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Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 74965 November 9, 1994

COMMISSIONER OF INTERNAL REVENUE, petitioner,


vs.
NATIONAL LABOR RELATIONS COMMISSION, DEPUTY CITY SHERIFF CARMELO V. CACHERO, MARITIME
COMPANY OF THE PHILIPPINES, DOMINGO C. NIANGAR, DANIEL C. SABINO, FERNANDO S. TULIAO and
TULMAR TRADING CORPORATION, respondents.

Reynaldo L. Libanan for respondent deputy sheriff.

Joaquin G. Chung, Jr. Law Office for respondent Tulmar Trading Corp.

Eliodoro C. Cruz & Arsenio P. Dizon for Maritime Co. of the Philippines.

MENDOZA, J.:

This is a petition for certiorari to set aside the resolution dated April 4, 1986 1 of the National Labor Relations
Commission in NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar v. Maritime Company of the Philippines),
affirming the denial by the Labor Arbiter2 of petitioner's motion to annul the sheriff's sale of four barges or, in the
alternative, to order him to remit the proceeds of his sale to the Bureau of the Internal Revenue for the satisfaction of
the tax liabilities of private respondent Maritime Company of the Philippines.

The facts are as follows:

On January 12, 1984 the Commissioner of the Internal Revenue sent two letters 3 of demand to the respondent
Maritime Company of the Philippines for deficiency common carrier's tax, fixed tax, 6% Commercial Broker's tax,
documentary stamp tax, income tax and withholding taxes in the total amount of P17,284,882.45.

The assessment became final and executory as private respondent did not contest it. But as private respondent did
not pay its tax liability either, the Commissioner of Internal Revenue issued warrants of distraint of personal property
and levy of real property of private respondent. Copies of the warrants, both dated January 23, 1985, were served on
January 28, 1985 on Yoly T. Petrache, private respondent's accountant. 4

On April 16, 1985 a "Receipt for Goods, Articles, and Things Seized5 under Authority of the National Internal
Revenue Code" was executed, covering, among other things, six barges identified as MCP-1,2,3,4,5 and 6. This
receipt is required by § 303 (now § 206) of the NIRC as proof of the constructive distraint of property. It is an
undertaking by the taxpayer or person in possession of the property covered that he will preserve the property and
deliver it upon order of the court or the Internal Revenue Commissioner.

The receipt was prepared by the BIR for the signature of a representative of respondent Maritime Company of the
Philippines, but it was not in fact signed. Petitioner later explained that the individuals who had possession of the
barges had refused to sign the receipt.

This circumstance has given rise to the question in this case as it appears that four of the barges placed under
constructive distraint were levied upon execution by respondent deputy sheriff of Manila on July 20, 1985 to satisfy a
judgment for unpaid wages and other benefits of employees of respondent Maritime Company of the Philippines.
More specifically, the question in this case is the validity of the warrant of distraint served by the Revenue Seizure
Officer against the writ of execution subsequently levied upon the same property by the deputy sheriff of Manila to
satisfy the claims of employees in NLRC Case No. NCR-12-4233-84 (Domingo C. Niangar, et al. v. Maritime
Company of the Philippines) for P490,749.21.

The four barges were sold by respondent deputy sheriff at a public auction on August 12, 1985. The highest bidder,
Daniel C. Sabino, subsequently sold them to private respondents Fernando S. Tuliao and Tulmar Trading
Corporation.

On September 4, 1985, petitioner asked the Labor Arbiter to annul the sale and to enjoin the sheriff from disposing of
the proceeds of the sale or, in the alternative, to remit them to the Bureau of Internal Revenue so that the amount
could be applied to the payment of private respondent Maritime Company's tax liabilities.

In an order dated September 30, 1985, Labor Arbiter Ceferina Diosana denied the motion on the ground that
petitioner Commissioner of Internal Revenue failed to show that the barges which were levied upon in execution and
sold at public auction had been validly placed under constructive distraint.6 The Labor Arbiter likewise rejected
petitioner's contention that the government's claim for taxes was preferred under Art. 2247, in relation to Art. 2241(1)
of the Civil Code, on the ground that under this provisions only taxes and fees which are due on specific movables
enjoy preference, whereas the taxes claimed by petitioner were not due on the four barges in question.

The order was appealed to the NLRC, which in resolution dated April 4, 1986, affirmed the denial of the Internal
Revenue Commissioner's motion. Hence this petition for certiorari.

For reasons to be presently stated, the petition is granted.

The National Internal Revenue Code provides for the collection of delinquent taxes by any of the following remedies:
(a) distraint of personal property or levy of real property of the delinquent taxpayer and (b) civil or criminal action.

With respect to the four barges in question, petitioner resorted to constructive distraint pursuant to § 303 (now § 206)
of the NLRC. This provisions states:

Constructive distraint of the property of a taxpayer. — To safeguard the interest of the Government,
the Commissioner of Internal Revenue may place under constructive distraint the property of a
delinquent taxpayer or any taxpayer who, in his opinion, is retiring from any business subject to tax,
or intends to leave the Philippines, or remove his property therefrom, or hide or conceal his
property, or perform any act tending to obstruct the proceedings, for collecting the tax due or which
may be due from him.

The constructive distraint of personal property shall be effected by requiring the taxpayer or any
person having possession or control of such property to sign a receipt covering the property
distrained and obligate himself to preserve the same intact and unaltered and not to dispose of the
same in any manner whatever without the express authority of the Commissioner of Internal
Revenue.

In case the taxpayer or the person having the possession and control of the property sought to be
placed under constructive distraint refuses or fails to sign the receipt herein referred to, the revenue
officer effecting the constructive distraint shall proceed to prepare a list of such property and in the
presence of two witnesses leave a copy thereof in the premises where the property distrained is
located, after which the said property shall be deemed to have been placed under constructive
distraint..

Although the warrant of distraint in this case had been issued earlier (January 23,1985) than the levy on execution in
the labor case on July 20, 1985, the Labor Arbiter nevertheless held that there was no valid distraint of personal
property on the ground that the receipt of property distrained had not been signed by the taxpayer as required above.
In her order, which the NLRC affirmed in toto, the Labor Arbiter said:

It is claimed by the Commissioner of the Internal Revenue that on January 23, 1984, he issued a
warrant of distraint of personal property on respondent to satisfy the collection of the deficiency
taxes in the aggregate sum of P17,284,882.45 and a copy of said warrant was served upon
Maritime Company on January 28, 1985 and pursuant to the warrant, the Commissioner, through
Revenue Seizure Agent Roland L. Bombay, issued on April 16, 1985, to Maritime Company a
receipt for goods, articles and things seized pursuant to authority granted to him under the National
Internal Revenue Code. Such personal properties seized includes, among others, "Six (6) units of
barges MCI-6 . . . " However, his own receipts for goods attached to his motions does not show that
it was received by Maritime; neither does it show any signature of any of Maritime's Officers.

Apart from the foregoing, in his affidavit of 11 September 1985, Sheriff Cachero stated that before
he sold the subject four barges at public auction, he conducted an investigation on the ownership of
the said four barges. In brief, he found out that the said four barges were purchased by respondent
through Makati Leasing and that the whole purchase price has been paid by respondent. In fact,
the corresponding deed of sale has already been signed. He did not find any lien or encumbrance
on any of the said four barges. Thus it cannot be true that the Commissioner effected a valid
warrant of distraint of personal property on the four barges in question. 7

However, this case arose out of the same facts involved in Republic v. Enriquez,8 in which we sustained the validity
of the distraint of the six barges, which included the four involved in this case, against the levy on execution made by
another deputy sheriff of Manila in another case filed against Maritime Company. Two barges (MCP-1 and MCP-4)
were the subject of a levy in the case. There we found that the "Receipt for Goods, Articles and Things Seized under
Authority of the National Internal Revenue Code" covering the six barges had been duly executed, with the
Headquarters, First Coast Guard District, Farola Compound Binondo, Manila acknowledging receipt of several
barges, vehicles and two (2) bodegas of spare parts belonging to Maritime Company of the Philippines.

Apparently, what had been attached to the petitioner's motion filed by the government with the Labor Arbiter in this
case was a copy, not the original one showing the rubber stamp of the Coast Guard and duly signed by its
representative. A xerox copy of this signed receipt was submitted in the prior case. 9 This could be due to the fact that,
except for Solicitor Erlinda B. Masakayan, the government lawyers who prepared the petition in the prior case were
different from those who filed the present petition. They admitted that the receipt of property distrained had not been
signed by the taxpayer or person in possession of the taxpayer's property allegedly because they had refused to do
so. What apparently they did not know is that the receipt had been acknowledged by the Coast Guard which
obviously had the barges in its possession.

In addition to the receipt duly acknowledged by the Coast Guard, the record of the prior case also shows that on
October 4, 1985, the Commissioner of the Internal Revenue issued a "Notice of Seizure of Personal Property" stating
that the goods and chattels listed on its reverse side, among which were the four barges (MCP-2, MCP-3, MCP-5,
and MCP-6), had been distrained by the Commissioner of Internal Revenue.10

The "Notice of Seizure of Personal Property," a copy of which was received by Atty. Redentor R. Melo in behalf of
Maritime Company of the Philippines, together with the receipt of the Coast Guard, belies the claim of respondent
deputy sheriff that when he levied upon the four barges there was no indication that the barges had previously been
placed under distraint by the Commissioner of Internal Revenue.

Accordingly, what we said in the prior case 11 in upholding the validity of distraint of two of the six barges (MCP Nos.
1 and 4), fully applies in this case:

It is settled that the claim of the government predicated on a tax lien is superior to the claim of a
private litigant predicated on a judgment. The tax lien attaches not only from the service of the
warrant of distraint of personal property but from the time the tax became due and payable.
Besides, the distraint on the subject properties of the Maritime Company of the Philippines as well
as the notice of their seizure were made by petitioner, through the Commissioner of the Internal
Revenue, long before the writ of the execution was issued by the Regional Trial Court of Manila,
Branch 31. There is no question then that at the time the writ of execution was issued, the two (2)
barges, MPC-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines.
The power of the court in execution of judgments extends only to properties unquestionably
belonging to the judgment debtor. Execution sales affect the rights of the judgment debtor only, and
the purchaser in an auction sale acquires only such right as the judgment debtor had at the time of
sale. It is also well-settled that the sheriff is not authorized to attach or levy on property not
belonging to the judgment debtor.
Nor is there any merit in the contention of the NLRC that taxes are absolutely preferred claims only with respect to
movable or immovable properties on which they are due and that since the taxes sought to be collected in this case
are not due on the barges in question the government's claim cannot prevail over the claims of employees of the
Maritime Company of the Philippines which, pursuant to Art. 110 of the Labor Code, "enjoy first preference."

In Republic v. Peralta 12 this Court rejected a similar contention. Through Mr. Justice Feliciano we held:

. . . [T]he claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a
claim for unpaid internal revenue taxes which gives rise to a tax lien upon all the properties and
assets, movable or immovable, of the insolvent as taxpayer. Clearly, under Articles 2241 No. 1,
2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given preference over any
other claim of any other creditor, in respect of any and all properties of the insolvent.

xxx xxx xxx

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

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of
their members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and
other products produced or manufactured by the Insolvent, but not to other assets owned by the
Insolvent. And even in respect of such tobacco and tobacco products produced by the Insolvent,
the claims of the Unions may be given effect only after the Bureau of Internal Revenue's claim for
unpaid tobacco inspection fees shall have been satisfied out of the products so manufactured by
the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of
the Insolvent in favor of workmen who constructed or repaired such building or other real property.
Article 2242, number 3, does not however appear relevant in the instant case, since the members
of the Unions to whom separation pay is due rendered services to the Insolvent not (so far as the
record of this case would show) in the construction or repair of buildings or other real property, but
rather, in the regular course of the manufacturing operations of the Insolvent. The Unions' claims
do not therefore constitute a lien or encumbrance upon any immovable property owned by the
insolvent, but rather, as already indicated, upon the Insolvent's existing inventory (if any) of
processed tobacco and tobacco products.

In addition, we have held 13 that Art. 110 of the Labor Code applies only in case of bankruptcy or judicial liquidation of
the employer. This is clear from the text of the law.

Art. 110. Worker preference in case of bankruptcy. — In the event of bankruptcy or liquidation of an
employer's business, his workers shall enjoy first preference as regards wages due them for
services rendered during the period prior to the bankruptcy or liquidation, any provision of law to
the contrary notwithstanding. Unpaid wages shall be paid in full before other creditors may
establish any claims to a share in the assets of the employer.

This case does not involve the liquidation of the employer's business.

WHEREFORE, the petition for certiorari is GRANTED and the resolution dated April 4, 1986 of respondent NLRC in
NLRC Case No. NCR-12-4233-84 is SET ASIDE insofar as it denies the government's claim for taxes, and
respondent deputy sheriff Carmelo V. Cachero or his successor is ORDERED to remit the proceeds of the auction
sale to the Bureau of Internal Revenue to be applied as part payment of respondent Maritime Company's tax
liabilities.

SO ORDERED.

Narvasa, C.J., Regalado and Puno, JJ., concur.


CIR vs. NLRC (G.R. No. 74965 November 9, 1994)

On January 12, 1984, the CIR demanded payment from private respondent Maritime Company of the Philippines of
deficiency common carrier’s tax, fixed tax, 6% commercial broker’s tax, documentary stamp tax, income tax and
withholding tax totaling P17,284,882.45. The assessment became final and executory, and with private respondent’s
failure to pay the tax liabilities, the CIR issued warrants of distraint of personal property and levy of real property
which were duly served on January 23, 1985. On April 16, 1985, a “receipt of goods, articles and things” was
executed covering, among others, 6 barges as proof of constructive distraint of property but the same was not signed
by any representative of private respondent because of the refusal of the persons actually in possession of the
barges.

It appeared that 4 of the barges constructively distrained were also levied upon by a deputy sheriff of Manila on July
20, 1985 and sold at public auction to satisfy a judgment for unpaid wages and other benefits of employees of private
respondent.

Issue: Who has a preferential lien over the barges, the Government or the company’s employees?

Held: The court held that it is the government which has preferential lien over the barges under Articles 2241 and
2247 of the Civil Code. Accordingly, the preferential lien of employees for unpaid wages under Article 110 of the
Labor Code applies only to bankruptcy cases where the employer is under liquidation due to bankruptcy.

The NIRC provides for the collection of delinquent taxes by any of the following remedies: a) distraint of personal
property or levy of real property of the delinquent taxpayer; b) civil or criminal action.

The court upheld the validity of distraint of the barges against the levy on execution and the claim of the Government
predicated on a tax lien is superior to the claim of a private litigant predicated on a judgment. The tax lien attaches
not only from the service of the warrant of distraint of personal property but from the time the tax became due and
payable. Besides, the distraint on the subject properties of Maritime Company of the Philippines as well as the notice
of their seizure were made by petitioner, through the CIR, a long before the writ of execution was issued by RTC-
Manila, Branch 31. There is no question then that at the time the writ of execution was issued, the two (2) barges,
MCP-1 and MCP-4, were no longer properties of the Maritime Company of the Philippines. The power of the court in
execution of judgment extends only to properties unquestionably belonging to the judgment debtor. Execution sales
affect the rights of the judgment debtor only, and the purchaser in auction sale requires only such rights as the
judgment debtor had tat the time of the sale. It is also well settled that the sheriff is not authorized to attach or levy on
property not belonging to the judgment debtor.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-5482 May 5, 1952

TRANQUILINO ROVERO, petitioner,


vs.
RAFAEL AMPARO as Judge of the Court of First Instance of Manila, Branch III, THE REPUBLIC OF THE
PHILIPPINES and THE SHERIFF OF THE CITY OF MANILA, respondents.

Jose W. Diokno for petitioner.

RESOLUTION

MONTEMAYOR, J.:

By minute resolution dated February 15, 1952, the present petition for certiorari and/or prohibition with preliminary
injunction was dismissed for lack of merit. In a motion for reconsideration petitioner prayed this Court to set aside said
resolution and to give due course to the petition. Although after studying said motion for reconsideration the court still
firmly believes that the original petition should be dismissed for lack of merit, and that its resolution of dismissal
should still stand, however, because of the importance of this case and for the future guidance of the Government
administrative officials as regards the importation of goods subject to duty, we have decided to promulgate a
resolution embodying our reasons for dismissing the petition.

Briefly, the facts pertinent to the present case are as follows: The petitioner Tranquilino Rovero in the evening of April
25, 1947, arrived at the Makati Air Port on board a PAL plane which came from Bangkok, Siam. He brought with him
several pieces of baggage, among which was a Chinese vase which he declared and valued at P15. The vase
together with some of the baggage were retained by the Customs officials for they suspected that they contained
merchandise not declared which should pay customs duty. In the course of the examination of said Chinese vase, it
was found that it had a false bottom which upon being broken open was seen to hold a tin can containing 259 pieces
of jewelry with precious stones, which the Customs officials appraised at P23,736. Rovero never mentioned to said
Customs officials the presence of said pieces of jewelry in the Chinese vase. The jewelry was, therefore, seized as
property subject to forfeiture under section 1363 (m-2) in relation to section 1292 of the Revised Administrative Code.

Rovero admitted that the pieces of jewelry belonged to him, he having bought them in Bangkok for $4,353, U.S.
currency, and that he purposely concealed them in the false bottom of the Chinese vase. Among the reasons given
by him for not declaring were that he was afraid that he might be robbed by hold-up men, and that he did not then
have enough cash with which to pay the duties and taxes which he figured to amount to about P6,000. Evidently, the
Customs officials were not impressed by his explanation.

In connection with the fraudulent bringing into the Philippines of said jewelry, the case was referred to the City Fiscal
for prosecution. Finally, Rovero was found guilty of violating section 2703 of the Revised Administrative Code and
sentenced to pay a fine of P2,500, with subsidiary imprisonment in case of insolvency, plus costs. In a decision dated
December 23, 1947, in Identification Case No. 555, entitled "Republic of the Philippines versus Two Hundred and
Fifty-nine (259) Pieces of Jewelry (Tranquillo Rovero, Claimant)," the Commissioner of Customs found that Rovero
had attempted to import the jewelry by fraudulent entry; that it was not the first time that Rovero was guilty of
fraudulent entry against the Government, because in Identification Case No. 483, decided on March 31, 1947,
Rovero was fined by the Commissioner of Customs in an amount equal to three times the customs duty due on a
piece of jewelry which was not declared in his baggage declaration and which was found concealed in his wallet. For
this reason the Commissioner of Customs declared that the seizure of said 259 pieces of jewelry was proper, and
that such jewelry was subject to forfeiture under section 1363 (m-2) of the Revised Administrative Code; but that
under section 1365 of the same Code, forfeiture was waived and in lieu thereof a fine in an amount equal to three
times the appraised value of the jewelry was imposed, it being understood that the jewelry may be delivered to
Rovero upon payment of the legal duties, compensating tax and other charges due thereon, plus the fine, and that
upon his failure to take delivery of the articles, and after the decision has become final the jewelry will be sold at
public auction for the satisfaction of the Government's claim. Not satisfied with that decision Rovero appealed the
case to the Court of First Instance of Manila which later affirmed the decision of the Commissioner of Customs, with
costs. Rovero again appealed the court's decision to this Tribunal under G.R. No. L-3281,* and in a decision
promulgated on June 28, 1951, the decision appealed from was affirmed, with costs.

After promulgation of the decision of the Supreme Court, Rovero wrote to the Commissioner of Customs a letter, Exh.
D, dated 19 July 1951, stating that the case of the 259 pieces of jewelry was still pending in this Tribunal, and
petitioning for a reappraisal of said jewelry. Acting upon said petition the Collector of Customs in a memorandum
order, Exhibit E, dated August 8, 1951, by order of the Commissioner of Customs created a Committee on
Reappraisement composed of three members with instructions to render its report to said Collector of Customs
through the Chief Appraiser. The next day, August 9, 1951, the Committee filed its report, Exhibit F, wherein the said
259 pieces of jewelry were reappraised at P9,880. On the same day the Chief Appraiser forwarded this report to the
Collector of Customs, Exhibit G, and the Collector of Customs the next day, August 10, 1951, transmitted the report
to the Commissioner of Customs, Exhibit H. On August 13, 1951, the Commissioner of Customs forwarded the
papers to the Secretary of Finance requesting informations as to whether the original appraisement of P23,736 of the
jewelry involved, which appraisal the Commissioner found to be excessive, may be set aside and the reappraisement
made by the Committee considered in the determination of the duties and fines that Rovero had to pay in accordance
with the decision of the case. On August 23, 1951, the Honorable, the Secretary of Finance granted authority "for the
setting aside of the original appraisement and for the collection of the fine imposed by the Supreme Court and of the
customs duties and charges based on the reappraisement value of P9,800."

In a motion dated January 2, 1951 (should be 1952), the Solicitor-General on behalf of the Republic of the Philippines
moved for execution of the decision of the Court of First Instance which have been affirmed by this Tribunal, Exhibit
O. In a "manifestation of satisfaction of judgement" dated January 9, 1951 (should be 1952), Exhibit P, Tranquilino
Rovero asked for the denial of the motion for execution of the ground that the judgment had already been satisfied,
claiming that under Official Receipt No. B-2361606, dated August 16, 1951, the fine in lieu for forfeiture plus
surcharge and other legal charges had already been paid, including sales tax. Incidentally, it should be here stated
that according to Exhibit M entitled RECEIPT, dated August 23, 1951, Rovero received from the Collector of Customs
the 259 pieces of jewelry after he had paid the corresponding duty and all charges and the fine of trebel the
reappraised value of P9,880 (not the original appraisal of P23,736). By order, Exhibit R, dated January 14, 1952,
Judge Amparo of the Court of First Instance of Manila declared that it appearing from the "manifestation of
satisfaction of judgment" that the full amount of the judgment had not been paid, said manifestation be stricken from
the record and he ordered the Sheriff to carry out the order of execution issued on January 14, 1952. A motion for
reconsideration of this order was denied on February 4, 1952, and Rovero's urgent motion for reconsideration dated
February 6th was equally denied on February 8, 1952. To seek relief from said orders of Judge Amparo petitioner
Rovero has filed the present petition for certiorari and/or prohibition with preliminary injunction.

To justify the reappraisal made by the Customs officials after the decision of this Court had become final, the
provisions of section 1368 is invoked. Said section reads:

SEC. 1368. Supervision and control over the judicial proceedings. — In the absence of special provisions,
judicial actions and proceedings instituted on behalf of the Government under the authority of the customs
laws shall be subject to the supervision and control of the Commissioner.

It must be clear that the said supervision and control over the judicial proceedings cannot be extended to the
modification of a final decision of a court. The Commissioner of Customs may supervise and control the filing of
pleadings, the conduct of the hearing, the presentation of evidence and even the taking of an appeal from the
decision of the Court of First Instance, adverse to the Government, to the Supreme Court. But surely he cannot under
the guise of supervision and control of judicial proceedings, modify or alter a final decision of a court, including an
appellate court or stay execution of a final judgment in favor of the Government by receiving of said Government
anything less than what the judgment calls for.

It is argued that the parties to a case may enter into a compromise about even a final judgment rendered by a court,
and it is contended by petitioner that the appraisal ordered by the Commissioner of Customs and sanctioned by the
Department of Finance was authorized by Section 1369 of the same Code. The contention may be correct as regards
private parties who are the owners of the property subject-matter of the litigation, and who are therefore free to do
with what they own or what is awarded to them, as they please, even to the extent of renouncing the award, or
condoning the obligation imposed by the judgment of the adverse party. Not so, however in the present case. Here,
the Commissioner of Customs is not a private party and is not the owner of the money involved in the fine based on
the original appraisal. He is a mere agent of the Government and acts as a trustee of the money or property in his
hands or coming thereto by virtue of a favorable judgment. Unless expressly authorized by his principal or by law, he
is not authorized to accept anything different from or anything less than what is adjudicated in favor of the
Government.

Another view of the question is that when the Republic of the Philippines won the case in court by virtue of a final
judgment, it acquired a vested right to the money represented by the fine based on the original appraisement of the
jewelry in question. In the form of a fine, the President alone under Article VII, Section 10, paragraph 6 of the
Constitution can remit such fine; in the form of money or property belonging to the Government, only the Legislature
by suitable enactment may dispose of it.

Moreover, the right of compromise claimed on behalf of the Commissioner under Section 1369 of the Revised
Administrative Code is clearly inapplicable at this stage of the judicial proceedings. For the Government, the time for
compromise is over. There no longer is any necessity or reason for its exercise. Article 1809 of the old Civil Code and
Article 2028 of the new Civil Code define a COMPROMISE as a contract whereby the parties in interest by giving,
promising or retaining something or otherwise making reciprocal concessions, avoid a litigation or terminate one
already commenced. Black's Law Dictionary on page 382 thereof says: "A compromise is an agreement between two
or more persons, who, for preventing for putting an end to a lawsuit, adjust their difficulties by mutual consent in
manner which they agree on, and which every one of them prefers to the hope of gaining, balanced by the danger of
losing."

Commenting on Section 1369 of the Revised Administrative Code invoked by petitioner, Gregorio Araneta in his
Commentaries on the Administrative Code, Vol. II page 1754 cite as cross reference Field Service Manual, Bureau of
Internal Revenue, Sec. 33 as follows:

. . . Agents and assistants should always bear in mind the fact that compromises in sufficient amounts are
preferable to prosecution. Some of the advantages are that they save the Government much trouble and
expenses, and do away with any delay in the settlement of the case and also with the possibility of the case
being lost by the Government and the offender escaping without penalty. These advantages of compromise
over prosecution are particularly apparent, since considerable difficulty is very frequently experienced in
cases of prosecution, and defendants in such cases often appeal them to the higher courts, thus causing not
only delay in the settlement, but also expense which is avoidable in the case of a compromise . . . The intent
of the law herein mentioned finds justification in the definition itself of the term compromise. "A compromise
is an agreement between two or more persons, who, to avoid a lawsuit, amicably settle their differences on
such terms as they can agree upon."

In other words, compromise is resorted to, to avoid a litigation or to end a suit already instituted. It contemplates
mutual concessions and mutual gains to avoid expenses and trouble of litigation or, when litigation has already been
begun, to end it because of the uncertainty of the result thereof. Here, as far as the Republic is concerned, the period
for compromise had definitely ended. The original controversy about the legality of the seizure of the jewelry, the
imposition of the fine treble the appraised value of P23,736 has not only been taken to court, but it has been finally
decided by the highest Tribunal. Whatever expense caused to the Government as a result of the suit in court,
including the appeal will be reimbursed to it, because of the adjudication of costs in its favor. There is no longer any
uncertainty as to the result of the litigation because the Government has definitely and finally won it. In other words,
there is nothing more to compromise. By the attempted so-called compromise in the form of reappraisal, the
Government had nothing to gain but much to lose in the form of several thousand pesos. Therefore, why the
compromise, even supposing that it were allowed by law, which it is not?

In the case of Matsui Sawhatsu & Mori vs. Hammond, 55 Phil. 909, this Court has held that Section 1369 of the
Revised Administrative Code "refers to cases pending i.e., to cases not finally decided." The original case which
motivated the present petition for certiorari, numbered Identification No. 555 in the Bureau of Customs, docketed as
Civil Case No. 4450 in the Court of First Instance and docketed as G.R. No. L-3281, in this Court, is no
longerpending either in the Courts or in the Bureau of Customs. The case had long ago been taken away from the
Bureau and the hands of the Commissioner of Customs when it was appealed to the Courts. It is therefore clear that
Section 1369 of the Revised Administrative Code is not applicable here.

Counsel for petitioner argues that if under Section 1369, the Commissioner of Customs may refund money
erroneously or illegally received, or fines imposed without authority, that it to say, money already in the Treasury of
the Philippines, with more reason may he compromise a judgment not yet executed. The argument is not flawless.
Section 1369 refers to money erroneously or illegally received, or fines imposed without authority. In the present
case, there is no money erroneously or illegally received. A fine was imposed, yes, but it was pursuant to law and
presumably with authority. That very question of the authority of the Commissioner to seize the jewelry and impose
the fine in lieu of forfeiture, was taken on appeal to the Courts which finally decided that the fine was legal and
authorized. Then he cites the case of U.S. vs. Morris, 10 Wheat. 246, wherein the U.S. Supreme Court held that the
Secretary of the Treasury may remit fines and forfeitures before or after a final sentence of condemnation or
judgment for the penalty. On the strength of the said counsel presumably presses his contention that the Secretary of
Finance of the Republic by approving the reappraisal was indirectly remitting or reducing the fine based on the
original appraisal. We have examined the Morris case and found in inapplicable. Among other reasons, in that case
the Federal Supreme Court found that the Secretary of the Treasury under the Remission Act of the 3rd of March
1797, c. 361(LVII), had authority to remit a forfeiture or penalty accruing under the revenue law, at any time, before or
after a final sentence of condemnation or judgment for the penalty. In this jurisdiction, we are not aware of any such
authority lodged either in the Secretary of Finance or the Commissioner of Customs.

It is insinuated that the original appraisement of the jewelry in the amount of P23,736 is not final because it was not in
issue in the case decided by the court, and because Rovero considered it immaterial, never questioned the amount of
said appraisal. That contention cannot be accepted. That the amount of the appraisal was material from the
beginning, is to us obvious. The imposed on Rovero for the fraudulent importation of jewelry was based on this same
appraisal. Naturally, if he lost the case as he did, the fine based on said appraisal will have to be paid by him. But
even if he won the case, said original appraisal was still material because he would have to pay the ordinary customs
duties on said jewelry just the same based on the original appraisement. He cannot ignore the fact that every
merchandise, even if regularly and lawfully imported has to be appraised, the duty payable thereon being based and
dependent upon the appraisal. So, the claim is not correct that the original appraisal was not material.

Furthermore, regardless of the final decision of the court, which as already stated, definitely decided the validity of the
original appraisal, it would seem that the original appraisal had become final. Rovero never filed a protest questioning
the propriety and correctness of the amount thereof. As the Solicitor-General well observes, Rovero had about four
years within which to question and protest said appraisement. Even without considering this mutual length of time,
when Rovero's appeal from the decision of the Commissioner of Customs the administrative proceedings were
transferred to the Court of First Instance, the authority of the Commissioner of Customs to order the reappraisal even
assuming that a protest had been made for that purpose, ended and until modified by the courts, said original
appraisal must stand as final.

In the course of the court's deliberations over this case, the possibility of fraud, even connivance on the part of the
Customs officials, was mentioned. To some members the proceedings leading to the reappraisal were not free from
suspicion, what with the seeming haste with which the reappraisal requested by Rovero was considered,
recommended and then as it were rushed to the Department of Finance for approval; the readiness, and conformity
of said officials to compromise a final judgment by the highest Court of the land in favor of the Government, when by
such compromise the Government had nothing to gain but much to lose, and the approval by said officials of the
relatively small amount of the reappraisal which is less than one-half of the original appraisal, which as already
stated, Rovero himself never questioned or protested for about four years. But, that is neither here nor there; that
question is not involved in the present case and we shall assume that everything as far as the Customs officials are
concerned, is above board, only that they misinterpreted the law and overestimated their authority.

In conclusion we hold that: (1) when the Commissioner of Customs or his subordinate orders the seizure of goods
fraudulently brought in or imported, have them appraised and then in lieu of forfeiture imposes on the importer a fine
based on said appraisal, and the importer appeals from that decision to the Court of First Instance, the amount of
appraisal is necessarily involved and is in issue in the appeal, though not touched upon in the pleadings, for the
reason that if the decision appealed from is affirmed, the action of the Commissioner in making the seizure and
imposing the fine, including its amount, is given legal sanction, and the sanction necessarily extends to the covers the
amount of appraisal on which the fine is based;(2) once the court decision becomes final, neither the Secretary of
Finance nor the Commissioner of Customs may have the goods reappraised for the purpose of reducing the amount
of the fine; (3) said officials, under the law have no authority to remit fines or forfeitures after the courts, on appeal
and in final decisions have sanctioned said fines or forfeitures; (4) the jurisdiction of Customs officials over
administrative cases involving seizures, appraisals forfeitures, and fines imposed, ends with the appeal of their
decisions to the courts, and the final judgments of said courts; thereafter, the remaining function of said officials is to
carry out the terms of said final court decisions, and in doing so, naturally guarding and protecting the interests of the
Government they represent; (5) the power of the Commissioner of Customs under Section 1369 of the Revised
Administrative Code, to compromise any case or proceeding arising under the customs laws, refers only to cases
appealed to the courts and finally decided by them; and (6) the supervision and control over judicial proceedings
given by Section 1368 of the Revised Administrative Code to the Commissioner of Customs, does not extend to
modifying final decisions of the Court, in the sense that he may accept on behalf of the Government anything different
or less than what is awarded to said Government in the decision.
In view of all the foregoing, the motion for reconsideration is denied.

Paras, C.J., Feria, Pablo, Bengzon, Bautista Angelo and Labrador, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-23611 April 24, 1967

THE GUAGUA ELECTRIC LIGHT PLANT COMPANY, INC., petitioner,


vs.
THE COLLECTOR OF INTERNAL REVENUE and THE HONORABLE COURT OF TAX APPEALS, respondents.

Eligio Lagman for petitioner.


Office of the Solicitor General for respondents.

BENGZON, J.P., J.:

Guagua Electric Light Plant Co. (hereinafter called Guagua Electric Company for short), a grantee of municipal
franchise by the municipal council of Guagua, Pampanga under Resolution No. 42 dated December 13, 1927 and by
the municipal council of Sexmoan, Pampanga under Resolution No. 48 dated November 15, 1928 pursuant to Act
667, as amended, realized and reported a gross income in the sum of P1,133,003.44 during the period from January
1, 1947 to November 1956 and paid thereon a franchise tax in the amount of P56,664.97 computed at 5% thereof in
accordance with Section 259 of the National Internal Revenue Code.

Believing that it should pay franchise tax at the lower rates provided for in its franchises 1 instead of 5% fixed by
Section 259 of the Tax Code, it filed on March 25, 1957 a claim for refund for allegedly overpaid franchise tax
amounting to P35,593.98 on its gross receipts realized from January 1, 1947 to November 1956. The Commissioner
of Internal Revenue denied refund of franchise tax corresponding to the period prior to the fourth quarter of 1951 on
the ground that the right to its refund had prescribed. 2 He however granted refund of the following amounts:

Period Sum Refunded


4th quarter, 1951 to 3rd quarter, 1953 P7,482.17
1st quarter, 1955 to Sept. 1956 P8,232.39
Oct. and Nov. 1956 879.31

TOTAL P16,593.87
============

Not satisfied with the determination of the Commissioner, Guagua Electric appealed to the Court of Tax Appeals.
However, its appeal, docketed as C.T.A. Case No. 508 was dismissed upon motion of the Commissioner of Internal
Revenue, interposed before filing his answer to the petition for review on the ground that the same was instituted
beyond the 30-days, period provided for in Section 11 of Republic Act 1125.

Subsequently, this Court held in Hoa Hin Co., Inc. vs. David3 that electric franchise holders under Act 567 are liable
for franchise tax at the rate fixed by Section 259 of the Tax Code, that is, 5% of the gross receipts. Accordingly, on
March 2, 1961 the Commissioner of Internal Revenue assessed against Guagua Electric deficiency franchise tax
computed thus:

1. Gross receipts, Guagua and Sexmoan, Oct. 1, 1952 to June 30, 1959 P1,116,138.01

Gross receipts, Sexmoan July 1, 1959 to Oct. 31, 1959 5,543.25

Gross receipts, Guagua, July 1, 1959 to June 30, 1960 181,354.57

Total gross receipts


P1,303,035.81
5% franchise tax due 65,151.79

Less: amount paid 43,941.64

Tax still due 21,210.15

Less: Overpayment, Sexmoan, Nov. 1, 1959 to June 30, 1960 181.71

Deficiency tax 21,028.44

Add: 25% surcharge 3,257.11

2 Add: Amount refunded 16,593.87

Total tax due 42,879.42


============

Guagua Electric contested the deficiency assessment in its letter dated March 30, 1961 contending that the same is
violative of its franchises; that the computation of the gross receipts is contrary to rules; and that the right to assess
and/or collect the tax has prescribed. On August 21, 1961 the appellate division of the Bureau of Internal Revenue
recommended that the right to assess and collect the tax corresponding to the period prior to January 1, 1956 has
prescribed. Consequently, the Commissioner issued the following revised assessment eliminating therefrom the
deficiency tax for the period prior to January 1, 1956, as recommended:

Gross receipts, Jan. 1, 1956 to June 30, 1962 P858,070.67

5% franchise tax and 3% percentage tax due thereon 42,662.71

Less: Tax already paid 22,724.59

Balance still due P19,938.12

Add: 25% surcharge 4,984.53

Amount refunded 16,593.87

Total tax due P41,516.52


=============

Guagua Electric appealed from the aforesaid Commissioner's decision to the Court of Tax Appeals which in turn
affirmed the same. Still not satisfied, it elevated the case to Us and submitted the following propositions:

1. The application of the rate of 5% as provided for in Section 259 of the Tax Code, instead of 1% or 2% as
provided for in its franchises granted under Act 667, impairs the obligation of contract and is therefore
unconstitutional.

2. The government is precluded from recovering the sum of P16,593.87 representing the amount refunded
to it on grounds of prescription and failure to set up as counterclaim in C.T.A. Case No. 508.

The constitutionality of collecting franchise tax at the rate of 5% of the gross receipts as provided for in Section 259 of
the Tax Code instead of at the lower rates fixed by the franchise granted under Act 667, has already been settled in
several cases.4 Guagua Electric, whose franchises were similarly granted under Act 667, being similarly situated as
the taxpayers-franchise holders in those cases already decided by Us, shall likewise be subject to the 5% rate
imposed in Section 259 of the Tax Code.
The Commissioner of Internal Revenue seeks the recovery of the amount of P16,593.87 allegedly erroneously
refunded to Guagua Electric. Said amount represents the difference between the tax computed at 5% pursuant to
Section 259 of the Tax Code and the tax at 1% or 2% under its franchises covering the period from September 1951
through November 1956. This, in effect, is an assessment for deficiency franchise tax.

It should be noted that the deficiency assessment of P19,638.12 in this case for the difference between the franchise
tax paid at 1% or 2% under taxpayer's franchises and the tax computed at 5% pursuant to Section 259 of the Tax
Code covers the period from January 1, 1956 to June 30, 1962. Obviously, if Guagua Electric were required to pay
P16,593.87 in addition to the sum of P19,938.12, it would be paying twice for the same deficiency tax for the period
from January 1 to November 30, 1956.

As afore-stated, moreover, the Commissioner of Internal Revenue revised his first deficiency assessment dated
March 2, 1961 by eliminating therefrom the deficiency tax for the period prior to January 1, 1956 because the right to
assess the same has prescribed. By insisting on the payment of the amount of P16,593.87 (which covers the period
from September 1951 to November 1956), he is, in fact, trying to collect the same deficiency tax, the right to assess
the same he had found to have been lost by prescription.

The Court of Tax Appeals however stated in its decision that Guagua Electric did not raise the issue of prescription of
the right of the Government to assess and collect the sum of P16,593.87. This finding of the lower court is not
supported by the pleadings. In its letter dated March 30, 1961 contesting the first assessment dated March 2, 1961
Guagua Electric assailed the right to assess and/or collect the tax on grounds of prescription. In paragraph 20 of its
petition for review (C.T.A. Rec. p. 4), it raised the defense of prescription of the Commissioner's right to assess and
collect the tax.

Anent the contention of the Commissioner of Internal Revenue that Guagua Electric failed to adduce evidence to
prove prescription of his right to assess and collect the P16.593.87, suffice it to state that in paragraph 10 of the
Commissioner's answer he admitted the allegations in paragraph 13 of the petition for review. Paragraph 13 alleged
the facts, supported by annexes, constituting prescription. There was therefore no need for the taxpayer to present
further evidence in the point.

The Commissioner of Internal Revenue further maintains that the prescription of his right to recover the amount of
P16,593.87 is governed by Article 1145(2) in relation to Articles 1154 and 1155 of the Civil Code. Hence, prescription
will set in only after the expiration of six years from 1957 and 1959, the dates refunds were granted. Since the petition
for review and answer thereto were filed in the Court of Tax Appeals on February 14, and May 4, 1962, he concludes
that the prescriptive period of six years has not expired.1äwphï1.ñët

As stated above, the demand on the taxpayer to pay the sum of P16,593.87 is in effect an assessment for deficiency
franchise tax. And being so, the right to assess or collect the same is governed by Section 331 of the Tax
Code5 rather than by Article 1145 of the Civil Code. A special law (Tax Code) shall prevail over a general law (Civil
Code).6

Our above conclusion absolving Guagua Electric from the payment of the sum of P16,593.87 has removed the
necessity of discussing Guagua Electric's assertion that the Government is precluded from recovering the said sum
because it failed to set it up as a counterclaim in C.T.A. Case No. 508.

With regard to the 25% surcharge in the amount of P4,984.53, it is patently unfair on the part of the Government to
require its payment inasmuch as the taxpayer acted in good faith in paying the franchise tax at the lower rates fixed
by its franchises. As a matter of fact, the Bureau of Internal Revenue shared with the taxpayer the view that Section
259 of the Tax Code does not apply. Guagua Electric should not therefore be made to pay the 25%
surcharge.7Wherefore, the judgment appealed from is affirmed with the modification that the amount of P16,593.87
representing franchise tax allegedly refunded erroneously and the 25% surcharge imposed on petitioner should be,
and are eliminated, thereby reducing the tax from a total of P41,516.52 to P19,938.12. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ., concur.
Guagua Electric Light Plant Co. vs. Collector
GR L-23611, 24 April 1967
En Banc, Bengzon JP (J): 8 concur
Facts: Guagua Electric Light Plant Co. is a grantee of municipal franchises by the municpal councils of Guagua and
Sexmoan, Pampanga. It reported a gross income of P1,133,003.44 for 1947 go 1956 and paid thereon a franchise
tax of P56,664.97 computed at 5% in accordance with Section 259 of the Tax Code. Believing that it should pay a
lower franchise tax as provided by its franchises, it filed a claim for refund on 25 March 1957 for overpayment. The
Commissioner denied the refund of franchise tax for the period prior to the 4th quarter of 1951 on the ground that the
right to refund has prescribed. The Commissioner allowed the refund of P16,593.87. Later however, due to the
holding in Hoa Hin Co. vs. David, the Commissioner
assessed against the company deficiency franchise tax subject to a 25% surcharge, and thereby including the
amount previously allowed by the Commissioner to be refunded.

Issue: Whether the tax “refunded erroneously” should be imposed against the company, or if the right to recover has
prescribed.

Held: Guagua Electric would be paying the same deficiency tax for the period of 1 January to 30 November 1956 if it
is required to pay P16,593.87 in addition to the sum of P19,938.12, the difference between the tax computed at 5%
pursuant to Section 259 of the Tax Code and the franchise tax paid at 1% and 2% under the franchise. Further, by
insisting on the payment of P16,593.87 (September 1951 to November 1956), the Commissioner is trying to collect
the same deficiency tax where the right to assess the same, according to him, has been lost by prescription. The
demand on the taxpayer to pay the sum of P16,593.87 is in effecct an
assessment of deficiency franchise tax. The right to assess, thus, and to collect is governed by Section 331 of the
Tax Code rather than by Article 1145 of the Civil Code, as a special law prevails over a general law.
Guagua Electric is absolved from the payment of P16,593.87
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue, and JAIME ARANETA, as Regional Director,
Revenue Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First Instance of Negros Occidental, Branch V, and
FRANCIS A. TONGOY, Administrator of the Estate of the late LUIS D. TONGOY respondents.

DE CASTRO, J.:

Appeal from two orders of the Court of First Instance of Negros Occidental, Branch V in Special Proceedings No.
7794, entitled: "Intestate Estate of Luis D. Tongoy," the first dated July 29, 1969 dismissing the Motion for Allowance
of Claim and for an Order of Payment of Taxes by the Government of the Republic of the Philippines against the
Estate of the late Luis D. Tongoy, for deficiency income taxes for the years 1963 and 1964 of the decedent in the total
amount of P3,254.80, inclusive 5% surcharge, 1% monthly interest and compromise penalties, and the second, dated
October 7, 1969, denying the Motion for reconsideration of the Order of dismissal.

The Motion for allowance of claim and for payment of taxes dated May 28, 1969 was filed on June 3, 1969 in the
abovementioned special proceedings, (par. 3, Annex A, Petition, pp. 1920, Rollo). The claim represents the
indebtedness to the Government of the late Luis D. Tongoy for deficiency income taxes in the total sum of P3,254.80
as above stated, covered by Assessment Notices Nos. 11-50-29-1-11061-21-63 and 11-50-291-1 10875-64, to which
motion was attached Proof of Claim (Annex B, Petition, pp. 21-22, Rollo). The Administrator opposed the motion
solely on the ground that the claim was barred under Section 5, Rule 86 of the Rules of Court (par. 4, Opposition to
Motion for Allowance of Claim, pp. 23-24, Rollo). Finding the opposition well-founded, the respondent Judge, Jose F.
Fernandez, dismissed the motion for allowance of claim filed by herein petitioner, Regional Director of the Bureau of
Internal Revenue, in an order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On September 18, 1969, a motion
for reconsideration was filed, of the order of July 29, 1969, but was denied in an Order dated October 7, 1969.

Hence, this appeal on certiorari, petitioner assigning the following errors:

1. The lower court erred in holding that the claim for taxes by the government against the estate of
Luis D. Tongoy was filed beyond the period provided in Section 2, Rule 86 of the Rules of Court.

2. The lower court erred in holding that the claim for taxes of the government was already barred
under Section 5, Rule 86 of the Rules of Court.

which raise the sole issue of whether or not the statute of non-claims Section 5, Rule 86 of the New Rule of Court,
bars claim of the government for unpaid taxes, still within the period of limitation prescribed in Section 331 and 332 of
the National Internal Revenue Code.

Section 5, Rule 86, as invoked by the respondent Administrator in hid Oppositions to the Motion for Allowance of
Claim, etc. of the petitioners reads as follows:

All claims for money against the decedent, arising from contracts, express or implied, whether the
same be due, not due, or contingent, all claims for funeral expenses and expenses for the last
sickness of the decedent, and judgment for money against the decedent, must be filed within the
time limited in they notice; otherwise they are barred forever, except that they may be set forth as
counter claims in any action that the executor or administrator may bring against the claimants.
Where the executor or administrator commence an action, or prosecutes an action already
commenced by the deceased in his lifetime, the debtor may set forth may answer the claims he has
against the decedents, instead of presenting them independently to the court has herein provided,
and mutual claims may be set off against each other in such action; and in final judgment is
rendered in favored of the decedent, the amount to determined shall be considered the true
balance against the estate, as though the claim has been presented directly before the court in the
administration proceedings. Claims not yet due, or contingent may be approved at their present
value.

A perusal of the aforequoted provisions shows that it makes no mention of claims for monetary obligation of the
decedent created by law, such as taxes which is entirely of different character from the claims expressly enumerated
therein, such as: "all claims for money against the decedent arising from contract, express or implied, whether the
same be due, not due or contingent, all claim for funeral expenses and expenses for the last sickness of the decedent
and judgment for money against the decedent." Under the familiar rule of statutory construction of expressio unius est
exclusio alterius, the mention of one thing implies the exclusion of another thing not mentioned. Thus, if a statute
enumerates the things upon which it is to operate, everything else must necessarily, and by implication be excluded
from its operation and effect (Crawford, Statutory Construction, pp. 334-335).

In the case of Commissioner of Internal Revenue vs. Ilagan Electric & Ice Plant, et al., G.R. No. L-23081, December
30, 1969, it was held that the assessment, collection and recovery of taxes, as well as the matter of prescription
thereof are governed by the provisions of the National Internal revenue Code, particularly Sections 331 and 332
thereof, and not by other provisions of law. (See also Lim Tio, Dy Heng and Dee Jue vs. Court of Tax Appeals &
Collector of Internal Revenue, G.R. No. L-10681, March 29, 1958). Even without being specifically mentioned, the
provisions of Section 2 of Rule 86 of the Rules of Court may reasonably be presumed to have been also in the mind
of the Court as not affecting the aforecited Section of the National Internal Revenue Code.

In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was even more pointedly held that "taxes assessed against
the estate of a deceased person ... need not be submitted to the committee on claims in the ordinary course of
administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes
upon motion showing that the taxes have been assessed against the estate." The abolition of the Committee on
Claims does not alter the basic ruling laid down giving exception to the claim for taxes from being filed as the other
claims mentioned in the Rule should be filed before the Court. Claims for taxes may be collected even after the
distribution of the decedent's estate among his heirs who shall be liable therefor in proportion of their share in the
inheritance. (Government of the Philippines vs. Pamintuan, 55 Phil. 13).

The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of exception from
the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the Government and their
prompt and certain availability are imperious need. (Commissioner of Internal Revenue vs. Pineda, G. R. No. L-
22734, September 15, 1967, 21 SCRA 105). Upon taxation depends the Government ability to serve the people for
whose benefit taxes are collected. To safeguard such interest, neglect or omission of government officials entrusted
with the collection of taxes should not be allowed to bring harm or detriment to the people, in the same manner as
private persons may be made to suffer individually on account of his own negligence, the presumption being that they
take good care of their personal affairs. This should not hold true to government officials with respect to matters not of
their own personal concern. This is the philosophy behind the government's exception, as a general rule, from the
operation of the principle of estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila
Lodge No. 761, Benevolent and Protective Order of the Elks Inc. vs. Court of Appeals, L-41001, September 30, 1976,
73 SCRA 162; Sy vs. Central Bank of the Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda vs.
Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine
Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January
27, 1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E.
Rodriguez, Inc. vs. Collector of Internal Revenue, L- 23041, July 31, 1969, 28 SCRA 119.) As already shown, taxes
may be collected even after the distribution of the estate of the decedent among his heirs (Government of the
Philippines vs. Pamintuan, supra; Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs. Commissioner of
Internal Revenue, G. R. No. L-16661, January 31, 1962).

Furthermore, as held in Commissioner of Internal Revenue vs. Pineda, supra, citing the last paragraph of Section 315
of the Tax Code payment of income tax shall be a lien in favor of the Government of the Philippines from the time the
assessment was made by the Commissioner of Internal Revenue until paid with interests, penalties, etc. By virtue of
such lien, this court held that the property of the estate already in the hands of an heir or transferee may be subject to
the payment of the tax due the estate. A fortiori before the inheritance has passed to the heirs, the unpaid taxes due
the decedent may be collected, even without its having been presented under Section 2 of Rule 86 of the Rules of
Court. It may truly be said that until the property of the estate of the decedent has vested in the heirs, the decedent,
represented by his estate, continues as if he were still alive, subject to the payment of such taxes as would be
collectible from the estate even after his death. Thus in the case above cited, the income taxes sought to be collected
were due from the estate, for the three years 1946, 1947 and 1948 following his death in May, 1945.

Even assuming arguendo that claims for taxes have to be filed within the time prescribed in Section 2, Rule 86 of the
Rules of Court, the claim in question may be filed even after the expiration of the time originally fixed therein, as may
be gleaned from the italicized portion of the Rule herein cited which reads:

Section 2. Time within which claims shall be filed. - In the notice provided in the preceding section,
the court shall state the time for the filing of claims against the estate, which shall not be more than
twelve (12) nor less than six (6) months after the date of the first publication of the notice. However,
at any time before an order of distribution is entered, on application of a creditor who has failed to
file his claim within the time previously limited the court may, for cause shown and on such terms
as are equitable, allow such claim to be flied within a time not exceeding one (1) month. (Emphasis
supplied)

In the instant case, petitioners filed an application (Motion for Allowance of Claim and for an Order of Payment of
Taxes) which, though filed after the expiration of the time previously limited but before an order of the distribution is
entered, should have been granted by the respondent court, in the absence of any valid ground, as none was shown,
justifying denial of the motion, specially considering that it was for allowance Of claim for taxes due from the estate,
which in effect represents a claim of the people at large, the only reason given for the denial that the claim was filed
out of the previously limited period, sustaining thereby private respondents' contention, erroneously as has been
demonstrated.

WHEREFORE, the order appealed from is reverse. Since the Tax Commissioner's assessment in the total amount of
P3,254.80 with 5 % surcharge and 1 % monthly interest as provided in the Tax Code is a final one and the
respondent estate's sole defense of prescription has been herein overruled, the Motion for Allowance of Claim is
herein granted and respondent estate is ordered to pay and discharge the same, subject only to the limitation of the
interest collectible thereon as provided by the Tax Code. No pronouncement as to costs.

SO ORDERED.

VERA v. FERNANDEZ
GR No. L-31364 March 30, 1979
89 SCRA 199

FACTS: The BIR filed on July 29, 1969 a motion for allowance of claim and for payment of taxes representing the
estate's tax deficiencies in 1963 to 1964 in the intestate proceedings of Luis Tongoy. The administrator opposed
arguing that the claim was already barred by the statute of limitation, Section 2 and Section 5 of Rule 86 of the Rules
of Court which provides that all claims for money against the decedent, arising from contracts, express or implied,
whether the same be due, not due, or contingent, all claims for funeral expenses and expenses for the last sickness
of the decedent, and judgment for money against the decedent, must be filed within the time limited in the notice;
otherwise they are barred forever.

ISSUE: Does the statute of non-claims of the Rules of Court bar the claim of the government for unpaid taxes?

HELD: No. The reason for the more liberal treatment of claims for taxes against a decedent's estate in the form of
exception from the application of the statute of non-claims, is not hard to find. Taxes are the lifeblood of the
Government and their prompt and certain availability are imperious need. (CIR vs. Pineda, 21 SCRA 105). Upon
taxation depends the Government ability to serve the people for whose benefit taxes are collected. To safeguard
such interest, neglect or omission of government officials entrusted with the collection of taxes should not be allowed
to bring harm or detriment to the people, in the same manner as private persons may be made to suffer individually
on account of his own negligence, the presumption being that they take good care of their personal affairs. This
should not hold true to government officials with respect to matters not of their own personal concern. This is the
philosophy behind the government's exception, as a general rule, from the operation of the principle of estoppel
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-13081 August 31, 1962

REPUBLIC OF THE PHILIPPINES, petitioner,


vs.
LIMACO & DE GUZMAN COMMERCIAL CO., INC.,
and VISAYAN SURETY & INSURANCE CORPORATION, respondents.

Office of the Solicitor General for petitioner.


Presbitero R. Velasco for respondent Limaco and De Guzman Commercial Company, Inc. Enrico I. de la Cruz for
respondent Visayan Surety and Insurance Corporation.

PAREDES, J.:

In 1946, "Limaco & De Guzman Commercial Co., Inc.", hereinafter referred to as defendant-principal, was engaged in
the importation of cigarettes. To guarantee payment of the revenue taxes due to the government plaintiff, the
defendant-principal and the Visayan Surety & Insurance Corporation, as surety, hereinafter referred to as defendant-
surety, executed two importers Bonds (Exhs. B & CW), dated June 12, 1946 and June 29, 1946, in the amounts of
P1,000.00 and P2,000,00, respectively, holding themselves jointly and severally liable to pay the said sum in favor of
plaintiff, under the terms and conditions specified therein. On June 27, 1946, defendant-principal filed with the Bureau
of Customs, entry papers covering shipment of 2 million "Spud" cigarettes it had imported from New York, U.S., on
board the "SS Steel Ranger". The specific tax due thereon amounted to P6,000.00, at the rate of P3.00/ thousand
(Sec. 13 [b] 2 of the Tax Code).

On July 15, 1946, defendant-principal, thru its broker J.O. Hiponia, paid to the Bureau of Customs, the sum of
P1,000.00 in cash and P5,000.00 in PNB Check No. 601580-K, on account of said tax. The cigarettes were released
to defendant-principal. The said check, however, was subsequently dishonored by the bank, for lack of funds, and
returned to the maker.

On June 17, 1948, the Collector of Internal Revenue, demanded from defendant-principal, the payment of the
aforesaid sum of P5,000.00 as deficiency specific tax, due on the imported cigarette (Exh. D). The said amount
remained unpaid, notwithstanding repeated demands upon the defendant-principal and the defendant surety (Exhs.
E, G, H, I and J).The Solicitor General, on July 19, 1950 wrote to defendant-surety (Exh- 1), demanding payment
within 10 days from receipt of the letter. In its reply, dated July 27, 1950, the defendant-surety requested for copy of
the statement showing the exact amount as well as the nature of the alleged specific taxes and that the complaint the
Solicitor General "intended to institute against us (defendants) be temporarily suspended" (Exh 2). On April 15, 1951,
defendant-principal requested action on the case be deferred as it was "willing to make representations with the
Collector of Internal Revenue with a view to settling the matter amicably" (Exh. K). On April 25, 1951, the defendant-
principal made a similar request to the Solicitor General (Exh. L), on the same ground.

On February 18, 1953, plaintiff filed a complaint with the CFI of Manila (Civil Case No. 18859), praying for the
forfeiture of the bonds and payment of the sum of P5,000, plus interest. On March 7, 1953, the defendant-surety filed
its answer, disclaiming its liability under the bonds, contesting the validity of the assessment and invoking the defense
of estoppel and prescription. On February 5, 1954 the defendant-principal likewise filed its answer, contesting the
validity of the tax assessment, on the ground of prescription.

On January 8, 1955, Hiponia paid P2,000.00 on account of the deficiency tax of P5,000.00.

On February 10, 1955, the defendant-surety, was granted by the CFI leave to file an amended answer by adding the
defense of lack of cause of action. However, the order granting leave to amend was vacated, in view of the allegation
that the case involved a disputed assessment of internal revenue taxes and the case was remanded on March 22,
1955, to the Court of Tax Appeals (Sec. 22, R.A. No. 1125). On March 17, 1955, the defendant-surety paid the
outstanding balance of P3,000.00, in order that it might be removed from the blacklist of surety companies banned by
the Collector of Internal Revenue. The defendant-surety was erased from the blacklist and again allowed to file bonds
in the B.I.R.

On November 10, 1955, the defendant-surety after reviving the "motion for leave to amend answer" in the Tax Court,
filed a second amended answer with counterclaim, seeking the return or refund of the P3,000.00 it had previously
paid. On November 15, 1955, plaintiff-appellant filed a motion to dismiss the case, on the ground that "The specific
tax in question in the above entitled case has been paid to the satisfaction of the plaintiff." The Tax Court, however,
denied the motion and instead ordered the plaintiff to answer the counterclaim.

After due hearing, the Tax Court rendered a decision, the dispositive portion of which reads —

WHEREFORE, the action of plaintiff for the forfeiture of importer's bond is hereby dismissed and the
counterclaim of defendant being legally justified, the Collector of Internal Revenue should be, as he is
hereby ordered to refund to the Visayan Surety and Insurance Corporation the sum of P3,000.00 with
interest from date of payment. Without pronouncement as to costs

In its appeal to this Court, plaintiff-appellant submits (1) that the counterclaim set up by defendant-surety, being for
the recovery of taxes previously paid, should comply with the requisites of section 306 of the Tax Code; (2) That
plaintiff-appellant's action has not been barred by the statute of limitations; (3) That the payment effected by
defendant-surety was voluntary and, therefore, constituted a waiver of prescription or of the statute of limitations; and
(4) That the amount of P3,000.00 was legally or correctly collected by the government.

Pursuant to the provisions of section 306 of the Tax Code, a taxpayer must first file "a claim for refund or tax credit
with the Collector of Internal Revenue", before maintaining a suit or proceeding in any court for the recovery of any
internal revenue tax alleged to have been erroneously or illegally assessed or collected. This provision is mandatory
and a condition precedent to the prosecution of a suit for the recovery of taxes said to have been erroneously or
illegally collected, the non-compliance of which bars the action, nay, it subjects the claim to dismissal, for lack of
cause of action (Johnston Lumber Co., Inc. v. CTA & Coll. of Int. Rev., G.R. No. L-9292, Apr. 23, 1957). No evidence
whatsoever was presented to show the defendant-surety filed a claim for refund or tax credit of the amount of
P3,000.00 paid by it on March 17, 1955, before it filed on November 10, 1955, its second amended answer wherein
the counterclaim in question was pleaded. There is not even an allegation in the counterclaim to effect. The letter
dated March 14, 1955 (Exhs. 6 and 6A) can not be considered as claim for refund, because it merely informed the
Collector of Internal Revenue that it was tendering payment of the sum of P3,000.00 so that defendant-surety might
be removed from the blacklist. The law governing an action for the recovery of taxes is section 306 of the Tax Code,
whether or not the recovery is by counterclaim or a separate action. The counterclaim should have been dismissed,
for lack of cause of action.

Plaintiff-appellant's action has not prescribed. Under Sec. 332 (c) of the Tax Code, the collection of the tax summary
methods or by judicial action shall be effected within five (5) years after the assessment of the tax. In the case at bar,
the Tax Court observed that "the taxes in question must have been assessed at the earliest on June 27, 1946, when
a return (importer's declaration) was filed or at the latest on July 15, 1946, when payment was made on the basis of
the said importer's declaration, and concluded that "the instant action having been instituted in the Court of First
Instance only on February 8, 1953, it becomes apparent that the right to collect the tax in question has been barred
by the statute of limitations." While the findings of the Tax Court has the character of finality, it appears, however, that
the Tax Court in this particular case was merely dwelling in the realms of surmises and speculations when it
pronounced that "the taxes in question must have been assessed at the earliest on June 27, 1946, when a return
(importer's declaration) was filed or at the latest on July 15, 1946, when payment was made on the basis of the said
importer's declaration". Factually, the assessment in question was not issued on July 14, 1946, but on June 17, 1948.
When the Collector of Internal Revenue received information from the Bureau of Customs that the said sum of
P5,000.00 was not paid (for lack of funds), he immediately issued a letter dated June 17, 1948 (Exh. D), addressed to
the defendant-principal assessing and demanding from the latter the payment of the said P5,000.00. It was then that
the unpaid specific tax of P5,000.00 was deemed to have been assessed. Assess means to impose a tax; to charge
with a tax; to declare a tax to be payable; to apportion a tax to be paid or contributed; to fix a rate; to fix or settle a
sum to be paid by way of tax; to set, or charge a certain sum to each taxpayer; to settle, determine or fix the amount
of tax to be paid (84 C.J.S. pp. 749-750). In the case at bar, when the tax was paid in cash and in cheek on July 15,
1946, the plaintiff-appellant had a right to rely, as it, in fact, relied that said payment fully settled the specific taxes due
on the imported cigarettes. The cigarettes would not have been released, had plaintiff-appellant been aware that the
payment did not fully settle the said specific taxes. It can not be said that July 15, 1946 (the date of payment) was the
date of assessment from which the period of collection should start. July 15, 1946 was simply the date of tender of
payment. The right to collect the amount of P5,000.00 began only after the P5,000.00 — rubber check was
dishonored. The action to assess and collect the unpaid tax commenced anew on June 14, 1948, when a letter of
demand for the amount of said rubber-check had been sent to the defendant-principal (Exh. D). This letter should be
deemed to be an assessment because it declared and fixed a tax to be payable against the party liable thereto, and
demanded the settlement thereof. Judicial action having been instituted on February 18, 1953, the five-year period for
collection had not then elapsed.

Even assuming that July 15, 1946 is the date of assessment, still the action to collect is not barred by the statute of
limitations, because the statute was suspended. When the rubber-check was dishonored and demand letters were
sent by the plaintiff-appellant and the Solicitor General to defendant-principal (Exhs. D, E, G, H, I and "1", the last
being an extrajudicial demand for payment of P3,000.00 on July 19, 1950), the defendant-principal wrote two letters
to the Solicitor General on April 15, and 25, 1951, respectively, requesting for the deferment of the judicial action to
be taken by the latter towards the collection of the obligation, so that the former could make representations with the
Collector to settle the matter amicably (Exhs. K and L). This being the case, the prescriptive period to effect the
collection of the tax which allegedly commenced on July 15, 1946, was interrupted. "The prescription of actions is
interrupted when they are filed before the court, when there is any written extrajudicial demand by the creditors and
when there is any written acknowledgment of the debt by the debtor" (Art. 1155, New Civil Code). The defendants-
appellees, under the circumstances, should be the last to claim prescription. As held in the case of Lattimore v. U.S.,
12 F. Supp. 895, 16 AFTR 1240, "Taxpayers seeking to recover overpayment in income could not claim that
collection by Commissioner was barred by limitations where procedure carried out which result in postponement of
collection was that requested by taxpayers". Having acknowledged the debt in writing in April 1951, and the complaint
was filed in 1953, prescription had not set in. The full time for the prescription must be reckoned from the cessation of
the interruption (Sagucio v. Bulos, G.R. Nos. L-17608-09, July 31, 1962, and cases cited therein). Had it not been for
the filing of the complaint in 1953, the interruption would have ceased in April 1956.

Moreover, it should be recalled that the present action is essentially one to collect on the bonds which is an action
separate and distinct from an action to collect taxes. Article 1144 of the Civil Code which provides that action upon a
written contract, must be brought within ten (10) years from the time the right of action accrues, finds a fitting
application (Rep. of the Phil. v. Xavier Gun Trading et al., G.R. No. L-17325; Rep. of the Phil. v. Dorego, et al., G.R.
No. L-16594, both promulgated April 26, 1962). It appearing that said bonds were execute on June 12 and 29, 1946,
the right of the government to collect amounts covered thereby, prescribed on June 12 and 29, 1956. The complaint
was filed on February 18, 1953.

The last argument advanced by defendant-surety is that the sum of P3,000.00 was illegally or erroneously collected
and payment thereof was involuntary, having been allegedly made under duress. The sum of P3,000.00 sought to be
refunded in the counterclaim was covered by the surety bond in the total sum of P3,000.00. The total sum of
P6,000.00 for specific taxes were just and demandable, for it represented the tax for 2 million "Spud" cigarettes, at
the rate of P3.00/thousand (Sec. 13 [b] 2, of the Tax Code) and the subsequent payment in cash in the same sum of
P3,000.00 in order to remove the name of the defendant-surety from the blacklist, can not be considered involuntary.
A threat to enforce one's claim through competent authority, if the claim is just or legal, does not vitiate consent (Art.
1335, Civil Code). Having been made by the defendant-surety to preserve its credit and enable it to carry on its
business with the Bureau of Internal Revenue, the said payment can not be considered involuntary (Harvey v. Gerard
Nat. Bank 119 Pa. 212, 13 A. 202; 48 C.J. 751).

IN VIEW HEREOF, the decision appealed from is reversed and the plaintiff-appellant is absolved from refunding the
amount of P3,000.00 to appellee-defendant surety, with costs against the latter.

Bengzon, C. J., Bautista Angelo, Labrador, Concepcion, Barrera, Dizon, Regala and Makalintal, JJ., concur.
Padilla and Reyes, J.B.L., JJ., took no part.
Republic vs. Limaco and De Guzman Commercial Co.
GR L-13081, 31 August 1962
En Banc, Paredes (J): 8 concur, 2 took no part

Facts: In 1946, Limaco & De Guzman Co. was engaged in the importation of cigarettes. To guarantee payment of
revenue taxes, the company and the Visayan Surety and Insurance Corp.. as surety, executed 2 importer bonds. On
27 June 1946, the company filed with the Bureau of Customs entry papers covering shipment of 2 million “Spud”
cigarettes it had imported from New York. the specific tax due thereon amounted to P6,000. The company, through
its agent/broker J. O. Hiponia, paid the Bureau of Customs the tax with P1000 in cash and P5,000 in a PNB Check on
15 July 1946. The cigarettes were released to the company but the check bounced. On 17 June 1948, the Collector
of Internal Revenue demanded the payment of the deficiency specific tax. The amount remained unpaid. On 15 April
1951, the company requested that action be deferred as it intends to settle the matter amicably with the BIR. The
Republic filed a complaint for the forfeiture of the bonds, and the payment of the sum of P5,000 plus interest. The
company invoked the defense of estoppel and prescription.

Issue: Whether the action has prescribed.

Held: Under Section 332 (c) of the Tax Code, the collection of the tax by summary method or by judicial action shall
be effected within 5 years after the assessment of the tax. To assess means to impose a tax; to charge with a tax; to
declare a tax to be payable; to apportion a tax to be paid or contributed; to fix a rate, to fix or settle a sum to be paid
by way of tax; to set, fix or charge a certain sum to each taxpayer; to settle, determine or fix the amount of tax to be
paid. Herein, the assessment was made on 17 June 1948 (when a letter of demand for the amount of the rubber
check was sent to the company) and not on 15 Jne 1946 (the date of payment). Even assuming that the latter date is
the date of assessment, the action is still not barred by the statute of limitations as teh statute was suspended when
the company acknowledged the debt in writing in April 1951, and requested the deferment of the judicial action to be
taken by the Government towards the collection of the obligation, so that the company could make representations
with the COllector to settle the matter amicably. Prescription has not set in.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-13754 March 31, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
DAMIAN P. RET, defendant-appellee.

Office of the Solicitor General and A.H. Garces for plaintiff-appellant.


Tongco, Tongco and De Leon for defendant-appellee.

PAREDES, J.:

On February 23, 1949, Damian Ret filed with the Bureau of Internal Revenue his Income Tax Return for the year
1948, where he made it appear that his net income was only P2,252.53 with no income tax liability at all. The BIR
found out later that the return was fraudulent since Ret's income, derived from his sales of office supplies to different
provincial government offices, totaled P94,198.76. The BIR assessed him P34,907.33, as deficiency income tax for
1948, inclusive of the 50% surcharge for rendering a false and/or fraudulent return.

Defendant Ret failed to file his Income Tax return for 1949, notwithstanding the fact that he earned a net income of
P150,447.32, also from sale of office supplies. His income, as assessed for tax purposes, showed a deficiency tax of
P68,338.40 for 1949, inclusive of the 50% surcharge.

On January 13, 1951, the Collector of Internal Revenue demanded from Ret the payment of the above sums, but he
failed and/or refused to pay said amounts. On January 20, 1951, the Collector issued income tax assessment notices
to Ret, urging him to pay the sums mentioned, but with the same result.

Upon recommendation of the Collector, Ret was prosecuted for a violation of Sections 45[a], 51[d] and 72, of the
N.I.R.C. penalized under Sec. 73, thereof (Crim. Cases Nos. 19037, and 19038. He pleaded guilty to the two (2)
cases and was sentenced to pay a fine of P300.00 in each.

After his conviction, on September 21, 1957, the Republic filed the present complaint for the recovery of Ret's
deficiency taxes in the total sum of P103,245.73, plus 5% surcharge and 1% monthly interest. Instead of answering,
he presented a Motion to Dismiss on February 8, 1958, claiming that the "cause of action had already prescribed".
The CFI handed down an Order, the pertinent portion of which are reproduced below: .

There is no question that the assessment of the income tax of the defendant for 1948 and 1949 was made
within the period of limitation, that is, on or before January 20, 1951, but the present suit to collect the same
was brought outside the five-year period, to wit, on September 5, 1957, counted from the date of the
assessment of said tax.

There can be no question that the above-quoted provisions of Section 332, letter (c) of the National Internal
Revenue Code, apply to all internal revenue taxes including income tax. The language therein used in all-
embracing, and nowhere in said code is found any other provision governing collection of income tax by
judicial action.

WHEREFORE, the five-year period fixed by law for the filing of suit for the collection of income tax having
already expired, the plaintiff has no cause of action against the defendant and the motion to dismiss should
be and is hereby granted, and the case is dismissed without pronouncement as to costs.

Plaintiff's Motion for Reconsideration of the above Order was denied on March 10, 1958. It appealed.
The dominant issue raised in this appeal is whether or not appellant's right to collect the income taxes due from
appellee through judicial action has already prescribed.

The basis of the motion to dismiss is section 332 of the Revenue Code, which provides —

(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment,
at any time within ten years after the discovery of the falsity, fraud, or omission.

xxx xxx xxx

(c) Where the assessment of any internal revenue tax has been made within the period of limitation above
prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun (1)
within five years after the assessment of the tax, or (2) period to the expiration of any period for collection
agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the expiration of such
five-year period. The period so agreed upon may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon.

The position of the Government may be stated as follows: —

1. The provisions of section 332(c) of the N.I.R.C. do not apply to income taxes. It premised its argument on the ruling
in the case of Collector vs. Avelino and CTA (G.R. No. L-9202, Nov. 19, 1956), wherein it was held that section 331
and 332 of the Tax Code "... merely apply to internal revenue taxes in general and not to income taxes, the collection
of which is specifically provided for under a different title of the same law. ..."; that the special provision alluded to is
section 51 (d), Title II, of the Code, which refers only to the collection of income tax thru the summary remedies of
distraint and levy within three years after the return was filed or should have been filed (Collector v. Villegas, 56 Phil.
554; Collector v. Haygood, 65 Phil. 520; De la Viña v. Government, 65 Phil. 265; Phil. Sugar Estate, Inc. v. Posadas,
68 Phil. 216; Collector v. A. P. Reyes, L-8685, Jan. 31, 1957; Collector v. Zulueta, No. L-8840, Feb. 8, 1957), and
after the lapse of the three year period, collection of income taxes must be had thru judicial action (Sec. 316[b]
N.I.R.C.); but in all these decisions, it is alleged, no mention of any period of limitation for the collection of income tax
thru judicial action has been made.

2. Even granting that section 332 (N.I.R.C.) is applicable, the Government is not barred from instituting the present
action, as shown by the very wordings of said section. It is claimed that as appellee Ret had admitted that he filed a
false and fraudulent income tax return for 1948 and unlawfully failed to file his income tax return for 1949, for which
he pleaded guilty in the two criminal cases heretofore mentioned, the collection of the tax may be enforced by a
proceeding in court within 10 years after the discovery of the falsity, fraud or omission (see also Avelino case, supra).
And the present action was filed within 10 years from the discovery of the falsity, fraud or omission (sec. 332[a],
N.I.R.C.). 1äwphï1.ñët

3. Further granting, that section 332, aforecited is applicable, the Government claims that it is not barred from
instituting the present action because the period within which to collect the taxes due was suspended upon the filing
of the two informations against the defendant-appellee on May 29, 1952, and began to accrue again from the receipt
of the decision on April 20, 1955. In support of this contention, plaintiff-appellant cites section 1, of Rules of Court and
sec. 333 of N.I.R.C. These provisions state: —

SEC. 1. Rules governing civil actions arising from offenses. — Except as otherwise provided by law, the
following rules should be observed:

xxx xxx xxx

(b) Criminal and civil actions arising from the same offense may be instituted separately, but after the
criminal action has been commenced, the civil action cannot be instituted until final judgment has been
rendered in the criminal action;

(c) After a criminal action has been commenced, no civil action arising from the same offense can be
prosecuted; and the same shall be suspended, in whatever stage it may be found, until final judgment in the
criminal proceedings has been rendered;
SEC. 333. Suspension of running of statute. —The running of the statute of limitations provided in section
three hundred thirty-one or three hundred thirty-two on the making of assessments and the beginning of
distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for
the period during which the Collector of Internal Revenue is prohibited from making the assessment or
beginning distraint or levy or a proceeding in court, and for sixty days thereafter.

Under the above-quoted provisions, it is alleged that from January 20, 1951 (date of assessment) to May 29, 1952
(date of filing of the informations), there is an interval of 1 year, 4 months and 9 days, and from April 20, 1955 (date of
decision in the criminal cases which plaintiff-appellant assume to be the date of receipt, as this does not appear) to
September 4, 1957 (date of filing of the complaint at bar), there is an intervening period of 2 years, 4 months and 15
days; and in all, the Government has only consumed a total of 3 years, 8 months and 24 days from the date the
income tax assessment notice was issued to the date of filing of the complaint, of the 5 years prescribed by law. The
government further alleged that the Collector was prohibited from going to court for the collection of the taxes due
from the defendant-appellee, in view of the filing of the two criminal cases, the nature of which covered the subject-
matter of the civil complaint; and there was need for the criminal charges to be determined first by the lower court,
before a civil action for the collection of the tax could be resorted to. In other words, it is contended, that the filing of
the criminal actions constituted a prejudicial question which should be resolved before the Civil Action for collection
could be filed. And this was the very thing the Government did in the instant case. Moreover, the period of
prescription was suspended because of the written extra-judicial demand made by the Collector, citing Art. 1155 of
the N.C.C. in support thereof.

4. The Government submits also that the collection income tax thru judicial action is imprescriptible, relying upon
certain rules of statutory construction and the decision of this Court in the case of Estate of De la Viña v. Government
of the Philippine Islands, 65 Phil. 263, holding that "... the statutes of limitations do not run against the State; and this
principle is applicable to action brought for the collection of taxes (26 R.C.L., 388; 37 C.J., 711)." The doctrine was
reiterated in the case of Philippine Sugar Estate Development Co. v. J. Posadas, et al., 68 Phil. 222, declaring that "...
when the taxpayer paid the additional tax under protest and brought the corresponding action to recover the
protested additional payment, the collection became judicial and the right of the Collector of Internal Revenue to
effect the collection through that means has not prescribed."

5. Assuming arguendo, that the action is prescriptible, then the provisions of Art. 1144 of the N.C.C. on prescription of
actions is applicable, inasmuch as aside from sections 331, 332 and 51 (d), there is no provision in the Revenue
Code which deals on the limitation of action for the collection of income tax thru judicial action. The plaintiff-appellant
argues that the income tax liabilities of the defendant-appellee being an obligation created by law an that the right of
action having accrued on January 20, 1951, the date of assessment, and the complaint at bar having been filed on
September 5, 1957, within the ten year period, the cause of action has not prescribed.

After going over the law and jurisprudence pertinent to the issues raised, We have come to the conclusion that the
cause of action has already prescribed.

It is true that this Court has declared in the Avelino case (1956, supra), that sections 331 and 332 of the Revenue
Code do not apply "to income taxes, the collection of which is specifically provided for under a different title to the
same law." But plaintiff-appellant overlooked the fact that this Court was only referring to the collection of income tax
by summary proceeding and not by court action. Clarifying this matter, in the more recent case of Collector v. Solano
& Court of Tax Appeals, G.R. No. L-11475, July 31, 1958, this Court held: —

.... The decision in the Avelino case was closely followed by our holding in the case of Collector v. Zulueta,
53 O.G. No. 19, 6532, that the three-year prescriptive period provided for in section 51(d) of the Code was
meant to serve as a limitation on the right of the government to collect income taxes by the summary
methods of distraint and levy, said period to be computed from the time the return is filed, or if there has
been a neglect or refusal to file one from the date the return is due, which is March 1st of the succeeding
year. Thus our decision makes it clear that prescriptive period of three years was intended to be a general
limitation on the right of the government to collect income taxes by summary proceedings, irrespective of
whether the taxpayer filed a return or not, or whether his return was true and correct or erroneous or
fraudulent.

Again We declared: —
We notice, however, that Section 51(d) of the National Internal Revenue Code, which refers to the collection
of income tax, does not provide for any prescriptive period insofar as the collection of income tax judicial
action is concerned, the prescriptive period therein mentioned being merely applicable to collection
by summary methods, as interpreted by this Court. Considering this void in the law applicable to income tax,
and bearing in mind that Section 331 of the Code which provides for the limitation upon assessment and
collection by judicial action comes under Title IX, Chapter II, which refers to 'CIVIL REMEDIES FOR
COLLECTION OF TAXES', we may conclude that the provisions of said Section 331 are general in
character which may be considered suppletory with regard to matters not covered by the title covering
income tax. In other words, Title II of the Code is a special provision which governs exclusively all matters
pertaining to income tax, whereas Title IX, Chapter II, is a general provision which governs all internal
revenue taxes in general, which cannot apply insofar as it may conflict with the provisions of Title II as to
which the latter shall prevail, but that in the absence of any provision in said Title II relative to the period and
method of collection of the tax, the provisions of Title IX, Chapter II, may be deemed to be suppletory in
character. Hence, in our opinion, the Court of Tax Appeals did not err in holding that the right of the
Government to collect the deficiency income taxes for the years 1945, 1946 and 1947 has already
prescribed under section 331 of the National Internal Revenue Code. ... (Coll. of Int. Rev. v. Bohol Land
Trans. Co., G.R. Nos. L-13099 & 13453, Apr. 2, 1960).

From all of which, it may be reasonably inferred that section 332 of the Revenue Code does not apply to income
taxes if the collection of said taxes will be made by summary proceedings, because this is provided for by Section 51
(d) aforementioned; but if the collection of income taxes is to be effected by court action, then section 332 will be the
controlling provision. It is alleged, however, that this Court did not mention any period of limitation for the collection of
income tax thru judicial action. To this, it may be observed that it was unnecessary to do so because the said section
(332) has already so provided. In the Solano case, it was declared, "Even so, section 332(c) of the National Internal
Revenue Code provides that such action may be brought only within five years from the time of the assessment of
the tax".

Plaintiff-appellant maintains that granting the applicability of section 332, still, according to paragraph (a) thereto
(supra), it has 10 years from the discovery of the falsity, fraud or omission within which to file the present action.
Under said section, the Collector is given two alternatives: (1) to assess the tax within 10 years from the discovery of
the falsity, fraud or omission, or (2) to file an action in court for the collection of such tax without assessment also
within 10 years from the discovery of the falsity, fraud, or omission. In the case at bar, an assessment had been
made and this fact has taken out the case from the realms of the provisions of section 332(a) and placed it under the
mandates of section 332(c), (supra), which is the law applicable hereon and general enough to cover the present
situation.

As heretofore stated, the plaintiff-appellant made the assessment on January 20, 1951 and had up to January 20,
1956 to file the necessary action. It was only on September 5, 1957, that an action was filed in Court for the collection
of alleged deficiency income tax - far beyond the 5-year period. This notwitstanding, plaintiff-appellant argues that
during the pendency of the criminal cases, it was prohibited from instituting the civil action for the collection of the
deficiency taxes. This contention is untenable. The present complaint against the defendant-appellee is not for the
recovery of civil liability arising from the offense of falsification; it is for the collection of deficiency income tax. The
provisions of Section 1, Rule 107 (supra) that "after a criminal action has been commenced, no civil action arising
from the same offense can be prosecuted", is not applicable. The said criminal cases would not effect, one way or
another, the running of the prescriptive period for the commencement of the civil suit. The criminal actions are entirely
separate and distinct from the present civil suit. There is nothing in the law which would have stopped the plaintiff-
appellant from filing this civil suit simultaneously with or during the pendency of the criminal cases. Assuming the
applicability of the rule, at most, the prosecution of the civil action would be suspended but not its filing within the
prescribed period. Section 332 of the Tax Code provides: "the running of the statutory limitation ... shall be
suspended for the period during which the Collector of Internal Revenue is prohibitedfrom making the assessment, or
beginning distraint or levy or a proceeding in court, and for sixty days thereafter". As heretofore stated, the plaintiff-
appellant was not prohibited by any order of the court or by any law from commencing or filing a proceeding in court.
It is also averred that the period of prescription for the collection of tax was suspended because of the written
extrajudicial demand made by the Collector against the defendant-appellee, citing Art. 1155 N.C.C. Again, in the
Solano case, (supra), We held that the only agreement that could have suspended the running of the prescriptive
period was a written agreement between Solano and the Collector, entered before the expiration of the five (5) year
prescriptive period, extending the period of limitations prescribed by law (sec. 332[c] N.I.R.C.) which "Rule is in
accord with the general law on prescription that requires a written acknowledgment of the debtor to renew the cause
of action or interrupt the running of the limitation period (Act 190, sec. 50; new Civil Code, Art. 1155)." In the instant
case, there is no such written agreement, and there was nothing to agree about. The letter of demand by the
Collector on January 13, 1951, was made prior to the issuance of the assessment notice to the defendant-appellee,
made on January 20, 1951, from which date, the 5-year period was to be counted. The letter of demand could not
suspend something that started to run only on January 20, 1951.

The very provisions of sections 331, 332 and 333 of the N.I.R.C. specially the last, heretofore quoted, support the
theory of prescriptibility of a judicial action to collect income tax. To hold otherwise, would render said provisions idle
and useless. It is true that in earlier decisions, there was a declaration to the effect that the action to collect income
tax is imprescriptible (Viña v. Government, 65 Phil. 262; Phil. Sugar Dev. v. Posadas, 68 Phil. 216). More recent
decisions, however, recognized the prescriptibility of such actions. Thus, it has been held: —

The 'judicial action' mentioned in the Tax Code may be resorted to within five (5) years from the date the
return has been filed, if there has been no assessment, or within five (5) years from the date of the
assessment made within the statutory period, or within the period agreed upon, in writing, by the Collector of
Internal Revenue and the taxpayer, before the expiration of said five-year period, or within such extension of
said stipulated period as may have been agreed upon, in writing, made before the expiration of the period
previously stipulated, except that in the case of a false or fraudulent return with intent to evade tax or for
failure to file a return the judicial action may be begun at any time within ten (10) years after the discovery of
the falsity, fraud or omission (Sections 331 and 332 of the Tax Code). (Gancayco v. Coll. of Int. Rev., G.R.
No. L-13325, April 20, 1961).

In view of the conclusions reached, it is deemed unnecessary to pass upon the other issues raised.

The decision appealed from is affirmed, without special pronouncement as to costs.

Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon and De Leon, JJ., concur.
Padilla, J., took no part.
REPUBLIC V RET March 31, 1962

Facts: Damian Ret filed 2 false and fraudulent returns for 1948 and 1949 for which he was assessed by the BIR the
sums of P34,907.33 and P68,338.40 including 50% surcharge for found. Demand was made on January 3, 1951 for
payment.

Ret refused to pay. On June 20, 1951, an assessment notice was issued but he still refused. Subsequently, Ret was
prosecuted in 2 criminal cases for filing false or fraudulent returns. He pleaded guilty thereto and was sentenced to
pay a fined of P300 in each case.

After his conviction, on September 21, 1957, the Government filed a complaint for the collection of Ret’s income
taxes but the lower court dismissed the case on the ground that the government’s right to collect by judicial action
had prescribed as more than five (now three) years had elapsed from the date of the assessment of Ret’s taxes.

The government however contended that prescription did not take place because the prescriptive period for collection
was suspended when the 2 informations were filed on May 29, 1952 and began to run again from the receipt of the
court’s decision on April 20, 1955.

Issue: Whether or not the prescriptive period was suspended when the 2 informations were filed.

Held: According to the SC, however, the prescriptive period for the civil action is suspended during the pendency of
the criminal nation only when the civil liability arises from the offense committed. However, such rule does not apply
here because the criminal actions for the violations are entirely separate and distinct from the civil suit.

The court further stated that there is nothing in the law which would have stopped the plaintiff-appellant from filing the
civil suit simultaneously with or during the pendency of the criminal case.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-20477 March 29, 1968

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
FELIX B. ACEBEDO, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.


Angel C. Facundo for defendant-appellee,.

MAKALINTAL, J.:

This is a suit for collection of deficiency income tax for the year 1948 in the amount of P5,962.83. The
corresponding notice of assessment was issued on September 24, 1949. The complaint was filed on December 27,
1961. After the defendant filed his answer but before trial started he moved to dismiss on the ground of prescription.
The court received evidence on the motion, and on September 1, 1962 issued an order finding the same meritorious
and hence dismissing the complaint. The case is before us on appeal by the plaintiff from the order of dismissal.

The statute of limitations which governs this case is Section 332, subsection (c), of the National Internal
Revenue Code, which reads:

SEC. 332. Exemptions as to period of limitation of assessment and collection of taxes. —

xxx xxx xxx

xxx xxx xxx

(c) Where the assessment of any internal-revenue tax has been made with the period of limitation
above prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun
(1) within five years after the assessment of the tax, or (2) prior to the expiration of any period for collection
agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the expiration of such
five-year period. The period so agreed upon may be extended by subsequent agreements in writing made
before the expiration of the period previously agreed upon.

The present suit was not begun within five years after the assessment of the tax, which was in 1949. Was it,
however, begun prior to the expiration of any period for collection agreed upon in writing by the Commissioner of
Internal Revenue and the defendant before the expiration of such five-year period? The only evidence of such written
agreement, in the form of a "waiver of the statute of limitations" signed by the defendant, is Exhibit U (also Exh. 4),
dated December 17, 1959. But this waiver was ineffective because it was executed beyond the original five-year
limitation.

The plaintiff contends that the period of prescription was suspended by the defendant's various requests for
reinvestigation or reconsideration of the tax assessment. The trial court rejected this contention, saying that a mere
request for reinvestigation or reconsideration of an assessment does not have the effect of such suspension. The
ruling is logical, otherwise there would be no point to the legal requirement that the extension of the original period be
agreed upon in writing.

To be sure, this legal provision, according to some, decisions of this Court, does not rule out a situation where
the taxpayer may be in estoppel to claim prescription. Thus we said in Commissioner of Internal Revenue, vs.
Consolidated Mining Co., L-11527, Nov. 25, 1958:
... There are cases however where a taxpayer may be prevented from setting up the defense of
prescription even if he has not previously waived it in writing as when by his repeated requests or positive
acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that
the demand was not unreasonable or that no harassment or injustice is meant by the Government.
(Emphasis supplied.)

Likewise, when a taxpayer asks for a reinvestigation of the tax assessment issued to him and such
reinvestigation is made, on the basis of which the Government makes another assessment, the five-year period with
which an action for collection may be commenced should be counted from this last assessment. (Republic vs. Lopez,
L-18007, March 30, 1963; Commissioner v. Sison, et al., L-13739, April 30, 1963.)

In the case at bar, the defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was considered or acted
upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the
full amount of the assessment at (Exh. D), but there was no follow up of this warrant. Consequently, the request for
reinvestigation did not suspend the running of the period for filing an action for collection.

The next communication of record is a letter signed for the defendant by one Troadio Concha and dated
October 6, 1951, again requesting a reinvestigation of his tax liability (Exh. B). Nothing came of this request either.
Then on February 9, 1954, the defendant's lawyers wrote the Collector of Internal Revenue informing him that the
books of their client were ready at their office for examination (Exh. C). The reply was dated more than a year later, or
on October 4, 1955, when the Collector bestirred himself for the first time in connection with the reinvestigation
sought, and required that the defendants specify his objections to the assessment and execute "the enclosed forms
for waiver, of the statute of limitations." (Exh. E). The last part of the letter was a warning that unless the waiver "was
accomplished and submitted within 10 days the collection of the deficiency taxes would be enforced by means of the
remedies provided for by law."

It will be noted that up to October 4, 1955 the delay in collection could not be attributed to the defendant at all.
His requests in fact had been unheeded until then, and there was nothing to impede enforcement of the tax liability by
any of the means provided by law. By October 4, 1955, more than five years had elapsed since assessment in
question was made, and hence prescription had already set in, making subsequent events in connection with the said
assessment entirely immaterial. Even the written waiver of the statute signed by the defendant on December 17,
1959 could no longer revive the right of action, for under the law such waiver must be executed within the original
five-year period within which suit could be commenced.

The order appealed from is affirmed, without pronouncement as to costs.1äwphï1.ñët

Reyes, J.B.L., Dizon, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.
Castro, J., took no part.
G.R. No. L-20477
March 29, 1968
REPUBLIC OF THE PHILIPPINES,
plaintiff-appellant,
vs.
FELIX B. ACEBEDO,
defendant-appellee.

FACTS:
This is a suit for collection of deficiency income tax for the year 1948 in the amount of P5,962.83. The corresponding
notice of assessment was issued on September 24, 1949.
The complaint was filed on December 27, 1961. After the defendant filed his answer but before trial started he
moved to dismiss on the ground of prescription. The court received evidence on the motion, and on September 1,
1962 issued an order finding the same meritorious and hence dismissing the complaint. Plaintiff appealed from the
order of dismissal.

ISSUE: Whether or not the right to collect has already prescribed.

HELD: YES

The statute of limitations which governs this case is Section 332, subsection (c), of the National Internal Revenue
Code, which provides for an exemption as to the period of limitation that tax
may be collected by distraint or levy or by a proceeding in court, but only if begun (1) within five years after the
assessment of the tax, or (2) prior to the expiration of any period for collection
agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the
expiration of such five-year period. The period so agreed upon may be extended by
subsequent agreements in writing made before the expiration of the period previously agreed
upon.

The present suit was not begun within five years after the assessment of the tax, which was in
1949.

Was it, however, begun prior to the expiration of any period for collection agreed upon in
writing by the Commissioner of Internal Revenue and the defendant before the expiration of
such five-year period? NO.

The only evidence of such written agreement, in the form of a "waiver of the statute of
limitations" signed by the defendant, dated December 17, 1959. But this waiver was ineffective because it was
executed beyond the original five-year limitation.
The plaintiff contends that the period of prescription was suspended by the defendant's various requests for
reinvestigation or reconsideration of the tax assessment.
The trial court rejected this contention, saying that a mere request for reinvestigation or reconsideration of an
assessment does not have the effect of such suspension
.
The ruling is logical, otherwise there would be no point to the legal requirement that the extension of the original
period be agreed upon in writing.
There are certain decisions where the taxpayer may be in estoppel to claim prescription as a
defense even if he has not previously waived it in writing:
IN the case of CIR vs Consolidated Mining the SC ruled that when by his repeated requests or
positive acts, the government has been for good reasons, persuaded to postpone collection
.
Likewise, when a taxpayer asks for a reinvestigation of the tax assessment issued to him and such reinvestigation is
made, on the basis of which the Government makes another assessment, the five-year period with which an action
for collection may be commenced should be counted from this last assessment.

In the case at bar, the defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949. There is no evidence that this request was considered or acted upon. In
fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full
amount of the assessment at (Exh. D), but there was no follow up of this warrant.
Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for
collection. The next communication of record is a letter signed for the defendant by one Troadio Concha and dated
October 6, 1951, again requesting a reinvestigation of his tax liability (Exh. B). Nothing came of this request either.

Then on February 9, 1954, the defendant's lawyers wrote the Collector of Internal Revenue informing him that the
books of their client were ready at their office for examination (Exh. C).
The reply was dated more than a year later, or on October 4, 1955, when the Collector bestirred himself for the first
time in connection with the reinvestigation sought, and required that the defendants specify his objections to the
assessment and execute "the enclosed forms for waiver, of the statute of limitations." The last part of the letter was a
warning that unless the waiver "was accomplished and submitted within 10 days the collection of the deficiency taxes
would be enforced by means of the remedies provided for by law."

It will be noted that up to October 4, 1955 the delay in collection could not be attributed to
the defendant at all. His requests in fact had been unheeded until then, and there was nothing
to impede enforcement of the tax liability by any of the means provided by law.

By October 4, 1955, more than five years had elapsed since assessment in question was made,
and hence prescription had already set in, making subsequent events in connection with the
said assessment entirely immaterial . Even the written waiver of the statute signed by the defendant on December 17,
1959 could no longer revive the right of action, for under the law such waiver must be executed within the original
five-year period within which suit could be commenced.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-18007 March 30, 1963

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
BENITO H. LOPEZ, defendant-appellee.

Office of the Solicitor General for plaintiff-appellant.


Rodolfo F. Baluyot for defendant-appellee.

REYES, J.B.L., J.:

This is an appeal interposed by the government from the order of 2 November 1960 of the Court of First Instance of
Baguio (Judge Jesus de Veyra, presiding) dismissing the complaint in a resolution, as follows:

A motion to dismiss has been filed on the ground that the action has already prescribed. Defendant has
attached to his motion a copy of his "Waiver of the Statute of Limitations" (Annex "9") wherein he waives the
running of the statutory period for assessment and collection but not beyond December 31, 1957. It is
admitted that this case refers to an assessment made in 1950. Under Section 332 of the National Internal
Revenue Code, the government had until December 31, 1957 within which to make its assessment and
collection. It is admitted that this assessment was made only on March 23, 1960 — too late. The
government assails this "Waiver" on the ground that it is null and void. The government is in estoppel to
attack this "Waiver" and as this "Waiver" was made on a form prepared by the Bureau of Internal Revenue
and filed on demand of this same bureau.

That action having prescribed, this case is hereby dismissed without pronouncement as to costs.

No brief was filed for appellee.

The record reveals that on 6 December 1950 Benito H. Lopez filed his income tax return for 1950, for which an
assessment was issued by the Bureau of Internal Revenue on 13 November 1952 demanding payment of
P245,100.29 as deficiency income tax. Lopez, through counsel, in a communication dated 30 November 1952,
requested for reconsideration. This was denied in plaintiff's letter of 14 July 1953. Appellee reiterated his petition
through counsel's letters of 14 November and 11 December 1953. This was given due course, and resulted in the
reduction of the assessment to P20,346.14 on 29 May 1954. Apparently satisfied, defendant manifested in his letter
of 1 July 1954 that he will settle the obligation by the end of the month. Without complying thereto, on 9 July 1955,
Lopez pleaded for another reinvestigation, which was granted by the BIR. As a result thereof, an assessment was
issued demanding payment of P6,019.00 as additional deficiency income tax for 1950, the total (P26,365.14) of which
he did not pay, notwithstanding repeated demands.

On 16 January and 11 February 1956, appellee prayed for a third reinvestigation, which, strangely enough, was
acceded to by the BIR in its letter of 25 February 1956, provided he waives the statute of limitations. Ironically,
however, instead of executing an unconditional waiver, defendant imposed a deadline of 31 December 1957 within
which the government should finish the third reinvestigation. Ignoring the same, on 23 March 1960, the BIR issued an
assessment demanding the same amount of P26,365.14 as deficiency income tax for 1950. For non-payment, a
collection suit was filed with the court a quo on 13 August 1960. On 30 September 1960, defendant-appellee filed a
motion to dismiss the complaint, which, as has already been stated, was sustained.

Obviously, the first issue is: Would the time limit of 31 December 1957, enjoined by appellee in the contemplated
"Waiver of the Statute of Limitations", be binding and operative? We believe, and hold, that it is not, on several
grounds.
It is now a settled rule in our jurisdiction that (1) the five-year prescriptive period fixed by section 332 (c) of the
Internal Revenue Code within which the Government may sue to collect an assessed tax is to be counted from the
last revised assessment resulting from a reinvestigation asked for by the taxpayer; 1 and (2) that where a taxpayer
demands a reinvestigation, the time employed in reinvestigation should be deducted from the total period of
limitation.2

An application of these rules will show that when action was brought by the Republic, the prescriptive period of 5
years had not elapsed from the revision of 1954. If from the period that intervened between the first revised
assessment (29 May 1954) and the filing of the complaint (13 August 1960) is deducted the time consumed in
considering and deciding the taxpayer's subsequent petition for reconsideration and reinvestigation (from 16 January
1956 to 22 April 1960), it will be seen that less than 5 years can be counted against the Government.

The first reinvestigation was granted, and a reduced assessment issued, on 29 May 1954, from which date the
Government had five years for bringing an action to collect.

The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22 April 1960, or a
period of 4 years, 3 months, and 6 days, during which the limitation period was interrupted.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1äwphï1.ñët

Deducting this interval from the period intervening between the first revised (and executory) assessment to the filing
of the complaint [i.e., from 29 May 1954 to 13 August 1960, which is a total of six (6) years, two (2) months, and
fifteen (15) days] leaves only one (1) year, three (3) months, and six (6) days counted against the government.

The fixing by the taxpayer of a prescriptive period "not beyond December 31, 1957" operates to reduce the time
available to the government for the collection of the tax from 29 May 1954 to 31 December 1957 only, which is much
less than the 5 years prescribed by law [Revenue Code sec. 332 (c)]. Even though we disregard the lack of written
conformity thereto by the Collector of Internal Revenue, it is seriously to be doubted that the said official could validly
agree to reduce the prescriptive period to less than that granted by law to the detriment of the state, since it
diminishes the opportunities of collecting taxes due to the Republic.

Even if we consider that, because of the date fixed by the taxpayer, the second reinvestigation asked on 16 January
1956 should have been decided on 31 December 1957, and that the interruption due to the second reinvestigation
was, therefore, only one (1) year, eleven (11) months, and sixteen (16) days, still it would appear that the government
brought suit after only four (4) years, nine (9) months, and one (1) day, and, therefore, well within the prescriptive 5-
year period.

Another ground for reversing the dismissal of the complaint is that the proper remedy of the taxpayer against the
assessment complained of was to appeal the ruling of the Collector to the Court of Tax Appeals. Section 7, paragraph
1, and section 11, first paragraph, of Republic Act No. 1125 (effective since 1954) expressly provide:

SEC. 7. Jurisdiction. — The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal, as herein provided —

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal
Revenue.

SEC. 11. Who may appeal; effect of append.— Any person, association or corporation adversely affected by
a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city
Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the
receipt of such decision or ruling.

The failure to appeal the Collector's ruling is a waiver of the defenses against it, and estops the taxpayer from
subsequently raising those objections thereafter. Otherwise, the period of thirty days for appeal to the Tax Court
would make title sense (Republic vs. Del Rosario, L-10460, 11 March 1959; Uy Ham vs. Republic, L-13809, 20 Oct.
1959).

However, we feel it our duty to call attention to the extraordinary reduction by the revenue authorities of the taxes due
in this case from the original P245,100.29 to less than one tenth of it (P20,346.14) upon reinvestigation. Such a result
is ample evidence that the first assessment was carelessly made, without regard to the true facts, and it strongly
reflects upon the efficiency of the revenue examiner who made the grossly excessive assessment. Equally
anomalous is the fact that after the taxpayer had promised to pay the computed tax, and after he had failed to keep
his promise, the tax authorities should still agree to a further revision of the assessment. Irregularities of this kind
inevitably provoke suspicion over the competency and honesty of the tax collecting operations, and it is expected that
the competent authorities will take immediate and drastic steps to stop such deplorable practices.

PREMISES CONSIDERED, the order of dismissal appealed from is revoked and set aside, and the records are
ordered remanded to the court of origin for further proceedings conformable to this opinion.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes, Dizon and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
Republic of the Philippines v. Lopez
No. L-18007
March 30, 1963

FACTS: Respondent Benito Lopez filed his income tax return for 1950 for which an
assessment was issued by the BIR on November 1952 demanding payment of
245,100.29 PHP as deficiency income tax. Lopez requested for a reconsideration. It
was given due course, and resulted in the reduction of the assessment to 20,346.14
PHP on May 1954. Apparently satisfied, respondent manifested in a letter that he will
settle the obligation by the end of the month. Without complying thereto, on July 9 1955,
Lopez pleaded for another reinvestigation which was granted by the BIR. As a result, an
assessment was issued demanding payment of 6,019 PHP as additional deficiency
income tax for 1950, the total of which he did not pay despite repeated demands.
Appellee prayed for a third investigation which was acceded to by the BIR in 1956
provided he waives the statue of limitations. Ironically instead of executing an
unconditional waiver, defendant imposed a deadline on December 1957 within which
the government should finish the third reinvestigation. The BIR ignored such an issued
an assessment demanding the same amount of 26,365.14 PHP as deficiency income
tax for 1950. On september 1960, defendant filed a motion to dismiss the complaint,
which, as has already been stated was sustained.

ISSUE:
(1) Whether or not the time limit of December 31, 1957 enjoined by appellee in the
contemplated “Waiver of the Statute of Limitations”, be binding and operative—NO

HELD:
(1) NO, it is not. It is well-settled in our jurisdiction that the 5-year prescriptive period
fixed by section 332 (c) of the Internal Revenue Code within which the government may
sue to collect an assessed tax is to be counted from the last revised assessment
resulting from a reinvestigation asked for by the taxpayer.
When a taxpayer demands a reinvestigation, the time employed in reinvestigation
should be deducted from the total period of limitation. BY applying these rules, the prescriptive period of 5 years had
not elapsed from the revision of 1954. If from the
period intervened between the first revised (1954) and the filing of the complaint (1960)
is deducted the time consumed in considering and deciding the taxpayer’s subsequent
petition for reconsideration and reinvestigation (Jan 1956 to April 1960) it will be seen
that less than 5 years can be counted against the Government.
1st reinvestigation—May 29, 1954 from which date the Government had 5 years for
bringing an action to collect
2nd reinvestigation—Jan 16, 1956 and lasted until it was decided on April 22, 1960 or a
period of 4 years, 3 months, and 6 days during which the limitation period was
interrupted.
Deducting this interval from the period intervening between the first revised and
executory assessment to the filing of the complaint (from May 1954 to August 1960,
which is a total of 6 years, 2 months, and 15 days) leaves only 1 year, 3 months, and 6
days counted against the government.
This court cannot accept the fact that a taxpayer fixed the prescriptive period “not
beyond December 31, 1957” operates to reduce the time available to the government for
the collection of the tax from May 1954 to December 1957 which is less than 5 years
prescribed by law. Even if we consider the date fixed by the taxpayer, the government is
well within the prescriptive 5-year period.
Another ground for reversing the dismissal of the complaint is that the proper remedy of
the taxpayer against the assessment complained of was to appeal then ruling of the
Collector to the Court of Tax Appeal. Under Republic Act No. 1154, the jurisdiction of
the CTA shall include the decisions of the CIR in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties imposed in relation
arising under the NIRC. The failure to appeal to the Collector’s ruling is a waiver of the
defenses against it and estops the taxpayer from subsequently raising those objections.
Otherwise, the period of 30 days for appeal to the Tax Court would make little sense.
However it is to be noted how much an extraordinary reduction was made by the
revenue authorities of the taxes originally assessed from 245, 100.29 to less than one
tenth of it 20, 346.14 upon reinvestigation. Such result is evidence that the first
assessment was carelessly made without regard to the true facts and strongly reflects
the efficiency of the revenue examiner who made the grossly excessive assessment.
Equally anomalous is the fact that after the taxpayer had promised to pay the computed
tax, and after he had failed to keep his promise the tax authorities should still agree to a
further revision of the assessment. This is highly irregular and suspicious over the competency and honesty of the tax
collecting authorities.
Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21609 September 29, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,


vs.
KER & COMPANY, LTD., defendant-appellant.

Office of the Solicitor General for plaintiff-appellant.


Leido, Andrada, Perez and Associates for defendant-appellant.

BENGZON, J.P., J.:

Ker & Co., Ltd., a domestic corporation, filed its income tax returns for the years 1947, 1948, 1949 and 1950 on the
following dates:

Year Date Filed


1947 April 12, 1948
1948 April 30, 1949
1949 May 15, 1950
1950 May 9, 1951

It amended its income tax returns for 1948 and 1949 on May 11, 1949 and June 30, 1950, respectively.

In 1953 the Bureau of Internal Revenue examined and audited Ker & Co., Ltd.'s returns and books of accounts and
subsequently issued the following assessments for deficiency income tax:

Year Amount Date Assessed


1947 P42,342.30 July 25, 1953
1948 18,651.87 Feb. 16, 1953
1949 139.67 Feb. 16, 1953
1950 12,813.00 Feb. 16, 1953

due and payable on dates indicated in the accompanying notices of assessment. The assessments for 1948 and
1950 carried the surcharge of 50% authorized under Section 72 of the Tax Code for the filing of fraudulent returns.

Upon request of Ker & Co., Ltd., through Atty. Jose Leido, its counsel, the Bureau of Internal Revenue reduced the
assessments for the year 1947 from P42,342.30 to P27,026.28 and for the year 1950 from P12,813.00 to P8,542.00,
imposed the 50% surcharge for the year 1947 and eliminated the same surcharge from the assessment for the year
1950. The assessments for years 1948 and 1949 remained the same.

On March 1, 1956 Ker & Co., Ltd. filed with the Court of Tax Appeals a petition for review with preliminary injunction.
No preliminary injunction was issued, for said court dismissed the appeal for having been instituted beyond the 30-
day period provided for in Section 11 of Republic Act 1125. We affirmed the order of dismissal of L-12396. 1

On March 15, 1962, the Bureau of Internal Revenue demanded payment of the aforesaid assessments together with
a surcharge of 5% for late payment and interest at the rate of 1% monthly. Ker & Co., Ltd. refused to pay, instead in
its letters dated March 28, 1962 and April 10, 1962 it set up the defense of prescription of the Commissioner's right to
collect the tax. Subsequently, the Republic of the Philippines filed on March 27, 1962 a complaint with the Court of
First Instance of Manila seeking collection of the aforesaid deficiency income tax for the years 1947, 1948, 1949 and
1950. The complaint did not allege fraud in the filing of any of the income tax returns for the years involved, nor did it
pray for the payment of the corresponding 50% surcharge, but it prayed for the payment of 5% surcharge for late
payment and interest of 1% per month without however specifying from what date interest started to accrue.

Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the
proceedings before the Bureau of Internal Revenue and the Court of Tax Appeals.

On April 14, 1962 Ker & Co., Ltd. through its counsel, Leido, Andrada, Perez & Associates, moved for the dismissal
of the complaint on the ground that the court did not acquire jurisdiction over the person of the defendant and that
plaintiff's cause of action has prescribed. This motion was denied and defendant filed a motion for reconsideration.
Resolution on said motion, however, was deferred until trial of the case on the merits.

On May 18, 1962, Ker & Co., Ltd. filed its answer to the complaint interposing therein the defense set up in its motion
to dismiss of April 14, 1962.

On September 18, 1962 the Republic of the Philippines amended its complaint, in answer to which Ker & Co., Ltd.
adopted the same answer which it had filed on May 18, 1962.

On January 30, 1963 the Court of First Instance rendered judgment, the dispositive portion of which states:

WHEREFORE, this Court dismisses the claim for the collection of deficiency income taxes for 1947, but
orders defendant taxpayer to pay the deficiency income taxes for 1948, 1949 and 1950, in the amounts of
P18,651.87, P139.67 and P8,542.00, respectively, plus 5% surcharge thereon on each amount and interest
of 1% a month computed from March 27, 1962 and until full payment thereof is made, plus the costs of suit.

On February 20, 1963 the Republic of the Philippines filed a motion for reconsideration contending that the right of
the Commissioner of Internal Revenue to collect the deficiency assessment for 1947 has not prescribed by a lapse of
merely five years and three months, because the taxpayer's income tax return was fraudulent in which case
prescription sets in ten years from October 31, 1951, the date of discovery of the fraud, pursuant to Section 332 (a) of
the Tax Codes and that the payment of delinquency interest of 1% per month should commence from the date it fell
due as indicated in the assessment notices instead of on the date the complaint was filed.

On March 6, 1963 Ker & Co., Ltd. also filed a motion for reconsideration reiterating its assertion that the Court of First
Instance did not acquire jurisdiction over its person, and maintaining that since the complaint was filed nine years,
one month and eleven days after the deficiency assessments for 1948, 1949 and 1950 were made and since the
filing of its petition for review in the Court of Tax Appeals did not stop the running of the period of limitations, the right
of the Commissioner of Internal Revenue to collect the tax in question has prescribed.

The two motions for reconsideration having been denied, both parties appealed directly to this Court.

The issues in this case are:

1. Did the Court of First Instance acquire jurisdiction over the person of defendant Ker & Co., Ltd.? .

2. Did the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1947
prescribe? .

3. Did the filing of a petition for review by the taxpayer in the Court of Tax Appeals suspend the running of
the statute of limitations to collect the deficiency income for the years 1948, 1949 and 1950?

4. When did the delinquency interest on the deficiency income tax for the years 1948, 1949 and 1950
accrue?

First Issue
Ker & Co., Ltd. maintains that the court a quo did not acquire jurisdiction over its person inasmuch as summons was
not served upon it but upon Messrs. Leido and Associates who do not come under any of the class of persons upon
whom summons should be served as enumerated in Section 13, Rule 7 of the Rules of Court, 2 which reads:

SEC. 13. Service upon private domestic corporation or partnership.—If the defendant is a corporation
formed under the laws of the Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent, or any of its directors.

Messrs. Leido and Associates acted as counsel for Ker Co., Ltd. when this tax case was in its administrative stage.
The same counsel represented Ker & Co., Ltd., when it appealed said case to the Court of Tax Appeals and later to
this Court. Subsequently, when the Deputy Commissioner of Internal Revenue, by letter dated March 15, 1962,
demanded the payment of the deficiency income tax in question, it was Messrs. Leido, Andrada, Perez & Associates
who replied in behalf of Ker & Co., Ltd. in two letters, dated March 28, 1962 and April 10, 1962, both after the
complaint in this case was filed. At least therefore on April 2, 1962 when Messrs. Leido and Associates received the
summons, they were still acting for and in behalf of Ker & Co., Ltd. in connection with its tax liability involved in this
case. Perforce, they were the taxpayer's agent when summons was served. Under Section 13 of Rule 7, aforequoted,
service upon the agent of a corporation is sufficient.

We observe that the motion to dismiss filed on April 14, 1962, aside from disputing the lower court's jurisdiction over
defendant's person, prayed for dismissal of the complaint on the ground that plaintiff's cause of action has prescribed.
By interposing such second ground in its motion to dismiss, Ker & Co., Ltd. availed of an affirmative defense on the
basis of which it prayed the court to resolve controversy in its favor. For the court to validly decide the said plea of
defendant Ker & Co., Ltd., it necessarily had to acquire jurisdiction upon the latter's person, who, being the proponent
of the affirmative defense, should be deemed to have abandoned its special appearance and voluntarily submitted
itself to the jurisdiction of the court.3

Voluntary appearance cures defects of summons, if any.4 Such defect, if any, was further cured when defendant filed
its answer to the complaint.5 A defendant can not be permitted to speculate upon the judgment of the court by
objecting to the court's jurisdiction over its person if the judgment is adverse to it, and acceding to jurisdiction over its
person if and when the judgment sustains its defenses.

Second Issue

Ker & Co., Ltd. contends that under Section 331 of the Tax Code the right of the Commissioner of Internal Revenue
to assess against it a deficiency income tax for the year 1947 has prescribed because the assessment was issued on
July 25, 1953 after a lapse of five years, three months and thirteen days from the date (April 12, 1948) it filed its
income tax return. On the other hand, the Republic of the Philippines insists that the taxpayer's income tax return was
fraudulent, therefore the Commissioner of Internal Revenue may assess the tax within ten years from discovery of the
fraud on October 31, 1951 pursuant to Section 322(a) of the Tax Code.

The stand of the Republic of the Philippines hinges on whether or not taxpayer's income tax return for 1947 was
fraudulent.

The court a quo, confining itself to determining whether or not the assessment of the tax for 1947 was issued within
the five-year period provided for in Section 331 of the Tax Code, ruled that the right of the Commissioner of Internal
Revenue to assess the tax has prescribed. Said the lower court:

The Court resolves the second issue in the negative, because Section 331 of the Revenue Code explicitly
provides, in mandatory terms, that "Internal Revenue taxes shall be assessed within 5 years after the return
was filed, and no proceedings in court without assessment, for the collection of such taxes, shall be
begun after expiration of such period. The attempt by the Commissioner of Internal Revenue to make an
assessment on July 25, 1953, on the basis of a return filed on April 12, 1948, is an exercise of authority
against the aforequoted explicit and mandatory limitations of statutory law. Settled in our system is the rule
that acts committed against the provisions of mandatory or prohibitory laws shall be void (Art. 5, New Civil
Code). . . .

Said court resolved the issue without touching upon fraudulence of the return. The reason is that the complaint
alleged no fraud, nor did the plaintiff present evidence to prove fraud.
In reply to the lower court's conclusion, the Republic of the Philippines maintains in its brief that Ker & Co., Ltd. filed a
false return and since the fraud penalty of 50% surcharge was imposed in the deficiency income tax assessment,
which has become final and executory, the finding of the Commissioner of Internal Revenue as to the existence of the
fraud has also become final and need not be proved. This contention suffers from a flaw in that it fails to consider the
well-settled principle that fraud is a question of fact6 which must be alleged and proved.7 Fraud is a serious charge
and, to be sustained, it must be supported by clear and convincing proof. 8 Accordingly, fraud should have been
alleged and proved in the lower court. On these premises We therefore sustain the ruling of the lower court upon the
point of prescription.

It would be worth mentioning that since the assessment for deficiency income tax for 1947 has become final and
executory, Ker & Co., Ltd. may not anymore raise defenses which go into the merits of the assessment, i.e.,
prescription of the Commissioner's right to assess the tax. Such was our ruling in previous cases. 9 In this case
however, Ker & Co., Ltd. raised the defense of prescription in the proceedings below and the Republic of the
Philippines, instead of questioning the right of the defendant to raise such defense, litigated on it and submitted the
issue for resolution of the court. By its actuation, the Republic of the Philippines should be considered to have waived
its right to object to the setting up of such defense.

Third Issue

Ker & Co., Ltd. impresses upon Us that since the Republic of the Philippines filed the complaint for the collection of
the deficiency income tax for the years 1948, 1949 and 1950 only on March 27, 1962, or nine years, one month and
eleven days from February 16, 1953, the date the tax was assessed, the right to collect the same has prescribed
pursuant to Section 332 (c) of the Tax Code. The Republic of the Philippines however contends that the running of
the prescriptive period was interrupted by the filing of the taxpayer's petition for review in the Court of Tax Appeals on
March 1, 1956.

If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not
counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect the
tax has not prescribed.

The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped the
running of the prescriptive period to collect because said court did not have jurisdiction over the case, the appeal
having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it adds, the
Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme Court in L-
12396 aforementioned.

Under Section 333 of the Tax Code, quoted hereunder:

SEC. 333. Suspension of running of statute.—The running of the statute of limitations provided in Section
331 or three hundred thirty-two on the making of assessments and the beginning, of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during
which the Collector of Internal Revenue is prohibited from making the assessment or beginning distraint or
levy or a proceeding in court, and for sixty days thereafter.

the running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in
court, and for sixty days thereafter.

Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the effect of
legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First Instance for
the collection of the tax? Our view is that it did.

From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the legality
of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner of Internal
Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax Appeals, 10 from filing
an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial
policy of avoiding multiplicity of suits and the rule on lis pendens. 11
It would be interesting to note that when the Commissioner of Internal Revenue issued the final deficiency
assessments on January 5, 1954, he had already lost, by prescription, the right to collect the tax (except that for
1950) by the summary method of warrant of distraint and levy. Ker & Co., Ltd. immediately thereafter requested
suspension of the collection of the tax without penalty incident to late payment pending the filing of a memorandum in
support of its views. As requested, no tax was collected. On May 22, 1954 the projected memorandum was filed, but
as of that date the Commissioner's right to collect by warrant of distraint and levy the deficiency tax for 1950 had
already prescribed. So much so, that on March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of
Tax Appeals, the Commissioner of Internal Revenue had but one remedy left to collect the tax, that is, by judicial
action. 12 However, as stated, an independent ordinary action in the Court of First Instance was not available to the
Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals, supra, in view of the pendency of
the taxpayer's petition for review in the Court of Tax Appeals. Precisely he urgently filed a motion to dismiss the
taxpayer's petition for review with a view to terminating therein the proceedings in the shortest possible time in order
that he could file a collection case in the Court of First Instance before his right to do so is cut off by the passage of
time. As moved, the Tax Court dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court. By the time
the Supreme Court affirmed the order of dismissal of the Court of Tax Appeals in L-12396 on January 31, 1962 more
than five years had elapsed since the final assessments were made on January 5, 1954. Thereafter, the
Commissioner of Internal Revenue demanded extra-judicially the payment of the deficiency tax in question and in
reply the taxpayer, by its letter dated March 28, 1962, advised the Commissioner of Internal Revenue that the right to
collect the tax has prescribed pursuant to Section 332 (c) of the Tax Code.1awphîl.nèt

Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal Revenue
simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be encouraging
taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.

Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in
question. This being so, the provisions of Section 333 of the Tax Code will apply.

Fourth Issue

The Republic of the Philippines maintains that the delinquency interest on the deficiency income tax for 1948, 1949
and 1950 accrued and should commence from the date of the assessments as shown in the assessment notices,
pursuant to Section 51(e) of the Tax Code, instead of from the date the complaint was filed as determined in the
decision appealed from.

Section 51 (e) of the Tax Code states:

SEC. 51(e). Surcharge and interest in case of delinquency.—To any sum or sums due and unpaid after the
dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of
five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said
tax from the time the same became due, except from the estates of insane, deceased, or insolvent persons.
(emphasis supplied)

Exhibit "F" — the letter of assessment — shows that the deficiency income tax for 1948 and 1949 became due on
March 15, 1953 and that for 1950 accrued on February 15, 1954 in accordance with Section 51(d) of the Tax Code.
Since the tax in question remained unpaid, delinquency interest accrued and became due starting from said due
dates. The decision appealed from should therefore be modified accordingly.

WHEREFORE, the decision appealed from is affirmed with the modification that the delinquency interest at the rate of
1% per month shall be computed from March 15, 1953 for the deficiency income tax for 1948 and 1949 and from
February 15, 1954 for the deficiency income tax for 1950. With costs against Ker & Co., Ltd. So ordered.

Concepcion, C.J., Reyes, J.B.L., Barrera, Dizon, Regala, Makalintal, Zaldivar, Sanchez and Castro, JJ., concur.
1 REPUBLIC v KER

In 1953 the BIR examined and audited Ker & Co., Ltd.'s returns and books of accounts and subsequently issued
assessments for deficiency income tax. (for years 1947, 48, 49, 50)
50% surcharge for fraudulent returns was imposed. However, upon request of Ker’s counsel, it was reviewed and
reduced accordingly by the BIR.
On March 1, 1956, Ker filed with the CTA a petition for review with preliminary injunction. No preliminary injunction
was issued, for CTA dismissed the appeal for having been instituted beyond the 30-day period provided in RA
1125(11). We affirmed the order of dismissal of L-12396.
On March 15, 1962, the BIR demanded payment of the assessments together with a 5% surcharge for late payment
and 1% monthly interest.
Ker refused to pay, claiming the defense of prescription of the CIR’s right to collect the tax.
Summons was served not on the defendant taxpayer but upon Messrs. Leido and Associates, its counsel in the
proceedings. Ker initially set up the case of lack of jurisdiction, but such has been disposed of by the SC (Voluntary
appearance cures defects of summons, if any.4 Such defect, if any, was further cured when defendant filed its answer
to the complaint.)
Lower courts dismissed the case filed by petitioner.
February 20, 1963: RP filed an MR contending that the right of the CIR collect the deficiency assessment for 1947
has not prescribed by a lapse of merely five years and three months, because the taxpayer's income tax return was
fraudulent in which case prescription sets in ten years from October 31, 1951, the date of discovery of the fraud
Ker’s stand: since the RP filed the complaint for the collection of the deficiency income tax for the years 1948, 1949
and 1950 only on March 27, 1962, or nine years, one month and eleven days from February 16, 1953, the date the
tax was assessed, the right to collect the same has prescribed pursuant to Section 332 (c) of the Tax Code.
RP’s stand: that the running of the prescriptive period was interrupted by the filing of the taxpayer's petition for review
in the Court of Tax Appeals on March 1, 1956.
If the period during which the case was pending in the Court of Tax Appeals and in the Supreme Court were not
counted in reckoning the prescriptive period, less than five years would have elapsed, hence, the right to collect the
tax has not prescribed.
The taxpayer counters that the filing of the petition for review in the Court of Tax Appeals could not have stopped the
running of the prescriptive period to collect because said court did not have jurisdiction over the case, the appeal
having been interposed beyond the 30-day period set forth in Section 11 of Republic Act 1125. Precisely, it adds, the
Tax Court dismissed the appeal for lack of jurisdiction and said dismissal was affirmed by the Supreme Court in L-
12396 aforementioned.
ISSUE: Did the pendency of the taxpayer's appeal in the Court of Tax Appeals and in the Supreme Court have the
effect of legally preventing the Commissioner of Internal Revenue from instituting an action in the Court of First
Instance for the collection of the tax? YES
Under Section 223 of the Tax Code: xxx
The running of the prescriptive period to collect the tax shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a proceeding in
court, and for sixty days thereafter.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals contesting the legality
of the assessments in question, until the termination of its appeal in the Supreme Court, the Commissioner of Internal
Revenue was prevented, as recognized in this Court's ruling in Ledesma, et al. v. Court of Tax Appeals, 10 from filing
an ordinary action in the Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial
policy of avoiding multiplicity of suits and the rule on lis pendens. 11
Thus, did the taxpayer produce the effect of temporarily staying the hands of the Commissioner of Internal Revenue
simply through a choice of remedy. And, if We were to sustain the taxpayer's stand, We would be encouraging
taxpayers to delay the payment of taxes in the hope of ultimately avoiding the same.
Under the circumstances, the Commissioner of Internal Revenue was in effect prohibited from collecting the tax in
question. This being so, the provisions of (then Section 333) will apply.
EN BANC

[G.R. No. L-15547. February 29, 1964.]

REPUBLIC OF THE PHILIPPINES, Plaintiff-Appellee, v. JOSEPH ARCACHE, ET AL., Defendants-Appellants.

Solicitor General for Plaintiff-Appellee.

Orlando V . Velasco and Jose K . Manguiat for defendant-appellants.

DECISION

DIZON, J.:

On July 7, 1958, the Republic of the Philippines filed an action against Joseph Arcache and the Globe Assurance
Company, Inc. for the forfeiture of the surety bond executed by them (Arcache, as principal, and the Globe Assurance
Company, Inc., as surety) to secure payment of the sum of P22,524.41 representing Arcache’s income tax for the
year 1946 and surcharge, plus 1% monthly interest on the income tax proper amounting to P18,289.71, from June
21, 1954 to August 31, 1956.

Arcache, after admitting some of the averments made in the complaint and denying others, interposed the defense of
prescription, and alleged further that he was compelled against his will" to execute the surety bond sought to be
forfeited, because the Bureau of Internal Revenue refused to issue him a tax clearance — which he needed to make
a business trip abroad — unless he executed said bond to secure the payment of his alleged tax obligation.

The separate answer filed by the Globe Assurance Company, Inc. likewise admitted some of the averments made in
the complaint and denied the others, and further alleged that it adopted the defense of fact and law raised by its co-
defendant; that the surety bond sought to be forfeited became null and void as against it after the lapse of one year
from the date of its execution, for lack of consideration, Arcache not having paid the required premium thereon for the
second year; and that, at any rate, it could not pay its obligation under the aforesaid surety bond because of the
injunction issued against it by the Court of First Instance of Manila in Civil Case No. 30844. By way of cross-claim, it
sought judgment against its co-defendant for the entire amount that it might be sentenced to pay to the plaintiff by
reason of the surety bond heretofore mentioned, plus the sum of P863,43 as unpaid premium on said bond.

Arcache was declared in default on the cross-claim, and after receiving cross-plaintiffs evidence thereon, the lower
court rendered judgment as follows:jgc:chanrobles.com.ph

"WHEREFORE, the Court hereby renders judgment on the cross-claim filed by defendant Globe Assurance
Company, Inc. against its co-defendant, Joseph Arcache, sentencing the cross-defendant to pay the cross-claimant
whatever amount may be adjudged against it in favor of the plaintiff, with interest thereon at the legal rate from the
date of payment by cross-claimant until fully paid by the cross-defendant; to pay the accrued premiums on the
ordinary bond for payment of taxes at the rate of P450.49 per annum or fraction thereof, also with interest at the rate
of 12% per annum from the time the same became due and payable; and to pay an amount equivalent to 15% of the
total sum due to the Globe Assurance Company, Inc., by way of attorney’s fees. With costs against the cross-
defendant."cralaw virtua1aw library

After trial on the issues arising from the main case, the lower court also rendered judgment on April 27, 1959, the
dispositive part of which is as follows:chanrob1es virtual 1aw library

WHEREFORE, the Court hereby renders judgment in favor of the plaintiff and against the defendants, ordering said
defendants to pay plaintiff, jointly and severally, thru the Commissioner of Internal Revenue, the sum of P22,524.41,
plus interest on the income tax proper of P18,289.81 at the rate of 12% per annum from September 1, 1956 until the
same and to pay the costs."cralaw virtua1aw library

From the judgment last mentioned, Arcache appealed claiming that (a) the lower court erred in not sustaining his
defense of prescription and (b) in holding that, by executing the surety bond to secure the payment of the income tax
allegedly due from him, he thereby acknowledges his tax liability.

The evidence discloses that on March 1, 1947, appellant filed his income tax return for the year 1946, which showed
a loss in the amount of P2,272.23 (Exh. B). Subsequent investigations revealed, however, that in 1946 he had an
unexplained increase in net worth, this prompting the Bureau of Internal Revenue to use the "net worth method" in
determining his true income for said year. As a result, the corresponding assessment was issued against him in 1948.
Upon his petition, several reinvestigations of his income tax liability were thereafter made, until finally in 1952 an
assessment for P63,536.40 was issued against him as income tax for 1946, (Exh. C). Not satisfied with the result
Arcache asked for a further reexamination of his case with a view to deducting the sum of P60,000 — representing
advances for goodwill, priority privilege etc. — from his 1946 net income for that year amounting to P137,944.00. The
Bureau of Internal Revenue obliged and made another reinvestigation, this resulting in the finding that appellant’s
income in 1946, represented by his increase in net worth, amounted to P77,944.00. Accordingly, on September 16,
1953, the Bureau assessed against him the amounts of P19,080.96 and P9,540.48 as income tax, and 50%
surcharge, respectively (Exh. D-1) .

On October 29, 1953, appellant wrote a letter to the Collector of Internal Revenue thanking him and his staff "for
having re-examined the assessments and having found that what he really owe the internal revenue office is
P19,080.96 instead of previous assessments," adding that as already manifested in previous letters, he was "willing
to pay the amounts stipulated above minus of course the P2,000 I already paid your office on account of said
assessments." He, however, asked for the elimination of the 50% surcharge amounting to P9,540.48 on the ground
that his refusal to pay the tax was due to a mere misunderstanding and not to any intention to defraud. Again, this
request was granted, and on December 9, 1953, another demand was made upon him for the payment only of the
sum of P19,080.96 representing the tax proper of his income tax liability for 1946, plus "the delinquency penalties
incident to late payment" and the additional sum of P133.50 as advertising expenses incurred by the Bureau in the
publication of the notice of sale of his real properties (Exh. F-1).

On December 28 of the same year, appellant wrote another letter to the Deputy Collector of Internal Revenue
reminding him of the previous, payment of P2,000 on account of his 1946 income tax liability of P19,080.96, and
requesting for an extension of one-hundred twenty days within which to pay the balance of P17,080.96 plus the 5%
surcharge and the monthly interest of 1% (Exh. F). Although this request was also granted, appellant failed to pay
within the extension granted. Instead, on June 17, 1954, he remitted to the Bureau of Internal Revenue a P1,000.00
check as partial payment of his tax liability "in sign of good faith", and requested another extension to pay the balance
to give him time to sell any of his properties in order to "liquidate once and for all my obligation to the Internal
Revenue" (Exh. H).

On August 23, 1955, appellant, as principal, and the Globe Assurance Company, Inc., as surety, executed the surety
bond Exhibit A to secure payment of the former’s tax liability then amounting to P22,524.41. They bound themselves,
jointly and severally, to pay the aforesaid amount and "to cover full payment of the obligation of Joseph Arcache to
the Bureau of Internal Revenue for income tax surcharge and interest computed under the inventory method, to be
paid on or before August 31, 1956", and to pay to the Republic of the Philippines whatever additional penalties may
accrue on account of their failure to pay each installment as it falls due.

While appellant contends that the above-mentioned bond was secured from him through coercion imposing its
execution as a condition for the issuance to him of a tax clearance required in connection with a trip abroad he
intended to make, the Bureau of Internal Revenue contends that the bond was required to get assurance of payment
in view of appellant’s repeated failure to comply with his promise to settle his tax liability. The issue thus arising is,
however, immaterial because even assuming that the bond was filed for the reason alleged by petitioner, it seems
obvious that the Bureau of Internal Revenue was perfectly with in its right in demanding the filing of the bond as a
condition for the issuance of the tax clearance for Appellant.

Subsequently, that is on August 31, 1956, appellant proposed to assign to the Bureau of Internal Revenue his rights,
title and interest in the amount of P20,713.00 allegedly due to him from the Department of Labor as rentals in arrears,
in partial satisfaction of his tax obligation, but the proposition was rejected, the Bureau granting petitioner instead
another extension provided he filed within ten days another surety bond with the conditions specified in its letter of
September 4, 1956 (Exh. M). Appellant, after obtaining two extensions of time, failed to file the bond. Consequently, a
final demand on him and his surety for the settlement of their obligation under the bond of August 23, 1955 (Exhibits
O-1 and P) was made, and when they both failed to do so, the present case was filed.

In the light of the undisputed facts stated heretofore, we are of the opinion that appellant is not barred from invoking
the defense of prescription.

In the first place, it appears obvious that the delay in the collection of his 1946 tax liability was due to his own
repeated requests for reinvestigation and similarly repeated requests for extension of time to pay. This case,
therefore, falls within the purview of our ruling in Collector of Internal Revenue v. Suyoc Consolidated Mining
Company Et. Al. (G.R. No. L-11527, November 25, 1958) to this effect:jgc:chanrobles.com.ph
"While we may argue with the Court of Tax Appeals that a mere request for re-examination or reinvestigation may not
have the effect of suspending the running of the period of limitation for in such a case there is need of a written
agreement to extend the period between the Collector and the taxpayers, there are cases however where a taxpayer
may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as
when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone
collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the
Government. And when such situation comes to pass there are authorities that hold, based on weighty reasons, that
such an attitude or behavior should not be countenanced if only to protect the interest of the Government."cralaw
virtua1aw library

This case has no precedent in this jurisdiction for it is the first time that such has arisen, but there are several
precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The applicable
principle is fundamental and unquestioned.’He who prevents a thing from being done may not avail himself of the
non-performance which he has himself occasioned, for the law says to him in effect ’this is your own act, and
therefore you are damnified.’ (R. H. Stearns Co. v. U.S., 78 L. ed., 647). Or, as was aptly said: "The tax could have
been collected, but the government withheld action at the specific request of the plaintiff. The plaintiff is now estopped
and should not be permitted to raise the defense of the Statute of Limitations." (Newport Co. v. U.S., [DC-WIS], 34 F.
Supp. 588)."

In the second place, appellant admitted in writing his tax obligation and promised to pay the same, not once but
several times even after the date when — according to him — the government’s right to collect had already
prescribed. In fact, he not only made such repeated promise to settle his account but he actually made two partial
payments, the first of P2,000 and the last P1,000.

In the third place, it is to be noted that the present action was filed for the forfeiture of the bond Exhibit A in
satisfaction of the tax obligation of appellant. Thus, the action is for the enforcement of a written contractual
obligation, for which the prescriptive period is ten years — which in this case had not yet elapsed when the action
was filed. It is already settled in this connection that the giving of a bond as a condition of an extension of time for the
payment of income tax, even after the collection of the tax as such was barred by the statute of limitations, does not
preclude recovery on the bond (John Bart Company v. U.S., 279 U.S. P. 370; [73 L. Ed. 743]; U.S. v. E. Hogshire and
Co. [1930; D.C.] 37 F. [2d] 720; U.S. v. Ruth, 62 [2d] 385 [CCA 5th, 1933]).

Finally, to the same effect is our ruling in Sambrano v. Court of Tax Appeals, Et Al., G.R. No. L-8652, March 30,
1957, as follows:jgc:chanrobles.com.ph

"By virtue of this instrument, petitioner in fact acknowledged the existence of the tax liabilities . . .,and assumed the
obligation to settle the same. Although the percentage taxes for the years 1939-1941 and 1945 may have been
extinguished by prescription on account of the mandate of sections 331 and 332, yet in the case at bar, petitioner’s
obligation to pay the percentage taxes for the years 1939-1941 and 1945, assessed on January 6, 1951, and re-
assessed on April 28, 1951, as well as other tax deficiencies, was acknowledged by means of the chatter mortgage
of May 3, 1951, an act which amounts to a renewal (renovacion) of the obligation or a waiver of the benefit granted by
law to the petitioner who is estopped from raising the question of prescription after having waived such defense by
the execution of said mortgage."cralaw virtua1aw library

WHEREFORE, finding no error in the decision appealed from, the same is hereby affirmed, with costs.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Reyes, J.B.L., Barrera, Paredes, Regala and Makalintal, JJ.,
concur.

Concepcion, J., took no part.


Republic vs. Arcache
No. L-15547. February 29, 1964.

Doctrine: The taxpayer is barred from invoking the defense of prescription if the delay was due to his repeated
requests for reinvestigation and for extensions of time to pay, which the government acted upon.

Facts:
Republic of the Philippines filed an action against Joseph Arcache (principal) and the Globe Assurance Company,
Inc. (surety) for the forfeiture of the surety bond executed by them to secure payment of P22,524.41 representing
Arcache's income tax for the year 1946 and surcharge, plus 1% monthly interest on the income tax proper amounting
to P18,289.71, from June 21, 1954 to August 31, 1956.

Arcache interposed the defense of prescription. He alleged that he was "compelled against his will" to execute the
surety bond sought to be forfeited, because the BIR refused to issue him a tax clearance unless he executed said
bond to secure the payment of his alleged tax obligation.

Globe Assurance Company, Inc. adopted the defense of fact and law raised by Arcache. And that the surety bond
sought to be forfeited became null and void as against it after the lapse of one year from the date of its execution, for
lack of consideration (non-payment of premium).

By way of cross-claim, it sought judgment against its co-defendant for the entire amount that it might be sentenced to
pay to the plaintiff by reason of the surety bond plus the unpaid premium.

Arcache was declared in default on the cross-claim. The Lower Court ordered Arcache to pay whatever may be
adjudged against Globe Assurance. Further, it ordered Archache and Globe Assurance to pay the BIR.

Arcache appealed claiming that the lower court erred in not sustaining his defense of prescription.

The evidence discloses that on March 1, 1947, Archache filed his income tax return for the year 1946.

Subsequent investigations revealed, however, that in 1946 he had an unexplained increase in net worth. As a result,
the corresponding assessment was issued against him in 1948.

Upon his petition, several reinvestigations of his income tax liability were thereafter made, until finally in 1952 an
assessment was issued.

Arcache asked for a further re-examination. BIR made another reinvestigation. Accordingly, on September 16, 1953,
the BIR assessed against him the amounts of
P19,080.96 and P9,540.48 as income tax, and 50% surcharge.

He wrote the CIR and told them that he was willing to pay the assessed amount and requested that the 50%
surcharge be removed.

Again, this request was granted, and on December 9, 1953, another demand was made upon him.

On December 28, he wrote another letter to the Deputy CIR reminding him of the previous payment of P2,000 on
account of his 1946 income tax liability of P19,080.96, and requesting for an extension of 120 days within which to
pay the balance.

Although this request was also granted, appellant failed to pay within the extension granted.

Instead, on June 17, 1954, he remitted to the BIR a P1,000.00-check as partial payment of his tax liability "in sign of
good faith", and requested another extension to pay.

A final demand on him and his surety for the settlement of their obligation under the bond of August 23, 1955 was
made, and when they both failed to do so, the present case was filed.

ISSUE: Whether Arcache can raise the defense of prescription

RULING: NO.
A taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in
writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to
postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is
meant by the Government.

In the given case, it appears obvious that the delay in the collection of his 1946 tax liability was due to his own
repeated requests for reinvestigation and similarly repeated requests for extension of time to pay.

In the second place, appellant admitted in writing his tax obligation and promised to pay the same, not once but
several times even after the date when—according to him—the government's right to collect had already prescribed.

In the third place, it is to be noted that the present action was filed for the forfeiture of the bond in satisfaction of the
tax obligation of appellant. Thus, the action is for the enforcement of a written contractual obligation, for which the
prescriptive period is ten years—which in this case had not yet elapsed when the action was filed.

It is already settled in this connection that the giving of a bond as a condition of an extension of time for the payment
of income tax, even after the collection of the tax as such was barred by the statute of limitations, does not preclude
recovery on the bond.
EN BANC

[G.R. No. 109976. April 26, 2005]

PHILIPPINE NATIONAL OIL COMPANY, petitioner, vs. THE HON. COURT OF APPEALS, THE COMMISSIONER
OF INTERNAL REVENUE and TIRSO SAVELLANO, respondents.

[G.R. No. 112800. April 26, 2005]

PHILIPPINE NATIONAL BANK, petitioner, vs. THE HON. COURT OF APPEALS, COURT OF TAX APPEALS,
TIRSO B. SAVELLANO and COMMISSIONER OF INTERNAL REVENUE, respondents.

DECISION
CHICO-NAZARIO, J.:

This is a consolidation of two Petitions for Review on Certiorari filed by the Philippine National Oil Company
(PNOC)[1] and the Philippine National Bank (PNB),[2] assailing the decisions of the Court of Appeals in CA-G.R. SP
No. 29583[3] and CA-G.R. SP No. 29526,[4] respectively, which both affirmed the decision of the Court of Tax Appeals
(CTA) in CTA Case No. 4249.[5]
The Petitions before this Court originated from a sworn statement submitted by private respondent Tirso B.
Savellano (Savellano) to the Bureau of Internal Revenue (BIR) on 24 June 1986. Through his sworn statement,
private respondent Savellano informed the BIR that PNB had failed to withhold the 15% final tax on interest earnings
and/or yields from the money placements of PNOC with the said bank, in violation of Presidential Decree (P.D.) No.
1931. P.D. No. 1931, which took effect on 11 June 1984, withdrew all tax exemptions of government-owned and
controlled corporations.
In a letter, dated 08 August 1986, the BIR requested PNOC to settle its liability for taxes on the interests earned
by its money placements with PNB and which PNB did not withhold. [6]PNOC wrote the BIR on 25 September 1986,
and made an offer to compromise its tax liability, which it estimated to be in the sum of P304,419,396.83, excluding
interest and surcharges, as of 31 July 1986. PNOC proposed to set-off its tax liability against a claim for tax
refund/credit of the National Power Corporation (NAPOCOR), then pending with the BIR, in the amount
of P335,259,450.21. The amount of the claim for tax refund/credit was supposedly a receivable account of PNOC
from NAPOCOR.[7]
On 08 October 1986, the BIR sent a demand letter to PNB, as withholding agent, for the payment of the final tax
on the interest earnings and/or yields from PNOCs money placements with the bank, from 15 October 1984 to 15
October 1986, in the total amount of P376,301,133.33.[8] On the same date, the BIR also mailed a letter to PNOC
informing it of the demand letter sent to PNB.[9]
PNOC, in another letter, dated 14 October 1986, reiterated its proposal to settle its tax liability through the set-
off of the said tax liability against NAPOCORS pending claim for tax refund/credit.[10] The BIR replied on 11
November 1986 that the proposal for set-off was premature since NAPOCORs claim was still under process. Once
more, BIR requested PNOC to settle its tax liability in the total amount of P385,961,580.82, consisting
of P303,343,765.32 final tax, plus P82,617,815.50 interest computed until 15 November 1986.[11]
On 09 June 1987, PNOC made another offer to the BIR to settle its tax liability. This time, however, PNOC
proposed a compromise by paying P91,003,129.89, representing 30% of the P303,343,766.29 basic tax, in
accordance with the provisions of Executive Order (E.O.) No. 44. [12]
Then BIR Commissioner Bienvenido A. Tan, in a letter, dated 22 June 1987, accepted the compromise. The
BIR received a total tax payment on the interest earnings and/or yields from PNOCs money placements with PNB in
the amount of P93,955,479.12, broken down as follows:
Previous payment made by PNB P 2,952,349.23
Add: Payment made by PNOC pursuant to the P 91,003,129.89
compromise agreement of June 22, 1987
Total tax payment P 93,955,479.12[13]

Private respondent Savellano, through four installments, was paid the informers reward in the total amount
of P14,093,321.89, representing 15% of the P93,955,479.12 tax collected by the BIR from PNOC and PNB. He
received the last installment on 01 December 1987.[14]
On 07 January 1988, private respondent Savellano, through his legal counsel, wrote the BIR to demand
payment of the balance of his informers reward, computed as follows:

BIR tax assessment P 385,961,580.82


Final tax rate 0.15
Informers reward due P 57,894,237.12

(BIR deficiency tax assessment x Final tax


rate)
Less: Payment received by private P 14,093,321.89
respondent Savellano
Outstanding balance P 43,800,915.25[15]

BIR Commissioner Tan replied through a letter, dated 08 March 1988, that private respondent Savellano was
already fully paid the informers reward equivalent to 15% of the amount of tax actually collected by the BIR pursuant
to its compromise agreement with PNOC. BIR Commissioner Tan further explained that the compromise was in
accordance with the provisions of E.O. No. 44, Revenue Memorandum Order (RMO) No. 39-86, and RMO No. 4-
87.[16]
Private respondent Savellano submitted another letter, dated 24 March 1988, to BIR Commissioner Tan,
seeking reconsideration of his decision to compromise the tax liability of PNOC. In the same letter, private respondent
Savellano questioned the legality of the compromise agreement entered into by the BIR and PNOC and claimed that
the tax liability should have been collected in full.[17]
On 08 April 1988, while the aforesaid Motion for Reconsideration was still pending with the BIR, private
respondent Savellano filed a Petition for Review ad cautelam with the CTA, docketed as CTA Case No. 4249. He
claimed therein that BIR Commissioner Tan acted with grave abuse of discretion and/or whimsical exercise of
jurisdiction in entering into a compromise agreement that resulted in a gross and unconscionable diminution of his
reward. Private respondent Savellano prayed for the enforcement and collection of the total tax assessment against
taxpayer PNOC and/or withholding agent PNB; and the payment to him by the BIR Commissioner of the 15%
informers reward on the total tax collected.[18] He would later amend his Petition to implead PNOC and PNB as
necessary and indispensable parties since they were parties to the compromise agreement. [19]
In his Answer filed with the CTA, BIR Commissioner Tan asserted that the Petition stated no cause of action
against him, and that private respondent Savellano was already paid the informers reward due him. Alleging that the
Petition was baseless and malicious, BIR Commissioner Tan filed a counterclaim for exemplary damages against
private respondent Savellano.[20]
PNOC and PNB filed separate Motions to Dismiss, both arguing that the CTA lacked jurisdiction to decide the
case.[21] In its Resolution, dated 28 November 1988, the CTA denied the Motions to Dismiss since the question of
lack of jurisdiction and/or cause of action do not appear to be indubitable.[22]
After their Motions to Dismiss were denied by the CTA, PNOC and PNB filed their respective Answers to the
amended Petition. PNOC averred, among other things, that (1) it had no privity with private respondent Savellano; (2)
the BIR Commissioners discretionary act in entering into the compromise agreement had legal basis under E.O. No.
44 and RMO No. 39-86 and RMO No. 4-87; and (3) the CTA had no jurisdiction to resolve the case against it.[23] On
the other hand, PNB asserted that (1) the CTA lacked jurisdiction over the case; and (2) the BIR Commissioners
decision to accept the compromise was discretionary on his part and, therefore, cannot be reviewed or interfered with
by the courts.[24] PNOC and PNB later filed their amended Answer invoking an opinion of the Commission on Audit
(COA) disallowing the payment by the BIR of informers reward to private respondent Savellano. [25]
The CTA, thereafter, ordered the parties to submit their evidence, [26] to be followed by their respective
Memoranda.[27]
On 23 November 1990, private respondent Savellano, filed a Manifestation with Motion for Suspension of
Proceedings, claiming that his pending Motion for Reconsideration with the BIR Commissioner may soon be
resolved.[28] Both PNOC and PNB opposed the said Motion.[29]
Subsequently, the new BIR Commissioner, Jose U. Ong, in a letter to PNB, dated 16 January 1991, demanded
that PNB pay deficiency withholding tax on the interest earnings and/or yields from PNOCs money placements, in the
amount of P294,958,450.73, computed as follows:

Withholding tax, plus interest under the letter of P 385,961,580.82


demand dated November 11, 1986
Less: Amount paid under E.O. No. 44 P 91,003,129.89
Amount still due and collectible P 294,958,450.73[30]

This BIR letter was received by PNB on 06 February 1991, [31] and was protested by it through a letter, dated 11
April 1991.[32] The BIR denied PNBs protest on the ground that it was filed out of time and, thus, the assessment had
already become final.[33]
Private respondent Savellano, on 22 February 1991, filed an Omnibus Motion moving to withdraw his previous
Motion for Suspension of Proceeding since BIR Commissioner Ong had finally resolved his Motion for
Reconsideration, and submitting by way of supplemental offer of evidence (1) the letter of BIR Commissioner Ong,
dated 13 February 1991, informing private respondent Savellano of the action on his Motion for Reconsideration; and
(2) the demand-letter of BIR Commissioner Ong to PNB, dated 16 January 1991. [34]
Despite the oppositions of PNOC and PNB, the CTA, in a Resolution, dated 02 May 1991, resolved to allow
private respondent Savellano to withdraw his previous Motion for Suspension of Proceeding and to admit the
supplementary evidence being offered by the same party.[35]
In its Order, dated 03 June 1991, the CTA considered the case submitted for decision as of the following day,
04 June 1991.[36]
On 11 June 1991, PNB appealed to the Department of Justice (DOJ) the BIR assessment, dated 16 January
1991, for deficiency withholding tax in the sum of P294,958,450.73. PNB alleged that its appeal to the DOJ was
sanctioned under P.D. No. 242, which provided for the administrative settlement of disputes between government
offices, agencies, and instrumentalities, including government-owned and controlled corporations.[37]
Three days later, on 14 June 1991, PNB filed a Motion to Suspend Proceedings before the CTA since it had a
pending appeal before the DOJ.[38] On 04 July 1991, PNB filed with the CTA a Motion for Reconsideration of its
Order, dated 03 June 1991, submitting the case for decision as of 04 June 1991, and prayed that the CTA hold its
resolution of the case in view of PNBs appeal pending before the DOJ.[39]
On 17 July 1991, PNB filed a Motion to Suspend the Collection of Tax by the BIR. It alleged that despite its
request for reconsideration of the deficiency withholding tax assessment, dated 16 January 1991, BIR Commissioner
Ong sent another letter, dated 23 April 1991, demanding payment of the P294,958,450.73 deficiency withholding tax
on the interest earnings and/or yields from PNOCs money placements. The same letter informed PNB that this was
the BIR Commissioners final decision on the matter and that the BIR Commissioner was set to issue a warrant of
distraint and/or levy against PNBs deposits with the Central Bank of the Philippines. PNB further alleged that the levy
and distraint of PNBs deposits, unless restrained by the CTA, would cause great and irreparable prejudice not only to
PNB, a government-owned and controlled corporation, but also to the Government itself. [40]
Pursuant to the Order of the CTA, during the hearing on 19 July 1991, [41] the parties submitted their respective
Memoranda on PNBs Motion to Suspend Proceedings.[42]
On 20 September 1991, private respondent Savellano filed another Omnibus Motion calling the attention of the
CTA to the fact that the BIR already issued, on 12 August 1991, a warrant of garnishment addressed to the Central
Bank Governor and against PNB. In compliance with the said warrant, the Central Bank issued, on 23 August 1991, a
debit advice against the demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73,
with a corresponding transfer of the same amount to the demand deposit-in-trust of BIR with the Central Bank. Since
the assessment had already been enforced, PNBs Motion to Suspend Proceedings became moot and academic.
Private respondent Savellano, thus, moved for the denial of PNBs Motion to Suspend Proceedings and for an order
requiring BIR to deposit with the CTA the amount of P44,243,767.00 as his informers reward, representing 15% of
the deficiency withholding tax collected.[43]
Both PNOC and PNB opposed private respondent Savellanos Omnibus Motion, dated 20 September 1991,
arguing that the DOJ already ordered the suspension of the collection of the tax deficiency. There was therefore no
basis for private respondent Savellanos Motion as the same was premised on the erroneous assumption that the tax
deficiency had been collected. When the DOJ denied the BIR Commissioners Motion to Dismiss and required him to
file his answer, the DOJ assumed jurisdiction over PNBs appeal, and the CTA should first suspend its proceedings to
give the DOJ the opportunity to decide the validity and propriety of the tax assessment against PNB. [44]
The CTA, on 28 May 1992, rendered its decision, wherein it upheld its jurisdiction and disposed of the case as
follows:

WHEREFORE, judgment is rendered declaring the COMPROMISE AGREEMENT between the Bureau of Internal
Revenue, on the one hand, and the Philippine National Oil Company and Philippine National Bank, on the other, as
WITHOUT FORCE AND EFFECT;

The Commissioner of Internal Revenue is hereby ordered to ENFORCE the ASSESSMENT of January 16, 1991
against Philippine National Bank which has become final and unappealable by collecting from Philippine National
Bank the deficiency withholding tax, plus interest totalling (sic) P294,958,450.73;

Petitioner may be paid, upon collection of the deficiency withholding tax, the balance of his entitlement to informers
reward based on fifteen percent (15%) of the deficiency withholding total tax collected in this case or P44,243.767.00
subject to existing rules and regulations governing payment of reward to informers. [45]

In a Resolution, dated 16 November 1992, the CTA denied the Motions for Reconsideration filed by PNOC and
PNB since they substantially raised the same issues in their previous pleadings and which had already been passed
upon and resolved adversely against them.[46]
PNOC and PNB filed separate appeals with the Court of Appeals seeking the reversal of the CTA decision in
CTA Case No. 4249, dated 28 May 1992, and the CTA Resolution in the same case, dated 16 November 1992.
PNOCs appeal was docketed as CA-G.R. SP No. 29583, while PNBs appeal was CA-G.R. SP No. 29526. In both
cases, the Court of Appeals affirmed the decision of the CTA.
In the meantime, the Central Bank again issued on 02 September 1992 a debit advice against the demand
deposit account of PNB with the Central Bank for the amount of P294,958,450.73,[47] and on 15 September 1992,
credited the same amount to the demand deposit account of the Treasurer of the Republic of the Philippines. [48] On
04 November 1992, the Treasurer of the Republic issued a journal voucher transferring P294,958,450.73 to the
account of the BIR.[49] PNB, in turn, debited P294,958,450.73 from the deposit account of PNOC with PNB.[50]
PNOC and PNB then filed separate Petitions for Review on Certiorari with this Court, praying that the decisions
of the Court of Appeals in CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, respectively, both affirming the
decision of the CTA in CTA Case No. 4249, be reversed and set aside. These two Petitions were consolidated since
they involved identical parties and factual background, and the resolution of related, if not exactly, the same issues.
In its Petition for Review, PNOC alleged the following errors committed by the Court of Appeals in CA-G.R. SP
No. 29583:
1. The Court of Appeals erred in holding that the deficiency taxes of PNOC could not be the subject of a
compromise under Executive Order No. 44; and
2. The Court of Appeals erred in holding that Savellano is entitled to additional informers reward.[51]
PNB, in its own Petition for Review, assailed the decision of the Court of Appeals in CA-G.R. SP No. 29526,
assigning the following errors:
1. Respondent Court erred in not finding that the Court of Tax Appeals lacks jurisdiction on the controversy
involving BIR and PNB (both government instrumentalities) regarding the new assessment of BIR
against PNB;
2. The respondent Court erred in not finding that the Court of Tax Appeals has no jurisdiction to question
the compromise agreement entered into by the Commissioner of Internal Revenue; and
3. The respondent Court erred in not ruling that the Commissioner of Internal Revenue cannot unilaterally
annul tax compromises validly entered into by his predecessor. [52]
The decisions of the Court of Appeals in CA-GR SP No. 29583 and CA-G.R. SP No. 29526, affirmed the
decision of the CTA in CTA Case No. 4249. The resolution, therefore, of the assigned errors in the Court of Appeals
decisions essentially requires a review of the CTA decision itself.
In consolidating the present Petitions, this Court finds that PNOC and PNB are basically questioning the (1)
Jurisdiction of the CTA in CTA Case No. 4249; (2) Declaration by the CTA that the compromise agreement was
without force and effect; (3) Finding of the CTA that the deficiency withholding tax assessment against PNB had
already become final and unappealable and, thus, enforceable; and (4) Order of the CTA directing payment of
additional informers reward to private respondent Savellano.
I
Jurisdiction of the CTA
A. The demand letter, dated 16 January 1991 did not constitute a new assessment against PNB.
The main argument of PNB in assailing the jurisdiction of the CTA in CTA Case No. 4249 is that the BIR
demand letter, dated 16 January 1991,[53] should be considered as a new assessment against PNB. As a new
assessment, it gave rise to a new dispute and controversy solely between the BIR and PNB that should be
administratively settled or adjudicated, as provided in P.D. No. 242.
This argument is without merit. The issuance by the BIR of the demand letter, dated 16 January 1991, was
merely a development in the continuing effort of the BIR to collect the tax assessed against PNOC and PNB way
back in 1986.
BIRs first letter, dated 08 August 1986, was addressed to PNOC, requesting it to settle its tax liability. The BIR
subsequently sent another letter, dated 08 October 1986, to PNB, as withholding agent, demanding payment of the
tax it had failed to withhold on the interest earnings and/or yields from PNOCs money placements. PNOC wrote the
BIR three succeeding letters offering to compromise its tax liability; PNB, on the other hand, did not act on the
demand letter it received, dated 08 October 1986. The BIR and PNOC eventually reached a compromise agreement
on 22 June 1987. Private respondent Savellano questioned the validity of the compromise agreement because the
reduced amount of tax collected from PNOC, by virtue of the compromise agreement, also proportionately reduced
his informers reward. Private respondent Savellano then requested the BIR Commissioner to review and reconsider
the compromise agreement. Acting on the request of private respondent Savellano, the new BIR Commissioner
declared the compromise agreement to be without basis and issued the demand letter, dated 16 January 1991,
against PNB, as the withholding agent for PNOC.
It is clear from the foregoing that the BIR demand letter, dated 16 January 1991, could not stand alone as a new
assessment. It should always be considered in the factual context summarized above.
In fact, the demand letter, dated 16 January 1991, actually referred to the withholding tax assessment first
issued in 1986 and its eventual settlement through a compromise agreement. In addition, the computation of the
deficiency withholding tax was based on the figures from the 1986 assessments against PNOC and PNB, and BIR no
longer conducted a new audit or investigation of either PNOC and PNB before it issued the demand letter on 16
January 1991.
These constant references to past events and circumstances demonstrate that the demand letter, dated 16
January 1991, was not a new assessment, but rather, the latest action taken by the BIR to collect on the tax
assessments issued against PNOC and PNB in 1986.
PNB argues that the demand letter, dated 16 January 1991, introduced a new controversy. We see it differently
as the said demand letter presented the resolution by BIR Commissioner Ong of the previous controversy involving
the compromise of the 1986 tax assessments. BIR Commissioner Ong explicitly declared therein that the
compromise agreement was without legal basis, and requested PNB, as the withholding agent, to pay the amount of
withholding tax still due.
B. The CTA correctly retained jurisdiction over CTA Case No. 4249 by virtue of Republic Act No. 1125.
Having established that the BIR demand letter, dated 16 January 1991, did not constitute a new assessment,
then, there could be no basis for PNBs claim that any dispute arising from the new assessment should only be
between BIR and PNB.
Still proceeding from the argument that there was a new dispute between PNB and BIR, PNB sought the
suspension of the proceedings in CTA Case No. 4249, after it contested the deficiency withholding tax assessment
against it and the demand for payment thereof before the DOJ, pursuant to P.D. No. 242. The CTA, however,
correctly sustained its jurisdiction and continued the proceedings in CTA Case No. 4249; and, in effect, rejected
DOJs claim of jurisdiction to administratively settle or adjudicate BIRs assessment against PNB.
The CTA assumed jurisdiction over the Petition for Review filed by private respondent Savellano based on the
following provision of Rep. Act No. 1125, the Act creating the Court of Tax Appeals:
SECTION 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by
appeal, as herein provided -

(1) Decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters
arising under the National Internal Revenue Code or other law or part of law administered by the
Bureau of Internal Revenue; . . . (Underscoring ours.)
In his Petition before the CTA, private respondent Savellano requested a review of the decisions of then BIR
Commissioner Tan to enter into a compromise agreement with PNOC and to reject his claim for additional informers
reward. He submitted before the CTA questions of law involving the interpretation and application of (1) E.O. No. 44,
and its implementing rules and regulations, which authorized the BIR Commissioner to compromise delinquent
accounts and disputed assessments pending as of 31 December 1985; and (2) Section 316(1) of the National
Internal Revenue Code of 1977 (NIRC of 1977), as amended, which granted to the informer a reward equivalent to
15% of the actual amount recovered or collected by the BIR. [54]These should undoubtedly be considered as matters
arising from the NIRC and other laws being administered by the BIR, thus, appealable to the CTA under Section 7(1)
of Rep. Act No. 1125.
PNB, however, insists on the jurisdiction of the DOJ over its appeal of the deficiency withholding tax
assessment by virtue of P.D. No. 242. Provisions on jurisdiction of P.D. No. 242 read:

SECTION 1. Provisions of law to the contrary notwithstanding, all disputes, claims and controversies solely between
or among the departments, bureaus, offices, agencies, and instrumentalities of the National Government, including
government-owned or controlled corporations, but excluding constitutional offices or agencies, arising from the
interpretation and application of statutes, contracts or agreements, shall henceforth be administratively settled or
adjudicated as provided hereinafter; Provided, That this shall not apply to cases already pending in court at the time
of the effectivity of this decree.

SECTION 2. In all cases involving only questions of law, the same shall be submitted to and settled or adjudicated by
the Secretary of Justice, as Attorney General and ex officio legal adviser of all government-owned or controlled
corporations and entities, in consonance with Section 83 of the Revised Administrative Code. His ruling or
determination of the question in each case shall be conclusive and binding upon all the parties concerned.

SECTION 3. Cases involving mixed questions of law and of fact or only factual issues shall be submitted to and
settled or adjudicated by:

(a) The Solicitor General, with respect to disputes or claims controversies between or among the
departments, bureaus, offices and other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to disputes or claims or controversies between or
among government-owned or controlled corporations or entities being served by the Office of the
Government Corporate Counsel; and
(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do not fall
under the categories mentioned in paragraphs (a) and (b).
The PNB and DOJ are of the same position that P.D. No. 242, the more recent law, repealed Section 7(1) of
Rep. Act No. 1125,[55] based on the pronouncement of this Court in Development Bank of the Philippines v. Court of
Appeals, et al., [56] quoted below:

The Court expresses its entire agreement with the conclusion of the Court of Appeals and the basic premises thereof
that there is an "irreconcilable repugnancybetween Section 7(2) of R.A. No. 1125 and P.D. No. 242," and hence, that
the later enactment (P.D. No. 242), being the latest expression of the legislative will, should prevail over the earlier.

In the said case, it was expressly declared that P.D. No. 242 repealed Section 7(2) of Rep. Act No. 1125, which
provides for the exclusive appellate jurisdiction of the CTA over decisions of the Commissioner of Customs. PNB
contends that P.D. No. 242 should be deemed to have likewise repealed Section 7(1) of Rep. Act No. 1125, which
provide for the exclusive appellate jurisdiction of the CTA over decisions of the BIR Commissioner. [57]
After re-examining the provisions on jurisdiction of Rep. Act No. 1125 and P.D. No. 242, this Court finds itself in
disagreement with the pronouncement made in Development Bank of the Philippines v. Court of Appeals, et
al.,[58] and refers to the earlier case of Lichauco & Company, Inc. v. Apostol, et al.,[59] for the guidelines in determining
the relation between the two statutes in question, to wit:

The cases relating to the subject of repeal by implication all proceed on the assumption that if the act of later date
clearly reveals an intention on the part of the law making power to abrogate the prior law, this intention must be given
effect; but there must always be a sufficient revelation of this intention, and it has become an unbending rule of
statutory construction that the intention to repeal a former law will not be imputed to the Legislature when it appears
that the two statutes, or provisions, with reference to which the question arises bear to each other the relation of
general to special. (Underscoring ours.)

When there appears to be an inconsistency or conflict between two statutes and one of the statutes is a general
law, while the other is a special law, then repeal by implication is not the primary rule applicable. The following rule
should principally govern instead:

Specific legislation upon a particular subject is not affected by a general law upon the same subject unless it clearly
appears that the provisions of the two laws are so repugnant that the legislators must have intended by the later to
modify or repeal the earlier legislation. The special act and the general law must stand together, the one as the law of
the particular subject and the other as the general law of the land. (Ex Parte United States, 226 U. S., 420; 57 L. ed.,
281; Ex Parte Crow Dog, 109 U. S., 556; 27 L. ed., 1030; Partee vs. St. Louis & S. F. R. Co., 204 Fed. Rep., 970.)

Where there are two acts or provisions, one of which is special and particular, and certainly includes the matter in
question, and the other general, which, if standing alone, would include the same matter and thus conflict with the
special act or provision, the special must be taken as intended to constitute an exception to the general act or
provision, especially when such general and special acts or provisions are contemporaneous, as the Legislature is
not to be presumed to have intended a conflict. (Crane v. Reeder and Reeder, 22 Mich., 322, 334; University of Utah
vs. Richards, 77 Am. St. Rep., 928.)[60]

It has, thus, become an established rule of statutory construction that between a general law and a special law,
the special law prevails Generalia specialibus non derogant.[61]
Sustained herein is the contention of private respondent Savellano that P.D. No. 242 is a general law that deals
with administrative settlement or adjudication of disputes, claims and controversies between or among government
offices, agencies and instrumentalities, including government-owned or controlled corporations. Its coverage is broad
and sweeping, encompassing all disputes, claims and controversies. It has been incorporated as Chapter 14, Book IV
of E.O. No. 292, otherwise known as the Revised Administrative Code of the Philippines.[62] On the other hand, Rep.
Act No. 1125 is a special law[63] dealing with a specific subject matter the creation of the CTA, which shall exercise
exclusive appellate jurisdiction over the tax disputes and controversies enumerated therein.
Following the rule on statutory construction involving a general and a special law previously discussed, then
P.D. No. 242 should not affect Rep. Act No. 1125. Rep. Act No. 1125, specifically Section 7 thereof on the jurisdiction
of the CTA, constitutes an exception to P.D. No. 242. Disputes, claims and controversies, falling under Section 7 of
Rep. Act No. 1125, even though solely among government offices, agencies, and instrumentalities, including
government-owned and controlled corporations, remain in the exclusive appellate jurisdiction of the CTA. Such a
construction resolves the alleged inconsistency or conflict between the two statutes, and the fact that P.D. No. 242 is
the more recent law is no longer significant.
Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the present dispute
would still not be covered by P.D. No. 242. Section 1 of P.D. No. 242 explicitly provides that only disputes, claims and
controversies solely between or among departments, bureaus, offices, agencies, and instrumentalities of the
National Government, including constitutional offices or agencies, as well as government-owned and controlled
corporations, shall be administratively settled or adjudicated. While the BIR is obviously a government bureau, and
both PNOC and PNB are government-owned and controlled corporations, respondent Savellano is a private citizen.
His standing in the controversy could not be lightly brushed aside. It was private respondent Savellano who gave the
BIR the information that resulted in the investigation of PNOC and PNB; who requested the BIR Commissioner to
reconsider the compromise agreement in question; and who initiated CTA Case No. 4249 by filing a Petition for
Review.
In Bay View Hotel, Inc. v. Manila Hotel Workers Union-PTGWO, et al.,[64] this Court upheld the jurisdiction of the
Court of Industrial Relations over the ordinary courts and justified its decision in the following manner:
We are unprepared to break away from the teaching in the cases just adverted to. To draw a tenuous jurisdictional
line is to undermine stability in labor litigations. A piecemeal resort to one court and another gives rise to multiplicity of
suits. To force the employees to shuttle from one court to another to secure full redress is a situation gravely
prejudicial. The time to be lost, effort wasted, anxiety augmented, additional expense incurred these are
considerations which weigh heavily against split jurisdiction. Indeed, it is more in keeping with orderly administration
of justice that all the causes of action here be cognizable and heard by only one court: the Court of Industrial
Relations.

The same justification is used in the present case to reject DOJs jurisdiction over the BIR and PNB, to the
exclusion of the other parties. The rights of all four parties in CTA Case No. 4249, namely the BIR, as the tax
collector; PNOC, the taxpayer; PNB, the withholding agent; and private respondent Savellano, the informer claiming
his reward; arose from the same factual background and were so closely interrelated, that a pronouncement as to
one would definitely have repercussions on the others. The ends of justice were best served when the CTA continued
to exercise its jurisdiction over CTA Case No. 4249. The CTA, which had assumed jurisdiction over all the parties to
the controversy, could render a comprehensive resolution of the issues raised and grant complete relief to the parties.
II
Validity of the Compromise Agreement
A. PNOC could not apply for a compromise under E.O. No. 44 because its tax liability was not a delinquent account
or a disputed assessment as of 31 December 1985.
PNOC and PNB, on different grounds, dispute the decision of the CTA in CTA Case No. 4249 declaring the
compromise agreement between BIR and PNOC without force and effect.
PNOC asserts that the compromise agreement was in accordance with E.O. No. 44, and its implementing rules
and regulations, and should be binding upon the parties thereto.
E.O. No. 44 granted the BIR Commissioner or his duly authorized representatives the power to compromise any
disputed assessment or delinquent account pending as of 31 December 1985, upon the payment of an amount equal
to 30% of the basic tax assessed; in which case, the corresponding interests and penalties shall be condoned. E.O.
No. 44 took effect on 04 September 1986 and remained effective until 31 March 1987.
The disputed assessments or delinquent accounts that the BIR Commissioner could compromise under E.O.
No. 44 are defined under Revenue Regulation (RR) No. 17-86, as follows:

a) Delinquent account Refers to the amount of tax due on or before December 31, 1985 from a taxpayer who
failed to pay the same within the time prescribed for its payment arising from (1) a self assessed tax,
whether or not a tax return was filed, or (2) a deficiency assessment issued by the BIR which has become
final and executory.

Where no return was filed, the taxpayer shall be considered delinquent as of the time the tax on such
return was due, and in availing of the compromise, a tax return shall be filed as a basis for computing the
amount of compromise to be paid.

b) Disputed assessment refers to a tax assessment disputed or protested on or before December 31, 1985
under any of the following categories:

1) if the same is administratively protested within thirty (30) days from the date the taxpayer received the assessment,
or

2.) if the decision of the BIR on the taxpayers administrative protest is appealed by the taxpayer before an appropriate
court.

PNOCs tax liability could not be considered a delinquent account since (1) it was not self-assessed, because
the BIR conducted an investigation and assessment of PNOC and PNB after obtaining information regarding the non-
withholding of tax from private respondent Savellano; and (2) the demand letter, issued against it on 08 August 1986,
could not have been a deficiency assessment that became final and executory by 31 December 1985.
The dissenting opinion contends, however, that the tax liability of PNOC constitutes a self-assessed tax, and is,
therefore, a delinquent account as of 31 December 1985, qualifying for a compromise under E.O. No. 44. It anchors
its argument on the declaration made by this Court in Tupaz v. Ulep,[65] that internal revenue taxes are self-assessing.
It is not denied herein that the self-assessing system governs Philippine internal revenue taxes. The dissenting
opinion itself defines self-assessed tax as, a tax that the taxpayer himself assesses or computes and pays to the
taxing authority. Clearly, such a system imposes upon the taxpayer the obligation to conduct an assessment of
himself so he could determine and declare the amount to be used as tax basis, any deductions therefrom, and finally,
the tax due.
E.O. No. 44 covers self-assessed tax, whether or not a tax return was filed. The phrase whether or not a tax
return was filed only refers to the compliance by the taxpayer with the obligation to file a return on the dates specified
by law, but it does not do away with the requisite that the tax must be self-assessed in order for the taxpayer to avail
of the compromise. The second paragraph of Section 2(a) of RR No. 17-86 expressly commands, and still imposes
upon the taxpayer, who is availing of the compromise under E.O. No. 44, and who has not previously filed any return,
the duty to conduct self-assessment by filing a tax return that would be used as the basis for computing the amount of
compromise to be paid.
Section 2(a)(1) of RR No. 17-86 thus involves a situation wherein a taxpayer, after conducting a self-
assessment, discovers or becomes aware that he had failed to pay a tax due on or before 31 December 1985,
regardless of whether he had previously filed a return to reflect such tax; voluntarily comes forward and admits to the
BIR his tax liability; and applies for a compromise thereof. In case the taxpayer has not previously filed any return, he
must fill out such a return reflecting therein his own declaration of the taxable amount and computation of the tax due.
The compromise payment shall be computed based on the amount reflected in the tax return submitted by the
taxpayer himself.
Neither PNOC nor PNB, the taxpayer and the withholding agent, respectively, conducted self-assessment in this
case. There is no showing that in the absence of the tax assessment issued by the BIR against them, that PNOC
and/or PNB would have voluntarily admitted their tax liabilities, already amounting to P385,961,580.82, as of 15
November 1986, and would have offered to compromise the same. In fact, both PNOC and PNB were conspicuously
silent about their tax liabilities until they were assessed thereon.
Any attempt by PNOC and PNB to assess and declare by themselves their tax liabilities had already been
overtaken by the BIRs conduct of its audit and investigation and subsequent issuance of the assessments, dated 08
August 1986 and 08 October 1986, against PNOC and PNB, respectively. The said tax assessments, uncontested
and undisputed, presented the results of the BIR audit and investigation and the computation of the total amount of
tax liabilities of PNOC and PNB. They should be controlling in this case, and should not be so easily and conveniently
ignored and set aside. It would be a contradiction to claim that the tax liabilities of PNOC and PNB are self-assessed
and, at the same time, BIR-assessed; when it is clear and simple that it had been the BIR that conducted the
assessment and determined the tax liabilities of PNOC and PNB.
That the BIR-assessed tax liability should be differentiated from a self-assessed one, is supported by the
provisions of RR No. 17-86 on the basis for computing the amount of compromise payment. Note that where tax
liabilities are self-assessed, the compromise payment shall be computed based on the tax return filed by the
taxpayer.[66] On the other hand, where the BIR already issued an assessment, the compromise payment shall be
computed based on the tax due on the assessment notice.[67]
For instances where the BIR had already issued an assessment against the taxpayer, the tax liability could still
be compromised under E.O. No. 44 only if: (1) the assessment had been final and executory on or before 31
December 1985 and, therefore, considered a delinquent account as of said date; [68] or (2) the assessment had been
disputed or protested on or before 31 December 1985.[69]
RMO No. 39-86, which provides the guidelines for the implementation of E.O. No. 44, does mention different
types of assessments that may be compromised under said statute (i.e., jeopardy assessments, arbitrary
assessments, and tax assessments of doubtful validity). RMO No. 39-86 may not have expressly stated any
qualification for these particular types of assessments; nonetheless, E.O. No. 44 specifically refers only to
assessments that were delinquent or disputed as of 31 December 1985.
E.O. No. 44 and all BIR issuances to implement said statute should be interpreted so that they are harmonized
and consistent with each other. Accordingly, this Court finds that the different types of assessments mentioned in
RMO No. 39-86 would still have to qualify as delinquent accounts or disputed assessments as of 31 Dcember 1985,
so that they could be compromised under E.O. No. 44.
The BIR had first written to PNOC on 08 August 1986, demanding payment of the income tax on the interest
earnings and/or yields from PNOCs money placements with PNB from 15 October 1984 to 15 October 1986. This
demand letter could be regarded as the first assessment notice against PNOC.
Such an assessment, issued only on 08 August 1986, could not have been final and executory as of 31
December 1985 so as to constitute a delinquent account. Neither was the assessment against PNOC an assessment
that could have been disputed or protested on or before 31 December 1985, having been issued on a later date.
Given that PNOCs tax liability did not constitute a delinquent account or a disputed assessment as of 31
December 1985, then it could not be compromised under E.O. No. 44.
The assessment against PNOC, instead, was more appropriately covered by Revenue Memorandum Circular
(RMC) No. 31-86. RMC No. 31-86 clarifies the scope of availment of the tax amnesty under E.O. No. 41 [70] and
compromise payments on delinquent accounts and disputed assessments under E.O. No. 44. The third paragraph of
RMC No. 31-86 reads:

[T]axpayers against whom assessments had been issued from January 1 to August 21, 1986 may settle their tax
liabilities by way of compromise under Section 246 of the Tax Code as amended by paying 30% of the basic
assessment excluding surcharge, interest, penalties and other increments thereto.

The above-quoted paragraph supports the position that only assessments that were disputed or that were final
and executory by 31 December 1985 could be the subject of a compromise under E.O. No. 44. Assessments issued
between 01 January to 21 August 1986 could still be compromised by payment of 30% of the basic tax assessed, not
anymore pursuant to E.O. No. 44, but pursuant to Section 246 of the NIRC of 1977, as amended.
Section 246 of the NIRC of 1977, as amended, granted the BIR Commissioner the authority to compromise the
payment of any internal revenue tax under the following circumstances: (1) there exists a reasonable doubt as to the
validity of the claim against the taxpayer; or (2) the financial position of the taxpayer demonstrates a clear inability to
pay the assessed tax.[71]
There are substantial differences in circumstances under which compromises may be granted under Section
246 of the NIRC of 1977, as amended, and E.O. No. 44. Although PNOC and PNB have extensively argued their
entitlement to compromise under E.O. No. 44, neither of them has alleged, much less, has presented any evidence to
prove that it may compromise its tax liability under Section 246 of the NIRC of 1977, as amended.
B. The tax liability of PNB as withholding agent also did not qualify for compromise under E.O. No. 44.
Before proceeding any further, this Court reconsiders the conclusion made by BIR Commissioner Ong in his
demand letter, dated 16 January 1991, that the compromise settlement executed between the BIR and PNOC was
without legal basis because withholding taxes were not actually taxes that could be compromised, but a penalty for
PNBs failure to withhold and for which it was made personally liable.
E.O. No. 44 covers disputed or delinquency cases where the person assessed was himself the taxpayer rather
than a mere agent.[72] RMO No. 39-86 expressly allows a withholding agent, who failed to withhold the required tax
because of neglect, ignorance of the law, or his belief that he was not required by law to withhold tax, to apply for a
compromise settlement of his withholding tax liability under E.O. No. 44. A withholding agent, in such a situation, may
compromise the withholding tax assessment against him precisely because he is being held directly accountable for
the tax.[73]
RMO No. 39-86 distinguishes between the withholding agent in the foregoing situation from the withholding
agent who withheld the tax but failed to remit the amount to the Government. A withholding agent in the latter
situation is the one disqualified from applying for a compromise settlement because he is being made accountable as
an agent, who held funds in trust for the Government.[74]
Both situations, however, involve withholding agents. The right to compromise under these provisions should
have been claimed by PNB, the withholding agent for PNOC. The BIR held PNB personally accountable for its failure
to withhold the tax on the interest earnings and/or yields from PNOCs money placements with PNB. The BIR sent a
demand letter, dated 08 October 1986, addressed directly to PNB, for payment of the withholding tax assessed
against it, but PNB failed to take any action on the said demand letter. Yet, all the offers to compromise the
withholding tax assessment came from PNOC and PNOC did not claim that it made the offers to compromise on
behalf of PNB.
Moreover, the general requirement of E.O. No. 44 still applies to withholding agents that the withholding tax
liability must either be a delinquent account or a disputed assessment as of 31 December 1985 to qualify for
compromise settlement. The demand letter against PNB, which also served as its assessment notice, had been
issued on 08 October 1986 or two months later than PNOCs. PNBs withholding tax liability could not be considered a
delinquent account or a disputed assessment, as defined under RR No. 17-86, for the same reasons that PNOCs tax
liability did not constitute as such. The tax liability of PNB, therefore, was also not eligible for compromise settlement
under E.O. No. 44.
C. Even assuming arguendo that PNOC and/or PNB qualified under E.O. No. 44, their application for compromise
was filed beyond the deadline.
Despite already ruling that the tax liabilities of PNOC and PNB could not be compromised under E.O. No. 44,
this Court still deems it necessary to discuss the finding of the CTA that the compromise agreement had been filed
beyond the effectivity of E.O. No. 44, since the CTA made a declaration in relation thereto that paragraph 2 of RMO
No. 39-86 was null and void for unduly extending the effectivity of E.O. No. 44.
Paragraph 2 of RMO No. 39-86 provides that:

2. Period for availment. Filing of application for compromise settlement under the said law shall be effective only until
March 31, 1987. Applications filed on or before this date shall be valid even if the payment or payments of the
compromise amount shall be made after the said date, subject, however, to the provisions of Executive Order No. 44
and its implementing Revenue Regulations No. 17-86.

It is well-settled in this jurisdiction that administrative authorities are vested with the power to make rules and
regulations because it is impracticable for the lawmakers to provide general regulations for various and varying
details of management. The interpretation given to a rule or regulation by those charged with its execution is entitled
to the greatest weight by the court construing such rule or regulation, and such interpretation will be followed unless it
appears to be clearly unreasonable or arbitrary.[75]
RMO No. 39-86, particularly paragraph 2 thereof, does not appear to be unreasonable or arbitrary. It does not
unduly expand the coverage of E.O. No. 44 by merely providing that applications for compromise filed until 31 March
1987 are still valid, even if payment of the compromised amount is made on a later date.
It cannot be expected that the compromise allowed under E.O. No. 44 can be automatically granted upon mere
filing of the application by the taxpayer. Irrefutably, the applications would still have to be processed by the BIR to
determine compliance with the requirements of E.O. No. 44. As it is uncontested that a taxpayer could still file an
application for compromise on 31 March 1987, the very last day of effectivity of E.O. No. 44, it would be unreasonable
to expect the BIR to process and approve the taxpayers application within the same date considering the volume of
applications filed and pending approval, plus the other matters the BIR personnel would also have to attend to. Thus,
RMO No. 39-86 merely assures the taxpayers that their applications would still be processed and could be approved
on a later date. Payment, of course, shall be made by the taxpayer only after his application had been approved and
the compromised amount had been determined.
Given that paragraph 2 of RMO No. 39-86 is valid, the next question that needs to be addressed is whether
PNOC had been able to submit an application for compromise on or before 31 March 1987 in compliance thereof.
Although the compromise agreement was executed only on 22 June 1987, PNOC is claiming that it had already
written a letter to the BIR, as early as 25 September 1986, offering to compromise its tax liability, and that the said
letter should be considered as PNOCs application for compromise settlement.
A perusal of PNOCs letter, dated 25 September 1986, would reveal, however, that the terms of its proposed
compromise did not conform to those authorized by E.O. No. 44. PNOC did not offer to pay outright 30% of the basic
tax assessed against it as required by E.O. No. 44; and instead, made the following offer:

(2) That PNOC be permitted to set-off its foregoing mentioned tax liability of P304,419,396.83 against the tax
refund/credit claims of the National Power Corporation (NPC) for specific taxes on fuel oil sold to NPC
totaling P335,259,450.21, which tax refunds/credits are actually receivable accounts of our Company from NPC. [76]

PNOC reiterated the offer in its letter to the BIR, dated 14 October 1986. [77] The BIR, in its letters to PNOC,
dated 8 October 1986[78] and 11 November 1986,[79] consistently denied PNOCs offer because the claim for tax
refund/credit of NAPOCOR was still under process, so that the offer to set-off such claim against PNOCs tax liability
was premature.
Furthermore, E.O. No. 44 does not contemplate compromise payment by set-off of a tax liability against a claim
for tax refund/credit. Compromise under E.O. No. 44 may be availed of only in the following circumstances:
SEC. 3. Who may avail. Any person, natural or juridical, may settle thru a compromise any delinquent account or
disputed assessment which has been due as of December 31, 1985, by paying an amount equal to thirty percent
(30%) of the basic tax assessed.

SEC. 6. Mode of Payment. Upon acceptance of the proposed compromise, the amount offered as compromise in
complete settlement of the delinquent account shall be paid immediately in cash or managers certified check.

Deferred or staggered payments of compromise amounts over P50,000 may be considered on a case to case basis
in accordance with the extant regulations of the Bureau upon approval of the Commissioner of Internal Revenue, his
Deputy or Assistant as delineated in their respective jurisdictions.

If the Compromise amount is not paid as required herein, the compromise agreement is automatically nullified and
the delinquent account reverted to the original amount plus the statutory increments, which shall be collected thru the
summary and/or judicial processes provided by law.

E.O. No. 44 is not for the benefit of the taxpayer alone, who can extinguish his tax liability by paying the
compromise amount equivalent to 30% of the basic tax. It also benefits the Government by making collection of
delinquent accounts and disputed assessments simpler, easier, and faster. Payment of the compromise amount must
be made immediately, in cash or in managers check. Although deferred or staggered payments may be allowed on a
case-to-case basis, the mode of payment remains unchanged, and must still be made either in cash or in managers
check.
PNOCs offer to set-off was obviously made to avoid actual cash-out by the company. The offer defeated the
purpose of E.O. No. 44 because it would not only delay collection, but more importantly, it would not guarantee
collection. First of all, BIRs collection was contingent on whether the claim for tax refund/credit of NAPOCOR would
be subsequently granted. Second, collection could not be made immediately and would have to wait until the
resolution of the claim for tax refund/credit of NAPOCOR. Third, there is no proof, other than the bare allegation of
PNOC, that NAPOCORs claim for tax refund/credit is an account receivable of PNOC. A possible dispute between
NAPOCOR and PNOC as to the proceeds of the tax refund/credit would only delay collection by the BIR even further.
It was only in its letter, dated 09 June 1987, that PNOC actually offered to compromise its tax liability in
accordance with the terms and circumstances prescribed by E.O. No. 44 and its implementing rules and regulations,
by stating that:

Consequently, we reiterate our previous request for compromise under E.O. No. 44, and convey our preparedness to
settle the subject tax assessment liability by payment of the compromise amount of P91,003,129.89, representing
thirty percent (30%) of the basic tax assessment of P303,343,766.29, in accordance with E.O. No. 44 and its
implementing BIR Revenue Memorandum Order No. 39-86.[80]

PNOC claimed in the same letter that it had previously requested for a compromise under the terms of E.O. No.
44, but this Court could not find evidence of such previous request. There are stark and substantial differences in the
terms of PNOCs offer to compromise in its earlier letters, dated 25 September 1986 and 14 October 1986 (set-off of
the entire amount of its tax liability against the claim for tax refund/credit of NAPOCOR), to those in its letter, dated 09
June 1987 (payment of the compromise amount representing 30% of the basic tax assessed against it), making it
difficult for this Court to accept that the letter of 09 June 1987 merely reiterated PNOCs offer to compromise in its
earlier letters.
This Court likewise cannot give credence to PNOCs allegation that beginning 25 September 1986, the date of
its first letter to the BIR, there were continuing negotiations between PNOC and BIR that culminated in the
compromise agreement on 22 June 1987. Aside from the exchange of letters recounted in the preceding paragraphs,
both PNOC and PNB failed to present any other proof of the supposed negotiations.
After the BIR denied the second offer of PNOC to set-off its tax liability against the claim for tax refund/credit of
NAPOCOR in a letter, dated 11 November 1986, there is no other evidence of subsequent communication between
PNOC and the BIR. It was only after almost seven months, or on 09 June 1987, that PNOC again wrote a letter to the
BIR, this time offering to pay the compromise amount of 30% of the basic tax assessed against. This letter was
already filed beyond 31 March 1987, after the lapse of the effectivity of E.O. No. 44 and the deadline for filing
applications for compromise under the said statute.
Evidence of meetings between PNOC and the BIR, or any other form of communication, wherein the parties
presented their offer and counter-offer to the other, would have been very valuable in explaining and supporting BIR
Commissioner Tans decision to accept PNOCs third offer to compromise after denying the previous two. The
absence of such evidence herein negates PNOCs claim of actual negotiations with the BIR.
Therefore, even assuming arguendo that the tax liabilities of PNOC and PNB qualify as delinquent accounts or
disputed assessments as of 31 December 1985, the application for compromise filed by PNOC on 09 June 1987, and
accepted by then BIR Commissioner Tan on 22 June 1987, was still filed way beyond 31 March 1987, the expiration
date of the effectivity of E.O. No. 44 and the deadline for filing of applications for compromise under RMO No. 39-86.
D. The BIR Commissioners discretionary authority to enter into a compromise agreement is not absolute and the CTA
may inquire into allegations of abuse thereof.
The foregoing discussion supports the CTAs conclusion that the compromise agreement between PNOC and
the BIR was indeed without legal basis. Despite this lack of legal support for the execution of the said compromise
agreement, PNB argues that the CTA still had no jurisdiction to review and set aside the compromise agreement. It
contends that the authority to compromise is purely discretionary on the BIR Commissioner and the courts cannot
interfere with his exercise thereof.
It is generally true that purely administrative and discretionary functions may not be interfered with by the courts;
but when the exercise of such functions by the administrative officer is tainted by a failure to abide by the command
of the law, then it is incumbent on the courts to set matters right, with this Court having the last say on the matter. [81]
The manner by which BIR Commissioner Tan exercised his discretionary power to enter into a compromise was
brought under the scrutiny of the CTA amidst allegations of grave abuse of discretion and/or whimsical exercise of
jurisdiction.[82] The discretionary power of the BIR Commissioner to enter into compromises cannot be superior over
the power of judicial review by the courts.
The discretionary authority to compromise granted to the BIR Commissioner is never meant to be absolute,
uncontrolled and unrestrained. No such unlimited power may be validly granted to any officer of the government,
except perhaps in cases of national emergency.[83] In this case, the BIR Commissioners authority to compromise,
whether under E.O. No. 44 or Section 246 of the NIRC of 1977, as amended, can only be exercised under certain
circumstances specifically identified in said statutes. The BIR Commissioner would have to exercise his discretion
within the parameters set by the law, and in case he abuses his discretion, the CTA may correct such abuse if the
matter is appealed to them.[84]
Petitioners PNOC and PNB both contend that BIR Commissioner Tan merely exercised his authority to enter
into a compromise specially granted by E.O. No. 44. Since this Court has already made a determination that the
compromise agreement did not qualify under E.O. No. 44, BIR Commissioner Tans decision to agree to the
compromise should have been reviewed in the light of the general authority granted to the BIR Commissioner to
compromise taxes under Section 246 of the NIRC of 1977, as amended. Then again, petitioners PNOC and PNB
failed to allege, much less present evidence, that BIR Commissioner Tan acted in accordance with Section 246 of the
NIRC of 1977, as amended, when he entered into the compromise agreement with PNOC.
E. The CTA may set aside a compromise agreement that is contrary to law and public policy.
PNB also asserts that the CTA had no jurisdiction to set aside a compromise agreement entered into in good
faith. It relies on the decision of this Court in Republic v. Sandiganbayan[85]that a compromise agreement cannot be
set aside merely because it is too one-sided. A compromise agreement should be respected by the courts as the res
judicata between the parties thereto.
This Court, though, finds that there are substantial differences in the factual background of Republic v.
Sandiganbayan and the present case.
The compromise agreement executed between the Presidential Commission on Good Government (PCGG) and
Roberto S. Benedicto in Republic v. Sandiganbayan was judicially approved by the Sandiganbayan. The
Sandiganbayan had ample opportunity to examine the validity of the compromise agreement since two years elapsed
from the time the agreement was executed up to the time it was judicially approved. This Court even stated in the
said case that, We are not dealing with the usual compromise agreement perfunctorily submitted to a court and
approved as a matter of course. The PCGG-Benedicto agreement was thoroughly and, at times, disputatiously
discussed before the respondent court. There could be no deception or misrepresentation foisted on either the PCGG
or the Sandiganbayan.[86]
In addition, the new PCGG Chairman originally prayed for the re-negotiation of the compromise agreement so
that it could be more just, fair, and equitable, an action considered by this Court as an implied admission that the
agreement was not contrary to law, public policy or morals nor was there any circumstance which had vitiated
consent.[87]
The above-mentioned circumstances strongly supported the validity of the compromise agreement in Republic
v. Sandiganbayan, which was why this Court refused to set it aside. Unfortunately for the petitioners in the present
case, the same cannot be said herein.
The Court of Appeals, in upholding the jurisdiction of the CTA to set aside the compromise agreement, ruled
that:

We are unable to accept petitioners submissions. Its formulation of the issues on CIR and CTAs lack of jurisdiction to
disturb a compromise agreement presupposes a compromise agreement validly entered into by the CIR and not,
when as in this case, it was indubitably shown that the supposed compromise agreement is without legal support. In
case of arbitrary or capricious exercise by the Commissioner or if the proceedings were fatally defective, the
compromise can be attacked and reversed through the judicial process (Meralco Securities Corporation v. Savellano,
117 SCRA 805, 812 [1982]; Sarah E. Ramsay, et. al. v. U.S. 21 Ct. C1 443, affd 120 U.S. 214, 30 L. Ed. 582; Tyson
v. U.S., 39 F. Supp. 135 cited in page 18 of decision) . [88]

Although the general rule is that compromises are to be favored, and that compromises entered into in good
faith cannot be set aside,[89] this rule is not without qualification. A court may still reject a compromise or settlement
when it is repugnant to law, morals, good customs, public order, or public policy. [90]
The compromise agreement between the BIR and PNOC was contrary to law having been entered into by BIR
Commissioner Tan in excess or in abuse of the authority granted to him by legislation. E.O. No. 44 and the NIRC of
1977, as amended, had identified the situations wherein the BIR Commissioner may compromise tax liabilities, and
none of these situations existed in this case.
The compromise, moreover, was contrary to public policy. The primary duty of the BIR is to collect taxes, since
taxes are the lifeblood of the Government and their prompt and certain availability are imperious needs.[91] In the
present case, however, BIR Commissioner Tan, by entering into the compromise agreement that was bereft of any
legal basis, would have caused the Government to lose almost P300 million in tax revenues and would have deprived
the Government of much needed monetary resources.
Allegations of good faith and previous execution of the terms of the compromise agreement on the part of
PNOC would not be enough for this Court to disregard the demands of law and public policy. Compromise may be
the favored method to settle disputes, but when it involves taxes, it may be subject to closer scrutiny by the courts. A
compromise agreement involving taxes would affect not just the taxpayer and the BIR, but also the whole nation, the
ultimate beneficiary of the tax revenues collected.
F. The Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its agents.
The new BIR Commissioner, Commissioner Ong, had acted well within his powers when he set aside the
compromise agreement, dated 22 June 1987, after finding that the said compromise agreement was without legal
basis. When he took over from his predecessor, there was still a pending motion for reconsideration of the said
compromise agreement, filed by private respondent Savellano on 24 March 1988. To resolve the said motion, he
reviewed the compromise agreement and, thereafter, came upon the conclusion that it did not comply with E.O. No.
44 and its implementing rules and regulations.
It had been declared by this Court in Hilado v. Collector of Internal Revenue, et al.,[92] that an administrative
officer, such as the BIR Commissioner, may revoke, repeal or abrogate the acts or previous rulings of his
predecessor in office. The construction of a statute by those administering it is not binding on their successors if,
thereafter, the latter becomes satisfied that a different construction should be given.
It is evident in this case that the new BIR Commissioner, Commissioner Ong, construed E.O. No. 44 and its
implementing rules and regulations differently from that of his predecessor, former Commissioner Tan, which led to
Commissioner Ongs revocation of the BIR approval of the compromise agreement, dated 22 June 1987. Such a
revocation was only proper considering that the former BIR Commissioners decision to approve the said compromise
agreement was based on the erroneous construction of the law (i.e., E.O. No. 44 and its implementing rules and
regulations) and should not give rise to any vested right on PNOC. [93]
Furthermore, approval of the compromise agreement and acceptance of the compromise payment by his
predecessor cannot estop BIR Commissioner Ong from setting aside the compromise agreement, dated 22 June
1987, for lack of legal basis; and from demanding payment of the deficiency withholding tax from PNB. As a general
rule, the Government cannot be estopped from collecting taxes by the mistake, negligence, or omission of its
agents[94] because:
. . . Upon taxation depends the Government ability to serve the people for whose benefit taxes are collected. To
safeguard such interest, neglect or omission of government officials entrusted with the collection of taxes should not
be allowed to bring harm or detriment to the people, in the same manner as private persons may be made to suffer
individually on account of his own negligence, the presumption being that they take good care of their personal
affairs. This should not hold true to government officials with respect to matters not of their own personal concern.
This is the philosophy behind the government's exception, as a general rule, from the operation of the principle of
estoppel. (Republic vs. Caballero, L-27437, September 30, 1977, 79 SCRA 177; Manila Lodge No. 761, Benevolent
and Protective Order of the Elks, Inc. vs. Court of Appeals, L-41001, September 30, 1976, 73 SCRA 162; Sy vs.
Central Bank of the Philippines, L-41480, April 30, 1976, 70 SCRA 571; Balmaceda vs. Corominas & Co., Inc., 66
SCRA 553; Auyong Hian vs. Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine Rabbit Bus Lines, Inc., 66
SCRA 553; Republic vs. Philippine Long Distance Telephone Company, L-18841, January 27, 1969, 26 SCRA
620; Zamora vs. Court of Tax Appeals, L-23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs. Collector of
Internal Revenue, L-23041, July 31, 1969, 28 SCRA 119).[95]

III
Finality of the Tax Assessment
A. The issue on whether the BIR complied with the notice requirements under RR No. 12-85 is raised for the first time
on appeal and should not be given due course.
PNB, in another effort to block the collection of the deficiency withholding tax, this time raises doubts as to the
validity of the deficiency withholding tax assessment issued against it on 16 January 1991. It submits that the BIR
failed to comply with the notice requirements set forth in RR No. 12-85.[96]
Whether or not the BIR complied with the notice requirements of RR No. 12-85 is a new issue raised by PNB
only before this Court. Such a question has not been ventilated before the lower courts. For an appellate tribunal to
consider a legal question, it should have been raised in the court below. [97] If raised earlier, the matter would have
been seriously delved into by the CTA and the Court of Appeals. [98]
B. The assessment against PNB had become final and unappealable, and therefore, enforceable.
The CTA and the Court of Appeals declared as final and unappealable, and thus, enforceable, the assessment
against PNB, dated 16 January 1991, since PNB failed to protest said assessment within the 30-day prescribed
period. This Court, though, finds that the significant BIR assessment, as far as this case is concerned, should be the
one issued by the BIR against PNB on 08 October 1986.
The BIR issued on 08 October 1986 an assessment against PNB for its withholding tax liability on the interest
earnings and/or yields from PNOCs money placements with the bank. It had 30 days from receipt to protest the BIRs
assessment. [99] PNB, however, did not take any action as to the said assessment so that upon the lapse of the period
to protest, the withholding tax assessment against it, dated 8 October 1986, became final and unappealable, and
could no longer be disputed.[100] The courts may therefore order the enforcement of this assessment.
It is the enforcement of this BIR assessment against PNB, dated 08 October 1986, that is in issue in the instant
case. If the compromise agreement is valid, it would effectively bar the BIR from enforcing the assessment and
collecting the assessed tax; on the other hand, if the compromise agreement is void, then the courts can order the
BIR to enforce the assessment and collect the assessed tax.
As has been previously discussed by this Court, the BIR demand letter, dated 16 January 1991, is not a new
assessment against PNB. It only demanded from PNB the payment of the balance of the withholding tax assessed
against it on 08 October 1986. The same demand letter also has no substantial effect or impact on the resolution of
the present case. It is already unnecessary and superfluous, having been issued by the BIR when CTA Case No.
4249 was already pending before the CTA. At best, the demand letter, dated 16 January 1991, constitute a useful
reference for the courts in computing the balance of PNBs tax liability, after applying as partial payment thereon the
amount previously received by the BIR from PNOC pursuant to the compromise agreement.
IV
Prescription
A. The defense of prescription was never raised by petitioners PNOC and PNB, and should be considered waived.
The dissenting opinion takes the position that the right of the BIR to assess and collect income tax on the
interest earnings and/or yields from PNOCs money placements with PNB, particularly for taxable year 1985, had
already prescribed, based on Section 268 of the NIRC of 1977, as amended.
Section 268 of the NIRC of 1977, as amended, provides a three-year period of limitation for the assessment and
collection of internal revenue taxes, which begins to run after the last day prescribed for filing of the return. [101]
The dissenting opinion points out that more than four years have elapsed from 25 January 1986 (the last day
prescribed by law for PNB to file its withholding tax return for the fourth quarter of 1985) to 16 January 1991 (the date
when the alleged final assessment of PNBs tax liability was issued).
The issue of prescription, however, was brought up only in the dissenting opinion and was never raised by
PNOC and PNB in the proceedings before the BIR nor in any of their pleadings submitted to the CTA and the Court
of Appeals.
Section 1, Rule 9 of the Rules of Civil Procedure lays down the rule on defenses and objections not pleaded,
and reads:

SECTION 1. Defenses and objections not pleaded. Defenses and objections not pleaded either in a motion to dismiss
or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on record that the
court has no jurisdiction over the subject matter, that there is another action pending between the parties for the
same cause, or that the action is barred by prior judgment or by the statute of limitations, the court shall dismiss the
claim.

The general rule enunciated in the above-quoted provision governs the present case, that is, the defense of
prescription, not pleaded in a motion to dismiss or in the answer, is deemed waived. The exception in same provision
cannot be applied herein because the pleadings and the evidence on record do not sufficiently show that the action is
barred by prescription.
It has been consistently held in earlier tax cases that the defense of prescription of the period for the
assessment and collection of tax liabilities shall be deemed waived when such defense was not properly pleaded and
the facts alleged and evidences submitted by the parties were not sufficient to support a finding by this Court on the
matter.[102] In Querol v. Collector of Internal Revenue,[103] this Court pronounced that prescription, being a matter of
defense, imposes the burden on the taxpayer to prove that the full period of the limitation has expired; and this
requires him to positively establish the date when the period started running and when the same was fully
accomplished.
In making its conclusion that the assessment and collection in this case had prescribed, the dissenting opinion
took liberties to assume the following facts even in the absence of allegations and evidences to the effect that: (1)
PNB filed returns for its withholding tax obligations for taxable year 1985; (2) PNB reported in the said returns the
interest earnings of PNOCs money placements with the bank; and (3) that the returns were filed on or before the
prescribed date, which was 25 January 1986.
It is not safe to adopt the first and second assumptions in this case considering that Section 269 of the NIRC of
1977, as amended, provides for a different period of limitation for assessment and collection of taxes in case of false
or fraudulent return or for failure to file a return. In such cases, the BIR is given 10 years after discovery of the falsity,
fraud, or omission within which to make an assessment.[104]
It is also not safe to accept the third assumption since there can be a possibility that PNB filed the withholding
tax return later than the prescribed date, in which case, following the dictates of Section 268 of the NIRC of 1977, as
amended, the three-year prescriptive period shall be counted from the date the return was actually filed. [105]
PNBs withholding tax returns for taxable year 1985, duly received by the BIR, would have been the best
evidence to prove actual filing, the date of filing and the contents thereof. These facts are relevant in determining
which prescriptive period should apply, and when such prescriptive period should begin to run and when it had
lapsed. Yet, the pleadings did not refer to any return, and no return was made part of the records of the present case.
This Court could not make a proper ruling on the matter of prescription on the mere basis of assumptions; such
an issue should have been properly raised, argued, and supported by evidences submitted by the parties themselves
before the BIR and the courts below.
B. Granting that this Court can take cognizance of the defense of prescription, this Court finds that the assessment of
the withholding tax liability against PNOC and collection of the tax assessed were done within the prescriptive
period.
Assuming, for the sake of argument, that this Court can give due course to the defense of prescription, it finds
that the assessment against PNB for its withholding tax liability for taxable year 1985 and the collection of the tax
assessed therein were accomplished within the prescribed periods for assessment and collection under the NIRC of
1977, as amended.
If this Court adopts the assumption made by the dissenting opinion that PNB filed its withholding tax return for
the last quarter of 1985 on 25 January 1986, then the BIR had until 24 January 1989 to assess PNB. The original
assessment against PNB was issued as early as 08 October 1986, well-within the three-year prescriptive period for
making the assessment as prescribed by the following provisions of the NIRC of 1977, as amended:

SEC. 268. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal
revenue taxes shall be assessed within three 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

SEC. 269. Exceptions as to period of limitation of assessment and collection of taxes.

(c) Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be
collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.

Sections 268 and 269(c) of the NIRC of 1977, as amended, should be read in conjunction with one another.
Section 268 requires that assessment be made within three years from the last day prescribed by law for the filing of
the return. Section 269(c), on the other hand, provides that when an assessment is issued within the prescribed
period provided in Section 268, the BIR has three years, counted from the date of the assessment, to collect the tax
assessed either by distraint, levy or court action. Therefore, when an assessment is timely issued in accordance with
Section 268, the BIR is given another three-year period, under Section 269(c), within which to collect the tax
assessed, reckoned from the date of the assessment.
In the case of PNB, an assessment was issued against it by the BIR on 08 October 1986, so that the BIR had
until 07 October 1989 to enforce it and to collect the tax assessed. The filing, however, by private respondent
Savellano of his Amended Petition for Review before the CTA on 02 July 1988 already constituted a judicial action for
collection of the tax assessed which stops the running of the three-year prescriptive period for collection thereof.
A judicial action for the collection of a tax may be initiated by the filing of a complaint with the proper regular trial
court; or where the assessment is appealed to the CTA, by filing an answer to the taxpayers petition for review
wherein payment of the tax is prayed for.[106]
The present case is unique, however, because the Petition for Review was filed by private respondent
Savellano, the informer, against the BIR, PNOC, and PNB. The BIR, the collecting government agency; PNOC, the
taxpayer; and PNB, the withholding agent, initially found themselves on the same side. The prayer in the Amended
Petition for Review of private respondent Savellano reads:

WHEREFORE, in view of the foregoing, petitioner respectfully prays that the compromise agreement of June 22,
1987 be reviewed and declared null and void, and that this Court directs:

a) respondent Commissioner to enforce and collect and respondents PNB and/or PNOC to pay in a joint and several
capacity, the total tax liability of P387,987,785.73, plus interests from 31 October 1986; and

b) respondent Commissioner to pay unto petitioner, as informers reward, 15% of the tax liability collected under
clause (a) hereof.

Other equitable reliefs under the premises are likewise prayed for. [107] (Underscoring ours.)

Private respondent Savellano, in his Amended Petition for Review in CTA Case No. 4249, prayed for (1) the
CTA to direct the BIR Commissioner to enforce and collect the tax, and (2) PNB and/or PNOC to pay the tax making
CTA Case No. 4249 a collection case. That the Amended Petition for Review was filed by the informer and not the
taxpayer; and that the prayer for the enforcement of the tax assessment and payment of the tax was also made by
the informer, not the BIR, should not affect the nature of the case as a judicial action for collection. In case the CTA
grants the Petition and the prayer therein, as what has happened in the present case, the ultimate result would be the
collection of the tax assessed. Consequently, upon the filing of the Amended Petition for Review by private
respondent Savellano, judicial action for collection of the tax had been initiated and the running of the prescriptive
period for collection of the said tax was terminated.
Supposing that CTA Case No. 4249 is not a collection case which stops the running of the prescriptive period
for the collection of the tax, CTA Case No. 4249, at the very least, suspends the running of the said prescriptive
period. Under Section 271 of the NIRC of 1977, as amended, the running of the prescriptive period to collect
deficiency taxes shall be suspended for the period during which the BIR Commissioner is prohibited from beginning a
distraint or levy or instituting a proceeding in court, and for 60 days thereafter.[108] Just as in the cases of Republic v.
Ker & Co., Ltd.[109] and Protectors Services, Inc. v. Court of Appeals,[110] this Court declares herein that the pendency
of the present case before the CTA, the Court of Appeals and this Court, legally prevents the BIR Commissioner from
instituting an action for collection of the same tax liabilities assessed against PNOC and PNB in the CTA or the
regular trial courts. To rule otherwise would be to violate the judicial policy of avoiding multiplicity of suits and the rule
on lis pendens.
Once again, that CTA Case No. 4249 was initiated by private respondent Savellano, the informer, instead of
PNOC, the taxpayer, or PNB, the withholding agent, would not prevent the suspension of the running of the
prescriptive period for collection of the tax. What is controlling herein is the fact that the BIR Commissioner cannot file
a judicial action in any other court for the collection of the tax because such a case would necessarily involve the
same parties and involve the same issues already being litigated before the CTA in CTA Case No. 4249. The three-
year prescriptive period for collection of the tax shall commence to run only after the promulgation of the decision of
this Court in which the issues of the present case are resolved with finality.
Whether the filing of the Amended Petition for Review by private respondent Savellano entirely stops or merely
suspends the running of the prescriptive period for collection of the tax, it had been premature for the BIR
Commissioner to issue a writ of garnishment against PNB on 12 August 1991 and for the Central Bank of the
Philippines to debit the account of PNB on 02 September 1992 pursuant to the said writ, because the case was by
then, pending review by the Court of Appeals. However, since this Court already finds that the compromise
agreement is without force and effect and hereby orders the enforcement of the assessment against PNB, then, any
issue or controversy arising from the premature garnishment of PNBs account and collection of the tax by the BIR
has become moot and academic at this point.
V
Additional Informers Reward
Private respondent Savellano is entitled to additional informers reward since the BIR had already collected the full
amount of the tax assessment against PNB.
PNOC insists that private respondent Savellano is not entitled to additional informers reward because there was
no voluntary payment of the withholding tax liability. PNOC, however, fails to state any legal basis for its argument.
Section 316(1) of the NIRC of 1977, as amended, granted a reward to an informer equivalent to 15% of the
revenues, surcharges, or fees recovered, plus, any fine or penalty imposed and collected. [111] The provision was clear
and uncomplicated an informer was entitled to a reward of 15% of the total amount actually recovered or collected by
the BIR based on his information. The provision did not make any distinction as to the manner the tax liability was
collected whether it was through voluntary payment by the taxpayer or through garnishment of the taxpayers
property. Applicable herein is another well-known maxim in statutory construction Ubi lex non distinguit nec nos
distinguere debemos when the law does not distinguish, we should not distinguish. [112]
Pursuant to the writ of garnishment issued by the BIR, the Central Bank issued a debit advice against the
demand deposit account of PNB with the Central Bank for the amount of P294,958,450.73, and credited the same
amount to the demand deposit account of the Treasurer of the Republic of the Philippines. The Treasurer of the
Republic, in turn, already issued a journal voucher transferring P294,958,450.73 to the account of the BIR.
Since the BIR had already collected P294,958,450.73 from PNB through the execution of the writ of
garnishment over PNBs deposit with the Central Bank, then private respondent Savellano should be awarded 15%
thereof as reward since the said collection could still be traced to the information he had given.
WHEREFORE, in view of the foregoing, the Petitions of PNOC and PNB in G.R. No. 109976 and G.R. No.
112800, respectively, are hereby DENIED. This Court AFFIRMS the assailed Decisions of the Court of Appeals in
CA-G.R. SP No. 29583 and CA-G.R. SP No. 29526, which affirmed the decision of the CTA in CTA Case No. 4249,
with modifications, to wit:
(1) The compromise agreement between PNOC and the BIR, dated 22 June 1987, is declared void for being contrary
to law and public policy, and is without force and effect;
(2)Paragraph 2 of RMO No. 39-86 remains a valid provision of the regulation;
(3)The withholding tax assessment against PNB, dated 08 October 1986, had become final and unappealable. The
BIR Commissioner is ordered to enforce the said assessment and collect the amount of P294,958,450.73, the
balance of tax assessed after crediting the previous payment made by PNOC pursuant to the compromise
agreement, dated 22 June 1987; and
(4) Private respondent Savellano shall be paid the remainder of his informers reward, equivalent to 15% of the
deficiency withholding tax ordered collected herein, or P 44,243,767.61.
SO ORDERED.
Quisumbing, Sandoval-Gutierrez, Austria-Martinez, Callejo, Sr., and Garcia, JJ., concur.
Davide, Jr., C.J., Corona, and Carpio-Morales, joins J. Carpio in his dissenting opinion.
Puno, and Panganiban, J., concurs with the majority and the separate opinion of J. Tinga.
Ynares-Santiago, J., no part.
Carpio, J., see dissenting opinion.
Azcuna, J., no partwas PNB Chairman in 1991.
Tinga, J., see separate concurring opinion.
SECOND DIVISION

BANK OF THE PHILIPPINE ISLANDS, G.R. No. 139736


P e t i t i o n e r, Present:

PUNO,
Chairman
AUSTRIA-MARTINEZ,
- versus- CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

Promulgated:
COMMISSIONER OF INTERNAL
REVENUE, October 17, 2005
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CHICO-NAZARIO, J.:

This Petition for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil Procedure, assails the Decision of the
Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999,[1] which reversed and set aside the Decision of
the Court of Tax Appeals (CTA), dated 02 February 1999, [2] and which reinstated Assessment No. FAS-5-85-89-
002054 requiring petitioner Bank of the Philippine Islands (BPI) to pay the amount of P28,020.00 as deficiency
documentary stamp tax (DST) for the taxable year 1985, inclusive of the compromise penalty.
There is hardly any controversy as to the factual antecedents of this Petition.

Petitioner BPI is a commercial banking corporation organized and existing under the laws of the Philippines.
On two separate occasions, particularly on 06 June 1985 and 14 June 1985, it sold United States (US) $500,000.00
to the Central Bank of the Philippines (Central Bank), for the total sales amount of US$1,000,000.00.

On 10 October 1989, the Bureau of Internal Revenue (BIR) issued Assessment No. FAS-5-85-89-
002054,[3] finding petitioner BPI liable for deficiency DST on its afore-mentioned sales of foreign bills of exchange to
the Central Bank, computed as follows

1985 Deficiency Documentary Stamp Tax

Foreign Bills of Exchange.. P 18,480,000.00

Tax Due Thereon:

P18,480,000.00 x P0.30 (Sec. 182 NIRC). 27,720.00


P200.00

Add: Suggested compromise penalty. 300.00

TOTAL AMOUNT DUE AND COLLECTIBLE. P 28,020.00

Petitioner BPI received the Assessment, together with the attached Assessment Notice, [4] on 20 October 1989.

Petitioner BPI, through its counsel, protested the Assessment in a letter dated 16 November 1989, and filed
with the BIR on 17 November 1989. The said protest letter is reproduced in full below
November 16, 1989
The Commissioner of Internal Revenue
Quezon City

Attention of: Mr. Pedro C. Aguillon


Asst. Commissioner for Collection

Sir:

On behalf of our client, Bank of the Philippine Islands (BPI), we have the honor to protest
your assessment against it for deficiency documentary stamp tax for the year 1985 in the amount
of P28,020.00, arising from its sale to the Central Bank of U.S. $500,000.00 on June 6, 1985 and
another U.S. $500,000.00 on June 14, 1985.

1. Under established market practice, the documentary stamp tax on telegraphic transfers
or sales of foreign exchange is paid by the buyer. Thus, when BPI sells to any party, the cost of
documentary stamp tax is added to the total price or charge to the buyer and the seller affixes the
corresponding documentary stamp on the document. Similarly, when the Central Bank sells foreign
exchange to BPI, it charges BPI for the cost of the documentary stamp on the transaction.

2. In the two transactions subject of your assessment, no documentary stamps were


affixed because the buyer,
Central Bank of the Philippines, was exempt from such tax. And while it is true that under P.D.
1994, a proviso was added to sec. 222 (now sec. 186) of the Tax Code that whenever one party to
a taxable document enjoys exemption from the tax herein imposed, the other party thereto who is
not exempt shall be the one directly liable for the tax, this proviso (and the other amendments of
P.D. 1994) took effect only on January 1, 1986, according to sec. 49 of P.D. 1994. Hence, the
liability for the documentary stamp tax could not be shifted to the seller.

In view of the foregoing, we request that the assessment be revoked and cancelled.

Very truly yours,


PADILLA LAW OFFICE
By:

(signed)
SABINO PADILLA, JR.[5]

Petitioner BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992, the
BIR issued a Warrant of Distraint and/or Levy[6] against petitioner BPI for the assessed deficiency DST for taxable
year 1985, in the amount of P27,720.00 (excluding the compromise penalty of P300.00). It served the Warrant on
petitioner BPI only on 23 October 1992.[7]

Then again, petitioner BPI did not hear from the BIR until 11 September 1997, when its counsel received a
letter, dated 13 August 1997, signed by then BIR Commissioner Liwayway Vinzons-Chato, denying its request for
reconsideration, and addressing the points raised by petitioner BPI in its protest letter, dated 16 November 1989, thus

In reply, please be informed that after a thorough and careful study of the facts of the case
as well as the law and jurisprudence pertinent thereto, this Office finds the above argument to be
legally untenable. It is admitted that while industry practice or market convention has the force of
law between the members of a particular industry, it is not binding with the BIR since it is not a
party thereto. The same should, therefore, not be allowed to prejudice the Bureau of its lawful task
of collecting revenues necessary to defray the expenses of the government. (Art. 11 in relation to
Art. 1306 of the New Civil Code.)

Moreover, let it be stated that even before the amendment of Sec. 222 (now Sec. 173) of
the Tax Code, as amended, the same was already interpreted to hold that the other party who is
not exempt from the payment of documentary stamp tax liable from the tax. This interpretation was
further strengthened by the following BIR Rulings which in substance state:

1. BIR Unnumbered Ruling dated May 30, 1977


x x x Documentary stamp taxes are payable by either person, signing, issuing, accepting,
or transferring the instrument, document or paper. It is now settled that where one party to the
instrument is exempt from said taxes, the other party who is not exempt should be liable.

2. BIR Ruling No. 144-84 dated September 3, 1984

x x x Thus, where one party to the contract is exempt from said tax, the other party, who is
not exempt, shall be liable therefore. Accordingly, since A.J.L. Construction Corporation, the other
party to the contract and the one assuming the payment of the expenses incidental to the
registration in the vendees name of the property sold, is not exempt from said tax, then it is the one
liable therefore, pursuant to Sec. 245 (now Sec. 196), in relation to Sec. 222 (now Sec. 173), both
of the Tax Code of 1977, as amended.

Premised on all the foregoing considerations, your request for reconsideration is hereby
DENIED.[8]

Upon receipt of the above-cited letter from the BIR, petitioner BPI proceeded to file a Petition for Review
with the CTA on 10 October 1997;[9] to which respondent BIR Commissioner, represented by the Office of the
Solicitor General, filed an Answer on 08 December 1997. [10]

Petitioner BPI raised in its Petition for Review before the CTA, in addition to the arguments presented in its
protest letter, dated 16 November 1989, the defense of prescription of the right of respondent BIR Commissioner to
enforce collection of the assessed amount. It alleged that respondent BIR Commissioner only had three years to
collect on Assessment N o . FAS-5-85-89-002054, but she waited for seven years and nine months to deny the
protest. In her Answer and subsequent Memorandum, respondent BIR Commissioner merely reiterated her position,
as stated in her letter to petitioner BPI, dated 13 August 1997, which denied the latters protest; and remained silent
as to the expiration of the prescriptive period for collection of the assessed deficiency DST.

After due trial, the CTA rendered a Decision on 02 February 1999, in which it identified two primary issues in
the controversy between petitioner BPI and respondent BIR Commissioner: (1) whether or not the right of respondent
BIR Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed;
and (2) whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the
Central Bank were subject to DST.

The CTA answered the first issue in the negative and held that the statute of limitations for respondent BIR
Commissioner to collect on the Assessment had not yet prescribed. In resolving the issue of prescription, the CTA
reasoned that

In the case of Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc.,
G.R. No. 76281, September 30, 1991, 202 SCRA 125, the Supreme Court laid to rest the first
issue. It categorically ruled that a protest is to be treated as request for reinvestigation or
reconsideration and a mere request for reexamination or reinvestigation tolls the prescriptive period
of the Commissioner to collect on an assessment. . .
...

In the case at bar, there being no dispute that petitioner filed its protest on the subject
assessment on November 17, 1989, there can be no conclusion other than that said protest
stopped the running of the prescriptive period of the Commissioner to collect.

Section 320 (now 223) of the Tax Code, clearly states that a request for reinvestigation
which is granted by the Commissioner, shall suspend the prescriptive period to collect. The
underscored portion above does not mean that the Commissioner will cancel the subject
assessment but should be construed as when the same was entertained by the Commissioner by
not issuing any warrant of distraint or levy on the properties of the taxpayer or any action prejudicial
to the latter unless and until the request for reinvestigation is finally given due course. Taking into
consideration this provision of law and the aforementioned ruling of the Supreme Court in Wyeth
Suaco which specifically and categorically states that a protest could be considered as a request
for reinvestigation, We rule that prescription has not set in against the government. [11]
The CTA had likewise resolved the second issue in the negative. Referring to its own decision in an earlier
case, Consolidated Bank & Trust Co. v. The Commissioner of Internal Revenue,[12] the CTA reached the conclusion
that the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were not subject to DST

From the abovementioned decision of this Court, it can be gleaned that the Central Bank,
during the period June 11, 1984 to March 9, 1987 enjoyed tax exemption privilege, including the
payment of documentary stamp tax (DST) pursuant to Resolution No. 35-85 dated May 3, 1985 of
the Fiscal Incentive Review Board. As such, the Central Bank, as buyer of the foreign currency, is
exempt from paying the documentary stamp tax for the period above-mentioned. This Court further
expounded that said tax exemption of the Central Bank was modified beginning January 1, 1986
when Presidential Decree (P.D.) 1994 took effect. Under this decree, the liability for DST on sales
of foreign currency to the Central Bank is shifted to the seller.

Applying the above decision to the case at bar, petitioner cannot be held liable for DST on
its 1985 sales of foreign currencies to the Central Bank, as the latter who is the purchaser of the
subject currencies is the one liable thereof. However, since the Central Bank is exempt from all
taxes during 1985 by virtue of Resolution No. 35-85 of the Fiscal Incentive Review Board dated
March 3, 1985, neither the petitioner nor the Central Bank is liable for the payment of the
documentary stamp tax for the formers 1985 sales of foreign currencies to the latter. This
aforecited case of Consolidated Bank vs. Commissioner of Internal Revenue was affirmed by the
Court of Appeals in its decision dated March 31, 1995, CA-GR Sp. No. 35930. Said decision was in
turn affirmed by the Supreme Court in its resolution denying the petition filed by Consolidated Bank
dated November 20, 1995 with the Supreme Court under Entry of Judgment dated March 1,
1996.[13]

In sum, the CTA decided that the statute of limitations for respondent BIR Commissioner to collect on
Assessment No. FAS-5-85-89-002054 had not yet prescribed; nonetheless, it still ordered the cancellation of the said
Assessment because the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were
tax-exempt.

Herein respondent BIR Commissioner appealed the Decision of the CTA to the Court of Appeals. In its
Decision dated 11 August 1999,[14] the Court of Appeals sustained the finding of the CTA on the first issue, that the
running of the prescriptive period for collection on Assessment No. FAS-5-85-89-002054 was suspended when
herein petitioner BPI filed a protest on 17 November 1989 and, therefore, the prescriptive period for collection on the
Assessment had not yet lapsed. In the same Decision, however, the Court of Appeals reversed the CTA on the
second issue and basically adopted the position of the respondent BIR Commissioner that the sales of foreign
currency by petitioner BPI to the Central Bank in taxable year 1985 were subject to DST. The Court of Appeals, thus,
ordered the reinstatement of Assessment No. FAS-5-85-89-002054 which required petitioner BPI to pay the amount
of P28,020.00 as deficiency DST for taxable year 1985, inclusive of the compromise penalty.

Comes now petitioner BPI before this Court in this Petition for Review on Certiorari, seeking resolution of the
same two legal issues raised and discussed in the courts below, to reiterate: (1) whether or not the right of
respondent BIR Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had
prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner
BPI to the Central Bank were subject to DST.

I
The efforts of respondent Commissioner to collect on Assessment No. FAS-5-85-89-002054 were
already barred by prescription.

Anent the question of prescription, this Court disagrees in the Decisions of the CTA and the Court of
Appeals, and herein determines the statute of limitations on collection of the deficiency DST in Assessment No. FAS-
5-85-89-002054 had already prescribed.

The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section 203
of the Tax Code of 1977, as amended,[15] which provides that
SEC. 203. Period of limitation upon assessment and collection. Except as provided in the
succeeding section, internal revenue taxes shall be assessed within three 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-year period shall be counted
from the day the return was filed. For the purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day.[16]

The three-year period of limitations on the assessment and collection of national internal revenue taxes set
by Section 203 of the Tax Code of 1977, as amended, can be affected, adjusted, or suspended, in accordance with
the following provisions of the same Code

SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes. (a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax
may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud, or
omission: 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.

(b) If before the expiration of the time prescribed in the preceding section for the
assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made before the expiration of the
period previously agreed upon.

(c) Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court within three
years following the assessment of the tax.

(d) Any internal revenue tax which has been assessed within the period agreed upon as
provided in paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in
court within the period agreed upon in writing before the expiration of the three-year period. The
period so agreed upon may be extended by subsequent written agreements made before the
expiration of the period previously agreed upon.

(e) Provided, however, That nothing in the immediately preceding section and paragraph
(a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax
returns filed in accordance with the provisions of any tax amnesty law or decree. [17]

SEC. 224. Suspension of running of statute. The running of the statute of limitation
provided in Section[s] 203 and 223 on the making of assessment and the beginning of distraint or
levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the
period during which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests
for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the
running of the statute of limitations will not be suspended; when the warrant of distraint and levy is
duly served upon the taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines.[18]

As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual filing of
the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a
national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case
of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for
assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the
BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the
BIR has another three years[19] after the assessment within which to collect the national internal revenue tax due
thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the three-year
period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed
or sent by the BIR to the taxpayer.[20]

In the present Petition, there is no controversy on the timeliness of the issuance of the Assessment, only on
the prescription of the period to collect the deficiency DST following its Assessment. While Assessment No. FAS-5-
85-89-002054 and its corresponding Assessment Notice were both dated 10 October 1989 and were received by
petitioner BPI on 20 October 1989, there was no showing as to when the said Assessment and Assessment Notice
were released, mailed or sent by the BIR. Still, it can be granted that the latest date the BIR could have released,
mailed or sent the Assessment and Assessment Notice to petitioner BPI was on the same date they were received by
the latter, on 20 October 1989. Counting the three-year prescriptive period, for a total of 1,095 days,[21] from 20
October 1989, then the BIR only had until 19 October 1992 within which to collect the assessed deficiency DST.

The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and
service of a Warrant of Distraint and/or Levy on petitioner BPI. Although the Warrant was issued on 15 October 1992,
previous to the expiration of the period for collection on 19 October 1992, the same was served on petitioner BPI only
on 23 October 1992.

Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of Distraint
and/or Levy be fully executed so that it can suspend the running of the statute of limitations on the collection of the
tax. It is enough that the proceedings have validly began or commenced and that their execution has not been
suspended by reason of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence
establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the
Warrant and service thereof on the taxpayer.[22] It is only logical to require that the Warrant of Distraint and/or Levy
be, at the very least, served upon the taxpayer in order to suspend the running of the prescriptive period for collection
of an assessed tax, because it may only be upon the service of the Warrant that the taxpayer is informed of the denial
by the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the tax
assessed.

If the service of the Warrant of Distraint and/or Levy on petitioner BPI on 23 October 1992 was already
beyond the prescriptive period for collection of the deficiency DST, which had expired on 19 October 1992, then what
more the letter of respondent BIR Commissioner, dated 13 August 1997 and received by the counsel of the petitioner
BPI only on 11 September 1997, denying the protest of petitioner BPI and requesting payment of the deficiency DST?
Even later and more unequivocally barred by prescription on collection was the demand made by respondent BIR
Commissioner for payment of the deficiency DST in her Answer to the Petition for Review of petitioner BPI before the
CTA, filed on 08 December 1997.[23]

II

There is no valid ground for the suspension of the running of the prescriptive period for collection of
the assessed DST under the Tax Code of 1977, as amended.

In their Decisions, both the CTA and the Court of Appeals found that the filing by petitioner BPI of a protest
letter suspended the running of the prescriptive period for collecting the assessed DST. This Court, however, takes
the opposing view, and, based on the succeeding discussion, concludes that there is no valid ground for suspending
the running of the prescriptive period for collection of the deficiency DST assessed against petitioner BPI.

A. The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and, thus, shall
be construed liberally in his favor.

Though the statute of limitations on assessment and collection of national internal revenue taxes benefits
both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable
investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said
taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time.[24] As aptly explained in Republic of the Philippines v. Ablaza[25]

The law prescribing a limitation of actions for the collection of the income tax is beneficial
both to the Government and to its citizens; to the Government because tax officers would be
obliged to act promptly in the making of assessment, and to citizens because after the lapse of the
period of prescription citizens would have a feeling of security against unscrupulous tax agents who
will always find an excuse to inspect the books of taxpayers, not to determine the latters 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 beneficent purpose of affording protection to the taxpayer within the contemplation of the
Commission which recommend the approval of the law.

In order to provide even better protection to the taxpayer against unreasonable investigation, the Tax Code of 1977,
as amended, identifies specifically in Sections 223 and 224 [26] thereof the circumstances when the prescriptive
periods for assessing and collecting taxes could be suspended or interrupted.

To give effect to the legislative intent, these provisions on the statute of limitations on assessment and collection of
taxes shall be construed and applied liberally in favor of the taxpayer and strictly against the Government.

B. The statute of limitations on assessment and collection of national internal revenue taxes may be waived, subject
to certain conditions, under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended,
respectively. Petitioner BPI, however, did not execute any such waiver in the case at bar.

According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the prescriptive
periods for assessment and collection of national internal revenue taxes, respectively, could be waived by agreement,
to wit

SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes.


...

(b) If before the expiration of the time prescribed in the preceding section for the
assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its
assessment after such time the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made before the expiration of the
period previously agreed upon.
...

(d) Any internal revenue tax which has been assessed within the period agreed upon as
provided in paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in
court within the period agreed upon in writing before the expiration of the three-year period. The
period so agreed upon may be extended by subsequent written agreements made before the
expiration of the period previously agreed upon. [27]

The agreements so described in the afore-quoted provisions are often referred to as waivers of the statute of
limitations. The waiver of the statute of limitations, whether on assessment or collection, should not be construed as a
waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR
to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does
not mean that the taxpayer relinquishes the right to invoke prescription unequivocally. [28]

A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of
1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the
expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the
ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by
subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The
BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed
procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of
the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription
of the right to assess and collect shall be administratively dealt with.
This Court had consistently ruled in a number of cases that a request for reconsideration or reinvestigation
by the taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as
required by the Tax Code and implementing rules, will not suspend the running thereof. [29]

In the Petition at bar, petitioner BPI executed no such waiver of the statute of limitations on the collection of
the deficiency DST per Assessment No. FAS-5-85-89-002054. In fact, an internal memorandum of the Chief of the
Legislative, Ruling & Research Division of the BIR to her counterpart in the Collection Enforcement Division, dated 15
October 1992, expressly noted that, The taxpayer fails to execute a Waiver of the Statute of Limitations extending the
period of collection of the said tax up to December 31, 1993 pending reconsideration of its protest. . . [30] Without a
valid waiver, the statute of limitations on collection by the BIR of the deficiency DST could not have been suspended
under paragraph (d) of Section 223 of the Tax Code of 1977, as amended.

C. The protest filed by petitioner BPI did not constitute a request for reinvestigation, granted by the respondent BIR
Commissioner, which could have suspended the running of the statute of limitations on collection of the
assessed deficiency DST under Section 224 of the Tax Code of 1977, as amended.

The Tax Code of 1977, as amended, also recognizes instances when the running of the statute of limitations
on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a
waiver, under Section 224 thereof, which reads

SEC. 224. Suspension of running of statute. The running of the statute of limitation
provided in Section[s] 203 and 223 on the making of assessment and the beginning of distraint or
levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the
period during which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests
for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the
running of the statute of limitations will not be suspended; when the warrant of distraint and levy is
duly served upon the taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines.[31]

Of particular importance to the present case is one of the circumstances enumerated in Section 224 of the Tax Code
of 1977, as amended, wherein the running of the statute of limitations on assessment and collection of taxes is
considered suspended when the taxpayer requests for a reinvestigation which is granted by the Commissioner.

This Court gives credence to the argument of petitioner BPI that there is a distinction between a request for
reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November
1985 by the Secretary of Finance, upon the recommendation of the BIR Commissioner, governs the procedure for
protesting an assessment and distinguishes between the two types of protest, as follows

PROTEST TO ASSESSMENT

SEC. 6. Protest. The taxpayer may protest administratively an assessment by filing a


written request for reconsideration or reinvestigation. . .
...

For the purpose of the protest herein

(a) Request for reconsideration. refers to a plea for a re-evaluation of an assessment on


the basis of existing records without need of additional evidence. It may involve both a question
of fact or of law or both.

(b) Request for reinvestigation. refers to a plea for re-evaluation of an assessment on the
basis of newly-discovered or additional evidence that a taxpayer intends to present in the
reinvestigation. It may also involve a question of fact or law or both.
With the issuance of RR No. 12-85 on 27 November 1985 providing the above-quoted distinctions between
a request for reconsideration and a request for reinvestigation, the two types of protest can no longer be used
interchangeably and their differences so lightly brushed aside. It bears to emphasize that under Section 224 of the
Tax Code of 1977, as amended, the running of the prescriptive period for collection of taxes can only be suspended
by a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the
reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment,
which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the
statute of limitations on collection of the assessed tax, while the latter can not.

The protest letter of petitioner BPI, dated 16 November 1989 and filed with the BIR the next day, on 17
November 1989, did not specifically request for either a reconsideration or reinvestigation. A close review of the
contents thereof would reveal, however, that it protested Assessment No. FAS-5-85-89-002054 based on a question
of law, in particular, whether or not petitioner BPI was liable for DST on its sales of foreign currency to the Central
Bank in taxable year 1985. The same protest letter did not raise any question of fact; neither did it offer to present any
new evidence. In its own letter to petitioner BPI, dated 10 September 1992, the BIR itself referred to the protest of
petitioner BPI as a request for reconsideration. [32] These considerations would lead this Court to deduce that the
protest letter of petitioner BPI was in the nature of a request for reconsideration, rather than a request for
reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the suspension of the
running of the statute of limitations should not apply.

Even if, for the sake of argument, this Court glosses over the distinction between a request for
reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a request for
reinvestigation, the filing thereof could not have suspended at once the running of the statute of limitations. Article
224 of the Tax Code of 1977, as amended, very plainly requires that the request for reinvestigation had
been granted by the BIR Commissioner to suspend the running of the prescriptive periods for assessment and
collection.

That the BIR Commissioner must first grant the request for reinvestigation as a requirement for suspension
of the statute of limitations is even supported by existing jurisprudence.

In the case of Republic of the Philippines v. Gancayco,[33] taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the
evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not
at all examined. Considering the given facts, this Court pronounced that

. . .The act of requesting a reinvestigation alone does not suspend the period. The
request should first be granted, in order to effect suspension. (Collector vs. Suyoc
Consolidated, supra; also Republic vs. Ablaza, supra). Moreover, the Collector gave appellee until
April 1, 1949, within which to submit his evidence, which the latter did one day before. There were
no impediments on the part of the Collector to file the collection case from April 1, 1949. . . . [34]

In Republic of the Philippines v. Acebedo,[35] this Court similarly found that

. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked
for a reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request
was considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal
Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. D), but
there was no follow-up of this warrant. Consequently, the request for reinvestigation did not
suspend the running of the period for filing an action for collection.

The burden of proof that the taxpayers request for reinvestigation had been actually granted shall be on
respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the
actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for
reinvestigation.
In Querol v. Collector of Internal Revenue,[36] the BIR, after receiving the protest letters of taxpayer Querol,
sent a tax examiner to San Fernando, Pampanga, to conduct the reinvestigation; as a result of which, the original
assessment against taxpayer Querol was revised by permitting him to deduct reasonable depreciation. In another
case, Republic of the Philippines v. Lopez,[37] taxpayer Lopez filed a total of four petitions for reconsideration and
reinvestigation. The first petition was denied by the BIR. The second and third petitions were granted by the BIR and
after each reinvestigation, the assessed amount was reduced. The fourth petition was again denied and, thereafter,
the BIR filed a collection suit against taxpayer Lopez. When the taxpayers spouses Sison, in Commissioner of
Internal Revenue v. Sison,[38] contested the assessment against them and asked for a reinvestigation, the BIR
ordered the reinvestigation resulting in the issuance of an amended assessment. Lastly, in Republic of the Philippines
v. Oquias,[39] the BIR granted taxpayer Oquiass request for reinvestigation and duly notified him of the date when
such reinvestigation would be held; only, neither taxpayer Oquias nor his counsel appeared on the given date.

In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was evidently
granted and actual reinvestigation was conducted by the BIR, which eventually resulted in the issuance of an
amended assessment. On the basis of these facts, this Court ruled in the same cases that the period between the
request for reinvestigation and the revised assessment should be subtracted from the total prescriptive period for the
assessment of the tax; and, once the assessment had been reconsidered at the taxpayers instance, the period for
collection should begin to run from the date of the reconsidered or modified assessment. [40]

The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by
petitioner BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and (2) even
granting that the protest of petitioner BPI was a request for reinvestigation, there was no showing that it was granted
by respondent BIR Commissioner and that actual reinvestigation had been conducted.

Going back to the administrative records of the present case, it would seem that the BIR, after receiving a
copy of the protest letter of petitioner BPI on 17 November 1989, did not attempt to communicate at all with the latter
until 10 September 1992, less than a month before the prescriptive period for collection on Assessment No. FAS-5-
85-89-002054 was due to expire. There were internal communications, mostly indorsements of the docket of the case
from one BIR division to another; but these hardly fall within the same sort of acts in the previously discussed cases
that satisfactorily demonstrated the grant of the taxpayers request for reinvestigation. Petitioner BPI, in the meantime,
was left in the dark as to the status of its protest in the absence of any word from the BIR. Besides, in its letter to
petitioner BPI, dated 10 September 1992, the BIR unwittingly admitted that it had not yet acted on the protest of the
former

This refers to your protest against and/or request for reconsideration of the assessment/s
of this Office against you involving the amount of P28,020.00 under FAS-5-85-89-002054 dated
October 23, 1989 as deficiency documentary stamp tax inclusive of compromise penalty for the
year 1985.

In this connection, it is requested that the enclosed waiver of the statute of limitations
extending the period of collection of the said tax/es to December 31, 1993 be executed by you as a
condition precedent of our giving due course to your protest[41]

When the BIR stated in its letter, dated 10 September 1992, that the waiver of the statute of limitations on collection
was a condition precedent to its giving due course to the request for reconsideration of petitioner BPI, then it was
understood that the grant of such request for reconsideration was being held off until compliance with the given
condition. When petitioner BPI failed to comply with the condition precedent, which was the execution of the waiver,
the logical inference would be that the request was not granted and was not given due course at all.

III
The suspension of the statute of limitations on collection of the assessed deficiency DST from
petitioner BPI does not find support in jurisprudence.

It is the position of respondent BIR Commissioner, affirmed by the CTA and the Court of Appeals, that the
three-year prescriptive period for collecting on Assessment No. FAS-5-85-89-002054 had not yet prescribed,
because the said prescriptive period was suspended, invoking the case of Commissioner of Internal Revenue v.
Wyeth Suaco Laboratories, Inc.[42] It was in this case in which this Court ruled that the prescriptive period provided by
law to make a collection is interrupted once a taxpayer requests for reinvestigation or reconsideration of the
assessment.
Petitioner BPI, on the other hand, is requesting this Court to revisit the Wyeth Suaco case contending that it
had unjustifiably expanded the grounds for suspending the prescriptive period for collection of national internal
revenue taxes.

This Court finds that although there is no compelling reason to abandon its decision in the Wyeth Suaco case, the
said case cannot be applied to the particular facts of the Petition at bar.

A. The only exception to the statute of limitations on collection of taxes, other than those already provided in the Tax
Code, was recognized in the Suyoc case.

As had been previously discussed herein, the statute of limitations on assessment and collection of national
internal revenue taxes may be suspended if the taxpayer executes a valid waiver thereof, as provided in paragraphs
(b) and (d) of Section 223 of the Tax Code of 1977, as amended; and in specific instances enumerated in Section
224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner. Outside of
these statutory provisions, however, this Court also recognized one other exception to the statute of limitations on
collection of taxes in the case of Collector of Internal Revenue v. Suyoc Consolidated Mining Co.[43]

In the said case, the Collector of Internal Revenue issued an assessment against taxpayer Suyoc
Consolidated Mining Co. on 11 February 1947 for deficiency income tax for the taxable year 1941. Taxpayer Suyoc
requested for at least a year within which to pay the amount assessed, but at the same time, reserving its right to
question the correctness of the assessment before actual payment. The Collector granted taxpayer Suyoc an
extension of only three months to pay the assessed tax. When taxpayer Suyoc failed to pay the assessed tax within
the extended period, the Collector sent it a demand letter, dated 28 November 1950. Upon receipt of the demand
letter, taxpayer Suyoc asked for a reinvestigation and reconsideration of the assessment, but the Collector denied the
request. Taxpayer Suyoc reiterated its request for reconsideration on 25 April 1952, which was denied again by the
Collector on 06 May 1953. Taxpayer Suyoc then appealed the denial to the Conference Staff. The Conference Staff
heard the appeal from 02 September 1952 to 16 July 1955, and the negotiations resulted in the reduction of the
assessment on 26 July 1955. It was the collection of the reduced assessment that was questioned before this Court
for being enforced beyond the prescriptive period. [44]

In resolving the issue on prescription, this Court ratiocinated thus

It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint
or levy or by proceeding in court within the 5-year period from the filing of the second amended
final return due to the several requests of respondent for extension to which petitioner yielded to
give it every opportunity to prove its claim regarding the correctness of the assessment. Because of
such requests, several reinvestigations were made and a hearing was even held by the Conference
Staff organized in the collection office to consider claims of such nature which, as the record
shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is
most unfair for respondent to now take advantage of such desistance to elude his deficiency
income tax liability to the prejudice of the Government invoking the technical ground of prescription.

While we may agree with the Court of Tax Appeals that a mere request for reexamination
or reinvestigation may not have the effect of suspending the running of the period of limitation for in
such case there is need of a written agreement to extend the period between the Collector and the
taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense
of prescription even if he has not previously waived it in writing as when by his repeated requests
or positive acts the Government has been, for good reasons, persuaded to postpone
collection to make him feel that the demand was not unreasonable or that no harassment or
injustice is meant by the Government. And when such situation comes to pass there are
authorities that hold, based on weighty reasons, that such an attitude or behavior should not be
countenanced if only to protect the interest of the Government.[45]

By the principle of estoppel, taxpayer Suyoc was not allowed to raise the defense of prescription against the efforts of
the Government to collect the tax assessed against it. This Court adopted the following principle from American
jurisprudence: He who prevents a thing from being done may not avail himself of the nonperformance which he has
himself occasioned, for the law says to him in effect this is your own act, and therefore you are not damnified. [46]
In the Suyoc case, this Court expressly conceded that a mere request for reconsideration or reinvestigation of an
assessment may not suspend the running of the statute of limitations. It affirmed the need for a waiver of the
prescriptive period in order to effect suspension thereof. However, even without such waiver, the taxpayer may be
estopped from raising the defense of prescription because by his repeated requests or positive acts, he had induced
Government authorities to delay collection of the assessed tax.

Based on the foregoing, petitioner BPI contends that the declaration made in the later case of Wyeth Suaco, that the
statute of limitations on collection is suspended once the taxpayer files a request for reconsideration or
reinvestigation, runs counter to the ruling made by this Court in the Suyoc case.

B. Although this Court is not compelled to abandon its decision in the Wyeth Suaco case, it finds that Wyeth Suaco is
not applicable to the Petition at bar because of the distinct facts involved herein.

In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit withholding taxes on royalties
and dividend declarations, as well as, for deficiency sales tax. The BIR issued two assessments, dated 16 December
1974 and 17 December 1974, both received by taxpayer Wyeth Suaco on 19 December 1974. Taxpayer Wyeth
Suaco, through its tax consultant, SGV & Co., sent to the BIR two letters, dated 17 January 1975 and 08 February
1975, protesting the assessments and requesting their cancellation or withdrawal on the ground that said
assessments lacked factual or legal basis. On 12 September 1975, the BIR Commissioner advised taxpayer Wyeth
Suaco to avail itself of the compromise settlement being offered under Letter of Instruction No. 308. Taxpayer Wyeth
Suaco manifested its conformity to paying a compromise amount, but subject to certain conditions; though,
apparently, the said compromise amount was never paid. On 10 December 1979, the BIR Commissioner rendered a
decision reducing the assessment for deficiency withholding tax against taxpayer Wyeth Suaco, but maintaining the
assessment for deficiency sales tax. It was at this point when taxpayer Wyeth Suaco brought its case before the CTA
to enjoin the BIR from enforcing the assessments by reason of prescription. Although the CTA decided in favor of
taxpayer Wyeth Suaco, it was reversed by this Court when the case was brought before it on appeal. According to
the decision of this Court

Settled is the rule that the prescriptive period provided by law to make a collection by
distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for
reinvestigation or reconsideration of the assessment. . .
...

Although the protest letters prepared by SGV & Co. in behalf of private respondent did not
categorically state or use the words reinvestigation and reconsideration, the same are to be treated
as letters of reinvestigation and reconsideration

These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to
collect the deficiency taxes. The Bureau of Internal Revenue, after having reviewed the
records of Wyeth Suaco, in accordance with its request for reinvestigation, rendered a final
assessment It was only upon receipt by Wyeth Suaco of this final assessment that the five-year
prescriptive period started to run again.[47]

The foremost criticism of petitioner BPI of the Wyeth Suaco decision is directed at the statement made
therein that, settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or
by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the
assessment.[48] It would seem that both petitioner BPI and respondent BIR Commissioner, as well as, the CTA and
Court of Appeals, take the statement to mean that the filing alone of the request for reconsideration or reinvestigation
can already interrupt or suspend the running of the prescriptive period on collection. This Court therefore takes this
opportunity to clarify and qualify this statement made in the Wyeth Suaco case. While it is true that, by itself, such
statement would appear to be a generalization of the exceptions to the statute of limitations on collection, it is best
interpreted in consideration of the particular facts of the Wyeth Suaco case and previous jurisprudence.

The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are substantial differences
in the factual backgrounds of the two cases. The Suyoc case refers to a situation where there were repeated
requests or positive acts performed by the taxpayer that convinced the BIR to delay collection of the assessed tax.
This Court pronounced therein that the repeated requests or positive acts of the taxpayer prevented or estopped it
from setting up the defense of prescription against the Government when the latter attempted to collect the assessed
tax. In the Wyeth Suaco case, taxpayer Wyeth Suaco filed a request for reinvestigation, which was apparently
granted by the BIR and, consequently, the prescriptive period was indeed suspended as provided under Section 224
of the Tax Code of 1977, as amended.[49]

To reiterate, Section 224 of the Tax Code of 1977, as amended, identifies specific circumstances when the
statute of limitations on assessment and collection may be interrupted or suspended, among which is a request for
reinvestigation that is granted by the BIR Commissioner. The act of filing a request for reinvestigation alone does not
suspend the period; such request must be granted.[50] The grant need not be express, but may be implied from the
acts of the BIR Commissioner or authorized BIR officials in response to the request for reinvestigation.[51]

This Court found in the Wyeth Suaco case that the BIR actually conducted a reinvestigation, in accordance
with the request of the taxpayer Wyeth Suaco, which resulted in the reduction of the assessment originally issued
against it. Taxpayer Wyeth Suaco was also aware that its request for reinvestigation was granted, as written by its
Finance Manager in a letter dated 01 July 1975, addressed to the Chief of the Tax Accounts Division, wherein he
admitted that, [a]s we understand, the matter is now undergoing review and consideration by your Manufacturing
Audit Division The statute of limitations on collection, then, started to run only upon the issuance and release of the
reduced assessment.

The Wyeth Suaco case, therefore, is correct in declaring that the prescriptive period for collection is
interrupted or suspended when the taxpayer files a request for reinvestigation, provided that, as clarified and qualified
herein, such request is granted by the BIR Commissioner.

Thus, this Court finds no compelling reason to abandon its decision in the Wyeth Suaco case. It also now
rules that the said case is not applicable to the Petition at bar because of the distinct facts involved herein. As already
heretofore determined by this Court, the protest filed by petitioner BPI was a request for reconsideration, which
merely required a review of existing evidence and the legal basis for the assessment. Respondent BIR Commissioner
did not require, neither did petitioner BPI offer, additional evidence on the matter. After petitioner BPI filed its request
for reconsideration, there was no other communication between it and respondent BIR Commissioner or any of the
authorized representatives of the latter. There was no showing that petitioner BPI was informed or aware that its
request for reconsideration was granted or acted upon by the BIR.
IV
Conclusion

To summarize all the foregoing discussion, this Court lays down the following rules on the exceptions to the
statute of limitations on collection.

The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in
accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and the existence of the
circumstances enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by
the BIR Commissioner.

Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is
no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in
estoppel and be prevented from setting up the defense of prescription of the statute of limitations on collection when,
by his own repeated requests or positive acts, the Government had been, for good reasons, persuaded to postpone
collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant
by the Government, as laid down by this Court in the Suyoc case.

Applying the given rules to the present Petition, this Court finds that
(a) The statute of limitations for collection of the deficiency DST in Assessment No. FAS-5-85-89-002054, issued
against petitioner BPI, had already expired; and
(b) None of the conditions and requirements for exception from the statute of limitations on collection exists herein:
Petitioner BPI did not execute any waiver of the prescriptive period on collection as mandated by paragraph (d) of
Section 223 of the Tax Code of 1977, as amended; the protest filed by petitioner BPI was a request for
reconsideration, not a request for reinvestigation that was granted by respondent BIR Commissioner which could
have suspended the prescriptive period for collection under Section 224 of the Tax Code of 1977, as amended; and,
petitioner BPI, other than filing a request for reconsideration of Assessment No. FAS-5-85-89-002054, did not make
repeated requests or performed positive acts that could have persuaded the respondent BIR Commissioner to delay
collection, and that would have prevented or estopped petitioner BPI from setting up the defense of prescription
against collection of the tax assessed, as required in the Suyoc case.
This is a simple case wherein respondent BIR Commissioner and other BIR officials failed to act promptly in resolving
and denying the request for reconsideration filed by petitioner BPI and in enforcing collection on the assessment.
They presented no reason or explanation as to why it took them almost eight years to address the protest of
petitioner BPI. The statute on limitations imposed by the Tax Code precisely intends to protect the taxpayer from such
prolonged and unreasonable assessment and investigation by the BIR.

Considering that the right of the respondent BIR Commissioner to collect from petitioner BPI the deficiency DST in
Assessment No. FAS-5-85-89-002054 had already prescribed, then, there is no more need for this Court to make a
determination on the validity and correctness of the said Assessment for the latter would only be unenforceable.

WHEREFORE, based on the foregoing, the instant Petition is GRANTED. The Decision of the Court of Appeals in
CA-G.R. SP No. 51271, dated 11 August 1999, which reinstated Assessment No. FAS-5-85-89-002054 requiring
petitioner BPI to pay the amount of P28,020.00 as deficiency documentary stamp tax for the taxable year 1985,
inclusive of the compromise penalty, is REVERSED and SET ASIDE. Assessment No. FAS-5-85-89-002054 is
hereby ordered CANCELED.

SO ORDERED.

MINITA V. CHICO-NAZARIO
Associate Justice

WE CONCUR:

R E Y N AT O S . P U N O
Associate Justice
Chairman

MA. ALICIA AUSTRIA-MARTINEZ ROMEO J. CALLEJO, SR.


Associate Justice Associate Justice

DANTE O. TINGA
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

REYNATO S. PUNO
Associate Justice
Chairman, Second Division
CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairmans Attestation, it is hereby certified
that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of
the opinion of the Courts Division.

HILARIO G. DAVIDE, JR.


Chief Justice
Bank of the Philippine Islands vs Commissioner of Internal Revenue

On October 20, 1989, the Bureau of Internal Revenue (BIR) issued a formal assessment notice (FAN) against the
Bank of the Philippine Islands (BPI). The FAN demanded BPI to pay P28k in taxes. In November 1989, BPI filed a
protest however the protest did not specify if it was a request for reconsideration or a reinvestigation. The BIR did not
reply on the protest but on October 15, 1992 (four days before the expiration of the period to collect – or 1095 days [3
years]after issuance of FAN on 10/20/1989), the Commissioner of Internal Revenue (CIR) issued a warrant of
distraint/levy against BPI for the satisfaction of the assessed tax. The warrant was served to BPI on October 23, 1992
(four days after period has prescribed). In September 1997, the CIR finally sent a letter to BPI advising the latter that
its protest is denied.
ISSUE:
1. Whether or not the filing of the protest by BPI suspended the running of the prescriptive period.
2. Whether or not the government’s right to collect the assessed tax has prescribed.
HELD:
No. The protest did not indicate whether BPI was asking for a reconsideration or a reinvestigation but since BPI did
not adduce additional evidence, it should be treated as a request for reconsideration. Under the tax code, a request
for reconsideration does not suspend the running of the prescriptive period. Even assuming that the protest is a
request for reinvestigation, the same did not toll the running of the prescriptive period because the CIR failed to show
proof that the request has been granted and that a reinvestigation has been actually conducted. In fact, BPI never
heard from the BIR not until the CIR decided the protest in September 1997 – 5 years after the protest has been
filed.
Yes. When it comes to collection, even though the warrant for distraint/levy was issued within the prescriptive period,
it is required that the same should be served upon the taxpayer within the prescriptive period. This is because it is
upon the service of the Warrant that the taxpayer is informed of the denial by the BIR of any pending protest of the
said taxpayer, and the resolute intention of the BIR to collect the tax assessed. In the case at bar, BPI received the
warrant 4 days after the expiration of the prescriptive period hence, the right to collect has already prescribed.
FIRST DIVISION

G.R. No. 172509, February 04, 2015

CHINA BANKING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

SERENO, C.J.:

This Rule 45 Petition1 requires this Court to address the question of prescription of the government’s right to collect
taxes. Petitioner China Banking Corporation (CBC) assails the Decision 2 and Resolution3 of the Court of Tax Appeals
(CTA) En Banc in CTA En Banc Case No. 109. The CTA En Banc affirmed the Decision4 in CTA Case No. 6379 of
the CTA Second Division, which had also affirmed the validity of Assessment No. FAS-5-82/85-89-000586 and FAS-
5-86-89-00587. The Assessment required petitioner CBC to pay the amount of P11,383,165.50, plus increments
accruing thereto, as deficiency documentary stamp tax (DST) for the taxable years 1982 to 1986.cralawred

FACTS

Petitioner CBC is a universal bank duly organized and existing under the laws of the Philippines. For the taxable
years 1982 to 1986, CBC was engaged in transactions involving sales of foreign exchange to the Central Bank of the
Philippines (now Bangko Sentral ng Pilipinas), commonly known as SWAP transactions.5 Petitioner did not file tax
returns or pay tax on the SWAP transactions for those taxable years.

On 19 April 1989, petitioner CBC received an assessment from the Bureau of Internal Revenue (BIR) finding CBC
liable for deficiency DST on the sales of foreign bills of exchange to the Central Bank. The deficiency DST was
computed as follows:chanroblesvirtuallawlibrary

Deficiency Documentary Stamp Tax

Amount
For the years 1982 to 1985 P 8,280,696.00
For calendar year 1986 P 2,481 ,975.60
Add : Surcharge P 620,493.90 P 3,102.469.50
P11 ,383,165.506
On 8 May 1989, petitioner CBC, through its vice-president, sent a letter of protest to the BIR. CBC raised the
following defenses: (1) double taxation, as the bank had previously paid the DST on all its transactions involving
sales of foreign bills of exchange to the Central Bank; (2) absence of liability, as the liability for the DST in a sale of
foreign exchange through telegraphic transfers to the Central Bank falls on the buyer ? in this case, the Central Bank;
(3) due process violation, as the bank’s records were never formally examined by the BIR examiners; (4) validity of
the assessment, as it did not include the factual basis therefore; (5) exemption, as neither the tax-exempt entity nor
the other party was liable for the payment of DST before the effectivity of Presidential Decree Nos. (PD) 1177 and
1931 for the years 1982 to 1986.7 In the protest, the taxpayer requested a reinvestigation so as to substantiate its
assertions.8chanRoblesvirtualLawlibrary

On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal Revenue
(CIR) rendered a decision reiterating the deficiency DST assessment and ordered the payment thereof plus
increments within 30 days from receipt of the Decision.9chanRoblesvirtualLawlibrary

On 18 January 2002, CBC filed a Petition for Review with the CTA. On 11 March 2002, the CIR filed an Answer
with a demand for CBC to pay the assessed DST.10chanRoblesvirtualLawlibrary

On 23 February 2005, and after trial on the merits, the CTA Second Division denied the Petition of CBC. The CTA
ruled that a SWAP arrangement should be treated as a telegraphic transfer subject to documentary stamp
tax.11chanRoblesvirtualLawlibrary

On 30 March 2005, petitioner CBC filed a Motion for Reconsideration, but it was denied in a Resolution dated 14 July
2005.
On 5 August 2005, petitioner appealed to the CTA En Banc. The appellate tax court, however, dismissed the Petition
for Review in a Decision dated 1 December 2005. CBC filed a Motion for Reconsideration on 21 December 2005, but
it was denied in a 20 March 2006 Resolution.

The taxpayer now comes to this Court with a Rule 45 Petition, reiterating the arguments it raised at the CTA level and
invoking for the first time the argument of prescription. Petitioner CBC states that the government has three years
from 19 April 1989, the date the former received the assessment of the CIR, to collect the tax. Within that time frame,
however, neither a warrant of distraint or levy was issued, nor a collection case filed in court.

On 17 October 2006, respondent CIR submitted its Comment in compliance with the Court’s Resolution dated 26
June 2006.12 The Comment did not have any discussion on the question of prescription.

On 21 February 2007, the Court issued a Resolution directing the parties to file their respective Memoranda.
Petitioner CBC filed its Memorandum13 on 26 April 2007. The CIR, on the other hand, filed on 17 April 2007 a
Manifestation stating that it was adopting the allegations and authorities in its Comment in lieu of the required
Memorandum.14chanRoblesvirtualLawlibrary

ISSUE

Given the facts and the arguments raised in this case, the resolution of this case hinges on this issue: whether the
right of the BIR to collect the assessed DST from CBC is barred by prescription.15chanRoblesvirtualLawlibrary

RULING OF THE COURT

We grant the Petition on the ground that the right of the BIR to collect the assessed DST is barred by the statute of
limitations.

Prescription Has Set In.

To recall, the Bureau of Internal Revenue (BIR) issued the assessment for deficiency DST on 19 April 1989, when the
applicable rule was Section 319(c) of the National Internal Revenue Code of 1977, as amended. 16 In that provision,
the time limit for the government to collect the assessed tax is set at three years, to be reckoned from the date when
the BIR mails/releases/sends the assessment notice to the taxpayer. Further, Section 319(c) states that the assessed
tax must be collected by distraint or levy and/or court proceeding within the three-year period.

With these rules in mind, we shall now determine whether the claim of the BIR is barred by time.

In this case, the records do not show when the assessment notice was mailed, released or sent to CBC.
Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment notice was on
the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the
BIR had three years to collect the assessed DST. However, the records of this case show that there was neither a
warrant of distraint or levy served on CBC's properties nor a collection case filed in court by the BIR within the three-
year period.

The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST in the
CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended. The demand was
made almost thirteen years from the date from which the prescriptive period is to be reckoned. Thus, the attempt to
collect the tax was made way beyond the three-year prescriptive period.

The BIR’s Answer in the case filed before the CTA could not, by any means, have qualified as a collection case as
required by law. Under the rule prevailing at the time the BIR filed its Answer, the regular courts, and not the CTA,
had jurisdiction over judicial actions for collection of internal revenue taxes. It was only on 23 April 2004, when
Republic Act Number 9282 took effect,17 that the jurisdiction of the CTA was expanded to include, among others,
original jurisdiction over collection cases in which the principal amount involved is one million pesos or more.

Consequently, the claim of the CIR for deficiency DST from petitioner is forever lost, as it is now barred by time. This
Court has no other option but to dismiss the present case.

The running of the statute of


limitations was not suspended
by the request for reinvestigation.
The fact that the taxpayer in this case may have requested a reinvestigation did not toll the running of the three-year
prescriptive period. Section 320 of the 1977 Tax Code states:chanroblesvirtuallawlibrary

Sec. 320. Suspension of running of statute.—The running of the statute of limitations provided in Sections 318 or 319
on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect
of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer
requests for a re-investigation which is granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being assessed or collected: Provided, That if the
taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be
suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or
a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out
of the Philippines. (Emphasis supplied)

The provision is clear. A request for reinvestigation alone will not suspend the statute of limitations. Two things must
concur: there must be a request for reinvestigation and the CIR must have granted it. BPI v. Commissioner of Internal
Revenue18 emphasized this rule by stating:chanroblesvirtuallawlibrary

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation
of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the [evidence] he
had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all
examined. Considering the given facts, this Court pronounced that—
x x x. The act of requesting a reinvestigation alone does not suspend the period. The request should first be
granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra).
Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one
day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949 x x x.
In Republic of the Philippines v. Acebedo, this Court similarly found that —
. . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof
on October 11, 1949 (Exh. “A”). There is no evidence that this request was considered or acted upon. In fact, on
October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of
the assessment (Exh. “D”), but there was follow-up of this warrant. Consequently, the request for reinvestigation did
not suspend the running of the period for filing an action for collection. (Emphasis in the original)
The Court went on to declare that the burden of proof that the request for reinvestigation had been actually granted
shall be on the CIR. Such grant may be expressed in its communications with the taxpayer or implied from the action
of the CIR or his authorized representative in response to the request for reinvestigation.

There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted the
request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and inaction of the CIR
on the request for reinvestigation, as he considered BPI's letters of protest to be.

In the present case, there is no showing from the records that the CIR ever granted the request for reinvestigation
filed by CBC. That being the case, it cannot be said that the running of the three-year prescriptive period was
effectively suspended.

Failure to raise prescription at the


administrative level/lower court as a
defense is of no moment.
When the pleadings or the evidence on record
show that the claim is barred by prescription,
the court must dismiss the claim even if prescription
is not raised as a defense.

We note that petitioner has raised the issue of prescription for the first time only before this Court. While we are
mindful of the established rule of remedial law that the defense of prescription must be raised at the trial court that
has also been applied for tax cases.19 Thus, as a rule, the failure to raise the defense of prescription at the
administrative level prevents the taxpayer from raising it at the appeal stage.

This rule, however, is not absolute.


The facts of the present case are substantially identical to those in the 2014 case, Bank of the Philippine Islands
(BPI) v. Commissioner of Internal Revenue.20 In that case, petitioner received an assessment notice from the BIR for
deficiency DST based on petitioner’s SWAP transactions for the year 1985 on 16 June 1989. On 23 June 1989, BPI,
through its counsel, filed a protest requesting the reinvestigation and/or reconsideration of the assessment for lack of
legal or factual bases. Almost ten years later, the CIR, in a letter dated 4 August 1998, denied the protest. On 4
January 1999, BPI filed a Petition for Review with the CTA. On 23 February 1999, the CIR filed an Answer with a
demand for BPI to pay the assessed DST. It was only when the case ultimately reached this Court that the issue of
prescription was brought up. Nevertheless, the Court ruled that the CIR could no longer collect the assessed tax due
to prescription. Basing its ruling on Section 1, Rule 9 of the Rules of Court and on jurisprudence, the Court held as
follows:chanroblesvirtuallawlibrary

In a Resolution dated 5 August 2013, the Court, through the Third Division, found that the assailed tax assessment
may be invalidated because the statute of limitations on the collection of the alleged deficiency DST had already
expired, conformably with Section 1, Rule 9 of the Rules of Court and the Bank of the Philippine Islands v.
Commissioner of Internal Revenue decision. However, to afford due process, the Court required both BPI and CIR to
submit their respective comments on the issue of prescription.

Only the CIR filed his comment on 9 December 2013. In his Comment, the CIR argues that the issue of prescription
cannot be raised for the first time on appeal. The CIR further alleges that even assuming that the issue of prescription
can be raised, the protest letter interrupted the prescriptive period to collect the assessed DST, unlike in the Bank of
the Philippine Islands case.

xxxx

We deny the right of the BIR to collect the assessed DST on the ground of prescription.

Section 1, Rule 9 of the Rules of Court expressly provides that:ChanRoblesVirtualawlibrary


Section 1. Defenses and objections not pleaded. - Defenses and objections not pleaded either in a motion to dismiss
or in the answer are deemed waived. However, when it appears from the pleadings or the evidence on
record that the court has no jurisdiction over the subject matter, that there is another action pending between the
same parties for the same cause, or that the action is barred by prior judgment or by the statute of limitations, the
court shall dismiss the claim.
If the pleadings or the evidence on record show that the claim is barred by prescription, the court is
mandated to dismiss the claim even if prescription is not raised as a defense. In Heirs of Valientes v. Ramas,
we ruled that the CA may motu proprio dismiss the case on the ground of prescription despite failure to raise this
ground on appeal. The court is imbued with sufficient discretion to review matters, not otherwise assigned as errors
on appeal, if it finds that their consideration is necessary in arriving at a complete and just resolution of the case.
More so, when the provisions on prescription were enacted to benefit and protect taxpayers from investigation after a
reasonable period of time.

Thus, we proceed to determine whether the period to collect the assessed DST for the year 1985 has prescribed.

To determine prescription, what is essential only is that the facts demonstrating the lapse of the prescriptive period
were sufficiently and satisfactorily apparent on the record either in the allegations of the plaintiff’s complaint, or
otherwise established by the evidence. Under the then applicable Section 319(c) [now, 222(c)] of the National Internal
Revenue Code (NIRC) of 1977, as amended, any internal revenue tax which has been assessed within the period of
limitation may be collected by distraint or levy, and/or court proceeding within three years following the assessment of
the tax. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax
begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer.

In the present case, although there was no allegation as to when the assessment notice had been released, mailed
or sent to BPI, still, the latest date that the BIR could have released, mailed or sent the assessment notice was on the
date BPI received the same on 16 June 1989. Counting the three-year prescriptive period from 16 June 1989, the
BIR had until 15 June 1992 to collect the assessed DST. But despite the lapse of 15 June 1992, the evidence
established that there was no warrant of distraint or levy served on BPI’s properties, or any judicial proceedings
initiated by the BIR.

The earliest attempt of the BIR to collect the tax was when it filed its answer in the CTA on 23 February 1999, which
was several years beyond the three-year prescriptive period. However, the BIR’s answer in the CTA was not the
collection case contemplated by the law. Before 2004 or the year Republic Act No. 9282 took effect, the judicial
action to collect internal revenue taxes fell under the jurisdiction of the regular trial courts, and not the CTA. Evidently,
prescription has set in to bar the collection of the assessed DST. (Emphasis supplied)

BPI thus provides an exception to the rule against raising the defense of prescription for the first time on appeal: the
exception arises when the pleadings or the evidence on record show that the claim is barred by prescription.

In this case, the fact that the claim of the government is time-barred is a matter of record. As can be seen from the
previous discussion on the determination of the prescription of the right of the government to claim deficiency DST,
the conclusion that prescription has set in was arrived at using the evidence on record. The date of receipt of the
assessment notice was not disputed, and the date of the attempt to collect was determined by merely checking the
records as to when the Answer of the CIR containing the demand to pay the tax was filed.

Estoppel or waiver prevents the government


from invoking the rule against raising the
issue of prescription for the first time on appeal.

In this case, petitioner may have raised the question of prescription only on appeal to this Court. The BIR could have
crushed the defense by the mere invocation of the rule against setting up the defense of prescription only at the
appeal stage. The government, however, failed to do so.

On the contrary, the BIR was silent despite having the opportunity to invoke the bar against the issue of prescription.
It is worthy of note that the Court ordered the BIR to file a Comment. The government, however, did not offer any
argument in its Comment about the issue of prescription, even if petitioner raised it in the latter’s Petition. It merely fell
silent on the issue. It was given another opportunity to meet the challenge when this Court ordered both parties to file
their respective memoranda. The CIR, however, merely filed a Manifestation that it would no longer be filing a
Memorandum and, in lieu thereof, it would be merely adopting the arguments raised in its Comment. Its silence spoke
loudly of its intent to waive its right to object to the argument of prescription.

We are mindful of the rule in taxation that estoppel does not prevent the government from collecting taxes; it is not
bound by the mistake or negligence of its agents. The rule is based on the political law concept “the king can do no
wrong,”21 which likens a state to a king: it does not commit mistakes, and it does not sleep on its rights. The analogy
fosters inequality between the taxpayer and the government, with the balance tilting in favor of the latter. This concept
finds justification in the theory and reality that government is necessary, and it must therefore collect taxes if it is to
survive. Thus, the mistake or negligence of government officials should not bind the state, lest it bring harm to the
government and ultimately the people, in whom sovereignty resides.22chanRoblesvirtualLawlibrary

Republic v. Ker & Co. Ltd.23 involved a collection case for a final and executory assessment. The taxpayer
nevertheless raised the prescription of the right to assess the tax as a defense before the Court of First Instance. The
Republic, instead of objecting to the invocation of prescription as a defense by the taxpayer, litigated on the issue and
thereafter submitted it for resolution. The Supreme Court ruled for the taxpayer, treating the actuations of the
government as a waiver of the right to invoke the defense of prescription. Ker effectively applied to the government
the rule of estoppel. Indeed, the no-estoppel rule is not absolute.

The same ingredients in Ker - procedural matter and injustice - obtain in this case. The procedural matter consists in
the failure to raise the issue of prescription at the trial court/administrative level, and injustice in the fact that the BIR
has unduly delayed the assessment and collection of the DST in this case. The fact is that it took more than 12
years for it to take steps to collect the assessed tax. The BIR definitely caused untold prejudice to petitioner, keeping
the latter in the dark for so long, as to whether it is liable for DST and, if so, for how much.cralawred

CONCLUSION

Inasmuch as the government’s claim for deficiency DST is barred by prescription, it is no longer necessary to dwell
on the validity of the assessment.chanrobleslaw

WHEREFORE, the Petition is GRANTED. The Court of Tax Appeals En Banc Decision dated 1 December 2005 and
its Resolution dated 20 March 2006 in CTA EB Case No. 109 are hereby REVERSED and SET ASIDE. A new ruling
is entered DENYING respondent’s claim for deficiency DST in the amount of P11,383,165.50.

SO ORDERED.cralawlawlibrary

Leonardo-De Castro, Bersamin, Perez, and Perlas-Bernabe, JJ., concur.


14. China Banking Corporation v. CIR
G.R. No. 172509
February 4, 2015

Facts:
China Banking Corporation (“CBC”) is a universal bank duly organized under the laws of the Philippines. It is
engaged in transactions involving sales of foreign exchange to the Central Bank of the Philippines, commonly known
as SWAP Transactions. CBC did not pay tax on the SWAP transactions for the years 1982-1986.
On 19 April 1989, CBC was assessed by the BIR for deficiency DST on the sales of foreign bills of exchange to the
Central Bank amounting to P 11,383, 165.50. CBC protested asserting five defenses: double taxation, absence of
liability, due process violation, validity of assessment and tax exemption.
On 6 December 2001, more than 12 years after the filing of the protest, the Commissioner of Internal Revenue (CIR)
rendered a decision reiterating the deficiency DST assessment and ordered the payment thereof plus increments
within 30 days from receipt of the Decision.
The CIR replied to the CBC’s protest only on 06 December 2001 in which it ordered CBC to pay its tax deficiency.
Thereafter, CBC filed a Petition for Review with the CTA.
The CTA denied CBC’s petition ruling that the SWAP transaction is a telegraphic transfer subject to DST; thus, CBC
is liable to pay the alleged deficiency.
On appeal, CBC raised for the first time the issue of prescription. The BIR did not address the issue of prescription in
its Comment.

Issue: Whether the right of the BIR to collect the assessed DST from CBC is barred by prescription.

Held:

Yes, the BIR’s claim is barred by prescription. Following Sec. 319(c) of the 1977 NIRC (the Tax Code applicable at
the time of assessment), assessed tax must be collected by distraint or levy and/or court proceeding within three
years from the date when the BIR mails/releases/sends the assessment notice to the taxpayer.
In this case, the records do not show when the assessment notice was mailed, released or sent to CBC.
Nevertheless, the latest possible date that the BIR could have released, mailed or sent the assessment notice was on
the same date that CBC received it, 19 April 1989. Assuming therefore that 19 April 1989 is the reckoning date, the
BIR had three years to collect the assessed DST. However, the records of this case show that there was neither a
warrant of distraint or levy served on CBC's properties nor a collection case filed in court by the BIR within the three-
year period.
The attempt of the BIR to collect the tax through its Answer with a demand for CBC to pay the assessed DST in the
CTA on 11 March 2002 did not comply with Section 319(c) of the 1977 Tax Code, as amended. The demand was
made almost thirteen years from the date from which the prescriptive period is to be reckoned. Thus, the attempt to
collect the tax was made way beyond the three-year prescriptive period.
The Court also stated that although CBC raised the issue of prescription for the first time only during appeal, this
does not negate the applicability of prescription. Citing Sec. 1 of Rule 9 of the Rules of Court, the Court ruled that if
the pleadings or evidence on record shows that the claim is barred by prescription; the court is mandated to dismiss
the claim even if prescription was not raised as a defense.
The principle of estoppel likewise applies. As a general rule, the principle of estoppel and waiver does not prevent
the government from collecting taxes as the BIR is not bound by the mistake or negligence of its agents.
Nonetheless, the Supreme Court enunciated that the principle is not absolute.
Relying on Republic v. Ker & Co. Ltd., the Court ruled that estoppel cannot apply in this case as the CIR failed to
raise the issue of prescription in its Comment. The 12-year delay in collecting the assessed tax further convinced the
Court that estoppel could not apply in this case.
FIRST DIVISION

COMMISSIONER OF INTERNAL REVENUE G. R. No. 167146


Petitioner,
Present:

PANGANIBAN, C.J.,
Chairman,
- versus - Y N A R E S - S A N TI A G O
A U S T R I A - MA R T I N E Z ,
CALLEJO, SR., and
CHICO-NAZARIO, JJ.

PHILIPPINE GLOBAL COMMUNICATION,


INC., Promulgated:
Respondent.
October 31, 2006

x--------------------------------------------------x

DECISION

CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the en
banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February 2005, [1] ordering the petitioner
to withdraw and cancel Assessment Notice No. 000688-80-7333 issued against respondent Philippine Global
Communication, Inc. for its 1990 income tax deficiency. The CTA, in its assailed en banc Decision, affirmed the
Decision of the First Division of the CTA dated 9 June 2004[2] and its Resolution dated 22 September 2004 in C.T.A.
Case No. 6568.

Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for taxable year 1990
on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR) issued Letter of Authority No.
0002307, authorizing the appropriate Bureau of Internal Revenue (BIR) officials to examine the books of account and
other accounting records of respondent, in connection with the investigation of respondents 1990 income tax
liability. On 22 April 1992, the BIR sent a letter to respondent requesting the latter to present for examination certain
records and documents, but respondent failed to present any document. On 21 April 1994, respondent received a
Preliminary Assessment Notice dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00,
inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed for failure to
pay the withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April 1994,
respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April 1994,
for deficiency income tax in the total amount of P118,271,672.00.[3]

On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law Offices, filed a
formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed another protest letter on 23
May 1994, through another counsel Siguion Reyna Montecillo & Ongsiako Law Offices. In both letters, respondent
requested for the cancellation of the tax assessment, which they alleged was invalid for lack of factual and legal
basis.[4]

On 16 October 2002, more than eight years after the assessment was presumably issued, the
Ponce Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated 8 October
2002 denying the respondents protest against Assessment Notice No. 000688-80-7333, and affirming the said
assessment in toto.[5]
On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and hearing,
the CTA rendered a Decision in favor of respondent on 9 June 2004.[6] The CTA ruled on the primary issue of
prescription and found it unnecessary to decide the issues on the validity and propriety of the assessment. It decided
that the protest letters filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll
the running of the prescriptive period to collect the assessed deficiency income tax.[7] Thus, since more than three
years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued in 1994, the CIRs right to collect
the same has prescribed in conformity with Section 269 of the National Internal Revenue Code of 1977 [8] (Tax Code
of 1977). The dispositive portion of this decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the


petitioner. Accordingly, respondents Final Decision dated October 8, 2002 is hereby REVERSED
and SET ASIDE and respondent is hereby ORDERED to WITHDRAW and CANCEL Assessment
Notice No. 000688-80-7333 issued against the petitioner for its 1990 income tax deficiency
because respondents right to collect the same has prescribed. [9]

The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a Resolution
dated 22 September 2004.[10] Thereafter, the CIR filed a Petition for Review with the CTA en banc, questioning the
aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed the Decision and Resolution in CTA
Case No. 6568. The dispositive part reads:

WHEREFORE, premises considered, the Petition for Review is hereby DISMISSED for
lack of merit. Accordingly, the assailed Decision and Resolution in CTA Case No. 6568 are hereby
AFFIRMED in toto.[11]

Hence, this Petition for Review on Certiorari raising the following grounds:

THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN


AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO.6568
DECLARING THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY
INCOME TAX FROM RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED

A. THE PRESCRIPTIVE PERIOD WAS INTERUPTED WHEN RESPONDENT


FILED TWO LETTERS OF PROTEST DISPUTING IN DETAIL THE
DEFICIENCY ASSESSMENT IN QUESTION AND REQUESTING THE
CANCELLATION OF SAID ASSESSMENT. THE TWO LETTERS OF
PROTEST ARE, BY NATURE, REQUESTS FOR REINVESTIGATION OF
THE DISPUTED ASSESSMENT.

B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE


GRANTED BY THE BUREAU OF INTERNAL REVENUE.[12]

This Court finds no merit in this Petition.

The main issue in this case is whether or not CIRs right to collect respondents alleged deficiency income tax
is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads:

Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. x x x

xxxx

c. Any internal revenue tax which has been assessed within the period of limitation
above-prescribed may be collected by distraint or levy or by a proceeding in court
within three years following the assessment of the tax.

The law prescribed a period of three years from the date the return was actually filed or from the last date
prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national
internal revenue tax.[13] However, the law increased the prescriptive period to assess or to begin a court proceeding
for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of
evading the tax or when no return was filed at all. [14] In such cases, the ten-year period began to run only from the
date of discovery by the BIR of the falsity, fraud or omission.

If the BIR issued this assessment within the three-year period or the ten-year period, whichever was
applicable, the law provided another three years after the assessment for the collection of the tax due thereon
through the administrative process of distraint and/or levy or through judicial proceedings.[15] The three-year period for
collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by
the BIR.[16]

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute
the CIRs claim. Therefore, the BIR had until 13 April 1997.However, as there was no Warrant of Distraint and/or Levy
served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect
the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which
was several years beyond the three-year prescriptive period.Thus, the CIR is now prescribed from collecting the
assessed tax.

The provisions on prescription in the assessment and collection of national internal revenue taxes became
law upon the recommendation of the tax commissioner of the Philippines. The report submitted by the tax
commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:

Under the former law, the right of the Government to collect the tax does not prescribe. However, in
fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed
to make the necessary investigation and assessment within 5 years after the filing of the return and
where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the
government is interested in the stability of its collections, so also are the taxpayers entitled to an
assurance that they will not be subjected to further investigation for tax purposes after the
expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines,
pp. 321-322).[17]

In a number of cases, this Court has also clarified that the statute of limitations on the collection of taxes
should benefit both the Government and the taxpayers. In these cases, the Court further illustrated the harmful
effects that the delay in the assessment and collection of taxes inflicts upon taxpayers. In Collector of Internal
Revenue v. SuyocConsolidated Mining Company,[18] Justice Montemayor, in his dissenting opinion, identified the
potential loss to the taxpayer if the assessment and collection of taxes are not promptly made.

Prescription in the assessment and in the collection of taxes is provided by the Legislature for the
benefit of both the Government and the taxpayer; for the Government for the purpose of expediting
the collection of taxes, so that the agency charged with the assessment and collection may not
tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes
to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know
the amount of the assessment he is required to pay, whether or not such assessment is well
founded and reasonable so that he may either pay the amount of the assessment or contest its
validity in court x x x. It would surely be prejudicial to the interest of the taxpayer for the
Government collecting agency to unduly delay the assessment and the collection because by the
time the collecting agency finally gets around to making the assessment or making the collection,
the taxpayer may then have lost his papers and books to support his claim and contest that of the
Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer
eventually has to pay .

In Republic of the Philippines v. Ablaza,[19] this Court emphatically explained that the statute of limitations of
actions for the collection of taxes is justified by the need to protect law-abiding citizens from possible harassment:

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to
the Government and to its citizens; to the Government because tax officers would be obliged to act
promptly in the making of assessment, and to citizens because after the lapse of the period of
prescription citizens would have a feeling of security against unscrupulous tax agents who will
always find an excuse to inspect the books of taxpayers, not to determine the latters real liability,
but to take advantage of every opportunity to molest, peaceful, law-abiding citizens.Without such
legal defense taxpayers would furthermore be under obligation to always keep their books and
keep them open for inspection subject to harassment by unscrupulous tax agents.The law on
prescription being a remedial measure should be interpreted in a way conducive to bringing about
the beneficient purpose of affording protection to the taxpayer within the contemplation of the
Commission which recommended the approval of the law.

And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue,[20] this Court, in
confirming these earlier rulings, pronounced that:

Though the statute of limitations on assessment and collection of national internal revenue taxes
benefits both the Government and the taxpayer, it principally intends to afford protection to the
taxpayer against unreasonable investigation. The indefinite extension of the period for assessment
is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be
subjected to further investigation for taxes after the expiration of a reasonable period of time.

Thus, in Commissioner of Internal Revenue v. B.F. Goodrich,[21] this Court affirmed that the law on prescription
should be liberally construed in order to protect taxpayers and that, as a corollary, the exceptions to the law on
prescription should be strictly construed.

The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on the
assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver,
under Section 271 thereof which reads:

Section 224. Suspension of running of statute. The running of the statute of limitation provided in
Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a
proceeding in court for collection in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the assessment or beginning distraintor
levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a
reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in
the address given by him in the return filed upon which a tax is being assessed or collected
x x x. (Emphasis supplied.)

Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for this
petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the
Commissioner. However, this exception does not apply to this case since the respondent never requested for a
reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as admitted by the CIR
in its Petition, the respondent refused to submit any new evidence.

Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the
Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request for
reconsideration and the request for reinvestigation, and distinguishes one from the other in this manner:

Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written
request for reconsideration or reinvestigation specifying the following particulars:

xxxx

For the purpose of protest herein

(a) Request for reconsideration-- refers to a plea for a re-evaluation of an


assessment on the basis of existing records without need of additional
evidence. It may involve both a question of fact or of law or both.

(b) Request for reinvestigationrefers to a plea for re-evaluation of an


assessment on the basis of newly-discovered evidence or additional evidence
that a taxpayer intends to present in the investigation. It may also involve a
question of fact or law or both.
The main difference between these two types of protests lies in the records or evidence to be examined by
internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-
evaluation of existing records which results from a request for reconsideration does not toll the running of the
prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of
the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the
CIR. The Court provided a clear-cut rationale in the case of Bank of the Philippine Islands v. Commissioner of Internal
Revenue[22] explaining why a request for reinvestigation, and not a request for reconsideration, interrupts the running
of the statute of limitations on the collection of the assessed tax:

Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional


evidence, will take more time than a reconsideration of a tax assessment, which will be limited to
the evidence already at hand; this justifies why the former can suspend the running of the statute of
limitations on collection of the assessed tax, while the latter cannot.

In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for
reconsideration. The CIRs allegation that there was a request for reinvestigation is inconceivable since respondent
consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. This
much was admitted in the Decision dated 8 October 2002 issued by then CIR Guillermo Payarno, Jr.

In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom, despite
repeated demands, failed to submit documentary evidences in support of its claimed deductible
expenses. Hence, except for the item of interest expense which was disallowed for being not
ordinary and necessary, the rest of the claimed expenses were disallowed for non-withholding. In
the same token, Revenue Officer Escober testified that upon his assignment to conduct the re-
investigation, he immediately requested the taxpayer to present various accounting records for the
year 1990, in addition to other documents in relation to the disallowed items (p.171). This was
followed by other requests for submission of documents (pp.199 &217) but these were not heeded
by the taxpayer. Essentially, he stated that Philcom did not cooperate in his reinvestigation of the
case.

In response to the testimonies of the Revenue Officers, Philcom thru Atty. Consunji, emphasized
that it was denied due process because of the issuance of the Pre-Assessment Notice and the
Assessment Notice on successive dates. x x x Counsel for the taxpayer even questioned the
propriety of the conference-hearing inasmuch as the only question to resolved (sic) is the legality of
the issuance of the assessment. On the disallowed items, Philcom thru counsel manifested that it
has no intention to present documents and/or evidences allegedly because of the pending legal
question on the validity of the assessment.[23]

Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for reconsideration
and a request for reinvestigation, there have been cases wherein these two terms were used interchangeably. But
upon closer examination, these cases all involved a reinvestigation that was requested by the taxpayer and granted
by the BIR.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,[24] the Court weighed the
considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer in deciding that
the prescription period was suspended during this time.

Because of such requests, several reinvestigations were made and a hearing was even held by the
Conference Staff organized in the collection office to consider claims of such nature which, as the
record shows, lasted for several months. After inducing petitioner to delay collection as he in fact
did, it is most unfair for respondent to now take advantage of such desistance to elude his
deficiency income tax liability to the prejudice of the Government invoking the technical ground of
prescription.

Although the Court used the term requests for reconsideration in reference to the letters sent by the
taxpayer in the case of Querol v. Collector of Internal Revenue,[25] it took into account the reinvestigation conducted
soon after these letters were received and the revised assessment that resulted from the reinvestigations.
It is true that the Collector revised the original assessment on February 9, 1955; and appellant
avers that this revision was invalid in that it was not made within the five-year prescriptive period
provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is that the revised assessment
was merely a result of petitioner Querols requests for reconsideration of the original assessment,
contained in his letters of December 14, 1951 and May 25, 1953. The records of the Bureau of
Internal Revenue show that after receiving the letters, the Bureau conducted a reinvestigation of
petitioners tax liabilities, and, in fact, sent a tax examiner to San Fernando, La Union, for that
purpose; that because of the examiners report, the Bureau revised the original assessment,
x x x. In other words, the reconsideration was granted in part, and the original assessment was
altered. Consequently, the period between the petition for reconsideration and the revised
assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza, 108 Phil
1105).

The Court, in Republic v. Lopez,[26] even gave a detailed accounting of the time the BIR spent for each
reinvestigation in order to deduct it from the five-year period set at that time in the statute of limitations:

It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by Section
332(c) of the Internal Revenue Code within which the Government may sue to collect an assessed
tax is to be computed from the last revised assessment resulting from a reinvestigation asked for
by the taxpayer and (2) that where a taxpayer demands a reinvestigation, the time employed in
reinvestigating should be deducted from the total period of limitation.

xxxx

The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954, from
which date the Government had five years for bringing an action to collect.

The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22
April 1960, or a period of 4 years, 3 months, and 6 days, during which the limitation period was
interrupted.

The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal Revenue
v. Sison,[27] that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be
deducted from the total period of limitation. Finally, in Republic v. Arcache,[28] the Court enumerated the reasons why
the taxpayer is barred from invoking the defense of prescription, one of which was that, In the first place, it appears
obvious that the delay in the collection of his 1946 tax liability was due to his own repeated requests for
reinvestigation and similarly repeated requests for extension of time to pay.

In this case, the BIR admitted that there was no new or additional evidence presented. Considering that the
BIR issued its Preliminary Assessment Notice on 13 April 1994and its Formal Assessment Notice on 14 April 1994,
just one day before the three-year prescription period for issuing the assessment expired on 15 April 1994, it had
ample time to make a factually and legally well-founded assessment. Added to the fact that the Final Decision that
the CIR issued on 8 October 2002 merely affirmed its earlier findings, whatever examination that the BIR may have
conducted cannot possibly outlast the entire three-year prescriptive period provided by law to collect the assessed
tax, not to mention the eight years it actually took the BIR to decide the respondents protest. The factual and legal
issues involved in the assessment are relatively simple, that is, whether certain income tax deductions should be
disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the running of the statute
of limitations in this case.

The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears
repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of
limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the
statute of limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the
erroneous assessment would become final and unappealable.[29] On the other hand, if the taxpayer does file the
protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax
thereon may be collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges
continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are burdened
with the costs of preserving their books and records. This is the predicament that the law on the statute of limitations
seeks to prevent.
The Court, in sustaining for the first time the suspension of the running of the statute of limitations in cases
where the taxpayer requested for a reinvestigation, gave this justification:

A taxpayer may be prevented from setting up the defense of prescription even if he has not
previously waived it in writing as when by his repeated requests or positive acts the Government
has been, for good reasons, persuaded to postpone collection to make him feel that the demand
was not unreasonable or that no harassment or injustice is meant by the Government.

xxxx

This case has no precedent in this jurisdiction for it is the first time that such has risen, but there
are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozohas
said: The applicable principle is fundamental and unquestioned. He who prevents a thing from
being done may not avail himself of the nonperformance which he himself occasioned, for
the law says to him in effect this is your own act, and therefore you are not damnified. (R.H.
Stearns Co. v. U.S., 78 L. ed., 647). (Emphasis supplied.)[30]

This rationale is not applicable to the present case where the respondent did nothing to prevent the BIR from
collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At the earliest opportunity,
respondent insisted that the assessment was invalid and made clear to the BIR its refusal to produce documents that
the BIR requested. On the other hand, the BIR also communicated to the respondent its unwavering stance that its
assessment is correct. Given that both parties were at a deadlock, the next logical step would have been for the BIR
to issue a Decision denying the respondents protest and to initiate proceedings for the collection of the assessed tax
and, thus, allow the respondent, should it so choose, to contest the assessment before the CTA. Postponing the
collection for eight long years could not possibly make the taxpayer feel that the demand was not unreasonable or
that no harassment or injustice is meant by the Government. There was no legal, or even a moral, obligation
preventing the CIR from collecting the assessed tax. In a similar case, Cordero v. Conda,[31] the Court did not
suspend the running of the prescription period where the acts of the taxpayer did not prevent the government from
collecting the tax.

The government also urges that partial payment is acknowledgement of the tax obligation, hence a
waiver on the defense of prescription. But partial payment would not prevent the government from
suing the taxpayer. Because, by such act of payment, the government is not thereby persuaded to
postpone collection to make him feel that the demand was not unreasonable or that no harassment
or injustice is meant. Which, as stated in Collector v. Suyoc Consolidated Mining Co., et al., L-
11527, November 25, 1958, is the underlying reason behind the rule that prescriptive period is
arrested by the taxpayers request for reexamination or reinvestigation even if he has not previously
waived it [prescription] in writing.

The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., [32] of the need to
balance the conflicting interests of the government and the taxpayers.

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interest of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of common good, may be achieved.

Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section 269(c) of the
Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given effect. In providing for
exceptions to such rule in Section 271, the law strictly limits the suspension of the running of the prescription period
to, among other instances, protests wherein the taxpayer requests for a reinvestigation. In this case, where the
taxpayer merely filed two protest letters requesting for a reconsideration, and where the BIR could not have
conducted a reinvestigation because no new or additional evidence was submitted, the running of statute of
limitations cannot be interrupted. The tax which is the subject of the Decision issued by the CIR on 8 October
2002 affirming the Formal Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its
collection. Consequently, the right of the government to collect the alleged deficiency tax is barred by prescription.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en banc Decision of the CTA
in CTA EB No. 37 dated 22 February 2005, cancellingAssessment Notice No. 000688-80-7333 issued against
Philippine Global Communication, Inc. for its 1990 income tax deficiency for the reason that it is barred by
prescription, is hereby AFFIRMED. No costs.

SO ORDERED.
Commissioner of Internal Revenue vs Philippine Global Communication, Inc.

Taxation – Tax Collection – Prescriptive Period – Reconsideration vs Reinvestigation

In April 1991, Philippine Global Communication, Inc. (PGCI) filed its annual income tax return (ITR) for the taxable
year 1990. A tax audit was subsequently conducted by the Bureau of Internal Revenue (BIR) and eventually a final
assessment notice (FAN) was timely issued in April 1994. The FAN demanded PGCI to pay P118 million in deficiency
taxes inclusive of surcharge and interest. PGCI was able to file a protest within the reglementary period. PGCI
however refused to produce additional evidence. In October 2002, eight years after the FAN was issued, the
Commissioner of Internal Revenue (CIR) issued a final decision denying the protest filed by PGCI. PGCI then filed a
petition for review with the Court of Tax Appeals (CTA). The CIR filed its answer in January 2003. The CTA ruled that
the CIR can no longer collect because it is already barred by prescription. The CIR argued that the prescriptive period
has been extended because PGCI asked for a reinvestigation.
ISSUE: Whether or not the CIR is barred by prescription.
HELD: Yes. Under the law, the CIR has 3 years from the issuance of the FAN to make its collection. The FAN was
issued in April 1994 and so the CIR has until April 1997 to make a collection. Within that period, the CIR never issued
a warrant of distraint/levy. Its earliest collection effort was only when it filed an answer to the appeal filed by PGCI.
CIR’s answer was filed in January 2003 which was way beyond the three year prescriptive period to collect the
assessed taxes.
The CIR cannot invoke that the protest filed by PGCI is in effect a request for reinvestigation. Under the law, a
request for reinvestigation shall toll the running of the prescriptive period to collect. However in the case at bar, the
protest filed by PGCI is not a request for reinvestigation but rather it was a request for reconsideration. And in such
case, it did not suspend the prescriptive period. The protest is a request for reconsideration because PGCI did not
adduce additional evidence or documents. PGCI merely sought the CIR to review the existing records on file.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 197515 July 2, 2014

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
UNITED SALVAGE AND TOWAGE (PHILS.), INC., Respondent.

DECISION

PERALTA, J.:

Before the Court is a petition for review on certiorari under Rule 45 of the Revised Rules of Court which seeks to
review, reverse and set aside the Decision1 of the Court of Tax Appeals En Banc (CTA En Banc), dated June 27,
2011, in the case entitled Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc. (USTP),
docketed as C.T.A. EB No. 662. The facts as culled from the records:

Respondent is engaged in the business of sub-contracting work for service contractors engaged in petroleum
operations in the Philippines.2 During the taxable years in question, it had entered into various contracts and/or sub-
contracts with several petroleum service contractors, such as Shell Philippines Exploration, B.V. and Alorn Production
Philippines for the supply of service vessels.3

In the course of respondent’s operations, petitioner found respondent liable for deficiency income tax, withholding tax,
value-added tax (VAT) and documentary stamp tax (DST) for taxable years 1992,1994, 1997 and 1998. 4Particularly,
petitioner, through BIR officials, issued demand letters with attached assessment notices for withholding tax on
compensation (WTC) and expanded withholding tax (EWT) for taxable years 1992, 1994 and 1998, 5 detailed as
follows:

Assessment Notice No. Tax Covered Period Amount

25-1-000545-92 WTC 1992 ₱50,429.18


25-1-000546-92 EWT 1992 ₱14,079.45
034-14-000029-94 EWT 1994 ₱48,461.76
034-1-000080-98 EWT 1998 ₱22,437.016

On January 29, 1998 and October 24, 2001, USTP filed administrative protests against the 1994 and 1998 EWT
assessments, respectively.7

On February 21, 2003, USTP appealed by way of Petition for Review before the Court in action (which was thereafter
raffled to the CTA-Special First Division) alleging, among others, that the Notices of Assessment are bereft of any
facts, law, rules and regulations or jurisprudence; thus, the assessments are void and the right of the government to
assess and collect deficiency taxes from it has prescribed on account of the failure to issue a valid notice of
assessment within the applicable period.8

During the pendency of the proceedings, USTP moved to withdraw the aforesaid Petition because it availed of the
benefits of the Tax Amnesty Program under Republic Act (R.A.) No. 9480. 9 Having complied with all the requirements
therefor, the CTA-Special First Division partially granted the Motion to Withdraw and declared the issues on income
tax, VAT and DST deficiencies closed and terminated in accordance with our pronouncement in Philippine Banking
Corporation v. Commissioner of Internal Revenue.10 Consequently, the case was submitted for decision covering the
remaining issue on deficiency EWT and WTC, respectively, for taxable years 1992, 1994 and 1998. 11
The CTA-Special First Division held that the Preliminary Assessment Notices (PANs) for deficiency EWT for taxable
years 1994 and 1998 were not formally offered; hence, pursuant to Section 34, Rule 132 of the Revised Rules of
Court, the Court shall neither consider the same as evidence nor rule on their validity.12 As regards the Final
Assessment Notices (FANs) for deficiency EWT for taxable years 1994 and 1998, the CTA-Special First Division held
that the same do not show the law and the facts on which the assessments were based. 13 Said assessments were,
therefore, declared void for failure to comply with Section 228 of the 1997 National Internal Revenue Code (Tax
Code).14 From the foregoing, the only remaining valid assessment is for taxable year 1992. 15

Nevertheless, the CTA-Special First Division declared that the right of petitioner to collect the deficiency EWT and
WTC, respectively, for taxable year 1992 had already lapsed pursuant to Section 203 of the Tax Code.16 Thus, in
ruling for USTP, the CTA-Special First Division cancelled Assessment Notice Nos. 25-1-00546-92 and 25-1-000545-
92, both dated January 9, 1996 and covering the period of 1992, as declared in its Decision 17 dated March 12, 2010,
the dispositive portion of which provides:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notice No. 25-1-
00546-92 dated January 9, 1996 for deficiency Expanded Withholding Tax and Assessment Notice No. 25-1-000545
dated January 9, 1996 for deficiency Withholding Tax on Compensation are hereby CANCELLED.

SO ORDERED.18

Dissatisfied, petitioner moved to reconsider the aforesaid ruling. However, in a Resolution19 dated July 15, 2010, the
CTA-Special First Division denied the same for lack of merit.

On August 18, 2010, petitioner filed a Petition for Review with the CTA En Banc praying that the Decision of the CTA-
Special First Division, dated March 12, 2010,be set aside. 20

On June 27, 2011, the CTA En Banc promulgated a Decision which affirmed with modification the Decision dated
March 12, 2010 and the Resolution dated July 15, 2010 of the CTA-Special First Division, the dispositive portion of
which reads:

WHEREFORE, premises considered, the Petition is PARTLY GRANTED. The Decision dated March 12, 2010 and
the Resolution dated July 15, 2010 are AFFIRMED with MODIFICATION upholding the 1998 EWT assessment. In
addition to the basic EWT deficiency of ₱14,496.79, USTP is ordered to pay surcharge, annual deficiency interest,
and annual delinquency interest from the date due until full payment pursuant to Section 249 of the 1997 NIRC.

SO ORDERED.21

Hence, the instant petition raising the following issues:

1. Whether or not the Court of Tax Appeals is governed strictly by the technical rules of evidence;

2. Whether or not the Expanded Withholding Tax Assessments issued by petitioner against the respondent
for taxable year 1994 was without any factual and legal basis; and

3. Whether or not petitioner’s right to collect the creditable withholding tax and expanded withholding tax for
taxable year 1992 has already prescribed.22

After careful review of the records and evidence presented before us, we find no basis to overturn the decision of the
CTA En Banc.

On this score, our ruling in Compagnie Financiere Sucres Et Denrees v. CIR, 23 is enlightening, to wit:

We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the
conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it
has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not present
here.24
Now, to the first issue.

Petitioner implores unto this Court that technical rules of evidence should not be strictly applied in the interest of
substantial justice, considering that the mandate of the CTA explicitly provides that its proceedings shall not be
governed by the technical rules of evidence.25 Relying thereon, petitioner avers that while it failed to formally offer the
PANs of EWTs for taxable years 1994and 1998, their existence and due execution were duly tackled during the
presentation of petitioner’s witnesses, Ruleo Badilles and Carmelita Lynne de Guzman (for taxable year 1994) and
Susan Salcedo-De Castro and Edna A. Ortalla (for taxable year 1998). 26 Petitioner further claims that although the
PANs were not marked as exhibits, their existence and value were properly established, since the BIR records for
taxable years 1994 and 1998 were forwarded by petitioner to the CTA in compliance with the latter’s directive and
were, in fact, made part of the CTA records.27

Under Section 828 of Republic Act (R.A.) No. 1125, the CTA is categorically described as a court of record. 29 As such,
it shall have the power to promulgate rules and regulations for the conduct of its business, and as may be needed, for
the uniformity of decisions within its jurisdiction.30 Moreover, as cases filed before it are litigated de novo, party-
litigants shall prove every minute aspect of their cases.31 Thus, no evidentiary value can be given the pieces of
evidence submitted by the BIR, as the rules on documentary evidence require that these documents must be formally
offered before the CTA.32 Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. – The court shall consider no evidence which has not been formally offered. The purpose
for which the evidence is offered must be specified.

Although in a long line of cases, we have relaxed the foregoing rule and allowed evidence not formally offered to be
admitted and considered by the trial court, we exercised extreme caution in applying the exceptions to the rule, as
pronounced in Vda. de Oñate v. Court of Appeals,33 thus:

From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered.
Corollarily, the mere fact that a particular document is identified and marked as an exhibit does not mean that it has
already been offered as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles[186 SCRA 385, 388-389
(1990)], we had the occasion to make a distinction between identification of documentary evidence and its formal
offer as an exhibit. We said that the first is done in the course of the trial and is accompanied by the marking of the
evidence as an exhibit while the second is done only when the party rests its case and not before. A party, therefore,
may opt to formally offer his evidence if he believes that it will advance his cause or not to do so at all. In the event he
chooses to do the latter, the trial court is not authorized by the Rules to consider the same.

However, in People v. Napat-a[179 SCRA 403 (1989)] citing People v. Mate[103 SCRA 484 (1980)], we relaxed the
foregoing rule and allowed evidence not formally offered to be admitted and considered by the trial court provided the
following requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded
and, second, the same must have been incorporated in the records of the case. 34

The evidence may, therefore, be admitted provided the following requirements are present: (1) the same must have
been duly identified by testimony duly recorded; and (2) the same must have been incorporated in the records of the
case. Being an exception, the same may only be applied when there is strict compliance with the requisites
mentioned above; otherwise, the general rule in Section 34 of Rule 132 of the Rules of Court should prevail. 35

In the case at bar, petitioner categorically admitted that it failed to formally offer the PANs as evidence. Worse, it
advanced no justifiable reason for such fatal omission. Instead, it merely alleged that the existence and due execution
of the PANs were duly tackled by petitioner’s witnesses. We hold that such is not sufficient to seek exception from the
general rule requiring a formal offer of evidence, since no evidence of positive identification of such PANs by
petitioner’s witnesses was presented. Hence, we agree with the CTA En Banc’s observation that the 1994 and 1998
PANs for EWT deficiencies were not duly identified by testimony and were not incorporated in the records of the
case, as required by jurisprudence.

While we concur with petitioner that the CTA is not governed strictly by technical rules of evidence, as rules of
procedure are not ends in themselves but are primarily intended as tools in the administration of justice, 36 the
presentation of PANs as evidence of the taxpayer’s liability is not mere procedural technicality. It is a means by which
a taxpayer is informed of his liability for deficiency taxes. It serves as basis for the taxpayer to answer the notices,
present his case and adduce supporting evidence.37 More so, the same is the only means by which the CTA may
ascertain and verify the truth of respondent's claims. We are, therefore, constrained to apply our ruling in Heirs of
Pedro Pasag v. Spouses Parocha,38 viz.:

x x x. A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only
and strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the
purpose or purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing
parties to examine the evidence and object to its admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the
formal offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It
explained that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so
would "condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage
needless delays and derail the speedy administration of justice."

Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that
petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several
extensions of time to make their formal offer, petitioners failed to comply with their commitment and allowed almost
five months to lapse before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence
is anathema to the efficient, effective, and expeditious dispensation of justice. x x x. 39

Anent the second issue, petitioner claims that the EWT assessment issued for taxable year 1994 has factual and
legal basis because at the time the PAN and FAN were issued by petitioner to respondent on January 19, 1998, the
provisions of Revenue Regulation No. 12-9940 which governs the issuance of assessments was not yet operative.
Hence, its compliance with Revenue Regulation No. 12-8541 was sufficient. In any case, petitioner argues that a
scrutiny of the BIR records of respondent for taxable year 1994 would show that the details of the factual finding of
EWT were itemized from the PAN issued by petitioner.42

In order to determine whether the requirement for a valid assessment is duly complied with, it is important to
ascertain the governing law, rules and regulations and jurisprudence at the time the assessment was issued. In the
instant case, the PANs and FANs pertaining to the deficiency EWT for taxable years 1994 and 1998, respectively,
were issued on January 19, 1998, when the Tax Code was already in effect, as correctly found by the CTA En Banc:

The date of issuance of the notice of assessment determines which law applies- the 1997 NIRC or the old Tax Code.
The case of Commissioner of Internal Revenue v. Bank of Philippine Islands is instructive:

In merely notifying BPI of his findings, the CIR relied on the provisions of the former Section 270 prior to its
amendment by RA 8424 (also known as the Tax Reform Act of 1997). In CIR v. Reyes, we held that:

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate
taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions
of former Section 229 prior to its amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement
of merely notifying the taxpayer of the CIR's findings was changed in 1998to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998,
the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was
already in effect. The notice required under the old law was no longer sufficient under the new law.(Emphasis ours.)

In the instant case, the 1997 NIRC covers the 1994 and 1998 EWT FANs because there were issued on January 19,
1998 and September 21, 2001, respectively, at the time of the effectivity of the 1997 NIRC. Clearly, the assessments
are governed by the law.43

Indeed, Section 228 of the Tax Code provides that the taxpayer shall be informed in writing of the law and the facts
on which the assessment is made. Otherwise, the assessment is void. To implement the aforesaid provision,
Revenue Regulation No. 12-99was enacted by the BIR, of which Section 3.1.4 thereof reads:
3.1.4. Formal Letter of Demand and Assessment Notice. –The formal letter of demand and assessment notice shall
be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be
sent to the taxpayer only by registered mail or by personal delivery. x x x44

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax
assessment made against him. The use of the word "shall" in these legal provisions indicates the mandatory nature
of the requirements laid down therein.

In the present case, a mere perusal of the FAN for the deficiency EWT for taxable year 1994will 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. 45 Petitioner should have
at least attached a detailed notice of discrepancy or stated an explanation why the amount of ₱48,461.76 is
collectible against respondent46 and how the same was arrived at. Any short-cuts to the prescribed content of the
assessment or the process thereof should not be countenanced, in consonance with the ruling in Commissioner of
Internal Revenue v. Enron Subic Power Corporation47 to wit:

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During
the pre-assessment stage, the CIR advised Enron’s representative of the tax deficiency, informed it of the proposed
tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper
allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to
inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-
day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the
assessment. These steps were mere perfunctory discharges of the CIR’s duties incorrectly assessing a taxpayer. The
requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a
deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because
the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order
required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax
assessment was made.

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

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was
changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the
assessment is made. Such amendment is in keeping with the constitutional principle that no person shall be deprived
of property without due process. In view of the absence of a fair opportunity for Enron to be informed of the legal and
factual bases of the assessment against it, the assessment in question was void. x x x. 48

In the same vein, we have held in Commissioner of Internal Revenue v. Reyes, 49 that:

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of
basis for -- not to mention the insufficiency of -- the gross figures and details of the itemized deductions indicated in
the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have
been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and
collection "should be made in accordance with law as any arbitrariness will negate the very reason for government
itself."50

Applying the aforequoted rulings to the case at bar, it is clear that the assailed deficiency tax assessment for the EWT
in 1994disregarded the provisions of Section 228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue
Regulations No. 12-99 by not providing the legal and factual bases of the assessment. Hence, the formal letter of
demand and the notice of assessment issued relative thereto are void.
In any case, we find no basis in petitioner’s claim that Revenue Regulation No. 12-99 is not applicable at the time the
PAN and FAN for the deficiency EWT for taxable year 1994 were issued. Considering that such regulation merely
implements the law, and does not create or take away vested rights, the same may be applied retroactively, as held
in Reyes:

x x x x.

Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it
merely implements the law.

A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code. While it is
desirable for the government authority or administrative agency to have one immediately issued after a law is passed,
the absence of the regulation does not automatically mean that the law itself would become inoperative.

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be
informed of both the law and facts on which the assessment was based. Thus, the CIR should have required the
assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law. The old
regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations-- old as
they were -- should be in harmony with, and not supplant or modify, the law.

It may be argued that the Tax Code provisions are not self- executory. It would be too wide a stretch of the
imagination, though, to still issue a regulation that would simply require tax officials to inform the taxpayer, in any
manner, of the law and the facts on which an assessment was based. That requirement is neither difficult to make nor
its desired results hard to achieve. Moreover, an administrative rule interpretive of a statute, and not declarative of
certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute.
RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued only on
September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior to the issuance of the preliminary
assessment notice and demand letter.51

Indubitably, the disputed assessments for taxable year 1994 should have already complied with the requirements laid
down under Revenue Regulation No. 12-99. Having failed so, the same produces no legal effect.

Notwithstanding the foregoing findings, we sustain the CTA En Banc’s findings on the deficiency EWT for taxable
year 1998 considering that it complies with Section 228 of the Tax Code as well as Revenue Regulation No. 12-99,
thus:

On the other hand, the 1998 EWT FAN reflected the following: a detailed factual account why the basic EWT is
₱14,496.79 and the legal basis, Section 57 B of the 1997 NIRC supporting findings of EWT liability of ₱22,437.01.
Thus, the EWT FAN for 1998 is duly issued in accordance with the law.52

As to the last issue, petitioner avers that its right to collect the EWT for taxable year 1992 has not yet prescribed. It
argues that while the final assessment notice and demand letter on EWT for taxable year 1992 were all issued on
January 9, 1996, the five (5)-year prescriptive period to collect was interrupted when respondent filed its request for
reinvestigation on March 14, 1997 which was granted by petitioner on January 22, 2001 through the issuance of Tax
Verification Notice No. 00165498 on even date.53 Thus, the period for tax collection should have begun to run from
the date of the reconsidered or modified assessment.54

This argument fails to persuade us.

The statute of limitations on assessment and collection of national internal revenue taxes was shortened from five (5)
years to three (3) years by virtue of Batas Pambansa Blg. 700. 55 Thus, petitioner has three (3) years from the date of
actual filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the
collection thereof without an assessment.56 However, when it validly issues an assessment within the three (3)-year
period, it has another three (3) years within which to collect the tax due by distraint, levy, or court proceeding. 57The
assessment of the tax is deemed made and the three (3)-year period for collection of the assessed tax begins to run
on the date the assessment notice had been released, mailed or sent to the taxpayer.58
On this matter, we note the findings of the CTA-Special First Division that no evidence was formally offered to prove
when respondent filed its returns and paid the corresponding EWT and WTC for taxable year 1992. 59

Nevertheless, as correctly held by the CTA En Banc, the Preliminary Collection Letter for deficiency taxes for taxable
year 1992 was only issued on February 21, 2002, despite the fact that the FANs for the deficiency EWT and WTC for
taxable year 1992 was issued as early as January 9, 1996. Clearly, five (5) long years had already lapsed, beyond
the three (3)-year prescriptive period, before collection was pursued by petitioner.

Further, while the request for reinvestigation was made on March 14, 1997, the same was only acted upon by
petitioner on January22, 2001, also beyond the three (3) year statute of limitations reckoned from January 9, 1996,
notwithstanding the lack of impediment to rule upon such issue. We cannot countenance such inaction by petitioner
to the prejudice of respondent pursuant to our ruling in Commissioner of Internal Revenue v. Philippine Global
Communication, Inc.,60 to wit:

The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the
CIR’s claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy
served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect
the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which
was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the
assessed tax.61

Here, petitioner had ample time to make a factually and legally well-founded assessment and implement collection
pursuant thereto.1âwphi1 Whatever examination that petitioner may have conducted cannot possibly outlast the
entire three (3)-year prescriptive period provided by law to collect the assessed tax. Thus, there is no reason to
suspend the running of the statute of limitations in this case.

Moreover, in Bank of the Philippine Islands, citing earlier jurisprudence, we held that the request for reinvestigation
should be granted or at least acted upon in due course before the suspension of the statute of limitations may set in,
thus:

In BPI v. Commissioner of Internal Revenue, the Court emphasized the rule that the CIR must first grant the request
for reinvestigation as a requirement for the suspension of the statute of limitations. The Court said:

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough reinvestigation
of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the evidences he
had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all
examined. Considering the given facts, this Court pronounced that—

x x x The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted,
in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v. Ablaza, supra). Moreover, the
Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before.
There were no impediments on the part of the Collector to file the collection case from April 1, 1949…

In Republic of the Philippines v. Acebedo, this Court similarly found that –

x x x T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation
thereof on October 11, 1949 (Exh. "A"). There is no evidence that this request was considered or acted upon. In fact,
on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount
of the assessment (Exh. "D"), but there was follow-up of this warrant. Consequently, the request for reinvestigation
did not suspend the running of the period for filing an action for collection.[Emphasis in the original] 62With respect to
petitioner’s argument that respondent’s act of elevating its protest to the CTA has fortified the continuing interruption
of petitioner’s prescriptive period to collect under Section 223 of the Tax Code, 63 the same is flawed at best because
respondent was merely exercising its right to resort to the proper Court, and does not in any way deter petitioner’s
right to collect taxes from respondent under existing laws.

On the strength of the foregoing observations, we ought to reiterate our earlier teachings that "in balancing the scales
between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one
side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizen’s right is amply protected by the Bill of Rights under the
Constitution."64 Thus, while "taxes are the lifeblood of the government," the power to tax has its limits, in spite of all its
plenitude.65 Even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure.66

After all, the statute of limitations on the collection of taxes was also enacted to benefit and protect the taxpayers, as
elucidated in the case of Philippine Global Communication, Inc.,67 thus:

x x x The report submitted by the tax commission clearly states that these provisions on prescription should be
enacted to benefit and protect taxpayers:

Under the former law, the right of the Government to collect the tax does not prescribe.1âwphi1 However, in fairness
to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary
investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5
years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so
also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes
after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-
322).68

WHEREFORE, the petition is DENIED. The June 27, 2011 Decision of the Court of Tax Appeals En Banc in C.T.A.
EB No. 662 is hereby AFFIRMED.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 174942 March 7, 2008

BANK OF THE PHILIPPINE ISLANDS (Formerly: Far East Bank and Trust Company), petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

TINGA, J.:

The Bank of the Philippine Islands (BPI) seeks a review of the Decision 1dated 15 August 2006 and the
Resolution2dated 5 October 2006, both of the Court of Tax Appeals (CTA or tax court), which ruled that BPI is liable
for the deficiency documentary stamp tax (DST) on its cabled instructions to its foreign correspondent bank and that
prescription had not yet set in against the government.

The following undisputed facts are culled from the CTA decision:

Petitioner, the surviving bank after its merger with Far East Bank and Trust Company, is a corporation duly
created and existing under the laws of the Republic of the Philippines with principal office at Ayala Avenue
corner Paseo de Roxas Ave., Makati City.

Respondent thru then Revenue Service Chief Cesar M. Valdez, issued to the petitioner a pre-assessment
notice (PAN) dated November 26, 1986.

Petitioner, in a letter dated November 29, 1986, requested for the details of the amounts alleged as 1982-
1986 deficiency taxes mentioned in the November 26, 1986 PAN.

On April 7, 1989, respondent issued to the petitioner, assessment/demand notices FAS-1-82 to 86/89-000
and FAS 5-82 to 86/89-000 for deficiency withholding tax at source (Swap Transactions) and DST involving
the amounts of P190,752,860.82 and P24,587,174.63, respectively, for the years 1982 to 1986.

On April 20, 1989, petitioner filed a protest on the demand/assessment notices. On May 8, 1989, petitioner
filed a supplemental protest.

On March 12, 1993, petitioner requested for an opportunity to present or submit additional documentation on
the Swap Transactions with the then Central Bank (page 240, BIR Records). Attached to the letter dated
June 17, 1994, in connection with the reinvestigation of the abovementioned assessment, petitioner
submitted to the BIR, Swap Contracts with the Central Bank.

Petitioner executed several Waivers of the Statutes of Limitations, the last of which was effective until
December 31, 1994.

On August 9, 2002, respondent issued a final decision on petitioner’s protest ordering the withdrawal and
cancellation of the deficiency withholding tax assessment in the amount of P190,752,860.82 and considered
the same as closed and terminated. On the other hand, the deficiency DST assessment in the amount
of P24,587,174.63 was reiterated and the petitioner was ordered to pay the said amount within thirty (30)
days from receipt of such order. Petitioner received a copy of the said decision on January 15, 2003.
Thereafter, on January 24, 2003, petitioner filed a Petition for Review before the Court.
On August 31, 2004, the Court rendered a Decision denying the petitioner’s Petition for Review, the
dispositive portion of which is quoted hereunder:

IN VIEW OF ALL THE FOREGOING, the petition is hereby DENIED for lack of merit. Accordingly,
petitioner is ORDERED to PAY the respondent the amount of P24,587,174.63 representing
deficiency documentary stamp tax for the period 1982-1986, plus 20% interest starting February
14, 2003 until the amount is fully paid pursuant to Section 249 of the Tax Code.

SO ORDERED.

On September 21, 2004, petitioner filed a Motion for Reconsideration of the abovementioned Decision which
was denied for lack of merit in a Resolution dated February 14, 2005.

On March 9, 2005, petitioner filed with the Court En Banc a Motion for Extension of Time to File Petition for
Review praying for an extension of fifteen (15) days from March 10, 2005 or until March 25, 2005.
Petitioner’s motion was granted in a Resolution dated March 16, 2005.

On March 28, 2005, (March 25 was Good Friday), petitioner filed the instant Petition for Review, advancing
the following assignment of errors.

I. THIS HONORABLE COURT OVERLOOKED THE SIGNIFICANCE OF THE WAIVER DULY AND
VALIDLY AGREED UPON BY THE PARTIES AND EFFECTIVE UNTIL DECEMBER 31, 1994;

II. THIS TAX COURT ERRED IN HOLDING THAT THE COLLECTION OF ALLEGED
DEFICIENCY TAX HAS NOT PRESCRIBED.

III. THIS HONORABLE COURT ERRED IN HOLDING THAT RESPONDENT DID NOT VIOLATE
PROCEDURAL DUE PROCESS IN THE ISSUANCE OF ASSESSMENT NOTICE RELATIVE TO
DOCUMENTARY STAMP DEFICIENCY.

IV. THIS HONORABLE COURT ERRED IN HOLDING THAT THE 4 MARCH 1987
MEMORANDUM OF THE LEGAL SERVICE CHIEF DULY APPROVED BY THE BIR
COMMISISONER VESTS NO RIGHTS TO PETITIONER.

V. THIS HONORABLE COURT ERRED IN HOLDING THAT PETITIONER IS LIABLE FOR


DOCUMENTARY STAMP TAX ON SWAP LOANS TRANSACTIONS FROM 1982 TO 1986.3

The CTA synthesized the foregoing issues into whether the collection of the deficiency DST is barred by prescription
and whether BPI is liable for DST on its SWAP loan transactions.

On the first issue, the tax court, applying the case of Commissioner of Internal Revenue v. Wyeth Suaco
Laboratories, Inc.,4(Wyeth Suaco case), ruled that BPI’s protest and supplemental protest should be considered
requests for reinvestigation which tolled the prescriptive period provided by law to collect a tax deficiency by distraint,
levy, or court proceeding. It further held, as regards the second issue, that BPI’s cabled instructions to its foreign
correspondent bank to remit a specific sum in dollars to the Federal Reserve Bank, the same to be credited to the
account of the Central Bank, are in the nature of a telegraphic transfer subject to DST under Section 195 of the Tax
Code.

In its Petition for Review5 dated 24 November 2006, BPI argues that the government’s right to collect the DST had
already prescribed because the Commissioner of Internal Revenue (CIR) failed to issue any reply granting BPI’s
request for reinvestigation manifested in the protest letters dated 20 April and 8 May 1989. It was only through the 9
August 2002 Decision ordering BPI to pay deficiency DST, or after the lapse of more than thirteen (13) years, that the
CIR acted on the request for reinvestigation, warranting the conclusion that prescription had already set in. It further
claims that the CIR was not precluded from collecting the deficiency within three (3) years from the time the notice of
assessment was issued on 7 April 1989, or even until the expiration on 31 December 1994 of the last waiver of the
statute of limitations signed by BPI.
Moreover, BPI avers that the cabled instructions to its correspondent bank are not subject to DST because the
National Internal Revenue Code of 1977 (Tax Code of 1977) does not contain a specific provision that cabled
instructions on SWAP transactions are subject to DST.

The Office of the Solicitor General (OSG) filed a Comment6 dated 1 June 2007, on behalf of the CIR, asserting that
the prescriptive period was tolled by the protest letters filed by BPI which were granted and acted upon by the CIR.
Such action was allegedly communicated to BPI as, in fact, the latter submitted additional documents pertaining to its
SWAP transactions in support of its request for reinvestigation. Thus, it was only upon BPI’s receipt on 13 January
2003 of the 9 August 2002 Decision that the period to collect commenced to run again.

The OSG cites the case of Collector of Internal Revenue v. Suyoc Consolidated Mining Company, et al. 7(Suyoc case)
in support of its argument that BPI is already estopped from raising the defense of prescription in view of its repeated
requests for reinvestigation which allegedly induced the CIR to delay the collection of the assessed tax.

In its Reply8dated 30 August 2007, BPI argues against the application of the Suyoc case on two points: first, it never
induced the CIR to postpone tax collection; second, its request for reinvestigation was not categorically acted upon by
the CIR within the three-year collection period after assessment. BPI maintains that it did not receive any
communication from the CIR in reply to its protest letters.

We grant the petition.

Section 3189 of the Tax Code of 1977 provides:

Sec. 318. Period of limitation upon assessment and collection.—Except as provided in the succeeding
section, internal revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of
such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases
already investigated prior to the approval of this Code.

The statute of limitations on assessment and collection of national internal revenue taxes was shortened from five (5)
years to three (3) years by Batas Pambansa Blg. 700.10 Thus, the CIR has three (3) years from the date of actual
filing of the tax return to assess a national internal revenue tax or to commence court proceedings for the collection
thereof without an assessment.

When it validly issues an assessment within the three (3)-year period, it has another three (3) years within which to
collect the tax due by distraint, levy, or court proceeding. The assessment of the tax is deemed made and the three
(3)-year period for collection of the assessed tax begins to run on the date the assessment notice had been released,
mailed or sent to the taxpayer.11

As applied to the present case, the CIR had three (3) years from the time he issued assessment notices to BPI on 7
April 1989 or until 6 April 1992 within which to collect the deficiency DST. However, it was only on 9 August 2002 that
the CIR ordered BPI to pay the deficiency.

In order to determine whether the prescriptive period for collecting the tax deficiency was effectively tolled by BPI’s
filing of the protest letters dated 20 April and 8 May 1989 as claimed by the CIR, we need to examine Section 320 12of
the Tax Code of 1977, which states:

Sec. 320. Suspension of running of statute.—The running of the statute of limitations provided in Sections
318 or 319 on the making of assessment and the beginning of distraint or levy or a proceeding in court for
collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty
days thereafter; when the taxpayer requests for a re-investigation which is granted by the
Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon
which a tax is being assessed or collected: Provided, That if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended; when the warrant of
distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines. (Emphasis supplied)

The above section is plainly worded. In order to suspend the running of the prescriptive periods for assessment and
collection, the request for reinvestigation must be granted by the CIR.

In BPI v. Commissioner of Internal Revenue,13the Court emphasized the rule that the CIR must first grant the request
for reinvestigation as a requirement for the suspension of the statute of limitations. The Court said:

In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal
Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records
and documents were not at all examined. Considering the given facts, this Court pronounced that—

x x x The act of requesting a reinvestigation alone does not suspend the period. The request should
first be granted, in order to effect suspension. (Collector v. Suyoc Consolidated, supra; also Republic v.
Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his
evidence, which the latter did one day before. There were no impediments on the part of the Collector to file
the collection case from April 1, 1949…

In Republic of the Philippines v. Acebedo, this Court similarly found that—

x x x T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. "A"). There is no evidence that this request was
considered or acted upon. In fact, on October 23, 1950 the then Collector of Internal Revenue issued a
warrant of distraint and levy for the full amount of the assessment (Exh. "D"), but there was follow-up of this
warrant. Consequently, the request for reinvestigation did not suspend the running of the period for
filing an action for collection. [Emphasis in the original]14

The Court went on to declare that the burden of proof that the request for reinvestigation had been actually granted
shall be on the CIR. Such grant may be expressed in its communications with the taxpayer or implied from the action
of the CIR or his authorized representative in response to the request for reinvestigation.

There is nothing in the records of this case which indicates, expressly or impliedly, that the CIR had granted the
request for reinvestigation filed by BPI. What is reflected in the records is the piercing silence and inaction of the CIR
on the request for reinvestigation, as he considered BPI’s letters of protest to be.

In fact, it was only in his comment to the present petition that the CIR, through the OSG, argued for the first time that
he had granted the request for reinvestigation. His consistent stance invoking the Wyeth Suaco case, as reflected in
the records, is that the prescriptive period was tolled by BPI’s request for reinvestigation, without any assertion that
the same had been granted or at least acted upon.15

In the Wyeth Suaco case, private respondent Wyeth Suaco Laboratories, Inc. sent letters seeking the reinvestigation
or reconsideration of the deficiency tax assessments issued by the BIR. The records of the case showed that as a
result of these protest letters, the BIR Manufacturing Audit Division conducted a review and reinvestigation of the
assessments. The records further showed that the company, thru its finance manager, communicated its inability to
settle the tax deficiency assessment and admitted that it knew of the ongoing review and consideration of its protest.

As differentiated from the Wyeth Suaco case, however, there is no evidence in this case that the CIR actually
conducted a reinvestigation upon the request of BPI or that the latter was made aware of the action taken on its
request. Hence, there is no basis for the tax court’s ruling that the filing of the request for reinvestigation tolled the
running of the prescriptive period for collecting the tax deficiency.

Neither did the waiver of the statute of limitations signed by BPI supposedly effective until 31 December 1994
suspend the prescriptive period. The CIR himself contends that the waiver is void as it shows no date of acceptance
in violation of RMO No. 20-90.16 At any rate, the records of this case do not disclose any effort on the part of the
Bureau of Internal Revenue to collect the deficiency tax after the expiration of the waiver until eight (8) years
thereafter when it finally issued a decision on the protest.
We also find the Suyoc case inapplicable. In that case, several requests for reinvestigation and reconsideration were
filed by Suyoc Consolidated Mining Company purporting to question the correctness of tax assessments against it.
As a result, the Collector of Internal Revenue refrained from collecting the tax by distraint, levy or court proceeding in
order to give the company every opportunity to prove its claim. The Collector also conducted several reinvestigations
which eventually led to a reduced assessment. The company, however, filed a petition with the CTA claiming that the
right of the government to collect the tax had already prescribed.

When the case reached this Court, we ruled that Suyoc could not set up the defense of prescription since, by its own
action, the government was induced to delay the collection of taxes to make the company feel that the demand was
not unreasonable or that no harassment or injustice was meant by the government.

In this case, BPI’s letters of protest and submission of additional documents pertaining to its SWAP transactions,
which were never even acted upon, much less granted, cannot be said to have persuaded the CIR to postpone the
collection of the deficiency DST.

The inordinate delay of the CIR in acting upon and resolving the request for reinvestigation filed by BPI and in
collecting the DST allegedly due from the latter had resulted in the prescription of the government’s right to collect the
deficiency. As this Court declared in Republic of the Philippines v. Ablaza:17

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the
Government and to its citizens; to the Government because tax officers would be obliged to act promptly in
the making of assessment, and to citizens because after the lapse of the period of prescription citizens
would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect
the books of taxpayers, not to determine the latter’s real liability, but to take advantage of every opportunity
to molest peaceful, law-abiding citizens. Without such 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 beneficent purpose of affording protection to the taxpayer within the
contemplation of the Commission which recommend the approval of the law. 18

Given the prescription of the government’s claim, we no longer deem it necessary to pass upon the validity of the
assessment.

WHEREFORE, the petition is GRANTED. The Decisionof the Court of Tax Appeals dated 15 August 2006 and its
Resolution dated 5 October 2006, are hereby REVERSED and SET ASIDE. No pronouncement as to costs.

SO ORDERED.
BPI (Far East Bank and Trust Co) vs. CIR
G.R. 174492 March 7, 2008
Tinga, J.:
FACTS:
Following a pre-assessment notice on deficiency tax filed by respondent in 1986, the latter sent final
demand to petitioner on April 7, 1989. Petitioner filed a protest and a waiver of the Statutes of Limitations was
effected until December 31, 1994. On August 9, 2002, respondent issued a final decision on petitioner’s protest
ordering the withdrawal and cancellation of the deficiency withholding tax assessment in the amount of
P190,752,860.82 and considered the sane as close and terminated but the documentary stamp tax of
P24,587,174.63 was reiterated. Thereafter petition for review was filed with CTA. The court denied the petition.
ISSUE:
Whether or not the collection of the deficiency DST is barred by prescription:
RULING:
In order to determine whether the prescriptive period for collecting the tax deficiency tolled by BPI’s filing
of the protest letters dated April 7, 1989. Section 20 of the Tax Code must be examined:
The running of the Statute of Limitations… on the making of assessment and the beginning of distraint or levy or a
proceeding in court of collection… shall be suspended for the period… when the taxpayer requests for re-
investigation which is granted by the Commissioner.
In order to suspend the running of the prescriptive periods for assessment and collection, the request for
re-investigation must be granted by CIR. There is nothing in this case which indicates, expressly or impliedly, that the
CIR had granted the request for re-investigation filed by BPI. What is reflected is the silence and inaction of the CIR.
Given the prescription of the Government’s claim, we no longer deem it necessary to pass upon the
validity of the assessment.
SECOND DIVISION

[G.R. No. 118176. April 12, 2000]

PROTECTOR'S SERVICES, INC., petitioner, vs. COURT OF APPEALS AND COMMISSIONER OF INTERNAL
REVENUE, respondents. Korte

DECISION

QUISUMBING, J.:

Assailed in this petition for review is the Decision[1] of the Court of Appeals dated November 28, 1994, in CA-G.R. SP
No.31825. It affirmed the judgment of the Court of Tax Appeals which had dismissed the petition for review of
assessments made by the Commissioner of Internal Revenue imposing deficiency percentage taxes on petitioner for
the years 1983, 1984 and 1985. The dispositive portion of the CTA's decision states:

"WHEREFORE, in all the foregoing, this case is hereby DISMISSED for lack of jurisdiction--the
subject assessments having become final and unappealable."[2]

The facts are as follows:

Petitioner Protector's Services, Inc. (PSI) is a contractor engaged in recruiting security guards for clients. After an
audit investigation conducted by the Bureau of Internal Revenue (BIR), petitioner was assessed for deficiency
percentage taxes including surcharges, penalties and interests thereon, as follows:

YEAR..........AMOUNT..........DEMAND LETTER NO.

1983..........P503,564.59..........18-452-83B-87-B2

1984........... 831,464.30..........18-451-84B-87-B2

1985..........P1,514,047.86.......18-450-85B-87-B2

On December 7, 1987, respondent Commissioner sent by registered mail, demand letters for payment of the
aforesaid assessments. However, petitioner alleged that on December 10, 1987, it only received Demand Letter Nos.
18-452-83B-87 -B2 and 18-451-84B-87 -B2 for the years 1983 and 1984, respectively. It denied receiving any notice
of deficiency percentage tax for the year 1985.

Petitioner sent a protest letter dated January 02, 1988, to the BIR regarding the 1983 and 1984 assessments. The
petitioner claimed that its gross receipts subject to percentage taxes should exclude the salaries of the security
guards as well as the corresponding employer's share of Social Security System (SSS), State Insurance Fund (SIP)
and Medicare contributions.Sclaw

Without formally acting on the petitioner's protest, the BIR sent a follow-up letter dated July 12, 1988, ordering the
settlement of taxes based on its computation. Additional documentary stamp taxes of two thousand twenty-five
(P2,025.00) pesos on petitioner's capitalization for 1983 and 1984, and seven hundred three pesos and forty-one
centavos (P703.41) as deficiency expanded withholding tax were included in the amount demanded. The total
unsettled tax amounted to two million, eight hundred fifty-one thousand, eight hundred five pesos and sixteen
centavos (P2,851,805.16).

On July 21, 1988, petitioner paid the P2,025.00 documentary stamp tax and the P703.41 deficiency expanded
withholding tax. On the following day, July 22, 1988, petitioner filed its second protest on the 1983 and 1984
percentage taxes, and included, for the first time, its protest against the 1985 assessment.

On November 9, 1990, BIR Deputy Commissioner Eufracio Santos sent a letter to the petitioner which denied with
finality the latter's protests against the subject assessments, stating thus:
"...[T]hat the salaries paid to the security guards form part of your taxable gross receipts in the
determination of the 3% and 4% contractor's tax imposed under Section 191 of the Tax Code prior
to its amendment by the provision of Executive Order No.273.

Considering that the security guards are actually your employees and not that of your clients, the
salaries corresponding to the services rendered by your employees form part of your taxable
receipts. This contention finds support in the case of Avecilla Building Corporation versus
Commissioner, et al., G.R. L-42395, 17 January 1985 and Resty Arbon Singh versus
Commissioner, CTA Case No.1901, 5 December 1970."[3]

On December 5, 1990, petitioner filed a petition for review before the CTA contending that:

1).....Assessments for documentary stamp tax and expanded withholding tax are without basis
since they were paid on July 22, 1988.

2).....The period for collection of the 1985 percentage tax had prescribed, because PSI denied
having received any assessment letter for the same year. Sc lex

3).....Percentage taxes for the three quarters of 1984 were filed as follows: 1st Qtr. -April 23, 1984;
2nd Qtr. -July 20, 1984, and; 3rd Qtr. - October 19, 1984. The three-year prescriptive period to
collect percentage taxes for the 1st, 2nd and 3rd quarters had prescribed because the BIR sent an
assessment letter only on December 10, 1987.

4).....The base amount for computing percentage tax was erroneous because the BIR included in
the taxable amount, the salaries of the security guards and the employer's corresponding
remittances to SSS, SIF, and Medicare, which amounts were earmarked for other persons, and
should not form part of PSIs receipts.

The CTA dismissed the petition on the following grounds: (1) The three-year period of limitation for assessment of
taxes in 1984 commenced from the date of filing the final return on January 20, 1985, hence assessment made on
December 10, 1987, was within said period. (2) Petitioner could not deny receipt of the 1985 assessment on the
same date, December 10, 1987, for as supported by testimony of the BIR personnel, all the assessment letters for
the years 1983, 1984, and 1985 were included in one envelope and mailed together. (3) Petitioner's protest letter
dated January 2, 1988, was filed on January 12, 1988, or thirty-three days from December 10, 1987, hence, the
request for reinvestigation was filed out of time.

Petitioner appealed to the Court of Appeals, which affirmed the decision of the CTA. Hence, the present petition,
wherein petitioner raises the following issues:

"I. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON THE PETITION
FOR REVIEW FILED BEFORE IT.

II. WHETHER THE ASSESSMENTS AGAINST THE PETITIONER FOR DEFICIENCY


PERCENTAGE TAX FOR TAXABLE YEARS 1983 AND 1984 WERE MADE AFTER THE LAPSE
OF THE PRESCRIPTIVE PERIOD.

III. WHETHER THE PERIOD FOR THE COLLECTION OF TAXES FOR TAXABLE YEARS
1983,1984, AND 1985 HAS ALREADY PRESCRIBED.

IV. WHETHER THE ASSESSMENTS ARE CORRECT."[4]

As to the first issue, petitioner maintains that the assessments only became final on November 9, 1990, when the CIR
denied the request for reconsideration. Consequently, the CTA had jurisdiction over the appeal filed by the petitioner
on December 5, 1990. Furthermore, the CTA resolved that the assessments became final after thirty days from
receipt of demand letters by the petitioner, without the latter interposing a reconsideration. x law
The pertinent provision of the National Internal Revenue Code of 1977 (NIRC 1977), concerning the period within
which to file a protest before the CIR, reads:

"Section 270. Protesting of assessment. --When the Commissioner of Internal Revenue or his duly
authorized representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall
issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or


reinvestigation in such form and manner as may be prescribed by the implementing regulations
within thirty (30) days from receipt of the assessment; otherwise, the assessment shall become
final, and unappealable.

If the protest is denied in whole or in part, the individual, association or corporation adversely
affected by the decision on the protest may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision; otherwise, the decision shall become final, executory and
demandable."

We note that indeed on December 10, 1987, petitioner received the BIR's assessment notices. On January 12, 1988,
petitioner protested the 1983 and 1984 assessments and requested for a reinvestigation. From December 10, 1987
to January 12, 1988, thirty-three days had lapsed. Thereafter petitioner may no longer dispute the correctness of the
assessments. Hence, in our view, the CTA correctly dismissed the appeal for lack of jurisdiction.

On the second issue, petitioner argues that the government's right to assess and collect the 1983, 1984 and 1985
taxes had already prescribed. Relying on Batas Parnbansa (BP) Blg. 700, which reduced the period of limitation for
assessment and collection of internal revenue taxes from five to three years, petitioner asserts that the government
was barred from reviewing the 1983 tax starting December 10, 1987, the expiry date of the three-year limit. Petitioner
insists that the reckoning period of prescription should start from the date when the quarterly percentage taxes were
paid and not when the Final Annual Percentage Tax Return for the year was filed. Moreover, he denies having
received the 1985 tax assessment.

Petitioner's contentions lack merit. Sections one and three of BP 700, "An Act Amending Sections 318 and 319 of the
National Internal Revenue Code, which reduced the period of limitation for assessment and collection of internal
revenue taxes from five to three years," provides: Sc

"Sec. 1, Section 318 of the National Internal Revenue Code, as amended, is hereby amended to
read as follows:

Sec. 318. Period of limitation upon assessment and collection. --Except as


provided in the succeeding sections, internal revenue taxes shall be assessed
within three 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-year period shall
be counted from the day the return was filed. For the purposes of this section, a
return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day.

xxx

"Sec. 3. The period of limitation herein prescribed shall apply to assessments of internal revenue
taxes beginning taxable year 1984."

B.P. 700 was approved on April 5, 1984. The three-year prescriptive period for assessment and collection of revenue
taxes applied to taxes paid beginning 1984. Clearly, the tax assessment made on December 10, 1987, for the year
1983 was still covered by the five-year statutory prescriptive period. This rule was emphasized in Revenue
Memorandum Circular (RMC) No. 33-84, published on November 12, 1984, which defined the salient features of the
application of BP 700, to wit:

"B. Effectivity of Prescriptive Periods of Assessment and Collection

1......Assessment made on or after April 5, 1984 (date, of approval of BP 700) will still be governed
by the original five-year period if the taxes assessed thereby cover taxable years prior to January
1, 1984. (emphasis supplied) Scmis

Corollarily, assessments made before April 5, 1984 shall still be governed by the original five-year
period.

However, assessments made on or April 5, 1984 covering taxable years beginning January 1, 1984
shall be under the new three-year period."

Should the three-year limitation be reckoned at the time of the quarterly payment of contractor's tax or at the due date
of the final annual tax?

Section 2 of Revenue Regulation No.6-81, states:

"Sec. 2. Percentage tax. --In general, unless otherwise specifically provided in the Tax Code, every
person conducting business on which a percentage tax is imposed under Chapter II Title V of the
Tax Code must render quarterly declaration on cumulative basis of the amount of his sales,
receipts or earnings or gross value of output actually removed from the factory or near warehouse,
compute and pay the tax due thereon.

(a) Quarterly Percentage Return.--

For each of the first three quarters of the taxable year, the tax
so computed shall be decreased by the amount of tax
previously paid and by the sum of the tax credits allowed under
this Title for the preceding current quarters. The tax due shall
be paid not later than twenty (20) days following the close of
each of the first three quarters of the taxable year.

(b) Final Annual Percentage Tax Return --

On or before the twentieth day of the second month following


the close of the taxable year, a final percentage tax return shall
be filed under BIR Form No. __ covering the entire taxable
year. If the sum of the total quarterly percentage tax payments
made for the first three quarters and total tax credit allowable
for the taxable year are not equal to the total tax due on the
entire gross sales, receipts or earnings or gross value of the
output for that taxable year, the taxpayer shall either:

(1) Pay the tax still due; or Mis sc

(2) Credit to the extent allowable under this Title, the amount of
excess tax credits shown in the final adjustment return against
the quarterly percentage tax liabilities for the succeeding
taxable quarters."

Only recently in G.R. No.115712, Commission of Internal Revenue vs. Court of Appeals, February 25, 1999, we held,
that the three-year prescriptive period of tax assessment of contractors tax should be computed at the time of the
filing of the "final annual percentage tax return," [5] when it can be finally ascertained if the taxpayer still has an unpaid
tax, and not from the tentative quarterly payments.
Turning now to petitioner's denial that he received the 1985 assessment, we agree with the factual findings of the
CTA that the assessment letter may be presumed to have been received by petitioner. The CTA found as follows: Mis
spped

"The 1985 assessment which petitioner denied as having been received was negated when the
respondent introduced documentary evidence showing that it was mailed by registered mail. It was
further buttressed by the testimony of witness Mr. Arnold C. Larroza, Chief Administrative Branch
Mailing Section, Rev. Region No. 4B-1, Quezon City that the 1983, 1984 and 1985 assessments
were placed in one envelope when it was mailed by registered mail. Presumably, it was received in
the regular course of the mail. ... The facts to be proved to raise this presumption are (a) that the
letter was properly addressed with postage prepaid; and (b) that it was mailed. Once these facts
are proved, the presumption is that the letter was received by the addressee as soon as it could
have been transmitted to him in the ordinary course of the mails. Such being the case, this Court
cannot be made to believe that the 1985 assessment which incidentally has a substantially greater
amount involved, was not received by the petitioner. Hence, the same assessment is also
considered final and unappealable for failure of the petitioner to protest the same within the
reglementary period provided by law."[6]

In reviewing administrative decisions, the reviewing court cannot re-examine the factual basis and sufficiency of the
evidence.[7] The findings of fact must be respected, so long as they are supported by substantial evidence. [8]

As a subsidiary defense, petitioner interposes the third issue claiming that since the CIR failed, until now, to
commence the collection of the 1983, 1984, and 1985 deficiency tax, the right to collect had, likewise, prescribed.
Petitioner urges us to consider that for the government's failure to institute collection remedies either by judicial action
or by distraint and levy, the right to collect the same has prescribed pursuant to Section 219 of the NIRC. Note,
however, that Section 271 of the 1986 Tax Code provides for the suspension of running of the statute of limitation of
tax collection, as follows: Spped

"Sec. 271. Suspension of running of statute. -- The running of the statute of limitations provided in
Sections 268 and 269 on the making of assessment and the beginning of distraint or levy or a
proceeding in court for collection, in respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the assessment or beginning
distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer
request for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be
located in the address given by him in the return filed upon which a tax is being assessed or
collected: Provided, That, if the taxpayer informs the Commissioner of any change in address, the
running of the statute of limitation will not be suspended; when the warrant of distraint and levy is
duly served upon the taxpayer, his authorized representative, or a member of his household with
sufficient discretion, and no property could be located; and when the taxpayer is out of the
Philippines." (Emphasis supplied.)

In the instant case, PSI filed a petition before the CTA to prevent the collection of the assessed deficiency tax. When
the CTA dismissed the case, petitioner elevated the case before us, hoping for a review in its favor. The actions taken
by the petitioner before the CTA and now before us, suspended the running of the statute of limitation. In the old case
of Republic of thePhilippines vs. Ker and Company, Ltd.,[9] we held:

"Under Section 333 (renumbered to 271 during the instant case) of the Tax Code the running of the
prescriptive period to collect deficiency taxes shall be suspended for the period during which the
Commissioner of Internal Revenue is prohibited from beginning a distraint and levy or instituting a
proceeding in court, and for sixty days thereafter. In the case at bar, the pendency of the taxpayer's
appeal in the Court of Tax Appeals and in the Supreme Court had the effect of temporarily staying
the hands of the said Commissioner. If the taxpayer's stand that the pendency of the appeal did not
stop the running of the period because the Court of Tax Appeals did not have jurisdiction over the
case of taxes is upheld, taxpayers would be encouraged to delay the payment of taxes in the hope
of ultimately avoiding the same. Under the circumstances, the running of the prescriptive period
was suspended."[10] Jo spped

Finally, petitioner contends that the assessments made by the respondent CIR were erroneous because they
included in the gross receipts subject to the contractor's tax the salaries of the security guards and the employer's
share in the SSS, SIF and Medicare. Petitioner claims that it did not benefit from those amounts earmarked for other
persons or institutions, hence, they must not be taxable.

Contractors tax on gross receipts imposed on business agents including private detective watchman agencies,[11] was
a tax on the sale of services or labor, imposed on the exercise of a privilege. [12] The term "gross receipts" means all
amounts received by the prime or principal contractor as the total price, undiminished by the amount paid to the
subcontractor under a subcontract arrangement.[13] Hence, gross receipts could not be diminished by employer's
SSS, SIF and Medicare contributions.[14] Furthermore, it has been consistently ruled by the BIR that the salaries paid
to security guards should form part of the gross receipts, subject to tax, to wit:

"...This Office has consistently ruled that salaries of security guards form part of the taxable gross
receipts of a security agency for purposes of the 4% [formerly 3%] contractors tax under Section
205 of the Tax Code, as amended. The reason is that the salaries of the security guards are
actually the liability of the agency and that the guards are considered their employees; hence, for
percentage tax purposes, the salaries of the security guards are includible in its gross receipts.
(BIR Ruling No.271-81 citing BIR Ruling No. 69-002)"[15]

These rulings were made by the CIR in the exercise of his power to "make judgments or opinions in connection with
the implementation of the provisions of the internal revenue code." The opinions and rulings of officials of the
government called upon to execute or implement administrative laws, command respect and weight. [16] We see no
compelling reason in this case to rule otherwise. Spped jo

WHEREFORE, the assailed decision of the Court of Appeals, in CA- G.R. SP 31825, is AFFIRMED. Costs against
petitioner.

SO ORDERED.
PROTECTOR’S SERVICES, INC., V CA ET. AL. G.R. No 118176, April 12, 2000

Facts: Petition Protector’s Services, Inc., (PSI) is a contractor engaged in recruiting security guards for clients. After
an audit investigation, the BIR assessed PSI deficiency percentage taxes including surcharges, penalties and
interests of P503,564.39, P831,464.30 and P1,514,047.86 for 1983, 1984 and 1985, respectively. On December 7,
1987, respondent CIR sent demand letters for payment of said assessments for 1983 and 1984 on December 10,
1987, but denied receiving the notice of deficiency tax for 1985.

Petitioner PSI, sent a protest letter dated January 12, 1988 regarding the 1983 and 1984 assessments, claiming that
gross receipts subject to percentage tax should exclude salaries of the security guards, employer’s share of SSS, SIF
and Medicare contributions. Without formally acting thereon, the BIR sent a follow-up letter dated July 12, 1988 for
the settlement of the taxes based on its computation, plus additional documentary stamp taxes of P2,025 on PSI’s
capitalization for 1983 and 1984 and as deficiency expanded withholding tax of P703.41, thereby bringing the total
unsettled tax to P2,851,805.16.

On July 12, 1988, petition paid the P2,025 documentary stamp tax and P703.41 deficiency expanded withholding tax.
The following day, PSI filed its second protest for the 1983 and 1984 assessments and included for the first time its
protest against the 1985 assessment. On November 9, 1990, the BIR denied the protests stating that salaries of
security guards are part of taxable gross receipts for determination of contractor’s tax.

PSI filed a petition for review on December 5, 1990 with the CTA averring that assessments for documentary stamp
and expanded withholding taxes and without basis having been paid on July 22, 1988; the period for collection of the
1985 assessment letter therefore, the period to collect the percentage taxes for the first, second and third quarter of
1984 has lapsed, the assessment letter therefore having been sent on December 10, 1987, or beyond 3 years from
filing of the quarterly returns, and that the base amount was erroneous since salaries of security guards, employer’s
share of SSS, SIF and medicare contributions should not form part of taxable gross receipts.

The CTA dismissed the petition stating that: (1) the assessments were made within the 3-year prescriptive period
which should be reckoned from January 20, 1985, the date of filing the final return; (2) receipt of the 1985
assessment cannot be denied as all assessments were sent in 1 envelope, as testified to by BIR personal; and (3)
the protest letter having filed only on January 12, 1988, or 33 days from December 10, 1987, the request for
reinvestigation was filed out of time. On review by the CA, the CTA’s decision was affirmed.

Issues:
• Whether or not the CTA has jurisdiction to act on the petition for review filed before it.
• Whether or not the assessments against PSI for deficiency percentage tax for 1983 and 1984 were made within the
prescriptive period.
• Whether or not the period for collection of taxes for taxable years 1983, 1984 and 1985 has already prescribed.
• Whether or not the assessments are correct.

Held: An assessment maybe administratively protested within 30 days from receipt thereof; otherwise, the
assessment shall become final and unappealable. In this case, PSI received the assessments on December 10, 1987
and protested the 1983 and 1984 assessments on January 12, 1988, or 33 days thereafter. Hence, the protests were
filed out of time and PSI can no longer dispute the correctness of assessment. The CTA correctly dismissed the
appeal for lack of jurisdiction.

Petitioner’s contention that the Government’s right to assess and collect the 1983, 1984 and 1985 assessments had
already prescribed in view of BP700, which reduced the prescriptive period for assessment and collection of internal
revenue taxes to 3 yrs, lacks merit BP700 was approved on April 5, 1984. The 3-year prescriptive period for
assessment and collection of revenue taxes applied to taxes paid beginning 1984. Clearly, the tax assessment made
on December 10, 1987, for the par 1983 was still covered by the 5-year statutory prescriptive period.

The 3-year prescriptive period for assessment of contractor’s tax should be computed at the time of filing of the final
annual percentage tax return, when it can be finally acclaimed if the taxpayer still has an unpaid tax, and not from the
tentative quarterly payments.

As to the contention that for failure of the BIR to commence collection of the 1983, 1984 and 1985 deficiency taxes
either by judicial action or by distraint and levy, the government’s right to collect the tax has prescribed, the court
ruled that “the suspension of the running of the statute of limitations for tax collection for the period during which the
commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and 60
days thereafter.” In the instant case, PSI filed a petition before the CTA to prevent the collection of the assessed
deficiency tax. When the CTA dismissed the case, petitioner elevated the case to the SC, hoping for a review in the
favor. The actions taken by petitioner before the CTA and the SC suspended the running of the statute of limitation.

As to the correctness of the assessment, it was held that contractor’s tax on gross receipts imposed on business
agents including private detective watchman agencies, was a tax on the sale of services or labor, imposed on the
exercise of a privilege. The term “gross receipts” means all amounts received by the prime or principal contractor as
the total price, undiminished by the amount paid to the subcontractor under the subcontract arrangement. Hence,
gross receipts could not be diminished by employer’s SSS, SIF and medicare contributions. Furthermore, it has been
consistently ruled by the BIR that the salaries paid to security guards should form part of the gross receipts subject to
tax.
THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 177279


Petitioner,
Present:

CARPIO MORALES, J.,


- versus - Chairperson,
BRION,
BERSAMIN,
VILLARAMA, JR., and
SERENO, JJ.

HON. RAUL M. GONZALEZ, Secretary of Justice,


L. M. CAMUS ENGINEERING CORPORATION Promulgated:
(represented by LUIS M. CAMUS and LINO D.
MENDOZA), October 13, 2010
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
assailing the Decision[1] dated October 31, 2006 and Resolution[2]dated March 6, 2007 of the Court of Appeals (CA) in CA-
G.R. SP No. 93387 which affirmed the Resolution[3] dated December 13, 2005 of respondent Secretary of Justice in I.S.
No. 2003-774 for violation of Sections 254 and 255 of the National Internal Revenue Code of 1997 (NIRC).

The facts as culled from the records:

Pursuant to Letter of Authority (LA) No. 00009361 dated August 25, 2000 issued by then Commissioner of
Internal Revenue (petitioner) Dakila B. Fonacier, Revenue Officers Remedios C. Advincula, Jr., Simplicio V.
Cabantac, Jr., Ricardo L. Suba, Jr. and Aurelio Agustin T. Zamora supervised by Section Chief Sixto C. Dy, Jr. of the
Tax Fraud Division (TFD), National Office, conducted a fraud investigation for all internal revenue taxes to
ascertain/determine the tax liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the taxable
years 1997, 1998 and 1999.[4] The audit and investigation against LMCEC was precipitated by the information
provided by an informer that LMCEC had substantial underdeclared income for the said period. For failure to comply
with the subpoena duces tecum issued in connection with the tax fraud investigation, a criminal complaint was instituted
by the Bureau of Internal Revenue (BIR) against LMCEC on January 19, 2001 for violation of Section 266 of the NIRC
(I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City).[5]

Based on data obtained from an informer and various clients of LMCEC, [6] it was discovered that LMCEC
filed fraudulent tax returns with substantial underdeclarations of taxable income for the years 1997, 1998 and
1999. Petitioner thus assessed the company of total deficiency taxes amounting to P430,958,005.90 (income tax -
P318,606,380.19 and value-added tax [VAT] - P112,351,625.71) covering the said period. The Preliminary
Assessment Notice (PAN) was received by LMCEC on February 22, 2001.[7]

LMCECs alleged underdeclared income was summarized by petitioner as follows:

Year Income Income Percentage of U


Per ITR Per Investigation ndeclared Underdeclaration
I
ncome
1997 96,638,540.00 283,412,140.84 186,733,600.84 193.30%
1998 86,793,913.00 236,863,236.81 150,069,323.81 172.90%
1999 88,287,792.00 251,507,903.13 163,220,111.13 184.90%[8]
In view of the above findings, assessment notices together with a formal letter of demand dated August 7,
2002 were sent to LMCEC through personal service on October 1, 2002.[9] Since the company and its
representatives refused to receive the said notices and demand letter, the revenue officers resorted to constructive
service[10] in accordance with Section 3, Revenue Regulations (RR) No. 12-99[11].

On May 21, 2003, petitioner, through then Commissioner Guillermo L. Parayno, Jr., referred to the Secretary
of Justice for preliminary investigation its complaint against LMCEC, Luis M. Camus and Lino D. Mendoza, the latter
two were sued in their capacities as President and Comptroller, respectively. The case was docketed as I.S. No.
2003-774. In the Joint Affidavit executed by the revenue officers who conducted the tax fraud investigation, it was
alleged that despite the receipt of the final assessment notice and formal demand letter on October 1, 2002, LMCEC
failed and refused to pay the deficiency tax assessment in the total amount of P630,164,631.61, inclusive of
increments, which had become final and executory as a result of the said taxpayers failure to file a protest thereon
within the thirty (30)-day reglementary period.[12]

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable
whatsoever for the alleged tax deficiency which had become due and demandable. Considering that the complaint
and its annexes all showed that the suit is a simple civil action for collection and not a tax evasion case, the
Department of Justice (DOJ) is not the proper forum for BIRs complaint. They also assail as invalid the assessment
notices which bear no serial numbers and should be shown to have been validly served by an Affidavit of
Constructive Service executed and sworn to by the revenue officers who served the same. As stated in LMCECs
letter-protest dated December 12, 2002addressed to Revenue District Officer (RDO) Clavelina S. Nacar of RD No.
40, Cubao, Quezon City, the company had already undergone a series of routine examinations for the years 1997,
1998 and 1999; under the NIRC, only one examination of the books of accounts is allowed per taxable year. [13]

LMCEC further averred that it had availed of the Bureaus Tax Amnesty Programs (Economic Recovery
Assistance Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997,
its tax liability was terminated and closed under Letter of Termination[14] dated June 1, 1999 issued by petitioner and
signed by the Chief of the Assessment Division.[15] LMCEC claimed it made payments of income tax, VAT and
expanded withholding tax (EWT), as follows:

TAXABLE AMOUNT OF TAXES


YEAR PAID

1997 Termination Letter Under Letter of EWT - P 6,000.00


Authority No. 174600 VAT - 540,605.02
Dated November 4, 1998 IT - 3,000.00
1998 ERAP Program pursuant WC - 38,404.55
to RR #2-99 VAT - 61,635.40

1999 VAP Program pursuant IT - 878,495.28


to RR #8-2001 VAT - 1,324,317.00[16]

LMCEC argued that petitioner is now estopped from further taking any action against it and its corporate
officers concerning the taxable years 1997 to 1999. With the grant of immunity from audit from the companys
availment of ERAP and VAP, which have a feature of a tax amnesty, the element of fraud is negated the moment the
Bureau accepts the offer of compromise or payment of taxes by the taxpayer. The act of the revenue officers in
finding justification under Section 6(B) of the NIRC (Best Evidence Obtainable) is misplaced and unavailing because
they were not able to open the books of the company for the second time, after the routine examination, issuance of
termination letter and the availment of ERAP and VAP. LMCEC thus maintained that unless there is a prior
determination of fraud supported by documents not yet incorporated in the docket of the case, petitioner cannot just
issue LAs without first terminating those previously issued. It emphasized the fact that the BIR officers who filed and
signed the Affidavit-Complaint in this case were the same ones who appeared as complainants in an earlier case filed
against Camus for his alleged failure to obey summons in violation of Section 5 punishable under Section 266 of the
NIRC of 1997 (I.S. No. 00-956 of the Office of the City Prosecutor of Quezon City). After preliminary investigation,
said case was dismissed for lack of probable cause in a Resolution issued by the Investigating Prosecutor on May 2,
2001.[17]
LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by petitioner for having no
basis in fact and law. However, until now the said protest remains unresolved. As to the alleged informant who
purportedly supplied the confidential information, LMCEC believes that such person is fictitious and his true identity
and personality could not be produced. Hence, this case is another form of harassment against the company as what
had been found by the Office of the City Prosecutor of Quezon City in I.S. No. 00-956. Said case and the present
case both have something to do with the audit/examination of LMCEC for taxable years 1997, 1998 and 1999
pursuant to LA No. 00009361.[18]

In the Joint Reply-Affidavit executed by the Bureaus revenue officers, petitioner disagreed with the
contention of LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus
and Mendoza were being charged for the criminal offenses defined and penalized under Sections 254 (Attempt to
Evade or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC. This finds support in Section 205 of the same
Code which provides for administrative (distraint, levy, fine, forfeiture, lien, etc.) and judicial (criminal or civil action)
remedies in order to enforce collection of taxes. Both remedies may be pursued either independently or
simultaneously.In this case, the BIR decided to simultaneously pursue both remedies and thus aside from this
criminal action, the Bureau also initiated administrative proceedings against LMCEC.[19]

On the lack of control number in the assessment notice, petitioner explained that such is a mere office
requirement in the Assessment Service for the purpose of internal control and monitoring; hence, the unnumbered
assessment notices should not be interpreted as irregular or anomalous. Petitioner stressed that LMCEC already lost
its right to file a protest letter after the lapse of the thirty (30)-day reglementary period. LMCECs protest-letter
dated December 12, 2002 to RDO Clavelina S. Nacar, RD No. 40, Cubao, Quezon City was actually filed only
on December 16, 2002, which was disregarded by the petitioner for being filed out of time. Even assuming for the
sake of argument that the assessment notices were invalid, petitioner contended that such could not affect the
present criminal action,[20] citing the ruling in the landmark case of Ungab v. Cusi, Jr.[21]

As to the Letter of Termination signed by Ruth Vivian G. Gandia of the Assessment Division, Revenue
Region No. 7, Quezon City, petitioner pointed out that LMCEC failed to mention that the undated Certification issued
by RDO Pablo C. Cabreros, Jr. of RD No. 40, Cubao, Quezon City stated that the report of the 1997 Internal
Revenue taxes of LMCEC had already been submitted for review and approval of higher authorities. LMCEC also
cannot claim as excuse from the reopening of its books of accounts the previous investigations and
examinations. Under Section 235 (a), an exception was provided in the rule on once a year audit examination in case
of fraud, irregularity or mistakes, as determined by the Commissioner. Petitioner explained that the distinction
between a Regular Audit Examination and Tax Fraud Audit Examination lies in the fact that the former is conducted
by the district offices of the Bureaus Regional Offices, the authority emanating from the Regional Director, while the
latter is conducted by the TFD of the National Office only when instances of fraud had been determined by the
petitioner.[22]

Petitioner further asserted that LMCECs claim that it was granted immunity from audit when it availed of the
VAP and ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR No. 2-99 is not a
grant of absolute immunity from audit and investigation, aside from the fact that said program was only for income tax
and did not cover VAT and withholding tax for the taxable year 1998. As for LMCECS availment of VAP in 1999
under RR No. 8-2001 dated August 1, 2001 as amended by RR No. 10-2001 dated September 3, 2001, the company
failed to state that it covers only income tax and VAT, and did not include withholding tax. However, LMCEC is not
actually entitled to the benefits of VAP under Section 1 (1.1 and 1.2) of RR No. 10-2001. As to the principle of
estoppel invoked by LMCEC, estoppel clearly does not lie against the BIR as this involved the exercise of an inherent
power by the government to collect taxes.[23]

Petitioner also pointed out that LMCECs assertion correlating this case with I.S. No. 00-956 is misleading
because said case involves another violation and offense (Sections 5 and 266 of the NIRC). Said case was filed by
petitioner due to the failure of LMCEC to submit or present its books of accounts and other accounting records for
examination despite the issuance of subpoena duces tecum against Camus in his capacity as President of
LMCEC. While indeed a Resolution was issued by Asst. City Prosecutor Titus C. Borlas on May 2, 2001 dismissing
the complaint, the same is still on appeal and pending resolution by the DOJ. The determination of probable cause in
said case is confined to the issue of whether there was already a violation of the NIRC by Camus in not complying
with the subpoena duces tecum issued by the BIR.[24]
Petitioner contended that precisely the reason for the issuance to the TFD of LA No. 00009361 by the
Commissioner is because the latter agreed with the findings of the investigating revenue officers that fraud exists in this
case. In the conduct of their investigation, the revenue officers observed the proper procedure under Revenue
Memorandum Order (RMO) No. 49-2000 wherein it is required that before the issuance of a Letter of Authority against a
particular taxpayer, a preliminary investigation should first be conducted to determine if a prima facie case for tax fraud
exists. As to the allegedly unresolved protest filed on April 20, 2001 by LMCEC over the PAN, this has been disregarded
by the Bureau for being pro forma and having been filed beyond the 15-day reglementary period. A subsequent letter
dated April 20, 2001 was filed with the TFD and signed by a certain Juan Ventigan. However, this was disregarded and
considered a mere scrap of paper since the said signatory had not shown any prior authorization to represent
LMCEC. Even assuming said protest letter was validly filed on behalf of the company, the issuance of a Formal Demand
Letter and Assessment Notice through constructive service on October 1, 2002 is deemed an implied denial of the said
protest. Lastly, the details regarding the informer being confidential, such information is entitled to some degree of
protection, including the identity of the informant against LMCEC.[25]

In their Joint Rejoinder-Affidavit,[26] Camus and Mendoza reiterated their argument that the identity of the
alleged informant is crucial to determine if he/she is qualified under Section 282 of the NIRC. Moreover, there was no
assessment that has already become final, the validity of its issuance and service has been put in issue being
anomalous, irregular and oppressive. It is contended that for criminal prosecution to proceed before assessment,
there must be a prima facie showing of a willful attempt to evade taxes. As to LMCECs availment of the VAP and
ERAP programs, the certificate of immunity from audit issued to it by the BIR is plain and simple, but petitioner is now
saying it has the right to renege with impunity from its undertaking. Though petitioner deems LMCEC not qualified to
avail of the benefits of VAP, it must be noted that if it is true that at the time the petitioner filed I.S. No. 00-956
sometime in January 2001 it had already in its custody that Confidential Information No. 29-2000 dated July 7, 2000,
these revenue officers could have rightly filed the instant case and would not resort to filing said criminal complaint for
refusal to comply with a subpoena duces tecum.

On September 22, 2003, the Chief State Prosecutor issued a Resolution [27] finding no sufficient evidence to
establish probable cause against respondents LMCEC, Camus and Mendoza. It was held that since the payments
were made by LMCEC under ERAP and VAP pursuant to the provisions of RR Nos. 2-99 and 8-2001 which were
offered to taxpayers by the BIR itself, the latter is now in estoppel to insist on the criminal prosecution of the
respondent taxpayer. The voluntary payments made thereunder are in the nature of a tax amnesty. The unnumbered
assessment notices were found highly irregular and thus their validity is suspect; if the amounts indicated therein
were collected, it is uncertain how these will be accounted for and if it would go to the coffers of the government or
elsewhere. On the required prior determination of fraud, the Chief State Prosecutor declared that the Office of the
City Prosecutor in I.S. No. 00-956 has already squarely ruled that (1) there was no prior determination of fraud, (2)
there was indiscriminate issuance of LAs, and (3) the complaint was more of harassment. In view of such findings,
any ensuing LA is thus defective and allowing the collection on the assailed assessment notices would already be in
the context of a fishing expedition or witch-hunting. Consequently, there is nothing to speak of regarding the finality of
assessment notices in the aggregate amount of P630,164,631.61.

Petitioner filed a motion for reconsideration which was denied by the Chief State Prosecutor. [28]

Petitioner appealed to respondent Secretary of Justice but the latter denied its petition for review under
Resolution dated December 13, 2005.[29]

The Secretary of Justice found that petitioners claim that there is yet no finality as to LMCECs payment of its
1997 taxes since the audit report was still pending review by higher authorities, is unsubstantiated and misplaced. It
was noted that the Termination Letter issued by the Commissioner on June 1, 1999 is explicit that the matter is
considered closed. As for taxable year 1998, respondent Secretary stated that the record shows that LMCEC paid
VAT and withholding tax in the amount of P61,635.40 and P38,404.55, respectively. This eventually gave rise to the
issuance of a certificate of immunity from audit for 1998 by the Office of the Commissioner of Internal Revenue. For
taxable year 1999, respondent Secretary found that pursuant to earlier LA No. 38633 dated July 4, 2000, LMCECs
1999 tax liabilities were still pending investigation for which reason LMCEC assailed the subsequent issuance of LA
No. 00009361 dated August 25, 2000 calling for a similar investigation of its alleged 1999 tax deficiencies when no
final determination has yet been arrived on the earlier LA No. 38633. [30]

On the allegation of fraud, respondent Secretary ruled that petitioner failed to establish the existence of the
following circumstances indicating fraud in the settlement of LMCECs tax liabilities: (1) there must be intentional and
substantial understatement of tax liability by the taxpayer; (2) there must be intentional and substantial overstatement
of deductions or exemptions; and (3) recurrence of the foregoing circumstances. First, petitioner miserably failed to
explain why the assessment notices were unnumbered; second,the claim that the tax fraud investigation was
precipitated by an alleged informant has not been corroborated nor was it clearly established, hence there is no other
conclusion but that the Bureau engaged in a fishing expedition; and furthermore, petitioners course of action is
contrary to Section 235 of the NIRC allowing only once in a given taxable year such examination and inspection of
the taxpayers books of accounts and other accounting records. There was no convincing proof presented by
petitioner to show that the case of LMCEC falls under the exceptions provided in Section 235. Respondent Secretary
duly considered the issuance of Certificate of Immunity from Audit and Letter of Termination dated June 1,
1999 issued to LMCEC.[31]

Anent the earlier case filed against the same taxpayer (I.S. No. 00-956), the Secretary of Justice found
petitioner to have engaged in forum shopping in view of the fact that while there is still pending an appeal from the
Resolution of the City Prosecutor of Quezon City in said case, petitioner hurriedly filed the instant case, which not
only involved the same parties but also similar substantial issues (the joint complaint-affidavit also alleged the
issuance of LA No. 00009361 dated August 25, 2000). Clearly, the evidence of litis pendentia is present. Finally,
respondent Secretary noted that if indeed LMCEC committed fraud in the settlement of its tax liabilities, then at the
outset, it should have been discovered by the agents of petitioner, and consequently petitioner should not have
issued the Letter of Termination and the Certificate of Immunity From Audit. Petitioner thus should have been more
circumspect in the issuance of said documents.[32]

Its motion for reconsideration having been denied, petitioner challenged the ruling of respondent
Secretary via a certiorari petition in the CA.

On October 31, 2006, the CA rendered the assailed decision[33] denying the petition and concurred with the
findings and conclusions of respondent Secretary. Petitioners motion for reconsideration was likewise denied by the
appellate court.[34] It appears that entry of judgment was issued by the CA stating that its October 31, 2006 Decision
attained finality on March 25, 2007.[35] However, the said entry of judgment was set aside upon manifestation by the
petitioner that it has filed a petition for review before this Court subsequent to its receipt of the Resolution
dated March 6, 2007 denying petitioners motion for reconsideration on March 20, 2007.[36]

The petition is anchored on the following grounds:

I.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing the complaint based on grounds which are not even
elements of the offenses charged.

II.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by dismissing petitioners evidence, contrary to law.

III.

The Honorable Court of Appeals erroneously sustained the findings of the Secretary of Justice who
gravely abused his discretion by inquiring into the validity of a Final Assessment Notice which has
become final, executory and demandable pursuant to Section 228 of the Tax Code of 1997 for
failure of private respondent to file a protest against the same.[37]

The core issue to be resolved is whether LMCEC and its corporate officers may be prosecuted for violation
of Sections 254 (Attempt to Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information
and Pay Tax).
Petitioner filed the criminal complaint against the private respondents for violation of the following provisions
of the NIRC, as amended:

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 other penalties provided by law, upon conviction thereof, be punished by a fine of not
less than Thirty thousand pesos (P30,000) but not more than One hundred thousand pesos
(P100,000) 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 any 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
compensations 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.

x x x x (Emphasis supplied.)

Respondent Secretary concurred with the Chief State Prosecutors conclusion that there is insufficient
evidence to establish probable cause to charge private respondents under the above provisions, based on the
following findings: (1) the tax deficiencies of LMCEC for taxable years 1997, 1998 and 1999 have all been settled or
terminated, as in fact LMCEC was issued a Certificate of Immunity and Letter of Termination, and availed of the
ERAP and VAP programs; (2) there was no prior determination of the existence of fraud; (3) the assessment notices
are unnumbered, hence irregular and suspect; (4) the books of accounts and other accounting records may be
subject to audit examination only once in a given taxable year and there is no proof that the case falls under the
exceptions provided in Section 235 of the NIRC; and (5) petitioner committed forum shopping when it filed the instant
case even as the earlier criminal complaint (I.S. No. 00-956) dismissed by the City Prosecutor of Quezon City was
still pending appeal.

Petitioner argues that with the finality of the assessment due to failure of the private respondents to
challenge the same in accordance with Section 228 of the NIRC, respondent Secretary has no jurisdiction and
authority to inquire into its validity. Respondent taxpayer is thereby allowed to do indirectly what it cannot do directly
to raise a collateral attack on the assessment when even a direct challenge of the same is legally barred. The
rationale for dismissing the complaint on the ground of lack of control number in the assessment notice likewise
betrays a lack of awareness of tax laws and jurisprudence, such circumstance not being an element of the
offense. Worse, the final, conclusive and undisputable evidence detailing a crime under our taxation laws is swept
under the rug so easily on mere conspiracy theories imputed on persons who are not even the subject of the
complaint.

We grant the petition.

There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud
investigation conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax returns for
1997, 1998 and 1999. Pursuant to RR No. 12-99,[38] a PAN was sent to and received by LMCEC on February 22,
2001 wherein it was notified of the proposed assessment of deficiency taxes amounting to P430,958,005.90 (income
tax - P318,606,380.19 and VAT - P112,351,625.71) covering taxable years 1997, 1998 and 1999. [39] In response to
said PAN, LMCEC sent a letter-protest to the TFD, which denied the same on April 12, 2001 for lack of legal and
factual basis and also for having been filed beyond the 15-day reglementary period.[40]

As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCECs books of
accounts and other accounting records because its officers failed to comply with the subpoena duces tecum earlier
issued, to verify its alleged underdeclarations of income reported by the Bureaus informant under Section 282 of the
NIRC. Hence, a criminal complaint was filed by the Bureau against private respondents for violation of Section 266
which provides:

SEC. 266. Failure to Obey Summons. Any person who, being duly summoned to appear to
testify, or to appear and produce books of accounts, records, memoranda, or other papers, or to
furnish information as required under the pertinent provisions of this Code, neglects to appear or to
produce such books of accounts, records, memoranda, or other papers, or to furnish such
information, shall, upon conviction, be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Ten thousand pesos (P10,000) and suffer imprisonment of not less
than one (1) year but not more than two (2) years.

It is clear that I.S. No. 00-956 involves a separate offense and hence litis pendentia is not present considering that
the outcome of I.S. No. 00-956 is not determinative of the issue as to whether probable cause exists to charge the
private respondents with the crimes of attempt to evade or defeat tax and willful failure to supply correct and accurate
information and pay tax defined and penalized under Sections 254 and 255, respectively. For the crime of tax evasion
in particular, compliance by the taxpayer with such subpoena, if any had been issued, is irrelevant. As we held
in Ungab v. Cusi, Jr.,[41] [t]he crime is complete when the [taxpayer] has x x x knowingly and willfully filed [a]
fraudulent [return] with intent to evade and defeat x x x the tax. Thus, respondent Secretary erred in holding that
petitioner committed forum shopping when it filed the present criminal complaint during the pendency of its appeal
from the City Prosecutors dismissal of I.S. No. 00-956 involving the act of disobedience to the summons in the course
of the preliminary investigation on LMCECs correct tax liabilities for taxable years 1997, 1998 and 1999.

In the Details of Discrepancies attached as Annex B of the PAN, [42] private respondents were already notified that
inasmuch as the revenue officers were not given the opportunity to examine LMCECs books of accounts, accounting
records and other documents, said revenue officers gathered information from third parties. Such procedure is
authorized under Section 5 of the NIRC, which provides:

SEC. 5. Power of the Commissioner to Obtain Information, and to Summon, Examine, and
Take Testimony of Persons. In ascertaining the correctness of any return, or in making a return
when none has been made, or in determining the liability of any person for any internal revenue
tax, or in collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized:

(A) To examine any book, paper, record or other data which may be relevant or material to
such inquiry;

(B) To obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the Bangko
Sentral ng Pilipinas and government-owned or -controlled corporations, any information such as,
but not limited to, costs and volume of production, receipts or sales and gross incomes of
taxpayers, and the names, addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of multinational companies,
joint accounts, associations, joint ventures or consortia and registered partnerships, and their
members;

(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books of
accounts and other accounting records containing entries relating to the business of the person
liable for tax, or any other person, to appear before the Commissioner or his duly authorized
representative at a time and place specified in the summons and to produce such books, papers,
records, or other data, and to give testimony;

(D) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; x x x

x x x x (Emphasis supplied.)
Private respondents assertions regarding the qualifications of the informer of the Bureau deserve scant
consideration. We have held that the lack of consent of the taxpayer under investigation does not imply that the BIR
obtained the information from third parties illegally or that the information received is false or malicious. Nor does the
lack of consent preclude the BIR from assessing deficiency taxes on the taxpayer based on the documents. [43] In the
same vein, herein private respondents cannot be allowed to escape criminal prosecution under Sections 254 and 255
of the NIRC by mere imputation of a fictitious or disqualified informant under Section 282 simply because other than
disclosure of the official registry number of the third party informer, the Bureau insisted on maintaining the
confidentiality of the identity and personal circumstances of said informer.

Subsequently, petitioner sent to LMCEC by constructive service allowed under Section 3 of RR No. 12-99,
assessment notice and formal demand informing the said taxpayer of the law and the facts on which the assessment
is made, as required by Section 228 of the NIRC. Respondent Secretary, however, fully concurred with private
respondents contention that the assessment notices were invalid for being unnumbered and the tax liabilities therein
stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report
of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state
the fact, the law, rules and regulations or jurisprudence on which the assessment is based,
otherwise the formal letter of demand and the notice of assessment shall be void.[44]

As it is, the formality of a control number in the assessment notice is not a requirement for its validity but rather the
contents thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer. Both the
formal letter of demand and the notice of assessment shall be void if the former failed to state the fact, the law, rules
and regulations or jurisprudence on which the assessment is based, which is a mandatory requirement under Section
228 of the NIRC.

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

3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative. The
letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the
facts, the law, rules and regulations, or jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment notice shall be void. The same shall
be sent to the taxpayer only by registered mail or by personal delivery. x x x. [45](Emphasis
supplied.)

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCECs
tax deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of the
assessment. It also reiterated that in the absence of accounting records and other documents necessary for the
proper determination of the companys internal revenue tax liabilities, the investigating revenue officers resorted to the
Best Evidence Obtainable as provided in Section 6(B) of the NIRC (third party information) and in accordance with
the procedure laid down in RMC No. 23-2000 dated November 27, 2000. Annex A of the Formal Letter of Demand
thus stated:

Thus, to verify the validity of the information previously provided by the informant, the
assigned revenue officers resorted to third party information. Pursuant to Section 5(B) of the NIRC
of 1997, access letters requesting for information and the submission of certain documents (i.e.,
Certificate of Income Tax Withheld at Source and/or Alphabetical List showing the income
payments made to L.M. Camus Engineering Corporation for the taxable years 1997 to 1999) were
sent to the various clients of the subject corporation, including but not limited to the following:

1. Ayala Land Inc.


2. Filinvest Alabang Inc.
3. D.M. Consunji, Inc.
4. SM Prime Holdings, Inc.
5. Alabang Commercial Corporation
6. Philam Properties Corporation
7. SM Investments, Inc.
8. Shoemart, Inc.
9. Philippine Securities Corporation
10. Makati Development Corporation

From the documents gathered and the data obtained therein, the substantial
underdeclaration as defined under Section 248(B) of the NIRC of 1997 by your corporation
of its income had been confirmed. x x x x[46] (Emphasis supplied.)

In the same letter, Assistant Commissioner Percival T. Salazar informed private respondents that the
estimated tax liabilities arising from LMCECs underdeclaration amounted to P186,773,600.84 in
1997, P150,069,323.81 in 1998 and P163,220,111.13 in 1999. These figures confirmed that the non-declaration by
LMCEC for the taxable years 1997, 1998 and 1999 of an amount exceeding 30% income [47] declared in its return is
considered a substantial underdeclaration of income, which constituted prima facieevidence of false or fraudulent
return under Section 248(B)[48] of the NIRC, as amended.[49]

On the alleged settlement of the assessed tax deficiencies by private respondents, respondent Secretary found the
latters claim as meritorious on the basis of the Certificate of Immunity From Audit issued on December 6, 1999
pursuant to RR No. 2-99 and Letter of Termination dated June 1, 1999 issued by Revenue Region No. 7 Chief of
Assessment Division Ruth Vivian G. Gandia. Petitioner, however, clarified that the certificate of immunity from audit
covered only income tax for the year 1997 and does not include VAT and withholding taxes, while the Letter of
Termination involved tax liabilities for taxable year 1997 (EWT, VAT and income taxes) but which was submitted for
review of higher authorities as per the Certification of RD No. 40 District Officer Pablo C. Cabreros, Jr. [50] For 1999,
private respondents supposedly availed of the VAP pursuant to RR No. 8-2001.

RR No. 2-99 issued on February 7, 1999 explained in its Policy Statement that considering the scarcity of financial
and human resources as well as the time constraints within which the Bureau has to clean the Bureaus backlog of
unaudited tax returns in order to keep updated and be focused with the most current accounts in preparation for the
full implementation of a computerized tax administration, the said revenue regulation was issued providing for last
priority in audit and investigation of tax returns to accomplish the said objective without, however, compromising the
revenue collection that would have been generated from audit and enforcement activities. The program named as
Economic Recovery Assistance Payment (ERAP) Program granted immunity from audit and investigation of income
tax, VAT and percentage tax returns for 1998. It expressly excluded withholding tax returns (whether for income,
VAT, or percentage tax purposes). Since such immunity from audit and investigation does not preclude the collection
of revenues generated from audit and enforcement activities, it follows that the Bureau is likewise not barred from
collecting any tax deficiency discovered as a result of tax fraud investigations. Respondent Secretarys opinion that
RR No. 2-99 contains the feature of a tax amnesty is thus misplaced.

Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate. It also gives the government a
chance to collect uncollected tax from tax evaders without having to go through the tedious process of a tax
case.[51] Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting
that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the
terms of the amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor
of the taxing authority.[52]

For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-2001,
through payment supposedly made in October 29, 2001 before the said program ended on October 31, 2001, did not
amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for
filing fraudulent return and attempt to evade or defeat tax. As correctly asserted by petitioner, from the express terms
of the aforesaid revenue regulations, LMCEC is not qualified to avail of the VAP granting taxpayers the privilege
of last priority in the audit and investigation of all internal revenue taxes for the taxable year 2000 and all prior years
under certain conditions, considering that first, it was issued a PAN on February 19, 2001, and second, it was the
subject of investigation as a result of verified information filed by a Tax Informer under Section 282 of the NIRC duly
recorded in the BIR Official Registry as Confidential Information (CI) No. 29-2000[53] even prior to the issuance of the
PAN.

Section 1 of RR No. 8-2001 provides:

SECTION 1. COVERAGE. x x x

Any person, natural or juridical, including estates and trusts, liable to pay any of the above-
cited internal revenue taxes for the above specified period/s who, due to inadvertence or otherwise,
erroneously paid his internal revenue tax liabilities or failed to file tax return/pay taxes may avail of
the Voluntary Assessment Program (VAP), except those falling under any of the following
instances:

1.1 Those covered by a Preliminary Assessment Notice (PAN), Final Assessment


Notice (FAN), or Collection Letter issued on or before July 31, 2001; or

1.2 Persons under investigation as a result of verified information filed by a Tax


Informer under Section 282 of the Tax Code of 1997, duly processed and recorded in the BIR
Official Registry Book on or before July 31, 2001;

1.3 Tax fraud cases already filed and pending in courts for adjudication; and

x x x x (Emphasis supplied.)

Moreover, private respondents cannot invoke LMCECs availment of VAP to foreclose any subsequent audit
of its account books and other accounting records in view of the strong finding of underdeclaration in LMCECs
payment of correct income tax liability by more than 30% as supported by the written report of the TFD detailing the
facts and the law on which such finding is based, pursuant to the tax fraud investigation authorized by petitioner
under LA No. 00009361. This conclusion finds support in Section 2 of RR No. 8-2001 as amended by RR No. 10-
2001 provides:

SEC. 2. TAXPAYERS BENEFIT FROM AVAILMENT OF THE VAP. A taxpayer who has
availed of the VAP shall not be audited except upon authorization and approval of the
Commissioner of Internal Revenue when there is strong evidence or finding of understatement in
the payment of taxpayers correct tax liability by more than thirty percent (30%) as supported by a
written report of the appropriate office detailing the facts and the law on which such finding is
based: Provided, however, that any VAP payment should be allowed as tax credit against the
deficiency tax due, if any, in case the concerned taxpayer has been subjected to tax audit.

xxxx

Given the explicit conditions for the grant of immunity from audit under RR No. 2-99, RR No. 8-2001 and RR
No. 10-2001, we hold that respondent Secretary gravely erred in declaring that petitioner is now estopped from
assessing any tax deficiency against LMCEC after issuance of the aforementioned documents of immunity from
audit/investigation and settlement of tax liabilities. It is axiomatic that the State can never be in estoppel, and this is
particularly true in matters involving taxation. The errors of certain administrative officers should never be allowed to
jeopardize the governments financial position. [54]

Respondent Secretarys other ground for assailing the course of action taken by petitioner in proceeding with
the audit and investigation of LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC allowing
the examination and inspection of taxpayers books of accounts and other accounting records only once in a taxable
year -- is likewise untenable. As correctly pointed out by petitioner, the discovery of substantial underdeclarations of
income by LMCEC for taxable years 1997, 1998 and 1999 upon verified information provided by an informer under
Section 282 of the NIRC, as well as the necessity of obtaining information from third parties to ascertain the
correctness of the return filed or evaluation of tax compliance in collecting taxes (as a result of the disobedience to
the summons issued by the Bureau against the private respondents), are circumstances warranting exception from
the general rule in Section 235.[55]

As already stated, the substantial underdeclared income in the returns filed by LMCEC for 1997, 1998 and
1999 in amounts equivalent to more than 30% (the computation in the final assessment notice showed
underdeclarations of almost 200%) constitutes prima facie evidence of fraudulent return under Section 248(B) of the
NIRC. Prior to the issuance of the preliminary and final notices of assessment, the revenue officers conducted a
preliminary investigation on the information and documents showing substantial understatement of LMCECs tax
liabilities which were provided by the Informer, following the procedure under RMO No. 15-95.[56] Based on the prima
facie finding of the existence of fraud, petitioner issued LA No. 00009361 for the TFD to conduct a formal fraud
investigation of LMCEC.[57] Consequently, respondent Secretarys ruling that the filing of criminal complaint for
violation of Sections 254 and 255 of the NIRC cannot prosper because of lack of prior determination of the existence
of fraud, is bereft of factual basis and contradicted by the evidence on record.

Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are
in favor of the correctness of a tax assessment unless proven otherwise. [58] We have held that a taxpayers failure to
file a petition for review with the Court of Tax Appeals within the statutory period rendered the disputed assessment
final, executory and demandable, thereby precluding it from interposing the defenses of legality or validity of the
assessment and prescription of the Governments right to assess. [59]Indeed, any objection against the assessment
should have been pursued following the avenue paved in Section 229 (now Section 228) of the NIRC on protests on
assessments of internal revenue taxes.[60]

Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were duly
served on LMCEC on October 1, 2002. Private respondents did not file a motion for reconsideration of the said
assessment notice and formal demand; neither did they appeal to the Court of Tax Appeals. Section 228 of the
NIRC[61] provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment
may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment
by the taxpayer. No such administrative protest was filed by private respondents seeking reconsideration of the August
7, 2002 assessment notice and formal letter of demand. Private respondents cannot belatedly assail the said
assessment, which they allowed to lapse into finality, by raising issues as to its validity and correctness during the
preliminary investigation after the BIR has referred the matter for prosecution under Sections 254 and 255 of the NIRC.

As we held in Marcos II v. Court of Appeals[62]:


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.
Moreover, these objections to the assessments should have been raised, considering
the ample remedies afforded the taxpayer by the Tax Code, with the Bureau of Internal
Revenue and the Court of Tax Appeals, as described earlier, and cannot be raised now via
Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by
the petitioner reflects his disregard or even repugnance of the established institutions for
governance in the scheme of a well-ordered society. The subject tax assessments having
become final, executory and enforceable, the same can no longer be contested by means of
a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or
remedy. This judicial policy becomes more pronounced in view of the absence of sufficient attack
against the actuations of government. (Emphasis supplied.)
The determination of probable cause is part of the discretion granted to the investigating prosecutor and ultimately,
the Secretary of Justice. However, this Court and the CA possess the power to review findings of prosecutors in
preliminary investigations. Although policy considerations call for the widest latitude of deference to the prosecutors
findings, courts should never shirk from exercising their power, when the circumstances warrant, to determine
whether the prosecutors findings are supported by the facts, or by the law. In so doing, courts do not act as
prosecutors but as organs of the judiciary, exercising their mandate under the Constitution, relevant statutes, and
remedial rules to settle cases and controversies.[63] Clearly, the power of the Secretary of Justice to review does not
preclude this Court and the CA from intervening and exercising our own powers of review with respect to the DOJs
findings, such as in the exceptional case in which grave abuse of discretion is committed, as when a clear sufficiency
or insufficiency of evidence to support a finding of probable cause is ignored. [64]

WHEREFORE, the petition is GRANTED. The Decision dated October 31, 2006 and Resolution dated March 6,
2007 of the Court of Appeals in CA-G.R. SP No. 93387 are hereby REVERSED and SET ASIDE. The Secretary of
Justice is hereby DIRECTED to order the Chief State Prosecutor to file before the Regional Trial Court of Quezon
City, National Capital Judicial Region, the corresponding Information against L. M. Camus Engineering Corporation,
represented by its President Luis M. Camus and Comptroller Lino D. Mendoza, for Violation of Sections 254 and 255
of the National Internal Revenue Code of 1997.

No costs.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, vs. HON. RAUL M. GONZALEZ,
G.R. No. 177279 October 13, 2010

FACTS:
Pursuant to Letter of Authority (LA) dated August 25, 2000, conducted a fraud investigation for all internal revenue
taxes to ascertain/determine the tax liabilities of respondent L. M. Camus Engineering Corporation (LMCEC) for the
taxable years 1997, 1998 and 1999.
The audit and investigation against LMCEC was precipitated by the information provided by an "informer" that
LMCEC had substantial underdeclared income for the said period.
For failure to comply with the subpoena duces tecum issued in connection with the tax fraud investigation,
a criminal complaint was instituted by the Bureau of Internal Revenue (BIR) against LMCEC on January 19, 2001 for
violation of Section 266 of the NIRC
Based on data obtained from an "informer" and various clients of LMCEC, it was discovered that LMCEC filed
fraudulent tax returns with substantial underdeclarations of taxable income for the years 1997, 1998 and 1999.
Petitioner thus assessed the company of total deficiency taxes amounting to P430,958,005.90 (income tax -
P318,606,380.19 and value-added tax [VAT] - P112,351,625.71) covering the said period.
The Preliminary Assessment Notice (PAN) was received by LMCEC on February 22, 2001.
In view of the above findings, assessment notices together with a formal letter of demand dated August 7, 2002 were
sent to LMCEC through personal service on October 1, 2002.
Since the company and its representatives refused to receive the said notices and demand letter, the revenue officers
resorted to constructive service in accordance with Section 3, Revenue Regulations (RR) No. 12-9911.

On May 21, 2003, petitioner, referred to the Secretary of Justice for preliminary investigation its complaint against
LMCEC, Luis M. Camus and Lino D. Mendoza, the latter two were sued in their capacities as President and
Comptroller, respectively.

The case was docketed as I.S. No. 2003-774. In the Joint Affidavit executed by the revenue officers who conducted
the tax fraud investigation, it was alleged that despite the receipt of the final assessment notice and formal demand
letter on October 1, 2002, LMCEC failed and refused to pay the deficiency tax assessment in the total amount of
P630,164,631.61, inclusive of increments, which had become final and executory as a result of the said taxpayer’s
failure to file a protest thereon within the thirty (30)-day reglementary period.

Camus and Mendoza filed a Joint Counter-Affidavit contending that LMCEC cannot be held liable whatsoever for the
alleged tax deficiency which had become due and demandable. Considering that the complaint and its annexes all
showed that the suit is a simple civil action for collection and not a tax evasion case,
LMCEC further averred that it had availed of the Bureau’s Tax Amnesty Programs (Economic Recovery Assistance
Payment [ERAP] Program and the Voluntary Assessment Program [VAP]) for 1998 and 1999; for 1997, its tax liability
was terminated and closed under Letter of Termination LMCEC argued that petitioner is now estopped from further
taking any action against it and its corporate officers concerning the taxable years 1997 to 1999. With the grant of
immunity from audit from the company’s availment of ERAP and VAP, which have a feature of a tax amnesty, the
element of fraud is negated LMCEC further asserted that it filed on April 20, 2001 a protest on the PAN issued by
petitioner for having no basis in fact and law. However, until now the said protest remains unresolved.

In the Joint Reply-Affidavit executed by the Bureau’s revenue officers, petitioner disagreed with the contention of
LMCEC that the complaint filed is not criminal in nature, pointing out that LMCEC and its officers Camus and
Mendoza were being charged for the criminal offenses defined and penalized under Sections 254 (Attempt to Evade
or Defeat Tax) and 255 (Willful Failure to Pay Tax) of the NIRC.

In this case, the BIR decided to simultaneously pursue both remedies and thus aside from this criminal action, the
Bureau also initiated administrative proceedings against LMCEC.
Petitioner stressed that LMCEC already lost its right to file a protest letter after the lapse of the thirty (30)-day
reglementary period. LMCEC’s protest-letter dated December 12, 2002 to RDO Clavelina S. Nacar, RD No. 40,
Cubao, Quezon City was actually filed only on December 16, 2002, which was disregarded by the petitioner for being
filed out of time.
Petitioner further asserted that LMCEC’s claim that it was granted immunity from audit when it availed of the VAP and
ERAP programs is misleading. LMCEC failed to state that its availment of ERAP under RR No. 2-99 is not a grant of
absolute immunity from audit and investigation, Petitioner also pointed out that LMCEC’s assertion correlating this
case with I.S. No. 00-956 is misleading because said case involves another violation and offense due to the failure of
LMCEC to submit or present its books of accounts and other accounting records for examination despite the issuance
of subpoena duces tecum against Camus in his capacity as President of LMCEC. The determination of probable
cause in said case is confined to the issue of whether there was already a violation of the NIRC by Camus in not
complying with the subpoena duces tecum issued by the BIR.
ISSUE: whether LMCEC and its corporate officers may be prosecuted for violation of Sections 254 (Attempt to
Evade or Defeat Tax) and 255 (Willful Failure to Supply Correct and Accurate Information and Pay Tax).

HELD:
We grant the petition.
There is no dispute that prior to the filing of the complaint with the DOJ, the report on the tax fraud investigation
conducted on LMCEC disclosed that it made substantial underdeclarations in its income tax returns for 1997, 1998
and 1999.
Pursuant to RR No. 12-99,38 a PAN was sent to and received by LMCEC on February 22, 2001 wherein it was
notified of the proposed assessment of deficiency taxes. In response to said PAN, LMCEC sent a letter-protest to the
TFD, which denied the same on April 12, 2001 for lack of legal and factual basis and also for having been filed
beyond the 15-day reglementary period.
As mentioned in the PAN, the revenue officers were not given the opportunity to examine LMCEC’s books of
accounts and other accounting records because its officers failed to comply with the subpoena duces tecum earlier
issued, to verify its alleged underdeclarations of income reported by the Bureau’s informant under Section 282 of the
NIRC. Hence, a criminal complaint was filed by the Bureau against private respondents for violation of Section 266
For the crime of tax evasion in particular, compliance by the taxpayer with such subpoena, if any had been issued, is
irrelevant. As we held in Ungab v. Cusi, Jr.,41 "[t]he crime is complete when the [taxpayer] has x x x knowingly and
willfully filed [a] fraudulent [return] with intent to evade and defeat x x x the tax."
In the Details of Discrepancies attached as Annex B of the PAN,42 private respondents were already notified that
inasmuch as the revenue officers were not given the opportunity to examine LMCEC’s books of accounts, accounting
records and other documents, said revenue officers gathered information from third parties. Such procedure is
authorized under Section 5 of the NIRC,

Respondent Secretary, however, fully concurred with private respondents’ contention that the assessment notices
were invalid for being unnumbered and the tax liabilities therein stated have already been settled and/or terminated.

We do not agree.

A notice of assessment is:


[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN)
within the prescribed period of time, or whose reply to the PAN was found to be without merit.

The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted by the
Revenue Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the fact, the law,
rules and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and
the notice of assessment shall be void.
The formality of a control number in the assessment notice is not a requirement for its validity but rather the contents
thereof which should inform the taxpayer of the declaration of deficiency tax against said taxpayer.

The Formal Letter of Demand dated August 7, 2002 contains not only a detailed computation of LMCEC’s tax
deficiencies but also details of the specified discrepancies, explaining the legal and factual bases of the assessment.
It also reiterated that in the absence of accounting records and other documents necessary for the proper
determination of the company’s internal revenue tax liabilities, the investigating revenue officers resorted to the "Best
Evidence Obtainable" as provided in Section 6(B) of the NIRC (third party information)

Economic Recovery Assistance Payment (ERAP) Program


The program named as "Economic Recovery Assistance Payment (ERAP) Program" granted immunity from audit
and investigation of income tax, VAT and percentage tax returns for 1998.
It expressly excluded withholding tax returns (whether for income, VAT, or percentage tax purposes).
Since such immunity from audit and investigation does not preclude the collection of revenues generated from audit
and enforcement activities, it follows that the Bureau is likewise not barred from collecting any tax deficiency
discovered as a result of tax fraud investigations.
Tax amnesty is a general pardon to taxpayers who want to start a clean tax slate.
It also gives the government a chance to collect uncollected tax from tax evaders without having to go through the
tedious process of a tax case.
Even assuming arguendo that the issuance of RR No. 2-99 is in the nature of tax amnesty, it bears noting that a tax
amnesty, much like a tax exemption, is never favored nor presumed in law and if granted by statute, the terms of the
amnesty like that of a tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.
For the same reason, the availment by LMCEC of VAP under RR No. 8-2001 as amended by RR No. 10-2001,
through payment supposedly made in October 29, 2001 before the said program ended on October 31, 2001, did not
amount to settlement of its assessed tax deficiencies for the period 1997 to 1999, nor immunity from prosecution for
filing fraudulent return and attempt to evade or defeat tax.
As correctly asserted by petitioner, from the express terms of the aforesaid revenue regulations, LMCEC is not
qualified to avail of the VAP granting taxpayers the privilege of last priority in the audit and investigation of all internal
revenue taxes for the taxable year 2000 and all prior years under certain conditions, considering that
first, it was issued a PAN on February 19, 2001, and
second, it was the subject of investigation as a result of verified information filed by a Tax Informer under Section 282
of the NIRC duly recorded in the BIR Official Registry as Confidential Information (CI) No. 29-200053 even prior to
the issuance of the PAN.
Moreover, private respondents cannot invoke LMCEC’s availment of VAP to foreclose any subsequent audit of its
account books and other accounting records in view of the strong finding of underdeclaration in LMCEC’s payment of
correct income tax liability by more than 30%

LMCEC -- the alleged violation of the general rule in Section 235 of the NIRC allowing the examination and inspection
of taxpayer’s books of accounts and other accounting records only once in a taxable year –
likewise untenable
the discovery of substantial underdeclarations of income by LMCEC for taxable years 1997, 1998 and 1999, as well
as the necessity of obtaining information from third parties to ascertain the correctness of the return filed or evaluation
of tax compliance in collecting taxes (as a result of the disobedience to the summons issued by the Bureau against
the private respondents), are circumstances warranting exception from the general rule in Section 235.

Consequently, respondent Secretary’s ruling that the filing of criminal complaint for violation of Sections 254 and 255
of the NIRC cannot prosper because of lack of prior determination of the existence of fraud, is bereft of factual basis
and contradicted by the evidence on record.
Tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are in favor
of the correctness of a tax assessment unless proven otherwise.
We have held that a taxpayer’s failure to file a petition for review with the Court of Tax Appeals within the statutory
period rendered the disputed assessment final, executory and demandable, thereby precluding it from interposing the
defenses of legality or validity of the assessment and prescription of the Government’s right to assess.

Indeed, any objection against the assessment should have been pursued following the avenue paved in Section 229
(now Section 228) of the NIRC on protests on assessments of internal revenue taxes.

Records bear out that the assessment notice and Formal Letter of Demand dated August 7, 2002 were duly served
on LMCEC on October 1, 2002.

Private respondents did not file a motion for reconsideration of the said assessment notice and formal demand;
neither did they appeal to the Court of Tax Appeals.
xxxxx assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from
receipt of the assessment by the taxpayer.
No such administrative protest was filed by private respondents seeking reconsideration of the August 7, 2002
assessment notice and formal letter of demand.
Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded
the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described
earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of discretion.
The subject tax assessments having become final, executory and enforceable, the same can no longer be contested
by means of a disguised protest.
The determination of probable cause is part of the discretion granted to the investigating prosecutor and ultimately,
the Secretary of Justice.
However, this Court and the CA possess the power to review findings of prosecutors in preliminary investigations.
Although policy considerations call for the widest latitude of deference to the prosecutor’s findings, courts should
never shirk from exercising their power, when the circumstances warrant, to determine whether the prosecutor’s
findings are supported by the facts, or by the law.
In so doing, courts do not act as prosecutors but as organs of the judiciary, exercising their mandate under the
Constitution, relevant statutes, and remedial rules to settle cases and controversies.
Clearly, the power of the Secretary of Justice to review does not preclude this Court and the CA from intervening and
exercising our own powers of review with respect to the DOJ’s findings, such as in the exceptional case in which
grave abuse of discretion is committed, as when a clear sufficiency or insufficiency of evidence to support a finding of
probable cause is ignored.
SECOND DIVISION

COMMISSIONER OF INTERNAL REVENUE, G.R. No. 185371


Petitioner,
Present:

CARPIO, J., Chairperson,


NACHURA,
- versus - PERALTA,
ABAD, and
MENDOZA, JJ.

METRO STAR SUPERAMA, INC., Promulgated:


Respondent.
December 8, 2010

x -------------------------------------------------------------------------------------- x

DECISION

MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of
Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, 2008 Decision[1] of the Court of Tax
Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution[2] denying
petitioners motion for reconsideration.

The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case
No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama,
Inc. (Metro Star) of deficiency value-added tax and withholding tax for the taxable year 1999.

Based on a Joint Stipulation of Facts and Issues[3] of the parties, the CTA Second Division summarized the factual
and procedural antecedents of the case, the pertinent portions of which read:

Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the
Republic of the Philippines, x x x.

On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City,
issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine
petitioners books of accounts and other accounting records for income tax and other internal
revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10,
2001 by Regional Director Leonardo Sacamos.

For petitioners failure to comply with several requests for the presentation of records and
Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September
26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed
with the investigation based on the best evidence obtainable preparatory to the issuance of
assessment notice.

On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a


Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated
that a post audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from petitioner in the amount of P292,874.16.

On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from
Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two
Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency
value-added and withholding taxes for the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072

VALUE ADDED TAX


Gross Sales P1,697,718.90
Output Tax P 154,338.08
Less: Input Tax
VAT Payable P 154,338.08
Add: 25% Surcharge P 38,584.54
20% Interest 79,746.49
Compromise Penalty
Late Payment P16,000.00
Failure to File VAT returns 2,400.00 18,400.00 136,731.01
TOTAL P 291,069.09

WITHHOLDING TAX
Compensation 2,772.91
Expanded 110,103.92
Total Tax Due P 112,876.83
Less: Tax Withheld 111,848.27
Deficiency Withholding Tax P 1,028.56
Add: 20% Interest p.a. 576.51
Compromise Penalty 200.00
TOTAL P 1,805.07

*Expanded Withholding Tax P1,949,334.25 x 5% 97,466.71


Film Rental 10,000.25 x 10% 1,000.00
Audit Fee 193,261.20 x 5% 9,663.00
Rental Expense 41,272.73 x 1% 412.73
Security Service 156,142.01 x 1% 1,561.42
Service Contractor P 110,103.92
Total

SUMMARIES OF DEFICIENCIES
VALUE ADDED TAX P 291,069.09
WITHHOLDING TAX 1,805.07
TOTAL P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure
dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to
settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent
BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy and
Garnishment to enforce collection.

On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of
Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding payment of deficiency value-
added tax and withholding tax payment in the amount of P292,874.16.

On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for
Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99.

On February 8, 2005, respondent Commissioner, through its authorized representative,


Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying
petitioners Motion for Reconsideration. Petitioner, through counsel received said Decision
on February 18, 2005.

x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due
process, Metro Star filed a petition for review[4] with the CTA. The parties then stipulated on the following issues to be
decided by the tax court:

1. Whether the respondent complied with the due process requirement as provided under the
National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the
issuance of a deficiency tax assessment;

1.1 Whether petitioner is liable for the respective amounts of P291,069.09


and P1,805.07 as deficiency VAT and withholding tax for the year 1999;

1.2. Whether the assessment has become final and executory and demandable for
failure of petitioner to protest the same within 30 days from its receipt thereof
on April 11, 2002, pursuant to Section 228 of the National Internal Revenue
Code;

2. Whether the deficiency assessments issued by the respondent are void for failure to state the
law and/or facts upon which they are based.

2.2 Whether petitioner was informed of the law and facts on which the assessment
is made in compliance with Section 228 of the National Internal Revenue
Code;

3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on


sales of services under Section 108(A) of the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section
6(b) of the National Internal Revenue Code.

The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a
decision, the decretal portion of which reads:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.


Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE
and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner.

The CTA-Second Division opined that [w]hile there [is] a disputable presumption that a mailed letter [is]
deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the
burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the
addressee.[5] It also found that there was no clear showing that Metro Star actually received the alleged PAN,
dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the
Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.[6]

The CIR sought reconsideration[7] of the decision of the CTA-Second Division, but the motion was denied in the
latters July 24, 2007 Resolution.[8]

Aggrieved, the CIR filed a petition for review[9] with the CTA-En Banc, but the petition was dismissed after a
determination that no new matters were raised. The CTA-En Bancdisposed:

WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and
DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007
Resolution of the CTA Second Division in CTA Case No. 7169 entitled, Metro Star Superama, Inc.,
petitioner vs. Commissioner of Internal Revenue, respondent are hereby AFFIRMED in toto.

SO ORDERED.

The motion for reconsideration[10] filed by the CIR was likewise denied by the CTA-En Banc in its November 18,
2008 Resolution.[11]
The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was
served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court
with the sole issue of whether or not Metro Star was denied due process.

The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the
very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has been
an abuse or improvident exercise of authority. [12] In Barcelon, Roxas Securities, Inc. (now known as UBP Securities,
Inc.) v. Commissioner of Internal Revenue,[13] the Court wrote:

Jurisprudence has consistently shown that this Court accords the findings of fact by the
CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals[G.R. No. 122605, 30
April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by
the very nature of its function is dedicated exclusively to the consideration of tax problems, has
necessarily developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such findings can only be
disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross
error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the
contrary, this Court must presume that the CTA rendered a decision which is valid in every respect.

On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz:

Jurisprudence is replete with cases holding that if the taxpayer denies ever having
received an assessment from the BIR, it is incumbent upon the latter to prove by competent
evidence that such notice was indeed received by the addressee. The onus probandi was
shifted to respondent to prove by contrary evidence that the Petitioner received the
assessment in the due course of mail. The Supreme Court has consistently held that while a
mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable
presumption subject to controversion and a direct denial thereof shifts the burden to the party
favored by the presumption to prove that the mailed letter was indeed received by the addressee
(Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P.
Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:

"The facts to be proved to raise this presumption are (a) that the
letter was properly addressed with postage prepaid, and (b) that it was
mailed. Once these facts are proved, the presumption is that the letter was
received by the addressee as soon as it could have been transmitted to him in
the ordinary course of the mail. But if one of the said facts fails to appear, the
presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed,
56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)."

x x x. What is essential to prove the fact of mailing is the registry receipt issued by
the Bureau of Posts or the Registry return card which would have been signed by the
Petitioner or its authorized representative. And if said documents cannot be located,
Respondent at the very least, should have submitted to the Court a certification issued by
the Bureau of Posts and any other pertinent document which is executed with the
intervention of the Bureau of Posts. This Court does not put much credence to the self serving
documentations made by the BIR personnel especially if they are unsupported by substantial
evidence establishing the fact of mailing. Thus:

"While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. of Int.
Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the
more imperative that the release, mailing or sending of the notice be clearly and
satisfactorily proved. Mere notations made without the taxpayers intervention,
notice or control, without adequate supporting evidence cannot suffice;
otherwise, the taxpayer would be at the mercy of the revenue offices, without
adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30,
1965).

x x x.
The failure of the respondent to prove receipt of the assessment by the Petitioner leads to
the conclusion that no assessment was issued. Consequently, the governments right to issue an
assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the
Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.)

The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show
that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt
or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it
failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman
dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was
willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of
lessening its tax liability.

This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under
Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to
a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the
computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer?

The answer to these questions require an examination of Section 228 of the Tax Code which reads:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer
of his findings: provided, however, that a preassessment notice shall not be required in the
following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount
actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and automatically applied
the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of
the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such as, but not
limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall
be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration
or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as
may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the
protest, all relevant supporting documents shall have been submitted; otherwise, the assessment
shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Emphasis supplied).

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable
for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the
assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence. [14]

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:

SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment.

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's
records shall, among others, state in his report whether or not the taxpayer agrees with his findings
that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the
said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the
Revenue District Office or by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National
Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes,
for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to
present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of
receipt of the notice for informal conference, he shall be considered in default, in which case, the
Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional
Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case
with the least possible delay to the Assessment Division of the Revenue Regional Office or to the
Commissioner or his duly authorized representative, as the case may be, for appropriate review
and issuance of a deficiency tax assessment, if warranted.

3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative, as the case
may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency
tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary
Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration
in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of
the PAN, he shall be considered in default, in which case, a formal letter of demand and
assessment notice shall be caused to be issued by the said Office, calling for payment of the
taxpayer's deficiency tax liability, inclusive of the applicable penalties.

3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference
and the preliminary assessment notice shall not be required in any of the following cases, in which
case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax
liability shall be sufficient:

(i) When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax appearing on the face of the tax return filed by the
taxpayer; or

(ii) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

(iii) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as,
but not limited to, vehicles, capital equipment, machineries and spare parts,
has been sold, traded or transferred to non-exempt persons.

3.1.4 Formal Letter of Demand and Assessment Notice. The formal letter of demand and
assessment notice shall be issued by the Commissioner or his duly authorized representative. The
letter of demand calling for payment of the taxpayer's deficiency tax or taxes shall state the facts,
the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof).

The same shall be sent to the taxpayer only by registered mail or by personal delivery.

If sent by personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following:
(a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if
acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof.

x x x.

From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the
assessment made 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. The use of the word shall in
subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due
process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the
requirements laid down by law and its own rules is a denial of Metro Stars right to due process.[15] Thus, for its failure
to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A.
No. 8424, the assessment made by the CIR is void.

The case of CIR v. Menguito[16] cited by the CIR in support of its argument that only the non-service of the
FAN is fatal to the validity of an assessment, cannot apply to this case because the issue therein was the non-
compliance with the provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No.
8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of
merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law,
but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be
invalid.[17] The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form
prescribed, and that no consequence would ensue for failure to comply with that form.

The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is well-settled
that a void assessment bears no fruit.[18]

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property
without due process of law.[19] In balancing the scales between the power of the State to tax and its inherent right to
prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of
law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right
is amply protected by the Bill of Rights under the Constitution. Thus, while taxes are the lifeblood of the government,
the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue,
Inc.,[20] it was said

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile
the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of
taxation, which is the promotion of the common good, may be achieved.

xxx xxx xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of ones hard-earned income to taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part is expected to respond in the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This symbiotic relationship is the
rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of
exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a


requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the
courts will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate x x x that the law has not
been observed.[21] (Emphasis supplied).

WHEREFORE, the petition is DENIED.

SO ORDERED.
Commissioner of Internal Revenue vs. Metro Star Superama, Inc. (December 8, 2010)

On January 26, 2011, a Letter of Authority was issued for the examination Metro Star Superama Inc.’s (Metro Star)
books of accounts and other accounting records for income tax and other internal revenue taxes for the taxable year
1999. For Metro Star’s failure to comply with several requests for the presentation of records and Subpoena Duces
Tecum, an Indorsement dated September 26, 2001 was issued informing Revenue District Officer of Legazpi City to
proceed with the investigation based on the best evidence obtainable preparatory to the issuance of assessment
notice.

On November 8, 2001, a Preliminary 15-day Letter, which Metro Star received on November 9, 2001, was issued
stating that a post audit review was held and it was ascertained that there was deficiency value-added and
withholding taxes due from Metro Star. On April 11, 2002, Metro Star received a Formal Letter of Demand dated April
3, 2002 assessing it an amount for deficiency value-added and withholding taxes for the taxable year 1999.

Subsequently, a Final Notice of Seizure dated May 12, 2003 was sent to Metro Star, which it received on May 15,
2003, giving it the last opportunity to settle its deficiency tax liabilities within 10 days from receipt thereof. On
February 6, 2004, Metro Star received a Warrant of Distraint/Levy dated May 12, 2003 demanding payment of
deficiency value-added tax and withholding tax payment. On July 30, 2004, Metro Star filed with the Office of the CIR
a MR which was denied. Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not
accorded with due process, Metro Star filed a petition for review with the CTA. The CTA-Second Division granted
Metro Star’s petition for review. A reconsideration was sought by the CIR but it was denied. On appeal to the CTA-En
Banc, the petition was dismissed.

ISSUE: Whether failure to send the PAN would render the assessment null and void

HELD: On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz:

Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the
BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the
addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received
the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is
deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to
controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351).

The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro
Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the
certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed
to comply with the requirement of service of the PAN.

Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for
deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the
assessment is made. The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in
administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence.

This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide:

xxx

3.1.2 Preliminary Assessment Notice (PAN). - If after review and evaluation by the Assessment Division or by the
Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by
registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts
and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in
ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be
considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued
by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.

From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment
made 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. The use of the word “shall” in subsection 3.1.2
describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both
substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law
and its own rules is a denial of Metro Star’s right to due process. Thus, for its failure to send the PAN stating the facts
and the law on which the assessment was made as required by Section 228 of R.A. No. 8424, the assessment made
by the CIR is void.
FIRST DIVISION

G.R. No. 159694 January 27, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner,


vs.
AZUCENA T. REYES, Respondent.

x -- -- -- -- -- -- -- -- -- -- -- -- -- x

G.R. No. 163581 January 27, 2006

AZUCENA T. REYES, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

PANGANIBAN, CJ.:

Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed
in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. Being
invalid, the assessment cannot in turn be used as a basis for the perfection of a tax compromise.

The Case

Before us are two consolidated1 Petitions for Review2 filed under Rule 45 of the Rules of Court, assailing the August
8, 2003 Decision3 of the Court of Appeals (CA) in CA-GR SP No. 71392. The dispositive portion of the assailed
Decision reads as follows:

"WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is ANNULLED and SET
ASIDE without prejudice to the action of the National Evaluation Board on the proposed compromise settlement of
the Maria C. Tancinco estate’s tax liability." 4

The Facts

The CA narrated the facts as follows:

"On July 8, 1993, Maria C. Tancinco (or ‘decedent’) died, leaving a 1,292 square-meter residential lot and an old
house thereon (or ‘subject property’) located at 4931 Pasay Road, Dasmariñas Village, Makati City.

"On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond Abad (or ‘Abad’),
Revenue District Office No. 50 (South Makati) conducted an investigation on the decedent’s estate (or ‘estate’).
Subsequently, it issued a Return Verification Order. But without the required preliminary findings being submitted, it
issued Letter of Authority No. 132963 for the regular investigation of the estate tax case. Azucena T. Reyes (or
‘[Reyes]’), one of the decedent’s heirs, received the Letter of Authority on March 14, 1997.

"On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or ‘BIR’), issued a preliminary
assessment notice against the estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent
(or ‘heirs’) received a final estate tax assessment notice and a demand letter, both dated April 22, 1998, for the
amount of P14,912,205.47, inclusive of surcharge and interest.

"On June 1, 1998, a certain Felix M. Sumbillo (or ‘Sumbillo’) protested the assessment [o]n behalf of the heirs on the
ground that the subject property had already been sold by the decedent sometime in 1990.
"On November 12, 1998, the Commissioner of Internal Revenue (or ‘[CIR]’) issued a preliminary collection letter to
[Reyes], followed by a Final Notice Before Seizure dated December 4, 1998.

"On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on February 11, 1999
by Notices of Levy on Real Property and Tax Lien against it.

"On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the heirs proposed a
compromise settlement of P1,000,000.00.

"In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic tax due, citing the heirs’
inability to pay the tax assessment. On March 20, 2000, [the CIR] rejected [Reyes’s] offer, pointing out that since the
estate tax is a charge on the estate and not on the heirs, the latter’s financial incapacity is immaterial as, in fact, the
gross value of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax liability. Thus, [the CIR]
demanded payment of the amount of P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of
the subject property would be published.

"On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of the basic tax due in the
amount of P5,313,891.00. She reiterated the proposal in a letter dated May 18, 2000.

"As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection Enforcement
Division, BIR, notified [Reyes] on June 6, 2000 that the subject property would be sold at public auction on August 8,
2000.

"On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the scheduled auction sale, she
asserted that x x x the assessment, letter of demand[,] and the whole tax proceedings against the estate are void ab
initio. She offered to file the corresponding estate tax return and pay the correct amount of tax without surcharge [or]
interest.

"Without acting on [Reyes’s] protest and offer, [the CIR] instructed the Collection Enforcement Division to proceed
with the August 8, 2000 auction sale. Consequently, on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the
Court of Tax Appeals (or ‘CTA’), docketed as CTA Case No. 6124.

"On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status Quo Order,
which was granted by the CTA on July 26, 2000. Upon [Reyes’s] filing of a surety bond in the amount
of P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000 ordering [the CIR] to desist and refrain from
proceeding with the auction sale of the subject property or from issuing a [W]arrant of [D]istraint or [G]arnishment of
[B]ank [A]ccount[,] pending determination of the case and/or unless a contrary order is issued.

"[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no longer has jurisdiction over the
case[,] because the assessment against the estate is already final and executory; and (ii) that the petition was filed
out of time. In a [R]esolution dated November 23, 2000, the CTA denied [the CIR’s] motion.

"During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued Revenue Regulation (or
‘RR’) No. 6-2000 and Revenue Memorandum Order (or ‘RMO’) No. 42-2000 offering certain taxpayers with
delinquent accounts and disputed assessments an opportunity to compromise their tax liability.

"On November 25, 2000, [Reyes] filed an application with the BIR for the compromise settlement (or ‘compromise’) of
the assessment against the estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and
RMO No. 42-2000.

"On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing before the CTA
scheduled on January 9, 2001, citing her pending application for compromise with the BIR. The motion was granted
and the hearing was reset to February 6, 2001.

"On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6, 2001, this time on the
ground that she had already paid the compromise amount of P1,062,778.20 but was still awaiting approval of the
National Evaluation Board (or ‘NEB’). The CTA granted the motion and reset the hearing to February 27, 2001.
"On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of Disputed Assessment as a
Perfected Compromise. In said motion, she alleged that [the CIR] had not yet signed the compromise[,] because of
procedural red tape requiring the initials of four Deputy Commissioners on relevant documents before the
compromise is signed by the [CIR]. [Reyes] posited that the absence of the requisite initials and signature[s] on said
documents does not vitiate the perfected compromise.

"Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB, [Reyes’s] application for
compromise with the BIR cannot be considered a perfected or consummated compromise.

"On March 9, 2001, the CTA denied [Reyes’s] motion, prompting her to file a Motion for Reconsideration Ad
Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the [M]otion for [R]econsideration with the
suggestion that[,] for an orderly presentation of her case and to prevent piecemeal resolutions of different issues,
[Reyes] should file a [S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there was already
a perfected compromise.

"On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed on June 4, 2001 by its
Amplificatory Arguments (for the Supplemental Petition for Review), raising the following issues:

‘1. Whether or not an offer to compromise by the [CIR], with the acquiescence by the Secretary of Finance, of a tax
liability pending in court, that was accepted and paid by the taxpayer, is a perfected and consummated compromise.

‘2. Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP) that requires
approval by the BIR [NEB].’

"Answering the Supplemental Petition, [the CIR] averred that an application for compromise of a tax liability under RR
No. 6-2000 and RMO No. 42-2000 requires the evaluation and approval of either the NEB or the Regional Evaluation
Board (or ‘REB’), as the case may be.

"On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion was granted on July 11, 2001.
After submission of memoranda, the case was submitted for [D]ecision.

"On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which pertinently reads:

‘WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is hereby DENIED. Accordingly, [Reyes]
is hereby ORDERED to PAY deficiency estate tax in the amount of Nineteen Million Five Hundred Twenty Four
Thousand Nine Hundred Nine and 78/100 (P19,524,909.78), computed as follows:

xxxxxxxxx

‘[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of P17,934,382.13 from
January 11, 2001 until full payment thereof pursuant to Section 249(c) of the Tax Code, as amended.’

"In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated compromise of
the estate’s tax liability[,] if the NEB has approved [Reyes’s] application for compromise in accordance with RR No. 6-
2000, as implemented by RMO No. 42-2000.

"Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that ‘at the time
the questioned assessment notice and letter of demand were issued, the heirs knew very well the law and the facts
on which the same were based.’ It also observed that the petition was not filed within the 30-day reglementary period
provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code." 5

Ruling of the Court of Appeals

In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were mandatory and
unequivocal in their requirement. The assessment notice and the demand letter should have stated the facts and the
law on which they were based; otherwise, they were deemed void.6 The appellate court held that while administrative
agencies, like the BIR, were not bound by procedural requirements, they were still required by law and equity to
observe substantive due process. The reason behind this requirement, said the CA, was to ensure that taxpayers
would be duly apprised of -- and could effectively protest -- the basis of tax assessments against them.7Since the
assessment and the demand were void, the proceedings emanating from them were likewise void, and any order
emanating from them could never attain finality.

The appellate court added, however, that it was premature to declare as perfected and consummated the
compromise of the estate’s tax liability. It explained that, where the basic tax assessed exceeded P1 million, or where
the settlement offer was less than the prescribed minimum rates, the National Evaluation Board’s (NEB) prior
evaluation and approval were the conditio sine qua non to the perfection and consummation of any
compromise.8Besides, the CA pointed out, Section 204(A) of the Tax Code applied to all compromises, whether
government-initiated or not.9 Where the law did not distinguish, courts too should not distinguish.

Hence, this Petition.10

The Issues

In GR No. 159694, petitioner raises the following issues for the Court’s consideration:

"I.

Whether petitioner’s assessment against the estate is valid.

"II.

Whether respondent can validly argue that she, as well as the other heirs, was not aware of the facts and the law on
which the assessment in question is based, after she had opted to propose several compromises on the estate tax
due, and even prematurely acting on such proposal by paying 20% of the basic estate tax due." 11

The foregoing issues can be simplified as follows: first, whether the assessment against the estate is valid; and,
second, whether the compromise entered into is also valid.

The Court’s Ruling

The Petition is unmeritorious.

First Issue:

Validity of the Assessment Against the Estate

The second paragraph of Section 228 of the Tax Code 12 is clear and mandatory. It provides as follows:

"Sec. 228. Protesting of Assessment. --

xxxxxxxxx

"The taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the
assessment shall be void."

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate
taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions
of former Section 22913 prior to its amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform
Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement
of merely notifying the taxpayer of the CIR’s findings was changed in 1998 to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid.

It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998,
the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was
already in effect. The notice required under the old law was no longer sufficient under the new law.

To be simply informed in writing of the investigation being conducted and of the recommendation for the assessment
of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly assessing a taxpayer.
The act cannot be taken to mean that Reyes already knew the law and the facts on which the assessment was
based. It does not at all conform to the compulsory requirement under Section 228. Moreover, the Letter of Authority
received by respondent on March 14, 1997 was for the sheer purpose of investigation and was not even the requisite
notice under the law.

The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII, which deals with
remedies. Being procedural in nature, can its provision then be applied retroactively? The answer is yes.

The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or
take away vested rights, do not fall under the general rule against the retroactive operation of statutes. 14 Clearly,
Section 228 provides for the procedure in case an assessment is protested. The provision does not create new or
take away vested rights. In both instances, it can surely be applied retroactively. Moreover, RA 8424 does not state,
either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or
that applying it to pending proceedings would impair vested rights.

Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it
merely implements the law.

A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code. 15 While it is
desirable for the government authority or administrative agency to have one immediately issued after a law is passed,
the absence of the regulation does not automatically mean that the law itself would become inoperative.

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be
informed of both the law and facts on which the assessment was based. Thus, the CIR should have required the
assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law. The old
regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations -- old as
they were -- should be in harmony with, and not supplant or modify, the law. 16

It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of the
imagination, though, to still issue a regulation that would simply require tax officials to inform the taxpayer, in any
manner, of the law and the facts on which an assessment was based. That requirement is neither difficult to make nor
its desired results hard to achieve.

Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and corresponding
obligations, is given retroactive effect as of the date of the effectivity of the statute. 17 RR 12-99 is one such rule. Being
interpretive of the provisions of the Tax Code, even if it was issued only on September 6, 1999, this regulation was to
retroact to January 1, 1998 -- a date prior to the issuance of the preliminary assessment notice and demand letter.

Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code.

No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been amended.
Furthermore, in case of discrepancy between the law as amended and its implementing but old regulation, the former
necessarily prevails.18 Thus, between Section 228 of the Tax Code and the pertinent provisions of RR 12-85, the
latter cannot stand because it cannot go beyond the provision of the law. The law must still be followed, even though
the existing tax regulation at that time provided for a different procedure. The regulation then simply provided that
notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply
with that form.
Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due process. Not only
was the law here disregarded, but no valid notice was sent, either. A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without
first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. 19 In the instant case, respondent
has not been informed of the basis of the estate tax liability. Without complying with the unequivocal mandate of first
informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective
protest can be made.20 The haphazard shot at slapping an assessment, supposedly based on estate taxation’s
general provisions that are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of
basis for -- not to mention the insufficiency of -- the gross figures and details of the itemized deductions indicated in
the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have
been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and
collection "should be made in accordance with law as any arbitrariness will negate the very reason for government
itself."21

Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the negligence or
omission of its agents, the obligatory provision on protesting a tax assessment cannot be rendered nugatory by a
mere act of the CIR .

Tax laws are civil in nature.22 Under our Civil Code, acts executed against the mandatory provisions of law are void,
except when the law itself authorizes the validity of those acts. 23 Failure to comply with Section 228 does not only
render the assessment void, but also finds no validation in any provision in the Tax Code. We cannot condone errant
or enterprising tax officials, as they are expected to be vigilant and law-abiding.

Second Issue:

Validity of Compromise

It would be premature for this Court to declare that the compromise on the estate tax liability has been perfected and
consummated, considering the earlier determination that the assessment against the estate was void. Nothing has
been settled or finalized. Under Section 204(A) of the Tax Code, where the basic tax involved exceeds one million
pesos or the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the
approval of the NEB composed of the petitioner and four deputy commissioners.

Finally, as correctly held by the appellate court, this provision applies to all compromises, whether government-
initiated or not. Ubi lex non distinguit, nec nos distinguere debemos. Where the law does not distinguish, we should
not distinguish.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.
Commissioner of Internal Revenue vs Azucena Reyes
In 1993, Maria Tancino died leaving behind an estate worth P32 million. In 1997, a tax audit was conducted on the
estate. Meanwhile, the National Internal Revenue Code (NIRC) of 1997 was passed. Eventually in 1998, the estate
was issued a final assessment notice (FAN) demanding the estate to pay P14.9 million in taxes inclusive of
surcharge and interest; the estate’s liability was based on Section 229 of the [old] Tax Code. Azucena Reyes, one of
the heirs, protested the FAN. The Commissioner of Internal Revenue (CIR) nevertheless issued a warrant of distraint
and/or levy. Reyes again protested the warrant but in March 1999, she offered a compromise and was willing to pay
P1 million in taxes. Her offer was denied. She continued to work on another compromise but was eventually denied.
The case reached the Court of Tax Appeals where Reyes was also denied. In the Court of Appeals, Reyes received a
favorable judgment.
ISSUE: Whether or not the formal assessment notice is valid.
HELD: No. The NIRC of 1997 was already in effect when the FAN was issued. Under Section 228 of the
NIRC, taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise,
the assessment shall be void. In the case at bar, the FAN merely stated the amount of liability to be shouldered by
the estate and the law upon which such liability is based. However, the estate was not informed in writing of the facts
on which the assessment of estate taxes had been made. The estate was merely informed of the findings of the CIR.
Section 228 of the NIRC being remedial in nature can be applied retroactively even though the tax investigation was
conducted prior to the law’s passage. Consequently, the invalid FAN cannot be a basis of a compromise, any
proceeding emanating from the invalid FAN is void including the issuance of the warrant of distraint and/or levy.
FIRST DIVISION

COMMISSIONER OF INTERNAL G.R. No. 166387


REVENUE,
Petitioner,
Present:
PUNO, C.J., Chairperson,
CARPIO,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.

ENRON SUBIC POWER


CORPORATION,
Respondent. Promulgated:

January 19, 2009


x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION
CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal
Revenue (CIR) assails the November 24, 2004 decision [1] of the Court of Appeals (CA) annulling the formal
assessment notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for failure to state
the legal and factual bases for such assessment.
Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport
enterprise,[2] filed its annual income tax return for the year 1996 on April 12, 1997. It indicated a net loss
of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-day letter,[3] informed it of a
proposed assessment of an alleged P2,880,817.25 deficiency income tax.[4] Enron disputed the proposed deficiency
assessment in its first protest letter.[5]

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

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

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

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

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

We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et Denrees
v. CIR,[11] we held:
We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set
aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the
very nature of its function, it has dedicated itself to the study and consideration of tax problems and
has necessarily developed an expertise on the subject, unless there has been an abuse or
improvident exercise of authority on its part, which is not present here.
The CIR errs in insisting that the notice of assessment in question complied with the requirements of the
NIRC and RR No. 12-99.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report
of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

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

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

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

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax
assessment made against him. The use of the word shall in these legal provisions indicates the mandatory nature of
the requirements laid down therein. We note the CTAs findings:

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax,
surcharge, interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in
the issuance of the Final Assessment Notice did not provide Enron with the written bases of the law
and facts on which the subject assessment is based. [The CIR] did not bother to explain how it
arrived at such an assessment. Moreso, he failed to mention the specific provision of the Tax Code
or rules and regulations which were not complied with by Enron. [13]

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions
disallowed and included these in the gross income. It also imposed the preferential rate of 5% on some items
categorized by Enron as costs. The legal and factual bases were, however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax
deficiency. During the pre-assessment stage, the CIR advised Enrons representative of the tax deficiency, informed it
of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the
audit working paper[14] allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that
these steps sufficed to inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the
preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases
of the assessment. These steps were mere perfunctory discharges of the CIRs duties in correctly assessing a
taxpayer.[15] The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the
existence of a deficiency tax assessment is markedly different from the requirement of what such notice must contain.
Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the
order required by law, does not necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.

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

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

Verily, taxes are the lifeblood of the Government and so should be collected
without unnecessary hindrance. However, such collection should be made in accordance
with law as any arbitrariness will negate the very reason for the Government itself.
WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals
is AFFIRMED.
No costs.

SO ORDERED.
CIR vs. ENRON Subic Power Corp, GR No. 166368, January 19, 2009

FACTS

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise filed its
annual income tax return for the year 1996 on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the
Bureau of Internal Revenue, through a preliminary five-day letter Enron disputed the proposed deficiency assessment
in its first protest letter. On May 26, 1999, Enron received from the CIR a formal assessment notice requiring it to pay
the alleged deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency tax
assessment. Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for review in the
Court of Tax Appeals (CTA). It argued that the deficiency tax assessment disregarded the provisions of Section 228
of the National Internal Revenue Code (NIRC), as amended, and Section 3.1.4 of Revenue Regulations (RR) No. 12-
99 ,by not providing the legal and factual bases of the assessment. Enron likewise questioned the substantive validity
of the assessment. In a decision dated September 12, 2001, the CTA granted Enrons petition and ordered the
cancellation of its deficiency tax assessment for the year 1996. The CTA reasoned that the assessment notice sent to
Enron failed to comply with the requirements of a valid written notice under Section 228 of the NIRC and RR No. 12-
99. The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit working papers
did not substantially comply with Section 228 of the NIRC and RR No. 12-99 because they failed to show the
applicability of the cited law to the facts of the assessment.

Petitioner’s Argument:
• The CIR now argues that respondent was informed of the legal and factual bases of the deficiency assessment
against it.
• The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During
the pre-assessment stage, the CIR advised Enrons representative of the tax deficiency, informed it of the proposed
tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper
allegedly showing in detail the legal and factual bases of the assessment.
• The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the deficiency tax
assessment was based.

ISSUE: W/N CIR issued a valid tax assessment?

HELD – NO

RATIO

1. Findings of the CTA

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge,
interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in the issuance of the Final
Assessment Notice did not provide Enron with the written bases of the law and facts on which the subject
assessment is based. [The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he failed to
mention the specific provision of the Tax Code or rules and regulations which were not complied with by Enron

2. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter,
were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIRs duties in correctly assessing a taxpayer.

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

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

NOTES: A notice of assessment is: [A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a
Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be
without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation
submitted by the Revenue Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the fact, the law,
rules and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and
the notice of assessment shall be void.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 193100 December 10, 2014

SAMAR-I ELECTRIC COOPERATIVE, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

VILLARAMA, JR., J.:

At bar is a petition for review on certiorari of the Decision1 of the Court of Tax Appeals En Banc (CTA EB) dated
March 11, 2010 and it,s Resolution2 dated July 28, 2010 in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697)
affirming the May 27, 2008 Decision3 and the January 19, 2009 Amended Decision4 of the CTA's First Division, and
ordering petitioner to pay respondent Commissioner of Internal Revenue (CIR) deficiency withholding tax on
compensation in the aggregate amount of ₱2,690,850.91, plus 20% interest starting September 30, 2002, until fully
paid, pursuant to Section 249( c) of the National Internal Revenue Code (NIRC) of 1997.

The following facts are undisputed as found by the CTA's First Division and adopted by the CTA EB:

Samar-I Electric Cooperative, Inc. (Petitioner) is an electric cooperative, with principal office at Barangay Carayman,
Calbayog City.

It was issued a Certificate of Registration by the National Electrification Administration (NEA) on February 27, 1974
pursuant to Presidential Decree (PD) 269. Likewise, it was granted a Certificate of Provisional Registration under
Republic Act (RA) 6938, otherwise known as the Cooperative Code of the Philippines on March 16, 1993, by the
Cooperative Development Authority (CDA).

Respondent Commissioner of InternalRevenue is a public officer authorized under the National Internal Revenue
Code (NIRC) to examine any taxpayer including inter alia, the power to issue tax assessment, evaluate, and decide
upon protests relative thereto.

On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income tax returns, respectively. Petitioner
filed its 1997, 1998, and 1999 Annual Information Return of Income Tax Withheld on Compensation, Expanded and
Final Withholding Taxes on February 17, 1998, February 1, 1999, and February 4, 2000, in that order.

On November 13, 2000, respondent issued a duly signed Letter of Authority (LOA) No. 1998 00023803; covering the
examination of petitioner’s books of account and other accounting records for income and withholding taxes for the
period 1997 to 1999. The LOA was received by petitioner on November 14, 2000.

Petitioner cooperated in the audit and investigation conducted by the Special Investigation Division of the BIR by
submitting the required documents on December 5, 2000.

On October 19, 2001, respondent sent a Notice for Informal Conference which was received by petitioner in
November 2001; indicating the allegedly income and withholding tax liabilities of petitioner for 1997 to 1999. Attached
to the letter is a summary of the report, with an explanation of the findingsof the investigators.

In response, petitioner sent a letter dated November 26, 2001 to respondent maintaining its indifference to the latter’s
findings and requesting details of the assessment.
On December 13, 2001, petitioner executed a Waiver of the Defense of Prescription under the Statute of Limitations,
good until March 29, 2002.

On February 27, 2002, a letter was sent by petitioner to respondent requesting a detailed computation of the alleged
1997, 1998 and 1999 deficiency withholding tax on compensation. On February 28, 2002, respondent issued a
Preliminary Assessment Notice (PAN). The PAN was received by petitioner on April 9, 2002, which was protested on
April 18, 2002. Respondent’s Reply dated May 27, 2002, contained the explanation of the legal basis of the issuance
of the questioned tax assessments.

However, on July 8, 2002, respondent dismissed petitioner’s protest and recommended the issuance of a Final
Assessment Notice.

Consequently, on September 15, 2002, petitioner received a demand letter and assessments notices (Final
Assessment Notices) for the alleged 1997, 1998, and 1999 deficiency withholding tax in the amount of
[P]3,760,225.69, as well as deficiency income tax covering the years 1998 to 1999 in the amount of [P]440,545.71, or
in the aggregate amount of [P]4,200,771.40. Petitioner filed its protest and Supplemental Protest to the Final
Assessment Notices on October 14, 2002 and November 4, 2002, respectively. But on the Final Decision on
Disputed Assessment issued on April 10, 2003, petitioner was still held liable for the alleged tax liabilities. 5

The CTA EB narrates the following succeeding events:

On May 29, 2003, the Petition for Review was filed by SAMELCO-I with the Court in division.

On May 27, 2008, the assailed Decision partially granting SAMELCO-I’s petition was promulgated.

Dissatisfied, both parties sought reconsideration of the said decision. CIR filed the "Motion for Partial Reconsideration
(Re: Decision dated 27 May 2008[)]" on June 13, 2008. On the other hand, SAMELCOI’s "Motion for
Reconsideration" was filed on June 17, 2008.

On January 19, 2009, the Court in division promulgated its Amended Decision which denied CIR’s motion and
partially granted SAMELCO-I’s motion.

Thereafter, CIR and SAMELCO-I filed their "Motion for Extension of Time to File Petition for Review" on February 6,
2009 and February 11, 2009, respectively. Both motionswere granted by the Court. 6

The following issues were raised by the parties in their petitions for review before the CTA EB. In C.T.A. EB 460,
herein respondent CIR raised the following grounds:

I. Whether or not SAMELCO-I is entitled to tax privileges accorded to members in accordance with Republic
Act No. 6938, or the Cooperative Code, or to privileges of Presidential Decree (PD) No. 269.

II. Whether or not SAMELCO-I is liable for the minimum corporate income tax (MCIT) for taxable years 1998
to 1999.

III. Whether or not SAMELCO-I is liable to pay the total deficiency expanded withholding tax of
[P]3,760,225.69 for taxable years 1997 to 1999.7

On the other hand, petitioner SAMELCO-I raised the following legal and factual errors in C.T.A. EB No. 462, viz.:

I. The Court in Division gravely erred in holding that the 1997 and 1998 assessments on withholding tax on
compensation (received by SAMELCO-I on September 15, 2002), have not prescribed even if the waiver
validly executed was good only until March 29, 2002.

II. The Court in Divisionerred in holding that CIR can validly assess within the ten (10)-year prescriptive
period even if the notice of informal conference, PAN, formal letter of demand, and assessment notice
mention not a word that the BIR is invoking Section 222 (a) of the 1997 Tax Code [then Sec. 223, NIRC],
due to alleged false withholding tax returns filed by [SAMELCO-I] as the same assertions were mere
afterthought to justify application of the 10-year prescriptive period to assess.

III. The Court in Division failed to consider that CIR made no findings as to SAMELCO-I’s filing of a false
return as clearly manifested by the non-imposition of 50% surcharge on the 1997, 1998 and 1999 basic
withholding tax deficiency in the PAN, demand notice and even in the assessment notice other than interest
charges.

IV. The Court in Division erred innot holding that given SAMELCOI’s filing of its 1997, 1998, and 1999
withholding tax returns in good faith, and in close consultation with the BIR personnel in Calbayog City
where SAMELCO-I’s place of business is located, the latter should no longer be imposed the incremental
penalties (surcharge and interest).

V. The Court in Division failed to rule that since there was no substantial under remittance of 1998
withholding tax as the basic deficiency tax per amended decision is less than 30% of the computed total tax
due per return, SAMELCO-I did not file a false return.

VI. The Court in Division overlooked the fact that for taxable year 1999, [SAMELCO-I] remitted the amount
of [P]844,958.00 as withholding tax in compensation instead of [P]786,702.43 as indicated in Page 8, Annex
C of the CTA (1st Division) Decision.

VII. The Court in Division erred in failing to declare as void both the formal letter of demand and assessment
notice on withholding tax on compensation for 1997 taxable year, given its non-compliance with Section
3.1.4 of RR 12-99.8

On February 26, 2009, the CTA EB consolidated both cases. After the filing of the respective Comments of both
parties, the cases were deemed submitted for decision. The CTA EB found that the issues and arguments raised by
the parties were "mere reiterations of what have been considered and passed upon by the Court in division in the
assailed Decision and the Amended Decision."9 It ruled that SAMELCO-I is exempted in the payment of the Minimum
Corporate Income Tax (MCIT); that due process was observed in the issuance of the assessments in accordance
with Section 228 of the Tax Code; and that the 1997 and 1998 assessments on deficiency withholding tax on
compensation have not prescribed. Finding no reversible error in the Decision and the Amended Decision, the CTA
EB ruled, viz.:

WHEREFORE, premises considered, We deny the petitions for lack of merit. Accordingly, We AFFIRM the May 27,
2008 Decision and the January 19, 2009 Amended Decision promulgated by the First Division of this Court.

SO ORDERED.10

Petitioner moved for reconsideration.In a Resolution dated July 28, 2010, the CTA EB denied the motion. Petitioner
now comes to this Court raising the following assignment of errors:

A. The Honorable CTA En Banc gravely erred in holding that respondent sufficiently complied withthe due
process requirements mandated by Section 228 of the 1997 Tax Code in the issuance of 1997-1999
assessments to petitioner, even if the details of discrepancies on which the assessments were factually and
legally based as required under Section 3.1.4 of Revenue Regulations (RR) No[.] 12-99, were not found in
the Formal Letter of Demand and Final Assessment Notice (FAN) sent to petitioner, in clear violation of the
doctrine established in the case of Commissioner of Internal Revenue vs. Enron Subic Power Corporation,
G.R. No. 166387, January 19, 2009, applying Section 3.1.4 of RR 12-99 in relation to Section 228 NIRC. B.
The Honorable CTA En Banc erred in holding that respondent observed due process notwithstanding the
missing Annex "A-1" that was meant to show Details of Discrepancies and to be attached to BIR’s Letter of
Demand/Final Notice dated September 15, 2002, which was not furnished to petitioner and worse, a file
copy of which is not even found in the BIR records as part of its Exhibit "16" and neither is the same found in
the CTA records.

C. In deciding that the 1997 and 1998 withholding tax assessments have not yet prescribed, the Honorable
CTA En Banc failed to consider the singular significance of the Waiver of the Defense of Prescription validly
agreed upon and executed by the parties.
D. The Honorable CTA En Bancerred in holding that respondent can validly assess within the ten (10)-year
prescriptive period even if the Notice of Informal Conference, PAN, and Final Letter of Demand (dated
September 15, 2002), mentioned not a word as to the falsity of the returns filed by petitioner, but as anafter
thought that was raised rather belatedly only in the Answer and during the trial.

E. The Honorable CTA En Bancerred in holding as valid the 1997 deficiency withholding tax assessment
being anchored on RR 2-98 (as cited in Notice of Informal Conference and PAN), as the said RR 2-98
governs compensation income paid beginning January 1, 1998. 11

We shall resolve the instant controversy by discussing the following two main issues in seriatim: whether the 1997
and 1998 assessments on withholding tax on compensation were issued within the prescriptive period provided by
law; and whether the assessments were issued in accordance with Section 228 of the NIRC of 1997.

On the issue of prescription, petitioner contends that the subject 1997 and 1998 withholding tax assessments on
compensation were issued beyond the prescriptive period of three years under Section 203 of the NIRC of 1997.
Under this section, the government is allowed a period of only three years to assess the correct tax liability of a
taxpayer, viz.:

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. Relying on Section 203,
petitioner argues that the subject deficiency tax assessments issued by respondent on September 15, 2002 was
issued beyond the three-year prescriptive period. Petitioner filed its Annual Information Return of Income Tax
Withheld on Compensation, Expanded and Final Withholding Taxeson the following dates: on February 17, 1998 for
the taxable year 1997; and on February 1, 1999 for the year taxable 1998. Thus, if the period prescribed under
Section 203 of the NIRC of 1997 is to be followed, the three-year prescriptive period to assess for the taxable years
1997 and 1998 should have ended on February 16,2001 and January 31, 2002, respectively.

We disagree.

While petitioner is correct that Section 203 sets the three-year prescriptive period to assess, the following exceptions
are provided under Section 222 of the NIRC of 1997, viz.:

SEC. 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 factof fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.

(b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the
Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be
assessed within the period agreed upon. The period so agreed upon may be extended by subsequent
written agreement made before the expiration of the period previously agreed upon.

(c) Any internal revenue tax which has been assessed within the period of limitation as prescribed in
paragraph (a) hereof may be collected by distraint or levy or by a proceeding in court within five (5) years
following the assessment of the tax.

(d) Any internal revenue tax, which has been assessed within the period agreed upon as provided in
paragraph (b) herein above, may be collected by distraint orlevy or by a proceeding incourt within the period
agreed upon in writing before the expiration of the five (5)-year period. The period so agreed upon may be
extended by subsequent written agreements made before the expiration of the period previously agreed
upon.
(e) Provided, however, That nothing in the immediately preceding Section and paragraph (a) hereof shall be
construed to authorize the examination and investigation or inquiry into any tax return filed in accordance
with the provisions of any tax amnesty law or decree. (Emphasis supplied.)

In the case at bar, it was petitioner’s substantial under declaration of withholding taxes in the amount of
₱2,690,850.91 which constituted the "falsity" in the subject returns – giving respondent the benefit of the period under
Section 222 of the NIRC of 1997 to assess the correct amount of tax "at any time within ten (10) years after the
discovery of the falsity, fraud or omission."12 The case of Aznar v. Court of Tax Appeals13 discusses what acts or
omissions may constitute falsity, viz.:

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent
returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with
respondent Court of Tax Appeals concluding that the very "substantial under declarations ofincome for six
consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade
the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings
of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great weight, by
resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable
interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with
intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of
such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2)
fraud,(3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations
of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by
the last portion of the provision which segregates the situations into three different classes, namely "falsity," "fraud"
and "omission." That there is a difference between "false return" and "fraudulent return" cannot be denied. While the
first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry
with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should
be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its
lawful agents fromproper assessment of tax liabilities due to false returns, fraudulent return intended to evade
payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the
discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced. There being
undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec.
332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner’s tax liability had
not expired at the time said assessment was made.14

A careful examination of the evidence on record yields to no other conclusion but that petitioner failed to withhold
taxes from its employees’ 13th month pay and other benefits inexcess of thirty thousand pesos (₱30,000.00)
amounting to ₱2,690,850.91for the taxable years 1997 to 1999 – resulting to its filing of the subject false returns.
Petitioner failed to refute this finding, both in fact and in law, before the courts a quo.

We quote the following portion of the assailed Decision of the CTA EB, viz.:

It is noteworthy to mention that during the trial, the witness for the CIR testified that SAMELCO-I did not file an
accurate return, as follows:

ATTY. FRANCIA:

Q: Did the petitioner file an accurate Return?

MS. RAPATAN:

A: No.

ATTY. FRANCIA:
Q: Can you please explain?

MS. RAPATAN:

A: Because I based the computation of my deficiency withholding taxes on declared taxable income per alpha list
submitted then, I have extracted a data from the Alpha List, particularly that of the manager and other officials, only
their basic salary and their overtime pay were declared but the other benefits were not actually subjected to
withholding tax. So, the deficiency withholding taxes from the taxes on the taxable 13th month pay and other benefits
in excess of the [P]12,000.00 for 1997 and for the taxable years 1998 and 1999, in excess of the [P]30,000.00. I also
noticed that the per diem of the Manager was not included in the withholding tax computation of SAMELCO[-]I.

ATTY. FRANCIA:

Nothing further, your Honors.

JUSTICE BAUTISTA:

Any re-cross?

ATTY. NAPUTO:

No re-cross, your Honors.15

We have consistently held that courts will not interfere in matters which are addressed to the sound discretion of the
government agency entrusted with the regulation of activities coming under its special and technical training and
knowledge.16 The findings of fact of these quasijudicial agencies are generally accorded respect and even finality as
long as they are supported by substantial evidence– in recognition of their expertise on the specific matters under
their consideration.17 In the case at bar, petitioner failed to proffer convincing argument and evidence that would
persuade us to disturb the factual findings of the CTA First Division, as affirmed by the CTA EB. As such, we cannot
but affirm the finding of petitioner’s substantial under declaration of withholding taxes in the amount of ₱2,690,850.91
which constituted the "falsity" in the subject returns.

Anent the issue of violation of due process in the issuance of the final notice of assessment and letter of demand,
Section 228 of the NIRC of 1997 provides:

SEC. 228. Protesting of Assessment. – x x x

xxxx

The taxpayers shall be informed in writing of the law and the factson which the assessment is made: otherwise, the
assessment shall be void.

Petitioner contends that as the Final Demand Letter and Assessment Notices (FAN) were silent as to the nature and
basis of the assessments, it was denied due process,18 and the assessments must be declared void. It likewise
invokes Revenue Regulations(RR) No. 12-99 which states, viz.:

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

We uphold the assessments issued to petitioner.


Both Section 228 of the NIRC of 1997 and Section 3.1.4 of RR No. 12-99 clearly require the written details on the
nature, factual and legal bases of the subject deficiency tax assessments. The reason for the mandatory nature of
this requirement isexplained in the case of Commissioner of Internal Revenue v. Reyes: 19

A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without
first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In the instant case, respondent has
not been informed of the basis of the estate tax liability. Without complying with the unequivocal mandate of first
informing the taxpayer of the government’s claim, there can be no deprivation of property, because no effective
protest can be made. The haphazard shot at slapping an assessment, supposedly based on estate taxation’s general
provisions that are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of
basis for – not to mention the insufficiency of – the gross figures and details of the itemized deductions indicated in
the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have
been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and
collection "should be made in accordance with law as any arbitrariness will negate the very reason for government
itself." (Emphasis supplied; citations omitted)

In Commissioner of Internal Revenue v. Enron Subic Power Corporation, 20 we held that the law requires that the legal
and factual bases of the assessment be stated in the formal letter of demand and assessment notice, and that the
alleged "factual bases" in the advice, preliminary letter and "audit working papers" did not suffice. Thus:

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed
and included these in the gross income. It also imposed the preferential rate of 5% on some items categorized by
Enron as costs. The legal and factual bases were, however, not indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During
the pre-assessment stage, the CIR advised Enron’s representative of the tax deficiency, informed it of the proposed
tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper
allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to
inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-
day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the
assessment. These steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a taxpayer.
The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of
a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the
order required by law, does not necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.21 (Emphasis supplied)

In this case, we agree with the respondent that petitioner was sufficiently apprised of the nature, factual and legal
bases, as well as how the deficiency taxes being assessed against it were computed. Records reveal that on October
19, 2001, prior to the conduct of an informal conference, petitioner was already informed of the results and findings of
the investigations made by the respondent, and was duly furnished with a copy of the summary of the report
submitted by Revenue Officer Elisa G. Ponferrada-Rapatan of the Special Investigation Division. Said summary
report contained an explanation of Findings of Investigation stating the legal and factual bases for the deficiency
assessment. In a letter dated February 27, 2002 petitioner requested for copies of working papers indicating how the
deficiency withholding taxes were computed.22 Respondent promptly responded in a letter-reply dated February 28,
2002 stating:

please be informed that the cooperative’s deficiency withholding taxes on compensation were due to the failure of the
cooperative to withhold taxes on the taxable 13th month pay and other benefits in excess of ₱30,000.00 threshold
pursuant to Section 3 of Revenue Regulation No. 2-95 implementing Republic Act No. 7833 and Section 2.78/1 B 11
of Revenue Regulation 2-98 implementing Section 32 B e of Republic Act No. 8424. Further, we are providing you
hereunder the computational format on how deficiency withholding taxes were computed and sample computation
from our working papers, for your information and guidance.23

On April 9, 2002, petitioner received the PAN dated February 28, 2002 which contained the computations of its
deficiency income and withholding taxes.1âwphi1 Attached to the PAN was the detailed explanation of the particular
provision of law and revenue regulation violated, thus: DETAILS OF DISCREPANCIES

1. Deficiency income taxes for 1998 and 1999 respectively result from non-payment of the minimum
corporate income tax (MCIT) imposed pursuant to Section 27(E) of the 1997 Tax Reform Act.

2. Deficiency Withholding Taxes on Compensation for 1997-1999 are the total withholding taxes on
compensation of all employees of SAMELCO[-]I resulting from failureof employer to withhold taxes on the
taxable 13th month pay and other benefits in excess of [P]30,000.00 threshold pursuant to Revenue
Regulation 2-98.24

The above information provided to petitioner enabled it to protest the PAN by questioning respondent's interpretation
of the laws cited as legal basis for the computation of the deficiency withholding taxes and assessment of minimum
corporate income tax despite petitioner's position that it remains exempt therefrom. 25 In its letter-reply dated May 27,
2002, respondent answered the arguments raised by petitioner in its protest, and requested it to pay the assessed
deficiency on the date of payment stated in the PAN. A second protest letter dated June 23, 2002 was sent by
petitioner, to which respondent replied (letter dated July 8, 2002) answering each of the two issues reiterated by
petitioner: ( 1) validity of EO 93 withdrawing the tax exemption privileges under PD 269; and (2) retroactive
application of RR No. 8-2000.26 The FAN was finally received by petitioner on September 24, 2002, and protested by
it in a letter dated October 14, 2002 which reiterated in lengthy arguments its earlier interpretation of the laws and
regulations upon which the assessments were based.27

Although the FAN 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 length the factual
and legal bases of the deficiency tax assessments and denying the protest. 28

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.

WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of the Court of Tax Appeals En Banc
dated March 11, 2010 and July 28, 2010, respectively, in C.T.A. EB Nos. 460 and 462 (C.T.A. Case No. 6697), are
hereby AFFIRMED and UPHELD.

With costs against the petitioner.

SO ORDERED.
Republic of the Philippines
COURT OF TAX APPEALS
Quezon City

SECOND DIVISION

FLUOR DANIEL CTA Case No. 7793


PHILIPPINES INC.,
Petitioner,

Members:
CASTANEDA, JR., Chairperson

-versus- CASANOVA, and


MINDARO-GRULLA, D.

COMMISSIONER OF INTERNAL Promulgated:


REVENUE,
Respondent.
APR

----x
DECISION CASANOVA, -Z:
In this Petition for Reviewl ,
filed on June 10, 2008, petitioner- Fluor Daniel Philippines, Inc., prays for the
cancellation and withdrawal of the deficiency final withholding tax assessment for the year 2004, including the
surcharges and interest thereon, by the Commissioner of Internal Revenue
(CIR), in the total amount of P21,368,659.46.
As culled from the records of the case, the facts are as follows:
Petitioner is a domestic corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal office located at Asian Star Building, 2402-2404 Asean Drive, Muntinlupa
City.2
Respondent is the government official duly charged with the duty of assessing and collecting internal
revenue taxes, as well as the power to

Docket, Vol. I, pp. 4-17.


- Par. l , Joint Stipulation of Facts and Issues (JSFI), Docket (Vol. I), p. 178.
cancel disputed assessments, with office address at the BIR National Office
Building, BIR Road, Diliman, Quezon City. 1
A Formal Letter of Demand dated April 16, 2007 was issued by respondent assessing petitioner the alleged
deficiency taxes for 2004 comprising Income Tax, Value-Added Tax (VAT) and Expanded Withholding
Tax (EWF). 2
The assessments, together with interest and compromise, totaling One Hundred Forty-Four Million Five
Hundred Thirty-Six Thousand Eight Hundred Sixty-Six Pesos and 21/100 centavos (P144,536,866.21), are broken
down as follows:

1
Par. 2, JSFI, Ibid, pp. 178-179.
2
Par. 3, JSFI, Id., p. 179. 5 Par. 4,
JSFI, Id., 179.
Basic Tax Interest Compromise Total

Income Tax
7,562,819.61 3,125,965.44 25,000.00

VAT 40,028 389.09 16 344 925.54 25 000.00 56,398 314.63


EWT 53,195 715.83 24 204,050.70 25,000.00
Total 43,674,941.68 75 000.00 144,536 866.21
Included in the EVff assessment was the alleged deficiency EVT on petitioner's payments of maintenance
service fees for software maintenance (the "software maintenance service fees") to Fluor International, Inc. (FII), a
non-resident foreign corporation. Respondent claimed that, since there was no documentary evidence to show the
nature of the contract between petitioner and FII, the software maintenance fees should be treated as income from
services and, thus, subject to EWT at 32 0/0. 5
Thereafter, petitioner filed an administrative protest (Request for

Reinvestigation/Reconsideration) on May 18, 2007. 3


In the said protest, petitioner explained that respondent's assessment for EVVT on its software
maintenance service fees lacks legal basis considering that they were paid to FII, a resident of the U.S. which is not
engaged in trade or business and, has no permanent establishment (PE) in the Philippines. Thus, FII cannot be
subjected to tax on the fees received
CTA
Page

pursuant to Article 8(1) of the Tax Treaty bewveen the Republic of the
Philippines and the United States of America (the RP-US Tax Treaty). 4
Petitioner, likewise, applied for the abatement of penalties, surcharges and interest 5 on February 27, 2008
pursuant to Section 204(B) of the 1997 Tax Code as implemented through Revenue Regulations No. 15-2007, with
respect to the deficiency VAT assessment6 .
In response to petitioner's protest, respondent issued a Final Decision on Disputed Assessment (FDDA)
dated March 3, 2008 and the same was received by petitioner on May 9, 2008. In the FDDA, respondent cancelled
the income tax and partially cancelled the VAT assessment, but issued an assessment for final withholding tax on
petitioner's payments of software maintenance service fees in lieu of the previous EWT assessment appearing in the
Formal Letter of Demand dated April 16, 2007. Hence, respondent issued a final deficiency assessment of
P21,939,457.85, computed as follows. 7

Final Withholding Tax (inclusive of increments

VAT inclusive of increments P570 798.39

Total Ph 21 939 457.85


In changing the assessment from deficiency EVVT to deficiency final withholding tax (FWT), respondent
argued that the software maintenance fees should be considered as "license generating royalty income", citing RMC
No. 44-05 as her basis. Thus, she maintained that the software maintenance service fees should have been
subjected to the preferred rate of 15% under
Article 13 of the RP-US Tax Treaty. ll

3
Par. 5, JSFI, p. 179.
4
Par. 6, Petition for Review, Id., p. 6.
5
Annex "E" to Respondent's Answer, Id., p. 1 10.
6
Par. 7, Petition for Review, Id., p. 6.
7
Par. 6, JSFI, Id., p. 180. Il Par. 7,
JSFI, p. 180.
On the basis of the FDDA, which constitutes a denial of petitioner's protest, petitioner filed its Petition for
Review before this Court on June 10, 2008, in accordance with the provision of Section 228 of the National Internal
Revenue Code of 1997 (NIRC 1997) which provides:
"SEC. 228. Protesting of Assessment. —

xxx xxx

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty
(180) days from submission of documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said
decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory' and demandable."

In her Answer, 8 filed on August 20, 2008, respondent averred the following Special and Affirmative Defenses:

Petitioner is liable to pay the final withholding tax on the alleged software maintenance
service fees being paid to Fluor International Incorporated (FII) for the following
reasons:

8.1. FII failed to comply with the provision of Revenue Memorandum Order No. 01-
2000 dated November 25, 1999 entitled "Procedures for Processing Tax
Treaty Relief Application". Under said RMO, it is provided that any availment
of the tax treaty provisions must be preceded by an application for treaty
relief with the Internationa_l _Tax Affairs Division (ITAD) of the Bureau of
Internal Revenue.

The implementation of the said RMO is in harmony with the objectives of the
contracting states to ensure that the granting of the benefits under the tax treaties
are enjoyed by the persons or corporations duly entitled to the same. In this way, the
consequences of any erroneous interpretation and/or application of the treaty
provisions with which the Philippines is a signatory to (i.e., claim for tax refund/credit
for overpayment of taxes, or deficiency tax liabilities for underpayment) can be
averted

8
PP. 80-105
crA
Page

before proceeding with the transactions and/or paying the tax liability covered by
the tax treaty.

It is quite noteworthy to say that the power to interpret the provisions of the Code
and other tax laws as provided for under Section 4 of the National Internal
Revenue Code shall be under the exclusive and original jurisdiction of the
Commissioner of Internal Revenue, subject to review by the Secretary of Finance.

'Findings of administrative officials and agencies who have


acquired expertise because their jurisdiction is confined to
specific matters are generally accorded not only respect but at
the time even finality" (Ibid., citing Motoomu// v. De/a Paz, 187
SCRA 743). Interpretations by officers of laws which are
entrusted to their administration, are entitled to great respect
(Anscor Container Corporation v. Court of Tax Appea/s, et a/.,
CA-GR SPNo. 38052, August 31, 1998)

In Mirant (Philippines) Operations Corporation (formerly: Southern Energy-Asia


Pacific Operations [Phils.] Inc. vs. Commissioner of Internal Revenue under CTA-
EB. No. 40 (CTA Case No. 6382) promu/gated on June 7, 2005, the Court held
that:

'A foreign corporation wishing to avail of the benefits of the


tax treaty should invoke the provisions of the tax treaty and
prove that indeed the provision of the tax treaty applies to it,
before the benefits may be extended to such corporation. In
other words, a resident or non-resident foreign corporation
shall be taxed according to the provision of the National Internal
Revenue CQde, unless it is shown that the treaty provisions
apply to said corporation, and that, in case the same are
applicable, the option to avail of the tax benefits under the tax
treaty has been successfully invoked."

Nowhere in the records of the case was it shown that FII observed the
provision of said order. To evince this, a copy of ITAD certification dated July 11,
2008 stating that FII has not secured any tax treaty relief applications before
petitioner commenced the filing of the instant petition is hereto attached as 'Annex
A' and made an integral part hereof.

Granting for the sake of argument that there are various BIR Rulings as
well as ITAD Rulings which might find application to petitioner's circumstances,
still, said rulings would not be applicable because not one of the rulings pertain to
the foreign corporation such as FII. BIR Rulings are issued based on the facts and
circumstances surrounding particular issue/s in question and are resolved on a
case-to-case basis. It would be erroneous to invoke the ruling in a specific case
which have no bearing to the case of petitioner.

Guided by the foregoing provision, since FII failed to comply with the
provisions of RMO 01-2000, it shall be taxed according to the provisions of the
National Internal Revenue Code.

8.2 Under Revenue Memorandum Circular (RMC) No. 77-2003 entitled


'Classification of Payments for Software for Income Tax Purposes' dated
November 18, 2003, the term 'Royalties' as generally used means:
'Payment of any kind received as a consideration for the use of
or the right to the use, any copyright of literary, artistic or
scientific work including cinematographic (sic) films or (sic) films
or tapes used for radio or television broadcasting, any patent,
trademark, design or model, plan, secret formula or process, or
for the use of, or the right to use, industrial, commercial, or
scientific equipment or for information concerning industrial,
commercial or scientific experience. The term 'use' as contained
herein shall include the reselling or distribution of software.

Software is generally assimilated as a literary, artistic, or


scientific work protected by the copyright laws of various
countries including the Philippines, thus, payments in
consideration for the use of, or the right to use a copyright or a
copyrighted article relating to software are generally royalties.

The contract executed between petitioner Fluor Daniel Philippines, Inc.


(FDI) and Fluor International Incorporated (FII) states that petitioner is granted free
access and usage of the software however petitioner is being charged a monthly
maintenance service fee. In addition, the presence of the following
terms/conditions appear:

a. A non-exclusive, non transferrable free authority to access or use


the software upon request of petitioner;

b. Petitioner shall not make use of the software for time-sharing or


otherwise allow its use by third parties without prior written approval
of FII;

c. Petitioner is not permitted to make any copies of the software for


distribution to third parties;

d. Petitioner is permitted to make and distribute to employees copies of


documentation and related materials, but only to the extent that such
reproduction and distribution is necessary to petitioner's access or
use of the software in accordance with the Agreement;

e. Petitioner shall not decompile, disassemble or reverse-engineer the


software or any portion thereof, nor modify or adapt the software or
documentation, nor create derivative works.

The nature of the contract shows that FII does not transfer all substantial rights to
the taxpayer. A transaction does not constitute a sale or exchange because not all
substantial rights have been transferred is classified as a license generating
royalty income as provided for under Revenue Memorandum Circular (RMC) No.
44-2005 entitled Taxation of Payments Software' dated September 1, 2005.

The contract reveals that petitioner is granted authority to use and the right to use
the copyright relating to software. The usage and access of the software is limited
to the terms and conditions by FII which are stipulated in the contract. Such that, if
petitioner fails to comply, it may be subject to cancellation of the contract. FII,
therefore, retains full and direct control over petitioner's access and usage of the
software. Hence, it loses the character of being 'free' because of the grant of
authority is subject to various restrictions.
Consequently, any consideration received by FII for the use of, or the right to use
the copyright of the software shall be considered royalties within the definition of
RMC 77-2003 and not just a simple 'maintenance service fee' as claimed by
petitioner.

The petitioner claims that the 'maintenance service fees' are considered
After-sales (sic) Service citing as their basis RMC No. 77-2003. After-sales
Service, as embodied in said RMC, is defined as follows:

'Contracts for the use of the software are often accompanied


with the provision of services installation, maintenance
and customization of the software) by the personnel of the
relevant foreign licensor/owner or of the relevant local
subsidiary, reseller and/or distributor. Payments as
consideration for aftersales service in a mixed contract are not
royalties alone, but will include income from services. The
appropriate course to take with such contract is, in principle, to
break down, on the basis of the information contained in the
contract or by means of a reasonable apportionment, the whole
amount of the stipulated payments according to the various
parts of what is being provided under the contract, and then to
apply to each part of it the proper tax treatment therefor. Thus,
the part of the payments representing use of, or the right to use,
copyright relating to software will be treated as royalties and
taxable as such. The other part of the payments representing
the provision of services will be treated as income from services
and taxed as such.'

The governing RMC speaks that for the payment/consideration to be


qualified as 'after-sales service', there must be a precedent sale of either a
License or a System which consists of series of software each containing trade
secrets and know-how that are considered proprietary, confidential, and of
significant commercial value to FII. In this case, the software is a component and
the right to use is given to make the system useful to the end-user.

The contract between petitioner and FII does not show that a license or
system was sold to petitioner by Ell. Petitioner was only granted free,
authority/access or usage of the software necessary in the performance of their
activities. Therefore, since there is no prior sale to speak of, then the alleged
maintenance service fee cannot be categorized as an 'after sales- service'.

Time and again, where the law speaks in clear and categorical language,
there is no room for interpretation, vacillation, or equivocation; there is room only
for application.

Furthermore, the contract to be perfected must be accompanied with the provision


of ser-vices which may be for installation, maintenance and customization of the
software. Apparently, the contract does not provide for the scope, specific and
exact details relative to the technical support, advice and assistance to be
provided by the petitioner on account of the alleged maintenance of services. It
also fails to show the manner and method as to how this alleged maintenance
services shall be done and the covered period during which said maintenance
services is to run. Suffice it to say that the aforementioned matters are necessary
to warrant petitioner's payment of said alleged fees.

A careful study under Article 3 of the contract: Compensation and Method


of Payment reveals that a term service fee' is to be paid monthly
by petitioner for every Home Office and Field Staff per project hour executed in its
office. It is clear that the monthly payment was billed for every use, or right to use
the software provided by FII.
In addition, it is worth stressing that the alleged maintenance service fee is
not to be paid in full but paid on a monthly basis. Neither does it state the specific
period during which said payment shall commence and end. If said payments
were for the purpose of reimbursement of cost and recovery charges as claimed
by petitioner, then the payment should have at least reached a period of finality at
a certain point in time. However, no agreement were undertaken to address the
issue on the duration of payments to be made by petitioner. Therefore, the
obligation of petitioner connotes payment in perpetuity or until such time that
petitioner and/or FII exists or the least, unless and until one of the parties revoke
the contract.

Likewise, it can be gleaned that no mixed contract was ever created as


asserted by petitioner. Such being the case, there is no need to apportion the
whole amount of the stipulated payments for royalties on one hand and income
from services on the other. In view thereof, since no specific provision for
maintenance was entered into by the parties, the monthly maintenance service fee
shall be considered as royalties and not an 'after-sales service'. It shall represent
payments for the use of, or the right to use copyright relating to software and shall
be taxable as such.

With respect to the appropriate taxes for which petitioner should be held
liable arising from the payment of royalties, RMC 77-2003 further states that under
the section 'Modes of Acquiring Software and the Relevant Tax Treatment
Thereof' that, a local end-user may acquire license to use software directly from
the foreign licensor/owner of the software. Payments made by the end-user to the
licensor/owner as royalties are subject to thirty-two (32%) income tax based on the
gross amount thereof as that imposed on royalties derived by a non-resident
foreign corporation (Section 28 [B] [1], NIRC), withheld and collected by the
subsidiaries, resellers, or distributors making the payments (Section 2.57-1 [1] [1],
RR 2-98). However, if the foreign licensor/owner is a resident of a country which
has an existing treaty with the Philippines, royalties paid thereto are subject to the
reduced tax rates on royalties under the relevant tax treaty, provided the
conditions prescribed therein are complied with by the licensor/owner.

The existing Tax Treaty between the United States and the Philippines,
Article 13 on Royalties provides:

However, the tax imposed by that other Contracting State shall not
exceed —

a. In the case of United States, 15% of the gross


amount of royalties, and
b. In the case of the Philippines, the least of:
1, 25% of the gross amount of royalties

2. 15% of the gross amount of the royalties,


where the royalties are paid by a corporation
registered with the Philippine Board of
Investments and engaged
in preferred areas of activities; and
3. The lowest rate of the Philippine tax that may
be imposed on royalties of the same kind paid
under similar circumstances to a resident of a
third state."

Taking into consideration the preceding section of the Treaty, the rate of
32% is then reduced to 15% of the gross amount of royalties because the royalties
are paid by a corporation registered with the Philippine Board of Investments and
engaged in preferred areas of activities which is the least applicable rate for the
tax deficiency report.

It is quite important to note that Article 3, Note 3 of the contract between


petitioner and FII further states that "All taxes payable in the Philippines shall be
the responsibility of the taxpayer".

9. Petitioner erroneously asserts that assessment for final withholding


tax constitutes a new assessment.

In the Formal Letter of Demand dated April 16, 2007, a 32% Expanded
Withholding Tax was assessed against petitioner. At that time, it is submitted that
the respondent considered the transaction as an after-sales service wherein the
owner or the licensor for the software petitioner is utilizing will receive income from
services. Thus, the rate of 32% was applied to said transaction. The oversight was
however rectified in the Final Decision on Disputed Assessment (FDDA). This
error was occasioned by the fact that during the period the Final Assessment
Notice was made, no documentary evidence was presented by petitioner to show
the nature of the contract between petitioner and the owner or the licensor of the
software. It was only at the time petitioner filed its administrative protest that the
contract between the petitioner and FII was produced by petitioner.

Considering the foregoing, respondent was under the duty to charge


petitioner the appropriate tax due in the FDDA. Hence, from the Withholding Tax-
Expanded category, the tax due from petitioner was reclassified as Final
Withholding Tax (Section 28 [B] NIRC in relation to Section 2.57-1 [1] RR 2-98.

The 32% rate applied to royalties derived by petitioner was further reduced to 15%
on account of the RP-US Tax Treaty, as petitioner is a resident of the United
States. To comply with the mandate of the tax treaty, the rate provided therein was
applied.

10. Petitioner in its quest to defeat payment of the assessed alleged


deficiency final withholding tax, cited the ruling on CTA EB No. 113 dated September
19, 2006 (CFA Case No. 6656) entitled Commissioner of Internal Revenue vs.
Deutsche Bank AG Manila Branch where it was held that petitioner (Bureau of
Internal Revenue) cannot change the basis of assessment without complying with
the provisions of Section 228 and Section 203 of the NIRC. However, let it be
stressed that in the abovementioned case, petitioner (Bureau of Internal Revenue)
for the first time sought alternative relief already in the Memorandum stage of the
trial.

Likewise, in Aguinaldo Industries Corp. Fishing Net Division vs.


Commissioner of Internal Revenue et al., (112 SCRA 136), which was mentioned
in the above-mentioned case, the Court held that

'To allow the litigant to assume a different posture when he


comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a
procedure whereby the court — which is supposed to review
administrative determinations — would not review but determine
and defy for the first time, a question not raised in the
administrative forum. This cannot be permitted for the same
reason that underlies the requirement of prior exhaustion of
administrative remedies to administrative authorities the prior
opportunity to decide controversies within its competence, and
in much the same way that, on the judicial level, issues not
raised in the lower coufl_cannot be raised for the first time on
appeal."
Petitioner is misplaced in citing the previous cases above-mentioned. Said
cases are not applicable to the issues at hand, first and foremost, the 'change of
assessment' was made after petitioner has filed its administrative protest. To
reiterate, the change of category from the Withholding Tax Expanded Category to
Final Withholding Tax occurred only during the preparation of the Final Decision
on Disputed Assessment (FDDA) because it was only during that time that
petitioner produced the contract entered into by petitioner and FII. Had it not been
for that relevant document, the amendment would not have occurred. This
document, in effect, proved that petitioner is subject to Final Withholding Tax. The
respondent has no other option but to charge petitioner the appropriate and
correct tax assessment.

The basis of assessment in holding petitioner for the alleged deficiency


final withholding tax is RMC No. 77-2003 which is stated in the Final Assessment
Notice. It is the very' same basis used and applied in the Final Decision on
Disputed Assessment. Petitioner was informed in writing of the law and facts on
which the assessment is made at the outset. Such being the case, the
assessment is valid and no violation of due process was committed.

11. To reiterate, it is clear that petitioner was given the opportunity to


challenge the assessment, refute the claim of the respondent, and be heard in the
proper forum and during trial by presentation of its pertinent evidence to
substantiate its claim. In fact, the change in the assessment was precisely an
offshoot of due process accorded to petitioner.
12. The right of respondent to assess, thus, has not yet prescribed.
The change of category is not considered as an assessment enough to prevent
the respondent from charging petitioner the appropriate taxes. It is not considered
a new assessment. Consequently, respondent can still correct the appropriate tax
due.

13. With regard to petitioner's VAT deficiency which involves the


difference between total amount issued with VAT Official Receipts during the year
and income reported as vatable transactions amounting to Php5,686,494.96, the
VAT inputed was duly considered, consequently, deficiency was adjusted to reflect
the correct taxable basis of Php3,223,193.69. Hence, the total Value Added Tax
due inclusive of increments is Php570,798.39. Copy of the computation of said
deficiency is attached hereto as Annex 'B' and made an integral hereof.

Out of the VAT deficiency, the petitioner admitted the basic VAT deficiency in the
amount of P326,519.37 as evidenced by the deposit made by petitioner of said
amount on February 27, 2008 and a letter from petitioner likewise dated February
27, 2008 addressed to the Large Taxpayers Service admitting the above-
mentioned circumstance. Copy of said documents are attached as annex 'C' and
'D' and made an integral part hereof. However, petitioner denied payment of legal
increments consisting of interest for the period from April 25, 2005 to March 31,
2008, penalty for non-compliance with invoicing requirements and compromise. In
relation thereto, it was noted that petitioner filed an Application for Abatement
Program under Revenue Regulations No. 15-2007 on February 27, 2008 with
regard to corresponding interest and compromise penalties. Said issues are yet to
be resolved by respondent on account of the pending Petition for Review filed
before this Honorable Court by petitioner. Copy of said Application for Abatement
is attached hereto as Annex 'E' and made an integral part hereof.

With regard to the penalty for non-compliance with invoicing


requirements, said increment occurred because of petitioner's failure to regularly
issue the registered official receipt for each and every zerorated transaction which
gave rise to the abovementioned VAT deficiency assessment.
'Sec. 113. Invoicing and Accounting Requirements for VAT-
registered Persons.

a. Invoicing Requirements. — A VATregistered person shall, for


every sale, issue an invoice or receipt. In addition to
the information required under Section 237, the
following information shall be indicated in the invoice
or receipt:

1. A statement that the seller is a VAT-registered


person, followed by his taxpayer's identification
number (TIN); and

2. The total amount which the purchaser pays or is


obligated to pay to the seller with the indication
that such amount includes value-added tax.

b13. Accounting requirements.


Notwithstanding the provisions Section 233, all
persons subject to the value-added tax under Sections
106 and 108 shall; In (sic) addition to the regular
accounting records required, maintain a subsidiary
sales journal and subsidiary purchase journal on which
the daily sales and purchases are recorded. The
subsidiary journals shall contain such information as
may be required by the Secretary of Finance.'

13 Should be quoted as sub paragraph "C".

Corollary thereto, Section 237 NIRC of 1997 provides:

'All persons subject to an internal revenue tax shall, for each


sale or transfer of merchandise or of services rendered value at
Twenty-five pesos (P25.00) or more, issue duly registered
receipts or sales or commercial invoices, prepared at least in
duplicate, showing the date of transaction, quantity, unit cost
and description of merchandise or nature of service: Provided,
however, That in the case of sales, receipts or transfers in the
amount of One Hundred Pesos (PIOO) or more, or regardless of
amount, where the sale or transfer is made by a person liable to
value-added tax, to another person also liable to value-added
tax; or where the receipt is issued to cover payment made as
rentals, commissions, compensation or fees, receipts or invoices
shall be issued which shall show the name, business style, if
any, and address of the purchaser, customer, or client:
Provided, further, That where the purchaser is a VAT-registered
person, in addition to the information herein required, the invoice
or receipt shall further show the Taxpayer Identification Number
of the purchaser.

In addition thereto, Section 4.108-1 of RR No. 7-95


requires that the word 'zero-rated' be imprinted on the invoice
covering zero-rated sales. It also provides that only VAT-
registered persons are required to print their TIN followed by the
word 'VAT' in their invoices or receipts, which will be considered
as 'VAT Invoice', such that all purchases covered by invoices
other than 'VAT Invoice' shall not give rise to any input tax.'
Likewise, Sec. 4.108-1 of Revenue Regulations No. 7-95 entitled Invoicing
requirements states that all VAT-registered persons shall, for every/ sale or lease
of goods or properties or services, issue duly registered receipts or sales or
commercial invoices which must show:

1. The name, TIN and address of the seller;

2. The date of transaction;


3. The quantity, unit cost and description of merchandise or nature of
service; and

4. The name, TIN, business style, if any, and address of the VAT-
registered purchaser, customer or client;
5. The word "zero-rated" imprinted on the invoice covering zero-rated
sales; and
6. The invoice value or consideration.

The requirement of imprinting the word 'zerorated' is useful, practical and


necessary not only with respect to the proper implementation of the provisions of
the 1997 NIRC on zero-rated transactions but more importantly, to prevent the
granting of refund or tax credit to non-existent input VAT.

In view thereof, the maximum penalty for noncompliance with invoicing


requirements under Section 113 and other related sections of the Tax Code will be
imposed."

Both parties presented evidence, both testimonial and documentary, to prove their case. On February 22, 2011 14,
this Court ordered the parties to file their respective Memorandum within fifteen (15) days from receipt of the said
Resolution. In a Resolution dated May 3, 2011, the case was submitted for decision taking into consideration
petitioner's Memorandum 9 filed on
January 31, 2011 and respondent's Memorandum 16 filed on May 2, 2011.

Resolution dated February 22, 201 1, Docket (Vol. Il), pp. 719-720.

From the parties' Joint Stipulation of Facts and Issues,10 the questions for decision are as follows:

1 . Whether or not respondent complied with the due process requirements under Section
228 of the 1997 Tax Code.

2. Whether or not respondent's right to assess petitioner for 2004 has prescribed.

3. Whether or not the change of category of the assessed deficiency tax from Withholding
Tax Expanded to Final Withholding Tax in the Final Decision on disputed Assessment
is a new assessment.

4. Whether or not petitioner is liable for Final Withholding Taxes for the year 2004.

9
Id., pp. 721-787.
16 Id., pp. 8 16-855.
10
JSFI, Docket (Vol. l), pp. 181-182.
5. Whether or not the software maintenance service fee paid by petitioner to Fluor
Intercontinental Incorporated (FII) is considered royalties within the definition of
Revenue Memorandum Circular (RMC) No. 77-2003, as further amended by RMC 44-
2005.

6. Whether or not petitioner is required to secure a tax treaty application prior to the filing
of the instant Petition before it can avail of the benefits under the RP-US Tax Treaty as
laid down under Revenue Memorandum Circular (RMC) No. 01-2000, dated November
25, 1999.

7. Assuming that petitioner is liable for Final Withholding Taxes for the year 2004,
whether or not petitioner is liable for the Final Withholding Tax of 32% or at the
reduced rate of 15%.

8. Whether or not petitioner is liable to pay legal increments consisting of interest and
compromise penalties of noncompliance with VAT invoicing requirements.

9. Whether or not petitioner is liable to pay twenty five (25%) percent surcharge and
twenty (20%) percent annual interest for late payment from FDDA dated 3 March 2008
until fully paid pursuant to Sections 248 and 249 of the NIRC.
This Court shall first resolve the third issue as it will determine the other issues raised by both parties.

A careful perusal of the records reveals that in the Formal Letter of Demandi8 respondent, at the onset, classified
petitioner's 'Software maintenance service fees" as an "after-sales service" and subjected the same to EVVT at
the rate of 32%, pursuant to Revenue Memorandum Circular (RMC) No. 77-03 19 , covering the taxable period of
2004. 20

Not satisfied with the respondent's findings, petitioner then filed an administrative protest (Request for
Reinvestigation/Reconsideration) on May 18, 2007, attaching therewith its contract with Fluor International, Inc. as
one of its supporting documents.

In response to the said protest, respondent rendered a Final Decision on Disputed Assessment wherein
respondent treated the software maintenance service fees as "license generating royalty income" under Section 5
of RMC No. 44-05 21 that should be subjected to a Final Withholding

18 Annex "A" to the Petition for Review, Ibid, pp. 18-22.


19 "After-sales Service:
Contracts for the use of software are often accompanied with the provision of services (e.g.,
installation, maintenance, and customization of the software) by the personnel of the relevant foreign
licensor/owner or of the relevant local subsidiary, reseller, and/or distributor. Payments as
consideration for after-sales service in a mixed contract are not royalties alone, but will include
income from services. The appropriate course to take with such a contract is, in principle, to break
down, on the basis of the information contained in the contract or by means of a reasonable
apportionment, the whole amount of the stipulated payments according to the various parts of what
is being provided under the contract, and then to apply to each part of it the proper tax treatment
therefore. Thus, the part of the payments representing use of, or the right to use, copyright relating to
software will be treated as royalties and taxable as such. The other part of the payments
representing the provisions of services will be treated as income from services and taxed as such."
(emphasis supplied)
20 Last paragraph of Respondent's Memorandum, Docket, Vol. Il, p. 844-845.

2 1 "SECTION 5. Characterization of Transactions. The character of payments received in a


transaction involving the transfer of computer software depends on the nature of the rights that the
transferee acquires under the particular arrangement regarding the use and exploitation of the
program,

a. Transfers of copyright rights. — A transfer of software is classified as a transfer of a copyright right


if, as a result of the transaction, a person acquires any one or more of the rights described below:
i. The right to make copies of the software for purposes of distribution to the public by sale or other
transfer of ownership, or by rental, lease or lending;

Tax and not Expanded Withholding Tax. 22 Accordingly, the tax rate that shall be applied, therefore, is 32% on the
income payment remitted to the foreign affiliate. But taking into consideration the tax treaty between the United
States and the Philippines, the tax rate that shall be applied is reduced to

15%.
Thus, in the case at bench, petitioner argues that the change in the classification of the assessed deficiency tax
from Expanded Withholding Tax in the Formal Letter of Demand to Final Withholding Tax in the Final Decision on
Disputed Assessment should be considered as a new assessment.

Respondent, on the other hand, counter-argues that no new assessment was made as it was merely an offshoot
of the original assessment.
We agree with petitioner.
The change of assessment from EVT to FVVT in the FDDA is considered a new assessment on the following
grounds:
First, a careful reading of respondent's FDDA would show that CIR primarily anchors the change of classification of
petitioner's deficiency taxes from EWT to FVW on Section 5 of RMC No. 44-05 where she classified the software
service maintenance fees as 'Yicense generating royalty income.

However, after reviewing the provisions of the said circular, this Court finds

ii. The right to prepare derivative computer programs based upon the copyrighted software; iii. The
right to make a public performance of the software; iv. The right to publicly display the computer
program; or
v. Any other rights of the copyright owner, the exercise of which by another without his authority shall
constitute infringement of said copyright.

The determination of whether a transfer of a copyright right in a software is a sale or exchange of


property is made on the basis of whether, taking into account all facts and circumstances, there has
been a transfer of all substantial rights in the copyright. A transaction that does not constitute a sale
or exchange because not all substantial rights have been transferred will be classified as a license
generating royalty income.

When only copyright rights are transferred, payments made in consideration therefor are royalties. On
the other hand, when copyright ownership is transferred, payments made in consideration therefor
are business income." (emphasis supplied)
Last paragraph of Respondent's Memorandum, Docket, Vol. Il, p. 845

that the same is not applicable in the instant case in view of the nonretroactive application of the circulars
promulgated by respondent. It is very clear under Section 9 of the RMC No. 44-05 that such circular only covers
software payments paid or payable from the date of effectivity of the same, which is September 1, 2005. But, as
can be gleaned from the records, the subject of the questioned assessment covers taxable year 2004, thus
respondent could not possibly use the provisions of the said circular as her basis in changing her earlier
assessment. In a long line of cases, 23 the High Tribunal has consistently ruled that the rulings, circulars, rules and
regulations promulgated by the Commissioner of Internal Revenue would have no retroactive application if to so
apply them would be prejudicial to the taxpayers.24
Second, the concept of "license generating royalty income" in RMC No. 44-05, is nowhere to be found in RMC No.
77-03. Hence, the retroactive application by the respondent of RMC No. 44-05 has no leg to stand on.
Third, We note that, changing the assessment from EVVT to FVVT only in the issuance of the FDDA would
certainly deprive petitioner of the reasonable opportunity to be heard and submit evidence in support of its
defense, which is a clear violation of the due process requirements pursuant to the mandatory provisions of
Section 228, to wit:
"SEC. 228. Protesting of Assessment. — When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, That a preassessment notice
shall not be required in the following cases:
xxx xxx xxx

23
Among others, Commissioner of Internal Revenue v. Benguet Corporation, G.R. No. 134587, July 8, 2005, 463
SCRA 28, 41; Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 1 17982, February 6, 1997,
267 SCRA 557, 564; Commissioner of Internal Revenue v. Telefunken Semiconductor Philippines, Inc., G.R. No.
103915, October 23, 1995, 249 SCRA 401.
4 Intel Technology Phil., Inc., vs. CIR, G.R. No. 166732, April 27, 2007

The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the


taxpayer shall be required to respond to said notice. If the taxpayer fails to respond,
the Commissioner or his duly authorized representative shall issue an assessment
based on his findings.

Such assessment may be protested administratively by filing a request for


reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations."

Corollary thereto, the importance of complying with the due process requirements under Section 228 is adequately
explained in the case of Commissioner of Interna/ Revenue vs. Metro Star Superama, Inc., 11 where the High
Tribunal had ruled as follows:

"It is an elementary rule enshrined in the 1987 Constitution that no person shall be
deprived of property without due process of law. In balancing the scales between the power of the
State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and
the constitutional rights of a citizen to due process of law and the equal protection of the laws on
the other, the scales must tilt in favor of the individual, for a citizen's right is amply protected by the
Bill of Rights under the Constitution. Thus, while 'taxes are the lifeblood of the government,' the
power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue
v. Algue, Inc., it was said

Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary' to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.æ

xxx

It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for the lack of the motive power to activate and operate it.
Hence, despite the natural reluctance to surrender part of one's hard-earned income to taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part is expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the people and enhance their moral and
material values. This symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in the seat of power.

11
G.R. No. 185371, December 8, 2010.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in accordance with
the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate .
. that the law has not been observed." (Emphasis supplied)

Applying the foregoing law and jurisprudence in the case at bench, records show that the basis of the original
assessment in the Formal Letter of Demand was RMC No. 77-03. Consequently, petitioner's defense in its protest
letter focused on its non-liability to the said tax. However, in the FDDA issued by respondent, she changed the
assessment from EWT to FWT applying this time, the provisions of RMC No. 44-05. Considering that the FDDA
constitutes respondent's final decision on the matter, petitioner was therefore, not given the chance to refute within
the administrative level the findings of respondent as to the applicability of RMC No. 44-05 to its case, which is a
clear violation of Section 228 of the 1997 NIRC, as amended.

After finding that RMC No. 44-2005 is not applicable in the case at bar, This Court holds that, there is no need to
further discuss and resolve the second, sixth, seventh and eight issues in the parties' Joint Stipulation of Facts and
Issues on the ground that the resolution of the said issues has become moot and academic in view of Our stand
that the FWT assessment on petitioner's software maintenance services fees is a new assessment.

Lastly, with respect to the ninth issue on whether or not petitioner is liable to pay legal increments consisting of
interest and compromise penalties of non-compliance with the VAT invoicing requirements, We find that there is no
need to delve on the same considering that the only prayer of petitioner in the instant Petition is, for this Court to
cancel and withdraw the deficiency final withholding tax assessment for the year 2004, including the surcharges
and interest thereon.
WHEREFORE, the Petition for Review is GRANTED. The assessments for deficiency Final Withholding Tax on its
software maintenance service fees for the year 2004 are hereby CANCELLED and SET ASIDE.

SO ORDERED.
FIRST DIVISION

G.R. No. 168498 June 16, 2006

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court assailing the Decision 1 of the Court of Tax Appeals
(CTA) En Banc dated June 7, 2005 in C.T.A. EB No. 50 which affirmed the Resolutions of the CTA Second Division
dated May 3, 20042 and November 5, 20043 in C.T.A. Case No. 6475 denying petitioner’s Petition for Relief from
Judgment and the Motion for Reconsideration thereof, respectively.

The undisputed facts are as follows:

On July 5, 2001, petitioner Rizal Commercial Banking Corporation received a Formal Letter of Demand dated May
25, 2001 from the respondent Commissioner of Internal Revenue for its tax liabilities particularly for Gross Onshore
Tax in the amount of P53,998,428.29 and Documentary Stamp Tax for its Special Savings Placements in the amount
of P46,717,952.76, for the taxable year 1997.4

On July 20, 2001, petitioner filed a protest letter/request for reconsideration/reinvestigation pursuant to Section 228 of
the National Internal Revenue Code of 1997 (NIRC).5

As the protest was not acted upon by the respondent, petitioner filed on April 30, 2002 a petition for review with the
CTA for the cancellation of the assessments which was docketed as C.T.A. Case No. 6475.6

On July 15, 2003, respondent filed a motion to resolve first the issue of CTA’s jurisdiction, 7 which was granted by the
CTA in a Resolution dated September 10, 2003.8 The petition for review was dismissed because it was filed beyond
the 30-day period following the lapse of 180 days from petitioner’s submission of documents in support of its protest,
as provided under Section 228 of the NIRC and Section 11 of R.A. No. 1125, otherwise known as the Law Creating
the Court of Tax Appeals.

Petitioner did not file a motion for reconsideration or an appeal to the CTA En Banc from the dismissal of its petition
for review. Consequently, the September 10, 2003 Resolution became final and executory on October 1, 2003 and
Entry of Judgment was made on December 1, 2003.9 Thereafter, respondent sent a Demand Letter to petitioner for
the payment of the deficiency tax assessments.

On February 20, 2004, petitioner filed a Petition for Relief from Judgment10 on the ground of excusable negligence of
its counsel’s secretary who allegedly misfiled and lost the September 10, 2003 Resolution. The CTA Second Division
set the case for hearing on April 2, 200411 during which petitioner’s counsel was present.12 Respondent filed an
Opposition13 while petitioner submitted its Manifestation and Counter-Motion.14

On May 3, 2004, the CTA Second Division rendered a Resolution15 denying petitioner’s Petition for Relief from
Judgment.lawph!l.net

Petitioner’s motion for reconsideration was denied in a Resolution dated November 5, 2004, 16 hence it filed a petition
for review with the CTA En Banc, docketed as C.T.A. EB No. 50, which affirmed the assailed Resolutions of the CTA
Second Division in a Decision dated June 7, 2005.

Hence, this petition for review based on the following grounds:

I.
THE HONORABLE CTA AND CTA EN BANC GRAVELY ERRED IN DENYING PETITIONER’S PETITION
FOR RELIEF, WITHOUT FIRST AFFORDING IT THE OPPORTUNITY TO ADDUCE EVIDENCE TO
ESTABLISH THE FACTUAL ALLEGATIONS CONSTITUTING ITS ALLEGED EXCUSABLE NEGLIGENCE,
IN CLEAR VIOLATION OF PETITIONER’S BASIC RIGHT TO DUE PROCESS.

II.

CONSIDERING THAT THE SUBJECT ASSESSMENT, INSOFAR AS IT INVOLVES ALLEGED


DEFICIENCY DOCUMENTARY STAMP TAXES ON SPECIAL SAVINGS ACCOUNTS, IS AN ISSUE
AFFECTING ALL MEMBERS OF THE BANKING INDUSTRY, PETITIONER, LIKE ALL OTHER BANKS,
SHOULD BE AFFORDED AN EQUAL OPPORTUNITY TO FULLY LITIGATE THE ISSUE, AND HAVE THE
CASE DETERMINED BASED ON ITS MERITS, RATHER THAN ON A MERE TECHNICALITY.17

Relief from judgment under Rule 38 of the Rules of Court is a legal remedy that is allowed only in exceptional cases
whereby a party seeks to set aside a judgment rendered against him by a court whenever he was unjustly deprived of
a hearing or was prevented from taking an appeal, in either case, because of fraud, accident, mistake or excusable
neglect.18

Petitioner argues that it was denied due process when it was not given the opportunity to be heard to prove that its
failure to file a motion for reconsideration or appeal from the dismissal of its petition for review was due to the failure
of its employee to forward the copy of the September 10, 2003 Resolution which constitutes excusable negligence.

Petitioner’s argument lacks merit.

It is basic that as long as a party is given the opportunity to defend his interests in due course, he would have no
reason to complain, for it is this opportunity to be heard that makes up the essence of due process. 19 In Batongbakal
v. Zafra,20 the Court held that:

There is no question that the "essence of due process is a hearing before conviction and before an impartial and
disinterested tribunal" but due process as a constitutional precept does not, always and in all situations, require a
trial-type proceeding. The essence of due process is to be found in the reasonable opportunity to be heard and
submit any evidence one may have in support of one’s defense. "To be heard" does not only mean verbal
arguments in court; one may be heard also through pleadings. Where opportunity to be heard, either through
oral arguments or pleadings, is accorded, there is no denial of procedural due process. (Emphasis supplied)

As correctly pointed by the Office of the Solicitor General (OSG), the CTA Second Division set the case for hearing
on April 2, 2004 after the filing by the petitioner of its petition for relief from judgment. Petitioner’s counsel was
present on the scheduled hearing and in fact orally argued its petition.

Moreover, after the CTA Second Division dismissed the petition for relief from judgment in a Resolution dated May 3,
2004, petitioner filed a motion for reconsideration and the court further required both parties to file their respective
memorandum. Indeed, petitioner was not denied its day in court considering the opportunities given to argue its
claim.

Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of petitioner’s
counsel.21 Otherwise, all that a losing party would do to salvage his case would be to invoke neglect or mistake of his
counsel as a ground for reversing or setting aside the adverse judgment, thereby putting no end to litigation. 22

Negligence to be "excusable" must be one which ordinary diligence and prudence could not have guarded against
and by reason of which the rights of an aggrieved party have probably been impaired. 23 Petitioner’s former counsel’s
omission could hardly be characterized as excusable, much less unavoidable.

The Court has repeatedly admonished lawyers to adopt a system whereby they can always receive promptly judicial
notices and pleadings intended for them.24 Apparently, petitioner’s counsel was not only remiss in complying with this
admonition but he also failed to check periodically, as an act of prudence and diligence, the status of the pending
case before the CTA Second Division. The fact that counsel allegedly had not renewed the employment of his
secretary, thereby making the latter no longer attentive or focused on her work, did not relieve him of his
responsibilities to his client. It is a problem personal to him which should not in any manner interfere with his
professional commitments.

In exceptional cases, when the mistake of counsel is so palpable that it amounts to gross negligence, this Court
affords a party a second opportunity to vindicate his right. But this opportunity is unavailing in the case at bar,
especially since petitioner had squandered the various opportunities available to it at the different stages of this case.
Public interest demands an end to every litigation and a belated effort to reopen a case that has already attained
finality will serve no purpose other than to delay the administration of justice. 25

Since petitioner’s ground for relief is not well-taken, it follows that the assailed judgment
stands.lavvphil.ñe+ Assuming ex gratia argumenti that the negligence of petitioner’s counsel is excusable, still the
petition must fail. As aptly observed by the OSG, even if the petition for relief from judgment would be granted,
petitioner will not fare any better if the case were to be returned to the CTA Second Division since its action for the
cancellation of its assessments had already prescribed.26

Petitioner protested the assessments pursuant to Section 228 of the NIRC, which provides:

SEC. 228. Protesting of Assessment.- x x x.

xxxx

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to
said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an
assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been
submitted; otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from
submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the
Court of Tax Appeals within (30) days from receipt of the said decision, or from the lapse of the one hundred
eighty (180)-day period; otherwise the decision shall become final, executory and demandable. (Emphasis
supplied)

The CTA Second Division held:

Following the periods provided for in the aforementioned laws, from July 20, 2001, that is, the date of petitioner’s filing
of protest, it had until September 18, 2001 to submit relevant documents and from September 18, 2001, the
Commissioner had until March 17, 2002 to issue his decision. As admitted by petitioner, the protest remained
unacted by the Commissioner of Internal Revenue. Therefore, it had until April 16, 2002 within which to elevate the
case to this court. Thus, when petitioner filed its Petition for Review on April 30, 2002, the same is outside the thirty
(30) period.27

As provided in Section 228, the failure of a taxpayer to appeal from an assessment on time rendered the assessment
final, executory and demandable. Consequently, petitioner is precluded from disputing the correctness of the
assessment.

In Ker & Company, Ltd. v. Court of Tax Appeals,28 the Court held that while the right to appeal a decision of the
Commissioner to the Court of Tax Appeals is merely a statutory remedy, nevertheless the requirement that it must be
brought within 30 days is jurisdictional. If a statutory remedy provides as a condition precedent that the action to
enforce it must be commenced within a prescribed time, such requirement is jurisdictional and failure to comply
therewith may be raised in a motion to dismiss.

In fine, the failure to comply with the 30-day statutory period would bar the appeal and deprive the Court of Tax
Appeals of its jurisdiction to entertain and determine the correctness of the assessment. 29
WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals En Banc dated June 7, 2005 in
C.T.A. EB No. 50 affirming the Resolutions of the Court of Tax Appeals Second Division dated May 3, 2004 and
November 5, 2004 in C.T.A. Case No. 6475 denying petitioner’s Petition for Relief from Judgment and Motion for
Reconsideration, respectively, is AFFIRMED.

SO ORDERED.
Rizal Commercial Banking Corporation vs Commissioner of Internal Revenue

On July 5, 2001, the Commissioner of Internal Revenue (CIR) issued a final assessment notice (FAN) to the Rizal
Commercial Banking Corporation (RCBC) demanding a total tax liability of about P100 million. On July 20, 2001
(within the 30 day period from issuance of FAN to file a protest), RCBC filed a protest. The CIR never acted on the
protest. On April 30, 2002, RCBC filed an appeal with the Court of Tax Appeals (CTA).
ISSUE: Whether or not RCBC filed a timely appeal.
HELD : No. Under the law, after the lapse of 180 days within which the CIR is supposed to rule on the protest – yet
the CIR did not, the taxpayer has 30 days from said lapse to file an appeal with the CTA. In the case at bar, the
protest was filed on July 20, 2001. From that date, RCBC had until September 18, 2001 (60 days) to submit
supporting documents. There was no showing that RCBC submitted any such documents. But assuming it submitted
said documents on September 18, 2001, the 180 day period for the CIR to decide shall commence on that date
hence the 180 day period has lapsed on March 17, 2002. Thereafter, RCBC has 30 days to appeal the inaction of the
CIR (30 days from the lapse of the 180 day period) or until April 16, 2002. RCBC filed its appeal on April 30, 2002
which was already beyond the 30 day period. In such case, the decision of the CIR indirectly denying the protest by
reason of inaction is already final and executory and is no longer appealable.
FIRST DIVISION

COMMISSIONER OF INTERNAL G.R. Nos. 172045-46

REVENUE,

Petitioner, Present:

PUNO, C.J., Chairperson,

CARPIO,

- versus - CORONA,

LEONARDO-DE CASTRO, and

BERSAMIN, JJ.

FIRST EXPRESS PAWNSHOP Promulgated:

COMPANY, INC.,

Respondent. June 16, 2009

x--------------------------------------------------x

DECISION

CARPIO, J.:

The Case
The Commissioner of Internal Revenue (petitioner) filed this Petition for Review[1] to reverse the Court of Tax Appeals
Decision[2] dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62. In the assailed decision, the
Court of Tax Appeals (CTA) En Banc partially reconsidered the CTA First Divisions Decision [3] dated 24 September
2004.
The Facts

On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of Revenue Region 6 Manila,
issued the following assessment notices against First Express Pawnshop Company, Inc. (respondent):
a. Assessment No. 31-1-98[4] for deficiency income tax of P20,712.58 with compromise
penalty of P3,000;

b. Assessment No. 31-14-000053-98[5] for deficiency value-added tax (VAT)


of P601,220.18 with compromise penalty of P16,000;

c. Assessment No. 31-14-000053-98[6] for deficiency documentary stamp tax (DST)


of P12,328.45 on deposit on subscription with compromise penalty of P2,000; and

d. Assessment No. 31-1-000053-98[7] for deficiency DST of P62,128.87 on pawn tickets with
compromise penalty of P8,500.

Respondent received the assessment notices on 3 January 2002. On 1 February 2002, respondent filed its written
protest on the above assessments. Since petitioner did not act on the protest during the 180-day period,[8] respondent
filed a petition before the CTA on 28 August 2002.[9]

Respondent contended that petitioner did not consider the supporting documents on the interest expenses and
donations which resulted in the deficiency income tax. [10]Respondent maintained that pawnshops are not lending
investors whose services are subject to VAT, hence it was not liable for deficiency VAT. [11] Respondent also alleged
that no deficiency DST was due because Section 180 [12] of the National Internal Revenue Code (Tax Code) does not
cover any document or transaction which relates to respondent. Respondent also argued that the issuance of a pawn
ticket did not constitute a pledge under Section 195[13] of the Tax Code.[14]

In its Answer filed before the CTA, petitioner alleged that the assessment was valid and correct and the taxpayer had
the burden of proof to impugn its validity or correctness. Petitioner maintained that respondent is subject to 10% VAT
based on its gross receipts pursuant to Republic Act No. 7716, or the Expanded Value-Added Tax Law (EVAT).
Petitioner also cited BIR Ruling No. 221-91 which provides that pawnshop tickets are subject to DST. [15]

On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest. [16]

After trial on the merits, the CTA First Division ruled, thus:

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED.
Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-Two
Thousand One Hundred Twenty-Eight Pesos and 87/100 (P62,128.87) and Assessment No. 31-14-
000053-98 for deficiency documentary stamp tax on deposits on subscription in the amount of
Twelve Thousand Three Hundred Twenty-Eight Pesos and 45/100 (P12,328.45)
are CANCELLED and SET ASIDE. However, Assessment No. 31-14-000053-98 is
hereby AFFIRMED except the imposition of compromise penalty in the absence of showing that
petitioner consented thereto (UST vs. Collector, 104 SCRA 1062; Exquisite Pawnshop Jewelry,
Inc. vs. Jaime B. Santiago, et al., supra).

Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the amount of Six
Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) inclusive of
deficiency interest for the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge
and 20% delinquency interest per annum from February 12, 2002 until fully paid pursuant to
Sections 248 and 249 of the 1997 Tax Code.
SO ORDERED.[17] (Boldfacing in the original)

Both parties filed their Motions for Reconsideration which were denied by the CTA First Division for lack of merit.
Thereafter, both parties filed their respective Petitions for Review under Section 11 of Republic Act No. 9282 (RA
9282) with the CTA En Banc.[18]

On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondents liability to pay the VAT and
ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that respondents deposit on
subscription was not subject to DST.[19]

Aggrieved by the CTA En Bancs Decision which ruled that respondents deposit on subscription was not subject to
DST, petitioner elevated the case before this Court.

The Ruling of the Court of Tax Appeals

On the taxability of deposit on subscription, the CTA, citing First Southern Philippines Enterprises, Inc. v.
Commissioner of Internal Revenue,[20] pointed out that deposit on subscription is not subject to DST in the absence of
proof that an equivalent amount of shares was subscribed or issued in consideration for the deposit. Expressed
otherwise, deposit on stock subscription is not subject to DST if: (1) there is no agreement to subscribe; (2) there are
no shares issued or any additional subscription in the restructuring plan; and (3) there is no proof that the issued
shares can be considered as issued certificates of stock.[21]

The CTA ruled that Section 175[22] of the Tax Code contemplates a subscription agreement. The CTA explained that
there can be subscription only with reference to shares of stock which have been unissued, in the following cases: (a)
the original issuance from authorized capital stock at the time of incorporation; (b) the opening, during the life of the
corporation, of the portion of the original authorized capital stock previously unissued; or (c) the increase of
authorized capital stock achieved through a formal amendment of the articles of incorporation and registration of the
articles of incorporation with the Securities and Exchange Commission.[23]

The CTA held that in this case, there was no subscription or any contract for the acquisition of unissued stock
for P800,000 in the taxable year assessed. The General Information Sheet (GIS) of respondent showed only a capital
structure of P500,000 as Subscribed Capital Stock and P250,000 as Paid-up Capital Stock and did not include the
assessed amount. Mere reliance on the presumption that the assessment was correct and done in good faith was
unavailing vis--vis the evidence presented by respondent. Thus, the CTA ruled that the assessment for deficiency
DST on deposit on subscription has not become final.[24]

The Issue

Petitioner submits this sole issue for our consideration: whether the CTA erred on a question of law in disregarding
the rule on finality of assessments prescribed under Section 228 of the Tax Code. Corollarily, petitioner raises the
issue on whether respondent is liable to pay P12,328.45 as DST on deposit on subscription of capital stock.

The Ruling of the Court


Petitioner contends that the CTA erred in disregarding the rule on the finality of assessments prescribed under
Section 228 of the Tax Code.[25] Petitioner asserts that even if respondent filed a protest, it did not offer evidence to
prove its claim that the deposit on subscription was an advance made by respondents stockholders. [26] Petitioner
alleges that respondents failure to submit supporting documents within 60 days from the filing of its protest as
required under Section 228 of the Tax Code caused the assessment of P12,328.45 for deposit on subscription to
become final and unassailable.[27]

Petitioner alleges that revenue officers are afforded the presumption of regularity in the performance of their official
functions, since they have the distinct opportunity, aside from competence, to peruse records of the assessments.
Petitioner invokes the principle that by reason of the expertise of administrative agencies over matters falling under
their jurisdiction, they are in a better position to pass judgment thereon; thus, their findings of fact are generally
accorded great respect, if not finality, by the courts. Hence, without the supporting documents to establish the non-
inclusion from DST of the deposit on subscription, petitioners assessment pursuant to Section 228 of the Tax Code
had become final and unassailable.[28]

Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of Internal Revenue,[29] asserts
that the submission of all the relevant supporting documents within the 60-day period from filing of the protest is
directory.

Respondent claims that petitioner requested for additional documents in petitioners letter dated 12 March 2002, to
wit: (1) loan agreement from lender banks; (2) official receipts of interest payments issued to respondent; (3)
documentary evidence to substantiate donations claimed; and (4) proof of payment of DST on subscription. [30] It must
be noted that the only document requested in connection with respondents DST assessment on deposit on
subscription is proof of DST payment. However, respondent could not produce any proof of DST payment because it
was not required to pay the same under the law considering that the deposit on subscription was an advance made
by its stockholders for future subscription, and no stock certificates were issued. [31] Respondent insists that petitioner
could have issued a subpoena requiring respondent to submit other documents to determine if the latter is liable for
DST on deposit on subscription pursuant to Section 5(c) of the Tax Code. [32]

Respondent argues that deposit on future subscription is not subject to DST under Section 175 of the Tax Code.
Respondent explains:

It must be noted that deposits on subscription represent advances made by the stockholders and
are in the nature of liabilities for which stocks may be issued in the future. Absent any express
agreement between the stockholders and petitioner to convert said advances/deposits to capital
stock, either through a subscription agreement or any other document, these deposits remain as
liabilities owed by respondent to its stockholders. For these deposits to be subject to DST, it is
necessary that a conversion/subscription agreement be made by First Express and its
stockholders. Absent such conversion, no DST can be imposed on said deposits under Section 175
of the Tax Code.[33] (Underscoring in the original)

Respondent contends that by presenting its GIS and financial statements, it had already sufficiently proved that the
amount sought to be taxed is deposit on future subscription, which is not subject to DST. [34] Respondent claims that it
cannot be required to submit proof of DST payment on subscription because such payment is non-existent. Thus, the
burden of proving that there was an agreement to subscribe and that certificates of stock were issued for the deposit
on subscription rests on petitioner and his examiners. Respondent states that absent any proof, the deficiency
assessment has no basis and should be cancelled.[35]

On the Taxability of Deposit on Stock Subscription

DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale
or transfer of an obligation, right or property incident thereto.DST is actually an excise tax because it is imposed on
the transaction rather than on the document.[36] DST is also levied on the exercise by persons of certain privileges
conferred by law for the creation, revision, or termination of specific legal relationships through the execution of
specific instruments.[37] The Tax Code provisions on DST relating to shares or certificates of stock state:

Section 175. Stamp Tax on Original Issue of Shares of Stock. - On every original issue, whether on
organization, reorganization or for any lawful purpose, of shares of stock by any association,
company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00)
on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of
stock: Provided, That in the case of the original issue of shares of stock without par value the
amount of the documentary stamp tax herein prescribed shall be based upon the actual
consideration for the issuance of such shares of stock: Provided, further, That in the case of stock
dividends, on the actual value represented by each share.[38]

Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer
of Due-bills, Certificates of Obligation, or Shares or Certificates of Stock. - On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of
obligation, or shares or certificates of stock in any association, company or corporation, or transfer
of such securities by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder in any manner to
the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of
money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be
collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred
pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or
stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities
from one person to another, regardless of whether or not a certificate of stock or obligation is
issued, indorsed, or delivered in pursuance of such sale or transfer: And provided, further, That in
the case of stock without par value the amount of the documentary stamp tax herein prescribed
shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the
original issue of said stock.[39]

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax,
is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In Commissioner of Internal
Revenue v. Construction Resources of Asia, Inc.,[40] this Court explained that the DST attaches upon acceptance of
the stockholders subscription in the corporations capital stock regardless of actual or constructive delivery of the
certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue,[41] the Court
held:

The documentary stamp tax under this provision of the law may be levied only once, that is upon
the original issue of the certificate. The crucial point therefore, in the case before Us is the proper
interpretation of the word issue. In other words, when is the certificate of stock deemed issued for
the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are
printed, at the time they are filled up (in whose name the stocks represented in the certificate
appear as certified by the proper officials of the corporation), at the time they are released by the
corporation, or at the time they are in the possession (actual or constructive) of the stockholders
owning them?

xxx

Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in
the corporation to fully paid subscription) the certificate of stock can be utilized for the exercise of
the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the
dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the
actual or constructive possession of the stockholder, is considered issued because it is with value
and hence the documentary stamp tax must be paid as imposed by Section 212 of the National
Internal Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales, deliveries or
transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or
sale whether entitling the holder in any manner to the benefit of such certificates of stock, or to secure the future
payment of money, or for the future transfer of certificates of stock. In Compagnie Financiere Sucres et Denrees v.
Commissioner of Internal Revenue, this Court held that under Section 176 of the Tax Code, sales to secure the future
transfer of due-bills, certificates of obligation or certificates of stock are subject to documentary stamp tax. [42]

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate stock documentary
stamp tax program. RMO 08-98 states that:

1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST
Return, if applicable when DST is still due on the subscribed share issued by the
corporation, on or before the tenth day of the month following publication of this Order.

xxx

3. All existing corporations with authorization for increased capital stock shall file their Corporate
Stock DST Declaration, together with the DST Return, if applicable when DST is due on
subscriptions made after the authorization, on or before the tenth day of the month following
the date of authorization. (Boldfacing supplied)

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that what is being taxed
is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the shares are issued. RMC 47-
97 also defines issuance as the point in which the stockholder acquires and may exercise attributes of ownership
over the stocks.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for
a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of
unissued stocks in an existing corporation or a corporation still to be formed. [43] A stock subscription is a contract by
which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the
same or expressly or impliedly promising to pay for the same. [44]

In this case, respondents Stockholders Equity section of its Balance Sheet as of 31 December 1998 [45] shows:

STOCKHOLDERS EQUITY 1998 1997

Authorized Capital Stock P 2,000,000.00 P 2,000,000.00

Paid-up Capital Stock 250,000.00 250,000.00

Deposit on Subscription 800,000.00

Retained Earnings 62,820.34 209,607.20


Net Income (858,498.38) (146,786.86)

TOTAL P 254,321.96 P 312,820.34

The GIS submitted to the Securities and Exchange Commission on 31 March 1999 shows the following Capital
Structure:[46]

B. Financial Profile

1. Capital Structure :

AUTHORIZED - P2,000,000.00

SUBSCRIBED - 500,000.00

PAID-UP - 250,000.00

These entries were explained by Miguel Rosario, Jr. (Rosario), respondents external auditor, during the hearing
before the CTA on 11 June 2003. Rosario testified in this wise:

Atty. Napiza

Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998 particularly the
entry of deposit on subscription in the amount of P800 thousand, will you please tell us what is (sic)
this entry represents?

Mr. Rosario Jr.

A. This amount of P800 thousand represents the case given by the stockholders to the
company but does not necessarily made (sic) payment to subscribed portion.

Atty. Napiza

Q. What is (sic) that payment stands for?

Mr. Rosario Jr.

A. This payment stands as (sic) for the deposit for future subscription.

Atty. Napiza

Q. Would you know if First Express issued corresponding shares pertinent to the amount being
deposited?

Mr. Rosario Jr.

A. No.
Atty. Napiza

Q. What do you mean by no? Did they or they did not?

Mr. Rosario Jr.

A. They did not issue any shares because that is not the payment of subscription. That is
just a mere deposit.

Atty. Napiza

Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express Pawnshop?

Mr. Rosario Jr.

A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998 is P500
thousand.

Atty. Napiza

Q. How about the Paid Up Capital?

Mr. Rosario Jr.

A. The Paid Up Capital is P250 thousand.

Atty. Napiza

Q. Are (sic) all those figures appear in the balance sheet?

Mr. Rosario Jr.

A. The Paid Up Capital appeared here but the Subscribed Portion was not stated. (Boldfacing
supplied)

Based on Rosarios testimony and respondents financial statements as of 1998, there was no agreement to subscribe
to the unissued shares. Here, the deposit on stock subscription refers to an amount of money received by the
corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital
stock.[47] In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,[48] we held:

We are firmly convinced that the Government stands to lose nothing in imposing the documentary
stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely
exercise the attributes of ownership and with value at the time they are originally issued. As
regards those certificates of stocks temporarily subject to suspensive conditions they shall
be liable for said tax only when released from said conditions, for then and only then shall
they truly acquire any practical value for their owners. (Boldfacing supplied)
Clearly, the deposit on stock subscription as reflected in respondents Balance Sheet as of 1998 is not a subscription
agreement subject to the payment of DST. There is no P800,000 worth of subscribed capital stock that is reflected in
respondents GIS. The deposit on stock subscription is merely an amount of money received by a corporation with a
view of applying the same as payment for additional issuance of shares in the future, an event which may or may not
happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not
entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, respondent is not
liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that
creates rights and obligations between the subscriber and the corporation.

On the Finality of Assessment as Prescribed

under Section 228 of the Tax Code

Section 228 of the Tax Code provides:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a preassessment notice shall not be required in the following
cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation
of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually
remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the same
amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the
succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or
transferred to non-exempt persons.

The taxpayer shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be
required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly
authorized representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or


reinvestigation within thirty (30) days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing
of the protest, all relevant supporting documents shall have been submitted; otherwise,
the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180)
days from submission of documents, the taxpayer adversely affected by the decision or inaction
may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision,
or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall
become final, executory and demandable. (Boldfacing supplied)

Section 228 of the Tax Code[49] provides the remedy to dispute a tax assessment within a certain period of time. It
states that an assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days
from receipt of the assessment by the taxpayer. Within 60 days from filing of the protest, all relevant supporting
documents shall have been submitted; otherwise, the assessment shall become final.

In this case, respondent received the tax assessment on 3 January 2002 and it had until 2 February 2002 to submit
its protest. On 1 February 2002, respondent submitted its protest and attached the GIS and Balance Sheet as of 31
December 1998. Respondent explained that it received P800,000 as a deposit with the possibility of applying the
same as payment for the future issuance of capital stock.

Within 60 days from the filing of protest or until 2 April 2002, respondent should submit relevant supporting
documents. Respondent, having submitted the supporting documents together with its protest, did not present
additional documents anymore.

In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment of DST on subscription.
In a letter-reply, respondent stated that it could not produce any proof of DST payment because it was not required to
pay DST under the law considering that the deposit on subscription was an advance made by its stockholders for
future subscription, and no stock certificates were issued.

Since respondent has not allegedly submitted any relevant supporting documents, petitioner now claims that the
assessment has become final, executory and demandable, hence, unappealable.

We reject petitioners view that the assessment has become final and unappealable. It cannot be said that respondent
failed to submit relevant supporting documents that would render the assessment final because when respondent
submitted its protest, respondent attached the GIS and Balance Sheet. Further, petitioner cannot insist on the
submission of proof of DST payment because such document does not exist as respondent claims that it is not liable
to pay, and has not paid, the DST on the deposit on subscription.

The term relevant supporting documents should be understood as those documents necessary to support the legal
basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise,
a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot
submit.

After respondent submitted its letter-reply stating that it could not comply with the presentation of the proof of DST
payment, no reply was received from petitioner.

Section 228 states that if the protest is not acted upon within 180 days from submission of documents, the taxpayer
adversely affected by the inaction may appeal to the CTA within 30 days from the lapse of the 180-day period.
Respondent, having submitted its supporting documents on the same day the protest was filed, had until 31 July
2002 to wait for petitioners reply to its protest. On 28 August 2002 or within 30 days after the lapse of the 180-day
period counted from the filing of the protest as the supporting documents were simultaneously filed, respondent filed
a petition before the CTA.

Respondent has complied with the requisites in disputing an assessment pursuant to Section 228 of the Tax Code.
Hence, the tax assessment cannot be considered as final, executory and demandable. Further, respondents deposit
on subscription is not subject to the payment of DST. Consequently, respondent is not liable to pay the deficiency
DST of P12,328.45.

WHEREFORE, we DENY the petition. We AFFIRM the Court of Tax Appeals Decision dated 24 March 2006 in the
consolidated cases of C.T.A. EB Nos. 60 and 62.

SO ORDERED.
CIR vs. First Express Pawnshop Company, Inc.
G.R. Nos. 172045-46; June 16 2009

Facts: CIR issued assessment notices against Respondent for deficiency income tax, VAT and documentary stamp
tax on deposit on subscription and on pawn tickets. Respondent filed its written protest on the assessments. When
CIR did not act on the protest during the 180-day period, respondent filed a petition before the CTA.

Issue: Has Respondent’s right to dispute the assessment in the CTA prescribed?

Held: NO. The assessment against Respondent has not become final and unappealable. It cannot be said that
respondent failed to submit relevant supporting documents that would render the assessment final because when
respondent submitted its protest, respondent attached all the documents it felt were necessary to support its claim.
Further, CIR cannot insist on the submission of proof of DST payment because such document does not exist as
respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription.

The term "relevant supporting documents" are those documents necessary to support the legal basis in disputing a
tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents
and cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the
mercy of the BIR, which may require the production of documents that a taxpayer cannot submit. Since the taxpayer
is deemed to have submitted all supporting documents at the time of filing of its protest, the 180-day period likewise
started to run on that same date.
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 168498 April 24, 2007

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION

YNARES-SANTIAGO, J.:

For resolution is petitioner’s Motion for Reconsideration of our Decision 1 dated June 16, 2006 affirming the Decision
of the Court of Tax Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50, which affirmed the Resolutions of the
Court of Tax Appeals Second Division dated May 3, 2004 and November 5, 2004 in C.T.A. Case No. 6475, denying
petitioner’s Petition for Relief from Judgment and Motion for Reconsideration, respectively.

Petitioner reiterates its claim that its former counsel’s failure to file petition for review with the Court of Tax Appeals
within the period set by Section 228 of the National Internal Revenue Code of 1997 (NIRC) was excusable and raised
the following issues for resolution:

A.

THE DENIAL OF PETITIONER’S PETITION FOR RELIEF FROM JUDGMENT WILL RESULT IN THE DENIAL OF
SUBSTANTIVE JUSTICE TO PETITIONER, CONTRARY TO ESTABLISHED DECISIONS OF THIS HONORABLE
COURT BECAUSE THE ASSESSMENT SOUGHT TO BE CANCELLED HAS ALREADY PRESCRIBED – A FACT
NOT DENIED BY THE RESPONDENT IN ITS ANSWER.

B.

CONTRARY TO THIS HONORABLE COURT’S DECISION, AND FOLLOWING THE LASCONA DECISION, AS
WELL AS THE 2005 REVISED RULES OF THE COURT OF TAX APPEALS, PETITIONER TIMELY FILED ITS
PETITION FOR REVIEW BEFORE THE COURT OF TAX APPEALS; THUS, THE COURT OF TAX APPEALS HAD
JURISDICTION OVER THE CASE.

C.

CONSIDERING THAT THE SUBJECT ASSESSMENT INVOLVES AN INDUSTRY ISSUE, THAT IS, A DEFICIENCY
ASSESSMENT FOR DOCUMENTARY STAMP TAX ON SPECIAL SAVINGS ACCOUNTS AND GROSS ONSHORE
TAX, PETITIONER IN THE INTEREST OF SUBSTANTIVE JUSTICE AND UNIFORMITY OF TAXATION, SHOULD
BE ALLOWED TO FULLY LITIGATE THE ISSUE BEFORE THE COURT OF TAX APPEALS.2

Petitioner’s motion for reconsideration is denied for lack of merit.

Other than the issue of prescription, which is raised herein for the first time, the issues presented are a mere rehash
of petitioner’s previous arguments, all of which have been considered and found without merit in our Decision dated
June 16, 2006.

Petitioner maintains that its counsel’s neglect in not filing the petition for review within the reglementary period was
excusable. It alleges that the counsel’s secretary misplaced the Resolution hence the counsel was not aware of its
issuance and that it had become final and executory.
We are not persuaded.

In our Decision, we held that:

Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of petitioner’s counsel.
Otherwise, all that a losing party would do to salvage his case would be to invoke neglect or mistake of his counsel as
a ground for reversing or setting aside the adverse judgment, thereby putting no end to litigation.

Negligence to be "excusable" must be one which ordinary diligence and prudence could not have guarded against
and by reason of which the rights of an aggrieved party have probably been impaired. Petitioner’s former counsel’s
omission could hardly be characterized as excusable, much less unavoidable.

The Court has repeatedly admonished lawyers to adopt a system whereby they can always receive promptly judicial
notices and pleadings intended for them. Apparently, petitioner’s counsel was not only remiss in complying with this
admonition but he also failed to check periodically, as an act of prudence and diligence, the status of the pending
case before the CTA Second Division. The fact that counsel allegedly had not renewed the employment of his
secretary, thereby making the latter no longer attentive or focused on her work, did not relieve him of his
responsibilities to his client. It is a problem personal to him which should not in any manner interfere with his
professional commitments.3

Petitioner also argues that, in the interest of substantial justice, the instant case should be re-opened considering that
it was allegedly not accorded its day in court when the Court of Tax Appeals dismissed its petition for review for late
filing. It claims that rules of procedure are intended to help secure, not override, substantial justice.

Petitioner’s arguments fail to persuade us.

As correctly observed by the Court of Tax Appeals in its Decision dated June 7, 2005:

If indeed there was negligence, this is obviously on the part of petitioner’s own counsel whose prudence in handling
the case fell short of that required under the circumstances. He was well aware of the motion filed by the respondent
for the Court to resolve first the issue of this Court’s jurisdiction on July 15, 2003, that a hearing was conducted
thereon on August 15, 2003 where both counsels were present and at said hearing the motion was submitted for
resolution. Petitioner’s counsel apparently did not show enthusiasm in the case he was handling as he should have
been vigilant of the outcome of said motion and be prepared for the necessary action to take whatever the outcome
may have been. Such kind of negligence cannot support petitioner’s claim for relief from judgment.

Besides, tax assessments by tax examiners are presumed correct and made in good faith, and all presumptions are
in favor of the correctness of a tax assessment unless proven otherwise. 4 Also, petitioner’s failure to file a petition for
review with the Court of Tax Appeals within the statutory period rendered the disputed assessment final, executory
and demandable, thereby precluding it from interposing the defenses of legality or validity of the assessment and
prescription of the Government’s right to assess.5

The Court of Tax Appeals is a court of special jurisdiction and can only take cognizance of such matters as are
clearly within its jurisdiction. Section 7 of Republic Act (R.A.) No. 9282, amending R.A. No. 1125, otherwise known as
the Law Creating the Court of Tax Appeals, provides:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue or other laws administered by the Bureau of
Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period
of action, in which case the inaction shall be deemed a denial;

Also, Section 3, Rule 4 and Section 3(a), Rule 8 of the Revised Rules of the Court of Tax Appeals 6 state:

RULE 4
Jurisdiction of the Court

xxxx

SECTION 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other
matters arising under the National Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal Revenue Code or other applicable law
provides a specific period for action: Provided, that in case of disputed assessments, the inaction of
the Commissioner of Internal Revenue within the one hundred eighty day-period under Section 228
of the National Internal Revenue Code shall be deemed a denial for purposes of allowing the
taxpayer to appeal his case to the Court and does not necessarily constitute a formal decision of
the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer
opt to await the final decision of the Commissioner of Internal Revenue on the disputed
assessments beyond the one hundred eighty day-period abovementioned, the taxpayer may
appeal such final decision to the Court under Section 3(a), Rule 8 of these Rules; and Provided,
still further, that in the case of claims for refund of taxes erroneously or illegally collected, the
taxpayer must file a petition for review with the Court prior to the expiration of the two-year period
under Section 229 of the National Internal Revenue Code;

xxxx

RULE 8
Procedure in Civil Cases

xxxx

SECTION 3. Who May Appeal; Period to File Petition. — (a) A party adversely affected by a decision, ruling or the
inaction of the Commissioner of Internal Revenue on disputed assessments or claims for refund of internal revenue
taxes, or by a decision or ruling of the Commissioner of Customs, the Secretary of Finance, the Secretary of Trade
and Industry, the Secretary of Agriculture, or a Regional Trial Court in the exercise of its original jurisdiction may
appeal to the Court by petition for review filed within thirty days after receipt of a copy of such decision or ruling, or
expiration of the period fixed by law for the Commissioner of Internal Revenue to act on the disputed assessments. In
case of inaction of the Commissioner of Internal Revenue on claims for refund of internal revenue taxes erroneously
or illegally collected, the taxpayer must file a petition for review within the two-year period prescribed by law from
payment or collection of the taxes. (n)

From the foregoing, it is clear that the jurisdiction of the Court of Tax Appeals has been expanded to include not only
decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The decisions, rulings or inaction of
the Commissioner are necessary in order to vest the Court of Tax Appeals with jurisdiction to entertain the appeal,
provided it is filed within 30 days after the receipt of such decision or ruling, or within 30 days after the expiration of
the 180-day period fixed by law for the Commissioner to act on the disputed assessments. This 30-day period within
which to file an appeal is jurisdictional and failure to comply therewith would bar the appeal and deprive the Court of
Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessments. Such period is not
merely directory but mandatory and it is beyond the power of the courts to extend the same. 7

In case the Commissioner failed to act on the disputed assessment within the 180-day period from date of
submission of documents, a taxpayer can either: 1) file a petition for review with the Court of Tax Appeals within 30
days after the expiration of the 180-day period; or 2) await the final decision of the Commissioner on the disputed
assessments and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of a copy of such
decision. However, these options are mutually exclusive, and resort to one bars the application of the other.

In the instant case, the Commissioner failed to act on the disputed assessment within 180 days from date of
submission of documents. Thus, petitioner opted to file a petition for review before the Court of Tax Appeals.
Unfortunately, the petition for review was filed out of time, i.e., it was filed more than 30 days after the lapse of the
180-day period. Consequently, it was dismissed by the Court of Tax Appeals for late filing. Petitioner did not file a
motion for reconsideration or make an appeal; hence, the disputed assessment became final, demandable and
executory.

Based on the foregoing, petitioner can not now claim that the disputed assessment is not yet final as it remained
unacted upon by the Commissioner; that it can still await the final decision of the Commissioner and thereafter appeal
the same to the Court of Tax Appeals. This legal maneuver cannot be countenanced. After availing the first
option, i.e., filing a petition for review which was however filed out of time, petitioner can not successfully resort to the
second option, i.e., awaiting the final decision of the Commissioner and appealing the same to the Court of Tax
Appeals, on the pretext that there is yet no final decision on the disputed assessment because of the Commissioner’s
inaction.

Lastly, we note that petitioner is raising the issue of prescription for the first time in the instant motion for
reconsideration. Although the same was raised in the petition for review, it was dismissed for late filing. No motion for
reconsideration was filed hence the disputed assessment became final, demandable and executory. Thereafter,
petitioner filed with the Court of Tax Appeals a petition for relief from judgment. However, it failed to raise the issue of
prescription therein. After its petition for relief from judgment was denied by the Court of Tax Appeals for lack of merit,
petitioner filed a petition for review before this Court without raising the issue of prescription. It is only in the instant
motion for reconsideration that petitioner raised the issue of prescription which is not allowed. The rule is well-settled
that points of law, theories, issues and arguments not adequately brought to the attention of the lower court need not
be considered by the reviewing court as they cannot be raised for the first time on appeal, 8 much more in a motion for
reconsideration as in this case, because this would be offensive to the basic rules of fair play, justice and due
process.9 This last ditch effort to shift to a new theory and raise a new matter in the hope of a favorable result is a
pernicious practice that has consistently been rejected.

WHEREFORE, in view of the foregoing, petitioner’s motion for reconsideration is DENIED.

SO ORDERED.
RIZAL COMMERCIAL BANKING CORPORATION vs. CIR- Protest Tax Assessments
FACTS:
RCBC received the final assessment notice on July 5, 2001. It filed a protest on July 20, 2001. As the protest was not
acted upon, it filed a Petition for Review with the Court of Tax Appeals (CTA) on April 30, 2002, or more than 30 days
after the lapse of the 180-day period reckoned from the submission of complete documents. The CTA dismissed the
Petition for lack of jurisdiction since the appeal was filed out of time.

ISSUE:
Has the action to protest the assessment judicially prescribed?

HELD:
YES. The assessment has become final. The jurisdiction of the CTA has been expanded to include not only decision
but also inactions and both are jurisdictional such that failure to observe either is fatal.
However, if there has been inaction, the taxpayer can choose between (1) file a Petition with the CTA within 30 days
from the lapse of the 180-day period OR (2) await the final decision of the CIR and appeal such decision to the CTA
within 30 days after receipt of the decision. These options are mutually exclusive and resort to one bars the
application of the other. Thus, if petitioner belatedly filed an action based on inaction, it can not subsequently file
another petition once the decision comes out.
SECOND DIVISION

G.R. No. 208731, January 27, 2016

PHILIPPINE AMUSEMENT AND GAMING CORPORATION, Petitioner, v. BUREAU OF INTERNAL REVENUE,


COMMISSIONER OF INTERNAL REVENUE, AND REGIONAL DIRECTOR, REVENUE REGION NO.
6, Respondents.

DECISION

CARPIO, J.:

The Case

G.R. No. 208731 is a petition for review1 assailing the Decision2 promulgated on 18 February 2013 as well as the
Resolution3 promulgated on 23 July 2013 by the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 844.
The CTA EB affirmed the Decision dated 6 July 20114 and Resolution5 dated 13 October 2011 of the Court of Tax
Appeals' First Division (CTA 1st Division) in CTA Case No. 7880.

In its 6 July 2011 Decision, the CTA 1st Division ruled in favor of the Bureau of Internal Revenue (BIR), Commissioner
of Internal Revenue (CIR), and the Regional Director of Revenue Region No. 6 (collectively, respondents) and
against petitioner Philippine Amusement and Gaming Corporation (PAGCOR). The CTA 1 st Division dismissed
PAGCOR's petition for review seeking the cancellation of the Final Assessment Notice (FAN) dated 14 January 2008
which respondents issued for alleged deficiency fringe benefits tax in 2004. The CTA 1 st Division ruled that
PAGCOR's petition was filed out of time.

The Facts

The CTA 1st Division recited the facts as follows:chanRoblesvirtualLawlibrary

[PAGCOR] claims that it is a duly organized government-owned and controlled corporation existing under and by
virtue of Presidential Decree No. 1869, as amended, with business address at the 6th Floor, Hyatt Hotel and Casino,
Pedro Gil corner M.H. Del Pilar Streets, Malate, Manila. It was created to regulate, establish and operate clubs and
casinos for amusement and recreation, including sports gaming pools, and such other forms of amusement and
recreation.

Respondent [CIR], on the other hand, is the Head of the [BIR] with authority, among others, to resolve protests on
assessments issued by her office or her authorized representatives. She holds office at the BIR National Office
Building, Agham Road, Diliman, Quezon City.

[PAGCOR] provides a car plan program to its qualified officers under which sixty percent (60%) of the car plan
availment is shouldered by PAGCOR and the remaining forty percent (40%) for the account of the officer, payable in
five (5) years.

On October 10, 2007, [PAGCOR] received a Post Reporting Notice dated September 28, 2007 from BIR Regional
Director Alfredo Misajon [RD Misajon] of Revenue Region 6, Revenue District No. 33, for an informal conference to
discuss the result of its investigation on [PAGCOR's] internal revenue taxes in 2004. The Post Reporting Notice
shows that [PAGCOR] has deficiencies on Value Added Tax (VAT), Withholding Tax on VAT (WTV), Expanded
Withholding Tax (EWT), and Fringe Benefits Tax (FBT).

Subsequently, the BIR abandoned the claim for deficiency assessments on VAT, WTV and EWT in the Letter to
[PAGCOR] dated November 23, 2007 in view of the principles laid down in Commissioner of Internal Revenue vs.
Acesite Hotel Corporation [G.R. No. 147295] exempting [PAGCOR] and its contractors from VAT. However, the
assessment on deficiency FBT subsists and remains due to date.

On January 17, 2008, [PAGCOR] received a Final Assessment Notice [FAN] dated January 14, 2008, with demand
for payment of deficiency FBT for taxable year 2004 in the amount of P48,589,507.65.

On January 24, 2008, [PAGCOR] filed a protest to the FAN addressed to [RD Misajon] of Revenue Region No. 6 of
the BIR.
On August 14, 2008, [PAGCOR] elevated its protest to respondent CIR in a Letter dated August 13, 2008, there
being no action taken thereon as of that date.

In a Letter dated September 23, 2008 received on September 25, 2008, [PAGCOR] was informed that the Legal
Division of Revenue Region No. 6 sustained Revenue Officer Ma. Elena Llantada on the imposition of FBT against it
based on the provisions of Revenue Regulations (RR) No. 3-98 and that its protest was forwarded to the Assessment
Division for further action.

On November 19, 2008, [PAGCOR] received a letter from the OIC-Regional Director, Revenue Region No. 6
(Manila), stating that its letter protest was referred to Revenue District Office No. 33 for appropriate action.

On March 11, 2009, [PAGCOR] filed the instant Petition for Review alleging respondents' inaction in its protest on the
disputed deficiency FBT.6ChanRoblesVirtualawlibrary
cralawlawlibrary

The CTA 1st Division's Ruling

The CTA 1st Division issued the assailed decision dated 6 July 2011 and ruled in favor of respondents. The CTA
1st Division ruled that RD Misajon's issuance of the FAN was a valid delegation of authority, and PAGCOR's
administrative protest was validly and seasonably filed on 24 January 2008. The petition for review filed with the CTA
1st Division, however, was filed out of time. The CTA 1st Division stated:chanRoblesvirtualLawlibrary

As earlier stated, [PAGCOR] timely filed its administrative protest on January 24, 2008. In accordance with Section
228 of the Tax Code, respondent CIR or her duly authorized representative had 180 days or until July 22, 2008 to act
on the protest. After the expiration of the 180-day period without action on the protest, as in the instant case, the
taxpayer, specifically [PAGCOR], had 30 days or until August 21, 2008 to assail the non-determination of its protest.

Clearly, the conclusion that the instant Petition for Review was filed beyond the reglementary period for appeal on
March 11, 2009, effectively depriving the Court of jurisdiction over the petition, is inescapable.

And as provided in Section 228 of the NIRC, the failure of [PAGCOR] to appeal from an assessment on time
rendered the same final, executory and demandable. Consequently, [PAGCOR] is already precluded from disputing
the correctness of the assessment. The failure to comply with the 30-day statutory period would bar the appeal and
deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessment.

Even assuming in gratia argumenti that the [CTA] has jurisdiction over the case as claimed by [PAGCOR], the
petition must still fail on the ground that [PAGCOR] is not exempt from payment of the assessed FBT under its
charter.

xxxx

Since the car plan provided by [PAGCOR] partakes of the nature of a personal expense attributable to its employees,
it shall be treated as taxable fringe benefit of its employees, whether or not the same is duly receipted in the name of
the employer. Therefore, [PAGCOR's] obligation as an agent of the government to withhold and remit the final tax on
the fringe benefit received by its employees is personal and direct. The government's cause of action against
[PAGCOR] is not for the collection of income tax, for which [PAGCOR] is exempted, but for the enforcement of the
withholding provision of the 1997 NIRC, compliance of which is imposed on [PAGCOR] as the withholding agent, and
not upon its employees. Consequently, [PAGCOR's] non-compliance with said obligation to withhold makes it
personally liable for the tax arising from the breach of its legal duty. 7cralawlawlibrary

PAGCOR filed a motion for reconsideration, dated 26 July 2011, of the 6 July 2011 Decision of the CTA 1 stDivision.
The CIR filed a comment,8 and asked that PAGCOR be ordered to pay P48,589,507.65 representing deficiency fringe
benefits tax for taxable year 2004 plus 25% surcharge and 20% delinquency interest from late payment beyond 15
February 2008 until fully paid, pursuant to Sections 248 and 249 of the National Internal Revenue Code (NIRC) of
1997.

In the meantime, the CIR sent PAGCOR a letter dated 18 July 2011.9 The letter stated that PAGCOR should be
subjected to the issuance of a Warrant of Distraint and/or Levy and a Warrant of Garnishment because of its failure to
pay its outstanding delinquent account in the amount of P46,589,507.65, which included surcharge and interest.
Settlement of the tax liability is necessary to obviate the issuance of a Warrant of Distraint and/or Levy and a Warrant
of Garnishment.

Subsequently, PAGCOR filed a reply dated 28 September 2011 to ask that an order be issued directing respondents
to hold in abeyance the execution of the Warrant of Distraint and/or Levy and the Warrant of Garnishment, as well as
to suspend the collection of tax insofar as the 2004 assessment is concerned. PAGCOR also asked for exemption
from filing a bond or depositing the amount claimed by respondents. 10

PAGCOR filed a petition for review with urgent motion to suspend tax collection 11 with the CTA En Banc on 23
November 2011.

The CTA En Banc's Ruling

The CTA En Bane dismissed PAGCOR's petition for review and affirmed the CTA 1st Division's Decision and
Resolution. The CTA En Bane ruled that the protest filed before the RD is a valid protest; hence, it was superfluous
for PAGCOR to raise the protest before the CIR. When PAGCOR filed its administrative protest on 24 January 2008,
the CIR or her duly authorized representative had 180 days or until 22 July 2008 to act on the protest. After the
expiration of the 180 days, PAGCOR had 30 days or until 21 August 2008 to assail before the CTA the non-
determination of its protest.

Moreover, Section 223 of the NIRC merely suspends the period within which the BIR can make assessments on a
certain taxpayer. A taxpayer's request for reinvestigation only happens upon the BIR's issuance of an assessment
within the three-year prescriptive period. The reinvestigation of the assessment suspends the prescriptive period for
either a revised assessment or a retained assessment.

PAGCOR filed its Motion for Reconsideration on 22 March 2013, while respondents filed their Comment/Opposition
on 3 June 2013.

The CTA En Banc denied PAGCOR's motion in a Resolution12 dated 23 July 2013.

PAGCOR filed the present petition for review on 14 October 2013. Respondents filed their comment through the
Office of the Solicitor General on 20 March 2014. On 23 April 2014, this Court required PAGCOR to file a reply to the
comment within 10 days from notice. This period expired on 26 June 2014. On 15 September 2014, this Court issued
another resolution denying PAGCOR's petition for failure to comply with its lawful order without any valid cause. On
31 October 2014, PAGCOR filed a motion for reconsideration of the Court's 15 September 2014 Resolution. We
granted PAGCOR's motion in a Resolution dated 10 December 2014.

The Issues

PAGCOR presented the following issues in its petition:chanRoblesvirtualLawlibrary

1. Whether or not the CTA En Bane gravely erred in affirming the CTA 1st Division's Decision
dismissing the Petition for Review for having been filed out of time.

2. Whether or not the CTA En Bane seriously erred when it affirmed the CTA 1st Division's failure to
decide the case on substantive matters, i.e., the full import of PAGCOR's tax exemption under its
charter which necessarily includes its exemption from the fringe benefits tax (FBT).

2.1 Assuming that PAGCOR is not exempt from the FBT, whether or not the car plan extended to
its officers inured to its benefit and it is required or necessary in the conduct of its business.

2.2 Assuming that PAGCOR is subject to the alleged deficiency FBT, whether or not it is only liable
for the basic tax, i.e., excluding surcharge and interest. 13

cralawlawlibrary

In their Comment,14 respondents argue that the CTA properly dismissed PAGCOR's petition because it was filed
beyond the periods provided by law.

The Court's Ruling


The petition has no merit. The CTA En Bane and 1st Division were correct in dismissing PAGCOR's petition.
However, as we shall explain below, the dismissal should be on the ground of premature, rather than late, filing.

Timeliness of PAGCOR's Petition before the CTA

The CTA 1st Division and CTA En Bane both established that PAGCOR received a FAN on 17 January 2008, filed its
protest to the FAN addressed to RD Misajon on 24 January 2008, filed yet another protest addressed to the CIR on
14 August 2008, and then filed a petition before the CTA on 11 March 2009. There was no action on PAGCOR's
protests filed on 24 January 2008 and 14 August 2008. PAGCOR would like this Court to rule that its protest before
the CIR starts a new period from which to determine the last day to file its petition before the CTA.

The CIR, on the other hand, denied PAGCOR's claims of exemption with the issuance of its 18 July 2011 letter. The
letter asked PAGCOR to settle its obligation of P46,589,507.65, which consisted of tax, surcharge and interest.
PAGCOR's failure to settle its obligation would result in the issuance of a Warrant of Distraint and/or Levy and a
Warrant of Garnishment.

The relevant portions of Section 228 of the NIRC of 1997 provide:chanRoblesvirtualLawlibrary

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that
proper taxes should be assessed, he shall first notify the taxpayer of his findings: x x x.

xxxx

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to
said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an
assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within
thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules
and regulations.

Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted;
otherwise, the assessment shall become final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission
of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals
within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period;
otherwise, the decision shall become final, executory and demandable.
cralawlawlibrary

Section 3.1.5 of Revenue Regulations No. 12-99, implementing Section 228 above,
provides:chanRoblesvirtualLawlibrary

3.1.5. Disputed Assessment. - The taxpayer or his duly authorized representative may protest administratively
against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt
thereof, x x x.

xxxx

If the taxpayer fails to file a valid protest against the formal letter of demand and assessment notice within thirty (30)
days from date of receipt thereof, the assessment shall become final, executory and demandable.

If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may appeal to the Court of Tax
Appeals within thirty (30) days from the date of receipt of the said decision, otherwise, the assessment shall become
final, executory and demandable.

In general, if the protest is denied, in whole or in part, by the Commissioner or his duly authorized representative, the
taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from date of receipt of the said decision,
otherwise, the assessment shall become final executory and demandable: Provided, however, that if the taxpayer
elevates his protest to the Commissioner within thirty (30) days from date of receipt of the final decision of the
Commissioner's duly authorized representative, the latter's decision shall not be considered final, executory and
demandable, in which case, the protest shall be decided by the Commissioner.

If the Commissioner or his duly authorized representative fails to act on the taxpayer's protest within one hundred
eighty (180) days from date of submission, by the taxpayer, of the required documents in support of his protest, the
taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said 180-day period,
otherwise the assessment shall become final, executory and demandable.cralawlawlibrary

Following the verba legis doctrine, the law must be applied exactly as worded since it is clear, plain, and
unequivocal.15 A textual reading of Section 3.1.5 gives a protesting taxpayer like PAGCOR only three
options:chanRoblesvirtualLawlibrary

1. If the protest is wholly or partially denied by the CIR or his authorized representative, then the taxpayer may
appeal to the CTA within 30 days from receipt of the whole or partial denial of the protest.

2. If the protest is wholly or partially denied by the CIR's authorized representative, then the taxpayer may appeal to
the CIR within 30 days from receipt of the whole or partial denial of the protest.

3. If the CIR or his authorized representative failed to act upon the protest within 180 days from submission of the
required supporting documents, then the taxpayer may appeal to the CTA within 30 days from the lapse of the 180-
day period.

To further clarify the three options: A whole or partial denial by the CIR's authorized representative may be appealed
to the CIR or the CTA. A whole or partial denial by the CIR may be appealed to the CTA. The CIR or the CIR's
authorized representative's failure to act may be appealed to the CTA. There is no mention of an appeal to the CIR
from the failure to act by the CIR's authorized representative.

PAGCOR did not wait for the RD or the CIR's decision on its protest. PAGCOR made separate andsuccessive filings
before the RD and the CIR before it filed its petition with the CTA. We shall illustrate below how PAGCOR failed to
follow the clear directive of Section 228 and Section 3.1.5.

PAGCOR's protest to the RD on 24 January 2008 was filed within the 30-day period prescribed in Section 228 and
Section 3.1.5. The RD did not release any decision on PAGCOR's protest; thus, PAGCOR was unable to make use
of the first option as described above to justify an appeal to the CTA. The effect of the lack of decision from the RD is
the same, whether we consider PAGCOR's April 2008 submission of documents 16 or not.

Under the third option described above, even if we grant leeway to PAGCOR and consider its unspecified April 2008
submission, PAGCOR still should have waited for the RD's decision until 27 October 2008, or 180 days from 30 April
2008. PAGCOR then had 30 days from 27 October 2008, or until 26 November 2008, to file its petition before the
CTA. PAGCOR, however, did not make use of the third option. PAGCOR did not file a petition before the CTA on or
before 26 November 2008.

Under the second option, PAGCOR ought to have waited for the RD's whole or partial denial of its protest before it
filed an appeal before the CIR. PAGCOR rendered the second option moot when it formulated its own rule and chose
to ignore the clear text of Section 3.1.5. PAGCOR "elevated an appeal" to the CIR on 13 August 2008 without any
decision from the RD, then filed a petition before the CTA on 11 March 2009. A textual reading of Section 228 and
Section 3.1.5 will readily show that neither Section 228 nor Section 3.1.5 provides for the remedy of an appeal to the
CIR in case of the RD's failure to act. The third option states that the remedy for failure to act by the CIR or his
authorized representative is to file an appeal to the CTA within 30 days after the lapse of 180 days from the
submission of the required supporting documents. PAGCOR clearly failed to do this.

If we consider, for the sake of argument, PAGCOR's submission before the CIR as a separate protest and not as an
appeal, then such protest should be denied for having been filed out of time. PAGCOR only had 30 days from 17
January 2008 within which to file its protest. This period ended on 16 February 2008. PAGCOR filed its submission
before the CIR on 13 August 2008.

When PAGCOR filed its petition before the CTA, it is clear that PAGCOR failed to make use of any of the three
options described above. A petition before the CTA may only be made after a whole or partial denial of the
protest by the CIR or the CIR's authorized representative. When PAGCOR filed its petition before the CTA on 11
March 2009, there was still no denial of PAGCOR's protest by either the RD or the CIR. Therefore, under the first
option, PAGCOR's petition before the CTA had no cause of action because it was prematurely filed. The CIR made
an unequivocal denial of PAGCOR's protest only on 18 July 2011, when the CIR sought to collect from PAGCOR the
amount of P46,589,507.65. The CIR's denial further puts PAGCOR in a bind, because it can no longer amend its
petition before the CTA.17chanroblesvirtuallawlibrary

It thus follows that a complaint whose cause of action has not yet accrued cannot be cured or remedied by an
amended or supplemental pleading alleging the existence or accrual of a cause of action while the case is pending.
Such an action is prematurely brought and is, therefore, a groundless suit, which should be dismissed by the court
upon proper motion seasonably filed by the defendant. The underlying reason for this rule is that a person should not
be summoned before the public tribunals to answer for complaints which are [premature]. As this Court eloquently
said in Surigao Mine Exploration Co., Inc. v. Harris:
It is a rule of law to which there is, perhaps, no exception, either at law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. As observed by counsel for appellees, there are reasons of
public policy why there should be no needless haste in bringing up litigation, and why people who are in no default
and against whom there is yet no cause of action should not be summoned before the public tribunals to answer
complaints which are groundless. We say groundless because if the action is [premature], it should not be
entertained, and an action prematurely brought is a groundless suit.

It is true that an amended complaint and the answer thereto take the place of the originals which are thereby
regarded as abandoned (Reynes vs. Compania General de Tabacos [1912], 21 Phil. 416; Ruyman and Farris vs.
Director of Lands [1916], 34 Phil. 428) and that "the complaint and answer having been superseded by the amended
complaint and answer thereto, and the answer to the original complaint not having been presented in evidence as an
exhibit, the trial court was not authorized to take it into account." (Bastida vs. Menzi & Co. [1933], 58 Phil. 188.) But in
none of these cases or in any other case have we held that if a right of action did not exist when the original
complaint was filed, one could be created by filing an amended complaint. In some jurisdictions in the United States
what was termed an "imperfect cause of action" could be perfected by suitable amendment (Brown vs. Galena Mining
& Smelting Co., 32 Kan., 528; Hooper vs. City of Atlanta, 26 Ga. App., 221) and this is virtually permitted in Banzon
and Rosauro vs. Sellner ([1933], 58 Phil. 453); Asiatic Potroleum [sic] Co. vs. Veloso ([1935], 62 Phil. 683); and
recently in Ramos vs. Gibbon (38 Off. Gaz. 241). That, however, which is no cause of action whatsoever cannot by
amendment or supplemental pleading be converted into a cause of action: Nihil de re accrescit ei qui nihil in re
quandojus accresceret habet.

We are therefore of the opinion, and so hold, that unless the plaintiff has a valid and subsisting cause of action at the
time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while the
action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of action is
not permissible. (Italics ours)18ChanRoblesVirtualawlibrary
cralawlawlibrary

PAGCOR has clearly failed to comply with the requisites in disputing an assessment as provided by Section 228 and
Section 3.1.5. Indeed, PAGCOR's lapses in procedure have made the BIR's assessment final, executory and
demandable, thus obviating the need to further discuss the issue of the propriety of imposition of fringe benefits tax.

WHEREFORE, we DENY the petition. The Decision promulgated on 18 February 2013 and the Resolution
promulgated on 23 July 2013 by the Court of Tax Appeals - En Bane in CTA EB No. 844 are AFFIRMEDwith
the MODIFICATION that the denial of Philippine Amusement and Gaming Corporation's petition is due to lack of
jurisdiction because of premature filing. We REMAND the case to the Court of Tax Appeals for the determination of
the final amount to be paid by PAGCOR after the imposition of surcharge and delinquency interest.

SO ORDERED.chanroblesvirtuallawlibrary
SECOND DIVISION

G.R. No. 215534, April 18, 2016

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. LIQUIGAZ PHILIPPINES CORPORATION, Respondent.

G.R. NO. 215557

LIQUIGAZ PHILIPPINES CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

MENDOZA, J.:

Presented before us is a novel issue. When may a Final Decision on Disputed Assessment (FDDA) be declared void,
and in the event that the FDD A is found void, what would be its effect on the tax assessment?

Assailed in these consolidated petitions for review on certiorari filed under Rule 45 of the Rules of Court are the May
22, 2014 Decision[1]and the November 26, 2014 Resolution[2] of the Court of Tax Appeals (CTA) En Banc which
affirmed the November 22, 2012 Decision[3]of the CTA Division, Second Division (CTA Division).

Liquigaz Philippines Corporation (Liquigaz) is a corporation duly organized and existing under Philippine laws. On
July 11, 2006, it received a copy of Letter of Authority (LOA) No. 00067824, dated July 4, 2006, issued by the
Commissioner of Internal Revenue (CIR), authorizing the investigation of all internal revenue taxes for taxable year
2005.[4]

On April 9, 2008, Liquigaz received an undated letter purporting to be a Notice of Informal Conference (NIC), as well
as the detailed computation of its supposed tax liability. On May 28, 2008, it received a copy of the Preliminary
Assessment Notice[5] (PAN), dated May 20, 2008, together with the attached details of discrepancies for the calendar
year ending December 31, 2005.[6] Upon investigation, Liquigaz was initially assessed with deficiency withholding tax
liabilities, inclusive of interest, in the aggregate amount of P23,931,708.72, broken down as follows:

Expanded Withholding Tax (EWT) P5,456,141.82


Withholding Tax on Compensation (WTC) P4,435,463.97
Fringe Benefits Tax (FBT) P14,040,102.93
TOTAL P23,931,708.72

Thereafter, on June 25, 2008, it received a Formal Letter of Demand[7] (FLD)/Formal Assessment Notice (FAN),
together with its attached details of discrepancies, for the calendar year ending December 31, 2005. The total
deficiency withholding tax liabilities, inclusive of interest, under the FLD was P24,332,347.20, which may be broken
down as follows:

EWT P 5,535,890.38
WTC P 4,500,169.94
FBT P 14,296,286.88
TOTAL P 24,332,347.20

On July 25, 2008, Liquigaz filed its protest against the FLD/FAN and subsequently submitted its supporting
documents on September 23, 2008.

Then, on July 1, 2010, it received a copy of the FDDA[8] covering the tax audit under LOA No. 00067824 for the
calendar year ending December 31, 2005. As reflected in the FDDA, the CIR still found Liquigaz liable for deficiency
withholding tax liabilities, inclusive of interest, in the aggregate amount of P22,380,025.19, which may be broken
down as follows:
EWT P 3,479,426.75
WTC P 4,508,025.93
FBT P14,392,572.51
TOTAL P 22,380,025.19

Consequently, on July 29, 2010, Liquigaz filed its Petition for Review before the CTA Division assailing the validity of
the FDDA issued by the CIR.[9]

The CTA Division Ruling

In its November 22, 2012 Decision, the CTA Division partially granted Liquigaz's petition cancelling the EWT and FBT
assessments but affirmed with modification the WTC assessment. It ruled that the portion of the FDDA relating to the
EWT and the FBT assessment was void pursuant to Section 228 of the National Internal Revenue Code (NIRC) of
1997, as implemented by Revenue Regulations (RR) No. 12-99.

The CTA Division noted that unlike the PAN and the FLD/FAN, the FDDA issued did not provide the details thereof,
hence, Liquigaz had no way of knowing what items were considered by the CIR in arriving at the deficiency
assessments. This was especially true because the FDDA reflected a different amount from what was stated in the
FLD/FAN. The CTA Division explained that though the legal bases for the EWT and FBT assessment were stated in
the FDDA, the taxpayer was not notified of the factual bases thereof, as required in Section 228 of the NIRC.

On the other hand, it upheld the WTC assessment against Liquigaz. It noted that the factual bases used in the FLD
and the FDDA with regard thereto were the same as the difference in the amount merely resulted from the use of a
different tax rate.

The CTA Division agreed with Liquigaz that the tax rate of 25.40% was more appropriate because it represents the
effective tax compensation paid, computed based on the total withholding tax on compensation paid and the total
taxable compensation income for the taxable year 2005. It did not give credence to Liquigaz's explanation that the
salaries account included accrued bonus, 13th month pay, de minimis benefits and other benefits and contributions
which were not subject to withholding tax on compensation. The CTA Division relied on the report prepared by
Antonio O. Maceda, Jr., the court-commissioned independent accountant, which found that Liquigaz was unable to
substantiate the discrepancy found by the CIR on its withholding tax liability on compensation. The dispositive portion
of the CTA Division decision reads:

WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED. Accordingly, the assessments for
deficiency expanded withholding tax in the amount of P3,479,426.75 and fringe benefits tax in the amount of
P14,392,572.51 issued by respondent against petitioner for taxable year 2005, both inclusive of interest and
compromise penalty is hereby CANCELLED and WITHDRAWNfor being void.

However, the assessment for deficiency withholding tax on compensation for taxable year 2005 is
hereby AFFIRMED with MODIFICATIONS. Accordingly, petitioner is hereby ORDERED to PAY respondent the
amount of P2,958,546.23, inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as
amended, computed as follows:

Salaries per ITR P52,239,313.00


Less: Salaries per Alphalist P42,921,057-16
Discrepancy P9,318,255-84
Tax rate 25.40%
Basic Withholding Tax on Compensation P2,366,836.98
Add: 25% Surcharge P591,709.5
Total Amount Due P2,958,546.23

In addition, petitioner is liable to pay: (a) deficiency interest at the rate of twenty percent (20%) per annum of the
basic deficiency withholding tax on compensation of P2,958,546.23 computed from January 20, 2006 until full
payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and (b) delinquency interest at the
rate of twenty percent (20%) per annum on the total amount due of £2,958,546.23 and on the deficiency interest
which have accrued as aforestated in (a) computed from July 1, 2010 until full payment thereof, pursuant to Section
249(0(3) of the NIRC of 1997, as amended.

The compromise penalty of P25,000.00, originally imposed by respondent is hereby excluded there being no
compromise agreement between the parties.

SO ORDERED[10]

Both the CIR and Liquigaz moved for reconsideration, but their respective motions were denied by the CTA Division
in its February 20, 2013 Resolution.

Aggrieved, they filed their respective petitions for review before the CTA En Banc.

The CTA En Bane- Ruling

In its May 22, 2014 Decision, the CTA En Banc affirmed the assailed decision of the CTA Division. It reiterated its
pronouncement that the requirement that the taxpayer should be informed in writing of the law and the facts on which
the assessment was made applies to the FDDA— otherwise the assessment would be void. The CTA En Bane
explained that the FDDA determined the final tax liability of the taxpayer, which may be the subject of an appeal
before the CTA.

The CTA En Banc echoed the findings of the CTA Division that while the FDDA indicated the legal provisions relied
upon for the assessment, the source of the amounts from which the assessments arose were not shown. It
emphasized the need for stating the factual bases as the FDDA reflected different amounts than that contained in the
FLD/FAN.

On the other hand, the CTA En Banc sustained Liquigaz' WTC assessment. It observed that the basis for the
assessment was the same for the FLD and the FDDA, which was a comparison of the salaries declared in the
Income Tax Return (ITR) and the Alphalist that resulted in a discrepancy of P9,318,255.84. The CTA En
Banc highlighted that the change in the amount of assessed WTC deficiency simply arose from the revision of the tax
rate used—from 32% to the effective tax rate of 25.40% suggested by Liquigaz.

Further, it disregarded the explanation of Liquigaz on the ground of its failure to specify how much of the salaries
account pertained to de minimis benefits, accrued bonuses, salaries and wages, and contributions to the Social
Security System, Medicare and Pag-Ibig Fund. The CTA En Banc reiterated that even the court-commissioned
independent accountant reported that Liquigaz was unable to substantiate the discrepancy found by the CIR.

Both parties moved for a partial reconsideration of the CTA En Banc Decision, but the latter denied the motions in its
November 26, 2014 Resolution.

Not satisfied, both parties filed their respective petitions for review, anchored on

SOLE ISSUE

WHETHER THE COURT OF TAX APPEALS EN BANC ERRED IN PARTIALLY UPHOLDING THE VALIDITY OF
THE ASSESSMENT AS TO THE WITHHOLDING TAX ON COMPENSATION BUT DECLARING INVALID THE
ASSESSMENT ON EXPANDED WITHHOLDING TAX AND FRINGE BENEFITS TAX.

The present consolidated petitions revolve around the same FDDA where Liquigaz seeks the cancellation of its
remaining tax liability and the CIR aims to revive the assessments struck down by the tax court. Basically, Liquigaz
asserts that like its assessment for EWT and FBT deficiency, the WTC assessment should have been invalidated
because the FDDA did not provide for the facts on which the assessment was based. It argues that it was deprived of
due process because in not stating the factual basis of the assessment, the CIR did not consider the defenses and
supporting documents it presented.

Moreover, Liquigaz is adamant that even if the FDDA would be upheld, it should not be liable for the deficiency WTC
liability because the CIR erred in comparing its ITR and Alphalist to determine possible discrepancies. It explains that
the salaries of its employees reflected in its ITR does not reflect the total taxable income paid and received by the
employees because the same refers to the gross salaries of the employees, which included amounts that were not
subject to WTC.
On the other hand, the CIR avers that the assessments for EWT and FBT liability should be upheld because the
FDDA must be taken together with the PAN and FAN, where details of the assessments were attached. Hence, the
CIR counters that Liquigaz was fully apprised of not only the laws, but also the facts on which the assessment was
based, which were likewise evidenced by the fact that it was able to file a protest on the assessment. Further, the CIR
avers that even if the FDDA would be declared void, it should not result in the automatic abatement of tax liability
especially because RR No. 12-99 merely states that a void decision of the CIR or his representative shall not be
considered as a decision on the assessment.

The Court's Ruling

Central to the resolution of the issue is Section 228[11] of the NIRC and RR No. 12-99,[12] as amended. They lay out
the procedure to be followed in tax assessments. Under Section 228 of the NIRC, a taxpayer shall be informed in
writing of the law and the facts on which the assessment is made, otherwise, the assessment shall be void. In
implementing Section 228 of the NIRC, RR No. 12-99 reiterates the requirement that a taxpayer must be informed in
writing of the law and the facts on which his tax liability was based, to wit:

SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. —

3.1 Mode of procedures in the issuance of a deficiency tax assessment:

3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's records shall, among others,
state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or
taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall
be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in
the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of
the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal
Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to
respond within.fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in
default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue
Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the
least possible delay to the: Assessment Division of the Revenue Regional Office or to the Commissioner or his duly
authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if
warranted.

3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the Assessment Division or by the
Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient
basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by
registered, mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts
and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in
ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be
considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued
by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties.
xxx

3.1.4 Formal Letter of Demand and Assessment Notice. — The formal letter of demand and assessment notice shall
be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of
the taxpayer's deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on
which the assessment is based,otherwise, the formal letter of demand and assessment notice shall be
void (see illustration in ANNEX B hereof), xxx

3.1.5 Disputed Assessment. — The taxpayer or his duly authorized representative may protest administratively
against the aforesaid formal letter of demand and assessment notice within thirty (30) days from date of receipt
thereof. If there are several issues involved in the formal letter of demand and assessment notice but the taxpayer
only disputes or protests against the validity of some of-the issues raised, the taxpayer shall be required to pay the
deficiency tax or taxes attributable to the undisputed issues, in which case, a collection letter shall be issued to the
taxpayer calling for payment of the said deficiency tax, inclusive of the applicable surcharge and/or interest. No action
shall be taken on the taxpayer's disputed issues until the taxpayer has paid the deficiency tax or taxes attributable to
the said undisputed issues. The prescriptive period for assessment or collection of the tax or taxes attributable to the
disputed issues shall be suspended, xxx
3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the Commissioner or his duly
authorized representative shall (a) state the facts, the applicable law, rules and regulations, or jurisprudence
on which such decision is based, otherwise, the decision shall be void (see illustration in ANNEX C hereof), in
which case, the same shall not be considered a decision on a disputed assessment; and (b) that the same is his final
decision.

[Emphases and Underscoring Supplied]

The importance of providing the taxpayer of adequate written notice of his tax liability is undeniable. Section 228 of
the NIRC declares that an assessment is void if the taxpayer is not notified in writing of the facts and law on which it
is made. Again, Section 3.1.4 of RR No. 12-99 requires that the FLD must state the facts and law on which it is
based, otherwise, the FLD/FAN itself shall be void. Meanwhile, Section 3.1.6 of RR No. 12-99 specifically requires
that the decision of the CIR or his duly authorized representative on a disputed assessment shall state the facts, law
and rules and regulations, or jurisprudence on which the decision is based. Failure to do so would invalidate the
FDDA.

The use of the word "shall" in Section 228 of the NIRC and in RR No. 12-99 indicates that the requirement of
informing the taxpayer of the legal and factual bases of the assessment and the decision made against him is
mandatory.[13] The requirement of providing the taxpayer with written notice of the factual and legal bases applies
both to the FLD/FAN and the FDDA.

Section 228 of the NIRC should not be read restrictively as to limit the written notice'only to the assessment itself. As
implemented by RR No. 12-99, the written notice requirement for both the FLD and the FAN is in observance of due
process—to afford the taxpayer adequate opportunity to file a protest on the assessment and thereafter file an appeal
in case of an adverse decision.

To rule otherwise would tolerate abuse and prejudice. Taxpayers will be unable to file an intelligent appeal before the
CTA as they would be unaware on how the CIR or his' authorized representative appreciated the defense raised in
connection with the assessment. On the other hand, it raises the possibility that the amounts reflected in the FDDA
were arbitrarily made if the factual and legal bases thereof are not shown.

A void FDDA does not


ipso facto render the
assessment void

The CIR arid Liquigaz are at odds with regards to the effect of a void FDDA. Liquigaz harps that a void FDDA will
lead to a void assessment because the FDDA ultimately determines the final tax'liability of a'taxpayer, which may
then be appealed before the CTA. On the other hand, the CIR believes that a void FDDA does not ipso facto result in
the nullification of the assessment.

In resolving the issue on the effects of a void FDDA, it is necessary to differentiate an "assessment" from a "decision."
In St. Stephen's Association v. Collector of Internal Revenue,[14] the Court has long recognized that a "decision"-
differs from an "assessment," to wit:

In the first place, we believe the respondent court erred in holding that the assessment in question is the respondent
Collector's decision or ruling appealable to it, and that consequently, the period of thirty days prescribed by section li
of Republic Act No. 1125 within which petitioner should have appealed to the respondent court must be counted from
its receipt of said assessment. Where a taxpayer questions an assessment and asks the Collector to reconsider or
cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a "disputed
assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon
receipt of the decision of the Collector on the disputed assessment, in accordance with paragraph (1) of section 7,
Republic Act No. 1125, conferring appellate jurisdiction upon the Court of Tax Appeals to review "decisions of the
Collector of Internal Revenue in cases involving disputed assessment..."

The difference is likewise readily apparent in Section 7[15] of R.A. 1125,[16] as amended, where the CTA is conferred
with appellate jurisdiction over the decision of the CIR in cases involving disputed assessments, as well as inaction of
the CIR in disputed assessments. From the foregoing, it is clear that what is appealable to the CTA is the "decision"
of the CIR on disputed assessment and not the assessment itself.

An assessment becomes a disputed assessment after a taxpayer has filed its protest to the assessment in the
administrative level. Thereafter, the CIR either issues a decision on the disputed assessment or fails to act on it and
is, therefore, considered denied. The taxpayer may then appeal the decision on the disputed assessment or the
inaction of the CIR. As such, the FDDA is not the only means that the final tax liability of a taxpayer is fixed, which
may then be appealed by the taxpayer. Under the law, inaction on the part of the CIR may likewise result in the
finality of a taxpayer's tax liability as it is deemed a denial of the protest filed by the latter, which may also be
appealed before the CTA.

Clearly, a decision of the CIR on a disputed assessment differs from the assessment itself. Hence, the invalidity of
one does not necessarily result to the invalidity of the other—unless the law or regulations otherwise provide.

Section 228 of the NIRC provides that an assessment shall be void if the taxpayer is not informed in writing of the law
and the facts on which it is based. It is, however, silent with regards to a decision on a disputed assessment by the
CIR which fails to state the law and facts on which it is based. This void is filled by RR No. 12-99 where it is stated
that failure of the FDDA to reflect the facts and law on which it is based will make the decision void. It, however, does
not extend to the nullification of the entire assessment.

With the effects of a void FDDA expounded, the next issue to be addressed is whether the assailed FDDA is void for
failure to state the facts and law on which it was based.

The FDDA must state the


facts and law on which it
is based to provide the
taxpayer the opportunity
to file an intelligent
appeal

The CIR and Liquigaz are also in disagreement whether the FDDA issued was compliant with the mandatory
requirement of written notice laid out in the law and implementing rules and regulations. Liquigaz argues that the
FDDA is void as it did not contain the factual bases of the assessment and merely showed the amounts of its alleged
tax liabilities.

A perusal of the FDDA issued in the case at bench reveals that it merely contained a table of Liquigaz's supposed tax
liabilities, without providing any details. The CIR explains that the FDDA still complied with the requirements of the
law as it was issued in connection with the PAN and FLD/FAN, which had an attachment of the details of
discrepancies. Hence, the CIR concludes that Liquigaz was sufficiently informed in writing of the factual bases of the
assessment.

The reason for requiring that taxpayers be informed in writing of the facts and law on which the assessment is made
is the constitutional guarantee that no person shall be deprived of his property without due process of law. [17] Merely
notifying the taxpayer of its tax liabilities without elaborating on its details is insufficient. In CIR v. Reyes,[18] the Court
further explained:.

In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate
taxes had been made:. She was merely notified of the findings by the CIR, who had simply relied upon the provisions
of former Section 229 prior to its amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act
of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old -
requirement- of merely notifying the taxpayer of the CIR's findings was changed in 1998 to informing the taxpayer of
not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself
would be invalid, xxx

At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be
informed of both the law and facts on which the assessment was based. Thus, the CIR should have required the
assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law. The old
regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations — old as
they were — should be in harmony with, and not supplant or modify, the law. xxx

Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due process. Not only
was the law here disregarded, but no valid notice was sent, either. A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without
first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In the instant case, respondent
has not been informed of the basis of the estate tax liability. Without complying with the unequivocal
mandate of first informing the taxpayer of the government's claim, there can be no deprivation of property,
because no effective protest can be made. The haphazard shot at slapping an assessment, supposedly based on
estate taxation's general provisions that are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of
basis for — not to mention the insufficiency of — the gross figures and details of the itemized deductions indicated in
the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to
have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their
assessment .and collection "should be made in accordance with law as any arbitrariness will negate the very reason
for government itself."

[Emphases Supplied]

In CIR v. United Salvage and Towage (Phils.), Inc.,[19] the Court struck down an assessment where the FAN only
contained a table of the taxes due without providing further detail thereto, to wit:

In the present case, a mere perusal of the FAN 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. Any short-cuts to the prescribed content of the
assessment or the process thereof should not be countenanced, in consonance with the ruling in Commissioner of
Internal Revenue v. Enron Subic Power Corporation to wit:

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During
the pre-assessment stage, the CIR advised Enron's representative of the tax deficiency, informed it of the proposed
tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper
allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to
inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-
day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the
assessment. These steps were mere perfunctory discharges of the CIR's duties in correctly assessing a taxpayer.
The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of
a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the
order required by law, does not necessarily mean that Enron was informed of the law and facts on which the
deficiency tax assessment was made.

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

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

xxx

Applying the aforequoted rulings to the case at bar, it is clear that the assailed deficiency tax assessment for the EWT
in 1994 disregarded the provisions of Section 228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue
Regulations No. 12-99 by not providing the legal and factual bases of« the assessment. Hence, the formal letter of
demand and the notice of assessment issued relative thereto are void.

[Emphasis Supplied]

Nevertheless, the requirement of providing the taxpayer with written notice of the facts and law used as basis for the
assessment is not to be mechanically. applied. Emphasis on the purpose of the written notice is important. The
requirement should be in place so that the taxpayer could be adequately informed of the basis of the assessment
enabling him to prepare an intelligent protest or appeal of the assessment or decision. In Samar-I Electric
Cooperative v. CIR,[20] the Court elaborated:

The above information provided to petitioner enabled it to protest the PAN by questioning respondent's interpretation
of the laws cited as legal basis for the computation of the deficiency withholding taxes and assessment of minimum
corporate income tax despite petitioner's position that it remains exempt therefrom. In its letter-reply dated May 27,
2002, respondent answered the arguments raised by petitioner in its protest, and requested it to pay the assessed
deficiency on the date of payment stated in the PAN. A second protest letter dated June 23, 2002 was sent by
petitioner, to which respondent replied (letter dated July 8, 2002) answering each of the. two issues reiterated by
petitioner: (1) validity of EO 93 withdrawing the tax exemption privileges under PD 269; and (2) retroactive application
of RR No. 8-2000. The FAN was finally received by petitioner on September 24, 2002, and protested by it in a letter
dated October 14, 2002 which reiterated in lengthy arguments its earlier interpretation of the laws and regulations
upon which the assessments were based.

Although the FAN 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 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.

Thus, substantial compliance with the requirement under Section 228 of the NIRC is permissible, provided that the
taxpayer would be eventually apprised in writing of the factual and legal bases of the assessment to allow him to file
an effective protest against.

The above-cited cases refer to the c