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G.R. No.

L-31364 March 30, 1979


MISAEL P. VERA, as Commissioner of Internal Revenue, and
JAIME ARANETA, as Regional Director, Revenue Region No. 14,
Bureau
of
Internal
Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance
of Negros Occidental, Branch V, and FRANCIS A. TONGOY,
Administrator
of
the
Estate
of
the
late
LUIS
D.
TONGOY respondents.
DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of Negros
Occidental, Branch V in Special Proceedings No. 7794, entitled:
"Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969
dismissing the Motion for Allowance of Claim and for an Order of
Payment of Taxes by the Government of the Republic of the
Philippines against the Estate of the late Luis D. Tongoy, for deficiency
income taxes for the years 1963 and 1964 of the decedent in the
total amount of P3,254.80, inclusive 5% surcharge, 1% monthly
interest and compromise penalties, and the second, dated October 7,
1969, denying the Motion for reconsideration of the Order of
dismissal.
The Motion for allowance of claim and for payment of taxes dated
May 28, 1969 was filed on June 3, 1969 in the abovementioned
special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The
claim represents the indebtedness to the Government of the late Luis
D. Tongoy for deficiency income taxes in the total sum of P3,254.80
as above stated, covered by Assessment Notices Nos. 11-50-29-111061-21-63 and 11-50-291-1 10875-64, to which motion was
attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The
Administrator opposed the motion solely on the ground that the claim
was barred under Section 5, Rule 86 of the Rules of Court (par. 4,
Opposition to Motion for Allowance of Claim, pp. 23-24, Rollo). Finding
the opposition well-founded, the respondent Judge, Jose F. Fernandez,
dismissed the motion for allowance of claim filed by herein petitioner,
Regional Director of the Bureau of Internal Revenue, in an order dated
July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18,
1969, a motion for reconsideration was filed, of the order of July 29,
1969, but was denied in an Order dated October 7, 1969.
Hence, this appeal on certiorari, petitioner assigning the following
errors:
1. The lower court erred in holding that the claim for
taxes by the government against the estate of Luis
D. Tongoy was filed beyond the period provided in
Section 2, Rule 86 of the Rules of Court.
2. The lower court erred in holding that the claim for
taxes of the government was already barred under
Section 5, Rule 86 of the Rules of Court.
which raise the sole issue of whether or not the statute of non-claims
Section 5, Rule 86 of the New Rule of Court, bars claim of the
government for unpaid taxes, still within the period of limitation
prescribed in Section 331 and 332 of the National Internal Revenue
Code.
Section 5, Rule 86, as invoked by the respondent Administrator in hid
Oppositions to the Motion for Allowance of Claim, etc. of the
petitioners reads as follows:
All claims for money against the decedent, arising
from contracts, express or implied, whether the
same be due, not due, or contingent, all claims for
funeral expenses and expenses for the last sickness
of the decedent, and judgment for money against
the decedent, must be filed within the time limited
in they notice; otherwise they are barred forever,
except that they may be set forth as counter claims
in any action that the executor or administrator
may bring against the claimants. Where the
executor or administrator commence an action, or
prosecutes an action already commenced by the
deceased in his lifetime, the debtor may set forth
may answer the claims he has against the
decedents,
instead
of
presenting
them
independently to the court has herein provided, and
mutual claims may be set off against each other in
such action; and in final judgment is rendered in
favored of the decedent, the amount to determined
shall be considered the true balance against the
estate, as though the claim has been presented
directly before the court in the administration

1Tax 1/Cases 1st set

proceedings. Claims not yet due, or contingent may


be approved at their present value.
A perusal of the aforequoted provisions shows that it makes no
mention of claims for monetary obligation of the decedent created by
law, such as taxes which is entirely of different character from the
claims expressly enumerated therein, such as: "all claims for money
against the decedent arising from contract, express or implied,
whether the same be due, not due or contingent, all claim for funeral
expenses and expenses for the last sickness of the decedent and
judgment for money against the decedent." Under the familiar rule of
statutory construction of expressio unius est exclusio alterius, the
mention of one thing implies the exclusion of another thing not
mentioned. Thus, if a statute enumerates the things upon which it is
to operate, everything else must necessarily, and by implication be
excluded from its operation and effect (Crawford, Statutory
Construction, pp. 334-335).
In the case of Commissioner of Internal Revenue vs. Ilagan Electric &
Ice Plant, et al., G.R. No. L-23081, December 30, 1969, it was held
that the assessment, collection and recovery of taxes, as well as the
matter of prescription thereof are governed by the provisions of the
National Internal revenue Code, particularly Sections 331 and 332
thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng
and Dee Jue vs. Court of Tax Appeals & Collector of Internal Revenue,
G.R. No. L-10681, March 29, 1958). Even without being specifically
mentioned, the provisions of Section 2 of Rule 86 of the Rules of Court
may reasonably be presumed to have been also in the mind of the
Court as not affecting the aforecited Section of the National Internal
Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even
more pointedly held that "taxes assessed against the estate of a
deceased person ... need not be submitted to the committee on
claims in the ordinary course of administration. In the exercise of its
control over the administrator, the court may direct the payment of
such taxes upon motion showing that the taxes have been assessed
against the estate." The abolition of the Committee on Claims does
not alter the basic ruling laid down giving exception to the claim for
taxes from being filed as the other claims mentioned in the Rule
should be filed before the Court. Claims for taxes may be collected
even after the distribution of the decedent's estate among his heirs
who shall be liable therefor in proportion of their share in the
inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil.
13).
The reason for the more liberal treatment of claims for taxes against
a decedent's estate in the form of exception from the application of
the statute of non-claims, is not hard to find. Taxes are the lifeblood of
the Government and their prompt and certain availability are
imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R.
No. L-22734, September 15, 1967, 21 SCRA 105). Upon taxation
depends the Government ability to serve the people for whose benefit
taxes are collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes should not
be allowed to bring harm or detriment to the people, in the same
manner as private persons may be made to suffer individually on
account of his own negligence, the presumption being that they take
good care of their personal affairs. This should not hold true to
government officials with respect to matters not of their own personal
concern. This is the philosophy behind the government's exception,
as a general rule, from the operation of the principle of estoppel.
(Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177;
Manila Lodge No. 761, Benevolent and Protective Order of the Elks
Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162;
Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70
SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66 SCRA 553;
Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs.
Philippine Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine
Long Distance Telephone Company, L-18841, January 27, 1969, 26
SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26,
1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of Internal
Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown,
taxes may be collected even after the distribution of the estate of the
decedent among his heirs (Government of the Philippines vs.
Pamintuan, supra; Pineda vs. CFI of Tayabas,supra Clara Diluangco
Palanca vs. Commissioner of Internal Revenue, G. R. No. L-16661,
January 31, 1962).
Furthermore, as held in Commissioner of Internal Revenue vs. Pineda,
supra, citing the last paragraph of Section 315 of the Tax Code
payment of income tax shall be a lien in favor of the Government of
the Philippines from the time the assessment was made by the
Commissioner of Internal Revenue until paid with interests, penalties,
etc. By virtue of such lien, this court held that the property of the
estate already in the hands of an heir or transferee may be subject to
the payment of the tax due the estate. A fortiori before the
inheritance has passed to the heirs, the unpaid taxes due the
decedent may be collected, even without its having been presented
under Section 2 of Rule 86 of the Rules of Court. It may truly be said
that until the property of the estate of the decedent has vested in the

heirs, the decedent, represented by his estate, continues as if he


were still alive, subject to the payment of such taxes as would be
collectible from the estate even after his death. Thus in the case
above cited, the income taxes sought to be collected were due from
the estate, for the three years 1946, 1947 and 1948 following his
death in May, 1945.

Deficiency percentage tax

P93,723,372.40

Add: 25% surcharge

23,430,843.10

Even assuming arguendo that claims for taxes have to be filed within
the time prescribed in Section 2, Rule 86 of the Rules of Court, the
claim in question may be filed even after the expiration of the time
originally fixed therein, as may be gleaned from the italicized portion
of the Rule herein cited which reads:

TOTAL AMOUNT DUE AND COLLECTIBLE

Section 2. Time within which claims shall be filed. In the notice provided in the preceding section, the
court shall state the time for the filing of claims
against the estate, which shall not be more than
twelve (12) nor less than six (6) months after the
date of the first publication of the notice. However,
at any time before an order of distribution is
entered, on application of a creditor who has failed
to file his claim within the time previously limited
the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within
a time not exceeding one (1) month. (Emphasis
supplied)
In the instant case, petitioners filed an application (Motion for
Allowance of Claim and for an Order of Payment of Taxes) which,
though filed after the expiration of the time previously limited but
before an order of the distribution is entered, should have been
granted by the respondent court, in the absence of any valid ground,
as none was shown, justifying denial of the motion, specially
considering that it was for allowance Of claim for taxes due from the
estate, which in effect represents a claim of the people at large, the
only reason given for the denial that the claim was filed out of the
previously limited period, sustaining thereby private respondents'
contention, erroneously as has been demonstrated.
WHEREFORE, the order appealed from is reverse. Since the Tax
Commissioner's assessment in the total amount of P3,254.80 with 5
% surcharge and 1 % monthly interest as provided in the Tax Code is
a final one and the respondent estate's sole defense of prescription
has been herein overruled, the Motion for Allowance of Claim is herein
granted and respondent estate is ordered to pay and discharge the
same, subject only to the limitation of the interest collectible thereon
as provided by the Tax Code. No pronouncement as to costs.
SO ORDERED.
G.R. No. 134062

April 17, 2007

COMMISSIONER
OF
INTERNAL
REVENUE, Petitioner,
vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

Compromise penalty

15,000.00

P117,169,215.50
.5

Both notices of assessment contained the following note:


Please be informed that your [percentage and documentary stamp
taxes have] been assessed as shown above. Said assessment has
been based on return (filed by you) (as verified) (made by this
Office) (pending investigation) (after investigation). You are
requested to pay the above amount to this Office or to our Collection
Agent in the Office of the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel, replied as
follows:
1. Your "deficiency assessments" are no assessments at all.
The taxpayer is not informed, even in the vaguest terms,
why it is being assessed a deficiency. The very purpose of a
deficiency assessment is to inform taxpayer why he has
incurred a deficiency so that he can make an intelligent
decision on whether to pay or to protest the assessment.
This is all the more so when the assessment involves
astronomical amounts, as in this case.
We therefore request that the examiner concerned be
required to state, even in the briefest form, why he believes
the taxpayer has a deficiency documentary and percentage
taxes, and as to the percentage tax, it is important that the
taxpayer be informed also as to what particular percentage
tax the assessment refers to.
2. As to the alleged deficiency documentary stamp tax, you
are aware of the compromise forged between your office and
the Bankers Association of the Philippines [BAP] on this issue
and of BPIs submission of its computations under this
compromise. There is therefore no basis whatsoever for this
assessment, assuming it is on the subject of the BAP
compromise. On the other hand, if it relates to documentary
stamp tax on some other issue, we should like to be
informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are
completely at a loss on how such assessment may be
protested since your letter does not even tell the taxpayer
what particular percentage tax is involved and how your
examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we
shall inform you of the taxpayers decision on whether to pay
or protest the assessment.7

DECISION
CORONA, J.:

On June 27, 1991, BPI received a letter from CIR dated May 8, 1991
stating that:

This is a petition for review on certiorari 1 of a decision2 of the Court of


Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which
reversed and set aside the decision 3 and resolution4 of the Court of
Tax Appeals (CTA) dated November 16, 1995 and May 27, 1996,
respectively, in CTA Case No. 4715.

although in all respects, your letter failed to qualify as a protest


under Revenue Regulations No. 12-85 and therefore not deserving of
any rejoinder by this office as no valid issue was raised against the
validity of our assessment still we obliged to explain the basis of the
assessments.

In two notices dated October 28, 1988, petitioner Commissioner of


Internal Revenue (CIR) assessed respondent Bank of the Philippine
Islands (BPIs) deficiency percentage and documentary stamp taxes
for the year 1986 in the total amount of P129,488,656.63:

xxx xxx xxx

On July 6, 1991, BPI requested a reconsideration of the assessments


stated in the CIRs May 8, 1991 letter. 9 This was denied in a letter
dated December 12, 1991, received by BPI on January 21, 1992. 10

1986 Deficiency Percentage Tax


Deficiency percentage tax

P 7, 270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03

Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
1986 Deficiency Documentary Stamp Tax

2Tax 1/Cases 1st set

this constitutes the final decision of this office on the matter.8

15,000.00

P12,319,441.13

On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a
decision dated November 16, 1995, the CTA dismissed the case for
lack of jurisdiction since the subject assessments had become final
and unappealable. The CTA ruled that BPI failed to protest on time
under Section 270 of the National Internal Revenue Code (NIRC) of
1986 and Section 7 in relation to Section 11 of RA 1125. 12 It denied
reconsideration in a resolution dated May 27, 1996. 13
On appeal, the CA reversed the tax courts decision and resolution
and remanded the case to the CTA 14 for a decision on the merits.15 It
ruled that the October 28, 1988 notices were not valid assessments

because they did not inform the taxpayer of the legal and factual
bases therefor. It declared that the proper assessments were those
contained in the May 8, 1991 letter which provided the reasons for
the claimed deficiencies.16 Thus, it held that BPI filed the petition for
review in the CTA on time.17 The CIR elevated the case to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for
deficiency percentage and documentary stamp taxes for
1986 had already become final and unappealable and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the
NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] or his duly
authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his
findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice.
If the taxpayer fails to respond, the [CIR] shall issue an
assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28,
1988 notices19 were valid assessments. If they were not, as held by
the CA, then the correct assessments were in the May 8, 1991 letter,
received by BPI on June 27, 1991. BPI, in its July 6, 1991 letter,
seasonably asked for a reconsideration of the findings which the CIR
denied in his December 12, 1991 letter, received by BPI on January
21, 1992. Consequently, the petition for review filed by BPI in the CTA
on February 18, 1992 would be well within the 30-day period provided
by law.20
The CIR argues that the CA erred in holding that the October 28, 1988
notices were invalid assessments. He asserts that he used BIR Form
No. 17.08 (as revised in November 1964) which was designed for the
precise purpose of notifying taxpayers of the assessed amounts due
and demanding payment thereof.21 He contends that there was no law
or jurisprudence then that required notices to state the reasons for
assessing deficiency tax liabilities.22
BPI counters that due process demanded that the facts, data and law
upon which the assessments were based be provided to the taxpayer.
It insists that the NIRC, as worded now (referring to Section 228),
specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall be
void."
According to BPI, this is declaratory of what sound tax procedure is
and a confirmation of what due process requires even under the
former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC
provides:
Sec. 228. Protesting of Assessment. When the [CIR] or his duly
authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not
be required in the following cases:
xxx xxx xxx
The taxpayer shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the
assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts
on which the assessments of the deficiency taxes were made. He
merely notified BPI of his findings, consisting only of the computation
of the tax liabilities and a demand for payment thereof within 30 days
after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions
of the former Section 270 prior to its amendment by RA 8424 (also
known as the Tax Reform Act of 1997). 23 In CIR v. Reyes,24 we held
that:
In the present case, Reyes was not informed in writing of the law and
the facts on which the assessment of estate taxes had been made.
She was merely notified of the findings by the CIR, who had simply
relied upon the provisions of former Section 229 prior to its
amendment by [RA] 8424, otherwise known as the Tax Reform Act of
1997.
First, RA 8424 has already amended the provision of Section 229 on
protesting
an
assessment. The
old
requirement
of merely notifying the taxpayer of the CIR's findings was
changed in 1998 to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made; otherwise,
the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice
was issued against the estate. On April 22, 1998, the final estate tax
assessment notice, as well as demand letter, was also issued. During
those dates, RA 8424 was already in effect. The notice required
under the old law was no longer sufficient under the new
law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the
former Section 270, the only requirement was for the CIR to "notify"
or inform the taxpayer of his "findings." Nothing in the old law
required a written statement to the taxpayer of the law and facts on
which the assessments were based. The Court cannot read into the
law what obviously was not intended by Congress. That would be
judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the amount the
taxpayer was to pay and a demand for payment within a prescribed
period.26 Everything considered, there was no doubt the October 28,
1988 notices sufficiently met the requirements of a valid assessment
under the old law and jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall be
void
was not in the old Section 270 but was only later on inserted in the
renumbered Section 228 in 1997. Evidently, the legislature saw the
need to modify the former Section 270 by inserting the aforequoted
sentence.27 The fact that the amendment was necessary showed that,
prior to the introduction of the amendment, the statute had an
entirely different meaning.28
Contrary to the submission of BPI, the inserted sentence in the
renumbered Section 228 was not an affirmation of what the law
required under the former Section 270. The amendment introduced
by RA 8424 was an innovation and could not be reasonably inferred
from the old law.29 Clearly, the legislature intended to insert a new
provision regarding the form and substance of assessments issued by
the CIR.30
In ruling that the October 28, 1988 notices were not valid
assessments, the CA explained:
xxx. Elementary concerns of due process of law should have
prompted the [CIR] to inform [BPI] of the legal and factual basis of the
formers decision to charge the latter for deficiency documentary
stamp and gross receipts taxes.31
In other words, the CAs theory was that BPI was deprived of due
process when the CIR failed to inform it in writing of the factual and
legal bases of the assessments even if these were not called for
under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional
requirement that "no person shall be deprived of his property without
due process of law."32 We note, however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only
was [BPI] given the opportunity to discuss with the [CIR] when the

3Tax 1/Cases 1st set

latter issued the former a Pre-Assessment Notice (which [BPI]


ignored) but that the examiners themselves went to [BPI] and "we
talk to them and we try to [thresh] out the issues, present evidences
as to what they need." Now, how can [BPI] and/or its counsel honestly
tell this Court that they did not know anything about the
assessments?
Not only that. To further buttress the fact that [BPI] indeed knew
beforehand the assessments[,] contrary to the allegations of its
counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager of
the Accounting Department of [BPI]. He testified to the fact that he
prepared worksheets which contain his analysis regarding the findings
of the [CIRs] examiner, Mr. San Pedro and that the same worksheets
were presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI]
was indeed aware of the nature and basis of the assessments, and
was given all the opportunity to contest the same but ignored it
despite the notice conspicuously written on the assessments which
states that "this ASSESSMENT becomes final and unappealable if not
protested within 30 days after receipt." Counsel resorted to dilatory
tactics and dangerously played with time. Unfortunately, such
strategy proved fatal to the cause of his client. 33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its
function is dedicated exclusively to the consideration of tax problems,
has necessarily developed an expertise on the subject, and its
conclusions will not be overturned unless there has been an abuse or
improvident exercise of authority. Such findings can only be disturbed
on appeal if they are not supported by substantial evidence or there
is a showing of gross error or abuse on the part of the [CTA].34
Under the former Section 270, there were two instances when an
assessment became final and unappealable: (1) when it was not
protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days
from receipt of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation in such form and
manner as may be prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment; otherwise, the
assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association
or corporation adversely affected by the decision on the protest may
appeal to the [CTA] within thirty (30) days from receipt of the said
decision; otherwise, the decision shall become final, executory and
demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid
assessments, BPI should have protested the same within 30 days
from receipt thereof. The December 10, 1988 reply it sent to the CIR
did not qualify as a protest since the letter itself stated that "[a]s soon
as this is explained and clarified in a proper letter of assessment, we
shall inform you of the taxpayers decision on whether to pay
or protest the assessment."36 Hence, by its own declaration, BPI
did not regard this letter as a protest against the assessments. As a
matter of fact, BPI never deemed this a protest since it did not even
consider the October 28, 1988 notices as valid or proper
assessments.
The inevitable conclusion is that BPIs failure to protest the
assessments within the 30-day period provided in the former Section
270 meant that they became final and unappealable. Thus, the CTA
correctly dismissed BPIs appeal for lack of jurisdiction. BPI was, from
then on, barred from disputing the correctness of the assessments or
invoking any defense that would reopen the question of its liability on
the merits.37 Not only that. There arose a presumption of correctness
when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in
good faith. The taxpayer has the duty to prove otherwise. In the
absence of proof of any irregularities in the performance of duties, an
assessment duly made by a Bureau of Internal Revenue examiner and

4Tax 1/Cases 1st set

approved by his superior officers will not be disturbed. All


presumptions are in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI
must nevertheless be deemed to have failed to appeal the CIRs final
decision regarding the disputed assessments within the 30-day period
provided by law. The CIR, in his May 8, 1991 response, stated that it
was his "final decision on the matter." BPI therefore had 30 days
from the time it received the decision on June 27, 1991 to appeal but
it did not. Instead it filed a request for reconsideration and lodged its
appeal in the CTA only on February 18, 1992, way beyond the
reglementary period. BPI must now suffer the repercussions of its
omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear and
unequivocal language whenever his action on an assessment
questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of [RA
1125], as amended. On the basis of his statement indubitably
showing that the Commissioner's communicated action is his
final decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the tax court
at the opportune time. Without needless difficulty, the
taxpayer would be able to determine when his right to appeal
to the tax court accrues.
The rule of conduct would also obviate all desire and
opportunity on the part of the taxpayer to continually delay
the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated
requests for recomputation and reconsideration. On the part of
the [CIR], this would encourage his office to conduct a careful and
thorough study of every questioned assessment and render a correct
and definite decision thereon in the first instance. This would also
deter the [CIR] from unfairly making the taxpayer grope in the dark
and speculate as to which action constitutes the decision appealable
to the tax court. Of greater import, this rule of conduct would meet a
pressing need for fair play, regularity, and orderliness in
administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve
BPI of its liability under the subject tax assessments.
We realize that these assessments (which have been pending for
almost 20 years) involve a considerable amount of money. Be that as
it may, we cannot legally presume the existence of something which
was never there. The state will be deprived of the taxes validly due it
and the public will suffer if taxpayers will not be held liable for the
proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the
government can neither exist nor endure. A principal attribute of
sovereignty, 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 common good. The theory
behind the exercise of the power to tax emanates from necessity;
without taxes, government cannot fulfill its mandate of promoting the
general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998
decision of the Court of Appeals in CA-G.R. SP No. 41025
is REVERSED and SET ASIDE.
SO ORDERED.
G.R. No. L-22734

September 15, 1967

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO
PINEDA, respondent.
Office
of
the
Solicitor
General
for
Manuel B. Pineda for and in his own behalf as respondent.

petitioner.

BENGZON, J.P., J.:


On May 23, 1945 Atanasio Pineda died, survived by his wife,
Felicisima Bagtas, and 15 children, the eldest of whom is Manuel B.
Pineda, a lawyer. Estate proceedings were had in the Court of First
Instance of Manila (Case No. 71129) wherein the surviving widow was
appointed administratrix. The estate was divided among and awarded
to the heirs and the proceedings terminated on June 8, 1948. Manuel
B. Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal


Revenue investigated the income tax liability of the estate for the
years 1945, 1946, 1947 and 1948 and it found that the corresponding
income tax returns were not filed. Thereupon, the representative of
the Collector of Internal Revenue filed said returns for the estate on
the basis of information and data obtained from the aforesaid estate
proceedings and issued an assessment for the following:
1. Deficiency income tax
194
P135.83
5
194
436.95
6
194
1,206.91
P1,779.69
7
Add: 5% surcharge
88.98
1% monthly interest from
November 30, 1953 to April
15, 1957
720.77
Compromise for late filing
80.00
Compromise for late payment 40.00
P2,707.44
=========
==
P14.50
2. Additional residence tax for 1945
=========
==
3. Real Estate dealer's tax for the P207.50
fourth quarter of 1946 and the =========
whole year of 1947
==
Total amount due

Manuel B. Pineda, who received the assessment, contested the same.


Subsequently, he appealed to the Court of Tax Appeals alleging that
he was appealing "only that proportionate part or portion pertaining
to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment
reversing the decision of the Commissioner on the ground that his
right to assess and collect the tax has prescribed. The Commissioner
appealed and this Court affirmed the findings of the Tax Court in
respect to the assessment for income tax for the year 1947 but held
that the right to assess and collect the taxes for 1945 and 1946 has
not prescribed. For 1945 and 1946 the returns were filed on August
24, 1953; assessments for both taxable years were made within five
years therefrom or on October 19, 1953; and the action to collect the
tax was filed within five years from the latter date, on August 7, 1957.
For taxable year 1947, however, the return was filed on March 1,
1948; the assessment was made on October 19, 1953, more than five
years from the date the return was filed; hence, the right to assess
income tax for 1947 had prescribed. Accordingly, We remanded the
case to the Tax Court for further appropriate proceedings.1
In the Tax Court, the parties submitted the case for decision without
additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment
holding Manuel B. Pineda liable for the payment corresponding to his
share of the following taxes:
Deficiency income tax
1945
P135.83
1946
436.95
Real estate dealer's fixed
tax 4th quarter of 1946 and P187.5
whole year of 1947
0
The Commissioner of Internal Revenue has appealed to Us and has
proposed to hold Manuel B. Pineda liable for the payment of all the
taxes found by the Tax Court to be due from the estate in the total
amount of P760.28 instead of only for the amount of taxes
corresponding to his share in the estate.1awphl.nt

Pineda is liable for the assessment as an heir and as a holdertransferee of property belonging to the estate/taxpayer. As an heir he
is individually answerable for the part of the tax proportionate to the
share he received from the inheritance.3 His liability, however, cannot
exceed the amount of his share.4
As a holder of property belonging to the estate, Pineda is liable for he
tax up to the amount of the property in his possession. The reason is
that the Government has a lien on the P2,500.00 received by him
from the estate as his share in the inheritance, for unpaid income
taxes4a for which said estate is liable, pursuant to the last paragraph
of Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta
en participacion), association, or insurance company liable to
pay the income tax, neglects or refuses to pay the same
after demand, the amount shall be a lien in favor of the
Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal
Revenue until paid with interest, penalties, and costs that
may accrue in addition thereto upon all property and rights
to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the
property in Pineda's possession, i.e., the P2,500.00, to satisfy the
income tax assessment in the sum of P760.28. After such payment,
Pineda will have a right of contribution from his co-heirs, 5 to achieve
an adjustment of the proper share of each heir in the distributable
estate.
All told, the Government has two ways of collecting the tax in
question. One, by going after all the heirs and collecting from each
one of them the amount of the tax proportionate to the inheritance
received. This remedy was adopted in Government of the Philippine
Islands v. Pamintuan, supra. In said case, the Government filed an
action against all the heirs for the collection of the tax. This action
rests on the concept that hereditary property consists only of that
part which remains after the settlement of all lawful claims against
the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs the tax
due from the estate is levied proportionately against them is to
achieve thereby two results: first, payment of the tax; and second,
adjustment of the shares of each heir in the distributed estate
as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the
Tax Code upon all property and rights to property belonging to the
taxpayer for unpaid income tax, is by subjecting said property of the
estate which is in the hands of an heir or transferee to the payment of
the tax due, the estate. This second remedy is the very avenue the
Government took in this case to collect the tax. The Bureau of
Internal Revenue should be given, in instances like the case at bar,
the necessary discretion to avail itself of the most expeditious way to
collect the tax as may be envisioned in the particular provision of the
Tax Code above quoted, because taxes are the lifeblood of
government and their prompt and certain availability is an imperious
need.7 And as afore-stated in this case the suit seeks to achieve only
one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax,
is left to await the suit for contribution by the heir from whom the
Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B.
Pineda is hereby ordered to pay to the Commissioner of Internal
Revenue the sum of P760.28 as deficiency income tax for 1945 and
1946, and real estate dealer's fixed tax for the fourth quarter of 1946
and for the whole year 1947, without prejudice to his right of
contribution for his co-heirs. No costs. So ordered.
G.R. No. L-28896 February 17, 1988
COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.
CRUZ, J.:

Manuel B. Pineda opposes the proposition on the ground that as an


heir he is liable for unpaid income tax due the estate only up to the
extent of and in proportion to any share he received. He relies
on Government of the Philippine Islands v. Pamintuan 2 where We held
that "after the partition of an estate, heirs and distributees are liable
individually for the payment of all lawful outstanding claims against
the estate in proportion to the amount or value of the property they
have respectively received from the estate."

Taxes are the lifeblood of the government and so should be collected


without unnecessary hindrance On the other hand, such collection
should be made in accordance with law as any arbitrariness will
negate the very reason for government itself. It is therefore necessary
to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.

We hold that the Government can require Manuel B. Pineda to pay the
full amount of the taxes assessed.

The main issue in this case is whether or not the Collector of Internal
Revenue correctly disallowed the P75,000.00 deduction claimed by

5Tax 1/Cases 1st set

private respondent Algue as legitimate business expenses in its


income tax returns. The corollary issue is whether or not the appeal of
the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private respondent, a
domestic corporation engaged in engineering, construction and other
allied activities, received a letter from the petitioner assessing it in
the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of
protest or request for reconsideration, which letter was stamp
received on the same day in the office of the petitioner. 2 On March
12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who
refused to receive it on the ground of the pending protest. 3 A search
of the protest in the dockets of the case proved fruitless. Atty.
Guevara produced his file copy and gave a photostat to BIR agent
Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965,
Atty. Guevara was finally informed that the BIR was not taking any
action on the protest and it was only then that he accepted the
warrant of distraint and levy earlier sought to be served. 5 Sixteen
days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of
Tax Appeals. 6
The above chronology shows that the petition was filed seasonably.
According to Rep. Act No. 1125, the appeal may be made within thirty
days after receipt of the decision or ruling challenged. 7 It is true that
as a rule the warrant of distraint and levy is "proof of the finality of
the
assessment" 8 and
renders
hopeless
a
request
for
reconsideration," 9being "tantamount to an outright denial thereof
and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of
this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter of
protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could
not be located in the office of the petitioner. It was only after Atty.
Guevara gave the BIR a copy of the protest that it was, if at all,
considered by the tax authorities. During the intervening period, the
warrant was premature and could therefore not be served.
As the Court of Tax Appeals correctly noted," 11 the protest filed by
private respondent was not pro forma and was based on strong legal
considerations. It thus had the effect of suspending on January 18,
1965, when it was filed, the reglementary period which started on the
date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of the said
protest and the warrant was finally served on it. Hence, when the
appeal was filed on April 23, 1965, only 20 days of the reglementary
period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of P75,000.00
was properly disallowed because it was not an ordinary reasonable or
necessary business expense. The Court of Tax Appeals had seen it
differently. Agreeing with Algue, it held that the said amount had
been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These
were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had Originally
claimed these promotional fees to be personal holding company
income 12 but later conformed to the decision of the respondent court
rejecting this assertion.13 In fact, as the said court found, the amount
was earned through the joint efforts of the persons among whom it
was distributed It has been established that the Philippine Sugar
Estate Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo
Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked
for the formation of the Vegetable Oil Investment Corporation,
inducing other persons to invest in it. 14 Ultimately, after its
incorporation largely through the promotion of the said persons, this
new corporation purchased the PSEDC properties. 15 For this sale,
Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals. 16

6Tax 1/Cases 1st set

There is no dispute that the payees duly reported their respective


shares of the fees in their income tax returns and paid the
corresponding taxes thereon. 17 The Court of Tax Appeals also found,
after examining the evidence, that no distribution of dividends was
involved. 18
The petitioner claims that these payments are fictitious because most
of the payees are members of the same family in control of Algue. It
is argued that no indication was made as to how such payments were
made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a
tax dodge, an attempt to evade a legitimate assessment by involving
an imaginary deduction.
We find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the accountant,
Cecilia V. de Jesus, testified that the payments were not made in one
lump sum but periodically and in different amounts as each payee's
need arose. 19 It should be remembered that this was a family
corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. Even so, at the end
of the year, when the books were to be closed, each payee made an
accounting of all of the fees received by him or her, to make up the
total of P75,000.00. 20 Admittedly, everything seemed to be informal.
This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission paid by the
Philippine Sugar Estate Development Co. to the private respondent
was P125,000.00. 21After deducting the said fees, Algue still had a
balance of P50,000.00 as clear profit from the transaction. The
amount of P75,000.00 was 60% of the total commission. This was a
reasonable proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar
Estate properties. This finding of the respondent court is in accord
with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In
computing net income there shall be allowed as
deductions
(a) Expenses:
(1) In general.--All the ordinary and necessary
expenses paid or incurred during the taxable year
in carrying on any trade or business, including a
reasonable allowance for salaries or other
compensation for personal services actually
rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as follows:
SEC. 70. Compensation for personal services.-Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business
may be included a reasonable allowance for salaries
or other compensation for personal services
actually rendered. The test of deductibility in the
case of compensation payments is whether they are
reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of
compensation payments is whether they are
reasonable and are, in fact, payments purely for
service. This test and its practical application may
be further stated and illustrated as follows:
Any amount paid in the form of compensation, but
not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a
corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a
corporation having few stockholders, Practically all
of whom draw salaries. If in such a case the salaries
are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or
bear a close relationship to the stockholdings of the
officers of employees, it would seem likely that the
salaries are not paid wholly for services rendered,
but the excessive payments are a distribution of
earnings upon the stock. . . . (Promulgated Feb. 11,
1931, 30 O.G. No. 18, 325.)
It is worth noting at this point that most of the payees were not in the
regular employ of Algue nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on


the taxpayer to prove the validity of the claimed deduction. In the
present case, however, we find that the onus has been discharged
satisfactorily. The private respondent has proved that the payment of
the fees was necessary and reasonable in the light of the efforts
exerted by the payees in inducing investors and prominent
businessmen to venture in an experimental enterprise and involve
themselves in a new business requiring millions of pesos. This was no
mean feat and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the
taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part,
is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral
and material values. This symbiotic relationship is the rationale of
taxation and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer
can demonstrate, as it has here, that the law has not been observed.
We hold that the appeal of the private respondent from the decision
of the petitioner was filed on time with the respondent court in
accordance with Rep. Act No. 1125. And we also find that the claimed
deduction by the private respondent was permitted under the Internal
Revenue Code and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax Appeals is
AFFIRMED in toto, without costs.
SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG
MEN'S CHRISTIAN ASSOCIATION OF THE PHILIPPINES,
INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the
Young Men's Christian Association of the Philippines, Inc. (YMCA)
established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?

Contesting the denial of its protest, the YMCA filed a petition for
review at the Court of Tax Appeals (CTA) on March 14, 1989. In due
course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities
to small shop owners, to restaurant and canteen
operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the
[private respondents]. It appears from the
testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former
accountant of YMCA, that these facilities were
leased to members and that they have to service
the needs of its members and their guests. The
rentals were minimal as for example, the
barbershop was only charged P300 per month. He
also testified that there was actually no lot devoted
for parking space but the parking was done at the
sides of the building. The parking was primarily for
members with stickers on the windshields of their
cars and they charged P.50 for non-members. The
rentals and parking fees were just enough to cover
the costs of operation and maintenance only. The
earning[s] from these rentals and parking charges
including those from lodging and other charges for
the use of the recreational facilities constitute [the]
bulk of its income which [is] channeled to support
its many activities and attainment of its objectives.
As pointed out earlier, the membership dues are
very insufficient to support its program. We find it
reasonably necessary therefore for [private
respondent] to make [the] most out [of] its existing
facilities to earn some income. It would have been
different if under the circumstances, [private
respondent] will purchase a lot and convert it to a
parking lot to cater to the needs of the general
public for a fee, or construct a building and lease it
out to the highest bidder or at the market rate for
commercial purposes, or should it invest its funds in
the buy and sell of properties, real or personal.
Under these circumstances, we could conclude that
the activities are already profit oriented, not
incidental and reasonably necessary to the pursuit
of the objectives of the association and therefore,
will fall under the last paragraph of Section 27 of
the Tax Code and any income derived therefrom
shall be taxable.
Considering our findings that [private respondent]
was not engaged in the business of operating or
contracting [a] parking lot, we find no legal basis
also for the imposition of [a] deficiency fixed tax
and [a] contractor's tax in the amount[s] of P353.15
and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the
following assessments are hereby dismissed for lack
of merit:

The Case
1980 Deficiency Fixed Tax P353,15;
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of
Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR
SP No. 32007. Both Resolutions affirmed the Decision of the Court of
Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the
latter's income from the lease of its real property.

1980 Deficiency Contractor's Tax P3,129.23;


1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:

The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock,
non-profit institution, which conducts various programs and activities
that are beneficial to the public, especially the young people,
pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small shop
owners, like restaurants and canteen operators, and P44,259.00 from
parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to
private respondent, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its basic protest,
filed a letter dated October 8, 1985. In reply, the CIR denied the
claims of YMCA.

7Tax 1/Cases 1st set

1980 Deficiency Expanded Withholding Tax


P1,798.93;
1980 Deficiency Withholding Tax on Wages
P33,058.82
plus 10% surcharge and 20% interest per annum
from July 2, 1984 until fully paid but not to exceed
three (3) years pursuant to Section 51(e)(2) & (3) of
the National Internal Revenue Code effective as of
1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the
Court of Appeals (CA). In its Decision of February 16, 1994, the
CA 6 initially decided in favor of the CIR and disposed of the appeal in
the following manner:

Following the ruling in the afore-cited cases


of Province of Abra vs. Hernando and Abra Valley
College Inc. vs. Aquino, the ruling of the respondent
Court of Tax Appeals that "the leasing of petitioner's
(herein respondent's) facilities to small shop
owners, to restaurant and canteen operators and
the operation of the parking lot are reasonably
incidental to and reasonably necessary for the
accomplishment of the objectives of the petitioners,
and the income derived therefrom are tax exempt,
must be reversed.
WHEREFORE, the appealed decision is hereby
REVERSED in so far as it dismissed the assessment
for:
1980 Deficiency Income Tax P
353.15
1980 Deficiency Contractor's Tax
P 3,129.23, &
1980 Deficiency Income Tax P
372,578.20
but the same is AFFIRMED in all other respect.

Aggrieved, the YMCA asked for reconsideration based on the following


grounds:
I
The findings of facts of the Public Respondent Court
of Tax Appeals being supported by substantial
evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent
exempting [p]rivate [r]espondent from the income
on rentals of small shops and parking fees [are] in
accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA, the
CA reversed itself and promulgated on September 28, 1995 its first
assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of
fact, as they are supported by evidence beyond
what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent
CTA did not err in saying that the rental from small
shops and parking fees do not result in the loss of
the exemption. Not even the petitioner would
hazard the suggestion that YMCA is designed for
profit. Consequently, the little income from small
shops and parking fees help[s] to keep its head
above the water, so to speak, and allow it to
continue with its laudable work.
The Court, therefore, finds the second ground of the
motion to be meritorious and in accord with law and
jurisprudence.
WHEREFORE, the motion for reconsideration is
GRANTED; the respondent CTA's decision is
AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for Reconsideration
was denied by Respondent Court in its second assailed Resolution of
February 29, 1996. Hence, this petition for review under Rule 45 of
the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following
errors:
I

8Tax 1/Cases 1st set

In holding that it had departed from the findings of


fact of Respondent Court of Tax Appeals when it
rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of
Tax Appeals that the income of private respondent
from rentals of small shops and parking fees [is]
exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First
Factual Findings of the CTA

Issue:

Private respondent contends that the February 16, 1994 CA Decision


reversed the factual findings of the CTA. On the other hand, petitioner
argues that the CA merely reversed the "ruling of the CTA that the
leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots
are reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the private respondent and that
the income derived therefrom are tax exempt." 12 Petitioner insists
that what the appellate court reversed was the legal conclusion, not
the factual finding, of the CTA. 13 The commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of the
CTA, when supported by substantial evidence, will be disturbed on
appeal unless it is shown that the said court committed gross error in
the appreciation of facts. 14 In the present case, this Court finds that
the February 16, 1994 Decision of the CA did not deviate from this
rule. The latter merely applied the law to the facts as found by the
CTA and ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of
1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved
the aforementioned issue, as indeed it was expected to. That it did so
in a manner different from that of the CTA did not necessarily imply a
reversal of factual findings.
The distinction between a question of law and a question of fact is
clear-cut. It has been held that "[t]here is a question of law in a given
case when the doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or falsehood of alleged facts." 16 In the
present case, the CA did not doubt, much less change, the facts
narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
Second
Is the Rental Income of the YMCA Taxable?

Issue:

We now come to the crucial issue: Is the rental income of the YMCA
from its real estate subject to tax? At the outset, we set forth the
relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations.
The following organizations shall not be taxed under
this Title in respect to income received by them as
such
xxx xxx xxx
(g) Civic league or organization not organized for
profit but operated exclusively for the promotion of
social welfare;
(h) Club organized and operated exclusively for
pleasure, recreation, and other non-profitable
purposes, no part of the net income of which inures
to the benefit of any private stockholder or
member;
xxx xxx xxx
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and
character of the foregoing organizations from any of

their properties, real or personal, or from any of


their activities conducted for profit, regardless of
the disposition made of such income, shall be
subject to the tax imposed under this Code. (as
amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations
enumerated in Section 27 (now Section 26) of the NIRC is, as a rule,
exempted from the payment of tax "in respect to income received by
them as such," the exemption does not apply to income derived ". . .
from any of their properties, real or personal, or from any of their
activities conducted for profit, regardless of the disposition made of
such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal, [is] not,
therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives." 17 We
agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict in interpretation in construing tax
exemptions. 18 Furthermore, a claim of statutory exemption from
taxation should be manifest. and unmistakable from the language of
the law on which it is based. Thus, the claimed exemption "must
expressly be granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section
27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because
the last paragraph of said section unequivocally subjects to tax the
rent income of the YMCA from its real property, 20 the Court is dutybound to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be applied. 21Parenthetically, a
consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to
"religious, charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be
"subject to the qualification that the income from the properties must
arise from activities 'conducted for profit' before it may be considered
taxable." 23 This argument is erroneous. As previously stated, a
reading of said paragraph ineludibly shows that the income from any
property of exempt organizations, as well as that arising from any
activity it conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word "properties."
This makes from the property of the organization taxable, regardless
of how that income is used whether for profit or for lofty non-profit
purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals
committed reversible error when it allowed, on reconsideration, the
tax exemption claimed by YMCA on income it derived from renting out
its real property, on the solitary but unconvincing ground that the
said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how it is
used or disposed of. Where the law does not distinguish, neither
should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private
respondent submits that Article VI, Section 28 of par. 3 of the 1987
Constitution, 24 exempts "charitable institutions" from the payment
not only of property taxes but also of income tax from any
source. 25 In support of its novel theory, it compares the use of the
words "charitable institutions," "actually" and "directly" in the 1973
and the 1987 Constitutions, on the one hand; and in Article VI,
Section 22, par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present
provision is divisible into two categories: (1) "[c]haritable institutions,
churches and parsonages or convents appurtenant thereto, mosques
and non-profit cemeteries," the incomes of which are, from whatever
source, all tax-exempt; 27 and (2) "[a]ll lands, buildings and
improvements actually and directly used for religious, charitable or
educational purposes," which are exempt only from property
taxes. 28 Second,
Lladoc
v.
Commissioner
of
Internal

9Tax 1/Cases 1st set

Revenue, 29 which limited the exemption only to the payment of


property taxes, referred to the provision of the 1935 Constitution and
not
to
its
counterparts
in
the
1973
and
the
1987
Constitutions. 30 Third, the phrase "actually, directly and exclusively
used for religious, charitable or educational purposes" refers not only
to "all lands, buildings and improvements," but also to the abovequoted first category which includes charitable institutions like the
private respondent. 31
The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution reveal their
intent which, in turn, may have guided the people in ratifying the
Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional
commissioner, who is now a member of this Court, stressed during
the Concom debates that ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for
religious,
charitable
or
educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the
Constitution and also a member of the Concom, adhered to the same
view that the exemption created by said provision pertained only to
property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating
that "[t]he tax exemption covers propertytaxes only." 35 Indeed, the
income tax exemption claimed by private respondent finds no basis in
Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Character, 36 claiming that the YMCA "is a non-stock, non-profit
educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from
taxes on its properties and income." 37 We reiterate that private
respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone
that it is a non-stock, non-profit educational institution is insufficient
to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification nonstock, non-profit educational institution; and (2) the income it seeks
to be exempted from taxation is used actually, directly, and
exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by private respondent to
prove that it met the said requisites.
Is the YMCA an educational institution within the purview of Article
XIV, Section 4, par. 3 of the Constitution? We rule that it is not. The
term "educational institution" or "institution of learning" has acquired
a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant. 38 Under the
Education Act of 1982, such term refers to schools. 39 The school
system is synonymous with formal education, 40 which "refers to the
hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which
certification is required in order for the learner to progress through
the grades or move to the higher levels." 41 The Court has examined
the "Amended Articles of Incorporation" and "By-Laws" 43 of the YMCA,
but found nothing in them that even hints that it is a school or an
educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private auspices
such as foundations and civic-spirited organizations" are ruled
out. 45 It is settled that the term "educational institution," when used
in laws granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." 46 Therefore, the private
respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken
in their ordinary acceptation. While in its broadest
and best sense education embraces all forms and
phases
of
instruction,
improvement
and
development of mind and body, and as well of
religious and moral sentiments, yet in the common
understanding and application it means a place
where systematic instruction in any or all of the
useful branches of learning is given by methods
common to schools and institutions of learning.
That we conceive to be the true intent and scope of
the term [educational institutions,] as used in the
Constitution. 47

Moreover, without conceding that Private Respondent YMCA is an


educational institution, the Court also notes that the former did not
submit proof of the proportionate amount of the subject income that
was actually, directly and exclusively used for educational purposes.
Article XIII, Section 5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since the same merely
signified that "[t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and
Member Associations as the National Board may decide." 48 In sum,
we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its
cause. YMCA of Manila v. Collector of Internal Revenue 50and Abra
Valley College, Inc. v. Aquino 51 are not applicable, because the
controversy in both cases involved exemption from the payment of
property tax, not income tax. Hospital de San Juan de Dios, Inc. v.
Pasay City 52 is not in point either, because it involves a claim for
exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City an issue
not at all related to that involved in a claimed exemption from the
payment of income taxes imposed on property leases. In Jesus Sacred
Heart College v. Com. of Internal Revenue, 53 the party therein, which
claimed an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used solely
for educational purposes. On the other hand, the private respondent
in the present case has not given any proof that it is an educational
institution, or that part of its rent income is actually, directly and
exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with
private respondent. It appreciates the nobility of its cause. However,
the Court's power and function are limited merely to applying the law
fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its
role and invading the realm of legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can facilitate,
and not frustrate, its humanitarian tasks. But the Court regrets that,
given its limited constitutional authority, it cannot rule on the wisdom
or propriety of legislation. That prerogative belongs to the political
departments of government. Indeed, some of the members of the
Court may even believe in the wisdom and prudence of granting more
tax exemptions to private respondent. But such belief, however wellmeaning and sincere, cannot bestow upon the Court the power to
change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of
Appeals dated September 28, 1995 and February 29, 1996 are hereby
REVERSED and SET ASIDE. The Decision of the Court of Appeals dated
February 16, 1995 is REINSTATED, insofar as it ruled that the income
derived by petitioner from rentals of its real property is subject to
income tax. No pronouncement as to costs.

SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of
overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed beyond
the reglementary period. The 1986 claim for refund
amounting to P234,077.69 is likewise denied since petitioner
has opted and in all likelihood automatically credited the
same to the succeeding year. The petition for review is
dismissed for lack of merit.
SO ORDERED. 5
The facts on record show the antecedent circumstances pertinent to
this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its
quarterly income tax returns for the first and second quarters of
1985, reported profits, and paid the total income tax of
P5,016,954.00. The taxes due were settled by applying PBCom's tax
credit memos and accordingly, the Bureau of Internal Revenue (BIR)
issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00
and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed
its Annual Income Tax Returns for the year-ended December 31, 1986,
the petitioner likewise reported a net loss of P14,129,602.00, and
thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased
properties. The lessees withheld and remitted to the BIR withholding
creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal
Revenue, among others, for a tax credit of P5,016,954.00
representing the overpayment of taxes in the first and second
quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of
creditable taxes withheld by their lessees from property rentals in
1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal
Revenue, petitioner instituted a Petition for Review on November 18,
1988 before the Court of Tax Appeals (CTA). The petition was
docketed as CTA Case No. 4309 entitled: "Philippine Bank of
Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of petitioner's
claims for refund and tax credit for 1985 and 1986, filed before the
Court of Tax Appeals, are as follows:
1985 1986

SO ORDERED.

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

G.R. No. 112024 January 28, 1999

Tax Due NIL NIL

PHILIPPINE
BANK
OF
COMMUNICATIONS, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX
APPEALS and COURT OF APPEALS,respondent.

Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50 234,077.69

QUISUMBING, J.:
This petition for review assails the Resolution 1 of the Court of Appeals
dated
September
22,
1993 affirming the
Decision 2 and
a
Resolution 3 of the Court Of Tax Appeals which denied the claims of
the petitioner for tax refund and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition for
review, is DENIED due course. The Decision of the Court of
Tax Appeals dated May 20, 1993 and its resolution dated July
20, 1993, are hereby AFFIRMED in toto.

10Tax 1/Cases 1st set


Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as
P5,299,749.95. A forty five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the
outset, denied the request of petitioner for a tax refund or credit in
the sum amount of P5,299,749.95, on the ground that it was filed
beyond the two-year reglementary period provided for by law. The

petitioner's claim for refund in 1986 amounting to P234,077.69 was


likewise denied on the assumption that it was automatically credited
by PBCom against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the
CTA's decision but the same was denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision and
resolution of the CTA with the Court of Appeals. However on
September 22, 1993, the Court of Appeals affirmed in toto the CTA's
resolution dated July 20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom which relied in good faith on
the formal assurances of BIR in RMC No. 7-85 and did not
immediately file with the CTA a petition for review asking for
the refund/tax credit of its 1985-86 excess quarterly income
tax payments can be prejudiced by the subsequent BIR
rejection, applied retroactivity, of its assurances in RMC No.
7-85 that the prescriptive period for the refund/tax credit of
excess quarterly income tax payments is not two years but
ten (10). 7
II. Whether the Court of Appeals seriously erred in affirming
the CTA decision which denied PBCom's claim for the refund
of P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987
and that PBCom availed of tax-crediting that year. 8
Simply stated, the main question is: Whether or not the Court of
Appeals erred in denying the plea for tax refund or tax credits on the
ground of prescription, despite petitioner's reliance on RMC No. 7-85,
changing the prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet
barred by prescription relying on the applicability of Revenue
Memorandum Circular No. 7-85 issued on April 1, 1985. The circular
states that overpaid income taxes are not covered by the two-year
prescriptive period under the tax Code and that taxpayers may claim
refund or tax credits for the excess quarterly income tax with the BIR
within ten (10) years under Article 1144 of the Civil Code. The
pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT
OF EXCESS CORPORATE INCOME TAX RESULTING
FROM THE FILING OF THE FINAL ADJUSTMENT
RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code
provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7 of
Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the excess
tax payments, corporations file claims for recovery of
overpaid income tax with the Court of Tax Appeals within the
two-year period from the date of payment, in accordance
with sections 292 and 295 of the National Internal Revenue
Code. It is obvious that the filing of the case in court is to
preserve the judicial right of the corporation to claim the
refund or tax credit.
It should he noted, however, that this is not a case of
erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation
may request for the refund of the overpaid income tax or
claim for automatic tax credit. To insure prompt action on
corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this
Office has promulgated Revenue Memorandum Order No. 3276 dated June 11, 1976, containing the procedure in
processing said returns. Under these procedures, the returns
are merely pre-audited which consist mainly of checking

11Tax 1/Cases 1st set

mathematical accuracy of the figures of the return. After


which, the refund or tax credit is granted, and, this
procedure was adopted to facilitate immediate action on
cases like this.
In this regard, therefore, there is no need to file petitions for
review in the Court of Tax Appeals in order to preserve the
right to claim refund or tax credit the two year period. As
already stated, actions hereon by the Bureau are immediate
after only a cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the Bureau of
Internal Revenue excess income tax paid under the
provisions of Section 86 of the Tax Code within 10 years from
the date of payment considering that it is an obligation
created by law (Article 1144 of the Civil Code). 9 (Emphasis
supplied.)
Petitioner argues that the government is barred from asserting a
position contrary to its declared circular if it would result to injustice
to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of
Tax Appeals 10petitioner claims that rulings or circulars promulgated
by the Commissioner of Internal Revenue have no retroactive effect if
it would be prejudicial to taxpayers, In ABS-CBN case, the Court held
that the government is precluded from adopting a position
inconsistent with one previously taken where injustice would result
therefrom or where there has been a misrepresentation to the
taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue
Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings Any revocation,
modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or
any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial to
the taxpayers except in the following cases:
a). where the taxpayer deliberately misstates or
omits material facts from his return or in any
document required of him by the Bureau of Internal
Revenue;
b). where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different
from the facts on which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through Solicitor
General, argues that the two-year prescriptive period for filing tax
cases in court concerning income tax payments of Corporations is
reckoned from the date of filing the Final Adjusted Income Tax Return,
which is generally done on April 15 following the close of the calendar
year. As precedents, respondent Commissioner cited cases which
adhered to this principle, to wit ACCRA Investments Corp. vs. Court of
Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX
Sales, Inc., et al.. 12Respondent Commissioner also states that since
the Final Adjusted Income Tax Return of the petitioner for the taxable
year 1985 was supposed to be filed on April 15, 1986, the latter had
only until April 15, 1988 to seek relief from the court. Further,
respondent Commissioner stresses that when the petitioner filed the
case before the CTA on November 18, 1988, the same was filed
beyond the time fixed by law, and such failure is fatal to petitioner's
cause of action.
After a careful study of the records and applicable jurisprudence on
the matter, we find that, contrary to the petitioner's contention, the
relaxation of revenue regulations by RMC 7-85 is not warranted as it
disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the nation." The
primary purpose is to generate funds for the State to finance the
needs of the citizenry and to advance the common weal. 13 Due
process of law under the Constitution does not require judicial
proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the means
to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit should be
exercised within the time fixed by law because the BIR being an
administrative body enforced to collect taxes, its functions should not
be unduly delayed or hampered by incidental matters.

Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now
Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a
court proceeding for the recovery of tax erroneously or illegally
collected, viz.:
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 penalty claimed to have been collected
without authority, 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 proceedings shall begun after
the expiration of two 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. (Emphasis supplied)
The rule states that the taxpayer may file a claim for refund or credit
with the Commissioner of Internal Revenue, within two (2) years after
payment of tax, before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American Life
Insurance Co., 15 this Court explained the application of Sec. 230 of
1977 NIRC, as follows:
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund is
ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case, this
date is April 16, 1984, and two years from this date would be
April 16, 1986. . . . As we have earlier said in the TMX Sales
case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate
Income Tax Payment and Section 321 should be considered
in conjunction with it 19
When the Acting Commissioner of Internal Revenue issued RMC 7-85,
changing the prescriptive period of two years to ten years on claims
of excess quarterly income tax payments, such circular created a
clear inconsistency with the provision of Sec. 230 of 1977 NIRC. In so
doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
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. 20 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 the case of People vs. Lim, 22 it was held that rules and regulations
issued by administrative officials to implement a law cannot go
beyond the terms and provisions of the latter.

Further, fundamental is the rule that the State cannot be put in


estoppel by the mistakes or errors of its officials or agents. 24 As
pointed out by the respondent courts, the nullification of RMC No. 785 issued by the Acting Commissioner of Internal Revenue is an
administrative interpretation which is not in harmony with Sec. 230 of
1977 NIRC. for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal
Revenue, after promulgating RMC No. 7-85, is estopped by
the principle of non-retroactively of BIR rulings. Again We do
not agree. The Memorandum Circular, stating that a
taxpayer may recover the excess income tax paid within 10
years from date of payment because this is an obligation
created by law, was issued by the Acting Commissioner of
Internal Revenue. On the other hand, the decision, stating
that the taxpayer should still file a claim for a refund or tax
credit and corresponding petition fro review within the
two-year prescription period, and that the lengthening of the
period of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive
mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioner's
claim of refund or tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the claim and in effect,
ruled that the RMC No. 7-85 issued by the Commissioner of
Internal Revenue is an administrative interpretation which is
out of harmony with or contrary to the express provision of a
statute (specifically Sec. 230, NIRC), hence, cannot be given
weight for to do so would in effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place
the Government in estoppel to correct or overrule the
same. 27 Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this case
because the nullity of RMC No. 7-85 was declared by respondent
courts and not by the Commissioner of Internal Revenue. Lastly, it
must be noted that, as repeatedly held by this Court, a claim for
refund is in the nature of a claim for exemption and should be
construed in strictissimi juris against the taxpayer. 28
On the second issue, the petitioner alleges that the Court of Appeals
seriously erred in affirming CTA's decision denying its claim for refund
of P234,077.69 (tax overpaid in 1986), based on mere speculation,
without proof, that PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides
that any excess of the total quarterly payments over the actual
income tax computed 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 (by marking the option box provided in the BIR form) its
intention, whether to request for a refund or claim for an automatic
tax credit for the succeeding taxable year. To ease the administration
of tax collection, these remedies are in the alternative, and the choice
of one precludes the other.
As stated by respondent Court of Appeals:

Appellant contends that Section 2 of FAO No. 37-1 is void


because it is not only inconsistent with but is contrary to the
provisions and spirit of Act. No 4003 as amended, because
whereas the prohibition prescribed in said Fisheries Act was
for any single period of time not exceeding five years
duration, FAO No 37-1 fixed no period, that is to say, it
establishes an absolute ban for all time. This discrepancy
between Act No. 4003 and FAO No. 37-1 was probably due to
an oversight on the part of Secretary of Agriculture and
Natural Resources. Of course, in case of discrepancy, the
basic Act prevails, for the reason that the regulation or rule
issued to implement a law cannot go beyond the terms and
provisions
of
the
latter. . . . In this connection, the attention of the technical
men in the offices of Department Heads who draft rules and
regulation is called to the importance and necessity of
closely following the terms and provisions of the law which
they intended to implement, this to avoid any possible
misunderstanding or confusion as in the present case. 23

12Tax 1/Cases 1st set

Finally, as to the claimed refund of income tax over-paid in


1986 the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for taxable
year 1986, found out that petitioner opted to apply for
automatic tax credit. This was the basis used (vis-avis the
fact that the 1987 annual corporate tax return was not
offered by the petitioner as evidence) by the CTA in
concluding that petitioner had indeed availed of and applied
the automatic tax credit to the succeeding year, hence it can
no longer ask for refund, as to [sic] the two remedies of
refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance
with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted
Income Tax Return, is a finding of fact which we must respect.
Moreover, the 1987 annual corporate tax return of the petitioner was
not offered as evidence to contovert said fact. Thus, we are bound by

the findings of fact by respondent courts, there being no showing of


gross error or abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of the
Court of Appeals appealed from is AFFIRMED, with COSTS against the
petitioner.1wphi1.nt

Gross premium per investigation . . . . . . . . . .

P780.880.68

Withholding tax due thereon at 24% . . . . . . . .

P184,411.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

P184,411.00

Compromise for non-filing of withholding


income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

100.00

SO ORDERED.
G.R. No. L-22074

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

April 30, 1965

THE
PHILIPPINE
GUARANTY
CO.,
INC., petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS, respondents.
Josue H. Gustilo and Ramirez and Ortigas for petitioner.
Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, on various dates, with foreign
insurance companies not doing business in the Philippines namely:
Imperio Compaia de Seguros, La Union y El Fenix Espaol, Overseas
Assurance Corp., Ltd., Socieded Anonima de Reaseguros Alianza,
Tokio Marino & Fire Insurance Co., Ltd., Union Assurance Society Ltd.,
Swiss Reinsurance Company and Tariff Reinsurance Limited. Philippine
Guaranty Co., Inc., thereby agreed to cede to the foreign reinsurers a
portion of the premiums on insurance it has originally underwritten in
the Philippines, in consideration for the assumption by the latter of
liability on an equivalent portion of the risks insured. Said
reinsurrance contracts were signed by Philippine Guaranty Co., Inc. in
Manila and by the foreign reinsurers outside the Philippines, except
the contract with Swiss Reinsurance Company, which was signed by
both parties in Switzerland.
The reinsurance contracts made the commencement of the
reinsurers' liability simultaneous with that of Philippine Guaranty Co.,
Inc. under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the
foreign reinsurers where entered, and entry therein was binding upon
the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid for
by the foreign reinsurers. The foreign reinsurers further agreed, in
consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an
amount equal to 5% of the reinsurance premiums. Conflicts and/or
differences between the parties under the reinsurance contracts were
to be arbitrated in Manila. Philippine Guaranty Co., Inc. and Swiss
Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine Guaranty
Co., Inc. ceded to the foreign reinsurers the following premiums:
1953 . . . . . . . . . . . . . . . . . . . . .

P842,466.71

1954 . . . . . . . . . . . . . . . . . . . . .

721,471.85

Said premiums were excluded by Philippine Guaranty Co., Inc. from its
gross income when it file its income tax returns for 1953 and 1954.
Furthermore, it did not withhold or pay tax on them. Consequently,
per letter dated April 13, 1959, the Commissioner of Internal Revenue
assessed against Philippine Guaranty Co., Inc. withholding tax on the
ceded reinsurance premiums, thus:
1953
Gross premium per investigation . . . . . . . . . .

P768,580.00

Withholding tax due thereon at 24% . . . . . . . .

P184,459.00

25% surcharge . . . . . . . . . . . . . . . . . . . . . . . . . .

46,114.00

Compromise for non-filing of withholding


income tax return . . . . . . . . . . . . . . . . . . . . . . . . .

100.00

TOTAL AMOUNT DUE & COLLECTIBLE . . . .

1954

13Tax 1/Cases 1st set

P230,673.00
=========
=

P234,364.00
=========
=

Philippine Guaranty Co., Inc., protested the assessment on the ground


that reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are not subject to withholding tax. Its
protest was denied and it appealed to the Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment with this
dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS, petitioner
Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the respective sums of
P202,192.00 and P173,153.00 or the total sum of
P375,345.00 as withholding income taxes for the years 1953
and 1954, plus the statutory delinquency penalties thereon.
With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the legality of
the Commissioner of Internal Revenue's assessment for withholding
tax on the reinsurance premiums ceded in 1953 and 1954 to the
foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question did not
constitute income from sources within the Philippines because the
foreign reinsurers did not engage in business in the Philippines, nor
did they have office here.
The reinsurance contracts, however, show that the transactions or
activities that constituted the undertaking to reinsure Philippine
Guaranty Co., Inc. against loses arising from the original insurances in
the Philippines were performed in the Philippines. The liability of the
foreign reinsurers commenced simultaneously with the liability of
Philippine Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., Inc. kept in Manila a register of the risks ceded to the
foreign reinsurers. Entries made in such register bound the foreign
resinsurers, localizing in the Philippines the actual cession of the risks
and premiums and assumption of the reinsurance undertaking by the
foreign reinsurers. Taxes on premiums imposed by Section 259 of the
Tax Code for the privilege of doing insurance business in the
Philippines were payable by the foreign reinsurers when the same
were not recoverable from the original assured. The foreign reinsurers
paid Philippine Guaranty Co., Inc. an amount equivalent to 5% of the
ceded premiums, in consideration for administration and
management by the latter of the affairs of the former in the
Philippines in regard to their reinsurance activities here. Disputes and
differences between the parties were subject to arbitration in the City
of Manila. All the reinsurance contracts, except that with Swiss
Reinsurance Company, were signed by Philippine Guaranty Co., Inc. in
the Philippines and later signed by the foreign reinsurers abroad.
Although the contract between Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company was signed by both parties in
Switzerland, the same specifically provided that its provision shall be
construed according to the laws of the Philippines, thereby
manifesting a clear intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign corporations to tax on
their income from sources within the Philippines. The word "sources"
has been interpreted as the activity, property or service giving rise to
the income.1 The reinsurance premiums were income created from
the undertaking of the foreign reinsurance companies to reinsure
Philippine Guaranty Co., Inc., against liability for loss under original
insurances. Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from sources
within the Philippines and, hence, are subject to corporate income
tax.
The foreign insurers' place of business should not be confused with
their place of activity. Business should not be continuity and
progression of transactions 2 while activity may consist of only a
single transaction. An activity may occur outside the place of
business. Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in subjecting its
income to tax. It suffices that the activity creating the income is
performed or done in the Philippines. What is controlling, therefore, is

not the place of business but the place ofactivity that created an
income.
Petitioner further contends that the reinsurance premiums are not
income from sources within the Philippines because they are not
specifically mentioned in Section 37 of the Tax Code. Section 37 is not
an all-inclusive enumeration, for it merely directs that the kinds of
income mentioned therein should be treated as income from sources
within the Philippines but it does not require that other kinds of
income should not be considered likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to preserve the
State's sovereignty and a means to give the citizenry an army to
resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvement designed for the
enjoyment of the citizenry and those which come within the State's
territory, and facilities and protection which a government is
supposed to provide. Considering that the reinsurance premiums in
question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers should share
the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith on the
rulings of the Commissioner of Internal Revenue requiring no
withholding of the tax due on the reinsurance premiums in question
relieved it of the duty to pay the corresponding withholding tax
thereon. This defense of petitioner may free if from the payment of
surcharges or penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from liability to
pay such withholding tax The Government is not estopped from
collecting taxes by the mistakes or errors of its agents.3
In respect to the question of whether or not reinsurance premiums
ceded to foreign reinsurers not doing business in the Philippines are
subject to withholding tax under Section 53 and 54 of the Tax Code,
suffice it to state that this question has already been answered in the
affirmative in Alexander Howden & Co., Ltd. vs. Collector of Internal
Revenue, L-19393, April 14, 1965.
Finally, petitioner contends that the withholding tax should be
computed from the amount actually remitted to the foreign reinsurers
instead of from the total amount ceded. And since it did not remit any
amount to its foreign insurers in 1953 and 1954, no withholding tax
was due.
The pertinent section of the Tax Code States:
Sec. 54. Payment of corporation income tax at source. In
the case of foreign corporations subject to taxation under
this Title not engaged in trade or business within the
Philippines and not having any office or place of business
therein, there shall be deducted and withheld at the source
in the same manner and upon the same items as is provided
in Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and paid in
the same manner and subject to the same conditions as
provided in that section.
The applicable portion of Section 53 provides:
(b) Nonresident aliens. All persons, corporations and
general copartnerships (compaias colectivas), in what ever
capacity acting, including lessees or mortgagors of real or
personal property, trustees acting in any trust capacity,
executors,
administrators,
receivers,
conservators,
fiduciaries, employers, and all officers and employees of the
Government of the Philippines having the control, receipt,
custody, disposal, or payment of interest, dividends, rents,
salaries, wages, premiums, annuities, compensation,
remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or
business within the Philippines and not having any office or
place of business therein, shall (except in the case provided
for in subsection [a] of this section) deduct and withhold
from such annual or periodical gains, profits, and income a
tax equal to twelve per centum thereof: Provided That no
deductions or withholding shall be required in the case of
dividends paid by a foreign corporation unless (1) such
corporation is engaged in trade or business within the
Philippines or has an office or place of business therein, and
(2) more than eighty-five per centum of the gross income of
such corporation for the three-year period ending with the
close of its taxable year preceding the declaration of such
dividends (or for such part of such period as the corporation
has been in existence)was derived from sources within the
Philippines as determined under the provisions of section

14Tax 1/Cases 1st set

thirty-seven:Provided, further, That the Collector of Internal


Revenue may authorize such tax to be deducted and
withheld from the interest upon any securities the owners of
which are not known to the withholding agent.
The above-quoted provisions allow no deduction from the income
therein enumerated in determining the amount to be withheld.
According, in computing the withholding tax due on the reinsurance
premium in question, no deduction shall be recognized.
WHEREFORE, in affirming the decision appealed from, the Philippine
Guaranty Co., Inc. is hereby ordered to pay to the Commissioner of
Internal Revenue the sums of P202,192.00 and P173,153.00, or a
total amount of P375,345.00, as withholding tax for the years 1953
and 1954, respectively. If the amount of P375,345.00 is not paid
within 30 days from the date this judgement becomes final, there
shall be collected a surcharged of 5% on the amount unpaid, plus
interest at the rate of 1% a month from the date of delinquency to the
date of payment, provided that the maximum amount that may be
collected as interest shall not exceed the amount corresponding to a
period of three (3) years. With costs againsts petitioner.
G.R. No. 125704 August 28, 1998
PHILEX
MINING
CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS,
and THE COURT OF TAX APPEALS,respondents.
ROMERO, J.:
Petitioner Philex Mining Corp. assails the decision of the Court of
Appeals promulgated on April 8, 1996 in CA-G.R. SP No.
36975 1 affirming the Court of Tax Appeals decision in CTA Case No.
4872 dated March 16, 1995 2 ordering it to pay the amount of
P110,677,668.52 as excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest
from August 6, 1994 until fully paid pursuant to Sections 248 and 249
of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex
asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of
1991 as well as the 1st and 2nd quarter of 1992 in the total amount
of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST
TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16
19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09
21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72
26,889,937.88

47,312,353.94
11,828,088.48
8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82
30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18
24,805,194.88

43,013,541.70
10,753,385.43
1,926,250.00 55,693,177.13

90,325,895.64
22,581,473.91
10,914,612.97 123,821,982.52 3

=========
=========
========= =========
In a letter dated August 20, 1992, 4 Philex protested the demand for
payment of the tax liabilities stating that it has pending claims for
VAT input credit/refund for the taxes it paid for the years 1989 to
1991 in the amount of P119,977,037.02 plus interest. Therefore these
claims for tax credit/refund should be applied against the tax
liabilities, citing our ruling inCommissioner of Internal Revenue v.
Itogon-Suyoc Mines, Inc. 5
In reply, the BIR, in a letter dated September 7, 1992, 6 found no
merit in Philex's position. Since these pending claims have not yet
been established or determined with certainty, it follows that no legal
compensation can take place. Hence, the BIR reiterated its demand
that Philex settle the amount plus interest within 30 days from the
receipt of the letter.
In view of the BIR's denial of the offsetting of Philex's claim for VAT
input credit/refund against its excise tax obligation, Philex raised the
issue to the Court of Tax Appeals on November 6, 1992. 7 In the
course of the proceedings, the BIR issued Tax Credit Certificate SN
001795 in the amount of P13,144,313.88 which, applied to the total
tax liabilities of Philex of P123,821,982.52; effectively lowered the
latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex
to pay the remaining balance of P110,677,688.52 plus interest,
elucidating its reason, to wit:
Thus, for legal compensation to take place, both
obligations must be liquidated and demandable.
"Liquidated" debts are those where the exact
amount has already been determined (PARAS, Civil
Code of the Philippines, Annotated, Vol. IV, Ninth
Edition, p. 259). In the instant case, the claims of
the Petitioner for VAT refund is still pending
litigation, and still has to be determined by this
Court (C.T.A. Case No. 4707). A fortiori,
the liquidated debt of the Petitioner to the
government cannot, therefore, be set-off against
the unliquidated claim which Petitioner conceived to
exist in its favor (see Compaia General de Tabacos
vs. French and Unson, No. 14027, November 8,
1918, 39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot be
subject to set-off on compensation since claim for taxes is not a debt
or contract." 9 The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is
hereby DENIED for lack of merit and Petitioner is
hereby ORDERED to PAY the Respondent the
amount of P110,677,668.52 representing excise tax
liability for the period from the 2nd quarter of 1991
to the 2nd quarter of 1992 plus 20% annual interest
from August 6, 1994 until fully paid pursuant to
Section 248 and 249 of the Tax Code, as amended.
Aggrieved with the decision, Philex appealed the case before the
Court of Appeals docketed as CA-GR. CV No. 36975. 11 Nonetheless,
on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax
Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for
review is hereby DISMISSED and the decision dated
March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was, nevertheless,
denied in a Resolution dated July 11, 1996. 13
However, a few days after the denial of its motion for reconsideration,
Philex was able to obtain its VAT input credit/refund not only for the
taxable year 1989 to 1991 but also for 1992 and 1994, computed as
follows: 14
Period Covered Tax Credit Date
By Claims For Certificate of
VAT refund/credit Number Issue Amount
1994 (2nd Quarter)
P25,317,534.01

15Tax 1/Cases 1st set

007730

11

July

1996

1994 (4th Quarter)


P21,791,020.61

007731

11

July

1996

1989 007732 11 July 1996 P37,322,799.19


1990-1991 007751 16 July 1996 P84,662,787.46
1992 (1st-3rd Quarter)
P36,501,147.95

007755

23

July

1996

In view of the grant of its VAT input credit/refund, Philex now contends
that the same should, ipso jure, off-set its excise tax liabilities 15 since
both had already become "due and demandable, as well as fully
liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already made
the pronouncement that taxes cannot be subject to compensation for
the simple reason that the government and the taxpayer are not
creditors and debtors of each other. 17 There is a material distinction
between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its
sovereign capacity. 18 We find no cogent reason to deviate from the
aforementioned distinction.
Prescinding from this premise, in Francia v. Intermediate Appellate
Court, 19 we categorically held that taxes cannot be subject to set-off
or compensation, thus:
We have consistently ruled that there can be no offsetting of taxes against the claims that the
taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground
that the government owes him an amount equal to
or greater than the tax being collected. The
collection of a tax cannot await the results of a
lawsuit against the government.
The ruling in Francia has been applied to the subsequent case
of Caltex Philippines, Inc. v. Commission on Audit,20 which reiterated
that:
. . . a taxpayer may not offset taxes due from the
claims that he may have against the government.
Taxes cannot be the subject of compensation
because the government and taxpayer are not
mutually creditors and debtors of each other and a
claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off.
Further, Philex's reliance on our holding in Commissioner of Internal
Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending
refund may be set off against an existing tax liability even though the
refund has not yet been approved by the Commissioner, 21 is no
longer without any support in statutory law.
It is important to note, that the premise of our ruling in the
aforementioned case was anchored on Section 51 (d) of the National
Revenue Code of 1939. However, when the National Internal Revenue
Code of 1977 was enacted, the same provision upon which
the Itogon-Suyoc pronouncement
was
based
was
omitted. 22 Accordingly,
the
doctrine
enunciated
in ItogonSuyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's position, it
asserts that the imposition of surcharge and interest for the nonpayment of the excise taxes within the time prescribed was
unjustified. Philex posits the theory that it had no obligation to pay
the excise tax liabilities within the prescribed period since, after all, it
still has pending claims for VAT input credit/refund with BIR. 23
We fail to see the logic of Philex's claim for this is an outright
disregard of the basic principle in tax law that taxes are the lifeblood
of the government and so should be collected without unnecessary
hindrance. 24 Evidently, to countenance Philex's whimsical reason
would render ineffective our tax collection system. Too simplistic, it
finds no support in law or in jurisprudence.
To be sure, we cannot allow Philex to refuse the payment of its tax
liabilities on the ground that it has a pending tax claim for refund or
credit against the government which has not yet been granted. It
must be noted that a distinguishing feature of a tax is that it is
compulsory rather than a matter of bargain. 25 Hence, a tax does not
depend upon the consent of the taxpayer. 26 If any taxpayer can defer
the payment of taxes by raising the defense that it still has a pending

claim for refund or credit, this would adversely affect the government
revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or
that the collection of the tax is contingent on the result of the lawsuit
it filed against the government. 27 Moreover, Philex's theory that
would automatically apply its VAT input credit/refund against its tax
liabilities can easily give rise to confusion and abuse, depriving the
government of authority over the manner by which taxpayers credit
and offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT input
claim/refund with the government is immaterial for the imposition of
charges and penalties prescribed under Section 248 and 249 of the
Tax Code of 1977. The payment of the surcharge is mandatory and
the BIR is not vested with any authority to waive the collection
thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar
to the one advanced by Philex in justifying its non-payment of its tax
liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the
National Internal Revenue Code of 1977, which requires the refund of
input taxes within 60 days, 31 when it took five years for the latter to
grant its tax claim for VAT input credit/refund. 32
In this regard, we agree with Philex. While there is no dispute that a
claimant has the burden of proof to establish the factual basis of his
or her claim for tax credit or refund, 33 however, once the claimant
has submitted all the required documents it is the function of the BIR
to assess these documents with purposeful dispatch. After all, since
taxpayers owe honestly to government it is but just that government
render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between 1989 to
1991 but the refund of these erroneously paid taxes was only granted
in 1996. Obviously, had the BIR been more diligent and judicious with
their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of
wrongly-held taxes. 35 Fair dealing and nothing less, is expected by
the taxpayer from the BIR in the latter's discharge of its function. As
aptly held inRoxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the
power to destroy. Therefore it should be exercised
with caution to minimize injury to the proprietary
rights of a taxpayer. It must be exercised fairly,
equally and uniformly, lest the tax collector kill the
"hen that lays the golden egg" And, in order to
maintain the general public's trust and confidence
in the Government this power must be used justly
and not treacherously.
Despite our concern with the lethargic manner by which the BIR
handled Philex's tax claim, it is a settled rule that in the performance
of governmental function, the State is not bound by the neglect of its
agents and officers. Nowhere is this more true than in the field of
taxation. 37 Again, while we understand Philex's predicament, it must
be stressed that the same is not a valid reason for the non-payment
of its tax liabilities.

16Tax 1/Cases 1st set

To be sure, this is not to state that the taxpayer is devoid of remedy


against public servants or employees, especially BIR examiners who,
in investigating tax claims are seen to drag their feet needlessly. First,
if the BIR takes time in acting upon the taxpayer's claim for refund,
the latter can seek judicial remedy before the Court of Tax Appeals in
the manner prescribed by law. 38 Second, if the inaction can be
characterized as willful neglect of duty, then recourse under the Civil
Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or moral loss
because a public servant or employee refuses or
neglects, without just cause, to perform his official
duty may file an action for damages and other relief
against the latter, without prejudice to any
disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal Revenue Act
of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by law
required for any sum collected in the performance
of duty or wilfully neglecting to perform, any other
duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful neglect and
unreasonable delay in the performance of official duties. 39 In no
uncertain terms must we stress that every public employee or
servant must strive to render service to the people with utmost
diligence and efficiency. Insolence and delay have no place in
government service. The BIR, being the government collecting arm,
must and should do no less. It simply cannot be apathetic and laggard
in rendering service to the taxpayer if it wishes to remain true to its
mission of hastening the country's development. We take judicial
notice of the taxpayer's generally negative perception towards the
BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in
performing its duties, still, the same cannot justify Philex's nonpayment of its tax liabilities. The adage "no one should take the law
into his own hands" should have guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED. The assailed decision of the Court of Appeals dated April
8, 1996 is hereby AFFIRMED.
SO ORDERED.