COMMISSIONER OF INTERNAL tickets with compromise penalty of

REVENUE, petitioner, vs. FIRST EXPRESS PA P8,500. ICHcTD

WNSHOP COMPANY, INC., respondent.
Respondent received the assessment notices on 3
January 2002. On 1 February 2002, respondent filed its
written protest on the above assessments. Since
CARPIO, J p:
petitioner did not act on the protest during the 180-day
period, 8 respondent filed a petition before the CTA on 28
The Case
August 2002. 9
The Commissioner of Internal Revenue (petitioner)
Respondent contended that petitioner did not
filed this Petition for Review 1 to reverse the Court of Tax
consider the supporting documents on the interest
Appeals' Decision 2 dated 24 March 2006 in the
expenses and donations which resulted in the deficiency
consolidated cases of C.T.A. EB Nos. 60 and 62. In the
income tax. 10 Respondent maintained that pawnshops
assailed decision, the Court of Tax Appeals (CTA) En Banc
are not lending investors whose services are subject to
partially reconsidered the CTA First Division's
VAT, hence it was not liable for deficiency
Decision 3 dated 24 September 2004.
VAT. 11 Respondent also alleged that no deficiency DST
The Facts was due because Section 180 12 of the National Internal
Revenue Code (Tax Code)does not cover any document or
On 28 December 2001, petitioner, through Acting
transaction which relates to respondent. Respondent also
Regional Director Ruperto P. Somera of Revenue Region 6
argued that the issuance of a pawn ticket did not
Manila, issued the following assessment notices
constitute a pledge under Section 195 13 of the Tax
against First Express Pawnshop Company, Inc.
Code.14
(respondent):
In its Answer filed before the CTA, petitioner
a. Assessment No. 31-1-98 4 for deficiency
alleged that the assessment was valid and correct and
income tax of P20,712.58 with
the taxpayer had the burden of proof to impugn its validity
compromise penalty of P3,000;
or correctness. Petitioner maintained that respondent is
b. Assessment No. 31-14-000053-98 5 for subject to 10% VAT based on its gross receipts pursuant
deficiency value-added tax (VAT) of to Republic Act No. 7716, or the Expanded Value-Added
P601,220.18 with compromise penalty Tax Law (EVAT). Petitioner also cited BIR Ruling No. 221-
of P16,000; 91 which provides that pawnshop tickets are subject to
DST. 15
c. Assessment No. 31-14-000053-98 6 for
deficiency documentary stamp tax On 1 July 2003, respondent paid P27,744.88 as
(DST) of P12,328.45 on deposit on deficiency income tax inclusive of interest. 16
subscription with compromise penalty
After trial on the merits, the CTA First Division
of P2,000; and
ruled, thus:
d. Assessment No. 31-1-000053-98 7 for
IN VIEW OF ALL THE FOREGOING, the instant
deficiency DST of P62,128.87 on pawn
petition is hereby PARTIALLY GRANTED.
 Assessment No. 31-1-000053-98 for However, the CTA En Banc found that respondent's
deficiency documentary stamp tax in the deposit on subscription was not subject to DST. 19
amount of Sixty-Two Thousand One Hundred
Aggrieved by the CTA En Banc's Decision which
Twenty-Eight Pesos and 87/100 (P62,128.87)
ruled that respondent's deposit on subscription was not
and Assessment No. 31-14-000053-98 for
subject to DST, petitioner elevated the case before this
deficiency documentary stamp tax on
Court.
deposits on subscription in the amount of
Twelve Thousand Three Hundred Twenty- The Ruling of the Court of Tax Appeals
Eight Pesos and 45/100 (P12,328.45)
On the taxability of deposit on subscription, the
are CANCELLED and SET ASIDE. However,
CTA, citing First Southern Philippines Enterprises, Inc. v.
Assessment No. 31-14-000053-98 is
Commissioner of Internal Revenue , 20 pointed out that
hereby AFFIRMED except the imposition of
deposit on subscription is not subject to DST in the
compromise penalty in the absence of
absence of proof that an equivalent amount of shares was
showing that petitioner consented
subscribed or issued in consideration for the deposit.
thereto (UST vs. Collector, 104 SCRA 1062;
Expressed otherwise, deposit on stock subscription is not
Exquisite Pawnshop Jewelry, Inc. vs. Jaime
subject to DST if: (1) there is no agreement to subscribe;
B. Santiago, et al., supra).
(2) there are no shares issued or any additional
Accordingly petitioner is ORDERED to subscription in the restructuring plan; and (3) there is no
PAY the deficiency value added tax in the proof that the issued shares can be considered as issued
amount of Six Hundred One Thousand Two certificates of stock. 21
Hundred Twenty Pesos and 18/100
The CTA ruled that Section 175 22 of the Tax
(P601,220.18) inclusive of deficiency interest
Code contemplates a subscription agreement. The CTA
for the year 1998. In addition, petitioner
explained that there can be subscription only with
is ORDERED to PAY 25% surcharge and 20%
reference to shares of stock which have been unissued, in
delinquency interest per annum from
the following cases: (a) the original issuance from
February 12, 2002 until fully paid pursuant to
authorized capital stock at the time of incorporation; (b)
Sections 248 and 249 of the 1997 Tax
the opening, during the life of the corporation, of the
Code. TSIDaH
portion of the original authorized capital stock previously
SO ORDERED. 17 (Boldfacing in the original) unissued; or (c) the increase of authorized capital stock
achieved through a formal amendment of the articles of
Both parties filed their Motions for
incorporation and registration of the articles of
Reconsideration which were denied by the
incorporation with the Securities and Exchange
CTA First Division for lack of merit. Thereafter, both
Commission. 23
parties filed their respective Petitions for Review under
Section 11 of Republic Act No. 9282 (RA 9282) with the The CTA held that in this case, there was no
CTA En Banc. 18 subscription or any contract for the acquisition of
unissued stock for P800,000 in the taxable year assessed.
On 24 March 2006, the CTA En Banc promulgated a
The General Information Sheet (GIS) of respondent
Decision affirming respondent's liability to pay the VAT
showed only a capital structure of P500,000 as
and ordering it to pay DST on its pawnshop tickets.
Subscribed Capital Stock and P250,000 as Paid-up Capital
Stock and did not include the assessed amount. Mere
reliance on the presumption that the assessment was
correct and done in good faith was unavailing vis-a-vis the
evidence presented by respondent. Thus, the CTA ruled
that the assessment for deficiency DST on deposit on
subscription has not become final. 24
The Issue
Petitioner submits this sole issue for our
consideration: whether the CTA erred on a question of law
in disregarding the rule on finality of assessments
prescribed under Section 228 of theTax Code.Corollarily,
petitioner raises the issue on whether respondent is liable
to pay P12,328.45 as DST on deposit on subscription of
capital stock. CASIEa
The Ruling of the Court
Petitioner contends that the CTA erred in
disregarding the rule on the finality of assessments
prescribed under Section 228 of the Tax
Code.25 Petitioner asserts that even if respondent filed a
protest, it did not offer evidence to prove its claim that
the deposit on subscription was an "advance" made by
respondent's stockholders. 26 Petitioner alleges that
respondent's failure to submit supporting documents
within 60 days from the filing of its protest as required
under Section 228 of the Tax Code caused the
assessment of P12,328.45 for deposit on subscription to
become final and unassailable. 27
Petitioner alleges that revenue officers are
afforded the presumption of regularity in the performance
of their official functions, since they have the distinct
opportunity, aside from competence, to peruse records of
the assessments. Petitioner invokes the principle that by
reason of the expertise of administrative agencies over
matters falling under their jurisdiction, they are in a better
position to pass judgment thereon; thus, their findings of
fact are generally accorded great respect, if not finality,
by the courts. Hence, without the supporting documents
to establish the non-inclusion from DST of the deposit on
subscription, petitioner's assessment pursuant to Section
228 of the Tax Code had become final and
unassailable. 28
Respondent, citing Standard Chartered Bank-
Philippine Branches v. Commissioner of Internal
Revenue, 29 asserts that the submission of all the
relevant supporting documents within the 60-day period
from filing of the protest is directory.
Respondent claims that petitioner requested for
additional documents in petitioner's letter dated 12 March
2002, to wit: (1) loan agreement from lender banks; (2)
official receipts of interest payments issued to
respondent; (3) documentary evidence to substantiate
donations claimed; and (4) proof of payment of DST on
subscription. 30 It must be noted that the only document
requested in connection with respondent's DST
assessment on deposit on subscription is proof of DST
payment. However, respondent could not produce any
proof of DST payment because it was not required to pay
the same under the law considering that the deposit on
subscription was an advance made by its stockholders for
future subscription, and no stock certificates were
issued. 31 Respondent insists that petitioner could have
issued a subpoena requiring respondent to submit other
documents to determine if the latter is liable for DST on
deposit on subscription pursuant to Section 5 (c) of
the Tax Code.32
Respondent argues that deposit on future
subscription is not subject to DST under Section 175 of
the Tax Code.Respondent explains:
It must be noted that deposits on
subscription represent advances made by the
stockholders and are in the nature of
liabilities for which stocks may be issued in
the future. Absent any expressagreement
between the stockholders and petitioner to
convert said advances/deposits to capital
stock, either through a subscription
 agreement or any other document, these
deposits remain as liabilities owed by
respondent to its stockholders. For these
deposits to be subject to DST, it is necessary
that a conversion/subscription agreement be
made by First Express and its stockholders.
Absent such conversion, no DST can be
imposed on said deposits under Section 175
of the Tax Code. 33 (Underscoring in the
original) cEITCA
Respondent contends that by presenting its GIS
and financial statements, it had already sufficiently
proved that the amount sought to be taxed is deposit on
future subscription, which is not subject to
DST. 34 Respondent claims that it cannot be required to
submit proof of DST payment on subscription because
such payment is non-existent. Thus, the burden of proving
that there was an agreement to subscribe and that
certificates of stock were issued for the deposit on
subscription rests on petitioner and his examiners.
Respondent states that absent any proof, the deficiency
assessment has no basis and should be cancelled. 35
On the Taxability of Deposit on Stock Subscription
DST is a tax on documents, instruments, loan
agreements, and papers evidencing the acceptance,
assignment, sale or transfer of an obligation, right or
property incident thereto. DST is actually an excise tax
because it is imposed on the transaction rather than on
the document. 36 DST is also levied on the exercise by
persons of certain privileges conferred by law for the
creation, revision, or termination of specific legal
relationships through the execution of specific
instruments. 37 The Tax Code provisions on DST relating
to shares or certificates of stock state:
Section 175. Stamp Tax on Original Issue of
Shares of Stock. — On every original issue,
whether on organization, reorganization or
for any lawful purpose, of shares of stock by
any association, company or corporation,
there shall be collected a documentary
stamp tax of Two pesos (P2.00) on each Two
hundred pesos (P200), or fractional part
thereof, of the par value, of such shares of
stock:Provided, That in the case of the
original issue of shares of stock without par
value the amount of the documentary stamp
tax herein prescribed shall be based upon
the actual consideration for the issuance of
such shares of stock: Provided, further, That
in the case of stock dividends, on the actual
value represented by each share. 38
Section 176. Stamp Tax on Sales,
Agreements to Sell, Memoranda of Sales,
Deliveries or Transfer of Due-bills,
Certificates of Obligation, or Shares or
Certificates of Stock. — On all sales, or
agreements to sell, or memoranda of sales,
or deliveries, or transfer of due-bills,
certificates of obligation, or shares or
certificates of stock in any association,
company or corporation, or transfer of such
securities by assignment in blank, or by
delivery, or by any paper or agreement, or
memorandum or other evidences of transfer
or sale whether entitling the holder in any
manner to the benefit of such due-bills,
certificates of obligation or stock, or to
secure the future payment of money, or for
the future transfer of any due-bill, certificate
of obligation or stock, there shall be
collected a documentary stamp tax of One
peso and fifty centavos (P1.50) on each Two
hundred pesos (P200), or fractional part
thereof, of the par value of such due-bill,
certificate of obligation or
stock:Provided, That only one tax shall be
collected on each sale or transfer of stock or
securities from one person to another,
 regardless of whether or not a certificate of
stock or obligation is issued, indorsed, or
delivered in pursuance of such sale or
transfer: And provided, further, That in the
case of stock without par value the amount
of the documentary stamp tax herein
prescribed shall be equivalent to twenty-five
percent (25%) of the documentary stamp tax
paid upon the original issue of said stock. 39
In Section 175 of the Tax Code,DST is imposed on
the original issue of shares of stock. The DST, as an
excise tax, is levied upon the privilege, the opportunity
and the facility of issuing shares of stock.
In Commissioner of Internal Revenue v. Construction
Resources of Asia, Inc., 40 this Court explained that the
DST attaches upon acceptance of the stockholder's
subscription in the corporation's capital stock regardless
of actual or constructive delivery of the certificates of
stock. Citing Philippine Consolidated Coconut Ind., Inc. v.
Collector of Internal Revenue, 41 the Court held: aHTDAc
The documentary stamp tax under this
provision of the law may be levied only once,
that is upon the original issue of the
certificate. The crucial point therefore, in the
case before Us is the proper interpretation of
the word 'issue'. In other words, when is the
certificate of stock deemed 'issued' for the
purpose of imposing the documentary stamp
tax? Is it at the time the certificates of stock
are printed, at the time they are filled up (in
whose name the stocks represented in the
certificate appear as certified by the proper
officials of the corporation), at the time they
are released by the corporation, or at the
time they are in the possession (actual or
constructive) of the stockholders owning
them?
xxx xxx xxx
Ordinarily, when a corporation issues a
certificate of stock (representing the
ownership of stocks in the corporation to
fully paid subscription) the certificate of
stock can be utilized for the exercise of the
attributes of ownership over the stocks
mentioned on its face. The stocks can be
alienated; the dividends or fruits derived
therefrom can be enjoyed, and they can be
conveyed, pledged or encumbered. The
certificate as issued by the corporation,
irrespective of whether or not it is in the
actual or constructive possession of the
stockholder, is considered issued because it
is with value and hence the documentary
stamp tax must be paid as imposed by
Section 212 of the National Internal Revenue
Code, as amended.
In Section 176 of the Tax Code,DST is imposed on
the sales, agreements to sell, memoranda of sales,
deliveries or transfer of shares or certificates of stock in
any association, company, or corporation, or transfer of
such securities by assignment in blank, or by delivery, or
by any paper or agreement, or memorandum or other
evidences of transfer or sale whether entitling the holder
in any manner to the benefit of such certificates of stock,
or to secure the future payment of money, or for the future
transfer of certificates of stock. In Compagnie Financiere
Sucres et Denrees v. Commissioner of Internal Revenue ,
this Court held that under Section 176 of the Tax
Code,sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are
subject to documentary stamp tax. 42
Revenue Memorandum Order No. 08-98 (RMO 08-
98) provides the guidelines on the corporate stock
documentary stamp tax program. RMO 08-98 states that:
1. All existing corporations shall file the
Corporation Stock DST Declaration,
and the DST Return, if
 applicable when DST is still due on Paid-up Capital Stock 250,000.00 250,000.00
the subscribed share issued by the
Deposit on Subscription 800,000.00
corporation, on or before the tenth
day of the month following publication Retained Earnings 62,820.34 209,607.20
of this Order. CSTDEH Net Income (858,498.38) (146,786.86)

xxx xxx xxx –––––––––––– ––––––––––––

TOTAL P254,321.96 P312,820.34
3. All existing corporations with
authorization for increased capital =========== ===========
stock shall file their Corporate Stock The GIS submitted to the Securities and Exchange
DST Declaration, together with the Commission on 31 March 1999 shows the following
DST Return, if applicable when DST is Capital Structure: 46
due on subscriptions made after the
authorization, on or before the tenth B. Financial Profile
day of the month following the date of
1. Capital Structure:
authorization. (Boldfacing supplied)
AUTHORIZED — P2,000,000.00
RMO 08-98, reiterating Revenue Memorandum
Circular No. 47-97 (RMC 47-97), also states that what is SUBSCRIBED — 500,000.00
being taxed is the privilege of issuing shares of stock, PAID-UP — 250,000.00
and, therefore, the taxes accrue at the time the shares
are issued. RMC 47-97 also defines issuance as the point These entries were explained by Miguel Rosario,
in which the stockholder acquires and may exercise Jr. (Rosario), respondent's external auditor, during the
attributes of ownership over the stocks. hearing before the CTA on 11 June 2003. Rosario testified
in this wise:
As pointed out by the CTA, Sections 175 and 176 of
the Tax Code contemplate a subscription agreement in Atty. Napiza
order for a taxpayer to be liable to pay the DST. A Q. Mr. Rosario, I refer you to the balance
subscription contract is defined as any contract for the sheet of First Express for the year
acquisition of unissued stocks in an existing corporation 1998 particularly the entry of deposit
or a corporation still to be formed. 43 A stock on subscription in the amount of P800
subscription is a contract by which the subscriber agrees thousand, will you please tell us what
to take a certain number of shares of the capital stock of is(sic) this entry represents? IcTCHD
a corporation, paying for the same or expressly or
impliedly promising to pay for the same. 44 Mr. Rosario Jr.

In this case, respondent's Stockholders' Equity A. This amount of P800 thousand represents
section of its Balance Sheet as of 31 December the case given by the stockholders to
1998 45 shows: the company but does not necessarily
made (sic) payment to subscribed
STOCKHOLDERS' EQUITY 1998 1997 portion.
Authorized Capital Stock P2,000,000.00 P2,000,000.00
Atty. Napiza
Q. What is (sic) that payment stands for? Atty. Napiza

Mr. Rosario Jr. Q. Are (sic) all those figures appear in the
balance sheet?
A. This payment stands as (sic) for the
deposit for future subscription. Mr. Rosario Jr.

Atty. Napiza A. The Paid Up Capital appeared here but the

Subscribed Portion was not stated.
Q. Would you know if First Express issued
(Boldfacing supplied)
corresponding shares pertinent to the
amount being deposited? Based on Rosario's testimony and respondent's
financial statements as of 1998, there was no agreement
Mr. Rosario Jr.
to subscribe to the unissued shares. Here, the deposit on
A. No. stock subscription refers to an amount of money received
by the corporation as a deposit with the possibility of
Atty. Napiza
applying the same as payment for the future issuance of
Q. What do you mean by no? Did they or they capital stock. 47 In Commissioner of Internal Revenue v.
did not? Construction Resources of Asia, Inc., 48 we held: CaTSEA

Mr. Rosario Jr. We are firmly convinced that the Government

stands to lose nothing in imposing the
A. They did not issue any shares because documentary stamp tax only on those stock
that is not the payment of certificates duly issued, or wherein the
subscription. That is just a mere stockholders can freely exercise the
deposit. attributes of ownership and with value at the
Atty. Napiza time they are originally issued. As regards
those certificates of stocks temporarily
Q. Would you know, Mr. Rosario, how much is subject to suspensive conditions they shall
the Subscribed Capital be liable for said tax only when released
of First Express Pawnshop? from said conditions, for then and only then
Mr. Rosario Jr. shall they truly acquire any practical value
for their owners. (Boldfacing supplied)
A. The Subscribed Capital
of First Express Pawnshop Company, Clearly, the deposit on stock subscription as
Inc. for the year 1998 is P500 reflected in respondent's Balance Sheet as of 1998 is not
thousand. a subscription agreement subject to the payment of DST.
There is no P800,000 worth of subscribed capital stock
Atty. Napiza that is reflected in respondent's GIS. The deposit on stock
Q. How about the Paid Up Capital? subscription is merely an amount of money received by a
corporation with a view of applying the same as payment
Mr. Rosario Jr. for additional issuance of shares in the future, an event
A. The Paid Up Capital is P250 thousand. which may or may not happen. The person making a
deposit on stock subscription does not have the standing
of a stockholder and he is not entitled to dividends, voting
rights or other prerogatives and attributes of a
stockholder. Hence, respondent is not liable for the
payment of DST on its deposit on subscription for the
reason that there is yet no subscription that creates
rights and obligations between the subscriber and the
corporation.
On the Finality of Assessment as Prescribed
under Section 228 of the Tax Code
Section 228 of the Tax Code provides:
SEC. 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 taxpayer shall be informed in writing of
the law and the facts on which the
assessment is made; otherwise, the
assessment shall be void. EAcTDH
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. (Boldfacing
supplied)
 Section 228 of the Tax Code 49 provides the
remedy to dispute a tax assessment within a certain
period of time. It states that an assessment may be
protested by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the
assessment by the taxpayer. Within 60 days from filing of
the protest, all relevant supporting documents shall have
been submitted; otherwise, the assessment shall become
final.
In this case, respondent received the tax
assessment on 3 January 2002 and it had until 2 February
2002 to submit its protest. On 1 February 2002,
respondent submitted its protest and attached the GIS
and Balance Sheet as of 31 December 1998. Respondent
explained that it received P800,000 as a deposit with the
possibility of applying the same as payment for the future
issuance of capital stock.
Within 60 days from the filing of protest or until 2
April 2002, respondent should submit relevant supporting
documents. Respondent, having submitted the supporting
documents together with its protest, did not present
additional documents anymore.
In a letter dated 12 March 2002, petitioner
requested respondent to present proof of payment of DST
on subscription. In a letter-reply, respondent stated that it
could not produce any proof of DST payment because it
was not required to pay DST under the law considering
that the deposit on subscription was an advance made by
its stockholders for future subscription, and no stock
certificates were issued.
Since respondent has not allegedly submitted any
relevant supporting documents, petitioner now claims
that the assessment has become final, executory and
demandable, hence, unappealable.
We reject petitioner's view that the assessment
has become final and unappealable. It cannot be said that
respondent failed to submit relevant supporting
documents that would render the assessment final
because when respondent submitted its protest,
respondent attached the GIS and Balance Sheet. Further,
petitioner cannot insist on the submission of proof of DST
payment because such document does not exist as
respondent claims that it is not liable to pay, and has not
paid, the DST on the deposit on subscription.
The term "relevant supporting documents" should
be understood as those documents necessary to support
the legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only inform the
taxpayer to submit additional documents. The BIR cannot
demand what type of supporting documents should be
submitted. Otherwise, a taxpayer will be at the mercy of
the BIR, which may require the production of documents
that a taxpayer cannot submit.
After respondent submitted its letter-reply stating
that it could not comply with the presentation of the proof
of DST payment, no reply was received from petitioner.
Section 228 states that if the protest is not acted
upon within 180 days from submission of documents, the
taxpayer adversely affected by the inaction may appeal to
the CTA within 30 days from the lapse of the 180-day
period. Respondent, having submitted its supporting
documents on the same day the protest was filed, had
until 31 July 2002 to wait for petitioner's reply to its
protest. On 28 August 2002 or within 30 days after the
lapse of the 180-day period counted from the filing of the
protest as the supporting documents were simultaneously
filed, respondent filed a petition before the CTA.
Respondent has complied with the requisites in
disputing an assessment pursuant to Section 228 of
the Tax Code.Hence, the tax assessment cannot be
considered as final, executory and demandable. Further,
respondent's deposit on subscription is not subject to the
payment of DST. Consequently, respondent is not liable to
pay the deficiency DST of P12,328.45. cTECHI
WHEREFORE, we DENY the petition.
We AFFIRM the Court of Tax Appeals' Decision dated 24
 March 2006 in the consolidated cases of C.T.A. EB Nos. 60
and 62.
|||
||| (Commissioner of Internal Revenue v. Pascor Realty &
Development Corp., G.R. No. 128315, [June 29, 1999], 368
PHIL 714-727)
FACTS
On March 1, 1995, the Commissioner of Internal
Revenue (CIR) filed a criminal complaint before the
Department of Justice against respondents alleging evasion
of taxes. Private respondents then filed a request for
reconsideration and reinvestigation. The CIR denied said
request on the ground that no formal assessment has been
issued. The matter was elevated to the Court of Tax Appeals
(CTA). The CIR moved to dismiss. The CTA denied said motion
to dismiss and held that the criminal complaint for tax
evasion was already an assessment. The Court of Appeals
affirmed the CTA's denial. Hence, this petition.
The revenue officers' affidavit attached to the criminal
complaint merely contained a computation of respondents'
tax liability. It did not state a demand or a period of payment.
It was addressed to the justice secretary, not to the
taxpayers. DHSCEc
As to the respondents' contention that the filing of a
criminal complaint must be preceded by an assessment, the
Court ruled that this was incorrect. Section 222 of the NLRC
especially states that in cases of failure to file a return such
as this case, proceedings in court may be commenced
without an assessment. A criminal complaint is instituted not
to demand payment, but to penalize the taxpayer for violation
of the Tax Code.
Issues:
Whether or not the criminal complaint for tax evasion
can be construed as an assessment.
Whether or not an assessment is necessary before
criminal charges for tax evasion may be instituted.
HELD
TAXATION; TAX; ASSESSMENT; CONSTRUED. — An
assessment must be sent to and received by a taxpayer, and
must demand payment of the taxes described therein within a
specific period. The issuance of an assessment is vital in
determining the period of limitation regarding its proper
issuance and the period within which to protest it.
Necessarily, the taxpayer must be certain that a specific
document constitutes an assessment. Otherwise, confusion
would arise regarding the period within which to make an
assessment or to protest the same, or whether interest and
penalty may accrue thereon. It should also be stressed that
the said document is a notice duly sent to the taxpayer.
Indeed, an assessment is deemed made only when the
collector of internal revenue releases, mails or sends such
notice to the taxpayer.
2. ID.; ID.; REVENUE OFFICER'S AFFIDAVIT WITHOUT
DEMAND OR PERIOD OF PAYMENT, NOT AN ASSESSMENT. —
In the present case, the revenue officers' Affidavit merely
contained a computation of respondents' tax liability. It did
not state a demand or a period for payment. Worse, it was
addressed to the Justice Secretary, not to the taxpayers. That
the BIR examiners' Joint Affidavit attached to the Criminal
Complaint contained some details of the tax liabilities of
private respondents does not ipso facto make it an
assessment. The purpose of the Joint Affidavit was merely to
support and substantiate the Criminal Complaint for tax
evasion. Clearly, it was not meant to be a notice of the tax
due and a demand to the private respondents for payment
thereof.
 3. ID.; ID.; FALSE OR FRAUDULENT RETURNS; Marcos II v. Court of Appeals, G.R. No. 120880, June 5, 1997,
PROCEEDINGS IN COURT MAY BE COMMENCED WITHOUT 339 PHIL 253-275
ASSESSMENT. — Section 222 of the NIRC specifically states
that in cases where a false or fraudulent return is submitted
or in cases of failure to file a return such as this case,
proceedings in court may be commenced without an FACTS
assessment. Furthermore, Section 205 of the same Code
clearly mandates that the civil and criminal aspects of the Ferdinand R. Marcos II assailed the decision of the Court of
case may be pursued simultaneously. Appeals declaring the deficiency income tax assessments
and estate tax assessments upon the estate and properties
4. ID.; ID.; ID.; ID.; PROTEST WILL NOT STOP OR of his late father despite the pendency of the probate
SUSPEND CRIMINAL ACTION. — In Ungab v. Cusi, petitioner proceedings of the will of the late President. On the other
therein sought the dismissal of the criminal Complaints for hand, the BIR argued that the State’s authority to collect
being premature, since his protest to the CTA had not yet internal revenue taxes is paramount.
been resolved. The Court held that such protests could not
stop or suspend the criminal action which was independent of Petitioner further argues that "the numerous pending court
the resolution of the protest in the CTA. This was because the cases questioning the late president's ownership or interests
commissioner of internal revenue had, in such tax evasion in several properties (both real and personal) make the total
cases, discretion on whether to issue an assessment or to file value of his estate, and the consequent estate tax due,
a criminal case against the taxpayer or to do both. incapable of exact pecuniary determination at this time.
Thus, respondents' assessment of the estate tax and their
5. ID.; ID.; ASSESSMENT DISTINGUISHED FROM FILING
issuance of the Notices of Levy and sale are premature and
OF COMPLAINT. — The issuance of an assessment must be
oppressive." He points out the pendency of Sandiganbayan
distinguished from the filing of a complaint. Before an
Civil Case Nos. 0001-0034 and 0141, which were filed by the
assessment is issued, there is, by practice, a pre-assessment
government to question the ownership and interests of the
notice sent to the taxpayer. The taxpayer is then given a
late President in real and personal properties located within
chance to submit position papers and documents to prove
and outside the Philippines. Petitioner, however, omits to
that the assessment is unwarranted. If the commissioner is
allege whether the properties levied upon by the BIR in the
unsatisfied, an assessment signed by him or her is then sent
collection of estate taxes upon the decedent's estate were
to the taxpayer informing the latter specifically and clearly
among those involved in the said cases pending in the
that an assessment has been made against him or her. In
Sandiganbayan. Indeed, the court is at a loss as to how these
contrast, the criminal charge need not go through all these.
cases are relevant to the matter at issue. The mere fact that
The criminal charge is filed directly with the DOJ. Thereafter,
the decedent has pending cases involving ill-gotten wealth
the taxpayer is notified that a criminal case had been filed
does not affect the enforcement of tax assessments over the
against him, not that the commissioner has issued an
properties indubitably included in his estate.
assessment. It must be stressed that a criminal complaint is
.
instituted not to demand payment, but to penalize the
taxpayer for violation of the Tax Code.

HELD
REMEDIAL LAW; EVIDENCE; PRESUMPTION THAT OFFICIAL
DUTIES ARE REGULARLY PERFORMED; APPLIED IN CASE AT
BAR. — It is not the Department of Justice which is the
government agency tasked to determine the amount of taxes
due upon the subject estate, but the Bureau of Internal
Revenue, whose determinations and assessments are
presumed correct and made in good faith. The taxpayer has
the duty of proving otherwise. In the absence of proof of any
irregularities in the performance of official duties, an
assessment will not be disturbed. Even an assessment based
on estimates is prima facie valid and lawful where it does not
appear to have been arrived at arbitrarily or capriciously. The
burden of proof is upon the complaining party to show clearly
that the assessment is erroneous. Failure to present proof of
error in the assessment will justify the judicial affirmance of
said assessment. In this instance, petitioner has not pointed
out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment,
which bears a trace of falsity. Indeed the petitioner's attack
on the assessment bears mainly on the alleged improbable
and unconscionable amount of the taxes charged. But mere
rhetoric cannot supply the basis for the charge of impropriety
of the assessment made.
Meralco Securities Corp. v. Savellano, G.R. No. L-36181, L-
36748, October 23, 1982], 203 PHIL 173-184
FACTS
Juan Maniago, who after his death was substituted in these
proceedings by his wife and children, submitted to the
Commissioner of Internal Revenue confidential information
against the MeralcoSecurities Corporation for tax evasion for
having paid income tax only on 25 percent of the dividends it
received from the Manila Electric Company for the years
1962-1966, thereby allegedly shortchanging the government
of income tax due from 75 percent of said dividends. The
Commissioner of Internal Revenue caused the investigation of
the denunciation after which he found and held that no
deficiency corporate income tax was due from
the Meralco Securities Corporation on the dividends it
received from the Manila Electric Company. Consequently,
the Commissioner denied the claim for informer's reward.
This action of the Commissioner was sustained by the
Secretary of Finance. On mandamus, respondent judge,
however, rendered judgment granting the writ prayed for and
ordered the Commissioner of Internal Revenue to assess and
collect from the Meralco Securities Corporation the sum of
P51,840,612.00 as deficiency corporate income tax for the
period 1962 to 1969 plus interest and surcharges due thereon
and to pay 25 percent thereof to Maniago as informer's
reward. Hence these petitions.
The Supreme Court granted the petitions and reversed and
set aside the questioned decision and order of respondent
judge, holding that (a) the decision or ruling of the
Commissioner of Internal Revenue that no tax is due or
collectible is a valid exercise of discretion in the performance
of official duty and cannot be controlled much less reversed
by mandamus; (b) considering that respondent judge may not
order by mandamus the Commissioner to issue the
assessment against Meralco Securities Corporation when no
such assessment has been found to be due, no deficiency
taxes may therefore be assessed and collected against the
said corporation; and (c) since no taxes are to be collected,
no informer's reward is due to private respondents as the
informer's heirs.
HELD
ADMINISTRATIVE LAW; COMMISSIONER OF INTERNAL
REVENUE; EXCLUSIVE APPELLATE JURISDICTION OF COURT
OF TAX APPEALS OVER DECISIONS THEREOF. — Section 7
of Republic Act No. 1125, enacted on June 16, 1954, granted
to the Court of Tax Appeals exclusive appellate jurisdiction to
review by appeal, among others, decisions of the
Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or
other law or part of law administered by the Bureau of
Internal Revenue. The law transferred to the Court of Appeals
jurisdiction over all cases involving said assessments
previously cognizable by courts of first instance, and even
those already pending in said courts. (Ledesma vs. Court of
Tax Appeals. 102 Phil. 931.)
2. ID.; ID.; ID.; CASE AT BAR. — The question of whether or not
to impose a deficiency tax assessment
on Meralco Securities Corporation undoubtedly comes within
the purview of the words "disputed assessments" or "other
matters arising under the National Internal Revenue
Code . . ." Hence, the Court of First Instance has no
jurisdiction to take cognizance of the case because the
subject matter thereof clearly falls within the scope of cases
now exclusively within the jurisdiction of the Court of Tax
Appeals. cdasia
3. ID.; ID.; ID.; FAILURE TO TAKE AN APPEAL THEREIN BARS
REVIEW BY THE COURTS; CASE AT BAR. — Even assuming
that the right granted the taxpayers affected to question and
appeal disputed assessments, under Section 7 of Republic
Act No. 1125, may be availed of by strangers or informers like
the late Maniago, the most that he could have done was to
appeal to the Court of Tax Appeals the ruling of petitioner
Commissioner of Internal Revenue within thirty (30) days from
receipt thereof pursuant to Section 11 of Republic Act No.
1125. He failed to take such an appeal to the tax court. The
ruling is clearly final and no longer subject to review by the
courts.
|
(Republic v. Court of Tax Appeals, G.R. No. 139050, [October 2,
2001], 418 PHIL 758-767)
FACTS
Due to the erroneous naming of the consignee in
the bill of lading of a shipment of bales of textile cloth,
the Bureau of Customs denied the release of the goods,
finding fraud on the part of private respondent AGFHA,
Inc., the true consignee. Private respondents, however,
maintained that there was only an honest mistake and not
an intentional wrongful declaration by the shipper to
evade payment of any tax due. The Collector of
Customs, Court of Tax Appeals and the Court of Appeals
unanimously concluded that no fraud had been committed
by the private respondent in the importation of the bales
of cloth.
On appeal, the Supreme Court affirmed the
decision of the Court of Appeals, ruling: that findings of
the appellate court are generally binding on appeal; that
they carry even more weight when they are consistent
with that of the trial court; that the factual determination
of the Court of Tax Appeals, when supported by
substantial evidence as in this case, will not be reversed
on appeal; and that to justify forfeiture, actual fraud with
a clear purpose of avoiding the tax must be proved.
HELD
TAXATION; TARIFF AND CUSTOMS CODE; FORFEITURE OF
GOODS; FRAUD COMMITTED MUST BE ACTUAL AND WITH
INTENT TO AVOID THE TAX; CASE AT BAR. — Fraud must be
proved to justify forfeiture. It must be actual, amounting to
intentional wrong-doing with the clear purpose of avoiding the
tax. Forfeiture is not favored in law nor in equity. Mere
negligence is not equivalent to the fraud contemplated by
law. What is here involved is an honest mistake, not even
directly attributable to private respondent, which will not
deprive the government of its right to collect the proper tax.
The conclusion of the appellate court, being consistent with
the evidence on record and not contrary to law and
jurisprudence, hardly can be overturned by this Court.|||
Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23,
1974], 157 PHIL 510-536
FACTS
Petitioner, as administrator of the estate of the deceased,
Matias H. Aznar, seeks a review and nullification of the
decision of the Court of Tax Appeals ordering the petitioner to
pay the government the sum of P227,691.77 representing
deficiency income taxes for the years 1946 to 1951. An
investigation by the Commissioner of Internal Revenue (CIR)
ascertained the assets and liabilities of the taxpayer and it
was discovered that from 1946 to 1951, his net worth had
increased every year, which increases in net worth was very
much more than the income reported during said years. The
findings clearly indicated that the taxpayer did not declare
correctly the income reported in his income tax returns for
the aforesaid years. Petitioner avers that according to the
NIRC, the right of the CIR to assess deficiency income taxes
of the late Aznar for the years 1946, 1947, and 1948 had
already prescribed at the time the assessment was made on
November 28, 1952; there being a five year limitation upon
assessment and collection from the filing of the returns.
Meanwhile, respondents believe that the prescription period
in the case at bar that is applicable is under Sec. 332 of the
NIRC which provides that: "(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". Petitioner argues said
provision does not apply because the taxpayer did not file
false and fraudulent returns with intent to evade tax.
Issue:
Whether or not the deceased Aznar filed false or fraudulent
income tax returns and subsequently, whether the action has
not prescribed.
Held:
The petition is without merit.
The respondent CTA concluded that the very "substantial
under declarations of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment of
tax." The ordinary period of prescription of 5 years within
which to assess tax liabilities under Sec. 331 of the NIRC
should be applicable to normal circumstances, but whenever
the government is placed at a disadvantage so as to prevent
its lawful agents from proper assessment of tax liabilities due
to false returns, fraudulent return intended to evade payment
of tax, or failure to file returns, the period of ten years from
the time of the discovery of the falsity, fraud or omission even
seems to be inadequate. There being undoubtedly false tax
returns in this case, We affirm the conclusion of the
respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC
should apply and that the period of ten years within which to
assess petitioner's tax liability had not expired at the time
said assessment was made.
CIR vs. BENIGNO TODA
FACTS
March 2, 1989: Cibeles Insurance Corp. (CIC) authorized
Benigno P. Toda Jr., President and Owner of 99.991% of
outstanding capital stock, to sell the Cibeles Building and 2
parcels of land which he sold to Rafael A. Altonaga on August
30, 1987 for P 100M who then sold it on the same day to Royal
Match Inc. for P 200M.
CIC included gains from sale of real property of P 75,728.021
in its annual income tax return while Altonaga paid a 5%
capital gains tax of P 10M
July 12, 1990: Toda sold his shares to Le Hun T. Choa for P
12.5M evidenced by a deed of ale of shares of stock which
provides that the buyer is free from all income tax liabilities
for 1987, 1988 and 1989.
Toda Jr. died 3 years later.
March 29, 1994: BIR sent an assessment notice and demand
letter to CIC for deficiency of income tax of P 79,099, 999.22
January 27, 1995: BIR sent the same to the estate of Toda Jr.
Estate filed a protest which was dismissed - fraudulent sale
to evade the 35% corporate income tax for the additional gain
of P 100M and that there is in fact only 1 sale.
Since it is falsity or fraud, the prescription period is 10 years
from the discovery of the falsity or fraud as prescribed under
Sec. 223 (a) of the NIRC
CTA: No proof of fraudulent transaction so the applicable
period is 3 years after the last day prescribed by law for filing
the return
CA: affirmed
CIR appealed
HELD
YES. Estate shall be liable since NOT yet prescribed.
Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. ax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on
the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the
taxpayer to further or additional civil or criminal liabilities.
Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less
than that known by the taxpayer to be legally due,
or the non-payment of tax when it is shown that a
tax is due
(2) an accompanying state of mind which is
described as being evil, in bad faith, willfull,or
deliberate and not accidental; and
(3) a course of action or failure of action which is
unlawful.
All are present in this case. The trial balance
showed that RMI debited P 40M as "other-inv.
Cibeles Building" that indicates RMI Paid CIC (NOT
Altonaga)
Fraud in its general sense, is deemed to comprise
anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another.
Here, it is obvious that the objective of the sale to
Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then
 subject the income to only 5% individual capital gains tax,
and not the 35% corporate income tax.
Generally, a sale of or exchange of assets will have an
income tax incidence only when it is consummated but
such tax incidence depends upon the substance of the
transaction rather them mere formalities.
Po v. Court of Tax Appeals, G.R. No. 81446, [August 18, 1988],
247 PHIL 487-495)
This is an appeal from the decision 1 of the
respondent Court of Tax Appeals, dated September 30,
1987, which affirmed an earlier decision of the
correspondent Commissioner of Internal Revenue in
assessment letters dated August 16, 1972 and September
26, 1972, which ordered the payment by the petitioner of
deficiency income tax for 1966 to 1970 in the amount of
P7,154,685.16 and deficiency specific tax for January 2,
1964 January 19, 1972, in the amount of
P5,595,003.68. LLpr
We adopt the respondent court's finding of facts,
to wit:
Petitioner is the widow of the late Mr. Po Bien
Sing who died on September 7, 1980. In the
taxable years 1964 to 1972, the
deceased Po Bien Sing was the sole
proprietor of Silver Cup Wine Factory (Silver
Cup for brevity), Talisay, Cebu. He was
engaged in the business of manufacture and
sale of compounded liquors, using alcohol
and other ingredients as raw materials.
On the basis of a denunciation against Silver
Cup allegedly "for tax evasion amounting to
millions of pesos" the then Secretary of
Finance Cesar Virata directed the Finance-
BIR-NBI team constituted under Finance
Department Order No. 13-70 dated February
19, 1971 (Exh. 3, pp. 532-533, Folder II, BIR
rec.) to conduct the corresponding
investigation in a memorandum dated April 2,
1971 (p. 528, Folder II, BIR rec.). Accordingly,
a letter and a subpoena duces tecum dated
April 13, 1971 and May 3, 1971, respectively,
were issued against Silver Cup requesting
production of the accounting records and
other related documents for the examination
of the team. (Exh. 11, pp. 525-526, Folder II,
BIR rec.). Mr. Po Bien Sing did not produce
his books of accounts as requested (Affidavit
dated December 24, 1971 of Mr. Generoso
Quinain of the team, p. 525, Folder II, BIR
rec.). This prompted the team with the
assistance of the PC Company, Cebu City, to
enter the factory bodega of Silver Cup and
seized different brands, consisting of 1,555
cases of alcohol products. (Exh. 22,
Memorandum Report of the Team dated June
5, 1971, pp. 491-492, Folder II, BIR rec.). The
inventory lists of the seized alcohol products
are contained in Volumes I, II, III, IV and V
(Exhibits 14, 15, 16, 17 and 18, respectively,
BIR rec.). On the basis of the team's report of
investigation, the respondent Commissioner
of Internal Revenue assessed Mr. Po Bien
Sing deficiency income tax for 1966 to 1970
in the amount of P7,154, 685.16 (Exh. 6 pp. 17-
19, Folder I, BIR rec.) and for deficiency
specific tax for January 2, 1964 to January
19, 1972 in the amount of P5,595,003.68 (Exh.
8, p. 107, Folder I, BIR rec.).
Petitioner protested the deficiency
assessments through letters dated October 9
and October 30, 1972 (Exhs. 7 and 9, pp. 27-
28; pp. 152-159, respectively, BIR rec.), which
protests were referred for reinvestigation.
The corresponding report dated August 13,
1981 (Exh. 10, pp. 355, Folder I, BIR rec.).
recommended the reiterating of the
assessments in view of the taxpayer's
persistent failure to present the books of
accounts for examination (Exh. 8, p. 107,
Folder I, BIR, rec.), compelling respondent to
issue warrants of distraint and levy on
September 10, 1981 (Exh. 11, p. 361, Folder I,
BIR rec.).
The warrants were admittedly received by
petitioner on October 14, 1981 (Par. IX,
Petition; admitted par. 2, Answer), which
petitioner deemed respondent's decision
denying her protest on the subject
assessments. Hence, petitioner's appeal on
October 29, 1981. 2
The petitioner assigns the following errors:
I (b) Failure to submit required returns,
RESPONDENT INTENTIONALLY ERRED IN
HOLDING THAT PETITIONER HAS NOT
PRESENTED ANY EVIDENCE OF RELEVANCE
AND COMPETENCE REQUIRED TO BASH THE
TROUBLING DISCREPANCIES AND SQUARE
THE ISSUE ILLEGALITY POSITED ON THE
SUBJECT ASSESSMENTS.
II
RESPONDENT COURT OF TAX APPEALS
PALPABLY ERRED IN DECIDING THE CASE IN
WAY CONTRARY TO THE DOCTRINES
ALREADY LAID DOWN BY THIS COURT.
III
RESPONDENT COURT OF TAX APPEALS
GRAVELY ERRED IN FINDING PO BIEN SING
TO HAVE INCURRED THE ALLEGED
DEFICIENCY TAXES IN QUESTION. 3
We affirm.
Settled is the rule that the factual findings of the
Court of Tax Appeals are binding upon this Honorable
Court and can only be disturbed on appeal if not
supported by substantial evidence.4
The assignments of errors boils down to a single
issue previously raised before the respondent Court, i.e.,
whether or not the assessments have valid and legal
bases. cdphil
The applicable legal provision is Section 16(b) of
the National Internal Revenue Code of 1977 as amended.
It reads:
Sec. 16. Power of the Commissioner of
Internal Revenue to make assessments. —
xxx xxx xxx
statements, reports and other documents. —
When a report required by law as a basis for
the assessment of any national internal
revenue tax shall not be forthcoming within
the time fixed by law or regulation or when
there is reason to believe that any such
report is false, incomplete, or erroneous, the
Commissioner of Internal Revenue shall
assess the proper tax on the best evidence
obtainable.
In case a person fails to file a required return
or other document at the time prescribed by
law, or willfully or otherwise, files a false or
fraudulent return or other documents, the
Commissioner shall make or amend the
return from his own knowledge and from his
own knowledge and from such information as
he can obtain through testimony or
 otherwise, which shall be prima facie correct
and sufficient for all legal purposes.
The law is specific and clear. The rule on the "best
evidence obtainable" applies when a tax report required
by law for the purpose of assessment is not available or
when the tax report is incomplete or fraudulent.
In the instant case, the persistent failure of the
late Po Bien Sing and the herein petitioner to present their
books of accounts for examination for the taxable years
involved left the Commissioner of Internal Revenue no
other legal option except to report to the power conferred
upon him under Section 16 of the Tax Code.
The tax figures arrived at by the Commissioner of
Internal Revenue are by no means arbitrary. We reproduce
the respondent court's findings, to wit:
As thus shown, on the basis of the quantity of
bottles of wines seized during the raid and
the sworn statements of former employees
Messrs. Nelson S. Po and Alfonso Po taken on
May 26, and 27, 1971, respectively, by the
investigating team in Cebu City (Exhs. 4 and
5, pp. 514-517, pp. 511-513, Folder II, BIR rec.),
it was ascertained that the Silver Cup for the
years 1964 to 1970, inclusive, utilized and
consumed in the manufacture of
compounded liquors and other products
20,105 drums of alcohol as raw materials
81,288,787 proof liters of alcohol. As
determined, the total specific tax liability of
the taxpayer for 1964 to 1971 amounted to
P5,593,003.68 ((Exh. E, petition, p. 10, CTA
rec.)
Likewise, the team found due from Silver Cup
deficiency income taxes for the years 1966 to
1970 inclusive in the aggregate sum of
P7,154,685.16, as follows:
1966 — P 207,636.24
1967 — 645,335.04
1968 — 1,683,588.48
1969 — 1,589,622.48
1970 — 3,028,502.92
——————
Total amount due
and collectible P7,154,685.16
The 50% surcharge has been imposed, pursuant
to Section 72 * of the Tax Code and tax 1/2% monthly
interest has likewise been imposed pursuant to the
provision of Section 51(d) ** of theTax Code (Exh. O,
petition). 5
The petitioner assails these assessments as
wrong. LibLex
In the case of Collector of Internal Revenue vs.
Reyes, 6 we ruled:
Where the taxpayer is appealing to the tax
court on the ground that the Collector's
assessment is erroneous, it is incumbent
upon him to prove there what is the correct
and just liability by a full and fair disclosure
of all pertinent data in his possession.
Otherwise, if the taxpayer confines himself
to proving that the tax assessment is wrong,
the tax court proceedings would settle
nothing, and the way would be left open for
subsequent assessments and appeals in
interminable succession.
Tax assessments by tax examiners are presumed
correct and made in good faith. The taxpayer has the duty
to prove otherwise. 7 In the absence of proof of any
irregularities in the performance of duties, an assessment
duly made by a Bureau of Internal Revenue examiner and
approved by his superior officers will not be
disturbed. 8 All presumptions are in favor of the
correctness of tax assessments. 9
 On the whole, we find that the fraudulent acts
detailed in the decision under review had not been
satisfactorily rebutted by the petitioner. There are indeed
clear indications on the part of the taxpayer to deprive
the Government of the taxes due. The Assistant Factory
Superintendent of Silver Cup, Nelson Po gave the
following testimony:
Annexes "A", "A-1" to "A-17" show that from
January to December 1970, Silver Cup has
used in production 189 drums of untaxed
distilled alcohol and 3,722 drums of untaxed
distilled alcohol. Can you tell us how could
this be possible with the presence of a
revenue inspector in the premises of Silver
Cup during working hours?
Actually, the revenue inspector or
storekeeper comes around once a week on
the average. Sometimes, when the
storekeeper is around in the morning
and Po Bien Sing wants to operate with
untaxed alcohol as raw materials, Po Bien
Sing tells the storekeeper to go home
because the factory is not going to operate
for the day. After the storekeeper leaves, the
illegal operation then begins. Untaxed
alcohol is brought in from Cebu Alcohol Plant
into the compound of Silver Cup sometimes
at about 6:00 A.M. or at 12:00 noon or in the
evening or even at mid-night when the
storekeeper is not around. When the
storekeeper comes, he sees nothing because
untaxed alcohol is brought directly to, and
stored at, a secret tunnel within the bodega
itself inside the compound of Silver Cup.
In the same vein, the factory personnel
manager testified that false entries were
entered in the official register book: thus,
A — As factory personnel manager and all-
around handy man of Po Bien Sing, owner of
Silver Cup, these labels were entrusted to
me to make the false entries in the official
register book of Silver Cup, which I did under
the direction of Po Bien Sing. (Sworn
statement, p. 512, Folder II, BIR
rec.) 10 (Emphasis ours)
The existence of fraud as found by the
respondents can not be lightly set aside absent
substantial evidence presented by the petitioner to
counteract such finding. The findings of fact of the
respondent Court of Tax Appeals are entitled to the
highest respect. 11 We do not find anything in the
questioned decision that should disturb this long-
established doctrine.
|||
CIR vs. HANTEX TRADING INC
FACTS
Hantex Trading Co is a company organized under the
Philippines. It is engaged in the sale of plastic products, it
imports synthetic resin and other chemicals for the
manufacture of its products. For this purpose, it is required to
file an Import Entry and Internal Revenue Declaration
(Consumption Entry) with the Bureau of Customs under
Section 1301 of the Tariff and Customs Code. Sometime in
October 1989, Lt. Vicente Amoto, Acting Chief of Counter-
Intelligence Division of the Economic Intelligence and
Investigation Bureau (EIIB), received confidential information
that the respondent had imported synthetic resin amounting
to P115,599,018.00 but only declared P45,538,694.57. Thus,
Hentex receive a subpoena to present its books of account
which it failed to do. The bureau cannot find any original
copies of the products Hentex imported since the originals
were eaten by termites. Thus, the Bureau relied on the
certified copies of the respondent’s Profit and Loss
Statement for 1987 and 1988 on file with the SEC, the
machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the
entries certified by Tomas and Danganan. The case was
submitted to the CTA which ruled that Hentex have tax
deficiency and is ordered to pay, per investigation of the
Bureau. The CA ruled that the income and sales tax
deficiency assessments issued by the petitioner were
unlawful and baseless since the copies of the import entries
relied upon in computing the deficiency tax of the respondent
were not duly authenticated by the public officer charged
with their custody, nor verified under oath by the EIIB and the
BIR investigators.
HELD
Issue: Whether or not the final assessment of the petitioner
against the respondent for deficiency income tax and sales
tax for the latter’s 1987 importation of resins and calcium
bicarbonate is based on competent evidence and the law.
Held: Central to the second issue is Section 16 of the NIRC of
1977, as amended which provides that the Commissioner of
Internal Revenue has the power to make assessments and
prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in
paragraph (b), which provides that “Failure to submit required
returns, statements, reports and other documents. – When a
report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within
the time fixed by law or regulation or when there is reason to
believe that any such report is false, incomplete or erroneous,
the Commissioner shall assess the proper tax on the best
evidence obtainable.” This provision applies when the
Commissioner of Internal Revenue undertakes to perform her
administrative duty of assessing the proper tax against a
taxpayer, to make a return in case of a taxpayer’s failure to
file one, or to amend a return already filed in the BIR. The
“best evidence” envisaged in Section 16 of the 1977 NIRC, as
amended, includes the corporate and accounting records of
the taxpayer who is the subject of the assessment process,
the accounting records of other taxpayers engaged in the
same line of business, including their gross profit and net
profit sales. Such evidence also includes data, record, paper,
document or any evidence gathered by internal revenue
officers from other taxpayers who had personal transactions
or from whom the subject taxpayer received any income; and
record, data, document and information secured from
government offices or agencies, such as the SEC, the Central
Bank of the Philippines, the Bureau of Customs, and the Tariff
and Customs Commission. However, the best evidence
obtainable under Section 16 of the 1977 NIRC, as amended,
does not include mere photocopies of records/documents.
The petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot anchor the
said assessment on mere machine copies of
records/documents. Mere photocopies of the Consumption
Entries have no probative weight if offered as proof of the
contents thereof. The reason for this is that such copies are
mere scraps of paper and are of no probative value as basis
for any deficiency income or business taxes against a
taxpayer.
Companies exempt from zero-rate tax
||| (Collector of Internal Revenue v. Reyes, G.R. No. L-8685,
[January 31, 1957], 100 PHIL 822-831)
FACTS
In a letter dated October 13, 1954, petitioner, the
Collector of Internal demanded from Aurelio P. Reyes
payment of his alleged deficiency income taxes,
surcharges, interest and penalties for the tax years 1946
to 1950 amounting to P641,470.04 as of October 31, 1954,
with the suggestion that the aforesaid tax liabilities be
paid either to the Bureau of Internal Revenue or the City
Treasurer of Manila. Together with said letter of
assessment, respondent Aurelio P. Reyes received a
warrant of distraint and levy on his properties in the event
that he should fail to pay the alleged deficiency income
taxes on or before October 31, 1954. Being informed by
the City Treasurer of Manila by a letter dated November 4,
1954, that said Treasurer was instructed by petitioner to
execute the warrant of distraint and levy in the amount
demanded is not settled on or before November 10, 1954,
Aurelio P. Reyes filed with the Court of Tax Appeals on
November 15, 1954, a petition for review of the Collector's
assessment of his alleged deficiency income tax
liabilities. This was followed by an urgent petition, filed on
November 16, 1954, to restrain the Collector of Internal
Revenue from executing the warrant of distraint and levy
on his properties, alleging among others, that the right of
respondent to collect by summary proceedings the tax
demanded had already prescribed in accordance with
section 51(d) of the National Internal Revenue Code, as
his income tax return for the tax years 1946 to 1950 had
been filed more than three years ago, the last one being
on April 27, 1951; that a distraint and levy on his
properties would work injustice or irreparable injury to
him and would tend to render any judgment of the Court in
the main case meaningless and ineffectual; that the
requisite of Section 11 of Republic Act No. 1125 for the
filing of a bond or deposit before a writ of distraint and
levy may be suspended is not applicable in this case; and
that the greater portion of his assets consists of real
properties located in Manila and shares of stock in the
Philippine Racing Club which are all encumbered in
various financial institutions and therefore there is no
possibility that he would abscond with his property or
remove or conceal the same.
The Collector of Internal Revenue opposed said
petition on November 19, 1954, on the ground that the
Court of Tax Appeals has no authority to restrain him from
executing the warrant of distraint and levy on the
properties of Aurelio P. Reyes in connection with the
collection of the latter's deficiency income taxes; that
said taxpayer has an adequate remedy in law by paying
first and then seek for the recovery thereof; and that
section 51(d) does not preclude distraint and levy. By
resolution of January 8, 1955, the Court of Tax Appeals
upheld the stand of Aurelio P. Reyes and ordered the
Collector of Internal Revenue to desist from collecting by
administrative method the taxes allegedly due from Reyes
pending the outcome of his appeal, without prejudice to
other judicial remedy or remedies which the Collector
may desire to pursue for the protection of the interest of
the Government, pending the final decision of the case on
the merits. On January 21, 1955, the Solicitor General
filed a notice of appeal from said Resolution and
instituted in this Court the instant certiorari case on
January 22, 1955.
It is not disputed that respondent Reyes filed his
income tax returns for the years 1946 to 1950, and that
the warrant of distraint and levy against the properties of
said respondent was issued only on October 13, 1954, or 3
years, 5 months and 16 days after the respondent
taxpayer had filed his returns for the tax year 1950, which
he made on April 27, 1951
HELD
TAXATION; INCOME TAX; COLLECTION BY
SUMMARY METHODS OF DISTRAINT AND LEVY, WHEN TO
MADE; WARRANTS ISSUED AFTER THE PRESCRIPTIVE
PERIOD; EFFECT OF. — In the collection of income tax, it
is mandatory that the right of the Collector of Internal
Revenue to collect it by the summary methods of distraint
and levy exercised within the period of three years from
the time the income tax return is filed, otherwise the right
can only be enforced by judicial action. Where, as in the
present case, the deficiency income taxes were assessed
and the warrants for their collection by distraint and levy
were issued after the three-year prescriptive period, said
warrants, as well as the steps taken in connection with
 the sale of the properties of the taxpayer were issued
without authority of the law and, hence, the Court of Tax
Appeals could properly enjoin their enforcement.
2. ID.; INJUNCTION; POWER OF TAX COURT TO
RESTRAIN COLLECTION OF TAX; PREREQUISITE FOR
ISSUANCE OF WRIT. — While Section 305 of the National
Internal Revenue Codeprohibits courts from granting
injunction to restrain the collection of any internal
revenue tax, fee or charge imposed by the Code, however,
Section 11 of Republic Act No. 1125 authorizes the Court
of Tax Appeals to suspend at any stage of the proceedings
the said collection when in its opinion, the same may
jeopardize the interest of the Government and/or the
taxpayer, provided the taxpayer either deposits the
amount claimed or files a surety bond or not more than
double the amount with the Court. Said Section 11 must
be deemed to have modified Section 305 of the Internal
Revenue Code in view of the repealing clause contained in
said Act to the effect that "any law or part of law, or any
executive order, rule or regulation or part thereof,
inconsistent with the provisions of this Act is hereby
repealed". (Section 21)
3. ID.; ID.; ID.; BOND REQUIRED ONLY WHERE THE
COLLECTION IS MADE IN ACCORDANCE WITH LA. — The
requirement of the bond as a condition precedent to the
issuance of the writ of injunction applies only in cases
where the processes by which the collection sought to be
made by means thereof are carried out in consonance
with the law for such cases provided and not when said
processes are obviously in violation of the law to the
extreme that they have to be suspended for jeopardizing
the interests of the taxpayer.
Li Yao v. Collector of Internal Revenue, G.R. No. L-11875,
[December 28, 1963], 119 PHIL 207-225
FACTS
Petitioner is a naturalized Filipino of Chinese parents, the
eldest son of a prosperous local businessman by the name of
Li Chay Too, who died sometime in 1948. In 1945 petitioner
organized the Li Yao & Company and made himself managing
partner; from 1948, to February 1955 he was president of, and
owned shares in, the Li Chay Too & Sons, Inc.; and in 1950 he
organized a corporation known as the Far East Realty &
Investment Co. of which he was also stockholder and
president. Petitioner filed his income tax returns for the years
1945 to 1951. However, a deficiency income tax in the amount
of P5,470.98 was assessed against him, which he paid.
In 1952 the Collector of Internal Revenue (CIR) believing that
petitioner had not reported his true incomes for the previous
years, appointed a team to examine his books, an additional
assessment of P899,794.02 was made against. A second team
of investigators was appointed and this team recommended a
deficiency income tax assessment of P2,722,030.33. This
team employed what is known as the net worth or inventory
method. A third team was appointed, this team recommended
an assessment of P1,505,768.54 against petitioner; the
inventory method was also used in making this assessment.
Demand was made for the collection of said assessment so
petitioner herein presented a petition with the CTA for the
review of the said assessment. CTA found that the amount of
the income tax deficiency due from petitioner is P424,536.77.
Petitioner Li Yao sought to reconsider the decision and the
assessment, alleging that the sum of P5,470.98 paid by him
as additional tax for the years 1945 to 1947 should be
credited against his deficiency income taxes, so that instead
of P424,536.77 the -sum due should be only P411,294.12. The
court approved this petition for recoupment and reduced the
assessment to P411,293.80.
Both petitioner and respondent appealed from the decision of
CTA. Petitioner Li Yao raised the questions on the validity of
the net worth method of inventory used against him, and
assails the CTA’s refusal to grant petitioner’s request that the
deficiency income assessed be distributed evenly over the
taxable years
HELD
Whether the contention of petitioner should be allowed.
NO. The taxpayer has the means of proving the existence of
the obligation and it is he that must produce such proof. The
procedure followed by the CTA is that laid down by the rules
on evidence; that is, that the taxpayer who alleges that an
obligation still exists must prove the existence thereof by
preponderance of evidence. The obligor or taxpayer has the
means of proving that the obligation does not exist or has
been paid; the Government collecting the tax cannot be
expected to find the evidence itself, because it is natural that
the taxpayer would try to suppress such evidence as may
prove that the obligation still exists.
After reading the arguments presented by petitioner and
considering that the witnesses for petitioner herein are his
father-in-law and his wife and their testimonies failed to
convince the judges of the court below, the Court finds no
potent reason why the findings of the court below that heard
the evidence should be disturbed.
The use of the inventory method is authorized under Section
15 of the National Internal Revenue Code, as amended, which
authorizes the CIR to assess taxes due a taxpayer from any
other available fact or evidence. If a taxpayer commits a
violation of the law, hiding his income to evade payment of
taxes, the Government must be permitted to resort to all
evidence or sources available to determine his said income,
so that the tax may be collected for public purposes. There is
and there should be a presumption of regularity accorded this
action of the CIR in assessing the tax on the best evidence
obtainable, otherwise it, would be impossible to assess taxes
due from a dishonest taxpayer.
In the case at bar the existence of assets or properties
appearing in the name of the taxpayer or in the name of his
dummies or friends, without the taxpayer being able to give a
definite reasonable explanation for their existence justifies
the CTA and this Court to resort to the inventory method of
assessment, such being necessary and at the same time just
and equitable.
The last legal question raised is petitioner’s claim that the
unreported incomes which appeared during the last years of
the period of assessment should not be considered as having
been earned during the years in which said incomes
appeared, but should be spread throughout the whole period
covered by the assessment, that is, from 1945 to 1951.
Petitioner does not claim that the amounts appearing in the
last period of the assessment were acquired through savings
or accumulated savings or any slow and continuous process,
such that the income cannot be distributed to any particular
year of the period of assessment.
Section 39 of the National Internal Revenue Code requires the
taxpayer to report yearly to the CIR the income that he gets
during the year from whatever source and include the same in
the taxable year in which the income was received by him. It
is to be presumed that the income was earned at the time
that it appeared in the possession or control of the taxpayer,
in accordance with the rule that the law has been followed.
If Petitioner’s contention is to be followed, a taxpayer would
be encouraged to hide his income because in any case, if his
unreported income would be discovered afterwards the said
income, although appearing in one year, would be distributed
over a period of years. In other words, we will have a rule, as
advocated by petitioner’s counsel, that would not discourage
the hiding of taxable income because any discovery of any
unreported income could always be allowed to be distributed
over a period of years. In the case at bar, the distribution over
a period of years demanded by petitioner would bring about a
reduction of the tax assessed by the Court of Tax Appeals
from P424,536,77 to P232,416.59, or about one-half of the
assessment made by the CTA. We are not prepared to permit
such unauthorized reduction in public taxes favorable to a
dishonest taxpayer and prejudicial to the interests of the
State.
BACHE and CO. Vs. RUIZ
FACTS
Respondent Commissioner, wrote a letter to respondent
Judge Ruiz requesting the issuance of a search warrant
against petitioners for violation of the National Internal
Revenue Code, in relation to all other pertinent provisions
thereof, and authorizing a Revenue Examiner to make and file
the application for search warrant which was attached to the
letter. In the afternoon of the following day, respondent De
Leon and his witness, respondent Logronio, went to the Court
of First Instance of Rizal. They brought with them the
following papers: respondent Vera’s aforesaid letter-request;
an application for search warrant already filled up but still
unsigned by respondent De Leon; an affidavit of respondent
Logronio subscribed before respondent De Leon; a deposition
in printed form of respondent Logronio already accomplished
and signed by him but not yet subscribed; and a search
warrant already accomplished but still unsigned by
respondent Judge. At that time respondent Judge was
hearing a certain case; so, by means of a note, he instructed
his Deputy Clerk of Court to take the depositions of
respondents De Leon and Logronio. After the session had
adjourned, respondent Judge was informed that the
depositions had already been taken. The stenographer, upon
request of respondent Judge, read to him her stenographic
notes; and thereafter, respondent Judge asked respondent
Logronio to take the oath and warned him that if his
deposition was found to be false and without legal basis, he
could be charged for perjury. Respondent Judge signed
respondent de Leon’s application for search warrant and
respondent Logronio’s deposition, Search Warrant was then
sign by respondent Judge and accordingly issued. Three days
later, the BIR agents served the search warrant petitioners at
the offices of petitioner corporation. Petitioners’ lawyers
protested the search on the ground that no formal complaint
or transcript of testimony was attached to the warrant. The
agents nevertheless proceeded with their search which
yielded six boxes of documents. Petitioners filed a petition
with the Court of First Instance of Rizal praying that the
search warrant be quashed, dissolved or recalled, that
preliminary prohibitory and mandatory writs of injunction be
issued, that the search warrant be declared null and void, and
that the respondents be ordered to pay petitioners, jointly and
severally, damages and attorney’s fees. On March 18, 1970,
the respondents, thru the Solicitor General, filed an answer to
the petition. After hearing, the court, presided over by
respondent Judge, issued on July 29, 1970, an order
dismissing the petition for dissolution of the search warrant.
Hence, Petitioners came to this Court.
Issue: Whether a corporation is entitled to protection against
unreasonable search and seizure?
HELD
The legality of a seizure can be contested only by the party
whose rights have been impaired thereby, and that the
objection to an unlawful search and seizure is purely personal
and cannot be availed of by third parties. In Stonehill, et al.
vs. Diokno, et al. the Supreme Court impliedly recognized the
right of a corporation to object against unreasonable
searches and seizures; holding that the corporations have
their respective personalities, separate and distinct from the
personality of the corporate officers, regardless of the
amount of shares of stock or the interest of each of them in
said corporations, whatever, the offices they hold therein may
be; and that the corporate officers therefore may not validly
object to the use in evidence against them of the documents,
papers and things seized from the offices and premises of the
corporations, since the right to object to the admission of
said papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong, and may not
be invoked by the corporate officers in proceedings against
them in their individual capacity.
The distinction between the Stonehill case and the present
case is that: in the former case, only the officers of the
various corporations in whose offices documents, papers and
effects were searched and seized were the petitioners; while
in the latter, the corporation to whom the seized documents
belong, and whose rights have thereby been impaired, is itself
a petitioner.
On that score, the corporation herein stands on a different
footing from the corporations in Stonehill. Moreover, herein,
the search warrant was void inasmuch as First, there was no
personal examination conducted by the Judge of the
complainant (De Leon) and his witness (Logronio).
distinct offenses under the Tax Code. The first is the violation
of Section 46(a), Section 72 and Section 73 (the filing of
income tax returns), which are interrelated. The second is the
violation of Section 53 (withholding of income taxes at
source).
The third is the violation of Section 208 (unlawful pursuit of
business or occupation); and the fourth is the violation of
Section 209 (failure to make a return of receipts, sales,
business or gross value of output actually removed or to pay
the tax due thereon). Even in their classification the 6
provisions are embraced in 2 different titles: Sections 46(a),
53, 72 and 73 are under Title II (Income Tax); while Sections
208 and 209 are under Title V (Privilege Tax on Business and
Occupation).
Lastly, the search warrant does not particularly describe the
things to be seized. Search Warrant No. 2-M-70 tends to
defeat the major objective of the Bill of Rights, i.e., the
elimination of general warrants, for the language used therein
is so all-embracing as to include all conceivable records of
the corporation, which, if seized, could possibly render its
business inoperative. Thus, Search Warrant 2-M-70 is null and
void.

The Judge did not ask either of the two any question the
answer to which could possibly be the basis for determining
whether or not there was probable cause against Bache & Co. FACTS
and Seggerman. The participation of the Judge in the
proceedings which led to the issuance of Search Warrant 2-M- HELD
70 was thus limited to listening to the stenographer’s
readings of her notes, to a few words of warning against the
commission of perjury, and to administering the oath to the
complainant and his witness. This cannot be consider a
personal examination.
FACTS

Second, the search warrant was issued for more than one
HELD
specific offense. The search warrant was issued for at least 4
 to Fortune Tobacco addressed to no one in particular. Then
Fortune Tobacco received, by ordinary mail, a certified xerox
FACTS copy of RMC 37-93. CIR assessed Fortune Tobacco for ad
valorem tax deficiency amounting to P9,598,334.00.
HELD
Fortune Tobacco filed a petition for review with the
CTA. 8 CTA upheld the position of Fortune. CA affirmed.

FACTS
HELD
||| (Commissioner of Internal Revenue v. Court of Appeals, G.R.
No. 119761, [August 29, 1996], 329 PHIL 987-1043)
FACTS
Fortune Tobacco Corporation ("Fortune Tobacco"), engaged in
the manufacture of different brands of cigarettes, registered
"Champion," "Hope," and "More" cigarettes. BIR classified
them as foreign brands since they were listed in the World
Tobacco Directory as belonging to foreign companies.
However, Fortun changed the names of 'Hope' to
'Hope Luxury'and 'More' to 'Premium More,' thereby removing
the said brands from the foreign brand category.
A 45% Ad Valorem taxes were imposed on these brands. Then
Republic Act ("RA") No. 7654 was enacted – 55% for locally
manufactured foreign brand while 45% for locally
manufactured brands. 2 days before the effectivity of RA
7654, Revenue Memorandum Circular No. 37-93 ("RMC 37-93"),
was issued by the BIR saying since there is no showing who
the real owner/s are of Champion, Hope and More, it follows
that the same shall be considered locally manufactured
foreign brand for purposes of determining the ad
valorem tax - 55%. BIR sent via telefax a copy of RMC 37-93
HELD
POLITICAL LAW; ADMINISTRATIVE LAW;
ADMINISTRATIVE AGENCIES; RULE MAKING POWERS;
LEGISLATIVE RULE AND INTERPRETATIVE RULE;
DISTINGUISHED. — Let us distinguish between two kinds of
administrative issuances — a legislative rule and an
interpretative rule. In Misamis Oriental Association of Coco
Traders, Inc., vs. Department of Finance Secretary , (238 SCRA
63) the Court expressed: ". . . a legislative rule is in
the nature of subordinate legislation, designed to implement
a primary legislation by providing the details thereof. In the
same way that laws must have the benefit of public hearing,
it is generally required that before a legislative rule is
adopted there must be hearing . In this connection, the
Administrative Code of 1987 provides: "Public Participation. —
If not otherwise required by law, an agency shall, as far as
practicable, publish or circulate notices of proposed rules
and afford interested parties the opportunity to submit their
views prior to the adoption of any rule. "(2) In the fixing of
rates, no rule or final order shall be valid unless the proposed
rates shall have been published in a newspaper of general
circulation at least two (2) weeks before the first hearing
thereon. "(3) In case of opposition, the rules on contested
cases shall be observed. "In addition such rule must be
published. On the other hand, interpretative rules are
designed to provide guidelines to the law which the
administrative agency is in charge of enforcing. " It should be
understandable that when an administrative rule is merely
interpretative in nature, its applicability needs nothing further
than its bare issuance for it gives no real consequence more
than what the law itself has already prescribed. When, upon
the other hand, the administrative rule goes beyond merely
(Commissioner of Internal Revenue. v. Burroughs Ltd., G.R.
providing for the means that can facilitate or render least
cumbersome the implementation of the law but substantially No. L-66653, [June 19, 1986], 226 PHIL 236-241)
adds to or increase the burden of those governed, it behooves
the agency to accord at least to those directly affected a
chance to be heard, and thereafter to be duly informed,
before that new issuance is given the force and effect of law. FACTS

2. ID.; ID.; ID.; ID.; ID.; REVENUE MEMORANDUM
CIRCULAR NO. 37-93; A LEGISLATIVE RULING; DUE
OBSERVANCE OF THE REQUIREMENTS OF NOTICE, OF
HEARING AND OF PUBLICATION FOR ITS VALIDITY SHOULD
NOT HAVE BEEN IGNORED. — A reading of RMC 37-93,
particularly considering the circumstances under which it
has been issued, convinces us that the circular cannot be
viewed simply as a corrective measure(revoking in the
process the previous holdings of past Commissioners) or
merely as construing Section 142(c)(1) of the NIRC, as
amended, but has, in fact and most importantly, been made in
order to place "Hope Luxury," "Premium More" and
"Champion" within the classification of locally manufactured
cigarettes bearing foreign brands and to thereby have them
covered by RA 7654. Specifically, the new law would have its
amendatory provisions applied to locally manufactured
cigarettes which at the time of its effectivity were not so
classified as bearing foreign brands. Prior to the issuance of
the questioned circular, "Hope Luxury," "Premium More," and
"Champion" cigarettes were in the category of locally
manufactured cigarettes not bearing foreign brand subject to
45% ad valorem tax. Hence, without RMC 37-93, the
enactment, of RA 7654, would have had no new tax rate
consequence on private respondent's products. Evidently, in
order to place "Hope Luxury," "Premium More," and
"Champion" cigarettes within the scope of the amendatory
law and subject them to an increased tax rate, the now
disputed RMC 37-93 had to be issued. In so doing, the BIR not
simply interpreted the law; verily, it legislated under its quasi-
legislative authority. The due observance of the requirements
of notice, of hearing, and of publication should not have been
then ignored.
Burroughs Limited is a foreign corporation authorized to
engage in trade or business in the Philippines through a
branch office located at De la Rosa corner Esteban Streets,
Legaspi Village, Makati, Metro Manila. Sometime in March
1979, said branch office applied with the Central Bank for
authority to remit to its parent company abroad, branch profit
amounting to P7,647,058.00. Thus, on 14 March 1979, it paid
the 15% branch profit remittance tax, pursuant to Sec. 24 (b)
(2) (ii) and remitted to its head office the amount of
P6,499,999.30. Claiming that the 15% profit remittance tax
should have been computed on the basis of the amount
actually remitted (P6,499,999.30) and not on the amount
before profit remittance tax (P7,647,058.00), Burroughs Ltd.
filed on 24 December 1980, a written claim for the refund or
tax credit of the amount of P172,058.90 representing alleged
overpaid branch profit remittance tax. On 24 February 1981,
Burroughs Ltd. filed with the Court of Tax Appeals, a petition
for review (CTA Case) 3204 for the recovery of the amount of
P172,058.81. On 27 June 1983, the tax court rendered its
Decision, ordering the Commission of Internal Revenue to
grant a tax credit in favor of Burroughs Ltd. the said amount
claimed; without pronouncement as to costs. Unable to
obtain a reconsideration from the decision, the Commissioner
filed the petition for certiorari before the Supreme Court.
HELD
Petitioner's aforesaid contention is without merit. What is
applicable in the case at bar is still the Revenue Ruling of
January 21, 1980 because private respondent Burroughs
Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated
March 17, 1982 cannot be given retroactive effect in the light
of Section 327 of the National Internal Revenue Code which
provides — "Sec. 327. Non-retroactivity of ruling. Any
revocation, modification, or reversal of any of the rules and
regulations promulgated in accordance with the preceding
Section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the
revocation, modification, or reversal will be prejudicial to the
taxpayer except in the following cases (a) where the taxpayer
deliberately mistakes or omits material facts from his return
or in any document required of him by the Bureau of Internal
Revenue; (b) where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different from the
facts on which the ruling is based, or (c) where the taxpayer
acted in bad faith."|||
(Philippine Bank of Communications v. Commissioner of
Internal Revenue, G.R. No. 112024, [January 28, 1999], 361
PHIL 916-933)
FACTS
Petitioner, Philippine Bank of Communications, on
August 7, 1987, requested the Commissioner of Internal
Revenue (CIR) for a tax credit of P5,016,954.00 representing
the overpayment of taxes in the first and second quartets of
1985. On July 25, 1988, it filed a claim for refund of creditable
taxes withheld by their lessees from property rentals in 1985
for P282,795.50 and in 1986 for P234,077.69. Pending
investigation by the CIR, petitioner instituted a petition for
review on Nov. 18, 1988 before the Court of Tax Appeals (CTA).
In 1993, the CTA rendered a decision denying the request for
a tax refund or credit in the amount of P5,299,749.95 on the
ground that it was filed beyond the two-year reglementary
period. The petitioner's claim for refund in 1986 was likewise
denied on the assumption that it was automatically credited
by PBCom against its tax payment in the succeeding year.
These pronouncements by the CTA were affirmed in toto by
the CA. Hence, this petition. Petitioner argues that its claim
for refund tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular
No. 7-85 stating that overpaid income taxes are not covered
by the two-year prescriptive period under the Tax Code and
that taxpayers may claim refund or tax credits within (ten) 10
years under Art. 1414 of the Civil Code. CTAIDE
The Supreme Court ruled that when the Acting
Commissioner of Internal Revenue issued RMC 7-85, changing
the prescriptive period of two years to ten years on claims of
excess quarterly income tax payments, such circular created
a clear inconsistency with the provision of Sec. 230 of the
1977 NIRC. In so doing, the BIR did not simply interpret the
law; rather it legislated guidelines contrary to the statute
passed by Congress. It bears repeating that Revenue
memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general
interpretations of tax laws) which are issued from time to
time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to
great respect by the courts. Nevertheless, such interpretation
is not conclusive and will be ignored if judicially found to be
erroneous. Thus, courts will not countenance administrative
issuances that override, instead of remaining consistent and
in harmony with, the law they seek to apply and implement.
HELD
COMMISSIONER OF INTERNAL REVENUE; ERRORS IN
ADMINISTRATIVE INTERPRETATION; CANNOT PUT THE STATE
IN ESTOPPEL. — Fundamental is the rule that the State
cannot be put in estoppel by the mistakes or errors of its
officials or agents. As pointed out by the respondent courts,
the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977
NIRC, for being contrary to the express provision of a statute.
Hence, his interpretation could not be given weight for to do
so would, in effect, amend the statute.
5. ID.; ADMINISTRATIVE BODIES; ADMINISTRATIVE
DECISIONS; DO NOT FORM PART OF THE LEGAL SYSTEM. —
Article 8 of the Civil Code recognizes judicial decisions,
applying or interpreting statutes as part of the legal system
of the country. But administrative decisions do not enjoy that
level of recognition. A memorandum-circular of a bureau head
could not operate to vest a taxpayer with a shield against
judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could
not place the Government in estoppel to correct or overrule
the same. Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this
case because the nullity of RMC No. 7-85 was declared by
respondent courts and not by the Commissioner of Internal
Revenue.
||| ABS-CBN Broadcasting Corp. v. Court of Tax Appeals, G.R.
No. L-52306, [October 12, 1981], 195 PHIL 33-45
FACTS
Petitioner cornoration was engaged in the business of
telecasting local as well as foreign films acquired from
foreign corporations not engaged intrade or business within
the Philippines, for which petitioner paid rentals after
withholding and turning over to the Bureau of Internal
Revenue income tax of 30% of one-half of the film rentals
pursuant to Section 24(b) of the National Internal Revenue
Code, as amended by Rep. Act No. 2343 and the Implementing
General Circular No. V-334 issued by the Commissioner of
Internal Revenue on April 12, 1961. For the years 1963 through
1968, petitioner dutifully observed the practice. With the
amendment of Section 24(b) of the Tax Code by Rep. Act No.
5431 on June 27, 1968, increasing the tax rate from 30% to
35%, the Commissioner of Internal Revenue revoked, for
being "erroneous for lack of legal basis" Gen. Circular No. V-
334, by issuing Revised Memo-Circular No. 471, basing the tax
therein prescribed on gross income. Pursuant thereto,
respondent Commissioner issued against petitioner a letter of
assessment and demand requiring the latter to pay deficiency
with holding income tax on the remitted film rentals for the
years 1965 to 1968 in the total amount of P525,897.06.
Without acting on petitioner's request for a reconsideration
and withdrawal of the assessment, respondent Commissioner
issued a warrant of distraint and levy over the former's
personal and real property. On petition for review filed with
respondent Court of Tax Appeals, the latter dismissed it and
affirmed the questioned assessment. Petitioner appealed
contesting the retroactivity of Revised Memo-Circular 471 and
averring prescription of the right of respondent Commissioner
to assess the deficiency with holding income tax.
In reversing the judgment appealed from and setting aside
the assessment, the Court ruled that in the interest of justice
and fairplay, rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive
application where to so apply them would be prejudicial to
taxpayers, who in the case at bar, relied in good faith and
religiously complied with no less than a circular issued "to all
internal revenue officials" by the highest official of the
Bureau of Internal Revenue and approved by the then
Secretary of Finance.
HELD
TAXATION; ASSESSMENT AND COLLECTION OF TAXES;
CIRCULARS OR RULINGS OF THE COMMISSIONER OF
INTERNAL REVENUE HAVE NO RETROACTIVE APPLICATION;
CASE AT BAR. — It is clear from Sec. 338-A (now Sec. 327) of
the Tax Code as insisted by Rep. Act No. 6110 on August 9,
1969 that rulings or circulars promulgated by the
Commissioner of Internal Revenue have no retroactive
application where to so apply them would be prejudicial to
taxpayers. The prejudice to petitioner of the retroactive
application of Memorandum Circular No. 4-71 is beyond
question. It was issued only in 1971, or three years after
1968, the last year that petitioner had with held taxes under
General Circular No. V-334. The assessment and demand on
petitioner to pay deficiency `withholding income tax was also
made three years after 1968 for a period of time commencing
in 1963. Petitioner was no longer in a position to withhold
taxes due from foreign corporations because it had already
remitted all film rentals and no longer had any control over
them when the new circular was issued. Neither does
petitioner fall under any of the enumerated exceptions stated
in the Section.|||