Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No.

159694 January 27, 2006

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. AZUCENA T. REYES, Respondent. x -- -- -- -- -- -- -- -- -- -- -- -- -- x G.R. No. 163581 January 27, 2006

AZUCENA T. REYES, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION PANGANIBAN, CJ.: Under the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of a tax compromise. The Case Before us are two consolidated1 Petitions for Review2 filed under Rule 45 of the Rules of Court, assailing the August 8, 2003 Decision3 of the Court of Appeals (CA) in CA-GR SP No. 71392. The dispositive portion of the assailed Decision reads as follows: "WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is ANNULLED and SET ASIDE without prejudice to the action of the National Evaluation Board on the proposed compromise settlement of the Maria C. Tancinco estates tax liability."4 The Facts The CA narrated the facts as follows: "On July 8, 1993, Maria C. Tancinco (or decedent) died, leaving a 1,292 square -meter residential lot and an old house thereon (or subject property) located at 4931 Pasay Road, Dasmarias Village, Makati City. "On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond Abad (or Abad), Revenue District Office No. 50 (South Makati) conducted an investigation on the decedents estate (or estate). Subsequently, it issued a Return Verification Order. But without the required preliminary findings being submitted, it issued Letter of Authority No. 132963 for the regular investigation of the estate tax case. Azucena T. Reyes (or [Reyes]), one of the decedents heirs, received the Letter of Authority on March 14, 1997. "On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or BIR), issued a preliminary assessment notice against the estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or heirs) received a final estate tax assessment notice and a demand letter, both dated April 22, 1998, for the amount ofP14,912,205.47, inclusive of surcharge and interest.

"On June 1, 1998, a certain Felix M. Sumbillo (or Sumbillo) protested the assessment [o]n behalf of the heirs on the ground that the subject property had already been sold by the decedent sometime in 1990. "On November 12, 1998, the Commissioner of Internal Revenue (or [CIR]) issued a preliminary collection letter to [Reyes], followed by a Final Notice Before Seizure dated December 4, 1998. "On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on February 11, 1999 by Notices of Levy on Real Property and Tax Lien against it. "On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the heirs proposed a compromise settlement of P1,000,000.00. "In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic tax due, citing the heirs inability to pay the tax assessment. On March 20, 2000, [the CIR] rejected [Reyess] offer, pointing out that since the estate tax is a charge on the estate and not on the heirs, the latters financial incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax liability. Thus, [the CIR] demanded payment of the amount of P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of the subject property would be published. "On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of the basic tax due in the amount ofP5,313,891.00. She reiterated the proposal in a letter dated May 18, 2000. "As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection Enforcement Division, BIR, notified [Reyes] on June 6, 2000 that the subject property would be sold at public auction on August 8, 2000. "On June 13, 2000, [Reyes] filed a protest with the BIR Appellate Division. Assailing the scheduled auction sale, she asserted that x x x the assessment, letter of demand[,] and the whole tax proceedings against the estate are void ab initio. She offered to file the corresponding estate tax return and pay the correct amount of tax without surcharge [or] interest. "Without acting on [Reyess] protest and offer, [the CIR] instructed the Collection Enforcement Division to p roceed with the August 8, 2000 auction sale. Consequently, on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the Court of Tax Appeals (or CTA), docketed as CTA Case No. 6124. "On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status Quo Order, which was granted by the CTA on July 26, 2000. Upon [Reyess] filing of a surety bond in the amount of P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000 ordering [the CIR] to desist and refrain from proceeding with the auction sale of the subject property or from issuing a [W]arrant of [D]istraint or [G]arnishment of [B]ank [A]ccount[,] pending determination of the case and/or unless a contrary order is issued. "[The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no longer has jurisdiction over the case[,] because the assessment against the estate is already final and executory; and (ii) that the petition was filed out of time. In a [R]esolution dated November 23, 2000, the CTA denied [the CIRs] motion. "During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued Revenue Regulation (or RR) No. 6-2000 and Revenue Memorandum Order (or RMO) No. 42-2000 offering certain taxpayers with delinquent accounts and disputed assessments an opportunity to compromise their tax liability. "On November 25, 2000, [Reyes] filed an application with the BIR for the compromise settlement (or compromise) of the assessment against the estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000. "On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing before the CTA scheduled on January 9, 2001, citing her pending application for compromise with the BIR. The motion was granted and the hearing was reset to February 6, 2001.

"On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6, 2001, this time on the ground that she had already paid the compromise amount of P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or NEB). The CTA granted the motion and reset the hearing to February 27, 2001. "On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of Disputed Assessment as a Perfected Compromise. In said motion, she alleged that [the CIR] had not yet signed the compromise[,] because of procedural red tape requiring the initials of four Deputy Commissioners on relevant documents before the compromise is signed by the [CIR]. [Reyes] posited that the absence of the requisite initials and signature[s] on said documents does not vitiate the perfected compromise. "Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB, [Reye ss] application for compromise with the BIR cannot be considered a perfected or consummated compromise. "On March 9, 2001, the CTA denied [Reyess] motion, prompting her to file a Motion for Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the [M]otion for [R]econsideration with the suggestion that[,] for an orderly presentation of her case and to prevent piecemeal resolutions of different issues, [Reyes] should file a [S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there was already a perfected compromise. "On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed on June 4, 2001 by its Amplificatory Arguments (for the Supplemental Petition for Review), raising the following issues: 1. Whether or not an offer to compromise by the [CIR], with the acquiescence by the Secretary of Finance, of a tax liability pending in court, that was accepted and paid by the taxpayer, is a perfected and consummated compromise. 2. Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP) that requires approval by the BIR [NEB]. "Answering the Supplemental Petition, [the CIR] averred that an application for compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000 requires the evaluation and approval of either the NEB or the Regional Evaluation Board (or REB), as the case may be. "On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion was granted on July 11, 2001. After submission of memoranda, the case was submitted for [D]ecision. "On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which pertinently reads: WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview i s hereby DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY deficiency estate tax in the amount of Nineteen Million Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,524,909.78), computed as follows: xxxxxxxxx [Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of P17,934,382.13 from January 11, 2001 until full payment thereof pursuant to Section 249(c) of the Tax Code, as amended. "In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated compromise of the estates tax liability[,] if the NEB has approved [Reyess] application for compromise in accordance with RR No. 6 -2000, as implemented by RMO No. 42-2000. "Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that at the time the questioned assessment notice and letter of demand were issued, the heirs knew very well the law and the facts on which the same were based. It also observed that the petit ion was not filed within the 30-day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code." 5 Ruling of the Court of Appeals

In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were mandatory and unequivocal in their requirement. The assessment notice and the demand letter should have stated the facts and the law on which they were based; otherwise, they were deemed void.6 The appellate court held that while administrative agencies, like the BIR, were not bound by procedural requirements, they were still required by law and equity to observe substantive due process. The reason behind this requirement, said the CA, was to ensure that taxpayers would be duly apprised of -and could effectively protest -- the basis of tax assessments against them.7 Since the assessment and the demand were void, the proceedings emanating from them were likewise void, and any order emanating from them could never attain finality. The appellate court added, however, that it was premature to declare as perfected and consummated the compromise of the estates tax liability. It explained that, where the basic tax assessed exceeded P1 million, or where the settlement offer was less than the prescribed minimum rates, the National Evaluation Boards (NEB) prior evaluation and approval were the conditio sine qua non to the perfection and consummation of any compromise. 8 Besides, the CA pointed out, Section 204(A) of the Tax Code applied to all compromises, whether government-initiated or not.9 Where the law did not distinguish, courts too should not distinguish. Hence, this Petition.10 The Issues In GR No. 159694, petitioner raises the following issue s for the Courts consideration: "I. Whether petitioners assessment against the estate is valid. "II. Whether respondent can validly argue that she, as well as the other heirs, was not aware of the facts and the law on which the assessment in question is based, after she had opted to propose several compromises on the estate tax due, and even prematurely acting on such proposal by paying 20% of the basic estate tax due." 11 The foregoing issues can be simplified as follows: first, whether the assessment against the estate is valid; and, second, whether the compromise entered into is also valid. The Courts Ruling The Petition is unmeritorious. First Issue: Validity of the Assessment Against the Estate The second paragraph of Section 228 of the Tax Code 12 is clear and mandatory. It provides as follows: "Sec. 228. Protesting of Assessment. -xxxxxxxxx "The taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the assessment shall be void." In the present case, Reyes was not informed in writing of the law and the facts on which the assessment of estate taxes had been made. She was merely notified of the findings by the CIR, who had simply relied upon the provisions of former Section 22913 prior to its amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of 1997.

First, RA 8424 has already amended the provision of Section 229 on protesting an assessment. The old requirement of merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required under the old law was no longer sufficient under the new law. To be simply informed in writing of the investigation being conducted and of the recommendation for the assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and the facts on which the assessment was based. It does not at all conform to the compulsory requirement under Section 228. Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of investigation and was not even the requisite notice under the law. The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII, which deals with remedies. Being procedural in nature, can its provision then be applied retroactively? The answer is yes. The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes.14 Clearly, Section 228 provides for the procedure in case an assessment is protested. The provision does not create new or take away vested rights. In both instances, it can surely be applied retroactively. Moreover, RA 8424 does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or that applying it to pending proceedings would impair vested rights. Second, the non-retroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it merely implements the law. A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code.15 While it is desirable for the government authority or administrative agency to have one immediately issued after a law is passed, the absence of the regulation does not automatically mean that the law itself would become inoperative. At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the taxpayer must be informed of both the law and facts on which the assessment was based. Thus, the CIR should have required the assessment officers of the Bureau of Internal Revenue (BIR) to follow the clear mandate of the new law. The old regulation governing the issuance of estate tax assessment notices ran afoul of the rule that tax regulations -- old as they were -- should be in harmony with, and not supplant or modify, the law.16 It may be argued that the Tax Code provisions are not self-executory. It would be too wide a stretch of the imagination, though, to still issue a regulation that would simply require tax officials to inform the taxpayer, in any manner, of the law and the facts on which an assessment was based. That requirement is neither difficult to make nor its desired results hard to achieve. Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute.17 RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code, even if it was issued only on September 6, 1999, this regulation was to retroact to January 1, 1998 -- a date prior to the issuance of the preliminary assessment notice and demand letter. Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code. No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been amended. Furthermore, in case of discrepancy between the law as amended and its implementing but old regulation, the former necessarily prevails.18 Thus, between Section 228 of the Tax Code and the pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the law. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure. The regulation then simply provided that notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form. Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due process. Not only was the law here disregarded, but no valid notice was sent, either. A void assessment bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations: that taxpayers should be able to present their case and adduce supporting evidence.19 In the instant case, respondent has not been informed of the basis of the estate tax liability. Without complying with the unequivocal mandate of first informing the taxpayer of the governments claim, there can be no deprivation of property, because no effective protest can be made.20The haphazard shot at slapping an assessment, supposedly based on estate taxations general provisions that are expected to be known by the taxpayer, is utter chicanery. Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals the lack of basis for - not to mention the insufficiency of -- the gross figures and details of the itemized deductions indicated in the notice and the letter. This Court cannot countenance an assessment based on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the lifeblood of the government, their assessment and collection "should be made in accordance with law as any arbitrariness will negate the very reason for government itself."21 Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the negligence or omission of its agents, the obligatory provision on protesting a tax assessment cannot be rendered nugatory by a mere act of the CIR . Tax laws are civil in nature.22 Under our Civil Code, acts executed against the mandatory provisions of law are void, except when the law itself authorizes the validity of those acts. 23 Failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any provision in the Tax Code. We cannot condone errant or enterprising tax officials, as they are expected to be vigilant and law-abiding. Second Issue: Validity of Compromise It would be premature for this Court to declare that the compromise on the estate tax liability has been perfected and consummated, considering the earlier determination that the assessment against the estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the NEB composed of the petitioner and four deputy commissioners. Finally, as correctly held by the appellate court, this provision applies to all compromises, whether government-initiated or not. Ubi lex non distinguit, nec nos distinguere debemos. Where the law does not distinguish, we should not distinguish. WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as to costs. SO ORDERED. ARTEMIO V. PANGANIBAN Chief Justice Chairperson, First Division WE CONCUR: CONSUELO YNARES-SANTIAGO Associate Justice ROMEO J. CALLEJO SR. Associate Justice MA. ALICIA AUSTRIA-MARTINEZ Asscociate Justice MINITA V. CHICO-NAZARIO Asscociate Justice CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. ARTEMIO V. PANGANIBAN Chief Justice

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION EN BANC G.R. No. 166387 January 19, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs. ENRON SUBIC POWERCORPORATION, Respondents. RESOLUTION CORONA, J.: In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision 1 of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for failure to state the legal and factual bases for such assessment. Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise, 2 filed its annual income tax return for the year 1996 on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-day letter,3 informed it of a proposed assessment of an alleged P2,880,817.25 deficiency income tax.4 Enron disputed the proposed deficiency assessment in its first protest letter. 5 On May 26, 1999, Enron received from the CIR a formal assessment notice6 requiring it to pay the alleged deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency tax assessment.7 Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for review in the Court of Tax Appeals (CTA). It argued that the deficiency tax assessment disregarded the provisions of Section 228 of the National Internal Revenue Code (NIRC), as amended,8and Section 3.1.4 of Revenue Regulations (RR) No. 12-999 by not providing the legal and factual bases of the assessment. Enron likewise questioned the substantive validity of the assessment.10 In a decision dated September 12, 2001, the CTA granted Enrons petition and ordered the cancellation of its deficiency tax assessment for the year 1996. The CTA reasoned that the assessment notice sent to Enron failed to comply with the requirements of a valid written notice under Section 228 of the NIRC and RR No. 12-99. The CIRs motion for reconsideration of the CTA decision was denied in a resolution dated November 12, 2001. The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit working papers did not substantially comply with Section 228 of the NIRC and RR No. 12-99 because they failed to show the applicability of the cited law to the facts of the assessment. The CIR filed a motion for reconsideration but this was deemed abandoned when he filed a motion for extension to file a petition for review in this Court. The CIR now argues that respondent was informed of the legal and factual bases of the deficiency assessment against it. We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et Denrees v. CIR,11 we held: We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not present here. The CIR errs in insisting that the notice of assessment in question complied with the requirements of the NIRC and RR No. 12-99.

A notice of assessment is: [A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course. The formal letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and the notice of assessment shall be void. (emphasis supplied)12 Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made. Otherwise, the assessment is void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads: 3.1.4. Formal Letter of Demand and Assessment Notice. The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly authorized representative. The letter of demand calling for payment of the taxpayers deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. xxx (emphasis supplied) It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. The use of the word shall in these legal provisions indicates the man datory nature of the requirements laid down therein. We note the CTAs findings: In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge, interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did not provide Enron with the written bases of the law and facts on which the subject assessment is based. [The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he failed to mention the specific provision of the Tax Code or rules and regulations which were not complied with by Enron. 13 Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed and included these in the gross income. It also imposed the preferential rate of 5% on some items categorized by Enron as costs. The legal and factual bases were, however, not indicated. The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the pre-assessment stage, the CIR advised Enrons representative of the tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working 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. We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIRs duties in correctly assessing a taxpayer. 15 The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made. The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged factual bases in the advice, preliminary letter and audit working papers did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice. We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the assessment is made.16 Such amendment is in keeping with the constitutional principle that no person shall be deprived of property

without due process.17 In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was void. We reiterate our ruling in Reyes v. Almanzor, et al.:18 Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for the Government itself. WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals isAFFIRMED. No costs. SO ORDERED. RENATO C. CORONA Associate Justice

10

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 136975 March 31, 2005

COMMISSION OF INTERNAL REVENUE, Petitioner, vs. HANTEX TRADING CO., INC., respondent. DECISION CALLEJO, SR., J.: Before us is a petition for review of the Decision1 of the Court of Appeals (CA) which reversed the Decision 2 of the Court of Tax Appeals (CTA) in CTA Case No. 5126, upholding the deficiency income and sales tax assessments against respondent Hantex Trading Co., Inc. The Antecedents The respondent is a corporation duly organized and existing under the laws of the Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and other chemicals for the manufacture of its products. For this purpose, it is required to file an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau of Customs under Section 1301 of the Tariff and Customs Code. Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence Division of the Economic Intelligence and Investigation Bureau (EIIB), received confidential information that the respondent had imported synthetic resin amounting to P115,599,018.00 but only declared P45,538,694.57.3 According to the informer, based on photocopies of 77 Consumption Entries furnished by another informer, the 1987 importations of the respondent were understated in its accounting records.4 Amoto submitted a report to the EIIB Commissioner recommending that an inventory audit of the respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the EIIB.5 Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued Mission Order No. 398-896 dated November 14, 1989 for the audit and investigation of the importations of Hantex for 1987. The IIPO issued subpoena duces tecum and ad testificandum for the president and general manager of the respondent to appear in a hearing and bring the following: 1. Books of Accounts for the year 1987; 2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987; 3. Income tax returns & attachments for 1987; and 4. Record of tax payments.7 However, the respondents president and general manager refused to comply with the subpoena, contend ing that its books of accounts and records of importation of synthetic resin and calcium bicarbonate had been investigated repeatedly by the Bureau of Internal Revenue (BIR) on prior occasions.8 The IIPO explained that despite such previous investigations, the EIIB was still authorized to conduct an investigation pursuant to Section 26-A of Executive Order No. 127. Still, the respondent refused to comply with the subpoena issued by the IIPO. The latter forthwith secured certified copies of the Profit and Loss Statements for 1987 filed by the respondent with the Securities and Exchange Commission (SEC).9However, the IIPO failed to secure certified copies of the respondents 1987 Consumption Entries from the Bureau of Customs since, according to the custodian thereof, the original copies had been eaten by termites. 10

11

In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division, Manila International Container Port, and the Acting Chief of the Collection Division, Port of Manila, to authenticate the machine copies of the import entries supplied by the informer. However, Chief of the Collection Division Merlita D. Tomas could not do so because the Collection Division did not have the original copies of the entries. Instead, she wrote the IIPO that, as gleaned from the records, the following entries had been duly processed and released after the payment of duties and taxes: IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987 ENTRY NO. 03058-87 09120-87 18089-87 19439-87 19441-87 11667-87 23294-87 45478-87 45691-87 25464-87 26483-87 29950-87 DATE RELEASED ENTRY NO. DATE RELEASED 12/9/87 11/27/87 8/21/87 8/20/87 9/16/87 9/11/87 11/2/87 11/16/87 11/16/87 11/19/87 11/18/87 11-27-8711

1/30/87 50265-87 3/20/87 46427-87 5/21/87 30764-87 6/2/87 30833-87 6/3/87 34690-87 4/15/87 34722-87 7/7/87 43234-87 11/16/87 44850-87 12/2/87 44851-87 7/16/87 46461-87 7/23/87 46467-87 8/11/87 48091-87

Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan could not authenticate the machine copies of the import entries as well, since the original copies of the said entries filed with the Bureau of Customs had apparently been eaten by termites. However, he issued a certification that the following enumerated entries were filed by the respondent which were processed and released from the Port of Manila after payment of duties and taxes, to wit: Hantex Trading Co., Inc. Entry No. 3903 4414 10683 12611 12989 17050 17169 18089 19439 21189 43451 42795 35582 45691 46187 46427 57669 62471 Date Released Entry No. 1/29/87 1/20/87 2/17/87 2/24/87 2/26/87 3/13/87 3/13/87 3/16/87 4/1/87 4/3/87 6/29/87 6/23/87 not received 7/3/87 7/8/87 7/3/87 8/12/87 8/28/87 22869 19441 24189 26431 45478 26796 28827 31617 39068 42581 42793 45477 85830 86650 87647 88829 92293 93292 Date Released 4/8/87 3/31/87 4/21/87 4/20/87 7/3/87 4/23/87 4/30/87 5/14/87 6/5/87 6/21/87 6/23/87 7/3/87 11/13/87 not received 11/18/87 11/23/87 12/3/87 12/7/87

12

63187 66859 67890 68115 69974 72213 77688 84253 85534

9/2/87 9/15/87 9/17/87 9/15/87 9/24/87 10/2/87 10/16/87 11/10/87 11/11/87

96357 96822 98823 99428 99429 99441 101406 101407 3118

12/16/87 12/15/87 not received 12/28/87 12/28/87 12/28/87 1/5/87 1/8/87 1-19-8712

Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt. Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation. They relied on the certified copies of the respondents Profit and Loss Statement for 1987 and 1988 on file with the SEC, the machine copies of the Consumption Entries, Series of 1987, submitted by the informer, as well as excerpts from the entries certified by Tomas and Danganan. Based on the documents/records on hand, inclusive of the machine copies of the Consumption Entries, the EIIB found that for 1987, the respondent had importations totaling P105,716,527.00 (inclusive of advance sales tax). Compared with the declared sales based on the Profit and Loss Statements filed with the SEC, the respondent had unreported sales in the amount of P63,032,989.17, and its corresponding income tax liability was P41,916,937.78, inclusive of penalty charge and interests. EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and recommended the collection of the total tax assessment from the respondent.13 On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to the BIR Assistant Commissioner for Special Operations Service, directing the latter to prepare a conference letter advising the respondent of its deficiency taxes.14 Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers Saturnino D. Torres and Wilson Filamor conducted an investigation on the 1987 importations of the respondent, in the light of the records elevated by the EIIB to the BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain the respondents liability for deficiency sales and income taxes for 1987, if any. Per Torres and Filamors Report dated March 6, 1991 which was based on the report of the EIIB and the documents/records appended thereto, there was a prima facie case of fraud against the respondent in filing its 1987 Consumption Entry reports with the Bureau of Customs. They found that the respondent had unrecorded importation in the total amount of P70,661,694.00, and that the amount was not declared in its income tax return for 1987. The District Revenue Officer and the Regional Director of the BIR concurred with the report.15 Based on the said report, the Acting Chief of the Special Investigation Branch wrote the respondent and invited its representative to a conference at 10:00 a.m. of March 14, 1991 to discuss its deficiency internal revenue taxes and to present whatever documentary and other evidence to refute the same. 16 Appended to the letter was a computation of the deficiency income and sales tax due from the respondent, inclusive of increments: B. Computations: 1. Cost of Sales Ratio 2. Undeclared Sales Imported 3. Undeclared Gross Profit C. Deficiency Taxes Due: 1. Deficiency Income Tax 50% Surcharge Interest to 2/28/91 Total 2. Deficiency Sales Tax at 10%

A2/A1 A3/B1 B2-A3 B3 x 35% C1 x 50% C1 x 57.5%

85.492923% 110,079,491.61 15,969,316.61 5,589,261.00 2,794,630.50 3,213,825.08 11,597,825.58 7,290,082.72

13

at 20% Total Due Less: Advanced Sales Taxes Paid Deficiency Sales Tax 50% Surcharge C2 x 50% Interest to 2/28/91 Total

10,493,312.31 17,783,395.03 11,636,352.00 6,147,043.03 3,073,521.52 5,532,338.73 14,752,903.2817

The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March 15, 1991, Mariano O. Chua, the President and General Manager of the respondent, requested that the report of Torres and Filamor be set aside on the following claim: [W]e had already been investigated by RDO No. 23 under Letters of Authority Nos. 0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and 0347838 RR dated March 2, 1988, and re-investigated by the Special Investigation Team on Aug. 17, 1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all for income and business tax liabilities for 1987. The Economic Intelligence and Investigation Bureau on Nov. 20, 1989, likewise, confronted us on the same information for the same year. In all of these investigations, save your request for an informal conference, we welcomed them and proved the contrary of the allegation. Now, with your new inquiry, we think that there will be no end to the problem. Madam, we had been subjected to so many investigations and re-investigations for 1987 and nothing came out except the payment of deficiency taxes as a result of oversight. Tax evasion through underdeclaration of income had never been proven.18 Invoking Section 23519 of the 1977 National Internal Revenue Code (NIRC), as amended, Chua requested that the inquiry be set aside. The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner for Collection Jaime M. Maza, sent a Letter dated April 15, 1991 to the respondent demanding payment of its deficiency income tax of P13,414,226.40 and deficiency sales tax of P14,752,903.25, inclusive of surcharge and interest.20 Appended thereto were the Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-87-91-001655.21 On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR sent a letter to the respondent demanding payment of its tax liability due for 1987 within ten (10) days from notice, on pain of the collection tax due via a warrant of distraint and levy and/or judicial action.22 The Warrant of Distraint and/or Levy23 was actually served on the respondent on January 21, 1992. On September 7, 1992, it wrote the Commissioner of Internal Revenue protesting the assessment on the following grounds: I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE FACT THAT NO INVESTIGATION OF OUR RECORDS WAS EVER MADE BY THE EIIB WHICH RECOMMENDED ITS ISSUANCE.24 II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR 1987 AMOUNTED TOP105,716,527.00 AS CLAIMED BY THE EIIB, THE ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT FAILED TO CONSIDER OUR REAL PURCHASES OF P45,538,694.57.25 III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS AND UNFOUNDED CONSIDERING THAT WE HAVE DUTIFULLY PAID THE SALES TAX DUE FROM OUR BUSINESS. 26 In view of the impasse, administrative hearings were conducted on the respondents protest to the assessment. During the hearing of August 20, 1993, the IIPO representative presented the photocopies of the Consumption and Import Entries and the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO representative testified that the Bureau of Customs failed to furnish the EIIB with certified copies of the Consumption and Import Entries; hence, the EIIB relied on the machine copies from their informer.27

14

The respondent wrote the BIR Commissioner on July 12, 1993 questioning the assessment on the ground that the EIIB representative failed to present the original, or authenticated, or duly certified copies of the Consumption and Import Entry Accounts, or excerpts thereof if the original copies were not readily available; or, if the originals were in the official custody of a public officer, certified copies thereof as provided for in Section 12, Chapter 3, Book VII, Administrative Procedure, Administrative Order of 1987. It stated that the only copies of the Consumption Entries submitted to the Hearing Officer were mere machine copies furnished by an informer of the EIIB. It asserted that the letters of Tomas and Danganan were unreliable because of the following: In the said letters, the two collection officers merely submitted a listing of alleged import entry numbers and dates released of alleged importations by Hantex Trading Co., Inc. of merchandise in 1987, for which they certified that the corresponding duties and taxes were paid after being processed in their offices. In said letters, no amounts of the landed costs and advance sales tax and duties were stated, and no particulars of the duties and taxes paid per import entry document was presented. The contents of the two letters failed to indicate the particulars of the importations per entry number, and the said letters do not constitute as evidence of the amounts of importations of Hantex Trading Co., Inc. in 1987. 28 The respondent cited the following findings of the Hearing Officer: [T]hat the import entry documents do not constitute evidence only indicate that the tax assessments in question have no factual basis, and must, at this point in time, be withdrawn and cancelled. Any new findings by the IIPO representative who attended the hearing could not be used as evidence in this hearing, because all the issues on the tax assessments in question have already been raised by the herein taxpayer.29 The respondent requested anew that the income tax deficiency assessment and the sales tax deficiency assessment be set aside for lack of factual and legal basis. The BIR Commissioner30 wrote the respondent on December 10, 1993, denying its letter-request for the dismissal of the assessments.31 The BIR Commissioner admitted, in the said letter, the possibility that the figures appearing in the photocopies of the Consumption Entries had been tampered with. She averred, however, that she was not proscribed from relying on other admissible evidence, namely, the Letters of Torres and Filamor dated August 7 and 22, 1990 on their investigation of the respondents tax liability. The Commissioner emphasized that her decision was final. 32 The respondent forthwith filed a petition for review in the CTA of the Commissioners Final Assessment Letter dated December 10, 1993 on the following grounds: First. The alleged 1987 deficiency income tax assessment (including increments) and the alleged 1987 deficiency sales tax assessment (including increments) are void ab initio, since under Sections 16(a) and 49(b) of the Tax Code, the Commissioner shall examine a return after it is filed and, thereafter, assess the correct amount of tax. The following facts obtaining in this case, however, are indicative of the incorrectness of the tax assessments in question: the deficiency interests imposed in the income and percentage tax deficiency assessment notices were computed in violation of the provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax deficiency was computed on an annual basis for the year 1987 in accordance with the provision of Section 193, which should have been computed in accordance with Section 162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and the BIR official who signed the deficiency tax assessments was the Assistant Commissioner for Collection, who had no authority to sign the same under the NIRC. Second. Even granting arguendo that the deficiency taxes and increments for 1987 against the respondent were correctly computed in accordance with the provisions of the Tax Code, the facts indicate that the above-stated assessments were based on alleged documents which are inadmissible in either administrative or judicial proceedings. Moreover, the alleged bases of the tax computations were anchored on mere presumptions and not on actual facts. The alleged undeclared purchases for 1987 were based on mere photocopies of alleged import entry documents, not the original ones, and which had never been duly certified by the public officer charged with the custody of such records in the Bureau of Customs. According to the respondent, the alleged undeclared sales were computed based on mere presumptions as to the alleged gross profit contained in its 1987 financial statement. Moreover, even the alleged financial statement of the respondent was a mere machine copy and not an official copy of the 1987 income and business tax returns. Finally, the respondent was following the accrual method of accounting in 1987, yet, the BIR investigator who computed the 1987 income tax

15

deficiency failed to allow as a deductible item the alleged sales tax deficiency for 1987 as provided for under Section 30(c) of the NIRC of 1986.33 The Commissioner did not adduce in evidence the original or certified true copies of the 1987 Consumption Entries on file with the Commission on Audit. Instead, she offered in evidence as proof of the contents thereof, the photocopies of the Consumption Entries which the respondent objected to for being inadmissible in evidence.34 She also failed to present any witness to prove the correct amount of tax due from it. Nevertheless, the CTA provisionally admitted the said documents in evidence, subject to its final evaluation of their relevancy and probative weight to the issues involved. 35 On December 11, 1997, the CTA rendered a decision, the dispositive portion of which reads: IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner of Internal Revenue its deficiency income and sales taxes for the year 1987 in the amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency interest per annum on both deficiency taxes from April 15, 1991 until fully paid pursuant to Section 283(c)(3) of the 1987 Tax Code, with costs against the petitioner. SO ORDERED.36 The CTA ruled that the respondent was burdened to prove not only that the assessment was erroneous, but also to adduce the correct taxes to be paid by it. The CTA declared that the respondent failed to prove the correct amount of taxes due to the BIR. It also ruled that the respondent was burdened to adduce in evidence a certification from the Bureau of Customs that the Consumption Entries in question did not belong to it. On appeal, the CA granted the petition and reversed the decision of the CTA. The dispositive portion of the decision reads: FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming the 1987 deficiency income and sales tax assessments and the increments thereof, issued by the BIR is hereby REVERSED. No costs.37 The Ruling of the Court of Appeals The CA held that the income and sales tax deficiency assessments issued by the petitioner were unlawful and baseless since the copies of the import entries relied upon in computing the deficiency tax of the respondent were not duly authenticated by the public officer charged with their custody, nor verified under oath by the EIIB and the BIR investigators.38 The CA also noted that the public officer charged with the custody of the import entries was never presented in court to lend credence to the alleged loss of the originals. 39 The CA pointed out that an import entry is a public document which falls within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply.40 Citing the ruling of this Court in Collector of Internal Revenue v. Benipayo,41 the CA ruled that the assessments were unlawful because they were based on hearsay evidence. The CA also ruled that the respondent was deprived of its right to due process of law. The CA added that the CTA should not have just brushed aside the legal requisites provided for under the pertinent provisions of the Rules of Court in the matter of the admissibility of public documents, considering that substantive rules of evidence should not be disregarded. It also ruled that the certifications made by the two Customs Collection Chiefs under the guise of supporting the respondents alleged tax deficiency assessments invoking the best evidence obtainable rule under the Tax Code should not be permitted to supplant the best evidence rule under Section 7, Rule 130 of the Rules of Court. Finally, the CA noted that the tax deficiency assessments were computed without the tax returns. The CA opined that the use of the tax returns is indispensable in the computation of a tax deficiency; hence, this essential requirement must be complied with in the preparation and issuance of valid tax deficiency assessments. 42 The Present Petition The Commissioner of Internal Revenue, the petitioner herein, filed the present petition for review under Rule 45 of the Rules of Court for the reversal of the decision of the CA and for the reinstatement of the ruling of the CTA.

16

As gleaned from the pleadings of the parties, the threshold issues for resolution are the following: (a) whether the petition at bench is proper and complies with Sections 4 and 5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991 final assessment of the petitioner against the respondent for deficiency income tax and sales tax for the latters 1987 importation of resins and calcium bicarbonate is based on competent evidence and the law; and (c) the total amount of deficiency taxes due from the respondent for 1987, if any. On the first issue, the respondent points out that the petition raises both questions of facts and law which cannot be the subject of an appeal by certiorari under Rule 45 of the Rules of Court. The respondent notes that the petition is defective because the verification and the certification against forum shopping were not signed by the petitioner herself, but only by the Regional Director of the BIR. The respondent submits that the petitioner should have filed a motion for reconsideration with the CA before filing the instant petition for review.43 We find and so rule that the petition is sufficient in form. A verification and certification against forum shopping signed by the Regional Director constitutes sufficient compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of Court. Under Section 10 of the NIRC of 1997,44 the Regional Director has the power to administer and enforce internal revenue laws, rules and regulations, including the assessment and collection of all internal revenue taxes, charges and fees. Such power is broad enough to vest the Revenue Regional Director with the authority to sign the verification and certification against forum shopping in behalf of the Commissioner of Internal Revenue. There is no other person in a better position to know the collection cases filed under his jurisdiction than the Revenue Regional Director. Moreover, under Revenue Administrative Order No. 5-83,45 the Regional Director is authorized to sign all pleadings filed in connection with cases referred to the Revenue Regions by the National Office which, otherwise, require the signature of the petitioner. We do not agree with the contention of the respondent that a motion for reconsideration ought to have been filed before the filing of the instant petition. A motion for reconsideration of the decision of the CA is not a condition sine qua non for the filing of a petition for review under Rule 45. As we held in Almora v. Court of Appeals:46 Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that: A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with the Supreme Court a petition for certiorari within fifteen (15) days from notice of judgment, or of the denial of his motion for reconsideration filed in due time. (Emphasis supplied) The conjunctive "or" clearly indicates that the 15-day reglementary period for the filing of a petition for certiorari under Rule 45 commences either from notice of the questioned judgment or from notice of denial of the appellants motion for reconsideration. A prior motion for reconsideration is not indispensable for a petition for review on certiorari under Rule 45 to prosper. 47 While Rule 45 of the Rules of Court provides that only questions of law may be raised by the petitioner and resolved by the Court, under exceptional circumstances, the Court may take cognizance thereof and resolve questions of fact. In this case, the findings and conclusion of the CA are inconsistent with those of the CTA, not to mention those of the Commissioner of Internal Revenue. The issues raised in this case relate to the propriety and the correctness of the tax assessments made by the petitioner against the respondent, as well as the propriety of the application of Section 16, paragraph (b) of the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive Order No. 273, in relation to Section 3, Rule 132 of the Rules of Evidence. There is also an imperative need for the Court to resolve the threshold factual issues to give justice to the parties, and to determine whether the CA capriciously ignored, misunderstood or misinterpreted cogent facts and circumstances which, if considered, would change the outcome of the case. On the second issue, the petitioner asserts that since the respondent refused to cooperate and show its 1987 books of account and other accounting records, it was proper for her to resort to the best evidence obtainable the photocopies of the import entries in the Bureau of Customs and the respondents financial statement filed with the SEC. 48 The petitioner maintains that these import entries were admissible as secondary evidence under the best evidence obtainable rule, since they were duly authenticated by the Bureau of Customs officials who processed the documents and released the cargoes after payment of the duties and taxes due.49 Further, the petitioner points out that under the best evidence obtainable rule, the tax return is not important in computing the tax deficiency.50

17

The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977 NIRC, as amended, legally cannot be equated to the best evidence rule under the Rules of Court; nor can the best evidence rule, being procedural law, be made strictly operative in the interpretation of the best evidence obtainable rule which is substantive in character. 51 The petitioner posits that the CTA is not strictly bound by technical rules of evidence, the reason being that the quantum of evidence required in the said court is merely substantial evidence.52 Finally, the petitioner avers that the respondent has the burden of proof to show the correct assessments; otherwise, the presumption in favor of the correctness of the assessments made by it stands. 53 Since the respondent was allowed to explain its side, there was no violation of due process.54 The respondent, for its part, maintains that the resort to the best evidence obtainable method was illegal. In the first place, the respondent argues, the EIIB agents are not duly authorized to undertake examination of the taxpayers accounting records for internal revenue tax purposes. Hence, the respondents failure to accede to their demands to show its books of accounts and other accounting records cannot justify resort to the use of the best evidence obtainable method. 55Secondly, when a taxpayer fails to submit its tax records upon demand by the BIR officer, the remedy is not to assess him and resort to the best evidence obtainable rule, but to punish the taxpayer according to the provisions of the Tax Code.56 In any case, the respondent argues that the photocopies of import entries cannot be used in making the assessment because they were not properly authenticated, pursuant to the provisions of Sections 24 57 and 2558 of Rule 132 of the Rules of Court. It avers that while the CTA is not bound by the technical rules of evidence, it is bound by substantial rules. 59 The respondent points out that the petitioner did not even secure a certification of the fact of loss of the original documents from the custodian of the import entries. It simply relied on the report of the EIIB agents that the import entry documents were no longer available because they were eaten by termites. The respondent posits that the two collectors of the Bureau of Customs never authenticated the xerox copies of the import entries; instead, they only issued certifications stating therein the import entry numbers which were processed by their office and the date the same were released. 60 The respondent argues that it was not necessary for it to show the correct assessment, considering that it is questioning the assessments not only because they are erroneous, but because they were issued without factual basis and in patent violation of the assessment procedures laid down in the NIRC of 1977, as amended.61 It is also pointed out that the petitioner failed to use the tax returns filed by the respondent in computing the deficiency taxes which is contrary to law;62as such, the deficiency assessments constituted deprivation of property without due process of law. 63 Central to the second issue is Section 16 of the NIRC of 1977, as amended, 64 which provides that the Commissioner of Internal Revenue has the power to make assessments and prescribe additional requirements for tax administration and enforcement. Among such powers are those provided in paragraph (b) thereof, which we quote: (b) Failure to submit required returns, statements, reports and other documents. When a report required by law as a basis for the assessment of any national internal revenue tax shall not be forthcoming within the time fixed by law or regulation or when there is reason to believe that any such report is false, incomplete or erroneous, the Commissioner shall assess the proper tax on the best evidence obtainable . In case a person fails to file a required return or other document at the time prescribed by law, or willfully or otherwise files a false or fraudulent return or other document, the Commissioner shall make or amend the return from his own knowledge and from such information as he can obtain through testimony or otherwise, which shall be prima facie correct and sufficient for all legal purposes.65 This provision applies when the Commissioner of Internal Revenue undertakes to perform her administrative duty of assessing the proper tax against a taxpayer, to make a return in case of a taxpayers failure to file one, or to amend a return already filed in the BIR. The petitioner may avail herself of the best evidence or other information or testimony by exercising her power or authority under paragraphs (1) to (4) of Section 7 of the NIRC: (1) To examine any book, paper, record or other data which may be relevant or material to such inquiry; (2) To obtain information from any office or officer of the national and local governments, government agencies or its instrumentalities, including the Central Bank of the Philippines and government owned or controlled corporations;

18

(3) To summon the person liable for tax or required to file a return, or any officer or employee of such person, or any person having possession, custody, or care of the books of accounts and other accounting records containing entries relating to the business of the person liable for tax, or any other person, to appear before the Commissioner or his duly authorized representative at a time and place specified in the summons and to produce such books, papers, records, or other data, and to give testimony; (4) To take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry; 66 The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes the corporate and accounting records of the taxpayer who is the subject of the assessment process, the accounting records of other taxpayers engaged in the same line of business, including their gross profit and net profit sales. 67 Such evidence also includes data, record, paper, document or any evidence gathered by internal revenue officers from other taxpayers who had personal transactions or from whom the subject taxpayer received any income; and record, data, document and information secured from government offices or agencies, such as the SEC, the Central Bank of the Philippines, the Bureau of Customs, and the Tariff and Customs Commission. The law allows the BIR access to all relevant or material records and data in the person of the taxpayer. It places no limit or condition on the type or form of the medium by which the record subject to the order of the BIR is kept. The purpose of the law is to enable the BIR to get at the taxpayers records in whatever form they may be kept. Such records include computer tapes of the said records prepared by the taxpayer in the course of business. 68 In this era of developing information-storage technology, there is no valid reason to immunize companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard is not the form of the record but where it might shed light on the accuracy of the taxpayers return. In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of Appeals (5th Circuit) declared that it is the duty of the Commissioner of Internal Revenue to investigate any circumstance which led him to believe that the taxpayer had taxable income larger than reported. Necessarily, this inquiry would have to be outside of the books because they supported the return as filed. He may take the sworn testimony of the taxpayer; he may take the testimony of third parties; he may examine and subpoena, if necessary, traders and brokers accounts and books and the taxpayers book accounts. The Commissioner is not bound to follow any set of patterns. The existence of unreported income may be shown by any practicable proof that is available in the circumstances of the particular situation. Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate court declared that where the records of the taxpayer are manifestly inaccurate and incomplete, the Commissioner may look to other sources of information to establish income made by the taxpayer during the years in question.71 We agree with the contention of the petitioner that the best evidence obtainable may consist of hearsay evidence, such as the testimony of third parties or accounts or other records of other taxpayers similarly circumstanced as the taxpayer subject of the investigation, hence, inadmissible in a regular proceeding in the regular courts. 72 Moreover, the general rule is that administrative agencies such as the BIR are not bound by the technical rules of evidence. It can accept documents which cannot be admitted in a judicial proceeding where the Rules of Court are strictly observed. It can choose to give weight or disregard such evidence, depending on its trustworthiness. However, the best evidence obtainable under Section 16 of the 1977 NIRC, as amended, does not include mere photocopies of records/documents. The petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer, cannot anchor the said assessment on mere machine copies of records/documents. Mere photocopies of the Consumption Entries have no probative weight if offered as proof of the contents thereof. The reason for this is that such copies are mere scraps of paper and are of no probative value as basis for any deficiency income or business taxes against a taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of Appeals (2nd Circuit) ruled that where the accuracy of a taxpayers return is being checked, the government is entitled to use the original records rather than be forced to accept purported copies which present the risk of error or tampering.74 In Collector of Internal Revenue v. Benipayo,75 the Court ruled that the assessment must be based on actual facts. The rule assumes more importance in this case since the xerox copies of the Consumption Entries furnished by the informer of the EIIB were furnished by yet another informer. While the EIIB tried to secure certified copies of the said entries from the Bureau of Customs, it was unable to do so because the said entries were allegedly eaten by termites. The Court can only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies of the said entries from the Tariff and Customs Commission or from the National Statistics Office which also had copies thereof. It bears stressing that under Section 1306 of the Tariff and Customs Code, the Consumption Entries shall be the required number of copies as

19

prescribed by regulations.76 The Consumption Entry is accomplished in sextuplicate copies and quadruplicate copies in other places. In Manila, the six copies are distributed to the Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR and relied on the photocopies supplied by the informer of the EIIB who secured the same from another informer. The BIR, in preparing and issuing its preliminary and final assessments against the respondent, even ignored the records on the investigation made by the District Revenue officers on the respondents importations for 1987. The original copies of the Consumption Entries were of prime importance to the BIR. This is so because such entries are under oath and are presumed to be true and correct under penalty of falsification or perjury. Admissions in the said entries of the importers documents are admissions against interest and presumptively correct. 77 In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving weight to the machine copies of the Consumption Entries in fixing the tax deficiency assessments against the respondent. The rule is that in the absence of the accounting records of a taxpayer, his tax liability may be determined by estimation. The petitioner is not required to compute such tax liabilities with mathematical exactness. Approximation in the calculation of the taxes due is justified. To hold otherwise would be tantamount to holding that skillful concealment is an invincible barrier to proof.78 However, the rule does not apply where the estimation is arrived at arbitrarily and capriciously.79 We agree with the contention of the petitioner that, as a general rule, tax assessments by tax examiners are presumed correct and made in good faith. All presumptions are in favor of the correctness of a tax assessment. It is to be presumed, however, that such assessment was based on sufficient evidence. Upon the introduction of the assessment in evidence, aprima facie case of liability on the part of the taxpayer is made.80 If a taxpayer files a petition for review in the CTA and assails the assessment, the prima facie presumption is that the assessment made by the BIR is correct, and that in preparing the same, the BIR personnel regularly performed their duties. This rule for tax initiated suits is premised on several factors other than the normal evidentiary rule imposing proof obligation on the petitioner-taxpayer: the presumption of administrative regularity; the likelihood that the taxpayer will have access to the relevant information; and the desirability of bolstering the record-keeping requirements of the NIRC.81 However, the prima facie correctness of a tax assessment does not apply upon proof that an assessment is utterly without foundation, meaning it is arbitrary and capricious. Where the BIR has come out with a "naked assessment," i.e., without any foundation character, the determination of the tax due is without rational basis. 82 In such a situation, the U.S. Court of Appeals ruled83 that the determination of the Commissioner contained in a deficiency notice disappears. Hence, the determination by the CTA must rest on all the evidence introduced and its ultimate determination must find support in credible evidence. The issue that now comes to fore is whether the tax deficiency assessment against the respondent based on the certified copies of the Profit and Loss Statement submitted by the respondent to the SEC in 1987 and 1988, as well as certifications of Tomas and Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed to overcome the prima facie correctness of the tax deficiency assessment issued by the petitioner, to wit: The issue should be ruled in the affirmative as petitioner has failed to rebut the validity or correctness of the aforementioned tax assessments. It is incongruous for petitioner to prove its cause by simply drawing an inference unfavorable to the respondent by attacking the source documents (Consumption Entries) which were the bases of the assessment and which were certified by the Chiefs of the Collection Division, Manila International Container Port and the Port of Manila, as having been processed and released in the name of the petitioner after payment of duties and taxes and the duly certified copies of Financial Statements secured from the Securities and Exchange Commission. Any such inference cannot operate to relieve petitioner from bearing its burden of proof and this Court has no warrant of absolution. The Court should have been persuaded to grant the reliefs sought by the petitioner should it have presented any evidence of relevance and competence required, like that of a certification from the Bureau of Customs or from any other agencies, attesting to the fact that those consumption entries did not really belong to them. The burden of proof is on the taxpayer contesting the validity or correctness of an assessment to prove not only that the Commissioner of Internal Revenue is wrong but the taxpayer is right ( Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption in favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524).

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The burden of proving the illegality of the assessment lies upon the petitioner alleging it to be so. In the case at bar, petitioner miserably failed to discharge this duty.84 We are not in full accord with the findings and ratiocination of the CTA. Based on the letter of the petitioner to the respondent dated December 10, 1993, the tax deficiency assessment in question was based on (a) the findings of the agents of the EIIB which was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and Loss Statements of the respondent for 1987 and 1988; and (c) the certifications of Tomas and Danganan dated August 7, 1990 and August 22, 1990: In reply, please be informed that after a thorough evaluation of the attending facts, as well as the laws and jurisprudence involved, this Office holds that you are liable to the assessed deficiency taxes. The conclusion was arrived at based on the findings of agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own examiners who have painstakingly examined the records furnished by the Bureau of Customs and the Securities & Exchange Commission (SEC). The examination conducted disclosed that while your actual sales for 1987 amounted to P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss Statements, the sum of P47,698,569.83 only. The difference, therefore, of P63,032,989.17 constitutes as undeclared or unrecorded sales which must be subjected to the income and sales taxes. You also argued that our assessment has no basis since the alleged amount of underdeclared importations were lifted from uncertified or unauthenticated xerox copies of consumption entries which are not admissible in evidence. On this issue, it must be considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the Collection Division of the Manila International Container Port and Port of Manila, respectively, certified that the enumerated consumption entries were filed, processed and released from the port after payment of duties and taxes. It is noted that the certification does not touch on the genuineness, authenticity and correctness of the consumption entries which are all xerox copies, wherein the figures therein appearing may have been tampered which may render said documents inadmissible in evidence, but for tax purposes, it has been held that the Commissioner is not required to make his determination (assessment) on the basis of evidence legally admissible in a formal proceeding in Court (Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory notice may be based in whole or in part upon admissible evidence ( Llorente v. Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977); and Rosano v. Commissioner, 46 TC 681 (1966). In the case also ofWeimerskirch v. Commissioner (1977), the assessment was given due course in the presence of admissible evidence as to how the Commissioner arrived at his determination, although there was no admissible evidence with respect to the substantial issue of whether the taxpayer had unreported or undeclared income from narcotics sale. 85 Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents for the actual cost of importation of the respondent are the machine copies of the Consumption Entries from the informer which the IIPO claimed to have been certified by Tomas and Danganan: The source documents for the total actual cost of importations, abovementioned, were the different copies of Consumption Entries, Series of 1987, filed by subject with the Bureau of Customs, marked Annexes "F-1" to "F68." The total cost of importations is the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed entries. These entries were duly authenticated as having been processed and released, after payment of the duties and taxes due thereon, by the Chief, Collection Division, Manila International Container Port, dated August 7, 1990, "Annex-G," and the Port of Manila, dated August 22, 1990, "Annex-H." So, it was established that subject-importations, mostly resins, really belong to HANTEX TRADING CO., INC.86 It also appears on the worksheet of the IIPO, as culled from the photocopies of the Consumption Entries from its informer, that the total cost of the respondents importation for 1987 was P105,761,527.00. Per the report of Torres and Filamor, they also relied on the photocopies of the said Consumption Entries: The importations made by taxpayer verified by us from the records of the Bureau of Customs and xerox copies of which are hereto attached shows the big volume of importations made and not declared in the income tax return filed by taxpayer. Based on the above findings, it clearly shows that a prima facie case of fraud exists in the herein transaction of the taxpayer, as a consequence of which, said transaction has not been possibly entered into the books of accounts of the subject taxpayer.87

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In fine, the petitioner based her finding that the 1987 importation of the respondent was underdeclared in the amount ofP105,761,527.00 on the worthless machine copies of the Consumption Entries. Aside from such copies, the petitioner has no other evidence to prove that the respondent imported goods costing P105,761,527.00. The petitioner cannot find solace on the certifications of Tomas and Danganan because they did not authenticate the machine copies of the Consumption Entries, and merely indicated therein the entry numbers of Consumption Entries and the dates when the Bureau of Customs released the same. The certifications of Tomas and Danganan do not even contain the landed costs and the advance sales taxes paid by the importer, if any. Comparing the certifications of Tomas and Danganan and the machine copies of the Consumption Entries, only 36 of the entry numbers of such copies are included in the said certifications; the entry numbers of the rest of the machine copies of the Consumption Entries are not found therein. Even if the Court would concede to the petitioners contention that the certification of Tomas and Danganan authenticated the machine copies of the Consumption Entries referred to in the certification, it appears that the total cost of importations inclusive of advance sales tax is only P64,324,953.00 far from the amount of P105,716,527.00 arrived at by the EIIB and the BIR,88 or even the amount of P110,079,491.61 arrived at by Deputy Commissioner Deoferio, Jr.89 As gleaned from the certifications of Tomas and Danganan, the goods covered by the Consumption Entries were released by the Bureau of Customs, from which it can be presumed that the respondent must have paid the taxes due on the said importation. The petitioner did not adduce any documentary evidence to prove otherwise. Thus, the computations of the EIIB and the BIR on the quantity and costs of the importations of the respondent in the amount of P105,761,527.00 for 1987 have no factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the presumption that she and the other employees of the BIR had regularly performed their duties. As the Court held inCollector of Internal Revenue v. Benipayo,90 in order to stand judicial scrutiny, the assessment must be based on facts. The presumption of the correctness of an assessment, being a mere presumption, cannot be made to rest on another presumption. Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly examined the 1987 books of accounts of the respondent showing its importations, and found that the latter had minimal business tax liability. In this case, the presumption that the District Revenue officers performed their duties in accordance with law shall apply. There is no evidence on record that the said officers neglected to perform their duties as mandated by law; neither is there evidencealiunde that the contents of the 1987 and 1988 Profit and Loss Statements submitted by the respondent with the SEC are incorrect. Admittedly, the respondent did not adduce evidence to prove its correct tax liability. However, considering that it has been established that the petitioners assessment is barren of factual basis, arbitrary and illegal, such failure on the part of the respondent cannot serve as a basis for a finding by the Court that it is liable for the amount contained in the said assessment; otherwise, the Court would thereby be committing a travesty. On the disposition of the case, the Court has two options, namely, to deny the petition for lack of merit and affirm the decision of the CA, without prejudice to the petitioners issuance of a new assessment agai nst the respondent based on credible evidence; or, to remand the case to the CTA for further proceedings, to enable the petitioner to adduce in evidence certified true copies or duplicate original copies of the Consumption Entries for the respondents 1987 importations, if there be any, and the correct tax deficiency assessment thereon, without prejudice to the right of the respondent to adduce controverting evidence, so that the matter may be resolved once and for all by the CTA. In the higher interest of justice to both the parties, the Court has chosen the latter option. After all, as the Tax Court of the United States emphasized inHarbin v. Commissioner of Internal Revenue,91 taxation is not only practical; it is vital. The obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as the government should never be over-reaching or tyrannical, neither should a taxpayer be permitted to escape payment by the concealment of material facts. IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is SET ASIDE. The records are REMANDED to the Court of Tax Appeals for further proceedings, conformably with the decision of this Court. No costs. SO ORDERED. Puno, (Chairman), Austria-Martinez, Tinga, and Chico-Nazario, JJ., concur.

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THIRD DIVISION [G.R. No. 128315. June 29, 1999] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO, respondents. DECISION PANGANIBAN, J.: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals.

Statement of the Case Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for the nullification of the October 30, 1996 Decision[1] of the Court of Appeals[2] in CA-GR SP No. 40853, which effectively affirmed the January 25, 1996 Resolution[3] of the Court of Tax Appeals[4] in CTA Case No. 5271. The CTA disposed as follows: WHEREFORE, finding [the herein petitioners] Motion to Dismiss as UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file her answer. Petitioner also seeks to nullify the February 13, 1997 Resolution [5] of the Court of Appeals denying reconsideration.

The Facts As found by the Court of Appeals, the undisputed facts of the case are as follows: It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong authorized Revenue Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to examine the books of accounts and other accounting records of Pascor Realty and Development Corporation. (PRDC) for the years ending 1986, 1987 and 1988. The said examination 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 of Internal Revenue filed a criminal complaint before the Department of Justice against the 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 PRDC, et. al. filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability. On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them. In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation of the private respondents on the ground that no formal assessment has as yet been issued by the Commissioner. Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6, 1995, the CIR 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 no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss in a Resolution dated January 25,

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1996 and ordered the CIR to file an answer within thirty (30) days from receipt of said resolution. The CIR received the resolution on January 31, 1996 but did not file an answer nor did she move to reconsider the resolution. Instead, the CIR filed this petition on June 7, 1996, alleging as ground s that: Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in considering the affidavit/report of the revenue officer and the indorsement of said report to the secretary of justice as assessment which may be appealed to the Court of Tax Appeals; Respondent Court of Tax Appeals acted with grave abuse of discretion in considering the denial by petitioner of private respondents Motion for Reconsideration as [a] final decision which may be appealed to the Court of Tax Appeals. In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated: We agree with petitioners contentions, that the criminal complaint for tax evasion is the assessment issued, and that the letter denial of May 17, 1995 is the decision properly appealable to [u]s. Respondents ground of denial, therefore, that there was no formal assessment issued, is untenable. It is the Courts honest belief, that the criminal case for tax evasion is already an assessment. The complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached thereto, contains the details of the assessment like the kind and amount of tax due, and the period covered. Petitioners are right, in claiming that the provisions o f Republic Act No. 1125, relating to exclusive appellate jurisdiction of this Court, do not, make any mention of formal assessment. The law merely states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, and other matters arising under the National Internal Revenue Code, other law or part administered by the Bureau of Internal Revenue Code. As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient details needed for an assessment. These details are more than complete, compared to the following definitions of the term as quoted hereunder. Thus: Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332. (Words and Phrases, Permanent Edition, Vol. 4, p. 446) The word assessment when used in connection with taxation, may have more than one meaning. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. More commonly, the word assessment means the official valuation of a taxpayers property for purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p. 445) From the above, it can be gleaned that an assessment simply states how much tax is due from a taxpayer. Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of respondents examiners, which was attached to th e tax evasion complaint, more than suffice to qualify as an assessment. Therefore, this assessment having been disputed by petitioners, and there being a denial of their letter disputing such assessment, this Court unquestionably acquired jurisdiction over the instant petition for review.[6] As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition. Hence, this recourse to this Court.[7]

Ruling of the Court of Appeals The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the Department of Justice constituted an assessment of the tax due, and that the said assessment could be the subject of a protest. By definition, an assessment is simply the statement of the details and the amount of tax due from a taxpayer. Based on this definition, the details of the

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tax contained in the BIR examiners Joint Affidavit, [8] which was attached to the criminal Complaint, constituted an assessment. Since the assailed Order of the CTA was merely interlocutory and devoid of grave abuse of discretion, a petition for certiorari did not lie.

Issues Petitioners submit for the consideration of this Court the following issues: (1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted. (3) Whether or not the CTA can take cognizance of the case in the absence of an assessment.[9] In the main, the Court will resolve whether the revenue officers Affidavit -Report, which was attached to the criminal Complaint filed with the Department of Justice, constituted an assessment that could be questioned before the Court of Tax Appeals.

The Courts Ruling The petition is meritorious.

Main Issue: Assessment Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any way be construed as a formal assessment of private respondents tax liabilities. This position is based on Section 205 of the National Internal Revenue Code[10] (NIRC), which provides that remedies for the collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites Section 223(a) of the same Code, which states that in case of failure to file a return, the tax may be assessed or a proceeding in court may be begun without assessment. Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the collection of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer is required to pay the same. Thus, qualifying as an assessment was the BIR examiners Joint Affidavit, which contained the details of the supposed taxes due from respondent for taxable years ending 1987 and 1988, and which was attached to the tax evasion Complaint filed with the DOJ. Consequently, the denial by the BIR of private respondents request for reinvestigation of the disputed assessment is properly appealable to the CTA. We agree with petitioner. Neither the NIRC nor the revenue regulations governing the protest of assessments[11] provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers. True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent 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. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its payment until the full payment.[12] The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203[13]of the NIRC provides that internal revenue taxes must be assessed within

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three years from the last day within which to file the return. Section 222,[14] on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228[15] of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer.[16] In the present case, the revenue officers Affidavit merely contained a computation of respondents tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. Respondents maintain that an assessment, in relation to taxation, is simply understood to mean: A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof.[17] Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls.[18] Even these definitions fail to advance private respondents case. That the BIR examiners Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof. The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment. In addition, what private respondents sent to the commissioner was a motion for a reconsideration of the tax evasion charges filed, not of an assessment, as shown thus: This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty and Development Corporation and for the same to be referred to the Appellate Division in order to give my client the opportunity of a fair and objective hearing[19]

Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi,[20] petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both. Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC, [21] which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment

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signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs. SO ORDERED. Vitug, Purisima, and Gonzaga-Reyes, JJ., concur. Romero (Chairman), J., abroad on official business.

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Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22492 September 5, 1967

BASILAN ESTATES, INC., petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents. Felix A. Gulfin and Antonio S. Alano for petitioner. Office of the Solicitor General for respondents. BENGZON, J.P., J.: 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: 1. Has the Commissioner's right to collect deficiency income tax prescribed? 2. Was the disallowance of items claimed as deductible proper? 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? 4. Is the petitioner exempt from the penalty tax under Republic Act 1823 amending Section 25 of the Tax Code? PRESCRIPTION There is no dispute that the assessment of the deficiency tax was made on February 26, 1959; but the petitioner claims that it never received notice of such assessment or if 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 24, 1954. 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

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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 assess deficiency 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 fiveyear period.1 ASSESSMENT The questioned assessment is as follows: Net Income per return Add: Over-claimed depreciation Mis. expenses disallowed Officer's travelling expenses disallowed Net Income per Investigation 20% tax on P59,702.96 Less: Tax already assessed Deficiency income tax Add: Additional tax of 25% on P347,507.01 Tax Due & Collectible P40,142.90 P10,500.49 6,759.17 2,300.40 19,560.06 P59,702.96 11,940.00 8,028.00 P3,912.00 86,876.75 P90,788.75 =========

The Commissioner disallowed: Over-claimed depreciation Miscellaneous expenses Officer's travelling expenses P10,500.49 6,759.17 2,300.40 DEDUCTIONS 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 changed the depreciable value of said assets by increasing it to conform with the 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. In 1953, the year involved in this case, taxpayer claimed the following depreciation deduction: Reappraised assets New assets consisting of hospital building and equipment Total depreciation P47,342.53 3,910.45 P51,252.98

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Upon investigation and examination of taxpayer's books and papers, the 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 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 acquisition cost at rates fixed by the taxpayer. Hence, the Commissioner pegged the 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. The question for resolution therefore is whether depreciation shall be determined on the acquisition cost or on the reappraised value of the assets. 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 business is definitely limited in duration. 2 Depreciation commences with the 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 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 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 tax.4 Precisely, Section 30 (f) (1) which states: (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 shall equal the capital invested by the taxpayer . . . no further allowance shall be made. . . . allows a deduction from gross income for depreciation but limits the recovery to the capital invested in the asset being depreciated. 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 allowed. The reason is that deductions from gross income are privileges,5 not matters of right.6 They are not created by implication but upon clear expression in the law.7 Moreover, the recovery, free of income tax, of an amount more than the invested 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 also some profit. Recovery in due time thru depreciation of investment made is the 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 depreciation. 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 Officer's travelling expenses Total P6,759.17 2,300.40 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

30

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.1awphl.nt 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 Hilano Industries, Inc. in building the factory site and buildings to house technical men . . . part of it was spent in the facilities for the waterworks system and for industrialization of the coconut industry" (p. 117 of TSN of Dec. 6, 1962). This is not sufficient explanation. Persuasive jurisprudence on the matter such as those in the United States from where our tax law was derived,8has it that: "In order to determine whether profits were accumulated for the reasonable needs of the business or to avoid the surtax upon shareholders, the controlling intention of the taxpayer is that which is manifested at the time

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of the accumulation, not subsequently declared intentions which are merely the products of after-thought."9 The reversion here was 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 argues that since it has P560,717.44 as its expenses for the year 1953, a surplus of P347,507.01 is not unreasonably accumulated. As rightly contended by the Government, there is no need to have such a large amount at the beginning of the following year because during the year, current assets are converted into cash and with the income realized from the business as the year goes, these expenses may well 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 equal to current operating needs for the year to cover "cost of goods sold and 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 expenses of the year, it does not mean that the accumulations are reasonable as a matter of law."11 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) 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 yet as of that date there was still a surplus of P347,507.01. Petitioner questions why the examiner covered the period from 1948-1953 when the 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, 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 particular year are within the reasonable needs of a corporation, it is neccessary to take into account prior accumulations, since accumulations prior to the year involved may have been sufficient to cover the business needs and additional accumulations during the year involved would not reasonably be necessary." 12 Another factor that stands out to show unreasonable accumulation is the fact that large amounts were withdrawn by or advanced to the stockholders. For the year 1953 alone these totalled P197,229.26. Yet the surplus of P347,507.01 was left as of December 31, 1953. We find unacceptable petitioner's explanation that these were advances made in furtherance of the business purposes of the petitioner. As correctly held by the Court of Tax Appeals, while certain expenses of the corporation were credited against these amounts, the unspent balance was retained by the stockholders without refunding them to petitioner at the end of each year. These advances were in fact indirect loans to the stockholders indicating the unreasonable accumulation of surplus beyond the needs of the business. ALLEGED EXEMPTION 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 or surplus if invested in any dollar-producing or dollar-earning industry or in the purchase of bonds issued by the Central Bank, may not be subject to the 25% surtax. We have but to point out that the unreasonable accumulation was in 1953. The exemption was by virtue of Republic Act 1823 which amended Sec. 25 only on June 22, 1957 more than three years after the period covered by the assessment. In resume, Basilan Estates, Inc. is liable for the payment of deficiency income tax and surtax for the year 1953 in the amount of P88,977.42, computed as follows: Net Income per return Add: Over-claimed depreciation Net income per finding 20% tax on P50,643.39 Less: Tax already assessed Deficiency income tax P40,142.90 10,500.49 P50,643.39 P10,128.67 8,028.00 P2,100.67

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Add: 25% surtax on P347,507.01 Total tax due and collectible

86,876.75 P88,977.42 ===========

WHEREFORE, the judgment appealed from is modified to the extent that petitioner is allowed its deductions for travelling and miscellaneous expenses, but affirmed insofar as the petitioner is liable for P2,100.67 as deficiency income tax for 1953 and P86,876.75 as 25% surtax on the unreasonably accumulated profit of P347,507.01. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 155541 January 27, 2004

ESTATE OF THE LATE JULIANA DIEZ VDA. DE GABRIEL, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION YNARES-SANTIAGO, J.: This petition for review on certiorari assails the decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002,1 which reversed the November 19, 1995 Order of Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, entitled "Testate Estate of Juliana Diez Vda. De Gabriel". The petition was filed by the Estate of the Late Juliana Diez Vda. De Gabriel, represented by Prudential Bank as its duly appointed and qualified Administrator. As correctly summarized by the Court of Appeals, the relevant facts are as follows: During the lifetime of the decedent, Juliana Vda. De Gabriel, her business affairs were managed by the Philippine Trust Company (Philtrust). The decedent died on April 3, 1979. Two days after her death, Philtrust, through its Trust Officer, Atty. Antonio M. Nuyles, filed her Income Tax Return for 1978. The return did not indicate that the decedent had died. On May 22, 1979, Philtrust also filed a verified petition for appointment as Special Administrator with the Regional Trial Court of Manila, Branch XXXVIII, docketed as Sp. Proc. No. R-82-6994. The court a quo appointed one of the heirs as Special Administrator. Philtrusts motion for reconsideration was denied by the probate court. On January 26, 1981, the court a quo issued an Order relieving Mr. Diez of his appointment, and appointed Antonio Lantin to take over as Special Administrator. Subsequently, on July 30, 1981, Mr. Lantin was also relieved of his appointment, and Atty. Vicente Onosa was appointed in his stead. In the meantime, the Bureau of Internal Revenue conducted an administrative investigation on the decedents tax liability and found a deficiency income tax for the year 1977 in the amount of P318,233.93. Thus, on November 18, 1982, the BIR sent by registered mail a demand letter and Assessment Notice No. NARD-78-82-00501 addressed to the decedent "c/o Philippine Trust Company, Sta. Cruz, Manila" which was the address stated in her 1978 Income Tax Return. No response was made by Philtrust. The BIR was not informed that the decedent had actually passed away. In an Order dated September 5, 1983, the court a quo appointed Antonio Ambrosio as the Commissioner and Auditor Tax Consultant of the Estate of the decedent. On June 18, 1984, respondent Commissioner of Internal Revenue issued warrants of distraint and levy to enforce collection of the decedents deficiency income tax liability, which were served upon her heir, Francisco Gabriel. On November 22, 1984, respondent filed a "Motion for Allowance of Claim and for an Order of Payment of Taxes" with the court a quo. On January 7, 1985, Mr. Ambrosio filed a letter of protest with the Litigation Division of the BIR, which was not acted upon because the assessment notice had allegedly become final, executory and incontestable. On May 16, 1985, petitioner, the Estate of the decedent, through Mr. Ambrosio, filed a formal opposition to the BIRs Motion for Allowance of Claim based on the ground that there was no proper service of the assessment and that the filing of the aforesaid claim had already prescribed. The BIR filed its Reply, contending that service to Philippine Trust Company was sufficient service, and that the filing of the claim against the Estate on November 22, 1984 was within the five-year prescriptive period for assessment and collection of taxes under Section 318 of the 1977 National Internal Revenue Code (NIRC).

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On November 19, 1985, the court a quo issued an Order denying respondents claim against the Estate, 2 after finding that there was no notice of its tax assessment on the proper party.3 On July 2, 1986, respondent filed an appeal with the Court of Appeals, docketed as CA-G.R. CV No. 09107,4 assailing the Order of the probate court dated November 19, 1985. It was claimed that Philtrust, in filing the decedents 1978 income tax return on April 5, 1979, two days after the taxpayers death, had "constituted itself as the administrator of the estate of the deceased at least insofar as said return is concerned."5 Citing Basilan Estate Inc. v. Commissioner of Internal Revenue,6respondent argued that the legal requirement of notice with respect to tax assessments 7 requires merely that the Commissioner of Internal Revenue release, mail and send the notice of the assessment to the taxpayer at the address stated in the return filed, but not that the taxpayer actually receive said assessment within the five-year prescriptive period.8Claiming that Philtrust had been remiss in not notifying respondent of the decedents death, respondent therefore argued that the deficiency tax assessment had already become final, executory and incontestable, and that petitioner Estate was liable therefor. On September 30, 2002, the Court of Appeals rendered a decision in favor of the respondent. Although acknowledging that the bond of agency between Philtrust and the dec edent was severed upon the latters death, it was ruled that the administrator of the Estate had failed in its legal duty to inform respondent of the decedents death, pursuant to Section 104 of the National Internal Revenue Code of 1977. Consequently, the BIRs service to Philtrust of the demand letter and Notice of Assessment was binding upon the Estate, and, upon the lapse of the statutory thirty-day period to question this claim, the assessment became final, executory and incontestable. The dispositive portion of said decision reads: WHEREFORE, finding merit in the appeal, the appealed decision is REVERSED AND SET ASIDE. Another one is entered ordering the Administrator of the Estate to pay the Commissioner of Internal Revenue the following: a. The amount of P318,223.93, representing the deficiency income tax liability for the year 1978, plus 20% interest per annum from November 2, 1982 up to November 2, 1985 and in addition thereto 10% surcharge on the basic tax of P169,155.34 pursuant to Section 51(e)(2) and (3) of the Tax Code as amended by PD 69 and 1705; and b. The costs of the suit. SO ORDERED.9 Hence, the instant petition, raising the following issues: 1. Whether or not the Court of Appeals erred in holding that the service of deficiency tax assessment against Juliana Diez Vda. de Gabriel through the Philippine Trust Company was a valid service in order to bind the Estate; 2. Whether or not the Court of Appeals erred in holding that the deficiency tax assessment and final demand was already final, executory and incontestable. Petitioner Estate denies that Philtrust had any legal personality to represent the decedent after her death. As such, petitioner argues that there was no proper notice of the assessment which, therefore, never became final, executory and incontestable.10 Petitioner further contends that respondents failure to file its claim against the Estate within the proper period prescribed by the Rules of Court is a fatal error, which forever bars its claim against the Estate. 11 Respondent, on the other hand, claims that because Philtrust filed the decedents income tax return subsequent to her death, Philtrust was the de facto administrator of her Estate.12 Consequently, when the Assessment Notice and demand letter dated November 18, 1982 were sent to Philtrust, there was proper service on the Estate. 13 Respondent further asserts that Philtrust had the legal obligation to inform petitioner of the decedents death, which requirement is found in Section 104 of the NIRC of 1977.14 Since Philtrust did not, respondent contends that petitioner Estate should not be allowed to profit from this omission.15 Respondent further argues that Philtrusts failure to protest the aforementioned assessment within the 30-day period provided in Section 319-A of the NIRC of 1977 meant that the assessment had already become final, executory and incontestable.16 The resolution of this case hinges on the legal relationship between Philtrust and the decedent, and, by extension, between Philtrust and petitioner Estate. Subsumed under this primary issue is the sub-issue of whether or not service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was valid service on petitioner, and the issue of

35

whether Philtrusts inaction thereon could bind petit ioner. If both sub-issues are answered in the affirmative, respondents contention as to the finality of Assessment Notice No. NARD-78-82-00501 must be answered in the affirmative. This is because Section 319-A of the NIRC of 1977 provides a clear 30-day period within which to protest an assessment. Failure to file such a protest within said period means that the assessment ipso jure becomes final and unappealable, as a consequence of which legal proceedings may then be initiated for collection thereof. We find in favor of the petitioner. The first point to be considered is that the relationship between the decedent and Philtrust was one of agency, which is a personal relationship between agent and principal. Under Article 1919 (3) of the Civil Code, death of the agent or principal automatically terminates the agency. In this instance, the death of the decedent on April 3, 1979 automatically severed the legal relationship between her and Philtrust, and such could not be revived by the mere fact that Philtrust continued to act as her agent when, on April 5, 1979, it filed her Income Tax Return for the year 1978. Since the relationship between Philtrust and the decedent was automatically severed at the moment of the Taxpayers death, none of Philtrusts acts or omissions could bind the estate of the Taxpayer. Service on Philtrust of the demand letter and Assessment Notice No. NARD-78-82-00501 was improperly done. It must be noted that Philtrust was never appointed as the administrator of the Estate of the decedent, and, indeed, that the court a quo twice rejected Philtrusts motion to be thus appointed. As of November 18, 1982, the date of the demand letter and Assessment Notice, the legal relationship between the decedent and Philtrust had already been non-existent for three years. Respondent claims that Section 104 of the National Internal Revenue Code of 1977 imposed the legal obligation on Philtrust to inform respondent of the decedents death. The said Section reads: SEC. 104. Notice of death to be filed. In all cases of transfers subject to tax or where, though exempt from tax, the gross value of the estate exceeds three thousand pesos, the executor, administrator, or any of the legal heirs, as the case may be, within two months after the decedents death, or within a like period after qualifying as such executor or administrator, shall give written notice thereof to the Commissioner of Internal Revenue. The foregoing provision falls in Title III, Chapter I of the National Internal Revenue Code of 1977, or the chapter on Estate Tax, and pertains to "all cases of transfers subject to tax" or where the "gross value of the estate exceeds three thousand pesos". It has absolutely no applicability to a case for deficiency income tax, such as the case at bar. It further lacks applicability since Philtrust was never the executor, administrator of the decedents estate, and, as such, never had the legal obligation, based on the above provision, to inform respondent of her death. Although the administrator of the estate may have been remiss in his legal obligation to inform respondent of the decedents death, the consequences thereof, as provided in Section 119 of the National Internal Revenue Code of 1977, merely refer to the imposition of certain penal sanctions on the administrator. These do not include the indefinite tolling of the prescriptive period for making deficiency tax assessments, or the waiver of the notice requirement for such assessments. Thus, as of November 18, 1982, the date of the demand letter and Assessment Notice No. NARD-78-82-00501, there was absolutely no legal obligation on the part of Philtrust to either (1) respond to the demand letter and assessment notice, (2) inform respondent of the decedents death, or (3) inform petitioner that it had received said demand letter and assessment notice. This lack of legal obligation was implicitly recognized by the Court of Appeals, which, in fact, rendered its assailed decision on grounds of "equity". 17 Since there was never any valid notice of this assessment, it could not have become final, executory and incontestable, and, for failure to make the assessment within the five-year period provided in Section 318 of the National Internal Revenue Code of 1977, respondents claim against the petitioner Estate is barred. Said Section 18 reads: 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 purpose of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered

36

as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code. Respondent argues that an assessment is deemed made for the purpose of giving effect to such assessment when the notice is released, mailed or sent to the taxpayer to effectuate the assessment, and there is no legal requirement that the taxpayer actually receive said notice within the five-year period.18 It must be noted, however, that the foregoing rule requires that the notice be sent to the taxpayer, and not merely to a disinterested party. Although there is no specific requirement that the taxpayer should receive the notice within the said period, due process requires at the very least that such notice actually be received. In Commissioner of Internal Revenue v. Pascor Realty and Development Corporation,19we had occasion to say: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. In Republic v. De le Rama,20 we clarified that, when an estate is under administration, notice must be sent to the administrator of the estate, since it is the said administrator, as representative of the estate, who has the legal obligation to pay and discharge all debts of the estate and to perform all orders of the court. In that case, legal notice of the assessment was sent to two heirs, neither one of whom had any authority to represent the estate. We said: The notice was not sent to the taxpayer for the purpose of giving effect to the assessment, and said notice could not produce any effect. In the case of Bautista and Corrales Tan v. Collector of Internal Revenue this Court had occasion to state that "the assessment is deemed made when the notice to this effect is released, mailed or sent to the taxpayer for the purpose of giving effect to said assessment." It appearing that the person liable for the payment of the tax did not receive the assessment, the assessment could not become final and executory. (Citations omitted, emphasis supplied.) In this case, the assessment was served not even on an heir of the Estate, but on a completely disinterested third party. This improper service was clearly not binding on the petitioner. By arguing that (1) the demand letter and assessment notice were served on Philtrust, (2) Philtrust was remiss in its obligation to respond to the demand letter and assessment notice, (3) Philtrust was remiss in its obligation to inform respondent of the decedents death, and (4) the assessment notice is therefore binding on the Estate, responde nt is arguing in circles. The most crucial point to be remembered is that Philtrust had absolutely no legal relationship to the deceased, or to her Estate. There was therefore no assessment served on the Estate as to the alleged underpayment of tax. Absent this assessment, no proceedings could be initiated in court for the collection of said tax, 21 and respondents claim for collection, filed with the probate court only on November 22, 1984, was barred for having been made beyond the fiveyear prescriptive period set by law. WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. CV No. 09107, dated September 30, 2002, is REVERSED and SET ASIDE. The Order of the Regional Trial Court of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, dated November 19, 1985, which denied the claim of the Bureau of Internal Revenue against the Estate of Juliana Diez Vda. De Gabriel for the deficiency income tax of the decedent for the year 1977 in the amount of P318,223.93, is AFFIRMED. No pronouncement as to costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Panganiban, and Carpio, JJ., concur. Azcuna, J., on official leave.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 162155 August 28, 2007

COMMISSIONER OF INTERNAL REVENUE and ARTURO V. PARCERO in his official capacity as Revenue District Officer of Revenue District No. 049 (Makati), Petitioners, vs. PRIMETOWN PROPERTY GROUP, INC., Respondent. DECISION CORONA, J.: This petition for review on certiorari1 seeks to set aside the August 1, 2003 decision2 of the Court of Appeals (CA) in CAG.R. SP No. 64782 and its February 9, 2004 resolution denying reconsideration. 3 On March 11, 1999, Gilbert Yap, vice chair of respondent Primetown Property Group, Inc., applied for the refund or credit of income tax respondent paid in 1997. In Yap's letter to petitioner revenue district officer Arturo V. Parcero of Revenue District No. 049 (Makati) of the Bureau of Internal Revenue (BIR),4 he explained that the increase in the cost of labor and materials and difficulty in obtaining financing for projects and collecting receivables caused the real estate industry to slowdown.5 As a consequence, while business was good during the first quarter of 1997, respondent suffered losses amounting to P71,879,228 that year.6 According to Yap, because respondent suffered losses, it was not liable for income taxes. 7 Nevertheless, respondent paid its quarterly corporate income tax and remitted creditable withholding tax from real estate sales to the BIR in the total amount of P26,318,398.32.8 Therefore, respondent was entitled to tax refund or tax credit.9 On May 13, 1999, revenue officer Elizabeth Y. Santos required respondent to submit additional documents to support its claim.10 Respondent complied but its claim was not acted upon. Thus, on April 14, 2000, it filed a petition for review11 in the Court of Tax Appeals (CTA). On December 15, 2000, the CTA dismissed the petition as it was filed beyond the two-year prescriptive period for filing a judicial claim for tax refund or tax credit.12 It invoked Section 229 of the National Internal Revenue Code (NIRC): Sec. 229. Recovery of Taxes Erroneously or Illegally Collected. -- No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment : Provided, however, That the Commissioner may, even without a claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (emphasis supplied) The CTA found that respondent filed its final adjusted return on April 14, 1998. Thus, its right to claim a refund or credit commenced on that date.13 The tax court applied Article 13 of the Civil Code which states: Art. 13. When the law speaks of years, months, days or nights, it shall be understood that years are of three hundred sixty-five days each; months, of thirty days; days, of twenty-four hours, and nights from sunset to sunrise.

38

If the months are designated by their name, they shall be computed by the number of days which they respectively have. In computing a period, the first day shall be excluded, and the last included. (emphasis supplied) Thus, according to the CTA, the two-year prescriptive period under Section 229 of the NIRC for the filing of judicial claims was equivalent to 730 days. Because the year 2000 was a leap year, respondent's petition, which was filed 731 days14after respondent filed its final adjusted return, was filed beyond the reglementary period. 15 Respondent moved for reconsideration but it was denied.16 Hence, it filed an appeal in the CA.17 On August 1, 2003, the CA reversed and set aside the decision of the CTA. 18 It ruled that Article 13 of the Civil Code did not distinguish between a regular year and a leap year. According to the CA: The rule that a year has 365 days applies, notwithstanding the fact that a particular year is a leap year. 19 In other words, even if the year 2000 was a leap year, the periods covered by April 15, 1998 to April 14, 1999 and April 15, 1999 to April 14, 2000 should still be counted as 365 days each or a total of 730 days. A statute which is clear and explicit shall be neither interpreted nor construed.20 Petitioners moved for reconsideration but it was denied.21 Thus, this appeal. Petitioners contend that tax refunds, being in the nature of an exemption, should be strictly construed against claimants.22Section 229 of the NIRC should be strictly applied against respondent inasmuch as it has been consistently held that the prescriptive period (for the filing of tax refunds and tax credits) begins to run on the day claimants file their final adjusted returns.23 Hence, the claim should have been filed on or before April 13, 2000 or within 730 days, reckoned from the time respondent filed its final adjusted return. The conclusion of the CA that respondent filed its petition for review in the CTA within the two-year prescriptive period provided in Section 229 of the NIRC is correct. Its basis, however, is not. The rule is that the two-year prescriptive period is reckoned from the filing of the final adjusted return. 24 But how should the two-year prescriptive period be computed? As already quoted, Article 13 of the Civil Code provides that when the law speaks of a year, it is understood to be equivalent to 365 days. In National Marketing Corporation v. Tecson, 25 we ruled that a year is equivalent to 365 days regardless of whether it is a regular year or a leap year.26 However, in 1987, EO27 292 or the Administrative Code of 1987 was enacted. Section 31, Chapter VIII, Book I thereof provides: Sec. 31. Legal Periods. "Year" shall be understood to be twelve calendar months; "month" of thirty days, unless it refers to a specific calendar month in which case it shall be computed according to the number of days the specific month contains; "day", to a day of twenty-four hours and; "night" from sunrise to sunset. (emphasis supplied) A calendar month is "a month designated in the calendar without regard to the number of days it may contain." 28 It is the "period of time running from the beginning of a certain numbered day up to, but not including, the corresponding numbered day of the next month, and if there is not a sufficient number of days in the next month, then up to and including the last day of that month." 29 To illustrate, one calendar month from December 31, 2007 will be from January 1, 2008 to January 31, 2008; one calendar month from January 31, 2008 will be from February 1, 2008 until February 29, 2008.30 A law may be repealed expressly (by a categorical declaration that the law is revoked and abrogated by another) or impliedly (when the provisions of a more recent law cannot be reasonably reconciled with the previous one). 31 Section 27, Book VII (Final Provisions) of the Administrative Code of 1987 states: Sec. 27. Repealing clause. All laws, decrees, orders, rules and regulation, or portions thereof, inconsistent with this Code are hereby repealed or modified accordingly.

39

A repealing clause like Sec. 27 above is not an express repealing clause because it fails to identify or designate the laws to be abolished.32 Thus, the provision above only impliedly repealed all laws inconsistent with the Administrative Code of 1987.1avvphi1 Implied repeals, however, are not favored. An implied repeal must have been clearly and unmistakably intended by the legislature. The test is whether the subsequent law encompasses entirely the subject matter of the former law and they cannot be logically or reasonably reconciled.33 Both Article 13 of the Civil Code and Section 31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject matter the computation of legal periods. Under the Civil Code, a year is equivalent to 365 days whether it be a regular year or a leap year. Under the Administrative Code of 1987, however, a year is composed of 12 calendar months. Needless to state, under the Administrative Code of 1987, the number of days is irrelevant. There obviously exists a manifest incompatibility in the manner of computing legal periods under the Civil Code and the Administrative Code of 1987. For this reason, we hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being the more recent law, governs the computation of legal periods. Lex posteriori derogat priori. Applying Section 31, Chapter VIII, Book I of the Administrative Code of 1987 to this case, the two-year prescriptive period (reckoned from the time respondent filed its final adjusted return34 on April 14, 1998) consisted of 24 calendar months, computed as follows: Year 1 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th 11th 12th Year 2 13th 14th 15th 16th 17th 18th 19th 20th 21st calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month calendar month April 15, 1998 May 15, 1998 June 15, 1998 July 15, 1998 August 15, 1998 September 15, 1998 October 15, 1998 November 15, 1998 December 15, 1998 January 15, 1999 February 15, 1999 March 15, 1999 April 15, 1999 May 15, 1999 June 15, 1999 July 15, 1999 August 15, 1999 September 15, 1999 October 15, 1999 November 15, 1999 December 15, 1999 to May 14, 1998

to June 14, 1998 to July 14, 1998 to August 14, 1998 to September 14, 1998 to October 14, 1998 to November 14, 1998 to December 14, 1998 to January 14, 1999 to February 14, 1999 to March 14, 1999 to April 14, 1999 to May 14, 1999 to June 14, 1999 to July 14, 1999 to August 14, 1999 to September 14, 1999 to October 14, 1999 to November 14, 1999 to December 14, 1999 to January 14, 2000

40

22nd 23rd 24th

calendar month calendar month calendar month

January 15, 2000 February 15, 2000 March 15, 2000

to February 14, 2000 to March 14, 2000 to April 14, 2000

We therefore hold that respondent's petition (filed on April 14, 2000) was filed on the last day of the 24th calendar month from the day respondent filed its final adjusted return. Hence, it was filed within the reglementary period. Accordingly, the petition is hereby DENIED. The case is REMANDED to the Court of Tax Appeals which is ordered to expeditiously proceed to hear C.T.A. Case No. 6113 entitled Primetown Property Group, Inc. v. Commissioner of Internal Revenue and Arturo V. Parcero. No costs. SO ORDERED. RENATO C. CORONA Associate Justice

41

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-19727 May 20, 1965

THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHOENIX ASSURANCE CO., LTD., respondent. ----------------------------G.R. No. L-19903 May 20, 1965

PHOENIX ASSURANCE, CO., LTD., petitioner, vs. 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.1wph1.t Pursuant to such reinsurance treaties, Phoenix Assurance Co., Ltd., ceded portions of the premiums it earned from its underwriting business in the Philippines, as follows: Year Amount Ceded 1952 1953 1954 P316,526.75 P246,082.04 P203,384.69

upon which the Commissioner of Internal Revenue, by letter of May 6, 1958, assessed the following withholding tax: Year 1952 1953 1954 Withholding Tax P 75,966.42 59,059.68 48,812.32

42

Total

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

On April 1, 1951, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1950, claiming therein, among others, a deduction of P37,147.04 as net addition to marine insurance reserve equivalent to 40% of the gross marine insurance premiums received during the year. The Commissioner of Internal Revenue disallowed P11,772.57 of such claim for deduction and subsequently assessed against Phoenix Assurance Co., Ltd. the sum of P1,884.00 as deficiency income tax. The disallowance resulted from the fixing by the Commissioner of the net addition to the marine insurance reserve at 100% of the marine insurance premiums received during the last three months of the year. The Commissioner assumed that "ninety and third, days are approximately the length of time required before shipments reach their destination or before claims are received by the insurance companies." On April 1, 1953, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1952, declaring therein a deduction from gross income of P35,912.25 as part of the head office expenses incurred for its Philippine business, computed at 5% on its gross Philippine income. On August 30, 1955 it amended its income tax return for 1952 by excluding from its gross income the amount of P316,526.75 representing reinsurance premiums ceded to foreign reinsurers and further eliminating deductions corresponding to the coded premiums. The amended return showed an income tax due in the amount of P2,502.00. The Commissioner of Internal Revenue disallowed P15,826.35 of the claimed deduction for head office expenses and assessed a deficiency tax of P5,667.00 on July 24, 1958. On April 30, 1954, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1953 and claimed therein a deduction from gross income of P33,070.88 as head office expenses allocable to its Philippine business, equivalent to 5%, of its gross Philippine income. On August 30, 1955 it amended its 1953 income tax return to exclude from its gross income the amount of P246,082.04 representing reinsurance premiums ceded to foreign reinsurers. At the same time, it requested the refund of P23,409.00 as overpaid income tax for 1953. To avoid the prescriptive period provided for in Section 306 of the Tax Code, it filed a petition for review on April 11, 1956 in the Court of Tax Appeals praying for such refund. After verification of the amended income tax return the Commissioner of Internal Revenue disallowed P12,304.10 of the deduction representing head office expenses allocable to Philippine business thereby reducing the refundable amount to P20,180.00. On April 29, 1955, Phoenix Assurance Co., Ltd. filed its Philippine income tax return for 1954 claiming therein, among others, a deduction from gross income of P99,624.75 as head office expenses allocable to its Philippine business, computed at 5% of its gross Philippine income. It also excluded from its gross income the amount of P203,384.69 representing reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines. On August 1, 1958 the Bureau of Internal Revenue released the following assessment for deficiency income tax for the years 1952 and 1954 against Phoenix Assurance Co., Ltd.: 1952 Net income per audited return Unallowable deduction & additional income: Overclaimed Head Office expenses: Amount claimed . . . . . . . . . . . . Amount allowed . . . . . . . . . . . . Net income per investigation Tax due thereon P 35,912.25 20,085.90 P 15,826.35 P 28,337.96 P 5,667.00 =========== P 12,511.61

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1954 Net income per audited Unallowable deduction & additional income: Overclaimed Head Office expenses: Amount claimed . . . . . . . . . . . . Amount allowed . . . . . . . . . . . . Net income per investigation Tax due thereon Less: amount already assessed DEFICIENCY TAX DUE P29,624.73 19,455.50 10,16.23 P170,489.41 P 39,737.00 36,890.00 P 2,847.00 =========== P160,320.21

The above assessment resulted from the disallowance of a portion of the deduction claimed by Phoenix Assurance Co., Ltd. as head office expenses allocable to its business in the Philippines fixed by the Commissioner at 5% of the net Philippine income instead of 5% of the gross Philippine income as claimed in the returns. Phoenix Assurance Co., Ltd. protested against the aforesaid assessments for withholding tax and deficiency income tax. However, the Commissioner of Internal Revenue denied such protest. Subsequently, Phoenix Assurance Co., Ltd. appealed to the Court of Tax Appeals. In a decision dated February 14, 1962, the Court of Tax Appeals allowed in full the decision claimed by Phoenix Assurance Co., Ltd. for 1950 as net addition to marine insurance reserve; determined the allowable head office expenses allocable to Philippine business to be 5% of the net income in the Philippines; declared the right of the Commissioner of Internal Revenue to assess deficiency income tax for 1952 to have prescribed; absolved Phoenix Assurance Co., Ltd. from payment of the statutory penalties for non-filing of withholding tax return; and, rendered the following judgment: WHEREFORE, petitioner Phoenix Assurance Company, Ltd. is hereby ordered to pay the Commissioner of Internal Revenue the respective amounts of P75,966.42, P59,059.68 and P48,812.32, as withholding tax for the years 1952, 1953 and 1954, and P2,847.00 as income tax for 1954, or the total sum of P186,685.42 within thirty (30) days from the date this decision becomes final. Upon the other hand, the respondent Commissioner is ordered to refund to petitioner the sum of P20,180.00 as overpaid income tax for 1953, which sum is to be deducted from the total sum of P186,685.42 due as taxes. If any amount of the tax is not paid within the time prescribed above, there shall be collected a surcharge of 5% of the tax unpaid, plus interest at the rate of 1% a month from the date of delinquency to the date of payment, provided that the maximum amount that may be collected as interest shall not exceed the amount corresponding to a period of three (3) years. Without pronouncement as to costs. Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue have appealed to this Court raising the following issues: (1) Whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to reinsurance contracts executed abroad are subject to withholding tax; (2) Whether or not the right of the Commissioner of Internal Revenue to assess deficiency income tax for the year 1952 against Phoenix Assurance Co., Ltd., has prescribed; (3) Whether or not the deduction of claimed by the Phoenix Assurance Co., Ltd.as net addition to reserve for the year 1950 is excessive; (4) Whether or not the deductions claimed by Phoenix Assurance Co., Ltd. for head office expenses allocable to Philippine business for the years 1952, 1953 and 1954 are excessive. The question of whether or not reinsurance premiums ceded to foreign reinsurers not doing business in the Philippines pursuant to contracts executed abroad are income from sources within the Philippines subject to withholding tax under

44

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.

45

We next consider Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 for 1950 representing net addition to reserve computed at 40% of the marine insurance premiums received during the year. Treating said said deduction to be excessive, the Commissioner of Internal Revenue reduced the same to P25,374.47 which is equivalent to 100% of all marine insurance premiums received during the last months of the year. Paragraph (a) of Section 32 of the Tax Code states: SEC. 32. Special provisions regarding income and deductions of insurance companies, whether domestic or foreign. (a) Special deductions allowed to insurance companies . In the case of insurance companies, except domestic life insurance companies and foreign life insurance companies doing business in the Philippines, the net additions, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts may be deducted from their gross income: Provided, however, That the released reserve be treated as income for the year of release. Section 186 of the Insurance Law requires the setting up of reserves for liability on marine insurance: SEC. 186. ... Provided, That for marine risks the insuring company shall be required to charge as the liability for reinsurance fifty per centum of the premiums written in the policies upon yearly risks , and the full premiums written in the policies upon all other marine risks not terminated (Emphasis supplied.) The reserve required for marine insurance is determined on two bases: 50% of premiums under policies on yearly risks and 100% of premiums under policies of marine risks not terminated during the year. Section 32 (a) of the Tax Code quoted above allows the full amount of such reserve to be deducted from gross income. It may be noteworthy to observe that the formulas for determining the marine reserve employed by Phoenix Assurance Co., Ltd. and the Commissioner of Internal Revenue 40% of premiums received during the year and 100% of premiums received during the last three months of the year, respectively do not comply with Section 186. Said determination runs short of the requirement. For purposes of the Insurance Law, this Court therefore cannot countenance the same. The reserve called for in Section 186 is a safeguard to the general public and should be strictly followed not only because it is an express provision but also as a matter of public policy. However, for income tax purposes a taxpayer is free to deduct from its gross income a lesser amount, or not to claim any deduction at all. What is prohibited by the income tax law is to claim a deduction beyond the amount authorized therein. Phoenix Assurance Co., Ltd.'s claim for deduction of P37,147.04 being less than the amount required in Section 186 of the Insurance Law, the same cannot be and is not excessive, and should therefore be fully allowed. * We come now to the controversy on the taxpayer's claim for deduction on head office expenses incurred during 1952, 1953, and 1954 allocable to its Philippine business computed at 5% of its gross income in the Philippines The Commissioner of Internal Revenue redetermined such deduction at 5% on Phoenix Assurance Co., Ltd's net income thereby partially disallowing the latter's claim. The parties are agreed as to the percentage 5% but differ as to the basis of computation. Phoenix Assurance Co. Lt. insists that the 5% head office expenses be determined from the gross income, while the Commissioner wants the computation to be made on the net income. What, therefore, needs to be resolved is: Should the 5% be computed on the gross or net income? The record shows that the gross income of Phoenix Assurance Co., Ltd. consists of income from its Philippine business as well as reinsurance premiums received for its head office in London and reinsurance premiums ceded to foreign reinsurance. Since the items of income not belonging to its Philippine business are not taxable to its Philippine branch, they should be excluded in determining the head office expenses allowable to said Philippine branch. This conclusion finds support in paragraph 2, subsection (a), Section 30 of the Tax Code, quoted hereunder: (2) Expenses allowable to non-resident alien individuals and foreign corporations. In the case of a non-resident alien individual or a foreign corporation, the expenses deductible are the, necessary expenses paid or incurred in carrying on any business or trade conducted within the Philippines exclusively. (Emphasis supplied.) Consequently, the deficiency assessments for 1952, 1953 and 1954, resulting from partial disallowance of deduction representing head office expenses, are sustained.

46

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.

47

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. 78953 July 31, 1991 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MELCHOR J. JAVIER, JR. and THE COURT OF TAX APPEALS, respondents. Elison G. Natividad for accused-appellant. SARMIENTO, J.:p Central in this controversy is the issue as to whether or not a taxpayer who merely states as a footnote in his income tax return that a sum of money that he erroneously received and already spent is the subject of a pending litigation and there did not declare it as income is liable to pay the 50% penalty for filing a fraudulent return. This question is the subject of the petition for review before the Court of the portion of the Decision 1 dated July 27, 1983 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 3393, entitled, "Melchor J. Javier, Jr. vs. Ruben B. Ancheta, in his capacity as Commissioner of Internal Revenue," which orders the deletion of the 50% surcharge from Javier's deficiency income tax assessment on his income for 1977. The respondent CTA in a Resolution 2 dated May 25, 1987, denied the Commissioner's Motion for Reconsideration 3 and Motion for New Trial 4 on the deletion of the 50% surcharge assessment or imposition. The pertinent facts as are accurately stated in the petition of private respondent Javier in the CTA and incorporated in the assailed decision now under review, read as follows: xxx xxx xxx 2. That on or about June 3, 1977, Victoria L. Javier, the wife of the petitioner (private respondent herein), received from the Prudential Bank and Trust Company in Pasay City the amount of US$999,973.70 remitted by her sister, Mrs. Dolores Ventosa, through some banks in the United States, among which is Mellon Bank, N.A. 3. That on or about June 29, 1977, Mellon Bank, N.A. filed a complaint with the Court of First Instance of Rizal (now Regional Trial Court), (docketed as Civil Case No. 26899), against the petitioner (private respondent herein), his wife and other defendants, claiming that its remittance of US$1,000,000.00 was a clerical error and should have been US$1,000.00 only, and praying that the excess amount of US$999,000.00 be returned on the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate, and continuing duty to return the said amount from the moment it was received. 4. That on or about November 5, 1977, the City Fiscal of Pasay City filed an Information with the then Circuit Criminal Court (docketed as CCC-VII-3369-P.C.) charging the petitioner (private respondent herein) and his wife with the crime of estafa, alleging that they misappropriated, misapplied, and converted to their own personal use and benefit the amount of US$999,000.00 which they received under an implied trust for the benefit of Mellon Bank and as a result of the mistake in the remittance by the latter. 5. That on March 15, 1978, the petitioner (private respondent herein) filed his Income Tax Return for the taxable year 1977 showing a gross income of P53,053.38 and a net income of P48,053.88 and stating in

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the footnote of the return that "Taxpayer was recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." 6. That on or before December 15, 1980, the petitioner (private respondent herein) received a letter from the acting Commissioner of Internal Revenue dated November 14, 1980, together with income assessment notices for the years 1976 and 1977, demanding that petitioner (private respondent herein) pay on or before December 15, 1980 the amount of P1,615.96 and P9,287,297.51 as deficiency assessments for the years 1976 and 1977 respectively. . . . 7. That on December 15, 1980, the petitioner (private respondent herein) wrote the Bureau of Internal Revenue that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to await final court decision on the case filed against him for filing an allegedly fraudulent return. . . . 8. That on November 11, 1981, the petitioner (private respondent herein) received from Acting Commissioner of Internal Revenue Romulo Villa a letter dated October 8, 1981 stating in reply to his December 15, 1980 letter-protest that "the amount of Mellon Bank's erroneous remittance which you were able to dispose, is definitely taxable." . . . 5 The Commissioner also imposed a 50% fraud penalty against Javier. Disagreeing, Javier filed an appeal 6 before the respondent Court of Tax Appeals on December 10, 1981. The respondent CTA, after the proper proceedings, rendered the challenged decision. We quote the concluding portion: We note that in the deficiency income tax assessment under consideration, respondent (petitioner here) further requested petitioner (private respondent here) to pay 50% surcharge as provided for in Section 72 of the Tax Code, in addition to the deficiency income tax of P4,888,615.00 and interest due thereon. Since petitioner (private respondent) filed his income tax return for taxable year 1977, the 50% surcharge was imposed, in all probability, by respondent (petitioner) because he considered the return filed false or fraudulent. This additional requirement, to our mind, is much less called for because petitioner (private respondent), as stated earlier, reflected in as 1977 return as footnote that "Taxpayer was recipient of some money received from abroad which he presumed to be gift but turned out to be an error and is now subject of litigation." From this, it can hardly be said that there was actual and intentional fraud, consisting of deception willfully and deliberately done or resorted to by petitioner (private respondent) in order to induce the Government to give up some legal right, or the latter, due to a false return, was placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities. (Aznar vs. Court of Tax Appeals, L-20569, August 23, 1974, 56 (sic) SCRA 519), because petitioner literally "laid his cards on the table" for respondent to examine. Error or mistake of fact or law is not fraud. (Insular Lumber vs. Collector, L-7100, April 28, 1956.). Besides, Section 29 is not too plain and simple to understand. Since the question involved in this case is of first impression in this jurisdiction, under the circumstances, the 50% surcharge imposed in the deficiency assessment should be deleted. 7 The Commissioner of Internal Revenue, not satisfied with the respondent CTA's ruling, elevated the matter to us, by the present petition, raising the main issue as to: WHETHER OR NOT PRIVATE RESPONDENT IS LIABLE FOR THE 50% FRAUD PENALTY? 8 On the other hand, Javier candidly stated in his Memorandum, 9 that he "did not appeal the decision which held him liable for the basic deficiency income tax (excluding the 50% surcharge for fraud)." However, he submitted in the same memorandum"that the issue may be raised in the case not for the purpose of correcting or setting aside the decision which held him liable for deficiency income tax, but only to show that there is no basis for the imposition of the surcharge." This subsequent disavowal therefore renders moot and academic the posturings articulated in as Comment 10 on the non-taxability of the amount he erroneously received and the bulk of which he had already disbursed. In any event, an appeal at that time (of the filing of the Comments) would have been already too late to be seasonable. The petitioner, through the office of the Solicitor General, stresses that:

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xxx xxx xxx The record however is not ambivalent, as the record clearly shows that private respondent is selfconvinced, and so acted, that he is the beneficial owner, and of which reason is liable to tax. Put another way, the studied insinuation that private respondent may not be the beneficial owner of the money or income flowing to him as enhanced by the studied claim that the amount is "subject of litigation" is belied by the record and clearly exposed as a fraudulent ploy, as witness what transpired upon receipt of the amount. Here, it will be noted that the excess in the amount erroneously remitted by MELLON BANK for the amount of private respondent's wife was $999,000.00 after opening a dollar account with Prudential Bank in the amount of $999,993.70, private respondent and his wife, with haste and dispatch, within a span of eleven (11) electric days, specifically from June 3 to June 14, 1977, effected a total massive withdrawal from the said dollar account in the sum of $975,000.00 or P7,020,000.00. . . . 11 In reply, the private respondent argues: xxx xxx xxx The petitioner contends that the private respondent committed fraud by not declaring the "mistaken remittance" in his income tax return and by merely making a footnote thereon which read: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation." It is respectfully submitted that the said return was not fraudulent. The footnote was practically an invitation to the petitioner to make an investigation, and to make the proper assessment. The rule in fraud cases is that the proof "must be clear and convincing" (Griffiths v. Comm., 50 F [2d] 782), that is, it must be stronger than the "mere preponderance of evidence" which would be sufficient to sustain a judgment on the issue of correctness of the deficiency itself apart from the fraud penalty. (Frank A. Neddas, 40 BTA 672). The following circumstances attendant to the case at bar show that in filing the questioned return, the private respondent was guided, not by that "willful and deliberate intent to prevent the Government from making a proper assessment" which constitute fraud, but by an honest doubt as to whether or not the "mistaken remittance" was subject to tax. First, this Honorable Court will take judicial notice of the fact that so-called "million dollar case" was given very, very wide publicity by media; and only one who is not in his right mind would have entertained the idea that the BIR would not make an assessment if the amount in question was indeed subject to the income tax. Second, as the respondent Court ruled, "the question involved in this case is of first impression in this jurisdiction" (See p. 15 of Annex "A" of the Petition). Even in the United States, the authorities are not unanimous in holding that similar receipts are subject to the income tax. It should be noted that the decision in the Rutkin case is a five-to-four decision; and in the very case before this Honorable Court, one out of three Judges of the respondent Court was of the opinion that the amount in question is not taxable. Thus, even without the footnote, the failure to declare the "mistaken remittance" is not fraudulent. Third, when the private respondent filed his income tax return on March 15, 1978 he was being sued by the Mellon Bank for the return of the money, and was being prosecuted by the Government for estafa committed allegedly by his failure to return the money and by converting it to his personal benefit. The basic tax amounted to P4,899,377.00 (See p. 6 of the Petition) and could not have been paid without using part of the mistaken remittance. Thus, it was not unreasonable for the private respondent to simply state in his income tax return that the amount received was still under litigation. If he had paid the tax, would that not constitute estafa for using the funds for his own personal benefit? and would the Government refund it to him if the courts ordered him to refund the money to the Mellon Bank? 12 xxx xxx xxx

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Under the then Section 72 of the Tax Code (now Section 248 of the 1988 National Internal Revenue Code), a taxpayer who files a false return is liable to pay the fraud penalty of 50% of the tax due from him or of the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud. We are persuaded considerably by the private respondent's contention that there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals' interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus: "Taxpayer was the recipient of some money from abroad which he presumed to be a gift but turned out to be an error and is now subject of litigation that it was an "error or mistake of fact or law" not constituting fraud, that such notation was practically an invitation for investigation and that Javier had literally "laid his cards on the table." 13 In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was discussed in this manner: . . . The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at most, create only suspicion and the mere understatement of a tax is not itself proof of fraud for the purpose of tax evasion. 15 A "fraudulent return" is always an attempt to evade a tax, but a merely "false return" may not be, Rick v. U.S., App. D.C., 161 F. 2d 897, 898. 16 In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the Bureau of Internal Revenue, headed by the herein petitioner. The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending most of the money he received, but the records lack a clear showing of fraud committed because he did not conceal the fact that he had received an amount of money although it was a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted. WHEREFORE, the petition is DENIED and the decision appealed from the Court of Tax Appeals is AFFIRMED. No costs. SO ORDERED. Melencio-Herrera, Padilla and Regalado, JJ., concur.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-20569 August 23, 1974 JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H. Aznar, petitioner, vs. COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents. ESGUERRA, J.:p Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case No. 109, modifying the decision of respondent Commissioner of Internal Revenue and ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to 1951, inclusive, with the condition that if the said amount is not paid within thirty days from the date the decision becomes final, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code, plus costs against the petitioner. It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his income tax returns on the cash and disbursement basis, reporting therein the following: Year 1945 1946 1947 1948 1949 1950 1951 Net Income P12,822.00 9,910.94 10,200.00 9,148.34 8,990.66 8,364.50 6,800.00 Amount of Tax Paid P114.66 114.66 132.00 68.90 59.72 28.22 none Exhibit pp. 85-88 B.I.R. rec. 38-A (pp. 329-332 B.I.R rec.) 39 (pp. 75-78 B.I.R rec.) 40 (pp. 70-73 B.I.R. rec.) 41 (pp. 64-67 B.I.R. rec.) 42 (pp. 59-62, BIR rec.) 43 (pp. 54-57 BIR rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of one obviously wealthy, pursuant to the authority granted him by Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner Honorio Guerrero to ascertain the taxpayer's true income for said years by using the net worth and expenditures method of tax investigation. The assets and liabilities of the taxpayer during the above-mentioned years were ascertained and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases in net worth was very much more than the income reported during said years. The findings clearly indicated that the taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid years. Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the amount of P723,032.66, plus compromise penalty. The taxpayer requested a reinvestigation which was granted for the purpose of verifying the merits of the various objections of the taxpayer to the deficiency income tax assessment of November 28, 1952.

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After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07 dated February 16, 1955, superseded the previous assessment and notice thereof was received by Matias H. Aznar on March 2, 1955. The new deficiency assessment was based on the following computations: 1946 Net income per return ........................ P9,910.94 Add: Under declared income .............. 22,559.94 Net income per investigation............... 32,470.45 Deduct: Income tax liability per return as assessed ...................................................... 114.66 Balance of tax due ........................................................... P3,687.10 Add: 50% surcharge ........................................................ 1,843.55 DEFICIENCY INCOME TAX ...................................... P5,530.65 1947 Net income per return ..................................................... P10,200.00 Add: Under declared income ............................................ 90,413.56 Net income per reinvestigation ....................................... P100,613.56 Deduct: Personal and additional exemption ...................... 7,000.00 Amount of income subject to tax ...................................... P93,613.56 Total tax liability ............................................................... P24,753.15 Deduct: Income tax liability per return as assessed ............ 132.00 Balance of tax due ........................................................... P24,621.15 Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME TAX ......................................P36,931.73 1948 Net income per return ...................................................... P9,148.34 Add: Under declared income ............................................. 15,624.63 Net income per reinvestigation .......................................... P24,772.97 Deduct: Personal and additional exemptions ...................... 7,000.00 Amount of income subject to tax ....................................... P17,772.97 Total tax liability ............................................................... 2,201.40 Deduct: Income tax liability per return as assessed ............ 68.90 Balance of tax due ........................................................... P2,132.500 Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME TAX ......................................P3,198.75 1949 Net income per return ....................................................... P9,990.66 Add: Under declared income ............................................. 105,418.53 Net income per reinvestigation .......................................... 114,409.19 Deduct: Personal and additional exemptions ...................... P7,000.00 Amount of income subject to tax ....................................... P107,409.19 Total tax liability ............................................................... P30,143.68 Deduct: Income tax liability per return as assessed ............. 59.72 Balance of tax due ............................................................ P30,083.96 Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME TAX .......................................P45,125.94 1950

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Net income per return ....................................................... P8,364.50 Add: Under declared income ............................................. 365,578.76 Net income per reinvestigation .......................................... P373,943.26 Deduct: Personal and additional exemptions ...................... 7,800.00 Amount of income subject to tax ....................................... P366,143.26 Total tax liability ............................................................... P185,883.00 Deduct: Income tax liability per return as assessed ............. 28.00 Balance of tax due ............................................................ P185,855.00 Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME TAX ....................................... P278,783.00 1951 Net income per return ........................................................ P6,800.00 Add: Under declared income ............................................... 33,355.80 Net income per reinvestigation ............................................ P40,155.80 Deduct: Personal and additional exemptions ........................ 7,200.00 Amount of income subject to tax ......................................... P32,955.80 Total tax liability .................................................................. P7,684.00 Deduct: Income tax liability per return as assessed ............... - o - . Balance of tax due .............................................................. P7,684.00 Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME TAX ..........................................P11,526.00 SUMMARY
1946

.... .... .... .... .... .... ....

P5,530.65 36,931.73 3,198.75 45,125.94 278,783.00 11,526.00 P381,096.07

1947 1948 1949 1950 1951 Total

In determining the unreported income, the respondent Commissioner of Internal Revenue resorted to the networth method which is based on the following computations: 1945 Real estate inventory ................................ P64,738.00 Other assets ............................................. 37,606.87 Total assets ............................................ P102,344.87 Less: Depreciation allowed ...................... 2,027.00 Networth as of Dec. 31, 1945 ................ P100,316.97 1946 Real estate inventory ................................. P86,944.18 Other assets ............................................. 60,801.65 Total assets ............................................. P147,745.83 Less: Depreciation allowed ...................... 4,875.41 Net assets ................................................ P142,870.42

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Less: Liabilities .................. P17,000.00 Net Worth as of Jan. 1, 1946 ................... P100,316.97 P117,316.97 Increase in networth ................................. 25,553.45 Add: Estimated living expenses ................. 6,917.00 Net income .............................................. P32,470.45 1947 Real estate inventory .................................. P237,824.18 Other assets ............................................... 54,495.52 Total assets ............................................... P292,319.70 Less: Depreciation allowed ......................... 12,835.72 Net assets .................................................. 279,483.98 Less: Liabilities ................... P60,000.00 Networth as of Jan. 1, 1947 ........................ 125,870.42 P185,870.42 Increase in networth ................................... P93,613.56 Add: Estimated living expenses ................... 7,000.00 Net income ................................................P100,613.56 1948 Real estate inventory .................................. P244,824.18 Other assets .............................................. 118,720.60 Total assets ............................................... P363,544.78 Less: Depreciation allowed ........................ 20,936.03 Net assets ................................................. P342,608.75 Less: Liabilities ................... P105,351.80 Networth as of Jan. 1, 1948 ...................... 219,483.98 P324,835.78 Increase in networth ................................... P17,772.97 Add: Estimated living expenses ................... 7,000.00 Net income ................................................ P24,772.97 1949 Real estate inventory ................................. P400,515.52 Investment in schools and other colleges .... 23,105.29 Other assets ............................................. 70,311.00 Total assets ............................................... P493,931.81 Less: Depreciation allowed ........................ 32,657.08 Net assets ................................................. P461.274.73 Less; Liabilities .................. P116,608.59 Networth as of Jan. 1, 1949 ...................... 237,256.95 P353,865.54 Increase in networth .................................. P107,409.19 Add: Estimated living expenses .................. 7,000.00 Net income ............................................... P114,409.19 1950 Real estate inventory .................................. P412,465.52 Investment in Schools and other colleges ................................ 193,460.99 October assets .......................................... 310,788.87 Total assets ............................................... P916,715.38 Less; Depreciation allowed ........................ 47,561.99 Net assets ................................................. P869,153.39

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Less: Liabilities .................. P158,343.99 Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13 Increase in networth ................................... P366,143.26 Add: Estimated living expenses ................... 7,800.00 Net income ................................................. P373,943.26 1951 Real estate inventory ................................... P412,465.52 Investment in schools and other colleges ..... 214,016.21 Other assets ............................................... 320,209.40 Total assets ................................................ P946,691.13 Less: Depreciation allowed ......................... 62,466.90 Net assets .................................................. P884,224.23 Less: Liabilities ........................................... P140,459.03 Networth as of Jan. 1, 1951 ................ 710,809.40 P851,268.43 Increase in networth .................................... P32,955.80 Add: Estimated living expenses .................... 7,200.00 Net income ................................................. P40,155.80 (Exh. 45-B, BIR rec. p. 188) On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and levy to secure payment of the deficiency income tax in question. Matias H. Aznar filed his petition for review of the case with the Court of Tax Appeals on April 1, 1955, with a subsequent petition immediately thereafter to restrain respondent from collecting the deficiency tax by summary method, the latter petition being granted on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review, this Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of Tax Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to 1951 or furnish a surety bond for not more than double the amount. On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the Court of Tax Appeals, the lower court concluded that the tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87 representing the tax credit for 1945, or P227,691.77, computed as follows: 1946 Net income per return .............................................. P9,910.94 Add: Under declared income ..................................... 22,559.51 Net income ............................................................ P32,470.45 Less: Personal and additional exemptions .................. 6,917.00 Income subject to tax ............................................. P25,553.45 Tax due thereon ...................................................... P3,801.76 Less: Tax already assessed ...................................... 114.66 Balance of tax due .................................................... P3,687.10 Add: 50% surcharge ................................................. 1,843.55 Deficiency income tax ................................................ P5,530.65 1947 Net income per return ............................................ P10,200.00 Add: Under declared income .................................. 57,551.19 Net income ........................................................... P67,751.19 Less: Personal and additional exemptions ............... 7,000.00 Income subject to tax ............................................. P60,751.19 Tax due thereon ..................................................... P13,420.38 Less: Tax already assessed ..................................... P132.00

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Balance of tax due ................................................... P13,288.38 Add: 50% surcharge ................................................ 6,644.19 Deficiency income tax .............................................. P19,932.57 1948 Net income per return .............................................. P9,148.34 Add: Under declared income ..................................... 8,732.10 Net income ............................................................ P17,880.44 Less: Personal and additional exemptions ................. 7,000.00 Income subject to tax .............................................. P10,880.44 Tax due thereon ...................................................... P1,029.67 Less: Tax already assessed ....................................... 68.90 Balance of tax due .................................................... 960.77 Add: 50% surcharge ................................................. 480.38 Deficiency income tax ............................................... P1,441.15 1949 Net income per return ................................................. P8,990.66 Add: under declared income ......................................... 43,718.53 Net income ............................................................... P52,709.19 Less: Personal and additional exemptions .................... 7,000.00 Income subject to tax ................................................. P45,709.19 Tax due thereon ......................................................... P8,978.57 Less: Tax already assessed ......................................... 59.72 Balance of tax due ....................................................... P8,918.85 Add: 50% surcharge .................................................... 4,459.42 Deficiency income tax ................................................. P13,378.27 1950 Net income per return .................................................. P6,800.00 Add: Under declared income ......................................... 33,355.80 Net income ................................................................. P40,155.80 Less: Personal and additional exemptions ...................... 7,200.00 Income subject to tax .................................................. P32,955.80 Tax due thereon ........................................................... P7,684.00 Less: Tax already assessed ........................................... -o- . Balance of tax due ........................................................ P7,684.00 Add: 50% surcharge .................................................... 3,842.00 Deficiency income tax .................................................. P11,526.00 1951 Net income per return ................................................... P8,364.50 Add: Under declared income ........................................ 246,449.06 Net income ............................................................... P254.813.56 Less: Personal and additional exemptions .................... 7,800.00 Income subject to tax ................................................ P247,013.56 Tax due thereon ........................................................ P117,348.00 Less: Tax already assessed ........................................ 28.00 Balance of tax due ..................................................... P117,320.00 Add: 50% surcharge .................................................. 58,660.00 Deficiency income tax ................................................ P175 980.00 SUMMARY

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1946 P5,530.65 1947 19,932.57 1948 1,441.15 1949 13,378.27 1950 175,980.00 1951 11,526.00 P227,788.64. I The first vital issue to be decided here is whether or not the right of the Commissioner of Internal Revenue to assess deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952. Petitioner's contention is that the provision of law applicable to this case is the period of five years limitation upon assessment and collection from the filing of the returns provided for in See. 331 of the National Internal Revenue Code. He argues that since the 1946 income tax return could be presumed filed before March 1, 1947 and the notice of final and last assessment was received by the taxpayer on March 2, 1955, a period of about 8 years had elapsed and the five year period provided by law (Sec. 331 of the National Internal Revenue Code) had already expired. The same argument is advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the return for 1948, which was filed on February 28, 1949. Respondents, on the other hand, are of the firm belief that regarding the prescriptive period for assessment of tax returns, Section 332 of the National Internal Revenue Code should apply because, as in this case, "(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC). Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax returns with an intent to evade the payment of tax." To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1) falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the situations into three different classes, namely "falsity", "fraud" and "omission". That there is a difference between "false return" and "fraudulent return" cannot be denied. While the first merely implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due. The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or omission even seems to be inadequate and should be the one enforced.

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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

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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

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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.

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The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer to the Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be proven. What is evident is that those buildings were used by the Southwestern Colleges. It is true that Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for shares of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that Mr. Aznar was amenable to the value fixed by the board of trustees and that he requested to be paid in cash instead of shares of stock. But those are not sufficient evidence to prove that transfer of ownership actually happened on December 15, 1950. Hence, the lower court did not commit any error in sustaining the respondent Commissioner of Internal Revenue's act of including those buildings as part of the assets of petitioner as of December 31, 1950. Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for P150,000 worth of shares of stocks, consisting of: land, P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses home, P4,100; nurses home, P2,080, should be excluded from the inventory of assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows that said properties were formally conveyed to the Southwestern Colleges only on September 25, 1952. Undoubtedly, petitioner was the owner of those properties prior to September 25, 1952 and said properties should form part of his assets as of December 31, 1951. The uncontested portions of the lower court's decision consisting of its conclusions that library books valued at P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit 25-A, being an investment, should be treated as an asset beginning December 31, 1950; that the expenses for construction to the amount of P113,353.70, which were spent for the improvement of the buildings appearing in Exhibit 24 are deemed absorbed in the increased value of the buildings as appraised by respondent Commissioner of Internal Revenue at cost after improvements were made, and should be taken out as additional assets; that the amount receivable of P5,776 from a certain Benito Chan should be treated as petitioner's asset but the amount of P5,776 representing the value of a house and lot given as collateral to secure said loan should not be considered as an asset of petitioner since to do so would result in a glaring duplication of items, are all affirmed. There seems to be no controversy as to the rest of the items listed in the inventory of assets. III The second issue which appears to be of vital importance in this case centers on the lower court's imposition of the fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The petitioner insists that there might have been false returns by mistake filed by Mr. Matias H. Aznar as those returns were prepared by his accountant employees, but there were no proven fraudulent returns with intent to evade taxes that would justify the imposition of the 50% surcharge authorized by law as fraud penalty. The lower court based its conclusion that the 50% fraud penalty must be imposed on the following reasoning: . It appears that Matias H. Aznar declared net income of P9,910.94, P10,200, P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948, 1949, 1950 and 1951, respectively. Using the net worth method of determining the net income of a taxpayer, we find that he had net incomes of P32,470.45, P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the respective years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he underdeclared his income by 227% for 1946, 564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for 1951. These substantial under declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax return with an intent to evade the payment of tax. Hence, the imposition of the fraud penalty is proper (Perez vs. Court of Tax Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied) As could be readily seen from the above rationalization of the lower court, no distinction has been made between false returns (due to mistake, carelessness or ignorance) and fraudulent returns (with intent to evade taxes). The lower court based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the substantial difference between the amounts of net income on the face of the returns as filed by him in the years 1946 to 1951 and the net income as determined by the inventory method utilized by both respondents for the same years. The lower court based its conclusion on a presumption that fraud can be deduced from the very substantial disparity of incomes as reported and determined by the inventory method and on the similarity of consecutive disparities for six years. Such a basis for determining the existence of fraud (intent to evade payment of tax) suffers from an inherent flaw when applied to this case. It is very apparent here that the respondent Commissioner of Internal Revenue, when the inventory method was resorted to in the first assessment, concluded that the correct tax liability of Mr. Aznar amounted to P723,032.66 (Exh. 1, B.I.R. rec. pp. 126129). After a reinvestigation the same respondent, in another assessment dated February 16, 1955, concluded that the tax liability should be reduced to P381,096.07. This is a crystal-clear, indication that even the respondent Commissioner of

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Internal Revenue with the use of the inventory method can commit a glaring mistake in the assessment of petitioner's tax liability. When the respondent Court of Tax Appeals reviewed this case on appeal, it concluded that petitioner's tax liability should be only P227,788.64. The lower court in three instances (elimination of two buildings in the list of petitioner's assets beginning December 31, 1949, because they were destroyed by fire; elimination of expenses for construction in petitioner's assets as duplication of increased value in buildings, and elimination of value of house and lot in petitioner's assets because said property was only given as collateral) supported petitioner's stand on the wrong inclusions in his lists of assets made by the respondent Commissioner of Internal Revenue, resulting in the very substantial reduction of petitioner's tax liability by the lower court. The foregoing shows that it was not only Mr. Matias H. Aznar who committed mistakes in his report of his income but also the respondent Commissioner of Internal Revenue who committed mistakes in his use of the inventory method to determine the petitioner's tax liability. The mistakes committed by the Commissioner of Internal Revenue which also involve very substantial amounts were also repeated yearly, and yet we cannot presume therefrom the existence of any taint of official fraud. From the above exposition of facts, we cannot but emphatically reiterate the well established doctrine that fraud cannot be presumed but must be proven. As a corollary thereto, we can also state that fraudulent intent could not be deduced from mistakes however frequent they may be, especially if such mistakes emanate from erroneous entries or erroneous classification of items in accounting methods utilized for determination of tax liabilities The predecessor of the petitioner undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax returns were prepared for him by his accountant and employees. It also appears that petitioner in his lifetime and during the investigation of his tax liabilities cooperated readily with the B.I.R. and there is no indication in the record of any act of bad faith committed by him. The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was based merely on a presumption and not on evidence establishing a willful filing of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the respondent as made in good faith. We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code should not be imposed, but eliminated from the income tax deficiency for each year from 1946 to 1951, inclusive. The tax liability of the petitioner for each year should, therefore, be: 1946 P 3,687.10 1947 13,288.38 1948 960.77 1949 8,918.85 1950 117,320.00 1951 7,684.00 P151,859.10 The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945, thereby leaving a balance of P151,762.23. WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of the 50% fraud penalty is concerned, and affirmed in all other respects. The petitioner is ordered to pay to the Commissioner of Internal Revenue, or his duly authorized representative, the sum of P151,762.23, representing deficiency income taxes for the years 1946 to 1951, inclusive, within 30 days from the date this decision becomes final. If the said amount is not paid within said period, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code. With costs against the petitioner. Makalintal, C.J, Castro, Teehankee, Makasiar and Muoz Palma, JJ., concur.

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G.R. No. 115712 February 25, 1999 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and CARNATION PHILIPPINES, INC. (now merged with Nestle Phils, Inc.), respondent. PURISIMA, J.: Before the Court is an appeal from the decision of the Court of Appeals 1 dated May 31, 1994, which affirmed in toto the decision of the Court of Tax Appeals 2 dated January 26, 1993, the dispositive portion of which reads: WHEREFORE, the Court, finds the assessments for allegedly deficient income and sales taxes for petitioner's fiscal year ending September 30, 1981 covered by Demand Letter NO. FAS-1B-81-87 and Assessment Notices Nos. FAS-1-81-87-005824, FAS-4-81-87-005825 and FAS-4-81-87-005826 (all dated July 29, 1987) in the total amount of P19,535,183.44 to be NULL AND VOID for having been issued beyond the five-year prescriptive period provided by law. 3 The undisputed facts of the case as recited in the Decision (Annex "A") of the Court of Appeals, are: 4 On January 15, 1982, Carnation Phils. Inc. (Carnation), filed its Corporation Annual Income Tax Return for taxable year ending September 30, 1981; and its Manufacturers/Producers Percentage Tax Return for the quarter ending September 30, 1981. 5 On October 13, 1986, March 16, 1987 and May 18, 1987, Carnation, through its Senior Vice President Jaime O. Lardizabal, signed three separate "waivers of the Statute of Limitations Under the National Internal Revenue Code" wherein it: . . . waives the running of the prescriptive period provided for in sections 318 and 319 and other related provisions of the National Internal Revenue Code and consents to the assessment and collection of the taxes which may be found due after reinvestigation and reconsideration at anytime before or after the lapse of the period of limitations fixed by said sections 318 and 319 and other relevant provisions of the National Internal Revenue Code, but not after (13 April 1987 for the earlierexecuted waiver, or June 14, 1987 for the later waiver, or July 30, 1987 for the subsequent waiver, as the case may be). However, the taxpayer (petitioner herein) does not waive any prescription already accrued in its favor. The waivers were not signed by the BIR Commissioner or any of his agents. On August 5, 1987, Carnation received BIR's letter of demand dated July 29, 1987 asking the said corporation to pay P1,442,586.56 as deficiency income tax, P14,152,683.85 as deficiency sales tax and P3,939,913.03 as deficiency sales tax on undeclared sales, all for the year 1981. This demand letter was accompanied by assessment Notices Nos. FAS-4-81-87-005824, FAS-4-81-87-005825 and FAS-4-81-87005826. In a basic protest dated August 17, 1987, Carnation disputed the assessments and requested a reconsideration and reinvestigation thereof. On September 30, 1987, Carnation filed a supplemental protest. These protests were denied by the BIR Commissioner in a letter dated March 15, 1988. Whereupon, Carnation appealed to the CTA.

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On January 26, 1993, the CTA issued the questioned order, the dispositive portion of which reads: WHEREFORE, the Court finds the assessments for allegedly deficient income and sales taxes for petitioner's fiscal year ending September 30, 1981 covered by Demand Letter No. FAS-1B-81-87 and assessment Notices No. FAS-1-81-87-005824, FAS-4-81-87-005825, and FAS-4-8187-005826 (all dated July 29, 1987) in the total amount of P19,535,183.44 to be NULL AND VOID for having been issued beyond the five-year prescriptive period provided by law. The pivot of inquiry here is whether or not the three (3) waivers signed by the private respondent are valid and binding 6 as to toll the running of the prescriptive period for assessment and not bar the Government from issuing subject deficiency tax assessments. Sec. 318 (now Section 203) of the National Internal Revenue Code, the law then applicable reads: Sec 318. Period of Limitations 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 purpose 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. 7 (emphasis ours) The decision of the Court of Appeals affirming what the Court of Tax Appeals decided, established that subject assessments of July 29, 1987 were issued outside the statutory prescriptive period. Carnation filed its annual income tax and percentage tax returns for the fiscal year ending September 30, 1981 on January 15, 1982 8 and November 20, 1981, 9respectively. In accordance with the above-quoted provision of law, private respondent's 1981 income and sales taxes could have been validly assessed only until January 14, 1987 and November 19, 1986, respectively. 10 However, Carnation's income and sales taxes were assessed only on July 29, 1987, beyond the five-year prescriptive period. 11 Petitioner BIR Commissioner contends that the waivers signed by Carnation were valid although not signed by the BIR Commissioner because (a) when the BIR agents/examiners extended the period to audit and investigate Carnation's tax returns, the BIR gave its implied consent to such waivers; (b) the signature of the Commissioner is a mere formality and the lack of it does not vitiate binding effect of the waivers; and (c) that a waiver is not a contract but a unilateral act of renouncing ones right to avail of the defense of prescription and remains binding in accordance with the terms and conditions set forth in the waiver. 12 Petitioner's submission is inaccurate. The same tax code is clear on the matter, to wit: Sec. 319. Exceptions as to period of limitation of assessment and collection of taxes. (a) . . . (b) Where before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner of Internal Revenue and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at anytime prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreement in writing made before the expiration of the period previously agreed upon. 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-year 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.

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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)." The ruling of the Supreme Court in Collector of Internal Revenue vs. Solano 13 is in point, thus: . . . The only agreement that could have suspended the running of the prescriptive period the collection of the tax in question is, as correctly pointed out by the Court of Tax Appeals, a written agreement between Solano and the Collector, entered into before the expiration of the of the five-year prescriptive period, extending the limitation prescribed by law. For sure, no such written agreement concerning the said three waivers exists between the petitioner and private respondent Carnation. 14 Verily, we discern no basis for overruling the aforesaid conclusions arrived at by the Court of Appeals. In fact, there is every reason to leave undisturbed the said conclusions, having in mind the precept that all doubts as to the correctness of such conclusions will be resolved in favor of the Court of Appeals. 15 Besides being a reiteration of the holding of the Court of Tax Appeals, such decision should be accorded respect. Thus, the Court held in Philippine Refining Co. vs. Court of Appeals, 16that the Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing tax cases. As a matter of principle, this Court will not set aside the conclusion reached by an agency such as the Court of Tax Appeals which is, by the very nature of its function, dedicated exclusively 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. 17 This point becomes more evident in the case under consideration where the findings and conclusions of bath the Court of Tax Appeals and the Court of Appeals appear untainted by any abuse of authority, much less grave abuse of discretion. Indeed, we find the decision of the latter affirming that of the former free from any palpable error. 18 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. In fact, in his reply dated April 18, 1995, the Solicitor General, representing the Commissioner of Internal Revenue, admitted that subject waivers executed by Carnation were "for end in consideration of the approval by the Commissioner of Internal Revenue of its request for reinvestigation and/or reconsideration of its internal revenue case involving tax assessments for the fiscal year ended September 30, 1981 which were all pending at the time". 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 agreements 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. WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED. No pronouncement as to costs. SO ORDERED. Romero, Panganiban and Gonzaga-Reyes, JJ., concur. Vitug, J, abroad on official business.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 162852 December 16, 2004

PHILIPPINE JOURNALISTS, INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION YNARES-SANTIAGO, J.: This is a petition for review filed by Philippine Journalists, Incorporated (PJI) assailing the Decision 1 of the Court of Appeals dated August 5, 2003,2 which ordered petitioner to pay the assessed tax liability of P111,291,214.46 and the Resolution3dated March 31, 2004 which denied the Motion for Reconsideration. The case arose from the Annual Income Tax Return filed by petitioner for the calendar year ended December 31, 1994 which presented a net income of P30,877,387.00 and the tax due of P10,807,086.00. After deducting tax credits for the year, petitioner paid the amount of P10,247,384.00. On August 10, 1995, Revenue District Office No. 33 of the Bureau of Internal Revenue (BIR) issued Letter of Authority No. 871204 for Revenue Officer Federico de Vera, Jr. and Group Supervisor Vivencio Gapasin to examine petitioners books of account and other accounting records for internal revenue taxes for the period January 1, 1994 to December 31, 1994. From the examination, the petitioner was told that there were deficiency taxes, inclusive of surcharges, interest and compromise penalty in the following amounts: Value Added Tax Income Tax Withholding Tax Total P 229,527.90 125,002,892.95 2,748,012.35 P 127,980,433.20

In a letter dated August 29, 1997, Revenue District Officer Jaime Concepcion invited petitioner to send a representative to an informal conference on September 15, 1997 for an opportunity to object and present documentary evidence relative to the proposed assessment. On September 22, 1997, petitioners Comptroller , Lorenza Tolentino, executed a "Waiver of the Statute of Limitation Under the National Internal Revenue Code (NIRC)".5 The document "waive[d] the running of the prescriptive period provided by Sections 223 and 224 and other relevant provisions of the NIRC and consent[ed] to the assessment and collection of taxes which may be found due after the examination at any time after the lapse of the period of limitations fixed by said Sections 223 and 224 and other relevant provisions of the NIRC, until the completion of the investigation".6 On July 2, 1998, Revenue Officer De Vera submitted his audit report recommending the issuance of an assessment and finding that petitioner had deficiency taxes in the total amount of P136,952,408.97. On October 5, 1998, the Assessment Division of the BIR issued Pre-Assessment Notices which informed petitioner of the results of the investigation. Thus, BIR Revenue Region No. 6, Assessment Division/Billing Section, issued Assessment/Demand No. 33-1-000757-947 on December 9, 1998 stating the following deficiency taxes, inclusive of interest and compromise penalty: Income Tax P108,743,694.88

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Value Added Tax Expanded Withholding Tax Total

184,299.20 2,363,220.38 P111,291,214.46

On March 16, 1999, a Preliminary Collection Letter was sent by Deputy Commissioner Romeo S. Panganiban to the petitioner to pay the assessment within ten (10) days from receipt of the letter. On November 10, 1999, a Final Notice Before Seizure8 was issued by the same deputy commissioner giving the petitioner ten (10) days from receipt to pay. Petitioner received a copy of the final notice on November 24, 1999. By letters dated November 26, 1999, petitioner asked to be clarified how the tax liability of P111,291,214.46 was reached and requested an extension of thirty (30) days from receipt of the clarification within which to reply.9 The BIR received a follow-up letter from the petitioner asserting that its (PJI) records do not show receipt of Tax Assessment/Demand No. 33-1-000757-94.10 Petitioner also contested that the assessment had no factual and legal basis. On March 28, 2000, a Warrant of Distraint and/or Levy No. 33-06-04611 signed by Deputy Commissioner Romeo Panganiban for the BIR was received by the petitioner. Petitioner filed a Petition for Review12 with the Court of Tax Appeals (CTA) which was amended on May 12, 2000. Petitioner complains: (a) that no assessment or demand was received from the BIR; (b) that the warrant of distraint and/or levy was without factual and legal bases as its issuance was premature; (c) that the assessment, having been made beyond the 3-year prescriptive period, is null and void; (d) that the issuance of the warrant without being given the opportunity to dispute the same violates its right to due process; and (e) that the grave prejudice that will be sustained if the warrant is enforced is enough basis for the issuance of the writ of preliminary injunction. On May 14, 2002, the CTA rendered its decision,13 to wit: As to whether or not the assessment notices were received by the petitioner, this Court rules in the affirmative. To disprove petitioners allegation of non-receipt of the aforesaid assessment notices, respondent presented a certification issued by the Post Master of the Central Post Office, Manila to the effect that Registered Letter No. 76134 sent by the BIR, Region No. 6, Manila on December 15, 1998 addressed to Phil. Journalists, Inc. at Journal Bldg., Railroad St., Manila was duly delivered to and received by a certain Alfonso Sanchez, Jr. (Authorized Representative) on January 8, 1999. Respondent also showed proof that in claiming 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

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 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 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 declaredCANCELLED, 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 BIRs authorized representative. Although the date of acceptance was not stated, the document was dated 22 September 1997. This date could reasonably be understood as the same date of acceptance by the BIR since a different date was not otherwise indicated. As to the allegation that Phil. Journalists was not furnished a copy of the waiver, this requirement appears ridiculous. Phil. Journalists, through its comptroller, Lorenza Tolentino, signed the waiver. Why would it need a copy of the document it 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? As regards the need for a definite expiration date, this is the biggest flaw of the decision. The period of prescription for the assessment of taxes may be extended provided that the extension be made in writing and that it be made prior to the expiration of the period of prescription. These are the requirements for a valid extension of the prescriptive period. To these requirements provided by law, the memorandum order adds that the length of the extension be specified by indicating its expiration date. This requirement could be reasonably construed from the rule on 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 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 valid waiver. When one waives the prescriptive period, it is no longer necessary to indicate the length of the extension of the prescriptive period since the person waiving may no longer use this defense.

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WHEREFORE, the 02 August 2002 resolution and 14 May 2002 decision of the CTA are hereby SET ASIDE. Respondent Phil. Journalists is ordered [to] pay its assessed tax liability of P111,291,214.46. SO ORDERED.15 Petitioners Motion for Reconsideration was denied in a Resolution dated March 31, 2004. Hence, this appeal on the following assignment of errors: I. The Honorable Court of Appeals committed grave error in ruling that it is outside the jurisdiction of the Court of Tax Appeals to entertain the Petition for Review filed by the herein Petitioner at the CTA despite the fact that such case inevitably rests upon the validity of the issuance by the BIR of warrants of distraint and levy contrary to the provisions of Section 7(1) of Republic Act No. 1125. II. The Honorable Court of Appeals gravely erred when it ruled that failure to comply with the provisions of Revenue Memorandum Order (RMO) No. 20-90 is merely a formal defect that does not invalidate the waiver of the statute of limitations without stating the legal justification for such conclusion. Such ruling totally disregarded the mandatory requirements of Section 222(b) of the Tax Code and its implementing regulation, RMO No. 20-90 which are substantive in nature. The RMO provides that violation thereof subjects the erring officer to administrative sanction. This directive shows that the RMO is not merely cover forms. III. The Honorable Court of Appeals gravely erred when it ruled that the assessment notices became final and unappealable. The assessment issued is void and legally non-existent because the BIR has no power to issue an assessment beyond the three-year prescriptive period where there is no valid and binding waiver of the statute of limitation. IV. The Honorable Court of Appeals gravely erred when it held that the assessment in question has became final and executory due to the failure of the Petitioner to protest the same. Respondent had no power to issue an assessment beyond the three year period under the mandatory provisions of Section 203 of the NIRC. Such assessment should be held void and non-existent, otherwise, Section 203, an 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 violation of the mandatory provisions of Section 203 and would go against the vested right of the Petitioner to claim prescription of assessment. V. The Honorable Court of Appeals committed grave error when it HELD valid a defective waiver by considering the latter a waiver of the right to invoke the defense of prescription rather than an extension of the three year period of prescription (to make an assessment) as provided under Section 222 in relation to Section 203 of the Tax Code, an interpretation that is contrary to law, existing jurisprudence and outside of the purpose and intent for which they were enacted.16 We find merit in the appeal. The first assigned error relates to the jurisdiction of the CTA over the issues in this case. The Court of Appeals ruled that only decisions of the BIR denying a request for reconsideration or reinvestigation may be appealed to the CTA. Since the petitioner did not file a request for reinvestigation or reconsideration within thirty (30) days, the assessment notices became final and unappealable. The petitioner now argue that the case was brought to the CTA because the warrant of distraint or levy was illegally issued and that no assessment was issued because it was based on an invalid waiver of the statutes of limitations.

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We agree with petitioner. Section 7(1) of Republic Act No. 1125, the Act Creating the Court of Tax Appeals, provides for the jurisdiction of that special court: 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; (Emphasis supplied). The appellate jurisdiction of the CTA is not limited to cases which involve decisions 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 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 warrant of distraint and levy issued by the BIR is valid and to rule if the Waiver of Statute of Limitations was validly effected. This is not the first case where the CTA validly ruled on issues that did not relate directly to a disputed assessment or a claim for refund. In Pantoja v. David,17 we upheld the jurisdiction of the CTA to act on a petition to invalidate and annul the distraint orders of the Commissioner of Internal Revenue. Also, in Commissioner of Internal Revenue v. Court of Appeals,18 the decision of the CTA declaring several waivers executed by the taxpayer as null and void, thus invalidating the assessments issued by the BIR, was upheld by this Court. The second and fifth assigned errors both focus on Revenue Memorandum Circular No. 20-90 (RMO No. 20-90) on the requisites of a valid waiver of the statute of limitations. The Court of Appeals held that the requirements and procedures laid down in the RMO are only formal in nature and did not invalidate the waiver that was signed even if the requirements were not strictly observed. The NIRC, under Sections 203 and 222,19 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. 20 Unreasonable investigation contemplates cases where the period for assessment extends indefinitely because this deprives the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. As was held in Republic of the Phils. v. Ablaza:21 The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest peaceful, law -abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. (Emphasis supplied) RMO No. 20-90 implements these provisions of the NIRC relating to the period of prescription for the assessment and collection of taxes. A cursory reading of the Order supports petitioners argument that the RMO must be strictly followed, thus: In the execution of said waiver, the following procedures should be followed: 1. The waiver must be in the form identified hereof. This form may be reproduced by the Office concerned but there should be no deviation from such form. The phrase "but not after __________ 19___" should be filled up 2.

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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 3. The following revenue officials are authorized to sign the waiver. A. In the National Office 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. 5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. (Emphasis supplied)22 A waiver of the statute of limitations under the NIRC, to a certain ex tent, is a derogation of the taxpayers right to security against prolonged and unscrupulous 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 prescription as erroneously held by the Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an assessment and collect the taxes due is extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally particularly where the language of the document is equivocal. 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.24 RMO No. 20-90 explains the rationale of a waiver: ... 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 petitioners 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, petitioners 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:

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Petitioners submission is inaccurate The Court of Appeals itself also passed upon the validity of the waivers executed by Carnation, observing thus: We cannot go along with the petitioners 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) 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. Sarmientos 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. 1498.28 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 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 courts 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 petitioners comptroller si gned 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 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

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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. 33-06046 null and void, is REINSTATED. SO ORDERED. Davide, Jr., C.J. (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.

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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 167765 June 30, 2008

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. FMF DEVELOPMENT CORPORATION, respondent. DECISION 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 ofP3,348,932. On May 8, 1996, however, it filed an amended return and declared a loss of P2,826,541. The BIR then sent FMF pre-assessment notices, all dated October 6, 1998, informing it of its alleged tax liabilities. 4 FMF filed a protest against these notices with the BIR and requested for a reconsideration/reinvestigation. On January 22, 1999, Revenue District Officer (RDO) Rogelio Zambarrano informed FMF that the reinvestigation had been referred to Revenue Officer Alberto Fortaleza. He also advised FMF of the informal conference set on February 2, 1999 to allow it to present evidence to dispute the BIR assessments. On February 9, 1999, FMF President Enrique Fernandez executed a waiver of the three-year prescriptive period for the BIR to assess internal revenue taxes, hence extending the assessment period until October 31, 1999. The waiver was accepted and signed by RDO Zambarrano. On October 18, 1999, FMF received amended pre-assessment notices5 dated October 6, 1999 from the BIR. FMF immediately filed a protest on November 3, 1999 but on the same day, it received BIRs Demand Letter and Assessment Notice No. 33-1-00487-95 dated October 25, 1999 reflecting FMFs alleged deficiency taxes and accrued interests, as follows: Income Tax Assessment Compromise Penalty on Income Tax Assessment Increments on Withholding Tax on Compensation Compromise Penalty on Increments on Withholding Tax on Compensation Increments on Withholding Tax on Management Fees Compromise Penalty on Increments on Withholding Tax on Management Fees TOTAL P1,608,015.50 20,000.00 184,132.26 16,000.00 209,550.49 16,000.00 P2,053,698.256

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On November 24, 1999, FMF filed a letter of protest on the assessment invoking, inter alia,7 the defense of prescription by reason of the invalidity of the waiver. In its reply, the BIR insisted that the waiver is valid because it was signed by the RDO, a duly authorized representative of petitioner. It also ordered FMF to immediately settle its tax liabilities; otherwise, judicial action will be taken. Treating this as BIRs final decision, FMF filed a petition for review with the CTA challengin g the validity of the assessment. On March 20, 2003, the CTA granted the petition and cancelled Assessment Notice No. 33-1-00487-95 because it was already time-barred. The CTA ruled that the waiver did not extend the three-year prescriptive period within which the BIR can make a valid assessment because it did not comply with the procedures laid down in Revenue Memorandum Order (RMO) No. 20-90.8 First, the waiver did not state the dates of execution and acceptance of the waiver, by the taxpayer and the BIR, respectively; thus, it cannot be determined with certainty if the waiver was executed and accepted within the prescribed period. Second, the CTA also found that FMF was not furnished a copy of the waiver signed by RDO Zambarrano. Third, the CTA pointed out that since the case involves an amount of more than P1 million, and the period to assess is not yet about to prescribe, the waiver should have been signed by the Commissioner of Internal Revenue, and not a mere RDO.9 The Commissioner of Internal Revenue filed a motion for reconsideration, but it was denied. On appeal to the Court of Appeals, the decision of the CTA was affirmed. Sustaining the findings of the CTA, the Court of Appeals held that the waiver did not strictly comply with RMO No. 20-90. Thus, it nullified Assessment Notice No. 33-100487-95. The fallo of the Court of Appeals decision reads: WHEREFORE, finding the instant petition not impressed with merit, the same is DENIED DUE COURSE and is hereby DISMISSED. No costs. SO ORDERED.10 The Commissioner of Internal Revenue sought reconsideration, but it was denied. Hence the instant petition, raising the following issues: I. WHETHER OR NOT RESPONDENTS WAIVER OF THE STATUTE OF LIMITATIONS WAS VALIDLY EXECUTED. II. WHETHER O[R] NOT THE PERIOD TO ASSESS HAD PRESCRIBED. III. WHETHER OR NOT THE COURT OF APPEALS CORRECTLY DISREGARDED PETITIONERS SUBSTANTIVE ARGUMENT.11 Essentially, the present controversy deals with the validity of the waiver and whether it validly extended the original threeyear prescriptive period so as to make Assessment Notice No. 33-1-00487-95 valid. The basic questions to be resolved therefore are: (1) Is the waiver valid? and (2) Did the three-year period to assess internal revenue taxes already prescribe? Petitioner contends that the waiver was validly executed mainly because it complied with Section 222 (b) 12 of the National Internal Revenue Code (NIRC). Petitioner points out that the waiver was in writing, signed by the taxpayer and the Commissioner, and executed within the three-year prescriptive period. Petitioner also argues that the requirements in RMO No. 20-90 are merely directory; thus, the indication of the dates of execution and acceptance of the waiver, by the taxpayer and the BIR, respectively, are not required by law. Petitioner adds that there is no provision in RMO No. 20-90 stating that a waiver may be invalidated upon failure of the BIR to furnish the taxpayer a copy of the waiver. Further, it contends that respondents execution of the waiver was a renunciation of its right to invoke prescription. Petitio ner also argues that the government cannot be estopped by the mistakes committed by its revenue officer in the enforcement of RMO No. 20-90.

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On the other hand, respondent counters that the waiver is void because it did not comply with RMO No. 20-90. Respondent assails the waiver because (1) it was not signed by the Commissioner despite the fact that the assessment involves an amount of more than P1 million; (2) there is no stated date of acceptance by the Commissioner or his duly authorized representative; and (3) it was not furnished a copy of the BIR-accepted waiver. Respondent also citesPhilippine Journalists, Inc. v. Commissioner of Internal Revenue13 and contends that the procedures in RMO No. 20-90 are mandatory in character, precisely to give full effect to Section 222 (b) of the NIRC. Moreover, a waiver of the statute of limitations is not a waiver of the right to invoke the defense of prescription. 14 After considering the issues and the submissions of the parties in the light of the facts of this case, we are in agreement that the petition lacks merit. Under Section 20315 of the NIRC, internal revenue taxes must be assessed within three years counted from the period fixed by law for the filing of the tax return or the actual date of filing, whichever is later. This mandate governs the question of prescription of the governments right to assess internal revenue taxes primarily to safeguard the interests of taxpayers from unreasonable investigation. Accordingly, the government must assess internal revenue taxes on time so as not to extend indefinitely the period of assessment and deprive the taxpayer of the assurance that it will no longer be subjected to further investigation for taxes after the expiration of reasonable period of time.16 An exception to the three-year prescriptive period on the assessment of taxes is Section 222 (b) of the NIRC, which provides: xxxx (b) If before the expiration of the time prescribed in Section 203 for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time, the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. xxxx The above provision authorizes the extension of the original three-year period by the execution of a valid waiver, where the taxpayer and the BIR agreed in writing that the period to issue an assessment and collect the taxes due is extended to an agreed upon date. Under RMO No. 20-90, which implements Sections 203 and 222 (b), the following procedures should be followed: 1. The waiver must be in the form identified as Annex "A" hereof. 2. The waiver shall be signed by the taxpayer himself or his duly authorized representative. In the case of a corporation, the waiver must be signed by any of its responsible officials. Soon after the waiver is signed by the taxpayer, the Commissioner of Internal Revenue or the revenue official authorized by him, as hereinafter provided, shall sign the waiver indicating that the Bureau has accepted and agreed to the waiver. The date of such acceptance by the Bureau should be indicated . Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before the expiration of the period of prescription orbefore the lapse of the period agreed upon in case a subsequent agreement is executed. 3. The following revenue officials are authorized to sign the waiver. A. In the National Office xxxx 3. Commissioner For tax cases involving more than P1M B. In the Regional Offices

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1. The Revenue District Officer with respect to tax cases still pending investigation and the period to assess is about to prescribe regardless of amount. xxxx 4. The waiver must be executed in three (3) copies, the original copy to be attached to the docket of the case,the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact of receipt by the taxpayer of his/her file copy shall be indicated in the original copy. 5. The foregoing procedures shall be strictly followed. Any revenue official found not to have complied with this Order resulting in prescription of the right to assess/collect shall be administratively dealt with. (Emphasis supplied.) Applying RMO No. 20-90, the waiver in question here was defective and did not validly extend the original three-year prescriptive period. Firstly, it was not proven that respondent was furnished a copy of the BIR-accepted waiver. Secondly, the waiver was signed only by a revenue district officer, when it should have been signed by the Commissioner as mandated by the NIRC and RMO No. 20-90, considering that the case involves an amount of more than P1 million, and the period to assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance by the Commissioner of Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before the expiration of the original three-year period. Bear in mind that the waiver in question is a bilateral agreement, thus necessitating the very signatures of both the Commissioner and the taxpayer to give birth to a valid agreement.17 Petitioner contends that the procedures in RMO No. 20-90 are merely directory and that the execution of a waiver was a renunciation of respondents right to invoke prescription. We do not agree. RMO No. 20 -90 must be strictly followed. InPhilippine Journalists, Inc. v. Commissioner of Internal Revenue,18 we ruled that a waiver of the statute of limitations under the NIRC, to a certain extent being a derogation of the taxpayers right to security against prolong ed and unscrupulous investigations, must be carefully and strictly construed. The waiver of the statute of limitations does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally, particularly where the language of the document is equivocal.19 Notably, in this case, the waiver became unlimited in time because it did not specify a definite date, agreed upon between the BIR and respondent, within which the former may assess and collect taxes. It also had no binding effect on respondent because there was no consent by the Commissioner. On this basis, no implied consent can be presumed, nor can it be contended that the concurrence to such waiver is a mere formality.20 Consequently, petitioner cannot rely on its invocation of the rule that the government cannot be estopped by the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. To the Government, its tax officers are obliged to act promptly in the making of assessment so that taxpayers, after the lapse of the period of prescription, would have a feeling of security against unscrupulous tax agents who will always try to find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of a possible opportunity to harass even law -abiding businessmen. Without such legal defense, taxpayers would be open season to harassment by unscrupulous tax agents.21 In fine, Assessment Notice No. 33-1-00487-95 dated October 25, 1999, was issued beyond the three-year prescriptive period. The waiver was incomplete and defective and thus, the three-year prescriptive period was not tolled nor extended and continued to run until April 15, 1999. Even if the three-year period be counted from May 8, 1996, the date of filing of the amended return, assuming the amended return was substantially different from the original return, a case which affects the reckoning point of the prescriptive period,22 still, the subject assessment is definitely considered time-barred. WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution dated January 31, 2005 and April 14, 2005, respectively, of the Court of Appeals in CA-G.R. SP No. 79675 are hereby AFFIRMED. No pronouncement as to costs. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 167146 October 31, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE GLOBAL COMMUNICATION, INC., respondent. DECISION CHICO-NAZARIO, J.: This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the en banc Decision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February 2005,1 ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333 issued against respondent Philippine Global Communication, Inc. for its 1990 income tax deficiency. The CTA, in its assailed en banc Decision, affirmed the Decision of the First Division of the CTA dated 9 June 20042 and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568. Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR) issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR) officials to examine the books of account and other accounting records of respondent, in connection with the investigation of respondents 1990 income tax liability. On 22 April 1992, the BIR sent a letter to respondent requesting the latter to present for examination certain records and documents, but respondent failed to present any document. On 21 April 1994, respondent received a Preliminary Assessment Notice dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00, inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed for failure to pay the withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April 1994, respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April 1994, for deficiency income tax in the total amount ofP118,271,672.00.3 On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law Offices, filed a formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed another protest letter on 23 May 1994, through another counsel Siguion Reyna Montecillo & Ongsiako Law Offices. In both letters, respondent requested for the cancellation of the tax assessment, which they alleged was invalid for lack of factual and legal basis.4 On 16 October 2002, more than eight years after the assessment was presumably issued, the Ponce Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated 8 October 2002 denying the respondents protest against Assessment Notice No. 000688-80-7333, and affirming the said assessment in toto.5 On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004.6 The CTA ruled on the primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of the assessment. It decided that the protest letters filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed deficiency income tax. 7 Thus, since more than three years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued in 1994, the CIRs right to collect the same has prescribed in conformity with Section 269 of the National Internal Revenue Code of 1977 8 (Tax Code of 1977). The dispositive portion of this decision reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioner. Accordingly, respondents Final Decision dated October 8, 2002 is hereby REVERSED and SET ASIDE and respondent is hereby ORDERED to WITHDRAW and CANCEL Assessment Notice No. 000688-80-7333 issued against the petitioner for its 1990 income tax deficiency because respondents right to collect the same has prescribed.9

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The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a Resolution dated 22 September 2004.10 Thereafter, the CIR filed a Petition for Review with the CTA en banc, questioning the aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed the Decision and Resolution in CTA Case No. 6568. The dispositive part reads: WHEREFORE, premises considered, the Petition for Review is hereby DISMISSED for lack of merit. Accordingly, the assailed Decision and Resolution in CTA Case No. 6568 are hereby AFFIRMED in toto.11 Hence, this Petition for Review on Certiorari raising the following grounds: THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO. 6568 DECLARING THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY INCOME TAX FROM RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED A. THE PRESCRIPTIVE PERIOD WAS INTERUPTED WHEN RESPONDENT FILED TWO LETTERS OF PROTEST DISPUTING IN DETAIL THE DEFICIENCY ASSESSMENT IN QUESTION AND REQUESTING THE CANCELLATION OF SAID ASSESSMENT. THE TWO LETTERS OF PROTEST ARE, BY NATURE, REQUESTS FOR REINVESTIGATION OF THE DISPUTED ASSESSMENT. B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE GRANTED BY THE BUREAU OF INTERNAL REVENUE.12 This Court finds no merit in this Petition. The main issue in this case is whether or not CIRs right to collect respondents alleged deficiency income tax is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads: Section 269. Exceptions as to the period of limitation of assessment and collection of taxes. x x x xxxx c. Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax.13However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all.14 In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission. If the BIR issued this assessment within the three-year period or the ten-year period, whichever was applicable, the law provided another three years after the assessment for the collection of the tax due thereon through the administrative process of distraint and/or levy or through judicial proceedings.15 The three-year period for collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by the BIR. 16 The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIRs claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax. The provisions on prescription in the assessment and collection of national internal revenue taxes became law upon the recommendation of the tax commissioner of the Philippines. The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:

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Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).17 In a number of cases, this Court has also clarified that the statute of limitations on the collection of taxes should benefit both the Government and the taxpayers. In these cases, the Court further illustrated the harmful effects that the delay in the assessment and collection of taxes inflicts upon taxpayers. In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,18 Justice Montemayor, in his dissenting opinion, identified the potential loss to the taxpayer if the assessment and collection of taxes are not promptly made. Prescription in the assessment and in the collection of taxes is provided by the Legislature for the benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the assessment he is required to pay, whether or not such assessment is well founded and reasonable so that he may either pay the amount of the assessment or contest its validity in court x x x. It would surely be prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and the collection because by the time the collecting agency finally gets around to making the assessment or making the collection, the taxpayer may then have lost his papers and books to support his claim and contest that of the Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer eventually has to pay . In Republic of the Philippines v. Ablaza,19 this Court emphatically explained that the statute of limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens from possible harassment: The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest, peaceful, law-abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue,20 this Court, in confirming these earlier rulings, pronounced that: Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. Thus, in Commissioner of Internal Revenue v. B.F. Goodrich,21 this Court affirmed that the law on prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the exceptions to the law on prescription should be strictly construed. The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under Section 271 thereof which reads:

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Section 224. Suspension of running of statute. The running of the statute of limitation provided in Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a proceeding in court for collection in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected x x x. (Emphasis supplied.) Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for this petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner. However, this exception does not apply to this case since the respondent never requested for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as admitted by the CIR in its Petition, the respondent refused to submit any new evidence. Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request for reconsideration and the request for reinvestigation, and distinguishes one from the other in this manner: Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation specifying the following particulars: xxxx For the purpose of protest herein (a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. (b) Request for reinvestigationrefers to a plea for re-evaluation of an assessment on the basis of newlydiscovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. The Court provided a clear-cut rationale in the case of Bank of the Philippine Islands v. Commissioner of Internal Revenue 22 explaining why a request for reinvestigation, and not a request for reconsideration, interrupts the running of the statute of limitations on the collection of the assessed tax: Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIRs allegation that there was a request for reinvestigation is inconc eivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. This much was admitted in the Decision dated 8 October 2002 issued by then CIR Guillermo Payarno, Jr. In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom, despite repeated demands, failed to submit documentary evidences in support of its claimed deductible expenses. Hence, except for the item of interest expense which was disallowed for being not ordinary and necessary, the rest of the claimed expenses were disallowed for non-withholding. In the same token, Revenue Officer Escober testified that upon his assignment to conduct the re-investigation, he immediately requested the taxpayer to present various accounting records for the year 1990, in addition to other documents in relation to the disallowed items (p.171). This was followed by other requests for submission of documents (pp.199 &217) but these were not heeded by the taxpayer. Essentially, he stated that Philcom did not cooperate in his reinvestigation of the case.

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In response to the testimonies of the Revenue Officers, Philcom thru Atty. Consunji, emphasized that it was denied due process because of the issuance of the Pre-Assessment Notice and the Assessment Notice on successive dates. x x x Counsel for the taxpayer even questioned the propriety of the conference-hearing inasmuch as the only question to resolved (sic) is the legality of the issuance of the assessment. On the disallowed items, Philcom thru counsel manifested that it has no intention to present documents and/or evidences allegedly because of the pending legal question on the validity of the assessment.23 Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for reconsideration and a request for reinvestigation, there have been cases wherein these two terms were used interchangeably. But upon closer examination, these cases all involved a reinvestigation that was requested by the taxpayer and granted by the BIR. In Collector of Internal Revenue v. Suyoc Consolidated Mining Company ,24 the Court weighed the considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer in deciding that the prescription period was suspended during this time. Because of such requests, several reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription. Although the Court used the term "requests for reconsideration" in reference to the letters sent by the taxpayer in the case of Querol v. Collector of Internal Revenue,25 it took into account the reinvestigation conducted soon after these letters were received and the revised assessment that resulted from the reinvestigations. It is true that the Collector revised the original assessment on February 9, 1955; and appellant avers that this revision was invalid in that it was not made within the five-year prescriptive period provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is that the revised assessment was merely a result of petitioner Querols requests for reconsideration of the original assessment, contained in his letters of December 14, 1951 and May 25, 1953. The records of the Bureau of Internal Revenue show that after receiving the letters, the Bureau conducted a reinvestigation of petitioners tax liabilities, and, in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that because of the examiners report, the Bureau revised the original assessment, x x x. In other words, the reconsideration was granted in part, and the original assessment was altered. Consequently, the period between the petition for reconsideration and the revised assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza, 108 Phil 1105). The Court, in Republic v. Lopez,26 even gave a detailed accounting of the time the BIR spent for each reinvestigation in order to deduct it from the five-year period set at that time in the statute of limitations: It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by Section 332(c) of the Internal Revenue Code within which the Government may sue to collect an assessed tax is to be computed from the last revised assessment resulting from a reinvestigation asked for by the taxpayer and (2) that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation. xxxx The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954, from which date the Government had five years for bringing an action to collect. The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22 April 1960, or a period of 4 years, 3 months, and 6 days, during which the limitation period was interrupted. The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal Revenue v. Sison,27 "that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation." Finally, in Republic v. Arcache,28 the Court enumerated the reasons why the taxpayer is barred from invoking the defense of prescription, one of which was that, "In the first place, it appears obvious that the delay in the

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collection of his 1946 tax liability was due to his own repeated requests for reinvestigation and similarly repeated requests for extension of time to pay." In this case, the BIR admitted that there was no new or additional evidence presented. Considering that the BIR issued its Preliminary Assessment Notice on 13 April 1994 and its Formal Assessment Notice on 14 April 1994, just one day before the three-year prescription period for issuing the assessment expired on 15 April 1994, it had ample time to make a factually and legally well-founded assessment. Added to the fact that the Final Decision that the CIR issued on 8 October 2002 merely affirmed its earlier findings, whatever examination that the BIR may have conducted cannot possibly outlast the entire three-year prescriptive period provided by law to collect the assessed tax, not to mention the eight years it actually took the BIR to decide the respondents protest. The factual and legal issues involved in the assessment are relatively simple, that is, whether certain income tax deductions should be disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the running of the statute of limitations in this case. The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the statute of limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable.29 On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax thereon may be collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are burdened with the costs of preserving their books and records. This is the predicament that the law on the statute of limitations seeks to prevent. The Court, in sustaining for the first time the suspension of the running of the statute of limitations in cases where the taxpayer requested for a reinvestigation, gave this justification: A taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government . xxxx This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The applicable principle is fundamental and unquestioned. He who prevents a thing from being done may not avail himself of the nonperformance which he himself occasioned, for the law says to him in effect "this is your own act, and therefore you are not damnified ." (R.H. Stearns Co. v. U.S., 78 L. ed., 647). (Emphasis supplied.)30 This rationale is not applicable to the present case where the respondent did nothing to prevent the BIR from collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At the earliest opportunity, respondent insisted that the assessment was invalid and made clear to the BIR its refusal to produce documents that the BIR requested. On the other hand, the BIR also communicated to the respondent its unwavering stance that its assessment is correct. Given that both parties were at a deadlock, the next logical step would have been for the BIR to issue a Decision denying the respondents protest and to initiate proceedings for the collection of the assessed tax and, thus, allow the respondent, should it so choose, to contest the assessment before the CTA. Postponing the collection for eight long years could not possibly make the taxpayer feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. There was no legal, or even a moral, obligation preventing the CIR from collecting the assessed tax. In a similar case, Cordero v. Conda,31 the Court did not suspend the running of the prescription period where the acts of the taxpayer did not prevent the government from collecting the tax. The government also urges that partial payment is "acknowledgement of the tax obligation", hence a "waiver on the defense of prescription." But partial payment would not prevent the government from suing the taxpayer. Because, by such act of payment, the government is not thereby "persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant." Which, as stated in Collector v. Suyoc Consolidated Mining Co., et al., L-11527, November 25, 1958, is the underlying reason behind the rule that prescriptive period is arrested by the taxpayers request for reexamination or reinvestigation even if "he has not previously waived it [prescription] in writing."

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The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., 32 of the need to balance the conflicting interests of the government and the taxpayers. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interest of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of common good, may be achieved. Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section 269(c) of the Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given effect. In providing for exceptions to such rule in Section 271, the law strictly limits the suspension of the running of the prescription period to, among other instances, protests wherein the taxpayer requests for a reinvestigation. In this case, where the taxpayer merely filed two protest letters requesting for a reconsideration, and where the BIR could not have conducted a reinvestigation because no new or additional evidence was submitted, the running of statute of limitations cannot be interrupted. The tax which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its collection. Consequently, the right of the government to collect the alleged deficiency tax is barred by prescription. IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en banc Decision of the CTA in CTA EB No. 37 dated 22 February 2005, cancelling Assessment Notice No. 000688-80-7333 issued against Philippine Global Communication, Inc. for its 1990 income tax deficiency for the reason that it is barred by prescription, is herebyAFFIRMED. No costs. SO ORDERED. Panganiban, C.J. (Chairperson), Ynares-Santiago, Austria-Martinez, and Callejo, Sr., JJ., concur.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 167146 October 31, 2006

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PHILIPPINE GLOBAL COMMUNICATION, INC., respondent. DECISION CHICO-NAZARIO, J.: This is a Petition for Review on Certiorari, under Rule 45 of the Rules of Court, seeking to set aside the en bancDecision of the Court of Tax Appeals (CTA) in CTA EB No. 37 dated 22 February 2005, 1 ordering the petitioner to withdraw and cancel Assessment Notice No. 000688-80-7333 issued against respondent Philippine Global Communication, Inc. for its 1990 income tax deficiency. The CTA, in its assailed en banc Decision, affirmed the Decision of the First Division of the CTA dated 9 June 20042 and its Resolution dated 22 September 2004 in C.T.A. Case No. 6568. Respondent, a corporation engaged in telecommunications, filed its Annual Income Tax Return for taxable year 1990 on 15 April 1991. On 13 April 1992, the Commissioner of Internal Revenue (CIR) issued Letter of Authority No. 0002307, authorizing the appropriate Bureau of Internal Revenue (BIR) officials to examine the books of account and other accounting records of respondent, in connection with the investigation of respondents 1990 income tax liability. On 22 April 1992, the BIR sent a letter to respondent requesting the latter to present for examination certain records and documents, but respondent failed to present any document. On 21 April 1994, respondent received a Preliminary Assessment Notice dated 13 April 1994 for deficiency income tax in the amount of P118,271,672.00, inclusive of surcharge, interest, and compromise penalty, arising from deductions that were disallowed for failure to pay the withholding tax and interest expenses that were likewise disallowed. On the following day, 22 April 1994, respondent received a Formal Assessment Notice with Assessment Notice No. 000688-80-7333, dated 14 April 1994, for deficiency income tax in the total amount of P118,271,672.00.3 On 6 May 1994, respondent, through its counsel Ponce Enrile Cayetano Reyes and Manalastas Law Offices, filed a formal protest letter against Assessment Notice No. 000688-80-7333. Respondent filed another protest letter on 23 May 1994, through another counsel Siguion Reyna Montecillo & Ongsiako Law Offices. In both letters, respondent requested for the cancellation of the tax assessment, which they alleged was invalid for lack of factual and legal basis. 4 On 16 October 2002, more than eight years after the assessment was presumably issued, the Ponce Enrile Cayetano Reyes and Manalastas Law Offices received from the CIR a Final Decision dated 8 October 2002 denying the respondents protest against Assessment Notice No. 000688-80-7333, and affirming the said assessment in toto.5 On 15 November 2002, respondent filed a Petition for Review with the CTA. After due notice and hearing, the CTA rendered a Decision in favor of respondent on 9 June 2004.6 The CTA ruled on the primary issue of prescription and found it unnecessary to decide the issues on the validity and propriety of the assessment. It decided that the protest letters filed by the respondent cannot constitute a request for reinvestigation, hence, they cannot toll the running of the prescriptive period to collect the assessed deficiency income tax.7 Thus, since more than three years had lapsed from the time Assessment Notice No. 000688-80-7333 was issued in 1994, the CIRs right to collect the same has prescribed in conformity with Section 269 of the National Internal Revenue Code of 1977 8(Tax Code of 1977). The dispositive portion of this decision reads: WHEREFORE, premises considered, judgment is hereby rendered in favor of the petitioner. Accordingly, respondents Final Decision dated October 8, 2002 is hereby REVERSED and SET ASIDE and respondent is hereby ORDERED to WITHDRAW and CANCEL Assessment Notice No. 000688-80-7333 issued against the petitioner for its 1990 income tax deficiency because respondents right to collect the same has prescribed. 9

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The CIR moved for reconsideration of the aforesaid Decision but was denied by the CTA in a Resolution dated 22 September 2004.10 Thereafter, the CIR filed a Petition for Review with the CTA en banc, questioning the aforesaid Decision and Resolution. In its en banc Decision, the CTA affirmed the Decision and Resolution in CTA Case No. 6568. The dispositive part reads: WHEREFORE, premises considered, the Petition for Review is hereby DISMISSED for lack of merit. Accordingly, the assailed Decision and Resolution in CTA Case No. 6568 are hereby AFFIRMED in toto.11 Hence, this Petition for Review on Certiorari raising the following grounds: THE COURT OF TAX APPEALS, SITTING EN BANC, COMMITTED REVERSIBLE ERROR IN AFFIRMING THE ASSAILED DECISION AND RESOLUTION IN CTA CASE NO. 6568 DECLARING THAT THE RIGHT OF THE GOVERNMENT TO COLLECT THE DEFICIENCY INCOME TAX FROM RESPONDENT FOR THE YEAR 1990 HAS PRESCRIBED A. THE PRESCRIPTIVE PERIOD WAS INTERUPTED WHEN RESPONDENT FILED TWO LETTERS OF PROTEST DISPUTING IN DETAIL THE DEFICIENCY ASSESSMENT IN QUESTION AND REQUESTING THE CANCELLATION OF SAID ASSESSMENT. THE TWO LETTERS OF PROTEST ARE, BY NATURE, REQUESTS FOR REINVESTIGATION OF THE DISPUTED ASSESSMENT. B. THE REQUESTS FOR REINVESTIGATION OF RESPONDENT WERE GRANTED BY THE BUREAU OF INTERNAL REVENUE.12 This Court finds no merit in this Petition. The main issue in this case is whether or not CIRs right to collect respondents alleged deficiency income tax is barred by prescription under Section 269(c) of the Tax Code of 1977, which reads: Section 269. Exceptions as to the period of limitation of assessment and collection of taxes . x x x xxxx c. Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. The law prescribed a period of three years from the date the return was actually filed or from the last date prescribed by law for the filing of such return, whichever came later, within which the BIR may assess a national internal revenue tax.13 However, the law increased the prescriptive period to assess or to begin a court proceeding for the collection without an assessment to ten years when a false or fraudulent return was filed with the intent of evading the tax or when no return was filed at all.14 In such cases, the ten-year period began to run only from the date of discovery by the BIR of the falsity, fraud or omission. If the BIR issued this assessment within the three-year period or the ten-year period, whichever was applicable, the law provided another three years after the assessment for the collection of the tax due thereon through the administrative process of distraint and/or levy or through judicial proceedings.15 The three-year period for collection of the assessed tax began to run on the date the assessment notice had been released, mailed or sent by the BIR. 16 The assessment, in this case, was presumably issued on 14 April 1994 since the respondent did not dispute the CIRs claim. Therefore, the BIR had until 13 April 1997. However, as there was no Warrant of Distraint and/or Levy served on the respondents nor any judicial proceedings initiated by the BIR, the earliest attempt of the BIR to collect the tax due based on this assessment was when it filed its Answer in CTA Case No. 6568 on 9 January 2003, which was several years beyond the three-year prescriptive period. Thus, the CIR is now prescribed from collecting the assessed tax. The provisions on prescription in the assessment and collection of national internal revenue taxes became law upon the recommendation of the tax commissioner of the Philippines. The report submitted by the tax commission clearly states that these provisions on prescription should be enacted to benefit and protect taxpayers:

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Under the former law, the right of the Government to collect the tax does not prescribe. However, in fairness to the taxpayer, the Government should be estopped from collecting the tax where it failed to make the necessary investigation and assessment within 5 years after the filing of the return and where it failed to collect the tax within 5 years from the date of assessment thereof. Just as the government is interested in the stability of its collections, so also are the taxpayers entitled to an assurance that they will not be subjected to further investigation for tax purposes after the expiration of a reasonable period of time. (Vol. II, Report of the Tax Commission of the Philippines, pp. 321-322).17 In a number of cases, this Court has also clarified that the statute of limitations on the collection of taxes should benefit both the Government and the taxpayers. In these cases, the Court further illustrated the harmful effects that the delay in the assessment and collection of taxes inflicts upon taxpayers. In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,18 Justice Montemayor, in his dissenting opinion, identified the potential loss to the taxpayer if the assessment and collection of taxes are not promptly made. Prescription in the assessment and in the collection of taxes is provided by the Legislature for the benefit of both the Government and the taxpayer; for the Government for the purpose of expediting the collection of taxes, so that the agency charged with the assessment and collection may not tarry too long or indefinitely to the prejudice of the interests of the Government, which needs taxes to run it; and for the taxpayer so that within a reasonable time after filing his return, he may know the amount of the assessment he is required to pay, whether or not such assessment is well founded and reasonable so that he may either pay the amount of the assessment or contest its validity in court x x x. It would surely be prejudicial to the interest of the taxpayer for the Government collecting agency to unduly delay the assessment and the collection because by the time the collecting agency finally gets around to making the assessment or making the collection, the taxpayer may then have lost his papers and books to support his claim and contest that of the Government, and what is more, the tax is in the meantime accumulating interest which the taxpayer eventually has to pay . In Republic of the Philippines v. Ablaza,19 this Court emphatically explained that the statute of limitations of actions for the collection of taxes is justified by the need to protect law-abiding citizens from possible harassment: The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest, peaceful, law -abiding citizens. Without such legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficient purpose of affording protection to the taxpayer within the contemplation of the Commission which recommended the approval of the law. And again in the recent case Bank of the Philippine Islands v. Commissioner of Internal Revenue,20 this Court, in confirming these earlier rulings, pronounced that: Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time. Thus, in Commissioner of Internal Revenue v. B.F. Goodrich,21 this Court affirmed that the law on prescription should be liberally construed in order to protect taxpayers and that, as a corollary, the exceptions to the law on prescription should be strictly construed. The Tax Code of 1977, as amended, provides instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under Section 271 thereof which reads:

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Section 224. Suspension of running of statute. The running of the statute of limitation provided in Sections 268 and 269 on the making of assessments and the beginning of distraint or levy or a proceeding in court for collection in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected x x x. (Emphasis supplied.) Among the exceptions provided by the aforecited section, and invoked by the CIR as a ground for this petition, is the instance when the taxpayer requests for a reinvestigation which is granted by the Commissioner. However, this exception does not apply to this case since the respondent never requested for a reinvestigation. More importantly, the CIR could not have conducted a reinvestigation where, as admitted by the CIR in its Petition, the respondent refused to submit any new evidence. Revenue Regulations No. 12-85, the Procedure Governing Administrative Protests of Assessment of the Bureau of Internal Revenue, issued on 27 November 1985, defines the two types of protest, the request for reconsideration and the request for reinvestigation, and distinguishes one from the other in this manner: Section 6. Protest. - The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation specifying the following particulars: xxxx For the purpose of protest herein (a) Request for reconsideration-- refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. (b) Request for reinvestigationrefers to a plea for re-evaluation of an assessment on the basis of newlydiscovered evidence or additional evidence that a taxpayer intends to present in the investigation. It may also involve a question of fact or law or both. The main difference between these two types of protests lies in the records or evidence to be examined by internal revenue officers, whether these are existing records or newly discovered or additional evidence. A re-evaluation of existing records which results from a request for reconsideration does not toll the running of the prescription period for the collection of an assessed tax. Section 271 distinctly limits the suspension of the running of the statute of limitations to instances when reinvestigation is requested by a taxpayer and is granted by the CIR. The Court provided a clear-cut rationale in the case of Bank of the Philippine Islands v. Commissioner of Internal Revenue22 explaining why a request for reinvestigation, and not a request for reconsideration, interrupts the running of the statute of limitations on the collection of the assessed tax: Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter cannot. In the present case, the separate letters of protest dated 6 May 1994 and 23 May 1994 are requests for reconsideration. The CIRs allegation that there was a request for reinvestigation is inconceivable since respondent consistently and categorically refused to submit new evidence and cooperate in any reinvestigation proceedings. This much was admitted in the Decision dated 8 October 2002 issued by then CIR Guillermo Payarno, Jr. In the said conference-hearing, Revenue Officer Alameda basically testified that Philcom, despite repeated demands, failed to submit documentary evidences in support of its claimed deductible expenses. Hence, except for the item of interest expense which was disallowed for being not ordinary and necessary, the rest of the claimed expenses were disallowed for non-withholding. In the same token, Revenue Officer Escober testified that upon his assignment to conduct the re-investigation, he immediately requested the taxpayer to present various accounting records for the year 1990, in addition to other documents in relation to the disallowed items (p.171). This was followed by other requests for submission of documents (pp.199 &217) but these were not heeded by the taxpayer. Essentially, he stated that Philcom did not cooperate in his reinvestigation of the case.

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In response to the testimonies of the Revenue Officers, Philcom thru Atty. Consunji, emphasized that it was denied due process because of the issuance of the Pre-Assessment Notice and the Assessment Notice on successive dates. x x x Counsel for the taxpayer even questioned the propriety of the conference-hearing inasmuch as the only question to resolved (sic) is the legality of the issuance of the assessment. On the disallowed items, Philcom thru counsel manifested that it has no intention to present documents and/or evidences allegedly because of the pending legal question on the validity of the assessment.23 Prior to the issuance of Revenue Regulations No. 12-85, which distinguishes a request for reconsideration and a request for reinvestigation, there have been cases wherein these two terms were used interchangeably. But upon closer examination, these cases all involved a reinvestigation that was requested by the taxpayer and granted by the BIR. In Collector of Internal Revenue v. Suyoc Consolidated Mining Company,24 the Court weighed the considerable time spent by the BIR to actually conduct the reinvestigations requested by the taxpayer in deciding that the prescription period was suspended during this time. Because of such requests, several reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take advantage of such desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription. Although the Court used the term "requests for reconsideration" in reference to the letters sent by the taxpayer in the case of Querol v. Collector of Internal Revenue,25 it took into account the reinvestigation conducted soon after these letters were received and the revised assessment that resulted from the reinvestigations. It is true that the Collector revised the original assessment on February 9, 1955; and appellant avers that this revision was invalid in that it was not made within the five-year prescriptive period provided by law (Collector vs. Pineda, 112 Phil. 321). But that fact is that the revised assessme nt was merely a result of petitioner Querols requests for reconsideration of the original assessment, contained in his letters of December 14, 1951 and May 25, 1953. The records of the Bureau of Internal Revenue show that after receiving the letters, the Bureau conducted a reinvestigation of petitioners tax liabilities, and, in fact, sent a tax examiner to San Fernando, La Union, for that purpose; that because of the examiners report, the Bureau revised the original assessment, x x x. In other words, the reconsideration was granted in part, and the original assessment was altered. Consequently, the period between the petition for reconsideration and the revised assessment should be subtracted from the total prescriptive period (Republic vs. Ablaza, 108 Phil 1105). The Court, in Republic v. Lopez,26 even gave a detailed accounting of the time the BIR spent for each reinvestigation in order to deduct it from the five-year period set at that time in the statute of limitations: It is now a settled ruled in our jurisdiction that the five-year prescriptive period fixed by Section 332(c) of the Internal Revenue Code within which the Government may sue to collect an assessed tax is to be computed from the last revised assessment resulting from a reinvestigation asked for by the taxpayer and (2) that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation. xxxx The first reinvestigation was granted, and a reduced assessment issued on 29 May 1954, from which date the Government had five years for bringing an action to collect. The second reinvestigation was asked on 16 January 1956, and lasted until it was decided on 22 April 1960, or a period of 4 years, 3 months, and 6 days, during which the limitation period was interrupted. The Court reiterated the ruling in Republic v. Lopez in the case of Commissioner of Internal Revenue v. Sison,27"that where a taxpayer demands a reinvestigation, the time employed in reinvestigating should be deducted from the total period of limitation." Finally, in Republic v. Arcache,28 the Court enumerated the reasons why the taxpayer is barred from invoking the defense of prescription, one of which was that, "In the first place, it appears obvious that the delay in the

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collection of his 1946 tax liability was due to his own repeated requests for reinvestigation and similarly repeated requests for extension of time to pay." In this case, the BIR admitted that there was no new or additional evidence presented. Considering that the BIR issued its Preliminary Assessment Notice on 13 April 1994 and its Formal Assessment Notice on 14 April 1994, just one day before the three-year prescription period for issuing the assessment expired on 15 April 1994, it had ample time to make a factually and legally well-founded assessment. Added to the fact that the Final Decision that the CIR issued on 8 October 2002 merely affirmed its earlier findings, whatever examination that the BIR may have conducted cannot possibly outlast the entire three-year prescriptive period provided by law to collect the assessed tax, not to mention the eight years it actually took the BIR to decide the respondents protest. The factual and legal issues involved in the as sessment are relatively simple, that is, whether certain income tax deductions should be disallowed, mostly for failure to pay withholding taxes. Thus, there is no reason to suspend the running of the statute of limitations in this case. The distinction between a request for reconsideration and a request for reinvestigation is significant. It bears repetition that a request for reconsideration, unlike a request for reinvestigation, cannot suspend the statute of limitations on the collection of an assessed tax. If both types of protest can effectively interrupt the running of the statute of limitations, an erroneous assessment may never prescribe. If the taxpayer fails to file a protest, then the erroneous assessment would become final and unappealable.29 On the other hand, if the taxpayer does file the protest on a patently erroneous assessment, the statute of limitations would automatically be suspended and the tax thereon may be collected long after it was assessed. Meanwhile the interest on the deficiencies and the surcharges continue to accumulate. And for an unrestricted number of years, the taxpayers remain uncertain and are burdened with the costs of preserving their books and records. This is the predicament that the law on the statute of limitations seeks to prevent. The Court, in sustaining for the first time the suspension of the running of the statute of limitations in cases where the taxpayer requested for a reinvestigation, gave this justification: A taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government . xxxx This case has no precedent in this jurisdiction for it is the first time that such has risen, but there are several precedents that may be invoked in American jurisprudence. As Mr. Justice Cardozo has said: "The applicable principle is fundamental and unquestioned. He who prevents a thing from being done may not avail himself of the nonperformance which he himself occasioned, for the law says to him in effect "this is your own act, and therefore you are not damnified ." (R.H. Stearns Co. v. U.S., 78 L. ed., 647). (Emphasis supplied.)30 This rationale is not applicable to the present case where the respondent did nothing to prevent the BIR from collecting the tax. It did not present to the BIR any new evidence for its re-evaluation. At the earliest opportunity, respondent insisted that the assessment was invalid and made clear to the BIR its refusal to produce documents that the BIR requested. On the other hand, the BIR also communicated to the respondent its unwavering stance that its assessment is correct. Given that both parties were at a deadlock, the next logical step would have been for the BIR to issue a Decision denying the respondents protest and to initiate proceedings for the collection of the assessed tax and, thus, allow the respondent, should it so choose, to contest the assessment before the CTA. Postponing the collection for eight long years could not possibly make the taxpayer feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. There was no legal, or even a moral, obligation preventing the CIR from collecting the assessed tax. In a similar case, Cordero v. Conda,31 the Court did not suspend the running of the prescription period where the acts of the taxpayer did not prevent the government from collecting the tax. The government also urges that partial payment is "acknowledgement of the tax obligation", hence a "waiver on the defense of prescription." But partial payment would not prevent the government from suing the taxpayer. Because, by such act of payment, the government is not thereby "persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant." Which, as stated in Collector v. Suyoc Consolidated Mining Co., et al., L-11527, November 25, 1958, is the underlying reason behind the rule that prescriptive period is arrested by the taxpayers request for reexamination or rein vestigation even if "he has not previously waived it [prescription] in writing."

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The Court reminds us, in the case of Commissioner of Internal Revenue v. Algue, Inc., 32 of the need to balance the conflicting interests of the government and the taxpayers. Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interest of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of common good, may be achieved. Thus, the three-year statute of limitations on the collection of an assessed tax provided under Section 269(c) of the Tax Code of 1977, a law enacted to protect the interests of the taxpayer, must be given effect. In providing for exceptions to such rule in Section 271, the law strictly limits the suspension of the running of the prescription period to, among other instances, protests wherein the taxpayer requests for a reinvestigation. In this case, where the taxpayer merely filed two protest letters requesting for a reconsideration, and where the BIR could not have conducted a reinvestigation because no new or additional evidence was submitted, the running of statute of limitations cannot be interrupted. The tax which is the subject of the Decision issued by the CIR on 8 October 2002 affirming the Formal Assessment issued on 14 April 1994 can no longer be the subject of any proceeding for its collection. Consequently, the right of the government to collect the alleged deficiency tax is barred by prescription. IN VIEW OF THE FOREGOING, the instant Petition is DENIED. The assailed en banc Decision of the CTA in CTA EB No. 37 dated 22 February 2005, cancelling Assessment Notice No. 000688-80-7333 issued against Philippine Global Communication, Inc. for its 1990 income tax deficiency for the reason that it is barred by prescription, is hereby AFFIRMED. No costs. SO ORDERED. Panganiban, C.J. (Chairperson), Ynares-Santiago, Austria-Martinez, and Callejo, Sr., JJ., concur.

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Republic of the Philippines SUPREME COURT SECOND DIVISION G.R. No. 139736 October 17, 2005 BANK OF THE PHILIPPINE ISLANDS, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION CHICO-NAZARIO, J.: This Petition for Review on Certiorari, under Rule 45 of the 1997 Rules of Civil Procedure, assails the Decision of the Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999,1 which reversed and set aside the Decision of the Court of Tax Appeals (CTA), dated 02 February 1999,2 and which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner Bank of the Philippine Islands (BPI) to pay the amount of P28,020.00 as deficiency documentary stamp tax (DST) for the taxable year 1985, inclusive of the compromise penalty. There is hardly any controversy as to the factual antecedents of this Petition. Petitioner BPI is a commercial banking corporation organized and existing under the laws of the Philippines. On two separate occasions, particularly on 06 June 1985 and 14 June 1985, it sold United States (US) $500,000.00 to the Central Bank of the Philippines (Central Bank), for the total sales amount of US$1,000,000.00. On 10 October 1989, the Bureau of Internal Revenue (BIR) issued Assessment No. FAS-5-85-89-002054,3 finding petitioner BPI liable for deficiency DST on its afore-mentioned sales of foreign bills of exchange to the Central Bank, computed as follows 1985 Deficiency Documentary Stamp Tax Foreign Bills of Exchange.. P 18,480,000.00 Tax Due Thereon: P18,480,000.00 x P0.30 (Sec. 182 NIRC). P200.00 Add: Suggested compromise penalty. TOTAL AMOUNT DUE AND COLLECTIBLE.

27,720.00

300.00 P 28,020.00

Petitioner BPI received the Assessment, together with the attached Assessment Notice,4 on 20 October 1989. Petitioner BPI, through its counsel, protested the Assessment in a letter dated 16 November 1989, and filed with the BIR on 17 November 1989. The said protest letter is reproduced in full below November 16, 1989 The Commissioner of Internal Revenue Quezon City Attention of: Mr. Pedro C. Aguillon Asst. Commissioner for Collection

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Sir: On behalf of our client, Bank of the Philippine Islands (BPI), we have the honor to protest your assessment against it for deficiency documentary stamp tax for the year 1985 in the amount of P28,020.00, arising from its sale to the Central Bank of U.S. $500,000.00 on June 6, 1985 and another U.S. $500,000.00 on June 14, 1985. 1. Under established market practice, the documentary stamp tax on telegraphic transfers or sales of foreign exchange is paid by the buyer. Thus, when BPI sells to any party, the cost of documentary stamp tax is added to the total price or charge to the buyer and the seller affixes the corresponding documentary stamp on the document. Similarly, when the Central Bank sells foreign exchange to BPI, it charges BPI for the cost of the documentary stamp on the transaction. 2. In the two transactions subject of your assessment, no documentary stamps were affixed because the buyer, Central Bank of the Philippines, was exempt from such tax. And while it is true that under P.D. 1994, a proviso was added to sec. 222 (now sec. 186) of the Tax Code "that whenever one party to a taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable for the tax," this proviso (and the other amendments of P.D. 1994) took effect only on January 1, 1986, according to sec. 49 of P.D. 1994. Hence, the liability for the documentary stamp tax could not be shifted to the seller. In view of the foregoing, we request that the assessment be revoked and cancelled. Very truly yours, PADILLA LAW OFFICE By: (signed) SABINO PADILLA, JR.5 Petitioner BPI did not receive any immediate reply to its protest letter. However, on 15 October 1992, the BIR issued a Warrant of Distraint and/or Levy6 against petitioner BPI for the assessed deficiency DST for taxable year 1985, in the amount of P27,720.00 (excluding the compromise penalty of P300.00). It served the Warrant on petitioner BPI only on 23 October 1992.7 Then again, petitioner BPI did not hear from the BIR until 11 September 1997, when its counsel received a letter, dated 13 August 1997, signed by then BIR Commissioner Liwayway Vinzons-Chato, denying its "request for reconsideration," and addressing the points raised by petitioner BPI in its protest letter, dated 16 November 1989, thus In reply, please be informed that after a thorough and careful study of the facts of the case as well as the law and jurisprudence pertinent thereto, this Office finds the above argument to be legally untenable. It is admitted that while industry practice or market convention has the force of law between the members of a particular industry, it is not binding with the BIR since it is not a party thereto. The same should, therefore, not be allowed to prejudice the Bureau of its lawful task of collecting revenues necessary to defray the expenses of the government. (Art. 11 in relation to Art. 1306 of the New Civil Code.) Moreover, let it be stated that even before the amendment of Sec. 222 (now Sec. 173) of the Tax Code, as amended, the same was already interpreted to hold that the other party who is not exempt from the payment of documentary stamp tax liable from the tax. This interpretation was further strengthened by the following BIR Rulings which in substance state: 1. BIR Unnumbered Ruling dated May 30, 1977 "x x x Documentary stamp taxes are payable by either person, signing, issuing, accepting, or transferring the instrument, document or paper. It is now settled that where one party to the instrument is exempt from said taxes, the other party who is not exempt should be liable." 2. BIR Ruling No. 144-84 dated September 3, 1984

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"x x x Thus, where one party to the contract is exempt from said tax, the other party, who is not exempt, shall be liable therefore. Accordingly, since A.J.L. Construction Corporation, the other party to the contract and the one assuming the payment of the expenses incidental to the registration in the vendees name of the property sold, is not exempt from said tax, then it is the one liable therefore, pursuant to Sec. 245 (now Sec. 196), in relation to Sec. 222 (now Sec. 173), both of the Tax Code of 1977, as amended." Premised on all the foregoing considerations, your request for reconsideration is hereby DENIED. 8 Upon receipt of the above-cited letter from the BIR, petitioner BPI proceeded to file a Petition for Review with the CTA on 10 October 1997;9 to which respondent BIR Commissioner, represented by the Office of the Solicitor General, filed an Answer on 08 December 1997.10 Petitioner BPI raised in its Petition for Review before the CTA, in addition to the arguments presented in its protest letter, dated 16 November 1989, the defense of prescription of the right of respondent BIR Commissioner to enforce collection of the assessed amount. It alleged that respondent BIR Commissioner only had three years to collect on Assessment No. FAS-5-85-89-002054, but she waited for seven years and nine months to deny the protest. In her Answer and subsequent Memorandum, respondent BIR Commissioner merely reiterated her position, as stated in her letter to petitioner BPI, dated 13 August 1997, which denied the latters protest; and remained silent as to the expiration of the prescriptive period for collection of the assessed deficiency DST. After due trial, the CTA rendered a Decision on 02 February 1999, in which it identified two primary issues in the controversy between petitioner BPI and respondent BIR Commissioner: (1) whether or not the right of respondent BIR Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were subject to DST. The CTA answered the first issue in the negative and held that the statute of limitations for respondent BIR Commissioner to collect on the Assessment had not yet prescribed. In resolving the issue of prescription, the CTA reasoned that In the case of Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc., G.R. No. 76281, September 30, 1991, 202 SCRA 125, the Supreme Court laid to rest the first issue. It categorically ruled that a "protest" is to be treated as request for reinvestigation or reconsideration and a mere request for reexamination or reinvestigation tolls the prescriptive period of the Commissioner to collect on an assessment. . . ... In the case at bar, there being no dispute that petitioner filed its protest on the subject assessment on November 17, 1989, there can be no conclusion other than that said protest stopped the running of the prescriptive period of the Commissioner to collect. Section 320 (now 223) of the Tax Code, clearly states that a request for reinvestigation which is granted by the Commissioner, shall suspend the prescriptive period to collect. The underscored portion above does not mean that the Commissioner will cancel the subject assessment but should be construed as when the same was entertained by the Commissioner by not issuing any warrant of distraint or levy on the properties of the taxpayer or any action prejudicial to the latter unless and until the request for reinvestigation is finally given due course. Taking into consideration this provision of law and the aforementioned ruling of the Supreme Court in Wyeth Suaco which specifically and categorically states that a protest could be considered as a request for reinvestigation, We rule that prescription has not set in against the government.11 The CTA had likewise resolved the second issue in the negative. Referring to its own decision in an earlier case,Consolidated Bank & Trust Co. v. The Commissioner of Internal Revenue ,12 the CTA reached the conclusion that the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were not subject to DST From the abovementioned decision of this Court, it can be gleaned that the Central Bank, during the period June 11, 1984 to March 9, 1987 enjoyed tax exemption privilege, including the payment of documentary stamp tax (DST) pursuant to Resolution No. 35-85 dated May 3, 1985 of the Fiscal Incentive Review Board. As such, the Central Bank, as buyer of the foreign currency, is exempt from paying the documentary stamp tax for the period above-mentioned. This Court further expounded that said tax exemption of the Central Bank was modified beginning January 1, 1986 when Presidential Decree

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(P.D.) 1994 took effect. Under this decree, the liability for DST on sales of foreign currency to the Central Bank is shifted to the seller. Applying the above decision to the case at bar, petitioner cannot be held liable for DST on its 1985 sales of foreign currencies to the Central Bank, as the latter who is the purchaser of the subject currencies is the one liable thereof. However, since the Central Bank is exempt from all taxes during 1985 by virtue of Resolution No. 35-85 of the Fiscal Incentive Review Board dated March 3, 1985, neither the petitioner nor the Central Bank is liable for the payment of the documentary stamp tax for the formers 1985 sales of foreign currencies to the latter. This aforecited case of Consolidated Bank vs. Commissioner of Internal Revenue was affirmed by the Court of Appeals in its decision dated March 31, 1995, CA-GR Sp. No. 35930. Said decision was in turn affirmed by the Supreme Court in its resolution denying the petition filed by Consolidated Bank dated November 20, 1995 with the Supreme Court under Entry of Judgment dated March 1, 1996. 13 In sum, the CTA decided that the statute of limitations for respondent BIR Commissioner to collect on Assessment No. FAS-5-85-89-002054 had not yet prescribed; nonetheless, it still ordered the cancellation of the said Assessment because the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were tax-exempt. Herein respondent BIR Commissioner appealed the Decision of the CTA to the Court of Appeals. In its Decision dated 11 August 1999,14 the Court of Appeals sustained the finding of the CTA on the first issue, that the running of the prescriptive period for collection on Assessment No. FAS-5-85-89-002054 was suspended when herein petitioner BPI filed a protest on 17 November 1989 and, therefore, the prescriptive period for collection on the Assessment had not yet lapsed. In the same Decision, however, the Court of Appeals reversed the CTA on the second issue and basically adopted the position of the respondent BIR Commissioner that the sales of foreign currency by petitioner BPI to the Central Bank in taxable year 1985 were subject to DST. The Court of Appeals, thus, ordered the reinstatement of Assessment No. FAS-5-85-89-002054 which required petitioner BPI to pay the amount of P28,020.00 as deficiency DST for taxable year 1985, inclusive of the compromise penalty. Comes now petitioner BPI before this Court in this Petition for Review on Certiorari, seeking resolution of the same two legal issues raised and discussed in the courts below, to reiterate: (1) whether or not the right of respondent BIR Commissioner to collect from petitioner BPI the alleged deficiency DST for taxable year 1985 had prescribed; and (2) whether or not the sales of US$1,000,000.00 on 06 June 1985 and 14 June 1985 by petitioner BPI to the Central Bank were subject to DST. I The efforts of respondent Commissioner to collect on Assessment No. FAS-5-85-89-002054 were already barred by prescription. Anent the question of prescription, this Court disagrees in the Decisions of the CTA and the Court of Appeals, and herein determines the statute of limitations on collection of the deficiency DST in Assessment No. FAS-5-85-89-002054 had already prescribed. The period for the BIR to assess and collect an internal revenue tax is limited to three years by Section 203 of the Tax Code of 1977, as amended,15 which provides that SEC. 203. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by law, the three-year period shall be counted from the day the return was filed. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day.16 The three-year period of limitations on the assessment and collection of national internal revenue taxes set by Section 203 of the Tax Code of 1977, as amended, can be affected, adjusted, or suspended, in accordance with the following provisions of the same Code SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes. (a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity,

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fraud, or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof. (b) If before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. (c) Any internal revenue tax which has been assessed within the period of limitation above-prescribed may be collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax. (d) Any internal revenue tax which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. (e) Provided, however, That nothing in the immediately preceding section and paragraph (a) hereof shall be construed to authorize the examination and investigation or inquiry into any tax returns filed in accordance with the provisions of any tax amnesty law or decree.17 SEC. 224. Suspension of running of statute. The running of the statute of limitation provided in Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided,That, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint and levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. 18 As enunciated in these statutory provisions, the BIR has three years, counted from the date of actual filing of the return or from the last date prescribed by law for the filing of such return, whichever comes later, to assess a national internal revenue tax or to begin a court proceeding for the collection thereof without an assessment. In case of a false or fraudulent return with intent to evade tax or the failure to file any return at all, the prescriptive period for assessment of the tax due shall be 10 years from discovery by the BIR of the falsity, fraud, or omission. When the BIR validly issues an assessment, within either the three-year or ten-year period, whichever is appropriate, then the BIR has another three years 19 after the assessment within which to collect the national internal revenue tax due thereon by distraint, levy, and/or court proceeding. The assessment of the tax is deemed made and the three-year period for collection of the assessed tax begins to run on the date the assessment notice had been released, mailed or sent by the BIR to the taxpayer. 20 In the present Petition, there is no controversy on the timeliness of the issuance of the Assessment, only on the prescription of the period to collect the deficiency DST following its Assessment. While Assessment No. FAS-5-85-89002054 and its corresponding Assessment Notice were both dated 10 October 1989 and were received by petitioner BPI on 20 October 1989, there was no showing as to when the said Assessment and Assessment Notice were released, mailed or sent by the BIR. Still, it can be granted that the latest date the BIR could have released, mailed or sent the Assessment and Assessment Notice to petitioner BPI was on the same date they were received by the latter, on 20 October 1989. Counting the three-year prescriptive period, for a total of 1,095 days,21 from 20 October 1989, then the BIR only had until 19 October 1992 within which to collect the assessed deficiency DST. The earliest attempt of the BIR to collect on Assessment No. FAS-5-85-89-002054 was its issuance and service of a Warrant of Distraint and/or Levy on petitioner BPI. Although the Warrant was issued on 15 October 1992, previous to the expiration of the period for collection on 19 October 1992, the same was served on petitioner BPI only on 23 October 1992. Under Section 223(c) of the Tax Code of 1977, as amended, it is not essential that the Warrant of Distraint and/or Levy be fully executed so that it can suspend the running of the statute of limitations on the collection of the tax. It is enough that the proceedings have validly began or commenced and that their execution has not been suspended by reason of the voluntary desistance of the respondent BIR Commissioner. Existing jurisprudence establishes that distraint and levy proceedings are validly begun or commenced by the issuance of the Warrantand service thereof on the taxpayer.22 It is

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only logical to require that the Warrant of Distraint and/or Levy be, at the very least, served upon the taxpayer in order to suspend the running of the prescriptive period for collection of an assessed tax, because it may only be upon the service of the Warrant that the taxpayer is informed of the denial by the BIR of any pending protest of the said taxpayer, and the resolute intention of the BIR to collect the tax assessed. If the service of the Warrant of Distraint and/or Levy on petitioner BPI on 23 October 1992 was already beyond the prescriptive period for collection of the deficiency DST, which had expired on 19 October 1992, then what more the letter of respondent BIR Commissioner, dated 13 August 1997 and received by the counsel of the petitioner BPI only on 11 September 1997, denying the protest of petitioner BPI and requesting payment of the deficiency DST? Even later and more unequivocally barred by prescription on collection was the demand made by respondent BIR Commissioner for payment of the deficiency DST in her Answer to the Petition for Review of petitioner BPI before the CTA, filed on 08 December 1997.23 II There is no valid ground for the suspension of the running of the prescriptive period for collection of the assessed DST under the Tax Code of 1977, as amended. In their Decisions, both the CTA and the Court of Appeals found that the filing by petitioner BPI of a protest letter suspended the running of the prescriptive period for collecting the assessed DST. This Court, however, takes the opposing view, and, based on the succeeding discussion, concludes that there is no valid ground for suspending the running of the prescriptive period for collection of the deficiency DST assessed against petitioner BPI. A. The statute of limitations on assessment and collection of taxes is for the protection of the taxpayer and, thus, shall be construed liberally in his favor. Though the statute of limitations on assessment and collection of national internal revenue taxes benefits both the Government and the taxpayer, it principally intends to afford protection to the taxpayer against unreasonable investigation. The indefinite extension of the period for assessment is unreasonable because it deprives the said taxpayer of the assurance that he will no longer be subjected to further investigation for taxes after the expiration of a reasonable period of time.24 As aptly explained in Republic of the Philippines v. Ablaza25 The law prescribing a limitation of actions for the collection of the income tax is beneficial both to the Government and to its citizens; to the Government because tax officers would be obliged to act promptly in the making of assessment, and to citizens because after the lapse of the period of prescription citizens would have a feeling of security against unscrupulous tax agents who will always find an excuse to inspect the books of taxpayers, not to determine the latters real liability, but to take advantage of every opportunity to molest peaceful, law-abiding citizens. Without such a legal defense taxpayers would furthermore be under obligation to always keep their books and keep them open for inspection subject to harassment by unscrupulous tax agents. The law on prescription being a remedial measure should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to the taxpayer within the contemplation of the Commission which recommend the approval of the law. In order to provide even better protection to the taxpayer against unreasonable investigation, the Tax Code of 1977, as amended, identifies specifically in Sections 223 and 22426 thereof the circumstances when the prescriptive periods for assessing and collecting taxes could be suspended or interrupted. To give effect to the legislative intent, these provisions on the statute of limitations on assessment and collection of taxes shall be construed and applied liberally in favor of the taxpayer and strictly against the Government. B. The statute of limitations on assessment and collection of national internal revenue taxes may be waived, subject to certain conditions, under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, respectively. Petitioner BPI, however, did not execute any such waiver in the case at bar. According to paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, the prescriptive periods for assessment and collection of national internal revenue taxes, respectively, could be waived by agreement, to wit SEC. 223. Exceptions as to period of limitation of assessment and collection of taxes.

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... (b) If before the expiration of the time prescribed in the preceding section for the assessment of the tax, both the Commissioner and the taxpayer have agreed in writing to its assessment after such time the tax may be assessed within the period agreed upon. The period so agreed upon may be extended by subsequent written agreement made before the expiration of the period previously agreed upon. ... (d) Any internal revenue tax which has been assessed within the period agreed upon as provided in paragraph (b) hereinabove may be collected by distraint or levy or by a proceeding in court within the period agreed upon in writing before the expiration of the three-year period. The period so agreed upon may be extended by subsequent written agreements made before the expiration of the period previously agreed upon. 27 The agreements so described in the afore-quoted provisions are often referred to as waivers of the statute of limitations. The waiver of the statute of limitations, whether on assessment or collection, should not be construed as a waiver of the right to invoke the defense of prescription but, rather, an agreement between the taxpayer and the BIR to extend the period to a date certain, within which the latter could still assess or collect taxes due. The waiver does not mean that the taxpayer relinquishes the right to invoke prescription unequivocally.28 A valid waiver of the statute of limitations under paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended, must be: (1) in writing; (2) agreed to by both the Commissioner and the taxpayer; (3) before the expiration of the ordinary prescriptive periods for assessment and collection; and (4) for a definite period beyond the ordinary prescriptive periods for assessment and collection. The period agreed upon can still be extended by subsequent written agreement, provided that it is executed prior to the expiration of the first period agreed upon. The BIR had issued Revenue Memorandum Order (RMO) No. 20-90 on 04 April 1990 to lay down an even more detailed procedure for the proper execution of such a waiver. RMO No. 20-90 mandates that the procedure for execution of the waiver shall be strictly followed, and any revenue official who fails to comply therewith resulting in the prescription of the right to assess and collect shall be administratively dealt with. This Court had consistently ruled in a number of cases that a request for reconsideration or reinvestigation by the taxpayer, without a valid waiver of the prescriptive periods for the assessment and collection of tax, as required by the Tax Code and implementing rules, will not suspend the running thereof.29 In the Petition at bar, petitioner BPI executed no such waiver of the statute of limitations on the collection of the deficiency DST per Assessment No. FAS-5-85-89-002054. In fact, an internal memorandum of the Chief of the Legislative, Ruling & Research Division of the BIR to her counterpart in the Collection Enforcement Division, dated 15 October 1992, expressly noted that, "The taxpayer fails to execute a Waiver of the Statute of Limitations extending the period of collection of the said tax up to December 31, 1993 pending reconsideration of its protest. . ."30 Without a valid waiver, the statute of limitations on collection by the BIR of the deficiency DST could not have been suspended under paragraph (d) of Section 223 of the Tax Code of 1977, as amended. C. The protest filed by petitioner BPI did not constitute a request for reinvestigation, granted by the respondent BIR Commissioner, which could have suspended the running of the statute of limitations on collection of the assessed deficiency DST under Section 224 of the Tax Code of 1977, as amended. The Tax Code of 1977, as amended, also recognizes instances when the running of the statute of limitations on the assessment and collection of national internal revenue taxes could be suspended, even in the absence of a waiver, under Section 224 thereof, which reads SEC. 224. Suspension of running of statute. The running of the statute of limitation provided in Section[s] 203 and 223 on the making of assessment and the beginning of distraint or levy or a proceeding in court for collection, in respect of any deficiency, shall be suspended for the period during which the Commissioner is prohibited from making the assessment or beginning distraint or levy or a proceeding in court and for sixty days thereafter; when the taxpayer requests for a reinvestigation which is granted by the Commissioner; when the taxpayer cannot be located in the address given by him in the return filed upon which a tax is being assessed or collected: Provided,That, if the taxpayer informs the Commissioner of any change in address, the running of the statute of limitations will not be suspended; when the warrant of distraint and

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levy is duly served upon the taxpayer, his authorized representative, or a member of his household with sufficient discretion, and no property could be located; and when the taxpayer is out of the Philippines. 31 Of particular importance to the present case is one of the circumstances enumerated in Section 224 of the Tax Code of 1977, as amended, wherein the running of the statute of limitations on assessment and collection of taxes is considered suspended "when the taxpayer requests for a reinvestigation which is granted by the Commissioner." This Court gives credence to the argument of petitioner BPI that there is a distinction between a request for reconsideration and a request for reinvestigation. Revenue Regulations (RR) No. 12-85, issued on 27 November 1985 by the Secretary of Finance, upon the recommendation of the BIR Commissioner, governs the procedure for protesting an assessment and distinguishes between the two types of protest, as follows PROTEST TO ASSESSMENT SEC. 6. Protest. The taxpayer may protest administratively an assessment by filing a written request for reconsideration or reinvestigation. . . ... For the purpose of the protest herein (a) Request for reconsideration. refers to a plea for a re-evaluation of an assessment on the basis of existing records without need of additional evidence. It may involve both a question of fact or of law or both. (b) Request for reinvestigation. refers to a plea for re-evaluation of an assessment on the basis of newlydiscovered or additional evidence that a taxpayer intends to present in the reinvestigation. It may also involve a question of fact or law or both. With the issuance of RR No. 12-85 on 27 November 1985 providing the above-quoted distinctions between a request for reconsideration and a request for reinvestigation, the two types of protest can no longer be used interchangeably and their differences so lightly brushed aside. It bears to emphasize that under Section 224 of the Tax Code of 1977, as amended, the running of the prescriptive period for collection of taxes can only be suspended by a request for reinvestigation, not a request for reconsideration. Undoubtedly, a reinvestigation, which entails the reception and evaluation of additional evidence, will take more time than a reconsideration of a tax assessment, which will be limited to the evidence already at hand; this justifies why the former can suspend the running of the statute of limitations on collection of the assessed tax, while the latter can not. The protest letter of petitioner BPI, dated 16 November 1989 and filed with the BIR the next day, on 17 November 1989, did not specifically request for either a reconsideration or reinvestigation. A close review of the contents thereof would reveal, however, that it protested Assessment No. FAS-5-85-89-002054 based on a question of law, in particular, whether or not petitioner BPI was liable for DST on its sales of foreign currency to the Central Bank in taxable year 1985. The same protest letter did not raise any question of fact; neither did it offer to present any new evidence. In its own letter to petitioner BPI, dated 10 September 1992, the BIR itself referred to the protest of petitioner BPI as a request for reconsideration.32 These considerations would lead this Court to deduce that the protest letter of petitioner BPI was in the nature of a request for reconsideration, rather than a request for reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the suspension of the running of the statute of limitations should not apply. Even if, for the sake of argument, this Court glosses over the distinction between a request for reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI as a request for reinvestigation, the filing thereof could not have suspended at once the running of the statute of limitations. Article 224 of the Tax Code of 1977, as amended, very plainly requires that the request for reinvestigation had been granted by the BIR Commissioner to suspend the running of the prescriptive periods for assessment and collection. That the BIR Commissioner must first grant the request for reinvestigation as a requirement for suspension of the statute of limitations is even supported by existing jurisprudence.

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In the case of Republic of the Philippines v. Gancayco,33 taxpayer Gancayco requested for a thorough reinvestigation of the assessment against him and placed at the disposal of the Collector of Internal Revenue all the evidences he had for such purpose; yet, the Collector ignored the request, and the records and documents were not at all examined. Considering the given facts, this Court pronounced that . . .The act of requesting a reinvestigation alone does not suspend the period. The request should first be granted, in order to effect suspension. (Collector vs. Suyoc Consolidated, supra; also Republic vs. Ablaza, supra). Moreover, the Collector gave appellee until April 1, 1949, within which to submit his evidence, which the latter did one day before. There were no impediments on the part of the Collector to file the collection case from April 1, 1949. . . . 34 In Republic of the Philippines v. Acebedo,35 this Court similarly found that . . . [T]he defendant, after receiving the assessment notice of September 24, 1949, asked for a reinvestigation thereof on October 11, 1949 (Exh. A). There is no evidence that this request was considered or acted upon.In fact, on October 23, 1950 the then Collector of Internal Revenue issued a warrant of distraint and levy for the full amount of the assessment (Exh. D), but there was no follow-up of this warrant. Consequently, the request for reinvestigation did not suspend the running of the period for filing an action for collection. The burden of proof that the taxpayers request for reinvestigation had been actually granted shall be on respondent BIR Commissioner. The grant may be expressed in communications with the taxpayer or implied from the actions of the respondent BIR Commissioner or his authorized BIR representatives in response to the request for reinvestigation. In Querol v. Collector of Internal Revenue,36 the BIR, after receiving the protest letters of taxpayer Querol, sent a tax examiner to San Fernando, Pampanga, to conduct the reinvestigation; as a result of which, the original assessment against taxpayer Querol was revised by permitting him to deduct reasonable depreciation. In another case, Republic of the Philippines v. Lopez,37 taxpayer Lopez filed a total of four petitions for reconsideration and reinvestigation. The first petition was denied by the BIR. The second and third petitions were granted by the BIR and after each reinvestigation, the assessed amount was reduced. The fourth petition was again denied and, thereafter, the BIR filed a collection suit against taxpayer Lopez. When the taxpayers spouses Sison, in Commissioner of Internal Revenue v. Sison,38 contested the assessment against them and asked for a reinvestigation, the BIR ordered the reinvestigation resulting in the issuance of an amended assessment. Lastly, inRepublic of the Philippines v. Oquias,39 the BIR granted taxpayer Oquiass request for reinvestigation and duly notified him of the date when such reinvestigation would be held; only, neither taxpayer Oquias nor his counsel appeared on the given date. In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was evidently granted and actual reinvestigation was conducted by the BIR, which eventually resulted in the issuance of an amended assessment. On the basis of these facts, this Court ruled in the same cases that the period between the request for reinvestigation and the revised assessment should be subtracted from the total prescriptive period for the assessment of the tax; and, once the assessment had been reconsidered at the taxpayers instance, the period for collection should begin to run from the date of the reconsidered or modified assessment.40 The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest filed by petitioner BPI was a request for reconsideration, not a reinvestigation, of the assessment against it; and (2) even granting that the protest of petitioner BPI was a request for reinvestigation, there was no showing that it was granted by respondent BIR Commissioner and that actual reinvestigation had been conducted. Going back to the administrative records of the present case, it would seem that the BIR, after receiving a copy of the protest letter of petitioner BPI on 17 November 1989, did not attempt to communicate at all with the latter until 10 September 1992, less than a month before the prescriptive period for collection on Assessment No. FAS-5-85-89-002054 was due to expire. There were internal communications, mostly indorsements of the docket of the case from one BIR division to another; but these hardly fall within the same sort of acts in the previously discussed cases that satisfactorily demonstrated the grant of the taxpayers request for reinvestigation. Petitioner BPI, in the meantime, was left in the dark as to the status of its protest in the absence of any word from the BIR. Besides, in its letter to petitioner BPI, dated 10 September 1992, the BIR unwittingly admitted that it had not yet acted on the protest of the former This refers to your protest against and/or request for reconsideration of the assessment/s of this Office against you involving the amount of P28,020.00 under FAS-5-85-89-002054 dated October 23, 1989 as deficiency documentary stamp tax inclusive of compromise penalty for the year 1985.

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In this connection, it is requested that the enclosed waiver of the statute of limitations extending the period of collection of the said tax/es to December 31, 1993 be executed by you as a condition precedent of our giving due course to your protest41 When the BIR stated in its letter, dated 10 September 1992, that the waiver of the statute of limitations on collection was a condition precedent to its giving due course to the request for reconsideration of petitioner BPI, then it was understood that the grant of such request for reconsideration was being held off until compliance with the given condition. When petitioner BPI failed to comply with the condition precedent, which was the execution of the waiver, the logical inference would be that the request was not granted and was not given due course at all. III The suspension of the statute of limitations on collection of the assessed deficiency DST from petitioner BPI does not find support in jurisprudence. It is the position of respondent BIR Commissioner, affirmed by the CTA and the Court of Appeals, that the three-year prescriptive period for collecting on Assessment No. FAS-5-85-89-002054 had not yet prescribed, because the said prescriptive period was suspended, invoking the case of Commissioner of Internal Revenue v. Wyeth Suaco Laboratories, Inc.42 It was in this case in which this Court ruled that the prescriptive period provided by law to make a collection is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. Petitioner BPI, on the other hand, is requesting this Court to revisit the Wyeth Suaco case contending that it had unjustifiably expanded the grounds for suspending the prescriptive period for collection of national internal revenue taxes. This Court finds that although there is no compelling reason to abandon its decision in the Wyeth Suaco case, the said case cannot be applied to the particular facts of the Petition at bar. A. The only exception to the statute of limitations on collection of taxes, other than those already provided in the Tax Code, was recognized in the Suyoc case. As had been previously discussed herein, the statute of limitations on assessment and collection of national internal revenue taxes may be suspended if the taxpayer executes a valid waiver thereof, as provided in paragraphs (b) and (d) of Section 223 of the Tax Code of 1977, as amended; and in specific instances enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner. Outside of these statutory provisions, however, this Court also recognized one other exception to the statute of limitations on collection of taxes in the case of Collector of Internal Revenue v. Suyoc Consolidated Mining Co.43 In the said case, the Collector of Internal Revenue issued an assessment against taxpayer Suyoc Consolidated Mining Co. on 11 February 1947 for deficiency income tax for the taxable year 1941. Taxpayer Suyoc requested for at least a year within which to pay the amount assessed, but at the same time, reserving its right to question the correctness of the assessment before actual payment. The Collector granted taxpayer Suyoc an extension of only three months to pay the assessed tax. When taxpayer Suyoc failed to pay the assessed tax within the extended period, the Collector sent it a demand letter, dated 28 November 1950. Upon receipt of the demand letter, taxpayer Suyoc asked for a reinvestigation and reconsideration of the assessment, but the Collector denied the request. Taxpayer Suyoc reiterated its request for reconsideration on 25 April 1952, which was denied again by the Collector on 06 May 1953. Taxpayer Suyoc then appealed the denial to the Conference Staff. The Conference Staff heard the appeal from 02 September 1952 to 16 July 1955, and the negotiations resulted in the reduction of the assessment on 26 July 1955. It was the collection of the reduced assessment that was questioned before this Court for being enforced beyond the prescriptive period. 44 In resolving the issue on prescription, this Court ratiocinated thus It is obvious from the foregoing that petitioner refrained from collecting the tax by distraint or levy or by proceeding in court within the 5-year period from the filing of the second amended final return due to the several requests of respondent for extension to which petitioner yielded to give it every opportunity to prove its claim regarding the correctness of the assessment. Because of such requests, several reinvestigations were made and a hearing was even held by the Conference Staff organized in the collection office to consider claims of such nature which, as the record shows, lasted for several months. After inducing petitioner to delay collection as he in fact did, it is most unfair for respondent to now take

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advantage of such desistance to elude his deficiency income tax liability to the prejudice of the Government invoking the technical ground of prescription. While we may agree with the Court of Tax Appeals that a mere request for reexamination or reinvestigation may not have the effect of suspending the running of the period of limitation for in such case there is need of a written agreement to extend the period between the Collector and the taxpayer, there are cases however where a taxpayer may be prevented from setting up the defense of prescription even if he has not previously waived it in writing as when by his repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Government. And when such situation comes to pass there are authorities that hold, based on weighty reasons, that such an attitude or behavior should not be countenanced if only to protect the interest of the Government. 45 By the principle of estoppel, taxpayer Suyoc was not allowed to raise the defense of prescription against the efforts of the Government to collect the tax assessed against it. This Court adopted the following principle from American jurisprudence: "He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned, for the law says to him in effect this is your own act, and therefore you are not damnified."46 In the Suyoc case, this Court expressly conceded that a mere request for reconsideration or reinvestigation of an assessment may not suspend the running of the statute of limitations. It affirmed the need for a waiver of the prescriptive period in order to effect suspension thereof. However, even without such waiver, the taxpayer may be estopped from raising the defense of prescription because by his repeated requests or positive acts, he had induced Government authorities to delay collection of the assessed tax. Based on the foregoing, petitioner BPI contends that the declaration made in the later case of Wyeth Suaco, that the statute of limitations on collection is suspended once the taxpayer files a request for reconsideration or reinvestigation, runs counter to the ruling made by this Court in the Suyoc case. B. Although this Court is not compelled to abandon its decision in the Wyeth Suaco case, it finds that Wyeth Suaco is not applicable to the Petition at bar because of the distinct facts involved herein. In the case of Wyeth Suaco, taxpayer Wyeth Suaco was assessed for failing to remit withholding taxes on royalties and dividend declarations, as well as, for deficiency sales tax. The BIR issued two assessments, dated 16 December 1974 and 17 December 1974, both received by taxpayer Wyeth Suaco on 19 December 1974. Taxpayer Wyeth Suaco, through its tax consultant, SGV & Co., sent to the BIR two letters, dated 17 January 1975 and 08 February 1975, protesting the assessments and requesting their cancellation or withdrawal on the ground that said assessments lacked factual or legal basis. On 12 September 1975, the BIR Commissioner advised taxpayer Wyeth Suaco to avail itself of the compromise settlement being offered under Letter of Instruction No. 308. Taxpayer Wyeth Suaco manifested its conformity to paying a compromise amount, but subject to certain conditions; though, apparently, the said compromise amount was never paid. On 10 December 1979, the BIR Commissioner rendered a decision reducing the assessment for deficiency withholding tax against taxpayer Wyeth Suaco, but maintaining the assessment for deficiency sales tax. It was at this point when taxpayer Wyeth Suaco brought its case before the CTA to enjoin the BIR from enforcing the assessments by reason of prescription. Although the CTA decided in favor of taxpayer Wyeth Suaco, it was reversed by this Court when the case was brought before it on appeal. According to the decision of this Court Settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. . . ... Although the protest letters prepared by SGV & Co. in behalf of private respondent did not categorically state or use the words "reinvestigation" and "reconsideration," the same are to be treated as letters of reinvestigation and reconsideration These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect the deficiency taxes. The Bureau of Internal Revenue, after having reviewed the records of Wyeth Suaco, in accordance with its request for reinvestigation, rendered a final assessment It was only upon receipt by Wyeth Suaco of this final assessment that the five-year prescriptive period started to run again.47

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The foremost criticism of petitioner BPI of the Wyeth Suaco decision is directed at the statement made therein that, "settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment." 48 It would seem that both petitioner BPI and respondent BIR Commissioner, as well as, the CTA and Court of Appeals, take the statement to mean that the filing alone of the request for reconsideration or reinvestigation can already interrupt or suspend the running of the prescriptive period on collection. This Court therefore takes this opportunity to clarify and qualify this statement made in the Wyeth Suaco case. While it is true that, by itself, such statement would appear to be a generalization of the exceptions to the statute of limitations on collection, it is best interpreted in consideration of the particular facts of the Wyeth Suaco case and previous jurisprudence. The Wyeth Suaco case cannot be in conflict with the Suyoc case because there are substantial differences in the factual backgrounds of the two cases. The Suyoc case refers to a situation where there were repeated requests or positive acts performed by the taxpayer that convinced the BIR to delay collection of the assessed tax. This Court pronounced therein that the repeated requests or positive acts of the taxpayer prevented or estopped it from setting up the defense of prescription against the Government when the latter attempted to collect the assessed tax. In the Wyeth Suaco case, taxpayer Wyeth Suaco filed a request for reinvestigation, which was apparently granted by the BIR and, consequently, the prescriptive period was indeed suspended as provided under Section 224 of the Tax Code of 1977, as amended. 49 To reiterate, Section 224 of the Tax Code of 1977, as amended, identifies specific circumstances when the statute of limitations on assessment and collection may be interrupted or suspended, among which is a request for reinvestigation that is granted by the BIR Commissioner. The act of filing a request for reinvestigation alone does not suspend the period; such request must be granted.50 The grant need not be express, but may be implied from the acts of the BIR Commissioner or authorized BIR officials in response to the request for reinvestigation.51 This Court found in the Wyeth Suaco case that the BIR actually conducted a reinvestigation, in accordance with the request of the taxpayer Wyeth Suaco, which resulted in the reduction of the assessment originally issued against it. Taxpayer Wyeth Suaco was also aware that its request for reinvestigation was granted, as written by its Finance Manager in a letter dated 01 July 1975, addressed to the Chief of the Tax Accounts Division, wherein he admitted that, "[a]s we understand, the matter is now undergoing review and consideration by your Manufacturing Audit Division" The statute of limitations on collection, then, started to run only upon the issuance and release of the reduced assessment. The Wyeth Suaco case, therefore, is correct in declaring that the prescriptive period for collection is interrupted or suspended when the taxpayer files a request for reinvestigation, provided that, as clarified and qualified herein, such request is granted by the BIR Commissioner. Thus, this Court finds no compelling reason to abandon its decision in the Wyeth Suaco case. It also now rules that the said case is not applicable to the Petition at bar because of the distinct facts involved herein. As already heretofore determined by this Court, the protest filed by petitioner BPI was a request for reconsideration, which merely required a review of existing evidence and the legal basis for the assessment. Respondent BIR Commissioner did not require, neither did petitioner BPI offer, additional evidence on the matter. After petitioner BPI filed its request for reconsideration, there was no other communication between it and respondent BIR Commissioner or any of the authorized representatives of the latter. There was no showing that petitioner BPI was informed or aware that its request for reconsideration was granted or acted upon by the BIR. IV Conclusion To summarize all the foregoing discussion, this Court lays down the following rules on the exceptions to the statute of limitations on collection. The statute of limitations on collection may only be interrupted or suspended by a valid waiver executed in accordance with paragraph (d) of Section 223 of the Tax Code of 1977, as amended, and the existence of the circumstances enumerated in Section 224 of the same Code, which include a request for reinvestigation granted by the BIR Commissioner. Even when the request for reconsideration or reinvestigation is not accompanied by a valid waiver or there is no request for reinvestigation that had been granted by the BIR Commissioner, the taxpayer may still be held in estoppel and be

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prevented from setting up the defense of prescription of the statute of limitations on collection when, by his own repeated requests or positive acts, the Government had been, for good reasons, persuaded to postpone collection to make the taxpayer feel that the demand is not unreasonable or that no harassment or injustice is meant by the Government, as laid down by this Court in the Suyoc case. Applying the given rules to the present Petition, this Court finds that (a) The statute of limitations for collection of the deficiency DST in Assessment No. FAS-5-85-89-002054, issued against petitioner BPI, had already expired; and (b) None of the conditions and requirements for exception from the statute of limitations on collection exists herein: Petitioner BPI did not execute any waiver of the prescriptive period on collection as mandated by paragraph (d) of Section 223 of the Tax Code of 1977, as amended; the protest filed by petitioner BPI was a request for reconsideration, not a request for reinvestigation that was granted by respondent BIR Commissioner which could have suspended the prescriptive period for collection under Section 224 of the Tax Code of 1977, as amended; and, petitioner BPI, other than filing a request for reconsideration of Assessment No. FAS-5-85-89-002054, did not make repeated requests or performed positive acts that could have persuaded the respondent BIR Commissioner to delay collection, and that would have prevented or estopped petitioner BPI from setting up the defense of prescription against collection of the tax assessed, as required in the Suyoc case. This is a simple case wherein respondent BIR Commissioner and other BIR officials failed to act promptly in resolving and denying the request for reconsideration filed by petitioner BPI and in enforcing collection on the assessment. They presented no reason or explanation as to why it took them almost eight years to address the protest of petitioner BPI. The statute on limitations imposed by the Tax Code precisely intends to protect the taxpayer from such prolonged and unreasonable assessment and investigation by the BIR. Considering that the right of the respondent BIR Commissioner to collect from petitioner BPI the deficiency DST in Assessment No. FAS-5-85-89-002054 had already prescribed, then, there is no more need for this Court to make a determination on the validity and correctness of the said Assessment for the latter would only be unenforceable. Wherefore, based on the foregoing, the instant Petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 51271, dated 11 August 1999, which reinstated Assessment No. FAS-5-85-89-002054 requiring petitioner BPI to pay the amount of P28,020.00 as deficiency documentary stamp tax for the taxable year 1985, inclusive of the compromise penalty, is REVERSED and SET ASIDE. Assessment No. FAS-5-85-89-002054 is hereby ordered CANCELED. SO ORDERED.

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION 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. x - - - - - - - - - - - - - - - - - - - - - - -x G.R. No. 124557 May 21, 2009

INTERNAL REVENUE, Petitioner, vs. COMMISSIONER OF COURT OF APPEALS, COURT OF TAX APPEALS, ADAMSON MANAGEMENT CORPORATION, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES,Respondents. DECISION 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 on certiorari 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. Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals upheld the Resolution promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in 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 forP17,718,360.00. 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.

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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 Complaint2 against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for violation of Sections 45 (a) and (d)3 , and 1104 , in relation to Section 1005 , as penalized under Section 255,6 and for violation of Section 2537 , in relation to Section 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 courts 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 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 courts 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 courts 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.9 It 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 IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR. 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.

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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 preceded G.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 "Examiners 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 Commissioners 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 DOJ as an implied formal assessment, and the filing of the criminal informations with the RTC as a denial of petitione rs 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 CTAs denial of the Commissioners Motion to Dismiss. Thus, the Commis sioner filed the petition for review under G.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 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.

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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 file an answer within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider the resolution. Instead, the Commissioner filed a petition for review of the CTA decision with the Court of Appeals. The Court of Appeals upheld the CTA order. However, this Court reversed the Court of Appeals decision and the CTA order, and ordered the dismissal of the petition. We held: An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals. Neither the NIRC nor the revenue regulations governing the protest of assessments 12 provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers. True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments. To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent 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. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its payment until the full payment.13 The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 14 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, 15 on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 16 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon. It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer.17 In the present case, the revenue officers Affidavit merely contained a computation of respondents tax liability.lawphil.net It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers. Respondents maintain that an assessment, in relation to taxation, is simply understood to mean: "A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof."18 "Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls."19

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Even these definitions fail to advance private respondents case. That the BIR examiners Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof. The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment. Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi,20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both. Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC, 21 which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment. The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code. In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that she wrote the recommendation letter22 addressed to the Secretary of the DOJ recommending the filing of criminal complaints against AMC and the aforecited persons for fraudulent returns and tax evasion. The first issue is whether the Commissioners 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 examiners findings is not an assessment since it is yet indefinite.23 We rule that the recommendation letter of the Commissioner cannot be considered a 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.

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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 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 25 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 Mertens 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 governments failure to discover the error and promptly to assess has no c onnections 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.1avvphi1 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; 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.

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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 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 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:

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(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 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 collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction. 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. Finally, we hold that contrary to private respondents stance, the doctrines laid down in CIR v. Union Shipping Co. and Yabes 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 Courts 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

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Republic of the Philippines SUPREME COURT Manila FIRST DIVISION

G.R. No. 119322 June 4, 1996 COMMISSIONER ON INTERNAL REVENUE, SENIOR STATE PROSECUTOR AURORA S. LAGMAN, SENIOR STATE PROSECUTOR BERNELITO R. FERNANDEZ, SENIOR STATE PROSECUTOR HENRICK P. GINGOYON, ROGELIO F. VISTA, STATE PROSECUTOR ALFREDO AGCAOILI, PROSECUTING ATTORNEY EMMANUEL VELASCO, CITY PROSECUTOR CANDIDO V. RIVERA, AND ASSISTANT CITY PROSECUTOR LEOPOLDO E. BARAQUIA, petitioners, vs. THE HONORABLE COURT OF APPEALS, THE HONORABLE TIRSO D'C VELASCO, PRESIDING JUDGE, REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH 88, FORTUNE TOBACCO CORPORATION, LUCIO TAN, HARRY C. TAN, CARMEN KAO TAN, FLORENCIO SANTOS, SALVADOR MISON, CHUNG POE KEE, ROJAS CHUA, MARIANO TANENGLIAN, JUANITA LEE AND ANTONIO P. ABAYA, respondents. DAGUPAN COMBINED COMMODITIES, INC., TOWNSMAN COMMERCIALS, INC., LANDMARK SALES AND MARKETING INC., CRIMSON CROCKER DISTRIBUTORS, INC., MOUNT MATUTUM MARKETING CORP., FIRST UNION TRADING CORP., CARLSBURG AND SONS, INC., OMAR ALI DISTRIBUTORS, INC., ORIEL AND COMPANY, NEMESIO TAN, QUINTIN CALLEJA, YOLANDA MANALILI, CARLOS CHAN, ROMEO TAN, VICENTE CO, WILLIAM YU, LETICIA LIM, GLORIA LOPEZ, ROBERT TANTAMCO, FELIPE LOY, ROLANDO CHUA, HONORINA TAN, WILLIE TANTAMCO, HENRY WEECHEE, JESUS LIM, TEODORO TAN, ANTONIO APOSTOL, DOMINGO TENG, CANDELARIO LI, ERLINDA CRUZ, CARLOS TUMPALAN, LARRY JOHN SY, ERNESTO ONG, WILFREDO MACROHON, ANTONIO TIU, ROSARIO LESTER, WILFREDO ONG, BONIFACIO CHUA, GO CHING CHUAN, HENRY CHUA, LOPE LIM GUAN, EMILIO TAN, FELIPE TAN SEH CHUAN, ANDRES CO, FELIPE KEE, HENRY GO CO, NARCISO GO, ADOLFO LIM, CO SHU, DANIEL YAO CABIGUN, GABRIELLE. QUINTELA, NELSON TE, EMILLIO GO, EDWIN LEE, CESAR LEDESMA, JR., JAO CHEP SENG, ARNULFO TAN, BENJAMIN T. HONG, PHILIP JAO, JOSE P. YU, AND DAVID R. CORTES, respondents-intervenors.

KAPUNAN, J.:p The pivotal issue in this petition for review is whether or not respondent Court of Appeals in its decision 1 in CA-G.R. SP No. 33599 correctly ruled that the Regional Trial Court of Quezon City (Branch 88) in Civil Case No. Q-94- 18790 did not commit grave abuse of discretion amounting to lack of jurisdiction in issuing four (4) orders directing the issuance of writs of preliminary injunction restraining petitioner prosecutors from continuing with the preliminary injunction of I.S. Nos. 93-508 and 93-584 in the Department of Justice and I.S. No. 93-17942 in the Office of the City Prosecutors of Quezon City wherein private respondents were respondents and denying petitioners' Motion to Dismiss said Civil Case No. 94-18790. 2 In resolving the issue raised in the petition, the Court may be guided by its definition of what constitutes grave abuse of discretion. By grave abuse of discretion is meant such capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction. The abuse of discretion must be patent and gross as to amount to an evasion of positive duty or a virtual refusal to perform a duty enjoined by law, or to act at all in contemplation of law as where the power is exercised in an arbitrary and despotic manner by reason of passion and hostility. 3 On June 1, 1993, the President issued a Memorandum creating a Task Force to investigate the tax liabilities of manufacturers engaged in tax evasion scheme, such as selling products through dummy marketing corporations to avoid payment of correct internal revenue tax, to collect from them any tax liabilities discovered from such investigation, and to file the necessary criminal actions against those who may have violated the tax code. The task force was composed of the Commissioner of Internal Revenue as Chairman, a representative of the Department of Justice and a representative of the Executive Secretary.

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On July 1, 1993, the Commissioner of Internal Revenue issued a Revenue Memorandum Circular No. 37-93 reclassifying best selling cigarettes bearing the brands "Hope," "More," and "Champion" as cigarettes of foreign brands subject to a higher rate of tax. On August 3, 1993, respondent Fortune Tobacco Corporation (Fortune) questioned the validity of the reclassification of said brands of cigarettes as violative of its right to due process and equal protection of law. Parenthetically, on September 8, 1993, the Court of Tax Appeals by resolution ruled that the reclassification made by the Commissioner "is of doubtful legality" and enjoined its enforcement. In a letter of August 13, 1993 which was received by Fortune on August 24, 1993, the Commissioner assessed against Fortune the total amount of P7,685,942,221.66 representing deficiency income, ad valorem and value-added tax for the year 1992 with the request that the said amount be paid within thirty (30) days upon receipt thereof. 4 Fortune on September 17, 1993 moved for reconsideration of the assessments. On September 7, 1993, the Commissioner of Internal Revenue filed a complaint with the Department of Justice against respondent Fortune, its corporate officers, nine (9) other corporations and their respective corporate officers for alleged fraudulent tax evasion for supposed non-payment by Fortune of the correct amount of income tax, ad valorem tax and value-added tax for the year 1992. The complaint alleged, among others, that: In the said income tax return, the taxpayer declared a net taxable income of P183,613,408.00 and an income tax due of P64,264,693.00. Based mainly on documentary evidence submitted by the taxpayer itself, these declarations are false and fraudulent because the correct taxable income of the corporation for the said year is P1,282,959,399.25. This underdeclaration which resulted in the evasion of the amount of P723,773,759.79 as deficiency income tax for the year 1992 is a violation of Section 45 of the Tax Code, penalized under Section 253 in relation to Sections 252(b) and (d) and 253 thereof, thus: . . . xxx xxx xxx Fortune Tobacco Corporation, through its Vice-President for Finance, Roxas Chua, likewise filed valueadded tax returns for the 1st, 2nd, 3rd and 4th quarters of 1992 with the Rev. District Office of Marikina, Metro Manila, declaring therein gross taxable sales, as follows: 1st Qtr. P 2,924,418,055.00 2nd Qtr. 2,980,335,235.00 3rd Qtr. 2,839,519,325.00 4th Qtr. 2,992,386,005.00 However, contrary to what have been reported in the said value- added tax returns, and based on documentary evidence obtained from the taxpayer, the total actual taxable sales of the corporation for the year 1992 amounted to P16,158,575,035.00 instead of P11,929,322,334.52 as declared by the corporation in the said VAT returns. These fraudulent underdeclarations which resulted in the evasion of value-added taxes in the aggregate amount of P1,169,688,645.63 for the entire year 1992 are violations of Section 110 in relation to Section 100 of the Tax Code, which are likewise penalized under the aforequoted Section 253, in relation to Section 252, thereof. Sections 110 and 100 provide: xxx xxx xxx Furthermore, based on the corporation's VAT returns, the corporation reported its taxable sales for 1992 in the amount of P11,736,658,580. This declaration is likewise false and fraudulent because, based on the daily manufacturer's sworn statements submitted to the BIR by the taxpayer, its total taxable sales during

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the year 1992 is P16,686,372,295.00. As a result thereof, the corporation was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 in violation of Section 127 in relation to Section 142, as amended by R.A. 6956, penalized under the aforequoted Section 253, in relation to Section 252, all of the Tax Code. Sections 127 and 142, as amended by R.A. 6956, are quoted as follows: . . . The complaint docketed as I.S. No. 93-508, was referred to the Department of Justice Task Force on revenue cases which found sufficient basis to further investigate the allegations that Fortune, through fraudulent means, evaded payment of income tax, ad valorem tax, and value-added tax for the year 1992 thus, depriving the government of revenues in the amount of Seven and One-half (P7.5) Billion Pesos. The fraudulent scheme allegedly adopted by private respondents consisted of making fictitious and simulated sales of Fortune's cigarette products to non-existing individuals and to entities incorporated and existing only for the purpose of such fictitious sales by declaring registered wholesale prices with the BIR lower than Fortune's actual wholesale prices which are required for determination of Fortune's correct income, ad valorem, and value-added tax liabilities. The "ghosts wholesale buyers" then ostensibly sold the products to customers and other wholesalers/retailers at higher wholesale prices determined by Fortune. The tax returns and manufacturer's sworn statements filed by Fortune would then declare the fictitious sales it made to the conduit corporators and non-existing individual buyers as its gross sales. 5 On September 8, 1993, the Department of Justice Task Force issued a subpoena directing private respondents to submit their counter-affidavits not later than September 20, 1993. 6 Instead of filing their counter-affidavits, the private respondents on October 15, 1993 filed a Verified Motion to Dismiss; Alternatively Motion to Suspend, 7 based principally on the following grounds: 1. The complaint of petitioner Commissioner follows a pattern of prosecution against private respondents in violation of their right to due process and equal protection of the law. 2. Petitioner Commissioner and the Court of Tax Appeals have still to determine Fortune's tax liability for 1992 in question; without any tax liability, there can be no tax evasion. 3. Exclusive jurisdiction to determine tax liability is vested in the Court of Tax Appeals; therefore, the DOJ is without jurisdiction to conduct preliminary investigation. 4. The complaint of petitioner Commissioner is not supported by any evidence to serve as adequate basis for the issuance of subpoena to private respondents and to put them to their defense. At the scheduled preliminary investigation on October 15, 1993, private respondents were asked by the panel of prosecutors to inform it of the aspects of the Verified Motion to Dismiss which counsel for private respondents did so briefly. Counsel for the Commissioner of Internal Revenue asked for fifteen (15) days within which to file a reply in writing to private respondents' Verified Motion to Dismiss. Thereupon, the panel of prosecutors declared a recess. Upon reconvening, the panel of prosecutors denied the motion to dismiss and treated the same as private respondents' counteraffidavits. 8 On October 20, 1993, private respondents filed a motion for reconsideration of the order of October 15, 1993. 9 On October 21, 1993, private respondents filed a motion to require the submission by the Bureau of Internal Revenue of certain documents in further support of their Verified Motion to Dismiss. Among the documents sought to be produced are the "Daily Manufacturer's Sworn Statements" which according to petitioner Commissioner in her complaint were submitted by Fortune to the BIR and which were the basis of her conclusion that Fortune's tax declarations were false and fraudulent. Fortune claimed that without the "Daily Manufacturer's Sworn Statements," there is no evidence to support the complaint, hence, warranting its outright dismissal. On October 26, 1993, private respondents moved for the inhibition of the State prosecutors assigned to the case for alleged lack of impartiality. 10 Private respondents also sought the production of the "Daily Manufacturer's Sworn Statements" submitted by certain cigarette companies similarly situated as Fortune but were not proceeded against, thus, private respondents charged that Fortune and its officers were being singled out for criminal prosecution which is discriminatory and in violation of the equal protection clause of the Constitution.

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On December 20, 1993, the panel of prosecutors issued an Omnibus Order 11 denying private respondents' motion for reconsideration, motion for suspension of investigation, motion to inhibit the State Prosecutors, and motion to require submission by the BIR of certain documents to further support private respondents' motion to dismiss. On January 4, 1994, private respondents filed a petition for certiorari and prohibition with prayer for preliminary injunction with the Regional Trial Court, Branch 88, Quezon City, docketed as Q-94-18790, praying that the complaint of the Commissioner of Internal Revenue and the orders of the prosecutors in I.S. No. 93-508 be dismissed or set aside, alternatively, the proceedings on the preliminary investigation be suspended pending final determination by the Commissioner of Fortune's motion for reconsideration/ reinvestigation of the August 13, 1993 assessment of the taxes due. 12 On January 17, 1994, petitioners filed a motion to dismiss the petition 13 on the grounds that (a) the trial court is bereft of jurisdiction to enjoin a criminal prosecution under preliminary investigation; (b) a criminal prosecution for tax fraud can proceed independently of criminal or administrative action; (c) there is no prejudicial question to justify suspension of the preliminary investigation; (d) private respondents' rights to due process was not violated; and (e) selective prosecution is not a valid defense in this jurisdiction. On January 19, 1994, at the hearing of the incident for the issuance of a writ of preliminary injunction in the petition, private respondents offered in evidence their verified petition for certiorari and prohibition and its annexes. Petitioners responded by praying that their motion to dismiss the petition for certiorari and prohibition be considered as their opposition to private respondents' application for the issuance of a writ of preliminary injunction. On January 25, 1994, the trial court issued an order granting the prayer for the issuance of a preliminary injunction. 14 The trial court rationalized its order in this wise: a) It is private respondents' claim that the ad valorem tax for the year 1992 was levied, assessed and collected by the BIR under Section 142(c) of the Tax Code on the basis of the "manufacturer's registered wholesale price" duly approved by the BIR. Fortune's taxable sales for 1992 was in the amount of P11,736,658,580.00. b) On the other hand, it is petitioners' contention that Fortune's declaration was false and fraudulent because, based on its daily manufacturer's sworn statements submitted to the BIR, its taxable sales in 1992 were P16,686,372,295.00, as a result of which, Fortune was able to evade the payment of ad valorem tax in the aggregate amount of P5,792,479,816.24. c) At the hearing for preliminary investigation, the "Daily Manufacturer's Sworn Statements" which, according to petitioners, were submitted to the BIR by private respondents and made the basis of petitioner Commissioner's complaint that the total taxable sales of Fortune in 1992 amounted to P16,686,372, 295.00 were not produced as part of the evidence for petitioners. In fact, private respondents had filed a motion to require petitioner Commissioner to submit the aforesaid daily manufacturer's sworn statements before the DOJ panel of prosecutors to show that Fortune's actual taxable sales totaled P16,686,373,295.00, but the motion was denied. d) There is nothing on record in the preliminary investigation before the panel of investigators which supports the allegation that Fortune made a fraudulent declaration of its 1992 taxable sales. e) Since, as alleged by private respondents, the ad valorem tax for the year 1992 should be based on the "manufacturer's registered wholesale price" while, as claimed by petitioners, the ad valorem taxes should be based on the wholesale price at which the manufacturer sold the cigarettes, which is a legal issue as admitted by a BIR lawyer during the hearing for preliminary injunction, the correct interpretation of the law involved, which is Section 142(c) of the Tax Code, constitutes a prejudicial question which must first be resolved before criminal proceedings for tax evasion may be pursued. In other words, the BIR must first make a final determination, which it has not, of Fortune's tax liability relative to its 1992 ad valorem, value-added and income taxes before the taxpayer can be made liable for tax evasion. f) There was a precipitate issuance by the panel of prosecutors of subpoenas to private respondents, on the very day following the filing of the complaint with the DOJ consisting of about 600 pages, and the

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precipitate denial by the panel of prosecutors, after a recess of about twenty (20) minutes, of private respondents' motion to dismiss, consisting of one hundred and thirty five (135) pages. g) Private respondents had been especially targeted by the government for prosecution. Prior to the filing of the complaint in I.S. No. 93-508, petitioner Commissioner issued Revenue Memorandum Circular No. 37-93 reclassifying Fortune's best selling cigarettes, namely "Hope," "More," and "Champion" as cigarettes bearing a foreign brand, thereby imposing upon them a higher rate of tax that would price them out of the market. h) While in petitioner Commissioner's letter of August 13, 1993, she gave Fortune a period of thirty (30) days from receipt thereof within which to pay the alleged tax deficiency assessments, she filed the criminal complaint for tax evasion before the period lapsed. i) Based on the foregoing, the criminal complaint against private respondents was filed prematurely and in violation of their constitutional right to equal protection of the laws. On January 26, 1994, private respondents filed with the trial court a Motion to Admit Supplemental Petition and sought the issuance of a writ of preliminary injunction to enjoin the State Prosecutors from continuing with the preliminary investigation filed by them against private respondents with the Quezon City Prosecutor's Office, docketed as I.S. 9317942, for alleged fraudulent tax evasion, committed by private respondents for the taxable year 1990. Private respondents averred in their motion that no supporting documents or copies of the complaint were attached to the subpoena in I.S. 9317942; that the subpoena violates private respondents' constitutional right to due process, equal protection and presumption of innocence; that I.S. 93-17942 is substantially the same as I.S. 93-508; that no tax assessment has been issued by the Commission of Internal Revenue and considering that taxes paid have not been challenged, no tax liability exists; and that since Assistant City Prosecutor Baraquia was a former classmate of Presidential Legal Counsel Antonio T. Carpio, the former cannot conduct the preliminary investigation in an impartial manner. On January 28, 1994, private respondents filed with the trial court a second supplemental petition, 15 also seeking to stay the preliminary investigation in I.S. 93-584, which was the third complaint filed against private respondents with the DOJ for alleged fraudulent tax evasion for the taxable year 1991. On January 31, 1994, the lower court admitted the two (2) supplemental petitions and issued a temporary restraining order in I.S. 93-17942 and I.S. 93-584. 16 Also, on the same day, petitioners filed an Urgent Motion for Immediate Resolution of petitioners' motion to dismiss. On February 7, 1994, the trial court issued an order denying petitioners' motion to dismiss private respondents' petition seeking to stay preliminary investigation in I.S. 93-508, ruling that the issue of whether Sec. 127(b) of the National Tax Revenue Code should be the basis of private respondents' tax liability as contended by the Bureau of Internal Revenue, or whether it is Section 142(c) of the same Code that applies, as argued by herein private respondents, should first be settled before any complaint for fraudulent tax evasion can be initiated. 17 On February 14, 1994, the trial court issued an order granting private respondents' petition for a supplemental writ of preliminary injunction, likewise enjoining the preliminary investigation of the two (2) other complaints filed with the Quezon City Prosecutor's Office and the DOJ for fraudulent tax evasion, I.S. 93-17942 and I.S. 93-584, for alleged tax evasion for the taxable years 1990 and 1991 respectively. 18 In granting the supplemental writ, the trial court stated that the two other complaints are the same as in I.S. 93-508, except that the former refer to the taxable years 1990 and 1991. On March 7, 1994, petitioners filed a petition for certiorari and prohibition with prayer for preliminary injunction before this Court. However, the petition was referred to the Court of Appeals for disposition by virtue of its original concurrent jurisdiction over the petition. On December 19, 1994, the Court of Appeals in CA-G.R No. SP-33599 rendered a decision denying the petition. The Court of Appeals ruled that the trial court committed no grave abuse of discretion in ordering the issuance of writs of preliminary injunction and in denying petitioners' motion to dismiss. In upholding the reasons and conclusions given by the trial court in its orders for the issuance of the questioned writs, the Court of Appeals said in part: In making such conclusion the respondent Court must have understood from herein petitioner Commissioner's letter-complaint of 14 pages (pp. 477-490, rollo of this case) and the joint affidavit of

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eight revenue officers of 17 pages attached thereto (pp. 491-507, supra) and its annexes (pp. 5081077, supra), that the charge against herein respondents is for tax evasion for non-payment by herein respondent Fortune of the correct amounts of income tax, ad valorem tax and value added tax, not necessarily "fraudulent tax evasion." Hence, the need for previous assessment of the correct amount by herein petitioner Commissioner before herein respondents may be charged criminally. Certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a Court acts within its jurisdictions, any alleged error committed in the exercise of its jurisdiction, will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari (Santos, Jr. vs. Court of Appeals, 152 SCRA 378; Gold City Integrated Port Services, Inc. vs. Intermediate Appellate Court, 171 SCRA 579). The questioned orders issued after hearing (Annexes A, B, C and D, petition) being but interlocutory, review thereof by this Court is inappropriate until final judgment is rendered, absent a showing of grave abuse of discretion on the part of the issuing court (See Van Dorn vs. Romillo, 139 SCRA 139, 141; Newsweek, Inc. vs. IAC, 171, 177; Mendoza vs. Court of Appeals, 201 SCRA 343, 352). The factual and legal issues involved in the main case still before the respondent Court are best resolved after trial. Petitioners, therefore, instead of resorting to this petition for certiorari and prohibition should have filed an answer to the petition as ordained in Section 4, Rule 16, in connection with Rule 11 of the Revised Rules of Court, interposing as defense or defenses the objection or objections raised in their motion to dismiss, then proceed to trial in order that thereafter the case may be decided on the merits by the respondent Court. In case of an adverse decision, they may appeal therefrom by which the entire record of the case would be elevated for review (SeeMendoza vs. Court of Appeals, supra). Therefore, certiorari and prohibition resorted to by herein petitioners will not lie in view of the remedy open to them. Thus, the resulting delay in the final disposition of the case before the respondent Court would not have been incurred. Grave abuse of discretion as a ground for issuance of writs of certiorari and prohibition implies capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction, or where the power is exercised in an arbitrary or despotic manner by reason of passion, prejudice, or personal hostility, amounting to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all in contemplation of law (Confederation of Citizens Labor Union vs. NLRC, 60 SCRA 84; Bustamante vs. Commission on Audit, 216 SCRA 134). For such writs to lie, there must be capricious, arbitrary and whimsical exercise of power, the very antithesis of the judicial prerogative in accordance with centuries of both civil law and common law traditions (Young vs. Sulit, 162 SCRA 659, 664; FCC vs. IAC, 166 SCRA 155; Purefoods Corp. vs. NLRC, 171 SCRA 45). Certiorari and prohibition are remedies narrow in scope and inflexible in character. They are not general utility tools in the legal workshop (Vda. de Guia vs. Veloso, 158 SCRA 340, 344). Their function is but limited to correction of defects of jurisdiction solely, not to be used for any other purpose (Garcia vs. Ranada, 166 SCRA 9), such as to cure errors in. proceedings or to correct erroneous conclusions of law or fact (Gold City Integrated Ports Services vs. IAC, 171 SCRA 579). Due regard for the foregoing teachings enunciated in the decisions cited can not bring about a decision other than what has been reached herein. Needless to say, the case before the respondent court involving those against herein respondents for alleged non-payment of the correct amounts due as income tax, ad valorem tax and value added tax for the years 1990, 1991 and 1992 (Civil Case No. Q-94-18790) is not ended by this decision. The respondent Court is still to try the case and decide it on the merits. All that is decided here is but the validity of the orders of the respondent Court granting herein respondents' application for preliminary injunction and denying herein petitioners' motion to dismiss. If upon the facts established after trial and the applicable law, dissolution of the writ of preliminary injunction allowed to be issued by the respondent Court is called for and a judgment favorable to herein petitioners is demanded, the respondent Court is duty bound to render judgment accordingly. WHEREFORE, the instant petition for certiorari and prohibition with application for issuance of restraining order and writ of preliminary injunction is DISMISSED. Costs de oficio. 19 Their motion for reconsideration having been denied by respondent appellate court on February 23, 1995, petitioners filed the present petition for review based on the following grounds: THE RESPONDENT COURTS COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN HOLDING THAT:

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I. THERE IS A PREJUDICIAL AND/OR LEGAL QUESTION TO JUSTIFY THE SUSPENSION OF THE PRELIMINARY INVESTIGATION. II. PRIVATE RESPONDENTS' RIGHTS TO DUE PROCESS, EQUAL PROTECTION AND PRESUMPTION OF INNOCENCE WERE VIOLATED; ON THE CONTRARY, THE STATE ITSELF WAS DEPRIVED OF DUE PROCESS. III. THE ADMISSION OF PRIVATE RESPONDENTS' SUPPLEMENTAL PETITIONS WERE PROPER. IV. THERE WAS SELECTIVE PROSECUTION. V. THE FACTUAL ALLEGATIONS IN THE PETITION ARE HYPOTHETICALLY ADMITTED IN A MOTION TO DISMISS BASED ON JURISDICTIONAL GROUNDS. VI. THE ISSUANCE OF THE WRITS OF INJUNCTION IS NOT A DECISION ON THE MERITS OF THE PETITION BEFORE THE LOWER COURT. 20 The petition is bereft of merit. In essence, the complaints in I.S. Nos. 93-508, 93-584 and 93-17942 charged private respondents with fraudulent tax evasion or wilfully attempting to evade or defeat payment of income tax, ad valorem tax and value-added tax for the year 1992, as well as for the years 1990-1991. The pertinent provisions of law involved are Sections 127(b) and 142(c) of the National Internal Revenue Code which state: Sec. 127. . . . (b) Determination of gross selling price of goods subject to ad valorem tax . -- Unless otherwise provided, the price, excluding the value-added tax, at which the goods are sold at wholesale in the place of production or through their sales agents to the public shall constitute the gross selling price. If the manufacturer also sells or allows such goods to be sold at wholesale price in another establishment of which he is the owner or in the profits at which he has an interest, the wholesale price in such establishment shall constitute the gross selling price. Should such price be less than the costs of manufacture plus expenses incurred until the goods are finally sold, then a proportionate margin of profit, not less than 10% of such manufacturing costs and expenses, shall be added to constitute the gross selling price. Sec. 142. . . . (c) Cigarettes packed in twenties. -- There shall be levied, assessed and collected on cigarettes packed in twenties an ad valorem tax at the rates prescribed below based on the manufacturer's registered wholesale price. xxx xxx xxx Private respondents contend that per Fortune's VAT returns, correct taxable sales for 1992 was in the amount of P11,736,658,580.00 which was the "manufacturer's registered wholesale price" in accordance with Section 142(c) of the Tax Code and paid the amount of P4,805,254,523 as ad valorem tax. On the other hand, petitioners allege, as specifically worded in the complaint in I.S. No. 93-508, that "based on the daily manufacturer's sworn statements submitted to the BIR by the Taxpayer (Fortune's) total taxable sales during the year 1992 is P16,686,372,295.00," as result of which Fortune "was able to evade the payment of ad valorem taxes in the aggregate amount of P5,792,479,816.24 . . ." Petitioners now argue that Section 127(b) lays down the rule that in determining the gross selling price of goods subject to ad valorem tax, it is the price, excluding the value-added tax, at which the goods are sold at wholesale price in the place of

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production or through their sales agents to the public. The registered wholesale price shall then be used for computing the ad valorem tax which is imposable upon removal of the taxable goods from the place of production. However, petitioners claim that Fortune used the "manufacturer's registered wholesale price" in selling the goods to alleged fictitious individuals and dummy corporations for the purpose of evading the payment of the correct ad valorem tax. There can be no question that under Section 127(b), the ad valorem tax should be based on the correct price excluding the value-added tax, at which goods are sold at wholesale in the place of production. It is significant to note that among the goods subject to ad valorem tax, the law -- specifically Section 142(c) -- requires that the corresponding tax on cigarettes shall be levied, assessed and collected at the rates based on the "manufacturer's registered wholesale price." Why does the wholesale price need to be registered and what is the purpose of the registration? The reason is self-evident, which is to ensure the payment of the correct taxes by the manufacturers of cigarettes through close supervision, monitoring and checking of the business operations of the cigarette companies. As pointed out by private respondents, no industry is as intensely supervised by the BIR and also by the National Tobacco Administration (NTA). Thus, the purchase and use of raw materials are subject to prior authorization and approval by the NTA. Importations of bobbins or cigarette paper, the manufacture, sale, and utilization of the same, are subject to BIR supervision and approval. 21 Moreover, as pointed to by private respondents, for purposes of closer supervision by the BIR over the production of cigarettes, Revenue Enforcement Officers are detailed on a 24-hour basis in the premises of the manufacturer to secure production and removal of finished products. Composite Mobile Teams conduct counter-security on the business operations as well as the performance of the Revenue Enforcement Officers detailed thereat. Every transfer of any raw material is not allowed unless, in addition to the required permits, accompanied by Revenue Enforcement Officer. For the purpose of determining the "Manufacturer's Registered Wholesale Price" a cigarette manufacturer is required to file a Manufacturer's Declaration (BIR Form No. 31.03) for each brand of cigarette manufactured, stating: a) Materials, b) Labor; c) Overhead; d) Tax Burden and the Wholesale Price by Case. The data submitted therewith is verified by the Revenue Officers and approved by the Commission of Internal Revenue. Any change in the manufacturer's registered wholesale price of any brand cannot be effected without submitting the corresponding Sworn Manufacturer's Declaration and verified by the Revenue Officer and approved by the Commissioner on Internal Revenue. 22 The amount of ad valorem tax payments together with the Payment Order and Confirmation Receipt Nos. must be indicated in the sales and delivery invoices and together with the Manufacturer's Sworn Declarations on (a) the quantity of raw materials used during the day's operations; (b) the total quantity produced according to brand; and (c) the corresponding quantity removed during the day, the corresponding wholesale price thereof, and the VAT paid thereon must be presented to the corresponding BIR representative for authentication before removal. Thus, as observed by the trial court in its order of January 25, 1994 granting private respondents' prayer for the issuance of a writ of preliminary injunction, Fortune's registered wholesale price (was) duly approved by the BIR, which fact is not disputed by petitioners. 23 Now, if every step in the production of cigarettes was closely monitored and supervised by the BIR personnel specifically assigned to Fortune's premises, and considering that the Manufacturer's Sworn Declarations on the data required to be submitted by the manufacturer were scrutinized and verified by the BIR and, further, since the manufacturer's wholesale price was duly approved by the BIR, then it is presumed that such registered wholesale price is the same as, or approximates "the price, excluding the value-added tax, at which the goods are sold at wholesale in the place production," otherwise, the BIR would not have approved the registered wholesale price of the goods for purposes of imposing the ad valorem tax due. In such case, and in the absence of contrary evidence, it was precipitate and premature to conclude that private respondents made fraudulent returns or wilfully attempted to evade payment of taxes due. "Wilful" means "premeditated; malicious; done with intent, or with bad motive or purpose, or with indifference to the natural consequence . . ." 24 "Fraud" in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage taken of another. 25 Fraud cannot be presumed. If there was fraud or wilful attempt to evade payment of ad valorem taxes by private respondents through the manipulation of the registered wholesale price of the cigarettes, it must have been with the connivance or cooperation of certain BIR officials and employees who supervised and monitored Fortune's production activities to see to it that the correct taxes were paid. But there is no allegation, much less evidence, of BIR personnel's malfeasance. In the very least, there is the presumption that the BIR personnel performed their duties in the regular course in ensuing the correct taxes were paid by Fortune. 26 It is the opinion of both the trial court and respondent Court of Appeals, that before Fortune and the other private respondents could be prosecuted for tax evasion under Sections 253 and 255 of the Tax Code, the fact that the deficiency

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income, ad valorem and value-added taxes were due from Fortune for the year 1992 should first be established. Fortune received form the Commissioner of Internal Revenue the deficiency assessment notices in the total amount of P7,685,942,221.06 on August 24, 1993. However, under Section 229 of the Tax Code, the taxpayer has the right to move for reconsideration of the assessment issued by the Commissioner of Internal Revenue within thirty (30) days from receipt of the assessment; and if the motion for reconsideration is denied, it may appeal to the Court of Appeals within thirty (30) days from receipt of the Commissioner's decision. Here, Fortune received the Commissioner's assessment notice dated August 13, 1993 on August 24, 1993 asking for the payment of the deficiency taxes. Within thirty (30) days from receipt thereof, Fortune moved for reconsideration. The Commissioner has not resolved the request for reconsideration up to the present. We share with the view of both the trial court and court of Appeals that before the tax liabilities of Fortune are first finally determined, it cannot be correctly asserted that private respondents have wilfully attempted to evade or defeat the taxes sought to be collected from Fortune. In plain words, before one is prosecuted for wilful attempt to evade or defeat any tax under Sections 253 and 255 of the Tax code, the fact that a tax is due must first be proved. Suppose the Commissioner eventually resolves Fortune's motion for reconsideration of the assessments by pronouncing that the taxpayer is not liable for any deficiency assessment, then, the criminal complaints filed against private respondents will have no leg to stand on. In view of the foregoing reasons, we cannot subscribe to the petitioners' thesis citing Ungad v. Cusi, 27 that the lack of a final determination of Fortune's exact or correct tax liability is not a bar to criminal prosecution, and that while a precise computation and assessment is required for a civil action to collect tax deficiencies, the Tax Code does not require such computation and assessment prior to criminal prosecution. Reading Ungad carefully, the pronouncement therein that deficiency assessment is not necessary prior to prosecution is pointedly and deliberately qualified by the Court with following statement quoted from Guzik v. U.S.: 28 "The crime is complete when the violator has knowingly and wilfully filed a fraudulent return with intent to evade and defeat apart or all of the tax." In plain words, for criminal prosecution to proceed before assessment, there must be a prima facie showing of a wilful attempt to evade taxes. There was a wilful attempt to evade tax in Ungad because of the taxpayer's failure to declare in his income tax return "his income derived from banana sapplings." In the mind of the trial court and the Court of Appeals, Fortune's situation is quite apart factually since the registered wholesale price of the goods, approved by the BIR, is presumed to be the actual wholesale price, therefore, not fraudulent and unless and until the BIR has made a final determination of what is supposed to be the correct taxes, the taxpayer should not be placed in the crucible of criminal prosecution. Herein lies a whale of difference between Ungad and the case at bar. This brings us to the erroneous disquisition that private respondents' recourse to the trial court by way of special civil action of certiorari and prohibition was improper because: a) the proceedings before the state prosecutors (preliminary injunction) were far from terminated -- private respondents were merely subpoenaed and asked to submit counter affidavits, matters that they should have appealed to the Secretary of Justice; b) it is only after the submission of private respondents' counter affidavits that the prosecutors will determine whether or not there is enough evidence to file in court criminal charges for fraudulent tax evasion against private respondents; and c) the proper procedure is to allow the prosecutors to conduct and finish the preliminary investigation and to render a resolution, after which the aggrieved party can appeal the resolution to the Secretary of Justice. We disagree. As a general rule, criminal prosecutions cannot be enjoined. However, there are recognized exceptions which, as summarized in Brocka v. Enrile 29 are: a. To afford adequate protection to the constitutional rights of the accused (Hernandez vs. Albano, et al., L-19272, January 25, 1967, 19 SCRA 95); b. When necessary for the orderly administration of justice or to avoid oppression or multiplicity of actions (Dimayuga, et al. vs. Fernandez, 43 Phil. 304; Hernandez vs. Albano, supra; Fortun vs. Labang, et al., L-38383, May 27, 1981, 104 SCRA 607); c. When there is a prejudicial question which is sub judice (De Leon vs. Mabanag, 70 Phil 202);

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d. When the acts of the officer are without or in excess of authority (Planas vs. Gil, 67 Phil 62); e. Where the prosecution is under an invalid law, ordinance or regulation (Young vs. Rafferty, 33 Phil. 556; Yu Cong Eng vs. Trinidad, 47 Phil. 385, 389); f. When double jeopardy is clearly apparent (Sangalang vs. People and Alvendia, 109 Phil. 1140); g. Where the court had no jurisdiction over the offense (Lopez vs. City Judge, L-25795, October 29, 1966, 18 SCRA 616); h. Where it is a case of persecution rather than prosecution (Rustia vs. Ocampo, CA-G.R. No. 4760, March 25, 1960); i. Where the charges are manifestly false and motivated by the lust for vengeance (Recto vs. Castelo, 18 L.J. [1953], cited in Rano vs. Alvenia, CA-G.R. No. 30720-R, October 8, 1962; Cf. Guingona, et al. vs. City Fiscal, L-60033, April 4, 1984, 128 SCRA 577); and j. When there is clearly no prima facie case against the accused and a motion to quash on that ground has been denied (Salonga vs. Pane, et al., L-59524, February 18, 1985, 134 SCRA 438). In issuing the questioned orders granting the issuance of a writ of preliminary injunction, the trial court believed that said orders were warranted to afford private respondents adequate protection of their constitutional rights, particularly in reference to presumption of innocence, due process and equal protection of the laws. The trial court also found merit in private respondents' contention that preliminary injunction should be issued to avoid oppression and because the acts of the state prosecutors were without or in excess of authority and for the reason that there was a prejudicial question. Contrary to petitioners' submission, preliminary investigation may be enjoined where exceptional circumstances so warrant. In Hernandez v. Albano 30 and Fortun v. Labang, 31 injunction was issued to enjoin a preliminary investigation. In the case at bar, private respondents filed a motion to dismiss the complaint against them before the prosecution and alternatively, to suspend the preliminary investigation on the grounds cited hereinbefore, one of which is that the complaint of the Commissioner is not supported by any evidence to serve as adequate basis for the issuance of the subpoena to them and put them to their defense. Indeed, the purpose of a preliminary injunction is to secure the innocent against hasty, malicious and oppressive prosecution and to protect him from an open and public accusation of crime, from the trouble, expense and anxiety of a public trial and also to protect the state from useless and expensive trials. 32 Thus, the pertinent provisions of Rule 112 of the Rules of Court state: Sec. 3. Procedure. -- Except as provided for in Section 7 hereof, no complaint or information for an offense cognizable by the Regional Trial Court shall be filed without a preliminary investigation having been first conducted in the following manner: (a) The complaint shall state the known address of the respondent and be accompanied by affidavits of the complainant and his witnesses as well as other supporting documents, in such number of copies as there are respondents, plus two (2) copies for the official file. The said affidavits shall be sworn to before any fiscal, state prosecutor or government official authorized to administer oath, or, in their absence or unavailability, a notary public, who must certify that he personally examined the affiants and that he is satisfied that they voluntarily executed and understood their affidavits. (b) Within ten (10) days after the filing of the complaint, the investigating officer shall either dismiss the same if he finds no ground to continue with the inquiry, or issue a subpoena to the respondent, attaching thereto a copy of the complaint, affidavits and other supporting documents. Within ten (10) days from receipt thereof, the respondent shall submit counter-affidavits and other supporting documents. He shall have the right to examine all other evidence submitted by the complainant.

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(c) Such counter-affidavits and other supporting evidence submitted by the respondent shall also be sworn to and certified as prescribed in paragraph (a) hereof and copies thereof shall be furnished by him to the complainant. (d) If the respondent cannot be subpoenaed, or if subpoenaed, does not submit counter-affidavits within the ten (10) day period, the investigating officer shall base his resolution on the evidence presented by the complainant. (e) If the investigating officer believes that there are matters to be clarified, he may set a hearing to propound clarificatory questions to the parties or their witnesses, during which the parties shall be afforded an opportunity to be present but without the right to examine or cross-examine. If the parties so desire, they may submit questions to the investigating officer which the latter may propound to the parties or witnesses concerned. (f) Thereafter, the investigation shall be deemed concluded, and the investigating officer shall resolve the case within ten (10) days therefrom. Upon the evidence thus adduced, the investigating officer shall determine whether or not there is sufficient ground to hold the respondent for trial. As found by the Court of Appeals, there was obvious haste by which the subpoena was issued to private respondents, just the day after the complaint was filed, hence, without the investigating prosecutors being afforded material time to examine and study the voluminous documents appended to the complaint for them to determine if preliminary investigation should be conducted. The Court of Appeals further added that the precipitate haste in the issuance of the subpoena justified private respondents' misgivings regarding the objectivity and neutrality of the prosecutors in the conduct of the preliminary investigation and so, the appellate court concluded, the grant of preliminary investigation by the trial court to afford adequate protection to private respondents' constitutional rights and to avoid oppression does not constitute grave abuse of discretion amounting to lack of jurisdiction. The complaint filed by the Commissioner on Internal Revenue states itself that the primary evidence establishing the falsity of the declared taxable sales in 1992 in the amount of P11,736,658,580.00 were the "daily Manufacturer's Sworn Statements" submitted by the taxpayer which would show that the total taxable sales in 1992 are in the amount of P16,686,372,295.00. However, the Commissioner did not present the "Daily Manufacturer's Sworn Statements" supposedly submitted to the BIR by the taxpayer, prompting private respondents to move for their production in order to verify the basis of petitioners' computation. Still, the Commissioner failed to produce the declarations. In Borja v. Moreno,33 it was held that the act of the investigator in proceeding with the hearing without first acting on respondents' motion to dismiss is a manifest disregard of the requirement of due process. Implicit in the opinion of the trial court and the Court of Appeals is that, if upon the examination of the complaint, it was clear that there was no ground to continue, with the inquiry, the investigating prosecutor was duty bound to dismiss the case. On this point, the trial court stressed that the prosecutor conducting the preliminary investigation should have allowed the production of the "Daily Manufacturer's Sworn Statements" submitted by Fortune without which there was no valid basis for the allegation that private respondents wilfully attempted to evade payment of the correct taxes. The prosecutors should also have produced the "Daily Manufacturer's Sworn Statements" by other cigarette companies, as sought by private respondents, to show that these companies which had paid the ad valorem taxes on the same basis and in the same manner as Fortune were not similarly criminally charged. But the investigating prosecutors denied private respondents' motion, thus, indicating that only Fortune was singled out for prosecution. The trial court and the Court of Appeals maintained that at that stage of the preliminary investigation, where the complaint and the accompanying affidavits and supporting documents did not show any violation of the Tax Code providing penal sanctions, the prosecutors should have dismissed the complaint outright because of total lack of evidence, instead of requiring private respondents to submit their counter affidavits under Section 3(b) of Rule 112. We believe that the trial court in issuing its questioned orders, which are interlocutory in nature, committed no grave abuse of discretion amounting to lack of jurisdiction. There are factual and legal bases for the assailed orders. On the other hand, the burden is upon the petitioners to demonstrate that the questioned orders constitute a whimsical and capricious exercise of judgment, which they have not. For certiorari will not be issued to cure errors in proceedings or correct erroneous conclusions of law or fact. As long as a court acts within its jurisdiction, any alleged errors committed in the exercise of its jurisdiction will amount to nothing more than errors of judgment which are reviewable by timely appeal and not by a special civil action of certiorari. 34 Consequently, the Regional Trial Court acted correctly and judiciously, and as demanded by the facts and the law, in issuing the orders granting the writs of preliminary injunction, in denying petitioners' motion to dismiss and in admitting the supplemental petitions. What petitioners should have done was to file

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an answer to the petition filed in the trial court, proceed to the hearing and appeal the decision of the court if adverse to them. WHEREFORE, the instant petition is hereby DISMISSED. SO ORDERED. Hermosisima, Jr., J., concurs.

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Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 185371 December 8, 2010

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. METRO STAR SUPERAMA, INC., Respondent. DECISION MENDOZA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court filed by the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set aside the 1] September 16, 2008 Decision 1 of the Court of Tax Appeals En Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008 Resolution 2 denying petitioners motion for reconsideration. The CTA-En Banc affirmed in toto the decision of its Second Division (CTA-Second Division) in CTA Case No. 7169 reversing the February 8, 2005 Decision of the CIR which assessed respondent Metro Star Superama, Inc. (Metro Star) of deficiency value-added tax and withholding tax for the taxable year 1999. Based on a Joint Stipulation of Facts and Issues3 of the parties, the CTA Second Division summarized the factual and procedural antecedents of the case, the pertinent portions of which read: Petitioner is a domestic corporation duly organized and existing by virtue of the laws of the Republic of the Philippines, x x x. On January 26, 2001, the Regional Director of Revenue Region No. 10, Legazpi City, issued Letter of Authority No. 00006561 for Revenue Officer Daisy G. Justiniana to examine petitioners books of accounts and other accounting records for income tax and other internal revenue taxes for the taxable year 1999. Said Letter of Authority was revalidated on August 10, 2001 by Regional Director Leonardo Sacamos. For petitioners failure to comply with several requests for the presentation of records and Subpoena Duces Tecum, [the] OIC of BIR Legal Division issued an Indorsement dated September 26, 2001 informing Revenue District Officer of Revenue Region No. 67, Legazpi City to proceed with the investigation based on the best evidence obtainable preparatory to the issuance of assessment notice. On November 8, 2001, Revenue District Officer Socorro O. Ramos-Lafuente issued a Preliminary 15-day Letter, which petitioner received on November 9, 2001. The said letter stated that a post audit review was held and it was ascertained that there was deficiency value-added and withholding taxes due from petitioner in the amount of P 292,874.16. On April 11, 2002, petitioner received a Formal Letter of Demand dated April 3, 2002 from Revenue District No. 67, Legazpi City, assessing petitioner the amount of Two Hundred Ninety Two Thousand Eight Hundred Seventy Four Pesos and Sixteen Centavos (P292,874.16.) for deficiency value-added and withholding taxes for the taxable year 1999, computed as follows: ASSESSMENT NOTICE NO. 067-99-003-579-072 VALUE ADDED TAX Gross Sales Output Tax P1,697,718.90 P 154,338.08

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Less: Input Tax VAT Payable Add: 25% Surcharge 20% Interest Compromise Penalty Late Payment Failure to File VAT returns TOTAL WITHHOLDING TAX Compensation Expanded Total Tax Due Less: Tax Withheld Deficiency Withholding Tax Add: 20% Interest p.a. Compromise Penalty TOTAL *Expanded Withholding Tax P1,949,334.25 x 5% Film Rental Audit Fee Rental Expense Security Service Service Contractor Total SUMMARIES OF DEFICIENCIES VALUE ADDED TAX WITHHOLDING TAX TOTAL 10,000.25 193,261.20 41,272.73 156,142.01 x 10% x 5% x 1% x 1% P16,000.00 2,400.00 18,400.00 P 38,584.54 79,746.49

_____________ P 154,338.08

136,731.01 P 291,069.09

2,772.91 110,103.92 P 112,876.83 111,848.27 P 1,028.56 576.51 200.00 P 1,805.07 97,466.71 1,000.00 9,663.00 412.73 1,561.42 P 110,103.92

P 291,069.09 1,805.07 P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the Final Notice of Seizure dated May 12, 2003, which petitioner received on May 15, 2003, giving the latter last opportunity to settle its deficiency tax liabilities within ten (10) [days] from receipt thereof, otherwise respondent BIR shall be constrained to serve and execute the Warrants of Distraint and/or Levy and Garnishment to enforce collection. On February 6, 2004, petitioner received from Revenue District Office No. 67 a Warrant of Distraint and/or Levy No. 670029-23 dated May 12, 2003 demanding payment of deficiency value-added tax and withholding tax payment in the amount of P292,874.16.

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On July 30, 2004, petitioner filed with the Office of respondent Commissioner a Motion for Reconsideration pursuant to Section 3.1.5 of Revenue Regulations No. 12-99. On February 8, 2005, respondent Commissioner, through its authorized representative, Revenue Regional Director of Revenue Region 10, Legaspi City, issued a Decision denying pet itioners Motion for Reconsideration. Petitioner, through counsel received said Decision on February 18, 2005. x x x. Denying that it received a Preliminary Assessment Notice (PAN) and claiming that it was not accorded due process, Metro Star filed a petition for review4 with the CTA. The parties then stipulated on the following issues to be decided by the tax court: 1. Whether the respondent complied with the due process requirement as provided under the National Internal Revenue Code and Revenue Regulations No. 12-99 with regard to the issuance of a deficiency tax assessment; 1.1 Whether petitioner is liable for the respective amounts of P291,069.09 and P1,805.07 as deficiency VAT and withholding tax for the year 1999; 1.2. Whether the assessment has become final and executory and demandable for failure of petitioner to protest the same within 30 days from its receipt thereof on April 11, 2002, pursuant to Section 228 of the National Internal Revenue Code; 2. Whether the deficiency assessments issued by the respondent are void for failure to state the law and/or facts upon which they are based. 2.2 Whether petitioner was informed of the law and facts on which the assessment is made in compliance with Section 228 of the National Internal Revenue Code; 3. Whether or not petitioner, as owner/operator of a movie/cinema house, is subject to VAT on sales of services under Section 108(A) of the National Internal Revenue Code; 4. Whether or not the assessment is based on the best evidence obtainable pursuant to Section 6(b) of the National Internal Revenue Code. The CTA-Second Division found merit in the petition of Metro Star and, on March 21, 2007, rendered a decision, the decretal portion of which reads: WHEREFORE, premises considered, the Petition for Review is hereby GRANTED. Accordingly, the assailed Decision dated February 8, 2005 is hereby REVERSED and SET ASIDE and respondent is ORDERED TO DESIST from collecting the subject taxes against petitioner. The CTA-Second Division opined that "[w]hile there [is] a disputable presumption that a mailed letter [is] deemed received by the addressee in the ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon the party favored by the presumption to prove that the mailed letter was indeed received by the addressee." 5 It also found that there was no clear showing that Metro Star actually received the alleged PAN, dated January 16, 2002. It, accordingly, ruled that the Formal Letter of Demand dated April 3, 2002, as well as the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star was denied due process.6 The CIR sought reconsideration7 of the decision of the CTA-Second Division, but the motion was denied in the latters July 24, 2007 Resolution.8 Aggrieved, the CIR filed a petition for review9 with the CTA-En Banc, but the petition was dismissed after a determination that no new matters were raised. The CTA-En Banc disposed: WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision and July 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169

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entitled, "Metro Star Superama, Inc., petitioner vs. Commissioner of Internal Revenue, respondent" are hereby AFFIRMED in toto. SO ORDERED. The motion for reconsideration10 filed by the CIR was likewise denied by the CTA-En Banc in its November 18, 2008 Resolution.11 The CIR, insisting that Metro Star received the PAN, dated January 16, 2002, and that due process was served nonetheless because the latter received the Final Assessment Notice (FAN), comes now before this Court with the sole issue of whether or not Metro Star was denied due process. The general rule is that the Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its functions, has accordingly developed an exclusive expertise on the resolution unless there has been an abuse or improvident exercise of authority.12 In Barcelon, Roxas Securities, Inc. (now known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,13 the Court wrote: Jurisprudence has consistently shown that this Court accords the findings of fact by the CTA with the highest respect. InSea-Land Service Inc. v. Court of Appeals [G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court recognizes that the Court of Tax Appeals, which by the very nature of its function is dedicated exclusively to the consideration of tax problems, has necessarily developed an expertise on the subject, and its conclusions will not be overturned unless there has been an abuse or improvident exercise of authority. Such findings can only be disturbed on appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse on the part of the Tax Court. In the absence of any clear and convincing proof to the contrary, this Court must presume that the CTA rendered a decision which is valid in every respect. On the matter of service of a tax assessment, a further perusal of our ruling in Barcelon is instructive, viz: Jurisprudence is replete with cases holding that if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. The onus probandi was shifted to respondent to prove by contrary evidence that the Petitioner received the assessment in the due course of mail. The Supreme Court has consistently held that while a mailed letter is deemed received by the addressee in the course of mail, this is merely a disputable presumption subject to controversion and a direct denial thereof shifts the burden to the party favored by the presumption to prove that the mailed letter was indeed received by the addressee (Republic vs. Court of Appeals, 149 SCRA 351). Thus as held by the Supreme Court in Gonzalo P. Nava vs. Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965: "The facts to be proved to raise this presumption are (a) that the letter was properly addressed with postage prepaid, and (b) that it was mailed. Once these facts are proved, the presumption is that the letter was received by the addressee as soon as it could have been transmitted to him in the ordinary course of the mail. But if one of the said facts fails to appear, the presumption does not lie. (VI, Moran, Comments on the Rules of Court, 1963 ed, 56-57 citing Enriquez vs. Sunlife Assurance of Canada, 41 Phil 269)." x x x. What is essential to prove the fact of mailing is the registry receipt issued by the Bureau of Posts or the Registry return card which would have been signed by the Petitioner or its authorized representative. And if said documents cannot be located, Respondent at the very least, should have submitted to the Court a certification issued by the Bureau of Posts and any other pertinent document which is executed with the intervention of the Bureau of Posts. This Court does not put much credence to the self serving documentations made by the BIR personnel especially if they are unsupported by substantial evidence establishing the fact of mailing. Thus: "While we have held that an assessment is made when sent within the prescribed period, even if received by the taxpayer after its expiration (Coll. of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959), this ruling makes it the more imperative that the release, mailing or sending of the notice be clearly and satisfactorily proved. Mere notations made without the taxpayers intervention, notice or control, without adequate supporting evidence cannot suffice; otherwise, the taxpayer would be at the mercy of the revenue offices, without adequate protection or defense." (Nava vs. CIR, 13 SCRA 104, January 30, 1965). x x x.

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The failure of the respondent to prove receipt of the assessment by the Petitioner leads to the conclusion that no assessment was issued. Consequently, the governments right to issue an assessment for the said period has already prescribed. (Industrial Textile Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22, 1996). (Emphases supplied.) The Court agrees with the CTA that the CIR failed to discharge its duty and present any evidence to show that Metro Star indeed received the PAN dated January 16, 2002. It could have simply presented the registry receipt or the certification from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on why it failed to comply with the requirement of service of the PAN. It merely accepted the letter of Metro Stars chairman dated April 29, 2002, that stated that he had received the FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax liability. This now leads to the question: Is the failure to strictly comply with notice requirements prescribed under Section 228 of the National Internal Revenue Code of 1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due process? Specifically, are the requirements of due process satisfied if only the FAN stating the computation of tax liabilities and a demand to pay within the prescribed period was sent to the taxpayer? The answer to these questions require an examination of Section 228 of the Tax Code which reads: SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: provided, however, that a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on exciseable articles has not been paid; or (e) When the article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons. The taxpayers shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Emphasis supplied). Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the facts and the law upon which the assessment is made.

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The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative of the cardinal principle in administrative investigations - that taxpayers should be able to present their case and adduce supporting evidence. 14 This is confirmed under the provisions R.R. No. 12-99 of the BIR which pertinently provide: SECTION 3. Due Process Requirement in the Issuance of a Deficiency Tax Assessment. 3.1 Mode of procedures in the issuance of a deficiency tax assessment: 3.1.1 Notice for informal conference. The Revenue Officer who audited the taxpayer's records shall, among others, state in his report whether or not the taxpayer agrees with his findings that the taxpayer is liable for deficiency tax or taxes. If the taxpayer is not amenable, based on the said Officer's submitted report of investigation, the taxpayer shall be informed, in writing, by the Revenue District Office or by the Special Investigation Division, as the case may be (in the case Revenue Regional Offices) or by the Chief of Division concerned (in the case of the BIR National Office) of the discrepancy or discrepancies in the taxpayer's payment of his internal revenue taxes, for the purpose of "Informal Conference," in order to afford the taxpayer with an opportunity to present his side of the case. If the taxpayer fails to respond within fifteen (15) days from date of receipt of the notice for informal conference, he shall be considered in default, in which case, the Revenue District Officer or the Chief of the Special Investigation Division of the Revenue Regional Office, or the Chief of Division in the National Office, as the case may be, shall endorse the case with the least possible delay to the Assessment Division of the Revenue Regional Office or to the Commissioner or his duly authorized representative, as the case may be, for appropriate review and issuance of a deficiency tax assessment, if warranted. 3.1.2 Preliminary Assessment Notice (PAN). If after review and evaluation by the Assessment Division or by the Commissioner or his duly authorized representative, as the case may be, it is determined that there exists sufficient basis to assess the taxpayer for any deficiency tax or taxes, the said Office shall issue to the taxpayer, at least by registered mail, a Preliminary Assessment Notice (PAN) for the proposed assessment, showing in detail, the facts and the law, rules and regulations, or jurisprudence on which the proposed assessment is based (see illustration in ANNEX A hereof). If the taxpayer fails to respond within fifteen (15) days from date of receipt of the PAN, he shall be considered in default, in which case, a formal letter of demand and assessment notice shall be caused to be issued by the said Office, calling for payment of the taxpayer's deficiency tax liability, inclusive of the applicable penalties. 3.1.3 Exceptions to Prior Notice of the Assessment. The notice for informal conference and the preliminary assessment notice shall not be required in any of the following cases, in which case, issuance of the formal assessment notice for the payment of the taxpayer's deficiency tax liability shall be sufficient: (i) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax appearing on the face of the tax return filed by the taxpayer; or (ii) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (iii) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (iv) When the excise tax due on excisable articles has not been paid; or (v) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to nonexempt 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

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jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void (see illustration in ANNEX B hereof). The same shall be sent to the taxpayer only by registered mail or by personal delivery. If sent by personal delivery, the taxpayer or his duly authorized representative shall acknowledge receipt thereof in the duplicate copy of the letter of demand, showing the following: (a) His name; (b) signature; (c) designation and authority to act for and in behalf of the taxpayer, if acknowledged received by a person other than the taxpayer himself; and (d) date of receipt thereof. x x x. From the provision quoted above, it is clear that the sending of a PAN to taxpayer to inform him of the assessment made is but part of the "due process requirement in the issuance of a deficiency tax assessment," the absence of which renders nugatory any assessment made by the tax authorities. The use of the word "shall" in subsection 3.1.2 describes the mandatory nature of the service of a PAN. The persuasiveness of the right to due process reaches both substantial and procedural rights and the failure of the CIR to strictly comply with the requirements laid down by law and its own rules is a denial of Metro Stars right to due process.15 Thus, for its failure to send the PAN stating the facts and the law on which the assessment was made as required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void. The case of CIR v. 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 merely notifying the taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made. Otherwise, the assessment itself would be invalid. 17 The regulation then, on the other hand, simply provided that a notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form.1avvphi1 The Court need not belabor to discuss the matter of Metro Stars failure to file its protest, for it is well -settled that a void assessment bears no fruit.18 It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property without due process of law.19 In balancing the scales between the power of the State to tax and its inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt in favor of the individual, for a citizens right is amply protecte d by the Bill of Rights under the Constitution. Thus, while "taxes are the lifeblood of the government," the power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of Internal Revenue v. Algue, Inc., 20 it was said Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. xxx xxx xxx

It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for the lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of ones hard -earned income to taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate x x x that the law has not been observed. 21 (Emphasis supplied).

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WHEREFORE, the petition is DENIED. SO ORDERED.

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[G.R. No. 31230-32. February 14, 2000] COMMISSIONER OF INTERNAL REVENUE vs. CMS LOGGING, INC., et al. THIRD DIVISION Gentlemen: Quoted hereunder, for your information, is a resolution of this Court dated FEB 14, 2000. G.R. No. 31230-32 (Commissioner of Internal Revenue vs. CMS Logging, Inc. and Court of Tax Appeals. ) Assailed in this petition for review is the decision of the Court of Tax Appeals (CTA) promulgated on August 30, 1969 in CTA Cases Nos. 1569, 1674 and 1804 entitled "CMS Logging, Inc. vs. Commissioner of Internal Revenue." CMS Logging, Inc., a domestic corporation, is a duly licensed forest concessionaire operating in Baganga, Davao. Pursuant to Section 5 of republic Act (RA) No. 1435, CMS Logging filed several claims for tax refund for 25% of the specific taxes on fuel and lubricants used by it in its logging operation, enumerated as follows: 1. On June 21, 1962, the sum of P4,894.63, covering the period from July 1 to December 31, 1961; 2. On November 5, 1962, the sums of P6,294.26 covering the period from January 1, to June 30, 1962; 3. On August 6, 1963, the sum of P5,998.46, covering the period from July 1 to December 31, 1962. 4. On January 20, 1964, the sum of P4,918.00, covering the period from January 1, to June 30, 1963; 5. On September 25, 1964, the sum of P4,932.96, covering the period from July 1 to December 31, 1963; 6. On May 31, 1965, the sum P5,859.84, covering the period from January 1 to July 31, 1964; 7. On June 16, 1965, the sum of P5,707.01, covering the period from August 1, 1964 to February 23, 1965; 8. On September 27, 1966, the sum of P6,135.24 covering the period from March 1 to August 31, 1965. The first five claims and the seventh were denied by the Commissioner of Internal Revenue in six separate letters addressed to private respondent. However, no letters of denial were received by private as to the sixth and eight claims. Private respondent's motion for reconsideration of the denials of the first five claims were similarly rejected. Private respondent filed three separate cases with the CTA, which were docketed as CTA Cases Nos. 1569, 1674 and 1804.1 CTA Cases Nos. 1569, 1674 and 1804 were filed on February 8, 1965, August 5, 1965 and October 6, 1966, respectively. CTA Case No. 1569 involved the first five claims, the sixth and seventh claims constituted CTA Case No. 1674 and the eighth claim was dealt with CTA Case No. 1804.2 CTA Decision, 1-2; Rollo, 82-83. After a joint hearing, the Court of Tax Appeals rendered the assailed decision, the dispositive portion of which provides IN VIEW OF THE FOREGOING, the petitions for review filed by petitioner in CTA Case No. 1569 is dismissed with regard to the 1st, 2nd, 3rd, 5th, and part of the 4th causes of action. Respondent is hereby ordered to refund or grant a tax credit to petitioner [in] the sums of P3,893.44, corresponding to the period from February 8 to June 30, 1963 in CTA Case No. 1569; P11,566.85 in CTA Case No. 1674; and

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P6,135.25 in CTA Case No. 1804, representing 25% of the specific taxes paid on manufactured oils and other fuels. Without pronouncement as to costs. SO ORDERED. Both parties appealed to this Court from CTA's decision.3 The appeal of private respondent was docketed as G.R. No. 31140-42. However, in our Resolution dated February 21, 1996, we dismissed private respondent's petition for lack of interest to prosecute, which dismissal became final and executory on June 5, 1996. Petitioner, however, in compliance with our December 15, 1999 Resolution, manifested on January 7, 2000 that he is still interested in continuing his appeal since there have been no supervening events which would render the present case moot and academic.4 Rollo, 180-181. We are therefore resolving the petition filed by the Commissioner of Internal Revenue. The parties agree that the sole issue in this case is whether the 25% specific tax exemption granted by Section 5 of RA 1435 on manufactured oils and other fuels used by miners and forest concessionaires in their operation is limited to a period of five (5) years from the effectivity of RA 1435 on June 14, 1956.5 Petition, 4; Rollo, 9; Answer, 1 Rollo, 100. Republic Act No. 1435, entitled "An Act To Provide Means For Increasing The Highway Special Fund," was approved and took effect on June 14, 1956. Its full text is reproduced herein: Sec. 1. Section one hundred and forty-two of the National Internal Revenue Code, as amended, is further amended to read as follows: "Sec. 42. Specific Tax on manufactured oils and other fuels. - On refined and manufactured mineral oils and motor fuels, there shall be collected the following taxes: "(a) Kerosene or petroleum, per liter of volume capacity, two and one-half centavos; "(b) Lubricating oils, per liter of volume capacity, seven centavos; "(c) Naptha, gasoline, and all other similar products of distillation, per liter of volume capacity, eight centavos; and "(d) On denatured alcohol to be used for motive power, per liter of volume capacity, one centavo: Provided, That if the denatured alcohol is mixed with gasoline, the specific tax on which has already been paid, the purpose of this subsection, the removal of denatured alcohol of not less than one hundred eighty degrees proof (ninety percentum absolute alcohol) shall be deemed to have been removed for motive power, unless shown to the contrary. "Whenever any of the oils mentioned above are, during the five years from June eighteen, nineteen hundred and fifty-two, used in agriculture and aviation, fifty percentum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon the submission of the following: "(1) A sworn affidavit of the producer and two disinterested persons proving that the said oils were actually used in agriculture, or in lieu thereof. "(2) Should the producer belong to any producer's association or federation, duly registered with the Securities and Exchange Commission, the affidavit of the president of the association or federation, attesting to the fact that the oils were actually used in agriculture. "(3) In the case of aviation oils, a sworn certificate satisfactory to the Collector proving that the said oils were actually used in aviation: Provided, that no such refunds shall be granted in respect to the oils used in aviation by citizens and corporations of foreign countries which do not grant equivalent refunds or exemptions in respect to similar oils used in aviation by citizen and corporation of the Philippines." Sec. 2. Section one hundred and forty-five of the National Internal Revenue Code, as amended, is further amended to read as follows:

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"Sec. 145. Specific Tax on Diesel fuel oil. - On fuel oil commercially known as diesel fuel oil, and on all similar fuel oils, having more or less the same generating power, there shall be collected, per metric ton, one peso." Sec. 3. The proceed of the increased taxes accruing to the Highway Special Fund, as a result of the amendment of sections one hundred and forty-two and one hundred and forty-five of the National Internal revenue Code as above provided, shall be set aside exclusively for amortizing loans or bonds that may have been authorized for the construction, reconstruction or improvement for highways including bridges as well as for liquidating toll bridges constructed from revolving funds authorized under Act Numbered Thirty-five hundred, as amended, whenever such liquidation is recommended by the Secretary of Public Works and Communication and approved by the President. Sec. 4. Municipal boards or councils may, notwithstanding the provisions of sections one hundred and forty-two and one hundred and forty-five of the National Internal Revenue Code, as hereinabove amended, levy an additional tax of not exceeding twenty-five per cent of the rates fixed in said sections, on manufactured oils sold or distributed within the limits of the city or the municipality:Provided, That municipal taxes heretofore levied by cities through city ordinances on gasoline, airplane fuel, lubricating oil and other fuels, are hereby ratified and declared valid. The method of collecting said additional tax shall be prescribe by the municipal board or council concerned. Sec. 5. The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected. Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in subparagraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue Code: Provided, further, That no new road shall be constructed unless the routes or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953. Sec. 6. This Act shall take effect upon its approval. Approved, June 14, 1956. It is petitioner's contention that the 25% tax refund of specific tax paid on oils used by miners or forest concessionaires granted by Section 5 RA 1435 should be limited to a period of five years to be counted from June 14, 1956, the date of effectivity of RA 1435, as is the case in the partial tax refund of specific tax paid on oils used in agriculture and aviation granted by Section 142 of the National Internal Revenue Code, as amended by Section 1 of RA 1435. Petitioner maintains that the Court of Tax Appeals erred in ordering him to grant tax refunds to private respondents corresponding to the period from February 8, 1963 to August 31, 1965 since said period is obviously beyond the five-year period.6Petition, 45; Rollo, 9-10. The petition must fail. This issue has already been resolved in Insular Lumber Co. vs. Court of Tax Appeals,7 104 SCRA 710 (1981). which is squarely applicable to the case at bench. In Insular Lumber, a licensed forest concessionaire filed a claim with the Commissioner of Internal revenue for refund of P19,921.37 representing 25% of the specific tax paid on manufactured oil and fuel used in its operations pursuant to Section 5 of RA 1435. The Commissioner denied the company's claim for refund on the ground that the privileged of partial tax refund granted by Section 5 of RA 1435 to those using oil in the operation of forest and mining concessions is limited to a period of five (5) years from June 14, 1956, the date of effectivity of said law. Thus, oil used in such concessions after June 14, 1961 are subject to the full tax prescribe in Section 142 of the National Internal Revenue Code (NIRC). In passing upon this issue, the Court held that Based on the aforequoted provisions, it is very apparent that the partial refund of specific tax paid for oils in agriculture and aviation is limited to five years while there is no time limit for the partial refund of specific tax paid for oils used by miners and forest concessionaires. We find no basis in applying the limitation of the operative period provided for oils used in agriculture and aviation to the provisions on the refund to miners and forest concessionaires. It should be noted that Section 5 makes reference to subparagraphs 1 and 2 of Section 1 only for the purpose of prescribing the procedure for refund. This express reference cannot be expanded in scope to include the limitation to include the limitation of the

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period of refund. If the limitations of the period of refund of specific taxes on oils used in aviation and agriculture is intended to cover similar taxes paid on oil use by miners and forest concessionaires, there would have been no need of dealing with oil used in mining and forest concessions separately and Section 5 should very well have been included in Section 1 of Republic Act No. 1435, notwithstanding the different rate of exemption.8 Id., 718-719. In fact, in a recent case we declared that mining and logging companies were entitled to the refund privilege granted by RA 1435 on specific taxes paid up to 1985, after which the Highway Special Fund was abolished.9 Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, 207 SCRA 549 (1992). The rationale for extending a tax privilege to lumber and mining companies was explained in Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation.10 202 SCRA 137 (1991). Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corporation, 207 SCRA 549 (1992). Citing the congressional deliberations on RA 1435, we explained that it would be unfair to subject miners and forest concessionaires to the increased rates and in effect make them subsidize the construction of highways from which they did not directly benefit since these companies seldom used the national highways because they have roads and compounds of their own.11 Id., citing Congressional record, 3rd Congress, 3rd Regular Session, 7, 1967, Vol. III, No. 67, pp. 2093-2107. WHEREFORE, the petition is DENIED. The challenged decision of the Court of Tax Appeals in CTA Cases Nos. 1569, 1674, and 1804 is AFFIRMED. SO ORDERED. Very truly yours, (Sgd.) JULIETA Y. CARREON Clerk of Court

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