SECOND DIVISION

COMMISSIONER OF INTERNAL
REVENUE,
Petitioner,

- versus -

G.R. No. 185371

Present:
CARPIO, J., Chairperson,
NACHURA,
PERALTA,
ABAD, and
MENDOZA, JJ.
Promulgated:

METRO STAR SUPERAMA, INC.,

Respondent.

December 8, 2010

DECISION
MENDOZA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court filed
by the petitioner Commissioner of Internal Revenue (CIR) seeks to reverse and set
aside the 1] September 16, 2008 Decision [1] of the Court of Tax Appeals En
Banc (CTA-En Banc), in C.T.A. EB No. 306 and 2] its November 18, 2008
Resolution[2] denying petitioners motion for reconsideration.
The CTA-En Banc affirmed in toto the decision of its Second Division (CTASecond Division) in CTA Case No. 7169 reversing the February 8, 2005 (talo)
Decision of the CIR which assessed respondent Metro Star Superama, Inc. (Metro
Star) of deficiency value-added tax and withholding tax for the taxable year 1999.panalo ms
Based on a Joint Stipulation of Facts and Issues [3] of the parties, the CTA
Second Division summarized the factual and procedural antecedents of the case,
the pertinent portions of which read:
Petitioner is a domestic corporation duly organized and existing by virtue of
the laws of the Republic of the Philippines,
x x x.
On January 26, 2001, the Regional Director of Revenue Region
No. 10, Legazpi City, issued Letter of Authority No. 00006561 for
Revenue Officer Daisy G. Justiniana to examine petitioners books of
accounts and other accounting records for income tax and other
internal revenue taxes for the taxable year 1999. Said Letter of
Authority was revalidated on August 10, 2001 by Regional Director
Leonardo Sacamos.
For petitioners failure to comply with several requests for the
presentation of records and Subpoena Duces Tecum, [the] OIC of BIR

Legal Division issued an Indorsement dated September 26,

2001 informing Revenue District Officer of Revenue Region No.
67, Legazpi City to proceed with the investigation based on the best
evidence obtainable preparatory to the issuance of assessment notice.
On November 8, 2001, Revenue District Officer Socorro O.
Ramos-Lafuente issued a Preliminary 15-day Letter, which petitioner
received on November 9, 2001. The said letter stated that a post audit
review was held and it was ascertained that there was deficiency
value-added and withholding taxes due from petitioner in the amount
of P292,874.16.
On April 11, 2002, petitioner received a Formal Letter of Demand
dated April 3, 2002 from Revenue District No. 67, Legazpi City,
assessing petitioner the amount of Two Hundred Ninety Two Thousand
Eight Hundred Seventy Four Pesos and Sixteen Centavos
(P292,874.16.) for deficiency value-added and withholding taxes for
the taxable year 1999, computed as follows:
ASSESSMENT NOTICE NO. 067-99-003-579-072
VALUE ADDED TAX
Gross Sales
Output Tax
Less: Input Tax
VAT Payable
Add: 25% Surcharge
20% Interest
Compromise Penalty
Late Payment
Failure to File VAT returns
TOTAL
WITHHOLDING TAX
Compensation
Expanded
Total Tax Due
Less: Tax
Withheld
Deficiency Withholding Tax
Add: 20% Interest p.a.
Compromise Penalty
TOTAL

P1,697,718.90
P 154,338.08
P 154,338.08
P 38,584.54
79,746.49
P16,000.00
2,400.00 18,400.00

136,731.01
P 291,069.09
2,772.91
110,103.92
P 112,876.83

111,848.27
P
1,028.56
576.51
200.00
P
1,805.07

*Expanded Withholding Tax P1,949,334.25

x 5%
97,466.71
Film Rental
10,000.25
x 10%
1,000.00
Audit Fee
193,261.20
x 5%
9,663.00
Rental
Expense
41,272.73
x 1%
412.73
Security Service
156,142.01
x 1%
1,561.42

Service Contractor
Total
SUMMARIES OF DEFICIENCIES
VALUE ADDED TAX
WITHHOLDING TAX
TOTAL

110,103.92

P 291,069.09
1,805.07
P 292,874.16

Subsequently, Revenue District Office No. 67 sent a copy of the

Final Notice of Seizure dated May 12, 2003, which petitioner received
on May 15, 2003, giving the latter last opportunity to settle its
deficiency tax liabilities within ten (10) [days] from receipt thereof,
otherwise respondent BIR shall be constrained to serve and execute
the Warrants of Distraint and/or Levy and Garnishment to enforce
collection.
On February 6, 2004, petitioner received from Revenue District
Office No. 67 a Warrant of Distraint and/or Levy No. 67-0029-23 dated
May 12, 2003 demanding payment of deficiency value-added tax and
withholding tax payment in the amount of P292,874.16.
On July 30, 2004, petitioner filed with the Office of respondent
Commissioner a Motion for Reconsideration pursuant to Section 3.1.5
of Revenue Regulations No. 12-99.
On February 8, 2005, respondent Commissioner, through its
authorized representative, Revenue Regional Director of Revenue
Region 10, Legaspi City, issued a Decision denying petitioners Motion
for Reconsideration. Petitioner, through counsel received said Decision
on February 18, 2005.
x x x.
Denying that it received a Preliminary Assessment Notice (PAN) and claiming
that it was not accorded due process, Metro Star filed a petition for review[4] with the
CTA. The parties then stipulated on the following issues to be decided by the tax
court:
1. Whether the respondent complied with the due process requirement
as provided under the National Internal Revenue Code and Revenue
Regulations No. 12-99 with regard to the issuance of a deficiency
tax assessment;
1.1 Whether petitioner is liable for the respective amounts
of P291,069.09 and P1,805.07 as deficiency VAT and
withholding tax for the year 1999;
1.2. Whether the assessment has become final and
executory and demandable for failure of petitioner to
protest the same within 30 days from its receipt thereof

onApril 11, 2002, pursuant to Section 228 of the

National Internal Revenue Code;
2.

Whether the deficiency assessments issued by the respondent are

void for failure to state the law and/or facts upon which they are
based.
2.2 Whether petitioner was informed of the law and facts on
which the assessment is made in compliance with
Section 228 of the National Internal Revenue Code;

3. Whether or not petitioner, as owner/operator of a movie/cinema

house, is subject to VAT on sales of services under Section 108(A) of
the National Internal Revenue Code;
4. Whether or not the assessment is based on the best evidence
obtainable pursuant to Section 6(b) of the National Internal
Revenue Code.
The CTA-Second Division found merit in the petition of Metro Star and,
on March 21, 2007, rendered a decision, the decretal portion of which reads:
WHEREFORE, premises considered, the Petition for Review is
hereby GRANTED. Accordingly, the assailed Decision dated February
8, 2005 is hereby REVERSED and SET ASIDE and respondent is
ORDERED TO DESIST from collecting the subject taxes against
petitioner.
The CTA-Second Division opined that [w]hile there [is] a disputable
presumption that a mailed letter [is] deemed received by the addressee in the
ordinary course of mail, a direct denial of the receipt of mail shifts the burden upon
the party favored by the presumption to prove that the mailed letter was indeed
received by the addressee.[5] It also found that there was no clear showing that
Metro Star actually received the alleged PAN, dated January 16, 2002. It,
accordingly, ruled that the Formal Letter of Demand datedApril 3, 2002, as well as
the Warrant of Distraint and/or Levy dated May 12, 2003 were void, as Metro Star
was denied due process.[6]
The CIR sought reconsideration[7] of the decision of the CTA-Second Division,
but the motion was denied in the latters July 24, 2007 Resolution.[8]
Aggrieved, the CIR filed a petition for review [9] with the CTA-En Banc, but the
petition was dismissed after a determination that no new matters were raised.
The CTA-En Banc disposed:
WHEREFORE, the instant Petition for Review is hereby DENIED DUE COURSE
and DISMISSED for lack of merit. Accordingly, the March 21, 2007 Decision
and July 27, 2007 Resolution of the CTA Second Division in CTA Case No. 7169
entitled, Metro Star Superama, Inc., petitioner vs. Commissioner of Internal
Revenue, respondentare hereby AFFIRMED in toto.
SO ORDERED.

The motion for reconsideration[10] filed by the CIR was likewise denied
by the CTA-En Banc in its November 18, 2008 Resolution.[11]
The CIR, insisting that Metro Star received the PAN, dated January 16, 2002,
and that due process was served nonetheless because the latter received the Final
Assessment Notice (FAN), comes now before this Court with the sole issue of
whether or not Metro Star was denied due process.
The general rule is that the Court will not lightly set aside the conclusions
reached by the CTA which, by the very nature of its functions, has accordingly
developed an exclusive expertise on the resolution unless there has been an abuse
or improvident exercise of authority.[12] In Barcelon, Roxas Securities, Inc. (now
known as UBP Securities, Inc.) v. Commissioner of Internal Revenue,[13] the Court
wrote:
Jurisprudence has consistently shown that this Court accords the findings of
fact by the CTA with the highest respect. In Sea-Land Service Inc. v. Court of
Appeals[G.R. No. 122605, 30 April 2001, 357 SCRA 441, 445-446], this Court
recognizes that the Court of Tax Appeals, which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily
developed an expertise on the subject, and its conclusions will not be overturned
unless there has been an abuse or improvident exercise of authority. Such findings
can only be disturbed on appeal if they are not supported by substantial evidence or
there is a showing of gross error or abuse on the part of the Tax Court. In the
absence of any clear and convincing proof to the contrary, this Court must presume
that the CTA rendered a decision which is valid in every respect.
On the matter of service of a tax assessment, a further perusal of our ruling
in Barcelon is instructive, viz:
Jurisprudence is replete with cases holding that if the taxpayer
denies ever having received an assessment from the BIR, it is
incumbent upon the latter to prove by competent evidence
that such notice was indeed received by the addressee.
The onus probandi was shifted to respondent to prove by
contrary evidence that the Petitioner received the assessment
in the due course of mail. The Supreme Court has consistently held
that while a mailed letter is deemed received by the addressee in the
course of mail, this is merely a disputable presumption subject to
controversion and a direct denial thereof shifts the burden to the party
favored by the presumption to prove that the mailed letter was indeed
received by the addressee (Republic vs. Court of Appeals, 149 SCRA
351). Thus as held by the Supreme Court in Gonzalo P. Nava vs.
Commissioner of Internal Revenue, 13 SCRA 104, January 30, 1965:
"The facts to be proved to raise this
presumption are (a) that the letter was properly
addressed with postage prepaid, and (b) that it
was mailed. Once these facts are proved, the
presumption is that the letter was received by the
addressee as soon as it could have been transmitted to
him in the ordinary course of the mail. But if one of the
said facts fails to appear, the presumption does not lie.
(VI, Moran, Comments on the Rules of Court, 1963 ed, 5657 citing Enriquez vs. Sunlife Assurance of Canada, 41
Phil 269)."

x x x. What is essential to prove the fact of mailing is the

registry receipt issued by the Bureau of Posts or the Registry
return card which would have been signed by the Petitioner or
its authorized representative. And if said documents cannot be
located, Respondent at the very least, should have submitted
to the Court a certification issued by the Bureau of Posts and
any other pertinent document which is executed with the
intervention of the Bureau of Posts. This Court does not put much
credence to the self serving documentations made by the BIR
personnel especially if they are unsupported by substantial evidence
establishing the fact of mailing. Thus:
"While we have held that an assessment is made
when sent within the prescribed period, even if received
by the taxpayer after its expiration (Coll. of Int. Rev. vs.
Bautista, L-12250 and L-12259, May 27, 1959), this ruling
makes it the more imperative that the release, mailing or
sending of the notice be clearly and satisfactorily proved.
Mere notations made without the taxpayers intervention,
notice or control, without adequate supporting evidence
cannot suffice; otherwise, the taxpayer would be at the
mercy of the revenue offices, without adequate protection
or defense." (Nava vs. CIR, 13 SCRA 104, January 30,
1965).
xxx
The failure of the respondent to prove receipt of the assessment
by the Petitioner leads to the conclusion that no assessment was
issued. Consequently, the governments right to issue an assessment
for the said period has already prescribed. (Industrial Textile
Manufacturing Co. of the Phils., Inc. vs. CIR CTA Case 4885, August 22,
1996). (Emphases supplied.)
The Court agrees with the CTA that the CIR failed to discharge its duty and
present any evidence to show that Metro Star indeed received the PAN
dated January 16, 2002. It could have simply presented the registry receipt or the
certification from the postmaster that it mailed the PAN, but failed. Neither did it
offer any explanation on why it failed to comply with the requirement of service of
the PAN. It merely accepted the letter of Metro Stars chairman dated April 29, 2002,
that stated that he had received the FAN datedApril 3, 2002, but not the PAN; that
he was willing to pay the tax as computed by the CIR; and that he just wanted to
clarify some matters with the hope of lessening its tax liability.
This now leads to the question: Is the failure to strictly comply with notice
requirements prescribed under Section 228 of the National Internal Revenue Code of
1997 and Revenue Regulations (R.R.) No. 12-99 tantamount to a denial of due
process? Specifically, are the requirements of due process satisfied if only the FAN
stating the computation of tax liabilities and a demand to pay within the prescribed
period was sent to the taxpayer?
The answer to these questions require an examination of Section 228 of the
Tax Code which reads:
SEC. 228. Protesting of Assessment. - When the
Commissioner or his duly authorized representative finds that

proper taxes should be assessed, he shall first notify the

taxpayer of his findings: provided, however, that a preassessment
notice shall not be required in the following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as appearing on the
face of the return; or
(b) When a discrepancy has been determined between the tax
withheld and the amount actually remitted by the withholding agent;
or
(c) When a taxpayer who opted to claim a refund or tax credit of
excess creditable withholding tax for a taxable period was determined
to have carried over and automatically applied the same amount
claimed against the estimated tax liabilities for the taxable quarter or
quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has not been
paid; or
(e) When the article locally purchased or imported by an exempt
person, such as, but not limited to, vehicles, capital equipment,
machineries and spare parts, has been sold, traded or transferred to
non-exempt persons.
The taxpayers shall be informed in writing of the law and
the facts on which the assessment is made; otherwise, the
assessment shall be void.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said notice. If
the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30) days
from receipt of the assessment in such form and manner as may be
prescribed by implementing rules and regulations. Within sixty (60)
days from filing of the protest, all relevant supporting documents shall
have been submitted; otherwise, the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from submission of documents,
the taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the
said decision, or from the lapse of one hundred eighty (180)-day
period; otherwise, the decision shall become final, executory and
demandable. (Emphasis supplied)
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must
first be informed that he is liable for deficiency taxes through the sending of a PAN.
He must be informed of the facts and the law upon which the assessment is
made. The law imposes a substantive, not merely a formal, requirement. To proceed
heedlessly with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative investigations - that
taxpayers should be able to present their case and adduce supporting evidence. [14]
This is confirmed under the provisions R.R. No. 12-99 of the BIR which
pertinently provide:

SECTION 3. Due Process Requirement in the Issuance of a

Deficiency Tax Assessment.
3.1 Mode of procedures in the issuance of a deficiency tax
assessment:
3.1.1 Notice for informal conference. The Revenue Officer who
audited the taxpayer's records shall, among others, state in his report
whether or not the taxpayer agrees with his findings that the taxpayer
is liable for deficiency tax or taxes. If the taxpayer is not amenable,
based on the said Officer's submitted report of investigation, the
taxpayer shall be informed, in writing, by the Revenue District Office or
by the Special Investigation Division, as the case may be (in the case
Revenue Regional Offices) or by the Chief of Division concerned (in the
case of the BIR National Office) of the discrepancy or discrepancies in
the taxpayer's payment of his internal revenue taxes, for the purpose
of "Informal Conference," in order to afford the taxpayer with an
opportunity to present his side of the case. If the taxpayer fails to
respond within fifteen (15) days from date of receipt of the notice for
informal conference, he shall be considered in default, in which case,
the Revenue District Officer or the Chief of the Special Investigation
Division of the Revenue Regional Office, or the Chief of Division in the
National Office, as the case may be, shall endorse the case with the
least possible delay to the Assessment Division of the Revenue
Regional Office or to the Commissioner or his duly authorized
representative, as the case may be, for appropriate review and
issuance of a deficiency tax assessment, if warranted.
3.1.2 Preliminary Assessment Notice (PAN). If after review and
evaluation by the Assessment Division or by the Commissioner or his
duly authorized representative, as the case may be, it is determined
that there exists sufficient basis to assess the taxpayer for any
deficiency tax or taxes, the said Office shall issue to the taxpayer, at
least by registered mail, a Preliminary Assessment Notice (PAN) for the
proposed assessment, showing in detail, the facts and the law, rules
and regulations, or jurisprudence on which the proposed assessment is
based (see illustration in ANNEX A hereof). If the taxpayer fails to
respond within fifteen (15) days from date of receipt of the PAN, he
shall be considered in default, in which case, a formal letter of demand
and assessment notice shall be caused to be issued by the said Office,
calling for payment of the taxpayer's deficiency tax liability, inclusive
of the applicable penalties.
3.1.3 Exceptions to Prior Notice of the Assessment. The notice
for informal conference and the preliminary assessment notice shall
not be required in any of the following cases, in which case, issuance of
the formal assessment notice for the payment of the taxpayer's
deficiency tax liability shall be sufficient:
(i) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax
appearing on the face of the tax return filed by the
taxpayer; or

(ii) When a discrepancy has been determined between the

tax withheld and the amount actually remitted by the
withholding agent; or
(iii) When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a
taxable period was determined to have carried over
and automatically applied the same amount claimed
against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(iv) When the excise tax due on excisable articles has not
been paid; or
(v) When an article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt
persons.
3.1.4 Formal Letter of Demand and Assessment Notice. The
formal letter of demand and assessment notice shall be issued by the
Commissioner or his duly authorized representative. The letter of
demand calling for payment of the taxpayer's deficiency tax or taxes
shall state the facts, the law, rules and regulations, or jurisprudence on
which the assessment is based, otherwise, the formal letter of demand
and assessment notice shall be void (see illustration in ANNEX B
hereof).
The same shall be sent to the taxpayer only by registered mail
or by personal delivery.
If sent by personal delivery, the taxpayer or his duly authorized
representative shall acknowledge receipt thereof in the duplicate copy
of the letter of demand, showing the following: (a) His name; (b)
signature; (c) designation and authority to act for and in behalf of the
taxpayer, if acknowledged received by a person other than the
taxpayer himself; and (d) date of receipt thereof.
x x x.
From the provision quoted above, it is clear that the sending of a PAN to
taxpayer to inform him of the assessment made is but part of the due process
requirement in the issuance of a deficiency tax assessment, the absence of which
renders nugatory any assessment made by the tax authorities. The use of the word
shall in subsection 3.1.2 describes the mandatory nature of the service of a
PAN. The persuasiveness of the right to due process reaches both substantial and
procedural rights and the failure of the CIR to strictly comply with the requirements
laid down by law and its own rules is a denial of Metro Stars right to due process.
[15]
Thus, for its failure to send the PAN stating the facts and the law on which the
assessment was made as required by Section 228 of R.A. No. 8424, the assessment
made by the CIR is void.
The case of CIR v. Menguito[16] cited by the CIR in support of its argument that
only the non-service of the FAN is fatal to the validity of an assessment, cannot
apply to this case because the issue therein was the non-compliance with the
provisions of R. R. No. 12-85 which sought to interpret Section 229 of the old tax

law. RA No. 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIRs
findings was changed in 1998 toinforming the taxpayer of not only the law, but also
of the facts on which an assessment would be made. OtheRwise, the assessment
itself would be invalid.[17] The regulation then, on the other hand, simply provided
that a notice be sent to the respondent in the form prescribed, and that no
consequence would ensue for failure to comply with that form.
The Court need not belabour to discuss the matter of Metro Stars failure to
file its protest, for it is well-settled that a void assessment bears no fruit. [18]
It is an elementary rule enshrined in the 1987 Constitution that no person
shall be deprived of property without due process of law. [19] In balancing the scales
between the power of the State to tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the constitutional rights of a citizen to due
process of law and the equal protection of the laws on the other, the scales must tilt
in favor of the individual, for a citizens right is amply protected by the Bill of Rights
under the Constitution. Thus, while taxes are the lifeblood of the government, the
power to tax has its limits, in spite of all its plenitude. Hence in Commissioner of
Internal Revenue v. Algue, Inc.,[20] it was said
Taxes are the lifeblood of the government and so should be
collected without unnecessary hindrance. On the other hand, such
collection should be made in accordance with law as any arbitrariness
will negate the very reason for government itself. It is
therefore necessary to reconcile the apparently conflicting interests of
the authorities and the taxpayers so that the real purpose of taxation,
which is the promotion of the common good, may be achieved.
xxx
xxx
xxx
It is said that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for the lack of the motive
power to activate and operate it. Hence, despite the natural reluctance
to surrender part of ones hard-earned income to taxing authorities,
every person who is able to must contribute his share in the running of
the government. The government for its part is expected to respond in
the form of tangible and intangible benefits intended to improve the
lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.
But even as we concede the inevitability and
indispensability of taxation, it is a requirement in all
democratic regimes that it be exercised reasonably and in
accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his
succor. For all the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate x x x that the
law has not been
observed.[21] (Emphasis supplied).
WHEREFORE, the petition is DENIED.
SO ORDERED.
SECOND DIVISION

DUMAGUETE CATHEDRAL
CREDIT COOPERATIVE
[DCCCO], Represented by
Felicidad L. Ruiz, its General
Manager,
Petitioner,
-versusCOMMISSIONER OF
INTERNAL REVENUE,
Respondent.

G.R. No. 182722

Present:
CARPIO, J., Chairperson,
BRION,
DEL CASTILLO,
ABAD, and
PEREZ, JJ.
Promulgated:
January 22, 2010

DECISION
DEL CASTILLO, J.:
The clashing interests of the State and the taxpayers are again pitted against each
other. Two basic principles, the States inherent power of taxation and its declared policy
of fostering the creation and growth of cooperatives come into play. However, the one
that embodies the spirit of the law and the true intent of the legislature prevails.
This Petition for Review on Certiorari under Section 11 of Republic Act (RA) No.
9282,[1] in relation to Rule 45 of the Rules of Court, seeks to set aside the December 18,
2007 Decision[2] of the Court of Tax Appeals (CTA), ordering petitioner to pay deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, pursuant to Section 24(B)(1) of the National Internal Revenue Code
of 1997 (NIRC), as well as the delinquency interest of 20% per annum under Section
249(C) of the same Code. It also assails the April 11, 2008 Resolution[3] denying
petitioners Motion for Reconsideration.
Factual Antecedents
Petitioner Dumaguete Cathedral Credit Cooperative (DCCCO) is a credit cooperative
duly registered with and regulated by the Cooperative Development Authority (CDA).[4] It
was established on February 17, 1968[5] with the following objectives and purposes: (1) to
increase the income and purchasing power of the members; (2) to pool the resources of
the members by encouraging savings and promoting thrift to mobilize capital formation
for development activities; and (3) to extend loans to members for provident and
productive purposes.[6] It has the power (1) to draw, make, accept, endorse, guarantee,
execute, and issue promissory notes, mortgages, bills of exchange, drafts, warrants,
certificates and all kinds of obligations and instruments in connection with and in
furtherance of its business operations; and (2) to issue bonds, debentures, and other
obligations; to contract indebtedness; and to secure the same with a mortgage or deed of
trust, or pledge or lien on any or all of its real and personal properties.[7]
On November 27, 2001, the Bureau of Internal Revenue (BIR) Operations Group
Deputy Commissioner, Lilian B. Hefti, issued Letters of Authority Nos. 63222 and 63223,
authorizing BIR Officers Tomas Rambuyon and Tarcisio Cubillan of Revenue Region No. 12,
Bacolod City, to examine petitioners books of accounts and other accounting records for
all internal revenue taxes for the taxable years 1999 and 2000.[8]

Proceedings before the BIR Regional Office

On June 26, 2002, petitioner received two Pre-Assessment Notices for deficiency
withholding taxes for taxable years 1999 and 2000 which were protested by petitioner
on July 23, 2002.[9] Thereafter, on October 16, 2002, petitioner received two other PreAssessment Notices for deficiency withholding taxes also for taxable years 1999 and 2000.
[10]
The deficiency withholding taxes cover the payments of the honorarium of the Board
of Directors, security and janitorial services, legal and professional fees, and interest on
savings and time deposits of its members.
On October 22, 2002, petitioner informed BIR Regional Director Sonia L. Flores that
it would only pay the deficiency withholding taxes corresponding to the honorarium of the
Board of Directors, security and janitorial services, legal and professional fees for the year
1999 in the amount of P87,977.86, excluding penalties and interest.[11]
In another letter dated November 8, 2002, petitioner also informed the BIR
Assistant Regional Director, Rogelio B. Zambarrano, that it would pay the withholding
taxes due on the honorarium and per diems of the Board of Directors, security and
janitorial services, commissions and legal & professional fees for the year 2000 in the
amount of P119,889.37, excluding penalties and interest, and that it would avail of the
Voluntary Assessment and Abatement Program (VAAP) of the BIR under Revenue
Regulations No. 17-2002.[12]
On November 29, 2002, petitioner availed of the VAAP and paid the amounts
of P105,574.62 and P143,867.24[13] corresponding to the withholding taxes on the
payments for the compensation, honorarium of the Board of Directors, security and
janitorial services, and legal and professional services, for the years 1999 and 2000,
respectively.
On April 24, 2003, petitioner received from the BIR Regional Director, Sonia L.
Flores, Letters of Demand Nos. 00027-2003 and 00026-2003, with attached Transcripts of
Assessment and Audit Results/Assessment Notices, ordering petitioner to pay the
deficiency withholding taxes, inclusive of penalties, for the years 1999 and 2000 in the
amounts of P1,489,065.30 andP1,462,644.90, respectively.[14]
Proceedings before the Commissioner of Internal Revenue
On May 9, 2003, petitioner protested the Letters of Demand and Assessment
Notices with the Commissioner of Internal Revenue (CIR).[15] However, the latter failed to
act on the protest within the prescribed 180-day period. Hence, on December 3, 2003,
petitioner filed a Petition for Review before the CTA, docketed as C.T.A. Case No. 6827.[16]
Proceedings before the CTA First Division
The case was raffled to the First Division of the CTA which rendered its Decision
on February 6, 2007, disposing of the case in this wise:
IN VIEW OF ALL THE FOREGOING, the Petition for Review is hereby
PARTIALLY GRANTED. Assessment Notice Nos. 00026-2003 and 00027-2003
are hereby MODIFIED and the assessment for deficiency withholding taxes
on the honorarium and per diems of petitioners Board of Directors, security
and janitorial services, commissions and legal and professional fees are
hereby CANCELLED. However, the assessments for deficiency withholding
taxes on interests are hereby AFFIRMED.
Accordingly, petitioner is ORDERED TO PAY the respondent the
respective amounts of P1,280,145.89 and P1,357,881.14 representing
deficiency withholding taxes on interests from savings and time deposits of
its members for the taxable years 1999 and 2000. In addition, petitioner is
ordered to pay the 20% delinquency interest from May 26, 2003 until the

amount of deficiency withholding taxes are fully paid pursuant to Section

249 (C) of the Tax Code.
SO ORDERED.[17]
Dissatisfied, petitioner moved for a partial reconsideration, but it was denied by the
First Division in its Resolution dated May 29, 2007.[18]
Proceedings before the CTA En Banc
On July 3, 2007, petitioner filed a Petition for Review with the CTA En Banc,
[19]
interposing the lone issue of whether or not petitioner is liable to pay the deficiency
withholding taxes on interest from savings and time deposits of its members for taxable
years 1999 and 2000, and the consequent delinquency interest of 20% per annum.[20]
Finding no reversible error in the Decision dated February 6, 2007 and the
Resolution dated May 29, 2007 of the CTA First Division, the CTA En Banc denied the
Petition for Review[21] as well as petitioners Motion for Reconsideration.[22]
The CTA En Banc held that Section 57 of the NIRC requires the withholding of tax at
source. Pursuant thereto, Revenue Regulations No. 2-98 was issued enumerating the
income payments subject to final withholding tax, among which is interest from any peso
bank deposit and yield, or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements x x x. According to the CTA En Banc, petitioners
business falls under the phrase similar arrangements; as such, it should have withheld
the corresponding 20% final tax on the interest from the deposits of its members.
Issue
Hence, the present recourse, where petitioner raises the issue of whether or not it
is liable to pay the deficiency withholding taxes on interest from savings and time deposits
of its members for the taxable years 1999 and 2000, as well as the delinquency interest of
20% per annum.
Petitioners Arguments
Petitioner argues that Section 24(B)(1) of the NIRC which reads in part, to wit:
SECTION 24.
Income Tax Rates.
xxxx
(B)
Rate of Tax on Certain Passive Income:
(1)
Interests, Royalties, Prizes, and Other Winnings. A
final tax at the rate of twenty percent (20%) is hereby imposed upon the
amount of interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements; x x x
applies only to banks and not to cooperatives, since the phrase similar arrangements is
preceded by terms referring to banking transactions that have deposit
peculiarities. Petitioner thus posits that the savings and time deposits of members of
cooperatives are not included in the enumeration, and thus not subject to the 20% final
tax. To bolster its position, petitioner cites BIR Ruling No. 551-888[23] and BIR Ruling [DA591-2006][24] where the BIR ruled that interests from deposits maintained by members of
cooperative are not subject to withholding tax under Section 24(B)(1) of the
NIRC. Petitioner further contends that pursuant to Article XII, Section 15 of the
Constitution[25] and Article 2 of Republic Act No. 6938 (RA 6938) or the Cooperative Code

of the Philippines,[26] cooperatives enjoy a preferential tax treatment which exempts their
members from the application of Section 24(B)(1) of the NIRC.
Respondents Arguments
As a counter-argument, respondent invokes the legal maxim Ubi lex non distinguit
nec nos distinguere debemos (where the law does not distinguish, the courts should not
distinguish). Respondent maintains that Section 24(B)(1) of the NIRC applies to
cooperatives as the phrase similar arrangements is not limited to banks, but includes
cooperatives that are depositaries of their members. Regarding the exemption relied
upon by petitioner, respondent adverts to the jurisprudential rule that tax exemptions are
highly disfavored and construedstrictissimi juris against the taxpayer and liberally in favor
of the taxing power. In this connection, respondent likewise points out that the deficiency
tax assessments were issued against petitioner not as a taxpayer but as a withholding
agent.
Our Ruling
The petition has merit.
Petitioners invocation of BIR Ruling No.
551-888, reiterated in BIR Ruling [DA591-2006], is proper.
On November 16, 1988, the BIR declared in BIR Ruling No. 551-888 that
cooperatives are not required to withhold taxes on interest from savings and time deposits
of their members. The pertinent BIR Ruling reads:
November 16, 1988
BIR RULING NO. 551-888
24 369-88 551-888
Gentlemen:
This refers to your letter dated September 5, 1988 stating that you are a
corporation established under P.D. No. 175 and duly registered with the
Bureau of Cooperatives Development as full-fledged cooperative of good
standing with Certificate of Registration No. FF 563-RR dated August 8,
1985; and that one of your objectives is to provide and strengthen
cooperative endeavour and extend assistance to members and nonmembers through credit scheme both in cash and in kind.
Based on the foregoing representations, you now request in effect a ruling
as to whether or not you are exempt from the following:
1.
2.
3.

Payment of sales tax

Filing and payment of income tax
Withholding taxes from compensation of employees
and savings account and time deposits of
members. (Underscoring ours)

In reply, please be informed that Executive Order No. 93 which took effect
on March 10, 1987 withdrew all tax exemptions and preferential privileges
e.g., income tax and sales tax, granted to cooperatives under P.D. No. 175
which were previously withdrawn by P.D. No. 1955 effective October 15,
1984 and restored by P.D. No. 2008 effective January 8, 1986. However,
implementation of said Executive Order insofar as electric, agricultural,
irrigation and waterworks cooperatives are concerned was suspended
until June 30, 1987. (Memorandum Order No. 65 dated January 21, 1987 of

the President) Accordingly, your tax exemption privilege expired as of June

30, 1987. Such being the case, you are now subject to income and sales
taxes.
Moreover, under Section 72(a) of the Tax Code, as amended, every
employer making payment of wages shall deduct and withhold upon such
wages a tax at the rates prescribed by Section 21(a) in relation to section
71, Chapter X, Title II, of the same Code as amended by Batas Pambansa
Blg. 135 and implemented by Revenue Regulations No. 6-82 as
amended. Accordingly, as an employer you are required to withhold the
corresponding tax due from the compensation of your employees.
Furthermore, under Section 50(a) of the Tax Code, as amended, the tax
imposed or prescribed by Section 21(c) of the same Code on specified items
of income shall be withheld by payor-corporation and/or person and paid in
the same manner and subject to the same conditions as provided in Section
51 of the Tax Code, as amended. Such being the case, and since interest
from any Philippine currency bank deposit and yield or any other monetary
benefit from deposit substitutes are paid by banks, you are not the party
required to withhold the corresponding tax on the aforesaid savings account
and time deposits of your members. (Underscoring ours)
Very truly yours,
(SGD.) BIENVENIDO A. TAN, JR.
Commissioner
The CTA First Division, however, disregarded the above quoted ruling in
determining whether petitioner is liable to pay the deficiency withholding taxes on interest
from the deposits of its members. It ratiocinated in this wise:
This Court does not agree. As correctly pointed out by respondent in
his Memorandum, nothing in the above quoted resolution will give the
conclusion that savings account and time deposits of members of a
cooperative are tax-exempt. What is entirely clear is the opinion of the
Commissioner that the proper party to withhold the corresponding taxes on
certain specified items of income is the payor-corporation and/or person. In
the same way, in the case of interests earned from Philippine currency
deposits made in a bank, then it is the bank which is liable to withhold the
corresponding taxes considering that the bank is the payor-corporation.
Thus, the ruling that a cooperative is not the proper party to withhold the
corresponding taxes on the aforementioned accounts is correct. However,
this ruling does not hold true if the savings and time deposits are being
maintained in the cooperative, for in this case, it is the cooperative which
becomes the payor-corporation, a separate entity acting no more than an
agent of the government for the collection of taxes, liable to withhold the
corresponding taxes on the interests earned. [27] (Underscoring ours)
The CTA En Banc affirmed the above-quoted Decision and found petitioners
invocation of BIR Ruling No. 551-88 misplaced. According to the CTA En Banc, the BIR
Ruling was based on the premise that the savings and time deposits were placed by the
members of the cooperative in the bank.[28] Consequently, it ruled that the BIR Ruling does
not apply when the deposits are maintained in the cooperative such as the instant case.
We disagree.
There is nothing in the ruling to suggest that it applies only when deposits are
maintained in a bank. Rather, the ruling clearly states, without any qualification, that

since interest from any Philippine currency bank deposit and yield or any other monetary
benefit from deposit substitutes are paid by banks, cooperatives are not required to
withhold the corresponding tax on the interest from savings and time deposits of their
members. This interpretation was reiterated in BIR Ruling [DA-591-2006] dated October
5, 2006, which was issued by Assistant Commissioner James H. Roldan upon the request
of the cooperatives for a confirmatory ruling on several issues, among which is the alleged
exemption of interest income on members deposit (over and above the share capital
holdings) from the 20% final withholding tax. In the said ruling, the BIR opined that:
xxxx
3.
Exemption of interest income on members deposit (over and above
the share capital holdings) from the 20% Final Withholding Tax.
The National Internal Revenue Code states that a final tax at the rate
of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from the
deposit substitutes and from trust funds and similar arrangement x x x for
individuals under Section 24(B)(1) and for domestic corporations under
Section 27(D)(1). Considering the members deposits with the cooperatives
are not currency bank deposits nor deposit substitutes, Section 24(B)(1) and
Section 27(D)(1), therefore, do not apply to members of cooperatives and to
deposits of primaries with federations, respectively.
It bears stressing that interpretations of administrative agencies in charge of
enforcing a law are entitled to great weight and consideration by the courts, unless such
interpretations are in a sharp conflict with the governing statute or the Constitution and
other laws.[29] In this case, BIR Ruling No. 551-888 and BIR Ruling [DA-591-2006] are in
perfect harmony with the Constitution and the laws they seek to implement. Accordingly,
the interpretation in BIR Ruling No. 551-888 that cooperatives are not required to withhold
the corresponding tax on the interest from savings and time deposits of their members,
which was reiterated in BIR Ruling [DA-591-2006], applies to the instant case.
Members of cooperatives deserve a
preferential tax treatment pursuant to RA
6938, as amended by RA 9520.
Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), Section 24(B)(1) of the NIRC must be read together with RA
6938, as amended by RA 9520.
Under Article 2 of RA 6938, as amended by RA 9520, it is a declared policy of the
State to foster the creation and growth of cooperatives as a practical vehicle for promoting
self-reliance and harnessing people power towards the attainment of economic
development and social justice. Thus, to encourage the formation of cooperatives and to
create an atmosphere conducive to their growth and development, the State extends all
forms of assistance to them, one of which is providing cooperatives a preferential tax
treatment.
The legislative intent to give cooperatives a preferential tax treatment is apparent
in Articles 61 and 62 of RA 6938, which read:
ART. 61. Tax Treatment of Cooperatives. Duly registered
cooperatives under this Code which do not transact any business with nonmembers or the general public shall not be subject to any government taxes
and fees imposed under the Internal Revenue Laws and other tax laws.
Cooperatives not falling under this article shall be governed by the
succeeding section.

ART. 62. Tax and Other Exemptions. Cooperatives transacting

business with both members and nonmembers shall not be subject to tax on
their transactions to members. Notwithstanding the provision of any law or
regulation to the contrary, such cooperatives dealing with nonmembers shall
enjoy the following tax exemptions; x x x.
This exemption extends to members of cooperatives. It must be emphasized that
cooperatives exist for the benefit of their members. In fact, the primary objective of every
cooperative is to provide goods and services to its members to enable them to attain
increased income, savings, investments, and productivity.[30] Therefore, limiting the
application of the tax exemption to cooperatives would go against the very purpose of a
credit cooperative. Extending the exemption to members of cooperatives, on the other
hand, would be consistent with the intent of the legislature. Thus, although the tax
exemption only mentions cooperatives, this should be construed to include the members,
pursuant to Article 126 of RA 6938, which provides:
ART. 126. Interpretation and Construction. In case of doubt as
to the meaning of any provision of this Code or the regulations issued in
pursuance thereof, the same shall be resolved liberally in favor of the
cooperatives and their members.
We need not belabor that what is within the spirit is within the law even if it is not
within the letter of the law because the spirit prevails over the letter.[31] Apropos is the
ruling in the case of Alonzo v. Intermediate Appellate Court,[32] to wit:
But as has also been aptly observed, we test a law by its results; and
likewise, we may add, by its purposes. It is a cardinal rule that, in seeking
the meaning of the law, the first concern of the judge should be to discover
in its provisions the intent of the lawmaker. Unquestionably, the law should
never be interpreted in such a way as to cause injustice as this is never
within the legislative intent. An indispensable part of that intent, in fact, for
we presume the good motives of the legislature, is to render justice.
Thus, we interpret and apply the law not independently of but in
consonance with justice. Law and justice are inseparable, and we must keep
them so. To be sure, there are some laws that, while generally valid, may
seem arbitrary when applied in a particular case because of its peculiar
circumstances. In such a situation, we are not bound, because only of our
nature and functions, to apply them just the same, [is] slavish obedience to
their language. What we do instead is find a balance between the word and
the will, that justice may be done even as the law is obeyed.
As judges, we are not automatons. We do not and must not
unfeelingly apply the law as it is worded, yielding like robots to the literal
command without regard to its cause and consequence. Courts are apt to
err by sticking too closely to the words of a law, so we are warned, by
Justice Holmes again, where these words import a policy that goes beyond
them. While we admittedly may not legislate, we nevertheless have the
power to interpret the law in such a way as to reflect the will of the
legislature. While we may not read into the law a purpose that is not there,
we nevertheless have the right to read out of it the reason for its enactment.
In doing so, we defer not to the letter that killeth but to the spirit that
vivifieth, to give effect to the lawmakers will.
The spirit, rather than the letter of a statute determines
its construction, hence, a statute must be read according to its

spirit or intent. For what is within the spirit is within the statute
although it is not within the letter thereof, and that which is
within the letter but not within the spirit is not within the
statute. Stated differently, a thing which is within the intent of
the lawmaker is as much within the statute as if within the
letter; and a thing which is within the letter of the statute is
not within the statute unless within the intent of the
lawmakers. (Underscoring ours)
It is also worthy to note that the tax exemption in RA 6938 was retained in RA
9520. The only difference is that Article 61 of RA 9520 (formerly Section 62 of RA 6938)
now expressly states that transactions of members with the cooperatives are not subject
to any taxes and fees. Thus:
ART. 61. Tax and Other Exemptions. Cooperatives transacting
business with both members and non-members shall not be subjected to tax
on their transactions with members. In relation to this, the transactions of
members with the cooperative shall not be subject to any taxes and fees,
including but not limited to final taxes on members deposits and
documentary tax. Notwithstanding the provisions of any law or regulation to
the contrary, such cooperatives dealing with nonmembers shall enjoy the
following tax exemptions: (Underscoring ours)
xxxx
This amendment in Article 61 of RA 9520, specifically providing that members of
cooperatives are not subject to final taxes on their deposits, affirms the interpretation of
the BIR that Section 24(B)(1) of the NIRC does not apply to cooperatives and confirms that
such ruling carries out the legislative intent. Under the principle of legislative approval of
administrative interpretation by reenactment, the reenactment of a statute substantially
unchanged is persuasive indication of the adoption by Congress of a prior executive
construction.[33]
Moreover, no less than our Constitution guarantees the protection of
cooperatives. Section 15, Article XII of the Constitution considers cooperatives as
instruments for social justice and economic development. At the same time, Section 10 of
Article II of the Constitution declares that it is a policy of the State to promote social justice
in all phases of national development. In relation thereto, Section 2 of Article XIII of the
Constitution states that the promotion of social justice shall include the commitment to
create economic opportunities based on freedom of initiative and self-reliance. Bearing in
mind the foregoing provisions, we find that an interpretation exempting the members of
cooperatives from the imposition of the final tax under Section 24(B)(1) of the NIRC is
more in keeping with the letter and spirit of our Constitution.
All told, we hold that petitioner is not liable to pay the assessed deficiency
withholding taxes on interest from the savings and time deposits of its members, as well
as the delinquency interest of 20% per annum.
In closing, cooperatives, including their members, deserve a preferential tax
treatment because of the vital role they play in the attainment of economic development
and social justice. Thus, although taxes are the lifeblood of the government, the States
power to tax must give way to foster the creation and growth of cooperatives. To borrow
the words of Justice Isagani A. Cruz: The power of taxation, while indispensable, is not
absolute and may be subordinated to the demands of social justice.[34]
WHEREFORE, the Petition is hereby GRANTED. The assailed December 18,
2007 Decision of the Court of Tax Appeals and the April 11, 2008 Resolution

are REVERSED andSET ASIDE. Accordingly, the assessments for deficiency

withholding taxes on interest from the savings and time deposits of petitioners members
for the taxable years 1999 and 2000 as well as the delinquency interest of 20% per
annum are hereby CANCELLED.
SO ORDERED.