G.R. No.

177982

October 17, 2008

FITNESS BY DESIGN, INC., petitioner,

vs.
COMMISSIONER ON INTERNAL REVENUE, respondent.
DECISION
CARPIO MORALES, J.:
On March 17, 2004, the Commissioner on Internal Revenue (respondent) assessed Fitness by
Design, Inc. (petitioner) for deficiency income taxes for the tax year 1995 in the total amount of
P10,647,529.69.1 Petitioner protested the assessment on the ground that it was issued beyond the
three-year prescriptive period under Section 203 of the Tax Code.2 Additionally, petitioner
claimed that since it was incorporated only on May 30, 1995, there was no basis to assume that it
had already earned income for the tax year 1995.3
On February 1, 2005, respondent issued a warrant of distraint and/or levy against petitioner,4
drawing petitioner to file on March 1, 2005 a Petition for Review (with Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and Surcharges and
Interests subject of this Petition)5 before the Court of Tax Appeals (CTA) before which it
reiterated its defense of prescription. The petition was docketed as CTA Case No. 7160.
In his Answer,6 respondent alleged:
The right of the respondent to assess petitioner for deficiency income tax, VAT and Documentary
Stamp Tax for the year 1995 has not prescribed pursuant to Section 222(a) of the 1997 Tax Code.
Petitioners 1995 Income Tax Return (ITR) filed on April 11, 1996 was false and fraudulent for
its deliberate failure to declare its true sales. Petitioner declared in its 1995 Income Tax Return
that it was on its pre-operation stage and has not declared its income. Investigation by the
revenue officers of the respondent, however, disclosed that it has been operating/doing business
and had sales operations for the year 1995 in the total amount of P7,156,336.08 which it failed to
report in its 1995 ITR. Thus, for the year 1995, petitioner filed a fraudulent annual income return
with intent to evade tax. Likewise, petitioner failed to file Value-Added Tax (VAT) Return and
reported the amount of P7,156,336.08 as its gross sales for the year 1995. Hence, for failure to
file a VAT return and for filing a fraudulent income tax return for the year 1995, the
corresponding taxes may be assessed at any time within ten (10) years after the discovery of
such omission or fraud pursuant to Section 222(a) of the 1997 Tax Code.
The subject deficiency tax assessments have already become final, executory and demandable
for failure of the petitioner to file a protest within the reglementary period provided for by law.
The "alleged protest" allegedly filed on June 25, 2004 at the Legal Division, Revenue Region
No. 8, Makati City is nowhere to be found in the BIR Records nor reflected in the Record Book
of the Legal Division as normally done by our receiving clerk when she receive[s] any
document. The respondent, therefore, has legal basis to collect the tax liability either by distraint
and levy or civil action.7 (Emphasis and underscoring supplied)

The aforecited Section 222(a)8 of the 1997 Tax Code provides:

In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
tax may be assessed, or a proceeding in court for the collection of such tax may be filed without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission:
Provided, That in a fraud assessment which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.
(Underscoring supplied)
The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a criminal complaint
before the Department of Justice against the officers and accountant of petitioner for violation of
the provisions of "The National Internal Revenue Code of 1977, as amended,9 covering the
taxable year 1995." The criminal complaint was docketed as I.S. No. 2005-203.
On motion of petitioner in CTA Case No. 7160, a preliminary hearing on the issue of
prescription10 was conducted during which petitioners former bookkeeper attested that a former
colleague certified public accountant Leonardo Sablan (Sablan) illegally took custody of
petitioners accounting records, invoices, and official receipts and turned them over to the BIR.11
On petitioners request, a subpoena ad testificandum was issued to Sablan for the hearing before
the CTA scheduled on September 4, 2006 but he failed to appear.12
Petitioner thus requested for the issuance of another subpoena ad testificandum to Sablan for the
hearing scheduled on October 23, 2006,13 and of subpoena duces tecum to the chief of the
National Investigation Division of the BIR for the production of the Affidavit of the Informer
bearing on the assessment in question.14 Petitioners requests were granted.15
During the scheduled hearing of the case on October 23, 2006, on respondents counsels
manifestation that he was not furnished a copy of petitioners motion for the issuance of
subpoenaes, the CTA ordered petitioner to file a motion for the issuance of subpoenas and to
furnish respondents counsel a copy thereof.16 Petitioner complied with the CTA order.17
In a related move, petitioner submitted written interrogatories addressed to Sablan and to Henry
Sarmiento and Marinella German, revenue officers of the National Investigation Division of the
BIR.18
By Resolution19 of January 15, 2007, the CTA denied petitioners Motion for Issuance of
Subpoenas and disallowed the submission by petitioner of written interrogatories to Sablan, who
is not a party to the case, and the revenue officers,20 it finding that the testimony, documents, and
admissions sought are not relevant.21 Besides, the CTA found that to require Sablan to testify
would violate Section 2 of Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities of informers of violations of
internal revenue laws, except when the information is proven to be malicious or false.22

In any event, the CTA held that there was no need to issue a subpoena duces tecum to obtain the
Affidavit of the Informer as the same formed part of the BIR records of the case, the production
of which had been ordered by it.23
Petitioners Motion for Reconsideration24 of the CTA Resolution of January 15, 2007 was
denied,25 hence, the present Petition for Certiorari26 which imputes grave abuse of discretion to
the CTA
I.
x x x in holding that the legality of the mode of acquiring the documents which are the bases of
the above discussed deficiency tax assessments, the subject matter of the Petition for Review
now pending in the Honorable Second Division, is not material and relevant to the issue of
prescription.
II.
x x x in holding that Mr. Leonardo Sablans testimony, if allowed, would violate RA 2338 which
prohibits the BIR to reveal the identity of the informer since 1) the purpose of the subpoena is to
elicit from him the whereabouts of the original accounting records, documents and receipts
owned by the Petitioner and not to discover if he is the informer since the identity of the informer
is not relevant to the issues raised; 2) RA 2338 cannot legally justify violation of the Petitioners
property rights by a person, whether he is an informer or not, since such RA cannot allow such
invasion of property rights otherwise RA 2338 would run counter to the constitutional mandate
that "no person shall be deprive[d] of life, liberty or property without due process of law."
III.
x x x in holding that the issuance of subpoena ad testificandum would constitute a violation of
the prohibition to reveal the identity of the informer because compliance with such prohibition
has been rendered moot and academic by the voluntary admissions of the Respondent himself.
IV.
x x x in holding that the constitutional right of an accused to examine the witness against him
does not exist in this case. The Petitioners liability for tax deficiency assessment which is the
main issue in the Petition for Review is currently pending at the Honorable Second Division.
Therefore, it is a prejudicial question raised in the criminal case filed by the herein Respondent
against the officers of the Petitioner with the Department of Justice.
V.
x x x in dismissing the request for subpoena ad testificandum because the Opposition thereto
submitted by the Respondent was not promptly filed as provided by the Rules of Court thus, it is
respectfully submitted that, Respondent has waived his right to object thereto.

VI.
x x x when the Honorable Court of Tax Appeals ruled that the purpose of the Petitioner in
requesting for written interrogatories is to annoy, embarrass, or oppress the witness because such
ruling has no factual basis since Respondent never alleged nor proved that the witnesses to
whom the interrogatories are addressed will be annoyed, embarrassed or oppressed; besides the
only obvious purpose of the Petitioner is to know the whereabouts of accounting records and
documents which are in the possession of the witnesses to whom the interrogatories are directed
and to ultimately get possession thereof. Granting without admitting that there is annoyance,
embarrassment or oppression; the same is not unreasonable.
VII.
x x x when it failed to rule that the BIR officers and employees are not covered by the
prohibition under RA 2338 and do not have the authority to withhold from the taxpayer
documents owned by such taxpayer.
VIII.
x x x when it required the "clear and unequivocal proof" of relevance of the documents as a
condition precedent for the issuance of subpoena duces tecum.
IX.
x x x when it quashed the subpoena duces tecum as the Honorable Court had issued an
outstanding order to the Respondent to certify and forward to the CTA all the records of the case
because up to the date of this Petition the BIR records have not been submitted yet to the CTA.27
Grave abuse of discretion implies such capricious and whimsical exercise of judgment as
equivalent to lack of jurisdiction or, in other words, when the power is exercised in an arbitrary
or despotic manner by reason of passion or personal hostility, and it must be so patent and gross
as to amount to an evasion of positive duty or a virtual refusal of duty enjoined or to act at all in
contemplation of law.28
The Court finds that the issuance by the CTA of the questioned resolutions was not tainted by
arbitrariness.
The fact that Sablan was not a party to the case aside, the testimonies, documents, and
admissions sought by petitioner are not indeed relevant to the issue before the CTA. For in
requesting the issuance of the subpoenas and the submission of written interrogatories, petitioner
sought to establish that its accounting records and related documents, invoices, and receipts
which were the bases of the assessment against it were illegally obtained. The only issues,
however, which surfaced during the preliminary hearing before the CTA, were whether
respondents issuance of assessment against petitioner had prescribed and whether petitioners
tax return was false or fraudulent.

Besides, as the CTA held, the subpoenas and answers to the written interrogatories would violate
Section 2 of Republic Act No. 2338 as implemented by Section 12 of Finance Department Order
No. 46-66.
Petitioner claims, however, that it only intended to elicit information on the whereabouts of the
documents it needs in order to refute the assessment, and not to disclose the identity of the
informer.29 Petitioners position does not persuade. The interrogatories addressed to Sablan and
the revenue officers show that they were intended to confirm petitioners belief that Sablan was
the informer. Thus the questions for Sablan read:
1. Under what circumstances do you know petitioner corporation? Please state in what capacity,
the date or period you obtained said knowledge.
2. Do you know a Ms. Elnora Carpio, who from 1995 to the early part of 1996 was the book
keeper of petitioner? Please state how you came to know of Ms. Carpio.
3. At the time that Ms. Carpio was book keeper of petitioner did she consult you or show any
accounting documents and records of petitioner?
4. What documents, if any, did you obtain from petitioner?
5. Were these documents that you obtained from petitioner submitted to the Bureau of Internal
Revenue (BIR)? Please describe said documents and under what circumstances the same were
submitted.
6. Was the consent of the petitioner, its officers or employees obtained when the documents that
you obtained were submitted to the BIR? Please state when and from whom the consent was
obtained.
7. Did you execute an affidavit as an informer in the assessment which was issued by the BIR
against petitioner for the tax year 1995 and other years?30 (Underscoring supplied)
while the questions for the revenue officers read:
1. Where did you obtain the documents, particularly the invoices and official receipts, which
[were] used by your office as evidence and as basis of the assessment for deficiency income tax
and value added tax for the tax year 1995 issued against petitioner?
2. Do you know Mr. Leonardo Sablan? Please state under what circumstance you came to know
Mr. Sablan?31 (Underscoring supplied)
Petitioner impugns the manner in which the documents in question reached the BIR, Sablan
having allegedly submitted them to the BIR without its (petitioners) consent. Petitioners lack of
consent does not, however, imply that the BIR obtained them illegally or that the information
received is false or malicious. Nor does the lack of consent preclude the BIR from assessing
deficiency taxes on petitioner based on the documents. Thus Section 5 of the Tax Code provides:

In ascertaining the correctness of any return, or in making a return when none has been made, or
in determining the liability of any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record or other data which may be relevant or material to such
query;
(B) To obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the
Bangko Sentral ng Pilipinas and government-owned and controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales and
gross incomes of taxpayers, and the names, addresses, and financial statements of corporations,
mutual fund companies, insurance companies, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures or consortia and registered partnerships
and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or employee of
such person, or any person having possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the business of the person liable for
tax, or any other person, to appear before the Commissioner or his duly authorized
representatives at a time and place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to time of any revenue
district or region and inquire after and concerning all persons therein who may be liable to pay
any internal revenue tax, and all persons owning or having the care, management or possession
of any object with respect to which a tax is imposed.
x x x x (Emphasis and underscoring supplied)
The law thus allows the BIR access to all relevant or material records and data in the person of
the taxpayer,32 and the BIR can accept documents which cannot be admitted in a judicial
proceeding where the Rules of Court are strictly observed.33 To require the consent of the
taxpayer would defeat the intent of the law to help the BIR assess and collect the correct amount
of taxes.
Petitioners invocation of the rights of an accused in a criminal prosecution to cross examine the
witness against him and to have compulsory process issued to secure the attendance of witnesses
and the production of other evidence in his behalf does not lie. CTA Case No. 7160 is not a
criminal prosecution, and even granting that it is related to I.S. No. 2005-203, the respondents in
the latter proceeding are the officers and accountant of petitioner-corporation, not petitioner.

From the complaint and supporting affidavits in I.S. No. 2005-203, Sablan does not even appear
to be a witness against the respondents therein.34
AT ALL EVENTS, issuance of subpoena duces tecum for the production of the documents
requested by the petitioner which documents petitioner claims to be crucial to its defense35 is
unnecessary in view of the CTA order for respondent to certify and forward to it all the records
of the case.36 If the order has not been complied with, the CTA can enforce it by citing
respondent for indirect contempt.37
WHEREFORE, in light of the foregoing disquisition, the petition is DISMISSED.
Costs against petitioner.
SO ORDERED.

G.R. No. L-14519

July 26, 1960

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LUIS G. ABLAZA, defendant-appellee.
Assistant Solicitor General Jose P. Alejandro and Special Attorneys Cirilio R. Francisco and
Santiago M. Kapunan for appellant.
Martin B. Istaro for appellee.
LABRADOR, J.:
Appeal from a judgment of the Court of First Instance of Manila, Hon. Carmelino G. Alvendia,
presiding, dismissing an action instituted by the Government to recover income taxes from the
defendant-appellee corresponding to the years 1945, 1946, 1947 and 1948.
The record discloses that on October 3, 1951, the Collector of Internal Revenue assessed income
taxes for the years 1945, 1946, 1947 and 1948 on the income tax returns of defendant-appellee
Luis G. Ablaza. The assessments total P5,254.70 (Exhibit "I"). On October 16, 1951, the
accountants for Ablaza requested a reinvestigation of Ablaza's tax liability, on the ground that (1)
the assessment is based on third-party information and (3) neither the taxpayer nor his
accountants were permitted to appear in person (Exh. "J"). The petition for reinvestigation was
granted in a letter of the Collector of Internal Revenue, dated October 17, 1951. On October 30,
1951, the accountants for Ablaza again sent another letter to the Collector of Internal Revenue
submitting a copy of their own computation (Exh. "L"). On October 23, 1952, said accountants
again submitted a supplemental memorandum (Exh. "M"). On March 10, 1954, the accountants
for Ablaza sent a letter to the examiner of accounts and collections of the Bureau of Internal
Revenue, stating:
In this connection, we wish to state that this case is presently under reinvestigation as per
our request dated October 16, 1951, and your letter to us dated October 17, 1951, and that
said tax liability being only a tentative assessment, we are not as yet advised of the results
of the requested reinvestigation.
In view thereof, we wish to request, in fairness to the taxpayer concerned, that we be
furnished a copy of the detailed computation of the alleged tax liability as soon as the
reinvestigation is terminated to enable us to prove the veracity of the taxpayer's side of
the case, and if it is found out that said assessment is proper and in order, we assure you
of our assistance in the speedy disposition of this case. (Exh. "P")
On February 11, 1957, after the reinvestigation, the Collector of Internal Revenue made a final
assessment of the income taxes of Ablaza, fixing said income taxes for the years already
mentioned at P2,066.56 (Exh. "Q"). Notice of the said assessment was sent (Exhs. "V", "W" and
"X") and upon receipt thereof the accountants of Ablaza sent a letter to the Collector of Internal

Revenue, dated May 8, 1957, protesting the assessments, on the ground that the income taxes are
no longer collectible for the reason that they have already prescribed. As the Collector did not
agree to the alleged claim of prescription, action was instituted by him in the Court of First
Instance to recover the amount assessed. The Court of First Instance upheld the contention of
Ablaza that the action to collect the said income taxes had prescribed. Against this decision the
case was brought here on appeal, where it is claimed by the Government that the prescriptive
period has not fully run at the time of the assessment, in view especially of the letter of the
accountants of Ablaza, dated March 10, 1954, pertinent provisions of which are quoted above.
It is of course true on October 14, 1951, Ablaza's accountants requested a reinvestigation of the
assessment of the income taxes against him, the period of prescription of action to collect the
taxes was suspended. (Sec. 333, C. A. No. 466.) The provision of law on prescription was
adopted in our statute books upon recommendation of the tax commissioner of the Philippines
which declares:
Under the former law, the right of the Government to collect the tax does not prescribe.
However, in fairness to the taxpayer, the Government should be estopped from collecting
the tax where it failed to make the necessary investigation and assessment within 5 years
after the filing of the return and where it failed to collect the tax within 5 years from the
date of assessment thereof. just as the government is interested in the stability of its
collection, so also are the taxpayers entitled to an assurance that they will not be
subjected to further investigation for tax purposes after the expiration of a reasonable
period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322)
The law prescribing a limitation of actions for the collection of the income tax is beneficial both
to the Government and to its citizens; to the Government because tax officers would be obliged
to act promptly in the making of assessment, and to citizens because after the lapse of the period
of prescription citizens would have a feeling of security against unscrupulous tax agents who will
always find an excuse to inspect the books of taxpayers, not to determine the latter's real liability,
but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such
legal defense taxpayers would furthermore be under obligation to always keep their books and
keep them open for inspection subject to harassment by unscrupulous tax agents. The law on
prescription being a remedial measure should be interpreted in a way conducive to bringing
about the beneficient purpose of affording protection to the taxpayer within the contemplation of
the Commission which recommend the approval of the law.
The question in the case at bar boils down to the interpretation of Exhibit "P", dated March 10,
1954, quoted above. If said letter be interpreted as a request for further investigation or a new
investigation, different and distinct from the investigation demanded or prayed for in Ablaza's
first letter, Exhibit "L", then the period of prescription would continue to be suspended thereby.
but if the letter in question does not ask for another investigation, the result would be just the
opposite. In our opinion the letter in question, Exhibit "P", does not ask for another investigation.
Its first paragraph quoted above shows that the reinvestigation then being conducted was by
virtue of its request of October 16, 1951. All that the letter asks is that the taxpayer be furnished
a copy of the computation. The request may be explained in this manner: As the reinvestigation
was allowed on October 1, 1951 and on October 16, 1951, the taxpayer supposed or expected

that at the time, March, 1954 the reinvestigation was about to be finished and he wanted a copy
of the re-assessment in order to be prepared to admit or contest it. Nowhere does the letter imply
a demand or request for a ready requested and, therefore, the said letter may not be interpreted to
authorize or justify the continuance of the suspension of the period of limitations.
We find the appeal without merit and we hereby affirm the judgment of the lower court
dismissing the action. Without costs.

G.R. No. 162155

August 28, 2007

COMMISSIONER OF INTERNAL REVENUE and ARTURO V. PARCERO in his official

capacity as Revenue District Officer of Revenue District No. 049 (Makati), Petitioners,
vs.
PRIMETOWN PROPERTY GROUP, INC., Respondent.
DECISION
CORONA, J.:
This petition for review on certiorari1 seeks to set aside the August 1, 2003 decision2 of the Court
of Appeals (CA) in CA-G.R. SP No. 64782 and its February 9, 2004 resolution denying
reconsideration.3
On March 11, 1999, Gilbert Yap, vice chair of respondent Primetown Property Group, Inc.,
applied for the refund or credit of income tax respondent paid in 1997. In Yap's letter to
petitioner revenue district officer Arturo V. Parcero of Revenue District No. 049 (Makati) of the
Bureau of Internal Revenue (BIR),4 he explained that the increase in the cost of labor and
materials and difficulty in obtaining financing for projects and collecting receivables caused the
real estate industry to slowdown.5 As a consequence, while business was good during the first
quarter of 1997, respondent suffered losses amounting to P71,879,228 that year.6
According to Yap, because respondent suffered losses, it was not liable for income taxes.7
Nevertheless, respondent paid its quarterly corporate income tax and remitted creditable
withholding tax from real estate sales to the BIR in the total amount of P26,318,398.32.8
Therefore, respondent was entitled to tax refund or tax credit.9
On May 13, 1999, revenue officer Elizabeth Y. Santos required respondent to submit additional
documents to support its claim.10 Respondent complied but its claim was not acted upon. Thus,
on April 14, 2000, it filed a petition for review11 in the Court of Tax Appeals (CTA).
On December 15, 2000, the CTA dismissed the petition as it was filed beyond the two-year
prescriptive period for filing a judicial claim for tax refund or tax credit.12 It invoked Section 229
of the National Internal Revenue Code (NIRC):
Sec. 229. Recovery of Taxes Erroneously or Illegally Collected. -- No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to
have been erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any manner
wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without a claim
therefor, refund or credit any tax, where on the face of the return upon which payment was made,
such payment appears clearly to have been erroneously paid. (emphasis supplied)
The CTA found that respondent filed its final adjusted return on April 14, 1998. Thus, its right to
claim a refund or credit commenced on that date.13
The tax court applied Article 13 of the Civil Code which states:
Art. 13. When the law speaks of years, months, days or nights, it shall be understood that years
are of three hundred sixty-five days each; months, of thirty days; days, of twenty-four hours,
and nights from sunset to sunrise.
If the months are designated by their name, they shall be computed by the number of days which
they respectively have.
In computing a period, the first day shall be excluded, and the last included. (emphasis supplied)
Thus, according to the CTA, the two-year prescriptive period under Section 229 of the NIRC for
the filing of judicial claims was equivalent to 730 days. Because the year 2000 was a leap year,
respondent's petition, which was filed 731 days14 after respondent filed its final adjusted return,
was filed beyond the reglementary period.15
Respondent moved for reconsideration but it was denied.16 Hence, it filed an appeal in the CA.17
On August 1, 2003, the CA reversed and set aside the decision of the CTA.18 It ruled that Article
13 of the Civil Code did not distinguish between a regular year and a leap year. According to the
CA:
The rule that a year has 365 days applies, notwithstanding the fact that a particular year is a leap
year.19
In other words, even if the year 2000 was a leap year, the periods covered by April 15, 1998 to
April 14, 1999 and April 15, 1999 to April 14, 2000 should still be counted as 365 days each or a
total of 730 days. A statute which is clear and explicit shall be neither interpreted nor construed.20
Petitioners moved for reconsideration but it was denied.21 Thus, this appeal.
Petitioners contend that tax refunds, being in the nature of an exemption, should be strictly
construed against claimants.22 Section 229 of the NIRC should be strictly applied against
respondent inasmuch as it has been consistently held that the prescriptive period (for the filing of
tax refunds and tax credits) begins to run on the day claimants file their final adjusted returns.23
Hence, the claim should have been filed on or before April 13, 2000 or within 730 days,
reckoned from the time respondent filed its final adjusted return.

The conclusion of the CA that respondent filed its petition for review in the CTA within the twoyear prescriptive period provided in Section 229 of the NIRC is correct. Its basis, however, is
not.
The rule is that the two-year prescriptive period is reckoned from the filing of the final adjusted
return.24 But how should the two-year prescriptive period be computed?
As already quoted, Article 13 of the Civil Code provides that when the law speaks of a year, it is
understood to be equivalent to 365 days. In National Marketing Corporation v. Tecson,25 we
ruled that a year is equivalent to 365 days regardless of whether it is a regular year or a leap
year.26
However, in 1987, EO27 292 or the Administrative Code of 1987 was enacted. Section 31,
Chapter VIII, Book I thereof provides:
Sec. 31. Legal Periods. "Year" shall be understood to be twelve calendar months;
"month" of thirty days, unless it refers to a specific calendar month in which case it shall be
computed according to the number of days the specific month contains; "day", to a day of
twenty-four hours and; "night" from sunrise to sunset. (emphasis supplied)
A calendar month is "a month designated in the calendar without regard to the number of days it
may contain."28 It is the "period of time running from the beginning of a certain numbered day up
to, but not including, the corresponding numbered day of the next month, and if there is not a
sufficient number of days in the next month, then up to and including the last day of that
month."29 To illustrate, one calendar month from December 31, 2007 will be from January 1,
2008 to January 31, 2008; one calendar month from January 31, 2008 will be from February 1,
2008 until February 29, 2008.30
A law may be repealed expressly (by a categorical declaration that the law is revoked and
abrogated by another) or impliedly (when the provisions of a more recent law cannot be
reasonably reconciled with the previous one).31 Section 27, Book VII (Final Provisions) of the
Administrative Code of 1987 states:
Sec. 27. Repealing clause. All laws, decrees, orders, rules and regulation, or portions thereof,
inconsistent with this Code are hereby repealed or modified accordingly.
A repealing clause like Sec. 27 above is not an express repealing clause because it fails to
identify or designate the laws to be abolished.32 Thus, the provision above only impliedly
repealed all laws inconsistent with the Administrative Code of 1987.1avvphi1
Implied repeals, however, are not favored. An implied repeal must have been clearly and
unmistakably intended by the legislature. The test is whether the subsequent law encompasses
entirely the subject matter of the former law and they cannot be logically or reasonably
reconciled.33

Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative
Code of 1987 deal with the same subject matter the computation of legal periods. Under the
Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the
Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to
state, under the Administrative Code of 1987, the number of days is irrelevant.
There obviously exists a manifest incompatibility in the manner of computing legal periods
under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section
31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs
the computation of legal periods. Lex posteriori derogat priori.
Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the
two-year prescriptive period (reckoned from the time respondent filed its final adjusted return34
on April 14, 1998) consisted of 24 calendar months, computed as follows:
Year 1

1st

calendar
month

April 15, 1998

to

May 14, 1998

2nd

calendar
month

May 15, 1998

to June 14, 1998

3rd

calendar
month

June 15, 1998

to July 14, 1998

4th

calendar
month

July 15, 1998

to August 14, 1998

5th

calendar
month

August 15, 1998

to September 14,
1998

6th

calendar
month

September 15,
1998

to October 14, 1998

7th

calendar
month

October 15, 1998

to November 14,
1998

8th

calendar
month

November 15,
1998

to December 14,
1998

9th

calendar
month

December 15,
1998

to January 14, 1999

10th

calendar
month

January 15, 1999

to February 14, 1999

11th

calendar
month

February 15, 1999

to March 14, 1999

12th

calendar
month

March 15, 1999

to April 14, 1999

Year 2 13th

calendar
month

April 15, 1999

to May 14, 1999

14th

calendar
month

May 15, 1999

to June 14, 1999

15th

calendar
month

June 15, 1999

to July 14, 1999

16th

calendar
month

July 15, 1999

to August 14, 1999

17th

calendar
month

August 15, 1999

to September 14,
1999

18th

calendar
month

September 15,
1999

to October 14, 1999

19th

calendar
month

October 15, 1999

to November 14,
1999

20th

calendar
month

November 15,
1999

to December 14,
1999

21st

calendar
month

December 15,
1999

to January 14, 2000

22nd

calendar
month

January 15, 2000

to February 14, 2000

23rd

calendar
month

February 15, 2000

to March 14, 2000

24th

calendar
month

March 15, 2000

to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of
the 24th calendar month from the day respondent filed its final adjusted return. Hence, it was
filed within the reglementary period.
Accordingly, the petition is hereby DENIED. The case is REMANDED to the Court of Tax
Appeals which is ordered to expeditiously proceed to hear C.T.A. Case No. 6113 entitled
Primetown Property Group, Inc. v. Commissioner of Internal Revenue and Arturo V. Parcero.
No costs.
SO ORDERED.

G.R. No. L-29485 November 21, 1980

COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, respondents.

TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's motion for
reconsideration of the Court's decision of April 8, 1976 wherein the Court affirmed in toto
the appealed decision of respondent Court of Tax Appeals, the dispositive portion of
which provides as follows:
WHEREFORE, the decision of the respondent Commissioner of Internal
Revenue assessing petitioner the amount of P758,687.04 as 25% surtax
and interest is reversed. Accordingly, said assessment of respondent for
1955 is hereby cancelled and declared of no force and effect, Without
pronouncement as to costs.
This Court's decision under reconsideration held that the assessment made on
February 21, 1961 by petitioner against respondent corporation (and received by the
latter on March 22, 1961) in the sum of P758,687.04 on its surplus of P2,758,442.37 for
its fiscal year ending September 30, 1955 fell under the five-year prescriptive period
provided in section 331 of the National Internal Revenue Code and that the assessment
had, therefore, been made after the expiration of the said five-year prescriptive period
and was of no binding force and effect .
Petitioner has urged that
A perusal of Sections 331 and 332(a) will reveal that they refer to a tax,
the basis of which is required by law to be reported in a return such as for
example, income tax or sales tax. However, the surtax imposed by Section
25 of the Tax Code is not one such tax. Accumulated surplus are never
returned for tax purposes, as there is no law requiring that such surplus be
reported in a return for purposes of the 25% surtax. In fact, taxpayers
resort to all means and devices to cover up the fact that they have
unreasonably accumulated surplus.
Petitioner, therefore, submits that

As there is no law requiring taxpayers to file returns of their accumulated

surplus, it is obvious that neither Section 33 nor Section 332(a) of the Tax
Code applies in a case involving the 25% surtax imposed by Section 25 of
the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United Equipment
& Supply Company vs. Commissioner of Internal Revenue (CTA Case No. 1795,
October 30, 1971) which was appealed by petitioner taxpayer to this Court in G. R. No.
L-35653 bearing the same title, which appeal was denied by this Court en banc for lack
of merit as per its Resolution of October 25, 1972, In said case, the tax court squarely
ruled that the provisions of sections 331 and 332 of the National Internal Revenue Code
for prescriptive periods of five 5 and ten (10) years after the filing of the return do not
apply to the tax on the taxpayer's unreasonably accumulated surplus under section 25
of the Tax Code since no return is required to be filed by law or by regulation on such
unduly ac cumulated surplus on earnings, reasoning as follows:
In resisting the assessment amounting to P10,864.26 as accumulated earnings tax for
1957, petitioner also invoked the defense of prescription against the right of respondent
to assess the said tax. It is contended that since its income tax return for 1957 was filed
in 1958, and with the clarification by respondent in his letter dated May 14, 1963, that
the amount sought to be collected was petitioner's surtax liability under Section 25
rather than deficiency corporate income tax under Section 24 of the National Internal
Revenue Code, the assessment has already prescribed under Section 331 of the same
Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and collection. Except
as provided in the succeeding section, internal revenue taxes shall be
assessed within five years after the return was filed, and no proceeding in
court without assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purpose of this section a return
filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day; Provided, That this limitation shall not
apply to cases already investigated prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National Internal
Revenue Taxes which requires the filing of returns. A return, the filing of
which is necessary to start the running of tile five-year period for making
an assessment, must be one which is required for the particular tax.
Consequently, it has been held that the filing of an income tax return does
not start the running of the statute of limitation for assessment of the sales
tax. (Butuan Sawmill, Inc. v. Court of Tax Appeals, G.R. No. L-20601, Feb.
28, 1966, 16 SCRA 277).

Although petitioner filed an income tax return, no return was filed covering
its surplus profits which were improperly accumulated. In fact, no return
could have been filed, and the law could not possibly require, for obvious
reasons, the filing of a return covering unreasonable accumulation of
corporate surplus profits. A tax imposed upon unreasonable accumulation
of surplus is in the nature of a penalty. (Helvering v. National Grocery Co.,
304 U.S. 282). It would not be proper for the law to compel a corporation
to report improper accumulation of surplus. Accordingly, Section 331
limiting the right to assess internal revenue taxes within five years from the
date the return was filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment and
collection of taxes. (a) In the case of a false or fraudulent return with
intent to evade tax or of failure to file a return, the tax may be assessed, or
a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity,
fraud, or omission.
(b) Where before the expiration of the time prescribed in the
preceding section for the assessment of the tax, both the
Commissioner of Internal Revenue and the taxpayer have
consented in writing to its assessment after such time, the
tax may be assessed at any time prior to the expiration of
the period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before
the expiration of the period previously agreed upon.
(c) Where the assessment of any internal revenue tax has
been made within the period of limitation above-prescribed
such tax may be collected by distraint or levy by a
proceeding in court, but only if begun (1) within five years
after the assessment of the tax, or (2) prior to the expiration
of any period for collection agreed upon in writing by the
Commissioner of Internal Revenue and the taxpayer before
the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing
made before the expiration of the period previously agreed
upon.
It will be noted that Section 332 has reference to national internal revenue
taxes which require the filing of returns. This is implied, from the provision
that the ten-year period for assessment specified therein treats of the filing
of a false or fraudulent return or of a failure to file a return. There can be
no failure or omission to file a return where no return is required to be filed

by law or by regulation. It is, therefore, our opinion that the ten-year period
for making in assessment under Section 332 does not apply to internal
revenue taxes which do not require the filing of a return.
It is well settled limitations upon the right of the government to assess and
collect taxes will not be presumed in the absence of clear legislation to the
contrary. The existence of a time limit beyond which the government may
recover unpaid taxes is purely dependent upon some express statutory
provision, (51 Am. Jur. 867; 10 Mertens Law of Federal Income Taxation,
par. 57. 02.). It follows that in the absence of express statutory provision,
the right of the government to assess unpaid taxes is imprescriptible.
Since there is no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on unreasonable
accumulation of surplus provided in Section 25 of the Revenue Code, said
tax may be assessed at any time. (Emphasis supplied)
Such ruling was in effect upheld by this Court en banc upon its dismissal of the
taxpayer's appeal for lack of merit as above stated.
The Court is persuaded by the fundamental principle invoked by petitioner that
limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary and that where the
government has not by express statutory provision provided a limitation upon its right to
assess unpaid taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under reconsideration that the
right to assess and collect the assessment in question had prescribed after five years,
and instead rules that there is no such time limit on the right of the Commissioner of
Internal Revenue to assess the 25% tax on unreasonably accumulated surplus provided
in section 25 of the Tax Code, since there is no express statutory provision limiting such
right or providing for its prescription. The underlying purpose of the additional tax in
question on a corporation's improperly accumulated profits or surplus is as set forth in
the text of section 25 of the Tax Code itself 1 to avoid the situation where a corporation unduly
retains its surplus instead of declaring and paving dividends to its shareholders or members who would
then have to pay the income tax due on such dividends received by them. The record amply shows that
respondent corporation is a mere holding company of its shareholders through its mother company, a
registered co-partnership then set up by the individual shareholders belonging to the same family and that
the prima facie evidence and presumption set up by the Tax Code, therefore applied without having been
adequately rebutted by the respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before the court as follows:
Atty. Garces
The investigation, Your Honor, shows that for the year 1955, the Ayala Securities Corporation had
175,000 outstanding shares of stock and out of these shares of Ayala Securities Corporation, the
Ayala and Company owned 174,996 shares of stock.
Q. Is that right, Mr. Cabral?

Atty. Ong
Objection, Your Honor, on the materiality of the question.
Judge Alvarez
What is the materiality of the question?
Atty. Garces
We want to prove to this honorable Court that Ayala Securities Corporation is a holding or
investment company, the parent company being Ayala and Company.
Judge Alvarez
Witness may answer.
A. I think so; yes.
Q. And Ayala and Company's owned almost wholly by the Zobel Family and the Ayala Family?
Atty. Ong
If Your Honor please, objection again on the materiality. What would counsel for the respondent
prove on this point?
Atty. Garces
Same purpose, Your If Honor to prove that Ayala Securities corporation is a mere investment or
holding company
Atty. Ong
What is the materiality of the case if it is a mere investment company. In fact, we are here in court
to prove the reasonableness or unreasonableness of the accumulation of profit. I think counsel
for the respondent is trying to harp on presumption; but actually we will not be delving on
presumption but on actual facts proving the reasonableness of the accumulation based on actual
evidence.
Judge Alvarez
In order to determine the reasonableness or unreasonableness, there must be a basis. witness
will have to answer the question.
A. Yes.
xxx xxx xxx
Q. As of September 30, 1955 when the Ayala Securities Corporation tiled its income tax return,
were the officers of the Ayala Securities Corporation and the Ayala and Company housed in the
same building?
A. Yes, sir; they were.
Q. And also are the employees of the Ayala Securities corporation and the Ayala and Company
the same - meaning that the employees of the Ayala Securities Corporation are also the
employees of the Ayala and Company?
A. At the time, if I remember right, Ayala and Company was the operating company and the
employees were the employees of the Ayala and Company; (t.s.n., pp. 32-37).

Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal Department of the corporation, also testified that:
Judge Alvarez questions
Q. May we know from you whether Ayala Securities corporation is an affiliate of Ayala and
Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala and Company is the mother corporation of this affiliate?
A. That is correct.
Q. And that the policy of Ayala Securities Corporation is practically governed by the officers or
partners of Ayala and company
A. They have a strong influence over the policy of Ayala Securities Corporation.
Q. So that whatever is decided by the partners of Ayala and Company for a certain investment or
project would also be followed by Ayala Securities Corporation?
A. If the project is assigned to Ayala Securities Corporation it will be followed by Ayala Securities
Corporation; if to another affiliate, no (t.s.n., pp. 149-150). ...
Respondent corporation was therefore fully shown to fall under Revenue Regulation No. 2 implementing the provisions of the income tax law
which provides on holding and investment companies that
SEC. 20. Holding and Investment Companies. A corporation having practically no activities except holding property,
and collecting the income therefrom or investing therein, shall be considered a holding company within the meaning of
section 25.
Petitioner commissioner's plausible alternative contention is that even if the 25% surtax were to be deemed subject to prescription, computed
from the filing of the income tax return in 1955, the intent to evade payment of the surtax is an inherent quality of the violation and the return
filed must necessarily partake of a false and/or fraudulent character which would make applicable the 10-year prescriptive period provided in
section 332(a) of the Tax Code and since the assessment was made in 1961 (the sixth year), the assessment was clearly within the 10-year
prescriptive period. The Court sees no necessity, however, for ruling on this point in view of its adherence to the ruling in the earlier raise of
United Equipment & Supply Co., supra, holding that the 25% surtax is not subject to any statutory prescriptive period.
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu thereof, judgment is hereby rendered ordering respondent
corporation to pay the assessment in the sum of P758,687.04 as 25% surtax on its unreasonably accumulated surplus, plus the 5%
surcharge and 1% monthly interest thereon, pursuant to section 51 (e) of the National Internal Revenue Code, as amended by R. A. 2343.
With Costs.

G.R. No. L-20601

February 28, 1966

BUTUAN SAWMILL, INC., petitioner,

vs.
HON. COURT OF TAX APPEALS, ET AL., respondents.
David G. Nitafan for the petitioner.
Office of the Solicitor General for the respondents.
REYES, J.B.L., J.:
Appeal from a decision of the Court of Tax Appeals, in its CTA Case No. 965, ordering petitioner
herein, Butuan Sawmill, Inc., to pay respondent Commissioner of Internal Revenue the sum of
P36,107.74 as deficiency sales tax and surcharge due on its sales of logs to buyers in Japan from
January 31, 1951 to June 8, 1953.
The facts, as found and stated by the lower court in its decision, are in full accord with the
evidences presented therein; hence, we quote them hereunder:
. . . that during the period from January 31, 1951 to June 8, 1953, it sold logs to Japanese
firms at prices FOB Vessel Magallanes, Agusan (in some cases FOB Vessel, Nasipit, also
in Agusan); that the FOB prices included costs of loading, wharfage stevedoring and
other costs in the Philippines; that the quality, quantity and measurement specifications of
the logs were certified by the Bureau of Forestry; that the freight was paid by the
Japanese buyers; and the payments of the logs were effected by means of irrevocable
letters of credit in favor of petitioner and payable through the Philippine National Bank or
any other bank named by it.
Upon investigation by the Bureau of Internal Revenue, it was ascertained that no sales tax
return was filed by the petitioner and neither did it pay the corresponding tax on the sales.
On the basis of agent Antonio Mole's report dated September 17, 1957, respondent, on
August 27, 1958, determined against petitioner the sum of P40,004.01 representing sales
tax, surcharge and compromise penalty on its sales [tax, surcharge and compromise
penalty on its sales] of logs from January 1951 to June 1953 pursuant to Sections 183,
186 and 209 of the National Internal Revenue Code (Exhibit "E", p. 14, CTA rec. & p. 14,
BIR rec.). And in consequence of a reinvestigation, respondent, on November 6, 1958,
amended the amount of the previous assessment to P38,917.74 (Exh. "F", p. 52, BIR
rec.). Subsequent requests for reconsideration of the amended assessment having been
denied (Exh. "G", p. 55, BIR rec.; Exh. "H", pp. 75-76, BIR rec.: Exh. "I", pp. 79-80, BIR
rec.; Exh. "J", p. 81, BIR rec.), petitioner filed the instant petition for review on
November 7, 1960.
On the bases of the above-quoted findings and circumstances, the lower court upheld the legality
and correctness of the amended assessment of the sales tax and surcharge, ruling that the sales in
question, in the light of our previous decisions1, were domestic or "local" sales, and, therefore,

subject to sales tax under the provision of section 186 of the Tax Code, as amended by Republic
Acts Nos. 558 and 594; and that the assessment thereof was made well within the ten-year period
prescribed by Section 332(a) of the same Code, since petitioner herein omitted to file its sales tax
returns for the years 1951, 1952 and 1953, and this omission was discovered only on September
17, 1957. The imposition of the compromise penalty was, however, eliminated therefrom for
want of agreement between the taxpayer and the Collector (now Commissioner) of Internal
Revenue. A motion to reconsider said decision having been denied, petitioner herein interposed
the present appeal before this Court.
The issues presented in this appeal are: whether or not petitioner herein is liable to pay the 5%
sales tax as then prescribed by Section 186 of the Tax Code on its sales of logs to the Japanese
buyers; and whether or not the assessment thereof was made within the prescriptive period
provided by law therefor.1wph1.t
On the first issue, petitioner herein insists that the circumstances enumerated in the above
finding, which this Court had, in previous decisions (Cf. footnote [1]), considered as
determinative of the place of transfer of ownership of the logs sold, for purposes of taxation, are
not in themselves evidentiary indications to show that the parties intended the title of the logs to
pass to the Japanese buyers in Japan. Thus, it points out that the "FOB" feature of the sales
contract was made only to fix its price and not to fix the place of delivery; that the requirement
of certification of quality, quantity, and measurement specifications of the logs by local
authorities was done to comply with local laws, rules, and regulations, and was not a part of the
sales arrangement; that the payment of freight by the Japanese buyers is not an uncommon
feature of "FOB" shipments; and that the payment of prices by means of irrevocable letters of
credit is but a common established business practice to secure payment of the price to the seller.
It also insists that, even assuming that the "FOB" feature of the disputed sales determines the
situs of transfer of ownership, the same is merely a prima facie presumption which yields to
contrary proof such as that the logs were made deliverable to the "order of the shipper" and the
logs were shipped at the risk of the shipper, which circumstances, if considered, would negate
the above implications. Hence, petitioner herein contends that the disputed sales were
consummated in Japan, and, therefore, not subject to the taxing jurisdiction of our Government.
The above contentions of petitioner are devoid of merit. In a decided case with practically
identical set of facts obtaining in the case at bar, this Court declared:
. . . it is admitted that the agreed price was "F.O.B. Agusan", thus indicating, although
prima facie, that the parties intended the title to pass to the buyer upon delivery of the
logs in Agusan; on board the vessels that took the goods to Japan. Moreover, said prima
facie proof was bolstered up by the following circumstances, namely:
1. Irrevocable letters of credit were opened by the Japanese buyers in favor of the
petitioners.
2. Payment of freight charges of every shipment by the Japanese buyers.

3. The Japanese buyers chartered the ships that carried the logs they purchased from the
Philippines to Japan.
4. The Japanese buyers insured the shipment of logs and collected the insurance coverage
in case of loss in transit.
5. The petitioner collected the purchase price of every shipment of logs by surrendering
the covering letter of credit, bill of lading, which was indorsed in blank, tally sheet,
invoice and export entry, to the corresponding bank in Manila of the Japanese agent bank
with whom the Japanese buyers opened letters of credit.
6. In case of natural defects in logs shipped to the buyers discovered in Japan, instead of
returning such defective logs, accepted them, but were granted a corresponding credit
based on the contract price.
7. The logs purchased by the Japanese buyers were measured by a representative of the
Director of Forestry and such measurement was final, thereby making the Government of
the Philippines a sort of agent of the Japanese buyers.
Upon the foregoing facts and authority of Bislig (Bay) Lumber Co., Inc. vs. Collector of Internal
Revenue, G.R. No. L-13186 (January 28, 1961), Misamis Lumber Co., Inc. vs. Collector of
Internal Revenue (56 Off. Gaz. 517) and Western Mindanao Lumber Development Co., Inc. vs.
Court of Tax Appeals, et al. (G.R. No. L-11710, June 30, 1958), it is clear that said export sales
had been consummated in the Philippines and were, accordingly, subject to sales tax therein."
(Taligaman Lumber Co., Inc. vs. Collector of Internal Revenue, G.R. No. L-15716, March 31,
1962).
With respect to petitioner's contention that there are proofs to rebut the prima facie finding and
circumstances that the disputed sales were consummated here in the Philippines, we find that the
allegation is not borne out by the law or the evidence.
That the specification in the bill of lading to the effect that the goods are deliverable to the order
of the seller or his agent does not necessarily negate the passing of title to the goods upon
delivery to the carrier is clear from the second part of paragraph 2 of Article 1503 of the Civil
Code of the Philippines (which appellant's counsel improperly omits from his citation):
Where goods are shipped, and by the bill of lading the goods are deliverable to the seller
or his agent, or to the order of the seller or of his agent, the seller thereby reserves the
ownership in the goods. But, if except for the form of the bill of lading, the ownership
would have passed to the buyer on shipment of the goods, the sellers's property in the
goods shall be deemed to be only for the purpose of securing performance by the buyer of
his obligations under the contract.
Moreover, it has been "a settled rule that in petitions to review decisions of the Court of Tax
Appeals, only questions of law may be raised and may be passed upon by this Court" (Gutierrez
vs. Court of Tax Appeals & Collector of Internal Revenue vs. Gutierrez, G.R. Nos. L-7938 & L-

9771, May 21, 1957, cited in Sanchez vs. Commissioner of Customs, G.R. No. L-8556,
September 30, 1957); and it having been found that there is no proof to substantiate the
foregoing contention of petitioner, the same should also be ruled as devoid of merit.
On the second issue, petitioner avers that the filing of its income tax returns, wherein the
proceeds of the disputed sales were declared, is substantial compliance with the requirement of
filing a sales tax return, and, if there should be deemed a return filed, Section 331, and not
Section 332(a), of the Tax Code providing for a five-year prescriptive period within which to
make an assessment and collection of the tax in question from the time the return was deemed
filed, should be applied to the case at bar. Since petitioner filed its income tax returns for the
years 1951, 1952 and 1953, and the assessment was made in 1957 only, it further contends that
the assessment of the sales tax corresponding to the years 1951 and 1952 has already prescribed
for having been made outside the five-year period prescribed in Section 331 of the Tax Code and
should, therefore, be deducted from the assessment of the deficiency sales tax made by
respondent.
The above contention has already been raised and rejected as not meritorious in a previous case
decided by this Court. Thus, we held that an income tax return cannot be considered as a return
for compensating tax for purposes of computing the period of prescription under Section 331 of
the Tax Code, and that the taxpayer must file a return for the particular tax required by law in
order to avail himself of the benefits of Section 331 of the Tax Code; otherwise, if he does not
file a return, an assessment may be made within the time stated in Section 332(a) of the same
Code (Bisaya Land Transportation Co., Inc. vs. Collector of Internal Revenue & Collector of
Internal Revenue vs. Bisaya Land Transportation Co., Inc., G.R. Nos. L-12100 & L-11812, May
29, 1959). The principle enunciated in this last cited case is applicable by analogy to the case at
bar.
It being undisputed that petitioner failed to file a return for the disputed sales corresponding to
the years 1951, 1952 and 1953, and this omission was discovered only on September 17, 1957,
and that under Section 332(a) of the Tax Code assessment thereof may be made within ten (10)
years from and after the discovery of the omission to file the return, it is evident that the lower
court correctly held that the assessment and collection of the sales tax in question has not yet
prescribed.
Wherefore, the decision appealed from should be, as it is hereby affirmed, with costs against
petitioner.

G.R. No. L-19727

May 20, 1965

THE COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
PHOENIX ASSURANCE CO., LTD., respondent.
----------------------------G.R. No. L-19903

May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
Office of the Solicitor General for petitioner-respondent Commissioner of Internal Revenue.
Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V. Abela & J. M. Castillo for
respondent-petitioner Phoenix Assurance Co., Ltd.
BENGZON, J.P., J.:
From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and 543, consolidated
and jointly heard therein, these two appeals were taken. Since they involve the same facts and
interrelated issues, the appeals are herein decided together.
Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under the laws of Great
Britain, is licensed to do business in the Philippines with head office in London. Through its
head office, it entered in London into worldwide reinsurance treaties with various foreign
insurance companies. It agree to cede a portion of premiums received on original insurances
underwritten by its head office, subsidiaries, and branch offices throughout the world, in
consideration for assumption by the foreign insurance companies of an equivalent portion of the
liability from such original insurances.1wph1.t
Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of the
premiums it earned from its underwriting business in the Philippines, as follows:
Year Amount Ceded
1952

P316,526.75

1953

P246,082.04

1954

P203,384.69

upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed the
following withholding tax:

Year Withholding Tax

1952

P 75,966.42

1953

59,059.68

1954

48,812.32

Total

P183,838.42
=============

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1950,
claiming therein, among others, a deduction of P37,147.04 as net addition to marine insurance
reserve equivalent to 40% of the gross marine insurance premiums received during the year. The
Commissioner of Internal Revenue disallowed P11,772.57 of such claim for deduction and
subsequently assessed against Phoenix Assurance Co., Ltd. the sum of P1,884.00 as deficiency
income tax. The disallowance resulted from the fixing by the Commissioner of the net addition
to the marine insurance reserve at 100% of the marine insurance premiums received during the
last three months of the year. The Commissioner assumed that "ninety and third, days are
approximately the length of time required before shipments reach their destination or before
claims are received by the insurance companies."
On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1952,
declaring therein a deduction from gross income of P35,912.25 as part of the head office
expenses incurred for its Philippine business, computed at 5% on its gross Philippine income.
On August 30, 1955 it amended its income tax return for 1952 by excluding from its gross
income the amount of P316,526.75 representing reinsurance premiums ceded to foreign
reinsurers and further eliminating deductions corresponding to the coded premiums. The
amended return showed an income tax due in the amount of P2,502.00. The Commissioner of
Internal Revenue disallowed P15,826.35 of the claimed deduction for head office expenses and
assessed a deficiency tax of P5,667.00 on July 24, 1958.
On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1953
and claimed therein a deduction from gross income of P33,070.88 as head office expenses
allocable to its Philippine business, equivalent to 5%, of its gross Philippine income. On August
30, 1955 it amended its 1953 income tax return to exclude from its gross income the amount of
P246,082.04 representing reinsurance premiums ceded to foreign reinsurers. At the same time, it
requested the refund of P23,409.00 as overpaid income tax for 1953. To avoid the prescriptive
period provided for in Section 306 of the Tax Code, it filed a petition for review on April 11,
1956 in the Court of Tax Appeals praying for such refund. After verification of the amended
income tax return the Commissioner of Internal Revenue disallowed P12,304.10 of the deduction
representing head office expenses allocable to Philippine business thereby reducing the
refundable amount to P20,180.00.
On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1954
claiming therein, among others, a deduction from gross income of P99,624.75 as head office

expenses allocable to its Philippine business, computed at 5% of its gross Philippine income. It
also excluded from its gross income the amount of P203,384.69 representing reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines.
On August 1, 1958 the Bureau of Internal Revenue released the following assessment for
deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co., Ltd.:
1952
Net income per audited return

P 12,511.61

Unallowable deduction & additional income:

Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . .
P 35,912.25
..
Amount allowed . . . . . . . . . .
..

20,085.90

Net income per investigation

P 15,826.35
P 28,337.96

Tax due thereon

P 5,667.00
===========
1954

Net income per audited

P160,320.21

Unallowable deduction & additional income:

Overclaimed Head Office expenses:
Amount claimed . . . . . . . . . .
P29,624.73
..
Amount allowed . . . . . . . . . .
..

19,455.50

10,16.23

Net income per investigation

P170,489.41

Tax due thereon

P 39,737.00

Less: amount already assessed

DEFICIENCY TAX DUE

36,890.00
P 2,847.00
===========

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

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its income tax return for
1952 on April 1, 1953 showing a loss of P199,583.93. It amended said return on August 30, 1955
reporting a tax liability of P2,502.00. On July 24, 1958, after examination of the amended return,
the Commissioner of Internal Revenue assessed deficiency income tax in the sum of P5,667.00.
The Court of Tax Appeals found the right of the Commissioner of Internal Revenue barred by
prescription, the same having been exercised more than five years from the date the original
return was filed. On the other hand, the Commissioner of Internal Revenue insists that his right
to issue the assessment has not prescribed inasmuch as the same was availed of before the 5-year
period provided for in Section 331 of the Tax Code expired, counting the running of the period
from August 30, 1955, the date when the amended return was filed.
Section 331 of the Tax Code, which limits the right of the Commissioner of Internal Revenue to
assess income tax within five years from the Filipino of the income tax return, states:
SEC. 331. Period of limitation upon assessment and collection. Except as provided in
the succeeding section internal revenue taxes shall be assessed within five years after the
return was filed, and no proceeding in court without assessment for the collection of such
taxes shall be begun after the expiration of such period. For the purposes of this section, a
return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day: Provided, That this limitation shall not apply to cases already
investigated prior to the approval of this Code.
The question is: Should the running of the prescriptive period commence from the filing of the
original or amended return?
The Court of Tax Appears that the original return was a complete return containing "information
on various items of income and deduction from which respondent may intelligently compute and
determine the tax liability of petitioner, hence, the prescriptive period should be counted from the
filing of said original return. On the other hand, the Commissioner of Internal Revenue maintains
that:
"... the deficiency income tax in question could not possibly be determined, or assessed,
on the basis of the original return filed on April 1, 1953, for considering that the declared
loss amounted to P199,583.93, the mere disallowance of part of the head office expenses
could not probably result in said loss being completely wiped out and Phoenix being
liable to deficiency tax. Not until the amended return was filed on August 30, 1955 could
the Commissioner assess the deficiency income tax in question."
Accordingly, he would wish to press for the counting of the prescriptive period from the filing of
the amended return.
To our mind, the Commissioner's view should be sustained. The changes and alterations
embodied in the amended income tax return consisted of the exclusion of reinsurance premiums
received from domestic insurance companies by Phoenix Assurance Co., Ltd.'s London head
office, reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines
and various items of deduction attributable to such excluded reinsurance premiums thereby

substantially modifying the original return. Furthermore, although the deduction for head office
expenses allocable to Philippine business, whose disallowance gave rise to the deficiency tax,
was claimed also in the original return, the Commissioner could not have possibly determined a
deficiency tax thereunder because Phoenix Assurance Co., Ltd. declared a loss of P199,583.93
therein which would have more than offset such disallowance of P15,826.35. Considering that
the deficiency assessment was based on the amended return which, as aforestated, is
substantially different from the original return, the period of limitation of the right to issue the
same should be counted from the filing of the amended income tax return. From August 30,
1955, when the amended return was filed, to July 24, 1958, when the deficiency assessment was
issued, less than five years elapsed. The right of the Commissioner to assess the deficiency tax
on such amended return has not prescribed.
To strengthen our opinion, we believe that to hold otherwise, we would be paving the way for
taxpayers to evade the payment of taxes by simply reporting in their original return heavy losses
and amending the same more than five years later when the Commissioner of Internal Revenue
has lost his authority to assess the proper tax thereunder. The object of the Tax Code is to impose
taxes for the needs of the Government, not to enhance tax avoidance to its prejudice.
We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for 1950
representing net addition to reserve computed at 40% of the marine insurance premiums received
during the year. Treating said said deduction to be excessive, the Commissioner of Internal
Revenue reduced the same to P25,374.47 which is equivalent to 100% of all marine insurance
premiums received during the last months of the year.
Paragraph (a) of Section 32 of the Tax Code states:
SEC. 32. Special provisions regarding income and deductions of insurance companies,
whether domestic or foreign. (a) Special deductions allowed to insurance companies.
In the case of insurance companies, except domestic life insurance companies and
foreign life insurance companies doing business in the Philippines, the net additions, if
any, required by law to be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be deducted from
their gross income: Provided, however, That the released reserve be treated as income for
the year of release.
Section 186 of the Insurance Law requires the setting up of reserves for liability on marine
insurance:
SEC. 186. ... Provided, That for marine risks the insuring company shall be required to
charge as the liability for reinsurance fifty per centum of the premiums written in the
policies upon yearly risks, and the full premiums written in the policies upon all other
marine risks not terminated (Emphasis supplied.)
The reserve required for marine insurance is determined on two bases: 50% of premiums under
policies on yearly risks and 100% of premiums under policies of marine risks not terminated

during the year. Section 32 (a) of the Tax Code quoted above allows the full amount of such
reserve to be deducted from gross income.
It may be noteworthy to observe that the formulas for determining the marine reserve employed
by Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue 40% of premiums
received during the year and 100% of premiums received during the last three months of the
year, respectively do not comply with Section 186. Said determination runs short of the
requirement. For purposes of the Insurance Law, this Court therefore cannot countenance the
same. The reserve called for in Section 186 is a safeguard to the general public and should be
strictly followed not only because it is an express provision but also as a matter of public policy.
However, for income tax purposes a taxpayer is free to deduct from its gross income a lesser
amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim
a deduction beyond the amount authorized therein.
Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the amount
required in Section 186 of the Insurance Law, the same cannot be and is not excessive, and
should therefore be fully allowed. *
We come now to the controversy on the taxpayer's claim for deduction on head office expenses
incurred during 1952, 1953, and 1954 allocable to its Philippine business computed at 5% of its
gross income in the Philippines The Commissioner of Internal Revenue redetermined such
deduction at 5% on Phoenix Assurance Co., Ltd's net income thereby partially disallowing the
latter's claim. The parties are agreed as to the percentage 5% but differ as to the basis of
computation. Phoenix Assurance Co. Lt. insists that the 5% head office expenses be determined
from the gross income, while the Commissioner wants the computation to be made on the net
income. What, therefore, needs to be resolved is: Should the 5% be computed on the gross or net
income?
The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of income from
its Philippine business as well as reinsurance premiums received for its head office in London
and reinsurance premiums ceded to foreign reinsurance. Since the items of income not belonging
to its Philippine business are not taxable to its Philippine branch, they should be excluded in
determining the head office expenses allowable to said Philippine branch. This conclusion finds
support in paragraph 2, subsection (a), Section 30 of the Tax Code, quoted hereunder:
(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the
case of a non-resident alien individual or a foreign corporation, the expenses deductible
are the, necessary expenses paid or incurred in carrying on any business or trade
conducted within the Philippines exclusively. (Emphasis supplied.)
Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial
disallowance of deduction representing head office expenses, are sustained.
Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax Court's
decision limiting the maximum amount of interest collectible for deliquency of an amount
corresponding to a period of three years. He contends that since such limitation was incorporated

into Section 51 of the Tax Code by Republic Act 2343 which took effect only on June 20, 1959,
it must not be applied retroactively on withholding tax for the years 1952, 1953 and 1954.
The imposition of interest on unpaid taxes is one of the statutory penalties for tax delinquency,
from the payments of which the Court of Tax Appeals absolved the Phoenix Assurance Co., Ltd.
on the equitable ground that the latter's failure to pay the withholding tax was due to the
Commissioner's opinion that no withholding tax was due. Consequently, the taxpayer could be
held liable for the payment of statutory penalties only upon its failure to comply with the Tax
Court's judgment rendered on February 14. 1962, after Republic Act 2343 took effect. This part
of the ruling of the lower court ought not to be disturbed.
WHEREFORE, the decision appealed from is modified, Phoenix Assurance Co., Ltd. is hereby
ordered to pay the Commissioner, of Internal Revenue the amount of P75,966.42, P59,059.68
and P48,812.32 as withholding tax for the years 1952, 1953 and 1954, respectively, and the sums
of P5,667.00 and P2,847.00 as income tax for 1952 and 1954 or a total of P192,352.42. The
Commissioner of Internal Revenue is ordered to refund to Phoenix Assurance Co., Ltd. the
amount of P20,180.00 as overpaid income tax for 1953, which should be deducted from the
amount of P192,352.42.
If the amount of P192,352.42 or a portion thereof is not paid within thirty (30) days from the date
this judgment becomes final, there should be collected a surcharge and interest as provided for in
Section 51(c) (2) of the Tax Code. No costs. It is so ordered.

G.R. No. L-19495

November 24, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LILIA YUSAY GONZALES and THE COURT OF TAX APPEALS, respondents.
Office of the Solicitor General for the petitioner.
Ramon A. Gonzales for respondent Lilia Yusay Gonzales.
BENGZON, J.P., J.:
Matias Yusay, a resident of Pototan, Iloilo, died intestate on May 13, 1948, leaving two heirs,
namely, Jose S. Yusay, a legitimate child, and Lilia Yusay Gonzales, an acknowledged natural
child. Intestate proceedings for the settlement of his estate were instituted in the Court of First
Instance of Iloilo (Special Proceedings No. 459). Jose S. Yusay was therein appointed
administrator.
On May 11, 1949 Jose S. Yusay filed with the Bureau of Internal Revenue an estate and
inheritance tax return declaring therein the following properties:
Personal properties
Palay
Carabaos

P6,444.00
1,000.00

P7,444.00

Real properties:
Capital, 74 parcels )
Conjugal 19 parcels)
Total gross estate

assessed
at

P179,760.00
P187,204.00

The return mentioned no heir.

Upon investigation however the Bureau of Internal Revenue found the following properties:
Personal properties:
Palay
Carabaos
Packard Automobile
2 Aparadors
Real properties:

P6,444.00
1,500.00
2,000.00
500.00
P87,715.32

P10,444.00

Capital, 25 parcels
assessed at
1/2 of Conjugal, 130
parcels assessed at

P121,425.00
Total

P209,140.32
P219,584.32

The fair market value of the real properties was computed by increasing the assessed value by
forty percent.
Based on the above findings, the Bureau of Internal Revenue assessed on October 29, 1953
estate and inheritance taxes in the sums of P6,849.78 and P16,970.63, respectively.
On January 25, 1955 the Bureau of Internal Revenue increased the assessment to P8,225.89 as
estate tax and P22,117.10 as inheritance tax plus delinquency interest and demanded payment
thereof on or before February 28, 1955. Meanwhile, on February 16, 1955, the Court of First
Instance of Iloilo required Jose S. Yusay to show proof of payment of said estate and inheritance
taxes.
On March 3, 1955 Jose S. Yusay requested an extension of time within which to pay the tax. He
posted a surety bond to guarantee payment of the taxes in question within one year. The
Commissioner of Internal Revenue however denied the request. Then he issued a warrant of
distraint and levy which he transmitted to the Municipal Treasurer of Pototan for execution. This
warrant was not enforced because all the personal properties subject to distraint were located in
Iloilo City.
On May 20, 1955 the Provincial Treasurer of Iloilo requested the BIR Provincial Revenue
Officer to furnish him copies of the assessment notices to support a motion for payment of taxes
which the Provincial Fiscal would file in Special Proceedings No. 459 before the Court of First
Instance of Iloilo. The papers requested were sent by the Commissioner of Internal Revenue to
the Provincial Revenue Officer of Iloilo to be transmitted to the Provincial Treasurer. The records
do not however show whether the Provincial Fiscal filed a claim with the Court of First Instance
for the taxes due.
On May 30, 1956 the commissioner appointed by the Court of First Instance for the purpose,
submitted a reamended project of partition which listed the following properties:
Personal
properties:
Buick Sedan
Packard car
Aparadors
Cash in Bank
(PNB)

P8,100.00
2,000.00
500.00
8,858.46
6,444.00

P27,402.46

Palay
Carabaos

1,500.00

Real properties:
Land, 174 parcels
assessed at
Buildings

P324,797.21
4,500.00 P329,297.21

Total

P356,699.67

More than a year later, particularly on July 12, 1957, an agent of the Bureau of Internal Revenue
apprised the Commissioner of Internal Revenue of the existence of said reamended project of
partition. Whereupon, the Internal Revenue Commissioner caused the estate of Matias Yusay to
be reinvestigated for estate and inheritance tax liability. Accordingly, on February 13, 1958 he
issued the following assessment:
Estate tax

P16,246.04

5% surcharge

411.29

Delinquency
interest

11,868.90

Compromise
No notice of death
Late payment

P15.00
40.00

Total
Inheritance Tax
5% surcharge

55.00
P28,581.23
P38,178.12
1,105.86

Delinquency
interest

28,808.75

Compromise for late payment

Total
Total estate and inheritance
taxes

50.00
P69,142.73
P97,723.96

Like in previous assessments, the fair market value of the real properties was arrived at by
adding 40% to the assessed value.

In view of the demise of Jose S. Yusay, said assessment was sent to his widow, Mrs. Florencia
Piccio Vda. de Yusay, who succeeded him in the administration of the estate of Matias Yusay.
No payment having been made despite repeated demands, the Commissioner of Internal Revenue
filed a proof of claim for the estate and inheritance taxes due and a motion for its allowance with
the settlement court in voting priority of lien pursuant to Section 315 of the Tax Code.
On June 1, 1959, Lilia Yusay, through her counsel, Ramon Gonzales, filed an answer to the proof
of claim alleging non-receipt of the assessment of February 13, 1958, the existence of two
administrators, namely Florencia Piccio Vda. de Yusay who administered two-thirds of the
estate, and Lilia Yusay, who administered the remaining one-third, and her willingness to pay the
taxes corresponding to her share, and praying for deferment of the resolution on the motion for
the payment of taxes until after a new assessment corresponding to her share was issued.
On November 17, 1959 Lilia Yusay disputed the legality of the assessment dated February 13,
1958. She claimed that the right to make the same had prescribed inasmuch as more than five
years had elapsed since the filing of the estate and inheritance tax return on May 11, 1949. She
therefore requested that the assessment be declared invalid and without force and effect. This
request was rejected by the Commissioner in his letter dates January 20, 1960, received by Lilia
Yusay on March 14, 1960, for the reasons, namely, (1) that the right to assess the taxes in
question has not been lost by prescription since the return which did not name the heirs cannot be
considered a true and complete return sufficient to start the running of the period of limitations of
five years under Section 331 of the Tax Code and pursuant to Section 332 of the same Code he
has ten years within which to make the assessment counted from the discovery on September 24,
1953 of the identity of the heirs; and (2) that the estate's administrator waived the defense of
prescription when he filed a surety bond on March 3, 1955 to guarantee payment of the taxes in
question and when he requested postponement of the payment of the taxes pending
determination of who the heirs are by the settlement court.
On April 13, 1960 Lilia Yusay filed a petition for review in the Court of Tax Appeals assailing
the legality of the assessment dated February 13, 1958. After hearing the parties, said Court
declared the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question to have prescribed and rendered the following judgment:
WHEREFORE, the decision of respondent assessing against the estate of the late Matias
Yusay estate and inheritance taxes is hereby reversed. No costs.
The Commissioner of Internal Revenue appealed to this Court and raises the following issues:
1. Was the petition for review in the Court of Tax Appeals within the 30-day period provided for
in Section 11 of Republic Act 1125?
2. Could the Court of Tax Appeals take cognizance of Lilia Yusay's appeal despite the pendency
of the "Proof of Claim" and "Motion for Allowance of Claim and for an Order of Payment of
Taxes" filed by the Commissioner of Internal Revenue in Special Proceedings No. 459 before the
Court of First Instance of Iloilo?

3. Has the right of the Commissioner of Internal Revenue to assess the estate and inheritance
taxes in question prescribed?
On November 17, 1959 Lilia Yusay disputed the legality of the assessment of February 13, 1958.
On March 14, 1960 she received the decision of the Commissioner of Internal Revenue on the
disputed assessment. On April 13, 1960 she filed her petition for review in the Court of Tax
Appeals. Said Court correctly held that the appeal was seasonably interposed pursuant to Section
11 of Republic Act 1125. We already ruled in St. Stephen's Association v. Collector of Internal
Revenue,1 that the counting of the thirty days within which to institute an appeal in the Court of
Tax Appeals should commence from the date of receipt of the decision of the Commissioner on
the disputed assessment, not from the date the assessment was issued.
Accordingly, the thirty-day period should begin running from March 14, 1960, the date Lilia
Yusay received the appealable decision. From said date to April 13, 1960, when she filed her
appeal in the Court of Tax Appeals, is exactly thirty days. Hence, the appeal was timely.
Next, the Commissioner attacks the jurisdiction of the Court of Tax Appeals to take cognizance
of Lilia Yusay's appeal on the ground of lis pendens. He maintains that the pendency of his
motion for allowance of claim and for order of payment of taxes in the Court of First Instance of
Iloilo would preclude the Court of Tax Appeals from acquiring jurisdiction over Lilia Yusay's
appeal. This contention lacks merit.
Lilia Yusay's cause seeks to resist the legality of the assessment in question. Should she maintain
it in the settlement court or should she elevate her cause to the Court of Tax Appeals? We say,
she acted correctly by appealing to the latter court. An action involving a disputed assessment for
internal revenue taxes falls within the exclusive jurisdiction of the Court of Tax Appeals.2 It is in
that forum, to the exclusion of the Court of First Instance,3 where she could ventilate her
defenses against the assessment.
Moreover, the settlement court, where the Commissioner would wish Lilia Yusay to contest the
assessment, is of limited jurisdiction. And under the Rules,4 its authority relates only to matters
having to do with the settlement of estates and probate of wills of deceased persons.5 Said court
has no jurisdiction to adjudicate the contentions in question, which assuming they do not
come exclusively under the Tax Court's cognizance must be submitted to the Court of First
Instance in the exercise of its general jurisdiction.6
We now come to the issue of prescription. Lilia Yusay claims that since the latest assessment was
issued only on February 13, 1958 or eight years, nine months and two days from the filing of the
estate and inheritance tax return, the Commissioner's right to make it has expired. She would rest
her stand on Section 331 of the Tax Code which limits the right of the Commissioner to assess
the tax within five years from the filing of the return.
The Commissioner claims that fraud attended the filing of the return; that this being so, Section
332(a) of the Tax Code would apply.7 It may be well to note that the assessment letter itself
(Exhibit 22) did not impute fraud in the return with intent to evade payment of tax. Precisely, no
surcharge for fraud was imposed. In his answer to the petition for review filed by Lilia Yusay in

the Court of Tax Appeals, the Commissioner alleged no fraud. Instead, he broached the
insufficiency of the return as barring the commencement of the running of the statute of
limitations. He raised the point of fraud for the first time in the proceedings, only in his
memorandum filed with the Tax Court subsequent to resting his case. Said Court rejected the
plea of fraud for lack of allegation and proof, and ruled that the return, although not accurate,
was sufficient to start the period of prescription.
Fraud is a question of fact.8 The circumstances constituting it must be alleged and proved in the
court below.9 And the finding of said court as to its existence and non-existence is final unless
clearly shown to be erroneous.10 As the court a quo found that no fraud was alleged and proved
therein, We see no reason to entertain the Commissioner's assertion that the return was
fraudulent.
The conclusion, however, that the return filed by Jose S. Yusay was sufficient to commence the
running of the prescriptive period under Section 331 of the Tax Code rests on no solid ground.
Paragraph (a) of Section 93 of the Tax Code lists the requirements of a valid return. It states:
(a) Requirements.In all cases of inheritance or transfers subject to either the estate tax
or the inheritance tax, or both, or where, though exempt from both taxes, the gross value
of the estate exceeds three thousand pesos, the executor, administrator, or anyone of the
heirs, as the case may be, shall file a return under oath in duplicate, setting forth (1) the
value of the gross estate of the decedent at the time of his death, or, in case of a
nonresident not a citizen of the Philippines ; (2) the deductions allowed from gross estate
in determining net estate as defined in section eighty-nine; (3) such part of such
information as may at the time be ascertainable and such supplemental data as may be
necessary to establish the correct taxes.
A return need not be complete in all particulars. It is sufficient if it complies substantially with
the law. There is substantial compliance (1) when the return is made in good faith and is not false
or fraudulent; (2) when it covers the entire period involved; and (3) when it contains information
as to the various items of income, deduction and credit with such definiteness as to permit the
computation and assessment of the tax.11
There is no question that the state and inheritance tax return filed by Jose S. Yusay was
substantially defective.
First, it was incomplete. It declared only ninety-three parcels of land representing about 400
hectares and left out ninety-two parcels covering 503 hectares. Said huge under declaration could
not have been the result of an over-sight or mistake. As found in L-11378, supra note 7, Jose S.
Yusay very well knew of the existence of the ommited properties. Perhaps his motive in under
declaring the inventory of properties attached to the return was to deprive Lilia Yusay from
inheriting her legal share in the hereditary estate, but certainly not because he honestly believed
that they did not form part of the gross estate.

Second, the return mentioned no heir. Thus, no inheritance tax could be assessed. As a matter of
law, on the basis of the return, there would be no occasion for the imposition of estate and
inheritance taxes. When there is no heir - the return showed none - the intestate estate is
escheated to the State.12 The State taxes not itself.
In a case where the return was made on the wrong form, the Supreme Court of the United States
held that the filing thereof did not start the running of the period of limitations.13 The reason is
that the return submitted did not contain the necessary information required in the correct form.
In this jurisdiction, however, the Supreme Court refrained from applying the said ruling of the
United States Supreme Court in Collector of Internal Revenue v. Central Azucarera de Tarlac, L11760-61, July 31, 1958, on the ground that the return was complete in itself although inaccurate.
To our mind, it would not make much difference where a return is made on the correct form
prescribed by the Bureau of Internal Revenue if the data therein required are not supplied by the
taxpayer. Just the same, the necessary information for the assessment of the tax would be
missing.
The return filed in this case was so deficient that it prevented the Commissioner from computing
the taxes due on the estate. It was as though no return was made. The Commissioner had to
determine and assess the taxes on data obtained, not from the return, but from other sources. We
therefore hold the view that the return in question was no return at all as required in Section 93
of the Tax Code.
The law imposes upon the taxpayer the burden of supplying by the return the information upon
which an assessment would be based.14 His duty complied with, the taxpayer is not bound to do
anything more than to wait for the Commissioner to assess the tax. However, he is not required
to wait forever. Section 331 of the Tax Code gives the Commissioner five years within which to
make his assessment.15 Except, of course, if the taxpayer failed to observe the law, in which case
Section 332 of the same Code grants the Commissioner a longer period. Non-observance consists
in filing a false or fraudulent return with intent to evade the tax or in filing no return at all.
Accordingly, for purposes of determining whether or not the Commissioner's assessment of
February 13, 1958 is barred by prescription, Section 332(a) which is an exception to Section 331
of the Tax Code finds application.16 We quote Section 332(a):
SEC. 332. Exceptions as to period of limitation of assessment and collection of taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file
a return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be begun without assessment, at any time within ten years after the discovery of the
falsity, fraud or omission.
As stated, the Commissioner came to know of the identity of the heirs on September 24, 1953
and the huge underdeclaration in the gross estate on July 12, 1957. From the latter date, Section
94 of the Tax Code obligated him to make a return or amend one already filed based on his own
knowledge and information obtained through testimony or otherwise, and subsequently to assess
thereon the taxes due. The running of the period of limitations under Section 332(a) of the Tax
Code should therefore be reckoned from said date for, as aforesaid, it is from that time that the

Commissioner was expected by law to make his return and assess the tax due thereon. From July
12, 1957 to February 13, 1958, the date of the assessment now in dispute, less than ten years
have elapsed. Hence, prescription did not abate the Commissioner's right to issue said
assessment.
Anent the Commissioner's contention that Lilia Yusay is estopped from raising the defense of
prescription because she failed to raise the same in her answer to the motion for allowance of
claim and for the payment of taxes filed in the settlement court (Court of First Instance of Iloilo),
suffice it to state that it would be unjust to the taxpayer if We were to sustain such a view. The
Court of First Instance acting as a settlement court is not the proper tribunal to pass upon such
defense, therefore it would be but futile to raise it therein. Moreover, the Tax Code does not bar
the right to contest the legality of the tax after a taxpayer pays it. Under Section 306 thereof, he
can pay the tax and claim a refund therefor. A fortiori his willingness to pay the tax is no waiver
to raise defenses against the tax's legality.
WHEREFORE, the judgment appealed from is set aside and another entered affirming the
assessment of the Commissioner of Internal Revenue dated February 13, 1958. Lilia Yusay
Gonzales, as administratrix of the intestate estate of Matias Yusay, is hereby ordered to pay the
sums of P16,246.04 and P39,178.12 as estate and inheritance taxes, respectively, plus interest
and surcharge for delinquency in accordance with Section 101 of the National Internal Revenue
Code, without prejudice to reimbursement from her co-administratrix, Florencia Piccio Vda. de
Yusay for the latter's corresponding tax liability. No costs. So ordered.