G.R. No.

199422, June 21, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. KEPCO ILIJAN CORPORATION, Respondent.

DECISION

PERALTA, J.:

This is a petition for Review on Certiorari under Rule 45 of the Rules of Court seeking the reversal of the
Resolutions1 dated July 27, 20112 and November 15, 20113 of the Court of Tax Appeals (CTA) En Banc.

The facts follow.

For the first4 and second5 quarters of the calendar year 2000, respondent filed its Quarterly value-added
tax (VAT) returns with the Bureau of Internal Revenue (BIR). It also filed the Application for Zero Rated
Sales for calendar year 2000 which was duly approved by the BIR.6chanrobleslaw

Thereafter, respondent filed with the BIR its claim for refund in the amount, of P449,569,448.73
representing input tax incurred for the first and second quarters of the calendar year 2000 from its
importation and domestic purchases of capital goods and services preparatory to its production and sales
of electricity to the National Power Corporation.7chanrobleslaw

Petitioner did not act upon respondent's claim for refund or issuance of tax credit certificate for the first
and second quarters of the calendar year 2000. Consequently, respondent filed a Petition for Review8 on
March 21, 2002, and an Amended Petition for Review9 on September 12, 2003.

In her Answer,10 petitioner alleged the following Special and Affirmative Defenses: (1) respondent is not
entitled to the refund of the amounts prayed for; (2) the petition was prematurely filed for respondent's
failure to exhaust administrative remedies; (3) respondent failed to show that the taxes paid were
erroneously or illegally collected; and (4) respondent has no cause of action.

After the issues were joined, trial on the merits ensued.

Respondent, thereafter, filed its Memorandum on September 1, 2008. For failure of petitioner to file the
required Memorandum despite notice, the CTA First Division issued a Resolution11 dated September 12,
2008 submitting the case for decision.

On September 11, 2009, the CTA First Division rendered a Decision,12 the dispositive portion13 of which
reads as follows:ChanRoblesVirtualawlibrary

IN VIEW OF THE FOREGOING, THIS Court finds petitioner entitled to a refund in the amount.of
P443,447,184.50, representing unutilized input VAT paid on its domestic purchases and importation of
capital goods for the first and second quarters of 2000, as computed below:ChanRoblesVirtualawlibrary

Amount of Input VAT Claim

P449,569,448.73

Less: Input VAT Pertaining to Non-Capital Goods

706,328.22

Input VAT Claim Pertaining to Capital Goods Purchases

P448,863,120.51

Less: Not Properly Substantiated Input VAT

Per ICPA's Findings

45,878.55

Per this Court's Further Verification

5,370,057.46

Refundable Input VAT on Capital Goods Purchases

P443,447,184.50

There being no motion for reconsideration filed by the petitioner, the abovementioned decision became
final and executory and a corresponding Entry of Judgment was issued on October 10, 2009. Thus, on
February 16, 2010, the Court issued a Writ of Exeeution,14 the pertinent portion of which reads as
follows:ChanRoblesVirtualawlibrary

You are hereby ORDERED to REFUND in favor of the petitioner KEPCO ILIJAN CORPORATION, the amount
of P443,447,184.50 representing unutilized input VAT paid on its domestic purchases and importation of
capital goods for the first and second quarters of 2000, pursuant to the Decision of this Court,
promulgated on September 11, 2009, which has become final and executory on October 10, 2009, by
virtue of the Entry of Judgment issued on said date.
The Sheriff of this Court is hereby directed to see to it that this Writ is carried out by. the Respondent
and/or his agents, and shall make the corresponding return/report thereon within thirty (30) days after
receipt of the Writ.

SO ORDERED.

Petitioner alleges that she learned only of the Decision and the subsequent issuance of the writ of March
7, 2011 when the Office of the Deputy Commissioner for Legal and Inspection Group received a
Memorandum from the Appellate Division of the National Office recommending the issuance of a Tax
Credit Certificate in favor of the respondent in the amount of P443,447,184.50.

Accordingly, on April 11, 2011 petitioner filed a petition for annulment of judgment with the CTA En Banc,
praying for the following reliefs: (1) that the Decision dated September 11, 2009 of the CTA First Division
in CTA Case No. 6412 be annulled and set aside; (2) that the Entry of Judgment on October 10, 2009 and
Writ of Execution on February 16, 2010 be nullified; and (3) that the CTA First Division be directed to re-
open CIA Case No. 6412 to allow petitioner to submit her memoranda setting forth her substantial legal
defenses.

In opposition, respondent filed its Motion to Deny Due Course (To The Petition for Annulment of
Judgment), arguing, among others, that petitioner is not lawfully entitled to the annulment of judgment
on the ground that the CTA En Banc is bereft of jurisdiction to entertain annulment of judgments on the
premise that the Rules of Court, Republic Act No. (RA No.) 9282,15 and the Revised Rules'of the. Court of
Tax Appeals do not expressly provide a remedy on annulment of judgments.

On July 27, 2011, the CTA En Banc issueda Resolution16 dismissing the petition. Petitioner filed a motion
for reconsideration, but the same was denied in a Resolution17 dated November 15, 2011.

Hence, this petition.

Petitioner raises the following arguments to support her petition:ChanRoblesVirtualawlibrary

THE COURT OF TAX APPEALS (EN BANC) HAS JURISDICTION TO TAKE COGNIZANCE OF THE PETITION FOR
ANNULMENT OF JUDGMENT.
II

THE NEGLIGENCE COMMITTED BY PETITIONER'S COUNSEL IS GROSS, PALPABLE AND CONSTITUTES TOTAL
ABANDONMENT OF PETITIONER'S CAUSE WHICH IS TANTAMOUNT TO EXTRINSIC FRAUD.

III

THE COURT OF TAX APPEALS (FIRST DIVISION) HAS NO JURISDICTION OVER THE ORIGINAL PETITION FILED
BY RESPONDENT.

IV

PETITIONER IS NOT BARRED BY LACHES FROM ASSAILING THE JURISDICTION OF THE COURT OF TAX
APPEALS (FIRST DIVISION) OVER THE PETITION FILED BY RESPONDENT.18chanroblesvirtuallawlibrary

Prefatorily, we first pass upon the issue of whether the CTA En Banc has jurisdiction to take cognizance of
the petition for annulment of judgment filed by petitioner.

Annulment of judgment, as provided for in Rule 47 of the Rules of Court, is based only on the grounds of
extrinsic fraud and lack of jurisdiction. It is a recourse that presupposes the filing of a separate and original
action for the purpose of annulling or avoiding a decision in another case. Annulment is a remedy in law
independent of the case where the judgment sought to be annulled is rendered.19 It is unlike a motion
for reconsideration, appeal or even a petition for relief from judgment, because annulment is not a
continuation or progression of the same case, as in fact the case it seeks to annul is already final and
executory. Rather, it is an extraordinary remedy that is equitable in character and is permitted only in
exceptional cases.20chanrobleslaw

Annulment of judgment involves the exercise of original jurisdiction, as expressly conferred on the Court
of Appeals by Batas Pambansa Bilang (BP Blg.) 129, Section 9(2). It also implies power by a superior court
over a subordinate one, as provided for in Rule 47 of the Rules of Court, wherein the appellate court may
annul a decision of the regional trial court, or the latter court may annul a decision of the municipal or
metropolitan trial court.

But the law and the rules are silent when it comes to a situation similar to the case at bar, in which a court,
in this case the Court of Tax Appeals, is called upon to annul its own judgment. More specifically, in the
case at bar, the CTA sitting en banc is being asked to annul a decision of one of its divisions. However, the
laws creating the CTA and expanding its jurisdiction (RA Nos. 1125 and 9282) and the court's own rules of
procedure (the Revised Rules of the CTA) do not provide for such a scenario.

It is the same situation among other collegial courts. To illustrate, the Supreme Court or the Court of
Appeals may sit and acjjudicate cases in divisions consisting of only a number of members, and such
adjudication is already regarded as the decision of the Court itself.21 It is provided for in the Constitution,
Article VIII, Section 4(1) and BP Blg. 129, Section 4, respectively. The divisions are not considered separate
and distinct courts but are divisions of one and the same court; there is no hierarchy of courts within the
Supreme Court and the Court of Appeals, for they each remain as one court notwithstanding that they
also work in divisions.22 The Supreme Court sitting en banc is not an appellate court vis-a-vis its divisions,
and it exercises no appellate jurisdiction over the latter.23 As for the Court of Appeals en banc, it sits as
such only for the purpose of exercising administrative, ceremonial, or other non-
adjudicator/functions.24chanrobleslaw

Thus, it appears contrary to these features that a collegial court, sitting en banc, may be called upon to
annul a decision of one of its divisions which had become final and executory, for it is tantamount to
allowing a court to annul its own judgment and acknowledging that a hierarchy exists within such court.
In the process, it also betrays the principle that judgments must, at some point, attain finality. A court
that can revisit its own final judgments leaves the door open to possible endless reversals or modifications
which is anathema to a stable legal system.

Thus, the Revised Rules of the CTA and even the Rules of Court which apply suppletorily thereto provide
for no instance in which the en banc may reverse, annul or void a final decision of a division. Verily, the
Revised Rules of the CTA provide for no instance of an annulment of judgment at all. On the other hand,
the Rules of Court, through Rule 47, provides, with certain conditions, for annulment of judgment done
by a superior court, like the Court of Appeals, against the final judgment, decision or ruling of an inferior
court, which is the Regional Trial Court, based on the grounds of extrinsic' fraud and lack of jurisdiction.
The Regional Trial Court, in turn, also is empowered to, upon a similar action, annul a judgment or ruling
of the Metropolitan or Municipal Trial Courts within its territorial jurisdiction. But, again, the said Rules
are silent as to whether a collegial court sitting en banc may annul a final judgment of its own division.

As earlier explained, the silence of the Rules may be attributed to the need to preserve the principles that
there can be no hierarchy within a collegial court between its divisions and the en banc, and that a court's
judgment, once final, is immutable.

A direct petition for annulment of a judgment of the CTA to the Supreme Court, meanwhile, is likewise
unavailing, for the same reason that there is no identical remedy with the High Court to annul a final and
executory judgment of the Court of Appeals. RA No. 9282, Section I puts the CTA on the same level as the
Court of Appeals, so that .if the latter's final judgments may not be annulled before the Supreme Court,
then the CTA's own decisions similarly may not be so annulled. And more importantly, it has been
previously discussed that annulment of judgment is an original action, yet, it is not among the cases
enumerated in the Constitution's Article VIII, Section 5 over which the Supreme Court exercises original
jurisdiction. Annulment of judgment also often requires an adjudication of facts, a task that the Court
loathes to perform, as it is not a trier of facts.25cralawredchanrobleslaw

Nevertheless, there will be extraordinary cases, when the interest of justice highly demands it, where final
judgments of the Court of Appeals, the CTA or any other inferior court may still be vacated or subjected
to the Supreme Court's modification, reversal, annulment or declaration as void. But it will be
accomplished not through the same species of original action or petition for annulment as that found in
Rule 47 of the Rules of Court, but through any of the actions over which the Supreme Court has original
jurisdiction as specified in the Constitution, like 65 of the Rules of Court.

Hence, the next query is: Did the CTA En Banc correctly deny the petition for annulment of judgment filed
by petitioner?

As earlier discussed, the petition designated as one for annulment of judgment (following Rule 47) was
legally and procedurally infirm and, thus, was soundly dismissed by the CTA En Banc on such ground. Also,
the CTA could not have treated the petition as an appeal or a continuation of the case before the CTA First
Division because the latter's decision had become final and executory and, thus, no longer subject to an
appeal.

Instead, what remained as a remedy for the petitioner was to file a petition for certiorari under Rule 65,
which could have been filed as an original action before this Court and not before the CTA En Banc.
Certiorari is available when there is no appeal or any other plain, speedy and adequate remedy in the
ordinary course of law, such as in the case at bar. Since the petition below invoked the gross and palpable
negligence of petitioner's counsel which is allegedly tantamount to its being deprived of due process and
its day in court as party-litigant26 and, as it also invokes lack of jurisdiction of the CTA First Division to
entertain the petition filed by private respondent since the same allegedly fails to comply with the
reglementary periods for judicial rernedies involving administrative claims for refund of excess unutilized
input VAT under the National Internal Revenue Code (NIRC),27 which periods it claims to be jurisdictional,
then the proper remedy that petitioner should have availed of was indeed a petition for certiorari under
Rule 65, an original or independent action premised on the public respondent having acted without or in
excess of jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction.
However, since a certiorari petition is not a continuation of the appellate process borne out of the original
case but is a separate action focused on actions that are in excess or wanting of jurisdiction,28 then it
cannot be filed in the same tribunal whose actions are being assailed but is instead cognizable by a higher
tribunal which, in the case of the CTA, is this Court.29 In the case involving petitioner, the petition could
have been filed directly with this Court, even without any need to file a motion for reconsideration with
the CTA division or En Banc, as the case appears to fall under one of the recognized exceptions to the rule
requiring such a motion as a prerequisite to filing such petition.30chanrobleslaw

The office of a certiorari petition is detailed in the Rules of Court, thus:ChanRoblesVirtualawlibrary

Section 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or quasi-judicial
functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate
remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be rendered annulling or modifying the
proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may
require.

The petition shall be accompanied by a certified true copy of the judgment, order or resolution subject
thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn certification
of non-forum shopping as provided in the third paragraph of section 3, Rule 46.

(1a)

The writ of certiorari is an "extraordinary remedy" that is justified in the "absence of an appeal or any
plain» speedy and adequate remedy in the ordinary course of law."31 It may be given due course as long
as petitioners allege that they had no appeal or any other efficacious remedy against the appellate court's
decision.32chanrobleslaw

Direct resort to this Court via a certiorari petition on the same grounds as in this case has jurisprudential
precedents. In one, We held that when the appellate court's decision is void for lack of due process, the
filing of a petition for certiorari with this court without a motion for reconsideration is justified.33 This
Court also has held that a petition for certiorari under Rule 65 of the Rules of Court is available when the
proceedings in question amount to depriving the petitioner his day in court.34 It is true that certiorari is
not a substitute for appeal, but exempt from this rule is a case when the trial court's decision or resolution
was issued without jurisdiction or with grave abuse of discretion.35When a fraudulent scheme prevents
a party from having his day in court or from presenting his case, the fraud is one that affects and goes into
the jurisdiction of the court.36 A question as to lack of jurisdiction of the respondent tribunal or agency is
properly the office of a petition for certiorari.

In any event, petitioner's failure to avail of this remedy and mistaken filing of the wrong action are fatal
to its case and renders and leaves the CTA First Division's decision as indeed final and executory. By the
time the instant petition for review was filed by petitioner with this Court on December 9, 2011, more
than sixty (60) days have passed since petitioner's alleged discovery (on March 7, 2011) of its loss in the
case as brought about by the alleged negligence or fraud of its counsel.
Thus, the current discussion serves no further purpose other than as merely a future guide to the bench
and the bar when confronted with a similar situation.

Although in select cases, this Court has asseverated that "it is always within its power to suspend its own
rules or to except a particular case from its operation, whenever the purposes of justice require it" and
that the Rules of Court were conceived and promulgated to set forth guidelines in the dispensation of
justice but not to bind and chain the hand that dispenses it, for otherwise, courts will be mere slaves to
or robots of technical rules, shorn of judicial discretion.37 We have also equally stressed that strict
compliance with the rules of procedure is essential to the administration of justice.38chanrobleslaw

In this case, even if there was allegedly a deliberate effort from petitioner's counsel to refuse to
participate, despite notice, in the conduct of the case after the filing of the Answer right up to the issuance
of the Writ of Execution against petitioner,38 equally apparent is the failure of petitioner and/or
petitioner's responsible subordinates to supervise the said counsel as well as the conduct and progress of
the case. Not only was there an apparent negligence of counsel,39 which binds the client, there likewise
appears to have been lapses on the part of the client - the petitioner and the petitioner's responsible
subordinates - themselves. Equally oft-repeated is the rule that service made upon the present counsel of
record at his given address is service to the client.40 Thus, it is harder to justify a relaxation of the rules
when the litigant itself suffers from inexcusable neglect. It is an oft-repeated pronouncement that clients
should take the initiative of periodically checking the progress of their cases, so that they could take timely
steps to protect their interest.41 Failing such, clients are left with more recourse against the consequence
of their and their counsel's omissions.

To prevent similar disadvantageous incidents against the government in the future, the BIR is DIRECTED
to ADOPT mechanisms, procedures, or measures that can effectively monitor the progress of cases being
handled by its counsels. Likewise, the Ombudsman is DIRECTED to CONDUCT an in-depth investigation to
determine who were responsible for the apparent mishandling of the present case that resulted in the
loss of almost half-a-billion pesos, which the government could have used to finance its much needed
infrastructure, livelihood projects, and other equally important projects.

WHEREFORE, premises considered, the petition for review is hereby DENIED. The assailed Resolutions
dated July 27, 2011 and November 15, 2011 of the Court of Tax Appeals En Banc are AFFIRMED.

SO ORDERED.chanRoblesvirtualLawlibrary
G.R. No. 120935 May 21, 2009

LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES, in their capacities as
President, Treasurer and Secretary of Adamson Management Corporation, Petitioners,

vs.

COURT OF APPEALS and LIWAYWAY VINZONS-CHATO, in her capacity as Commissioner of the Bureau of
Internal Revenue, Respondents.

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

G.R. No. 124557 May 21, 2009

INTERNAL REVENUE, Petitioner,

vs.

COMMISSIONER OF COURT OF APPEALS, COURT OF TAX APPEALS, ADAMSON MANAGEMENT

CORPORATION, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES,
Respondents.

DECISION

PUNO, C.J.:

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

G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G. ADAMSON,
THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in their respective
capacities as president, treasurer and secretary of Adamson Management Corporation (AMC) against then
Commissioner of Internal Revenue Liwayway Vinzons-Chato (COMMISSIONER), under Rule 45 of the
Revised Rules of Court. They seek to review and reverse the Decision promulgated on March 21, 1995 and
Resolution issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No. 35488 (Liwayway Vinzons-
Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.).
G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the Decision
dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled Commissioner of Internal
Revenue v. Court of Tax Appeals, Adamson Management Corporation, Lucas G. Adamson, Therese June
D. Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals upheld the Resolution
promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in C.T.A. Case No. 5075 (Adamson
Management Corporation, Lucas G. Adamson, Therese Adamson and Sara de los Reyes v. Commissioner
of Internal Revenue).

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

On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and
Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares were valued at ₱7,789,995.00.1 On June
22, 1990, ₱159,363.21 was paid as capital gains tax for the transaction.

On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock in AAI
for ₱17,718,360.00. AMC paid the capital gains tax of ₱352,242.96.

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

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

On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit of
Complaint2 against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for
violation of Sections 45 (a) and (d)3 , and 1104 , in relation to Section 1005 , as penalized under Section
255,6 and for violation of Section 2537 , in relation to Section 252 (b) and (d) of the National Internal
Revenue Code (NIRC).8

AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ a motion
to suspend proceedings on the ground of prejudicial question, pendency of a civil case with the Supreme
Court, and pendency of their letter-request for re-investigation with the Commissioner. After the
preliminary investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The Motion for
Reconsideration against the findings of probable cause was denied by the prosecutor.
On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged
before the Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846.
They filed a Motion to Dismiss or Suspend the Proceedings. They invoked the grounds that there was yet
no final assessment of their tax liability, and there were still pending relevant Supreme Court and CTA
cases. Initially, the trial court denied the motion. A Motion for Reconsideration was however filed, this
time assailing the trial court’s lack of jurisdiction over the nature of the subject cases. On August 8, 1994,
the trial court granted the Motion. It ruled that the complaints for tax evasion filed by the Commissioner
should be regarded as a decision of the Commissioner regarding the tax liabilities of Lucas G. Adamson,
Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held that the said
cases cannot proceed independently of the assessment case pending before the CTA, which has
jurisdiction to determine the civil and criminal tax liability of the respondents therein.

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

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

Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on July 6,
1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues:

1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING THE
DOCTRINE IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.

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

3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE CASE AT
BAR.
4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED ASSESSMENT ON
THE TAX LIABILITY OF THE TAXPAYER.

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

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

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

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

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

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

The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave abuse of
discretion. She contended that, with regard to the protest provided under Section 229 of the NIRC, there
must first be a formal assessment issued by the Commissioner, and it must be in accord with Section 6 of
Revenue Regulation No. 12-85. She maintained that she had not yet issued a formal assessment of tax
liability, and the tax deficiency amounts mentioned in her criminal complaint with the DOJ were given
only to show the difference between the tax returns filed and the audit findings of the revenue examiner.
The Court of Appeals sustained the CTA’s denial of the Commissioner’s Motion to Dismiss. Thus, the
Commissioner filed the petition for review under G.R. No. 124557, raising the following issues:

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

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

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

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

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

1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR OTHERWISE)

OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS
REYES;

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

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

The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR Commissioner Jose U. Ong
authorized revenue officers to examine the books of accounts and other accounting records of Pascor
Realty and Development Corporation (PRDC) for 1986, 1987 and 1988. This resulted in a recommendation
for the issuance of an assessment in the amounts of ₱7,498,434.65 and ₱3,015,236.35 for the years 1986
and 1987, respectively.
On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against PRDC, its President
Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of
₱10,513,671.00. Private respondents filed an Urgent Request for Reconsideration/Reinvestigation
disputing the tax assessment and tax liability.

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

Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for review.
The Commissioner filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction
over the subject matter of the petition, as there was yet no formal assessment issued against the
petitioners. The CTA denied the said motion to dismiss and ordered the Commissioner to file an answer
within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider the
resolution. Instead, the Commissioner filed a petition for review of the CTA decision with the Court of
Appeals. The Court of Appeals upheld the CTA order. However, this Court reversed the Court of Appeals
decision and the CTA order, and ordered the dismissal of the petition. We held:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and interests begin to accrue against the
taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must
be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot
be deemed an assessment that can be questioned before the Court of Tax Appeals.

Neither the NIRC nor the revenue regulations governing the protest of assessments12 provide a specific
definition or form of an assessment. However, the NIRC defines the specific functions and effects of an
assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the
nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has
tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can
be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of
the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in
addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for
its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher
rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its
payment until the full payment.13

The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance
and the period within which to protest it. Section 20314 of the NIRC provides that internal revenue taxes
must be assessed within three years from the last day within which to file the return. Section 222,15 on
the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was
submitted or in case of failure to file a return. Also, Section 22816 of the same law states that said
assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must
be certain that a specific document constitutes an assessment. Otherwise, confusion would arise
regarding the period within which to make an assessment or to protest the same, or whether interest and
penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an
assessment is deemed made only when the collector of internal revenue releases, mails or sends such
notice to the taxpayer.17

In the present case, the revenue officers’ Affidavit merely contained a computation of respondents’ tax
liability.lawphil.net It did not state a demand or a period for payment. Worse, it was addressed to the
justice secretary, not to the taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:

"A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof."18

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

Even these definitions fail to advance private respondents’ case. That the BIR examiners’ Joint Affidavit
attached to the Criminal Complaint contained some details of the tax liabilities of private respondents
does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and
substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due
and a demand to the private respondents for payment thereof.
The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not
to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax
evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an
assessment, the commissioner opted instead to file a criminal case for tax evasion. What private
respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against
them, not a notice that the Bureau of Internal Revenue had made an assessment.

Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment.
This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or
fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court
may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates
that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi,20
petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest
to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the
criminal action which was independent of the resolution of the protest in the CTA. This was because the
commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an
assessment or to file a criminal case against the taxpayer or to do both.

Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC,21 which
penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We
disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge
can be filed. This is the general rule. Private respondents failed to show that they are entitled to an
exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to
file a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment
is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a
chance to submit position papers and documents to prove that the assessment is unwarranted. If the
commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing
the latter specifically and clearly that an assessment has been made against him or her. In contrast, the
criminal charge need not go through all these. The criminal charge is filed directly with the DOJ.
Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the
commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to
demand payment, but to penalize the taxpayer for violation of the Tax Code.

In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that she
wrote the recommendation letter22 addressed to the Secretary of the DOJ recommending the filing of
criminal complaints against AMC and the aforecited persons for fraudulent returns and tax evasion.
The first issue is whether the Commissioner’s recommendation letter can be considered as a formal
assessment of private respondents’ tax liability.

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

We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment.
Even a cursory perusal of the said letter would reveal three key points:

1. It was not addressed to the taxpayers.

2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set
therein.

3. The letter was never mailed or sent to the taxpayers by the Commissioner.

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

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

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

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

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

Thus, the applicability of Ungab v. Cusi25 is evident to the cases at bar. In this seminal case, this Court
ruled that there was no need for precise computation and formal assessment in order for criminal
complaints to be filed against him. It quoted Merten’s Law of Federal Income Taxation, Vol. 10, Sec.
55A.05, p. 21, thus:

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and
evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent
return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon
knowledge on the part of the taxpayer that he has made an inaccurate return, and the government’s
failure to discover the error and promptly to assess has no connections with the commission of the crime.

This hoary principle still underlies Section 269 and related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the criminal
and civil cases here at bar.1avvphi1

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the rulings of the
Commissioner are appealable to the CTA, thus:

SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal, as herein provided -
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau
of Internal Revenue;

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

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to interpret
the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the
Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282.26 It provides:

SEC. 7. Section 7 of the same Act is hereby amended to read as follows:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under
the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where
the National Internal Revenue Code provides a specific period of action, in which case the inaction shall
be deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction;

xxx

(b) Jurisdiction over cases involving criminal offenses as herein provided:

(1) Exclusive original jurisdiction over all criminal offenses arising from violations of the National Internal
Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue
or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph
where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular
courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the
contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined
in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with
it the filing of the civil action, and no right to reserve the filling of such civil action separately from the
criminal action will be recognized.

(2) Exclusive appellate jurisdiction in criminal offenses:

(a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases
originally decided by them, in their respected territorial jurisdiction.

(b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

(c) Jurisdiction over tax collection cases as herein provided:

(1) Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes,
fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes
and fees, exclusive of charges and penalties, claimed is less than One million pesos (₱1,000,000.00) shall
be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court.

(2) Exclusive appellate jurisdiction in tax collection cases:

(a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection
cases originally decided by them, in their respective territorial jurisdiction.

(b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan
Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

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

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

IN VIEW WHEREOF, premises considered, judgment is rendered:

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

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

SO ORDERED.

G.R. No. 155541 January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

YNARES-SANTIAGO, J.:

This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 09107,
dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of
Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De
Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel, represented by
Prudential Bank as its duly appointed and qualified Administrator.

As correctly summarized by the Court of Appeals, the relevant facts are as follows:

During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the
Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death,
Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The
return did not indicate that the decedent had died.

On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the
Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a quo
appointed one of the heirs as Special Administrator. Philtrust’s motion for reconsideration was denied by
the probate court.
On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appointed
Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was also
relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead.

In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the
decedent’s tax liability and found a deficiency income tax for the year 1977 in the amount of P318,233.93.
Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and Assessment Notice No.
NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which
was the address stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was
not informed that the decedent had actually passed away.

In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner
and Auditor Tax Consultant of the Estate of the decedent.

On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to
enforce collection of the decedent’s deficiency income tax liability, which were served upon her heir,
Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an
Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest
with the Litigation Division of the BIR, which was not acted upon because the assessment notice had
allegedly become final, executory and incontestable.

On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition
to the BIR’s Motion for Allowance of Claim based on the ground that there was no proper service of the
assessment and that the filing of the aforesaid claim had already prescribed. The BIR filed its Reply,
contending that service to Philippine Trust Company was sufficient service, and that the filing of the claim
against the Estate on November 22, 1984 was within the five-year prescriptive period for assessment and
collection of taxes under Section 318 of the 1977 National Internal Revenue Code (NIRC).

On November 19, 1985, the court a quo issued an Order denying respondent’s claim against the Estate,2
after finding that there was no notice of its tax assessment on the proper party.3

On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 09107,4
assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing
the decedent’s 1978 income tax return on April 5, 1979, two days after the taxpayer’s death, had
"constituted itself as the administrator of the estate of the deceased at least insofar as said return is
concerned."5 Citing Basilan Estate Inc. v. Commissioner of Internal Revenue,6 respondent argued that the
legal requirement of notice with respect to tax assessments7 requires merely that the Commissioner of
Internal Revenue release, mail and send the notice of the assessment to the taxpayer at the address stated
in the return filed, but not that the taxpayer actually receive said assessment within the five-year
prescriptive period.8 Claiming that Philtrust had been remiss in not notifying respondent of the decedent’s
death, respondent therefore argued that the deficiency tax assessment had already become final,
executory and incontestable, and that petitioner Estate was liable therefor.

On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although
acknowledging that the bond of agency between Philtrust and the decedent was severed upon the latter’s
death, it was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of
the decedent’s death, pursuant to Section 104 of the National Internal Revenue Code of 1977.
Consequently, the BIR’s service to Philtrust of the demand letter and Notice of Assessment was binding
upon the Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the
assessment became final, executory and incontestable. The dispositive portion of said decision reads:

WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE. Another one
is entered ordering the Administrator of the Estate to pay the Commissioner of Internal Revenue the
following:

a. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978, plus 20%
interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10%
surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended
by PD 69 and 1705; and

b. The costs of the suit.

SO ORDERED.9

Hence, the instant petition, raising the following issues:

1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment
against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in order to
bind the Estate;

2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final
demand was already final, executory and incontestable.
Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death.
As such, petitioner argues that there was no proper notice of the assessment which, therefore, never
became final, executory and incontestable.10 Petitioner further contends that respondent’s failure to file
its claim against the Estate within the proper period prescribed by the Rules of Court is a fatal error, which
forever bars its claim against the Estate.11

Respondent, on the other hand, claims that because Philtrust filed the decedent’s income tax return
subsequent to her death, Philtrust was the de facto administrator of her Estate.12 Consequently, when
the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust, there was
proper service on the Estate.13 Respondent further asserts that Philtrust had the legal obligation to
inform petitioner of the decedent’s death, which requirement is found in Section 104 of the NIRC of
1977.14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to profit
from this omission.15 Respondent further argues that Philtrust’s failure to protest the aforementioned
assessment within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the
assessment had already become final, executory and incontestable.16

The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by
extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of
whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501
was valid service on petitioner, and the issue of whether Philtrust’s inaction thereon could bind petitioner.
If both sub-issues are answered in the affirmative, respondent’s contention as to the finality of
Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative. This is because Section
319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure
to file such a protest within said period means that the assessment ipso jure becomes final and
unappealable, as a consequence of which legal proceedings may then be initiated for collection thereof.

We find in favor of the petitioner.

The first point to be considered is that the relationship between the decedent and Philtrust was one of
agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil
Code, death of the agent or principal automatically terminates the agency. In this instance, the death of
the decedent on April 3, 1979 automatically severed the legal relationship between her and Philtrust, and
such could not be revived by the mere fact that Philtrust continued to act as her agent when, on April 5,
1979, it filed her Income Tax Return for the year 1978.

Since the relationship between Philtrust and the decedent was automatically severed at the moment of
the Taxpayer’s death, none of Philtrust’s acts or omissions could bind the estate of the Taxpayer. Service
on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done.
It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent,
and, indeed, that the court a quo twice rejected Philtrust’s motion to be thus appointed. As of November
18, 1982, the date of the demand letter and Assessment Notice, the legal relationship between the
decedent and Philtrust had already been non-existent for three years.

Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal
obligation on Philtrust to inform respondent of the decedent’s death. The said Section reads:

SEC. 104. Notice of death to be filed. – In all cases of transfers subject to tax or where, though exempt
from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any
of the legal heirs, as the case may be, within two months after the decedent’s death, or within a like period
after qualifying as such executor or administrator, shall give written notice thereof to the Commissioner
of Internal Revenue.

The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the
chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value of
the estate exceeds three thousand pesos". It has absolutely no applicability to a case for deficiency income
tax, such as the case at bar. It further lacks applicability since Philtrust was never the executor,
administrator of the decedent’s estate, and, as such, never had the legal obligation, based on the above
provision, to inform respondent of her death.

Although the administrator of the estate may have been remiss in his legal obligation to inform
respondent of the decedent’s death, the consequences thereof, as provided in Section 119 of the National
Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on the
administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency
tax assessments, or the waiver of the notice requirement for such assessments.

Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-
00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand
letter and assessment notice, (2) inform respondent of the decedent’s death, or (3) inform petitioner that
it had received said demand letter and assessment notice. This lack of legal obligation was implicitly
recognized by the Court of Appeals, which, in fact, rendered its assailed decision on grounds of "equity".17

Since there was never any valid notice of this assessment, it could not have become final, executory and
incontestable, and, for failure to make the assessment within the five-year period provided in Section 318
of the National Internal Revenue Code of 1977, respondent’s claim against the petitioner Estate is barred.
Said Section 18 reads:

SEC. 318. Period of limitation upon assessment and collection. – Except as provided in the succeeding
section, internal revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the expiration
of such period. For the purpose of this section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to
cases already investigated prior to the approval of this Code.

Respondent argues that an assessment is deemed made for the purpose of giving effect to such
assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and
there is no legal requirement that the taxpayer actually receive said notice within the five-year period.18
It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer, and
not merely to a disinterested party. Although there is no specific requirement that the taxpayer should
receive the notice within the said period, due process requires at the very least that such notice actually
be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,19 we
had occasion to say:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and interests begin to accrue against the
taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must
be served on and received by the taxpayer.

In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be
sent to the administrator of the estate, since it is the said administrator, as representative of the estate,
who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the
court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any
authority to represent the estate. We said:

The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice
could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue …
this Court had occasion to state that "the assessment is deemed made when the notice to this effect is
released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appearing
that the person liable for the payment of the tax did not receive the assessment, the assessment could
not become final and executory. (Citations omitted, emphasis supplied.)
In this case, the assessment was served not even on an heir of the Estate, but on a completely
disinterested third party. This improper service was clearly not binding on the petitioner.

By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was
remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in
its obligation to inform respondent of the decedent’s death, and (4) the assessment notice is therefore
binding on the Estate, respondent is arguing in circles. The most crucial point to be remembered is that
Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no
assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no
proceedings could be initiated in court for the collection of said tax,21 and respondent’s claim for
collection, filed with the probate court only on November 22, 1984, was barred for having been made
beyond the five-year prescriptive period set by law.

WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 09107,
dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Manila,
Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the
Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income
tax of the decedent for the year 1977 in the amount of P318,223.93, is AFFIRMED.

G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO., INC.) and THE COURT OF
APPEALS, respondents.

PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of Internal Revenue
(BIR) still assess a taxpayer even after the latter has already paid the tax due, on the ground that the
previous assessment was insufficient or based on a "false" return?
The Case

This is the main question raised before us in this Petition for Review on Certiorari assailing the Decision 1
dated February 14, 1992, promulgated by the Court of Appeals 2 in CA-GR SP No. 25100. The assailed
Decision reversed the Court of Tax Appeals (CTA) 3 which upheld the BIR commissioner's assessments
made beyond the five-year statute of limitations.

The Facts

The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime Darby International Tire
Co, Inc.), was an American-owned and controlled corporation previous to July 3, 1974. As a condition for
approving the manufacture by private respondent of tires and other rubber products, the Central Bank of
the Philippines required that it should develop a rubber plantation. In compliance with this requirement,
private respondent purchased from the Philippine government in 1961, under the Public Land Act and the
Parity Amendment to the 1935 Constitution, certain parcels of land located in Tumajubong, Basilan, and
there developed a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon
the expiration of the Parity Amendment on July 3, 1974, the ownership rights of Americans over public
agricultural lands, including the right to dispose or sell their real estate, would be lost. On the basis of this
Opinion, private respondent sold to Siltown Realty Philippines, Inc. on January 21, 1974, its Basilan
landholding for P500,000 payable in installments. In accord with the terms of the sale, Siltown Realty
Philippines, Inc. leased the said parcels of land to private respondent for a period of 25 years, with an
extension of another 25 years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private
respondent were examined for the purpose of determining its tax liability for taxable year 1974. The
examination resulted in the April 23, 1975 assessment of private respondent for deficiency income tax in
the amount of P6,005.35, which it duly paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum
Authority Reference No. 749157 for the purpose of examining Siltown's business, income and tax
liabilities. On the basis of this examination, the BIR commissioner issued against private respondent on
October 10, 1980, an assessment for deficiency in donor's tax in the amount of P1,020,850, in relation to
the previously mentioned sale of its Basilan landholdings to Siltown. Apparently, the BIR deemed the
consideration for the sale insufficient, and the difference between the fair market value and the actual
purchase price a taxable donation.
In a letter dated November 24, 1980, private respondent contested this assessment. On April 9, 1981, it
received another assessment dated March 16, 1981, which increased to P 1,092,949 the amount
demanded for the alleged deficiency donor's tax, surcharge, interest and compromise penalty.

Private respondent appealed the correctness and the legality of these last two assessments to the CTA.
After trial in due course, the CTA rendered its Decision dated March 29, 1991, the dispositive portion of
which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency gift
tax is MODIFIED land petitioner is ordered to pay the amount of P1,311,179.01 plus 10% surcharge and
20% annual interest from March 16, 1981 until fully paid provided that the maximum amount that may
be collected as interest on delinquency shall in no case exceed an amount corresponding to a period of
three years pursuant to Section 130(b)(l) and (c) of the 1977 Tax Code, as amended by P.D. No. 1705,
which took effect on August 1, 1980.

SO ORDERED. 5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the CTA, as
follows:

What is involved here is not a first assessment; nor is it one within the 5-year period stated in Section 331
above. Since what is involved in this case is a multiple assessment beyond the five-year period, the
assessment must be based on the grounds provided in Section 337, and not on Section 15 of the 1974 Tax
Code. Section 337 utilizes the very specific terms "fraud, irregularity, and mistake". "Falsity does not
appear to be included in this enumeration. Falsity suffices for an assessment, which is a first assessment
made within the five-year period. When it is a subsequent assessment made beyond the five-year period,
then, it may be validly justified only by "fraud, irregularity and mistake" on the part of the

taxpayer.6

Hence, this Petition for Review under Rule 45 of the Rules of Court. 7

The Issues
Before us, petitioner raises the following issues:

Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as ruled
by public respondent Court of Appeals

II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid and in accordance with law

Prescription is the crucial issue in the resolution of this case.

The Court's Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription,
because its ruling was based on factual findings that should have been left undisturbed on appeal, in the
absence of any showing that it had been tainted with gross error or grave abuse of

discretion. 8 The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supported by substantial
evidence and in the absence of gross error or grave abuse of discretion. However, the CTA's application
of the law to the facts of this controversy is an altogether different matter, for it involves a legal question.
There is a question of law when the issue is the application of the law to a given set of facts. On the other
hand, a question of fact involves the truth or falsehood of alleged facts.9 In the present case, the Court of
Appeals ruled not on the truth or falsity of the facts found by the CTA, but on the latter's application of
the law on prescription.
Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. — Except as provided in the
succeeding section, internal-revenue taxes shall be assessed within five years after the return was filed,
and no proceeding in court without assessment for the collection of such taxes shall be begun after
expiration of such period. For the purposes of this section, a return filed before the last day prescribed by
law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall
not apply to cases already investigated prior to the approval of this Code.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the March
1981 assessments were issued by the BIR beyond the five-year statute of limitations. The Court has
thoroughly studied the records of this case and found no basis to disregard the five-year period of
prescription. As succinctly pronounced by the Court of Appeals:

The subsequent assessment made by the respondent Commissioner on October 40, 1980, modified by
that of March 16, 1981, violates the law. Involved in this petition is the income of the petitioner for the
year 1974, the returns for which were required to be filed on or before April 15 of the succeeding year.
The returns for the year 1974 were duly filed by the petitioner, and assessment of taxes due for such year
— including that on the transfer of properties on June 21, 1974 — was made on April 13, 1975 and
acknowledged by Letter of Confirmation No. 101155 terminating the examination on this subject. The
subsequent assessment of October 10, 1980 modified, by that of March 16, 1981, was made beyond the
period expressly set in Section 331 of the National Internal Revenue Code . . . . 10

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the second assessment (March
16, 1981) of the Commissioner was well-advised having been made in contemplation of his power under
Section 15 of the 1974 Code (now Section 16, of NIRC) to assess the proper tax on the best evidence
obtainable "when there is reason to believe that a report of a taxpayer is false, incomplete or erroneous.
More, when there is falsity with intent to evade tax as in this case, the ordinary period of limitation upon
assessment and collection does not apply so that contrary to the averment of petitioner, the right to
assess respondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land in Tumajubong, Lamitan,
Basilan in favor of Siltown Realty for the sum of P500,000.00 only whereas said lands had been sworn to
under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)
(see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11
For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law on
prescription, being a remedial measure, should be liberally construed in order to afford such protection.
12 As a corollary, the exceptions to the law on prescription should perforce be strictly construed.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis for the
assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or
regulation, or when there is reason to believe that any such report is false, incomplete, or erroneous, the
Commissioner of Internal Revenue shall assess the proper tax on the best evidence obtainable." Clearly,
Section 15 does not provide an exception to the statute of limitations on the issuance of an assessment,
by allowing the initial assessment to be made on the basis of the best evidence available. Having made its
initial assessment in the manner prescribed, the commissioner could not have been authorized to issue,
beyond the five-year prescriptive period, the second and the third assessments under consideration
before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit of the
statute of limitations. The relevant part of then Section 332 of the NIRC, which enumerates the exceptions
to the period of prescription, provides:

Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the
case of a false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may
be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser
than its declared fair market value. This fact alone did not constitute a false return which contains wrong
information due to mistake, carelessness or ignorance.13 It is possible that real property may be sold for
less than adequate consideration for a bona fide business purpose; in such event, the sale remains an
"arm's length" transaction. In the present case, the private respondent was compelled to sell the property
even at a price less than its market value, because it would have lost all ownership rights over it upon the
expiration of the parity amendment. In other words, private respondent was attempting to minimize its
losses. At the same time, it was able to lease the property for 25 years, renewable for another 25. This
can be regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than its declared fair
market value did not by itself justify a finding of false return. Indeed, private respondent declared the sale
in its 1974 return submitted to the BIR. 14 Within the five-year prescriptive period, the BIR could have
issued the questioned assessment, because the declared fair market value of said property was of public
record. This it did not do, however, during all those five years. Moreover, the BIR failed to prove that
respondent's 1974 return had been filed fraudulently. Equally significant was its failure to prove
respondent's intent to evade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent
to evade the payment of the correct amount of tax. 15 Moreover, even though a donor's tax, which is
defined as "a tax on the privilege of transmitting one's property or property rights to another or others
without adequate and full valuable consideration," 16 is different from capital gains tax, a tax on the gain
from the sale of the taxpayer's property forming part of capital assets, 17 the tax return filed by private
respondent to report its income for the year 1974 was sufficient compliance with the legal requirement
to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation
does not change the fact that private respondent already reported its income for 1974 by filing an income
tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the
intent to evade tax, or that it had failed to file a return at all, the period for assessments has obviously
prescribed. Such instances of negligence or oversight on the part of the BIR cannot prejudice taxpayers,
considering that the prescriptive period was precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become
moot and unnecessary.

WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of Appeals is
AFFIRMED. No costs.

SO ORDERED.

G.R. No. 221590

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.

ASALUS CORPORATION, Respondent

DECISION

MENDOZA, J.:

This petition for review on certiorari seeks to reverse and set aside the July 30, 2015 Decision1 and the
November 6, 2015 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1191, which
affirmed the April 2, 2014 Decision3 of the CTA Third Division (CTA Division).

The Antecedents

On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice of Informal Conference
from Revenue District Office (RDO) No. 47 of the Bureau of Internal Revenue (BIR). It was in connection
with the investigation conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-Added
Tax (VAT) transactions of Asalus for the taxable year 2007.4 Asalus filed its Letter-Reply,5 dated December
29, 2010, questioning the basis of Bañares' computation for its VAT liability.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued the Preliminary
Assessment Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the aggregate amount of
₱413, 378, 058.11, inclusive of surcharge and interest. Asalus filed its protest against the PAN but it was
denied by the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating that it was liable for
deficiency VAT for 2007 in the total amount of ₱95,681,988.64, inclusive of surcharge and interest.
Consequently, it filed its protest against the FAN, dated September 6, 2011. Thereafter, Asal us filed a
supplemental protest stating that the deficiency VAT assessment had prescribed pursuant to Section 203
of the National Internal Revenue Code (NIRC).7

On October 16, 2012, Asal us received the Final Decision on Disputed Assessment8 (FDDA) showing VAT
deficiency for 2007 in the aggregate amount of ₱106,761,025.17, inclusive of surcharge and interest and
₱25,000.00 as compromise penalty. As a result, it filed a petition for review before the CTA Division.

The CTA Division Ruling

In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment issued on August 26, 2011
had prescribed and consequently deemed invalid. It opined that the ten (10)-year prescriptive period
under Section 222 of the NIRC was inapplicable as neither the FAN nor the FDDA indicated that Asalus had
filed a false VAT return warranting the application of the ten (10)-year prescriptive period. It explained
that it was only in the PAN where an allegation of false or fraudulent return was made. The CTA stressed
that after Asalus had protested the PAN, the CIR never mentioned in both the FAN and the FDDA that the
prescriptive period would be ten (10) years. It further pointed out that the CIR failed to present evidence
regarding its allegation of fraud or falsity in the returns.

The CTA wrote that "the three instances where the three-year prescriptive period will not apply must
always be alleged and established by clear and convincing evidence and should not be anchored on mere
conjectures and speculations,9 before the ten (10) year prescriptive period could be considered. Thus, it
disposed:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the deficiency VAT
assessment for taxable year 2007 and the compromise penalty are hereby CANCELLED and WITHDRAWN,
on ground of prescription.

SO ORDERED.10

The CIR moved for reconsideration but its motion was denied.

The CTA En Banc Ruling

In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of the CT A Division and
dismissed the petition for review filed by the CIR. It explained that there was nothing in the FAN and the
FDDA that would indicate, the non-application of the three (3) year prescriptive period under Section 203
of the NIRC. It found that the CIR did not present any evidence during the trial to substantiate its claim of
falsity in the returns and again missed its chance to do so when it failed to file its memorandum before
the CTA Division.

The CTA En Banc further explained that the PAN alone could not be used as a basis because it was not the
assessment contemplated by law. Consequently, the allegation of falsity in Asalus' tax returns could not
be considered as it was not reiterated in the FAN. The dispositive portion thus reads:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly,
DISMISSED for lack of merit.

SO ORDERED.11

The CIR sought the reconsideration of the decision of the CTA En Banc, but the latter upheld its decision
in its November 6, 2015 resolution.

Hence, this petition.

ISSUES

WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE FAN AND FDDA ISSUED
AGAINST THE LATTER FALLS UNDER SECTION 222(A) OF THE 1997 NIRC, AS AMENDED;

II

WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE FEES IT COLLECTED FROM
ITS MEMBERS APPLYING FOR HEALTHCARE SERVICES CONSTITUTES "FALSE" RETURN UNDER SECTION
222(A) OF THE 1997 NIRC, AS AMENDED; AND

II

WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY VAT FOR TAXABLE YEAR
2007 HAD ALREADY PRESCRIBED.12

The CIR, through the Office of the Solicitor General (OSG), argues that the VAT assessment had yet to
prescribe as the applicable prescriptive period is the ten (10)-year prescriptive period under Section 222
of the NIRC, and not the three (3) year prescriptive period under Section 203 thereof. It claims that Asalus
was informed in the PAN of the ten (10)-year prescriptive period and that the FAN made specific reference
to the PAN. In turn, the FDDA made reference to the FAN. Asalus, on the other hand, only raised
prescription in its supplemental protest to the FAN. The CIR insists that Asalus was made fully aware that
the prescriptive period under Section 222 would apply.

Moreover, the CIR asserts that there was substantial understatement in Asalus' income, which exceeded
30% of what was declared in its VAT returns as appearing in its quarterly VAT returns; and the
underdeclaration was supported by the judicial admission of its lone witness that not all the membership
fees collected from members applying for healthcare services were reported in its VAT returns. Thus, the
CIR concludes that there was prima facie evidence of a false return.

The Position of Asalus

In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the present petition involved
a question of fact, which was beyond the ambit of a petition for review under Rule 45. Moreover, it
asserted that the findings of fact of the CT A Division, which were affirmed by the CTA En Banc, were
conclusive and binding upon the Court. It posited that the CIR could not raise for the first time on appeal
a new argument that "the FDDA and the FAN need not explicitly state the applicability of the ten-year
prescriptive period and the bases thereof as long as the totality of the circumstances show that the
taxpayer was 'sufficiently informed' of the facts in support of the assessment. Based on the totality of the
circumstances, it was informed of the facts in support of the assessment." 14

Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it had filed false returns
warranting the application of the extraordinary prescriptive period under Section 222 of the NIRC. It
insisted that it was not informed of the facts and law on which the assessment was based because the
FAN did not state that it filed false or fraudulent returns. For this reason, Asalus averred that the
assessment had prescribed because it was made beyond the three (3)-year period as provided in Section
203 of the NIRC.

The Reply of the CIR

In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the CT A might be set aside on
appeal if they were not supported with substantial evidence or if there was a showing of gross error or
abuse. It repeated that there was presumption of falsity in light of the 30% underdeclaration of sales. The
CIR emphasized that even Asalus' own witness testified that not all the membership fees collected were
reported in its VAT returns. It insisted that Asalus was sufficiently informed of its assessment based on
the prescriptive period under Section 222 of the NIRC as early as when the PAN was issued.
On another note, the CIR manifested that Asalus' counsels made use of insulting words in its Comment,
which could have been dispensed with. Particularly, it highlighted the use of the following phrases as
insulting: "even to the uninitiated," "petitioner's habit of disregarding firmly established rules of
procedure," "twist establish facts to suit her ends," "just to indulge petitioner," and "she then tried to
calculate, on her own but without factual basis." It asserted that "[w]hile a lawyer has a complete
discretion on what legal strategy to employ in a case, the overzealousness in protecting his client's interest
does not warrant the use of insulting and profane language in his pleadings xxx." 16

The Court's Ruling

There is merit in the petition.

It is true that the findings of fact of the CT A are, as a rule, respected by the Court, but they can be set
aside in exceptional cases. In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v.
Commissioner of Internal Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v.
Commissioner of Internal Revenue, 17 explicitly pronounced-

Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the
highest respect. In Sea-Land Service, Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA
441, 445-446], this Court recognizes that the Court of Tax Appeals, 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 Tax Court. In the
absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered
a decision which is valid in every respect.18 [Emphasis supplied]

After a review of the records and applicable laws and jurisprudence, the Court finds that the CTA erred in
concluding that the assessment against Asalus had prescribed.

Generally, internal revenue taxes shall be assessed within three (3) years after the ,last day prescribed by
law for the filing of the return, or where the return is filed beyond the period, from the day the return was
actually filed. 19 Section 222 of the NIRC, however, provides for exceptions to the general rule. It states
that in the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
assessment may be made within ten (10) years from the discovery of the falsity, fraud or omission.
In the oft-cited Aznar v. CTA,20the Court compared a false return to a fraudulent return in relation to the
applicable prescriptive periods for assessments, to wit:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and
fraudulent returns with intent to' evade tax, while respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under
declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment of tax."

xxxx

xxx We believe that the proper and reasonable interpretation of said provision should be that in the three
different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return,
the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessmeμt, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our
stand that the law should be interpreted to mean a separation of the three different situations of false
return, fraudulent return with intent to evade tax, and failure to file a return is strengthened
immeasurably by the last portion of the provision which seggregates the situations into three different
classes, namely "falsity", "fraud" and "omission." That there is a difference between "false return" and
"fraudulent return" cannot be denied. While the first merely implies deviation from the truth, whether
intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the
NIRC should be applicable to normal circumstances, but whenever the government is placed, at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten
years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission
even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court
of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to
assess petitioner's tax liability had not expired at the time said assessment was made. (Emphasis supplied)

Thus, a mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of
intent to defraud, is sufficient to warrant the application of the ten (10) year prescriptive period under
Section 222 of the NIRC.
Presumption of Falsity of Returns

In the present case, the CTA opined that the CIR failed to substantiate with clear and convincing evidence
its claim that Asalus filed a false return. As it noted that the CIR never presented any evidence to prove
the falsity in the returns that Asalus filed, the CTA ruled that the assessment was subject to the three (3)
year ordinary prescriptive period.

The Court is of a different view.

Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false return if there is a substantial
underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an
amount exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima
facie evidence is one which that will establish a fact or sustain a judgment unless contradictory evidence
is produced. 22

In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt
or income, there is a presumption that it has filed a false return. As such, the CIR need not immediately
present evidence to support the falsity of the return, unless the taxpayer fails to overcome the
presumption against it.

Applied in this case, the audit investigation revealed that there were undeclared VA Table sales more than
30% of that declared in Asalus' VAT returns. Moreover, Asalus' lone witness testified that not all
membership fees, particularly those pertaining to medical practitioners and hospitals, were reported in
Asalus' VAT returns. The testimony of its witness, in trying to justify why not all of its sales were included
in the gross receipts reflected in the VAT returns, supported the presumption that the return filed was
indeed false precisely because not all the sales of Asalus were included in the VAT returns.

Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not
overcome. Asalus was bound to refute the presumption of the falsity of the return and to prove that it
had filed accurate returns. Its failure to overcome the same warranted the application of the ten (10)-year
prescriptive period for assessment under Section 222 of the NIRC. To require the CIR to present additional
evidence in spite of the presumption provided in Section 248(B) of the NIRC would render the said
provision inutile.

Substantial Compliance of Notice Requirement

The CTA also posited that the ordinary prescriptive period of three (3) years applied in this case because
there was no mention in the FAN or the FDDA that what would apply was the extraordinary prescriptive
period and that the CIR did not present any evidence to support its claim of false returns.

Again, the Court disagrees.

It is true that neither the FAN nor the FDDA explicitly stated that the applicable prescriptive period was
the ten (10)-year period set in Section 222 of the NIRC. They, however, made reference to the PAN, which
categorically stated that "[t]he running of the three-year statute of limitation I as provided un4er Section
203 of the 1997 National Internal Revenue Code (NIRC) is not i applicable xxx but rather to the ten (10)
year prescriptive period pursua11t to Section 222(A) of the tax code xxx." 23 In Samar-I Electric
Cooperative v. COMELEC,24the Court ruled that it sufficed that the taxpayer was substantially informed
of the legal and factual bases of the assessment enabling him to file an effective protest, to wit:

Although, the FAN and demand letter issued to petitioner were not accompanied by a written explanation
of the legal and factual bases of the deficiency taxes assessed against the petitioner, the records showed
that respondent in its letter dated April 10, 2003 responded to petitioner's October 14, 2002 letter-
protest, explaining at length the factual and legal bases of the deficiency tax assessments and denying the
protest.

Considerirg the foregoing exchange of correspondence and Document between the parties, we find that
the requirement of Section 228 was substantially complied with. Respondent had fully informed I
petitioner in writing of the factual and legal bases of the deficiency taxes assessment, which enabled the
latter to file an "effective" protest, much unlike the taxpayer's situation in Enron. Petitioner's right to due
process was thus not violated. [Emphasis supplied]

Thus, substantial compliance with the requirement as laid down under Section 228 of the NIRC suffices,
for what is important is that the taxpayer has been sufficiently informed of the factual and legal bases of
the assessment so that it may file an effective protest against the assessment. In the case at bench, Asalus
was sufficiently informed that with respect to its tax liability, the extraordinary period laid down in Section
222 of the NIRC would apply. This was categorically stated in the PAN and all subsequent communications
from the CIR made reference to the PAN. Asalus was eventually able to file a protest addressing the issue
on prescription, although it was done only in its supplemental protest to the FAN.

Considering the existing circumstances, the assessment was timely made because the applicable
prescriptive period was the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate,
there was a prima facie showing that the returns filed by Asalus were false, which it failed to controvert.
Also, it was adequately informed that it was being assessed within the extraordinary prescriptive period.
A Reminder

A lawyer is indeed expected to champion the cause of his client with utmost zeal and competence. Such
exuberance, however, must be tempered to meet the standards of civility and decorum. Rule 8.01 of the
Code of Professional Responsibility mandates that "[a] lawyer shall not, in his professional dealings, use
language which is abusive, offensive or otherwise improper." In Noble v. Atty. Ailes, 25 the Court
cautioned lawyers to be careful in their: choice of words as not to unduly malign the other party, to wit:

Though a lawyer's language may be forceful and emphatic, it should always be dignified and respectful,
befitting the dignity of the legal profession.1âwphi1 The use of intemperate language and unkind
ascriptions has no place in the dignity of the judicial forum. In Buatis Jr. v. People, the Court treated a
lawyer's use of the words "lousy," "inutile," "carabao English," "stupidity," and "satan" in a letter
addressed to another colleague as defamatory and injurious which effectively maligned his integrity.
Similarly, the hurling of insulting language to describe the opposing counsel is considered conduct
unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a privilege burdened with conditions
such that a lawyer's words and actions directly affect the public's opinion of the legal profession. Lawyers
are expected to observe such conduct of nobility and uprightness which should remain with them,
whether in their public or private lives, and may be disciplined in the event their conduct falls short of the
standards imposed upon them. Thus, in this case, it is inconsequential that the statements were merely
relayed to Orlando's brother in private. As a member of the bar, Orlando should have been more
circumspect in his words, being fully aware that they pertain to another lawyer to whom fairness as well
as candor is owed. It was highly improper for Orlando to interfere and insult Maximino to his client.

Indulging in offensive personalities in the course of judicial proceedings, as in this case, constitutes
unprofessional conduct which subjects a lawyer to disciplinary action. While a lawyer is entitled to.
present his case with vigor and courage, such enthusiasm does not justify the use of offensive and abusive
language. The Court has consistently reminded the members of the bar to abstain from all offensive
personality and to advance no fact prejudicial to the honor and reputation of a party. xxx26 [Emphases
supplied]

While the Court recognizes and appreciates the passion of Asalus' counsels in promoting and protecting
its interest, they must still be reminded that they should be more circumspect in their choice of words to
argue their client's position. As much as possible, words which undermine the integrity, competence and
ability of the opposing party, or are otherwise offensive, must be avoided especially if the message may
be delivered in a respectful, yet equally emphatic manner. A counsel's mettle will not be viewed any less
should he choose to pursue his cause without denigrating the other party.

WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the November 6, 2015 Resolution of
the Court of Tax Appeals En Banc are REVERSED and SET ASIDE. The case is ordered REMANDED to the
Court of Tax Appeals for the determination of the Value Added Tax liabilities of the Asalus Corporation.

SO ORDERED.

G.R. No. 213943

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs

PHILIPPINE DAILY INQUIRER, INC., Respondent

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 4 November 2013 Decision2 and the 1 August 2014
Resolution3 of the Court of Tax. Appeals (CTA) En Banc in CTA EB Case No. 905. The CTA En Banc affirmed
the 16 February 2012 Decision4 and the 8 May 2012 Resolution5 of the CTA First Division in CTA Case No.
7853 which granted the petition for review filed by Philippine Daily Inquirer, Inc. (PDI) and cancelled the
Formal Letter of Demand dated 11 March 2008 and Assessment No. LN # 116-AS-04-00-00038-000526
issued by the Bureau of Internal Revenue (BIR) for deficiency Value Added Tax. (VAT) and income tax. for
the taxable year 2004.

The Antecedent Facts

The facts of this case, as presented by the CTA, are as follows:

PDI is a corporation engaged in the business of newspaper publication. On 15 April 2005, it filed its Annual
Income Tax Return for taxable year 2004. Its Quarterly VAT Returns for the same year showed the
following:

Date of Filing

For the First Quarter 20 April 2004

For the Second Quarter 16 July 2004

For the Third Quarter 18 October 2004

For the Fourth Quarter 21 January 20056

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers' Service of
BIR under LN No. 116-AS-04-00- 00038. BIR alleged that based on the computerized matching it conducted
on the information and data provided by third party sources against PDI's declaration on its VAT Returns
for taxable year 2004, there was an underdeclaration of domestic purchases from its suppliers amounting
to P317,705,610.52. The BIR invited PDI to reconcile the deficiencies with BIR's Large Taxpayers Audit &
Investigation Division I (BIR-LTAID). In response, PDI submitted reconciliation reports, attached to its
letters dated 22 August 2006 and 19 December 2006, to BIR-LTAID. On 21 March 2007, PDI executed a
Waiver of the Statute of Limitation (First Waiver) consenting to the assessment and/or collection of taxes
for the year 2004 which may be found due after the investigation, at any time before or after the lapse of
the period of limitations fixed by Sections 203 and 222 of the National Internal Revenue Code (NIRC) but
not later than 30 June 2007. The First Waiver was received on 23 March 2007 by Nestor Valeroso
(Valeroso), OIC-ACTR of the Large Taxpayer Service. In a letter dated 7 May 2007, PDI submitted additional
partial reconciliation and explanations on the discrepancies found by the BIR. On 30 May 2007, PDI
received a letter dated 28 May 2007 from Mr. Gerardo Florendo, Chief of the BIR-LTAID, informing it that
the results of the evaluation relative to the matching of sales of its suppliers against its purchases for the
taxable year 2004 had been submitted by Revenue Officer Narciso Laguerta under Group Supervisor Fe
Caling. In the same letter, BIR invited PDI to an informal conference to present any objections that it might
have on the BIR's findings. On 5 June 2007, PDI executed a Waiver of the Statute of Limitation (Second
Waiver), which Valeroso accepted on 8 June 2007.

In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the BIR-LTAID, PDI was
assessed for alleged deficiency income tax and VAT for taxable year 2004 on the basis of LN No. 116-AS-
04-00- 00038. The PAN states:

COMPUTATION OF DEFICIENCY VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43

Total undeclared income per Investigation ₱2,609,217.46

Less: Attributable input tax 715,371.17

VAT still payable per investigation ₱1,893,846.29

Add: Increments -

Interest from 1/26/05 to 11/15/07 ₱1,062,629.37

Compromise penalty 25,000.00 1,087,629.37

Amount Due and Collectible ₱2,981,475.66

COMPUTATION OF DEFICIENCY INCOME TAX

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70

Undeclared Net Income ₱2,921,938.58

Multiply by income tax rate 32%

Income tax still due per investigation ₱935,020.35

Add: Increments -

Interest from 4/16/05 to 11/15/07 ₱483,648.88

Compromise penalty 20,000.00 503,648.88

Amount Due and Collectible ₱1,438,669.237

PDI received the PAN on 4 December 2007. In a letter dated 12 December 2007, PDI sought
reconsideration of the PAN and expressed its willingness to execute another Waiver (Third Waiver), which
it did on the same date, thus extending BIR's right to assess and/or collect from it until 30 April 2008.
Romulo L. Aguila, Jr. (Aguila), OIC-Head Revenue Executive Assistant for the Large Taxpayers Service-
Regular, accepted the Third Waiver on 20 December 2007.

On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March 2008 and an Audit Result/
Assessment Notice from the BIR, demanding for the payment of alleged deficiency VAT and income tax,
respectively, computed as follows:

1. COMPUTATION OF (DEFICIENCY) VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43

Total Undeclared Income per Investigation ₱2,609,217.46

Less: Attributable input tax 715,371.17

VAT still payable per investigation ₱1,893,846.29

Add: Increments -

Interest from 1/26/05 to 11/15/07 ₱l,235,929.28

Compromise penalty 25,000.00 1,260,929.28

Amount Due and Collectible ₱3,154,775.56

2. COMPUTATION OF [DEFICIENCY INCOME TAX]

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70

Undeclared Net Income 2,921,938.58

Multiply by income tax rate 32%

Income tax still due per investigation ₱935,020.35

Add: Increments -

Interest from 4/16/05 to 11/15/07 ₱569,209.65

Compromise penalty 20,000.00 589,209.65

Amount Due and Collectible ₱1,524,229.998

On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition for Review against the
Commissioner of Internal Revenue (CIR) alleging that the 180-day period within which the BIR should act
on its protest had already lapsed.

The CTA First Division, quoting at length the CIR's Answer, presented the following facts:

Petitioner Philippine Daily inquirer is liable to pay the amount of Three Million One Hundred fifty Four
Thousand Seven hundred Seventy Five Pesos and 56/100 (₱3,154,775.56) and One Million Five Hundred
Twenty Four Thousand Two Hundred Twenty Nine Pesos and 99/100 (₱l,524,299.99) representing
deficiency Value-Added Tax (VAT and Income Tax, respectively, for the taxable year 2004.

1. The VAT and inc0me tax liabilities of petitioner in the aggregate amount of Four Million Six Hundred
Seventy Nine Thousand and Five Pesos and 55/100 (₱4,679,005.55) arose on account of the issuance to
petitioner of Letter Notice No. 116-AS-04-00-00038 dated June 30, 2006. Computerized matching
conducted by respondent on information/data provided by third party sources against its declaration per
VAT returns revealed the aforesaid discrepancies for taxable year 2004. The income and value-added tax
liabilities were generated through the Reconciliation of Listing for Enforcement (REUEF) system-Summary
List of Sales and Purchases (SLSP) and Third Party Matching. Through the system, respondent was able to
detect tax leaks through the matching of data available in the Integrated Tax Systems (ITS) with the
information gathered from third party sources.

On the basis of the consolidation and cross-referencing of third party information, discrepancy reports on
sales and purchases were generated to uncover under-declared income and over-claimed purchases
(goods and services).

As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:

II. POLICIES

[x x x]

2. In order to intensify enforcement, the power of the Commissioner to authorize the examination of the
taxpayer and the assessment of the correct amount of tax is hereby ordered done through the so called
'no contact-audit- approach '.

3. The 'no contact-audit-approach' includes the process of computerized matching of sales and purchases
data contained in the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted
by VAT taxpayer under the RELIEF system pursuant to RR No. 7- 95 as amended by RR Nos. 13-97, 7-99
and 8-2002. This may also include the matching of data from other information or returns filed by the
taxpayers with the BIR such as Alphalist of Payees subject to Final or Creditable Withholding Taxes.

4. Even without conducting a detailed examination of taxpayer's books and records, the
computerized/manual matching of sales and purchases/expenses will reveal discrepancies which shall be
communicated to the concerned taxpayer through the issuance of a Letter Notice (LN) by the
Commissioner.

5. LNs being served by the Bureau upon the taxpayer found to have understated their sales or over claimed
their purchases/expenses can be considered notice of audit or investigation in so far as the amendment
of any return is concerned which is the subject of such LN. A taxpayer is therefore disqualified from
amending his return once an LN is served upon him.

III. GUIDELINES

Xxx

5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice of Informal Conference, thus,
the procedures defined in RR 12-99 should likewise be observed.

Furthermore, in CTA Case No. 7092 entitled 'BIG AA Corporation represented by Erlinda L. Stohner vs.
Bureau of Internal Revenue' dated February 22, 2006, the Honorable Court had the opportunity to say:

'Letter Notices issued against a taxpayer in connection with the information of under declaration of sales
and purchases gathered through Third Party Information Program may be considered as a 'notice of audit
or investigation' in the absence of evident error or clear abuse of discretion.'

2. On the basis of the abovementioned LN and after a careful and extensive scrutiny of petitioner's
documents, resulting deficiency in income and Value-added taxes led to the issuance of the Preliminary
Assessment Notice (PAN) dated October 15, 2007 together with the Details of Discrepancies and
subsequently, a Formal Letter of Demand (FLD) dated March 11, 2008.

Relative thereto, Section 203 of the National Internal Revenue Code (NIRC) explicitly provides:

Section 203. Period of Limitation Upon Assessment and Collection of Taxes.

Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the
last day prescribed by law for filing of the return, and no proceeding in court without assessment, for the
collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where
a return i[s] filed beyond the period prescribed by law, the three (3) year period shall be counted from the
day [t]he return was filed. For purposes of this Section, a return filed before the last day prescribed by law
for the filing thereof shall be considered filed on such day.'

However, Section 222 of the NIRC provides the exceptions as regards to the provisions laid down under
Section 203. In particular, as shown under Section (1) thereof, the three (3) [year] period of limitation in
making assessment shall not apply in cases where it involves false or fraudulent return or in cases where
there is failure to file a return [by] the person obliged to file such return. Section 222(a) of the National
Internal Revenue Code provides:

'Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity, fraud or omission; Provided, That in a
fraud assessment which has become final and executor[y], [t]he fact of fraud shall be judicially taken
cognizance of in the civil and criminal action for the collection thereof.'

Such being the case, the three (3) [year] period of limitation for the assessment of internal revenue tax
liabilities reckoned from the last day prescribed by law for the filing of the return shall not apply in the
case at hand for the simple reason that petitioner falsely filed the return for taxable year 2004. Such being
the case, the applicable provision shall be Section 222(a) where the period of limitation provides that the
assessment may be made within ten (10) years after the discovery of falsity, fraud or omission. In the case
at hand, the reckoning period was from the time during which the LN dated June 30, 2006 was issued to
petitioner. Indubitably, the Formal Letter of Demand dated March 11, 2008 was issued within the
prescriptive period provided by law. Such being the case, the FLD is considered valid and has the force
and effect of law.

3. On the basis of the investigation conducted by respondent through the RELIEF system, respondent
though the FLD, outlined how the tax liabilities in the aggregate amount of ₱4,679,005.55 representing
income and VAT liabilities were arrived at. Upon matching the data gathered from respondent's
Integrated Tax System (ITS) against the Summary of List of Purchases (SLP) attached to the Quarterly VAT
returns filed with respondent, the following discrepancies remain unsettled despite petitioner's
submission of supporting documents:

(a) An excess of SLP over the Letter Notices (LN) in the amount of ₱1,601,652.43 from the following
suppliers:
 Per SLP PerLN Discrepancy

Alliance Media Printing Corp. 109,073,375.58 107,640,812.95 1,432,562.63

Citimotors Inc. 70,454.55 70,056.65 397.90

Diamond Motors Corp. 288,181.82 142,363.64 145,818.18

Western Marketing Corp. 30,830.99 7,957.27 22,873.72

Total 109,462,842.94 107,861,190.51 1,601,652.43

(b) On the other hand, it is likewise evident than an excess of LN over the SLP also occurred in the total
amount of Seven Hundred Fifteen Thousand Three Hundred Seventy One Pesos and 17 /100 (₱715,3
71.17). The details of which are shown hereunder:

Per SLP PerLN Discrepancy

Grasco Industries Inc. 202.55 (202.55)

Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23)

Makati Property Ventures 64.55 (64.55)

Mc[C]an[n] Erikson Phils. Inc. 204,769.38 (204,769.38)

Millennium Cars Inc. 89,545.45 (89,545.45)

WPP Marketing Communications Inc. 40,616.01 (40,616.01)

Total 18,157.89 733,529.06 (715,371.17)

On the basis of the aforesaid investigation, it can be observed that the SLP which petitioner attached as
supporting documents upon filing the quarterly VAT return revealed the declared amount of
₱l09,462,842.94 as its input VAT for purchases incurred. However, on the basis of the LN, its suppliers
recorded in its books of account the aggregate amount of ₱107,861,190.51 as its corresponding VAT.
Suffice it to say, the over-declared VAT input tax on the part of petitioner led to the under declaration of
VAT payable in the amount of ₱1,601,652.43 for the taxable year 2004. Therefore, petitioner is liable to
pay said outstanding VAT. In addition, the amount of ₱l0,075,650.28 which resulted from the excess of
the LN over the SLP amounting to ₱715,371.17 must be likewise added to arrive at the total VAT liability
of ₱3,l 54,775.56 (including increments up to April 30, 2008). Details of the computation are shown in the
FLD.

As stated earlier, the excess of LN over the SLP in the amount of ₱715,371.17 resulted to under-declared
input tax on the part of petitioner which led to an under[-]declared purchases of ₱7,153,711.70, arrived
at by dividing ₱715,371.17 by the VAT rate of 10%. As can be gleaned from the LN, suppliers declared in
its books of accounts output VAT for sales made to petitioner. However, in petitioner's SLP, no declaration
of such amount incurred for the taxable year 2004 was shown. Such being the case, petitioner under-
declared its purchases that resulted to the under-declared amount of Input VAT. If petitioner has under[-
]declared its purchases, it would likewise have under-declared its Gross Income which will be worked back
by using the ratio of Cost of Sales against its Gross Income per Income Tax Return. In the case at hand, the
ratio of Cost of Sales against its Gross Income per Income Tax Return filed for taxable year 2004 is 71%. If
petitioner divides the amount of ₱7,153,711.70 by the cost ratio of 71%, the under-declared Gross Income
of ₱l0,075,650.28 will be arrived at. Such being the case, petitioner would then be liable to pay the
corresponding income tax for the under-declared Net [I]ncome at the rate of 32%. Net Income was arrived
at by deducting from the Gross Income of ₱l0,075,650.28 the corresponding Cost of Sales of
₱7,153,711.70. Hence, the amount of income tax still to be paid is ₱l,524,229.99 (including additional
increments until April 30, 2008). For ready reference of this Honorable Court, the full details of the
aforesaid computation are shown in the Formal Letter of Demand issued to petitioner.

4. Petitioner emphasized that it is a service company deriving its main source of income from newspaper
and advertising sales, thus any understatement of expenses or purchases (also mostly from services) does
not mean it understated its sales. It goes further by saying that its transactions pertaining mostly to
services and goods must be reflected as Operating Expenses and not as part of the Cost of Sales. It
revealed that Harrison Communications Inc., McCann Erikson Inc., WPP Marketing Corporation are some
of the advertising agencies which rendered direct professional services to petitioner in the form of
marketing or promotional purposes. To bolster its claim, it likewise stated that the transactions with
aforesaid three (3) main entities should not be treated as cost of sales since what these entities provided
were 'not materials' in order for petitioner to gain income that can be both taxable under the income tax
and VAT provisions.

Corollary thereto, Section 27 E(4) of the NIRC specifically provides:

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

xxx

In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales
returns, allowances, discounts and cost of services. 'Cost of services' shall mean direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (a) salaries
and employee benefits of personnel, consultants and specialists directly rendering the service and (b) cost
of facilities directly utilized in providing the service such as depreciation or rental of equipment used and
cost of supplies.'
Petitioner, by its own admission, is a service-oriented company which derives its income from sale of
newspaper and advertisement. It is without doubt that in selling newspapers to the public, it necessarily
incurs direct costs to bring about the merchandise it sells to its present state and/or condition. In the same
vein, in selling advertisements to clients/customers, it likewise incurs direct costs for the rendition of
services in the process. On the basis of the aforesaid provision of the NIRC, 'cost of services' include[s]
direct costs and expenses necessarily incurred to provide the services required by its customers or clients.
Applying the same at hand, in order for petitioner to boost its sales on advertisement, it would actually
employ services of companies which would handle the promotion and marketing of the services it is
offering. The direct and professional services rendered by the three (3) advertising companies nan1ely
Harrison Communications Inc., McCann Erikson Inc. and WPP Marketing Corporation should be
considered as part of the cost of advertisement sales/services by petitioner.

In view of the foregoing, the amount of discrepancy that resulted on account of the under-declared input
tax of P7 l 5,3 71.17 should be treated as Cost of Sales of services and not just an ordinary operating
expenses because the services provided by the aforementioned three (3) advertising agencies are direct
costs and expenses necessary to bring about the advertisement sales of petitioner."9

After the presentation of oral and documentary evidence and submission of the parties' respective
Memoranda, the case was submitted for resolution.

The Decision of the CTA First Division

The CTA First Division resolved the following issues raised by the parties:

1. Whether or not respondent's authority to issue an assessment against petitioner for deficiency value-
added and income taxes has prescribed;

2. Whether or not respondent erred in assessing petitioner deficiency value-added tax and income tax for
calendar year 2004;

3. Whether petitioner is liable to pay the aggregate amount of Four Million Six Hundred Seventy Nine
Thousand Five Pesos and 55/100 (Php 4,679,005.55) representing alleged deficiency income and value-
added tax for taxable year 2004, including interest and compromise penalty from 30 April 2008 until fully
paid pursuant to Sections 248 and 249 of the Tax Code, arising from discrepancies which were generated
through the Reconciliation of Listing for Enforcement (RELIEF) System-Summary List of Sales and
Purchases and Third Party Matching of Data available in the Integrated Tax System (ITS) of respondent
against information gathered from third party sources;

4. Whether the fees paid to the three (3) advertising agencies, namely Harrison Communications Inc.,
McCann Erikson Inc., and WPP Marketing Corporation are considered part of the cost of sales made by
petitioner for taxable year 2004;

5. Whether Section 222 of the Tax Code is applicable in the case at hand;

6. Whether the Formal Letter of Demand dated 11 March 2008 was issued within the prescriptive period
provided by law; and

7. Whether or not petitioner should be assessed a compromise penalty.10

In its 16 February 2012 Decision, the CTA First Division ruled m favor of PDI.

The CTA First Division ruled that the period of limitation in the assessment and collection of taxes is
governed by Section 203 of the NIRC which provides:

Sec. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall
be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day.

The CTA First Division ruled that internal revenue taxes must be assessed on time. It added that the period
of assessment must not extend indefinitely because doing so will deprive the taxpayer of the assurance
that it will not be subjected to further investigation after the expiration of a reasonable period of time.
Nevertheless, the CTA First Division noted that the three-year prescriptive period under Section 203 of
the NIRC applies only when the returns are filed pursuant to legal requirements. The CTA First Division
explained that for false or fraudulent tax returns, or for failure to file returns, the prescriptive period is 10
years after the discovery of the falsity or fraud, or from failure to file tax returns. It also added that in the
absence of a false or fraudulent return, or where a return has been filed, the period of limitation may still
be extended in cases where the taxpayer and the CIR have agreed in writing, prior to the expiration of the
period prescribed under Section 203 of the NIRC, to an assessment within the time agreed upon.

In ruling on the prescriptive period, the CTA First Division had to determine whether PDI's tax returns
were false or fraudulent. The CTA First Division ruled that in ascertaining the correctness of any return, or
in determining the tax liability of any person, the CIR is authorized to obtain information, on a regular
basis, from any person other than the taxpayer subject of the audit or investigation. It further ruled that
the CIR may rely on the information obtained from third parties in issuing assessments to taxpayers, and
that the CIR enjoys the presumption of regularity in obtaining such information. Further, the CTA First
Division stated that the determinations and assessments of the CIR are presumed correct and made in
good faith, and it is the duty of the taxpayer to prove otherwise. The CTA First Division then ruled that in
this case, PDI introduced proof that the determination made by the CIR on the supposed overdeclared
input tax of ₱l,601,652.43 is not correct. The CTA First Division ruled that the CIR failed to disprove the
findings submitted by the Independent Certified Public Accountant (ICPA) that supported PDI's assertions.

The CTA First Division rejected the CIR's theory that since there was an underdeclaration of the input tax
and of purchases, it translates to taxable income for tax purposes and taxable gross receipts for VAT
purposes. According to the CTA First Division, the following elements must be present in the imposition
of income tax: (1) there must be gain or profit; (2) the gain or profit is realized or received, actually or
constructively; and (3) it is not exempted by law or treaty from income tax. In this case, the CTA First
Division ruled that in the imposition or assessment of income tax, it must be clear that there was an
income and the income was received by the taxpayer. The basis could not be merely an underdeclaration
of purchases. The CTA First Division added that for income tax purposes, a taxpayer may either deduct
from its gross income a lesser amount, or not claim any deduction at all. It stated that what is prohibited
is to claim a deduction beyond the amount authorized by law. According to the CTA First Division, even
when there was underdeclaration of input tax, which means there was an underdeclaration of purchases
and expenses, the same is not prohibited by law.

As regards the VAT assessment, the CTA First Division ruled that the 10% VAT is assessed on "gross receipts
derived from the sale or exchange of services." As such, it is critical to show that the taxpayer received an
amount of money or its equivalent, and not only that there was underdeclared input taxes or purchases.
The CTA First Division ruled that it was an error for the CIR to impose a deficiency income tax based on
the underdeclared input tax, and the income tax return cannot be treated as false. Thus, the CTA First
Division ruled that the prescriptive period applicable to the case is the three-year period, and the
deficiency income tax assessment issued by the BIR beyond the three-year prescriptive period is void.

The CTA First Division further ruled that Section 222(b) of the NIRC authorizes the extension of the original
three-year prescriptive period by the execution of a valid waiver upon the agreement in writing between
the taxpayer and the BIR, provided: (1) the agreement was made before the expiration of the three-year
period and (2) the guidelines in the proper execution of the waiver are strictly foll0wed. The CTA First
Division found that while the First and Second Waivers were executed in three copies, the BIR failed to
provide the office accepting the waivers with their respective third copies. The CTA First Division found
that the third copies were still attached to the docket of the case. The CTA First Division also found that
the BIR failed to prove that the Third Waiver was executed in three copies. Further, the revenue official
who accepted the Third Waiver was not authorized to do so. The CTA First Division also noted that the
Second Waiver would have expired on 31 December 2007 but the Third Waiver was already executed on
20 December 2007, meaning there was enough time to have it signed by the ACIR of the Large Taxpayers
Service. The CTA First Division concluded that due to the defects in the Waivers, the three-year period
within which to assess PDI was not extended. The CTA First Division further ruled that the compromise
penalties should likewise be cancelled. The dispositive portion 0f ~he CTA First Division's Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The Formal Letter
of Demand dated March 11, 2008 and Assessment No. LN # 116-AS-04-00-00038- [000526) for calendar
year 2004 issued by the BIR against petitioner are hereby CANCELLED and SET ASIDE.

SO ORDERED.11

The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the CTA First Division denied the
motion for lack of merit.

The CIR filed a petition for review before the CTA En Banc.

The Decision of the CTA En Banc

In its 4 November 2013 Decision, the CTA En Banc cited the CTA First Division's Decision extensively. The
CTA En Banc ruled that it found no reason to depart from the CTA First Division's findings. The CTA En
Banc held that PDI sufficiently discharged its burden of proving that the VAT assessment and the Income
Tax assessment made by the CIR were not correct. The CTA En Banc ruled that the presumptions of
correctness and regularity cited by the CIR were overturned by the evidence presented by PDI particularly,
the final report of the ICPA, accounts payable, check vouchers, invoices, official receipts, and credit
memoranda. The CTA En Banc noted that the CIR did not present any evidence to the contrary. The CTA
En Banc rejected the CIR's allegation that PDI made a false return and held that the three-year prescriptive
period based on Section 203, in relation to Section 222(a) of the NIRC, as amended, should apply in this
case. The CTA En Banc likewise sustained the CTA First Division's ruling that the Waivers issued by PDI
were defective and could not extend the three-year prescriptive period. The CTA En Banc also sustained
the CTA First Division's ruling that it can resolve the issue of prescription because the CIR did not contest
it when it was raised by PDI.
The dispositive p01iion of the CTA En Bane's Decision reads:

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. Accordingly,
the Decision and Resolution dated February 16, 2012 and May 8, 2012, respectively, are hereby AFFIRMED
in toto.

SO ORDERED.12

The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the CTA En Banc denied the
motion for lack of merit.

Hence, the CIR filed a petition for review on certiorari before this Court.

The Issues

The CIR raised the following issues in her petition:

(l) The CTA En Banc erred in ruling that petitioner's assessment for deficiency VAT and income tax was
adequately controverted by respondent;

(2) The CTA En Banc erred in ruling that the petitioner's right to assess respondent for deficiency VAT and
income tax has prescribed; and

(3) The CTA En Banc erred in ruling that respondent is not estopped from raising the defense of
prescription.13

The Ruling of this Court

BIR 's assessment was not adequately controverted by PDI

Reconciliation of Listing for Enforcement information technology tool used by the administration.14 The
system was created -

x x x to support third party information program and voluntary assessment program of the Bureau through
the cross-referencing of third party information from the taxpayers' Summary Lists of Sales and Purchases
prescribed to be submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7-95, as amended
by RR 13-97, RR 7-99 and RR 8-2002.15

In addition -

[RELIEF] can detect tax leaks by matching the data available under the Bureau's Integrated Tax System
(ITS) with data gathered from third party sources (i.e. Schedules of Sales and Domestic Purchases, and
Schedule of Importations submitted by VAT taxpayers pursuant to RR No. 7-95, as amended by RR Nos.
13-97, 7-99 and 8-2002).

Through the consolidation and cross-referencing of third party information, discrepancy reports on sales
and purchases can be generated to uncover under declared income and over claimed purchases (goods
and services). Timely recognition and accurate reporting of unregistered taxpayers and non-filers can be
made possible.16

Using the RELIEF system, the BIR assessed PDI for deficiency VAT and income tax amounting to
₱3,154,775.57 and ₱l ,525,230.00, respectively. According to the BIR, the computerized matching
conducted by its office, using information and data from third party sources against PDI's VAT returns for
2004 showed an underdeclaration of domestic purchases from its suppliers amounting to
₱317,705,610.52. PDI. denied the allegation.

In ruling on the case, the CTA recognized that the BIR may obtain information from third party sources in
assessing taxpayers. The CTA also stated that the BIR enjoyed a presumption of regularity in obtaining the
information, and its assessments are presumed correct and made in good faith. Indeed, the burden to
controvert the assessments made by the BIR lies with the taxpayer. In this case, the CTA rejected BIR's
finding that PDI underdeclared its input tax and purchases. According to the CTA, PDI was able to disprove
BIR's assessments.

The general rule is that findings of fact of the CTA are not to be disturbed by this Court unless clearly
shown to be unsupported by substantial evidence.17 Since by the very nature of its functions, the CTA
has developed an expertise to resolve tax issues, the Court will not set aside lightly the conclusions
reached by them, unless there has been an abuse or improvident exercise of authority.18
In reaching their conclusions, the CTA First Division and En Banc relied on the report submitted by the
ICPA. According to the CTA, the BIR failed to rebut the ICPA report. After going over the ICPA report, as
well as the affidavit summarizing the examination submitted by Jerome Antonio B. Constantino
(Constantino), a Certified Public Accountant and the Managing Partner of the firm that conducted the
examination, this Court notes that:

(1) Purchases made from Harrison Communications, Inc. were recorded as general and administrative
expenses and selling expenses in the 2004 General Ledger and 2004 Audited Financial Statements and not
as cost of sales;19

(2) The 2004 purchases from Harrison Communications, Inc. and McCann Erickson, Inc. were recorded in
PDI's book in 2005 and 2006 as "Summary List of Purchases." There was a discrepancy between the
purchases from Harrison Communications, Inc. and McCann Erickson, Inc. and the BIR's Letter Notice
amounting to Pl 50,203.29 and Pl 91,406.02, respectively, but the ICPA was not able to account for the
difference because according to PDI, the details were not provided in the BIR's Letter Notice;20

(3) Promotional services purchased from Harrison Communications, Inc. and McCann Erickson, Inc. in
2004 were recorded in PDI's books in 2005 and 2006. According to Constantino, the VAT input on
purchases from Harrison Communications, Inc. and McCann Erickson, Inc. recorded in 2005 and 2006,
amounting to ₱206,713.63 and ₱13,363.36, respectively, were supported only by photocopies of sales
invoices because PDI claimed that it could not find the original documents despite diligent efforts to locate
them;21

(4) Constantino reported that no input taxes were recorded in 2004 from McCann Erickson, Inc.,
Millennium Cars, Inc., WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati Property
Ventures. Constantino was not able to vouch for supporting documents for purchase transactions from
WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati Property Ventures. He
established that the purchase from Millennium Cars, Inc. was for a car loan account for an employee and
was recorded to Advances to Officers and Employees;22

(5) Alliance Media Printing, Inc.'s erroneous posting of data in the BIR RELIEF caused the discrepancies in
the analysis of suppliers' sales and purchases made by PDI.23

The foregoing showed that there were discrepancies that PDI were able to explain. In particular, the ICPA
report showed that the purchase from Millennium Cars, Inc. was made on behalf of an employee as a
loan. In addition, the underdeclared input tax insofar as Alliance Printing, Inc. is concerned was due to the
latter's erroneous posting of data, a fact that the corporation admitted. However, there are still issues
that need to be resolved. In particular, PDI failed to justify its erroneous listing of purchases from Harrison
Communications, Inc., McCann Erickson, Inc., and WPP Marketing Corporation as general and
administrative expenses.

The CIR pointed out that PDI could not treat purchases from Harrison Communications, Inc. and McCann
Erickson, Inc. as general and administrative expenses. Indeed, Section 27(E)(4) of the NIRC provides:

xxxx

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

xxxx

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

The ICPA report found nothing wrong in the entries. However, as pointed out by the Office of the Solicitor
General, PDI is a service-oriented company that derives its income fr0m the sale of newspapers and
advertisements. The services rendered by Harrison Communications, Inc., McCann Erickson, Inc., and \VPP
Marketing Corporation were meant to promote and market the advertising services offered by PDI. As
such, their services should be considered part of cost of services instead of general and administrative
expenses and operating expenses.

Such finding would ordinarily call for a recomputation. However, we need to resolve first whether the
BIR's assessment was made within the prescriptive period.
Prescription and Estoppel

We will discuss the second and third issues jointly.

The CIR alleges that PDT filed a false or fraudulent return. As such, Section 222 of the NIRC should apply
to this case and the applicable prescriptive period is 10 years from the discovery of the falsity of the return.
The CIR argues that the ten-year period starts from the time of the issuance of its Letter Notice on 10
August 2006. As such, the assessment made I through the Formal Letter of Demand dated 11 March 2008
is within the prescriptive period.

We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject
to the exceptions provided under Section 222 of the NIRC. The CIR invokes Section 222(a) which provides:

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be filed without assessment,
at any time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the fact of fraud shall be judicially taken
cognizance of in the civil or criminal action for the collection thereof.

In Commissioner of Internal Revenue v. Javier,24 this Court ruled that fraud is never imputed. The Court
stated that it will not sustain findings of fraud upon circumstances which, at most, create only suspicion.25
The Court added that the mere understatement of a tax is not itself proof of fraud for the purpose of tax
evasion.26 The Court explained:

x x x. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted to in order to induce another to give up some
legal right. Negligence, whether slight or gross, is not equivalent to fraud with intent to evade the tax
contemplated by law. It must amount to intentional wrongdoing with the sole object of avoiding the tax.
x x x.27
In Samar-1 Electric Cooperative v. Commissioner of Internal Revenue,28 the Court differentiated between
false and fraudulent returns. Quoting Aznar v. Court of Tax Appeals,29 the Court explained in Samar-l the
acts or omissions that may constitute falsity, thus:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and
fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial
underdeclarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence
of the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny that
the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry
great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the
proper· and reasonable interpretation of said provision should be that in the three different cases of (1)
false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be begun without assessment. at any
time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law
should be interpreted to mean a separation of the three different situations of false return, fraudulent
return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last
portion of the provision which segregates the situation into three different classes, namely "falsity,"
"fraud," and "omission." That there is a difference between "false return" and "fraudulent return" cannot
be denied. While the first implies deviation from the truth, whether intentional or not, the second implies
intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the
NIRC should be applicable to normal circumstances, but whenever the government is placed at a
disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten
years provided for in Sec. 332(a) NIRC, from the time of discovery of the falsity, fraud or omission even
seems to be inadequate and should be the one enforced.30

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was intentional
and done with intent to evade the taxes due, the filing of a false return can be intentional or due to honest
mistake. In CIR v. B.F. Goodrich Phils., Inc.,31 the Court stated that the entry of wrong information due to
mistake, carelessness, or ignorance, without intent to evade tax, does not constitute a false return. In this
case, we do not find enough evidence to prove fraud or intentional falsity on the part of PDI.

Since the case does not fall under the exceptions, Section 203 of the NIRC should apply. It provides:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222,
internal revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without assessment for the collection of such taxes shall
be begun after the expiration of such period. Provided, That in a case where a return is filed beyond the
period prescribed by law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day.

Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year prescriptive period,
and would have extended such period were it not for the defects found by the CTA. This further shows
that at the outset, the BIR did not find any ground that would make the assessment fall under the
exceptions.

In Commissioner of Internal Revenue v. Kudos Metal Corporation,32 the Court ruled:

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

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

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

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However,
before signing the waiver, the CIR or the revenue official authorized by him must make sure that the
waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly authorized
representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent
agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case,
the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt
by the taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was
notified of the acceptance of the BIR and the perfection of the agreement.33

In this case, the CTA found that contrary to PDI's allegntions, the First and Second Waivers were executed
in three copies.1âwphi1 However, the CTA also found that the CIR failed to provide the office accepting
the First and Second Waivers with their respective third copies, as the CTA found them still attached to
the docket of the case. In addition, the CTA found that the Third Waiver was not executed in three copies.

The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and RDAO
05-01. Therefore, the First Waiver was not properly executed on 21 March 2007 and thus, could not have
extended the three-year prescriptive period to assess and collect taxes for the year 2004. To make matters
worse, the CIR committed the same error in the execution of the Second Waiver on 5 June 2007. Even if
we consider that the First Waiver was validly executed, the Second Waiver failed to extend the
prescriptive period because its execution was contrary to the procedure set forth in RMO 20-90 and RDAO
05-01. Granting further that the First and Second Waivers were validly executed, the Third Waiver
executed on 12 December 2007 still failed to extend the three-year prescriptive period because it was not
executed in three copies. In short, the records of the case showed that the CIR's three-year prescriptive
period to assess deficiency tax had already prescribed due to the defects of all the Waivers.

In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated,34 the Court
explained the nature of a waiver of assessment. The Court said:

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated that a
Waiver must strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in
RMO No. 20-90, as ruled upon by this Court, was recognized by the BIR itself in the latter's subsequent
issuances, namely, Revenue Memorandum Circular (RMC) Nos. 6-2005 and 29-2012. Thus. the BIR cannot
claim the benefits of extending the period to collect the deficiency tax as a consequence of the Waiver
when, in truth it was the BIR's inaction which is the proximate cause of the defects of the Waiver. The BIR
has the burden of ensuring compliance with the requirements of RMO No. 20-90 as they have the burden
of securing the right of the government to assess and collect tax deficiencies. This right would prescribe
absent any showing of a valid extension of the period set by the law.
To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by
conforming to or by disagreeing with the extension. A waiver of the statute of limitations, whether on
assessment or collection, should not be construed as a waiver of the right to invoke the defense 0f
prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date
certain, within which the latter could still assess or collect taxes due. The waiver does not imply that the
taxpayer relinquishes the right to invoke prescription unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to support the government,
tax provisions are not all about raising revenue. Our legislature has provided safeguards and remedies
beneficial to both the taxpayer, to protect against abuse; and the government, to promptly act for the
availability and recovery of revenues. A statute of limitations on the assessment and collection of internal
revenue taxes was adopted to serve a purpose that would benefit both the taxpayer and the
governn1ent.35

Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect taxes,
and made the assessments issued by the BIR beyond the three-year prescriptive period void.36

The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not agree.
As stated by the CTA, the BIR cannot shift the blame to the taxpayer for issuing defective waivers.37 The
Court has ruled that the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply
with RMO 20-90 and RDAO 05-01 which were issued by the BIR itself.38 A waiver of the statute of
limitations is a derogation of the taxpayer's right to security against prolonged and unscrupulous
investigations and thus, it must be carefully and strictly construed.39

Since the three Waivers in this case are defective, they do not produce any effect and did not suspend the
three-year prescriptive period under Section 203 of the NIRC. As such, we sustain the cancellation of the
Formal Letter of Demand dated 11 March 2008 and Assessment No. LN # 116-AS- 04-00-00038-000526
for taxable year 2004 issued by the BIR against PDI.