Tax Cases Full

FIRST DIVISION
G.R. No. L-31364 March 30, 1979

MISAEL P. VERA, as Commissioner of Internal Revenue,
and JAIME ARANETA, as Regional Director, Revenue
Region No. 14, Bureau of Internal Revenue, petitioners,
vs.
HON. JOSE F. FERNANDEZ, Judge of the Court of First
Instance of Negros Occidental, Branch V, and FRANCIS
A. TONGOY, Administrator of the Estate of the late LUIS
D. TONGOY respondents.
DE CASTRO, J.:
Appeal from two orders of the Court of First Instance of Negros
Occidental, Branch V in Special Proceedings No. 7794,
entitled: "Intestate Estate of Luis D. Tongoy," the first dated
July 29, 1969 dismissing the Motion for Allowance of Claim
and for an Order of Payment of Taxes by the Government of
the Republic of the Philippines against the Estate of the late
Luis D. Tongoy, for deficiency income taxes for the years 1963
and 1964 of the decedent in the total amount of P3,254.80,
inclusive 5% surcharge, 1% monthly interest and compromise
penalties, and the second, dated October 7, 1969, denying
the Motion for reconsideration of the Order of dismissal.
The Motion for allowance of claim and for payment of taxes
dated May 28, 1969 was filed on June 3, 1969 in the
abovementioned special proceedings, (par. 3, Annex A,
Petition, pp. 1920, Rollo). The claim represents the
indebtedness to the Government of the late Luis D. Tongoy for
deficiency income taxes in the total sum of P3,254.80 as
above stated, covered by Assessment Notices Nos. 11-50-291-11061-21-63 and 11-50-291-1 10875-64, to which motion
was attached Proof of Claim (Annex B, Petition, pp. 21-22,
Rollo). The Administrator opposed the motion solely on the
ground that the claim was barred under Section 5, Rule 86 of
the Rules of Court (par. 4, Opposition to Motion for Allowance
of Claim, pp. 23-24, Rollo). Finding the opposition wellfounded, the respondent Judge, Jose F. Fernandez, dismissed
the motion for allowance of claim filed by herein petitioner,
Regional Director of the Bureau of Internal Revenue, in an
order dated July 29, 1969 (Annex D, Petition, p. 26, Rollo). On
September 18, 1969, a motion for reconsideration was filed,
of the order of July 29, 1969, but was denied in an Order
dated October 7, 1969.
Hence, this appeal on certiorari, petitioner assigning the
following errors:
1. The lower court erred in holding that the claim for taxes by
the government against the estate of Luis D. Tongoy was filed
beyond the period provided in Section 2, Rule 86 of the Rules
of Court.
2. The lower court erred in holding that the claim for taxes of
the government was already barred under Section 5, Rule 86
of the Rules of Court.
which raise the sole issue of whether or not the statute of
non-claims Section 5, Rule 86 of the New Rule of Court, bars
claim of the government for unpaid taxes, still within the
period of limitation prescribed in Section 331 and 332 of the
National Internal Revenue Code.
Section 5, Rule 86, as invoked by the respondent
Administrator in hid Oppositions to the Motion for Allowance of
Claim, etc. of the petitioners reads as follows:
All claims for money against the decedent, arising from

contracts, express or implied, whether the same be due, not
due, or contingent, all claims for funeral expenses and
expenses for the last sickness of the decedent, and judgment
for money against the decedent, must be filed within the time
limited in they notice; otherwise they are barred forever,
except that they may be set forth as counter claims in any
action that the executor or administrator may bring against
the claimants. Where the executor or administrator
commence an action, or prosecutes an action already
commenced by the deceased in his lifetime, the debtor may
set forth may answer the claims he has against the
decedents, instead of presenting them independently to the
court has herein provided, and mutual claims may be set off
against each other in such action; and in final judgment is
rendered in favored of the decedent, the amount to
determined shall be considered the true balance against the
estate, as though the claim has been presented directly
before the court in the administration proceedings. Claims not
yet due, or contingent may be approved at their present
value.
A perusal of the aforequoted provisions shows that it makes
no mention of claims for monetary obligation of the decedent
created by law, such as taxes which is entirely of different
character from the claims expressly enumerated therein, such
as: "all claims for money against the decedent arising from
contract, express or implied, whether the same be due, not
due or contingent, all claim for funeral expenses and
expenses for the last sickness of the decedent and judgment
for money against the decedent." Under the familiar rule of
statutory construction of expressio unius est exclusio alterius,
the mention of one thing implies the exclusion of another
thing not mentioned. Thus, if a statute enumerates the things
upon which it is to operate, everything else must necessarily,
and by implication be excluded from its operation and effect
(Crawford, Statutory Construction, pp. 334-335).
In the case of Commissioner of Internal Revenue vs. Ilagan
Electric & Ice Plant, et al., G.R. No. L-23081, December 30,
1969, it was held that the assessment, collection and recovery
of taxes, as well as the matter of prescription thereof are
governed by the provisions of the National Internal revenue
Code, particularly Sections 331 and 332 thereof, and not by
other provisions of law. (See also Lim Tio, Dy Heng and Dee
Jue vs. Court of Tax Appeals & Collector of Internal Revenue,
G.R. No. L-10681, March 29, 1958). Even without being
specifically mentioned, the provisions of Section 2 of Rule 86
of the Rules of Court may reasonably be presumed to have
been also in the mind of the Court as not affecting the
aforecited Section of the National Internal Revenue Code.
In the case of Pineda vs. CFI of Tayabas, 52 Phil. 803, it was
even more pointedly held that "taxes assessed against the
estate of a deceased person ... 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." The
abolition of the Committee on Claims does not alter the basic
ruling laid down giving exception to the claim for taxes from
being filed as the other claims mentioned in the Rule should
be filed before the Court. Claims for taxes may be collected
even after the distribution of the decedent's estate among his
heirs who shall be liable therefor in proportion of their share in
the inheritance. (Government of the Philippines vs.
Pamintuan, 55 Phil. 13).
The reason for the more liberal treatment of claims for taxes
against a decedent's estate in the form of exception from the
application of the statute of non-claims, is not hard to find.
Taxes are the lifeblood of the Government and their prompt
and certain availability are imperious need. (Commissioner of
Internal Revenue vs. Pineda, G. R. No. L-22734, September 15,
1967, 21 SCRA 105). Upon taxation depends the Government
Tax Law Fulltext (1st set) | 1
ability to serve the people for whose benefit taxes are

collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes
should not be allowed to bring harm or detriment to the
people, in the same manner as private persons may be made
to suffer individually on account of his own negligence, the
presumption being that they take good care of their personal
affairs. This should not hold true to government officials with
respect to matters not of their own personal concern. This is
the philosophy behind the government's exception, as a
general rule, from the operation of the principle of estoppel.
(Republic vs. Caballero, L-27437, September 30, 1977, 79
SCRA 177; Manila Lodge No. 761, Benevolent and Protective
Order of the Elks Inc. vs. Court of Appeals, L-41001,
September 30, 1976, 73 SCRA 162; Sy vs. Central Bank of the
Philippines, L-41480, April 30,1976, 70 SCRA 571; Balmaceda
vs. Corominas & Co., Inc., 66 SCRA 553; Auyong Hian vs.
Court of Tax Appeals, 59 SCRA 110; Republic vs. Philippine
Rabbit Bus Lines, Inc., 66 SCRA 553; Republic vs. Philippine
Long Distance Telephone Company, L-18841, January 27,
1969, 26 SCRA 620; Zamora vs. Court of Tax Appeals, L23272, November 26, 1970, 36 SCRA 77; E. Rodriguez, Inc. vs.
Collector of Internal Revenue, L- 23041, July 31, 1969, 28
SCRA 119.) As already shown, taxes may be collected even
after the distribution of the estate of the decedent among his
heirs (Government of the Philippines vs. Pamintuan, supra;
Pineda vs. CFI of Tayabas, supra Clara Diluangco Palanca vs.
Commissioner of Internal Revenue, G. R. No. L-16661, January
31, 1962).
Furthermore, as held in Commissioner of Internal Revenue vs.
Pineda, supra, citing the last paragraph of Section 315 of the
Tax Code payment of income tax shall be a lien in favor of the
Government of the Philippines from the time the assessment
was made by the Commissioner of Internal Revenue until paid
with interests, penalties, etc. By virtue of such lien, this court
held that the property of the estate already in the hands of an
heir or transferee may be subject to the payment of the tax
due the estate. A fortiori before the inheritance has passed to
the heirs, the unpaid taxes due the decedent may be
collected, even without its having been presented under
Section 2 of Rule 86 of the Rules of Court. It may truly be said
that until the property of the estate of the decedent has
vested in the heirs, the decedent, represented by his estate,
continues as if he were still alive, subject to the payment of
such taxes as would be collectible from the estate even after
his death. Thus in the case above cited, the income taxes
sought to be collected were due from the estate, for the three
years 1946, 1947 and 1948 following his death in May, 1945.
Even assuming arguendo that claims for taxes have to be filed
within the time prescribed in Section 2, Rule 86 of the Rules of
Court, the claim in question may be filed even after the
expiration of the time originally fixed therein, as may be
gleaned from the italicized portion of the Rule herein cited
which reads:
Section 2. Time within which claims shall be filed. - In the
notice provided in the preceding section, the court shall state
the time for the filing of claims against the estate, which shall
not be more than twelve (12) nor less than six (6) months
after the date of the first publication of the notice. However,
at any time before an order of distribution is entered, on
application of a creditor who has failed to file his claim within
the time previously limited the court may, for cause shown
and on such terms as are equitable, allow such claim to be
flied within a time not exceeding one (1) month. (Emphasis
supplied)
In the instant case, petitioners filed an application (Motion for
Allowance of Claim and for an Order of Payment of Taxes)
which, though filed after the expiration of the time previously
limited but before an order of the distribution is entered,
should have been granted by the respondent court, in the
absence of any valid ground, as none was shown, justifying
denial of the motion, specially considering that it was for

allowance Of claim for taxes due from the estate, which in
effect represents a claim of the people at large, the only
reason given for the denial that the claim was filed out of the
previously limited period, sustaining thereby private
respondents' contention, erroneously as has been
demonstrated.
WHEREFORE, the order appealed from is reverse. Since the
Tax Commissioner's assessment in the total amount of
P3,254.80 with 5 % surcharge and 1 % monthly interest as
provided in the Tax Code is a final one and the respondent
estate's sole defense of prescription has been herein
overruled, the Motion for Allowance of Claim is herein granted
and respondent estate is ordered to pay and discharge the
same, subject only to the limitation of the interest collectible
thereon as provided by the Tax Code. No pronouncement as to
costs.
SO ORDERED.
FIRST DIVISION
G.R. No. 134062
April 17, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
DECISION
CORONA, J.:
This is a petition for review on certiorari 1 of a decision2 of the
Court of Appeals (CA) dated May 29, 1998 in CA-G.R. SP No.
41025 which reversed and set aside the decision3 and
resolution4 of the Court of Tax Appeals (CTA) dated November
16, 1995 and May 27, 1996, respectively, in CTA Case No.
4715.
In two notices dated October 28, 1988, petitioner
Commissioner of Internal Revenue (CIR) assessed respondent
Bank of the Philippine Islands (BPIs) deficiency percentage
and documentary stamp taxes for the year 1986 in the total
amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax
P 7, 27
Add: 25% surcharge
1,817,
20% interest from 1-21-87 to 10-28-88
3,215,
15,000
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
P12,31
1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax
P93,723
Add: 25% surcharge
23,430,8
15,000.0
Compromise penalty
TOTAL AMOUNT DUE AND COLLECTIBLE
P117,16
Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary
stamp taxes have] been assessed as shown above. Said
assessment has been based on return (filed by you) (as
verified) (made by this Office) (pending investigation)
(after investigation). You are requested to pay the above
amount to this Office or to our Collection Agent in the Office of
the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel,
replied as follows:
1. Your "deficiency assessments" are no assessments
at all. The taxpayer is not informed, even in the
vaguest terms, why it is being assessed a deficiency.
The very purpose of a deficiency assessment is to
inform taxpayer why he has incurred a deficiency so
that he can make an intelligent decision on whether
to pay or to protest the assessment. This is all the
more so when the assessment involves astronomical
amounts, as in this case.
We therefore request that the examiner concerned
be required to state, even in the briefest form, why
he believes the taxpayer has a deficiency
documentary and percentage taxes, and as to the
percentage tax, it is important that the taxpayer be
informed also as to what particular percentage tax
the assessment refers to.
2. As to the alleged deficiency documentary stamp
tax, you are aware of the compromise forged
between your office and the Bankers Association of
the Philippines [BAP] on this issue and of BPIs
submission of its computations under this
compromise. There is therefore no basis whatsoever
for this assessment, assuming it is on the subject of
the BAP compromise. On the other hand, if it relates
to documentary stamp tax on some other issue, we
should like to be informed about what those issues
are.
3. As to the alleged deficiency percentage tax, we
are completely at a loss on how such assessment
may be protested since your letter does not even tell
the taxpayer what particular percentage tax is
involved and how your examiner arrived at the
deficiency. As soon as this is explained and clarified
in a proper letter of assessment, we shall inform you
of the taxpayers decision on whether to pay or
protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8,
1991 stating that:
although in all respects, your letter failed to qualify as a
protest under Revenue Regulations No. 12-85 and therefore
not deserving of any rejoinder by this office as no valid issue
was raised against the validity of our assessment still we
obliged to explain the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the
matter.8
On July 6, 1991, BPI requested a reconsideration of the
assessments stated in the CIRs May 8, 1991 letter. 9 This was
denied in a letter dated December 12, 1991, received by BPI
on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review in the

CTA.11 In a decision dated November 16, 1995, the CTA
dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA
ruled that BPI failed to protest on time under Section 270 of
the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125.12 It denied
reconsideration in a resolution dated May 27, 1996. 13
On appeal, the CA reversed the tax courts decision and
resolution and remanded the case to the CTA14 for a decision
on the merits.15 It ruled that the October 28, 1988 notices
were not valid assessments because they did not inform the
taxpayer of the legal and factual bases therefor. It declared
that the proper assessments were those contained in the May
8, 1991 letter which provided the reasons for the claimed
deficiencies.16 Thus, it held that BPI filed the petition for
review in the CTA on time.17 The CIR elevated the case to this
Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for
deficiency percentage and documentary stamp taxes
for 1986 had already become final and unappealable
and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of
the NIRC stated:
Sec. 270. Protesting of assessment. When the [CIR] 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
[CIR] shall issue an assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October
28, 1988 notices19 were valid assessments. If they were not,
as held by the CA, then the correct assessments were in the
May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in
its July 6, 1991 letter, seasonably asked for a reconsideration
of the findings which the CIR denied in his December 12, 1991
letter, received by BPI on January 21, 1992. Consequently, the
petition for review filed by BPI in the CTA on February 18,
1992 would be well within the 30-day period provided by
law.20
The CIR argues that the CA erred in holding that the October
28, 1988 notices were invalid assessments. He asserts that he
used BIR Form No. 17.08 (as revised in November 1964) which
was designed for the precise purpose of notifying taxpayers of
the assessed amounts due and demanding payment thereof. 21
He contends that there was no law or jurisprudence then that
required notices to state the reasons for assessing deficiency
tax liabilities.22
BPI counters that due process demanded that the facts, data
and law upon which the assessments were based be provided
to the taxpayer. It insists that the NIRC, as worded now
(referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the

facts on which the assessment is made; otherwise, the
assessment shall be void."
According to BPI, this is declaratory of what sound tax
procedure is and a confirmation of what due process requires
even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the
NIRC provides:
Sec. 228. Protesting of Assessment. When the [CIR] 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:
xxx xxx xxx
The taxpayer shall be informed in writing of the law
and the facts on which the assessment is made;
otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and
facts on which the assessments of the deficiency taxes were
made. He merely notified BPI of his findings, consisting only of
the computation of the tax liabilities and a demand for
payment thereof within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the
provisions of the former Section 270 prior to its amendment
by RA 8424 (also known as the Tax Reform Act of 1997).23 In
CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the
law and the facts on which the assessment of estate taxes
had been made. She was merely notified of the findings by
the CIR, who had simply relied upon the provisions of former
Section 229 prior to its amendment by [RA] 8424, otherwise
known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section
229 on protesting an assessment. The old requirement of
merely notifying the taxpayer of the CIR's findings was
changed in 1998 to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be
made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment
notice was issued against the estate. On April 22, 1998, the
final estate tax assessment notice, as well as demand letter,
was also issued. During those dates, RA 8424 was already in
effect. The notice required under the old law was no
longer sufficient under the new law. 25 (emphasis supplied;
italics in the original)
Accordingly, when the assessments were made pursuant to
the former Section 270, the only requirement was for the CIR
to "notify" or inform the taxpayer of his "findings." Nothing in
the old law required a written statement to the taxpayer of
the law and facts on which the assessments were based. The
Court cannot read into the law what obviously was not
intended by Congress. That would be judicial legislation,
nothing less.
Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the
amount the taxpayer was to pay and a demand for payment

within a prescribed period.26 Everything considered, there was
no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and
jurisprudence.
The sentence
[t]he taxpayers shall be informed in writing of the law and the
facts on which the assessment is made; otherwise, the
assessment shall be void
was not in the old Section 270 but was only later on inserted
in the renumbered Section 228 in 1997. Evidently, the
legislature saw the need to modify the former Section 270 by
inserting the aforequoted sentence.27 The fact that the
amendment was necessary showed that, prior to the
introduction of the amendment, the statute had an entirely
different meaning.28
Contrary to the submission of BPI, the inserted sentence in
the renumbered Section 228 was not an affirmation of what
the law required under the former Section 270. The
amendment introduced by RA 8424 was an innovation and
could not be reasonably inferred from the old law. 29 Clearly,
the legislature intended to insert a new provision regarding
the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid
assessments, the CA explained:
xxx. Elementary concerns of due process of law should have
prompted the [CIR] to inform [BPI] of the legal and factual
basis of the formers decision to charge the latter for
deficiency documentary stamp and gross receipts taxes. 31
In other words, the CAs theory was that BPI was deprived of
due process when the CIR failed to inform it in writing of the
factual and legal bases of the assessments even if these
were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic
constitutional requirement that "no person shall be deprived
of his property without due process of law." 32 We note,
however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that
not only was [BPI] given the opportunity to discuss with the
[CIR] when the latter issued the former a Pre-Assessment
Notice (which [BPI] ignored) but that the examiners
themselves went to [BPI] and "we talk to them and we try to
[thresh] out the issues, present evidences as to what they
need." Now, how can [BPI] and/or its counsel honestly tell this
Court that they did not know anything about the
assessments?
Not only that. To further buttress the fact that [BPI] indeed
knew beforehand the assessments[,] contrary to the
allegations of its counsel[,] was the testimony of Mr. Jerry
Lazaro, Assistant Manager of the Accounting Department of
[BPI]. He testified to the fact that he prepared worksheets
which contain his analysis regarding the findings of the [CIRs]
examiner, Mr. San Pedro and that the same worksheets were
presented to Mr. Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that

[BPI] was indeed aware of the nature and basis of the
assessments, and was given all the opportunity to contest the
same but ignored it despite the notice conspicuously written
on the assessments which states that "this ASSESSMENT
becomes final and unappealable if not protested within 30
days after receipt." Counsel resorted to dilatory tactics and
dangerously played with time. Unfortunately, such strategy
proved fatal to the cause of his client.33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], 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
[CTA].34
Under the former Section 270, there were two instances when
an assessment became final and unappealable: (1) when it
was not protested within 30 days from receipt and (2) when
the adverse decision on the protest was not appealed to the
CTA within 30 days from receipt of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing
a request for reconsideration or reinvestigation in such form
and manner as may be prescribed by the implementing
regulations within thirty (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 [CTA] within thirty (30) days
from receipt of the said decision; otherwise, the decision shall
become final, executory and demandable.
Tax assessments by tax examiners are presumed correct and

made in good faith. The taxpayer has the duty to prove
otherwise. In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a Bureau
of Internal Revenue examiner and approved by his superior
officers will not be disturbed. All presumptions are in favor of
the correctness of tax assessments.38
Even if we considered the December 10, 1988 letter as a
protest, BPI must nevertheless be deemed to have failed to
appeal the CIRs final decision regarding the disputed
assessments within the 30-day period provided by law. The
CIR, in his May 8, 1991 response, stated that it was his "final
decision on the matter." BPI therefore had 30 days from the
time it received the decision on June 27, 1991 to appeal but it
did not. Instead it filed a request for reconsideration and
lodged its appeal in the CTA only on February 18, 1992, way
beyond the reglementary period. BPI must now suffer the
repercussions of its omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear
and unequivocal language whenever his action on an
assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated
by Sections 7 and 11 of [RA 1125], as amended. On the
basis of his statement indubitably showing that the
Commissioner's communicated action is his final
decision on the contested assessment, the aggrieved
taxpayer would then be able to take recourse to the
tax court at the opportune time. Without needless
difficulty, the taxpayer would be able to determine
when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and
opportunity on the part of the taxpayer to continually
delay the finality of the assessment and,
consequently, the collection of the amount demanded
as taxes by repeated requests for recomputation
and reconsideration. On the part of the [CIR], this would
encourage his office to conduct a careful and thorough study
of every questioned assessment and render a correct and
definite decision thereon in the first instance. This would also
deter the [CIR] from unfairly making the taxpayer grope in the
dark and speculate as to which action constitutes the decision
appealable to the tax court. Of greater import, this rule of
conduct would meet a pressing need for fair play, regularity,
and orderliness in administrative action.39 (emphasis supplied)
Implications Of A Valid Assessment

Considering that the October 28, 1988 notices were valid
assessments, BPI should have protested the same within 30
days from receipt thereof. The December 10, 1988 reply it
sent to the CIR did not qualify as a protest since the letter
itself stated that "[a]s soon as this is explained and clarified in
a proper letter of assessment, we shall inform you of the
taxpayers decision on whether to pay or protest the
assessment."36 Hence, by its own declaration, BPI did not
regard this letter as a protest against the assessments. As a
matter of fact, BPI never deemed this a protest since it did not
even consider the October 28, 1988 notices as valid or proper
assessments.
The inevitable conclusion is that BPIs failure to protest the
assessments within the 30-day period provided in the former
Section 270 meant that they became final and unappealable.
Thus, the CTA correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that
would reopen the question of its liability on the merits.37 Not
only that. There arose a presumption of correctness when BPI
failed to protest the assessments:
Either way (whether or not a protest was made), we cannot

absolve BPI of its liability under the subject tax assessments.
We realize that these assessments (which have been pending
for almost 20 years) involve a considerable amount of money.
Be that as it may, we cannot legally presume the existence of
something which was never there. The state will be deprived
of the taxes validly due it and the public will suffer if
taxpayers will not be held liable for the proper taxes assessed
against them:
Taxes are the lifeblood of the government, for without taxes,
the government can neither exist nor endure. A principal
attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social
contract with its citizens obliges it to promote public interest
and common good. The theory behind the exercise of the
power to tax emanates from necessity; without taxes,
government cannot fulfill its mandate of promoting the
general welfare and well-being of the people.40
WHEREFORE, the petition is hereby GRANTED. The May 29,
1998 decision of the Court of Appeals in CA-G.R. SP No. 41025
is REVERSED and SET ASIDE.
SO ORDERED.
EN BANC
G.R. No. L-22734
September 15, 1967
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased
ATANASIO PINEDA, respondent.
Office of the Solicitor General for petitioner.
Manuel B. Pineda for and in his own behalf as respondent.
ground that his right to assess and collect the tax has
prescribed. The Commissioner appealed and this Court
affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the
right to assess and collect the taxes for 1945 and 1946 has
not prescribed. For 1945 and 1946 the returns were filed on
August 24, 1953; assessments for both taxable years were
made within five years therefrom or on October 19, 1953; and
the action to collect the tax was filed within five years from
the latter date, on August 7, 1957. For taxable year 1947,
however, the return was filed on March 1, 1948; the
assessment was made on October 19, 1953, more than five
years from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly, We
remanded the case to the Tax Court for further appropriate
proceedings.1
In the Tax Court, the parties submitted the case for decision
without additional evidence.
BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife,
FelicisimaBagtas, and 15 children, the eldest of whom is
Manuel B. Pineda, a lawyer. Estate proceedings were had in
the Court of First Instance of Manila (Case No. 71129) wherein
the surviving widow was appointed administratrix. The estate
was divided among and awarded to the heirs and the
proceedings terminated on June 8, 1948. Manuel B. Pineda's
share amounted to about P2,500.00.
After the estate proceedings were closed, the Bureau of
Internal Revenue investigated the income tax liability of the
estate for the years 1945, 1946, 1947 and 1948 and it found
that the corresponding income tax returns were not filed.
Thereupon, the representative of the Collector of Internal
Revenue filed said returns for the estate on the basis of
information and data obtained from the aforesaid estate
proceedings and issued an assessment for the following:
1. Deficiency income tax
194
P135.83
5
194
436.95
6
194
1,206.91
7
Add: 5% surcharge
1% monthly interest from
November 30, 1953 to April 15,
1957
Compromise for late filing
Compromise for late payment
P1,779.69
88.98
720.77
80.00
40.00
P2,707.44
========
===
P14.50
2. Additional residence tax for 1945
========
===
3. Real Estate dealer's tax for the fourth
P207.50
quarter of 1946 and the whole year of ========
1947
===
Total amount due
Manuel B. Pineda, who received the assessment, contested

the same. Subsequently, he appealed to the Court of Tax
Appeals alleging that he was appealing "only that
proportionate part or portion pertaining to him as one of the
heirs."
After hearing the parties, the Court of Tax Appeals rendered
judgment reversing the decision of the Commissioner on the
On November 29, 1963 the Court of Tax Appeals rendered

judgment holding Manuel B. Pineda liable for the payment
corresponding to his share of the following taxes:
Deficiency income tax
1945
P135.8
3
436.95
1946
Real estate dealer's fixed
tax 4th quarter of 1946 and P187.5
whole year of 1947
0
The Commissioner of Internal Revenue has appealed to Us

and has proposed to hold Manuel B. Pineda liable for the
payment of all the taxes found by the Tax Court to be due
from the estate in the total amount of P760.28 instead of only
for the amount of taxes corresponding to his share in the
estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that
as an heir he is liable for unpaid income tax due the estate
only up to the extent of and in proportion to any share he
received. He relies on Government of the Philippine Islands v.
Pamintuan2 where We held that "after the partition of an
estate, heirs and distributees are liable individually for the
payment of all lawful outstanding claims against the estate in
proportion to the amount or value of the property they have
respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to
pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holdertransferee of property belonging to the estate/taxpayer. As an
heir he is individually answerable for the part of the tax
proportionate to the share he received from the
inheritance.3 His liability, however, cannot exceed the amount
of his share.4
As a holder of property belonging to the estate, Pineda is
liable for he tax up to the amount of the property in his
possession. The reason is that the Government has a lien on
the P2,500.00 received by him from the estate as his share in
the inheritance, for unpaid income taxes 4a for which said
estate is liable, pursuant to the last paragraph of Section 315
of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account
(cuenta en participacion), association, or insurance
company liable to pay the income tax, neglects or
refuses to pay the same after demand, the amount

shall be a lien in favor of the Government of the
Philippines from the time when the assessment was
made by the Commissioner of Internal Revenue until
paid with interest, penalties, and costs that may
accrue in addition thereto upon all property and
rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject
the property in Pineda's possession, i.e., the P2,500.00, to
satisfy the income tax assessment in the sum of P760.28.
After such payment, Pineda will have a right of contribution
from his co-heirs,5 to achieve an adjustment of the proper
share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax 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. This remedy was adopted
in Government of the Philippine Islands v. Pamintuan, supra.
In said case, the Government filed an action against all the
heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part
which remains after the settlement of all lawful claims against
the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs
the tax due from the estate is levied proportionately against
them is to achieve thereby two results: first, payment of the
tax; and second, adjustment of the shares of each heir in the
distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315
of the Tax Code upon all property and rights to property
belonging 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. This second remedy is the very avenue the
Government took in this case to collect the tax. The Bureau of
Internal Revenue should be given, in instances like the case at
bar, the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because
taxes are the lifeblood of government and their prompt and
certain availability is an imperious need.7 And as afore-stated
in this case the suit seeks to achieve only one objective:
payment of the tax. The adjustment of the respective shares
due to the heirs from the inheritance, as lessened by the tax,
is left to await the suit for contribution by the heir from whom
the Government recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel
B. Pineda is hereby ordered to pay to the Commissioner of
Internal Revenue the sum of P760.28 as deficiency income tax
for 1945 and 1946, and real estate dealer's fixed tax for the
fourth quarter of 1946 and for the whole year 1947, without
prejudice to his right of contribution for his co-heirs. No costs.
So ordered.
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.
The main issue in this case is whether or not the Collector of
Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary
issue is whether or not the appeal of the private respondent
from the decision of the Collector of Internal Revenue was
made on time and in accordance with law.
We deal first with the procedural question.
The record shows that on January 14, 1965, the private
respondent, a domestic corporation engaged in engineering,
construction and other allied activities, received a letter from
the petitioner assessing it in the total amount of P83,183.85
as delinquency income taxes for the years 1958 and
1959. 1 On January 18, 1965, Algue flied a letter of protest or
request for reconsideration, which letter was stamp received
on the same day in the office of the petitioner. 2 On March 12,
1965, a warrant of distraint and levy was presented to the
private respondent, through its counsel, Atty. Alberto Guevara,
Jr., who refused to receive it on the ground of the pending
protest. 3 A search of the protest in the dockets of the case
proved fruitless. Atty. Guevara produced his file copy and
gave a photostat to BIR agent Ramon Reyes, who deferred
service of the warrant. 4 On April 7, 1965, Atty. Guevara was
finally informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of
distraint and levy earlier sought to be served. 5 Sixteen days
later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the
Court of Tax Appeals. 6
The above chronology shows that the petition was filed
seasonably. According to Rep. Act No. 1125, the appeal may
be made within thirty days after receipt of the decision or
ruling challenged. 7 It is true that as a rule the warrant of
distraint and levy is "proof of the finality of the
assessment" 8 and renders hopeless a request for
reconsideration," 9being "tantamount to an outright denial
thereof and makes the said request deemed rejected." 10 But
there is a special circumstance in the case at bar that
prevents application of this accepted doctrine.
The proven fact is that four days after the private respondent
received the petitioner's notice of assessment, it filed its letter
of protest. This was apparently not taken into account before
the warrant of distraint and levy was issued; indeed, such
protest could not be located in the office of the petitioner. It
was only after Atty. Guevara gave the BIR a copy of the
protest that it was, if at all, considered by the tax authorities.
During the intervening period, the warrant was premature and
could therefore not be served.
FIRST DIVISION
G.R. No. L-28896 February 17, 1988
vs.
ALGUE, INC., and THE COURT OF TAX
APPEALS, respondents.
CRUZ, J.:
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
As the Court of Tax Appeals correctly noted," 11 the protest

filed by private respondent was not pro forma and was based
on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the
reglementary period which started on the date the
assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private
respondent was definitely informed of the implied rejection of
the said protest and the warrant was finally served on it.
Hence, when the appeal was filed on April 23, 1965, only 20
days of the reglementary period had been consumed.
Now for the substantive question.
The petitioner contends that the claimed deduction of

P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court
of Tax Appeals had seen it differently. Agreeing with Algue, it
held that the said amount had been legitimately paid by the
private respondent for actual services rendered. The payment
was in the form of promotional fees. These were collected by
the Payees for their work in the creation of the Vegetable Oil
Investment Corporation of the Philippines and its subsequent
purchase of the properties of the Philippine Sugar Estate
Development Company.
Parenthetically, it may be observed that the petitioner had
Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion.13 In
fact, as the said court found, the amount was earned through
the joint efforts of the persons among whom it was distributed
It has been established that the Philippine Sugar Estate
Development Company had earlier appointed Algue as its
agent, authorizing it to sell its land, factories and oil
manufacturing process. Pursuant to such authority, Alberto
Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell,
and Pablo Sanchez, worked for the formation of the Vegetable
Oil Investment Corporation, inducing other persons to invest
in it. 14 Ultimately, after its incorporation largely through the
promotion of the said persons, this new corporation purchased
the PSEDC properties. 15 For this sale, Algue received as agent
a commission of P126,000.00, and it was from this
commission that the P75,000.00 promotional fees were paid
to the aforenamed individuals. 16
There is no dispute that the payees duly reported their
respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon. 17 The Court of Tax
Appeals also found, after examining the evidence, that no
distribution of dividends was involved. 18
The petitioner claims that these payments are fictitious
because most of the payees are members of the same family
in control of Algue. It is argued that no indication was made as
to how such payments were made, whether by check or in
cash, and there is not enough substantiation of such
payments. In short, the petitioner suggests a tax dodge, an
attempt to evade a legitimate assessment by involving an
imaginary deduction.
We find that these suspicions were adequately met by the
private respondent when its President, Alberto Guevara, and
the accountant, Cecilia V. de Jesus, testified that the payments
were not made in one lump sum but periodically and in
different amounts as each payee's need arose. 19 It should be
remembered that this was a family corporation where strict
business procedures were not applied and immediate
issuance of receipts was not required. Even so, at the end of
the year, when the books were to be closed, each payee
made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. 20 Admittedly, everything
seemed to be informal. This arrangement was
understandable, however, in view of the close relationship
among the persons in the family corporation.
We agree with the respondent court that the amount of the
promotional fees was not excessive. The total commission
paid by the Philippine Sugar Estate Development Co. to the
private respondent was P125,000.00. 21After deducting the
said fees, Algue still had a balance of P50,000.00 as clear
profit from the transaction. The amount of P75,000.00 was
60% of the total commission. This was a reasonable
proportion, considering that it was the payees who did
practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the
Sugar Estate properties. This finding of the respondent court
is in accord with the following provision of the Tax Code:
SEC. 30. Deductions from gross income.--In

computing net income there shall be
allowed as deductions
(a) Expenses:
(1) In general.--All the ordinary and
necessary expenses paid or incurred during
the taxable year in carrying on any trade or
business, including a reasonable allowance
for salaries or other compensation for
personal services actually rendered; ... 22
and Revenue Regulations No. 2, Section 70 (1), reading as
follows:
SEC. 70. Compensation for personal
services.--Among the ordinary and
necessary expenses paid or incurred in
carrying on any trade or business may be
included a reasonable allowance for salaries
or other compensation for personal services
actually rendered. The test of deductibility
in the case of compensation payments is
whether they are reasonable and are, in
fact, payments purely for service. This test
and deductibility in the case of
compensation payments is whether they are
reasonable and are, in fact, payments purely
for service. This test and its practical
application may be further stated and
illustrated as follows:
Any amount paid in the form of
compensation, but not in fact as the
purchase price of services, is not deductible.
(a) An ostensible salary paid by a
corporation may be a distribution of a
dividend on stock. This is likely to occur in
the case of a corporation having few
stockholders, Practically all of whom draw
salaries. If in such a case the salaries are in
excess of those ordinarily paid for similar
services, and the excessive payment
correspond or bear a close relationship to
the stockholdings of the officers of
employees, it would seem likely that the
salaries are not paid wholly for services
rendered, but the excessive payments are a
distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18,
325.)
It is worth noting at this point that most of the payees were
not in the regular employ of Algue nor were they its
controlling stockholders. 23
The Solicitor General is correct when he says that the burden
is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus
has been discharged satisfactorily. The private respondent has
proved that the payment of the fees was necessary and
reasonable in the light of the efforts exerted by the payees in
inducing investors and prominent businessmen to venture in
an experimental enterprise and involve themselves in a new
business requiring millions of pesos. This was no mean feat
and should be, as it was, sufficiently recompensed.
It is said that taxes are what we pay for civilization society.
Without taxes, the government would be paralyzed for lack of
the motive power to activate and operate it. Hence, despite
the natural reluctance to surrender part of one's hard earned
income to the taxing authorities, every person who is able to
must contribute his share in the running of the government.

The government for its part, is expected to respond in the
form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material
values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary
method of exaction by those in the seat of power.
But even as we concede the inevitability and indispensability
of taxation, it is a requirement in all democratic regimes that
it be exercised reasonably and in accordance with the
prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor. For all
the awesome power of the tax collector, he may still be
stopped in his tracks if the taxpayer can demonstrate, as it
has here, that the law has not been observed.
We hold that the appeal of the private respondent from the
decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And
we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code
and should therefore not have been disallowed by the
petitioner.
ACCORDINGLY, the appealed decision of the Court of Tax
Appeals is AFFIRMED in toto, without costs.
SO ORDERED.
FIRST DIVISION
G.R. No. 124043 October 14, 1998

vs.
COURT OF APPEALS, COURT OF TAX APPEALS and
YOUNG MEN'S CHRISTIAN ASSOCIATION OF THE
PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by
the Young Men's Christian Association of the Philippines, Inc.
(YMCA) established as "a welfare, educational and
charitable non-profit corporation" subject to income tax
under the National Internal Revenue Code (NIRC) and the
Constitution?
The Case
This is the main question raised before us in this petition for
review on certiorari challenging two Resolutions issued by the
Court of Appeals 1 on September 28, 1995 2 and February 29,
1996 3 in CA-GR SP No. 32007. Both Resolutions affirmed the
Decision of the Court of Tax Appeals (CTA) allowing the YMCA
to claim tax exemption on the latter's income from the lease
of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a nonstock, non-profit institution, which conducts various programs
and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and

charitable objectives.
In 1980, private respondent earned, among others, an income
of P676,829.80 from leasing out a portion of its premises to
small shop owners, like restaurants and canteen operators,
and P44,259.00 from parking fees collected from nonmembers. On July 2, 1984, the commissioner of internal
revenue (CIR) issued an assessment to private respondent, in
the total amount of P415,615.01 including surcharge and
interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. Private respondent
formally protested the assessment and, as a supplement to its
basic protest, filed a letter dated October 8, 1985. In reply,
the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition
for review at the Court of Tax Appeals (CTA) on March 14,
1989. In due course, the CTA issued this ruling in favor of the
YMCA:
. . . [T]he leasing of [private respondent's]
facilities to small shop owners, to restaurant
and canteen operators and the operation of
the parking lot are reasonably incidental to
and reasonably necessary for the
accomplishment of the objectives of the
[private respondents]. It appears from the
testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote,
former accountant of YMCA, that these
facilities were leased to members and that
they have to service the needs of its
members and their guests. The rentals were
minimal as for example, the barbershop was
only charged P300 per month. He also
testified that there was actually no lot
devoted for parking space but the parking
was done at the sides of the building. The
parking was primarily for members with
stickers on the windshields of their cars and
they charged P.50 for non-members. The
rentals and parking fees were just enough to
cover the costs of operation and
maintenance only. The earning[s] from these
rentals and parking charges including those
from lodging and other charges for the use
of the recreational facilities constitute [the]
bulk of its income which [is] channeled to
support its many activities and attainment
of its objectives. As pointed out earlier, the
membership dues are very insufficient to
support its program. We find it reasonably
necessary therefore for [private respondent]
to make [the] most out [of] its existing
facilities to earn some income. It would have
been different if under the circumstances,
[private respondent] will purchase a lot and
convert it to a parking lot to cater to the
needs of the general public for a fee, or
construct a building and lease it out to the
highest bidder or at the market rate for
commercial purposes, or should it invest its
funds in the buy and sell of properties, real
or personal. Under these circumstances, we
could conclude that the activities are
already profit oriented, not incidental and
reasonably necessary to the pursuit of the
objectives of the association and therefore,
will fall under the last paragraph of Section
27 of the Tax Code and any income derived
therefrom shall be taxable.
Considering our findings that [private

respondent] was not engaged in the
business of operating or contracting [a]
parking lot, we find no legal basis also for
the imposition of [a] deficiency fixed tax and
[a] contractor's tax in the amount[s] of
P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing,
the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax
P3,129.23;
but the same is AFFIRMED in all other respect.
Aggrieved, the YMCA asked for reconsideration based on the

following grounds:
I
The findings of facts of the Public
Respondent Court of Tax Appeals being
supported by substantial evidence [are] final
and conclusive.
II
The conclusions of law of [p]ublic
[r]espondent exempting [p]rivate
[r]espondent from the income on rentals of
small shops and parking fees [are] in accord
with the applicable law and jurisprudence. 8
1980 Deficiency Income Tax P372,578.20.

While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax
P1,798.93;
1980 Deficiency Withholding Tax on Wages
P33,058.82
plus 10% surcharge and 20% interest per
annum from July 2, 1984 until fully paid but
not to exceed three (3) years pursuant to
Section 51(e)(2) & (3) of the National
Internal Revenue Code effective as of 1984.
5
Dissatisfied with the CTA ruling, the CIR elevated the case to
the Court of Appeals (CA). In its Decision of February 16,
1994, the CA 6 initially decided in favor of the CIR and
disposed of the appeal in the following manner:
Following the ruling in the afore-cited cases
of Province of Abra vs. Hernando and Abra
Valley College Inc. vs. Aquino, the ruling of
the respondent Court of Tax Appeals that
"the leasing of petitioner's (herein
respondent's) facilities to small shop
owners, to restaurant and canteen operators
and the operation of the parking lot are
reasonably incidental to and reasonably
necessary for the accomplishment of the
objectives of the petitioners, and the income
derived therefrom are tax exempt, must be
reversed.
WHEREFORE, the appealed decision is
hereby REVERSED in so far as it dismissed
the assessment for:
1980 Deficiency Income
Tax P 353.15
1980 Deficiency
Contractor's Tax P
3,129.23, &
1980 Deficiency Income
Tax P 372,578.20
Finding merit in the Motion for Reconsideration filed by the

YMCA, the CA reversed itself and promulgated on September
28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's
findings of fact, as they are supported by
evidence beyond what is considered as
substantial.
xxx xxx xxx
The second ground raised is that the
respondent CTA did not err in saying that
the rental from small shops and parking fees
do not result in the loss of the exemption.
Not even the petitioner would hazard the
suggestion that YMCA is designed for profit.
Consequently, the little income from small
shops and parking fees help[s] to keep its
head above the water, so to speak, and
allow it to continue with its laudable work.
The Court, therefore, finds the second
ground of the motion to be meritorious and
in accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration
is GRANTED; the respondent CTA's decision
is AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for
Reconsideration was denied by Respondent Court in its
second assailed Resolution of February 29, 1996. Hence, this
petition for review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the
following errors:
I
In holding that it had departed from the
findings of fact of Respondent Court of Tax
Appeals when it rendered its Decision dated
February 16, 1994; and
II
In affirming the conclusion of Respondent

Court of Tax Appeals that the income of
private respondent from rentals of small
shops and parking fees [is] exempt from
taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA
Decision reversed the factual findings of the CTA. On the other
hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's
facilities to small shop owners, to restaurant and canteen
operators and the operation of parking lots are reasonably
incidental to and reasonably necessary for the
accomplishment of the objectives of the private respondent
and that the income derived therefrom are tax exempt." 12
Petitioner insists that what the appellate court reversed was
the legal conclusion, not the factual finding, of the CTA. 13 The
commissioner has a point.
Indeed, it is a basic rule in taxation that the factual findings of
the CTA, when supported by substantial evidence, will be
disturbed on appeal unless it is shown that the said court
committed gross error in the appreciation of facts. 14 In the
present case, this Court finds that the February 16, 1994
Decision of the CA did not deviate from this rule. The latter
merely applied the law to the facts as found by the CTA and
ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of
certain premises and income earned from parking fees shall
fall under the last paragraph of Section 27 of the National
Internal Revenue Code of 1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely
resolved the aforementioned issue, as indeed it was expected
to. That it did so in a manner different from that of the CTA did
not necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of
fact is clear-cut. It has been held that "[t]here is a question of
law in a given case when the doubt or difference arises as to
what the law is on a certain state of facts; there is a question
of fact when the doubt or difference arises as to the truth or
falsehood of alleged facts." 16 In the present case, the CA did
not doubt, much less change, the facts narrated by the CTA. It
merely applied the law to the facts. That its interpretation or
conclusion is different from that of the CTA is not irregular or
abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the
YMCA from its real estate subject to tax? At the outset, we set
forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on
corporations. The following organizations
shall not be taxed under this Title in respect
to income received by them as such
xxx xxx xxx
(g) Civic league or organization not

organized for profit but operated exclusively
for the promotion of social welfare;
(h) Club organized and operated exclusively
for pleasure, recreation, and other nonprofitable purposes, no part of the net
income of which inures to the benefit of any
private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the
preceding paragraphs, the income of
whatever kind and character of the
foregoing organizations from any of their
properties, real or personal, or from any of
their activities conducted for profit,
regardless of the disposition made of such
income, shall be subject to the tax imposed
under this Code. (as amended by Pres.
Decree No. 1457)
Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of
the NIRC is, as a rule, exempted from the payment of tax "in
respect to income received by them as such," the exemption
does not apply to income derived ". . . from any of their
properties, real or personal, or from any of their activities
conducted for profit, regardless of the disposition made of
such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal,
[is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its
objectives." 17 We agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has
always applied the doctrine of strict in interpretation in
construing tax exemptions. 18 Furthermore, a claim of
statutory exemption from taxation should be manifest. and
unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be
granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is
expressly disallowed by the very wording of the last
paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA)
from any of their properties, real or personal, be subject to the
tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of
the YMCA from its real property, 20 the Court is duty-bound to
abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be applied. 21
Parenthetically, a consideration of the question of construction
must not even begin, particularly when such question is on
whether to apply a strict construction or a liberal one on
statutes that grant tax exemptions to "religious, charitable
and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be
"subject to the qualification that the income from the
properties must arise from activities 'conducted for profit'
before it may be considered taxable." 23 This argument is
erroneous. As previously stated, a reading of said paragraph
ineludibly shows that the income from any property of exempt
organizations, as well as that arising from any activity it

conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word
"properties." This makes from the property of the organization
taxable, regardless of how that income is used whether for
profit or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of
Appeals committed reversible error when it allowed, on
reconsideration, the tax exemption claimed by YMCA on
income it derived from renting out its real property, on the
solitary but unconvincing ground that the said income is not
collected for profit but is merely incidental to its operation.
The law does not make a distinction. The rental income is
taxable regardless of whence such income is derived and how
it is used or disposed of. Where the law does not distinguish,
neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law,
private respondent submits that Article VI, Section 28 of par. 3
of the 1987 Constitution, 24 exempts "charitable institutions"
from the payment not only of property taxes but also of
income tax from any source. 25 In support of its novel theory,
it compares the use of the words "charitable institutions,"
"actually" and "directly" in the 1973 and the 1987
Constitutions, on the one hand; and in Article VI, Section 22,
par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present
provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries," the
incomes of which are, from whatever source, all tax-exempt;
27
and (2) "[a]ll lands, buildings and improvements actually
and directly used for religious, charitable or educational
purposes," which are exempt only from property taxes. 28
Second, Lladoc v. Commissioner of Internal Revenue, 29 which
limited the exemption only to the payment of property taxes,
referred to the provision of the 1935 Constitution and not to
its counterparts in the 1973 and the 1987 Constitutions. 30
Third, the phrase "actually, directly and exclusively used for
religious, charitable or educational purposes" refers not only
to "all lands, buildings and improvements," but also to the
above-quoted first category which includes charitable
institutions like the private respondent. 31
The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution
reveal their intent which, in turn, may have guided the people
in ratifying the Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former
constitutional commissioner, who is now a member of this
Court, stressed during the Concom debates that ". . . what is
exempted is not the institution itself . . .; those exempted from
real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable
or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority
on the Constitution and also a member of the Concom,
adhered to the same view that the exemption created by said
provision pertained only to property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs,
stating that "[t]he tax exemption covers property taxes only."
35
Indeed, the income tax exemption claimed by private
respondent finds no basis in Article VI, Section 26, par. 3 of
the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3

of the Character, 36 claiming that the YMCA "is a non-stock,
non-profit educational institution whose revenues and assets
are used actually, directly and exclusively for educational
purposes so it is exempt from taxes on its properties and
income." 37 We reiterate that private respondent is exempt
from the payment of property tax, but not income tax on the
rentals from its property. The bare allegation alone that it is a
non-stock, non-profit educational institution is insufficient to
justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted
the exemption it claims under the aforecited provision, it must
prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and
(2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
However, the Court notes that not a scintilla of evidence was
submitted by private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview of
Article XIV, Section 4, par. 3 of the Constitution? We rule that
it is not. The term "educational institution" or "institution of
learning" has acquired a well-known technical meaning, of
which the members of the Constitutional Commission are
deemed cognizant. 38 Under the Education Act of 1982, such
term refers to schools. 39 The school system is synonymous
with formal education, 40 which "refers to the hierarchically
structured and chronologically graded learnings organized and
provided by the formal school system and for which
certification is required in order for the learner to progress
through the grades or move to the higher levels." 41 The Court
has examined the "Amended Articles of Incorporation" and
"By-Laws" 43 of the YMCA, but found nothing in them that even
hints that it is a school or an educational institution. 44
Furthermore, under the Education Act of 1982, even nonformal education is understood to be school-based and
"private auspices such as foundations and civic-spirited
organizations" are ruled out. 45 It is settled that the term
"educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or
educational establishment . . . ." 46 Therefore, the private
respondent cannot be deemed one of the educational
institutions covered by the constitutional provision under
consideration.
. . . Words used in the Constitution are to be
taken in their ordinary acceptation. While in
its broadest and best sense education
embraces all forms and phases of
instruction, improvement and development
of mind and body, and as well of religious
and moral sentiments, yet in the common
understanding and application it means a
place where systematic instruction in any or
all of the useful branches of learning is
given by methods common to schools and
institutions of learning. That we conceive to
be the true intent and scope of the term
[educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is
an educational institution, the Court also notes that the
former did not submit proof of the proportionate amount of
the subject income that was actually, directly and exclusively
used for educational purposes. Article XIII, Section 5 of the
YMCA by-laws, which formed part of the evidence submitted,
is patently insufficient, since the same merely signified that
"[t]he net income derived from the rentals of the commercial
buildings shall be apportioned to the Federation and Member
Associations as the National Board may decide." 48 In sum, we

find no basis for granting the YMCA exemption from income
tax under the constitutional provision invoked.
COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX

APPEALS and COURT OF APPEALS, respondent.
Cases Cited by Private

QUISUMBING, J.:
Respondent Inapplicable
49
The cases relied on by private respondent do not support its

cause. YMCA of Manila v. Collector of Internal Revenue 50 and
Abra Valley College, Inc. v. Aquino 51 are not applicable,
because the controversy in both cases involved exemption
from the payment of property tax, not income tax. Hospital de
San Juan de Dios, Inc. v. Pasay City 52 is not in point either,
because it involves a claim for exemption from the payment
of regulatory fees, specifically electrical inspection fees,
imposed by an ordinance of Pasay City an issue not at all
related to that involved in a claimed exemption from the
payment of income taxes imposed on property leases. In
Jesus Sacred Heart College v. Com. of Internal Revenue, 53 the
party therein, which claimed an exemption from the payment
of income tax, was an educational institution which submitted
substantial evidence that the income subject of the
controversy had been devoted or used solely for educational
purposes. On the other hand, the private respondent in the
present case has not given any proof that it is an educational
institution, or that part of its rent income is actually, directly
and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its
sympathy with private respondent. It appreciates the nobility
of its cause. However, the Court's power and function are
limited merely to applying the law fairly and objectively. It
cannot change the law or bend it to suit its sympathies and
appreciations. Otherwise, it would be overspilling its role and
invading the realm of legislation.
We concede that private respondent deserves the help and
the encouragement of the government. It needs laws that can
facilitate, and not frustrate, its humanitarian tasks. But the
Court regrets that, given its limited constitutional authority, it
cannot rule on the wisdom or propriety of legislation. That
prerogative belongs to the political departments of
government. Indeed, some of the members of the Court may
even believe in the wisdom and prudence of granting more
tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon the
Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the
Court of Appeals dated September 28, 1995 and February 29,
1996 are hereby REVERSED and SET ASIDE. The Decision of
the Court of Appeals dated February 16, 1995 is REINSTATED,
insofar as it ruled that the income derived by petitioner from
rentals of its real property is subject to income tax. No
pronouncement as to costs.
SO ORDERED.
SECOND DIVISION
G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
This petition for review assails the Resolution 1 of the Court of

Appeals dated September 22, 1993 affirming the Decision 2
and a Resolution 3 of the Court Of Tax Appeals which denied
the claims of the petitioner for tax refund and tax credits, and
disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the
instant petition for review, is DENIED due
course. The Decision of the Court of Tax
Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby
AFFIRMED in toto.
SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for
refund/tax credits of overpaid income tax for
1985 in the amount of P5,299,749.95 is
hereby denied for having been filed beyond
the reglementary period. The 1986 claim for
refund amounting to P234,077.69 is likewise
denied since petitioner has opted and in all
likelihood automatically credited the same
to the succeeding year. The petition for
review is dismissed for lack of merit.
SO ORDERED. 5
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a
commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for the
first and second quarters of 1985, reported profits, and paid
the total income tax of P5,016,954.00. The taxes due were
settled by applying PBCom's tax credit memos and
accordingly, the Bureau of Internal Revenue (BIR) issued Tax
Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and
P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when
it filed its Annual Income Tax Returns for the year-ended
December 31, 1986, the petitioner likewise reported a net loss
of P14,129,602.00, and thus declared no tax payable for the
year.
But during these two years, PBCom earned rental income from
leased properties. The lessees withheld and remitted to the
BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of
Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the
first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund
of creditable taxes withheld by their lessees from property
rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of

Internal Revenue, petitioner instituted a Petition for Review on
November 18, 1988 before the Court of Tax Appeals (CTA).
The petition was docketed as CTA Case No. 4309 entitled:
"Philippine Bank of Communications vs. Commissioner of
Internal Revenue."
The losses petitioner incurred as per the summary of
petitioner's claims for refund and tax credit for 1985 and
1986, filed before the Court of Tax Appeals, are as follows:
1985 1986
CTA a petition for review

asking for the refund/tax
credit of its 1985-86
excess quarterly income
tax payments can be
prejudiced by the
subsequent BIR rejection,
applied retroactivity, of its
assurances in RMC No. 785 that the prescriptive
period for the refund/tax
credit of excess quarterly
income tax payments is
not two years but ten (10).
7

Net Income (Loss) (P25,317,288.00)
(P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00
Tax Withheld at Source 282,795.50
234,077.69

Excess Tax Payments P5,299,749.50*
P234,077.69
===============
=============
* CTA's decision reflects
PBCom's 1985 tax claim
as P5,299,749.95. A forty
five centavo difference
was noted.
On May 20, 1993, the CTA rendered a decision which, as
stated on the outset, denied the request of petitioner for a tax
refund or credit in the sum amount of P5,299,749.95, on the
ground that it was filed beyond the two-year reglementary
period provided for by law. The petitioner's claim for refund in
1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom
against its tax payment in the succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration
of the CTA's decision but the same was denied due course for
lack of merit. 6
Thereafter, PBCom filed a petition for review of said decision
and resolution of the CTA with the Court of Appeals. However
on September 22, 1993, the Court of Appeals affirmed in toto
the CTA's resolution dated July 20, 1993. Hence this petition
now before us.
The issues raised by the petitioner are:
I. Whether taxpayer
PBCom which relied in
good faith on the formal
assurances of BIR in RMC
No. 7-85 and did not
immediately file with the
II. Whether the Court of

Appeals seriously erred in
affirming the CTA decision
which denied PBCom's
claim for the refund of
P234,077.69 income tax
overpaid in 1986 on the
mere speculation, without
proof, that there were
taxes due in 1987 and
that PBCom availed of taxcrediting that year. 8
Simply stated, the main question is: Whether or not the Court
of Appeals erred in denying the plea for tax refund or tax
credits on the ground of prescription, despite petitioner's
reliance on RMC No. 7-85, changing the prescriptive period of
two years to ten years?
Petitioner argues that its claims for refund and tax credits are
not yet barred by prescription relying on the applicability of
Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not
covered by the two-year prescriptive period under the tax
Code and that taxpayers may claim refund or tax credits for
the excess quarterly income tax with the BIR within ten (10)
years under Article 1144 of the Civil Code. The pertinent
portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 785
SUBJECT: PROCESSING OF REFUND OR TAX
CREDIT OF EXCESS CORPORATE INCOME TAX
RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others
Concerned.
Sec. 85 And 86 Of the National Internal
Revenue Code provide:
xxx xxx xxx
The foregoing provisions are implemented
by Section 7 of Revenue Regulations Nos.
10-77 which provide;
xxx xxx xxx
It has been observed, however, that
because of the excess tax payments,
corporations file claims for recovery of
overpaid income tax with the Court of Tax
Appeals within the two-year period from the

date of payment, in accordance with
sections 292 and 295 of the National
Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the
judicial right of the corporation to claim the
refund or tax credit.
It should he noted, however, that this is not
a case of erroneously or illegally paid tax
under the provisions of Sections 292 and
295 of the Tax Code.
In the above provision of the Regulations
the corporation may request for the refund
of the overpaid income tax or claim for
automatic tax credit. To insure prompt
action on corporate annual income tax
returns showing refundable amounts arising
from overpaid quarterly income taxes, this
Office has promulgated Revenue
Memorandum Order No. 32-76 dated June
11, 1976, containing the procedure in
processing said returns. Under these
procedures, the returns are merely preaudited which consist mainly of checking
mathematical accuracy of the figures of the
return. After which, the refund or tax credit
is granted, and, this procedure was adopted
to facilitate immediate action on cases like
this.
In this regard, therefore, there is no need to
file petitions for review in the Court of Tax
Appeals in order to preserve the right to
claim refund or tax credit the two year
period. As already stated, actions hereon by
the Bureau are immediate after only a
cursory pre-audit of the income tax returns.
Moreover, a taxpayer may recover from the
Bureau of Internal Revenue excess income
tax paid under the provisions of Section 86
of the Tax Code within 10 years from the
date of payment considering that it is an
obligation created by law (Article 1144 of
the Civil Code). 9 (Emphasis supplied.)
Petitioner argues that the government is barred from
asserting a position contrary to its declared circular if it would
result to injustice to taxpayers. Citing ABS CBN Broadcasting
Corporation vs. Court of Tax Appeals 10 petitioner claims that
rulings or circulars promulgated by the Commissioner of
Internal Revenue have no retroactive effect if it would be
prejudicial to taxpayers, In ABS-CBN case, the Court held that
the government is precluded from adopting a position
inconsistent with one previously taken where injustice would
result therefrom or where there has been a misrepresentation
to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal
Revenue Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings Any
revocation, modification or reversal of any
of the rules and regulations promulgated in
accordance with the preceding section or
any of the rulings or circulars promulgated
by the Commissioner shall not be given
retroactive application if the revocation,
modification or reversal will be prejudicial to
the taxpayers except in the following cases:
a). where the taxpayer deliberately

misstates or omits material facts from his
return or in any document required of him
by the Bureau of Internal Revenue;
b). where the facts subsequently gathered
by the Bureau of Internal Revenue are
materially different from the facts on
which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through
Solicitor General, argues that the two-year prescriptive period
for filing tax cases in court concerning income tax payments
of Corporations is reckoned from the date of filing the Final
Adjusted Income Tax Return, which is generally done on April
15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this
principle, to wit ACCRA Investments Corp. vs. Court of
Appeals, et al., 11 and Commissioner of Internal Revenue vs.
TMX Sales, Inc., et al.. 12 Respondent Commissioner also
states that since the Final Adjusted Income Tax Return of the
petitioner for the taxable year 1985 was supposed to be filed
on April 15, 1986, the latter had only until April 15, 1988 to
seek relief from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the CTA
on November 18, 1988, the same was filed beyond the time
fixed by law, and such failure is fatal to petitioner's cause of
action.
After a careful study of the records and applicable
jurisprudence on the matter, we find that, contrary to the
petitioner's contention, the relaxation of revenue regulations
by RMC 7-85 is not warranted as it disregards the two-year
prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the
nation." The primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance the
common weal. 13 Due process of law under the Constitution
does not require judicial proceedings in tax cases. This must
necessarily be so because it is upon taxation that the
government chiefly relies to obtain the means to carry on its
operations and it is of utmost importance that the modes
adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible. 14
From the same perspective, claims for refund or tax credit
should be exercised within the time fixed by law because the
BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by
incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC) of 1977
(now Sec. 229, NIRC of 1997) provides for the prescriptive
period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:
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 proceedings
shall 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. (Emphasis
supplied)
The rule states that the taxpayer may file a claim for refund or
credit with the Commissioner of Internal Revenue, within two
(2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided,
should be computed from the time of filing the Adjustment
Return and final payment of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine American
Life Insurance Co., 15 this Court explained the application of
Sec. 230 of 1977 NIRC, as follows:
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. In the present case,
this date is April 16, 1984, and two years
from this date would be April 16, 1986. . . .
As we have earlier said in the TMX Sales
case, Sections 68. 16 69, 17 and 70 18 on
Quarterly Corporate Income Tax Payment
and Section 321 should be considered in
conjunction with it 19
When the Acting Commissioner of Internal Revenue issued
RMC 7-85, changing the prescriptive period of two years to
ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision
of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply
interpret the law; rather it legislated guidelines contrary to the
statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are
considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are
issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed
upon a statute by the executive officers, whose duty is to
enforce it, is entitled to great respect by the courts.
Nevertheless, such interpretation is not conclusive and will be
ignored if judicially found to be erroneous. 20 Thus, courts will
not countenance administrative issuances that override,
instead of remaining consistent and in harmony with the law
they seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement a
law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO
No. 37-1 is void because it is not only
inconsistent with but is contrary to the
provisions and spirit of Act. No 4003 as
amended, because whereas the prohibition
prescribed in said Fisheries Act was for any
single period of time not exceeding five
years duration, FAO No 37-1 fixed no period,
that is to say, it establishes an absolute ban

for all time. This discrepancy between Act
No. 4003 and FAO No. 37-1 was probably
due to an oversight on the part of Secretary
of Agriculture and Natural Resources. Of
course, in case of discrepancy, the basic Act
prevails, for the reason that the regulation
or rule issued to implement a law cannot go
beyond the terms and provisions of the
latter. . . . In this connection, the attention of
the technical men in the offices of
Department Heads who draft rules and
regulation is called to the importance and
necessity of closely following the terms and
provisions of the law which they intended to
implement, this to avoid any possible
misunderstanding or confusion as in the
present case. 23
Further, fundamental is the rule that the State cannot be put
in estoppel by the mistakes or errors of its officials or agents.
24
As pointed out by the respondent courts, the nullification of
RMC No. 7-85 issued by the Acting Commissioner of Internal
Revenue is an administrative interpretation which is not in
harmony with Sec. 230 of 1977 NIRC. for being contrary to the
express provision of a statute. Hence, his interpretation could
not be given weight for to do so would, in effect, amend the
statute.
It is likewise argued that the Commissioner
of Internal Revenue, after promulgating RMC
No. 7-85, is estopped by the principle of
non-retroactively of BIR rulings. Again We do
not agree. The Memorandum Circular,
stating that a taxpayer may recover the
excess income tax paid within 10 years from
date of payment because this is an
obligation created by law, was issued by the
Acting Commissioner of Internal Revenue.
On the other hand, the decision, stating that
the taxpayer should still file a claim for a
refund or tax credit and corresponding
petition fro review within the
two-year prescription period, and that the
lengthening of the period of limitation on
refund from two to ten years would be
adverse to public policy and run counter to
the positive mandate of Sec. 230, NIRC, was the ruling and judicial interpretation of
the Court of Tax Appeals. Estoppel has no
application in the case at bar because it was
not the Commissioner of Internal Revenue
who denied petitioner's claim of refund or
tax credit. Rather, it was the Court of Tax
Appeals who denied (albeit correctly) the
claim and in effect, ruled that the RMC No.
7-85 issued by the Commissioner of Internal
Revenue is an administrative interpretation
which is out of harmony with or contrary to
the express provision of a statute
(specifically Sec. 230, NIRC), hence, cannot
be given weight for to do so would in effect
amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions,
applying or interpreting statutes as part of the legal system of
the country. But administrative decisions do not enjoy that
level of recognition. A memorandum-circular of a bureau head
could not operate to vest a taxpayer with shield against
judicial action. For there are no vested rights to speak of
respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could
not place the Government in estoppel to correct or overrule
the same. 27 Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this
case because the nullity of RMC No. 7-85 was declared by

respondent courts and not by the Commissioner of Internal
Revenue. Lastly, it must be noted that, as repeatedly held by
this Court, a claim for refund is in the nature of a claim for
exemption and should be construed in strictissimi juris against
the taxpayer. 28
On the second issue, the petitioner alleges that the Court of
Appeals seriously erred in affirming CTA's decision denying its
claim for refund of P234,077.69 (tax overpaid in 1986), based
on mere speculation, without proof, that PBCom availed of the
automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC)
provides that any excess of the total quarterly payments over
the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to
the corporation, or (b) may be credited against the estimated
quarterly income tax liabilities for the quarters of the
succeeding taxable year.
The corporation must signify in its annual corporate
adjustment return (by marking the option box provided in the
BIR form) its intention, whether to request for a refund or
claim for an automatic tax credit for the succeeding taxable
year. To ease the administration of tax collection, these
remedies are in the alternative, and the choice of one
precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income
tax over-paid in 1986 the Court of Tax
Appeals, after examining the adjusted final
corporate annual income tax return for
taxable year 1986, found out that petitioner
opted to apply for automatic tax credit. This
was the basis used (vis-avis the fact that the
1987 annual corporate tax return was not
offered by the petitioner as evidence) by the
CTA in concluding that petitioner had indeed
availed of and applied the automatic tax
credit to the succeeding year, hence it can
no longer ask for refund, as to [sic] the two
remedies of refund and tax credit are
alternative. 30
That the petitioner opted for an automatic tax credit in
accordance with Sec. 69 of the 1977 NIRC, as specified in its
1986 Final Adjusted Income Tax Return, is a finding of fact
which we must respect. Moreover, the 1987 annual corporate
tax return of the petitioner was not offered as evidence to
contovert said fact. Thus, we are bound by the findings of fact
by respondent courts, there being no showing of gross error or
abuse on their part to disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The decision of
the Court of Appeals appealed from is AFFIRMED, with COSTS
against the petitioner.1wphi1.nt
SO ORDERED.
G.R. No. L-22074
Josue H. Gustilo and Ramirez and Ortigas for petitioner.

Office of the Solicitor General and Attorney V.G. Saldajena for
respondents.
BENGZON, J.P., J.:
The Philippine Guaranty Co., Inc., a domestic insurance
company, entered into reinsurance contracts, on various
dates, with foreign insurance companies not doing business in
the Philippines namely: Imperio Compaia de Seguros, La
Union y El Fenix Espaol, Overseas Assurance Corp., Ltd.,
Socieded Anonima de Reaseguros Alianza, Tokio Marino & Fire
Insurance Co., Ltd., Union Assurance Society Ltd., Swiss
Reinsurance Company and Tariff Reinsurance Limited.
Philippine Guaranty Co., Inc., thereby agreed to cede to the
foreign reinsurers a portion of the premiums on insurance it
has originally underwritten in the Philippines, in consideration
for the assumption by the latter of liability on an equivalent
portion of the risks insured. Said reinsurrance contracts were
signed by Philippine Guaranty Co., Inc. in Manila and by the
foreign reinsurers outside the Philippines, except the contract
with Swiss Reinsurance Company, which was signed by both
parties in Switzerland.
The reinsurance contracts made the commencement of the
reinsurers' liability simultaneous with that of Philippine
Guaranty Co., Inc. under the original insurance. Philippine
Guaranty Co., Inc. was required to keep a register in Manila
where the risks ceded to the foreign reinsurers where entered,
and entry therein was binding upon the reinsurers. A
proportionate amount of taxes on insurance premiums not
recovered from the original assured were to be paid for by the
foreign reinsurers. The foreign reinsurers further agreed, in
consideration for managing or administering their affairs in
the Philippines, to compensate the Philippine Guaranty Co.,
Inc., in an amount equal to 5% of the reinsurance premiums.
Conflicts and/or differences between the parties under the
reinsurance contracts were to be arbitrated in Manila.
Philippine Guaranty Co., Inc. and Swiss Reinsurance Company
stipulated that their contract shall be construed by the laws of
the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine
Guaranty Co., Inc. ceded to the foreign reinsurers the
following premiums:
1953 . . . . . . . . . . . . .
........
P842,466.7
1
1954 . . . . . . . . . . . . .
........
721,471.8
5
Said premiums were excluded by Philippine Guaranty Co., Inc.

from its gross income when it file its income tax returns for
1953 and 1954. Furthermore, it did not withhold or pay tax on
them. Consequently, per letter dated April 13, 1959, the
Commissioner of Internal Revenue assessed against Philippine
Guaranty Co., Inc. withholding tax on the ceded reinsurance
premiums, thus:
1953
N BANC
Gross premium per investigation . . . .

......
P768,580.0
0
April 30, 1965
Withholding tax due thereon at

24% . . . . . . . .
P184,459.0
0
THE PHILIPPINE GUARANTY CO., INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE and THE
COURT OF TAX APPEALS, respondents.
25% surcharge . . . . . . . . . . . . . . . . . .
........
Compromise for non-filing of
46,114.00
100.00
withholding
income tax return . . . . . . . . . . . . . . . .
.........
TOTAL AMOUNT DUE & COLLECTIBLE .

...
P230,673.0
0
======
====
1954
Gross premium per investigation . . . .
......
P780.880.6
8
Withholding tax due thereon at

24% . . . . . . . .
P184,411.0
0
25% surcharge . . . . . . . . . . . . . . . . . .
........
P184,411.0
0
Compromise for non-filing of

withholding
income tax return . . . . . . . . . . . . . . . .
.........
100.00
TOTAL AMOUNT DUE & COLLECTIBLE .

...
P234,364.0
0
======
====
Philippine Guaranty Co., Inc., protested the assessment on the

ground that reinsurance premiums ceded to foreign reinsurers
not doing business in the Philippines are not subject to
withholding tax. Its protest was denied and it appealed to the
Court of Tax Appeals.
On July 6, 1963, the Court of Tax Appeals rendered judgment
with this dispositive portion:
IN VIEW OF THE FOREGOING CONSIDERATIONS,
petitioner Philippine Guaranty Co., Inc. is hereby
ordered to pay to the Commissioner of Internal
Revenue the respective sums of P202,192.00 and
P173,153.00 or the total sum of P375,345.00 as
withholding income taxes for the years 1953 and
1954, plus the statutory delinquency penalties
thereon. With costs against petitioner.
Philippine Guaranty Co, Inc. has appealed, questioning the
legality of the Commissioner of Internal Revenue's
assessment for withholding tax on the reinsurance premiums
ceded in 1953 and 1954 to the foreign reinsurers.
Petitioner maintain that the reinsurance premiums in question
did not constitute income from sources within the Philippines
because the foreign reinsurers did not engage in business in
the Philippines, nor did they have office here.
The reinsurance contracts, however, show that the
transactions or activities that constituted the undertaking to
reinsure Philippine Guaranty Co., Inc. against loses arising
from the original insurances in the Philippines were performed
in the Philippines. The liability of the foreign reinsurers
commenced simultaneously with the liability of Philippine
Guaranty Co., Inc. under the original insurances. Philippine
Guaranty Co., Inc. kept in Manila a register of the risks ceded
to the foreign reinsurers. Entries made in such register bound
the foreign resinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of the
reinsurance undertaking by the foreign reinsurers. Taxes on
premiums imposed by Section 259 of the Tax Code for the
privilege of doing insurance business in the Philippines were
payable by the foreign reinsurers when the same were not

recoverable from the original assured. The foreign reinsurers
paid Philippine Guaranty Co., Inc. an amount equivalent to 5%
of the ceded premiums, in consideration for administration
and management by the latter of the affairs of the former in
the Philippines in regard to their reinsurance activities here.
Disputes and differences between the parties were subject to
arbitration in the City of Manila. All the reinsurance contracts,
except that with Swiss Reinsurance Company, were signed by
Philippine Guaranty Co., Inc. in the Philippines and later
signed by the foreign reinsurers abroad. Although the contract
between Philippine Guaranty Co., Inc. and Swiss Reinsurance
Company was signed by both parties in Switzerland, the same
specifically provided that its provision shall be construed
according to the laws of the Philippines, thereby manifesting a
clear intention of the parties to subject themselves to
Philippine law.
Section 24 of the Tax Code subjects foreign corporations to
tax on their income from sources within the Philippines. The
word "sources" has been interpreted as the activity, property
or service giving rise to the income. 1 The reinsurance
premiums were income created from the undertaking of the
foreign reinsurance companies to reinsure Philippine Guaranty
Co., Inc., against liability for loss under original insurances.
Such undertaking, as explained above, took place in the
Philippines. These insurance premiums, therefore, came from
sources within the Philippines and, hence, are subject to
corporate income tax.
The foreign insurers' place of business should not be confused
with their place of activity. Business should not be continuity
and progression of transactions 2 while activity may consist of
only a single transaction. An activity may occur outside the
place of business. Section 24 of the Tax Code does not require
a foreign corporation to engage in business in the Philippines
in subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the Philippines.
What is controlling, therefore, is not the place of business but
the place of activity that created an income.
Petitioner further contends that the reinsurance premiums are
not income from sources within the Philippines because they
are not specifically mentioned in Section 37 of the Tax Code.
Section 37 is not an all-inclusive enumeration, for it merely
directs that the kinds of income mentioned therein should be
treated as income from sources within the Philippines but it
does not require that other kinds of income should not be
considered likewise.1wph1.t
The power to tax is an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its
shores from invasion, a corps of civil servants to serve, public
improvement designed for the enjoyment of the citizenry and
those which come within the State's territory, and facilities
and protection which a government is supposed to provide.
Considering that the reinsurance premiums in question were
afforded protection by the government and the recipient
foreign reinsurers exercised rights and privileges guaranteed
by our laws, such reinsurance premiums and reinsurers should
share the burden of maintaining the state.
Petitioner would wish to stress that its reliance in good faith
on the rulings of the Commissioner of Internal Revenue
requiring no withholding of the tax due on the reinsurance
premiums in question relieved it of the duty to pay the
corresponding withholding tax thereon. This defense of
petitioner may free if from the payment of surcharges or
penalties imposed for failure to pay the corresponding
withholding tax, but it certainly would not exculpate if from
liability to pay such withholding tax The Government is not
estopped from collecting taxes by the mistakes or errors of its

agents.3
the reinsurance premium in question, no deduction shall be

recognized.
In respect to the question of whether or not reinsurance

premiums ceded to foreign reinsurers not doing business in
the Philippines are subject to withholding tax under Section 53
and 54 of the Tax Code, suffice it to state that this question
has already been answered in the affirmative in Alexander
Howden & Co., Ltd. vs. Collector of Internal Revenue, L-19393,
April 14, 1965.
WHEREFORE, in affirming the decision appealed from, the

Philippine Guaranty Co., Inc. is hereby ordered to pay to the
Commissioner of Internal Revenue the sums of P202,192.00
and P173,153.00, or a total amount of P375,345.00, as
withholding tax for the years 1953 and 1954, respectively. If
the amount of P375,345.00 is not paid within 30 days from
the date this judgement becomes final, there shall be
collected a surcharged of 5% on the amount unpaid, plus
interest at the rate of 1% a month from the date of
delinquency to the date of payment, provided that the
maximum amount that may be collected as interest shall not
exceed the amount corresponding to a period of three (3)
years. With costs againsts petitioner.
Finally, petitioner contends that the withholding tax should be

computed from the amount actually remitted to the foreign
reinsurers instead of from the total amount ceded. And since
it did not remit any amount to its foreign insurers in 1953 and
1954, no withholding tax was due.
THIRD DIVISION
The pertinent section of the Tax Code States:

Sec. 54. Payment of corporation income tax at
source. In the case of foreign corporations subject
to taxation under this Title not engaged in trade or
business within the Philippines and not having any
office or place of business therein, there shall be
deducted and withheld at the source in the same
manner and upon the same items as is provided in
Section fifty-three a tax equal to twenty-four per
centum thereof, and such tax shall be returned and
paid in the same manner and subject to the same
conditions as provided in that section.
G.R. No. 125704 August 28, 1998

PHILEX MINING CORPORATION, petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, COURT OF
APPEALS, and THE COURT OF TAX APPEALS,
respondents.
The applicable portion of Section 53 provides:

ROMERO, J.:
(b) Nonresident aliens. All persons, corporations
and general copartnerships (compaias colectivas),
in what ever capacity acting, including lessees or
mortgagors of real or personal property, trustees
acting in any trust capacity, executors,
administrators, receivers, conservators, fiduciaries,
employers, and all officers and employees of the
Government of the Philippines having the control,
receipt, custody, disposal, or payment of interest,
dividends, rents, salaries, wages, premiums,
annuities, compensation, remunerations,
emoluments, or other fixed or determinable annual
or periodical gains, profits, and income of any
nonresident alien individual, not engaged in trade or
business within the Philippines and not having any
office or place of business therein, shall (except in
the case provided for in subsection [a] of this
section) deduct and withhold from such annual or
periodical gains, profits, and income a tax equal to
twelve per centum thereof: Provided That no
deductions or withholding shall be required in the
case of dividends paid by a foreign corporation
unless (1) such corporation is engaged in trade or
business within the Philippines or has an office or
place of business therein, and (2) more than eightyfive per centum of the gross income of such
corporation for the three-year period ending with the
close of its taxable year preceding the declaration of
such dividends (or for such part of such period as the
corporation has been in existence)was derived from
sources within the Philippines as determined under
the provisions of section thirty-seven: Provided,
further, That the Collector of Internal Revenue may
authorize such tax to be deducted and withheld from
the interest upon any securities the owners of which
are not known to the withholding agent.
The above-quoted provisions allow no deduction from the
income therein enumerated in determining the amount to be
withheld. According, in computing the withholding tax due on
Petitioner Philex Mining Corp. assails the decision of the Court

of Appeals promulgated on April 8, 1996 in CA-G.R. SP No.
36975 1 affirming the Court of Tax Appeals decision in CTA
Case No. 4872 dated March 16, 1995 2 ordering it to pay the
amount of P110,677,668.52 as excise tax liability for the
period from the 2nd quarter of 1991 to the 2nd quarter of
1992 plus 20% annual interest from August 6, 1994 until fully
paid pursuant to Sections 248 and 249 of the Tax Code of
1977.
The facts show that on August 5, 1992, the BIR sent a letter to
Philex asking it to settle its tax liabilities for the 2nd, 3rd and
4th quarter of 1991 as well as the 1st and 2nd quarter of 1992
in the total amount of P123,821.982.52 computed as follows:
PERIOD COVERED BASIC TAX 25% SURCHARGE
INTEREST TOTAL EXCISE
TAX DUE
2nd Qtr., 1991 12,911,124.60 3,227,781.15
3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30
2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03
2,631,837.72 26,889,937.88

47,312,353.94
11,828,088.48
8,988,362.97
68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49
1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94
215,580.18 24,805,194.88

43,013,541.70
10,753,385.43
1,926,250.00
55,693,177.13

90,325,895.64
22,581,473.91
10,914,612.97
123,821,982.52
=========
=========
=========
=========
In a letter dated August 20, 1992, 4 Philex protested the
demand for payment of the tax liabilities stating that it has
pending claims for VAT input credit/refund for the taxes it paid
for the years 1989 to 1991 in the amount of P119,977,037.02
plus interest. Therefore these claims for tax credit/refund
should be applied against the tax liabilities, citing our ruling in
Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.
5
and Unson, No. 14027, November 8, 1918,

39 Phil. 34). 8
Moreover, the Court of Tax Appeals ruled that "taxes cannot
be subject to set-off on compensation since claim for taxes is
not a debt or contract." 9 The dispositive portion of the CTA
decision 10 provides:
In all the foregoing, this Petition for Review
is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the
Respondent the amount of P110,677,668.52
representing excise tax liability for the
period from the 2nd quarter of 1991 to the
2nd quarter of 1992 plus 20% annual
interest from August 6, 1994 until fully paid
pursuant to Section 248 and 249 of the Tax
Code, as amended.
Aggrieved with the decision, Philex appealed the case before
the Court of Appeals docketed as CA-GR. CV No. 36975. 11
Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed
the Court of Tax Appeals observation. The pertinent portion of
which reads: 12
WHEREFORE, the appeal by way of petition
for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.
Philex filed a motion for reconsideration which was,
nevertheless, denied in a Resolution dated July 11, 1996.
13
However, a few days after the denial of its motion for

reconsideration, Philex was able to obtain its VAT input
credit/refund not only for the taxable year 1989 to 1991 but
also for 1992 and 1994, computed as follows: 14
In reply, the BIR, in a letter dated September 7, 1992, 6 found

no merit in Philex's position. Since these pending claims have
not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, the
BIR reiterated its demand that Philex settle the amount plus
interest within 30 days from the receipt of the letter.
Period Covered Tax Credit Date
In view of the BIR's denial of the offsetting of Philex's claim for

VAT input credit/refund against its excise tax obligation, Philex
raised the issue to the Court of Tax Appeals on November 6,
1992. 7 In the course of the proceedings, the BIR issued Tax
Credit Certificate SN 001795 in the amount of P13,144,313.88
which, applied to the total tax liabilities of Philex of
P123,821,982.52; effectively lowered the latter's tax
obligation to P110,677,688.52.
1994 (2nd Quarter) 007730 11 July 1996

P25,317,534.01
Despite the reduction of its tax liabilities, the CTA still ordered
Philex to pay the remaining balance of P110,677,688.52 plus
interest, elucidating its reason, to wit:
1990-1991 007751 16 July 1996

P84,662,787.46
Thus, for legal compensation to take place,

both obligations must be liquidated and
demandable. "Liquidated" debts are those
where the exact amount has already been
determined (PARAS, Civil Code of the
Philippines, Annotated, Vol. IV, Ninth Edition,
p. 259). In the instant case, the claims of
the Petitioner for VAT refund is still pending
litigation, and still has to be determined by
this Court (C.T.A. Case No. 4707). A fortiori,
the liquidated debt of the Petitioner to the
government cannot, therefore, be set-off
against the unliquidated claim which
Petitioner conceived to exist in its favor (see
Compaia General de Tabacos vs. French
By Claims For Certificate of

VAT refund/credit Number Issue Amount
1994 (4th Quarter) 007731 11 July 1996

P21,791,020.61
1989 007732 11 July 1996 P37,322,799.19
1992 (1st-3rd Quarter) 007755 23 July 1996

P36,501,147.95
In view of the grant of its VAT input credit/refund, Philex now
contends that the same should, ipso jure, off-set its excise tax
liabilities 15 since both had already become "due and
demandable, as well as fully liquidated;" 16 hence, legal
compensation can properly take place.
We see no merit in this contention.
In several instances prior to the instant case, we have already
made the pronouncement that taxes cannot be subject to
compensation for the simple reason that the government and
the taxpayer are not creditors and debtors of each other. 17

There is a material distinction between a tax and debt. Debts
are due to the Government in its corporate capacity, while
taxes are due to the Government in its sovereign capacity. 18
We find no cogent reason to deviate from the aforementioned
distinction.
Prescinding from this premise, in Francia v. Intermediate
Appellate Court, 19 we categorically held that taxes cannot be
subject to set-off or compensation, thus:
We have consistently ruled that there can
be no off-setting of taxes against the claims
that the taxpayer may have against the
government. A person cannot refuse to pay
a tax on the ground that the government
owes him an amount equal to or greater
than the tax being collected. The collection
of a tax cannot await the results of a lawsuit
against the government.
The ruling in Francia has been applied to the subsequent case
of Caltex Philippines, Inc. v. Commission on Audit, 20 which
reiterated that:
. . . a taxpayer may not offset taxes due
from the claims that he may have against
the government. Taxes cannot be the
subject of compensation because the
government and taxpayer are not mutually
creditors and debtors of each other and a
claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be setoff.
Further, Philex's reliance on our holding in Commissioner of
Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled
that a pending refund may be set off against an existing tax
liability even though the refund has not yet been approved by
the Commissioner, 21 is no longer without any support in
statutory law.
It is important to note, that the premise of our ruling in the
aforementioned case was anchored on Section 51 (d) of the
National Revenue Code of 1939. However, when the National
Internal Revenue Code of 1977 was enacted, the same
provision upon which the Itogon-Suyoc pronouncement was
based was omitted. 22 Accordingly, the doctrine enunciated in
Itogon-Suyoc cannot be invoked by Philex.
Despite the foregoing rulings clearly adverse to Philex's
position, it asserts that the imposition of surcharge and
interest for the non-payment of the excise taxes within the
time prescribed was unjustified. Philex posits the theory that it
had no obligation to pay the excise tax liabilities within the
prescribed period since, after all, it still has pending claims for
VAT input credit/refund with BIR. 23
taxpayer. 26 If any taxpayer can defer the payment of taxes by

raising the defense that it still has a pending claim for refund
or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the
government or that the collection of the tax is contingent on
the result of the lawsuit it filed against the government. 27
Moreover, Philex's theory that would automatically apply its
VAT input credit/refund against its tax liabilities can easily give
rise to confusion and abuse, depriving the government of
authority over the manner by which taxpayers credit and
offset their tax liabilities.
Corollarily, the fact that Philex has pending claims for VAT
input claim/refund with the government is immaterial for the
imposition of charges and penalties prescribed under Section
248 and 249 of the Tax Code of 1977. The payment of the
surcharge is mandatory and the BIR is not vested with any
authority to waive the collection thereof. 28 The same cannot
be condoned for flimsy reasons, 29 similar to the one advanced
by Philex in justifying its non-payment of its tax liabilities.
Finally, Philex asserts that the BIR violated Section 106 (e) 30
of the National Internal Revenue Code of 1977, which requires
the refund of input taxes within 60 days, 31 when it took five
years for the latter to grant its tax claim for VAT input
credit/refund. 32
In this regard, we agree with Philex. While there is no dispute
that a claimant has the burden of proof to establish the
factual basis of his or her claim for tax credit or refund, 33
however, once the claimant has submitted all the required
documents it is the function of the BIR to assess these
documents with purposeful dispatch. After all, since taxpayers
owe honestly to government it is but just that government
render fair service to the taxpayers. 34
In the instant case, the VAT input taxes were paid between
1989 to 1991 but the refund of these erroneously paid taxes
was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted
the refund earlier. We need not remind the BIR that simple
justice requires the speedy refund of wrongly-held taxes. 35
Fair dealing and nothing less, is expected by the taxpayer
from the BIR in the latter's discharge of its function. As aptly
held in Roxas v. Court of Tax Appeals: 36
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.
We fail to see the logic of Philex's claim for this is an outright

disregard of the basic principle in tax law that taxes are the
lifeblood of the government and so should be collected
without unnecessary hindrance. 24 Evidently, to countenance
Philex's whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in law or
in jurisprudence.
Despite our concern with the lethargic manner by which the

BIR handled Philex's tax claim, it is a settled rule that in the
performance of governmental function, the State is not bound
by the neglect of its agents and officers. Nowhere is this more
true than in the field of taxation. 37 Again, while we
understand Philex's predicament, it must be stressed that the
same is not a valid reason for the non-payment of its tax
liabilities.
To be sure, we cannot allow Philex to refuse the payment of its

tax liabilities on the ground that it has a pending tax claim for
refund or credit against the government which has not yet
been granted. It must be noted that a distinguishing feature of
a tax is that it is compulsory rather than a matter of bargain.
25
Hence, a tax does not depend upon the consent of the
To be sure, this is not to state that the taxpayer is devoid of

remedy against public servants or employees, especially BIR
examiners who, in investigating tax claims are seen to drag
their feet needlessly. First, if the BIR takes time in acting upon
the taxpayer's claim for refund, the latter can seek judicial
remedy before the Court of Tax Appeals in the manner
prescribed by law. 38 Second, if the inaction can be

characterized as willful neglect of duty, then recourse under
the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides:
Art. 27. Any person suffering material or
moral loss because a public servant or
employee refuses or neglects, without just
cause, to perform his official duty may file
an action for damages and other relief
against the latter, without prejudice to any
disciplinary action that may be taken.
More importantly, Section 269 (c) of the National Internal
Revenue Act of 1997 states:
xxx xxx xxx
(c) Wilfully neglecting to give receipts, as by
law required for any sum collected in the
performance of duty or wilfully neglecting to
perform, any other duties enjoyed by law.
Simply put, both provisions abhor official inaction, willful
neglect and unreasonable delay in the performance of official
duties. 39 In no uncertain terms must we stress that every
public employee or servant must strive to render service to
the people with utmost diligence and efficiency. Insolence and
delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It
simply cannot be apathetic and laggard in rendering service
to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice
of the taxpayer's generally negative perception towards the
BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent
callousness in performing its duties, still, the same cannot
justify Philex's non-payment of its tax liabilities. The adage
"no one should take the law into his own hands" should have
guided Philex's action.
WHEREFORE, in view of the foregoing, the instant petition is
hereby DISMISSED. The assailed decision of the Court of
Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.

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FIRST DIVISION

G.R. No. L-31364 March 30, 1979

All claims for money against the decedent, arising from

ability to serve the people for whose benefit taxes are

denial of the motion, specially considering that it was for

April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

Add: 25% surcharge

20% interest from 1-21-87 to 10-28-88

1986 Deficiency Documentary Stamp Tax

Add: 25% surcharge

Tax Law Fulltext (1st set) | 2

Both notices of assessment contained the following note:

On February 18, 1992, BPI filed a petition for review in the

Tax Law Fulltext (1st set) | 3

"[t]he taxpayer shall be informed in writing of the law and the

amount the taxpayer was to pay and a demand for payment

From all the foregoing discussions, We can now conclude that

Tax assessments by tax examiners are presumed correct and

Implications Of A Valid Assessment

Either way (whether or not a protest was made), we cannot

Tax Law Fulltext (1st set) | 5

G.R. No. L-22734

September 15, 1967

COMMISSIONER OF INTERNAL REVENUE, petitioner,

BENGZON, J.P., J.:

Manuel B. Pineda, who received the assessment, contested

On November 29, 1963 the Court of Tax Appeals rendered

The Commissioner of Internal Revenue has appealed to Us

refuses to pay the same after demand, the amount

arbitrariness will negate the very reason for government itself.

As the Court of Tax Appeals correctly noted," 11 the protest

Tax Law Fulltext (1st set) | 7

The petitioner contends that the claimed deduction of

SEC. 30. Deductions from gross income.--In

must contribute his share in the running of the government.

G.R. No. 124043 October 14, 1998

young people, pursuant to its religious, educational and

Tax Law Fulltext (1st set) | 9

Considering our findings that [private

but the same is AFFIRMED in all other respect.

Aggrieved, the YMCA asked for reconsideration based on the

1980 Deficiency Income Tax P372,578.20.

Finding merit in the Motion for Reconsideration filed by the

In affirming the conclusion of Respondent

(g) Civic league or organization not

organizations, as well as that arising from any activity it

Private respondent also invokes Article XIV, Section 4, par. 3

Associations as the National Board may decide." 48 In sum, we

COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX

Cases Cited by Private

The cases relied on by private respondent do not support its

G.R. No. 112024 January 28, 1999

This petition for review assails the Resolution 1 of the Court of

Pending the investigation of the respondent Commissioner of

CTA a petition for review

II. Whether the Court of

Appeals within the two-year period from the

a). where the taxpayer deliberately

not such tax, penalty, or sum has been paid

that is to say, it establishes an absolute ban

case because the nullity of RMC No. 7-85 was declared by

G.R. No. L-22074