G.R. No. 175410. November 12, 2014.

14.* Same; Court of Tax Appeals; Jurisdiction; Section 7(a)(1) and Section 7(a)(2) of
Republic Act (RA) No. 1125, as amended by RA No. 9282, provide that the Court of Tax
SMI-ED PHILIPPINES TECHNOLOGY, INC., petitioner, vs.COMMISSIONER OF Appeals (CTA) reviews decisions and inactions of the Commissioner of Internal Revenue
INTERNAL REVENUE, respondent. (CIR) in disputed assessments and claims for tax refunds.—The Court of Tax Appeals has
no power to make an assessment at the first instance. On matters such as tax
Taxation; Assessment; Words and Phrases; The term “assessment” refers to the
collection, tax refund, and others related to the national internal revenue taxes, the
determination of amounts due from a person obligated to make payments.—The term
Court of Tax Appeals’ jurisdiction is appellate in nature. Section 7(a)(1) and Section
“assessment” refers to the determination of amounts due from a person obligated to
7(a)(2) of Republic Act No. 1125, as amended by Republic Act No. 9282, provide that
make payments. In the context of national internal revenue collection, it refers the
the Court of Tax Appeals reviews decisions and inactions of the Commissioner of
determination of the taxes due from a taxpayer under the National Internal Revenue
Internal Revenue in disputed assessments and claims for tax refunds.
Code of 1997.
Same; Assessment; Taxes are generally self-assessed. They are initially computed and
Same; Same; Bureau of Internal Revenue; The power and duty to assess national
voluntarily paid by the taxpayer. The government does not have to demand it.—Taxes are
internal revenue taxes are lodged with the Bureau of Internal Revenue (BIR).—The power
generally self-assessed. They are initially computed and voluntarily paid by the
and duty to assess national internal revenue taxes are lodged with the BIR. Section 2
taxpayer. The government does not have to demand it. If the tax payments are
of the National Internal Revenue Code of 1997 provides: SEC. 2.Powers and Duties of
correct, the BIR need not make an assessment. The self-assessing and voluntarily
the Bureau of Internal Revenue.—The Bureau of Internal Revenue shall be under the
paying taxpayer, however, may later find that he or she has erroneously paid taxes.
supervision and control of the Department of Finance and its powers and duties shall
Erroneously paid taxes may come in the form of amounts that should not have been
comprehend the assessment and collection of all national internal revenue taxes, fees, and
paid. Thus, a taxpayer may find that he or she has paid more than the amount that
charges, and the enforcement of all forfeitures, penalties, and fines connected
should have been paid under the law. Erroneously paid taxes may also come in the
therewith, including the execution of judgments in all cases decided in its favor by
form of tax payments for the wrong category of tax. Thus, a taxpayer may find that he
the Court of Tax Appeals and the ordinary courts. The Bureau shall give effect to and
or she has paid a certain kind of tax that he or she is not subject to.
administer the supervisory and police powers conferred to it by this Code or other
Same; Same; Court of Tax Appeals; The Court of Tax Appeals (CTA) has no power to
laws. (Emphasis supplied) The BIR is not mandated to make an assessment relative to
make an assessment.—Petitioner argued that the Court of Tax Appeals had no
every return filed with it. Tax returns filed with the BIR enjoy the presumption that
jurisdiction to subject it to 6% capital gains tax or other taxes at the first instance. The
these are in accordance with the law. Tax returns are also presumed correct since
Court of Tax Appeals has no power to make an assessment. As earlier established, the
these are filed under the penalty of perjury. Generally, however, the BIR assesses
Court of Tax Appeals has no assessment powers. In stating that petitioner’s
taxes when it appears, after a return had been filed, that the taxes paid were incorrect,
transactions are subject to capital gains tax, however, the Court of Tax Appeals was
false, or fraudulent. The BIR also assesses taxes when taxes are due but no return is
not making an assessment. It was merely determining the proper category of tax that
filed.
petitioner should have paid, in view of its claim that it erroneously imposed upon
692
itself and paid the 5% final tax imposed upon PEZA-registered enterprises.

6 SUPREME COURT 693

92 REPORTS ANNOTATED
VOL. 739, NOVEMBER 12, 6
SMI-ED Philippines Technology, Inc.
2014 93
vs. Commissioner of Internal Revenue
SMI-ED Philippines Technology, Inc.
vs. Commissioner of Internal Revenue
 Same; Tax Refunds; A claim for tax refund carries the assumption that the tax returns
filed were correct.—The issue of petitioner’s claim for tax refund is intertwined with
the issue of the proper taxes that are due from petitioner. A claim for tax refund
carries the assumption that the tax returns filed were correct. If the tax return filed
was not proper, the correctness of the amount paid and, therefore, the claim for
refund become questionable. In that case, the court must determine if a taxpayer
claiming refund of erroneously paid taxes is more properly liable for taxes other than
that paid.
Same; Republic Act No. 7916; The purpose of Republic Act (RA) No. 7916 is to
promote development and encourage investments and business activities that will generate
employment.—Essentially, the purpose of Republic Act No. 7916 is to promote
development and encourage investments and business activities that will generate
employment. Giving fiscal incentives to businesses is one of the means devised to
achieve this purpose. It comes with the expectation that persons who will avail these
incentives will contribute to the purpose’s achievement. Hence, to avail the fiscal
incentives under Republic Act No. 7916, the law did not say that mere PEZA
registration is sufficient.
Same; Capital Assets; Words and Phrases; “Capital assets” refers to taxpayer’s
property that is NOT any of the following: Stock in trade; Property that should be included in
the taxpayer’s inventory at the close of the taxable year; Property held for sale in the ordinary
course of the taxpayer’s business; Depreciable property used in the trade or business; and Real
property used in the trade or business.—Thus, “capital assets” refers to taxpayer’s
property that is NOT any of the following: 1. Stock in trade; 2. Property that should
be included in the taxpayer’s inventory at the close of the taxable year; 3. Property
held for sale in the ordinary course of the taxpayer’s business; 4. Depreciable
property used in the trade or business; and 5. Real property used in the trade or
business.
Same; Corporations; For corporations, the National Internal Revenue Code (NIRC) of
1997 treats the sale of land andbuildings, and the sale of machineries and equipment,
differently.—For corporations, the National Internal Revenue Code of 1997 treats the
sale of land and buildings, and the sale of machineries and equipment, differently.
Domestic corporations are imposed a 6% capital gains tax only on the presumed gain
realized from the sale of lands and/or
694
6 SUPREME COURT
94 REPORTS ANNOTATED
SMI-ED Philippines Technology, Inc.
vs. Commissioner of Internal Revenue
buildings. The National Internal Revenue Code of 1997 does not impose the 6%
capital gains tax on the gains realized from the sale of machineries and equipment.
Remedial Law; Evidence; Presumptions; Rule 131, Section 3(ff) of the Rules of Court
provides for the presumption that the law has been obeyed unless contradicted or overcome.—
Rule 131, Section 3(ff) of the Rules of Court provides for the presumption that the law
has been obeyed unless contradicted or overcome by other evidence, thus: SEC.
3.Disputable presumptions.—The following presumptions are satisfactory if
uncontradicted, but may be contradicted and overcome by other evidence: . . . . (ff)
That the law has been obeyed.
Taxation; Assessment; Income Tax Returns; Section 203 of the National Internal
Revenue Code (NIRC) of 1997 provides that as a general rule, the Bureau of Internal Revenue
(BIR) has three (3) years from the last day prescribed by law for the filing of a return to make
an assessment.—Section 203 of the National Internal Revenue Code of 1997 provides
that as a general rule, the BIR has three (3) years from the last day prescribed by law
for the filing of a return to make an assessment. If the return is filed beyond the last
day prescribed by law for filing, the three-year period shall run from the actual date
of filing. Thus: 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.
PETITION for review on certiorari of the decision of the Court of Tax AppealsEn
Banc.
The facts are stated in the opinion of the Court.
Cabrera, Lavadia & Associates for petitioner.
Office of the Solicitor General for respondent.
695
VOL. 739, NOVEMBER 12, 2014 695 Philippines filed an administrative claim for the refund of P44,677,500.00 with the
SMI-ED Philippines Technology, Inc. vs. Bureau of Internal Revenue (BIR). SMI-Ed Philippines alleged that the amount was
Commissioner of Internal Revenue erroneously paid. It also indicated the refundable amount in its final income tax
LEONEN, J.: return filed on March 1, 2001. It also alleged that it incurred a net loss of
In an action for the refund of taxes allegedly erroneously paid, the Court of Tax P2,233,464,538.00.12
Appeals may determine whether there are taxes that should have been paid in lieu of The BIR did not act on SMI-Ed Philippines’ claim, which prompted the latter to
the taxes paid. Determining the proper category of tax that should have been paid is file a petition for review before the Court of Tax Appeals on September 9, 2002.13
not an assessment. It is incidental to determining whether there should be a refund. 697
A Philippine Economic Zone Authority (PEZA)-registered corporation that has VOL. 739, NOVEMBER 12, 2014 697
never commenced operations may not avail the tax incentives and preferential rates SMI-ED Philippines Technology, Inc. vs.
given to PEZA-registered enterprises. Such corporation is subject to ordinary tax rates Commissioner of Internal Revenue
under the National Internal Revenue Code of 1997. The Court of Tax Appeals Second Division denied SMI-Ed Philippines’ claim for
This is a petition for review1on certiorari of the November 3, 2006 Court of Tax refund in the decision dated December 29, 2004.14
AppealsEn Banc decision.2 It affirmed the Court of Tax Appeals Second Division’s The Court of Tax Appeals Second Division found that SMI-Ed Philippines’
decision3 and resolution4 denying petitioner SMI-Ed Philippines Technology, Inc.’s administrative claim for refund and the petition for review with the Court of Tax
(SMI-Ed Philippines) claim for tax refund.5 Appeals were filed within the two-year prescriptive period.15However, fiscal
SMI-Ed Philippines is a PEZA-registered corporation authorized “to engage in incentives given to PEZA-registered enterprises may be availed only by PEZA-
the business of manufacturing ultra high-density microprocessor unit package.”6 registered enterprises that had already commenced operations. 16 Since SMI-Ed
696 Philippines had not commenced operations, it was not entitled to the incentives of
696 SUPREME COURT REPORTS either the income tax holiday or the 5% preferential tax rate.17 Payment of the 5%
ANNOTATED preferential tax amounting to P44,677,500.00 was erroneous.18
SMI-ED Philippines Technology, Inc. vs. After finding that SMI-Ed Philippines sold properties that were capital assets
Commissioner of Internal Revenue under Section 39(A)(1) of the National Internal Revenue Code of 1997, the Court of
After its registration on June 29, 1998, SMI-Ed Philippines constructed buildings Tax Appeals Second Division subjected the sale of SMI-Ed Philippines’ assets to 6%
and purchased machineries and equipment.7As of December 31, 1999, the total cost of capital gains tax under Section 27(D)(5) of the same Code and Section 2 of Revenue
the properties amounted to P3,150,925,917.00.8 Regulations No. 8-98.19 It was found liable for capital gains tax amounting to
SMI-Ed Philippines “failed to commence operations.”9 Its factory was temporarily P53,613,000.00.20 Therefore, SMI-Ed Philippines must still pay the balance of
closed, effective October 15, 1999. On August 1, 2000, it sold its buildings and some of P8,935,500.00 as deficiency tax,21 “which respondent should perhaps look into.”22The
its installed machineries and equipment to Ibiden Philippines, Inc., another PEZA- dispositive portion of the Court of Tax Appeals Second Division’s decision reads:
registered enterprise, for ¥2,100,000,000.00 (P893,550,000.00). SMI-Ed Philippines was 698
dissolved on November 30, 2000.10 698 SUPREME COURT REPORTS
In its quarterly income tax return for year 2000, SMI-Ed Philippines subjected the ANNOTATED
entire gross sales of its properties to 5% final tax on PEZA-registered corporations. SMI-ED Philippines Technology, Inc. vs.
SMI-Ed Philippines paid taxes amounting to P44,677,500.00. 11 Commissioner of Internal Revenue
On February 2, 2001, after requesting the cancellation of its PEZA registration and WHEREFORE, premises considered, the instant petition is hereby DENIED.
amending its articles of incorporation to shorten its corporate term, SMI-Ed SO ORDERED.23

The Court of Tax Appeals denied SMI-Ed Philippines’ motion for reconsideration
in its June 15, 2005 resolution.24
On July 17, 2005, SMI-Ed Philippines filed a petition for review before the Court
of Tax Appeals En Banc.25 It argued that the Court of Tax Appeals Second Division
erroneously assessed the 6% capital gains tax on the sale of SMI-Ed Philippines’
equipment, machineries, and buildings.26It also argued that the Court of Tax Appeals
Second Division cannot make an assessment at the first instance. 27 Even if the Court
of Tax Appeals Second Division has such power, the period to make an assessment
had already prescribed.28
In the decision promulgated on November 3, 2006, the Court of Tax Appeals En
Bancdismissed SMI-Ed Philippines’ petition and affirmed the Court of Tax Appeals
Second Division’s decision and resolution.29 The dispositive portion of the Court of
Tax Appeals En Banc’s decision reads:
WHEREFORE, finding no reversible error to reverse the assailed Decision
promulgated on December 29, 2004 and the Resolution dated June 15, 2005, the
instant petition for review is hereby DISMISSED. Accordingly, the assailed Decision
and Resolution are herebyAFFIRMED.
SO ORDERED.30
699
VOL. 739, NOVEMBER 12, 2014 699
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
SMI-Ed Philippines filed a petition for review before this court on December 27,
2006,31praying for the grant of its claim for refund and the reversal of the Court of Tax
Appeals En Banc’s decision.32
SMI-Ed Philippines assigned the following errors:
A. The honorable CTA En Bancgrievously erred and acted beyond its jurisdiction
when it assessed for deficiency tax in the first instance.
B. Even assuming that the honorable CTA En Banc has the right to make an
assessment against the petitioner-appellant, it grievously erred in finding that the
machineries and equipment sold by the petitioner-appellant is subject to the six
percent (6%) capital gains tax under Section 27(D)(5) of the Tax Code.33
Petitioner argued that the Court of Tax Appeals has no jurisdiction to make an
assessment since its jurisdiction, with respect to the decisions of respondent, is merely
appellate.34 Moreover, the power to make assessment had already prescribed under
Section 203 of the National Internal Revenue Code of 1997 since the return for the
erroneous payment was filed on September 13, 2000. This is more than three (3) years
from the last day prescribed by law for the filing of the return. 35
Petitioner also argued that the Court of Tax Appeals En Banc erroneously
subjected petitioner’s machineries to 6% capital gains tax.36 Section 27(D)(5) of the
National Internal Revenue Code of 1997 is clear that the 6% capital gains tax on
700
700 SUPREME COURT REPORTS
ANNOTATED
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
domestic corporations applies only on the sale of lands and buildings and not to
machineries and equipment.37Since ¥1,700,000,000.00 of the ¥2,100,000,000.00
constituted the consideration for the sale of petitioner’s machineries, only
¥400,000,000.00 or P170,200,000.00 should be subjected to the 6% capital gains
tax.38 Petitioner should be liable only for P10,212,000.00.39 It should be entitled to a
refund of P34,464,500.00 after deducting P10,212,000.00 from the erroneously paid
final tax of P44,677,500.00.40
In its comment, respondent argued that the Court of Tax Appeals’ determination
of petitioner’s liability for capital gains tax was not an assessment. Such
determination was necessary to settle the question regarding the tax consequence of
the sale of the properties.41This is clearly within the Court of Tax Appeals’
jurisdiction under Section 7 of Republic Act No. 9282.42 Respondent also argued that
“petitioner failed to justify its claim for refund.”43
The petition is meritorious.
I
Jurisdiction of the Court of Tax Appeals
The term “assessment” refers to the determination of amounts due from a person
obligated to make payments. In the context of national internal revenue collection, it
refers the determination of the taxes due from a taxpayer under the National Internal
Revenue Code of 1997.
 701 any deficiency tax so assessed shall be paid upon notice and demand from the
VOL. 739, NOVEMBER 12, 2014 701 Commissioner or from his duly authorized representative.
SMI-ED Philippines Technology, Inc. vs. ....
Commissioner of Internal Revenue SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection
The power and duty to assess national internal revenue taxes are lodged with the of Taxes.—
BIR.44 Section 2 of the National Internal Revenue Code of 1997 provides: (a) In the case of a false or fraudulent return with intent to evade tax or of failure to
SEC. 2. Powers and Duties of the Bureau of Internal Revenue.—The Bureau of file a return, the tax may be assessed, or a preceeding in court for the collection of such
Internal Revenue shall be under the supervision and control of the Department of tax may be filed without assessment, at any time within ten (10) years after the
Finance and its powers and duties shall comprehend the assessment and collection of all discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which
national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, has become final and executory, the fact of fraud shall be judicially taken cognizance
penalties, and fines connected therewith, including the execution of judgments in all of in the civil or criminal action for the collection thereof. (Emphasis supplied)
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
The Court of Tax Appeals has no power to make an assessment at the first
conferred to it by this Code or other laws. (Emphasis supplied)
instance. On matters such as tax collection, tax refund, and others related to the
national internal revenue taxes, the Court of Tax Appeals’ jurisdiction is appellate in
The BIR is not mandated to make an assessment relative to every return filed with nature.
it. Tax returns filed with the BIR enjoy the presumption that these are in accordance Section 7(a)(1) and Section 7(a)(2) of Republic Act No. 1125,51 as amended by
with the law.45 Tax returns are also presumed correct since these are filed under the Republic Act No. 9282,52provide that
penalty of perjury.46 Generally, however, the BIR assesses taxes when it appears, after 703
a return had been filed, that the taxes paid were incorrect, 47 false,48 or VOL. 739, NOVEMBER 12, 2014 703
fraudulent.49 The BIR also assesses taxes when taxes are due but no return is SMI-ED Philippines Technology, Inc. vs.
filed.50Thus: Commissioner of Internal Revenue
SEC. 6. Power of the Commissioner to Make assessments and Prescribe the Court of Tax Appeals reviews decisions and inactions of the Commissioner of
additional Requirements for Tax Administration and Enforcement.— Internal Revenue in disputed assessments and claims for tax refunds. Thus:
702 SEC. 7. Jurisdiction.—The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
702 SUPREME COURT REPORTS
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
ANNOTATED
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
SMI-ED Philippines Technology, Inc. vs.
thereto, or other matters arising under the National Internal Revenue or other laws
Commissioner of Internal Revenue
administered by the Bureau of Internal Revenue;
(A) Examination of Returns and Determination of Tax Due.—After a return has been
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed
filed as required under the provisions of this Code, the Commissioner or his duly
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations
authorized representative may authorize the examination of any taxpayer and the
thereto, or other matters arising under the National Internal Revenue Code or other
assessment of the correct amount of tax:Provided, however; That failure to file a return shall
laws administered by the Bureau of Internal Revenue, where the National Internal
not prevent the Commissioner from authorizing the examination of any taxpayer.The tax or
Revenue Code provides a specific period of action, in which case the inaction shall be decisions. When the BIR fails to act on a claim for refund of voluntarily but
deemed a denial[.] (Emphasis supplied) mistakenly paid taxes, for example, there is no decision or assessment involved.
Taxes are generally self-assessed. They are initially computed and voluntarily
paid by the taxpayer. The government does not have to demand it. If the tax
Based on these provisions, the following must be present for the Court of Tax
payments are correct, the BIR need not make an assessment.
Appeals to have jurisdiction over a case involving the BIR’s decisions or inactions:
705
a) A case involving any of the following: VOL. 739, NOVEMBER 12, 2014 705
i. Disputed assessments; SMI-ED Philippines Technology, Inc. vs.
ii. Refunds of internal revenue taxes, fees, or other charges, penalties in relation Commissioner of Internal Revenue
thereto; and
The self-assessing and voluntarily paying taxpayer, however, may later find that
iii. Other matters arising under the National Internal Revenue Code of 1997.
he or she has erroneously paid taxes. Erroneously paid taxes may come in the form of
704
amounts that should not have been paid. Thus, a taxpayer may find that he or she has
704 SUPREME COURT REPORTS
paid more than the amount that should have been paid under the law. Erroneously
ANNOTATED
paid taxes may also come in the form of tax payments for the wrong category of tax.
SMI-ED Philippines Technology, Inc. vs.
Thus, a taxpayer may find that he or she has paid a certain kind of tax that he or she
Commissioner of Internal Revenue
is not subject to.
b) Commissioner of Internal Revenue’s decision or inaction in a case submitted to
In these instances, the taxpayer may ask for a refund. If the BIR fails to act on the
him or her.
request for refund, the taxpayer may bring the matter to the Court of Tax Appeals.
Thus, the BIR first has to make an assessment of the taxpayer’s liabilities. When
From the taxpayer’s self-assessment and tax payment up to his or her request for
the BIR makes the assessment, the taxpayer is allowed to dispute that assessment
refund and the BIR’s inaction, the BIR’s participation is limited to the receipt of the
before the BIR. If the BIR issues a decision that is unfavorable to the taxpayer or if the
taxpayer’s payment. The BIR does not make an assessment; the BIR issues no
BIR fails to act on a dispute brought by the taxpayer, the BIR’s decision or inaction
decision; and there is no dispute yet involved.
may be brought on appeal to the Court of Tax Appeals. The Court of Tax Appeals
Since there is no BIR assessment yet, the Court of Tax Appeals may not determine
then acquires jurisdiction over the case.
the amount of taxes due from the taxpayer. There is also no decision yet to review.
When the BIR’s unfavorable decision is brought on appeal to the Court of Tax
However, there was inaction on the part of the BIR. That inaction is within the Court
Appeals, the Court of Tax Appeals reviews the correctness of the BIR’s assessment
of Tax Appeals’ jurisdiction.
and decision. In reviewing the BIR’s assessment and decision, the Court of Tax
In other words, the Court of Tax Appeals may acquire jurisdiction over cases
Appeals had to make its own determination of the taxpayer’s tax liabilities. The Court
even if they do not involve BIR assessments or decisions.
of Tax Appeals may not make such determination before the BIR makes its
In this case, the Court of Tax Appeals’ jurisdiction was acquired because
assessment and before a dispute involving such assessment is brought to the Court of
petitioner brought the case on appeal before the Court of Tax Appeals after the BIR
Tax Appeals on appeal.
had failed to act on petitioner’s claim for refund of erroneously paid taxes. The Court
The Court of Tax Appeals’ jurisdiction is not limited to cases when the BIR makes
of Tax Appeals did not acquire jurisdiction as a result of a disputed assessment of a
an assessment or a decision unfavorable to the taxpayer. Because Republic Act No.
BIR decision.
112553 also vests the Court of Tax Appeals with jurisdiction over the BIR’s inaction on
Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to
a taxpayer’s refund claim, there may be instances when the Court of Tax Appeals has
6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals has
to take cognizance of cases that have nothing to do with the BIR’s assessments or
no power to make an assessment.
 706 tax and, instead, liable for taxes other than the 5% final tax. As in South African
706 SUPREME COURT REPORTS Airways, petitioner’s request for refund can neither be granted nor denied outright
ANNOTATED without such determination.58
SMI-ED Philippines Technology, Inc. vs. If the taxpayer is found liable for taxes other than the erroneously paid 5% final
Commissioner of Internal Revenue tax, the amount of the taxpayer’s liability should be computed and deducted from the
As earlier established, the Court of Tax Appeals has no assessment powers. In refundable amount.
stating that petitioner’s transactions are subject to capital gains tax, however, the Any liability in excess of the refundable amount, however, may not be collected
Court of Tax Appeals was not making an assessment. It was merely determining the in a case involving solely the issue of the taxpayer’s entitlement to refund. The
proper category of tax that petitioner should have paid, in view of its claim that it question of tax deficiency is distinct and unrelated to the question of petitioner’s
erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA- entitlement to refund. Tax deficiencies should be subject to assessment procedures
registered enterprises. and the rules of prescription. The court cannot be expected to perform the BIR’s
The determination of the proper category of tax that petitioner should have paid duties whenever it fails to do so either through neglect or oversight. Neither can court
is an incidental matter necessary for the resolution of the principal issue, which is processes be used as a tool to circumvent laws protecting the rights of taxpayers.
whether petitioner was entitled to a refund.54
The issue of petitioner’s claim for tax refund is intertwined with the issue of the II
proper taxes that are due from petitioner. A claim for tax refund carries the Petitioner’s entitlement to benefits given
assumption that the tax returns filed were correct.55 If the tax return filed was not to PEZA-registered enterprises
proper, the correctness of the amount paid and, therefore, the claim for refund
become questionable. In that case, the court must determine if a taxpayer claiming Petitioner is not entitled to benefits given to PEZA-registered enterprises,
refund of erroneously paid taxes is more properly liable for taxes other than that including the 5% preferential tax rate
paid. 708
In South African Airways v. Commissioner of Internal Revenue,56 South African 708 SUPREME COURT REPORTS
Airways claimed for refund of its erroneously paid 2 1/2% taxes on its gross ANNOTATED
Philippine billings. This court did not immediately grant South African’s claim for SMI-ED Philippines Technology, Inc. vs.
refund. This is because although this court found that South African Airways was not Commissioner of Internal Revenue
subject to the 2 1/2% tax on under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This is
707 because it never began its operation.
VOL. 739, NOVEMBER 12, 2014 707 Essentially, the purpose of Republic Act No. 7916 is to promote development and
SMI-ED Philippines Technology, Inc. vs. encourage investments and business activities that will generate
Commissioner of Internal Revenue employment.59Giving fiscal incentives to businesses is one of the means devised to
its gross Philippine billings, this court also found that it was subject to 32% tax on its achieve this purpose. It comes with the expectation that persons who will avail these
taxable income.57 incentives will contribute to the purpose’s achievement. Hence, to avail the fiscal
In this case, petitioner’s claim that it erroneously paid the 5% final tax is an incentives under Republic Act No. 7916, the law did not say that mere PEZA
admission that the quarterly tax return it filed in 2000 was improper. Hence, to registration is sufficient.
determine if petitioner was entitled to the refund being claimed, the Court of Tax Republic Act No. 7916 or The Special Economic Zone Act of 1995 provides:
Appeals has the duty to determine if petitioner was indeed not liable for the 5% final
 SEC. 23. Fiscal Incentives.—Business establishments operating within the corporations to maintain court actions. In Mentholatum Co., Inc., et al. v. Mangaliman, et
ECOZONES shall be entitled to the fiscal incentives as provided for under al.,61 this court said that the terms “doing” or “engaging in” or “transacting business”:
Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or . . . impl[y] a continuity of commercial dealings and arrangements, and
those provided under Book VI of Executive Order No. 226, otherwise known as the contemplates, to that extent, the performance of acts or works or the exercise of some
Omnibus Investment Code of 1987. of the functions normally incident to, and in progressive prosecution of, the purpose
Furthermore, tax credits for exporters using local materials as inputs shall enjoy and object of its organization.62
the same benefits provided for in the Export Development Act of 1994.
710
SEC. 24. Exemption from Taxes Under the National Internal Revenue Code.—Any
710 SUPREME COURT REPORTS
provision of existing laws, rules and regulations to the contrary notwithstanding, no
ANNOTATED
taxes, local and national, shall be imposed onbusiness establishments operating within
SMI-ED Philippines Technology, Inc. vs.
the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned
Commissioner of Internal Revenue
by all businesses and enterprises within the ECOZONE shall be remitted to the
Petitioner never started its operations since its registration on June 29,
national government. This five percent (5%) shall be shared and distributed as
199863because of the Asian financial crisis.64 Petitioner admitted this.65 Therefore, it
follows:
cannot avail the incentives provided under Republic Act No. 7916. It is not entitled to
a. Three percent (3%) to the national government;
the preferential tax rate of 5% on gross income in lieu of all taxes. Because petitioner
709
is not entitled to a preferential rate, it is subject to ordinary tax rates under the
VOL. 739, NOVEMBER 12, 2014 709 National Internal Revenue Code of 1997.
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue III
b. One percent (1%) to the local government units affected by the declaration of Imposition of capital gains tax
the ECOZONE in proportion to their population, land area, and equal sharing factors;
and The Court of Tax Appeals found that petitioner’s sale of its properties is subject to
c. One percent (1%) for the establishment of a development fund to be utilized for capital gains tax.
the development of municipalities outside and contiguous to each For petitioner’s properties to be subjected to capital gains tax, the properties must
ECOZONE: Provided, however, That the respective share of the affected local form part of petitioner’s capital assets.
government units shall be determined on the basis of the following formula: Section 39(A)(1) of the National Internal Revenue Code of 1997 defines “capital
1. Population – fifty percent (50%); assets”:
2. Land area – twenty-five percent (25%); and SEC. 39. Capital Gains and Losses.—
3. Equal sharing – twenty-five percent (25%). (Emphasis supplied) (A) Definitions.—As used in this Title.—
(1) Capital Assets.—the term ‘capital assets’ means property held by the
Based on these provisions, the fiscal incentives and the 5% preferential tax rate taxpayer (whether or not connected with his trade or business), but does not include
are available only to businesses operating within the Ecozone. 60 A business is stock in trade of the taxpayer or other property of a kind which would properly be
considered in operation when it starts entering into commercial transactions that are included in the inventory of the taxpayer if on hand at the close of the taxable year, or
not merely incidental to but are related to the purposes of the business. It is similar to property held by the taxpayer primarily for sale to customers in the ordinary course
the definition of “doing business,” as applied in actions involving the right of foreign
of his trade or business, or propertyused in the trade or business, of a character which SMI-ED Philippines Technology, Inc. vs.
is subject to the allowance for depreciation provided in Sub- Commissioner of Internal Revenue
711 that purpose. Accordingly, the general rule of requiring adherence to the letter in
construing statutes applies with peculiar strictness to tax laws and the provisions of a
VOL. 739, NOVEMBER 12, 2014 711
taxing act are not to be extended by implication. In answering the question of who is
SMI-ED Philippines Technology, Inc. vs.
subject to tax statutes, it is basic that in case of doubt, such statutes are to be
Commissioner of Internal Revenue
construed most strongly against the government and in favor of the subjects or
section (F) of Section 34; or real property used in trade or business of the taxpayer.
citizens because burdens are not to be imposed nor presumed to be imposed beyond
(Emphasis supplied)
what statutes expressly and clearly import. As burdens, taxes should not be unduly
exacted nor assumed beyond the plain meaning of the tax laws. 67 (Citations omitted)

Thus, “capital assets” refers to taxpayer’s property that is NOT any of the
following:
Capital gains of individuals and corporations from the sale of real properties are
1. Stock in trade;
taxed differently.
2. Property that should be included in the taxpayer’s inventory at the close of the
Individuals are taxed on capital gains from sale of all real properties located in
taxable year;
the Philippines and classified as capital assets. Thus:
3. Property held for sale in the ordinary course of the taxpayer’s business;
SEC. 24. Income Tax Rates.—
4. Depreciable property used in the trade or business; and
....
5. Real property used in the trade or business.
(D) Capital Gains from Sale of Real Property.—
The properties involved in this case include petitioner’s buildings, equipment,
(1) In General.—The provisions of Section 39(B) notwithstanding, a final tax of
and machineries. They are not among the exclusions enumerated in Section 39(A)(1)
six percent (6%) based on the gross selling price or current fair market value as
of the National Internal Revenue Code of 1997. None of the properties were used in
determined in accordance with Section 6(E) of this Code, whichever is higher, is
petitioner’s trade or ordinary course of business because petitioner never commenced
hereby imposed upon capital gains presumed to have been realized from the sale, exchange,
operations. They were not part of the inventory. None of them were stocks in trade.
or other disposition of real property located in the Philippines, classified as capital assets,
Based on the definition of capital assets under Section 39 of the National Internal
including pacto de retro sales and other forms of conditional sales, by individuals,
Revenue Code of 1997, they are capital assets.
including estates and trusts:Provided, That the tax liability, if any, on gains from sales
Respondent insists that since petitioner’s machineries and equipment are
or other dispositions of real property to the government or any of its political
classified as capital assets, their sales should be subject to capital gains tax.
subdivisions or agencies
Respondent is mistaken.
713
In Commissioner of Internal Revenue v. Fortune Tobacco Corporation,66 this court said:
The rule in the interpretation of tax laws is that a statute will not be construed as VOL. 739, NOVEMBER 12, 2014 713
imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot SMI-ED Philippines Technology, Inc. vs.
be imposed without clear and express words for Commissioner of Internal Revenue
712 or to government-owned or -controlled corporations shall be determined either under
Section 24(A) or under this Subsection, at the option of the taxpayer. 68(Emphasis
712 SUPREME COURT REPORTS
supplied)
ANNOTATED
 For corporations, the National Internal Revenue Code of 1997 treats the sale of
land and buildings, and the sale of machineries and equipment, differently. Domestic
corporations are imposed a 6% capital gains tax only on the presumed gain realized
from the sale of lands and/or buildings. The National Internal Revenue Code of 1997
does not impose the 6% capital gains tax on the gains realized from the sale of
machineries and equipment. Section 27(D)(5) of the National Internal Revenue Code
of 1997 provides:
SEC. 27. Rates of Income tax on Domestic Corporations.—
....
(D) Rates of Tax on Certain Passive Incomes.—
....
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings.—A final tax of six percent (6%) is hereby imposed on the gain presumed to
have been realized on the sale, exchange or disposition of lands and/or buildings which are
not actually used in the business of a corporation and are treated as capital assets,
based on the gross selling price of fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, of such lands and/or buildings.
(Emphasis supplied)
Therefore, only the presumed gain from the sale of petitioner’s land and/or
building may be subjected to the 6% capital gains tax. The income from the sale of
petitioner’s machin-
714
714 SUPREME COURT REPORTS
ANNOTATED
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
eries and equipment is subject to the provisions on normal corporate income tax.
To determine, therefore, if petitioner is entitled to refund, the amount of capital
gains tax for the sold land and/or building of petitioner and the amount of corporate
income tax for the sale of petitioner’s machineries and equipment should be deducted
from the total final tax paid.
Petitioner indicated, however, in its March 1, 2001 income tax return for the 11-
month period ending on November 30, 2000 that it suffered a net loss of
P2,233,464,538.00.69 This declaration was made under the pain of perjury. Section 267
of the National Internal Revenue Code of 1997 provides:
SEC. 267. Declaration under Penalties of Perjury.—Any declaration, return and
other statement 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.
Moreover, Rule 131, Section 3(ff) of the Rules of Court provides for the
presumption that the law has been obeyed unless contradicted or overcome by other
evidence, thus:
SEC. 3. Disputable presumptions.—The following presumptions are satisfactory if
uncontradicted, but may be contradicted and overcome by other evidence:
....
(ff) That the law has been obeyed.
The BIR did not make a deficiency assessment for this declaration. Neither did
the BIR dispute this statement in its pleadings filed before this court. There is,
therefore, no reason
715
VOL. 739, NOVEMBER 12, 2014 715
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
to doubt the truth that petitioner indeed suffered a net loss in 2000.
Since petitioner had not started its operations, it was also not subject to the
minimum corporate income tax of 2% on gross income.70Therefore, petitioner is not
liable for any income tax.
IV
Prescription
Section 203 of the National Internal Revenue Code of 1997 provides that as a
general rule, the BIR has three (3) years from the last day prescribed by law for the
filing of a return to make an assessment. If the return is filed beyond the last day
prescribed by law for filing, the three-year period shall run from the actual date of
filing. Thus:
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.
This court said that the prescriptive period to make an assessment of internal
revenue taxes is provided “primarily to safeguard the interests of taxpayers from
unreasonable investigation.”71
716
716 SUPREME COURT REPORTS
ANNOTATED
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
This court explained inCommissioner of Internal Revenue v. FMF Development
Corporation72 the reason behind the provisions on prescriptive periods for tax
assessments:
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.73
Rules derogating taxpayers’ right against prolonged and unscrupulous
investigations are strictly construed against the government.74
[T]he 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.75
717
VOL. 739, NOVEMBER 12, 2014 717
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
Moreover, in Commissioner of Internal Revenue v. BF Goodrich Phils.:76
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. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed[.]
....
. . . . 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.77 (Citation omitted)
The BIR had three years from the filing of petitioner’s final tax return in 2000 to
assess petitioner’s taxes. Nothing stopped the BIR from making the correct
assessment. The elevation of the refund claim with the Court of Tax Appeals was not
a bar against the BIR’s exercise of its assessment powers.
The BIR, however, did not initiate any assessment for deficiency capital gains
tax.78Since more than a decade have lapsed from the filing of petitioner’s return, the
BIR can no longer assess petitioner for deficiency capital gains taxes, if petitioner is
later found to have capital gains tax liabilities in excess of the amount claimed for
refund.
The Court of Tax Appeals should not be expected to perform the BIR’s duties of
assessing and collecting taxes when-
718
718 SUPREME COURT REPORTS
ANNOTATED
SMI-ED Philippines Technology, Inc. vs.
Commissioner of Internal Revenue
ever the BIR, through neglect or oversight, fails to do so within the prescriptive
period allowed by law.
WHEREFORE, the Court of Tax Appeals’ November 3, 2006 decision is SET
ASIDE. The Bureau of Internal Revenue is ordered to refund petitioner SMI-Ed
Philippines Technology, Inc. the amount of 5% final tax paid to the BIR, less the 6%
capital gains tax on the sale of petitioner SMI-Ed Philippines Technology, Inc.’s land
and building. In view of the lapse of the prescriptive period for assessment, any
capital gains tax accrued from the sale of its land and building that is in excess of the
5% final tax paid to the Bureau of Internal Revenue may no longer be recovered from
petitioner SMI-Ed Philippines Technology, Inc.
SO ORDERED.
Carpio (Chairperson), Brion, Del Castillo andMendoza, JJ., concur.

Judgment set aside.

Notes.—The amendatory law, R.A. No. 8748, purposely deleted the last
paragraph of Section 11 of R.A. No. 7916 that authorized the grant ofper diems to
Philippine Economic Zone Authority (PEZA) Board members as it was in conflict
with the proscription laid down in the 1987 Constitution. (Philippine Economic Zone
Authority [PEZA] vs. Commission on Audit, 675 SCRA 513 [2012])
A consequence of failing to comply with the invoicing requirements is the denial
of the claim for tax refund or tax credit, as stated in Revenue Memorandum Circular
No.
42-2003. (Eastern Telecommunications Philippines, Inc. vs. Commissioner of Internal
Revenue, 679 SCRA 305 [2012])
——o0o——
 Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
G.R. No. 148380. December 9, 2005.*
OCEANIC WIRELESS NETWORK, INC., petitioner,vs. COMMISSIONER OF
INTERNAL REVENUE, THE COURT OF TAX APPEALS, and THE COURT OF
APPEALS, respondents.
Taxation; A demand letter for payment of delinquent taxes may be considered a decision
on a disputed or protested assessment.—A demand letter for payment of delinquent taxes
may be considered a decision on a disputed or protested assessment. The
determination on whether or not a demand letter is final is conditioned upon the
language used or the tenor of the letter being sent to the taxpayer.
Same; The Commissioner of Internal Revenue should always indicate to the taxpayer in
clear and unequivocal language what constitutes his final determination of the disputed
assessment.—We laid down the rule that the Commissioner of Internal Revenue
should always indicate to the taxpayer in clear and unequivocal language what
constitutes his final determination of the disputed assessment, thus: . . . we deem it
appropriate to state that the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language whenever his action on an
assessment questioned by a taxpayer constitutes his final determination on the
disputed assessment, as contemplated by Sections 7 and 11 of Republic Act No. 1125,
as amended. On the basis of his statement indubitably showing that the
Commissioner’s communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able
to determine when his right to appeal to the tax court accrues.
206
2 SUPREME COURT
06 REPORTS ANNOTATED
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
Same; The Commissioner of Internal Revenue may delegate any power vested upon him
by law to Division Chiefs or to officials of higher rank except the four powers granted to him
under the National Internal Revenue Code enumerated in Section 7.—The general rule is
that the Commissioner of Internal Revenue may delegate any power vested upon him
by law to Division Chiefs or to officials of higher rank. He cannot, however, delegate
the four powers granted to him under the National Internal Revenue Code (NIRC)
enumerated in Section 7.
Same; The authority to make tax assessments may be delegated to subordinate
officers.—The authority to make tax assessments may be delegated to subordinate
officers. Said assessment has the same force and effect as that issued by the
Commissioner himself, if not reviewed or revised by the latter such as in this case.
Same; A request for reconsideration must be made within thirty (30) days from the
taxpayer’s receipt of the tax deficiency assessment otherwise, the decision becomes final,
unappealable and therefore demandable.—A request for reconsideration must be made
within thirty (30) days from the taxpayer’s receipt of the tax deficiency assessment,
otherwise, the decision becomes final, unappealable and therefore, demandable. A
tax assessment that has become final, executory and enforceable for failure of the
taxpayer to assail the same as provided in Section 228 can no longer be contested.
Same; For the Court of Tax Appeals to acquire jurisdiction, an assessment must first be
disputed by the taxpayer and ruled upon by the Commissioner of Internal Revenue to warrant
a decision from which a petition for review may be taken to the Court of Tax Appeals.—The
rule is that for the Court of Tax Appeals to acquire jurisdiction, an assessment must
first be disputed by the taxpayer and ruled upon by the Commissioner of Internal
Revenue to warrant a decision from which a petition for review may be taken to the
Court of Tax Appeals. Where an adverse ruling has been rendered by the
Commissioner of Internal Revenue with reference to a disputed assessment or a claim
for refund or credit, the taxpayer may appeal the same within thirty (30) days after
receipt thereof.
PETITION for review on certiorari of the decision and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
207
VOL. 477, DECEMBER 9, 2005 207
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
Tarriela, Tagao, Ona & Associates for petitioner.
AZCUNA, J.: Commissioner
of Internal Revenue
This is a Petition for Review on Certiorari seeking to reverse and set aside the Acting in behalf of the BIR Commissioner, then Chief of the BIR Accounts Receivable
Decision of the Court of Appeals dated October 31, 2000, and its Resolution dated and Billing Division, Mr. Severino B. Buot, reiterated the tax assessments while
May 3, 2001, in “Oceanic Wireless Network, Inc. v. Commissioner of Internal Revenue” denying petitioner’s request for reinvestigation in a letter 1dated January 24, 1991,
docketed as CA-G.R. SP No. 35581, upholding the Decision of the Court of Tax thus:
Appeals dismissing the Petition for Review in CTA Case No. 4668 for lack of “Note: Your request for re-investigation has been denied for failure to submit the
jurisdiction. necessary supporting papers as per endorsement letter from the office of the Special
Petitioner Oceanic Wireless Network, Inc. challenges the authority of the Chief of Operation Service dated 12-12-90.”
the Accounts Receivable and Billing Division of the Bureau of Internal Revenue (BIR) Said letter likewise requested petitioner to pay the total amount of P8,644,998.71
National Office to decide and/or act with finality on behalf of the Commissioner of within ten (10) days from receipt thereof, otherwise the case shall be referred to the
Internal Revenue (CIR) on protests against disputed tax deficiency assessments. Collection Enforcement Division of the BIR National Office for the issuance of a
The facts of the case are as follows: warrant of distraint and levy without further notice.
On March 17, 1988, petitioner received from the Bureau of Internal Revenue (BIR) Upon petitioner’s failure to pay the subject tax assessments within the prescribed
deficiency tax assessments for the taxable year 1984 in the total amount of period, the Assistant Commissioner for Collection, acting for the Commissioner of
P8,644,998.71, broken down as follows: Internal Revenue, issued the corresponding warrants of distraint and/or levy and
Kind of T ax Assessment No. Amount garnishment. These were served on petitioner on October 10, 1991 and October 17,
Deficiency Income FAR-4-1984-88- P8,381,354.00 1991, respectively.2
Tax 001130 On November 8, 1991, petitioner filed a Petition for Review with the Court of Tax
Penalties for late FAR-4-1984-88- 3,000.00
Appeals (CTA) to contest the issuance of the warrants to enforce the collection of the
payment of 001131
tax assessments. This was docketed as CTA Case No. 4668.
income and failure to
The CTA dismissed the petition for lack of jurisdiction in a decision dated
file
September 16, 1994, declaring that said petition was filed beyond the thirty (30)-day
quarterly returns
period reckoned from the time when the demand letter of January 24, 1991 by the
Deficiency FAR-4-1984-88- 29,849.06
Chief of the BIR Accounts Receivable and Billing Division was presumably received
Contractor’s Tax 001132
by petitioner, i.e., “within a reasonable time from said date in the regular course of
Deficiency Fixed Tax FAR-4-88-001133 12,083.65
mail pursuant to Section 2(v) of Rule 131 of the Rules of Court.” 3
Deficiency Franchise FAR-4-84-88- 227,712.00
209
Tax 001134
VOL. 477, DECEMBER 9, 2005 209
Total ------- P8,644,998.71
Oceanic Wireless Network, Inc. vs.
Petitioner filed its protest against the tax assessments and requested a reconsideration
Commissioner
or cancellation of the same in a letter to the BIR Commissioner dated April 12, 1988.
of Internal Revenue
208
208 SUPREME COURT REPORTS The decision cited Surigao Electric Co., Inc. v. Court of Tax Appeals4 wherein this Court

ANNOTATED considered a mere demand letter sent to the taxpayer after his protest of the

Oceanic Wireless Network, Inc. vs. assessment notice as the final decision of the Commissioner of Internal Revenue on
the protest. Hence, the filing of the petition on November 8, 1991 was held clearly
beyond the reglementary period.5
The court a quo likewise stated that the finality of the denial of the protest by
petitioner against the tax deficiency assessments was bolstered by the subsequent
issuance of the warrants of distraint and/or levy and garnishment to enforce the
collection of the deficiency taxes. The issuance was not barred by prescription
because the mere filing of the letter of protest by petitioner which was given due
course by the Bureau of Internal Revenue suspended the running of the prescription
period as expressly provided under the then Section 224 of the Tax Code:
“SEC. 224. Suspension of Running of the Statute of Limitations.—The running of the
Statute of Limitations provided in Section 203 and 223 on the making of assessment
decision to speak of because the Commissioner had yet to make a personal
determination as regards the merits of petitioner’s case.8
The Court of Appeals denied the petition in a decision dated October 31, 2000, the
dispositive portion of which reads:
“WHEREFORE, the petition is DISMISSED for lack of merit.
SO ORDERED.”
Petitioner’s Motion for Reconsideration was likewise denied in a resolution dated
May 3, 2001.
Hence, this petition with the following assignment of errors:9
I

and the beginning of distraint or levy or a proceeding in court for collection, in

THE HONORABLE RESPONDENT CA ERRED IN FINDING THAT THE DEMAND
respect of any deficiency, shall be suspended for the period during which the
LETTER ISSUED BY THE (THEN) ACCOUNTS RECEIVABLE/BILLING DIVISION
Commissioner is prohibited from making the assessment or beginning distraint or
OF THE BIR NATIONAL OFFICE WAS THE FINAL DECISION OF THE
levy or a proceeding in court and for sixty (60) days thereafter; when the taxpayer
RESPONDENT CIR ON THE DISPUTED ASSESSMENTS, AND HENCE
requests for a reinvestigation which is granted by the Commissioner; when the taxpayer
CONSTITUTED THE DECISION APPEALABLE TO THE HONORABLE
cannot be located in the address given by him in the return files upon which a tax is
RESPONDENT CTA; AND,
being assessed or collected:Provided, That if the taxpayer inform the Commissioner of
any change of address, the running of the statute of limitations will not be suspended;
II
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, THE HONORABLE RESPONDENT CA ERRED IN DECLARING THAT THE
and no property could located; and when the taxpayer is out of the DENIAL OF THE PROTEST OF THE SUBJECT ALLEGED DEFICIENCY TAX
Philippines.”6 (Italics supplied.) ASSESSMENTS HAD LONG BECOME FINAL AND EXECUTORY FOR FAILURE
Petitioner filed a Motion for Reconsideration arguing that the demand letter of OF THE PETITIONER TO INSTITUTE THE APPEAL FROM THE DEMAND
January 24, 1991 cannot be considered as the LETTER OF THE CHIEF OF THE ACCOUNTS RECEIVABLE/BILLING DIVISION,
210 BIR NATIONAL OF-
210 SUPREME COURT REPORTS 211
ANNOTATED VOL. 477, DECEMBER 9, 2005 211
Oceanic Wireless Network, Inc. vs. Oceanic Wireless Network, Inc. vs.
Commissioner Commissioner
of Internal Revenue of Internal Revenue
final decision of the Commissioner of Internal Revenue on its protest because the FICE, TO THE HONORABLE RESPONDENT CTA, WITHIN THIRTY (30) DAYS
same was signed by a mere subordinate and not by the Commissioner himself. 7 FROM RECEIPT THEREOF.
With the denial of its motion for reconsideration, petitioner consequently filed a Thus, the main issue is whether or not a demand letter for tax deficiency assessments
Petition for Review with the Court of Appeals contending that there was no final issued and signed by a subordinate officer who was acting in behalf of the
Commissioner of Internal Revenue, is deemed final and executory and subject to an
appeal to the Court of Tax Appeals.
We rule in the affirmative.
A demand letter for payment of delinquent taxes may be considered a decision on
a disputed or protested assessment. The determination on whether or not a demand
letter is final is conditioned upon the language used or the tenor of the letter being
sent to the taxpayer.
We laid down the rule that the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language what constitutes his final
determination of the disputed assessment, thus:
“. . . we deem it appropriate to state that the Commissioner of Internal Revenue
should always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Sections 7 and 11 of
Republic Act No. 1125, as amended. On the basis of his statement indubitably
showing that the Commissioner’s communicated action is his final decision on the
contested assessment, the aggrieved taxpayer would then be able to take recourse to
the tax court at the opportune time. Without needless difficulty, the taxpayer would
be able to determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of
the taxpayer to continually delay the finality of the assessment—and, consequently,
the collection of the amount demanded as taxes—by repeated requests for
recomputation and reconsideration. On the part of the Commissioner, this would
encourage his office to conduct a careful and thorough study of every questioned
assessment and render a correct and definite decision thereon in the first instance.
This would also deter the Commissioner from unfairly making the taxpayer grope in
the dark and speculate as to which action constitutes the decision appealable
212
212 SUPREME COURT REPORTS
ANNOTATED
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
to the tax court. Of greater import, this rule of conduct would meet a pressing
need for fair play, regularity, and orderliness in administrative action.” 10
In this case, the letter of demand dated January 24, 1991, unquestionably constitutes
the final action taken by the Bureau of Internal Revenue on petitioner’s request for
reconsideration when it reiterated the tax deficiency assessments due from petitioner,
and requested its payment. Failure to do so would result in the “issuance of a warrant
of distraint and levy to enforce its collection without further notice.”11 In addition, the
letter contained a notation indicating that petitioner’s request for reconsideration had
been denied for lack of supporting documents.
The above conclusion finds support inCommissioner of Internal Revenue v. Ayala
Securities Corporation,12 where we held:
“The letter of February 18, 1963 (Exh. “G”), in the view of the Court, is tantamount to
a denial of the reconsideration or [respondent corporation’s] . . . protest o[f] the
assessment made by the petitioner, considering that the said letter [was] 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. . . This being so, the said letter
amount[ed] to a decision on a disputed or protested assessment, and, there, the
court a quo did not err in taking cognizance of this case.”
Similarly, in Surigao Electric Co., Inc v. Court of Tax Appeals,13 and in CIR v. Union
Shipping Corporation,14 we held:
213
VOL. 477, DECEMBER 9, 2005 213
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
“. . . In this letter, the commissioner not only in effect demanded that the petitioner
pay the amount of P11,533.53 but also gave warning that in the event it failed to pay,
the said commissioner would be constrained to enforce the collection thereof by
means of the remedies provided by law. The tenor of the letter, specifically the
statement regarding the resort to legal remedies, unmistakably indicated the final
nature of the determination made by the commissioner of the petitioner’s deficiency
franchise tax liability.”
The demand letter received by petitioner verily signified a character of finality.
Therefore, it was tantamount to a rejection of the request for reconsideration. As
correctly held by the Court of Tax Appeals, “while the denial of the protest was in the
form of a demand letter, the notation in the said letter making reference to the protest
filed by petitioner clearly shows the intention of the respondent to make it as [his]
final decision.”15
This now brings us to the crux of the matter as to whether said demand letter
indeed attained finality despite the fact that it was issued and signed by the Chief of
the Accounts Receivable and Billing Division instead of the BIR Commissioner.
The general rule is that the Commissioner of Internal Revenue may delegate any
power vested upon him by law to Division Chiefs or to officials of higher rank. He
cannot, however, delegate the four powers granted to him under the National
Internal Revenue Code (NIRC) enumerated in Section 7.
As amended by Republic Act No. 8424, Section 7 of the Code authorizes the BIR
Commissioner to delegate the powers vested in him under the pertinent provisions of
the Code to any subordinate official with the rank equivalent to a division chief or
higher, except the following:
1. (a)The power to recommend the promulgation of rules and regulations by
the Secretary of Finance;
2. (b)The power to issue rulings of first impression or to reverse, revoke or
modify any existing ruling of the Bureau;
214
214 SUPREME COURT REPORTS
ANNOTATED
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
1. (c)The power to compromise or abate under Section 204(A) and (B) of this
Code, any tax deficiency:Provided, however, That assessments issued by the
Regional Offices involving basic deficiency taxes of five hundred thousand
pesos (P500,000) or less, and minor criminal violations as may be
determined by rules and regulations to be promulgated by the Secretary of
Finance, upon the recommendation of the Commissioner, discovered by
regional and district officials, may be compromised by a regional
evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, heads of the Legal, Assessment
and Collection Divisions and the Revenue District Officer having
jurisdiction over the taxpayer, as members; and
2. (d)The power to assign or reassign internal revenue officers to
establishments where articles subject to excise tax are produced or kept.
It is clear from the above provision that the act of issuance of the demand letter by the
Chief of the Accounts Receivable and Billing Division does not fall under any of the
exceptions that have been mentioned as non-delegable.
Section 6 of the Code further provides:
“SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement.—
(A) Examination of Returns 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 theCommissioner or from his duly authorized representative. . . .” (Emphasis
supplied)
Thus, the authority to make tax assessments may be delegated to subordinate officers.
Said assessment has the same force and effect as that issued by the Commissioner
himself, if not reviewed or revised by the latter such as in this case. 16
215
VOL. 477, DECEMBER 9, 2005 215
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
A request for reconsideration must be made within thirty (30) days from the
taxpayer’s receipt of the tax deficiency assessment, otherwise, the decision becomes
final, unappealable and therefore, demandable. A tax assessment that has become
final, executory and enforceable for failure of the taxpayer to assail the same as
provided in Section 228 can no longer be contested, thus:
“SEC. 228. Protesting of Assessment.—When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the
taxpayer of his findings . . . Such assessment may be protested administratively by
filing a request for reconsideration or reinvestigation within thirty (30) days from
receipt of the assessment in such form and manner as may be prescribed by
implementing rules and regulations. Within sixty (60) days from filing of the protest,
all relevant supporting documents shall have been submitted; otherwise, the
assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred (180) days from submission of documents, the taxpayer adversely affected
by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable.”
Here, petitioner failed to avail of its right to bring the matter before the Court of Tax
Appeals within the reglementary period upon the receipt of the demand letter
reiterating the assessed delinquent taxes and denying its request for reconsideration
which constituted the final determination by the Bureau of Internal Revenue on
January 24, 1991, the period of thirty (30) days to appeal the adverse decision on the
request for reconsideration had already lapsed when the petition was filed with the
Court of Tax Appeals only on November 8, 1991. Hence, the Court of Tax Appeals
properly dismissed the petition as the tax delinquency assessment had long become
final and executory.
WHEREFORE, premises considered, the Decision of the Court of Appeals dated
October 31, 2000 and its Resolution dated May 3, 2001 in CA-G.R. SP No. 35581 are
hereby AFFIRMED. The petition is accordingly DENIED for lack of merit.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Quisumbing,Ynares-Santiago and Carpio, JJ., concur.
Judgment and resolution affirmed.
Note.—A taxpayer only has thirty (30) days within which to protest an
assessment. (Protector’s Services, Inc. vs. Court of Ap-peals, 330 SCRA 404 [2000])
——o0o——

petitioner’s protest. Being a final disposition by said agency, the same would have
been a proper subject for appeal to the Court of Tax Appeals.
The rule is that for the Court of Tax Appeals to acquire jurisdiction, an
assessment must first be disputed by the taxpayer and ruled upon by the
Commissioner of Internal Revenue to warrant a decision from which a petition for
review may be taken to the Court of Tax Appeals. Where an adverse ruling has been
rendered by the Commissioner of Internal Revenue with reference to a dis-
216
216 SUPREME COURT REPORTS
ANNOTATED
Oceanic Wireless Network, Inc. vs.
Commissioner
of Internal Revenue
puted assessment or a claim for refund or credit, the taxpayer may appeal the same
within thirty (30) days after receipt thereof.17
We agree with the factual findings of the Court of Tax Appeals that the demand
letter may be presumed to have been duly directed, mailed and was received by
petitioner in the regular course of the mail in the absence of evidence to the contrary.
This is in accordance with Section 2(v), Rule 131 of the Rules of Court, and in this
case, since the period to appeal has commenced to run from the time the letter of
demand was presumably received by petitioner within a reasonable time after
Republic of the Philippines veracity of the taxpayer's side of the case, and if it is found out that said
SUPREME COURT assessment is proper and in order, we assure you of our assistance in the
Manila speedy disposition of this case. (Exh. "P")

EN BANC On February 11, 1957, after the reinvestigation, the Collector of Internal Revenue
made a final assessment of the income taxes of Ablaza, fixing said income taxes for
G.R. No. L-14519 July 26, 1960 the years already mentioned at P2,066.56 (Exh. "Q"). Notice of the said assessment
was sent (Exhs. "V", "W" and "X") and upon receipt thereof the accountants of Ablaza
sent a letter to the Collector of Internal Revenue, dated May 8, 1957, protesting the
REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
assessments, on the ground that the income taxes are no longer collectible for the
vs.
reason that they have already prescribed. As the Collector did not agree to the alleged
LUIS G. ABLAZA, defendant-appellee.
claim of prescription, action was instituted by him in the Court of First Instance to
recover the amount assessed. The Court of First Instance upheld the contention of
Assistant Solicitor General Jose P. Alejandro and Special Attorneys Cirilio R. Francisco and Ablaza that the action to collect the said income taxes had prescribed. Against this
Santiago M. Kapunan for appellant. decision the case was brought here on appeal, where it is claimed by the Government
Martin B. Istaro for appellee. that the prescriptive period has not fully run at the time of the assessment, in view
especially of the letter of the accountants of Ablaza, dated March 10, 1954, pertinent
LABRADOR, J.: provisions of which are quoted above.

Appeal from a judgment of the Court of First Instance of Manila, Hon. Carmelino G.
Alvendia, presiding, dismissing an action instituted by the Government to recover
income taxes from the defendant-appellee corresponding to the years 1945, 1946, 1947
and 1948.
The record discloses that on October 3, 1951, the Collector of Internal Revenue
assessed income taxes for the years 1945, 1946, 1947 and 1948 on the income tax
returns of defendant-appellee Luis G. Ablaza. The assessments total P5,254.70
(Exhibit "I"). On October 16, 1951, the accountants for Ablaza requested a
reinvestigation of Ablaza's tax liability, on the ground that (1) the assessment is based
on third-party information and (3) neither the taxpayer nor his accountants were
permitted to appear in person (Exh. "J"). The petition for reinvestigation was granted
in a letter of the Collector of Internal Revenue, dated October 17, 1951. On October 30,
1951, the accountants for Ablaza again sent another letter to the Collector of Internal
Revenue submitting a copy of their own computation (Exh. "L"). On October 23, 1952,
said accountants again submitted a supplemental memorandum (Exh. "M"). On
March 10, 1954, the accountants for Ablaza sent a letter to the examiner of accounts
and collections of the Bureau of Internal Revenue, stating:
In this connection, we wish to state that this case is presently under
reinvestigation as per our request dated October 16, 1951, and your letter to
us dated October 17, 1951, and that said tax liability being only a tentative
assessment, we are not as yet advised of the results of the requested
reinvestigation.
In view thereof, we wish to request, in fairness to the taxpayer concerned,
that we be furnished a copy of the detailed computation of the alleged tax
liability as soon as the reinvestigation is terminated to enable us to prove the
It is of course true on October 14, 1951, Ablaza's accountants requested a
reinvestigation of the assessment of the income taxes against him, the period of
prescription of action to collect the taxes was suspended. (Sec. 333, C. A. No. 466.) 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 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)
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 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.

The question in the case at bar boils down to the interpretation of Exhibit "P", dated
March 10, 1954, quoted above. If said letter be interpreted as a request for further
investigation or a new investigation, different and distinct from the investigation
demanded or prayed for in Ablaza's first letter, Exhibit "L", then the period of
prescription would continue to be suspended thereby. but if the letter in question
does not ask for another investigation, the result would be just the opposite. In our
opinion the letter in question, Exhibit "P", does not ask for another investigation. Its
first paragraph quoted above shows that the reinvestigation then being conducted
was by virtue of its request of October 16, 1951. All that the letter asks is that the
taxpayer be furnished a copy of the computation. The request may be explained in
this manner: As the reinvestigation was allowed on October 1, 1951 and on October
16, 1951, the taxpayer supposed or expected that at the time, March, 1954 the
reinvestigation was about to be finished and he wanted a copy of the re-assessment in
order to be prepared to admit or contest it. Nowhere does the letter imply a demand
or request for a ready requested and, therefore, the said letter may not be interpreted
to authorize or justify the continuance of the suspension of the period of limitations.

We find the appeal without merit and we hereby affirm the judgment of the lower
court dismissing the action. Without costs.
Republic of the Philippines
1952 P316,526.75
SUPREME COURT
Manila 1953 P246,082.04

EN BANC 1954 P203,384.69

G.R. No. L-19727 May 20, 1965 upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed
the following withholding tax:
THE COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
PHOENIX ASSURANCE CO., LTD., respondent. Year Withholding Tax

1952 P 75,966.42
-----------------------------
1953 59,059.68
G.R. No. L-19903 May 20, 1965
1954 48,812.32
PHOENIX ASSURANCE, CO., LTD., petitioner,
vs. Total P183,838.42
COMMISSIONER OF INTERNAL REVENUE, respondent. =============

Office of the Solicitor General for petitioner-respondent Commissioner of Internal Revenue.

Sycip, Salazar, Luna & Associates and A. S. Monzon, B. V. Abela & J. M. Castillo for
respondent-petitioner Phoenix Assurance Co., Ltd.
BENGZON, J.P., J.:
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
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
Overclaimed Head Office expenses:
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 Amount claimed . . . . . . . . . . . . P29,624.73
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 Amount allowed . . . . . . . . . . . . 19,455.50 10,16.23
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 Net income per investigation P170,489.41
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 Tax due thereon P 39,737.00
reducing the refundable amount to P20,180.00.
Less: amount already assessed 36,890.00

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 DEFICIENCY TAX DUE P 2,847.00
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. 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
On August 1, 1958 the Bureau of Internal Revenue released the following assessment
income instead of 5% of the gross Philippine income as claimed in the returns.
for deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co.,
Ltd.:
Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for
withholding tax and deficiency income tax. However, the Commissioner of Internal
1952 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
Net income per audited return P 12,511.61 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
Unallowable deduction & additional income: 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
Overclaimed Head Office expenses:
deficiency income tax for 1952 to have prescribed; absolved Phoenix Assurance Co.,
Amount claimed . . . . . . . . . . . . P 35,912.25 Ltd. from payment of the statutory penalties for non-filing of withholding tax return;
and, rendered the following judgment:
Amount allowed . . . . . . . . . . . . 20,085.90 P 15,826.35
WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby
ordered to pay the Commissioner of Internal Revenue the respective
Net income per investigation P 28,337.96
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
Tax due thereon P 5,667.00
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
1954 for 1953, which sum is to be deducted from the total sum of P186,685.42 due
as taxes.
Net income per audited P160,320.21
If any amount of the tax is not paid within the time prescribed above, there
Unallowable deduction & additional income:
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 thefull 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.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala,
Makalintal and Zaldivar, JJ., concur.
Republic of the Philippines 1. Has the Commissioner's right to collect deficiency income tax prescribed?
SUPREME COURT
Manila 2. Was the disallowance of items claimed as deductible proper?

EN BANC 3. Have there been unreasonably accumulated profits? If so, should the 25% surtax be
imposed on the balance of the entire surplus from 1947-1953, or only for 1953?
G.R. No. L-22492 September 5, 1967
4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending
BASILAN ESTATES, INC., petitioner, Section 25 of the Tax Code?
vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX PRESCRIPTION
APPEALS, respondents.
There is no dispute that the assessment of the deficiency tax was made on February
Felix A. Gulfin and Antonio S. Alano for petitioner. 26, 1959; but the petitioner claims that it never received notice of such assessment or if
Office of the Solicitor General for respondents. it did, it received the notice beyond the five-year prescriptive period. To show
prescription, the annotation on the notice (Exhibit 10, No. 52, ACR, p. 54-A of the BIR
records) "No accompanying letter 11/25/" is advanced as indicative of the fact that
receipt of the notice was after March 24, 1959, the last date of the five-year period
within which to assess deficiency tax, since the original returns were filed on March
BENGZON, J.P., J.: 24, 1954.

A Philippine corporation engaged in the coconut industry, Basilan Estates, Inc., with
principal offices in Basilan City, filed on March 24, 1954 its income tax returns for
1953 and paid an income tax of P8,028. On February 26, 1959, the Commissioner of
Internal Revenue, per examiners' report of February 19, 1959, assessed Basilan
Estates, Inc., a deficiency income tax of P3,912 for 1953 and P86,876.85 as 25% surtax
on unreasonably accumulated profits as of 1953 pursuant to Section 25 of the Tax
Code. On non-payment of the assessed amount, a warrant of distraint and levy was
issued but the same was not executed because Basilan Estates, Inc. succeeded in
getting the Deputy Commissioner of Internal Revenue to order the Director of the
district in Zamboanga City to hold execution and maintain constructive embargo
instead. Because of its refusal to waive the period of prescription, the corporation's
request for reinvestigation was not given due course, and on December 2, 1960, notice
was served the corporation that the warrant of distraint and levy would be executed.
On December 20, 1960, Basilan Estates, Inc. filed before the Court of Tax Appeals a
petition for review of the Commissioner's assessment, alleging prescription of the
period for assessment and collection; error in disallowing claimed depreciations,
travelling and miscellaneous expenses; and error in finding the existence of
unreasonably accumulated profits and the imposition of 25% surtax thereon. On
October 31, 1963, the Court of Tax Appeals found that there was no prescription and
affirmed the deficiency assessment in toto.
On February 21, 1964, the case was appealed to Us by the taxpayer, upon the
following issues:
Although the evidence is not clear on this point, We cannot accept this interpretation
of the petitioner, considering the presence of circumstances that lead Us to presume
regularity in the performance of official functions. The notice of assessment shows the
assessment to have been made on February 26, 1959, well within the five-year period.
On the right side of the notice is also stamped "Feb. 26, 1959" — denoting the date of
release, according to Bureau of Internal Revenue practice. The Commissioner himself
in his letter (Exh. H, p. 84 of BIR records) answering petitioner's request to lift, the
warrant of distraint and levy, asserts that notice had been sent to petitioner. In the
letter of the Regional Director forwarding the case to the Chief of the Investigation
Division which the latter received on March 10, 1959 (p. 71 of the BIR records), notice
of assessment was said to have been sent to petitioner. Subsequently, the Chief of the
Investigation Division indorsed on March 18, 1959 (p. 24 of the BIR records) the case
to the Chief of the Law Division. There it was alleged that notice was already sent to
petitioner on February 26, 1959. These circumstances pointing to official performance
of duty must necessarily prevail over petitioner's contrary interpretation. Besides,
even granting that notice had been received by the petitioner late, as alleged, under
Section 331 of the Tax Code requiring five years within which to assessdeficiency
taxes, the assessment is deemed made when notice to this effect is released, mailed or
sent by the Collector to the taxpayer and it is not required that the notice be received
by the taxpayer within the aforementioned five-year period.1
ASSESSMENT
The questioned assessment is as follows:
 Net Income per return P40,142.90 year 1952, the Commissioner had already determined, with taxpayer's concurrence,
the depreciation allowable on said assets to be P36,842.04, computed on their
Add: Over-claimed depreciation P10,500.49
acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the
Mis. expenses disallowed 6,759.17 deductible depreciation for 1953 on the same old assets at P36,842.04 and disallowed
the excess thereof in the amount of P10,500.49.
Officer's travelling expenses disallowed 2,300.40 19,560.06
The question for resolution therefore is whether depreciation shall be determined on
Net Income per Investigation P59,702.96 the acquisition cost or on the reappraised value of the assets.
20% tax on P59,702.96 11,940.00
Less: Tax already assessed 8,028.00 Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. The term is also applied to
amortization of the value of intangible assets, the use of which in the trade or
Deficiency income tax P3,912.00
business is definitely limited in duration.2 Depreciation commences with the
Add: Additional tax of 25% on P347,507.01 86,876.75 acquisition of the property and its owner is not bound to see his property gradually
waste, without making provision out of earnings for its replacement. It is entitled to
Tax Due & Collectible P90,788.75 see that from earnings the value of the property invested is kept unimpaired, so that
========= at the end of any given term of years, the original investment remains as it was in the
beginning. It is not only the right of a company to make such a provision, but it is its
duty to its bond and stockholders, and, in the case of a public service corporation, at
The Commissioner disallowed:
least, its plain duty to the public.3 Accordingly, the law permits the taxpayer to
recover gradually his capital investment in wasting assets free from income
Over-claimed depreciation P10,500.49 tax.4 Precisely, Section 30 (f) (1) which states:
Miscellaneous expenses 6,759.17
Officer's travelling expenses 2,300.40 (1)In general. — A reasonable allowance for deterioration of property arising
out of its use or employment in the business or trade, or out of its not being
used: Provided, That when the allowance authorized under this subsection
DEDUCTIONS shall equal the capital invested by the taxpayer . . . no further allowance
shall be made. . . .
A. Depreciation. — Basilan Estates, Inc. claimed deductions for the depreciation of its
assets up to 1949 on the basis of their acquisition cost. As of January 1, 1950 it allows a deduction from gross income for depreciation but limits the recovery to the
changed the depreciable value of said assets by increasing it to conform with the capital invested in the asset being depreciated.
increase in cost for their replacement. Accordingly, from 1950 to 1953 it deducted
from gross income the value of depreciation computed on the reappraised value.
The income tax law does not authorize the depreciation of an asset beyond its
acquisition cost. Hence, a deduction over and above such cost cannot be claimed and
In 1953, the year involved in this case, taxpayer claimed the following depreciation allowed. The reason is that deductions from gross income are privileges, 5 not matters
deduction: of right.6 They are not created by implication but upon clear expression in the law.7

Reappraised assets P47,342.53 Moreover, the recovery, free of income tax, of an amount more than the invested
New assets consisting of hospital building and equipment 3,910.45 capital in an asset will transgress the underlying purpose of a depreciation allowance.
For then what the taxpayer would recover will be, not only the acquisition cost, but
Total depreciation
also some profit. Recovery in due time thru depreciation of investment made is the
P51,252.98
philosophy behind depreciation allowance; the idea of profit on the investment made
has never been the underlying reason for the allowance of a deduction for
Upon investigation and examination of taxpayer's books and papers, the depreciation.
Commissioner of Internal Revenue found that the reappraised assets depreciated in
1953 were the same ones upon which depreciation was claimed in 1952. And for the
Accordingly, the claim for depreciation beyond P36,842.04 or in the amount of
P10,500.49 has no justification in the law. The determination, therefore, of the
Commissioner of Internal Revenue disallowing said amount, affirmed by the Court of
Tax Appeals, is sustained.
B. Expenses. — The next item involves disallowed expenses incurred in 1953, broken
as follows:
Miscellaneous expenses P6,759.17
Officer's travelling expenses 2,300.40
Total
P9,059.57
These were disallowed on the ground that the nature of these expenses could not be
satisfactorily explained nor could the same be supported by appropriate papers.
Felix Gulfin, petitioner's accountant, explained the P6,759.17 was actual expenses
credited to the account of the president of the corporation incurred in the interest of
the corporation during the president's trip to Manila (pp. 33-34 of TSN of Dec. 5,
1962); he stated that the P2,300.40 was the president's travelling expenses to and from
Manila as to the vouchers and receipts of these, he said the same were made but got
burned during the Basilan fire on March 30, 1962 (p. 40 of same TSN). Petitioner
further argues that when it sent its records to Manila in February, 1959, the papers in
support of these miscellaneous and travelling expenses were not included for the
reason that by February 9, 1959, when the Bureau of Internal Revenue decided to
investigate, petitioner had no more obligation to keep the same since five years had
lapsed from the time these expenses were incurred (p. 41 of same TSN). On this
ground, the petitioner may be sustained, for under Section 337 of the Tax Code,
receipts and papers supporting such expenses need be kept by the taxpayer for a
period of five years from the last entry. At the time of the investigation, said five
years had lapsed. Taxpayer's stand on this issue is therefore sustained.
UNREASONABLY ACCUMULATED PROFITS
Section 25 of the Tax Code which imposes a surtax on profits unreasonably
accumulated, provides:
Sec. 25. Additional tax on corporations improperly accumulating profits or surplus
— (a) Imposition of tax. — If any corporation, except banks, insurance
companies, or personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of the tax
upon its shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and profits
to accumulate instead of being divided or distributed, there is levied and
assessed against such corporation, for each taxable year, a tax equal to
twenty-five per centum of the undistributed portion of its accumulated
profits or surplus which shall be in addition to the tax imposed by section
twenty-four, and shall be computed, collected and paid in the same manner
and subject to the same provisions of law, including penalties, as that
tax.1awphîl.nèt
The Commissioner found that in violation of the abovequoted section, petitioner had
unreasonably accumulated profits as of 1953 in the amount of P347,507.01, based on
the following circumstances (Examiner's Report pp. 62-68 of BIR records):
1. Strong financial position of the petitioner as of December 31, 1953. Assets
were P388,617.00 while the liabilities amounted to only P61,117.31 or a ratio
of 6:1.
2. As of 1953, the corporation had considerable capital adequate to meet the
reasonable needs of the business amounting to P327,499.69 (assets less
liabilities).
3. The P200,000 reserved for electrification of drier and mechanization and
the P50,000 reserved for malaria control were reverted to its surplus in 1953.
4. Withdrawal by shareholders, of large sums of money as personal loans.
5. Investment of undistributed earnings in assets having no proximate
connection with the business — as hospital building and equipment worth
P59,794.72.
6. In 1953, with an increase of surplus amounting to P677,232.01, the capital
stock was increased to P500,000 although there was no need for such
increase.
Petitioner tried to show that in considering the surplus, the examiner did not take
into account the possible expenses for cultivation, labor, fertilitation, drainage,
irrigation, repair, etc. (pp. 235-237 of TSN of Dec. 7, 1962). As aptly answered by the
examiner himself, however, they were already included as part of the working capital
(pp. 237-238 of TSN of Dec. 7, 1962).
In the unreasonable accumulation of P347,507.01 are included P200,000 for
electrification of driers and mechanization and P50,000 for malaria control which
were reserved way back in 1948 (p. 67 of the BIR records) but reverted to the general
fund only in 1953. If there were any plans for these amounts to be used in further
expansion through projects, it did not appear in the records as was properly indicated
in 1948 when such amounts were reserved. Thus, while in 1948 it was already clear
that the money was intended to go to future projects, in 1953 upon reversion to the
general fund, no such intention was shown. Such reversion therefore gave occasion
for the Government to consider the same for tax purposes. The P250,000 reverted to
the general fund was sought to be explained as later used elsewhere: "part of it in the alone these totalled P197,229.26. Yet the surplus of P347,507.01 was left as of
Hilano Industries, Inc. in building the factory site and buildings to house technical December 31, 1953. We find unacceptable petitioner's explanation that these were
men . . . part of it was spent in the facilities for the waterworks system and for advances made in furtherance of the business purposes of the petitioner. As correctly
industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not held by the Court of Tax Appeals, while certain expenses of the corporation were
sufficient explanation. Persuasive jurisprudence on the matter such as those in the credited against these amounts, the unspent balance was retained by the stockholders
United States from where our tax law was derived,8 has it that: "In order to determine without refunding them to petitioner at the end of each year. These advances were in
whether profits were accumulated for the reasonable needs of the business or to fact indirect loans to the stockholders indicating the unreasonable accumulation of
avoid the surtax upon shareholders, the controlling intention of the taxpayer is that surplus beyond the needs of the business.
which is manifested at the time of the accumulation, not subsequently declared
intentions which are merely the products of after-thought."9 The reversion here was ALLEGED EXEMPTION
made because the reserved amount was not enough for the projects intended, without
any intent to channel the same to some particular future projects in mind.
Petitioner wishes to avail of the exempting proviso in Sec. 25 of the Internal Revenue
Code as amended by R.A. 1823, approved June 22, 1957, whereby accumulated profits
Petitioner argues that since it has P560,717.44 as its expenses for the year 1953, a or surplus if invested in any dollar-producing or dollar-earning industry or in the
surplus of P347,507.01 is not unreasonably accumulated. As rightly contended by the purchase of bonds issued by the Central Bank, may not be subject to the 25% surtax.
Government, there is no need to have such a large amount at the beginning of the We have but to point out that the unreasonable accumulation was in 1953. The
following year because during the year, current assets are converted into cash and exemption was by virtue of Republic Act 1823 which amended Sec. 25 only on June
with the income realized from the business as the year goes, these expenses may well 22, 1957 — more than three years after the period covered by the assessment.
be taken care of (pp. 238 of TSN of Dec. 7, 1962). Thus, it is erroneous to say that the
taxpayer is entitled to retain enough liquid net assets in amounts approximately
In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and
equal to current operating needs for the year to cover "cost of goods sold and
surtax for the year 1953 in the amount of P88,977.42, computed as follows:
operating expenses" for "it excludes proper consideration of funds generated by the
collection of notes receivable as trade accounts during the course of the year." 10 In
fact, just because the fatal accumulations are less than 70% of the annual operating Net Income per return P40,142.90
expenses of the year, it does not mean that the accumulations are reasonable as a Add: Over-claimed depreciation 10,500.49
matter of law."11
Net income per finding P50,643.39
Petitioner tried to show that investments were made with Basilan Coconut Producers
Cooperative Association and Basilan Hospital (pp. 103-105 of TSN of Dec. 6, 1962)
20% tax on P50,643.39 P10,128.67
totalling P59,794.72 as of December 31, 1953. This shows all the more the
unreasonable accumulation. As of December 31, 1953 already P59,794.72 was spent — Less: Tax already assessed 8,028.00
yet as of that date there was still a surplus of P347,507.01.
Deficiency income tax P2,100.67
Petitioner questions why the examiner covered the period from 1948-1953 when the Add: 25% surtax on P347,507.01 86,876.75
taxable year on review was 1953. The surplus of P347,507.01 was taken by the
examiner from the balance sheet of petitioner for 1953. To check the figure arrived at, Total tax due and collectible P88,977.42
the examiner traced the accumulation process from 1947 until 1953, and petitioner's ===========
figure stood out to be correct. There was no error in the process applied, for previous
accumulations should be considered in determining unreasonable accumulations for
the year concerned. "In determining whether accumulations of earnings or profits in a WHEREFORE, the judgment appealed from is modified to the extent that petitioner is
particular year are within the reasonable needs of a corporation, it is neccessary to allowed its deductions for travelling and miscellaneous expenses, but affirmed
take into account prior accumulations, since accumulations prior to the year involved insofar as the petitioner is liable for P2,100.67 as deficiency income tax for 1953 and
may have been sufficient to cover the business needs and additional accumulations P86,876.75 as 25% surtax on the unreasonably accumulated profit of P347,507.01. No
during the year involved would not reasonably be necessary." 12 costs. So ordered.

Another factor that stands out to show unreasonable accumulation is the fact that Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and
large amounts were withdrawn by or advanced to the stockholders. For the year 1953 Fernando, JJ., concur.
G.R. No. 174942. March 7, 2008.*
BANK OF THE PHILIPPINE ISLANDS (Formerly: Far East Bank and Trust
Company), petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.
Taxation; Assessment and Collection of Taxes; Prescription; The statute of limitations
on assessment and collection of national internal revenue taxes was shortened from five (5)
years to three (3) years by Batas Pambansa Blg. 700.—The statute of limitations on
assessment and collection of national internal revenue taxes was shortened from five
(5) years to three (3) years by Batas Pambansa Blg. 700. Thus, the CIR has three (3)
years from the date of actual filing of the tax return to assess a national internal
revenue tax or to commence court proceedings for the collection thereof without an
assessment.
106
1 SUPREME COURT
06 REPORTS ANNOTATED
Bank of the Philippine Islands vs.
Commissioner of Internal Revenue
Same; Same; Same; 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.—When it validly issues an assessment
within the three (3)-year period, it has another three (3) years within which to collect
the tax due by distraint, levy, or court proceeding. The assessment of the tax is
deemed made and the three (3)-year period for collection of the assessed tax begins to
run on the date the assessment notice had been released, mailed or sent to the
taxpayer.
Same; Same; Same; The Commissioner of Internal Revenue (CIR) must first grant the
request for reinvestigation as a requirement for the suspension of the statute of limitations.—
In order to determine whether the prescriptive period for collecting the tax deficiency
was effectively tolled by BPI’s filing of the protest letters dated 20 April and 8 May
1989 as claimed by the CIR, we need to examine Section 320 of the Tax Code of 1977
x x x The above section is plainly worded. In order to suspend the running of the
prescriptive periods for assessment and collection, the request for reinvestigation
must be granted by the CIR. In BPI v. Commissioner of Internal Revenue, 473 SCRA 205
(2005),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.
Same; Same; Same; The burden of proof that the request for reinvestigation had been
actually granted shall be on the Commissioner of Internal Revenue (CIR).—The Court went
on to declare that the burden of proof that the request for reinvestigation had been
actually granted shall be on the CIR. Such grant may be expressed in its
communications with the taxpayer or implied from the action of the CIR or his
authorized representative in response to the request for reinvestigation.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals.
The facts are stated in the opinion of the Court.
Francisco I. Naputo for petitioner.
Dennis Villarubia for respondent.
107
VOL. 548, MARCH 7, 2008 107
Bank of the Philippine Islands vs.
Commissioner of Internal Revenue
TINGA, J.:
The Bank of the Philippine Islands (BPI) seeks a review of the Decision1 dated 15
August 2006 and the Resolution2dated 5 October 2006, both of the Court of Tax
Appeals (CTA or tax court), which ruled that BPI is liable for the deficiency
documentary stamp tax (DST) on its cabled instructions to its foreign correspondent
bank and that prescription had not yet set in against the government.
The following undisputed facts are culled from the CTA decision:
“Petitioner, the surviving bank after its merger with Far East Bank and Trust
Company, is a corporation duly created and existing under the laws of the Republic
of the Philippines with principal office at Ayala Avenue corner Paseo de Roxas Ave.,
Makati City.
Respondent thru then Revenue Service Chief Cesar M. Valdez, issued to the
petitioner a pre-assessment notice (PAN) dated November 26, 1986.
Petitioner, in a letter dated November 29, 1986, requested for the details of the
amounts alleged as 1982-1986 deficiency taxes mentioned in the November 26, 1986
PAN.
On April 7, 1989, respondent issued to the petitioner, assessment/demand notices
FAS-1-82 to 86/89-000 and FAS 5-82 to 86/89-000 for deficiency withholding tax at
source (Swap Transactions) and DST involving the amounts of P190,752,860.82 and
P24,587,174.63, respectively, for the years 1982 to 1986.
On April 20, 1989, petitioner filed a protest on the demand/assessment notices.
On May 8, 1989, petitioner filed a supplemental protest.
On March 12, 1993, petitioner requested for an opportunity to present or submit
additional documentation on the Swap Transactions with the then Central Bank
(page 240, BIR Records). Attached to the letter dated June 17, 1994, in connection with
the reinvestiga-
108
On September 21, 2004, petitioner filed a Motion for Reconsideration of the
abovementioned Decision which was denied for lack of merit in a Resolution dated
February 14, 2005.
On March 9, 2005, petitioner filed with the Court En Banc a Motion for Extension
of Time to File Petition for Review praying for an extension of fifteen (15) days from
March 10, 2005 or until March 25, 2005. Petitioner’s motion was granted in a
Resolution dated March 16, 2005.
On March 28, 2005, (March 25 was Good Friday), petitioner filed the instant
Petition for Review, advancing the following assignment of errors.109

108 SUPREME COURT REPORTS VOL. 548, MARCH 7, 2008 109

ANNOTATED Bank of the Philippine Islands vs.
Bank of the Philippine Islands vs. Commissioner of Internal Revenue
Commissioner of Internal Revenue I. THIS HONORABLE COURT OVERLOOKED THE SIGNIFICANCE OF
tion of the abovementioned assessment, petitioner submitted to the BIR, Swap THE WAIVER DULY AND VALIDLY AGREED UPON BY THE PARTIES AND
Contracts with the Central Bank. EFFECTIVE UNTIL DECEMBER 31, 1994;
Petitioner executed several Waivers of the Statutes of Limitations, the last of II. THIS TAX COURT ERRED IN HOLDING THAT THE COLLECTION OF
which was effective until December 31, 1994. ALLEGED DEFICIENCY TAX HAS NOT PRESCRIBED.
On August 9, 2002, respondent issued a final decision on petitioner’s protest III. THIS HONORABLE COURT ERRED IN HOLDING THAT
ordering the withdrawal and cancellation of the deficiency withholding tax RESPONDENT DID NOT VIOLATE PROCEDURAL DUE PROCESS IN THE
assessment in the amount of P190,752,860.82 and considered the same as closed and ISSUANCE OF ASSESSMENT NOTICE RELATIVE TO DOCUMENTARY
terminated. On the other hand, the deficiency DST assessment in the amount of STAMP DEFICIENCY.
P24,587,174.63 was reiterated and the petitioner was ordered to pay the said amount IV. THIS HONORABLE COURT ERRED IN HOLDING THAT THE 4
within thirty (30) days from receipt of such order. Petitioner received a copy of the MARCH 1987 MEMORANDUM OF THE LEGAL SERVICE CHIEF DULY
said decision on January 15, 2003. Thereafter, on January 24, 2003, petitioner filed a APPROVED BY THE BIR COMMISSIONER VESTS NO RIGHTS TO
Petition for Review before the Court. PETITIONER.
On August 31, 2004, the Court rendered a Decision denying the petitioner’s V. THIS HONORABLE COURT ERRED IN HOLDING THAT PETITIONER
Petition for Review, the dispositive portion of which is quoted hereunder: IS LIABLE FOR DOCUMENTARY STAMP TAX ON SWAP LOANS
IN VIEW OF ALL THE FOREGOING, the petition is hereby DENIED for lack of TRANSACTIONS FROM 1982 TO 1986.3
merit. Accordingly, petitioner is ORDERED to PAY the respondent the amount
of P24,587,174.63 representing deficiency documentary stamp tax for the period The CTA synthesized the foregoing issues into whether the collection of the

1982-1986, plus 20% interest starting February 14, 2003 until the amount is fully deficiency DST is barred by prescription and whether BPI is liable for DST on its

paid pursuant to Section 249 of the Tax Code. SWAP loan transactions.
On the first issue, the tax court, applying the case ofCommissioner of Internal
SO ORDERED.
Revenue v. Wyeth Suaco Laboratories, Inc.,4 (Wyeth Suaco case), ruled that BPI’s protest
and supplemental protest should be considered requests for reinvestigation which
tolled the prescriptive period provided by law to collect a tax deficiency by distraint, Commissioner of Internal Revenue
levy, or court proceeding. It further held, as regards the second issue, that BPI’s The OSG cites the case ofCollector of Internal Revenue v. Suyoc Consolidated Mining
cabled instructions to its foreign correspondent bank to remit a specific sum in dollars Company, et al.7(Suyoc case) in support of its argument that BPI is already estopped
to the Federal Reserve Bank, the same to from raising the defense of prescription in view of its repeated requests for
110 reinvestigation which allegedly induced the CIR to delay the collection of the
110 SUPREME COURT REPORTS assessed tax.
ANNOTATED In its Reply8 dated 30 August 2007, BPI argues against the application of
Bank of the Philippine Islands vs. theSuyoc case on two points:first, it never induced the CIR to postpone tax
Commissioner of Internal Revenue collection; second, its request for reinvestigation was not categorically acted upon by
be credited to the account of the Central Bank, are in the nature of a telegraphic the CIR within the three-year collection period after assessment. BPI maintains that it
transfer subject to DST under Section 195 of the Tax Code. did not receive any communication from the CIR in reply to its protest letters.
In its Petition for Review5dated 24 November 2006, BPI argues that the We grant the petition.
government’s right to collect the DST had already prescribed because the Section 3189 of the Tax Code of 1977 provides:
Commissioner of Internal Revenue (CIR) failed to issue any reply granting BPI’s “Sec. 318. Period of limitation upon assessment and collection.—Except as provided
request for reinvestigation manifested in the protest letters dated 20 April and 8 May in the succeeding section, internal revenue taxes shall be assessed within five years
1989. It was only through the 9 August 2002 Decision ordering BPI to pay deficiency after the return was filed, and no proceeding in court without assessment for the
DST, or after the lapse of more than thirteen (13) years, that the CIR acted on the collection of such taxes shall be begun after the expiration of such period. For the
request for reinvestigation, warranting the conclusion that prescription had already purposes of this section, a return filed before the last day prescribed by law for the
set in. It further claims that the CIR was not precluded from collecting the deficiency filing thereof shall be considered as filed on such last day: Provided, That this
within three (3) years from the time the notice of assessment was issued on 7 April limitation shall not apply to cases already investigated prior to the approval of this
1989, or even until the expiration on 31 December 1994 of the last waiver of the Code.”
statute of limitations signed by BPI.
Moreover, BPI avers that the cabled instructions to its correspondent bank are not The statute of limitations on assessment and collection of national internal

subject to DST because the National Internal Revenue Code of 1977 (Tax Code of revenue taxes was shortened from five (5) years to three (3) years byBatas Pambansa

1977) does not contain a specific provision that cabled instructions on SWAP Blg. 700.10Thus, the CIR has three (3) years from the date of actual filing of the tax

transactions are subject to DST. return to assess a national internal revenue tax or to

The Office of the Solicitor General (OSG) filed a Comment6 dated 1 June 2007, on 112
112 SUPREME COURT REPORTS
behalf of the CIR, asserting that the prescriptive period was tolled by the protest
ANNOTATED
letters filed by BPI which were granted and acted upon by the CIR. Such action was
Bank of the Philippine Islands vs.
allegedly communicated to BPI as, in fact, the latter submitted additional documents
Commissioner of Internal Revenue
pertaining to its SWAP transactions in support of its request for reinvestigation. Thus,
commence court proceedings for the collection thereof without an assessment.
it was only upon BPI’s receipt on 13 January 2003 of the 9 August 2002 Decision that
When it validly issues an assessment within the three (3)-year period, it has
the period to collect commenced to run again.
another three (3) years within which to collect the tax due by distraint, levy, or court
111
VOL. 548, MARCH 7, 2008 111 proceeding. The assessment of the tax is deemed made and the three (3)-year period

Bank of the Philippine Islands vs.

for collection of the assessed tax begins to run on the date the assessment notice had
been released, mailed or sent to the taxpayer.11
As applied to the present case, the CIR had three (3) years from the time he issued
assessment notices to BPI on 7 April 1989 or until 6 April 1992 within which to collect
the deficiency DST. However, it was only on 9 August 2002 that the CIR ordered BPI
to pay the deficiency.
In order to determine whether the prescriptive period for collecting the tax
deficiency was effectively tolled by BPI’s filing of the protest letters dated 20 April
and 8 May 1989 as claimed by the CIR, we need to examine Section 320 12 of the Tax
Code of 1977, which states:
“Sec. 320. Suspension of running of statute.—The running of the statute of
limitations provided in Sections 318 or 319 on the making of assessment and the
beginning of distraint or levy or a proceeding in court for collection, in respect of any
deficiency, shall be suspended for the period during which the Commissioner is
prohibited from making the assessment or beginning distraint or levy or a proceeding
in court and for sixty days thereafter; when the taxpayer requests for a re-
investigation which is granted by the Commissioner; when the taxpayer cannot be
located in the address given by him in the return filed upon which a tax is being
assessed or collected:Provided, That if the taxpayer informs the Commissioner of any
change in address, the running of the statute of limitations will not be suspended;
when the warrant of distraint and levy is duly served upon the taxpayer, his
authorized representative, or a
113
VOL. 548, MARCH 7, 2008 113
Bank of the Philippine Islands vs.
Commissioner of Internal Revenue
member of his household with sufficient discretion, and no property could be located;
and when the taxpayer is out of the Philippines.” (Emphasis supplied)
The above section is plainly worded. In order to suspend the running of the
prescriptive periods for assessment and collection, the request for reinvestigation
must be granted by the CIR.
In BPI v. Commissioner of Internal Revenue,13 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; alsoRepublic v. Ablaza, supra). Moreover, the Collector gave
appellee until April 1, 1949, within which to submit his evidence, which the latter did
one day before. There were no impediments on the part of the Collector to file the
collection case from April 1, 1949. . .
In Republic of the Philippines v. Acebedo, this Court similarly found that—
x x x T]he defendant, after receiving the assessment notice of September 24, 1949,
asked for a reinvestigation thereof on October 11, 1949 (Exh. “A”).There is no
evidence that this request was considered or acted upon. In fact, on October 23, 1950
the then Collector of Internal Revenue issued a warrant of distraint and levy for the
full amount of the assessment (Exh. “D”), but there was follow-up of this warrant.
Consequently, the request for reinvestigation did not suspend the running of the
period for filing an action for collection.[Emphasis in the original]”14
The Court went on to declare that the burden of proof that the request for
reinvestigation had been actually granted shall be on the CIR. Such grant may be
expressed in its communications with the taxpayer or implied from the action of the
CIR or his authorized representative in response to the request for reinvestigation.
There is nothing in the records of this case which indicates, expressly or
impliedly, that the CIR had granted the request for reinvestigation filed by BPI. What
is reflected in the records is the piercing silence and inaction of the CIR on the request
for reinvestigation, as he considered BPI’s letters of protest to be.
In fact, it was only in his comment to the present petition that the CIR, through
the OSG, argued for the first time that he had granted the request for reinvestigation.
His consistent stance invoking the Wyeth Suaco case, as reflected in the records, is that
the prescriptive period was tolled by BPI’s request for reinvestigation, without any
assertion that the same had been granted or at least acted upon. 15
In the Wyeth Suaco case, private respondent Wyeth Suaco Laboratories, Inc. sent
letters seeking the reinvestigation or reconsideration of the deficiency tax assessments
issued by the BIR. The records of the case showed that as a result of these protest
letters, the BIR Manufacturing Audit Division conducted a review and
reinvestigation of the assessments. The records further showed that the company,
thru its finance manager, communicated its inability to settle the tax deficiency
assessment andadmitted that it knew of the ongoing review and consideration of its
protest.
115
VOL. 548, MARCH 7, 2008 115
Bank of the Philippine Islands vs.
Commissioner of Internal Revenue
As differentiated from theWyeth Suaco case, however, there is no evidence in this
case that the CIR actually conducted a reinvestigation upon the request of BPI or that
the latter was made aware of the action taken on its request. Hence, there is no basis
for the tax court’s ruling that the filing of the request for reinvestigation tolled the
running of the prescriptive period for collecting the tax deficiency.
Neither did the waiver of the statute of limitations signed by BPI supposedly
effective until 31 December 1994 suspend the prescriptive period. The CIR himself
contends that the waiver is void as it shows no date of acceptance in violation of
RMO No. 20-90.16At any rate, the records of this case do not disclose any effort on the
part of the Bureau of Internal Revenue to collect the deficiency tax after the expiration
of the waiver until eight (8) years thereafter when it finally issued a decision on the
protest.
We also find the Suyoccase inapplicable. In that case, several requests for
reinvestigation and reconsideration were filed by Suyoc Consolidated Mining
Company purporting to question the correctness of tax assessments against it. As a
result, the Collector of Internal Revenue refrained from collecting the tax by distraint,
levy or court proceeding in order to give the company every opportunity to prove its
claim. The Collector also conducted several reinvestigations which eventually led to a
reduced assessment. The company, however, filed a petition with the CTA claiming
that the right of the government to collect the tax had already prescribed.
When the case reached this Court, we ruled that Suyoc could not set up the
defense of prescription since, by its own action, the government was induced to delay
the collection of taxes to make the company feel that the demand was not
unreasonable or that no harassment or injustice was meant by the government.
116
116 SUPREME COURT REPORTS
ANNOTATED
Bank of the Philippine Islands vs.
Commissioner of Internal Revenue
In this case, BPI’s letters of protest and submission of additional documents
pertaining to its SWAP transactions, which were never even acted upon, much less
granted, cannot be said to have persuaded the CIR to postpone the collection of the
deficiency DST.
The inordinate delay of the CIR in acting upon and resolving the request for
reinvestigation filed by BPI and in collecting the DST allegedly due from the latter
had resulted in the prescription of the government’s right to collect the deficiency. As
this Court declared in Republic of the Philippines v. Ablaza:17
“The law prescribing a limitation of actions for the collection of the income tax is
beneficial both to the Government and to its citizens; to the Government because tax
officers would be obliged to act promptly in the making of assessment, and to citizens
because after the lapse of the period of prescription citizens would have a feeling of
security against unscrupulous tax agents who will always find an excuse to inspect
the books of taxpayers, not to determine the latter’s real liability, but to take
advantage of every opportunity to molest peaceful, law-abiding citizens. Without
such a legal defense taxpayers would furthermore be under obligation to always keep
their books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial measure should
be interpreted in a way conducive to bringing about the beneficent purpose of
affording protection to the taxpayer within the contemplation of the Commission
which recommend the approval of the law.”18
Given the prescription of the government’s claim, we no longer deem it necessary
to pass upon the validity of the assessment.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Tax
Appeals dated 15 August 2006 and its Reso-
Republic of the Philippines
88
SUPREME COURT
B.I.R.
Manila
rec.

FIRST DIVISION 9,910.94 114.66 38-A

(pp.
329-
332
G.R. No. L-20569 August 23, 1974 B.I.R
rec.)
JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased,
10,200.00 132.00 39 (pp.
Matias H. Aznar,petitioner,
75-78
vs.
B.I.R
COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
rec.)
REVENUE, respondents.
9,148.34 68.90 40 (pp.
Sato, Enad Garcia for petitioner. 70-73
B.I.R.
Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special rec.)
Attorney Librada R. Natividad for respondents.
8,990.66 59.72 41 (pp.
64-67
B.I.R.
rec.)
ESGUERRA, J.:p
8,364.50 28.22 42 (pp.
Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a 59-62,
review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case BIR
No. 109, modifying the decision of respondent Commissioner of Internal Revenue rec.)
and ordering the petitioner to pay the government the sum of P227,691.77
representing deficiency income taxes for the6,800.00
years 1946 to 1951, inclusive, with the none 43 (pp.
condition that if the said amount is not paid within thirty days from the date the 54-57
decision becomes final, there shall be added to the unpaid amount the surcharge of BIR
5%, plus interest at the rate of 12% per annum from the date of delinquency to the rec.).
date of payment, in accordance with Section 51 of the National Internal Revenue
Code, plus costs against the petitioner.
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
It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor
Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner Honorio
in interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his
Guerrero to ascertain the taxpayer's true income for said years by using the net worth
income tax returns on the cash and disbursement basis, reporting therein the
and expenditures method of tax investigation. The assets and liabilities of the
following:
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
Amount of Tax Paid Exhibit 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
P114.66 pp. 85- income tax returns for the aforesaid years.
Based on the above findings of Examiner Guerrero, respondent Commissioner, in his Deduct: Income tax liability per return as assessed ............ 68.90
letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the Balance of tax due ........................................................... P2,132.500
assessed tax delinquency to the amount of P723,032.66, plus compromise penalty. The Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME
taxpayer requested a reinvestigation which was granted for the purpose of verifying TAX ...................................... P3,198.75
the merits of the various objections of the taxpayer to the deficiency income tax
assessment of November 28, 1952. 1949

After the reinvestigation, another deficiency assessment to the reduced amount of Net income per return ....................................................... P9,990.66
P381,096.07 dated February 16, 1955, superseded the previous assessment and notice Add: Under declared income ............................................. 105,418.53
thereof was received by Matias H. Aznar on March 2, 1955. Net income per reinvestigation .......................................... 114,409.19
Deduct: Personal and additional exemptions ...................... P7,000.00
The new deficiency assessment was based on the following computations: Amount of income subject to tax ....................................... P107,409.19
Total tax liability ............................................................... P30,143.68
1946 Deduct: Income tax liability per return as assessed ............. 59.72
Balance of tax due ............................................................ P30,083.96
Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY
Net income per return ........................ P9,910.94
INCOME TAX ....................................... P45,125.94
Add: Under declared income .............. 22,559.94
Net income per investigation............... 32,470.45
1950
Deduct: Income tax liability
per return as assessed ...................................................... 114.66 Net income per return ....................................................... P8,364.50
Balance of tax due ........................................................... P3,687.10 Add: Under declared income ............................................. 365,578.76
Add: 50% surcharge ........................................................ 1,843.55 Net income per reinvestigation .......................................... P373,943.26
DEFICIENCY INCOME TAX ...................................... P5,530.65 Deduct: Personal and additional exemptions ...................... 7,800.00
Amount of income subject to tax ....................................... P366,143.26
Total tax liability ............................................................... P185,883.00
1947
Deduct: Income tax liability per return as assessed ............. 28.00
Balance of tax due ............................................................ P185,855.00
Net income per return ..................................................... P10,200.00 Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY
Add: Under declared income ............................................ 90,413.56 INCOME TAX ....................................... P278,783.00
Net income per reinvestigation ....................................... P100,613.56
Deduct: Personal and additional exemption ...................... 7,000.00
1951
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 Net income per return ........................................................ P6,800.00
Balance of tax due ........................................................... P24,621.15 Add: Under declared income ............................................... 33,355.80
Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY Net income per reinvestigation ............................................ P40,155.80
INCOME TAX ...................................... P36,931.73 Deduct: Personal and additional exemptions ........................ 7,200.00
Amount of income subject to tax ......................................... P32,955.80
Total tax liability .................................................................. P7,684.00
1948
Deduct: Income tax liability per return as assessed ............... - o - .
Balance of tax due .............................................................. P7,684.00
Net income per return ...................................................... P9,148.34 Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY
Add: Under declared income ............................................. 15,624.63 INCOME TAX .......................................... P11,526.00
Net income per reinvestigation .......................................... P24,772.97
Deduct: Personal and additional exemptions ...................... 7,000.00
SUMMARY
Amount of income subject to tax ....................................... P17,772.97
Total tax liability ............................................................... 2,201.40
 Net assets .................................................. 279,483.98
1946 .... P5,530.65
Less: Liabilities ................... P60,000.00
Networth as of
1947 .... 36,931.73
Jan. 1, 1947 ........................ 125,870.42 P185,870.42
1948 .... 3,198.75 Increase in networth ................................... P93,613.56
Add: Estimated living expenses ................... 7,000.00
1949 .... 45,125.94 Net income ................................................P100,613.56

1950 .... 278,783.00 1948

1951 .... 11,526.00 Real estate inventory .................................. P244,824.18

Other assets .............................................. 118,720.60
Total .... P381,096.07 Total assets ............................................... P363,544.78
Less: Depreciation allowed ........................ 20,936.03
In determining the unreported income, the respondent Commissioner of Internal Net assets ................................................. P342,608.75
Revenue resorted to the networth method which is based on the following Less: Liabilities ................... P105,351.80
computations: Networth as of
Jan. 1, 1948 ...................... 219,483.98 P324,835.78
Increase in networth ................................... P17,772.97
1945
Add: Estimated living expenses ................... 7,000.00
Net income ................................................ P24,772.97
Real estate inventory ................................ P64,738.00
Other assets ............................................. 37,606.87 1949
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00
Networth as of Dec. 31, 1945 ................ P100,316.97 Real estate inventory ................................. P400,515.52
Investment in schools and other colleges .... 23,105.29
Other assets ............................................. 70,311.00
1946
Total assets ............................................... P493,931.81
Less: Depreciation allowed ........................ 32,657.08
Real estate inventory ................................. P86,944.18 Net assets ................................................. P461.274.73
Other assets ............................................. 60,801.65 Less; Liabilities .................. P116,608.59
Total assets ............................................. P147,745.83 Networth as of
Less: Depreciation allowed ...................... 4,875.41 Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Net assets ................................................ P142,870.42 Increase in networth .................................. P107,409.19
Less: Liabilities .................. P17,000.00 Add: Estimated living expenses .................. 7,000.00
Net Worth as of Net income ............................................... P114,409.19
Jan. 1, 1946 ................... P100,316.97 P117,316.97
Increase in networth ................................. 25,553.45 1950
Add: Estimated living expenses ................. 6,917.00
Net income .............................................. P32,470.45
Real estate inventory .................................. P412,465.52
Investment in Schools and
1947
other colleges ................................ 193,460.99
October assets .......................................... 310,788.87
Real estate inventory .................................. P237,824.18 Total assets ............................................... P916,715.38
Other assets ............................................... 54,495.52 Less; Depreciation allowed ........................ 47,561.99
Total assets ............................................... P292,319.70 Net assets ................................................. P869,153.39
Less: Depreciation allowed ......................... 12,835.72
Less: Liabilities .................. P158,343.99 Less: Personal and additional exemptions .................. 6,917.00
Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13 Income subject to tax ............................................. P25,553.45
Increase in networth ................................... P366,143.26 Tax due thereon ...................................................... P3,801.76
Add: Estimated living expenses ................... 7,800.00 Less: Tax already assessed ...................................... 114.66
Net income ................................................. P373,943.26 Balance of tax due .................................................... P3,687.10
Add: 50% surcharge ................................................. 1,843.55
1951 Deficiency income tax ................................................ P5,530.65

Real estate inventory ................................... P412,465.52 1947

Investment in schools and other colleges ..... 214,016.21
Other assets ............................................... 320,209.40 Net income per return ............................................ P10,200.00
Total assets ................................................ P946,691.13 Add: Under declared income .................................. 57,551.19
Less: Depreciation allowed ......................... 62,466.90 Net income ........................................................... P67,751.19
Net assets .................................................. P884,224.23 Less: Personal and additional exemptions ............... 7,000.00
Less: Liabilities ........................................... P140,459.03 Income subject to tax ............................................. P60,751.19
Networth as of Tax due thereon ..................................................... P13,420.38
Jan. 1, 1951 ................ 710,809.40 P851,268.43 Less: Tax already assessed ..................................... P132.00
Increase in networth .................................... P32,955.80 Balance of tax due ................................................... P13,288.38
Add: Estimated living expenses .................... 7,200.00 Add: 50% surcharge ................................................ 6,644.19
Net income ................................................. P40,155.80 Deficiency income tax .............................................. P19,932.57

(Exh. 45-B, BIR rec. p. 188) 1948

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Net income per return .............................................. P9,148.34
Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and levy Add: Under declared income ..................................... 8,732.10
to secure payment of the deficiency income tax in question. Matias H. Aznar filed his Net income ............................................................ P17,880.44
petition for review of the case with the Court of Tax Appeals on April 1, 1955, with a Less: Personal and additional exemptions ................. 7,000.00
subsequent petition immediately thereafter to restrain respondent from collecting the Income subject to tax .............................................. P10,880.44
deficiency tax by summary method, the latter petition being granted on February 8, Tax due thereon ...................................................... P1,029.67
1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review, Less: Tax already assessed ....................................... 68.90
this Court set aside the C.T.A. resolution and required the petitioner to deposit with Balance of tax due .................................................... 960.77
the Court of Tax Appeals the amount demanded by the Commissioner of Internal Add: 50% surcharge ................................................. 480.38
Revenue for the years 1949 to 1951 or furnish a surety bond for not more than double Deficiency income tax ............................................... P1,441.15
the amount.
1949
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 Net income per return ................................................. P8,990.66
the late Matias H. Aznar for the year 1946 to 1951, inclusive should be P227,788.64 Add: under declared income ......................................... 43,718.53
minus P96.87 representing the tax credit for 1945, or P227,691.77, computed as Net income ............................................................... P52,709.19
follows: Less: Personal and additional exemptions .................... 7,000.00
Income subject to tax ................................................. P45,709.19
1946 Tax due thereon ......................................................... P8,978.57
Less: Tax already assessed ......................................... 59.72
Net income per return .............................................. P9,910.94 Balance of tax due ....................................................... P8,918.85
Add: Under declared income ..................................... 22,559.51 Add: 50% surcharge .................................................... 4,459.42
Net income ............................................................ P32,470.45 Deficiency income tax ................................................. P13,378.27
1950 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
Net income per return .................................................. P6,800.00 Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the time
Add: Under declared income ......................................... 33,355.80 the assessment was made on November 28, 1952.
Net income ................................................................. P40,155.80
Less: Personal and additional exemptions ...................... 7,200.00 Petitioner's contention is that the provision of law applicable to this case is the period
Income subject to tax .................................................. P32,955.80 of five years limitation upon assessment and collection from the filing of the returns
Tax due thereon ........................................................... P7,684.00 provided for in See. 331 of the National Internal Revenue Code. He argues that since
Less: Tax already assessed ........................................... -o- . the 1946 income tax return could be presumed filed before March 1, 1947 and the
Balance of tax due ........................................................ P7,684.00 notice of final and last assessment was received by the taxpayer on March 2, 1955, a
Add: 50% surcharge .................................................... 3,842.00 period of about 8 years had elapsed and the five year period provided by law (Sec.
Deficiency income tax .................................................. P11,526.00 331 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
1951 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,
Net income per return ................................................... P8,364.50
as in this case, "(a) In the case of a false or fraudulent return with intent to evade tax
Add: Under declared income ........................................ 246,449.06
or of a failure to file a return, the tax may be assessed, or a proceeding in court for the
Net income ............................................................... P254.813.56
collection of such tax may be begun without assessment, at any time within ten years
Less: Personal and additional exemptions .................... 7,800.00
after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC).
Income subject to tax ................................................ P247,013.56
Tax due thereon ........................................................ P117,348.00
Less: Tax already assessed ........................................ 28.00 Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did
Balance of tax due ..................................................... P117,320.00 not file false and fraudulent returns with intent to evade tax, while respondent
Add: 50% surcharge .................................................. 58,660.00 Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax
Deficiency income tax ................................................ P175 980.00 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."
SUMMARY

To our minds we can dispense with these controversial arguments on facts, although
1946 P5,530.65
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
1947 19,932.57 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
1948 1,441.15 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
1949 13,378.27 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
1950 175,980.00
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
1951 11,526.00 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
P227,788.64. deviation from the truth, whether intentional or not, the second implies intentional or
deceitful entry with intent to evade the taxes due.
I
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 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
The second issue which appears to be of vital importance in this case centers on the three instances (elimination of two buildings in the list of petitioner's assets beginning
lower court's imposition of the fraud penalty (surcharge of 50% authorized in Section December 31, 1949, because they were destroyed by fire; elimination of expenses for
72 of the Tax Code). The petitioner insists that there might have been false returns by construction in petitioner's assets as duplication of increased value in buildings, and
mistake filed by Mr. Matias H. Aznar as those returns were prepared by his elimination of value of house and lot in petitioner's assets because said property was
accountant employees, but there were no proven fraudulent returns with intent to only given as collateral) supported petitioner's stand on the wrong inclusions in his
evade taxes that would justify the imposition of the 50% surcharge authorized by law lists of assets made by the respondent Commissioner of Internal Revenue, resulting in
as fraud penalty. 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
The lower court based its conclusion that the 50% fraud penalty must be imposed on
who committed mistakes in his use of the inventory method to determine the
the following reasoning: .
petitioner's tax liability. The mistakes committed by the Commissioner of Internal
Revenue which also involve very substantial amounts were also repeated yearly, and
It appears that Matias H. Aznar declared net income of P9,910.94, yet we cannot presume therefrom the existence of any taint of official fraud.
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
From the above exposition of facts, we cannot but emphatically reiterate the well
worth method of determining the net income of a taxpayer, we find
established doctrine that fraud cannot be presumed but must be proven. As a
that he had net incomes of P32,470.45, P67,751.19, P17,880.44,
corollary thereto, we can also state that fraudulent intent could not be deduced from
P52,709.11, P254,813.56 and P40,155.80 during the respective years
mistakes however frequent they may be, especially if such mistakes emanate from
1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he
erroneous entries or erroneous classification of items in accounting methods utilized
underdeclared his income by 227% for 1946, 564% for 1947, 95%, for
for determination of tax liabilities The predecessor of the petitioner undoubtedly filed
1948, 486% for 1949, 2,946% for 1950 and 490% for 1951. These
his income tax returns for "the years 1946 to 1951 and those tax returns were prepared
substantial under declarations of income for six consecutive years
for him by his accountant and employees. It also appears that petitioner in his lifetime
eloquently demonstrate the falsity or fraudulence of the income tax
and during the investigation of his tax liabilities cooperated readily with the B.I.R.
return with an intent to evade the payment of tax. Hence, the
and there is no indication in the record of any act of bad faith committed by him.
imposition of the fraud penalty is proper (Perez vs. Court of Tax
Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)
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
As could be readily seen from the above rationalization of the lower court, no
establishing a willful filing of false and fraudulent returns so as to warrant the
distinction has been made between false returns (due to mistake, carelessness or
imposition of the fraud penalty. The fraud contemplated by law is actual and not
ignorance) and fraudulent returns (with intent to evade taxes). The lower court based
constructive. It must be intentional fraud, consisting of deception willfully and
its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the
deliberately done or resorted to in order to induce another to give up some legal
substantial difference between the amounts of net income on the face of the returns as
right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to
filed by him in the years 1946 to 1951 and the net income as determined by the
evade the tax contemplated by the law. It must amount to intentional wrong-doing
inventory method utilized by both respondents for the same years. The lower court
with the sole object of avoiding the tax. It necessarily follows that a mere mistake
based its conclusion on a presumption that fraud can be deduced from the very
cannot be considered as fraudulent intent, and if both petitioner and respondent
substantial disparity of incomes as reported and determined by the inventory method
Commissioner of Internal Revenue committed mistakes in making entries in the
and on the similarity of consecutive disparities for six years. Such a basis for
returns and in the assessment, respectively, under the inventory method of
determining the existence of fraud (intent to evade payment of tax) suffers from an
determining tax liability, it would be unfair to treat the mistakes of the petitioner as
inherent flaw when applied to this case. It is very apparent here that the respondent
tainted with fraud and those of the respondent as made in good faith.
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 We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of
respondent, in another assessment dated February 16, 1955, concluded that the tax the Tax Code should not be imposed, but eliminated from the income tax deficiency
liability should be reduced to P381,096.07. This is a crystal-clear, indication that even for each year from 1946 to 1951, inclusive. The tax liability of the petitioner for each
the respondent Commissioner of Internal Revenue with the use of the inventory year should, therefore, be:
method can commit a glaring mistake in the assessment of petitioner's tax liability.
 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.

 G.R. No. 213943. March 22, 2017.* 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., 303 SCRA 546 (1999), the Court
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE DAILY stated that the entry of wrong information due to mistake, carelessness, or ignorance,
INQUIRER, INC., respondent. 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
Remedial Law; Civil Procedure; Judgments; Court of Tax Appeals; Since by the very
the case does not fall under the exceptions, Section 203 of the NIRC should apply. It
nature of its functions, the Court of Tax Appeals (CTA) has developed an expertise to resolve
provides: SEC. 203. Period of Limitation Upon Assessment and Collection.—Except as
tax issues, the Supreme Court (SC) will not set aside lightly the conclusions reached by them,
provided in Section 222, internal revenue taxes shall be assessed within three (3)
unless there has been an abuse or improvident exercise of authority.—The general rule is
years after the last day prescribed by law for the filing of the return, and no
that findings of fact of the CTA are not to be disturbed by this Court unless clearly
proceeding in court without assessment for the collection of such taxes shall be begun
shown to be unsupported by substantial evidence. Since by the very nature of its
after the expiration of such period. Provided, That in a case where a return is filed
functions, the CTA has developed an expertise to resolve tax issues, the Court will
beyond the period prescribed by law, the three (3)-year period shall be counted from
not set aside lightly the conclusions reached by them, unless there has been an abuse
the day the return was filed. For purposes of this Section, a return filed before the last
or improvident exercise of authority.
day prescribed by law for the filing thereof shall be considered as filed on such last
Taxation; Prescriptive Period; Under Section 203 of the National Internal Revenue
day. Indeed, the Waivers executed by the BIR and PDI were meant to extend the
Code (NIRC), the prescriptive period to assess is set at three (3) years. This rule is subject to
three-year prescriptive period, and would have extended such period were it not for
the exceptions provided under Section 222 of the NIRC.—Under Section 203 of the NIRC,
the defects found by the CTA. This further shows that at the outset, the BIR did not
the prescriptive period to assess is set at three years. This rule is subject to the
find any ground that would make the assessment fall under the exceptions.
exceptions provided under Section 222 of the NIRC. The CIR
PETITION for review on certiorari of the decision and resolution of the Court of Tax
351
Appeals En Banc.
VOL. 821, MARCH 22, 2017 351
The facts are stated in the opinion of the Court.
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc. 352
invokes Section 222(a) which provides: SEC. 222.Exceptions as to Period of 352 SUPREME COURT REPORTS
Limitation of Assessment and Collection of Taxes.—(a) In the case of a false or fraudulent ANNOTATED
return with intent to evade tax or of failure to file a return, the tax may be assessed, or Commissioner of Internal Revenue vs.
a proceeding in court for the collection of such tax may be filed without assessment, Philippine Daily Inquirer, Inc.
at any time within ten (10) years after the discovery of the falsity, fraud or Office of the Solicitor General for petitioner.
omission: Provided, That in a fraud assessment which has become final and executory, Gerodias, Suchianco, Estrella for respondent.
the fact of fraud shall be judicially taken cognizance of in the civil or criminal action
CARPIO, J.:
for the collection thereof.
Same; While the filing of a fraudulent return necessarily implies that the act of the
The Case
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.—While the filing of a fraudulent
Before the Court is a petition for review1 assailing the 4 November 2013
return necessarily implies that the act of the taxpayer was intentional and done with
Decision2 and the 1 August 2014 Resolution3 of the Court of Tax Appeals (CTA)En
Banc in C.T.A. E.B. Case No. 905. The CTA En Bancaffirmed the 16 February 2012 2007 from Mr. Gerardo Florendo, Chief of the BIR-LTAID, informing it that the
Decision4 and the 8 May 2012 Resolution5 of the CTA First Division in CTA Case No. results of the evaluation relative to the matching of sales of its suppliers against
7853 which granted the petition for review filed by Philippine Daily Inquirer, Inc. 354
(PDI) and cancelled the Formal Letter of Demand dated 11 March 2008 and 354 SUPREME COURT REPORTS
Assessment No. LN # 116-AS-04-00-00038-000526 issued by the Bureau of Internal ANNOTATED
Revenue (BIR) for deficiency Value-Added Tax (VAT) and income tax for the taxable Commissioner of Internal Revenue vs.
year 2004. Philippine Daily Inquirer, Inc.
its purchases for the taxable year 2004 had been submitted by Revenue Officer
The Antecedent Facts 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
The facts of this case, as presented by the CTA, are as follows: BIR’s findings. On 5 June 2007, PDI executed a Waiver of the Statute of Limitation
PDI is a corporation engaged in the business of newspaper publication. On 15 (Second Waiver), which Valeroso accepted on 8 June 2007.
April 2005, it filed its Annual Income Tax In a Preliminary Assessment Notice (PAN) dated 15 October 2007 issued by the
353 BIR-LTAID, PDI was assessed for alleged deficiency income tax and VAT for taxable
VOL. 821, MARCH 22, 2017 353 year 2004 on the basis of LN No. 116-AS-04-00-00038. The PAN states:.
Commissioner of Internal Revenue vs. COMPUTATION OF DEFICIENCY VAT
Undeclared Income P1,007,565.03
Philippine Daily Inquirer, Inc. Add: Overdeclared input VAT 1,601,652.43
Return for taxable year 2004. Its Quarterly VAT Returns for the same year showed the Total undeclared income per Investigation P2,609,217.46
Less: Attributable input tax 715,371.17
following:
VAT still payable per investigation P1,893,846.29
On 10 August 2006, PDI received a letter dated 30 June 2006 from Region 020 Add: Increments –
P1,062,629.37
Large Taxpayers’ Service of BIR under LN No. 116-AS-04-00-00038. BIR alleged that Interest from 1/26/05 to 11/15/07
Compromise penalty 25,000.00 1,087,629.37
based on the computerized matching it conducted on the information and data
Amount Due and Collectible P2,981,475.66
provided by third party sources against PDI’s declaration on its VAT Returns for COMPUTATION OF DEFICIENCY INCOME TAX
taxable year 2004, there was an underdeclaration of domestic purchases from its Undeclared Gross Income P10,075,650.28
suppliers amounting to P317,705,610.52. The BIR invited PDI to reconcile the Less: Cost of Sales 7,153,711.70
Undeclared Net Income P2,921,938.58
deficiencies with BIR’s Large Taxpayers Audit & Investigation Division I (BIR-
Multiply by income tax rate 32%
LTAID). In response, PDI submitted reconciliation reports, attached to its letters Income tax still due per
P935,020.35
dated 22 August 2006 and 19 December 2006, to BIR-LTAID. On 21 March 2007, PDI investigation
Add: Increments –
executed a Waiver of the Statute of Limitation (First Waiver) consenting to the
Interest from 4/16/05 to
assessment and/or collection of taxes for the year 2004 which may be found due after 11/15/07 P483,648.88
the investigation, at any time before or after the lapse of the period of limitations Compromise
20,000.00503,648.88
fixed by Sections 203 and 222 of the National Internal Revenue Code (NIRC) but not penalty
Amount Due and Collectible P1,438,669.237
later than 30 June 2007. The First Waiver was received on 23 March 2007 by Nestor
.
Valeroso (Valeroso), OIC-ACIR 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
 355 356
VOL. 821, MARCH 22, 2017 355 356 SUPREME COURT REPORTS
Commissioner of Internal Revenue vs. ANNOTATED
Philippine Daily Inquirer, Inc. Commissioner of Internal Revenue vs.
PDI received the PAN on 4 December 2007. In a letter dated 12 December 2007, Philippine Daily Inquirer, Inc.
PDI sought reconsideration of the PAN and expressed its willingness to execute On 16 May 2008, PDI filed its protest. On 12 December 2008, PDI filed a Petition
another Waiver (Third Waiver), which it did on the same date, thus extending BIR’s for Review against the Commissioner of Internal Revenue (CIR) alleging that the 180-
right to assess and/or collect from it until 30 April 2008. Romulo L. Aguila, Jr. day period within which the BIR should act on its protest had already lapsed.
(Aguila), OIC-Head Revenue Executive Assistant for the Large Taxpayers’ Service- The CTA First Division, quoting at length the CIR’s Answer, presented the
Regular, accepted the Third Waiver on 20 December 2007. following facts:
On 17 April 2008, PDI received a Formal Letter of Demand dated 11 March 2008 Petitioner Philippine Daily Inquirer is liable to pay the amount of Three Million
and an Audit Result/Assessment Notice from the BIR, demanding for the payment of One Hundred Fifty-Four Thousand Seven Hundred Seventy-Five Pesos and 56/100
alleged deficiency VAT and income tax, respectively, computed as follows: (P3,154,775.56) and One Million Five Hundred Twenty-Four Thousand Two Hundred
1. COMPUTATION OF (DEFICIENCY) VAT Twenty-Nine Pesos and 99/100 (P1,524,299.99) representing deficiency Value-Added
Tax (VAT) and Income Tax, respectively, for the taxable year 2004.
Undeclared Income P1,007,565.03
Add: Overdeclared input VAT 1,601,652.43 1. The VAT and income tax liabilities of petitioner in the aggregate amount of Four
Total Undeclared Income per Investigation P2,609,217.46 Million Six Hundred Seventy-Nine Thousand and Five Pesos and 55/100
Less: Attributable input tax 715,371.17
(P4,679,005.55) arose on account of the issuance to petitioner of Letter Notice No. 116-
VAT still payable per investigation P1,893,846.29
Add: Increments – AS-04-00-00038 dated June 30, 2006. Computerized matching conducted by
Interest from 1/26/05 to respondent on information/data provided by third party sources against its
11/15/07 P1,235,929.28
declaration per VAT returns revealed the aforesaid discrepancies for taxable year
Compromise
penalty 25,000.00 1,260,929.28 2004. The income and value-added tax liabilities were generated through the
Amount Due and Collectible P3,154,775.56 Reconciliation of Listing for Enforcement (RELIEF) system-Summary List of Sales and
2. COMPUTATION OF [DEFICIENCY INCOME TAX] Purchases (SLSP) and Third Party Matching. Through the system, respondent was

Undeclared Gross able to detect tax leaks through the matching of data available in the Integrated Tax
P10,075,650.28
Income Systems (ITS) with the information gathered from third party sources.
Less: Cost of Sales 7,153,711.70 On the basis of the consolidation and cross-referencing of third party information,
Undeclared Net Income 2,921,938.58
Multiply by income tax rate 32% discrepancy reports on sales and purchases were generated to uncover
Income tax still due per
P935,020.35
investigation 357
Add: Increments – VOL. 821, MARCH 22, 2017 357
Interest from 4/16/05 to
P569,209.65 Commissioner of Internal Revenue vs.
11/15/07
Compromise 20,000.00 Philippine Daily Inquirer, Inc.
penalty 589,209.65 under-declared income and over-claimed purchases (goods and services).
Amount Due and Collectible P1,524,229.998
As explicitly provided under Revenue Memorandum Order (RMO) No. 42-2003:
II. POLICIES
 [x x x] “Letter Notices issued against a taxpayer in connection with the
2. In order to intensify enforcement, the power of the Commissioner to information of underdeclaration of sales and purchases gathered through
authorize the examination of the taxpayer and the assessment of the correct Third Party Information Program may be considered as a ‘notice of audit or
amount of tax is hereby ordered done through the so called ‘no contact-audit- investigation’ in the absence of evident error or clear abuse of discretion.”
approach.’ 2. On the basis of the above mentioned LN and after a careful and extensive
3. The ‘no contact-audit-approach’ includes the process of computerized scrutiny of petitioner’s documents, resulting deficiency in income and Value-added
matching of sales and purchases data contained in the Schedules of Sales and taxes led to the issuance of the Preliminary Assessment Notice (PAN) dated October
Domestic Purchases, and Schedule of Importation submitted by VAT taxpayer 15, 2007 together with the Details of Discrepancies and subsequently, a Formal Letter
under the RELIEF system pursuant to RR No. 7-95 as amended by RR Nos. 13- of Demand (FLD) dated March 11, 2008.
97, 7-99 and 8-2002. This may also include the matching of data from other Relative thereto, Section 203 of the National Internal Revenue Code (NIRC)
information or returns filed by the taxpayers with the BIR such as Alphalist of explicitly provides:
Payees subject to Final or Creditable Withholding Taxes. ‘Section 203. Period of Limitation Upon Assessment and Collection of
4. Even without conducting a detailed examination of taxpayer’s books Taxes.—
and records, the computerized/manual matching of sales and Except as provided in Section 222, internal revenue taxes shall be
purchases/expenses will reveal discrepancies which shall be communicated assessed within three (3) years after the last day prescribed by law for filing
to the concerned taxpayer through the issuance of a Letter Notice (LN) by the of the return, and no proceeding in court without assessment, for the
Commissioner. collection of such taxes shall be begun after the expiration of such period:
5. LNs being served by the Bureau upon the taxpayer found to have
359
understated their sales or over claimed their purchases/expenses can be
VOL. 821, MARCH 22, 2017 359
considered notice of audit or investigation insofar as the amendment of any
Commissioner of Internal Revenue vs.
return is concerned which is the subject of such LN. A taxpayer is therefore
Philippine Daily Inquirer, Inc.
358 Provided, That in a case where a return i[s] filed beyond the period prescribed
358 SUPREME COURT REPORTS by law, the three (3)-year period shall be counted from the day [t]he return
ANNOTATED was filed. For purposes of this Section, a return filed before the last day
Commissioner of Internal Revenue vs. prescribed by law for the filing thereof shall be considered filed on such day.’
Philippine Daily Inquirer, Inc. However, Section 222 of the NIRC provides the exceptions as regards to the
disqualified from amending his return once an LN is served upon him. provisions laid down under Section 203. In particular, as shown under Section (1)
III. GUIDELINES thereof, the three (3)-[year] period of limitation in making assessment shall notapply
xxx in cases where it involvesfalse or fraudulent return or in cases where there is failure
5. The LN shall serve as a discrepancy notice to taxpayer similar to a to file a return [by] the person obliged to file such return. Section 222(a) of the
Notice of Informal Conference, thus, the procedures defined in RR 12-99 National Internal Revenue Code provides:
should likewise be observed. ‘Section 222. Exceptions as to Period of Limitation of Assessment and
Furthermore, in CTA Case No. 7092 entitled ‘BIG AA Corporation represented by Collection of Taxes.—
Erlinda L. Stohner v. Bureau of Internal Revenue’ dated February 22, 2006, the Honorable (a) In the case of afalse or fraudulent return with intent to evade tax
Court had the opportunity to say: 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 timewithin Per SLP Per LN Discrepancy
Western Marketing
ten (10) yearsafter the discovery of the falsity, fraud or omission;Provided, 30,830.99 7,957.27 22,873.72
Corp.
That in a fraud assessment which has become final and executor[y], [t]he fact Total 109,462,842.94107,861,190.511,601,652.43
of fraud shall be judicially taken cognizance of in the civil and criminal action (b) On the other hand, it is likewise evident that an excess of LN over the SLP
for the collection thereof.’ also occurred in the total amount of Seven Hundred Fifteen Thousand Three
Such being the case, the three (3)-[year] period of limitation for the assessment of Hundred Seventy-One Pesos and 17/100 (P715,371.17). The details of which are
internal revenue tax liabilities reckoned from the last day prescribed by law for the shown hereunder:
filing of the return shall not apply in the case at hand for the simple reason that
Per
petitioner falsely filed the return for taxable year 2004. Such being the case, the Per SLP Discrepancy
LN
applicable provision shall be Section 222(a) where the period of limitation provides Grasco Industries, Inc. 202.55 (202.55)
that the assessment may be

360
361
360 SUPREME COURT REPORTS
VOL. 821, MARCH 22, 2017 361
ANNOTATED
Commissioner of Internal Revenue vs. Philippine Daily
Commissioner of Internal Revenue vs.
Inquirer, Inc.
Philippine Daily Inquirer, Inc. Harrison
made within ten (10) years after the discovery of falsity, fraud or omission. In the case Communications,18,157.89398,331.12(380,173.23)
at hand, the reckoning period was from the time during which the LN dated June 30, Inc.
Makati Property
2006 was issued to petitioner. Indubitably, the Formal Letter of Demand dated March 64.55 (64.55)
Ventures
11, 2008 was issued within the prescriptive period provided by law. Such being the Mc[C]an[n]
Erikson Phils., 204,769.38(204,769.38)
case, the FLD is considered valid and has the force and effect of law.
Inc.
3. On the basis of the investigation conducted by respondent through the RELIEF Millennium Cars,
89,545.45 (89,545.45)
system, respondent though the FLD, outlined how the tax liabilities in the aggregate Inc.
WPP Marketing
amount of P4,679,005.55 representing income and VAT liabilities were arrived at.
Communications, 40,616.01 (40,616.01)
Upon matching the data gathered from respondent’s Integrated Tax System (ITS) Inc.
against the Summary of List of Purchases (SLP) attached to the Quarterly VAT Total 18,157.89733,529.06(715,371.17)
returns filed with respondent, the following discrepancies remain unsettled despite On the basis of the aforesaid investigation, it can be observed that the SLP which
petitioner’s submission of supporting documents: petitioner attached as supporting documents upon filing the quarterly VAT return
(a) An excess of SLP over the Letter Notices (LN) in the amount of P1,601,652.43 revealed the declared amount of P109,462,842.94 as its input VAT for purchases
from the following suppliers: incurred. However, on the basis of the LN, its suppliers recorded in its books of
account the aggregate amount of P107,861,190.51 as its corresponding VAT. Suffice it
Per SLP Per LN Discrepancy
Alliance Media to say, the over-declared VAT input tax on the part of petitioner led to the underdec-
109,073,375.58107,640,812.951,432,562.63
Printing Corp. laration of VAT payable in the amount of P1,601,652.43 for the taxable year 2004.
Citimotors, Inc. 70,454.55 70,056.65 397.90 Therefore, petitioner is liable to pay said outstanding VAT. In addition, the amount of
Diamond Motors
288,181.82 142,363.64 145,818.18 P10,075,650.28 which resulted from the excess of the LN over the SLP amounting to
Corp.
P715,371.17 must be likewise added to arrive at the total VAT liability of
P3,154,775.56 (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 P715,371.17
resulted to under-declared input tax on the part of petitioner which led to an under[-]
declared purchases of P7,153,711.70, arrived at by dividing P715,371.17 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
362
362 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 P7,153,711.70 by the cost ratio of 71%, the under-declared Gross
Income of P10,075,650.28 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 P10,075,650.28 the corresponding Cost of Sales of P7,153,711.70. Hence, the
amount of income tax still to be paid is P1,524,229.99 (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 andadvertising 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,
363
VOL. 821, MARCH 22, 2017 363
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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
expensesdirectly 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 clientsincluding (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 namely Harrison Communications, Inc., McCann Erikson, Inc. and WPP
364
364 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 P715,371.17 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 (Php4,679,005.55)
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
365
VOL. 821, MARCH 22, 2017 365
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 in 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.
366
366 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 P1,601,652.43 is not correct. The CTA
First Division ruled that the CIR failed to disprove the findings submitted by the
367
VOL. 821, MARCH 22, 2017 367
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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
368
368 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 followed. 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 of the 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
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 portion of the CTA En Banc’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

370
The CIR filed a motion for reconsideration. In its 8 May 2012 Resolution, the CTA 370 SUPREME COURT REPORTS
First Division denied the motion for lack of merit. ANNOTATED
Commissioner of Internal Revenue vs.
369 Philippine Daily Inquirer, Inc.
VOL. 821, MARCH 22, 2017 369 The CIR filed a motion for reconsideration. In its 1 August 2014 Resolution, the
Commissioner of Internal Revenue vs. CTA En Banc denied the motion for lack of merit.
Philippine Daily Inquirer, Inc. Hence, the CIR filed a petition for review oncertiorari before this Court.
The CIR filed a petition for review before the CTA En Banc.
The Issues
The Decision of the CTA En Banc
The CIR raised the following issues in her petition:
In its 4 November 2013 Decision, the CTA En Banccited the CTA First Division’s (1) The CTA En Banc erred in ruling that petitioner’s assessment for deficiency VAT
Decision extensively. The CTA En Banc ruled that it found no reason to depart from and income tax was adequately controverted by respondent;
the CTA First Division’s findings. The CTA En Bancheld that PDI sufficiently (2) The CTA En Banc erred in ruling that the petitioner’s right to assess respondent
discharged its burden of proving that the VAT assessment and the Income Tax for deficiency VAT and income tax has prescribed; and
assessment made by the CIR were not correct. The CTA En Banc ruled that the (3) The CTA En Banc erred in ruling that respondent is not estopped from raising
presumptions of correctness and regularity cited by the CIR were overturned by the the defense of prescription.13
evidence presented by PDI particularly, the final report of the ICPA, accounts
The Ruling of this Court
payable, check vouchers, invoices, official receipts, and credit memoranda. The
CTAEn Banc noted that the CIR did not present any evidence to the contrary. The
BIR’s assessment was not adequately
CTA En Banc rejected the CIR’s allegation that PDI made a false return and held that
controverted by PDI
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
Reconciliation of Listing for Enforcement (RELIEF) System is an information
sustained the CTA First Division’s ruling that the Waivers issued by PDI were
technology tool used by the BIR to improve tax administration. 14 The system was
defective and could not extend the three-year prescriptive period. The CTAEn
created —
 x x x to support third party information program and voluntary assessment 372
program of the Bureau through the cross-referencing of third party information from 372 SUPREME COURT REPORTS
the taxpayers’ Summary Lists of Sales and Purchases prescribed to be submitted on a ANNOTATED
quarterly basis Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
371 BIR’s finding that PDI underdeclared its input tax and purchases. According to the
VOL. 821, MARCH 22, 2017 371
CTA, PDI was able to disprove BIR’s assessments.
Commissioner of Internal Revenue vs.
The general rule is that findings of fact of the CTA are not to be disturbed by this
Philippine Daily Inquirer, Inc.
Court unless clearly shown to be unsupported by substantial evidence. 17 Since by the
pursuant to Revenue Regulations Nos. 7-95, as amended by RR 13-97, RR 7-99 and RR very nature of its functions, the CTA has developed an expertise to resolve tax issues,
8-2002.15 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
In addition —
report submitted by the ICPA. According to the CTA, the BIR failed to rebut the ICPA
[RELIEF] can detect tax leaks by matching the data available under the Bureau’s
report. After going over the ICPA report, as well as the affidavit summarizing the
Integrated Tax System (ITS) with data gathered from third party sources (i.e.,
examination submitted by Jerome Antonio B. Constantino (Constantino), a Certified
Schedules of Sales and Domestic Purchases, and Schedule of Importations submitted
Public Accountant and the Managing Partner of the firm that conducted the
by VAT taxpayers pursuant to RR No. 7-95, as amended by RR Nos. 13-97, 7-99 and 8-
examination, this Court notes that:
2002).
(1) Purchases made from Harrison Communications, Inc. were recorded as general
Through the consolidation and cross-referencing of third party information,
and administrative expenses and selling expenses in the 2004 General Ledger and
discrepancy reports on sales and purchases can be generated to uncover
2004 Audited Financial Statements and not as cost of sales; 19
underdeclared income and over claimed purchases (goods and services). Timely
(2) The 2004 purchases from Harrison Communications, Inc. and McCann Erickson,
recognition and accurate reporting of unregistered taxpayers and non-filers can be
Inc. were recorded in PDI’s book in 2005 and 2006 as “Summary List of Purchases.”
made possible.16
There was a discrepancy between the purchases from Harrison Communications, Inc.
and McCann Erickson, Inc. and the
Using the RELIEF system, the BIR assessed PDI for deficiency VAT and income
373
tax amounting to P3,154,775.57 and P1,525,230.00, respectively. According to the BIR,
VOL. 821, MARCH 22, 2017 373
the computerized matching conducted by its office, using information and data from
Commissioner of Internal Revenue vs.
third party sources against PDI’s VAT returns for 2004 showed an underdeclaration
Philippine Daily Inquirer, Inc.
of domestic purchases from its suppliers amounting to P317,705,610.52. PDI denied
BIR’s Letter Notice amounting to P150,203.29 and P191,406.02, respectively, but the
the allegation.
ICPA was not able to account for the difference because according to PDI, the details
In ruling on the case, the CTA recognized that the BIR may obtain information
were not provided in the BIR’s Letter Notice;20
from third party sources in assessing taxpayers. The CTA also stated that the BIR
(3) Promotional services purchased from Harrison Communications, Inc. and
enjoyed a presumption of regularity in obtaining the information, and its assessments
McCann Erickson, Inc. in 2004 were recorded in PDI’s books in 2005 and 2006.
are presumed correct and made in good faith. Indeed, the burden to controvert the
According to Constantino, the VAT input on purchases from Harrison
assessments made by the BIR lies with the taxpayer. In this case, the CTA rejected
Communications, Inc. and McCann Erickson, Inc. recorded in 2005 and 2006, (4) Gross Income Defined.—For purposes of applying the minimum corporate income
amounting to P206,713.63 and P13,363.36, respectively, were supported only by tax provided under Subsection (E) hereof, the term “gross income” shall mean gross
photocopies of sales invoices because PDI claimed that it could not find the original sales less sales returns, discounts and allowances and cost of goods sold. “Cost of
documents despite diligent efforts to locate them;21 goods sold” shall include business expenses directly incurred to produce the
(4) Constantino reported that no input taxes were recorded in 2004 from McCann merchandise to bring them to their present location and use.
Erickson, Inc., Millennium Cars, Inc., WPP Marketing Communications, Inc., Grasco xxxx
Industries, Inc., and Makati Property Ventures. Constantino was not able to vouch for In the case of taxpayers engaged in the sale of service, “gross income” means gross
supporting documents for purchase transactions from WPP Marketing receipts less sales returns, allowances, discounts and cost of services. “Cost of
Communications, Inc., Grasco Industries, Inc., and Makati Property Ventures. He services” shall mean direct costs and expenses necessarily incurred to provide the
established that the purchase from Millennium Cars, Inc. was for a car loan account services required by the customers and clients including (a) salaries and employee
for an employee and was recorded to Advances to Officers and Employees;22 benefits of personnel, consultants and specialists directly ren-
(5) Alliance Media Printing, Inc.’s erroneous posting of data in the BIR RELIEF
375
caused the discrep-
VOL. 821, MARCH 22, 2017 375
374 Commissioner of Internal Revenue vs.
374 SUPREME COURT REPORTS Philippine Daily Inquirer, Inc.
ANNOTATED dering the service and (b) cost of facilities directly utilized in providing the service
Commissioner of Internal Revenue vs. such as depreciation or rental of equipment used and cost of supplies: Provided,
Philippine Daily Inquirer, Inc. however, That in the case of banks, “cost of services” shall include interest expense.
ancies 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
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 from the sale of newspapers and advertisements. The services rendered by
Harrison Communications, Inc., McCann Erickson, Inc., and WPP 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 PDI 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 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:
376
376 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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,24this 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.25The 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-I Electric Cooperative v. Commissioner of Internal Revenue,28 the Court
differentiated between false and fraudu-
377
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Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
lent returns. Quoting Aznar v. Court of Tax Appeals,29 the Court explained in Samar-
Ithe 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.
378
378 SUPREME COURT REPORTS
 ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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.,31the 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
379
VOL. 821, MARCH 22, 2017 379
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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
380
380 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 allegations, the First and
Second Waivers were executed in three copies. 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-
381
VOL. 821, MARCH 22, 2017 381
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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.
382
382 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
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 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.
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 government.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.37The 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 is-
383
VOL. 821, MARCH 22, 2017 383
Commissioner of Internal Revenue vs.
Philippine Daily Inquirer, Inc.
sued 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, weDENY the petition.
SO ORDERED.
Peralta, Mendoza, Leonen and Martires, JJ., concur.

Petition denied.

Notes.—The filing of a “fraudulent return with intent to evade tax” is a crime

involving moral turpitude as it entails willfulness and fraudulent intent on the part of
the individual, but the same, however, cannot be said for “failure to file a return”
where the mere omission already constitutes a violation. (Republic vs. Marcos II, 595
SCRA 43 [2009])
The Court of Tax Appeals (CTA) may order the suspension of the collection of
taxes provided that the taxpayer either: (1) deposits the amount claimed; or (2) files a
surety bond for not more than double the amount. (Tridharma Marketing Corporation
vs. Court of Tax Appeals, Second Division, 794 SCRA 126 [2016])

——o0o——
 G.R. No. 221590. February 22, 2017.* the return is filed beyond the period, from the day the return was actually filed.
Section 222 of the NIRC, however, provides for exceptions to the general rule. It states
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ASALUS that in the case of a false or fraudulent return with intent to evade tax or of failure to
CORPORATION, respondent. file a return, the assessment may be made within ten (10) years from the discovery of
the falsity, fraud or omission.
Remedial Law; Civil Procedure; Courts; Court of Tax Appeals; The findings of fact of
Same; Same; Same; Under Section 248(B) of the National Internal Revenue Code
the Court of Tax Appeals (CTA) are, as a rule, respected by the Supreme Court (SC), but they
(NIRC), there is a prima facie evidence of a false return if there is a substantial
can be set aside in exceptional cases.—It is true that the findings of fact of the CTA are, as
underdeclaration of taxable sales, receipt or income. The failure to report sales, receipts or
a rule, respected by the Court, but they can be set aside in exceptional cases.
income in an amount exceeding thirty percent (30%) what is declared in the returns
In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
constitutes substantial underdeclaration.—Under Section 248(B) of the NIRC, there is
Internal Revenue, 498 SCRA 126 (2006), this Court in Toshiba Information Equipment
a prima facie evidence of a false return if there is a substantial underdeclaration of
(Phils.), Inc. v. Commissioner of Internal Revenue, explicitly pronounced —
taxable sales, receipt or income. The failure to report sales, receipts or income in an
Jurisprudence has consistently shown that this Court accords the findings of fact by
amount exceeding 30% what is declared in the returns constitute substantial
the CTA with the highest respect. In Sea-Land Service, Inc. v. Court of Appeals [G.R. No.
underdeclaration. Aprima facie evidence is one which that will establish a fact or
122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of
sustain a judgment unless contradictory evidence is produced. In other words, when
Tax Appeals, which by the very nature of its function is dedicated exclusively to the
there is a showing that a taxpayer has substantially underdeclared its sales, receipt or
consideration of tax problems, has necessarily developed an expertise on the subject,
income, there is a presumption that it has filed a false return. As such, the CIR need
and its conclusions will not be overturned unless there has been an abuse or
not immediately present evidence to support the falsity of the return, unless the
improvident exercise of authority. Such findings can only be disturbed on appeal if
taxpayer fails to overcome the presumption against it.
they are not supported by substantial evidence or there is a showing of gross error
Same; Same; Same; In Samar-I Electric Cooperative v. Commissioner of Internal
or abuse on the part of the Tax Court. In the absence of any clear and convincing
Revenue, 744 SCRA 459 (2014), the Supreme Court (SC) ruled that it sufficed that the
proof to the contrary, this Court must presume that the CTA rendered a decision
taxpayer was substantially informed of the legal and factual bases of the assessment enabling
which is valid in every respect.
him to file an effective protest.—It is true that neither the FAN nor the FDDA explicitly
Taxation; Assessment; Tax Assessment; Generally, internal revenue taxes shall be
stated that the applicable prescriptive period was the ten (10)-year period set in
assessed within three (3) years after the last day prescribed by law for the filing of the return,
Section 222 of the NIRC. They, however, made reference to the PAN, which
or where the return is filed beyond the period, from the day the return was actually filed; In
categorically stated that “[t]he running of the three-year statute of limitation as
the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the
provided under Section 203 of the 1997 National Internal Revenue Code (NIRC) is not
assessment may be made within ten (10) years from the discovery of the falsity, fraud or
applicable x x x but rather to the ten (10)-year prescriptive period pursuant to Section
omission.—Generally, internal revenue taxes shall be assessed within three (3) years
222(A) of the tax code x x x.” In Samar-I Electric Cooperative v. Commissioner of Internal
after the last day prescribed by law for the filing of the return, or where
Revenue, 744 SCRA 459 (2014), the Court ruled that it sufficed that the taxpayer was
substantially informed of the legal and factual bases of the assessment enabling him
544
544 SUPREME COURT REPORTS to file an effective protest.

ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
545
VOL. 818, FEBRUARY 22, 2017 545
Commissioner of Internal Revenue vs.
Asalus Corporation
Attorneys; Legal Ethics; Rule 8.01 of the Code of Professional Responsibility (CPR)
mandates that “[a] lawyer shall not, in his professional dealings, use language which is
abusive, offensive or otherwiseimproper.”—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
III v. Atty. Ailes, 761 SCRA 1 (2015), 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. 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.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals En Banc.
The facts are stated in the opinion of the Court.
Office of the Solicitor General for petitioner.
Gallardo, Songco & Associates for respondent.
MENDOZA, J.:
This petition for review oncertiorari seeks to reverse and set aside the July 30, 2015
Decision1 and the November 6,
546
546 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
2015 Resolution2 of the Court of Tax Appeals (CTA)En Banc in C.T.A. E.B. 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 P413,378,058.11, 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 P95,681,988.64,
inclusive of surcharge and interest. Consequently, it filed its protest against the FAN,
dated September 6, 2011. Thereafter, Asalus filed a supplemental protest stating that
the deficiency
547
VOL. 818, FEBRUARY 22, 2017 547
Commissioner of Internal Revenue vs.
Asalus Corporation
VAT assessment had prescribed pursuant to Section 203 of the National Internal
Revenue Code (NIRC).7
On October 16, 2012, Asalus received the Final Decision on Disputed
Assessment8 (FDDA) showing VAT deficiency for 2007 in the aggregate amount of
P106,761,025.17, inclusive of surcharge and interest and P25,000.00 as compromise
penalty. As a result, it filed a petition for review before the CTA Division.
The CTA Division’s Ruling
In its April 2, 2014 Decision, the CTA 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 as-
548
548 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
sessment for taxable year 2007 and the compromise penalty are hereby CANCELLED
and WITHDRAWN, on ground of prescription.
SO ORDERED.10
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.
549
VOL. 818, FEBRUARY 22, 2017 549
Commissioner of Internal Revenue vs.
Asalus Corporation
Issues
I
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;

The CIR moved for reconsideration but its motion was denied.
II

The CTA En Banc’sRuling

WHETHER RESPONDENT’S FAILURE TO REPORT IN ITS VAT RETURNS ALL
THE FEES IT COLLECTED FROM ITS MEMBERS APPLYING FOR
In its July 30, 2015 Decision, the CTA En Bancsustained the assailed decision of
HEALTHCARE SERVICES CONSTITUTES “FALSE” RETURN UNDER
the CTA Division and dismissed the petition for review filed by the CIR. It explained
SECTION 222(A) OF THE 1997 NIRC, AS AMENDED; AND
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
III
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
WHETHER PETITIONER’S RIGHT TO ASSESS RESPONDENT FOR ITS
file its memorandum before the CTA Division.
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
550
550 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
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 wasprima 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 CTA
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
551
VOL. 818, FEBRUARY 22, 2017 551
Commissioner of Internal Revenue vs.
Asalus Corporation
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 CTA
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 x x x.”16
The Court’s Ruling
There is merit in the petition.
552
552 SUPREME COURT REPORTS
 ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
It is true that the findings of fact of the CTA are, as a rule, respected by the Court,
but they can be set aside in exceptional cases. InBarcelon, Roxas Securities, Inc. (now
known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,17 this Court inToshiba
Information Equipment (Phils.), Inc. v. Commissioner of Internal Revenue, 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. 19Section 222 of the
NIRC, however, provides for exceptions to the general rule. It states that in the case of
a false or fraudulent
553
VOL. 818, FEBRUARY 22, 2017 553
Commissioner of Internal Revenue vs.
Asalus Corporation
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,20 the 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
x x x 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
554
554 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
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.
555
VOL. 818, FEBRUARY 22, 2017 555
Commissioner of Internal Revenue vs.
Asalus Corporation
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
VATable 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,
556
556 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
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 as provided under Section 203 of the 1997
National Internal Revenue Code (NIRC) is not applicable x x x but rather to the ten
(10)-year prescriptive period pursuant to Section 222(A) of the tax code
x x x.”23 In Samar-I Electric Cooperative v. Com-
 557
VOL. 818, FEBRUARY 22, 2017 557
Commissioner of Internal Revenue vs.
Asalus Corporation
missioner of Internal Revenue,24 the 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.
Considering the foregoing exchange of correspondence and documents between
the parties, we find that the requirement of Section 228 was substantially complied
with. Respondent had fully informed petitioner in writing of the factual and legal
bases of the deficiency taxes assessment, which enabled the latter to file an “effective”
protest, much unlike the taxpayer’s situation inEnron. 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.
558
558 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
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 III 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. 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 ac-
559
VOL. 818, FEBRUARY 22, 2017 559
Commissioner of Internal Revenue vs.
Asalus Corporation
tions 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.
x x x26[Emphases supplied]
language abounds with countless possibilities for one to be emphatic but respectful,
convincing but not derogatory, illuminating but not offensive. (Foodsphere, Inc. vs.
Mauricio, Jr., 593 SCRA 367 [2009])
Tax assessments by tax examiners are presumed correct and made in good faith.
(Commissioner of Internal Revenue vs. Traders Royal Bank, 753 SCRA 414 [2015])
——o0o——

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.
560
560 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Asalus Corporation
WHEREFORE, petition is GRANTED. The July 30, 2015 Decision and the
November 6, 2015 Resolution of the Court of Tax AppealsEn
Banc are REVERSEDand 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.
Carpio (Chairperson), Peralta, Perlas-Bernabe**and Leonen, JJ., concur.

Petition granted, judgment and resolution reversed and set aside. Case remanded to Court
of Tax Appeals.

Notes.—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 —
 SUPREME COURT REPORTS period to issue an assessment and collect the taxes due is extended to a date certain.
ANNOTATED The waiver does not mean that the taxpayer relinquishes the right to invoke
Philippine Journalists, Inc. vs. prescription unequivocally particularly where the language of the document is
Commissioner of Internal Revenue equivocal. For the purpose of safeguarding taxpayers from any unreasonable
G.R. No. 162852. December 16, 2004.* examination, investigation or assessment, our tax law provides a statute of limitations
PHILIPPINE JOURNALISTS, INC., petitioner, vs.COMMISSIONER OF INTERNAL in the collection of taxes. Thus, the law on prescription, being a remedial measure,
REVENUE, respondent. should be liberally construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed.
Court of Tax Appeals;Jurisdictions; Appellate jurisdiction of the CTA is not limited to
cases which involve decisions of the Commissioner of Internal Revenue on matters relating to PETITION for review on certiorari of the decision and resolution of the Court of
assessments or refunds; The CTA is given the jurisdiction to determine if the warrant of Appeals.
distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of Limitations
was validly effected.—The appellate jurisdiction of the CTA is not limited to cases The facts are stated in the opinion of the Court.
which involve decisions of the Commissioner of Internal Revenue on matters relating Balmeo & Peñasalesfor petitioner.
to assessments or refunds. The second part of the provision covers other cases that
arise out of the NIRC or related laws administered by the Bureau of Internal Revenue. YNARES-SANTIAGO, J.:
The wording of the provision is clear and simple. It gives the CTA the jurisdiction to
This is a petition for review filed by Philippine Journalists, Incorporated (PJI)
determine if the warrant of distraint and levy issued by the BIR is valid and to rule if
assailing the Decision1of the Court of Appeals dated August 5, 2003,2 which ordered
the Waiver of Statute of Limitations was validly effected.
petitioner to pay the assessed tax liability of P111,291,214.46 and the
Same; Same; A waiver of the statute of limitations under the NIRC, to a certain extent,
Resolution3 dated March 31, 2004 which denied the Motion for Reconsideration.
is a derogation of the taxpayers’ right to security against prolonged and unscrupulous
The case arose from the Annual Income Tax Return filed by petitioner for the
investigations and must therefore be carefully and strictly construed; The law on prescription,
calendar year ended December 31, 1994
being a remedial measure, should be liberally construed in order to afford such protection.—A
61.
waiver of the statute of limita-
. 216
216 SUPREME COURT REPORTS
215
ANNOTATED
VOL. 447, DECEMBER 16, 2 Philippine Journalists, Inc. vs.
2004 15 Commissioner of Internal Revenue
Philippine Journalists, Inc. vs. which presented a net income of P30,877,387.00 and the tax due of P10,807,086.00.
Commissioner of Internal Revenue After deducting tax credits for the year, petitioner paid the amount of P10,247,384.00.
tions under the NIRC, to a certain extent, is a derogation of the taxpayers’ right On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal
to security against prolonged and unscrupulous investigations and must therefore be Revenue (BIR) issued Letter of Authority No. 871204 for Revenue Officer Federico de
carefully and strictly construed. The waiver of the statute of limitations is not a Vera, Jr. and Group Supervisor Vivencio Gapasin to examine petitioner’s books of
waiver of the right to invoke the defense of prescription as erroneously held by the account and other accounting records for internal revenue taxes for the period
Court of Appeals. It is an agreement between the taxpayer and the BIR that the January 1, 1994 to December 31, 1994.
 From the examination, the petitioner was told that there were deficiency taxes, ten (10) days from receipt of the letter. On November 10, 1999, a Final Notice Before
inclusive of surcharges, interest and compromise penalty in the following amounts: Seizure8 was issued by the same deputy commissioner giving the petitioner ten (10)
Value Added Tax P 229,527.90 days from receipt to pay. Petitioner received a copy of the final notice on November
Income Tax 125,002,892.95 24, 1999. By letters dated November 26, 1999, petitioner asked to be clarified how the
Withholding Tax 2,748,012.35 tax liability of P111,291,214.46 was reached and requested an extension of thirty (30)
Total P 127,980,433.20 days from receipt of the clarification within which to reply.9
In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion invited 218
petitioner to send a representative to an informal conference on September 15, 1997 218 SUPREME COURT REPORTS
for an opportunity to object and present documentary evidence relative to the ANNOTATED
proposed assessment. On September 22, 1997, petitioner’s Comptroller, Lorenza Philippine Journalists, Inc. vs.
Tolentino, executed a “Waiver of the Statute of Limitation Under the National Commissioner of Internal Revenue
Internal Revenue Code (NIRC).”5 The document “waive[d] the running of the The BIR received a follow-up letter from the petitioner asserting that its (PJI) records
prescriptive period provided by Sections 223 and 224 and other relevant provisions of do not show receipt of Tax Assessment/Demand No. 33-1-000757-94.10 Petitioner also
the NIRC and consent[ed] to the assessment and collection of taxes which may be contested that the assessment had no factual and legal basis. On March 28, 2000, a
found due after the examination at any time after the lapse of the period of Warrant of Distraint and/or Levy No. 33-06-04611 signed by Deputy Commissioner
limitations fixed by said Sections 223 and 224 and Romeo Panganiban for the BIR was received by the petitioner.
217 Petitioner filed a Petition for Review12 with the Court of Tax Appeals (CTA)
VOL. 447, DECEMBER 16, 2004 217 which was amended on May 12, 2000. Petitioner complains: (a) that no assessment or
Philippine Journalists, Inc. vs. demand was received from the BIR; (b) that the warrant of distraint and/or levy was
Commissioner of Internal Revenue without factual and legal bases as its issuance was premature; (c) that the assessment,
other relevant provisions of the NIRC, until the completion of the investigation.” 6 having been made beyond the 3-year prescriptive period, is null and void; (d) that the
On July 2, 1998, Revenue Officer De Vera submitted his audit report issuance of the warrant without being given the opportunity to dispute the same
recommending the issuance of an assessment and finding that petitioner had violates its right to due process; and (e) that the grave prejudice that will be sustained
deficiency taxes in the total amount of P136,952,408.97. On October 5, 1998, the if the warrant is enforced is enough basis for the issuance of the writ of preliminary
Assessment Division of the BIR issued Pre-Assessment Notices which informed injunction.
petitioner of the results of the investigation. Thus, BIR Revenue Region No. 6, On May 14, 2002, the CTA rendered its decision, 13to wit:
Assessment Division/Billing Section, issued Assessment/Demand No. 33-1-000757- “As to whether or not the assessment notices were received by the petitioner, this
947 on December 9, 1998 stating the following deficiency taxes, inclusive of interest Court rules in the affirmative.
and compromise penalty: “To disprove petitioner’s allegation of non-receipt of the aforesaid assessment
Income Tax P108,743,694.88 notices, respondent presented a certification issued by the Post Master of the Central
Value Added Tax 184,299.20 Post Office, Manila to the effect that Registered Letter No. 76134 sent by the BIR,
Expanded Withholding 2,363,220.38 Region No. 6, Manila on December 15, 1998 addressed to Phil. Journalists, Inc. at
Tax Journal Bldg., Railroad St., Manila was duly delivered to and received by a certain
Total P111,291,214.46
Alfonso Sanchez, Jr. (Authorized Representative) on January 8, 1999. Respondent also
On March 16, 1999, a Preliminary Collection Letter was sent by Deputy
showed proof that in claiming
Commissioner Romeo S. Panganiban to the petitioner to pay the assessment within
219
VOL. 447, DECEMBER 16, 2004 219
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
Registered Letter No. 76134, Mr. Sanchez presented three identification cards, one of
which is his company ID with herein petitioner.
...
“However, as to whether or not the Waiver of the Statute of Limitations is valid
and binding on the petitioner is another question. Since the subject assessments were
issued beyond the three-year prescriptive period, it becomes imperative on our part
to rule first on the validity of the waiver allegedly executed on September 22, 1997,
for if this court finds the same to be ineffective, then the assessments must necessarily
fail.
...
“After carefully examining the questioned Waiver of the Statute of Limitations,
this Court considers the same to be without any binding effect on the petitioner for
the following reasons:
“The waiver is an unlimited waiver. It does not contain a definite expiration date.
Under RMO No. 20-90, the phrase indicating 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 . . .
...
“Secondly, the waiver failed to state the date of acceptance by the Bureau which
under the aforequoted RMO should likewise be indicated . . .
...
“Finally, petitioner was not furnished a copy of the waiver. It is to be noted that
under RMO No. 20-90, the waiver must be executed in three (3) copies, the second
copy of which is for the taxpayer. It is likewise required that the fact of receipt by the
taxpayer of his/her file copy be indicated in the original copy. Again, respondent
failed to comply.
“It bears stressing that RMO No. 20-90 is directed to all concerned internal
revenue officers. The said RMO even provides that the procedures found therein
should be strictly followed, under pain of being administratively dealt with should
non-compliance result to prescription of the right to assess/collect . . .
“Thus, finding the waiver executed by the petitioner on September 22, 1997 to be
suffering from legal infirmities, rendering the same invalid and ineffective, the Court
finds Assessment/Demand
220
220 SUPREME COURT REPORTS
ANNOTATED
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
No. 33-1-000757-94 issued on December 5, 1998 to be time-barred. Consequently, the
Warrant of Distraint and/or Levy issued pursuant thereto is considered null and
void.
“WHEREFORE, in view of all the foregoing, the instant Petition for Review is
hereby GRANTED. Accordingly, the deficiency income, value-added and expanded
withholding tax assessments issued by the respondent against the petitioner on
December 9, 1998, in the total amount of P111,291,214.46 for the year 1994 are hereby
declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT.
Likewise, Warrant of Distraint and/or Levy No. 33-06-046 is hereby declared NULL
and VOID.
“SO ORDERED.”14
After the motion for reconsideration of the Commissioner of Internal Revenue was
denied by the CTA in a Resolution dated August 2, 2002, an appeal was filed with the
Court of Appeals on August 12, 2002.
In its decision dated August 5, 2003, the Court of Appeals disagreed with the
ruling of the CTA, to wit:
“. . . The petition for review filed on 26 April 2000 with CTA was neither timely filed
nor the proper remedy. Only decisions of the BIR, denying the request for
reconsideration or reinvestigation may be appealed to the CTA. Mere assessment
notices which have become final after the lapse of the thirty (30)-day reglementary
period are not appealable. Thus, the CTA should not have entertained the petition at
all.
...
. . . [T]he CTA found the waiver executed by Phil. Journalists to be invalid for the
following reasons: (1) it does not indicate a definite expiration date; (2) it does not
state the date of acceptance by the BIR; and (3) Phil. Journalist, the taxpayer, was not
furnished a copy of the waiver. These grounds are merely formal in nature. The date
of acceptance by the BIR does not categorically appear in the document but it states at
the bottom page that the BIR “accepted and agreed to:” . . ., followed by the signature
of the BIR’s authorized
 221 Philippine Journalists, Inc. vs.
VOL. 447, DECEMBER 16, 2004 221 Commissioner of Internal Revenue
Philippine Journalists, Inc. vs. I.
Commissioner of Internal Revenue
representative. Although the date of acceptance was not stated, the document was The Honorable Court of Appeals committed grave error in ruling that it is outside the

dated 22 September 1997. This date could reasonably be understood as the same date jurisdiction of the Court of Tax Appeals to entertain the Petition for Review filed by

of acceptance by the BIR since a different date was not otherwise indicated. As to the the herein Petitioner at the CTA despite the fact that such case inevitably rests upon

allegation that Phil. Journalists was not furnished a copy of the waiver, this the validity of the issuance by the BIR of warrants of distraint and levy contrary to the

requirement appears ridiculous. Phil. Journalists, through its comptroller, Lorenza provisions of Section 7(1) of Republic Act No. 1125.

Tolentino, signed the waiver. Why would it need a copy of the document it
II.
knowingly executed when the reason why copies are furnished to a party is to notify
it of the existence of a document, event or proceeding? . . .
The Honorable Court of Appeals gravely erred when it ruled that failure to
As regards the need for a definite expiration date, this is the biggest flaw of the
comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90 is
decision. The period of prescription for the assessment of taxes may be extended
merely a formal defect that does not invalidate the waiver of the statute of limitations
provided that the extension be made in writing and that it be made prior to the
without stating the legal justification for such conclusion. Such ruling totally
expiration of the period of prescription. These are the requirements for a valid
disregarded the mandatory requirements of Section 222(b) of the Tax Code and its
extension of the prescriptive period. To these requirements provided by law, the
implementing regulation, RMO No. 20-90 which are substantive in nature. The RMO
memorandum order adds that the length of the extension be specified by indicating
provides that violation thereof subjects the erring officer to administrative sanction.
its expiration date. This requirement could be reasonably construed from the rule on
This directive shows that the RMO is not merely cover forms.
extension of the prescriptive period. But this requirement does not apply in the
instant case because what we have here is not an extension of the prescriptive period III.
but a waiver thereof. These are two (2) very different things. What Phil. Journalists
executed was a renunciation of its right to invoke the defense of prescription. This is a The Honorable Court of Appeals gravely erred when it ruled that the assessment
valid waiver. When one waives the prescriptive period, it is no longer necessary to notices became final and unappealable. The assessment issued is void and legally
indicate the length of the extension of the prescriptive period since the person non-existent because the BIR has no power to issue an assessment beyond the three-
waiving may no longer use this defense. year prescriptive period where there is no valid and binding waiver of the statute of
WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision of the limitation.
CTA are hereby SET ASIDE. Respondent Phil. Journalists is ordered [to] pay its
assessed tax liability of P111,291,214.46. IV.

SO ORDERED.”15
The Honorable Court of Appeals gravely erred when it held that the assessment
Petitioner’s Motion for Reconsideration was denied in a Resolution dated March 31, in question has became final and executory due to the failure of the Petitioner to
2004. Hence, this appeal on the following assignment of errors: protest the same. Respondent had no power to issue an assessment beyond the three
222 year period under the mandatory provisions of Section 203 of the NIRC. Such
222 SUPREME COURT REPORTS assessment should be held void and non-existent, otherwise, Section 203, an
ANNOTATED expression of a public policy, would be rendered useless and nugatory. Besides, such
right to assess cannot be validly granted after three years since it would arise from a 224 SUPREME COURT REPORTS
violation of the mandatory ANNOTATED
Philippine Journalists, Inc. vs.
223 Commissioner of Internal Revenue
VOL. 447, DECEMBER 16, 2004 223
Code or other laws or part of law administered by the Bureau of Internal
Philippine Journalists, Inc. vs.
Revenue;(Emphasis supplied).
Commissioner of Internal Revenue
provisions of Section 203 and would go against the vested right of the Petitioner to The appellate jurisdiction of the CTA is not limited to cases which involve decisions
claim prescription of assessment. of the Commissioner of Internal Revenue on matters relating to assessments or
refunds. The second part of the provision covers other cases that arise out of the
V. NIRC or related laws administered by the Bureau of Internal Revenue. The wording
of the provision is clear and simple. It gives the CTA the jurisdiction to determine if
The Honorable Court of Appeals committed grave error when it HELD valid a
the warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of
defective waiver by considering the latter a waiver of the right to invoke the defense
Statute of Limitations was validly effected.
of prescription rather than an extension of the three year period of prescription (to
This is not the first case where the CTA validly ruled on issues that did not relate
make an assessment) as provided under Section 222 in relation to Section 203 of the
directly to a disputed assessment or a claim for refund. In Pantoja v. David,17we
Tax Code, an interpretation that is contrary to law, existing jurisprudence and outside
upheld the jurisdiction of the CTA to act on a petition to invalidate and annul the
of the purpose and intent for which they were enacted. 16
distraint orders of the Commissioner of Internal Revenue. Also, inCommissioner of
Internal Revenue v. Court of Appeals,18the decision of the CTA declaring several waivers
We find merit in the appeal.
executed by the taxpayer as null and void, thus invalidating the assessments issued
The first assigned error relates to the jurisdiction of the CTA over the issues in
by the BIR, was upheld by this Court.
this case. The Court of Appeals ruled that only decisions of the BIR denying a request
The second and fifth assigned errors both focus on Revenue Memorandum
for reconsideration or reinvestigation may be appealed to the CTA. Since the
Circular No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the statute
petitioner did not file a request for reinvestigation or reconsideration within thirty
of limitations. The Court of Appeals held that the requirements and procedures laid
(30) days, the assessment notices became final and unappealable. The petitioner now
down in the RMO are only formal in nature and did not invalidate the waiver that
argue that the case was brought to the CTA because the warrant of distraint or levy
was signed even if the requirements were not strictly observed.
was illegally issued and that no assessment was issued because it was based on an
225
invalid waiver of the statutes of limitations.
VOL. 447, DECEMBER 16, 2004 225
We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating
Philippine Journalists, Inc. vs.
the Court of Tax Appeals, provides for the jurisdiction of that special court:
Commissioner of Internal Revenue
SEC. 7. Jurisdiction.—The Court of Tax Appeals shall exercise exclusive appellate
The NIRC, under Sections 203 and 222,19 provides for a statute of limitations on the
jurisdiction to review by appeal, as herein provided—
assessment and collection of internal revenue taxes in order to safeguard the interest
(1) Decisions of the Commissioner of Internal Revenue in cases involving
of the taxpayer against unreasonable investigation.20 Unreasonable investigation
disputed assessments, refunds of internal revenue taxes, fees or other charges,
contemplates cases where the period for assessment extends indefinitely because this
penalties imposed in relation thereto, or other matters arising under the National
deprives the taxpayer of the assurance that it will no longer be subjected to further
Internal Revenue
224
investigation for taxes after the expiration of a reasonable period of time. As was held 3. 3.The following revenue officials are authorized to sign the waiver.
in Republic of the Phils. v. Ablaza:21
The law prescribing a limitation of actions for the collection of the income tax is A. In the National Office
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 3. Commissioner For tax cases involving
because after more than P1M
226
227
226 SUPREME COURT REPORTS
VOL. 447, DECEMBER 16, 2004 227
ANNOTATED
Philippine Journalists, Inc. vs.
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
Commissioner of Internal Revenue
B. In the Regional Offices
the lapse of the period of prescription citizens would have a feeling of security
1. The Revenue District Officer with respect to tax cases still pending
against unscrupulous tax agents who will always find an excuse to inspect the books
investigation and the period to assess is about to prescribe regardless of amount.
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
5. The foregoing procedures shall be strictly followed. Any revenue official
taxpayers would furthermore be under obligation to always keep their books and
found not to have complied with this Order resulting in prescription of the right to
keep them open for inspection subject to harassment by unscrupulous tax agents. The
assess/collect shall be administratively dealt with. (Emphasis supplied)22
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
A waiver of the statute of limitations under the NIRC, to a certain extent, is a
taxpayer within the contemplation of the Commission which recommend the
derogation of the taxpayers’ right to security against prolonged and unscrupulous
approval of the law. (Emphasis supplied)
investigations and must therefore be carefully and strictly construed.23 The waiver of
the statute of limitations is not a waiver of the right to invoke the defense of
RMO No. 20-90 implements these provisions of the NIRC relating to the period of
prescription as erroneously held by the Court of Appeals. It is an agreement between
prescription for the assessment and collection of taxes. A cursory reading of the
the taxpayer and the BIR that the period to issue an assessment and collect the taxes
Order supports petitioner’s argument that the RMO must be strictly followed, thus:
due is extended to a date certain. The waiver does not mean that the taxpayer
In the execution of said waiver, the following procedures should be followed:
relinquishes the right to invoke prescription unequivocally particularly where the

1. 1.The waiver must be in the form identified hereof. This form may be language of the document is equivocal. For the purpose of safeguarding taxpayers

reproduced by the Office concerned but there should be no deviation from any unreasonable examination, investigation or assessment, our tax law

from such form. The phrase “but not after __________ 19___” should be provides a statute of limitations in the collection of taxes. Thus, the law on

filled up . . . prescription, being a remedial measure, should be liberally construed in order to

2. 2.. . .Soon after the waiver is signed by the taxpayer, the Commissioner of afford such protection. As a corollary, the exceptions to the law on prescription

Internal Revenue or the revenue official authorized by him, as should perforce be strictly construed.24 RMO No. 20-90 explains the rationale of a

hereinafter provided, shall sign the waiver indicating that the Bureau waiver:

has accepted and agreed to the waiver. The date of such acceptance by the 228

Bureau should be indicated . . . 228 SUPREME COURT REPORTS

 ANNOTATED
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
. . . The phrase “but not after _________ 19___” should be filled up. This indicates the
expiry date of the period agreed upon to assess/collect the tax after the regular three-
year period of prescription. The period agreed upon shall constitute the time within
which to effect the assessment/collection of the tax in addition to the ordinary
prescriptive period.(Emphasis supplied)
As found by the CTA, the Waiver of Statute of Limitations, signed by petitioner’s
comptroller on September 22, 1997 is not valid and binding because it does not
conform with the provisions of RMO No. 20-90. It did not specify a definite agreed
date between the BIR and petitioner, within which the former may assess and collect
revenue taxes. Thus, petitioner’s waiver became unlimited in time, violating Section
222(b) of the NIRC.
The waiver is also defective from the government side because it was signed only
by a revenue district officer, not the Commissioner, as mandated by the NIRC and
RMO No. 20-90. The waiver is not a unilateral act by the taxpayer or the BIR, but is a
bilateral agreement between two parties to extend the period to a date certain. The
conformity of the BIR must be made by either the Commissioner or the Revenue
District Officer. This case involves taxes amounting to more than One Million Pesos
(P1,000,000.00) and executed almost seven months before the expiration of the three-
year prescription period. For this, RMO No. 20-90 requires the Commissioner of
Internal Revenue to sign for the BIR.
The case of Commissioner of Internal Revenue v. Court of Appeals,25 dealt with
waivers that were not signed by the Commissioner but were argued to have been
given implied consent by the BIR. We invalidated the subject waivers and ruled:
Petitioner’s submission is inaccurate . . .
...
229
VOL. 447, DECEMBER 16, 2004 229
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
The Court of Appeals itself also passed upon the validity of the waivers executed by
Carnation, observing thus:
We cannot go along with the petitioner’s theory. Section 319 of the Tax Code earlier
quoted is clear and explicit that the waiver of the five-year26 prescriptive period must
be in writing and signed by both the BIR Commissioner and the taxpayer.
Here, the three waivers signed by Carnation do not bear the written consent of
the BIR Commissioner as required by law.
We agree with the CTA in holding “these ‘waivers’ to be invalid and without any
binding effect on petitioner (Carnation) for the reason that there was no consent by
the respondent (Commissioner of Internal Revenue).”
...
For sure, no such written agreement concerning the said three waivers exists
between the petitioner and private respondent Carnation.
...
What is more, the waivers in question reveal that they are in no wise unequivocal,
and therefore necessitates for its binding effect the concurrence of the Commissioner
of Internal Revenue . . . . On this basis neither implied consent can be presumed nor
can it be contended that the waiver required under Sec. 319 of the Tax Code is one
which is unilateral nor can it be said that concurrence to such an agreement is a
mere formality because it is the very signatures of both the Commissioner of
Internal Revenue and the taxpayer which give birth to such a valid
agreement.27 (Emphasis supplied)
230
230 SUPREME COURT REPORTS
ANNOTATED
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
The other defect noted in this case is the date of acceptance which makes it difficult to
fix with certainty if the waiver was actually agreed before the expiration of the three-
year prescriptive period. The Court of Appeals held that the date of the execution of
the waiver on September 22, 1997 could reasonably be understood as the same date of
acceptance by the BIR. Petitioner points out however that Revenue District Officer
Sarmiento could not have accepted the waiver yet because she was not the Revenue
District Officer of RDO No. 33 on such date. Ms. Sarmiento’s transfer and assignment
to RDO No. 33 was only signed by the BIR Commissioner on January 16, 1998 as
shown by the Revenue Travel Assignment Order No. 14-98.28 The Court of Tax
Appeals noted in its decision that it is unlikely as well that Ms. Sarmiento made the
acceptance on January 16, 1998 because “Revenue Officials normally have to conduct
first an inventory of their pending papers and property responsibilities.”29
Finally, the records show that petitioner was not furnished a copy of the waiver.
Under RMO No. 20-90, the waiver must be executed in three copies with the second
copy for the taxpayer. The Court of Appeals did not think this was important because
the petitioner need not have a copy of the document it knowingly executed. It stated
Petition granted, judgment and resolution reversed and set aside. Decision of the Court of
Tax Appeals reinstated declaring Warrant of Distraint and/or Levy reinstated.
Note.—Laws granting exemption from tax are construed strictissimi jurisagainst
the taxpayer and liberally in favor of the taxing power. (Cyanamid Philippines, Inc. vs.
Court of Appeals, 322 SCRA 639[2000])
——o0o——

that the reason copies are furnished is for a party to be notified of the existence of a
document, event or proceeding.
The flaw in the appellate court’s reasoning stems from its assumption that the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
between the taxpayer and the BIR. When the petitioner’s comptroller signed the
waiver on September 22, 1997, it was not yet complete and final because the BIR had
not assented. There is compliance with the provision of RMO No. 20-90 only after the
taxpayer received a copy of the waiver accepted by the BIR. The
231
VOL. 447, DECEMBER 16, 2004 231
Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue
requirement to furnish the taxpayer with a copy of the waiver is not only to give
notice of the existence of the document but of the acceptance by the BIR and the
perfection of the agreement.
The waiver document is incomplete and defective and thus the three-year
prescriptive period was not tolled or extended and continued to run until April 17,
1998. Consequently, the Assessment/Demand No. 33-1-000757-94 issued on
December 9, 1998 was invalid because it was issued beyond the three (3) year period.
In the same manner, Warrant of Distraint and/or Levy No. 33-06-046 which
petitioner received on March 28, 2000 is also null and void for having been issued
pursuant to an invalid assessment.
WHEREFORE, premises considered, the instant petition for review is GRANTED.
The Decision of the Court of Appeals dated August 5, 2003 and its Resolution dated
March 31, 2004 are REVERSED and SET ASIDE. The Decision of the Court of Tax
Appeals in CTA Case No. 6108 dated May 14, 2002, declaring Warrant of Distraint
and/or Levy No. 33-06-046 null and void, is REINSTATED.
SO ORDERED.
Davide, Jr. (C.J., Chairman), Quisumbing,Carpio and Azcuna, JJ.,concur.
G.R. No. 167765. June 30, 2008.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FMF DEVELOPMENT
CORPORATION, respondent.
Taxation; 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.—An
exception to the three-year prescriptive period on the assessment of taxes is Section
222 (b) of the NIRC, which provides: x x x x (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.
Same; 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.—Petitioner contends that the procedures in RMO No. 20-
699
VOL. 556, JUNE 30, 2008 6 PETITION for review on certiorari of the decision and resolution of the Court of
99
Commissioner of Internal Revenue
vs. FMF Development Corporation
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. InPhilippine Journalists, Inc. v. Commissioner of Internal Revenue, 447
SCRA 214 (2004),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. 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.
Same; Public Officers; 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.—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.
Appeals.700
700 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
FMF Development Corporation
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Salvador, Guevara and Associates for respondent.
QUISUMBING, J.:
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
Less: Personal and Additional
amended return and declared a loss of P2,826,541. The BIR then sent FMF pre- -0-
Exemptions
assessment notices, all dated October 6, 1998, informing it of its alleged tax P6,012,720.89
liabilities.4FMF filed a protest Income Tax Due (35%) P2,104,452.00
Less: Amount already assessed 154,995.30
TOTAL TAX DUE (excl.
DEFICIENCY INCOME TAX P2,461,820.87
increments)
A. INCREMENTS ON LATE PAYMENT OF
Net Income per WITHHOLDING TAX ON COMPENSATION (dividend bonus
(P2,826,541.00)
investigation payable)
Basic Tax P304,891.10
Add: Unallowable 25% surcharge (Sec. 248) 87,016.20
Deductions/Additional Interest (1/26/96 to 11/7/96) (Sec.
+ 60,343.02
Income 249)
Compromise Penalty (Sec. 254) 16,000.00
Total Expenses P10,912,669.00 TOTAL P163,359.22
B. INCREMENTS ON LATE PAYMENT OF EXPANDED
WITHHOLDING TAX ON MANAGEMENT FEE
Disallowed Portion
Management fee per financial
x 81% P4,104,800.00
statement
Less: Management fee subj. to
Total Adjustments 8,839,261.89 260,640.00
EWT (1995)
Mgmt. Fee not subject to EWT
Net Income per P3,844,160.00
P6,012,720.89 until 10-15-96
investigation Basic Tax (10%) P 384,416.00
25% surcharge (Sec. 248) 96,104.00
701 Interest (1-26-96 to 10-15-96) (Sec.
69,942.35
249)
VOL. 556, JUNE 30, 2008 701
Compromise Penalty (Sec. 254) 16,000.00
Commissioner of Internal Revenue vs. Total P 182,046.35
FMF Development Corporation INCREMENTS DUE (A + B) P 345,405.57

against these notices with the BIR and requested for a

reconsideration/reinvestigation. 702
702 SUPREME COURT REPORTS
On January 22, 1999, Revenue District Officer (RDO) Rogelio Zambarrano
ANNOTATED
informed FMF that the reinvestigation had been referred to Revenue Officer Alberto
Commissioner of Internal Revenue vs.
Fortaleza. He also advised FMF of the informal conference set on February 2, 1999 to
FMF Development Corporation
allow it to present evidence to dispute the BIR assessments.
On October 18, 1999, FMF received amended pre-assessment notices5 dated
On February 9, 1999, FMF President Enrique Fernandez executed a waiver of the
October 6, 1999 from the BIR. FMF
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
Net Income per Investigation (P2,826,541.00)
signed by RDO Zambarrano.
 Net Income per Investigation (P2,826,541.00) Management Fee per financial Statement P4,104,800.00

Add: Adjustments/Disallowances Less: Management Fee subj. to EWT (1995) 260,640.00

Management Fees-Not necessary (Sec. 29) 4,104,800.00 P3,844,160.00

Difference (Mgmt. fee subj. to EWT until 10-15-96)
Employee Benefits-unsupported (Sec. 29) 58,611.55 Basic Tax (P3,844,160.00 x 10%) P384,416.00

Salaries and Wages-No EWT (Sec. 29) 1,059,118.50 25% Surcharge (Sec. 248) 96,104.00

Withholding Tax-unaccounted (Sec. 28) 348,813.13 Interest (1-2-96 to 10-15-96) (Sec. 249 69,942.35

Cash Overdraft-unaccounted (Sec. 28) 254,853.96 Compromise Penalty (Sec. 254) 16,000.00

Transportation Exp.-unaccounted (Sec. 28) 22,390.16 Total P182,046.35

Representation Exp.-unaccounted (Sec. 29) 14,772.59 TOTAL INCREMENTS ON LATE P 345,405.57

PAYMENTS (A+B)
Miscellaneous Exp.-unsupported (Sec. 29) 69,404.65

5,932,764.44

Net Taxable Income P3,106,223.44 703

VOL. 556, JUNE 30, 2008 703
Income Tax Due Thereon P1,087,178.20
Commissioner of Internal Revenue vs.

Less Tax Credit/Paid 154,995.30 FMF Development Corporation

immediately filed a protest on November 3, 1999 but on the same day, it received
Income Tax Due Thereon (excludingP932,182.90 BIR’s Demand Letter and Assessment Notice No. 33-1-00487-95 dated October 25,
increments)
1999 reflecting FMF’s alleged deficiency taxes and accrued interests, as follows:
A. Increments on Late Payment of Withholding Tax on Compensation Income Tax Assessment P1,608,015.50
(dividend bonus payable) Compromise Penalty on Income Tax Assessment 20,000.00
Basic P304,891.10 Increments on Withholding Tax on Compensation 184,132.26
Compromise Penalty on Increments on With-
16,000.00
25% surcharge (Sec. 248) 87,016.20 holding Tax on Compensation
Increments on Withholding Tax on Management
209,550.49
Interest (1/26/96 to 11/7/96) (Sec. 249) 60,343.02 Fees
Compromise Penalty on Increments on With-
16,000.00
Compromise Penalty (Sec. 254) 16,000.00 holding Tax on Management Fees
P2,053,698.256
TOTAL
Total P163,359.22
On November 24, 1999, FMF filed a letter of protest on the assessment
B. Increments on Late Payment of Expanded Withholding Tax on invoking,inter alia,7 the defense of prescription by reason of the invalidity of the
Management Fee waiver. In its reply, the BIR insisted that the waiver is valid because it was signed by
Management Fee per financial Statement P4,104,800.00
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 WHETHER OR NOT RESPONDENT’S WAIVER OF THE STATUTE OF
this as BIR’s final decision, FMF filed a petition for review with the CTA challenging LIMITATIONS WAS VALIDLY EXECUTED.
the validity of the assessment. II.
704 WHETHER O[R] NOT THE PERIOD TO ASSESS HAD PRESCRIBED.
704 SUPREME COURT REPORTS III.
ANNOTATED WHETHER OR NOT THE COURT OF APPEALS CORRECTLY DISREGARDED
Commissioner of Internal Revenue vs. PETITIONER’S SUBSTANTIVE ARGUMENT.11
FMF Development Corporation Essentially, the present controversy deals with the validity of the waiver and
On March 20, 2003, the CTA granted the petition and cancelled Assessment whether it validly extended the original three-year prescriptive period so as to make
Notice No. 33-1-00487-95 because it was already time-barred. The CTA ruled that the Assessment Notice No. 33-1-00487-95 valid. The basic questions to be resolved
waiver did not extend the three-year prescriptive period within which the BIR can therefore are: (1) Is the waiver valid? and (2) Did the three-year period to assess
make a valid assessment because it did not comply with the procedures laid down in internal revenue taxes already prescribe?
Revenue Memorandum Order (RMO) No. 20-90.8 First, the waiver did not state the Petitioner contends that the waiver was validly executed mainly because it
dates of execution and acceptance of the waiver, by the taxpayer and the BIR, complied with Section 222 (b)12 of the National Internal Revenue Code (NIRC).
respectively; thus, it cannot be determined with certainty if the waiver was executed Petitioner points out that the waiver was in writing, signed by the taxpayer and the
and accepted within the prescribed period.Second, the CTA also found that FMF was Commissioner, and executed within the three-year prescriptive period. Petitioner also
not furnished a copy of the waiver signed by RDO Zambarrano. Third, the CTA argues that the requirements
pointed out that since the case involves an amount of more than P1 million, and the 706
period to assess is not yet about to prescribe, the waiver should have been signed by 706 SUPREME COURT REPORTS
the Commissioner of Internal Revenue, and not a mere RDO.9 The Commissioner of ANNOTATED
Internal Revenue filed a motion for reconsideration, but it was denied. Commissioner of Internal Revenue vs.
On appeal to the Court of Appeals, the decision of the CTA was affirmed. FMF Development Corporation
Sustaining the findings of the CTA, the Court of Appeals held that the waiver did not in RMO No. 20-90 are merely directory; thus, the indication of the dates of execution
strictly comply with RMO No. 20-90. Thus, it nullified Assessment Notice No. 33-1- and acceptance of the waiver, by the taxpayer and the BIR, respectively, are not
00487-95. The falloof the Court of Appeals’ decision reads: required by law. Petitioner adds that there is no provision in RMO No. 20-90 stating
“WHEREFORE, finding the instant petition not impressed with merit, the same that a waiver may be invalidated upon failure of the BIR to furnish the taxpayer a
is DENIED DUE COURSE and is herebyDISMISSED. No costs. copy of the waiver. Further, it contends that respondent’s execution of the waiver was
SO ORDERED.”10 a renunciation of its right to invoke prescription. Petitioner also argues that the
The Commissioner of Internal Revenue sought reconsideration, but it was denied. government cannot be estopped by the mistakes committed by its revenue officer in
705 the enforcement of RMO No. 20-90.
VOL. 556, JUNE 30, 2008 705 On the other hand, respondent counters that the waiver is void because it did not
Commissioner of Internal Revenue vs. comply with RMO No. 20-90. Respondent assails the waiver because (1) it was not
FMF Development Corporation signed by the Commissioner despite the fact that the assessment involves an amount
Hence the instant petition, raising the following issues: of more than P1 million; (2) there is no stated date of acceptance by the Commissioner
I. or his duly authorized representative; and (3) it was not furnished a copy of the BIR-
accepted waiver. Respondent also citesPhilippine Journalists, Inc. v. Commissioner of
Internal Revenue13 and contends that the procedures in RMO No. 20-90 are mandatory Commissioner of Internal Revenue vs.
in character, precisely to give full effect to Section 222 (b) of the NIRC. Moreover, a FMF Development Corporation
waiver of the statute of limitations is not a waiver of the right to invoke the defense of “1. The waiver must be in the form identified as Annex “A” hereof . . . .
prescription.14 2. The waiver shall be signed by the taxpayer himself or his duly authorized
After considering the issues and the submissions of the parties in the light of the representative. In the case of a corporation, the waiver must be signed by any of its
facts of this case, we are in agreement that the petition lacks merit. responsible officials.
Under Section 20315 of the NIRC, internal revenue taxes must be assessed within Soon after the waiver is signed by the taxpayer, the Commissioner of Internal
three years counted from the period Revenue or the revenue official authorized by him, as hereinafter provided, shall sign
707 the waiver indicating that the Bureau has accepted and agreed to the waiver. The
VOL. 556, JUNE 30, 2008 707 date of such acceptance by the Bureau should be indicated. Both the date of
Commissioner of Internal Revenue vs. execution by the taxpayer and date of acceptance by the Bureau should be beforethe
FMF Development Corporation expiration of the period of prescription or before the lapse of the period agreed upon
fixed by law for the filing of the tax return or the actual date of filing, whichever is in case a subsequent agreement is executed.
later. This mandate governs the question of prescription of the government’s right to 3. The following revenue officials are authorized to sign the waiver.
assess internal revenue taxes primarily to safeguard the interests of taxpayers from A. In the National Office
unreasonable investigation. Accordingly, the government must assess internal xxxx
revenue taxes on time so as not to extend indefinitely the period of assessment and 3. Commissioner For tax cases involving more than P1M
deprive the taxpayer of the assurance that it will no longer be subjected to further B. In the Regional Offices
investigation for taxes after the expiration of reasonable period of time.16 1. The Revenue District Officer with respect to tax cases still pending
An exception to the three-year prescriptive period on the assessment of taxes is investigation and the period to assess is about to prescribe regardless of amount.
Section 222 (b) of the NIRC, which provides: xxxx
“x x x x 4. The waiver must be executed in three (3) copies, the original copy to be
(b) If before the expiration of the time prescribed in Section 203 for the attached to the docket of the case, the second copy for the taxpayerand the third copy
assessment of the tax, both the Commissioner and the taxpayer have agreed in for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file
writing to its assessment after such time, the tax may be assessed within the period copy shall be indicated in the original copy.
agreed upon. The period so agreed upon may be extended by subsequent written 5. The foregoing procedures shall be strictly followed. Any revenue official
agreement made before the expiration of the period previously agreed upon. found not to have complied with this Order resulting in prescription of the right to
x x x x” assess/collect shall be administratively dealt with.” (Emphasis supplied.)
The above provision authorizes the extension of the original three-year period by Applying RMO No. 20-90, the waiver in question here was defective and did not
the execution of a valid waiver, where the taxpayer and the BIR agreed in writing that validly extend the original three-year prescriptive period. Firstly, it was not proven
the period to issue an assessment and collect the taxes due is extended to an agreed that respondent was furnished a copy of the BIR-accepted waiver. Secondly,
upon date. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the 709
following procedures should be followed: VOL. 556, JUNE 30, 2008 709
708 Commissioner of Internal Revenue vs.
708 SUPREME COURT REPORTS FMF Development Corporation
ANNOTATED
the waiver was signed only by a revenue district officer, when it should have been prescription, would have a feeling of security against unscrupulous tax agents who
signed by the Commissioner as mandated by the NIRC and RMO No. 20-90, will always try to find an excuse to inspect the books of taxpayers, not to determine
considering that the case involves an amount of more than P1 million, and the period the latter’s real liability, but to take advantage of a possible opportunity to harass
to assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance even law-abiding businessmen. Without such legal defense, taxpayers would be open
by the Commissioner of Internal Revenue, a requisite necessary to determine whether season to harassment by unscrupulous tax agents.21
the waiver was validly accepted before the expiration of the original three-year In fine, Assessment Notice No. 33-1-00487-95 dated October 25, 1999, was issued
period. Bear in mind that the waiver in question is a bilateral agreement, thus beyond the three-year prescriptive period. The waiver was incomplete and defective
necessitating the very signatures of both the Commissioner and the taxpayer to give and thus, the three-year prescriptive period was not tolled nor extended and
birth to a valid agreement.17 continued to run until April 15, 1999. Even if the three-year period be counted from
Petitioner contends that the procedures in RMO No. 20-90 are merely directory May 8, 1996, the date of filing of the amended return, assuming the amended return
and that the execution of a waiver was a renunciation of respondent’s right to invoke was substantially different from the original return, a case which affects the
prescription. We do not agree. RMO No. 20-90 must be strictly followed. InPhilippine reckoning point of the prescriptive period,22 still, the subject assessment is definitely
Journalists, Inc. v. Commissioner of Internal Revenue,18 we ruled that a waiver of the considered time-barred.
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. 19Notably, 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 pre-
710
710 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
FMF Development Corporation
sumed, 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
 G.R. No. 178087. May 5, 2010.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. KUDOS METAL
CORPORATION, respondent.
Civil Law; Doctrine of Estoppel; The doctrine of estoppel is predicated on, and has its
origin in equity which, broadly defined, is justice according to natural law and right. As such,
the doctrine of estoppel cannot give validity to an act that is prohibited by law or one
_______________
* SECOND DIVISION.
233
VOL. 620, MAY 5, 2010 2 2007 denying the motion for reconsideration.
33
Commissioner of Internal Revenue
vs. Kudos Metal Corporation
that is against public policy.—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. As such, the doctrine of estoppel cannot give
validity to an act that is prohibited by law or one that is against public policy. 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. Simply put, the doctrine of estoppel must be sparingly applied.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
The Law Firm of Lucena, Margate, Mogpo & Associatesfor respondent.
DEL CASTILLO, J.:
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
234
234 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Kudos Metal Corporation
having been issued beyond the prescriptive period and the Resolution3 dated May 18,
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 aSubpoena
Duces Tecumdated 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,4which 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 Prescription 5 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.
235
VOL. 620, MAY 5, 2010 235
Commissioner of Internal Revenue vs.
Kudos Metal Corporation
 On August 25, 2003, the BIR issued a Preliminary Assessment Notice for the period. It found the first Waiver of the Statute of Limitations incomplete and
taxable year 1998 against the respondent. This was followed by a Formal Letter of defective for failure to comply with the provisions of Revenue Memorandum Order
Demand with Assessment Notices for taxable year 1998, dated September 26, 2003 (RMO) No. 20-90. Thus:
which was received by respondent on November 12, 2003. “First, the Assistant Commissioner is not the revenue official authorized to sign
Respondent challenged the assessments by filing its “Protest on Various Tax the waiver, as the tax case involves more than P1,000,000.00. In this regard, only the
Assessments” on December 3, 2003 and its “Legal Arguments and Documents in Commissioner is authorized to enter into agreement with the petitioner in extending
Support of Protests against Various Assessments” on February 2, 2004. the period of assessment;
On June 22, 2004, the BIR rendered a final Decision6 on the matter, requesting the Secondly, the waiver failed to indicate the date of acceptance. Such date of
immediate payment of the following tax liabilities: acceptance is necessary to determine whether the acceptance was made within the
Kind of Tax Amount prescriptive period;
Income Tax P 9,693,897.85 Third, the fact of receipt by the taxpayer of his file copy was not indicated on the
VAT 13,962,460.90 original copy. The requirement to furnish the taxpayer with a copy of the waiver is
EWT 1,712,336.76 not only to give notice of the existence of the document but also of the acceptance by
Withholding 247,353.24 the BIR and the perfection of the agreement.
Tax- The subject waiver is therefore incomplete and defective. As such, the three-year
Compensation prescriptive period was not tolled or extended and continued to run. x x x” 11
Penalties _______8,000.00
Total P25,624,048.76 Petitioner moved for reconsideration but the CTA Second Division denied the
motion in a Resolution12dated April 18, 2006.
Ruling of the Court of Tax Appeals, En Banc
Ruling of the Court of Tax Appeals, Second Division On appeal, the CTA En Banc affirmed the cancellation of the assessment notices.
Believing that the government’s right to assess taxes had prescribed, respondent Although it ruled that the Assistant Commissioner was authorized to sign the waiver
filed on August 27, 2004 a Petition for Review7 with the CTA. Petitioner in turn filed pursuant to Revenue Delegation Authority Order (RDAO) No. 05-01, it found that the
his Answer.8 first waiver was still invalid based on the second and third grounds stated by the
On April 11, 2005, respondent filed an “Urgent Motion for Preferential Resolution CTA Second Division. Pertinent portions of the Decision read as follows:
of the Issue on Prescription.”9 237
On October 4, 2005, the CTA Second Division issued a Resolution 10 canceling the VOL. 620, MAY 5, 2010 237
assessment notices issued against respondent for having been issued beyond the Commissioner of Internal Revenue vs.
prescriptive Kudos Metal Corporation
236 “While the Court En Bancagrees with the second and third grounds for
236 SUPREME COURT REPORTS
invalidating the first waiver, it finds that the Assistant Commissioner of the
ANNOTATED
Enforcement Service is authorized to sign the waiver pursuant to RDAO No. 05-01,
Commissioner of Internal Revenue vs.
which provides in part as follows:
Kudos Metal Corporation
A. For National Office cases
Designated Revenue Official
 1. Assistant Commissioner (ACIR), For tax fraud and policy 238
Enforcement Service cases
238 SUPREME COURT REPORTS
2. ACIR, Large Taxpayers Service For large
ANNOTATED
taxpayers cases
Commissioner of Internal Revenue vs.
other than those
Kudos Metal Corporation
cases falling
agreed upon. As previously discussed, the exceptions to the law on prescription must
under Subsection
be strictly construed.
B hereof
In the case at bar, the period agreed upon in the subject first waiver expired on
3. ACIR, Legal Service For cases pending
December 31, 2002. The second waiver in the instant case which was supposed to
verification and
extend the period to assess to December 31, 2003 was executed on February 18, 2003
awaiting
and was notarized on February 19, 2003. Clearly, the second waiver was executed
resolution of
after the expiration of the first period agreed upon. Consequently, the same could not
certain legal
have tolled the 3-year prescriptive period to assess.”13
issues prior to
prescription and Petitioner sought reconsideration but the same was unavailing.
for issuance/com
pliance Issue
of Subpoen Duces Tecum
4. ACIR, Assessment Service (AS) For cases which Hence, the present recourse where petitioner interposes that:
are pending in or THE COURT OF TAX APPEALSEN BANC ERRED IN RULING THAT THE
subject to review GOVERNMENT’S RIGHT TO ASSESS UNPAID TAXES OF RESPONDENT
or approval by the PRESCRIBED.14
ACIR, AS
Petitioner’s Arguments
Based on the foregoing, the Assistant Commissioner, Enforcement Service is
Petitioner argues that the government’s right to assess taxes is not barred by
authorized to sign waivers in tax fraud cases. A perusal of the records reveals that the
prescription as the two waivers executed by respondent, through its accountant,
investigation of the subject deficiency taxes in this case was conducted by the
effectively tolled or extended the period within which the assessment can be made. In
National Investigation Division of the BIR, which was formerly named the Tax Fraud
disputing the conclusion of the CTA that the waivers are invalid, petitioner claims
Division. Thus, the subject assessment is a tax fraud case.
that respondent is estopped from adopting a position contrary to what it has
Nevertheless, the first waiver is still invalid based on the second and third
previously taken. Petitioner insists that by acquiescing to the audit during the period
grounds stated by the Court in Division. Hence, it did not extend the prescriptive
specified in the waivers, respondent led the government to believe that the “delay” in
period to assess.
the process would not be utilized against it. Thus, respondent may no longer
Moreover, assuming arguendothat the first waiver is valid, the second waiver is
239
invalid for violating Section 222(b) of the 1997 Tax Code which mandates that the
VOL. 620, MAY 5, 2010 239
period agreed upon in a waiver of the statute can still be extended by subsequent
Commissioner of Internal Revenue vs.
written agreement, provided that it is executed prior to the expiration of the first
Kudos Metal Corporation
period
repudiate the validity of the waivers and raise the issue of prescription. Section 222 (b) of the NIRC provides that the period to assess and collect taxes
Respondent’s Arguments may only be extended upon a written agreement between the CIR and the taxpayer
Respondent maintains that prescription had set in due to the invalidity of the executed before the expiration of the three-year period. RMO 20-9017 issued on
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 estoppelby
1. ACIRs for Collection, Special For tax cases
acquiescence relied upon by petitioner, respondent counters that the principle of
Operations National Asses- involving not
equity comes into play only when the law is doubtful, which is not present in the
more
instant case.
sment, Excise and Legal on tax than

Our Ruling P500,000.003.

cases pending before their re-
The petition is bereft of merit. spective offices. In the absence of
Section 20315 of the National Internal Revenue Code of 1997 (NIRC) mandates the the ACIR, the Head Executive

government to assess internal revenue taxes within three years from the last day Assistant may sign the waiver.

prescribed by law for the filing of the tax return or the actual date of filing of such 242
return, whichever comes later. Hence, an assessment notice issued after the three-year 242 SUPREME COURT REPORTS

prescriptive period is no longer valid and effective. Exceptions however are provided ANNOTATED

under Section 22216of the NIRC. Commissioner of Internal Revenue vs.

Kudos Metal Corporation
240
240 SUPREME COURT REPORTS April 4, 1990 and RDAO 05-0118 issued on August 2, 2001 lay down the procedure for
ANNOTATED the proper execution of the waiver,
Commissioner of Internal Revenue vs. 243
Kudos Metal Corporation VOL. 620, MAY 5, 2010 243

The waivers executed by respondent’s Commissioner of Internal Revenue vs.

accountant did not extend the period Kudos Metal Corporation

within which the assessment can be to wit:

made 1. The waiver must be in the proper form prescribed by RMO 20-90. The phrase

Petitioner does not deny that the assessment notices were issued beyond the “but not after ______ 19 ___”, which indicates the expiry date of the period

three-year prescriptive period, but claims that the period was extended by the two agreed upon to assess/collect the tax after the regular three-year period of

waivers executed by respondent’s accountant. prescription, should be filled up.

241
VOL. 620, MAY 5, 2010
Commissioner of Internal Revenue vs.
Kudos Metal Corporation
We do not agree.
2. The waiver must be signed by the taxpayer himself or his duly authorized
241 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
244
244 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Kudos Metal Corporation
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
oncollection of taxes and not on the assessment of taxes, as the BIR was able to make an
assessment within the prescribed period. More
245
VOL. 620, MAY 5, 2010 245
Commissioner of Internal Revenue vs.
Kudos Metal Corporation
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 The doctrine of estoppel cannot be applied in this case as an exception to the
Government invoking the technical ground of prescription. statute of limitations on the assessment of taxes considering that there is a detailed
While we may agree with the Court of Tax Appeals that a mere request for procedure for the proper execution of the waiver, which the BIR must strictly follow.
reexamination or reinvestigation may not have the effect of suspending the running As we have often said, the doctrine of estoppel is predicated on, and has its origin in,
of the period of limitation for in such case there is need of a written agreement to equity which, broadly defined, is justice according to natural law and right.22 As
extend the period between 247
246 VOL. 620, MAY 5, 2010 247
Commissioner of Internal Revenue vs.
246 SUPREME COURT REPORTS
Kudos Metal Corporation
ANNOTATED
such, the doctrine of estoppel cannot give validity to an act that is prohibited by law
Commissioner of Internal Revenue vs.
or one that is against public policy.23 It should be resorted to solely as a means of
Kudos Metal Corporation
preventing injustice and should not be permitted to defeat the administration of the
the Collector and the taxpayer, there are cases however where a taxpayer may be
law, or to accomplish a wrong or secure an undue advantage, or to extend beyond
prevented from setting up the defense of prescription even if he has not previously
them requirements of the transactions in which they originate. 24 Simply put, the
waived it in writing as when by his repeated requests or positive acts the
doctrine of estoppel must be sparingly applied.
Government has been, for good reasons, persuaded to postpone collection to make
Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure
him feel that the demand was not unreasonable or that no harassment or injustice is
to comply with RMO 20-90 and RDAO 05-01, which the BIR itself issued. As stated
meant by the Government. And when such situation comes to pass there are
earlier, the BIR failed to verify whether a notarized written authority was given by
authorities that hold, based on weighty reasons, that such an attitude or behavior
the respondent to its accountant, and to indicate the date of acceptance and the
should not be countenanced if only to protect the interest of the Government.
receipt by the respondent of the waivers. Having caused the defects in the waivers,
This case has no precedent in this jurisdiction for it is the first time that such has
the BIR must bear the consequence. It cannot shift the blame to the taxpayer. To
risen, but there are several precedents that may be invoked in American
stress, a waiver of the statute of limitations, being a derogation of the taxpayer’s right
jurisprudence. As Mr. Justice Cardozo has said: “The applicable principle is
to security against prolonged and unscrupulous investigations, must be carefully and
fundamental and unquestioned. ‘He who prevents a thing from being done may not
strictly construed.25
avail himself of the nonperformance which he has himself occasioned, for the law
As to the alleged delay of the respondent to furnish the BIR of the required
says to him in effect “this is your own act, and therefore you are not damnified.’ ”
documents, this cannot be taken against respondent. Neither can the BIR use this as
“(R. H. Stearns Co. vs. U.S., 78 L. ed., 647). Or, as was aptly said, “The tax could have
an excuse for issuing the assessments beyond the three-year period because with or
been collected, but the government withheld action at the specific request of the
without the required documents, the CIR has the power to make assessments based
plaintiff. The plaintiff is now estopped and should not be permitted to raise the
on the best evidence obtainable.26
defense of the Statute of Limitations.” [Newport Co. vs. U.S., (DC-WIS), 34 F. Supp.
248
588].”21
248 SUPREME COURT REPORTS
ANNOTATED
Conversely, in this case, the assessments were issued beyond the prescribed
Commissioner of Internal Revenue vs.
period. Also, there is no showing that respondent made any request to persuade the
Kudos Metal Corporation
BIR to postpone the issuance of the assessments.
 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.
Carpio (Chairperson), Brion, Abad and Perez, JJ.,concur.

Petition denied, judgment and resolution affirmed.

Note.—The doctrine of estoppel is based on the grounds of public policy, fair

dealing, good faith and justice and its purpose is to forbid one to speak against his
own act, representations or commitments to the injury of one to whom they were
directed and who reasonably relied thereon. (Rockland Construction Company, Inc. vs.
Mid-Pasig Land Development Corporation, 543 SCRA 596 [2008])
——o0o——
 G.R. No. 187589. December 3, 2014.* Same; Same; Same; 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
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE STANLEY government.—Although we recognize that the power of taxation is deemed inherent in
WORKS SALES (PHILS.), INCORPORATED, respondent. 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,
Taxation; Assessment; Statute of Limitations; The period to assess and collect
to protect against abuse; and the government, to promptly act for the availability and
deficiency taxes may be extended only upon a written agreement between the Commissioner of
recovery of revenues. A statute of limitations on the assessment and collection of
Internal Revenue (CIR) and the taxpayer prior to the expiration of the three (3)-year
internal revenue taxes was adopted to serve a purpose that would benefit both the
prescribed period in accordance with Section 222(b) of the National Internal Revenue Code
taxpayer and the government.
(NIRC).—The statute of limitations on the right to assess and collect a tax means that
Same; Same; Same; The statute of limitations imposed by the Tax Code precisely
once the period established by law for the assessment and collection of taxes has
intends to protect the taxpayer from prolonged and unreasonable assessment and investigation
lapsed, the government’s corresponding right to enforce that action is barred by
by the Bureau of Internal Revenue (BIR).—Petitioner’s reliance onCIR v. Suyoc, 104 Phil.
provision of law. The period to assess and collect deficiency taxes may be extended
819 (1958), (Suyoc) is likewise misplaced. In Suyoc, the BIR was induced to extend the
only upon a written agreement between the CIR and the taxpayer prior to the
collection of tax through repeated requests for extension to pay and for
expiration of the three-year prescribed period in accordance with Section 222(b) of the
reinvestigation, which were all denied by the Collector. Contrarily, herein respondent
NIRC. In relation to the implementation of this provision, the CIR issued Revenue
filed only one Protest over the assessment, and petitioner denied it 10 years after. The
Memorandum Order (RMO) No. 20-90 on 4 April 1990 to provide guidelines on the
subsequent letters of respondent cannot be construed as inducements to extend the
proper execution of the Waiver of the Statute of Limitations.
period of limitation, since the letters were intended to urge petitioner to act on the
Same; Same; Same; A waiver of the statute of limitations, whether on assessment or
Protest, and not to persuade the latter to delay the actual collection. Petitioner cannot
collection, should not be construed as a waiver of the right to invoke the defense of prescription
take refuge in BPI v. CIR, 473 SCRA 205 (2005), either, considering that respondent
but, rather, an agreement between the taxpayer and the Bureau of Internal Revenue (BIR) to
and BPI are similarly situated. Similar to BPI, this is a simple case in which the BIR
extend the period to a date certain, within which the latter could still assess or collect taxes
Commissioner and other BIR officials failed to act promptly in resolving and denying
due.—To emphasize, the Waiver was not a unilateral act of the taxpayer; hence, the
the request for reconsideration filed by the taxpayer and in enforcing the collection on
BIR must act on it, either by conforming to or by disagreeing with the extension. A
the assessment. Both in BPI and in this case, the BIR presented no reason or
waiver of the statute of limitations, whether on assessment or collection, should not
explanation as to why it took many years to address the Protest of the taxpayer. The
be construed as a waiver of the right to invoke the defense of prescription but, rather,
statute of limitations imposed by the Tax Code precisely intends to protect the
an agreement between the taxpayer and the BIR to extend the period to a date certain,
taxpayer from prolonged and unreasonable assessment and investigation by the BIR.
within which the latter could still assess or collect taxes due. The waiver
PETITION for review on certiorari of the decision and resolution of the Court of
643
Tax Appeals En Banc.
VOL. 743, DECEMBER 3, 2014 643
Commissioner of Internal Revenue vs. The 644
Stanley Works Sales (Phils.), Incorporated 644 SUPREME COURT REPORTS
does not imply that the taxpayer relinquishes the right to invoke prescription ANNOTATED
unequivocally. Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
 The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
Quisumbing, Torres for respondent.
SERENO, CJ.:
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.
645
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
Respondent is authorized “to engage in the business of designing, manufacturing,
fabricating, or otherwise producing, and the purchase, sale at wholesale, 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,
646
646 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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.
647
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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
648
648 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
The CTA FirstDivision’s 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’sRuling5
The CTA En Bancaffirmed 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
649
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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;
650
650 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
(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 in determining 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:
651
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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 x x.
2. xxxx
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 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
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 ______
652
652 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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.11
653
VOL. 743, DECEMBER 3, 2014 653
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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 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
imply that the taxpayer relinquishes the right to invoke prescription unequivocally. 15
654
654 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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 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 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)
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
655
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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 onCIR 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
656
656 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
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. Similar to BPI, 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 BPI 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 arguendothat 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.
657
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Commissioner of Internal Revenue vs. The
Stanley Works Sales (Phils.), Incorporated
WHEREFORE, premises considered, the Petition isDENIED.
SO ORDERED.
Leonardo-De Castro, Bersamin, Perez and Perlas-Bernabe, JJ., concur.

Petition denied.

Notes.—Courts have the authority to dismiss a claim when it appears from the
pleadings or the evidence on record that the action is already barred by the statute of
limitations. (Heirs of Shomanay Paclit vs. Belisario, 674 SCRA 272 [2012])
It is a better rule that courts, under the principle of equity, will not be guided or
bound strictly by the statute of limitations or the doctrine of laches when to do so,
manifest wrong or injustice would result. (Coderias vs. Estate of Juan Chioco, 699
SCRA 684 [2013])
——o0o——
 G.R. No. 192173. July 29, 2015.* prescription. A waiver of the Statute of Limitations is nothing more than “an
agreement between the taxpayer and the Bureau of Internal Revenue (BIR) that the
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. STANDARD period to issue an assessment and collect the taxes due is extended to a date certain.”
CHARTERED BANK, respondent. It is a bilateral agreement, thus necessitating the very signatures of both the CIR and
the taxpayer to give birth to a valid agreement. Furthermore, indicating in the waiver
Taxation; Assessment; The period for Commissioner of Internal Revenue (CIR) to
the date of acceptance by the BIR is necessary in order to determine whether the
assess and collect an internal revenue tax is limited only to three (3) years by Section 203 of
parties (the taxpayer and the government) had entered into a waiver “before the
the National Internal Revenue Code (NIRC) of 1997, as amended.—At the outset, the
expiration of the time prescribed in Section 203 (the three-year prescriptive period)
period for petitioner to assess and collect an internal revenue tax is limited only to
for the assessment of the tax.” When the period of prescription has expired, there will
three years by Section 203 of the NIRC of 1997, as amended, quoted hereunder as
be no more need to execute a waiver as there will be nothing more to extend. Hence,
follows: SEC. 203. Period of Limitation Upon Assessment and Collection.—Except as
no implied consent can be presumed, nor can it be contended that the concurrence to
provided in Section 222, internal revenue taxes shall be assessed within three years
such waiver is a mere formality.
after the last day prescribed by law for the filing of the return, and no proceeding in
Civil Law; Payment; Words and Phrases; Under Article 1232 of the Civil Code, payment
court without assessment for the collection of such taxes shall be begun after the
means not only the delivery of money but also the performance, in any other manner, of an
expiration of such period: Provided, That in a case where a return is filed beyond the
obligation.—When respondent paid the deficiency WTC and FWT assessments,
period prescribed by law, the three (3)-year period shall be counted from the day
petitioner accepted said payment without any opposition. This effectively
the return was filed. For purposes of this Section, a return filed before the last day
extinguished respondent’s obligation to pay the subject taxes. It bears emphasis that,
prescribed by law for the filing thereof shall be considered as filed on such last
obligations are extinguished, among others, by payment or performance. Under
day. (Em-
Article 1232 of the Civil Code, payment means not only the delivery of money but
also the performance, in any other manner, of an obligation. As intended, which
intention was recognized by the CTA in Division and CTA En Banc,
175
VOL. 764, JULY 29, 2015 175
Commissioner of Internal Revenue vs.
Standard Chartered Bank 176
176 SUPREME COURT REPORTS
phasis supplied) This mandate governs the question of prescription of the
ANNOTATED
government’s right to assess internal revenue taxes primarily to safeguard the
Commissioner of Internal Revenue vs.
interests of taxpayers from unreasonable investigation by not indefinitely extending
Standard Chartered Bank
the period of assessment and depriving the taxpayer of the assurance that it will no
the question regarding the income tax, final income tax – FCDU, and EWT, was
longer be subjected to further investigation for taxes after the expiration of reasonable
kept unaffected by the payment of the deficiency WTC and FWT assessments.
period of time.
Taxation; Prescription; The law on prescription being a remedial measure should be
Same; Same; A waiver of the Statute of Limitations is nothing more than “an agreement
interpreted in a way conducive to bringing about the beneficent purpose of affording
between the taxpayer and the Bureau of Internal Revenue (BIR) that the period to issue an
protection to the taxpayer within the contemplation of the Commission which recommends the
assessment and collect the taxes due is extended to a date certain.”—In the landmark case
approval of the law.—It must be remembered that the execution of a Waiver of Statute
of Philippine Journalists, Inc. v. CIR, 447 SCRA 214 (2004), (PJI case), we pronounced
of Limitations may be beneficial to the taxpayer or to the BIR, or to both. Considering
that a waiver is not automatically a renunciation of the right to invoke the defense of
however, that it results to a derogation of some of the rights of the taxpayer, the same
must be executed in accordance with preset guidelines and procedural requirements.
Otherwise, it does not serve its purpose, and the taxpayer has all the right to invoke
its nullity. For that reason, this Court cannot turn blind on the importance of the
Statute of Limitations upon the assessment and collection of internal revenue taxes
provided for under the NIRC. 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 properly in the making
of the 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 may
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 recommends the approval of the law.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals En Banc.
The facts are stated in the opinion of the Court.
The Solicitor General for petitioner.
177
VOL. 764, JULY 29, 2015 177
Commissioner of Internal Revenue vs.
Standard Chartered Bank
Salvador & Associatesfor respondent.
PEREZ, J.:
For the Court’s consideration is a Petition for Review on Certiorari which seeks to
reverse and set aside the 1 March 2010 Decision1and the 30 April 2010 Resolution2 of
the Court of Tax Appeals (CTA) En Bancin C.T.A. E.B. Case No. 522, affirming in
toto the Decision3 and Resolution4dated 27 February 2009 and 29 July 2009,
respectively, of the Second Division of the CTA (CTA in Division) in CTA Case No.
7165. The court a quo cancelled and set aside the Formal Letter of Demand and
Assessment Notices dated 24 June 2004 issued by petitioner against respondent for
deficiency income tax, final income tax – Foreign Currency Deposit Unit (FCDU), and
expanded withholding tax (EWT) in the aggregate amount of P33,076,944.18,
including increments covering taxable year 1998, for having been issued beyond the
reglementary period.
The Facts
As found by the CTA in Division and affirmed by the CTA En Banc, the factual
antecedents of the case and the proceedings conducted thereon were as follows:
On July 14, 2004, [respondent] received [petitioner’s] Formal Letter of Demand
dated June 24, 2004,
178
178 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Standard Chartered Bank
for alleged deficiency income tax, final income tax – FCDU, [withholding tax –
compensation (WTC)], EWT, [final withholding tax (FWT)], and increments for
taxable year 1998 in the aggregate amount of P33,326,211.37, broken down as follows:
On August 12, 2004, [respondent] protested the said assessment by filing a letter-
protest dated August 9, 2004 addressed to the BIR Deputy Commissioner for Large
Taxpayers’ Service stating the factual and legal bases of the assessment, and
requested that it be withdrawn and cancelled.
As of the date of filing of thisPetition for Review, [petitioner] has not rendered a
decision on [respondent’s] protest.
In view of [petitioner’s] inaction on [respondent’s] protest, on March 9, 2005,
[respondent] filed the present Petition for Review.
xxxx
 On October 14, 2005, [respondent] filed a Motion for Leave of Court to Serve 180
Supplemental Petition, with attached Supplemental Petition for Review, pursuant to Rule 180 SUPREME COURT REPORTS
10 of the 1997 Rules of Civil Procedure, as amended, ANNOTATED
Commissioner of Internal Revenue vs.
179 Standard Chartered Bank
VOL. 764, JULY 29, 2015 179
[Petitioner’s] “Memorandum”was filed on August 4, 2008, while
Commissioner of Internal Revenue vs.
[respondent’s] Memorandum was filed on October 24, 2008 after a series of motions for
Standard Chartered Bank
extension of time to file memorandum were granted by the [c]ourt. The case was
in view of the alleged payments made by [respondent] through the BIR’s deemed submitted for decision on November 12, 2008.5
Electronic Filing and Payment System (eFPS) as regards its deficiency [WTC] and
[FWT] assessments in the amounts of P124,967.73 and P139,713.11, respectively. In
its Supplemental Petition for Review, (respondent) seeks to be fully credited of the The Ruling of the CTA in Division
payments it made to cover the deficiency [WTC] and [FWT]. Thus, the remaining
assessments cover only the deficiency income tax, final income tax – FCDU, and In a Decision dated 27 February 2009,6 the CTA in Division granted respondent’s
[EWT] in the modified total amount of P33,076,944.18, computed as follows: petition for the cancellation and setting aside of the subject Formal Letter of Demand
and Assessment Notices dated 24 June 2004 on the ground that petitioner’s right to
Compromise
Tax Basic Tax Interest Total assess respondent for the deficiency income tax, final income tax – FCDU, and EWT
Penalty
Income Tax 3,594,272.00 3,803,936.67 25,000.00 7,423,208.67 covering taxable year 1998 was already barred by prescription. The court a
Final Income Tax – quoexplained that although petitioner offered in evidence copies of the Waivers of
11,748,483.99 12,433,808.31 25,000.00 24,207,292.30
FCDU
Statute of Limitations executed by the parties, for the purpose of justifying the
Expanded Withholding
678,361.62 748,081.59 20,000.00 1,446,443.21 extension of period to assess respondent, the subject waivers, particularly the First
Tax
TOTAL 16,021,117.61 16,985,826.57 70,000.00 33,076,944.18 and Second Waivers dated 20 July 2001 and 4 April 2002, respectively, failed to
Finding merit in [respondent’s] motion, the same was granted and theSupplemental strictly comply and conform with the provisions of Revenue Memorandum Order
Petition for Reviewwas admitted in a Resolutiondated December 12, 2005. (RMO) No. 20-90, citing the case of Philippine Journalists, Inc. v. CIR.7 It therefore
[Respondent] presented Chona G. Reyes, its Vice President, as witness, and concluded that since the aforesaid waivers were invalid, it necessarily follows that the
documentary exhibits which were admitted by the Court in its Resolutions dated subsequent waivers did not in any way cure these defects. Neither did it extend the
October 1, 2007, and January 31, 2008. prescriptive period to assess. Accordingly, it ruled that the assailed Formal Letter of
On the other hand, [petitioner] presented Juan M. Luna, Jr., Revenue Officer II of Demand and Assessment Notices are void for having been issued beyond the
the BIR LTAID I, as witness, and documentary evidence marked as Exhibits “1” to reglementary period.8 Having
“4.” 181
Thereafter, the parties were ordered to file their simultaneous memoranda, within VOL. 764, JULY 29, 2015 181
thirty (30) days from notice, afterwhich the case shall be deemed submitted for Commissioner of Internal Revenue vs.
decision. Standard Chartered Bank
rendered such ruling, the CTA in Division decided not to pass upon other incidental
issues raised before it for being moot.
 On 29 July 2009, the CTA in Division denied petitioner’s Motion for
Reconsideration thereof for lack of merit.9
Aggrieved, petitioner appealed to the CTA En Banc by filing a Petition for Review
under Section 18 of Republic Act (R.A.) No. 1125, as amended by R.A. No. 9282, 10
3 September 2009, docketed as C.T.A. E.B. No. 522.
The Ruling of the CTAEn Banc
The CTA En Bancaffirmed in toto both the aforesaid Decision and Resolution
rendered by the CTA in Division in CTA Case No. 7165, pronouncing that there was
no cogent justification to disturb the findings and conclusion spelled out therein,
since what petitioner merely prayed was for the appellate court to view and
appreciate the arguments/discussions raised by petitioner in her own perspective of
things, which unfortunately had already been considered and passed upon.
In other words, the CTA En Banc simply concurred with the ruling that petitioner’s
subject Formal Letter of Demand and Assessment Notices (insofar as to the deficiency
income tax, final income tax – FCDU, and EWT) shall be cancelled considering that
the same was already barred by prescription for having been issued beyond the
three-year prescriptive pe-
182
182 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Standard Chartered Bank
riod provided for in Section 203 of the National Internal Revenue Code (NIRC) of
1997, as amended. The waivers of the statute of limitations executed by the parties
did not extend the aforesaid prescriptive period because they were invalid for failure
to comply with and conform to the requirements set forth in RMO No. 20-90.
Upon denial of petitioner’s Motion for Reconsideration thereof, it filed the instant
Petition for Review onCertiorari before this Court seeking the reversal of the 1 March
2010 Decision11 and the 30 April 2010 Resolution12 rendered in C.T.A. E.B. No. 522,
based on the sole ground, to wit: The CTA En Banc committed reversible error in not
holding that respondent is estopped from questioning the validity of the waivers of
the Statute of Limitations executed by its representatives in view of the partial
payments it made on the deficiency taxes sought to be collected in petitioner’s Formal
Letter of Demand and Assessment Notices dated 24 June 2004.
The Issues
The primary issue presented before this Court is whether or not petitioner’s right
on to assess respondent for deficiency income tax, final income tax – FCDU, and EWT
covering taxable year 1998 has already prescribed under Section 203 of the NIRC of
1997, as amended, for failure to comply with the requirements set forth in RMO No.
20-90 dated 4 April 1990, pertaining to the proper and valid execution of a waiver of
the Statute of Limitations, and in accordance with existing jurisprudential
pronouncements.
Subsequently, even assuming that petitioner’s right to assess had indeed
prescribed, another issue was submitted for our consideration, to wit: whether or not
respondent is estopped from questioning the validity of the waivers of the Statute of
Limitations executed by its representatives in view
183
VOL. 764, JULY 29, 2015 183
Commissioner of Internal Revenue vs.
Standard Chartered Bank
of the partial payments it made on the deficiency taxes (i.e., WTC and FWT) sought to
be collected in petitioner’s Formal Letter of Demand and Assessment Notices dated
24 June 2004.
Our Ruling
We find no merit in the petition.
At the outset, the period for petitioner to assess and collect an internal revenue
tax is limited only to three years by Section 203 of the NIRC of 1997, as amended,
quoted hereunder as follows:
SEC. 203. Period of Limitation Upon Assessment and Collection.—Except as
provided in Section 222, 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 (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 and the Commissioner of Internal Revenue (CIR) may stipulate to extend the period
for the filing thereof shall be considered as filed on such last day. (Emphasis of assessment by a written agreement executed prior to the lapse of the period
supplied) prescribed by law, and by subsequent written agreements before the expiration of the
period previously agreed upon. It must be kept in mind that the very reason why the
law provided for prescription is to give taxpayers peace of mind, that is, to safeguard
This mandate governs the question of prescription of the government’s right to
them from unreasonable examination, investigation, or assessment. The law on
assess internal revenue taxes primarily to safeguard the interests of taxpayers from
prescription, being a remedial measure, should be liberally construed in order to
unreasonable investigation by not indefinitely extending the period of assessment
afford such protection. As a corol-
and depriving 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. 13
185
184 VOL. 764, JULY 29, 2015 185
184 SUPREME COURT REPORTS
Commissioner of Internal Revenue vs.
ANNOTATED
Standard Chartered Bank
Commissioner of Internal Revenue vs.
lary, the exceptions to the law on prescription should perforce be strictly construed. 14
Standard Chartered Bank
In the landmark case ofPhilippine Journalists, Inc. v. CIR (PJI case),15 we
Thus, in the present case, petitioner only had three years, counted from the date
pronounced that a waiver is not automatically a renunciation of the right to invoke
of actual filing of the return or from the last date prescribed by law for the filing of
the defense of prescription. A waiver of the Statute of Limitations is nothing more
such return, whichever comes later, to assess a national internal revenue tax or to
than “an agreement between the taxpayer and the Bureau of Internal Revenue (BIR)
begin a court proceeding for the collection thereof without an assessment. However,
that the period to issue an assessment and collect the taxes due is extended to a date
one of the exceptions to the three-year prescriptive period on the assessment of taxes
certain.” It is a bilateral agreement, thus necessitating the very signatures of both the
is that provided for under Section 222(b) of the NIRC of 1997, as amended, which
CIR and the taxpayer to give birth to a valid agreement. Furthermore, indicating in
states:
the waiver the date of acceptance by the BIR is necessary in order to determine
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
whether the parties (the taxpayer and the government) had entered into a waiver
Taxes.—
“before the expiration of the time prescribed in Section 203 (the three-year
xxxx
prescriptive period) for the assessment of the tax.” When the period of prescription
(b) If before the expiration of the time prescribed in Section 203 for the
has expired, there will be no more need to execute a waiver as there will be nothing
assessment of the tax, both the Commissioner and the taxpayer have agreed in
more to extend. Hence, no implied consent can be presumed, nor can it be contended
writing to its assessment after such time, the tax may be assessed within the period
that the concurrence to such waiver is a mere formality.
agreed upon.
In delineation of the same sense about the waiver of the Statute of Limitations,
The period so agreed upon may be extended by subsequent written agreement
RMO No. 20-90 and Revenue Delegation Authority Order (RDAO) No. 05-01 were
made before the expiration of the period previously agreed upon.(Emphasis
issued on 4 April 1990 and 2 August 2001, respectively. The said revenue orders
supplied)
outline the procedure for the proper execution of a waiver,viz.:16

From the foregoing, the above provision authorizes the extension of the original 1. The waiver must be in the proper form prescribed by RMO 20-90. The
three-year prescriptive period by the execution of a valid waiver, where the taxpayer phrase “but not after
 186 VOL. 764, JULY 29, 2015 187
186 SUPREME COURT REPORTS Commissioner of Internal Revenue vs.
ANNOTATED Standard Chartered Bank
Commissioner of Internal Revenue vs. been upheld in the PJIcase.17 In reversing the decision of the Court of Appeals
Standard Chartered Bank promulgated on 5 August 2003, this Court ruled that:
____ 19 __,” which indicates the expiry date of the period agreed upon to The NIRC, under Sections 203 and 222, provides for a statute of limitations on the
assess/collect the tax after the regular three-year period of prescription, should be assessment and collection of internal revenue taxes in order to safeguard the interest
filled up. of the taxpayer against unreasonable investigation. Unreasonable investigation
2. The waiver must be signed by the taxpayer himself or his duly authorized contemplates cases where the period of assessment extends indefinitely because this
representative. In the case of a corporation, the waiver must be signed by any of its deprives the taxpayer of the assurance that it will no longer be subjected to further
responsible officials. In case the authority is delegated by the taxpayer to a investigation for taxes after the expiration of a reasonable period of time. x x x
representative, such delegation should be in writing and duly notarized. xxxx
3. The waiver should be duly notarized. RMO No. 20-90 implements these provisions of the NIRC relating to the period of
4. The CIR or the revenue official authorized by him must sign the waiver prescription for the assessment and collection of taxes. A cursory reading of the
indicating that the BIR has accepted and agreed to the waiver. The date of such Order supports petitioner’s argument that the RMO must be strictly followed.
acceptance by the BIR should be indicated. However, before signing the waiver, the x x x18(Emphasis supplied)
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. Applying the rules and rulings, the waivers in question were defective and did

5. Both the date of execution by the taxpayer and date of acceptance by the not validly extend the original three-year prescriptive period. As correctly found by

Bureau should be before the expiration of the period of prescription or before the the CTA in Division, and affirmed in toto by the CTA En Banc, the subject waivers of

lapse of the period agreed upon in case a subsequent agreement is executed. the Statute of Limitations were in clear violation of RMO No. 20-90:

6. The waiver must be executed in three copies, the original copy to be attached 1) This case involves assessment amounting to more than P1,000,000.00. For

to the docket of the case, the second copy for the taxpayer and the third copy for the this,RMO No. 20-90 requires the Commissioner of Internal Revenue to sign for the

Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy BIR. A perusal of the First and Second Waivers of the Statute of Limitations shows

must be indicated in the original copy to show that the taxpayer was notified of the that they were signed by Assistant Commissioner-Large

acceptance of the BIR and the perfection of the agreement. (Emphases supplied)
188
188 SUPREME COURT REPORTS
ANNOTATED
The provisions of the RMO and RDAO explicitly show their mandatory nature,
Commissioner of Internal Revenue vs.
requiring strict compliance. Hence, failure to comply with any of the requisites
Standard Chartered Bank
renders a waiver defective and ineffectual. It is worth mentioning that strict
Taxpayers Service Virginia L. Trinidad and Assistant Commissioner-Large
compliance with the requirements set forth in RMO No. 20-90 has
Taxpayers Service Edwin R. Abella respectively, and not by the Commissioner of
Internal Revenue;

187
 2) The date of acceptance by the Assistant Commissioner-Large Taxpayers Service
Virginia L. Trinidad of the First Waiver was not indicated therein;
3) The date of acceptance by the Assistant Commissioner-Large Taxpayers Service
Edwin R. Abella of the Second Waiver was not indicated therein;
4) The First and Second Waivers of Statute of Limitations did not specify the kind
and amount of the tax due; and
5) The tenor of the Waiver of the Statute of Limitations signed by petitioner’s
authorized representative failed to comply with the prescribed requirements of RMO
No. 20-90. The subject waiver speaks of a request for extension of time within which
to present additional documents, whereas the waiver provided under RMO No. 20-90
pertains to the approval by the Commissioner of Internal Revenue of the taxpayer’s
request for reinvestigation and/or reconsideration of his/its pending internal
revenue case.19
Taking into consideration the foregoing defects in the First and Second Waivers
presented and admitted in evidence before the court a quo, the period to assess the tax
liabilities of respondent for taxable year 1998 was never extended. Consequently,
when the succeeding waivers of Statute of Limitations were subsequently executed
covering the same tax liabilities of respondent, and there being no assessment having
been issued as of that time, prescription has already set in. We therefore hold that the
subject waivers did not extend the period to assess the subject deficiency tax liabilities
of re-
189
VOL. 764, JULY 29, 2015 189
Commissioner of Internal Revenue vs.
Standard Chartered Bank
spondent for taxable year 1998. The aforesaid waivers cannot be considered as
“subsequent written agreement(s) made before the expiration of the period
previously agreed upon” referred to in the second sentence of the earlier quoted
Section 222(b) of the NIRC of 1997, as amended, since there is no “period previously
agreed upon” to speak of.
As regards petitioner’s insistence that respondent is already estopped from
impugning the validity of the subject waivers considering that it made partial
payments on the deficiency taxes being collected, particularly as to the payment of its
deficiency WTC and FWT assessments in the amounts of P124,967.73 and P139,713.11,
respectively, we find this argument bereft of merit.
As aptly found in the 29 July 2009 Resolution of the CTA in Division, although
respondent paid the deficiency WTC and FWT assessments, it did not waive the
defense of prescription as regards the remaining tax deficiencies, it being on record
that respondent continued to raise the issue of prescription in its Pre-Trial Brief filed
on 15 August 2005, Joint Stipulations of Facts and Issues filed on 1 September 2005,
direct testimonies of its witness, and Memorandum filed on 24 October 2008. More so,
even petitioner did not consider such payment of respondent as a waiver of the
defense of prescription, but merely raised the issue of estoppel in her Motion for
Reconsideration of the aforesaid decision. From the conduct of both parties, there can
be no estoppel in this case.20
Upon payment of the assessed deficiency in the WTC in the amount of
P124,967.73 and in the FWT in the amount of P139,713.11, respondent filed a Motion
for Leave of Court to Serve Supplemental Petition, with attached Supplemental
Petition for Review. As stated in the CTAEn Banc affirmed decision of the CTA in
Division, “[i]n itsSupplemental Petition for Review, respondent seeks to be fully credited
of the payments it made to cover the deficiency WTC and FWT.
190
190 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Standard Chartered Bank
Thus, the remaining assessments cover only the deficiency income tax, final
income tax – FCDU, and (EWT) in the modified total amount of P33,076,944.18,
x x x.”21 The aforesaid motion was granted and the supplemental petition was
admitted by the CTA in Division. Undeniably, the acceptance of said payments was
never questioned by petitioner. Indeed, the decision of the CTA in Division, which
decision was affirmed by the CTA En Banc, covered only the remaining questioned
assessment, namely: income tax, final income tax – FCDU, and EWT. Clearly, the
payment of the deficiency WTC and FWT was made together with the reiteration in
the petition for the cancellation of the assessment notices on the alleged deficiency
income tax, final income tax – FCDU, and EWT.
When respondent paid the deficiency WTC and FWT assessments, petitioner
accepted said payment without any opposition. This effectively extinguished
respondent’s obligation to pay the subject taxes. It bears emphasis that, obligations In fine, considering the defects in the First and Second Waivers, the period to
are extinguished, among others, by payment or performance.22 Under Article 1232 of assess or collect deficiency taxes for the taxable year 1998 was never extended.
the Civil Code, payment means not only the delivery of money but also the Consequently, the Formal Letter of Demand and Assessment Notices dated 24 June
performance, in any other manner, of an obligation. As intended, which intention 2004 for deficiency income tax, FCDU, and EWT in the aggregate amount of
was recognized by the CTA in Division and CTA En Banc, the question regarding the P33,076,944.18, including increments,
income tax, final income tax – FCDU, and EWT, was kept unaffected by the payment 192
of the deficiency WTC and FWT assessments. 192 SUPREME COURT REPORTS
By way of reiteration, taking into consideration the foregoing flaws found in the ANNOTATED
subject waivers, the same are void, and the supposed suspensions of the prescriptive Commissioner of Internal Revenue vs.
periods within which to issue the subject assessments were not legally effected. And Standard Chartered Bank
the facts of this case do not call for the application of the doctrine of estoppel. were issued by the BIR beyond the three-year prescriptive period and are therefore
191 void.24
VOL. 764, JULY 29, 2015 191 WHEREFORE, the petition is DENIED for lack of merit. No costs.
Commissioner of Internal Revenue vs. SO ORDERED.
Standard Chartered Bank Leonardo-De Castro**(Acting Chairperson), Peralta,*** Bersamin andPerlas-Bernabe,
It must be remembered that the execution of a Waiver of Statute of Limitations JJ., concur.
may be beneficial to the taxpayer or to the BIR, or to both. Considering however, that
Petition denied.
it results to a derogation of some of the rights of the taxpayer, the same must be
executed in accordance with preset guidelines and procedural requirements. Notes.—A taxpayer’s failure to question the assessment before the Local Board of
Otherwise, it does not serve its purpose, and the taxpayer has all the right to invoke Assessment Appeals (LBAA) renders the assessment of the local assessor final,
its nullity. For that reason, this Court cannot turn blind on the importance of the executory, and demandable; Entities vested with the personality to contest an
Statute of Limitations upon the assessment and collection of internal revenue taxes assessment are the owner and the person with legal interest in the property. (National
provided for under the NIRC. The law prescribing a limitation of actions for the Power Corporation vs. Province of Quezon, 593 SCRA 47 [2009])
collection of the income tax is beneficial both to the Government and to its citizens; to When it appears from the pleadings or the evidence on record that the action is
the Government because tax officers would be obliged to act properly in the making already barred by the statute of limitations, the court shall dismiss the claim.
of the assessment, and to citizens because after the lapse of the period of prescription, (Feliciano vs. Canoza, 629 SCRA 550 [2010])
citizens would have a feeling of security against unscrupulous tax agents who may
find an excuse to inspect the books of taxpayers, not to determine the latter’s real ——o0o——
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 recommends the approval of the law.23
SECOND DIVISION
[ G.R. No. 211289, January 14, 2019 ]
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V. LA FLOR DELA
ISABELA, INC., RESPONDENT.
DECISION
J. REYES, JR., J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to reverse and set aside the September 30, 2013 Decision [1] and the
February 10, 2014 Resolution[2] of the Court of Tax Appeals (CTA) En Banc in CTA EB
No. 951, which affirmed the August 3, 2012 Decision [3] and the October 5, 2012
Resolution of the CTA Third Division (CTA Division).
Factual background
Respondent La Flor dela Isabela, Inc. (La Flor) is a domestic corporation duly
organized and existing under Philippine Law. It filed monthly returns for the
Expanded Withholding Tax (EWT) and Withholding Tax on Compensation (WTC)
for calendar year 2005.[4]
On September 3, 2008, La Flor, through its president, executed a Waiver of the Statute
of Limitations (Waiver)[5] in connection with its internal revenue liabilities for the
calendar year ending December 31, 2005. On February 16, 2009, it executed another
Waiver[6] to extend the period of assessment until December 31, 2009.
On November 20, 2009, La Flor received a copy of the Preliminary Assessment Notice
for deficiency taxes for the taxable year 2005. Meanwhile, on December 2, 2009, it
executed another Waiver.[7]
On January 7, 2010, La Flor received the following Formal Letter of Demand and
Final Assessment Notices (FANs): (1) LTEADI-II CP-05-00007 for penalties for late
filing and payment of WTC; (2) LTADI-II CP 05-00008 for penalties for late filing and
payment of EWT; (3) LTADI-II WE-05-00062 for deficiency assessment for EWT; and
(4) LTEADI-II WC-05-00038 for deficiency assessment for WTC. The above-
mentioned assessment notices were all dated December 17, 2009 and covered the
deficiency taxes for the taxable year 2005.[8]
On January 15, 2010, La Flor filed its Letter of Protest contesting the assessment
notices. On July 20, 2010, petitioner Commissioner of Internal Revenue (CIR) issued
the Final Decision on Disputed Assessment (FDDA) involving the alleged deficiency
withholding taxes in the aggregate amount of P6,835,994.76. Aggrieved, it filed a
petition for review before the CTA Division.
CTA Division Decision
In its August 3, 2012 Decision, the CTA Division ruled in favor of La Flor and
cancelled the deficiency tax assessments against it. It noted that based on the dates La
Flor had filed its returns for EWT and WTC, the CIR had until February 15, 2008 to
March 1, 2009 to issue an assessment pursuant to the three-year prescriptive period
under Section 203 of the National Internal Revenue Code (NIRC). The CTA Division
pointed out that the assessment was issued beyond the prescriptive period
considering that the CIR issued the FANs only on December 17, 2009. Thus, it posited
that the assessment was barred by prescription.
On the other hand, the CTA Division ruled that the Waivers entered into by the CIR
and La Flor did not effectively extend the prescriptive period for the issuance of the
tax assessments. It pointed out that only the February 16, 2009 Waiver was stipulated
upon and the Waivers dated September 3, 2008 and December 2, 2009 were never
presented or offered in evidence. In addition, the CTA Division highlighted that the
Waiver dated February 16, 2009 did not comply with the provisions of Revenue
Memorandum Order (RMO) No. 20-90 because it failed to state the nature and
amount of the tax to be assessed.
Thus, it disposed:
WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the Formal
Letter of Demand, with Final Assessment Notices LTEADI-WC-05-00038, LTEADI-
WE-05-00062, LTEADI-CP-05-00007, LTEADI-CP-05-00008, all dated December 17,
2009 are hereby CANCELLED and SET ASIDE.
SO ORDERED.[9]
The CIR moved for reconsideration but it was denied by the CTA Division in its
October 5, 2012 Resolution.[10]Undeterred, it filed a Petition for Review[11] before the
CTA En Banc.
CTA En Banc Decision
In its September 30, 2013 Decision, the CTA En Banc affirmed the Decision of the CTA
Division. The tax court agreed that the EWT and WTC assessments were barred by
prescription. It explained that the Waivers dated September 3, 2008 and December 2,
2009 were inadmissible because they were never offered in evidence. The CTA En
Banc added that these documents were neither incorporated in the records nor duly
identified by testimony. It also elucidated that the Waiver dated February 16, 2009
was defective because it failed to comply with RMO No. 20-90 as it did not specify the
kind and amount of tax involved. As such, the CTA En Banc concluded that the
prescriptive period for the assessment of EWT and WTC for 2005 was not extended in
view of the inadmissibility and invalidity of the Waivers between the CIR and La
Flor. Thus, it disposed:
WHEREFORE, premises considered, the assailed Decision dated August 3, 2012 and
the Resolution dated October 5, 2012 are AFFIRMED. The Petition for Review is
hereby DISMISSED.
SO ORDERED.[12]
The CIR moved for reconsideration, but it was denied by the CTA En Banc in its
February 10, 2014 Resolution.
Hence, this present petition raising the following:
Issues
I
WHETHER THE PRESCRIPTIVE PERIOD UNDER SECTION 203 OF THE NIRC
APPLIES TO EWT AND WTC ASSESSMENTS; and
II
WHETHER LA FLOR'S EWT AND WTC ASSESSMENTS FOR 2005 WERE
BARRED BY PRESCRIPTION.
The CIR argued that the prescriptive period under Section 203 of the NIRC does not
apply to withholding agents such as La Flor. It explained that the amount collected
from them is not the tax itself but rather a penalty. The CIR pointed out that the
provision of Section 203 of the NIRC only mentions assessment of taxes as
distinguished from assessment of penalties. It highlighted that La Flor was made
liable for EWT and WTC deficiencies in its capacity as a withholding agent and not in
its personality as a taxpayer.
On the other hand, the CIR maintained that even applying the periods set in Section
203 of the NIRC, the EWT and WTC assessment of La Flor had not yet prescribed. It
pointed out that La Flor had executed three Waivers extending the prescriptive
period under the NIRC. The CIR lamented that the CTA erred in disregarding them
because evidence not formally offered may be considered if they form part of the
records. It noted that in the Answer it filed before the CTA Division, the subject
Waivers were included as annexes. In addition, the CIR assailed that failure to
comply with RMO No. 20-90 does not invalidate the Waivers.
In its Comment[13] dated August 15, 2014, La Flor countered that the CIR's petition for
review should be denied outright for procedural infirmities. It pointed out that the
petition failed to comply with Bar Matter (B.M.) No. 1922 because the date of issue of
the Mandatory Continuing Legal Education (MCLE) compliance of the counsels of
the CIR was not indicated. In addition, La Flor noted that the petition for review did
not observe Section 2, Rule 7 of the Rules of Court requiring the paragraphs to be
numbered. Further, it asserted that the assessment of the EWT and WTC had MCLE Certificate of Compliance will no longer result in the dismissal of the case and

prescribed because it went beyond the prescriptive period provided under Section expunction of the pleadings from the records. Nonetheless, such failure will subject

203 of the NIRC. La Flor also assailed that the Waivers should not be considered the lawyer to the prescribed fine and/or disciplinary action.

because they were neither offered in evidence nor complied with the requirements On the other hand, even La Flor recognizes that Section 2, Rule 7 of the Rules of Court

under RMO No. 20-90. does not provide for any punishment for failure to number the paragraphs in a

In its Reply[14] dated February 18, 2015, the CIR brushed aside the allegations of pleading. In short, the perceived procedural irregularities in the petition for review

procedural infirmities of its petition for review. It elucidated that failure to indicate on certiorari do not justify its outright dismissal. Procedural rules are in place to

the date of issue of the MCLE compliance is no longer a ground for dismissal and that facilitate the adjudication of cases and avoid delay in the resolution of rival

it had stated the MCLE certificate compliance numbers of its counsels. The CIR claims.[16] In addition, courts must strive to resolve cases on their merits, rather than

posited that the Rules of Court does not penalize the failure to number the summarily dismiss them on technicalities.[17] This is especially true when the alleged

paragraphs in pleadings. procedural rules violated do not provide any sanction at all or when the transgression

The Court's Ruling thereof does not result in a dismissal of the action.

Other than challenging the merits of the CIR's petition, La Flor believes that the Nevertheless, the Court finds no reason to reverse the CTA in invalidating the

former's petition for review oncertiorari should be dismissed outright on procedural assessments against La Flor.

grounds. It points out that failure to include the date of issue of the MCLE
Withholding taxes are internal
compliance number of a counsel in a pleading is a ground for dismissal. Further, La revenue taxes covered by Section 203
Flor highlights that the paragraphs in the CIR's petition for review on certiorari were of the NIRC.

not numbered.
Section 203 of the NIRC provides for the ordinary prescriptive period for the
In People v. Arrojado,[15] the Court had already clarified that failure to indicate the
assessment and collection of taxes, to wit:
number and date of issue of the counsel's MCLE compliance will no longer result in

the dismissal of the case, to wit:

SEC. 203. Period of Limitation Upon Assessment and Collection. — Except as provided in
In any event, to avoid inordinate delays in the disposition of cases brought about by a
Section 222, internal revenue taxes shall be assessed within three (3) years after the
counsel's failure to indicate in his or her pleadings the number and date of issue of his
last day prescribed by law for the filing of the return, and no proceeding in court
or her MCLE Certificate of Compliance, this Court issued an En Banc Resolution,
without assessment for the collection of such taxes shall be begun after the expiration
dated January 14, 2014 which amended B.M. No. 1922 by repealing the phrase
of such period: Provided, That in case where a return is filed beyond the period
"Failure to disclose the required information would cause the dismissal of the case
prescribed by law, the three (3)-year period shall be counted from the day the return
and the expunction of the pleadings from the records" and replacing it with "Failure
was filed. For purposes of this Section, a return filed before the last day prescribed by
to disclose the required information would subject the counsel to appropriate penalty
law for the filing thereof shall be considered as filed on such last day. (Emphasis
and disciplinary action." Thus, under the amendatory Resolution, the failure of a
supplied)
lawyer to indicate in his or her pleadings the number and date of issue of his or her
On the other hand, Section 222(a)[18] of the NIRC provides for instances where the
ordinary prescriptive period of three years for the assessment and collection of taxes
is extended to 10 years, i.e., false return, fraudulent returns, or failure to file a return.
In short, the relevant provisions in the NIRC concerning the prescriptive period for
the assessment of internal revenue taxes provide for an ordinary and extraordinary
period for assessment.
The CIR, however, forwards a novel theory that Section 203 is inapplicable in the
present assessment of EWT and WTC deficiency against La Flor. It argues that
withholding taxes are not contemplated under the said provision considering that
they are not internal revenue taxes but are penalties imposed on the withholding
agent should it fail to remit the proper amount of tax withheld.
In Chamber of Real Estate and Builders' Associations, Inc. v. Hon. Executive Secretary
Romulo,[19] the Court had succinctly explained the withholding tax system observed in
our jurisdiction, to wit:
We have long recognized that the method of withholding tax at source is a procedure
of collecting income tax which is sanctioned by our tax laws. The withholding tax
system was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the
collection of income tax which can otherwise be lost or substantially reduced through
failure to file the corresponding returns and third, to improve the government's cash
flow. This results in administrative savings, prompt and efficient collection of taxes,
prevention of delinquencies and reduction of governmental effort to collect taxes
through more complicated means and remedies.
Under the existing withholding tax system, the withholding agent retains a portion of
the amount received by the income earner. In turn, the said amount is credited to the
total income tax payable in transactions covered by the EWT. On the other hand, in
cases of income payments subject to WTC and Final Withholding Tax, the amount
withheld is already the entire tax to be paid for the particular source of income. Thus,
it can readily be seen that the payee is the taxpayer, the person on whom the tax is
imposed, while the payor, a separate entity, acts as the government's agent for the
collection of the tax in order to ensure its payment.[20]
As a consequence of the withholding tax system, two distinct liabilities arise — one
for the income earner/payee and another for the withholding agent. In Rizal
Commercial Banking Corporation v. Commissioner of Internal Revenue,[21] the Court
elaborated:
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, 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."
Based on the foregoing, the liability of the withholding agent is independent from
that of the taxpayer. 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 In Philippine Guaranty Co. v. The Commissioner of Internal Revenue and the Court of Tax

same to the government. The liability for the tax, however, remains with the taxpayer Appeals, the Court quoted with approval the following regulation of the BIR on the

because the gain was realized and received by him. (Citations omitted) responsibilities of withholding agents:

In case of doubt, a withholding agent may always protect himself by withholding the
It is true that withholding tax is a method of collecting tax in advance [22] and that a tax due, and promptly causing a query to be addressed to the Commissioner of
withholding tax on income necessarily implies that the amount of tax withheld comes Internal Revenue for the determination whether or not the income paid to an
from the income earned by the taxpayer/payee.[23]Nonetheless, the Court does not individual is not subject to withholding. In case the Commissioner of Internal
agree with the CIR that withholding tax assessments are merely an imposition of a Revenue decides that the income paid to an individual is not subject to withholding,
penalty on the withholding agent, and thus, outside the coverage of Section 203 of the the withholding agent may thereupon remit the amount of tax withheld. (2nd par.,
NIRC. Sec. 200, Income Tax Regulations).
The CIR cites National Development Company v. Commissioner of Internal Revenue[24] as

basis that withholding taxes are only penalties imposed on the withholding agent, to "Strict observance of said steps is required of a withholding agent before he could be

wit: released from liability," so said Justice Jose P. Bengson, who wrote the decision.

The petitioner also forgets that it is not the NDC that is being taxed. The tax was due "Generally, the law frowns upon exemption from taxation; hence, an exempting

on the interests earned by the Japanese shipbuilders. It was the income of these provision should be construed strictissimi juris."

companies and not the Republic of the Philippines that was subject to the tax the The petitioner was remiss in the discharge of its obligation as the withholding agent

NDC did not withhold. of the government and so should be held liable for its omission.

In effect, therefore, the imposition of the deficiency taxes on the NDC is a penalty for A careful analysis of the above-quoted decision, however, reveals that the Court did

its failure to withhold the same from the Japanese shipbuilders. Such liability is not equate withholding tax assessments to the imposition of civil penalties imposed

imposed by Section 53(c) of the Tax Code, thus: on tax deficiencies. The word "penalty" was used to underscore the dynamics in the

Section 53(c). Return and Payment. — Every person required to deduct and withhold withholding tax system that it is the income of the payee being subjected to tax and

any tax under this section shall make return thereof, in duplicate, on or before the not of the withholding agent. It was never meant to mean that withholding taxes do

fifteenth day of April of each year, and, on or before the time fixed by law for the not fall within the definition of internal revenue taxes, especially considering that

payment of the tax, shall pay the amount withheld to the officer of the Government of income taxes are the ones withheld by the withholding agent. Withholding taxes do

the Philippines authorized to receive it. Every such person is made personally liable not cease to become income taxes just because it is collected and paid by the
for such tax, and is indemnified against the claims and demands of any person for the withholding agent.

amount of any payments made in accordance with the provisions of this section. (As

amended by Section 9, R.A. No. 2343.) The liability of the withholding agent is distinct and separate from the tax liability of

the income earner. It is premised on its duty to withhold the taxes paid to the payee.
Should the withholding agent fail to deduct the required amount from its payment to
the payee, it is liable for deficiency taxes and applicable penalties. InCommissioner of
Internal Revenue v. Procter & Gamble Philippine Manufacturing Corporation [25] the Court
explained:
It thus becomes important to note that under Section 53 (c) of the NIRC, the
withholding agent who is "required to deduct and withhold any tax" is made
"personally liable for such tax" and indeed is indemnified against any claims and
demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of the
NIRC. The withholding agent, P&G-Phil., is directly and independently liable for
the correct amount of the tax that should be withheld from the dividend
remittances. The withholding agent is, moreover, subject to and liable for
deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been
withheld under law.
A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote
legal obligation or duty to pay a tax. It is very difficult, indeed conceptually
impossible, to consider a person who is statutorily made "liable for tax" as not "subject
to tax." By any reasonable standard, such a person should be regarded as a party in
interest, or as a person having sufficient legal interest, to bring a suit for refund of
taxes he believes were illegally collected from him. (Emphasis supplied)
Thus, withholding tax assessments such as EWT and WTC clearly contemplate
deficiency internal revenue taxes. Their aim is to collect unpaid income taxes and not
merely to impose a penalty on the withholding agent for its failure to comply with its
statutory duty. Further, a holistic reading of the Tax Code reveals that the CIR's
interpretation of Section 203 is erroneous. Provisions of the NIRC itself recognize that
the tax assessment for withholding tax deficiency is different and independent from
possible penalties that may be imposed for the failure of withholding agents to
withhold and remit taxes. For one, Title X, Chapter I of the NIRC provides for
additions to the tax or deficiency tax and is applicable to all taxes, fees and charges
under the Tax Code.
In addition, Section 247(b) of the NIRC provides:
SEC. 247. General Provisions. —
xxxx
(b) If the withholding agent is the Government or any of its agencies, political
subdivisions or instrumentalities, or a government-owned or controlled corporation
the employee thereof responsible for the withholding and remittance of the tax shall
be personally liable for the additions to the tax prescribed herein.
On the other hand, Section 251 of the Tax Code reads:
SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. — Any person
required to withhold, account for and remit any tax imposed by this Code or who
willfully fails to withhold such tax, or account for and remit such tax, or aids or abets
in any manner to evade any such tax or the payment thereof, shall, in addition to
other penalties provided for under this Chapter, be liable upon conviction to a
penalty equal to the total amount of the tax not withheld, or not accounted for and
remitted.
Based on the above-cited provisions, it is clear to see that the "penalties" are amounts
collected on top of the deficiency tax assessments including deficiency withholding
tax assessments. Thus, it was wrong for the CIR to restrict the EWT and WTC
assessments against La Floras only for the purpose of imposing penalties and not for
the collection of internal revenue taxes.
The CIR further argues that even if Section 203 of the NIRC was applicable, the
assessments against La Flor had yet to prescribe. It points out that La Flor had
executed three Waivers to extend the statutory prescriptive period. The CIR insists
that the Waivers should have been considered even if they were not offered in
evidence because the CTA is not strictly governed by technical rules of evidence. It
adds that the requirements under RMO No. 20-90 are not mandatory.
In Commissioner of Internal Revenue v. Systems Technology Institute, Inc.,[26] the Court
had ruled that waivers extending the prescriptive period of tax assessments must be
compliant with RMO No. 20-90 and must indicate the nature and amount of the tax
due, to wit:
These requirements are mandatory and must strictly be followed. To be sure, in a
number of cases, this Court did not hesitate to strike down waivers which failed to
strictly comply with the provisions of RMO 20-90 and RDAO 05-01.
xxxx
The Court also invalidated the waivers executed by the taxpayer in the case
of Commissioner of Internal Revenue v. Standard Chartered Bank, because: (1) they were
signed by Assistant Commissioner-Large Taxpayers Service and not by the CIR; (2)
the date of acceptance was not shown; (3) they did not specify the kind and amount
of the tax due; and (4) the waivers speak of a request for extension of time within
which to present additional documents and not for reinvestigation and/or
reconsideration of the pending internal revenue case as required under RMO No. 20-
90.
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the Court
cannot but agree with the CTA's finding that the waivers subject of this case suffer
from the following defects:
xxxx
3. Similar to Standard Chartered Bank, the waivers in this case did not specify the kind
of tax and the amount of tax due. It is established that a waiver of the statute of
limitations is a bilateral agreement between the taxpayer and the BIR to extend the
period to assess or collect deficiency taxes on a certain date. Logically, there can be
no agreement if the kind and amount of the taxes to be assessed or collected were
not indicated. Hence, specific information in the waiver is necessary for its validity.
(Emphasis supplied)
In the present case, the September 3, 2008, February 16, 2009 and December 2, 2009
Waivers failed to indicate the specific tax involved and the exact amount of the tax to
be assessed or collected. As above-mentioned, these details are material as there can
be no true and valid agreement between the taxpayer and the CIR absent these
information. Clearly, the Waivers did not effectively extend the prescriptive period
under Section 203 on account of their invalidity. The issue on whether the CTA was
correct in not admitting them as evidence becomes immaterial since even if they were
properly offered or considered by the CTA, the same conclusion would be reached —
the assessments had prescribed as there was no valid waiver.
WHEREFORE, the petition is DENIED. The September 30, 2013 Decision and the
February 10, 2014 Resolution of the Court of Tax Appeals En Banc in CTA EB No. 951
are AFFIRMED.
SO ORDERED.
 G.R. No. 227544. November 22, 2017.* upon the Commissioner of Internal Revenue and the taxpayer’s written agreement,
executed before the expiration of the three (3)-year period.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.TRANSITIONS Same; Same; Preliminary Assessment Notice; The Preliminary Assessment Notice
OPTICAL PHILIPPINES, INC., respondent. (PAN) is a part of due process. It gives both the taxpayer and the Commissioner of Internal
Revenue (CIR) the opportunity to settle the case at the earliest possible time without the need
Taxation; Tax Assessment; The period to assess and collect taxes may be extended upon
for the issuance of a Final Assessment Notice (FAN).—The PAN is a part of due process.
the Commissioner of Internal Revenue (CIR) and the taxpayer’s written agreement, executed
It gives both the taxpayer and the Commissioner of Internal Revenue the opportunity
before the expiration of the three (3)-year period.—As a general rule, petitioner has three
to settle the case at the earliest possible time without the need for the issuance of a
(3) years to assess taxpayers from the filing of the return. Section 203 of the National
FAN. On the other hand, a FAN contains not only a computation of tax liabilities but
Internal Revenue Code provides: Section 203. Period of Limitation Upon Assessment and
also a demand for payment within a prescribed period. As soon as it is served, an
Collection.—Except as provided in Section 222, internal revenue taxes shall be
obligation arises on the part of the taxpayer concerned to pay the amount assessed
assessed within three (3) years after the last day prescribed by law for the filing of the
and demanded. It also signals the time when penalties and interests begin to accrue
return, and no proceeding in court without assessment for the collection of such taxes
against the taxpayer. Thus, the National Internal Revenue Code imposes a 25%
shall be begun after the expiration of such period: Provided, That in a case where a
penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax
return is filed beyond the period prescribed by law, the three (3)-year period shall be
within the time prescribed for its payment in the notice of assessment. Likewise, an
counted from the day the return was filed. For purposes of this Section, a return filed
interest of 20% per annum, or such higher rate as may be prescribed by rules and
before the last day prescribed by law for the filing thereof shall be considered as filed
regulations, is to be collected from the date prescribed for payment until the amount
on such last day. An exception to the rule of prescription is found in Section 222(b)
is fully paid. Failure to file an administrative protest within 30 days from receipt of
and (d) of this Code, viz.: Section 222. Exceptions as to Period of Limitation of Assessment
the FAN will render the assessment final, executory, and demandable.
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 PETITION for review on certiorari of the decision and resolution of the Court of Tax
have agreed in writing to its assessment after such time, the tax may be assessed Appeals En Banc.
within the The facts are stated in the opinion of the Court.

515 516
VOL. 846, NOVEMBER 22, 2017 515 516 SUPREME COURT REPORTS
Commissioner of Internal Revenue ANNOTATED
vs.Transitions Optical Philippines, Inc. Commissioner of Internal Revenue
period agreed upon. The period so agreed upon may be extended by vs.Transitions Optical Philippines, Inc.
subsequent written agreement made before the expiration of the period previously
agreed upon. . . . . (d) Any internal revenue tax, which has been assessed within the Office of the Solicitor General for petitioner.
period agreed upon as provided in paragraph (b) hereinabove, may be collected by Esquivias & Arbues Law Firm for respondent.
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
LEONEN, J.:
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
 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 C.T.A. E.B. No. 1251. The Court of Tax Appeals En Banc affirmed its First
Division’s September 1, 2014 Decision,4 cancelling the
517
VOL. 846, NOVEMBER 22, 2017 517
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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).6In 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 Internal 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
518
518 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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 P19,701,849.68.11
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
P19,701,849.68 for taxable year 2004, broken down as follows:
On March 16, 2012, Transitions Optical filed a Petition for Review before the
Court of Tax Appeals.14
519
VOL. 846, NOVEMBER 22, 2017 519
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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, 2008 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 with the orders of the Bureau of Internal Revenue to submit documents for audit and
however to present adequate supporting evidence to prove that it issued the examination.24
FAN and the FLD within the extended period agreed upon in the 2nd Waiver, Furthermore, petitioner argues that the assessment required to be issued within
the subject assessment must be cancelled for being issued beyond the the three (3)-year period provided in Sections 203 and 222 of the National Internal
prescriptive period provided by law to assess. Revenue Code refer to petitioner’s actual issuance of the notice of as-
WHEREFORE, in light of the foregoing considerations, the instant 521
Petition for Review is hereby GRANTED. Accordingly, the Final Assessment VOL. 846, NOVEMBER 22, 2017 521
Notice, Formal Letter of Demand and Final Decision on Disputed Assessment Commissioner of Internal Revenue
finding petitioner Transitions Optical Philippines, Inc. liable for deficiency vs.Transitions Optical Philippines, Inc.
income tax, deficiency expanded withholding tax, deficiency value-added tax sessment to the taxpayer or what is usually known as PAN, and not the FAN issued
and deficiency final tax for taxable year 2004 in the total amount of in case the taxpayer files a protest.25
P19,701,849.68 are herebyCANCELLED and SET ASIDE. On the other hand, respondent contends that the Court of Tax Appeals properly
SO ORDERED.17(Emphasis in the original) 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
520
waiver of this period must be strictly scrutinized in light of the requirements of the
520 SUPREME COURT REPORTS
laws and rules.26Respondent posits that the requirements for valid waivers are not
ANNOTATED
mere technical rules of procedure that can be set aside.27
Commissioner of Internal Revenue
Respondent further asserts that it is not estopped from questioning the validity of
vs.Transitions Optical Philippines, Inc.
the waivers as it raised its objections at the earliest opportunity.28 Besides, the duty to
The Commissioner of Internal Revenue filed a Motion for Reconsideration, which
ensure compliance with the requirements of RMO No. 20-90 and RDAO No. 05-01,
was denied by the First Division in its Resolution18 dated November 7, 2014.
including proper authorization of the taxpayer’s representative, fell primarily on
The Court of Tax AppealsEn Banc affirmed the First Division’s Decision19 and
petitioner and her revenue officers. Thus, petitioner came to court with unclean
subsequently denied the Commissioner of Internal Revenue’s Motion for
hands and cannot be permitted to invoke the doctrine of estoppel. 29 Respondent
Reconsideration.20
insists that there was no clear showing that the signatories in the waivers were duly
Hence, this Petition was filed before this Court. Transitions Optical filed its
sanctioned to act on its behalf.30
Comment.21
Even assuming that the waivers were valid, respondent argues that the
Petitioner contends that “[t]he two Waivers executed by the parties on October 9,
assessment would still be void as the FAN was served only on December 4, 2008,
2007 and June 2, 2008 substantially complied with the requirements of Sections 203
beyond the extended period of November 30, 2008.31Contrary to petitioner’s stance,
and 222 of the [National Internal Revenue Code].”22She adds that technical rules of
respondent counters that the assessment required to be served within the three (3)-
procedure of administrative bodies, such as those provided in Revenue
year prescriptive period is the FAN and
Memorandum Order (RMO) No. 20-90 issued on April 4, 1990 and Revenue
522
Delegation Authority Order (RDAO) No. 05-01 issued on August 2, 2001, must be
522 SUPREME COURT REPORTS
liberally applied to promote justice.23 At any rate, petitioner maintains that ANNOTATED
respondent is estopped from questioning the validity of the waivers since their Commissioner of Internal Revenue
execution was caused by the delay occasioned by respondent’s own failure to comply vs.Transitions Optical Philippines, Inc.
FLD, not just the PAN.32According to respondent, “it is the FAN and FLD that
formally notif[y] the taxpayer, and categorically [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.
I period. The period so agreed upon may be extended by subsequent
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 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.
523
VOL. 846, NOVEMBER 22, 2017 523
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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
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.
524
524 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
The Court of Tax Appeals, both its First Division andEn Banc, declared as
defective and void the two (2) Waivers of the Defense of Prescription for
noncompliance 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 pre-
525
VOL. 846, NOVEMBER 22, 2017 525
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
scription 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., Inc.),37 this Court recognized the doctrine of estoppel and
upheld the waivers when both the taxpayer and the Bureau of Internal Revenue
were in pari delicto. 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
526
526 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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 executedfive 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 noncompliance 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’ au-
527
VOL. 846, NOVEMBER 22, 2017 527
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
thority 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.
528
528 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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 supporting 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.
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.
529
VOL. 846, NOVEMBER 22, 2017 529
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
Considering the functions and effects of a PAN vis-à-visa 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 declare its inclusion in the computation of just compensation inasmuch as these were
Internal Revenue.49 It contains the proposed assessment, and the facts, law, rules, and not presented before the lower courts. (Republic vs. Mupas, 790 SCRA 217 [2016])
regulations or jurisprudence on which the proposed assessment is based.50 It does not It is settled that all presumptions are in favor of the correctness of tax
contain a demand for payment but usually requires the taxpayer to reply within 15 assessments. The good faith of the tax assessors and the validity of their actions are
days from receipt. Otherwise, the Commissioner of Internal Revenue will finalize an thus presumed. (Commissioner of Internal Revenue vs. Secretary of Justice, 808 SCRA 14
assessment and issue a FAN. [2016])
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 ——o0o——
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
530
530 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue
vs.Transitions Optical Philippines, Inc.
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. 54Failure
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 C.T.A. E.B. No. 1251
areAFFIRMED.
SO ORDERED.
Bersamin** (Acting Chairperson), Martires andGesmundo, JJ., concur.
Velasco, Jr., J., On Official Leave.

Petition denied, judgment and resolution affirmed.

Notes.—The tax assessments should first go through the appropriate tax

proceedings prescribed by law. The present case is neither the proper venue nor the
forum to determine the validity of these alleged pending tax assessments or to
G.R. No. 170257. September 7, 2011.*
RIZAL COMMERCIAL BANKING CORPORATION, petitioner, vs.COMMISSIONER
OF INTERNAL REVENUE, respondent.
Estoppel; 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.—
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.
Taxation; Withholding Tax System; 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; 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.—Based on the foregoing, the liability of the
withholding agent is independent from that of the taxpayer. 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
_______________
* THIRD DIVISION.
71
VOL. 657, SEPTEMBER 7, 7 Revenue.”
2011 1
Rizal Commercial Banking
Corporation vs. Commissioner of Internal
Revenue
for FCDU Onshore Tax by shifting the blame on the payor-borrower as the
withholding agent.
Same; Courts; Court of Tax Appeals (CTA); The Court of Tax Appeals (CTA), as a
specialized court dedicated exclusively to the study and resolution of tax problems, has
developed an expertise on the subject of taxation—its decision shall not be lightly set aside on
appeal, unless the Supreme 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.—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. 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. 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.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals.
The facts are stated in the opinion of the Court.
Lapuz-Ureta, Ramos, Arches, Cruz & Manlangit Law Offices for petitioner.
Office of the Solicitor General for respondent.
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 seeking to set aside the
July 27, 2005 Decision1and October
_______________
72
72 SUPREME COURT REPORTS
ANNOTATED
Rizal Commercial Banking Corporation
vs. Commissioner of Internal Revenue
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
The Facts
 Petitioner Rizal Commercial Banking Corporation (RCBC) is a corporation Receipts
engaged in general banking operations. It seasonably filed its Corporation Annual Tax
Income Tax Returns for Foreign Currency Deposit Unit for the calendar years 1994 1995 (ST- 13,697,083.68 12,428,696.21 2,819,745.5 28,945,525.41
and 1995.3 GRT-95- 2
On August 15, 1996, RCBC received Letter of Authority No. 133959 issued by 0201-2000)
then Commissioner of Internal Revenue (CIR)Liwayway Vinzons-Chato, authorizing
1994 (ST- 2,488,462.38 2,755,716.42 25,000.00 5,269,178.80
a special audit team to examine the books of accounts and other accounting records
GRT-94-
for all internal revenue taxes from January 1, 1994 to December 31, 1995. 4
0202-2000)
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 Deficiency
internal revenue taxes due for the years 1994 and 1995, effectively extending the Final
period of the Bureau of Internal Revenue (BIR) to assess up to December 31, 2000.5 Withhol-
Subsequently, on January 27, 2000, RCBC received a Formal Letter of Demand ding Tax
together with Assessment Notices from the BIR for the following deficiency tax 1995 (ST- 64,365,610.12 58,757,866.78 25,000.00 123,148,477.15
assessments:6 EWT-95-
_______________ 0203-2000)

73
1994 (ST- 53,058,075.25 59,047,096.34 25,000.00 112,130,171.59
VOL. 657, SEPTEMBER 7, 2011 7
EWT-94-
3
0204-2000)
Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue
Particulars Basic Tax Interest Compromi Total Deficiency
se Final
Penalties Tax on
FCDU
Deficiency
Onshore
Inco-
Income
me Tax
1995 (ST- 81,508,718.20 61,901,963,.52 25,000.00 143,435,681.72
1995 (ST- P252,150,988.0 P191,496,585.9 P 25,000.00 P443,672,573.9
OT-95-
INC-95- 1 6 7
0205-2000)
0199-2000)
1994 (ST- 34,429,503.10 33,052,322.98 25,000.00 67,506,826.08
1994 (ST- 216,478,397.90 207,819,261.99 25,000.00 424,322,659.89
OT-94-
INC-94-
0206-2000)
0200-2000)
Deficiency
Deficiency
Expanded
Gross
Withholdin
 g Tax it. Much later on November 20, 2000, it filed a petition for review before the CTA,
1995 (ST- 5,051,415.22 4,583,640.33 113,000.00 9,748,055.55 pursuant to Section 228 of the 1997 Tax Code.7
EWT-95- On December 6, 2000, RCBC received another Formal Letter of Demand with
0207-2000) Assessment Notices dated October 20, 2000, following the reinvestigation it
requested, which drastically reduced the original amount of deficiency taxes to the
1994 (ST- 4,482,740.35 4,067,626.31 78,200.00 8,628,566.66
following:8
EWT-94-
Particulars Basic Tax Interest Surcharge Total
0208-2000)
&/
Deficiency Compromise
Documenta
Deficiency
ry
Income Tax
Stamp Tax
1995 (ST- 351,900,539.39 315,804,946.26 250,000.00 667,955,485.65 1995 (INC- P374,348.45 P346,656.92 P721,005.37
DST1-95- 95-000003)
0209-2000)
1994 (INC- 1,392,366.28 1,568,605.52 2,960,971.80
1995 (ST- 367,207,105.29 331,535,844.68 300,000.00 699,042,949.97 94-000002)
DST2-95-
0210-2000) Deficiency
Gross
1994 (ST- 460,370,640.05 512,193,460.02 300,000.00 972,864,100.07 Receipts Tax
DST3-94-
0211-2000) 1995 (GRT- 2,000,926.96 3,322,589.63 P1,367,222.04 6,690,738.63
95-000004)
1994 (ST- 223,037,675.89 240,050,706.09 300,000.00 463,388,381.98
DST4-94- 1994 (GRT- 138,368.61 161,872.32 300,240.93
0212-2000) 94-000003)

TOTALS P2,130,226,954 P2,035,495,733 P4,335,945. P4,170,058,634 Deficiency

.83 .89 52 .49 Final
Withholding
74 Tax
74 SUPREME COURT REPORTS
ANNOTATED 1995 (FT-95- 362,203.47 351,287.75 713,491.22
Rizal Commercial Banking Corporation 000005)
vs. Commissioner of Internal Revenue
1994 (FT-94- 188,746.43 220,807.47 409,553.90
Disagreeing with the said deficiency tax assessment, RCBC filed a protest on
000004)
February 24, 2000 and later submitted the relevant documentary evidence to support
Particulars Basic Tax Interest Surcharge Total 1995 24,953,842.46 6,238,460.62 31,192,303.08
&/ (DST2-
Compromise 95-
000002)
Deficiency
Final Tax on 1994 905,064.74 226,266.18 1,131,330.92
FCDU (DST-
Onshore 94-
Income 000005)

1995 (OT-95- 81,508,718.20 79,052,291.08 160,561,009.28 1994 17,040,104.84 4,260,026.21 21,300,131.05

000006) (DST2-
94-
1994 (OT-94- 34,429,503.10 40,277,802.26 74,707,305.36 000001)
000005)
TOTAL P164,712,903.4 P126,155,645.3 P12,291,947.7 P303,160,496.5
Deficiency S 4 8 3 5
Expanded
Withholding On the same day, RCBC paid the following deficiency taxes as assessed by the
Tax BIR:9
Particulars 1994 1995 Total
1995 (EWT- 520,869.72 505,171.80 25,000.00 1,051,041.03
95-000004) Deficiency Income Tax P2,965,549.44 P 722,236.11 P3,687,785.55

1994 (EWT- 297,949.95 348,560.63 25,000.00 671,510.58 Deficiency Gross Receipts 300,695.84 6,701,893.17 7,002,589.01
94-000003) Tax

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

Documentary Withholding Tax
Stamp Tax
Deficiency Expanded 672,490.14 1,052,753.48 1,725,243.62
1995 (DST- 599,890.72 149,972.68 749,863.40 Withholding Tax
95-000006)
Deficiency Documentary 1,131,330.92 749,863.40 1,881,194.32
_______________ Stamp Tax
75
VOL. 657, SEPTEMBER 7, 2011 7 TOTALS P5,480,240.78 P9,941,428.18 P15,421,668.96
5
Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue
 RCBC, however, refused to pay the following assessments for deficiency onshore On December 15, 2004, the First Division of the Court of Tax Appeals (CTA-First
tax and documentary stamp tax which remained to be the subjects of its petition for Division) promulgated its Decision13 which partially granted the petition for review. It
review:10 considered as closed and terminated the assessments for deficiency income tax,
Particulars 1994 1995 Total deficiency gross receipts tax, deficiency final withholding tax, deficiency expanded
withholding tax, and deficiency documentary stamp tax (not an industry issue) for
Deficiency Final Tax on
1994 and 1995.14 It, however, upheld the assessment for deficiency final tax on FCDU
FCDU Onshore Income
onshore income and deficiency documentary stamp tax for 1994 and 1995 and

Basic P34,429,503.10 P81,508,718.20 P115,938,221.30 ordered RCBC to pay the following amounts plus 20% delinquency tax: 15
_______________
Interest 40,277,802.26 79,052,291.08 119,330,093.34 77
VOL. 657, SEPTEMBER 7, 2011 77
_______________
Rizal Commercial Banking Corporation vs. Commissioner of Internal
76
Revenue
76 SUPREME COURT REPORTS ANNOTATED
Particulars 1994 1995 Total
Rizal Commercial Banking Corporation vs. Commissioner of Internal
Revenue Deficiency
Sub Total P74,707,305.36 P160,561,009.28 P235,268,314.64 Final Tax on
FCDU
Deficiency
Onshore
Documentary
Income
Stamp Tax
Basic P22,356,324.43 P16,067,952.86 P115,938,
Basic P17,040,104.84 P 24,953,842.46 P 41,993,947.30
221.30

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

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

Sub Total P21,300,131.05 P 31,192,303.08 P 52,492,434.13

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

TOTALS P96,007,436.41 P191,753,312.36 P287,760,748.77

Deficiency
Documentary
RCBC argued that the waivers of the Statute of Limitations which it executed on
Stamp Tax
January 23, 1997 were not valid because the same were not signed or conformed to by
(Industry
the respondent CIR as required under Section 222(b) of the Tax Code. 11 As regards
Issue)
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 Basic P17,040,104.84 P24,953,842.46 P 41,993,947.30
law as the withholding agent, that was primarily liable for the remittance of the said
Surcharge 4,260,026.21 6,238,460.62 10,498,486.83
tax.12
 Sub Total 21,300,131.05 31,192,303.08 52,492,434.13 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
TOTALS P69,810,292.56 P62,843,969.13 P171,822,527.47
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.22Finally, in relation to the
Unsatisfied, RCBC filed its Motion for Reconsideration on January 21, 2005,
assessment of the deficiency documentary stamp tax on petitioner’s special savings
arguing that: (1) the CTA erred in its addition of the total amount of deficiency taxes
account, it held that petitioner’s special sav-
and the correct amount should only be P132,654,261.69 and not P171,822,527.47; (2)
79
the CTA erred in holding that RCBC was estopped from questioning the validity of
VOL. 657, SEPTEMBER 7, 2011 79
the waivers; (3) it was the payor-borrower as withholding tax agent, and not RCBC,
Rizal Commercial Banking Corporation
who was liable to pay the final tax on FCDU, and (4) RCBC’s special savings account
vs. Commissioner of Internal Revenue
was not subject to documentary stamp tax.16
ings account was a certificate of deposit and, as such, was subject to documentary
In its Resolution17 dated April 11, 2005, the CTA-First Division substantially
stamp tax.23
upheld its earlier ruling, except for its inadvertence in the addition of the total
Hence, this petition.
amount of deficiency taxes. As such, it modified its earlier decision and ordered
While awaiting the decision of this Court, RCBC filed its Manifestation dated July
RCBC to pay the amount of P132,654,261.69 plus 20% delinquency tax.18
22, 2009, informing the Court that this petition, relative to the DST deficiency
78
assessment, had been rendered moot and academic by its payment of the tax
78 SUPREME COURT REPORTS
ANNOTATED deficiencies on Documentary Stamp Tax(DST) on Special Savings Account (SSA) for

Rizal Commercial Banking Corporation taxable years 1994 and 1995 after the BIR approved its applications for tax

vs. Commissioner of Internal Revenue abatement.24

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.20RCBC could not assail the validity of the waivers after it had received
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 P80,161,827.56 plus 20% delinquency interest per annum. The
CIR prayed that RCBC be considered to have withdrawn its appeal with respect to
the CTA-En Bancruling 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
80
80 SUPREME COURT REPORTS
 ANNOTATED 6, 2000, upon receipt of the revised assessment, RCBC immediately made payment on
Rizal Commercial Banking Corporation the uncontested taxes. Thus, RCBC is estopped from questioning the validity of the
vs. Commissioner of Internal Revenue waivers. To hold otherwise and allow a party to gainsay its own act or deny rights
and which it had previously recognized would run counter to the principle of equity
Whether petitioner, as payee-bank, can be held liable for deficiency onshore tax, which this institution holds dear.31
which is mandated by law to be collected at source in the form of a final Liability for Deficiency
withholding tax.27 Onshore Withholding Tax
RCBC is convinced that it is the payor-borrower, as withholding agent, who is
The Court’s Ruling directly liable for the payment of onshore tax, citing Section 2.57(A) of Revenue
Regulations No. 2-98 which states:
Petitioner is estopped from
(A) Final Withholding Tax.—Under the final withholding tax system the amount of
questioning the validity of the waivers
income tax withheld by the withholding agent is constituted as a full and final
RCBC assails the validity of the waivers of the statute of limitations on the
payment of the income tax due from the payee on the said income. The liability for
ground that the said waivers were merely attested to by Sixto Esquivias, then
payment of the tax rests primarily on the payor as a withholding agent. Thus, in
Coordinator for the CIR, and that he failed to indicate acceptance or agreement of the
case of his failure to withhold the tax or in case of under withholding, the
CIR, as required under Section 223 (b) of the 1977 Tax Code. 28RCBC further argues
deficiency tax shall be collected from the payor/withholding agent. The payee is not
that the principle of estoppel cannot be applied against it because its payment of the
required to file an income tax return for the particular income. (Emphasis supplied)
other tax assessments does not signify a clear intention on its part to give up its right
The petitioner is mistaken.
to question the validity of the waivers.29
Before any further discussion, it should be pointed out that RCBC erred in citing
The Court disagrees.
the abovementioned Revenue Regulations No. 2-98 because the same governs
Under Article 1431 of the Civil Code, the doctrine of estoppel is anchored on the
collection at source on income paid only on or after January 1, 1998. The defi-
rule that “an admission or representation is rendered conclusive upon the person
82
making it, and cannot be denied or disproved as against the person relying thereon.”
82 SUPREME COURT REPORTS
A party is precluded from denying his own acts, admissions or representations to the
ANNOTATED
prejudice of the other party in order to prevent fraud and falsehood. 30
Rizal Commercial Banking Corporation
Estoppel is clearly applicable to the case at bench. RCBC, through its partial
vs. Commissioner of Internal Revenue
payment of the revised assessments issued within the extended period as provided
ciency withholding tax subject of this petition was supposed to have been withheld
for in the questioned waivers, impliedly admitted the validity of those waivers. Had
on income paid during the taxable years of 1994 and 1995. Hence, Revenue
81
Regulations No. 2-98 obviously does not apply in this case.
VOL. 657, SEPTEMBER 7, 2011 81
In Chamber of Real Estate and Builders’ Associations, Inc. v. The Executive
Rizal Commercial Banking Corporation
Secretary,32 the Court has explained that the purpose of the withholding tax system is
vs. Commissioner of Internal Revenue
three-fold: (1) to provide the taxpayer with a convenient way of paying his tax
petitioner truly believed that the waivers were invalid and that the assessments were
liability; (2) to ensure the collection of tax, and (3) to improve the government’s
issued beyond the prescriptive period, then it should not have paid the reduced
cashflow. Under the withholding tax system, the payor is the taxpayer upon whom
amount of taxes in the revised assessment. RCBC’s subsequent action effectively
the tax is imposed, while the withholding agent simply acts as an agent or a collector
belies its insistence that the waivers are invalid. The records show that on December
of the government to ensure the collection of taxes.33
 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 ofCommissioner 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:
83
VOL. 657, SEPTEMBER 7, 2011 83
Rizal Commercial Banking Corporation
vs. Commissioner of Internal Revenue
“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. 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:
84
84 SUPREME COURT REPORTS
ANNOTATED
Rizal Commercial Banking Corporation
vs. Commissioner of Internal Revenue
“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
85
VOL. 657, SEPTEMBER 7, 2011 85
Rizal Commercial Banking Corporation
vs. Commissioner of Internal Revenue
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.
Velasco, Jr. (Chairperson), Peralta, Abadand Villarama, Jr.,** JJ., concur.
Petition denied.
Notes.—When the law itself does not explicitly provide that a refund under RA
1435 may be based on higher rates which were nonexistent at the time of its
enactment, this Court cannot presume otherwise—a legislative lacuna cannot be filled
by judicial fiat. (Aras-Asan Timber Co., Inc. vs. Commissioner of Internal Revenue, 363
SCRA 332 [2001])
An estoppel may arise from the making of a promise even though without
consideration, if it was intended that the promise should be relied upon and in fact it
was relied upon,

86 SUPREME COURT REPORTS

ANNOTATED
Rizal Commercial Banking Corporation
vs. Commissioner of Internal Revenue
and if a refusal to enforce it would be virtually to sanction the perpetration of fraud
or would result in other injustice. (Terminal Facilities and Services Corporation vs.
Philippine Ports Authority, 378 SCRA 82 [2002])
——o0o——
 G.R. No. 212825. December 7, 2015.* officials and RDAO 01-05 which requires the presentation of a written and
notarized authority to the BIR.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. NEXT MOBILE, INC. Same; Same; Under Revenue Delegation Authority Order (RDAO) No. 05-01 it is the
(formerly Nextel Communications Phils., Inc.), respondent. duty of the authorized revenue official to ensure that the waiver is duly accomplished and
signed by the taxpayer or his authorized representative before affixing his signature to signify
Taxation; Assessments; Section 203 of the 1997 National Internal Revenue Code
acceptance of the same.—The BIR violated its own rules and was careless in performing
(NIRC) mandates the Bureau of Internal Revenue (BIR) to assess internal revenue taxes
its functions with respect to these Waivers. It is very clear that under RDAO 05-01 it is
within three (3) years from the last day prescribed by law for the filing of the tax return or the
the duty of the authorized revenue official to ensure that the waiver is duly
actual date of filing of such return, whichever comes later.—Section 203 of the 1997 NIRC
accomplished and signed by the taxpayer or his authorized representativebefore
mandates the BIR to assess internal revenue taxes within three years from the last day
affixing his signature to signify acceptance of the same. It also instructs that in case
prescribed by law for the filing of the tax return or the actual date of filing of such
the authority is delegated by the taxpayer to a representative, the concerned
return, whichever comes later. Hence, an assessment notice issued after the three-year
revenue official shall see to it that such delegation is in writing and duly notarized.
prescriptive period is not valid and effective. Exceptions to this rule are provided
Furthermore, it mandates thatthe waiver should not be accepted by the concerned
under Section 222 of the NIRC. Section 222(b) of the NIRC provides that the period to
BIR office and official unless duly notarized.
assess and collect taxes may only be extended upon a written agreement between the
Same; Same; The general rule is that when a waiver does not comply with the requisites
CIR and the taxpayer executed before the expiration of the three-year period. RMO
for its validity specified under Revenue Memorandum Order (RMO) No. 20-90 and Revenue
20-90 issued on April 4, 1990 and RDAO 05-01 issued on August 2, 2001 provide the
Delegation Authority Order (RDAO) No. 01-05, it is invalid and ineffective to extend the
procedure for the proper execution of a waiver.
prescriptive period to assess taxes.—The general rule is that when a waiver does not
Same; Same; Revenue Memorandum Order (RMO) No. 20-90 states that in case of a
comply with the requisites for its validity specified under RMO 20-90 and RDAO 01-
corporate taxpayer, the waiver must be signed by its responsible officials and Revenue
05, it is invalid and ineffective to extend the prescriptive period to assess taxes.
Delegation Authority Order (RDAO) No. 01-05 which requires the presentation of a written
However, due to its peculiar circumstances, We shall treat this case as an exception to
and notarized authority to the Bureau of Internal Revenue (BIR).—Here, respondent,
this rule and find the Waivers valid for the reasons discussed below.
through Sarmiento, executed fiveWaivers in favor of petitioner. However, her
Same; Same; Although the parties are in pari delicto, the Court may interfere and grant
authority to sign these Waivers was not presented upon their submission to the BIR.
relief at the suit of one (1) of them, where public policy requires its intervention, even though
In fact, later on, her authority to sign was questioned by respondent itself, the very
the result may be that a benefit will be derived by one party who is in equal guilt with the
same entity that caused her to sign such in the first place. Thus, it is clear that
other.—The parties in this case are in pari delicto or “in equal fault.” In pari
respondent violated RMO 20-90 which states that in case of a corporate taxpayer, the
delictoconnotes that the two parties to a controversy are equally culpable or guilty and
waiver must be signed by its responsible
they shall have no action against each other. However, although the parties are in pari
delicto, the Court may interfere and grant relief at the suit of one of them, where
344
344 SUPREME COURT REPORTS
345
ANNOTATED
VOL. 776, DECEMBER 7, 2015 345
Commissioner of Internal Revenue vs.
Commissioner of Internal Revenue vs.
Next Mobile, Inc. (formerly Nextel
Next Mobile, Inc. (formerly Nextel
Communications Phils., Inc.)
Communications Phils., Inc.)
 public policy requires its intervention, even though the result may be that a
benefit will be derived by one party who is in equal guilt with the other.
Same; Taxes are the nation’s lifeblood through which government agencies continue to
operate and which the State discharges its functions for the welfare of its constituents.—To
uphold the validity of the Waivers would be consistent with the public policy
embodied in the principle that taxes are the lifeblood of the government, and their
prompt and certain availability is an imperious need. Taxes are the nation’s lifeblood
through which government agencies continue to operate and which the State
discharges its functions for the welfare of its constituents. As between the parties, it
would be more equitable if petitioner’s lapses were allowed to pass and consequently
uphold the Waivers in order to support this principle and public policy.
Same; Assessments; The Bureau of Internal Revenue’s (BIR’s) right to assess and
collect taxes should not be jeopardized merely because of the mistakes and lapses of its officers,
especially in cases like this where the taxpayer is obviously in bad faith.—It is true that
petitioner was also at fault here because it was careless in complying with the
requirements of RMO 20-90 and RDAO 01-05. Nevertheless, petitioner’s negligence
may be addressed by enforcing the provisions imposing administrative liabilities
upon the officers responsible for these errors. The BIR’s right to assess and collect
taxes should not be jeopardized merely because of the mistakes and lapses of its
officers, especially in cases like this where the taxpayer is obviously in bad faith.
PETITION for review on certiorari of a decision of the Court of Tax AppealsEn Banc.
The facts are stated in the opinion of the Court.
Office of the Solicitor General for petitioner.
Angara, Abello, Concepcion, Regala & Cruzfor respondent.
346
346 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Next Mobile, Inc. (formerly Nextel
Communications Phils., Inc.)
VELASCO, JR., J.:
This is a Petition for Review under Rule 45 of the Rules of Court seeking to
reverse and set aside the Decision of the Court of Tax Appeals En Banc affirming the
earlier decision of its First Division in CTA Case No. 7965, cancelling and
withdrawing petitioner’s formal letter of demand and assessment notices to
respondent for having been issued beyond the prescriptive period provided by law.
The Facts
On April 15, 2002, respondent filed with the Bureau of Internal Revenue (BIR) its
Annual Income Tax Return (ITR) for taxable year ending December 31, 2001.
Respondent also filed its Monthly Remittance Returns of Final Income Taxes
Withheld (BIR Form No. 1601-F), its Monthly Remittance Returns of Expanded
Withholding Tax (BIR Form No. 1501-E) and its Monthly Remittance Return of
Income Taxes Withheld on Compensation (BIR Form No. 1601-C) for year ending
December 31, 2001.
On September 25, 2003, respondent received a copy of the Letter of Authority
dated September 8, 2003 signed by Regional Director Nestor S. Valeroso authorizing
Revenue Officer Nenita L. Crespo of Revenue District Office 43 to examine
respondent’s books of accounts and other accounting records for income and
withholding taxes for the period covering January 1, 2001 to December 31, 2001.
Ma. Lida Sarmiento (Sarmiento), respondent’s Director of Finance, subsequently
executed several waivers of the statute of limitations to extend the prescriptive period
of assessment for taxes due in taxable year ending December 31, 2001 (Waivers), the
details of which are summarized as follows:
347
VOL. 776, DECEMBER 7, 2015 347
Commissioner of Internal Revenue vs.
Next Mobile, Inc. (formerly Nextel
Communications Phils., Inc.)
On September 26, 2005, respondent received from the BIR a Preliminary
Assessment Notice dated September 16, 2005 to which it filed a Reply.
On October 25, 2005, respondent received a Formal Letter of Demand (FLD) and
Assessment Notices/Demand No. 43-734 both dated October 17, 2005 from the BIR,
demanding payment of deficiency income tax, final withholding tax (FWT),
expanded withholding tax (EWT), increments for late remittance of taxes withheld, Furthermore, the CTA First Division held that the Waivers executed by Sarmiento
and compromise penalty for failure to file returns/late filing/late remittance of taxes did not validly extend the three-year prescriptive period to assess respondent for
withheld, in the total amount of P313,339,610.42 for the taxable year ending deficiency income tax, FWT, EWT, increments for late remittance of tax withheld and
December 31, 2001. compromise penalty, for, as found, the Waivers were not properly executed
On November 23, 2005, respondent filed its protest against the FLD and according to the procedure in Revenue
requested the reinvestigation of the assessments. On July 28, 2009, respondent 349
received a letter from the BIR denying its protest. Thus, on August 27, 2009, VOL. 776, DECEMBER 7, 2015 349
respondent filed a Petition for Review before the CTA docketed as CTA Case No. Commissioner of Internal Revenue vs.
7965. Next Mobile, Inc. (formerly Nextel
348 Communications Phils., Inc.)
348 SUPREME COURT REPORTS Memorandum Order No. 20-90 (RMO 20-90)1 and Revenue Delegation Authority
ANNOTATED Order No. 05-01 (RDAO 05-01).2
Commissioner of Internal Revenue vs. The tax court declared that, in this case, the Waivers have no binding effect on
Next Mobile, Inc. (formerly Nextel respondent for the following reasons:
Communications Phils., Inc.) First, Sarmiento signed the Waivers without any notarized written authority from
Ruling of the CTA Former First Division respondent’s Board of Directors. Petitioner’s witness explicitly admitted that he did
not require Sarmiento to present any notarized written authority from the Board of
On December 11, 2012, the former First Division of the CTA (CTA First Division) Directors of respondent, authorizing her to sign the Waivers. Petitioner’s witness also
rendered a Decision granting respondent’s Petition for Review and declared the FLD confirmed that Revenue District Officer Raul Vicente L. Recto (RDO Recto) accepted
dated October 17, 2005 and Assessment Notices/Demand No. 43-734 dated October the Waivers as submitted.
17, 2005 cancelled and withdrawn for being issued beyond the three-year prescriptive 350
period provided by law. 350 SUPREME COURT REPORTS
It was held that based on the date of filing of respondent’s Annual ITR as well as ANNOTATED
the dates of filing of its monthly BIR Form Nos. 1601-F, 1601-E and 1601-C, it is clear Commissioner of Internal Revenue vs.
that the adverted FLD and the Final Assessment Notices both dated October 17, 2005 Next Mobile, Inc. (formerly Nextel
were issued beyond the three-year prescriptive period provided under Section 203 of Communications Phils., Inc.)
the 1997 National Internal Revenue Code (NIRC), as amended. Second, even assuming that Sarmiento had the necessary board authority, the
The tax court also rejected petitioner’s claim that this case falls under the Waivers are still invalid as the respective dates of their acceptance by RDO Recto are
exception as to the three-year prescriptive period for assessment and that the 10-year not indicated therein.
prescriptive period should apply on the ground of filing a false or fraudulent return. Third, records of this case reveal additional irregularities in the subject Waivers:
Under Section 222(a) of the 1997 NIRC, as amended, in case a taxpayer filed a false or (1) The fact of receipt by respondent of its copy of the Second Waiver was
fraudulent return, the Commissioner of Internal Revenue (CIR) may assess a taxpayer not indicated on the face of the original Second Waiver;
for deficiency tax within ten (10) years after the discovery of the falsity or the fraud. (2) Respondent received its copy of the First and the Third Waivers on the
The tax court explained that petitioner failed to substantiate its allegation by clear same day, May 23, 2005; and
and convincing proof that respondent filed a false or fraudulent return. (3) Respondent received its copy of the Fourth and the Fifth Waivers on
the same day, May 13, 2005.
 352 SUPREME COURT REPORTS
Finally, the CTA held that estoppel does not apply in questioning the validity of a ANNOTATED
waiver of the statute of limitations. It stated that the BIR cannot hide behind the Commissioner of Internal Revenue vs.
doctrine of estoppel to cover its failure to comply with RMO 20-90 and RDAO 05-01. Next Mobile, Inc. (formerly Nextel
Petitioner’s Motion for Reconsideration was denied on March 14, 2013. Communications Phils., Inc.)
Petitioner filed a Petition for Review before the CTAEn Banc. Section 222(b) of the NIRC provides that the period to assess and collect taxes
On May 28, 2014, the CTA En Banc rendered a Decision denying the Petition for may only be extended upon a written agreement between the CIR and the taxpayer
Review and affirmed that of the former CTA First Division. executed before the expiration of the three-year period. RMO 20-90 issued on April 4,
It held that the five (5) Waivers of the statute of limitations were not valid and 1990 and RDAO 05-015 issued on August 2, 2001
binding; thus, the three-year period of limitation within which to assess deficiency 353
taxes was not extended. It also held that the records belie the allegation that VOL. 776, DECEMBER 7, 2015 353
respondent filed false and fraudulent tax returns; thus, the extension of the period of Commissioner of Internal Revenue vs.
limitation from three (3) to ten (10) years does not apply. Next Mobile, Inc. (formerly Nextel
Communications Phils., Inc.)
_______________
351
Designated Revenue Official
VOL. 776, DECEMBER 7, 2015 351
1. Assistant Commissioner (ACIR) — For tax fraud and policy Enforcement
Commissioner of Internal Revenue vs.
Next Mobile, Inc. (formerly Nextel Service cases

Communications Phils., Inc.) 2. ACIR, Large Taxpayers Service — For large taxpayers cases other than those
cases falling under Subsection B hereof
Issue
3. ACIR, Legal Service — For cases pending verification and awaiting resolution

Petitioner has filed the instant petition on the issue of whether or not the CIR’s of certain legal issues prior to prescription and for issuance/compliance of Subpoena

right to assess respondent’s deficiency taxes had already prescribed. Duces Tecum
4. ACIR, Assessment Service (AS) — For cases which are pending in or subject
to review or approval by the ACIR, AS
Our Ruling
5. ACIR, Collection Service — For cases pending action in the Collection Service

The petition has merit. B. For cases in the Large Taxpayers District Office (LTDO)

Section 2033 of the 1997 NIRC mandates the BIR to assess internal revenue taxes The Chief of the LTDO shall sign and accept the waiver for cases pending

within three years from the last day prescribed by law for the filing of the tax return investigation/action in his possession.

or the actual date of filing of such return, whichever comes later. Hence, an C. For Regional cases

assessment notice issued after the three-year prescriptive period is not valid and Designated Revenue Official

effective. Exceptions to this rule are provided under Section 222 4of the NIRC. 1. Revenue District Officer — Cases pending investigation/
verification/reinvestigation in the Revenue District Offices
2. Regional Director — Cases pending in the Divisions in the Regional Office,

352 including cases pending approval by the Regional Director.

 In order to prevent undue delay in the execution and acceptance of the waiver, 1. The waiver must be in the form identified hereof. This form may be
the assistant heads of the concerned offices are likewise authorized to sign the same reproduced by the Office concerned but there should be no deviation from
under meritorious circumstances in the absence of the above mentioned officials. such form. The phrase “but not after ______ 19 ___” should be filled up.
The authorized revenue official shall ensure that the waiver is duly accomplished This indicates the expiry date of the period agreed upon to assess/collect
and signed by the taxpayer or his authorized representative before affixing his the tax after the regular three-year period of prescription. The period
signature to signify acceptance of the same. In case the authority is delegated by the agreed upon shall constitute the time within which to effect the
taxpayer to a representative, the concerned revenue official shall see to it that such assessment/collection of the tax in addition to the ordinary prescriptive
delegation is in writing and duly notarized. The “WAIVER” should not be accepted period.
by the concerned BIR office and official unless duly notarized. 2. The waiver shall be signed by the taxpayer himself or his duly
II. Repealing Clause authorized representative. In the case of a cor-
All other issuances and/or portions thereof inconsistent herewith are hereby
355
repealed and amended accordingly.
VOL. 776, DECEMBER 7, 2015 355
III. Effectivity
Commissioner of Internal Revenue vs.
This revenue delegation authority order shall take effect immediately upon
Next Mobile, Inc. (formerly Nextel
approval.
Communications Phils., Inc.)
354 poration, the waiver must be signed by any of its responsible officials.
354 SUPREME COURT REPORTS Soon after the waiver is signed by the taxpayer, the Commissioner of
ANNOTATED Internal Revenue or the revenue official authorized by him, as hereinafter
Commissioner of Internal Revenue vs. provided, shall sign the waiver indicating that the Bureau has accepted
Next Mobile, Inc. (formerly Nextel and agreed to the waiver. The date of such acceptance by the Bureau
Communications Phils., Inc.) should be indicated. Both the date of execution by the taxpayer and date of
April 4, 1990 acceptance by the Bureau should be before the expiration of the period of
REVENUE MEMORANDUM ORDER NO. 20-90 prescription or before the lapse of the period agreed upon in case a
Subject: Proper Execution of the Waiver of the Statute of Limitations subsequent agreement is executed.
under the National Internal Revenue Code 3. The following revenue officials are authorized to sign the waiver:
To : All Internal Revenue Officers and Others Concerned xxxx
Pursuant to Section 223 of the Tax Code, internal revenue taxes may be 4. The waiver must be executed in three (3) copies, the original copy
assessed or collected after the ordinary prescriptive period, if before its to be attached to the docket of the case, the second copy for the taxpayer
expiration, both the Commissioner and the taxpayer have agreed in and the third copy for the Office accepting the waiver. The fact of receipt
writing to its assessment and/or collection after said period. The period so by the taxpayer of his/her file copy shall be indicated in the original copy.
agreed upon may be extended by subsequent written agreement made 5. The foregoing procedures shall be strictly followed. Any revenue
before the expiration of the period previously agreed upon. This written official found not to have complied with this Order resulting in
agreement between the Commissioner and the taxpayer is the so-called prescription of the right to assess/collect shall be administratively dealt
Waiver of the Statute of Limitations. In the execution of said waiver, the with.
following procedures should be followed: This Revenue Memorandum Order shall take effect immediately.
 (SGD.) JOSE U. ONG 357
Commissioner of Internal Revenue VOL. 776, DECEMBER 7, 2015 357
Commissioner of Internal Revenue vs.
Next Mobile, Inc. (formerly Nextel
The Court has consistently held that a waiver of the statute of limitations must Communications Phils., Inc.)
faithfully comply with the provisions of RMO 20-90 and RDAO 05-01 in order to be In CIR v. Kudos Metal Corporation,9 the waivers executed by Kudos were found
valid and binding. ineffective to extend the period to assess or collect taxes because: (1) the accountant
356 who executed the waivers had no notarized written board authority to sign the
356 SUPREME COURT REPORTS
waivers in behalf of respondent corporation; (2) there was no date of acceptance
ANNOTATED
indicated on the waivers; and (3) the fact of receipt by respondent of its file copy was
Commissioner of Internal Revenue vs.
not indicated in the original copies of the waivers.
Next Mobile, Inc. (formerly Nextel
9 G.R. No. 178087, May 5, 2010, 620 SCRA 232.
Communications Phils., Inc.)
The Court rejected the CIR’s argument that since it was the one who asked for
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue6 the Court declared
additional time, Kudos should be considered estopped from raising the defense of
the waiver executed by petitioner therein invalid because: (1) it did not specify a
prescription. The Court held that the BIR cannot hide behind the doctrine of estoppel
definite agreed date between the BIR and petitioner within which the former may
to cover its failure to comply with its RMO 20-90 and RDAO 05-01. Having caused
assess and collect revenue taxes; (2) it was signed only by a revenue district officer,
the defects in the waivers, the Court held that the BIR must bear the
not the Commissioner; (3) there was no date of acceptance; and (4) petitioner was not
consequence.10Hence, the BIR assessments were found to be issued beyond the three-
furnished a copy of the waiver.
year period and declared void.11 Further, the Court stressed that there is compliance
Philippine Journaliststells us that since a waiver of the statute of limitations is a
with RMO 20-90 only after the taxpayer receives a copy of the waiver accepted by the
derogation of the taxpayer’s right to security against prolonged and unscrupulous
BIR, viz.:
investigations, waivers of this kind must be carefully and strictly construed.Philippine
The flaw in the appellate court’s reasoning stems from its assumption that the
Journalists also clarifies that a waiver of the statute of limitations is not a waiver of the
waiver is a unilateral act of the taxpayer when it is in fact and in law an agreement
right to invoke the defense of prescription but rather an agreement between the
between the taxpayer and the BIR. When the petitioner’s comptroller signed the
taxpayer and the BIR that the period to issue an assessment and collect the taxes due
waiver on September 22, 1997, it was not yet complete and final because the BIR had
is extended to a date certain. It is not a unilateral act by the taxpayer of the BIR but is
not assented. There is compliance with the provision of RMO No. 20-90 only after the
a bilateral agreement between two parties.
taxpayer received a copy of the waiver accepted by the BIR. The requirement to
In Commissioner of Internal Revenue v. FMF Development Corporation7the Court
furnish the taxpayer with a copy of the waiver is not only to give notice of the
found the waiver in question defective because: (1) it was not proved that respondent
existence of the document but of the acceptance by the BIR and the perfection of the
therein was furnished a copy of the BIR-accepted waiver; (2) the waiver was signed
agreement.12
by a revenue district officer instead of the Commissioner as mandated by the NIRC
The deficiencies of the Waivers in this case are the same as the defects of the
and RMO 20-90 considering that the case involved an amount of more than
waiver in Kudos. In the instant case, the CTA found the Waivers because of the
P1,000,000.00, and the period to assess was not yet about to prescribe; and (3) it did
following flaws: (1) they were executed without a notarized board authority; (2) the
not contain the date of acceptance by the CIR. The Court explained that the date of
dates of acceptance by the BIR were not indicated therein; and (3) the fact of receipt
acceptance by the CIR is a requisite necessary to determine whether the waiver was
by respondent of its copy of the Second Waiver was not indicated on the face of the
validly accepted before the expiration of the original period.8
original Second Waiver.
 To be sure, both parties in this case are at fault.
Here, respondent, through Sarmiento, executed fiveWaivers in favor of petitioner.
However, her authority to sign these Waivers was not presented upon their
submission to the BIR. In fact, later on, her authority to sign was questioned by
respondent itself, the very same entity that caused her to sign such in the first place.
Thus, it is clear that respondent violated RMO 20-90 which states that in case of a
corporate taxpayer, the waiver must be signed by its responsible officials 13 and
RDAO 01-05 which requires the presentation of a written and notarized authority to
the BIR.14
Similarly, the BIR violated its own rules and was careless in performing its
functions with respect to these Waivers. It is very clear that under RDAO 05-01 it is
the duty of the authorized revenue officialto ensure that the waiver is duly
accomplished and signed by the taxpayer or his authorized representative before
affixing his signature to signify acceptance of the same. It also instructs thatin case
the authority is delegated by the taxpayer to a representative, the concerned
revenue official shall see to it that such delegation is in writing and duly notarized.
Furthermore, it mandates that the waiver should not be accepted by the concerned
BIR office and official unless duly notarized.15
Both parties knew the infirmities of the Waivers yet they continued dealing with
each other on the strength of these documents without bothering to rectify these
infirmities. In fact, in its Letter Protest to the BIR, respondent did not even question
the validity of the Waivers or call attention to their alleged defects.
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 CIR 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.
On the other hand, the stringent requirements in RMO
20-90 and RDAO 05-01 are in place precisely because the BIR put them there. Yet,
instead of strictly enforcing its provisions, the BIR defied the mandates of its very
own issuances. Verily, if the BIR was truly determined to validly assess and collect
taxes from respondent after the prescriptive period, it should have been prudent
enough to make sure that all the requirements for the effectivity of the Waivers were
followed not only by its revenue officers but also by respondent. The BIR stood to
lose millions of pesos in case the Waivers were declared void, as they eventually were
by the CTA, but it appears that it was too negligent to even comply with its most
basic requirements.
The BIR’s negligence in this case is so gross that it amounts to malice and bad
faith. Without doubt, the BIR knew that waivers should conform strictly to RMO 20-
90 and RDAO
05-01 in order to be valid. In fact, the mandatory nature of the requirements, as ruled
by this Court, has been recognized by the BIR itself in its issuances such as Revenue
Memorandum Circular No. 6-2005,16 among others. Nevertheless, the BIR allowed
respondent to submit, and it duly received, five defective Waivers when it was its
duty to exact compliance with RMO 20-90 and RDAO 05-01 and follow the procedure
dictated therein. It even openly admitted that it did not require respondent to present
any notarized authority to sign the questioned Waivers.17 The BIR failed to demand
respondent to follow the requirements for the validity of the Waivers when it had the
duty to do so, most especially because it had the highest interest at stake. If it was
serious in collecting taxes, the BIR should have meticulously complied with the
foregoing orders, leaving no stone unturned.
The general rule is that when a waiver does not comply with the requisites for its
validity specified under RMO 20-90 and RDAO 01-05, it is invalid and ineffective to
extend the prescriptive period to assess taxes. However, due to its peculiar
circumstances, We shall treat this case as an exception to this rule and find the
Waivers valid for the reasons discussed below.
First, the parties in this case are in pari delicto or “in equal fault.” In pari
delictoconnotes that the two parties to a controversy are equally culpable or guilty and
they shall have no action against each other. However, although the parties are in pari
delicto, the Court may interfere and grant relief at the suit of one of them, where
public policy requires its intervention, even though the result may be that a benefit
will be derived by one party who is in equal guilt with the other. 18
Here, to uphold the validity of the Waivers would be consistent with the public
policy embodied in the principle that taxes are the lifeblood of the government, and
their prompt and certain availability is an imperious need.19 Taxes are the nation’s
lifeblood through which government agencies continue to operate and which the
State discharges its functions for the welfare of its constituents.20 As between the
parties, it would be more equitable if petitioner’s lapses were allowed to pass and
consequently uphold the Waivers in order to support this principle and public policy.
Second, the Court has repeatedly pronounced that parties must come to court with
clean hands.21 Parties who do not come to court with clean hands cannot be allowed
to benefit from their own wrongdoing.22 Following the foregoing principle,
respondent should not be allowed to benefit from the flaws in its own Waivers and
successfully insist on their invalidity in order to evade its responsibility to pay taxes.
Third, respondent is estopped from questioning the validity of its Waivers. While
it is true that the Court has repeatedly held that the doctrine of estoppel must be
sparingly applied as an exception to the statute of limitations for assessment of taxes,
the Court finds that the application of the doctrine is justified in this case. Verily, the
application of estoppel in this case would promote the administration of the law,
prevent injustice and avert the accomplishment of a wrong and undue advantage.
Respondent executed fiveWaivers 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.
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the
taxpayer, on the one hand, after voluntarily executing waivers, insisted on their
invalidity by raising the very same defects it caused. On the other hand, the BIR
miserably failed to exact from respondent compliance with its rules. The BIR’s
negligence in the performance of its duties was so gross that it amounted to malice
and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to
the mistakes in the Waivers. Such a 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.
It is true that petitioner was also at fault here because it was careless in complying
with the requirements of RMO 20-90 and RDAO 01-05. Nevertheless, petitioner’s
negligence may be addressed by enforcing the provisions imposing administrative
liabilities upon the officers responsible for these errors.23The BIR’s right to assess and
collect taxes should not be jeopardized merely because of the mistakes and lapses of
its officers, especially in cases like this where the taxpayer is obviously in bad faith. 24
As regards petitioner’s claim that the 10-year period of limitation within which to
assess deficiency taxes provided in Section 222(a) of the 1997 NIRC is applicable in
this case as respondent allegedly filed false and fraudulent returns, there is no reason
to disturb the tax court’s findings that records failed to establish, even by prima
facie evidence, that respondent Next Mobile filed false and fraudulent returns on
the ground of substantial underdeclaration of income in respondent Next Mobile’s
Annual ITR for taxable year ending December 31, 2001.25
While the Court rules that the subject Waivers are valid, We, however, refer back
to the tax court the determination of the merits of respondent’s petition seeking the
nullification of the BIR Formal Letter of Demand and Assessment Notices/
Demand No. 43-734.
WHEREFORE, premises considered, the Court resolves to GRANT the petition.
The Decision of the Court of Tax Appeals En Banc dated May 28, 2014 in C.T.A. E.B.
Case No. 1001 is hereby REVERSED andSET ASIDE. Accordingly, let this case be
remanded to the Court of Tax Appeals for further proceedings in order to determine
and rule on the merits of respondent’s petition seeking the nullification of the BIR
Formal Letter of Demand and Assessment Notices/
Demand No. 43-734, both dated October 17, 2005.
SO ORDERED.
Peralta, Villarama, Jr., Perez** and Reyes, JJ., concur.
* * Jardeleza, J., no part, due to his prior action as Solicitor General; Perez, J.,
designated additional member per Raffle dated January 7, 2015.
Petition granted, judgment reversed and set aside.
Notes.—In pari delictosituations involve the parties in one contract who are both
at fault, such that neither can recover nor have any action against each other.
(Constantino vs. Heirs of Pedro Constantino, Jr., 706 SCRA 580 [2013])
Tax assessments by tax examiners are presumed correct and made in good faith.
(Commissioner of Internal Revenue vs. Traders Royal Bank, 753 SCRA 414 [2015])
——o0o——
FIRST DIVISION On August 11, 2004, ATC received Letter of Authority [(LOA)] No. 200000003557
where [the CIR] informed ATC that its revenue officers from the Large Taxpayers
G.R. No. 230861, September 19, 2018 Audit and Investigation Division II shall examine its books of accounts and other
accounting records for the taxable year 2002.
ASIAN TRANSMISSION CORPORATION, Petitioner, v. COMMISSIONER OF
INTERNAL REVENUE,Respondent. Thereafter, [the CIR] issued a Preliminary Assessment Notice (PAN) to ATC.

DECISION Consequently, on various dates, ATC, through its Vice President for Personnel and
Legal Affairs, Mr. Roderick M. Tan, executed several documents denominated as
BERSAMIN, J.: "Waiver of the Defense of Prescription Under the Statute of Limitations of the
National Internal Revenue Code" (Waiver), as follows:

We reiterate through this decision that the taxpayer has the primary responsibility for
the proper preparation of the waiver of the prescriptive period for assessing Waiver Source of Document Date of Execution Date of Extension
deficiency taxes. Hence, the Commissioner of Internal Revenue (CIR) may not be
blamed for any defects in the execution of the waiver. First Waiver Page 415, BIR Records September 8, 2004 June 30, 2005

The Case December 31,

Second Waiver Page 419, BIR Records March 3, 2005
2005
This appeal seeks the review and reversal of the decision promulgated on August 9,
2016,1 whereby the Court of Tax Appeals En Banc (CTA En Banc) reversed and set November 10,
Third Waiver Page 422, BIR Records June 30, 2006
aside the decision rendered by its Second Division (CTA in Division) holding that the 2005
waivers executed by petitioner Asian Transmission Corporation (ATC) were invalid
and did not operate to extend the three-year period of prescription to assess December 31,
Fourth Waiver Page 429, BIR Records March 21, 2006
deficiency taxes for the calendar year 2002.2 2006

Fifth Waiver Page 767, BIR Records March 21, 2006 June 30, 2007
Antecedents
December 31,
As found by the CTA in Division, the factual and procedural antecedents are as Sixth Waiver Page 349, BIR Records April 18, 2007
2007
follows:
Seventh
Page 354, BIR Records October 25, 2007 June 30, 2008
[ATC] is a corporation duly organized and existing under Philippine Laws and with Waiver
business address at Carmelray Industrial Park, Canlubang, Calamba City, Laguna.
ATC is a manufacturer of motor vehicle transmission component parts and engines of Eight[h] Page 1176, BIR December 31,
May 30, 2008
Mitsubishi vehicles. It was organized and registered with the Securities and Exchange Waiver Records 2008
Commission on August 29, 1973 as evidenced by its Certificate of Incorporation.

[The CIR] is the Commissioner of the Bureau of Internal Revenue (BIR) with office
address at BIR National Office Bldg., Agham Road, Diliman, Quezon City.
On January 3, 2003 and March 3, 2003, ATC filed its Annual Information Return of
Income Taxes Withheld on Compensation and Final Withholding Taxes and Annual
Information Return of Creditable Income Taxed Withheld (Expanded)/Income
Payments Exempt from Withholding Tax, respectively.
Meanwhile, on February 28, 2008, ATC availed of the Tax Amnesty [P]rogram under
Republic Act No. 9480.
On July 15, 2008, ATC received a Formal Letter of Demand from [the] CIR for
deficiency [WTC] in the amount of P[hp]62,977,798.02, [EWT] in the amount of
P[hp]6,916,910.51, [FWT] in the amount of P[hp]501,077.72. On August 14, 2008, ATC
filed its Protest Letter in regard thereto.
Accordingly, on April 14, 2009, ATC received the Final Decision on Disputed
Assessment where [the] CIR found ATC liable to pay deficiency tax in the amount of
P[hp]75,696,616.75. Thus, on May 14, 2009, ATC filed an appeal letter/request for
reconsideration with [the] CIR.
On April 10, 2012, ATC received the Decision of [the] CIR dated November 15, 2011,
denying its request for reconsideration. As such, on April 23, 2012, ATC filed the
instant Petition for Review (with Application for Preliminary Injunction and
Temporary Restraining Order).3
Ruling of the CTA in Division
On November 28, 2014, the CTA in Division rendered its decision granting the
petition for review of ATC. It held that ATC was not estopped from raising the
invalidity of the waivers inasmuch as the Bureau of Internal Revenue (BIR) had itself
caused the defects thereof, namely: (a) the waivers were notarized by its own
employee despite not being validly commissioned to perform notarial acts; (b) the
BIR did not indicate the date of its acceptance; (c) the BIR did not specify the amounts
of and the particular taxes involved; and (d) respondent CIR did not sign the waivers
despite the clear mandate of RMO 20-90 to that effect. It ruled that the waivers, being
invalid, did not operate to toll or extend the three-year period of prescription.4
The CTA in Division disposed:
WHEREFORE, in view thereof, the Petition for Review is hereby GRANTED.
Accordingly, the deficiency [WTC] in the amount of P[hp]67,722,419.38, [EWT] in the
amount of P[hp]7,436,545.83 and [FWT] in the amount of P[hp]537,651.55, or in the
total amount of P[hp]75,696,616.75 for the taxable year 2002, are hereby
declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT.
SO ORDERED.5
On December 16, 2014, the CIR moved for reconsideration, and ATC opposed.
On March 13, 2015, the CTA in Division denied the CIR's motion for
reconsideration,6 to wit:
WHEREFORE, premises considered, [the CIR's] Motion for Reconsideration is
herebyDENIED for lack of merit.
SO ORDERED.7
On April 20, 2015, the CIR filed a petition for review in the CTA En Banc.
Decision of the CTA En Banc
On August 9, 2016, the CTA En Banc promulgated the assailed decision reversing and
setting aside the decision of the CTA in Division, and holding that the waivers were
valid. It observed that the CIR's right to assess deficiency withholding taxes for CY
2002 against ATC had not yet prescribed. It disposed:
WHEREFORE, premises considered, the Court hereby GRANTS the Petition for
Review. Accordingly, the Decision promulgated on November 28, 2014 and the
Resolution on March 13, 2015 by the Second Division are REVERSED and SET
ASIDE. Let the case beREMANDED to the Court in Division for further proceedings
in order to determine and rule on the merits of respondent's petition seeking the
cancellation of the deficiency tax assessments for calendar year 2002 for withholding
tax on compensation, expanded withholding tax, and final withholding tax in the
aggregate amount of Php75,696,616.75.
SO ORDERED.8
On September 9 and September 16, 2016, ATC filed its motion for
reconsideration9 and supplemental motion for reconsideration,10 respectively, but the
CTA En Banc denied the motions for lack of merit.
Issue
In this appeal, ATC insists that the CTA En Banc acted in excess of jurisdiction or with
grave abuse of discretion amounting to lack or excess of jurisdiction in applying the
ruling in Commissioner of Internal Revenue v. Next Mobile Inc.11 as well as the equitable
principles of in pari delicto, unclean hands, andestoppel.
Ruling of the Court
The appeal has no merit.
To be noted is that the CTA En Banc cited Commissioner of Internal Revenue v. Kudos
Metal Corporation,12 whereby the Court reiterated that RMO 20-90 and RDAO 05-01
governed the proper execution of a valid waiver of the statute of limitations; and
pointed to Commissioner of Internal Revenue v. Next Mobile Inc., supra, to highlight the
recognized exception to the strict application of RMO 20-90 and RDAO 05-01.
In Commissioner of Internal Revenue v. Next Mobile Inc., the Court declared that as a
general rule a waiver that did not comply with the requisites for validity specified in
RMO No. 20-90 and RDAO 01-05 was invalid and ineffective to extend the
prescriptive period to assess the deficiency taxes. However, due to peculiar
circumstances obtaining, the Court treated the case as an exception to the rule, and
considered the waivers concerned as valid for the following reasons, viz.:
First, the parties in this case are in pari delicto or "in equal fault." In pari delicto connotes
that the two parties to a controversy are equally culpable or guilty and they shall
have no action against each other. However, although the parties are in pari delicto,
the Court may interfere and grant relief at the suit of one of them, where public
policy requires its intervention, even though the result may be that a benefit will be
derived by one party who is in equal guilt with the other.
liabilities upon the officers responsible for these errors. The BIR's right to assess and
collect taxes should not be jeopardized merely because of the mistakes and lapses of
its officers, especially in cases like this where the taxpayer is obviously in bad faith. 13
In this case, the CTA in Division noted that the eight waivers of ATC contained the
following defects, to wit:

Here, to uphold the validity of the Waivers would be consistent with the public 1.
policy embodied in the principle that taxes are the lifeblood of the government, and
their prompt and certain availability is an imperious need. Taxes are the nation's
lifeblood through which government agencies continue to operate and which the 2.
State discharges its functions for the welfare of its constituents. As between the
parties, it would be more equitable if petitioner's lapses were allowed to pass and
consequently uphold the Waivers in order to support this principle and public policy.
3.
The notarization of the Waivers was not in accordance with the 2004 Rules
on Notarial Practice;
Several waivers clearly failed to indicate the date of acceptance by the
Bureau of Internal Revenue;
The Waivers were not signed by the proper revenue officer; and

Second, the Court has repeatedly pronounced that parties must come to court with 4. The Waivers failed to specify the type of tax and the amount of tax due.14
clean hands. Parties who do not come to court with clean hands cannot be allowed to
benefit from their own wrongdoing. Following the foregoing principle, respondent
We agree with the holding of the CTA En Banc that ATC's case was similar to the case
should not be allowed to benefit from the flaws in its own Waivers and successfully
of the taxpayer involved in Commissioner of Internal Revenue v. Next Mobile Inc. The
insist on their invalidity in order to evade its responsibility to pay taxes.
foregoing defects noted in the waivers of ATC were not solely attributable to the CIR.
Indeed, although RDAO 01-05 stated that the waiver should not be accepted by the
Third, respondent is estopped from questioning the validity of its Waivers. While it is concerned BIR office or official unless duly notarized, a careful reading of RDAO 01-
true that the Court has repeatedly held that the doctrine of estoppel must be 05 indicates that the proper preparation of the waiver was primarily the
sparingly applied as an exception to the statute of limitations for assessment of taxes, responsibility of the taxpayer or its authorized representative signing the waiver.
the Court finds that the application of the doctrine is justified in this case. Verily, the Such responsibility did not pertain to the BIR as the receiving party. Consequently,
application of estoppel in this case would promote the administration of the law, ATC was not correct in insisting that the act or omission giving rise to the defects of
prevent injustice and avert the accomplishment of a wrong and undue advantage. the waivers should be ascribed solely to the respondent CIR and her subordinates.
Respondent executed fiveWaivers and delivered them to petitioner, one after the
other. It allowed petitioner to rely on them and did not raise any objection against
Moreover, the principle of estoppel was applicable. The execution of the waivers was
their validity until petitioner assessed taxes and penalties against it. Moreover, the
to the advantage of ATC because the waivers would provide to ATC the sufficient
application of estoppel is necessary to prevent the undue injury that the government
time to gather and produce voluminous records for the audit. It would really be
would suffer because of the cancellation of petitioner's assessment of respondent's tax
unfair, therefore, were ATC to be permitted to assail the waivers only after the final
liabilities.
assessment proved to be adverse. Indeed, the Court observed in Commissioner of
Internal Revenue v. Next Mobile Inc. that:
Finally, the Court cannot tolerate this highly suspicious situation. In this case, the
taxpayer, on the one hand, after voluntarily executing waivers, insisted on their
In this case, respondent, after deliberately executing defective waivers, raised the
invalidity by raising the very same defects it caused. On the other hand, the BIR
very same deficiencies it caused to avoid the tax liability determined by the BIR
miserably failed to exact from respondent compliance with its rules. The BIR's
during the extended assessment period. It must be remembered that by virtue of
negligence in the performance of its duties was so gross that it amounted to malice
these Waivers, respondent was given the opportunity to gather and submit
and bad faith. Moreover, the BIR was so lax such that it seemed that it consented to
documents to substantiate its claims before the CIR during investigation. It was able
the mistakes in the Waivers. Such a situation is dangerous and open to abuse by
to postpone the payment of taxes, as well as contest and negotiate the assessment
unscrupulous taxpayers who intend to escape their responsibility to pay taxes by
against it. Yet, after enjoying these benefits, respondent challenged the validity of the
mere expedient of hiding behind technicalities.
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
It is true that petitioner was also at fault here because it was careless in complying petitioner to rely on the same is an act of bad faith. 15
with the requirements of RMO No. 20-90 and RDAO 01-05. Nevertheless, petitioner's
negligence may be addressed by enforcing the provisions imposing administrative
Thus, the CTA En Banc did not err in ruling that ATC, after having benefitted from
the defective waivers, should not be allowed to assail them. In short, the CTA En
Banc properly applied the equitable principles of in pari delicto, unclean hands, and
estoppel as enunciated in Commissioner of Internal Revenue v. Next Mobile case.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the
decision promulgated on August 9, 2016 by the Court of Tax Appeals En Banc in CTA
EB No. 1289 (CTA Case No. 8476); and ORDERS the petitioner to pay the costs of
suit.

SO ORDERED.
G.R. No. 178697. November 17, 2010.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SONY PHILIPPINES,
INC., respondent.
Taxation; Assessment; Letter of Authority (LOA); A Letter of Authority or (LOA) is
the authority given to the appropriate revenue officer assigned to perform assessment
functions.—Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the
authority given to the appropriate revenue officer assigned to perform assessment
functions. It empowers or enables said revenue officer to examine the books of
account and other accounting records of a taxpayer for the purpose of collecting the
correct amount of tax. The very provision of the Tax Code that the CIR relies on is
unequivocal with
_______________
* SECOND DIVISION.
235
VOL. 635, NOVEMBER 17, 2
2010 35
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
regard to its power to grant authority to examine and assess a taxpayer.
Same; Same; Same; In the absence of such an authority, the assessment or examination
is a nullity.—There must be a grant of authority before any revenue officer can
conduct an examination or assessment. Equally important is that the revenue officer
so authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.
Same; Same; It is evident under Section 110 of the 1997 Tax Code that an advertising
expense duly covered by a Value Added Tax (VAT) invoice is a legitimate business expense.—
The Court is not persuaded. As aptly found by the CTA-First Division and later
affirmed by the CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s
disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter. It is evident under Section 110 of the 1997 Tax Code
that an advertising expense duly covered by a VAT invoice is a legitimate business
expense. This is confirmed by no less than CIR’s own witness, Revenue Officer
Antonio Aluquin. There is also no denying that Sony incurred advertising expense.
Aluquin testified that advertising companies issued invoices in the name of Sony and
the latter paid for the same. Indubitably, Sony incurred and paid for advertising
expense/
services. Where the money came from is another matter all together but will
definitely not change said fact.
Same; Same; Value Added Tax (VAT); Services rendered for a fee even on
reimbursement-on-cost basis only and without realizing profit are also subject to Value Added
Tax (VAT).—In the case of CIR v. Court of Appeals (CA), 329 SCRA 237 (2000), the
Court had the occasion to rule that services rendered for a fee even on
reimbursement-on-cost basis only and without realizing profit are also subject to
VAT. The case, however, is not applicable to the present case. In that case,
COMASERCO rendered service to its affiliates and, in turn, the affiliates paid the
former reimbursement-on-cost which means that it was paid the cost or expense that
it incurred although without profit. This is not true in the present case. Sony did not
render any service to SIS at all. The services rendered by the advertising companies,
paid for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave
assistance to Sony in the amount equiva-
236
2 SUPREME COURT
36 REPORTS ANNOTATED
Commissioner of Internal Revenue
vs. Sony Philippines, Inc.
lent to the latter’s advertising expense but never received any goods, properties
or service from Sony.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals.
The facts are stated in the opinion of the Court.
Amado Paolo C. Dimayuga for respondent.
MENDOZA, J.:
This petition for review oncertiorari seeks to set aside the May 17, 2007 Decision
and the July 5, 2007 Resolution of the Court of Tax Appeals – En Banc1(CTA-EB), in
C.T.A. EB No. 90, affirming the October 26, 2004 Decision of the CTA-First
Division2 which, in turn, partially granted the petition for review of respondent Sony
Philippines, Inc. (Sony). The CTA-First Division decision cancelled the deficiency
assessment issued by petitioner Commissioner of Internal Revenue (CIR) against
Sony for Value Added Tax (VAT)but upheld the deficiency assessment for expanded
withholding tax (EWT) in the amount of P1,035,879.70 and the penalties for late DEFICIENCY VALUE -ADDED TAX (VAT)
remittance of internal revenue taxes in the amount of P1,269,593.90. 3
Add: Penalties
The Facts:
On November 24, 1998, the CIR issued Letter of Authority No. 000019734(LOA Interest up to 3-31-2000 P 550,485.82
19734) authorizing certain revenue officers to examine Sony’s books of accounts and
other accounting records regarding revenue taxes for “the period Compromise 25,000.00 575,485.82
237
Deficiency EWT Due P 1,992,462.72
VOL. 635, NOVEMBER 17, 2010 237
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
1997 and unverified prior years.” On December 6, 1999, a preliminary assessment for DEFICIENCY OF VAT ON ROYALTY PAYMENTS

1997 deficiency taxes and penalties was issued by the CIR which Sony protested.
(Assessment No. ST-LR1-97-0126-2000)
Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.4Said details of the deficiency taxes Basic Tax Due
and penalties for late remittance of internal revenue taxes are as follows:
Add: Penalties
DEFICIENCY VALUE -ADDED TAX (VAT)

Surcharge P 359,177.80
(Assessment No. ST-VAT-97-0124-2000)

Interest up to 3-31-2000 87,580.34

Basic Tax Due P 7,958,700.00

Compromise 16,000.00 462,758.14

Add: Penalties

Penalties Due P 462,758.14

Interest up to 3-31-2000 P
3,157,314.41

Compromise 25,000.00 3,182,314.41 238

238 SUPREME COURT REPORTS
Deficiency VAT Due P ANNOTATED
11,141,014.41 Commissioner of Internal Revenue vs. Sony Philippines, Inc.
LATE REMITTANCE OF FINAL WITHHOLDING TAX

(Assessment No. ST-LR2-97-0127-2000)

DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)
Basic Tax Due P
(Assessment No. ST-EWT-97-0125-2000)
Add: Penalties
Basic Tax Due P 1,416,976.90
Surcharge P
 1,729,690.71 Sony Philippines, Inc.
sessment on Sony’s motor vehicles and on professional fees paid to general
Interest up to 3-31-2000 508,783.07
professional partnerships. It also assessed the amounts paid to sales agents as

Compromise 50,000.00 2,288,473.78 commissions with five percent (5%) EWT pursuant to Section 1(g) of Revenue
Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT
Penalties Due P 2,288,473.78 assessment on rental expense since it found that the total rental deposit of
P10,523,821.99 was incurred from January to March 1998 which was again beyond the
coverage of LOA 19734. Except for the compromise penalties, the CTA-First Division
LATE REMITTANCE OF INCOME PAYMENTS also upheld the penalties for the late payment of VAT on royalties, for late remittance
of final withholding tax on royalty as of December 1997 and for the late remittance of
(Assessment No. ST-LR3-97-0128-2000) EWT by some of Sony’s branches.8 In sum, the CTA-First Division partly granted
Sony’s petition by cancelling the deficiency VAT assessment but upheld a modified
Basic Tax Due P
deficiency EWT assessment as well as the penalties. Thus, the dispositive portion
Add: Penalties reads:
“WHEREFORE, the petition for review is hereby PARTIALLY GRANTED.
25 % Surcharge P 8,865.34
Respondent is ORDERED to CANCEL and WITHDRAW the deficiency assessment

Interest up to 3-31-2000 58.29 for value-added tax for 1997 for lack of merit. However, the deficiency assessments
for expanded withholding tax and penalties for late remittance of internal revenue
Compromise 2,000.00 10,923.60 taxes are UPHELD.
Accordingly, petitioner is DIRECTED to PAY the respondent the deficiency
Penalties Due P 10,923.60
expanded withholding tax in the amount of P1,035,879.70 and the following penalties
GRAND TOTAL P 15,895,632.655 for late remittance of internal revenue taxes in the sum of P1,269,593.90:
1. VAT on Royalty P 429,242.07
Sony sought re-evaluation of the aforementioned assessment by filing a protest 2. Withholding Tax on Royalty 831,428.20
on February 2, 2000. Sony submitted relevant documents in support of its protest on 3. EWT of Petitioner’s Branches 8,923.63
the 16th of that same month.6 Total P 1,269,593.90
On October 24, 2000, within 30 days after the lapse of 180 days from submission Plus 20% delinquency interest from January 17, 2000 until fully paid pursuant to
of the said supporting documents to the CIR, Sony filed a petition for review before Section 249(C)(3) of the 1997 Tax Code.
the CTA.7 240
After trial, the CTA-First Division disallowed the deficiency VAT assessment 240 SUPREME COURT REPORTS
because the subsidized advertising expense paid by Sony which was duly covered by ANNOTATED
a VAT invoice resulted in an input VAT credit. As regards the EWT, the CTA-First Commissioner of Internal Revenue vs.
Division maintained the deficiency EWT as- Sony Philippines, Inc.
239 SO ORDERED.”9
VOL. 635, NOVEMBER 17, 2010 239 The CIR sought a reconsideration of the above decision and submitted the
Commissioner of Internal Revenue vs. following grounds in support thereof:
 A. The Honorable Court committed reversible error in holding that petitioner is THE CTA EN BANC ERRED IN RULING THAT RESPONDENT IS NOT
not liable for the deficiency VAT in the amount of P11,141,014.41; LIABLE FOR DEFICIENCY VAT IN THE AMOUNT OF PHP11,141,014.41.
B. The Honorable court committed reversible error in holding that the II
commission expense in the amount of P2,894,797.00 should be subjected to 5% AS TO RESPONDENT’S DEFICIENCY EXPANDED WITHHOLDING TAX IN
withholding tax instead of the 10% tax rate; THE AMOUNT OF PHP1,992,462.72:
C. The Honorable Court committed a reversible error in holding that the A. THE CTA EN BANCERRED IN RULING THAT THE COMMISSION
withholding tax assessment with respect to the 5% withholding tax on rental EXPENSE IN THE AMOUNT OF PHP2,894,797.00 SHOULD BE
deposit in the amount of P10,523,821.99 should be cancelled; and SUBJECTED TO A WITHHOLDING TAX OF 5% INSTEAD OF THE 10%
D. The Honorable Court committed reversible error in holding that the TAX RATE.
remittance of final withholding tax on royalties covering the period January to B. THE CTA EN BANCERRED IN RULING THAT THE ASSESSMENT
March 1998 was filed on time.10 WITH RESPECT TO THE 5% WITHHOLDING TAX ON RENTAL
On April 28, 2005, the CTA-First Division denied the motion for reconsideration. DEPOSIT IN THE AMOUNT OF PHP10,523,821.99 IS NOT PROPER.
Unfazed, the CIR filed a petition for review with the CTA-EB raising identical issues: 242
1. Whether or not respondent (Sony) is liable for the deficiency VAT in the 242 SUPREME COURT REPORTS
amount of P11,141,014.41; ANNOTATED
2. Whether or not the commission expense in the amount of P2,894,797.00 Commissioner of Internal Revenue vs.
should be subjected to 10% withholding tax instead of the 5% tax rate; Sony Philippines, Inc.
3. Whether or not the withholding assessment with respect to the 5% III
withholding tax on rental deposit in the amount of P10,523,821.99 is proper; THE CTA EN BANC ERRED IN RULING THAT THE FINAL WITHHOLDING
and TAX ON ROYALTIES COVERING THE PERIOD JANUARY TO MARCH 1998
241 WAS FILED ON TIME.12
VOL. 635, NOVEMBER 17, 2010 241 Upon filing of Sony’s comment, the Court ordered the CIR to file its reply thereto.
Commissioner of Internal Revenue vs. The CIR subsequently filed a manifestation informing the Court that it would no
Sony Philippines, Inc. longer file a reply. Thus, on December 3, 2008, the Court resolved to give due course
4. Whether or not the remittance of final withholding tax on royalties covering to the petition and to decide the case on the basis of the pleadings filed.13
the period January to March 1998 was filed outside of time. 11 The Court finds no merit in the petition.
Finding no cogent reason to reverse the decision of the CTA-First Division, the The CIR insists that LOA 19734, although it states “the period 1997 and
CTA-EB dismissed CIR’s petition on May 17, 2007. CIR’s motion for reconsideration unverified prior years,” should be understood to mean the fiscal year ending in
was denied by the CTA-EB on July 5, 2007. March 31, 1998.14 The Court cannot agree.
The CIR is now before this Court via this petition for review relying on the very Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority
same grounds it raised before the CTA-First Division and the CTA-EB. The said given to the appropriate revenue officer assigned to perform assessment functions. It
grounds are reproduced below: empowers or enables said revenue officer to examine the books of account and other
GROUNDS FOR THE ALLOWANCE OF THE accounting records of a taxpayer for the purpose of collecting the correct amount of
PETITION tax.15 The very provi-
I 243
VOL. 635, NOVEMBER 17, 2010 243
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
sion of the Tax Code that the CIR relies on is unequivocal with regard to its power to
grant authority to examine and assess a taxpayer.
“SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement.—
(A) Examination of Returns 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 fromauthorizing the examination of any
taxpayer.” x x x [Emphases supplied]
Clearly, there must be a grant of authority before any revenue officer can conduct
an examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered “the period 1997 and unverified prior
years.” For said reason, the CIR acting through its revenue officers went beyond the
scope of their authority because the deficiency VAT assessment they arrived at was
based on records from January to March 1998 or using the fiscal year which ended in
March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation. Thus,
if CIR wanted or intended the investigation to include the year 1998, it should have
done so by including it in the LOA or issuing another LOA.
Upon review, the CTA-EB even added that the coverage of LOA 19734,
particularly the phrase “and unverified prior years,” violated Section C of Revenue
Memorandum Order No. 43-90 dated September 20, 1990, the pertinent portion of
which reads:244
244 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
“3. A Letter of Authority should cover a taxable period not exceeding one taxable
year. The practice of issuing L/As covering audit of “unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the L/A.” 16 [Emphasis
supplied]
On this point alone, the deficiency VAT assessment should have been disallowed.
Be that as it may, the CIR’s argument, that Sony’s advertising expense could not be
considered as an input VAT credit because the same was eventually reimbursed by
Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS,
the former never incurred any advertising expense. As a result, Sony is not entitled to
a tax credit. At most, the CIR continues, the said advertising expense should be for
the account of SIS, and not Sony.17
The Court is not persuaded. As aptly found by the CTA-First Division and later
affirmed by the CTA-EB, Sony’s deficiency VAT assessment stemmed from the CIR’s
disallowance of the input VAT credits that should have been realized from the
advertising expense of the latter.18 It is evident under Section 11019 of the 1997 Tax
Code that an advertising expense duly covered by a VAT invoice is a legitimate
business ex-
245
VOL. 635, NOVEMBER 17, 2010 245
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
pense. This is confirmed by no less than CIR’s own witness, Revenue Officer Antonio
Aluquin.20 There is also no denying that Sony incurred advertising expense. Aluquin
testified that advertising companies issued invoices in the name of Sony and the latter
paid for the same.21 Indubitably, Sony incurred and paid for advertising
expense/services. Where the money came from is another matter all together but will
definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS
was income and, thus, taxable. In support of this, the CIR cited a portion of Sony’s
protest filed before it:
“The fact that due to adverse economic conditions, Sony-Singapore has granted to
our client a subsidy equivalent to the latter’s advertising expenses will not affect the
validity of the input taxes from such expenses. Thus, at the most, this is an additional
income of our client subject to income tax. We submit further that our client is not
subject to VAT on the subsidy income as this was not derived from the sale of goods
or services.”22
246
246 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
Insofar as the above-mentioned subsidy may be considered as income and,
therefore, subject to income tax, the Court agrees. However, the Court does not agree
that the same subsidy should be subject to the 10% VAT. To begin with, the said
subsidy termed by the CIR as reimbursement was not even exclusively earmarked for
Sony’s advertising expense for it was but an assistance or aid in view of Sony’s dire or
adverse economic conditions, and was only “equivalent to the latter’s (Sony’s)
advertising expenses.”
Section 106 of the Tax Code explains when VAT may be imposed or exacted.
Thus:
“SEC. 106. Value-added Tax on Sale of Goods or Properties.—
(A) Rate and Base of Tax.—There shall be levied, assessed and collected on
every sale, barter or exchange of goods or properties, value-added tax equivalent to
ten percent (10%) of the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by the seller or
transferor.”
Thus, there must be a sale, barter or exchange of goods or properties before any
VAT may be levied. Certainly, there was no such sale, barter or exchange in the
subsidy given by SIS to Sony. It was but a dole out by SIS and not in payment for
goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA),23 the Court had the occasion to rule that
services rendered for a fee even on reimbursement-on-cost basis only and without
realizing profit are also subject to VAT. The case, however, is not applicable to the
present case. In that case, COMASERCO rendered service to its affiliates and, in turn,
the affiliates paid the former reimbursement-on-cost which means that it was paid the
cost or expense that it incurred although without profit. This is not true in the present
case. Sony did not render any
247
VOL. 635, NOVEMBER 17, 2010 247
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
service to SIS at all. The services rendered by the advertising companies, paid for by
Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in
the amount equivalent to the latter’s advertising expense but never received any
goods, properties or service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission
expense, the CIR insists that said deficiency EWT assessment is subject to the ten
percent (10%) rate instead of the five percent (5%) citing Revenue Regulation No. 2-98
dated April 17, 1998.24 The said revenue regulation provides that the 10% rate is
applied when the recipient of the commission income is a natural person. According
to the CIR, Sony’s schedule of Selling, General and Administrative expenses shows
the commission expense as “commission/dealer salesman incentive,” emphasizing
the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First
Division is based on Section 1(g) of Revenue Regulations No. 6-85 which provides:
“(g) Amounts paid to certain Brokers and Agents.—On gross payments to
customs, insurance, real estate and commercial brokers and agents of professional
entertainers—fiveper centum (5%).”25
In denying the very same argument of the CIR in its motion for reconsideration,
the CTA-First Division, held:
“x x x, commission expense is indeed subject to 10% withholding tax but
payments made to broker is subject to 5% withholding tax pursuant to Section 1(g) of
Revenue Regulations No. 6-85. While the commission expense in the schedule of
Selling, General and Administrative expenses submitted by petitioner (SPI) to the BIR
is captioned as “commission/dealer salesman incentive” the same does not justify the
automatic imposition of flat 10% rate. As itemized by
248
248 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
petitioner, such expense is composed of “Commission Expense” in the amount of
P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.”26
The Court agrees with the CTA-EB when it affirmed the CTA-First Division
decision. Indeed, the applicable rule is Revenue Regulations No. 6-85, as amended by
Revenue Regulations No. 12-94, which was the applicable rule during the subject
period of examination and assessment as specified in the LOA. Revenue Regulations
No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore, cannot be
applied in the present case. Besides, the withholding tax on brokers and agents was
only increased to 10% much later or by the end of July 2001 under Revenue
Regulations No. 6-2001.27Until then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-
EB on the deficiency EWT assessment on the rental deposit. According to their
findings, Sony incurred the subject rental deposit in the amount of P10,523,821.99
only from January to March 1998. As stated earlier, in the absence of the appropriate
LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to
March 1998, is not valid and must be disallowed.
Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of
its FWT on royalties (i) as of December 1997; and (ii) for the period from January to
March 1998. Again, the Court agrees with the CTA-First Division when it upheld the
CIR with respect to the royalties for December 1997 but cancelled that from January
to March 1998.
249
VOL. 635, NOVEMBER 17, 2010 249
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
The CIR insists that under Section 328 of Revenue Regulations No. 5-82 and
Sections 2.57.4 and 2.58(A)(2)(a)29 of Revenue Regulations No. 2-98, Sony should also
be made liable for the FWT on royalties from January to March of 1998. At the same
time, it downplays the relevance of the Manufacturing License Agreement (MLA)
between Sony and Sony-Japan, particularly in the payment of royalties.
The above revenue regulations provide the manner of withholding remittance as
well as the payment of final tax on royalty. Based on the same, Sony is required to
deduct and withhold final taxes on royalty payments when the royalty is paid or is
payable. After which, the corresponding return and remittance must be made within
10 days after the end of each month. The question now is when does the royalty
become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following
terms of royalty payments were agreed upon:
250
250 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Sony Philippines, Inc.
“(5) Within two (2) months following each semi-annual period ending June 30
and December 31, the LICENSEE shall furnish to the LICENSOR a statement,
certified by an officer of the LICENSEE, showing quantities of the MODELS sold,
leased or otherwise disposed of by the LICENSEE during such respective semi-
annual period and amount of royalty due pursuant this ARTICLE X therefore, and
the LICENSEE shall pay the royalty hereunder to the LICENSOR concurrently with
the furnishing of the above statement.”30
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every
semi-annual period which ends in June 30 and December 31. However, the CTA-First
Division found that there was accrual of royalty by the end of December 1997 as well
as by the end of June 1998. Given this, the FWTs should have been paid or remitted
by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it was correct for the
CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from
January to March 1998 was seasonably filed. Although the royalty from January to
March 1998 was well within the semi-annual period ending June 30, which meant
that the royalty may be payable until August 1998 pursuant to the MLA, the FWT for
said royalty had to be paid on or before July 10, 1998 or 10 days from its accrual at the
end of June 1998. Thus, when Sony remitted the same on July 8, 1998, it was not yet
late.
In view of the foregoing, the Court finds no reason to disturb the findings of the
CTA-EB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Carpio (Chairperson), Leonardo-De Castro,**Peralta and Abad, JJ., concur.
G.R. No. 196596. November 9, 2016.* exempt from duties and taxes. To avail of the exemption, the taxpayer must factually
provethat it used actually, directly and exclusively for educational purposes the
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. DE LA SALLE revenues or income sought to be exempted.
UNIVERSITY, INC., respondent. Same; Same; While a non-stock, nonprofit educational institution is classified as a tax-
exempt entity under Section 30 (Exemptions from Tax on Corporations) of the National
Internal Revenue Code (NIRC), a proprietary educational institution is covered by Section 27
(Rates of Income Tax on Domestic Corporations).—While a non-stock, nonprofit
G.R. No. 198841. November 9, 2016.*
educational institution is classified as a tax-exempt entity under Section 30
(Exemptions from Tax on Corporations) of the Tax Code, a proprietary educational
DE LA SALLE UNIVERSITY INC., petitioner, vs.COMMISSIONER OF INTERNAL
institution is covered by Section 27 (Rates of Income Tax on Domestic Corporations).
REVENUE, respondent.
Same; A proprietary educational institution is entitled only to the reduced rate of ten
percent (10%) corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is nonprofit and (2) its gross income from unrelated trade, business or
activity does not exceed fifty percent (50%) of its total gross income.—By the Tax Code’s
G.R. No. 198941. November 9, 2016.*
clear terms, a proprietary educational institution is entitled only to the reduced rate of
10% corporate income tax. The reduced rate is applicable only if: (1) the proprietary
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. DE LA SALLE
educational institution is nonprofit and (2) its gross income from unrelated trade,
UNIVERSITY, INC., respondent.
business or activity does not exceed 50% of its total gross income.
Taxation; Tax Exemptions;When a non-stock, nonprofit educational institution proves Same; The last paragraph of Section 30 of the National Internal Revenue Code (NIRC)
that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be is declared without force and effect for being contrary to the Constitution insofar as it subjects
exempted from income tax, value-added tax (VAT), and local business tax. On the other hand, to tax the income and revenues of non-stock, nonprofit educational institutions
when it also shows that it uses its assets in the form of real property for educational purposes,
158
it shall be exempted from real property tax.—Thus, when a non-stock, nonprofit
158 SUPREME COURT REPORTS
educational institution proves that it uses its revenues actually, directly, and exclu-
ANNOTATED
157 Commissioner of Internal Revenue vs. De
VOL. 808, NOVEMBER 9, 2016 157 La Salle University, Inc.
Commissioner of Internal Revenue vs. De used actually, directly and exclusively for educational purpose.—Thus, we declare
La Salle University, Inc. the last paragraph of Section 30 of the Tax Code without force and effect for being
sively for educational purposes, it shall be exempted from income tax, VAT, contrary to the Constitution insofar as it subjects to tax the income and revenues of
and LBT. On the other hand, when it also shows that it uses its assets in the form of non-stock, nonprofit educational institutions used actually, directly and exclusively
real property for educational purposes, it shall be exempted from RPT. for educational purpose. We make this declaration in the exercise of and consistent
Same; Same; Income and revenues of non-stock, nonprofit educational institution not with our duty to uphold the primacy of the Constitution.
used actually, directly and exclusively for educational purposes are not exempt from duties Same; The requirement to specify the taxable period covered by the Letter of Authority
and taxes.—Parenthetically, income and revenues of non-stock, nonprofit educational (LOA) is simply to inform the taxpayer of the extent of the audit and the scope of the revenue
institution not used actually, directly and exclusively for educational purposes are not officer’s authority.—Read in this light, the requirement to specify the taxable period
covered by the LOA is simply to inform the taxpayer of the extent of the audit and Taxation; View that to uphold the validity of a letter of authority covering a base year
the scope of the revenue officer’s authority. Without this rule, a revenue officer can plus unverified prior years, would in essence encourage the unscrupulous practice of issuing
unduly burden the taxpayer by demanding random accounting records from letters of authority even without prior compliance with the procedure that the Commissioner
randomunverified years, which may include documents from as far back as ten years of Internal Revenue (CIR) prescribed.—If we were to uphold the validity of a letter of
in cases offraud audit. authority covering a base year plus unverified prior years, we would in essence
Civil Procedure; If a party desires the court to reject the evidence offered, it must so encourage the unscrupulous practice of issuing letters of authority even without prior
state in the form of a timely objection and it cannot raise the objection to the evidence for the compliance with the procedure that the Commissioner herself prescribed. This would
first time on appeal.—The Court has held that if a party desires the court to reject the not help in curtailing inefficiencies and abuses among revenue officers in the
evidence offered, it must so state in the form of a timely objection and it cannot raise discharge of their tasks.
the objection to the evidence for the first time on appeal. Because of a party’s failure
PETITIONS for review on certiorari of the decisions and resolutions of the Court of
to timely object, the evidence offered becomes part of the evidence in the case. As a
Tax Appeals En Banc.
consequence, all the parties are considered bound by any outcome arising from the
The facts are stated in the opinion of the Court.
offer of evidence properly presented.
Office of the Solicitor General for petitioner.
Same; Jurisdiction; Court of Tax Appeals; The Court will not lightly set aside the
Joaquin G. Bernas andZambrano & Gruba Law Offices for DLSU.
conclusions reached by the Court of Tax Appeals (CTA) which, by the very nature of its
function of being dedicated exclusively to the resolution of tax problems, has developed an
expertise on the subject, unless there has been an abuse or improvident exercise of authority.—
BRION, J.:
It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
Before the Court are consolidated petitions for review on certiorari:1
resolution of tax problems, has developed an expertise on the subject, unless there
160
has been an abuse or improvident exercise of authority. We thus accord thefindings of 160 SUPREME COURT REPORTS
fact by the CTA with the highest respect. ANNOTATED
Commissioner of Internal Revenue vs. De
159
La Salle University, Inc.
VOL. 808, NOVEMBER 9, 2016 159
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner)
Commissioner of Internal Revenue vs. De
to assail the December 10, 2010 decision and March 29, 2011 resolution of the
La Salle University, Inc.
Court of Tax Appeals (CTA) inEn Banc Case No. 622;2
Taxation; Equality and uniformity of taxation means that all taxable articles or kinds of
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8,
property of the same class shall be taxed at the same rate.—Equality and uniformity of
2011 decision and October 4, 2011 resolution in CTA En Banc Case No.
taxation means that all taxable articles or kinds of property of the same class shall be
671;3and
taxed at the same rate. A tax is uniform when it operates with the same force and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision
effect in every place where the subject of it is found.
and October 4, 2011 resolution in CTAEn Banc Case No. 671.4

LEONEN, J., Dissenting Opinion: G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303. G.R.
Nos. 198841 and 198941 both stemmed fromCTA En Banc Case No. 671 filed by
DLSU to also challenge CTA Case No. 7303.
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter’s
books of accounts and other accounting records for all internal revenue taxes for the
period Fiscal Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
161
VOL. 808, NOVEMBER 9, 2016 161
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
Subsequently on August 18, 2004, the BIR through aFormal Letter of
Demandassessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAT) on business income; and (3) documentarystamp tax (DST) on
loans and lease contracts. The BIR demanded the payment ofP17,303,001.12, inclusive
of surcharge, interest and penalty for taxable years 2001, 2002 and 2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest;
thus, DLSU filed on August 3, 2005 a petition for review with the CTA Division. 8
DLSU, a non-stock, nonprofit educational institution, principally anchored its
petition onArticle XIV, Section 4(3)of the Constitution, which reads:
(3) All revenues and assets of non-stock, nonprofit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from
taxes and duties. x x x
On January 5, 2010, the CTA Division partially granted DLSU’s petition for
review. The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of P1,681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income
tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total amount ofP18,421,363.53. . . x x x
162
162 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the
total amount due computed from September 30, 2004 until full payment thereof
pursuant to Section 249(C)(3) of the [National Internal Revenue Code]. Further, the
compromise penalties imposed by [the Commissioner] were excluded, there being no
compromise agreement between the parties.
SO ORDERED.9
Both the Commissioner and DLSU moved for the reconsideration of the January
5, 2010 decision.10On April 6, 2010, the CTA Division denied the Commissioner’s
motion for reconsideration while it held in abeyance the resolution on DLSU’s motion
for reconsideration.11
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU’s use of its revenues and assets for
noneducational or commercial purposes removed these items from the exemption
coverage under the Constitution.12
On May 18, 2010, DLSU formally offered to the CTA Division supplemental
pieces of documentary evidence to prove that its rental income was used actually,
directly and exclusively for educational purposes.13 The Commissioner did not promptly
object to the formal offer of supplemental evidence despite notice.14
163
VOL. 808, NOVEMBER 9, 2016 163
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
On July 29, 2010, the CTA Division, in view of the supplemental evidence
submitted, reduced the amount of DLSU’s tax deficiencies. The dispositive portion of
the amended decision reads:
 WHEREFORE, [DLSU]’s Motion for Partial Reconsideration is The CTA En Bancdismissed the Commissioner’s petition for review and sustained
herebyPARTIALLY GRANTED. [DLSU] is hereby ORDERED TO PAY for the findings of the CTA Division.19
deficiency income tax, VAT and DST plus 25% surcharge for the fiscal years 2001,
2002 and 2003 in the total adjusted amount ofP5,506,456.71. . . x x x Tax on rental income
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency
interest on the . . . basic deficiency taxes . . . until full payment thereof pursuant to Relying on the findings of the court-commissioned Independent Certified Public
Section 249(B) of the [National Internal Revenue Code]. . . x x x Accountant (Independent CPA), the CTA En Bancfound that DLSU was able to prove
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency that a portion of the assessed rental income was used actually, directly and exclusively
interest on the deficiency taxes, surcharge and deficiency interest which have accrued for educational purposes; hence, exempt from tax.20 The CTA En Banc was satisfied
. . . from September 30, 2004 until fully paid.15 with DLSU’s supporting evidence confirming that part of its rental income had
indeed been used to pay the loan it obtained to build the university’s Physical
Education — Sports Complex.21
Consequently, the Commissioner supplemented its petition with the CTA En
Parenthetically, DLSU’s unsubstantiated claim for exemption, i.e., the part of its
Banc and argued that the CTA Division erred in admitting DLSU’s additional
income that was not shown by supporting documents to have been actually, directly
evidence.16
and exclusively used for educational purposes, must be subjected to income tax and
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed
VAT.22
aseparate petition for review with the CTA En Banc (CTAEn Banc Case No. 671) on the
165
following grounds: (1) the entire assessment should have been cancelled because it VOL. 808, NOVEMBER 9, 2016 165
was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division Commissioner of Internal Revenue vs. De
should still have cancelled the entire assessment because DLSU submitted evidence La Salle University, Inc.
similar to those submitted by Ateneo De Manila University (Ateneo) in a separate case
DST on loan and mortgage
where the CTA cancelled Ateneo’s tax assess-
transactions

164
Contrary to the Commissioner’s contention, DLSU proved its remittance of the DST
164 SUPREME COURT REPORTS
due on its loan and mortgage documents.23The CTA En Banc found that DLSU’s DST
ANNOTATED
payments had been remitted to the BIR, evidenced by the stamp on the documents
Commissioner of Internal Revenue vs. De
made by a DST imprinting machine, which is allowed under Section 200(D) of the
La Salle University, Inc.
National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue Regulations
ment;17 and (3) the CTA Division erred in finding that a portion of DLSU’s rental
(RR) No. 15-2001.25
income was not proved to have been used actually, directly and exclusively for
educational purposes.18
Admissibility of DLSU’s
supplemental evidence
The CTA En Banc’sRulings

The CTA En Banc held that the supplemental pieces of documentary evidence
CTA En Banc Case No. 622
were admissible even if DLSU formally offered them only when it moved for
reconsideration of the CTA Division’s original decision. Notably, the law creating the
CTA provides that proceedings before it shall not be governed strictly by the
technical rules of evidence.26 The CTA En Banc held that the Ateneo case is not a valid precedent because it
166 involved different parties, factual settings, bases of assessments, sets of evidence, and
166 SUPREME COURT REPORTS defenses.33
ANNOTATED
Commissioner of Internal Revenue vs. De On the CTA Division’s
La Salle University, Inc. appreciation of the
The Commissioner moved but failed to obtain a reconsideration of the CTAEn evidence
Banc’s December 10, 2010 decision.27 Thus, she came to this court for relief through a
petition for review on certiorari (G.R. No. 196596). The CTA En Bancaffirmed the CTA Division’s appreciation of DLSU’s evidence. It
held that while DLSU successfully proved that a portion of its rental income was
CTA En Banc Case No. 671 transmitted and used to pay the loan obtained to fund the construction of the Sports
Complex, the rental income from othersources were not shown to have been actually,
The CTA En Bancpartially granted DLSU’s petition for review and further directly and exclusively used for educational purposes.34
reduced its tax liabilities to P2,554,825.47inclusive of surcharge.28 Not pleased with the CTAEn Banc’s ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.
On the validity of the
Letter of Authority The Consolidated Petitions

The issue of the LOA’s validity was raised during trial; 29 hence, the issue was G.R. No. 196596
deemed properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one The Commissioner submits the following arguments:
taxable period and that the practice of issuing a LOA covering audit of unverified prior First, DLSU’s rental income is taxable regardless of how such income is derived,
years is prohibited.30The prohibition is consistent with Revenue Memorandum Order used or disposed of.35DLSU’s operations of canteens and bookstores within its
(RMO) No. 43-90, which provides that if the audit includes more than one taxable campus even
period, the other periods or years shall be specifically indicated in the LOA. 31
In the present case, the LOA issued to DLSU is forFiscal Year Ending 2003 and 168
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and 168 SUPREME COURT REPORTS
DST for taxable years2001 and 2002 are void, but the assessment for taxable ANNOTATED
year 2003 is valid.32 Commissioner of Internal Revenue vs. De
167 La Salle University, Inc.
VOL. 808, NOVEMBER 9, 2016 167 though exclusively serving the university community do not negate income tax
Commissioner of Internal Revenue vs. De liability.36
La Salle University, Inc. The Commissioner contends that Article XIV, Section 4(3) of the Constitution
On the applicability must be harmonized with Section 30(H) of the Tax Code, which states among others,
of the Ateneo case that the income of whatever kind and character of [a non-stock and nonprofit
educational institution] from any of [its] properties, real or personal, or from any of 2003.47 DLSU objects to the CTA En Banc’s conclusion that the LOA is valid for
[its] activities conducted for profitregardless of the disposition made of such income, shall taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
be subject to tax imposed by this Code.37 170
The Commissioner argues that the CTA En Bancmisread and misapplied the case 170 SUPREME COURT REPORTS
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that ANNOTATED
revenues however generated are covered by the constitutional exemption, provided Commissioner of Internal Revenue vs. De
that, the revenues will be used for educational purposes or will be held in reserve for La Salle University, Inc.
such purposes.39 The practice of issuing [LOAs] covering audit of ‘unverified prior years’ is hereby
On the contrary, the Commissioner posits that a tax-exempt organization like prohibited.
DLSU is exempt only from property tax but not from income tax on the rentals
it refers to the LOA which has the format “Base Year +Unverified Prior Years.” Since the
earned from property.40Thus, DLSU’s income from the leases of its real properties is
LOA issued to DLSU follows this format, then any assessment arising from it must
not exempt from taxation even if the income would be used for educational
be entirelyvoided.48
purposes.41
Second, DLSU invokes the principle of uniformity in taxation, which mandates that
Second, the Commissioner insists that DLSU did not prove the fact of DST
for similarly situated parties, the same set of evidence should be appreciated and
payment42 and that it is not qualified to use the Online Electronic DST Imprinting
weighed in the same manner.49 The CTAEn Banc erred when it did not similarly
Machine, which is available only to certain classes of taxpayers under RR No. 9-2000.43
appreciate DLSU’s evidence as it did to the pieces of evidence submitted by Ateneo,
169
also a non-stock, nonprofit educational institution.50
VOL. 808, NOVEMBER 9, 2016 169
Commissioner of Internal Revenue vs. De
G.R. No. 198941
La Salle University, Inc.
Finally, the Commissioner objects to the admission of DLSU’s supplemental offer
The issues and arguments raised by the Commissioner in G.R. No. 198941
of evidence. The belated submission of supplemental evidence reopened the case for
petition are exactly the same as those she raised in her: (1) petition docketed as G.R.
trial, and worse, DLSU offered the supplemental evidence only after it received the
No. 196596; and (2) comment on DLSU’s petition docketed as G.R. No. 198841.51
unfavorable CTA Division’s original decision.44 In any case, DLSU’s submission of
supplemental documentary evidence was unnecessary since its rental income was
Counter-Arguments
taxable regardless of its disposition.45

DLSU’s Comment on
G.R. No. 198841
G.R. No. 196596

DLSU argues as that:

First, DLSU questions the defective verification attached to the petition. 52
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
171
assessment issued based on such defective LOA must also be void. 46
VOL. 808, NOVEMBER 9, 2016 171
DLSU points out that the LOA issued to it covered theFiscal Year Ending 2003 and
Commissioner of Internal Revenue vs. De
Unverified Prior Years. On the basis of this defective LOA, the Commissioner assessed
La Salle University, Inc.
DLSU for deficiency income tax, VAT and DST for taxable years 2001, 2002 and
 Second, DLSU stresses that Article XIV, Section 4(3) of the Constitution is clear from taxation is used actually, directly and exclusively for educational
that all assets and revenuesof non-stock, nonprofit educational institutions used purposes.58 Unlike YMCA, which is not an educational institution, DLSU is
actually, directly and exclusively for educational purposes are exempt from taxes and undisputedly a non-stock, nonprofit educational institution. It had also submitted
duties.53 evidence to prove that it actually, directly and exclusively used its income for
On this point, DLSU explains that: (1) the tax exemption of non-stock, nonprofit educational purposes.59
educational institutions is novel to the1987 Constitution and that Section 30(H) of DLSU also cites the deliberations of the 1986 Constitutional Commission where
the 1997 Tax Code cannot amend the1987 Constitution;54 (2) Section 30 of the 1997 they recognized that the tax exemption was granted “to incentivize private
Tax Code is almost an exact replica of Section 26 of the1977 Tax Code — with the educational institutions to share with the State the responsibility of educating the
addition of non-stock, nonprofit educational institutions to the list of tax-exempt youth.”60
entities; and (3) that the 1977 Tax Code was promulgated when the 1973 Third, DLSU highlights that both the CTA En Bancand Division found that the
Constitution was still in place. bank that handled DLSU’s loan and mortgage transactions had remitted to the BIR
DLSU elaborates that the tax exemption granted to a private educational the DST through an imprinting machine, a method allowed under RR No. 15-
institution under the 1973 Constitution was only for real property tax. Back then, the 2001.61 In any case, DLSU argues that it cannot be
special tax treatment onincome of private educational institutions only emanates from 173
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption from VOL. 808, NOVEMBER 9, 2016 173
tax of all theassets and revenues of non-stock, nonprofit educational institutions used Commissioner of Internal Revenue vs. De
actually, directly and exclusively for educational purposes, was expressly and La Salle University, Inc.
categorically enshrined.55 held liable for DST owing to the exemption granted under the Constitution. 62
DLSU thus invokes the doctrine of constitutional supremacy, which renders any Finally, DLSU underscores that the Commissioner, despite notice, did not oppose
subsequent law that is contrary to the Constitution void and without any force and the formal offer of supplemental evidence. Because of the Commissioner’s failure to
effect.56 Section 30(H) of the 1997 Tax Code insofar as it subjects to tax the in- timely object, she became bound by the results of the submission of such
172 supplemental evidence.63
172 SUPREME COURT REPORTS
ANNOTATED The CIR’s Comment
Commissioner of Internal Revenue vs. De on G.R. No. 198841
La Salle University, Inc.
come of whatever kind and character of a non-stock and nonprofit educational The Commissioner submits that DLSU is estopped from questioning the LOA’s
institution from any of its properties, real or personal, or from any of its activities validity because it failed to raise this issue in both the administrative and judicial
conducted for profitregardless of the disposition made of such income, should be proceedings.64 That it was asked on cross-examination during the trial does not make
declared without force and effect in view of the constitutionally granted tax exemption it an issue that the CTA could resolve.65The Commissioner also maintains that
on “all revenues and assets of non-stock, nonprofit educational institutions used DLSU’s rental income is not tax-exempt because an educational institution is only
actually, directly, and exclusively for educational purposes.”57 exempt from property tax but not from tax on the income earned from the property. 66
DLSU further submits that it complies with the requirements enunciated in
the YMCA case, that for an exemption to be granted under Article XIV, Section 4(3) of DLSU’s Comment on
the Constitution, the taxpayer must prove that: (1) it falls under the classification non- G.R. No. 198941
stock, nonprofit educational institution; and (2) the income it seeks to be exempted
 DLSU puts forward the same counter-arguments discussed above.67 In addition, 175
DLSU prays that the Court award attorney’s fees in its favor because it was VOL. 808, NOVEMBER 9, 2016 175
constrained to unnecessarily retain the services of counsel in this separate petition. 68 Commissioner of Internal Revenue vs. De
174 La Salle University, Inc.
174 SUPREME COURT REPORTS The parties failed to convince the Court that the CTA overlooked or failed to
ANNOTATED consider relevant facts. We thus sustain the CTA En Banc’s findings that:
Commissioner of Internal Revenue vs. De a. DLSU proved that a portion of its rental income was used actually,
La Salle University, Inc. directly and exclusively for educational purposes; and
Issues b. DLSU proved the payment of the DST through its bank’s online
imprinting machine.
Although the parties raised a number of issues, the Court shall decide only the
pivotal issues, which we summarize as follows: I. The revenues and assets of
I. Whether DLSU’s income and revenues proved to have been used actually, non-stock, nonprofit educa-
directly and exclusively for educational purposes are exempt from duties and tional institutions proved to
taxes; have been used actually, di-
II. Whether the entire assessment should be voided because of the defective LOA; rectly, and exclusively for edu-
III. Whether the CTA correctly admitted DLSU’s supplemental pieces of evidence; cational purposes are exempt
and from duties and taxes.
IV. Whether the CTA’s appreciation of the sufficiency of DLSU’s evidence may be
disturbed by the Court. DLSU rests it case on Article XIV, Section 4(3) of the 1987 Constitution, which
reads:
Our Ruling (3) All revenues and assets ofnon-stock, nonprofit educational institutionsused
actually, directly, and exclusively for educational purposes shall be exempt
As we explain in full below, we rule that: from taxes and duties. Upon the dissolution or cessation of the corporate
I. The income, revenues and assets of non-stock, nonprofit educational institutions existence of such institutions, their assets shall be disposed of in the manner
proved to have been used actually, directly and exclusively for educational provided by law.
purposes are exempt from duties and taxes.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable year Proprietary educational institutions, including those cooperatively owned, may
2003 is valid. likewise be entitled to such exemptions subject to
III. The CTA correctly admitted DLSU’s formal offer of supplemental evidence; the limitations providedby law including restrictions on dividends and
and provisions for reinvestment. [underscoring and emphasis supplied]
IV. The CTA’s appreciation of evidence is conclusive unless the CTA is shown to
have manifestly overlooked certain relevant facts not disputed by the parties
and which, if properly considered, would justify a different conclusion. Before fully discussing the merits of the case, we observe that:
176
176 SUPREME COURT REPORTS xxxx
ANNOTATED
Commissioner of Internal Revenue vs. De Notwithstanding the provisions in the preceding paragraphs, theincome of whatever
La Salle University, Inc. kind and character of the foregoing organizations from any of their properties, real or
First, the constitutional provision refers to two kinds of educational institutions: personal, orfrom any of their activities conducted for profitregardless of the
(1) non-stock, nonprofit educational institutions and (2) proprietary educational disposition made of such income shall be subject to tax imposed under this Code.
institutions.69 [underscoring and emphasis supplied]
Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, nonprofit educational institution.70
Third, while DLSU’s claim for tax exemption arises from and is based on the The Commissioner posits that the 1997 Tax Code qualified the tax exemption
Constitution, the Constitution, in the same provision, also imposes certain conditions granted to non-stock, nonprofit educational institutions such that the revenues and
to avail of the exemption. We discuss below the import of the constitutional text vis-à-
visthe Commissioner’s counter-arguments. income they derived from their assets, or from any of their activities conducted for
profit, are taxable even if these revenues and income are used for educational
Fourth, there is a marked distinction between the treatment of non-stock, purposes.
nonprofit educational institutions and proprietary educational institutions. The tax Did the 1997 Tax Code qualify the tax exemptionconstitutionally-granted to non-stock,
exemption granted to non-stock, nonprofit educational institutions is conditioned nonprofit educational institutions?
only on the actual, direct and exclusive use of their revenues and assets for We answer in the negative.
educational purposes. While tax exemptions may also be granted to proprietary While the present petition appears to be a case of first impression, 71 the Court in
educational institutions, these exemptions may be subject to limitations imposed by the YMCA case had in fact already
Congress. 178
As we explain below, the marked distinction between a non-stock, nonprofit and 178 SUPREME COURT REPORTS
a proprietary educational institution is crucial in determining the nature and extent of ANNOTATED
the tax exemption granted to non-stock, nonprofit educational institutions. Commissioner of Internal Revenue vs. De
The Commissioner opposes DLSU’s claim for tax exemption on the basis of La Salle University, Inc.
Section 30(H) of the Tax Code. The relevant text reads: analyzed and explained the meaning of Article XIV, Section 4(3) of the Constitution.
177 The Court in that case made doctrinal pronouncements that are relevant to the
VOL. 808, NOVEMBER 9, 2016 177 present case.
Commissioner of Internal Revenue vs. De The issue in YMCA was whether the income derived from rentals of real property
La Salle University, Inc. owned by the YMCA, established as a “welfare, educational and charitable nonprofit
The following organizationsshall not be taxed under this Title [Tax on Income] in corporation,” was subject to income tax under the Tax Code and the Constitution. 72
respect to income received by them as such: The Court denied YMCA’s claim for exemption on the ground that as a charitable
institution falling underArticle VI, Section 28(3) of the Constitution,73 the YMCA is
xxxx not tax-exempt per se; “what is exempted is not the institution itself. . . those
exempted from real estate taxes are lands, buildings and improvements actually,
(H) A non-stock and nonprofit educational institution directly and exclusively used for religious, charitable or educational purposes.” 74
 The Court held that the exemption claimed by the YMCA is expressly disallowed 180 SUPREME COURT REPORTS
by the last paragraph of then Section 27 (now Section 30) of the Tax Code, which ANNOTATED
mandates that the income of exempt organizations from any of their properties, real Commissioner of Internal Revenue vs. De
or personal, are subject to the same tax imposed by the Tax Code, regardless of how that La Salle University, Inc.
income is used. The Court ruled that the last paragraph of Section 27 unequivocally conditioned only on the actual, di-
subjects to tax the rent income of the YMCA from its property. 75 rect and exclusive use of their as-
In short, the YMCA is exempt only from property tax but not from income tax. sets, revenues and income78 for
179 educational purposes.
VOL. 808, NOVEMBER 9, 2016 179
Commissioner of Internal Revenue vs. De We find that unlikeArticle VI, Section 28(3) of the Constitution (pertaining to
La Salle University, Inc. charitable institutions, churches, parsonages or convents, mosques, and nonprofit
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA cemeteries), which exempts from tax only theassets, i.e., “all lands, buildings, and
invoked the tax privilege granted under Article XIV, Section 4(3) of the Constitution. improvements, actually, directly, and exclusively used for religious, charitable, or
The Court denied YMCA’s claim that it falls under Article XIV, Section 4(3) of the educational purposes. . .”Article XIV, Section 4(3)categorically states that
Constitution holding that the term educational institution, when used in laws granting “[a]ll revenues and assets. . . used actually, directly, and exclusively for educational
tax exemptions, refers to the school system (synonymous with formal education); it purposes shall be exempt from taxes and duties.”
includes a college or an educational establishment; it refers to the hierarchically The addition and express use of the word revenues in Article XIV, Section 4(3) of
structured and chronologically graded learnings organized and provided by the the Constitution is not without significance.
formal school system.76 We find that the text demonstrates the policy of the 1987 Constitution, discernible
The Court then significantly laid down the requisites for availing the tax from the records of the 1986 Constitutional Commission79 to provide broader tax
exemption under Article XIV, Section 4(3), namely: (1) the taxpayer falls under the privilege to non-stock, nonprofit educational institutions as recognition of their role
classification non-stock, nonprofit educational institution; and (2) theincome it in assisting the State provide a public good. The tax exemption was seen as beneficial
seeks to be exempted from taxation isused actually, directly and exclusively for to students who may otherwise be charged unreasonable tuition fees if not for the tax
educational purposes.77 181
We now adopt YMCA as precedent and hold that: VOL. 808, NOVEMBER 9, 2016 181
1. The last paragraph of Section 30 of the Tax Code is without force and effect Commissioner of Internal Revenue vs. De
with respect to non-stock, nonprofit educational institutions, provided, that the La Salle University, Inc.
non-stock, nonprofit educational institutions prove that its assets and exemption extended to allrevenues and assets of non-stock, nonprofit educational
revenues are used actually, directly and exclusively for educational purposes. institutions.80
2. The tax-exemption constitutionally-granted to non-stock, nonprofit educational Further, a plain reading of the Constitution would show that Article XIV, Section
institutions, is not subject to limitations imposed by law. 4(3) does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational
The tax exemption granted by the institution. The phrase all revenues is unqualified by any reference to the source of
Constitution to non-stock, non- revenues. Thus, so long as the revenues and income are used actually, directly and
profit educational institutions is exclusively for educational purposes, then said revenues and income shall be exempt
180 from taxes and duties.81
 We find it helpful to discuss at this point the taxation of revenues versus the from taxation is the use of the property for purposes mentioned in the Constitution.
taxation of assets. We also held that the exemption extends to facilities which are incidental to and
182 reasonably necessary for the accomplishment of the main purposes.
182 SUPREME COURT REPORTS In concrete terms, the lease of a portion of a school building for commercial
ANNOTATED purposes, removes such assetfrom the property taxexemption granted under the
Commissioner of Internal Revenue vs. De Constitution.91 There is no exemption because the asset is not used actually, directly and
La Salle University, Inc. exclusively for educational purposes. The commercial use of the property is also not
Revenues consist of the amounts earned by a person or entity from the conduct of incidental to and reasonably necessary for the accomplishment of the main purpose
business operations.82 It may refer to the sale of goods, rendition of services, or the of a university, which is to educate its students.
return of an investment. Revenue is a component of the tax base in income However, if the universityactually, directly and exclusively uses for educational
tax,83VAT,84 and local business tax (LBT).85 purposes therevenues earned from the lease of its school building, such revenues shall
Assets, on the other hand, are the tangible and intangible properties owned by a be exempt from taxes and duties. The tax exemption no longer hinges on
person or entity.86 It may refer to real estate, cash deposit in a bank, investment in the 184
stocks of a corporation, inventory of goods, or any property from which the person or 184 SUPREME COURT REPORTS
entity may derive income or use to generate the same. In Philippine taxation, the fair ANNOTATED
market value of real property is a component of the tax base in real property tax Commissioner of Internal Revenue vs. De
(RPT).87 Also, the landed cost of imported goods is a component of the tax base in La Salle University, Inc.
VAT on importation88 and tariff duties.89 the use of the asset from which the revenues were earned, but on the actual, direct and
Thus, when a non-stock, nonprofit educational institution proves that it uses exclusive use of the revenues for educational purposes.
its revenues actually, directly, and exclu- Parenthetically, income and revenues of non-stock, nonprofit educational
183 institution not used actually, directly and exclusively for educational purposes are not
VOL. 808, NOVEMBER 9, 2016 183 exempt from duties and taxes. To avail of the exemption, the taxpayer must factually
Commissioner of Internal Revenue vs. De prove that it used actually, directly and exclusively for educational purposes the
La Salle University, Inc. revenues or income sought to be exempted.
sively for educational purposes, it shall be exempted from income tax, VAT, and LBT. The crucial point of inquiry then is on the use of the assets or on the use of the
On the other hand, when it also shows that it uses its assets in the form of real revenues. These are two things that must be viewed and treated separately. But so
property for educational purposes, it shall be exempted from RPT. long as the assets or revenues are used actually, directly and exclusively for educational
To be clear, proving the actual use of the taxable item will result in an exemption, purposes, they are exempt from duties and taxes.
but the specific tax from which the entity shall be exempted from shall depend on
whether the item is an item of revenue or asset. The tax exemption granted by the
To illustrate, if a university leases a portion of its school building to a bookstore Constitution to non-stock, non-
or cafeteria, the leased portion is not actually, directly and exclusively used for profit educational institutions,
educational purposes, even if the bookstore or canteen caters only to university unlike the exemption that may be
students, faculty and staff. availed of by proprietary educa-
The leased portion of the building may be subject toreal property tax, as held tional institutions, is not subject
in Abra Valley College, Inc. v. Aquino.90 We ruled in that case that the test of exemption to limitations imposed by law.
 Thus, we declare the last paragraph of Section 30 of the Tax Code without force
That the Constitution treats non-stock, nonprofit educational institutions and effect for being contrary to the Constitution insofar as it subjects to tax the
differently from proprietary educational institutions cannot be doubted. As income and revenues of non-stock, nonprofit educational institutions used actually,
discussed, the privilege granted to the former is conditioned only on the actual, direct directly and exclusively for educational purpose. We
and exclusive use of their revenues and assets for educational purposes. In clear 186
contrast, the tax privilege granted to the latter may be subject to limitations imposed 186 SUPREME COURT REPORTS
by law. ANNOTATED
We spell out below the difference in treatment if only to highlight the privileged Commissioner of Internal Revenue vs. De
status of non-stock, nonprofit educational institutions compared with their La Salle University, Inc.
proprietary counterparts. make this declaration in the exercise of and consistent with our duty93 to uphold the
primacy of the Constitution.94
Finally, we stress that our holding here pertains only to non-stock, nonprofit
185 educational institutions and does not cover the other exempt organizations under
VOL. 808, NOVEMBER 9, 2016 185 Section 30 of the Tax Code.
Commissioner of Internal Revenue vs. De For all these reasons, we hold that the income and revenues of DLSU proven to
La Salle University, Inc. have been used actually, directly and exclusively for educational purposes are
While a non-stock, nonprofit educational institution is classified as a tax-exempt exempt from duties and taxes.
entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax on II. The LOA issued to DLSU
Domestic Corporations). is not entirely void. The
To be specific, Section 30 provides that exempt organizations like non-stock, assessment for taxable
nonprofit educational institutions shall not be taxed on income received by them as year 2003 is valid.
such.
Section 27(B), on the other hand, states that “[p]roprietary educational DLSU objects to the CTAEn Banc’s conclusion that the LOA is valid for taxable
institutions . . . which are nonprofit shall pay a tax of ten percent (10%) on their year 2003 and insists that the entire LOA should be voided for being contrary to RMO
taxable income . . . Provided, that if the gross income from unrelated trade, business or No. 43-90, which provides that if tax audit includes more than one taxable period, the
other activity exceeds fifty percent (50%) of the total gross income derived by such other periods or years shall be specifically indicated in the LOA.
educational institutions . . . [the regular corporate income tax of 30%] shall be A LOA is the authority given to the appropriate revenue officer to examine the
imposed on the entire taxable income. . .”92 books of account and other accounting records of the taxpayer in order to determine
By the Tax Code’s clear terms, a proprietary educational institution is entitled the taxpayer’s correct internal revenue liabilities95 and for the purpose of col-
only to the reduced rate of 10% corporate income tax. The reduced rate is applicable 187
only if: (1) the proprietary educational institution is nonprofit and (2) its gross income VOL. 808, NOVEMBER 9, 2016 187
from unrelated trade, business or activity does not exceed 50% of its total gross Commissioner of Internal Revenue vs. De
income. La Salle University, Inc.
Consistent with Article XIV, Section 4(3) of the Constitution, these limitations do lecting the correct amount of tax,96 in accordance with Section 5 of the Tax Code,
not apply to non-stock, nonprofit educational institutions. which gives the CIR the power to obtain information, to summon/examine, and take
testimony of persons. The LOA commences the audit process97 and informs the As the CTA correctly held, the assessment for taxable year 2003 is valid because
taxpayer that it is under audit for possible deficiency tax assessment. this taxable period is specified in the LOA. DLSU was fully apprised that it was being
Given the purposes of a LOA, is there basis to completely nullify the LOA issued audited for taxable year 2003. Corollarily, the assessments for taxable years 2001 and
to DLSU, and consequently, disregard the BIR and the CTA’s findings of tax 2002 are void for having been unspecifiedon separate LOAs as required under RMO
deficiency for taxable year 2003? No. 43-90.
We answer in the negative. Lastly, the Commissioner’s claim that DLSU failed to raise the issue of the LOA’s
The relevant provision is Section C of RMO No. 43-90, the pertinent portion of validity at the CTA Division, and thus, should not have been entertained on appeal, is
which reads: not accurate.
3. A Letter of Authority [LOA] should cover a taxable period not exceeding one On the contrary, the CTAEn Banc found that the issue of the LOA’s validity came
taxable year. The practice of issuing [LOAs] covering audit of unverified prior up during the trial.100 DLSU then raised the issue in itsmemorandum and motion for
years is hereby prohibited. If the audit of a taxpayer shall include more than one partial reconsideration with the CTA Division. DLSU raised it again on appeal to the
taxable period, the other periods or years shall be specifically indicated in the CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
[LOA].98 LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of
the LOA at the CTA En Banc but she chose not to file her comment and memorandum
despite notice.102
What this provision clearly prohibits is the practice of issuing LOAs covering
audit of unverified prior years. RMO 43-90 does not say that a LOA which contains
189
unverified prior years is void. It merely prescribes that if the audit includes more VOL. 808, NOVEMBER 9, 2016 189
than one taxable period, the other periods or years must be specified. The provision Commissioner of Internal Revenue vs. De
read as a whole requires that if a taxpayer is audited for more than one taxable year, La Salle University, Inc.
the BIR must specify each taxable year or taxable period on separate LOAs.
III. The CTA correctly admit-
188
ted the supplemental evi-
188 SUPREME COURT REPORTS
dence formally offered by
ANNOTATED
DLSU.
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
The Commissioner objects to the CTA Division’s admission of DLSU’s
Read in this light, the requirement to specify the taxable period covered by the
supplemental pieces of documentary evidence.
LOA is simply to inform the taxpayer of the extent of the audit and the scope of the
To recall, DLSU formally offered its supplemental evidence upon filing its motion
revenue officer’s authority. Without this rule, a revenue officer can unduly burden
for reconsideration with the CTA Division.103The CTA Division admitted the
the taxpayer by demanding random accounting records from random unverified years,
supplemental evidence, which proved that a portion of DLSU’s rental income was
which may include documents from as far back as ten years in cases of fraudaudit.99
used actually, directly and exclusively for educational purposes. Consequently, the
In the present case, the LOA issued to DLSU is forFiscal Year Ending 2003 and
CTA Division reduced DLSU’s tax liabilities.
Unverified Prior Years. The LOA does not strictly comply with RMO No. 43-90 because
We uphold the CTA Division’s admission of the supplemental evidence on
it includes unverified prior years. This does not mean, however, that the entire LOA
distinct but mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely
is void.
object to the formal offer of supplemental evidence; and (2) the CTA is not governed strictly
by the technical rules of evidence.
 First, the failure to object to the offered evidence renders it admissible, and the Commissioner of Internal Revenue vs. De
court cannot, on its own, disregard such evidence.104 La Salle University, Inc.
The Court has held that if a party desires the court to reject the evidence offered, We held that while it is true that strict procedural rules generally frown upon the
it must so state in the form of a timely objection and it cannot raise the objection to submission of documents after the trial, the law creating the CTA specifically
the evidence for the first time on appeal.105 Because of a party’s failure to timely provides that proceedings before it shall not be governed strictly by the technical
object, the evidence offered becomes part of the evidence in the case. As a rules of evidence111and that the paramount consideration remains the ascertainment
consequence, all the parties are of truth. We ruled that procedural rules should not bar courts from
190 considering undisputed factsto arrive at a just determination of a controversy.112
190 SUPREME COURT REPORTS We applied the same reasoning in the subsequent cases of Filinvest Development
ANNOTATED Corporation v. Commissioner of Internal Revenue113 andCommissioner of Internal Revenue
Commissioner of Internal Revenue vs. De v. PERF Realty Corporation,114 where the taxpayers also submitted the supplemental
La Salle University, Inc. supporting document only upon filing their motions for reconsideration.
considered bound by any outcome arising from the offer of evidence properly Although the cited cases involved claims for tax refunds, we also dispense with
presented.106 the strict application of the technical rules of evidence in the present tax
As disclosed by DLSU, the Commissioner did not oppose the supplemental assessment case. If anything, the liberal application of the rules assumes greater force
formal offer of evidence despite notice.107 The Commissioner objected to the and significance in the case of a taxpayer who claims a constitutionally granted tax
admission of the supplemental evidence only when the case was on appeal to the exemption. While the taxpayers in the cited cases claimed refund of excess tax
CTA En Banc. By the time the Commissioner raised her objection, it was too late; payments based on the Tax Code,115 DLSU is claiming tax exemption based on the
theformal offer, admissionand evaluation of the supplemental evidence were all fait Constitution. If liberality is afforded to taxpayers who paid more than they should
accompli. have under a statute, then with more reason that we should allow a taxpayer to prove
We clarify that while the Commissioner’s failure to promptly object had no its exemption from tax based on the Constitution.
bearing on the materiality or sufficiency of the supplemental evidence admitted, she Hence, we sustain the CTA’s admission of DLSU’s supplemental offer of evidence
was bound by the outcome of the CTA Division’s assessment of the evidence. 108 not only because the Commissioner
Second, the CTA is not governed strictly by the technical rules of evidence. The 192
CTA Division’s admission of the formal offer of supplemental evidence,without 192 SUPREME COURT REPORTS
prompt objectionfrom the Commissioner, was thus justified. ANNOTATED
Notably, this Court had in the past admitted and considered evidence attached to Commissioner of Internal Revenue vs. De
the taxpayers’ motion for reconsideration. La Salle University, Inc.
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund failed to promptly object, but more so because the strict application of the technical
claimant attached to its motion for reconsideration with the CTA its Final Adjustment rules of evidence may defeat the intent of the Constitution.
Return. The Commissioner, as in the present case, did not oppose the taxpayer’s
motion for reconsideration and the admission of the Final Adjustment Return.110 We IV. The CTA’s appreciation of
thus admitted and gave weight to the Final Adjustment Return although it was only evidence is generally bind-
submitted upon motion for reconsideration. ing on the Court unless
191 compelling reasons justify
VOL. 808, NOVEMBER 9, 2016 191 otherwise.
 preponderance of evidence was sufficiently met to prove actual, direct and exclusive
It is doctrinal that the Court will not lightly set aside the conclusions reached by use for educational purposes.
the CTA which, by the very nature of its function of being dedicated exclusively to The CTA also found that DLSU’s rental income fromother concessionaires, which
the resolution of tax problems, has developed an expertise on the subject, unless there were allegedly deposited to afund (CF-CPA Account),120intended for the university’s
has been an abuse or improvident exercise of authority.116 We thus accord the findings capital projects, was not proved to have been used actually, directly and exclusively
of fact by the CTA with the highest respect. These findings of facts can only be for educational purposes. The CTA observed that “[DLSU] . . . failed to fully account
disturbed on appeal if they are not supported by substantial evidence or there is a for and substantiate all the disbursements from the [fund].” Thus, the
showing of gross error or abuse on the part of the CTA. In the absence of any clear 194
and convincing proof to the contrary, this Court must presume that the CTA 194 SUPREME COURT REPORTS
rendered a decision which is valid in every respect.117 ANNOTATED
We sustain the factual findings of the CTA. Commissioner of Internal Revenue vs. De
The parties failed to raise credible basis for us to disturb the CTA’s findings that La Salle University, Inc.
DLSU had used actually, directly and exclusively for educational purposes CTA “cannot ascertain whether rental income from the [other] concessionaires was
a portion of its assessed income and that it had remitted the DST payments though an indeed used for educational purposes.”121
online imprinting machine. To stress, the CTA’s factual findings were based on and supported by the report
193 of the Independent CPA who reviewed, audited and examined the voluminous
VOL. 808, NOVEMBER 9, 2016 193 documents submitted by DLSU.
Commissioner of Internal Revenue vs. De Under the CTA Revised Rules, an Independent CPA’s functions include: (a)
La Salle University, Inc. examination and verification of receipts, invoices, vouchers and other long accounts;
a. DLSU used actually, directly, (b) reproduction of, and comparison of such reproduction with, and certification that
and exclusively for educa- the same are faithful copies of original documents, and pre-marking of documentary
tional purposes aportion of exhibits consisting of voluminous documents; (c) preparation of schedules or
its assessed income. summaries containing a chronological listing of the numbers, dates and amounts
covered by receipts or invoices or other relevant documents and the amount(s) of
To see how the CTA arrived at its factual findings, we review the process taxes paid; (d)making findings as to compliance with substantiation requirements
undertaken, from which it deduced that DLSU successfully proved that it used under pertinent tax laws, regulations and jurisprudence; (e) submission of a formal
actually, directly and exclusively for educational purposes a portion of its rental report with certification of authenticity and veracity of findings and conclusions in
income. the performance of the audit; (f) testifying on such formal report; and (g) performing
The CTA reduced DLSU’s deficiency income tax and VAT liabilities in view of the such other functions as the CTA may direct.122
submission of the supplemental evidence, which consisted of statement of receipts, Based on the Independent CPA’s report and on its own appreciation of the
statement ofdisbursement and fund balance and statement of fund changes.118 evidence, the CTA held that only theportion of the rental income pertaining to
These documents showed that DLSU borrowed P93.86 Million,119 which was used thesubstantiated disbursements(i.e., proved by receipts, vouchers, etc.) from the CF-CPA
to build the university’s Sports Complex. Based on these pieces of evidence, the CTA Account was considered as used actually, directly and exclusively for educational
found that DLSU’s rental income from its concessionaires were indeed transmitted purposes. Consequently, the unaccounted and unsubstantiated disbursements must
and used for the payment of this loan. The CTA held that the degree of be subjected to income tax and VAT.123
195 The CTA then concluded that the ratio of substantiated disbursements to the total
VOL. 808, NOVEMBER 9, 2016 195 disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%. 130 The
Commissioner of Internal Revenue vs. De CTA held as follows:
La Salle University, Inc. However, as regards petitioner’s rental income from Alarey, Inc., Zaide Food Corp.,
The CTA then further reduced DLSU’s tax liabilities by cancelling the assessments Capri International and MTO Bookstore, which were transmitted to the CF-CPA
for taxable years 2001 and 2002 due to the defective LOA. 124 Account, petitioner again failed to fully account for and substantiate all the
The Court finds that the above fact-finding process undertaken by the CTA disbursements from the CF-CPA Account; thus failing to prove that the rental income
shows that it based its ruling on the evidence on record, which we reiterate, were derived therein were actually, directly and exclusively used for educational purposes.
examined and verified by the Independent CPA. Thus, we see no persuasive reason Likewise, the findings of the Court-Commissioned Independent CPA show that the
to deviate from these factual findings. disbursements from the CF-CPA Account for fiscal year 2003 amounts to
However, while we generally respect the factual findings of the CTA, it does not P6,259,078.30 only. Hence, this portion of the rental income, being the substantiated
mean that we are bound by its conclusions. In the present case, we do not agree with disbursements of the CF-CPA Account, was considered by the Special First Division
the method used by the CTA to arrive at DLSU’s unsubstantiated rental income (i.e., as used actually, directly and exclusively for educational purposes. Since for fiscal
income not proved to have been actually, directly and exclusively used for year 2003, the total disbursements per voucher is P6,259,078.3 (Exhibit “LL-25-C”),
educational purposes). and the total disbursements per subsidiary ledger amounts to P23,463,543.02 (Exhibit
To recall, the CTA found that DLSU earned a rental income of P10,610,379.00 in “LL-29-C”), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
taxable year 2003.125 DLSU earned this income from leasing a portion of its premises (P6,259,078.30/P23,463,543.02).
to: 1) MTO-Sports Complex, 2) La Casita, 3)Alarey, Inc., 4) Zaide Food Corp., 5) Capri
International, and 6) MTO Bookstore.126
197
To prove that its rental income was used for educational purposes, DLSU
VOL. 808, NOVEMBER 9, 2016 197
identified the transactions where the rental income was expended, viz.:
Commissioner of Internal Revenue vs. De
1)P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports
La Salle University, Inc.
Complex; and 2) P6,602,655.00transferred to the CF-CPA Account.128
196
196 SUPREME COURT REPORTS Thus, the substantiated portion of CF-CPA Disbursements for fiscal year 2003,

ANNOTATED arrived at by multiplying the ratio of 26.68% with the total rent income added to and

Commissioner of Internal Revenue vs. De used in the CF-CPA Account in the amount of P6,602,655.00 is

La Salle University, Inc. P1,761,588.35.131 (emphasis supplied)

DLSU also submitted documents to the Independent CPA to prove that the
P6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
For better understanding, we summarize the CTA’s computation as follows:
exclusively for educational purposes. According to the Independent CPA’ findings,
1. The CTA subtracted the rent income used in the construction of the Sports
DLSU was able to substantiate disbursements from the CF-CPA Account amounting
Complex (P4,007,724.00) from the rental income (P10,610,379.00) earned from
to P6,259,078.30.
the above mentioned concessionaries. The difference (P6,602,655.00) was the
Contradicting the findings of the Independent CPA, the CTA concluded that out
portion claimed to have been deposited to the CF-CPA Account.
of the P10,610,379.00 rental income, P4,841,066.65 wasunsubstantiated, and thus,
subject to income tax and VAT.129
 2. The CTA then subtracted thesupposed substantiated portion of CF-CPA
disbursements (P1,761,308.37) from the P6,602,655.00 to arrive at the supposed
unsubstantiatedportion of the rental income (P4,841,066.65).132
3. The substantiatedportion of CF-CPA disbursements (P1,761,308.37)133
derived by multiplying the
198
198 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
rental income claimed to have been added to the CF-CPA Account
(P6,602,655.00) by 26.68% or the ratio ofsubstantiateddisbursements to total
disbursements(P23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements
from the CF-CPA Account as found by the Independent CPA (P6,259,078.30)
by the total disbursements (P23,463,543.02) from the same account.
We find that this system of calculation is incorrect and does not truly give effect
to the constitutional grant of tax exemption to non-stock, nonprofit educational
institutions. The CTA’s reasoning is flawed because it required DLSU to substantiate
an amount that is greater than the rental income deposited in the CF-CPA Account in
2003.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of P10.61 million) 135
used for educational purposes. This amount was divided into two parts: (a) the P4.01
199
VOL. 808, NOVEMBER 9, 2016 199
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
million, which was used to pay the loan obtained for the construction of the Sports
Complex; and (b) the P6.60 million,136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to
P23.46 million.137 These figures, read in light of the constitutional exemption, raises
the question: does DLSU claim that the whole total CF-CPA disbursement of P23.46
million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements
of P23.46 million had been for educational purposes and should thus be tax-exempt;
was DLSU only claimed P10.61 million for tax-exemption and should thus be required to
prove that this amount had been used as claimed.
Of this amount, P4.01 had been proven to have been used for educational
purposes, as confirmed by the Independent CPA. The amount in issue is therefore the
balance of P6.60 million which was transferred to the CF-CPA which in turn made
disbursements of P23.46 million for various general purposes, among them the P6.60
million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made
disbursements for educational purposes in year 2003 in the amount P6.26 million.
Based on these given figures, the CTA concluded that the expenses for educational
purposes that had been coursed through the CF-CPA should be prorated so that only
the portion that P6.26 million bears
200
200 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
to the total CF-CPA disbursements should be credited to DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt. As
were already mentioned above, DLSU is not claiming that the whole P23.46 million CF-
CPA disbursement had been used for educational purposes; it only claims that P6.60
million transferred to CF-CPA had been used for educational purposes. This was
what DLSU needed to prove to have actually and directly used for educational
purposes.
That this fund had been first deposited into a separate fund (the CF-CPA
established to fund capital projects) lends peculiarity to the facts of this case, but does
not detract from the fact that the deposited funds were DLSU revenue funds that had
been confirmed and proven to have been actually and directly used for educational
purposes via the CF-CPA. That the CF-CPA might have had other sources of funding
is irrelevant because the assessment in the present case pertains only to the rental
income which DLSU indisputably earned as revenue in 2003. That the proven CF-
CPA funds used for educational purposes should not be prorated as part of its total
CF-CPA disbursements for purposes of crediting to DLSU is also logical because no
claim whatsoever had been made that the totality of the CF-CPA disbursements had
been for educational purposes. No prorating is necessary; to state the obvious,
exemption is based on actual and direct use and this DLSU has indisputably proven.
Based on these considerations, DLSU should therefore be liable only for the
difference between what it claimed and what it has proven. In more concrete terms,
DLSU only had to prove that its rental income for taxable year 2003 (P10,610,379.00)
was used for educational purposes. Hence, while the total disbursements from the
CF-CPA Account amounted to P23,463,543.02, DLSU only had to substantiate its
P10.6 million rental income, part of which was the
201
VOL. 808, NOVEMBER 9, 2016 201
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
P6,602,655.00 transferred to the CF-CPA account. Of this latter amount, P6.259 million
was substantiated to have been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows:
On DLSU’s argument that the CTA should have appreciated its evidence in the
same way as it did with the evidence submitted by Ateneo in another separate case, the
CTA explained that the issue in the Ateneo case was not the same as the issue in the
present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to
pay income taxes and VAT under certain BIR and Department of Finance
issuances139 that required the educational institution toown and operate the canteens, or
other commercial enterprises within its campus, as condition for tax exemption. The
CTA held that the Constitution does not require the educational institution to own or
op-
202
202 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
erate these commercial establishments to avail of the exemption.140
Given the lack of complete identity of the issues involved, the CTA held that it
had to evaluate the separate sets of evidence differently. The CTA likewise stressed
that DLSU and Ateneo gave distinct defenses and that its wisdom “cannot be equated
on its decision ontwo different cases with two different issues.”141
DLSU disagrees with the CTA and argues that the entire assessment must be
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo. We
reject DLSU’s argument for being non sequitur. Its reliance on the concept of
uniformity of taxation is also incorrect.
First, even granting that Ateneo and DLSU submittedsimilar evidence,
thesufficiency and materiality of the evidence supporting their respective claims for
tax exemption would necessarily differ because their attendant issues and facts differ.
To state the obvious, the amount of income received by DLSU and by Ateneo
during the taxable years they were assessed varied. The amount of tax assessment
also varied. The amount of income proven to have been used for educational purposes
alsovaried because the amount substantiated varied.142Thus, the amount of tax
assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency
of P17,303,001.12for taxable years 2001, 2002 and 2003. On the other hand, the BIR
assessed Ateneo a total deficiency tax ofP8,864,042.35 for the same period. Notably,
DLSU was assessed deficiency DST, while Ateneo was not.143
203
VOL. 808, NOVEMBER 9, 2016 203
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
Thus, although both Ateneo and DLSU claimed that they used their rental income
actually, directly and exclusively for educational purposes by submitting similar
evidence, e.g., the testimony of their employees on the use of university revenues, the
report of the Independent CPA, their income summaries, financial statements,
vouchers, etc., the fact remains that DLSU failed to prove that a portion of its income and
revenues had indeed been used for educational purposes.
The CTA significantly found that some documents that could have fully supported
DLSU’s claim were not produced in court.Indeed, the Independent CPA testified that
some disbursements had not been proven to have been used actually, directly and
exclusively for educational purposes.144
The final nail on the question of evidence is DLSU’s own admission that the
original of these documents had not in fact been produced before the CTA although it
claimed that there was no bad faith on its part.145 To our mind, this admission is a
good indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU’s
failure to substantiate a portion of its claimed exemption.
Further, DLSU’s invocation of Section 5, Rule 130 of the Revised Rules on
Evidence, that the contents of the missing supporting documents were proven by its
recital in some other authentic documents on record,146 can no longer be entertained at
this late stage of the proceeding. The CTA did not rule on this particular claim. The
CTA also made no finding on DLSU’s assertion of lack of bad faith. Besides, it is not
our duty to go over these documents to test the truthfulness of their contents, this
Court not being a trier of facts.
Second, DLSU misunderstands the concept of uniformity of taxation.
204
204 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
Equality and uniformity of taxation means that all taxable articles or kinds of
property of the same class shall be taxed at the same rate. 147 A tax is uniform when it
operates with the same force and effect in every place where the subject of it is
found.148 The concept requires that all subjects of taxation similarly situated should
be treated alike and placed in equal footing.149
In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated
them alike because their income proved to have been used actually, directly and
exclusively for educational purposes were exempted from taxes. The CTA equally
applied the requirements in the YMCAcase to test if they indeed used their revenues
for educational purposes.
DLSU can only assert that the CTA violated the rule on uniformity if it can show
that, despite proving that it used actually, directly and exclusively for educational
purposes its income and revenues, the CTA still affirmed the imposition of taxes.
That the DLSU secured a different result happened because it failed tofully prove that
it used actually, directly and exclusively for educational purposes its revenues and
income.
On this point, we remind DLSU that the rule on uniformity of taxation
doesnot mean that subjects of taxation similarly situated are treated in literally the
same way in all and every occasion. The fact that the Ateneo and DLSU are both non-
stock, nonprofit educational institutions, does not mean that the CTA or this Court
would similarly decide every case for (or against) both universities. Success in tax
litigation, like in any other litigation, depends to a large extent on the suffi-
205
VOL. 808, NOVEMBER 9, 2016 205
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
ciency of evidence. DLSU’s evidence was wanting, thus, the CTA was correct in not
fully cancelling its tax liabilities.
b. DLSU proved its pay-
ment of the DST.
The CTA affirmed DLSU’s claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank’sOn-Line Electronic DST
Imprinting Machine. The Commissioner argues that DLSU is not allowed to use this
method of payment because an educational institution is excluded from the class of
taxpayers who can use the On-Line Electronic DST Imprinting Machine.
We sustain the findings of the CTA. The Commissioner’s argument lacks basis in
both the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and
paid for by the person making, signing, issuing, accepting, or transferring the
same.150The Tax Code provides that whenever one party to the document enjoys
exemption from DST, the other party not exempt from DST shall be directly liable for
the tax. Thus, it is clear that DST shall be payable by any party to the document, such
that the payment and compliance by one shall mean the full settlement of the DST
due on the document.
In the present case, DLSU entered into mortgage and loan agreements with
banks. These agreements are subject to DST.151 For the purpose of showing that the
DST on the loan agreement has been paid, DLSU presented its agreements bearing
the imprint showing that DST on the document has been paid by the bank, its
counterparty. The imprint should be sufficient proof that DST has been paid. Thus,
DLSU can-
206
206 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs. De
La Salle University, Inc.
not be further assessed for deficiency DST on the said documents.
Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST Imprinting
Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because
it was not DLSU who used the On-Line Electronic DST Imprinting Machine but the
bank that handled its mortgage and loan transactions. RR No. 9-2000 expressly
includes banks in the class of taxpayers that can use theOn-Line Electronic DST
Imprinting Machine.
Thus, the Court sustains the finding of the CTA that DLSU proved the payment
of the assessed DST deficiency, except for the unpaid balance of P13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner
of Internal Revenue in G.R. No. 196596 and AFFIRMthe December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La
Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court of
Tax Appeals En Banc in CTA En Banc Case No. 671, with theMODIFICATION that
the base for the deficiency income tax and VAT for taxable year 2003 isP343,576.70.
SO ORDERED.
Carpio (Chairperson)and Del Castillo, JJ., concur.
 G.R. No. 222743. April 5, 2017.* Same; It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous, meaningless, void
MEDICARD PHILIPPINES, INC., petitioner, vs.COMMISSIONER OF INTERNAL and insignificant.—It is a cardinal rule in statutory construction that no word, clause,
REVENUE, respondent. sentence, provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders every
Taxation; Assessment; Letter of Authority; Unless authorized by the Commissioner of
word operative is preferred over that which makes some words idle and nugatory.
Internal Revenue (CIR) himself or by his duly authorized representative, through a Letter of
This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose
Authority (LOA), an examination of the taxpayer cannot ordinarily be undertaken.—It is
the interpretation which gives effect to the whole of the statute — its every word.
clear that unless authorized by the CIR himself or by his duly authorized
Health Maintenance Organization; Insurance Companies; The main difference between
representative, through an LOA, an examination of the taxpayer cannot ordinarily be
a Health Maintenance Organization (HMO) and an insurance company is that HMOs
undertaken. The circumstances contemplated under Section 6 where the taxpayer
undertake to provide or arrange for the provision of medical services through participating
may be assessed through best-evidence obtainable, inventory-taking, or surveillance
physicians while insurance companies simply undertake to indemnify the insured for medical
among others has nothing to do with the LOA. These are simply methods of
expenses incurred up to a pre-agreed limit.—The Court said that the main difference
examining the taxpayer in order to arrive at the correct amount of taxes. Hence,
between an HMO and an insurance company is that HMOs undertake to provide or
unless undertaken by the CIR himself or his duly authorized representatives, other
arrange for the provision of medical services through participating physicians while
tax agents may not validly conduct any of these kinds of examinations without prior
insurance companies simply undertake to indemnify the insured for medical
authority.
expenses incurred up to a pre-agreed limit. In the present case, the VAT is a tax on
Statutory Construction; It is a well-settled principle of legal hermeneutics that words of
the value added by the performance of the service by the taxpayer. It is, thus, this
a statue will be interpreted in their natural, plain and ordinary acceptation and signification,
service and the value charged thereof by the taxpayer that is taxable under the NIRC.
unless it is evident that the legislature intended a technical or special legal meaning to those
To be sure, there are pros and cons in subjecting the entire amount of membership
words.—The CTA En Bancoverlooked that the definition of gross receipts under RR
fees to VAT. But the Court’s task however is not to weigh these policy considerations
No. 16-2005 merely presumed
but to determine if these

445
446
VOL. 822, APRIL 5, 2017 445
446 SUPREME COURT REPORTS
Medicard Philippines, Inc. vs. ANNOTATED
Commissioner of Internal Revenue
Medicard Philippines, Inc. vs.
that the amount received by an HMO as membership fee is the HMO’s Commissioner of Internal Revenue
compensation for their services. As a mere presumption, an HMO is, thus, allowed to considerations in favor of taxation can even be implied from the statute where
establish that a portion of the amount it received as membership fee does NOT the CIR purports to derive her authority. This Court rules that they cannot because
actually compensate it but some other person, which in this case are the medical the language of the NIRC is pretty straightforward and clear.
service providers themselves. It is well-settled principle of legal hermeneutics that Taxation; Our tax authorities fill in the details that Congress may not have the
words of a statute will be interpreted in their natural, plain and ordinary acceptation opportunity or competence to provide; Courts, however, will not uphold these authorities’
and signification, unless it is evident that the legislature intended a technical or interpretations when clearlyabsurd, erroneous or improper.—For this Court to subject the
special legal meaning to those words. The Court cannot read the word “presumed” in entire amount of MEDICARD’s gross receipts without exclusion, the authority should
any other way. have been reasonably founded from the language of the statute. That language is
wanting in this case. In the scheme of judicial tax administration, the need for diagnostic and curative medical services provided by duly licensed physicians,
certainty and predictability in the implementation of tax laws is crucial. Our tax specialists and other professional technical staff participating in the group practice
authorities fill in the details that Congress may not have the opportunity or health de-
competence to provide. The regulations these authorities issue are relied upon by 448
taxpayer, who are certain that these will be followed by the courts. Courts, however, 448 SUPREME COURT REPORTS
will not uphold these authorities’ interpretations when clearly absurd, erroneous or ANNOTATED
improper. The CIR’s interpretation of gross receipts in the present case is patently Medicard Philippines, Inc. vs.
erroneous for lack of both textual and non-textual support. Commissioner of Internal Revenue
livery system at a hospital or clinic owned, operated or accredited by it. 7
PETITION for review on certiorari of the decision and resolution of the Court of Tax MEDICARD filed its First, Second, and Third Quarterly VAT Returns through
Appeals En Banc. Electronic Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and
The facts are stated in the opinion of the Court. October 20, 2006, respectively, and its Fourth Quarterly VAT Return on January 25,
Divina Law for petitioner. 2007.8
Upon finding some discrepancies between MEDICARD’s Income Tax Returns
REYES, J.:
(ITRs) and VAT Returns, the CIR informed MEDICARD and issued a Letter Notice
(LN) No. 122-VT-06-00-00020 dated September 20, 2007. Subsequently, the CIR also
This appeal by Petition for Review1 seeks to reverse and set aside the
issued a Preliminary Assessment Notice (PAN) against MEDICARD for deficiency
Decision2 dated September 2, 2015 and Resolution3
VAT. A Memorandum dated December 10, 2007 was likewise issued recommending
447
the issuance of a Formal Assessment Notice (FAN) against MEDICARD.9
VOL. 822, APRIL 5, 2017 447
On January 4, 2008, MEDICARD received CIR’s FAN dated December 10, 2007
Medicard Philippines, Inc. vs.
for alleged deficiency VAT for taxable year 2006 in the total amount of
Commissioner of Internal Revenue
P196,614,476.69,10 inclusive of penalties.11
dated January 29, 2016 of the Court of Tax Appeals (CTA) En Banc in CTA E.B. No.
449
1224, affirming with modification the Decision 4dated June 5, 2014 and the
VOL. 822, APRIL 5, 2017 449
Resolution5 dated September 15, 2014 in CTA Case No. 7948 of the CTA Third
Medicard Philippines, Inc. vs.
Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay
Commissioner of Internal Revenue
respondent Commissioner of Internal Revenue (CIR) the deficiency Value-Added Tax
According to the CIR, the taxable base of HMOs for VAT purposes is its gross
(VAT) assessment in the aggregate amount of P220,234,609.48, plus 20% interest per
receipts without any deduction under Section 4.108.3(k) of Revenue Regulation (RR)
annum starting January 25, 2007, until fully paid, pursuant to Section 249(c) 6 of the
No. 16-2005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers,
National Internal Revenue Code (NIRC) of 1997.
Inc.,12 the CIR argued that since MEDICARD does not actually provide medical
and/or hospital services, but merely arranges for the same, its services are not VAT
The Facts
exempt.13
450
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid
450 SUPREME COURT REPORTS
health and medical insurance coverage to its clients. Individuals enrolled in its health
ANNOTATED
care programs pay an annual membership fee and are entitled to various preventive,
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
MEDICARD argued that: (1) the services it render is not limited merely to
arranging for the provision of medical and/or hospital services by hospitals and/or
clinics but include actual and direct rendition of medical and laboratory services; in
fact, its 2006 audited balance sheet shows that it owns x-ray and laboratory facilities
which it used in providing medical and laboratory services to its members; (2) out of
the P1.9 Billion membership fees, P319 Million was received from clients that are
registered with the Philippine Export Zone Authority (PEZA) and/or Bureau of
Investments; (3) the processing fees amounting to P11.5 Million should be excluded
from gross receipts because P5.6 Million of which represent advances for professional
fees due from clients which were paid by MEDICARD while the remainder was
already previously subjected to VAT; (4) the professional fees in the amount of P11
Million should also be excluded because it represents the amount of medical services
actually and directly rendered by MEDICARD and/or its subsidiary company; and
(5) even assuming that it is liable to pay for the VAT, the 12% VAT rate should not be
applied on the entire amount but only for the period when the 12% VAT rate was
already in effect, i.e., on February 1, 2006. It should not also be held liable for
surcharge and deficiency interest because it did not pass on the VAT to its members. 14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing
Revenue Officer Romualdo Plocios to verify the supporting documents of
MEDICARD’s Protest. MEDICARD also submitted additional supporting
documentary evidence in aid of its Protest thru a letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR’s Final Decision on Disputed
Assessment dated May 15, 2009, denying MEDICARD’s protest, to wit:
451
VOL. 822, APRIL 5, 2017 451
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in
toto assessment of deficiency [VAT] in total sum of P196,614,476.99. It is requested
that you pay said deficiency taxes immediately. Should payment be made later,
adjustment has to be made to impose interest until date of payment. This is our final
decision. If you disagree, you may take an appeal to the [CTA] within the period
provided by law, otherwise, said assessment shall become final, executory and
demandable.16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the
CTA, reiterating its position before the tax authorities.17
On June 5, 2014, the CTA Division rendered a Decision 18 affirming with
modifications the CIR’s deficiency VAT assessment covering taxable year 2006,viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by
[CIR] against [MEDICARD] covering taxable year 2006 is herebyAFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount
of P223,173,208.35, inclusive of the twenty-five percent (25%) surcharge imposed
under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis
deficiency VAT of P178,538,566.68 computed from January 25, 2007 until
452
452 SUPREME COURT REPORTS
ANNOTATED
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
full payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%)per annum on the total
amount of P223,173,208.35 representing basic deficiency VAT of P178,538,566.68 and
25% surcharge of P44,634,641.67 and on the 20% deficiency interest which have
accrued as aforestated in (a), computed from June 19, 2009 until full payment thereof
pursuant to Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not
limited to the issuance of Letter of Authority (LOA) alone as the CIR is granted vast
powers to perform examination and assessment functions; (2) in lieu of an LOA, an
LN was issued to MEDICARD informing it of the discrepancies between its ITRs and
VAT Returns and this procedure is authorized under Revenue Memorandum Order
(RMO) No. 30-2003 and 42-2003; (3) MEDICARD is estopped from questioning the
validity of the assessment on the ground of lack of LOA since the assessment issued
against MEDICARD contained the requisite legal and factual bases that put
MEDICARD on notice of the deficiencies and it in fact availed of the remedies 454
provided by law without questioning the nullity of the assessment; (4) the amounts 454 SUPREME COURT REPORTS
that MEDICARD earmarked and eventually paid to doctors, hospitals and clinics ANNOTATED
cannot be excluded from the computation of its gross receipts under the provisions of Medicard Philippines, Inc. vs.
RR No. 4-2007 because the act of earmarking or allocation is by itself an act of Commissioner of Internal Revenue
ownership and management over the funds by MEDICARD which is beyond the (a) Deficiency interest at the rate of 20% per annum on the basic
contemplation of RR No. 4-2007; (5) MEDICARD’s earnings from its clinics and deficiency VAT of P176,187,687.58 computed from January 25, 2007 until full
laboratory facilities cannot be excluded from its gross receipts because the operation payment thereof pursuant to Section 249(B) of the NIRC of 1997, as amended;
of these clinics and laboratory is merely an incident to MEDICARD’s main line of and
453 (b) Delinquency interest at the rate of 20%per annum on the total amount
VOL. 822, APRIL 5, 2017 453 of P220,234,609.48 (representing basic deficiency VAT of P176,187,687.58 and
Medicard Philippines, Inc. vs. 25% surcharge of P44,046,921.90) and on the deficiency interest which have
Commissioner of Internal Revenue accrued as afore-stated in (a), computed from June 19, 2009 until full payment
business as an HMO and there is no evidence that MEDICARD segregated the thereof pursuant to Section 249(C) of the NIRC of 1997, as amended.”
amounts pertaining to this at the time it received the premium from its members; and SO ORDERED.22
(6) MEDICARD was not able to substantiate the amount pertaining to its January
2006 income and therefore has no basis to impose a 10% VAT rate. 20
Disagreeing with the CTAEn Banc’s decision, MEDICARD filed a motion for
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied.
reconsideration but it was denied.23 Hence, MEDICARD now seeks recourse to this
Hence, MEDICARD elevated the matter to the CTA En Banc.
Court via a petition for review oncertiorari.
In a Decision21 dated September 2, 2015, the CTAEn Banc partially granted the
The Issues
petition only insofar as the 10% VAT rate for January 2006 is concerned but sustained
the findings of the CTA Division in all other matters, thus:
1. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
WHEREFORE, in view thereof, the instant Petition for Review is
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND
hereby PARTIALLY GRANTED. Accordingly, the Decision dated June 5, 2014 is
EVENTUALLY PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL
hereby MODIFIED, as follows:
FORM PART OF ITS GROSS RECEIPTS FOR VAT PURPOSES.24
“WHEREFORE, premises considered, the deficiency VAT assessment
issued by [CIR] against [MEDICARD] covering taxable year 2006 is 455
hereby AFFIRMED WITH MODIFICATIONS. Accordingly, [MEDICARD] VOL. 822, APRIL 5, 2017 455
is ordered to pay [CIR] the amount of P220,234,609.48, inclusive of the 25% Medicard Philippines, Inc. vs.
surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, Commissioner of Internal Revenue
computed as follows: Ruling of the Court
Basic Deficiency VAT P176,187,687.58
Add: 25% Surcharge 44,046,921.90 The petition is meritorious.
Total P220,234,609.48
In addition, [MEDICARD] is ordered to pay:
The absence of an LOA tax agents may not validly conduct any of these kinds of examinations without prior
violated MEDICARD’s authority.
right to due process With the advances in information and communication technology, the Bureau of
Internal Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and
An LOA is the authority given to the appropriate revenue officer assigned to guidelines once its then incipient centralized Data Warehouse (DW) becomes fully
perform assessment functions. It empowers or enables said revenue officer to operational in conjunction with its Reconciliation of Listing for Enforcement System
examine the books of account and other accounting records of a taxpayer for the (RELIEF System).26 This system can detect tax leaks by matching the data available
purpose of collecting the correct amount of tax.25 An LOA is premised on the fact that under the BIR’s Integrated Tax System (ITS) with data gathered from third party
the examination of a taxpayer who has already filed his tax returns is a power that sources. Through the consolidation and cross-referencing of third party information,
statutorily belongs only to the CIR himself or his duly authorized representatives. discrepancy reports on sales and purchases can be generated to uncover under
Section 6 of the NIRC clearly provides as follows: declared income and over claimed purchases of goods and services.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional 457
Requirements for Tax Administration and Enforcement.— VOL. 822, APRIL 5, 2017 457
(A) Examination of Return and Determination of Tax Due.—After a return has Medicard Philippines, Inc. vs.
been filed as required under the provisions of this Code, the Commissioner or his Commissioner of Internal Revenue
duly authorized representativemay authorize the examination of any taxpayerand Under this RMO, several offices of the BIR are tasked with specific functions
the assessment of the correct amount of tax: Provided, however, That failure to file a relative to the RELIEF System, particularly with regard to LNs. Thus, the Systems
return shall not prevent the Commissioner from authorizing the examination of any Operations Division (SOD) under the Information Systems Group (ISG) is responsible
taxpayer. for: (1) coming up with the List of Taxpayers with discrepancies within the threshold
x x x x (Emphasis and underlining ours) amount set by management for the issuance of LN and for the system-generated LNs;
and (2) sending the same to the taxpayer and to the Audit Information, Tax
Exemption and Incentives Division (AITEID). After receiving the LNs, the AITEID
Based on the aforequoted provision, it is clear that unless authorized by the CIR
under the Assessment Service (AS), in coordination with the concerned offices under
himself or by his duly authorized rep-
the ISG, shall be responsible for transmitting the LNs to the investigating offices
456
[Revenue District Office (RDO)/Large Taxpayers District Office (LTDO)/Large
456 SUPREME COURT REPORTS
Taxpayers Audit and Investigation Division (LTAID)]. At the level of these
ANNOTATED
investigating offices, the appropriate action on the LNs issued to taxpayers with
Medicard Philippines, Inc. vs.
RELIEF data discrepancy would be determined.
Commissioner of Internal Revenue
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the
resentative, through an LOA, an examination of the taxpayer cannot ordinarily be
“no-contact-audit approach” in the CIR’s exercise of its power to authorize any
undertaken. The circumstances contemplated under Section 6 where the taxpayer
examination of taxpayer and the assessment of the correct amount of tax. The no-
may be assessed through best-evidence obtainable, inventory-taking, or surveillance
contact-audit approachincludes the process of computerized matching of sales and
among others has nothing to do with the LOA. These are simply methods of
purchases data contained in the Schedules of Sales and Domestic Purchases, and
examining the taxpayer in order to arrive at the correct amount of taxes. Hence,
Schedule of Importation submitted by VAT taxpayers under the RELIEF System
unless undertaken by the CIR himself or his duly authorized representatives, other
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 Commissioner of Internal Revenue
Withholding Taxes. IV. POLICIES AND GUIDELINES
Under this policy, even without conducting a detailed examination of taxpayer’s xxxx
books and records, if the computerized/manual matching of sales and 8. In the event a taxpayer who has been issued an LN refutes the discrepancy
purchases/expenses appears to reveal discrepancies, the same shall be communicated shown in the LN, the concerned taxpayer will be given an opportunity to
to the concerned taxpayer through the issuance of LN. reconcile its records with those of the BIR within One Hundred and Twenty (120)
458 days from the date of the issuance of the LN. However, the subject taxpayer shall
458 SUPREME COURT REPORTS no longer be entitled to the abatement of interest and penalties after the lapse of
ANNOTATED the sixty (60)-day period from the LN issuance.
Medicard Philippines, Inc. vs. 9. In case the above discrepancies remained unresolved at the end of the One
Commissioner of Internal Revenue Hundred and Twenty (120)-day period, the revenue officer (RO) assigned to
The LN shall serve as a discrepancy notice to taxpayer similar to a Notice for Informal handle the LN shall recommend the issuance of [LOA] to replace the LN. The
Conference to the concerned taxpayer. Thus, under the RELIEF System, a revenue head of the concerned investigating office shall submit a summary list of LNs for
officer may begin an examination of the taxpayer even prior to the issuance of an LN conversion to LAs (using the herein prescribed format in Annex “E” hereof) to the
or even in the absence of an LOA with the aid of a computerized/manual matching OACIR-LTS/ORD for the preparation of the corresponding LAs with the notation
of taxpayers’ documents/records. Accordingly, under the RELIEF System, the “This LA cancels LN No. ___________.”
presumption that the tax returns are in accordance with law and are presumed xxxx
correct since these are filed under the penalty of perjury27 are easily rebutted and the V. PROCEDURES
taxpayer becomes instantly burdened to explain a purported discrepancy. xxxx
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the B. At the Regional Office/Large Taxpayers Service
statutory requirement of an LOA before any investigation or examination of the xxxx
taxpayer may be conducted. As provided in the RMO No. 42-2003, the LN is merely 7. Evaluate the Summary List of LNs for Conversion to LAs submitted by
similar to a Notice for Informal Conference. However, for a Notice of Informal the RDO x x x prior to approval.
Conference, which generally precedes the issuance of an assessment notice to be 8. Upon approval of the above list, prepare/accomplish and sign the
valid, the same presupposes that the revenue officer who issued the same is properly corresponding LAs.
authorized in the first place. xxxx
With this apparent lacunain the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune 460
460 SUPREME COURT REPORTS
existing procedures in handing assessments against taxpayers’ issued LNs by
ANNOTATED
reconciling various revenue issuances which conflict with the NIRC. Among the
Medicard Philippines, Inc. vs.
objectives in the issuance of RMO No. 32-2005 is to prescribe procedure in the
Commissioner of Internal Revenue
resolution of LN discrepancies, conversion of LNs to LOAs and assessment and
10. Transmit the approved/signed LAs, together with the duly
collection of deficiency taxes.
accomplished/approved Summary List of LNs for conversion to LAs, to the
459
VOL. 822, APRIL 5, 2017 459 concerned investigating offices for the encoding of the required information

Medicard Philippines, Inc. vs. x x x and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty
(120) days from issuance thereof, prepare a summary list of said LNs for
conversion to LAs x x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a
PAN and FAN against MEDICARD. Therefore no LOA was also served on
MEDICARD. The LN that was issued earlier was also not converted into an LOA
contrary to the above quoted provision. Surprisingly, the CIR did not even dispute
the applicability of the above provision of RMO No. 32-2005 in the present case which
is clear and unequivocal on the necessity of an LOA for the assessment proceeding to
be valid. Hence, the CTA’s disregard of MEDICARD’s right to due process warrant
the reversal of the assailed decision and resolution.
In the case ofCommissioner of Internal Revenue v. Sony Philippines, Inc.29 the Court
said that:
461
VOL. 822, APRIL 5, 2017 461
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
Clearly, there must be a grant of authority before any revenue officer can conduct
an examination or assessment. Equally important is that the revenue officer so
authorized must not go beyond the authority given. In the absence of such an
authority, the assessment or examination is a nullity.30 (Emphasis and underlining
ours)
The Court cannot convert the LN into the LOA required under the law even if the
same was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a person
found to have underreported sales/receipts per data generated under the RELIEF
system. Upon receipt of the LN, a taxpayer may avail of the BIR’s Voluntary
Assessment and Abatement Program. If a taxpayer fails or refuses to avail of the said
program, the BIR may avail of administrative and criminal remedies, particularly
closure, criminal action, or audit and investigation. Since the law specifically requires
an LOA and RMO No. 32-2005 requires the conversion of the previously issued LN to
an LOA, the absence thereof cannot be simply swept under the rug, as the CIR would
have it. In fact Revenue Memorandum Circular No. 40-2003 considers an LN as a
notice of audit or investigation only for the purpose of disqualifying the taxpayer
from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA
addressed to a revenue officer is specifically required under the NIRC before an
examination of a taxpayer may be had while an LN is not found in the NIRC and is
only for the purpose of notifying the taxpayer that a discrepancy is found based on
the BIR’s RELIEF System. Second, an LOA is valid only for 30 days from date of issue
while an LN has no such limitation. Third, an LOA gives the revenue officer only a
period of 120 days from receipt of LOA to conduct his examination of the taxpayer
whereas an LN
462
462 SUPREME COURT REPORTS
ANNOTATED
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
does not contain such a limitation.31 Simply put, LN is entirely different and serves a
different purpose than an LOA. Due process demands, as recognized under RMO No.
32-2005, that after an LN has served its purpose, the revenue officer should have
properly secured an LOA before proceeding with the further examination and
assessment of the petitioner. Unfortunately, this was not done in this case.
Contrary to the ruling of the CTA En Banc, an LOA cannot be dispensed with just
because none of the financial books or records being physically kept by MEDICARD
was examined. To begin with, Section 6 of the NIRC requires an authority from the
CIR or from his duly authorized representatives before an examination “of a
taxpayer” may be made. The requirement of authorization is therefore not dependent
on whether the taxpayer may be required to physically open his books and financial
records but only on whether a taxpayer is being subject to examination.
The BIR’s RELIEF System has admittedly made the BIR’s assessment and
collection efforts much easier and faster. The ease by which the BIR’s revenue
generating objectives is achieved is no excuse however for its noncompliance with the
statutory requirement under Section 6 and with its own administrative issuance. In
fact, apart from being a statutory requirement, an LOA is equally needed even under clinics and medical and dental practitioners. MEDICARD explains that its business as
the BIR’s RELIEF System because the rationale of requirement is the same whether or an HMO involves two different although interrelated contracts. One is between a
not the CIR conducts a physical examination of the taxpayer’s records: to prevent corporate client and MEDICARD, with the corporate client’s employees being
undue harassment of a taxpayer and level the playing field between the considered as MEDICARD members; and the other is between the healthcare
government’s vast resources for tax assessment, collection and enforcement, on one institutions/healthcare professionals and MEDICARD.
hand, and the solitary taxpayer’s dual need to prosecute its business while at the Under the first, MEDICARD undertakes to make arrangements with healthcare
same time responding to the BIR exercise of its statutory powers. The balance institutions/healthcare profes-
between these is achieved by ensuring that any examination of the taxpayer by the 464
BIR’s revenue officers is properly authorized 464 SUPREME COURT REPORTS
463 ANNOTATED
VOL. 822, APRIL 5, 2017 463 Medicard Philippines, Inc. vs.
Medicard Philippines, Inc. vs. Commissioner of Internal Revenue
Commissioner of Internal Revenue sionals for the coverage of MEDICARD members under specific health related
in the first place by those to whom the discretion to exercise the power of services for a specified period of time in exchange for payment of a more or less fixed
examination is given by the statute. membership fee. Under its contract with its corporate clients, MEDICARD expressly
That the BIR officials herein were not shown to have acted unreasonably is beside provides that 20% of the membership fees per individual, regardless of the amount
the point because the issue of their lack of authority was only brought up during the involved, already includes the VAT of 10%/20% excluding the remaining 80%
trial of the case. What is crucial is whether the proceedings that led to the issuance of because MEDICARD would earmark this latter portion for medical utilization of its
VAT deficiency assessment against MEDICARD had the prior approval and members. Lastly, MEDICARD also assails CIR’s inclusion in its gross receipts of its
authorization from the CIR or her duly authorized representatives. Not having earnings from medical services which it actually and directly rendered to its
authority to examine MEDICARD in the first place, the assessment issued by the CIR members.
is inescapably void. Since an HMO like MEDICARD is primarily engaged in arranging for coverage
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court or designated managed care services that are needed by plan holders/members for
still partially finds merit in MEDICARD’s substantive arguments. fixed prepaid membership fees and for a specified period of time, then MEDICARD is
principally engaged in the sale of services. Its VAT base and corresponding liability
The amounts earmarked is, thus, determined under Section 108(A)32 of the Tax Code, as amended by Republic
and eventually paid by Act No. 9337.
MEDICARD to the medical 465
service providers do not VOL. 822, APRIL 5, 2017 465
form part of gross receipts Medicard Philippines, Inc. vs.
for VAT purposes Commissioner of Internal Revenue
_______________
MEDICARD argues that the CTA En Banc seriously erred in affirming the ruling
of the CTA Division that the gross receipts of an HMO for VAT purposes shall be the performed or rendered by construction and service contractors; stock, real estate,

total amount of money or its equivalent actually received from members commercial, customs and immigration brokers; lessors of property, whether personal

undiminished by any amount paid or payable to the owners/operators of hospitals, or real; warehousing services; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for others; restrictive tenor changed under RR No. 16-2005. Under this RR, an HMO’s gross
proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, receipts and gross receipts in general were defined, thus:
resorts; proprietors or operators of restaurants, refreshment parlors, cafes and other Section 4.108-3. x x x.—
eating places, including clubs and caterers; dealers in securities; lending investors; xxxx
transportation contractors on their transport of goods or cargoes, including persons
_______________
who transport goods or cargoes for hire and other domestic common carriers by land
relative to their transport of goods or cargoes; common carriers by air and sea relative
(5) The supply of services by a nonresident person or his employee in
to their transport of passengers, goods or cargoes from one place in the Philippines to
connection with the use of property or rights belonging to, or the installation or
another place in the Philippines; sales of electricity by generation companies,
operation of any brand, machinery or other apparatus purchased from such
transmission, and distribution companies; services of franchise grantees of electric
nonresident person;
utilities, telephone and telegraph, radio and television broadcasting and all other
(6) The supply of technical advice, assistance or services rendered in connection
franchise grantees except those under Section 119 of this Code and non-life insurance
with technical management or administration of any scientific, industrial or
companies (except their crop insurances), including surety, fidelity, indemnity and
commercial undertaking, venture, project or scheme;
bonding companies; and similar services regardless of whether or not the
(7) The lease of motion picture films, films, tapes and discs; and
performance thereof calls for the exercise or use of the physical or mental faculties.
(8) The lease or the use of or the right to use radio, television, satellite
The phrase ‘sale or exchange of services’ shall likewise include:
transmission and cable television time.
(1) The lease or the use of or the right or privilege to use any copyright, patent,
Lease of properties shall be subject to the tax herein imposed irrespective of the
design or model plan, secret formula or process, goodwill, trademark, trade brand or
place where the contract of lease or licensing agreement was executed if the property
other like property or right;
is leased or used in the Philippines.
(2) The lease or the use of, or the right to use of any industrial, commercial or,
The term ‘gross receipts’ means the total amount of money or its equivalent
scientific equipment;
representing the contract price, compensation, service fee, rental or royalty,
(3) The supply of scientific, technical, industrial or commercial knowledge or
including the amount charged for materials supplied with the services and
information;
deposits and advanced payments actually or constructively received during the
(4) The supply of any assistance that is ancillary and subsidiary to and is
taxable quarter for the services performed or to be performed for another person,
furnished as a means of enabling the application or enjoyment of any such property,
excluding value-added tax.(Emphasis ours)
or right as is mentioned in subparagraph (2) or any such knowledge or information as
33 RR No. 14-2005, Section 4.108-3(i).
is mentioned in subparagraph (3);
467
466
VOL. 822, APRIL 5, 2017 467
466 SUPREME COURT REPORTS
Medicard Philippines, Inc. vs.
ANNOTATED
Commissioner of Internal Revenue
Medicard Philippines, Inc. vs.
HMO’s gross receipts shall be the total amount of money or its equivalent
Commissioner of Internal Revenue
representing the service fee actually or constructively received during the taxable
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT
period for the services performed or to be performed for another person, excluding
purposes as a dealer in securities whose gross receipts is the amount actually received
the value-added tax.The compensation for their services representing their service
as contract price without allowing any deduction from the gross receipts.33 This
fee, is presumed to be the total amount received as enrollment fee from their Medicard Philippines, Inc. vs.
members plus other charges received. Commissioner of Internal Revenue
Section 4.108-4. x x x.—“Gross receipts” refers to the total amount of money or its contain any specific definition.36 Therefore, absent a statutory definition, this Court
equivalent representing the contract price, compensation, service fee, rental or has construed the term gross receipts in its plain and ordinary meaning, that is, gross
royalty, including the amount charged for materials supplied with the services and receipts is understood as comprising the entire receipts without any
deposits applied aspayments for services rendered, and advance payments actually deduction.37 Congress, under Section 108, could have simply left the term gross
or constructively received during the taxable period for the services performed or to receipts similarly undefined and its interpretation subjected to ordinary acceptation.
be performed for another person, excluding the VAT.34 Instead of doing so, Congress limited the scope of the term gross receipts for VAT
purposes only to the amount that the taxpayer received for the services it performed
or to the amount it received as advance payment for the services it will render in the
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005,
future for another person.
including the definition of gross receipts in general.35
In the proceedings below, the nature of MEDICARD’s business and the extent of
468
the services it rendered are not seriously disputed. As an HMO, MEDICARD
468 SUPREME COURT REPORTS
primarily acts as an intermediary between the purchaser of healthcare services (its
ANNOTATED
members) and the healthcare providers (the doctors, hospitals and clinics) for a fee.
Medicard Philippines, Inc. vs.
By enrolling membership with MEDICARD, its members will be able to avail of the
Commissioner of Internal Revenue
prearranged medical services from its accredited healthcare providers without the
According to the CTA En Banc, the entire amount of membership fees should
necessary protocol of posting cash bonds or deposits prior to being attended to or
form part of MEDICARD’s gross receipts because the exclusions to the gross receipts
admitted to hospitals or clinics, especially during emergencies, at any given time.
under RR No. 4-2007 does not apply to MEDICARD. What applies to MEDICARD is
Apart from this, MEDICARD may also directly provide medical, hospital and
the definition of gross receipts of an HMO under RR No. 16-2005 and not the
laboratory services, which depends upon its member’s choice.
modified definition of gross receipts in general under the RR No. 4-2007.
Thus, in the course of its business as such, MEDICARD members can either avail
The CTA En Bancoverlooked that the definition of gross receipts under RR No.
of medical services from MEDICARD’s accredited healthcare providers or directly
16-2005 merely presumed that the amount received by an HMO as membership fee is
from
the HMO’s compensation for their services. As a mere presumption, an HMO is, thus,
470
allowed to establish that a portion of the amount it received as membership fee does
470 SUPREME COURT REPORTS
NOT actually compensate it but some other person, which in this case are the medical ANNOTATED
service providers themselves. It is a well-settled principle of legal hermeneutics that Medicard Philippines, Inc. vs.
words of a statute will be interpreted in their natural, plain and ordinary acceptation Commissioner of Internal Revenue
and signification, unless it is evident that the legislature intended a technical or
MEDICARD. In the former, MEDICARD members obviously knew that beyond the
special legal meaning to those words. The Court cannot read the word “presumed” in
agreement to prearrange the healthcare needs of its members, MEDICARD would not
any other way.
actually be providing the actual healthcare service. Thus, based on industry practice,
It is notable in this regard that the term gross receipts as elsewhere mentioned as
MEDICARD informs its would-be member beforehand that 80% of the amount would
the tax base under the NIRC does not
be earmarked for medical utilization and only the remaining 20% comprises its
469
service fee. In the latter case, MEDICARD’s sale of its services is exempt from VAT
VOL. 822, APRIL 5, 2017 469
under Section 109(G).
 The CTA’s ruling and CIR’s Comment have not pointed to any portion of Section
108 of the NIRC that would extend the definition of gross receipts even to amounts
that do not only pertain to the services to be performed by another person, other than
the taxpayer, but even to amounts that were indisputably utilized not by MEDICARD
itself but by the medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence,
provision or part of a statute shall be considered surplusage or superfluous,
meaningless, void and insignificant. To this end, a construction which renders every
word operative is preferred over that which makes some words idle and nugatory.
This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose
the interpretation which gives effect to the whole of the statute — its every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38
Court adopted the principal object and purpose object in determining whether the
MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the business of an
insurance, thus:
471
VOL. 822, APRIL 5, 2017 471
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
To summarize, the distinctive features of the cooperative arethe rendering of service,
its extension, the bringing of physician and patient together, the preventive
features, the regularization of service as well as payment, the substantial reduction
in cost by quantity purchasing in short, getting the medical job done and paid for;
not, except incidentally to these features, the indemnification for cost after the
services is rendered. Except the last, these are not distinctive or generally
characteristic of the insurance arrangement. There is, therefore, a substantial
difference between contracting in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to stand its cost when or after it
is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision
of medical services through participating physicians while insurance companies
simply undertake to indemnify the insured for medical expenses incurred up to a
pre-agreed limit. In the present case, the VAT is a tax on the value added by the
performance of the service by the taxpayer. It is, thus, this service and the value
charged thereof by the taxpayer that is taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of
membership fees to VAT.40But the Court’s task
472
472 SUPREME COURT REPORTS
ANNOTATED
Medicard Philippines, Inc. vs.
Commissioner of Internal Revenue
the however is not to weigh these policy considerations but to determine if these
considerations in favor of taxation can even be implied from the statute where the
CIR purports to derive her authority. This Court rules that they cannot because the
language of the NIRC is pretty straightforward and clear. As this Court previously
ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation
in the imposition of taxes, not the similar doctrine as applied to tax exemptions. The
rule in the interpretation tax laws is that a statute will not be construed as imposing a
tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed
without clear and express words for that purpose. Accordingly, the general rule of
requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by
implication. In answering the question of who is subject to tax statutes, it is basic that
in case of doubt, such statutes are to be construed most strongly against the
government and in favor of the subjects or citizens because burdens are not to be
imposed nor presumed to be imposed beyond what statutes expressly and clearly
import. As burdens, taxes should not be unduly exacted nor assumed beyond the
plain meaning of the tax laws.41 (Citation omitted and emphasis and underlining
ours)
For this Court to subject the entire amount of MEDICARD’s gross receipts
without exclusion, the authority should have been reasonably founded from the
language of the statute. That language is wanting in this case. In the scheme of
473
VOL. 822, APRIL 5, 2017 473 vatable portion pertaining to the amount earmarked for medical utilization.
Medicard Philippines, Inc. vs. Therefore, the absence of an actual and physical segregation of the amounts
Commissioner of Internal Revenue pertaining to two different kinds of fees cannot arbitrarily disqualify MEDICARD
judicial tax administration, the need for certainty and predictability in the from rebutting the presumption under the law and from proving that indeed services
implementation of tax laws is crucial. Our tax authorities fill in the details that were rendered by its healthcare providers for which it paid the amount it sought to
Congress may not have the opportunity or competence to provide. The regulations be excluded from its gross receipts.
these authorities issue are relied upon by taxpayer, who are certain that these will be With the foregoing discussions on the nullity of the assessment on due process
followed by the courts. Courts, however, will not uphold these authorities’ grounds and violation of the NIRC, on one hand, and the utter lack of legal basis of
interpretations when clearly absurd, erroneous or improper. 42 The CIR’s the CIR’s position on the computation of MEDICARD’s gross receipts, the Court finds
interpretation of gross receipts in the present case is patently erroneous for lack of it unnecessary, nay useless, to discuss the rest of the parties’ arguments and counter-
both textual and non-textual support. arguments.
As to the CIR’s argument that the act of earmarking or allocation is by itself an act In fine, the foregoing discussion suffices for the reversal of the assailed decision
of ownership and management over the funds, the Court does not agree. On the and resolution of the CTA En Banc grounded as it is on due process violation. The
contrary, it is MEDICARD’s act of earmarking or allocating 80% of the amount it Court likewise rules that for purposes of determining the VAT liability of an HMO,
received as membership fee at the time of payment that weakens the ownership the amounts earmarked and actually spent for medical utilization of its members
imputed to it. By earmarking or allocating 80% of the amount, MEDICARD should not be included in the computation of its gross receipts.
unequivocally recognizes that its possession of the funds is not in the concept of WHEREFORE, in consideration of the foregoing disquisitions, the petition is
owner but as a mere administrator of the same. For this reason, at most, herebyGRANTED. The Decision dated September 2, 2015 and Resolution dated
MEDICARD’s right in relation to these amounts is a mere inchoate owner which January 29, 2016 issued by the Court of Tax Appeals En Banc in CTA E.B. No. 1224
would ripen into actual ownership if, and only if, there is underutilization of the areREVERSED and SET ASIDE. The definition of gross receipts under Revenue
membership fees at the end of the fiscal year. Prior to that, MEDICARD is bound to Regulations Nos. 16-2005 and 4-2007, in relation to Section 108(A) of the National
pay from the amounts it had allocated as an administrator once its members avail of Internal Revenue Code, as amended by Republic Act No. 9337, for purposes of
the medical services of MEDICARD’s healthcare providers. determining its Value-Added Tax liability, is hereby declared toEXCLUDE the eighty
Before the Court, the parties were one in submitting the legal issue of whether the percent (80%) of the amount of the contract price earmarked as fiduciary funds for
amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and the medical utilization of its members. Further, the Value-Added Tax
paid to the medical service providers should form part of its gross receipt for VAT 475
purposes, after having paid the VAT on the amount comprising the 20%. It is VOL. 822, APRIL 5, 2017 475
significant to note in this regard that MEDICARD established that upon receipt of Medicard Philippines, Inc. vs.
payment of Commissioner of Internal Revenue
474 deficiency assessment issued against Medicard Philippines, Inc. is hereby declared
474 SUPREME COURT REPORTS unauthorized for having been issued without a Letter of Authority by the
ANNOTATED Commissioner of Internal Revenue or his duly authorized representatives.
Medicard Philippines, Inc. vs. SO ORDERED.
Commissioner of Internal Revenue Velasco, Jr. (Chairperson), Bersamin, Caguioa** and Tijam, JJ., concur.
membership fee it actually issued two official receipts, one pertaining to the VATable
portion, representing compensation for its services, and the other represents the non- Petition granted, judgment and resolution reversed and set aside.
 Notes.—A claim for tax exemption whether full or partial does not question the
authority of local assessor to assess real property tax. (National Power Corporation vs.
Province of Quezon and Municipality of Pagbilao, 611 SCRA 71 [2010])
A notice of assessment is a declaration of deficiency taxes issued to a taxpayer
who fails to respond to Pre-Assessment Notice (PAN) within the prescribed period of
time, or whose reply to the PAN was found to be without merit. (Commissioner of
Internal Revenue vs. Gonzalez, 633 SCRA 139 [2010])

——o0o——

_______________
 G.R. No. 183408. July 12, 2017.* by law to the CIR are intended, among other things, to determine the liability of any
person for any national internal revenue tax.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LANCASTER Same; Courts; Court of Tax Appeals; Jurisdiction; The authority to make an examination
PHILIPPINES, INC., respondent. or assessment, being a matter provided for by the National Internal Revenue Code (NIRC), is
well within the exclusive and appellate jurisdiction of the Court of Tax Appeals (CTA).—It is
Taxation; Courts; Court of Tax Appeals; Jurisdiction; The jurisdiction of the Court of
clear that the issue on whether the revenue officers who had conducted the
Tax Appeals (CTA) is not limited only to cases which involve decisions or inactions of the
examination on Lancaster exceeded their authority pursuant to LOA No. 00012289
Commissioner of Internal Revenue (CIR) on matters relating to assessments or refunds but
may be considered as covered by the terms “other matters” under Section 7 of R.A.
also includes other cases arising from the National Internal Revenue Code (NIRC) or related
No. 1125 or its amendment, R.A. No. 9282. The authority to make an examination or
laws administered by the Bureau of Internal Revenue (BIR).—The law vesting unto the
assessment, being a matter provided for by the NIRC, is well within the exclusive and
CTA its jurisdic-
appellate jurisdiction of the CTA.

2
3
2 SUPREME COURT REPORTS
VOL. 831, JULY 12, 2017 3
ANNOTATED
Commissioner of Internal Revenue vs.
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
Lancaster Philippines, Inc.
Same; Letter of Authority; The Letter of Authority (LOA) gives notice to the taxpayer
tion is Section 7 of Republic Act No. 1125 (R.A. No. 1125), which in part provides:
that it is under investigation for possible deficiency tax assessment; at the same time it
Section 7.Jurisdiction.—The Court of Tax Appeals shall exercise exclusive appellate
authorizes or empowers a designated revenue officer to examine, verify, and scrutinize a
jurisdiction to review by appeal, as herein provided: (1) Decisions of the Collector of
taxpayer’s books and records, in relation to internal revenue tax liabilities for a particular
Internal Revenue in cases involving disputed assessments, refunds of internal
period.—The audit process normally commences with the issuance by the CIR of a
revenue taxes, fees or other charges, penalties imposed in relation thereto, or other
Letter of Authority. The LOA gives notice to the taxpayer that it is under
mattersarising under the National Internal Revenue Code or other law or part of law
investigation for possible deficiency tax assessment; at the same time it authorizes or
administered by the Bureau of Internal Revenue; x x x (emphasis supplied) Under the
empowers a designated revenue officer to examine, verify, and scrutinize a taxpayer’s
aforecited provision, the jurisdiction of the CTA is not limited only to cases which
books and records, in relation to internal revenue tax liabilities for aparticular period.
involve decisions or inactions of the CIR on matters relating to assessments or
Same; Accounting; In our jurisdiction, the concepts in business accounting, including
refunds but also includes other cases arising from the NIRC or related laws
certain generally accepted accounting principles (GAAP) embedded in the National Internal
administered by the BIR. Thus, for instance, we had once held that the question of
Revenue Code (NIRC) comprise the rules on tax accounting.—Noticeably, the records of
whether or not to impose a deficiency tax assessment comes within the purview of
this case are rife with terms and concepts in accounting. As a science, accounting
the words “other matters arising under the National Internal Revenue Code.”
pervades many aspects of financial planning, forecasting, and decision making in
Same; Commissioner of Internal Revenue; Jurisdiction; The Commissioner of Internal
business. Its reach, however, has also permeated tax practice. To put it into
Revenue (CIR) may authorize the examination of any taxpayer and correspondingly make an
perspective, although the foundations of accounting were built principally to analyze
assessment whenever necessary.—The CIR may authorize the examination of any
finances and assist businesses, many of its principles have since been adopted for
taxpayer and correspondingly make an assessment whenever necessary. Thus, to give
purposes of taxation. In our jurisdiction, the concepts in business accounting,
more teeth to such power of the CIR, to make an assessment, the NIRC authorizes the
including certain generally accepted accounting principles (GAAP), embedded in the
CIR to examine any book, paper, record, or data of any person. The powers granted
NIRC comprise the rules on tax accounting.
 Same; Same; While there may be differences between tax and accounting, it cannot be
said that the two (2) mutually excluded each other.—While there may be differences
between tax and accounting, it cannot be said that the two mutually exclude each
other. As already made clear, tax laws borrowed concepts that had origins from
accounting. In truth, tax cannot do away with accounting. It relies upon approved
accounting methods and practices to effectively carry out its objective of collecting
the proper amount of taxes from the taxpayers. Thus, an important mechanism
established in many tax systems is the requirement for taxpayers to make a return of
their true income. Maintaining accounting books and records, among other important
considerations, would in turn assist the taxpayers in
4 VOL. 831, JULY 12, 2017
4 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
complying with their obligation to file their income tax returns. At the same
time, such books and records provide vital information and possible bases for the
government, after appropriate audit, to make an assessment for deficiency tax
whenever so warranted under the circumstances.
Same; Same; Accounting Methods; Section 43 of the National Internal Revenue Code
(NIRC) authorizes the Commissioner of Internal Revenue (CIR) to allow the use of a method
of accounting that in its opinion would clearly reflect the income of the taxpayer.—Too, other
methods approved by the CIR, even when not expressly mentioned in the NIRC, may
be adopted if such method would enable the taxpayer to properly reflect its income.
Section 43 of the NIRC authorizes the CIR to allow the use of a method of accounting
that in its opinion would clearly reflect the income of the taxpayer. An example of
such method not expressly mentioned in the NIRC, but duly approved by the CIR, is
the ‘crop method of accounting’ authorized under RAM No. 2-95.
Same; Same; Same; Crop Method; The crop method recognizes that the harvesting and
selling of crops do not fall within the same year that they are planted or grown.—The crop
method recognizes that the harvesting and selling of crops do not fall within the same
year that they are planted or grown. This method is especially relevant to farmers, or
those engaged in the business of producing crops who, pursuant to RAM No. 2-95,
would then be able to compute their taxable income on the basis of their crop year.
On when to recognize expenses as deductions against income, the governing rule is
found in the second sentence of Subsection F cited above. The rule enjoins the
recognition of the expense (or the deduction of the cost) of crop production in the
year that the crops are sold (when income is realized).
Same; Same; A taxpayer is authorized to employ what it finds suitable for its purpose so
long as it consistently does so.—We find it wholly justifiable for Lancaster, as a business
engaged in the production and marketing of tobacco, to adopt the crop method of
accounting. A taxpayer is authorized to employ what it finds suitable for its purpose
so long as it consistently does so, and in this case, Lancaster does appear to have
utilized the method regularly for
5
5
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
many decades already. Considering that the crop year of Lancaster starts from
October up to September of the following year, it follows that all of its expenses in the
crop production made within the crop year starting from October 1997 to September
1998, including the February and March 1998 purchases covered by purchase invoice
vouchers, are rightfully deductible for income tax purposes in the year when the
gross income from the crops are realized. Pertinently, nothing from the pleadings or
memoranda of the parties, or even from their testimonies before the CTA, would
support a finding that the gross income from the crops (to which the subject expenses
refer) was actually realized by the end of March 1998, or the closing of Lancaster’s
fiscal year for 1998. Instead, the records show that the February and March 1998
purchases were recorded by Lancaster as advances and later taken up as purchases by
the close of the crop year in September 1998, or as stated very clearly above, within the
fiscal year 1999.
Same; Same; Matching Concept; The matching concept, which is one of the generally
accepted accounting principles, directs that the expenses are to be reported in the same period
that related revenues are earned.—In essence, the matching concept, which is one of the
generally accepted accounting principles, directs that the expenses are to be reported
in the same period that related revenues are earned. It attempts to match revenue
with expenses that helped earn it.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals En Banc.
 The facts are stated in the opinion of the Court. LETTER OF AUTHORITY
Ricardo R. Querrer, Jr.for respondent. LANCASTER PHILS. INC.
11th Flr. Metro Bank Plaza
MARTIRES, J.:
Makati City
SIR/MADAM/GENTLEMEN:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be supervised by GH
seeking to reverse and set aside the 30
Catalina Leny Barrion of the Special Team created pursuant to RSO 770-99 is/are
6
authorized to examine your books of accounts and other accounting records forall
6 SUPREME COURT REPORTS
internal revenue taxes for the period from taxable year, 1998 to ____, 19__. He
ANNOTATED
is/[t]hey are provided with the necessary identification card(s) which shall be
Commissioner of Internal Revenue vs.
presented to you upon request.
Lancaster Philippines, Inc.
It is requested that all facilities be extended to the Revenue Officer(s) in order to
April 2008 Decision2 and 24 June 2008 Resolution3 of the Court of Tax Appeals
expedite the examination.
(CTA)En Banc in C.T.A. E.B. No. 352.
You will be duly informed of the results of the examination upon approval of the
The assailed decision and resolution affirmed the 12 September 2007
report submitted by the aforementioned Revenue Officer(s).7
Decision4and 12 December 2007 Resolution5 of the CTA First Division (CTA Division)
in CTA Case No. 6753.
After the conduct of an examination pursuant to the LOA, the BIR issued
The Facts aPreliminary Assessment Notice (PAN)8 which cited Lancaster for: 1) overstatement of
its purchases for the fiscal year April 1998 to March 1999; and 2) noncompliance with
The facts6 are undisputed. the generally accepted accounting principle of proper matching of cost and
Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among revenue.9 More concretely, the BIR disallowed the purchases of tobacco from farmers
others, to investigate or examine and, if necessary, issue assessments for deficiency covered by Purchase Invoice Vouchers (PIVs) for the months of February andMarch
taxes. 1998 as deductions against income for the fiscal year April 1998 to March 1999. The
On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a computation of
domestic corporation established in 1963 and is engaged in the production, 8
processing, and marketing of tobacco. 8 SUPREME COURT REPORTS
In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) ANNOTATED
No. 00012289 authorizing its revenue officers to examine Lancaster’s books of Commissioner of Internal Revenue vs.
accounts and other accounting records for all internal revenue taxes due from taxable Lancaster Philippines, Inc.
year 1998 to an unspecified date. The LOA reads: Lancaster’s tax deficiency, with the details of discrepancies, is reproduced below:
7 INCOME TAX:
VOL. 831, JULY 12, 2017 7 INCOME TAX DUE – Basic
Commissioner of Internal Revenue vs.
April 1 – December
Lancaster Philippines, Inc. 31, 1998
SEPT. 30 1999 (9/12 xP2,913,676.4
 April 1 – December Furthermore, it did not comply with the generally accepted principle of
31, 1998
P11,496,770.18 x proper matching of cost and revenue.10
34%)
January 1 – March
31, 1999 Lancaster replied11 to the PAN contending, among other things, that for the past
(3/12 x
P11,496,770.18 x948,483.54 decades, it has used an entire‘tobacco-cropping season’to determine its total
33%) purchases covering a one-year period from 1 Octoberup to 30 September of the
Income tax still due per following year (as against its fiscal year which is from 1 April up to 31 March of the
P3,880,159.94
investigation
Interest (6/15/99 to following year); that it has been adopting the 6-month timing difference to conform
2,560,905.56
10/15/02) .66 to the matching concept (of cost and revenue); and that this has long been installed as
Compromise Penalty 25,000
part of the company’s system and consistently applied in its accounting books. 12
TOTAL DEFICIENCY Invoking the same provisions of the law cited in the assessment, i.e., Sections
P6,466,065.50
INCOME TAX 4313 and 4514 of the National Internal
DETAILS OF DISCREPANCIES
Assessment No. LTAID 11-98-00007 10
A. INCOME TAX (P3,880,159.94) – Taxpayer’s fiscal year covers April 1998 to 10 SUPREME COURT REPORTS
March 1999. Verification of the books of accounts and pertinent documents ANNOTATED
disclosed that there was an overstatement of purchases for the year. Purchase Commissioner of Internal Revenue vs.
Invoice Vouchers (PIVs) for February and March 1998 purchases amounting Lancaster Philippines, Inc.
to P11,496,770.18 were included as part of purchases for taxable year 1998 in Revenue Code (NIRC), in conjunction with Section 4515of Revenue Regulation No. 2,
violation of Section 45 of the National Internal Revenue Code in relation to as amended, Lancaster argued that the February and March 1998 purchases should
Section 43 of the same and Revenue Regulations No. 2 which states that the not have been disallowed. It maintained that the situation of farmers engaged in
Crop-Basis method of reporting income may be used by a farmer engaged in producing tobacco, like Lancaster, is unique in that the costs, i.e., purchases, are taken
producing crops which take more than one (1) year from the time of planting as of a different period and posted in the year in which the gross income from the
to crop is realized. Lancaster concluded that it correctly posted the subject purchases in
the fiscal year ending March 1999 as it was only in this year that the gross income
9
from the crop was realized.
VOL. 831, JULY 12, 2017 9
11
Commissioner of Internal Revenue vs.
VOL. 831, JULY 12, 2017 11
Lancaster Philippines, Inc.
Commissioner of Internal Revenue vs.
the time of gathering and disposing of crop, in such a case, the entire cost of
Lancaster Philippines, Inc.
producing the crop must be taken as deduction in the year in which the gross
Subsequently on 6 November 2002, Lancaster received from the BIR a final
income from the crop is realized and that the taxable income should be
assessment notice (FAN),16captioned Formal Letter of Demand and Audit
computed upon the basis of the taxpayer’s annual accounting period, (fiscal or
Result/Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, which assessed
calendar year, as the case may be) in accordance with the method of
Lancaster’s deficiency income tax amounting to P11,496,770.18, as a consequence of
accounting regularly employed in keeping with the books of the taxpayer.
the disallowance of purchases claimed for the taxable year ending 31 March 1999.
 Lancaster duly protested17the FAN. There being no action taken by the amount of P6,466,065.50, covering the fiscal year from April 1, 1998 to March 31,
Commissioner on its protest, Lancaster filed on 21 August 2003 a petition for 1999.20
review18before the CTA Division.

The CIR moved21 but failed to obtain reconsideration of the CTA Division
The Proceedings before the CTA
ruling.22
Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of
In its petition before the CTA Division, Lancaster essentially reiterated its
the decision and the resolution of the CTA Division.
arguments in the protest against the assessment, maintaining that the tobacco
However, the CTA En Banc found no reversible error in the CTA Division’s
purchases in February and March 1998 are deductible in its fiscal year ending 31
ruling, thus, it affirmed the cancellation of the assessment against Lancaster. The
March 1999.
dispositive portion of the decision of the CTA En Banc states:
The issues19 raised by the parties for the resolution of the CTA Division were:
WHEREFORE, premises considered, the present Petition for Review is
I
hereby DENIEDDUE COURSE, and, accordingly DISMISSED for lack of merit.24
WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY
ACCEPTED ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND
13
REVENUE; VOL. 831, JULY 12, 2017 13
II Commissioner of Internal Revenue vs.
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST Lancaster Philippines, Inc.
PETITIONER FOR THE TAX
The CTA En Banclikewise denied25 the motion for reconsideration from its
Decision.
12
Hence, this petition.
12 SUPREME COURT REPORTS
ANNOTATED The CIR assigns the following errors as committed by the CTA En Banc:

Commissioner of Internal Revenue vs. I.

Lancaster Philippines, Inc.

ABLE YEAR 1998 IN THE AGGREGATE AMOUNT OF P6,466,065.50 SHOULD BE THE COURT OF TAX APPEALSEN BANC ERRED IN HOLDING THAT

CANCELLED AND WITHDRAWN BY RESPONDENT. PETITIONER’S REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO
INVESTIGATE THE PERIOD NOT COVERED BY THEIR LETTER OF AUTHORITY.

After trial, the CTA Division granted the petition of Lancaster, disposing as II.
follows:
IN VIEW OF THE FOREGOING, the subject Petition, for Review is THE COURT OF TAX APPEALSEN BANC ERRED IN ORDERING PETITIONER TO
herebyGRANTED. Accordingly, respondent CANCEL AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST
is ORDERED toCANCEL and WITHDRAW the deficiency income tax assessment RESPONDENT.26
issued against petitioner under Formal Letter of Demand and Audit
Result/Assessment Notice No. LTAID II IT-98-00007 dated October 11, 2002, in the
The Court’s Ruling
 We deny the petition. 15
VOL. 831, JULY 12, 2017 15
I. Commissioner of Internal Revenue vs.
The CTA En Banc did not err when it ruled Lancaster Philippines, Inc.
that the BIR revenue officers had Under the aforecited provision, the jurisdiction of the CTA is not limited only to
exceeded their authority. cases which involve decisions or inactions of the CIR on matters relating to
assessments or refunds but also includes other cases arising from the NIRC or related
To support its first assignment of error, the CIR argues that the revenue officers laws administered by the BIR.28 Thus, for instance, we had once held that the
did not exceed their authority when, question of whether or not to impose a deficiency tax assessment comes within the
14 purview of the words “other matters arising under the National Internal Revenue Code.”29
14 SUPREME COURT REPORTS The jurisdiction of the CTA on such other matters arising under the NIRCwas
ANNOTATED retained under the amendments introduced by R.A No. 9282.30 Under R.A. No. 9282,
Commissioner of Internal Revenue vs. Section 7 now reads:
Lancaster Philippines, Inc. Sec. 7. Jurisdiction.—The CTA shall exercise:
upon examination (of the Lancaster’s books of accounts and other accounting a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
records), they verified that Lancaster made purchases for February and March of 1. Decisions of the Commissioner of Internal Revenue in cases involving
1998, which purchases were not declared in the latter’s fiscal year from 1 April 1997 disputed assessments, refunds of internal revenue taxes, fees or other charges,
to 31 March 1998. Additionally, the CIR posits that Lancaster did not raise the issue penalties in relation thereto, or other matters arising under the National
on the scope of authority of the revenue examiners at any stage of the proceedings Internal Revenue or other laws administered by the Bureau of Internal
before the CTA and, consequently, the CTA had no jurisdiction to rule on said issue. Revenue;
On both counts, the CIR is mistaken. 2. Inaction by the Commissioner of Internal Revenue in cases involving
disputed assess-
A. The Jurisdiction of the CTA
16
16 SUPREME COURT REPORTS
Preliminarily, we shall take up the CTA’s jurisdiction to rule on the issue of the
ANNOTATED
scope of authority of the revenue officers to conduct the examination of Lancaster’s
Commissioner of Internal Revenue vs.
books of accounts and accounting records.
Lancaster Philippines, Inc.
The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No.
ments, refunds of internal revenue taxes, fees or other charges, penalties in relation
1125 (R.A. No. 1125),27 which in part provides:
thereto, or other mattersarising under the National Internal Revenue Code or other
Section 7. Jurisdiction.—The Court of Tax Appeals shall exercise exclusive appellate
laws administered by the Bureau of Internal Revenue, where the National Internal
jurisdiction to review by appeal, as herein provided:
Revenue Code provides a specific period of action, in which case the inaction shall be
(1) Decisions of the Collector of Internal Revenue in cases involving
deemed a denial; x x x. (emphasis supplied)
disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other mattersarising under the
National Internal Revenue Code or other law or part of law administered by
the Bureau of Internal Revenue; x x x (emphasis supplied)
 Is the question on the authority of revenue officers to examine the books and ANNOTATED
records of any person cognizable by the CTA? Commissioner of Internal Revenue vs.
It must be stressed that the assessment of internal revenue taxes is one of the Lancaster Philippines, Inc.
duties of the BIR. Section 2 of the NIRC states: ment, being a matter provided for by the NIRC, is well within the exclusive and
Sec. 2. Powers and Duties of the Bureau of Internal Revenue.—The Bureau of Internal appellate jurisdiction of the CTA.
Revenue shall be under the supervision and control of the Department of Finance and On whether the CTA can resolve an issue which was not raised by the parties, we
its powers and duties shall comprehend, the assessmentand collection of all national rule in the affirmative.
internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the
penalties, and fines connected therewith, including the execution of judgments in all Court of Tax Appeals,33 the CTA is not bound by the issues specifically raised by the
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. parties but may also rule upon related issues necessary to achieve an orderly
The Bureau shall give effect to and administer the supervisory and police powers disposition of the case. The text of the provision reads:
conferred to it by this Code or other laws. (emphasis supplied) SECTION 1. Rendition of judgment.—x x x
In deciding the case, the Court may not limit itself to the issues stipulated by the
parties but may also rule upon related issues necessary to achieve an orderly
In connection therewith, the CIR may authorize the examination of any taxpayer
disposition of the case.
and correspondingly make an assessment whenever necessary.31 Thus, to give more
teeth to
17 The above section is clearly worded. On the basis thereof, the CTA Division was,
VOL. 831, JULY 12, 2017 17 therefore, well within its authority to consider in its decision the question on the
Commissioner of Internal Revenue vs. scope of authority of the revenue officers who were named in the LOA even though
Lancaster Philippines, Inc. the parties had not raised the same in their pleadings or memoranda. The CTA En
such power of the CIR, to make an assessment, the NIRC authorizes the CIR to Banc was likewise correct in sustaining the CTA Division’s view concerning such
examine any book, paper, record, or data of any person. 32 The powers granted by law matter.
to the CIR are intended, among other things, to determine the liability of any person
for any national internal revenue tax. B. The Scope of the Authority of the Examining Officers
It is pursuant to such pertinent provisions of the NIRC conferring the powers to
the CIR that the petitioner (CIR) had, in this case, authorized its revenue officers to In the assailed decision of the CTA Division, the trial court observed that LOA
conduct an examination of the books of account and accounting records of Lancaster, No. 00012289 authorized the BIR officers to examine the books of account of
and eventually issue a deficiency assessment against it. Lancaster for the taxable year 1998 only or, since Lancaster adopted a fiscal year (FY),
From the foregoing, it is clear that the issue on whether the revenue officers who for the period 1 April 1997 to 31 March 1998. However, the deficiency income tax
had conducted the examination on Lancaster exceeded their authority pursuant to assessment which the BIR eventually
LOA No. 00012289 may be considered as covered by the terms “other matters” under 19
Section 7 of R.A. No. 1125 or its amendment, R.A. VOL. 831, JULY 12, 2017 19
No. 9282. The authority to make an examination or assess- Commissioner of Internal Revenue vs.
18 Lancaster Philippines, Inc.
18 SUPREME COURT REPORTS
issued against Lancaster was based on the disallowance of expenses reported in FY
1999, or for the period 1 April 1998 to 31 March 1999. The CTA concluded that the
revenue examiners had exceeded their authority when they issued the assessment
against Lancaster and, consequently, declared such assessment to be without force
and effect.
We agree.
The audit process normally commences with the issuance by the CIR of a Letter
of Authority. The LOA gives notice to the taxpayer that it is under investigation for
possible deficiency tax assessment; at the same time, it authorizes or empowers a
designated revenue officer to examine, verify, and scrutinize a taxpayer’s books and
records, in relation to internal revenue tax liabilities for aparticular period.34
In this case, a perusal of LOA No. 00012289 indeed shows that the period of
examination is the taxable year 1998, For better clarity, the pertinent portion of the
LOA is again
reproduced, thus:
The bearer(s) hereof xxx is/are authorized to
examine your books of accounts and other accounting records forall internal revenue
taxes for the period from taxable year, 1998to _____, 19__. x x x.” (emphasis supplied)
Even though the date after the words “taxable year1998 to” is unstated, it is not at
all difficult to discern that the period of examination is the whole taxable year 1998.
This means that the examination of Lancaster must cover the FY period from 1 April
1997 to 31 March 1998. It could not have contemplated a longer period. The
examination for the full taxable year 1998 only is consistent with the guideline in
Revenue Memorandum Order (RMO) No. 43-90, dated 20 September 1990, that the
LOA shall cover a taxable period not exceeding one taxable
20
20 SUPREME COURT REPORTS
ANNOTATED
outside of the authority granted them under said LOA. Recently in CIR v. De La Salle
University, Inc.36 we accorded validity to the LOA authorizing the examination of
DLSU for “Fiscal Year Ending 2003 and Unverified Prior Years” and correspondingly
held the assessment for taxable year 2003 as valid because this taxable period is
specified in the LOA. However, we declared void the assessments for taxable
years 2001 and 2002 for having been unspecified on separate LOAs as required under
RMO No. 43-90.
Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the
cancellation of a deficiency VAT assessment because, while the LOA covered “the
period 1997 and unverified prior years,” the said deficiency was arrived at based on the
records of a later year, from January to March 1998, or using the fiscal year which
ended on 31 March 1998. We explained that the CIR knew which period should be
covered by the investigation and that if the CIR wanted or intended the investigation
to include the year 1998, it would have done so by including it in the LOA or by
issuing another LOA.38
21
VOL. 831, JULY 12, 2017 21
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
The present case is no different from Sony in that the subject LOA specified that
the examination should be for the taxable year 1998 only but the subsequent
assessment issued against Lancaster involved disallowed expenses covering the next
fiscal year, or the period ending 31 March 1999. This much is clear from the notice of
assessment, the relevant portion of which we again restate as follows:
INCOME TAX:
Taxable Income per ITR -0-
Adjustments-Disallowed
Add: 11,496.770.18
purchases
Adjusted Taxable Income per
P11,496,770.18
Investigation

Commissioner of Internal Revenue vs. INCOME TAX DUE – Basic

Lancaster Philippines, Inc. April 1 – December 31, 1998

year.35 In other words, absent any other valid cause, the LOA issued in this case is (9/12 x P11,496,770.18 x 34%) P2,913,676.4
January 1 – March 31, 1999
valid in all respects.
(3/12 x P11,496,770.18 x 33%) 948,483.54
Nonetheless, a valid LOA does not necessarily clothe validity to an assessment Income tax still due per investigation P3,880,159.94
issued on it, as when the revenue officers designated in the LOA act in excess or Interest (6/15/99 to 10/15/02) .66 2,560,905.56
April 1 – December 31, 1998 Upon the other hand, Lancaster justifies the inclusion of the February and March
Compromise Penalty 25,000
1998 purchases in its FY 1999 considering that they coincided with its crop year
TOTAL DEFICIENCY INCOME covering the period of October 1997 to September 1998. Consistent with Revenue
P6,466,065.50
TAX(emphasis supplied)
Audit Memorandum (RAM) No. 2-95,39 Lancaster
23
The taxable year covered by the assessment being outside of the period specified VOL. 831, JULY 12, 2017 23
in the LOA in this case, the assessment issued against Lancaster is, therefore, void. Commissioner of Internal Revenue vs.
This point alone would have sufficed to invalidate the subject deficiency income Lancaster Philippines, Inc.
tax assessment, thus, obviating any further necessity to resolve the issue on whether argues that its purchases in February and March 1998 were properly posted in FY
Lancaster erroneously claimed the February and March 1998 expenses as deductions 1999, or the year in which its gross income from the crop was realized. Lancaster
against income for FY 1999. concludes that by doing so, it had complied with the matching concept that was also
relied upon by the BIR in its assessment.
22 The issue essentially boils down to the proper timing when Lancaster should
22 SUPREME COURT REPORTS
recognize its purchases in computing its taxable income. Such issue directly
ANNOTATED
correlates to the fact that Lancaster’s ‘crop year’ does not exactly coincide with its
Commissioner of Internal Revenue vs.
fiscal year for tax purposes.
Lancaster Philippines, Inc.
Noticeably, the records of this case are rife with terms and concepts in
But, as the CTA did, we shall discuss the issue on the disallowance for the proper
accounting. As a science, accounting40pervades many aspects of financial planning,
guidance not only of the parties, but the bench and the bar as well.
forecasting, and decision making in business. Its reach, however, has also permeated
tax practice.
II.
To put it into perspective, although the foundations of accounting were built
principally to analyze finances and assist businesses, many of its principles have since
The CTA En Banccorrectly sustained the
been adopted for purposes of taxation.41 In our jurisdiction, the concepts in
order cancelling and withdrawing
posal. Expenses paid or incurred are deductible in the year the gross income from the
the deficiency tax assessment.
sale of the crops are realized.
40 Black’s Law Dictionary, Sixth Edition, defines ‘Accounting’ as “[a]n act or a
To recall, the assessment against Lancaster for deficiency income tax stemmed
system of making up or settling accounts, consisting of a statement of account with
from the disallowance of its February and March 1998 purchases which Lancaster
debits and credits arising from relationship of parties. x x x The methods under which
posted in its fiscal year ending on 31 March 1999 (FY 1999)instead of the fiscal year
income and expenses are determined for tax purposes. Major accounting methods are
ending on 31 March 1998(FY 1998).
the cash basis and the accrual basis. Special methods are available for the reporting of
On the one hand, the BIR insists that the purchases in question should have been
gain on installment sales, recognition of income on construction projects (i.e., the
reported in FY 1998 in order to conform to the generally accepted accounting
completed-contract and percentage-of-completion methods), and the valuation of
principle of proper matching of cost and revenue. Thus, when Lancaster reported the
inventories (i.e., last-in first-out and first-in first-out).
said purchases in FY 1999, this resulted in overstatement of expenses warranting their
41 It is not suggested, however, that tax rules do not influence accounting
disallowance and, by consequence, resulting in the deficiency in the payment of its
practice. It is generally recognized that certain tax incentives do have certain
income tax for FY 1999.
repercussionary effect on accounting approach and practice.
 24
24 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
business accounting, including certain generally accepted accounting principles
(GAAP), embedded in the NIRC comprise the rules on tax accounting.
To be clear, the principles under financial or business accounting, in theory and
application, are not necessarily interchangeable with those in tax accounting. Thus,
although closely related, tax and business accounting had invariably produced
concepts that at some point diverge in understanding or usage. For instance, two of
such important concepts are taxable income and business income (or accounting
income). Much of the difference can be attributed to the distinct purposes or
objectives that the concepts of tax and business accounting are aimed at. Chief Justice
Querube Makalintal made an apt observation on the nature of such difference.
InConsolidated Mines, Inc. v. CTA,42 he noted:
While taxable income is based on the method of accounting used by the taxpayer,
it will almost always differ from accounting income. This is so because of a
fundamental difference in the ends the two concepts serve. Accounting attempts
to match cost against revenue. Tax law is aimed atcollecting revenue. It is quick to
treat an item as income, slow to recognize deductions or losses. Thus, the tax law will
not recognize deductions for contingent future losses except in very limited
situations. Good accounting, on the other hand, requires their recognition. Once this
fundamental difference in approach is accepted, income tax accounting methods can
be understood more easily.43(emphasis supplied)
25
VOL. 831, JULY 12, 2017 25
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
While there may be differences between tax and accounting,44 it cannot be said
that the two mutually exclude each other. As already made clear, tax laws borrowed
concepts that had origins from accounting. In truth, tax cannot do away with
accounting. It relies upon approved accounting methods and practices to effectively
carry out its objective of collecting the proper amount of taxes from the taxpayers.
Thus, an important mechanism established in many tax systems is the requirement
for taxpayers to make a return of their true income.45Maintaining accounting books
and records, among other important considerations, would in turn assist the
taxpayers in complying with their obligation to file their income tax returns. At the
same time, such books and records provide
26
26 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
vital information and possible bases for the government, after appropriate audit, to
make an assessment for deficiency tax whenever so warranted under the
circumstances.
The NIRC, just like the tax laws in other jurisdictions, recognizes the important
facility provided by generally accepted accounting principles and methods to the
primary aim of tax laws to collect the correct amount of taxes. The NIRC even
devoted a whole chapter on accounting periods and methods of accounting, some
relevant provisions of which we cite here for more emphasis:
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS
OF ACCOUNTING
Sec. 43. General Rule.—The taxable income shall be computed upon the basis of the
taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be)
in accordance with the method of accounting regularly employed in keeping the
books of such taxpayer; but if no such method of accounting has been so employed,
or if the method employed does not clearly reflect the income, the computation shall
be made in accordance with such method as in the opinion of the Commissioner
clearly reflects the income.
If the taxpayer’s annual accounting period is other than a fiscal year, as defined in
Section 22(Q), or if the taxpayer has no annual accounting period, or does not keep
books, or if the taxpayer is an individual, the taxable income shall be computed on
the basis of the calendar year.
Sec. 44. Period in which Items of Gross Income Included.—The amount of all items
of gross income shall be included in the gross income for the taxable year in which
received by the taxpayer, unless, under methods of accounting permitted under
Section 43, any such amounts are to be properly accounted for as of a different Lancaster Philippines, Inc.
period. The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
27
performed under contract.
VOL. 831, JULY 12, 2017 27
There should be deducted from such gross income all expenditures made during the
Commissioner of Internal Revenue vs.
taxable year on account of the contract, account being taken of the material and
Lancaster Philippines, Inc.
supplies on hand at the beginning and end of the taxable period for use in connection
In the case of the death of a taxpayer, there shall be included in computing taxable
with the work under the contract but not yet so applied.
income for the taxable period in which falls the date of his death, amounts accrued up
If upon completion of a contract, it is found that the taxable net income arising
to the date of his death if not otherwise properly includible in respect of such period
thereunder has not been clearly reflected for any year or years, the Commissioner
or a prior period.
may permit or require an amended return.
Sec. 45. Period for which Deductions and Credits Taken.—The deductions
Sec. 49. Installment Basis.—
provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’
(A) Sales of Dealers in Personal Property.—Under rules and regulations prescribed
or ‘paid or incurred’ dependent upon the method of accounting upon the basis of
by the Secretary of Finance, upon recommendation of the Commissioner, a person
which the net income is computed, unless in order to clearly reflect the income, the
who regularly sells or otherwise disposes of personal property on the installment
deductions should be taken as of a different period. In the case of the death of a
plan may return as income therefrom in any taxable year that proportion of the
taxpayer, there shall be allowed, as deductions for the taxable period in which falls
installment payments actually received in that year, which the gross profit realized or
the date of his death, amounts accrued up to the date of his death if not otherwise
to be realized when payment is completed, bears to the total contract price.
properly allowable in respect of such period or a prior period.
(B) Sales of Realty and Casual Sales of Personality.—In the case (1) of a casual sale
Sec. 46. Change of Accounting Period.—If a taxpayer, other than an individual,
or other casual disposition of personal property (other than property of a kind which
changes his accounting period from fiscal year to calendar year, from calendar year to
would properly be included in the inventory of the taxpayer if onhand at the close of
fiscal year, or from one fiscal year to another, the net income shall, with the approval
the taxable year), for a price exceeding One thousand pesos (P1,000), or (2) of a sale or
of the Commissioner, be computed on the basis of such new accounting period,
other disposition of real property, if in either case the initial payments do not exceed
subject to the provisions of Section 47.
twenty-five percent (25%) of the selling price, the income may, under the rules and
xxxx
regulations prescribed by the Secretary of Finance, upon recommendation of the
Sec. 48. Accounting for Long-term Contracts.—Income from long-term contracts
Commissioner, be returned on the basis and ill the manner above prescribed in this
shall be reported for tax purposes in the manner as provided in this Section.
Section.
As used herein, the term ‘long-term contracts’ means building, installation or
construction contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall
report such income upon the basis of percentage of completion. 29
VOL. 831, JULY 12, 2017 29
28
Commissioner of Internal Revenue vs.
28 SUPREME COURT REPORTS
Lancaster Philippines, Inc.
ANNOTATED
Commissioner of Internal Revenue vs.
As used in this Section, the term ‘initial payments’ means the payments received in
cash or property other than evidences of indebtedness of the purchaser during the
taxable period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals—An
individual who sells or disposes of real property, considered as capital asset, and is
otherwise qualified to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis.—If a taxpayer entitled to the
benefits of Subsection (A) elects for any taxable year to report his taxable income on
the installment basis, then in computing his income for the year of change or any
subsequent year, amounts actually received during any such year on account of sales
or other dispositions of property made in any prior year shall not be excluded.
(emphasis in the original)
would report incomes and expenses in its accounting books or records. The NIRC
does not prescribe a uniform, or even specific, method of accounting.
Too, other methods approved by the CIR, even when not expressly mentioned in
the NIRC, may be adopted if such method would enable the taxpayer to properly
reflect its income. Section 43 of the NIRC authorizes the CIR to allow the use of a
method of accounting that in its opinion would clearly reflect the income of the
taxpayer. An example of such method not expressly mentioned in the NIRC, but duly
approved by the CIR, is the ‘crop method of accounting’ authorized under RAM No.
2-95. The pertinent provision reads:
II. Accounting Methods
xxxx
F. Crop Year Basis is a method applicable only to farmers engaged in the
production of crops which take more than a year from the time of planting to the
process of gathering and disposal. Expenses paid or incurred are deductible in the
year the gross income from the sale of the crops are realized.

We now proceed to the matter respecting the accounting method employed by

Lancaster. The crop method recognizes that the harvesting and selling of crops do not fall
An accounting method is a “set of rules for determining when and how to report within the same year that they are planted or grown. This method is especially
income and deductions.”46The provisions under Chapter VIII, Title II of the NIRC relevant to farmers, or those engaged in the business of producing crops who, pursu-
cited above enumerate the methods of accounting that the law expressly recognizes, 31
to wit: VOL. 831, JULY 12, 2017 31
(1) Cash basis method;47 Commissioner of Internal Revenue vs.
(2) Accrual method;48 Lancaster Philippines, Inc.
(3) Installment method;49 ant to RAM No. 2-95, would then be able to compute their taxable income on the
30 basis of their crop year. On when to recognize expenses as deductions against
30 SUPREME COURT REPORTS income, the governing rule is found in the second sentence of Subsection F cited
ANNOTATED above. The rule enjoins the recognition of the expense (or the deduction of the cost) of
Commissioner of Internal Revenue vs. crop production in the year that the crops are sold(when income is realized).
Lancaster Philippines, Inc. In the present case, we find it wholly justifiable for Lancaster, as a business
(4) Percentage of completion method;50 and engaged in the production and marketing of tobacco, to adopt the crop method of
(5) Other accounting methods. accounting. A taxpayer is authorized to employ what it finds suitable for its purpose
so long as it consistently does so, and in this case, Lancaster does appear to have
Any of the foregoing methods may be employed by any taxpayer so long as it reflects utilized the method regularly for many decades already. Considering that the crop
its income properly and such method is used regularly. The peculiarities of the year of Lancaster starts from October up to September of the following year, it
business or occupation engaged in by a taxpayer would largely determine how it follows that all of its expenses in the crop production made within the crop year
starting from October 1997 to September 1998, including the February and March
1998 purchases covered by purchase invoice vouchers, are rightfully deductible for
income tax purposes in the year when the gross income from the crops are realized.
Pertinently, nothing from the pleadings or memoranda of the parties, or even from
their testimonies before the CTA, would support a finding that the gross income from
the crops (to which the subject expenses refer) was actually realized by the end of
March 1998, or the closing of Lancaster’s fiscal year for 1998. Instead, the records
show that the February and March 1998 purchases were recorded by Lancaster
asadvances and later taken up as purchases by the close of the crop year in September
1998, or as stated very clearly above, within the fiscal year 1999.51 On this point, we
quote with approval the ruling of the CTA En Banc, thus:
32
32 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
Considering that [Lancaster] is engaged in the production of tobacco, it applied
the crop year basis in determining its total purchases for each fiscal year. Thus,
[Lancaster’s] total cost for the production of its crops, which includes its purchases,
must be taken as a deduction in the year in which the gross income is realized. Thus,
We agree with the following ratiocination of the First Division:
Evident from the foregoing, the crop year basis is one unusual method of
accounting wherein the entire cost of producing the crops (including
purchases) must be taken as a deduction in the year in which the gross income
from the crop is realized. Since the petitioner’s crop year starts in October and
ends in September of the following year, the same does not coincide with
petitioner’s fiscal year which starts in April and ends in March of the
following year. However, the law and regulations consider this peculiar
situation and allow the costs to be taken up at the time the gross income from
the crop is realized, as in the instant case.
[Lancaster’s] fiscal period is from April 1, 1998 to March 31, 1999. On the other
hand, its crop year is from October 1, 1997 to September 1, 1998. Accordingly, in
applying the crop year method, all the purchases made by the respondent for October
1, 1997 to September 1, 1998 should be deducted from the fiscal year ending March
31, 1999, since it is the time when the gross income from the crops is realized. 52
The matching principle
Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the
concept of matching cost against revenue
33
VOL. 831, JULY 12, 2017 33
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
to buttress their respective theories. Also, both parties cite RAM 2-95 in referencing
the crop method of accounting.
We are tasked to determine which view is legally sound.
In essence, the matching concept, which is one of the generally accepted
accounting principles, directs that the expenses are to be reported in the same period
that related revenues are earned. It attempts to match revenue with expenses that
helped earn it.
The CIR posits that Lancaster should not have recognized in FY 1999 the
purchases for February and March 1998.53 Apparent from the reasoning of the CIR is
that such expenses ought to have been deducted in FY 1998, when they were
supposed to be paid or incurred by Lancaster. In other words, the CIR is of the view
that the subject purchases match with revenues in 1998, not in 1999.
A reading of RAM No. 2-95, however, clearly evinces that it conforms with the
concept that the expensespaid or incurred be deducted in the year in which gross
income from the sale of the crops is realized. Put in another way, the expenses are
matched with the related incomes which are eventually earned. Nothing from the
provision is it strictly required that for the expense to be deductible, the income to
which such expense is related to be realized in the same year that it is paid or incurred.
As noted by the CTA,54 the crop method is an unusual method of accounting, unlike
other recognized accounting methods that, by mandate of Sec. 45 of the NIRC, strictly
require expenses be taken in the same taxable year when the income is
‘paid orincurred,’ or ‘paid or accrued,’ depending upon the method of accounting
employed by the taxpayer.
Even if we were to accept the notion that applying the 1998 purchases as
deductions in the fiscal year 1998 conforms with
34
34 SUPREME COURT REPORTS
 ANNOTATED
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
the generally accepted principle of matching cost against revenue, the same would
still not lend any comfort to the CIR. Revenue Memorandum Circular(RMC) No. 22-
04, entitled “Supplement to Revenue Memorandum Circular No. 44-2002 on Accounting
Methods to be Used by Taxpayers for Internal Revenue Tax Purposes”55dated 12 April 2004,
commands that where there is conflict between the provisions of the Tax Code
(NIRC), including its implementing rules and regulations, on accounting methods
and the generally accepted accounting principles, the former shall prevail. The
relevant portion of RMC 22-04 reads:
II. Provisions of the Tax Code Shall Prevail.
All returns required to be filed by the Tax Code shall be prepared always in
conformity with the provisions of the Tax Code, and the rules and regulations
implementing said Tax Code. Taxability of income and deductibility of expenses shall
be determined strictly in accordance with the provisions of the Tax Code and the
rules and regulations issued implementing said Tax Code. In case of difference between
the provisions of the Tax Code and the rules
P6,466,065.50 for deficiency income tax should be cancelled and set aside. The
assessment is void for being issued without valid authority. Furthermore, there is no
legal justification for the disallowance of Lancaster’s expenses for the purchase of
tobacco in February and March 1998.
WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and
24 June 2008 Resolution of the Court of Tax Appeals En Banc areAFFIRMED. No
costs.
SO ORDERED.
Note.—Despite the amendments to the law, the Supreme Court (SC) still holds
that the Court of Tax Appeals (CTA) has ample authority to issue injunctive writs to
restrain the collection of tax and to even dispense with the deposit of the amount
claimed or the filing of the required bond, whenever the method employed by the
Commissioner of Internal Revenue (CIR) in the collection of tax jeopardizes the
interests of a taxpayer for being patently in violation of the law. (Pacquiao vs. Court of
Tax Appeals, First Division, 789 SCRA 19 [2016])

35
VOL. 831, JULY 12, 2017 35
Commissioner of Internal Revenue vs.
Lancaster Philippines, Inc.
and regulations implementing the Tax Code, on one hand, and the generally accepted
accounting principles (GAAP) and the generally accepted accounting standards (GAAS), on
the other hand, the provisions of the Tax Code and the rules and regulations issued
implementing said Tax Code shall prevail. (italics supplied)

RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for
taxpayers using the crop method of accounting. The rule prevails over any GAAP,
including the matching concept as applied in financial or business accounting.
In sum, and considering the foregoing premises, we find no cogent reason to
overturn the assailed decision and resolution of the CTA. As the CTA decreed,
Assessment Notice LTAID II IT-98-00007, dated 11 October 2002, in the amount of
 FIRST DIVISION TCCs in settling respondents' own excise tax liabilities. The DOF Center issued Tax
Debit Memoranda (DOF TDMs) addressed to the Collection Program Division of the
Bureau of Internal Revenue (BIR),8 allowing respondents to do so.
G.R. No. 197945, July 09, 2018
Thus, to pay for their excise tax liabilities from 1992 to 1997 (Covered
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PILIPINAS SHELL Years),9 respondents presented the DOF TDMs to the BIR. The BIR accepted the
PETROLEUM CORPORATION, Respondent TDMs and issued the following: (a) TDMs signed by the BIR Assistant Commissioner
for Collection Service10 (BIR TDMs); (b) Authorities to Accept Payment for Excise
[G.R. Nos. 204119-20] Taxes (ATAPETs) signed by the BIR Regional District Officer; and (c) corresponding
instructions to BIR's authorized agent banks to accept respondents' payments in the
COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PILIPINAS SHELL form of BIR TDMs.11
PETROLEUM CORPORATION AND PETRON CORPORATION, Respondents.
Three significant incidents arising from the foregoing antecedents resulted in the
DECISION filing of several petitions before this Court, viz.:

Significant Incidents Resultant Petition/s before the Court

LEONARDO-DE CASTRO,*J.:
(a) 1998 Collection Letters G.R. Nos. 204119-20 (one of the pr sent petitions)
Before the Court are consolidated petitions for review on certiorari under Rule 45 of issued by the BIR against
the Rules of Court, as amended, filed by petitioner Commissioner of Internal Revenue respondents
(CIR):
(b) 1999 Assessments issued by Pilipinas Shell Petroleum Corporation v. Commissioner
1. G.R. No. 197945 assailing the Decision1 dated February 22, 2011 and the BIR against respondents of Internal Revenue, G.R. No. 172598, December 21,
Resolution2 dated July 27, 2011 of the Court of Tax Appeals (CTA) in 2007 (2007 Shell Case)
CTA En Banc Case No. 535; and
Petron Corporation v. Commissioner of Internal
2. G.R. Nos. 204119-20 assailing the Decision3
dated March 21, 2012 and Revenue, G.R. No. 180385, July 28, 2010 (2010 Petron
Resolution4 dated October 10, 2012 of the Court of Appeals in CA-G.R. SP Case)
Nos. 55329-30.
(c) 2002 Collection Letter issued G.R. No. 197945 (one of the present petitions)
by the BIR against respondent
Respondents Pilipinas Shell Petroleum Corporation (Shell) and Petron Corporation
Shell
(Petron) are domestic corporations engaged in the production of petroleum products
and are duly registered with the Board of Investments (BOI) under the Omnibus Said incidents and petitions are discussed in detail below.
Investments Code of 1987.5
A. 1998 Collection Letters
On different occasions during 1988 to 1996, respondents separately sold bunker oil (G.R. Nos. 204119-20)
and other fuel products to other BOT-registered entities engaged in the export of their
own manufactured goods (BOI export entities).6 These BOT-registered export entities In its collection letters12 dated April 22, 1998 (1998 Collection Letters) addressed to
used Tax Credit Certificates (TCCs) originally issued in their name to pay for these respondents' respective presidents, the BIR13 pointed out that respondents partly paid
purchases. for their excise tax liabilities during the Covered Years using TCCs issued in the
names of other companies; invalidated respondents' tax payments using said TCCs;
To proceed with this mode of payment, the BOT-registered export entities executed and requested respondent Shell and respondent Petron to pay their delinquent tax
Deeds of Assignment in favor of respondents, transferring the TCCs to the latter. liabilities amounting to P1,705,028,008.06 and P1,107,542,547.08, respectively. The
Subsequently, the Department of Finance (DOF), through its One Stop Shop Inter- 1998 Collection Letters similarly read:
Agency Tax Credit and Duty Drawback Center (DOF Center), approved the Deeds of Our records show that for the years x x x, you have been paying part of your excise
Assignment.7 tax liabilities in the form of Tax Credit Certificate (TCC) which bear the name of a
company other than yours in violation of Rule IX of the Rules and Regulations issued
Thereafter, respondents sought the DOF Center's permission to use the assigned by the Board of Investments to implement P.D. No. 1789 and B.P. 391. Accordingly,
your payment through the aforesaid TCC's are considered invalid and therefore, collect taxes without an assessment was a denial of due process and a violation of
you are hereby requested to pay the amount of x x x inclusive of delinquency for late Section 22822 of the National Internal Revenue Code of the Philippines of 1997 (Tax
payments as of even date, covering the years heretofore mentioned within thirty days Code). The CTA also noted that the BIR might have purposely avoided the issuance
(30) from receipt hereof, lest we will be constrained to resort to administrative and of a for;mal assessment because its right to assess majority of respondents' alleged
legal remedies available in accordance with law. (Emphasis supplied.) delinquent taxes had already prescribed.
Respondents separately filed their administrative protests 14 against the 1998
Collection Letters, but the BIR denied15 said protests. The BIR maintained that the Petitioner's motions for reconsideration of the above-mentioned decisions were
transfers of the TCCs from the BOI-registered export entities to respondents and the denied by the CTA.23Thus, petitioner CIR sought recourse before the Court of
use of the same TCCs by respondents to pay for their self-assessed specific tax Appeals24 through the consolidated petitions docketed as CA-G.R. SP Nos. 55329-30.
liabilities were invalid, and reiterated its demand that respondents pay their
delinquent taxes. However, the Court of Appeals dismissed the petitions and found the transfer and
utilization of the subject TCCs were valid, in accordance with the 2007 Shell
This prompted respondent Petron to file a Petition for Review 16 before the CTA Case.25 The appellate court eventually denied petitioner's motion for reconsideration.
docketed as CTA Case No. 5657.
Undaunted, petitioner CIR filed the present petition docketed as G.R. Nos. 204119-20.
As for respondent Shell, it first requested for reconsideration of the denial of its
protest by the BIR.17However, while said request for reconsideration was pending, B. 1999 Assessments (The 2007 Shell Case and 2010 Petron Case)
the BIR issued a Warrant of Garnishment18 against respondent Shell. Taking this as a
denial of its request for reconsideration, respondent Shell likewise filed a Petition for During the pendency of the consolidated petitions in CA-G.R. SP Nos. 55329-30
Review19 before the CTA docketed as CTA Case No. 5728. before the Court of Appeals, the DOF Center conducted separate post-audit
procedures26 on all of the TCCs acquired and used by respondents during the
In their respective petitions before the CTA, respondents raised similar arguments Covered Years, requiring them to submit documents to support their acquisition of
against petitioner, to wit: (a) The collection of tax without prior assessment was a the TCCs from the BOI-registered export entities. As a result of its post-audit
denial of the taxpayer's right to due process; (b) The use of TCCs as payment of excise procedures, the DOF Center cancelled the first batch of the transferred TCCs27 used
tax liabilities was valid; (c) Since the BIR approved the transfers and subsequent use by respondent Shell and Petron, with aggregate amount of P830,560,791.00 and
of the TCCs, it was estopped from questioning the validity thereof; and (d) The BIR's P284,390,845.00, respectively.
right to collect the alleged delinquent taxes had already prescribed.
Following the cancellation of the TCCs, petitioner issued separate assessment letters
The CTA granted respondents' petitions in separate Decisions both dated July 23, to respondents in November 1999 (1999 Assessments) for the payment of deficiency
1999, decreeing as follows: excise taxes, surcharges, and interest for the Covered Years, which were also covered
CTA Case No. 5657 by the 1998 Collection Letters. Respondents filed their respective administrative
protests against said assessments. While petitioner denied respondent Shell's protest,
WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby he did not act upon that of respondent Petron.
GRANTED. The collection of the alleged delinquent excise taxes in the amount of
P1,107,542,547.08 is hereby CANCELLED AND SET ASIDE for being contrary to law. B.1 The 2007 Shell Case
Accordingly, [herein petitioner and BIR Regional Director of Makati, Region No. 8]
are ENJOINED from collecting the said amount of taxes against [herein respondent Respondent Shell raised petitioner's denial of its protest through a petition for review
Petron].20 before the CTA, docketed as CTA Case No. 6003. The CTA Division rendered a
Decision dated August 2, 2004 granting said petition and cancelled and set aside the
CTA Case No. 5728 assessment against respondent Shell; but then the CTAen banc, in its Decision dated
April 28, 2006, set aside the CTA Division's judgment and ordered respondent Shell
IN LIGHT OF ALL THE FOREGOING, the instant petition for review is GRANTED. to pay petitioner deficiency excise tax, surcharges, and interest. Hence, respondent
The collection letter issued by [herein petitioner] dated April 22, 1998 is considered Shell filed a petition for review before this Court docketed as G.R. No. 172598,
withdrawn and he is ENJOINED from any attempts to collect from [herein the 2007 Shell Case.
respondent Shell] the specific tax, surcharge and interest subject of this petition. 21
In both Decisions, the CTA upheld the validity of the TCC transfers from the BOI- In its Decision in the 2007 Shell Case, the Court cancelled the 1999 assessment against
registered export entities to respondents, the latter having complied with the respondent Shell and disposed thus:
requirements of transferability. The CTA further ruled that the BIR's attempt to
WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En Banc Decision in
CTA EB No. 64 is hereby REVERSED and SET ASIDE, and the August 2, 2004 CTA
Decision in CTA Case No. 6003 disallowing the assessment is hereby REINSTATED.
The assessment of respondent for deficiency excise taxes against petitioner for 1992
and 1994 to 1997 inclusive contained in the April 22, 1998 letter of respondent is
cancelled and declared without force and effect for lack of legal basis. No
pronouncement as to costs.28
In nullifying petitioner's assessments, the Court upheld the TCCs' validity,
respondent Shell's qualifications as transferees of said TCCs, respondent Shell's status
as a transferee in good faith and for value, and respondent Shell's right to due
process.
Debit Memos which were used to pay your 1995 to 1998 excise tax liabilities. Said
cancellation was embodied in EXCOM Resolution No. 03-05-99 of the Tax & Duty
Drawback Center of the Department of Finance. Upon verification by this Office,
however, some of these TCCs/TDMs were already included in the tax case
previously filed in [the] Court of Tax Appeals. Accordingly, the collectible amount
has been reduced from P691,508,005.82 to P234,555,275.48, the summary of which is
hereto attached for your ready reference.
Basic P 87,893,876.00
Surcharge 21,973,469.00

The 2007 Shell Case became final and executory on March 17, 2008.29 Interest 124,687,930.48

B.2 The 2010 Petron Case TOTAL P 234,555,275.48

In view thereof, you are hereby requested to pay the aforesaid tax liability/ties
Considering petitioner's inaction on its protest, respondent Petron likewise filed a within ten (10) days from receipt hereof thru any authorized agent bank x x
petition for review with the CTA, docketed as CTA Case No. 6136, to challenge the x Should you fail to do so, this Office, much to our regret, will be constrained to
assessment. In a Decision dated August 23, 2006, the CTA Division denied the enforce the collection of the said amount thru the summary administrative
petition and ordered respondent Petron to pay petitioner deficiency excise taxes, remedies provided by law, without any further notice. (Emphasis supplied.)
surcharges, and interest. Said judgment was subsequently affirmed by the CTA En DOF Executive Committee Resolution No. 03-05-99 referred to in the aforequoted
Banc in. its Decision dated October 30, 2007. This prompted respondent Petron to seek Collection Letter prescribed the guidelines and procedures for the cancellation, recall,
relief from this Court through a petition for review, docketed as G.R. No. 180385, and recovery of fraudulently-issued TCCs.
the 2010 Petron Case.30
Respondent Shell filed on July 11, 2002 its administrative protest34 to the 2002
Citing the 2007 Shell Case, the Court similarly cancelled the 1999 assessment against Collection Letter. However, without resolving said protest, petitioner35 issued a
respondent Petron and decided the 2010 Petron Case as follows: Warrant of Distraint and/or Levy dated September 12, 2002 for the satisfaction of the
WHEREFORE, premises considered, the petition is GRANTED and the October 30, following alleged tax delinquency of respondent Shell:
2007 CTA En Banc Decision in CTA EB No. 238 is, accordingly, REVERSED and SET WHEREAS, THERE IS DUE FROM:
ASIDE. In lieu thereof, another is entered invalidating respondent's Assessment of
petitioner's deficiency excise taxes for the years 1995 to 1997 for lack of legal bases. PILIPINAS SHELL PETROLEUM CORP. x x x x
No pronouncement as to costs.31
Entry of Judgment32 was made in the 2010 Petron Case on November 2, 2010. The sum of TWO HUNDRED THIRTY[-]FOUR MILLION FIVE HUNDRED FIFTY[-
]FIVE THOUSAND TWO HUNDRED TWENTY[-]FIVE PESOS AND 48 CENTAVOS
C. 2002 Collection Letter as Internal Revenue Taxes shown hereunder, plus all increments incident to
(G.R. No. 197945) delinquency.

Meanwhile, during the pendency of respondent Shell's CTA Case No. 6003 (which Assessment Notice No. : Unnumbered
was eventually elevated to this Court in the 2007 Shell Case), the BIR requested
respondent Shell to pay its purported excise tax liabilities amounting to Date Issued : January 30, 2002
P234,555,275.48, in a collection letter33 dated June 17, 2002 (2002 Collection Letter),
which read: Tax Type : Excise Tax
Collection Letter
Period Covered : Various Dates (December 18, 1995 to July 03, 1997)
x x x x
Amount : P234,555,275.48
Our records show that a letter dated January 30, 2002 was served to you by our
Collection Service, for the collection of cancelled Tax Credit Certificates and Tax
WHEREAS, the said taxpayer failed and refused and still fails and refuses to pay the Hence, petitioner now comes before this Court citing in the petitions at bar the
same notwithstanding demands made by this Office. 36 following errors allegedly committed by the courts a quo in G.R. Nos. 204119-20 and
Aggrieved, respondent Shell filed a petition for review 37 before the CTA docketed as G.R. No. 197945:
CTA Case No. 6547, arguing that: (a) the issuance of the 2002 Collection Letter and
Warrant of Distraint and/or Levy and enforcement of DOF Center's Executive G.R. Nos. 204119-20
Committee Resolution No. 03-05-99 violated its right to due process; (b) The DOF
Center did not have authority to cancel the TCCs; (c) The TCCs' transfers and The Court of Appeals erred:
utilizations were valid and legal; (d) It was an innocent purchaser for value; (e) The I.
HIR was estopped from invalidating the transfer and utilization of the TCCs; and (f)
The HIR's right to collect had already prescribed. IN NOT HOLDING THAT RESPONDENTS SHELL AND PETRON WERE NOT
QUALIFIED TRANSFEREES OF THE TAX CREDIT CERTIFICATES (TCCs) SINCE
The CTA Second Division ruled in favor of respondent Shell in its Decision 38 dated THEY WERE NOT SUPPLIERS OF DOMESTIC CAPITAL EQUIPMENT OR OF
April 30, 2009: RAW MATERIAL AND/OR COMPONENTS TO THEIR TRANSFERORS.
WHEREFORE, premises considered, the instant Petition for Review is hereby
GRANTED. The Collection Letters and Warrant of Distraint and/or Levy are II.
CANCELLED and declared without force and effect for lack of legal basis. 39
After the CTA Division denied40 his motion for reconsideration, petitioner elevated IN NOT HOLDING THAT SINCE RESPONDENTS WERE NOT QUALIFIED
the case to the CTAEn Banc via a petition for review41 docketed as CTA EB No. 535. TRANSFEREES OF THE TCCs, THE SAME COULD NOT BE VALIDLY USED IN
PAYING THEIR EXCISE TAX LIABILITIES.
In its Decision dated February 22, 2011, the CTA En Banc denied the petition and
affirmed the judgment of the CTA Division. III.

The CTA En Banc resolved the issues relying on the 2007 Shell Case. Pursuant to this IN NOT HOLDING THAT GOVERNMENT IS NOT ESTOPPED FROM
ruling, the real issue is not whether the BOI-registered export entities validly COLLECTING TAXES DUE TO THE MISTAKES OF ITS AGENTS.
procured the TCCs from the DOF Center, but whether respondent Shell fraudulently
obtained the TCCs from said BOI-registered export entities. IV.

The CTA En Banc brushed aside petitioner's argument that respondent Shell was IN NOT HOLDING THAT SHELL WAS ACCORDED DUE PROCESS IN
aware that the transferred TCCs were subject to post-audit procedures. It explained PETITIONER'S ATTEMPT TO COLLECT ITS EXCISE TAX LIABILITIES.42
that the TCCs were valid and effective upon issuance and were not subject to post-
audit procedures as a suspensive condition. Further, the TCCs could no longer be G.R. No. 197945
cancelled once these had been fully utilized or duly applied against any outstanding
tax liability of an innocent transferee for value. I. The CTA EN BANC COMMITTED GRIEVOUS ERROR IN NOT RULING ON THE
VALIDITY OF THE TCCs AND ITS CONSEQUENT EFFECTS ON THE RIGHTS
In this regard, the CTA En Banc found that respondent Shell did not participate in any AND OBLIGATIONS ASSUMED BY RESPONDENT.
fraud attending the issuance of the TCCs, as well as its subsequent transfers. Thus,
respondent Shell is an innocent transferee in good faith and for value and could not II. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN HOLDING THAT
be prejudiced by fraud attending the TCCs' procurement. RESPONDENT IS AN INNOCENT TRANSFEREE OF THE DISPUTED TCCs IN
GOOD FAITH.
In the absence of fraud, petitioner could only reassess Shell for deficiency tax within
the three-year prescriptive period under Section 203 of the Tax Code, not the 10-year III. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN RULING THAT
period under Section 222(a) of the same Code. Further, petitioner violated respondent RESPONDENT IS NOT LIABLE TO PAY EXCISE TAXES.
Shell's right to due process when he issued the 2002 Collection Letter without a
Notice of Informal Conference (NIC) or a Preliminary Assessment Notice as required IV. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN HOLDING THAT
by Revenue Regulations No. (RR) 12-99. THE GOVERNMENT IS ESTOPPED FROM NULLIFYING THE TCCs, AND
DECLARING THEIR USE, TRANSFER AND UTILIZATION AS FRAUDULENT.
The CIR moved for reconsideration but was denied.
V. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN RULING THAT
RESPONDENT WAS DENIED DUE PROCESS.
VI. THE CTA EN BANC COMMITTED A GRIEVOUS ERROR IN DECLARING
THAT THE PERIOD TO COLLECT RESPONDENT'S UNPAID EXCISE TAXES HAS
ALREADY PRESCRIBED.
VII. THE CTA EN BANC COMMITTED A GRIEVOUS ERROR IN RULING
THAT,RESPONDENT IS NOT LIABLE TO PAY SURCHARGES AND INTERESTS.43
The Ruling of the Court
The petitions are without merit.
The issues concerning the transferred TCCs' validity, respondents' qualifications as
transferees of said TCCs, and the respondents' valid use of the TCCs to pay for their
excise tax liabilities for the Covered Years had been finally settled in the 2007 Shell
Case and 2010 Petron Case and are already barred from being re-litigated herein by
the doctrine of res judicata in the concept of conclusiveness of judgment.
While the present petitions, on one hand, and the 2007 Shell Case and 2010 Petron Case,
on the other hand, involve identical parties and originate from the same factual
antecedents, there are also substantial distinctions between these cases, for which
reason, the Court cannot simply dismiss the former on account of the latter based on
the doctrine of res judicata in the concept of "barby prior judgment."
The 2007 Shell Case and 2010 Petron Case were assessment cases. These initiated from
respondents' protests of the 1999 Assessments issued by petitioner CIR against them
for deficiency excise taxes, surcharges, and interest, following cancellation of the
transferred TCCs and the corresponding TDMs which respondents used to pay for
said excise taxes. Said cases were primarily concerned with the legality and propriety
of petitioner's issuance of the 1999 Assessments against respondents.
In contrast, the consolidated petitions now before the Court arose from respondents'
protests of petitioner's 1998 and 2002 Collection Letters for essentially the same
excise tax deficiencies covered by the 1999
Assessments, but apparently issued and pursued by the petitioner and BIR separately
from and concurrently with the assessment cases. At the crux of these cases is
petitioner's right to collect the deficiency excise taxes from respondents.
In the instant petitions, petitioner asserts his right to collect as excise tax deficiencies
the excise tax liabilities which respondents had previously settled using the
transferred TCCs, impugning the TCCs' validity on account of fraud as well as
respondents' qualifications as transferees of said TCCs. However, respondents
already raised the same arguments and the Court definitively ruled thereon in its
final and executory decisions in the 2007 Shell Case and 2010 Petron Case.
The re-litigation of these issues in the present petitions, when said issues had already
been settled with finality in the 2007 Shell Case and 2010 Petron Case, is precluded
by res judicata in the concept of "conclusiveness of judgment."
In Ocho v. Calos,44 the Court extensively explained the doctrine of res judicata in the
concept of "conclusiveness of judgment," thus:
The doctrine of res judicata as embodied in Section 47, Rule 39 of the Rules of Court
states:
SECTION 47. Effect of judgments or final orders. - The effect of a judgment or final order
rendered by a court of the Philippines, having jurisdiction to pronom:tce the
judgment or final order, may be as follows:
x x x x
(b) In other cases, the judgment or final order is, with respect to the matter directly
adjudged or as to any other matter that could have been raised in relation thereto,
conclusive between the parties and their successors-in interest by title subsequent to
the commencement of the action or special proceeding, litigating for the same thing
and under the same title and in the same capacity; and
(c) In any other litigation between the same parties or their successors-in-interest, that
only is deemed. to have been adjudged in a former judgment or final order which
appears upon its face to have been so adjudged, or which was actually and
necessarily included therein or necessary thereto.
It must be pointed out at this point that, contrary to the insistence of the Caloses, the
doctrine of res judicata applies to both judicial and quasi-judiCial proceedings. The
doctrine actually embraces two (2) concepts: the first is "bar by prior judgment" under
paragraph (b) of Rule 39, Section 47, and the second is "conclusiveness of
judgment"under paragraph (c) thereof. In the present case, the second concept -
conclusiveness of judgment- applies. The said concept is explained in this manner:
[A] fact or question which was in issue in a former suit and was there judicially
passed upon and determined by a court of competent jurisdiction, is conclusively
settled by the judgment therein as far as the parties to that action and persons in
privity with them are concerned and cannot be again litigated in any future action
between such parties or their privies, in the same court or any other court of
concurrent jurisdiction on either the same or different cause of action, while the
judgment remains unreversed by proper authority. It has been held that in order.
that a judgment in one action can be conclusive as to a particular matter in another
action between the same parties or their privies, it is essential that the issue be
identical. If a particular point or question is in issue in the second action, and the
judgment will depend on the determination of that particular point or question, a
former judgment between the same parties or their privies will be final and
conclusive in the second if that same point or question was in issue and adjudicated
in the first suit. x x x.
Although the action instituted by the Caloses in Adm. Case No. 006-90
(Anomalies/Irregularities in OLT Transfer Action and Other Related Activities) is
different from the action in Adm. Case No. (X)-014 (Annulment of Deeds of
Assignment, Emancipation Patents and Transfer Certificate of Titles, Retention and
Recovery of Possession and Ownership), the concept of conclusiveness of judgment
still applies because under this principle "the identity of causes of action is not
required but merely identity of issues."
[Simply] put, conclusiveness of judgment bars the relitigation of particular facts or
issues in another litigation between the same parties on a different claim or cause
of action. In Lopez vs. Reyes, we expounded on the concept of conclusiveness of
judgment as follows:
The general rule precluding the relitigation of material facts or questions which were
in issue and adjudicated in former action are commonly applied to all matters
essentially connected with the subject matter of litigation. Thus it extends to
questions necessarily involved in an issue, and necessarily adjudicated, or necessarily
implied in the final judgment, although no specific finding may have been made in
reference thereto, and although such matters were directly referred to in the
pleadings and were not actually or formally presented. Under this rule, if the record
of the former trial shows that the judgment could not have been rendered without
deciding the particular matter, it will be considered as having settled that matter as to
all future actions between the parties, and if a judgment necessarily presupposes
certain premises, they are as conclusive as the judgment itself. Reasons for the rule
are that a judgment is an adjudication on all the matters which are essential to
support it, and that every proposition assumed or decided by the court leading up to
the final conclusion upon which such conclusion is based is as effectually passed
upon as the ultimate question which is solved.
xxxx
As held in Legarda vs. Savellano:
x x x It is a general rule common to all civilized system of jurisprudence, that the
solemn and deliberate sentence of the law, pronounced by its appointed organs, upon
a disputed fact or a state of facts, should be regarded as a final and conclusive
determination of the question litigated, and should forever set the controversy at rest.
Indeed, it has been well said that this maxim is more than a mere rule of law; more
even than an important principle of public policy; and that it is not too much to say
that it is a fundamental concept in the organization of every jural system. Public
policy and sound practice demand that, at the risk of occasional errors, judgments of
courts should become final at some definite date fixed by law. The very object for
which courts were constituted was to put an end to controversies.
The findings of the Hearing Officer in Adm. Case No. 006-90, which had long
attained finality, that petitioner is not the owner of other agricultural lands foreclosed
any inquiry on the same issue involving the same parties and property. The CA thus
erred in still making a finding that petitioner is not qualified to be a farmer-
beneficiary because he owns other agricultural lands. (Emphases supplied, citations
omitted.)
In the 2007 Shell Case, the Court affirmed the validity of the TCCs, the transfer of the
TCCs to respondent Shell, and the use of the transfe ed TCCs by respondent Shell to
partly pay for its excise tax liabilities for the Covered Years. The Court ratiocinated as
follows: First, the results of postaudit procedures conducted in connection with the
TCCs should not operate as a suspensive condition to the TCCs' validity. Second,
while it was one of the conditions appearing on the face of the TCCs, the post-audit
contemplated therein did not pertain to the TCCs' genuineness or validity, but to
computational discrepancies that might have resulted from their utilization and
transfer. Third, the DOF Center or DOF could not compel respondent Shell to submit
sales documents for the purported post-audit. As a BOI-registered enterprise,
respondent Shell was a qualified transferee of the subject TCCs, pursuant to existing
rules and regulations.45Fourth, respondent Shell was a transferee in good faith and for
value as it secured the necessary approvals from various government agencies before
it used and applied the transferred TCCs against its tax liabilities and it did not
participate in the perpetuation of fraudulent acts in the procurement of the said
TCCs. As a transferee in good faith, respondent Shell could not be prejudiced with a
re-assessment of excise tax liabilities it had already settled when due using the subject
TCCs nor by any fraud attending the procurement of the subject TCCs. Fifth, while
the DOF Center was authorized to cancel TCCs it might have erroneously issued, it
could no longer exercise such authority after the subject TCCs have already been
utilized and accepted as payment for respondent Shell's excise tax liabilities. What
had been used up, debited, and cancelled could no longer be voided and cancelled
anew. While the State was not estopped by the neglect or omission of its agents, this
principle could not be applied to the prejudice of an innocent transferee in good faith
and for value.
And finally, the Court found in the 2007 Shell Case that respondent Shell's right to due
process was violated. Petitioner did not issue a Notice of Informal Conference (NIC)
and Preliminary Assessment Notice (PAN) to respondent Shell, in violation of the
formal assessment procedure required by Revenue Regulations No. (RR) 12-
99.46 Petitioner merely relied on the DOF Center's findings supporting the
cancellation of respondent Shell's TCCs. Thus, the Court voided the assessment dated
November 15, 1999 issued by the CIR against herein respondent Shell.
On the other hand, the Court resolved the 2010 Petron Case in accordance with its
ruling in the 2007 Shell Case, reiterating that: First, the subject TCCs' validity and
effectivity should be immediate and should not be dependent on the outcome of a
post-audit as a suspensive condition. Second, respondent Petron could not be
prejudiced by fraud alleged to have attended such issuance as it was not privy to the
issuance of the subject TCCs and it had already used said TCCs in settling its tax
liabilities. Third, respondent Petron was also an innocent transferee in good faith and
for value because it was a qualified transferee of the TCCs based on existing rules and
regulations and the TCCs' transfers were approved by the appropriate government
agencies. And fourth, while the government cannot be estopped from collecting taxes
by the mistake, negligence, or omission of its agents, the rights of a transferee in good
faith and for value should be protected.
The Court's aforementioned findings in the 2007 Shell Case and 2010 Petron Case are
conclusive and binding upon this Court in the petitions at bar. Res judicata by
conclusiveness of judgment bars the Court from relitigating the issues on the TCCs'
validity and respondents' qualifications as transferees in these cases. As a result of
such findings in the 2007 Shell Case and 2010 Petron Case, then respondents could not
have had excise tax deficiencies for the Covered Years as they had validly paid for
and settled their excise tax liabilities using the transferred TCCs.
In any case, the present petitions are dismissed as petitioner violated respondents'
right to due process for failing to observe the prescribed procedure for collection of
unpaid taxes through summary administrative remedies.
The Court dismisses the present petitions for it cannot allow petitioner to collect any
excise tax deficiency from respondents by mere issuance of the 1998 and 2002
Collection Letters. Petitioner had failed to comply with the prescribed procedure for
collection of unpaid taxes through summary administrative remedies and, thus,
violated respondents' right to due process.
That taxation is an essential attribute of sovereignty and the lifeblood of every nation
are doctrines well-entrenched in our jurisdiction. Taxes are the government's primary
means to generate funds needed to fulfill its mandate of promoting the general
welfare and well-being of the people47 and so should be collected without
unnecessary hindrance.48
While taxation per se is generally legislative in nature, collection of tax is
administrative in character.49Thus, Congress delegated the assessment and collection
of all national internal revenue taxes, fees, and charges to the BIR. 50 And as the BIR's
chief, the CIR has the power to make assessments and prescribe additional
requirements for tax administration and enforcement.51
The Tax Code provides two types of remedies to enforce the collection of unpaid
taxes, to wit: (a)summary administrative remedies, such as the distraint and/or levy
of taxpayer's property;52and/or (b) judicial remedies, such as the filing of a criminal
or civil action against the erring taxpayer.53
Verily, pursuant to the lifeblood doctrine, the Court has allowed tax authorities
ample discretion to avail themselves of the most expeditious way to collect the
taxes,54including summary processes, with as little interference as
possible.55 However, the Court, at the same time, has not hesitated to strike down
these processes in cases wherein tax authorities disregarded due process. 56 The BIR's
power to collect taxes must yield to the fundamental rule that no person shall be
deprived of his/her property without due process of law.57The rule is that taxes
must be collected reasonably and in accordance with the prescribed procedure. 58
In the normal course of tax administration and enforcement, the BIR must first make
an assessmentthen enforce the collection of the amounts so assessed. "An assessment
is not an action or proceeding for the collection of taxes. x x x It is a step preliminary,
but essential to warrant distraint, if still feasible, and, also, to establish a cause for
judicial action."59 The BIR may summarily enforce collection only when it has
accorded the taxpayer administrative due process, which vitally includes the
issuance of a valid assessment.60 A valid assessment sufficiently informs the taxpayer
in writing of the legal and factual bases of the said assessment, thereby allowing the
taxpayer to effectively protest the assessment and adduce supporting evidence in its
behalf.
In Commissioner of Internal Revenue v. Reyes61 (Reyes Case), the petitioner issued an
assessment notice and a demand letter for alleged deficiency estate tax against the
taxpayer estate. The assessment notice and demand letter. simply notified the
taxpayer estate of petitioner's findings, without stating the factual and legal bases for
said assessment. The Court, absent a valid assessment, refused to accord validity and
effect to petitioner's collection efforts - which involved, among other things, the
successive issuances of a collection letter, a final notice before seizure, and a warrant
of distraint and/or levy against the taxpayer estate - and declared that:
x x x [P]etitioner violated the cardinal rule in administrative law that the taxpayer be
accorded due process. Not only was the law here disregarded, but no valid notice
was sent, either. A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In
the instant case, respondent has not been informed of the basis of the estate tax
liability. Without complying with the unequivocal mandate of first informing the
taxpayer of the government's claim, there can be no deprivation of property, because
no effective protest can be made. The haphazard shot at slapping an assessment,
supposedly based on estate taxation's general provisions that are expected to be
known by the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the demand
letter sent, reveals the lack of basis for - not to mention the insufficiency of - the gross
figures and details of the itemized deductions indicated in the notice and the letter.
This Court cannot countenance an assessment based on estimates that appear to have
been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the
government, their assessment and collection "should be made in accordance with law
as any arbitrariness will negate the very reason for government itself." 62 (Emphasis
supplied.)
The Court similarly found that there was no valid assessment in Commissioner of
Internal Revenue v. BASF Coating + Inks Phils., Inc.63 (BASF Coating Case) as the
assessment notice therein was sent to the taxpayer company's former address.
Without a valid assessment, the Court pronounced that petitioner's issuance of a First
Notice Before Issuance of Warrant of Distraint and Levy to be in violation of the
taxpayer company's right to due process and effectively blocked any further efforts
by petitioner to collect by virtue thereof. The Court ratiocinated that:
It might not also be amiss to point out that petitioner's issuance of the First Notice
Before Issuance of Warrant of Distraint and Levy violated respondent's right to due
process because no valid notice of assessment was sent to it. An invalid assessment
bears no valid fruit. The law imposes a substantive, not merely a formal, requirement.
To proceed heedlessly with tax collection without first establishing a valid assessment
is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In the
instant case, respondent has not properly been informed of the basis of its tax
liabilities. Without complying with the unequivocal mandate of first informing the
taxpayer of the government's claim, there can be no deprivation of property, because
no effective protest can be made.

x x x x
It is an elementary rule enshrined in the 1987 Constitution that no person shall be
deprived of property without due process of law. In balancing the scales between the
power of the State to tax and its inherent right to prosecute perceived transgressors of
the law on one side, and the constitutional rights of a citizen to due process of law
and the equal protection of the laws on the other, the scales must tilt in favor of the
individual, for a citizen's right is amply protected by the Bill of Rights under the
Constitution.64
It is worthy to note that in the Reyes Case and BASF Coating Case, there were
assessments actually issued against the taxpayers therein, except that said
assessments were adjudged invalid for different reasons (i.e., for failing to state the
factual and legal bases for the assessment in the Reyes Case and for sending the
assessment to the wrong address in the BASF Coating Case). In the instant cases,
petitioner did not issue at all an assessment against respondents prior to his issuance
of the 1998 and 2002 Collection Letters. Thus, there is even more reason for the Court
to bar petitioner's attempts to collect the alleged deficiency excise taxes through any
summary administrative remedy.
In the present case, it is clear from the wording of the 1998 and 2002 Collection Letters
that petitioner intended to pursue, through said collection letters, summary
administrative remedies for the collection of respondents' alleged excise tax
deficiencies for the Covered Years. In fact, in the respondent Shell's case, the
collection letters were already followed by the BIR's issuance of Warrants of
Garnishment and Distraint and/or Levy against it.
That the BIR proceeded with the collection of respondents' alleged unpaid
taxes without a previous valid assessment is evident from the following: First,
petitioner admitted in CTA Case Nos. 572865and 6547 that: (a) the collections letters
were not tax assessment notices; (b) the letters were issued solely based on the DOF
Center's findings; and (c) the BIR never issued any preliminary assessment notice
prior to the issuance of the collection letters. Second, although the 1998 and 2002
Collection Letters and the 1999 Assessments against respondents were for the same
excise taxes for the Covered Years, the former were evidently not based on the latter.
The 1998 Collection Letters against respondents were issued prior to the 1999
Assessments; while the 2002 Collection Letter against respondent Shell was issued
even while respondent Shell's protest of the 1999 Assessment was still pending before
the CTA. And third, assuming arguendo that the 1998 and 2002 Collection Letters were
intended to implement the 1999 Assessments against respondents, the 1999
Assessments were already nullified in the 2007 Shell Case and 2010 Petron Case.
Absent a previously issued assessment supporting the 1998 and 2002 Collection
Letters, it is clear that petitioner's attempts to collect through said collection letters as
well as the subsequent Warrants of Garnishment and Distraint and/or Levy are void
and ineffectual. If an invalid assessment bears no valid fruit, with more reason will no
such fruit arise if there was no assessment in the first place.
The period for petitioner to collect the alleged deficiency excise taxes from
respondents through judicial remedies had already prescribed.
After establishing that petitioner could not collect respondents' alleged deficiency
excise taxes for the covered years through summary administrative remedies without
a valid assessment, the Court next determines whether petitioner could still resort to
judicial remedies to enforce collection.
The Court answers in the negative as the period for collection o£ the respondents'
alleged deficiency excise taxes for the Covered Years through judicial remedies had
already prescribed.
The alleged deficiency excise taxes petitioner seeks to collect from respondents in the
cases at bar pertain to the Covered Years, i.e., 1992 to 1997, during which, the
National Internal Revenue Code of the Philippines of 1977 66 (1977 NIRC) was the
governing law. Pertinent provisions of the 1977 NIRC read:
Sec. 318. Period of Limitation Upon Assessment and Collection. - Except as provided in the
succeeding section, internal-revenue taxes shall be assessed within five years after
the return was filed, and no proceeding in court without assessment for the
collection of such taxes shall be begun after the expiration of such period. For the
purposes of this section, a return filed before the last day prescribed by law for the
filing thereof shall be considered as filed on such last day: Provided, That this
limitation shall not apply to cases already investigated prior to the approval of this
Code. (Emphasis Supplied)
Sec. 319. 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 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: 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) Where before the expiration of the time prescribed in the preceding section for the
assessment of the tax, both the Commissioner and the taxpayer have consented in
writing to its assessment after such time, the tax may be assessed at any time prior to
the expiration of the period agreed upon. The period so agreed upon may be
extended by subsequent agreements in writing made before the expiration of the
period previously agreed upon.
(c) Where the assessment of any internal revenue tax has been made within the
period of limitation above-prescribed, such tax may be collected by distraint or levy
or by a proceeding in court, but only if began (1) within five years after assessment of
the tax, or (2) prior to the expiration of any period for collection agreed upon in
writing by the Commissioner and the taxpayer before the expiration of such five-year
period. The period so agreed upon may be extended by subsequent agreements in
writing made before the expiration of the period previously agreed upon.
Under Section 318 of the 1977 NIRC, petitioner had five years 67 from the time
respondents filed their excise tax returns in question to: (a) issue an assessment;
and/or (b) file a court action for collection without an assessment. In the petitions at
bar, respondents filed their returns for the Covered Years from 1992 to 1997, and the
five-year prescriptive period under Section 319 of the 1977 NIRC would have
prescribed accordingly from 1997 to 2002.
As the Court has explicitly found herein as well as in the 2007 Shell Case and 2010
Petron Case, petitioner failed to issue any valid assessment against respondents for the
latter's alleged deficiency excise taxes for the Covered Years. Without a valid
assessment, the five-year prescriptive period to assess continued to run and had, in
fact, expired in these cases. Irrefragably, petitioner is already barred by prescription
from issuing an assessment against respondents for deficiency excise taxes for the
Covered Years. Resultantly, this also bars petitioner from undertaking any summary
administrative remedies, i.e., distraint and/or levy, against respondents for
collection of the same taxes.
Unlike summary administrative remedies, the government's power to enforce the
collection through judicial action is not conditioned upon a previous valid
assessment. Sections 318 and 319(a) of the 1977 NIRC expressly allowed the
institution of court proceedings for collection of taxes without assessment within five
years from the filing of the tax return and 10 years from the discovery of falsity,
fraud, or omission, respectively.68
A judicial action for the collection of a tax is begun: (a) by the filing of a
complaint with the court of competent jurisdiction, or (b) where the assessment is
appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition
for review wherein payment of the tax is prayed for.69
From respondents' filing of their excise tax returns in the years 1992 to 1997 until the
lapse of the five-year prescriptive period under Section 318 of the 1977 NIRC in the
years 1997 to 2002, petitioner did not institute any judicial action for collection of
tax as aforedescribed. Instead, petitioner relied solely on summary administrative
remedies by issuing the collection letters and warrants of garnishment and distraint
and/or levy without prior assessment against respondents. Sifting through records, it
can be said that petitioner's earliest attempts to judicially enforce collection of
respondents' alleged deficiency excise taxes were his Answers to respondents'
Petitions for Review filed before the CTA in Case Nos. 5657, 5728, and 6547 on
August 6, 1998,70 March 2, 1999,71 and November 29, 2002,72 respectively.
Verily, in a long line of jurisprudence, the Court deemed the filing of such pleadings
as effective tax collection suits so as to stop the running of the prescriptive period in
cases where: (a) the CIR issued an assessment and the taxpayer appealed the same to
the CTA;73 (b) the CIR filed the answer praying for the payment of tax within five
years after the issuance of the assessment;74 and (c) at the time of its filing, jurisdiction
over judicial actions for collection of internal revenue taxes was vested in the CTA,
not in the regular courts.75
However, judging by the foregoing conditions, even petitioner's Answers in CTA
Case Nos. 5657, 5728, and 6547 cannot be deemed judicial actions for collection of
tax. First, CTA Case Nos. 5657, 5728, and 6547 were not appeals of assessments.
Respondents went before the CTA to challenge the 1998 and 2002 Collection Letters,
which, by petitioner's own admission, are not assessments.Second, by the time
petitioner filed. his Answers before the CTA on August 6, 1998, March 2, 1999, and
November 29, 2002, his power to collect alleged deficiency excise taxes, the returns
for which were filed from 1992 to 1997, had already partially prescribed, particularly
those pertaining to the earlier portion of the Covered Years. Third, at the time
petitioner filed his Answers before the CTA, the jurisdiction over judicial actions for
collection of internal revenue taxes was vested in the regular courts, not the
CTA.76 Original jurisdiction over collection cases77 was transferred to the CTA only
on April 23, 2004, upon the effectivity of Republic Act No. 9282. 78
Without either a formal tax collection suit filed before the court of competent
jurisdiction or ananswer deemed as a judicial action for collection of tax within the
prescribed five-year period under Section 318 of the 1977 NIRC, petitioner's power to
institute a court proceeding for the collection of respondents' alleged deficiency
excise taxes without an assessment had already prescribed in 1997 to 2002.
The Court's ruling remains the same even if the 10-year prescriptive period under
Section 319(a) of the 1977 NIRC, in case of falsity, fraud, or omission in the taxpayer's
return, is applied to the present cases.
Even if the Court concedes, for the sake of argument, that respondents' returns for the
Covered Years were false or fraudulent, Section 319(a) of the 1977 NIRC similarly
required petitioner to (a) issue an assessment; and/or (b) file a court action for
collection without an assessment, but within 10 years after the discovery of the falsity,
fraud, or omission in the taxpayer's return. As early as the 1998 Collection Letters,
petitioner could already be charged with knowledge of the alleged falsity or fraud in
respondents' excise tax returns, which precisely led petitioner to invalidate
respondents' payments using the transferred TCCs and to demand payment of
deficiency excise taxes through said letters. The 10-year prescriptive period under
Section 319(a) of the 1977 NIRC wholly expired in 2008 without petitioner issuing a
valid assessment or instituting judicial action for collection.
The Court cannot countenance the tax authorities' non-performance of their duties in
the present cases. The law provides for a statute of limitations on the assessment and
collection of internal revenue taxes in order to safeguard the interest of the taxpayer
against unreasonable investigation.79
While taxes are the lifeblood of the nation, the Court cannot allow tax authorities
indefinite periods to assess and/or collect alleged unpaid taxes. Certainly, it is an
injustice to leave any taxpayer in perpetual uncertainty whether he will be made
liable for deficiency or delinquent taxes.
In sum, petitioner's attempts to collect the alleged deficiency excise taxes from
respondents are void and ineffectual because (a) the Issues regarding the transferred
TCCs' validity, respondents' qualifications as transferees of said TCCs, and
respondents' use of the TCCs to pay for their excise tax liabilities for the Covered
Years, had already been settled with finality in the 2007 Shell Case and2010 Petron
Case, and could no longer be re-litigated on the ground of res judicata in the concept of
conclusiveness of judgment; (b) petitioner's resort to summary administrative
remedies without a valid assessment was not in accordance with the prescribed
procedure and was in violation of respondents' right to substantive due process; and
(c) none of petitioner's collection efforts constitute a valid institution of a judicial
remedy for collection of taxes without an assessment, and any such judicial remedy is
now barred by prescription.

WHEREFORE, premises considered, the Court DENIES the petition of the

Commissioner of Internal Revenue in G.R. No. 197945 and AFFIRMS the Decision
dated February 22, 2011 and Resolution dated July 27, 2011 of the Court of Tax
Appeals en banc in CTA En Banc Case No. 535.

The Court likewise DENIES the petition of the Commissioner of Internal Revenue in
G.R. Nos. 204119-20 and AFFIRMS the Decision dated March 21, 2012 and Resolution
dated October 10, 2012 of the Court of Appeals in CA-G.R. SP Nos. 55329-30.

SO ORDERED.
THIRD DIVISION
4th Quarter VAT Return January 25, 2000

G.R. Nos. 201398-99, October 03, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. AVON PRODUCTS

MANUFACTURING, INC., Respondent.
Monthly Remittance
G.R. Nos. 201418-19, October 3, 2018 Return of Income Expanded Compensation
Taxes Withheld
AVON PRODUCTS MANUFACTURING, INC., Petitioner, v. THE
COMMISSIONER OF THE INTERNAL REVENUE, Respondent. January February 25, 1999 February 25, 1999

DECISION February March 25, 1999 March 25, 1999

March April 26, 1999 April 26, 1999

LEONEN, J.:
April May 25, 1999 May 25, 1999
Tax assessments issued in violation of the due process rights of a taxpayer are null
and void. While the government has an interest in the swift collection of taxes, the May June 25, 1999 June 25, 1999
Bureau of Internal Revenue and its officers and agents cannot be overreaching in their
efforts, but must perform their duties in accordance with law, with their own rules of June July 26, 1999 July 26, 1999
procedure, and always with regard to the basic tenets of due process.
July August 25, 1999 August 25, 1999
The 1997 National Internal Revenue Code, also known as the Tax Code, and revenue
regulations allow a taxpayer to file a reply or otherwise to submit comments or August September 27, 1999 September 27, 1999
arguments with supporting documents at each stage in the assessment process. Due
process requires the Bureau of Internal Revenue to consider the defenses and September October 25, 1999 October 25, 1999
evidence submitted by the taxpayer and to render a decision based on these
submissions. Failure to adhere to these requirements constitutes a denial of due October November 25, 1999 November 25, 1999
process and taints the administrative proceedings with invalidity.
November December 27, 1999 December 27, 1999
These consolidated cases assail the Court of Tax Appeals En Banc November 9, 2011
Decision1 and April 10, 2012 Resolution2in CTA EB Case Nos. 661 and 663. The December January 25, 2000 January 25, 20008
assailed Decision denied the respective Petitions for Review by the Commissioner of
Internal Revenue (Commissioner)3 and of Avon Products Manufacturing, Inc.
(Avon),4 and affirmed the Court of Tax Appeals Special First Division May 13, 2010 Avon signed two (2) Waivers of the Defense of Prescription dated October 14, 2002
Decision.5 The assailed Resolution denied the Commissioner's Motion for and December 27, 2002,9 which expired on January 14, 2003 and April 14, 2003,
Reconsideration6and Avon's Motion for Partial Reconsideration.7 respectively.10

Avon filed its Value Added Tax (VAT) Returns and Monthly Remittance Returns of On July 14, 2004, Avon was served a Collection Letter 11 dated July 9, 2004. It was
Income Tax Withheld for the taxable year 1999 on the following dates: required to pay P80,246,459.1512 broken down as follows:

Return Date Filed KIND OF YE COMPROM TOTAL

BASIC TAX INTEREST
TAX AR ISE AMOUNT
3rd Quarter VAT Return October 25, 1999
 A conference was allegedly held on June 26, 2003 where Avon informed the revenue
Income 22,012,984 13,207,790 35,245,774. officers that all the documents necessary to support its defenses had already been
1999 25,000.00 submitted. Another meeting was held on August 4, 2003, where it showed the
Tax .19 .51 70
original General Ledger Book as previously directed by the revenue officers. During
these meetings, the revenue officers allegedly expressed that they would cancel the
assessments resulting from the alleged discrepancy in sales if Avon would pay part of
1,645,390.4
Excise Tax 1999 913,514.87 658,675.57 73,200.00 the assessments.22
4

Thus, on January 30, 2004, Avon paid the following portions of the Final Assessment
Notices:
20,286,033 13,254,677 33,590,711.
VAT 1999 50,000.00
.82 .47 29
a) Disallowed taxes and licenses/Fringe Benefit Tax adjustment P153,559.37; and

Withholdi b) Withholding Tax on Compensation - Late Remittance - P32,829.2823

ng Tax
4,702,116. 3,040,229. 7,787,345.6
on 1999 45,000.00
38 28 6 However, in a Memorandum dated May 27, 2004, the Bureau of Internal Revenue's
Compens
officers recommended the enforcement and collection of the assessments on the sole
ation
justification that Avon failed to submit supporting documents within the 60-day
period as required under Section 228 of the Tax Code. 24
Expanded
1,187,610. 1,977,237.0
1999 764,626.18 25,000.00 The Large Taxpayers Collection and Enforcement Division thereafter served Avon
Withholdi 88 6
ng Tax with the Collection Letter dated July 9, 2004.25 Avon asserted that even the items
already paid on January 30, 2004 were still included in the deficiency tax assessments
covered by this Collection Letter.26
P49,102,26 P30,925,99 P218,200. P80,246,45
TOTAL
0.14 9.01 00 9.1513 In a letter27 to the Deputy Commissioner for Large Taxpayers Service dated and filed
on July 27, 2004, Avon requested the reconsideration and withdrawal of the
Collection Letter. It argued that it was devoid of legal and factual basis, and was
These deficiency assessments were the same deficiency taxes covered by the premature as the Commissioner of Internal Revenue had not yet acted on its protest
Preliminary Assessment Notice14 dated November 29, 2002, received by Avon on against the Final Assessment Notices.28
December 23, 2002.15
The Commissioner did not act on Avon's request for reconsideration. Thus, Avon was
On February 14, 2003, Avon filed a letter dated February 13, 2003 protesting against constrained to treat the Collection Letter as denial of its protest. 29
the Preliminary Assessment Notice.16
On August 13, 2004, Avon filed a Petition for Review before the Court of Tax
Without ruling on Avon's protest, the Commissioner prepared the Formal Letter of Appeals.30 On August 24, 2004, it filed an Urgent Motion for Suspension of Collection
Demand17 and Final Assessment Notices,18all dated February 28, 2003, received by of Tax.31
Avon on April 11, 2003. Except for the amount of interest, the Final Assessment
Notices were the same as the Preliminary Assessment Notice.19 On May 13, 2010, the Court of Tax Appeals Special First Division rendered its
Decision,32 partially granting Avon's Petition for Review insofar as it ordered
In a letter20 dated and filed on May 9, 2003, Avon protested the Final Assessment the cancellation of the Final Demand and Final Assessment Notices for deficiency excise
Notices. Avon resubmitted its protest to the Preliminary Assessment Notice and tax, VAT, withholding tax on compensation, and expanded withholding tax.
adopted the same as its protest to the Final Assessment Notices. 21 However, it ordered Avon to pay deficiency income tax in the amount of P357,345.88
including 20% deficiency interest on the total amount due pursuant to Section 249,
paragraphs (b) and (c)(3) of the Tax Code. The Court of Tax Appeals Special First
Division also made the following pronouncements:33
a) There was no deprivation of due process in the issuance by the CIR of the
assessment for deficiency income tax, deficiency excise tax, deficiency VAT,
deficiency final withholding tax on compensation and deficiency expanded
withholding tax against AVON for the latter was afforded an opportunity to explain
and present its evidence;
b) The Waivers of the Statute of Limitations executed by AVON are invalid and
ineffective as the CIR failed to provide [AVON] a copy of the accepted Waivers, as
required under Revenue Memorandum Order No. 20-90. Hence, the assessment of
AVON's deficiency VAT, deficiency expanded withholding tax and deficiency
withholding tax on compensation is considered to have prescribed;
c) AVON's failure to submit the relevant documents in support of its protest did not
make the assessment final and executory;
d) As to assessment on AVON's deficiency Income Tax,
(1) there was no undeclared sales/income in the amount of P62,911,619.58 per ITR
for the taxable year 1999;
(2) AVON's liability for disallowed taxes and licenses and December 1998 Fringe
Benefit Tax payment adjustment in the amount of P152,632.10 and P927.27,
respectively, or a total of P153,559.37 is extinguished in view of the payment
made;
(3) The discrepancy between Ending Inventories reflected in Balance Sheet and
Cost of Sales represents variance/adjustments on standard cost to actual cost
allocated to ending inventories and not under-declaration as alleged by CIR;
(4) AVON's claimed tax credits in the amount of P203,645.89 was disallowed as the
same was unsupported by withholding tax certificates as required under
Section 2.58.3 (B) of Revenue Regulations No. 2-98. However, the amount of
P140,505.28 was upheld as a proper deduction from its 1999 income tax due;
and
e) As to assessment on AVON's deficiency excise tax, the same is deemed cancelled
and withdrawn in view of its Application for Abatement over its deficiency excise tax
assessment for the year 1999 and its corresponding payment.34
The dispositive portion of the Court of Tax Appeals Special First Division May 13,
2010 Decision read:
WHEREFORE, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is ORDERED TO CANCEL/WITHDRAW the Final
Demand and Final Assessment Notices: (1) Assessment No. LTAID-ET-99-00011 for
deficiency Excise Tax, (2) Assessment No. LTAID-II-VAT-99-00017 for deficiency
Value Added Tax, (3) Assessment No. LTAID-II-WTC-9900002 for deficiency
Withholding Tax on Compensation Under Withholding and Later Remittance, and (4)
Assessment No. LTAID-EWT-99-00010 for deficiency Expanded Withholding Tax.
However, petitioner is ORDERED TO PAY respondent the deficiency Income Tax
under Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable
year 1999.
In addition, petitioner is liable to pay: i) a deficiency interest on the deficiency basic
income tax due of P100,761.01 at the rate of 20% per annum from January 31, 2004
until fully paid pursuant to Section 249(B) of the 1997 NIRC and ii) a delinquency
interest on the total amount due (inclusive of the deficiency interest) at the rate of
20% per annum from July 24, 2004 until fully paid pursuant to Section 249(C)(3) of the
1997 NIRC.
SO ORDERED.35
The parties' Motions for Partial Reconsideration were denied in the July 12, 2010
Resolution.36 Both parties filed their respective Petitions for Review before the Court
of Tax Appeals En Banc.37
In its assailed November 9, 2011 Decision,38 the Court of Tax Appeals En Banc denied
the respective Petitions of the Commissioner and Avon, and affirmed the Court of
Tax Appeals Special First Division May 13, 2010 Decision. It held that the Waivers of
the Defense of Prescription were defective, thereby rendering the assessment of
Avon's deficiency VAT, expanded withholding tax, and withholding tax on
compensation to have prescribed.39 It further ruled that contrary to the
Commissioner's argument, the requirement under Revenue Memorandum Order No.
20-90 to furnish the taxpayer with copies of the accepted waivers was not merely
formal in nature, and non-compliance with it rendered the Waivers of the Defense of
Prescription invalid and ineffective.40
On the issue of jurisdiction, the Court of Tax Appeals En Banc held that under Section
228 of the Tax Code, the taxpayer has two (2) options in case of inaction of the
Commissioner on disputed assessments. The first option is to file a petition with the
Court of Tax Appeals within 30 days from the lapse of the 180-day period for the
Commissioner to decide. The second option is to await the final decision of the
Commissioner and appeal this decision within 30 days from its receipt. Here, Avon
opted for the second remedy by filing its petition on July 14, 2004, within 30 days
from receipt of the July 9, 2004 Collection Letter, which also served as the final
decision denying its protest. Hence, the Court of Tax Appeals En Banc ruled that it
had jurisdiction over the case.41
The Court of Tax Appeals En Banc further affirmed the Court of Tax Appeals Special
First Division's factual findings with regard to the cancellation of deficiency tax
assessments42 and disallowance of Avon's claimed tax credits.43
Finally, the Court of Tax Appeals En Banc rejected Avon's contention regarding
denial of due process. It held that Avon was accorded by the Commissioner a
reasonable opportunity to explain and present evidence.44 Moreover, the
Commissioner's failure to appreciate Avon's supporting documents and arguments
did not ipso facto amount to denial of due process absent any proof of irregularity in
the performance of duties.45
In its April 10, 2012 Resolution,46 the Court of Tax Appeals En Banc denied the
Commissioner's Motion for Reconsideration and Avon's Motion for Partial
Reconsideration. It held that the "RCBC case,"47 cited by the Commissioner, was not
on all fours with, and therefore not applicable as stare decisis in this case. Instead, the
ruling in CIR v. Kudos Metal Corporation,48 precluding the Bureau of Internal Revenue
from invoking the doctrine of estoppel to cover its failure to comply with the
procedures in the execution of a waiver, would apply.49
Hence, the present Petitions via Rule 45 were filed before this Court.
In her Petition,50 docketed as G.R. Nos. 201398-99, the Commissioner asserts that
Avon is estopped from assailing the validity of the Waivers of the Defense of
Prescription as it has paid the other assessments that these waivers covered. It also
avers that Avon's right to appeal its protest before the Court of Tax Appeals has
prescribed and that the assessments have attained finality. Finally, it states that Avon
is liable for the deficiency assessments.51
Avon, in its separate Petition,52 docketed as G.R. Nos. 201418-19, argues that the
assessments are void ab initio due to the failure of the Commissioner to observe due
process.53 It maintains that from the start up to the end of the administrative process,
the Commissioner ignored all of its protests and submissions. 54
The Petitions were consolidated on July 4, 2012.55 The Commissioner and Avon
subsequently submitted their respective Memoranda56 in compliance with this
Court's June 5, 2013 Resolution.57
The issues for this Court's resolution are:
First, whether or not the Commissioner of Internal Revenue failed to observe
administrative due process, and consequently, whether or not the assessments are
void;
Second, whether or not Avon Products Manufacturing, Inc., by paying the other tax
assessments covered by the Waivers of the Defense of Prescription, is estopped from
assailing their validity;
Third, whether or not Avon Products Manufacturing, Inc.'s right to appeal its protest
before the Court of Tax Appeals has already prescribed; and whether or not the
assessments against it for deficiency income tax, excise tax, value-added tax,
withholding tax on compensation, and expanded withholding tax have already
attained finality; and
Finally, whether or not Avon Products Manufacturing, Inc. is liable for deficiency
income tax, excise tax, value-added tax, withholding tax on compensation, and
expanded withholding tax for the taxable year 1999.
I.A
Avon asserts that the deficiency tax assessments are void because they were made
without due process58 and were not based on actual facts but on the erroneous
presumptions of the Commissioner.59
It submits that a fundamental part of administrative due process is the administrative
body's due consideration and evaluation of all the evidence submitted by the affected
party. With regard to tax assessment and collection, Section 228 of the Tax Code and
Revenue Regulations No. 12-99 prescribe compliance with due process requirements
through all the four (4) stages of the assessment process, from the preliminary
findings up to the Commissioner's decision on the disputed assessment.60
Avon claims that from the start up to the end of the administrative process, the
Commissioner ignored all of its protests and submissions to contest the deficiency tax
assessments.61 The Commissioner issued identical Preliminary Assessment Notice,
Final Assessment Notices, and Collection Letters without considering Avon's
submissions or its partial payment of the assessments. Avon asserts that it was not
accorded a real opportunity to be heard, making all of the assessments null and
void.62
Avon's arguments are well-taken.
The Bureau of Internal Revenue is the primary agency tasked to assess and collect
proper taxes, and to administer and enforce the Tax Code. 63 To perform its functions
of tax assessment and collection properly, it is given ample powers under the Tax
Code, such as the power to examine tax returns and books of accounts, 64 to issue a
subpoena,65 and to assess based on best evidence obtainable,66 among others.
However, these powers must "be exercised reasonably and [under] the prescribed
procedure."67 The Commissioner and revenue officers must strictly comply with the
requirements of the law, with the Bureau of Internal Revenue's own rules, 68 and with
due regard to taxpayers' constitutional rights.
The Commissioner exercises administrative adjudicatory power or quasi-judicial
function in adjudicating the rights and liabilities of persons under the Tax Code.
(2) The administrative tribunal or body must consider the evidence presented.
Quasi-judicial power has been described as:

Quasi-judicial or administrative adjudicatory power on the other hand is the power

of the administrative agency to adjudicate the rights of persons before it. It is the (3) There must be evidence supporting the tribunal's decision.
power to hear and determine questions of fact to which the legislative policy is to
apply and to decide in accordance with the standards laid down by the law itself in
enforcing and administering the same law. The administrative body exercises its
quasi-judicial power when it performs in a judicial manner an act which is essentially (4) The evidence must be substantial or "such relevant evidence as a reasonable
of an executive or administrative nature, where the power to act in such manner is mind might accept as adequate to support a conclusion."74
incidental to or reasonably necessary for the performance of the executive or
administrative duty entrusted to it.69 (Emphasis supplied, citations omitted)

In carrying out these quasi-judicial functions, the Commissioner is required to
"investigate facts or ascertain the existence of facts, hold hearings, weigh evidence,
and draw conclusions from them as basis for their official action and exercise of
discretion in a judicial nature."70 Tax investigation and assessment necessarily
demand the observance of due process because they affect the proprietary rights of
specific persons.
This Court has stressed the importance of due process in administrative proceedings:
(5) The administrative tribunal's decision must be rendered on the evidence
presented, or at least contained in the record and disclosed to the parties
affected.
(6) The administrative tribunal's decision must be based on the deciding authority's
own independent consideration of the law and facts governing the case.

The principle of due process furnishes a standard to which governmental action

should conform in order to impress it with the stamp of validity. Fidelity to such
standard must of necessity be the overriding concern of government agencies
exercising quasi-judicial functions. Although a speedy administration of action
implies a speedy trial, speed is not the chief objective of a trial. Respect for the rights
of all parties and the requirements of procedural due process equally apply in
proceedings before administrative agencies with quasi-judicial perspective in
administrative decision making and for maintaining the vision which led to the
creation of the administrative office.71
In Ang Tibay v. The Court of Industrial Relations,72 this Court observed that although
quasi-judicial agencies "may be said to be free from the rigidity of certain procedural
requirements[, it] does not mean that it can, in justiciable cases coming before it,
entirely ignore or disregard the fundamental and essential requirements of due
process in trials and investigations of an administrative character." 73 It then
enumerated the fundamental requirements of due process that must be respected in
administrative proceedings:
(7) The administrative tribunal's decision is rendered in a manner that the parties
may know the various issues involved and the reasons for the decision. 75
Mendoza v. Comelec76 explained that the first requirement is the party's substantive
right at the hearing stage of the proceedings, which, in essence, is the opportunity to
explain one's side or to seek a reconsideration of the adverse action or ruling.
It was emphasized, however, that the mere filing of a motion for reconsideration does
not always result in curing the due process defect,77 "especially if the motion was filed
precisely to raise the issue of violation of the right to due process and the lack of
opportunity to be heard on the merits remained."78
The second to the sixth requirements refer to the party's "inviolable rights applicable at
the deliberative stage."79 The decision-maker must consider the totality of the
evidence presented as he or she decides the case.80

(1) The party interested or affected must be able to present his or her own case and The last requirement relating to the form and substance of the decision is the
submit evidence in support of it. decision-maker's '"duty to give reason' to enable the affected person to understand how
the rule of fairness has been administered in his [or her] case, to expose the reason to
public scrutiny and criticism, and to ensure that the decision will be thought through
by the decision-maker."81
The Ang Tibay safeguards were subsequently "simplified into four basic rights,"82 as
follows:
(a) [T]he right to notice, be it actual or constructive, of the institution of the
proceedings that may affect a person's legal right; (b) reasonable opportunity to
appear and defend his rights and to introduce witnesses and relevant evidence in his
favor; (c) a tribunal so constituted as to give him reasonable assurance of honesty and
impartiality, and one of competent jurisdiction; and (d) a finding or decision by that
tribunal supported by substantial evidence presented at the hearing or at least
ascertained in the records or disclosed to the parties.83 (Emphasis supplied)
Saunar v. Ermita84 expounded on Ang Tibay by emphasizing that while administrative
bodies enjoy a certain procedural leniency, they are nevertheless obligated to inform
themselves of all facts material and relevant to the case, and to render a decision
based on an accurate appreciation of facts. In this regard, this Court held that Ang
Tibay did not necessarily do away with the conduct of hearing and a party may
invoke its right to a hearing to thresh out substantial factual issues, thus:
A closer perusal of past jurisprudence shows that the Court did not intend to
trivialize the conduct of a formal hearing but merely afforded latitude to
administrative bodies especially in cases where a party fails to invoke the right to
hearing or is given the opportunity but opts not to avail of it. In the landmark case
of Ang Tibay, the Court explained that administrative bodies are free from a strict application
of technical rules of procedure and are given sufficient leeway. In the said case, however,
nothing was said that the freedom included the setting aside of a hearing but merely to allow
matters which would ordinarily be incompetent or inadmissible in the usual judicial
proceedings.
In fact, the seminal words of Ang Tibay manifest a desire for administrative bodies to
exhaust all possible means to ensure that the decision rendered be based on the accurate
appreciation of facts. The Court reminded that administrative bodies have the active duty to
use the authorized legal methods of securing evidence and informing itself of facts
material and relevant to the controversy. As such, it would be more in keeping with
administrative due process that the conduct of a hearing be the general rule rather
than the exception.
....
To reiterate, due process is a malleable concept anchored on fairness and equity. The
due process requirement before administrative bodies are not as strict compared to
judicial tribunals in that it suffices that a party is given a reasonable opportunity to be
heard. Nevertheless, such "reasonable opportunity" should not be confined to the
mere submission of position papers and/or affidavits and the parties must be given
the opportunity to examine the witnesses against them. The right to a hearing is a
right which may be invoked by the parties to thresh out substantial factual issues. It
becomes even more imperative when the rules itself of the administrative body
provides for one. While the absence of a formal hearing does not necessarily result in
the deprivation of due process, it should be acceptable only when the party does not
invoke the said right or waives the same. 85(Emphasis supplied)
In Saunar, this Court held that the petitioner in that case was denied due process
when he was not notified of the clarificatory hearings conducted by the Presidential
Anti-Graft Commission. Under the Presidential Anti-Graft Commission's Rules, in
the event that a clarificatory hearing was determined to be necessary, the Presidential
Anti-Graft Commission must notify the parties of the clarificatory hearings. Further,
"the parties shall be afforded the opportunity to be present in the hearings without
the right to examine witnesses. They, however, may ask questions and elicit answers
from the opposing party coursed through the [Presidential Anti-Graft
Commission]."86 This Court held that the petitioner in Saunar was not treated fairly in
the proceedings before the Presidential Anti-Graft Commission because he was
deprived of the opportunity to be present in the clarificatory hearings and was denied
the chance to propound questions through the Presidential Anti-Graft Commission
against the opposing parties.
"[A] fair and reasonable opportunity to explain one's side" 87 is one aspect of due
process. Another aspect is the due consideration given by the decision-maker to the
arguments and evidence submitted by the affected party.
Baguio Country Club Corp. v. National Labor Relations Commission88 precisely involved
the question of the denial of due process for failure of the labor tribunals to consider
the evidence presented by the employer. The labor tribunals unanimously denied the
employer's application for clearance to terminate the services of an employee on the
ground of insufficient evidence to show a just cause for the employee's dismissal, and
ordered the reinstatement of the employee with backwages.
This Court held that "[t]he summary procedures used by the [labor tribunals] were too
summary to satisfy the requirements of justice and fair play."89 It noted the irregular
procedures adopted by the Labor Arbiter. First, "[he] allowed a last minute position
paper of [the] respondent ... to be filed and without requiring a copy to be served
upon the Baguio Country Club and without affording the latter an opportunity to
refute or rebut the contents of the paper, [and] forthwith decided the case." 90Second,
"the petitioner specifically stressed to the arbiter that it was 'adopting the
investigations which were enclosed with the application to terminate, which are now
parts of the record of the Ministry of Labor, as part and parcel of this position
paper."'91 But the Labor Arbiter, instead of calling for the complete records of the
conciliation proceedings, "denied the application for clearance on the ground that all
that was before it was a position paper with mere quotations about an investigation
conducted . . ."92 This Court held that the affirmance by the Commission of the
decision of the Labor Arbiter was a denial of the elementary principle of fair play.
[I]t was a denial of elementary principles of fair play for the Commission not to have
ordered the elevation of the entire records of the case with the affidavits earlier
submitted as part of the position paper but completely ignored by the labor arbiter.
Or at the very least, the case should have been remanded to the labor arbiter
consonant with the requirements of administrative due process.
The ever increasing scope of administrative jurisdiction and the statutory grant of
expansive powers in the exercise of discretion by administrative agencies illustrate
our nation's faith in the administrative process as an efficient and effective mode of
public control over sensitive areas of private activity. Because of the specific
constitutional mandates on social justice and protection to labor, and the fact that
major labor management controversies are highly intricate and complex, the
legislature and executive have reposed uncommon reliance upon what they believe is
the expertise, the rational and efficient modes of ascertaining facts, and the unbiased
and discerning adjudicative techniques of the Ministry of Labor and Employment
and its instrumentalities.
....
The instant petition is a timely reminder to labor arbiters and all who wield quasi-
judicial power to ever bear in mind that evidence is the means, sanctioned by rules, of
ascertaining in a judicial or quasi-judicial proceeding, the truth respecting a matter of
fact ... The object of evidence is to establish the truth by the use of perceptive and
reasoning faculties . . . The statutory grant of power to use summary procedures should
heighten a concern for due process, for judicial perspectives in administrative
decision making, and for maintaining the visions which led to the creation of the
administrative office.93
In Alliance for the Family Foundation, Philippines, Inc. v.
Garin,94
this Court held that the
Food and Drug Administration failed to observe the basic requirements of due
process when it did not act on or address the oppositions submitted by petitioner
Alliance for the Family Foundation, Philippines, Inc., but proceeded with the
registration, recertification, and distribution of the questioned contraceptive drugs
and devices. It ruled that petitioner was not afforded the genuine opportunity to be
heard.
Administrative due process is anchored on fairness and equity in procedure. 95 It is
satisfied if the party is properly notified of the charge against it and is given a fair and
reasonable opportunity to explain or defend itself.96 Moreover, it demands that the
party's defenses be considered by the administrative body in making its
conclusions,97 and that the party be sufficiently informed of the reasons for its
conclusions.
I.B
Section 228 of the Tax Code, as implemented by Revenue Regulations No. 12-99,
provides certain procedures to ensure that the right of the taxpayer to procedural due
process is observed in tax assessments, thus:
Section 228. Protesting of Assessment. — When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: Provided, however, That a preassessment notice
shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
withholding tax for a taxable period was determined to have carried over and
automatically applied the same amount claimed against the estimated tax liabilities
for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on excisable articles has not been paid; or
(e) When an article locally purchased or imported by an exempt person, such as, but
not limited to, vehicles, capital equipment, machineries and spare parts, has been
sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the
Commissioner or his duly authorized representative shall issue an assessment based
on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable.
Section 3 of Revenue Regulations No. 12-9998 prescribes the due process requirement
for the four (4) stages of the assessment process:
Section 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. —
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference. — The Revenue Officer who audited the taxpayer's
records shall, among others, state in his report whether or not the taxpayer agrees
with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer
is not amenable, based on the said Officer's submitted report of investigation,
the taxpayer shall be informed, in writing, by the Revenue District Office or by the
Special Investigation Division, as the case may be (in the case Revenue Regional
Offices) or by the Chief of Division concerned (in the case of the BIR National
Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal
revenue taxes, for the purpose of "Informal Conference,” in order to afford the
taxpayer with an opportunity to present his side of the case. If the taxpayer fails to
respond within fifteen (15) days from date of receipt of the notice for informal
conference, he shall be considered in default, in which case, the Revenue District
Officer or the Chief of the Special Investigation Division of the Revenue Regional
Office, or the Chief of Division in the National Office, as the case may be, shall
endorse the case with the least possible delay to the Assessment Division of the
Revenue Regional Office or to the Commissioner or his duly authorized
representative, as the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). — If after review and evaluation by the
Assessment Division or by the Commissioner or his duly authorized representative,
as the case may be, it is determined that there exists sufficient basis to assess the
taxpayer for any deficiency tax or taxes,the said Office shall issue to the taxpayer, at
least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed
assessment, showing in detail, the facts and the law, rules and regulations, or
jurisprudence on which the proposed assessment is based . . . If the taxpayer fails
to respond within fifteen (15) days from date of receipt of the PAN, he shall be
considered in default, in which case, a formal letter of demand and assessment
notice shall be caused to be issued by the said Office, calling for payment of the
taxpayer's deficiency tax liability, inclusive of the applicable penalties.
....
3.1.4 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 . . .
3.1.5 Disputed Assessment. — The taxpayer or his duly authorized representative may
protest administratively against the aforesaid formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof....
....
The taxpayer shall submit the required documents in support of his protest within
sixty (60) days from date of filing of his letter of protest, otherwise, the assessment
shall become final, executory and demandable. The phrase "submit the required
documents" includes submission or presentation of the pertinent documents for
scrutiny and evaluation by the Revenue Officer conducting the audit. The said
Revenue Officer shall state this fact in his report of investigation.
If the taxpayer fails to file a valid protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof, the assessment
shall become final, executory and demandable.
....
3.1.6 Administrative Decision on a Disputed Assessment. — The decision of the
Commissioner or his duly authorized representative shall (a) state the facts, the
applicable law, rules and regulations, or jurisprudence on which such decision is
based, otherwise, the decision shall be void . . . in which case, the same shall not be
considered a decision on a disputed assessment; and (b) that the same is his final
decision. (Emphasis supplied)
The importance of providing the taxpayer with adequate written notice of his or her
tax liability is undeniable. Under Section 228, it is explicitly required that the taxpayer
be informed in writing of the law and of the facts on which the assessment is made;
otherwise, the assessment shall be void. Section 3.1.2 of Revenue Regulations No. 12-
99 requires the Preliminary Assessment Notice to show in detail the facts and law,
rules and regulations, or jurisprudence on which the proposed assessment is based.
Further, Section 3.1.4 requires that the Final Letter of Demand must state the facts and
law on which it is based; otherwise, the Final Letter of Demand and Final Assessment
Notices themselves shall be void. Finally, Section 3.1.6 specifically requires that the
decision of the Commissioner or of his or her duly authorized representative on a
disputed assessment shall state the facts and law, rules and regulations, or
jurisprudence on which the decision is based. Failure to do so would invalidate the
Final Decision on Disputed Assessment.
"The use of the word 'shall' in Section 228 of the [National Internal Revenue Code]
and in [Revenue Regulations] No. 12-99 indicates that the requirement of informing
the taxpayer of the legal and factual bases of the assessment and the decision made
against him [or her] is mandatory."99 This is an essential requirement of due process
and applies to the Preliminary Assessment Notice, Final Letter of Demand with the
Final Assessment Notices, and the Final Decision on Disputed Assessment.
On the other hand, the taxpayer is explicitly given the opportunity to explain or
present his or her side throughout the process, from tax investigation through tax
assessment. Under Section 3.1.1 of Revenue Regulations No. 12-99, the taxpayer is
given 15 days from receipt of the Notice for Informal Conference to respond;
otherwise, he or she will be considered in default and the case will be referred to the
Assessment Division for appropriate review and issuance of deficiency tax
assessment, if warranted. Again, under Section 228 of the Tax Code and Section 3.1.2
of Revenue Regulations No. 12-99, the taxpayer is required to respond within 15 days
from receipt of the Preliminary Assessment Notice; otherwise, he or she will be
considered in default and the Final Letter of Demand and Final Assessment Notices
will be issued. After receipt of the Final Letter of Demand and Final Assessment
Notices, the taxpayer is given 30 days to file a protest, and subsequently, to appeal his
or her protest to the Court of Tax Appeals.
Avon asserts feigned compliance by the Bureau of Internal Revenue officials and
agents of their duties under the law and revenue regulation.100 It adds that the
administrative proceeding conducted by the Bureau of Internal Revenue was "a
farce," an idle ritual tantamount to a denial of its right to be heard. 101 It specifies the
Bureau of Internal Revenue's inaction throughout the proceedings as follows:
First, during the informal conference, Avon orally rebutted and submitted a written
Reply102 dated November 26, 2002, with attached supporting documents, to the
summary of audit findings of the Bureau of Internal Revenue. Revenue Examiner
Enrico Z. Gesmundo (Gesmundo), on cross-examination, admitted receiving its Reply
with the appended documents and that this Reply should be the basis of the
Preliminary Assessment Notice.103
However, the Commissioner issued the Preliminary Assessment Notice dated
November 29, 2002, which simply reiterated the rebutted audit findings. 104 The
alleged under-declared sales was increased by more than 300% based on the alleged
sales discrepancy in the Third Quarter VAT Return vis á vis Financial Statement,
without justifiable reason and despite clean opinion of Avon's external auditor on its
financial statements.105
Second, in its protest letter to the Preliminary Assessment Notice, Avon explained the
error in the presentation of export sales in the Third Quarter VAT Return. That is,
instead of presenting the total sales for the third quarter alone, the presentation was a
cumulative or year-to-date sales presentation. Avon appended copies of the Third
Quarter VAT Return and the General Ledger Pages of Export Sales to its protest letter
to prove the cumulative presentation of its sales. The Bureau of Internal Revenue
Examiners accepted their explanation during their meeting. 106
However, within just two (2) weeks from receipt of Avon's protest letter, the
Commissioner issued the Final Letter of Demand and Final Assessment Notices,
reiterating the findings stated in the Preliminary Assessment Notice. 107 The Bureau of
Internal Revenue chose to ignore Avon's explanations and refused to cancel the
assessments unless Avon would agree to pay the other deficiency assessments. 108
Third, since the Final Assessment Notices merely reiterated the findings in the
Preliminary Assessment Notice, Avon resubmitted its protest letter and supporting
documents. During the conference with the revenue officers on August 4, 2003, Avon
explained that it had already submitted all the reconciliation, schedules, and other
supporting documents. It also submitted additional documents as directed by the
revenue officers on June 26, 2003,109 and presented the original General Ledger Book
for 1999 for comparison by the Bureau of Internal Revenue's officers with the copies
previously submitted. Again, Avon explained the alleged sales discrepancy to the
revenue officers, who were convinced that there was no under declaration of sales,
and that the sales discrepancy between the Annual Income Tax Return and Quarterly
VAT Return was merely due to erroneous presentation of sales in the Third Quarter
VAT Return.110
By this time, hoping that the Commissioner would cancel the deficiency income and
VAT assessments arising from the alleged sales discrepancy, Avon informed the
Bureau of Internal Revenue examiners that it would make a partial payment of the
assessments, which it did.111
Fourth, however, the Commissioner issued the Collection Letter112 dated July 9, 2004
without deciding on the protest letter to the Final Assessment Notices. Once again,
she failed to even comment on the arguments raised or address the documents
submitted by Avon. Even the amounts supposedly paid by Avon were not deducted
from the amount demanded in the Collection Letter. To justify its issuance, the
Commissioner falsely alleged Avon of failing to submit its supporting documents. 113
Fifth, Avon filed a request for withdrawal of the Collection Letter, but it was likewise
ignored.114
Finally, the documents which reveal the events after the filing of the protest to the
Final Assessment Notices on May 9, 2004 were missing from the Bureau of Internal
Revenue Records.115 These were (a) the handwritten Minutes of the Bureau of Internal
Revenue/Taxpayer Conference on June 26, 2003; (b) Avon's letter 116 dated August 1,
2003, with supporting documents, received by Revenue Officer Gesmundo on August
4, 2003, showing Avon's submission of the documents required by the Revenue
Officers during the June 26, 2003 meeting; and (c) the two (2) Bureau of Internal
Revenue Tax Payment Confirmations dated January 30, 2004, and Payment Forms
called Bureau of Internal Revenue Form No. 0605.117
Avon further submits that the presumption of correctness of the assessments cannot
apply in the face of compelling proof that they were issued without due process. It
adds that "[h]ad the administrative process been conducted with fairness and in
accordance with the prescribed procedure, [it] need not have incurred [filing fees and
other litigation expenses to defend against a bloated deficiency tax assessment]." 118
Against these claims of Avon, the Commissioner did not submit any refutation either
in her Comment119 or Memorandum,120and even in her pleadings before the Court of
Tax Appeals. Instead, she could only give out a perfunctory resistance that "tax
assessments . . . are presumed correct and made in good faith." 121
The Court of Tax Appeals ruled that the difference in the appreciation by the
Commissioner of Avon's supporting documents, which led to the deficiency tax
assessments, was not violative of due process. While the Commissioner has the duty
to receive the taxpayer's clarifications and explanations, she does not have the duty to
accept them on face value.122
This Court disagrees.
The facts demonstrate that Avon was deprived of due process. It was not fully
apprised of the legal and factual bases of the assessments issued against it. The
Details of Discrepancy123 attached to the Preliminary Assessment Notice, as well as
the Formal Letter of Demand with the Final Assessment Notices, did not even
comment or address the defenses and documents submitted by Avon. Thus, Avon
was left unaware on how the Commissioner or her authorized representatives
appreciated the explanations or defenses raised in connection with the assessments.
There was clear inaction of the Commissioner at every stage of the proceedings.
First, despite Avon's submission of its Reply, together with supporting documents, to
the revenue examiners' initial audit findings, and its explanation during the informal
conference,124 the Preliminary Assessment Notice was issued. The Preliminary
Assessment Notice reiterated the same audit findings, except for the alleged under-
declared sales which ballooned in amount from P15,700,000.00 to
P62,900,000.00,125 without any discussion or explanation on the merits of Avon's
explanations.
Upon receipt of the Preliminary Assessment Notice, Avon submitted its protest letter
and supporting documents,126 and even met with revenue examiners to explain.
Nonetheless, the Bureau of Internal Revenue issued the Final Letter of Demand and
Final Assessment Notices, merely reiterating the assessments in the Preliminary
Assessment Notice. There was no comment whatsoever on the matters raised by
Avon, or discussion of the Bureau of Internal Revenue's findings in a manner that
Avon may know the various issues involved and the reasons for the assessments.
Under the Bureau of Internal Revenue's own procedures, the taxpayer is required to
respond to the Notice of Informal Conference and to the Preliminary Assessment
Notice within 15 days from receipt. Despite Avon's timely submission of a Reply to
the Notice of Informal Conference and protest to the Preliminary Assessment Notice,
together with supporting documents, the Commissioner and her agents violated their
own procedures by refusing to answer or even acknowledge the submitted Reply and
protest.
The Notice of Informal Conference and the Preliminary Assessment Notice are a part
of due process.127 They give both the taxpayer and the Commissioner the opportunity
to settle the case at the earliest possible time without the need for the issuance of a
Final Assessment Notice. However, this purpose is not served in this case because of
the Bureau of Internal Revenue's inaction or failure to consider Avon's explanations.
Upon receipt of the Final Assessment Notices, Avon resubmitted its protest and
submitted additional documents required by the revenue examiners, including the
original General Ledger for 1999. As testified by Avon's Finance Director, Mildred C.
Emlano, the Bureau of Internal Revenue examiners were convinced with Avon's
explanation during the meeting on August 4, 2003, particularly, that there was no
underdeclaration of sales.128 Still, the Commissioner merely issued a Collection Letter
dated July 9, 2004, demanding from Avon the payment of the same deficiency tax
assessments with a warning that should it fail to do so within the required period,
summary administrative remedies would be instituted without further notice.129 This
Collection Letter was based on the May 27, 2004 Memorandum of the Revenue
Officers stating that "[Avon] failed to submit supporting documents within 60-day
period."130 This inaction on the part of the Bureau of Internal Revenue and its agents
could hardly be considered substantial compliance of what is mandated by Section
228 of the Tax Code and the Revenue Regulation No. 12-99.
It is true that the Commissioner is not obliged to accept the taxpayer's explanations,
as explained by the Court of Tax Appeals.131 However, when he or she rejects these
explanations, he or she must give some reason for doing so. He or she must give the
particular facts upon which his or her conclusions are based, and those facts must
appear in the record.
Indeed, the Commissioner's inaction and omission to give due consideration to the
arguments and evidence submitted before her by Avon are deplorable transgressions
of Avon's right to due process.132 The right to be heard, which includes the right to
present evidence, is meaningless if the Commissioner can simply ignore the evidence
without reason.
In Edwards v. McCoy:133
The object of a hearing is as much to have evidence considered as it is to present it.
The right to adduce evidence, without the corresponding duty on the part of the
board to consider it, is vain. Such right is conspicuously futile if the person or persons
to whom the evidence is presented can thrust it aside without notice or
consideration.134
In Ang Tibay, this Court similarly ruled that "[n]ot only must the party be given an
opportunity to present his case and to adduce evidence tending to establish the rights
which he asserts but the tribunal must consider the evidence presented."135
Furthermore, in Mendoza v. Commission on Elections,136 this Court explained:
[T]he last requirement, relating to the form and substance of the decision of a quasi-
judicial body, further complements the hearing and decision-making due process
rights and is similar in substance to the constitutional requirement that a decision of a
court must state distinctly the facts and the law upon which it is based. As a
component of the rule of fairness that underlies due process, this is the "duty to
give reason" to enable the affected person to understand how the rule of fairness
has been administered in his case, to expose the reason to public scrutiny and
criticism, and to ensure that the decision will be thought through by the decision-
maker.137 (Emphasis supplied, citation omitted)
In Villa v. Lazaro,138 this Court held that Anita Villa (Villa) was denied due process
when the then Human Settlement Regulatory Commission ignored her submission,
not once but thrice, of the official documents certifying to her compliance with the
pertinent locational, zoning, and land use requirements, and plans for the
construction of her funeral parlor. It imposed on Villa a fine of P10,000.00 and
required her to cease operations on the spurious premise that she had failed to submit
the required documents. This Court found the Commissioner's failure or refusal to
even acknowledge the documents submitted by Villa indefensible. It further held that
the defects in the administrative proceedings "translate to a denial of due process
against which the defense of failure to take timely appeal will not avail." 139
Similarly, in this case, despite Avon's submission of its explanations and pieces of
evidence to the assessments, the Commissioner failed to acknowledge these
submissions and instead issued identical Preliminary Assessment Notice, Final Letter
of Demand with the Final Assessment Notices, and Collection Letter, the latter being
premised on Avon's alleged failure to submit supporting documents to its protest.
Had the Commissioner performed her functions properly and considered the
explanations and pieces of evidence submitted by Avon, this case could have been
settled at the earliest possible time. For instance, all the evidence needed to settle the
issue on under-declared sales, which constituted the bulk of the deficiency tax
assessments, have been submitted to the Bureau of Internal Revenue. Indeed, from
these same submissions, the Court of Tax Appeals concluded that there was no
under-declaration of sales. As aptly pointed out by Avon, "The [Commissioner could
not] feign simple mistake or misappreciation of the evidence . . . because [the issue
was] plain and simple."140
Moreover, the Court of Tax Appeals erroneously applied the "presumption of
regularity" in sustaining the Commissioner's assessments.
The presumption that official duty has been regularly performed is a disputable
presumption under Rule 131, Section 3(m) of the Rules of Court. As a disputable
presumption —
[I]t may be accepted and acted on where there is no other evidence to uphold the
contention for which it stands, or one which may be overcome by other evidence ...
The presumption of regularity of official acts may be rebutted by affirmative evidence
of irregularity or failure to perform a duty.141 (Citation omitted)
In Sevilla v. Cardenas,142 this Court refused to apply the "presumption of regularity"
when it noted that there was documentary and testimonial evidence that the civil
registrar did not exert utmost efforts before certifying that no marriage license was
issued in favor of one of the parties.
This Court also refused to apply the presumption of regularity in Bank of the Philippine
Islands v. Evangelista,143 where the process server failed to show that he followed the
required procedures:
We cannot sustain petitioner's argument, which is anchored on the presumption of
regularity in the process server's performance of duty. The Court already had
occasion to rule that "[c]ertainly, it was never intended that the presumption of
regularity in the performance of official duty will be applied even in cases where
there is no showing of substantial compliance with the requirements of the rules of
procedure." Such presumption does not apply where it is patent that the sheriff's or
server's return is defective. Under this circumstance, respondents are not duty-bound
to adduce further evidence to overcome the presumption, which no longer
holds.144(Citations omitted)
Here, contrary to the ruling of the Court of Appeals, the presumption of regularity in
the performance of the Commissioner's official duties cannot stand in the face of
positive evidence of irregularity or failure to perform a duty.
I.C
The Commissioner's total disregard of due process rendered the identical Preliminary
Assessment Notice, Final Assessment Notices, and Collection Letter null and void,
and of no force and effect.
This Court has, in several cases, declared void any assessment that failed to strictly
comply with the due process requirements set forth in Section 228 of the Tax Code
and Revenue Regulation No. 12-99.
In Commissioner of Internal Revenue v. Metro Star Superama, Inc.,145 this Court held that
failure to send a Preliminary Assessment Notice stating the facts and the law on
which the assessment was made as required by Section 228 of the Tax Code rendered
the assessment made by the Commissioner as void. This Court explained:
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be
informed that he is liable for deficiency taxes through the sending of a PAN. He must
be informed of the facts and the law upon which the assessment is made. The law
imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the
cardinal principle in administrative investigations — that taxpayers should be able to
present their case and adduce supporting evidence.146 (Citation omitted)
In Commissioner of Internal Revenue v. Reyes,147 this Court ruled as void an assessment
for deficiency estate tax issued by the Commissioner for failure to inform the
taxpayer of the law and the facts on which the assessment was made, in violation of
Section 228 of the Tax Code.
In Pilipinas Shell Petroleum Corporation v. Commissioner of Internal Revenue,148 this Court
ruled, among others, that the taxpayer was deprived of due process when the
Commissioner failed to issue a notice of informal conference and a Preliminary
Assessment Notice as required by Revenue Regulation No. 12-99, in relation to
Section 228 of the Tax Code. Hence, the assessment was void.
Compliance with strict procedural requirements must be followed in the collection of
taxes as emphasized in Commissioner of Internal Revenue v. Algue, Inc.:149
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for
government itself. It is therefore necessary to reconcile the apparently conflicting
interests of the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
....
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for lack of the motive power to activate and operate
it. Hence, despite the natural reluctance to surrender part of one's hard-earned
income to the taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor. For all the awesome power
of the tax collector, he may still be stopped in his tracks if the taxpayer can
demonstrate ... that the law has not been observed. 150 (Emphasis supplied)
In this case, Avon was able to amply demonstrate the Commissioner's disregard of
the due process standards raised in Ang Tibay and subsequent cases, and of the
Commissioner's own rules of procedure. Her disregard of the standards and rules
renders the deficiency tax assessments null and void. This Court, nonetheless,
proceeds to discuss the points raised by the Commissioner pertaining to estoppel and
prescription.
II
As a general rule, petitioner has three (3) years from the filing of the return to assess
taxpayers. Section 203 of the Tax Code provides:
Section 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.
An exception to the rule of prescription is found m Section 222, paragraphs (b) and
(d) of the same 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
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, VAT, and expanded and final
withholding taxes to January 14, 2003, and then to April 14, 2003. 151
The Court of Tax Appeals, both the Special First Division and En Banc, declared the
two (2) Waivers of the Defense of Prescription defective and void, for the
Commissioner's failure to furnish signed copies of the Waivers to Avon, in violation
of the requirements provided in Revenue Memorandum Order No. 20-90.152
Indeed, a Waiver of the Defense of Prescription is a bilateral agreement between a
taxpayer and the Bureau of Internal Revenue to extend the period of assessment and
collection to a certain date. "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 of the
acceptance by the [Bureau of Internal Revenue] and the perfection of the
agreement."153
However, the Commissioner in this case contends that Avon is estopped from
assailing the validity of the Waivers of the Defense of Prescription that it executed
when it paid portions of the disputed assessments.154 The Commissioner invokes the
ruling in Rizal Commercial Banking Corporation v. Commissioner of Internal
Revenue,155 which allegedly must be applied as stare decisis.156
The Commissioner's contention is untenable.
Rizal Commercial Banking Corporation is not on all fours with this case. The estoppel
upheld in that case arose from the benefit obtained by the taxpayer from its execution
of the waiver, in the form of a drastic reduction of the deficiency taxes, and the
taxpayer's payment of a portion of the reduced tax assessment. In that case, this Court
explained that Rizal Commercial Banking Corporation's partial payment of the
revised assessments effectively belied its insistence that the waivers were invalid and
the assessments were issued beyond the prescriptive period. Thus:
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.157 (Citation omitted)
Here, Avon claimed that it did not receive any benefit from the waivers. 158 On the
contrary, there was even a drastic increase in the assessed deficiency taxes when the
Commissioner increased the alleged sales discrepancy from P15,700,000.00 in the
preliminary findings to P62,900,000.00 in the Preliminary Assessment Notice and
Final Assessment Notices. Furthermore, Avon was compelled to pay a portion of the
deficiency assessments "in compliance with the Revenue Officer's condition in the
hope of cancelling the assessments on the non-existent sales discrepancy."159 Under
these circumstances, Avon's payment of an insignificant portion of the assessment
cannot be deemed an admission or recognition of the validity of the waivers.
On the other hand, the Court of Tax Appeals' reliance on the general rule enunciated
in Commissioner of Internal Revenue v. Kudos Metal Corporation 160 is proper. In that case,
this Court ruled that the Bureau of Internal Revenue could not hide behind the
doctrine of estoppel to cover its failure to comply with its own procedures. "[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."161
III
The Commissioner of Internal Revenue in this case asserts that since Avon filed its
protest on May 9, 2003, it only had 30 days from November 5, 2003, i.e., the end of the
180 days, or until December 5, 2003 within which to appeal to the Court of Tax
Appeals. As Avon only filed its appeal on August 13, 2004, its right to appeal has
prescribed.162
Avon counters that it acted in good faith and in accordance with Rule 4, Section 3 of
the Revised Rules of the Court of Tax Appeals and jurisprudence when it opted to
wait for the decision of the Commissioner and appeal it within the 30-day
period.163 "The Collection Letter, albeit void, constitutes a constructive denial of
Avon's protest and is the final decision of the [Commissioner] for purposes of
counting the reglementary 30-day period to appeal[.]"164 Since Avon received the
Collection Letter on July 14, 2004, its Petition for Review was timely filed on August
13, 2004.165 At any rate, Avon argues that the issue on the timeliness of its appeal was
raised by the Commissioner only in its Motion for Reconsideration of the Court of
Tax Appeals En Banc November 9, 2011 Decision, and a belated consideration of this
matter would violate its right to due process and fair play.166
The issue on whether Avon's Petition for Review before the Court of Tax Appeals
was time-barred requires the interpretation and application of Section 228 of the Tax
Code, viz:
Section 228. Protesting of Assessment. —
....
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected by
the decision or inaction may appeal to the Court of Tax Appeals within thirty (30)
days from receipt of the said decision, or from the lapse of the one hundred eighty
(180)-day period; otherwise, the decision shall become final, executory and
demandable. (Emphasis supplied)
Section 228 of the Tax Code amended Section 229167 of the Old Tax Code168 by adding,
among others, the 180-day rule. This new provision presumably avoids the situation
in the past when a taxpayer would be held hostage by the Commissioner's inaction
on his or her protest. Under the Old Tax Code, in conjunction with Section 11 of
Republic Act No. 1125, only the decision or ruling of the Commissioner on a disputed
assessment is appealable to the Court of Tax Appeals. Consequently, the taxpayer
then had to wait for the Commissioner's action on his or her protest, which more
often was long-delayed.169 With the amendment introduced by Republic Act No.
8424, the taxpayer may now immediately appeal to the Court of Tax Appeals in case
of inaction of the Commissioner for 180 days from submission of supporting
documents.
Republic Act No. 9282, or the new Court of Tax Appeals Law, which took effect on
April 23, 2004, amended Republic Act No. 1125 and included a provision
complementing Section 228 of the Tax Code, as follows:
Section 7. Jurisdiction. — The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
....
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National
Internal Revenue Code provides a specific period of action, in which case the
inaction shall be deemed a denial[.] (Emphasis supplied)
Under Section 7(a)(2) above, it is expressly provided that the "inaction" of the
Commissioner on his or her failure to decide a disputed assessment within 180 days
is "deemed a denial" of the protest.
In Rizal Commercial Banking Corporation v. Commissioner of Internal Revenue,170 this
Court, by way of an obiter, ruled as follows:
In case the Commissioner failed to act on the disputed assessment within the 180-day
period from the date of submission of documents, a taxpayer can either: 1) file a
petition for review with the Court of Tax Appeals within 30 days after the expiration
of the 180-day period; or 2) await the final decision of the Commissioner on the
disputed assessment and appeal such final decision to the Court of Tax Appeals
within 30 days after receipt of a copy of such decision. However, these options are
mutually exclusive, and resort to one bars the application of the other. 171
In Rizal Commercial Banking Corporation, the Commissioner failed to act on the
disputed assessment within 180 days from date of submission of documents. Thus,
Rizal Commercial Banking Corporation opted to file a Petition for Review before the
Court of Tax Appeals. Unfortunately, it was filed more than 30 days following the
lapse of the 180-day period. Consequently, it was dismissed by the Court of Tax
Appeals for late filing. Rizal Commercial Banking Corporation did not file a Motion
for Reconsideration or make an appeal; hence, the disputed assessment became final
and executory.
Subsequently, Rizal Commercial Banking Corporation filed a petition for relief from
judgment on the ground of excusable negligence, but this was denied by the Court of
Tax Appeals for lack of merit. This Court affirmed the Court of Tax Appeals. It
further held that even if the negligence of Rizal Commercial Banking Corporation's
counsel was excusable and the petition for relief from judgment would be granted, it
would not fare any better because its action for cancellation of assessments had
already prescribed since its Petition was filed beyond the 180+30-day period stated in
Section 228.
Rizal Commercial Banking Corporation then filed a Motion for Reconsideration.
Denying the motion, this Court held that it could not anymore "claim that the
disputed assessment is not yet final as it remained unacted upon by the
Commissioner; that it can still await the final decision of the Commissioner and
thereafter appeal the same to the Court of Tax Appeals." 172 Since it had availed of the
first option by filing a petition for review because of the Commissioner's inaction,
although late, it could no longer resort to the second option.
Rizal Commercial Banking Corporation referred to Rule 4, Section 3(a)(2) of the 2005
Revised Rules of the Court of Tax Appeals, or the 2005 Court of Tax Appeals Rules,
which provides:
Section 3. Cases Within the Jurisdiction of the Court in Divisions. — The Court in
Divisions shall exercise:
(a) Exclusive original
or appellate
jurisdiction to
review by appeal
the following:
....
(2) Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of internal
revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National
Internal Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National Internal
Revenue Code or other applicable law provides a specific
period for action: Provided, that in case of disputed
assessments, the inaction of the Commissioner of Internal
Revenue within the one hundred eighty day-period under
Section 228 of the National Internal Revenue Code shall be
deemed a denial for purposes of allowing the taxpayer to
appeal his case to the Court and does not necessarily
constitute a formal decision of the Commissioner of
Internal Revenue on the tax case; Provided, further, that
should the taxpayer opt to await the final decision of the
Commissioner of Internal Revenue on the disputed
assessments beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such final
decision to the Court under Section 3(a), Rule 8 of these
Rules; and Provided, still further, that in the case of claims
for refund of taxes erroneously or illegally collected, the
taxpayer must file a petition for review with the Court
prior to the expiration of the two-year period under
Section 229 of the National Internal Revenue Code[.]
(Emphasis supplied)
In Lascona Land Co., Inc. v. Commissioner of Internal Revenue,173 this Court reaffirmed
Rizal Commercial Banking Corporation,viz:
In arguing that the assessment became final and executory by the sole reason that
petitioner failed to appeal the inaction of the Commissioner within 30 days after the
180-day reglementary period, respondent, in effect, limited the remedy of Lascona, as
a taxpayer, under Section 228 of the NIRC to just one, that is — to appeal the inaction
of the Commissioner on its protested assessment after the lapse of the 180-day period.
This is incorrect.
....
[W]hen the law provided for the remedy to appeal the inaction of the CIR, it did not
intend to limit it to a single remedy of filing of an appeal after the lapse of the 180-day
prescribed period. Precisely, when a taxpayer protested an assessment, he naturally
expects the CIR to decide either positively or negatively. A taxpayer cannot be
prejudiced if he chooses to wait for the final decision of the CIR on the protested
assessment. More so, because the law and jurisprudence have always contemplated a
scenario where the CIR will decide on the protested assessment.174
This Court, nonetheless, stressed that these two (2) options of the taxpayer, i.e., to (1)
file a petition for review before the Court of Tax Appeals within 30 days after the
expiration of the 180-day period; or (2) to await the final decision of the
Commissioner on the disputed assessment and appeal this final decision to the Court
of Tax Appeals within 30 days from receipt of it, "are mutually exclusive and resort to
one bars the application of the other." 175
Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules clarifies Section 7(a)(2)
of Republic Act No. 9282 by stating that the "deemed a denial'' rule is only for the
"purposes of allowing the taxpayer to appeal" in case of inaction of the Commissioner
and "does not necessarily constitute a formal decision of the Commissioner."
Furthermore, the same provision clarifies that the taxpayer may choose to wait for the
final decision of the Commissioner even beyond the 180-day period, and appeal from
it.
The 2005 Court of Tax Appeals Rules were approved by the Court En Banc on
November 22, 2005, in A.M. No. 05-11-07-CTA, pursuant to its constitutional rule-
making authority.176 Under Article VIII, Section 5, paragraph 5 of the 1987
Constitution:
Section 5. The Supreme Court shall have the following powers:
....

(5) Promulgate rules concerning the protection and enforcement of constitutional
rights, pleading, practice, and procedure in all courts, the admission to the
practice of law, the Integrated Bar, and legal assistance to the underprivileged.
Such rules shall provide a simplified and inexpensive procedure for the speedy
disposition of cases, shall be uniform for all courts of the same grade, and shall
not diminish, increase, or modify substantive rights. Rules of procedure of
special courts and quasi-judicial bodies shall remain effective unless
disapproved by the Supreme Court. (Emphases supplied)
In Metro Construction, Inc. v. Chatham Properties, Inc.,177 this Court held:
There is no controversy on the principle that the right to appeal is statutory.
However, the mode or manner by which this right may be exercised is a question of
procedure which may be altered and modified provided that vested rights are not
impaired. The Supreme Court is bestowed by the Constitution with the power and
prerogative, inter alia, to promulgate rules concerning pleadings, practice and
procedure in all courts, as well as to review rules of procedure of special courts and
quasi-judicial bodies, which, however, shall remain in force until disapproved by the
Supreme Court. This power is constitutionally enshrined to enhance the
independence of the Supreme Court.178 (Citation omitted)
Carpio-Morales v. Court of Appeals179 elucidated that while Congress has the authority
to establish the lower courts, including the Court of Tax Appeals, and to define,
prescribe, and apportion their jurisdiction, the authority to promulgate rules of
procedure is exclusive to this Court:
A court's exercise of the jurisdiction it has acquired over a particular case conforms
to the limits and parameters of the rules of procedure duly promulgated by this
Court. In other words, procedure is the framework within which judicial power is
exercised. In Manila Railroad Co. v. Attorney-General, the Court elucidated that
"[t]he power or authority of the court over the subject matter existed and was fixed
before procedure in a given cause began. Procedure does not alter or change that
power or authority; it simply directs the manner in which it shall be fully and
justly exercised. To be sure, in certain cases, if that power is not exercised in
conformity with the provisions of the procedural law, purely, the court attempting to
exercise it loses the power to exercise it legally. This does not mean that it loses
jurisdiction of the subject matter."
While the power to define, prescribe, and apportion the jurisdiction of the various
courts is, by constitutional design, vested unto Congress, the power to promulgate
rules concerning the protection and enforcement of constitutional rights, pleading,
practice, and procedure in all courts belongs exclusively to this Court.(Emphasis in
the original, citations omitted)180
Section 228 of the Tax Code and Section 7 of Republic Act No. 9282 should be read in
conjunction with Rule 4, Section 3(a)(2) of the 2005 Court of Tax Appeals Rules. In
other words, the taxpayer has the option to either elevate the case to the Court of Tax
Appeals if the Commissioner does not act on his or her protest, or to wait for the
Commissioner to decide on his or her protest before he or she elevates the case to the
Court of Tax Appeals. This construction is reasonable considering that Section 228
states that the decision of the Commissioner not appealed by the taxpayer becomes
final, executory, and demandable.
IV
In this case, Avon opted to wait for the final decision of the Commissioner on its
protest filed on May 9, 2003.
This Court holds that the Collection Letter dated July 9, 2004 constitutes the final
decision of the Commissioner that is appealable to the Court of Tax Appeals. 181 The
Collection Letter dated July 9, 2004 demanded from Avon the payment of the
deficiency tax assessments with a warning that should it fail to do so within the
required period, summary administrative remedies would be instituted without
further notice.182 The Collection Letter was purportedly based on the May 27, 2004
Memorandum of the Revenue Officers stating that Avon "failed to submit supporting
documents within 60-day period."183 This Collection Letter demonstrated a character
of finality such that there can be no doubt that the Commissioner had already made a
conclusion to deny Avon's request and she had the clear resolve to collect the subject
taxes.
Avon received the Collection Letter on July 14, 2004. Hence, Avon's appeal to the
Court of Tax Appeals filed on August 13, 2004 was not time-barred.
In any case, even if this Court were to disregard the Collection Letter as a final
decision of the Commissioner on Avon's protest, the Collection Letter constitutes an
act of the Commissioner on "other matters" arising under the National Internal
Revenue Code, which, pursuant to Philippine Journalists, Inc. v. CIR,184 may be the
subject of an appropriate appeal before the Court of Tax Appeals.
On a final note, the Commissioner is reminded of her duty enunciated in Section 3.1.6
of Revenue Regulations No. 12-99 to render a final decision on disputed assessment.
Section 228 of the Tax Code requires taxpayers to exhaust administrative remedies by
filing a request for reconsideration or reinvestigation within 30 days from receipt of
the assessment. Exhaustion of administrative remedies is required prior to resort to
the Court of Tax Appeals precisely to give the Commissioner the opportunity to "re-
examine its findings and conclusions"185 and to decide the Issues raised within her
competence.186
Paat v. Court of Appeals187 wrote:
This Court in a long line of cases has consistently held that before a party is allowed
to seek the intervention of the court, it is a pre-condition that he should have availed
of all the means of administrative processes afforded him. Hence, if a remedy within
the administrative machinery can still be resorted to by giving the administrative
officer concerned every opportunity to decide on a matter that comes within his
jurisdiction then such remedy should be exhausted first before court's judicial power
can be sought. The premature invocation of court's intervention is fatal to one's cause
of action. Accordingly, absent any finding of waiver or estoppel the case is susceptible
of dismissal for lack of cause of action. This doctrine of exhaustion of administrative
remedies was not without its practical and legal reasons, for one thing, availment
of administrative remedy entails lesser expenses and provides for a speedier
disposition of controversies. It is no less true to state that the courts of justice for
reasons of comity and convenience will shy away from a dispute until the system
of administrative redress has been completed and complied with so as to give the
administrative agency concerned every opportunity to correct its error and to
dispose of the case.188 (Emphasis supplied, citations omitted)

Taxpayers cannot be left in quandary by the Commissioner's inaction on the

protested assessment. It is imperative that the taxpayers are informed of the
Commissioner's action for them to take proper recourse to the Court of Tax Appeals
at the opportune time.189 Furthermore, this Court had time and again expressed the
dictum that "the Commissioner should always indicate to the taxpayer in clear and
unequivocal language what constitutes his [or her] final determination of the
disputed assessment. That procedure is demanded by the pressing need for fair play,
regularity and orderliness in administrative action."190

While indeed the government has an interest in the swift collection of taxes, its
assessment and collection should be exercised justly and fairly, and always in strict
adherence to the requirements of the law and of the Bureau of Internal Revenue's
own rules.

WHEREFORE, the Petition of the Commissioner of Internal Revenue in G.R. Nos.

201398-99 is DENIED. The Petition of Avon Products Manufacturing, Inc. in G.R.
Nos. 201418-19 is GRANTED. The remaining deficiency Income Tax under
Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year
1999, including increments, is hereby declared NULL and VOID and
is CANCELLED.

SO ORDERED.
G.R. No. 215957. November 9, 2016.* an individual’s right to due process, the scale favors the right of the taxpayer to due
process.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FITNESS BY DESIGN, Same; The purpose of the written notice requirement is to aid the taxpayer in making a
INC., respondent. reasonable protest, if necessary. Merely notifying the taxpayer of his or her tax liabilities
without details or particulars is not enough.—The purpose of the written notice
Taxation; To avail of the extraordinary period of assessment in Section 222(a) of the
requirement is to aid the taxpayer in making a reasonable protest, if necessary.
National Internal Revenue Code (NIRC), the Commissioner of Internal Revenue (CIR) should
Merely notifying the taxpayer of his or her tax liabilities without details or particulars
show that the facts upon which the fraud is based is communicated to the taxpayer.—To avail
is not enough.
of the extraordinary period of assessment in Section 222(a) of the National Internal
Same; To immediately ensue with tax collection without initially substantiating a valid
Revenue Code, the Commissioner of Internal Revenue should show that the facts
assessment contravenes the principle in administrative investigations that taxpayer should be
upon which the fraud is based is communicated to the taxpayer. The burden of
able to present their case and adduce supporting evidence.—Due process requires that
proving that the facts exist in any subsequent proceeding is with the Commissioner.
taxpayers be informed in writing of the facts and law on which the assessment is
Furthermore, the Final Assessment Notice is not valid if it does not contain a definite
based in order to aid the taxpayer in making a reasonable protest. To immediately
due date for payment by the taxpayer.
ensue with tax collection without initially substantiating a valid assessment
Same; Assessment refers to the determination of the taxes due from a taxpayer under
contravenes the principle in administrative investigations “that taxpayers should be
the National Internal Revenue Code (NIRC) of 1997.—An assessment “refers to the
able to present their case and adduce supporting evidence.”
determination of amounts due from a person obligated to make payments.” “In the
Same; The prescriptive period in making an assessment depends upon whether a tax
context of national internal revenue collection, it refers to the determination of the
return was filed or whether the tax return filed was either false or fraudulent.—The
taxes due from a taxpayer under the National Internal Revenue Code of 1997.”
prescriptive period in making an assessment depends upon whether a tax return was
Same; The formal letter of demand and assessment notice shall state the facts,
filed or whether the tax return filed was either false or fraudulent. When a tax return
jurisprudence, and law on which the assessment was based; otherwise, these shall be void.—
that is neither false nor fraudulent has been filed, the Bureau of Internal Revenue may
The formal letter of demand and assessment notice shall state the facts, jurisprudence,
assess within three (3) years, reckoned from the date of actual filing or from the last
and law on which the assessment was based; otherwise, these shall be void. The
day prescribed by law for filing.
taxpayer or the authorized representative may administratively protest the formal
Same; The willful neglect to file the required tax return or the fraudulent intent to
letter of demand and assessment notice within 30 days from receipt of the notice.
evade the payment of taxes cannot be presumed.—Fraud is a question of fact that should
Same; Between the power of the State to tax and an individual’s right to due process,
be alleged and duly proven. “The willful neglect to file the required tax return or the
the scale favors the right of the taxpayer to due process.—The rationale behind the
fraudulent intent to evade the payment of taxes, considering that the
requirement that taxpayers
424
423 424 SUPREME COURT REPORTS
VOL. 808, NOVEMBER 9, 2016 423 ANNOTATED
Commissioner of Internal Revenue vs. Commissioner of Internal Revenue vs.
Fitness by Design, Inc. Fitness by Design, Inc.
should be informed of the facts and the law on which the assessments are based same is accompanied by legal consequences, cannot be presumed.” Fraud
conforms with the constitutional mandate that no person shall be deprived of his or entails corresponding sanctions under the tax law.
her property without due process of law. Between the power of the State to tax and
 Same; The issuance of a valid formal assessment is a substantive prerequisite for
collection of taxes.—The issuance of a valid formal assessment is a substantive
prerequisite for collection of taxes. Neither the National Internal Revenue Code nor
the revenue regulations provide for a “specific definition or form of an assessment.”
Same; Taxes are the lifeblood of government and should be collected without hindrance.
However, the collection of taxes should be exercised reasonably and in accordance with the
prescribed procedure.—Taxes are the lifeblood of government and should be collected
without hindrance. However, the collection of taxes should be exercised “reasonably
and in accordance with the prescribed procedure.”
On April 11, 1996, Fitness filed its Annul Income Tax Return for the taxable year
of 1995.5 According to Fitness, it was still in its pre-operating stage during the
covered period.6
On June 9, 2004, Fitness received a copy of the Final Assessment Notice dated
March 17, 2004.7 The Final Assessment Notice was issued under Letter of Authority
No. 00002953.8The Final Assessment Notice assessed that Fitness had a tax deficiency
in the amount of P10,647,529.69.9 It provides:
FINAL ASSESSMENT NOTICE

PETITION for review on certiorari of the decision and resolution of the Court of Tax
March 17, 2004
Appeals En Banc.
The facts are stated in the opinion of the Court.
FITNESS BY DESIGN, INC.
Office of the Solicitor General for petitioner.
169 Aguirre St., BF Homes,
Balmeo and Go Law Offices for respondent.
Parañaque City

426
LEONEN, J.: 426 SUPREME COURT REPORTS
ANNOTATED
To avail of the extraordinary period of assessment in Section 222(a) of the Commissioner of Internal Revenue vs.
National Internal Revenue Code, the Commissioner of Internal Revenue should show Fitness by Design, Inc.
that the facts upon which the fraud is based is communicated to the taxpayer. The Gentlemen:
burden of proving that the facts exist in any subsequent proceeding is with the
Commissioner. Furthermore, the Final Assessment Notice is not valid if it does not Please be informed that after investigation of your Internal Revenue Tax
contain a definite due date for payment by the taxpayer. Liabilities for the year 1995 pursuant to Letter of Authority No. 00002953 dated May
This resolves a Petition for Review on Certiorari1filed by the Commissioner of 13, 2002, there has been found due deficiency taxes as shown hereunder:
Internal Revenue, which assails the Deci-
425 Assessment No. __________
VOL. 808, NOVEMBER 9, 2016 425
Commissioner of Internal Revenue vs. Value-Added Tax
Unreported Sales P7,156,336.08
Fitness by Design, Inc. Output Tax (10%) 715,633.61
sion2 dated July 14, 2014 and Resolution3 dated December 16, 2014 of the Court of Tax Add: Surcharge (50%) P357,816.80
Interest (20%/annum)
Appeals. The Court of Tax Appeals En Banc affirmed the Decision of the First
until 4-15-04 1,303,823.60 1,661,640.41
Division, which declared the assessment issued against Fitness by Design, Inc. Deficiency VAT P2,377,274.02
(Fitness) as invalid.4 Documentary Stamp Tax

Subscribe Capital Stock P375,000.00

Value-Added Tax ANNOTATED
Unreported Sales P7,156,336.08
DST due (2/200) 3,750.00 Commissioner of Internal Revenue vs.
Add: Surcharge (25%) 937.50 Fitness by Design, Inc.
Deficiency DST P4,687.50 with law.15 The Commissioner claimed that its right to assess had not yet prescribed
Total Deficiency Taxes P10,647,529.69 under Section 222(a)16 of the National Internal Revenue Code.17Because the 1995

The complete details covering the aforementioned discrepancies established Income Tax Return filed by Fitness was false and fraudulent for its alleged intentional

during the investigation of this case are shown in the accompanying Annex 1 of this failure to reflect its true sales, Fitness’ respective taxes may be assessed at any time

Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections within 10 years from the discovery of fraud or omission.18

248 and 249(B) of the [National Internal Revenue Code], as amended. Please note, The Commissioner asserted further that the assessment already became final and

however, that the interest and the total
427
VOL. 808, NOVEMBER 9, 2016 427
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
amount due will have to be adjusted if paid prior or beyond April 15, 2004.
In view thereof, you are requested to pay your aforesaid deficiency internal
revenue taxes liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.10 (Emphasis in the
original)
Fitness filed a protest to the Final Assessment Notice on June 25, 2004. According
to Fitness, the Commissioner’s period to assess had already prescribed. Further, the
assessment was without basis since the company was only incorporated on May 30,
1995.11
On February 2, 2005, the Commissioner issued a Warrant of Distraint and/or
Levy with Reference No. OCN WDL-95-05-005 dated February 1, 2005 to Fitness.12
Fitness filed before the First Division of the Court of Tax Appeals a Petition for
Review (With Motion to Suspend Collection of Income Tax, Value-Added Tax,
Documentary Stamp Tax and Surcharges and Interests) on March 1, 2005. 13
On May 17, 2005, the Commissioner of Internal Revenue filed an Answer to
Fitness’ Petition and raised special and affirmative defenses.14 The Commissioner
posited that the Warrant of Distraint and/or Levy was issued in accordance
428
428 SUPREME COURT REPORTS
executory for Fitness’ failure to file a protest within the reglementary period.19 The
Commissioner denied that there was a protest to the Final Assessment Notice filed by
Fitness on June 25, 2004.20 According to the Commissioner, the alleged protest was
“nowhere to be found in the [Bureau of Internal Revenue] Records nor reflected in
the Record Book of the Legal Division as normally done by [its] receiving clerk when
she received [sic] any document.”21 Therefore, the Commissioner had sufficient basis
to collect the tax deficiency through the Warrant of Distraint and/or Levy.22
429
VOL. 808, NOVEMBER 9, 2016 429
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
The alleged fraudulent return was discovered through a tip from a confidential
informant.23 The revenue officers’ investigation revealed that Fitness had been
operating business with sales operations amounting to P7,156,336.08 in 1995, which it
neglected to report in its income tax return.24 Fitness’ failure to report its income
resulted in deficiencies to its income tax and value-added tax of P8,265,568.17 and
P2,377,274.02 respectively, as well as the documentary stamp tax with regard to
capital stock subscription.25
Through the report, the revenue officers recommended the filing of a civil case for
collection of taxes and a criminal case for failure to declare Fitness’ purported sales in
its 1995 Income Tax Return.26 Hence, a criminal complaint against Fitness was filed
before the Department of Justice.27
The Court of Tax Appeals First Division granted Fitness’ Petition on the ground
that the assessment has already prescribed.28 It cancelled and set aside the Final
Assessment Notice dated March 17, 2004 as well as the Warrant of Distraint and/or
Levy issued by the Commissioner.29 It ruled that the Final Assessment Notice is
invalid for failure to comply with the requirements of Section 228 30 of the National If the protest is denied in whole or in part, or is not acted upon within one
Inter- hundred eighty (180) days from submission of documents, the taxpayer adversely
430 affected by the decision or inaction may appeal to the Court of Tax Appeals within
430 SUPREME COURT REPORTS thirty (30) days from receipt of the said decision, or from the lapse of the one hundred
ANNOTATED eighty (180)-day period; otherwise, the decision shall become final, executory and
Commissioner of Internal Revenue vs. demandable.
Fitness by Design, Inc.
_______________ 431
VOL. 808, NOVEMBER 9, 2016 431

1. (a) When the finding for any deficiency tax is the result of mathematical error Commissioner of Internal Revenue vs.

in the computation of the tax as appearing on the face of the return; or Fitness by Design, Inc.

2. (b) When a discrepancy has been determined between the tax withheld and nal Revenue Code. The dispositive portion of the Decision reads:

the amount actually remitted by the withholding agent; or WHEREFORE, the Petition for Review dated February 24, 2005 filed by petitioner

3. (c) When a taxpayer who opted to claim a refund or tax credit of excess Fitness by Design, Inc., is herebyGRANTED. Accordingly, the Final Assessment

creditable withholding tax for a taxable period was determined to have carried Notice dated March 17, 2004, finding petitioner liable for deficiency income tax,

over and automatically applied the same amount claimed against the documentary stamp tax and value-added tax for taxable year 1995 in the total amount

estimated tax liabilities for the taxable quarter or quarters of the succeeding of P10,647,529.69 is hereby CANCELLED and SET ASIDE. The Warrant of Distraint

taxable year; or and Levy dated February 1, 2005 is likewiseCANCELLED and SET ASIDE.

4. (d) When the excise tax due on excisable articles has not been paid; or SO ORDERED.31 (Emphasis in the original)

5. (e) When an article locally purchased or imported by an exempt person, such

as, but not limited to, vehicles, capital equipment, machineries and spare parts,
The Commissioner’s Motion for Reconsideration and its Supplemental Motion for
has been sold, traded or transferred to nonexempt persons.
Reconsideration were denied by the Court of Tax Appeals First Division. 32
Aggrieved, the Commissioner filed an appeal before the Court of Tax Appeals En
The taxpayers shall be informed in writing of the law and the facts on which
Banc.33 The Commissioner asserted that it had 10 years to make an assessment due to
the assessment is made; otherwise, the assessment shall be void.
the fraudulent income tax return filed by Fitness. 34 It also claimed that the assessment
Within a period to be prescribed by implementing rules and regulations, the
already attained finality due to Fitness’ failure to file its protest within the period
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond,
provided by law.35
the Commissioner or his duly authorized representative shall issue an assessment
Fitness argued that the Final Assessment Notice issued to it could not be claimed
based on his
as a valid deficiency assessment that could justify the issuance of a warrant of
findings.
distraint and/or levy.36 It asserted that it was a mere request for payment as it did not
Such assessment may be protested administratively by filing a request for
provide the period within which to pay the alleged liabilities.37
reconsideration or reinvestigation within thirty (30) days from receipt of the
432
assessment in such form and manner as may be prescribed by implementing rules
432 SUPREME COURT REPORTS
and regulations. Within sixty (60) days from filing of the protest, all relevant
ANNOTATED
supporting documents shall have been submitted; otherwise, the assessment shall
Commissioner of Internal Revenue vs.
become final.
Fitness by Design, Inc.
The Court of Tax AppealsEn Banc ruled in favor of Fitness. It affirmed the
Decision of the Court of Tax Appeals First Division, thus:
WHEREFORE, the instant Petition for Review is DENIEDfor lack of merit.
Accordingly, both the Decision and Resolution in CTA Case No. 7160 dated July 10,
2012 and November 21, 2012 respectively are AFFIRMED in toto.38 (Emphasis in the
original)
The Commissioner’s Motion for Reconsideration was denied by the Court of Tax
Appeals En Banc in the Resolution39 dated December 16, 2014.
Hence, the Commissioner of Internal Revenue filed before this Court a Petition
for Review.
Petitioner Commissioner of Internal Revenue raises the sole issue of whether the
Final Assessment Notice issued against respondent Fitness by Design, Inc. is a valid
assessment under Section 228 of the National Internal Revenue Code and Revenue
Regulations No. 12-99.40
433
VOL. 808, NOVEMBER 9, 2016 433
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
Petitioner argues that the Final Assessment Notice issued to respondent is valid
since it complies with Section 228 of the National Internal Revenue Code and
Revenue Regulations No. 12-99.41 The law states that the taxpayer shall be informed
in writing of the facts, jurisprudence, and law on which the assessment is
based.42Nothing in the law provides that due date for payment is a substantive
requirement for the validity of a final assessment notice.43
Petitioner further claims that a perusal of the Final Assessment Notice shows that
April 15, 2004 is the due date for payment.44 The pertinent portion of the assessment
reads:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of this
Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections
248 and 249(B) of the [National Internal Revenue Code], as amended. Please note,
however, that the interest and the total amount due will have to be adjusted if paid
prior or beyond April 15, 2004.45(Emphasis supplied)
This Court, through the Resolution46 dated July 22, 2015, required respondent to
comment on the Petition for Review.
In its Comment,47respondent argues that the Final Assessment Notice issued was
merely a request and not a demand for payment of tax liabilities. 48The Final
Assessment
434
434 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
Notice cannot be considered as a final deficiency assessment because it deprived
respondent of due process when it failed to reflect its fixed tax liabilities. 49 Moreover,
it also gave respondent an indefinite period to pay its tax liabilities. 50
Respondent points out that an assessment should strictly comply with the law for
its validity.51Jurisprudence provides that “not all documents coming from the
[Bureau of Internal Revenue] containing a computation of the tax liability can be
deemed assessments[,] which can attain finality.”52 Therefore, the Warrant of
Distraint and/or Levy cannot be enforced since it is based on an invalid assessment. 53
Respondent likewise claims that since the Final Assessment Notice was allegedly
based on fraud, it must show the details of the fraudulent acts imputed to it as part of
due process.54
I
The Petition has no merit.
An assessment “refers to the determination of amounts due from a person
obligated to make payments.”55 “In the context of national internal revenue
collection, it refers to the determination of the taxes due from a taxpayer under the
National Internal Revenue Code of 1997.”56
435
VOL. 808, NOVEMBER 9, 2016 435
Commissioner of Internal Revenue vs.
Fitness by Design, Inc. ANNOTATED
The assessment process starts with the filing of tax return and payment of tax by Commissioner of Internal Revenue vs.
the taxpayer.57 The initial assessment Fitness by Design, Inc.
436 revenue taxes for “Informal Conference.”70 The informal conference gives the
436 SUPREME COURT REPORTS taxpayer an opportunity to present his or her side of the case. 71
ANNOTATED The taxpayer is given 15 days from receipt of the notice of informal conference to
Commissioner of Internal Revenue vs. respond.72 If the taxpayer fails to respond, he or she will be considered in
Fitness by Design, Inc. default.73The revenue officer74endorses the case with the least possible delay to the
evidenced by the tax return is a self-assessment of the taxpayer.58 The tax is primarily Assessment Division of the Revenue Regional Office or the Commissioner or his or
computed and voluntarily paid by the taxpayer without need of any demand from her authorized representative.75 The Assessment Division of the Revenue Regional
government.59If tax obligations are properly paid, the Bureau of Internal Revenue Office or the Commissioner or his or her authorized representative is responsible for
may dispense with its own assessment.60 the “appropriate review and issuance of a deficiency tax assessment, if warranted.”76
After filing a return, the Commissioner or his or her representative may allow the If, after the review conducted, there exists sufficient basis to assess the taxpayer
examination of any taxpayer for assessment of proper tax liability. 61 The failure of a with deficiency taxes, the officer shall issue a preliminary assessment notice showing
taxpayer to file his or her return will not hinder the Commissioner from permitting in detail the facts, jurisprudence, and law on which the assessment is based.77 The
the taxpayer’s examination.62 The Commissioner can examine records or other data taxpayer is given 15 days from receipt of the pre-assessment notice to respond.78 If the
relevant to his or her inquiry in order to verify the correctness of any return, or to taxpayer fails to respond, he or she will be considered in default, and a formal letter
make a return in case of noncompliance, as well as to determine and collect tax of demand and assessment notice will be issued.79
liability.63
437
VOL. 808, NOVEMBER 9, 2016 437 439
Commissioner of Internal Revenue vs. VOL. 808, NOVEMBER 9, 2016 439
Fitness by Design, Inc. Commissioner of Internal Revenue vs.
The indispensability of affording taxpayers sufficient written notice of his or her Fitness by Design, Inc.
tax liability is a clear definite requirement.64 Section 228 of the National Internal The formal letter of demand and assessment notice shall state the facts,
Revenue Code and Revenue Regulations No. 12-99, as amended, transparently jurisprudence, and law on which the assessment was based; otherwise, these shall be
outline the procedure in tax assessment.65 void.80 The taxpayer or the authorized representative may administratively protest
Section 3 of Revenue Regulations No. 12-99,66 the then prevailing regulation the formal letter of demand and assessment notice within 30 days from receipt of the
regarding the due process requirement in the issuance of a deficiency tax assessment, notice.81
requires a notice for informal conference.67The revenue officer who audited the
taxpayer’s records shall state in his or her report whether the taxpayer concurs with II
his or her findings of liability for deficiency taxes.68 If the taxpayer does not agree,
based on the revenue officer’s report, the taxpayer shall be informed in writing 69 of The word “shall” in Section 228 of the National Internal Revenue Code and
the discrepancies in his or her payment of internal Revenue Regulations No. 12-99 means the act of informing the taxpayer of both the
438 legal and factual bases of the assessment is mandatory. 82 The law requires that the
438 SUPREME COURT REPORTS bases be reflected in the formal letter of demand and assessment notice.83 This cannot
be presumed.84 Otherwise, the express mandate of Section 228 and Revenue ternal Revenue v. Enron,94 an advice of tax deficiency from the Commissioner of
Regulations No. 12-99 would be nugatory.85 The requirement enables the taxpayer to Internal Revenue to an employee of Enron, including the preliminary five (5)-day
make an effective protest or appeal of the assessment or decision.86 letter, were not considered valid substitutes for the mandatory written notice of the
The rationale behind the requirement that taxpayers should be informed of the legal and factual basis of the assessment.95 The required issuance of deficiency tax
facts and the law on which the assessments are based conforms with the assessment notice to the taxpayer is different from the required contents of the
constitutional mandate that no person shall be deprived of his or her property notice.96Thus:
440 The law requires that the legal and factual bases of the assessment be stated in the formal
440 SUPREME COURT REPORTS letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the
ANNOTATED express provisions of Article 228 of the [National Internal Revenue Code] and [Revenue
Commissioner of Internal Revenue vs. Regulations] No. 12-99 would be rendered nugatory. The alleged “factual bases” in the
Fitness by Design, Inc. advice, preliminary letter and “audit working papers” did not suffice. There was no
without due process of law.87Between the power of the State to tax and an going around the mandate of the law that the legal and factual bases of the
individual’s right to due process, the scale favors the right of the taxpayer to due assessment be stated in writing in the formal letter of demand accompanying the
process.88 assessment notice.97 (Emphasis supplied)
The purpose of the written notice requirement is to aid the taxpayer in making a
reasonable protest, if necessary.89 Merely notifying the taxpayer of his or her tax
liabilities without details or particulars is not enough. 90 However, the mandate of giving the taxpayer a notice of the facts and laws on

Commissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.91held which the assessments are based should not be mechanically applied.98 To

that a final assessment notice that only contained a table of taxes with no other details emphasize, the purpose of this requirement is to sufficiently inform the taxpayer of

was insufficient: the bases for the assessment to enable him or her to make an intelligent protest. 99

In the present case, a mere perusal of the [Final Assessment Notice] for the 442
442 SUPREME COURT REPORTS
deficiency EWT for taxable year 1994 will show that other than a tabulation of the alleged
ANNOTATED
deficiency taxes due, no further detail regarding the assessment was provided by petitioner.
Commissioner of Internal Revenue vs.
Only the resulting interest, surcharge and penalty were anchored with legal basis. Petitioner
Fitness by Design, Inc.
should have at least attached a detailed notice of discrepancy or stated an explanation
In Samar-I Electric Cooperative v. Commissioner of Internal Revenue,100substantial
why the amount of P48,461.76 is collectible against respondent and how the same was
compliance with Section 228 of the National Internal Revenue Code is allowed,
arrived at.92
provided that the taxpayer would be later apprised in writing of the factual and legal
bases of the assessment to enable him or her to prepare for an effective
Any deficiency to the mandated content of the assessment or its process will not protest.101 Thus:
be tolerated.93 InCommissioner of In- Although the [Final Assessment Notice] and demand letter issued to petitioner
441 were not accompanied by a written explanation of the legal and factual bases of the
VOL. 808, NOVEMBER 9, 2016 441 deficiency taxes assessed against the petitioner, the records showed that respondent
Commissioner of Internal Revenue vs. in its letter dated April 10, 2003 responded to petitioner’s October 14, 2002 letter-
Fitness by Design, Inc. protest, explaining at length the factual and legal bases of the deficiency tax
assessments and denying the protest.
 Considering the foregoing exchange of correspondence and documents between 444
the parties, we find that the requirement of Section 228 was substantially complied 444 SUPREME COURT REPORTS
with. Respondent had fully informed petitioner in writing of the factual and legal ANNOTATED
bases of the deficiency taxes assessment, which enabled the latter to file an “effective” Commissioner of Internal Revenue vs.
protest, much unlike the taxpayer’s situation in Enron. Petitioner’s right to due Fitness by Design, Inc.
process was thus not violated.102 fraudulent return with intent to evade tax, Section 222(a) provides:
Section 222. Exceptions as to Period of Limitation of Assessment and Collection of
Taxes.—
A final assessment notice provides for the amount of tax due with a demand for
payment.103 This is to determine the amount of tax due to a taxpayer.104However, due (a) In the case of a false or fraudulent return with intent to evade tax or of failure to
process requires that taxpayers be informed in writing of the facts and law on which file a return, the tax may be assessed, or a proceeding in court for the collection of
the assessment is based in order to aid the such tax may be filed without assessment, at any time within ten (10) years after the
443 discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
VOL. 808, NOVEMBER 9, 2016 443
become final and executory, the fact of fraud shall be judicially taken cognizance of in
Commissioner of Internal Revenue vs.
the civil or criminal action for the collection thereof. (Emphasis supplied)
Fitness by Design, Inc.
taxpayer in making a reasonable protest.105 To immediately ensue with tax collection
without initially substantiating a valid assessment contravenes the principle in In Aznar v. Court of Tax Appeals,111 this Court interpreted Section 332112(now
administrative investigations “that taxpayers should be able to present their case and Section 222[a] of the National Internal Revenue Code) by dividing it in three (3)
adduce supporting evidence.”106 different cases: first, in case of false return; second, in case of a fraudulent return with
Respondent filed its income tax return in 1995.107Almost eight (8) years passed intent to evade; andthird, in case of failure to file a return.113 Thus:
before the disputed final assessment notice was issued. Respondent pleaded 445
prescription as its defense when it filed a protest to the Final Assessment Notice. VOL. 808, NOVEMBER 9, 2016 445
Petitioner claimed fraud assessment to justify the belated assessment made on Commissioner of Internal Revenue vs.
respondent.108 If fraud was indeed present, the period of assessment should be within Fitness by Design, Inc.
10 years.109 It is incumbent upon petitioner to clearly state the allegations of fraud Our stand that the law should be interpreted to mean a separation of the three
committed by respondent to serve the purpose of an assessment notice to aid different situations of false return, fraudulent return with intent to evade tax and
respondent in filing an effective protest. failure to file a return is strengthened immeasurably by the last portion of the
provision which aggregates the situations into three different classes, namely
III “falsity,” “fraud” and “omission.”114

The prescriptive period in making an assessment depends upon whether a tax

This Court held that there is a difference between “false return” and a
return was filed or whether the tax return filed was either false or fraudulent. When a
“fraudulent return.”115 A false return simply involves a “deviation from the truth,
tax return that is neither false nor fraudulent has been filed, the Bureau of Internal
whether intentional or not” while a fraudulent return “implies intentional or deceitful
Revenue may assess within three (3) years, reckoned from the date of actual filing or
entry with intent to evade the taxes due.”116
from the last day prescribed by law for filing.110 However, in case of a false or
 Fraud is a question of fact that should be alleged and duly proven. 117 “The willful
neglect to file the required tax return or the fraudulent intent to evade the payment of
taxes, considering that the same is accompanied by legal consequences, cannot be
presumed.”118 Fraud entails corresponding sanctions under the tax law. Therefore, it
is indispensable for the Commissioner of Internal Revenue to include the basis for its
allegations of fraud in the assessment notice.
During the proceedings in the Court of Tax Appeals First Division, respondent
presented its President, Domingo C. Juan, Jr. (Juan, Jr.), as witness. 119 Juan, Jr. testified
that respondent was in its pre-operating stage in 1995.120 During that period,
respondent “imported equipment and distributed
446
446 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
them for market testing in the Philippines without earning any profit.” 121
confirmed that the Final Assessment Notice and its attachments failed to substantiate
the Commissioner’s allegations of fraud against respondent, thus:
More than three (3) years from the time petitioner filed its 1995 annual income tax
return on April 11, 1996, respondent issued to petitioner a [Final Assessment Notice]
dated March 17, 2004 for the year 1995, pursuant to the Letter of Authority No.
00002953 dated May 13, 2002. The attached Details of discrepancy containing the
assessment for income tax (IT), value-added tax (VAT) and documentary stamp tax
(DST) as well as the Audit Result/Assessment Notice do not impute fraud on the part of
petitioner. Moreover, it was obtained on information and documents illegally obtained
by a [Bureau of Internal Revenue] informant from petitioner’s accountant Elnora
Carpio in 1996.122 (Emphasis supplied)
Petitioner did not refute respondent’s allegations. For its defense, it presented
Socrates Regala (Regala), the Group Supervisor of the team, who examined
respondent’s tax liabilities.123Regala confirmed that the investigation was prompted
by a tip from an informant who provided them with respondent’s list of sales. 124He
admitted125 that the gathered
447
VOL. 808, NOVEMBER 9, 2016 447
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
information did not show that respondent deliberately failed to reflect its true income
in 1995.126
IV
The issuance of a valid formal assessment is a substantive prerequisite for
collection of taxes.127 Neither the National Internal Revenue Code nor the revenue
regulations provide for a “specific definition or form of an assessment.” However, the
National Internal Revenue Code defines its explicit functions and effects. 128 An
assessment does not only include a computation of tax liabilities; it also includes a
demand for payment within a period prescribed.129 Its main purpose is to determine
the amount that a taxpayer is liable to pay.130
A pre-assessment notice “do[es] not bear the gravity of a formal assessment
He also notice.”131 A pre-assessment notice merely gives a tip regarding the Bureau of
Internal Revenue’s findings against a taxpayer for an informal conference or a
clarificatory meeting.132
A final assessment is a notice “to the effect that the amount therein stated is due
as tax and a demand for payment thereof.”133 This demand for payment signals the
time “when
448
448 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
penalties and interests begin to accrue against the taxpayer and enabling the latter to
determine his remedies[.]”134 Thus, it must be “sent to and received by the taxpayer,
and must demand payment of the taxes described therein within a specific period.” 135
The disputed Final Assessment Notice is not a valid assessment.
First, it lacks the definite amount of tax liability for which respondent is
accountable. It does not purport to be a demand for payment of tax due, which a final
assessment notice should supposedly be. An assessment, in the context of the
National Internal Revenue Code, is a “written notice and demand made by the
[Bureau of Internal Revenue] on the taxpayer for the settlement of a due tax liability
that is there definitely set and fixed.”136Although the disputed notice provides for the
computations of respondent’s tax liability, the amount remains indefinite. It only
provides that the tax due is still subject to modification, depending on the date of
payment. Thus:
The complete details covering the aforementioned discrepancies established
during the investigation of this case are shown in the accompanying Annex 1 of this
Notice. The 50% surcharge and 20% interest have been imposed pursuant to Sections
248 and 249(B) of the [National Internal Revenue Code], as amended. Please
note,however, that the interest and the total amount due will have to be adjusted if prior or
beyond April 15, 2004.137 (Emphasis supplied)
449
VOL. 808, NOVEMBER 9, 2016 449
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
Second, there are no due dates in the Final Assessment Notice. This negates
petitioner’s demand for payment.138 Petitioner’s contention that April 15, 2004 should
be regarded
as the actual due date cannot be accepted. The last paragraph of the Final Assessment
Notice states that the due dates for payment were supposedly reflected in the
attached assessment:
In view thereof, you arerequested to pay your aforesaid deficiency internal revenue
tax liabilities through the duly authorized agent bank in which you are
enrolled within the time shown in the enclosed assessment notice.139 (Emphasis in the
original)
However, based on the findings of the Court of Tax Appeals First Division, the
enclosed assessment pertained to remained unaccomplished.140
Contrary to petitioner’s view, April 15, 2004 was the reckoning date of accrual of
penalties and surcharges and not the due date for payment of tax liabilities. The total
amount depended upon when respondent decides to pay. The notice, therefore, did
not contain a definite and actual demand to pay.
Compliance with Section 228 of the National Internal Revenue Code is a
substantive requirement.141It is not a mere formality.142Providing the taxpayer with
the factual and legal bases for the assessment is crucial before proceeding with tax
collection. Tax collection should be premised on a valid as-
450
450 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
sessment, which would allow the taxpayer to present his or her case and produce
evidence for substantiation.143
The Court of Tax Appeals did not err in cancelling the Final Assessment Notice as
well as the Audit Result/Assessment Notice issued by petitioner to respondent for
the year 1995 covering the “alleged deficiency income tax, value-added tax and
documentary stamp tax amounting to P10,647,529.69, inclusive of surcharges and
interest”144for lack of due process. Thus, the Warrant of Distraint and/or Levy is void
since an invalid assessment bears no valid effect.145
Taxes are the lifeblood of government and should be collected without
hindrance.146 However, the collection of taxes should be exercised “reasonably and in
accordance with the prescribed procedure.”147
The essential nature of taxes for the existence of the State grants government with
vast remedies to ensure its collection. However, taxpayers are guaranteed their
fundamental right to due process of law, as articulated in various ways in the process
of tax assessment. After all, the State’s purpose is to ensure the well-being of its
citizens, not simply to deprive them of their fundamental rights.
WHEREFORE, the Petition is DENIED. The Decision of the Court of Tax
Appeals En Banc dated July 14, 2014 and Resolution dated December 16, 2014 in
C.T.A. E.B. Case No. 970 (CTA Case No. 7160) are hereby AFFIRMED.
451
VOL. 808, NOVEMBER 9, 2016 451
Commissioner of Internal Revenue vs.
Fitness by Design, Inc.
SO ORDERED.
Carpio (Chairperson), Brion and Del Castillo, JJ., concur.
Mendoza, J., On Official Leave.
Petition denied, judgment and resolution affirmed.
 Note.—A tax amnesty is a general pardon or the intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty of violation of a
tax law. It partakes of an absolute waiver by the government of its right to collect
what is due it and to give tax evaders who wish to relent a chance to start with a clean
slate. (LG Electronics Philippines, Inc. vs. Commissioner of Internal Revenue, 743 SCRA
511 [2014])

——o0o——
G.R. No. 185371. December 8, 2010.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. METRO STAR
SUPERAMA, INC., respondent.
Taxation; Court of Tax Appeals; Appeals; Court will not lightly set aside the
conclusions reached by the Court of Tax Appeals (CTA) which by the very nature of its
functions has accordingly developed an exclusive expertise on the resolution unless there has
been an abuse or improvident exercise of authority.—The general rule is that the Court
will not lightly set aside the conclusions reached by the CTA which, by the very
nature of its functions, has accordingly developed an exclusive expertise on the
resolution unless there has been an abuse or improvident exercise of authority.
In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of
Internal Revenue, the Court wrote: Jurisprudence has consistently shown that this
Court accords the findings of fact by the CTA with the highest respect. In Sea-Land
Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446],
this Court recognizes that the Court of Tax Appeals, which by the very nature of its
function is dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such findings
can only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the Tax Court. In the absence
of any clear and convincing proof to the contrary, this Court must presume that the
CTA rendered a decision which is valid in every respect.
634
6 SUPREME COURT
34 REPORTS ANNOTATED
Commissioner of Internal Revenue
vs. Metro Star Superama Inc.
Same; Assessment; If the taxpayer denies ever having received an assessment from the
Bureau of Internal Revenue (BIR), it is incumbent upon the latter to prove by competent
evidence that such notice was indeed received by the addressee.—Jurisprudence is replete
with cases holding that if the taxpayer denies ever having received an assessment
from the BIR, it is incumbent upon the latter to prove by competent evidence that
such notice was indeed received by the addressee. The onus probandi was shifted to
respondent to prove by contrary evidence that the Petitioner received the assessment
in the due course of mail. The Supreme Court has consistently held that while a
mailed letter is deemed received by the addressee in the course of mail, this is merely
a disputable presumption subject to controversion and a direct denial thereof shifts
the burden to the party favored by the presumption to prove that the mailed letter
was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351).
Same; Same; Section 228 of the Tax Code clearly requires that the taxpayer must be
informed that he is liable for deficiency taxes through the sending of a Preliminary Assessment
Notice (PAN).—Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the sending of a PAN.
He must be informed of the facts and the law upon which the assessment is made.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations — that
taxpayers should be able to present their case and adduce supporting evidence.
Same; Same; The sending of a Preliminary Assessment Notice (PAN) to taxpayer to
inform him of the assessment made is but part of the due process requirement in the issuance
of a deficiency tax assessment, the absence of which senders nugatory any assessment made by
the tax authorities.—It is clear that the sending of a PAN to taxpayer to inform him of
the assessment made is but part of the “due process requirement in the issuance of a
deficiency tax assessment,” the absence of which renders nugatory any assessment
made by the tax authorities. The use of the word “shall” in subsection 3.1.2 describes
the mandatory nature of the service of a PAN. The persuasiveness of the right to due
process reaches both substantial and procedural rights and the failure of the CIR to
strictly comply with the requirements laid down by law and its own rules is a denial
of Metro Star’s right to due process. Thus, for its failure to send the PAN stating the
facts and the law on which the assessment was made as required by Section 228 of
R.A. No. 8424, the assessment made by the CIR is void.635
VOL. 637, DECEMBER 8, 6
2010 35
Commissioner of Internal Revenue
vs. Metro Star Superama Inc.
Same; Same; While taxes are the lifeblood of the government, the power to tax has its
limits in spite of all its plenitude.—It is an elementary rule enshrined in the 1987
Constitution that no person shall be deprived of property without due process of law.
In balancing the scales between the power of the State to tax and its inherent right to
prosecute perceived transgressors of the law on one side, and the constitutional rights
of a citizen to due process of law and the equal protection of the laws on the other,
the scales must tilt in favor of the individual, for a citizen’s right is amply protected
by the Bill of Rights under the Constitution. Thus, while “taxes are the lifeblood of the Revenue Region No. 67, Legazpi City to proceed with the investigation based on the
government,” the power to tax has its limits, in spite of all its plenitude. best evidence obtainable preparatory to the issuance of assessment notice.
PETITION for review on certiorari of the decision and resolution of the Court of Tax On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente
Appeals. issued a Preliminary 15-day Letter, which petitioner received on November 9, 2001.
The facts are stated in the opinion of the Court. The said letter stated that a post audit review was held and it was ascertained that
Office of the Solicitor General for petitioner. there was deficiency value-added and withholding taxes due from petitioner in the
Baterina, Baterina, Casals, Lozada & Tiblani for respondent. amount of P 292,874.16.
MENDOZA, J.: On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3,
This petition for review oncertiorari under Rule 45 of the Rules of Court filed by 2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount of
the petitioner Commissioner of Internal Revenue (CIR)seeks to reverse and set aside Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen
the 1] September 16, 2008 Decision1 of the Court of Tax Appeals En Banc (CTA-En Centavos (P292,874.16.) for deficiency value-added and withholding taxes for the
Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution 2 denying taxable year 1999, computed as follows:
petitioner’s motion for reconsideration. ASSESSMENT NOTICE NO. 067-99-003-579-072
The CTA-En Bancaffirmed in toto the decision of its Second Division (CTA-Second VALUE ADDED TAX
Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR
Gross Sales P1,697,718.90
which assessed respondent Metro Star Superama, Inc. (Metro Star)of deficiency value-
added tax and withholding tax for the taxable year 1999. Output Tax P 154,338.08
636
636 SUPREME COURT REPORTS Less: Input Tax _____________
ANNOTATED
VAT Payable P 154,338.08
Commissioner of Internal Revenue vs.
Metro Star Superama Inc. Add: 25% Surcharge P 38,584.54
Based on a Joint Stipulation of Facts and Issues3 of the parties, the CTA Second
Division summarized the factual and procedural antecedents of the case, the 637
pertinent portions of which read:
VOL. 637, DECEMBER 8, 2010 637
“Petitioner is a domestic corporation duly organized and existing by virtue of the
Commissioner of Internal Revenue vs. Metro Star Superama Inc.
laws of the Republic of the Philippines, x x x.
20% Interest 79,746.49
On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi
City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana Compromise
to examine petitioner’s books of accounts and other accounting records for income Penalty
tax and other internal revenue taxes for the taxable year 1999. Said Letter of Authority
was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos. Late Payment P16,000.00

For petitioner’s failure to comply with several requests for the presentation of
Failure to File VAT
records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an
returns 2,400.00 18,400.00 136,731.01
Indorsement dated September 26, 2001 informing Revenue District Officer of
TOTAL P 291,069.09 Total

WITHHOLDING SUMMARIES OF
TAX DEFICIENCIES

Compensation 2,772.91 VALUE ADDED P 291,069.09

TAX
Expanded 110,103.92
WITHHOLDING 1,805.07
Total Tax Due P112,876.83 TAX

Less: Tax Withheld 111,848.27 TOTAL P 292,874.16

Deficiency P 1,028.56
Withholding Tax
Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of

Add: 20% Interest 576.51 Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving the

p.a. latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from
receipt thereof, otherwise respondent BIR shall be constrained to serve and execute
Compromise 200.00 the Warrants of Distraint and/or Levy and Garnishment to enforce collection.
Penalty On February 6, 2004, petitioner received from Revenue District Office No. 67 a
Warrant of Distraint and/or Levy No. 67-0029-23 dated May 12, 2003 demanding
TOTAL P 1,805.07
payment of deficiency value-added tax and withholding tax payment in the amount
of P292,874.16.638
638 SUPREME COURT REPORTS
*Expanded P1,949,334.25 x 5% 97,466.71 ANNOTATED
Withholding Tax Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
Film Rental 10,000.25 x 10% 1,000.00
On July 30, 2004, petitioner filed with the Office of respondent Commissioner a
Audit Fee 193,261.20 x 5% 9,663.00 Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-
99.
Rental Expense 41,272.73 x 1% 412.73
On February 8, 2005, respondent Commissioner, through its authorized

Security Service 156,142.01 x 1% ____1,561.42 representative, Revenue Regional Director of Revenue Region 10, Legaspi City,
issued a Decision denying petitioner’s Motion for Reconsideration. Petitioner,
Service P 110,103.92 through counsel received said Decision on February 18, 2005.
Contractor x x x.”
 Denying that it received a Preliminary Assessment Notice (PAN) and claiming The CTA-Second Division opined that “[w]hile there [is] a disputable
that it was not accorded due process, Metro Star filed a petition for review4 with the presumption that a mailed letter [is] deemed received by the addressee in the
CTA. The parties then stipulated on the following issues to be decided by the tax ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon
court: the party favored by the presumption to prove that the mailed letter was indeed
1. Whether the respondent complied with the due process requirement as received by the addressee.”5 It also found that there was no clear showing that Metro
provided under the National Internal Revenue Code and Revenue Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled
Regulations No. 12-99 with regard to the issuance of a deficiency tax that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of
assessment; Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due
1.1 Whether petitioner is liable for the respective amounts of P291,069.09 process.6
and P1,805.07 as deficiency VAT and withholding tax for the year The CIR sought reconsideration7 of the decision of the CTA-Second Division, but
1999; the motion was denied in the latter’s July 24, 2007 Resolution. 8
1.2. Whether the assessment has become final and executory and Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc, but the
demandable for failure of petitioner to protest the same within 30 days petition was dismissed after a determination that no new matters were raised. The
from its receipt thereof on April 11, 2002, pursuant to Section 228 of CTA-En Banc disposed:
the National Internal Revenue Code; 640
2. Whether the deficiency assessments issued by the respondent are void for 640 SUPREME COURT REPORTS
failure to state the law and/or facts upon which they are based. ANNOTATED
2.2 Whether petitioner was informed of the law and facts on which the Commissioner of Internal Revenue vs.
assessment is made in compliance with Section 228 of the National Metro Star Superama Inc.
Internal Revenue Code; “WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE
3. Whether or not petitioner, as owner/operator of a movie/cinema house, is and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July
subject to VAT on sales of services under Section 108(A) of the National 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169 entitled, “Metro
Internal Revenue Code; Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue, respondent”are
639 hereby AFFIRMED in toto.
VOL. 637, DECEMBER 8, 2010 639 SO ORDERED.”
Commissioner of Internal Revenue vs. The motion for reconsideration10 filed by the CIR was likewise denied by the
Metro Star Superama Inc. CTA-En Banc in its November 18, 2008 Resolution.11
4. Whether or not the assessment is based on the best evidence obtainable The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and
pursuant to Section 6(b) of the National Internal Revenue Code. that due process was served nonetheless because the latter received the Final
The CTA-Second Division found merit in the petition of Metro Star and, on Assessment Notice (FAN), comes now before this Court with the sole issue of
March 21, 2007, rendered a decision, the decretal portion of which reads: whether or not Metro Star was denied due process.
“WHEREFORE, premises considered, the Petition for Review is The general rule is that the Court will not lightly set aside the conclusions
hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is reached by the CTA which, by the very nature of its functions, has accordingly
hereby REVERSED and SET ASIDE and respondent is ORDERED TO DESIST from developed an exclusive expertise on the resolution unless there has been an abuse or
collecting the subject taxes against petitioner.” improvident exercise of authority.12 In Barcelon, Roxas Securities, Inc. (now known as
UBP Securities, Inc.) v. Commissioner of Internal Revenue,13 the Court wrote:
 “Jurisprudence has consistently shown that this Court accords the findings of fact
by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of Appeals [G.R.
No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the
Court of Tax Appeals, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an
expertise on the subject, and its conclusions will not be overturned unless there has
been an abuse or improvident exercise of authority. Such findings can only be
disturbed on appeal if they are not supported by substantial evidence or there is a
showing of gross error or abuse on the part of the Tax Court. In the absence of any
clear and convincing proof
641
VOL. 637, DECEMBER 8, 2010 641
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
to the contrary, this Court must presume that the CTA rendered a decision which is
valid in every respect.”
On the matter of service of a tax assessment, a further perusal of our ruling
inBarcelon is instructive, viz.:
“Jurisprudence is replete with cases holding that if the taxpayer denies ever
having received an assessment from the BIR, it is incumbent upon the latter to
prove by competent evidence that such notice was indeed received by the
addressee. The onus probandi was shifted to respondent to prove by contrary
evidence that the Petitioner received the assessment in the due course of mail. The
Supreme Court has consistently held that while a mailed letter is deemed received by
the addressee in the course of mail, this is merely a disputable presumption subject to
controversion and a direct denial thereof shifts the burden to the party favored by the
presumption to prove that the mailed letter was indeed received by the addressee
(Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court
in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
“The facts to be proved to raise this presumption are (a) that the letter
was properly addressed with postage prepaid, and (b) that it was
mailed. Once these facts are proved, the presumption is that the letter was
received by the addressee as soon as it could have been transmitted to him in
the ordinary course of the mail. But if one of the said facts fails to appear, the
presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed,
56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil. 269).”
x x x. What is essential to prove the fact of mailing is the registry receipt issued
by the Bureau of Posts or the Registry return card which would have been signed
by the Petitioner or its authorized representative. And if said documents cannot be
located, Respondent at the very least, should have submitted to the Court a
certification issued by the Bureau of Posts and any other pertinent document
which is executed with the intervention of the Bureau of Posts. This Court does not
put much credence to the self serving documentations made by the BIR personnel
especially if they are unsupported by substantial evidence establishing the fact of
mailing. Thus:
“While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its
642
642 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959),
this ruling makes it the more imperative that the release, mailing or sending
of the notice be clearly and satisfactorily proved. Mere notations made
without the taxpayer’s intervention, notice or control, without adequate
supporting evidence cannot suffice; otherwise, the taxpayer would be at the
mercy of the revenue offices, without adequate protection or defense.” (Nava
vs. CIR, 13 SCRA 104, January 30, 1965).
x x x.
The failure of the respondent to prove receipt of the assessment by the Petitioner
leads to the conclusion that no assessment was issued. Consequently, the
government’s right to issue an assessment for the said period has already prescribed.
(Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR, CTA Case 4885, August
22, 1996).” (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and
present any evidence to show that Metro Star indeed received the PAN dated January
16, 2002. It could have simply presented the registry receipt or the certification from
the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation
on why it failed to comply with the requirement of service of the PAN. It merely
accepted the letter of Metro Star’s chairman dated April 29, 2002, that stated that he
had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay
the tax as computed by the CIR; and that he just wanted to clarify some matters with
the hope of lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice
requirements prescribed under Section 228 of the National Internal Revenue Code of
1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due
process? Specifically, are the requirements of due process satisfied if only the FAN
stating the computation of tax liabilities and a demand to pay within the prescribed
period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the Tax
Code which reads:
“SEC. 228. Protesting of Assessment.—When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he shall first
notify the taxpayer of his findings: provided,
643
VOL. 637, DECEMBER 8, 2010 643
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
however, that a preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax as appearing on the face of the return; or
(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have carried over
and automatically applied the same amount claimed against the estimated tax
liabilities for the taxable quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been paid; or
(e) When the article locally purchased or imported by an exempt person, such
as, but not limited to, vehicles, capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and the facts on which
the assessment is made; otherwise, the assessment shall be void.
Within a period to be prescribed by implementing rules and regulations, the
taxpayer shall be required to respond to said notice. If the taxpayer fails to respond,
the Commissioner or his duly authorized representative shall issue an assessment
based on his findings.
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the
assessment in such form and manner as may be prescribed by implementing rules
and regulations. Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise, the assessment shall
become final.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer adversely
affected by the decision or inaction may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of the said decision, or from the lapse of one hundred
eighty (180)-day period; otherwise, the decision shall become final, executory and
demandable.” (Emphasis supplied).
644
644 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first
be informed that he is liable for deficiency taxes through the sending of a PAN. He
must be informed of the facts and the law upon which the assessment is made. The
law imposes a substantive, not merely a formal, requirement. To proceed heedlessly
with tax collection without first establishing a valid assessment is evidently violative
of the cardinal principle in administrative investigations—that taxpayers should be
able to present their case and adduce supporting evidence. 14
This is confirmed under the provisions R.R. No. 12-99 of the BIR which
pertinently provide:
“SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax
Assessment.—
3.1 Mode of procedures in the issuance of a deficiency tax assessment:
3.1.1 Notice for informal conference.—The Revenue Officer who audited the
taxpayer's records shall, among others, state in his report whether or not the taxpayer
agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the
taxpayer is not amenable, based on the said Officer’s submitted report of
investigation, the taxpayer shall be informed, in writing, by the Revenue District
Office or by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the case of the
BIR National Office) of the discrepancy or discrepancies in the taxpayer’s payment of
his internal revenue taxes, for the purpose of “Informal Conference,” in order to
afford the taxpayer with an opportunity to present his side of the case. If the taxpayer
fails to respond within fifteen (15) days from date of receipt of the notice for informal
conference, he shall be considered in default, in which case, the Revenue District
Officer or the Chief of the Special Investigation Division of the Revenue Regional
Office, or the Chief of Division in the National Office, as the case may be, shall
endorse the case with the least possible delay to the Assessment Division of the
Revenue Regional Office or to the Commissioner or his duly authorized
representative, as the case may be, for appropriate review and issuance of a
deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN).—If after review and evaluation by the
Assessment Division or by the Commissioner or his duly
645
VOL. 637, DECEMBER 8, 2010 645
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
authorized representative, as the case may be, it is determined that there exists
sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office
shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment
Notice (PAN) for the proposed assessment, showing in detail, the facts and the law,
rules and regulations, or jurisprudence on which the proposed assessment is based
(see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen
(15) days from date of receipt of the PAN, he shall be considered in default, in which
case, a formal letter of demand and assessment notice shall be caused to be issued by
the said Office, calling for payment of the taxpayer’s deficiency tax liability, inclusive
of the applicable penalties.
3.1.3 Exceptions to Prior Notice of the Assessment.—The notice for informal
conference and the preliminary assessment notice shall not be required in any of the
following cases, in which case, issuance of the formal assessment notice for the
payment of the taxpayer’s deficiency tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of mathematical error in
the computation of the tax appearing on the face of the tax return filed by the
taxpayer; or
(ii) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have
carried over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or
(iv) When the excise tax due on excisable articles has not been paid; or
(v) When an article locally purchased or imported by an exempt person, such as,
but not limited to, vehicles, capital equipment, machineries and spare parts,
has been sold, traded or transferred to non-exempt persons.
3.1.4 Formal Letter of Demand and Assessment Notice.—The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based,
646
646 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
otherwise, the formal letter of demand and assessment notice shall be void (see
illustration in ANNEX B hereof).
The same shall be sent to the taxpayer only by registered mail or by personal
delivery.
If sent by personal delivery, the taxpayer or his duly authorized representative
shall acknowledge receipt thereof in the duplicate copy of the letter of demand,
showing the following: (a) His name; (b) signature; (c) designation and authority to
act for and in behalf of the taxpayer, if acknowledged received by a person other than
the taxpayer himself; and (d) date of receipt thereof.
x x x.”
From the provision quoted above, it is clear that the sending of a PAN to taxpayer
to inform him of the assessment made is but part of the “due process requirement in
the issuance of a deficiency tax assessment,” the absence of which renders nugatory
any assessment made by the tax authorities. The use of the word “shall” in subsection
3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of
the right to due process reaches both substantial and procedural rights and the failure
of the CIR to strictly comply with the requirements laid down by law and its own
rules is a denial of Metro Star’s right to due process. 15 Thus, for its failure to send the
PAN stating the facts and the law on which the assessment was made as required by
Section 228 of R.A. No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito16 cited by the CIR in support of its argument that only
the non-service of the FAN is fatal to the validity of an assessment, cannot apply to
this case because the issue therein was the non-compliance with the provisions of R.
R. No. 12-85 which sought to interpret Section 229 of the old tax law. RA No. 8424 has
already amended the provision of Section 229 on protesting an assessment. The old
requirement of merelynotifying the taxpayer of the CIR’s findings was changed in
1998 to informing the taxpayer of not
647
VOL. 637, DECEMBER 8, 2010 647
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
only the law, but also of the facts on which an assessment would be made. Otherwise,
the assessment itself would be invalid.17 The regulation then, on the other hand,
simply provided that a notice be sent to the respondent in the form prescribed, and
that no consequence would ensue for failure to comply with that form.
The Court need not belabor to discuss the matter of Metro Star’s failure to file its
protest, for it is well-settled that a void assessment bears no fruit.18
It is an elementary rule enshrined in the 1987 Constitution that no person shall be
deprived of property without due process of law.19In balancing the scales between
the power of the State to tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the constitutional rights of a citizen to due
process of law and the equal protection of the laws on the other, the scales must tilt in
favor of the individual, for a citizen’s right is amply protected by the Bill of Rights
under the Constitution. Thus, while “taxes are the lifeblood of the government,” the
power to tax has its limits, in spite of all its plenitude. Hence inCommissioner of
Internal Revenue v. Algue, Inc.,20 it was said—
“Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
xxx xxx xxx
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for the lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of
648
648 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Metro Star Superama Inc.
one’s hard-earned income to taxing authorities, every person who is able to must
contribute his share in the running of the government. The government for its part is
expected to respond in the form of tangible and intangible benefits intended to
improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous
notion that it is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the taxpayer has a right to
complain and the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate
x x x that the law has not been observed.”21(Emphasis supplied).
WHEREFORE, the petition is DENIED.
SO ORDERED.
Carpio (Chairperson), Nachura, Peralta and Abad, JJ., concur.
Petition denied.
Note.—A post-reporting notice and pre-assessment notice do not bear the gravity
of a formal assessment notice. (Commissioner on Internal Revenue vs. Menguito, 565
SCRA 461 [2008]
——o0o——
 G.R. No. 205955. March 7, 2018.* the succeeding taxable years.—The irrevocability rule is provided in the last sentence of
Section 76. A perfunctory reading of the law unmistakably discloses that the
UNIVERSITY PHYSICIANS SERVICES INC.-MANAGEMENT, INC., irrevocable option referred to is the carryover option only. There appears nothing
petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. therein from which to infer that the other choice, i.e., cash refund or tax credit
certificate, is also irrevocable. If the intention of the lawmakers was to make such
Taxation; Tax Remedies; Irrevocability Rule; The irrevocability is limited only to the
option of cash refund or tax credit certificate also irrevo-
option of carryover such that a taxpayer is still free to change its choice after electing a refund
of its excess tax credit. But once it opts to carry over such excess creditable tax, after
electingrefund or issuance of tax credit certificate, the carryover option be- 3
cable, then they would have clearly provided so. In other words, the law does
2
not prevent a taxpayer who originally opted for a refund or tax credit certificate from
comes irrevocable.—We cannot subscribe to the suggestion that the irrevocability
shifting to the carryover of the excess creditable taxes to the taxable quarters of the
rule enshrined in Section 76 of the National Internal Revenue Code (NIRC) applies to
succeeding taxable years. However, in case the taxpayer decides to shift its option to
either of the options of refund or carryover. Our reading of the law assumes the
carry over, it may no longer revert to its original choice due to the irrevocability rule.
interpretation that the irrevocability is limited only to the option of carryover such
As Section 76 unequivocally provides, once the option to carry over has been made, it
that a taxpayer is still free to change its choice after electing a refund of its excess tax
shall be irrevocable. Furthermore, the provision seems to suggest that there are no
credit. But once it opts to carry over such excess creditable tax, after electing refund
qualifications or conditions attached to the rule on irrevocability. Law and
or issuance of tax credit certificate, the carryover option becomes irrevocable.
jurisprudence unequivocally support the view that only the option of carryover is
Accordingly, the previous choice of a claim for refund, even if subsequently pursued,
irrevocable.
may no longer be granted.
Same; Same; Tax Assessment; Issuing an assessment against the taxpayer who
Same; Same; There are two (2) options available to the corporation whenever it
benefited twice because of the application of automatic tax credit is a wholly acceptable remedy
overpays its income tax for the taxable year: (1) to carry over and apply the overpayment as
for the government.—In order to place a sensible meaning to paragraph (c) of Section
tax credit against the estimated quarterly income tax liabilities of the succeeding taxable years
228, it should be interpreted as contemplating only that situation when an application
(also known as automatic tax credit) until fully utilized (meaning, there is no prescriptive
for refund or tax credit certificate had already been previously granted. Issuing an
period); and (2) to apply for a cash refund or issuance of a tax creditcertificate within the
assessment against the taxpayer who benefited twice because of the application of
prescribed period.—There are two options available to the corporation whenever it
automatic tax credit is a wholly acceptable remedy for the government.
overpays its income tax for the taxable year: (1) tocarry over and apply the
Same; Same; It is clear that the taxpayer cannot avail of both refund and automatic tax
overpayment as tax credit against the estimated quarterly income tax liabilities of the
credit at the same time.—It is clear that the taxpayer cannot avail of both refund and
succeeding taxable years (also known as automatic tax credit) until fully utilized
automatic tax credit at the same time. Thus, asPhilam declared: “One cannot get a tax
(meaning, there is no prescriptive period); and (2) to apply for a cash refund or
refund and a tax credit at the same time for the same excess income taxes paid.” This
issuance of a tax credit certificate within the prescribed period. Such overpayment of
is the import of the Court’s pronouncement that the options under Section 76 are
income tax is usually occasioned by the overwithholding of taxes on the income
alternative in nature. In declaring that “the choice of one (option) precludes the
payments to the corporate taxpayer.
other,” the Court in Philamcited Philippine Bank of Communications v. Commissioner of
Same; Same; Carryover Option; The irrevocable option referred to is the carryover
Internal Revenue (PBCom), 302 SCRA 241 (1999), a case decided under the aegis of the
option only; the law does not prevent a taxpayer who originally opted for a refund or tax credit
old NIRC of 1977 under which the irrevocability rule had not yet been established. It
certificate from shifting to the carryover of the excess creditable taxes to the taxable quarters of
was in PBComthat the Court stated for the first time that “the choice of one precludes
the other.” However, a closer perusal of PBCom reveals that the taxpayer had opted 5
for an automatic tax credit. Thus, it was precluded from availing of the other remedy MARTIRES, J.:
of refund; otherwise, it would recover twice the same excess creditable tax. Again,
nowhere is it even suggested that When a corporation overpays its income tax liability as adjusted at the close of the
taxable year, it has two options: (1) to be refunded or issued a tax credit certificate, or
(2) to carry over such overpayment to the succeeding taxable quarters to be applied as
4
tax credit against income tax due.1 Once the carryover option is taken, it becomes
the choice of refund is irrevocable. For one thing, it was not the choice taken by
irrevocable such that the taxpayer cannot later on change its mind in order to claim a
the taxpayer. For another, the irrevocability rule had not yet been provided.
cash refund or the issuance of a tax credit certificate of the very same amount of
Same; Same; Irrevocability Rule; Insisting upon the irrevocability of the option for
overpayment or excess income tax credit.2
refund, even though the taxpayer subsequently changed its mind by resorting to automatic tax
Does the irrevocability rule apply exclusively to the carryover option? Such is the
credit, is not only contrary to the apparent intention of the lawmakers but is also clearly
novel issue presented in this case.
violative of the principle of administrative feasibility.—As inPBCom, the Court also said
in PL Management that the choice of one (option) precludes the other. Similarly, the
The Facts
taxpayer in PL Management initially signified in the FAR its choice of automatic tax
credit. But unlike in PBCom, PL Management was decided under the NIRC of 1997
Before the Court is a petition for review under Rule 45 of the Rules of Court filed
when the irrevocability rule was already applicable. Thus, although PL
by petitioner University Physicians Services Inc.-Management, Inc. (UPSI-MI) which
Management was unable to actually apply its excess creditable tax in the next
seeks the reversal and setting aside of the 8 February 2013 Decision 3 of the Court of
succeeding taxable quarters due to lack of income tax liability, its subsequent
Tax Appeals (CTA) En Banc in C.T.A.-E.B. Case No. 828. Said decision of the CTA En
application for TCC was rightfully denied by the Court. The reason is the
Bancaffirmed the 5 July 2011 Decision and 8 September 2011 Resolution of the CTA
irrevocability of its choice of carryover. In other words, previous incarnations of the
Second Division (CTA Division) in CTA Case No. 7908. The CTA Division denied the
words “the options are alternative. . . the choice of one precludes the other” did not
application of UPSI-MI for tax refund or issuance of Tax Credit Certificate (TCC) of
lay down a doctrinal rule that the option of refund or tax credit certificate is
its ex-
irrevocable. Again, we need not belabor the point that insisting upon the
6
irrevocability of the option for refund, even though the taxpayer subsequently
cess unutilized creditable income tax for the taxable year 2006.
changed its mind by resorting to automatic tax credit, is not only contrary to the
apparent intention of the lawmakers but is also clearly violative of the principle of
The Antecedents
administrative feasibility.
As narrated by the CTA, the facts are uncomplicated, viz.:

PETITION for review on certiorari of a decision of the Court of Tax AppealsEn Banc.
UPSI-MI is a corporation incorporated and existing under and by virtue of
laws of the Republic of the Philippines, with business address at 1122 General
The facts are stated in the opinion of the Court.
Luna Street, Paco. Manila. Respondent on the other hand, is the duly
appointed Commissioner of Internal Revenue, with power, among others, to
Kalaw, Sy, Selva & Campos for petitioner.
act upon claims for refund or tax credit of overpaid internal revenue taxes,
Office of the Solicitor General for respondent.
with office address at the Fifth Floor, BIR National Office Building, BIR Road,
Diliman, Quezon City.
 On April 16, 2007, petitioner filed its Annual Income Tax Return (ITR) for 8
the year ended December 31, 2006 with the Revenue District No. 34 of the Total Tax Credits/Payments P6,266,569
Revenue Region No. 6 of the Bureau of Internal Revenue (BIR), reflecting an Tax Payable/(Overpayment) (P6,246,007)
income tax overpayment of 5,159,341.00, computed as follows: 4 On the same date, petitioner filed an amended Annual ITR tor the short
period fiscal year ended March 31, 2007, reflecting the removal of the amount
Sales/Revenues/Receipts/Fees P28,808,960.00
of the instant claim in the ‘‘Prior Year’s Excess Credit.” Thus, the amount
Less: Cost of Sales/Services 23,834,605.00 thereof was changed from P5,159,341 to P2,231,507.
Gross Income from Operation P4,974,355.00 On October 10, 2008, petitioner filed with the respondent’s office, a claim
Add: Non-Operating & Other Income _____5,375.00 for refund and/or issuance of a Tax Credit Certificate (TCC) in the amount of
Total Gross Income P4,979,730.00 P2,927,834.00, representing the alleged excess and unutilized creditable
Less: Deductions P4,979,730.00 withholding taxes for 2006.
Taxable Income - In view of the fact that respondent has not acted upon the foregoing claim
for refund/tax credit, petitioner filed with a Petition for Review on April 14,
Tax Rate (except MCIT Rate) 35% 2009 before the Court in Division.
Income Tax -
Minimum Corporate Income Tax (MCIT) P99,595.00
The Ruling of the CTA’s Division

7
After trial, the CTA Division denied the petition for review for lack of merit. It
Aggregate Income Tax Due P99,595.00
reasoned that UPSI-MI effectively exercised the carryover option under Section 76 of
Less: Tax Credits/Payments the National Internal Revenue Code (NIRC) of 1997. On motion for reconsideration,
Prior Year’s Excess Credits P2,331,102.00 UPSI-MI argued that the irrevocability rule under Section 76 of the NIRC is not
Creditable Tax Withheld for the First Three applicable for the reason that it did not carry over to the succeeding taxable period
-
Quarters the 2006 excess income tax credit. UPSI-MI added that the subject excess tax credits
Creditable Tax Withheld for were inadvertently included in its original 2007 ITR, and such mistake was rectified
the Fourth Quarter 2,972,834.00 in the amended 2007 ITR. Thus, UPSI-MI insisted that what should control is its
Total Tax Credits/Payments P5,258,936.00 election of the option “To be issued a Tax Credit Certificate” in its 2006 ITR.
Tax Payable/(Overpayment) (P5,159,341.00) The CTA Division ruled that UPSI-MI’s alleged inadvertent inclusion of the 2006
excess tax credit in the 2007 original ITR belies its own allegation that it did not carry
Subsequently, on November 14, 2007, petitioner filed an Annual ITR for over the said amount to the succeeding taxable period. The amend-
the short period fiscal year ended March 31, 2007, ref1ecting the income tax
overpayment of P5,159,341 from the previous period as “Prior Year’s Excess
Credit,” as follows:5 9
ment of the 2007 ITR cannot undo UPSI-MI’s actual exercise of the carryover option
in the original 2007 ITR, for to do so would be against the irrevocability rule. The
dispositive portion of the CTA Division’s decision reads:
 WHEREFORE, the instant Petition for Review is hereby DENIED for lack The Present Petition
of merit.6 for Review
UPSI-MI interposed the following reasons for its petition:
Aggrieved, UPSI-MI appealed before the CTA En Banc.

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY

The Ruling of the CTAEn Banc
ERRED AND DECIDED IN A MANNER NOT IN ACCORDANCE WITH
THE LAW, PREVAILING JURISPRUDENCE, AND FACTUAL MILIEU
The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the NIRC from
SURROUNDING THE CASE, WHEN IT ADOPTED THE DECISION OF
claiming a refund of its excess tax credits for the taxable year 2006. The barring effect
THE COURT OF TAX APPEALS IN DIVISION AND RULED THAT:
applies after UPSI-MI carried over its excess tax credits to the succeeding quarters of
2007, even if such carryover was allegedly done inadvertently. The court emphasized
a. Petitioner is not entitled to the refund or issuance of a Tax Credit
that the prevailing law and jurisprudence admit of no exception or qualification to
Certificate in the amount of P2,927,834.00 representing its 2006 excess
the irrevocability rule. Thus, the CTA En Banc affirmed the assailed decision and
tax credits because of the application of the “irrevocability rule” under
resolution of the CTA Division, disposing as follows:
Section 76 of the NIRC of 1997.
WHEREFORE, all the foregoing considered, the instant Petition for
b. The amendment of the original ITR for fiscal year ended 31 March
Review is hereby DENIED. The assailed Decision dated July 5, 2011 and
2007 does not take back, cancel or rescind the original option to refund
Resolution dated September 8, 2011 both rendered by the Court in Division in
through tax credit certificate based on the argument that the Petitioner
CTA Case No. 7908 are herebyAFFIRMED.
allegedly made an option to carry over the excess credits.
SO ORDERED.7

Notably, the said decision was met by a dissent from Justice Esperanza R.
Fabon-Victorino. InvokingPhilam Asset Management, Inc. v.
11
Commissioner(Philam),8 Justice Fabon-
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY
ERRED WHEN IT IGNORED THAT ON JOINT STIPULATIONS, THE
10
RESPONDENT ADMITTED THE FACT THAT PETITIONER INDICATED
Victorino took the view that the irrevocability rule applies as much to the option of
IN THE CORRESPONDING BOX ITS INTENTION TO BE ISSUED A TAX
refund or tax credit certificate. She wrote:
CREDIT CERTIFICATE REPRESENTING ITS UNUTILIZED
A contextual appreciation of the ruling [Philam] would tell us that any of
CREDITABLE WITHHOLDING TAX WITHHELD FOR THE TAXABLE
the two alternatives once chosen is irrevocable — be it for refund or
YEAR 2006 BY MARKING THE APPROPRIATE BOX.
carryover. The controlling factor for the operation of the irrevocability rule
THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY
is that the taxpayer chose an option; and once it had already done so, it
ERRED WHEN IT DECIDED ON THE ISSUE OF WHETHER OR NOT
could no longer make another one.
PETITIONER CARRIED OVER ITS 2006 EXCESS TAX CREDITS TO THE
SUCCEEDING SHORT TAXABLE PERIOD OF 2007 WHEN THE SAME
Unsatisfied with the decision of the CTA En Banc, UPSI-MI appealed before this
WAS NEVER RAISED IN THE JOINT STIPULATION OF FACTS.
Court.
 UPSI-MI faults the CTAEn Banc for banking too much on the irrevocability of Taxable Excess Creditable Income Tax Tax Balance of
Less Tax Credit
Year Withholding Due Payable Excess
the option to carry over. It contends that even the option to be refunded through the Tax (CWT) CWT
issuance of a TCC is likewise irrevocable. Taking cue from the dissent of Justice
Fabon-Victorino, UPSI-MI cites Philam in restating this Court’s pronouncement that 2005 P2,331,102.00 --- --- --- P2,231,507.00
P99,105.00 (A
“the options of a corporate taxpayer, whose total quarterly income tax payments P99,105.00
2006 P2,927,834.00 portion of the P0.00 P2,927,834.00
exceed its tax liability, are alternative in nature and the choice of one precludes the (MCIT)
excess
other.” It also cites Commissioner v. PL Management International Philippines, Inc. (PL
Management)9 that reiterated the rule that the choice of one precludes the other. Thus,
when it indicated in its 2006 Annual ITR the option “To be issued a Tax Credit 13
Certificate,” such choice precluded the other option to carry over.10
12
In other words, UPSI-MI proposes that the options of refund on one hand and
carryover on the other hand are both irrevocable by nature. Relying again on the
dissent of Justice Fabon-Victorino, UPSI-MI also points to BIR Form 1702 (Annual
In the following year, UPSI-MI changed its taxable period from calendar year to
Income Tax Return) itself which expressly states under line 31 thereof:
fiscal year ending on the last day of March. Thus, it filed on 14 November 2007 an
“If overpayment, mark one box only:
Annual ITR covering the short period from January 1 to March 31 of 2007. In the
(once the choice is made, the same is irrevocable)”
original 2007 Annual ITR, UPSI-MI opted to carry over as “Prior Year’s Excess
Credits” the total amount of P5,159,341.00 which included the 2006 unutilized

Resumé of relevant facts creditable withholding tax of P2,927,834.00. UPSI-MI amended the return by
excluding the sum of P2,927,834.00 under the line “Prior Year’s Excess Credits” which

To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding amount of amount is the subject of the refund claim.

P2,331,102.00 in excess and unutilized creditable withholding taxes. In sum, the question to be resolved is whether UPSI-MI may still be entitled to the

For the subsequent taxable year ending 31 December 2006, the total sum of refund of its 2006 excess tax credits in the amount of P2,927,834.00 when it thereafter

creditable taxes withheld on the management fees of UPSI-MI was P2,927,834.00. Per filed its income tax return (for the short period ending 31 March 2007) indicating the

its 2006 Annual Income Tax Return (ITR), UPSI-MI’s income tax due amounted to option of carryover.

P99,105.00. UPSI-MI applied its “Prior Year’s Excess Credits” of P2,331,102.00 as tax
credit against such 2006 Income Tax due, leaving a balance of P2,231,507.00 of still Our Ruling

unutilized excess creditable tax. Meanwhile, the creditable taxes withheld for the year
2006 (P2,927,834.00) remained intact and unutilized. In said 2006 Annual ITR, UPSI- We affirm the CTA.

MI chose the option “To be issued a tax credit certificate” with respect to the amount We cannot subscribe to the suggestion that the irrevocability rule enshrined in

P2,927,834.00, representing unutilized excess creditable taxes for the taxable year Section 76 of the National Internal Revenue Code (NIRC) applies to either of the

ending 31 December 2006. The figures are summarized in the table below: options of refund or carryover. Our reading of the law assumes the interpretation that
Taxable Excess Creditable Income Tax Tax Balance of the irrevocability is limited only to the option of carryover such that a taxpayer is still
Less Tax Credit
Year Withholding Due Payable Excess free to change its choice after electing a refund of its excess tax credit. But once it opts
Tax (CWT) CWT
to carry over such excess creditable tax, after electing refund or issuance of tax credit
certificate, the carryover option becomes irrevocable. Accordingly, the previous
choice of a claim for refund, even if subsequently pursued, may no longer be granted.
14
The aforementioned Section 76 of the NIRC provides:
SECTION 76. Final Adjustment Return.—Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the total taxable
income for the preceding calendar or fiscal year. If the sum of the quarterly
tax payments made during the said taxable year is not equal to the total tax
due on the entire taxable income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case
may be.
In case the corporation is entitled to a tax credit or refund of the excess
estimated quarterly income taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once
the option to carry over and apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years has been made, such
option shall be considered irrevocablefor that taxable period and no application for
cash refund or issuance of a tax credit certificate shall be allowed therefor. (Emphasis
supplied)
Under the cited law, there are two options available to the corporation whenever
it overpays its income tax for the taxable year: (1) to carry over and apply the
overpayment as tax credit against the estimated quarterly income tax liabilities of the
succeeding taxable years (also known as automatic tax credit) until fully utilized
(meaning, there is no prescriptive period); and (2) to apply for a cash refund or
issuance of a tax
15
credit certificate within the prescribed period.11 Such overpayment of income tax is
usually occasioned by the overwithholding of taxes on the income payments to the
corporate taxpayer.
The irrevocability rule is provided in the last sentence of Section 76. A
perfunctory reading of the law unmistakably discloses that the irrevocable option
referred to is the carryover option only. There appears nothing therein from which to
infer that the other choice, i.e., cash refund or tax credit certificate, is also irrevocable.
If the intention of the lawmakers was to make such option of cash refund or tax credit
certificate also irrevocable, then they would have clearly provided so.
16
In other words, the law does not prevent a taxpayer who originally opted for a
refund or tax credit certificate from shifting to the carryover of the excess creditable
taxes to the taxable quarters of the succeeding taxable years. However, in case the
taxpayer decides to shift its option to carry over, it may no longer revert to its original
choice due to the irrevocability rule. As Section 76 unequivocally provides, once the
option to carry over has been made, it shall be irrevocable. Furthermore, the
provision seems to suggest that there are no qualifications or conditions attached to
the rule on irrevocability.
Law and jurisprudence unequivocally support the view that only the option of
carryover is irrevocable.
Aside from the uncompromising last sentence of Section 76, Section 228 of the
NIRC recognizes such freedom of a taxpayer to change its option from refund to
carryover. This law affords the government a remedy in case a taxpayer, who had
previously claimed a refund or tax credit certificate (TCC) of excess creditable
withholding tax, subsequently applies such amount as automatic tax credit. The
pertinent text of Section 228 reads:
SEC. 228. Protesting of Assessment.—When the Commissioner or his duly
authorized representative finds that proper taxes should be assessed, he shall
first notify the taxpayer of his findings: Provided, however, That a
preassessment notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical
error in the computation of the tax as appearing on the face of the
return; or
 (b) When a discrepancy has been determined between the tax withheld assessment (PAN), for the reason that the discrepancy or deficiency is so glaring or
and the amount actually remitted by the withholding agent; or reasonably within the taxpayer’s knowledge such that a preliminary notice to the
taxpayer, through the issuance of a PAN, would be a superfluity.
Pertinently, paragraph (c) contemplates a double recovery by the taxpayer of an
17 overpaid income tax that arose from an overwithholding of creditable taxes. The
(c) When a taxpayer who opted to claim a refund or tax credit of excess refundable amount is the excess and unutilized creditable withholding tax.
creditable withholding taxfor a taxable period was determined to This paragraph envisages that the taxpayer hadpreviously asked
have carried over and automatically applied the same for andsuccessfully recoveredfrom the BIR its excess creditable withholding tax
amount claimed against the estimated tax liabilities for the taxable through refund or tax credit certificate; it could not be viewed any other way. If the
quarter or quarters of the succeeding taxable year; or government had already granted the refund, but the taxpayer is determined to have
(d) When the excise tax due on exciseable articles has not been paid; or automatically applied the excess creditable withholding tax against its estimated
(e) When the article locally purchased or imported by an exempt quarterly tax liabilities in the succeeding taxable year(s), the taxpayer would
person, such as, but not limited to, vehicles, capital equipment, undeservedly recover twice the same amount of excess creditable withholding tax.
machineries and spare parts, has been sold, traded or transferred to There appears, therefore, no other viable remedial recourse on the part of the
nonexempt persons. government except to assess the taxpayer for the double recovery. In this instance,
and in accordance with the above rule, the government can right away issue a FAN.
The taxpayers shall be informed in writing of the law and the facts on
If, on the other hand, an administrative claim for refund or issuance of TCC is
which the assessment is made; otherwise, the assessment shall be void. x x x
still pending but the taxpayer had in the meantime automatically carried over the
(Emphasis supplied)
excess creditable tax, it would appear not only wholly unjustified but also
tantamount to adopting an unsound policy if the government should resort to the
The provision contemplates three scenarios:
remedy of assessment.
First, on the premise that the carryover is to be sustained, there should be no
(1) Deficiency in the payment or remittance of tax to the government
more reason for the government to make an assessment for the sum (equivalent to the
(paragraphs [a], [b] and [d]);
excess creditable withholding tax) that has been justifiably returned already to the
(2) Overclaim of refund or tax credit (paragraph [c]); and
taxpayer (through automatic tax credit) and for which the government has no right to
(3) Unwarranted claim of tax exemption (paragraph [e]).
retain in the first place.

In each case, the government is deprived of the rightful amount of tax due it. The
law assures recovery of the amount through the issuance of an assessment against the
19
erring taxpayer. However, the usual two-stage process in making an assessment is
In this instance, all that the government needs to do is to deny the refund claim.
not strictly followed. Accordingly, the government may immediately proceed to the
Second, on the premise that the carryover is to be disallowed due to the pending
issuance of a final assessment notice (FAN), thus dispensing with the preliminary
application for refund, it would be more complicated and circuitous if the
government were to grant first the refund claim and then later assess the taxpayer for
the claim of automatic tax credit that was previously disallowed. Such procedure is
18
highly inefficient and expensive on the part of the government due to the costs
entailed by an assessment. It unduly hampers, instead of eases, tax administration
and unnecessarily exhausts the government’s time and resources. It defeats, rather
than promotes, administrative feasibility.12Such could not have been intended by our
lawmakers. Congress is deemed to have enacted a valid, sensible, and just law. 13
Thus, in order to place a sensible meaning to paragraph (c) of Section 228, it
should be interpreted as contemplating only that situation when an application for
refund or tax credit certificate had already been previously granted. Issuing an
assessment against the taxpayer who benefited twice because of the application of
automatic tax credit is a wholly acceptable remedy for the government.
Going back to the case wherein the application for refund or tax credit is still
pending before the BIR, but the taxpayer had in the meantime automatically carried
over its excess creditable tax in the taxable quarters of the succeeding tax-
20
able year(s), the only judicious course of action that the BIR may take is to deny the
pending claim for refund. To insist on giving due course to the refund claim only
because it was the first option taken, and consequently disallowing the automatic tax
credit, is to encourage inefficiency or to suppress administrative feasibility, as
previously explained. Otherwise put, imbuing upon the choice of refund or tax credit
certificate the character of irrevocability would bring about an irrational situation that
Congress did not intend to remedy by means of an assessment through the issuance
of a FAN without a prior PAN, as provided in paragraph (c) of Section 228. It should
be remembered that Congress’ declared national policy in passing the NIRC of 1997 is
to rationalize the internal revenue tax system of the Philippines, including tax
administration.14
Philam and PL Man-
agement cases did not
categorically declare
21
the option of refund
or TCC irrevocable.
The petitioner hinges its claim of irrevocability of the option of refund on the
statement of this Court inPhilam and PL Managementthat “the options x x x are
alternative and the choice of one precludes the other.” This also appears as the basis
of Justice Fabon-Victorino’s stance in her dissent to the majority opinion in the
assailed decision.
We do not agree.
The cases cited in the petition did not make an express declaration that the option
of cash refund or TCC, once made, is irrevocable. Neither should this be inferred
from the statement of the Court that the options are alternative and that the choice of
one precludes the other. Such statement must be understood in the light of the factual
milieu obtaining in the cases.
Philam involved two cases wherein the taxpayer failed to signify its option in the
Final Adjustment Return (FAR).
In the first case (G.R. No. 156637), the Court ruled that such failure did not mean
the outright barring of the request for a refund should one still choose this option
later on. The taxpayer did in fact file on 11 September 1998 an administrative claim
for refund of its 1997 excess creditable taxes. We sustained the refund claim in this
case.
It was different in the second case (G.R. No. 162004) because the taxpayer filled
out the portion “Prior Year’s Excess Credits” in its subsequent FAR. The court
considered the taxpayer to have constructively chosen the carryover option. It was in
this context that the court determined the taxpayer to be bound by its initial choice (of
automatic tax credit), so that it is precluded from asking for a refund of the excess
CWT. It must be so because the carryover option is irrevocable, and it cannot be
allowed to recover twice for its overpayment of tax.
22
Unlike the second case, there was no flip-flopping of choices in the first one. The
taxpayer did not indicate in its 1997 FAR the choice of carryover. Neither did it apply
automatic tax credit in subsequent income tax returns so as to be considered as
having constructively chosen the carryover option. When it later on asked for a
refund of its 1997 excess CWT, the taxpayer was expressing its option for the first
time. It must be emphasized that the Court sustained the application for refund but
without expressly declaring that such choice was irrevocable.
In either case, it is clear that the taxpayer cannot avail of both refund and
automatic tax credit at the same time. Thus, as Philamdeclared: “One cannot get a tax
refund and a tax credit at the same time for the same excess income taxes paid.” This
is the import of the Court’s pronouncement that the options under Section 76 are rule is to avoid confusion and complication that could be brought about by the flip-
alternative in nature. flopping on the options, viz.:
In declaring that “the choice of one (option) precludes the other,” the Court The evident intent of the legislature, in adding the last sentence to Section
in Philam citedPhilippine Bank of Communications v. Commissioner of Internal 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on its
Revenue (PBCom),15 a case decided under the aegis of the old NIRC of 1977 under options, and avoid confusion and complication as regards said taxpayer’s
which the irrevocability rule had not yet been established. It was in PBCom that the excess tax credit.19
Court stated for the first time that “the choice of one precludes the other.” 16However,
The current rule specifically addresses the problematic situation when a
a closer perusal ofPBCom reveals that the taxpayer had opted for an automatic tax
taxpayer, after claiming cash refund or applying for the issuance of tax credit, and
credit. Thus, it was precluded from availing of the other remedy of refund; otherwise,
during the pendency of such claim or application, automatically carries over the same
it would recover twice the same excess creditable tax. Again, nowhere is it even
excess creditable tax and applies it against the estimated quarterly income tax
suggested that the choice of refund is irrevocable. For one thing, it was not the choice
liabilities of the succeeding year. Thus, the rule not only eases tax administration but
taken by the taxpayer. For another, the irrevocability rule had not yet been provided.
also obviates double recovery of the excess creditable tax.
As in PBCom, the Court also said in PL Managementthat the choice of one (option)
Further, nothing in the contents of BIR 1702 expressly declares that the option of
precludes the other. Similarly, the
refund or TCC is irrevocable. Even on the assumption that the irrevocability also
23
applies to the option of refund, such would be an interpretation of the BIR that, as
taxpayer in PL Managementinitially signified in the FAR its choice of automatic tax
already demonstrated in the foregoing discussion, is contrary to the intent of the law.
credit. But unlike in PBCom, PL Management was decided under the NIRC of 1997
It must be stressed that such
when the irrevocability rule was already applicable. Thus, although PL
25
Managementwas unable to actually apply its excess creditable tax in the next
erroneous interpretation is not binding on the court. Philippine Bank of Communications
succeeding taxable quarters due to lack of income tax liability, its subsequent
v. CIR20 is apropos:
application for TCC was rightfully denied by the Court. The reason is the
It is widely accepted that the interpretation placed upon a statute by the
irrevocability of its choice of carryover.
executive officers, whose duty is to enforce it, is entitled to great respect by
In other words, previous incarnations of the words “the options are alternative. . .
the courts. Nevertheless, such interpretation is not conclusive and will be
the choice of one precludes the other” did not lay down a doctrinal rule that the
ignored if judicially found to be erroneous. Thus, courts will not countenance
option of refund or tax credit certificate is irrevocable.
administrative issuances that override, instead of remaining consistent and in
Again, we need not belabor the point that insisting upon the irrevocability of the
harmony with, the law they seek to apply and implement. 21
option for refund, even though the taxpayer subsequently changed its mind by
resorting to automatic tax credit, is not only contrary to the apparent intention of the
Applying the foregoing precepts to the given case, UPSI-MI is barred from
lawmakers but is also clearly violative of the principle of administrative feasibility.
recovering its excess creditable tax through refund or TCC. It is undisputed that
Prior to the NIRC of 1997, the alternative options of refund and carryover of
despite its initial option to refund its 2006 excess creditable tax, UPSI-MI
excess creditable tax had already been firmly established. However, the irrevocability
subsequently indicated in its 2007 short-period FAR that it carried over the 2006
rule was not yet in place.17 As we explained in PL Management, Congress added
excess creditable tax and applied the same against its 2007 income tax due. The CTA
24
was correct in considering UPSI-MI to have constructively chosen the option of
the last sentence of Section 76 in order to lay down the irrevocability rule. More
carryover, for which reason, the irrevocability rule forbade it to revert to its initial
recently, in Republic v. Team (Phils.) Energy Corp.,18 we said that the rationale of the
choice. It does not matter that UPSI-MI had not actually benefited from the carryover
on the ground that it did not have a tax due in its 2007 short period. Neither may it
insist that the insertion of the carryover in the 2007 FAR was by mere mistake or
inadvertence. As we previously laid down, the irrevocability rule admits of no
qualifications or conditions.
In sum, the petitioner is clearly mistaken in its view that the irrevocability rule
also applies to the option of refund or tax credit certificate. In view of the court’s
finding that it constructively chose the option of carryover, it is already
26
barred from recovering its 2006 excess creditable tax through refund or TCC even if it
was its initial choice.
However, the petitioner remains entitled to the benefit of carryover and thus may
apply the 2006 overpaid income tax as tax credit in succeeding taxable years until
fully exhausted. This is because, unlike the remedy of refund or tax credit certificate,
the option of carryover under Section 76 is not subject to any prescriptive period.
WHEREFORE, the petition is DENIED for lack of merit. The 8 February 2013
Decision of the Court of Tax Appeals in C.T.A.-E.B. Case No. 828 is
herebyAFFIRMED.
SO ORDERED.
Velasco, Jr. (Chairperson), Bersamin, Leonen and Gesmundo, JJ., concur.

Petition denied, judgment affirmed.

Notes.—A claim for tax refund or credit is similar to a tax exemption and should
be strictly construed against the taxpayer. (Coral Bay Nickel Corporation vs.
Commissioner of Internal Revenue, 793 SCRA 190 [2016))
It is settled that all presumptions are in favor of the correctness of tax
assessments. The good faith of the tax assessors and the validity of their actions are
thus presumed. (Commissioner of Internal Revenue vs. Secretary of Justice, 808 SCRA 14
[2016])

——o0o——
 G.R. No. 166387. January 19, 2009.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ENRON SUBIC POWER
CORPORATION, respondent.
Taxation; A taxpayer must be informed in writing of the legal and factual bases of the
tax assessment made against him.—It is clear from the foregoing that a taxpayer must be
informed in writing of the legal and factual bases of the tax assessment made against
him. The use of the word “shall” in these legal provisions indicates the mandatory
nature of the requirements laid down therein. We note the CTA’s findings: In [this]
case, [the CIR] merely issued a formal assessment and indicated therein the supposed
tax, surcharge, interest and compromise penalty due thereon. The Revenue Officers
of the [the CIR] in the issuance of the Final Assessment Notice did not provide Enron
with the written bases of the law and facts on which the subject assessment is based.
[The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he
failed to mention the specific provision of the Tax Code or rules and regulations
which were not complied with by Enron.
Same; The advice of tax deficiency, given by the Commissioner of Internal Revenue
(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.—The advice of tax deficiency, given by the CIR to an employee of Enron,
as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a
taxpayer. The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly
different from the requirement of what such notice must contain. Just because the CIR
issued an advice, a preliminary letter during the pre-assessment stage and a final
notice, in the order required by law, does not necessarily mean that Enron was
informed of the law and facts on which the deficiency tax assessment was made.
Same; Tax Assessment; The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand and assessment notice.—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
213cannot 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.
Same; Same; In view of the absence of a fair opportunity for Enron to be informed of the
legal and factual bases of the assessment against it, the assessment in question was void.—We
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. We reiterate our ruling in Reyes v.
Almanzor, et al., 196 SCRA 322 (1991): Verily, taxes are the lifeblood of the
Government and so should be collected without unnecessary hindrance. However,
such collection should be made in accordance with law as any arbitrariness will
negate the very reason for the Government itself.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the resolution of the Court.
The Solicitor General for petitioner.
Quiason, Makalintal, Barot, Torres & Ibarra for respondent.
RESOLUTION
CORONA, J.:
In this petition for review on certiorari under Rule 45 of the Rules of Court,
petitioner Commissioner of Internal Revenue (CIR) assails the November 24, 2004
decision1of the Court of Appeals (CA) annulling the formal assessment notice issued
by the CIR against respon-
214dent Enron Subic Power Corporation (Enron) for failure to state the legal and
factual bases for such assessment.
Enron, a domestic corporation registered with the Subic Bay Metropolitan
Authority as a freeport enterprise,2 filed its annual income tax return for the year 1996
on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of
Internal Revenue, through a preliminary five-day letter,3informed it of a proposed
assessment of an alleged P2,880,817.25 deficiency income tax. 4 Enron disputed the
proposed deficiency assessment in its first protest letter. 5
 On May 26, 1999, Enron received from the CIR a formal assessment
notice6requiring it to pay the alleged deficiency income tax of P2,880,817.25 for the
taxable year 1996. Enron protested this deficiency tax assessment. 7
Due to the non-resolution of its protest within the 180-day period, Enron filed a
petition for review in the Court of Tax Appeals (CTA). It argued that the deficiency
tax assessment disregarded the provisions of Section 228 of the National Internal
Revenue Code (NIRC), as amended,8 and Section 3.1.4 of Revenue Regulations (RR)
No. 12-999
215by not providing the legal and factual bases of the assessment. Enron likewise
questioned the substantive validity of the assessment.10
In a decision dated September 12, 2001, the CTA granted Enron’s petition and
ordered the cancellation of its deficiency tax assessment for the year 1996. The CTA
reasoned that the assessment notice sent to Enron failed to comply with the
requirements of a valid written notice under Section 228 of the NIRC and RR No. 12-
99. The CIR’s motion for reconsideration of the CTA decision was denied in a
resolution dated November 12, 2001.
The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA
held that the audit working papers did not substantially comply with Section 228 of
the NIRC and RR No. 12-99 because they failed to show the applicability of the cited
law to the facts of the assessment. The CIR filed a motion for reconsideration but this
was deemed abandoned when he filed a motion for extension to file a petition for
review in this Court.
The CIR now argues that respondent was informed of the legal and factual bases
of the deficiency assessment against it.
We adopt in toto the findings of fact of the CTA, as affirmed by the CA.
InCompagnie Financiere Sucres et Denrees v. CIR,11we held:
“We reiterate the well-established doctrine that as a matter of practice and
principle, [we] will not set aside the conclusion reached by an agency, like the CTA,
especially if affirmed by the [CA]. By the very nature of its function, it has dedicated
itself to the study and consideration of tax problems and has necessarily developed
an expertise on the subject, unless there has
216been an abuse or improvident exercise of authority on its part, which is not
present here.”
The CIR errs in insisting that the notice of assessment in question complied with
the requirements of the NIRC and RR No. 12-99.
A notice of assessment is:
“[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a
Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to
the PAN was found to be without merit. The Notice of Assessment shall inform the
[t]axpayer of this fact, and that the report of investigation submitted by the Revenue
Officer conducting the audit shall be given due course.
The formal letter of demand calling for payment of the taxpayer’s deficiency tax or
taxes shall state the fact, the law, rules and regulations or jurisprudence on which
the assessment is based, otherwise the formal letter of demand and the notice of
assessment shall be void.” (emphasis supplied)12
Section 228 of the NIRC provides that the taxpayer shall be informed in writing of
the law and the facts on which the assessment is made. Otherwise, the assessment is
void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was
enacted. Section 3.1.4 of the revenue regulation reads:
“3.1.4. Formal Letter of Demand and Assessment Notice.—The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the assessment is based, otherwise, the
formal letter of demand and assessment notice shall be void. The same shall be sent
to the taxpayer only by registered mail or by personal delivery. x x x” (emphasis
supplied)
It is clear from the foregoing that a taxpayer must be informed in writing of the
legal and factual bases of the tax assessment made against him. The use of the word
“shall” in these legal provisions
217indicates the mandatory nature of the requirements laid down therein. We note
the CTA’s findings:
“In [this] case, [the CIR] merely issued a formal assessment and indicated therein
the supposed tax, surcharge, interest and compromise penalty due thereon. The
Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did
not provide Enron with the written bases of the law and facts on which the subject
assessment is based. [The CIR] did not bother to explain how it arrived at such an
assessment. Moreso, he failed to mention the specific provision of the Tax Code or
rules and regulations which were not complied with by Enron.” 13
 Both the CTA and the CA concluded that the deficiency tax assessment merely
itemized the deductions disallowed and included these in the gross income. It also
imposed the preferential rate of 5% on some items categorized by Enron as costs. The
legal and factual bases were, however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the pre-assessment stage, the CIR advised
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 paper14allegedly 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.
assessment against it, the assessment in question was void. We reiterate our ruling
in Reyes v. Almanzor, et al.:18
“Verily, taxes are the lifeblood of the Government and so should be collected
without unnecessary hindrance. However, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for the
Government itself.”
WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision
of the Court of Appeals is AFFIRMED.
No costs.
_______________

We disagree. The advice of tax deficiency, given by the CIR to an employee of

Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a
taxpayer.15 The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax as-

218sessment is markedly different from the requirement of what such notice must
contain. Just because the CIR issued an advice, a preliminary letter during the pre-
assessment stage and a final notice, in the order required by law, does not necessarily
mean that Enron was informed of the law and facts on which the deficiency tax
assessment was made.
The law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice. Thus, such cannot be presumed.
Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would
be rendered nugatory. The alleged “factual bases” in the advice, preliminary letter
and “audit working papers” did not suffice. There was no going around the mandate
of the law that the legal and factual bases of the assessment be stated in writing in the
formal letter of demand accompanying the assessment notice.
We note that the old law merely required that the taxpayer be notified of the
assessment made by the CIR. This was changed in 1998 and the taxpayer must now
be informed not only of the law but also of the facts on which the assessment is
made.16 Such amendment is in keeping with the constitutional principle that no
person shall be deprived of property without due process.17 In view of the absence of
a fair opportunity for Enron to be informed of the legal and factual bases of the
 G.R. No. 197515. July 2, 2014.* to the taxpayer only by registered mail or by personal delivery. x x x It is clear from
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. UNITED SALVAGE the foregoing that a taxpayer must be informed in writing of the legal and factual
AND TOWAGE (PHILS.), INC., respondent. 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
Court of Tax Appeals; Jurisdiction; The Court of Tax Appeals (CTA) shall have the
therein.
power to promulgate rules and regulations for the conduct of its business, and as may be
Same; The statute of limitations on assessment and collection of national internal
needed, for the uniformity of decisions within its jurisdiction.—Under Section 8 of Republic
revenue taxes was shortened from five (5) years to three (3) years by virtue of Batas Pambansa
Act (R.A.) No. 1125, the CTA is categorically described as a court of record. As such,
(B.P.) Blg. 700.—The statute of limitations on assessment and collection of national
it shall have the power to promulgate rules and regulations for the conduct of its
internal revenue taxes was shortened from five (5) years to three (3) years by virtue
business, and as may be needed, for the uniformity of decisions within its
of Batas Pambansa Blg. 700. Thus, petitioner has three (3) years from the date of actual
jurisdiction. Moreover, as cases filed before it are litigated de novo, party-litigants
filing of the tax return to assess a national internal revenue tax or to commence court
shall prove every minute aspect of their cases. Thus, no evidentiary value can be
proceedings for the collection thereof without an assessment. However, when it
given the pieces of evidence submitted by the BIR, as the rules on documentary
validly issues an assessment within the three (3)-year period, it has another three (3)
evidence require that these documents must be formally offered before the CTA.
years within which to collect the tax due by distraint, levy, or court proceeding. The
Pertinent is Section 34, Rule 132 of the Revised Rules on Evidence which reads: SEC.
assessment of the tax is deemed made and the three (3)-year period for collection of
34.Offer of evidence.—
the assessed tax begins to run on the date the assessment notice had been released,
114
mailed or sent to the taxpayer.

1 SUPREME COURT 115

14 REPORTS ANNOTATED
VOL. 729, JULY 2, 2014 1
Commissioner of Internal Revenue
15
vs. United Salvage and Towage (Phils.),
Commissioner of Internal Revenue
Inc.
vs. United Salvage and Towage (Phils.),
The court shall consider no evidence which has not been formally offered. The Inc.
purpose for which the evidence is offered must be specified.
Same; While taxes are the lifeblood of the government, the power to tax has its limits, in
Taxation; Section 228 of the Tax Code provides that the taxpayer shall be informed in
spite of all its plenitude.—We ought to reiterate our earlier teachings that “in balancing
writing of the law and the facts on which the assessment is made.—Indeed, Section 228 of
the scales between the power of the State to tax and its inherent right to prosecute
the Tax Code provides that the taxpayer shall be informed in writing of the law and
perceived transgressors of the law on one side, and the constitutional rights of a
the facts on which the assessment is made. Otherwise, the assessment is void. To
citizen to due process of law and the equal protection of the laws on the other, the
implement the aforesaid provision, Revenue Regulation No. 12-99 was enacted by the
scales must tilt in favor of the individual, for a citizen’s right is amply protected by
BIR, of which Section 3.1.4 thereof reads: 3.1.4. Formal Letter of Demand and Assessment
the Bill of Rights under the Constitution.” Thus, while “taxes are the lifeblood of the
Notice.—The formal letter of demand and assessment notice shall be issued by the
government,” the power to tax has its limits, in spite of all its plenitude. Even as we
Commissioner or his duly authorized representative. The letter of demand calling for
concede the inevitability and indispensability of taxation, it is a requirement in all
payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules
democratic regimes that it be exercised reasonably and in accordance with the
and regulations, or jurisprudence on which the assessment is based, otherwise, the
prescribed procedure. After all, the statute of limitations on the collection of taxes
formal letter of demand and assessment notice shall be void. The same shall be sent
was also enacted to benefit and protect the taxpayers, as elucidated in the case
ofCommissioner of Internal Revenue v. Philippine Global Communication, Inc., 506 SCRA On January 29, 1998 and October 24, 2001, USTP filed administrative protests
427 (2006). against the 1994 and 1998 EWT assessments, respectively.7
On February 21, 2003, USTP appealed by way of Petition for Review before the
PETITION for review on certiorari of a decision of the Court of Tax Appeals.
Court in action (which was thereafter raffled to the CTA-Special First Division)
The facts are stated in the opinion of the Court.
alleging, among
Office of the Solicitor General for petitioner.
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Commissioner of Internal Revenue vs.
PERALTA, J.:
United Salvage and Towage (Phils.), Inc.
Before the Court is a petition for review oncertiorari under Rule 45 of the Revised
others, that the Notices of Assessment are bereft of any facts, law, rules and
Rules of Court which seeks to review, reverse and set aside the Decision 1 of the Court
regulations or jurisprudence; thus, the assessments are void and the right of the
of Tax Appeals En Banc (CTA En Banc), dated June 27, 2011, in the case
government to assess and collect deficiency taxes from it has prescribed on account of
entitledCommissioner of Internal Revenue v. United Salvage and Towage (Phils.), Inc.
the failure to issue a valid notice of assessment within the applicable period. 8
(USTP), docketed as C.T.A. EB No. 662.
During the pendency of the proceedings, USTP moved to withdraw the aforesaid
116
Petition because it availed of the benefits of the Tax Amnesty Program under
116 SUPREME COURT REPORTS
ANNOTATED Republic Act (R.A.) No. 9480.9 Having complied with all the requirements therefor,

Commissioner of Internal Revenue vs. the CTA-Special First Division partially granted the Motion to Withdraw and

United Salvage and Towage (Phils.), Inc. declared the issues on income tax, VAT and DST deficiencies closed and terminated

The facts as culled from the records: in accordance with our pronouncement in Philippine Banking Corporation v.

Respondent is engaged in the business of sub-contracting work for service Commissioner of Internal Revenue.10 Consequently, the case was submitted for decision

contractors engaged in petroleum operations in the Philippines. 2 During the taxable covering the remaining issue on deficiency EWT and WTC, respectively, for taxable

years in question, it had entered into various contracts and/or sub-contracts with years 1992, 1994 and 1998.11

several petroleum service contractors, such as Shell Philippines Exploration, B.V. and The CTA-Special First Division held that the Preliminary Assessment Notices

Alorn Production Philippines for the supply of service vessels. 3 In the course of (PANs) for deficiency EWT for taxable years 1994 and 1998 were not formally offered;

respondent’s operations, petitioner found respondent liable for deficiency income tax, hence, pursuant to Section 34, Rule 132 of the Revised Rules of Court, the Court shall

withholding tax, value-added tax (VAT) and documentary stamp tax (DST) for neither consider the same as evidence nor rule on their validity. 12 As regards the Final

taxable years 1992, 1994, 1997 and 1998.4Particularly, petitioner, through BIR officials, Assessment Notices (FANs) for deficiency EWT for taxable years 1994 and 1998, the

issued demand letters with attached assessment notices for withholding tax on CTA-Special First Division held that the same do not show the law and the facts on

compensation (WTC) and expanded withholding tax (EWT) for taxable years 1992, which the assessments were based.13Said assessments were, therefore, declared void

1994 and 1998,5detailed as follows: for failure to comply with Section 228 of the 1997 National Inter-
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nal 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 herebyGRANTED. 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 herebyCANCELLED.
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
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Commissioner of Internal Revenue vs.
United Salvage and Towage (Phils.), Inc.
CTA-Special First Division, the dispositive portion of which reads:
WHEREFORE, premises considered, the Petition isPARTLY GRANTED. The
Decision dated March 12, 2010 and the Resolution dated July 15, 2010
are AFFIRMED withMODIFICATION upholding the 1998 EWT assessment. In
addition to the basic EWT deficiency of P14,496.79, 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:
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Commissioner of Internal Revenue vs.
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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 1994 and 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
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Commissioner of Internal Revenue vs.
United Salvage and Towage (Phils.), Inc.
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
inVda. de Oñate v. Court of Appeals,33 thus:
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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;
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Commissioner of Internal Revenue vs.
United Salvage and Towage (Phils.), Inc.
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 evi-
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Commissioner of Internal Revenue vs.
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dence 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 noncompliance 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
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United Salvage and Towage (Phils.), Inc.
of assessments was not yet operative. Hence, its compliance with Revenue Regulation
No. 12-8541 was sufficient. In any
it is determined that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered
mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing
in detail, the facts and the law, rules and regulations, or jurisprudence on which the
proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer
fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be
considered in default, in which case, a formal letter of demand and assessment notice
shall be caused to be issued by the said Office, calling for payment of the taxpayer’s
deficiency tax liability, inclusive of the applicablepenalties.
x x x.
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 taxes shall state the facts, the law, rules and regulations, or jurisprudence
on which the assessment is based, otherwise, the formal letter of demand and
assessment notice shall be void (see illustration in ANNEX B hereof). The same shall
be sent to the taxpayer only by registered mail or by personal delivery. If sent by
personal delivery, the taxpayer or his duly authorized representative shall
acknowledge receipt thereof in the duplicate copy of the letter of demand, showing
the following: (a) His name; (b) signature; (c) designation and authority to act for and
in behalf of the taxpayer, if acknowledged received by a person other than the
taxpayer himself; and (d) date of receipt thereof.
41 SECTION 2. Notice of proposed assessment.—When the Commissioner or
his duly authorized representative finds that taxes should be assessed, he shall first
notify the taxpayer of his findings in the attached prescribed form as Annex “B”
hereof. The notice shall be made in writing and sent to the taxpayer at the address
indicated in his return or at his last known address as stated in his notice of change of
address. In cases where the taxpayer has agreed in writing to the pro-
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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 ofmerely notifying the taxpayer of the
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Commissioner of Internal Revenue vs.
United Salvage and Towage (Phils.), Inc.
CIR’s findings was changed in 1998 to informing the taxpayer of not only the law, but
also of the facts on which an assessment would be made; otherwise, the assessment
itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued
against the estate. On April 22, 1998, the final estate tax assessment notice, as well
as demand letter, was also issued. During those dates, RA 8424 was already in
effect. The notice required under the old law was no longer sufficient under the
new law.(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.
12-99 was 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
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Commissioner of Internal Revenue vs.
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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 1994 will show that other than a tabulation of the alleged deficiency taxes due,
no further detail regarding the assessment was provided by petitioner. Only the
resulting interest, surcharge and penalty were anchored with legal basis. 45Petitioner
should have at least attached a detailed notice of discrepancy or stated an explanation
why the amount of P48,461.76 is collectible against respondent46 and how the same
was arrived at. Any shortcuts 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.
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Commissioner of Internal Revenue vs.
United Salvage and Towage (Phils.), Inc.
We disagree. The advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a
taxpayer. The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly
different from the requirement of what such notice must contain. Just because the
CIR issued an advice, a preliminary letter during the pre-assessment stage and a
final notice, in the order required by law, does not necessarily mean that Enron was
informed of the law and facts on which the deficiency tax assessment was made.
The law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice. Thus, such cannot be presumed.
Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would
be rendered nugatory. The alleged “factual bases” in the advice, preliminary letter
and “audit working papers” did not suffice. There was no going around the mandate
of the law that the legal and factual bases of the assessment be stated in writing in the
formal letter of demand accompanying the assessment notice.
We note that the old law merely required that the taxpayer be notified of the
assessment made by the CIR. This was changed in 1998 and the taxpayer must now
be informed not only of the law but also of the facts on which the assessment is made.
Such amendment is in keeping with the constitutional principle that no person shall
be deprived of property without due process. In view of the absence of a fair
opportunity for Enron to be
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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 1994 disregarded the provisions of Section
228 of the Tax Code, as amended, as well as Section 3.1.4 of Revenue Regulations No.
12-99 by not providing the legal and factual bases of the assessment. Hence, the
formal letter of demand and the notice of assessment issued relative thereto are void.
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:
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Commissioner of Internal Revenue vs.
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x x x x.
Second, the nonretroactive 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 On the other hand, the 1998 EWT FAN reflected the following: a detailed factual
provisions of the Tax Code. While it is desirable for the government authority or account why the basic EWT is P14,496.79 and the legal basis, Section 57(B) of the 1997
administrative agency to have one immediately issued after a law is passed, the NIRC supporting findings of EWT liability of P22,437.01. Thus, the EWT FAN for
absence of the regulation does not automatically mean that the law itself would 1998 is duly issued in accordance with the law.52
become inoperative.
As to the last issue, petitioner avers that its right to collect the EWT for taxable
At the time the pre-assessment notice was issued to Reyes, RA 8424 already
year 1992 has not yet prescribed. It argues that while the final assessment notice and
stated that the taxpayer must be informed of both the law and facts on which the
demand letter on EWT for taxable year 1992 were all issued on January 9, 1996, the
assessment was based. Thus, the CIR should have required the assessment officers of
five (5)-year prescriptive period to collect was interrupted when respondent filed its
the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law.
request for reinvestigation on March 14, 1997 which was granted by petitioner on
The old regulation governing the issuance of estate tax assessment notices ran afoul
January 22, 2001 through the issuance of Tax Verification Notice No. 00165498 on
of the rule that tax regulations — old as they were — should be in harmony with,
even date.53Thus, the period for tax collection should have begun to run from the date
and not supplant or modify, the law.
of the reconsidered or modified assessment.54
It may be argued that the Tax Code provisions are not self-executory. It would be
This argument fails to persuade us.
too wide a stretch of the imagination, though, to still issue a regulation that would
133
simply require tax officials to inform the taxpayer, in any manner, of the law and the
VOL. 729, JULY 2, 2014 133
facts on which an assessment was based. That requirement is neither difficult to make
Commissioner of Internal Revenue vs.
nor its desired results hard to achieve.
United Salvage and Towage (Phils.), Inc.
Moreover, an administrative rule interpretive of a statute, and not declarative of
The statute of limitations on assessment and collection of national internal
certain rights and corresponding obligations, is given retroactive effect as of the date
revenue taxes was shortened from five (5) years to three (3) years by virtue of Batas
of the effectivity of the statute. RR 12-99 is one such rule. Being interpretive of the
Pambansa Blg. 700.55 Thus, petitioner has three (3) years from the date of actual filing
provisions of the Tax Code, even if it was issued only on September 6, 1999, this
of the tax return to assess a national internal revenue tax or to commence court
regulation was to retroact to January 1, 1998 — a date prior to the is
proceedings for the collection thereof without an assessment.56However, when it
132
validly issues an assessment within the three (3)-year period, it has another three (3)
132 SUPREME COURT REPORTS years within which to collect the tax due by distraint, levy, or court proceeding. 57 The
ANNOTATED assessment of the tax is deemed made and the three (3)-year period for collection of
Commissioner of Internal Revenue vs. the assessed tax begins to run on the date the assessment notice had been released,
United Salvage and Towage (Phils.), Inc. mailed or sent to the taxpayer.58
suance of the preliminary assessment notice and demand letter.51 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
Indubitably, the disputed assessments for taxable year 1994 should have already
the corresponding EWT and WTC for taxable year 1992.59
complied with the requirements laid down under Revenue Regulation No. 12-99.
Nevertheless, as correctly held by the CTA En Banc, the Preliminary Collection
Having failed so, the same produces no legal effect.
Letter for deficiency taxes for taxable year 1992 was only issued on February 21, 2002,
Notwithstanding the foregoing findings, we sustain the CTA En Banc’s findings
despite the fact that the FANs for the deficiency EWT and WTC for taxable year 1992
on the deficiency EWT for taxable year 1998 considering that it complies with Section
was issued as early as January 9, 1996. Clearly, five (5) long years had already lapsed,
228 of the Tax Code as well as Revenue Regulation No. 12-99, thus:
beyond the three (3)-year prescriptive period, before collection was pursued by VOL. 729, JULY 2, 2014 135
petitioner. Commissioner of Internal Revenue vs.
Further, while the request for reinvestigation was made on March 14, 1997, the United Salvage and Towage (Phils.), Inc.
same was only acted upon by petitioner on January 22, 2001, also beyond the three (3) the request for reinvestigation as a requirement for the suspension of the statute of
year statute of limitations. The Court said:
134 In the case of Republic of the Philippines v. Gancayco, taxpayer Gancayco requested
134 SUPREME COURT REPORTS for a thorough reinvestigation of the assessment against him and placed at the
ANNOTATED disposal of the Collector of Internal Revenue all the evidences he had for such
Commissioner of Internal Revenue vs. purpose; yet, the Collector ignored the request, and the records and documents were
United Salvage and Towage (Phils.), Inc. not at all examined. Considering the given facts, this Court pronounced that—
limitations reckoned from January 9, 1996, notwithstanding the lack of impediment to x x x The act of requesting a reinvestigation alone does not suspend the period.
rule upon such issue. The request should first be granted, in order to effect suspension. (Collector v. Suyoc
We cannot countenance such inaction by petitioner to the prejudice of respondent Consolidated, supra; alsoRepublic v. Ablaza, supra). Moreover, the Collector gave
pursuant to our ruling inCommissioner of Internal Revenue v. Philippine Global appellee until April 1, 1949, within which to submit his evidence, which the latter did
Communication, Inc.,60 to wit: one day before. There were no impediments on the part of the Collector to file the
The assessment, in this case, was presumably issued on 14 April 1994 since the collection case from April 1, 1949. . .
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 In Republic of the Philippines v. Acebedo, this Court similarly found that—

respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of x x x The defendant, after receiving the assessment notice of September 24, 1949,

the BIR to collect the tax due based on this assessment was when it filed its Answer in asked for a reinvestigation thereof on October 11, 1949 (Exh. “A”).There is no

CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year evidence that this request was considered or acted upon. In fact, on October 23, 1950

prescriptive period. Thus, the CIR is now prescribed from collecting the assessed the then Collector of Internal Revenue issued a warrant of distraint and levy for the

tax.61 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
Here, petitioner had ample time to make a factually and legally well-founded period for filing
assessment and implement collection pursuant thereto. Whatever examination that 136
petitioner may have conducted cannot possibly outlast the entire three (3)-year
136 SUPREME COURT REPORTS
prescriptive period provided by law to collect the assessed tax. Thus, there is no
ANNOTATED
reason to suspend the running of the statute of limitations in this case.
Commissioner of Internal Revenue vs.
Moreover, in Bank of the Philippine Islands, citing earlier jurisprudence, we held
United Salvage and Towage (Phils.), Inc.
that the request for reinvestigation should be granted or at least acted upon in due
an action for collection.[Emphasis in the original]62
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
With respect to petitioner’s argument that respondent’s act of elevating its protest
CIR must first grant
to the CTA has fortified the continuing interruption of petitioner’s prescriptive period
135
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 138
laws. On the strength of the foregoing observations, we ought to reiterate our earlier 138 SUPREME COURT REPORTS
teachings that “in balancing the scales between the power of the State to tax and its ANNOTATED
inherent right to prosecute perceived transgressors of the law on one side, and the Commissioner of Internal Revenue vs.
constitutional rights of a citizen to due process of law and the equal protection of the United Salvage and Towage (Phils.), Inc.
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 Notes.—Taxes, being burdens, are not to be presumed beyond what the
are the lifeblood of the government,” the power to tax has its limits, in spite of all its applicable statute expressly and clearly declares; While it is true that taxes are the
plenitude.65 Even as we concede the inevitability and indispensability of taxation, it is lifeblood of the government, it has been held that their assessment and collection
a requirement in all democratic regimes that it be exercised reasonably and in should be in accordance with law as any arbitrariness will negate the very reason for
accordance with the prescribed procedure.66 government itself. (Commissioner of Internal Revenue vs. Filinvest Development
After all, the statute of limitations on the collection of taxes was also enacted to Corporation, 654 SCRA 56 [2011])
benefit and protect the taxpayers, as The charter of the Court of Tax Appeals (CTA) expressly provides that if the
137 Commissioner fails to decide within “a specific period” required by law, such
VOL. 729, JULY 2, 2014 137 “inaction shall be deemed a denial” of the application for tax refund or credit.
Commissioner of Internal Revenue vs. (Applied Food Ingredients Company, Inc. vs. Commissioner of Internal Revenue, 709 SCRA
United Salvage and Towage (Phils.), Inc. 164 [2013])
elucidated in the case ofPhilippine Global Communication, Inc.,67 thus:
x x x The report submitted by the tax commission clearly states that these ——o0o—–

provisions on prescription should be enacted to benefit and protect taxpayers:

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

Petition denied, judgment affirmed.

G.R. No. 157064. August 7, 2006.*
BARCELON, ROXAS SECURITIES, INC. (now known as UBP Securities, Inc.),
petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, respondent.
Appeals; Factual findings of the Court of Appeals are binding on the Supreme Court;
Exceptions.—While the general rule is that factual findings of the Court of Appeals are
binding on this Court, there are, however, recognized exceptions thereto, such as
when the findings are contrary to those of the trial court or, in this case, the CTA.
Instances when the findings of fact of the trial court and/or Court of Appeals may be
reviewed by the Supreme Court are (1) when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) where there is a grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of fact are conflicting; (6) when the Court of Appeals, in making its
findings, went beyond the issues of the case and the same is contrary to the
admissions of both appellant and appellee; (7) the findings of the Court of Appeals
are contrary to those of the trial court; (8) when the findings of fact are conclusions
without citation of specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondents; and (10) the finding of fact of the Court of Appeals is
premised on the supposed absence of evidence and is contradicted by the evidence
on record. (Misa v. Court of Appeals, G.R. No. 97291, 5 August 1992, 212 SCRA 217,
221-222)
Same; Court of Tax Appeals (CTA); The Supreme Court accords the findings of fact by
the Court of Tax Appeals (CTA) with the highest respect—the absence of any clear and
convincing proof to the contrary, the Supreme Court must presume that the CTA rendered a
decision which is valid in every respect.—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, 357 SCRA 441 (2001), this Court recognizes that the
Court of
127
VOL. 498, AUGUST 7, 1 1
2006 27
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
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.
Taxation; Assessment Notices; An assessment is made within the prescriptive period if
notice to this effect is released, mailed or sent by the Commissioner of Internal Revenue to the
taxpayer within said period—receipt thereof by the taxpayer within the prescriptive period is
not necessary but this rule does not dispense with the requirement that the taxpayer should
actually receive, even beyond the prescriptive period, the assessment notice.—Under Section
203 of the National Internal Revenue Code (NIRC), respondent had three (3) years
from the last day for the filing of the return to send an assessment notice to petitioner.
In the case ofCollector of Internal Revenue v. Bautista, 105 Phil. 1326 (1959), this Court
held that an assessment is made within the prescriptive period if notice to this effect
is released, mailed or sent by the CIR to the taxpayer within said period. Receipt
thereof by the taxpayer within the prescriptive period is not necessary. At this point,
it should be clarified that the rule does not dispense with the requirement that the
taxpayer should actually receive, even beyond the prescriptive period, the assessment
notice which was timely released, mailed and sent.
Same; Presumptions; While a mailed letter is deemed received by the addressee in the
ordinary course of mail, this is still merely a disputable presumption subject to contravention,
and a direct denial of the receipt thereof shifts the burden upon the party favored by the
presumption to prove that the mailed letter was indeed received by the addressee.—
In Protector’s Services, Inc. v. Court of Appeals, 330 SCRA 404 (2000), this Court ruled
that when a mail matter is sent by registered mail, there exists a presumption, set
forth under Section 3(v), Rule 131 of the Rules of Court, that it was received in the
regular course of mail. The facts to be proved in order to raise this presumption are:
(a) that the letter was properly addressed with
128
SUPREME COURT
28 REPORTS ANNOTATED
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
postage prepaid; and (b) that it was mailed. While a mailed letter is deemed
received by the addressee in the ordinary course of mail, this is still merely a
disputable presumption subject to contravention, and a direct denial of the receipt
thereof shifts the burden upon the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee.
Evidence; Presumptions;Hearsay Evidence; The presumption that entries in official
records made in the performance of his duty by a public officer or by a person in the
performance of a duty specially enjoined by law, are prima facie evidence of the facts therein
stated, must be read in accordance with the Court’s pronouncement in Africa v. Caltex (Phil.),
Inc., 16 SCRA 448 (1966), that an entrant must have personal knowledge of the facts stated
by him or such facts were acquired by him from reports made by persons under a legal duty to
submit the same.—Respondent offered the entry in the BIR record book and the
testimony of its record custodian as entries in official records in accordance with
Section 44, Rule 130 of the Rules of Court, which states that: Section 44. Entries in
official records.—Entries in official records made in the performance of his duty by a
public officer of the Philippines, or by a person in the performance of a duty specially
enjoined by law, are prima facieevidence of the facts therein stated. The foregoing rule
on evidence, however, must be read in accordance with this Court’s pronouncement
in Africa v. Caltex (Phil.), Inc., 16 SCRA 448 (1966), where it has been held that an
entrant must have personal knowledge of the facts stated by him or such facts were
acquired by him from reports made by persons under a legal duty to submit the
same. There are three requisites for admissibility under the rule just mentioned: (a)
that the entry was made by a public officer, or by another person specially enjoined
by law to do so; (b) that it was made by the public officer in the performance of his
duties, or by such other person in the performance of a duty specially enjoined by
law; and (c) that the public officer or other person had sufficient knowledge of the
facts by him stated, which must have been acquired by him personally or through
official information x x x. In this case, the entries made by Ingrid Versola were not
based on her personal knowledge as she did not attest to the fact that she personally
prepared and mailed the assessment notice. Nor was it stated in the transcript of
stenographic notes how and from whom she obtained the pertinent information.
Moreover, she did not attest to the fact that she acquired the reports from
129
VOL. 498, AUGUST 7, 1 60209 dated 11 July
2006 29
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
persons under a legal duty to submit the same. Hence, Rule 130, Section 44
finds no application in the present case. Thus, the evidence offered by respondent
does not qualify as an exception to the rule against hearsay evidence.
Assessment Notices; While an assessment is made when sent within the prescribed
period, even if received by the taxpayer after its expiration, this rule makes it more imperative
that the release, mailing, or sending of the notice be clearly and satisfactorily proved—mere
notations made without the taxpayer’s intervention, notice, or control, without adequate
supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy of the
revenue offices, without adequate protection or defense.—Independent evidence, such as
the registry receipt of the assessment notice, or a certification from the Bureau of
Posts, could have easily been obtained. Yet respondent failed to present such
evidence. In the case of Nava v. Commissioner of Internal Revenue, 13 SCRA 104 (1965),
this Court stressed on the importance of proving the release, mailing or sending of
the notice. While we have held that an assessment is made when sent within the
prescribed period, even if received by the taxpayer after its expiration (Coll. of Int.
Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more
imperative that the release, mailing, or sending of the notice be clearly and
satisfactorily proved. Mere notations made without the taxpayer’s intervention,
notice, or control, without adequate supporting evidence, cannot suffice; otherwise,
the taxpayer would be at the mercy of the revenue offices, without adequate
protection or defense.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Macalino & Associatesfor petitioner.
Pablo M. Bastes, Jr. for respondent.
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court,
seeking to set aside the Decision of the Court of Appeals in CA-G.R. SP No.
130
130 SUPREME COURT REPORTS
ANNOTATED
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
2002,1 ordering the petitioner to pay the Government the amount of P826,698.31 as
deficiency income tax for the year 1987 plus 25% surcharge and 20% interestper
annum. The Court of Appeals, in its assailed Decision, reversed the Decision of the
Court of Tax Appeals (CTA) dated 17 May 20002 in C.T.A. Case No. 5662.
Petitioner Barcelon, Roxas Securities Inc. (now known as UBP Securities, Inc.) is a
corporation engaged in the trading of securities. On 14 April 1988, petitioner filed its
Annual Income Tax Return for taxable year 1987. After an audit investigation
conducted by the Bureau of Internal Revenue (BIR), respondent Commissioner of
Internal Revenue (CIR) issued an assessment for deficiency income tax in the amount
of P826,698.31 arising from the disallowance of the item on salaries, bonuses and
allowances in the amount of P1,219,093,93 as part of the deductible business expense
since petitioner failed to subject the salaries, bonuses and allowances to withholding
taxes. This assessment was covered by Formal Assessment Notice No. FAN-1-87-91-
000649 dated 1 February 1991, which, respondent alleges, was sent to petitioner
through registered mail on 6 February 1991. However, petitioner denies receiving the
formal assessment notice.3
On 17 March 1992, petitioner was served with a Warrant of Distraint and/or Levy
to enforce collection of the deficiency income tax for the year 1987. Petitioner filed a
formal protest, dated 25 March 1992, against the Warrant of Distraint and/or Levy,
requesting for its cancellation. On 3 July 1998, petitioner received a letter dated 30
April 1998 from the respondent denying the protest with finality. 4
131
VOL. 498, AUGUST 7, 2006 131
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
On 31 July 1998, petitioner filed a petition for review with the CTA. After due notice
and hearing, the CTA rendered a decision in favor of petitioner on 17 May 2000. The
CTA ruled on the primary issue of prescription and found it unnecessary to decide
the issues on the validity and propriety of the assessment. It maintained that while a
mailed letter is deemed received by the addressee in the course of mail, this is merely
a disputable presumption. It reasoned that the direct denial of the petitioner shifts the
burden of proof to the respondent that the mailed letter was actually received by the
petitioner. The CTA found the BIR records submitted by the respondent immaterial,
self-serving, and therefore insufficient to prove that the assessment notice was mailed
and duly received by the petitioner.5The dispositive portion of this decision reads:
“WHEREFORE, in view of the foregoing, the 1988 deficiency tax assessment against
petitioner is hereby CANCELLED. Respondent is hereby ORDERED TO DESIST from
collecting said deficiency tax. No pronouncement as to costs.” 6
On 6 June 2000, respondent moved for reconsideration of the aforesaid decision but
was denied by the CTA in a Resolution dated 25 July 2000. Thereafter, respondent
appealed to the Court of Appeals on 31 August 2001. In reversing the CTA decision,
the Court of Appeals found the evidence presented by the respondent to be sufficient
proof that the tax assessment notice was mailed to the petitioner, therefore the legal
presumption that it was received should apply.7 Thus, the Court of Appeals ruled
that:
“WHEREFORE, the petition is hereby GRANTED. The decision dated May 17, 2000
as well as the Resolution dated July 25, 2000 are hereby REVERSED and SET ASIDE,
and a new on entered ordering the respondent to pay the amount of P826,698.31 as
defi-
132
132 SUPREME COURT REPORTS
ANNOTATED
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
ciency income tax for the year 1987 plus 25% surcharge and 20% interest per
annum from February 6, 1991 until fully paid pursuant to Sections 248 and 249 of the
Tax Code.”8
Petitioner moved for reconsideration of the said decision but the same was denied by
the Court of Appeals in its assailed Resolution dated 30 January 2003. 9
Hence, this Petition for Review on Certiorari raising the following issues:
I
WHETHER OR NOT LEGAL BASES EXIST FOR THE COURT OF APPEALS’
FINDING THAT THE COURT OF TAX APPEALS COMMITTED “GROSS ERROR IN
THE APPRECIATION OF FACTS.”
II
 WHETHER OR NOT THE COURT OF APPEALS WAS CORRECT IN In its Decision, the CTA resolved the issues raised by the parties thus:
REVERSING THE SUBJECT DECISION OF THE COURT OF TAX APPEALS. 134
134 SUPREME COURT REPORTS
III ANNOTATED
Barcelon, Roxas Securities, Inc. vs.
WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE Commissioner of Internal Revenue
TO ASSESS PETITIONER FOR ALLEGED DEFICIENCY INCOME TAX FOR 1987
Jurisprudence is replete with cases holding that if the taxpayer denies ever having
HAS PRESCRIBED.
received an assessment from the BIR, it is incumbent upon the latter to prove by
competent evidence that such notice was indeed received by the addressee. The onus
IV
probandi was shifted to respondent to prove by contrary evidence that the Petitioner

WHETHER OR NOT THE RIGHT OF THE BUREAU OF INTERNAL REVENUE received the assessment in the due course of mail. The Supreme Court has

TO COLLECT THE SUBJECT ALLEGED DEFICIENCY INCOME TAX FOR 1987 consistently held that while a mailed letter is deemed received by the addressee in the

HAS PRESCRIBED. course of mail, this is merely a disputable presumption subject to contravention and a
direct denial thereof shifts the burden to the party favored by the presumption to
V prove that the mailed letter was indeed received by the addressee (Republic vs. Court
of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs.
WHETHER OR NOT PETITIONER IS LIABLE FOR THE ALLEGED Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
DEFICIENCY INCOME TAX ASSESSMENT FOR 1987. “The facts to be proved to raise this presumption are (a) that the letter was properly
. addressed with postage prepaid, and (b) that it was mailed. Once these facts are
133 proved, the presumption is that the letter was received by the addressee as soon as it
VOL. 498, AUGUST 7, 2006 133 could have been transmitted to him in the ordinary course of the mail. But if one of
Barcelon, Roxas Securities, Inc. vs. the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on
Commissioner of Internal Revenue the Rules of Court, 1963 ed, 56-57 citingEnriquez vs. Sunlife Assurance of Canada, 41 Phil
269).”
VI
In the instant case, Respondent utterly failed to discharge this duty. No
substantial evidence was ever presented to prove that the assessment notice No.
WHETHER OR NOT THE SUBJECT ASSESSMENT IS VIOLATIVE OF THE RIGHT
FAN-1-87-91-000649 or other supposed notices subsequent thereto were in fact issued
OF PETITIONER TO DUE PROCESS.10
or sent to the taxpayer. As a matter of fact, it only submitted the BIR record book
This Court finds the instant Petition meritorious.
which allegedly contains the list of taxpayer’s names, the reference number, the year,
The core issue in this case is whether or not respondent’s right to assess
the nature of tax, the city/municipality and the amount (see Exh. “5-a” for the
petitioner’s alleged deficiency income tax is barred by prescription, the resolution of
Respondent). Purportedly, Respondent intended to show to this Court that all
which depends on reviewing the findings of fact of the Court of Appeals and the
assessments made are entered into a record book in chronological order outlining the
CTA.
details of the assessment and the taxpayer liable thereon. However, as can be gleaned
While the general rule is that factual findings of the Court of Appeals are binding
from the face of the exhibit, all entries thereon appears to be immaterial and
on this Court, there are, however, recognized exceptions 11 thereto, such as when the
impertinent in proving that the assessment notice was mailed and duly received by
findings are contrary to those of the trial court or, in this case, the CTA. 12
Petitioner. Nothing indicates therein all essential facts that could sustain the burden
of proof being shifted to the Respondent. What is essential to prove the fact of
mailing is the registry receipt issued by the Bureau of Posts or the
135
VOL. 498, AUGUST 7, 2006 135
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
Registry return card which would have been signed by the Petitioner or its
authorized representative. And if said documents cannot be located, Respondent at
the very least, should have submitted to the Court a certification issued by the Bureau
of Posts and any other pertinent document which is executed with the intervention of
the Bureau of Posts. This Court does not put much credence to the self serving
documentations made by the BIR personnel especially if they are unsupported by
substantial evidence establishing the fact of mailing. Thus:
“While we have held that an assessment is made when sent within the prescribed
period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs.
Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative
that the release, mailing or sending of the notice be clearly and satisfactorily proved.
Mere notations made without the taxpayer’s intervention, notice or control, without
adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the
mercy of the revenue offices, without adequate protection or defense.” (Nava vs.
CIR, 13 SCRA 104, January 30, 1965).
xxxx
The failure of the respondent to prove receipt of the assessment by the Petitioner
leads to the conclusion that no assessment was issued. Consequently, the
government’s right to issue an assessment for the said period has already prescribed.
(Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22,
1996).13
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 Appeals14 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
136
136 SUPREME COURT REPORTS
ANNOTATED
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
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.15 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.
Under Section 20316 of the National Internal Revenue Code (NIRC), respondent
had three (3) years from the last day for the filing of the return to send an assessment
notice to petitioner. In the case of Collector of Internal Revenue v. Bautista,17 this Court
held that an assessment is made within the prescriptive period if notice to this effect
is released, mailed or sent by the CIR to the taxpayer within said period. Receipt
thereof by the taxpayer within the prescriptive period is not necessary. At this point,
it should be clarified that the rule does not dispense with the requirement that the
taxpayer should actually receive, even beyond the prescriptive period, the assessment
notice which was timely released, mailed and sent.
In the present case, records show that petitioner filed its Annual Income Tax
Return for taxable year 1987 on 14 April 1988.18 The last day for filing by petitioner of
its return was
137
VOL. 498, AUGUST 7, 2006 137
Barcelon, Roxas Securities, Inc. vs.
Commissioner of Internal Revenue
on 15 April 1988,19 thus, giving respondent until 15 April 1991 within which to send
an assessment notice. While respondent avers that it sent the assessment notice dated
1 February 1991 on 6 February 1991, within the three (3)-year period prescribed by
law, petitioner denies having received an assessment notice from respondent.
Petitioner alleges that it came to know of the deficiency tax assessment only on 17
March 1992 when it was served with the Warrant of Distraint and Levy. 20
In Protector’s Services, Inc. v. Court of Appeals,21 this Court ruled that when a mail
matter is sent by registered mail, there exists a presumption, set forth under Section
3(v), Rule 131 of the Rules of Court,22 that it was received in the regular course of
mail. The facts to be proved in order to raise this presumption are: (a) that the letter
was properly addressed with postage prepaid; and (b) that it was mailed. While a
mailed letter is deemed received by the addressee in the ordinary course of mail, this
is still merely a disputable presumption subject to controversion, and a direct denial such other person in the performance of a duty specially enjoined by law; and (c) that
of the receipt the public officer or other person had sufficient knowledge of the facts by him stated,
138 which must have been acquired by him personally or through official information x x
138 SUPREME COURT REPORTS x.”
ANNOTATED In this case, the entries made by Ingrid Versola were not based on her personal
Barcelon, Roxas Securities, Inc. vs. knowledge as she did not attest to the fact that she personally prepared and mailed
Commissioner of Internal Revenue the assessment notice. Nor was it stated in the transcript of stenographic notes 26 how
thereof shifts the burden upon the party favored by the presumption to prove that the and from whom she obtained the pertinent information. Moreover, she did not attest
mailed letter was indeed received by the addressee.23 to the fact that she acquired the reports from persons under a legal duty to submit the
In the present case, petitioner denies receiving the assessment notice, and the same. Hence, Rule 130, Section 44 finds no application in the present case. Thus, the
respondent was unable to present substantial evidence that such notice was, indeed, evidence offered by respondent does not qualify as an exception to the rule against
mailed or sent by the respondent before the BIR’s right to assess had prescribed and hearsay evidence.
that said notice was received by the petitioner. The respondent presented the BIR Furthermore, independent evidence, such as the registry receipt of the assessment
record book where the name of the taxpayer, the kind of tax assessed, the registry notice, or a certification from the Bureau of Posts, could have easily been obtained.
receipt number and the date of mailing were noted. The BIR records custodian, Ingrid Yet respondent failed to present such evidence.
Versola, also testified that she made the entries therein. Respondent offered the entry In the case of Nava v. Commissioner of Internal Revenue,27 this Court stressed on the
in the BIR record book and the testimony of its record custodian as entries in official importance of proving the release, mailing or sending of the notice.
records in accordance with Section 44, Rule 130 of the Rules of Court, 24 which states “While we have held that an assessment is made when sent within the prescribed
that: period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs.
Section 44. Entries in official records.—Entries in official records made in the Bautista, L-12250 andL-12259, May 27, 1959), this ruling makes it the more imperative
performance of his duty by a public officer of the Philippines, or by a person in the that the release, mailing, or sending of the notice be clearly and satisfactorily proved.
performance of a duty specially enjoined by law, areprima facie evidence of the facts Mere notations made without the taxpayer’s intervention, notice, or control, without
therein stated. adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at
The foregoing rule on evidence, however, must be read in accordance with this the mercy of the revenue offices, without adequate protection or defense.”
Court’s pronouncement inAfrica v. Caltex (Phil.), Inc.,25where it has been held that an 140
entrant must have personal knowledge of the facts stated by him or such facts were 140 SUPREME COURT REPORTS
acquired by him from reports made by persons under a legal duty to submit the ANNOTATED
same. Barcelon, Roxas Securities, Inc. vs.
“There are three requisites for admissibility under the rule just mentioned: (a) that the Commissioner of Internal Revenue
entry was made by a public officer, or by another person specially enjoined by law to In the present case, the evidence offered by the respondent fails to convince this
do so; (b) that it was made by the public officer in the performance of his duties, or by Court that Formal Assessment Notice No. FAN-1-87-91-000649 was released, mailed,
139 or sent before 15 April 1991, or before the lapse of the period of limitation upon
VOL. 498, AUGUST 7, 2006 139 assessment and collection prescribed by Section 203 of the NIRC. Such evidence,
Barcelon, Roxas Securities, Inc. vs. therefore, is insufficient to give rise to the presumption that the assessment notice
Commissioner of Internal Revenue was received in the regular course of mail. Consequently, the right of the government
to assess and collect the alleged deficiency tax is barred by prescription.
 IN VIEW OF THE FOREGOING, the instant Petition is GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. SP No. 60209 dated 11 July 2002, is
hereby REVERSED and SET ASIDE, and the Decision of the Court of Tax Appeals in
C.T.A. Case No. 5662, dated 17 May 2000, cancelling the 1988 Deficiency Tax
Assessment against Barce-lon, Roxas Securitites, Inc. (now known as UPB Securities,
Inc.) for being barred by prescription, is hereby REINSTATED. No costs.
SO ORDERED.
Panganiban (C.J., Chairman), Ynares-Santiago,Austria-Martinez andCallejo, Sr.,
JJ., concur.
Petition granted, assailed decision reversed and set aside.
Notes.—Almost invariably in an ad valoremtax, as well as in income tax, estate
and gift taxes, and the value added tax, the tax paid or withheld is not deducted from
the tax base. (Bank of America NT & SA vs. Court of Appeals, 234 SCRA 302[1994])
Where the Secretary of Justice reviews, pursuant to law, a tax measure enacted by
a local government unit to determine if the officials performed their functions in
accordance with law, that is, with the prescribed procedure for the enactment of tax
ordinances and the grant of powers under the Local
141
VOL. 498, AUGUST 7, 2006 141
Heirs of Enrique Diaz vs. Virata
Government Code, the same is an act of mere supervision, not control. (Drilon vs.
Lim,235 SCRA 135 [1994])

——o0o——
G.R. No. 120935. May 21, 2009.*
LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS
REYES, in their capacities as President, Treasurer and Secretary of Adamson
Management Corporation, petitioners, vs.COURT OF APPEALS and LIWAYWAY
VINZONS-CHATO, in her capacity as Commissioner of the Bureau of Internal
Revenue, respondents.
G.R. No. 124557. May 21, 2009.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS,
COURT OF TAX APPEALS, ADAMSON MANAGEMENT CORPORATION, LUCAS
G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES,
respondents.
Taxation; Assessments; Words and Phrases; In the context in which it is used in the
National Internal Revenue Code (NIRC), an assessment is a written notice and demand made
by the Bureau of Internal Revenue (BIR) on the taxpayer for the settlement of a due tax
liability that is there definitely set and fixed—a written communication containing a
computation by a revenue officer of the tax liability of a taxpayer and giving him an
opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is
yet indefinite; A recommendation letter of the Commissioner to the Department of Justice
(DOJ) Secretary recommending the filing of a criminal complaint against a taxpayer for
fraudulent returns and tax evasion cannot be considered a formal assessment.—The first
issue is whether the Commissioner’s recommendation letter can be considered as a
formal assessment of private respondents’ tax liability. In the context in which it is
used in the NIRC, an assessment is a written notice and demand made by the BIR on
the taxpayer for the settlement of a due tax liability that is there definitely set and
fixed. A written communication containing a computation by a revenue officer of the
tax liability of a taxpayer and giving him an opportunity to contest or disprove the
BIR examiner’s findings is not an assessment since it is yet indefinite. We rule that the
recommendation letter of the Commissioner cannot be considered a
_______________
* FIRST DIVISION.
28
2 SUPREME COURT
8 REPORTS ANNOTATED
Adamson vs. Court of Apepals
formal assessment. Even a cursory perusal of the said letter would reveal three
key points: 1. It was not addressed to the taxpayers. 2. There was no demand made
on the taxpayers to pay the tax liability, nor a period for payment set therein. 3. The
letter was never mailed or sent to the taxpayers by the Commissioner. In fine, the said
recommendation letter served merely as the prima facie basis for filing criminal
informations that the taxpayers had violated Section 45 (a) and (d), and 110, in
relation to Section 100, as penalized under Section 255, and for violation of Section
253, in relation to Section 252 9(b) and (d) of the Tax Code.
Same; Same; When fraudulent tax returns are involved, a proceeding in court after the
collection of such tax may be begun without assessment; There is no need for precise
computation and formal assessment in order for criminal complaints to be filed against a tax
evader.—The law is clear. When fraudulent tax returns are involved as in the cases at
bar, a proceeding in court after the collection of such tax may be begun without
assessment.Here, the private respondents had already filed the capital gains tax
return and the VAT returns, and paid the taxes they have declared due therefrom.
Upon investigation of the examiners of the BIR, there was a preliminary finding of
gross discrepancy in the computation of the capital gains taxes due from the sale of
two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The
examiners also found that the VAT had not been paid for VAT-liable sale of services
for the third and fourth quarters of 1990. Arguably, the gross disparity in the taxes
due and the amounts actually declared by the private respondents constitutes badges
of fraud. Thus, the applicability of Ungab v. Cusi (97 SCRA 877 [1980]) is evident to
the cases at bar. In this seminal case, this Court ruled that there was no need for
precise computation and formal assessment in order for criminal complaints to be
filed against him. It quoted Merten’s Law of Federal Income Taxation, Vol. 10, Sec.
55A.05, p. 21, thus: An assessment of a deficiency is not necessary to a criminal
prosecution for willful attempt to defeat and evade the income tax. A crime is
complete when the violator has knowingly and willfully filed a fraudulent return,
with intent to evade and defeat the tax. The perpetration of the crime is grounded
upon knowledge on the part of the taxpayer that he has made an inaccurate return,
and the government’s failure to discover the error and promptly to assess has no
connections with the commission of the crime.
Same; Court of Tax Appeals; Republic Act Nos. 8424 and 9282, even as they expanded
the jurisdiction of the Court of Tax Appeals (CTA), did not change the jurisdiction of the CTA
to entertain an appeal only from a
29
 VOL. 588, MAY 21, 2009 2 Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals upheld the
9 Resolution promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in
Adamson vs. Court of Apepals
final decision or assessment of the Commissioner, or in cases where the Commissioner
has not acted within the period prescribed by the National Internal Revenue Code (NIRC).—
These laws have expanded the jurisdiction of the CTA. However, they did not change
the jurisdiction of the CTA to entertain an appeal only from a final decision or
assessment of the Commissioner, or in cases where the Commissioner has not acted
within the period prescribed by the NIRC. In the cases at bar, the Commissioner has
not issued an assessment of the tax liability of private respondents.
PETITIONS for review on certiorari of the decisions and resolution of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Abello, Concepcion, Regala & Cruz for Lucas G. Adamson, et al.
Redentor G. Liboro for petitioners.
PUNO, C.J.:
Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No.
124557.
G.R. No. 120935 involves a petition for review oncertiorari filed by petitioners
LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS
REYES (private respondents), in their respective capacities as president, treasurer and
secretary of Adamson Management Corporation (AMC) against then Commissioner
of Internal Revenue Liwayway Vinzons-Chato (COMMISSIONER), under Rule 45 of
the Revised Rules of Court. They seek to review and reverse the Decision
promulgated on March 21, 1995 and Resolution issued on July 6, 1995 of the Court of
Appeals in CA-G.R. SP No. 35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna
Falloran-Aliposa, et al.).
G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner,
assailing the Decision dated March 29, 1996 of the Court of Appeals in CA-G.R. SP
No. 35520, titled Commissioner of Internal Revenue v. Court of Tax Appeals, Adamson
Management Corporation, Lucas G. Adamson, Therese June D.
30
30 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
C.T.A. Case No. 5075 (Adamson Management Corporation, Lucas G. Adamson, Therese
Adamson and Sara de los Reyes v. Commissioner of Internal Revenue).
The facts, as culled from the findings of the appellate court, follow:
On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock
in Adamson and Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares
were valued at P7,789,995.00.1 On June 22, 1990, P159,363.21 was paid as capital gains
tax for the transaction.
On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870
common shares of stock in AAI for P17,718,360.00. AMC paid the capital gains tax of
P352,242.96.
On October 15, 1993, the Commissioner issued a “Notice of Taxpayer” to AMC,
Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, informing
them of deficiencies on their payment of capital gains tax and Value Added Tax
(VAT). The notice contained a schedule for preliminary conference.
The events preceding G.R. No. 120935 are the following:
On October 22, 1993, the Commissioner filed with the Department of Justice
(DOJ) her Affidavit of Complaint2against AMC, Lucas G. Adamson, Therese June D.
Adamson and Sara S. de los Reyes for violation of Sections 45 (a) and (d), 3 and
31
VOL. 588, MAY 21, 2009 31
Adamson vs. Court of Apepals
110,4 in relation to Section 100,5 as penalized under Section
32
32 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
255,6 and for violation of Section 253,7 in relation to Sec-
33
VOL. 588, MAY 21, 2009 33
Adamson vs. Court of Apepals
tion 252 (b) and (d) of the National Internal Revenue Code (NIRC).8
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes
filed with the DOJ a motion to suspend proceedings on the ground of prejudicial
question, pendency of a civil case with the Supreme Court, and pendency of their
letter-request for re-investigation with the Commissioner. After the preliminary
investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The Motion
for Reconsideration against the findings of probable cause was denied by the
prosecutor.
On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de
los Reyes were charged before the Regional Trial Court (RTC) of Makati, Branch 150
in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss or Suspend
the Proceedings. They invoked the grounds that there was yet no final assessment of
their tax liability, and there were still pending relevant Supreme Court and CTA
cases. Initially, the trial court denied the motion. A Motion for Reconsideration was
however filed, this time assailing the trial court’s lack of jurisdiction over the nature
of the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled
that the complaints for tax evasion filed by the Commissioner should be regarded as
a decision of the Commissioner regarding the tax liabilities of Lucas G. Adamson,
Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It
further held that the said cases cannot
34
34 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
proceed independently of the assessment case pending before the CTA, which has
jurisdiction to determine the civil and criminal tax liability of the respondents therein.
On October 10, 1994, the Commissioner filed a Petition for Review with the Court
of Appeals assailing the trial court’s dismissal of the criminal cases. She averred that
it was not a condition prerequisite that a formal assessment should first be given to
the private respondents before she may file the aforesaid criminal complaints against
them. She argued that the criminal complaints for tax evasion may proceed
independently from the assessment cases pending before the CTA.
On March 21, 1995, the Court of Appeals reversed the trial court’s decision and
reinstated the criminal complaints. The appellate court held that, in a criminal
prosecution for tax evasion, assessment of tax deficiency is not required because
the offense of tax evasion is complete or consummated when the offender has
knowingly and willfully filed a fraudulent return with intent to evade the tax. 9It
ruled that private respondents filed false and fraudulent returns with intent to
evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with
the Department of Justice, without an accompanying assessment of the tax
deficiency of private respondents, in order to commence criminal action against the
latter for tax evasion.10
Private respondents filed a Motion for Reconsideration, but the trial court denied
the motion on July 6, 1995. Thus, they filed the petition in G.R. No. 120935, raising the
following issues:
1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF
APPEALS ERRED IN APPLYING THE DOCTRINE INUNGAB V. CUSI (Nos. L-
41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.
35
VOL. 588, MAY 21, 2009 35
Adamson vs. Court of Apepals
2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE
SECOND CATEGORY OF THE OFFENSE IN SECTION 253 OF THE NIRC.
3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE
COMMISSIONER IN THE CASE AT BAR.
4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES
AS AN IMPLIED ASSESSMENT ON THE TAX LIABILITY OF THE TAXPAYER.
5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION
FOR TAX EVASION IN THE TRIAL COURT IS PREMATURE BECAUSE THERE IS
YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL INTENT TO EVADE
THE PAYMENT OF A TAX.
6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES
OF YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA 286) AND CIR V. UNION
SHIPPING CORP.(G.R. No. 66160, May 21, 1990, 185 SCRA 547) ARE APPLICABLE
TO THE CASE AT BAR.
7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION
OVER THE DISPUTE ON WHAT CONSTITUTES THE PROPER TAXES DUE FROM
THE TAXPAYER.
In parallel circumstances, the following events precededG.R. No. 124557:
On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and
Sara S. de los Reyes filed a letter request for re-investigation with the Commissioner
of the “Examiner’s Findings” earlier issued by the Bureau of Internal Revenue (BIR),
which pointed out the tax deficiencies.
 On March 15, 1994 before the Commissioner could act on their letter-request,
AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a
Petition for Review with the CTA. They assailed the Commissioner’s finding of tax
evasion against them. The Commissioner moved to dismiss the petition, on the
ground that it was premature, as she had not yet issued a formal assessment of the
tax liability of therein petitioners. On September 19, 1994, the CTA denied the Motion
to Dismiss. It considered the criminal complaint filed by the Commissioner with the
36
36 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
DOJ as an implied formal assessment, and the filing of the criminal informations with
the RTC as a denial of petitioners’ protest regarding the tax deficiency.
The Commissioner repaired to the Court of Appeals on the ground that the CTA
acted with grave abuse of discretion. She contended that, with regard to the protest
provided under Section 229 of the NIRC, there must first be a formal assessment
issued by the Commissioner, and it must be in accord with Section 6 of Revenue
Regulation No. 12-85. She maintained that she had not yet issued a formal assessment
of tax liability, and the tax deficiency amounts mentioned in her criminal complaint
with the DOJ were given only to show the difference between the tax returns filed
and the audit findings of the revenue examiner.
The Court of Appeals sustained the CTA’s denial of the Commissioner’s Motion
to Dismiss. Thus, the Commissioner filed the petition for review underG.R. No.
124557, raising the following issues:
1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED
FOR FAILURE TO COMPLY WITH THE MANDATORY REQUIREMENT OF A
CERTIFICATION UNDER OATH AGAINST FORUM SHOPPING;
2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE
CASE AT BAR CAN PROCEED WITHOUT AN ASSESSMENT;
3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT
OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED ASSESSMENT; and
4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION
TO ACT ON PRIVATE RESPONDENTS’ PETITION FOR REVIEW FILED WITH
THE SAID COURT.
The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:
1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN
ASSESSMENT (FORMAL OR OTHERWISE) OF THE
37
VOL. 588, MAY 21, 2009 37
Adamson vs. Court of Apepals
TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D.
ADAMSON AND SARA S. DE LOS REYES;
2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX
EVASION TO PROCEED AGAINST AMC, LUCAS G. ADAMSON, THERESE
JUNE D. ADAMSON AND SARA S. DE LOS REYES; and
3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO
TAKE COGNIZANCE OF BOTH THE CIVIL AND THE CRIMINAL ASPECTS OF
THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D.
ADAMSON AND SARA S. DE LOS REYES.
The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR
Commissioner Jose U. Ong authorized revenue officers to examine the books of
accounts and other accounting records of Pascor Realty and Development
Corporation (PRDC) for 1986, 1987 and 1988. This resulted in a recommendation for
the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for
the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ
against PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging
evasion of taxes in the total amount of P10,513,671.00. Private respondents filed an
Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment
and tax liability.
The Commissioner denied the urgent request for reconsideration/reinvestigation
because she had not yet issued a formal assessment.
Private respondents then elevated the Decision of the Commissioner to the CTA
on a petition for review. The Commissioner filed a Motion to Dismiss the petition on
the ground that the CTA has no jurisdiction over the subject matter of the petition, as
there was yet no formal assessment issued against the petitioners. The CTA denied
the said motion to dismiss and ordered the Commissioner to
38
38 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
file an answer within thirty (30) days. The Commissioner did not file an answer nor 40
did she move to reconsider the resolution. Instead, the Commissioner filed a petition 40 SUPREME COURT REPORTS
for review of the CTA decision with the Court of Appeals. The Court of Appeals ANNOTATED
upheld the CTA order. However, this Court reversed the Court of Appeals decision Adamson vs. Court of Apepals
and the CTA order, and ordered the dismissal of the petition. We held: the return. Section 222,15 on the other hand, specifies a period of ten years in case a
“An assessment contains not only a computation of tax liabilities, but also a fraudulent return with intent to evade was submitted or in case of failure to file a
demand for payment within a prescribed period. It also signals the time when return. Also, Section 22816of the same law states that
penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to 41
determine his remedies thereon, due process requires that it must be served on and VOL. 588, MAY 21, 2009 41
received by the taxpayer. Accordingly, an affidavit, which was executed by revenue Adamson vs. Court of Apepals
officers stating the tax liabilities of a taxpayer and attached to a criminal complaint said assessment may be protested only within thirty days from receipt thereof.
for tax evasion, cannot be deemed an assessment that can be questioned before the Necessarily, the taxpayer must be certain that a specific document constitutes an
Court of Tax Appeals. assessment. Otherwise, confusion would arise regarding the period within which to
Neither the NIRC nor the revenue regulations governing the protest of make an assessment or to protest the same, or whether interest and penalty may
assessments12provide a specific definition or form of an assessment. However, the accrue thereon.
NIRC defines the specific functions and effects of an assessment. To consider the It should also be stressed that the said document is a notice duly sent to the taxpayer.
affidavit attached to the Complaint as a proper assessment is to subvert the nature of Indeed, an assessment is deemed made only when
an assessment and to set a bad precedent that will prejudice innocent taxpayers. 42
True, as pointed out by the private respondents, an assessment informs the 42 SUPREME COURT REPORTS
taxpayer that he or she has tax liabilities. But not all documents coming from the BIR ANNOTATED
containing a computation of the tax liability can be deemed assessments. Adamson vs. Court of Apepals
To start with, an assessment must be sent to and received by a taxpayer, and must the collector of internal revenue releases, mails or sends such notice to the taxpayer. 17
demand payment of the taxes described therein within a specific period. Thus, the In the present case, the revenue officers’ Affidavit merely contained a computation of
NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer respondents’ tax liability. It did not state a demand or a period for payment. Worse, it
fails to pay the deficiency tax within the time prescribed for its payment in the notice was addressed to the justice secretary, not to the taxpayers.
of assessment. Likewise, an interest of 20 percent per annum, or such higher rate as Respondents maintain that an assessment, in relation to taxation, is simply
may be prescribed by rules and regulations, is to be collected from the date understood to mean:
prescribed for its payment until the full payment.”13 “A notice to the effect that the amount therein stated is due as tax and a
39 demand for payment thereof.”18
VOL. 588, MAY 21, 2009 39 “Fixes the liability of the taxpayer and ascertains the facts and furnishes
Adamson vs. Court of Apepals the data for the proper presentation of tax rolls.”19
The issuance of an assessment is vital in determining the period of limitation Even these definitions fail to advance private respondents’ case. That the BIR
regarding its proper issuance and the period within which to protest it. Section examiners’ Joint Affidavit attached to the Criminal Complaint contained some details
20314of the NIRC provides that internal revenue taxes must be assessed within three of the tax liabilities of private respondents does notipso facto make it an assessment.
years from the last day within which to file The purpose of the Joint Affidavit was merely to support and substantiate the
Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax 44 SUPREME COURT REPORTS
due and a demand to the private respondents for payment thereof. ANNOTATED
The fact that the Complaint itself was specifically directed and sent to the Adamson vs. Court of Apepals
Department of Justice and not to private respondents shows that the intent of the The issuance of an assessment must be distinguished from the filing of a complaint.
commissioner was to file a criminal complaint for tax evasion, not to issue an Before an assessment is issued, there is, by practice, a pre-assessment notice sent to
assessment. Although the revenue officers recommended the issuance of an the taxpayer. The taxpayer is then given a chance to submit position papers and
assessment, the commissioner opted instead to file a criminal case for tax evasion. documents to prove that the assessment is unwarranted. If the commissioner is
What private respondents received was a notice from the DOJ that a criminal case for unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing
tax evasion had been filed against them, not a notice that the Bureau of Internal the latter specifically and clearly that an assessment has been made against him or
Revenue had made an assessment. her. In contrast, the criminal charge need not go through all these. The criminal
Private respondents maintain that the filing of a criminal complaint must be charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a
preceded by an assessment. This is incorrect, because Section 222 of the NIRC criminal case had been filed against him, not that the commissioner has issued an
specifically states that in cases where a false or fraudulent return is submitted or in assessment. It must be stressed that a criminal complaint is instituted not to demand
cases of failure to file a return such as this case, proceedings in court may be payment, but to penalize the taxpayer for violation of the Tax Code.”
commenced without an assessment. Further- In the cases at bar, the Commissioner denied that she issued a formal assessment
43 of the tax liability of AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S.
VOL. 588, MAY 21, 2009 43 de los Reyes. She admits though that she wrote the recommendation
Adamson vs. Court of Apepals letter22addressed to the Secretary of the DOJ recommending the filing of criminal
more, Section 205 of the same Code clearly mandates that the civil and criminal complaints against AMC and the aforecited persons for fraudulent returns and tax
aspects of the case may be pursued simultaneously. In Ungab v. Cusi,20 petitioner evasion.
therein sought the dismissal of the criminal Complaints for being premature, since his The first issue is whether the Commissioner’s recommendation letter can be
protest to the CTA had not yet been resolved. The Court held that such protests could considered as a formal assessment of private respondents’ tax liability.
not stop or suspend the criminal action which was independent of the resolution of In the context in which it is used in the NIRC, an assessment is a written notice
the protest in the CTA. This was because the commissioner of internal revenue had, and demand made by the BIR on the taxpayer for the settlement of a due tax liability
in such tax evasion cases, discretion on whether to issue an assessment or to file a that is there definitely set and fixed. A written communication containing a
criminal case against the taxpayer or to do both. computation by a revenue officer of the tax liability of a taxpayer and giving him an
Private respondents insist that Section 222 should be read in relation to Section 255 of opportunity to contest or disprove the BIR examiner’s findings is not an assessment
the NIRC,21 which penalizes failure to file a return. They add that a tax assessment since it is yet indefinite.23
should precede a criminal indictment. We disagree. To reiterate, said Section 222 We rule that the recommendation letter of the Commissioner cannot be
states that an assessment is not necessary before a criminal charge can be filed. This is considered a formal assessment. Even a cursory perusal of the said letter would
the general rule. Private respondents failed to show that they are entitled to an reveal three key points:
exception. Moreover, the criminal charge need only be supported by a prima 45
facie showing of failure to file a required return. This fact need not be proven by an VOL. 588, MAY 21, 2009 45
assessment. Adamson vs. Court of Apepals
44 1. It was not addressed to the taxpayers.
 2. There was no demand made on the taxpayers to pay the tax liability,
nor a period for payment set therein.
3. The letter was never mailed or sent to the taxpayers by the
Commissioner.
In fine, the said recommendation letter served merely as the prima facie basis for
filing criminal informations that the taxpayers had violated Section 45 (a) and (d), and
110, in relation to Section 100, as penalized under Section 255, and for violation of
Section 253, in relation to Section 252 9(b) and (d) of the Tax Code. 24
The next issue is whether the filing of the criminal complaints against the private
respondents by the DOJ is premature for lack of a formal assessment.
Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997)
provides:
“Sec. 269. 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 after 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 collection thereof…”
The law is clear. When fraudulent tax returns are involved as in the cases at bar, a
proceeding in court after the collection of such tax may be begun without
assessment. Here, the private respondents had already filed the capital gains tax
return and the VAT returns, and paid the taxes they have declared due therefrom.
Upon investigation of the examiners of the BIR, there was a preliminary finding of
gross discrepancy in the computation of the capital gains taxes due from the sale of
two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The
examiners also found that the VAT had not been paid for VAT-liable sale of
46
46 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
services for the third and fourth quarters of 1990. Arguably, the gross disparity in the
taxes due and the amounts actually declared by the private respondents constitutes
badges of fraud.
Thus, the applicability ofUngab v. Cusi25 is evident to the cases at bar. In this
seminal case, this Court ruled that there was no need for precise computation and
formal assessment in order for criminal complaints to be filed against him. It quoted
Merten’s Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:
“An assessment of a deficiency is not necessary to a criminal prosecution for
willful attempt to defeat and evade the income tax. A crime is complete when the
violator has knowingly and willfully filed a fraudulent return, with intent to evade
and defeat the tax. The perpetration of the crime is grounded upon knowledge on the
part of the taxpayer that he has made an inaccurate return, and the government’s
failure to discover the error and promptly to assess has no connections with the
commission of the crime.”
This hoary principle still underlies Section 269 and related provisions of the
present Tax Code.
We now go to the issue of whether the CTA has no jurisdiction to take cognizance
of both the criminal and civil cases here at bar.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as
amended, the rulings of the Commissioner are appealable to the CTA, thus:
“SEC. 7. Jurisdiction.—The Court of Tax Appeals shall exercise exclusive
appellate jurisdiction to review by appeal, as herein provided—
(1) Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other laws or part of law
administered by the Bureau of Internal Revenue;
47
VOL. 588, MAY 21, 2009 47
Adamson vs. Court of Apepals
Republic Act No. 8424, titled “An Act Amending the National Internal Revenue
Code, As Amended, And For Other Purposes,” later expanded the jurisdiction of the
Commissioner and, correspondingly, that of the CTA, thus:
“SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax
Cases.—The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to review
by the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties imposed in relation thereto, or other matters arising under
this Code or other laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction
of the Court of Tax Appeals.”
The latest statute dealing with the jurisdiction of the CTA is Republic Act No.
9282.26 It provides:
“SEC. 7. Section 7 of the same Act is hereby amended to read as follows:
Sec. 7. Jurisdiction.—The CTA shall exercise:
(a) Exclusive appellate jurisdiction to review by appeal, as herein
provided:
(1) Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal
48
48 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
revenue taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action,
in which case the inaction shall be deemed a denial;
(3) Decisions, orders or resolutions of the Regional Trial Courts
in local tax cases originally decided or resolved by them in the exercise
of their original or appellate jurisdiction;
xxx
(b) Jurisdiction over cases involving criminal offenses as herein
provided:
(1) Exclusive original jurisdiction over all criminal offenses
arising from violations of the National Internal Revenue Code or Tariff
and Customs Code and other laws administered by the Bureau of
Internal Revenue or the Bureau of Customs:Provided, however, That
offenses or felonies mentioned in this paragraph where the principal
amount of taxes and fees, exclusive of charges and penalties, claimed
is less than One million pesos (P1,000,000.00) or where there is no
specified amount claimed shall be tried by the regular courts and the
jurisdiction of the CTA shall be appellate. Any provision of law or the
Rules of Court to the contrary notwithstanding, the criminal action
and the corresponding civil action for the recovery of civil liability for
taxes and penalties shall at all times be simultaneously instituted with,
and jointly determined in the same proceeding by the CTA, the filing
of the criminal action being deemed to necessarily carry with it the
filing of the civil action, and no right to reserve the filling of such civil
action separately from the criminal action will be recognized.
(2) Exclusive appellate jurisdiction in criminal offenses:
(a) Over appeals from the judgments, resolutions or
orders of the Regional Trial Courts in tax cases originally
decided by them, in their respected territorial jurisdiction.
(b) Over petitions for review of the judgments,
resolutions or orders of the Regional Trial Courts in the
exercise of their appellate jurisdiction over tax cases originally
decided by the Metropolitan Trial Courts, Municipal
49
VOL. 588, MAY 21, 2009 49
Adamson vs. Court of Apepals
Trial Courts and Municipal Circuit Trial Courts in their
respective jurisdiction.
(c) Jurisdiction over tax collection cases as herein
provided:
(1) Exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees,
charges and penalties:Provided, however, That collection cases
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos
(P1,000,000.00) shall be tried by the proper Municipal Trial
Court, Metropolitan Trial Court and Regional Trial Court.
(2) Exclusive appellate jurisdiction in tax collection cases:
(a) Over appeals from the judgments, resolutions
or orders of the Regional Trial Courts in tax collection
 cases originally decided by them, in their respective Judgment affirmed in G.R. No. 120935; while judgment in G.R. No. 124557 reversed and
territorial jurisdiction. set aside.
(b) Over petitions for review of the judgments, Notes.—Before one is prosecuted for wilful attempt to evade or defeat any tax
resolutions or orders of the Regional Trial Courts in the under Sections 253 and 255 of the Tax Code, the fact that a tax is due must first be
exercise of their appellate jurisdiction over tax proved. (Commissioner of Internal Revenue vs. Court of Appeals, 257 SCRA 200 [1996])
collection cases originally decided by the Metropolitan While tax avoidance schemes and arrangements are not prohibited, tax laws
Trial Courts, Municipal Trial Courts and Municipal cannot be circumvented in order to evade the payment of just taxes. (Commissioner of
Circuit Trial Courts, in their respective jurisdiction. Internal Revenue vs. Lincoln Philippine Life Insurance Company, Inc., 379 SCRA 423
These laws have expanded the jurisdiction of the CTA. However, they did not [2002])
change the jurisdiction of the CTA to entertain an appeal only from a final decision or ——o0o——
assessment of the Commissioner, or in cases where the Commissioner has not acted
within the period prescribed by the NIRC. In the cases at bar, the Commissioner has
not issued an assessment of the tax liability of private respondents.
Finally, we hold that contrary to private respondents’ stance, the doctrines laid
down in CIR v. Union Shipping Co. andYabes
50
50 SUPREME COURT REPORTS
ANNOTATED
Adamson vs. Court of Apepals
v. Flojo are not applicable to the cases at bar. In these earlier cases, the Commissioner
already rendered an assessment of the tax liabilities of the delinquent taxpayers, for
which reason the Court ruled that the filing of the civil suit for collection of the taxes
due was a final denial of the taxpayers’ request for reconsideration of the tax
assessment.
IN VIEW WHEREOF, premises considered, judgment is rendered:
1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21,
1995, which set aside the Regional Trial Court’s Order dated August 8, 1994,
and REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for further
proceedings before the trial court; and
2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of
the Court of Appeals dated March 29, 1996, and ORDERING the dismissal of
C.T.A. Case No. 5075.
No costs.
SO ORDERED.
Carpio, Corona, Leonardo-De Castro andBersamin, JJ., concur.
G.R. No. 135446. September 23, 2003.* Stamp Tax 44,300.00
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BANK OF THE 1982
PHILIPPINE ISLANDS, as liquidator of PARAMOUNT ACCEPTANCE TOTAL P214,950.01
CORPORATION, respondent. Deficiency Income Tax P150,707.20
Taxation; Prescription;Where there was a failure to effect a timely valid assessment, the Deficiency Percentage Tax 35,887.91
period for filing a criminal case for tax liabilities prescribed.—Since there was a failure to Deficiency Expanded

effect a timely valid assessment, the period for filing a criminal case for PAC’s tax Withholding Tax 9,836.99

liabilities had prescribed by the time petitioner instituted the criminal cases against its TOTAL P196,432.101

former officers. Thus, Poblador and Albert were correctly acquitted by the trial court. Respondent wrote to the petitioner, claiming that it was not aware of any assessment
regarding any tax deficiency owed by PAC, but that it was willing to compromise
PETITION for review on certiorari of a decision of the Court of Appeals. and pay the deficiency tax. At the same time, respondent asked for the withdrawal of
the criminal cases against Poblador and Albert. The parties agreed to settle for not
The facts are stated in the opinion of the Court. less than 30% of the basic income and documentary stamps taxes and 100% of the
The Solicitor Generalfor petitioner. basic expanded withholding tax due. Respondent paid to the petitioner a total
Padilla Law Office for respondent. amount of P119,815.13, broken down as follows:
1981
CORONA, J.: Deficiency Income Tax P 31,298.10
Deficiency Expanded
Respondent Bank of the Philippine Islands (BPI) is the liquidator of Paramount
458
Acceptance Corporation (PAC), a financing corporation which was dissolved on July
458 SUPREME COURT REPORTS
17, 1989 pursuant to the January 30, 1986 resolution of its Board of Directors and
ANNOTATED
stockholders, shortening its corporate life to March 31, 1987.
Commissioner of Internal Revenue vs. Bank of the Philippine Islands
457
Withholding Tax 1,625.01
VOL. 411, SEPTEMBER 23, 2003 457
Deficiency
Commissioner of Internal Revenue vs. Documentary
Bank of the Philippine Islands Stamp Tax __44,000.00
After the dissolution of the PAC, respondent BPI learned from the newspapers that TOTAL P 76,923.11
petitioner Commissioner of Internal Revenue (CIR) filed certain criminal cases 1982
against Horacio V. Poblador and Ramon A. Albert, former president and treasurer of Deficiency Income P 28,257.60
PAC, respectively, for willful failure to pay the corporation’s final deficiency tax Tax
assessments for the years 1981 and 1982. According to the petitioner, PAC was liable Deficiency 4,797.43
for a total amount of P411,382.11 in deficiency taxes, computed as follows: Percentage Tax
1981 Deficiency
Deficiency Income Tax P166,923.00 Expanded
Deficiency Expanded Withholding Tax ___9,836.99
Withholding Tax 3,727.01 TOTAL P 42,892.022
Deficiency Documentary
However, in spite of the payment, petitioner continued to prosecute the criminal
cases against Poblador and Albert: Criminal Cases Nos. 91-5800, 91-5801 and 91-5802,
involving the 1981 assessments, before the Regional Trial Court of Makati, Branch
150; and, Criminal Case No. 91-4007 involving the 1982 percentage tax deficiency,
pending in the Regional Trial Court of Makati, Branch 143.
Respondent, in its August 18, 1992 letter to petitioner, pointed out that the
assessments were not sent to the proper address and asked for the refund of the
P119,815.13 it paid under the compromise agreement since the criminal cases against
Poblador and Albert were not dropped as agreed upon. Petitioner did not answer the
letter and continued to prosecute the said cases.
At the trial of Criminal Case Nos. 91-5800, 5801 and 5802, the following facts were
established:
1. (a)that Paramount filed its Annual Income Tax Return for 1985 on April 2,
1986, in which it disclosed in the space provided for in the Return, that its
current address was 8th Floor, FCC Bldg., Paseo de Roxas, Makati, Metro
Manila, while its “Previous Address (if different from current year)” was
Ground Flr., DCG Building cor. De la Rosa and Legaspi St. Makati, Metro
Manila;
2. (b)that Paramount filed its Annual Income Tax Return for the three months
of 1986,i.e., up to March 31, 1986, on April 30, 1986 and indicated in the
proper space provided for in the return that its current address was “BPI
Building, Ayala Avenue, Makati, Metro Manila while its
459
VOL. 411, SEPTEMBER 23, 2003 459
Commissioner of Internal Revenue vs.
Bank of the Philippine Islands
1. “Previous address (if different from current year)” was 8th Floor, FCC
Building, Paseo de Roxas, Makati, M.M.x x x xxx xxx
2. (e)that on July 17, 1987 the SEC issued to Paramount the Certificate of Filing
of Amended Articles of Incorporation shortening the term of existence and
thereby dissolving the corporation;
3. (f)that after issuing such Certificate, the SEC sent a letter dated July 14, 1987
to the respondent, informing him that pursuant to Executive Order No.
1026 which requires a tax clearance before a corporation may be dissolved,
the SEC had dissolved Paramount as of March 31, 1986 in view of the tax
clearance certificate which the respondent had issued on November 11,
1986. The same letter further informed respondent that “[t]he principal
office of the corporation was located at 8th Flr., BPI-FB Bldg., 8753 Paseo de
Roxas, Makati, MM;
4. (g)that contrary to the testimony of prosecution witness Rolando Bumbay of
the respondent’s Collection Enforcement Division that he just could not
locate Paramount, he looked everywhere except the Makati BIR Office,
where Paramount had been filing its income tax returns, and the Litigation
Division of the BIR which would have informed him that instead of
disappearing and hiding from the BIR, Paramount even sued the
respondent in the Court of Tax Appeals for the refund of excess creditable
income taxes paid in 1986, docketed as CTA Case No. 4257. (Citations
omitted)3
In an order dated June 22, 1993, Criminal Case Nos. 91-5800 to 5802 were dismissed
by the trial court, on motion of the BIR Special Prosecutor. The motion to dismiss was
“anchored on the fact that the assessments made by the BIR on the tax deficiencies of
PAC/accused Poblador and Albert for the year 1981 have already been paid and
amicably settled, evidenced by the Letter of Deputy Commissioner Eufracio D. Santos
to Atty. Sabino Padilla, Jr. dated June 6, 1991.”4 Strangely, however, petitioner did not
move for the dismissal of Criminal Case No. 91-4007 involving the 1982 corporate
percentage tax deficiency.
On November 15, 1993, petitioner finally replied to respondent’s August 18, 1992
letter, refusing to grant a refund and denying that a compromise settlement was
reached by them. Petitioner reasoned that it could not have entered into a
compromise agreement
460
460 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
Bank of the Philippine Islands
with respondent since the criminal cases had already been filed in court, and to enter
into a compromise after the filing of the cases would have violated Section 204 of the
Tax Code. Thus, the payment of P119,815.13 could not have been accepted by the CIR
in the concept of a compromise settlement.
On December 12, 1993, respondent filed a case with the Court of Tax Appeals
(CTA) for the refund of the money it paid petitioner. The CTA, however, dismissed it
on the ground of litis pendencia. Respondent appealed to the Court of Appeals, which
ruled thatlitis pendencia was not present and ordered the CTA to commence trial on
the refund case. Thus, petitioner elevated the case to this Court via a petition for
review.
The petition is denied for being moot.
On January 28, 2000, the Regional Trial Court of Makati City, Branch 143,
rendered a decision5 in Criminal Case No. 91-4007 acquitting Poblador and Albert of
willful failure to pay the corporate percentage tax deficiency for 1982. Furthermore, a
copy of the said decision was served on petitioner by registered mail, 6 prior to the
submission of its memorandum in this case.7 Despite being furnished a copy of the
RTC decision, petitioner merely adopted its comment as its memorandum and did
not discuss the effect of Po-blador and Albert’s acquittal on the present petition.
WHEREFORE, the petition is hereby DENIED.
SO ORDERED.
Puno (Chairman),Panganiban, Sandoval-Gutierrez and Carpio-Morales,
JJ., concur.
Petition denied.
Notes.—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. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed.
(Commissioner of Internal Revenue vs. B.F. Goodrich Phils., Inc., 303 SCRA 546 [1999])
It is settled that Section 2 of Act No. 3326 governs the computation of prescription
of offenses defined and penalized by special laws. (People vs. Pacificador, 354 SCRA
310 [2001])
——o0o——

Petitioner even stated that respondent BPI may recover the amount it paid once
Poblador and Albert were acquitted in the criminal case. 8
In its decision in Criminal Case No. 91-4007, the trial court ruled that the
prosecution failed to establish that PAC was in fact liable for deficiency taxes prior to
its liquidation. Assuming argu-endo that there was a deficiency tax for which PAC
was liable, petitioners failed to make a valid assessment on it since the notice of
assessment was sent to the PAC’s old (and therefore improper) office address. PAC
already indicated its new address in its 1986 tax return filed with the BIR’s Makati
office. This notwithstanding, petitioner CIR sent the notice of assessment to PAC’s
old business
461
VOL. 411, SEPTEMBER 23, 2003 461
Commissioner of Internal Revenue vs.
Bank of the Philippine Islands
address instead of its new address, which was also BPI’s (PAC’s liquidator) office
address.
Since there was a failure to effect a timely valid assessment, the period for filing a
criminal case for PAC’s tax liabilities had prescribed by the time petitioner instituted
the criminal cases against its former officers. Thus, Poblador and Albert were
correctly acquitted by the trial court.
 G.R. No. 198677. November 26, 2014.*
assessment and collection of taxes are not promptly made, thus: Prescription in
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. BASF COATING + the assessment and in the collection of taxes is provided by the Legislature for the
INKS PHILS., INC., respondent. benefit of both the Government and the taxpayer; for the Government for the purpose
of expediting the collection of taxes, so that the agency charged with the assessment
Taxation; Statute of Limitations; Under Section 223 of the Tax Reform Act of 1997, the
and collection may not tarry too long or indefinitely to the prejudice of the interests of
running of the Statute of Limitations provided under the provisions of Sections 203 and 222 of
the Government, which needs taxes to run it; and for the taxpayer so that within a
the same Act shall be suspended when the taxpayer cannot be located in the address given by
reasonable time after filing his return, he may know the amount of the assessment he
him in the return filed upon which a tax is being assessed or collected.—It is true that, under
is required to pay, whether or not such assessment is well-founded and reasonable so
Section 223 of the Tax Reform Act of 1997, the running of the Statute of Limitations
that he may either pay the amount of the assessment or contest its validity in court
provided under the provisions of Sections 203 and 222 of the same Act shall be
x x x. It would surely be prejudicial to the interest of the taxpayer for the Government
suspended when the taxpayer cannot be located in the address given by him in the
collecting agency to unduly delay the assessment and the collection because by the
return filed upon which a tax is being assessed or collected. In addition, Section 11 of
time the collecting agency finally gets around to making the assessment or making
Revenue Regulation No. 12-85 states that, in case of change of address, the taxpayer is
the collection, the taxpayer may then have lost his papers and books to support his
required to give a written notice thereof to the Revenue District Officer or the district
claim and contest that of the Government, and what is more, the tax is in the
having jurisdiction over his former legal residence and/or place of business.
meantime accumulating interest which the taxpayer eventually has to pay.
However, this Court agrees with both the CTA Special First Division and the CTA En
Same; Assessment; To proceed heedlessly with tax collection without first establishing a
Banc in their ruling that the above mentioned provisions on the suspension of the
valid assessment is evidently violative of the cardinal principle in administrative
three-year period to assess apply only if the BIR Commissioner is not aware of the
investigations: that taxpayers should be able to present their case and adduce supporting
whereabouts of the taxpayer.
evidence.—It might not also be amiss to point out that petitioner’s issuance of theFirst
Same; Same; In a number of cases, the Supreme Court (SC) has explained that the
Notice Before Issuance of Warrant of Distraint and Levyviolated respondent’s right to due
statute of limitations on the collection of taxes primarily benefits the taxpayer.—It bears
process because no valid notice of assessment was sent to it. An invalid assessment
stressing that, in a number of cases, this Court has explained that the statute of
bears no valid fruit. The law imposes a substantive, not merely a formal, requirement.
limitations on the collection of taxes primarily benefits the taxpayer. In these cases,
To proceed heedlessly with tax collection without first establishing a valid assessment
the Court exemplified the detrimental effects that the delay in the assessment and
is evidently violative of the cardinal principle in administrative investigations: that
collection of taxes inflicts upon the taxpayers. Thus, inCommissioner of Internal Revenue
taxpayers should be able to present their case and adduce supporting evidence. In the
v. Philippine Global Communication, Inc., 506 SCRA 427 (2006), this Court echoed Justice
instant case, respondent has not properly been informed of the basis of its tax
Montemayor’s disquisition in his dissenting opinion in Collector of Internal Revenue v.
liabilities. Without complying with the unequivocal mandate of first informing the
Suyoc Consolidated Mining Company, 104 Phil. 819 (1958), regarding the potential loss
taxpayer of the government’s claim, there can be no deprivation of property, because
to the taxpayer if the
no effective protest can be made.

114
115
114 SUPREME COURT REPORTS
VOL. 743, NOVEMBER 26, 2014 115
ANNOTATED
Commissioner of Internal Revenue vs.
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc.
BASF Coating + Inks Phil., Inc.
 Constitutional Law; Due Process; It is an elementary rule enshrined in the 1987
Constitution that no person shall be deprived of property without due process of law.—It is an
elementary rule enshrined in the 1987 Constitution that no person shall be deprived
of property without due process of law. In balancing the scales between the power of
the State to tax and its inherent right to prosecute perceived transgressors of the law
on one side, and the constitutional rights of a citizen to due process of law and the
equal protection of the laws on the other, the scales must tilt in favor of the
individual, for a citizen’s right is amply protected by the Bill of Rights under the
Constitution.
PETITION for review on certiorari of the decision and resolution of the Court of Tax
Appeals En Banc.
The facts are stated in the opinion of the Court.
Office of the Solicitor General for petitioner.
Romulo, Mabanta, Buenaventura, Sayoc & Delos Angeles for respondent.
PERALTA, J.:
Before the Court is a petition for review oncertiorari assailing the Decision1 of the
Court of Tax Appeals (CTA) En Banc, dated June 16, 2011, and Resolution2 dated
September 16, 2011, in C.T.A. EB No. 664 (C.T.A. Case No. 7125).
The pertinent factual and procedural antecedents of the case are as follows:
116
116 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc.
Respondent was a corporation which was duly organized under and by virtue of
the laws of the Republic of the Philippines on August 1, 1990 with a term of existence
of fifty (50) years. Its BIR-registered address was at 101 Marcos Alvarez
Avenue, BarrioTalon, Las Piñas City. In a joint special meeting held on March 19,
2001, majority of the members of the Board of Directors and the stockholders
representing more than two-thirds (2/3) of the entire subscribed and outstanding
capital stock of herein respondent corporation, resolved to dissolve the corporation
by shortening its corporate term to March 31, 2001.3Subsequently, respondent moved
out of its address in Las Piñas City and transferred to Carmelray Industrial Park,
Canlubang, Calamba, Laguna.
On June 26, 2001, respondent submitted two (2) letters to the Bureau of Internal
Revenue (BIR) Revenue District Officer of Revenue District Office (RDO) No. 53,
Region 8, in Alabang, Muntinlupa City. The first letter, dated April 26, 2001, was a
notice of respondent’s dissolution, in compliance with the requirements of Section
52(c) of the National Internal Revenue Code.4 On the other hand, the second letter,
dated June 22, 2001, was a manifestation indicating the submission of various
documents supporting respondent’s dissolution, among which was BIR Form No.
1905, which refers to an update of information contained in its tax registration. 5
Thereafter, in a Formal Assessment Notice (FAN) dated January 17, 2003,
petitioner assessed respondent the aggregate amount of P18,671,343.14 representing
deficiencies in income tax, value added tax, withholding tax on compensation,
expanded withholding tax and documentary stamp tax, including increments, for the
taxable year 1999.6 The FAN
117
VOL. 743, NOVEMBER 26, 2014 117
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc.
was sent by registered mail on January 24, 2003 to respondent’s former address in
Las Piñas City.
On March 5, 2004, the Chief of the Collection Section of BIR Revenue Region No.
7, RDO No. 39, South Quezon City, issued a First Notice Before Issuance of Warrant
of Distraint and Levy, which was sent to the residence of one of respondent’s
directors.7
On March 19, 2004, respondent filed a protest letter citing lack of due process and
prescription as grounds.8 On April 16, 2004, respondent filed a supplemental letter of
protest.9 Subsequently, on June 14, 2004, respondent submitted a letter wherein it
attached documents to prove the defenses raised in its protest letters. 10
On January 10, 2005, after 180 days had lapsed without action on the part of
petitioner on respondent’s protest, the latter filed a Petition for Review 11 with the
CTA.
Trial on the merits ensued.
 On February 17, 2010, the CTA Special First Division promulgated its THE HONORABLE CTAEN BANC ERRED IN RULING THAT THE RIGHT
Decision,12the dispositive portion of which reads, thus: OF PETITIONER TO ASSESS HEREIN RESPONDENT FOR
WHEREFORE, the Petition for Review is herebyGRANTED. The assessments for DEFICIENCY INCOME TAX, VALUE-ADDED TAX, WITHHOLD-
deficiency income tax in the amount of P14,227,425.39, deficiency value-added tax of
119
P3,981,245.66, deficiency withholding tax on compensation of P49,977.21, deficiency
VOL. 743, NOVEMBER 26, 2014 119
expanded withholding tax of P156,261.97 and deficiency documentary stamp tax of
Commissioner of Internal Revenue vs.
P256,432.91, including increments, in the aggregate amount of P18,671,343.14 for the
BASF Coating + Inks Phil., Inc.
taxable year 1999 are herebyCANCELLED and SET ASIDE.

118 ING TAX ON COMPENSATION, EXPANDED WITHHOLDING TAX AND

118 SUPREME COURT REPORTS DOCUMENTARY STAMP TAX, FOR TAXABLE YEAR 1999 IS BARRED BY
ANNOTATED PRESCRIPTION.
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc. II
THE HONORABLE COURT OF TAX APPEALS,EN BANC, ERRED IN
RULING THAT THE FORMAL ASSESSMENT NOTICE (FAN) FOR
SO ORDERED.13 RESPONDENT’S DEFICIENCY INCOME TAX, VALUE-ADDED TAX,
WITHHOLDING TAX ON COMPENSATION, EXPANDED WITHHOLDING
TAX AND DOCUMENTARY STAMP TAX FOR TAXABLE YEAR 1999 HAS NOT
The CTA Special First Division ruled that since petitioner was actually aware of
YET BECOME FINAL, EXECUTORY AND DEMANDABLE.16
respondent’s new address, the former’s failure to send the Preliminary Assessment
Notice and FAN to the said address should not be taken against the latter.
Consequently, since there are no valid notices sent to respondent, the subsequent The petition lacks merit.
assessments against it are considered void. Petitioner contends that, insofar as respondent’s alleged deficiency taxes for the
Aggrieved by the Decision, petitioner filed a Motion for Reconsideration, but the taxable year 1999 are concerned, the running of the three-year prescriptive period to
CTA Special First Division denied it in its Resolution14 dated July 13, 2010. assess, under Sections 203 and 222 of the National Internal Revenue Act of 1997 (Tax
Petitioner then filed a Petition for Review with the CTA En Banc.15 Reform Act of 1997) was suspended when respondent failed to notify petitioner, in
On June 16, 2011, the CTA En Banc promulgated its assailed Decision denying writing, of its change of address, pursuant to the provisions of Section 223 of the same
petitioner’s Petition for Review for lack of merit. The CTA En Banc held that Act and Section 11 of BIR Revenue Regulation No. 12-85.
petitioner’s right to assess respondent for deficiency taxes for the taxable year 1999 Sections 203, 222 and 223 of the Tax Reform Act of 1997 provide, respectively:
has already prescribed and that the FAN issued to respondent never attained finality Sec. 203. Period of Limitation Upon Assessment and Collection.—Except as
because respondent did not receive it. provided in Section 222,internal revenue taxes shall be assessed within three (3)
Petitioner filed a Motion for Reconsideration, but the CTA En Banc denied it in its years after the last day prescribed by law for the filing of the return, and no
Resolution dated September 16, 2011. proceeding in court without assessment for the collection of such taxes shall be
Hence, the present petition with the following Assignment of Errors: begun after the expiration of such pe-
I
120
120 SUPREME COURT REPORTS
ANNOTATED
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc.
riod: 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. (emphasis supplied)
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
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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. 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. (emphasis supplied)
In addition, Section 11 of BIR Revenue Regulation No. 12-85 states:
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Sec. 11. Change of Address.—In case of change of address, the taxpayer must
give a written notice thereof to the Revenue District Officer or the district having
jurisdiction over his former legal residence and/or place of business, copy furnished
the Revenue District Officer having jurisdiction over his new legal residence or place
of business, the Revenue Computer Center and the Receivable Accounts Division,
BIR, National Office, Quezon City, and in case of failure to do so, any communication
referred to in these regulations previously sent to his former legal residence or
business address as appear in is tax return for the period involved shall be considered
valid and binding for purposes of the period within which to reply.
It is true that, under Section 223 of the Tax Reform Act of 1997, the running of the
Statute of Limitations provided under the provisions of Sections 203 and 222 of the
same Act shall be suspended 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. In
addition, Section 11 of Revenue Regulation No. 12-85 states that, in case of change of
address, the taxpayer is required to give a written notice thereof to the Revenue
District Officer or the district having jurisdiction over his former legal residence
and/or place of business. However, this Court agrees with both the CTA Special First
Division and the CTA En Banc in their ruling that the above mentioned provisions on
the suspension of the three-year period to assess apply only if the BIR Commissioner
is not aware of the whereabouts of the taxpayer.
In the present case, petitioner, by all indications, is well aware that respondent
had moved to its new address in Calamba, Laguna, as shown by the following
documents which form part of respondent’s records with the BIR:
1) Checklist on Income Tax/Withholding Tax/Documentary Stamp Tax/Value-
Added Tax and Other Percentage Taxes;17
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2) General Information (BIR Form No. 23-02);18
3) Report on Taxpayer’s Delinquent Account, dated June 27, 2002; 19
4) Activity Report, dated October 17, 2002;20
5) Memorandum Report of Examiner, dated June 27, 2002; 21
6) Revenue Officer’s Audit Report on Income Tax;22
7) Revenue Officer’s Audit Report on Value-Added Tax;23
8) Revenue Officer’s Audit Report on Compensation Withholding Taxes; 24
9) Revenue Officer’s Audit Report on Expanded Withholding Taxes;25
10) Revenue Officer’s Audit Report on Documentary Stamp Taxes.26
The above documents, all of which were accomplished and signed by officers of
the BIR, clearly show that respondent’s address is at Carmelray Industrial Park,
Canlubang, Calamba, Laguna.
The CTA also found that BIR officers, at various times prior to the issuance of the
subject FAN, conducted examination and investigation of respondent’s tax liabilities
for 1999 at the latter’s new address in Laguna as evidenced by the following, in
addition to the above mentioned records:
1) Letter, dated September 27, 2001, signed by Revenue Officer I Eugene R.
Garcia;27
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ANNOTATED
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2) Final Request for Presentation of Records Before Subpoena Duces Tecum, dated
March 20, 2002, signed by Revenue Officer I Eugene R. Garcia. 28
Moreover, the CTA found that, based on records, the RDO sent respondent a
letter dated April 24, 2002 informing the latter of the results of their investigation and
inviting it to an informal conference.29 Subsequently, the RDO also sent respondent
another letter dated May 30, 2002, acknowledging receipt of the latter’s reply to his
April 24, 2002 letter.30 These two letters were sent to respondent’s new address in
Laguna. Had the RDO not been informed or was not aware of respondent’s new
address, he could not have sent the said letters to the said address.
Furthermore, petitioner should have been alerted by the fact that prior to mailing
the FAN, petitioner sent to respondent’s old address a Preliminary Assessment
Notice but it was “returned to sender.” This was testified to by petitioner’s Revenue
Officer II at its Revenue District Office 39 in Quezon City.31 Yet, despite this
occurrence, petitioner still insisted in mailing the FAN to respondent’s old address.
Hence, despite the absence of a formal written notice of respondent’s change of
address, the fact remains that petitioner became aware of respondent’s new address
as shown by documents replete in its records. As a consequence, the running of the
three-year period to assess respondent was not suspended and has already
prescribed.
 It bears stressing that, in a number of cases, this Court has explained that the
statute of limitations on the collection of taxes primarily benefits the taxpayer. In
these cases, the
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Court exemplified the detrimental effects that the delay in the assessment and
collection of taxes inflicts upon the taxpayers. Thus, inCommissioner of Internal Revenue
v. Philippine Global Communication, Inc.,32 this Court echoed Justice Montemayor’s
disquisition in his dissenting opinion inCollector of Internal Revenue v. Suyoc
Consolidated Mining Company,33regarding the potential loss to the taxpayer if the
assessment and collection of taxes are not promptly made, thus:
Prescription in the assessment and in the collection of taxes is provided by the
Legislature for the benefit of both the Government and the taxpayer; for the
Government for the purpose of expediting the collection of taxes, so that the agency
charged with the assessment and collection may not tarry too long or indefinitely to
the prejudice of the interests of the Government, which needs taxes to run it; and for
the taxpayer so that within a reasonable time after filing his return, he may know the
amount of the assessment he is required to pay, whether or not such assessment is
well-founded and reasonable so that he may either pay the amount of the assessment
or contest its validity in court x x x. It would surely be prejudicial to the interest of the
taxpayer for the Government collecting agency to unduly delay the assessment and
the collection because by the time the collecting agency finally gets around to making
the assessment or making the collection, the taxpayer may then have lost his papers
and books to support his claim and contest that of the Government, and what is
more, the tax is in the meantime accumulating interest which the taxpayer eventually
has to pay.34
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ANNOTATED
Commissioner of Internal Revenue vs.
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Likewise, in Republic of the Philippines v. Ablaza,35this Court elucidated that the
prescriptive period for the filing of actions for collection of taxes is justified by the
need to protect law-abiding citizens from possible harassment. Also, in Bank of the
Philippine Islands v. Commissioner of Internal Revenue,36 it was held that the statute of
limitations on the assessment and collection of taxes is principally intended to afford
protection to the taxpayer against unreasonable investigations as the indefinite
extension of the period for assessment deprives the taxpayer of the assurance that he
will no longer be subjected to further investigation for taxes after the expiration of a
reasonable period of time. Thus, in Commissioner of Internal Revenue v. B.F. Goodrich
Phils., Inc.,37 this Court ruled that the legal provisions on prescription should be
liberally construed to protect taxpayers and that, as a corollary, the exceptions to the
rule on prescription should be strictly construed.
It might not also be amiss to point out that petitioner’s issuance of the First Notice
Before Issuance of Warrant of Distraint and Levy38 violated respondent’s right to due
process because no valid notice of assessment was sent to it. An invalid assessment
bears no valid fruit. The law imposes a substantive, not merely a formal, requirement.
To proceed heedlessly with tax collection without first establishing a valid assessment
is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. 39 In
the instant case, respondent has not properly been informed of the basis of its tax
liabilities. Without complying with the
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unequivocal mandate of first informing the taxpayer of the government’s claim,
there can be no deprivation of property, because no effective protest can be made.
It is true that taxes are the lifeblood of the government. However, in spite of all its
plenitude, the power to tax has its limits.40Thus, in Commissioner of Internal Revenue v.
Algue, Inc.,41 this Court held:
Taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself. It is therefore necessary to reconcile the apparently conflicting interests of the
authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved.
xxxx
It is said that taxes are what we pay for civilized society. Without taxes, the
government would be paralyzed for the lack of the motive power to activate and
operate it. Hence, despite the natural reluctance to surrender part of one’s hard-
earned income to taxing authorities, every person who is able to must contribute his
share in the running of the government. The government for its part is expected to
respond in the form of tangible and intangible benefits intended to improve the lives
of the people and enhance their moral and material values. This symbiotic
relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be exercised reasonably and in ac-
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ANNOTATED
Commissioner of Internal Revenue vs.
BASF Coating + Inks Phil., Inc.
cordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor. For all the awesome power of
the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate
x x x that the law has not been observed.42
It is an elementary rule enshrined in the 1987 Constitution that no person shall be
deprived of property without due process of law. In balancing the scales between the
power of the State to tax and its inherent right to prosecute perceived transgressors of
the law on one side, and the constitutional rights of a citizen to due process of law
and the equal protection of the laws on the other, the scales must tilt in favor of the
individual, for a citizen’s right is amply protected by the Bill of Rights under the
Constitution.43
As to the second assigned error, petitioner’s reliance on the provisions of Section
3.1.7 of BIR Revenue Regulation No. 12-9944 as well as on the case of Nava v.
Commissioner of Internal
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Revenue45 is misplaced, because in the said case, one of the requirements of a valid
assessment notice is that the letter or notice must be properly addressed. It is not
enough that the notice is sent by registered mail as provided under the said Revenue
Regulation. In the instant case, the FAN was sent to the wrong address. Thus, the
CTA is correct in holding that the FAN never attained finality because respondent
never received it, either actually or constructively.
WHEREFORE, the instant petition is DENIED. The Decision of the Court of Tax
Appeals En Banc, dated June 16, 2011, and its Resolution dated September 16, 2011, in
C.T.A. EB No. 664 (C.T.A. Case No. 7125), are AFFIRMED.
SO ORDERED.
Velasco, Jr. (Chairperson), Bersamin,**Villarama, Jr., and Reyes, JJ., concur.
Petition denied, judgment and resolution affirmed.
Notes.—Courts have the authority to dismiss a claim when it appears from the
pleadings or the evidence on record that the action is already barred by the statute of
limitations. (Heirs of Shomanay Paclit vs. Belisario, 674 SCRA 272 [2012])
The Supreme Court held that the taxpayer can file his administrative claim for
refund or issuance of tax credit certificate anytime within the two-year prescriptive
period. (Team Energy Corporation [formerly Mirant Pagbilao Corp.] vs. Commissioner of
Internal Revenue, 713 SCRA 104 [2014])
——o0o——
 G.R. No. 193100. December 10, 2014.* tigation or inquiry into any tax return filed in accordance with the provisions of
any tax amnesty law or decree. (Emphasis supplied) In the case at bar, it was
SAMAR-I ELECTRIC COOPERATIVE, petitioner,vs. COMMISSIONER OF petitioner’s substantial underdeclaration of withholding taxes in the amount of
INTERNAL REVENUE, respondent. P2,690,850.91 which constituted the “falsity” in the subject returns — giving
respondent the benefit of the period under Section 222 of the NIRC of 1997 to assess
Taxation; Assessment; Section 203 of the National Internal Revenue Code (NIRC) sets
the correct amount of tax “at any time within ten (10) years after the discovery of the
the three (3)-year prescriptive period to assess; Exceptions.—While petitioner is correct that
falsity, fraud or omission.”
Section 203 sets the three-year prescriptive period to assess, the following exceptions
Remedial Law; Civil Procedure; Appeals; Courts will not interfere in matters which are
are provided under Section 222 of the NIRC of 1997, viz.: SEC. 222. Exceptions as to
addressed to the sound discretion of the government agency entrusted with the regulation of
Period of Limitation of Assessment and Collection of Taxes.—(a) In the case of a false or
activities coming under its special and technical training and knowledge.—We have
fraudulent return with intent to evade tax or of failure to file a return, the tax may
consistently held that courts will not interfere in matters which are addressed to the
be assessed, or a proceeding in court for the collection of such tax may be filed
sound discretion of the government agency entrusted with the regulation of activities
without assessment, at any time within ten (10) years after the discovery of the
coming under its special and technical training and knowledge. The findings of fact
falsity, fraud or omission:Provided, That in a fraud assessment which has become
of these quasi-judicial agencies are generally accorded respect and even finality as
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil
long as they are supported by substantial evidence — in recognition of their expertise
or criminal action for the collection thereof. (b) If before the expiration of the time
on the specific matters under their consideration. In the case at bar, petitioner failed
prescribed in Section 203 for the assessment of the tax, both the Commissioner and
to proffer convincing argument and evidence that would persuade us to disturb the
the taxpayer have agreed in writing to its assessment after such time, the tax may be
factual findings of the CTA First Division, as affirmed by the CTA EB. As such, we
assessed within the period agreed upon. The period so agreed upon may be extended
cannot but affirm the finding of petitioner’s substantial underdeclaration of
by subsequent written agreement made before the expiration of the period previously
withholding taxes in the amount of P2,690,850.91 which constituted the “falsity” in
agreed upon. (c) Any internal revenue tax which has been assessed within the period
the subject returns.
of limitation as prescribed in paragraph (a) hereof may be collected by distraint or
Taxation; Assessment; In Commissioner of Internal Revenue v. Enron Subic Power
levy or by a proceeding in court within five (5) years following the assessment of the
Corporation, 576 SCRA 212(2009), the Supreme Court (SC) held that the law requires that
tax. (d) Any internal revenue tax, which has been assessed within the period agreed
the legal and factual bases of the assessment be stated in the formal letter of demand and
upon as provided in paragraph (b) hereinabove, may be collected by distraint or levy
assessment notice.—InCommissioner of Internal Revenue v. Enron Subic Power
or by a proceeding in court within the period agreed upon in writing before the
Corporation, 576 SCRA 212 (2009), we held that the law requires that the legal and
expiration of the five (5)-year period. The period so agreed upon may be extended by
factual bases of the assessment be stated in the formal letter of demand and
subsequent written agreements made before the expiration of the period previously
assessment notice, and that the alleged “factual bases” in the advice, preliminary
agreed upon. (e)Provided, however, That nothing in the immediately preceding Section
letter and “audit working papers” did not suffice.
and paragraph (a) hereof shall be construed to authorize the examination and inves-
PETITION for review on certiorari of the decision and resolution of the Court of
460
Tax Appeals En Banc.
460 SUPREME COURT REPORTS
ANNOTATED 461
Samar-I Electric Cooperative vs. VOL. 744, DECEMBER 10, 2014 461
Commissioner of Internal Revenue Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue On July 13, 1999 and April 17, 2000, petitioner filed its 1998 and 1999 income tax
The facts are stated in the opinion of the Court. returns, respectively. Petitioner filed its 1997, 1998, and 1999 Annual Information
Francisco I. Naputo for petitioner. Return of Income Tax Withheld on Compensation, Expanded and Final Withholding
Office of the Solicitor General for respondent. Taxes on February 17, 1998, February 1, 1999, and February 4, 2000, in that order.
On November 13, 2000, respondent issued a duly signed Letter of Authority
(LOA) No. 1998 00023803; covering the examination of petitioner’s books of account
VILLARAMA, JR., J.:
and other accounting records for income and withholding taxes for the period 1997 to
1999. The LOA was received by petitioner on November 14, 2000.
At bar is a petition for review on certiorari of the Decision1 of the Court of Tax
Petitioner cooperated in the audit and investigation conducted by the Special
Appeals En Banc (CTA EB) dated March 11, 2010 and its Resolution2 dated July 28,
Investigation Division of the BIR by submitting the required documents on December
2010 in C.T.A. E.B. Nos. 460 and 462 (C.T.A. Case No. 6697) affirming the May 27,
5, 2000.
2008 Decision3 and the January 19, 2009 Amended Decision4 of the CTA’s First
On October 19, 2001, respondent sent a Notice for Informal Conference which
Division, and ordering petitioner to pay respondent Commissioner of Internal
was received by petitioner in November 2001; indicating the allegedly income and
Revenue (CIR) deficiency withholding tax on compensation in the aggregate amount
withholding tax liabilities of petitioner for 1997 to 1999. Attached to the letter is a
of P2,690,850.91, plus 20% interest starting September 30, 2002, until fully paid,
summary of the report, with an explanation of the findings of the investigators.
pursuant to Section 249(c) of the National Internal Revenue Code (NIRC) of 1997.
In response, petitioner sent a letter dated November 26, 2001 to respondent
The following facts are undisputed as found by the CTA’s First Division and
maintaining its indifference to the latter’s findings and requesting details of the
adopted by the CTA EB:
assessment.
Samar-I Electric Cooperative, Inc. (Petitioner) is an electric cooperative, with
On December 13, 2001, petitioner executed a Waiver of the Defense of
principal office at Barangay Carayman, Calbayog City. It was issued a Certificate of
Prescription under the Statute of Limitations, good until March 29, 2002.
Registration by the National Electrification Administration (NEA) on February 27,
On February 27, 2002, a letter was sent by petitioner to respondent requesting a
1974 pursuant to Presidential Decree (PD) 269. Likewise, it was granted a Certificate
detailed computation of the alleged 1997, 1998 and 1999 deficiency withholding tax
of Provisional Registration under Republic Act (RA) 6938, otherwise known as the
on compensation.
Cooperative Code of the Philippines on March 16, 1993, by the Cooperative
Development Authority (CDA). 463
VOL. 744, DECEMBER 10, 2014 463
462 Samar-I Electric Cooperative vs.
462 SUPREME COURT REPORTS Commissioner of Internal Revenue
ANNOTATED
On February 28, 2002, respondent issued a Preliminary Assessment Notice
Samar-I Electric Cooperative vs.
(PAN). The PAN was received by petitioner on April 9, 2002, which was protested on
Commissioner of Internal Revenue
April 18, 2002. Respondent’s Reply dated May 27, 2002, contained the explanation of
Respondent Commissioner of Internal Revenue is a public officer authorized
the legal basis of the issuance of the questioned tax assessments.
under the National Internal Revenue Code (NIRC) to examine any taxpayer
However, on July 8, 2002, respondent dismissed petitioner’s protest and
including inter alia, the power to issue tax assessment, evaluate, and decide upon
recommended the issuance of a Final Assessment Notice.
protests relative thereto.
Consequently, on September 15, 2002, petitioner received a demand letter and
assessments notices (Final Assessment Notices) for the alleged 1997, 1998, and 1999
deficiency withholding tax in the amount of [P]3,760,225.69, as well as deficiency II. Whether or not SAMELCO-I is liable for the minimum corporate income tax
income tax covering the years 1998 to 1999 in the amount of [P]440,545.71, or in the (MCIT) for taxable years 1998 to 1999.
aggregate amount of [P]4,200,771.40. III. Whether or not SAMELCO-I is liable to pay the total deficiency expanded
Petitioner filed its protest and Supplemental Protest to the Final Assessment withholding tax of [P]3,760,225.69 for taxable years 1997 to 1999. 7
Notices on October 14, 2002 and November 4, 2002, respectively. But on the Final
Decision on Disputed Assessment issued on April 10, 2003, petitioner was still held
On the other hand, petitioner SAMELCO-I raised the following legal and factual
liable for the alleged tax liabilities.5
errors in C.T.A. E.B. No. 462, viz.:
I. The Court in Division gravely erred in holding that the 1997 and 1998
The CTA EB narrates the following succeeding events: assessments on withholding tax on compensation (received by SAMELCO-I on
On May 29, 2003, the Petition for Review was filed by SAMELCO-I with the September 15, 2002), have not prescribed even if the waiver validly executed was
Court in division. good only until March 29, 2002.
On May 27, 2008, the assailed Decision partially granting SAMELCO-I’s petition II. The Court in Division erred in holding that CIR can validly assess within the
was promulgated. ten (10)-year prescriptive period even if the notice of informal conference,
Dissatisfied, both parties sought reconsideration of the said decision. CIR filed the
465
“Motion for Partial Reconsideration (Re: Decision dated 27 May 2008[)]” on June 13,
VOL. 744, DECEMBER 10, 2014 465
2008. On the other hand, SAMELCO-I’s “Motion for Reconsideration” was filed on
Samar-I Electric Cooperative vs.
June 17, 2008.
Commissioner of Internal Revenue
464 PAN, formal letter of demand, and assessment notice mention not a word that the
464 SUPREME COURT REPORTS BIR is invoking Section 222(a) of the 1997 Tax Code [then Sec. 223, NIRC], due to
ANNOTATED alleged false withholding tax returns filed by [SAMELCO-I] as the same assertions
Samar-I Electric Cooperative vs. were mere afterthought to justify application of the
Commissioner of Internal Revenue 10-year prescriptive period to assess.
On January 19, 2009, the Court in division promulgated its Amended Decision III. The Court in Division failed to consider that CIR made no findings as to
which denied CIR’s motion and partially granted SAMELCO-I’s motion. SAMELCO-I’s filing of a false return as clearly manifested by the non-imposition of
Thereafter, CIR and SAMELCO-I filed their “Motion for Extension of Time to File 50% surcharge on the 1997, 1998 and 1999 basic withholding tax deficiency in the
Petition for Review” on February 6, 2009 and February 11, 2009, respectively. Both PAN, demand notice and even in the assessment notice other than interest charges.
motions were granted by the Court.6 IV. The Court in Division erred in not holding that given SAMELCO I’s filing of
its 1997, 1998, and 1999 withholding tax returns in good faith, and in close
consultation with the BIR personnel in Calbayog City where SAMELCO-I’s place of
The following issues were raised by the parties in their petitions for review before
business is located, the latter should no longer be imposed the incremental penalties
the CTA EB. In C.T.A. E.B. 460, herein respondent CIR raised the following grounds:
(surcharge and interest).
I. Whether or not SAMELCO-I is entitled to tax privileges accorded to members
V. The Court in Division failed to rule that since there was no substantial under
in accordance with Republic Act No. 6938, or the Cooperative Code, or to privileges
remittance of 1998 withholding tax as the basic deficiency tax per amended decision
of Presidential Decree (PD) No. 269.
is less than 30% of the computed total tax due per return, SAMELCO-I did not file a A. The Honorable CTA En Banc gravely erred in holding that respondent
false return. sufficiently complied with the due process requirements mandated by Section 228 of
VI. The Court in Division overlooked the fact that for taxable year 1999, the 1997 Tax Code in the issuance of 1997-1999
[SAMELCO-I] remitted the amount of[P]844,958.00 as withholding tax in
467
compensation instead of[P]786,702.43 as indicated in Page 8, Annex C of the CTA
VOL. 744, DECEMBER 10, 2014 467
(1stDivision) Decision.
Samar-I Electric Cooperative vs.
VII. The Court in Division erred in failing to declare as void both the formal letter
Commissioner of Internal Revenue
of demand and assessment notice on withholding tax on compensation for

466 assessments to petitioner, even if the details of discrepancies on which the

466 SUPREME COURT REPORTS
ANNOTATED
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
1997 taxable year, given its noncompliance with Section 3.1.4 of RR 12-99.8
On February 26, 2009, the CTA EB consolidated both cases. After the filing of the
respective Comments of both parties, the cases were deemed submitted for decision.
The CTA EB found that the issues and arguments raised by the parties were “mere
reiterations of what have been considered and passed upon by the Court in division
in the assailed Decision and the Amended Decision.” 9 It ruled that SAMELCO-I is
exempted in the payment of the Minimum Corporate Income Tax (MCIT); that due
process was observed in the issuance of the assessments in accordance with Section
228 of the Tax Code; and that the 1997 and 1998 assessments on deficiency
withholding tax on compensation have not prescribed. Finding no reversible error in
the Decision and the Amended Decision, the CTA EB ruled,viz.:
WHEREFORE, premises considered, We deny the petitions for lack of merit.
Accordingly, We AFFIRM the May 27, 2008 Decision and the January 19, 2009
Amended Decision promulgated by the First Division of this Court.
SO ORDERED.10
assessments were factually and legally based as required under Section 3.1.4 of
Revenue Regulations (RR) No[.] 12-99, were not found in the Formal Letter of
Demand and Final Assessment Notice (FAN) sent to petitioner, in clear violation of
the doctrine established in the case of Commissioner of Internal Revenue v. Enron Subic
Power Corporation, G.R. No. 166387, January 19, 2009, applying Section 3.1.4 of RR 12-99
in relation to Section 228 NIRC.
B. The Honorable CTA En Banc erred in holding that respondent observed due
process notwithstanding the missingAnnex “A-1” that was meant to show Details of
Discrepancies and to be attached to BIR’s Letter of Demand/Final Notice dated
September 15, 2002, which was not furnished to petitioner and worse, a file copy of
which is not even found in the BIR records as part of its Exhibit “16” and neither is
the same found in the CTA records.
C. In deciding that the 1997 and 1998 withholding tax assessments have not yet
prescribed, the Honorable CTAEn Banc failed to consider the singular significance of
the Waiver of the Defense of Prescription validly agreed upon and executed by the
parties.
D. The Honorable CTA En Banc erred in holding that respondent can validly
assess within the ten (10)-year prescriptive period even if the Notice of Informal
Conference, PAN, and Final Letter of Demand (dated September 15, 2002), mentioned
not a word as to the falsity of the returns filed by petitioner, but as
anafterthought that was raised rather belatedly only in the Answer and during the
trial.

Petitioner moved for reconsideration. In a Resolution dated July 28, 2010, the E. The Honorable CTA En Banc erred in holding as valid the 1997 deficiency

CTA EB denied the motion. Petitioner now comes to this Court raising the following withholding tax assessment being anchored on RR 2-98 (as cited in Notice of

assignment of errors: Informal Conference and PAN), as the said RR 2-98

 468 Samar-I Electric Cooperative vs.
468 SUPREME COURT REPORTS Commissioner of Internal Revenue
ANNOTATED 1998 for the taxable year 1997; and on February 1, 1999 for the year taxable 1998.
Samar-I Electric Cooperative vs. Thus, if the period prescribed under Section 203 of the NIRC of 1997 is to be followed,
Commissioner of Internal Revenue the three-year prescriptive period to assess for the taxable years 1997 and 1998 should
governs compensation income paid beginning January 1, 1998. 11 have ended on February 16, 2001 and January 31, 2002, respectively.
We disagree.
While petitioner is correct that Section 203 sets the three-year prescriptive period
We shall resolve the instant controversy by discussing the following two main
to assess, the following exceptions are provided under Section 222 of the NIRC of
issues in seriatim: whether the 1997 and 1998 assessments on withholding tax on
1997, viz.:
compensation were issued within the prescriptive period provided by law; and
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of
whether the assessments were issued in accordance with Section 228 of the NIRC of
Taxes.—
1997.
(a) In the case of a false or fraudulent return with intent to evade tax or of
On the issue of prescription, petitioner contends that the subject 1997 and 1998
failure to file a return, the tax may be assessed, or a proceeding in court for the
withholding tax assessments on compensation were issued beyond the prescriptive
collection of such tax may be filed without assessment, at any time within ten (10)
period of three years under Section 203 of the NIRC of 1997. Under this section, the
years after the discovery of the falsity, fraud or omission:Provided, That in a fraud
government is allowed a period of only three years to assess the correct tax liability of
assessment which has become final and executory, the fact of fraud shall be judicially
a taxpayer, viz.:
taken cognizance of in the civil or criminal action for the collection thereof.
SEC. 203. Period of Limitation Upon Assessment and Collection.—Except as
(b) If before the expiration of the time prescribed in Section 203 for the
provided in Section 222, internal revenue taxes shall be assessed within three (3)
assessment of the tax, both the Commissioner and the taxpayer have agreed in
years after the last day prescribed by law for the filing of the return, and no
writing to its assessment after such time, the tax may be assessed within the period
proceeding in court without assessment for the collection of such taxes shall be begun
agreed upon. The period so agreed upon may be extended by subsequent written
after the expiration of such period: Provided, That in a case where a return is filed
agreement made before the expiration of the period previously agreed upon.
beyond the period prescribed by law, the three (3)-year period shall be counted from
(c) Any internal revenue tax which has been assessed within the period of
the day the return was filed. For purposes of this Section, a return filed before the last
limitation as prescribed in paragraph (a) hereof may be collected by distraint or levy
day prescribed by law for the filing thereof shall be considered as filed on such last
or by a proceeding in court within five (5) years following the assessment of the tax.
day.
(d) Any internal revenue tax, which has been assessed within the period agreed
upon as provided in

Relying on Section 203, petitioner argues that the subject deficiency tax
470
assessments issued by respondent on September 15, 2002 was issued beyond the
470 SUPREME COURT REPORTS
three-year prescriptive period. Petitioner filed itsAnnual Information Return of Income ANNOTATED
Tax Withheld on Compensation, Expanded and Final Withholding Taxeson the following Samar-I Electric Cooperative vs.
dates: on February 17, Commissioner of Internal Revenue
469
paragraph (b) hereinabove, may be collected by distraint or levy or by a
VOL. 744, DECEMBER 10, 2014 469
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 Section and
paragraph (a) hereof shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the provisions of
any tax amnesty law or decree. (Emphasis supplied)
In the case at bar, it was petitioner’s substantial underdeclaration of withholding
taxes in the amount of P2,690,850.91 which constituted the “falsity” in the subject
returns — giving respondent the benefit of the period under Section 222 of the NIRC
of 1997 to assess the correct amount of tax “at any time within ten (10) years after the
discovery of the falsity, fraud or omission.”12
The case of Aznar v. Court of Tax Appeals13 discusses what acts or omissions may
constitute falsity, viz.:
Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer
did not file false and fraudulent returns with intent to evade tax, while respondent
Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax
Appeals concluding that the very “substantial 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, sup-
471
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Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
ported 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.14
472
472 SUPREME COURT REPORTS
ANNOTATED
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
A careful examination of the evidence on record yields to no other conclusion but
that petitioner failed to withhold taxes from its employees’ 13th month pay and other
benefits in excess of thirty thousand pesos (P30,000.00) amounting to P2,690,850.91 for
the taxable years 1997 to 1999 — resulting to its filing of the subject false returns.
Petitioner failed to refute this finding, both in fact and in law, before the courts a quo.
We quote the following portion of the assailed Decision of the CTA EB, viz.:
It is noteworthy to mention that during the trial, the witness for the CIR testified
that SAMELCO-I did not file an accurate return, as follows:
ATTY. FRANCIA:
Q: Did the petitioner file an accurate Return?
MS. RAPATAN:
A: No.
ATTY. FRANCIA:
 Q: Can you please explain?
MS. RAPATAN:
A: Because I based the computation of my deficiency withholding taxes on
declared taxable income per alpha list submitted then, I have extracted a data from
the Alpha List, particularly that of the manager and other officials, only their basic
salary and their overtime pay were declared but the other benefits were not actually
subjected to withholding tax. So, the deficiency withholding taxes from the taxes on
the taxable 13th month pay and other benefits in excess of the [P]12,000.00 for 1997
and for the taxable years 1998 and 1999, in excess of the [P]30,000.00. I also noticed
that the per diem of the Manager was not included in the withholding tax computation
of SAMELCO[-]I.
ATTY. FRANCIA:
Nothing further, your Honors.
473
VOL. 744, DECEMBER 10, 2014 473
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
JUSTICE BAUTISTA:
Any recross?
ATTY. NAPUTO:
No recross, your Honors.15
We have consistently held that courts will not interfere in matters which are
addressed to the sound discretion of the government agency entrusted with the
regulation of activities coming under its special and technical training and
knowledge.16 The findings of fact of these quasi-judicial agencies are generally
accorded respect and even finality as long as they are supported by substantial
evidence — in recognition of their expertise on the specific matters under their
consideration.17 In the case at bar, petitioner failed to proffer convincing argument
and evidence that would persuade us to disturb the factual findings of the CTA First
Division, as affirmed by the CTA EB. As such, we cannot but affirm the finding of
petitioner’s substantial underdeclaration of withholding taxes in the amount of
P2,690,850.91 which constituted the “falsity” in the subject returns.
Anent the issue of violation of due process in the issuance of the final notice of
assessment and letter of demand, Section 228 of the NIRC of 1997 provides:
SEC. 228. Protesting of Assessment.—x x x
xxxx
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made: otherwise, the assessment shall be void.
Petitioner contends that as the Final Demand Letter and Assessment Notices
(FAN) were silent as to the nature and
474
474 SUPREME COURT REPORTS
ANNOTATED
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
basis of the assessments, it was denied due process,18 and the assessments must
be declared void. It likewise invokes Revenue Regulations (RR) No. 12-99 which
states, viz.:
3.1.4 Formal Letter of Demand and Assessment Notice.—The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based,otherwise, the formal letter of
demand and assessment notice shall be void. The same shall be sent to the taxpayer
only by registered mail or by personal delivery. x x x
We uphold the assessments issued to petitioner.
Both Section 228 of the NIRC of 1997 and Section 3.1.4 of RR No. 12-99 clearly
require the written details on the nature, factual and legal bases of the subject
deficiency tax assessments. The reason for the mandatory nature of this requirement
is explained in the case of Commissioner of Internal Revenue v. Reyes:19
A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In the
instant case, respondent has not been informed of the basis of the estate tax
liability. Without complying with the unequivocal mandate of first informing the
taxpayer of the government’s claim, there can be
475
VOL. 744, DECEMBER 10, 2014 475
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
no deprivation of property, because no effective protest can be made. The
haphazard shot at slapping an assessment, supposedly based on estate taxation’s
general provisions that are expected to be known by the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the
demand letter sent, reveals the lack of basis for — not to mention the insufficiency of
— the gross figures and details of the itemized deductions indicated in the notice and
the letter. This Court cannot countenance an assessment based on estimates that
appear to have been arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection “should be made in
accordance with law as any arbitrariness will negate the very reason for government
itself.” (Emphasis supplied; citations omitted)
In Commissioner of Internal Revenue v. Enron Subic Power Corporation,20we held that
the law requires that the legal and factual bases of the assessment be stated in the
formal letter of demand and assessment notice, and that the alleged “factual bases” in
the advice, preliminary letter and “audit working papers” did not suffice. Thus:
Both the CTA and the CA concluded that the deficiency tax assessment merely
itemized the deductions disallowed and included these in the gross income. It also
imposed the preferential rate of 5% on some items categorized by Enron as costs. The
legal and factual bases were, however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly
apprised of its tax deficiency. During the preassessment 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
476
476 SUPREME COURT REPORTS
ANNOTATED
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
the audit working paper allegedly showing in detail the legal and factual bases of
the assessment. The CIR argues that these steps sufficed to inform Enron of the laws
and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of
Enron, as well as the preliminary five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual bases of the assessment. These
steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a
taxpayer. The requirement for issuing a preliminary or final notice, as the case may
be, informing a taxpayer of the existence of a deficiency tax assessment is markedly
different from the requirement of what such notice must contain. Just because the
CIR issued an advice, a preliminary letter during the preassessment stage and a
final notice, in the order required by law, does not necessarily mean that Enron
was informed of the law and facts on which the deficiency tax assessment was
made.21(Emphasis supplied)
In this case, we agree with the respondent that petitioner was sufficiently
apprised of the nature, factual and legal bases, as well as how the deficiency taxes
being assessed against it were computed. Records reveal that on October 19, 2001,
prior to the conduct of an informal conference, petitioner was already informed of the
results and findings of the investigations made by the respondent, and was duly
furnished with a copy of the summary of the report submitted by Revenue Officer
Elisa G. Ponferrada-Rapatan of the Special Investigation Division. Said summary
report contained an explanation of Findings of Investigation stating the legal and
factual bases for the deficiency assessment. In a letter dated February 27, 2002
petitioner requested for copies of working
477
VOL. 744, DECEMBER 10, 2014 477
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
 papers indicating how the deficiency withholding taxes were
computed.22 Respondent promptly responded in a letter-reply dated February 28,
2002 stating:
please be informed that the cooperative’s deficiency withholding taxes on
compensation were due to the failure of the cooperative to withhold taxes on the
taxable 13th month pay and other benefits in excess of P30,000.00 threshold pursuant
to Section 3 of Revenue Regulation No. 2-95 implementing Republic Act No. 7833 and
Section 2.78/1 B 11 of Revenue Regulation 2-98 implementing Section 32 B e of
Republic Act No. 8424. Further, we are providing you hereunder the computational
format on how deficiency withholding taxes were computed and sample
computation from our working papers, for your information and guidance. 23
On April 9, 2002, petitioner received the PAN dated February 28, 2002 which
contained the computations of its deficiency income and withholding taxes. Attached
to the PAN was the detailed explanation of the particular provision of law and
revenue regulation violated, thus:
DETAILS OF DISCREPANCIES
1. Deficiency income taxes for 1998 and 1999 respectively result from nonpayment
of the minimum corporate income tax (MCIT) imposed pursuant to Section 27(E) of
the 1997 Tax Reform Act.
2. Deficiency Withholding Taxes on Compensation for 1997-1999 are the total
withholding taxes on compensation of all employees of SAMELCO[-]I resulting from
failure of employer to withhold taxes on the taxable 13th month pay and other
benefits in excess of [P]30,000.00 threshold pursuant to Revenue Regulation 2-98.24
478
478 SUPREME COURT REPORTS
ANNOTATED
therefrom.25In its letter-reply dated May 27, 2002, respondent answered the
arguments raised by petitioner in its protest, and requested it to pay the assessed
deficiency on the date of payment stated in the PAN. A second protest letter dated
June 23, 2002 was sent by petitioner, to which respondent replied (letter dated July 8,
2002) answering each of the two issues reiterated by petitioner: (1) validity of EO 93
withdrawing the tax exemption privileges under PD 269; and (2) retroactive
application of RR No. 8-2000.26 The FAN was finally received by petitioner on
September 24, 2002, and protested by it in a letter dated October 14, 2002 which
reiterated in lengthy arguments its earlier interpretation of the laws and regulations
upon which the assessments were based.27
Although the FAN and demand letter issued to petitioner were not accompanied
by a written explanation of the legal and factual bases of the deficiency taxes assessed
against the petitioner, the records showed that respondent in its letter dated April 10,
2003 responded to petitioner’s October 14, 2002 letter-protest, explaining at length the
factual and legal bases of the deficiency tax assessments and denying the protest. 28
Considering the foregoing exchange of correspondence and documents between
the parties, we find that the requirement of Section 228 was substantially complied
with. Respondent had fully informed petitioner in writing of the factual and legal
bases of the deficiency taxes assessment, which enabled
479
VOL. 744, DECEMBER 10, 2014 479
Samar-I Electric Cooperative vs.
Commissioner of Internal Revenue
the latter to file an “effective” protest, much unlike the taxpayer’s situation
in Enron.Petitioner’s right to due process was thus not violated.
WHEREFORE, the petition is DENIED. The assailed Decision and Resolution of
the Court of Tax Appeals En Banc dated March 11, 2010 and July 28, 2010,
respectively, in C.T.A. E.B. Nos. 460 and 462 (C.T.A. Case No. 6697), are
hereby AFFIRMED and UPHELD.

Samar-I Electric Cooperative vs. With costs against the petitioner.

Commissioner of Internal Revenue SO ORDERED.

The above information provided to petitioner enabled it to protest the PAN by Velasco, Jr. (Chairperson), Peralta, Mendoza** and Reyes, JJ., concur.

questioning respondent’s interpretation of the laws cited as legal basis for the
Petition denied, judgment and resolution affirmed and upheld.
computation of the deficiency withholding taxes and assessment of minimum
corporate income tax despite petitioner’s position that it remains exempt
 Notes.—Commonwealth Act (CA) No. 55 has removed from the courts’
jurisdiction over petitions for declaratory relief involving tax assessments. (CJH
Development Corporation vs. Bureau of Internal Revenue, 575 SCRA 467 [2008])
A taxpayer dissatisfied with a local treasurer’s denial of or inaction on his protest
over an assessment has thirty (30) days within which to appeal to the court of
competent jurisdiction. (Team Pacific Corporation vs. Daza, 676 SCRA 82 [2012])
——o0o——
THIRD DIVISION
G.R. No. 221780, March 25, 2019
COMMISSIONER OF INTERNAL REVENUE, PETITIONER, v. V.Y. DOMINGO
JEWELLERS, INC., RESPONDENT.
DECISION
PERALTA, J.:
This is petition for review on certiorari under Rule 45 seeking to reverse and set aside
the Court of Tax Appeals (CTA) En Banc Decision1 dated July 1, 2015 in CTA EB Case
No. 1170, which granted respondent V.Y. Domingo Jewellers, Inc.'s (V.Y. Domingo)
petition for review, and ordered the remand of the case to the CTA First Division for
further proceedings; and the Resolution2 dated December 3, 2015 which denied
petitioner Commissioner of Internal Revenue's (CIR) motion for reconsideration.
The facts are as follows:
On September 9, 2009, the Bureau of Internal Revenue (BIR) issued a Preliminary
Assessment Notice3(PAN) against V.Y. Domingo, a corporation primarily engaged in
manufacturing and selling emblematic jewelry, assessing the latter the total amount
of P2,781,844.21 representing deficiency income tax and value-added tax, inclusive of
interest, for the taxable year 2006.
V.Y. Domingo filed a Request for Re-evaluation/Re-investigation and
Reconsideration4 dated September 17, 2009 with the Regional Director of BIR -
Revenue Region No. 6, requesting a "thorough re-evaluation and re-investigation to
verify the accuracy of the computation as well as the accounts included in the
Preliminary Assessment Notice."
V.Y. Domingo then received a Preliminary Collection Letter 5 (PCL) dated August 10,
2011 from the Revenue District Office (RDO) No. 28 - Novaliches, informing it of the
existence of Assessment Notice No. 32-06-IT-0242 and Assessment Notice No. 32-06-
VT-0243, both dated November 18, 2010, for collection of its tax liabilities in the
amounts of P1,798,889.80 and P1,365,727.63, respectively, for a total amount of
P3,164,617.43. The PCL likewise stated:
If you want to know the details and/or settle this assessment, may we invite you to
come to this office, within ten (10) days from receipt of this notice. However, if
payment had already been made, please send or bring us copies of the receipts of
payment together with this letter to be our basis for canceling/closing your
liability/ies.
We will highly appreciate if you can give this matter your preferential attention,
otherwise we shall be constrained to enforce the collection thereof thru
Administrative Summary Remedies provided for by the law, without further notice. 6
On September 12, 2011, V.Y. Domingo sent a letter to the BIR Revenue District Office
No. 28 in Quezon City, requesting certified true copies of Assessment Notice Nos. 32-
06-IT-0242 and 32-06-VT-0243. Upon receipt of the requested copies of the notices on
September 15, 2011, V.Y. Domingo filed on September 16, 2011 a Petition for
Review7 with the CTA in Division, under Section 7(1) of RA No. 1125 and Section 4,
Rule 8 of the Revised Rules of the Court of Tax Appeals (RRCTA), praying that
Assessment Notice Nos. 32-06-IT-0242 and 32-06-VT-0243 dated November 18, 2010
and the PCL dated August 10, 2011 be declared null and void, cancelled, withdrawn,
and with no force and effect, for allegedly having been issued beyond the prescriptive
period for assessment and collection of internal revenue taxes.
During trial, the CIR filed her Motion to Dismiss8 the petition for lack of jurisdiction.
She argued that under Republic Act (R.A.) No. 1125 ("An Act Creating the Court of Tax
Appeals"), as amended, and the RRCTA, it is neither the assessment nor the formal
letter of demand that is appealable to the CTA but the decision of the CIR on a
disputed assessment. Claiming that V.Y. Domingo's petition was anchored on its
receipt of the PCL, which it treated as a denial of its Request for Re-evaluation/Re-
investigation and Reconsideration, the CIR further argued that there was no disputed
assessment to speak of, and that the CTA had no jurisdiction to entertain the said
Petition for Review.
In a Resolution9 dated January 29, 2014, the CTA First Division granted the CIR's
motion and dismissed V.Y. Domingo's Petition for Review. It held that it was without
jurisdiction to entertain the petition, as the rule is that for the CTA to acquire
jurisdiction, as assessment must first be disputed by the taxpayer and either ruled
upon by the CIR to warrant a decision, or denied by the CIR through inaction. The
CTA First Division ruled that what were appealed to it were the subject assessments,
not a decision or the CIR's denial of its protest; thus, the said assessments had
attained finality, and the CTA in Division was without jurisdiction to entertain the
appeal.
V.Y. Domingo's motion for reconsideration having been denied in a Resolution dated
April 23, 2014, it filed on May 30, 2014 a petition for review before the CTA En Banc. It
argued that the CTA First Division erred when it upheld the CIR's position that V.Y.
Domingo should have administratively protested the Assessment Notices first before
filing its Petition for Review. Furthermore, V.Y. Domingo claimed that it was denied
due process when the CIR failed to send the Notice of Final Assessment to it.
In its Decision dated July 1, 2015, the CTA En Banc granted V.Y. Domingo's Petition
for Review, reversing and setting aside the January 29, 2014 and April 23, 2014
Resolutions of the CTA First Division. It remanded the case to the CTA First Division
for further proceedings to afford the CIR full opportunity to present her evidence. It
held — Furthermore, V.Y. Domingo also claims that the tenor of the PCL forecloses any
Petitioner's case did not fall within the usual procedure in the issuance of an opportunity for it to file its administrative protest as a reading of the same will show
assessment as respondent failed to serve or send the FAN to petitioner. Section 228 of that the CIR had already decided to deny any protest as regards the assessment made
the NIRC of 1997, as amended, and Section 3 of Revenue Regulations No. 12-99 are against the respondent taxpayer.17
silent as to the procedure to be followed in case the taxpayer did not receive the FAN
but instead receives a preliminary collection letter or a warrant of distraint/levy or We rule for the petitioner.
similar communications, informing the taxpayer of the existence of a FAN for the first
time. Understandably, this would cause some confusion as to what the next step it. At the outset, it bears emphasis that the CTA, being a court of special jurisdiction, can
Hence, petitioner cannot be faulted for not filing an administrative protest before take cognizance only of matters that are clearly within its jurisdiction. 18 Section 7 of
filing a petition for review before the Court in Division since it did not receive the R.A. No. 1125, as amended by R.A. No. 9282, specifically provides:
FAN and the language of the PCL shows that the respondent is already demanding SEC. 7. Jurisdiction. — The CTA shall exercise:
payment from petitioner presupposing that the assessment has become final. 10
Thus, the present petition raising the sole issue of whether the First Division of the (a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
CTA has jurisdiction to entertain V.Y. Domingo's petition for review.
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
The CIR argues that assessment notices are not appealable to the CTA as the power to assessments, refunds of internal revenue taxes, fees or other charges, penalties in
decide disputed assessments is vested in the CIR, subject only to the exclusive relation thereto, or other matters arising under the National Internal Revenue Code or
appellate jurisdiction of the CTA. The CIR adds that a thorough review of V.Y. other laws, administered by the Bureau of Internal Revenue;
Domingo's petition for review before the CTA First Division would readily show that
it was an original protest on the assessment made by the petitioner, a matter that, (2) Inaction by the Commissioner of Internal. Revenue in cases involving disputed
under R.A. No. 1125, is not within the jurisdiction of the CTA. assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
The CIR likewise claims that a close scrutiny of V.Y. Domingo's petition for review other laws administered by the Bureau of Internal Revenue, where the National
before the CTA would reveal that it was anchored on its receipt of the PCL issued by Internal Revenue Code provides a specific period of action, in which case the inaction
the BIR, which V.Y. Domingo mistakenly treated as a denial of its motion for shall be deemed a denial;
reinvestigation of the PAN.11 Before V.Y. Domingo filed its petition for review before
the CTA First Division on September 16,2011, it had already received copies of x x x.19
Assessment Notice Nos. 32-06-IT-0242 and 32-06- VT-0243 and the Formal Letter of In relation thereto, Section 228 of R.A. No. 8424 or The Tax Reform Act of 1997, as
Demand (FLD) dated September 9, 2010. However, instead of challenging the amended, implemented by Revenue Regulations No. 12-99,20 provides for the
contents of the said assessment notices by filing the appropriate protest or motion for procedure to be followed in issuing tax assessments and in protesting the same. Thus:
reinvestigation within thirty (30) days from September 15, 2011, the date it received Section 228. Protesting of Assessment. — When the Commissioner or his duly
the copies of the notices, the CIR laments that V.Y. Domingo opted to immediately authorized representative finds that proper taxes should be assessed, he shall first
institute a petition for review on the basis of the PCL.12 This, argues the CIR, is in notify the taxpayer of his findings: Provided, however, That a pre-assessment notice
clear violation of the doctrine of exhaustion of administrative remedies. shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of mathematical error in the
This Court, through a Resolution13 dated March 7, 2016, required respondent V.Y. computation of the tax as appearing on the face of the return; or
Domingo to comment on the Petition for Review.
(b) When a discrepancy has been determined between the tax withheld and the
In its Comment,14 V.Y. Domingo contends that contrary to the CIR's allegation, the amount actually remitted by the withholding agent; or
CTA has jurisdiction to take cognizance of its Petition for Review. Citing Section 7 of
R.A. No. 1125, as amended, V.Y. Domingo suggests that the CIR may have (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable
disregarded the fact that the jurisdiction of the CTA is not limited to review of withholding tax for a taxable period was determined to have carried over and
decisions of the CIR. in cases involving disputed assessments only, but also includes automatically applied the same amount claimed against the estimated tax liabilities
"other matters arising under the National Internal Revenue or other laws for the taxable quarter or quarters of the succeeding taxable year; or
administered by the Bureau of Internal Revenue."15 V.Y. Domingo reiterates that its
case does not involve an appeal from a decision of the CIR on a disputed assessment (d) When the excise tax due on excisable articles has not been paid; or
since in the first place, there is no "disputed" assessment to speak of. 16
(e) When an article locally purchased or imported by an exempt person, such as, but date of receipt of the final decision of the Commissioner's duly authorized
not limited to, vehicles, capital equipment, machineries and spare parts, has been representative, the latter's decision shall not be considered final, executory and
sold, traded or transferred to non-exempt persons. demandable, in which case, the protest shall be decided by the Commissioner.
The taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void. If the Commissioner or his duly authorized representative fails to act on the
taxpayer's protest within one hundred eighty (180) days from date of submission, by
Within a period to be prescribed by implementing rules and regulations, the taxpayer the taxpayer, of the required documents in support of his protest, the taxpayer may
shall be required to respond to said notice. appeal to the Court of Tax Appeals within thirty (30) days from the lapse of the said
180-day period, otherwise the assessment shall become final, executory and
If the taxpayer fails to respond, the Commissioner or his duly authorized demandable. (Emphasis ours)
representative shall issue an assessment based on his findings. It is clear from the said provisions of the law that a protesting taxpayer like V.Y.
Domingo has only three options to dispute an assessment:
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation within thirty (30) days from receipt of the 1. If the protest is wholly or partially denied by the CIR or his authorized
assessment in such form and manner as may be prescribed by implementing rules representative, then the taxpayer may appeal to the CTA within 30 days from receipt
and regulations. of the whole or partial denial of the protest;

Within sixty (60) days from filing of the protest, all relevant, supporting documents
shall have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon within one hundred
eighty (180) days from submission of documents, the taxpayer adversely affected
by the decision or inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of one hundred eighty
(180)-day period; otherwise, the decision shall become final., executory and
demandable.21
On the other hand, Section 3.1.5 of Revenue Regulations No. 12-99,22 implementing
Section 228 above, provides:
3.1.5. Disputed Assessment. — The taxpayer or his duly authorized representative
may protest administratively against the aforesaid formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof. . .
x x x x
If the taxpayer fails to file a valid protest against the formal letter of demand and
assessment notice within thirty (30) days from date of receipt thereof, the
assessment shall become final, executory and demandable.
If the protest is denied, in whole or in part, by the Commissioner, the taxpayer may
appeal to the Court of Tax Appeals within thirty (30) days from the date of receipt of
the said decision, otherwise, the assessment shall become final, executory and
demandable.
In general, if the protest is denied, in whole or in part, by the Commissioner or his
duly authorized representative, the taxpayer may appeal to the Court of Tax Appeals
within thirty (30) days from date of receipt of the said decision, otherwise, the
assessment shall become final executory and demandable: Provided, however, that if
the taxpayer elevates his protest to the Commissioner within thirty (30.) days from
2. If the protest is wholly or partially denied by the CIR's authorized representative,
then the taxpayer may appeal to the CIR within 30 days from receipt of the whole or
partial denial of the protest;
3. If the CIR or his authorized representative failed to act upon the protest within 180
days from submission of the required supporting documents, then the taxpayer may
appeal to the CTA within 30 days from the lapse of the 180-day period.23
In this case, records show that on August 11, 2011, V.Y. Domingo received the PCL
issued by petitioner CIR informing it of Assessment Notice Nos. 32-06-IT-0242 and
32-06-VT-0243 dated November 18, 2010. On September 12, 2011, the former sent a
letter request to the BIR requesting for certified true copies of the said Assessment
Notices.
However, instead of filing an administrative protest against the assessment notice
within thirty (30) days from its receipt of the requested copies of the Assessment
Notices on September 15, 2011, V.Y. Domingo elected to file its petition for review
before the CTA First Division on September 16, 2011, ratiocinating that the issuance
of the PCL and the alleged finality of the terms used for demanding payment therein
proved that its Request for Re-evaluation/Re-investigation and Reconsideration had
been denied by the CIR.
That V.Y. Domingo believed that the PCL "undeniably shows" the intention of the
CIR to make it as its final "decision" did not give it cause of action to disregard the
procedure set forth by the law in protesting tax assessments and act prematurely by
filing a petition for review before the courts. The word "decisions" in the
aforementioned provision of R.A. No. 9282 has been interpreted to mean the
decisions of the CIR on the protest of the taxpayer against the
assessments.24 Definitely, said word does not signify the assessment itself. 25 Where a
taxpayer questions an assessment and asks the Collector to reconsider or cancel the
same because he (the taxpayer) believes he is not liable therefor, the assessment
becomes a "disputed assessment" that the Collector must decide, and the taxpayer can
appeal to the CTA only upon receipt of the decision of the Collector on the disputed
assessment.26
Admitting for the sake of argument the claim of V.Y. Domingo in its Comment —
that its case does not involve an appeal from a decision of the CIR on a disputed
assessment since in the first place, there is no disputed assessment to speak of —
admits the veracity of petitioner CIR's claim: there being no disputed assessment to
speak of when V.Y. Domingo filed its petition for review before the CTA First
Division, the latter had no jurisdiction to entertain the same. Thus, the latter's
dismissal of the petition for review was proper.
Evidently, V.Y. Domingo's immediate recourse to the CTA First Division was in
violation of the doctrine of exhaustion of administrative remedies.
Under the doctrine of exhaustion of administrative remedies, before a party is
allowed to seek the intervention of the court, he or she should have availed himself or
herself of all the means of administrative processes afforded him or her. 27 Section 228
of the Tax Code requires taxpayers to exhaust administrative remedies by filing a
request for reconsideration or reinvestigation within 30 days from receipt of the
assessment.28 Exhaustion of administrative remedies is required prior to resort to the
CTA precisely to give the Commissioner the opportunity to "re-examine its findings
and conclusions" and to decide the issues raised within her competence. 29
V.Y. Domingo posits that its case is an exception to the rule on exhaustion of
administrative remedies and the rule on primary jurisdiction as it cannot be expected
to be able to file an administrative protest to the Assessment Notices which it never
received.30 It expressly admitted that it did not file an administrative protest, based
on its alleged non-receipt of the same.31 Citing the case of Allied Banking Corporation v.
CIR,32 wherein this Court ruled that the filing of therein petitioner of a petition.for
review with the CTA without first contesting the FAN issued against it was an
exception to the rule on exhaustion of administrative remedies, V.Y. Domingo
maintains that in its case, the CIR was similarly estopped from claiming that the filing
of the petition for review was premature.
However, as previously mentioned, the records of the case show that V.Y. Domingo
did receive the certified true copies of the Assessment Notices it requested on
September 15, 2011, the day before it filed its petition for review before the CTA First
Division. V.Y. Domingo cannot now assert that its recourse to the court was based on
its non-receipt of the Assessment Notices that it requested.
Likewise, this Court cannot apply the ruling in Allied Banking Corporation v.
CIR,33 wherein the demand letter sent by the CIR was worded as follows:
It is requested that the above deficiency tax be paid immediately upon receipt hereof,
inclusive of penalties incident to delinquency. This is our final decision based on
investigation. If you disagree, you may appeal the final decision within thirty (30)
days from receipt hereof, otherwise said deficiency tax assessment shall become final,
executory and demandable.34
The ruling of this Court in the said case was grounded on the language used and the
tenor of the demand letter, which indicate that it was the final decision of the CIR on
the matter. The words used, specifically the words "final decision" and "appeal,"
taken together led therein petitioner to believe that the Formal Letter of Demand with
Assessment Notices was, in fact, the final decision of the CIR on the letter-protest it
filed and that the available remedy was to appeal the same to the CTA.35
Comparing the wording of the above-quoted demand letter with that sent by the CIR
to V.Y. Domingo in the instant case, it becomes apparent that the latter's invocation of
the ruling in the Allied Banking Corporation case in misguided as the foregoing
statements and terms are not present in the subject PCL dated August 10, 2011.
What is evident in the instant case is that Assessment Notice Nos. 32-06-IT-0242 and
32-06-VT-0243 dated November 18, 2010 have not been disputed by V.Y. Domingo at
the administrative level without any valid basis therefor, in violation of the doctrine
of exhaustion of administrative remedies. To reiterate, what is appealable to the CTA
are decisions of the CIR on the protest of the taxpayer against the assessments. There
being no protest ruling by the CIR when V.Y. Domingo's petition for review was
filed, the dismissal of the same by the CTA First Division was proper. As correctly
put by Associate Justice Roman G. Del Rosario in his Dissenting Opinion, "(C)learly,
petitioner did not exhaust the administrative remedy provided under Section 228 of
the MRC of 1997, as amended, and RR No. 12-99 which is fatal to its cause.
Consequently, the non-filing of the protest against the FLD let to the finality of the
assessment."36
WHEREFORE, in view of the foregoing, the Court GRANTS the petition for review
on certiorari. The assailed July 1, 2015 Decision and December 3, 2015 Resolution of
the Court of Tax Appeals En Bancare hereby REVERSED and SET ASIDE, and the
January 29, 2014 and April 23, 2014 Resolutions of the First Division of the Court of
Tax Appeals are REINSTATED.
SO ORDERED.