying for a tax refund. The sole purpose of
requiring the presentation of PERFs 1998 ITR is to verify whether or not PERF had carried over the 1997 excess income tax
claimed for refund to the year 1998. The verification process is not incumbent upon PERF; rather, it is the duty of the BIR to
disprove the taxpayers claim.

The CIR filed a motion for reconsideration which was subsequently denied by the CA. Thus, this appeal to Us under
Rule 45.

Issues

Petitioner submits the following assignment:

I
THE COURT OF APPEALS ERRED IN GRANTING RESPONDENTS TAX REFUND CONSIDERING THE LATTERS
FAILURE TO SUBSTANTIALLY ESTABLISH ITS CLAIM FOR REFUND.

II
THE COURT OF APPEALS ERRED IN CONSIDERING RESPONDENTS ANNUAL CORPORATE INCOME TAX
RETURN FOR 1998 NOTWITHSTANDING THAT IT WAS NOT FORMALLY OFFERED IN
EVIDENCE.
[4]
(Underscoring supplied)

Our Ruling

We rule in favor of respondent.

I. Respondent substantially complied with the requisites for claim of
refund.

The CTA, citing Section 10 of Revenue Regulations 6-85 and Citibank, N.A. v. Court of Appeals,
[5]
determined the
requisites for a claim for refund, thus:

1) That the claim for refund was filed within the two (2) year period as prescribed under Section 230 of the
National Internal Revenue Code;

2) That the income upon which the taxes were withheld were included in the return of the recipient;

3) That the fact of withholding is established by a copy of a statement (BIR Form 1743.1) duly issued by the
payor (withholding agent) to the payee, showing the amount paid and the amount of tax withheld
therefrom.
[6]


We find that PERF filed its administrative and judicial claims for refund on November 3, 1999 and December 3, 1999,
respectively, which are within the two-year prescriptive period under Section 230 (now 229) of the National Internal Tax
Code.

The CTA noted that based on the records, PERF presented certificates of creditable withholding tax at source
reflecting creditable withholding taxes in the amount of P4,153,604.18 withheld from PERFs rental income of P83,072,076.81
(Exhibits B, C, D, E, and H). In addition, it submitted in evidence the Monthly Remittance Returns of its withholding agents to
prove the fact of remittance of said taxes to the BIR. Although the certificates of creditable withholding tax at source for 1997
reflected a total amount of P4,153,604.18 corresponding to the rental income ofP83,072,076.81, PERF is claiming only the
amount of P3,531,125.00 pertaining to a rental income of P70,813,079.00. The amount of P3,531,125.00 less the income tax
due of PERF ofP2,250,621.00 leaves the refundable amount of P1,280,504.00.

It is settled that findings of fact of the CTA are entitled to great weight and will not be disturbed on appeal unless it is
shown that the lower courts committed gross error in the appreciation of facts. We see no cogent reason not to apply the same
principle here.

II. The failure of respondent to indicate its option in its annual ITR to
avail itself of either the tax refund or tax credit is not fatal to its
claim for refund.

Respondent PERF did not indicate in its 1997 ITR the option whether to request a refund or claim the excess
withholding tax as tax credit for the succeeding taxable year.

Citing Section 76 of the NIRC, the CIR opines that such failure is fatal to PERFs claim for refund.

We do not agree.

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue,
[7]
the Court had occasion to trace the history of
the Final Adjustment Return found in Section 69 (now 76) of the NIRC. Thus:

The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential
Decree (PD) No. 1158, otherwise known as the National Internal Revenue Code of 1977. On August 1, 1980,
this provision was restated as Section 86 in PD 1705.

On November 5, 1985, all prior amendments and those introduced by PD 1994 were codified into the
National Internal Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered as Section
79.

On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all net income phrases
appearing in Title II of the NIRC of 1977 to taxable income. Section 79 of the NIRC of 1985, however, was
not amended.

On July 25, 1987, EO 273 renumbered Section 86 of the NIRC as Section 76, which was also
rearranged to fall under Chapter of Title II of the NIRC. Section 79, which had earlier been renumbered by PD
1994, remained unchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section
79 under PD 1994; then, as Section 76 under EO 273. Finally, after being renumbered and reduced to the
chaff of a grain, Section 69 was repealed by EO 37.

Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of 1997 as Section 76, which reads:

Section 76. Final Adjustment Return. Every corporation liable to tax under Section
24 shall file a final adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable
year is not equal to the total tax due on the entire taxable net income of that year the
corporation shall either:

(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly
income taxes paid, the refundable amount shown on its final adjustment return may be
credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year.
[8]


Section 76 offers two options: (1) filing for tax refund and (2) availing of tax credit. The two options are alternative
and the choice of one precludes the other. However, in Philam Asset Management, Inc. v. Commissioner of Internal
Revenue,
[9]
the Court ruled that failure to indicate a choice, however, will not bar a valid request for a refund, should this option
be chosen by the taxpayer later on. The requirement is only for the purpose of easing tax administration particularly the self-
assessment and collection aspects. Thus:

These two options under Section 76 are alternative in nature. The choice of one precludes the
other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that
a corporation must signify its intention whether to request a tax refund or claim a tax credit by marking
the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the
form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes
paid. Failure to signify ones intention in the FAR does not mean outright barring of a valid request for a
refund, should one still choose this option later on. A tax credit should be construed merely as an alternative
remedy to a tax refund under Section 76, subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration,
particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or
preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses
uncertainty or lack of preference and hence shows simple negligence or plain oversight.

x x x x

Third, there is no automatic grant of a tax refund. As a matter of procedure, the BIR should be given
the opportunity to investigate and confirm the veracity of a taxpayers claim, before it grants the
refund. Exercising the option for a tax refund or a tax credit does not ipso facto confer upon a taxpayer the
right to an immediate availment of the choice made. Neither does it impose a duty on the government to
allow tax collection to be at the sole control of a taxpayer.

Fourth, the BIR ought to have on file its own copies of petitioners FAR for the succeeding year, on the
basis of which it could rebut the assertion that there was a subsequent credit of the excess income tax
payments for the previous year. Its failure to present this vital document to support its contention against the
grant of a tax refund to petitioner is certainly fatal.

Fifth, the CTA should have taken judicial notice of the fact of filing and the pendency of petitioners
subsequent claim for a refund of excess creditable taxes withheld for 1998. The existence of the claim ought
to be known by reason of its judicial functions. Furthermore, it is decisive to and will easily resolve the
material issue in this case. If only judicial notice were taken earlier, the fact that there was no carry-over of
the excess creditable taxes withheld for 1997 would have already been crystal clear.

Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two years
after payment of the taxes erroneously received by the BIR. Despite the failure of petitioner to make the
appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of its
choice to request a tax refund, instead of a tax credit. To assert that any future claim for a tax refund will be
instantly hindered by a failure to signify ones intention in the FAR is to render nugatory the clear provision
that allows for a two-year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA, this Court even ordered the refund of a taxpayers excess
creditable taxes, despite the express declaration in the FAR to apply the excess to the succeeding year. When
circumstances show that a choice of tax credit has been made, it should be respected. But when indubitable
circumstances clearly show that another choice a tax refund is in order, it should be
granted. Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens.

In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it
perform any act indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an
administrative claim for the refund of its excess taxes withheld in 1997. In none of its quarterly returns for
1998 did it apply the excess creditable taxes. Under these circumstances, petitioner is entitled to a tax
refund of its 1997 excess tax credits in the amount of P522,092.
[10]


In this case, PERF did not mark the refund box in its 1997 FAR. Neither did it perform any act indicating that it chose
tax credit. In fact, in its 1998 ITR, PERF left blank the portion Less: Tax Credit/ Payments. That action coupled with the filing
of a claim for refund indicates that PERF opted to claim a refund. Under these circumstances, PERF is entitled to a refund of its
1997 excess tax credits in the amount of P1,280,504.00.

III. The failure of respondent to present in evidence the 1998 ITR is not
fatal to its claim for refund.

The CIR takes the view that the CA erred in considering the 1998 ITR of PERF. It was not formally offered in
evidence. Section 34, Rule 132 of the Revised Rules of Court states that the court shall consider no evidence which has not
been formally offered.

The reasoning is specious.

PERF attached its 1998 ITR to its motion for reconsideration. The 1998 ITR is a part of the records of the case and clearly
showed that income taxes in the amount of P1,280,504.00 were not claimed as tax credit in 1998.

In Filinvest Development Corporation v. Commissioner of Internal Revenue,
[11]
the Court held that the 1997 ITR attached to
the motion for reconsideration is part of the records of that case and cannot be simply ignored by the CTA. Moreover,
technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. We
quote:

In the proceedings before the CTA, petitioner presented in evidence its letter of claim for refund
before the BIR to show that it was made within the two-year reglementary period; its Income Tax Returns for
the years 1995 and 1996 to prove its total creditable withholding tax and the fact that the amounts were
declared as part of its gross income; and several certificates of income tax withheld at source corresponding
to the period of claim to prove the total amount of the taxes erroneously withheld. More importantly,
petitioner attached its 1997 Income Tax Return to its Motion for Reconsideration, making the same part of
the records of the case. The CTA cannot simply ignore this document.

Thus, we hold that petitioner has complied with all the requirements to prove its claim for tax
refund. The CA, therefore, erred in denying the petition for review of the CTAs denial of petitioners claim for
tax refund on the ground that it failed to present its 1997 Income Tax Return.

The CAs reliance on Rule 132, Section 34 26 of the Rules on Evidence is misplaced. This
provision must be taken in the light of Republic Act No. 1125, as amended, the law creating the CTA,
which provides that proceedings therein shall not be governed strictly by technical rules of
evidence. Moreover, this Court has held time and again that technicalities should not be used to
defeat substantive rights, especially those that have been established as a matter of fact.

x x x x

We must also point out that, simply by exercising the CIRs power to examine and verify petitioners
claim for tax exemption as granted by law, respondent CIR could have easily verified petitioners claim by
presenting the latters 1997 Income Tax Return, the original of which it has in its files. However, records
show that in the proceedings before the CTA, respondent CIR failed to comment on petitioners formal offer of
evidence, waived its right to present its own evidence, and failed to file its memorandum. Neither did it file
an opposition to petitioners motion to reconsider the CTA decision to which the 1997 Income Tax Return
was appended.

That no one shall unjustly enrich oneself at the expense of another is a long-standing principle
prevailing in our legal system. This applies not only to individuals but to the State as well. In the field of
taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with
taxpayers with fairness and honesty. The harsh power of taxation must be tempered with evenhandedness.
Hence, under the principle of solutio indebiti, the Government has to restore to petitioner the sums
representing erroneous payments of taxes.
[12]


Further, We sustain the CA that there is no need to rule on the issue of the admissibility of the 1998 ITR since
the CTA ruled that PERF already complied with the requisites of applying for a tax refund. The verification process is not
incumbent on PERF; it is the duty of the CIR to verify whether or not PERF had carried over the 1997 excess income taxes.

WHEREFORE, the petition is DENIED for lack of merit.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. Nos. 167274-75
REVENUE,
Petitioner, Present:

QUISUMBING, J.,
Chairperson,
YNARES-SANTIAGO,
- versus - CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

FORTUNE TOBACCO
CORPORATION, Promulgated:
Respondent.
July 21, 2008

x---------------------------------------------------------------------------x


D E C I S I O N

TINGA, J.:

Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco Corporation (Fortune
Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously collected from its tobacco
products. The tax refund is being re-claimed by the Commissioner of Internal Revenue (Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed Decision
[1]
dated 28
September 2004:

CAG.R. SP No. 80675

x x x x

Petitioner
[2]
is a domestic corporation duly organized and existing under and by virtue of the laws of
the Republic of the Philippines, with principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax
rate classification based on net retail price prescribed by Annex D to R.A. No. 4280, to wit:

Brand Tax Rate
Champion M 100 P1.00
Salem M 100 P1.00
Salem M King P1.00
Camel F King P1.00
Camel Lights Box 20s P1.00
Camel Filters Box 20s P1.00
Winston F Kings P5.00
Winston Lights P5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to
ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as amended. However, on January 1,
1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax
system was made and subjecting the aforesaid cigarette brands to specific tax under [S]ection 142 thereof,
now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. There shall be levied, assessed and collected on cigars a tax of One peso (P1.00)
per cigar.

(B) Cigarettes packed by hand. There shall be levied, assessesed and collected on
cigarettes packed by hand a tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine. There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten
pesos (P10.00) per pack, the tax shall be Twelve (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos
and Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight
Pesos (P8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos
(P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos
(P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five
pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the domestic market after
the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that
brand.
The excise tax from any brand of cigarettes within the next three (3) years from the
effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October
1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed in paragraphs (1),
(2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent
(70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of
the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be
effective in 1998.
Duly registered or existing brands of cigarettes or new brands thereof packed by machine
shall only be packed in twenties.
The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4)
hereof, shall be increased by twelve percent (12%) on January 1, 2000. (Emphasis supplied)
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette is sold
on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed
nationally), excluding the amount intended to cover the applicable excise tax and value-added
tax. For brands which are marketed only outside Metro [M]anila, the net retail price shall mean
the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the
amount intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average retail price as of October 1,
1996, as set forth in Annex D, shall remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to
the root name of the brand and/or a different brand which carries the same logo or design of the
existing brand.
To implement the provisions for a twelve percent (12%) increase of excise tax on, among others,
cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon
recommendation of the respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-
99, dated December 16, 1999, which provides the increase on the applicable tax rates on cigar and cigarettes
as follows:

SECTION DESCRIPTION OF
ARTICLES
PRESENT SPECIFIC
TAX RATE PRIOR
TO JAN. 1, 2000
NEW SPECIFIC
TAX RATE
EFFECTIVE JAN.
1, 2000
145 (A) P1.00/cigar P1.12/cigar
(B)Cigarettes packed by
machine
(1) Net retail price
(excluding VAT and
excise) exceedsP10.00
per pack
(2) Exceeds P10.00 per
pack
(3) Net retail price
(excluding VAT and
excise) is P5.00 toP6.50
per pack
(4) Net Retail Price
(excluding VAT and
excise) is belowP5.00
per pack



P12.00/pack

P8.00/pack

P5.00/pack


P1.00/pack




P13.44/ pack

P8.96/pack

P5.60/pack


P1.12/pack

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, (t)hat the new
specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and
fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.
For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands
manufactured and removed in the total amounts of P585,705,250.00.
On February 7, 2000, petitioner filed with respondents Appellate Division a claim for refund or tax
credit of its purportedly overpaid excise tax for the month of January 2000 in the amount
of P35,651,410.00
On June 21, 2001, petitioner filed with respondents Legal Service a letter dated June 20, 2001
reiterating all the claims for refund/tax credit of its overpaid excise taxes filed on various dates, including
the present claim for the month of January 2000 in the amount of P35,651,410.00.
As there was no action on the part of the respondent, petitioner filed the instant petition for review
with this Court on December 11, 2001, in order to comply with the two-year period for filing a claim for
refund.
In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative
Defenses;
4. Petitioners alleged claim for refund is subject to administrative routinary
investigation/examination by the Bureau;
5. The amount of P35,651,410 being claimed by petitioner as alleged overpaid excise tax for
the month of January 2000 was not properly documented.
6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to
refund, and failure to sustain the burden is fatal to its claim for refund/credit.
7. Petitioner must show that it has complied with the provisions of Section 204(C) in
relation [to] Section 229 of the Tax Code on the prescriptive period for claiming tax
refund/credit;
8. Claims for refund are construed strictly against the claimant for the same partake of tax
exemption from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid
implementing regulation which has the force and effect of law.
CA G.R. SP No. 83165
The petition contains essentially similar facts, except that the said case questions the CTAs
December 4, 2003 decision in CTA Case No. 6612 granting respondents
[3]
claim for refund of the amount
ofP355,385,920.00 representing erroneously or illegally collected specific taxes covering the period January
1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration thereof.
x x x x
In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues
to be resolved into two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of
Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240,
now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a
refund of P35,651,410.00 as alleged overpaid excise tax for the month of January 2000.
x x x x
Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA
Case Nos. 6365 & 6383:
WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious
and in accordance with law. Accordingly, respondent is hereby ORDERED to REFUND to
petitioner the amount of P35,651.410.00 representing erroneously paid excise taxes for the
period January 1 to January 31, 2000.
SO ORDERED.
Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s]
[both] dated July 15, 2003, the Tax Court, in an apparent change of heart, granted the petitioners consolidated
motions for reconsideration, thereby denying the respondents claim for refund.
However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos.
6363 and 6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a semblance of
finality, that the respondent is entitled to the refund claimed. Hence, in a resolution dated November 4, 2003, the
tax court reinstated its December 21, 2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby
REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND petitioner the total
amount ofP680,387,025.00 representing erroneously paid excise taxes for the
period January 1, 2000 to January 31, 2000 and February 1, 2000 to December 31, 2001.
SO ORDERED.
Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612
granting the prayer for the refund of the amount of P355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as follows:
IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly,
respondent is hereby ORDERED to REFUND to petitioner the amount of P355,385,920.00
representing overpaid excise tax for the period covering January 1, 2002 to December 31,
2002.
SO ORDERED.
Petitioner sought reconsideration of the decision, but the same was denied in a Resolution
dated March 17, 2004.
[4]
(Emphasis supplied) (Citations omitted).

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the
amount of P680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount
of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and eventually denied by the
Court of Appeals. The appellate court also denied reconsideration in its Resolution
[5]
dated 1 March 2005.
In its Memorandum
[6]
22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor General
(OSG) seeks to convince the Court that the literal interpretation given by the CTA and the Court of Appeals of Section 145 of
the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable on 1 January 2000 than that imposable during the
transition period. Instead of an increase of 12% in the tax rate effective on 1 January 2000 as allegedly mandated by the Tax
Code, the appellate courts ruling would result in a significant decrease in the tax rate by as much as 66%.
The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:
1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the specific
tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by par.
5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed under
Annex D referred to in par. 8, Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par. (1)-
(4), Sec. 145 of the Tax Code even if the resulting figure will be lower than the amount already being paid
at the end of the transition period. This is the interpretation followed by both the CTA and the Court of
Appeals.
[7]

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the OSG stresses.
Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be construed strictly
against the taxpayer, such as Fortune Tobacco.
In its Memorandum
[8]
dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of Appeals merely
followed the letter of the law when they ruled that the basis for the 12% increase in the tax rate should be the net retail price
of the cigarettes in the market as outlined in paragraph C, sub paragraphs (1)-(4), Section 145 of the Tax Code. The
Commissioner allegedly has gone beyond his delegated rule-making power when he promulgated, enforced and implemented
Revenue Regulation No. 17-99, which effectively created a separate classification for cigarettes based on the excise tax
actually being paid prior to January 1, 2000.
[9]

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought to be
refunded and the receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question about the mathematical
accuracy of Fortune Tobaccos claim since the documentary evidence in support of the refund has not been controverted by
the revenue agency. Likewise, the claims have been made and the actions have been filed within the two (2)-year prescriptive
period provided under Section 229 of the Tax Code.
The power to tax is inherent in the State, such power being inherently legislative, based on the principle that taxes are
a grant of the people who are taxed, and the grant must be made by the immediate representatives of the people; and where
the people have laid the power, there it must remain and be exercised.
[10]

This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue Regulation 17-
99. The main issue is an inquiry into whether the revenue regulation has exceeded the allowable limits of legislative
delegation.
For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.There shall be levied, assessed and collected on cigars a tax of One peso (P1.00) per
cigar.

(B). Cigarettes packed by hand.There shall be levied, assessed and collected on cigarettes
packed by hand a tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine.There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;
(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and
Fifty centavos (P6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00)
per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but
does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;
(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos
(P5.00) per pack, the tax shall be One peso (P1.00) per pack;
Variants of existing brands of cigarettes which are introduced in the domestic market after the
effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.
The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A.
No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided,
however, That in cases where the excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will
result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase
shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one
hundred percent (100%) of the increase shall be effective in 1998.
Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only
be packed in twenties.
The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof,
shall be increased by twelve percent (12%) on January 1, 2000.
New brands shall be classified according to their current net retail price.
For the above purpose, net retail price shall mean the price at which the cigarette is sold on retail
in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding
the amount intended to cover the applicable excise tax and value-added tax. For brands which are marketed
only outside Metro Manila, the net retail price shall mean the price at which the cigarette is sold in five (5)
major intended to cover the applicable excise tax and the value-added tax.
The classification of each brand of cigarettes based on its average retail price as of October 1, 1996,
as set forth in Annex D, shall remain in force until revised by Congress.
Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root
name of the brand and/or a different brand which carries the same logo or design of the existing
brand.
[11]
(Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of Finance to
promulgate rules and regulations for the effective implementation of the Tax Code,
[12]
interprets the above-quoted provision
and reflects the 12% increase in excise taxes in the following manner:

SECTION DESCRIPTION OF
ARTICLES
PRESENT SPECIFIC
TAX RATES PRIOR
TO JAN. 1, 2000
NEW SPECIFIC
TAX RATE
Effective Jan.. 1,
2000
145 (A) Cigars P1.00/cigar P1.12/cigar
(B)Cigarettes packed by
Machine
(1) Net Retail Price
(excluding VAT and
Excise) exceedsP10.00
per pack
(2) Net Retail Price
(excluding VAT and
Excise) is P6.51 up
to P10.00 per pack
(3) Net Retail Price
(excluding VAT and
excise) is P5.00 toP6.50
per pack
(4) Net Retail Price
(excluding VAT and
excise) is belowP5.00
per pack)



P12.00/pack


P8.00/pack

P5.00/pack


P1.00/pack




P13.44/pack


P8.96/pack

P5.60/pack


P1.12/pack

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January 2000
based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation No. 17-99 went further
and added that [T]he new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits,
wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.
[13]

Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from the
effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due from each brand on 1
October 1996. This qualification, however, is conspicuously absent as regards the 12% increase which is to be applied on
cigars and cigarettes packed by machine, among others, effective on 1 January 2000. Clearly and unmistakably, Section 145
mandates a new rate of excise tax for cigarettes packed by machine due to the 12% increase effective on 1 January
2000 without regard to whether the revenue collection starting from this period may turn out to be lower than that collected
prior to this date.
By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than the tax
actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which is the higher amount
between the ad valorem tax being paid at the end of the three (3)-year transition period and the specific tax under paragraph
C, sub-paragraph (1)-(4), as increased by 12%a situation not supported by the plain wording of Section 145 of the Tax
Code.
This is not the first time that national revenue officials had ventured in the area of unauthorized administrative
legislation.

In Commissioner of Internal Revenue v. Reyes,
[14]
respondent was not informed in writing of the law and the facts on
which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as amended by Republic Act
(R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who had simply relied upon the old provisions of
the law and Revenue Regulation No. 12-85 which was based on the old provision of the law. The Court held that in case of
discrepancy between the law as amended and the implementing regulation based on the old law, the former necessarily
prevails. The law must still be followed, even though the existing tax regulation at that time provided for a different
procedure.
[15]

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,
[16]
the tax authorities gave the term tax credit in
Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No. 7432 provides. Their
interpretation muddled up the intent of Congress to grant a mere discount privilege and not a sales discount. The Court,
striking down the revenue regulation, held that an administrative agency issuing regulations may not enlarge, alter or restrict
the provisions of the law it administers, and it cannot engraft additional requirements not contemplated by the
legislature. The Court emphasized that tax administrators are not allowed to expand or contract the legislative mandate and
that the plain meaning rule or verba legis in statutory construction should be applied such that where the words of a statute
are clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings in
order to carry into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory
requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with
the provisions of the law because any resulting discrepancy between the two will always be resolved in favor of the basic
law.
[17]

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,
[18]
Commissioner Jose Ong issued Revenue
Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular (RMC) 43-91, imposing a
5% lending investors tax under the 1977 Tax Code, as amended by Executive Order (E.O.) No. 273, on pawnshops. The
Commissioner anchored the imposition on the definition of lending investors provided in the 1977 Tax Code which, according
to him, was broad enough to include pawnshop operators. However, the Court noted that pawnshops and lending investors
were subjected to different tax treatments under the Tax Code prior to its amendment by the executive order; that Congress
never intended to treat pawnshops in the same way as lending investors; and that the particularly involved section of the Tax
Code explicitly subjected lending investors and dealers in securities only to percentage tax. And so the Court affirmed the
invalidity of the challenged circulars, stressing that administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out.
[19]

In Philippine Bank of Communications v. Commissioner of Internal Revenue,
[20]
the then acting Commissioner issued
RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly income tax payments,
thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax Code. The Court nullified the circular,
ruling that the BIR did not simply interpret the law; rather it legislated guidelines contrary to the statute passed by
Congress. The Court held:
It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued from time to time
by the Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute
by the executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will
not countenance administrative issuances that override, instead of remaining consistent and in harmony
with, the law they seek to apply and implement.
[21]


In Commissioner of Internal Revenue v. CA, et al.,
[22]
the central issue was the validity of RMO 4-87 which had construed
the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR after the promulgation of the
executive order on 22 August 1986 and not assessments made to that date. Resolving the issue in the negative, the Court held:

x x x all such issuances must not override, but must remain consistent and in harmony with, the law
they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to
supplant nor to modify, the law.
[23]


x x x

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985
tax liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so
provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive
order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases
specifically excepted by it.
[24]



In the case at bar, the OSGs argument that by 1 January 2000, the excise tax on cigarettes should be the higher tax
imposed under the specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase imposed by
paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify what is clearly an impermissible incursion into
the limits of administrative legislation. Such an interpretation is not supported by the clear language of the law and is
obviously only meant to validate the OSGs thesis that Section 145 of the Tax Code is ambiguous and admits of several
interpretations.
The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes listed
under Annex D is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code simply states that, [T]he
classification of each brand of cigarettes based on its average net retail price as of October 1, 1996, as set forth in Annex D,
shall remain in force until revised by Congress. This declaration certainly does not lend itself to the interpretation given to it
by the OSG. As plainly worded, the average net retail prices of the listed brands under Annex D, which classify cigarettes
according to their net retail price into low, medium or high, obviously remain the bases for the application of the increase in
excise tax rates effective on1 January 2000.
The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The Commissioner
cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to generate additional revenues for the
government. Revenue generation has undoubtedly been a major consideration in the passage of the Tax Code. However, as
borne by the legislative record,
[25]
the shift from the ad valorem system to the specific tax system
is likewise meant to promote fair competition among the players in the industries concerned, to ensure an equitable
distribution of the tax burden and to simplify tax administration by classifying cigarettes, among others, into high, medium
and low-priced based on their net retail price and accordingly graduating tax rates.
At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the meaning of the law
is clear on its face and free from the ambiguities that the Commissioner imputes. We simply cannot disregard the letter of the
law on the pretext of pursuing its spirit.
[26]


Finally, the Commissioners contention that a tax refund partakes the nature of a tax exemption does not apply to the
tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax exemption only when the former
is based either on a tax exemption statute or a tax refund statute. Obviously, that is not the situation here. Quite the contrary,
Fortune Tobaccos claim for refund is premised on its erroneous payment of the tax, or better still the governments exaction in
the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must
justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken.
[27]
The rule is that
tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under
which it is granted clearly and distinctly show that such was the intention.
[28]


A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of strict
interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, a legislative
grace, which cannot be allowed unless granted in the most explicit and categorical language. The taxpayer must show that the
legislature intended to exempt him from the tax by words too plain to be mistaken.
[29]


Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal principle
which underlies all quasi-contracts abhorring a persons unjust enrichment at the expense of another.
[30]
The dynamic of
erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti, which covers not only mistake in fact but
also mistake in law.
[31]


The Government is not exempt from the application of solutio indebiti.
[32]
Indeed, the taxpayer expects fair dealing
from the Government, and the latter has the duty to refund without any unreasonable delay what it has erroneously
collected.
[33]
If the State expects its taxpayers to observe fairness and honesty in paying their taxes, it must hold itself against
the same standard in refunding excess (or erroneous) payments of such taxes. It should not unjustly enrich itself at the
expense of taxpayers.
[34]
And so, given its essence, a claim for tax refund necessitates only preponderance of evidence for its
approbation like in any other ordinary civil case.

Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax refund
may be based on the following: (a) erroneously or illegally assessed or collected internal revenue taxes; (b) penalties imposed
without authority; and (c) any sum alleged to have been excessive or in any manner wrongfully collected.
[35]


What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not the
similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will not be construed
as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express
words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication. In answering the
question of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be
imposed beyond what statutes expressly and clearly import.
[36]
As burdens, taxes should not be unduly exacted nor assumed
beyond the plain meaning of the tax laws.
[37]

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated 28 September
2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.
SO ORDERED.

FIRST DIVISION


LUCAS G. ADAMSON, THERESE G.R. No. 120935
JUNE D. ADAMSON, and SARA
S. DE LOS REYES, in their capacities
as President, Treasurer and Secretary
of Adamson Management Corporation,
Petitioners,

- versus -


COURT OF APPEALS and
LIWAYWAY VINZONS-CHATO,
in her capacity as Commissioner
of the Bureau of Internal Revenue,
Respondents.
x-- - - - - - - - - - - - - - - - - - - - - - - - x
COMMISSIONER OF G.R. No. 124557
INTERNAL REVENUE,
Petitioner,
Present:

-versus- PUNO, C.J., Chairperson,
CARPIO,
CORONA,
COURT OF APPEALS, COURT LEONARDO-DE CASTRO, and
OF TAX APPEALS, ADAMSON BERSAMIN, JJ.
MANAGEMENT CORPORATION,
LUCAS G. ADAMSON, THERESE
JUNE D. ADAMSON, and SARA Promulgated:
S. DE LOS REYES,
Respondents. May 21, 2009
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

PUNO, C.J.:

Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No. 124557.

G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G. ADAMSON, THERESE
JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in their respective capacities as president, treasurer
and secretary of Adamson Management Corporation (AMC) against then Commissioner of Internal Revenue Liwayway
Vinzons-Chato (COMMISSIONER), under Rule 45 of the Revised Rules of Court. They seek to review and reverse the
Decision promulgated on March 21, 1995 and Resolution issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No.
35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.).

G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the Decision
dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled Commissioner of Internal Revenue v. Court of
Tax Appeals, Adamson Management Corporation, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. In
the said Decision, the Court of Appeals upheld the Resolution promulgated on September 19, 1994 by the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5075 (Adamson Management Corporation, Lucas G. Adamson, Therese Adamson and Sara
de los Reyes v. Commissioner of Internal Revenue).

The facts, as culled from the findings of the appellate court, follow:

On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and Adamson, Inc.
(AAI) to APAC Holding Limited (APAC). The shares were valued atP7,789,995.00.
[1]
On June 22, 1990, P159,363.21 was
paid as capital gains tax for the transaction.

On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock
in AAI for P17,718,360.00. AMC paid the capital gains tax of P352,242.96.

On October 15, 1993, the Commissioner issued a Notice of Taxpayer to AMC, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes, informing them of deficiencies on their payment of capital gains tax and Value Added
Tax (VAT). The notice contained a schedule for preliminary conference.

The events preceding G.R. No. 120935 are the following:

On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit of
Complaint
[2]
against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for violation of Sections 45
(a) and (d)
[3]
, and 110
[4]
, in relation to Section 100
[5]
, as penalized under Section 255,
[6]
and for violation of Section 253
[7]
,
in relation to Section 252 (b) and (d) of the National Internal Revenue Code (NIRC).
[8]


AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ a motion to suspend
proceedings on the ground of prejudicial question, pendency of a civil case with the Supreme Court, and pendency of their
letter-request for re-investigation with the Commissioner. After the preliminary investigation, State Prosecutor Alfredo P.
Agcaoili found probable cause. The Motion for Reconsideration against the findings of probable cause was denied by the
prosecutor.

On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged before the
Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to
Dismiss or Suspend the Proceedings. They invoked the grounds that there was yet no final assessment of their tax
liability, and there were still pending relevant Supreme Court and CTA cases. Initially, the trial court denied the motion. A
Motion for Reconsideration was however filed, this time assailing the trial courts lack of jurisdiction over the nature of
the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled that the complaints for tax evasion filed
by the Commissioner should be regarded as a decision of the Commissioner regarding the tax liabilities of Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held that the said cases
cannot proceed independently of the assessment case pending before the CTA, which has jurisdiction to determine the
civil and criminal tax liability of the respondents therein.

On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals assailing the trial
courts dismissal of the criminal cases. She averred that it was not a condition prerequisite that a formal assessment
should first be given to the private respondents before she may file the aforesaid criminal complaints against them. She
argued that the criminal complaints for tax evasion may proceed independently from the assessment cases pending before
the CTA.

On March 21, 1995, the Court of Appeals reversed the trial courts decision and reinstated the criminal
complaints. The appellate court held that, in a criminal prosecution for tax evasion, assessment of tax deficiency is
not required because the offense of tax evasion is complete or consummated when the offender has knowingly
and willfully filed a fraudulent return with intent to evade the tax.
[9]
It ruled that private respondents filed false
and fraudulent returns with intent to evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint
with the Department of Justice, without an accompanying assessment of the tax deficiency of private respondents,
in order to commence criminal action against the latter for tax evasion.
[10]


Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on July 6,
1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues:
1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING
THE DOCTRINE IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT
BAR.

2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE SECOND CATEGORY OF THE
OFFENSE IN SECTION 253 OF THE NIRC.

3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE
CASE AT BAR.

4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED
ASSESSMENT ON THE TAX LIABILITY OF THE TAXPAYER.

5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION FOR TAX EVASION IN THE
TRIAL COURT IS PREMATURE BECAUSE THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF
WILLFULL INTENT TO EVADE THE PAYMENT OF A TAX.

6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF YABES V. FLOJO (No. L-
46954, July 20, 1982, 115 SCRA 286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21,
1990, 185 SCRA 547) ARE APPLICABLE TO THE CASE AT BAR.

7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION OVER THE DISPUTE ON
WHAT CONSTITUTES THE PROPER TAXES DUE FROM THE TAXPAYER.

In parallel circumstances, the following events preceded G.R. No. 124557:

On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a letter
request for re-investigation with the Commissioner of the Examiners Findings earlier issued by the Bureau of Internal
Revenue (BIR), which pointed out the tax deficiencies.

On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G. Adamson, Therese
June D. Adamson and Sara S. de los Reyes filed a Petition for Review with the CTA. They assailed the Commissioners
finding of tax evasion against them. The Commissioner moved to dismiss the petition, on the ground that it was
premature, as she had not yet issued a formal assessment of the tax liability of therein petitioners. On September 19,
1994, the CTA denied the Motion to Dismiss. It considered the criminal complaint filed by the Commissioner with the DOJ
as an implied formal assessment, and the filing of the criminal informations with the RTC as a denial of petitioners protest
regarding the tax deficiency.

The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave abuse of
discretion. She contended that, with regard to the protest provided under Section 229 of the NIRC, there must first be a
formal assessment issued by the Commissioner, and it must be in accord with Section 6 of Revenue Regulation No. 12-
85. She maintained that she had not yet issued a formal assessment of tax liability, and the tax deficiency amounts
mentioned in her criminal complaint with the DOJ were given only to show the difference between the tax returns filed
and the audit findings of the revenue examiner.

The Court of Appeals sustained the CTAs denial of the Commissioners Motion to Dismiss. Thus, the
Commissioner filed the petition for review under G.R. No. 124557, raising the following issues:

1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED FOR FAILURE TO COMPLY
WITH THE MANDATORY REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM
SHOPPING;

2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE CASE AT BAR CAN PROCEED
WITHOUT AN ASSESSMENT;

3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT OF JUSTICE CAN BE
CONSTRUED AS AN IMPLIED ASSESSMENT; and

4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON PRIVATE
RESPONDENTS PETITION FOR REVIEW FILED WITH THE SAID COURT.

The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:

1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR
OTHERWISE) OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D.
ADAMSON AND SARA S. DE LOS REYES;

2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX EVASION TO PROCEED
AGAINST AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES;
and

3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO TAKE COGNIZANCE OF
BOTH THE CIVIL AND THE CRIMINAL ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G.
ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.

The case of CIR v. Pascor Realty, et al.
[11]
is relevant. In this case, then BIR Commissioner Jose U. Ong authorized
revenue officers to examine the books of accounts and other accounting records of Pascor Realty and Development
Corporation (PRDC) for 1986, 1987 and 1988. This resulted in a recommendation for the issuance of an assessment in the
amounts ofP7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against 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
filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

The Commissioner denied the urgent request for reconsideration/reinvestigation because she had not yet issued a
formal assessment.

Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for review. The
Commissioner 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 yet no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss
and ordered the Commissioner to file an answer within thirty (30) days. The Commissioner did not file an answer nor did she
move to reconsider the resolution. Instead, the Commissioner filed a petition for review of the CTA decision with the Court of
Appeals. The Court of Appeals upheld the CTA order. However, this Court reversed the Court of Appeals decision and the CTA
order, and ordered the dismissal of the petition. We held:
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.
Neither the NIRC nor the revenue regulations governing the protest of assessments
[12]
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.
[13]

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
[14]
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,
[15]
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
[16]
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.
[17]

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.
[18]

Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for
the proper presentation of tax rolls.
[19]

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
notipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due
and a demand to the private respondents for payment thereof.
The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not
to private respondents shows that the intent of the commissioner was to file a criminal complaint
for taxevasion, 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.
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.

In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of AMC, Lucas G.
Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that she wrote the recommendation
letter
[22]
addressed to the Secretary of the DOJ recommending the filing of criminal complaints against AMC and the
aforecited persons for fraudulent returns and tax evasion.
The first issue is whether the Commissioners recommendation letter can be considered as a formal assessment of
private respondents tax liability.

In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on
the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication
containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or
disprove the BIR examiners findings is not an assessment since it is yet indefinite.
[23]


We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment. Even a
cursory perusal of the said letter would reveal three key points:
1. It was not addressed to the taxpayers.
2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set
therein.
3. The letter was never mailed or sent to the taxpayers by the Commissioner.

In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that
the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and
for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code.
[24]


The next issue is whether the filing of the criminal complaints against the private respondents by the DOJ is
premature for lack of a formal assessment.

Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a
false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a
proceeding in court after the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for collection thereof

The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the
collection of such tax may be begun without assessment. Here, the private respondents had already filed the capital
gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the
examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes
due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found
that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably, the
gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.

Thus, the applicability of Ungab v. Cusi
[25]
is evident to the cases at bar. In this seminal case, this Court ruled that
there was no need for precise computation and formal assessment in order for criminal complaints to be filed against
him. It quoted Mertens Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat
and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a
fraudulent return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he has made an inaccurate return, and the governments failure to
discover the error and promptly to assess has no connections with the commission of the crime.
This hoary principle still underlies Section 269 and related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the criminal and civil
cases here at bar.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the rulings of the
Commissioner are appealable to the CTA, thus:
SEC. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review
by appeal, as herein provided -
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under the National Internal Revenue Code or other
laws or part of law administered by the Bureau of Internal Revenue;

Republic Act No. 8424, titled An Act Amending the National Internal Revenue Code, As Amended, And For Other
Purposes, later expanded the jurisdiction of the Commissioner and, correspondingly, that of the CTA, thus:

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction
of the Commissioner, subject to review by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282.
[26]
It provides:
SEC. 7. Section 7 of the same Act is hereby amended to read as follows:

Sec. 7. Jurisdiction. The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue, where the National Internal Revenue Code
provides a specific period of action, in which case the inaction shall be deemed a denial;
(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction;
x x x
(b) Jurisdiction over cases involving criminal offenses as herein provided:
(1) Exclusive original jurisdiction over all criminal offenses arising from violations of the
National Internal Revenue Code or Tariff and Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is
no specified amount claimed shall be tried by the regular courts and the jurisdiction of the CTA
shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding,
the criminal action and the corresponding civil action for the recovery of civil liability for taxes
and penalties shall at all times be simultaneously instituted with, and jointly determined in the
same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry
with it the filing of the civil action, and no right to reserve the filling of such civil action
separately from the criminal action will be recognized.
(2) Exclusive appellate jurisdiction in criminal offenses:
(a) Over appeals from the judgments, resolutions or orders of the Regional Trial
Courts in tax cases originally decided by them, in their respected territorial
jurisdiction.
(b) Over petitions for review of the judgments, resolutions or orders of the
Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases
originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.
(c) Jurisdiction over tax collection cases as herein provided:
(1) Exclusive original jurisdiction in tax collection cases involving final and
executory assessments for taxes, fees, charges and penalties: Provided, however,
That collection cases where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos (P1,000,000.00)
shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.
(2) Exclusive appellate jurisdiction in tax collection cases:
(a) Over appeals from the judgments, resolutions or orders of the
Regional Trial Courts in tax collection cases originally decided by them, in
their respective territorial jurisdiction.
(b) Over petitions for review of the judgments, resolutions or orders of
the Regional Trial Courts in the exercise of their appellate jurisdiction over
tax collection cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective
jurisdiction.

These laws have expanded the jurisdiction of the CTA. However, they did not change the jurisdiction of the CTA to
entertain an appeal only from a final decision or assessment of the Commissioner, or in cases where the Commissioner has
not acted within the period prescribed by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of
the tax liability of private respondents.

Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v. Union Shipping
Co. and Yabes v. Flojo are not applicable to the cases at bar. In these earlier cases, the Commissioner already rendered an
assessment of the tax liabilities of the delinquent taxpayers, for which reason the Court ruled that the filing of the civil suit
for collection of the taxes due was a final denial of the taxpayers request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment is rendered:

1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside the Regional
Trial Courts Order dated August 8, 1994, and REINSTATING Criminal Case Nos. 94-1842 to 94-1846
for further proceedings before the trial court; and

2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of the Court of Appeals
dated March 29, 1996, and ORDERING the dismissal of C.T.A. Case No. 5075.

No costs.

SO ORDERED.

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE,
Petitioner,



- versus -




PHILIPPINE NATIONAL BANK,
Respondent.

G.R. No. 161997

Present:

PANGANIBAN, J., Chairman
SANDOVAL-GUTIERREZ,
CORONA,
CARPIO MORALES, and
GARCIA, JJ.

Promulgated:

October 25, 2005

x------------------------------------------------------------------------------------x

D E C I S I O N

GARCIA, J.:

Thru this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner
of Internal Revenue seeks to set aside the Decision dated October 14, 2003
[1]
of the Court of Appeals (CA) in CA-G.R. SP No.
76488 and its Resolution dated January 26, 2004
[2]
denying petitioners motion for reconsideration.

The petition is cast against the following factual setting:

In early April 1991, respondent Philippine National Bank (PNB) issued to the Bureau of Internal Revenue (BIR) PNB
Cashiers Check No. 109435 for P180,000,000.00. The check represented PNBs advance income tax payment for the banks
1991 operations and was remitted in response to then President Corazon C. Aquinos call to generate more revenues for
national development. The BIR acknowledged receipt of the amount by issuing Payment Order No. C-10151465 and BIR
Confirmation Receipt No. 22063553, both dated April 15, 1991.
[3]


Via separate letters dated April 19 and 29, 1991 and May 14, 1991
[4]
to then BIR Commissioner Jose C. Ong, PNB requested
the issuance of a tax credit certificate (TCC) to be utilized against future tax obligations of the bank.

For the first and second quarters of 1991, PNB also paid additional taxes amounting to P6,096,150.00 and P26,854,505.80,
respectively, as shown in its corporate quarterly income tax return filed on May 30, 1991.
[5]
Inclusive of the P180 Million
aforementioned, PNB paid and BIR received in 1991 the aggregate amount of P212, 950,656.79.
[6]
This final figure, if tacked to
PNBs prior years excess tax credit (P1,385,198.30) and the creditable tax withheld for 1991 (P3,216,267.29), adds up to
P217,552,122.38.

By the end of CY 1991, PNBs annual income tax liability, per its 1992 annual income tax return,
[7]
amounted to
P144,253,229.78, which, when compared to its claimed total credits and tax payments of P217,552,122.38, resulted to a credit
balance in its favor in the amount of P73,298,892.60.
[8]
This credit balance was carried-over to cover tax liability for the
years 1992 to 1996, but, as PNB alleged, was never applied owing to the banks negative tax position for the said inclusive
years, having incurred losses during the 4-year period.

On July 28, 1997, PNB wrote then BIR Commissioner Liwayway Vinzons-Chato, Attention: Appellate Division, to inform
her about the above developments and to reiterate its request for the issuance of a TCC, this time for the unutilized balance of
its advance payment made in 1991 amounting to P73,298,892.60.
[9]
This request was forwarded for review and further
processing to the Office of the Deputy Commissioner for Legal and Inspection Group, Lilian B. Hefti, and then to the BIRs Large
Taxpayers Service.

In a letter dated July 26, 2000, PNB sought reconsideration of the decision of Deputy Commissioner Hefti not to take
cognizance of the banks claim for tax credit certificate on the ground that the jurisdiction of the Appellate Division is limited
to claims for tax refund and credit involving erroneous or illegal collection of taxes whenever there are questions of law and/or
facts and does not include claims for refund of advance payment, pursuant to Revenue Administrative Order [RAO] No. 7-95 dated
October 10, 1995.
[10]
In her letter-reply dated August 8, 2008,
[11]
Deputy Commissioner Hefti denied PNBs request for
reconsideration with the following explanations:

In reply, please be advised that upon review . . . of your case, this Office finds that the same presents
no legal question for resolution. Rather, what is involved is the verification of factual matters, i.e., the existence
of material facts to establish your entitlement to refund. Such facts were initially verified through the proper
audit of your refund case by the investigating unit under the functional control and supervision of the Deputy
Commissioner, Operations Group of this Bureau. It is therefore right and proper for the Operations Group to
review, confirm and/or pass judgment upon the findings of the unit under it.

At any rate, sound management practices demand that issues as crucial as refund cases be subjected to
complete staff work. There might be a little delay in the transition of cases but expect the new procedures to be
well-established in no time. Allow us, however, to allay your concern about delayed processing of your claim. In
fact, the undersigned has made representations with the Operations Group about your case and if you would
check the status of your case again, you will find that the same has been duly acted upon. (Emphasis
supplied)

On August 14, 2001, PNB again wrote the BIR requesting that it be allowed to apply its unutilized advance tax payment
of P73,298,892.60 to the banks future gross receipts tax liability.
[12]


Replying, the BIR Commissioner denied PNBs claim for tax credit for the following reasons stated in his letter of May 21,
2002, to wit:
[13]


1. The amount subject of claim for [TCC] is being carried over from your 1991 to 1996 Annual Income Tax
Returns. xxx. To grant your claim would result into granting it twice first for tax carry over as
shown in your 1991 amended Income Tax Return and second for granting a tax credit.

2. When you requested for a refund on April 19, 1991, reiterated on April 29, 1991 and again on May 14,
1991 on alleged excess income taxes, the same was considered premature since the determination . . .
of your income tax liability can only be ascertained upon filing of your Final or Adjusted Income Tax
Return for 1991 on or before April 15, 1992.

3. When you carried over the excess tax payments from 1991 to 1996 Annual Income Tax Return, you had
already abandoned your original intention of claiming for a [TCC]. Furthermore, the 1991 amended
Income Tax Return you filed on April 14, 1994 clearly showed that the amount being claimed has
already been applied as tax credit against your 1992 income tax liability.

4. Although there was already a recommendation for the issuance of a [TCC] by the Chief, Appellate
Division and concurred in by the Assistant Commissioner, Legal Service, the recommendation was for
. . . year 1992 and not for the taxable year 1991, which is the taxable year involved in this case.

5. Even if you reiterated your claim for tax credit certificate when you filed your claim on July 28, 1997, the
same has already prescribed on the ground that it was filed beyond the two (2) year prescriptive period
as provided for under Section 204 of NIRC. [Words in bracket and emphasis added]

On June 20, 2002, PNB, via a petition for review, appealed the denial action of the BIR Commissioner to the Court of Tax
Appeals (CTA). There, its appellate recourse was docketed as C.T.A. Case No. 6487.

The Revenue Commissioner filed a motion to dismiss PNBs aforementioned petition on ground of prescription under the
1977 National Internal Revenue Code (NIRC)
[14]
. To this motion, PNB interposed an opposition, citing Commissioner of Internal
Revenue vs. Philippine American Life Insurance Co.
[15]


In its Resolution of October 10, 2002,
[16]
the CTA granted the Commissioners motion to dismiss and, accordingly, denied
PNBs petition for review, pertinently stating as follows:

To reiterate, both the claim for refund and the subsequent appeal to this court must be filed within
the same two (2)-year period [provided in Sec. 230 of the NIRC]. This is not subject to qualification. The court
is bereft of any jurisdiction or authority to hear the instant Petition for Review, considering that the above
stated action for refund was filed beyond the two (2)-year prescriptive period as allowed under the Tax Code.
(Words in bracket added)

PNBs motion for reconsideration was denied by the tax court in its subsequent Resolution of March 20, 2003.
[17]

In time, PNB filed a petition for review with the Court of Appeals (CA), thereat docketed as CA-G.R. SP No. 76488, arguing
that the applicability of the two (2)-year prescriptive period is not jurisdictional and that said rule admits of certain
exceptions.
[18]
Following the filing by the Commissioner Internal Revenue of his Comment to PNBs petition in CA-G.R. in SP No.
76488, respondent PNB filed a Supplement to its Petition for Review.
[19]


In the herein assailed Decision dated October 14, 2003,
[20]
the appellate court reversed the ruling of the CTA, disposing as
follows:

WHEREFORE, premises considered, the present petition is hereby GIVEN DUE COURSE.
Consequently, the assailed Resolutions dated October 10, 2002 and March 30, 2003 of the Court of Tax
Appeals in C.T.A. Case No. 6487 are hereby ANNULLED and SET ASIDE. The case is hereby REMANDED to
the respondent Commissioner for issuance with deliberate dispatch of the tax credit certificate after
completion of processing of petitioners claim/request by the concerned BIR officer/s as to the correct
amount of tax credit to which petitioner is entitled.

No pronouncements as to costs.

SO ORDERED.

In gist, the appellate court predicated its disposition on the following main premises:

1. Considering the special circumstance that the tax credit PNB has been seeking is to be sourced not from any tax
erroneously or illegally collected but from advance income tax payment voluntarily made in response to then
President Aquinos call to generate more revenues for the government, in no way can the amount of P180 million
advanced by PNB in 1991 be considered as erroneously or illegally paid tax.
[21]


2. The BIR is deemed to have waived the two (2)-year prescriptive period when its officials led the PNB to believe
that its request for tax credit had not yet prescribed since the matter was not being treated as an ordinary claim
for tax refund/credit or a simple case of excess payment.

3. Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.
[22]
instructs that even if the two (2)-
year prescriptive period under the Tax Code had already lapsed, the same is not jurisdictional, and may be
suspended for reasons of equity and other special circumstances. PNBs failure to apply the advance income tax
payment due to its negative tax liability in the succeeding taxable years i.e., 1992-1996, should not be subject to
the two (2)-year limitation as to bar its claim for tax credit. The advance income tax payment, made as it were
under special circumstances, warrants a suspension of the two (2)-year limitation, underscoring the fact that
PNBs claim is not even a simple case of excess payment.

In time, the BIR Commissioner moved for a reconsideration, but its motion was denied by the appellate court in its equally
challenged Resolution of January 26, 2004.
[23]


Hence, the Commissioners present recourse on the following substantive submissions:

1. A prior tax assessment before respondent PNB can apply for tax credit is unnecessary;

2. PNBs letter dated April 19, 29 and May 14, 1991 cannot be legally interpreted as claims for refund or tax credit as
required by the NIRC;

3. PNBs claim for tax credit is barred by prescription; and

4. The equitable principle of estoppel does bar the BIR petitioner from collecting taxes due.
[24]


Petitioner first scores the CA for concluding that the amount of advance income tax payment voluntarily remitted to the BIR
by the [respondent] was not a consequence of a prior tax assessment or computation by the taxpayer based on business income
and, therefore, it cannot be treated as similar to those national revenue taxes erroneously, illegally or wrongfully paid as to be
automatically covered by the two (2)-year limitation under Sec. 230 [of the NIRC] for the right to its recovery. Petitioner invokes
the all too-familiar principle that the collection of taxes, being the lifeblood of the nation,
[25]
should be summary and with the
least interference from the courts.

Pressing its point, petitioner asserts that what transpired under the premises is a case of excessive collection not arising
from an erroneous, illegal of wrongful assessment and collection. According to petitioner, respondent PNB, after making a
prepayment of taxes in 1991, had realized, upon filing, in 1992, of its 1991 final annual income tax return, the excess payment
by simple process of mathematical computation; hence, it was unnecessary to make any assessment of overpaid taxes.
Moreover, petitioner points out that the tenor of PNBs letters of April 19, 29, and May 14, 1991
[26]
indicated a mere request
for an issuance of a TCC covering the advance payments of taxes, not a claim for refund or tax credit of overpaid national
internal revenue taxes.

Citing Revenue Regulation No. 10-77, petitioner likewise argues that any excess or overpaid income tax for a given taxable
year may be carried to the succeeding taxable year only. It cannot, petitioner expounds, go beyond, as what respondent PNB
attempted to do in 1997, when, after realizing the inapplicability of the excess carry-forward scheme for its 1992 income tax
liabilities owing to its negative tax position for the 1992 to 1996 tax period, it belatedly requested for a TCC issuance.

Lastly, petitioner urges the Court to make short shrift of the invocation of equity and estoppel, on the postulate that
the erroneous application and enforcement of tax laws by public officers does not preclude the subsequent correct application
of such laws.
[27]


In its Comment, respondent PNB contends that its claim for tax credit did not arise from overpayment resulting from
erroneous, illegal or wrongful collection of tax. And obviously having in mind the holding of this Court in Juan Luna Subdivision
Inc. vs. Sarmiento,
[28]
respondent stresses that its P180 Million advance income tax payment for 1991 partakes of the nature of
a deposit made in anticipation of taxes not yet due or levied. Accordingly, respondent adds, the P180 Million was strictly not a
payment of a valid and existing tax liability, let alone an erroneous payment, the refund of which is governed by Section 230 of
the NIRC.

Taking a different tack, respondent PNB would also argue that, even assuming, in gratia argumenti that the two (2)-
year limitation in Section 230 of the NIRC is of governing application, still the prescriptive period set forth therein is not
jurisdictional. The suspension of the statutory limitation in this case, PNB adds, is justified under exceptional circumstance.

We rule for respondent PNB.

As may be recalled, both the CTAs and the BIRs refusal to grant PNBs claim for refund or credit was based on the
proposition that such claim was time-barred. On the other hand, the CA rejected both the CTAs and BIRs stance for reasons as
shall be explained shortly.

As we see it then, the core issue in this case pivots on the applicability hereto of the two (2)-year prescriptive period
under in Section 230 (now Sec. 229) of the NIRC, reading:

SEC. 230. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected , . . , or of any sum, alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under
protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two [(2)] years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment:Provided, however, That the Commissioner may, even without a written claim therefor, refund or
credit any tax, where on the face of the return upon which payment was made, such payment appears clearly
to have been erroneously paid. (Underscoring added.)


Here, respondent PNB requested the BIR to issue a TCC on the remaining balance of the advance income tax payment it
made in 1991. It should be noted that the request was made considering that, while PNB carried over such credit balance to
the succeeding taxable years, i.e., 1992 to 1996, its negative tax position during said tax period prevented it from actually
applying the credit balance of P73, 298,892.60. It is fairly correct to say then that the claim for tax credit was specifically
pursued to enable the respondent bank to utilize the same for future tax liabilities. However, petitioner ruled that the claim in
question is time-barred, the bank having filed such claim only in 1997, or more than two (2) years from 1992 when the
overpayment of annual income tax for 1991 was realized by the bank and the amount of excess payment ascertained with the
filing of its final 1991 income tax return.

In rejecting petitioners ruling, as seconded by the CTA, the CA stated that PNBs request for issuance of a tax credit
certificate on the balance of its advance income tax payment cannot be treated as a simple case of excess payment as to be
automatically covered by the two (2)-year limitation in Section 230, supra of the NIRC.
We agree with the Court of Appeals.

Section 230 of the Tax Code, as couched, particularly its statute of limitations component, is, in context, intended to
apply to suits for the recovery of internal revenue taxes or sums erroneously, excessively, illegally or wrongfully collected.

Black defines the term erroneous or illegal tax as one levied without statutory authority.
[29]
In the strict legal viewpoint,
therefore, PNBs claim for tax credit did not proceed from, or is a consequence of overpayment of tax erroneously or illegally
collected. It is beyond cavil that respondent PNB issued to the BIR the check for P180 Million in the concept of tax payment in
advance, thus eschewing the notion that there was error or illegality in the payment. What in effect transpired when PNB
wrote its July 28, 1997 letter
[30]
was that respondent sought the application of amounts advanced to the BIR to future annual
income tax liabilities, in view of its inability to carry-over the remaining amount of such advance payment to the four (4)
succeeding taxable years, not having incurred income tax liability during that period.

The instant case ought to be distinguished from a situation where, owing to net losses suffered during a taxable year, a
corporation was also unable to apply to its income tax liability taxes which the law requires to be withheld and remitted. In
the latter instance, such creditable withholding taxes, albeit also legally collected, are in the nature of erroneously collected
taxes which entitled the corporate taxpayer to a refund under Section 230 of the Tax Code. So it is that in Citibank, N.A. vs.
Court of Appeals
[31]
, we held:

The taxes thus withheld and remitted are provisional in nature. We repeat: five percent of the rental
income withheld and remitted to the BIR pursuant to Rev. Reg. No. 13-78 is, unlike the withholding of final
taxes on passive incomes, a creditable withholding tax; that is, creditable against income tax liability if any,
for that taxable year.

In Commissioner of Internal Revenue vs. TMX Sales, Inc., this Court ruled that the payments of quarterly
income taxes (per Section 68, NIRC) should be considered mere installments on the annual tax due. These
quarterly tax payments . . . should be treated as advances or portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal year. The same holds true in the case of the withholding of
creditable tax at source. Withholding taxes are deposits which are subject to adjustments at the proper
time when the complete tax liability is determined.

In this case, the payments of the withholding taxes for 1979 and 1980 were creditable to the income tax
liability, if any, of petitioner-bank, determined after the filing of the corporate income tax returns on April 15,
1980 and April 15, 1981. As petitioner posted net losses in its 1979 and 1980 returns, it was not liable for
any income taxes. Consequently and clearly, the taxes withheld during the course of the taxable year, while
collected legally under the aforecited revenue regulation, became untenable and took on the nature of
erroneously collected taxes at the end of the taxable year. (Underscoring added)


Analyzing the underlying reason behind the advance payment made by respondent PNB in 1991, the CA held that it would
be improper to treat the same as erroneous, wrongful or illegal payment of tax within the meaning of Section 230 of the Tax
Code. So that even if the respondents inability to carry-over the remaining amount of its advance payment to taxable years
1992 to 1996 resulted in excess credit, it would be inequitable to impose the two (2)-year prescriptive period in Section 230 as
to bar PNBs claim for tax credit to utilize the same for future tax liabilities. We quote with approval the CAs disquisition on
this point:

Thus, in no sense can the subject amount of advance income tax voluntarily remitted to the BIR by the
[respondent], not as a consequence of prior tax assessment or computation by the taxpayer based on
business income, be treated as similar to those national revenue taxes erroneously, illegally or
wrongfully paid as to be automatically covered by the two (2)-year limitation under Sec. 230 for the right to
its recovery. When the P180 million advance income tax payment was tendered by [respondent], no tax had
been assessed or due, or actually imposed and collected by the BIR. Neither can such payment be considered
as illegal having been made in response to a call of patriotic duty to help the national government . We
therefore hold that the tax credit sought by [respondent] is not simply a case of excess payment, but rather
for the application of the balance of advance income tax payment for subsequent taxable years after failure or
impossibility to make such application or carry over the preceding four (4)-year period when no tax liability was
incurred by petitioner due to losses in its operations. It is truly inequitable to strictly impose the two (2)-year
prescriptive period as to legally bar any request for such tax credit certificate considering the special
circumstances under which the advance income tax payment was made and the unexpected event (four years of
business losses) which prevented such application or carry over. Ironically, both the [petitioner] and CTA
would fault the [respondent] for electing to credit or carry over the excess amount of tax payment advanced
instead of choosing to refund any such excess amount, holding that such decision on the part of petitioner
caused the two (2)-year period to lapse without the petitioner filing such a request for the issuance of a tax
credit certificate. They emphasized that the advance tax payment was made with the understanding that any
excess amount will be either carried over to the next taxable year or refunded. It appears then that the
request for issuance of a tax credit certificate was arbitrarily interpreted by respondent as a simple claim for
refund instead of a request for application of the balance (excess amount) to tax liability for the succeeding
taxable years, as was the original intention of [respondent] when it tendered the advance payment in
1991.
[32]
(Emphasis in the original; words in bracket added)

Petitioner insists that a prior tax assessment in this case was unnecessary, the excess tax payment having already been
ascertained by the end of 1992 upon the filing by respondent of its adjusted final return. Thus, petitioner adds, the two (2)-
year prescriptive period to recover said excess credit balance had begun to run from the accomplishment of the said final
return and, ergo, PNBs claim for tax credit asserted in 1997 is definitely belated. Additionally, petitioner, citing Revenue
Regulation No. 10-77, contends that the carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.

We do not agree.

Revenue Regulation No. 10-77
[33]
governs the method of computing corporate quarterly income tax on a cumulative basis.
Section 7 thereof provides:

SEC. 7. Filing of final or adjustment return and final payment of income tax. -- A final or an adjustment
return . . . covering the total taxable income of the corporation for the preceding calendar or fiscal year shall
be filed on or before the 15
th
day of the fourth month following the close of the calendar or fiscal year. xxxx.
The amount of income tax to be paid shall be the balance of the total income tax shown on the final or
adjustment return after deducting therefrom the total quarterly income taxes paid during the preceding first
three quarters of the same calendar or fiscal year.


Any excess of the total quarterly payments over the actual income tax computed and shown in the
adjustment or final corporate income tax return shall either (a) be refunded to the corporation, or (b) may
be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year. The corporation must signify in its annual corporate adjustment return its intention whether
to request for the refund of the overpaid income or claim for automatic tax credit to be applied against its
income tax liabilities for the quarters of the succeeding taxable year by filling the appropriate box on the
corporate tax return. (B.I.R. Form No. 1702) [Emphasis added]

As can be gleaned from the above, the mandate of Rev. Reg. No. 10-77 is hardly of any application to PNBs advance
payment which, needless to stress, are not quarterly payments reflected in the adjusted final return, but a lump sum payment
to cover future tax obligations. Neither can such advance lump sum payment be considered overpaid income tax for a given
taxable year, so that the carrying forward of any excess or overpaid income tax for a given taxable year is limited to the
succeeding taxable year only.
[34]
Clearly, limiting the right to carry-over the balance of respondents advance payment only to
the immediately succeeding taxable year would be unfair and improper considering that, at the time payment was made, BIR
was put on due notice of PNBs intention to apply the entire amount to its future tax obligations.

In Commissioner vs. Phi-am Life
[35]
, the Court ruled that an availment of a tax credit due for reasons other than the
erroneous or wrongful collection of taxes may have a different prescriptive period. Absent any specific provision in the Tax
Code or special laws, that period would be ten (10) years under Article 1144 of the Civil Code.
Significantly,Commissioner vs. Phil-Am is partly a reiteration of a previous holding that even if the two (2)-year prescriptive
period, if applicable, had already lapsed, the same is not jurisdictional
[36]
and may be suspended for reasons of equity and
other special circumstances.
[37]


While perhaps not in all fours because it involved the refund of overpayment due to misinterpretation of the law on
franchise, our ruling in Panay Electric Co. vs. Collector of Internal Revenue
[38]
, is apropos. There, the Court stated:

xxx(L)egally speaking, the decision of the Tax Court [on the two-year prescriptive period for
tax refund] is therefore correct, being in accordance with law. However, ones conscience does not and
cannot rest easy on this strict application of the law, considering the special circumstances that surround this
case. Because of his erroneous interpretation of the law on franchise taxes, the Collector, from the year 1947
had illegally collected from petitioner the respectable sum of . . . . From a moral standpoint, the Government
would be enriching itself of this amount at the expense of the taxpayer. (Words in bracket added and
underscoring added.)

Like the CA, this Court perceives no compelling reason why the principle enunciated in Panay Electric and Commissioner vs.
Phil-Am Life should not be applied in this case, more so since the amount over which tax credit is claimed was theoretically
booked as advance income tax payment. It bears stressing that respondent PNB remitted the P180 Million in question as a
measure of goodwill and patriotism, a gesture noblesse oblige, so to speak, to help the cash-strapped national government. It
would thus indeed, be unfair, as the CA correctly observed, to leave respondent PNB to suffer losing millions of pesos advanced
by it for future tax liabilities. The cut becomes all the more painful when it is considered that PNBs failure to apply the balance
of such advance income tax payment from 1992 to 1996 was, to repeat, due to business downturn experienced by the bank so
that it incurred no tax liability for the period.

The rule of long standing is that the Court will not set aside lightly the conclusions reached by the CTA which, by the very
nature of its functions, is dedicated exclusively to the resolution of tax problems and has, accordingly, developed an expertise
on the subject, unless there has been an abuse or improvident exercise of authority.
[39]
It is likewise settled that to a claimant
rests the onus to establish the factual basis of his or her claim for tax credit or refund.
[40]
In this case, however, petitioner does
not dispute that a portion of the P180 Million PNB remitted to the BIR in 1991 as advance payment remains unutilized for the
purpose for which it was intended in the first place. But petitioner asserts that respondents right to recover the same is
already time-barred. The CTA upheld the position of petitioner. The CA ruled otherwise. We find the CAs position more in
accord with the facts on record and is consistent with applicable laws and jurisprudence.

Verily, the suspension of the two (2)-year prescriptive period is warranted not solely by the objective or purpose pursuant
to which respondent PNB made the advance income tax payment in 1991. Records show that petitioners very own conduct
led the bank to believe all along that its original intention to apply the advance payment to its future income tax obligations
will be respected by the BIR. Notwithstanding respondent PNBs failure to request for tax credit after incurring negative tax
position in 1992, up to taxable year 1996, there appears to be a valid reason to assume that the agreed carrying forward of the
balance of the advance payment extended to succeeding taxable years, and not only in 1992. Thus, upon posting a net income
in 1997 and regaining a profitable business operation, respondent bank promptly sought the issuance of a TCC for the reason
that its credit balance of P73, 298,892.60 remained unutilized. If ever, petitioners pose about respondent PNB never having
made a written claim for refund only serves to buttress the latters position that it was not out to secure a refund or recover
the aforesaid amount, but for the BIR to issue a TCC so it can apply the same to its future tax obligations.

Lest it be overlooked, petitioner peremptorily denied the request for tax credit on the ground of its having been filed
beyond the two (2)-year prescriptive period. In the same breath, however, petitioner appears to have glossed over an incident
which amounts to an earlier BIR ruling that there is no legal question to be resolved but only a factual investigation in the
processing of PNBs claim. Even as petitioner concluded such administrative investigation, it did not deny the request for
issuance of a tax credit certificate on any factual finding, such as the veracity of alleged business losses in the taxable years
1992 to 1996, during which the respondent bank alleged the credit balance was not applied. Lastly, there is no indication that
petitioner considered respondents request as an ordinary claim for refund, the very reason why the same was referred by the
BIR for processing to the Operations Group of the Bureau.

Hence, no reversible error was committed by the CA in holding that, upon basic considerations of equity and fairness,
respondents request for issuance of a tax credit certificate should not be subject to the two (2)-year limitation in Section 230
of the NIRC.

With the foregoing disquisitions, the Court finds it unnecessary to delve on the question of whether or not mistakes of
tax officers constitute a bar to collection of taxes by the BIR Commissioner.

The procedural issue presently raised by petitioner, i.e., respondent PNBs alleged non-compliance with the forum
shopping rule when its petition for review filed with the CTA did not contain the requisite authority of PNB Vice President
Ligaya R. Gagolinan to sign the certification, need not detain us long.

Petitioner presently faults the CA for not having taken notice that PNBs initiatory pleading before the CTA suffers
from an infirmity that justifies the dismissal thereof. But it is evident that the issue of forum shopping is being raised for the
first time in this appellate proceedings. Accordingly, the Court loathes to accommodate petitioners urging for the dismissal of
respondents basic claim on the forum-shopping angle. As earlier ruled by this Court, a party ought to invoke the issue of
forum shopping, assuming its presence, at the first opportunity in his motion to dismiss or similar pleading filed in the trial
court. Else, he is barred from raising the ground of forum shopping in the Court of Appeals and in this Court.
[41]
So it must be
here.

WHEREFORE, the petition is DENIED for lack of merit and the assailed decision and resolution of the Court of Appeals in
CA-G.R. SP No. 76488 AFFIRMED.

No pronouncement as to costs.

SO ORDERED.

Republic of the Philippines
Supreme Court
Manila


SECOND DIVISION


COMMISSIONER OF INTERNAL G.R. No. 178087
REVENUE,
Petitioner, Present:

CARPIO, J., Chairperson,
BRION,
- versus - DEL CASTILLO,
ABAD, and
PEREZ, JJ.

KUDOS METAL CORPORATION, Promulgated:
Respondent. May 5, 2010
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

DEL CASTILLO, J.:

The prescriptive period on when to assess taxes benefits both the government and the taxpayer.
[1]
Exceptions extending the period to
assess must, therefore, be strictly construed.

This Petition for Review on Certiorari seeks to set aside the Decision
[2]
dated March 30, 2007 of the Court of Tax Appeals (CTA)
affirming the cancellation of the assessment notices for having been issued beyond the prescriptive period and the Resolution
[3]
dated May
18, 2007 denying the motion for reconsideration.
Factual Antecedents

On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax Return (ITR) for the taxable year 1998.

Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal Revenue (BIR) served upon respondent three
Notices of Presentation of Records. Respondent failed to comply with these notices, hence, the BIR issued a Subpeona Duces
Tecum dated September 21, 2006, receipt of which was acknowledged by respondents President, Mr. Chan Ching Bio, in a letter
dated October 20, 2000.

A review and audit of respondents records then ensued.

On December 10, 2001, Nelia Pasco (Pasco), respondents accountant, executed a Waiver of the Defense of Prescription,
[4]
which
was notarized on January 22, 2002, received by the BIR Enforcement Service on January 31, 2002 and by the BIR Tax Fraud Division
on February 4, 2002, and accepted by the Assistant Commissioner of the Enforcement Service, Percival T. Salazar (Salazar).

This was followed by a second Waiver of Defense of Prescription
[5]
executed by Pasco on February 18, 2003, notarized
on February 19, 2003, received by the BIR Tax Fraud Division on February 28, 2003 and accepted by Assistant Commissioner Salazar.

On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the respondent. This was
followed by a Formal Letter of Demand with Assessment Notices for taxable year 1998, dated September 26, 2003 which was received by
respondent on November 12, 2003.
Respondent challenged the assessments by filing its Protest on Various Tax Assessments on December 3, 2003 and its
Legal Arguments and Documents in Support of Protests against Various Assessments on February 2, 2004.

On June 22, 2004, the BIR rendered a final Decision
[6]
on the matter, requesting the immediate payment of the following tax
liabilities:

Kind of Tax Amount
Income Tax P 9,693,897.85
VAT 13,962,460.90
EWT 1,712,336.76
Withholding Tax-Compensation 247,353.24
Penalties 8,000.00
Total P25,624,048.76


Ruling of the Court of Tax Appeals, Second Division

Believing that the governments right to assess taxes had prescribed, respondent filed on August 27, 2004 a Petition for
Review
[7]
with the CTA. Petitioner in turn filed his Answer.
[8]


On April 11, 2005, respondent filed an Urgent Motion for Preferential Resolution of the Issue on Prescription.
[9]


On October 4, 2005, the CTA Second Division issued a Resolution
[10]
canceling the assessment notices issued against respondent
for having been issued beyond the prescriptive period. It found the first Waiver of the Statute of Limitations incomplete and defective for
failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90. Thus:
First, the Assistant Commissioner is not the revenue official authorized to sign the waiver, as the tax case
involves more than P1,000,000.00. In this regard, only the Commissioner is authorized to enter into agreement with the
petitioner in extending the period of assessment;

Secondly, the waiver failed to indicate the date of acceptance. Such date of acceptance is necessary to determine
whether the acceptance was made within the prescriptive period;

Third, the fact of receipt by the taxpayer of his file copy was not indicated on the original copy. The requirement
to furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but also of the
acceptance by the BIR and the perfection of the agreement.

The subject waiver is therefore incomplete and defective. As such, the three-year prescriptive period was not
tolled or extended and continued to run. x x x
[11]


Petitioner moved for reconsideration but the CTA Second Division denied the motion in a Resolution
[12]
dated April 18, 2006.

Ruling of the Court of Tax Appeals, En Banc

On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. Although it ruled that the Assistant Commissioner
was authorized to sign the waiver pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it found that the first waiver was still
invalid based on the second and third grounds stated by the CTA Second Division. Pertinent portions of the Decision read as follows:

While the Court En Banc agrees with the second and third grounds for invalidating the first waiver, it finds that
the Assistant Commissioner of the Enforcement Service is authorized to sign the waiver pursuant to RDAO No. 05-01,
which provides in part as follows:

A. For National Office cases

Designated Revenue Official

1. Assistant Commissioner (ACIR), For tax fraud and policy
Enforcement Service cases

2. ACIR, Large Taxpayers Service For large taxpayers cases
other than those cases falling under Subsection B hereof

3. ACIR, Legal Service For cases pending
verification and awaiting
resolution of certain legal issues prior to prescription and for
issuance/compliance of Subpoena Duces Tecum

4. ACIR, Assessment Service (AS) For cases which are
pending in or subject to
review or approval by the ACIR, AS

Based on the foregoing, the Assistant Commissioner, Enforcement Service is authorized to sign waivers in tax
fraud cases. A perusal of the records reveals that the investigation of the subject deficiency taxes in this case was
conducted by the National Investigation Division of the BIR, which was formerly named the Tax Fraud Division. Thus,
the subject assessment is a tax fraud case.

Nevertheless, the first waiver is still invalid based on the second and third grounds stated by the Court in
Division. Hence, it did not extend the prescriptive period to assess.

Moreover, assuming arguendo that the first waiver is valid, the second waiver is invalid for violating Section
222(b) of the 1997 Tax Code which mandates that the period agreed upon in a waiver of the statute can still be extended
by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. As
previously discussed, the exceptions to the law on prescription must be strictly construed.

In the case at bar, the period agreed upon in the subject first waiver expired on December 31, 2002. The second
waiver in the instant case which was supposed to extend the period to assess to December 31, 2003 was executed
onFebruary 18, 2003 and was notarized on February 19, 2003. Clearly, the second waiver was executed after the
expiration of the first period agreed upon. Consequently, the same could not have tolled the 3-year prescriptive period to
assess.
[13]



Petitioner sought reconsideration but the same was unavailing.

Issue

Hence, the present recourse where petitioner interposes that:

THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENTS RIGHT TO ASSESS UNPAID
TAXES OF RESPONDENT PRESCRIBED.
[14]


Petitioners Arguments

Petitioner argues that the governments right to assess taxes is not barred by prescription as the two waivers executed by
respondent, through its accountant, effectively tolled or extended the period within which the assessment can be made. In disputing the
conclusion of the CTA that the waivers are invalid, petitioner claims that respondent is estopped from adopting a position contrary to what
it has previously taken. Petitioner insists that by acquiescing to the audit during the period specified in the waivers, respondent led the
government to believe that the delay in the process would not be utilized against it. Thus, respondent may no longer repudiate the
validity of the waivers and raise the issue of prescription.

Respondents Arguments

Respondent maintains that prescription had set in due to the invalidity of the waivers executed by Pasco, who executed the same
without any written authority from it, in clear violation of RDAO No. 5-01. As to the doctrine of estoppel by acquiescence relied upon by
petitioner, respondent counters that the principle of equity comes into play only when the law is doubtful, which is not present in the
instant case.

Our Ruling

The petition is bereft of merit.

Section 203
[15]
of the National Internal Revenue Code of 1997 (NIRC) mandates the government to assess internal revenue taxes
within three years from the last day prescribed by law for the filing of the tax return or the actual date of filing of such return, whichever
comes later. Hence, an assessment notice issued after the three-year prescriptive period is no longer valid and effective. Exceptions
however are provided under Section 222
[16]
of the NIRC.

The waivers executed by respondents accountant did not extend the period
within which the assessment can be made

Petitioner does not deny that the assessment notices were issued beyond the three-year prescriptive period, but claims that the
period was extended by the two waivers executed by respondents accountant.

We do not agree.

Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written agreement
between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90
[17]
issued on April 4, 1990 and RDAO
05-01
[18]
issued on August 2, 2001 lay down the procedure for the proper execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase but not after ______ 19 ___, which
indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of
prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation,
the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and
agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the
waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form,
duly notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of
the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second
copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of
his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of
the BIR and the perfection of the agreement.
[19]


A perusal of the waivers executed by respondents accountant reveals the following infirmities:

1. The waivers were executed without the notarized written authority of Pasco to sign the waiver in behalf of
respondent.

2. The waivers failed to indicate the date of acceptance.

3. The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers.

Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments were
issued by the BIR beyond the three-year period and are void.

Estoppel does not apply in this case

We find no merit in petitioners claim that respondent is now estopped from claiming prescription since by executing the waivers,
it was the one which asked for additional time to submit the required documents.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,
[20]
the doctrine of estoppel prevented the taxpayer from
raising the defense of prescription against the efforts of the government to collect the assessed tax. However, it must be stressed that in the
said case, estoppel was applied as an exception to the statute of limitations on collection of taxes and not on the assessment of taxes, as the
BIR was able to make an assessment within the prescribed period. More important, there was a finding that the taxpayer made several
requests or positive acts to convince the government to postpone the collection of taxes, viz:

It appears that the first assessment made against respondent based on its second final return filed
on November 28, 1946 was made on February 11, 1947. Upon receipt of this assessment respondent requested for at
least one year within which to pay the amount assessed although it reserved its right to question the correctness of the
assessment before actual payment. Petitioner granted an extension of only three months. When it failed to pay the tax
within the period extended, petitioner sent respondent a letter on November 28, 1950 demanding payment of the tax as
assessed, and upon receipt of the letter respondent asked for a reinvestigation and reconsideration of the assessment.
When this request was denied, respondent again requested for a reconsideration on April 25, 1952, which was denied
on May 6, 1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference Staff
from September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the assessment was finally
reduced on July 26, 1955. This is the ruling which is now being questioned after a protracted negotiation on the ground
that the collection of the tax has already prescribed.

It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or by
proceeding in court within the 5-year period from the filing of the second amended final return due to the several
requests of respondent for extension to which petitioner yielded to give it every opportunity to prove its claim regarding
the correctness of the assessment. Because of such requests, several reinvestigations were made and a hearing was even
held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record
shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for
respondent to now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of the
Government invoking the technical ground of prescription.

While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation
may not have the effect of suspending the running of the period of limitation for in such case there is need of a written
agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may
be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his
repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make
him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. And
when such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or
behavior should not be countenanced if only to protect the interest of the Government.

This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are several
precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: The applicable principle is
fundamental and unquestioned. He who prevents a thing from being done may not avail himself of the nonperformance
which he has himself occasioned, for the law says to him in effect this is your own act, and therefore you are not
damnified. (R. H. Stearns Co. vs. U.S., 78 L. ed., 647). Or, as was aptly said, The tax could have been collected, but the
government withheld action at the specific request of the plaintiff. The plaintiff is now estopped and should not be
permitted to raise the defense of the Statute of Limitations. [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp. 588].
[21]


Conversely, in this case, the assessments were issued beyond the prescribed period. Also, there is no showing that respondent
made any request to persuade the BIR to postpone the issuance of the assessments.

The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of taxes
considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly follow. As we have often
said, the doctrine of estoppel is predicated on, and has its origin in, equity which, broadly defined, is justice according to natural law and
right.
[22]
As such, the doctrine of estoppel cannot give validity to an act that is prohibited by law or one that is against public policy.
[23]
It
should be resorted to solely as a means of preventing injustice and should not be permitted to defeat the administration of the law, or to
accomplish a wrong or secure an undue advantage, or to extend beyond them requirements of the transactions in which they
originate.
[24]
Simply put, the doctrine of estoppel must be sparingly applied.

Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01,
which the BIR itself issued. As stated earlier, the BIR failed to verify whether a notarized written authority was given by the respondent to
its accountant, and to indicate the date of acceptance and the receipt by the respondent of the waivers. Having caused the defects in the
waivers, the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the statute of limitations, being
a derogation of the taxpayers right to security against prolonged and unscrupulous investigations, must be carefully and strictly
construed.
[25]


As to the alleged delay of the respondent to furnish the BIR of the required documents, this cannot be taken against
respondent. Neither can the BIR use this as an excuse for issuing the assessments beyond the three-year period because with or without
the required documents, the CIR has the power to make assessments based on the best evidence obtainable.
[26]


WHEREFORE, the petition is DENIED. The assailed Decision dated March 30, 2007 and Resolution dated May 18, 2007 of the
Court of Tax Appeals are hereby AFFIRMED.

SO ORDERED.

THIRD DIVISION

EMERLINDA S. TALENTO, G.R. No. 180884
in her capacity as the Provincial
Treasurer of the Province of Bataan,
Petitioner, Present:

Ynares-Santiago, J. (Chairperson),
- versus - Austria-Martinez,
Carpio Morales,
*

Chico-Nazario, and
Reyes, JJ.
HON. REMIGIO M. ESCALADA, JR.,
Presiding Judge of the Regional Trial
Court of Bataan, Branch 3, and Promulgated:
PETRON CORPORATION,
Respondents. June 27, 2008
x ---------------------------------------------------------------------------------------- x

DECISION

YNARES-SANTIAGO, J.:

The instant petition for certiorari under Rule 65 of the Rules of Court assails the November 5, 2007 Order
[1]
of the
Regional Trial Court of Bataan, Branch 3, in Civil Case No. 8801, granting the petition for the issuance of a writ of preliminary
injunction filed by private respondent Petron Corporation (Petron) thereby enjoining petitioner Emerlinda S. Talento,
Provincial Treasurer of Bataan, and her representatives from proceeding with the public auction of Petrons machineries and
pieces of equipment during the pendency of the latters appeal from the revised assessment of its properties.

The facts of the case are as follows:

On June 18, 2007, Petron received from the Provincial Assessors Office of Bataan a notice of revised assessment over
its machineries and pieces of equipment in Lamao, Limay, Bataan. Petron was given a period of 60 days within which to file an
appeal with the Local Board of Assessment Appeals (LBAA).
[2]
Based on said revised assessment, petitioner Provincial
Treasurer ofBataan issued a notice informing Petron that as of June 30, 2007, its total liability is
P1,731,025,403.06,
[3]
representing deficiency real property tax due from 1994 up to the first and second quarters of 2007.

On August 17, 2007, Petron filed a petition
[4]
with the LBAA (docketed as LBAA Case No. 2007-01) contesting the
revised assessment on the grounds that the subject assessment pertained to properties that have been previously declared;
and that the assessment covered periods of more than 10 years which is not allowed under the Local Government Code
(LGC). According to Petron, the possible valid assessment pursuant to Section 222 of the LGC could only be for the years 1997
to 2006. Petron further contended that the fair market value or replacement cost used by petitioner included items which
should be properly excluded; that prompt payment of discounts were not considered in determining the fair market value; and
that the subject assessment should take effect a year after or on January 1, 2008. In the same petition, Petron sought the
approval of a surety bond in the amount of P1,286,057,899.54.
[5]


On August 22, 2007, Petron received from petitioner a final notice of delinquent real property tax with a warning that
the subject properties would be levied and auctioned should Petron fail to settle the revised assessment due.
[6]


Consequently, Petron sent a letter
[7]
to petitioner stating that in view of the pendency of its appeal
[8]
with the LBAA,
any action by the Treasurers Office on the subject properties would be premature. However, petitioner replied that only
Petrons payment under protest shall bar the collection of the realty taxes due,
[9]
pursuant to Sections 231 and 252 of the LGC.

With the issuance of a Warrant of Levy
[10]
against its machineries and pieces of equipment, Petron filed on September
24, 2007, an urgent motion to lift the final notice of delinquent real property tax and warrant of levy with the LBAA. It argued
that the issuance of the notice and warrant is premature because an appeal has been filed with the LBAA, where it posted a
surety bond in the amount of P1,286,057,899.54.
[11]


On October 3, 2007, Petron received a notice of sale of its properties scheduled on October 17, 2007.
[12]
Consequently,
on October 8, 2007, Petron withdrew its motion to lift the final notice of delinquent real property tax and warrant of levy with
the LBAA.
[13]
On even date, Petron filed with the Regional Trial Court of Bataan the instant case (docketed as Civil Case
No. 8801) for prohibition with prayer for the issuance of a temporary restraining order (TRO) and preliminary
injunction.
[14]


On October 15, 2007, the trial court issued a TRO for 20 days enjoining petitioner from proceeding with the public
auction of Petrons properties.
[15]
Petitioner thereafter filed an urgent motion for the immediate dissolution of the TRO,
followed by a motion to dismiss Petrons petition for prohibition.

On November 5, 2007, the trial court issued the assailed Order granting Petrons petition for issuance of writ of
preliminary injunction, subject to Petrons posting of a P444,967,503.52 bond in addition to its previously posted surety bond
of P1,286,057,899.54, to complete the total amount equivalent to the revised assessment of P1,731,025,403.06. The trial court
held that in scheduling the sale of the properties despite the pendency of Petrons appeal and posting of the surety bond with
the LBAA, petitioner deprived Petron of the right to appeal. The dispositive portion thereof, reads:

WHEREFORE, the writ of preliminary injunction prayed for by plaintiff is hereby GRANTED and
ISSUED, enjoining defendant Treasurer, her agents, representatives, or anybody acting in her behalf from
proceeding with the scheduled public auction of plaintiffs real properties, or any disposition thereof,
pending the determination of the merits of the main action, to be effective upon posting by plaintiff to the
Court of an injunction bond in the amount of Four Hundred Forty Four Million Nine Hundred Sixty Seven
Thousand Five Hundred Three and 52/100 Pesos (P444,967,503.52) and the approval thereof by the Court.

Defendants Urgent Motion for the Immediate Dissolution of the Temporary Restraining Order
dated October 23, 2007 is hereby DENIED.

SO ORDERED.
[16]


From the said Order of the trial court, petitioner went directly to this Court via the instant petition for certiorari under
Rule 65 of the Rules of Court.

The question posed in this petition, i.e., whether the collection of taxes may be suspended by reason of the filing of an
appeal and posting of a surety bond, is undoubtedly a pure question of law. Section 2(c) of Rule 41 of the Rules of Court
provides:

SEC. 2. Modes of Appeal.

(c) Appeal by certiorari. In all cases when only questions of law are raised or involved, the
appeal shall be to the Supreme Court by petition for review on certiorari under Rule 45. (Emphasis
supplied)

Thus, petitioner resorted to the erroneous remedy when she filed a petition for certiorari under Rule 65, when the
proper mode should have been a petition for review on certiorari under Rule 45. Moreover, under Section 2, Rule 45 of the
same Rules, the period to file a petition for review is 15 days from notice of the order appealed from. In the instant case,
petitioner received the questioned order of the trial court on November 6, 2007, hence, she had only up to November 21,
2007 to file the petition. However, the same was filed only on January 4, 2008, or 43 days late. Consequently, petitioners
failure to file an appeal within the reglementary period rendered the order of the trial court final and executory.

The perfection of an appeal in the manner and within the period prescribed by law is mandatory. Failure to conform
to the rules regarding appeal will render the judgment final and executory and beyond the power of the Courts
review. Jurisprudence mandates that when a decision becomes final and executory, it becomes valid and binding upon the
parties and their successors in interest. Such decision or order can no longer be disturbed or reopened no matter how
erroneous it may have been.
[17]


Petitioners resort to a petition under Rule 65 is obviously a play to make up for the loss of the right to file an appeal via a
petition under Rule 45. However, a special civil action under Rule 65 can not cure petitioners failure to timely file a petition
for review on certiorari under Rule 45 of the Rules of Court. Rule 65 is an independent action that cannot be availed of as a
substitute for the lost remedy of an ordinary appeal, including that under Rule 45, especially if such loss or lapse was
occasioned by ones own neglect or error in the choice of remedies.
[18]


Moreover, even if we assume that a petition under Rule 65 is the proper remedy, the petition is still dismissible.

We note that no motion for reconsideration of the November 5, 2007 order of the trial court was filed prior to the
filing of the instant petition. The settled rule is that a motion for reconsideration is a sine qua non condition for the filing of a
petition for certiorari. The purpose is to grant the public respondent an opportunity to correct any actual or perceived error
attributed to it by the re-examination of the legal and factual circumstances of the case. Petitioners failure to file a motion for
reconsideration deprived the trial court of the opportunity to rectify an error unwittingly committed or to vindicate itself of an
act unfairly imputed. Besides, a motion for reconsideration under the present circumstances is the plain, speedy and adequate
remedy to the adverse judgment of the trial court.
[19]


Petitioner also blatantly disregarded the rule on hierarchy of courts. Although the Supreme Court, Regional Trial
Courts, and the Court of Appeals have concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo
warranto, habeas corpus and injunction, such concurrence does not give the petitioner unrestricted freedom of choice of court
forum. Recourse should have been made first with the Court of Appeals and not directly to this Court.
[20]


True, litigation is not a game of technicalities. It is equally true, however, that every case must be presented in
accordance with the prescribed procedure to ensure an orderly and speedy administration of justice.
[21]
The failure therefore
of petitioner to comply with the settled procedural rules justifies the dismissal of the present petition.

Finally, we find that the trial court correctly granted respondents petition for issuance of a writ of preliminary
injunction. Section 3, Rule 58, of the Rules of Court, provides:

SEC. 3. Grounds for issuance of preliminary injunction. A preliminary injunction may be granted by
the court when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief
consists in restraining the commission or continuance of the acts complained of, or in the performance of an
act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during
the litigation would probably work injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is
procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant
respecting the subject of the action or proceeding, and tending to render the judgment ineffectual.

The requisites for the issuance of a writ of preliminary injunction are: (1) the existence of a clear and unmistakable
right that must be protected; and (2) an urgent and paramount necessity for the writ to prevent serious damage.
[22]


The urgency and paramount necessity for the issuance of a writ of injunction becomes relevant in the instant case
considering that what is being enjoined is the sale by public auction of the properties of Petron amounting to at least P1.7
billion and which properties are vital to its business operations. If at all, the repercussions and far-reaching implications of the
sale of these properties on the operations of Petron merit the issuance of a writ of preliminary injunction in its favor.

We are not unaware of the doctrine that taxes are the lifeblood of the government, without which it can not properly
perform its functions; and that appeal shall not suspend the collection of realty taxes. However, there is an exception to the
foregoing rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance the payment
of taxes. In the instant case, we note that respondent contested the revised assessment on the following grounds: that the
subject assessment pertained to properties that have been previously declared; that the assessment covered periods of more
than 10 years which is not allowed under the LGC; that the fair market value or replacement cost used by petitioner included
items which should be properly excluded; that prompt payment of discounts were not considered in determining the fair
market value; and that the subject assessment should take effect a year after or on January 1, 2008. To our mind, the
resolution of these issues would have a direct bearing on the assessment made by petitioner. Hence, it is necessary that the
issues must first be passed upon before the properties of respondent is sold in public auction.

In addition to the fact that the issues raised by the respondent would have a direct impact on the validity of the
assessment made by the petitioner, we also note that respondent has posted a surety bond equivalent to the amount of the
assessment due. The Rules of Procedure of the LBAA, particularly Section 7, Rule V thereof, provides:

Section 7. Effect of Appeal on Collection of Taxes. An appeal shall not suspend the collection of the
corresponding realty taxes on the real property subject of the appeal as assessed by the Provincial, City or
Municipal Assessor, without prejudice to the subsequent adjustment depending upon the outcome of the
appeal. An appeal may be entertained but the hearing thereof shall be deferred until the corresponding taxes
due on the real property subject of the appeal shall have been paid under protest or the petitioner shall have
given a surety bond, subject to the following conditions:

(1) the amount of the bond must not be less than the total realty taxes and penalties due as
assessed by the assessor nor more than double said amount;

(2) the bond must be accompanied by a certification from the Insurance Commissioner (a) that
the surety is duly authorized to issue such bond; (a) that the surety bond is approved by and registered with
said Commission; and (c) that the amount covered by the surety bond is within the writing capacity of the
surety company; and

(3) the amount of the bond in excess of the surety companys writing capacity, if any, must be
covered by Reinsurance Binder, in which case, a certification to this effect must likewise accompany the
surety bond.

Corollarily, Section 11 of Republic Act No. 9282,
[23]
which amended Republic Act No. 1125 (The Law Creating the
Court of Tax Appeals) provides:

Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -

x x x x

No appeal taken to the Court of Appeals from the Collector of Internal Revenue x x x shall suspend the
payment, levy, distraint, and/or sale of any property for the satisfaction of his tax liability as provided by
existing law. Provided, however, That when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the interest of the Government and/or the taxpayer the
Court at any stage of the processing may suspend the collection and require the taxpayer either to deposit the
amount claimed or to file a surety bond for not more than double the amount with the Court.


WHEREFORE, in view of all the foregoing, the instant petition is DISMISSED.

SO ORDERED.

SECOND DIVISION

BANK OF THE PHILIPPINE ISLANDS,
P e t i t i o n e r,




- versus-




COMMISSIONER OF INTERNAL
REVENUE,
R e s p o n d e n t .
G.R. No. 139736

Present:

PUNO,
Chairman
AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.


Promulgated:

October 17, 2005
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
D E C I S I O N

CHICO-NAZARIO, J.:

This Petition for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil Procedure, assails the Decision of the
Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999,
[1]
which reversed and set aside the Decision of the Court of
Tax Appeals (CTA), dated 02 February 1999,
[2]
and which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner
Bank of the Philippine Islands (BPI) to pay the amount of P28,020.00 as deficiency documentary stamp tax (DST) for the
taxable year 1985, inclusive of the compromise penalty.

There is hardly any controversy as to the factual antecedents of this Petition.

Petitioner BPI is a commercial banking corporation organized and existing under the laws of the Philippines. On two
separate occasions, particularly on 06 June 1985 and 14 June 1985, it sold United States (US) $500,000.00 to the Central Bank
of the Philippines (Central Bank), for the total sales amount of US$1,000,000.00.

On 10 October 1989, the Bureau of Internal Revenue (BIR) issued Assessment No. FAS-5-85-89-002054,
[3]
finding
petitioner BPI liable for deficiency DST on its afore-mentioned sales of foreign bills of exchange to the Central Bank, computed
as follows


1985 Deficiency Documentary Stamp Tax

Foreign Bills of Exchange..

P 18,480,000.00

Tax Due Thereon:

P18,480,000.00 x P0.30 (Sec. 182 NIRC).
P200.00



27,720.00

Add: Suggested compromise penalty.

300.00

TOTAL AMOUNT DUE AND COLLECTIBLE.

P 28,020.00

Petitioner BPI received the Assessment, together with the attached Assessment Notice,
[4]
on 20 October 1989.

Petitioner BPI, through its counsel, protested the Assessment in a letter dated 16 November 1989, and filed with
the BIR on 17 November 1989. The said protest letter is reproduced in full below

November 16, 1989

The Commissioner of Internal Revenue
Quezon City

Attention of: Mr. Pedro C. Aguillon
Asst. Commissioner for Collection

Sir:

On behalf of our client, Bank of the Philippine Islands (BPI), we have the honor to protest your
assessment against it for deficiency documentary stamp tax for the year 1985 in the amount ofP28,020.00,
arising from its sale to the Central Bank of U.S. $500,000.00 on June 6, 1985 and another U.S. $500,000.00 on
June 14, 1985.

1. Under established market practice, the documentary stamp tax on telegraphic transfers or sales
of foreign exchange is paid by the buyer. Thus, when BPI sells to any party, the cost of documentary stamp
tax is added to the total price or charge to the buyer and the seller affixes the corresponding documentary
stamp on the document. Similarly, when the Central Bank sells foreign exchange to BPI, it charges BPI for the
cost of the documentary stamp on the transaction.

2. In the two transactions subject of your assessment, no documentary stamps were affixed because
the buyer,
Central Bank of the Philippines, was exempt from such tax. And while it is true that under P.D. 1994, a
proviso was added to sec. 222 (now sec. 186) of the Tax Code that whenever one party to a taxable
document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be
the one directly liable for the tax, this proviso (and the other amendments of P.D. 1994) took effect only on
January 1, 1986, according to sec. 49 of P.D. 1994. Hence, the liability for the documentary stamp tax could
not be shifted to the seller.

In view of the foregoing, we request that the assessment be revoked and cancelled.

Very truly yours,

PADILLA LAW OFFICE
By:

(signed)
SABINO PADILLA, JR.
[5]


Petitioner BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992, the BIR
issued a Warrant of Distraint and/or Levy
[6]
against petitioner BPI for the assessed deficiency DST for taxable year 1985,
in the amount of P27,720.00 (excluding the compromise penalty of P300.00). It served the Warrant on petitioner BPI only
on 23 October 1992.
[7]


Then again, petitioner BPI did not hear from the BIR until 11 September 1997, when its counsel received a letter,
dated 13 August 1997, signed by then BIR Commissioner Liwayway Vinzons-Chato, denying its request for
reconsideration, and addressing the points raised by petitioner BPI in its protest letter, dated 16 November 1989, thus

In reply, please be informed that after a thorough and careful study of the facts of the case as well as
the law and jurisprudence pertinent thereto, this Office finds the above argument to be legally untenable. It is
admitted that while industry practice or market convention has the force of law between the members of a
particular industry, it is not binding with the BIR since it is not a party thereto. The same should, therefore,
not be allowed to prejudice the Bureau of its lawful task of collecting revenues necessary to defray the
expenses of the government. (Art. 11 in relation to Art. 1306 of the New Civil Code.)

Moreover, let it be stated that even before the amendment of Sec. 222 (now Sec. 173) of the Tax Code,
as amended, the same was already interpreted to hold that the other party who is not exempt from the
payment of documentary stamp tax liable from the tax. This interpretation was further strengthened by the
following BIR Rulings which in substance state:

1. BIR Unnumbered Ruling dated May 30, 1977

x x x Documentary stamp taxes are payable by either person, signing, issuing, accepting, or
transferring the instrument, document or paper. It is now settled that where one party to the instrument is
exempt from said taxes, the other party who is not exempt should be liable.

2. BIR Ruling No. 144-84 dated September 3, 1984

x x x Thus, where one party to the contract is exempt from said tax, the other party, who is not
exempt, shall be liable therefore. Accordingly, since A.J.L. Construction Corporation, the other party to the
contract and the one assuming the payment of the expenses incidental to the registration in the vendees
name of the property sold, is not exempt from said tax, then it is the one liable therefore, pursuant to Sec. 245
(now Sec. 196), in relation to Sec. 222 (now Sec. 173), both of the Tax Code of 1977, as amended.

Premised on all the foregoing considerations, your request for reconsideration is hereby DENIED.
[8]


Upon receipt of the above-cited letter from the BIR, petitioner BPI proceeded to file a Petition for Review with the
CTA on 10 October 1997;
[9]
to which respondent BIR Commissioner, represented by the Office of the Solicitor General,
filed an Answer on 08 December 1997.
[10]


Petitioner BPI raised in its Petition for Review before the CTA, in addition to the arguments presented in its
protest letter, dated 16 November 1989, the defense of prescription of the right of respondent BIR Commissioner to
enforce collection of the assessed amount. It alleged that respondent BIR Commissioner only had three years to collect on
Assessment No. FAS-5-85-89-002054, but she waited for seven years and nine months to deny the protest. In her Answer
and subsequent Memorandum, respondent BIR Commissioner merely reiterated her position, as stated in her letter to
petitioner BPI, dated 13 August 1997, which denied the latters protest; and remained silent as to the expiration of the
prescriptive period for collection of the assessed deficiency DST.

After due trial, the CTA rendered a Decision on 02 February 1999, in which it identified two primary issues in the
controversy between petitioner BPI and respondent BIR Commissioner: (1) whether or not the right of respondent BIR
Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed; and (2)
whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were
subject to DST.

The CTA answered the first issue in the negative and held that the statute of limitations for respondent BIR
Commissioner to collect on the Assessment had not yet prescribed. In resolving the issue of prescription, the CTA
reasoned that

In the case of Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc., G.R. No.
76281, September 30, 1991, 202 SCRA 125, the Supreme Court laid to rest the first issue. It categorically
ruled that a protest is to be treated as request for reinvestigation or reconsideration and a mere request for
reexamination or reinvestigation tolls the prescriptive period of the Commissioner to collect on an
assessment. . .
. . .

In the case at bar, there being no dispute that petitioner filed its protest on the subject assessment on
November 17, 1989, there can be no conclusion other than that said protest stopped the running of the
prescriptive period of the Commissioner to collect.

Section 320 (now 223) of the Tax Code, clearly states that a request for reinvestigation which is
granted by the Commissioner, shall suspend the prescriptive period to collect. The underscored portion
above does not mean that the Commissioner will cancel the subject assessment but should be construed as
when the same was entertained by the Commissioner by not issuing any warrant of distraint or levy on the
properties of the taxpayer or any action prejudicial to the latter unless and until the request for
reinvestigation is finally given due course. Taking into consideration this provision of law and the
aforementioned ruling of the Supreme Court in Wyeth Suaco which specifically and categorically states that a
protest could be considered as a request for reinvestigation, We rule that prescription has not set in against
the government.
[11]


The CTA had likewise resolved the second issue in the negative. Referring to its own decision in an earlier
case, Consolidated Bank & Trust Co. v. The Commissioner of Internal Revenue,
[12]
the CTA reached the conclusion that the
sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were not subject to DST

From the abovementioned decision of this Court, it can be gleaned that the Central Bank, during the
period June 11, 1984 to March 9, 1987 enjoyed tax exemption privilege, including the payment of
documentary stamp tax (DST) pursuant to Resolution No. 35-85 dated May 3, 1985 of the Fiscal Incentive
Review Board. As such, the Central Bank, as buyer of the foreign currency, is exempt from paying the
documentary stamp tax for the period above-mentioned. This Court further expounded that said tax
exemption of the Central Bank was modified beginning January 1, 1986 when Presidential Decree (P.D.) 1994
took effect. Under this decree, the liability for DST on sales of foreign currency to the Central Bank is shifted
to the seller.

Applying the above decision to the case at bar, petitioner cannot be held liable for DST on its 1985
sales of foreign currencies to the Central Bank, as the latter who is the purchaser of the subject currencies is
the one liable thereof. However, since the Central Bank is exempt from all taxes during 1985 by virtue of
Resolution No. 35-85 of the Fiscal Incentive Review Board dated March 3, 1985, neither the petitioner nor the
Central Bank is liable for the payment of the documentary stamp tax for the formers 1985 sales of foreign
currencies to the latter. This aforecited case of Consolidated Bank vs. Commissioner of Internal Revenue was
affirmed by the Court of Appeals in its decision dated March 31, 1995, CA-GR Sp. No. 35930. Said decision
was in turn affirmed by the Supreme Court in its resolution denying the petition filed by Consolidated Bank
dated November 20, 1995 with the Supreme Court under Entry of Judgment dated March 1, 1996.
[13]


In sum, the CTA decided that the statute of limitations for respondent BIR Commissioner to collect on Assessment
No. FAS-5-85-89-002054 had not yet prescribed; nonetheless, it still ordered the cancellation of the said Assessment
because the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were tax-exempt.

Herein respondent BIR Commissioner appealed the Decision of the CTA to the Court of Appeals. In its Decision
dated 11 August 1999,
[14]
the Court of Appeals sustained the finding of the CTA on the first issue, that the running of the
prescriptive period for collection on Assessment No. FAS-5-85-89-002054 was suspended when herein petitioner BPI
filed a protest on 17 November 1989 and, therefore, the prescriptive period for collection on the Assessment had not yet
lapsed. In the same Decision, however, the Court of Appeals reversed the CTA on the second issue and basically adopted
the position of the respondent BIR Commissioner that the sales of foreign currency by petitioner BPI to the Central Bank
in taxable year 1985 were subject to DST. The Court of Appeals, thus, ordered the reinstatement of Assessment No. FAS-5-
85-89-002054 which required petitioner BPI to pay the amount of P28,020.00 as deficiency DST for taxable year 1985,
inclusive of the compromise penalty.

Comes now petitioner BPI before this Court in this Petition for Review on Certiorari, seeking resolution of the
same two legal issues raised and discussed in the courts below, to reiterate: (1) whether or not the right of respondent BIR
Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed; and (2)
whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were
subject to DST.
I
The efforts of respondent Commissioner to collect on Assessment No. FAS-5-85-89-002054 were already barred
by prescription.

Anent the question of prescription, this Court disagrees in the Decisions of the CTA and the Court of Appeals, and
herein determines the statute of limitations on collection of the deficiency DST in Assessment No. FAS-5-85-89-002054
had already prescribed.

The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section 203 of the
Tax Code of 1977, as amended,
[15]
which provides that

SEC. 203. Period of limitation upon assessment and collection. Except as provided in the succeeding
section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for
the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period
prescribed by law, the three-year period shall be counted from the day the return was filed. For the purposes
of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as
filed on such last day.
[16]


The three-year period of limitations on the assessment and collection of national internal revenue taxes set by
Section 203 of the Tax Code of 1977, as amended, can be affected, adjusted, or suspended, in accordance with the
following provisions of the same Code

SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the case
of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or
a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud, or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.

(b) If before the expiration of the time prescribed in the preceding section for the assessment of the
tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time the tax
may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent
written agreement made before the expiration of the period previously agreed upon.

(c) Any internal revenue tax which has been assessed within the period of limitation above-
prescribed may be collected by distraint or levy or by a proceeding in court within three years following the
assessment of the tax.

(d) Any internal revenue tax which has been assessed within the period agreed upon as provided in
paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the period
agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be
extended by subsequent written agreements made before the expiration of the period previously agreed
upon.

(e) Provided, however, That nothing in the immediately preceding section and paragraph (a) hereof
shall be construed to authorize the examination and investigation or inquiry into any tax returns filed in
accordance with the provisions of any tax amnesty law or decree.
[17]


SEC. 224. Suspension of running of statute. The running of the statute of limitation provided in
Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in
court for collection, in respect of any deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in
court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines.
[18]


As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual filing of the
return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national
internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or
fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of
the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an
assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three
years
[19]
after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy,
and/or court proceeding. The assessment of the tax is deemed made and the three-year period for collection of the
assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the
taxpayer.
[20]


In the present Petition, there is no controversy on the timeliness of the issuance of the Assessment, only on the
prescription of the period to collect the deficiency DST following its Assessment. While Assessment No. FAS-5-85-89-
002054 and its corresponding Assessment Notice were both dated 10 October 1989 and were received by petitioner BPI
on 20 October 1989, there was no showing as to when the said Assessment and Assessment Notice were released, mailed
or sent by the BIR. Still, it can be granted that the latest date the BIR could have released, mailed or sent the Assessment
and Assessment Notice to petitioner BPI was on the same date they were received by the latter, on 20 October 1989.
Counting the three-year prescriptive period, for a total of 1,095 days,
[21]
from 20 October 1989, then the BIR only had until
19 October 1992 within which to collect the assessed deficiency DST.

The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and service of a
Warrant of Distraint and/or Levy on petitioner BPI. Although the Warrant was issued on 15 October 1992, previous to the
expiration of the period for collection on 19 October 1992, the same was served on petitioner BPI only on 23 October
1992.

Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of Distraint and/or
Levy be fully executed so that it can suspend the running of the statute of limitations on the collection of the tax. It is
enough that the proceedings have validly began or commenced and that their execution has not been suspended by reason
of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence establishes that distraint and
levy proceedings are validly begun or commenced by the issuance of the Warrant and service thereof on the taxpayer.
[22]

It is only logical to require that the Warrant of Distraint and/or Levy be, at the very least, served upon the taxpayer in
order to suspend the running of the prescriptive period for collection of an assessed tax, because it may only be upon the
service of the Warrant that the taxpayer is informed of the denial by the BIR of any pending protest of the said taxpayer,
and the resolute intention of the BIR to collect the tax assessed.

If the service of the Warrant of Distraint and/or Levy on petitioner BPI on 23 October 1992 was already beyond
the prescriptive period for collection of the deficiency DST, which had expired on 19 October 1992, then what more the
letter of respondent BIR Commissioner, dated 13 August 1997 and received by the counsel of the petitioner BPI only on 11
September 1997, denying the protest of petitioner BPI and requesting payment of the deficiency DST? Even later and
more unequivocally barred by prescription on collection was the demand made by respondent BIR Commissioner for
payment of the deficiency DST in her Answer to the Petition for Review of petitioner BPI before the CTA, filed on 08
December 1997.
[23]


II

There is no valid ground for the suspension of the running of the prescriptive period for collection of the assessed
DST under the Tax Code of 1977, as amended.

In their Decisions, both the CTA and the Court of Appeals found that the filing by petitioner BPI of a protest letter
suspended the running of the prescriptive period for collecting the assessed DST. This Court, however, takes the opposing
view, and, based on the succeeding discussion, concludes that there is no valid ground for suspending the running of the
prescriptive period for collection of the deficiency DST assessed against petitioner BPI.

A. The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and, thus, shall be
construed liberally in his favor.

Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the
Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable
investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer
of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable
period of time.
[24]
As aptly explained in Republic of the Philippines v. Ablaza
[25]


The law prescribing a limitation of actions for the collection of the income tax is beneficial both to
the Government and to its citizens; to the Government because tax officers would be obliged to act promptly
in the making of assessment, and to citizens because after the lapse of the period of prescription citizens
would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the
books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to
molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under
obligation to always keep their books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way
conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommend the approval of the law.

In order to provide even better protection to the taxpayer against unreasonable investigation, the Tax Code of 1977,
as amended, identifies specifically in Sections 223 and 224
[26]
thereof the circumstances when the prescriptive periods for
assessing and collecting taxes could be suspended or interrupted.

To give effect to the legislative intent, these provisions on the statute of limitations on assessment and collection of
taxes shall be construed and applied liberally in favor of the taxpayer and strictly against the Government.

B. The statute of limitations on assessment and collection of national internal revenue taxes may be waived, subject to certain
conditions, under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, respectively. Petitioner
BPI, however, did not execute any such waiver in the case at bar.
According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the prescriptive periods
for assessment and collection of national internal revenue taxes, respectively, could be waived by agreement, to wit

SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes.
. . .

(b) If before the expiration of the time prescribed in the preceding section for the assessment of the
tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time the tax
may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent
written agreement made before the expiration of the period previously agreed upon.
. . .

(d) Any internal revenue tax which has been assessed within the period agreed upon as provided in
paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the period
agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be
extended by subsequent written agreements made before the expiration of the period previously agreed
upon.
[27]


The agreements so described in the afore-quoted provisions are often referred to as waivers of the statute of
limitations. The waiver of the statute of limitations, whether on assessment or collection, should not be construed as a
waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to
extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not
mean that the taxpayer relinquishes the right to invoke prescription unequivocally.
[28]


A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as
amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of
the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary
prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written
agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued
Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the
proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be
strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess
and collect shall be administratively dealt with.

This Court had consistently ruled in a number of cases that a request for reconsideration or reinvestigation by the
taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax
Code and implementing rules, will not suspend the running thereof.
[29]


In the Petition at bar, petitioner BPI executed no such waiver of the statute of limitations on the collection of the
deficiency DST per Assessment No. FAS-5-85-89-002054. In fact, an internal memorandum of the Chief of the Legislative,
Ruling & Research Division of the BIR to her counterpart in the Collection Enforcement Division, dated 15 October 1992,
expressly noted that, The taxpayer fails to execute a Waiver of the Statute of Limitations extending the period of
collection of the said tax up to December 31, 1993 pending reconsideration of its protest. . .
[30]
Without a valid waiver, the
statute of limitations on collection by the BIR of the deficiency DST could not have been suspended under paragraph (d) of
Section 223 of the Tax Code of 1977, as amended.

C. The protest filed by petitioner BPI did not constitute a request for reinvestigation, granted by the respondent BIR
Commissioner, which could have suspended the running of the statute of limitations on collection of the assessed
deficiency DST under Section 224 of the Tax Code of 1977, as amended.

The Tax Code of 1977, as amended, also recognizes instances when the running of the statute of limitations on the
assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under
Section 224 thereof, which reads

SEC. 224. Suspension of running of statute. The running of the statute of limitation provided in
Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in
court for collection, in respect of any deficiency, shall be suspended for the period during which the
Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in
court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That, if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines.
[31]


Of particular importance to the present case is one of the circumstances enumerated in Section 224 of the Tax Code
of 1977, as amended, wherein the running of the statute of limitations on assessment and collection of taxes is considered
suspended when the taxpayer requests for a reinvestigation which is granted by the Commissioner.

This Court gives credence to the argument of petitioner BPI that there is a distinction between a request for
reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November 1985 by
the Secretary of Finance, upon the recommendation of the BIR Commissioner, governs the procedure for protesting an
assessment and distinguishes between the two types of protest, as follows

PROTEST TO ASSESSMENT

SEC. 6. Protest. The taxpayer may protest administratively an assessment by filing a written request
for reconsideration or reinvestigation. . .
. . .

For the purpose of the protest herein

(a) Request for reconsideration. refers to a plea for a re-evaluation of an assessment on the basis of
existing records without need of additional evidence. It may involve both a question of fact or of law or both.

(b) Request for reinvestigation. refers to a plea for re-evaluation of an assessment on the basis of
newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may
also involve a question of fact or law or both.

With the issuance of RR No. 12-85 on 27 November 1985 providing the above-quoted distinctions between a
request for reconsideration and a request for reinvestigation, the two types of protest can no longer be used
interchangeably and their differences so lightly brushed aside. It bears to emphasize that under Section 224 of the Tax
Code of 1977, as amended, the running of the prescriptive period for collection of taxes can only be suspended by
a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the
reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will
be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of
limitations on collection of the assessed tax, while the latter can not.

The protest letter of petitioner BPI, dated 16 November 1989 and filed with the BIR the next day, on 17 November
1989, did not specifically request for either a reconsideration or reinvestigation. A close review of the contents thereof
would reveal, however, that it protested Assessment No. FAS-5-85-89-002054 based on a question of law, in particular,
whether or not petitioner BPI was liable for DST on its sales of foreign currency to the Central Bank in taxable year 1985.
The same protest letter did not raise any question of fact; neither did it offer to present any new evidence. In its own
letter to petitioner BPI, dated 10 September 1992, the BIR itself referred to the protest of petitioner BPI as a request for
reconsideration.
[32]
These considerations would lead this Court to deduce that the protest letter of petitioner BPI was in
the nature of a request for reconsideration, rather than a request for reinvestigation and, consequently, Section 224 of the
Tax Code of 1977, as amended, on the suspension of the running of the statute of limitations should not apply.

Even if, for the sake of argument, this Court glosses over the distinction between a request for reconsideration
and a request for reinvestigation, and considers the protest of petitioner BPI as a request for reinvestigation, the filing
thereof could not have suspended at once the running of the statute of limitations. Article 224 of the Tax Code of 1977, as
amended, very plainly requires that the request for reinvestigation had been granted by the BIR Commissioner to
suspend the running of the prescriptive periods for assessment and collection.

That the BIR Commissioner must first grant the request for reinvestigation as a requirement for suspension of the
statute of limitations is even supported by existing jurisprudence.

In the case of Republic of the Philippines v. Gancayco,
[33]
taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the
evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all
examined. Considering the given facts, this Court pronounced that

. . .The act of requesting a reinvestigation alone does not suspend the period. The request should
first be granted, in order to effect suspension. (Collector vs. Suyoc Consolidated, supra; also Republic vs.
Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his
evidence, which the latter did one day before. There were no impediments on the part of the Collector to file
the collection case from April 1, 1949. . . .
[34]


In Republic of the Philippines v. Acebedo,
[35]
this Court similarly found that

. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a
warrant of distraint and levy for the full amount of the assessment (Exh. D), but there was no follow-up of this
warrant. Consequently, the request for reinvestigation did not suspend the running of the period for
filing an action for collection.

The burden of proof that the taxpayers request for reinvestigation had been actually granted shall be on
respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the
actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for
reinvestigation.

In Querol v. Collector of Internal Revenue,
[36]
the BIR, after receiving the protest letters of taxpayer Querol, sent a
tax examiner to San Fernando, Pampanga, to conduct the reinvestigation; as a result of which, the original assessment
against taxpayer Querol was revised by permitting him to deduct reasonable depreciation. In another case, Republic of the
Philippines v. Lopez,
[37]
taxpayer Lopez filed a total of four petitions for reconsideration and reinvestigation. The first
petition was denied by the BIR. The second and third petitions were granted by the BIR and after each reinvestigation, the
assessed amount was reduced. The fourth petition was again denied and, thereafter, the BIR filed a collection suit against
taxpayer Lopez. When the taxpayers spouses Sison, inCommissioner of Internal Revenue v. Sison,
[38]
contested the
assessment against them and asked for a reinvestigation, the BIR ordered the reinvestigation resulting in the issuance of
an amended assessment. Lastly, in Republic of the Philippines v. Oquias,
[39]
the BIR granted taxpayer Oquiass request for
reinvestigation and duly notified him of the date when such reinvestigation would be held; only, neither taxpayer Oquias
nor his counsel appeared on the given date.

In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was evidently granted
and actual reinvestigation was conducted by the BIR, which eventually resulted in the issuance of an amended
assessment. On the basis of these facts, this Court ruled in the same cases that the period between the request for
reinvestigation and the revised assessment should be subtracted from the total prescriptive period for the assessment of
the tax; and, once the assessment had been reconsidered at the taxpayers instance, the period for collection should begin
to run from the date of the reconsidered or modified assessment.
[40]


The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by petitioner
BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and (2) even granting that the
protest of petitioner BPI was a request for reinvestigation, there was no showing that it was granted by respondent BIR
Commissioner and that actual reinvestigation had been conducted.

Going back to the administrative records of the present case, it would seem that the BIR, after receiving a copy of
the protest letter of petitioner BPI on 17 November 1989, did not attempt to communicate at all with the latter until 10
September 1992, less than a month before the prescriptive period for collection on Assessment No. FAS-5-85-89-002054
was due to expire. There were internal communications, mostly indorsements of the docket of the case from one BIR
division to another; but these hardly fall within the same sort of acts in the previously discussed cases that satisfactorily
demonstrated the grant of the taxpayers request for reinvestigation. Petitioner BPI, in the meantime, was left in the dark
as to the status of its protest in the absence of any word from the BIR. Besides, in its letter to petitioner BPI, dated 10
September 1992, the BIR unwittingly admitted that it had not yet acted on the protest of the former

This refers to your protest against and/or request for reconsideration of the assessment/s of this
Office against you involving the amount of P28,020.00 under FAS-5-85-89-002054 dated October 23, 1989 as
deficiency documentary stamp tax inclusive of compromise penalty for the year 1985.

In this connection, it is requested that the enclosed waiver of the statute of limitations extending the
period of collection of the said tax/es to December 31, 1993 be executed by you as a condition precedent of
our giving due course to your protest
[41]

When the BIR stated in its letter, dated 10 September 1992, that the waiver of the statute of limitations on collection was a
condition precedent to its giving due course to the request for reconsideration of petitioner BPI, then it was understood
that the grant of such request for reconsideration was being held off until compliance with the given condition. When
petitioner BPI failed to comply with the condition precedent, which was the execution of the waiver, the logical inference
would be that the request was not granted and was not given due course at all.

III
The suspension of the statute of limitations on collection of the assessed deficiency DST from petitioner BPI does
not find support in jurisprudence.

It is the position of respondent BIR Commissioner, affirmed by the CTA and the Court of Appeals, that the three-
year prescriptive period for collecting on Assessment No. FAS-5-85-89-002054 had not yet prescribed, because the said
prescriptive period was suspended, invoking the case of Commissioner of Internal Revenue v. Wyeth Suaco Laboratories,
Inc.
[42]
It was in this case in which this Court ruled that the prescriptive period provided by law to make a collection is
interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment.

Petitioner BPI, on the other hand, is requesting this Court to revisit the Wyeth Suaco case contending that it had
unjustifiably expanded the grounds for suspending the prescriptive period for collection of national internal revenue
taxes.

This Court finds that although there is no compelling reason to abandon its decision in the Wyeth Suaco case, the said
case cannot be applied to the particular facts of the Petition at bar.

A. The only exception to the statute of limitations on collection of taxes, other than those already provided in the Tax Code, was
recognized in the Suyoc case.

As had been previously discussed herein, the statute of limitations on assessment and collection of national
internal revenue taxes may be suspended if the taxpayer executes a valid waiver thereof, as provided in paragraphs (b)
and (d) of Section 223 of the Tax Code of 1977, as amended; and in specific instances enumerated in Section 224 of the
same Code, which include a request for reinvestigation granted by the BIR Commissioner. Outside of these statutory
provisions, however, this Court also recognized one other exception to the statute of limitations on collection of taxes in
the case of Collector of Internal Revenue v. Suyoc Consolidated Mining Co.
[43]


In the said case, the Collector of Internal Revenue issued an assessment against taxpayer Suyoc Consolidated
Mining Co. on 11 February 1947 for deficiency income tax for the taxable year 1941. Taxpayer Suyoc requested for at
least a year within which to pay the amount assessed, but at the same time, reserving its right to question the correctness
of the assessment before actual payment. The Collector granted taxpayer Suyoc an extension of only three months to pay
the assessed tax. When taxpayer Suyoc failed to pay the assessed tax within the extended period, the Collector sent it a
demand letter, dated 28 November 1950. Upon receipt of the demand letter, taxpayer Suyoc asked for a reinvestigation
and reconsideration of the assessment, but the Collector denied the request. Taxpayer Suyoc reiterated its request for
reconsideration on 25 April 1952, which was denied again by the Collector on 06 May 1953. Taxpayer Suyoc then
appealed the denial to the Conference Staff. The Conference Staff heard the appeal from 02 September 1952 to 16 July
1955, and the negotiations resulted in the reduction of the assessment on 26 July 1955. It was the collection of the
reduced assessment that was questioned before this Court for being enforced beyond the prescriptive period.
[44]


In resolving the issue on prescription, this Court ratiocinated thus

It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy
or by proceeding in court within the 5-year period from the filing of the second amended final return due to
the several requests of respondent for extension to which petitioner yielded to give it every opportunity to
prove its claim regarding the correctness of the assessment. Because of such requests, several
reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection
office to consider claims of such nature which, as the record shows, lasted for several months. After inducing
petitioner to delay collection as he in fact did, it is most unfair for respondent to now take advantage of such
desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the
technical ground of prescription.

While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation for in such case
there is need of a written agreement to extend the period between the Collector and the taxpayer, there are
cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has
not previously waived it in writing as when by his repeated requests or positive acts the Government has
been, for good reasons, persuaded to postpone collection to make him feel that the demand was not
unreasonable or that no harassment or injustice is meant by the Government. And when such situation
comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or behavior
should not be countenanced if only to protect the interest of the Government.
[45]


By the principle of estoppel, taxpayer Suyoc was not allowed to raise the defense of prescription against the efforts of the
Government to collect the tax assessed against it. This Court adopted the following principle from American jurisprudence:
He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for
the law says to him in effect this is your own act, and therefore you are not damnified.
[46]


In the Suyoc case, this Court expressly conceded that a mere request for reconsideration or reinvestigation of an
assessment may not suspend the running of the statute of limitations. It affirmed the need for a waiver of the prescriptive
period in order to effect suspension thereof. However, even without such waiver, the taxpayer may be estopped from raising
the defense of prescription because by his repeated requests or positive acts, he had induced Government authorities to delay
collection of the assessed tax.

Based on the foregoing, petitioner BPI contends that the declaration made in the later case of Wyeth Suaco, that the
statute of limitations on collection is suspended once the taxpayer files a request for reconsideration or reinvestigation, runs
counter to the ruling made by this Court in the Suyoc case.

B. Although this Court is not compelled to abandon its decision in the Wyeth Suaco case, it finds that Wyeth Suaco is not
applicable to the Petition at bar because of the distinct facts involved herein.

In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit withholding taxes on royalties and
dividend declarations, as well as, for deficiency sales tax. The BIR issued two assessments, dated 16 December 1974 and 17
December 1974, both received by taxpayer Wyeth Suaco on 19 December 1974. Taxpayer Wyeth Suaco, through its tax
consultant, SGV & Co., sent to the BIR two letters, dated 17 January 1975 and 08 February 1975, protesting the assessments
and requesting their cancellation or withdrawal on the ground that said assessments lacked factual or legal basis. On 12
September 1975, the BIR Commissioner advised taxpayer Wyeth Suaco to avail itself of the compromise settlement being
offered under Letter of Instruction No. 308. Taxpayer Wyeth Suaco manifested its conformity to paying a compromise
amount, but subject to certain conditions; though, apparently, the said compromise amount was never paid. On 10 December
1979, the BIR Commissioner rendered a decision reducing the assessment for deficiency withholding tax against taxpayer
Wyeth Suaco, but maintaining the assessment for deficiency sales tax. It was at this point when taxpayer Wyeth Suaco brought
its case before the CTA to enjoin the BIR from enforcing the assessments by reason of prescription. Although the CTA decided
in favor of taxpayer Wyeth Suaco, it was reversed by this Court when the case was brought before it on appeal. According to
the decision of this Court

Settled is the rule that the prescriptive period provided by law to make a collection by distraint or
levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration
of the assessment. . .
. . .

Although the protest letters prepared by SGV & Co. in behalf of private respondent did not
categorically state or use the words reinvestigation and reconsideration, the same are to be treated as
letters of reinvestigation and reconsideration

These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect
the deficiency taxes. The Bureau of Internal Revenue, after having reviewed the records of Wyeth Suaco,
in accordance with its request for reinvestigation, rendered a final assessment It was only upon receipt
by Wyeth Suaco of this final assessment that the five-year prescriptive period started to run again.
[47]


The foremost criticism of petitioner BPI of the Wyeth Suaco decision is directed at the statement made therein
that, settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or by a
proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment.
[48]

It would seem that both petitioner BPI and respondent BIR Commissioner, as well as, the CTA and Court of Appeals, take
the statement to mean that the filing alone of the request for reconsideration or reinvestigation can already interrupt or
suspend the running of the prescriptive period on collection. This Court therefore takes this opportunity to clarify and
qualify this statement made in the Wyeth Suaco case. While it is true that, by itself, such statement would appear to be a
generalization of the exceptions to the statute of limitations on collection, it is best interpreted in consideration of the
particular facts of theWyeth Suaco case and previous jurisprudence.
The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are substantial differences in the factual
backgrounds of the two cases. The Suyoc case refers to a situation where there were repeated requests or positive acts
performed by the taxpayer that convinced the BIR to delay collection of the assessed tax. This Court pronounced therein that
the repeated requests or positive acts of the taxpayer prevented or estopped it from setting up the defense of prescription
against the Government when the latter attempted to collect the assessed tax. In theWyeth Suaco case, taxpayer Wyeth Suaco
filed a request for reinvestigation, which was apparently granted by the BIR and, consequently, the prescriptive period was
indeed suspended as provided under Section 224 of the Tax Code of 1977, as amended.
[49]


To reiterate, Section 224 of the Tax Code of 1977, as amended, identifies specific circumstances when the statute
of limitations on assessment and collection may be interrupted or suspended, among which is a request for
reinvestigation that is granted by the BIR Commissioner. The act of filing a request for reinvestigation alone does not
suspend the period; such request must be granted.
[50]
The grant need not be express, but may be implied from the acts of
the BIR Commissioner or authorized BIR officials in response to the request for reinvestigation.
[51]


This Court found in the Wyeth Suaco case that the BIR actually conducted a reinvestigation, in accordance with the
request of the taxpayer Wyeth Suaco, which resulted in the reduction of the assessment originally issued against it.
Taxpayer Wyeth Suaco was also aware that its request for reinvestigation was granted, as written by its Finance Manager
in a letter dated 01 July 1975, addressed to the Chief of the Tax Accounts Division, wherein he admitted that, [a]s we
understand, the matter is now undergoing review and consideration by your Manufacturing Audit Division The statute
of limitations on collection, then, started to run only upon the issuance and release of the reduced assessment.

The Wyeth Suaco case, therefore, is correct in declaring that the prescriptive period for collection is interrupted or
suspended when the taxpayer files a request for reinvestigation, provided that, as clarified and qualified herein, such
request is granted by the BIR Commissioner.

Thus, this Court finds no compelling reason to abandon its decision in the Wyeth Suaco case. It also now rules that the
said case is not applicable to the Petition at bar because of the distinct facts involved herein. As already heretofore determined
by this Court, the protest filed by petitioner BPI was a request for reconsideration, which merely required a review of existing
evidence and the legal basis for the assessment. Respondent BIR Commissioner did not require, neither did petitioner BPI
offer, additional evidence on the matter. After petitioner BPI filed its request for reconsideration, there was no other
communication between it and respondent BIR Commissioner or any of the authorized representatives of the latter. There
was no showing that petitioner BPI was informed or aware that its request for reconsideration was granted or acted upon by
the BIR.

IV
Conclusion

To summarize all the foregoing discussion, this Court lays down the following rules on the exceptions to the statute of
limitations on collection.

The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in
accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and the existence of the circumstances
enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner.

Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no
request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be
prevented from setting up the defense of prescription of the statute of limitations on collection when, by his own repeated
requests or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer
feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government, as laid down by this
Court in the Suyoc case.

Applying the given rules to the present Petition, this Court finds that
(a) The statute of limitations for collection of the deficiency DST in Assessment No. FAS-5-85-89-002054, issued
against petitioner BPI, had already expired; and
(b) None of the conditions and requirements for exception from the statute of limitations on collection exists herein:
Petitioner BPI did not execute any waiver of the prescriptive period on collection as mandated by paragraph (d) of Section 223
of the Tax Code of 1977, as amended; the protest filed by petitioner BPI was a request for reconsideration, not a request for
reinvestigation that was granted by respondent BIR Commissioner which could have suspended the prescriptive period for
collection under Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than filing a request for
reconsideration of Assessment No. FAS-5-85-89-002054, did not make repeated requests or performed positive acts that
could have persuaded the respondent BIR Commissioner to delay collection, and that would have prevented or estopped
petitioner BPI from setting up the defense of prescription against collection of the tax assessed, as required in the Suyoc case.

This is a simple case wherein respondent BIR Commissioner and other BIR officials failed to act promptly in resolving
and denying the request for reconsideration filed by petitioner BPI and in enforcing collection on the assessment. They
presented no reason or explanation as to why it took them almost eight years to address the protest of petitioner BPI. The
statute on limitations imposed by the Tax Code precisely intends to protect the taxpayer from such prolonged and
unreasonable assessment and investigation by the BIR.

Considering that the right of the respondent BIR Commissioner to collect from petitioner BPI the deficiency DST in
Assessment No. FAS-5-85-89-002054 had already prescribed, then, there is no more need for this Court to make a
determination on the validity and correctness of the said Assessment for the latter would only be unenforceable.

WHEREFORE, based on the foregoing, the instant Petition is GRANTED. The Decision of the Court of Appeals in CA-G.R.
SP No. 51271, dated 11 August 1999, which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner BPI to pay
the amount of P28,020.00 as deficiency documentary stamp tax for the taxable year 1985, inclusive of the compromise
penalty, is REVERSED and SET ASIDE. Assessment No. FAS-5-85-89-002054 is hereby ordered CANCELED.

SO ORDERED.

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
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.
10

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

Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan could not authenticate the machine
copies of the import entries as well, since the original copies of the said entries filed with the Bureau of Customs had
apparently been eaten by termites. However, he issued a certification that the following enumerated entries were filed by the
respondent which were processed and released from the Port of Manila after payment of duties and taxes, to wit:
Hantex Trading Co., Inc.
Entry No. Date Released Entry No. Date Released
3903 1/29/87 22869 4/8/87
4414 1/20/87 19441 3/31/87
10683 2/17/87 24189 4/21/87
12611 2/24/87 26431 4/20/87
12989 2/26/87 45478 7/3/87
17050 3/13/87 26796 4/23/87
17169 3/13/87 28827 4/30/87
18089 3/16/87 31617 5/14/87
19439 4/1/87 39068 6/5/87
21189 4/3/87 42581 6/21/87
43451 6/29/87 42793 6/23/87
42795 6/23/87 45477 7/3/87
35582 not received 85830 11/13/87
45691 7/3/87 86650 not received
46187 7/8/87 87647 11/18/87
46427 7/3/87 88829 11/23/87
57669 8/12/87 92293 12/3/87
62471 8/28/87 93292 12/7/87
63187 9/2/87 96357 12/16/87
66859 9/15/87 96822 12/15/87
67890 9/17/87 98823 not received
68115 9/15/87 99428 12/28/87
69974 9/24/87 99429 12/28/87
72213 10/2/87 99441 12/28/87
77688 10/16/87 101406 1/5/87
84253 11/10/87 101407 1/8/87
85534 11/11/87 3118 1-19-87
12

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.
13

On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to the BIR Assistant Commissioner for
Special Operations Service, directing the latter to prepare a conference letter advising the respondent of its deficiency taxes.
14

Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers Saturnino D. Torres and Wilson Filamor
conducted an investigation on the 1987 importations of the respondent, in the light of the records elevated by the EIIB to the
BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain the 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.
15

Based on the said report, the Acting Chief of the Special Investigation Branch wrote the respondent and invited its
representative to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and to present
whatever documentary and other evidence to refute the same.
16
Appended to the letter was a computation of the deficiency
income and sales tax due from the respondent, inclusive of increments:
B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00
50% Surcharge C1 x 50% 2,794,630.50
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
Total Due 17,783,395.03
Less: Advanced Sales Taxes Paid 11,636,352.00
Deficiency Sales Tax 6,147,043.03
50% Surcharge C2 x 50% 3,073,521.52
Interest to 2/28/91 5,532,338.73
Total 14,752,903.28
17

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.
18

Invoking Section 235
19
of the 1977 National Internal Revenue Code (NIRC), as amended, Chua requested that the inquiry be
set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner for Collection Jaime M. Maza, sent a
Letter dated April 15, 1991 to the respondent demanding payment of its deficiency income tax of P13,414,226.40 and
deficiency sales tax of P14,752,903.25, inclusive of surcharge and interest.
20
Appended thereto were the Assessment Notices of
Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.
21

On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR sent a letter to the respondent
demanding payment of its tax liability due for 1987 within ten (10) days from notice, on pain of the collection tax due via a
warrant of distraint and levy and/or judicial action.
22
The Warrant of Distraint and/or Levy
23
was actually served on the
respondent on January 21, 1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue protesting the
assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF
OUR RECORDS WAS EVER MADE BY THE EIIB WHICH RECOMMENDED ITS ISSUANCE.
24

II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR 1987 AMOUNTED TOP105,716,527.00
AS CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO
CONSIDER OUR REAL PURCHASES OF P45,538,694.57.
25

III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS AND UNFOUNDED CONSIDERING THAT
WE HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR BUSINESS.
26

In view of the impasse, administrative hearings were conducted on the 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.
27

The respondent wrote the BIR Commissioner on July 12, 1993 questioning the assessment on the ground that the EIIB
representative failed to present the original, or authenticated, or duly certified copies of the Consumption and Import Entry
Accounts, or excerpts thereof if the original copies were not readily available; or, if the originals were in the official custody of
a public officer, certified copies thereof as provided for in Section 12, Chapter 3, Book VII, Administrative Procedure,
Administrative Order of 1987. It stated that the only copies of the Consumption Entries submitted to the Hearing Officer were
mere machine copies furnished by an informer of the EIIB. It asserted that the letters of Tomas and Danganan were unreliable
because of the following:
In the said letters, the two collection officers merely submitted a listing of alleged import entry numbers and dates
released of alleged importations by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified that the
corresponding duties and taxes were paid after being processed in their offices. In said letters, no amounts of the
landed costs and advance sales tax and duties were stated, and no particulars of the duties and taxes paid per import
entry document was presented.
The contents of the two letters failed to indicate the particulars of the importations per entry number, and the said
letters do not constitute as evidence of the amounts of importations of Hantex Trading Co., Inc. in 1987.
28

The respondent cited the following findings of the Hearing Officer:
[T]hat the import entry documents do not constitute evidence only indicate that the tax assessments in question
have no factual basis, and must, at this point in time, be withdrawn and cancelled. Any new findings by the IIPO
representative who attended the hearing could not be used as evidence in this hearing, because all the issues on the
tax assessments in question have already been raised by the herein taxpayer.
29

The respondent requested anew that the income tax deficiency assessment and the sales tax deficiency assessment be set
aside for lack of factual and legal basis.
The BIR Commissioner
30
wrote the respondent on December 10, 1993, denying its letter-request for the dismissal of the
assessments.
31
The BIR Commissioner admitted, in the said letter, the possibility that the figures appearing in the photocopies
of the Consumption Entries had been tampered with. She averred, however, that she was not proscribed from relying on other
admissible evidence, namely, the Letters of Torres and Filamor dated August 7 and 22, 1990 on their investigation of the
respondents tax liability. The Commissioner emphasized that her decision was final.
32

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.
33

The Commissioner did not adduce in evidence the original or certified true copies of the 1987 Consumption Entries on file
with the Commission on Audit. Instead, she offered in evidence as proof of the contents thereof, the photocopies of the
Consumption Entries which the respondent objected to for being inadmissible in evidence.
34
She also failed to present any
witness to prove the correct amount of tax due from it. Nevertheless, the CTA provisionally admitted the said documents in
evidence, subject to its final evaluation of their relevancy and probative weight to the issues involved.
35

On December 11, 1997, the CTA rendered a decision, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the herein petition. Petitioner is
hereby ORDERED TO PAY the respondent Commissioner of Internal Revenue its deficiency income and sales taxes for
the year 1987 in the amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency interest per
annum on both deficiency taxes from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax
Code, with costs against the petitioner.
SO ORDERED.
36

The CTA ruled that the respondent was burdened to prove not only that the assessment was erroneous, but also to adduce the
correct taxes to be paid by it. The CTA declared that the respondent failed to prove the correct amount of taxes due to the BIR.
It also ruled that the respondent was burdened to adduce in evidence a certification from the Bureau of Customs that the
Consumption Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the CTA. The dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 decision of the
CTA in CTA Case No. 5162 affirming the 1987 deficiency income and sales tax assessments and the increments
thereof, issued by the BIR is hereby REVERSED. No costs.
37

The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since
the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by
the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators.
38
The CA also noted
that the public officer charged with the custody of the import entries was never presented in court to lend credence to the
alleged loss of the originals.
39
The CA pointed out that an import entry is a public document which falls within the provisions of
Section 19, Rule 132 of the Rules of Court, and to be admissible for any legal purpose, Section 24, Rule 132 of the Rules of
Court should apply.
40
Citing the ruling of this Court in Collector of Internal Revenue v. Benipayo,
41
the CA ruled that the
assessments were unlawful because they were based on hearsay evidence. The CA also ruled that the respondent was
deprived of its right to due process of law.
The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent provisions
of the Rules of Court in the matter of the admissibility of public documents, considering that substantive rules of evidence
should not be disregarded. It also ruled that the certifications made by the two Customs Collection Chiefs under the guise of
supporting the 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.
42

The Present Petition
The Commissioner of Internal Revenue, the petitioner herein, filed the present petition for review under Rule 45 of the Rules
of Court for the reversal of the decision of the CA and for the reinstatement of the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues for resolution are the following: (a) whether the petition at
bench is proper and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991 final
assessment of the petitioner against the respondent for deficiency income tax and sales tax for the 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.
43

We find and so rule that the petition is sufficient in form. A verification and certification against forum shopping signed by the
Regional Director constitutes sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of Court.
Under Section 10 of the NIRC of 1997,
44
the Regional Director has the power to administer and enforce internal revenue laws,
rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees. Such power is
broad enough to vest the Revenue Regional Director with the authority to sign the verification and certification against forum
shopping in behalf of the Commissioner of Internal Revenue. There is no other person in a better position to know the
collection cases filed under his jurisdiction than the Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-83,
45
the Regional Director is authorized to sign all pleadings filed in
connection with cases referred to the Revenue Regions by the National Office which, otherwise, require the signature of the
petitioner.
We do not agree with the contention of the respondent that a motion for reconsideration ought to have been filed before the
filing of the instant petition. A motion for reconsideration of the decision of the CA is not a condition sine qua non for the filing
of a petition for review under Rule 45. As we held in Almora v. Court of Appeals:
46

Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:
A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with the Supreme Court a
petition for certiorari within fifteen (15) days from notice of judgment, or of the denial of his motion for
reconsideration filed in due time. (Emphasis supplied)
The conjunctive "or" clearly indicates that the 15-day reglementary period for the filing of a petition for certiorari
under Rule 45 commences either from notice of the questioned judgment or from notice of denial of the appellants
motion for reconsideration. A prior motion for reconsideration is not indispensable for a petition for review on
certiorari under Rule 45 to prosper.
47

While Rule 45 of the Rules of Court provides that only questions of law may be raised by the petitioner and resolved by the
Court, under exceptional circumstances, the Court may take cognizance thereof and resolve questions of fact. In this case, the
findings and conclusion of the CA are inconsistent with those of the CTA, not to mention those of the Commissioner of Internal
Revenue. The issues raised in this case relate to the propriety and the correctness of the tax assessments made by the
petitioner against the respondent, as well as the propriety of the application of Section 16, paragraph (b) of the 1977 NIRC, as
amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in relation to Section 3, Rule 132 of the Rules of
Evidence. There is also an imperative need for the Court to resolve the threshold factual issues to give justice to the parties,
and to determine whether the CA capriciously ignored, misunderstood or misinterpreted cogent facts and circumstances
which, if considered, would change the outcome of the case.
On the second issue, the petitioner asserts that since the respondent refused to cooperate and show its 1987 books of account
and other accounting records, it was proper for her to resort to the best evidence obtainable the photocopies of the import
entries in the Bureau of Customs and the respondents financial statement filed with the SEC.
48
The petitioner maintains that
these import entries were admissible as secondary evidence under the best evidence obtainable rule, since they were duly
authenticated by the Bureau of Customs officials who processed the documents and released the cargoes after payment of the
duties and taxes due.
49
Further, the petitioner points out that under the best evidence obtainable rule, the tax return is not
important in computing the tax deficiency.
50

The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977 NIRC, as amended, legally cannot be
equated to the best evidence rule under the Rules of Court; nor can the best evidence rule, being procedural law, be made
strictly operative in the interpretation of the best evidence obtainable rule which is substantive in character.
51
The petitioner
posits that the CTA is not strictly bound by technical rules of evidence, the reason being that the quantum of evidence required
in the said court is merely substantial evidence.
52

Finally, the petitioner avers that the respondent has the burden of proof to show the correct assessments; otherwise, the
presumption in favor of the correctness of the assessments made by it stands.
53
Since the respondent was allowed to explain
its side, there was no violation of due process.
54

The respondent, for its part, maintains that the resort to the best evidence obtainable method was illegal. In the first place, the
respondent argues, the EIIB agents are not duly authorized to undertake examination of the 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.
55
Secondly, when a taxpayer
fails to submit its tax records upon demand by the BIR officer, the remedy is not to assess him and resort to the best evidence
obtainable rule, but to punish the taxpayer according to the provisions of the Tax Code.
56

In any case, the respondent argues that the photocopies of import entries cannot be used in making the assessment because
they were not properly authenticated, pursuant to the provisions of Sections 24
57
and 25
58
of Rule 132 of the Rules of Court. It
avers that while the CTA is not bound by the technical rules of evidence, it is bound by substantial rules.
59
The respondent
points out that the petitioner did not even secure a certification of the fact of loss of the original documents from the custodian
of the import entries. It simply relied on the report of the EIIB agents that the import entry documents were no longer
available because they were eaten by termites. The respondent posits that the two collectors of the Bureau of Customs never
authenticated the xerox copies of the import entries; instead, they only issued certifications stating therein the import entry
numbers which were processed by their office and the date the same were released.
60

The respondent argues that it was not necessary for it to show the correct assessment, considering that it is questioning the
assessments not only because they are erroneous, but because they were issued without factual basis and in patent violation
of the assessment procedures laid down in the NIRC of 1977, as amended.
61
It is also pointed out that the petitioner failed to
use the tax returns filed by the respondent in computing the deficiency taxes which is contrary to law;
62
as such, the deficiency
assessments constituted deprivation of property without due process of law.
63

Central to the second issue is Section 16 of the NIRC of 1977, as amended,
64
which provides that the Commissioner of Internal
Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement.
Among such powers are those provided in paragraph (b) thereof, which we quote:
(b) Failure to submit required returns, statements, reports and other documents. When a report required by law as
a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner
shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or willfully or
otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his
own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.
65

This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of
assessing the proper tax against a taxpayer, to make a return in case of a 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;
66

The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of
the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line
of business, including their gross profit and net profit sales.
67
Such evidence also includes data, record, paper, document or any
evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject
taxpayer received any income; and record, data, document and information secured from government offices or agencies, such
as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or
condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law
is to enable the BIR to get at the 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.
68
In this era of developing information-storage
technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR
scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,
69
the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the
Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable
income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the
return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine
and subpoena, if necessary, traders and brokers accounts and books and the 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,
70
the U.S. appellate court
declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to
other sources of information to establish income made by the taxpayer during the years in question.
71

We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence, such as the
testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of
the investigation, hence, inadmissible in a regular proceeding in the regular courts.
72
Moreover, the general rule is that
administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which
cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or
disregard such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of
records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot
anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries
have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of
paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United
States v. Davey,
73
the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a 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.
74

In Collector of Internal Revenue v. Benipayo,
75
the Court ruled that the assessment must be based on actual facts. The rule
assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the informer of the EIIB
were furnished by yet another informer. While the EIIB tried to secure certified copies of the said entries from the Bureau of
Customs, it was unable to do so because the said entries were allegedly eaten by termites. The Court can only surmise why the
EIIB or the BIR, for that matter, failed to secure certified copies of the said entries from the Tariff and Customs Commission or
from the National Statistics Office which also had copies thereof. It bears stressing that under Section 1306 of the Tariff and
Customs Code, the Consumption Entries shall be the required number of copies as prescribed by regulations.
76
The
Consumption Entry is accomplished in sextuplicate copies and quadruplicate copies in other places. In Manila, the six copies
are distributed to the Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the Terminal
Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR personnel ignored the copy of the
Consumption Entries filed with the BIR and relied on the photocopies supplied by the informer of the EIIB who secured the
same from another informer. The BIR, in preparing and issuing its preliminary and final assessments against the respondent,
even ignored the records on the investigation made by the District Revenue officers on the 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.
77

In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the
Consumption Entries in fixing the tax deficiency assessments against the respondent.
The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The
petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the
taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to
proof.
78
However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.
79

We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct
and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however,
that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, aprima facie case
of liability on the part of the taxpayer is made.
80
If a taxpayer files a petition for review in the CTA and assails the assessment,
the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR
personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the
normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the presumption of administrative regularity;
the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-
keeping requirements of the NIRC.
81

However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without
foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any
foundation character, the determination of the tax due is without rational basis.
82
In such a situation, the U.S. Court of Appeals
ruled
83
that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the determination by
the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence.
The issue that now comes to fore is whether the tax deficiency assessment against the respondent based on the certified
copies of the Profit and Loss Statement submitted by the respondent to the SEC in 1987 and 1988, as well as certifications of
Tomas and Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed to overcome the prima facie
correctness of the tax deficiency assessment issued by the petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed to rebut the validity or correctness of the
aforementioned tax assessments. It is incongruous for petitioner to prove its cause by simply drawing an inference
unfavorable to the respondent by attacking the source documents (Consumption Entries) which were the bases of the
assessment and which were certified by the Chiefs of the Collection Division, Manila International Container Port and
the Port of Manila, as having been processed and released in the name of the petitioner after payment of duties and
taxes and the duly certified copies of Financial Statements secured from the Securities and Exchange Commission. Any
such inference cannot operate to relieve petitioner from bearing its burden of proof and this Court has no warrant of
absolution. The Court should have been persuaded to grant the reliefs sought by the petitioner should it have
presented any evidence of relevance and competence required, like that of a certification from the Bureau of Customs
or from any other agencies, attesting to the fact that those consumption entries did not really belong to them.
The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that
the Commissioner of Internal Revenue is wrong but the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise,
the presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The burden of
proving the illegality of the assessment lies upon the petitioner alleging it to be so. In the case at bar, petitioner
miserably failed to discharge this duty.
84

We are not in full accord with the findings and ratiocination of the CTA. Based on the letter of the petitioner to the respondent
dated December 10, 1993, the tax deficiency assessment in question was based on (a) the findings of the agents of the EIIB
which was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and Loss Statements of the respondent
for 1987 and 1988; and (c) the certifications of Tomas and Danganan dated August 7, 1990 and August 22, 1990:
In reply, please be informed that after a thorough evaluation of the attending facts, as well as the laws and
jurisprudence involved, this Office holds that you are liable to the assessed deficiency taxes. The conclusion was
arrived at based on the findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own
examiners who have painstakingly examined the records furnished by the Bureau of Customs and the Securities &
Exchange Commission (SEC). The examination conducted disclosed that while your actual sales for 1987 amounted
to P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss Statements, the sum
of P47,698,569.83 only. The difference, therefore, of P63,032,989.17 constitutes as undeclared or unrecorded sales
which must be subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of underdeclared importations were lifted
from uncertified or unauthenticated xerox copies of consumption entries which are not admissible in evidence. On
this issue, it must be considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the
Collection Division of the Manila International Container Port and Port of Manila, respectively, certified that the
enumerated consumption entries were filed, processed and released from the port after payment of duties and taxes.
It is noted that the certification does not touch on the genuineness, authenticity and correctness of the consumption
entries which are all xerox copies, wherein the figures therein appearing may have been tampered which may render
said documents inadmissible in evidence, but for tax purposes, it has been held that the Commissioner is not required
to make his determination (assessment) on the basis of evidence legally admissible in a formal proceeding in Court
(Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in part upon
admissible evidence (Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977);
and Rosano v. Commissioner, 46 TC 681 (1966). In the case also ofWeimerskirch v. Commissioner (1977), the
assessment was given due course in the presence of admissible evidence as to how the Commissioner arrived at his
determination, although there was no admissible evidence with respect to the substantial issue of whether the
taxpayer had unreported or undeclared income from narcotics sale.
85

Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents for the actual cost of importation of the
respondent are the machine copies of the Consumption Entries from the informer which the IIPO claimed to have been
certified by Tomas and Danganan:
The source documents for the total actual cost of importations, abovementioned, were the different copies of
Consumption Entries, Series of 1987, filed by subject with the Bureau of Customs, marked Annexes "F-1" to "F-68."
The total cost of importations is the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed
entries. These entries were duly authenticated as having been processed and released, after payment of the duties and
taxes due thereon, by the Chief, Collection Division, Manila International Container Port, dated August 7, 1990,
"Annex-G," and the Port of Manila, dated August 22, 1990, "Annex-H." So, it was established that subject-importations,
mostly resins, really belong to HANTEX TRADING CO., INC.
86

It also appears on the worksheet of the IIPO, as culled from the photocopies of the Consumption Entries from its informer, that
the total cost of the respondents importation for 1987 was P105,761,527.00. Per the report of Torres and Filamor, they also
relied on the photocopies of the said Consumption Entries:
The importations made by taxpayer verified by us from the records of the Bureau of Customs and xerox copies of
which are hereto attached shows the big volume of importations made and not declared in the income tax return filed
by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud exists in the herein transaction of the
taxpayer, as a consequence of which, said transaction has not been possibly entered into the books of accounts of the
subject taxpayer.
87

In fine, the petitioner based her finding that the 1987 importation of the respondent was underdeclared in the amount
ofP105,761,527.00 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,
88
or even the amount of P110,079,491.61 arrived at by Deputy Commissioner Deoferio, Jr.
89
As gleaned from the
certifications of Tomas and Danganan, the goods covered by the Consumption Entries were released by the Bureau of Customs,
from which it can be presumed that the respondent must have paid the taxes due on the said importation. The petitioner did
not adduce any documentary evidence to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the amount
of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the
presumption that she and the other employees of the BIR had regularly performed their duties. As the Court held inCollector of
Internal Revenue v. Benipayo,
90
in order to stand judicial scrutiny, the assessment must be based on facts. The presumption of
the correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly examined the 1987 books of accounts
of the respondent showing its importations, and found that the latter had minimal business tax liability. In this case, the
presumption that the District Revenue officers performed their duties in accordance with law shall apply. There is no evidence
on record that the said officers neglected to perform their duties as mandated by law; neither is there evidencealiunde 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 inHarbin v. Commissioner of
Internal Revenue,
91
taxation is not only practical; it is vital. The obligation of good faith and fair dealing in carrying out its
provision is reciprocal and, as the government should never be over-reaching or tyrannical, neither should a taxpayer be
permitted to escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is SET ASIDE. The records
are REMANDED to the Court of Tax Appeals for further proceedings, conformably with the decision of this Court. No costs.
SO ORDERED.