Tax 2 Full Text 1 13 To Be Digested

1
FIRST DIVISION
[G.R. No. 147188. September 14, 2004]
COMMISSIONER OF INTERNAL REVENUE,
petitioner, vs. THE ESTATE OF BENIGNO P.
TODA, JR., Represented by Special Coadministrators Lorna Kapunan and Mario
Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this
case whether the tax planning scheme adopted
by a corporation constitutes tax evasion that
would justify an assessment of deficiency income
tax.
The petitioner seeks the reversal of the
Decision[1] of the Court of Appeals of 31 January
2001 in CA-G.R. SP No. 57799 affirming the 3
January 2000 Decision[2] of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5328,[3] which
held that the respondent Estate of Benigno P.
Toda, Jr. is not liable for the deficiency income tax
of Cibeles Insurance Corporation (CIC) in the
amount of P79,099,999.22 for the year 1989, and
ordered the cancellation and setting aside of the
assessment issued by Commissioner of Internal
Revenue Liwayway Vinzons-Chato on 9 January
1995.
The case at bar stemmed from a Notice of
Assessment sent to CIC by the Commissioner of
Internal Revenue for deficiency income tax
arising from an alleged simulated sale of a 16storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala
Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P.
Toda, Jr., President and owner of 99.991% of its
issued and outstanding capital stock, to sell the
Cibeles Building and the two parcels of land on
which the building stands for an amount of not
less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the
property for P100 million to Rafael A. Altonaga,
who, in turn, sold the same property on the same
day to Royal Match Inc. (RMI) for P200 million.
These two transactions were evidenced by
Deeds of Absolute Sale notarized on the same
day by the same notary public.[5]
For the sale of the property to RMI, Altonaga paid
capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual
income tax return[7] for the year 1989, declaring,
among other things, its gain from the sale of real
property in the amount of P75,728.021. After
crediting withholding taxes of P254,497.00, it paid
P26,341,207[8] for its net taxable income of
P75,987,725.
On 12 July 1990, Toda sold his entire shares of
stocks in CIC to Le Hun T. Choa for P12.5 million,
as evidenced by a Deed of Sale of Shares of
Stocks.[9] Three and a half years later, or on 16
January 1994, Toda died.
On 29 March 1994, the Bureau of Internal
Revenue (BIR) sent an assessment notice[10] and

demand letter to the CIC for deficiency income
tax for the year 1989 in the amount of
P79,099,999.22.
The new CIC asked for a reconsideration,
asserting that the assessment should be directed
against the old CIC, and not against the new CIC,
which is owned by an entirely different set of
stockholders; moreover, Toda had undertaken to
hold the buyer of his stockholdings and the CIC
free from all tax liabilities for the fiscal years
1987-1989.[11]
On 27 January 1995, the Estate of Benigno P.
Toda, Jr., represented by special coadministrators Lorna Kapunan and Mario Luza
Bautista, received a Notice of Assessment[12]
dated 9 January 1995 from the Commissioner of
Internal Revenue for deficiency income tax for the
year 1989 in the amount of P79,099,999.22,
computed as follows:
Income Tax 1989
Net Income per
return
P75,987,725.00
Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M
100M)
100,000,000.00
Total Net Taxable
Income
P175,987,725.00
per investigation
Tax Due thereof at
35%
P
61,595,703.75
Less: Payment already made
1. Per return
P26,595,704.00
2. Thru Capital Gains
Tax made by R.A.
Altonaga
10,000,000.00
36,595,704.00
Balance of tax
due
P
24,999,999.75
Add: 50%
Surcharge
12,499,999.88
25%
Surcharge
6,249,999.94
Total
P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94
(.808)
35,349,999.65
TOTAL AMT. DUE &
2
COLLECTIBLE
79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the
Commissioner dismissed the protest, stating that
a fraudulent scheme was deliberately
perpetuated by the CIC wholly owned and
controlled by Toda by covering up the additional
gain of P100 million, which resulted in the change
in the income structure of the proceeds of the
sale of the two parcels of land and the building
thereon to an individual capital gains, thus
evading the higher corporate income tax rate of
35%.
On 15 February 1996, the Estate filed a petition
for review[15] with the CTA alleging that the
Commissioner erred in holding the Estate liable
for income tax deficiency; that the inference of
fraud of the sale of the properties is unreasonable
and unsupported; and that the right of the
Commissioner to assess CIC had already
prescribed.
In his Answer[16] and Amended Answer,[17] the
Commissioner argued that the two transactions
actually constituted a single sale of the property
by CIC to RMI, and that Altonaga was neither the
buyer of the property from CIC nor the seller of
the same property to RMI. The additional gain of
P100 million (the difference between the second
simulated sale for P200 million and the first
simulated sale for P100 million) realized by CIC
was taxed at the rate of only 5% purportedly as
capital gains tax of Altonaga, instead of at the
rate of 35% as corporate income tax of CIC. The
income tax return filed by CIC for 1989 with intent
to evade payment of the tax was thus false or
fraudulent. Since such falsity or fraud was
discovered by the BIR only on 8 March 1991, the
assessment issued on 9 January 1995 was well
within the prescriptive period prescribed by
Section 223 (a) of the National Internal Revenue
Code of 1986, which provides that tax may be
assessed within ten years from the discovery of
the falsity or fraud. With the sale being tainted
with fraud, the separate corporate personality of
CIC should be disregarded. Toda, being the
registered owner of the 99.991% shares of stock
of CIC and the beneficial owner of the remaining
0.009% shares registered in the name of the
individual directors of CIC, should be held liable
for the deficiency income tax, especially because
the gains realized from the sale were withdrawn
by him as cash advances or paid to him as cash
dividends. Since he is already dead, his estate
shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held
that the Commissioner failed to prove that CIC
committed fraud to deprive the government of the
taxes due it. It ruled that even assuming that a
pre-conceived scheme was adopted by CIC, the
same constituted mere tax avoidance, and not

tax evasion. There being no proof of fraudulent
transaction, the applicable period for the BIR to
assess CIC is that prescribed in Section 203 of
the NIRC of 1986, which is three years after the
last day prescribed by law for the filing of the
return. Thus, the governments right to assess
CIC prescribed on 15 April 1993. The
assessment issued on 9 January 1995 was,
therefore, no longer valid. The CTA also ruled
that the mere ownership by Toda of 99.991% of
the capital stock of CIC was not in itself sufficient
ground for piercing the separate corporate
personality of CIC. Hence, the CTA declared that
the Estate is not liable for deficiency income tax
of P79,099,999.22 and, accordingly, cancelled
and set aside the assessment issued by the
Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the
Commissioner insisted that the sale of the
property owned by CIC was the result of the
connivance between Toda and Altonaga. She
further alleged that the latter was a
representative, dummy, and a close business
associate of the former, having held his office in a
property owned by CIC and derived his salary
from a foreign corporation (Aerobin, Inc.) duly
owned by Toda for representation services
rendered. The CTA denied[20] the motion for
reconsideration, prompting the Commissioner to
file a petition for review[21] with the Court of
Appeals.
In its challenged Decision of 31 January 2001,
the Court of Appeals affirmed the decision of the
CTA, reasoning that the CTA, being more
advantageously situated and having the
necessary expertise in matters of taxation, is
better situated to determine the correctness,
propriety, and legality of the income tax
assessments assailed by the Toda Estate.[22]
Unsatisfied with the decision of the Court of
Appeals, the Commissioner filed the present
petition invoking the following grounds:
I. THE COURT OF APPEALS ERRED IN
HOLDING THAT RESPONDENT COMMITTED
NO FRAUD WITH INTENT TO EVADE THE TAX
ON THE SALE OF THE PROPERTIES OF
CIBELES INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT
DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE
CORPORATION.
III. THE COURT OF APPEALS ERRED IN
HOLDING THAT THE RIGHT OF PETITIONER
TO ASSESS RESPONDENT FOR DEFICIENCY
INCOME TAX FOR THE YEAR 1989 HAD
PRESCRIBED.
The Commissioner reiterates her arguments in
her previous pleadings and insists that the sale
by CIC of the Cibeles property was in connivance
with its dummy Rafael Altonaga, who was
financially incapable of purchasing it. She further
3
points out that the documents themselves prove
the fact of fraud in that (1) the two sales were
done simultaneously on the same date, 30
August 1989; (2) the Deed of Absolute Sale
between Altonaga and RMI was notarized ahead
of the alleged sale between CIC and Altonaga,
with the former registered in the Notarial Register
of Jocelyn H. Arreza Pabelana as Doc. 91, Page
20, Book I, Series of 1989; and the latter, as Doc.
No. 92, Page 20, Book I, Series of 1989, of the
same Notary Public; (3) as early as 4 May 1989,
CIC received P40 million from RMI, and not from
Altonaga. The said amount was debited by RMI
in its trial balance as of 30 June 1989 as
investment in Cibeles Building. The substantial
portion of P40 million was withdrawn by Toda
through the declaration of cash dividends to all its
stockholders.
For its part, respondent Estate asserts that the
Commissioner failed to present the income tax
return of Altonaga to prove that the latter is
financially incapable of purchasing the Cibeles
property.
To resolve the grounds raised by the
Commissioner, the following questions are
pertinent:
1.
Is this a case of tax evasion or tax
avoidance?
2.
Has the period for assessment of
deficiency income tax for the year 1989
prescribed? and
3.
Can respondent Estate be held liable for
the deficiency income tax of CIC for the year
1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion
or tax avoidance?
Tax avoidance and tax evasion are the
two most common ways used by taxpayers in
escaping from taxation. Tax avoidance is the tax
saving device within the means sanctioned by
law. This method should be used by the taxpayer
in good faith and at arms length. Tax evasion, on
the other hand, is a scheme used outside of
those lawful means and when availed of, it
usually subjects the taxpayer to further or
additional civil or criminal liabilities.[23]
Tax evasion connotes the integration of
three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer
to be legally due, or the non-payment of tax when
it is shown that a tax is due; (2) an accompanying
state of mind which is described as being evil, in
bad faith, willfull,or deliberate and not
accidental; and (3) a course of action or failure of
action which is unlawful.[24]
All these factors are present in the instant
case. It is significant to note that as early as 4
May 1989, prior to the purported sale of the
Cibeles property by CIC to Altonaga on 30 August
1989, CIC received P40 million from RMI,[25] and
not from Altonaga. That P40 million was debited
by RMI and reflected in its trial balance[26] as

other inv. Cibeles Bldg. Also, as of 31 July
1989, another P40 million was debited and
reflected in RMIs trial balance as other inv.
Cibeles Bldg. This would show that the real
buyer of the properties was RMI, and not the
intermediary Altonaga.
The investigation conducted by the BIR
disclosed that Altonaga was a close business
associate and one of the many trusted corporate
executives of Toda. This information was
revealed by Mr. Boy Prieto, the assistant
accountant of CIC and an old timer in the
company. [27] But Mr. Prieto did not testify on this
matter, hence, that information remains to be
hearsay and is thus inadmissible in evidence. It
was not verified either, since the letter-request for
investigation of Altonaga was unserved,[28]
Altonaga having left for the United States of
America in January 1990. Nevertheless, that
Altonaga was a mere conduit finds support in the
admission of respondent Estate that the sale to
him was part of the tax planning scheme of CIC.
That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a change
of structure of the proceeds of sale. Admitted
one hundred percent. But isnt this precisely the
definition of tax planning? Change the structure
of the funds and pay a lower tax. Precisely, Sec.
40 (2) of the Tax Code exists, allowing tax free
transfers of property for stock, changing the
structure of the property and the tax to be paid.
As long as it is done legally, changing the
structure of a transaction to achieve a lower tax is
not against the law. It is absolutely allowed.
Tax planning is by definition to reduce, if not
eliminate altogether, a tax. Surely petitioner [sic]
cannot be faulted for wanting to reduce the tax
from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it
appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted
with fraud.
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 is taken of another.[30]
Here, it is obvious that the objective of the
sale to Altonaga was to reduce the amount of tax
to be paid especially that the transfer from him to
RMI would then subject the income to only 5%
individual capital gains tax, and not the 35%
corporate income tax. Altonagas sole purpose of
acquiring and transferring title of the subject
properties on the same day was to create a tax
shelter. Altonaga never controlled the property
4
and did not enjoy the normal benefits and
burdens of ownership. The sale to him was
merely a tax ploy, a sham, and without business
purpose and economic substance. Doubtless,
the execution of the two sales was calculated to
mislead the BIR with the end in view of reducing
the consequent income tax liability.
In a nutshell, the intermediary transaction,
i.e., the sale of Altonaga, which was prompted
more on the mitigation of tax liabilities than for
legitimate business purposes constitutes one of
tax evasion.[31]
Generally, a sale or exchange of assets
will have an income tax incidence only when it is
consummated.[32] The incidence of taxation
depends upon the substance of a transaction.
The tax consequences arising from gains from a
sale of property are not finally to be determined
solely by the means employed to transfer legal
title. Rather, the transaction must be viewed as a
whole, and each step from the commencement of
negotiations to the consummation of the sale is
relevant. A sale by one person cannot be
transformed for tax purposes into a sale by
another by using the latter as a conduit through
which to pass title. To permit the true nature of
the transaction to be disguised by mere
formalisms, which exist solely to alter tax
liabilities, would seriously impair the effective
administration of the tax policies of Congress.[33]
To allow a taxpayer to deny tax liability on
the ground that the sale was made through
another and distinct entity when it is proved that
the latter was merely a conduit is to sanction a
circumvention of our tax laws. Hence, the sale to
Altonaga should be disregarded for income tax
purposes.[34] The two sale transactions should be
treated as a single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is
governed by then Section 24 of the NIRC of
1986, as amended (now 27 (A) of the Tax Reform
Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a)
Tax on domestic corporations.- A tax is hereby
imposed upon the taxable net income received
during each taxable year from all sources by
every corporation organized in, or existing under
the laws of the Philippines, and partnerships, no
matter how created or organized but not including
general professional partnerships, in accordance
with the following:
Twenty-five percent upon the amount by which
the taxable net income does not exceed one
hundred thousand pesos; and
Thirty-five percent upon the amount by which the
taxable net income exceeds one hundred
thousand pesos.
CIC is therefore liable to pay a 35% corporate tax
for its taxable net income in 1989. The 5%
individual capital gains tax provided for in Section
34 (h) of the NIRC of 1986[35] (now 6% under
Section 24 (D) (1) of the Tax Reform Act of 1997)
is inapplicable. Hence, the assessment for the

deficiency income tax issued by the BIR must be
upheld.
Has the period of
assessment prescribed?
No. Section 269 of the NIRC of 1986 (now
Section 222 of the Tax Reform Act of 1997) read:
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 .
Put differently, in cases of (1) fraudulent returns;
(2) false returns with intent to evade tax; and (3)
failure to file a return, the period within which to
assess tax is ten years from discovery of the
fraud, falsification or omission, as the case may
be.
It is true that in a query dated 24 August 1989,
Altonaga, through his counsel, asked the Opinion
of the BIR on the tax consequence of the two
sale transactions.[36] Thus, the BIR was amply
informed of the transactions even prior to the
execution of the necessary documents to effect
the transfer. Subsequently, the two sales were
openly made with the execution of public
documents and the declaration of taxes for 1989.
However, these circumstances do not negate the
existence of fraud. As earlier discussed those
two transactions were tainted with fraud. And
even assuming arguendo that there was no fraud,
we find that the income tax return filed by CIC for
the year 1989 was false. It did not reflect the true
or actual amount gained from the sale of the
Cibeles property. Obviously, such was done with
intent to evade or reduce tax liability.
As stated above, the prescriptive period to
assess the correct taxes in case of false returns
is ten years from the discovery of the falsity. The
false return was filed on 15 April 1990, and the
falsity thereof was claimed to have been
discovered only on 8 March 1991.[37] The
assessment for the 1989 deficiency income tax of
CIC was issued on 9 January 1995. Clearly, the
issuance of the correct assessment for deficiency
income tax was well within the prescriptive
period.
Is respondent Estate liable
for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct
and separate from the persons owning or
composing it. Thus, the owners or stockholders
5
of a corporation may not generally be made to
answer for the liabilities of a corporation and vice
versa. There are, however, certain instances in
which personal liability may arise. It has been
held in a number of cases that personal liability of
a corporate director, trustee, or officer along,
albeit not necessarily, with the corporation may
validly attach when:
1. He assents to the (a) patently unlawful act of
the corporation, (b) bad faith or gross negligence
in directing its affairs, or (c) conflict of interest,
resulting in damages to the corporation, its
stockholders, or other persons;
2. He consents to the issuance of watered down
stocks or, having knowledge thereof, does not
forthwith file with the corporate secretary his
written objection thereto;
3. He agrees to hold himself personally and
solidarily liable with the corporation; or
4. He is made, by specific provision of law, to
personally answer for his corporate action.[38]
It is worth noting that when the late Toda sold his
shares of stock to Le Hun T. Choa, he knowingly
and voluntarily held himself personally liable for
all the tax liabilities of CIC and the buyer for the
years 1987, 1988, and 1989. Paragraph g of the
Deed of Sale of Shares of Stocks specifically
provides:
g. Except for transactions occurring in the
ordinary course of business, Cibeles has no
liabilities or obligations, contingent or otherwise,
for taxes, sums of money or insurance claims
other than those reported in its audited financial
statement as of December 31, 1989, attached
hereto as Annex B and made a part hereof.
The business of Cibeles has at all times been
conducted in full compliance with all applicable
laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER
and Cibeles free from any and all income tax
liabilities of Cibeles for the fiscal years 1987,
1988 and 1989.[39] [Underscoring Supplied].
When the late Toda undertook and agreed to
hold the BUYER and Cibeles free from any all
income tax liabilities of Cibeles for the fiscal years
1987, 1988, and 1989, he thereby voluntarily
held himself personally liable therefor.
Respondent estate cannot, therefore, deny
liability for CICs deficiency income tax for the
year 1989 by invoking the separate corporate
personality of CIC, since its obligation arose from
Todas contractual undertaking, as contained in
the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the
foregoing, the petition is hereby GRANTED. The
decision of the Court of Appeals of 31 January
2001 in CA-G.R. SP No. 57799 is REVERSED
and SET ASIDE, and another one is hereby
rendered ordering respondent Estate of Benigno
P. Toda Jr. to pay P79,099,999.22 as deficiency
income tax of Cibeles Insurance Corporation for
the year 1989, plus legal interest from 1 May
1994 until the amount is fully paid.

Costs against respondent.
SO ORDERED.
Quisumbing, Ynares-Santiago, Carpio, and
Azcuna, JJ., concur.
SECOND DIVISION
[G.R. No. 120880. June 5, 1997]
FERDINAND R. MARCOS II, petitioner, vs.
COURT OF APPEALS, THE COMMISSIONER
OF THE BUREAU OF INTERNAL REVENUE
and HERMINIA D. DE GUZMAN, respondents.
DECISION
TORRES, JR., J.:
In this Petition for Review on Certiorari,
Government action is once again assailed as
precipitate and unfair, suffering the basic and oftly
implored requisites of due process of law.
Specifically, the petition assails the Decision[if !
supportFootnotes][1][endif]
of the Court of Appeals dated
November 29, 1994 in CA-G.R. SP No. 31363,
where the said court held:
"In view of all the foregoing, we rule that the
deficiency income tax assessments and estate
tax assessment, are already final and
(u)nappealable -and- the subsequent levy of real
properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218
of the National Internal Revenue Code. This
summary tax remedy is distinct and separate
from the other tax remedies (such as Judicial
Civil actions and Criminal actions), and is not
affected or precluded by the pendency of any
other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is
hereby rendered DISMISSING the petition for
certiorari with prayer for Restraining Order and
Injunction.
No pronouncements as to costs.
SO ORDERED."
More than seven years since the demise of the
late Ferdinand E. Marcos, the former President of
the Republic of the Philippines, the matter of the
settlement of his estate, and its dues to the
government in estate taxes, are still unresolved,
the latter issue being now before this Court for
resolution. Specifically, petitioner Ferdinand R.
Marcos II, the eldest son of the decedent,
questions the actuations of the respondent
Commissioner of Internal Revenue in assessing,
and collecting through the summary remedy of
Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of
his father, despite the pendency of the
proceedings on probate of the will of the late
president, which is docketed as Sp. Proc. No.
10279 in the Regional Trial Court of Pasig,
Branch 156.
Petitioner had filed with the respondent Court of
Appeals a Petition for Certiorari and Prohibition
with an application for writ of preliminary
6
injunction and/or temporary restraining order on
June 28, 1993, seeking to I. Annul and set aside the Notices of Levy on real
property dated February 22, 1993 and May 20,
1993, issued by respondent Commissioner of
Internal Revenue;
II. Annul and set aside the Notices of Sale dated
May 26, 1993;
III. Enjoin the Head Revenue Executive Assistant
Director II (Collection Service), from proceeding
with the Auction of the real properties covered by
Notices of Sale.
After the parties had pleaded their case, the
Court of Appeals rendered its Decision[if !
on November 29, 1994, ruling
that the deficiency assessments for estate and
income tax made upon the petitioner and the
estate of the deceased President Marcos have
already become final and unappealable, and may
thus be enforced by the summary remedy of
levying upon the properties of the late President,
as was done by the respondent Commissioner of
Internal Revenue.
"WHEREFORE, premises considered judgment
is hereby rendered DISMISSING the petition for
Certiorari with prayer for Restraining Order and
Injunction.
No pronouncements as to cost.
SO ORDERED."
Unperturbed, petitioner is now before us assailing
the validity of the appellate court's decision,
assigning the following as errors:
A. RESPONDENT COURT MANIFESTLY
ERRED IN RULING THAT THE SUMMARY TAX
REMEDIES RESORTED TO BY THE
GOVERNMENT ARE NOT AFFECTED AND
PRECLUDED BY THE PENDENCY OF THE
SPECIAL PROCEEDING FOR THE
ALLOWANCE OF THE LATE PRESIDENT'S
ALLEGED WILL. TO THE CONTRARY, THIS
PROBATE PROCEEDING PRECISELY PLACED
ALL PROPERTIES WHICH FORM PART OF
THE LATE PRESIDENT'S ESTATE IN
CUSTODIA LEGIS OF THE PROBATE COURT
TO THE EXCLUSION OF ALL OTHER COURTS
AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY
ERRED IN SWEEPINGLY DECIDING THAT
SINCE THE TAX ASSESSMENTS OF
PETITIONER AND HIS PARENTS HAD
ALREADY BECOME FINAL AND
UNAPPEALABLE, THERE WAS NO NEED TO
GO INTO THE MERITS OF THE GROUNDS
CITED IN THE PETITION. INDEPENDENT OF
WHETHER THE TAX ASSESSMENTS HAD
ALREADY BECOME FINAL, HOWEVER,
PETITIONER HAS THE RIGHT TO QUESTION
THE UNLAWFUL MANNER AND METHOD IN
WHICH TAX COLLECTION IS SOUGHT TO BE
ENFORCED BY RESPONDENTS
COMMISSIONER AND DE GUZMAN. THUS,
RESPONDENT COURT SHOULD HAVE
FAVORABLY CONSIDERED THE MERITS OF

THE FOLLOWING GROUNDS IN THE
PETITION:
(1) The Notices of Levy on Real Property were
issued beyond the period provided in the
Revenue Memorandum Circular No. 38-68.
(2) [a] The numerous pending court cases
questioning the late President's ownership or
interests in several properties (both personal and
real) make the total value of his estate, and the
consequent estate tax due, incapable of exact
pecuniary determination at this time. Thus,
respondents assessment of the estate tax and
their issuance of the Notices of Levy and Sale are
premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's
compulsory heirs, was never notified, much less
served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the
NIRC. As such, petitioner was never given an
opportunity to contest the Notices in violation of
his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF
THE PETITION, RESPONDENT COURT
MANIFESTLY ERRED IN RULING THAT IT HAD
NO POWER TO GRANT INJUNCTIVE RELIEF
TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE
POWER TO ISSUE A WRIT OF PRELIMINARY
INJUNCTION TO RESTRAIN RESPONDENTS
COMMISSIONER'S AND DE GUZMAN'S
ARBITRARY METHOD OF COLLECTING THE
ALLEGED DEFICIENCY ESTATE AND INCOME
TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are
undisputed, and are hereby adopted:
"On September 29, 1989, former President
Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was
created to conduct investigations and
examinations of the tax liabilities and obligations
of the late president, as well as that of his family,
associates and "cronies". Said audit team
concluded its investigation with a Memorandum
dated July 26, 1991. The investigation disclosed
that the Marcoses failed to file a written notice of
the death of the decedent, an estate tax returns
[sic], as well as several income tax returns
covering the years 1982 to 1986, -all in violation
of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against
Mrs. Imelda R. Marcos before the Regional Trial
of Quezon City for violations of Sections 82, 83
and 84 (has penalized under Sections 253 and
254 in relation to Section 252- a & b) of the
National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby
caused the preparation and filing of the Estate
Tax Return for the estate of the late president, the
Income Tax Returns of the Spouses Marcos for
the years 1985 to 1986, and the Income Tax
Returns of petitioner Ferdinand 'Bongbong'
7
Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following:
(1) Deficiency estate tax assessment no. FAC-289-91-002464 (against the estate of the late
president Ferdinand Marcos in the amount of
P23,293,607,638.00 Pesos); (2) Deficiency
income tax assessment no. FAC-1-85-91-002452
and Deficiency income tax assessment no. FAC1-86-91-002451 (against the Spouses Ferdinand
and Imelda Marcos in the amounts of
P149,551.70 and P184,009,737.40 representing
deficiency income tax for the years 1985 and
1986); (3) Deficiency income tax assessment
nos. FAC-1-82-91-002460 to FAC-1-85-91002463 (against petitioner Ferdinand 'Bongbong'
Marcos II in the amounts of P258.70 pesos;
P9,386.40 Pesos; P4,388.30 Pesos; and
P6,376.60 Pesos representing his deficiency
income taxes for the years 1982 to 1985).
The Commissioner of Internal Revenue avers
that copies of the deficiency estate and income
tax assessments were all personally and
constructively served on August 26, 1991 and
September 12, 1991 upon Mrs. Imelda Marcos
(through her caretaker Mr. Martinez) at her last
known address at No. 204 Ortega St., San Juan,
M.M. (Annexes 'D' and 'E' of the Petition).
Likewise, copies of the deficiency tax
assessments issued against petitioner Ferdinand
'Bongbong' Marcos II were also personally and
constructively served upon him (through his
caretaker) on September 12, 1991, at his last
known address at Don Mariano Marcos St. corner
P. Guevarra St., San Juan, M.M. (Annexes 'J' and
'J-1' of the Petition). Thereafter, Formal
Assessment notices were served on October 20,
1992, upon Mrs. Marcos c/o petitioner, at his
office, House of Representatives, Batasan
Pambansa, Quezon City. Moreover, a notice to
Taxpayer inviting Mrs. Marcos (or her duly
authorized representative or counsel), to a
conference, was furnished the counsel of Mrs.
Marcos, Dean Antonio Coronel - but to no avail.
The deficiency tax assessments were not
protested administratively, by Mrs. Marcos and
the other heirs of the late president, within 30
days from service of said assessments.
On February 22, 1993, the BIR Commissioner
issued twenty-two notices of levy on real property
against certain parcels of land owned by the
Marcoses - to satisfy the alleged estate tax and
deficiency income taxes of Spouses Marcos.
On May 20, 1993, four more Notices of Levy on
real property were issued for the purpose of
satisfying the deficiency income taxes.
On May 26, 1993, additional four (4) notices of
Levy on real property were again issued. The
foregoing tax remedies were resorted to pursuant
to Sections 205 and 213 of the National Internal
Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent
by Atty. Loreto Ata (counsel of herein petitioner)
calling the attention of the BIR and requesting

that they be duly notified of any action taken by
the BIR affecting the interest of their client
Ferdinand 'Bongbong Marcos II, as well as the
interest of the late president - copies of the
aforesaid notices were served on April 7, 1993
and on June 10, 1993, upon Mrs. Imelda Marcos,
the petitioner, and their counsel of record, 'De
Borja, Medialdea, Ata, Bello, Guevarra and
Serapio Law Office'.
Notices of sale at public auction were posted on
May 26, 1993, at the lobby of the City Hall of
Tacloban City. The public auction for the sale of
the eleven (11) parcels of land took place on July
5, 1993. There being no bidder, the lots were
declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand
'Bongbong' Marcos II filed the instant petition for
certiorari and prohibition under Rule 65 of the
Rules of Court, with prayer for temporary
restraining order and/or writ of preliminary
injunction."
It has been repeatedly observed, and not without
merit, that the enforcement of tax laws and the
collection of taxes, is of paramount importance
for the sustenance of government. Taxes are the
lifeblood of the government and 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 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."[if !supportFootnotes][3][endif]
Whether or not the proper avenues of
assessment and collection of the said tax
obligations were taken by the respondent Bureau
is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of
sale, and subsequent sale of properties of the
late President Marcos effected by the BIR are null
and void for disregarding the established
procedure for the enforcement of taxes due upon
the estate of the deceased. The case of
Domingo vs. Garlitos[if !supportFootnotes][4][endif] is
specifically cited to bolster the argument that "the
ordinary procedure by which to settle claims of
indebtedness against the estate of a deceased,
person, as in an inheritance (estate) tax, is for the
claimant to present a claim before the probate
court so that said court may order the
administrator to pay the amount therefor." This
remedy is allegedly, exclusive, and cannot be
effected through any other means.
Petitioner goes further, submitting that the
probate court is not precluded from denying a
request by the government for the immediate
payment of taxes, and should order the payment
of the same only within the period fixed by the
probate court for the payment of all the debts of
8
the decedent. In this regard, petitioner cites the
case of Collector of Internal Revenue vs. The
Administratrix of the Estate of Echarri (67 Phil
502), where it was held that:
"The case of Pineda vs. Court of First Instance of
Tayabas and Collector of Internal Revenue (52
Phil 803), relied upon by the petitioner-appellant
is good authority on the proposition that the court
having control over the administration
proceedings has jurisdiction to entertain the claim
presented by the government for taxes due and
to order the administrator to pay the tax should it
find that the assessment was proper, and that the
tax was legal, due and collectible. And the rule
laid down in that case must be understood in
relation to the case of Collector of Customs vs.
Haygood, supra., as to the procedure to be
followed in a given case by the government to
effectuate the collection of the tax. Categorically
stated, where during the pendency of judicial
administration over the estate of a deceased
person a claim for taxes is presented by the
government, the court has the authority to order
payment by the administrator; but, in the same
way that it has authority to order payment or
satisfaction, it also has the negative authority to
deny the same. While there are cases where
courts are required to perform certain duties
mandatory and ministerial in character, the
function of the court in a case of the present
character is not one of them; and here, the court
cannot be an organism endowed with latitude of
judgment in one direction, and converted into a
mere mechanical contrivance in another
direction."
On the other hand, it is argued by the BIR, that
the state's authority to collect internal revenue
taxes is paramount. Thus, the pendency of
probate proceedings over the estate of the
deceased does not preclude the assessment and
collection, through summary remedies, of estate
taxes over the same. According to the
respondent, claims for payment of estate and
income taxes due and assessed after the death
of the decedent need not be presented in the
form of a claim against the estate. These can
and should be paid immediately. The probate
court is not the government agency to decide
whether an estate is liable for payment of estate
of income taxes. Well-settled is the rule that the
probate court is a court with special and limited
jurisdiction.
Concededly, the authority of the Regional Trial
Court, sitting, albeit with limited jurisdiction, as a
probate court over estate of deceased individual,
is not a trifling thing. The court's jurisdiction,
once invoked, and made effective, cannot be
treated with indifference nor should it be ignored
with impunity by the very parties invoking its
authority.
In testament to this, it has been held that it is
within the jurisdiction of the probate court to
approve the sale of properties of a deceased

person by his prospective heirs before final
adjudication;[if !supportFootnotes][5][endif] to determine who
are the heirs of the decedent;[if !supportFootnotes][6][endif]
the recognition of a natural child;[if !supportFootnotes][7]
[endif]
the status of a woman claiming to be the
legal wife of the decedent;[if !supportFootnotes][8][endif] the
legality of disinheritance of an heir by the testator;
[if !supportFootnotes][9][endif]
and to pass upon the validity of
a waiver of hereditary rights.[if !supportFootnotes][10][endif]
The pivotal question the court is tasked to resolve
refers to the authority of the Bureau of Internal
Revenue to collect by the summary remedy of
levying upon, and sale of real properties of the
decedent, estate tax deficiencies, without the
cognition and authority of the court sitting in
probate over the supposed will of the deceased.
The nature of the process of estate tax collection
has been described as follows:
"Strictly speaking, the assessment of an
inheritance tax does not directly involve the
administration of a decedent's estate, although it
may be viewed as an incident to the complete
settlement of an estate, and, under some
statutes, it is made the duty of the probate court
to make the amount of the inheritance tax a part
of the final decree of distribution of the estate. It
is not against the property of decedent, nor is it a
claim against the estate as such, but it is against
the interest or property right which the heir,
legatee, devisee, etc., has in the property
formerly held by decedent. Further, under some
statutes, it has been held that it is not a suit or
controversy between the parties, nor is it an
adversary proceeding between the state and the
person who owes the tax on the inheritance.
However, under other statutes it has been held
that the hearing and determination of the cash
value of the assets and the determination of the
tax are adversary proceedings. The proceeding
has been held to be necessarily a proceeding in
rem.[if !supportFootnotes][11][endif]
In the Philippine experience, the enforcement and
collection of estate tax, is executive in character,
as the legislature has seen it fit to ascribe this
task to the Bureau of Internal Revenue. Section
3 of the National Internal Revenue Code attests
to this:
"Sec. 3. Powers and duties of the Bureau.-The
powers and duties of the Bureau of Internal
Revenue shall comprehend the assessment and
collection of all national internal revenue taxes,
fees, and charges, and the enforcement of all
forfeitures, penalties, and fines connected
therewith, including the execution of judgments in
all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. Said Bureau
shall also give effect to and administer the
supervisory and police power conferred to it by
this Code or other laws."
Thus, it was in Vera vs. Fernandez[if !supportFootnotes][12]
[endif]
that the court recognized the liberal treatment
9
of claims for taxes charged against the estate of
the decedent. Such taxes, we said, were
exempted from the application of the statute of
non-claims, and this is justified by the necessity
of government funding, immortalized in the
maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae taxes are the sinews of the state.
"Taxes assessed against the estate of a
deceased person, after administration is opened,
need not be submitted to the committee on
claims in the ordinary course of administration. In
the exercise of its control over the administrator,
the court may direct the payment of such taxes
upon motion showing that the taxes have been
assessed against the estate."
Such liberal treatment of internal revenue taxes in
the probate proceedings extends so far, even to
allowing the enforcement of tax obligations
against the heirs of the decedent, even after
distribution of the estate's properties.
"Claims for taxes, whether assessed before or
after the death of the deceased, can be collected
from the heirs even after the distribution of the
properties of the decedent. They are exempted
from the application of the statute of non-claims.
The heirs shall be liable therefor, in proportion to
their share in the inheritance."[if !supportFootnotes][13][endif]
"Thus, the Government has two ways of
collecting the taxes in question. One, by going
after all the heirs and collecting from each one of
them the amount of the tax proportionate to the
inheritance received. Another remedy, pursuant
to the lien created by Section 315 of the Tax
Code upon all property and rights to property
belong to the taxpayer for unpaid income tax, is
by subjecting said property of the estate which is
in the hands of an heir or transferee to the
payment of the tax due the estate.
(Commissioner of Internal Revenue vs. Pineda,
21 SCRA 105, September 15, 1967.)
From the foregoing, it is discernible that the
approval of the court, sitting in probate, or as a
settlement tribunal over the deceased is not a
mandatory requirement in the collection of estate
taxes. It cannot therefore be argued that the Tax
Bureau erred in proceeding with the levying and
sale of the properties allegedly owned by the late
President, on the ground that it was required to
seek first the probate court's sanction. There is
nothing in the Tax Code, and in the pertinent
remedial laws that implies the necessity of the
probate or estate settlement court's approval of
the state's claim for estate taxes, before the
same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it
is the probate or settlement court which is bidden
not to authorize the executor or judicial
administrator of the decedent's estate to deliver
any distributive share to any party interested in
the estate, unless it is shown a Certification by
the Commissioner of Internal Revenue that the
estate taxes have been paid. This provision

disproves the petitioner's contention that it is the
probate court which approves the assessment
and collection of the estate tax.
If there is any issue as to the validity of the BIR's
decision to assess the estate taxes, this should
have been pursued through the proper
administrative and judicial avenues provided for
by law.
Section 229 of the NIRC tells us how:
"Sec. 229. Protesting of assessment.-When the
Commissioner of Internal Revenue or his duly
authorized representative finds that proper taxes
should be assessed, he shall first notify the
taxpayer of his findings. Within a period to be
prescribed by implementing regulations, the
taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the
Commissioner shall issue an assessment based
on his findings.
Such assessment may be protested
administratively by filing a request for
reconsideration or reinvestigation in such form
and manner as may be prescribed by
implementing regulations within (30) days from
receipt of the assessment; otherwise, the
assessment shall become final and
unappealable.
If the protest is denied in whole or in part, the
individual, association or corporation adversely
affected by the decision on the protest may
appeal to the Court of Tax Appeals within thirty
(30) days from receipt of said decision; otherwise,
the decision shall become final, executory and
demandable. (As inserted by P.D. 1773)"
Apart from failing to file the required estate tax
return within the time required for the filing of the
same, petitioner, and the other heirs never
questioned the assessments served upon them,
allowing the same to lapse into finality, and
prompting the BIR to collect the said taxes by
levying upon the properties left by President
Marcos.
Petitioner submits, however, that "while the
assessment of taxes may have been validly
undertaken by the Government, collection thereof
may have been done in violation of the law.
Thus, the manner and method in which the latter
is enforced may be questioned separately, and
irrespective of the finality of the former, because
the Government does not have the unbridled
discretion to enforce collection without regard to
the clear provision of law."[if !supportFootnotes][14][endif]
Petitioner specifically points out that applying
Memorandum Circular No. 38-68, implementing
Sections 318 and 324 of the old tax code
(Republic Act 5203), the BIR's Notices of Levy on
the Marcos properties, were issued beyond the
allowed period, and are therefore null and void:
"...the Notices of Levy on Real Property (Annexes
0 to NN of Annex C of this Petition) in satisfaction
of said assessments were still issued by
10
respondents well beyond the period mandated in
Revenue Memorandum Circular No. 38-68.
These Notices of Levy were issued only on 22
February 1993 and 20 May 1993 when at least
seventeen (17) months had already lapsed from
the last service of tax assessment on 12
September 1991. As no notices of distraint of
personal property were first issued by
respondents, the latter should have complied with
Revenue Memorandum Circular No. 38-68 and
issued these Notices of Levy not earlier than
three (3) months nor later than six (6) months
from 12 September 1991. In accordance with the
Circular, respondents only had until 12 March
1992 (the last day of the sixth month) within
which to issue these Notices of Levy. The
Notices of Levy, having been issued beyond the
period allowed by law, are thus void and of no
effect."[if !supportFootnotes][15][endif]
We hold otherwise. The Notices of Levy upon
real property were issued within the prescriptive
period and in accordance with the provisions of
the present Tax Code. The deficiency tax
assessment, having already become final,
executory, and demandable, the same can now
be collected through the summary remedy of
distraint or levy pursuant to Section 205 of the
NIRC.
The applicable provision in regard to the
prescriptive period for the assessment and
collection of tax deficiency in this instance is
Article 223 of the NIRC, which pertinently
provides:
"Sec. 223. Exceptions as to a period of limitation
of assessment and collection of taxes.- (a) In the
case of a false or fraudulent return with intent to
evade tax or of a failure to file a return, the tax
may be assessed, or a proceeding in court for the
collection of such tax may be begun without
assessment, at any time within ten (10) years
after the discovery of the falsity, fraud, or
omission: Provided, That, in a fraud assessment
which has become final and executory, the fact
of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection
thereof.
xxx
(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.
xxx
The omission to file an estate tax return, and the
subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the
petitioner's cause, as under the above-cited
provision, in case of failure to file a return, the tax
may be assessed at any time within ten years
after the omission, and any tax so assessed may
be collected by levy upon real property within
three years following the assessment of the tax.
Since the estate tax assessment had become

final and unappealable by the petitioner's default
as regards protesting the validity of the said
assessment, there is now no reason why the BIR
cannot continue with the collection of the said
tax. Any objection against the assessment
should have been pursued following the avenue
paved in Section 229 of the NIRC on protests on
assessments of internal revenue taxes.
Petitioner further argues that "the numerous
pending court cases questioning the late
president's ownership or interests in several
properties (both real and personal) make the total
value of his estate, and the consequent estate tax
due, incapable of exact pecuniary determination
at this time. Thus, respondents' assessment of
the estate tax and their issuance of the Notices of
Levy and sale are premature and oppressive." He
points out the pendency of Sandiganbayan Civil
Case Nos. 0001-0034 and 0141, which were filed
by the government to question the ownership and
interests of the late President in real and personal
properties located within and outside the
Philippines. Petitioner, however, omits to allege
whether the properties levied upon by the BIR in
the collection of estate taxes upon the decedent's
estate were among those involved in the said
cases pending in the Sandiganbayan. Indeed,
the court is at a loss as to how these cases are
relevant to the matter at issue. The mere fact
that the decedent has pending cases involving illgotten wealth does not affect the enforcement of
tax assessments over the properties indubitably
included in his estate.
Petitioner also expresses his reservation as to
the propriety of the BIR's total assessment of
P23,292,607,638.00, stating that this amount
deviates from the findings of the Department of
Justice's Panel of Prosecutors as per its
resolution of 20 September 1991. Allegedly, this
is clear evidence of the uncertainty on the part of
the Government as to the total value of the estate
of the late President.
This is, to our mind, the petitioner's last ditch
effort to assail the assessment of estate tax
which had already become final and
unappealable.
It is not the Department of Justice which is the
government agency tasked to determine the
amount of taxes due upon the subject estate, but
the Bureau of Internal Revenue[if !supportFootnotes][16][endif]
whose determinations and assessments are
presumed correct and made in good faith.[if !
The taxpayer has the duty of
proving otherwise. In the absence of proof of any
irregularities in the performance of official duties,
an assessment will not be disturbed. Even an
assessment based on estimates is prima facie
valid and lawful where it does not appear to have
been arrived at arbitrarily or capriciously. The
burden of proof is upon the complaining party to
show clearly that the assessment is erroneous.
11
Failure to present proof of error in the
assessment will justify the judicial affirmance of
said assessment.[if !supportFootnotes][18][endif] In this
instance, petitioner has not pointed out one single
provision in the Memorandum of the Special Audit
Team which gave rise to the questioned
assessment, which bears a trace of falsity.
Indeed, the petitioner's attack on the assessment
bears mainly on the alleged improbable and
unconscionable amount of the taxes charged.
But mere rhetoric cannot supply the basis for the
charge of impropriety of the assessments made.
Moreover, these objections to the assessments
should have been raised, considering the ample
remedies afforded the taxpayer by the Tax Code,
with the Bureau of Internal Revenue and the
Court of Tax Appeals, as described earlier, and
cannot be raised now via Petition for Certiorari,
under the pretext of grave abuse of discretion.
The course of action taken by the petitioner
reflects his disregard or even repugnance of the
established institutions for governance in the
scheme of a well-ordered society. The subject
tax assessments having become final, executory
and enforceable, the same can no longer be
contested by means of a disguised protest. In
the main, Certiorari may not be used as a
substitute for a lost appeal or remedy.[if !
This judicial policy becomes
more pronounced in view of the absence of
sufficient attack against the actuations of
government.
On the matter of sufficiency of service of Notices
of Assessment to the petitioner, we find the
respondent appellate court's pronouncements
sound and resilient to petitioner's attacks.
"Anent grounds 3(b) and (B) - both
alleging/claiming lack of notice - We find, after
considering the facts and circumstances, as well
as evidences, that there was sufficient,
constructive and/or actual notice of assessments,
levy and sale, sent to herein petitioner Ferdinand
"Bongbong" Marcos as well as to his mother
Mrs. Imelda Marcos.
Even if we are to rule out the notices of
assessments personally given to the caretaker of
Mrs. Marcos at the latter's last known address, on
August 26, 1991 and September 12, 1991, as
well as the notices of assessment personally
given to the caretaker of petitioner also at his last
known address on September 12, 1991 - the
subsequent notices given thereafter could no
longer be ignored as they were sent at a time
when petitioner was already here in the
Philippines, and at a place where said notices
would surely be called to petitioner's attention,
and received by responsible persons of sufficient
age and discretion.
Thus, on October 20, 1992, formal assessment
notices were served upon Mrs. Marcos c/o the
petitioner, at his office, House of Representatives,
Batasan Pambansa, Q.C. (Annexes "A", "A-1",
"A-2", "A-3"; pp. 207-210,

Comment/Memorandum of OSG). Moreover, a
notice to taxpayer dated October 8, 1992 inviting
Mrs. Marcos to a conference relative to her tax
liabilities, was furnished the counsel of Mrs.
Marcos - Dean Antonio Coronel (Annex "B", p.
211, ibid). Thereafter, copies of Notices were
also served upon Mrs. Imelda Marcos, the
petitioner and their counsel "De Borja, Medialdea,
Ata, Bello, Guevarra and Serapio Law Office", on
April 7, 1993 and June 10, 1993. Despite all of
these Notices, petitioner never lifted a finger to
protest the assessments, (upon which the Levy
and sale of properties were based), nor appealed
the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein
petitioner (and his mother) and it appearing that
petitioner continuously ignored said Notices
despite several opportunities given him to file a
protest and to thereafter appeal to the Court of
Tax Appeals, - the tax assessments subject of
this case, upon which the levy and sale of
properties were based, could no longer be
contested (directly or indirectly) via this instant
petition for certiorari."[if !supportFootnotes][20][endif]
Petitioner argues that all the questioned Notices
of Levy, however, must be nullified for having
been issued without validly serving copies thereof
to the petitioner. As a mandatory heir of the
decedent, petitioner avers that he has an interest
in the subject estate, and notices of levy upon its
properties should have been served upon him.
We do not agree. In the case of notices of levy
issued to satisfy the delinquent estate tax, the
delinquent taxpayer is the Estate of the decedent,
and not necessarily, and exclusively, the
petitioner as heir of the deceased. In the same
vein, in the matter of income tax delinquency of
the late president and his spouse, petitioner is not
the taxpayer liable. Thus, it follows that service
of notices of levy in satisfaction of these tax
delinquencies upon the petitioner is not required
by law, as under Section 213 of the NIRC, which
pertinently states:
"xxx
...Levy shall be effected by writing upon said
certificate a description of the property upon
which levy is made. At the same time, written
notice of the levy shall be mailed to or served
upon the Register of Deeds of the province or city
where the property is located and upon the
delinquent taxpayer, or if he be absent from the
Philippines, to his agent or the manager of the
business in respect to which the liability arose, or
if there be none, to the occupant of the property
in question.
xxx"
The foregoing notwithstanding, the record shows
that notices of warrants of distraint and levy of
sale were furnished the counsel of petitioner on
April 7, 1993, and June 10, 1993, and the
petitioner himself on April 12, 1993 at his office at
12
the Batasang Pambansa.[if !supportFootnotes][21][endif] We
cannot therefore, countenance petitioner's
insistence that he was denied due process.
Where there was an opportunity to raise
objections to government action, and such
opportunity was disregarded, for no justifiable
reason, the party claiming oppression then
becomes the oppressor of the orderly functions of
government. He who comes to court must come
with clean hands. Otherwise, he not only taints
his name, but ridicules the very structure of
established authority.
IN VIEW WHEREOF, the Court
RESOLVED to DENY the present petition. The
Decision of the Court of Appeals dated November
29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.
on Certiorari[if !supportFootnotes][1][endif] under Rule 45 of

the Rules of Court, seeking to set aside the
March 13, 1997 Decision[if !supportFootnotes][2][endif] and
August 27, 1997 Resolution[if !supportFootnotes][3][endif] of
the Court of Appeals (CA) in CA-G.R. SP No.
43450.
The facts of the case are as follows:
On January 11, 1996, the Regional
Trial Court (RTC) of Pasig City Branch 156,
acting as a probate court, in Special Proceeding
No. 10279, issued an Order[if !supportFootnotes][4][endif]
granting letters testamentary in solidum to
respondents Ferdinand R. Marcos II and Imelda
Trinidad Romualdez-Marcos as executors of the
last will and testament of the late Ferdinand E.
Marcos.
The dispositive portion of the January 11,
1996 Order reads:
Republic of the Philippines

Supreme Court
Manila
WHEREFORE, finding the Last Will and

Testament of Ferdinand Edralin Marcos to have
been duly executed in accordance with law, the
same is hereby ALLOWED AND ADMITTED TO
PROBATE.
THIRD DIVISION
G.R. Nos.
130371
&130855
Present:
YNARESSANTIA
GO, J.,
REPUBLIC OF THE
PHILIPPINES,
Petitio
ner,
- versus -
FERDINAND R. MARCOS II
and IMELDA R. MARCOS,
Respondents.
Chairperson,
CHICONAZARI
O,
VELASCO,
JR.,
NACHURA,
and
PERALTA, JJ.
Upon the filing of a bond in

the amount of
P50,000.00, let letters
testamentary be issued
in solidum to Imelda
Trinidad RomualdezMarcos AND Ferdinand
Romualdez Marcos II,
named executors
therein.
Promulgated:
August 4,
2009
x-------------------------------------------------x
DECISION
PERALTA, J.:
Before this Court is a Petition for Review
Pending the filing of said

bond and their oath,
Commissioner Liwayway
Vinzons-Chato of the
Bureau of Internal
Revenue is hereby
authorized to continue
her functions as Special
Administrator of the
Estate of Ferdinand
13
Edralin Marcos.
RTC Order and that he took his oath as named

executor of the will on January 30, 1996.
On March 13, 1996, the RTC issued
Letters of Administration[if !supportFootnotes][7][endif] to BIR
Commissioner Liwayway Vinzons-Chato in
accordance with an earlier Order dated
September 9, 1994, appointing her as Special
Administratrix of the Marcos Estate.
Let NOTICE be given to all

known heirs and
creditors of the decedent,
and to any other persons
having an interest in the
estate for them to lay
their claim against the
Estate or forever hold
their peace.
On April 1, 1996, respondent Ferdinand

Marcos II filed a Motion to Revoke the Letters of
Administration issued by the RTC to BIR
Commissioner Vinzons-Chato.
On April 26, 1996, the RTC issued an
Order[if !supportFootnotes][8][endif] denying the motion for
partial reconsideration filed by petitioner as well
as the motion for reconsideration filed by
respondent Imelda Marcos, the penultimate
portion of which reads:
Under the Rules, a decedents
testamentary privilege must be accorded utmost
respect. Guided by this legal precept, therefore,
in resolving the two (2) motions at hand, the
Court is constrained to DENY both.
SO ORDERED.[if !supportFootnotes][5]
[endif]
Examining the arguments

poised by the movants,
the Court observed that
these are but a mere
rehash of issues already
raised and passed upon
by the Court.
On January 15, 1996, the petitioner

Republic of the Philippines filed a Motion for
Partial Reconsideration[if !supportFootnotes][6][endif] in so far
as the January 11, 1996 RTC Order granted
letters testamentary to respondents. On the other
hand, respondent Imelda Marcos filed her own
motion for reconsideration on the ground that the
will is lost and that petitioner has not proven its
existence and validity.
On February 5, 1996, respondent
Ferdinand Marcos II filed a Compliance stating
that he already filed a bond in the amount of
P50,000.00 as directed by the January 11, 1996
One has to review the

previous orders issued
by the Court in this case,
e.g., the orders dated
September 9, 1994,
November 25, 1994, as
well as October 3, 1995,
to see that even as far
back then, the Court has
considered the matter of
competency of the
oppositors and of
14
Commissioner Liwayway
Vinzons-Chato as having
been settled.
It cannot be overstressed that

the assailed January 11,
1996 Orders of the Court
was arrived at only after
extensive consideration
of every legal facet
available on the question
of validity of the Will.
x x x x
The special civil action for

certiorari as well as all
the other pleadings filed
herein are REFERRED
to the Court of Appeals
for consideration and
adjudication on the
merits or any other
action as it may deem
appropriate, the latter
having jurisdiction
concurrent with this Court
over the Case, and this
Court having been cited
to no special and
important reason for it to
take cognizance of said
case in the first instance.
(Emphasis and
Underscoring Supplied)
WHEREFORE, for lack of merit, the motion

for reconsideration filed separately by petitioner
Republic and oppositor Imelda R. Marcos are
both DENIED.
SO ORDERED.[if !supportFootnotes][9]
[endif]
On March 13, 1997, the CA issued a

Decision,[if !supportFootnotes][11][endif] dismissing the
referred petition for having taken the wrong mode
of appeal, the pertinent portions of which reads:
On June 6, 1996, petitioner filed with this

Court a Petition for Review on Certiorari, under
Ruled 45 of the Rules of Court, questioning the
aforementioned RTC Orders granting letters
testamentary to respondents.
On February 5, 1997, the First Division of
this Court issued a Resolution referring the
petition to the CA, to wit:
Consequently, for having

taken the wrong mode of
appeal, the present
petition should be
dismissed in accordance
with the same Supreme
Court Circular 2-90
which expressly
provides that:
15
SPECIFICALLY
REFERRING SAID
PETITION FOR A
DECISION ON THE
MERITS.
4. Erroneous Appeals An appeal

taken to either the Supreme Court or the
Court of Appeals by the wrong or
inappropriate mode shall be dismissed.
IN VIEW OF THE
FOREGOING, the instant
petition for review is
hereby DISMISSED.
II.
SO ORDERED.[if !supportFootnotes][12][endif]
Petitioner filed a Motion for

Reconsideration,[if !supportFootnotes][13][endif] which was,
however denied by the CA in a Resolution[if !
dated August 27, 1997.
Hence, herein petition, with petitioner
raising the following assignment of errors, to wit:
THE PROBATE COURT GRAVELY

ERRED IN FAILING TO
CONSIDER THAT
RESPONDENTS
IMELDA R. MARCOS
AND FERDINAND R.
MARCOS II SHOULD BE
DISQUALIFIED TO ACT
AND SERVE AS
EXECUTORS.
III.
I.
THE COURT OF APPEALS

GRAVELY ERRED IN
DISMISSING THE
PETITION ON
TECHNICAL GROUNDS
DESPITE THE
SUPREME COURT
RESOLUTION

ERRED IN FAILING TO
CONSIDER THAT SAID
PRIVATE
RESPONDENTS HAVE
DENIED AND
DISCLAIMED THE VERY
EXISTENCE AND
VALIDITY OF THE
MARCOS WILL.
16
DEPOSITED IN THE
SWISS BANKS.[if !
IV.

ERRED IN FAILING TO
CONSIDER THAT ITS
ORDER OF JANUARY
11, 1996, WHICH
ADMITTED THE
MARCOS WILL TO
PROBATE AND WHICH
DIRECTED THE
ISSUANCE OF
LETTERS
TESTAMENTARY IN
SOLIDUM TO PRIVATE
RESPONDENTS AS
EXECUTORS OF SAID
MARCOS WILL, WAS
BASED ON THE
EVIDENCE OF THE
REPUBLIC ALONE.
V.
In the meantime, on October 9, 2002,

the RTC, acting on the pending unresolved
motions before it, issued an Order[if !supportFootnotes][16]
[endif]
which reads:
WHEREFORE, the Court hereby appoints
as joint special administrators of the estate of
the late Ferdinand E. Marcos, the nominee of the
Republic of the Philippines (the Undersecretary of
the Department of Justice whom the Secretary of
Justice will designate for this purpose) and Mrs.
Imelda Romualdez Marcos and Mr. Ferdinand R.
Marcos II, to serve as such until an executor is
finally appointed.
SO ORDERED.
The petition is without merit.

When the assailed Orders granting letters
testamentary in solidum to respondents were
issued by the RTC, petitioner sought to question
them by filing a petition for review on certiorari
under Rule 45 of the Rules of Court.
Supreme Court Circular No. 2-90,[if !
which was then in effect, reads:

ERRED IN FAILING TO
CONSIDER THAT BOTH
PRIVATE
RESPONDENTS HAVE
OBSTRUCTED THE
TRANSFER TO THE
PHILIPPINES OF THE
MARCOS ASSETS
2. Appeals from Regional Trial Courts to

the Supreme Court. Except in criminal cases
where the penalty imposed is life imprisonment to
reclusion perpetua, judgments of regional trial
courts may be appealed to the Supreme Court
only by petition for review on certiorari in
accordance with Rule 45 of the Rules of Court
in relation to Section 17 of the Judiciary Act of
1948, as amended, this being the clear
intendment of the provision of the Interim Rules
17
that (a)ppeals to the Supreme Court shall be
taken by petition for certiorari which shall be
governed by Rule 45 of the Rules of Court.
(Emphasis and Underscoring Supplied)
The pertinent portions of Section 17[if !
of the Judiciary Act of 1948
read:
The Supreme Court shall further have exclusive
jurisdiction to review, revise, reverse, modify or
affirm on certiorari as the law or rules of court
may provide, final judgments and decrees of
inferior courts as herein provided, in
(1) All cases in which the constitutionality or
validity of any treaty, law, ordinance, or executive
order or regulation is in question;
(2) All cases involving the legality of any tax,
impost, assessment or toll, or any penalty
imposed in relation thereto;
(3) All cases in which the jurisdiction of any
inferior court is in issue;
(4) All other cases in which only errors or
questions of law are involved: Provided, however,
That if, in addition to constitutional, tax or
jurisdictional questions, the cases mentioned in
the three next preceding paragraphs also involve
questions of fact or mixed questions of fact and
law, the aggrieved party shall appeal to the Court
of Appeals; and the final judgment or decision of
the latter may be reviewed, revised, reversed,
modified or affirmed by the Supreme Court on
writ of certiorari; and
(5) Final awards, judgments, decision or orders of
the Commission on Elections, Court of Tax
Appeals, Court of Industrial Relations, the Public
Service Commission, and the Workmens
Compensation Commission.
A reading of Supreme Court Circular 2-90,
in relation to Section 17 of the Judiciary Act of
1948, clearly shows that the subject matter of
therein petition, that is, the propriety of granting
letters testamentary to respondents, do not fall
within any ground which can be the subject of a
direct appeal to this Court. The CA was thus
correct in declaring that the issues raised by
petitioner do not fall within the purview of Section
17 of the Judiciary Act of 1948 such that the
Supreme Court should take cognizance of the
instant case.[if !supportFootnotes][19][endif]
Moreover, the Courts
pronouncement in Suarez v. Judge Villarama[if !
is instructive:
Section 4 of Circular No. 2-90, in effect at the
time of the antecedents, provides that an
appeal taken to either the Supreme Court or
the Court of Appeals by the wrong mode or
inappropriate mode shall be dismissed. This
rule is now incorporated in Section 5, Rule 56 of
the 1997 Rules of Civil Procedure.
Moreover, the filing of the case directly with
this Court runs afoul of the doctrine of

hierarchy of courts. Pursuant to this doctrine,
direct resort from the lower courts to the
Supreme Court will not be entertained unless
the appropriate remedy cannot be obtained in
the lower tribunals. This Court is a court of last
resort, and must so remain if it is to satisfactorily
perform the functions assigned to it by the
Constitution and immemorial tradition. Thus, a
petition for review on certiorari assailing the
decision involving both questions of fact and
law must first be brought before the Court of
Appeals.[if !supportFootnotes][21][endif]
Also, in Southern Negros
Development Bank v. Court of Appeals,[if !
this Court ruled:
It is
incumbent upon private
respondent qua
appellants to utilize the
correct mode of appeal of
the decisions of trial
courts to the appellate
courts. In the mistaken
choice of their remedy,
they can blame no one
but themselves (Jocson
v. Baguio, 179 SCRA 550
[1989]; Yucuanseh Drug
Co. v. National Labor
Union, 101 Phil. 409
[1957]).
x x x x
Pursuant to Section 4 of Circular No. 2-90,

which provides that "[a]n appeal taken to
either the Supreme Court or the Court of
Appeals by the wrong mode or inappropriate
mode shall be dismissed," the only course of
action of the Court to which an erroneous
appeal is made is to dismiss the same. There
is no longer any justification for allowing
transfers of erroneous appeals from one court
to another (Quesada v. Court of Appeals, G.R.
No. 93869, November 12, 1990, First Division,
Minute Resolution).[if !supportFootnotes][23][endif]
Based on the foregoing, petitioner
cannot deny that the determination of whether or
not respondents should be disqualified to act as
executors is a question of fact. Hence, the proper
remedy was to appeal to the CA, not to this
Court.
18
Petitioner is adamant, however, that

notwithstanding the improper remedy, the CA
should not have dismissed therein petition.
Petitioner argues in the wise:
However, as can be seen in
the Resolution of
February 5, 1997, (Annex
H) this Honorable Court
deemed it more proper to
transmit the first Petition
for Review to respondent
appellate court for the
reason that:
Additionally, this Honorable

Court itself plainly stated
that the case under
review is:
.REFERRED to the Court

of Appeals for
consideration and
adjudication on the
merits. The latter
having jurisdiction
over the case[if !
This Court having been cited

to no special and
xxx
It would appear then that

even though this
Honorable Court
apparently considers the
Republics petition as
deserving to be given
due course, it deemed it
in the best interest of the
parties concerned if the
Court of Appeals would
first take cognizance of
said case, thereby
preserving its stance as a
court of last resort.
Petitioners arguments are misplaced. To

stress, the February 5, 1997 Resolution reads:
The special civil action for
certiorari as well as all
the other pleadings filed
herein are REFERRED
to the Court of Appeals
for consideration and
adjudication on the
merits or any other
action as it may deem
appropriate, the latter
having jurisdiction
over the Case, and this
Court having been cited
to no special and
Based thereon, this Court agrees

with the ruling of the CA that said resolution gave
the CA discretion and latitude to decide the
petition as it may deem proper. The resolution is
clear that the petition was referred to the CA for
consideration and adjudication on the merits or
any other action as it may deem appropriate.
19
Thus, no error can be attributed to the CA when
the action it deemed appropriate was to dismiss
the petition for having availed of an improper
remedy. More importantly, the action of the CA
was sanctioned under Section 4 of Supreme
Court Circular 2-90 which provides that an
appeal taken to either the Supreme Court or the
Court of Appeals by the wrong mode or
inappropriate mode shall be dismissed.
Moreover, petitioner mistakenly relies in
Oriental Media, Inc. v. Court of Appeals,[if !
in which this Court made the
following pronouncements:
In the case at bar, there was no urgency
or need for Oriental to resort to the
extraordinary remedy of certiorari for when it
learned of the case and the judgment against it
on July 25, 1986, due to its receipt of a copy of
the decision by default; no execution had as yet
been ordered by the trial court. As
aforementioned, Oriental had still the time and
the opportunity to file a motion for
reconsideration, as was actually done. Upon the
denial of its motion for reconsideration in the
first case, or at the latest upon the denial of
its petition for relief from judgment, Oriental
should have appealed. Oriental should have
followed the procedure set forth in the Rules of
Court for
Rules of procedure are intended to ensure the
orderly administration of justice and the
protection of substantive rights in judicial and
extrajudicial proceedings. It is a mistake to
purpose that substantive law and adjective law
are contradictory to each other or, as has often
been suggested, that enforcement of procedural
rules should never be permitted if it will result in
prejudice to the substantive rights of the litigants.
This is not exactly true; the concept is much
misunderstood. As a matter of fact, the policy of
the courts is to give effect to both kinds of law, as
complementing each other, in the just and speedy
resolution of the dispute between the parties.
Observance of both substantive rights is equally
guaranteed by due process whatever the source
of such rights, be it the Constitution itself or only
a statute or a rule of court.[if !supportFootnotes][27][endif]
In the case at bar, as found by this

Court in its February 5, 1997 Resolution, therein
petition offered no important or special reason for
the Court to take cognizance of it at the first
instance. Petitioner offered no plausible reason
why it went straight to this Court when an
adequate and proper remedy was still available.
The CA was thus correct that the remedy that
petitioner should have availed of was to file an
appeal under Rule 109 of the Rules of Court
which states:
Section 1. Orders of
judgments from which
appeals taken. An
interested person may
appeal in special
proceedings from an
order or judgment
rendered by a Court of
First Instance or a
Juvenile and Domestic
Relations Court, where
such order or judgment:
[if !supportLists](a)
disallows a will;
[endif]allows or
Because of the preceding discussion,

herein petition must necessarily fail. However,
even if this Court were to set aside petitioners
procedural lapses, a careful review of the records
of the case reveal that herein petition is without
merit.
At the crux of the controversy is a
determination of whether or not respondents are
incompetent to serve as executors of the will of
Ferdinand Marcos.
Ozeata v. Pecson[if !supportFootnotes][28][endif] is instructive:
The choice of his executor is a precious
prerogative of a testator, a necessary
20
concomitant of his right to dispose of his property
in the manner he wishes. It is natural that the
testator should desire to appoint one of his
confidence, one who can be trusted to carry out
his wishes in the disposal of the estate. The
curtailment of this right may be considered as a
curtailment of the right to dispose. And as the
rights granted by will take effect from the time of
death (Article 777, Civil Code of the Philippines),
the management of his estate by the
administrator of his choice should be made as
soon as practicable, when no reasonable
objection to his assumption of the trust can be
interposed any longer. It has been held that
when a will has been admitted to probate, it is
the duty of the court to issue letters
testamentary to the person named as
executor upon his application (23 C.J. 1023).
x x x x
The case of
In re Erlanger's Estate,
242 N.Y.S. 249, also
reiterates the same
principle.
The courts
have always respected
the right to which a
testator enjoys to
determine who is most
suitable to settle his
testamentary affairs, and
his solemn selection
should not lightly be
disregarded. After the
admission of a will to
probate, the courts will
not name a better
executor for the
testator nor disqualify,
by a judicial veto, the
widow or friend or
other person selected
in the will, except upon
strict proof of the
statutory grounds of
incompetency. Matter of
Leland's Will, 219 N.Y.
387, 393, 114 N.E. 854.
x x x[if !supportFootnotes][29][endif]
Section 1. Who are

incompetent to serve as
executors or
administrators. No
person is competent to
serve as executor or
administrator who:
x x x x
(c) Is in the opinion of the

court unfit to execute the
duties of trust by reason
of drunkenness,
improvidence, or want of
understanding or
integrity, or by reason of
conviction of an
offense involving moral
turpitude. (Emphasis
Supplied)
In the case at bar, petitioner

anchored its opposition to the grant of letters
testamentary to respondents, specifically on the
following grounds: (1) want of integrity, and (2)
conviction of an offense involving moral
turpitude. Petitioner contends that respondents
have been convicted of a number of cases[if !
and, hence, should be
characterized as one without integrity, or at the
least, with questionable integrity.[if !supportFootnotes][31]
[endif]
The RTC, however, in its January 11,

1996 Order, made the following findings:
Section 1(c), Rule 78 of the Rules of
Court defines who are incompetent to serve as
executors, to wit:
21
However,
except for petitioner
Republics allegation of
want of integrity on the
part of Imelda Trinidad
Romualdez-Marcos and
Ferdinand Romualdez
Marco II, named
executors in the last will
and testament, so as to
render them
incompetent to serve as
executors, the Court
sees at this time, no
evidence on record,
oral or documentary, to
substantiate and
support the said
allegation. (Emphasis
Supplied)
Based on the foregoing, this Court

stresses that an appellate court is disinclined to
interfere with the action taken by the probate
court in the matter of removal of an executor or
administrator unless positive error or gross abuse
of discretion is shown.[if !supportFootnotes][32][endif] The
Rules of Court gives the lower court the duty and
discretion to determine whether in its opinion an
individual is unfit to serve as an executor. The
sufficiency of any ground for removal should thus
be determined by the said court, whose
sensibilities are, in the first place, affected by any
act or omission on the part of the administrator
not conformable to or in disregard of the rules of
orders of the court.[if !supportFootnotes][33][endif]
Hence, in order to reverse the
findings of the RTC, this Court must evaluate the
evidence presented or alleged by petitioner in
support of its petition for disqualification.
However, after a painstaking review of the
records and evidence on hand, this Court finds
that the RTC committed no error or gross abuse
of discretion when it ruled that petitioner failed to
substantiate its allegation.
Petitioner conveniently omits to state
that the two cases against respondent Imelda
Marcos have already been reversed by this
Court. Her conviction in Criminal Case No. 17453
was reversed by this Court in Dans, Jr. v. People.
Likewise, her conviction in
Criminal Case No. 17450 was reversed by this
Court in Marcos v. Sandiganbayan.[if !supportFootnotes][35]
[endif]
Hence, the so-called convictions against
respondent Imelda Marcos cannot serve as a
ground for her disqualification to serve as an
executor.
On the other hand, the eight cases filed
against respondent Ferdinand Marcos II involve
four charges for violation of Section 45 (failure to
file income tax returns) and four charges for
violation of Section 50 (non-payment of
deficiency taxes) of the National Internal
Revenue Code of 1977 (NIRC).
It is a matter of record, that in CAG.R. CR No. 18569,[if !supportFootnotes][36][endif] the CA
acquitted respondent Ferdinand Marcos II of all
the four charges for violation of Section 50 and
sustained his conviction for all the four charges
for violation of Section 45. It, however, bears to
stress, that the CA only ordered respondent
Marcos II to pay a fine for his failure to file his
income tax return. Moreover, and as admitted by
petitioner,[if !supportFootnotes][37][endif] said decision is still
pending appeal.
Therefore, since respondent Ferdinand
Marcos II has appealed his conviction relating to
four violations of Section 45 of the NIRC, the
same should not serve as a basis to disqualify
him to be appointed as an executor of the will of
his father. More importantly, even assuming
arguendo that his conviction is later on affirmed,
the same is still insufficient to disqualify him as
the failure to file an income tax return is not a
crime involving moral turpitude.
In Villaber v. Commision on Elections,[if !
this Court held:
As to the
meaning of "moral
turpitude," we have
consistently adopted the
definition in Black's Law
Dictionary as "an act of
baseness, vileness, or
depravity in the private
duties which a man
owes his fellow men, or
to society in general,
contrary to the
accepted and
customary rule of right
and duty between man
and woman, or conduct
contrary to justice,
honesty, modesty, or
good morals."
In In re
Vinzon, the term "moral
22
turpitude" is considered
as encompassing
"everything which is done
contrary to justice,
honesty, or good morals."
x x x x
We,
however, clarified in Dela
Torre vs. Commission
on Elections that "not
every criminal act
involves moral
turpitude," and that ''as
to what crime involves
moral turpitude is for
the Supreme Court to
determine."[if !supportFootnotes]
[39][endif]
Moreover, In De Jesus-Paras v.
Vailoces:[if !supportFootnotes][40][endif]
Indeed, it is well-settled that "embezzlement,
forgery, robbery, and swindling are crimes which
denote moral turpitude and, as a general rule,
all crimes of which fraud is an element are
looked on as involving moral turpitude" (58
C.J.S., 1206).
The failure to file an income tax
return is not a crime involving moral turpitude as
the mere omission is already a violation
regardless of the fraudulent intent or willfulness of
the individual. This conclusion is supported by the
provisions of the NIRC as well as previous Court
decisions which show that with regard to the filing
of an income tax return, the NIRC considers three
distinct violations: (1) a false return, (2) a
fraudulent return with intent to evade tax, and (3)
failure to file a return.
The same is illustrated in Section 51(b) of
the NIRC which reads:
(b) Assessment and payment of deficiency

tax xxx
In case a person fails to

make and file a return
or list at the time
prescribed by law, or
makes willfully or
otherwise, false or
fraudulent return or list
x x x. (Emphasis
Supplied)
Likewise, in Aznar v. Court of Tax

Appeals,[if !supportFootnotes][41][endif] this Court observed:
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
23
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, and (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."[if !
(Emphasis Supplied)
serve as officers of the court.

This Court does not agree with the
posture taken by petitioner, and instead, accepts
the explanation given by respondents, to wit:
Respondents opposed the petition for probate not
because they are disclaiming the existence of the
will, but because of certain legal grounds, to wit:
(a) petitioner does not have the requisite interest
to institute it; (b) the original copy of the will was
not attached to the petition for probate as
required by the rules; and (c) the Commissioner
of the Bureau of Internal Revenue is not qualified
to be appointed as administrator of the estate.[if !
Based on the foregoing, considering

the nature of their opposition, respondents cannot
be held guilty of estoppel as they merely acted
within their rights when they put in issue legal
grounds in opposing the probate proceedings.
More importantly, even if said grounds were later
on overruled by the RTC, said court was still of
opinion that respondents were fit to serve as
executors notwithstanding their earlier opposition.
Again, in the absence of palpable error or gross
abuse of discretion, this Court will not interfere
with the RTCs discretion.
As for the remaining errors assigned
by petitioner, the same are bereft of merit.
Applying the foregoing considerations

to the case at bar, the filing of a fraudulent return
with intent to evade tax is a crime involving
moral turpitude as it entails willfulness and
fraudulent intent on the part of the individual. The
same, however, cannot be said for failure to file
a return where the mere omission already
constitutes a violation. Thus, this Court holds that
even if the conviction of respondent Marcos II is
affirmed, the same not being a crime involving
moral turpitude cannot serve as a ground for his
disqualification.
Anent the third error raised by
petitioner, the same has no merit.
Petitioner contends that respondents
denied the existence of the will, and are,
therefore, estopped from claiming to be the
rightful executors thereof. Petitioner further
claims that said actions clearly show that
respondents lack the competence and integrity to
Petitioner contends that respondents

have strongly objected to the transfer to the
Philippines of the Marcos assets deposited in the
Swiss Banks[if !supportFootnotes][44][endif] and thus the
same should serve as a ground for their
disqualification to act as executors. This Court
does not agree. In the first place, the same are
mere allegations which, without proof, deserve
scant consideration. Time and again, this Court
has stressed that this Court is a court of law and
not a court of public opinion. Moreover, petitioner
had already raised the same argument in its
motion for partial reconsideration before the RTC.
Said court, however, still did not find the same as
a sufficient ground to disqualify respondents.
Again, in the absence of palpable error or gross
abuse of discretion, this Court will not interfere
with the RTCs discretion.
Lastly, petitioner argues that the
assailed RTC Orders were based solely on their
own evidence and that respondents offered no
evidence to show that they were qualified to
serve as executors.[if !supportFootnotes][45][endif] It is basic
24
that one who alleges a fact has the burden of
proving it and a mere allegation is not evidence.[if !
Consequently, it was the burden
of petitioner (not respondents) to substantiate the
grounds upon which it claims that respondents
should be disqualified to serve as executors, and
having failed in doing so, its petition must
necessarily fail.
of the Court of Appeals (CA) Decision[if !

dated April 30, 1999 which
affirmed the Decision[if !supportFootnotes][3][endif] of the
Court of Tax Appeals (CTA) dated June 17, 1997.
WHEREFORE, premises considered, the

March 13, 1997 Decision and August 27, 1997
Resolution of the Court of Appeals in CA-G.R. SP
No. 43450 are hereby AFFIRMED.
On November 7, 1987, Jose P. Fernandez

(Jose) died. Thereafter, a petition for the probate
of his will[if !supportFootnotes][5][endif] was filed with Branch
51 of the Regional Trial Court (RTC) of Manila
(probate court).[if !supportFootnotes][6][endif] The probate
court then appointed retired Supreme Court
Justice Arsenio P. Dizon (Justice Dizon) and
petitioner, Atty. Rafael Arsenio P. Dizon
(petitioner) as Special and Assistant Special
Administrator, respectively, of the Estate of Jose
(Estate). In a letter[if !supportFootnotes][7][endif] dated
October 13, 1988, Justice Dizon informed
respondent Commissioner of the Bureau of
Internal Revenue (BIR) of the special
proceedings for the Estate.
The Regional Trial Court of Pasig

City, Branch 156, acting as a probate court in
Special Proceeding No. 10279, is hereby
ORDERED to issue letters testamentary, in
solidum, to Imelda Romualdez-Marcos and
Ferdinand Marcos II.
SO ORDERED.
THIRD DIVISION
RAFAEL ARSENIO S.
DIZON, in his capacity as
the Judicial Administrator
of the Estate of the
deceased JOSE P.
FERNANDEZ,
- versus COURT OF TAX APPEALS

and COMMISSIONER OF
INTERNAL REVENUE,
Respondents.
G.R. No.
140944
Present:
YNARESSANTIAGO,
J.,
Chairperson,
AUSTRIAMARTINEZ,
CHICONAZARIO,
NACHURA,
and
REYES, JJ.
Promulgated:
April 30,
2008
x-----------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before this Court is a Petition for Review
on Certiorari[if !supportFootnotes][1][endif] under Rule 45 of
the Rules of Civil Procedure seeking the reversal
The Facts
Petitioner alleged that several requests for

extension of the period to file the required estate
tax return were granted by the BIR since the
assets of the estate, as well as the claims against
it, had yet to be collated, determined and
identified. Thus, in a letter[if !supportFootnotes][8][endif] dated
March 14, 1990, Justice Dizon authorized Atty.
Jesus M. Gonzales (Atty. Gonzales) to sign and
file on behalf of the Estate the required estate tax
return and to represent the same in securing a
Certificate of Tax Clearance. Eventually, on April
17, 1990, Atty. Gonzales wrote a letter[if !
addressed to the BIR Regional
Director for San Pablo City and filed the estate
tax return[if !supportFootnotes][10][endif] with the same BIR
Regional Office, showing therein a NIL estate tax
liability, computed as follows:
COMPUTATION OF TAX
Conjugal Real Property (Sch. 1)
P10,855,020.00
Conjugal Personal Property (Sch.2)
3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate
14,315,611.34
Less: Deductions (Sch. 4)
187,822,576.06
Net Conjugal
Estate
NIL
Less: Share of Surviving Spouse
NIL
.
Net Share in Conjugal
25
Estate
xxx
Net Taxable Estate
NIL
NIL
Estate Tax Due

NIL
no CPA
Certificate
.
collectible
.[if !supportFootnotes][11][endif]
On April 27, 1990, BIR Regional

Director for San Pablo City, Osmundo G. Umali
issued Certification Nos. 2052[if !supportFootnotes][12][endif]
and 2053[if !supportFootnotes][13][endif] stating that the taxes
due on the transfer of real and personal
properties[if !supportFootnotes][14][endif] of Jose had been
fully paid and said properties may be transferred
to his heirs. Sometime in August 1990, Justice
Dizon passed away. Thus, on October 22, 1990,
the probate court appointed petitioner as the
administrator of the Estate.[if !supportFootnotes][15][endif]
Petitioner requested the probate
court's authority to sell several properties forming
part of the Estate, for the purpose of paying its
creditors, namely: Equitable Banking Corporation
(P19,756,428.31), Banque de L'Indochine et. de
Suez (US$4,828,905.90 as of January 31, 1988),
Manila Banking Corporation (P84,199,160.46 as
of February 28, 1989) and State Investment
House, Inc. (P6,280,006.21). Petitioner
manifested that Manila Bank, a major creditor of
the Estate was not included, as it did not file a
claim with the probate court since it had security
over several real estate properties forming part of
the Estate.[if !supportFootnotes][16][endif]
However, on November 26, 1991, the
Assistant Commissioner for Collection of the BIR,
Themistocles Montalban, issued Estate Tax
Assessment Notice No. FAS-E-87-91-003269,[if !
demanding the payment of
P66,973,985.40 as deficiency estate tax, itemized
as follows:
300.00
Total amount due &
P66,973,985.40[if !supportFootnotes][18]
[endif]
In his letter[if !supportFootnotes][19][endif] dated

December 12, 1991, Atty. Gonzales moved for
the reconsideration of the said estate tax
assessment. However, in her letter[if !supportFootnotes][20]
[endif]
dated April 12, 1994, the BIR Commissioner
denied the request and reiterated that the estate
is liable for the payment of P66,973,985.40 as
deficiency estate tax. On May 3, 1994, petitioner
received the letter of denial. On June 2, 1994,
petitioner filed a petition for review[if !supportFootnotes][21]
[endif]
before respondent CTA. Trial on the merits
ensued.
As found by the CTA, the respective parties
presented the following pieces of evidence, to wit:
In the hearings conducted, petitioner did
not present testimonial evidence but merely
documentary evidence consisting of the following:
Nature of Document
(sic)
Exhibits
1.
Letter dated October 13, 1988
from Arsenio P. Dizon

addressed
Deficiency Estate Tax- 1987

Estate
tax
P31,868,414.48
25% surcharge- late filing
7,967,103.62
late
payment
7,967,103.62
Interest
19,121,048.68
Compromise-non
filing
25,000.00
non
payment
25,000.00
no notice of
death
15.00
to the Commissioner of
Internal
Revenue informing the latter

of
the special proceedings for

the
26
settlement of the estate (p.
126,
3.
BIR
Pleading entitled
"Compliance"
records);
"A"
filed with the probate Court
submitting the final inventory

2.
Petition for the probate of the
of all the properties of the

will and issuance of letter of
deceased (p. 106, BIR

records);
"C"
administration filed with the
Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc.
No. 87-42980 (pp. 107-108,

BIR
4.
Attachment to Exh. "C" which
is the detailed and complete
listing of the properties of

records);
"B" &
"B-1
the deceased (pp. 89-105,
BIR rec.);
"C-1"
to "C-17"
27
of
5.
Claims against the estate filed
US $4,828,905.90 as of
January 31,
by Equitable Banking Corp.

with
1988 (pp. 262-265, BIR

records);
"E"
to "E-3"
the probate Court in the

amount
of P19,756,428.31 as of
March 31,
7.
Claim of the Manila Banking
1988, together with the

Annexes
Corporation (MBC) which as

of
to the claim (pp. 64-88, BIR

records); "D" to "D-24"
November 7, 1987 amounts

to
P65,158,023.54, but
recomputed
6.
Claim filed by Banque de L'

as of February 28, 1989 at a
Indochine et de Suez with the

total amount of
P84,199,160.46;
probate Court in the amount
28
together with the demand
letter
total amount of
P240,479,693.17
from MBC's lawyer (pp. 194197,
as of February 28, 1989
(pp. 186-187, BIR

records);
"G" & "G-1"
BIR
records);
"F" to "F3"
9.
8.
Claim of State Investment
Demand letter of Manila

Banking
House, Inc. filed with the
Corporation prepared by
Asedillo,
RTC, Branch VII of Manila,
Ramos and Associates Law

Offices
docketed as Civil Case No.
addressed to Fernandez
Hermanos,
86-38599 entitled "State
Inc., represented by Jose P.
Investment House, Inc.,
Fernandez, as mortgagors, in
the
Plaintiff, versus Maritime
29
Company Overseas, Inc.
and/or
from J.M. Gonzales

addressed
Jose P. Fernandez,
Defendants,"
to the Regional Director of
BIR in San Pablo City

(pp. 200-215, BIR
records);
"H" to "H-16"
(p. 183, BIR
records);
"J"
10.
Letter dated March 14, 1990
12.
Estate Tax Return filed by
of Arsenio P. Dizon addressed
the estate of the late Jose P.

to Atty. Jesus M. Gonzales,
(p. 184, BIR

records);
"I"
Fernandez through its

authorized
representative, Atty. Jesus M.
Gonzales, for Arsenio P.

Dizon,
11.
Letter dated April 17, 1990
with attachments (pp. 177-
30
182,
records)
BIR
records);
and
"K" to "K-
"L"
5"
14.
13.
Certification of Payment of
Certified true copy of the
estate taxes Nos. 2052 and

Letter of Administration
issued by RTC Manila,

Branch
2053, both dated April 27,

1990,
issued by the Office of the

51, in Sp. Proc. No. 87-42980
Regional Director, Revenue

appointing Atty. Rafael S.
Region No. 4-C, San Pablo

Dizon as Judicial
Administrator
City, with attachments

of the estate of Jose P.
Fernandez; (p. 102, CTA
(pp. 103-104, CTA

records.).
"M" to "M-5"
31
Respondent's [BIR] counsel

presented on June 26,
1995 one witness in the
person of Alberto
Enriquez, who was one
of the revenue
examiners who
conducted the
investigation on the
estate tax case of the
late Jose P. Fernandez.
In the course of the
direct examination of
the witness, he
identified the following:
2.
Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh.
"1";
-do-
Documents/
3.
Signatures
Memorandum for the

Commissioner,
BIR
Record
dated July 19, 1991, prepared
by
1.
Estate Tax Return prepared

by
revenue examiners, Ma.

Anabella A.
Abuloc, Alberto S. Enriquez

and
the
BIR;
p. 138
32
Raymund S. Gallardo;
Reviewed by
6.
Signature of Raymund S.
Gallardo appearing at the

Maximino V.
Tagle
pp. 143-144
Lower portion on p. 2 of Exh.
"2";
-do-
4.
Signature of Alberto S.
7.
Signature of Maximino V.
Enriquez appearing at the
Tagle also appearing on

lower portion on p. 2 of Exh.
"2";
-dop. 2 of Exh.
"2";
-do-
5.
Signature of Ma. Anabella A.
8.
Summary of revenue
Abuloc appearing at the
Enforcement Officers Audit

lower portion on p. 2 of Exh.
"2";
-do-
Report, dated July 19,

1991;
139
p.
33
portion of Exh.
"3";
-do-
9.
Signature of Alberto
Enriquez at the lower

12.
portion of Exh.
"3";
-do-
Signature of Maximino
V. Tagle at the lower
portion of Exh.
"3";
-do-
10.
Signature of Ma. Anabella A.
Abuloc at the lower

13.
Demand letter (FAS-E-87-9100),
portion of Exh.
"3";
-dosigned by the Asst.
Commissioner
for Collection for the

Commissioner
11.
Signature of Raymond S.
of Internal Revenue,
demanding
Gallardo at the lower
34
payment of the amount of
presentation of
respondent's witness,
whose testimony was
duly recorded as part of
the records of this case.
Besides, the documents
marked as respondent's
exhibits formed part of
the BIR records of the
case.[if !supportFootnotes][24][endif]
P66,973,985.40;
and
p. 169
14.
Assessment Notice FAS-E87-91-00

pp.
169-170[if !supportFootnotes][22]
[endif]
Nevertheless, the CTA did not fully adopt the

assessment made by the BIR and it came up with
its own computation of the deficiency estate tax,
to wit:
Conjugal Real
Property
P
5,062,016.00
The CTA's Ruling

On June 17, 1997, the CTA denied the said
petition for review. Citing this Court's ruling in
Vda. de Oate v. Court of Appeals,[if !supportFootnotes][23]
[endif]
the CTA opined that the aforementioned
pieces of evidence introduced by the BIR were
admissible in evidence. The CTA ratiocinated:
Although the above-mentioned
documents were not
formally offered as
evidence for respondent,
considering that
respondent has been
declared to have waived
the presentation thereof
during the hearing on
March 20, 1996, still they
could be considered as
evidence for respondent
since they were properly
identified during the
Conjugal Personal
Prop.
33,021,999.93
Gross Conjugal
Estate
38,084,015.93
Less:
35
Deductions
26,250,000.00
============
Net Conjugal
Estate
P
11,834,015.93
Estate Tax Due P 29,935,342.97
Less: Share of Surviving
Spouse
5,917,007.96
Net Share in Conjugal

Estate
P 5,917,007.96
Add: 25% Surcharge for Late

Filing
7,483,835.74
Add: Penalties for-No notice of

death
15.00
Add: Capital/Paraphernal
No CPA
certificate
300.00
Properties P44,652,813.66
Less:
Capital/Paraphernal
Total deficiency estate

tax
P
37,419,493.71
Deductions
44,652,813.66
=============
Net Taxable
Estate
P
50,569,821.62
36
exclusive of 20% interest from due
date of its payment until
full payment thereof
[Sec. 283 (b), Tax Code of 1987].[if !

Thus, the CTA disposed of the case in this

wise:
WHEREFORE, viewed from all the
foregoing, the Court finds the petition
unmeritorious and denies the same. Petitioner
and/or the heirs of Jose P. Fernandez are hereby
ordered to pay to respondent the amount of
P37,419,493.71 plus 20% interest from the due
date of its payment until full payment thereof as
estate tax liability of the estate of Jose P.
Fernandez who died on November 7, 1987.
Hence, the instant Petition raising the

following issues:
[if !supportLists]1.
[endif]Whether or not the
admission of evidence which were not formally
offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the
Court of Appeals is contrary to the Rules of Court
and rulings of this Honorable Court;
2. Whether or not the Court of Tax
Appeals and the
Court of Appeals
erred in
recognizing/consider
ing the estate tax
return prepared and
filed by respondent
BIR knowing that the
probate court
appointed
administrator of the
estate of Jose P.
Fernandez had
previously filed one
as in fact, BIR
Certification
Clearance Nos.
2052 and 2053 had
been issued in the
estate's favor;
Aggrieved, petitioner, on March 2, 1998,
went to the CA via a petition for review.[if !
The CA's Ruling[if !

supportLineBreakNewLine][endif]
On April 30, 1999, the CA affirmed the
CTA's ruling. Adopting in full the CTA's findings,
the CA ruled that the petitioner's act of filing an
estate tax return with the BIR and the issuance of
BIR Certification Nos. 2052 and 2053 did not
deprive the BIR Commissioner of her authority to
re-examine or re-assess the said return filed on
behalf of the Estate.[if !supportFootnotes][28][endif]
On May 31, 1999, petitioner filed a Motion
for Reconsideration[if !supportFootnotes][29][endif] which the
CA denied in its Resolution[if !supportFootnotes][30][endif]
dated November 3, 1999.

Appeals and the
Court of Appeals
erred in disallowing
the valid and
enforceable claims
of creditors against
the estate, as lawful
deductions despite
clear and convincing
evidence thereof;
and
37
Appeals and the
Court of Appeals
erred in validating
erroneous double
imputation of
values on the very
same estate
properties in the
estate tax return it
prepared and filed
which effectively
bloated the estate's
assets.[if !supportFootnotes]
[31][endif]
the reckoning date of the claims against the

Estate and the settlement of the estate tax due
should be at the time the estate tax return was
filed by the judicial administrator and the
issuance of said BIR Certifications and not at the
time the aforementioned Compromise
Agreements were entered into with the Estate's
creditors.[if !supportFootnotes][32][endif]
On the other hand, respondent counters
that the documents, being part of the records of
the case and duly identified in a duly recorded
testimony are considered evidence even if the
same were not formally offered; that the filing of
the estate tax return by the Estate and the
issuance of BIR Certification Nos. 2052 and 2053
did not deprive the BIR of its authority to examine
the return and assess the estate tax; and that the
factual findings of the CTA as affirmed by the CA
may no longer be reviewed by this Court via a
petition for review.[if !supportFootnotes][33][endif]
The Issues
There are two ultimate issues which
require resolution in this case:
The petitioner claims that in as much as

the valid claims of creditors against the Estate
are in excess of the gross estate, no estate tax
was due; that the lack of a formal offer of
evidence is fatal to BIR's cause; that the doctrine
laid down in Vda. de Oate has already been
abandoned in a long line of cases in which the
Court held that evidence not formally offered is
without any weight or value; that Section 34 of
Rule 132 of the Rules on Evidence requiring a
formal offer of evidence is mandatory in
character; that, while BIR's witness Alberto
Enriquez (Alberto) in his testimony before the
CTA identified the pieces of evidence
aforementioned such that the same were marked,
BIR's failure to formally offer said pieces of
evidence and depriving petitioner the opportunity
to cross-examine Alberto, render the same
inadmissible in evidence; that assuming
arguendo that the ruling in Vda. de Oate is still
applicable, BIR failed to comply with the
doctrine's requisites because the documents
herein remained simply part of the BIR records
and were not duly incorporated in the court
records; that the BIR failed to consider that
although the actual payments made to the Estate
creditors were lower than their respective claims,
such were compromise agreements reached long
after the Estate's liability had been settled by the
filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that
First. Whether or not the CTA and the CA

gravely erred in allowing the admission of the
pieces of evidence which were not formally
offered by the BIR; and
Second. Whether or not the CA erred in
affirming the CTA in the latter's determination of
the deficiency estate tax imposed against the
Estate.
The Courts Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is
categorically described as a court of record. As
cases filed before it are litigated de novo, partylitigants shall prove every minute aspect of their
cases. Indubitably, no evidentiary value can be
given the pieces of evidence submitted by the
BIR, as the rules on documentary evidence
require that these documents must be formally
offered before the CTA.[if !supportFootnotes][34][endif]
Pertinent is Section 34, Rule 132 of the Revised
Rules on Evidence which reads:
SEC. 34. Offer of evidence. The court
shall consider no evidence which has not been
formally offered. The purpose for which the
evidence is offered must be specified.
38
The CTA and the CA rely solely on
the case of Vda. de Oate, which reiterated this
Court's previous rulings in People v. Napat-a[if !
and People v. Mate[if !supportFootnotes]
[36][endif]
on the admission and consideration of
exhibits which were not formally offered during
the trial. Although in a long line of cases many of
which were decided after Vda. de Oate, we held
that courts cannot consider evidence which has
not been formally offered,[if !supportFootnotes][37][endif]
nevertheless, petitioner cannot validly assume
that the doctrine laid down in Vda. de Oate has
already been abandoned. Recently, in Ramos v.
Dizon,[if !supportFootnotes][38][endif] this Court, applying the
said doctrine, ruled that the trial court judge
therein committed no error when he admitted and
considered the respondents' exhibits in the
resolution of the case, notwithstanding the fact
that the same were not formally offered. Likewise,
in Far East Bank & Trust Company v.
Commissioner of Internal Revenue,[if !supportFootnotes]
[39][endif]
the Court made reference to said doctrine
in resolving the issues therein. Indubitably, the
doctrine laid down in Vda. De Oate still subsists
in this jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision,

it is clear that for
evidence to be
considered, the same
must be formally offered.
Corollarily, the mere fact
that a particular
document is identified
and marked as an exhibit
does not mean that it has
already been offered as
part of the evidence of a
party. In Interpacific
Transit, Inc. v. Aviles [186
SCRA 385], we had the
occasion to make a
distinction between
identification of
documentary evidence
and its formal offer as an
exhibit. We said that the
first is done in the course
of the trial and is
accompanied by the
marking of the evidence
as an exhibit while the
second is done only
when the party rests its
case and not before. A
party, therefore, may opt
to formally offer his

evidence if he believes
that it will advance his
cause or not to do so at
all. In the event he
chooses to do the latter,
the trial court is not
authorized by the Rules
to consider the same.
However, in People v. Napata [179 SCRA 403] citing

People v. Mate [103
SCRA 484], we relaxed
the foregoing rule and
allowed evidence not
formally offered to be
admitted and
considered by the trial
court provided the
following requirements
are present, viz.: first,
the same must have
been duly identified by
testimony duly
recorded and, second,
the same must have
been incorporated in
the records of the case.
From the foregoing declaration,

however, it is clear that Vda. de Oate is merely
an exception to the general rule. Being an
exception, it may be applied only when there is
strict compliance with the requisites mentioned
therein; otherwise, the general rule in Section 34
of Rule 132 of the Rules of Court should prevail.
In this case, we find that these
requirements have not been satisfied. The
assailed pieces of evidence were presented and
marked during the trial particularly when Alberto
39
took the witness stand. Alberto identified these
pieces of evidence in his direct testimony.[if !
He was also subjected to crossexamination and re-cross examination by
petitioner.[if !supportFootnotes][42][endif] But Albertos account
and the exchanges between Alberto and
petitioner did not sufficiently describe the
contents of the said pieces of evidence presented
by the BIR. In fact, petitioner sought that the lead
examiner, one Ma. Anabella A. Abuloc, be
summoned to testify, inasmuch as Alberto was
incompetent to answer questions relative to the
working papers.[if !supportFootnotes][43][endif] The lead
examiner never testified. Moreover, while
Alberto's testimony identifying the BIR's evidence
was duly recorded, the BIR documents
themselves were not incorporated in the records
of the case.
A common fact threads through Vda. de
Oate and Ramos that does not exist at all in the
instant case. In the aforementioned cases, the
exhibits were marked at the pre-trial proceedings
to warrant the pronouncement that the same
were duly incorporated in the records of the case.
Thus, we held in Ramos:
In this case, we find and so rule that these
requirements have been satisfied. The exhibits
in question were presented and marked
during the pre-trial of the case thus, they have
been incorporated into the records. Further,
Elpidio himself explained the contents of these
exhibits when he was interrogated by
respondents' counsel...
xxxx
While the CTA is not governed strictly by

technical rules of evidence,[if !supportFootnotes][45][endif] as
rules of procedure are not ends in themselves
and are primarily intended as tools in the
administration of justice, the presentation of the
BIR's evidence is not a mere procedural
technicality which may be disregarded
considering that it is the only means by which the
CTA may ascertain and verify the truth of BIR's
claims against the Estate.[if !supportFootnotes][46][endif] The
BIR's failure to formally offer these pieces of
evidence, despite CTA's directives, is fatal to its
cause.[if !supportFootnotes][47][endif] Such failure is
aggravated by the fact that not even a single
reason was advanced by the BIR to justify such
fatal omission. This, we take against the BIR.
Per the records of this case, the BIR was
directed to present its evidence[if !supportFootnotes][48][endif]
in the hearing of February 21, 1996, but BIR's
counsel failed to appear.[if !supportFootnotes][49][endif] The
CTA denied petitioner's motion to consider BIR's
presentation of evidence as waived, with a
warning to BIR that such presentation would be
considered waived if BIR's evidence would not be
presented at the next hearing. Again, in the
hearing of March 20, 1996, BIR's counsel failed
to appear.[if !supportFootnotes][50][endif] Thus, in its
Resolution[if !supportFootnotes][51][endif] dated March 21,
1996, the CTA considered the BIR to have
waived presentation of its evidence. In the same
Resolution, the parties were directed to file their
respective memorandum. Petitioner complied but
BIR failed to do so.[if !supportFootnotes][52][endif] In all of
these proceedings, BIR was duly notified. Hence,
in this case, we are constrained to apply our
ruling in Heirs of Pedro Pasag v. Parocha:[if !
But what further defeats petitioner's

cause on this issue is
that respondents' exhibits
were marked and
admitted during the pretrial stage as shown by
the Pre-Trial Order
quoted earlier.[if !
A formal offer
is necessary because
judges are mandated to
rest their findings of facts
and their judgment only
and strictly upon the
evidence offered by the
parties at the trial. Its
function is to enable the
trial judge to know the
purpose or purposes for
which the proponent is
presenting the evidence.
On the other hand, this
allows opposing parties
to examine the evidence
and object to its
admissibility. Moreover, it
facilitates review as the
appellate court will not be
40
required to review
documents not previously
scrutinized by the trial
court.
Strict
adherence to the said
rule is not a trivial matter.
The Court in Constantino
v. Court of Appeals ruled
that the formal offer of
one's evidence is
deemed waived after
failing to submit it
within a considerable
period of time. It
explained that the court
cannot admit an offer
of evidence made after
a lapse of three (3)
months because to do
so would "condone an
inexcusable laxity if not
non-compliance with a
court order which, in
effect, would
encourage needless
delays and derail the
speedy administration
of justice."
offer, petitioners failed to

comply with their
commitment and allowed
almost five months to
lapse before finally
submitting it. Petitioners'
failure to comply with
the rule on
admissibility of
evidence is anathema
to the efficient,
effective, and
expeditious
dispensation of justice.
Having disposed of the foregoing

procedural issue, we proceed to discuss the
merits of the case.
Ordinarily, the CTA's findings, as
affirmed by the CA, are entitled to the highest
respect and will not be disturbed on appeal
unless it is shown that the lower courts committed
gross error in the appreciation of facts.[if !
In this case, however, we find
the decision of the CA affirming that of the CTA
tainted with palpable error.
Applying the
aforementioned principle
in this case, we find that
the trial court had
reasonable ground to
consider that petitioners
had waived their right to
make a formal offer of
documentary or object
evidence. Despite
several extensions of
time to make their formal
It is admitted that the claims of the Estate's

aforementioned creditors have been condoned.
As a mode of extinguishing an obligation,[if !
condonation or remission of
debt[if !supportFootnotes][56][endif] is defined as:
an act of liberality, by virtue of which,
without receiving any
equivalent, the creditor
renounces the
enforcement of the
obligation, which is
extinguished in its
entirety or in that part or
41
aspect of the same to
which the remission
refers. It is an essential
characteristic of
remission that it be
gratuitous, that there is
no equivalent received
for the benefit given;
once such equivalent
exists, the nature of the
act changes. It may
become dation in
payment when the
creditor receives a thing
different from that
stipulated; or novation,
when the object or
principal conditions of the
obligation should be
changed; or compromise,
when the matter
renounced is in litigation
or dispute and in
exchange of some
concession which the
creditor receives.[if !
Verily, the second issue in this case

involves the construction of Section 79[if !
of the National Internal Revenue
Code[if !supportFootnotes][59][endif] (Tax Code) which
provides for the allowable deductions from the
gross estate of the decedent. The specific
question is whether the actual claims of the
aforementioned creditors may be fully allowed as
deductions from the gross estate of Jose despite
the fact that the said claims were reduced or
condoned through compromise agreements
entered into by the Estate with its creditors.
Claims against the estate, as allowable
deductions from the gross estate under Section
79 of the Tax Code, are basically a reproduction
of the deductions allowed under Section 89 (a)
(1) (C) and (E) of Commonwealth Act No. 466
(CA 466), otherwise known as the National
Internal Revenue Code of 1939, and which was
the first codification of Philippine tax laws.
Philippine tax laws were, in turn, based on the
federal tax laws of the United States. Thus,
pursuant to established rules of statutory
construction, the decisions of American courts
construing the federal tax code are entitled to
great weight in the interpretation of our own tax
laws.[if !supportFootnotes][60][endif]
It is noteworthy that even in the United

States, there is some dispute as to whether the
deductible amount for a claim against the estate
is fixed as of the decedent's death which is the
general rule, or the same should be adjusted to
reflect post-death developments, such as where
a settlement between the parties results in the
reduction of the amount actually paid.[if !
On one hand, the U.S. court
ruled that the appropriate deduction is the value
that the claim had at the date of the decedent's
death.[if !supportFootnotes][62][endif] Also, as held in Propstra
v. U.S., [if !supportFootnotes][63][endif] where a lien claimed
against the estate was certain and enforceable
on the date of the decedent's death, the fact that
the claimant subsequently settled for lesser
amount did not preclude the estate from
deducting the entire amount of the claim for
estate tax purposes. These pronouncements
essentially confirm the general principle that postdeath developments are not material in
determining the amount of the deduction.
On the other hand, the Internal
Revenue Service (Service) opines that postdeath settlement should be taken into
consideration and the claim should be allowed as
a deduction only to the extent of the amount
actually paid.[if !supportFootnotes][64][endif] Recognizing the
dispute, the Service released Proposed
Regulations in 2007 mandating that the deduction
would be limited to the actual amount paid.[if !
In announcing its agreement with Propstra,[if !

the U.S. 5th Circuit Court of
Appeals held:
We are persuaded that the Ninth

Circuit's decision...in
Propstra correctly apply
the Ithaca Trust date-ofdeath valuation principle
to enforceable claims
against the estate. As we
interpret Ithaca Trust,
when the Supreme Court
announced the date-ofdeath valuation principle,
it was making a judgment
about the nature of the
federal estate tax
specifically, that it is a tax
imposed on the act of
transferring property by
will or intestacy and,
because the act on which
the tax is levied occurs at
a discrete time, i.e., the
instance of death, the net
42
value of the property
transferred should be
ascertained, as nearly as
possible, as of that time.
This analysis supports
broad application of the
date-of-death valuation
rule.[if !supportFootnotes][67][endif]
We express our agreement with the dateof-death valuation rule, made pursuant to the
ruling of the U.S. Supreme Court in Ithaca Trust
Co. v. United States.[if !supportFootnotes][68][endif] First.
There is no law, nor do we discern any legislative
intent in our tax laws, which disregards the dateof-death valuation principle and particularly
provides that post-death developments must be
considered in determining the net value of the
estate. It bears emphasis that tax burdens are not
to be imposed, nor presumed to be imposed,
beyond what the statute expressly and clearly
imports, tax statutes being construed strictissimi
juris against the government.[if !supportFootnotes][69][endif]
Any doubt on whether a person, article or activity
is taxable is generally resolved against taxation.[if !
Second. Such construction finds
relevance and consistency in our Rules on
Special Proceedings wherein the term "claims"
required to be presented against a decedent's
estate is generally construed to mean debts or
demands of a pecuniary nature which could have
been enforced against the deceased in his
lifetime, or liability contracted by the deceased
before his death.[if !supportFootnotes][71][endif] Therefore, the
claims existing at the time of death are significant
to, and should be made the basis of, the
determination of allowable deductions.
WHEREFORE, the instant Petition is
GRANTED. Accordingly, the assailed Decision
dated April 30, 1999 and the Resolution dated
November 3, 1999 of the Court of Appeals in CAG.R. S.P. No. 46947 are REVERSED and SET
ASIDE. The Bureau of Internal Revenue's
deficiency estate tax assessment against the
Estate of Jose P. Fernandez is hereby
NULLIFIED. No costs.
SO ORDERED.

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 144653
August 28, 2001
BANK OF THE PHILIPPINE ISLANDS,
petitioner,
vs.
respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the
decision, dated April 14, 2000, of the Court of
Appeals,1 affirming the decision of the Court of
Tax Appeals (which denied petitioner Bank of the
Philippine Islands' claim for tax refund for 1985),
and the appeals court's resolution, dated August
21, 2000, denying reconsideration.
The facts are as follows:
Prior to its merger with petitioner Bank of the
Philippine Islands (BPI) on July 1985, The Family
Bank and Trust Co. (FBTC) earned income
consisting of rentals from its leased properties
and interest from its treasury notes for the period
January 1 to June 30, 1985. As required by the
Expanded Withholding Tax Regulation, the
lessees of FBTC withheld 5 percent of the rental
income, in the amount of P118,609.17, while the
Central Bank, from which the treasury notes were
purchased by FBTC, withheld P55,456.60 from
the interest earned thereon. Creditable
withholding taxes in the total amount of
P174,065.77 were remitted to respondent
Commissioner of Internal Revenue.
FBTC, however, suffered a new loss of about
P64,000,000.00 during the period in question. It
also had an excess credit of P2,146,072.57 from
the previous year. Thus, upon its dissolution in
1985, FBTC had a refundable of P2,320,138.34,
representing that year's tax credit of P174,065.77
and the previous year's excess credit of
P2,146,072.57.
As FBTC's successor-in-interest, petitioner BPI
claimed this amount as tax refund, but
respondent Commissioner of Internal Revenue
refunded only the amount of P2,146,072.57,
leaving a balance of P174,065.77. Accordingly,
petitioner filed a petition for review in the Court of
Tax Appeals on December 29, 1987, seeking the
refund of the aforesaid amount.2 However, in its
decision rendered on July 19, 1994, the Court of
Tax Appeals dismissed petitioner's petition for
review and denied its claim for refund on the
ground that the claim had already prescribed.3 In
its resolution, dated August 4, 1995, the Court of
43
Tax Appeals denied petitioner's motion for
reconsideration.4
Petitioner appealed to the Court of Appeals, but,
in its decision rendered on April 14, 2000, the
appeals court affirmed the decision of the CTA.5
The appeals court subsequently denied
petitioner's motion for reconsideration.6 Hence
this petition.
The sole issue in this case is whether petitioner's
claim is barred by prescription. The resolution of
this question requires determination of when the
two-year period of prescription under 292 of the
Tax Code started to run. This provision states:
Recovery of tax erroneously or illegally collected.
No suit or proceedings 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 excessive 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
begun after the expiration of two 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 written 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.
There is no dispute that FBTC ceased operations
on June 30, 1985 upon its merger with petitioner
BPI. The merger was approved by the Securities
and Exchange Commission on July 1, 1985.
Petitioner contends, however that its claim for
refund has yet prescribed because the two-year
prescriptive period commenced to run only after it
had filed FBTC's Final Adjustment Return on April
15 1986, pursuant to 46(a) of the National
Internal Revenue Code of 1977 (the law
applicable at the time of this transaction) which
provided that
Corporation returns. (a) Requirement. Every
corporation, subject to the tax herein imposed,
except foreign corporations not engaged in trade
or business in the Philippines shall render, in
duplicate, a true and accurate quarterly income
tax return and final or adjustment return in
accordance with the provisions of Chapter X of
this Title. The return shall be filed by the
president, vice-president, or other principal
officer, and shall be sworn to by such officer and
by the treasurer or assistant treasurer.
On the other hand, the Court of Tax Appeals ruled
that the prescriptive period should be counted
from July 31, 1985, 30 days after the approval by
the SEC of the plan of dissolution in view of 78

of the Code which provided that
Every corporation shall, within thirty days after
the adoption by the corporation of a resolution or
plan for the dissolution of the corporation or for
the liquidation of the whole or any part of its
capital stock, including corporations which have
been notified of the possible involuntary
dissolution by the Securities and Exchange
Commission, render a correct return to the
Commission of Internal Revenue, verified under
oath, setting forth the terms of such resolution or
plan and such other information as the Minister of
Finance shall, by regulations, prescribe. The
dissolving corporation prior to the issuance of the
Certificate of Dissolution by the Securities and
Exchange Commission shall secure a certificate
of tax clearance from the Bureau of Internal
Revenue which certificate shall be submitted to
the Securities and Exchange Commission.
Failure to render the return and secure the
certificate of tax clearance as above-mentioned
shall subject the officer (s) of the corporation
required by law to file the return under Section
46(a) of this Code, to a fine of not less than Five
Thousand Pesos or imprisonment of not less than
two years and shall make them liable for all
outstanding or unpaid tax liabilities of the
dissolving corporation.
Its ruling was sustained by the Court of Appeals.
After due consideration of the parties' arguments,
we are of the opinion that, in case of the
dissolution of a corporation, the period of
prescription should be reckoned from the date of
filing of the return required by 78 of the Tax
Code. Accordingly, we hold that petitioner's claim
for refund is barred by prescription.
First. Generally speaking, it is the Final
Adjustment Return, in which amounts of the
gross receipts and deductions have been audited
and adjusted, which is reflective of the results of
the operations of a business enterprise. It is only
when the return, covering the whole year, is filed
that the taxpayer will be able to ascertain whether
a tax is still due or a refund can be claimed based
on the adjusted and audited figures.7 Hence, this
Court has ruled that at the earliest, the two-year
prescriptive period for claiming a refund
commences to run on the date of filing of the
adjusted final tax return.8
In the case at bar, however, the Court of Tax
Appeals, applying 78 of the Tax Code, held:
Before this Court can be rule on the issue of
prescription, it is noteworthy to point out that
based on the financial statements of FBTC and
the independent auditor's opinion (Exh. "A-7" to
"A-17"), FBTC operates on a calendar year basis.
Its twelve (12) months accounting period was
shortened at the time it was merged with BPI.
Thereby, losing its corporate existence on July 1,
1985 when the Articles of Merger was approved
by the Security and Exchange Commission.
44
Thus, respondent('s) stand that FBTC operates
on a fiscal year basis, based on its income tax
return, holds no ground. Third Court believes that
FBTC is operating on a calendar year period
based on the audited financial statements and
the opinion thereof. The fiscal period ending June
30, 1985 on the upper left corner of the income
tax return can be concluded as an error on the
part of FBTC. It should have been for the six
month period ending June 30, 1985. It should
also be emphasized that "where one corporation
succeeds another both are separate entities and
the income earned by the predecessor
corporation before organization of its successor is
not income to the successor" (Mertens, Law of
Federal Income Taxation, Vol. 7 S 38.36).
Ruling now on the issue of prescription, this Court
finds that the petition for review is filed out of
time. FBTC, after the end of its corporate life on
June 30, 1985, should have filed its income tax
return within thirty days after the cessation of its
business or thirty days after the approval of the
Articles of Merger. This is bolstered by Sec. 78 of
the tax Code and under Sec. 244 of Revenue
Regulation No. 29
As the FBTC did not file its quarterly income tax
returns for the year 1985, there was no need for it
to file a Final adjustment Return because there
was nothing for it to adjust or to audit. After it
ceased operations on June 30, 1985, its taxable
year was shortened to six months, from January
1, 1985 to June 30, 1985 The situation of FBTC
is precisely what was contemplated under 78 of
the Tax Code. It thus became necessary for
FBTC to file its income tax return within 30 days
after approval by the SEC of its plan or resolution
of dissolution. Indeed, it would be absurd for
FBTC to wait until the fifteenth day of April, or
almost 10 months after it ceased its operations,
before filing its income tax return.
Thus, 46(a) of the Tax Code applies only to
instances in which the corporation remains
subsisting and its business operations are
continuing. In instances in which the corporation
is contemplating dissolution, 78 of the Tax Code
applies. It is a rule of statutory construction that
"[w]here there is in the same statute a particular
enactment and also a general one which in its
most comprehensive sense would include what is
embraced in the former, the particular enactment
must be operative, and the general enactment
must be taken to affect only such cases within its
general language as are not within the provisions
of the particular enactment.10
Petitioner argues that to hold, as the Court of Tax
Appeals and the Court of Appeals do, that 78
applies in case a corporation contemplates
dissolution would lead to absurd results. It
contends that it is not feasible for the certified
public accountants to complete their report and
audited financial statements, which are required
to be submitted together with the plan of
dissolution to the SEC, within the period

contemplated by 78. It maintains that, in turn,
the SEC would not have sufficient time to process
the papers considering that 78 also requires the
submission of a tax clearance certificate before
the SEC can approve the plan of dissolution.
As the Court of Tax Appeals observed, however,
petitioner could have asked for an extension of
time of file its income tax return under 47 of the
NIRC which provides:
Extension of time to file returns. The
Commissioner of Internal Revenue may, in
meritorious cases, grant a reasonable extension
of time for filing returns of income (or final and
adjustment returns in the case of corporations),
subject to the provisions of section fifty-one of
this Code.
Petitioner further argues that the filing of a Final
Adjustment Return would fall due on July 30,
1985, even before the due date for filing the
quarterly return. This argument begs the
question. It assumes that a quarterly return was
required when the fact is that, because its taxable
year was shortened, the FBTC did not have to file
a quarterly return. In fact, petitioner presented no
evidence that the FBTC ever filed such quarterly
return in 1985.
Finally, petitioner cites a hypothetical situation
wherein the directors of a corporation would
convene on June 30, 2000 to plan the dissolution
of the corporation on December 31, 2000, but
would submit the plan for dissolution earlier with
the SEC, which, in turn, would approve the same
on October 1, 2000. Following 78 of the Tax
Code, the corporation would be required to
submit its complete return on October 31, 2000,
although its actual dissolution would take place
only on December 31, 2000.
Suffice it to say that such a situation may likewise
be remedied by resort to 47 of the Tax Code.
The corporation can ask for an extension of time
to file a complete income tax return until
December 31, 2000, when it would cease
operations. This would obviate any difficulty
which may arise out of the discrepancies not
covered by 78 of the Tax Code.
In any case, as held in Commissioner of Internal
Revenue v. Santos,11 "Debatable questions are
for the legislature to decide. The courts do not sit
to resolve the merits of conflicting issues."
Second. Petitioner contends that what 78
required was an information return, not an
income tax return. It cites Revenue Memorandum
Circular No. 14-85, of then Acting Commissioner
of Internal Revenue Ruben B. Ancheta, referring
to an "information return" in interpreting Executive
Order No. 1026, which amended 78.12
The contention has no merit. The circular in
question must be considered merely as an
administrative interpretation of the law which in
no case is binding on the courts.13 The opinion in
question cannot be given any effect inasmuch as
45
it is contrary to 244 of Revenue Regulation No. 2,
as amended, which was issued by the Minister of
Finance pursuant to the authority to him by 78 of
the Tax Code. This provision states:
SEC. 244. Return of corporations contemplating
dissolution or retiring from business. All
corporations, partnership joint accounts and
associations, contemplating dissolution or retiring
from business without formal dissolution shall,
within 30 days after the approval of such
resolution authorizing their dissolution, and within
the same period after their retirement from
business, file their income tax returns covering
the profit earned or business done by them from
the beginning of the year up to the date of such
dissolution or retirement and pay the
corresponding income tax due thereon upon
demand by the Commissioner of Internal
Revenue
This regulation prevails over the memorandum
circular of the Acting Commissioner of Internal
Revenue, which petitioner invokes.
Thus, as required by 244 of Revenue
Regulation No. 2, any corporation contemplating
dissolution must submit tax return on the income
earned by it from the beginning of the year up to
the date of its dissolution or retirement and pay
the corresponding tax due upon demand by the
Commissioner of Internal Revenue. Nothing in
78 of the Tax Code limited the return to be filed
by the corporation concerned to a mere
information return.
It is noteworthy that 78 of the Tax Code was
substantially reproduced first in 45 (c), of the
amendments to the same tax Code, and later in
52 (C) of the National Internal Revenue Code of
1997. Through all the re-enactments of the law,
there has been no change in the authority
granted to the Secretary (formerly Minister) of
Finance to require corporations to submit such
other information as he may prescribe. Indeed,
Revenue Regulation No. 2 had been in existence
prior to these amendments. Had Congress
intended only information returns, it would have
expressly provided so.
Third. Considering that 78 of the Tax Code, in
relation to 244 of Revenue Regulation No. 2
applies to FBTC, the two-year prescriptive period
should be counted from July 30, 1985, i.e., 30
days after the approval by the SEC of its plan for
dissolution. In accordance with 292 of the Tax
Code, July 30, 1985 should be considered the
date of payment by FBTC of the taxes withheld
on the earned income. Consequently, the twoyear period of prescription ended on July 30,
1987. As petitioner's claim for tax refund before
the Court of Tax Appeals was filed only on
December 29, 1987, it is clear that the claim is
barred by prescription.
WHEREFORE, the petition is DENIED for lack of
merit.1wphi1.nt
SO ORDERED.
THIRD DIVISION
COMMISSIONER OF
INTERNAL REVENUE,
G.R. No.
178490
Petitioner,
Present:
YNARESSANTIAGO,
J.,
- versus -
BANK OF THE
PHILIPPINE ISLANDS,
Respondent.
Chairperso
n,
CHICONAZARIO,
VELASCO,
JR.,
NACHURA,
and
PERALTA,
JJ.
Promulgated:
July 7, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review assailing
the Decision[if !supportFootnotes][1][endif] dated 29 April
2005 and the Resolution dated 20 April 2007 of
the Court of Appeals in CA-G.R. SP No. 77655,
which annulled and set aside the Decision dated
12 March 2003 of the Court of Tax Appeals (CTA)
in CTA Case No. 6276, wherein the CTA held that
respondent Bank of the Philippine Islands (BPI)
already exercised the irrevocable option to carry
over its excess tax credits for the year 1998 to
the succeeding years 1999 and 2000 and was,
therefore, no longer entitled to claim the refund or
issuance of a tax credit certificate for the amount
thereof.
On 15 April 1999, BPI filed with the
Bureau of Internal Revenue (BIR) its final
adjusted Corporate Annual Income Tax Return
(ITR) for the taxable year ending on 31
December 1998, showing a taxable income of
P1,773,236,745.00 and a total tax due of
P602,900,493.00.
46
For the same taxable year 1998, BPI

already made income tax payments for the first
three quarters, which amounted to
P563,547,470.46.[if !supportFootnotes][2][endif] The bank
also received income in 1998 from various third
persons, which, were already subjected to
expanded withholding taxes amounting to
P7,685,887.90. BPI additionally acquired foreign
tax credit when it paid the United States
government taxes in the amount of $151,467.00,
or the equivalent of P6,190,014.46, on the
operations of formers New York Branch. Finally,
respondent BPI had carried over excess tax
credit from the prior year, 1997, amounting to
P59,424,222.00.
Crediting the aforementioned
amounts against the total tax due from it at the
end of 1998, BPI computed an overpayment to
the BIR of income taxes in the amount of
P33,947,101.00. The computation of BPI is
reproduced below:
Total Income Taxes
Due
P602,900,493.00
Less: Tax Credits:
Prior years tax credits

P59,424,222.00
Quarterly payments
563,547,470.46
Creditable taxes withheld
7,685,887.90
Foreign tax credit
6,190,014.00
636,847,594.00
------------------------------------Net Tax Payable/
(Refundable)
P(33,947,101.00)
BPI opted to carry over its 1998

excess tax credit, in the amount of
P33,947,101.00, to the succeeding taxable year
ending 31 December 1999.[if !supportFootnotes][3][endif] For
1999, however, respondent BPI ended up with (1)
a net loss in the amount of P615,742,102.00; (2)
its still unapplied excess tax credit carried over
from 1998, in the amount of P33,947,101.00; and
(3) more excess tax credit, acquired in 1999, in
the sum of P12,975,750.00. So in 1999, the total
excess tax credits of BPI increased to
P46,922,851.00, which it once more opted to
carry over to the following taxable year.
For the taxable year ending 31

December 2000, respondent BPI declared in its
Corporate Annual ITR: (1) zero taxable income;
(2) excess tax credit carried over from 1998 and
1999, amounting to P46,922,851.00; and (3)
even more excess tax credit, gained in 2000, in
the amount of P25,207,939.00. This time, BPI
failed to indicate in its ITR its choice of whether to
carry over its excess tax credits or to claim the
refund of or issuance of a tax credit certificate for
the amounts thereof.
On 3 April 2001, BPI filed with
petitioner Commissioner of Internal Revenue
(CIR) an administrative claim for refund in the
amount of P33,947,101.00, representing its
excess creditable income tax for 1998.
The CIR failed to act on the claim for
tax refund of BPI. Hence, BPI filed a Petition for
Review before the CTA, docketed as CTA Case
No. 6276.
The CTA promulgated its Decision in
CTA Case No. 6276 on 12 March 2003, ruling
therein that since BPI had opted to carry over its
1998 excess tax credit to 1999 and 2000, it was
barred from filing a claim for the refund of the
same.
The CTA relied on the irrevocability
rule laid down in Section 76 of the National
Internal Revenue Code (NIRC) of 1997, which
states that once the taxpayer opts to carry over
and apply its excess income tax to succeeding
taxable years, its option shall be irrevocable for
that taxable period and no application for tax
refund or issuance of a tax credit shall be allowed
for the same.
The CTA Decision adjudged:
A close
scrutiny of the 1998
income tax return of [BPI]
reveals that it opted to
carry over its excess tax
credits, the amount
subject of this claim, to
the succeeding taxable
year by placing an x
mark on the
corresponding box of
said return (Exhibits A-2
& 3-a). For the year
1999, [BPI] again
manifested its intention to
carry over to the
succeeding taxable
period the subject claim
together with the current
excess tax credits
47
(Exhibit J). Still unable to
apply its prior years
excess credits in 1999 as
it ended up in a net loss
position, petitioner again
carried over the said
excess credits in the year
2000 (Exhibit K).
entitled to claim for a

refund or issuance of a
tax credit certificate.[if !
In the end, the CTA decreed:
The court
already categorically
ruled in a number of
cases that once the
option to carry-over and
apply the excess
quarterly income tax
against the income tax
due for the taxable
quarters of the
succeeding taxable years
has been made, such
option shall be
considered irrevocable
and no application for
cash refund or issuance
of a tax credit certificate
shall be allowed
therefore (Pilipinas
Transport Industries vs.
Commissioner of Internal
Revenue, CTA Case No.
6073, dated March 1,
2002; Pilipinas Hino, Inc.
vs. Commissioner of
Internal Revenue, CTA
Case No. 6074, dated
April 19, 2002; Philam
Asset Management, Inc.
vs. Commissioner of
Internal Revenue, CTA
Case No. 6210, dated
May 2, 2002; The
Philippine Banking
Corporation (now known
as Global Business
Bank, Inc.) vs.
Commissioner of Internal
Revenue, CTA
Resolution, CTA Case
No. 6280, August 16,
2001. Since [BPI]
already exercised the
irrevocable option to
carry over its excess tax
credits for the year 1998
to the succeeding years
1999 and 2000, it is,
therefore, no longer
IN VIEW OF
ALL THE FOREGOING,
the instant petition for
review is hereby DENIED
for lack of merit.[if !
BPI filed a Motion for

Reconsideration of the foregoing Decision, but
the CTA denied the same in a Resolution dated 3
June 2003.
BPI filed an appeal with the Court of
Appeals, docketed as CA-G.R. SP No. 77655.
On 29 April 2005, the Court of Appeals rendered
its Decision, reversing that of the CTA and
holding that BPI was entitled to a refund of the
excess income tax it paid for 1998.
The Court of Appeals conceded that
BPI indeed opted to carry over its excess tax
credit in 1998 to 1999 by placing an x mark on
the corresponding box of its 1998 ITR.
Nonetheless, there was no actual carrying over of
the excess tax credit, given that BPI suffered a
net loss in 1999, and was not liable for any
income tax for said taxable period, against which
the 1998 excess tax credit could have been
applied.
The Court of Appeals added that
even if Section 76 was to be construed strictly
and literally, the irrevocability rule would still not
bar BPI from seeking a tax refund of its 1998
excess tax credit despite previously opting to
carry over the same. The phrase for that taxable
period qualified the irrevocability of the option of
BIR to carry over its 1998 excess tax credit to
only the 1999 taxable period; such that, when the
1999 taxable period expired, the irrevocability of
the option of BPI to carry over its excess tax
credit from 1998 also expired.
The Court of Appeals further
reasoned that the government would be unjustly
48
enriched should the appellate court hold that the
irrevocability rule barred the claim for refund of a
taxpayer, who previously opted to carry-over its
excess tax credit, but was not able to use the
same because it suffered a net loss in the
succeeding year.
Finally, the appellate court cited BPIFamily Savings Bank, Inc. v. Court of Appeals[if !
wherein this Court held that if a
taxpayer suffered a net loss in a year, thus,
incurring no tax liability to which the tax credit
from the previous year could be applied, there
was no reason for the BIR to withhold the tax
refund which rightfully belonged to the taxpayer.[if !
ENTITLED TO THE
CLAIMED TAX REFUND.
The Court finds merit in the instant

Petition.
The Court of Appeals erred in relying
on BPI-Family, missing significant details that
rendered said case inapplicable to the one at bar.
In a Resolution dated 20 April 2007,

the Court of Appeals denied the Motion for
Reconsideration of the CIR.[if !supportFootnotes][8][endif]
Hence, the CIR filed the instant
Petition for Review, alleging that:
I

COMMITTED A
REVERSIBLE ERROR
IN HOLDING THAT THE
IRREVOCABILITY
RULE UNDER
SECTION 76 OF THE
TAX CODE DOES NOT
OPERATE TO BAR
PETITIONER FROM
ASKING FOR A TAX
REFUND.
II

COMMITTED GRAVE
ERROR WHEN IT
REVERSED AND SET
ASIDE THE DECISION
OF THE COURT OF TAX
APPEALS AND HELD
THAT RESPONDENT IS
In BPI-Family, therein petitioner BPIFamily declared in its Corporate Annual ITR for
1989 excess tax credits of P185,001.00 from
1988 and P112,491.00 from 1989, totaling
P297,492.00. BPI-Family clearly indicated in the
same ITR that it was carrying over said excess
tax credits to the following year. But on 11
October 1990, BPI-Family filed a claim for refund
of its P112,491.00 tax credit from 1989. When
no action from the BIR was forthcoming, BPIFamily filed its claim with the CTA. The CTA
denied the claim for refund of BPI-Family on the
ground that, since the bank declared in its 1989
ITR that it would carry over its tax credits to the
following year, it should be presumed to have
done so. In its Motion for Reconsideration filed
with the CTA, BPI-Family submitted its final
adjusted ITR for 1989 showing that it incurred
P52,480,173.00 net loss in 1990. Still, the CTA
denied the Motion for Reconsideration of BPIFamily. The Court of Appeals likewise denied the
appeal of BPI-Family and merely affirmed the
judgment of the CTA. The Court, however,
reversed the CTA and the Court of Appeals.
This Court decided to grant the claim
for refund of BPI-Family after finding that the
bank had presented sufficient evidence to prove
that it incurred a net loss in 1990 and, thus, had
no tax liability to which its tax credit from 1989
could be applied. The Court stressed in BPI
Family that the undisputed fact is that [BPIFamily] suffered a net loss in 1990; accordingly, it
incurred no tax liability to which the tax credit
could be applied. Consequently, there is no
reason for the BIR and this Court to withhold the
tax refund which rightfully belongs to the [BPIFamily]. It was on the basis of this fact that the
Court granted the appeal of BPI-Family, brushing
aside all procedural and technical objections to
the same through the following pronouncements:
Finally,
respondents argue that
tax refunds are in the
nature of tax exemptions
49
and are to be construed
strictissimi juris against
the claimant. Under the
facts of this case, we
hold that [BPI-Family]
has established its
claim. [BPI-Family] may
have failed to strictly
comply with the rules of
procedure; it may have
even been negligent.
These circumstances,
however, should not
compel the Court to
disregard this cold,
undisputed fact: that
petitioner suffered a net
loss in 1990, and that it
could not have applied
the amount claimed as
tax credits.
prevailing tax law then was the NIRC of 1985,

Section 79[if !supportFootnotes][10][endif] of which provided:
Sec. 79.
Final Adjustment Return. Every corporation liable to
tax under Section 24 shall
file a final adjustment
return covering the total
net income for the
preceding calendar or
fiscal year. If the sum of
the quarterly tax payments
made during the said
taxable year is not equal
to the total tax due on the
entire taxable net income
of that year the
corporation shall either:
(a)
Pay
the excess tax still due; or
Substantial
justice, equity and fair
play are on the side of
[BPI-Family].
Technicalities and
legalisms, however
exalted, should not be
misused by the
government to keep
money not belonging to it
and thereby enrich itself
at the expense of its lawabiding citizens. If the
State expects its
taxpayers to observe
fairness and honesty in
paying their taxes, so
must it apply the same
standard against itself in
refunding excess
payments of such taxes.
Indeed, the State must
lead by its own example
of honor, dignity and
uprightness.[if !supportFootnotes]
[9][endif]
It is necessary for this Court,

however, to emphasize that BPI-Family involved
tax credit acquired by the bank in 1989, which it
initially opted to carry over to 1990. The
(b)
Be
refunded the excess
amount paid, as the case
may be.
In case the
corporation is entitled to a
refund of the excess
estimated quarterly
income taxes-paid, the
refundable amount shown
on its final adjustment
return may be credited
against the estimated
liabilities for the taxable
quarters of the succeeding
taxable year. (Emphases
ours.)
50
By virtue of the afore-quoted
provision, the taxpayer with excess income tax
was given the option to either (1) refund the
amount; or (2) credit the same to its tax liability
for succeeding taxable periods.
Section 79 of the NIRC of 1985 was
reproduced as Section 76 of the NIRC of 1997,[if !
with the addition of one
important sentence, which laid down the
irrevocability rule:
Section 76.
Final Adjustment Return.
- Every corporation liable
to tax under Section 24
shall file a final
adjustment return
covering the total net
income for the preceding
calendar or fiscal year. If
the sum of the quarterly
tax payments made
during the said taxable
year is not equal to the
total tax due on the entire
taxable net income of
that year the corporation
shall either:
(a) Pay the

excess tax still due; or
(b) Be
refunded the excess
amount paid, as the case
may be.
In case the
corporation is entitled to
a refund of the excess
estimated quarterly
income taxes paid, the
refundable amount
shown on its final
adjustment return may be
credited against the
estimated quarterly
income tax liabilities for
the taxable quarters of
the succeeding taxable
years. Once the option
to carry-over and apply
the excess quarterly
income tax against
income tax due for the
taxable quarters of the
succeeding taxable
years has been made,
such option shall be
considered irrevocable
for that taxable period
and no application for
tax refund or issuance
of a tax credit
certificate shall be
allowed therefor.
(Emphases ours.)
When BPI-Family was decided by

this Court, it did not yet have the irrevocability
rule to consider. Hence, BPI-Family cannot be
cited as a precedent for this case.
The factual background of Philam
Asset Management, Inc. v. Commissioner of
Internal Revenue,[if !supportFootnotes][12][endif] cited by the
CIR, is closer to the instant Petition. Both involve
tax credits acquired and claims for refund filed
more than a decade after those in BPI-Family, to
which Section 76 of the NIRC of 1997 already
apply.
The Court, in Philam, recognized the
two options offered by Section 76 of the NIRC of
1997 to a taxable corporation whose total
quarterly income tax payments in a given taxable
year exceeds its total income tax due. These
options are: (1) filing for a tax refund or (2)
availing of a tax credit. The Court further
explained:
The first
option is relatively simple.
Any tax on income that is
paid in excess of the
amount due the
government may be
refunded, provided that a
taxpayer properly applies
for the refund.
51
The second
option works by applying
the refundable amount, as
shown on the [Final
Adjustment Return (FAR)]
of a given taxable year,
against the estimated
liabilities of the succeeding
taxable year.
These two options under Section 76 are

alternative in nature. The choice of one
precludes the other. Indeed, in Philippine Bank
of Communications v. Commissioner of Internal
Revenue, the Court ruled that a corporation must
signify its intention -- whether to request a tax
refund or claim a tax credit -- by marking the
corresponding option box provided in the FAR.
While a taxpayer is required to mark its choice in
the form provided by the BIR, this requirement is
only for the purpose of facilitating tax collection.
One cannot
get a tax refund and a tax
credit at the same time for
the same excess income
taxes paid.[if !supportFootnotes][13]
[endif]
xxx
The Court categorically declared in

Philam that: Section 76 remains clear and
unequivocal. Once the carry-over option is
taken, actually or constructively, it becomes
irrevocable. It mentioned no exception or
qualification to the irrevocability rule.
Hence, the controlling factor for the
operation of the irrevocability rule is that the
taxpayer chose an option; and once it had
already done so, it could no longer make another
one. Consequently, after the taxpayer opts to
carry-over its excess tax credit to the following
taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant.
Section 76 of the NIRC of 1997 is explicit in
stating that once the option to carry over has
been made, no application for tax refund or
issuance of a tax credit certificate shall be
allowed therefor.
The last sentence of Section 76 of

the NIRC of 1997 reads: Once the option to
carry-over and apply the excess quarterly income
tax against income tax due for the taxable
quarters of the succeeding taxable years has
been made, such option shall be considered
irrevocable for that taxable period and no
application for tax refund or issuance of a tax
credit certificate shall be allowed therefor. The
phrase for that taxable period merely identifies
the excess income tax, subject of the option, by
referring to the taxable period when it was
acquired by the taxpayer. In the present case,
the excess income tax credit, which BPI opted to
carry over, was acquired by the said bank during
the taxable year 1998. The option of BPI to carry
over its 1998 excess income tax credit is
irrevocable; it cannot later on opt to apply for a
refund of the very same 1998 excess income tax
credit.
The Court of Appeals mistakenly
understood the phrase for that taxable period as
a prescriptive period for the irrevocability rule.
This would mean that since the tax credit in this
case was acquired in 1998, and BPI opted to
carry it over to 1999, then the irrevocability of the
option to carry over expired by the end of 1999,
leaving BPI free to again take another option as
regards its 1998 excess income tax credit. This
construal effectively renders nugatory the
irrevocability rule. The evident intent of the
legislature, in adding the last sentence to Section
76 of the NIRC of 1997, is to keep the taxpayer
from flip-flopping on its options, and avoid
confusion and complication as regards said
taxpayers excess tax credit. The interpretation
of the Court of Appeals only delays the flipflopping to the end of each succeeding taxable
period.
The Court similarly disagrees in the
declaration of the Court of Appeals that to deny
the claim for refund of BPI, because of the
irrevocability rule, would be tantamount to unjust
enrichment on the part of the government. The
Court addressed the very same argument in
Philam, where it elucidated that there would be
no unjust enrichment in the event of denial of the
claim for refund under such circumstances,
because there would be no forfeiture of any
amount in favor of the government. The amount
being claimed as a refund would remain in the
account of the taxpayer until utilized in
succeeding taxable years,[if !supportFootnotes][14][endif] as
provided in Section 76 of the NIRC of 1997. It is
worthy to note that unlike the option for refund of
excess income tax, which prescribes after two
years from the filing of the FAR, there is no
prescriptive period for the carrying over of the
same. Therefore, the excess income tax credit of
BPI, which it acquired in 1998 and opted to carry
52
over, may be repeatedly carried over to
succeeding taxable years, i.e., to 1999, 2000,
2001, and so on and so forth, until actually
applied or credited to a tax liability of BPI.
Finally, while the Court, in Philam,
was firm in its position that the choice of option as
regards the excess income tax shall be
irrevocable, it was less rigid in the determination
of which option the taxpayer actually chose. It
did not limit itself to the indication by the taxpayer
of its option in the ITR.
Thus, failure of the taxpayer to make
an appropriate marking of its option in the ITR
does not automatically mean that the taxpayer
has opted for a tax credit. The Court ratiocinated
in G.R. No. 156637[if !supportFootnotes][15][endif] of Philam:
One cannot
get a tax refund and a tax
credit at the same time
for the same excess
income taxes paid.
Failure to signify ones
intention in the FAR
does not mean outright
barring of a valid
request for a refund,
should one still choose
this option later on. A
tax credit should be
construed merely as an
alternative remedy to a
tax refund under Section
76, subject to prior
verification and approval
by respondent.
The reason for requiring that a choice be

made in the FAR upon its filing is to ease tax
administration, particularly the self-assessment
and collection aspects. A taxpayer that makes a
choice expresses certainty or preference and
thus demonstrates clear diligence. Conversely, a
taxpayer that makes no choice expresses
uncertainty or lack of preference and hence
shows simple negligence or plain oversight.
xxxx
x x x Despite
the failure of [Philam] to
make the appropriate

marking in the BIR form,
the filing of its written
claim effectively serves
as an expression of its
choice to request a tax
refund, instead of a tax
credit. To assert that any
future claim for a tax
refund will be instantly
hindered by a failure to
signify ones intention in
the FAR is to render
nugatory the clear
provision that allows for a
two-year prescriptive
period.[if !supportFootnotes][16][endif]
(Emphases ours.)
Philam reveals a meticulous consideration by the

Court of the evidence submitted by the parties
and the circumstances surrounding the
taxpayers option to carry over or claim for
refund. When circumstances show that a choice
has been made by the taxpayer to carry over the
excess income tax as credit, it should be
respected; but when indubitable circumstances
clearly show that another choice a tax refund
is in order, it should be granted. Technicalities
and legalisms, however exalted, should not be
misused by the government to keep money not
belonging to it and thereby enrich itself at the
expense of its law-abiding citizens.
Therefore, as to which option the
taxpayer chose is generally a matter of
evidence. It is axiomatic that a claimant has the
burden of proof to establish the factual basis of
his or her claim for tax credit or refund. Tax
refunds, like tax exemptions, are construed
strictly against the taxpayer.[if !supportFootnotes][17][endif]
In the Petition at bar, BPI was
unable to discharge the burden of proof
necessary for the grant of a refund. BPI
expressly indicated in its ITR for 1998 that it was
carrying over, instead of refunding, the excess
income tax it paid during the said taxable year.
BPI consistently reported the said amount in its
ITRs for 1999 and 2000 as credit to be applied to
any tax liability the bank may incur; only, no such
opportunity arose because it suffered a net loss
53
in 1999 and incurred zero tax liability in 2000. In
G.R. No. 162004 of Philam, the Court found:
First, the fact
that it filled out the
portion Prior Years
Excess Credits in its
1999 FAR means that it
categorically availed itself
of the carry-over option.
In fact, the line that
precedes that phrase in
the BIR form clearly
states Less: Tax
Credits/Payments. The
contention that it merely
filled out that portion
because it was a
requirement and that to
have done otherwise
would have been
tantamount to falsifying
the FAR is a long shot.
The FAR is
the most reliable
firsthand evidence of
corporate acts pertaining
to income taxes. In it are
found the itemization and
summary of additions to
and deductions from
income taxes due.
These entries are not
without rhyme or reason.
They are required,
because they facilitate
the tax administration
process.[if !supportFootnotes][18]
The choice by BPI of the option to

carry over its 1998 excess income tax credit to
succeeding taxable years, which it explicitly
indicated in its 1998 ITR, is irrevocable,
regardless of whether it was able to actually
apply the said amount to a tax liability. The
reiteration by BPI of the carry over option in its
ITR for 1999 was already a superfluity, as far as
its 1998 excess income tax credit was
concerned, given the irrevocability of the initial
choice made by the bank to carry over the said
amount. For the same reason, the failure of BPI
to indicate any option in its ITR for 2000 was
already immaterial to its 1998 excess income tax
credit.
WHEREFORE, the instant Petition for Review of
the Commissioner for Internal Revenue is
GRANTED. The Decision dated 29 April 2005
and the Resolution dated 20 April 2007 of the
Court of Appeals in CA-G.R. SP No. 77655 are
REVERSED and SET ASIDE. The Decision
dated 12 March 2003 of the Court of Tax Appeals
in CTA Case No. 6276, denying the claim of
respondent Bank of the Philippine Islands for the
refund of its 1998 excess income tax credits, is
REINSTATED. No costs.
SO ORDERED.
FIRST DIVISION
COMMISSIONER OF
No. 149671
INTERNAL REVENUE,
Petitioner,
Present:
G.R.
[endif]
Chairman,
- versus Ynares-Santiago,
Austria-Martinez,
BPI itself never denied that its
original intention was to carry over the excess
income tax credit it acquired in 1998, and only
chose to refund the said amount when it was
unable to apply the same to any tax liability in the
succeeding taxable years. There can be no
doubt that BPI opted to carry over its excess
income tax credit from 1998; it only subsequently
changed its mind which it was barred from
doing by the irrevocability rule.
Callejo, Sr.,
and
Chico-Nazario, JJ
SEKISUI JUSHI
Promulgated:
PHILIPPINES, INC.,
Respondent.
July 21, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
54
-- -- -- -- -- -- x
RE, the instant Petition

for Review is
PARTIALLY GRANTED.
[Petitioner] is hereby
ordered to refund or to
issue a Tax Credit
Certificate in favor of the
[Respondent] in the
amount of P4,377,102.26
representing excess
input taxes paid for the
period covering January
1 to June 30, 1997.[if !
DECISION
PANGANIBAN, CJ:
B
usiness enterprises registered with the Philippine
Export Zone Authority (PEZA) may choose
between two fiscal incentive schemes: (1) to pay
a five percent preferential tax rate on its gross
income and thus be exempt from all other taxes;
or (b) to enjoy an income tax holiday, in which
case it is not exempt from applicable national
revenue taxes including the value-added tax
(VAT). The present respondent, which availed
itself of the second tax incentive scheme, has
proven that all its transactions were export sales.
Hence, they should be VAT zero-rated.
The Facts
The uncontested[if !supportFootnotes][6][endif]
facts are narrated by the CA as follows:
The Case
Before us is a Petition for Review[if !
under Rule 45 of the Rules of
Court, challenging the August 16, 2001
Decision[if !supportFootnotes][2][endif] of the Court of Appeals
(CA) in CA-GR SP No. 64679. The assailed
Decision upheld the April 26, 2001 Decision[if !
of the Court of Tax Appeals (CTA)
in CTA Case No. 5751. The CA Decision
disposed as follows:
WHEREFO
RE, premises
considered, the present
petition for review is
hereby DENIED DUE
COURSE and
accordingly DISMISSED
for lack of merit. The
Decision dated April 26,
2001 of the Court of Tax
Appeals in CTA Case No.
5751 is hereby
AFFIRMED and
UPHELD.[if !supportFootnotes][4]
[endif]
On the other hand, the dispositive

portion of the CTA Decision reads:
WHEREFO
Respondent
is a domestic corporation
duly organized and
existing under and by
virtue of the laws of the
Philippines with principal
office located at the
Special Export
Processing Zone,
Laguna Technopark,
Bian, Laguna. It is
principally engaged in the
business of
manufacturing, importing,
exporting, buying, selling,
or otherwise dealing in,
at wholesale such goods
as strapping bands and
other packaging
materials and goods of
similar nature, and any
and all equipment,
materials, supplies used
or employed in or related
to the manufacture of
such finished products.
Having
registered with the
Bureau of Internal
Revenue (BIR) as a
55
value-added tax (VAT)
taxpayer, respondent
filed its quarterly returns
with the BIR, for the
period January 1 to June
30, 1997, reflecting
therein input taxes in the
amount of P4,631,132.70
paid by it in connection
with its domestic
purchase of capital
goods and services.
Said input taxes
remained unutilized since
respondent has not
engaged in any business
activity or transaction for
which it may be liable for
output tax and for which
said input taxes may be
credited.
On
November 11, 1998,
respondent filed with the
One-Stop-Shop InterAgency Tax Credit and
Duty Drawback Center of
the Department of
Finance (CENTER-DOF)
two (2) separate
applications for tax
credit/refund of VAT input
taxes paid for the period
January 1 to March 31,
1997 and April 1 to June
30, 1997, respectively.
There being no action on
its application for tax
credit/refund under
Section 112 (B) of the
1997 National Internal
Revenue Code (Tax
Code), as amended,
private respondent filed,
within the two (2)-year
prescriptive period under
Section 229 of said
Code, a petition for
review with the Court of
Tax Appeals on March
26, 1999.
Petitioner
filed its Answer to the

petition asseverating
that: (1) said claim for tax
credit/refund is subject to
administrative routinary
investigation by the BIR;
(2) respondent miserably
failed to show that the
amount claimed as VAT
input taxes were
erroneously collected or
that the same were
properly documented; (3)
taxes due and collected
are presumed to have
been made in
accordance with law,
hence, not refundable;
(4) the burden of proof is
on the taxpayer to
establish his right to a
refund in an action for tax
refund. Failure to
discharge such duty is
fatal to his action; (5)
respondent should show
that it complied with the
provisions of Section 204
in relation to Section 229
of the 1997 Tax Code;
and (6) claims for refund
are strictly construed
against the taxpayer as it
partakes of the nature of
a tax exemption. Hence,
petitioner prayed for the
denial of respondents
petition.[if !supportFootnotes][7]
[endif]
Ruling of the Court of Tax Appeals

The CTA ruled that respondent was
entitled to the refund. While the company was
registered with the PEZA as an ecozone and
was, as such, exempt from income tax, it availed
itself of the fiscal incentive under Executive Order
No. 226. It thereby subjected itself to other
internal revenue taxes like the VAT.[if !supportFootnotes][8]
[endif]
The CTA then found that only input taxes
amounting to P4,377,102.26 were duly
substantiated by invoices and Official Receipts,[if !
while those amounting to
P254,313.43 had not been sufficiently proven and
were thus disallowed.[if !supportFootnotes][10][endif]
56
Ruling of the Court of Appeals
an [e]cozone [e]xport
[e]nterprise, its business
is not subject to VAT
pursuant to Section 24 of
Republic Act No. 7916 in
relation to Section 103
(now Sec. 109) of the Tax
Code, as amended by
R.A. 7716.
The Court of Appeals upheld the

Decision of the CTA. According to the CA,
respondent had complied with the procedural and
substantive requirements for a claim by 1)
submitting receipts, invoices, and supporting
papers as evidence; 2) paying the subject input
taxes on capital goods; 3) not applying the input
taxes against any output tax liability; and 4) filing
the claim within the two-year prescriptive period
under Section 229 of the 1997 Tax Code.[if !
Hence, this Petition.[if !supportFootnotes][12]

[endif]
II.
The Court of Appeals erred in

not holding that since
respondent is EXEMPT
from Value-Added Tax
(VAT), the capital goods
and services it purchased
are considered not used
in VAT taxable business,
hence, is not allowed any
tax credit/refund on VAT
input tax previously paid
on such capital goods
pursuant to Section
4.106-1 of Revenue
Regulations No. 7-95,
and of input taxes paid
on services pursuant to
Section 4.103-1 of the
same regulations.
III.

not holding that tax
refunds being in the
nature of tax exemptions
are construed strictissimi
juris against claimants.[if !
The Issue
Petitioner raises this sole issue for
our consideration:
Whether or
not respondent is entitled
to the refund or issuance
of tax credit certificate in
the amount of
P4,377,102.26 as alleged
unutilized input taxes
paid on domestic
purchase of capital
goods and services for
the period covering
January 1 to June 30,
1997.[if !supportFootnotes][13][endif]
The Courts Ruling

The Petition has no merit.
Sole Issue:
Entitlement to Refund
To support the issue raised, petitioner

advances the following arguments:
I.

not holding that
respondent being
registered with the
Philippine Economic
Zone Authority (PEZA) as
These issues have previously been

addressed by this Court in Commissioner of
Internal Revenue v. Toshiba Information
Equipment (Phils.),[if !supportFootnotes][15][endif]
Commissioner of Internal Revenue v. Cebu Toyo
Corporation,[if !supportFootnotes][16][endif] and
Commissioner of Internal Revenue v. Seagate
57
Technology (Philippines).[if !supportFootnotes][17][endif]
An entity registered with the PEZA as
an ecozone[if !supportFootnotes][18][endif] may be covered by
the VAT system. Section 23 of Republic Act
7916, as amended, gives a PEZA-registered
enterprise the option to choose between two
fiscal incentives: a) a five percent preferential tax
rate on its gross income under the said law; or b)
an income tax holiday provided under Executive
Order No. 226 or the Omnibus Investment Code
of 1987, as amended. If the entity avails itself of
the five percent preferential tax rate under the
first scheme, it is exempt from all taxes, including
the VAT;[if !supportFootnotes][19][endif] under the second, it is
exempt from income taxes for a number of years,
but not from other national
internal revenue taxes like the VAT.[if !supportFootnotes][21]
On the other hand, since 100 percent

of the products of respondent are exported,[if !
all its transactions are deemed
export sales and are thus VAT zero-rated. It has
been shown that respondent has no output tax
with which it could offset its paid input tax.[if !
Since the subject input tax it
paid for its domestic purchases of capital goods
and services remained unutilized, it can claim a
refund for the input VAT previously charged by its
suppliers.[if !supportFootnotes][32][endif] The amount of
P4,377,102.26 is excess input taxes that justify a
refund.
WHEREFORE, the Petition is
DENIED and the assailed Decision AFFIRMED.
No costs, as petitioner is a government agency.
[endif]
SO ORDERED.
The CA and CTA found that
respondent had availed itself of the fiscal
incentive of an income tax holiday under
Executive Order No. 226. This Court respects
that factual finding. Absent a sufficient showing
of error, findings of the CTA as affirmed by the CA
are deemed conclusive.[if !supportFootnotes][22][endif]
Moreover, a perusal of the pleadings and
supporting documents before us indicates that
when it registered as a VAT-entity -- a fact
admitted by the parties -- respondent intended to
avail itself of the income tax holiday.[if !supportFootnotes]
[23][endif]
Verily, being a question of fact, the type of
fiscal incentive chosen cannot be a subject of this
Petition, which should raise only questions of law.
SECOND DIVISION
COMMISSIONER
OF INTERNAL
REVENUE,
Petitioner,
- versus -
By availing itself of the income tax

holiday, respondent became subject to the VAT.
It correctly registered as a VAT taxpayer, because
its transactions were not VAT-exempt.
Notably, while an ecozone is
geographically within the Philippines, it is deemed
a separate customs territory[if !supportFootnotes][24][endif]
and is regarded in law as foreign soil.[if !supportFootnotes]
[25][endif]
Sales by suppliers from outside the
borders of the ecozone to this separate customs
territory are deemed as exports[if !supportFootnotes][26][endif]
and treated as export sales.[if !supportFootnotes][27][endif]
These sales are zero-rated or subject to a tax
rate of zero percent.[if !supportFootnotes][28][endif]
Notwithstanding the fact that its
purchases should have been zero-rated,
respondent was able to prove that it had paid
input taxes in the amount of P4,377,102.26. The
CTA found, and the CA affirmed, that this amount
was substantially supported by invoices and
Official Receipts;[if !supportFootnotes][29][endif] and petitioner
has not challenged the computation. Accordingly,
this Court upholds the findings of the CTA and the
CA.
G.R. No. 178697

Present:
CARPIO, J.,
Chairperson,
LEONARDO-DE
CASTRO,
PERALTA,
ABAD, and
MENDOZA, JJ.
SONY
PHILIPPINES,
Promulgated:
INC.,
November 17, 2010
Respondent.
X
--------------------------------------------------------------------------------------X
DECISION
MENDOZA, J.:
This petition for review on certiorari
seeks to set aside the May 17, 2007 Decision
and the July 5, 2007 Resolution of the Court of
Tax Appeals En Banc[if !supportFootnotes][1][endif] (CTAEB), in C.T.A. EB No. 90, affirming the October
26, 2004 Decision of the CTA-First Division[if !
which, in turn, partially granted
the petition for review of respondent Sony
Philippines, Inc. (Sony). The CTA-First Division
58
decision cancelled the deficiency assessment
issued by petitioner Commissioner of Internal
Revenue (CIR) against Sony for Value Added Tax
(VAT) but upheld the deficiency assessment for
expanded withholding tax (EWT) in the amount of
P1,035,879.70 and the penalties for late
remittance of internal revenue taxes in the
amount of P1,269, 593.90.[if !supportFootnotes][3][endif]
Surcharge
Interest up to 3-31-2000
Compromise
Penalties Due
THE FACTS:
LATE REMITTANCE OF FINAL WITHHOLDING TAX
On November 24, 1998, the CIR

issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to
examine Sonys books of accounts and other
accounting records regarding revenue taxes for
the period 1997 and unverified prior years.
On December 6, 1999, a preliminary assessment
for 1997 deficiency taxes and penalties was
issued by the CIR which Sony protested.
Thereafter, acting on the protest, the CIR issued
final assessment notices, the formal letter of
demand and the details of discrepancies.[if !
Said details of the deficiency
taxes and penalties for late remittance of internal
revenue taxes are as follows:
(Assessment No. ST-LR2-97-0127-2000)
DEFICIENCY VALUE -ADDED TAX (VAT)

(Assessment No. ST-VAT-97-0124-2000)
Basic Tax Due
Add: Penalties
Compromise
Deficiency VAT Due
Basic Tax Due

Add: Penalties
Surcharge
Compromise
Penalties Due
LATE REMITTANCE OF INCOME PAYMENTS

Basic Tax Due
Add: Penalties
25 % Surcharge
Compromise
Penalties Due
DEFICIENCY EXPANDED WITHHOLDING TAX (EWT)

(Assessment No. ST-EWT-97-0125-2000)
GRAND TOTAL
Basic Tax Due

Add: Penalties
Deficiency EWT Due
Sony sought re-evaluation of the

aforementioned assessment by filing a protest on
February 2, 2000. Sony submitted relevant
documents in support of its protest on the 16th of
that same month.[if !supportFootnotes][6][endif]
DEFICIENCY OF VAT ON ROYALTY PAYMENTS
On October 24, 2000, within 30 days

after the lapse of 180 days from submission of
the said supporting documents to the CIR, Sony
filed a petition for review before the CTA.[if !
Compromise

Basic Tax Due
Add: Penalties
After trial, the CTA-First Division

disallowed the deficiency VAT assessment
59
because the subsidized advertising expense paid
by Sony which was duly covered by a VAT
invoice resulted in an input VAT credit. As regards
the EWT, the CTA-First Division maintained the
deficiency EWT assessment on Sonys motor
vehicles and on professional fees paid to general
professional partnerships. It also assessed the
amounts paid to sales agents as commissions
with five percent (5%) EWT pursuant to Section
1(g) of Revenue Regulations No. 6-85. The CTAFirst Division, however, disallowed the EWT
assessment on rental expense since it found that
the total rental deposit of P10,523,821.99 was
incurred from January to March 1998 which was
again beyond the coverage of LOA 19734.
Except for the compromise penalties, the CTAFirst Division also upheld the penalties for the
late payment of VAT on royalties, for late
remittance of final withholding tax on royalty as of
December 1997 and for the late remittance of
EWT by some of Sonys branches.[if !supportFootnotes][8]
[endif]
In sum, the CTA-First Division partly granted
Sonys petition by cancelling the deficiency VAT
assessment but upheld a modified deficiency
EWT assessment as well as the penalties. Thus,
the dispositive portion reads:
WHEREFOR
E, the petition for review
is hereby PARTIALLY
GRANTED. Respondent
is ORDERED to
CANCEL and
WITHDRAW the
deficiency assessment
for value-added tax for
1997 for lack of merit.
However, the deficiency
assessments for
expanded withholding tax
and penalties for late
remittance of internal
revenue taxes are
UPHELD.
Accordingly,
petitioner is DIRECTED
to PAY the respondent
the deficiency expanded
withholding tax in the
amount of P1,035,879.70
and the following
penalties for late
remittance of internal
revenue taxes in the sum
of P1,269,593.90:
Royalty
Royalty
Branches
Total
[endif]VAT on
P
429,242.07
[endif]Withholding Tax on
831,428.20
[endif]EWT of Petitioners
8,923.63
1,269,593.90
Plus 20% delinquency interest from

January 17, 2000 until
fully paid pursuant to
Section 249(C)(3) of the
1997 Tax Code.
SO
ORDERED.[if !supportFootnotes][9]
[endif]
The CIR sought a reconsideration of

the above decision and submitted the following
grounds in support thereof:
[if !supportLists]A. [endif]The Honorable Court
committed reversible error in holding that
petitioner is not liable for the deficiency VAT in the
amount of P11,141,014.41;
[if !supportLists]B. [endif]The Honorable court
committed reversible error in holding that the
commission expense in the amount of
P2,894,797.00 should be subjected to 5%
withholding tax instead of the 10% tax rate;
[if !supportLists]C. [endif]The Honorable Court
committed a reversible error in holding that the
withholding tax assessment with respect to the
5% withholding tax on rental deposit in the
amount of P10,523,821.99 should be cancelled;
and
[if !supportLists]D. [endif]The Honorable Court
committed reversible error in holding that the
remittance of final withholding tax on royalties
covering the period January to March 1998 was
filed on time.[if !supportFootnotes][10][endif]
On April 28, 2005, the CTA-First
Division denied the motion for reconsideration.
Unfazed, the CIR filed a petition for review with
the CTA-EB raising identical issues:
60
WITHHOLDING TAX IN
THE AMOUNT OF
PHP1,992,462.72:
[endif]Whether or not
respondent (Sony) is liable for the deficiency VAT
in the amount of P11,141,014.41;
commission expense in the amount of
P2,894,797.00 should be subjected to 10%
withholding tax instead of the 5% tax rate;
withholding assessment with respect to the 5%
withholding tax on rental deposit in the amount of
P10,523,821.99 is proper; and
[if !supportLists]4. [endif]Whether or not the
remittance of final withholding tax on royalties
covering the period January to March 1998 was
filed outside of time.[if !supportFootnotes][11][endif]
Finding no cogent reason to reverse
the decision of the CTA-First Division, the CTAEB dismissed CIRs petition on May 17, 2007.
CIRs motion for reconsideration was denied by
the CTA-EB on July 5, 2007.
[if !supportLists]A. [endif]THE CTA EN BANC

ERRED IN RULING THAT THE COMMISSION
EXPENSE IN THE AMOUNT OF
PHP2,894,797.00 SHOULD BE SUBJECTED
TO A WITHHOLDING TAX OF 5% INSTEAD OF
THE 10% TAX RATE.
[if !supportLists]B. [endif]THE CTA EN BANC
ERRED IN RULING THAT THE ASSESSMENT
WITH RESPECT TO THE 5% WITHHOLDING
TAX ON RENTAL DEPOSIT IN THE AMOUNT
OF PHP10,523,821.99 IS NOT PROPER.
III
THE CTA EN
BANC ERRED IN
RULING THAT THE
FINAL WITHHOLDING
TAX ON ROYALTIES
COVERING THE
PERIOD JANUARY TO
MARCH 1998 WAS
FILED ON TIME.[if !
The CIR is now before this Court via

this petition for review relying on the very same
grounds it raised before the CTA-First Division
and the CTA-EB. The said grounds are
reproduced below:
GROUNDS
FOR THE ALLOWANCE
OF THE PETITION
I
THE CTA EN
BANC ERRED IN
RULING THAT
RESPONDENT IS NOT
LIABLE FOR
DEFICIENCY VAT IN
THE AMOUNT OF
PHP11,141,014.41.
Upon filing of Sonys comment, the

Court ordered the CIR to file its reply thereto. The
CIR subsequently filed a manifestation informing
the Court that it would no longer file a reply. Thus,
on December 3, 2008, the Court resolved to give
due course to the petition and to decide the case
on the basis of the pleadings filed.[if !supportFootnotes][13]
[endif]
The Court finds no merit in the

petition.
The CIR insists that LOA 19734,
although it states the period 1997 and unverified
prior years, should be understood to mean the
fiscal year ending in March 31, 1998.[if !supportFootnotes]
[14][endif]
The Court cannot agree.
II
AS TO
RESPONDENTS
DEFICIENCY
EXPANDED
Based on Section 13 of the Tax

Code, a Letter of Authority or LOA is the authority
given to the appropriate revenue officer assigned
to perform assessment functions. It empowers or
61
enables said revenue officer to examine the
books of account and other accounting records of
a taxpayer for the purpose of collecting the
correct amount of tax.[if !supportFootnotes][15][endif] The
very provision of the Tax Code that the CIR relies
on is unequivocal with regard to its power to grant
authority to examine and assess a taxpayer.
SEC. 6.
Power of the
Commissioner to Make
Assessments and
Prescribe Additional
Requirements for Tax
Administration and
Enforcement.
(A)Examinati
on of Returns and
Determination of tax Due.
After a return has been
filed as required under
the provisions of this
Code, the Commissioner
or his duly authorized
representative may
authorize the
examination of any
taxpayer and the
assessment of the
correct amount of tax:
Provided, however, That
failure to file a return
shall not prevent the
Commissioner from
authorizing the
examination of any
taxpayer. x x x
[Emphases supplied]
arrived at was based on records from January to

March 1998 or using the fiscal year which ended
in March 31, 1998. As pointed out by the CTAFirst Division in its April 28, 2005 Resolution, the
CIR knew which period should be covered by the
investigation. Thus, if CIR wanted or intended the
investigation to include the year 1998, it should
have done so by including it in the LOA or issuing
another LOA.
Upon review, the CTA-EB even
added that the coverage of LOA 19734,
particularly the phrase and unverified prior
years, violated Section C of Revenue
Memorandum Order No. 43-90 dated September
20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a
taxable period not
exceeding one
taxable year. The
practice of issuing
L/As covering audit
of unverified prior
years is hereby
prohibited. If the
audit of a taxpayer
shall include more
than one taxable
period, the other
periods or years
shall be specifically
indicated in the
L/A.[if !supportFootnotes][16]
[endif]
[Emphasis
supplied]
On this point alone, the deficiency

VAT assessment should have been disallowed.
Be that as it may, the CIRs argument, that Sonys
advertising expense could not be considered as
an input VAT credit because the same was
eventually reimbursed by Sony International
Singapore (SIS), is also erroneous.
Clearly, there must be a grant of

authority before any revenue officer can conduct
an examination or assessment. Equally
important is that the revenue officer so authorized
must not go beyond the authority given. In the
absence of such an authority, the assessment or
examination is a nullity.
The CIR contends that since Sonys

advertising expense was reimbursed by SIS, the
former never incurred any advertising expense.
As a result, Sony is not entitled to a tax credit. At
most, the CIR continues, the said advertising
expense should be for the account of SIS, and
not Sony.[if !supportFootnotes][17][endif]
As earlier stated, LOA 19734 covered

the period 1997 and unverified prior years. For
said reason, the CIR acting through its revenue
officers went beyond the scope of their authority
because the deficiency VAT assessment they
The Court is not persuaded. As aptly

found by the CTA-First Division and later affirmed
by the CTA-EB, Sonys deficiency VAT
assessment stemmed from the CIRs
62
disallowance of the input VAT credits that should
have been realized from the advertising expense
of the latter.[if !supportFootnotes][18][endif] It is evident under
Section 110[if !supportFootnotes][19][endif] of the 1997 Tax
Code that an advertising expense duly covered
by a VAT invoice is a legitimate business
expense. This is confirmed by no less than CIRs
own witness, Revenue Officer Antonio Aluquin.[if !
There is also no denying that
Sony incurred advertising expense. Aluquin
testified that advertising companies issued
invoices in the name of Sony and the latter paid
for the same.[if !supportFootnotes][21][endif] Indubitably, Sony
incurred and paid for advertising expense/
services. Where the money came from is another
matter all together but will definitely not change
said fact.
The CIR further argues that Sony
itself admitted that the reimbursement from SIS
was income and, thus, taxable. In support of this,
the CIR cited a portion of Sonys protest filed
before it:
The fact that
due to adverse economic
conditions, SonySingapore has granted to
our client a subsidy
equivalent to the latters
advertising expenses will
not affect the validity of
the input taxes from such
expenses. Thus, at the
most, this is an additional
income of our client
subject to income tax.
We submit further that
our client is not subject to
VAT on the subsidy
income as this was not
derived from the sale of
goods or services.[if !
Insofar as the above-mentioned

subsidy may be considered as income and,
therefore, subject to income tax, the Court
agrees. However, the Court does not agree that
the same subsidy should be subject to the 10%
VAT. To begin with, the said subsidy termed by
the CIR as reimbursement was not even
exclusively earmarked for Sonys advertising
expense for it was but an assistance or aid in
view of Sonys dire or adverse economic
conditions, and was only equivalent to the
latters (Sonys) advertising expenses.
Section 106 of the Tax Code explains when VAT

may be imposed or exacted. Thus:
SEC. 106.
Value-added Tax on
Sale of Goods or
Properties.
(A) Rate and

Base of Tax. There
shall be levied, assessed
and collected on every
sale, barter or exchange
of goods or properties,
value-added tax
equivalent to ten percent
(10%) of the gross selling
price or gross value in
money of the goods or
properties sold, bartered
or exchanged, such tax
to be paid by the seller or
transferor.
Thus, there must be a sale, barter or

exchange of goods or properties before any VAT
may be levied. Certainly, there was no such sale,
barter or exchange in the subsidy given by SIS to
Sony. It was but a dole out by SIS and not in
payment for goods or properties sold, bartered or
exchanged by Sony.
In the case of CIR v. Court of
Appeals (CA),[if !supportFootnotes][23][endif] the Court had
the occasion to rule that services rendered for a
fee even on reimbursement-on-cost basis only
and without realizing profit are also subject to
VAT. The case, however, is not applicable to the
present case. In that case, COMASERCO
rendered service to its affiliates and, in turn, the
affiliates paid the former reimbursement-on-cost
which means that it was paid the cost or expense
that it incurred although without profit. This is not
true in the present case. Sony did not render any
service to SIS at all. The services rendered by
the advertising companies, paid for by Sony
using SIS dole-out, were for Sony and not SIS.
SIS just gave assistance to Sony in the amount
equivalent to the latters advertising expense but
never received any goods, properties or service
from Sony.
63
Regarding the deficiency EWT
assessment, more particularly Sonys
commission expense, the CIR insists that said
deficiency EWT assessment is subject to the ten
percent (10%) rate instead of the five percent
(5%) citing Revenue Regulation No. 2-98 dated
April 17, 1998.[if !supportFootnotes][24][endif] The said
revenue regulation provides that the 10% rate is
applied when the recipient of the commission
income is a natural person. According to the CIR,
Sonys schedule of Selling, General and
Administrative expenses shows the commission
expense as commission/dealer salesman
incentive, emphasizing the word salesman.
On the other hand, the application of
the five percent (5%) rate by the CTA-First
Division is based on Section 1(g) of Revenue
Regulations
No. 6-85 which provides:
(g) Amounts
paid to certain Brokers
and Agents. On gross
payments to customs,
insurance, real estate
and commercial brokers
and agents of
professional entertainers
five per centum (5%).[if !
In denying the very same argument

of the CIR in its motion for reconsideration, the
CTA-First Division, held:
x x x,
commission expense is
indeed subject to 10%
withholding tax but
payments made to broker
is subject to 5%
withholding tax pursuant
to Section 1(g) of
Revenue Regulations
No. 6-85. While the
commission expense in
the schedule of Selling,
General and
Administrative expenses
submitted by petitioner
(SPI) to the BIR is
captioned as
commission/dealer
salesman incentive the
same does not justify the
automatic imposition of
flat 10% rate. As itemized
by petitioner, such
expense is composed of
Commission Expense
in the amount of
P10,200.00 and Broker
Dealer of P2,894,797.00.
The Court agrees with the CTA-EB

when it affirmed the CTA-First Division decision.
Indeed, the applicable rule is Revenue
Regulations
No. 6-85, as amended by
Revenue Regulations No. 12-94, which was the
applicable rule during the subject period of
examination and assessment as specified in the
LOA. Revenue Regulations No. 2-98, cited by
the CIR, was only adopted in April 1998 and,
therefore, cannot be applied in the present case.
Besides, the withholding tax on brokers and
agents was only increased to 10% much later or
by the end of July 2001 under Revenue
Regulations No. 6-2001.[if !supportFootnotes][27][endif] Until
then, the rate was only 5%.
The Court also affirms the findings of
both the CTA-First Division and the CTA-EB on
the deficiency EWT assessment on the rental
deposit. According to their findings, Sony incurred
the subject rental deposit in the amount of
P10,523,821.99 only from January to March
1998. As stated earlier, in the absence of the
appropriate LOA specifying the coverage, the
CIRs deficiency EWT assessment from January
to March 1998, is not valid and must be
disallowed.
Finally, the Court now proceeds to
the third ground relied upon by the CIR.
The CIR initially assessed Sony to be
liable for penalties for belated remittance of its
FWT on royalties (i) as of December 1997; and
(ii) for the period from January to March 1998.
Again, the Court agrees with the CTA-First
Division when it upheld the CIR with respect to
the royalties for December 1997 but cancelled
that from January to March 1998.
The CIR insists that under Section
3[if !supportFootnotes][28][endif] of Revenue Regulations
No. 5-82 and Sections 2.57.4 and 2.58(A)
(2)(a)[if !supportFootnotes][29][endif] of Revenue Regulations
No. 2-98, Sony should also be made liable for
the FWT on royalties from January to March of
1998. At the same time, it downplays the
relevance of the Manufacturing License
Agreement (MLA) between Sony and SonyJapan, particularly in the payment of royalties.
64
The above revenue regulations

provide the manner of withholding remittance as
well as the payment of final tax on royalty. Based
on the same, Sony is required to deduct and
withhold final taxes on royalty payments when the
royalty is paid or is payable. After which, the
corresponding return and remittance must be
made within 10 days after the end of each month.
The question now is when does the royalty
become payable?
said royalty had to be paid on or before July 10,

1998 or 10 days from its accrual at the end of
June 1998. Thus, when Sony remitted the same
on July 8, 1998, it was not yet late.
In view of the foregoing, the Court
finds no reason to disturb the findings of the CTAEB.
WHEREFORE, the petition is DENIED.
SO ORDERED.
Under Article X(5) of the MLA

between Sony and Sony-Japan, the following
terms of royalty payments were agreed upon:
(5)Within two
(2) months following
each semi-annual period
ending June 30 and
December 31, the
LICENSEE shall furnish
to the LICENSOR a
statement, certified by an
officer of the LICENSEE,
showing quantities of the
MODELS sold, leased or
otherwise disposed of by
the LICENSEE during
such respective semiannual period and
amount of royalty due
pursuant this ARTICLE X
therefore, and the
LICENSEE shall pay the
royalty hereunder to the
LICENSOR concurrently
with the furnishing of the
above statement.[if !
Withal, Sony was to pay Sony-Japan

royalty within two (2) months after every semiannual period which ends in June 30 and
December 31. However, the CTA-First Division
found that there was accrual of royalty by the end
of December 1997 as well as by the end of June
1998. Given this, the FWTs should have been
paid or remitted by Sony to the CIR on January
10, 1998 and July 10, 1998. Thus, it was correct
for the CTA-First Division and the CTA-EB in
ruling that the FWT for the royalty from January
to March 1998 was seasonably filed. Although the
royalty from January to March 1998 was well
within the semi-annual period ending June 30,
which meant that the royalty may be payable until
August 1998 pursuant to the MLA, the FWT for

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 146984
July 28, 2006
petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG
NAVIGATION, INC., FIM LIMITED OF THE
MARDEN GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
The issue in this present petition is whether the
sale by the National Development Company
(NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT)
under the National Internal Revenue Code of
1986 (Tax Code) then prevailing at the time of the
sale. The Court of Tax Appeals (CTA) and the
Court of Appeals commonly ruled that the sale is
not subject to VAT. We affirm, though on a more
unequivocal rationale than that utilized by the
rulings under review. The fact that the sale was
not in the course of the trade or business of NDC
is sufficient in itself to declare the sale as outside
the coverage of VAT.
The facts are culled primarily from the ruling of
the CTA.
Pursuant to a government program of
privatization, NDC decided to sell to private
enterprise all of its shares in its wholly-owned
subsidiary the National Marine Corporation
(NMC). The NDC decided to sell in one lot its
NMC shares and five (5) of its ships, which are
3,700 DWT Tween-Decker, "Kloeckner" type
vessels.1 The vessels were constructed for the
NDC between 1981 and 1984, then initially
leased to Luzon Stevedoring Company, also its
wholly-owned subsidiary. Subsequently, the
vessels were transferred and leased, on a
bareboat basis, to the NMC.2
The NMC shares and the vessels were offered
for public bidding. Among the stipulated terms
and conditions for the public auction was that the
winning bidder was to pay "a value added tax of
65
10% on the value of the vessels."3 On 3 June
1988, private respondent Magsaysay Lines, Inc.
(Magsaysay Lines) offered to buy the shares and
the vessels for P168,000,000.00. The bid was
made by Magsaysay Lines, purportedly for a new
company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the
Marden Group based in Hongkong (collectively,
private respondents).4 The bid was approved by
the Committee on Privatization, and a Notice of
Award dated 1 July 1988 was issued to
Magsaysay Lines.
On 28 September 1988, the implementing
Contract of Sale was executed between NDC, on
one hand, and Magsaysay Lines, Baliwag
Navigation, and FIM Limited, on the other.
Paragraph 11.02 of the contract stipulated that
"[v]alue-added tax, if any, shall be for the account
of the PURCHASER."5 Per arrangement, an
irrevocable confirmed Letter of Credit previously
filed as bidders bond was accepted by NDC as
security for the payment of VAT, if any. By this
time, a formal request for a ruling on whether or
not the sale of the vessels was subject to VAT
had already been filed with the Bureau of Internal
Revenue (BIR) by the law firm of Sycip Salazar
Hernandez & Gatmaitan, presumably in behalf of
private respondents. Thus, the parties agreed
that should no favorable ruling be received from
the BIR, NDC was authorized to draw on the
Letter of Credit upon written demand the amount
needed for the payment of the VAT on the
stipulated due date, 20 December 1988.6
In January of 1989, private respondents through
counsel received VAT Ruling No. 568-88 dated
14 December 1988 from the BIR, holding that the
sale of the vessels was subject to the 10% VAT.
The ruling cited the fact that NDC was a VATregistered enterprise, and thus its "transactions
incident to its normal VAT registered activity of
leasing out personal property including sale of its
own assets that are movable, tangible objects
which are appropriable or transferable are subject
to the 10% [VAT]."7
Private respondents moved for the
reconsideration of VAT Ruling No. 568-88, as well
as VAT Ruling No. 395-88 (dated 18 August
1988), which made a similar ruling on the sale of
the same vessels in response to an inquiry from
the Chairman of the Senate Blue Ribbon
Committee. Their motion was denied when the
BIR issued VAT Ruling Nos. 007-89 dated 24
February 1989, reiterating the earlier VAT rulings.
At this point, NDC drew on the Letter of Credit to
pay for the VAT, and the amount of
P15,120,000.00 in taxes was paid on 16 March
1989.
On 10 April 1989, private respondents filed an
Appeal and Petition for Refund with the CTA,
followed by a Supplemental Petition for Review
on 14 July 1989. They prayed for the reversal of
VAT Rulings No. 395-88, 568-88 and 007-89, as
well as the refund of the VAT payment made

amounting to P15,120,000.00.8 The
Commissioner of Internal Revenue (CIR)
opposed the petition, first arguing that private
respondents were not the real parties in interest
as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then
Tax Code. The CIR also squarely defended the
VAT rulings holding the sale of the vessels liable
for VAT, especially citing Section 3 of Revenue
Regulation No. 5-87 (R.R. No. 5-87), which
provided that "[VAT] is imposed on any sale or
transactions deemed sale of taxable goods
(including capital goods, irrespective of the date
of acquisition)." The CIR argued that the sale of
the vessels were among those transactions
"deemed sale," as enumerated in Section 4 of
R.R. No. 5-87. It seems that the CIR particularly
emphasized Section 4(E)(i) of the Regulation,
which classified "change of ownership of
business" as a circumstance that gave rise to a
transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA
rejected the CIRs arguments and granted the
petition.9 The CTA ruled that the sale of a vessel
was an "isolated transaction," not done in the
ordinary course of NDCs business, and was thus
not subject to VAT, which under Section 99 of the
Tax Code, was applied only to sales in the
course of trade or business. The CTA further
held that the sale of the vessels could not be
"deemed sale," and thus subject to VAT, as the
transaction did not fall under the enumeration of
transactions deemed sale as listed either in
Section 100(b) of the Tax Code, or Section 4 of
R.R. No. 5-87. Finally, the CTA ruled that any
case of doubt should be resolved in favor of
private respondents since Section 99 of the Tax
Code which implemented VAT is not an
exemption provision, but a classification provision
which warranted the resolution of doubts in favor
of the taxpayer.
The CIR appealed the CTA Decision to the Court
of Appeals,10 which on 11 March 1997, rendered
a Decision reversing the CTA.11 While the
appellate court agreed that the sale was an
isolated transaction, not made in the course of
NDCs regular trade or business, it nonetheless
found that the transaction fell within the
classification of those "deemed sale" under R.R.
No. 5-87, since the sale of the vessels together
with the NMC shares brought about a change of
ownership in NMC. The Court of Appeals also
applied the principle governing tax exemptions
that such should be strictly construed against the
taxpayer, and liberally in favor of the
government.12
However, the Court of Appeals reversed itself
upon reconsidering the case, through a
Resolution dated 5 February 2001.13 This time,
the appellate court ruled that the "change of
ownership of business" as contemplated in R.R.
66
No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the
owner of the goods, as provided for in Section
100 of the Tax Code. The Court of Appeals also
agreed with the CTA that the classification of
transactions "deemed sale" was a classification
statute, and not an exemption statute, thus
warranting the resolution of any doubt in favor of
the taxpayer.14
To the mind of the Court, the arguments raised in
the present petition have already been
adequately discussed and refuted in the rulings
assailed before us. Evidently, the petition should
be denied. Yet the Court finds that Section 99 of
the Tax Code is sufficient reason for upholding
the refund of VAT payments, and the subsequent
disquisitions by the lower courts on the
applicability of Section 100 of the Tax Code and
Section 4 of R.R. No. 5-87 are ultimately
irrelevant.
A brief reiteration of the basic principles
governing VAT is in order. VAT is ultimately a tax
on consumption, even though it is assessed on
many levels of transactions on the basis of a
fixed percentage.15 It is the end user of consumer
goods or services which ultimately shoulders the
tax, as the liability therefrom is passed on to the
end users by the providers of these goods or
services16 who in turn may credit their own VAT
liability (or input VAT) from the VAT payments
they receive from the final consumer (or output
VAT).17 The final purchase by the end consumer
represents the final link in a production chain that
itself involves several transactions and several
acts of consumption. The VAT system assures
fiscal adequacy through the collection of taxes on
every level of consumption,18 yet assuages the
manufacturers or providers of goods and services
by enabling them to pass on their respective VAT
liabilities to the next link of the chain until finally
the end consumer shoulders the entire tax
liability.
Yet VAT is not a singular-minded tax on every
transactional level. Its assessment bears direct
relevance to the taxpayers role or link in the
production chain. Hence, as affirmed by Section
99 of the Tax Code and its subsequent
incarnations,19 the tax is levied only on the sale,
barter or exchange of goods or services by
persons who engage in such activities, in the
course of trade or business. These
transactions outside the course of trade or
business may invariably contribute to the
production chain, but they do so only as a matter
of accident or incident. As the sales of goods or
services do not occur within the course of trade
or business, the providers of such goods or
services would hardly, if at all, have the
opportunity to appropriately credit any VAT
liability as against their own accumulated VAT
collections since the accumulation of output VAT
arises in the first place only through the ordinary
course of trade or business.

That the sale of the vessels was not in the
ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of
Appeals, the latter doing so even in its first
decision which it eventually reconsidered.20 We
cite with approval the CTAs explanation on this
point:
In Imperial v. Collector of Internal Revenue,
G.R. No. L-7924, September 30, 1955 (97 Phil.
992), the term "carrying on business" does not
mean the performance of a single disconnected
act, but means conducting, prosecuting and
continuing business by performing progressively
all the acts normally incident thereof; while
"doing business" conveys the idea of business
being done, not from time to time, but all the time.
[J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p.
608-9 (1988)]. "Course of business" is what is
usually done in the management of trade or
business. [Idmi v. Weeks & Russel, 99 So. 761,
764, 135 Miss. 65, cited in Words & Phrases, Vol.
10, (1984)].
What is clear therefore, based on the aforecited
jurisprudence, is that "course of business" or
"doing business" connotes regularity of activity. In
the instant case, the sale was an isolated
transaction. The sale which was involuntary and
made pursuant to the declared policy of
Government for privatization could no longer be
repeated or carried on with regularity. It should be
emphasized that the normal VAT-registered
activity of NDC is leasing personal property.21
This finding is confirmed by the Revised Charter22
of the NDC which bears no indication that the
NDC was created for the primary purpose of
selling real property.23
The conclusion that the sale was not in the
course of trade or business, which the CIR does
not dispute before this Court,24 should have
definitively settled the matter. Any sale, barter or
exchange of goods or services not in the course
of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is
implemented by Section 4(E)(i) of R.R. No. 5-87
now relied upon by the CIR, is captioned "Valueadded tax on sale of goods," and it expressly
states that "[t]here shall be levied, assessed and
collected on every sale, barter or exchange of
goods, a value added tax x x x." Section 100
should be read in light of Section 99, which lays
down the general rule on which persons are liable
for VAT in the first place and on what transaction
if at all. It may even be noted that Section 99 is
the very first provision in Title IV of the Tax Code,
the Title that covers VAT in the law. Before any
portion of Section 100, or the rest of the law for
that matter, may be applied in order to subject a
transaction to VAT, it must first be satisfied that
the taxpayer and transaction involved is liable for
VAT in the first place under Section 99.
67
It would have been a different matter if Section
100 purported to define the phrase "in the course
of trade or business" as expressed in Section 99.
If that were so, reference to Section 100 would
have been necessary as a means of ascertaining
whether the sale of the vessels was "in the
course of trade or business," and thus subject to
VAT. But that is not the case. What Section 100
and Section 4(E)(i) of R.R. No. 5-87 elaborate on
is not the meaning of "in the course of trade or
business," but instead the identification of the
transactions which may be deemed as sale. It
would become necessary to ascertain whether
under those two provisions the transaction may
be deemed a sale, only if it is settled that the
transaction occurred in the course of trade or
business in the first place. If the transaction
transpired outside the course of trade or
business, it would be irrelevant for the purpose of
determining VAT liability whether the transaction
may be deemed sale, since it anyway is not
subject to VAT.
Accordingly, the Court rules that given the
undisputed finding that the transaction in question
was not made in the course of trade or business
of the seller, NDC that is, the sale is not subject
to VAT pursuant to Section 99 of the Tax Code,
no matter how the said sale may hew to those
transactions deemed sale as defined under
Section 100.
In any event, even if Section 100 or Section 4 of
R.R. No. 5-87 were to find application in this
case, the Court finds the discussions offered on
this point by the CTA and the Court of Appeals (in
its subsequent Resolution) essentially correct.
Section 4 (E)(i) of R.R. No. 5-87 does classify as
among the transactions deemed sale those
involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87,
reflecting Section 100 of the Tax Code, clarifies
that such "change of ownership" is only an
attending circumstance to "retirement from or
cessation of business[, ] with respect to all goods
on hand [as] of the date of such retirement or
cessation."25 Indeed, Section 4(E) of R.R. No. 587 expressly characterizes the "change of
ownership of business" as only a "circumstance"
that attends those transactions "deemed sale,"
which are otherwise stated in the same section.26
WHEREFORE, the petition is DENIED. No costs.
SO ORDERED.
L
HOLDING
S, INC.
PHILIPPIN
E
BRANCH,
Presen
t:
CARPI
O, J.,
Chairp
erson,
NACH
URA,
PERAL
TA,
ABAD,
and
MEND
OZA,
JJ.
COMMISS
IONER OF
INTERNA
L
REVENUE
,
[if !
suppor
tLineBr
eakNe
wLine]
[endif]
Promul
gated:
Petitioner,
- versus
Respon
dent.
if
]
Januar
y 19,
2011
x
--------------------------------------------------------------------------------------- x
DECISION
MENDOZA, J.:
This is a petition for review on
certiorari under Rule 45 filed
by petitioner
Exxonmobil Petroleum and Chemical Holdings,
Inc. - Philippine Branch (Exxon) to set aside the
September 7, 2007 Decision[if !supportFootnotes][1][endif]
of the Court of Tax Appeals En Banc (CTA-En
Banc) in CTA E.B. No. 204,
and its
November 27, 2007 Resolution[if !supportFootnotes][2][endif]
denying petitioners motion for reconsideration.
THE FACTS
SECOND DIVISION
EXXONM
OBIL
PETROLE
UM AND
CHEMICA
G.R.
No.
18090
9
[if !
suppo
rtMisa
ligned
Rows]
[
e
n
d
Petitioner Exxon is a foreign corporation

duly organized and existing under the laws of the
State of Delaware, United States of America.[if !
It is authorized to do business in
the Philippines through its Philippine Branch, with
principal office address at the 17/F The Orient
Square, Emerald Avenue, Ortigas Center, Pasig
City.[if !supportFootnotes][4][endif]
68
Exxon is engaged in the business of selling

petroleum products to domestic and international
carriers.[if !supportFootnotes][5][endif] In pursuit of its
business, Exxon purchased from Caltex
Philippines, Inc. (Caltex) and Petron Corporation
(Petron) Jet A-1 fuel and other petroleum
products, the excise taxes on which were paid for
and remitted by both Caltex and Petron.[if !
Said taxes, however, were
passed on to Exxon which ultimately shouldered
the excise taxes on the fuel and petroleum
products.[if !supportFootnotes][7][endif]
From November 2001 to June 2002,
Exxon sold a total of 28,635,841 liters of Jet A-1
fuel to international carriers, free of excise taxes
amounting to Php105,093,536.47.[if !supportFootnotes][8]
[endif]
On various dates, it filed administrative
claims for refund with the Bureau of Internal
Revenue (BIR) amounting to Php105,093,536.47.
In its Decision dated September 7, 2007,

the CTA En Banc dismissed the petition for
review and affirmed the two resolutions of the
First Division dated July 27, 2005 and July 27,
2006. Exxon filed a motion for reconsideration,
but it was denied on November 27, 2007.
Citing Sections 130 (A)(2)[if !
and 204 (C) in relation to
Section 135 (a)[if !supportFootnotes][19][endif] of the National
Internal Revenue Code of 1997 (NIRC), the CTA
ruled that in consonance with its ruling in several
cases,[if !supportFootnotes][20][endif] only the taxpayer or the
manufacturer of the petroleum products sold has
the legal personality to claim the refund of excise
taxes paid on petroleum products sold to
international carriers.[if !supportFootnotes][21][endif]
On October 30, 2003, Exxon filed a petition

for review with the CTA[if !supportFootnotes][10][endif]
claiming a refund or tax credit in the amount of
Php105,093,536.47, representing the amount of
excise taxes paid on Jet A-1 fuel and other
petroleum products it sold to international carriers
from November 2001 to June 2002.[if !supportFootnotes]
[11][endif]
Exxon and the Commissioner of Internal

Revenue (CIR) filed their Joint Stipulation of
Facts and Issues on June 24, 2004, presenting a
total of fourteen (14) issues for resolution.[if !
The CTA stated that Section 130(A)

(2) makes the manufacturer or producer of the
petroleum products directly liable for the payment
of excise taxes.[if !supportFootnotes][22][endif] Therefore, it
follows that the manufacturer or producer is the
taxpayer.[if !supportFootnotes][23][endif]
This determination of the identity of the
taxpayer designated by law is pivotal as the NIRC
provides that it is only the taxpayer who has the
legal personality to ask for a refund in case of
erroneous payment of taxes.[if !supportFootnotes][24][endif]
Exxon filed a petition for review[if !

with the CTA En Banc assailing
the July 27, 2005 Resolution of the CTA First
Division which dismissed the petition for review,
and the July 27, 2006 Resolution[if !supportFootnotes][17]
[endif]
which affirmed the said ruling.
Further, the excise tax imposed on

manufacturers upon the removal of petroleum
products by oil companies is an indirect tax, or a
tax which is primarily paid by persons who can
shift the burden upon someone else.[if !supportFootnotes]
[25][endif]
The CTA cited the cases of Philippine
Acetylene Co., Inc. v. Commissioner of Internal
Revenue,[if !supportFootnotes][26][endif] Contex Corporation
v. Commissioner of Internal Revenue,[if !
and Commissioner of Internal
Revenue v. Philippine Long Distance Telephone
Company,[if !supportFootnotes][28][endif] and explained that
with indirect taxes, although the burden of an
indirect tax can be shifted or passed on to the
purchaser of the goods, the liability for the
indirect tax remains with the manufacturer.[if !
Moreover, the manufacturer has
the option whether or not to shift the burden of
the tax to the purchaser. When shifted, the
amount added by the manufacturer becomes a
part of the price, therefore, the purchaser does
not really pay the tax per se but only the price of
the commodity.[if !supportFootnotes][30][endif]
RULING OF THE COURT OF TAX APPEALS

EN BANC
Going by such logic, the CTA concluded

that a refund of erroneously paid or illegally
received tax can only be made in favor of the
During Exxons preparation of evidence,

the CIR filed a motion dated January 28, 2005 to
first resolve the issue of whether or not Exxon
was the proper party to ask for a refund.[if !
Exxon filed its opposition to the
motion on March 15, 2005.
On July 27, 2005, the CTA First Division
issued a resolution[if !supportFootnotes][14][endif] sustaining
the CIRs position and dismissing Exxons claim
for refund. Exxon filed a motion for
reconsideration, but this was denied on July 27,
69
taxpayer, pursuant to Section 204(C) of the
NIRC.[if !supportFootnotes][31][endif] As categorically ruled in
the Cebu Portland Cement[if !supportFootnotes][32][endif] and
Contex[if !supportFootnotes][33][endif] cases, in the case of
indirect taxes, it is the manufacturer of the goods
who is entitled to claim any refund thereof.[if !
Therefore, it follows that the
indirect taxes paid by the manufacturers or
producers of the goods cannot be refunded to the
purchasers of the goods because the purchasers
are not the taxpayers.[if !supportFootnotes][35][endif]
The CTA also emphasized that tax refunds
are in the nature of tax exemptions and are, thus,
regarded as in derogation of sovereign authority
and construed strictissimi juris against the person
or entity claiming the exemption.[if !supportFootnotes][36]
II.
[endif]
Finally, the CTA disregarded Exxons

argument that in effectively holding that only
petroleum products purchased directly from the
manufacturers or producers are exempt from
excise taxes, the First Division of [the CTA]
sanctioned a universal amendment of existing
bilateral agreements which the Philippines have
with other countries, in violation of the basic
principle of pacta sunt servanda.[if !supportFootnotes][37]
[endif]
The CTA explained that the findings of fact of
the First Division (that when Exxon sold the Jet A1 fuel to international carriers, it did so free of tax)
negated any violation of the exemption from
excise tax of the petroleum products sold to
international carriers. Second, the right of
international carriers to invoke the exemption
granted under Section 135(a) of the NIRC was
neither affected nor restricted in any way by the
ruling of the First Division. At the point of sale, the
international carriers were free to invoke the
exemption from excise taxes of the petroleum
products sold to them. Lastly, the lawmaking
body was presumed to have enacted a later law
with the knowledge of all other laws involving the
same subject matter.[if !supportFootnotes][38][endif]
THE ISSUES
Petitioner now raises the following issues
in its petition for review:
I.
WHETHER THE ASSAILED DECISION AND
RESOLUTION ERRONEOUSLY PROHIBITED
PETITIONER, AS THE DISTRIBUTOR AND
VENDOR OF PETROLEUM PRODUCTS TO
INTERNATIONAL CARRIERS REGISTERED IN
FOREIGN COUNTRIES WHICH HAVE
EXISTING BILATERAL AGREEMENTS WITH
THE PHILIPPINES, FROM CLAIMING A
REFUND OF THE EXCISE TAXES PAID
THEREON; AND
WHETHER THE ASSAILED DECISIONS

ERRED IN AFFIRMING THE DISMISSAL OF
PETITIONERS CLAIM FOR REFUND BASED
ON RESPONDENTS MOTION TO RESOLVE
FIRST THE ISSUE OF WHETHER OR NOT THE
PETITIONER IS THE PROPER PARTY THAT
MAY ASK FOR A REFUND, SINCE SAID
MOTION IS ESSENTIALLY A MOTION TO
DISMISS, WHICH SHOULD HAVE BEEN
DENIED OUTRIGHT BY THE COURT OF TAX
APPEALS FOR HAVING BEEN FILED OUT OF
TIME.
RULING OF THE COURT
I. On respondents motion to
resolve first the issue of whether
or not the petitioner is the
proper party that may ask for a
refund.
For a logical resolution of the issues,
the court will tackle first the issue of whether or
not the CTA erred in granting respondents
Motion to Resolve First the Issue of Whether or
Not the Petitioner is the Proper Party that may
Ask for a Refund.[if !supportFootnotes][39][endif] In said
motion, the CIR prayed that the CTA First
Division resolve ahead of the other stipulated
issues the sole issue of whether petitioner was
the proper party to ask for a refund.[if !supportFootnotes]
[40][endif]
70
Exxon opines that the CIRs motion is
essentially a motion to dismiss filed out of time,[if !
as it was filed after petitioner
began presenting evidence[if !supportFootnotes][42][endif]
more than a year after the filing of the Answer.[if !
By praying that Exxon be
declared as not the proper party to ask for a
refund, the CIR asked for the dismissal of the
petition, as the grant of the Motion to Resolve
would bring trial to a close.[if !supportFootnotes][44][endif]
Moreover, Exxon states that the
motion should have also complied with the threeday notice and ten-day hearing rules provided in
Rule 15 of the Rules of Court.[if !supportFootnotes][45][endif]
Since the CIR failed to set its motion for any
hearing before the filing of the Answer, the motion
should have been considered a mere scrap of
paper.[if !supportFootnotes][46][endif]
Finally, citing Maruhom v.
Commission on Elections and Dimaporo,[if !
Exxon argues that a defendant
who desires a preliminary hearing on special and
affirmative defenses must file a motion to that
effect at the time of filing of his answer.[if !
the disposition of the case, but rather, to expedite

proceedings.[if !supportFootnotes][57][endif]
Rule 16, Section 6 of the 1997 Rules
of Civil Procedure provides:
SEC. 6. Pleading grounds as affirmative
defenses. - If no motion to dismiss has been
filed, any of the grounds for dismissal provided
for in this Rule may be pleaded as an affirmative
defense in the answer, and in the discretion of the
court, a preliminary hearing may be had thereon
as if a motion to dismiss had been filed.
The
dismissal of the
complaint under this
section shall be without
prejudice to the
prosecution in the same
or separate action of a
counterclaim pleaded in
the answer.
(Underscoring supplied.)
The CIR, on the other hand, counters

that it did not file a motion to dismiss.[if !supportFootnotes]
[49][endif]
Instead, the grounds for dismissal of the
case were pleaded as special and affirmative
defenses in its Answer filed on December 15,
2003.[if !supportFootnotes][50][endif] Therefore, the issue of
whether or not petitioner is the proper party to
claim for a tax refund of the excise taxes
allegedly passed on by Caltex and Petron was
included as one of the issues in the Joint
Stipulation of Facts and Issues dated June 24,
2004 signed by petitioner and respondent.[if !
The CIR now argues that nothing in

the Rules requires the preliminary hearing to be
held before the filing of an Answer.[if !supportFootnotes][52]
[endif]
However, a preliminary hearing cannot be
held before the filing of the Answer precisely
because any ground raised as an affirmative
defense is pleaded in the Answer itself.[if !
This case is a clear cut application of

the above provision. The CIR did not file a motion
to dismiss. Thus, he pleaded the grounds for
dismissal as affirmative defenses in its Answer
and thereafter prayed for the conduct of a
preliminary hearing to determine whether
petitioner was the proper party to apply for the
refund of excise taxes paid.
The determination of this question
was the keystone on which the entire case was
leaning. If Exxon was not the proper party to
apply for the refund of excise taxes paid, then it
would be useless to proceed with the case. It
would not make any sense to proceed to try a
case when petitioner had no standing to pursue
it.
Further, the CIR contends that the

case cited by petitioner, Maruhom v. Comelec,[if !
does not apply here. In the said
case, a motion to dismiss was filed after the filing
of the answer.[if !supportFootnotes][55][endif] And, the said
motion to dismiss was
found to be a frivolous motion designed to
prevent the early termination of the proceedings
in the election case therein.[if !supportFootnotes][56][endif]
Here, the Motion to Resolve was filed not to delay
In the case of California and

Hawaiian Sugar Company v. Pioneer Insurance
and Surety Corporation,[if !supportFootnotes][58][endif] the
Court held that:
Considering that there was only one question,
which may even be deemed to be the very
touchstone of the whole case, the trial court had
no cogent reason to deny the Motion for
Preliminary Hearing. Indeed, it committed grave
abuse of discretion when it denied a preliminary
71
hearing on a simple issue of fact that could have
possibly settled the entire case. Verily, where a
preliminary hearing appears to suffice, there is no
reason to go on to trial. One reason why dockets
of trial courts are clogged is the unreasonable
refusal to use a process or procedure, like a
motion to dismiss, which is designed to
abbreviate the resolution of a case.[if !supportFootnotes][59]
[endif]
and not to the seller, the exemption will apply

regardless of whether the same were sold by its
manufacturer or its distributor for two reasons.[if !
First, Section 135 does not
require that to be exempt from excise tax, the
products should be sold by the manufacturer or
producer.[if !supportFootnotes][63][endif] Second, the
legislative intent was precisely to make Section
135 independent from Sections 129 and 130 of
the NIRC,[if !supportFootnotes][64][endif] stemming from the
fact that unlike other products subject to excise
tax, petroleum products of this nature have
become subject to preferential tax treatment by
virtue of either specific international agreements
or simply of international reciprocity.[if !supportFootnotes]
[65][endif]
II. On whether petitioner, as the

distributor and vendor of
petroleum products to
international carriers registered
in foreign countries which have
existing bilateral agreements
with the Philippines, can claim a
refund of the excise taxes paid
thereon
This brings us now to the substantive issue
of whether Exxon, as the distributor and vendor
of petroleum products to international carriers
registered in foreign countries which have
existing bilateral agreements with the Philippines,
is the proper party to claim a tax refund for the
excise taxes paid by the manufacturers, Caltex
and Petron, and passed on to it as part of the
purchase price.
Exxon argues that having paid the
excise taxes on the petroleum products sold to
international carriers, it is a real party in interest
consistent with the rules and jurisprudence.[if !
It reasons out that the subject of the

exemption is neither the seller nor the buyer of
the petroleum products, but the products
themselves, so long as they are sold to
international carriers for use in international flight
operations, or to exempt entities covered by tax
treaties, conventions and other international
agreements for their use or consumption, among
other conditions.[if !supportFootnotes][61][endif]
Thus, as the exemption granted under
Section 135 attaches to the petroleum products
Respondent CIR, on the other hand, posits

that Exxon is not the proper party to seek a
refund of excise taxes paid on the petroleum
products.[if !supportFootnotes][66][endif] In so arguing, the
CIR states that excise taxes are indirect taxes,
the liability for payment of which falls on one
person, but the burden of payment may be
shifted to another.[if !supportFootnotes][67][endif] Here, the
sellers of the petroleum products or Jet A-1 fuel
subject to excise tax are Petron and Caltex, while
Exxon was the buyer to whom the burden of
paying excise tax was shifted.[if !supportFootnotes][68][endif]
While the impact or burden of taxation falls on
Exxon, as the tax is shifted to it as part of the
purchase price, the persons statutorily liable to
pay the tax are Petron and Caltex.[if !supportFootnotes][69]
[endif]
As Exxon is not the taxpayer primarily liable
to pay, and not exempted from paying, excise tax,
it is not the proper party to claim for the refund of
excise taxes paid.[if !supportFootnotes][70][endif]
The excise tax, when passed on to the
purchaser, becomes part of the purchase price.
72
Excise taxes are imposed under Title VI of
the NIRC. They apply to specific goods
manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition, and to those that are imported.[if !
In effect, these taxes are
imposed when two conditions concur: first, that
the articles subject to tax belong to any of the
categories of goods enumerated in Title VI of the
NIRC; and second, that said articles are for
domestic sale or consumption, excluding those
that are actually exported.[if !supportFootnotes][72][endif]
Thus, under Section 135, petroleum

products sold to international carriers of foreign
registry on their use or consumption outside the
Philippines are exempt from excise tax, provided
that the petroleum products sold to such
international carriers shall be stored in a bonded
storage tank and may be disposed of only in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.[if !
There are, however, certain exemptions to

the coverage of excise taxes, such as petroleum
products sold to international carriers and exempt
entities or agencies. Section 135 of the NIRC
provides:
The confusion here stems from the fact

that excise taxes are of the nature of indirect
taxes, the liability for payment of which may fall
on a person other than he who actually bears the
burden of the tax.
SEC. 135. Petroleum Products Sold to

International Carriers and Exempt Entities or
Agencies. - Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine or foreign
registry on their use or consumption outside the
Philippines: Provided, That the petroleum
products sold to these international carriers shall
be stored in a bonded storage tank and may be
disposed of only in accordance with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner;
(b) Exempt
entities or agencies
covered by tax treaties,
conventions and other
international
agreements for their use
of consumption:
Provided, however, That
the country of said
foreign international
carrier or exempt
entities or agencies
exempts from similar
taxes petroleum
products sold to
Philippine carriers,
entities or agencies; and
In Commissioner of Internal Revenue v.

Philippine Long Distance Telephone Company,[if !
the Court discussed the nature
of indirect taxes as follows:
(c) Entities
which are by law exempt
from direct and indirect
taxes. (Underscoring
supplied.)
[I]ndirect taxes are those that are

demanded, in the first instance, from, or are paid
by, one person to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for
the payment of the tax falls on one person but the
burden thereof can be shifted or passed on to
another person, such as when the tax is imposed
upon goods before reaching the consumer who
ultimately pays for it. When the seller passes on
the tax to his buyer, he, in effect, shifts the tax
burden, not the liability to pay it, to the purchaser,
as part of the goods sold or services rendered.
Accordingly, the party liable for the tax can
shift the burden to another, as part of the
purchase price of the goods or services. Although
the manufacturer/seller is the one who is
statutorily liable for the tax, it is the buyer who
actually shoulders or bears the burden of the tax,
albeit not in the nature of a tax, but part of the
purchase price or the cost of the goods or
services sold.
73
As petitioner is not the statutory taxpayer, it is not
entitled to claim a refund of excise taxes paid.
The question we are faced with now is, if
the party statutorily liable for the tax is different
from the party who bears the burden of such tax,
who is entitled to claim a refund of the tax paid?
Sections 129 and 130 of the NIRC provide:
SEC. 129. Goods subject to Excise Taxes. Excise taxes apply to goods manufactured or
produced in the Philippines for domestic sales or
consumption or for any other disposition and to
things imported. The excise tax imposed herein
shall be in addition to the value-added tax
imposed under Title IV.
For purposes
of this Title, excise taxes
herein imposed and
based on weight or
volume capacity or any
other physical unit of
measurement shall be
referred to as 'specific
tax' and an excise tax
herein imposed and
based on selling price or
other specified value of
the good shall be
referred to as 'ad
valorem tax.'
SEC. 130. Filing of Return and Payment of

Excise Tax on Domestic Products. (A) Persons
Liable to File a Return,
Filing of Return on
Removal and Payment
of Tax. -
(1) Persons Liable to File a Return. - Every

person liable to pay excise tax imposed under
this Title shall file a separate return for each
place of production setting forth, among others
the description and quantity or volume of
products to be removed, the applicable tax base
and the amount of tax due thereon: Provided,
however, That in the case of indigenous
petroleum, natural gas or liquefied natural gas,
the excise tax shall be paid by the first buyer,
purchaser or transferee for local sale, barter or
transfer, while the excise tax on exported
products shall be paid by the owner, lessee,
concessionaire or operator of the mining claim.
Should
domestic products be
removed from the place
of production without the
payment of the tax, the
owner or person having
possession thereof shall
be liable for the tax due
thereon.
(2) Time for Filing of Return and Payment of

the Tax. - Unless otherwise specifically allowed,
the return shall be filed and the excise tax paid
by the manufacturer or producer before removal
of domestic products from place of production:
Provided, That the tax excise on locally
manufactured petroleum products and indigenous
petroleum/levied under Sections 148 and 151(A)
(4), respectively, of this Title shall be paid within
ten (10) days from the date of removal of such
products for the period from January 1, 1998 to
June 30, 1998; within five (5) days from the date
of removal of such products for the period from
July 1, 1998 to December 31, 1998; and, before
removal from the place of production of such
products from January 1, 1999 and thereafter:
Provided, further, That the excise tax on
nonmetallic mineral or mineral products, or quarry
resources shall be due and payable upon
removal of such products from the locality where
mined or extracted, but with respect to the excise
tax on locally produced or extracted metallic
mineral or mineral products, the person liable
shall file a return and pay the tax within fifteen
(15) days after the end of the calendar quarter
when such products were removed subject to
such conditions as may be prescribed by rules
and regulations to be promulgated by the
Secretary of Finance, upon recommendation of
the Commissioner. For this purpose, the taxpayer
shall file a bond in an amount which
approximates the amount of excise tax due on
the removals for the said quarter. The foregoing
rules notwithstanding, for imported mineral or
mineral products, whether metallic or nonmetallic,
the excise tax due thereon shall be paid before
their removal from customs custody.
xxx
(Italics and underscoring supplied.)
74
As early as the 1960s, this Court has ruled

that the proper party to question, or to seek a
refund of, an indirect tax, is the statutory
taxpayer, or the person on whom the tax is
imposed by law and who paid the same, even if
he shifts the burden thereof to another.[if !
In Philippine Acetylene Co., Inc. v.

Commissioner of Internal Revenue,[if !supportFootnotes]
[76][endif]
the Court held that the sales tax is imposed
on the manufacturer or producer and not on the
purchaser, except probably in a very remote and
inconsequential sense.[if !supportFootnotes][77][endif]
Discussing the passing on of the sales tax to
the purchaser, the Court therein cited Justice
Oliver Wendell Holmes opinion in Lashs
Products v. United States[if !supportFootnotes][78][endif]
wherein he said:
The phrase passed the tax on is
inaccurate, as obviously the tax is laid and
remains on the manufacturer and on him alone.
The purchaser does not really pay the tax. He
pays or may pay the seller more for the goods
because of the sellers obligation, but that is all.
x x x The price is the sum total paid for the
goods. The amount added because of the tax is
paid to get the goods and for nothing else.
Therefore it is part of the price x x x.[if !
petitioner and not its customers, who may ask for

a refund of whatever amount it is entitled for the
percentage or sales taxes it paid before the
amendment of section 246 of the Tax Code.[if !
The Philippine Acetylene case was also

cited in the first Silkair (Singapore) Pte, Ltd. v.
Commissioner of Internal Revenue[if !supportFootnotes][83]
[endif]
case, where the Court held that the proper
party to question, or to seek a refund of, an
indirect tax is the statutory taxpayer, the person
on whom the tax is imposed by law and who paid
the same even if he shifts the burden thereof to
another.[if !supportFootnotes][84][endif]
In the Silkair cases,[if !supportFootnotes][85][endif]
petitioner Silkair (Singapore) Pte, Ltd. (Silkair),
filed with the BIR a written application for the
refund of excise taxes it claimed to have paid on
its purchase of jet fuel from Petron. As the BIR
did not act on the application, Silkair filed a
Petition for Review before the CTA.
In both cases, the CIR argued that the
excise tax on petroleum products is the direct
liability of the manufacturer/producer, and when
added to the cost of the goods sold to the buyer,
it is no longer a tax but part of the price which the
buyer has to pay to obtain the article.
In the first Silkair case, the Court ruled:
Proceeding from this discussion, the Court

went on to state:
It may indeed be that the
economic burden of the tax finally falls on the
purchaser; when it does the tax becomes a part
of the price which the purchaser must pay. It does
not matter that an additional amount is billed as
tax to the purchaser. x x x The effect is still the
same, namely, that the purchaser does not pay
the tax. He pays or may pay the seller more for
the goods because of the sellers obligation, but
that is all and the amount added because of the
tax is paid to get the goods and for nothing else.
But the tax burden may not even
be shifted to the purchaser at all. A decision to
absorb the burden of the tax is largely a matter of
economics. Then it can no longer be contended
that a sales tax is a tax on the purchaser.[if !
The above case was cited in the later case

of Cebu Portland Cement Company v. Collector
(now Commissioner) of Internal Revenue,[if !
where the Court ruled that as
the sales tax is imposed upon the manufacturer
or producer and not on the purchaser, it is
The proper
party to question, or
seek a refund of, an
indirect tax is the
statutory taxpayer, the
person on whom the
tax is imposed by law
and who paid the
same even if he shifts
the burden thereof to
another. Section 130
(A) (2) of the NIRC
provides that "[u]nless
otherwise specifically
allowed, the return shall
be filed and the excise
tax paid by the
manufacturer or
producer before removal
75
of domestic products
from place of
production." Thus,
Petron Corporation, not
Silkair, is the statutory
taxpayer which is
entitled to claim a refund
based on Section 135 of
the NIRC of 1997 and
Article 4(2) of the Air
Transport Agreement
between RP and
Singapore.
Even if
Petron Corporation
passed on to Silkair
the burden of the tax,
the additional amount
billed to Silkair for jet
fuel is not a tax but
part of the price which
Silkair had to pay as a
purchaser.[if !supportFootnotes]
[86][endif]
(Emphasis and
underscoring supplied.)
SEC. 204. Authority of the

Commissioner to Compromise,
Abate, and Refund or Credit
Taxes. The Commissioner may
xxx
xxx
xxx
[if !supportLists](C)
[endif]Credit or
refund taxes erroneously or illegally received
or penalties imposed without authority, refund the
value of internal revenue stamps when they are
returned in good condition by the purchaser, and,
in his discretion, redeem or change unused
stamps that have been rendered unfit for use and
refund their value upon proof of destruction. No
credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing
with the Commissioner a claim for credit or
refund within two (2) years after the payment of
the tax or penalty: Provided, however, That a
return showing an overpayment shall be
considered as a written claim for credit or refund.
xxx
xxx
xxx
(Emphasis shown supplied by the

CTA.)[if !supportFootnotes][88][endif]
Citing the above case, the second Silkair

case was promulgated a few months after the
first, and stated:
The issue presented is not novel. In a
similar case involving the same parties, this Court
has categorically ruled that "the proper party to
question, or seek a refund of an indirect tax is the
statutory taxpayer, the person on whom the tax is
imposed by law and who paid the same even if
he shifts the burden thereof to another." The
Court added that "even if Petron Corporation
passed on to Silkair the burden of the tax, the
additional amount billed to Silkair for jet fuel is
not a tax but part of the price which Silkair had
to pay as a purchaser."[if !supportFootnotes][87][endif]
Therefore, as Exxon is not the party

statutorily liable for payment of excise taxes
under Section 130, in relation to Section 129 of
the NIRC, it is not the proper party to claim a
refund of any taxes erroneously paid.
There is no unilateral amendment of existing
bilateral agreements of the Philippines with other
countries.
Exxon also argues that in effectively
holding that only petroleum products purchased
directly from the manufacturers or producers are
exempt from excise taxes, the CTA En Banc
sanctioned a unilateral amendment of existing
bilateral agreements which the Philippines has
with other countries, in violation of the basic
international law principle of pacta sunt servanda.
The Court does not agree.
The CTA En Banc, thus, held that:

The determination of who is the taxpayer
plays a pivotal role in claims for refund because
the same law provides that it is only the taxpayer
who has the legal personality to ask for a refund
in case of erroneous payment of taxes. Section
204 (C) of the 1997 NIRC, [provides] in part, as
follows:
As correctly held by the CTA En

Banc:
One final point, petitioners argument that
in effectively holding that only petroleum products
purchased directly from the manufacturers or
76
producers are exempt from excise taxes, the First
Division of this Court sanctioned a unilateral
amendment of existing bilateral agreements
which the Philippines have (sic) with other
countries, in violation of the basic international
principle of pacta sunt servanda is misplaced.
First, the findings of fact of the First Division of
this Court that when petitioner sold the Jet A-1
fuel to international carriers, it did so free of tax
negates any violation of the exemption from
excise tax of the petroleum products sold to
international carriers insofar as this case is
concerned. Secondly, the right of international
carriers to invoke the exemption granted under
Section 135 (a) of the 1997 NIRC has neither
been affected nor restricted in any way by the
ruling of the First Division of this Court. At the
point of sale, the international carriers are free to
invoke the exemption from excise taxes of the
petroleum products sold to them. Lastly, the lawmaking body is presumed to have enacted a later
law with the knowledge of all other laws involving
the same subject matter.[if !supportFootnotes][90][endif]
WHEREFORE, the petition is DENIED.
SO ORDERED.

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 125355
March 30, 2000
petitioner,
vs.
COURT OF APPEALS and COMMONWEALTH
MANAGEMENT AND SERVICES
CORPORATION, respondents.
PARDO, J.:
What is before the Court is a petition for review
on certiorari of the decision of the Court of
Appeals,1 reversing that of the Court of Tax
Appeals,2 which affirmed with modification the
decision of the Commissioner of Internal
Revenue ruling that Commonwealth Management
and Services Corporation, is liable for value
added tax for services to clients during taxable
year 1988.
Commonwealth Management and Services
Corporation (COMASERCO, for brevity), is a
corporation duly organized and existing under the
laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co.
(Philamlife), organized by the letter to perform
collection, consultative and other technical
services, including functioning as an internal
auditor, of Philamlife and its other

affiliates.1wphi1.nt
On January 24, 1992, the Bureau of Internal
Revenue (BIR) issued an assessment to private
respondent COMASERCO for deficiency valueadded tax (VAT) amounting to P351,851.01, for
taxable year 1988, computed as follows:
Taxable sale/receipt
P1,6
===
10% tax due thereon
167
25% surcharge
41,9
20% interest per annum
125
Compromise penalty for late payment
16,0
TOTAL AMOUNT DUE AND COLLECTIBLE
P35
===
COMASERCO's annual corporate income tax

return ending December 31, 1988 indicated a net
loss in its operations in the amount of P6,077.00.
On February 10, 1992, COMASERCO filed with
the BIR, a letter-protest objecting to the latter's
finding of deficiency VAT. On August 20, 1992,
the Commissioner of Internal Revenue sent a
collection letter to COMASERCO demanding
payment of the deficiency VAT.
On September 29, 1992, COMASERCO filed with
the Court of Tax Appeals4 a petition for review
contesting the Commissioner's assessment.
COMASERCO asserted that the services it
rendered to Philamlife and its affiliates, relating to
collections, consultative and other technical
assistance, including functioning as an internal
auditor, were on a "no-profit, reimbursement-ofcost-only" basis. It averred that it was not
engaged in the business of providing services to
Philamlife and its affiliates. COMASERCO was
established to ensure operational orderliness and
administrative efficiency of Philamlife and its
affiliates, and not in the sale of services.
COMASERCO stressed that it was not profitmotivated, thus not engaged in business. In fact,
it did not generate profit but suffered a net loss in
taxable year 1988. COMASERCO averred that
since it was not engaged in business, it was not
liable to pay VAT.
On June 22, 1995, the Court of Tax Appeals
rendered decision in favor of the Commissioner
of Internal Revenue, the dispositive portion of
which reads:
WHEREFORE, the decision of the Commissioner
of Internal Revenue assessing petitioner
deficiency value-added tax for the taxable year
1988 is AFFIRMED with slight modifications.
Accordingly, petitioner is ordered to pay
respondent Commissioner of Internal Revenue
the amount of P335,831.01 inclusive of the 25%
77
surcharge and interest plus 20% interest from
January 24, 1992 until fully paid pursuant to
Section 248 and 249 of the Tax Code.
The compromise penalty of P16,000.00 imposed
by the respondent in her assessment letter shall
not be included in the payment as there was no
compromise agreement entered into between
petitioner and respondent with respect to the
value-added tax deficiency.5
On July 26, 1995, respondent filed with the Court
of Appeals, a petition for review of the decision of
the Court of Appeals.
After due proceedings, on May 13, 1996, the
Court of Appeals rendered decision reversing that
of the Court of Tax Appeals, the dispositive
portion of which reads:
WHEREFORE, in view of the foregoing, judgment
is hereby rendered REVERSING and SETTING
ASIDE the questioned Decision promulgated on
22 June 1995. The assessment for deficiency
value-added tax for the taxable year 1988
inclusive of surcharge, interest and penalty
charges are ordered CANCELLED for lack of
legal and factual basis. 6
The Court of Appeals anchored its decision on
the ratiocination in another tax case involving the
same parties,7 where it was held that
COMASERCO was not liable to pay fixed and
contractor's tax for services rendered to
Philamlife and its affiliates. The Court of Appeals,
in that case, reasoned that COMASERCO was
not engaged in business of providing services to
Philamlife and its affiliates. In the same manner,
the Court of Appeals held that COMASERCO
was not liable to pay VAT for it was not engaged
in the business of selling services.
On July 16, 1996, the Commissioner of Internal
Revenue filed with this Court a petition for review
on certiorari assailing the decision of the Court of
Appeals.
On August 7, 1996, we required respondent
COMASERCO to file comment on the petition,
and on September 26, 1996, COMASERCO
complied with the resolution.8
We give due course to the petition.
At issue in this case is whether COMASERCO
was engaged in the sale of services, and thus
liable to pay VAT thereon.
Petitioner avers that to "engage in business" and
to "engage in the sale of services" are two
different things. Petitioner maintains that the
services rendered by COMASERCO to Philamlife
and its affiliates, for a fee or consideration, are
subject to VAT. VAT is a tax on the value added
by the performance of the service. It is immaterial
whether profit is derived from rendering the
service.
We agree with the Commissioner.
Sec. 99 of the National Internal Revenue Code of
1986, as amended by Executive Order (E. O.)
No. 273 in 1988, provides that:
Sec. 99. Persons liable. Any person who, in
the course of trade or business, sells, barters or

exchanges goods, renders services, or engages
in similar transactions and any person who,
imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 100 to 102 of this
Code. 9
COMASERCO contends that the term "in the
course of trade or business" requires that the
"business" is carried on with a view to profit or
livelihood. It avers that the activities of the entity
must be profit-oriented. COMASERCO submits
that it is not motivated by profit, as defined by its
primary purpose in the articles of incorporation,
stating that it is operating "only on
reimbursement-of-cost basis, without any profit."
Private respondent argues that profit motive is
material in ascertaining who to tax for purposes
of determining liability for VAT.
We disagree.
On May 28, 1994, Congress enacted Republic
Act No. 7716, the Expanded VAT Law (EVAT),
amending among other sections, Section 99 of
the Tax Code. On January 1, 1998, Republic Act
8424, the National Internal Revenue Code of
1997, took effect. The amended law provides
that:
Sec. 105. Persons Liable. Any person who, in
the course of trade or business, sells, barters,
exchanges, leases goods or properties, renders
services, and any person who imports goods
shall be subject to the value-added tax (VAT)
imposed in Sections 106 and 108 of this Code.
The value-added tax is an indirect tax and the
amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services. This rule shall likewise
apply to existing sale or lease of goods,
properties or services at the time of the effectivity
of Republic Act No. 7716.
The phrase "in the course of trade or business"
means the regular conduct or pursuit of a
commercial or an economic activity, including
transactions incidental thereto, by any person
regardless of whether or not the person engaged
therein is a nonstock, nonprofit organization
(irrespective of the disposition of its net income
and whether or not it sells exclusively to
members of their guests), or government entity.
The rule of regularity, to the contrary
notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign
persons shall be considered as being rendered in
the course of trade or business.
Contrary to COMASERCO's contention the
above provision clarifies that even a non-stock,
non-profit, organization or government entity, is
liable to pay VAT on the sale of goods or
services. VAT is a tax on transactions, imposed at
every stage of the distribution process on the
sale, barter, exchange of goods or property, and
on the performance of services, even in the
absence of profit attributable thereto. The term "in
78
the course of trade or business" requires the
regular conduct or pursuit of a commercial or an
economic activity regardless of whether or not the
entity is profit-oriented.
The definition of the term "in the course of trade
or business" present law applies to all
transactions even to those made prior to its
enactment. Executive Order No. 273 stated that
any person who, in the course of trade or
business, sells, barters or exchanges goods and
services, was already liable to pay VAT. The
present law merely stresses that even a
nonstock, nonprofit organization or government
entity is liable to pay VAT for the sale of goods
and services.
Sec. 108 of the National Internal Revenue Code
of 1997 10 defines the phrase "sale of services" as
the "performance of all kinds of services for
others for a fee, remuneration or consideration."
It includes "the supply of technical advice,
assistance or services rendered in connection
with technical management or administration of
any scientific, industrial or commercial
undertaking or project." 11
On February 5, 1998, the Commissioner of
Internal Revenue issued BIR Ruling No. 010-98
12 emphasizing that a domestic corporation that
provided technical, research, management and
technical assistance to its affiliated companies
and received payments on a reimbursement-ofcost basis, without any intention of realizing profit,
was subject to VAT on services rendered. In fact,
even if such corporation was organized without
any intention realizing profit, any income or profit
generated by the entity in the conduct of its
activities was subject to income tax.
Hence, it is immaterial whether the primary
purpose of a corporation indicates that it receives
payments for services rendered to its affiliates on
a reimbursement-on-cost basis only, without
realizing profit, for purposes of determining
liability for VAT on services rendered. As long as
the entity provides service for a fee, remuneration
or consideration, then the service rendered is
subject to VAT.1awp++i1
At any rate, it is a rule that because taxes are the
lifeblood of the nation, statutes that allow
exemptions are construed strictly against the
grantee and liberally in favor of the government.
Otherwise stated, any exemption from the
payment of a tax must be clearly stated in the
language of the law; it cannot be merely implied
therefrom. 13 In the case of VAT, Section 109,
Republic Act 8424 clearly enumerates the
transactions exempted from VAT. The services
rendered by COMASERCO do not fall within the
exemptions.
Both the Commissioner of Internal Revenue and
the Court of Tax Appeals correctly ruled that the
services rendered by COMASERCO to Philamlife
and its affiliates are subject to VAT. As pointed out
by the Commissioner, the performance of all
kinds of services for others for a fee,

remuneration or consideration is considered as
sale of services subject to VAT. As the
government agency charged with the
enforcement of the law, the opinion of the
Commissioner of Internal Revenue, in the
absence of any showing that it is plainly wrong, is
entitled to great weight. 14 Also, it has been the
long standing policy and practice of this Court to
respect the conclusions of quasi-judicial
agencies, such as the Court of Tax Appeals
which, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax
cases and has necessarily developed an
expertise on the subject, unless there has been
an abuse or improvident exercise of its authority.
15
There is no merit to respondent's contention that

the Court of Appeals' decision in CA-G.R. No.
34042, declaring the COMASERCO as not
engaged in business and not liable for the
payment of fixed and percentage taxes, binds
petitioner. The issue in CA-G.R. No. 34042 is
different from the present case, which involves
COMASERCO's liability for VAT. As heretofore
stated, every person who sells, barters, or
exchanges goods and services, in the course of
trade or business, as defined by law, is subject to
VAT.
WHEREFORE, the Court GRANTS the petition
and REVERSES the decision of the Court of
Appeals in CA-G.R. SP No. 37930. The Court
hereby REINSTATES the decision of the Court of
Tax Appeals in C. T. A. Case No. 4853.
No costs.
SO ORDERED.

Supreme Court
Manila
SECOND DIVISION
COMMISSIONER OF
INTERNAL
G.R. No. 183505
REVENUE,
Petitioner,
Present:
CARPIO, J.,
Chairperson,
- versus -
BRION,
DEL CASTILLO,
79
ABAD, and
SM PRIME
HOLDINGS, INC.
PEREZ, JJ.
and FIRST ASIA

REALTY
DEVELOPMENT
CORPORATION,
in a letter dated January 14, 2004.[if !supportFootnotes][10]

[endif]
On September 6, 2004, the BIR

denied the protest filed by SM Prime and ordered
it to pay the VAT deficiency for taxable year 2000
in the amount of P124,035,874.12.[if !supportFootnotes][11]
[endif]
Promulgated:
Respondents.
February 26,
2010
x------------------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
When the intent of the law is not
apparent as worded, or when the application of
the law would lead to absurdity or injustice,
legislative history is all important. In such cases,
courts may take judicial notice of the origin and
history of the law,[if !supportFootnotes][1][endif] the
deliberations during the enactment,[if !supportFootnotes][2]
[endif]
as well as prior laws on the same subject
matter[if !supportFootnotes][3][endif] to ascertain the true
intent or spirit of the law.
This Petition for Review on Certiorari
under Rule 45 of the Rules of Court, in relation to
Republic Act (RA) No. 9282,[if !supportFootnotes][4][endif]
seeks to set aside the April 30, 2008 Decision[if !
and the June 24, 2008
Resolution[if !supportFootnotes][6][endif] of the Court of Tax
Appeals (CTA).
Factual Antecedents
Respondents SM Prime Holdings,
Inc. (SM Prime) and First Asia Realty
Development Corporation (First Asia) are
domestic corporations duly organized and
existing under the laws of the Republic of the
Philippines. Both are engaged in the business of
operating cinema houses, among others.[if !
CTA Case No. 7079

On September 26, 2003, the Bureau
of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value
added tax (VAT) deficiency on cinema ticket sales
in the amount of P119,276,047.40 for taxable
year 2000.[if !supportFootnotes][8][endif] In response, SM
Prime filed a letter-protest dated December 15,
On December 12, 2003, the BIR sent
SM Prime a Formal Letter of Demand for the
alleged VAT deficiency, which the latter protested
On October 15, 2004, SM Prime filed

a Petition for Review before the CTA docketed as
CTA Case No. 7079.[if !supportFootnotes][12][endif]
CTA Case No. 7085
On May 15, 2002, the BIR sent First
Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the
total amount of P35,823,680.93.[if !supportFootnotes][13]
[endif]
First Asia protested the PAN in a letter dated
July 9, 2002.[if !supportFootnotes][14][endif]
Subsequently, the BIR issued a
Formal Letter of Demand for the alleged VAT
deficiency which was protested by First Asia in a
letter dated December 12, 2002.[if !supportFootnotes][15]
[endif]
On September 6, 2004, the BIR

rendered a Decision denying the protest and
ordering First Asia to pay the amount of
P35,823,680.93 for VAT deficiency for taxable
year 1999.[if !supportFootnotes][16][endif]
Accordingly, on October 20, 2004,
First Asia filed a Petition for Review before the
CTA, docketed as CTA Case No. 7085.[if !
CTA Case No. 7111

On April 16, 2004, the BIR sent a
PAN to First Asia for VAT deficiency on cinema
ticket sales for taxable year 2000 in the amount
of P35,840,895.78. First Asia protested the PAN
through a letter dated April 22, 2004.[if !supportFootnotes]
[18][endif]
Thereafter, the BIR issued a Formal

Letter of Demand for alleged VAT deficiency.[if !
First Asia protested the same in
a letter dated July 9, 2004.[if !supportFootnotes][20][endif]
On October 5, 2004, the BIR denied
the protest and ordered First Asia to pay the VAT
deficiency in the amount of P35,840,895.78 for
taxable year 2000.[if !supportFootnotes][21][endif]
This prompted First Asia to file a
Petition for Review before the CTA on December
16, 2004. The case was docketed as CTA Case
No. 7111.[if !supportFootnotes][22][endif]
80
CTA Case No. 7272

Re: Assessment Notice No. 008-02
A PAN for VAT deficiency on cinema
ticket sales for the taxable year 2002 in the total
amount of P32,802,912.21 was issued against
First Asia by the BIR. In response, First Asia filed
a protest-letter dated November 11, 2004. The
BIR then sent a Formal Letter of Demand, which
was protested by First Asia on December 14,
Re: Assessment Notice No. 003-03
A PAN for VAT deficiency on cinema
ticket sales in the total amount of P28,196,376.46
for the taxable year 2003 was issued by the BIR
against First Asia. In a letter dated September
23, 2004, First Asia protested the PAN. A Formal
Letter of Demand was thereafter issued by the
BIR to First Asia, which the latter protested
through a letter dated November 11, 2004. [if !
On May 11, 2005, the BIR rendered a

Decision denying the protests. It ordered First
Asia to pay the amounts of P33,610,202.91 and
P28,590,826.50 for VAT deficiency for taxable
years 2002 and 2003, respectively.[if !supportFootnotes][25]
[endif]
Thus, on June 22, 2005, First Asia

filed a Petition for Review before the CTA,
docketed as CTA Case No. 7272.[if !supportFootnotes][26]
[endif]
Consolidated Petitions
The Commissioner of Internal
Revenue (CIR) filed his Answers to the Petitions
filed by SM Prime and First Asia.[if !supportFootnotes][27]
[endif]
On July 1, 2005, SM Prime filed a

Motion to Consolidate CTA Case Nos. 7085, 7111
and 7272 with CTA Case No. 7079 on the
grounds that the issues raised therein are
identical and that SM Prime is a majority
shareholder of First Asia. The motion was
granted.[if !supportFootnotes][28][endif]
Upon submission of the parties
respective memoranda, the consolidated cases
were submitted for decision on the sole issue of
whether gross receipts derived from admission
tickets by cinema/theater operators or proprietors
are subject to VAT.[if !supportFootnotes][29][endif]
Ruling of the CTA First Division
On September 22, 2006, the First

Division of the CTA rendered a Decision granting
the Petition for Review. Resorting to the
language used and the legislative history of the
law, it ruled that the activity of showing
cinematographic films is not a service covered by
VAT under the National Internal Revenue Code
(NIRC) of 1997, as amended, but an activity
subject to amusement tax under RA 7160,
otherwise known as the Local Government Code
(LGC) of 1991. Citing House Joint Resolution
No. 13, entitled Joint Resolution Expressing the
True Intent of Congress with Respect to the
Prevailing Tax Regime in the Theater and Local
Film Industry Consistent with the States Policy to
Have a Viable, Sustainable and Competitive
Theater and Film Industry as One of its Partners
in National Development,[if !supportFootnotes][30][endif] the
CTA First Division held that the House of
Representatives resolved that there should only
be one business tax applicable to theaters and
movie houses, which is the 30% amusement tax
imposed by cities and provinces under the LGC
of 1991. Further, it held that consistent with the
States policy to have a viable, sustainable and
competitive theater and film industry, the national
government should be precluded from imposing
its own business tax in addition to that already
imposed and collected by local government units.
The CTA First Division likewise found that
Revenue Memorandum Circular (RMC) No. 282001, which imposes VAT on gross receipts from
admission to cinema houses, cannot be given
force and effect because it failed to comply with
the procedural due process for tax issuances
under RMC No. 20-86.[if !supportFootnotes][31][endif] Thus,
it disposed of the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court
hereby GRANTS the Petitions for Review.
Respondents Decisions denying petitioners
protests against deficiency value-added taxes are
hereby REVERSED. Accordingly, Assessment
Notices Nos. VT-00-000098, VT-99-000057, VT00-000122, 003-03 and 008-02 are ORDERED
cancelled and set aside.
Aggrieved, the CIR moved for
reconsideration which was denied by the First
Division in its Resolution dated December 14,
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA
En Banc.[if !supportFootnotes][34][endif] The case was
docketed as CTA EB No. 244.[if !supportFootnotes][35][endif]
The CTA En Banc however denied[if !supportFootnotes][36]
[endif]
the Petition for Review and dismissed[if !
as well petitioners Motion for
81
Reconsideration.
The CTA En Banc held that Section
108 of the NIRC actually sets forth an exhaustive
enumeration of what services are intended to be
subject to VAT. And since the showing or
exhibition of motion pictures, films or movies by
cinema operators or proprietors is not among the
enumerated activities contemplated in the phrase
sale or exchange of services, then gross
receipts derived by cinema/ theater operators or
proprietors from admission tickets in showing
motion pictures, film or movie are not subject to
VAT. It reiterated that the exhibition or showing of
motion pictures, films, or movies is instead
subject to amusement tax under the LGC of
1991. As regards the validity of RMC No. 282001, the CTA En Banc agreed with its First
Division that the same cannot be given force and
effect for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where
petitioner alleges that the CTA En Banc seriously
erred:
[if !supportLists](1)
[endif]In
not finding/holding that the gross receipts derived
by operators/proprietors of cinema houses from
admission tickets [are] subject to the 10% VAT
because:
[if !supportLists](a)
[endif]THE EXHIBITION
OF MOVIES BY CINEMA
OPERATORS/PROPRIETORS TO THE PAYING
PUBLIC IS A SALE OF SERVICE;
[if !supportLists](b)
[endif]UNLESS
EXEMPTED BY LAW, ALL SALES OF
SERVICES ARE EXPRESSLY SUBJECT TO VAT
UNDER SECTION 108 OF THE NIRC OF 1997;
[if !supportLists](c)
[endif]SECTION 108 OF
THE NIRC OF 1997 IS A CLEAR PROVISION
OF LAW AND THE APPLICATION OF RULES
OF STATUTORY CONSTRUCTION AND
EXTRINSIC AIDS IS UNWARRANTED;
[if !supportLists](d)
[endif]GRANTING
WITHOUT CONCEDING THAT RULES OF
CONSTRUCTION ARE APPLICABLE HEREIN,
STILL THE HONORABLE COURT
ERRONEOUSLY APPLIED THE SAME AND
PROMULGATED DANGEROUS PRECEDENTS;
[if !supportLists](e)
[endif]THERE IS NO
VALID, EXISTING PROVISION OF LAW
EXEMPTING RESPONDENTS SERVICES
FROM THE VAT IMPOSED UNDER SECTION
108 OF THE NIRC OF 1997;
[if !supportLists](f)
[endif]QUESTIONS ON
THE WISDOM OF THE LAW ARE NOT PROPER

ISSUES TO BE TRIED BY THE HONORABLE
COURT; and
[if !supportLists](g)
[endif]RESPONDENTS
WERE TAXED BASED ON THE PROVISION OF
SECTION 108 OF THE NIRC.
[endif]In
ruling that the enumeration in Section 108 of the
NIRC of 1997 is exhaustive in coverage;
[endif]In
misconstruing the NIRC of 1997 to conclude that
the showing of motion pictures is merely subject
to the amusement tax imposed by the Local
Government Code; and
(4)
In invalidating Revenue
Memorandu
m Circular
(RMC) No.
28-2001.[if !
supportFootnotes][38]
[endif]
Simply put, the issue in this case is

whether the gross receipts derived by operators
or proprietors of cinema/theater houses from
admission tickets are subject to VAT.
Petitioners Arguments
Petitioner argues that the
enumeration of services subject to VAT in Section
108 of the NIRC is not exhaustive because it
covers all sales of services unless exempted by
law. He claims that the CTA erred in applying the
rules on statutory construction and in using
extrinsic aids in interpreting Section 108 because
the provision is clear and unambiguous. Thus, he
maintains that the exhibition of movies by cinema
operators or proprietors to the paying public,
being a sale of service, is subject to VAT.
Respondents Arguments
Respondents, on the other hand,
argue that a plain reading of Section 108 of the
NIRC of 1997 shows that the gross receipts of
proprietors or operators of cinemas/theaters
derived from public admission are not among the
services subject to VAT. Respondents insist that
gross receipts from cinema/theater admission
tickets were never intended to be subject to any
tax imposed by the national government.
According to them, the absence of gross receipts
82
from cinema/theater admission tickets from the
list of services which are subject to the national
amusement tax under Section 125 of the NIRC of
1997 reinforces this legislative intent.
Respondents also highlight the fact that RMC No.
28-2001 on which the deficiency assessments
were based is an unpublished administrative
ruling.
of the physical or mental faculties. The phrase

sale or exchange of services shall likewise
include:
(1) The lease or the use of or the right
or privilege to use any copyright, patent, design
or model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
Our Ruling
xxxx
The petition is bereft of merit.
The enumeration of services subject to VAT
under Section 108 of the NIRC is not exhaustive
(7) The lease of motion

picture films, films,
tapes and discs; and
Section 108 of the NIRC of the 1997

reads:
SEC. 108. Value-added Tax on Sale of
Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There
shall be levied, assessed and collected, a valueadded tax equivalent to ten percent (10%) of
gross receipts derived from the sale or exchange
of services, including the use or lease of
properties.
The phrase sale or exchange of
services means the performance of all kinds of
services in the Philippines for others for a fee,
remuneration or consideration, including those
performed or rendered by construction and
service contractors; stock, real estate,
commercial, customs and immigration brokers;
lessors of property, whether personal or real;
warehousing services; lessors or distributors of
cinematographic films; persons engaged in
milling, processing, manufacturing or repacking
goods for others; proprietors, operators or
keepers of hotels, motels, rest houses, pension
houses, inns, resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and other
eating places, including clubs and caterers;
dealers in securities; lending investors;
transportation contractors on their transport of
goods or cargoes, including persons who
transport goods or cargoes for hire and other
domestic common carriers by land, air and water
relative to their transport of goods or cargoes;
services of franchise grantees of telephone and
telegraph, radio and television broadcasting and
all other franchise grantees except those under
Section 119 of this Code; services of banks, nonbank financial intermediaries and finance
companies; and non-life insurance companies
(except their crop insurances), including surety,
fidelity, indemnity and bonding companies; and
similar services regardless of whether or not the
performance thereof calls for the exercise or use
(8) The lease or the use of

or the right to use radio,
television, satellite
transmission and cable
television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing

provision clearly shows that the enumeration of
the sale or exchange of services subject to VAT
is not exhaustive. The words, including, similar
services, and shall likewise include, indicate
that the enumeration is by way of example only.[if !
Among those included in the

enumeration is the lease of motion picture films,
films, tapes and discs. This, however, is not the
same as the showing or exhibition of motion
pictures or films. As pointed out by the CTA En
Banc:
83
Exhibition in Blacks Law Dictionary
is defined as To show or
display. x x x To produce
anything in public so that
it may be taken into
possession (6th ed., p.
573). While the word
lease is defined as a
contract by which one
owning such property
grants to another the
right to possess, use and
enjoy it on specified
period of time in
exchange for periodic
payment of a stipulated
price, referred to as rent
(Blacks Law Dictionary,
6th ed., p. 889). x x x[if !
Since the activity of showing motion

pictures, films or movies by cinema/ theater
operators or proprietors is not included in the
enumeration, it is incumbent upon the court to the
determine whether such activity falls under the
phrase similar services. The intent of the
legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be
covered by VAT
Under the NIRC of 1939,[if !supportFootnotes]
the national government imposed
amusement tax on proprietors, lessees, or
operators of theaters, cinematographs, concert
halls, circuses, boxing exhibitions, and other
places of amusement, including cockpits, race
tracks, and cabaret.[if !supportFootnotes][42][endif] In the case
of theaters or cinematographs, the taxes were
first deducted, withheld, and paid by the
proprietors, lessees, or operators of such
theaters or cinematographs before the gross
receipts were divided between the proprietors,
lessees, or operators of the theaters or
cinematographs and the distributors of the
cinematographic films. Section 11[if !supportFootnotes][43]
[endif]
of the Local Tax Code,[if !supportFootnotes][44][endif]
however, amended this provision by transferring
the power to impose amusement tax[if !supportFootnotes]
[45][endif]
on admission from theaters,
cinematographs, concert halls, circuses and other
places of amusements exclusively to the local
government. Thus, when the NIRC of 1977[if !
was enacted, the national
[41][endif]
government imposed amusement tax only on

proprietors, lessees or operators of cabarets, day
and night clubs, Jai-Alai and race tracks.[if !
On January 1, 1988, the VAT Law[if !

was promulgated. It amended
certain provisions of the NIRC of 1977 by
imposing a multi-stage VAT to replace the tax on
original and subsequent sales tax and
percentage tax on certain services. It imposed
VAT on sales of services under Section 102
thereof, which provides:
SECTION
102. Value-added tax
on sale of services. (a)
Rate and base of tax.
There shall be levied,
assessed and collected,
a value-added tax
equivalent to 10%
percent of gross receipts
derived by any person
engaged in the sale of
services. The phrase
sale of services means
the performance of all
kinds of services for
others for a fee,
remuneration or
consideration, including
those performed or
rendered by construction
and service contractors;
stock, real estate,
commercial, customs and
immigration brokers;
lessors of personal
property; lessors or
distributors of
cinematographic films;
persons engaged in
milling, processing,
manufacturing or
repacking goods for
others; and similar
services regardless of
whether or not the
performance thereof calls
for the exercise or use of
the physical or mental
faculties: Provided That
the following services
performed in the
Philippines by VATregistered persons shall
be subject to 0%:
84
(b)
Determination of the tax.
(1) Tax billed as a
separate item in the
invoice. If the tax is
billed as a separate item
in the invoice, the tax
shall be based on the
gross receipts, excluding
the tax.
(1)
Processing
manufacturing or
repacking goods for other
persons doing business
outside the Philippines
which goods are
subsequently exported, x
xx
(2)
Tax
not billed separately or is
billed erroneously in the
invoice. If the tax is
not billed separately or is
billed erroneously in the
invoice, the tax shall be
determined by multiplying
the gross receipts
(including the amount
intended to cover the tax
or the tax billed
erroneously) by 1/11.
(Emphasis supplied)
xxxx
Gross
receipts means the total
amount of money or its
equivalent representing
the contract price,
compensation or service
fee, including the amount
charged for materials
supplied with the
services and deposits or
advance payments
actually or constructively
received during the
taxable quarter for the
service performed or to
be performed for another
person, excluding valueadded tax.
Persons subject to amusement tax under the

NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.[if !supportFootnotes]
[49][endif]
On February 19, 1988, then

Commissioner Bienvenido A. Tan, Jr. issued
RMC 8-88, which clarified that the power to
impose amusement tax on gross receipts derived
from admission tickets was exclusive with the
local government units and that only the gross
receipts of amusement places derived from
sources other than from admission tickets were
subject to amusement tax under the NIRC of
1977, as amended. Pertinent portions of RMC 888 read:
Under the
Local Tax Code (P.D.
231, as amended), the
jurisdiction to levy
amusement tax on gross
receipts arising from
85
admission to places of
amusement has been
transferred to the local
governments to the
exclusion of the national
government.
xxxx
Since the
promulgation of the Local
Tax Code which took
effect on June 28, 1973
none of the amendatory
laws which amended the
National Internal
Revenue Code, including
the value added tax law
under Executive Order
No. 273, has amended
the provisions of Section
11 of the Local Tax Code.
Accordingly, the sole
jurisdiction for collection
of amusement tax on
admission receipts in
places of amusement
rests exclusively on the
local government, to the
exclusion of the national
government. Since the
Bureau of Internal
Revenue is an agency of
the national government,
then it follows that it has
no legal mandate to levy
amusement tax on
admission receipts in the
said places of
amusement.
Considering
the foregoing legal
background, the
provisions under Section
123 of the National
Internal Revenue Code
as renumbered by
Executive Order No. 273
(Sec. 228, old NIRC)
pertaining to amusement
taxes on places of
amusement shall be
implemented in
accordance with BIR
RULING, dated
December 4, 1973 and
BIR RULING NO. 231-86
dated November 5, 1986
to wit:
x x x
Accordingly, only the
gross receipts of the
amusement places
derived from sources
other than from
admission tickets shall
be subject to x x x
amusement tax
prescribed under
Section 228 of the Tax
Code, as amended (now
Section 123, NIRC, as
amended by E.O. 273).
The tax on gross
receipts derived from
admission tickets shall
be levied and collected
by the city government
pursuant to Section 23
of Presidential Decree
No. 231, as amended x
x x or by the
provincial government,
of P.D. 231, otherwise
known as the Local Tax
86
Code. (Emphasis
supplied)
government.
[endif]Under the
NIRC of 1977, the national government imposed
amusement tax only on proprietors, lessees or
operators of cabarets, day and night clubs, JaiAlai and race tracks.
On October 10, 1991, the LGC of

1991 was passed into law. The local government
retained the power to impose amusement tax on
proprietors, lessees, or operators of theaters,
cinemas, concert halls, circuses, boxing stadia,
and other places of amusement at a rate of not
more than thirty percent (30%) of the gross
receipts from admission fees under Section 140
thereof.[if !supportFootnotes][50][endif] In the case of theaters
or cinemas, the tax shall first be deducted and
withheld by their proprietors, lessees, or
operators and paid to the local government
before the gross receipts are divided between
said proprietors, lessees, or operators and the
distributors of the cinematographic films.
However, the provision in the Local Tax Code
expressly excluding the national government from
collecting tax from the proprietors, lessees, or
operators of theaters, cinematographs, concert
halls, circuses and other places of amusements
was no longer included.
In 1994, RA 7716 restructured the
VAT system by widening its tax base and
enhancing its administration. Three years later,
RA 7716 was amended by RA 8241. Shortly
thereafter, the NIRC of 1997[if !supportFootnotes][51][endif]
was signed into law. Several amendments[if !
were made to expand the
coverage of VAT. However, none pertain to
cinema/theater operators or proprietors. At
present, only lessors or distributors of
cinematographic films are subject to VAT. While
persons subject to amusement tax[if !supportFootnotes][53]
[endif]
under the NIRC of 1997 are exempt from the
coverage of VAT.[if !supportFootnotes][54][endif]
Based on the foregoing, the following
facts can be established:
[endif]Historically,
the activity of showing motion pictures, films or
movies by cinema/theater operators or
proprietors has always been considered as a
form of entertainment subject to amusement tax.
[endif]Prior to the
Local Tax Code, all forms of amusement tax were
imposed by the national government.
[endif]When the
Local Tax Code was enacted, amusement tax on
admission tickets from theaters, cinematographs,
concert halls, circuses and other places of
amusements were transferred to the local
[endif]The VAT law
was enacted to replace the tax on original and
subsequent sales tax and percentage tax on
certain services.
[endif]When the VAT
law was implemented, it exempted persons
subject to amusement tax under the NIRC from
the coverage of VAT.
[endif]When the
Local Tax Code was repealed by the LGC of
1991, the local government continued to impose
amusement tax on admission tickets from
theaters, cinematographs, concert halls, circuses
and other places of amusements.
[endif]Amendments
to the VAT law have been consistent in exempting
persons subject to amusement tax under the
NIRC from the coverage of VAT.
[endif]Only lessors
or distributors of cinematographic films are
included in the coverage of VAT.
These reveal the legislative intent not
to impose VAT on persons already covered by the
amusement tax. This holds true even in the case
of cinema/theater operators taxed under the LGC
of 1991 precisely because the VAT law was
intended to replace the percentage tax on certain
services. The mere fact that they are taxed by
the local government unit and not by the national
government is immaterial. The Local Tax Code, in
transferring the power to tax gross receipts
derived by cinema/theater operators or proprietor
from admission tickets to the local government,
did not intend to treat cinema/theater houses as a
separate class. No distinction must, therefore,
be made between the places of amusement
taxed by the national government and those
taxed by the local government.
To hold otherwise would impose an
unreasonable burden on cinema/theater houses
operators or proprietors, who would be paying an
additional 10%[if !supportFootnotes][55][endif] VAT on top of
the 30% amusement tax imposed by Section 140
of the LGC of 1991, or a total of 40% tax. Such
imposition would result in injustice, as persons
taxed under the NIRC of 1997 would be in a
better position than those taxed under the LGC of
1991. We need not belabor that a literal
application of a law must be rejected if it will
87
operate unjustly or lead to absurd results.[if !
Thus, we are convinced that the
legislature never intended to include
cinema/theater operators or proprietors in the
coverage of VAT.
On this point, it is apropos to quote the
case of Roxas v. Court of Tax Appeals,[if !
to wit:
The power of
taxation is sometimes
called also the power to
destroy. Therefore, it
should be exercised with
caution to minimize injury
to the proprietary rights
of a taxpayer. It must be
exercised fairly, equally
and uniformly, lest the tax
collector kill the hen that
lays the golden egg.
And, in order to maintain
the general public's trust
and confidence in the
Government this power
must be used justly and
not treacherously.
The repeal of the Local Tax Code by the LGC of

1991 is not a legal basis for the imposition of VAT
Petitioner, in issuing the assessment
notices for deficiency VAT against respondents,
ratiocinated that:
Basically, it
was acknowledged that a
cinema/theater operator
was then subject to
amusement tax under
Section 260 of
Commonwealth Act No.
466, otherwise known as
the National Internal
Revenue Code of 1939,
computed on the amount
paid for admission. With
the enactment of the
Local Tax Code under
Presidential Decree (PD)
No. 231, dated June 28,
1973, the power of
imposing taxes on gross
receipts from admission
of persons to
cinema/theater and other
places of amusement
had, thereafter, been
transferred to the
provincial government, to
the exclusion of the
national or municipal
government (Sections 11
& 13, Local Tax Code).
However, the said
provision containing the
exclusive power of the
provincial government to
impose amusement tax,
had also been repealed
and/or deleted by
Republic Act (RA) No.
7160, otherwise known
as the Local Government
Code of 1991, enacted
into law on October 10,
1991. Accordingly, the
enactment of RA No.
7160, thus, eliminating
the statutory
prohibition on the
national government to
impose business tax on
gross receipts from
admission of persons
to places of
amusement, led the
way to the valid
imposition of the VAT
(now Section 108) of
the old Tax Code, as
amended by the
Expanded VAT Law (RA
No. 7716) and which
was implemented
beginning January 1,
(Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by
the LGC of 1991 is not a legal basis for the
imposition of VAT on the gross receipts of
cinema/theater operators or proprietors derived
from admission tickets. The removal of the
prohibition under the Local Tax Code did not
grant nor restore to the national government the
power to impose amusement tax on
cinema/theater operators or proprietors. Neither
88
did it expand the coverage of VAT. Since the
imposition of a tax is a burden on the taxpayer, it
cannot be presumed nor can it be extended by
implication. A law will not be construed as
imposing a tax unless it does so clearly,
expressly, and unambiguously.[if !supportFootnotes][59][endif]
As it is, the power to impose amusement tax on
cinema/theater operators or proprietors remains
with the local government.
Considering that there is no provision

of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived
from admission tickets, RMC No. 28-2001 which
imposes VAT on the gross receipts from
admission to cinema houses must be struck
down. We cannot overemphasize that RMCs
must not override, supplant, or modify the law,
but must remain consistent and in harmony with,
the law they seek to apply and implement.[if !
Revenue Memorandum Circular No. 28-2001 is

invalid
In view of the foregoing, there is no

need to discuss whether RMC No. 28-2001
complied with the procedural due process for tax
issuances as prescribed under RMC No. 20-86.
Rule on tax exemption does not apply
Moreover, contrary to the view of
petitioner, respondents need not prove their
entitlement to an exemption from the coverage of
VAT. The rule that tax exemptions should be
construed strictly against the taxpayer
presupposes that the taxpayer is clearly subject
to the tax being levied against him.[if !supportFootnotes][61]
[endif]
The reason is obvious: it is both illogical and
impractical to determine who are exempted
without first determining who are covered by the
provision.[if !supportFootnotes][62][endif] Thus, unless a
statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally wellsettled rule that the imposition of a tax cannot be
presumed.[if !supportFootnotes][63][endif] In fact, in case of
doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.[if !
WHEREFORE, the Petition is hereby DENIED.

The assailed April 30, 2008 Decision of the Court
of Tax Appeals En Banc holding that gross
receipts derived by respondents from admission
tickets in showing motion pictures, films or
movies are not subject to value-added tax under
Section 108 of the National Internal Revenue
Code of 1997, as amended, and its June 24,
2008 Resolution denying the motion for
reconsideration are AFFIRMED.
SO ORDERED.

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 107434 October 10, 1997
89
CITIBANK, N.A., petitioner,
vs.
COURT OF APPEALS and COMMISSIONER
OF INTERNAL REVENUE, respondents.
PANGANIBAN, J.:
The law requires a lessee to withhold and remit to
the Bureau of Internal Revenue (BIR) five percent
(5%) of the rental due the lessor, by way of
advance payment of the latter's income tax
liability. Is the lessor entitled to a refund of such
withheld amount after it is determined that the
lessor was not, in fact, liable for any income tax
at all because its annual operation resulted in a
net loss as shown in its income tax return filed at
the end of the taxable year?
This is the question raised in this petition for
review on certiorari of the Court of Appeals 1
Decision 2 promulgated on May 27, 1992 and
Resolution 3 promulgated on October 27, 1992 in
CA-G.R. No. SP-26555, reversing the decision of
the Court of Tax Appeals which allowed the tax
refund.
The Facts
The facts, as found by Respondent Court, are
undisputed. 4
From the pleadings and supporting papers on
hand, it can be gathered that Citibank N.A.
Philippine Branch (CITIBANK) is a foreign
corporation doing business in the Philippines. In
1979 and 1980, its tenants withheld and paid to
the Bureau of Internal Revenue the following
taxes on rents due to Citibank, pursuant to
Section 1(c) of the Expanded Withholding Tax
Regulations (BIR Revenue Regulations No. 1378, as amended), to wit:
1979
First quarter P60,690.97
Second quarter 69,897.08
Third quarter 69,160.89
Fourth quarter 70,160.56
P270,160.56
1980
First quarter P78,370.22
Second quarter 69,049.37
Third quarter 79,139.60
Fourth quarter 72,270.10
P298,829.29
On April 15, 1980, Citibank filed its corporate
income tax returns for the year ended December
31, 1979 (Exh. "E:), showing a net loss of
P74,854,916.00 and its tax credits totalled
P6,257,780.00, even without including the
amounts withheld on rental income under the
Expanded Withholding Tax System, the same not
having been utilized or applied for the reason that
the year's operation resulted in a loss. (Exh. & "E1 & E-2"). The taxes thus withheld by the tenants
from rentals paid to Citibank in 1979 were not
included as tax credits although a rental income
amounting to P7,796,811.00 was included in its

income declared for the year ended December
31, 1979 (Exhs. "E-3" & "E-4").
For the year ended December 31, 1980,
Citibank's corporate income tax returns (Exh.
"EC"), filed on April 15, 1981, showed a net loss
of P77,071,790.00 for income tax purposes. Its
available tax credit (refundable) at the end of
1980 amounting to P11,532,855.00 (Exh. "BC-1"
& "BC-2") was not utilized or applied. The said
available tax credits did not include the amounts
withheld by Citibank's tenants from rental
payments in 1980 but the rental payments for that
year were declared as part of its gross income
included in its annual income tax returns (Exh.
"BC-3").
On October 31, 1981, Citibank submitted its claim
for refund of the aforesaid amounts of
P270,160.56 and P298,829, respectively, or a
total of P568,989.85; and on October 12, 1981
filed a petition for review with the Court of Tax
Appeals concerning subject claim for tax refund,
docketed as CTA Case No. 3378. 5
On August 30, 1981, the Court of Tax Appeals
adjudged Citibank's entitlement to the tax refund
sought for, representing the 5% tax withheld and
paid on Citibank's rental income for 1979 and
1980. . . .
In its decision 6 granting a refund to petitioner, 7
the Court of Tax Appeals rejected Respondent
Commissioner's argument that the claim was not
seasonably filed:
WHEREFORE, respondent is hereby ordered to
grant the refund of the amount sought by the
petitioner. No costs.
Not satisfied, the Commissioner appealed to the
Court of Appeals. In due course, Respondent
Court issued the assailed Decision and
Resolution, ruling that the five percent tax
withheld by tenants from the rental income of
Citibank for the years 1979 and 1980 was in
accordance with Section 1(c) of the Expanded
Withholding Tax Regulations (BIR Revenue
Regulation No. 13-78, as amended) and did not
involve illegally or erroneously collected taxes.
The dispositive portion of the Decision reads: 8
WHEREFORE, the appealed judgment of August
30, 1991, adjudging Citibank, N.A., Philippine
Branch, entitled to a tax refund/credit in the
amount of P569,989.85, representing the 5%
withheld tax on Citibank's rental income for the
taxable years 1979 and 1980 is hereby
REVERSED. No pronouncement as to costs.
Respondent Court denied the motion for
reconsideration of the petitioner-bank in the
assailed Resolution, the dispositive portion of
which reads: 9
WHEREFORE, for want of merit, the motion for
reconsideration, dated June 19, 1992, of
respondent Citibank, N.A. is hereby DENIED.
SO ORDERED.
Hence, this petition under Rule 45 of the Rules of
90
Court.
The Issues
The appellate court ruled that it was not enough
for petitioner to show its lack of income tax
liability against which the five percent withholding
tax could be credited. Petitioner should have also
shown that the withholding tax was illegally or
erroneously collected and remitted by the
tenants. On the other hand, petitioner counters
that Respondent Court failed to grasp "two
fundamental concepts in the present income tax
system, namely: (1) the yearly computation of the
corporate income tax and (2) the nature of the
creditable withholding tax."
In the main, petitioner thus raises the following
issues: (1) For creditable withholding tax to be
refundable, when should the illegality or error in
its assessment or collection be reckoned: at the
time of withholding or at the end of the taxable
year? (2) Where the income tax returns show that
no income tax is payable to the government, is a
creditable withholding tax, as contradistinguished
from a final tax, refundable (or creditable) at the
end of the taxable year?
The Court's Ruling
The petition is meritorious.
First Issue: Determination of the Illegality or Error
in Assessment or Collection
Tax refunds are allowed under Section 230 of the
National Internal Revenue Code:
Sec. 230. Recovery of tax 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 excessive 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
begun after the expiration of two 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 written 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.
Petitioner maintains that it is entitled to a refund
of the five percent creditable withholding tax in
1979 and 1980, since its operations resulted in a
net loss and thus did not have any income tax
liability for such years. Respondent Court refused
to allow the claim for refund for the reason that
the taxes were "not illegally or erroneously
collected:" 10
It is decisively clear that the instant claim for tax
refund under scrutiny does not involve illegally or

erroneously collected taxes. It involves the 5%
tax withheld by tenants from the rental income of
Citibank for the years 1979 and 1980, in
accordance with Section 1(c) of the Expanded
Withholding Tax Regulations (BIR Revenue
Regulation No. 13-78 as amended) . . .
It is thus evident that the tenants or lessee of
Citibank were required by law to withhold and pay
to BIR 5% of their rental and, therefore, such
withholding taxes were not illegally or erroneously
collected. It was the burden of Citibank to prove
that the taxes it asked to be refunded were
illegally or erroneously collected; an onus
probandi Citibank utterly failed to discharge.
We disagree with the Court of Appeals. In several
cases, we have already ruled that income taxes
remitted partially on a periodic or quarterly basis
should be credited or refunded to the taxpayer on
the basis of the taxpayer's final adjusted returns,
nor on such periodic or quarterly basis. 11 For
instance, in the recent case of Commissioner of
Internal Revenue vs. Philippine American Life
Insurance Co., 12 the Court held:
. . . When applied to taxpayers filing income tax
returns on a quarterly basis, the date of payment
mentioned in Section 292 (now Section 230)
must be deemed to be qualified by Sections 68
and 69 of the present Tax Code . . .
It may be observed that although quarterly taxes
due are required to be paid within 60 days from
the close of each quarter, the fact that the amount
shall be deducted from the tax due for the
succeeding quarter shows that until a final
adjustment return shall have been filed, the taxes
paid in the preceding quarters are merely partial
taxes due from a corporation. Neither amount can
serve as the final figure to quantify what is due
the government nor what should be refunded to
the corporation.
This interpretation may be gleaned from the last
paragraph of Section 69 of the Tax Code which
provides that the refundable amount, in case a
refund is due a corporation, is that amount which
is shown on its final adjustment return and not on
its quarterly returns.
xxx xxx xxx
Clearly the prescriptive period of two years
should commence to run only from the time that
the refund is ascertained, which can only be
determined after a final adjustment return is
accomplished. Private respondent being a
corporation, Section 292 (now Section 230)
cannot serve as the sole basis for determining
the two-year prescriptive period for refunds. . . .
In the present case, there is no question that the
taxes were withheld in accordance with Section
1(c), Rev. Reg. No. 13-78. In that sense, it can be
said that they were withheld legally by the
tenants. However, the annual income tax returns
of petitioner-bank for tax years 1979 and 1980
undisputedly reflected the net losses it suffered.
91
The question arises: whether the taxes withheld
remained legal and correct at the end of each
taxable year. We hold in the negative.
The withholding tax system was devised for two
main reasons: first, to provide the taxpayer a
convenient manner to meet his probable income
tax liability; and second, to ensure the collection
of the income tax which could otherwise be lost
or substantially reduced through failure to file the
corresponding returns. 13 To these, a third reason
may be added: to improve the government's cash
flow. Under Section 53 a-f of the tax code which
was in effect at the time this case ripened,
withholding of tax at source was mandated in
cases of: (a) tax free covenant bonds, (b)
payments of interest, dividends, rents, royalties,
salaries, wages, premiums, annuities,
compensations, remunerations, emoluments, or
other fixed or determinable annual, periodical, or
casual gains, profits and income, and capital
gains of non-resident aliens and foreign
corporations; (c) dividends from a domestic
corporation and royalties received by resident
individuals and corporation; (d) certain dividends;
(e) interest on bank deposit; and (f) other items of
income payable to resident individuals or
corporations. Section 53-f was amended by
Presidential Decree No. 1351, delegating to the
Secretary of Finance the power to require the
withholding of a tax, as follows:
Sec. 1. Section 53 (f) of the National Internal
Revenue Code of 1997 is hereby amended to
read as follows:
(f) The Secretary of Finance may, upon
recommendation of the Commissioner of Internal
Revenue, require also the withholding of a tax on
the same items of income payable to persons
(natural or juridical) residing in the Philippines by
the same persons mentioned in paragraph (b) (1)
of this Section at the rate of not less than 2-1/2%
but not more than 35% thereof which shall be
credited against the income tax liability of the
taxpayer for the taxable year.
Pursuant to said P.D. No. 1351 and in
accordance with Section 4 in relation to Section
326 14 of the National Internal Revenue Code, the
Commissioner promulgated on September 7,
1978, Revenue Regulations No. 13-78 to
implement the withholding of creditable income
taxes from certain types of income. Rev. Reg. No.
13-78 requires that a certain percentage of
income be deducted and withheld by a payor,
who is constituted as the withholding agent, and
paid to the revenue district officer or BIR
collection agent. Section 1 of this revenue
regulation provides:
Sec. 1. Income payments subject to withholding
tax and rates prescribed therein. Except as
herein otherwise provided, there shall be withheld
a creditable income tax at the rates herein
specified for each class of payee from the
following items of income payments to persons
residing in the Philippines:

(a) xxx xxx xxx
(b) xxx xxx xxx
(c) Rentals. When the gross rental or other
payment required to be made as a condition to
the continued use or possession of property,
whether real or personal, to which the payor or
obligor has not taken or is not taking title or in
which he has no equity, exceeds five hundred
pesos (P500.00) five per centum (5%).
xxx xxx xxx
Under this system, income is viewed as a flow 15
and is measured over a period of time known as
an "accounting period." An accounting period
covers twelve months, subdivided into four equal
segments known as "quarters." Income realized
within the taxpayer's annual accounting period
(fiscal or calendar year) becomes the basis for
the computation of the gross income and the tax
liability. 16
The same basic principles apply under the
prevailing tax laws. Under the present tax code,
the types of income subject to withholding tax in
Section 53, now Section 50, is simplified into
three categories: (a) withholding of final tax on
certain incomes; (b) withholding of creditable tax
at source; and (c) tax free covenant bonds.
Accordingly, the withheld amounts equivalent to
five percent of the gross rental are remitted to the
BIR and are considered creditable withholding
taxes under Section 53-f, i.e., creditable against
income tax liability for that year. The taxes
withheld, as ruled in Gibbs vs. Commissioner of
Internal Revenue, 17 are in the nature of payment
by a taxpayer in order to extinguish his possible
tax obligation. They are installments on the
annual tax which may be due at the end of the
taxable year. 18
In this case, petitioner's lessees withheld and
remitted to the BIR the amounts now claimed as
tax refunds. That they were withheld and remitted
pursuant to Rev. Reg. No. 13-78 does not
derogate from the fact that they were merely
partial payments of probable taxes. Like the
corporate quarterly income tax, creditable
withholding taxes are subject to adjustment upon
determination of the correct income tax liability
after the filing of the corporate income tax return,
as at the end of the taxable year. This final
determination of the corporate income tax liability
is provided in Section 69, NIRC:
Sec. 69. Final Adjustment Return. Every
corporation liable to tax under Section 24 shall
file a final adjustment return covering the total
taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is
not equal to the total tax due on the entire taxable
net income of that year the corporation shall
either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the
92
case may be.
In case the corporation is entitled to a refund of
the excess estimated quarterly income taxes
paid, the refundable amount shown on its final
adjustment return may be credited against the
estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year.
The taxes thus withheld and remitted are
provisional in nature. 19 We repeat: five per cent
of the rental income withheld and remitted to the
BIR pursuant to Rev. Reg. No. 13-78 is, unlike
the withholding of final taxes on passive incomes,
a creditable withholding tax; that is, creditable
against income tax liability if any, for that taxable
year.
In Commissioner of Internal Revenue vs. TMX
Sales, Inc., 20 this Court ruled that the payments
of quarterly income taxes (per Section 68, NIRC)
should be considered mere installments of the
annual tax due. These quarterly tax payments,
which are computed based on the cumulative
figures of gross receipts and deductions in order
to arrive at a net taxable income, should be
treated as advances or portions of the annual
income tax due, to be adjusted at the end of the
calendar or fiscal year. The same holds true in
the case of the withholding of creditable tax at
source. Withholding taxes are "deposits" which
are subject to adjustments at the proper time
when the complete tax liability is determined.
In this case, the payments of the withholding
taxes for 1979 and 1980 were creditable to the
income tax liability, if any, of petitioner-bank,
determined after the filing of the corporate
income tax returns on April 15, 1980 and April 15,
1981. As petitioner posted net losses in its 1979
and 1980 returns, it was not liable for any income
taxes. Consequently and clearly, the taxes
withheld during the course of the taxable year,
while collected legally under the aforesaid
revenue regulation, became untenable and took
on the nature of erroneously collected taxes at
the end of the taxable year.
Second Issue: Onus of Disputing a Claim for
Refund
In general, there is no disagreement that a
claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or
refund. 21 Tax refunds, like tax exemptions, are
construed strictly against the taxpayer. The
mechanics of a tax refunds provided in Rev. Reg.
No. 13-78:
Sec. 8. Claims for tax credit or refund. Claims
for tax credit or refund of income tax deducted
and withheld on income payments shall be given
due course only when it is shown on the return
that the income payment received was declared
as part of the gross income and the fact of
withholding is established by a copy of the
statement, duly issued by the payor to the payee
(BIR Form No. 1743-A) showing the amount paid
and the amount of tax withheld therefrom.
A refund claimant is required to prove the

inclusion of the income payments which were the
basis of the withholding taxes and the fact of
withholding. However, detailed proof of the
truthfulness of each and every item in the income
tax return is nor required. That function is lodged
in the commissioner of internal revenue by the
NIRC which requires the commissioner to assess
internal revenue taxes within three years after the
last day prescribed by law for the filing of the
return. 22 In San Carlos Milling Co., Inc. vs.
Commissioner of Internal Revenue, 23 the Court
held that the internal revenue branch of
government must investigate and confirm the
claims for tax refund or credit before taxpayers
may avail themselves of this option. The grant of
a refund is founded on the assumption that the
tax return is valid; that is, the facts stated therein
are true and correct. 24 In fact, even without
petitioner's tax claim, the commissioner can
proceed to examine the books, records of the
petitioner-bank, or any data which may be
relevant or material in accordance with Section
16 of the present NIRC.
In the case in hand, Respondent Commissioner
examined petitioner's income tax returns and
presumably found no false declaration in them,
because he did not allege any such false
declaration before Respondent Court and the
Court of Tax Appeals (CTA). In the CTA,
Respondent Commissioner's refusal to refund
was based on the argument that the claim filed
on October 31, 1981 was time-barred. It bears
stressing that this issue was not raised in the
appeal before us. The issue of operational losses
was not raised until the appeal before
Respondent Court was filed on February 5, 1992.
By such time, at least a decade had already
passed since the pertinent books and accounting
records of petitioner-bank were closed. Section
235 of the Tax Code requires the preservation of
the books of account and records only "for a
period beginning from the last entry in each book
until the last day prescribed by Section 203."
Section 203 provides that 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 an
assessment for the collection of such taxes shall
begin after the expiration of such period. To
expect petitioner to have its book and records on
hand during the appeal was obviously
unreasonable and violative of Section 235 in
relation to Section 203 of the Tax Code.
In addition, the Tax Code has placed several
safety measures to prevent falsification of income
tax returns which the Court recognized in
Commissioner vs. TMX Sales, Inc.: 25
Furthermore, Section 321 (now Section 232) of
the National Internal Revenue Code requires that
the books of accounts of companies or persons
with gross quarterly sales or earnings exceeding
93
Twenty Five Thousand Pesos (P25,000.00) be
audited and examined yearly by an independent
Certified Public Accountant and their income tax
returns be accompanied by certified balance
sheets, profit and loss statements, schedules
listing income producing properties and the
corresponding incomes therefrom and other
related statements.
It is generally recognized that before an
accountant can make a certification on the
financial statements or render an auditor's
opinion, an audit of the books of accounts has to
be conducted in accordance with generally
accepted auditing standards.
Since the audit, as required by Section 321 (now
Section 232) of the Tax Code is to be conducted
yearly, then it is the Final Adjustment Return,
where the figures of the gross receipts and
deductions have been audited and adjusted, that
is truly reflective of the results of the operations of
a business enterprise. Thus, it is only when the
Adjustment Return covering the whole year is
filed that the taxpayer would know whether a tax
is still due or a refund can be claimed based on
the adjusted and audited figures.
Therefore, the alleged irregularity in the declared
operational losses is a matter which must be
proven by competent evidence. In resisting the
claims of petitioner, Respondent Commissioner
set up the defense of the legality of the collection
of the creditable withholding tax as well as
prescription, instead of presenting an assessment
of the proper tax liability of the petitioner. This fact
leads us to the conclusion that the income tax
returns were accepted as accurate and regular by
the BIR.
After this case was filed, the Commissioner
clarified on June 27, 1994, the onus probandi of a
taxpayer claiming refund of overpaid withholding
taxes, inter alia, in Revenue Regulation No. 1294, Section 10:
Sec. 10. Claim for Tax Credit or Refund.
(a) Claims for Tax Credit or Refund of income tax
deducted and withheld on income payments shall
be given due course only when it is shown on the
return that the income payment received has
been declared as part of the gross income and
the fact of withholding is established by a copy of
the Withholding Tax Statement duly issued by the
payor to the payee showing the amount paid and
the amount of tax withheld therefrom.
(b) Excess Credits. A taxpayer's excess
expanded withholding tax credits for the taxable
quarter/taxable year shall automatically be
allowed as a credit for purposes of filing his
income tax return for the taxable quarter/taxable
year immediately succeeding the taxable
quarter/taxable year in which the aforesaid
excess credit arose, provided, however, he

submits with his income tax return a copy of his
income tax return for the aforesaid previous
taxable period showing the amount of his
aforementioned excess withholding tax credits.
If the taxpayer, in lieu of the aforesaid automatic
application of his excess credit, wants a cash
refund or a tax credit certificate for use in
payment of his other national internal tax
liabilities, he shall make a written request
therefor. Upon filing of his request, the taxpayer's
income tax return showing the excess expanded
withholding tax credits shall be examined. The
excess expanded withholding tax, if any, shall
determined and refunded/credited to the
taxpayer-applicant. The refunded/credit shall be
made within a period of sixty (60) days from date
of the taxpayer's request provided, however, that
the taxpayer-applicant submitted for audit all his
pertinent accounting records and that the
aforesaid records established the veracity of his
claim for a refund/credit of his excess expanded
withholding tax credits.
Prior to Rev. Reg. 12-94, the requisites for a
refund were: (1) the income tax return for the
previous year must show that income payment
(rental in this case) was reported as part of the
gross income; and (2) the withholding tax
statement of the withholding tax agent must show
that payment of the creditable withholding tax
was made. However, even without this regulation,
the commissioner may inspect the books of the
taxpayer and reassess a taxpayer for deficiency
tax payments under Sections 7, NICR. We stress
that what was required under Rev. Reg. 12-94
was only a submission of records but the
verification of the tax return remained the function
of the commissioner.
Worth emphasizing are these uncontested facts:
(1) the amounts withheld were actually remitted
to the BIR and (2) the final adjusted returns
which the BIR did not question showed that,
for 1979 and 1980, no income taxes from
petitioner were due. Hence, under the principle of
solutio indebiti provided in Art. 2154, Civil Code,
26
the BIR received something when "there [was]
no right to demand it," and thus "the obligation to
return arises." 27 Heavily militating against
Respondent Commissioner is the ancient
principle that no one, not even the state, shall
enrich oneself at the expense of another. Indeed,
simple justice requires the speedy refund of the
wrongly held taxes.
WHEREFORE, the assailed Decision is hereby
REVERSED and the decision of the Court of Tax
Appeals is REINSTATED. No costs.
SO ORDERED.

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1

Revenue (BIR) sent an assessment notice[10] and

same constituted mere tax avoidance, and not

by RMI and reflected in its trial balance[26] as

is inapplicable. Hence, the assessment for the

1994 until the amount is fully paid.

FAVORABLY CONSIDERED THE MERITS OF

calling the attention of the BIR and requesting

approve the sale of properties of a deceased

estate taxes have been paid. This provision

Since the estate tax assessment had become

"A-2", "A-3"; pp. 207-210,

on Certiorari[if !supportFootnotes][1][endif] under Rule 45 of

Republic of the Philippines

WHEREFORE, finding the Last Will and

Upon the filing of a bond in

Pending the filing of said

RTC Order and that he took his oath as named

Let NOTICE be given to all

On April 1, 1996, respondent Ferdinand

Examining the arguments

On January 15, 1996, the petitioner

One has to review the

It cannot be overstressed that

The special civil action for

WHEREFORE, for lack of merit, the motion

On March 13, 1997, the CA issued a

On June 6, 1996, petitioner filed with this

Consequently, for having

4. Erroneous Appeals An appeal

Petitioner filed a Motion for

THE PROBATE COURT GRAVELY

THE COURT OF APPEALS

THE PROBATE COURT GRAVELY

THE PROBATE COURT GRAVELY

In the meantime, on October 9, 2002,

The petition is without merit.

THE PROBATE COURT GRAVELY

2. Appeals from Regional Trial Courts to

this Court runs afoul of the doctrine of

Pursuant to Section 4 of Circular No. 2-90,

Petitioner is adamant, however, that

Additionally, this Honorable

.REFERRED to the Court

This Court having been cited

It would appear then that

Petitioners arguments are misplaced. To

Based thereon, this Court agrees

In the case at bar, as found by this

Because of the preceding discussion,

Section 1. Who are

(c) Is in the opinion of the

In the case at bar, petitioner

The RTC, however, in its January 11,

Based on the foregoing, this Court

(b) Assessment and payment of deficiency

In case a person fails to

Likewise, in Aznar v. Court of Tax

serve as officers of the court.

Based on the foregoing, considering

Applying the foregoing considerations

Petitioner contends that respondents

of the Court of Appeals (CA) Decision[if !