G.R. No. 167134 March 18, 2015 TOTAL P 10,517,740.57 P 18,349,556.

33 8

============ ============
COMMISSIONER OF INTERNAL REVENUE, Petitioner, === ===
vs.
TRADERS ROYAL BANK, Respondent.
TRB Vice President Bayani R. Navarro (Navarro) wrote a
letter dated January 7, 20009 protesting the foregoing
DECISION assessments of the BIR on the following grounds:

LEONARDO-DE CASTRO, J.:
Before this Court is a Petition for Review on Certiorari filed
by petitioner Commissioner of Internal Revenue (CIR)
assailing the Decision1 dated February 14, 2005 of the
Court of Tax: Appeals (CTA) en bane in C.T.A. EB No. 32,
which denied the CIR's appeal of the Decision2 dated April
28, 2004 and Resolution3 dated September 10, 2004 of the
CT A Division in C.T.A. Case No. 6392. The CTA Division
cancelled the assessments issued by the CIR against
respondent Traders Royal Bank (TRB) for deficiency
documentary stamp taxes (DST) on the latter's Trust
Indenture Agreements for taxable years 1996 and 1997, in
the amounts of ₱10,517,740.57and1!18,349,556.33,
respectively.4
In response, we would like to point out that Special Savings
Deposits being savings deposit accounts are not subject to
the documentary stamp tax. Likewise, Trust Indenture
Agreement[s] are not subject to documentary stamp tax for
the reason that relationship established between parties is
that of the trustor and trustee, wherein the funds and/or
properties of the trustor are given to the Trustee Bank not
as a deposit but under a Common Trust Fund maintained
and to be managed by the Trustee.
The same arguments are being invoked by other banks
using similar instruments and the imposition of the DST is
considered as an industry problem and is being contested
by the entire banking community.

In his Decision dated December 20, 2001,10 the CIR denied

TRB is a domestic corporation duly registered with the the protest of TRB. The CIR adopted the position of the BIR
Securities and Exchange Commission and authorized by the examiners that the Special Savings Deposit should be
Bangko Sentral ng Pilipinas (BSP) to engage in commercial deemed a time deposit account subject to DST under
banking.5 On the strength of the Letter of Authority (L.A.) Section 180 of the Tax Code of 1977. The CIR reasoned:
No. 000018565 dated July 27, 1998, the Bureau of Internal
Revenue (BIR) conducted an investigation concerning all
national internal revenue tax liabilities of TRB for taxable [T]his Office believes and so holds that the Special Savings
years 1996-1997. Following the investigation, the BIR Deposit and Time Deposit are just one and the same
issued a Pre-Assessment Notice dated November 10, 1999 banking transaction. To evade payment of the DST, efforts
against TRB. Subsequently, the BIR issued a Formal Letter were made by banks to place a superficial distinction
of Demand and Assessment Notice Nos. ST-DST-96-0234- between the two (2) deposit accounts by introducing an
996 and ST-DST-97-0233-99,7 all dated December 27, innovation using a regular passbook to document the
1999, against TRB for deficiency DST for 1996 and 1997, in Special Savings Deposit and by claiming that the said
the total amount of ₱28,867,296.90, broken down as special deposit has no specific maturity date. At first glance,
follows: the innovative scheme may have accomplished in putting a
semblance of difference between the aforesaid two (2)
deposit accounts, but an analytical look at the passbook
DEFICIENCY DOCUMENTARY STAMP TAX issued clearly reveals that although it does not have the
form of a certificate nor labelled as such, it has a fixed
maturity date and for all intents and purposes, it has the
Industry
same nature and substance as a "certificate of deposit
Issues 1996 1997
bearing interest." In fact, it could be said that the passbook
on:
is in itself a "certificate of deposit."11
Special ₱5,041,882,798.03 ₱9,579,733,184.65
Savings As for the Trust Indenture Agreements, the CIR opined that
Deposit they were but a form of deposit, likewise subject to DST.
According to the CIR:
Trust 567,500,927.00 55,783,860.92
Fund
In an earlier case involving the same industry issue, We
Mega 77,911.32 150,872,997.87 ruled that the essential features/characteristics of a Trust
Savings Agreement are as follows:
Deposit

Total 5,609,461,636.35 9,786,390,043.44 A) The required minimum deposit is ₱50,000.00;

Tax .30/200 .30/200 B) The shortest maturity date is 30 days;

Rate

Basic 8,414,192.45 14,679,645.07 C) It is not payable on sight or demand, in case

of pretermination, prior written notice is
Add: 2,103,548.11 3,669,911.27 required; D) It is automatically renewed in case
Surchar the depositor fails to withdraw the deposit at
ge maturity date; E) The bank used confirmation of
participation to evidence the acceptance of the
funds from the trustor.

1|Page
Based on the foregoing features, it is evident that the
contention of the bank is misplaced. Although the contract
is termed as "trust agreement," it can be considered as a
misnomer because the relationship existing between the
parties in the subject contract is actually not a trustor-
trustee relationship but that of a creditor-debtor
relationship, the same relationship governing deposits of
money in banks.
xxxx
In the said contract of trust under the Civil Code, there is
only an equitable transfer of ownership by the trustor to the
trustee, the trustor retains his legal title to the subject
property. On the other hand, in the bank’s "trust
agreement," once the specific funds or properties of the
trustor are placed under the common trust fund, there is a
complete transfer of ownership from the trustor to the
trustee-bank. It is manifested by the fact that said funds or
properties may be invested by the bank in whatever manner
it may deem necessary, the trustor has no control
whatsoever over his funds. Another point of distinction
between the two contracts is that, in the contract of trust
every transaction involving the trust property must be
entered into by the trustee for the benefit of the trustor or
his designated beneficiary; while in the bank’s "trust
agreement," all benefits from the transactions involving
properties from the common trust fund will be received
solely by the trustee-bank, the trustor’s only consolation is
limited to receiving higher rate of interest from his property.
In effect, the subject "trust agreement" although termed as
such is but a form of a deposit.
The fact that the subject trust agreement is evidenced by a
"confirmation of participation" and not by a certificate of
deposit is immaterial. As discussed above, what is
important and controlling is the nature or meaning
conveyed by the document and not the particular label or
nomenclature attached to it, inasmuch as its substance is
paramount than its form. Therefore, the examiners are
correct in imposing documentary stamp tax on the bank’s
"trust agreements."12
The CIR ruled in the end:
IN VIEW WHEREOF, this Office has resolved to DENY the
protest of herein protestant-bank. Assessment Notice Nos.
ST-DST-96-0234-99 and ST-DST-97-0233-99 demanding
payment of the respective amounts of ₱10,517,740.57 and
₱18,349,556.33 as documentary stamp taxes for the
taxable years 1996 and 1997 are hereby AFFIRMED in all
respects. Consequently, the protestant-bank is hereby
ordered to pay the above-stated amounts plus interest that
may have accrued thereon until actual payment, to the
Collection Service, BIR National Office, Diliman, Quezon
City, within thirty (30) days from receipt hereof, otherwise,
collection shall be effected through the summary remedies
provided by law.
This constitutes the final decision of this Office on the
matter.13
TRB filed a Petition for Review14 with the CTA, which was
docketed as C.T.A. Case No. 6392. The parties stipulated
the following issues to be resolved by the CTA Division:
A. Whether or not Special Saving Deposits and
Mega Savings Deposits [both are Special Savings
2|Page
Accounts (SSA)] are subject to documentary
stamp tax (DST) under Section 180 of the Tax
Code.
B. Whether or not the ordinary saving account
passbook issued by [TRB] x x x can be considered
a certificate of deposit subject to documentary
stamp tax (DST).
C. Whether or not the Trust Indenture
Agreements are subject to documentary stamp
tax (DST) under Section 180 of the Tax Code.15
On April 28, 2004, the CTA Division rendered a Decision,
resolving the first two issues in favor of the CIR and the last
one in favor of TRB.
The CTA Division agreed with the CIR that the Special
Savings Deposits and Time Deposits were akin to each
other in that the bank would acknowledge the receipt of
money on deposit which the bank promised to pay to the
depositor, bearer, or to the order of the bearer after a
specified period of time. In both cases, the deposits could
be withdrawn anytime but the depositor would earn a lower
rate of interest. The only difference was the evidence of the
deposits: a passbook for Special Savings Deposits and a
certificate of deposit for Time Deposits. Considering that
the passbook and the certificate of time deposit were
evidence of transactions, then both should be subject to
DST, an excise tax on transactions.
The CTA Division, however, concurred with TRB that the
Trust Indenture Agreements were different from the
certificate of deposit, thus:
A Trust Indenture Agreement has a different feature and
concept from a certificate of deposit. When a depositor
enters into a trust agreement, what is created is a trustor-
trustee relationship. The money deposited is placed in trust
to a common fund and then invested by the Trust
Department into a profitable venture. The yield or return of
investment is higher and varies depending on the actual
profit earned. In some trust agreements, a depositor may
even get a negative return of investment. The fact that
there is an "expected rate of return" does not necessarily
convert a trust agreement into a time deposit. Under
Section X407 of the Manual of Regulations for Banks it is
provided that "the basic characteristic of trust, other
fiduciary and investment management relationship is the
absolute non-existence of a debtor-creditor relationship,
thus, there is no obligation on the part of the trustee,
fiduciary or investment manager to guarantee returns on
the funds or properties regardless of the results of the
investment."16
The CTA Division ultimately decreed:
WHEREFORE, the assessments for deficiency documentary
stamp taxes on trust fund against [TRB] for taxable years
1996 and 1997 are hereby CANCELLED. However, the
assessments for deficiency documentary stamp taxes on
special savings deposit and mega savings deposit for same
taxable years 1996 and 1997 are hereby AFFIRMED.
ACCORDINGLY, [TRB] is ORDERED TO PAY the [CIR] the
deficiency documentary stamp taxes for the years 1996 and
1997 in the respective amounts of ₱9,453,676.33 and
₱18,244,886.69 (all inclusive of 25% surcharge) totaling
₱27,698,562.92 x x x.
xxxx
In addition, [TRB] is ORDERED TO PAY the [CIR] 20%
delinquency interest on ₱27,698,562.92 computed from
February 14, 2002 until fully paid pursuant to Section 249
of the Tax Code, as amended.17
The parties each filed motions relative to the
aforementioned judgment of the CTA Division, to wit:
1. "Omnibus Motion for Substitution of Parties
and Motion for Reconsideration (Re: Decision
dated April 28, 2004)"filed on May 28, 2004 by
[TRB] seeking for the:
a. Substitution of parties from Traders
Royal Bank to Bank of Commerce;
b. Reconsideration and reversal of this
court’s Decision promulgated on April
28, 2004 finding [TRB] liable for
deficiency documentary stamp taxes
for the taxable years 1996 and 1997 in
the amounts of ₱9,453,676.33 and
₱18,244,886.69, respectively (all
inclusive of the 25% surcharge), plus
20% delinquency interest computed
from February 14, 2002 until fully paid;
and c. Cancellation of the subject
deficiency tax assessments.
2. "Motion for Partial Reconsideration" filed on
May 24, 2004 by [CIR] seeking for a partial
reversal of this court’s Decision promulgated on
April 28, 2004 with regard to the cancellation by
this court of [CIR’s] assessment for deficiency
documentary stamp taxes on the trust fund
against [TRB] for the taxable years 1996 and
1997.18
The CTA Division issued a Resolution dated September 10,
2004 denying the motions of the parties:
Based on the allegations of [TRB], the Purchase and Sale
Agreement [between TRB and the Bank of Commerce
(BOC)] was executed on November 9, 2001. Upon the
execution of the said agreement, the BOC assumed the
deposit liabilities of [TRB] for the taxable years covering
1996 and 1997. However, it is noteworthy to emphasize
that the Petition for Review was filed by [TRB] only on
February 15, 2002 after the alleged transfer of right
happened. To adopt the view of [TRB] and pursuant to the
quoted Section 19,Rule 3 of the 1997 Rules of Court, it
should have been the BOC that should have filed the
Petition for Review instead of [TRB]. Yet, this was not the
case. The petition was filed by petitioner Traders Royal
Bank, notwithstanding the alleged transfer of rights to Bank
of Commerce prior to the commencement of the action.
Failure of[TRB] to show justifiable reasons for such
negligence and blunder, this court cannot then allow the
substitution of parties.
xxxx
3|Page
There being no other new issues raised by [TRB] which this
court has not yet passed upon in its Decision of April 28,
2004, this court hereby RESOLVES to DENY[TRB’s] motion.
xxxx
Finding that the issue raised by the [CIR] had been
thoroughly discussed in the Decision of April 28, 2004, this
court finds no compelling reason to modify or alter the same
and thereby RESOLVES to DENY [CIR’s] Motion for Partial
Reconsideration.
WHEREFORE, both motions are hereby DENIED for lack of
merit. Accordingly, this court’s Decision promulgated on
April 28, 2004 is AFFIRMED in all respects.19
The CIR and TRB filed with the CTA en banc separate
Petitions for Review, docketed as C.T.A. EB Nos. 32 and 34,
respectively, partially appealing the Decision dated April 28,
2004 and Resolution dated September 10, 2004 of the CTA
Division.
The CTA en banc promulgated its Decision in C.T.A. EB No.
32 on February 14, 2005, dismissing the Petition of the CIR
and affirming the cancellation by the CTA Division of the
assessments against TRB for DST on its Trust Indenture
Agreements for 1996 to 1997. According to the CTA en
banc:
[A]n examination of the Petition for Review revealed that
the issues raised therein by the [CIR] have been discussed
at length and directly ruled upon in the assailed Decision
and in the subsequent Resolution. The Court is not
convinced by [CIR’s] arguments on the assigned errors to
justify a reversal of the questioned Decision.
The Manual for Regulations of Banks issued by the Central
Bank of the Philippines has defined the trust business as "xx
x any activity resulting from a trustor-trustee relationship
(trusteeship) involving the appointment of a trustee by a
trustor for the administration, holding, management of
funds and/or properties of the trustor by the trustee for use,
benefit or advantage of the trustor or others called
beneficiaries (Sec.X403 [a])."
As correctly explained in the questioned Decision, "When a
depositor enters into a trust agreement, what is created is
a trustor-trustee relationship. The money deposited is
placed in trust to a common fund and then invested by the
Trust Department into a profitable venture". [CIR’s]
contention that there is a complete transfer of ownership
from the trustor to the trustee bank because the funds may
be invested by the bank in whatever manner it may deem
necessary and the trustor having no control whatsoever
over his funds runs counter to[CIR’s] allegation in the
Petition that "A contract of trust under the Civil Code is
defined as the legal relationship between one person having
an equitable ownership in property and another person
owning [the] legal title to such property, the equitable
ownership of the former entitling him to the performance
of duties and the exercise of certain powers by the latter."
(citing Commentaries and Jurisprudence on the Civil Code
of the Philippines, Arturo Tolentino, Volume 4, p. 669). The
[CIR], in effect, admits that the trustee bank holds legal
title over the funds (i.e., has legal ownership of the funds),
and is entitled to exercise certain powers such as the
investment of the funds in behalf of the trustor (which is
the essence of the trust business).
[TRB] likewise correctly pointed out that the trust funds
managed by its Trust Department cannot be appropriately
alleged as time deposits, because the acceptance of
deposits is beyond the realm of the business of the trust
department of banks as implied under Section X407 of the
Manual of Regulations for Banks inasmuch as no debtor-
creditor relationship exists between the parties in the trust
agreement.
The trust placement not being a time deposit, it cannot
therefore be subject to documentary stamp tax as a
certificate of deposit.20
Hence, the dispositive portion of the Decision dated
February 14, 2005 of the CTA en banc in C.T.A. EB No. 32
reads:
WHEREFORE, finding that the Petition for Review is patently
without merit, the same is denied due course. Accordingly,
the same is DISMISSED.21
The CTA en banc, in a Decision dated April 26, 2005 in
C.T.A. EB No. 34,22 similarly dismissed the Petition of TRB
and upheld the ruling of the CTA Division that TRB was
liable for DST on its Special Savings Deposits for 1996 to
1997, plus surcharge and delinquency interest. The CTA en
banc concluded:
For all intents and purposes, [TRB’s] Special Savings and
Mega Savings Deposit are deemed to be of the same nature
and substance as a certificate of deposit bearing interest.
Therefore, We hold that said Special Savings and Mega
Savings passbooks are in themselves certificates of deposit,
subject to documentary stamp tax in accordance with
Section 180, National Internal Revenue Code of 1993, as
amended. While the DST is levied on the document itself, it
is not intended to be a tax on the document alone. Rather,
the DST is levied on the exercise of a privilege of conducting
a particular business or transaction through the execution
of specific instruments or documents (Phil. Home Assurance
Corp. vs. Court of Appeals, 301 SCRA 435). Lastly, there is
likewise no merit to [TRB’s] contention that the Division
erred in denying the "Motion for Substitution of Parties".
Generally, there is no need of a substitution or joinder of
the transferee as a party-litigant for after all even if the
action is continued by or against the original party, the
judgment is binding on all the parties (original party,
adverse party and transferee) (Oria Hnos. v. Gutierrez
Hnos., 52 Phil. 156; Correa v. Pascual, 99 Phil.
696;Bustamante v. Azarcon, L-8939, May 28, 1957). This is
a settled rule in this jurisdiction. Indeed, We may say that
the transferee is a proper (or necessary) party, but not an
indispensable party to the original case (Fetalino v. Sanz,
44 Phil. 69).
xxxx
Accordingly, no error was committed by the Division when
it denied the "Motion for Substitution of Parties."23
Consequently, in its Decision dated April 26, 2005 in C.T.A.
EB No. 34, the CTA en banc adjudged:
All the foregoing considered, We see no reason to reverse
the assailed Decision and Resolution of the Division of this
Court.
4|Page
WHEREFORE, premises considered, the instant petition is
hereby DENIED DUE COURSE, and accordingly, DISMISSED
for lack of merit.24
TRB filed a Motion for Reconsideration of the foregoing
Decision, but said Motion was denied by the CTA en banc
in a Resolution dated June 10, 2005.
The CIR filed a Petition for Review before the Court,
docketed as G.R. No. 167134, assailing the Decision dated
February 14, 2005 of the CTA en banc in C.T.A. EB No. 32.
TRB initially filed a Motion for Extension of Time to File
Petition for Review, requesting an extension of 30 days
(i.e., until August 1, 2005) within which to appeal the
Decision dated April 26, 2005 and Resolution dated June
10, 2005 of the CTA en banc in C.T.A. EB No. 34. The
Motion of TRB was docketed as G.R. No. 168491.
In a Resolution dated August 3, 2005, the Court
consolidated the Petitions in G.R. Nos. 167134 and 168491
considering that they "assail the same decision of the Court
of Tax Appeals, involve the same parties, and raise
interrelated issues."
Eventually, the Court issued a Resolution dated June26,
2006, in which it resolved as follows:
It appearing that [TRB] in G.R. No. 168491 failed to file a
petition for review on certiorari within the extended period
which expired on August 1, 2005, the Court further resolves
to CONSIDER G.R. No. 168491 CLOSED and
TERMINATED.25
The Resolution dated June 26, 2006 of the Court in G.R.
No. 168491 became final and executory and Entry of
Judgment was made in said case on August 24, 2006.
Presently pending resolution by the Court is the Petition for
Review of the CIR in G.R. No. 167134 which appealed the
Decision dated February 14, 2005 of the CTA en banc in
C.T.A. EB No. 32 based on the lone assignment of error,
viz:
THE COURT OF TAX APPEALS EN BANC ERRED IN
HOLDING THAT A TRUST INDENTURE AGREEMENT IS NOT
A CERTIFICATE OF DEPOSIT, HENCE, NOT SUBJECT TO
DOCUMENTARY STAMP TAX UNDER SECTION 180 OF THE
TAX CODE.26
Section 180 of the National Internal Revenue Code (NIRC)
of 1977, as amended by Republic Act No. 7660 – in force
in1996 and 1997 – imposed DST on the following
documents:
Sec. 180. Stamp tax on all loan agreements, promissory
notes, bills of exchange, drafts, instruments and securities
issued by the government or any of its instrumentalities,
certificates of deposit bearing interest and others not
payable on sight or demand. – On all loan agreements
signed abroad wherein the object of the contract is located
or used in the Philippines; bills of exchange (between points
within the Philippines), drafts, instruments and securities
issued by the Government or any of its instrumentalities or
certificates of deposits drawing interest, or orders for the
payment of any sum of money otherwise than at sight or
on demand, or on all promissory notes, whether negotiable
or nonnegotiable, except bank notes issued for circulation,
and on each renewal of any such note, there shall be
collected a documentary stamp tax of Thirty centavos
(P0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of
exchange, draft, certificate of deposit, or note: Provided,
That only one documentary stamp tax shall be imposed on
either loan agreement, or promissory notes issued to secure
such loan, whichever will yield a higher tax: Provided,
however, That loan agreements or promissory notes the
aggregate of which does not exceed Two hundred fifty
thousand pesos (₱250,000) executed by an individual for
his purchase on installment for his personal use or that of
his family and not for business, resale, barter or hire of a
house, lot, motor vehicle, appliance or furniture shall be
exempt from the payment of the documentary stamp tax
provided under this section.
The CIR maintains that the relationship between TRB and
its clients under the Trust Indenture Agreements was
debtor-creditors and the said Agreements were actually
certificates of deposit drawing/bearing interest subject to
DST under Section 180 of the NIRC of 1977, as amended.
The CIR points out that the only basis of the CTA en banc
in ruling that the relationship between TRB and its clients
under the Trust Indenture Agreements was that of trustee-
trustors was Section X407 of the 1993 Manual of
Regulations for Banks (MORB) issued by the BSP, which
identified the basic characteristics of a trust. The CIR
argues, however, that the very same provision, Section
X407 of the 1993 MORB, identified exceptions, that is,
instances when the agreement or contract would not
constitute a trust. A trust as defined in Section X407 of the
1993 MORB would be in the nature of an exemption from
the payment of DST. Accordingly, TRB had the burden of
proving the legal and factual bases of its claim that its Trust
Indenture Agreements fell under the definition of "trust"
and not among the exceptions in Section X407 of the 1993
MORB. TRB, though, was unable to discharge such burden,
failing to present evidence, whether testimonial or
documentary, to prove its entitlement to DST exemption.
The CIR, for its part, claims that the Trust Indenture
Agreements were akin to certificates of deposit because
said Agreements also stated expected rates of return of the
investment or for the use of the amounts of deposits/trust
funds for a certain period, clearly falling under the
exception to what constituted a "trust" in Section X407,
paragraph (d) of the 1993 MORB. The CIR also asserts that
TRB should not be permitted to escape/evade the payment
of DST by simply labeling its certificates of deposit
drawing/bearing interests as "trust funds." In determining
whether a certain
contract/agreement/document/instrument is subject to
DST, substance should control over form and labels.
In addition, the CIR insists that the Trust Indenture
Agreements between TRB and its clients were simple loans
governed by Article 1980 of the Civil Code.27 The trust
funds, being generic, could not be segregated from the
other funds/deposits held by TRB. While TRB had the
obligation to return the equivalent amount deposited, it had
no obligation to return or deliver the same money
deposited. Legal title to the trust funds was
vested/transmitted to TRB upon perfection of the trust
agreement. It then followed that TRB could make use of
the funds/deposits for its banking operations, such as to
pay interest on deposits, to pay withdrawals and dispose of
the amount borrowed for any purpose such as investing the
funds/deposits into a profitable venture. Currently, the CIR
avers, the Trust Indenture Agreements may be considered
as "loan agreements" or "debt instruments" subject to DST
5|Page
under Sections 17328 and 17929 of the NIRC of 1997, as
amended.
The Petition is meritorious.
Generally, the factual findings of the CTA, a special court
exercising expertise on the subject of tax, are regarded as
final, binding and conclusive upon this Court.30 However,
there are well-recognized exceptions to this rule,31 such as
when the conclusion is grounded entirely on speculations,
surmises, or conjectures, as well as when the findings are
conclusions without citation of specific evidence on which
they are based.
At the crux of the instant controversy are the Trust
Indenture Agreements of TRB. At issue is whether the said
Trust Indenture Agreements constituted deposits or trusts.
The BIR posits that the Agreements were deposits subject
to DST, while TRB proffers that the Agreements were trusts
exempt from DST.
Surprisingly, not a single copy of a Trust Indenture
Agreement and/or the Certificate of Participation (issued to
the client as evidence of the trust) could be found in the
records of the case.
The conduct by banks, such as TRB, of trusts and other
fiduciary business (in 1996 and 1997) was governed by the
1993 MORB, which enumerated the minimum documentary
requirements for trusts, including a written agreement or
indenture and a plan (i.e., written declaration of trust) for
common trust funds (CTF). Relevant provisions of the 1993
MORB are quoted in full below:
Sec. X409 Trust and Other Fiduciary Business. The conduct
of trust and other fiduciary business shall be subject to the
following regulations.
§ X409.1 Minimum documentary requirements. Each trust
or fiduciary account shall be covered by a written document
establishing such account, as follows:
a. In the case of accounts created by an order of
the court or other competent authority, the
written order of said court or authority.
b. In the case of accounts created by
corporations, business firms, organizations or
institutions, the voluntary written agreement or
indenture entered into by the parties,
accompanied by a copy of the board resolution
or other evidence authorizing the establishment
of, and designating the signatories to, the trust
or other fiduciary account.
c. In the case of accounts created by individuals,
the voluntary written agreement or indenture
entered into by the parties.
The voluntary written agreement or indenture shall include
the following minimum provisions:
(1) Title or nature of contractual agreement in
noticeable print;
 (2) Legal capacities, in noticeable print, of parties
sought to be covered;
(3) Purposes and objectives;
(4) Funds and/or properties subject of the
arrangement;
(5) Distribution of the funds and/or properties;
(6) Duties and powers of trustee or fiduciary;
(7) Liabilities of the trustee or fiduciary;
(8) Reports to the client;
(9) Termination of contractual arrangement and,
in appropriate cases, provision for successor-
trustee or fiduciary;
(10) The amount or rate of the compensation of
trustee or fiduciary;
(11) A statement in noticeable print to the effect
that trust and other fiduciary business are not
covered by the PDIC and that losses, if any, shall
be for the account of the client; and
(12) Disclosure requirements for transactions
requiring prior authority and/or specific written
investment directive from the client, court of
competent jurisdiction or other competent
authority. x x x x
Sec. X410 Common Trust Funds.(1)
The administration of CTFs shall be subject to the
provisions of Subsecs. X409.1 up to X409.6 and to the
following regulations.
As an alternative compliance with the required prior
authority and disclosure under Subsecs. X409.2 and
X409.3, a list which shall be updated quarterly of
prospective and/or outstanding investment outlets may be
made available by the trustee for the review of all CTF
clients.
xxxx
(3) Minimum documentary requirements for common trust
funds. In addition to the trust agreement or indenture
required under Subsec. X409.1, each CTF shall be
established, administered and maintained in accordance
with a written declaration of trust referred to as the plan,
which shall be approved by the board of directors of the
trustee and a copy submitted to the appropriate supervising
and examining department of the BSP within thirty (30)
banking days prior to its implementation.
The plan shall make provisions on the following matters:
a. Title of the plan;
b. Manner in which the plan is to be operated;
6|Page
c. Investment powers of the trustee with respect
to the plan, including the character and kind of
investments which may be purchased;
d. Allocation, apportionment, distribution dates
of income, profit and losses;
e. Terms and conditions governing the admission
or withdrawal as well as expansion or contraction
of participation in the plan including the minimum
initial placement and account balance to be
maintained by the trustor;
f. Auditing and settlement of accounts of the
trustee with respect to the plan;
g. Detailed information on the basis, frequency,
and method of valuing and accounting of CTF
assets and each participation in the fund;
h. Basis upon which the plan may be terminated;
i. Liability clause of the trustee;
j. Schedule of fees and commissions which shall
be uniformly applied to all participants in a fund
and which shall not be changed between
valuation dates; and
k. Such other matters as may be necessary or
proper to define clearly the rights of participants
under the plan.
The legal capacity of the bank administering a CTF shall be
indicated in the plan and other related agreements or
contracts as trustee of the fund and not in any other
capacity such as fund manager, financial manager, or like
terms.
The provisions of the plan shall control all participations in
the fund and the rights and benefits of all parties in interest.
The plan may be amended by resolution of the board of
directors of the trustee: Provided, however, That
participants in the fund shall be immediately notified of such
amendments and shall be allowed to withdraw their
participation if they are not in conformity with the
amendments made: Provided, further, That amendments to
the plan shall be submitted to the appropriate supervising
and examining department of the BSP within ten (10)
banking days from approval of the amendments by the
board of directors.
A copy of the plan shall be available at the principal office
of the trustee during regular office hours for inspection by
any person having an interest in a trust whose funds are
invested in the plan or by his authorized representative.
Upon request, a copy of the plan shall be furnished such
person.(Emphases supplied.)
The importance of the actual Trust Indenture Agreements
cannot be gainsaid. The only way the Court can determine
the actual relationship between TRB and its clients is
through a scrutiny of the terms and conditions embodied in
the said Agreements.
Article 1370 of the Civil Code provides:
Art. 1370. If the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the
literal meaning of its stipulations shall control.
If the words appear to be contrary to the evident intention
of the parties, the latter shall prevail over the former.
In the interpretation of contracts, the ascertainment of the
intention of the contracting parties is to be discharged by
looking to the words they used to project that intention in
their contract, all the words, not just a particular word or
two, and words in context, not words standing alone.32 In
Bautista v. Court of Appeals,33 this Court said:
The rule is that where the language of a contract is plain
and unambiguous, its meaning should be determined
without reference to extrinsic facts or aids. The intention of
the parties must be gathered from that language, and from
that language alone. x x x.
Following the rules on interpretation of contracts, Rule 130,
Section 9 of the Revised Rules of Court lays down the parol
evidence rule:
Sec. 9. Evidence of written agreements.– When the terms
of an agreement have been reduced to writing, it is
considered as containing all the terms agreed upon and
there can be, between the parties and their successors in
interest, no evidence of such terms other than the contents
of the written agreement.
However, a party may present evidence to modify, explain
or add to the terms of the written agreement if he puts in
issue in his pleading:
(a) An intrinsic ambiguity, mistake or
imperfection in the written agreement;
(b) The failure of the written agreement to
express the true intent and agreement of the
parties thereto;
(c) The validity of the written agreement; or
(d) The existence of other terms agreed to by the
parties or their successors in interest after the
execution of the written agreement.
The term "agreement" includes wills.
The burden fell upon TRB to produce the Trust Indenture
Agreements, not only because the said Agreements were in
its possession, but more importantly, because its protest
against the DST assessments was entirely grounded on the
allegation that said Agreements were trusts. TRB was the
petitioner before the CTA in C.T.A. Case No. 6392 and it
was among its affirmative allegations that the said Trust
Indenture Agreements were trusts, thus, TRB had the
obligation of proving this fact. It is a basic rule of evidence
that each party must prove its affirmative allegation.34 As
Rule 131, Section 1 of the Revised Rules of Court states:
7|Page
Section 1. Burden of proof. — Burden of proof is the duty
of a party to present evidence on the facts in issue
necessary to establish his claim or defense by the amount
of evidence required by law.
TRB, in its Formal Offer of Evidence,35 submitted only one
document, Exhibit "A," which was page 10 of the 1993
MORB containing Section X407 on Non-Trust, Non-Fiduciary
and/or Non-Investment Management Activities.
Section X407 of the 1993 MORB is reproduced hereunder:
Sec. X407Non-Trust, Non-Fiduciary and/or Non-Investment
Management Activities The basic characteristic of trust,
other fiduciary and investment management relationship is
the absolute non-existence of a debtor-creditor
relationship, thus, there is no obligation on the part of the
trustee, fiduciary or investment manager to guarantee
returns on the funds or properties regardless of the results
of the investment. The trustee, fiduciary or investment
manager is entitled to fees/commissions which shall be
stipulated and fixed in the contract or indenture and the
trustor or principal is entitled to all the funds or properties
less fees/commissions, losses and other charges. Any
agreement/arrangement that does not conform to these
shall not be considered as trust, other fiduciary and/or
investment management relationship.
The following shall not constitute a trust, other fiduciary
and/or investment management relationship:
a. When there is a preponderance of purpose or
of intent that the arrangement creates or
establishes a relationship other than a trust,
fiduciary and/or investment management;
b. When the agreement or contract is itself used
as a certificate of indebtedness in exchange for
money placement from clients and/or as the
medium for confirming placements and
investment thereof;
c. When the agreement or contract of an account
is accepted under the signature(s) of those other
than the trust officer or subordinate officer of the
trust department or those authorized by the
board of directors to represent the trust officer;
d. Where there is a fixed rate or guaranty of
interest, income or return in favor of its client or
beneficiary: Provided, however, That where
funds are placed in fixed income-generating
investments, a quotation of income expectation
or like terms, shall neither be considered as
arrangements with a fixed rate nor a guaranty of
interest, income or return when the agreement
or indenture categorically states in bold letters
that the quoted income expectation or like terms
is neither assured nor guaranteed by the trustee
or fiduciary and it does not, therefore, entitle the
client to a fixed interest or return on his
investments: Provided, further, that any of the
following practices or practices similar and/or
tantamount thereto shall be construed as fixing
or guaranteeing the rate of interest, income or
return:
 (1) Issuance of certificates, side
agreements, letters of undertaking, or
other similar documents providing for
fixed rates or guaranteeing interest,
income or return;
(2) Paying trust earnings based on
indicated or expected yield regardless
of the actual investment results;
(3) Increasing or reducing fees in order
to meet a quoted or expected yield;
(4) Entering into any arrangement,
scheme or practice which results in the
payment of fixed rates or yield on trust
investments or in the payment of the
indicated or expected yield regardless
of the actual investment results; and
e. Where the risk or responsibility is exclusively
with the trustee, fiduciary or investment manager
in case of loss in the investment of trust, fiduciary
or investment management funds, when such
loss is not due to the failure of the trustee or
fiduciary to exercise the skill, care, prudence and
diligence required by law.
Trust, other fiduciary and investment management
activities involving any of the foregoing which are accepted,
renewed or extended after 16 October 1990 shall be
reported as deposit substitutes and shall be subject to the
reserve requirement for deposit substitutes from the time
of inception, without prejudice to the imposition of the
applicable sanctions provided for in Sections 36 and 37 of
R.A. No. 7653.
A reading of Section X407 of the 1993 MORB reveals that it
merely explained the basic characteristics of a trust or other
fiduciary and investment management relationship, and
expressly identified the instances which would not
constitute a trust, fiduciary and/or investment management
relationship. Simply put, Section X407 of the MORB set the
standards in determining whether a contract was one of
trust or some other agreement.
Therefore, it was still necessary for TRB to present the Trust
Indenture Agreements to test the terms and conditions
thereof against the standards set by Section X407 of the
1993 MORB. Without the actual Trust Indenture
Agreements, there would be no factual basis for concluding
that the same were trusts under Section X407 of the 1993
MORB. TRB called Mr. Navarro, its Vice President, to the
witness stand to testify on the terms and conditions of the
Trust Indenture Agreements. Mr. Navarro’s testimony,
though, cannot be accorded much weight and credence as
it is in violation of the parol evidence rule.
TRB made no attempt to explain why it did not present the
Trust Indenture Agreements, and it also did not take the
effort to establish that any of the exceptional circumstances
under Rule 130, Section 9 of the Revised Rules of Court,
allowing "a party to modify, explain or add to the terms of
written agreement," was extant in this case. Moreover, Mr.
Navarro’s testimony consisted essentially of conclusions of
law and general descriptions of trusts using the very same
words and terms under Section X407 of the 1993 MORB.
8|Page
In contrast, records show that the BIR examiners
conducted a thorough audit and investigation of the books
of account of TRB. Mr. Alexander D. Martinez, a BIR
Revenue Officer, testified that it took the BIR team of
examiners more than one-year to conduct and complete the
audit and examination of the documents of TRB, which
consisted of approximately 20,000 pages.36 The audit and
investigation resulted in the issuance of Assessment Notices
against TRB for DST tax liabilities for 1996 and 1997, which
were duly received by TRB. The tax assessments against
TRB are presumed valid. In Sy Po v. Court of Tax
Appeals,37 the Court pronounced:
Tax assessments by tax examiners are presumed correct
and made in good faith. The taxpayer has the duty to prove
otherwise. 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. All presumptions are
in favor of the correctness of tax assessments. (Citations
omitted.)
In Marcos II v. Court of Appeals,38 the Court again had the
occasion to rule:
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. x x x.
(Citations omitted.)
Given the failure of TRB to present proof of error in the tax
assessments of the BIR, the Court affirms the same.
The liabilities of TRB for deficiency DST on its Trust
Indenture Agreements for 1996 and 1997 are computed as
follows:
1996 1997
Trust Fund P P
567,500,927.000 55,783,860.92
Tax Rate .30/200 .30/200
Basic Tax 851,251.50 83,676.00
Add: 212,812.88 20,919.00
Surcharge
Total P 1,064,064.38 P 104,595.00 39
In addition, TRB is liable for 20%delinquency interest under
Section 249 of the NIRC of 199340
from February 14, 200241 until full payment of its foregoing
tax liabilities.
WHEREFORE, premises considered, the instant Petition for
Review on Certiorari is GRANTED. The assailed Decision
dated February 14, 2005 of the CTA en bane in C.T.A. EB
No. 32, affirming the Decision dated April 28, 2004 and
Resolution dated September 10, 2004 of the CT A Division
in C.T.A. Case No. 6392, is REVERSED and SET ASIDE.
Respondent Traders Royal Bank is ORDERED to pay the
deficiency Documentary Stamp Taxes on its Trust
Indenture Agreements for the taxable years 1996 and 1997,
in the amounts of Pl,064,064.38 and "1104, 595.00,
respectively, plus 20% delinquency interest from February
14, 2002 until full payment thereof.
SO ORDERED.
G.R. No. 213394, April 06, 2016
SPOUSES EMMANUEL D. PACQUIAO AND JINKEE J.
PACQUIAO, Petitioners, v. THE COURT OF TAX
APPEALS - FIRST DIVISION AND THE COMMISSION
OF INTERNAL REVENUE, Respondents.
DECISION
MENDOZA, J.:
Before this Court is a petition for review on certiorari1 under
Rule 65 of the Rules of Court filed by petitioner spouses,
now Congressman Emmanuel D. Pacquiao (Pacquiao) and
Vice-Governor Jinkee J. Pacquiao (Jinkee), to set aside and
annul the April 22, 2014 Resolution2 and the July 11, 2014
Resolution3 of the Court of Tax Appeals (CTA), First
Division, in CTA Case No. 8683.
Through the assailed issuances, the CTA granted the
petitioners' Urgent Motion to Lift Warrants of Distraint &
Levy and Garnishment and for the Issuance of an Order to
Suspend the Collection of Tax (with Prayer for the Issuance
of a Temporary Restraining Order4[Urgent Motion], dated
October 18, 2013, but required them, as a condition, to
deposit a cash bond in the amount of P3,298,514,894.35-
or post a bond of P4,947,772,341.53.
The Antecedents
The genesis of the foregoing controversy began a few years
before the petitioners became elected officials in their own
right. Prior to their election as public officers, the petitioners
relied heavily on Pacquiao's claim to fame as a world-class
professional boxer. Due to his success, Pacquiao was able
to amass income from both the Philippines and the United
States of America (US). His income from the US came
primarily from the purses he received for the boxing
matches he took part under Top Rank, Inc. On the other
hand, his income from the Philippines consisted of talent
fees received from various Philippine corporations for
product endorsements, advertising commercials and
television appearances.
In compliance with his duty to his home country, Pacquiao
filed his 2008 income tax return on April 15, 2009 reporting
his Philippine-sourced income.5 It was subsequently
amended to include his US-sourced income.6
The controversy began on March 25, 2010, when Pacquiao
received a Letter of Authority7(March LA) from the Regional
District Office No. 43 (RDO) of the Bureau of Internal
Revenue (BIR) for the examination of his books of accounts
and other accounting records for the period covering
January 1, 2008 to December 31, 2008.
9|Page
On April 15, 2010, Pacquiao filed his 2009 income tax
return,8 which although reflecting his Philippines-sourced
income, failed to include his income derived from his
earnings in the US.9 He also failed to file his Value Added
Tax (VAT) returns for the years 2008 and 2009.10
Finding the need to directly conduct the investigation and
determine the tax liabilities of the petitioners, respondent
Commissioner on Internal Revenue (CIR) issued another
Letter of Authority, dated July 27, 2010 (July LA),
authorizing the BIR's National Investigation
Division (NID) to examine the books of accounts and other
accounting records of both Pacquiao and Jinkee for the last
15 years, from 1995 to 2009.11 On September 21, 2010 and
September 22, 2010, the CIR replaced the July LA by
issuing to both Pacquiao12 and Jinkee13separate electronic
versions of the July LA pursuant to Revenue Memorandum
Circular (RMC) No. 56-2010.14
Due to these developments, the petitioners, through
counsel, wrote a letter15 questioning the propriety of the
CIR investigation. According to the petitioners, they were
already subjected to an earlier investigation by the BIR for
the years prior to 2007, and no fraud was ever found to
have been committed. They added that pursuant to the
March LA issued by the RDO, they were already being
investigated for the year 2008.
In its letter,16 dated December 13, 2010, the NID informed
the counsel of the petitioners that the July LA issued by the
CIR had effectively cancelled and superseded the March LA
issued by its RDO. The same letter also stated that:
Although fraud had been established in the instant
case as determined by the Commissioner, your clients
would still be given the opportunity to present documents
as part of their procedural rights to due process with regard
to the civil aspect thereof. Moreover, any tax credits and/or
payments from the taxable year 2007 & prior years will be
properly considered and credited in the current
investigation.17
The CIR informed the petitioners that its reinvestigation of
years prior to 2007 was justified because the assessment
thereof was pursuant to a "fraud investigation" against the
petitioners under the "Run After Tax
Evaders" (RATE) program of the BIR.
On January 5 and 21, 2011, the petitioners submitted
various income tax related documents for the years 2007-
2009.18 As for the years 1995 to 2006, the petitioners
explained that they could not furnish the bureau with the
books of accounts and other, tax related documents as they
had already been disposed in accordance with Section 235
of the Tax Code.19They added that even if they wanted to,
they could no longer find copies of the documents because
during those years, their accounting records were then
managed by previous counsels, who had since passed
away. Finally, the petitioners pointed out that their tax
liabilities for the said years had already been fully settled
with then CIR Jose Mario Buñag, who after a review, found
no fraud against them.20
On June 21; 2011, on the same day that the petitioners
made their last compliance in submitting their tax-related
documents, the CIR issued a subpoena duces
tecum21 requiring the petitioners rto submit additional
income tax and VAT-related documents for the years 1995-
2009.

After conducting its own- investigation, the CIR made its
initial assessment finding that the petitioners were unable
to fully settle their tax liabilities. Thus, the CIR issued its
Notice of Initial Assessment-Informal
Conference (NIC),22 dated January 31, 2012, directly
addressed to the petitioners, informing them that
based on the best evidence obtainable, they were liable for
deficiency income taxes in the amount of
P714,061,116.30 for 2008 and P1,446,245,864.33 for 2009,
inclusive of interests and surcharges. After being informed
of this development, the counsel for the petitioners sought
to have the conference reset but he never received a
response.
Then, on "February 20, 2012, the CIR issued the
Preliminary Assessment Notice23(PAN), informing the
petitioners that based on third-party information allowed
under Section 5(B)24and 6 of the National Internal Revenue
Code (NIRC),25 they found the petitioners liable not only for
deficiency income taxes in the amount of
P714,061,116.30 for 2008 and P1,446;245,864.33 for 2009,
but aiso for their non-payment of their VAT liabilities in
the amount P4,104,360.01 for 2008 and P 24,901,276.77
for 2009.
The petitioners filed their protest against the PAN.26
After denying the protest, the BIR issued its Formal Letter
Demand27(FLD), dated May 2, 2012, finding the petitioners
liable for deficiency income tax and VAT amounting to
P766,899,530.62 for taxable years 2008 and
P1,433,421,214.61 for 2009, inclusive of interests and
surcharges. Again, the petitioners questioned the findings
of the CIR.28
On May 14, 2013, the BIR issued its Final Decision on
Disputed Assessment (FDDA),29 addressed to Pacquiao
only, informing him that the CIR found him liable for
deficiency income tax and VAT for taxable years 2008 and
2009 which, inclusive of interests and surcharges,
amounted to a total of P2,261,217,439.92.
Seeking to collect the total outstanding tax liabilities of the
petitioners, the Accounts Receivable Monitoring Division of
the BIR (BIR-ARMD), issued the Preliminary Collection
Letter (PCL),30 dated July 19, 2013, demanding that both
Pacquiao and Jinkee pay the amount of P2,261,217,439.92,
inclusive of interests and surcharges.
Then, on August 7, 2013, the BIR-ARMD sent Pacquiao and
Jinkee the Final Notice Before Seizure (FNBS),31 informing
the petitioners of their last opportunity to make the
necessary settlement of deficiency income and VAT
liabilities before the bureau would proceed against their
property.
Although they no longer questioned the BIR's assessment
of their deficiency VAT liability, the petitioners
requested that they be allowed to pay the same in four (4)
quarterly installments. Eventually, through a series of
installments, Pacquiao and Jinkee paid a total
P32,196,534.40 in satisfaction of their liability for deficiency
VAT.32
Proceedings at the CTA
Aggrieved that they were being made liable for deficiency
income taxes for the years 2008 and 2009, the petitioners
sought redress and filed a petition for review33 with the
CTA.
10 | P a g e
Before the CTA, the petitioners contended that the
assessment of the CIR was defective because it was
predicated on its mere allegation that they were guilty of
fraud.34
They also questioned the validity of the attempt by the CIR
to collect deficiency taxes from Jinkee, arguing that she was
denied due process. According to the petitioners, as all
previous communications and notices from the CIR were
addressed to both petitioners, the FDDA was void because
it was only addressed to Pacquiao. Moreover, considering
that the PCL and FNBS were based on the FDDA, the same
should likewise be declared void.35
The petitioners added that the CIR assessment, which
was not based on actual transaction documents but
simply on "best possible sources," was not sanctioned
by the Tax Code. They also argue that the assessment
failed to consider not only the taxes paid by Pacquiao to the
US authorities for his fights, but also the deductions claimed
by him for his expenses.36
Pending the resolution by the CTA of their appeal, the
petitioners sought the suspension of the issuance of
warrants of distraint and/or levy and warrants of
garnishment.37
Meanwhile, in a letter,38 dated October 14, 2013, the BIR-
ARMD informed the petitioners that they were denying their
request to defer the collection enforcement action for lack
of legal basis. The same letter also informed the petitioners
that despite their initial payment, the amount to be
collected from both of them still amounted to
P3,259,643,792.24, for deficiency income tax for
taxable years 2008 and 2009, and P46,920,235.74
for deficiency VAT for the same period. A warrant of
distraint and/or levy39 against Pacquiao and Jinkee was
included in the letter.
Aggrieved, the petitioners filed the subject Urgent Motion
for the CTA to lift the warrants of distraint, levy and
garnishments issued by the CIR against their .assets and to
enjoin the CIR from collecting the assessed deficiency taxes
pending the resolution of their appeal. As for- the cash
deposit and bond requirement under Section 11 of Republic
Act (R.A.) No. 1125, the petitioners question the necessity
thereof, arguing that the CIR's assessment of their tax
liabilities was highly questionable. At the same time, the
petitioners manifested that they were willing to file a bond
for such reasonable amount to be fixed by the tax court.
On April 22, 2014, the CTA issued the first assailed
resolution granting the petitioner's Urgent Motion, ordering
the CIR to desist from collecting on the deficiency tax
assessments against the petitioners. In its resolution, the
CTA noted that the amount sought to be collected was way
beyond the petitioners' net worth, which, based on
Pacquiao's Statement of Assets, Liabilities and Net
Worth (SALN), only amounted to P1,185,984,697.00.
Considering that the petitioners still needed to cover the
costs of their daily subsistence, the CTA opined that the
collection of the total amount of P3,298,514,894.35 from
the petitioners would be highly prejudicial to their interests
and should, thus, be suspended pursuant to Section 11 of
R.A. No. 1125, as amended.
The CTA, however, saw no justification that the petitioners
should deposit less than the disputed amount. They were,
thus, required to deposit the amount of P3,298,514,894.35
or post a bond in the amount of P4,947,772,341.53.
The petitioners sought partial reconsideration of the April
22, 2014 CTA resolution, praying for the reduction of the
amount of the bond required or an extension of 30 days to
file the same. On July 11, 2014, the CTA issued the second
assailed resolution40 denying the petitioner's motion to
reduce the required cash deposit or bond, but allowed them
an extension of thirty (30) days within which to file the
same.
Hence, this petition, raising the following
GROUNDS
A.
Respondent Court acted with grave abuse of
discretion amounting to lack or excess of
jurisdiction in presuming the correctness of a fraud
assessment without evidentiary support other than
the issuance of the fraud assessments themselves,
thereby violating Petitioner's constitutional right to
due process.
B.
Respondent Court acted with grave abuse of
discretion amounting to lack or excess of
jurisdiction when it required the Petitioners to post
a bond even if the tax collection processes employed
by Respondent Commissioner against Petitioners
was patently in violation of law thereby blatantly
breaching Petitioners' constitutional right to due
process, to wit:
Respondent Commissioner commenced tax
collection process against Jinkee without issuing or
serving an FDDA against her.
Respondent Commissioner failed to comply with the
procedural due process requirements for summary
tax collection remedies under Sections 207(A) and
(B) of the Tax Code when she commenced summary
collection remedies before the expiration of the
period for Petitioners to pay the assessed deficiency
taxes.
Respondent Commissioner failed to comply with the
procedural due process requirements for summary
tax collection remedies under Section 208 of the Tax
Code when she failed to serve Petitioners with
warrants of garnishment against their bank
accounts.
The Chief of the ARMD, without any authority from
Respondent Commissioner, increased the aggregate
amount of deficiency income tax and VAT assessed
against Petitioners from P2,261,217,439.92 to
P3,298,514,894.35 after the filing of the Petition for
Review with the Court of Tax Appeals.
Respondent Commissioner arbitrarily refused to
admit that Petitioners had already paid the
deficiency VAT assessments for the years 2008 and
2009.
C.
Respondent Court acted with grave abuse of
discretion amounting to lack or excess of
jurisdiction in requiring Petitioners to post a cash
bond in the amount of P3,298,514,894.35 or a
surety bond in the amount of P4,947,772,341.53,
11 | P a g e
which is effectively an impossible condition given
that their undisputed net worth is only
P1,185,984,697.00.
D.
Respondent Court acted with grave abuse of
discretion amounting to lack or excess of
jurisdiction when it imposed a bond requirement
which will effectively prevent Petitioners from
continuing the prosecution of its appeal from the
arbitrary and bloated assessments issued by
Respondent Commissioner.41
Arguments of the Petitioners
Contending that the CTA En Bane has
no certiorari jurisdiction over interlocutory orders issued by
its division, the petitioners come before the Court, asking it
to 1] direct the CTA to dispense with the bond requirement
imposed under Section 11 of R.A. No. 1125, as amended;
and 2] direct the CIR to suspend the collection of the
deficiency income tax and VAT for the years 2008 and 2009.
The petitioners also pray that a temporary restraining
order (TRO) be issued seeking a similar relief pending the
disposition of the subject petition.
In support of their position, the petitioners assert that the
CTA acted with grave abuse of discretion amounting to lack
or excess of jurisdiction in requiring them to provide
security required under Section 11 of R.A. No. 1125. Under
the circumstances, they claim that they should not be
required to make a cash deposit or post a bond to stay the
collection of the questioned deficiency taxes considering
that the assessment and collection efforts of the BIR was
marred by both procedural and substantive errors. They are
synthesized as follows:
First. The CTA erred when it required them to make a cash
deposit or post a bond on the basis of the fraud assessment
by the CIR. Similar to the argument they raised in their
petition for review with the CTA, they insist that the fraud
assessment by the CIR could not serve as basis for security
because the amount assessed by the CIR was made without
evidentiary basis,42 but just grounded on the "best possible
sources," without any detail.
Second... The BIR failed to accord them procedural due
process when it initiated summary collection remedies even
before the expiration of the period allowed for them to pay
the assessed deficiency taxes.43 They also claimed that they
were not served with warrants of garnishment and that the
warrants of garnishment served on their banks of account
were made even before they received the FDDA and PCL.44
Third. The BIR only served the FDDA to Pacquiao. There
was no similar notice to Jinkee. Considering such failure,
the CIR effectively did not find Jinkee liable for deficiency
taxes. The collection of deficiency taxes against Jinkee was
improper as it violated her right to due process of
law.45 Accordingly, the petitioners question the propriety of
the CIR's attempt to collect deficiency taxes from Jinkee.
Fourth. The amount assessed by the BIR as deficiency taxes
included the deficiency VAT for the years 2008 and 2009
which they had already paid, albeit in installments.
Fifth. The posting of the required security is effectively an
impossible condition given that their undisputed net worth
is only P1,185,984,697.00
Considering the issues raised, it is the position of the
petitioners that the circumstances of the case warrant the
application of the exception provided under Section 11 of
R.A. No. 1125 as affirmed by the ruling of the Court
in Collector of Internal Revenue v. Avelino46 (Avelino)
and Collector of Internal Revenue v. Zulueta,47 (Zulueta)
and that they should have been exempted from posting the
required security as a prerequisite to suspend the collection
of deficiency taxes from them.
On August 18, 2014, the Court resolved to grant the
petitioners' prayer for the issuance of a TRO and to require
the CIR to file its comment.48
Arguments of the CIR
For its part,- the CIR asserts that the CTA was correct in
insisting that the petitioners post the required cash deposit
or bond as a condition to suspend the collection of
deficiency taxes. According to. the tax administrator,
Section 11 of R.A. No. 1125, as amended, is without
exception when it states that notwithstanding an appeal to
the CTA, a taxpayer, in order to suspend the payment of
his tax liabilities, is required to deposit the amount claimed
by the CIR or to file a surety bond for not more than double
the amount due.49
As for the Court's rulings in Avelino and Zulueta invoked by
the petitioners, the CIR argues that they are inapplicable
considering that in the said cases, it was ruled that the
requirement of posting a bond to suspend the collection of
taxes could be dispensed with only if the methods employed
by the CIR in the tax collection were clearly null and void
and prejudicial to the taxpayer.50 The CIR points out that,
in this case, the CTA itself made, no finding that its
collection by summary methods was void and even ruled
that "the alleged illegality of the methods employed by the
respondent (CIR) to effect the collection of tax [is] not at
all patent or evident xxx" and could only be determined
after a full-blown trial.51The CIR even suggests that the
Court revisit its ruling in Avelino and Zulueta as Section 11
of R.A. No. 1125, as amended, gives the CTA no discretion
to allow the dispensation of the required bond as a
condition to suspend the collection of taxes.
Finally, the CIR adds that whether the assessment and
collection of the petitioners' tax liabilities were proper as to
justify the application of Avelino and Zulueta is a question
of fact which is not proper in a petition for certiorari under
Rule 65, considering that the rule is only confined to issues
of jurisdiction.52
The Court's Ruling
Appeal will not suspend
the collection of tax;
Exception
Section 11 of R.A. No. 1125, as amended by R.A. No.
9282,53 embodies the rule that an appeal to the CTA from
the decision of the CIR will not suspend the payment, levy,
distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law.
When, in the view of the CTA, the collection may jeopardize
the interest of the Government and/or the taxpayer, it may
suspend the said collection and require the taxpayer either
to deposit the amount claimed or to file a surety bond.
The application of the exception to the rule is the crux of
the subject controversy. Specifically, Section 11 provides:
12 | P a g e
SEC. 11. Who May Appeal; Mode of Appeal; Effect of
Appeal. - Any party adversely affected by a decision, ruling
or inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of
Agriculture or the Central Board of Assessment Appeals or
the Regional Trial Courts may file an appeal with the CTA
within thirty (30) days after the receipt of such decision or
ruling or after the expiration of the period fixed by law for
action as referred to in Section 7(a)(2) herein.
xxxx
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the
Secretary of Trade and Industry and Secretary of
Agriculture, as the case may be shall suspend the payment,
levy, distraint, and/or sale of any property of the taxpayer
for the satisfaction of his tax liability as provided by existing
law:
Provided, however, That when in the opinion of the
Court the collection by the aforementioned
government agencies may jeopardize the interest of
the Government and/or the taxpayer, the Court at
any stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit
the amount claimed or to file a surety bond for not
more than double the amount with the Court.
xxxx
[Emphasis Supplied]
Essentially, the petitioners ascribe grave abuse of discretion
on the part of the CTA when it issued the subject resolutions
requiring them to deposit-the amount of P3,298,514,894.35
or post a bond in the amount of P4,947,772,341.53 as a
condition for its order enjoining the CIR from collecting the
taxes from them. The petitioners anchor their contention
on the premise that the assessment and collection
processes employed by the CIR in exacting their tax
liabilities were in patent violation of their constitutional right
to due process of law. They, thus, posit that pursuant
to Avelino and Zulueta, the tax court should have not only
ordered the CIR to suspend the collection efforts it was
pursuing in satisfaction of their tax liability, but also
dispensed with the requirement of depositing a cash or
filing a surety bond.
To recall, the Court in Avelino upheld the decision of the
CTA to declare the warrants of garnishment, distraint and
levy and the notice of sale of the properties of Jose Avelino
null and void and ordered the CIR to desist from collecting
the deficiency income taxes which were assessed for the
years 1946 to 1948 through summary administrative
methods. The Court therein found that the demand of the
then CIR was made without authority of law because it was
made five (5) years and thirty-five (35) days after the last
two returns of Jose Avelino were filed - clearly beyond the
three (3)-year prescriptive period provided under what was
then Section 51(d) of the National Internal Revenue Code.
Dismissing the contention of the CIR that the deposit of the
amount claimed or the filing of a bond as required by law
was a requisite before relief was granted, the Court therein
concurred with the opinion of the CTA that the courts were
clothed with authority to dispense with the requirement "if
the method employed by the Collector of Internal Revenue
in the collection of tax is not sanctioned by law."54
a. Exclusive appellate jurisdiction to review by appeal, as
In Zulueta, the Court likewise dismissed the argument that herein provided:
the CTA erred in issuing the injunction without requiring the
taxpayer either to deposit the amount claimed or to file a l. Decisions of the Commissioner of Internal Revenue in
surety bond for an amount not more than double the tax cases involving disputed assessments, refunds of internal
sought to be collected. The Court cited Collector of Internal revenue taxes, fees or other charges, penalties imposed in
Revenue v. Aurelio P. Reyes and the Court of Tax relation thereto, or other matters arising under the
Appeals55 where it was written: National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
Xxx. At first blush it might be as contended by the Solicitor
General, but a careful analysis of the second paragraph of xxxx
said Section 11 will lead Us to the conclusion that the
requirement of the bond as a condition precedent to the [Emphasis Supplied]
issuance of a 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 law for From all the foregoing, it is clear that the authority of the
such cases provided and not when said processes are courts to issue injunctive writs to restrain the collection of
obviously in violation of the law to the extreme that they tax and to dispense with the deposit of the amount claimed
have to be SUSPENDED for jeopardizing the interests of the or the filing of the required bond is not simply confined
taxpayer.56 to cases where prescription has set in. As explained by
the Court in those cases, whenever it is determined by
[Italics included] the courts that the method employed by the
Collector of Internal Revenue in the collection of
tax is not sanctioned by law, the bond requirement
The Court went on to explain the reason for empowering under Section 11 of R.A. No. 1125should be dispensed
the courts to issue such injunctive writs. It wrote: with. The purpose of the rule is not only to prevent
jeopardizing the interest of the taxpayer, but more
importantly, to prevent the absurd situation wherein the
"Section 11 of Republic Act No. 1125 is therefore premised
court would declare "that the collection by the summary
on the assumption that the collection by summary
methods of distraint and levy was violative of law, and then,
proceedings is by itself in accordance with existing laws;
in the same breath require the petitioner to deposit or file
and then what is suspended is the act of collecting,
a bond as a prerequisite for the issuance of a writ of
whereas, in the case at bar what the respondent Court
injunction."58
suspended was the use of the method employed to verify
the collection which was evidently illegal after the lapse of
The determination of whether
the three-year limitation period. The respondent Court
the petitioners.' case falls
issued the injunction in question on the basis of its findings
within the exception provided
that the means intended to be used by petitioner in the
under Section 11, R.A No. 1125
collection of the alleged deficiency taxes were in violation
cannot be determined
of law. It would certainly be an absurdity on the part
at this point
of the Court of Tax Appeals to declare that the
collection by the summary methods of distraint and
Applying the foregoing precepts to the subject controversy,
levy was violative of the law, and then, on the same
the Court finds no sufficient basis in the records for the
breath require the petitioner to deposit or file a bond
Court to determine whether the dispensation of the
as a prerequisite of the issuance of a writ of
required cash deposit or bond provided under Section 11,
injunction. Let us suppose, for the sake of argument, that
R.A No. 1125 is appropriate.
the Court a quo would have required the petitioner to post
the bond in question and that the taxpayer would refuse or
It should first be highlighted that in rendering the assailed
fail to furnish said bond, would the Court a quo be obliged
resolution, the CTA, without stating the facts and law, made
to authorize or allow the Collector of Internal Revenue to
a determination that the illegality of the methods employed
proceed with the collection from the petitioner of the taxes
by the CIR to effect the collection of tax was not patent. To
due by a means it previously declared to be contrary to
quote the CTA:
law?"57

In this case, the alleged illegality of the methods employed

[Italics included. Emphases and Underlining Supplied]
Thus, despite the amendments to the law, the Court still
holds that the CTA has ample authority to issue injunctive
writs to restrain the collection of tax and to even
dispense with the deposit of the amount claimed or
the filing of the required bond, whenever
the method employed by the CIR in the collection of. tax
jeopardizes the interests of a taxpayer for being patently
in violation of the law. Such authority emanates from
the jurisdiction conferred to it not only by Section 11 of R.A.
No. 1125, but also by Section 7 of the same law, which, as
amended provides:
Sec. 7. Jurisdiction. - The Court of Tax Appeals shall
exercise:
by respondent to effect the collection of tax is not at all
patent or evident as in the foregoing cases. At this
early stage of the proceedings, it is premature for this Court
to rule on the issues of whether or not the warrants were
defectively issued; or whether the service thereof was done
in violation of the rules; or whether or not respondent's
assessments were valid. These matters are evidentiary
in nature, the resolution of which can only be made
after a full blown trial.
Apropos, the Court finds no legal basis to
apply Avelino and Zulueta to the instant case and exempt
petitioners from depositing a cash bond or filing a surety
bond before a suspension order may be
effected.59ChanRoblesVirtualawlibrary

13 | P a g e

Though it may be true that it would have been premature
for the CTA to immediately determine whether the
assessment made against the petitioners was valid or
whether the warrants were properly issued and served, still,
it behooved upon the CTA to properly determine, at least
preliminarily, whether the CIR, in its assessment of the
tax liability of the petitioners, and its effort of collecting the
same, complied with the law and the pertinent
issuances of the BIR itself. The CTA should have
conducted a preliminary hearing and received evidence so
it could have properly determined whether the requirement
of providing the required security under Section 11, R.A.
No. 1125 could be reduced or dispensed withpendente lite.
The Court cannot make a conducted before
preliminary determination
on whether the CIR used
methods not sanctioned by law
Absent any evidence and preliminary determination by the
CTA, the Court cannot make any factual finding and settle
the issue of whether the petitioners should comply with the
security requirement under Section 11, R.A. No. 1125. The
determination of whether the methods, employed by the
CIR in its assessment, jeopardized the interests of a
taxpayer for being patently in violation of the law is a
question of fact that calls for the reception of
evidence which would serve as basis. In this regard, the
CTA is in a better position to initiate this given its time and
resources. The remand of the "case to the CTA on this
question is, therefore, more sensible and proper.
For the Court to make any finding of fact on this point would
be premature. As stated earlier, there is no evidentiary
basis. All the arguments are mere allegations from both
sides. Moreover, any finding by the Court would pre-
empt the CTA from properly exercising its jurisdiction and
settle the main issues presented before it, that is, whether
the petitioners were afforded due process; whether the CIR
has valid basis for its assessment; and whether the
petitioners should be held liable for the deficiency taxes.
Petition to be remanded to
the CTA; CTA to conduct
preliminary hearing
As the CTA is in a better, position to make such a
preliminary determination, a remand to the CTA is in order.
To resolve the issue of whether the petitioners should be
required to post the security bond under Section 11 of R.A.
No. 1125, and, if so, in what, amount, the CTA must take
into account, among others, the following:
First. Whether the requirement of a Notice of Informal
Conference was complied with - The petitioners contend
that the BIR issued the PAN without first sending a NIC to
petitioners. One of the first requirements of Section 3 of
Revenue Regulation (R.R.) No. 12-99,60 the then prevailing
regulation on the due process requirement in tax audits
and/or investigation,61is that a NIC be first accorded to the
taxpayer. The use of the word "shall" in subsection 3.1.1
describes the mandatory nature of the service of a NIC. As
with the other notices required under the regulation, the
purpose of sending a NIC is but part of the "due process
requirement in the issuance of a deficiency tax
assessment," the absence of which renders nugatory any
assessment made by the tax authorities.62
Second. Whether the 15-year period subject of the CIR's
investigation is arbitrary and excessive. - Section 20363 of
the Tax Code provides a 3-year limit for the assessment. of
14 | P a g e
internal revenue taxes. While the prescriptive period to
assess deficiency taxes may be extended to 10 years in
cases where there is false, fraudulent, or non-filing of a tax
return - the fraud contemplated by law must be actual. It
must be intentional, consisting of deception willfully and
deliberately done or resorted to in order to induce another
to give up some right.64
Third. Whether fraud was duly established. - In its letter,
dated December 13, 2010, the NID had been conducting a
fraud investigation against the petitioners under its RATE
program and that it found that "fraud had been established
in the instant case as determined by the Commissioner."
Under Revenue Memorandum Order (RMO) No. 27-10, it is
required that a preliminary investigation must first be
a LA is issued.65
Fourth. Whether the FLD issued against the petitioners
was irregular. - The FLD issued against the petitioners
allegedly stated that the amounts therein were "estimates
based on best possible sources." A taxpayer should be
informed in writing of the law and the facts on which the
assessment is made, otherwise, the assessment is
void.66 An assessment, in order to stand judicial scrutiny,
must be based on facts. The presumption of the correctness
of an assessment, being a mere presumption, cannot be
made to rest on another presumption.67
To stress, the petitioners had asserted that the assessment
of the CIR was not based on actual transactions but
on "estimates based on best possible sources." This
assertion has not been satisfactorily addressed by the CIR
in detail. Thus, there is a need for the CTA to conduct a
preliminary hearing.
Fifth. Whether the FDDA, the PCL, the FNBS, and the
Warrants of Distraint and/or Levy were validly issued. In its
hearing, the CTA must also determine if the following
allegations of the petitioners have merit:,
a. The FDDA and PCL were issued against
petitioner Pacquiao only. The Warrant of Distraint and/or
Levy/Garnishment issued by the CIR, however, were made
against the assets of both petitioners;
b. The warrants of garnishment had been served on the
banks of both petitioners even before the petitioners
received the FDDA and PCL;
c. The Warrant of Distraint and/or Levy/Garnishment
against the petitioners was allegedly made prior to the
expiration of the period allowed for the petitioners
to pay the assessed deficiency taxes;
d. The Warrant of Distraint and/or Levy/Garnishment
against petitioners failed to take into consideration that
the deficiency VAT was already paid in full; and
e. Petitioners were not given a copy of the Warrants.
Sections 20768 and 20869 of the Tax Code require the
Warrant of Distraint and/or Levy/Garnishment be served
upon the taxpayer.
Additional Factors
In case the CTA finds that the petitioners should provide
the necessary security under Section 11 of R.A. 1125, a
recomputation of the amount thereof is in order.- If there
would be a need for a bond or to reduce the same, the CTA
should take note that the Court, in A.M. No. 15-92-01-CTA,
resolved to approve the CTA En Banc Resolution No. 02-
2015, where the phrase "amount claimed" stated in Section
11 of R.A. No. 1125 was construed to refer to
the principal amount of the deficiency taxes, excluding
penalties, interests and surcharges.

Moreover, the CTA should.also consider the claim of the

petitioners that they already paid a total of P32,196,534.40
deficiency VAT assessed against' them.. Despite said
payment, the CIR still assessed them the total amount of
P3,298,514,894.35, including the amount assessed as VAT
deficiency, plus surcharges, penalties and interest. If so,
these should also be deducted from the.amount of the bond
to be computed and required.

In the conduct of its preliminary hearing, the CTA must

balance the scale between the inherent power of the State
to tax and its right to prosecute perceived transgressors of
the law, on one side; and the constitutional rights of
petitioners to due process of law and the equal protection
of the laws, on the other. In case of doubt, the tax court
must remember that as in all tax cases, such scale should
favor the taxpayer, for a citizen's right to due process and
equal protection of the law is amply protected by the Bill of
Rights under the Constitution.70

In view of all the foregoing, the April 22, 2014 and July 11,
2014 Resolutions of the CTA, in so far as it required the
petitioners to deposit first a cash bond in the amount of
P3,298,514,894.35 or post a bond of P4,947,772,341.53,
should be further enjoined until the issues aforementioned
are settled in a preliminary hearing to be conducted by it.
Thereafter, it should make a determination if the posting of
a bond would still be required and, if so, compute it taking
into account the CTA En Banc Resolution, which was
approved by the Court in A.M. No. 15-02-01-CTA, and the
claimed payment of P32,196,534.40, among
others.chanrobleslaw

WHEREFORE, the petition is PARTIALLY GRANTED. Let

a Writ of Preliminary Injunction be issued, enjoining the
implementation of the April 22, 2014 and July 11, 2014
Resolutions of the Court of Tax Appeals, First Division, in
CTA Case No. 8683, requiring the petitioners to first deposit
a cash bond in the amount of P3,298,514,894.35 or post a
bond of P4,947,772,341.53, as a condition to restrain the
collection of the deficiency taxes assessed against them.

The writ shall remain in effect until the issues

aforementioned are settled in a preliminary hearing to be
conducted by the Court of Tax Appeals, First Division.

Accordingly, the case is hereby REMANDED to the Court

of Tax Appeals, First Division, which is ordered to conduct
a preliminary hearing to determine whether the
dispensation or reduction of the required cash deposit or
bond provided under Section 11, Republic Act No. 1125 is
proper to restrain the collection of deficiency taxes assessed
against the petitioners.

If required, the Court of Tax Appeals, First Division, shall

proceed to compute the amount of the bond in accordance
with the guidelines aforestated, particularly the provisions
of A.M. No. 15-02-01-CTA. It should also take into account
the amounts already paid by the petitioners.

After the posting of the required bond, or if the Court of

Tax Appeals, First Division, determines that no bond is
necessary, it shall proceed to hear and resolve the petition
for review pending before it.

SO ORDERED.

15 | P a g e
[ GR No. 215950, Jun 20, 2016 ] VAT.[9]

On June 13, 2014, the petitioner appealed the CIR's

TRIDHARMA MARKETING CORPORATION v. CTA, SECOND decision to the CTA via its so-called Petition for Review with
DIVISION + Motion to Suspend Collection of Tax, which was docketed
as CTA Case No. 8833 and raffled to the CTA Second
RESOLUTION Division.[10]

The CTA in Division issued the first assailed resolution on

BERSAMIN, J.: July 8, 2014, stating thusly:
In this special civil action for certiorari,[1] the taxpayer
In the instant case, petitioner's Financial Statements and
assails t he resolutions issued on July 8, 2014[2] and
Independent Auditor's Report for December 31, 2013 and
December 22, 2014[3] in CTA Case No. 8833 whereby the
2012, as identified by its witness, indicate that the
Court of Tax Appeals (CTA), Second Division, granted its
company's total equity for the year 2012 and 2013 was
motion for suspension of the collection of tax but required
P955,095,301 and P916,768,767, respectively. To yield to
it to post a surety bond amounting to P4,467,391,881.76.
respondent's alleged assessment and collection in the
amount of P4,467,391,881.76 would definitely jeopardize
The relevant facts follow.
the normal business operations of petitioner thereby
causing irreparable injury to its ability to continue.
On August 16, 2013, the petitioner received a Preliminary
Assessment Notice (PAN) from the Bureau of Internal
Moreover, considering petitioner's willingness to post bond,
Revenue (BIR) assessing it with various deficiency taxes -
as manifested during the June 19, 2014 hearing, in such
income tax (IT), value-added tax (VAT), withholding tax on
reasonable amount as may be fixed by this Court, pursuant
compensation (WTC), expanded withholding tax (EWT) and
to Section 11 of R.A. No. 1125, as amended, this Court in
documentary stamp tax (DST) - totalling
the interest of substantial justice, resolves to grant
P4,640,394,039.97, inclusive of surcharge and interest. A
petitioner's Motion.
substantial portion of the deficiency income tax and VAT
arose from the complete disallowance[4] by the BIR of the
x x x x
petitioner's purchases from Etheria Trading in 2010
amounting to P4,942,937,053.82. The petitioner replied to
WHEREFORE, considering the urgency of the action to be
the PAN through its letter dated August 30, 2013.[5]
enjoined, petitioner's Motion for Suspension of Collection of
Tax in the amount of P4,467,391,881.76 allegedly
On September 23, 2013, the petitioner received from the
representing its deficiency Income Tax and Value Added
BIR a Formal Letter of Demand assessing it with deficiency
Tax for taxable year 2010 is GRANTED. Provided,
taxes for the taxable year ending December 31, 2010
however, that petitioner deposits with this Court an
amounting to P4,697,696,275.25, inclusive of surcharge
acceptable surety bond equivalent to 150% of the
and interest. It filed a protest against the formal letter of
assessment or in the amount of SIX BILLION SEVEN
demand. Respondent Commissioner of Internal Revenue
HUNDRED ONE MILLION EIGHTY SEVEN THOUSAND
(CIR) required the petitioner to submit additional
EIGHT HUNDRED TWENTY TWO and 64/100 PESOS
documents in support of its protest, and the petitioner
(P6,701,087,822.64) within fifteen (15) days from notice
complied.[6]
hereof.
On February 28, 2014, the petitioner received a Final
Moreover, pursuant to Supreme Court Circular A.M. No. 04-
Decision on Disputed Assessment worth
7-02-SC, otherwise known as the "Proposed Guidelines on
P4,473,228,667.87, computed as follows:[7]
Corporate Surety Bonds", petitioner is
hereby ORDERED to submit the following documents with
Tax
the surety bond stated above:
Typ Basic Tax Surcharge Interest Total
e
1. Certified copy of a valid Certificate of Accreditation and
1,527,100,90763,550,451.878,605,999.P3,169,257,3
1. IT Authority issued by the Office of the Court Administrator;
3.98 99 55 55.52
2. 612,723,525.306,361,762.379,049,238.1,298,134,52
2. Copy of the Certificate of Compliance with Circular No.
VAT 25 63 36 6.24
66 of the Insurance Commission duly certified by the
3.
1,679,413.14 1,048,137.842,727,550.98 Insurance Commission;
WHT
4.
534,493.40 336,511.18 871,004.58 3. Proof of payment of legal fees under the Rules of Court
DST
and the documentary stamp tax (thirty centavos [P0.30J on
5.
1,378,127.78 860,102.76 2,238,230.54 each four pesos [P4.00] or fractional part thereof, of the
EWT
premium charged, pursuant to Section 187 Title VII of Rep.
TOT 2,143,416,461,069,912,211,259,899,984,473,228,66
Act No. 8424) and Value Added Tax (VAT) under the
AL 3.55 4.62 9.69 7.87
National Internal Revenue Code;
The petitioner filed with the CIR a protest through a
Request for Reconsideration. However, the CIR rendered a
4. Photocopy of the Certificate of Accreditation and
decision dated May 26, 2014 denying the request for
Authority issued by the Court Administrator containing the
reconsideration.[8]
photograph of the authorized agent (after presentation to
the Clerk of Court of the original copy thereof as Copy of
Prior to the CIR's decision, the petitioner paid the
the Certificate of Accreditation and Authority containing the
assessments corresponding to the WTC, DST and EWT
photograph of the agent); and
deficiency assessments, inclusive of interest, amounting to
P5,836,786.10. It likewise reiterated its offer to
5. Secretary Certificate containing the specimen signatures
compromise the alleged deficiency assessments on IT and

16 | P a g e
of the agents authorized to transact business with the
courts.
In addition, the said bond must be a continuing bond which
shall remain effective until the above-captioned case is
finally decided, resolved or terminated by this Court without
necessity of renewal on a yearly basis, or its validity being
dependent on the payment of a renewal premium pursuant
to Section 177 of the Insurance Code.
Failure to comply with the above requirements will cause
the setting aside of this Resolution granting petitioner's
motion for the suspension of the collection of the tax
liability.
x x x x
SO ORDERED.[11]
The petitioner filed its Motion for Partial Reconsideration
praying, among others, for the reduction of the bond to an
amount it could obtain.
On December 22, 2014, the CTA in Division issued its
second assailed resolution reducing the amount of the
petitioner's surety bond to P4,467,391,881.76, which was
the equivalent of the BIR's deficiency assessment for IT and
VAT.[12]
Hence, the petitioner has commenced this special civil
action for certiorari, asserting:
I.
WITH ALL DUE RESPECT, THE CTA SECOND
DIVISION COMMITTED GRAVE ABUSE OF
DISCRETION IN REFUSING TO CONSIDER, AND IN
COMPLETELY IGNORING, THE PATENT ILLEGALITY
OF THE ASSESSMENT THAT, UNDER LAW AND
JURISPRUDENCE, FULLY JUSTIFIED DISPENSING
WITH THE REQUIREMENT OF POSTING A BOND.
II.
WITH ALL DUE RESPECT, THE CTA SECOND
DIVISION COMMITTED GRAVE ABUSE OF
DISCRETION IN IMPOSING A GARGANTUAN BOND
IN THE AMOUNT OF P4,467,391,881.76 THAT
PETITIONER HAS DEMONSTRATED BY UNREFUTED
EVIDENCE TO BE FACTUALLY AND LEGALLY
IMPOSSIBLE TO PROCURE.
III.
WITH ALL DUE RESPECT, THE CTA SECOND
DIVISION COMMITTEED GRAVE ABUSE OF
DISCRETION IN GRANTING AN ILLUSORY RELIEF,
AND IN EFFECTIVELY DENYING PETITIONER
ACCESS TO THE REMEDY PROVIDED BY LAW. UPON
UNCONTRADICTED EVIDENCE, THE IMPOSITION OF
A BOND IS NOT ONLY UNJUST, BUT WILL CAUSE
IRREPARABLE INJURY UPON PETITIONER EVEN
BEFORE IT IS HEARD.[13]
On February 9, 2015, the Court issued a temporary
restraining order[14] enjoining the implementation of July 8,
2014 and December 22, 2014 resolutions of the CTA in
Division, and the collection of the deficiency assessments.
17 | P a g e
Issue
Did the CTA in Division commit grave abuse of discretion in
requiring the petitioner to file a surety bond despite the
supposedly patent illegality of the assessment that was
beyond the petitioner's net worth but equivalent to the
deficiency assessment for IT and VAT?
Ruling of the Court
The petition for certiorari is meritorious.
Section 11 of Republic Act No. 1125 (R.A. No. 1125),[15] as
amended by Republic Act No. 9282 (RA 9282)[16] it is stated
that:
Sec. 11. Who may appeal; effect of appeal. — x x x
x x x x
No appeal taken to the Court of Tax Appeals from the
decision of the Collector of Internal Revenue or the
Collector of Customs shall suspend the payment, levy,
distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing
law: Provided, however, That when in the opinion of
the Court the collection by the Bureau of Internal
Revenue or the Commissioner of Customs may
jeopardize the interest of the Government and/or
the taxpayer the Court at any stage of the
proceeding may suspend the said collection and
require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than
double the amount with the Court. (bold emphasis
supplied.)
Clearly, the CTA may order the suspension of the collection
of taxes provided that the taxpayer either: (1) deposits the
amount claimed; or (2) files a surety bond for not more
than double the amount.
The petitioner argues that the surety bond amounting to
P4,467,391,881.76 greatly exceeds its net worth and makes
it legally impossible to procure the bond from bonding
companies that are limited in their risk assumptions.[17] As
shown in its audited financial statements for the year
ending December 31, 2013, its net worth only amounted to
P916,768,767.00,[18] making the amount of
P4,467,391,881.76 fixed for the bond nearly five times
greater than such net worth.
The surety bond amounting to P4,467,391,881.76 imposed
by the CTA was within the parameters delineated in Section
11 of R.A. 1125, as amended. The Court holds, however,
that the CTA in Division gravely abused its discretion under
Section 11 because it fixed the amount of the bond at nearly
five times the net worth of the petitioner without
conducting a preliminary hearing to ascertain whether there
were grounds to suspend the collection of the deficiency
assessment on the ground that such collection would
jeopardize the interests of the taxpayer. Although the
amount of P4,467,391,881.76 was itself the amount of the
assessment, it behoved the CTA in Division to consider
other factors recognized by the law itself towards
suspending the collection of the assessment, like whether
or not the assessment would jeopardize the interest of the
taxpayer, or whether the means adopted by the CIR in
determining the liability of the taxpayer was legal and valid.
Simply prescribing such high amount of the bond like the
initial 150% of the deficiency assessment of
P4,467,391,881.76 (or P6,701,087,822.64), or later on
even reducing the amount of the bond to equal the
deficiency assessment would practically deny to the
petitioner the meaningful opportunity to contest the validity
of the assessments, and would likely even impoverish it as
to force it out of business.
At this juncture, it becomes imperative to reiterate the
principle that the power to tax is not the power to destroy.
In Philippine Health Care Providers, Inc. v. Commissioner of
Internal Revenue,[19] the Court has stressed that:
As a general rule, the power to tax is an incident of
sovereignty and is unlimited in its range, acknowledging in
its very nature no limits, so that security against its abuse
is to be found only in the responsibility of the legislature
which imposes the tax on the constituency who is to pay it.
So potent indeed is the power that it was once opined that
the power to tax involves the power to destroy.
Petitioner claims that the assessed DST to date which
amounts to P376 million is way beyond its net worth of P259
million. Respondent never disputed these assertions. Given
the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the
government to throttle private business. On the contrary,
the government ought to encourage private enterprise.
Petitioner, just like any concern organized for a lawful
economic activity, has a right to maintain a legitimate
business. As aptly held in Roxas, et al. v. CTA, et al.:
The power of taxation is sometimes called also the power
to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax
collector "kill the hen that lays the golden egg."
Legitimate enterprises enjoy the constitutional protection
not to be taxed out of existence. Incurring losses because
of a tax imposition may be an acceptable consequence but
killing the business of an entity is another matter and should
not be allowed. It is counter-productive and ultimately
subversive of the nation's thrust towards a better economy
which will ultimately benefit the majority of our people.
Moreover, Section 11 of R.A. 1125, as amended, indicates
that the requirement of the bond as a condition precedent
to suspension of the collection 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,
not when the processes are in plain violation of the law that
they have to be suspended for jeopardizing the interests of
the taxpayer.[20]
The petitioner submits that the patent illegality of the
assessment was sufficient ground to dispense with the bond
requirement because the CIR was essentially taxing its sales
revenues without allowing the deduction of the cost of
goods sold by virtue of the CIR refusing to consider
evidence showing that it had really incurred
costs.[21] However, the Court is not in the position to rule
on the correctness of the deficiency assessment, which is a
matter still pending in the CTA. Conformably with the
pronouncement in Pacquiao v. Court of Tax Appeals, First
Division, and the Commissioner of Internal Revenue,[22] a
ruling that has precedential value herein, the Court deems
it best to remand the matter involving the petitioner's plea
against the correctness of the deficiency assessment to the
CTA for the conduct of a preliminary hearing in order to
determine whether the required surety bond should be
dispensed with or reduced.
In Pacquiao, the petitioners were issued deficiency IT and
18 | P a g e
VAT assessments for 2008 and 2009 in the aggregate
amount of P2,261,217,439.92, which amount was above
their net worth of P1,185,984,697.00 as reported in their
joint Statement of Assets, Liabilities and Net Worth (SALN).
They had paid the VAT assessments but appealed to the
CTA the IT assessments. Notwithstanding their appeal, the
CIR still initiated collection proceedings against them by
issuing warrants of distraint or levy against their properties,
and warrants of garnishment against their bank accounts.
As a consequence, they went to the CTA through an urgent
motion to lift the warrants and to suspend the collection of
taxes. The CTA in Division found the motion to suspend tax
collection meritorious, and lifted the warrant of distraint or
levy and garnishment on the condition that they post a cash
bond of P3,298,514,894.35, or surety bond of
P4,947,772,341.53. They thus came to the Court to
challenge the order to post the cash or surety bond as a
condition for the suspension of collection of their deficiency
taxes. In resolving their petition, the Court held and
disposed:
Absent any evidence and preliminary determination by the
CTA, the Court cannot make any factual finding and settle
the issue of whether the petitioners should comply with the
security requirement under Section 11, R.A. No. 1125. The
determination of whether the methods, employed by the
CIR in its assessment, jeopardized the interests of a
taxpayer for being patently in violation of the law is a
question of fact that calls for the reception of
evidence which would serve as basis. In this regard, the
CTA is in a better position to initiate this given its time and
resources. The remand of the case to the CTA on this
question is, therefore, more sensible and proper.
For the Court to make any finding of fact on this point would
be premature. As stated earlier, there is no evidentiary
basis. All the arguments are mere allegations from both
sides. Moreover, any finding by the Court would pre-
empt the CTA from properly exercising its jurisdiction and
settle the main issues presented before it, that is, whether
the petitioners were afforded due process; whether the CIR
has valid basis for its assessment; and whether the
petitioners should be held liable for the deficiency taxes.
x x x x
In the conduct of its preliminary hearing, the CTA must
balance the scale between the inherent power of the State
to tax and its right to prosecute perceived transgressors of
the law, on one side; and the constitutional rights of
petitioners to due process of law and the equal protection
of the laws, on the other. In case of doubt, the tax court
must remember that as in all tax cases, such scale should
favor the taxpayer, for a citizen's right to due process and
equal protection of the law is amply protected by the Bill of
Rights under the Constitution.[23]
Consequently, to prevent undue and irreparable damage to
the normal business operations of the petitioner, the
remand to the CTA of the questions involving the
suspension of collection and the correct amount of the bond
is the proper course of action.
WHEREFORE, the Court GRANTS the petition
for certiorari; ANNULS and SETS ASIDE the resolutions
issued on July 8, 2014 and December 22, 2014 in CTA Case
No. 8833 requiring the petitioner to post a surety bond of
P4,467,391,881.76 as a condition to restrain the collection
of the deficiency taxes assessed against
it; PERMANENTLY ENJOINS the enforcement of the
resolutions issued on July 8, 2014 and December 22, 2014
in CTA Case No. 8833; and REQUIRES the Court of Tax
Appeals, Second Division, to forthwith conduct a
preliminary hearing in CTA Case No. 8833 to determine and
rule on whether the bond required under Section 11 of
Republic Act No. 1125 may be dispensed with or reduced
to restrain the collection of the deficiency taxes assessed
against the petitioner.

No pronouncement on costs of suit.

SO ORDERED.

19 | P a g e
G.R. No. 215957 Taxable Income per
7,156,336.08
audit
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
FITNESS BY DESIGN, INC., Respondent
Tax Due (35%) 2,504,717.63

DECISION ₱
Add: Surcharge (50%) 1,252,358.8
1
LEONEN, J.:
Interest (20%/annu 4,508,491.
5, 760,850.54
To avail of the extraordinary period of assessment in m) until 4-15-04 73
Section 222(a) of the National Internal Revenue Code, the
Deficiency Income ₱
Commissioner of Internal Revenue should show that the
Tax 8,265,568.17
facts upon which the fraud' is based is communicated to the
taxpayer. The burden of proving that the facts exist in any
subsequent proceeding is with the Commissioner.
Furthermore, the Final Assessment Notice is not valid if it Value Added Tax
does not contain a definite due date for payment by the
taxpayer.
Unreported Sales ₱ 7,156,336.08
This resolves a Petition for Review on Certiorari1 filed by the
Commissioner of Internal Revenue, which assails the Output Tax (10%) 715,633.61
Decision2 dated July 14, 2014 and Resolution3 dated
December 16, 2014 of the Court of Tax Appeals. The Court ₱
Add: Surcharge (50%)
of Tax Appeals En Banc affirmed the Decision of the First 357,816.80
Division, which declared the assessment issued against
Interest (20%/ 1,303,823.6
Fitness by Design, Inc. (Fitness) as invalid.4 1,661,640.41
annum) until 4-15-04 0

On April 11, 1996, Fitness filed its Annual Income Tax Deficiency VAT ₱ 2,311,214.02
Return for the taxable year of 1995.5 According to Fitness,
Documentary Stamp
it was still in its pre-operating stage during the covered
Tax
period.6

On June 9, 2004, Fitness received a copy of the Final

Assessment Notice dated March 17, 2004.7 The Final Subscribe Capital Stock ₱ 375,000.00
Assessment Notice was issued under Letter of Authority No.
DST due (2/200) 3,750.00
00002953.8 The Final Assessment Notice assessed that
Fitness had a tax deficiency in the amount of Add: Surcharge (25%) 937.50
₱10,647,529.69.9 It provides:
Deficiency DST ₱ 4,687.50
FINAL ASSESSMENT NOTICE

March 17, 2004 ₱

Total Deficiency
10,647,529.6
Taxes
9
FITNESS BY DESIGN, INC
169 Aguirre St., BF Homes,
Paranaque City The complete details covering the aforementioned
discrepancies established during the investigation of this
Gentlemen: case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National
Please be informed that after investigation of your Internal Internal Revenue Code], as amended. Please note,
revenue Tax Liabilities for the year 1995 pursuant to Letter however, that the interest and the total amount due
of Authority No. 000029353 dated May 13, 2002, there has will have to be adjusted if paid prior or beyond April
been found due deficiency taxes as shown hereunder: 15, 2004.

Assessment No. _____________ In view thereof, you are requested to pay your aforesaid
deficiency internal revenue taxes liabilities through the duly
authorized agent bank in which you are enrolled within the
Income Tax time shown in the enclosed assessment notice.10 (Emphasis
in the original)

Taxable Income per Fitness filed a protest to the Final Assessment Notice on
₱
return June 25, 2004. According to Fitness, the Commissioner's
period to assess had already prescribed. Further, the
Add: Unreported Sales 7,156,336.08

20 | P a g e
assessment was without basis since the company was only
incorporated on May 30, 1995.11
On February 2, 2005, the Commissioner issued a Warrant
of Distraint and/or Levy with Reference No. OCN WDL-95-
05-005 dated February 1, 2005 to Fitness.12
Fitness filed before the First Division of the Court of Tax
Appeals a Petition for Review (With Motion to Suspend
Collection of Income Tax, Value Added Tax, Documentary
Stamp Tax and Surcharges and Interests) on March 1,
2005.13
On May 17, 2005, the Commissioner of Internal Revenue
filed an Answer to Fitness' Petition and raised special and
affirmative defenses.14 The Commissioner posited that the
Warrant of Distraint and/or Levy was issued in accordance
with law.15 The Commissioner claimed that its right to
assess had not yet prescribed under Section 222(a)16 of the
National Internal Revenue Code.17 Because the 1995
Income Tax ,Return filed by Fitness was false and
fraudulent for its alleged intentional failure to reflect its true
sales, Fitness' respective taxes may be assessed at any time
within 10 years from the discovery of fraud or omission.18
The Commissioner asserted further that the assessment
already became final and executory for Fitness' failure , to
file a protest within the reglementary period.19 The
Commissioner denied that there was a protest to the Final
Assessment Notice filed by Fitness on June 25,
2004.20 According to the Commissioner, the alleged protest
was "nowhere to be found in the [Bureau of Internal
Revenue] Records nor reflected in the Record Book of the
Legal Division as normally done by [its]' receiving clerk
when she received [sic] any document."21 Therefore, the
Commissioner had sufficient basis to collect the tax
deficiency through the Warrant of Distraint and/or Levy.22
The alleged fraudulent return was discovered through a tip
from a confidential informant.23 The revenue officers'
investigation revealed that Fitness had been operating
business with sales operations amounting to ₱7,156,336.08
in 1995, which it neglected toreport in its income tax
return.24 Fitness' failure to report its income resulted in
deficiencies to its income tax and value-added tax of
₱8,265,568.17 and ₱2,377,274.02 respectively, as well as
the documentary stamp tax with regard to capital stock
subscription.25
Through the report, the revenue officers recommended the
filing of a civil case for collection of taxes and a criminal
case for failure to declare Fitness' purported sales in its
1995 Income Tax Return.26 Hence, a criminal complaint
against Fitness was filed before the Department of Justice.27
The Court of Tax Appeals First Division granted Fitness'
Petition on the ground that the assessment has already
prescribed.28 It cancelled and set aside the Final
Assessment Notice dated March 1 7, 2004 as well as the
Warrant of Distraint and/or Levy issued by the
Commissioner.29 It ruled that the Final Assessment Notice
is invalid for failure to comply with the requirements of
Section 22830 of the National Internal Revenue Code. The
dispositive portion of the Decision reads:
WHEREFORE, the Petition for Review dated February 24,
2005 filed by petitioner Fitness by Design, Inc., is
hereby GRANTED. Accordingly, the Final Assessment
21 | P a g e
Notice dated 'March 17, 2004, finding petitioner liable for
deficiency income tax, documentary stamp tax and value-
added tax for taxable year 1995 in the total amount of
₱10,647,529.69 is hereby CANCELLED and SET ASIDE.
The Warrant of Distraint and Levy dated February 1, 2005
is 'likewise CANCELLED and SET ASIDE.
SO ORDERED.31 (Emphasis in the original)
The Commissioner's Motion for Reconsideration and its
Supplemental Motion for Reconsideration were denied by
the Court of Tax Appeals First Division.32
Aggrieved, the Commissioner filed an appeal before the
Court of Tax Appeals En Banc.33 The Commissioner
asserted ,that it had 10 years to make an assessment due
to the fraudulent income tax return filed by Fitness.34 It also
claimed that the assessment already attained finality due to
Fitness' failure to file its protest within the period provided
by law.35
Fitness argued that the Final Assessment Notice issued to it
could not be claimed as a valid deficiency assessment that
could justify the issuance of a warrant of distraint and/or
levy.36 It asserted that it was a mere request for payment
as it did not provide the period within which to pay the
alleged liabilities.37
The Court of Tax Appeals En Banc ruled in favor of Fitness.
It affirmed the Decision of the Court of Tax Appeals First
Division, thus:
WHEREFORE, the instant Petition for Review
is DENIED for lack of merit. Accordingly, both the Decision
and Resolution in CTA Case No. 7160 dated July 10, 2012
and November 21, 2012 respectively are AFFIRMED in
toto.38 (Emphasis in the original)
The Commissioner's Motion for Reconsideration was denied
by the Court of Tax Appeals En Banc in the
Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before
this Court a Petition for Review.
Petitioner Commissioner of Internal Revenue raises the sole
issue of whether the Final Assessment Notice issued against
respondent Fitness by Design, Inc. is a valid assessment
under Section 228 of the National Internal Revenue Code
and Revenue Regulations No. 12-99.40
Petitioner argues that the Final Assessment Notice issued
to respondent is valid since it complies with Section 228 of
the National Internal Revenue Code and Revenue
Regulations No. 12-99.41 The law states that the taxpayer
shall be informed in writing of the facts, jurisprudence, and
law on which the assessment is based.42 Nothing in the law
provides that due date for payment is a substantive
requirement for the validity of a final assessment notice.43
Petitioner further claims that a perusal of the Final
Assessment Notice shows that April 15, 2004 is the due date
for payment.44 The pertinent portion of the assessment
reads:
The complete details covering the aforementioned
discrepancies established during the investigation of this
case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249(B) of the [National
Internal Revenue Code], as amended. Please note,
however, that the interest and the total amount due will
have to be adjusted if paid prior or beyond April 15,
2004.45 (Emphasis supplied)
This Court, through the Resolution46 dated July 22, 2015,
required respondent to comment on the Petition for Review.
In its Comment,47 respondent argues that the Final
Assessment Notice issued was merely a request and not a
demand for payment of tax liabilities.48 The Final
Assessment Notice cannot be considered as a final
deficiency assessment because it deprived respondent of
due process when it failed to reflect its fixed tax
liabilities.49Moreover, it also gave respondent an indefinite
period to pay its tax liabilities.50
Respondent points out that an assessment should strictly
comply with the law for its validity.51 Jurisprudence provides
that "not all documents coming from the [Bureau of Internal
Revenue] containing a computation of the tax liability can
be deemed assessments[,] which can attain
finality."52 Therefore, the Warrant of Distraint and/or Levy
cannot be enforced since it is based on an invalid
assessment.53
Respondent likewise claims that since the Final Assessment
Notice was allegedly based on fraud, it must show the
details of the fraudulent acts imputed to it as part of due
process.54
I receipt of the pre-assessment notice to respond.78 If the
The Petition has no merit.
An assessment "refers to the determination of amounts due
from a person obligated to make payments."55 "In the
context of national internal revenue collection, it refers to
the determination of the taxes due from a taxpayer under
the National Internal Revenue Code of 1997."56
The assessment process starts with the filing of tax return
and payment of tax by the taxpayer.57 The initial
assessment evidenced by the tax return is a self-
assessment of the taxpayer.58 The tax is primarily
computed and voluntarily paid by the taxpayer without
need of any demand from government.59 If tax obligations
are properly paid, the Bureau of Internal Revenue may
dispense with its own assessment.60
After filing a return, the Commissioner or his or her
representative may allow the examination of any taxpayer
for assessment of proper tax liability.61 The failure of a
taxpayer to file his or her return will not hinder the
Commissioner from permitting the taxpayer's
examination.62 The Commissioner can examine records or
other data relevant to his or her inquiry in order to verify
the correctness of any return, or to make a return in case
of noncompliance, as well as to determine and collect tax
liability.63
22 | P a g e
The indispensability of affording taxpayers sufficient written
notice of his or her tax liability is a clear definite
requirement.64 Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99, as
amended, transparently outline the procedure in tax
assessment.65
Section 3 of Revenue Regulations No. 12-99,66 the then
prevailing regulation regarding the due process
requirement in the issuance of a deficiency tax assessment,
requires a notice for informal conference.67 The revenue
officer who audited the taxpayer's records shall state in his
or her report whether the taxpayer concurs with his or her
findings of liability for deficiency taxes.68 If the taxpayer
does not agree, based on the revenue officer's report, the
taxpayer shall be informed in writing69 of the discrepancies
in his or her payment of internal revenue taxes for "Informal
Conference."70 The informal conference gives the taxpayer
an opportunity to present his or her side of the case.71
The taxpayer is given 15 days from receipt of the notice of
informal conference to respond.72 If the taxpayer fails to
respond, he or she will be considered in default.73 The
revenue officer74 endorses the case with the least possible
delay to the Assessment Division of the Revenue Regional
Office or the Commissioner or his or her authorized
representative.75 The Assessment Division of the Revenue
Regional Office or the Commissioner or his or her
authorized representative is responsible for the
"appropriate review and issuance of a deficiency tax
assessment, if warranted."76
If, after the review conducted, there exists sufficient basis
to assess the taxpayer with deficiency taxes, the officer
'shall issue a preliminary assessment notice showing in
detail the facts, jurisprudence, and law on which the
assessment is based.77 The taxpayer is given 15 days from
taxpayer fails to respond, he or she will be considered in
default, and a formal letter of demand and assessment
notice will be issued.79
The formal letter of demand and assessment notice shall
state the facts, jurisprudence, and law on which the
assessment was based; otherwise, these shall be
void.80 The taxpayer or the authorized representative may
administratively protest the formal letter of demand and
assessment notice within 30 days from receipt of the
notice.81
II
The word "shall" in Section 228 of the National Internal
Revenue Code and Revenue Regulations No. 12-99 means
the act of informing the taxpayer of both the legal and
factual bases of the assessment is mandatory.82 The law
requires that the bases be reflected in the formal letter of
demand and assessment notice.83 This cannot be
presumed.84 Otherwise, the express mandate of Section
228 and Revenue Regulations No. 12-99 would be
nugatory.85 The requirement enables the taxpayer to make
an effective protest or appeal of the assessment or
decision.86
The rationale behind the requirement that taxpayers should
be informed of the facts and the law on which the
assessments are based conforms with the constitutional
mandate that no person shall be deprived of his or her
property without due process of law.87 Between the power
of the State to tax and an individual's right to due process,
the scale favors the right of the taxpayer to due process.88
The purpose of the written notice requirement is to aid the
taxpayer in making a reasonable protest, if
necessary.89Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough.90
Commissioner of Internal Revenue v. United Salvage and
Towage (Phils.), Inc.91 held that a final assessment notice
that only contained a table of taxes with no other details
was insufficient:
In the present case, a mere perusal of the [Final
Assessment Notice] for the deficiency EWT for taxable year
1994 will show that other than a tabulation of the alleged
deficiency taxes due, no further detail regarding the
assessment was provided by petitioner. Only the resulting
interest, surcharge and penalty were anchored with legal
basis. Petitioner should have at least attached a detailed
notice of discrepancy or stated an explanation why the
amount of P48,461.76 is collectible against respondent and
how the same was arrived at.92
Any deficiency to the mandated content of the assessment
or its process will not be tolerated.93 In Commissioner of
Internal Revenue v. Enron,94 an advice of tax deficiency
from the Commissioner of Internal Revenue to an employee
of Enron, including the preliminary five (5)-day letter, were
not considered valid substitutes for the mandatory written
notice of the legal and factual basis of the
assessment.95 The required issuance of deficiency tax
assessment notice to the taxpayer is different from the
required contents of the notice.96 Thus:
The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and
assessment notice.1âwphi1 Thus, such cannot be
presumed. Otherwise, the express provisions of Article 228
of the [National Internal Revenue Code] and [Revenue
Regulations] No. 12-99 would be rendered nugatory. The
alleged "factual bases" in the advice, preliminary letter and
"audit working papers" did not suffice. There was no going
around the mandate of the law that the legal and factual
bases of the assessment be stated in writing in the formal
letter of demand accompanying the assessment
notice.97 (Emphasis supplied)
However, the mandate of giving the taxpayer a notice of
the facts and laws on which the assessments are based
should not be mechanically applied.98 To emphasize, the
purpose of this requirement is to sufficiently inform the
taxpayer of the bases for the assessment to enable him or
her to make an intelligent protest.99
In Samar-I Electric Cooperative v. Commissioner of Internal
Revenue,100 substantial compliance with Section 228 of the
National Internal Revenue Code is allowed, provided that
the taxpayer would be later apprised in writing of the
factual and legal bases of the assessment to enable him or
her to prepare for an effective protest.101 Thus:
Although the [Final Assessment Notice] and demand letter
issued to petitioner were not accompanied by a written
explanation of the legal and factual bases of the deficiency
taxes assessed against the petitioner, the records showed
that respondent in its letter dated April 10, 2003 responded
to petitioner's October 14, 2002 letter-protest, explaining at
23 | P a g e
length the factual and legal bases of the deficiency tax
assessments and denying the protest.
Considering the foregoing exchange of correspondence and
documents between the parties, we find that the
requirement of Section 228 was substantially complied with.
Respondent had fully informed petitioner in writing of the
factual and legal bases of the deficiency taxes assessment,
which enabled the latter to file an "effective" protest, much
unlike the taxpayer's situation in Enron. Petitioner's right to
due process was thus not violated.102
A final assessment notice provides for the amount of tax
due with a demand for payment.103 This is to determine the
amount of tax due to a taxpayer.104 However, due process
requires that taxpayers be informed in writing of the facts
and law on which the assessment is based in order to aid
the taxpayer in making a reasonable protest.105 To
immediately ensue with tax collection without initially
substantiating a valid assessment contravenes the principle
in administrative investigations "that taxpayers should be
able to present their case and adduce supporting
evidence."106
Respondent filed its income tax return in 1995.107 Almost
eight (8) years passed before the disputed final assessment
notice was issued. Respondent pleaded prescription as its
defense when it filed a protest to the Final Assessment
Notice. Petitioner claimed fraud assessment to justify the
belated assessment made on respondent.108If fraud was
indeed present, the period of assessment should be within
10 years.109 It is incumbent upon petitioner to clearly state
the allegations of fraud committed by respondent to serve
the purpose of an assessment notice to aid respondent in
filing an effective protest.
III
The prescriptive period in making an assessment depends
upon whether a tax return was filed or whether the tax
return filed was either false or fraudulent.1âwphi1 When a
tax return that is neither false nor fraudulent has been filed,
the Bureau of Internal Revenue may assess within three (3)
years, reckoned from the date of actual filing or from the
last day prescribed by law for filing.110 However, in case of
a false or fraudulent return with intent to evade tax, Section
222(a) provides:
Section 222. Exceptions as to Period of Limitation of
Assessment and Collection of Taxes. –
(a) In the case of a false or fraudulent return with intent to
evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such
tax may be filed without assessment, at any time within ten
(10) years after the discovery of the falsity, fraud or
omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be
judicially taken cognizance of in the civil or criminal action
for the collection thereof. (Emphasis supplied)
In Aznar v. Court of Tax Appeals,111 this Court interpreted
Section 332112 (now Section 222[a] of the National Internal
Revenue Code) by dividing it in three (3) different cases:
first, in case of false return; second, in case of a fraudulent
return with intent to evade; and third, in case of failure to
file a return.113 Thus:
Our stand that the law should be interpreted to mean a main purpose is to determine the amount that a taxpayer
separation of the three different situations of false return, is liable to pay.130
fraudulent return with intent to evade tax and failure to file
a return is strengthened immeasurably by the last portion
A pre-assessment notice "do[es] not bear the gravity of a
of the provision which aggregates the situations into three
formal assessment notice."131 A pre-assessment notice
different classes, namely "falsity'', "fraud" and
merely gives a tip regarding the Bureau of Internal
"omission."114
Revenue's findings against a taxpayer for an informal
conference or a clarificatory meeting.132
This Court held that there is a difference between "false
return" and a "fraudulent return."115 A false return simply
A final assessment is a notice "to the effect that the amount
involves a "deviation from the truth, whether intentional or
therein stated is due as tax and a demand for payment
not" while a fraudulent return "implies intentional or
thereof."133 This demand for payment signals the time
deceitful entry with intent to evade the taxes due."116
"when penalties and interests begin to accrue against the
taxpayer and enabling the latter to determine his
Fraud is a question of fact that should be alleged and duly remedies[.]"134 Thus, it must be "sent to and received by
proven.117 "The willful neglect to file the required tax return the taxpayer, and must demand payment of the taxes
or the fraudulent intent to evade the payment of taxes, described therein within a specific period."135
considering that the same is accompanied by legal
consequences, cannot be presumed."118 Fraud entails
The disputed Final Assessment Notice is not a valid
corresponding sanctions under the tax law. Therefore, it is
assessment.
indispensable for the Commissioner of Internal Revenue to
include the basis for its allegations of fraud in the
assessment notice. First, it lacks the definite amount of tax liability for which
respondent is accountable. It does not purport to be a
demand for payment of tax due, which a final assessment
During the proceedings in the Court of Tax Appeals First
notice should supposedly be. An assessment, in the context
Division, respondent presented its President, Domingo C.
of the National Internal Revenue Code, is a "written notice
Juan Jr. (Juan, Jr.), as witness.119 Juan, Jr. testified that
and demand made by the [Bureau of Internal Revenue] on
respondent was, in its pre-operating stage in
the taxpayer for the settlement of a due tax liability that is
1995.120During that period, respondent "imported
there: definitely set and fixed."136 Although the disputed
equipment and distributed them for market testing in the
notice provides for the computations of respondent's tax
Philippines without earning any profit."121 He also confirmed
liability, the amount remains indefinite. It only provides that
that the Final Assessment Notice and its attachments failed
the tax due is still subject to modification, depending on the
to substantiate the Commissioner's allegations of fraud
date of payment. Thus:
against respondent, thus:

The complete details covering the aforementioned

More than three (3) years from the time petitioner filed its
1995 annual income tax return on April 11, 1996,
respondent issued to petitioner a [Final Assessment Notice]
dated March 17, 2004 for the year 1995, pursuant to the
Letter of Authority No. 00002953 dated May 13, 2002. The
attached Details of discrepancy containing the assessment
for income tax (IT), value-added tax (VAT) and
documentary stamp tax (DST) as well as the Audit Result/
Assessment Notice do not impute fraud on the part of
petitioner. Moreover, it was obtained on information and
documents illegally obtained by a [Bureau of Internal
Revenue] informant from petitioner's accountant Elnora
Carpio in 1996.122 (Emphasis supplied)
Petitioner did not refute respondent's allegations. For its
defense, it presented Socrates Regala (Regala), the Group
Supervisor of the team, who examined respondent's tax
liabilities.123 Regala confirmed that the investigation was
prompted by a tip from an informant who provided them
with respondent's list of sales.124 He admitted125 that the
gathered information did not show that respondent
deliberately failed to reflect its true income in 1995.126
IV
The issuance of a valid formal assessment is a substantive
prerequisite for collection of taxes.127 Neither the National
Internal Revenue Code nor the revenue regulations provide
for a "specific definition or form of an assessment."
However, the National Internal Revenue Code defines its
explicit functions and effects."128 An assessment does not
only include a computation of tax liabilities; it also includes
a demand for payment within a period prescribed.129 Its
discrepancies established during the investigation of this
case are shown in the accompanying Annex 1 of this Notice.
The 50% surcharge and 20% interest have been imposed
pursuant to Sections 248 and 249 (B) of the [National
Internal Revenue Code], as amended. Please
note, however, that the interest and the total amount due
will have to be adjusted if prior or beyond April 15,
2004.137 (Emphasis Supplied)
Second, there are no due dates in the Final Assessment
Notice. This negates petitioner's demand for
payment.138Petitioner's contention that April 15, 2004
should be regarded as the actual due date cannot be
accepted. The last paragraph of the Final Assessment
Notice states that the due dates for payment were
supposedly reflected in the attached assessment:
In view thereof, you are requested to pay your aforesaid
deficiency internal revenue tax liabilities through the duly
authorized agent bank in which you are enrolled within the
time shown in the enclosed assessment
notice.139 (Emphasis in the original)
However, based on the findings of the Court of Tax Appeals
First Division, the enclosed assessment pertained to
remained unaccomplished.140
Contrary to petitioner's view, April 15, 2004 was the
reckoning date of accrual of penalties and surcharges and
not the due date for payment of tax liabilities.1avvphi1 The
total amount depended upon when respondent decides to
pay. The notice, therefore, did not contain a definite and
actual demand to pay.

24 | P a g e
Compliance with Section 228 of the National Internal
Revenue Code is a substantative requirement.141 It is not a
mere formality.142 Providing the taxpayer with the factual
and legal bases for the assessment is crucial before
proceeding with tax collection. Tax collection should be
premised on a valid assessment, which would allow the
taxpayer to present his or her case and produce evidence
for substantiation.143

The Court of Tax Appeals did not err in cancelling the Final
Assessment Notice as well as the Audit Result/Assessment
Notice issued by petitioner to respondent for the year 1995
covering the "alleged deficiency income tax, value-added
tax and documentary stamp tax amounting to
₱10,647,529.69, inclusive of surcharges and interest"144 for
lack of due process. Thus, the Warrant of Distraint and/or
Levy is void since an invalid assessment bears no valid
effect.145

Taxes are the lifeblood of government and should be

collected without hindrance.146 However, the collection of
taxes should be exercised "reasonably and in accordance
with the prescribed procedure."147

The essential nature of taxes for the existence of the State

grants government with vast remedies to ensure its
collection. However, taxpayers are guaranteed their
fundamental right to due process of law, as articulated in
various ways in the process of tax assessment. After all, the
State's purpose is to ensure the well-being of its citizens,
not simply to deprive them of their fundamental rights.

WHEREFORE, the Petition is DENIED. The Decision of

the Court of Tax Appeals En Banc dated July 14, 2014 and
Resolution dated December 16, 2014 in CTA EB Case No.
970 (CTA Case No. 7160) are hereby AFFIRMED.

SO ORDERED.

25 | P a g e
[ GR No. 191856, Dec 07, 2016 ]
REPUBLIC v. GMCC UNITED DEVELOPMENT
CORPORATION +
DECISION
LEONEN, J.:
Before this Court is a Petition for Review on
Certiorari[1] assailing the Court of Appeals' Decision[2] dated
September 8, 2009 and Resolution[3] dated March 30, 2010
in CA-G.R. SP No. 100380. The Court of Appeals affirmed
the May 26, 2006 Resolution[4] of the Department of
Justice, which dismissed the criminal complaint for tax
evasion filed by the Bureau of Internal Revenue against
GMCC United Development Corporation's corporate officers
on the ground that the period to assess the tax had already
prescribed.[5]
On March 28, 2003, the Bureau of Internal Revenue
National Investigation Division issued a Letter of Authority,
authorizing its revenue officers to examine the books of
accounts and other accounting records of GMCC United
Development Corporation (GMCC) covering taxable years
1998 and 1999.[6] On April 3, 2003 GMCC was served a copy
of said Letter of Authority and was requested to present its
books of accounts and other accounting records.[7] GMCC
failed to respond to the Letter of Authority as well as the
subsequent letters requesting that its records and
documents be produced.[8]
Due to GMCC's failure to act on the requests, the Assistant
Commissioner of the Enforcement Service of the Bureau of
Internal Revenue issued a Subpoena Duces Tecum on
GMCC president, Jose C. Go (Go).[9] When GMCC still failed
to comply with the Subpoena Duces Tecum, the revenue
officers were constrained to investigate GMCC through
Third Party Information.[10]
The investigation revealed that in 1998, GMCC, through Go,
executed two dacion en pago agreements to pay for the
obligations of GMCC's sister companies, Ever Emporium,
Inc., Gotesco Properties, Inc. and Ever Price Club, Inc., to
Rizal Commercial Banking Corporation.[11]GMCC allegedly
failed to declare the income it earned from these
agreements for taxation purposes in 1998.[12] Moreover,
these transactions constituted a donation in favor of
GMCC's sister companies for which GMCC failed to pay the
corresponding donor's tax.[13]The BIR also assessed the
value added tax over the said transactions.[14]
It was also discovered that in 1999, GMCC sold
condominium units and parking slots for a total amount of
P5,350,000.00 to a Valencia K. Wong.[15] However, GMCC
did not declare the income it earned from these
transactions in its 1999 Audited Financial Statements.[16]
Thus, on November 17, 2003, the Bureau of Internal
Revenue issued a Notice to Taxpayer to GMCC, which GMCC
ignored.[17] On December 8, 2003, the Bureau of Internal
Revenue issued a Preliminary Assessment Notice.[18] It was
only when the Bureau of Internal Revenue issued the Final
Assessment Notice that GMCC responded.[19] In a Letter
dated November 23, 2004, GMCC protested the issuance of
the Final Assessment Notice citing that the period to assess
and collect the tax had already prescribed. The Bureau of
Internal Revenue denied the protest in a Final Decision
dated February 10, 2005.[20] .
In light of the discovered tax deficiencies, the Bureau of
Internal Revenue, on October 7, 2005, filed with the
Department of Justice a criminal complaint for violation of
26 | P a g e
Sections 254,[21] 255,[22] and 267,[23] of the National
Internal Revenue Code against GMCC, its president, Jose C.
Go, and its treasurer, Xu Xian Chun.[24]
In his Counter-Affidavit, Go prayed that the complaint be
dismissed, arguing, among others, that the action had
already prescribed and that GMCC did not defraud the
government.[25] Assuming that the period to assess had not
yet prescribed, GMCC argued that there was nothing to
declare since it earned no income from the dacion en
pago transactions.[26] Furthermore, even though the dacion
en pagotransactions were not included in the GMCC 1998
Financial Statement, they had been duly reflected in the
GMCC 2000 Financial Statement.
On May 26, 2006, the Department of Justice, through the
Chief State Prosecutor, issued a Resolution[27] dismissing
the criminal complaint against the GMCC officers. The State
Prosecutor ruled that there was no proof that GMCC
defrauded the government. The Bureau went beyond its
authority when it assessed and issued the Letter of
Authority knowing that the period to assess had already
lapsed. Moreover, the prosecutor ruled that since GMCC did
not gain from the assailed transactions, the imposition of
income, VAT, and donor's taxes were improper.[28] The
dispositive portion of the Resolution reads:
All told, we find no probable cause to warrant indictment of
respondents for violation of Sections 254, 255 and 267 of
the National Internal Revenue Code of 1997.
WHEREFORE, it is respectfully recommended that the
instant complaint be DISMISSED.[29]
The Bureau of Internal Revenue filed a Motion for
Reconsideration,[30] which the Department of Justice denied
in the Resolution dated August 31, 2006.[31]
Aggrieved, the Bureau of Internal Revenue filed before the
Court of Appeals a Petition for Certiorari.[32] The Bureau
argued that the Department of Justice gravely abused its
discretion in dismissing the criminal complaint against
GMCC's officers. On September 8, 2009, the Court of
Appeals denied the Petition and affirmed in toto the
Department of Justice's Resolution. The dispositive portion
of the Decision[33] reads:
WHEREFORE, the foregoing considered, the instant
petition is hereby DISMISSED and the assailed
resolutions AFFIRMED in toto. No costs.
SO ORDERED.[34]
The Bureau of Internal Revenue moved for reconsideration,
but it was denied in the Resolution[35] dated March 30,
2010.
Petitioner Bureau of Internal Revenue is now before this
Court, insisting that the Court of Appeals erred in finding
that the applicable period of prescription in its case is the
three-year period under Section 203 of the NIRC and not
the ten-year prescriptive period under Section 222.[36]
The issues before us are as follows:
First, whether the Court of Appeals erred in declaring that
the Secretary of Justice did not commit grave abuse of
discretion when he found no probable cause and dismissed
the tax evasion case against the respondent officers of
GMCC.
Second, whether the applicable prescriptive period for the
tax assessment is the ten-year period or the three-year
period.
The Petition must be denied.
I
We are convinced that the Court of Appeals committed no
reversible error in affirming the ruling of the Secretary of
Justice that there was no probable cause to file a tax
evasion case against the respondent officers. Since the
assessment for the tax had already prescribed, no
proceeding in court on the basis of such return can be filed.
The petitioner filed a criminal complaint against
respondents for violating Articles 254, 255, and 267 of the
National Internal Revenue Code. The Articles provide:
SEC. 254. Attempt to Evade or Defeat Tax. - Any person
who willfully attempts in any manner to evade or defeat any
tax imposed under this Code or the payment thereof shall,
in addition to the other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than
Thirty thousand pesos (P30,000.00) but not more than One
hundred thousand pesos (P100,000.00) and suffer
imprisonment of not less than two (2) years but not more
than four (4) years: Provided, That the conviction or
acquittal obtained under this Section shall not be a bar to
the filing of a civil suit for the collection of taxes.
SEC. 255. Failure to File Return, Supply Correct and
Accurate Information, Pay Tax, Withhold and Remit Tax
and Refund Excess Taxes Withheld on Compensation. - Any
person required under this Code or by rules and regulations
promulgated thereunder to pay any tax, make a return,
keep any record, or supply correct and accurate
information, who willfully fails to pay such tax, make such
return, keep such record, or supply such correct and
accurate information, or withhold or remit taxes withheld,
or refund excess taxes withheld on compensation, at the
time or times required by law or rules and regulations shall,
in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than
Ten thousand pesos (P10,000) and suffer imprisonment of
not less than one (1) year but not more than ten (10) years.
Any person who attempts to make it appear for any reason
that he or another has in fact filed a return or statement,
or actually files a return or statement and subsequently
withdraws the same return or statement after securing the
official receiving seal or stamp of receipt of an internal
revenue office wherein the same was actually filed shall,
upon conviction therefore, be punished by a fine of not less
than Ten thousand pesos (P10,000) but not more than
Twenty thousand pesos (P20,000) and suffer imprisonment
of not less than one (1) year but not more than three (3)
years.
SEC. 267. Declaration under Penalties of Perjury. - Any
declaration, return and other statements required under
this Code, shall, in lieu of an oath, contain a written
statement that they are made under the penalties of
perjury. Any person who willfully files a declaration, return
or statement containing information which is not true and
correct as to every material matter shall, upon conviction,
be subject to the penalties prescribed for perjury under the
Revised Penal Code.
In ruling that there was no probable cause to indict the
respondent officers for the acts charged, the Court of
Appeals said there was no clear showing that there was
deliberate intent on the part of the respondents to evade
payment of the taxes. Both the State Prosecutor[37]and the
Court of Appeals[38] emphasized that if respondents really
intended to evade payment, they would have omitted the
27 | P a g e
assailed transactions completely in all their financial
statements. We agree.
As it stands, while the dacion en pago transactions were
missing in the GMCC 1998 Financial Statement, they had
been listed in the GMCC 2000 Financial
Statement.[39] Respondents' act of filing and recording said
transactions in their 2000 Financial Statement belie the
allegation that they intended to evade paying their tax
liability. Petitioner's contention that the belated filing is a
mere afterthought designed to make it appear that the non-
reporting was not deliberate, does not persuade
considering that the filing of the 2000 Financial Statement
was done prior to the issuance of the March 2003 Letter of
Authority, which authorized the investigation of GMCC's
books.[40]
In any case, this Court has a policy of non-interference in
the conduct of preliminary investigations. In First Women's
Credit Corporation v. Baybay[41] the Court said:
It is settled that the determination of whether probable
cause exists to warrant the prosecution in court of an
accused should be consigned and entrusted to the
Department of Justice, as reviewer of the findings of public
prosecutors. The court's duty in an appropriate case is
confined to a determination of whether the assailed
executive or judicial determination of probable cause was
done without or in excess of jurisdiction or with grave abuse
of discretion amounting to want of jurisdiction. This is
consistent with the general rule that criminal prosecutions
may not be restrained or stayed by injunction, preliminary
or final, albeit in extreme cases, exceptional circumstances
have been recognized. The rule is also consistent with this
Court's policy of non-interference in the conduct of
preliminary investigations, and of leaving to the
investigating prosecutor sufficient latitude of discretion in
the exercise of determination of what constitutes sufficient
evidence as will establish probable cause for the filing of an
information against a supposed offender. While prosecutors
are given sufficient latitude of discretion in the
determination of probable cause, their findings are subject
to review by the Secretary of Justice.
Once a complaint or information is filed in court, however,
any disposition of the case, e.g., its dismissal or the
conviction or acquittal of the accused rests on the sound
discretion of the Court.[42]
Moreover, a prosecutor's grave abuse of discretion in
dismissing a case must be clearly shown before the Courts
can intervene. Elma v Jacobi,[43] explained:
The necessary component of the Executive's power to
faithfully execute the laws of the land is the State's self-
preserving power to prosecute violators of its penal laws.
This responsibility is primarily lodged with the DOJ, as the
principal law agency of the government. The prosecutor has
the discretionary authority to determine whether facts and
circumstances exist meriting reasonable belief that a person
has committed a crime. The question of whether or not to
dismiss a criminal complaint is necessarily dependent on the
sound discretion of the investigating prosecutor and,
ultimately, of the Secretary (or Undersecretary acting for
the Secretary) of Justice. Who to charge with what crime or
none at all is basically the prosecutor's call.
Accordingly, the Court has consistently adopted the policy
of non interference in the conduct of preliminary
investigations, and to leave the investigating prosecutor
sufficient latitude of discretion in the determination of what
constitutes sufficient evidence to establish probable cause.
Courts cannot order the prosecution of one against whom
the prosecutor has not found a prima facie case; as a rule,
courts, too, cannot substitute their own judgment for that
of the Executive.
In fact, the prosecutor may err or may even abuse the
discretion lodged in him by law. This error or abuse alone,
however, does not render his act amenable to correction
and annulment by the extraordinary remedy of certiorari.
To justify judicial intrusion into what is fundamentally the
domain of the Executive, the petitioner must clearly show
that the prosecutor gravely abused his discretion
amounting to lack or excess of jurisdiction in making his
determination and in arriving at the conclusion he reached.
This requires the petitioner to establish that the prosecutor
exercised his power in an arbitrary and despotic manner by
reason of passion or personal hostility; and it must be so
patent and gross as to amount to an evasion or to a
unilateral refusal to perform the duty enjoined or to act in
contemplation of law, before judicial relief from a
discretionary prosecutorial action may be obtained.[44]
Based on the foregoing, absent any indication that the
Secretary of Justice gravely abused his discretion in not
finding probable cause for the complaint against
respondent officers to prosper, the dismissal stands.
II
As to the issue on the applicable prescriptive period, it is
the three-year prescriptive period that applies in this case.
The power of the Commissioner of Internal Revenue to
assess and collect taxes is provided under Section 2 of the
National Internal Revenue Code:
SEC. 2. Powers and Duties of the Bureau of Internal
Revenue - The Bureau of Internal Revenue shall be under
the supervision and control of the Department of Finance
and its powers and duties shall comprehend the assessment
and collection of all national internal revenue taxes, fees,
and charges, and the enforcement of all forfeitures,
penalties, and fines connected therewith, including the
execution of judgments in all cases decided in its favor by
the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the
supervisory and police powers conferred to it by this Code
or other laws.
However, this power to assess and collect taxes is limited
by Section 203 of the National Internal Revenue Code:
SEC. 203. Period of Limitation Upon Assessment and
Collection.- Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after
the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration
of such period: Provided, That in a case where a return is
filed beyond the period prescribed by law, the three (3)-
year period shall be counted from the day the return was
filed.
For purposes of this Section, a return filed before the last
day prescribed by law for the filing thereof shall be
considered as filed on such last day.
The Court, in Republic v. Ablaza,[45] explained the purpose
behind this limitation:
The law prescribing a limitation of actions for the collection
of the income tax is beneficial both to the Government and
to its citizens; to the Government because tax officers
would be obliged to act promptly in the making of
28 | P a g e
assessment, and to citizens because after the lapse of the
period of prescription citizens would have a feeling of
security against unscrupulous tax agents who will always
find an excuse to inspect the books of taxpayers, not to
determine the latter's real liability, but to take advantage of
every opportunity to molest peaceful, law-abiding citizens.
Without such a legal defense[,] taxpayers would
furthermore be under obligation to always keep their books
and keep them open for inspection subject to harassment
by unscrupulous tax agents. The law on prescription being
a remedial measure should be interpreted in a way
conducive to bringing about the beneficient purpose of
affording protection to the taxpayer within the
contemplation of the Commission which recommend the
approval of the law.[46]
Petitioner contends that Section 203 finds no application in
this case and insists that it is Section 222 of the same Code,
which should be applied. Section 222 in part states:
SEC. 222. Exceptions as to Period of Limitation of
Assessment and Collection of Taxes. -
In the case of a false or fraudulent return with intent to
evade tax or of failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of
such tax may be filed without assessment, at any time
(a)within ten (10) years after the discovery of the falsity,
fraud or omission: Provided, That in a fraud assessment
which has become final and executory, the fact of fraud
shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
In arguing for the application of the 10-year prescriptive
period, petitioner claims that the tax return in this case is
fraudulent and thus, the three-year prescriptive period is
not applicable.[47]
Petitioner fails to convince that respondents filed a
fraudulent tax return. The respondents may have erred in
reporting their tax liability when they recorded the assailed
transactions in the wrong year, but such error stemmed
from the wrong application of the law and is not an
indication of their intent to evade payment. If there were
really an intent to evade payment, respondents would not
have reported and subsequently paid the income tax, albeit
in the wrong year.
In Commissioner of Internal Revenue v. B.F. Goodrich
Phils., Inc.,[48] the Court emphasized that the Bureau of
Internal Revenue must show that the return was filed
fraudulently with intent to evade payment. The Court ruled:
Ineludibly, the BIR failed to show that private respondent's
1974 return was filed fraudulently with intent to evade the
payment of the correct amount of tax. Moreover, even
though a donor's tax, which is defined as "a tax on the
privilege of transmitting one's property or property rights to
another or others without adequate and full valuable
consideration," is different from capital gains tax, a tax on
the gain from the sale of the taxpayer's property forming
part of capital assets, the tax return filed by private
respondent to report its income for the year 1974 was
sufficient compliance with the legal requirement to file a
return. In other words, the fact that the sale transaction
may have partly resulted in a donation does not change the
fact that private respondent already reported its income for
1974 by filing an income tax return.
Since the BIR failed to demonstrate clearly that private
respondent had filed a fraudulent return with the intent to
evade tax, or that it had failed to file a return at all, the
period for assessments has obviously prescribed. Such
instances of negligence or oversight on the part of the BIR
cannot prejudice taxpayers, considering that the
prescriptive period was precisely intended to give them
peace of mind.[49]

As found by the Court of Appeals, there is no clear and

deliberate intent to evade payment of taxes in relation to
the dacion en pagotransactions[50] or on the sale
transaction with Valencia Wong.[51] The dacion en
pago transactions, though not included in the 1998
Financial Statement, were properly listed in GMCC's
Financial Statement for the year 2000.[52] Regarding the
sale transaction with Valencia Wong, the respondents said
that it was not reflected in the year 1999 because it was an
installment sale. Units sold on installment, they explained,
are recognized not in the year they are fully paid, but in the
year when at least 25% of the selling price is paid.[53] In
this instance, the unit and the parking lot were sold prior to
1996, thus, in the Schedule of Unsold Units filed by GMCC
as of December 31, 1996, the said properties were no
longer included.[54]

For the ten-year period under Section 222(a) to apply, it is

not enough that fraud is alleged in the complaint, it must
be established by clear and convincing evidence.[55] The
petitioner, having failed to discharge the burden of proving
fraud, cannot invoke Section 222(a).

Having settled that the case falls under Section 203 of the
Tax Code, the three-year prescriptive period should be
applied. In GMCC's case, the last day prescribed by law for
filing its 1998 tax return was April 15, 1999.[56] The
petitioner had three years or until 2002 to make an
assessment. Since the Preliminary Assessment was made
only on December 8, 2003, the period to assess the tax had
already prescribed.

A reading of Section 203 will show that it prohibits two acts

after the expiration of the three-year period. First, an
assessment for the collection of the taxes in the return, and
second, initiating a court proceeding on the basis of such
return. The State Prosecutor was correct in dismissing the
complaint for tax evasion since it was clear that the
prescribed return cannot be used as basis for the case.

All told, the dismissal of the tax evasion case against

respondent officers was proper. The Court of Appeals did
not err in affirming the dismissal. Petitioner failed to prove
that respondent officers wilfully intended to evade paying
tax. Moreover, having found no basis to disregard the
three-year period of prescription, it is clear that the
assessments were issued beyond the statute of limitations.

WHEREFORE, the Petition is DENIED. The Decision dated

September 8, 2009 and the Resolution dated March 30,
2010 of the Court of Appeals in CA-GR. SP No. 100380
are AFFIRMED.

SO ORDERED.

29 | P a g e