Chavez v Ongpin

GR No 76778, June 6, 1990

FACTS:
Section 21 of Presidential Decree 464 provides that every 5 years starting calendar year 1978, there shall be a
provincial or city general revision of real property assessments. The general revision was completed in 1984.
On November 25, 1986, President Corazon Aquino issued EO 73 stating that beginning January 1, 1987, the 1984
assessments shall be the basis of real property taxes. Francisco Chavez, a taxpayer and landowner, questioned the
constitutionality of EO 74. He alleges that it will bring unreasonable increase in real property taxes.

ISSUE:
Is EO 73 constitutional?

RULING:
Yes. Without EO 73, the basis for collection of real property taxes will still be the 1978 revision of property values.
Certainly, to continue collecting real property taxes based on valuations arrived at several years ago, in disregard of
the increases in the value of real properties that have occurred since then is not in consonance with a sound tax
system.
Fiscal adequacy, which is one of the characteristics of a sound tax system, requires that sources of revenue must be
adequate to meet government expenditures and their variations.

Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from 1958-1959,
amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who
refused to receive it on the ground of the pending protest
Since the protest was not found on the records, a file copy from the corp was produced and given to BIR Agent
Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was 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
On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or
necessary business expense
- payments are fictitious because most of the payees are members of the same family in control of Algue and that
there is not enough substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered 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.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by Algue as
legitimate business expenses in its income tax returns

Ruling:
 Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in
accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged
During the intervening period, the warrant was premature and could therefore not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on
conformed to the decision of CTA
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. CTA also found, after examining the evidence, that no distribution of
dividends was involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction
Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance of
receipts was not required. 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. This arrangement was
understandable in view of the close relationship among the persons in the family corporation
The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate
Development Co. to Algue Inc. was P125K. After 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.
Sec. 30 of the Tax Code: allowed deductions in the net income Expenses - 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 xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. 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.
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
Taxation must 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

Algue Inc.s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep.
Act No. 1125. And we also find that the claimed deduction by Algue Inc. was permitted under the
Internal Revenue Code and should therefore not have been disallowed by the CIR

G.R. No. 85714 November 29, 1991

HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner,

vs.
THE COURT OF APPEALS, THE PROVINCIAL GOVERNMENT OF ISABELA, THE
MUNICIPALITY OF RAMON, ISABELA and THE NATIONAL IRRIGATION
ADMINISTRATION, respondents.

G.E. Aragones & Associates for petitioner.

PADILLA, J.:p
This is a petition for certiorari, treated as a petition for review on certiorari of the decision ** of the Court
of Appeals, dated 30 October 1987, in CA-G.R. SP Case No. 09196, affirming the Order dated 6 August 1983 of the Regional Trial Court of
Echague, Isabela, Branch 24, in CV No. XXIV-0106 (re-docketed as Civil Case No. 0093, before the Regional Trial Court, Santiago, Isabela,
Branch XXI). ***

Public respondent National Irrigation Administration (or "NIA") and petitioner Hydro Resources
Contractors Corporation (or "Hydro") entered into a contract whereby the latter undertook to
construct for the former the Magat River Multi-Purpose Project situated at Ramon, Isabela. 1

In June 1982, the Provincial Government of Isabela, its provincial treasurer, the Municipality of
Ramon, Isabela, and its assistant treasurer, as plaintiffs, filed a civil case against herein petitioner
Hydro, docketed as Civil Case No. XXIV-0106, with the Regional Trial Court of Echague, Isabela,
Branch 24, for collection of taxes over certain real properties which Hydro allegedly acquired,
possessed and used in connection with the construction of the said Magat River Multi-Purpose
Project. 2

After hearing, the Regional Trial Court, Echague, Br. 24, on 6 August 1983, issued an order in favor
of the plaintiffs, finding defendant Hydro (now petitioner) liable to pay realty taxes over the properties
it had constructed in connection with Magat River Multi-Purpose Project, but that the amount thereof
was to be determined in further proceedings of the court a quo, dispositive part of which order reads:

WHEREFORE, in the light of the foregoing considerations, the court finds and so
rules that under the pertinent provisions of Presidential Decree No. 464 as amended,
the defendant, Hydro Resources Contractors Corporation, is liable to the payment of
realty taxes over the real properties it constructed relative to the prosecution of the
Magat River Multi-Purpose Project (MRMP) at Barangay Aguinaldo, Ramon, Isabela.

Accordingly, it is hereby ordered that further proceedings shall be held to determine

the amount of real property taxes to be paid by the defendant corporation to the
plaintiffs in accordance with this Order and to receive evidence on the questions of
facts raised by the former.

However, by reason of the fact that pursuant to Administrative Order No. 7, dated
February 11, 1983, of the Honorable Supreme Court, implementing the provisions of
Section 18 of Batas Pambansa Blg. 129, cases which arise in the Municipality of
Ramon, Isabela, among other municipalities, now fall within the administrative
jurisdiction of the newly-created Regional Trial Court, Branch XXI, Santiago, Isabela
and it appearing that this case is a proper case for transfer to said Branch XXI since
its venue is the Municipality of Ramon, let the record of this case, consisting of 70
pages, be dropped from the civil docket of this Court and the same be forwarded to
the Regional Trial Court, Branch XXI, Santiago, Isabela for further proceedings . . .
(Emphasis supplied) 3

Civil Case No. XXIV-0106 was thereafter transferred to the Regional Trial Court, Branch XXI, of
Santiago, Isabela, and redocketed as Civil Case No. 0093.
On 4 November 1983, now before the Regional Trial Court of Santiago, Isabela, Br. XXI, Hydro
through counsel filed a motion for leave to file third-party complaint, dated 21 October 1983, against
NIA, attaching to the motion the proposed third-party complaint (for reimbursement from the NIA);
and a motion to admit amended answer, accompanying the same with the proposed amended
answer. 4 On the same date (4 November 1983), the Regional Trial Court, Santiago, Isabela admitted Hydro's third-party complaint;
however, as to its motion for leave to file amended answer, plaintiffs were given ten (10) days to file their opposition and Hydro was also
given ten (10) days from receipt of such opposition to file its reply. 5

On 12 December 1983, before the court a quo could resolve Hydro's motion for leave to file
amended answer, plaintiffs filed their reply to Hydro's amended answer. 6 NIA also filed its answer to Hydro's
third-party complaint. 7

In an order of 7 February 1983, the court a quo then ordered the parties to file their respective
memorandum, in this wise:

After several arguments made by counsels, three issues were submitted, namely:

1. Whether or not the Order of this Court dated 6 August 1983 was abandoned by the
filing of the Amended Answer by the defendant;

2. Whether the Hydro Resources or the NIA is the beneficial user of the land under
question therefore the beneficial user will pay the taxes; and

3. Whether it is proper for the plaintiff to avoid multiplicity of suit, to amend its
complaint and plead thereto the amount of P338,750.00 which was not included in
the original complaint but was included in the third party complaint against the third
party defendant.

This Court directed counsels of the parties to file their memoranda in support of their
respective position simultaneously within thirty (30) days from today, after which the
court, with or without the said memoranda will resolve the issues aforecited.
(emphasis supplied) 8

The parties did not filed their memoranda except Hydro which
complied. 9 On 20 May 1985, the court a quo ruled that the order dated 6 August 1983 (issued by the Regional Trial Court, Echague,
Isabela) was final and executory, disposing that:

WHEREFORE, the Court hereby rules the Order of this Court dated August 6, 1983
to be final and executory. The Orders of the Court dated October 14, 1983 10 and
November 4, 1983, being devoid of legal basis are hereby SET aside and the Third-party Complaint dated October 21,
1983 filed against the National Irrigation Administration is hereby DISMISSED. (Emphasis supplied) 11

On 14 October 1985, the court a quo denied Hydro's motion for reconsideration of the order dated
20 May 1985: 12

WHEREFORE, for lack of merit, defendant and third-party plaintiff's motion for
reconsideration is hereby Denied.
 Defendant and third-party plaintiff is granted a period of twenty (20) days from receipt
of this order within which to file whatever pleading it may deem appropriate under the
circumstances.

On 15 January 1986, Hydro filed with the Supreme Court a Petition, docketed G.R. No.
72849, 13 which (petition) was referred by this Court (First Division) to the Court of Appeals for proper action and disposition. In a
resolution dated 21 May 1986 14 said petition was re-docketed in the Court of Appeals as CA-G.R. SP No. 09196.

On 30 October 1987, the Court of Appeals rendered a decision (now assailed) denying (dismissing)
the petition, dispositive portion of which reads:

WHEREFORE, the writ of certiorari prayed for by petitioner is denied; and the court a
quo is hereby ordered to receive evidence only for the purpose of determining the
amount of realty taxes which petitioner was adjuged liable to pay respondents
Provincial Government of Isabela and Municipality of Ramon, Isabela, pursuant to
the order dated August 6, 1983 issued by the Regional Trial Court, Branch XXIV,
Echaque, Isabela in Civil Case No. XXIV-0106, where said respondents were the
plaintiffs and petitioner was the defendant, prior to the transfer of the case to the
Regional Trial Court, Branch XIV (sic,) Santiago Isabela, and there re-docketed as
Civil Case No. Br. XIV-0093, the same being the court and case a quo in this petition.
Costs against petitioner. 15

On 2 November 1988, the Court of Appeals denied petitioner's motion for reconsideration of the said
decision. Hence, the present petition for review, raising the following issues:

I. Whether or not the appellate court has acted without or in excess of its jurisdiction
or with grave abuse of discretion in not finding that the order issued by the court a
quo on August 6, 1983 is merely interlocutory and/or provisional in character and
could not be considered as a final determination of the merits of Civil Case No. 0093.

II. Whether or not the appellate court has acted without or in excess of its jurisdiction
or with grave abuse of discretion in not finding that the said order of August 6, 1983
was abandoned or set aside through the issuance of the order of November 4, 1983
which admitted herein petitioner's third-party complaint against respondent NIA.

III. Whether or not the appellate court has acted without or in excess of its jurisdiction
or with grave abuse of discretion in not finding that the court a quo, in issuing the
order of May 20, 1985 went beyond the issues presented by the parties, which act is
legally impermissible, irregular and invalid. 16

We grant the petition.

Both the petitioner and the respondents agree that the main issue in the case at bar is whether or
not the assailed order of the court a quo, dated 6 August 1983, is interlocutory in nature or a final
judgment.
It is to be observed that while the complaint in the case at bar is admittedly one for collection of
realty taxes over certain real properties, 17 filed against the petitioner, the complaint however, does not allege the amount of
taxes which the plaintiffs seek to collect from petitioner. 18 There is thus a need to determine the effect of such failure of the complaint to
state the aforesaid amount vis-a-vis plaintiff's cause of action. Although this issue is not raised in the present petition, it is basic that the Court
can review matters not assigned as an error in the appeal. 19

We hold that the complaint at bar has failed to state the ultimate facts, 20 which failure is violative of Section 3,
Rule 17 of the Rules of Court. 21

As admitted by the respondents, this case is one for collection of realty taxes. Section 82 of the
Presidential Decree No. 464 (Real Property Tax Code) states that "the delinquent real property tax
shall constitute a lawful indebtedness of the taxpayer to the province or city." Under P.D. 464, the
process of collecting real property taxes involve the acts or methods of appraisal and assessment of
the real property subject to tax; 22 the imposition of real property tax 23 and the collection thereof. 24

The amount of taxes sought to be collected is therefore determinable, yet the complaint at bar did
not plead the same. In the order of the court a quo, dated 7 February 1984, one of the issues
submitted was whether it s proper for the plaintiffs to amend their complaint and plead therein the
amount of tax sought to be collected. 25 But this issue was deemed abandoned when the court a quo issued an order dated
20 May 1985, which held that the order dated 6 August 1983 was final and executory.

As in any case for collection of a sum of money, stating the amount of tax sought to be collected in a
complaint for collection of realty taxes is part of the ultimate facts constituting the plaintiff cause of
action, as provided under Section 3, Rule 6 of the Rules of Court, supra. In the instant case, there is
failure to state in the complaint the ultimate facts because the amount of tax sought to be collected is
not pleaded or alleged.

It can be overlooked that the subject matter 26 of the complaint filed before the court a quo is the amount of the real estate
taxes to be collected. Section 82 of P.D. 464 provides that the collection of delinquent real property taxes may be enforced in any court of
competent jurisdiction. In the present case, as the complaint did not plead the amount of tax intended to be collected, how could the court a
quo ascertain, in the first place, in relation to the amount of the demand, whether it was the proper forum to try the case? 27 The fact that the
third party complaint filed by petitioner-defendant against the National Irrigation Administration pleaded the amount P338,750.00 as
reimbursible to it by the latter, is of no moment now, as the said third-party complaint was also ordered dismissed in the order of 20 May
1985. 28 Hence, it can be said that the complaint (in chief) was never amended.

While it may be true that petitioner-defendant did not move to question the failure of the complaint to
plead the amount of tax sought to be collected, the court a quo upon its own motion, may dismiss
the complaint for failure of the plaintiffs to comply with Section 3, Rule 6 of the Rules of Court in
relation to Section 3, Rule 17 thereof 29 which provides that the action may be dismissed for failure to comply with the rules.
This dismissal the court a quo did not order.

The complaint being fatally defective, the questioned order, dated 6 August 1983, which derived its
life from the said complaint, is also without effect. But assuming arguendo that the filing of the
compliant at bar complied with the rules thereby making the order of 6 August 1983 valid, the nature
of said order is interlocutory. It is not a final judgment.

The dispositive part of said order states that petitioner-defendant is liable for the payment of real
property taxes, but, it adds, further proceedings shall be held to determine the amount of real
property taxes to be paid by petitioner-defendant. Furthermore, the same order of 6 August 1983
states:
 The defendant corporation also invoked the ground of no cause of action in asking
for the dismissal of the complaint. In so doing, it adopted the stand that it was denied
due process by the fact that the notice of assessment was never served up it nor was
it furnished copies of any Tax Declarations Nos. 03-2101 to 03-2113 mentioned in the
fifth paragraph of the complaint and by the fact that it was never served of any notice
delinquency in the payment of real property tax nor was there any demand made
upon it for payment thereof. To the Court, these are matters or questions of facts
which necessitate presentation of evidence to prove or disprove them. At this stage
of the proceedings, the Court can not resolve them one way or the other. (Emphasis
supplied.) (Rollo, p. 12)

As held in Dela Cruz vs. Paras, 30 a court order is final in character if it puts an end to the particular matter resolved or settles
definitely the matter therein disposed of, such that no further questions can come before the court except the execution of the order; that on
the other hand, a court order is merely interlocutory in character if it is provisional and leaves substantial proceeding to be had in connection
with its subject.

Clearly, the order of 6 August 1983 is interlocutory. We fail to see how it could or did put an end to
the controversy when the court a quo still had to determine the amount of realty taxes to be collected
by plaintiffs from petitioner-defendant, and to make findings of fact on certain issues, which could still
affect the very liability to pay such taxes.

WHEREFORE, petition is GRANTED, the decision of the Court of Appeals, dated 30 October 1987
in CA-G.R. SP. No. 09196 is hereby SET ASIDE, and a new one entered ordering the complaint in
Civil Case No. 0093 before the Regional Trial Court of Santiago, Isabela, Branch XXI,
DISMISSED without prejudice. Without pronouncement as to costs.

SO ORDERED.

Paras and Regalado, JJ., concur.

Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I concur with the legal aspects of the majority opinion particularly with the conclusion that the
Complaint is defective as it failed to state ultimate facts.

However, considering that (1) the case has proceeded to trial and judgment with no objection having
been interposed by petitioner-defendant to the absence of specification regarding the amount of
taxes; (2) petitioner-defendant has been adjudged liable for the payment of realty taxes by the
Regional Trial Court of Echague, Isabela, Branch 24, on 6 August 1983, which judgment has been
affirmed by the Court of Appeals in CA-G.R. SP No. 09196; (3) the dismissal of the case without
prejudice would only result in multiplicity of suits and the prolongation of the controversy, which has
been pending since 1982, it is my view that the judgment of the Court of Appeals "ordering the
reception of evidence only for the purpose of determining the amount of realty taxes which petitioner
was adjuged liable to pay respondents" should be affirmed. The practicality of the situation justifies a
departure from the strict mandate of procedural rules.

The Order of the Regional Trial Court of Echague, Isabela, Branch 24, dismissing the Third-Party
Complaint should also be set aside and the said Complaint reinstated. The determination of the
liability of the NIA to reimburse HYDRO for whatever taxes the latter would pay to respondents could
then be included in the proceedings to be conducted by the Regional Trial Court of Santiago,
Isabela, as decreed by the Court of Appeals.

The foregoing procedure would settle all issues in one and the same case and obviate the need for
another litigation with its corresponding inherent delays.

# Separate Opinions

MELENCIO-HERRERA, J., dissenting:

I concur with the legal aspects of the majority opinion particularly with the conclusion that the
Complaint is defective as it failed to state ultimate facts.

However, considering that (1) the case has proceeded to trial and judgment with no objection having
been interposed by petitioner-defendant to the absence of specification regarding the amount of
taxes; (2) petitioner-defendant has been adjudged liable for the payment of realty taxes by the
Regional Trial Court of Echague, Isabela, Branch 24, on 6 August 1983, which judgment has been
affirmed by the Court of Appeals in CA-G.R. SP No. 09196; (3) the dismissal of the case without
prejudice would only result in multiplicity of suits and the prolongation of the controversy, which has
been pending since 1982, it is my view that the judgment of the Court of Appeals "ordering the
reception of evidence only for the purpose of determining the amount of realty taxes which petitioner
was adjuged liable to pay respondents" should be affirmed. The practicality of the situation justifies a
departure from the strict mandate of procedural rules.

The Order of the Regional Trial Court of Echague, Isabela, Branch 24, dismissing the Third-Party
Complaint should also be set aside and the said Complaint reinstated. The determination of the
liability of the NIA to reimburse HYDRO for whatever taxes the latter would pay to respondents could
then be included in the proceedings to be conducted by the Regional Trial Court of Santiago,
Isabela, as decreed by the Court of Appeals.

The foregoing procedure would settle all issues in one and the same case and obviate the need for
another litigation with its corresponding inherent delays.
G.R. No. L-29485 March 31, 1976

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX
APPEALS, respondents.

Solicitor General Felix V. Makasiar, Assistant Solicitor General Isidro C. Borromeo, Solicitor Lolita O.
Gal-lang and Special Attorney Salvador D. David for petitioner.

B. V. Abela M. C. Gutierrez, J. U. Ong and F.J. Malate, Jr. for respondents.

ESGUERRA, J.:

Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA Case No.
1346, cancelling and declaring of no force and effect the assessment made by the petitioner,
Commissioner of Internal Revenue, against the accumulated surplus of the respondent, Ayala
Securities Corporation.

The factual background of the case is as follows:

On November 29, 1955, respondent Ayala Securities Corporation, a domestic corporation organized
and existing under the laws of the Philippines, filed its income tax returns with the office of the
petitioner for its fiscal year which ended on September 30, 1955. Attached to its income tax return
was the audited financial statements of the respondent corporation as of September 30, 1955,
showing a surplus of P2,758,442.37. The income tax due on the return of the respondent corporation
was duly paid for within the time prescribed by law.

In a letter dated February 21, 1961, petitioner advised the respondent corporation of the assessment
of P758.687.04 on its accumulated surplus reflected on its income tax return for the fiscal year which
ended September 30, 1955 (Exit. D). The respondent corporation, on the other hand, in a letter
dated April 19, 1961, protested against the assessment on its retained and accumulated surplus
pertaining to the taxable year 1955 and sought reconsideration thereof for the reasons (1) that the
accumulation of the surplus was for a bona fide business purpose and not to avoid the imposition of
income tax on the individual shareholders, and (2) that the said assessment was issued beyond the
five-year prescriptive period (Exh. E).

On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting firm with the
"advise that your request for reconsideration will be the subject matter of further reinvestigation and
a thorough analysis of the issues involved conditioned, however, upon the execution of your client of
the enclosed form for waiver of the defense of prescription". (Exh. F) However, respondent
corporation did not execute the requested waiver of the statute of limitations, considering its claim
that the assessment in question had already prescribed.
On February 21, 1963, respondent corporation received a letter dated February 18, 1963, from the
Chief, Manila Examiners, of the Office of the herein petitioner, calling the attention of the respondent
corporation to its outstanding and unpaid tax in the amount of P708,687.04 and thereby requesting
for the payment of the said amount within five (5) days from receipt of the said letter (Exh. G).
Believing the aforesaid letter to be a denial of its protest, the herein respondent corporation filed with
the Court of Tax Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.

Respondent corporation in its Petition for Review alleges that the assessment made by petitioner
Commissioner of Internal Revenue is illegal and invalid considering that (1) the assessment in
question, having been issued only on February 21, 1961, and received by the respondent
corporation on March 22, 1961, the same was issued beyond the five-year period from the date of
the filing of respondent corporations income tax return November 29, 1955, and, therefore,
petitioner's right to make the assessment has already prescribed, pursuant to the provision of
Section 331 of the National Internal Revenue Code; and (2) the respondent corporation's
accumulation of surplus for the taxable year 1955 was not improper, considering that the retention of
such surplus was intended for legitimate business purposes and was not availed of by the
corporation to prevent the imposition of the income tax upon its shareholders.

Petitioner in his answer alleged that the assessment made by his office on the accumulated surplus
of the corporation as reflected on its income tax return for the taxable year 1955 has not as yet
prescribed and, further, that the respondent corporation's accumulation of surplus for the taxable
year 1955 was improper as the retention of such surplus was availed of by the corporation to prevent
the imposition of the income tax upon the individual shareholders or members of the said
corporation.

After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive portion of
which is as follows:

WHEREFORE, the decision of the respondent Commissioner of Internal Revenue

assessing petitioner the amount of P758,687.04 as 25 surtax and interest is
reversed. Accordingly, said assessment of respondent for 1955 is hereby cancelled
and declared of no force and effect. Without pronouncement as to costs.

From this decision, the Commissioner of Internal Revenue interposed this appeal.

Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter dated
February 18, 1963, (Exh. G) is a denial of the private respondent corporation's protest against the
assessment, and as such, is a decision contemplated under the provisions of Sections 7 and 11 of
Republic Act No. 1125. Petitioner contends that the letter dated February 18, 1963, is merely an
ordinary office letter designed to remind delinquent taxpayers of their obligations to pay their taxes to
the Government and, certainly, not a decision on a disputed or protested assessment contemplated
under Section 7(1) of R.A. 1125.

Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding that the
assessment of P758,687.04 as surtax on private respondent corporation's unreasonably
accumulated profits or surplus had already prescribed. Petitioner further contends that the applicable
provision of law to this case is Section 332 (a) of the National Internal Revenue Code which provides
for a ten (10) year prescriptive period of assessment, and not Section 331 thereof as held by the Tax
Court which provides a period of limitation of assessment for five (5) years only after the filing of the
return. Petitioner's theory, therefore, is to the effect that since the Corporate income tax return in
question was filed on, November 29, 1955, and the assessment thereto was issued on February 21,
1961, said assessment is not barred by prescription as the same was made very well within the ten
(10) year period allowed by law.

Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding the issue as
to whether or not the accumulated profits or surplus is indispensable to the business operations of
the private respondent corporation. It is the contention of the petitioner that the accumulation of
profits or surplus was resorted to by the respondent corporation in order to avoid the payment of
taxes by its stockholders or members, and was not availed of in order to meet the reasonable needs
of its business operations.

The legal issues for resolution by this Court in this case are: (1) Whether or not the instant case falls
within the jurisdiction of the respondent Court of Tax Appeals; (2) Whether or not the applicable
provision of law to this case is Section 331 of the National Internal Revenue Code, which provides
for a five-year period of prescription of assessment from the filing of the return, or Section 332(a) of
the same Code which provides for a ten-year period of limitation for the same purpose; and (3)
Whether or not the respondent Court of Tax Appeals committed a reversible error in not making any
ruling on the reasonableness or unreasonableness of the accumulated profits or surplus in question
of the private respondent corporation.

It is to be noted that the respondent Court of Tax Appeals is a court of special appellate jurisdiction
created under R. A. No. 1125. Thus under Section 7 (1), R. A. 1125, the Court of Tax Appeals
exercises exclusive appellate jurisdiction to review by appeal "decisions of the Collector of Internal
Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal Revenue".

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the
reconsideration or protest of the respondent corporation on the assessment made by the petitioner,
considering that the said letter is in itself a reiteration of the demand by the Bureau of Internal
Revenue for the settlement of the assessment already made, and for the immediate payment of the
sum of P758, 687.04 in spite of the vehement protest of the respondent corporation on April 21,
1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of
the disputed assessment in view of the continued refusal of the respondent corporation to execute
the waiver of the period of limitation upon the assessment in question.

This being so, the said letter amounts to a decision on a disputed or protested assessment and,
therefore, the court a quo did not err in taking cognizance of this case.

II
On the issue of whether Sec. 331 or See. 332(a) of the National Internal Revenue Code should
apply to this case, there is no iota of evidence presented by the petitioner as to any fraud or falsity
on the return with intent to evade payment of tax, not even in the income tax assessment (Exh. 5)
nor in the letter-decision of February 18, 1963 (Exh. G), nor in his answer to the petition for review.
Petitioner merely relies on the provisions of Sec 25 of the National Internal Revenue Code, violation
of which, according to Petitioner, presupposes the existence of fraud. But this is begging the
question and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in
the court below. The finding of the trial court as to its existence and non- existence is final and
cannot be reviewed here unless clearly shown to be erroneous (Republic of the Philippines vs. Ker &
Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of Internal Revenue vs. Lilia
Yusay Gonzales and the Court of Tax Appeals,
L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because it is serious
charge (Yutivo Sons Hardware Company vs. Court of Tax Appeals and Collector of Internal
Revenue, L-13203, January 28,1961, 1 SCRA 160).

The applicable provision of law in this case is Section 331 of the National Internal Revenue Code, to
wit:

SEC. 331. Period of limitation upon assessment and collection. Except as

provided in the succeeding section, internal revenue taxes shall be assessed within
five years after the return was filed, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period. For
the purposes of this section, a return filed before the last day prescribed by law for
the filing thereof shall be considered as filed on such last day: Provided, That this
limitation shall not apply to cases already investigated prior to the approval of this
Code.

Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities Corporation
designated September 30, 1955, as the last day of the closing of its fiscal year, and under Section
46(b) the income tax returns for the said corporation shall be filed on or before the fifteenth (15th)
day of the fourth (4th) month following the close of its fiscal year. The Ayala Securities Corporation
could, therefore, file its income tax returns on or before January 15, 1956. The assessment by the
Commissioner of Internal Revenue shall be made within five (5) years from January 15, 1956, or not
later than January 15, 1961, in accordance with Section 331 of the National Internal Revenue Code
herein above-quoted. As the assessment issued on February 21, 1961, which was received by the
Ayala Securities Corporation on March 22, 1961, was made beyond the five-year period prescribed
under Section 331 of said Code, the same was made after the prescriptive period had expired and,
therefore, was no longer binding on the Ayala Securities Corporation.

This Court is of the opinion that the respondent court committed no reversible error in not making
any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus of the
respondent corporation. For this reason, We are of the view that after reaching the conclusion that
the right of the Commissioner of Internal Revenue to assess the 25% surtax had already prescribed
under Section 331 of the National Internal Revenue Code, to delve further into the reasonableness
or unreasonableness of the accumulated profits or surplus of the respondent corporation for the
fiscal year ending September 30, 1955, will only be an exercise in futility.

WHEREFORE, the decision appealed from is hereby affirmed in toto.

Without special pronouncement as to costs.