26.

COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
BATANGAS TRANSPORTATION COMPANY and LAGUNA-TAYABAS BUS
COMPANY, respondents.
Office of the Solicitor General Ambrosio Padilla, Solicitor Conrado T. Limcaoco
and Zoilo R. Zandoval for petitioner.
Ozaeta, Lichauco and Picazo for respondents.
MONTEMAYOR, J.:
This is an appeal from the decision of the Court of Tax Appeals (C.T.A.), which
reversed the assessment and decision of petitioner Collector of Internal
Revenue, later referred to as Collector, assessing and demanding from the
respondents Batangas Transportation Company, later referred to as Batangas
Transportation, and Laguna-Tayabas Bus Company, later referred to as
Laguna Bus, the amount of P54,143.54, supposed to represent the deficiency
income tax and compromise for the years 1946 to 1949, inclusive, which
amount, pending appeal in the C.T.A., but before the Collector filed his
answer in said court, was increased to P148,890.14.
The following facts are undisputed: Respondent companies are two distinct
and separate corporations engaged in the business of land transportation by
means of motor buses, and operating distinct and separate lines. Batangas
Transportation was organized in 1918, while Laguna Bus was organized in
1928. Each company now has a fully paid up capital of Pl,000,000. Before the
last war, each company maintained separate head offices, that of Batangas
Transportation in Batangas, Batangas, while the Laguna Bus had its head
office in San Pablo Laguna. Each company also kept and maintained separate
books, fleets of buses, management, personnel, maintenance and repair
shops, and other facilities. Joseph Benedict managed the Batangas
Transportation, while Martin Olson was the manager of the Laguna Bus. To
show the connection and close relation between the two companies, it should
be stated that Max Blouse was the President of both corporations and owned
about 30 per cent of the stock in each company. During the war, the
American officials of these two corporations were interned in Santo Tomas,
and said companies ceased operations. They also lost their respective
properties and equipment. After Liberation, sometime in April, 1945, the two
companies were able to acquire 56 auto buses from the United States Army,
and the two companies diveded said equipment equally between
themselves,registering the same separately in their respective names. In
March, 1947, after the resignation of Martin Olson as Manager of the Laguna
Bus, Joseph Benedict, who was then managing the Batangas Transportation,
was appointed Manager of both companies by their respective Board of
Directors. The head office of the Laguna Bus in San Pablo City was made the
main office of both corporations. The placing of the two companies under one
sole mangement was made by Max Blouse, President of both companies, by
virtue of the authority granted him by resolution of the Board of Directors of
the Laguna Bus on August 10, 1945, and ratified by the Boards of the two
companies in their respective resolutions of October 27, 1947.

According to the testimony of joint Manager Joseph Benedict, the purpose of

the joint management, which was called, "Joint Emergency Operation", was to
economize in overhead expenses; that by means of said joint operation, both
companies had been able to save the salaries of one manager, one assistant
manager, fifteen inspectors, special agents, and one set of office of clerical
force, the savings in one year amounting to about P200,000 or about
P100,000 for each company. At the end of each calendar year, all gross
receipts and expenses of both companies were determined and the net
profits were divided fifty-fifty, and transferred to the book of accounts of each
company, and each company "then prepared its own income tax return from
this fifty per centum of the gross receipts and expenditures, assets and
liabilities thus transferred to it from the `Joint Emergency Operation' and paid
the corresponding income taxes thereon separately".
Under the theory that the two companies had pooled their resources in the
establishment of the Joint Emergency Operation, thereby forming a joint
venture, the Collector wrote the bus companies that there was due from them
the amount of P422,210.89 as deficiency income tax and compromise for the
years 1946 to 1949, inclusive. Since the Collector caused to be restrained,
seized, and advertized for sale all the rolling stock of the two corporations,
respondent companies had to file a surety bond in the same amount of
P422,210.89 to guarantee the payment of the income tax assessed by him.
After some exchange of communications between the parties, the Collector,
on January 8, 1955, informed the respondents "that after crediting the
overpayment made by them of their alleged income tax liabilities for the
aforesaid years, pursuant to the doctrine of equitable recoupment, the
income tax due from the `Joint Emergency Operation' for the years 1946 to
1949, inclusive, is in the total amount of P54,143.54." The respondent
companies appealed from said assessment of P54,143.54 to the Court of Tax
Appeals, but before filing his answer, the Collector set aside his original
assessment of P54,143.54 and reassessed the alleged income tax liability of
respondents of P148,890.14, claiming that he had later discovered that said
companies had been "erroneously credited in the last assessment with 100
per cent of their income taxes paid when they should in fact have been
credited with only 75 per cent thereof, since under Section 24 of the Tax Code
dividends received by them from the Joint Operation as a domestic
corporation are returnable to the extent of 25 per cent". That corrected and
increased reassessment was embodied in the answer filed by the Collector
with the Court of Tax Appeals.
The theory of the Collector is the Joint Emergency Operation was a
corporation distinct from the two respondent companies, as defined in section
84 (b), and so liable to income tax under section 24, both of the National
Internal Revenue Code. After hearing, the C.T.A. found and held, citing
authorities, that the Joint Emergency Operation or joint management of the
two companies "is not a corporation within the contemplation of section 84
(b) of the National Internal Revenue Code much less a partnership,
association or insurance company", and therefore was not subject to the

income tax under the provisions of section 24 of the same Code, separately
and independently of respondent companies; so, it reversed the decision of
the Collector assessing and demanding from the two companies the payment
of the amount of P54,143.54 and/or the amount of P148,890.14. The Tax
Court did not pass upon the question of whether or not in the appeal taken to
it by respondent companies, the Collector could change his original
assessment by increasing the same from P54,143.14 to P148,890.14, to
correct an error committed by him in having credited the Joint Emergency
Operation, totally or 100 per cent of the income taxes paid by the respondent
companies for the years 1946 to 1949, inclusive, by reason of the principle of
equitable recoupment, instead of only 75 per cent.
The two main and most important questions involved in the present appeal
are: (1) whether the two transportation companies herein involved are liable
to the payment of income tax as a corporation on the theory that the Joint
Emergency Operation organized and operated by them is a corporation within
the meaning of Section 84 of the Revised Internal Revenue Code, and (2)
whether the Collector of Internal Revenue, after the appeal from his decision
has been perfected, and after the Court of Tax Appeals has acquired
jurisdiction over the same, but before said Collector has filed his answer with
that court, may still modify his assessment subject of the appeal by
increasing the same, on the ground that he had committed error in good faith
in making said appealed assessment.
The first question has already been passed upon and determined by this
Tribunal in the case of Eufemia Evangelista et al., vs. Collector of Internal
Revenue et al.,* G.R. No. L-9996, promulgated on October 15, 1957.
Considering the views and rulings embodied in our decision in that case
penned by Mr. Justice Roberto Concepcion, we deem it unnecessary to
extensively discuss the point. Briefly, the facts in that case are as follows:
The three Evangelista sisters borrowed from their father about P59,000 and
adding thereto their own personal funds, bought real properties, such as a lot
with improvements for the sum of P100,000 in 1943, parcels of land with a
total area of almost P4,000 square meters with improvements thereon for
P18,000 in 1944, another lot for P108,000 in the same year, and still another
lot for P237,000 in the same year. The relatively large amounts invested may
be explained by the fact that purchases were made during the Japanese
occupation, apparently in Japanese military notes. In 1945, the sisters
appointed their brother to manage their properties, with full power to lease,
to collect and receive rents, on default of such payment, to bring suits
against the defaulting tenants, to sign all letters and contracts, etc. The
properties therein involved were rented to various tenants, and the sisters,
through their brother as manager, realized a net rental income of P5,948 in
1945, P7,498 in 1946, and P12,615 in 1948.
In 1954, the Collector of Internal Revenue demanded of them among other
things, payment of income tax on corporations from the year 1945 to 1949,
in the total amount of P6,157, including surcharge and compromise.
Dissatisfied with the said assessment, the three sisters appealed to the Court
of Tax Appeals, which court decided in favor of the Collector of Internal

Revenue. On appeal to us, we affirmed the decision of the Tax Court. We

found and held that considering all the facts and circumstances sorrounding
the case, the three sisters had the purpose to engage in real estate
transactions for monetary gain and then divide the same among themselves;
that they contributed to a common fund which they invested in a series of
transactions; that the properties bought with this common fund had been
under the management of one person with full power to lease, to collect
rents, issue receipts, bring suits, sign letters and contracts, etc., in such a
manner that the affairs relative to said properties have been handled as if the
same belonged to a corporation or business enterprise operated for profit;
and that the said sisters had the intention to constitute a partnership within
the meaning of the tax law. Said sisters in their appeal insisted that they were
mere co-owners, not co-partners, for the reason that their acts did not create
a personality independent of them, and that some of the characteristics of
partnerships were absent, but we held that when the Tax Code includes
"partnerships" among the entities subject to the tax on corporations, it must
refer to organizations which are not necessarily partnerships in the technical
sense of the term, and that furthermore, said law defined the term
"corporation" as including partnerships no matter how created or organized,
thereby indicating that "a joint venture need not be undertaken in any of the
standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of
the tax on corporations"; that besides, said section 84 (b) provides that the
term "corporation" includes "joint accounts" (cuentas en participacion) and
"associations", none of which has a legal personality independent of that of
its members. The decision cites 7A Merten's Law of Federal Income Taxation.
In the present case, the two companies contributed money to a common fund
to pay the sole general manager, the accounts and office personnel attached
to the office of said manager, as well as for the maintenance and operation of
a common maintenance and repair shop. Said common fund was also used to
buy spare parts, and equipment for both companies, including tires. Said
common fund was also used to pay all the salaries of the personnel of both
companies, such as drivers, conductors, helpers and mechanics, and at the
end of each year, the gross income or receipts of both companies were
merged, and after deducting therefrom the gross expenses of the two
companies, also merged, the net income was determined and divided equally
between them, wholly and utterly disregarding the expenses incurred in the
maintenance and operation of each company and of the individual income of
said companies.
From the standpoint of the income tax law, this procedure and practice of
determining the net income of each company was arbitrary and unwarranted,
disregarding as it did the real facts in the case. There can be no question that
the receipts and gross expenses of two, distinct and separate companies
operating different lines and in some cases, different territories, and different
equipment and personnel at least in value and in the amount of salaries, can
at the end of each year be equal or even approach equality. Those familiar
with the operation of the business of land transportation can readily see that
there are many factors that enter into said operation. Much depends upon the

number of lines operated and the length of each line, including the number of
trips made each day. Some lines are profitable, others break above even,
while still others are operated at a loss, at least for a time, depending, of
course, upon the volume of traffic, both passenger and freight. In some lines,
the operator may enjoy a more or less exclusive exclusive operation, while in
others, the competition is intense, sometimes even what they call "cutthroat
competition". Sometimes, the operator is involved in litigation, not only as
the result of money claims based on physical injuries ar deaths occassioned
by accidents or collisions, but litigations before the Public Service
Commission, initiated by the operator itself to acquire new lines or additional
service and equipment on the lines already existing, or litigations forced upon
said operator by its competitors. Said litigation causes expense to the
operator. At other times, operator is denounced by competitors before the
Public Service Commission for violation of its franchise or franchises, for
making unauthorized trips, for temporary abandonement of said lines or of
scheduled trips, etc. In view of this, and considering that the Batangas
Transportation and the Laguna Bus operated different lines, sometimes in
different provinces or territories, under different franchises, with different
equipment and personnel, it cannot possibly be true and correct to say that
the end of each year, the gross receipts and income in the gross expenses of
two companies are exactly the same for purposes of the payment of income
tax. What was actually done in this case was that, although no legal
personality may have been created by the Joint Emergency Operation,
nevertheless, said Joint Emergency Operation joint venture, or joint
management operated the business affairs of the two companies as though
they constituted a single entity, company or partnership, thereby obtaining
substantial economy and profits in the operation.
For the foregoing reasons, and in the light of our ruling in the Evangelista vs.
Collector of Internal Revenue case, supra, we believe and hold that the Joint
Emergency Operation or sole management or joint venture in this case falls
under the provisions of section 84 (b) of the Internal Revenue Code, and
consequently, it is liable to income tax provided for in section 24 of the same
code.
The second important question to determine is whether or not the Collector
of Internal Revenue, after appeal from his decision to the Court of Tax Appeals
has been perfected, and after the Tax Court Appeals has acquired jurisdiction
over the appeal, but before the Collector has filed his answer with the court,
may still modify his assessment, subject of the appeal, by increasing the
same. This legal point, interesting and vital to the interests of both the
Government and the taxpayer, provoked considerable discussion among the
members of this Tribunal, a minority of which the writer of this opinion forms
part, maintaining that for the information and guidance of the taxpayer, there
should be a definite and final assessment on which he can base his decision
whether or not to appeal; that when the assessment is appealed by the
taxpayer to the Court of Tax Appeals, the collector loses control and
jurisdiction over the same, the jurisdiction being transferred automatically to
the Tax Court, which has exclusive appellate jurisdiction over the same; that
the jurisdiction of the Tax Court is not revisory but only appellate, and

therefore, it can act only upon the amount of assessment subject of the
appeal to determine whether it is valid and correct from the standpoint of the
taxpayer-appellant; that the Tax Court may only correct errors committed by
the Collector against the taxpayer, but not those committed in his favor,
unless the Government itself is also an appellant; and that unless this be the
rule, the Collector of Internal Revenue and his agents may not exercise due
care, prudence and pay too much attention in making tax assessments,
knowing that they can at any time correct any error committed by them even
when due to negligence, carelessness or gross mistake in the interpretation
or application of the tax law, by increasing the assessment, naturally to the
prejudice of the taxpayer who would not know when his tax liability has been
completely and definitely met and complied with, this knowledge being
necessary for the wise and proper conduct and operation of his business; and
that lastly, while in the United States of America, on appeal from the decision
of the Commissioner of Internal Revenue to the Board or Court of Tax
Appeals, the Commissioner may still amend or modify his assessment, even
increasing the same the law in that jurisdiction expressly authorizes the
Board or Court of Tax Appeals to redetermine and revise the assessment
appealed to it.
The majority, however, holds, not without valid arguments and reasons, that
the Government is not bound by the errors committed by its agents and tax
collectors in making tax assessments, specially when due to a
misinterpretation or application of the tax laws, more so when done in good
faith; that the tax laws provide for a prescriptive period within which the tax
collectors may make assessments and reassessments in order to collect all
the taxes due to the Government, and that if the Collector of Internal
Revenue is not allowed to amend his assessment before the Court of Tax
Appeals, and since he may make a subsequent reassessment to collect
additional sums within the same subject of his original assessment, provided
it is done within the prescriptive period, that would lead to multiplicity of suits
which the law does not encourage; that since the Collector of Internal
Revenue, in modifying his assessment, may not only increase the same, but
may also reduce it, if he finds that he has committed an error against the
taxpayer, and may even make refunds of amounts erroneously and illegally
collected, the taxpayer is not prejudiced; that the hearing before the Court of
Tax Appeals partakes of a trial de novo and the Tax Court is authorized to
receive evidence, summon witnesses, and give both parties, the Government
and the taxpayer, opportunity to present and argue their sides, so that the
true and correct amount of the tax to be collected, may be determined and
decided, whether resulting in the increase or reduction of the assessment
appealed to it. The result is that the ruling and doctrine now being laid by this
Court is, that pending appeal before the Court of Tax Appeals, the Collector of
Internal Revenue may still amend his appealed assessment, as he has done
in the present case.
There is a third question raised in the appeal before the Tax Court and before
this Tribunal, namely, the liability of the two respondent transportation
companies for 25 per cent surcharge due to their failure to file an income tax
return for the Joint Emergency Operation, which we hold to be a corporation

within the meaning of the Tax Code. We understand that said 25 per cent
surcharge is included in the assessment of P148,890.14. The surcharge is
being imposed by the Collector under the provisions of Section 72 of the Tax
Code, which read as follows:
The Collector of Internal Revenue shall assess all income taxes. In case of
willful neglect to file the return or list within the time prescribed by law, or in
case a false or fraudulent return or list is willfully made the collector of
internal revenue shall add to the tax or to the deficiency tax, in case any
payment has been made on the basis of such return before the discovery of
the falsity or fraud, a surcharge of fifty per centum of the amount of such tax
or deficiency tax. In case of any failure to make and file a return list within
the time prescribed by law or by the Collector or other internal revenue
officer, not due to willful neglect, the Collector, shall add to the tax twentyfive per centum of its amount, except that, when the return is voluntarily and
without notice from the Collector or other officer filed after such time, it is
shown that the failure was due to a reasonable cause, no such addition shall
be made to the tax. The amount so added to any tax shall be collected at the
same time in the same manner and as part of the tax unless the tax has been
paid before the discovery of the neglect, falsity, or fraud, in which case the
amount so added shall be collected in the same manner as the tax.
We are satisfied that the failure to file an income tax return for the Joint
Emergency Operation was due to a reasonable cause, the honest belief of
respondent companies that there was no such corporation within the
meaning of the Tax Code, and that their separate income tax return was
sufficient compliance with the law. That this belief was not entirely without
foundation and that it was entertained in good faith, is shown by the fact that
the Court of Tax Appeals itself subscribed to the idea that the Joint
Emergency Operation was not a corporation, and so sustained the contention
of respondents. Furthermore, there are authorities to the effect that belief in
good faith, on advice of reputable tax accountants and attorneys, that a
corporation was not a personal holding company taxable as such constitutes
"reasonable cause" for failure to file holding company surtax returns, and that
in such a case, the imposition of penalties for failure to file holding company
surtax returns, and that in such a case, the imposition of penalties for failure
to file return is not warranted1
In view of the foregoing, and with the reversal of the appealed decision of the
Court of Tax Appeals, judgment is hereby rendered, holding that the Joint
Emergency Operation involved in the present is a corporation within the
meaning of section 84 (b) of the Internal Revenue Code, and so is liable to
incom tax under section 24 of the code; that pending appeal in the Court of
Tax Appeals of an assessment made by the Collector of Internal Revenue, the
Collector, pending hearing before said court, may amend his appealed
assessment and include the amendment in his answer before the court, and
the latter may on the basis of the evidence presented before it, redetermine
the assessment; that where the failure to file an income tax return for and in
behalf of an entity which is later found to be a corporation within the
meaning of section 84 (b) of the Tax Code was due to a reasonable cause,

such as an honest belief based on the advice of its attorneys and

accountants, a penalty in the form of a surcharge should not be imposed and
collected. The respondents are therefore ordered to pay the amount of the
reassessment made by the Collector of Internal Revenue before the Tax
Court, minus the amount of 25 per cent surcharge. No costs.
27. ALLIED BANKING
CORPORATION,
Petitioner,
- versus COMMISSIONER OF
INTERNAL REVENUE,
February 5, 2010
x -------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
The key to effective communication is clarity.
The Commissioner of Internal Revenue (CIR) as well as his duly authorized
representative must indicate clearly and unequivocally to the taxpayer
whether an action constitutes a final determination on a disputed
assessment.[1] Words must be carefully chosen in order to avoid any
confusion that could adversely affect the rights and interest of the taxpayer.
Assailed in this Petition for Review on Certiorari[2] under Section 12 of
Republic Act (RA) No. 9282,[3] in relation to Rule 45 of the Rules of Court, are
the August 23, 2006 Decision[4] of the Court of Tax Appeals (CTA) and its
October 17, 2006 Resolution[5] denying petitioners Motion for
Reconsideration.
Factual Antecedents
On April 30, 2004, the Bureau of Internal Revenue (BIR) issued a Preliminary
Assessment Notice (PAN) to petitioner Allied Banking Corporation for
deficiency Documentary Stamp Tax (DST) in the amount of P12,050,595.60
and Gross Receipts Tax (GRT) in the amount of P38,995,296.76 on industry
issue for the taxable year 2001.[6] Petitioner received the PAN on May 18,
2004 and filed a protest against it on May 27, 2004.[7]
On July 16, 2004, the BIR wrote a Formal Letter of Demand with Assessment

Notices to petitioner, which partly reads as follows:[8]

It is requested that the above deficiency tax be paid immediately upon
receipt hereof, inclusive of penalties incident to delinquency. This is our final
decision based on investigation. If you disagree, you may appeal the final
decision within thirty (30) days from receipt hereof, otherwise said deficiency
tax assessment shall become final, executory and demandable.
Petitioner received the Formal Letter of Demand with Assessment Notices on
August 30, 2004.[9]
Proceedings before the CTA First Division
On September 29, 2004, petitioner filed a Petition for Review[10] with the
CTA which was raffled to its First Division and docketed as CTA Case No. 7062.
[11]
On December 7, 2004, respondent CIR filed his Answer.[12] On July 28, 2005,
he filed a Motion to Dismiss[13] on the ground that petitioner failed to file an
administrative protest on the Formal Letter of Demand with Assessment
Notices. Petitioner opposed the Motion to Dismiss on August 18, 2005.[14]
On October 12, 2005, the First Division of the CTA rendered a Resolution[15]
granting respondents Motion to Dismiss. It ruled:
Clearly, it is neither the assessment nor the formal demand letter itself that is
appealable to this Court. It is the decision of the Commissioner of Internal
Revenue on the disputed assessment that can be appealed to this Court
(Commissioner of Internal Revenue vs. Villa, 22 SCRA 3). As correctly pointed
out by respondent, a disputed assessment is one wherein the taxpayer or his
duly authorized representative filed an administrative protest against the
formal letter of demand and assessment notice within thirty (30) days from
date [of] receipt thereof. In this case, petitioner failed to file an
administrative protest on the formal letter of demand with the corresponding
assessment notices. Hence, the assessments did not become disputed
assessments as subject to the Courts review under Republic Act No. 9282.
(See also Republic v. Liam Tian Teng Sons & Co., Inc., 16 SCRA 584.)
WHEREFORE, the Motion to Dismiss is GRANTED. The Petition for Review is
hereby DISMISSED for lack of jurisdiction.
SO ORDERED.[16]
Aggrieved, petitioner moved for reconsideration but the motion was denied
by the First Division in its Resolution dated February 1, 2006.[17]
Proceedings before the CTA En Banc
On February 22, 2006, petitioner appealed the dismissal to the CTA En Banc.
[18] The case was docketed as CTA EB No. 167.

Finding no reversible error in the Resolutions dated October 12, 2005 and
February 1, 2006 of the CTA First Division, the CTA En Banc denied the
Petition for Review[19]as well as petitioners Motion for Reconsideration.[20]
The CTA En Banc declared that it is absolutely necessary for the taxpayer to
file an administrative protest in order for the CTA to acquire jurisdiction. It
emphasized that an administrative protest is an integral part of the remedies
given to a taxpayer in challenging the legality or validity of an assessment.
According to the CTA En Banc, although there are exceptions to the doctrine
of exhaustion of administrative remedies, the instant case does not fall in any
of the exceptions.
Issue
Hence, the present recourse, where petitioner raises the lone issue of
whether the Formal Letter of Demand dated July 16, 2004 can be construed
as a final decision of the CIR appealable to the CTA under RA 9282.
Our Ruling
The petition is meritorious.
Section 7 of RA 9282 expressly provides that the CTA exercises exclusive
appellate jurisdiction to review by appeal decisions of the CIR in cases
involving disputed assessments
The CTA, being a court of special jurisdiction, can take cognizance only of
matters that are clearly within its jurisdiction.[21] Section 7 of RA 9282
provides:
Sec. 7.

Jurisdiction. The CTA shall exercise:

(a)
Exclusive appellate jurisdiction to review by appeal, as herein
provided:
(1)
Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue;
(2)
Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of
Internal Revenue, where the National Internal Revenue Code provides a
specific period of action, in which case the inaction shall be deemed a denial;
(Emphasis supplied)

xxxx
The word decisions in the above quoted provision of RA 9282 has been
interpreted to mean the decisions of the CIR on the protest of the taxpayer
against the assessments.[22] Corollary thereto, Section 228 of the National
Internal Revenue Code (NIRC) provides for the procedure for protesting an
assessment. It states:
SECTION 228. Protesting of Assessment. When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he
shall first notify the taxpayer of his findings: Provided, however, That a
preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical
error in the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and
the amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person,
such as, but not limited to, vehicles, capital equipment, machineries and
spare parts, has been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which
the assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to
respond, the Commissioner or his duly authorized representative shall issue
an assessment based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing
rules and regulations. Within sixty (60) days from filing of the protest, all
relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer
adversely affected by the decision or inaction may appeal to the Court of Tax
Appeals within thirty (30) days from receipt of the said decision, or from the

lapse of the one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable.
In the instant case, petitioner timely filed a protest after receiving the PAN. In
response thereto, the BIR issued a Formal Letter of Demand with Assessment
Notices. Pursuant to Section 228 of the NIRC, the proper recourse of
petitioner was to dispute the assessments by filing an administrative protest
within 30 days from receipt thereof. Petitioner, however, did not protest the
final assessment notices. Instead, it filed a Petition for Review with the CTA.
Thus, if we strictly apply the rules, the dismissal of the Petition for Review by
the CTA was proper.
The case is an exception to the
rule on exhaustion of administrative remedies
However, a careful reading of the Formal Letter of Demand with Assessment
Notices leads us to agree with petitioner that the instant case is an exception
to the rule on exhaustion of administrative remedies, i.e., estoppel on the
part of the administrative agency concerned.
In the case of Vda. De Tan v. Veterans Backpay Commission,[23] the
respondent contended that before filing a petition with the court, petitioner
should have first exhausted all administrative remedies by appealing to the
Office of the President. However, we ruled that respondent was estopped
from invoking the rule on exhaustion of administrative remedies considering
that in its Resolution, it said, The opinions promulgated by the Secretary of
Justice are advisory in nature, which may either be accepted or ignored by
the office seeking the opinion, and any aggrieved party has the court for
recourse. The statement of the respondent in said case led the petitioner to
conclude that only a final judicial ruling in her favor would be accepted by the
Commission.
Similarly, in this case, we find the CIR estopped from claiming that the filing
of the Petition for Review was premature because petitioner failed to exhaust
all administrative remedies.
The Formal Letter of Demand with Assessment Notices reads:
Based on your letter-protest dated May 26, 2004, you alleged the following:
1.
That the said assessment has already prescribed in accordance
with the provisions of Section 203 of the Tax Code.
2.
That since the exemption of FCDUs from all taxes found in the Old
Tax Code has been deleted, the wording of Section 28(A)(7)(b) discloses that
there are no other taxes imposable upon FCDUs aside from the 10% Final
Income Tax.
Contrary to your allegation, the assessments covering GRT and DST for
taxable year 2001 has not prescribed for [sic] simply because no returns were

filed, thus, the three year prescriptive period has not lapsed.
With the implementation of the CTRP, the phrase exempt from all taxes was
deleted. Please refer to Section 27(D)(3) and 28(A)(7) of the new Tax Code.
Accordingly, you were assessed for deficiency gross receipts tax on onshore
income from foreign currency transactions in accordance with the rates
provided under Section 121 of the said Tax Code. Likewise, deficiency
documentary stamp taxes was [sic] also assessed on Loan Agreements, Bills
Purchased, Certificate of Deposits and related transactions pursuant to
Sections 180 and 181 of NIRC, as amended.
The 25% surcharge and 20% interest have been imposed pursuant to the
provision of Section 248(A) and 249(b), respectively, of the National Internal
Revenue Code, as amended.
It is requested that the above deficiency tax be paid immediately upon
receipt hereof, inclusive of penalties incident to delinquency. This is our final
decision based on investigation. If you disagree, you may appeal this final
decision within thirty (30) days from receipt hereof, otherwise said deficiency
tax assessment shall become final, executory and demandable.[24]
(Emphasis supplied)
It appears from the foregoing demand letter that the CIR has already made a
final decision on the matter and that the remedy of petitioner is to appeal the
final decision within 30 days.
In Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue,[25]
we considered the language used and the tenor of the letter sent to the
taxpayer as the final decision of the CIR.
In this case, records show that petitioner disputed the PAN but not the Formal
Letter of Demand with Assessment Notices. Nevertheless, we cannot blame
petitioner for not filing a protest against the Formal Letter of Demand with
Assessment Notices since the language used and the tenor of the demand
letter indicate that it is the final decision of the respondent on the matter. We
have time and again reminded the CIR to indicate, in a clear and unequivocal
language, whether his action on a disputed assessment constitutes his final
determination thereon in order for the taxpayer concerned to determine
when his or her right to appeal to the tax court accrues.[26] Viewed in the
light of the foregoing, respondent is now estopped from claiming that he did
not intend the Formal Letter of Demand with Assessment Notices to be a final
decision.
Moreover, we cannot ignore the fact that in the Formal Letter of Demand with
Assessment Notices, respondent used the word appeal instead of protest,
reinvestigation, or reconsideration. Although there was no direct
reference for petitioner to bring the matter directly to the CTA, it cannot be
denied that the word appeal under prevailing tax laws refers to the filing of
a Petition for Review with the CTA. As aptly pointed out by petitioner, under
Section 228 of the NIRC, the terms protest, reinvestigation and

reconsideration refer to the administrative remedies a taxpayer may take

before the CIR, while the term appeal refers to the remedy available to the
taxpayer before the CTA. Section 9 of RA 9282, amending Section 11 of RA
1125,[27] likewise uses the term appeal when referring to the action a
taxpayer must take when adversely affected by a decision, ruling, or inaction
of the CIR. As we see it then, petitioner in appealing the Formal Letter of
Demand with Assessment Notices to the CTA merely took the cue from
respondent. Besides, any doubt in the interpretation or use of the word
appeal in the Formal Letter of Demand with Assessment Notices should be
resolved in favor of petitioner, and not the respondent who caused the
confusion.
To be clear, we are not disregarding the rules of procedure under Section 228
of the NIRC, as implemented by Section 3 of BIR Revenue Regulations No. 1299.[28] It is the Formal Letter of Demand and Assessment Notice that must
be administratively protested or disputed within 30 days, and not the PAN.
Neither are we deviating from our pronouncement in St. Stephens Chinese
Girls School v. Collector of Internal Revenue,[29] that the counting of the 30
days within which to institute an appeal in the CTA commences from the date
of receipt of the decision of the CIR on the disputed assessment, not from the
date the assessment was issued.
What we are saying in this particular case is that, the Formal Letter of
Demand with Assessment Notices which was not administratively protested
by the petitioner can be considered a final decision of the CIR appealable to
the CTA because the words used, specifically the words final decision and
appeal, taken together led petitioner to believe that the Formal Letter of
Demand with Assessment Notices was in fact the final decision of the CIR on
the letter-protest it filed and that the available remedy was to appeal the
same to the CTA.
We note, however, that during the pendency of the instant case, petitioner
availed of the provisions of Revenue Regulations No. 30-2002 and its
implementing Revenue Memorandum Order by submitting an offer of
compromise for the settlement of the GRT, DST and VAT for the period 19982003, as evidenced by a Certificate of Availment dated November 21, 2007.
[30] Accordingly, there is no reason to reinstate the Petition for Review in
CTA Case No. 7062.
WHEREFORE, the petition is hereby GRANTED. The assailed August 23, 2006
Decision and the October 17, 2006 Resolution of the Court of Tax Appeals are
REVERSED and SET ASIDE. The Petition for Review in CTA Case No. 7062 is
hereby DISMISSED based solely on the Bureau of Internal Revenues
acceptance of petitioners offer of compromise for the settlement of the gross
receipts tax, documentary stamp tax and value added tax, for the years
1998-2003.
SO ORDERED.
28. COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, DEPUTY CITY SHERIFF
CARMELO V. CACHERO, MARITIME COMPANY OF THE PHILIPPINES,
DOMINGO C. NIANGAR, DANIEL C. SABINO, FERNANDO S. TULIAO and
TULMAR TRADING CORPORATION, respondents.
Reynaldo L. Libanan for respondent deputy sheriff.
Joaquin G. Chung, Jr. Law Office for respondent Tulmar Trading Corp.
Eliodoro C. Cruz & Arsenio P. Dizon for Maritime Co. of the Philippines.

MENDOZA, J.:
This is a petition for certiorari to set aside the resolution dated April 4, 1986 1
of the National Labor Relations Commission in NLRC Case No. NCR-12-423384 (Domingo C. Niangar v. Maritime Company of the Philippines), affirming
the denial by the Labor Arbiter 2 of petitioner's motion to annul the sheriff's
sale of four barges or, in the alternative, to order him to remit the proceeds of
his sale to the Bureau of the Internal Revenue for the satisfaction of the tax
liabilities of private respondent Maritime Company of the Philippines.
The facts are as follows:
On January 12, 1984 the Commissioner of the Internal Revenue sent two
letters 3 of demand to the respondent Maritime Company of the Philippines
for deficiency common carrier's tax, fixed tax, 6% Commercial Broker's tax,
documentary stamp tax, income tax and withholding taxes in the total
amount of P17,284,882.45.
The assessment became final and executory as private respondent did not
contest it. But as private respondent did not pay its tax liability either, the
Commissioner of Internal Revenue issued warrants of distraint of personal
property and levy of real property of private respondent. Copies of the
warrants, both dated January 23, 1985, were served on January 28, 1985 on
Yoly T. Petrache, private respondent's accountant. 4
On April 16, 1985 a "Receipt for Goods, Articles, and Things Seized 5 under
Authority of the National Internal Revenue Code" was executed, covering,
among other things, six barges identified as MCP-1,2,3,4,5 and 6. This receipt
is required by 303 (now 206) of the NIRC as proof of the constructive
distraint of property. It is an undertaking by the taxpayer or person in
possession of the property covered that he will preserve the property and
deliver it upon order of the court or the Internal Revenue Commissioner.
The receipt was prepared by the BIR for the signature of a representative of
respondent Maritime Company of the Philippines, but it was not in fact
signed. Petitioner later explained that the individuals who had possession of

the barges had refused to sign the receipt.

This circumstance has given rise to the question in this case as it appears
that four of the barges placed under constructive distraint were levied upon
execution by respondent deputy sheriff of Manila on July 20, 1985 to satisfy a
judgment for unpaid wages and other benefits of employees of respondent
Maritime Company of the Philippines. More specifically, the question in this
case is the validity of the warrant of distraint served by the Revenue Seizure
Officer against the writ of execution subsequently levied upon the same
property by the deputy sheriff of Manila to satisfy the claims of employees in
NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar, et al. v. Maritime
Company of the Philippines) for P490,749.21.
The four barges were sold by respondent deputy sheriff at a public auction on
August 12, 1985. The highest bidder, Daniel C. Sabino, subsequently sold
them to private respondents Fernando S. Tuliao and Tulmar Trading
Corporation.
On September 4, 1985, petitioner asked the Labor Arbiter to annul the sale
and to enjoin the sheriff from disposing of the proceeds of the sale or, in the
alternative, to remit them to the Bureau of Internal Revenue so that the
amount could be applied to the payment of private respondent Maritime
Company's tax liabilities.
In an order dated September 30, 1985, Labor Arbiter Ceferina Diosana denied
the motion on the ground that petitioner Commissioner of Internal Revenue
failed to show that the barges which were levied upon in execution and sold
at public auction had been validly placed under constructive distraint. 6 The
Labor Arbiter likewise rejected petitioner's contention that the government's
claim for taxes was preferred under Art. 2247, in relation to Art. 2241(1) of
the Civil Code, on the ground that under this provisions only taxes and fees
which are due on specific movables enjoy preference, whereas the taxes
claimed by petitioner were not due on the four barges in question.
The order was appealed to the NLRC, which in resolution dated April 4, 1986,
affirmed the denial of the Internal Revenue Commissioner's motion. Hence
this petition for certiorari.
For reasons to be presently stated, the petition is granted.
The National Internal Revenue Code provides for the collection of delinquent
taxes by any of the following remedies: (a) distraint of personal property or
levy of real property of the delinquent taxpayer and (b) civil or criminal
action.
With respect to the four barges in question, petitioner resorted to
constructive distraint pursuant to 303 (now 206) of the NLRC. This
provisions states:
Constructive distraint of the property of a taxpayer. To safeguard the

interest of the Government, the Commissioner of Internal Revenue may place

under constructive distraint the property of a delinquent taxpayer or any
taxpayer who, in his opinion, is retiring from any business subject to tax, or
intends to leave the Philippines, or remove his property therefrom, or hide or
conceal his property, or perform any act tending to obstruct the proceedings,
for collecting the tax due or which may be due from him.
The constructive distraint of personal property shall be effected by requiring
the taxpayer or any person having possession or control of such property to
sign a receipt covering the property distrained and obligate himself to
preserve the same intact and unaltered and not to dispose of the same in any
manner whatever without the express authority of the Commissioner of
Internal Revenue.
In case the taxpayer or the person having the possession and control of the
property sought to be placed under constructive distraint refuses or fails to
sign the receipt herein referred to, the revenue officer effecting the
constructive distraint shall proceed to prepare a list of such property and in
the presence of two witnesses leave a copy thereof in the premises where the
property distrained is located, after which the said property shall be deemed
to have been placed under constructive distraint..
Although the warrant of distraint in this case had been issued earlier (January
23,1985) than the levy on execution in the labor case on July 20, 1985, the
Labor Arbiter nevertheless held that there was no valid distraint of personal
property on the ground that the receipt of property distrained had not been
signed by the taxpayer as required above. In her order, which the NLRC
affirmed in toto, the Labor Arbiter said:
It is claimed by the Commissioner of the Internal Revenue that on January 23,
1984, he issued a warrant of distraint of personal property on respondent to
satisfy the collection of the deficiency taxes in the aggregate sum of
P17,284,882.45 and a copy of said warrant was served upon Maritime
Company on January 28, 1985 and pursuant to the warrant, the
Commissioner, through Revenue Seizure Agent Roland L. Bombay, issued on
April 16, 1985, to Maritime Company a receipt for goods, articles and things
seized pursuant to authority granted to him under the National Internal
Revenue Code. Such personal properties seized includes, among others, "Six
(6) units of barges MCI-6 . . . " However, his own receipts for goods attached
to his motions does not show that it was received by Maritime; neither does it
show any signature of any of Maritime's Officers.
Apart from the foregoing, in his affidavit of 11 September 1985, Sheriff
Cachero stated that before he sold the subject four barges at public auction,
he conducted an investigation on the ownership of the said four barges. In
brief, he found out that the said four barges were purchased by respondent
through Makati Leasing and that the whole purchase price has been paid by
respondent. In fact, the corresponding deed of sale has already been signed.
He did not find any lien or encumbrance on any of the said four barges. Thus
it cannot be true that the Commissioner effected a valid warrant of distraint

of personal property on the four barges in question. 7

However, this case arose out of the same facts involved in Republic v.
Enriquez, 8 in which we sustained the validity of the distraint of the six
barges, which included the four involved in this case, against the levy on
execution made by another deputy sheriff of Manila in another case filed
against Maritime Company. Two barges (MCP-1 and MCP-4) were the subject
of a levy in the case. There we found that the "Receipt for Goods, Articles and
Things Seized under Authority of the National Internal Revenue Code"
covering the six barges had been duly executed, with the Headquarters, First
Coast Guard District, Farola Compound Binondo, Manila acknowledging
receipt of several barges, vehicles and two (2) bodegas of spare parts
belonging to Maritime Company of the Philippines.
Apparently, what had been attached to the petitioner's motion filed by the
government with the Labor Arbiter in this case was a copy, not the original
one showing the rubber stamp of the Coast Guard and duly signed by its
representative. A xerox copy of this signed receipt was submitted in the prior
case. 9 This could be due to the fact that, except for Solicitor Erlinda B.
Masakayan, the government lawyers who prepared the petition in the prior
case were different from those who filed the present petition. They admitted
that the receipt of property distrained had not been signed by the taxpayer or
person in possession of the taxpayer's property allegedly because they had
refused to do so. What apparently they did not know is that the receipt had
been acknowledged by the Coast Guard which obviously had the barges in its
possession.
In addition to the receipt duly acknowledged by the Coast Guard, the record
of the prior case also shows that on October 4, 1985, the Commissioner of
the Internal Revenue issued a "Notice of Seizure of Personal Property" stating
that the goods and chattels listed on its reverse side, among which were the
four barges (MCP-2, MCP-3, MCP-5, and MCP-6), had been distrained by the
Commissioner of Internal Revenue. 10
The "Notice of Seizure of Personal Property," a copy of which was received by
Atty. Redentor R. Melo in behalf of Maritime Company of the Philippines,
together with the receipt of the Coast Guard, belies the claim of respondent
deputy sheriff that when he levied upon the four barges there was no
indication that the barges had previously been placed under distraint by the
Commissioner of Internal Revenue.
Accordingly, what we said in the prior case 11 in upholding the validity of
distraint of two of the six barges (MCP Nos. 1 and 4), fully applies in this case:
It is settled that the claim of the government predicated on a tax lien is
superior to the claim of a private litigant predicated on a judgment. The tax
lien attaches not only from the service of the warrant of distraint of personal
property but from the time the tax became due and payable. Besides, the
distraint on the subject properties of the Maritime Company of the Philippines
as well as the notice of their seizure were made by petitioner, through the

Commissioner of the Internal Revenue, long before the writ of the execution
was issued by the Regional Trial Court of Manila, Branch 31. There is no
question then that at the time the writ of execution was issued, the two (2)
barges, MPC-1 and MCP-4, were no longer properties of the Maritime
Company of the Philippines. The power of the court in execution of judgments
extends only to properties unquestionably belonging to the judgment debtor.
Execution sales affect the rights of the judgment debtor only, and the
purchaser in an auction sale acquires only such right as the judgment debtor
had at the time of sale. It is also well-settled that the sheriff is not authorized
to attach or levy on property not belonging to the judgment debtor.
Nor is there any merit in the contention of the NLRC that taxes are absolutely
preferred claims only with respect to movable or immovable properties on
which they are due and that since the taxes sought to be collected in this
case are not due on the barges in question the government's claim cannot
prevail over the claims of employees of the Maritime Company of the
Philippines which, pursuant to Art. 110 of the Labor Code, "enjoy first
preference."
In Republic v. Peralta 12 this Court rejected a similar contention. Through Mr.
Justice Feliciano we held:
. . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco
inspection fees constitutes a claim for unpaid internal revenue taxes which
gives rise to a tax lien upon all the properties and assets, movable or
immovable, of the insolvent as taxpayer. Clearly, under Articles 2241 No. 1,
2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and
all properties of the insolvent.
xxx

xxx

xxx

Article 110 of the Labor Code does not purport to create a lien in favor of
workers or employees for unpaid wages either upon all of the properties or
upon any particular property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of specially preferred
claims established under Articles 2241 and 2242 of the Civil Code, except to
the extent that such claims for unpaid wages are already covered by Article
2241, number 6: "claims for laborer's wages, on the goods manufactured or
the work done," or by Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works." To the
extent that claims for unpaid wages fall outside the scope of Article 2241,
number 6 and 2242, number 3, they would come with the ambit of the
category of ordinary preferred credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the claims of the Unions
for separation pay of their members constitute liens attaching to the
processed leaf tobacco, cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets owned by the

Insolvent. And even in respect of such tobacco and tobacco products

produced by the Insolvent, the claims of the Unions may be given effect only
after the Bureau of Internal Revenue's claim for unpaid tobacco inspection
fees shall have been satisfied out of the products so manufactured by the
Insolvent.
Article 2242, number 3, also creates a lien or encumbrance upon a building or
other real property of the Insolvent in favor of workmen who constructed or
repaired such building or other real property. Article 2242, number 3, does
not however appear relevant in the instant case, since the members of the
Unions to whom separation pay is due rendered services to the Insolvent not
(so far as the record of this case would show) in the construction or repair of
buildings or other real property, but rather, in the regular course of the
manufacturing operations of the Insolvent. The Unions' claims do not
therefore constitute a lien or encumbrance upon any immovable property
owned by the insolvent, but rather, as already indicated, upon the Insolvent's
existing inventory (if any) of processed tobacco and tobacco products.
In addition, we have held 13 that Art. 110 of the Labor Code applies only in
case of bankruptcy or judicial liquidation of the employer. This is clear from
the text of the law.
Art. 110.
Worker preference in case of bankruptcy. In the event of
bankruptcy or liquidation of an employer's business, his workers shall enjoy
first preference as regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision of law to the
contrary notwithstanding. Unpaid wages shall be paid in full before other
creditors may establish any claims to a share in the assets of the employer.
This case does not involve the liquidation of the employer's business.
WHEREFORE, the petition for certiorari is GRANTED and the resolution dated
April 4, 1986 of respondent NLRC in NLRC Case No. NCR-12-4233-84 is SET
ASIDE insofar as it denies the government's claim for taxes, and respondent
deputy sheriff Carmelo V. Cachero or his successor is ORDERED to remit the
proceeds of the auction sale to the Bureau of Internal Revenue to be applied
as part payment of respondent Maritime Company's tax liabilities.
SO ORDERED.
29. BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellant,
vs.
WENCESLAO TRINIDAD, Collector of Internal Revenue, defendantappellee.
Yeager and Armstrong for appellant.
No appearance for appellee.

JOHNSON, J.:
There is a practically no dispute about the facts in this case. They are as
follows:
On the 13th day of July, 1916, the defendant Collector of Internal Revenue,
through his duly authorized agent at Zamboanga, seized and distrained
certain personal property, consisting of machinery for sawing lumber which is
particularly enumerated and described in paragraph 3 of the complaint, and
advertised the same for sale, to realize the sum of P2,159.79, alleged to be
due to the Government of the Philippine Islands from Pujalte and Co., as
forestry charges. The defendant claimed that said personality belonged to the
said company, was used in the business on which the taxes were due, and
was liable to seizure to cover said taxes. On the other hand, the plaintiff
claimed to be the owner of said property, and demanded its release. The
demand being denied, the plaintiff paid to the defendant the said sum of
P2,159.79 under protest to prevent the sale of said property, and
immediately brought the present action in the Court of First Instance of
Zamboanga to recover the said sum of P2,159.78 together with interest and
costs. The lower court, after due trial, dismissed the plaintiff's complaint and
absolved the defendant from all liability thereunder. From that judgment the
plaintiff appealed to this court.
The property in question formerly belonged to the Taba Saw Mill Co., a
copartnership formed by Pujalte and Co. and one Ramon Murga. In April,
1914, Ramon Murga sold all his rights, title, and interest in and to the said
copartnership to Pujalte and Co., which thereby became the sole owner of the
concern.
It appears from plaintiff's Exhibit AA, which was admitted in evidence without
objection on the part of the defendant, that on the 26th day of September,
1912, the said Taba Saw Mill Co. conveyed to the plaintiff bank, by way of
chattel mortgage, the property here in question together with other
personalities, as security for the payment to said bank of two certain
promissory notes for the sum of P180,000. Said chattel mortgage was duly
registered in the office of the register of deeds of Zamboanga on the 26th
day of December, 1912. On that date the property in question was free from
all tax liens; at least, the plaintiff mortgagee had no notice thereof. On the
13th day of July, 1916, when the amount here in question was found to be
due to the Government from Pujalte and Co. as forestry charges, and when
the property in question was seized by the defendant, the said chattel
mortgage was still subsisting. It is admitted that at the time of its seizure the
said property was being used in the sawmill of Pujalte and Co.
Upon the foregoing facts the lower court absolved the defendant from all
liability under the plaintiff's complaint, for the following reasons:
1. That the party who was liable to pay the taxes for which the property in
question was distrained was not the plaintiff but Pujalte and Co.; and that the
plaintiff having "voluntarily and spontaneously" paid the debt of the latter,

had no cause of action against the defendant collector, and could only
recover the sum so paid by it from Pujalte and Co., under article 1158 of the
Civil Code (p. 15, B. of E.); that the plaintiff should have proceeded under
section 141 of Act No. 2339 (now sec. 1580 of Act No. 2711), and not under
section 140 of the said Act (sec. 1579 of Act No. 2711).
2. That "even supposing for a moment" that the plaintiff had a right of action
against the defendant to recover the sum paid by it to the latter, yet this
action must fail because the property in question, having been used by
Pujalte and Co. in its business of cutting and sawing lumber, was liable to
seizure and distraint under section 149 of Act No. 2339.
We are of the opinion that neither of the foregoing reasons is sound, and that
the judgment of the lower court should be revoked.
First. There is absolutely no basis for the finding of the trial court that "the
plaintiff bank had voluntarily and spontaneously paid the debt of a third
party, that is, that of the firm of Pujalte and Co." (p. 15, B. of E.). Paragraph 7
of the plaintiff's complaint alleges: "That thereupon, involuntarily and under
due protest in writing, the plaintiff bank made payment of the required sum
of P2,159.79 in order to secure the release of its seized property." These
allegations were specially admitted by the defendant (par. 5, stipulation,
Plaintiff's Exhibit G).
Section 140 of the Internal Revenue Law (Act No. 2339 provides as follows:
SEC. 140. Recovery of tax paid under protest. When the validity of any tax
in questioned, or amount disputed, or other question raised as to liability
therefor, the person against whom or against whose property the same is
sought to be enforced shall pay the tax under instant protest, or upon protest
within ten days, and shall thereupon request the decision of the Collector of
Internal Revenue. If the decision of the Collector of Internal Revenue is
adverse, or if no decision is made by him within six months from the date
when his decision was requested, the taxpayer may proceed, at any time
within two years after the payment of the tax, to bring an action against the
Collector of Internal Revenue for the recovery of the sum alleged to have
been illegally collected, the process to be served upon him, upon the
provincial treasurer, or upon the officer collecting the tax.
Section 141 of the same Act provides:
SEC. 141. Action to contest forfeiture of chatted. In case of the seizure of
personal property under claim of forfeiture the owner, desiring to contest the
validity of the forfeiture, may at any time before sale or destruction of the
property bring an action against the person seizing the property or having
possession thereof to recover the same, and upon giving proper bond may
enjoin the sale; or after the sale and within six months he may bring an
action to recover the net proceeds realized at the sale.
The lower court was of the opinion that the plaintiff should have proceeded

under the latter section above quoted and not under the former. It cannot be
maintained that the personal property here in question was seized by the
defendant "under claim of forfeiture;" nor could it have been legally seized
under claim of forfeiture. It was seized to enforce an alleged tax lien, under
section 149 of Act No. 2339 (sec. 1588, Act No. 2711), which was quoted by
the lower court in its decision (p. 19 B. of E.) and which in no way provides for
the forfeiture of the property on which such a lien attaches. Forfeiture is "the
divestiture of property without compensation, in consequence of an offense.
The effect of such forfeiture is to transfer the title to the specific thing from
the owner to the sovereign power." (12 R. C. L., 124.) There is a great
difference between a seizure under forfeiture and a seizure to enforce a tax
lien. In the former all the proceeds derived from the sale of the thing forfeited
are turned over to the Collector of Internal Revenue (sec. 148, Act No. 2339)
in the latter the residue of such proceeds over and above what is required to
pay the tax sought to be realized, including expenses, is returned to the
owner of the property (second paragraph, sec. 152, Act No. 2339). Clearly,
the remedy applicable to the present case is that provided for in section 140,
above quoted, and which the plaintiff invoked. (See Hongkong and Shanghai
Banking Corporation vs. Rafferty, 39 Phil., 145, 147.)
Second. At the time of the seizure of the property here in question, the
plaintiff held a valid and subsisting chattel mortgage on the same, duly
registered in the registry of deeds. "A chattel mortgage is a conditional sale
of personal property as security for the payment of a debt, or the
performance of some other obligation specified therein, the condition being
that the sale shall be void upon the seller paying the purchaser a sum of
money or doing some other act named." (Sec. 3, Act No. 1508.) "Therefore,
so long as the mortgage exists, the dominion with respect to the mortgaged
personal property rests with the creditor-pledgee from the time of the
inscription of the mortgage in the registry, and the furniture ceases to be the
property of the debtor for the reason that it has become the property of the
creditor, in like manner as the domination of a thing sold is transferred to the
purchaser and ceases to belong to the vendor from the moment of the
delivery thereof, as a result of the sale." (Meyers vs. Thein, 15 Phil., 303, 303309; see also Bachrach vs. Mantel, 25 Phil., 410; In re Du Tec Chuan, 34 Phil.,
488, 490.) 1awph!l.net
The chattel mortgage in question was registered in the registry of deeds on
the 26th day of December, 1912. The forest charges sought to be collected
by the defendant were found to be due from Pujalte and Co. on the 13th day
of July, 1916, and on that date the property covered by said chattel mortgage
was seized by the defendant to enforce the payment of said forest charges. It
is clear from these facts and from the legal provisions and jurisprudence
above quoted that the plaintiff-mortgagee, and not Pujalte and Co., the
mortgagor, was, and had been for more than three years, the legal owner of
the property in question at the time the same was seized by the defendant.
And even granting, without deciding, that the forest charges are a tax on
business or occupation within the meaning of section 149 of Act No. 2339
(sec. 1588, Act No. 2711), yet we are of the opinion and so decide that the
mere fact that said property was used in the business of Pujalte and Co. could

not and did not make such property liable for the payment of taxes due from
said company, said property belonging as it did to an innocent third party.
"The property used in the business or occupation," referred to in said section
149, can only mean property belonging to the owner of the business or
occupation. Any other construction would be unwarranted and unjust.
For the foregoing reasons the judgment appealed from is hereby revoked, and
it is hereby ordered and decreed that a judgment be entered in favor of the
plaintiff and against the defendant, ordering the latter to refund to the former
the sum of P2,159.79, with interest thereon at the legal rate from the 13th
day of July, 1916, until paid, and without any finding as to costs. So ordered.
30. THE UNITED STATES, plaintiff-appellee,
vs.
CALIXTO SURLA, defendant-appellant.
Aurelio Pineda and Pedro Abad Santos, for appellant.
Acting Attorney-General Harvey, for appellee.
MORELAND, J.:
This is an appeal from a judgment of the Court of First Instance of the
Province of Pampanga, the Ho. Julio Llorente presiding, convicting the
accused of a violation of section 57 of Act No. 1189 and sentencing him to
one year in prison, to the payment of the costs of the action, and confiscating
in favor of the Insular Government the cigarettes sold in violation of the
Internal Revenue Law, the factory, the land upon which it stands, the
machinery, fixtures, and all other property located therein, and ordering the
disposition of the goods and the rendition of an account of the proceeds of
the same in the manner provided by law.
It is alleged in this case that between the 29th of December, 1908, and the
11th of July, 1909, Calixto Surla, The defendant in this case, being engaged in
the manufacture of cigarettes, and being duly licensed hereto by the Bureau
of Internal Revenue of the Insular Government, took from said factory was
situated 42,000 cigarettes which were properly subject to the tax imposed by
section 101 of the Internal Revenue Law [1189] aforesaid without paying the
revenue tax thereon. It is also charged in the information that this was the
second offense which the accused had committed, he having been fined for a
similar act on the 20th of March, 1908.
The shortage of 42,000 cigarettes is not denied. The difference between the
prosecution and the defense relates simply to the reason for such shortage,
the prosecution alleging that the shortage was due, as above stated, to the
secret and unlawful removal of said cigarettes from the factory by the
accused for the purpose of avoiding the payment of the tax thereon, the
accused asserting that the shortage was due, first, to the consumption of a
large number of cigarettes by the operatives in the factory, upon which there
is no tax, and, second, to the mistakes made by Eulogio Manalang, the
bookkeeper, in entering on the books the number of cigarettes daily

manufactured and the number taken from the warehouse and sold.
We are convinced that the following findings by the learned trial court are
fully sustained by the evidence:
That the accused is a manufacturer of cigarettes and is the owner of the
factory A5255, situated in the pueblo of Angeles, Province of Pampanga,
P. I., the license having been issued in the name of said Calixto Surla; that on
the 9th day of July, 1909, Roullven and Moran, internal-revenue agents,
visited the said factory for the purpose of inspecting it; that it appeared,
according to the statement of Eulogio Manalang, Surla's superintendent, that
Surla had possession of the key to the storehouse, and he being absent, the
revenue agents were not able at that time to inspect the warehouse. They
were under the necessity of waiting until they could obtain the key. Eulogio
Manalang went to get the key but soon returned stating that Surla was
sleeping and that he did not dare awaken him. By reason, however, of the
insistence of the agents that they would enter the storehouse even though
they did so by force, Manalang called Calixto Surla, who finally appeared and
opened the storehouse. In the presence of the accused the agents proceeded
to take an inventory of the cigarettes found therein and also of the books of
the factory. They found a shortage of 42,000 cigarettes. Surla admitted such
shortage but stated that he did not know to what to attribute the shortage
because ever since his first conviction he had always carried the key to the
storehouse himself. He further stated that the shortage must be due to the
mistakes of his superintendent, Eulogio Manalang. The agents then
immediately visited the different stores in Angeles and found ten packages of
cigarettes from the factory of Calixto Surla upon which the package number
had been duplicated. Nine of these pack ages were present in evidence. On
the 12th of July, 1909, the said internal-revenue agents, accompanied by Mr.
Armstrong, another agent, returned to the factory and made an inventory of
the materials there, finding there also a shortage of 693 kilos and 740 grams.
On this occasion Eulogio Manalang stated to the agent Armstrong that he had
made a mistake in the official books of the daily production of the factory and
exhibited to said agent a private book which contained as he stated correct
notes of the number of cigarettes produced daily by the factory. On
comparing the entries in the private book with those in the official registry,
great differences were found between them. They agregate, according to the
testimony of the agent, 52,500 cigarettes. If the differences in the entries on
the two books had been made to appear in the official book, instead of a
deficit of 42,000 cigarettes there would have been an excess of 10,500
cigarettes. On this occasion the accused again stated to agent Moran that
from the day he had been convicted before he had never confided the key of
the storehouse to anybody else. Agents Roullven and Moran who visited the
factory frequently during working hours always found the doors of the
storehouse locked with a padlock, and stated that Calixto Surla was always
the one who opened the door for them.
After a further discussion of the testimony presented by the accused the
court said:

In view of all the facts presented in this case the court has arrived at the
conclusion that the accused Calixto Surla maliciously and criminally
transferred or consented to the transfer from his factory of the 42,000
cigarettes in question without paying the tax imposed by law on or before the
moment of such transfer, and it appearing that the accused, according to
Exhibit A, was convicted on the 20th of March, 1908, for a similar infraction of
the law, he must by virtue of section 56 of the Internal Revenue Law be
punished as a second offender.
A careful consideration of the record in the cause leads us to agree with the
conclusion reached by the learned trial court. The explanation of the shortage
made by Eulogio Manalang varied with the time when it was made. The
explanations of the accused himself in relation to the same matter are
equally unsatisfactory and unreliable. The evidence of the prosecution is clear
and definite. It leaves substantially nothing to inference. It appears from the
whole case that the court neglected to take into consideration nothing which
would benefit the accused. No important or influential fact or circumstance
was left untouched, each being given the weight and significance which it
legally deserved.
The trial court also found that the accused had theretofore been found guilty
of a violation of section 56 of Act No. 1189. This fining is clearly sustained by
the proofs and the facts upon which it is based are not denied by the
defendant.
We are, therefore, in accord with the finding of the trial court upon the facts.
The accused asserts that the Act, in declaring forfeited the factory and all of
it s contents that the judgment of the trial court is fatally defective in that it
fails to state how the property forfeited shall be disposed of and its proceeds
a accounted for.
Over the question involving the constitutionally of the aforesaid provision,
little needs to be said. That the Act is constitutional is not open to question.
(U. S. vs. Stowell, 133 U. S., 1.)
As to the form of the judgment of confiscation, it is sufficient to say that it is
entirely immaterial to the defendant, legally speaking, how the property,
having been forfeited, belongs absolutely to the Government, and the
proceeds arising from the disposal thereof also belong to the Government. (U.
S. vs. Stowell, 133 U. S., 1, above.) Sections 42 [1189] invoked by the
accused for the purpose of demonstrating how the forfeited property should
be disposed of, and its proceeds divided, he asserting that under the terms
thereof he is entitled to have the balance returned to him after the liquidation
of the unpaid taxes and expenses of sale, is entirely inapplicable to forfeited
property. It relates solely to the sale of property distrained to pay taxes of
delinquents and the disposition of the proceeds thereof. The title to such
property remains in the delinquent until the sale. It is never forfeited and is
never in the government unless it becomes a purchaser at the sale. The
property being his he is entitled to whatever surplus there may be after the

payment of the taxes and all the expenses of the distraint and sale. In case of
a forfeiture of property for crime, however, the title and ownership of the
convict are absolutely divested and pass to the Government. He ceases to
have any interest therein. As a result he can have no interest in its proceeds.
Section 50 [1189] prescribes the disposition of the property in such cases.
We do not hare decide just when the title and ownership pass from the
convict to the Government in case of forfeiturewhether at the time the
criminal act is committed, or when the government takes possession under
the forfeiture, or when the judgment of confiscation is entered. It is
unnecessary to a decision of this case.