Mactan Cebu International Airport Authority vs Marcos

Date: September 11, 1996

Petitioner: Mactan Cebu International Airport Authority
Respondents: Hon. Ferdinand Marcos, City of Cebu, et al
Ponente: Davide Jr

Facts: Petitioner was created by virtue of RA6958, mandated to "principally undertake the economical,
efficient and effective control, management and supervision of the Mactan International Airport in the
Province of Cebu and the Lahug Airport in Cebu City. Under Section 1: The authority shall be exempt from
realty taxes imposed by the National Government or any of its political subdivisions, agencies and
instrumentalities.
However, the Officer of the Treasurer of Cebu City demanded payment for realty taxes on parcels of
land belonging to petitioner. Petitioner objected invoking its tax exemption. It also asserted that it is an
instrumentality of the government performing governmental functions, citing section 133 of the LGC which
puts limitations on the taxing powers of LGUs. The city refused insisting that petitioner is a GOCC
performing proprietary functions whose tax exemption was withdrawn by Sections 193 and 234 of the LGC.
Petitioner filed a declaratory relief before the RTC. The trial court dismissed the petitioner ruling that the LGC withdrew the tax
exemption granted the GOCCs.
Issue:WON the City of Cebu has the power to impose taxes on petitioner
Held: Yes
Ratio:As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only in the
responsibility of the legislature which imposes the tax on the constituency who are to pay it. Since taxes
are what we pay for civilized society, or are the lifeblood of the nation, the law frowns against exemptions
from taxation and statutes granting tax exemptions are thus construed strictissimi juris against the
taxpayers and liberally in favor of the taxing authority. A claim of exemption from tax payment must be
clearly shown and based on language in the law too plain to be mistaken.
There can be no question that under Section 14 RA 6958 the petitioner is exempt from the payment
of realty taxes imposed by the National Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption is the exception, the exemption
may thus be withdrawn at the pleasure of the taxing authority.
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by
LGUs of their power to tax, the scope thereof or its limitations, and the exemption from taxation. Section
133 of the LGC prescribes the common limitations on the taxing powers of LGUs: (o) Taxes, fees or charges
of any kind on the national government, its agencies and instrumentalities and LGUs. Among the "taxes"
enumerated in the LGC is real property tax. Section 234 of LGC provides for the exemptions from payment
of GOCCs, except as provided therein. On the other hand, the LGC authorizes LGUs to grant tax exemption
privileges.
Reading together Section 133, 232 and 234 of the LGC, we conclude that as a general rule, as
laid down in Secs 133 the taxing powers of LGUs cannot extend to the levy of inter alia, "taxes, fees, and
charges of any kind of the National Government, its agencies and instrumentalties, and LGUs"; however,
pursuant to Sec 232, provinces, cities, municipalities in the Metropolitan Manila Area may impose the real
property tax except on, inter alia, "real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial used thereof has been granted to a taxable person."
As to tax exemptions or incentives granted to or presently enjoyed by natural or juridical persons,
including government-owned and controlled corporations, Section 193 of the LGC prescribes the general
rule, viz., they are withdrawn upon the effectivity of the LGC, except upon the effectivity of the LGC,
except those granted to local water districts, cooperatives duly registered under R.A. No. 6938, non stock
and non-profit hospitals and educational institutions, and unless otherwise provided in the LGC. The latter
proviso could refer to Section 234, which enumerates the properties exempt from real property tax. But
the last paragraph of Section 234 further qualifies the retention of the exemption in so far as the real
property taxes are concerned by limiting the retention only to those enumerated there-in; all others not
included in the enumeration lost the privilege upon the effectivity of the LGC. Moreover, even as the real
property is owned by the Republic of the Philippines, or any of its political subdivisions covered by item (a)
of the first paragraph of Section 234, the exemption is withdrawn if the beneficial use of such property has
been granted to taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC, exemptions from real property taxes
granted to natural or juridical persons, including GOCCs, except as
provided in the said section, and the petitioner is, undoubtedly, a government-owned corporation, it
necessarily follows that its exemption from such tax granted it in Section 14 of its charter, R.A. No. 6958,
has been withdrawn. Any claim to the contrary can only be justified if the petitioner can seek refuge under

any of the exceptions provided in Section 234, but not under Section 133, as it now asserts, since, as
shown above, the said section is qualified by Section 232 and 234. In short, the petitioner can no longer
invoke the general rule in Section 133.
It must show that the parcels of land in question, which are real property, are any one of those
enumerated in Section 234, either by virtue of ownership, character, or use of the property. Most likely, it
could only be the first, but not under any explicit provision of the said section, for one exists. In light of the
petitioner's theory that it is an "instrumentality of the Government", it could only be within be first item of
the first paragraph of the section by expanding the scope of the terms Republic of the Philippines" to
embrace ."instrumentalities" and "agencies."
This view does not persuade us. In the first place, the petitioner's claim that it is an instrumentality of the Government is based on
Section 133(o), which expressly mentions the word "instrumentalities"; and in the second place it fails to consider the fact that the
legislature used the phrase "National Government, its agencies and instrumentalities" "in Section 133(o),but only the phrase "Republic
of the Philippines or any of its political subdivision "in Section 234(a). The terms "Republic of the Philippines" and "National
Government" are not interchangeable. The former is
boarder and synonymous with "Government of the Republic of the Philippines" which the Administrative Code of the
1987 defines as the "corporate governmental entity though which the functions of the government are exercised
through at the Philippines, including, saves as the contrary appears from the context, the various arms through which
political authority is made effective in the Philippines, whether pertaining to the autonomous reason, the provincial,
city, municipal or barangay subdivision or other forms of local government." These autonomous regions, provincial,
city, municipal or barangay subdivisions" are the political subdivision. On the other hand, "National Government"
refers "to the entire machinery of the central government, as distinguished from the different forms of local
Governments." The National Government then is composed of the three great departments the executive, the
legislative and the judicial. An "agency" of the Government refers to "any of the various units of the Government,
including a department, bureau, office instrumentality, or government-owned or controlled corporation, or a local
government or a distinct unit therein;" while an "instrumentality" refers to "any agency of the National Government,
not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with
some if not all corporate powers, administering special funds, and enjoying operational autonomy; usually through a
charter. This term includes regulatory agencies, chartered institutions and government-owned and controlled
corporations".
If Section 234(a) intended to extend the exception therein to the withdrawal of the exemption from
payment of real property taxes under the last sentence of the said section to the agencies and
instrumentalities of the National Government mentioned in Section 133(o), then it should have restated
the wording of the latter. Yet, it did not Moreover, that Congress did not wish to expand the scope of the
exemption in Section 234(a) to include real property owned by other instrumentalities or agencies of the
government including government-owned and controlled corporations is further borne out by the fact that
the source of this exemption is Section 40(a) of P.D. No. 646, otherwise known as the Real Property Tax
Code.
Note that as a reproduced in Section 234(a), the phrase "and any government-owned or controlled
corporation so exempt by its charter" was excluded. The justification for this restricted exemption in
Section 234(a) seems obvious: to limit further tax exemption privileges, specially in light of the general
provision on withdrawal of exemption from payment of real property taxes in the last paragraph of
property taxes in the last paragraph of Section 234. These policy considerations are consistent with the
State policy to ensure autonomy to local governments 33 and the objective of the LGC that they enjoy
genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant
communities and make them effective partners in the attainment of national goals. 34 The power to tax is
the most effective instrument to raise needed revenues to finance and support myriad activities of local
government units for the delivery of basic services essential to the promotion of the general welfare and
the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that
the original reasons for the withdrawal of tax exemption privileges granted to government-owned and
controlled corporations and all other units of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly situated enterprises, and there was a need
for this entities to share in the requirements of the development, fiscal or otherwise, by paying the taxes
and other charges due from them.
The crucial issues then to be addressed are: (a) whether the parcels of land in question belong to the
Republic of the Philippines whose beneficial use has been granted to the petitioner, and (b) whether the
petitioner is a "taxable person". It may be reasonable to assume that the term "lands" refer to "lands" in
Cebu City then administered by the Lahug Air Port and includes the parcels of land the respondent City of
Cebu seeks to levy on for real property taxes. This section involves a "transfer" of the "lands" among other
things, to the petitioner and not just the transfer of the beneficial use thereof, with the ownership being retained by the Republic of the
Philippines. This "transfer" is actually an absolute conveyance of the ownership thereof because the petitioner's
authorized capital stock consists of "the value of such real estate owned and/or administered by the
airports." Hence, the petitioner is now the owner of the land in question and the exception in Sec 234(c) of
the LGC is inapplicable. Petitioner cannot claim that it was never a "taxable person" under its Charter. It
was only exempted from the payment of real property taxes. The grant of the privilege only in respect of
this tax is conclusive proof of the legislative intent to make it a taxable person subject to all taxes, except
real property tax.

Finally, even if the petitioner was originally not a taxable person for purposes of real property tax,
in light of the forgoing disquisitions, it had already become even if it be conceded to be an "agency" or
"instrumentality" of the Government, a taxable person for such purpose in view of the withdrawal in the
last paragraph of Section 234 of exemptions from the payment of real property taxes, which, as earlier
adverted to, applies to the petitioner. Accordingly, the position taken by the petitioner is untenable.
Reliance on Basco vs. Pagcor is unavailing since it was decided before the effectivity of the LGC. Besides,
nothing can prevent Congress from decreeing that even instrumentalities or agencies of the government
performing governmental functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom.

MIAA is also not a non-stock corporation because it has no members. Section 87 of the Corporation Code defines a non-stock
corporation as "one where no part of its income is distributable as dividends to its members, trustees or officers." A non-stock
corporation must have members. Even if we assume that the Government is considered as the sole member of MIAA, this will not make
MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their members. Section 11 of the
MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents MIAA from
qualifying as a non-stock corporation. Section 88 of the Corporation Code provides that non-stock corporations are "organized for
charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar
purposes, like trade, industry, agriculture and like chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use. Since MIAA is neither a stock nor a non-stock corporation,
MIAA does not qualify as a government-owned or controlled corporation. What then is the legal status of MIAA within the National
Government? MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions.
MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers. x x x When the law
vests in a government instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government
instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of eminent domain, police authority and the
levying of fees and charges. At the same time, MIAA exercises "all the powers of a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions of this Executive Order."9 Thus, MIAA is not a government-owned or controlled
corporation but a government instrumentality which is exempt from any kind of tax from the local governments. Indeed, the exercise of
the taxing power of local government units is subject to the limitations enumerated in Section 133 of the Local Government Code.10
Under Section 133(o)11 of the Local Government Code, local government units have no power to tax instrumentalities of the national
government like the MIAA. Hence, MIAA is not liable to pay real property tax for the NAIA Pasay properties. Furthermore, the airport
lands and buildings of MIAA are properties of public dominion intended for public use, and as such are exempt from real property tax
under Section 234(a) of the Local Government Code. However, under the same provision, if MIAA leases its real property to a taxable
person, the specific property leased becomes subject to real property tax.12 In this case, only those portions of the NAIA Pasay
properties which are leased to taxable persons like private parties are subject to real property tax by the City of Pasay. WHEREFORE,
we GRANT the petition. We SET ASIDE the Decision dated 30 October 2002 and the Resolution dated 19 March 2004 of the Court of
Appeals in CA-G.R. SP No. 67416. We DECLARE the NAIA Pasay properties of the Manila International Airport Authority EXEMPT
from real property tax imposed by the City of Pasay. We declare VOID all the real property tax assessments, including the final notices
of real property tax delinquencies, issued by the City of Pasay on the NAIA Pasay properties of the Manila International Airport
Authority, except for the portions that the Manila International Airport Authority has leased to private parties. No costs. SO ORDERED.
ANTONIO T.CARPIO Associate Justice WE CONCUR: REYNATO S. PUNO Chief Justice LEONARDO A. QUISUMBING Associate
Justice CONSUELO YNARES-SANTIAGO Associate Justice MA. ALICIA AUSTRIA-MARTINEZ Associate Justice
RENATOC.CORONA Associate Justice CONCHITA CARPIO MORALES Associate Justice DANTE O. TINGA Associate Justice
MINITA V.CHICO-NAZARIO Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice ANTONIO EDUARDO B.
NACHURA Associate Justice TERESITA J. LEONARDO-DECASTRO Associate Justice ARTURO D. BRION Associate Justice
DIOSDADO M. PERALTA Associate Justice CERTIFIC ATION Pursuant to Section 13, Article VIII of the Constitution, I certify that the
conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court.
REYNATO S. PUNO Chief Justice cralaw Endnotes:
1 Under Rule 45 of the 1997 Rules of Civil Procedure. 2 Penned by Associate Justice Ruben T. Reyes (now retired Supreme Court
Justice) with Associate Justices Remedios Salazar-Fernando and Edgardo F. Sundiam, concurring. 3 Providing for a Revision of
Executive Order No. 778 Creating the Manila International Airport Authority, Transferring Existing Assets of the Manila International
Airport to the Authority, and Vesting the Authority with Power to Administer and Operate the Manila International Airport. 4 Section 3 of
EO 903 reads: SEC. 3. Creation of theManila International Airport Authority. There is hereby established a body corporate to be known
as the Manila International Airport Authority which shall be attached to the Ministry of Transportation and Communications. The
principal office of the Authority shall be located at the New Manila International Airport. The Authority may establish such offices,
branches, agencies or subsidiaries as it may deem proper and necessary; Provided, that any subsidiary that may be organized shall
have the prior approval of the President. The land where the Airport is presently located as well as the surrounding land area of
approximately six hundred hectares, are hereby transferred, conveyed and assigned to the ownership and administration of the
Authority, subject to existing rights, if any. The Bureau of Lands and other appropriate government agencies shall undertake an actual
survey of the area transferred within one year from the promulgation of this Executive Order and the corresponding title to be issued in
the name of the Authority. Any portion thereof shall not be disposed through the sale or through any other mode unless specifically
approved by the President of the Philippines. 5 Section 22 of EO 903 reads: SEC. 22. Transfer of Existing Facilities and Intangible
Assets. All existing public airport facilities, runways, lands, buildings and other property, movable and immovable, belonging to the
Airport, and all assets, powers, rights, interests and privileges belonging to the Bureau of Air Transportation relating to airport works or
air operations, including all equipment which are necessary for the operation of crash fire and rescue facilities, are hereby transferred to
the Authority. 6 G.R. No. 155650, 20 July 2006, 495 SCRA 591. 7 Id. at 644-645. 8 Section 2(13) of the Introductory Provisions of the
Administrative Code of 1987 reads: SEC. 2.General Terms Defined. - x x x (13) Government-owned or controlled corporation refers to

any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the
case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock:Provided, That government- owned or
controlled corporations may further be categorized by the department of Budget, the Civil Service Commission, and the Commission on
Audit for the purpose of the exercise and discharge of their respective powers, functions and responsibilities with respect to such
corporations. 9 Supra note 6 at 615-618. 10 Philippine Fisheries Development Authority v. Court of Appeals, G.R. No. 150301, 2
October 2007, 534 SCRA 490. 11 Section 133(o) of the Local Government Code reads:
SECTION 133. Common Limitations on the Taxing Powers of the LocalGovernment Units. - Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities, municipalities, andbarangays shall not extend to the levy of the following: xxx (o)
Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.
12Manila International Airport Authority v. Court of Appeals, supra note 6.
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 FalloranAliposa, 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 P7,789,995.00.1 On June 22, 1990, P159,363.21 was paid as capital gains tax for
the transaction.
On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock in AAI for P17,718,360.00. AMC
paid the capital gains tax of P352,242.96.
On October 15, 1993, the Commissioner issued a "Notice of Taxpayer" to AMC, Lucas G. Adamson, Therese June D. Adamson and
Sara S. de los Reyes, informing them of deficiencies on their payment of capital gains tax and Value Added Tax (VAT). The notice
contained a schedule for preliminary conference.
The events preceding G.R. No. 120935 are the following:
On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit of 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 reinvestigation with the Commissioner. After the preliminary investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The
Motion for Reconsideration against the findings of probable cause was denied by the prosecutor.
On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged before the Regional Trial
Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss or Suspend the
Proceedings. They invoked the grounds that there was yet no final assessment of their tax liability, and there were still pending relevant
Supreme Court and CTA cases. Initially, the trial court denied the motion. A Motion for Reconsideration was however filed, this time
assailing the trial courts lack of jurisdiction over the nature of the subject cases. On August 8, 1994, the trial court granted the Motion. It
ruled that the complaints for tax evasion filed by the Commissioner should be regarded as a decision of the Commissioner regarding
the tax liabilities of Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held
that the said cases cannot proceed independently of the assessment case pending before the CTA, which has jurisdiction to determine
the civil and criminal tax liability of the respondents therein.
On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals assailing the trial courts dismissal of the
criminal cases. She averred that it was not a condition prerequisite that a formal assessment should first be given to the private
respondents before she may file the aforesaid criminal complaints against them. She argued that the criminal complaints for tax evasion
may proceed independently from the assessment cases pending before the CTA.
On March 21, 1995, the Court of Appeals reversed the trial courts decision and reinstated the criminal complaints. The appellate court
held that, in a criminal prosecution for tax evasion, assessment of tax deficiency is not required because the offense of tax evasion is
complete or consummated when the offender has knowingly and willfully filed a fraudulent return with intent to evade the tax.9 It ruled
that private respondents filed false and fraudulent returns with intent to evade taxes, and acting thereupon, petitioner filed an Affidavit of
Complaint with the Department of Justice, without an accompanying assessment of the tax deficiency of private respondents, in order
to commence criminal action against the latter for tax evasion.10
Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on July 6, 1995. Thus, they filed the petition
in G.R. No. 120935, raising the following issues:
1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE IN UNGAB
V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.
2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE SECOND CATEGORY OF THE OFFENSE IN SECTION 253
OF THE NIRC.
3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE CASE AT BAR.
4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED ASSESSMENT ON THE TAX
LIABILITY OF THE TAXPAYER.
5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION FOR TAX EVASION IN THE TRIAL COURT IS
PREMATURE BECAUSE THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL INTENT TO EVADE THE
PAYMENT OF A TAX.
6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA
286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990, 185 SCRA 547) ARE APPLICABLE TO THE CASE AT
BAR.
7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION OVER THE DISPUTE ON WHAT CONSTITUTES THE
PROPER TAXES DUE FROM THE TAXPAYER.
In parallel circumstances, the following events preceded G.R. No. 124557:
On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a letter request for reinvestigation with the Commissioner of the "Examiners Findings" earlier issued by the Bureau of Internal Revenue (BIR), which pointed
out the tax deficiencies.
On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G. Adamson, Therese June D. Adamson
and Sara S. de los Reyes filed a Petition for Review with the CTA. They assailed the Commissioners finding of tax evasion against
them. The Commissioner moved to dismiss the petition, on the ground that it was premature, as she had not yet issued a formal
assessment of the tax liability of therein petitioners. On September 19, 1994, the CTA denied the Motion to Dismiss. It considered the
criminal complaint filed by the Commissioner with the DOJ as an implied formal assessment, and the filing of the criminal informations
with the RTC as a denial of petitioners protest regarding the tax deficiency.
The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave abuse of discretion. She contended
that, with regard to the protest provided under Section 229 of the NIRC, there must first be a formal assessment issued by the
Commissioner, and it must be in accord with Section 6 of Revenue Regulation No. 12-85. She maintained that she had not yet issued a

formal assessment of tax liability, and the tax deficiency amounts mentioned in her criminal complaint with the DOJ were given only to
show the difference between the tax returns filed and the audit findings of the revenue examiner.
The Court of Appeals sustained the CTAs denial of the Commissioners Motion to Dismiss. Thus, the Commissioner filed the petition
for review under G.R. No. 124557, raising the following issues:
1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED FOR FAILURE TO COMPLY WITH THE MANDATORY
REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM SHOPPING;
2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE CASE AT BAR CAN PROCEED WITHOUT AN
ASSESSMENT;
3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED
ASSESSMENT; and
4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON PRIVATE RESPONDENTS PETITION
FOR REVIEW FILED WITH THE SAID COURT.
The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:
1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR OTHERWISE) OF THE TAX
LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES;
2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX EVASION TO PROCEED AGAINST AMC, LUCAS G.
ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and
3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO TAKE COGNIZANCE OF BOTH THE CIVIL AND THE
CRIMINAL ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE
LOS REYES.
The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR Commissioner Jose U. Ong authorized revenue officers to
examine the books of accounts and other accounting records of Pascor Realty and Development Corporation (PRDC) for 1986, 1987
and 1988. This resulted in a recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35
for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against PRDC, its President Rogelio A. Dio, and its
Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of P10,513,671.00. Private respondents filed an Urgent Request
for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.
The Commissioner denied the urgent request for reconsideration/reinvestigation because she had not yet issued a formal assessment.
Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for review. The Commissioner filed a
Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was yet no
formal assessment issued against the petitioners. The CTA denied the said motion to dismiss and ordered the Commissioner to file an
answer within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider the resolution. Instead, the
Commissioner filed a petition for review of the CTA decision with the Court of Appeals. The Court of Appeals upheld the CTA order.
However, this Court reversed the Court of Appeals decision and the CTA order, and ordered the dismissal of the petition. We held:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also
signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies
thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by
revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an
assessment that can be questioned before the Court of Tax Appeals.
Neither the NIRC nor the revenue regulations governing the protest of 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 Commissioners recommendation letter can be considered as a formal assessment of private
respondents tax liability.
In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the
settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue
officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiners findings is not an
assessment since it is yet indefinite.23
We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the
said letter would reveal three key points:

1. It was not addressed to the taxpayers.

2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein.
3. The letter was never mailed or sent to the taxpayers by the Commissioner.
In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had
violated Section 45 (a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and for violation of Section 253, in
relation to Section 252 9(b) and (d) of the Tax Code.24
The next issue is whether the filing of the criminal complaints against the private respondents by the DOJ is premature for lack of a
formal assessment.
Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides:
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be
begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action
for collection thereof
The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax
may be begun without assessment. Here, the private respondents had already filed the capital gains tax return and the VAT returns,
and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of
gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to
APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and
fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents
constitutes badges of fraud.
Thus, the applicability of Ungab v. 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 Mertens Law of Federal
Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime
is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The
perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the
governments failure to discover the error and promptly to assess has no connections with the commission of the crime.
This hoary principle still underlies Section 269 and related provisions of the present Tax Code.
We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the criminal and civil cases here at
bar.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 (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and
Regional Trial Court.
(2) Exclusive appellate jurisdiction in tax collection cases:
(a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by
them, in their respective territorial jurisdiction.
(b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate
jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit
Trial Courts, in their respective jurisdiction.
These laws have expanded the jurisdiction of the CTA. However, they did not change the jurisdiction of the CTA to entertain an appeal
only from a final decision or assessment of the Commissioner, or in cases where the Commissioner has not acted within the period
prescribed by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of the tax liability of private respondents.
Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v. Union Shipping Co. and Yabes v. Flojo
are not applicable to the cases at bar. In these earlier cases, the Commissioner already rendered an assessment of the tax liabilities of
the delinquent taxpayers, for which reason the Court ruled that the filing of the civil suit for collection of the taxes due was a final denial
of the taxpayers request for reconsideration of the tax assessment.
IN VIEW WHEREOF, premises considered, judgment is rendered:
1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside the Regional Trial Courts Order dated
August 8, 1994, and REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for further proceedings before the trial court; and

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

ALLIED BANKING
G.R. No. 175097
CORPORATION,

Petitioner,

Present:

CARPIO, J., Chairperson,

- versus BRION,

DEL CASTILLO,

ABAD, and

PEREZ, JJ.
COMMISSIONER OF

INTERNAL REVENUE,
Promulgated:
Respondent.
February 5, 2010
x --------------------------------------------------------x

DECISION

DEL CASTILLO, J.:

The key to effective communication is clarity.

The Commissioner of Internal Revenue (CIR) as well as his duly authorized representative must indicate clearly and unequivocally to
the taxpayer whether an action constitutes a final determination on a disputed assessment.[1] Words must be carefully chosen in order
to avoid any confusion that could adversely affect the rights and interest of the taxpayer.
Assailed in this Petition for Review on Certiorari[2] under Section 12 of Republic Act (RA) No. 9282,[3] in relation to Rule 45 of the
Rules of Court, are the August 23, 2006 Decision[4] of the Court of Tax Appeals (CTA) and its October 17, 2006 Resolution[5] denying
petitioners Motion for Reconsideration.
Factual Antecedents

On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary Assessment Notice (PAN) to petitioner Allied Banking
Corporation for deficiency Documentary Stamp Tax (DST) in the amount of P12,050,595.60 and Gross Receipts Tax (GRT) in the
amount of P38,995,296.76 on industry issue for the taxable year 2001.[6] Petitioner received the PAN on May 18, 2004 and filed a
protest against it on May 27, 2004.[7]
On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment Notices to petitioner, which partly reads as follows:[8]
It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency.
This is our final decision based on investigation. If you disagree, you may appeal the final decision within thirty (30) days from receipt
hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.
Petitioner received the Formal Letter of Demand with Assessment Notices on August 30, 2004.[9]

Proceedings before the CTA First Division

On September 29, 2004, petitioner filed a Petition for Review[10] with the CTA which was raffled to its First Division and docketed as
CTA Case No. 7062.[11]
On December 7, 2004, respondent CIR filed his Answer.[12] On July 28, 2005, he filed a Motion to Dismiss[13] on the ground that
petitioner failed to file an administrative protest on the Formal Letter of Demand with Assessment Notices. Petitioner opposed the
Motion to Dismiss on August 18, 2005.[14]
On October 12, 2005, the First Division of the CTA rendered a Resolution[15] granting respondents Motion to Dismiss. It ruled:
Clearly, it is neither the assessment nor the formal demand letter itself that is appealable to this Court. It is the decision of the
Commissioner of Internal Revenue on the disputed assessment that can be appealed to this Court (Commissioner of Internal Revenue
vs. Villa, 22 SCRA 3). As correctly pointed out by respondent, a disputed assessment is one wherein the taxpayer or his duly
authorized representative filed an administrative protest against the formal letter of demand and assessment notice within thirty (30)
days from date [of] receipt thereof. In this case, petitioner failed to file an administrative protest on the formal letter of demand with the
corresponding assessment notices. Hence, the assessments did not become disputed assessments as subject to the Courts review
under Republic Act No. 9282. (See also Republic v. Liam Tian Teng Sons & Co., Inc., 16 SCRA 584.)
WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for Review is hereby DISMISSED for lack of jurisdiction.
SO ORDERED.[16]
Aggrieved, petitioner moved for reconsideration but the motion was denied by the First Division in its Resolution dated February 1,
2006.[17]
Proceedings before the CTA En Banc
On February 22, 2006, petitioner appealed the dismissal to the CTA En Banc.[18] The case was docketed as CTA EB No. 167.
Finding no reversible error in the Resolutions dated October 12, 2005 and February 1, 2006 of the CTA First Division, the CTA En Banc
denied the Petition for Review[19]as well as petitioners Motion for Reconsideration.[20]
The CTA En Banc declared that it is absolutely necessary for the taxpayer to file an administrative protest in order for the CTA to
acquire jurisdiction. It emphasized that an administrative protest is an integral part of the remedies given to a taxpayer in challenging
the legality or validity of an assessment. According to the CTA En Banc, although there are exceptions to the doctrine of exhaustion of
administrative remedies, the instant case does not fall in any of the exceptions.
Issue
Hence, the present recourse, where petitioner raises the lone issue of whether the Formal Letter of Demand dated July 16, 2004 can be
construed as a final decision of the CIR appealable to the CTA under RA 9282.
Our Ruling
The petition is meritorious.
Section 7 of RA 9282 expressly provides that the CTA exercises exclusive appellate jurisdiction to review by appeal decisions of the
CIR in cases involving disputed assessments

The CTA, being a court of special jurisdiction, can take cognizance only of
matters that are clearly within its jurisdiction.[21] Section 7 of RA 9282 provides:
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 Code 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; (Emphasis supplied)
xxxx
The word decisions in the above quoted provision of RA 9282 has been interpreted to mean the decisions of the CIR on the protest of
the taxpayer against the assessments.[22] Corollary thereto, Section 228 of the National Internal Revenue Code (NIRC) provides for
the procedure for protesting an assessment. It states:
SECTION 228. Protesting of Assessment. When the Commissioner or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be
required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of
the return; or
(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined
to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall
be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the
taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days
from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the
taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of
the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory
and demandable.
In the instant case, petitioner timely filed a protest after receiving the PAN. In response thereto, the BIR issued a Formal Letter of
Demand with Assessment Notices. Pursuant to Section 228 of the NIRC, the proper recourse of petitioner was to dispute the
assessments by filing an administrative protest within 30 days from receipt thereof. Petitioner, however, did not protest the final
assessment notices. Instead, it filed a Petition for Review with the CTA. Thus, if we strictly apply the rules, the dismissal of the Petition
for Review by the CTA was proper.
The case is an exception to the
rule on exhaustion of administrative remedies

However, a careful reading of the Formal Letter of Demand with Assessment Notices leads us to agree with petitioner that the instant
case is an exception to the rule on exhaustion of administrative remedies, i.e., estoppel on the part of the administrative agency
concerned.
In the case of Vda. De Tan v. Veterans Backpay Commission,[23] the respondent contended that before filing a petition with the court,
petitioner should have first exhausted all administrative remedies by appealing to the Office of the President. However, we ruled that
respondent was estopped from invoking the rule on exhaustion of administrative remedies considering that in its Resolution, it said,
The opinions promulgated by the Secretary of Justice are advisory in nature, which may either be accepted or ignored by the office

seeking the opinion, and any aggrieved party has the court for recourse. The statement of the respondent in said case led the
petitioner to conclude that only a final judicial ruling in her favor would be accepted by the Commission.
Similarly, in this case, we find the CIR estopped from claiming that the filing of the Petition for Review was premature because
petitioner failed to exhaust all administrative remedies.
The Formal Letter of Demand with Assessment Notices reads:
Based on your letter-protest dated May 26, 2004, you alleged the following:
1.

That the said assessment has already prescribed in accordance with the provisions of Section 203 of the Tax Code.

2.
That since the exemption of FCDUs from all taxes found in the Old Tax Code has been deleted, the wording of Section
28(A)(7)(b) discloses that there are no other taxes imposable upon FCDUs aside from the 10% Final Income Tax.
Contrary to your allegation, the assessments covering GRT and DST for taxable year 2001 has not prescribed for [sic] simply because
no returns were filed, thus, the three year prescriptive period has not lapsed.
With the implementation of the CTRP, the phrase exempt from all taxes was deleted. Please refer to Section 27(D)(3) and 28(A)(7) of
the new Tax Code. Accordingly, you were assessed for deficiency gross receipts tax on onshore income from foreign currency
transactions in accordance with the rates provided under Section 121 of the said Tax Code. Likewise, deficiency documentary stamp
taxes was [sic] also assessed on Loan Agreements, Bills Purchased, Certificate of Deposits and related transactions pursuant to
Sections 180 and 181 of NIRC, as amended.
The 25% surcharge and 20% interest have been imposed pursuant to the provision of Section 248(A) and 249(b), respectively, of the
National Internal Revenue Code, as amended.
It is requested that the above deficiency tax be paid immediately upon receipt hereof, inclusive of penalties incident to delinquency.
This is our final decision based on investigation. If you disagree, you may appeal this final decision within thirty (30) days from receipt
hereof, otherwise said deficiency tax assessment shall become final, executory and demandable.[24] (Emphasis supplied)
It appears from the foregoing demand letter that the CIR has already made a final decision on the matter and that the remedy of
petitioner is to appeal the final decision within 30 days.
In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue,[25] we considered the language used and the tenor of the
letter sent to the taxpayer as the final decision of the CIR.
In this case, records show that petitioner disputed the PAN but not the Formal Letter of Demand with Assessment Notices.
Nevertheless, we cannot blame petitioner for not filing a protest against the Formal Letter of Demand with Assessment Notices since
the language used and the tenor of the demand letter indicate that it is the final decision of the respondent on the matter. We have time
and again reminded the CIR to indicate, in a clear and unequivocal language, whether his action on a disputed assessment constitutes
his final determination thereon in order for the taxpayer concerned to determine when his or her right to appeal to the tax court
accrues.[26] Viewed in the light of the foregoing, respondent is now estopped from claiming that he did not intend the Formal Letter of
Demand with Assessment Notices to be a final decision.
Moreover, we cannot ignore the fact that in the Formal Letter of Demand with Assessment Notices, respondent used the word appeal
instead of protest, reinvestigation, or reconsideration. Although there was no direct reference for petitioner to bring the matter
directly to the CTA, it cannot be denied that the word appeal under prevailing tax laws refers to the filing of a Petition for Review with
the CTA. As aptly pointed out by petitioner, under Section 228 of the NIRC, the terms protest, reinvestigation and reconsideration
refer to the administrative remedies a taxpayer may take before the CIR, while the term appeal refers to the remedy available to the
taxpayer before the CTA. Section 9 of RA 9282, amending Section 11 of RA 1125,[27] likewise uses the term appeal when referring to
the action a taxpayer must take when adversely affected by a decision, ruling, or inaction of the CIR. As we see it then, petitioner in
appealing the Formal Letter of Demand with Assessment Notices to the CTA merely took the cue from respondent. Besides, any doubt
in the interpretation or use of the word appeal in the Formal Letter of Demand with Assessment Notices should be resolved in favor of
petitioner, and not the respondent who caused the confusion.
To be clear, we are not disregarding the rules of procedure under Section 228 of the NIRC, as implemented by Section 3 of BIR
Revenue Regulations No. 12-99.[28] It is the Formal Letter of Demand and Assessment Notice that must be administratively protested
or disputed within 30 days, and not the PAN. Neither are we deviating from our pronouncement in St. Stephens Chinese Girls School
v. Collector of Internal Revenue,[29] that the counting of the 30 days within which to institute an appeal in the CTA commences from the
date of receipt of the decision of the CIR on the disputed assessment, not from the date the assessment was issued.
What we are saying in this particular case is that, the Formal Letter of Demand with Assessment Notices which was not administratively
protested by the petitioner can be considered a final decision of the CIR appealable to the CTA because the words used, specifically
the words final decision and appeal, taken together led petitioner to believe that the Formal Letter of Demand with Assessment
Notices was in fact the final decision of the CIR on the letter-protest it filed and that the available remedy was to appeal the same to the
CTA.
We note, however, that during the pendency of the instant case, petitioner availed of the provisions of Revenue Regulations No. 302002 and its implementing Revenue Memorandum Order by submitting an offer of compromise for the settlement of the GRT, DST and

VAT for the period 1998-2003, as evidenced by a Certificate of Availment dated November 21, 2007.[30] Accordingly, there is no
reason to reinstate the Petition for Review in CTA Case No. 7062.
WHEREFORE, the petition is hereby GRANTED. The assailed August 23, 2006 Decision and the October 17, 2006 Resolution of the
Court of Tax Appeals are REVERSED and SET ASIDE. The Petition for Review in CTA Case No. 7062 is hereby DISMISSED based
solely on the Bureau of Internal Revenues acceptance of petitioners offer of compromise for the settlement of the gross receipts tax,
documentary stamp tax and value added tax, for the years 1998-2003.
SO ORDERED.

Haystack: Commissioner of Internal Revenue vs. Isabela Cultural Corporation (GR 135210, 11 July 2001)
Commissioner of Internal Revenue vs. Isabela Cultural Corporation (GR 135210, 11 July 2001)
Third Division, Panganiban (J): 3 concur, 1 on leave
Facts: In an investigation conducted on the 1986 books of account of Isabela Cultural Corporation had the preliminary finding that the corporation incurred a total
income tax deficiency of P9,985,392.15, inclusive of increments. Upon protest by [respondents] counsel, the said preliminary assessment was reduced to the
amount of P325,869.44. On 23 February 1990, the corporation received from the Commissioner an assessment letter, dated 9 February 1990, demanding
payment of the amounts of P333,196.86 and P4,897.79 as deficiency income tax and expanded withholding tax inclusive of surcharge and interest, respectively,
for the taxable period from 1 January 1986 to 31 December 1986. In a letter, dated 22 March 1990, filed with the Commissioners office on 23 March 1990, the
corporation requested a reconsideration of the subject assessment. Supplemental to its protest was a letter, dated 2 April 1990, filed with the Commissioner office
on 18 April 1990, to which were attached certain documents supportive of its protest, as well as a Waiver of Statute of Limitation, dated 17 April 1990, where it was
indicated that the Commissioner would only have until 5 April 1991 within which to asses and collect the taxes that may be found due from the corporation after the
re-investigation. On 9 February 1995, the corporation received from the Commissioner a Final Notice Before Seizure, dated 22 December 1994. In said letter, the
Commissioner demanded payment of the subject assessment within 10 days from receipt thereof. Otherwise, failure on its part would constrain the Commissioner
to collect the subject assessment through summary remedies. The corporation considered said final notice of seizure as the Commissioners final decision.
The corporation filed a petition for review with the Court of Tax Appeals (CTA) on 9 March 1995 (CTA Case 5211). The CTA having rendered judgment dismissing
the petition, the corporation filed a petition with the Court of Appeals, anchored on the argument that the Commissioners issuance of the Final Notice Before
Seizure constitutes its decision on the corporations request for reinvestigation, which the corporation may appeal to the CTA. In its Decision of 19 August 1998
(CA-GR SP 46383), the Court of Appeals reversed the Court of Tax Appeals. The CA considered the final notice sent by the Commissioner as the latters decision,
which was appealable to the CTA. The appellate court reasoned that the final Notice before seizure had effectively denied the corporations request for a
reconsideration of the commissioners assessment. The appellate court ordered the case be remanded to the CTA.
The Commissioner filed a petition for review on certiorari before the Supreme Court. The Supreme Court denied the petition and affirmed the assailed decision.
1. Normal procedure as to assessment of delinquent taxes; Final decision
In the normal course, the revenue district officer sends the taxpayer a notice of delinquent taxes, indicating the period covered, the amount due including interest,
and the reason for the delinquency. If the taxpayer disagrees with or wishes to protest the assessment, it sends a letter to the BIR indicating its protest, stating the
reasons therefor, and submitting such proof as may be necessary. That letter is considered as the taxpayers request for reconsideration of the delinquent
assessment. After the request is filed and received by the BIR, the assessment becomes a disputed assessment on which it must render a decision. That decision
is appealable to the Court of Tax Appeals for review. Prior to the decision on a disputed assessment, there may still be exchanges between the commissioner of
internal revenue (CIR) and the taxpayer. The former may ask clarificatory questions or require the latter to submit additional evidence. However, the CIRs position
regarding the disputed assessment must be indicated in the final decision. It is this decision that is properly appealable to the CTA for review.
2. Final Notice Before Seizure is the final decision of the Commissioner
The Final Notice Before Seizure, transmitted after the corporation requested for reconsideration of the assessment made by the Commissioner as to delinquent
taxes, should be considered as the commissioners decision disposing of the request for reconsideration filed by the corporation, who received no other response
to its request. Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIRs final act regarding the request
for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that respondent was being
given this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to distraint and levy.
3. Section 228 NIRC; Protesting an Assessment
Section 228 of the National Internal Revenue Code states that a delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its request for
reconsideration remains unacted upon 180 days after submission thereof. Section 228 provides that Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall
issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from
filing of the protest, all relevant supporting documents shall have become final. If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final, executory and
demandable.
4. Final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment; Commissioner of Internal
Revenue v. Ayala Securities Corporation
In Commissioner of Internal Revenue v. Ayala Securities Corporation, it was held that the letter is tantamount to a denial of the reconsideration of the corporations
protest of the assessment made by the Commissioner, considering that the said letter was in itself a reiteration of the demand by the BIR for the settlement of the
assessment already made, and for the immediate payment of the amount in spite of the vehement protest of the corporation. This certainly is a clear indication of
the firm stand of the Commissioner against the reconsideration of the disputed assessment, in view of the continued refusal of the corporation to execute the
waiver of the period of limitation upon the assessment in question.
5. Final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment; Surigao Electric Co., Inc.
vs. Court of Tax Appeals and CIR vs. Union Shipping

Similarly, in Surigao Electric Co., Inc. vs. Court of Tax Appeals and again in CIR v. Union Shipping Corp., it was held that the letter of demand unquestionably
constitutes the final action taken by the commissioner on the companys several requests for reconsideration and re-computation. In this letter the commissioner
not only in effect demanded that the company pay the amount but also gave warning that in the event it failed to pay, the said commissioner would be constrained
to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically the statement regarding the resort to legal remedies,
unmistakably indicated the final nature of the determination made by the commissioner of the companys deficiency franchise tax liability.
6. BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment; Purpose
The BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment. The object of this policy
is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment and, consequently, the collection of the taxes
due. Furthermore, the taxpayer would not be groping in the dark, speculating as to which communication or action of the BIR may be the decision appealable to
the tax court.
7. Commissioner vs. Algue not applicable
Commissioner v. Algue is not in point. In that case, the Warrant of Distraint and Levy, issued to the taxpayer without any categorical ruling on its request for
reconsideration, was not deemed equivalent to a denial of the request. Because such request could not in fact be found in its records, the BIR cannot be presumed
to have taken it into consideration. The request was considered only when the taxpayer gave a copy of it, duly stamp-received by the BIR. Hence, the Warrant was
deemed premature. In the present case, petitioner does not deny receipt of the Companys protest letter. As a matter of fact, it categorically relates the following in
its Statement of Relevant Facts. Having admitted as a fact the companys request for reconsideration, the Commissioner must have passed upon it prior to the
issuance of the Final Notice Before Seizure.

Dumaguete Cathedral Credit Cooperative v. Commissioner of Internal Revenue, G.R. No.

182722, January 22, 2010
Facts: Dumaguete Cathedral Credit Cooperative (the Cooperative) was assessed by the Commissioner
of Internal Revenue (CIR) on deficiency withholding taxes for taxable years 1999 and 2000 which it
protested on July 23, 2002. Thereafter, on October 16, 2002, the Cooperative received two (2) other
Pre-Assessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000. The
deficiency withholding taxes cover the payments of the honorarium of the Board of Directors, security
and janitorial services, legal and professional fees, and interest on savings and time deposits of its
members.
In another letter dated November 8, 2002, the Cooperative informed the CIR, that it would pay
the withholding taxes due on the honorarium and per diems of the Board of Directors, security and
janitorial services, commissions and legal and professional fees for the year 2000 excluding penalties
and interest, and that it would avail of the Voluntary Assessment and Abatement Program (VAAP) of the
BIR under Revenue Regulations No. 17-2002. On November 29, 2002, the Cooperative availed of the
VAAP and paid the amounts corresponding to the withholding taxes on the payments for the
compensation, honorarium of the Board of Directors, security and janitorial services, and legal and
professional services, for the years 1999 and 2000. On April 24, 2003, the Cooperative received from
the BIR Regional Director, Sonia L. Flores, Letters of Demand Nos. 00027-2003 and 00026-2003, with
attached Transcripts of Assessment and Audit Results/Assessment Notices, ordering it to pay the
deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the amounts of
P1,489,065.30 and P1,462,644.90, respectively.
On May 9, 2003, the Cooperative protested the Letters of Demand and Assessment Notices
with the CIR. However, the latter failed to act on the protest within the prescribed 180-day period.
Hence, on December 3, 2003, the Cooperative filed a Petition for Review before the CTA.
The Court of Tax Appeals First Division partially granted the petition and cancelled the deficiency
assessment against the Cooperative for deficiency withholding taxes on the honorarium and per diems
of the Cooperatives Board of Directors, security and janitorial services, commissions and legal and
professional fees in view of its VAAP application. However, The CTA ordered the Cooperative to pay the
amounts representing deficiency withholding taxes on interests from savings and time deposits of its
members for the taxable years 1999 and 2000 plus the 20% delinquency interest from May 26, 2003
until the amount of deficiency withholding taxes are fully paid pursuant to Section 249 (C) of the Tax
Code.
Aggrieved, the Cooperative filed an appeal before the CTA En Banc. However, the CTA En
Banc denied its appeal.
The Cooperative elevated its case before the Supreme Court.
Issue: Is the Cooperative liable to pay the deficiency withholding taxes on interest from savings and
time deposits of its members, as well as the delinquency interest of 20% per annum.
Held: The Supreme Court held that the Cooperative is not liable.The Supreme Court found that the BIR has previously issued rulings
dealing with the subject
matter. In BIR Ruling No. 551-888, the BIR stated that cooperatives are not required to withhold taxes on
interest from savings and time deposits of their members which ruling was reiterated in BIR Ruling [DA591-2006] dated October 5, 2006. The Court found that both BIR Ruling No. 551-888 and BIR Ruling
[DA-591-2006] are in perfect harmony with the Constitution and the laws they seek to implement.
Also, given that the Cooperative is duly registered with the Cooperative Development Authority

(CDA), Section 24(B)(1) of the NIRC must be read together with RA 6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the State to foster
the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing
people power towards the attainment of economic development and social justice. Thus, to encourage
the formation of cooperatives and to create an atmosphere conducive to their growth and development,
the State extends all forms of assistance to them, one of which is providing cooperatives a preferential
tax treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent in Articles 61
and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. Duly registered cooperatives under this
Code which do not transact any business with non-members or the general public shall
not be subject to any government taxes and fees imposed under the Internal Revenue
Laws and other tax laws. Cooperatives not falling under this article shall be governed by
the succeeding section.
ART. 62. Tax and Other Exemptions. Cooperatives transacting business with both
members and nonmembers shall not be subject to tax on their transactions to
members. Notwithstanding the provision of any law or regulation to the contrary, such
cooperatives dealing with nonmembers shall enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that cooperatives
exist for the benefit of their members. In fact, the primary objective of every cooperative is to provide
goods and services to its members to enable them to attain increased income, savings, investments,
and productivity. Therefore, limiting the application of the tax exemption to cooperatives would go against
the very purpose of a credit cooperative. Extending the exemption to members of cooperatives, on the
other hand, would be consistent with the intent of the legislature. Thus, although the tax exemption only
mentions cooperatives, this should be construed to include the members, pursuant to Article 126 of RA
6938, which provides:
ART. 126. Interpretation and Construction. In case of doubt as to the meaning of any
provision of this Code or the regulations issued in pursuance thereof, the same shall be
resolved liberally in favor of the cooperatives and their members.
The Supreme Court likewise noted that the tax exemption in RA 6938 was retained in RA 9520.
The only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938) now expressly states
that transactions of members with the cooperatives are not subject to any taxes and fees.ART. 61. Tax and Other Exemptions.
Cooperatives transacting business with both
members and non-members shall not be subjected to tax on their transactions with
members. In relation to this, the transactions of members with the cooperative shall not
be subject to any taxes and fees, including but not limited to final taxes on members
deposits and documentary tax. Notwithstanding the provisions of any law or regulation to
the contrary, such cooperatives dealing with nonmembers shall enjoy the following tax
exemptions: (Underscoring Supplied)
This amendment in Article 61 of RA 9520, specifically providing that members of cooperatives
are not subject to final taxes on their deposits, affirms the interpretation of the BIR that Section 24(B)(1)
of the NIRC does not apply to cooperatives and confirms that such ruling carries out the legislative intent.
Under the principle of legislative approval of administrative interpretation by reenactment, the
reenactment of a statute substantially unchanged is persuasive indication of the adoption by Congress of
a prior executive construction.
Moreover, no less than the Constitution guarantees the protection of cooperatives. Section 15,
Article XII of the Constitution considers cooperatives as instruments for social justice and economic
development. At the same time, Section 10 of Article II of the Constitution declares that it is a policy of
the State to promote social justice in all phases of national development. In relation thereto, Section 2 of
Article XIII of the Constitution states that the promotion of social justice shall include the commitment to
create economic opportunities based on freedom of initiative and self-reliance. Bearing in mind the
foregoing provisions, the Court found that an interpretation exempting the members of cooperatives from
the imposition of the final tax under Section 24(B)(1) of the NIRC is more in keeping with the letter and
spirit of the Constitution.
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 166387 : January 19, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. ENRON SUBIC POWER CORPORATION, Respondent. virtuallawlibrary

RESOLUTION

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) assails
the November 24, 2004 decision[1] of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against
respondent Enron Subic Power Corporation (Enron) for failure to state the legal and factual bases for such assessment.
virtuallawlibrary

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise,[2] filed its annual income
tax return for the year 1996 on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of Internal Revenue,
through a preliminary five-day letter,[3] informed it of a proposed assessment of an alleged P2,880,817.25 deficiency income tax.[4]
Enron disputed the proposed deficiency assessment in its first protest letter.[5] virtuallawlibrary

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

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

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

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

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

We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et Denrees v. CIR,[11] we
held:
We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an
agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and
consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority on its part, which is not present here.

The CIR errs in insisting that the notice of assessment in question complied with the requirements of the NIRC and RR No. 12-99.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the prescribed
period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the [t]axpayer of this
fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

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

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

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

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made
against him. The use of the word shall in these legal provisions indicates the mandatory nature of the requirements laid down therein.
We note the CTAs findings:
In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge, interest and
compromise penalty due thereon. The Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did not provide
Enron with the written bases of the law and facts on which the subject assessment is based. [The CIR] did not bother to explain how it
arrived at such an assessment. Moreso, he failed to mention the specific provision of the Tax Code or rules and regulations which were
not complied with by Enron.[13]
Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed and included these
in the gross income. It also imposed the preferential rate of 5% on some items categorized by Enron as costs. The legal and factual
bases were, however, not indicated.
virtuallawlibrary
The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the preassessment stage, the CIR advised Enrons representative of the tax deficiency, informed it of the proposed tax deficiency assessment
through a preliminary five-day letter and furnished Enron a copy of the audit working paper[14] allegedly showing in detail the legal and
factual bases of the assessment. The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the
deficiency tax assessment was based. virtuallawlibrary

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter, were
not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere

perfunctory discharges of the CIRs duties in correctly assessing a taxpayer.[15] The requirement for issuing a preliminary or final
notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the
requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment
stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which
the deficiency tax assessment was made. virtuallawlibrary

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice.
Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered
nugatory. The alleged factual bases in the advice, preliminary letter and audit working papers did not suffice. There was no going
around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand
accompanying the assessment notice. virtuallawlibrary

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

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection
should be made in accordance with law as any arbitrariness will negate the very reason for the Government itself. virtuallawlibrary

WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals is AFFIRMED