I.

BIR
II. PRESCRIPTIVE PERIODS
A. Imprescriptibility of Taxes
Exceptions:
1. Sec. 222, NIRC

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 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 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)
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 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 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.

2. Sec. 430, RA 10863

Sec. 430. Period of Limitation. – In the absence of fraud and when the goods have been finally assessed and released,
the assessment shall be conclusive upon all parties three (3) years from the date of final payment of duties and taxes, or
upon completion of the post clearance audit.

3. Sec. 194, LGC

Section 194. Periods of Assessment and Collection. -

(a) Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. No action for the
collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of
such period: Provided, That. taxes, fees or charges which have accrued before the effectivity of this Code may be
assessed within a period of three (3) years from the date they became due.

(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10)
years from discovery of the fraud or intent to evade payment.

(c) Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or
judicial action. No such action shall be instituted after the expiration of said period: Provided, however, That, taxes, fees
or charges assessed before the effectivity of this Code may be collected within a period of three (3) years from the date
of assessment.

(d) The running of the periods of prescription provided in the preceding paragraphs shall be suspended for the time
during which:

(1) The treasurer is legally prevented from making the assessment of collection;

(2) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period
within which to assess or collect; and
 (3) The taxpayer is out of the country or otherwise cannot be located.

4. Sec. 270, LGC

Section 270. Periods Within Which To Collect Real Property Taxes. - The basic real property tax and any other tax levied
under this Title shall be collected within five (5) years from the date they become due. No action for the collection of the
tax, whether administrative or judicial, shall be instituted after the expiration of such period. In case of fraud or intent to
evade payment of the tax, such action may be instituted for the collection of the same within ten (10) years from the
discovery of such fraud or intent to evade payment.

The period of prescription within which to collect shall be suspended for the time during which:

(1) The local treasurer is legally prevented from collecting the tax;

(2) The owner of the property or the person having legal interest therein requests for reinvestigation and
executes a waiver in writing before the expiration of the period within which to collect; and

(3) The owner of the property or the person having legal interest therein is out of the country or otherwise
cannot be located.

B. Sections 203, 222, 223, NIRC

SEC. 203 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.
SEC. 222 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 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

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) 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 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 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.

SEC. 223 SEC. 223. Suspension of Running of Statute of

Limitations. - The running of the Statute of Limitations
provided in Sections 203 and 222 on the making of
assessment and the beginning of distraint or levy 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 (60) 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 or 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.

1. Fraud v. Fraudulent Return

2. See Sec. 248(B)

SEC. 248. Civil Penalties. -

(A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent
(25%) of the amount due, in the following cases:

(1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and
regulations on the date prescribed; or

(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those
with whom the return is required to be filed; or

(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or

(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions
of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or
before the date prescribed for its payment.
 (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or
in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax
or of the deficiency tax, in case, any payment has been made on the basis of such return before the discovery of the
falsity or fraud: Provided, That a substantial under-declaration of taxable sales, receipts or income, or a substantial
overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be
promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return:
Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that
declared per return, and a claim of deductions in an amount exceeding (30%) of actual deductions, shall render the
taxpayer liable for substantial under-declaration of sales, receipts or income or for overstatement of deductions, as
mentioned herein.

3. CASES
a. G.R. No. 180884 June 27, 2008

EMERLINDA S. TALENTO vs. HON. REMIGIO M. ESCALADA, JR.

The instant petition for certiorari under Rule 65 of the Rules of Court assails the November 5, 2007 Order1 of the
Regional Trial Court of Bataan, Branch 3, in Civil Case No. 8801, granting the petition for the issuance of a writ of
preliminary injunction filed by private respondent Petron Corporation (Petron) thereby enjoining petitioner Emerlinda S.
Talento, Provincial Treasurer of Bataan, and her representatives from proceeding with the public auction of Petron's
machineries and pieces of equipment during the pendency of the latter's appeal from the revised assessment of its
properties.

The facts of the case are as follows:

On June 18, 2007, Petron received from the Provincial Assessor's Office of Bataan a notice of revised assessment over its
machineries and pieces of equipment in Lamao, Limay, Bataan. Petron was given a period of 60 days within which to file
an appeal with the Local Board of Assessment Appeals (LBAA).2 Based on said revised assessment, petitioner Provincial
Treasurer of Bataan issued a notice informing Petron that as of June 30, 2007, its total liability is
P1,731,025,403.06,3 representing deficiency real property tax due from 1994 up to the first and second quarters of 2007.

On August 17, 2007, Petron filed a petition4 with the LBAA (docketed as LBAA Case No. 2007-01) contesting the revised
assessment on the grounds that the subject assessment pertained to properties that have been previously declared; and
that the assessment covered periods of more than 10 years which is not allowed under the Local Government Code
(LGC). According to Petron, the possible valid assessment pursuant to Section 222 of the LGC could only be for the years
1997 to 2006. Petron further contended that the fair market value or replacement cost used by petitioner included
items which should be properly excluded; that prompt payment of discounts were not considered in determining the fair
market value; and that the subject assessment should take effect a year after or on January 1, 2008. In the same
petition, Petron sought the approval of a surety bond in the amount of P1,286,057,899.54.5

On August 22, 2007, Petron received from petitioner a final notice of delinquent real property tax with a warning that
the subject properties would be levied and auctioned should Petron fail to settle the revised assessment due.6

Consequently, Petron sent a letter7 to petitioner stating that in view of the pendency of its appeal8 with the LBAA, any
action by the Treasurer's Office on the subject properties would be premature. However, petitioner replied that only
Petron's payment under protest shall bar the collection of the realty taxes due,9 pursuant to Sections 231 and 252 of the
LGC.

With the issuance of a Warrant of Levy10 against its machineries and pieces of equipment, Petron filed on September 24,
2007, an urgent motion to lift the final notice of delinquent real property tax and warrant of levy with the LBAA. It
argued that the issuance of the notice and warrant is premature because an appeal has been filed with the LBAA, where
it posted a surety bond in the amount of P1,286,057,899.54.11

On October 3, 2007, Petron received a notice of sale of its properties scheduled on October 17, 2007.12 Consequently, on
October 8, 2007, Petron withdrew its motion to lift the final notice of delinquent real property tax and warrant of levy
with the LBAA.13 On even date, Petron filed with the Regional Trial Court of Bataan the instant case (docketed as Civil
Case No. 8801) for prohibition with prayer for the issuance of a temporary restraining order (TRO) and preliminary
injunction.14

On October 15, 2007, the trial court issued a TRO for 20 days enjoining petitioner from proceeding with the public
auction of Petron's properties.15 Petitioner thereafter filed an urgent motion for the immediate dissolution of the TRO,
followed by a motion to dismiss Petron's petition for prohibition.
On November 5, 2007, the trial court issued the assailed Order granting Petron's petition for issuance of writ of
preliminary injunction, subject to Petron's posting of a P444,967,503.52 bond in addition to its previously posted surety
bond of P1,286,057,899.54, to complete the total amount equivalent to the revised assessment of P1,731,025,403.06.
The trial court held that in scheduling the sale of the properties despite the pendency of Petron's appeal and posting of
the surety bond with the LBAA, petitioner deprived Petron of the right to appeal. The dispositive portion thereof, reads:

WHEREFORE, the writ of preliminary injunction prayed for by plaintiff is hereby GRANTED and ISSUED, enjoining
defendant Treasurer, her agents, representatives, or anybody acting in her behalf from proceeding with the
scheduled public auction of plaintiff's real properties, or any disposition thereof, pending the determination of
the merits of the main action, to be effective upon posting by plaintiff to the Court of an injunction bond in the
amount of Four Hundred Forty Four Million Nine Hundred Sixty Seven Thousand Five Hundred Three and 52/100
Pesos (P444,967,503.52) and the approval thereof by the Court.

Defendant's Urgent Motion for the Immediate Dissolution of the Temporary Restraining Order dated October
23, 2007 is hereby DENIED.

SO ORDERED.16

From the said Order of the trial court, petitioner went directly to this Court via the instant petition for certiorari under
Rule 65 of the Rules of Court.

The question posed in this petition, i.e., whether the collection of taxes may be suspended by reason of the filing of an
appeal and posting of a surety bond, is undoubtedly a pure question of law. Section 2(c) of Rule 41 of the Rules of Court
provides:

SEC. 2. Modes of Appeal. -

(c) Appeal by certiorari. - In all cases when only questions of law are raised or involved, the appeal shall be to the
Supreme Court by petition for review on certiorari under Rule 45. (Emphasis supplied)

Thus, petitioner resorted to the erroneous remedy when she filed a petition for certiorari under Rule 65, when the
proper mode should have been a petition for review on certiorari under Rule 45. Moreover, under Section 2, Rule 45 of
the same Rules, the period to file a petition for review is 15 days from notice of the order appealed from. In the instant
case, petitioner received the questioned order of the trial court on November 6, 2007, hence, she had only up to
November 21, 2007 to file the petition. However, the same was filed only on January 4, 2008, or 43 days late.
Consequently, petitioner's failure to file an appeal within the reglementary period rendered the order of the trial court
final and executory.

The perfection of an appeal in the manner and within the period prescribed by law is mandatory. Failure to conform to
the rules regarding appeal will render the judgment final and executory and beyond the power of the Court's review.
Jurisprudence mandates that when a decision becomes final and executory, it becomes valid and binding upon the
parties and their successors in interest. Such decision or order can no longer be disturbed or reopened no matter how
erroneous it may have been.17

Petitioner's resort to a petition under Rule 65 is obviously a play to make up for the loss of the right to file an
appeal via a petition under Rule 45. However, a special civil action under Rule 65 can not cure petitioner's failure to
timely file a petition for review on certiorari under Rule 45 of the Rules of Court. Rule 65 is an independent action that
cannot be availed of as a substitute for the lost remedy of an ordinary appeal, including that under Rule 45, especially if
such loss or lapse was occasioned by one's own neglect or error in the choice of remedies.18

Moreover, even if we assume that a petition under Rule 65 is the proper remedy, the petition is still dismissible.

We note that no motion for reconsideration of the November 5, 2007 order of the trial court was filed prior to the filing
of the instant petition. The settled rule is that a motion for reconsideration is a sine qua non condition for the filing of a
petition for certiorari. The purpose is to grant the public respondent an opportunity to correct any actual or perceived
error attributed to it by the re-examination of the legal and factual circumstances of the case. Petitioner's failure to file a
motion for reconsideration deprived the trial court of the opportunity to rectify an error unwittingly committed or to
vindicate itself of an act unfairly imputed. Besides, a motion for reconsideration under the present circumstances is the
plain, speedy and adequate remedy to the adverse judgment of the trial court.19

Petitioner also blatantly disregarded the rule on hierarchy of courts. Although the Supreme Court, Regional Trial Courts,
and the Court of Appeals have concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto,
habeas corpus and injunction, such concurrence does not give the petitioner unrestricted freedom of choice of court
forum. Recourse should have been made first with the Court of Appeals and not directly to this Court.20

True, litigation is not a game of technicalities. It is equally true, however, that every case must be presented in
accordance with the prescribed procedure to ensure an orderly and speedy administration of justice.21 The failure
therefore of petitioner to comply with the settled procedural rules justifies the dismissal of the present petition.

Finally, we find that the trial court correctly granted respondent's petition for issuance of a writ of preliminary
injunction. Section 3, Rule 58, of the Rules of Court, provides:

SEC. 3. Grounds for issuance of preliminary injunction. - A preliminary injunction may be granted by the court
when it is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the acts complained of, or in the performance of an act or acts,
either for a limited period or perpetually;

(b) That the commission, continuance or non-performance of the act or acts complained of during the litigation
would probably work injustice to the applicant; or

(c) That a party, court, or agency or a person is doing, threatening, or attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject
of the action or proceeding, and tending to render the judgment ineffectual.

The requisites for the issuance of a writ of preliminary injunction are: (1) the existence of a clear and unmistakable right
that must be protected; and (2) an urgent and paramount necessity for the writ to prevent serious damage.22

The urgency and paramount necessity for the issuance of a writ of injunction becomes relevant in the instant case
considering that what is being enjoined is the sale by public auction of the properties of Petron amounting to at least
P1.7 billion and which properties are vital to its business operations. If at all, the repercussions and far-reaching
implications of the sale of these properties on the operations of Petron merit the issuance of a writ of preliminary
injunction in its favor.

We are not unaware of the doctrine that taxes are the lifeblood of the government, without which it can not properly
perform its functions; and that appeal shall not suspend the collection of realty taxes. However, there is an exception to
the foregoing rule, i.e., where the taxpayer has shown a clear and unmistakable right to refuse or to hold in abeyance
the payment of taxes. In the instant case, we note that respondent contested the revised assessment on the following
grounds: that the subject assessment pertained to properties that have been previously declared; that the assessment
covered periods of more than 10 years which is not allowed under the LGC; that the fair market value or replacement
cost used by petitioner included items which should be properly excluded; that prompt payment of discounts were not
considered in determining the fair market value; and that the subject assessment should take effect a year after or on
January 1, 2008. To our mind, the resolution of these issues would have a direct bearing on the assessment made by
petitioner. Hence, it is necessary that the issues must first be passed upon before the properties of respondent is sold in
public auction.

In addition to the fact that the issues raised by the respondent would have a direct impact on the validity of the
assessment made by the petitioner, we also note that respondent has posted a surety bond equivalent to the amount of
the assessment due. The Rules of Procedure of the LBAA, particularly Section 7, Rule V thereof, provides:

Section 7. Effect of Appeal on Collection of Taxes. - An appeal shall not suspend the collection of the
corresponding realty taxes on the real property subject of the appeal as assessed by the Provincial, City or
Municipal Assessor, without prejudice to the subsequent adjustment depending upon the outcome of the
appeal. An appeal may be entertained but the hearing thereof shall be deferred until the corresponding taxes
due on the real property subject of the appeal shall have been paid under protest or the petitioner shall have
given a surety bond, subject to the following conditions:

(1) the amount of the bond must not be less than the total realty taxes and penalties due as assessed by the
assessor nor more than double said amount;

(2) the bond must be accompanied by a certification from the Insurance Commissioner (a) that the surety is duly
authorized to issue such bond; (a) that the surety bond is approved by and registered with said Commission; and
(c) that the amount covered by the surety bond is within the writing capacity of the surety company; and
 (3) the amount of the bond in excess of the surety company's writing capacity, if any, must be covered by
Reinsurance Binder, in which case, a certification to this effect must likewise accompany the surety bond.

Corollarily, Section 11 of Republic Act No. 9282,23 which amended Republic Act No. 1125 (The Law Creating the Court of
Tax Appeals) provides:

Section 11. Who may Appeal; Mode of Appeal; Effect of Appeal; -

xxxx

No appeal taken to the Court of Appeals from the Collector of Internal Revenue x x x shall suspend the payment,
levy, distraint, and/or sale of any property for the satisfaction of his tax liability as provided by existing
law. Provided, however, That when in the opinion of the Court the collection by the aforementioned
government agencies may jeopardize the interest of the Government and/or the taxpayer the Court at any stage
of the processing may suspend the collection and require the taxpayer either to deposit the amount claimed or
to file a surety bond for not more than double the amount with the Court.

WHEREFORE, in view of all the foregoing, the instant petition is DISMISSED.

SO ORDERED.

b. G.R. No. 104171 February 24, 1999

COMMISSIONER OF INTERNAL REVENUE vs. B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO.,
INC.) and THE COURT OF APPEALS,

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of Internal Revenue (BIR) still assess
a taxpayer even after the latter has already paid the tax due, on the ground that the previous assessment was
insufficient or based on a "false" return?

The Case

This is the main question raised before us in this Petition for Review on Certiorari assailing the Decision 1 dated February
14, 1992, promulgated by the Court of Appeals 2 in CA-GR SP No. 25100. The assailed Decision reversed the Court of Tax
Appeals (CTA) 3 which upheld the BIR commissioner's assessments made beyond the five-year statute of limitations.

The Facts

The facts undisputed. 4 Private Respondent BF Goodrich Phils., Inc. (now Sime Darby International Tire Co, Inc.), was an
American-owned and controlled corporation previous to July 3, 1974. As a condition for approving the manufacture by
private respondent of tires and other rubber products, the Central Bank of the Philippines required that it should
develop a rubber plantation. In compliance with this requirement, private respondent purchased from the Philippine
government in 1961, under the Public Land Act and the Parity Amendment to the 1935 Constitution, certain parcels of
land located in Tumajubong, Basilan, and there developed a rubber plantation.

More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating that, upon the expiration
of the Parity Amendment on July 3, 1974, the ownership rights of Americans over public agricultural lands, including the
right to dispose or sell their real estate, would be lost. On the basis of this Opinion, private respondent sold to Siltown
Realty Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in installments. In accord with
the terms of the sale, Siltown Realty Philippines, Inc. leased the said parcels of land to private respondent for a period of
25 years, with an extension of another 25 years at the latter's option.

Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts of private respondent
were examined for the purpose of determining its tax liability for taxable year 1974. The examination resulted in the
April 23, 1975 assessment of private respondent for deficiency income tax in the amount of P6,005.35, which it duly
paid.

Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and Memorandum Authority
Reference No. 749157 for the purpose of examining Siltown's business, income and tax liabilities. On the basis of this
examination, the BIR commissioner issued against private respondent on October 10, 1980, an assessment for deficiency
in donor's tax in the amount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings to
Siltown. Apparently, the BIR deemed the consideration for the sale insufficient, and the difference between the fair
market value and the actual purchase price a taxable donation.
In a letter dated November 24, 1980, private respondent contested this assessment. On April 9, 1981, it received
another assessment dated March 16, 1981, which increased to P 1,092,949 the amount demanded for the alleged
deficiency donor's tax, surcharge, interest and compromise penalty.

Private respondent appealed the correctness and the legality of these last two assessments to the CTA. After trial in due
course, the CTA rendered its Decision dated March 29, 1991, the dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing petitioner deficiency gift
tax is MODIFIED land petitioner is ordered to pay the amount of P1,311,179.01 plus 10% surcharge and
20% annual interest from March 16, 1981 until fully paid provided that the maximum amount that may
be collected as interest on delinquency shall in no case exceed an amount corresponding to a period of
three years pursuant to Section 130(b)(l) and (c) of the 1977 Tax Code, as amended by P.D. No. 1705,
which took effect on August 1, 1980.

SO ORDERED. 5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the CTA, as follows:

What is involved here is not a first assessment; nor is it one within the 5-year period stated in Section
331 above. Since what is involved in this case is a multiple assessment beyond the five-year period, the
assessment must be based on the grounds provided in Section 337, and not on Section 15 of the 1974
Tax Code. Section 337 utilizes the very specific terms "fraud, irregularity, and mistake". "Falsity does not
appear to be included in this enumeration. Falsity suffices for an assessment, which is a first assessment
made within the five-year period. When it is a subsequent assessment made beyond the five-year
period, then, it may be validly justified only by "fraud, irregularity and mistake" on the part of the
taxpayer.6

Hence, this Petition for Review under Rule 45 of the Rules of Court. 7

The Issues

Before us, petitioner raises the following issues:

Whether or not petitioner's right to assess herein deficiency donor's tax has indeed prescribed as ruled
by public respondent Court of Appeals

II

Whether or not the herein deficiency donor's tax assessment for 1974 is valid and in accordance with
law

Prescription is the crucial issue in the resolution of this case.

The Court's Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of prescription, because its
ruling was based on factual findings that should have been left undisturbed on appeal, in the absence of any showing
that it had been tainted with gross error or grave abuse of
discretion. 8 The Court is not persuaded.

True, the factual findings of the CTA are generally not disturbed on appeal when supported by substantial evidence and
in the absence of gross error or grave abuse of discretion. However, the CTA's application of the law to the facts of this
controversy is an altogether different matter, for it involves a legal question. There is a question of law when the issue is
the application of the law to a given set of facts. On the other hand, a question of fact involves the truth or falsehood of
alleged facts.9 In the present case, the Court of Appeals ruled not on the truth or falsity of the facts found by the CTA,
but on the latter's application of the law on prescription.
Sec. 331 of the National Internal Revenue Code provides:

Sec. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding
section, internal-revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after 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.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the March 1981 assessments
were issued by the BIR beyond the five-year statute of limitations. The Court has thoroughly studied the records of this
case and found no basis to disregard the five-year period of prescription. As succinctly pronounced by the Court of
Appeals:

The subsequent assessment made by the respondent Commissioner on October 40, 1980, modified by
that of March 16, 1981, violates the law. Involved in this petition is the income of the petitioner for the
year 1974, the returns for which were required to be filed on or before April 15 of the succeeding year.
The returns for the year 1974 were duly filed by the petitioner, and assessment of taxes due for such
year — including that on the transfer of properties on June 21, 1974 — was made on April 13, 1975 and
acknowledged by Letter of Confirmation No. 101155 terminating the examination on this subject. The
subsequent assessment of October 10, 1980 modified, by that of March 16, 1981, was made beyond the
period expressly set in Section 331 of the National Internal Revenue Code . . . . 10

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the second assessment (March
16, 1981) of the Commissioner was well-advised having been made in contemplation of his power under
Section 15 of the 1974 Code (now Section 16, of NIRC) to assess the proper tax on the best evidence
obtainable "when there is reason to believe that a report of a taxpayer is false, incomplete or erroneous.
More, when there is falsity with intent to evade tax as in this case, the ordinary period of limitation upon
assessment and collection does not apply so that contrary to the averment of petitioner, the right to
assess respondent has not prescribed.

What is the considered falsity? The transfer through sale of the parcels of land in Tumajubong, Lamitan,
Basilan in favor of Siltown Realty for the sum of P500,000.00 only whereas said lands had been sworn to
under Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)
(see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record). 11

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or assessment, our tax law
provides a statute of limitations in the collection of taxes. Thus, the law on prescription, being a remedial measure,
should be liberally construed in order to afford such protection. 12 As a corollary, the exceptions to the law on
prescription should perforce be strictly construed.

Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation, or when there is
reason to believe that any such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall
assess the proper tax on the best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute
of limitations on the issuance of an assessment, by allowing the initial assessment to be made on the basis of the best
evidence available. Having made its initial assessment in the manner prescribed, the commissioner could not have been
authorized to issue, beyond the five-year prescriptive period, the second and the third assessments under consideration
before us.

Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit of the statute of
limitations. The relevant part of then Section 332 of the NIRC, which enumerates the exceptions to the period of
prescription, provides:

Sec. 332. Exceptions as to period of limitation of assessment and collection of taxes. — (a) In the case of
a false or fraudulent return with intent to evade a tax or of a failure to file a return, the tax may be
assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at
any time within ten years after the discovery of the falsity, fraud, or omission: . . . .

Petitioner insists that private respondent committed "falsity" when it sold the property for a price lesser than its
declared fair market value. This fact alone did not constitute a false return which contains wrong information due to
mistake, carelessness or ignorance.13 It is possible that real property may be sold for less than adequate consideration
for a bona fide business purpose; in such event, the sale remains an "arm's length" transaction. In the present case, the
private respondent was compelled to sell the property even at a price less than its market value, because it would have
lost all ownership rights over it upon the expiration of the parity amendment. In other words, private respondent was
attempting to minimize its losses. At the same time, it was able to lease the property for 25 years, renewable for
another 25. This can be regarded as another consideration on the price.

Furthermore, the fact that private respondent sold its real property for a price less than its declared fair market value
did not by itself justify a finding of false return. Indeed, private respondent declared the sale in its 1974 return submitted
to the BIR. 14 Within the five-year prescriptive period, the BIR could have issued the questioned assessment, because the
declared fair market value of said property was of public record. This it did not do, however, during all those five years.
Moreover, the BIR failed to prove that respondent's 1974 return had been filed fraudulently. Equally significant was its
failure to prove respondent's intent to evade the payment of the correct amount of tax.

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to evade the
payment of the correct amount of tax. 15 Moreover, even though a donor's tax, which is defined as "a tax on the
privilege of transmitting one's property or property rights to another or others without adequate and full valuable
consideration," 16 is different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming
part of capital assets, 17 the tax return filed by private respondent to report its income for the year 1974 was sufficient
compliance with the legal requirement to file a return. In other words, the fact that the sale transaction may have partly
resulted in a donation does not change the fact that private respondent already reported its income for 1974 by filing an
income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to evade
tax, or that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances of
negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was
precisely intended to give them peace of mind.

Based on the foregoing, a discussion of the validity and legality of the assailed assessments has become moot and
unnecessary.

WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of Appeals is AFFIRMED. No costs.

SO ORDERED.

c. See Sec. 6(A)

SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional Requirements for Tax
Administration and Enforcement. -

(A) Examination of Return and Determination of Tax Due. After a return has been filed as required under the provisions
of this Code, the Commissioner or his duly authorized representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand from the Commissioner or from his duly
authorized representative.

Any return, statement of declaration filed in any office authorized to receive the same shall not be withdrawn: Provided,
That within three (3) years from the date of such filing, the same may be modified, changed, or amended: Provided,
further, That no notice for audit or investigation of such return, statement or declaration has in the meantime been
actually served upon the taxpayer.

d. G.R. No. 197515 July 2, 2014

COMMISSIONER OF INTERNAL REVENUE vs.UNITED SALVAGE AND TOWAGE (PHILS.), INC.,

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 1998.4 Particularly,
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 Decision17 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.57 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.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]62 With 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.

e. G.R. No. 139736 October 17, 2005

BANK OF THE PHILIPPINE ISLANDS vs. COMMISSIONER OF INTERNAL REVENUE

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 ₱28,020.00 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: 27,720.00

₱18,480,000.00 x ₱0.30 (Sec. 182 NIRC).

₱200.00
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 ₱28,020.00, 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 Levy6 against petitioner BPI for the assessed deficiency DST for taxable year 1985, in the
amount of ₱27,720.00 (excluding the compromise penalty of ₱300.00). 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 vendee’s 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 No. 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 latter’s 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 former’s 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 ₱28,020.00 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.

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
years19 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. Ablaza25 –

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.

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 22426 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 taxpayer’s 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 Oquias’s 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 taxpayer’s 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 taxpayer’s 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 ₱28,020.00 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 ₱28,020.00 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.

f. G.R. No. 227544 November 22, 2017G

COMMISSIONER OF INTERNAL REVENUE vs TRANSITIONS OPTICAL PHILIPPINES, INC

Estoppel applies against a taxpayer who did not only raise at the earliest opportunity its representative's lack of
authority to execute two (2) waivers of defense of prescription, but was also accorded, through these waivers, more
time to comply with the audit requirements of the Bureau of Internal Revenue. Nonetheless, a tax assessment served
beyond the extended period is void.
This Petition for Review on Certiorari1 seeks to nullify and set aside the June 7, 2016 Decision2 and September 26, 2016
Resolution3 of the Court of Tax Appeals En Banc in CTA EB No. 1251. The Court of Tax Appeals En Banc affirmed its First
Division's September 1, 2014 Decision,4 cancelling the deficiency assessments against Transitions Optical Philippines, Inc.
(Transitions Optical).

On April 28, 2006, Transitions Optical received Letter of Authority No. 00098746 dated March 23, 2006 from Revenue
Region No. 9, San Pablo City, of the Bureau of Internal Revenue. It was signed by then Officer-in-Charge- Regional
Director Corazon C. Pangcog and it authorized Revenue Officers Jocelyn Santos and Levi Visaya to examine Transition
Optical's books of accounts for internal revenue tax purposes for taxable year 2004.5

On October 9, 2007, the parties allegedly executed a Waiver of the Defense of Prescription (First Waiver).6 In this
supposed First Waiver, the prescriptive period for the assessment of Transition Optical's internal revenue taxes for the
year 2004 was extended to June 20, 2008.7 The document was signed by Transitions Optical's Finance Manager, Pamela
Theresa D. Abad, and by Bureau of Internal Revenue's Revenue District Officer; Myrna S. Leonida.8

This was followed by another supposed Waiver of the Defense of Prescription (Second Waiver) dated June 2, 2008. This
time, the prescriptive period was supposedly extended to November 30, 2008.9

Thereafter, the Commissioner of Inte1nal Revenue, through Regional Director Jaime B. Santiago (Director Santiago),
issued a Preliminary Assessment Notice (PAN) dated November 11, 2008, assessing Transitions Optical for its deficiency
taxes for taxable year 2004. Transitions Optical filed a written protest on November 26, 2008.10

The Commissioner of Internal Revenue, again through Director Santiago, subsequently issued against Transitions Optical
a Final Assessment Notice (FAN) and a Formal Letter of Demand (FLD) dated November 28, 2008 for deficiency income
tax, value-added tax, expanded withholding tax, and final tax for taxable year 2004 amounting to ₱l 9, 701,849.68.11

In its Protest Letter dated December 8, 2008 against the FAN, Transitions Optical alleged that the demand for deficiency
taxes had already prescribed at the time the FAN was mailed on December 2, 2008. In its Supplemental Protest,
Transitions Optical pointed out that the FAN was void because the FAN indicated 2006 as the return period, but the
assessment covered calendar year 2004.12

Years later, the Commissioner of Internal Revenue, through Regional Director Jose N. Tan, issued a Final Decision on the
Disputed Assessment dated January 24, 2012, holding Transitions Optical liable for deficiency taxes in the total amount
of ₱l9,701,849.68 for taxable year 2004, broken down as follows;

Tax Amount

Income Tax ₱3,153,371.04

Value-Added Tax 1,231,393.4 7

Expanded Withholding Tax 175,339.51

Final Tax on Royalty 14,026,247.90

Final Tax on Interest Income 1,115,497. 76

Total ₱19,701,849.6813

On March 16, 2012, Transitions Optical filed a Petition for Review before the Court of Tax Appeals.14

In her Answer, the Commissioner of Internal Revenue interposed that Transitions Optical's claim of prescription was
inappropriate because the executed Waiver of the Defense of Prescription extended the assessment period. She added
that the posting of the FAN and FLD was within San Pablo City Post Office's exclusive control. She averred that she could
not be faulted if the FAN and FLD were posted for mailing only on December 2, 20081 since November 28, 2008 fell on a
Friday and the next supposed working day, December 1, 2008, was declared a Special Holiday.15

After trial and upon submission of the parties' memoranda, the First Division of the Court of Tax Appeals (First Division)
rendered a Decision on September 1, 2014.16 It held:

In summary therefore, the Court hereby finds the subject Waivers to be defective and therefore void. Nevertheless,
granting for the sake of argument that the subject Waivers were validly executed, for failure of respondent however to
present adequate supporting evidence to prove that it issued the FAN and the FLD within the extended period agreed
upon in the 2nd Waiver, the subject assessment must be cancelled for being issued beyond the prescriptive period
provided by law to assess.
WHEREFORE, in light of the foregoing considerations, the instant Petition for Review is hereby GRANTED. Accordingly,
the Final Assessment Notice, Formal Letter of Demand and Final Decision on Disputed Assessment finding petitioner
Transitions Optical Philippines, Inc. liable for deficiency income tax, deficiency expanded withholding tax, deficiency
value-added tax and deficiency final tax for taxable year 2004 in the total amount of ₱19,701,849.68 are hereby
CANCELLEU and SET ASIDE.

SO ORDER.ED.17 (Emphasis in the original)

The Commissioner of Internal Revenue filed a Motion for Reconsideration, which was denied by the First Division in its
Resolution18 dated November 7, 2014.

The Court of Tax Appeals En Banc affirmed the First Division Decision19 and subsequently denied the Commissioner of
Internal Revenue's Motion for Reconsideration.20

Hence, this Petition was filed before this Court. Transitions Optical filed its Comment.21

Petitioner contends that "[t]he two Waivers executed by the parties on October 9, 2007 and June 2, 2008 substantially
complied with the requirements of Sections 203 and 222 of the [National Internal Revenue Code]."22 She adds that
technical rules of procedure of administrative bodies, such as those provided in Revenue Memorandum Order (RMO)
No. 20-90 issued on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No. 05-01 issued on August 2, 2001,
must be liberally applied to promote justice.23 At any rate, petitioner maintains that respondent is estopped from
questioning the validity of the waivers since their execution was caused by the delay occasioned by respondent's own
failure to comply with the orders of the Bureau of Internal Revenue to submit documents for audit and examination.24

Furthermore, petitioner argues that the assessment required to be issued within the three (3)-year period provided in
Sections 203 and 222 of the National Internal Revenue Code refer to petitioner's actual issuance of the notice of
assessment to the taxpayer or what is usually known as PAN, and not the FAN issued in case the taxpayer files a
protest.25

On the other hand, respondent contends that the Court of Tax Appeals properly found the waivers defective, and
therefore, void. It adds that the three (3)-year prescriptive period for tax assessment primarily benefits the taxpayer,
and any waiver of this period must be strictly scrutinized in light of the requirements of the laws and rules.26 Respondent
posits that the requirements for valid waivers are not mere technical rules of procedure that can be set aside.27

Respondent further asserts that it is not estopped from questioning the validity of the waivers as it raised its objections
at the earliest opportunity.28 Besides, the duty to ensure compliance with the requirements of RMO No. 20-90 and RDAO
No. 05-01, including proper authorization of the taxpayer's representative, fell primarily on petitioner and her revenue
officers. Thus, petitioner came to court with unclean hands and cannot be permitted to invoke the doctrine of
estoppel.29 Respondent insists that there was no clear showing that the signatories in the waivers were duly sanctioned
to act on its behalf.30

Even assuming that the waivers were valid, respondent argues that the assessment would still be void as the FAN was
served only on December 4, 2008, beyond the extended period of November 30, 2008.31 Contrary to petitioner's stance,
respondent counters that the assessment required to be served within the three (3)-year prescriptive period is the FAN
and FLD, not just the PAN.32 According to respondent, ''it is the FAN and FLD that formally notifly] the taxpayer, and
categorica1ly [demand] from him, that a deficiency tax is due."33

The issues for this Court's resolution are:

First, whether or not the two (2) Waivers of the Defense of Prescription entered into by the parties on October 9, 2007
and June 2, 2008 were valid; and

Second, whether or not the assessment of deficiency taxes against respondent Transitions Optical Philippines, Inc. for
taxable year 2004 had prescribed.

This Court denies the Petition. The Court of Tax Appeals committed no reversible error in cancelling the deficiency tax
assessments.

As a general rule, petitioner has three (3) years to assess taxpayers from the filing of the return. Section 203 of the
National Internal Revenue Code provides:
Section 203. Period of Limitation Upon Assessment m1d 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.

An exception to the rule of prescription is found in Section 222(b) and (d) of this Code, viz:

Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

....

(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.

....

(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 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.

Thus, the period to assess and collect taxes may be extended upon the Commissioner of Internal Revenue and the
taxpayer's written agreement, executed before the expiration of the three (3)-year period.

In this case, two (2) waivers were supposedly executed by the parties extending the prescriptive periods for assessment
of income tax, value-added tax, and expanded and final withholding taxes to June 20, 2008, and then to November 30,
2008.

The Court of Tax Appeals, both its First Division and En Banc, declared as defective and void the two (2) Waivers of the
Defense of Prescription for non-compliance with the requirements for the proper execution of a waiver as provided in
RMO No. 20-90 and RDAO No. 05-01. Specifically, the Court of Tax Appeals found that these Waivers were not
accompanied by a notarized written authority from respondent, authorizing the so-called representatives to act on its
behalf. Likewise, neither the Revenue District Office's acceptance date nor respondent's receipt of the Bureau of Internal
Revenue's acceptance was indicated in either document.34

However, Presiding Justice Roman G. Del Rosario (Justice Del Rosario) in his Separate Concurring Opinion35 in the Court
of Tax Appeals June 7, 2016 Decision, found that respondent is estopped from claiming that the waivers were invalid by
reason of its own actions, which persuaded the government to postpone the issuance of the assessment. He discussed:

In the case at bar, respondent performed acts that induced the BIR to defer the issuance of the assessment. Records
reveal that to extend the BIR's prescriptive period to assess respondent for deficiency taxes for taxable year 2004,
respondent executed two (2) waivers. The first Waiver dated October 2007 extended the period to assess until June 20,
2008, while the second Waiver, which was executed on June 2, 2008, extended the period to assess the taxes until
November 30, 2008. As a consequence of the issuance of said waivers, petitioner delayed the issuance of the
assessment.

Notably, when respondent filed its protest on November 26, 2008 against the Preliminary Assessment Notice dated
November 11, 2008, it merely argued that it is not liable for the assessed deficiency taxes and did not raise as an issue
the invalidity of the waiver and the prescription of petitioner's right to assess the deficiency taxes. In its protest dated
December 8, 2008 against the FAN, respondent argued that the year being audited in the FAN has already prescribed at
the time such FAN was mailed on December 2, 2008. Respondent even stated in that protest that it received the letter
(referring to the FAN dated November 28, 2008) on December 5, 2008, which accordingly is five (5) days after the waiver
it issued had prescribed. The foregoing narration plainly does not suggest that respondent has any objection to its
previously executed waivers. By the principle of estoppel, respondent should not be allowed to question the validity of
the waivers.36

In Commissioner of Internal Revenue v. Next Mobile, Inc. (formerly Nextel Communications Phils., lnc.),37 this Comi
recognized the doctrine of estoppel and upheld the waivers when both the taxpayer and the Bureau of Internal Revenue
were in part de lie to. The taxpayer's act of impugning its waivers after benefitting from them was considered an act of
bad faith:

In this case, respondent, after deliberately executing defective waivers, raised the very same deficiencies it caused to
avoid the tax liability determined by the BIR during the extended assessment period. It must be remembered that by
virtue of these Waivers, respondent was given the opportunity to gather and submit documents to substantiate its
claims before the [Commissioner of Internal Revenue] during investigation. It was able to postpone the payment of
taxes, as well as contest and negotiate the assessment against it. Yet, after enjoying these benefits, respondent
challenged the validity of the Waivers when the consequences thereof were not in its favor. In other words,
respondent's act of impugning these Waivers after benefiting therefrom and allowing petitioner to rely on the same is
an act of bad faith.38

This Court found the taxpayer estopped from questioning the validity of its waivers:

Respondent executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely on
them and did not raise any objection against their validity until petitioner assessed taxes and penalties against it.
Moreover, the application of estoppel is necessary to prevent the undue injury that the government would suffer
because of the cancellation of petitioner's assessment of respondent's tax liabilities.39 (Emphasis in the original)

Parenthetically, this Court stated that when both parties continued to deal with each other in spite of knowing and
without rectifying the defects of the waivers, their situation is "dangerous and open to abuse by unscrupulous taxpayers
who intend to escape their responsibility to pay taxes by mere expedient of hiding behind technicalities."40

Estoppel similarly applies in this case.

Indeed, the Bureau of Internal Revenue was at fault when it accepted respondent's Waivers despite their non-
compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01.

Nonetheless, respondent's acts also show its implied admission of the validity of the waivers. First, respondent never
raised the invalidity of the Waivers at the earliest opportunity, either in its Protest to the PAN, Protest to the FAN, or
Supplemental Protest to the FAN.41 It thereby impliedly recognized these Waivers' validity and its representatives'
authority to execute them. Respondent only raised the issue of these Waivers' validity in its Petition for Review filed
with the Court of Tax Appeals.42 In fact, as pointed out by Justice Del Rosario, respondent's Protest to the FAN clearly
recognized the validity of the Waivers,43 when it stated:

This has reference to the Final Assessment Notice ("[F]AN") issued by your office, dated November 28, 2008. The said
letter was received by Transitions Optical Philippines[,] Inc. (TOPI) on December 5, 2008, five days after the waiver we
issued which was valid until November 30, 2008 had prescribed.44 (Emphasis supplied)

Second, respondent does not dispute petitioner's assertion45 that respondent repeatedly failed to comply with
petitioner's notices, directing it to submit its books of accounts and related records for examination by the Bureau of
Internal Revenue. Respondent also ignored the Bureau of Internal Revenue's request for an Informal Conference to
discuss other "discrepancies" found in the partial documents submitted. The Waivers were necessary to give respondent
time to fully comply with the Bureau of Internal Revenue notices for audit examination and to respond to its Informal
Conference request to discuss the discrepancies.46 Thus, having benefitted from the Waivers executed at its instance,
respondent is estopped from claiming that they were invalid and that prescription had set in.

II

But, even as respondent is estopped from questioning the validity of the Waivers, the assessment is nonetheless void
because it was served beyond the supposedly extended period.

The First Division of the Court of Tax Appeals found that "the date indicated in the envelope/mail matter containing the
FAN and the FLD is December 4, 2008, which is considered as the date of their mailing."47 Since the validity period of the
second Waiver is only until November 30, 2008, prescription had already set in at the time the FAN and the FLD were
actually mailed on December 4, 2008.

For lack of adequate supp01ting evidence, the Court of Tax Appeals rejected petitioner's claim that the FAN and the FLD
were already delivered to the post office for mailing on November 28, 2008 but were actually processed by the post
office on December 2, 2008, since December 1, 2008 was declared a Special Holiday.48 The testimony of petitioner's
witness, Dario A. Consignado, Jr., that he brought the mail matter containing the FAN and the FLD to the post office on
November 28, 2008 was considered self-serving, uncorroborated by any other evidence. Additionally, the Certification
presented by petitioner certifying that the FAN issued to respondent was delivered to its Administrative Division for
mailing on November 28, 2008 was found insufficient to prove that the actual date of mailing was November 28, 2008.

This Court finds no clear and convincing reason to overturn these factual findings of the Court of Tax Appeals.1âwphi1

Finally, petitioner's contention that the assessment required to be issued within the three (3)-year or extended period
provided in Sections 203 and 222 of the National Internal Revenue Code refers to the PAN is untenable.

Considering the functions and effects of a PAN vis a vis a FAN, it is clear that the assessment contemplated in Sections
203 and 222 of the National Internal Revenue Code refers to the service of the FAN upon the taxpayer.

A PAN merely informs the taxpayer of the initial findings of the Bureau of Internal Revenue.49 It contains the proposed
assessment, and the facts, law, rules, and regulations or jurisprudence on which the proposed assessment is based.50 It
does not contain a demand for payment but usually requires the taxpayer to reply within 15 days from receipt.
Otherwise, the Commissioner of Internal Revenue will finalize an assessment and issue a FAN.

The PAN is a part of due process.51 It gives both the taxpayer and the Commissioner of Internal Revenue the opportunity
to settle the case at the earliest possible time without the need for the issuance of a FAN.

On the other hand, a FAN contains not only a computation of tax liabilities but also a demand for payment within a
prescribed period.52 As soon as it is served, an obligation arises on the part of the taxpayer concerned to pay the amount
assessed and demanded. It also signals the time when penalties and interests begin to accrue against the taxpayer. Thus,
the National Internal Revenue Code imposes a 25% penalty, in addition to the tax due, in case the taxpayer fails to pay
the deficiency tax within the time prescribed for its payment in the notice of assessment.53 Likewise, an interest of
20% per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date
prescribed for payment until the amount is fully paid.54 Failure to file an administrative protest within 30 days from
receipt of the FAN will render the assessment final, executory, and demandable.

WHEREFORE, the Petition is DENIED. The June 7, 2016 Decision and September 26, 2016 Resolution of the Court of Tax
Appeals En Banc in CTAEB No. 1251 are AFFIRMED.

SO ORDERED.

g. G.R. No. 191856, December 07, 2016

REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE BUREAU OF INTERNAL REVENUE (BIR), v. GMCC UNITED
DEVELOPMENT CORPORATION,

Before this Court is a Petition for Review on Certiorari1 assailing the Court of Appeals' Decision2 dated September 8,
2009 and Resolution3 dated March 30, 2010 in CA-G.R. SP No. 100380. The Court of Appeals affirmed the May 26, 2006
Resolution4 of the Department of Justice, which dismissed the criminal complaint for tax evasion filed by the Bureau of
Internal Revenue against GMCC United Development Corporation's corporate officers on the ground that the period to
assess the tax had already prescribed.5

On March 28, 2003, the Bureau of Internal Revenue National Investigation Division issued a Letter of Authority, authorizing
its revenue officers to examine the books of accounts and other accounting records of GMCC United Development
Corporation (GMCC) covering taxable years 1998 and 1999.6 On April 3, 2003 GMCC was served a copy of said Letter of
Authority and was requested to present its books of accounts and other accounting records.7 GMCC failed to respond to
the Letter of Authority as well as the subsequent letters requesting that its records and documents be produced.8

Due to GMCC's failure to act on the requests, the Assistant Commissioner of the Enforcement Service of the Bureau of
Internal Revenue issued a Subpoena Duces Tecum on GMCC president, Jose C. Go (Go).9 When GMCC still failed to comply
with the Subpoena Duces Tecum, the revenue officers were constrained to investigate GMCC through Third Party
Information.10

The investigation revealed that in 1998, GMCC, through Go, executed two dacion en pago agreements to pay for the
obligations of GMCC's sister companies, Ever Emporium, Inc., Gotesco Properties, Inc. and Ever Price Club, Inc., to Rizal
Commercial Banking Corporation.11 GMCC allegedly failed to declare the income it earned from these agreements for
taxation purposes in 1998.12 Moreover, these transactions constituted a donation in favor of GMCC's sister companies for
which GMCC failed to pay the corresponding donor's tax.13 The BIR also assessed the value added tax over the said
transactions.14
It was also discovered that in 1999, GMCC sold condominium units and parking slots for a total amount of P5,350,000.00
to a Valencia K. Wong.15 However, GMCC did not declare the income it earned from these transactions in its 1999 Audited
Financial Statements.16

Thus, on November 17, 2003, the Bureau of Internal Revenue issued a Notice to Taxpayer to GMCC, which GMCC
ignored.17 On December 8, 2003, the Bureau of Internal Revenue issued a Preliminary Assessment Notice.18 It was only
when the Bureau of Internal Revenue issued the Final Assessment Notice that GMCC responded.19 In a Letter dated
November 23, 2004, GMCC protested the issuance of the Final Assessment Notice citing that the period to assess and
collect the tax had already prescribed. The Bureau of Internal Revenue denied the protest in a Final Decision dated
February 10, 2005.20 .

In light of the discovered tax deficiencies, the Bureau of Internal Revenue, on October 7, 2005, filed with the Department
of Justice a criminal complaint for violation of Sections 254,21 255,22 and 267,23 of the National Internal Revenue Code
against GMCC, its president, Jose C. Go, and its treasurer, Xu Xian Chun.24

In his Counter-Affidavit, Go prayed that the complaint be dismissed, arguing, among others, that the action had already
prescribed and that GMCC did not defraud the government.25cralawred Assuming that the period to assess had not yet
prescribed, GMCC argued that there was nothing to declare since it earned no income from the dacion en
pago transactions.26 Furthermore, even though the dacion en pago transactions were not included in the GMCC 1998
Financial Statement, they had been duly reflected in the GMCC 2000 Financial Statement.

On May 26, 2006, the Department of Justice, through the Chief State Prosecutor, issued a Resolution27 dismissing the
criminal complaint against the GMCC officers. The State Prosecutor ruled that there was no proof that GMCC defrauded
the government. The Bureau went beyond its authority when it assessed and issued the Letter of Authority knowing that
the period to assess had already lapsed. Moreover, the prosecutor ruled that since GMCC did not gain from the assailed
transactions, the imposition of income, VAT, and donor's taxes were improper.28 The dispositive portion of the Resolution
reads:

All told, we find no probable cause to warrant indictment of respondents for violation of Sections 254, 255 and 267 of the
National Internal Revenue Code of 1997.

WHEREFORE, it is respectfully recommended that the instant complaint be DISMISSED.29

The Bureau of Internal Revenue filed a Motion for Reconsideration,30 which the Department of Justice denied in the
Resolution dated August 31, 2006.31

Aggrieved, the Bureau of Internal Revenue filed before the Court of Appeals a Petition for Certiorari.32 The Bureau argued
that the Department of Justice gravely abused its discretion in dismissing the criminal complaint against GMCC's officers.
On September 8, 2009, the Court of Appeals denied the Petition and affirmed in toto the Department of Justice's
Resolution. The dispositive portion of the Decision33 reads:

WHEREFORE, the foregoing considered, the instant petition is hereby DISMISSED and the assailed
resolutions AFFIRMED in toto. No costs.

SO ORDERED.

The Bureau of Internal Revenue moved for reconsideration, but it was denied in the Resolution35 dated March 30, 2010.

Petitioner Bureau of Internal Revenue is now before this Court, insisting that the Court of Appeals erred in finding that the
applicable period of prescription in its case is the three-year period under Section 203 of the NIRC and not the ten-year
prescriptive period under Section 222.36

The issues before us are as follows:

First, whether the Court of Appeals erred in declaring that the Secretary of Justice did not commit grave abuse of discretion
when he found no probable cause and dismissed the tax evasion case against the respondent officers of GMCC.

Second, whether the applicable prescriptive period for the tax assessment is the ten-year period or the three-year period.

The Petition must be denied.

I
We are convinced that the Court of Appeals committed no reversible error in affirming the ruling of the Secretary of Justice
that there was no probable cause to file a tax evasion case against the respondent officers. Since the assessment for the
tax had already prescribed, no proceeding in court on the basis of such return can be filed.

The petitioner filed a criminal complaint against respondents for violating Articles 254, 255, and 267 of the National
Internal Revenue Code. The Articles provide:

SEC. 254. Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to evade or defeat any tax
imposed under this Code or the payment thereof shall, in addition to the other penalties provided by law, upon conviction
thereof, be punished by a fine of not less than Thirty thousand pesos (P30,000.00) but not more than One hundred
thousand pesos (P100,000.00) and suffer imprisonment of not less than two (2) years but not more than four (4) years:
Provided, That the conviction or acquittal obtained under this Section shall not be a bar to the filing of a civil suit for the
collection of taxes.

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit Tax and Refund
Excess Taxes Withheld on Compensation. - Any person required under this Code or by rules and regulations promulgated
thereunder to pay any tax, make a return, keep any record, or supply correct and accurate information, who willfully fails
to pay such tax, make such return, keep such record, or supply such correct and accurate information, or withhold or remit
taxes withheld, or refund excess taxes withheld on compensation, at the time or times required by law or rules and
regulations shall, in addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more than ten (10)
years.

Any person who attempts to make it appear for any reason that he or another has in fact filed a return or statement, or
actually files a return or statement and subsequently withdraws the same return or statement after securing the official
receiving seal or stamp of receipt of an internal revenue office wherein the same was actually filed shall, upon conviction
therefore, be punished by a fine of not less than Ten thousand pesos (P10,000) but not more than Twenty thousand pesos
(P20,000) and suffer imprisonment of not less than one (1) year but not more than three (3) years.

SEC. 267. Declaration under Penalties of Perjury. - Any declaration, return and other statements required under this Code,
shall, in lieu of an oath, contain a written statement that they are made under the penalties of perjury. Any person who
willfully files a declaration, return or statement containing information which is not true and correct as to every material
matter shall, upon conviction, be subject to the penalties prescribed for perjury under the Revised Penal Code.

In ruling that there was no probable cause to indict the respondent officers for the acts charged, the Court of Appeals said
there was no clear showing that there was deliberate intent on the part of the respondents to evade payment of the taxes.
Both the State Prosecutor37 and the Court of Appeals38 emphasized that if respondents really intended to evade payment,
they would have omitted the assailed transactions completely in all their financial statements. We agree.

As it stands, while the dacion en pago transactions were missing in the GMCC 1998 Financial Statement, they had been
listed in the GMCC 2000 Financial Statement.39 Respondents' act of filing and recording said transactions in their 2000
Financial Statement belie the allegation that they intended to evade paying their tax liability. Petitioner's contention that
the belated filing is a mere afterthought designed to make it appear that the non-reporting was not deliberate, does not
persuade considering that the filing of the 2000 Financial Statement was done prior to the issuance of the March 2003
Letter of Authority, which authorized the investigation of GMCC's books.40

In any case, this Court has a policy of non-interference in the conduct of preliminary investigations. In First Women's Credit
Corporation v. Baybay41 the Court said:

It is settled that the determination of whether probable cause exists to warrant the prosecution in court of an accused
should be consigned and entrusted to the Department of Justice, as reviewer of the findings of public prosecutors. The
court's duty in an appropriate case is confined to a determination of whether the assailed executive or judicial
determination of probable cause was done without or in excess of jurisdiction or with grave abuse of discretion amounting
to want of jurisdiction. This is consistent with the general rule that criminal prosecutions may not be restrained or stayed
by injunction, preliminary or final, albeit in extreme cases, exceptional circumstances have been recognized. The rule is
also consistent with this Court's policy of non-interference in the conduct of preliminary investigations, and of leaving to
the investigating prosecutor sufficient latitude of discretion in the exercise of determination of what constitutes sufficient
evidence as will establish probable cause for the filing of an information against a supposed offender. While prosecutors
are given sufficient latitude of discretion in the determination of probable cause, their findings are subject to review by
the Secretary of Justice.

Once a complaint or information is filed in court, however, any disposition of the case, e.g., its dismissal or the conviction
or acquittal of the accused rests on the sound discretion of the Court.42
Moreover, a prosecutor's grave abuse of discretion in dismissing a case must be clearly shown before the Courts can
intervene. Elma v Jacobi,43 explained:

The necessary component of the Executive's power to faithfully execute the laws of the land is the State's self-preserving
power to prosecute violators of its penal laws. This responsibility is primarily lodged with the DOJ, as the principal law
agency of the government. The prosecutor has the discretionary authority to determine whether facts and circumstances
exist meriting reasonable belief that a person has committed a crime. The question of whether or not to dismiss a criminal
complaint is necessarily dependent on the sound discretion of the investigating prosecutor and, ultimately, of the
Secretary (or Undersecretary acting for the Secretary) of Justice. Who to charge with what crime or none at all is basically
the prosecutor's call.

Accordingly, the Court has consistently adopted the policy of non interference in the conduct of preliminary investigations,
and to leave the investigating prosecutor sufficient latitude of discretion in the determination of what constitutes
sufficient evidence to establish probable cause. Courts cannot order the prosecution of one against whom the prosecutor
has not found a prima facie case; as a rule, courts, too, cannot substitute their own judgment for that of the Executive.

In fact, the prosecutor may err or may even abuse the discretion lodged in him by law. This error or abuse alone, however,
does not render his act amenable to correction and annulment by the extraordinary remedy of certiorari. To justify judicial
intrusion into what is fundamentally the domain of the Executive, the petitioner must clearly show that the prosecutor
gravely abused his discretion amounting to lack or excess of jurisdiction in making his determination and in arriving at the
conclusion he reached. This requires the petitioner to establish that the prosecutor exercised his power in an arbitrary
and despotic manner by reason of passion or personal hostility; and it must be so patent and gross as to amount to an
evasion or to a unilateral refusal to perform the duty enjoined or to act in contemplation of law, before judicial relief from
a discretionary prosecutorial action may be obtained.44

Based on the foregoing, absent any indication that the Secretary of Justice gravely abused his discretion in not finding
probable cause for the complaint against respondent officers to prosper, the dismissal stands.

II

As to the issue on the applicable prescriptive period, it is the three-year prescriptive period that applies in this case.

The power of the Commissioner of Internal Revenue to assess and collect taxes is provided under Section 2 of the National
Internal Revenue Code:

SEC. 2. Powers and Duties of the Bureau of Internal Revenue - The Bureau of Internal Revenue shall be under the
supervision and control of the Department of Finance and its powers and duties shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and
fines connected therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals
and the ordinary courts.

The Bureau shall give effect to and administer the supervisory and police powers conferred to it by this Code or other
laws.

However, this power to assess and collect taxes is limited by Section 203 of the National Internal Revenue Code:

SEC. 203. Period of Limitation Upon Assessment and Collection.- Except as provided in Section 222, internal revenue taxes
shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no proceeding
in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided,
That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period shall be counted from
the day the return was filed.

For purposes of this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day.

The Court, in Republic v. Ablaza,45 explained the purpose behind this limitation:

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and
to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and
to citizens because after the lapse of the period of prescription citizens would have a feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's
real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal
defense[,] taxpayers would furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should
be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within
the contemplation of the Commission which recommend the approval of the law.46

Petitioner contends that Section 203 finds no application in this case and insists that it is Section 222 of the same Code,
which should be applied. Section 222 in part states:

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. -

(a)
In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or
a proceeding in court for the collection of such tax may be filed without assessment, at any time within ten (10) years after
the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory,
the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

In arguing for the application of the 10-year prescriptive period, petitioner claims that the tax return in this case is
fraudulent and thus, the three-year prescriptive period is not applicable.47

Petitioner fails to convince that respondents filed a fraudulent tax return. The respondents may have erred in reporting
their tax liability when they recorded the assailed transactions in the wrong year, but such error stemmed from the wrong
application of the law and is not an indication of their intent to evade payment. If there were really an intent to evade
payment, respondents would not have reported and subsequently paid the income tax, albeit in the wrong year.

In Commissioner of Internal Revenue v. B.F. Goodrich Phils., Inc.,48 the Court emphasized that the Bureau of Internal
Revenue must show that the return was filed fraudulently with intent to evade payment. The Court ruled:

Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently with intent to evade the
payment of the correct amount of tax. Moreover, even though a donor's tax, which is defined as "a tax on the privilege of
transmitting one's property or property rights to another or others without adequate and full valuable consideration," is
different from capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital assets,
the tax return filed by private respondent to report its income for the year 1974 was sufficient compliance with the legal
requirement to file a return. In other words, the fact that the sale transaction may have partly resulted in a donation does
not change the fact that private respondent already reported its income for 1974 by filing an income tax return.

Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return with the intent to evade
tax, or that it had failed to file a return at all, the period for assessments has obviously prescribed. Such instances of
negligence or oversight on the part of the BIR cannot prejudice taxpayers, considering that the prescriptive period was
precisely intended to give them peace of mind.49

As found by the Court of Appeals, there is no clear and deliberate intent to evade payment of taxes in relation to the dacion
en pago transactions50 or on the sale transaction with Valencia Wong.51 The dacion en pago transactions, though not
included in the 1998 Financial Statement, were properly listed in GMCC's Financial Statement for the year
2000.52 Regarding the sale transaction with Valencia Wong, the respondents said that it was not reflected in the year 1999
because it was an installment sale. Units sold on installment, they explained, are recognized not in the year they are fully
paid, but in the year when at least 25% of the selling price is paid.53 In this instance, the unit and the parking lot were sold
prior to 1996, thus, in the Schedule of Unsold Units filed by GMCC as of December 31, 1996, the said properties were no
longer included.54

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

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

A reading of Section 203 will show that it prohibits two acts after the expiration of the three-year period. First, an
assessment for the collection of the taxes in the return, and second, initiating a court proceeding on the basis of such
return. The State Prosecutor was correct in dismissing the complaint for tax evasion since it was clear that the prescribed
return cannot be used as basis for the case.
All told, the dismissal of the tax evasion case against respondent officers was proper. The Court of Appeals did not err in
affirming the dismissal. Petitioner failed to prove that respondent officers wilfully intended to evade paying tax. Moreover,
having found no basis to disregard the three-year period of prescription, it is clear that the assessments were issued
beyond the statute of limitations.

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

SO ORDERED

h. G.R. No. 167765 June 30, 2008

COMMISSIONER OF INTERNAL REVENUE vs. FMF DEVELOPMENT CORPORATION

For review on certiorari is the Decision1 and Resolution2 dated January 31, 2005 and April 14, 2005, respectively, of the
Court of Appeals in CA- G.R. SP No. 79675, which affirmed the Decision3 dated March 20, 2003 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 6153. In effect, the Court of Appeals cancelled the assessment notice issued by the
Bureau of Internal Revenue (BIR) for the deficiency income and withholding taxes for the taxable year 1995 of
respondent FMF Development Corporation (FMF), a domestic corporation organized and existing under Philippine laws.

The facts are as follows:

On April 15, 1996, FMF filed its Corporate Annual Income Tax Return for taxable year 1995 and declared a loss
of P3,348,932. On May 8, 1996, however, it filed an amended return and declared a loss of P2,826,541. The BIR then
sent FMF pre-assessment notices, all dated October 6, 1998, informing it of its alleged tax liabilities.4 FMF filed a protest
against these notices with the BIR and requested for a reconsideration/reinvestigation.

On January 22, 1999, Revenue District Officer (RDO) Rogelio Zambarrano informed FMF that the reinvestigation had
been referred to Revenue Officer Alberto Fortaleza. He also advised FMF of the informal conference set on February 2,
1999 to allow it to present evidence to dispute the BIR assessments.

On February 9, 1999, FMF President Enrique Fernandez executed a waiver of the three-year prescriptive period for the
BIR to assess internal revenue taxes, hence extending the assessment period until October 31, 1999. The waiver was
accepted and signed by RDO Zambarrano.

On October 18, 1999, FMF received amended pre-assessment notices5 dated October 6, 1999 from the BIR. FMF
immediately filed a protest on November 3, 1999 but on the same day, it received BIR’s Demand Letter and Assessment
Notice No. 33-1-00487-95 dated October 25, 1999 reflecting FMF’s alleged deficiency taxes and accrued interests, as
follows:

Income Tax Assessment P1,608,015.50

Compromise Penalty on Income Tax Assessment 20,000.00

Increments on Withholding Tax on Compensation 184,132.26

Compromise Penalty on Increments on Withholding Tax on

Compensation 16,000.00

Increments on Withholding Tax on Management Fees 209,550.49

Compromise Penalty on Increments on Withholding Tax on

Management Fees 16,000.00

TOTAL P2,053,698.256

On November 24, 1999, FMF filed a letter of protest on the assessment invoking, inter alia,7 the defense of prescription
by reason of the invalidity of the waiver. In its reply, the BIR insisted that the waiver is valid because it was signed by the
RDO, a duly authorized representative of petitioner. It also ordered FMF to immediately settle its tax liabilities;
otherwise, judicial action will be taken. Treating this as BIR’s final decision, FMF filed a petition for review with the CTA
challenging the validity of the assessment.

On March 20, 2003, the CTA granted the petition and cancelled Assessment Notice No. 33-1-00487-95 because it was
already time-barred. The CTA ruled that the waiver did not extend the three-year prescriptive period within which the
BIR can make a valid assessment because it did not comply with the procedures laid down in Revenue Memorandum
Order (RMO) No. 20-90.8 First, the waiver did not state the dates of execution and acceptance of the waiver, by the
taxpayer and the BIR, respectively; thus, it cannot be determined with certainty if the waiver was executed and accepted
within the prescribed period. Second, the CTA also found that FMF was not furnished a copy of the waiver signed by RDO
Zambarrano. Third, the CTA pointed out that since the case involves an amount of more than P1 million, and the period
to assess is not yet about to prescribe, the waiver should have been signed by the Commissioner of Internal Revenue,
and not a mere RDO.9 The Commissioner of Internal Revenue filed a motion for reconsideration, but it was denied.

On appeal to the Court of Appeals, the decision of the CTA was affirmed. Sustaining the findings of the CTA, the Court of
Appeals held that the waiver did not strictly comply with RMO No. 20-90. Thus, it nullified Assessment Notice No. 33-1-
00487-95. The fallo of the Court of Appeals’ decision reads:

WHEREFORE, finding the instant petition not impressed with merit, the same is DENIED DUE COURSE and is
hereby DISMISSED. No costs.

SO ORDERED.10

The Commissioner of Internal Revenue sought reconsideration, but it was denied.

Hence the instant petition, raising the following issues:

I.

WHETHER OR NOT RESPONDENT’S WAIVER OF THE STATUTE OF LIMITATIONS WAS VALIDLY EXECUTED.

II.

WHETHER O[R] NOT THE PERIOD TO ASSESS HAD PRESCRIBED.

III.

WHETHER OR NOT THE COURT OF APPEALS CORRECTLY DISREGARDED PETITIONER’S SUBSTANTIVE

ARGUMENT.11

Essentially, the present controversy deals with the validity of the waiver and whether it validly extended the original
three-year prescriptive period so as to make Assessment Notice No. 33-1-00487-95 valid. The basic questions to be
resolved therefore are: (1) Is the waiver valid? and (2) Did the three-year period to assess internal revenue taxes already
prescribe?

Petitioner contends that the waiver was validly executed mainly because it complied with Section 222 (b)12 of the
National Internal Revenue Code (NIRC). Petitioner points out that the waiver was in writing, signed by the taxpayer and
the Commissioner, and executed within the three-year prescriptive period. Petitioner also argues that the requirements
in RMO No. 20-90 are merely directory; thus, the indication of the dates of execution and acceptance of the waiver, by
the taxpayer and the BIR, respectively, are not required by law. Petitioner adds that there is no provision in RMO No. 20-
90 stating that a waiver may be invalidated upon failure of the BIR to furnish the taxpayer a copy of the waiver. Further,
it contends that respondent’s execution of the waiver was a renunciation of its right to invoke prescription. Petitioner
also argues that the government cannot be estopped by the mistakes committed by its revenue officer in the
enforcement of RMO No. 20-90.

On the other hand, respondent counters that the waiver is void because it did not comply with RMO No. 20-90.
Respondent assails the waiver because (1) it was not signed by the Commissioner despite the fact that the assessment
involves an amount of more than P1 million; (2) there is no stated date of acceptance by the Commissioner or his duly
authorized representative; and (3) it was not furnished a copy of the BIR-accepted waiver. Respondent also
cites Philippine Journalists, Inc. v. Commissioner of Internal Revenue13 and contends that the procedures in RMO No. 20-
90 are mandatory in character, precisely to give full effect to Section 222 (b) of the NIRC. Moreover, a waiver of the
statute of limitations is not a waiver of the right to invoke the defense of prescription.14

After considering the issues and the submissions of the parties in the light of the facts of this case, we are in agreement
that the petition lacks merit.

Under Section 20315 of the NIRC, internal revenue taxes must be assessed within three years counted from the period
fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the
question of prescription of the government’s right to assess internal revenue taxes primarily to safeguard the interests
of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time
so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer
be subjected to further investigation for taxes after the expiration of reasonable period of time.16

An exception to the three-year prescriptive period on the assessment of taxes is Section 222 (b) of the NIRC, which
provides:

xxxx

(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.

xxxx

The above provision authorizes the extension of the original three-year period by the execution of a valid waiver, where
the taxpayer and the BIR agreed in writing that the period to issue an assessment and collect the taxes due is extended
to an agreed upon date. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures
should be followed:

1. The waiver must be in the form identified as Annex "A" hereof….

2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its responsible officials.

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official
authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and
agreed to the waiver. The date of such acceptance by the Bureau should be indicated. Both the date of
execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period
of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

xxxx

3. Commissioner For tax cases involving more than P1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases still pending investigation and the
period to assess is about to prescribe regardless of amount.

xxxx

4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the
case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of
receipt by the taxpayer of his/her file copy shall be indicated in the original copy.

5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this
Order resulting in prescription of the right to assess/collect shall be administratively dealt with. (Emphasis
supplied.)

Applying RMO No. 20-90, the waiver in question here was defective and did not validly extend the original three-year
prescriptive period. Firstly, it was not proven that respondent was furnished a copy of the BIR-accepted waiver.
Secondly, the waiver was signed only by a revenue district officer, when it should have been signed by the Commissioner
as mandated by the NIRC and RMO No. 20-90, considering that the case involves an amount of more than P1 million,
and the period to assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance by the
Commissioner of Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before
the expiration of the original three-year period. Bear in mind that the waiver in question is a bilateral agreement, thus
necessitating the very signatures of both the Commissioner and the taxpayer to give birth to a valid agreement.17
Petitioner contends that the procedures in RMO No. 20-90 are merely directory and that the execution of a waiver was a
renunciation of respondent’s right to invoke prescription. We do not agree. RMO No. 20-90 must be strictly followed.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue,18 we ruled that a waiver of the statute of limitations
under the NIRC, to a certain extent being a derogation of the taxpayer’s right to security against prolonged and
unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of limitations does not
mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of
the document is equivocal.19 Notably, in this case, the waiver became unlimited in time because it did not specify a
definite date, agreed upon between the BIR and respondent, within which the former may assess and collect taxes. It
also had no binding effect on respondent because there was no consent by the Commissioner. On this basis, no implied
consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality.20

Consequently, petitioner cannot rely on its invocation of the rule that the government cannot be estopped by the
mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription 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 recommended the approval of the law. To the Government, its tax officers
are obliged to act promptly in the making of assessment so that taxpayers, after the lapse of the period of prescription,
would have a feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the
books of taxpayers, not to determine the latter’s real liability, but to take advantage of a possible opportunity to harass
even law-abiding businessmen. Without such legal defense, taxpayers would be open season to harassment by
unscrupulous tax agents.21

In fine, Assessment Notice No. 33-1-00487-95 dated October 25, 1999, was issued beyond the three-year prescriptive
period. The waiver was incomplete and defective and thus, the three-year prescriptive period was not tolled nor
extended and continued to run until April 15, 1999. Even if the three-year period be counted from May 8, 1996, the date
of filing of the amended return, assuming the amended return was substantially different from the original return, a
case which affects the reckoning point of the prescriptive period,22 still, the subject assessment is definitely considered
time-barred.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated January 31, 2005 and
April 14, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 79675 are hereby AFFIRMED. No pronouncement
as to costs.

SO ORDERED.

i. G.R. No. 187589 December 3, 2014

COMMISSIONER OF INTERNAL REVENUE vs. THE STANLEY WORKS SALES (PHILS.), INCORPORATED

This is a Petition for Review on Certiorari1 filed by the Commissioner of Internal Revenue (petitioner) under Rule 45 of
the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 27 February
2009 and Resolution3 dated 24 April 2009 in C.T.A. EB No. 406.

THE FACTS

The pertinent findings of fact of the CTA En Banc are as follows:

Petitioner is the duly appointed officer of the Bureau of Internal Revenue (BIR) mandated to exercise the powers and
perform the duties of his office including, among others, the power to decide disputed assessments, refunds of internal
revenue taxes, fees and other charges, penalties imposed in relation thereto, or other matters arising under the National
Internal Revenue Code. Respondent, on the other hand, is a domestic corporation duly organized and existing under
Philippine laws and duly registered with the Securities and Exchange Commission. Its office address is at the 5th Floor,
Pan Pacific Hotel, Adriatico Street corner Gen. Malvar Street, Manila.

Respondent is authorized "to engage in the business of designing, manufacturing, fabricating, or otherwise producing,
and the purchase, sale at whole sale, importation, export, distribution, marketing or otherwise dealing with,
construction and hardware materials, tools, fixtures and equipment."

On January 1, 1979, respondent and Stanley Works Agencies (Pte.) Limited, Singapore (Stanley-Singapore) entered into a
Representation Agreement. Under such agreement, Stanley-Singapore appointed respondent as its sole agent for the
selling of its products within the Philippines on an indent basis.

On April 16, 1990, respondent filed with the BIR its Annual Income Tax Return for taxable year 1989.
On March 19, 1993, pursuant to Letter of Authority dated July 3, 1992, the BIR issued against respondent a Pre-
Assessment Notice (PAN) No. 002523 for 1989 deficiency income tax.

On March 29, 1993, respondent received its copy of the PAN.

On April 12, 1993, petitioner, through OTC Domingo C. Paz of Revenue Region No. 4B-2 of Makati, issued to respondent
Assessment Notice No. 002523-89-6014 for deficiency income tax for taxable year 1989. The Notice was sent on April
15, 1993 and respondent received it on April 21, 1993.

On May 19, 1993, respondent, through its external auditors Punongbayan & Araullo, filed a protest letter and requested
reconsideration and cancellation of the assessment.

On November 16, 1993, a certain Mr. John Ang, on behalf of respondent, executed a "Waiver of the Defense of
Prescription Under the Statute of Limitations of the National Internal Revenue Code" (Waiver). Under the terms of the
Waiver, respondent waived its right to raise the defense of prescription under Section 223 of the NIRC of 1977 insofar as
the assessment and collection of any deficiency taxes for the year ended December 31, 1989, but not after June 30,
1994. The Waiver was not signed by petitioner or any of his authorized representatives and did not state the date of
acceptance as prescribed under Revenue Memorandum Order No. 20-90. Respondent did not execute any other Waiver
or similar document before or after the expiration of the November 16, 1993 Waiver on June 30, 1994.

On January 6, 1994, respondent, through its external auditors Punongbayan & Araullo, wrote a letter to the Chief of the
BIR Appellate Division and requested the latter to take cognizance of respondent's protest/request for reconsideration,
asserting that the dispute involved pure questions of law. On February 22, 1994, respondent sent a similar letter to the
Revenue District Officer (RDO) of BIR Revenue Region No. 4B-2 and asked for the transmittal of the entire docket of the
subject tax assessment to the BIR Appellate Division.

On September 30, 1994, respondent, through its external auditors Punongbayan & Araullo, submitted a Supplemental
Memorandum on its protest to the BIR Revenue Region No. 4B-2.

On September 20, 1995, respondent, through its external auditors Punongbayan & Araullo, filed a Supplemental
Memorandum with the BIR Appellate Division.

On November 29, 2001, the Chief of the BIR Appellate Division sent a letter to respondent requiring it to submit duly
authenticated financial statements for the worldwide operations of Stanley Works and a sworn declaration from the
home office on the allocated share of respondent as a "branch office."

On December 11, 2001, respondent, through its counsel, the Quisumbing Torres Law Offices, wrote the BIR Appellate
Division and asked for an extension of period within which to comply with the request for submission of documents. On
January 15, 2002, respondent sent a request for an extension of period to submit a Supplemental Memorandum.

On March 4, 2002, respondent, through its counsel, the Quisumbing Torres Law Offices, submitted a Supplemental
Memorandum alleging, inter alia, that petitioner's right to collect the alleged deficiency income tax has prescribed.

On March 22, 2004, petitioner rendered a Decision denying respondent’s request for reconsideration and ordering
respondent to pay the deficiency income tax plus interest that may have accrued. The dispositive portion reads:

IN VIEW WHEREOF, this Office resolves, as it hereby resolves, to DENY the request for reconsideration of STANLEY
WORK SALES (Philippines), INC. dated May 19, 1993 of Assessment No. 002523-89-6014 dated April 12, 1993 issued by
this Bureau demanding payment of the total amount of Php41,284,968.34 as deficiency income tax for taxable year
1989. Consequently, Stanley Works Sales (Philippines), Inc. is hereby ordered to pay the above-stated amount plus
interest that may have accrued thereon to the Collection Service, within thirty (30) days from receipt hereof, otherwise,
collection will be effected through the summary remedies provided by law.

This constitutes the final decision of this Office on the matter.

On March 30, 2004, respondent received its copy of the assailed Decision. Hence, on April 28, 2004, respondent filed
before the Court in Division a Petition for Review docketed as C.T.A. Case No. 6971 entitled "The Stanley Works Sales
(Philippines), Inc., petitioner, vs. Commissioner of Internal Revenue, respondent. x x x

THE CTA FIRST DIVISION RULING4

After trial on the merits, the CTA First Division found that although the assessment was made within the prescribed
period, the period within which petitioner may collect deficiency income taxes had already lapsed. Accordingly, the
court cancelled Assessment Notice No. 002523-89-6014 dated 12 April 1993.

The CTA Division ruled that the request for reconsideration did not suspend the running of the prescriptive period to
collect deficiency income tax. There was no valid waiver of the statute of limitations, as the following infirmities were
found: (1) there was no conformity, either by respondent or his duly authorized representative; (2) there was no date of
acceptance to show that both parties had agreed on the Waiver before the expiration of the prescriptive period; and (3)
there was no proof that respondent was furnished a copy of the Waiver. Applying jurisprudence and relevant BIR rulings,
the waiver was considered defective; thus, the period for collection of deficiency income tax had already prescribed.

THE CTA EN BANC RULING5

The CTA En Banc affirmed the CTA First Division Decision dated 6 May 2008 and Resolution dated 14 July 2008. The
Waiver executed by respondent on 16 November 1993 could not be used by petitioner as a basis for extending the
period of assessment and collection, as there was no evidence that the latter had acted upon the waiver. Hence, the
unilateral act of respondent in executing said document did not produce any effect on the prescriptive period for the
assessment and collection of its deficiency tax. As to the issue of estoppel, the court ruled that this measure could not
be used against respondent, as it was petitioner who had failed to act within the prescribed period on the protest asking
for a reconsideration of the assessment. ISSUES

In the present recourse, petitioner raises the following issues:

Whether or not petitioner’s right to collect the deficiency income tax of respondent for taxable year 1989 has
prescribed.

Whether or not respondent’s repeated requests and positive acts constitute "estoppel" from setting up the defense of
prescription under the NIRC.6

THE COURT’S RULING

We deny the Petition.

Petitioner mainly argues that in view of respondent’s execution of the Waiver of the statute of limitations, the period to
collect the assessed deficiency income taxes has not yet prescribed.

The resolution of the main issue requires a factual determination of the proper execution of the Waiver. The CTA
Division has already made a factual finding on the infirmities of the Waiver executed by respondent on 16 November
1993. The Court found that the following requisites were absent:

(1) Conformity of either petitioner or a duly authorized representative;

(2) Date of acceptance showing that both parties had agreed on the Waiver before the expiration of the
prescriptive period; and

(3) Proof that respondent was furnished a copy of the Waiver.7

These findings are undisputed by petitioner. In fact, it cites BPI v. CIR8 to support its contention that the approval of the
CIR need not be express, but may be implied from the acts of the BIR officials in response to the request for
reinvestigation. Accordingly, petitioner argues that the actual approval of the Waiver is apparent from the proceedings
that were additionally conducted indetermining the propriety of the subject assessment.9

We do not agree.

The statute of limitations on the right to assess and collect a tax means that once the period established by law for the
assessment and collection of taxes has lapsed, the government’s corresponding right to enforce that action is barred by
provision of law.

The period to assess and collect deficiency taxes may be extended only upon a written agreement between the CIR and
the taxpayer prior to the expiration of the three-year prescribed period in accordance with Section 222 (b) of the NIRC.
In relation to the implementation of this provision, the CIR issued Revenue Memorandum Order (RMO) No. 20-9010 on 4
April 1990 to provide guidelines on the proper execution of the Waiver of the Statute of Limitations. In the execution of
this waiver, the following procedures should be followed:
 1. The waiver must be in the form identified hereof. This form may be reproduced by the Office concerned but
there should be no deviation from such form. The phrase "but not after __________ 19___" should be filled up x
xx

2. x x x x

Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official
authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and
agreed to the waiver. The date of such acceptance by the Bureau should be indicated. x x x.

3. The following revenue officials are authorized to sign the waiver.

A. In the National Office

xxxx

3. Commissioner For tax cases involving more than 1M

B. In the Regional Offices

1. The Revenue District Officer with respect to tax cases still pending investigation and the period toassess is
about to prescribe regardless of amount.

xxxx

5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this
Order resulting in prescription of the right to assess/collect shall be administratively dealt with.

Furthermore, jurisprudence is replete with requisites of a valid waiver:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after ______ 19 ___",
which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year
period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by
the taxpayer toa representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted
and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed
form, duly notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent
agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the
second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement.11

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue,12 the Court categorically stated that a Waiver must
strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in RMO No. 20-90, as ruled
upon by this Court, was recognized by the BIR itself in the latter’s subsequent issuances, namely, Revenue Memorandum
Circular (RMC) Nos. 6-200513 and 29-2012.14 Thus, the BIR cannot claim the benefits of extending the period to collect
the deficiency tax as a consequence of the Waiver when, in truth it was the BIR’s inaction which is the proximate cause
of the defects of the Waiver. The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90,
as they have the burden of securing the right of the government to assess and collect tax deficiencies. This right would
prescribe absent any showing of a valid extension of the period set by the law.
To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by conforming to
or by disagreeing with the extension. A waiver of the statute of limitations, whether on assessment or collection, should
not be construed asa 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 imply that the taxpayer relinquishes the right to invoke prescription unequivocally.15

Although we recognize that the power of taxation is deemed inherent in order to support the government, tax
provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to both the
taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery ofrevenues. A
statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a purpose that
would benefit both the taxpayer and the government.

This Court has expounded on the significance of adopting a statute of limitation on tax assessment and collection in this
case:

The provision of law on prescription was adopted in our statute books upon recommendation of the tax commissioner
of the Philippines which declares:

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

The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and
to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment,
and to citizens because after the lapse of the period of prescription citizens would havea feeling of security against
unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latter's
real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such legal
defense taxpayers would furthermore be under obligation to always keep their books and keep them open for
inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should
be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer
within the contemplation of the Commission which recommends the approval of the law.16

Anent the second issue, we do not agree with petitioner that respondent is now barred from setting up the defense of
prescription by arguing that the repeated requests and positive acts of the latter constituted estoppels, as these were
attempts to persuade the CIR to delay the collection of respondent’s deficiency income tax.

True, respondent filed a Protest and asked for a reconsideration and cancellation of the assessment on 19 May 1993;
however, it is uncontested that petitioner failed to act on that Protest until 29 November 2001, when the latter required
the submission of other supporting documents. In fact, the Protest was denied only on 22 March 2004.

Petitioner’s reliance on CIR v. Suyoc17 (Suyoc) is likewise misplaced. In Suyoc, the BIR was induced to extend the
collection of tax through repeated requests for extension to pay and for reinvestigation, which were all denied by the
Collector. Contrarily, herein respondent filed only one Protest over the assessment, and petitioner denied it 10 years
after. The subsequent letters of respondent cannot be construed as inducements to extend the period of limitation,
since the letters were intended to urge petitioner to act on the Protest, and not to persuade the latter to delay the
actual collection.

Petitioner cannot take refuge in BPI18 either, considering that respondent and BPI are similarly situated.1a\^/phi1 Similar
to BP I, this is a simple case in which the BIR Commissioner and other BIR officials failed to act promptly in resolving and
denying the request for reconsideration filed by the taxpayer and in enforcing the collection on the assessment. Both in
BP I and in this case, the BIR presented no reason or explanation as to why it took many years to address the Protest of
the taxpayer. The statute of limitations imposed by the Tax Code precisely intends to protect the taxpayer from
prolonged and unreasonable assessment and investigation by the BIR.19

Even assuming arguendo that the Waiver executed by respondent on 16 November 1993 is valid, the right of petitioner
to collect the deficiency income tax for the year 1989 would have already prescribed by 2001 when the latter first acted
upon the protest, more so in 2004 when it finally denied the reconsideration. Records show that the Waiver extends
only for the period ending 30 June 1994, and that there were no further extensions or waivers executed by respondent.
Again, a waiver is not a unilateral act of the taxpayer or the BIR, but is a bilateral agreement between two parties to
extend the period to a date certain.20

Since the Waiver in this case is defective and therefore invalid, it produces no effect; thus, the prescriptive period for
collecting deficiency income tax for taxable year 1989 was never suspended or tolled. Consequently, the right to enforce
collection based on Assessment Notice No. 002523-89-6014 has already prescribed.

WHEREFORE, premises considered, the Petition is DENIED.

SO ORDERED.

j. See RMC 6-2005 for the format of the Waiver

k. Revenue Memorandum Order No. 14-2016

l. G.R. No. 178087 May 5, 2010

COMMISSIONER OF INTERNAL REVENUE vs. KUDOS METAL CORPORATION

The prescriptive period on when to assess taxes benefits both the government and the taxpayer.1 Exceptions extending
the period to assess must, therefore, be strictly construed.

This Petition for Review on Certiorari seeks to set aside the Decision2 dated March 30, 2007 of the Court of Tax Appeals
(CTA) affirming the cancellation of the assessment notices for having been issued beyond the prescriptive period and the
Resolution3 dated May 18, 2007 denying the motion for reconsideration.

Factual Antecedents

On April 15, 1999, respondent Kudos Metal Corporation filed its Annual Income Tax Return (ITR) for the taxable year
1998.

Pursuant to a Letter of Authority dated September 7, 1999, the Bureau of Internal Revenue (BIR) served upon
respondent three Notices of Presentation of Records. Respondent failed to comply with these notices, hence, the BIR
issued a Subpeona Duces Tecum dated September 21, 2006, receipt of which was acknowledged by respondent’s
President, Mr. Chan Ching Bio, in a letter dated October 20, 2000.

A review and audit of respondent’s records then ensued.

On December 10, 2001, Nelia Pasco (Pasco), respondent’s accountant, executed a Waiver of the Defense of
Prescription,4 which was notarized on January 22, 2002, received by the BIR Enforcement Service on January 31, 2002
and by the BIR Tax Fraud Division on February 4, 2002, and accepted by the Assistant Commissioner of the Enforcement
Service, Percival T. Salazar (Salazar).

This was followed by a second Waiver of Defense of Prescription5 executed by Pasco on February 18, 2003, notarized on
February 19, 2003, received by the BIR Tax Fraud Division on February 28, 2003 and accepted by Assistant Commissioner
Salazar.

On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the taxable year 1998 against the respondent.
This was followed by a Formal Letter of Demand with Assessment Notices for taxable year 1998, dated September 26,
2003 which was received by respondent on November 12, 2003.

Respondent challenged the assessments by filing its "Protest on Various Tax Assessments" on December 3, 2003 and its
"Legal Arguments and Documents in Support of Protests against Various Assessments" on February 2, 2004.

On June 22, 2004, the BIR rendered a final Decision6 on the matter, requesting the immediate payment of the following
tax liabilities:

Kind of Tax Amount

Income Tax ₱ 9,693,897.85

VAT 13,962,460.90
 EWT 1,712,336.76

Withholding Tax-Compensation 247,353.24

Penalties 8,000.00

Total ₱25,624,048.76

Ruling of the Court of Tax Appeals, Second Division

Believing that the government’s right to assess taxes had prescribed, respondent filed on August 27, 2004 a Petition for
Review7 with the CTA. Petitioner in turn filed his Answer.8

On April 11, 2005, respondent filed an "Urgent Motion for Preferential Resolution of the Issue on Prescription."9

On October 4, 2005, the CTA Second Division issued a Resolution10 canceling the assessment notices issued against
respondent for having been issued beyond the prescriptive period. It found the first Waiver of the Statute of Limitations
incomplete and defective for failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90.
Thus:

First, the Assistant Commissioner is not the revenue official authorized to sign the waiver, as the tax case involves more
than ₱1,000,000.00. In this regard, only the Commissioner is authorized to enter into agreement with the petitioner in
extending the period of assessment;

Secondly, the waiver failed to indicate the date of acceptance. Such date of acceptance is necessary to determine
whether the acceptance was made within the prescriptive period;

Third, the fact of receipt by the taxpayer of his file copy was not indicated on the original copy. The requirement to
furnish the taxpayer with a copy of the waiver is not only to give notice of the existence of the document but also of the
acceptance by the BIR and the perfection of the agreement.1avvphi1

The subject waiver is therefore incomplete and defective. As such, the three-year prescriptive period was not tolled or
extended and continued to run. x x x11

Petitioner moved for reconsideration but the CTA Second Division denied the motion in a Resolution12 dated April 18,
2006.

Ruling of the Court of Tax Appeals, En Banc

On appeal, the CTA En Banc affirmed the cancellation of the assessment notices. Although it ruled that the Assistant
Commissioner was authorized to sign the waiver pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it
found that the first waiver was still invalid based on the second and third grounds stated by the CTA Second Division.
Pertinent portions of the Decision read as follows:

While the Court En Banc agrees with the second and third grounds for invalidating the first waiver, it finds that the
Assistant Commissioner of the Enforcement Service is authorized to sign the waiver pursuant to RDAO No. 05-01, which
provides in part as follows:

A. For National Office cases

Designated Revenue Official

1. Assistant Commissioner (ACIR), For tax fraud and policy Enforcement Service cases

2. ACIR, Large Taxpayers Service For large taxpayers cases other than those cases falling under Subsection B hereof

3. ACIR, Legal Service For cases pending verification and awaiting resolution of certain legal issues prior to prescription
and for issuance/compliance of Subpoena Duces Tecum

4. ACIR, Assessment Service (AS) For cases which are pending in or subject to review or approval by the ACIR, AS
Based on the foregoing, the Assistant Commissioner, Enforcement Service is authorized to sign waivers in tax fraud
cases. A perusal of the records reveals that the investigation of the subject deficiency taxes in this case was conducted
by the National Investigation Division of the BIR, which was formerly named the Tax Fraud Division. Thus, the subject
assessment is a tax fraud case.

Nevertheless, the first waiver is still invalid based on the second and third grounds stated by the Court in Division.
Hence, it did not extend the prescriptive period to assess.

Moreover, assuming arguendo that the first waiver is valid, the second waiver is invalid for violating Section 222(b) of
the 1997 Tax Code which mandates that the period agreed upon in a waiver of the statute can still be extended by
subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. As
previously discussed, the exceptions to the law on prescription must be strictly construed.

In the case at bar, the period agreed upon in the subject first waiver expired on December 31, 2002. The second waiver
in the instant case which was supposed to extend the period to assess to December 31, 2003 was executed on February
18, 2003 and was notarized on February 19, 2003. Clearly, the second waiver was executed after the expiration of the
first period agreed upon. Consequently, the same could not have tolled the 3-year prescriptive period to assess.13

Petitioner sought reconsideration but the same was unavailing.

Issue

Hence, the present recourse where petitioner interposes that:

THE COURT OF TAX APPEALS EN BANC ERRED IN RULING THAT THE GOVERNMENT’S RIGHT TO ASSESS UNPAID TAXES OF
RESPONDENT PRESCRIBED.14

Petitioner’s Arguments

Petitioner argues that the government’s right to assess taxes is not barred by prescription as the two waivers executed
by respondent, through its accountant, effectively tolled or extended the period within which the assessment can be
made. In disputing the conclusion of the CTA that the waivers are invalid, petitioner claims that respondent is estopped
from adopting a position contrary to what it has previously taken. Petitioner insists that by acquiescing to the audit
during the period specified in the waivers, respondent led the government to believe that the "delay" in the process
would not be utilized against it. Thus, respondent may no longer repudiate the validity of the waivers and raise the issue
of prescription.

Respondent’s Arguments

Respondent maintains that prescription had set in due to the invalidity of the waivers executed by Pasco, who executed
the same without any written authority from it, in clear violation of RDAO No. 5-01. As to the doctrine of estoppel by
acquiescence relied upon by petitioner, respondent counters that the principle of equity comes into play only when the
law is doubtful, which is not present in the instant case.

Our Ruling

The petition is bereft of merit.

Section 20315 of the National Internal Revenue Code of 1997 (NIRC) mandates the government to assess internal
revenue taxes within three years from the last day prescribed by law for the filing of the tax return or the actual date of
filing of such return, whichever comes later. Hence, an assessment notice issued after the three-year prescriptive period
is no longer valid and effective. Exceptions however are provided under Section 22216 of the NIRC.

The waivers executed by respondent’s accountant did not extend the period within which the assessment can be made

Petitioner does not deny that the assessment notices were issued beyond the three-year prescriptive period, but claims
that the period was extended by the two waivers executed by respondent’s accountant.

We do not agree.

Section 222 (b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written
agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-
9017 issued on April 4, 1990 and RDAO 05-0118 issued on August 2, 2001 lay down the procedure for the proper
execution of the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after ______ 19 ___",
which indicates the expiry date of the period agreed upon to assess/collect the tax after the regular three-year
period of prescription, should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a
corporation, the waiver must be signed by any of its responsible officials. In case the authority is delegated by
the taxpayer to a representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted
and agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing
the waiver, the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed
form, duly notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the
expiration of the period of prescription or before the lapse of the period agreed upon in case a subsequent
agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the
second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the
taxpayer of his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the
acceptance of the BIR and the perfection of the agreement.19

A perusal of the waivers executed by respondent’s accountant reveals the following infirmities:

1. The waivers were executed without the notarized written authority of Pasco to sign the waiver in behalf of
respondent.

2. The waivers failed to indicate the date of acceptance.

3. The fact of receipt by the respondent of its file copy was not indicated in the original copies of the waivers.

Due to the defects in the waivers, the period to assess or collect taxes was not extended. Consequently, the assessments
were issued by the BIR beyond the three-year period and are void.

Estoppel does not apply in this case

We find no merit in petitioner’s claim that respondent is now estopped from claiming prescription since by executing
the waivers, it was the one which asked for additional time to submit the required documents.

In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,20 the doctrine of estoppel prevented the
taxpayer from raising the defense of prescription against the efforts of the government to collect the assessed tax.
However, it must be stressed that in the said case, estoppel was applied as an exception to the statute of limitations
on collection of taxes and not on the assessment of taxes, as the BIR was able to make an assessment within the
prescribed period. More important, there was a finding that the taxpayer made several requests or positive acts to
convince the government to postpone the collection of taxes, viz:

It appears that the first assessment made against respondent based on its second final return filed on November 28,
1946 was made on February 11, 1947. Upon receipt of this assessment respondent requested for at least one year
within which to pay the amount assessed although it reserved its right to question the correctness of the assessment
before actual payment. Petitioner granted an extension of only three months. When it failed to pay the tax within the
period extended, petitioner sent respondent a letter on November 28, 1950 demanding payment of the tax as assessed,
and upon receipt of the letter respondent asked for a reinvestigation and reconsideration of the assessment. When this
request was denied, respondent again requested for a reconsideration on April 25, 1952, which was denied on May 6,
1953, which denial was appealed to the Conference Staff. The appeal was heard by the Conference Staff from
September 2, 1953 to July 16, 1955, and as a result of these various negotiations, the assessment was finally reduced on
July 26, 1955. This is the ruling which is now being questioned after a protracted negotiation on the ground that the
collection of the tax has already prescribed.
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.

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 Cardozo has 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 has 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. vs. 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. vs. U.S., (DC-WIS), 34 F. Supp. 588].21

Conversely, in this case, the assessments were issued beyond the prescribed period. Also, there is no showing that
respondent made any request to persuade the BIR to postpone the issuance of the assessments.

The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on the assessment of
taxes considering that there is a detailed procedure for the proper execution of the waiver, which the BIR must strictly
follow. As we have often said, the doctrine of estoppel is predicated on, and has its origin in, equity which, broadly
defined, is justice according to natural law and right.22 As such, the doctrine of estoppel cannot give validity to an act
that is prohibited by law or one that is against public policy.23 It should be resorted to solely as a means of preventing
injustice and should not be permitted to defeat the administration of the law, or to accomplish a wrong or secure an
undue advantage, or to extend beyond them requirements of the transactions in which they originate.24 Simply put, the
doctrine of estoppel must be sparingly applied.

Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO
05-01, which the BIR itself issued. As stated earlier, the BIR failed to verify whether a notarized written authority was
given by the respondent to its accountant, and to indicate the date of acceptance and the receipt by the respondent of
the waivers. Having caused the defects in the waivers, the BIR must bear the consequence. It cannot shift the blame to
the taxpayer. To stress, a waiver of the statute of limitations, being a derogation of the taxpayer’s right to security
against prolonged and unscrupulous investigations, must be carefully and strictly construed.25

As to the alleged delay of the respondent to furnish the BIR of the required documents, this cannot be taken against
respondent. Neither can the BIR use this as an excuse for issuing the assessments beyond the three-year period because
with or without the required documents, the CIR has the power to make assessments based on the best evidence
obtainable.26

WHEREFORE, the petition is DENIED. The assailed Decision dated March 30, 2007 and Resolution dated May 18, 2007 of
the Court of Tax Appeals are hereby AFFIRMED.

SO ORDERED.

m. G.R. No. 170257 September 7, 2011

RIZAL COMMERCIAL BANKING CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE

This is a petition for review on certiorari under Rule 45 seeking to set aside the July 27, 2005 Decision1 and October 26,
2005 Resolution2 of the Court of Tax Appeals En Banc (CTA-En Banc) in C.T.A. E.B. No. 83 entitled "Rizal Commercial
Banking Corporation v. Commissioner of Internal Revenue."
 THE FACTS

Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation engaged in general banking operations. It
seasonably filed its Corporation Annual Income Tax Returns for Foreign Currency Deposit Unit for the calendar years
1994 and 1995.3

On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by then Commissioner of Internal
Revenue (CIR) Liwayway Vinzons-Chato, authorizing a special audit team to examine the books of accounts and other
accounting records for all internal revenue taxes from January 1, 1994 to December 31, 1995.4

On January 23, 1997, RCBC executed two Waivers of the Defense of Prescription Under the Statute of Limitations of the
National Internal Revenue Code covering the internal revenue taxes due for the years 1994 and 1995, effectively
extending the period of the Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.5

Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand together with Assessment Notices from
the BIR for the following deficiency tax assessments:6

Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (ST-INC-95-0199-2000) ₱ 252,150,988.01 ₱ 191,496,585.96 ₱ 25,000.00 ₱ 443,672,573.97
1994 (ST-INC-94-0200-2000) 216,478,397.90 207,819,261.99 25,000.00 424,322,659.89
Deficiency Gross Receipts Tax
1995 (ST-GRT-95-0201-2000) 13,697,083.68 12,428,696.21 2,819,745.52 28,945,525.41
1994 (ST-GRT-94-0202-2000) 2,488,462.38 2,755,716.42 25,000.00 5,269,178.80
Deficiency Final Withholding Tax
1995 (ST-EWT-95-0203-2000) 64,365,610.12 58,757,866.78 25,000.00 123,148,477.15
1994 (ST-EWT-94-0204-2000) 53,058,075.25 59,047,096.34 25,000.00 112,130,171.59
Deficiency Final Tax on FCDU Onshore Income
1995 (ST-OT-95-0205-2000) 81,508,718.20 61,901,963,.52 25,000.00 143,435,681.72
1994 (ST-OT-94-0206-2000) 34,429,503.10 33,052,322.98 25,000.00 67,506,826.08
Deficiency Expanded Withholding Tax
1995 (ST-EWT-95-0207-2000) 5,051,415.22 4,583,640.33 113,000.00 9,748,055.55
1994 (ST-EWT-94-0208-2000) 4,482,740.35 4,067,626.31 78,200.00 8,628,566.66
Deficiency Documentary Stamp Tax
1995 (ST-DST1-95-0209-2000) 351,900,539.39 315,804,946.26 250,000.00 667,955,485.65
1995 (ST-DST2-95-0210-2000) 367,207,105.29 331,535,844.68 300,000.00 699,042,949.97
1994 (ST-DST3-94-0211-2000) 460,370,640.05 512,193,460.02 300,000.00 972,864,100.07
1994 (ST-DST4-94-0212-2000) 223,037,675.89 240,050,706.09 300,000.00 463,388,381.98

TOTALS ₱2,130,226,954.83 ₱2,035,495,733.89 ₱4,335,945.52 ₱4,170,058,634.49

Disagreeing with the said deficiency tax assessment, RCBC filed a protest on February 24, 2000 and later submitted the
relevant documentary evidence to support it. Much later on November 20, 2000, it filed a petition for review before the
CTA, pursuant to Section 228 of the 1997 Tax Code.7

On December 6, 2000, RCBC received another Formal Letter of Demand with Assessment Notices dated October 20,
2000, following the reinvestigation it requested, which drastically reduced the original amount of deficiency taxes to the
following:8

Particulars Basic Tax Interest Compromise Penalties Total

Deficiency Income Tax

1995 (INC-95-000003) ₱ 374,348.45 ₱ 346,656.92 ₱ 721,005.37
1994 (INC-94-000002) 1,392,366.28 1,568,605.52 2,960,971.80
Deficiency Gross Receipts Tax
1995 (GRT-95-000004) 2,000,926.96 3,322,589.63 ₱ 1,367,222.04 6,690,738.63
1994 (GRT-94-000003) 138,368.61 161,872.32 300,240.93
Deficiency Final Withholding Tax
1995 (FT-95-000005) 362,203.47 351,287.75 713,491.22
1994 (FT-94-000004) 188,746.43 220,807.47 409,553.90
Deficiency Final Tax on FCDU Onshore Income
1995 (OT-95-000006) 81,508,718.20 79,052,291.08 160,561,009.28
1994 (OT-94-000005) 34,429,503.10 40,277,802.26 74,707,305.36
Deficiency Expanded Withholding Tax
1995 (EWT-95-000004) 520,869.72 505,171.80 25,000.00 1,051,041.03
1994 (EWT-94-000003) 297,949.95 348,560.63 25,000.00 671,510.58
Deficiency Documentary Stamp Tax
1995 (DST-95-000006) 599,890.72 149,972.68 749,863.40
1995 (DST2-95-000002) 24,953,842.46 6,238,460.62 31,192,303.08
1994 (DST-94-000005) 905,064.74 226,266.18 1,131,330.92
1994 (DST2-94-000001) 17,040,104.84 4,260,026.21 21,300,131.05

TOTALS ₱ 164,712,903.44 ₱ 126,155,645.38 ₱ 12,291,947.73 ₱ 303,160,496.55

On the same day, RCBC paid the following deficiency taxes as assessed by the BIR:9

Particulars 1994 1995 Total

Deficiency Income Tax ₱ 2,965,549.44 ₱ 722,236.11 ₱ 3,687,785.55

Deficiency Gross Receipts Tax 300,695.84 6,701,893.17 7,002,589.01

Deficiency Final Withholding Tax 410,174.44 714,682.02 1,124,856.46

Deficiency Expanded Withholding Tax 672,490.14 1,052,753.48 1,725,243.62

Deficiency Documentary Stamp Tax 1,131,330.92 749,863.40 1,881,194.32

TOTALS ₱ 5,480,240.78 ₱ 9,941,428.18 ₱ 15,421,668.96

RCBC, however, refused to pay the following assessments for deficiency onshore tax and documentary stamp tax which
remained to be the subjects of its petition for review:10

Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income

Basic ₱ 34,429,503.10 ₱ 81,508,718.20 ₱ 115,938,221.30

Interest 40,277,802.26 79,052,291.08 119,330,093.34

Sub Total ₱ 74,707,305.36 ₱ 160,561,009.28 ₱ 235,268,314.64

Deficiency Documentary Stamp Tax

Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30

Surcharge 4,260,026.21 6,238,460.62 10,498,486.83

Sub Total ₱ 21,300,131.05 ₱ 31,192,303.08 ₱ 52,492,434.13

TOTALS ₱ 96,007,436.41 ₱ 191,753,312.36 ₱ 287,760,748.77

RCBC argued that the waivers of the Statute of Limitations which it executed on January 23, 1997 were not valid because
the same were not signed or conformed to by the respondent CIR as required under Section 222(b) of the Tax Code.11 As
regards the deficiency FCDU onshore tax, RCBC contended that because the onshore tax was collected in the form of a
final withholding tax, it was the borrower, constituted by law as the withholding agent, that was primarily liable for the
remittance of the said tax.12

On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First Division) promulgated its
Decision13 which partially granted the petition for review. It considered as closed and terminated the assessments for
deficiency income tax, deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded withholding
tax, and deficiency documentary stamp tax (not an industry issue) for 1994 and 1995.14 It, however, upheld the
assessment for deficiency final tax on FCDU onshore income and deficiency documentary stamp tax for 1994 and 1995
and ordered RCBC to pay the following amounts plus 20% delinquency tax:15

Particulars 1994 1995 Total

Deficiency Final Tax on FCDU Onshore Income

Basic ₱ 22,356,324.43 ₱ 16,067,952.86 ₱ 115,938, 221.30

Interest 26,153,837.08 15,583,713.19 119,330,093.34

Sub Total 48,510,161.51 31,651,666.05 119,330,093.34

Deficiency Documentary Stamp Tax (Industry Issue)

Basic ₱ 17,040,104.84 ₱ 24,953,842.46 ₱ 41,993,947.30

Surcharge 4,260,026.21 6,238,460.62 10,498,486.83

Sub Total 21,300,131.05 31,192,303.08 52,492,434.13

TOTALS ₱ 69,810,292.56 ₱ 62,843,969.13 ₱ 171,822,527.47

Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005, arguing that: (1) the CTA erred in its addition
of the total amount of deficiency taxes and the correct amount should only be ₱ 132,654,261.69 and not ₱
171,822,527.47; (2) the CTA erred in holding that RCBC was estopped from questioning the validity of the waivers; (3) it
was the payor-borrower as withholding tax agent, and not RCBC, who was liable to pay the final tax on FCDU, and (4)
RCBC’s special savings account was not subject to documentary stamp tax.16

In its Resolution17 dated April 11, 2005, the CTA-First Division substantially upheld its earlier ruling, except for its
inadvertence in the addition of the total amount of deficiency taxes. As such, it modified its earlier decision and ordered
RCBC to pay the amount of ₱ 132,654,261.69 plus 20% delinquency tax.18

RCBC elevated the case to the CTA-En Banc where it raised the following issues:

I.

Whether or not the right of the respondent to assess deficiency onshore tax and documentary stamp tax for
taxable year 1994 and 1995 had already prescribed when it issued the formal letter of demand and
assessment notices for the said taxable years.

II.

Whether or not petitioner is liable for deficiency onshore tax for taxable year 1994 and 1995.

III.

Whether or not petitioner’s special savings account is subject to documentary stamp tax under then Section
180 of the 1993 Tax Code.19

The CTA-En Banc, in its assailed Decision, denied the petition for lack of merit. It ruled that by receiving, accepting and
paying portions of the reduced assessment, RCBC bound itself to the new assessment, implying that it recognized the
validity of the waivers.20 RCBC could not assail the validity of the waivers after it had received and accepted certain
benefits as a result of the execution of the said waivers.21 As to the deficiency onshore tax, it held that because the
payor-borrower was merely designated by law to withhold and remit the said tax, it would then follow that the tax
should be imposed on RCBC as the payee-bank.22 Finally, in relation to the assessment of the deficiency documentary
stamp tax on petitioner’s special savings account, it held that petitioner’s special savings account was a certificate of
deposit and, as such, was subject to documentary stamp tax.23

Hence, this petition.

While awaiting the decision of this Court, RCBC filed its Manifestation dated July 22, 2009, informing the Court that this
petition, relative to the DST deficiency assessment, had been rendered moot and academic by its payment of the tax
deficiencies on Documentary Stamp Tax (DST) on Special Savings Account (SSA) for taxable years 1994 and 1995 after
the BIR approved its applications for tax abatement.24

In its November 17, 2009 Comment to the Manifestation, the CIR pointed out that the only remaining issues raised in
the present petition were those pertaining to RCBC’s deficiency tax on FCDU Onshore Income for taxable years 1994 and
1995 in the aggregate amount of ₱ 80,161,827.56 plus 20% delinquency interest per annum. The CIR prayed that RCBC
be considered to have withdrawn its appeal with respect to the CTA-En Banc ruling on its DST on SSA deficiency for
taxable years 1994 and 1995 and that the questioned CTA decision regarding RCBC’s deficiency tax on FCDU Onshore
Income for the same period be affirmed.25

THE ISSUES

Thus, only the following issues remain to be resolved by this Court:

Whether petitioner, by paying the other tax assessment covered by the waivers of the statute of limitations, is
rendered estopped from questioning the validity of the said waivers with respect to the assessment of deficiency
onshore tax.26

and

Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which is mandated by law to be
collected at source in the form of a final withholding tax.27

THE COURT’S RULING

Petitioner is estopped from

questioning the validity of the waivers

RCBC assails the validity of the waivers of the statute of limitations on the ground that the said waivers were merely
attested to by Sixto Esquivias, then Coordinator for the CIR, and that he failed to indicate acceptance or agreement of
the CIR, as required under Section 223 (b) of the 1977 Tax Code.28 RCBC further argues that the principle of estoppel
cannot be applied against it because its payment of the other tax assessments does not signify a clear intention on its
part to give up its right to question the validity of the waivers.29

The Court disagrees.

Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the rule that "an admission or
representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the
person relying thereon." A party is precluded from denying his own acts, admissions or representations to the prejudice
of the other party in order to prevent fraud and falsehood.30

Estoppel is clearly applicable to the case at bench. RCBC, through its partial payment of the revised assessments issued
within the extended period as provided for in the questioned waivers, impliedly admitted the validity of those waivers.
Had petitioner truly believed that the waivers were invalid and that the assessments were issued beyond the
prescriptive period, then it should not have paid the reduced amount of taxes in the revised assessment. RCBC’s
subsequent action effectively belies its insistence that the waivers are invalid. The records show that on December 6,
2000, upon receipt of the revised assessment, RCBC immediately made payment on the uncontested taxes. Thus, RCBC
is estopped from questioning the validity of the waivers. To hold otherwise and allow a party to gainsay its own act or
deny rights which it had previously recognized would run counter to the principle of equity which this institution holds
dear.31

Liability for Deficiency

Onshore Withholding Tax

RCBC is convinced that it is the payor-borrower, as withholding agent, who is directly liable for the payment of onshore
tax, citing Section 2.57(A) of Revenue Regulations No. 2-98 which states:

(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as a full and final payment of the income tax due from the payee on the said
income. The liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his
failure to withhold the tax or in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for the particular income. (Emphasis
supplied)
The petitioner is mistaken.

Before any further discussion, it should be pointed out that RCBC erred in citing the abovementioned Revenue
Regulations No. 2-98 because the same governs collection at source on income paid only on or after January 1, 1998.
The deficiency withholding tax subject of this petition was supposed to have been withheld on income paid during the
taxable years of 1994 and 1995. Hence, Revenue Regulations No. 2-98 obviously does not apply in this case.

In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive Secretary,32 the Court has explained that the
purpose of the withholding tax system is three-fold: (1) to provide the taxpayer with a convenient way of paying his tax
liability; (2) to ensure the collection of tax, and (3) to improve the government’s cashflow. Under the withholding tax
system, the payor is the taxpayer upon whom the tax is imposed, while the withholding agent simply acts as an agent or
a collector of the government to ensure the collection of taxes.33 1avvphi1

It is, therefore, indisputable that the withholding agent is merely a tax collector and not a taxpayer, as elucidated by this
Court in the case of Commissioner of Internal Revenue v. Court of Appeals,34 to wit:

In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no more than
an agent of the government for the collection of the tax in order to ensure its payments; the payer is the taxpayer – he is
the person subject to tax imposed by law; and the payee is the taxing authority. In other words, the withholding agent is
merely a tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a payee by
fiction of law. His (agent) liability is direct and independent from the taxpayer, because the income tax is still imposed
on and due from the latter. The agent is not liable for the tax as no wealth flowed into him – he earned no
income. The Tax Code only makes the agent personally liable for the tax arising from the breach of its legal duty to
withhold as distinguished from its duty to pay tax since:

"the government’s cause of action against the withholding agent is not for the collection of income tax, but for the
enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer."35 (Emphases supplied)

Based on the foregoing, the liability of the withholding agent is independent from that of the taxpayer.1âwphi1 The
former cannot be made liable for the tax due because it is the latter who earned the income subject to withholding tax.
The withholding agent is liable only insofar as he failed to perform his duty to withhold the tax and remit the same to
the government. The liability for the tax, however, remains with the taxpayer because the gain was realized and
received by him.

While the payor-borrower can be held accountable for its negligence in performing its duty to withhold the amount of
tax due on the transaction, RCBC, as the taxpayer and the one which earned income on the transaction, remains liable
for the payment of tax as the taxpayer shares the responsibility of making certain that the tax is properly withheld by the
withholding agent, so as to avoid any penalty that may arise from the non-payment of the withholding tax due.

RCBC cannot evade its liability for FCDU Onshore Tax by shifting the blame on the payor-borrower as the withholding
agent. As such, it is liable for payment of deficiency onshore tax on interest income derived from foreign currency loans,
pursuant to Section 24(e)(3) of the National Internal Revenue Code of 1993:

Sec. 24. Rates of tax on domestic corporations.

xxxx

(e) Tax on certain incomes derived by domestic corporations

xxxx

(3) Tax on income derived under the Expanded Foreign Currency Deposit System. – Income derived by a depository bank
under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by
the Central Bank to transact business with foreign currency depository system units and other depository banks under
the expanded foreign currency deposit system shall be exempt from all taxes, except taxable income from such
transactions as may be specified by the Secretary of Finance, upon recommendation of the Monetary Board to be
subject to the usual income tax payable by banks: Provided, That interest income from foreign currency loans granted
by such depository banks under said expanded system to residents (other than offshore banking units in the
Philippines or other depository banks under the expanded system) shall be subject to a 10% tax. (Emphasis supplied)
As a final note, this Court has consistently held that findings and conclusions of the CTA shall be accorded the highest
respect and shall be presumed valid, in the absence of any clear and convincing proof to the contrary.36 The CTA, as a
specialized court dedicated exclusively to the study and resolution of tax problems, has developed an expertise on the
subject of taxation.37 As such, its decisions shall not be lightly set aside on appeal, unless this Court finds that the
questioned decision is not supported by substantial evidence or there is a showing of abuse or improvident exercise of
authority on the part of the Tax Court.38

WHEREFORE, the petition is DENIED.

SO ORDERED.

n. G.R. No. L-19727 May 20, 1965

THE COMMISSIONER OF INTERNAL REVENUE vs. PHOENIX ASSURANCE CO., LTD.

-----------------------------

G.R. No. L-19903 May 20, 1965

PHOENIX ASSURANCE, CO., LTD. vs. COMMISSIONER OF INTERNAL REVENUE

From a judgment of the Court of Tax Appeals in C.T.A. Cases Nos. 305 and 543, consolidated and jointly heard therein,
these two appeals were taken. Since they involve the same facts and interrelated issues, the appeals are herein decided
together.

Phoenix Assurance Co., Ltd., a foreign insurance corporation organized under the laws of Great Britain, is licensed to do
business in the Philippines with head office in London. Through its head office, it entered in London into worldwide
reinsurance treaties with various foreign insurance companies. It agree to cede a portion of premiums received on
original insurances underwritten by its head office, subsidiaries, and branch offices throughout the world, in
consideration for assumption by the foreign insurance companies of an equivalent portion of the liability from such
original insurances.1äwphï1.ñët

Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of the premiums it earned from its
underwriting business in the Philippines, as follows:

Year Amount Ceded

1952 P316,526.75

1953 P246,082.04

1954 P203,384.69

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

Year Withholding Tax

1952 P 75,966.42

1953 59,059.68

1954 48,812.32

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

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1950, claiming therein, among
others, a deduction of P37,147.04 as net addition to marine insurance reserve equivalent to 40% of the gross marine
insurance premiums received during the year. The Commissioner of Internal Revenue disallowed P11,772.57 of such
claim for deduction and subsequently assessed against Phoenix Assurance Co., Ltd. the sum of P1,884.00 as deficiency
income tax. The disallowance resulted from the fixing by the Commissioner of the net addition to the marine insurance
reserve at 100% of the marine insurance premiums received during the last three months of the year. The Commissioner
assumed that "ninety and third, days are approximately the length of time required before shipments reach their
destination or before claims are received by the insurance companies."

On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1952, declaring therein a
deduction from gross income of P35,912.25 as part of the head office expenses incurred for its Philippine business,
computed at 5% on its gross Philippine income.

On August 30, 1955 it amended its income tax return for 1952 by excluding from its gross income the amount of
P316,526.75 representing reinsurance premiums ceded to foreign reinsurers and further eliminating deductions
corresponding to the coded premiums. The amended return showed an income tax due in the amount of P2,502.00. The
Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction for head office expenses and
assessed a deficiency tax of P5,667.00 on July 24, 1958.

On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1953 and claimed therein a
deduction from gross income of P33,070.88 as head office expenses allocable to its Philippine business, equivalent to
5%, of its gross Philippine income. On August 30, 1955 it amended its 1953 income tax return to exclude from its gross
income the amount of P246,082.04 representing reinsurance premiums ceded to foreign reinsurers. At the same time, it
requested the refund of P23,409.00 as overpaid income tax for 1953. To avoid the prescriptive period provided for in
Section 306 of the Tax Code, it filed a petition for review on April 11, 1956 in the Court of Tax Appeals praying for such
refund. After verification of the amended income tax return the Commissioner of Internal Revenue disallowed
P12,304.10 of the deduction representing head office expenses allocable to Philippine business thereby reducing the
refundable amount to P20,180.00.

On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1954 claiming therein, among
others, a deduction from gross income of P99,624.75 as head office expenses allocable to its Philippine business,
computed at 5% of its gross Philippine income. It also excluded from its gross income the amount of P203,384.69
representing reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines.

On August 1, 1958 the Bureau of Internal Revenue released the following assessment for deficiency income tax for the
years 1952 and 1954 against Phoenix Assurance Co., Ltd.:

1952

Net income per audited return P 12,511.61

Unallowable deduction & additional income:

Overclaimed Head Office expenses:

Amount claimed . . . . . . . . . . . . P 35,912.25

Amount allowed . . . . . . . . . . . . 20,085.90 P 15,826.35

Net income per investigation P 28,337.96

Tax due thereon P 5,667.00

===========

1954

Net income per audited P160,320.21

Unallowable deduction & additional income:

Overclaimed Head Office expenses:

Amount claimed . . . . . . . . . . . . P29,624.73

Amount allowed . . . . . . . . . . . . 19,455.50 10,16.23

Net income per investigation P170,489.41

Tax due thereon P 39,737.00

 Less: amount already assessed 36,890.00

DEFICIENCY TAX DUE P 2,847.00

===========

The above assessment resulted from the disallowance of a portion of the deduction claimed by Phoenix Assurance Co.,
Ltd. as head office expenses allocable to its business in the Philippines fixed by the Commissioner at 5% of the net
Philippine income instead of 5% of the gross Philippine income as claimed in the returns.

Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for withholding tax and deficiency income tax.
However, the Commissioner of Internal Revenue denied such protest. Subsequently, Phoenix Assurance Co., Ltd.
appealed to the Court of Tax Appeals. In a decision dated February 14, 1962, the Court of Tax Appeals allowed in full the
decision claimed by Phoenix Assurance Co., Ltd. for 1950 as net addition to marine insurance reserve; determined the
allowable head office expenses allocable to Philippine business to be 5% of the net income in the Philippines; declared
the right of the Commissioner of Internal Revenue to assess deficiency income tax for 1952 to have prescribed; absolved
Phoenix Assurance Co., Ltd. from payment of the statutory penalties for non-filing of withholding tax return; and,
rendered the following judgment:

WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby ordered to pay the Commissioner of
Internal Revenue the respective amounts of P75,966.42, P59,059.68 and P48,812.32, as withholding tax for the
years 1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within thirty
(30) days from the date this decision becomes final. Upon the other hand, the respondent Commissioner is
ordered to refund to petitioner the sum of P20,180.00 as overpaid income tax for 1953, which sum is to be
deducted from the total sum of P186,685.42 due as taxes.

If any amount of the tax is not paid within the time prescribed above, there shall be collected a surcharge of 5%
of the tax unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment,
provided that the maximum amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. Without pronouncement as to costs.

Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have appealed to this Court raising the following
issues: (1) Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines
pursuant to reinsurance contracts executed abroad are subject to withholding tax; (2) Whether or not the right of the
Commissioner of Internal Revenue to assess deficiency income tax for the year 1952 against Phoenix Assurance Co., Ltd.,
has prescribed; (3) Whether or not the deduction of claimed by the Phoenix Assurance Co., Ltd.as net addition to reserve
for the year 1950 is excessive; (4) Whether or not the deductions claimed by Phoenix Assurance Co., Ltd. for head office
expenses allocable to Philippine business for the years 1952, 1953 and 1954 are excessive.

The question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines
pursuant to contracts executed abroad are income from sources within the Philippines subject to withholding tax under
Sections 53 and 54 of the Tax Code has already been resolved in the affirmative in British Traders' Insurance Co., Ltd.v.
Commisioner of Internal Revenue, L-20501, April 30, 1965. 1

We come to the issue of prescription. Phoenix Assurance Co., Ltd. filed its income tax return for 1952 on April 1, 1953
showing a loss of P199,583.93. It amended said return on August 30, 1955 reporting a tax liability of P2,502.00. On July
24, 1958, after examination of the amended return, the Commissioner of Internal Revenue assessed deficiency income
tax in the sum of P5,667.00. The Court of Tax Appeals found the right of the Commissioner of Internal Revenue barred
by prescription, the same having been exercised more than five years from the date the original return was filed. On the
other hand, the Commissioner of Internal Revenue insists that his right to issue the assessment has not prescribed
inasmuch as the same was availed of before the 5-year period provided for in Section 331 of the Tax Code expired,
counting the running of the period from August 30, 1955, the date when the amended return was filed.

Section 331 of the Tax Code, which limits the right of the Commissioner of Internal Revenue to assess income tax within
five years from the Filipino of the income tax return, states:

SEC. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding section
internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court
without assessment for the collection of such taxes shall be begun after the expiration of such period. For the
purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
The question is: Should the running of the prescriptive period commence from the filing of the original or amended
return?

The Court of Tax Appears that the original return was a complete return containing "information on various items of
income and deduction from which respondent may intelligently compute and determine the tax liability of petitioner,
hence, the prescriptive period should be counted from the filing of said original return. On the other hand, the
Commissioner of Internal Revenue maintains that:

"... the deficiency income tax in question could not possibly be determined, or assessed, on the basis of the
original return filed on April 1, 1953, for considering that the declared loss amounted to P199,583.93, the mere
disallowance of part of the head office expenses could not probably result in said loss being completely wiped
out and Phoenix being liable to deficiency tax. Not until the amended return was filed on August 30, 1955 could
the Commissioner assess the deficiency income tax in question."

Accordingly, he would wish to press for the counting of the prescriptive period from the filing of the amended return.

To our mind, the Commissioner's view should be sustained. The changes and alterations embodied in the amended
income tax return consisted of the exclusion of reinsurance premiums received from domestic insurance companies by
Phoenix Assurance Co., Ltd.'s London head office, reinsurance premiums ceded to foreign reinsurers not doing business
in the Philippines and various items of deduction attributable to such excluded reinsurance premiums thereby
substantially modifying the original return. Furthermore, although the deduction for head office expenses allocable to
Philippine business, whose disallowance gave rise to the deficiency tax, was claimed also in the original return, the
Commissioner could not have possibly determined a deficiency tax thereunder because Phoenix Assurance Co., Ltd.
declared a loss of P199,583.93 therein which would have more than offset such disallowance of P15,826.35. Considering
that the deficiency assessment was based on the amended return which, as aforestated, is substantially different from
the original return, the period of limitation of the right to issue the same should be counted from the filing of the
amended income tax return. From August 30, 1955, when the amended return was filed, to July 24, 1958, when the
deficiency assessment was issued, less than five years elapsed. The right of the Commissioner to assess the deficiency
tax on such amended return has not prescribed.

To strengthen our opinion, we believe that to hold otherwise, we would be paving the way for taxpayers to evade the
payment of taxes by simply reporting in their original return heavy losses and amending the same more than five years
later when the Commissioner of Internal Revenue has lost his authority to assess the proper tax thereunder. The object
of the Tax Code is to impose taxes for the needs of the Government, not to enhance tax avoidance to its prejudice.

We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for 1950 representing net addition to
reserve computed at 40% of the marine insurance premiums received during the year. Treating said said deduction to be
excessive, the Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent to 100% of all
marine insurance premiums received during the last months of the year.

Paragraph (a) of Section 32 of the Tax Code states:

SEC. 32. Special provisions regarding income and deductions of insurance companies, whether domestic or
foreign. — (a) Special deductions allowed to insurance companies. — In the case of insurance companies, except
domestic life insurance companies and foreign life insurance companies doing business in the Philippines, the
net additions, if any, required by law to be made within the year to reserve funds and the sums other than
dividends paid within the year on policy and annuity contracts may be deducted from their gross income:
Provided, however, That the released reserve be treated as income for the year of release.

Section 186 of the Insurance Law requires the setting up of reserves for liability on marine insurance:

SEC. 186. ... Provided, That for marine risks the insuring company shall be required to charge as the liability for
reinsurance fifty per centum of the premiums written in the policies upon yearly risks, and the full
premiums written in the policies upon all other marine risks not terminated (Emphasis supplied.)

The reserve required for marine insurance is determined on two bases: 50% of premiums under policies on yearly risks
and 100% of premiums under policies of marine risks not terminated during the year. Section 32 (a) of the Tax Code
quoted above allows the full amount of such reserve to be deducted from gross income.

It may be noteworthy to observe that the formulas for determining the marine reserve employed by Phoenix Assurance
Co., Ltd. and the Commissioner of Internal Revenue — 40% of premiums received during the year and 100% of
premiums received during the last three months of the year, respectively — do not comply with Section 186. Said
determination runs short of the requirement. For purposes of the Insurance Law, this Court therefore cannot
countenance the same. The reserve called for in Section 186 is a safeguard to the general public and should be strictly
followed not only because it is an express provision but also as a matter of public policy. However, for income tax
purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is
prohibited by the income tax law is to claim a deduction beyond the amount authorized therein.

Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the amount required in Section 186 of
the Insurance Law, the same cannot be and is not excessive, and should therefore be fully allowed. *

We come now to the controversy on the taxpayer's claim for deduction on head office expenses incurred during 1952,
1953, and 1954 allocable to its Philippine business computed at 5% of its gross income in the Philippines The
Commissioner of Internal Revenue redetermined such deduction at 5% on Phoenix Assurance Co., Ltd's net
income thereby partially disallowing the latter's claim. The parties are agreed as to the percentage — 5% — but differ as
to the basis of computation. Phoenix Assurance Co. Lt. insists that the 5% head office expenses be determined from
the gross income, while the Commissioner wants the computation to be made on the net income. What, therefore,
needs to be resolved is: Should the 5% be computed on the gross or net income?

The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of income from its Philippine business as
well as reinsurance premiums received for its head office in London and reinsurance premiums ceded to foreign
reinsurance. Since the items of income not belonging to its Philippine business are not taxable to its Philippine branch,
they should be excluded in determining the head office expenses allowable to said Philippine branch. This conclusion
finds support in paragraph 2, subsection (a), Section 30 of the Tax Code, quoted hereunder:

(2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident
alien individual or a foreign corporation, the expenses deductible are the, necessary expenses paid or incurred in
carrying on any business or trade conducted within the Philippines exclusively. (Emphasis supplied.)

Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial disallowance of deduction
representing head office expenses, are sustained.

Finally, the Commissioner of Internal Revenue assails the dispositive portion of the Tax Court's decision limiting the
maximum amount of interest collectible for deliquency of an amount corresponding to a period of three years. He
contends that since such limitation was incorporated into Section 51 of the Tax Code by Republic Act 2343 which took
effect only on June 20, 1959, it must not be applied retroactively on withholding tax for the years 1952, 1953 and 1954.

The imposition of interest on unpaid taxes is one of the statutory penalties for tax delinquency, from the payments of
which the Court of Tax Appeals absolved the Phoenix Assurance Co., Ltd. on the equitable ground that the latter's failure
to pay the withholding tax was due to the Commissioner's opinion that no withholding tax was due. Consequently, the
taxpayer could be held liable for the payment of statutory penalties only upon its failure to comply with the Tax Court's
judgment rendered on February 14. 1962, after Republic Act 2343 took effect. This part of the ruling of the lower court
ought not to be disturbed.

WHEREFORE, the decision appealed from is modified, Phoenix Assurance Co., Ltd. is hereby ordered to pay the
Commissioner, of Internal Revenue the amount of P75,966.42, P59,059.68 and P48,812.32 as withholding tax for the
years 1952, 1953 and 1954, respectively, and the sums of P5,667.00 and P2,847.00 as income tax for 1952 and 1954 or a
total of P192,352.42. The Commissioner of Internal Revenue is ordered to refund to Phoenix Assurance Co., Ltd. the
amount of P20,180.00 as overpaid income tax for 1953, which should be deducted from the amount of P192,352.42.

If the amount of P192,352.42 or a portion thereof is not paid within thirty (30) days from the date this judgment
becomes final, there should be collected a surcharge and interest as provided for in Section 51(c) (2) of the Tax Code. No
costs. It is so ordered.

o. Case E

p. G.R. No. L-20569 August 23, 1974

JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H. Aznar vs.
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE

Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the
decision of the Court of Tax Appeals in C.T.A. Case No. 109, modifying the decision of respondent Commissioner of
Internal Revenue and ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency
income taxes for the years 1946 to 1951, inclusive, with the condition that if the said amount is not paid within thirty
days from the date the decision becomes final, there shall be added to the unpaid amount the surcharge of 5%, plus
interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section
51 of the National Internal Revenue Code, plus costs against the petitioner.

It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in interest of herein petitioner,
during his lifetime as a resident of Cebu City, filed his income tax returns on the cash and disbursement basis, reporting
therein the following:

Year Net Amount Exhibit

Income of Tax
Paid

1945 P12,822.00 P114.66 pp.

85-88
B.I.R.
rec.

1946 9,910.94 114.66 38-A

(pp.
329-
332
B.I.R
rec.)

1947 10,200.00 132.00 39

(pp.
75-78
B.I.R
rec.)

1948 9,148.34 68.90 40

(pp.
70-73
B.I.R.
rec.)

1949 8,990.66 59.72 41

(pp.
64-67
B.I.R.
rec.)

1950 8,364.50 28.22 42

(pp.
59-62,
BIR
rec.)

1951 6,800.00 none 43

(pp.
54-57
BIR
rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of one obviously
wealthy, pursuant to the authority granted him by Section 38 of the National Internal Revenue Code, caused B.I.R.
Examiner Honorio Guerrero to ascertain the taxpayer's true income for said years by using the net worth and
expenditures method of tax investigation. The assets and liabilities of the taxpayer during the above-mentioned years
were ascertained and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases
in net worth was very much more than the income reported during said years. The findings clearly indicated that the
taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid years.

Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated November 28, 1952,
notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the amount of P723,032.66, plus compromise
penalty. The taxpayer requested a reinvestigation which was granted for the purpose of verifying the merits of the
various objections of the taxpayer to the deficiency income tax assessment of November 28, 1952.

After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07 dated February 16,
1955, superseded the previous assessment and notice thereof was received by Matias H. Aznar on March 2, 1955.

The new deficiency assessment was based on the following computations:

1946

Net income per return ........................ P9,910.94

Add: Under declared income .............. 22,559.94
Net income per investigation............... 32,470.45

Deduct: Income tax liability

per return as assessed ...................................................... 114.66
Balance of tax due ........................................................... P3,687.10
Add: 50% surcharge ........................................................ 1,843.55
DEFICIENCY INCOME TAX ...................................... P5,530.65

1947

Net income per return ..................................................... P10,200.00

Add: Under declared income ............................................ 90,413.56
Net income per reinvestigation ....................................... P100,613.56
Deduct: Personal and additional exemption ...................... 7,000.00
Amount of income subject to tax ...................................... P93,613.56
Total tax liability ............................................................... P24,753.15
Deduct: Income tax liability per return as assessed ............ 132.00
Balance of tax due ........................................................... P24,621.15
Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME TAX
...................................... P36,931.73

1948

Net income per return ...................................................... P9,148.34

Add: Under declared income ............................................. 15,624.63
Net income per reinvestigation .......................................... P24,772.97
Deduct: Personal and additional exemptions ...................... 7,000.00
Amount of income subject to tax ....................................... P17,772.97
Total tax liability ............................................................... 2,201.40
Deduct: Income tax liability per return as assessed ............ 68.90
Balance of tax due ........................................................... P2,132.500
Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME TAX
...................................... P3,198.75

1949

Net income per return ....................................................... P9,990.66

Add: Under declared income ............................................. 105,418.53
Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME TAX
....................................... P45,125.94

1950

Net income per return ....................................................... P8,364.50

Add: Under declared income ............................................. 365,578.76
Net income per reinvestigation .......................................... P373,943.26
Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME TAX .......................................
P278,783.00

1951

Net income per return ........................................................ P6,800.00

Add: Under declared income ............................................... 33,355.80
Net income per reinvestigation ............................................ P40,155.80
Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME TAX
.......................................... P11,526.00

SUMMARY

1946
.... P5,530.65

1947 .... 36,931.73

1948 .... 3,198.75

1949 .... 45,125.94

1950 .... 278,783.00

1951 .... 11,526.00

Total .... P381,096.07

In determining the unreported income, the respondent Commissioner of Internal Revenue resorted to the networth
method which is based on the following computations:

1945

Real estate inventory ................................ P64,738.00

Other assets ............................................. 37,606.87
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97

1946

Real estate inventory ................................. P86,944.18

Other assets ............................................. 60,801.65
Total assets ............................................. P147,745.83
Less: Depreciation allowed ...................... 4,875.41
Net assets ................................................ P142,870.42
Less: Liabilities .................. P17,000.00
Net Worth as of
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45

1947
Real estate inventory .................................. P237,824.18
Other assets ............................................... 54,495.52
Total assets ............................................... P292,319.70
Less: Depreciation allowed ......................... 12,835.72
Net assets .................................................. 279,483.98
Less: Liabilities ................... P60,000.00
Networth as of
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
Net income ................................................P100,613.56

1948

Real estate inventory .................................. P244,824.18

Other assets .............................................. 118,720.60
Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
Net assets ................................................. P342,608.75
Less: Liabilities ................... P105,351.80
Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97

1949

Real estate inventory ................................. P400,515.52

Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Net assets ................................................. P461.274.73
Less; Liabilities .................. P116,608.59
Networth as of
Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Increase in networth .................................. P107,409.19
Add: Estimated living expenses .................. 7,000.00
Net income ............................................... P114,409.19

1950

Real estate inventory .................................. P412,465.52

Investment in Schools and
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Total assets ............................................... P916,715.38
Less; Depreciation allowed ........................ 47,561.99
Net assets ................................................. P869,153.39
Less: Liabilities .................. P158,343.99
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13
Increase in networth ................................... P366,143.26
Add: Estimated living expenses ................... 7,800.00
Net income ................................................. P373,943.26

1951

Real estate inventory ................................... P412,465.52

Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40
Total assets ................................................ P946,691.13
Less: Depreciation allowed ......................... 62,466.90
Net assets .................................................. P884,224.23
Less: Liabilities ........................................... P140,459.03
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43
Increase in networth .................................... P32,955.80
Add: Estimated living expenses .................... 7,200.00
Net income ................................................. P40,155.80

(Exh. 45-B, BIR rec. p. 188)

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of Cebu, placed the
properties of Matias H. Aznar under distraint and levy to secure payment of the deficiency income tax in question.
Matias H. Aznar filed his petition for review of the case with the Court of Tax Appeals on April 1, 1955, with a
subsequent petition immediately thereafter to restrain respondent from collecting the deficiency tax by summary
method, the latter petition being granted on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file
a bond. Upon review, this Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of
Tax Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to 1951 or furnish a
surety bond for not more than double the amount.

On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the Court of Tax Appeals,
the lower court concluded that the tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should be
P227,788.64 minus P96.87 representing the tax credit for 1945, or P227,691.77, computed as follows:

1946

Net income per return .............................................. P9,910.94

Add: Under declared income ..................................... 22,559.51
Net income ............................................................ P32,470.45
Less: Personal and additional exemptions .................. 6,917.00
Income subject to tax ............................................. P25,553.45
Tax due thereon ...................................................... P3,801.76
Less: Tax already assessed ...................................... 114.66
Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
Deficiency income tax ................................................ P5,530.65

1947

Net income per return ............................................ P10,200.00

Add: Under declared income .................................. 57,551.19
Net income ........................................................... P67,751.19
Less: Personal and additional exemptions ............... 7,000.00
Income subject to tax ............................................. P60,751.19
Tax due thereon ..................................................... P13,420.38
Less: Tax already assessed ..................................... P132.00
Balance of tax due ................................................... P13,288.38
Add: 50% surcharge ................................................ 6,644.19
Deficiency income tax .............................................. P19,932.57

1948

Net income per return .............................................. P9,148.34

Add: Under declared income ..................................... 8,732.10
Net income ............................................................ P17,880.44
Less: Personal and additional exemptions ................. 7,000.00
Income subject to tax .............................................. P10,880.44
Tax due thereon ...................................................... P1,029.67
Less: Tax already assessed ....................................... 68.90
Balance of tax due .................................................... 960.77
Add: 50% surcharge ................................................. 480.38
Deficiency income tax ............................................... P1,441.15

1949
Net income per return ................................................. P8,990.66
Add: under declared income ......................................... 43,718.53
Net income ............................................................... P52,709.19
Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Balance of tax due ....................................................... P8,918.85
Add: 50% surcharge .................................................... 4,459.42
Deficiency income tax ................................................. P13,378.27

1950

Net income per return .................................................. P6,800.00

Add: Under declared income ......................................... 33,355.80
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00
Income subject to tax .................................................. P32,955.80
Tax due thereon ........................................................... P7,684.00
Less: Tax already assessed ........................................... -o- .
Balance of tax due ........................................................ P7,684.00
Add: 50% surcharge .................................................... 3,842.00
Deficiency income tax .................................................. P11,526.00

1951

Net income per return ................................................... P8,364.50

Add: Under declared income ........................................ 246,449.06
Net income ............................................................... P254.813.56
Less: Personal and additional exemptions .................... 7,800.00
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00
Balance of tax due ..................................................... P117,320.00
Add: 50% surcharge .................................................. 58,660.00
Deficiency income tax ................................................ P175 980.00

SUMMARY

1946 P5,530.65

1947 19,932.57

1948 1,441.15

1949 13,378.27

1950 175,980.00

1951 11,526.00

P227,788.64.

The first vital issue to be decided here is whether or not the right of the Commissioner of Internal Revenue to assess
deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the
time the assessment was made on November 28, 1952.

Petitioner's contention is that the provision of law applicable to this case is the period of five years limitation upon
assessment and collection from the filing of the returns provided for in See. 331 of the National Internal Revenue Code.
He argues that since the 1946 income tax return could be presumed filed before March 1, 1947 and the notice of final
and last assessment was received by the taxpayer on March 2, 1955, a period of about 8 years had elapsed and the five
year period provided by law (Sec. 331 of the National Internal Revenue Code) had already expired. The same argument
is advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the return for 1948, which was
filed on February 28, 1949. Respondents, on the other hand, are of the firm belief that regarding the prescriptive period
for assessment of tax returns, Section 332 of the National Internal Revenue Code should apply because, as in this case,
"(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" (Sec. 332 (a) of the NIRC).

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 of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of
tax."

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 from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax
or failure to file returns, the period of ten years 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.

II

As to the alleged errors committed by the Court of Tax Appeals in not deducting from the alleged undeclared income of
the taxpayer for 1946 the proceeds from the sale of jewelries valued at P30,000; in not excluding from other schedules
of assets of the taxpayer (a) accounts receivable from customers in the amount of P38,000 for 1948, P126,816.50 for
1950, and provisions for doubtful accounts in the amount of P41,810.56 for 1950; (b) over valuation of hospital and
dental buildings for 1949 in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow block business
in the amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the amount of P23,000 for the year 1949; (e)
various lands and buildings included in the schedule of assets for the years 1950 and 1951 in the total amount of
P243,717.42 for 1950 and P62,564.00 for 1951, these issues would depend for their resolution on determination of
questions of facts based on an evaluation of evidence, and the general rule is that the findings of fact of the Court of Tax
Appeals supported by substantial evidence should not be disturbed upon review of its decision (Section 2, Rule 44, Rules
of Court).

On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount petitioner contends should be
deducted from the taxpayer's net worth as of December 31, 1946, the record shows that Matias H. Aznar, when
interviewed by B.I.R. Examiner Guerrero, stated that at the beginning of 1945 he had P60,000 worth of jewelries
inherited from his ancestors and were disposed off as follows: 1945, P10,000; 1946, P20,000; 1947, P10,000; 1948,
P10,000; 1949, P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).

During the hearing of this case in the Court of Tax Appeals, petitioner's accountant testified that on January 1, 1945,
Matias H. Aznar had jewelries worth P60,000 which were acquired by purchase during the Japanese occupation (World
War II) and sold on various occasions, as follows: 1945, P5,000 and 1946, P30,000. To corroborate the testimony of the
accountant, Mrs. Ramona Agustines testified that she bought from the wife of Matias H. Aznar in 1946 a diamond ring
and a pair of earrings for P30,000; and in 1947 a wrist watch with diamonds, together with antique jewelries, for
P15,000. Matias H. Aznar, on the other hand testified that in 1945, his wife sold to Sards Parino jewelries for P5,000 and
question, Mr. Aznar stated that his transaction with Sards Parino, with respect to the sale of jewelries, amounted to
P15,000.

The lower court did not err in finding material inconsistencies in the testimonies of Matias H. Aznar and his witnesses
with respect to the values of the jewelries allegedly disposed off as stated by the witnesses. Thus, Mr. Aznar stated to
the B.I.R. examiner that jewelries worth P10,000 were sold in 1945, while his own accountant testified that the same
jewelries were sold for only P5,000. Mr. Aznar also testified that Mrs. Agustines purchased from his wife jewelries for
P35,000, and yet Mrs. Agustines herself testified that she bought jewelries for P30,000 and P15,000 on two occasions, or
a total of P45,000.

We do not see any plausible reason to challenge the fundamentally sound basis advanced by the Court of Tax Appeals in
considering the inconsistencies of the witnesses' testimony as material, in the following words:

We do not say that witnesses testifying on the same transaction should give identical testimonies.
Because of the frailties and the limitations of the human mind, witnesses' statements are apt to be
inconsistent in certain points, but usually the inconsistencies refer to the minor phases of the
transaction. It is the insignificance of the detail of an occurrence that fails to impress the human mind.
When that same mind, made to recall what actually happened, the significant point which it failed to
take note is naturally left out. But it is otherwise as regards significant matters, for they leave indelible
imprints upon the human mind. Hence, testimonial inconsistencies on the minor details of an
occurrence are dismissed lightly by the courts, while discrepancies on significant points are taken
seriously and weigh adversely to the party affected thereby.

There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in view of the aforesaid
inconsistencies, which we deem material and significant, we dismiss as without factual basis petitioner's allegation that
jewelries form part of his inventory of assets for the purpose of establishing his net worth at the beginning of 1946."

As to the accounts receivable from the United States government for the amount of P38,254.90, representing a claim for
goods commandered by the U.S. Army during World War II, and which amount petitioner claimed should be included in
his net worth as of January 1, 1946, the Court of Tax Appeals correctly concluded that the uncontradicted evidence
showed that "the collectible accounts of Mr. Aznar from the U.S. Government in the sum of P38,254.90 should be added
to his assets (under accounts receivable) as of January 1, 1946. As of December 31, 1947, and December 31, 1948, the
years within which the accounts were paid to him, the 'accounts receivable shall decrease by P31,362.37 and P6,892.53,
respectively."

Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was listed as an asset during the years
1945 and 1947 to 1951, but which was not listed as an asset in 1946 because of a notation in the tax declaration that it
was reconstructed in 1947, the lower court correctly concluded that the reconstruction of the property did not render it
valueless during the time it was being reconstructed and consequently it should be listed as an asset as of January 1,
1946, with the same valuation as in 1945, that is P1,500.

On the question of accounts receivable from customers in the amount of P38,000 for 1948, and P123,816.58 for the
years 1950 and 1951, which were included in the assets of Mr. Aznar for those years by the respondent Commissioner of
Internal Revenue, it is very clear that those figures were taken from the statements (Exhs. 31 and 32) filed by Mr. Matias
H. Aznar with the Philippine National Bank when he was intending to obtain a loan. These statements were under oath
and the natural implication is that the information therein reflected must be the true and accurate financial condition of
the one who executed those statements. To believe the petitioner's argument that the late Mr. Aznar included those
figures in his sworn statement only for the purpose of obtaining a bigger credit from the bank is to cast suspicion on the
character of a man who can no longer defend himself. It would be as if pointing the finger of accusation on the late Mr.
Aznar that he intentionally falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were non-
existent accounts receivable just to increase his assets by fictitious entries so that his credit with the Philippine National
Bank could be enhanced. Besides, We do not lose sight of the fact that those statements (Exhs. 31 and 32) were
executed before this tax controversy arose and the disputable presumptions that a person is innocent of crime or
wrong; that a person intends the ordinary consequences of his voluntary act; that a person takes ordinary care of his
concerns; that private transaction have been fair and regular; that the ordinary course of business has been followed;
that things have happened according to the ordinary course of nature and the ordinary habits of life; that the law has
been obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131 of the Rules of Court), together with the conclusive
presumption that "whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court), convincingly indicate that
the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were true, in existence, and accurate to the very
amounts mentioned.
There is no merit to petitioners argument that those statements were only for the purpose of obtaining a bigger credit
from the bank (impliedly stating that those statements were false) and those accounts were allegedly back accounts of
students of the Southwestern Colleges and were worthless, and if collected, would go to the funds of the school. The
statement of the late Mr. Aznar that they were accounts receivable from customers should prevail over the mere
allegation of petitioner, unsupported as they are by convincing evidence. There is no reason to disturb the lower court's
conclusion that the amounts of P38,000 and P123,816.58 were accounts receivable from customers and as such must be
included as petitioner's assets for the years indicated.

As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is clear that said amount is taken
from Exhibit 31, the sworn statement of financial condition filed by Mr. Matias H. Aznar with the Philippine National
Bank. The lower court did not commit any error in again giving much weight to the statement of Mr. Aznar and in
concluding that inasmuch as this is an item separate and apart from the taxpayer's accounts receivable and non-
deductible expense, it should be reverted to the accounts receivable and, consequently, considered as an asset in 1950.

On the alleged over valuation of two buildings (hospital building which respondent Commissioner of Internal Revenue
listed as an asset from 1949-1951 at the basic valuation of P130,000, and which petitioner claims to be over valued by
P32,000; dentistry building valued by respondent Commissioner of Internal Revenue at P36,191.34, which petitioner
claims to be over valued by P6,191.34), We find no sufficient reason to alter the conclusion of respondent Court of Tax
Appeals sustaining the respondent Commissioner of Internal Revenue's valuation of both properties.

Respondent Commissioner of Internal Revenue based his valuation of the hospital building on the representation of Mr.
Matias H. Aznar himself who, in his letter (Exh. 35) to the Philippine National Bank dated September 5, 1949, stated that
the hospital building cost him P132,000. However in view of the effect of a typhoon in 1949 upon the building, the value
allowed was P130,000. Exhibit 35, contrary to petitioner's contention, should be given probative value because,
although it is an unsigned plain copy, that exhibit was taken by the investigating examiner of the B.I.R. from the files of
the Southwestern Colleges and formed part of his report of investigation as a public official. The estimates of an
architect and a civil engineer who agreed that a value of P84,240 is fair for the hospital building, made years after the
building was constructed, cannot prevail over the petitioner's own estimate of his property's value.

Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry Building is based on the letter
of Mr. and Mrs. Matias H. Aznar to the Southwestern Colleges, dated December 15, 1950, which is embodied in the
minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on May 7, 1951 (Exhibit G-1). In
Exhibit 26 A, which is the cash book of the Southwestern Colleges, this building was listed as of the same amount.
Petitioner's estimate of P30,000 for this building, based on Architect Paca's opinion, cannot stand against the owner's
estimate and that which appears in the cash book of the Southwestern Colleges, if we take into consideration that the
owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding was initiated, while architect Paca's
estimate was made upon petitioner's request solely for the purpose of evidence in this tax case.

In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue included the administrative
building valued at P19,200 for the years 1947 and 1948, and P16,700 for the years 1949 to 1951; and a high school
building valued at P48,000 for 1947 and 1948, and P45,000 for 1949, 1950 and 1951. The reduced valuation for the
latter years are due to allowance for partial loss resulting from the 1949 typhoon. Petitioner did not question the
inclusion of these buildings in the inventory for the years prior to 1950, but objected to their inclusion as assets as of
January 1, 1950, because both buildings were destroyed by a typhoon in November of 1949. There is sufficient evidence
(Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of Cebu City, Exh. 18, Mr. Intan's testimony, a
copy of a letter of the City Assessor of Cebu City) to prove that the two buildings were really destroyed by typhoon in
1949 and, therefore, should be eliminated from the petitioner's inventory of assets beginning December 31, 1949.

On the issue of investment in the hollow blocks business, We see no compelling reason to alter the lower court's
conclusion that "whatever was spent in the hollow blocks business is an investment, and being an investment, the same
should be treated as an asset. With respect to the amount representing the value of the building, there is no duplication
in the listing as the inventory of real property does not include the building in question."

Respondent Commissioner of Internal Revenue included in the inventory, under the heading of other asset, the amount
of P8,663.22, treated as investment in the hollow block business. Petitioner objects to the inclusion of P1,683.42 which
was spent on the building and in the business and of P674.35 which was spent for labor, fuel, raw materials, office
supplies etc., contending that the former amount is a duplication of inventory (included among the list of properties)
and the latter is a business expense which should be eliminated from the list of assets.

The inclusion of expenses (labor and raw materials) as part of the hollow block business is sanctioned in the inventory
method of tax verification. It is a sound accounting practice to include raw materials that will be used for future
manufacture. Inclusion of direct labor is also proper, as all these items are to be embodied in a summary of assets
(investment by the taxpayer credited to his capital account as reflected in Exhibit 72-A, which is a working sheet with
entries taken from the journal of the petitioner concerning his hollow blocks business). There is no evidence to show
that there was duplication in the inclusion of the building used for hollow blocks business as part of petitioner's
investment as this building was not included in the listing of real properties of petitioner (Exh. 45-C p. 187 B.I.R. rec.).

As to the question of the real value of the surplus goods purchased by Mr. Matias H. Aznar from the U.S. Army, the best
evidence, as observed correctly by the lower court, is the statement of Mr. Matias H. Aznar, himself, as appearing Exh.
35 (copy of a letter dated September 5, 1949 to the Philippine National Bank), to the effect "as part of my assets I have
different merchandise from Warehouse 35, Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than
P20,000 at present market value." Petitioner's claim that the goods should be valued at only P20,000 in accordance with
an alleged invoice is not supported by evidence since the invoice was not presented as exhibit. The lower court's act in
giving more credence to the statement of Mr. Aznar cannot be questioned in the light of clear indications that it was
never controverted and it was given at a time long before the tax controversy arose.

The last issue on propriety of inclusion in petitioner's assets made by respondent Commissioner of Internal Revenue
concerns several buildings which were included in the list of petitioner's assets as of December 31, 1950. Petitioner
contends that those buildings were conveyed and ceded to Southwestern Colleges on December 15, 1950, in
consideration of P100,723.99 to be paid in cash. The value of the different buildings are listed as: hospital building,
P130,000; gymnasium, P43,000; dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law,
P10,950; laboratory building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600; faculty
house, P5,760. It is suggested that the value of the buildings be eliminated from the real estate inventory and the sum of
P100,723.99 be included as asset as of December 31, 1950.

The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer to the
Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be proven. What is evident is
that those buildings were used by the Southwestern Colleges. It is true that Exhibit G-1 shows that Mr. and Mrs. Matias
H. Aznar offered those properties in exchange for shares of stocks of the Southwestern Colleges, and Exhibit "G" which is
the minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that
Mr. Aznar was amenable to the value fixed by the board of trustees and that he requested to be paid in cash instead of
shares of stock. But those are not sufficient evidence to prove that transfer of ownership actually happened on
December 15, 1950. Hence, the lower court did not commit any error in sustaining the respondent Commissioner of
Internal Revenue's act of including those buildings as part of the assets of petitioner as of December 31, 1950.

Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for P150,000 worth of
shares of stocks, consisting of: land, P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses home,
P4,100; nurses home, P2,080, should be excluded from the inventory of assets as of December 31, 1951. The evidence
(Exh. H), however, clearly shows that said properties were formally conveyed to the Southwestern Colleges only on
September 25, 1952. Undoubtedly, petitioner was the owner of those properties prior to September 25, 1952 and said
properties should form part of his assets as of December 31, 1951.

The uncontested portions of the lower court's decision consisting of its conclusions that library books valued at
P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit 25-A, being an investment, should be
treated as an asset beginning December 31, 1950; that the expenses for construction to the amount of P113,353.70,
which were spent for the improvement of the buildings appearing in Exhibit 24 are deemed absorbed in the increased
value of the buildings as appraised by respondent Commissioner of Internal Revenue at cost after improvements were
made, and should be taken out as additional assets; that the amount receivable of P5,776 from a certain Benito Chan
should be treated as petitioner's asset but the amount of P5,776 representing the value of a house and lot given as
collateral to secure said loan should not be considered as an asset of petitioner since to do so would result in a glaring
duplication of items, are all affirmed. There seems to be no controversy as to the rest of the items listed in the inventory
of assets.

III

The second issue which appears to be of vital importance in this case centers on the lower court's imposition of the
fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The petitioner insists that there might have
been false returns by mistake filed by Mr. Matias H. Aznar as those returns were prepared by his accountant employees,
but there were no proven fraudulent returns with intent to evade taxes that would justify the imposition of the 50%
surcharge authorized by law as fraud penalty.

The lower court based its conclusion that the 50% fraud penalty must be imposed on the following reasoning: .

It appears that Matias H. Aznar declared net income of P9,910.94, P10,200, P9,148.34, P8,990.66,
P8,364.50 and P6,800 for the years 1946, 1947, 1948, 1949, 1950 and 1951, respectively. Using the net
worth method of determining the net income of a taxpayer, we find that he had net incomes of
P32,470.45, P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the respective
 years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he underdeclared his income by 227%
for 1946, 564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for 1951. These
substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or
fraudulence of the income tax return with an intent to evade the payment of tax. Hence, the imposition
of the fraud penalty is proper (Perez vs. Court of Tax Appeals, G.R. No. L-10507, May 30, 1958).
(Emphasis supplied)

As could be readily seen from the above rationalization of the lower court, no distinction has been made between false
returns (due to mistake, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). The lower court
based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the substantial difference between
the amounts of net income on the face of the returns as filed by him in the years 1946 to 1951 and the net income as
determined by the inventory method utilized by both respondents for the same years. The lower court based its
conclusion on a presumption that fraud can be deduced from the very substantial disparity of incomes as reported and
determined by the inventory method and on the similarity of consecutive disparities for six years. Such a basis for
determining the existence of fraud (intent to evade payment of tax) suffers from an inherent flaw when applied to this
case. It is very apparent here that the respondent Commissioner of Internal Revenue, when the inventory method was
resorted to in the first assessment, concluded that the correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh.
1, B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in another assessment dated February 16, 1955,
concluded that the tax liability should be reduced to P381,096.07. This is a crystal-clear, indication that even the
respondent Commissioner of Internal Revenue with the use of the inventory method can commit a glaring mistake in the
assessment of petitioner's tax liability. When the respondent Court of Tax Appeals reviewed this case on appeal, it
concluded that petitioner's tax liability should be only P227,788.64. The lower court in three instances (elimination of
two buildings in the list of petitioner's assets beginning December 31, 1949, because they were destroyed by fire;
elimination of expenses for construction in petitioner's assets as duplication of increased value in buildings, and
elimination of value of house and lot in petitioner's assets because said property was only given as collateral) supported
petitioner's stand on the wrong inclusions in his lists of assets made by the respondent Commissioner of Internal
Revenue, resulting in the very substantial reduction of petitioner's tax liability by the lower court. The foregoing shows
that it was not only Mr. Matias H. Aznar who committed mistakes in his report of his income but also the respondent
Commissioner of Internal Revenue who committed mistakes in his use of the inventory method to determine the
petitioner's tax liability. The mistakes committed by the Commissioner of Internal Revenue which also involve very
substantial amounts were also repeated yearly, and yet we cannot presume therefrom the existence of any taint of
official fraud.

From the above exposition of facts, we cannot but emphatically reiterate the well established doctrine that fraud cannot
be presumed but must be proven. As a corollary thereto, we can also state that fraudulent intent could not be deduced
from mistakes however frequent they may be, especially if such mistakes emanate from erroneous entries or erroneous
classification of items in accounting methods utilized for determination of tax liabilities The predecessor of the
petitioner undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax returns were prepared for
him by his accountant and employees. It also appears that petitioner in his lifetime and during the investigation of his
tax liabilities cooperated readily with the B.I.R. and there is no indication in the record of any act of bad faith committed
by him.

The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was based merely
on a presumption and not on evidence establishing a willful filing of false and fraudulent returns so as to warrant the
imposition of the fraud penalty. The fraud contemplated by law is actual and not constructive. It must be intentional
fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some
legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated
by the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that
a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of
Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the
inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with
fraud and those of the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code should not be
imposed, but eliminated from the income tax deficiency for each year from 1946 to 1951, inclusive. The tax liability of
the petitioner for each year should, therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10
The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945, thereby leaving a
balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of the 50% fraud penalty is
concerned, and affirmed in all other respects. The petitioner is ordered to pay to the Commissioner of Internal Revenue,
or his duly authorized representative, the sum of P151,762.23, representing deficiency income taxes for the years 1946
to 1951, inclusive, within 30 days from the date this decision becomes final. If the said amount is not paid within said
period, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from
the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code.

With costs against the petitioner.

q. G.R. No. 213943 March 22, 2017

COMMISSIONER OF INTERNAL REVENUE vs PHILIPPINE DAILY INQUIRER, INC.

The Case

Before the Court is a petition for review1 assailing the 4 November 2013 Decision2 and the 1 August 2014 Resolution3 of
the Court of Tax. Appeals (CTA) En Banc in CTA EB Case No. 905. The CTA En Banc affirmed the 16 February 2012
Decision4 and the 8 May 2012 Resolution5 of the CTA First Division in CTA Case No. 7853 which granted the petition for
review filed by Philippine Daily Inquirer, Inc. (PDI) and cancelled the Formal Letter of Demand dated 11 March 2008 and
Assessment No. LN # 116-AS-04-00-00038-000526 issued by the Bureau of Internal Revenue (BIR) for deficiency Value
Added Tax. (VAT) and income tax. for the taxable year 2004.

The Antecedent Facts

The facts of this case, as presented by the CTA, are as follows:

PDI is a corporation engaged in the business of newspaper publication. On 15 April 2005, it filed its Annual Income Tax
Return for taxable year 2004. Its Quarterly VAT Returns for the same year showed the following:

Date of Filing
For the First Quarter 20 April 2004
For the Second Quarter 16 July 2004
For the Third Quarter 18 October 2004
For the Fourth Quarter 21 January 20056

On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Large Taxpayers' Service of BIR under LN
No. 116-AS-04-00- 00038. BIR alleged that based on the computerized matching it conducted on the information and
data provided by third party sources against PDI's declaration on its VAT Returns for taxable year 2004, there was an
underdeclaration of domestic purchases from its suppliers amounting to P317,705,610.52. The BIR invited PDI to
reconcile the deficiencies with BIR's Large Taxpayers Audit & Investigation Division I (BIR-LTAID). In response, PDI
submitted reconciliation reports, attached to its letters dated 22 August 2006 and 19 December 2006, to BIR-LTAID. On
21 March 2007, PDI executed a Waiver of the Statute of Limitation (First Waiver) consenting to the assessment and/or
collection of taxes for the year 2004 which may be found due after the investigation, at any time before or after the
lapse of the period of limitations fixed by Sections 203 and 222 of the National Internal Revenue Code (NIRC) but not
later than 30 June 2007. The First Waiver was received on 23 March 2007 by Nestor Valeroso (Valeroso), OIC-ACTR of
the Large Taxpayer Service. In a letter dated 7 May 2007, PDI submitted additional partial reconciliation and
explanations on the discrepancies found by the BIR. On 30 May 2007, PDI received a letter dated 28 May 2007 from Mr.
Gerardo Florendo, Chief of the BIR-LTAID, informing it that the results of the evaluation relative to the matching of sales
of its suppliers against its purchases for the taxable year 2004 had been submitted by Revenue Officer Narciso Laguerta
under Group Supervisor Fe Caling. In the same letter, BIR invited PDI to an informal conference to present any
objections that it might have on the BIR's findings. On 5 June 2007, PDI executed a Waiver of the Statute of Limitation
(Second Waiver), which Valeroso accepted on 8 June 2007.

In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the BIR-LTAID, PDI was assessed for alleged
deficiency income tax and VAT for taxable year 2004 on the basis of LN No. 116-AS-04-00- 00038. The PAN states:

COMPUTATION OF DEFICIENCY VAT

 Undeclared Income ₱1,007,565.03
Add: Overdeclared input VAT 1,601,652.43
Total undeclared income per Investigation ₱2,609,217.46
Less: Attributable input tax 715,371.17
VAT still payable per investigation ₱1,893,846.29
Add: Increments -
Interest from 1/26/05 to 11/15/07 ₱1,062,629.37
Compromise penalty 25,000.00 1,087,629.37
Amount Due and Collectible ₱2,981,475.66
COMPUTATION OF DEFICIENCY INCOME TAX
Undeclared Gross Income ₱10,075,650.28
Less: Cost of Sales 7,153,711.70
Undeclared Net Income ₱2,921,938.58
Multiply by income tax rate 32%
Income tax still due per investigation ₱935,020.35
Add: Increments -
Interest from 4/16/05 to 11/15/07 ₱483,648.88
Compromise penalty 20,000.00 503,648.88
Amount Due and Collectible ₱1,438,669.237

PDI received the PAN on 4 December 2007. In a letter dated 12 December 2007, PDI sought reconsideration of the PAN
and expressed its willingness to execute another Waiver (Third Waiver), which it did on the same date, thus extending
BIR's right to assess and/or collect from it until 30 April 2008. Romulo L. Aguila, Jr. (Aguila), OIC-Head Revenue Executive
Assistant for the Large Taxpayers Service-Regular, accepted the Third Waiver on 20 December 2007.

On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March 2008 and an Audit Result/ Assessment Notice
from the BIR, demanding for the payment of alleged deficiency VAT and income tax, respectively, computed as follows:

1. COMPUTATION OF (DEFICIENCY) VAT

Undeclared Income ₱1,007,565.03

Add: Overdeclared input VAT 1,601,652.43
Total Undeclared Income per Investigation ₱2,609,217.46
Less: Attributable input tax 715,371.17
VAT still payable per investigation ₱1,893,846.29
Add: Increments -
Interest from 1/26/05 to 11/15/07 ₱l,235,929.28
Compromise penalty 25,000.00 1,260,929.28
Amount Due and Collectible ₱3,154,775.56

2. COMPUTATION OF [DEFICIENCY INCOME TAX]

Undeclared Gross Income ₱10,075,650.28

Less: Cost of Sales 7,153,711.70
Undeclared Net Income 2,921,938.58
 Multiply by income tax rate 32%
Income tax still due per investigation ₱935,020.35
Add: Increments -
Interest from 4/16/05 to 11/15/07 ₱569,209.65
Compromise penalty 20,000.00 589,209.65
Amount Due and Collectible ₱1,524,229.998

On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition for Review against the Commissioner of
Internal Revenue (CIR) alleging that the 180-day period within which the BIR should act on its protest had already
lapsed.

The CTA First Division, quoting at length the CIR's Answer, presented the following facts:

Petitioner Philippine Daily inquirer is liable to pay the amount of Three Million One Hundred fifty Four Thousand Seven
hundred Seventy Five Pesos and 56/100 (₱3,154,775.56) and One Million Five Hundred Twenty Four Thousand Two
Hundred Twenty Nine Pesos and 99/100 (₱l,524,299.99) representing deficiency Value-Added Tax (VAT and Income Tax,
respectively, for the taxable year 2004.

1. The VAT and inc0me tax liabilities of petitioner in the aggregate amount of Four Million Six Hundred Seventy Nine
Thousand and Five Pesos and 55/100 (₱4,679,005.55) arose on account of the issuance to petitioner of Letter Notice No.
116-AS-04-00-00038 dated June 30, 2006. Computerized matching conducted by respondent on information/data
provided by third party sources against its declaration per VAT returns revealed the aforesaid discrepancies for taxable
year 2004. The income and value-added tax liabilities were generated through the Reconciliation of Listing for
Enforcement (REUEF) system-Summary List of Sales and Purchases (SLSP) and Third Party Matching. Through the system,
respondent was able to detect tax leaks through the matching of data available in the Integrated Tax Systems (ITS) with
the information gathered from third party sources.

On the basis of the consolidation and cross-referencing of third party information, discrepancy reports on sales and
purchases were generated to uncover under-declared income and over-claimed purchases (goods and services).

As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:

II. POLICIES

[x x x]

2. In order to intensify enforcement, the power of the Commissioner to authorize the examination of the taxpayer and
the assessment of the correct amount of tax is hereby ordered done through the so called 'no contact-audit- approach '.

3. The 'no contact-audit-approach' includes the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases, and Schedule of Importation submitted by VAT taxpayer
under the RELIEF system pursuant to RR No. 7- 95 as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include
the matching of data from other information or returns filed by the taxpayers with the BIR such as Alphalist of Payees
subject to Final or Creditable Withholding Taxes.

4. Even without conducting a detailed examination of taxpayer's books and records, the computerized/manual matching
of sales and purchases/expenses will reveal discrepancies which shall be communicated to the concerned taxpayer
through the issuance of a Letter Notice (LN) by the Commissioner.

5. LNs being served by the Bureau upon the taxpayer found to have understated their sales or over claimed their
purchases/expenses can be considered notice of audit or investigation in so far as the amendment of any return is
concerned which is the subject of such LN. A taxpayer is therefore disqualified from amending his return once an LN is
served upon him.

III. GUIDELINES

Xxx
5. The LN shall serve as a discrepancy notice to taxpayer similar to a Notice of Informal Conference, thus, the procedures
defined in RR 12-99 should likewise be observed.

Furthermore, in CTA Case No. 7092 entitled 'BIG AA Corporation represented by Erlinda L. Stohner vs. Bureau of Internal
Revenue' dated February 22, 2006, the Honorable Court had the opportunity to say:

'Letter Notices issued against a taxpayer in connection with the information of under declaration of sales and purchases
gathered through Third Party Information Program may be considered as a 'notice of audit or investigation' in the
absence of evident error or clear abuse of discretion.'

2. On the basis of the abovementioned LN and after a careful and extensive scrutiny of petitioner's documents, resulting
deficiency in income and Value-added taxes led to the issuance of the Preliminary Assessment Notice (PAN) dated
October 15, 2007 together with the Details of Discrepancies and subsequently, a Formal Letter of Demand (FLD) dated
March 11, 2008.

Relative thereto, Section 203 of the National Internal Revenue Code (NIRC) explicitly provides:

Section 203. Period of Limitation Upon Assessment and Collection of Taxes.

Except as provided in Section 222, internal revenue taxes shall be assessed within three (3) years after the last day
prescribed by law for 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 i[s] filed beyond the
period prescribed by law, the three (3) year period shall be counted from the day [t]he 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 filed on such
day.'

However, Section 222 of the NIRC provides the exceptions as regards to the provisions laid down under Section 203. In
particular, as shown under Section (1) thereof, the three (3) [year] period of limitation in making assessment
shall not apply in cases where it involves false or fraudulent return or in cases where there is failure to file a return [by]
the person obliged to file such return. Section 222(a) of the National Internal Revenue Code provides:

'Section 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or 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 executor[y], [t]he fact of fraud shall be judicially taken cognizance of in the civil and criminal action for the collection
thereof.'

Such being the case, the three (3) [year] period of limitation for the assessment of internal revenue tax liabilities
reckoned from the last day prescribed by law for the filing of the return shall not apply in the case at hand for the simple
reason that petitioner falsely filed the return for taxable year 2004. Such being the case, the applicable provision shall
be Section 222(a) where the period of limitation provides that the assessment may be made within ten (10) years after
the discovery of falsity, fraud or omission. In the case at hand, the reckoning period was from the time during which the
LN dated June 30, 2006 was issued to petitioner. Indubitably, the Formal Letter of Demand dated March 11, 2008 was
issued within the prescriptive period provided by law. Such being the case, the FLD is considered valid and has the force
and effect of law.

3. On the basis of the investigation conducted by respondent through the RELIEF system, respondent though the FLD,
outlined how the tax liabilities in the aggregate amount of ₱4,679,005.55 representing income and VAT liabilities were
arrived at. Upon matching the data gathered from respondent's Integrated Tax System (ITS) against the Summary of List
of Purchases (SLP) attached to the Quarterly VAT returns filed with respondent, the following discrepancies remain
unsettled despite petitioner's submission of supporting documents:

(a) An excess of SLP over the Letter Notices (LN) in the amount of ₱1,601,652.43 from the following suppliers:

Per SLP PerLN Discrepancy

Alliance Media Printing Corp. 109,073,375.58 107,640,812.95 1,432,562.63
Citimotors Inc. 70,454.55 70,056.65 397.90
Diamond Motors Corp. 288,181.82 142,363.64 145,818.18
Western Marketing Corp. 30,830.99 7,957.27 22,873.72
 Total 109,462,842.94 107,861,190.51 1,601,652.43

(b) On the other hand, it is likewise evident than an excess of LN over the SLP also occurred in the total amount of Seven
Hundred Fifteen Thousand Three Hundred Seventy One Pesos and 17 /100 (₱715,3 71.17). The details of which are
shown hereunder:

Per SLP PerLN Discrepancy

Grasco Industries Inc. 202.55 (202.55)
Harrison Communications Inc. 18,157.89 398,331.12 (380,173.23)
Makati Property Ventures 64.55 (64.55)
Mc[C]an[n] Erikson Phils. Inc. 204,769.38 (204,769.38)
Millennium Cars Inc. 89,545.45 (89,545.45)
WPP Marketing Communications Inc. 40,616.01 (40,616.01)
Total 18,157.89 733,529.06 (715,371.17)

On the basis of the aforesaid investigation, it can be observed that the SLP which petitioner attached as supporting
documents upon filing the quarterly VAT return revealed the declared amount of ₱l09,462,842.94 as its input VAT for
purchases incurred. However, on the basis of the LN, its suppliers recorded in its books of account the aggregate amount
of ₱107,861,190.51 as its corresponding VAT. Suffice it to say, the over-declared VAT input tax on the part of petitioner
led to the under declaration of VAT payable in the amount of ₱1,601,652.43 for the taxable year 2004. Therefore,
petitioner is liable to pay said outstanding VAT. In addition, the amount of ₱l0,075,650.28 which resulted from the
excess of the LN over the SLP amounting to ₱715,371.17 must be likewise added to arrive at the total VAT liability of ₱3,l
54,775.56 (including increments up to April 30, 2008). Details of the computation are shown in the FLD.

As stated earlier, the excess of LN over the SLP in the amount of ₱715,371.17 resulted to under-declared input tax on
the part of petitioner which led to an under[-]declared purchases of ₱7,153,711.70, arrived at by dividing ₱715,371.17
by the VAT rate of 10%. As can be gleaned from the LN, suppliers declared in its books of accounts output VAT for sales
made to petitioner. However, in petitioner's SLP, no declaration of such amount incurred for the taxable year 2004 was
shown. Such being the case, petitioner under-declared its purchases that resulted to the under-declared amount of
Input VAT. If petitioner has under[-]declared its purchases, it would likewise have under-declared its Gross Income which
will be worked back by using the ratio of Cost of Sales against its Gross Income per Income Tax Return. In the case at
hand, the ratio of Cost of Sales against its Gross Income per Income Tax Return filed for taxable year 2004 is 71%. If
petitioner divides the amount of ₱7,153,711.70 by the cost ratio of 71%, the under-declared Gross Income of
₱l0,075,650.28 will be arrived at. Such being the case, petitioner would then be liable to pay the corresponding income
tax for the under-declared Net [I]ncome at the rate of 32%. Net Income was arrived at by deducting from the Gross
Income of ₱l0,075,650.28 the corresponding Cost of Sales of ₱7,153,711.70. Hence, the amount of income tax still to be
paid is ₱l,524,229.99 (including additional increments until April 30, 2008). For ready reference of this Honorable Court,
the full details of the aforesaid computation are shown in the Formal Letter of Demand issued to petitioner.

4. Petitioner emphasized that it is a service company deriving its main source of income from newspaper
and advertising sales, thus any understatement of expenses or purchases (also mostly from services) does not mean it
understated its sales. It goes further by saying that its transactions pertaining mostly to services and goods must be
reflected as Operating Expenses and not as part of the Cost of Sales. It revealed that Harrison Communications Inc.,
McCann Erikson Inc., WPP Marketing Corporation are some of the advertising agencies which rendered direct
professional services to petitioner in the form of marketing or promotional purposes. To bolster its claim, it likewise
stated that the transactions with aforesaid three (3) main entities should not be treated as cost of sales since what these
entities provided were 'not materials' in order for petitioner to gain income that can be both taxable under the income
tax and VAT provisions.

Corollary thereto, Section 27 E(4) of the NIRC specifically provides:

'(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided under Section (E)
hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods
sold. 'Cost of goods sold' shall include business expenses directly incurred to produce the merchandise to bring them to
their present location and use.

xxx
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,
allowances, discounts and cost of services. 'Cost of services' shall mean direct costs and expenses necessarily incurred to
provide the services required by the customers and clients including (a) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (b) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of supplies.'

Petitioner, by its own admission, is a service-oriented company which derives its income from sale of newspaper and
advertisement. It is without doubt that in selling newspapers to the public, it necessarily incurs direct costs to bring
about the merchandise it sells to its present state and/or condition. In the same vein, in selling advertisements to
clients/customers, it likewise incurs direct costs for the rendition of services in the process. On the basis of the aforesaid
provision of the NIRC, 'cost of services' include[s] direct costs and expenses necessarily incurred to provide the services
required by its customers or clients. Applying the same at hand, in order for petitioner to boost its sales on
advertisement, it would actually employ services of companies which would handle the promotion and marketing of the
services it is offering. The direct and professional services rendered by the three (3) advertising companies nan1ely
Harrison Communications Inc., McCann Erikson Inc. and WPP Marketing Corporation should be considered as part of the
cost of advertisement sales/services by petitioner.

In view of the foregoing, the amount of discrepancy that resulted on account of the under-declared input tax of P7 l 5,3
71.17 should be treated as Cost of Sales of services and not just an ordinary operating expenses because the services
provided by the aforementioned three (3) advertising agencies are direct costs and expenses necessary to bring about
the advertisement sales of petitioner."9

After the presentation of oral and documentary evidence and submission of the parties' respective Memoranda, the
case was submitted for resolution.

The Decision of the CTA First Division

The CTA First Division resolved the following issues raised by the parties:

1. Whether or not respondent's authority to issue an assessment against petitioner for deficiency value-added and
income taxes has prescribed;

2. Whether or not respondent erred in assessing petitioner deficiency value-added tax and income tax for calendar year
2004;

3. Whether petitioner is liable to pay the aggregate amount of Four Million Six Hundred Seventy Nine Thousand Five
Pesos and 55/100 (Php 4,679,005.55) representing alleged deficiency income and value-added tax for taxable year 2004,
including interest and compromise penalty from 30 April 2008 until fully paid pursuant to Sections 248 and 249 of the
Tax Code, arising from discrepancies which were generated through the Reconciliation of Listing for Enforcement
(RELIEF) System-Summary List of Sales and Purchases and Third Party Matching of Data available in the Integrated Tax
System (ITS) of respondent against information gathered from third party sources;

4. Whether the fees paid to the three (3) advertising agencies, namely Harrison Communications Inc., McCann Erikson
Inc., and WPP Marketing Corporation are considered part of the cost of sales made by petitioner for taxable year 2004;

5. Whether Section 222 of the Tax Code is applicable in the case at hand;

6. Whether the Formal Letter of Demand dated 11 March 2008 was issued within the prescriptive period provided by
law; and

7. Whether or not petitioner should be assessed a compromise penalty.10

In its 16 February 2012 Decision, the CTA First Division ruled m favor of PDI.

The CTA First Division ruled that the period of limitation in the assessment and collection of taxes is governed by Section
203 of the NIRC which provides:

Sec. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue
taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the return, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three (3)-year period
shall be counted from the day the return was filed. For purposes of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day.
The CTA First Division ruled that internal revenue taxes must be assessed on time. It added that the period of
assessment must not extend indefinitely because doing so will deprive the taxpayer of the assurance that it will not be
subjected to further investigation after the expiration of a reasonable period of time. Nevertheless, the CTA First
Division noted that the three-year prescriptive period under Section 203 of the NIRC applies only when the returns are
filed pursuant to legal requirements. The CTA First Division explained that for false or fraudulent tax returns, or for
failure to file returns, the prescriptive period is 10 years after the discovery of the falsity or fraud, or from failure to file
tax returns. It also added that in the absence of a false or fraudulent return, or where a return has been filed, the period
of limitation may still be extended in cases where the taxpayer and the CIR have agreed in writing, prior to the
expiration of the period prescribed under Section 203 of the NIRC, to an assessment within the time agreed upon.

In ruling on the prescriptive period, the CTA First Division had to determine whether PDI's tax returns were false or
fraudulent. The CTA First Division ruled that in ascertaining the correctness of any return, or in determining the tax
liability of any person, the CIR is authorized to obtain information, on a regular basis, from any person other than the
taxpayer subject of the audit or investigation. It further ruled that the CIR may rely on the information obtained from
third parties in issuing assessments to taxpayers, and that the CIR enjoys the presumption of regularity in obtaining such
information. Further, the CTA First Division stated that the determinations and assessments of the CIR are presumed
correct and made in good faith, and it is the duty of the taxpayer to prove otherwise. The CTA First Division then ruled
that in this case, PDI introduced proof that the determination made by the CIR on the supposed overdeclared input tax
of ₱l,601,652.43 is not correct. The CTA First Division ruled that the CIR failed to disprove the findings submitted by the
Independent Certified Public Accountant (ICPA) that supported PDI's assertions.

The CTA First Division rejected the CIR's theory that since there was an underdeclaration of the input tax and of
purchases, it translates to taxable income for tax purposes and taxable gross receipts for VAT purposes. According to the
CTA First Division, the following elements must be present in the imposition of income tax: (1) there must be gain or
profit; (2) the gain or profit is realized or received, actually or constructively; and (3) it is not exempted by law or treaty
from income tax. In this case, the CTA First Division ruled that in the imposition or assessment of income tax, it must be
clear that there was an income and the income was received by the taxpayer. The basis could not be merely an
underdeclaration of purchases. The CTA First Division added that for income tax purposes, a taxpayer may either deduct
from its gross income a lesser amount, or not claim any deduction at all. It stated that what is prohibited is to claim a
deduction beyond the amount authorized by law. According to the CTA First Division, even when there was
underdeclaration of input tax, which means there was an underdeclaration of purchases and expenses, the same is not
prohibited by law.

As regards the VAT assessment, the CTA First Division ruled that the 10% VAT is assessed on "gross receipts derived from
the sale or exchange of services." As such, it is critical to show that the taxpayer received an amount of money or its
equivalent, and not only that there was underdeclared input taxes or purchases. The CTA First Division ruled that it was
an error for the CIR to impose a deficiency income tax based on the underdeclared input tax, and the income tax return
cannot be treated as false. Thus, the CTA First Division ruled that the prescriptive period applicable to the case is the
three-year period, and the deficiency income tax assessment issued by the BIR beyond the three-year prescriptive
period is void.

The CTA First Division further ruled that Section 222(b) of the NIRC authorizes the extension of the original three-year
prescriptive period by the execution of a valid waiver upon the agreement in writing between the taxpayer and the BIR,
provided: (1) the agreement was made before the expiration of the three-year period and (2) the guidelines in the
proper execution of the waiver are strictly foll0wed. The CTA First Division found that while the First and Second Waivers
were executed in three copies, the BIR failed to provide the office accepting the waivers with their respective third
copies. The CTA First Division found that the third copies were still attached to the docket of the case. The CTA First
Division also found that the BIR failed to prove that the Third Waiver was executed in three copies. Further, the revenue
official who accepted the Third Waiver was not authorized to do so. The CTA First Division also noted that the Second
Waiver would have expired on 31 December 2007 but the Third Waiver was already executed on 20 December 2007,
meaning there was enough time to have it signed by the ACIR of the Large Taxpayers Service. The CTA First Division
concluded that due to the defects in the Waivers, the three-year period within which to assess PDI was not extended.
The CTA First Division further ruled that the compromise penalties should likewise be cancelled. The dispositive portion
0f ~he CTA First Division's Decision reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The Formal Letter of Demand
dated March 11, 2008 and Assessment No. LN # 116-AS-04-00-00038- [000526) for calendar year 2004 issued by the BIR
against petitioner are hereby CANCELLED and SET ASIDE.

SO ORDERED.11

The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the CTA First Division denied the motion for lack
of merit.
The CIR filed a petition for review before the CTA En Banc.

The Decision of the CTA En Banc

In its 4 November 2013 Decision, the CTA En Banc cited the CTA First Division's Decision extensively. The CTA En
Banc ruled that it found no reason to depart from the CTA First Division's findings. The CTA En Banc held that PDI
sufficiently discharged its burden of proving that the VAT assessment and the Income Tax assessment made by the CIR
were not correct. The CTA En Banc ruled that the presumptions of correctness and regularity cited by the CIR were
overturned by the evidence presented by PDI particularly, the final report of the ICPA, accounts payable, check
vouchers, invoices, official receipts, and credit memoranda. The CTA En Banc noted that the CIR did not present any
evidence to the contrary. The CTA En Banc rejected the CIR's allegation that PDI made a false return and held that the
three-year prescriptive period based on Section 203, in relation to Section 222(a) of the NIRC, as amended, should apply
in this case. The CTA En Banc likewise sustained the CTA First Division's ruling that the Waivers issued by PDI were
defective and could not extend the three-year prescriptive period. The CTA En Banc also sustained the CTA First
Division's ruling that it can resolve the issue of prescription because the CIR did not contest it when it was raised by PDI.

The dispositive p01iion of the CTA En Bane's Decision reads:

WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of merit. Accordingly, the Decision
and Resolution dated February 16, 2012 and May 8, 2012, respectively, are hereby AFFIRMED in toto.

SO ORDERED.12

The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the CTA En Banc denied the motion for lack
of merit.

Hence, the CIR filed a petition for review on certiorari before this Court.

The Issues

The CIR raised the following issues in her petition:

(l) The CTA En Banc erred in ruling that petitioner's assessment for deficiency VAT and income tax was adequately
controverted by respondent;

(2) The CTA En Banc erred in ruling that the petitioner's right to assess respondent for deficiency VAT and income tax has
prescribed; and

(3) The CTA En Banc erred in ruling that respondent is not estopped from raising the defense of prescription.13

The Ruling of this Court

BIR 's assessment was not adequately controverted by PDI

Reconciliation of Listing for Enforcement information technology tool used by the administration.14 The system was
created -

x x x to support third party information program and voluntary assessment program of the Bureau through the cross-
referencing of third party information from the taxpayers' Summary Lists of Sales and Purchases prescribed to be
submitted on a quarterly basis pursuant to Revenue Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR 8-
2002.15

In addition -

[RELIEF] can detect tax leaks by matching the data available under the Bureau's Integrated Tax System (ITS) with data
gathered from third party sources (i.e. Schedules of Sales and Domestic Purchases, and Schedule of Importations
submitted by VAT taxpayers pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002).

Through the consolidation and cross-referencing of third party information, discrepancy reports on sales and purchases
can be generated to uncover under declared income and over claimed purchases (goods and services). Timely
recognition and accurate reporting of unregistered taxpayers and non-filers can be made possible.16
Using the RELIEF system, the BIR assessed PDI for deficiency VAT and income tax amounting to ₱3,154,775.57 and ₱l
,525,230.00, respectively. According to the BIR, the computerized matching conducted by its office, using information
and data from third party sources against PDI's VAT returns for 2004 showed an underdeclaration of domestic purchases
from its suppliers amounting to ₱317,705,610.52. PDI. denied the allegation.

In ruling on the case, the CTA recognized that the BIR may obtain information from third party sources in assessing
taxpayers. The CTA also stated that the BIR enjoyed a presumption of regularity in obtaining the information, and its
assessments are presumed correct and made in good faith. Indeed, the burden to controvert the assessments made by
the BIR lies with the taxpayer. In this case, the CTA rejected BIR's finding that PDI underdeclared its input tax and
purchases. According to the CTA, PDI was able to disprove BIR's assessments.

The general rule is that findings of fact of the CTA are not to be disturbed by this Court unless clearly shown to be
unsupported by substantial evidence.17 Since by the very nature of its functions, the CTA has developed an expertise to
resolve tax issues, the Court will not set aside lightly the conclusions reached by them, unless there has been an abuse
or improvident exercise of authority.18

In reaching their conclusions, the CTA First Division and En Banc relied on the report submitted by the ICPA. According to
the CTA, the BIR failed to rebut the ICPA report. After going over the ICPA report, as well as the affidavit summarizing
the examination submitted by Jerome Antonio B. Constantino (Constantino), a Certified Public Accountant and the
Managing Partner of the firm that conducted the examination, this Court notes that:

(1) Purchases made from Harrison Communications, Inc. were recorded as general and administrative expenses and
selling expenses in the 2004 General Ledger and 2004 Audited Financial Statements and not as cost of sales;19

(2) The 2004 purchases from Harrison Communications, Inc. and McCann Erickson, Inc. were recorded in PDI's book in
2005 and 2006 as "Summary List of Purchases." There was a discrepancy between the purchases from Harrison
Communications, Inc. and McCann Erickson, Inc. and the BIR's Letter Notice amounting to Pl 50,203.29 and Pl 91,406.02,
respectively, but the ICPA was not able to account for the difference because according to PDI, the details were not
provided in the BIR's Letter Notice;20

(3) Promotional services purchased from Harrison Communications, Inc. and McCann Erickson, Inc. in 2004 were
recorded in PDI's books in 2005 and 2006. According to Constantino, the VAT input on purchases from Harrison
Communications, Inc. and McCann Erickson, Inc. recorded in 2005 and 2006, amounting to ₱206,713.63 and ₱13,363.36,
respectively, were supported only by photocopies of sales invoices because PDI claimed that it could not find the original
documents despite diligent efforts to locate them;21

(4) Constantino reported that no input taxes were recorded in 2004 from McCann Erickson, Inc., Millennium Cars, Inc.,
WPP Marketing Communications, Inc., Grasco Industries, Inc., and Makati Property Ventures. Constantino was not able
to vouch for supporting documents for purchase transactions from WPP Marketing Communications, Inc., Grasco
Industries, Inc., and Makati Property Ventures. He established that the purchase from Millennium Cars, Inc. was for a car
loan account for an employee and was recorded to Advances to Officers and Employees;22

(5) Alliance Media Printing, Inc.'s erroneous posting of data in the BIR RELIEF caused the discrepancies in the analysis of
suppliers' sales and purchases made by PDI.23

The foregoing showed that there were discrepancies that PDI were able to explain. In particular, the ICPA report showed
that the purchase from Millennium Cars, Inc. was made on behalf of an employee as a loan. In addition, the
underdeclared input tax insofar as Alliance Printing, Inc. is concerned was due to the latter's erroneous posting of data, a
fact that the corporation admitted. However, there are still issues that need to be resolved. In particular, PDI failed to
justify its erroneous listing of purchases from Harrison Communications, Inc., McCann Erickson, Inc., and WPP Marketing
Corporation as general and administrative expenses.

The CIR pointed out that PDI could not treat purchases from Harrison Communications, Inc. and McCann Erickson, Inc. as
general and administrative expenses. Indeed, Section 27(E)(4) of the NIRC provides:

xxxx

(4) Gross Income Defined. For purposes of applying the minimum corporate income tax provided under Subsection (E)
hereof, the term "gross income" shall mean gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold" shall include business expenses directly incurred to produce the merchandise to bring them to
their present location and use.

xxxx
In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales returns,
allowances, discounts and cost of services. "Cost of services" shall mean direct costs and expenses necessarily incurred
to provide the services required by the customers and, clients including (a) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (b) cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks,
"cost of services" shall include interest expense.

The ICPA report found nothing wrong in the entries. However, as pointed out by the Office of the Solicitor General, PDI is
a service-oriented company that derives its income fr0m the sale of newspapers and advertisements. The services
rendered by Harrison Communications, Inc., McCann Erickson, Inc., and \VPP Marketing Corporation were meant to
promote and market the advertising services offered by PDI. As such, their services should be considered part of cost of
services instead of general and administrative expenses and operating expenses.

Such finding would ordinarily call for a recomputation. However, we need to resolve first whether the BIR's assessment
was made within the prescriptive period.

Prescription and Estoppel

We will discuss the second and third issues jointly.

The CIR alleges that PDT filed a false or fraudulent return. As such, Section 222 of the NIRC should apply to this case and
the applicable prescriptive period is 10 years from the discovery of the falsity of the return. The CIR argues that the ten-
year period starts from the time of the issuance of its Letter Notice on 10 August 2006. As such, the assessment made I
through the Formal Letter of Demand dated 11 March 2008 is within the prescriptive period.

We do not agree.

Under Section 203 of the NIRC, the prescriptive period to assess is set at three years. This rule is subject to the
exceptions provided under Section 222 of the NIRC. The CIR invokes Section 222(a) which provides:

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 fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the
collection thereof.

In Commissioner of Internal Revenue v. Javier,24 this Court ruled that fraud is never imputed. The Court stated that it will
not sustain findings of fraud upon circumstances which, at most, create only suspicion.25 The Court added that the mere
understatement of a tax is not itself proof of fraud for the purpose of tax evasion.26 The Court explained:

x x x. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception
willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether
slight or gross, is not equivalent to fraud with intent to evade the tax contemplated by law. It must amount to
intentional wrongdoing with the sole object of avoiding the tax. x x x.27

In Samar-1 Electric Cooperative v. Commissioner of Internal Revenue,28 the Court differentiated between false and
fraudulent returns. Quoting Aznar v. Court of Tax Appeals,29 the Court explained in Samar-l the acts or omissions that
may constitute falsity, thus:

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 underdeclarations of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of
tax."

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 situation 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 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 from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax
or failure to file returns, the period of ten years provided for in Sec. 332(a) NIRC, from the time of discovery of the
falsity, fraud or omission even seems to be inadequate and should be the one enforced.30

Thus, while the filing of a fraudulent return necessarily implies that the act of the taxpayer was intentional and done
with intent to evade the taxes due, the filing of a false return can be intentional or due to honest mistake. In CIR v. B.F.
Goodrich Phils., Inc.,31 the Court stated that the entry of wrong information due to mistake, carelessness, or ignorance,
without intent to evade tax, does not constitute a false return. In this case, we do not find enough evidence to prove
fraud or intentional falsity on the part of PDI.

Since the case does not fall under the exceptions, Section 203 of the NIRC should apply. It provides:

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.

Indeed, the Waivers executed by the BIR and PDI were meant to extend the three-year prescriptive period, and would
have extended such period were it not for the defects found by the CTA. This further shows that at the outset, the BIR
did not find any ground that would make the assessment fall under the exceptions.

In Commissioner of Internal Revenue v. Kudos Metal Corporation,32 the Court ruled:

Section 222(b) of the NIRC provides that the period to assess and collect taxes may only be extended upon a written
agreement between the CIR and the taxpayer executed before the expiration of the three-year period. RMO 20-90
issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 lay down the procedure for the proper execution of
the waiver, to wit:

1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase "but not after __ 19_", which indicates
the expiry date of the period agreed upon to assess/collect the tax after the regular three-year period of prescription,
should be filled up.

2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation,
the waiver must be signed by any of its responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.

3. The waiver should be duly notarized.

4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has accepted and
agreed to the waiver. The date of such acceptance by the BIR should be indicated. However, before signing the waiver,
the CIR or the revenue official authorized by him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized representative.

5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of
the period of prescription or before the lapse of the period agreed upon in case a subsequent agreement is executed.

6. The waiver must be executed in three copies, the original copy to be attached to the docket of the case, the second
copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of
his/her file copy must be indicated in the original copy to show that the taxpayer was notified of the acceptance of the
BIR and the perfection of the agreement.33
In this case, the CTA found that contrary to PDI's allegntions, the First and Second Waivers were executed in three
copies.1âwphi1 However, the CTA also found that the CIR failed to provide the office accepting the First and Second
Waivers with their respective third copies, as the CTA found them still attached to the docket of the case. In addition,
the CTA found that the Third Waiver was not executed in three copies.

The failure to provide the office accepting the waiver with the third copy violates RMO 20-90 and RDAO 05-01.
Therefore, the First Waiver was not properly executed on 21 March 2007 and thus, could not have extended the three-
year prescriptive period to assess and collect taxes for the year 2004. To make matters worse, the CIR committed the
same error in the execution of the Second Waiver on 5 June 2007. Even if we consider that the First Waiver was validly
executed, the Second Waiver failed to extend the prescriptive period because its execution was contrary to the
procedure set forth in RMO 20-90 and RDAO 05-01. Granting further that the First and Second Waivers were validly
executed, the Third Waiver executed on 12 December 2007 still failed to extend the three-year prescriptive period
because it was not executed in three copies. In short, the records of the case showed that the CIR's three-year
prescriptive period to assess deficiency tax had already prescribed due to the defects of all the Waivers.

In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Incorporated,34 the Court explained the nature
of a waiver of assessment. The Court said:

In Philippine Journalist, Inc. v. Commissioner of Internal Revenue, the Court categorically stated that a Waiver must
strictly conform to RMO No. 20-90. The mandatory nature of the requirements set forth in RMO No. 20-90, as ruled
upon by this Court, was recognized by the BIR itself in the latter's subsequent issuances, namely, Revenue Memorandum
Circular (RMC) Nos. 6-2005 and 29-2012. Thus. the BIR cannot claim the benefits of extending the period to collect the
deficiency tax as a consequence of the Waiver when, in truth it was the BIR's inaction which is the proximate cause of
the defects of the Waiver. The BIR has the burden of ensuring compliance with the requirements of RMO No. 20-90 as
they have the burden of securing the right of the government to assess and collect tax deficiencies. This right would
prescribe absent any showing of a valid extension of the period set by the law.

To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the BIR must act on it, either by conforming to
or by disagreeing with the extension. A 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 0f 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 imply that the taxpayer relinquishes the right to invoke prescription unequivocally.

Although we recognize that the power of taxation is deemed inherent in order to support the government, tax
provisions are not all about raising revenue. Our legislature has provided safeguards and remedies beneficial to both the
taxpayer, to protect against abuse; and the government, to promptly act for the availability and recovery of revenues. A
statute of limitations on the assessment and collection of internal revenue taxes was adopted to serve a purpose that
would benefit both the taxpayer and the governn1ent.35

Clearly, the defects in the Waivers resulted to the non-extension of the period to assess or collect taxes, and made the
assessments issued by the BIR beyond the three-year prescriptive period void.36

The CIR also argues that PDI is estopped from questioning the validity of the Waivers. We do not agree. As stated by the
CTA, the BIR cannot shift the blame to the taxpayer for issuing defective waivers.37 The Court has ruled that the BIR
cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01 which were
issued by the BIR itself.38 A waiver of the statute of limitations is a derogation of the taxpayer's right to security against
prolonged and unscrupulous investigations and thus, it must be carefully and strictly construed.39

Since the three Waivers in this case are defective, they do not produce any effect and did not suspend the three-year
prescriptive period under Section 203 of the NIRC. As such, we sustain the cancellation of the Formal Letter of Demand
dated 11 March 2008 and Assessment No. LN # 116-AS- 04-00-00038-000526 for taxable year 2004 issued by the BIR
against PDI.

WHEREFORE, we DENY the petition.

SO ORDERED.

r. G.R. No. 221590 February 22, 2017

COMMISSIONER OF INTERNAL REVENUE vs. ASALUS CORPORATION

This petition for review on certiorari seeks to reverse and set aside the July 30, 2015 Decision1 and the November 6,
2015 Resolution2 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1191, which affirmed the April 2, 2014
Decision3 of the CTA Third Division (CTA Division).

The Antecedents

On December 16, 2010, respondent Asalus Corporation (Asalus) received a Notice of Informal Conference from Revenue
District Office (RDO) No. 47 of the Bureau of Internal Revenue (BIR). It was in connection with the investigation
conducted by Revenue Officer Fidel M. Bañares II (Bañares) on the Value-Added Tax (VAT) transactions of Asalus for the
taxable year 2007.4 Asalus filed its Letter-Reply,5 dated December 29, 2010, questioning the basis of Bañares'
computation for its VAT liability.

On January 10, 2011, petitioner Commissioner of Internal Revenue (CIR) issued the Preliminary Assessment
Notice (PAN) finding Asalus liable for deficiency VAT for 2007 in the aggregate amount of ₱413, 378, 058.11, inclusive of
surcharge and interest. Asalus filed its protest against the PAN but it was denied by the CIR. 6

On August 26, 2011, Asalus received the Formal Assessment Notice (FAN) stating that it was liable for deficiency VAT for
2007 in the total amount of ₱95,681,988.64, inclusive of surcharge and interest. Consequently, it filed its protest against
the FAN, dated September 6, 2011. Thereafter, Asal us filed a supplemental protest stating that the deficiency VAT
assessment had prescribed pursuant to Section 203 of the National Internal Revenue Code (NIRC).7

On October 16, 2012, Asal us received the Final Decision on Disputed Assessment8 (FDDA) showing VAT deficiency for
2007 in the aggregate amount of ₱106,761,025.17, inclusive of surcharge and interest and ₱25,000.00 as compromise
penalty. As a result, it filed a petition for review before the CTA Division.

The CTA Division Ruling

In its April 2, 2014 Decision, the CT A Division ruled that the VAT assessment issued on August 26, 2011 had prescribed
and consequently deemed invalid. It opined that the ten (10)-year prescriptive period under Section 222 of the NIRC was
inapplicable as neither the FAN nor the FDDA indicated that Asalus had filed a false VAT return warranting the
application of the ten (10)-year prescriptive period. It explained that it was only in the PAN where an allegation of false
or fraudulent return was made. The CTA stressed that after Asalus had protested the PAN, the CIR never mentioned in
both the FAN and the FDDA that the prescriptive period would be ten (10) years. It further pointed out that the CIR
failed to present evidence regarding its allegation of fraud or falsity in the returns.

The CTA wrote that "the three instances where the three-year prescriptive period will not apply must always be alleged
and established by clear and convincing evidence and should not be anchored on mere conjectures and
speculations,9 before the ten (10) year prescriptive period could be considered. Thus, it disposed:

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, the deficiency VAT assessment for taxable
year 2007 and the compromise penalty are hereby CANCELLED and WITHDRAWN, on ground of prescription.

SO ORDERED.10

The CIR moved for reconsideration but its motion was denied.

The CTA En Banc Ruling

In its July 30, 2015 Decision, the CTA En Banc sustained the assailed decision of the CT A Division and dismissed the
petition for review filed by the CIR. It explained that there was nothing in the FAN and the FDDA that would indicate, the
non-application of the three (3) year prescriptive period under Section 203 of the NIRC. It found that the CIR did not
present any evidence during the trial to substantiate its claim of falsity in the returns and again missed its chance to do
so when it failed to file its memorandum before the CTA Division.

The CTA En Banc further explained that the PAN alone could not be used as a basis because it was not the assessment
contemplated by law. Consequently, the allegation of falsity in Asalus' tax returns could not be considered as it was not
reiterated in the FAN. The dispositive portion thus reads:

WHEREFORE, premises considered, the present Petition for Review is hereby DENIED, and accordingly, DISMISSED for
lack of merit.

SO ORDERED.11
The CIR sought the reconsideration of the decision of the CTA En Banc, but the latter upheld its decision in its November
6, 2015 resolution.

Hence, this petition.

ISSUES

WHETHER PETITIONER HAD SUFFICIENTLY APPRISED RESPONDENT THAT THE FAN AND FDDA ISSUED AGAINST THE
LATTER FALLS UNDER SECTION 222(A) OF THE 1997 NIRC, AS AMENDED;

II

WHETHER RESPONDENT'S FAILURE TO REPORT IN ITS VAT RETURNS ALL THE FEES IT COLLECTED FROM ITS MEMBERS
APPLYING FOR HEALTHCARE SERVICES CONSTITUTES "FALSE" RETURN UNDER SECTION 222(A) OF THE 1997 NIRC, AS
AMENDED; AND

II

WHETHER PETITIONER'S RIGHT TO ASSESS RESPONDENT FOR ITS DEFICIENCY VAT FOR TAXABLE YEAR 2007 HAD
ALREADY PRESCRIBED.12

The CIR, through the Office of the Solicitor General (OSG), argues that the VAT assessment had yet to prescribe as the
applicable prescriptive period is the ten (10)-year prescriptive period under Section 222 of the NIRC, and not the three
(3) year prescriptive period under Section 203 thereof. It claims that Asalus was informed in the PAN of the ten (10)-year
prescriptive period and that the FAN made specific reference to the PAN. In turn, the FDDA made reference to the FAN.
Asalus, on the other hand, only raised prescription in its supplemental protest to the FAN. The CIR insists that Asalus was
made fully aware that the prescriptive period under Section 222 would apply.

Moreover, the CIR asserts that there was substantial understatement in Asalus' income, which exceeded 30% of what
was declared in its VAT returns as appearing in its quarterly VAT returns; and the underdeclaration was supported by the
judicial admission of its lone witness that not all the membership fees collected from members applying for healthcare
services were reported in its VAT returns. Thus, the CIR concludes that there was prima facie evidence of a false return.

The Position of Asalus

In its Comment/Opposition,13 dated April 22, 2016, Asalus countered that the present petition involved a question of
fact, which was beyond the ambit of a petition for review under Rule 45. Moreover, it asserted that the findings of fact
of the CT A Division, which were affirmed by the CTA En Banc, were conclusive and binding upon the Court. It posited
that the CIR could not raise for the first time on appeal a new argument that "the FDDA and the FAN need not explicitly
state the applicability of the ten-year prescriptive period and the bases thereof as long as the totality of the
circumstances show that the taxpayer was 'sufficiently informed' of the facts in support of the assessment. Based on the
totality of the circumstances, it was informed of the facts in support of the assessment." 14

Asalus reiterated that the CIR, either in the FAN or the FDDA, failed to show that it had filed false returns warranting the
application of the extraordinary prescriptive period under Section 222 of the NIRC. It insisted that it was not informed of
the facts and law on which the assessment was based because the FAN did not state that it filed false or fraudulent
returns. For this reason, Asalus averred that the assessment had prescribed because it was made beyond the three (3)-
year period as provided in Section 203 of the NIRC.

The Reply of the CIR

In its Reply, 15 dated August 15, 2016, the CIR argued that the findings of the CT A might be set aside on appeal if they
were not supported with substantial evidence or if there was a showing of gross error or abuse. It repeated that there
was presumption of falsity in light of the 30% underdeclaration of sales. The CIR emphasized that even Asalus' own
witness testified that not all the membership fees collected were reported in its VAT returns. It insisted that Asalus was
sufficiently informed of its assessment based on the prescriptive period under Section 222 of the NIRC as early as when
the PAN was issued.

On another note, the CIR manifested that Asalus' counsels made use of insulting words in its Comment, which could
have been dispensed with. Particularly, it highlighted the use of the following phrases as insulting: "even to the
uninitiated," "petitioner's habit of disregarding firmly established rules of procedure," "twist establish facts to suit her
ends," "just to indulge petitioner," and "she then tried to calculate, on her own but without factual basis." It asserted
that "[w]hile a lawyer has a complete discretion on what legal strategy to employ in a case, the overzealousness in
protecting his client's interest does not warrant the use of insulting and profane language in his pleadings xxx." 16

The Court's Ruling

There is merit in the petition.

It is true that the findings of fact of the CT A are, as a rule, respected by the Court, but they can be set aside in
exceptional cases. In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal
Revenue, this Court in Toshiba Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue, 17 explicitly
pronounced-

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.18 [Emphasis supplied]

After a review of the records and applicable laws and jurisprudence, the Court finds that the CTA erred in concluding
that the assessment against Asalus had prescribed.

Generally, internal revenue taxes shall be assessed within three (3) years after the ,last day prescribed by law for the
filing of the return, or where the return is filed beyond the period, from the day the return was actually filed. 19 Section
222 of the NIRC, however, provides for exceptions to the general rule. It states that in the case of a false or fraudulent
return with intent to evade tax or of failure to file a return, the assessment may be made within ten (10) years from the
discovery of the falsity, fraud or omission.

In the oft-cited Aznar v. CTA,20the Court compared a false return to a fraudulent return in relation to the applicable
prescriptive periods for assessments, to wit:

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 of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of
tax."

xxxx

xxx 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 assessmeμt, 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 seggregates 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 from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade
payment of tax or failure to file returns, the period of ten years 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. (Emphasis supplied)
Thus, a mere showing that the returns filed by the taxpayer were false, notwithstanding the absence of intent to
defraud, is sufficient to warrant the application of the ten (10) year prescriptive period under Section 222 of the NIRC.

Presumption of Falsity of Returns

In the present case, the CTA opined that the CIR failed to substantiate with clear and convincing evidence its claim that
Asalus filed a false return. As it noted that the CIR never presented any evidence to prove the falsity in the returns that
Asalus filed, the CTA ruled that the assessment was subject to the three (3) year ordinary prescriptive period.

The Court is of a different view.

Under Section 248(B) of the NIRC,21 there is a prima facie evidence of a false return if there is a substantial
underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or income in an amount
exceeding 30% what is declared in the returns constitute substantial underdeclaration. A prima facie evidence is one
which that will establish a fact or sustain a judgment unless contradictory evidence is produced. 22

In other words, when there is a showing that a taxpayer has substantially underdeclared its sales, receipt or income,
there is a presumption that it has filed a false return. As such, the CIR need not immediately present evidence to support
the falsity of the return, unless the taxpayer fails to overcome the presumption against it.

Applied in this case, the audit investigation revealed that there were undeclared VA Table sales more than 30% of that
declared in Asalus' VAT returns. Moreover, Asalus' lone witness testified that not all membership fees, particularly those
pertaining to medical practitioners and hospitals, were reported in Asalus' VAT returns. The testimony of its witness, in
trying to justify why not all of its sales were included in the gross receipts reflected in the VAT returns, supported the
presumption that the return filed was indeed false precisely because not all the sales of Asalus were included in the VAT
returns.

Hence, the CIR need not present further evidence as the presumption of falsity of the returns was not overcome. Asalus
was bound to refute the presumption of the falsity of the return and to prove that it had filed accurate returns. Its
failure to overcome the same warranted the application of the ten (10)-year prescriptive period for assessment under
Section 222 of the NIRC. To require the CIR to present additional evidence in spite of the presumption provided in
Section 248(B) of the NIRC would render the said provision inutile.

Substantial Compliance of Notice Requirement

The CTA also posited that the ordinary prescriptive period of three (3) years applied in this case because there was no
mention in the FAN or the FDDA that what would apply was the extraordinary prescriptive period and that the CIR did
not present any evidence to support its claim of false returns.

Again, the Court disagrees.

It is true that neither the FAN nor the FDDA explicitly stated that the applicable prescriptive period was the ten (10)-year
period set in Section 222 of the NIRC. They, however, made reference to the PAN, which categorically stated that "[t]he
running of the three-year statute of limitation I as provided un4er Section 203 of the 1997 National Internal Revenue
Code (NIRC) is not i applicable xxx but rather to the ten (10) year prescriptive period pursua11t to Section 222(A) of the
tax code xxx." 23 In Samar-I Electric Cooperative v. COMELEC,24the Court ruled that it sufficed that the taxpayer was
substantially informed of the legal and factual bases of the assessment enabling him to file an effective protest, to wit:

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.

Considerirg the foregoing exchange of correspondence and Document between the parties, we find that the
requirement of Section 228 was substantially complied with. Respondent had fully informed I 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. [Emphasis
supplied]

Thus, substantial compliance with the requirement as laid down under Section 228 of the NIRC suffices, for what is
important is that the taxpayer has been sufficiently informed of the factual and legal bases of the assessment so that it
may file an effective protest against the assessment. In the case at bench, Asalus was sufficiently informed that with
respect to its tax liability, the extraordinary period laid down in Section 222 of the NIRC would apply. This was
categorically stated in the PAN and all subsequent communications from the CIR made reference to the PAN. Asalus was
eventually able to file a protest addressing the issue on prescription, although it was done only in its supplemental
protest to the FAN.

Considering the existing circumstances, the assessment was timely made because the applicable prescriptive period was
the ten (10)-year prescriptive period under Section 222 of the NIRC. To reiterate, there was a prima facie showing that
the returns filed by Asalus were false, which it failed to controvert. Also, it was adequately informed that it was being
assessed within the extraordinary prescriptive period.

A Reminder

A lawyer is indeed expected to champion the cause of his client with utmost zeal and competence. Such exuberance,
however, must be tempered to meet the standards of civility and decorum. Rule 8.01 of the Code of Professional
Responsibility mandates that "[a] lawyer shall not, in his professional dealings, use language which is abusive, offensive
or otherwise improper." In Noble v. Atty. Ailes, 25 the Court cautioned lawyers to be careful in their: choice of words as
not to unduly malign the other party, to wit:

Though a lawyer's language may be forceful and emphatic, it should always be dignified and respectful, befitting the
dignity of the legal profession.1âwphi1 The use of intemperate language and unkind ascriptions has no place in the
dignity of the judicial forum. In Buatis Jr. v. People, the Court treated a lawyer's use of the words "lousy," "inutile,"
"carabao English," "stupidity," and "satan" in a letter addressed to another colleague as defamatory and injurious which
effectively maligned his integrity. Similarly, the hurling of insulting language to describe the opposing counsel is
considered conduct unbecoming of the legal profession.

xxx

On this score, it must be emphasized that membership in the bar is a privilege burdened with conditions such that a
lawyer's words and actions directly affect the public's opinion of the legal profession. Lawyers are expected to
observe such conduct of nobility and uprightness which should remain with them, whether in their public or private
lives, and may be disciplined in the event their conduct falls short of the standards imposed upon them. Thus, in this
case, it is inconsequential that the statements were merely relayed to Orlando's brother in private. As a member of the
bar, Orlando should have been more circumspect in his words, being fully aware that they pertain to another lawyer
to whom fairness as well as candor is owed. It was highly improper for Orlando to interfere and insult Maximino to his
client.

Indulging in offensive personalities in the course of judicial proceedings, as in this case, constitutes unprofessional
conduct which subjects a lawyer to disciplinary action. While a lawyer is entitled to. present his case with vigor and
courage, such enthusiasm does not justify the use of offensive and abusive language. The Court has consistently
reminded the members of the bar to abstain from all offensive personality and to advance no fact prejudicial to the
honor and reputation of a party. xxx26 [Emphases supplied]

While the Court recognizes and appreciates the passion of Asalus' counsels in promoting and protecting its interest, they
must still be reminded that they should be more circumspect in their choice of words to argue their client's position. As
much as possible, words which undermine the integrity, competence and ability of the opposing party, or are otherwise
offensive, must be avoided especially if the message may be delivered in a respectful, yet equally emphatic manner. A
counsel's mettle will not be viewed any less should he choose to pursue his cause without denigrating the other party.

WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the November 6, 2015 Resolution of the Court of Tax
Appeals En Banc are REVERSED and SET ASIDE. The case is ordered REMANDED to the Court of Tax Appeals for the
determination of the Value Added Tax liabilities of the Asalus Corporation.

SO ORDERED.

s. G.R. No. L-29485 March 31, 1976

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

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA Case No. 1346, cancelling and
declaring of no force and effect the assessment made by the petitioner, Commissioner of Internal Revenue, against the
accumulated surplus of the respondent, Ayala Securities Corporation.

The factual background of the case is as follows:

On November 29, 1955, respondent Ayala Securities Corporation, a domestic corporation organized and existing under
the laws of the Philippines, filed its income tax returns with the office of the petitioner for its fiscal year which ended on
September 30, 1955. Attached to its income tax return was the audited financial statements of the respondent
corporation as of September 30, 1955, showing a surplus of P2,758,442.37. The income tax due on the return of the
respondent corporation was duly paid for within the time prescribed by law.

In a letter dated February 21, 1961, petitioner advised the respondent corporation of the assessment of P758.687.04 on
its accumulated surplus reflected on its income tax return for the fiscal year which ended September 30, 1955 (Exit. D).
The respondent corporation, on the other hand, in a letter dated April 19, 1961, protested against the assessment on its
retained and accumulated surplus pertaining to the taxable year 1955 and sought reconsideration thereof for the
reasons (1) that the accumulation of the surplus was for a bona fide business purpose and not to avoid the imposition of
income tax on the individual shareholders, and (2) that the said assessment was issued beyond the five-year prescriptive
period (Exh. E).

On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting firm with the "advise that your
request for reconsideration will be the subject matter of further reinvestigation and a thorough analysis of the issues
involved conditioned, however, upon the execution of your client of the enclosed form for waiver of the defense of
prescription". (Exh. F) However, respondent corporation did not execute the requested waiver of the statute of
limitations, considering its claim that the assessment in question had already prescribed.

On February 21, 1963, respondent corporation received a letter dated February 18, 1963, from the Chief, Manila
Examiners, of the Office of the herein petitioner, calling the attention of the respondent corporation to its outstanding
and unpaid tax in the amount of P708,687.04 and thereby requesting for the payment of the said amount within five (5)
days from receipt of the said letter (Exh. G). Believing the aforesaid letter to be a denial of its protest, the herein
respondent corporation filed with the Court of Tax Appeals a Petition for Review of the assessment, docketed as CTA
Case No. 1346.

Respondent corporation in its Petition for Review alleges that the assessment made by petitioner Commissioner of
Internal Revenue is illegal and invalid considering that (1) the assessment in question, having been issued only on
February 21, 1961, and received by the respondent corporation on March 22, 1961, the same was issued beyond the
five-year period from the date of the filing of respondent corporations income tax return November 29, 1955, and,
therefore, petitioner's right to make the assessment has already prescribed, pursuant to the provision of Section 331 of
the National Internal Revenue Code; and (2) the respondent corporation's accumulation of surplus for the taxable year
1955 was not improper, considering that the retention of such surplus was intended for legitimate business purposes
and was not availed of by the corporation to prevent the imposition of the income tax upon its shareholders.

Petitioner in his answer alleged that the assessment made by his office on the accumulated surplus of the corporation as
reflected on its income tax return for the taxable year 1955 has not as yet prescribed and, further, that the respondent
corporation's accumulation of surplus for the taxable year 1955 was improper as the retention of such surplus was
availed of by the corporation to prevent the imposition of the income tax upon the individual shareholders or members
of the said corporation.

After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive portion of which is as follows:

WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing petitioner the
amount of P758,687.04 as 25 surtax and interest is reversed. Accordingly, said assessment of
respondent for 1955 is hereby cancelled and declared of no force and effect. Without pronouncement
as to costs.

From this decision, the Commissioner of Internal Revenue interposed this appeal.

Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter dated February 18, 1963, (Exh.
G) is a denial of the private respondent corporation's protest against the assessment, and as such, is a decision
contemplated under the provisions of Sections 7 and 11 of Republic Act No. 1125. Petitioner contends that the letter
dated February 18, 1963, is merely an ordinary office letter designed to remind delinquent taxpayers of their obligations
to pay their taxes to the Government and, certainly, not a decision on a disputed or protested assessment contemplated
under Section 7(1) of R.A. 1125.

Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding that the assessment of
P758,687.04 as surtax on private respondent corporation's unreasonably accumulated profits or surplus had already
prescribed. Petitioner further contends that the applicable provision of law to this case is Section 332 (a) of the National
Internal Revenue Code which provides for a ten (10) year prescriptive period of assessment, and not Section 331 thereof
as held by the Tax Court which provides a period of limitation of assessment for five (5) years only after the filing of the
return. Petitioner's theory, therefore, is to the effect that since the Corporate income tax return in question was filed on,
November 29, 1955, and the assessment thereto was issued on February 21, 1961, said assessment is not barred by
prescription as the same was made very well within the ten (10) year period allowed by law.

Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding the issue as to whether or not
the accumulated profits or surplus is indispensable to the business operations of the private respondent corporation. It
is the contention of the petitioner that the accumulation of profits or surplus was resorted to by the respondent
corporation in order to avoid the payment of taxes by its stockholders or members, and was not availed of in order to
meet the reasonable needs of its business operations.

The legal issues for resolution by this Court in this case are: (1) Whether or not the instant case falls within the
jurisdiction of the respondent Court of Tax Appeals; (2) Whether or not the applicable provision of law to this case is
Section 331 of the National Internal Revenue Code, which provides for a five-year period of prescription of assessment
from the filing of the return, or Section 332(a) of the same Code which provides for a ten-year period of limitation for
the same purpose; and (3) Whether or not the respondent Court of Tax Appeals committed a reversible error in not
making any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus in question of the
private respondent corporation.

It is to be noted that the respondent Court of Tax Appeals is a court of special appellate jurisdiction created under R. A.
No. 1125. Thus under Section 7 (1), R. A. 1125, the Court of Tax Appeals exercises exclusive appellate jurisdiction to
review by appeal "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".

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or
protest of the respondent corporation on the assessment made by the petitioner, considering that the said letter is in
itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made,
and for the immediate payment of the sum of P758, 687.04 in spite of the vehement protest of the respondent
corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the
reconsideration of the disputed assessment in view of the continued refusal of the respondent corporation to execute
the waiver of the period of limitation upon the assessment in question.

This being so, the said letter amounts to a decision on a disputed or protested assessment and, therefore, the court a
quo did not err in taking cognizance of this case.

II

On the issue of whether Sec. 331 or See. 332(a) of the National Internal Revenue Code should apply to this case, there is
no iota of evidence presented by the petitioner as to any fraud or falsity on the return with intent to evade payment of
tax, not even in the income tax assessment (Exh. 5) nor in the letter-decision of February 18, 1963 (Exh. G), nor in his
answer to the petition for review. Petitioner merely relies on the provisions of Sec 25 of the National Internal Revenue
Code, violation of which, according to Petitioner, presupposes the existence of fraud. But this is begging the question
and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The
finding of the trial court as to its existence and non- existence is final and cannot be reviewed here unless clearly shown
to be erroneous (Republic of the Philippines vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207;
Commissioner of Internal Revenue vs. Lilia Yusay Gonzales and the Court of Tax Appeals,
L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because it is serious charge (Yutivo Sons
Hardware Company vs. Court of Tax Appeals and Collector of Internal Revenue, L-13203, January 28,1961, 1 SCRA 160).

The applicable provision of law in this case is Section 331 of the National Internal Revenue Code, to wit:

SEC. 331. Period of limitation upon assessment and collection. — Except as provided in the succeeding
section, internal revenue taxes shall be assessed within five years after the return was filed, and no
proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period. For the purposes of this section, a return filed before the last day prescribed
by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation
shall not apply to cases already investigated prior to the approval of this Code.
Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities Corporation designated September 30,
1955, as the last day of the closing of its fiscal year, and under Section 46(b) the income tax returns for the said
corporation shall be filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of its fiscal
year. The Ayala Securities Corporation could, therefore, file its income tax returns on or before January 15, 1956. The
assessment by the Commissioner of Internal Revenue shall be made within five (5) years from January 15, 1956, or not
later than January 15, 1961, in accordance with Section 331 of the National Internal Revenue Code herein above-quoted.
As the assessment issued on February 21, 1961, which was received by the Ayala Securities Corporation on March 22,
1961, was made beyond the five-year period prescribed under Section 331 of said Code, the same was made after the
prescriptive period had expired and, therefore, was no longer binding on the Ayala Securities Corporation.

This Court is of the opinion that the respondent court committed no reversible error in not making any ruling on the
reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation. For this
reason, We are of the view that after reaching the conclusion that the right of the Commissioner of Internal Revenue to
assess the 25% surtax had already prescribed under Section 331 of the National Internal Revenue Code, to delve further
into the reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation for
the fiscal year ending September 30, 1955, will only be an exercise in futility.

WHEREFORE, the decision appealed from is hereby affirmed in toto.

Without special pronouncement as to costs.

SO ORDERED.