G.R. Nos.

L-18843 and L-18844 August 29, 1974

CONSOLIDATED MINES, INC., petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. Nos. L-18853 & L-18854 August 29, 1974
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
CONSOLIDATED MINES, INC., respondent.
Office of the Solicitor General for Commissioner of Internal Revenue.
Taada, Carreon & Taada for Consolidated Mines, Inc.

MAKALINTAL, C.J.:p
These are appeals from the amended decision of the Court of Tax Appeals dated August 7, 1961, in CTA Cases
No. 565 and 578, both entitled "Consolidated Mines, Inc. vs. Commissioner of Internal Revenue," ordering the
Consolidated Mines, Inc., hereinafter referred to as the Company, to pay the Commissioner of Internal Revenue
the amounts of P79,812.93, P51,528.24 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and
1956, respectively, or the total sum of P202,733.99, plus 5% surcharge and 1% monthly interest from the date of
finality of the decision.
The Company, a domestic corporation engaged in mining, had filed its income tax returns for 1951, 1952, 1953
and 1956. In 1957 examiners of the Bureau of Internal Revenue investigated the income tax returns filed by the
Company because on August 10, 1954, its auditor, Felipe Ollada claimed the refund of the sum of P107,472.00
representing alleged overpayments of income taxes for the year 1951. After the investigation the examiners
reported that (A) for the years 1951 to 1954 (1) the Company had not accrued as an expense the share in the
company profits of Benguet Consolidated Mines as operator of the Company's mines, although for income tax
purposes the Company had reported income and expenses on the accrual basis; (2) depletion and depreciation
expenses had been overcharged; and (3) the claims for audit and legal fees and miscellaneous expenses for 1953
and 1954 had not been properly substantiated; and that (B) for the year 1956 (1) the Company had overstated its
claim for depletion; and (2) certain claims for miscellaneous expenses were not duly supported by evidence.
In view of said reports the Commissioner of Internal Revenue sent the Company a letter of demand requiring it
to pay certain deficiency income taxes for the years 1951 to 1954, inclusive, and for the year 1956. Deficiency
income tax assessment notices for said years were also sent to the Company. The Company requested a
reconsideration of the assessment, but the Commissioner refused to reconsider, hence the Company appealed to
the Court of Tax Appeals. The assessments for 1951 to 1954 were contested in CTA Case No. 565, while that for
1956 was contested in CTA Case No. 578. Upon agreement of the parties the two cases were heard and decided
jointly.
On May 6, 1961 the Tax Court rendered judgment ordering the Company to pay the amounts of P107,846.56,
P134,033.01 and P71,392.82 as deficiency income taxes for the years 1953, 1954 and 1956, respectively. The
Tax Court nullified the assessments for the years 1951 and 1952 on the ground that they were issued beyond the
five-year period prescribed by Section 331 of the National Internal Revenue Code.
However, on August 7, 1961, upon motion of the Company, the Tax Court reconsidered its decision and further
reduced the deficiency income tax liabilities of the Company to P79,812.93, P51,528.24 and P71,382.82 for the
years 1953, 1954 and 1956, respectively. In this amended decision the Tax Court subscribed to the theory of the
Company that Benguet Consolidated Mining Company, hereafter referred to as Benguet, had no right to share in
"Accounts Receivable," hence one-half thereof may not be accrued as an expense of the Company for a given
year.
Both the Company and the Commissioner appealed to this Court. The Company questions the rate of mine
depletion adopted by the Court of Tax Appeals and the disallowance of depreciation charges and certain
miscellaneous expenses (G.R. Nos.
L-18843 & L-18844). The Commissioner, on the other hand, questions what he characterizes as the "hybrid" or
"mixed" method of accounting utilized by the Company, and approved by the Tax Court, in treating the share of
Benguet in the net profits from the operation of the mines in connection with its income tax returns (G.R. Nos.
L-18853 &
L-18854).
With respect to methods of accounting, the Tax Code states:
Sec. 38. General Rules. The net income shall be computed upon the basis of the taxpayer's annual accounting
period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer but if no such method of accounting has been so employed or
if the method employed does not clearly reflect the income the computation shall be made in accordance with
such methods as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income ...
Sec. 39. Period in which items of gross income included. The amount of all items of gross income shall be
included in the gross income for the taxable year in which received by the taxpayer, unless, under the methods
of accounting permitted under section 38, any such amounts are to be properly accounted for as of a different
period ...
Sec. 40. Period for which deductions and credits taken. The deductions provided for in this Title shall be
taken for the taxable year in which "paid or accrued" or "paid or incurred" dependent upon the method of
accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the
deductions should be taken as of a different period ...
It is said that accounting methods for tax purposes 1 comprise a set of rules for determining when and how to
report income and deductions. The U.S. Internal Revenue Code 2 allows each taxpayer to adopt the accounting
method most suitable to his business, and requires only that taxable income generally be based on the method of
accounting regularly employed in keeping the taxpayer's books, provided that the method clearly reflects
income. 3
The Company used the accrual method of accounting in computing its income. One of its expenses is the
amount-paid to Benguet as mine operator, which amount is computed as 50% of "net income." The Company
deducts as an expense 50% of cash receipts minus disbursements, but does not deduct at the end of each
calendar year what the Commissioner alleges is "50% of the share of Benguet" in the "accounts receivable."
However, it deducts Benguet's 50% if and when the "accounts receivable" are actually paid. It would seem,
therefore, that the Company has been deducting a portion of this expense (Benguet's share as mine operator) on
the "cash & carry" basis. The question is whether or not the accounting system used by the Company justifies
such a treatment of this item; and if not, whether said method used by the Company, and characterized by the
Commissioner as a "hybrid method," may be allowed under the aforequoted provisions of our tax code. 4
For a proper understanding of the situation the following facts are stated: The Company has certain mining
claims located in Masinloc, Zambales. Because it wanted to relieve itself of the work and expense necessary for
developing the claims, the Company, on July 9, 1934, entered into an agreement (Exhibit L) with Benguet, a
domestic anonymous partnership engaged in the production and marketing of chromite, whereby the latter
undertook to "explore, develop, mine, concentrate and market" the pay ore in said mining claims.
The pertinent provisions of their agreement, as amended by the supplemental agreements of September 14,
1939 (Exhibit L-1) and October 2, 1941 (Exhibit L-2), are as follows:
IV. Benguet further agrees to provide such funds from its own resources as are in its judgment necessary for the
exploration and development of said claims and properties, for the purchase and construction of said
concentrator plant and for the installation of the proper transportation facilities as provided in paragraphs I, II
and III hereof until such time as the said properties are on a profit producing basis and agrees thereafter to
expand additional funds from its own resources, if the income from the said claims is insufficient therefor, in the
exploration and development of said properties or in the enlargement or extension of said concentration and
transportation facilities if in its judgment good mining practice requires such additional expenditures. Such
expenditures from its own resources prior to the time the said properties are put on a profit producing basis shall
be reimbursed as provided in paragraph VIII hereof. Expenditures from its own resources thereafter shall be
charged against the subsequent gross income of the properties as provided in paragraph X hereof.
VII. As soon as practicable after the close of each month Benguet shall furnish Consolidated with a statement
showing its expenditures made and ore settlements received under this agreement for the preceding month
which statement shall betaken as accepted by Consolidated unless exception is taken thereto or to any item
thereof within ten days in writing in which case the dispute shall be settled by agreement or by arbitration as
provided in paragraph XXII hereof.
VIII. While Benguet is being reimbursed for all its expenditures, advances and disbursements hereunder as
evidenced by said statements of accounts, the net profits resulting from the operation of the aforesaid claims or
properties shall be divided ninety per cent (90%) to Benguet and ten per cent (10%) to Consolidated. Such
division of net profits shall be based on the receipts, and expenditures during each calendar year, and shall
continue until such time as the ninety per cent (90%) of the net profits pertaining to Benguet hereunder shall
equal the amount of such expenditures, advances and disbursements. The net profits shall be computed as
provided in Paragraph X hereof.
X. After Benguet has been fully reimbursed for its expenditures, advances and disbursements as aforesaid the
net profits from the operation shall be divided between Benguet and Consolidated share and share alike, it being
understood however, that the net profits as the term is used in this agreement shall be computed by deducting
from gross income all operating expenses and all disbursements of any nature whatsoever as may be made in
order to carry out the terms of this agreement.
XIII. It is understood that Benguet shall receive no compensation for services rendered as manager or technical
consultants in connection with the carrying out of this agreement. It may, however, charge against the operation
actual additional expenses incurred in its Manila Office in connection with the carrying out of the terms of this
agreement including traveling expenses of consulting staff to the mines. Such expenses, however, shall not
exceed the sum of One Thousand Pesos (P1,000.00) per month. Otherwise, the sole compensation of Benguet
shall be its proportion of the net profits of the operation as herein above set forth.
XIV. All payments due Consolidated by Benguet under the terms of this agreement with respect to expenditures
made and ore settlements received during the preceding calendar month, shall be payable on or before the
twentieth day of each month.
There is no question with respect to the 90%-10% sharing of profits while Benguet was being reimbursed the
expenses disbursed during the period it was trying to put the mines on a profit-producing basis. 5 It appears that
by 1953 Benguet had completely recouped said advances, because they were then dividing the profits share and
share alike. .
As heretofore stated the question is: Under the arrangement between the Company and Benguet, when did
Benguet's 50% share in the "Accounts Receivable
6
accrue?
The following table (summary, Exhibit A, of examiner's report of January 28, 1967, Exh. 8) prepared for the
Commissioner graphically illustrates the effect of the inclusion of one-half of "Accounts Receivable" as
expense in the computation of the net income of the Company:

SUMMARY: 1951 1952 1953 1954

Original share 1,313,640.26 3,521,751,94 2,340,624.59 2,622,968.58

of Benguet

Additional 383,829.87 677,504.76 577,394.66 282,724.76

share of
Rec'bles

Total share of 1,697,470.13 4,199,256.70 2,918,009.25 2,905,693.34

Benguet

Less: Receipts 269,619.00 383,829.87 677,504.76 577,384.66

due from prior
year operation

Share of 1,427,851.13 3,815,426.83 2,240,504.49 2,328,308.68

Benguet as
adjusted
(Acc'rd)

Less: 1,313,640.26 3,521,751.94 2,340,624.59 2,622,968.58

Participation of
Benguet
already
deducted

Additional 114,210.87 293,674.89 (100,120.10) (294,659.90)

Expense
(Income)

In the aforesaid table "Additional share on Rec'bles" is one-half of "Total Rec'bles minus "Total Payables." It
indicates, from the Commissioner's viewpoint, that there were years when the Company had been overstating its
income (1951 and 1952) and there were years when it had been understating its income (1953 and 1954). 7 The
Commissioner is not interested in the taxes for 1951 and 1952 (which had prescribed anyway) when the
Company had overstated its income, but in those for 1953 and 1954, in each of which years the amount of the
"Accounts Receivable" was less than that of the previous year, and the Company, therefore, appears to have
deducted, as expense, compensation to Benguet bigger (than what the Commissioner claims is due) by one-half
of the difference between the year's "Accounts Receivable" and the previous year's "Accounts Receivable," thus
apparently understating its income to that extent.
According to the agreement between the Company and Benguet the net profits "shall be computed by deducting
from gross income all operating expenses and all expenses of any nature whatsoever." Periodically, Benguet
was to furnish the Company with the statement of accounts for a given month "as soon as practicable after the
close" of that month. The Company had ten days from receipt of the statement to register its objections thereto.
Thereafter, the statement was considered binding on the Company. And all payments due the Company "with
respect to the expenditures made and ore settlements received during the calendar month shall be payable on or
before the twentieth of each month."
The agreement does not say that Benguet was to share in "Accounts Receivable." But may this be implied from
the terms of the agreement? The statement of accounts (par. VIII) and the payment part (XIV) that
Benguet 8must make are both with respect to "expenditures made and ore settlements received." "Expenditures"
are payments of money. 9 This is the meaning intended by the parties, considering the provision that Benguet
agreed to "provide such funds from its own resources, etc."; and that "such expenditures from its own
resources" were to be reimbursed first as provided in par. VIII, and later as provided in par. X. "Settlement"
does not necessarily mean payment or satisfaction, though it may mean that; it frequently means adjustment or
arrangement. 10 The term "settlement" may be used in the sense of "payment," or it may be used in the sense of
"adjustment" or "ascertainment," or it may be used in the sense of "adjustment" or "ascertainment of a balance
between contending parties," depending upon the circumstances under which, and the connection in which, use
of the term is made. 11 In the term "ore settlements received," the word "settlement" was not used in the concept
of "adjustment," "arrangement" or "ascertainment of a balance between contending parties," since all these are
"made," not "received." "Payment," then, is the more appropriate equivalent of, and interchangeable with, the
term "Settlement." Hence, "ore settlements received" means "ore payments received," which excludes
"Accounts Receivable." Thus, both par. VIII and par. XIV refer to "payment," either received or paid by
Benguet.
According to par. X, the 50-50 sharing should be on "net profits;" and "net profits" shall be computed "by
deducting from gross income all operating expenses and all disbursements of any nature whatsoever as may be
made in order to carry out the terms of the agreement." The term "gross profit" was not defined. In the accrual
method of accounting "gross income" would include both "cash receipts" and "Accounts Receivable." But the
term "gross income" does not carry a definite and inflexible meaning under all circumstances, and should be
defined in such a way as to ascertain the sense in which the parties have used it in contracting. 12 According to
par. VIII 13 the "division of net profits shall be based on the receipts and expenditures." The term "expenditures"
we have already analyzed. As used, receipts" means "money received." 14 The same par. VIII uses the term
"expenditures, advances and disbursements." "Disbursements" means "payment," 15 while the word "advances"
when used in a contract ordinarily means money furnished with an expectation that it shall be returned. 16 It is
thus clear from par. VIII that in the computation of "net profits" (to be divided on the 90%-10% sharing
arrangement) only "cash payments" received and "cash disbursements" made by Benguet were to be considered.
On the presumption that the parties were consistent in the use of the term, the same meaning must be given to
"net profits" as used in par. X, and "gross income," accordingly, must be equated with "cash receipts." The
language used by the parties show their intention to compute Benguet's 50% share on the excess of actual
receipts over disbursements, without considering "Accounts Receivable" and "Accounts Payable" as factors in
the computation. Benguet then did not have a right to share in "Accounts Receivable," and, correspondingly, the
Company did not have the liability to pay Benguet any part of that item. And a deduction cannot be accrued
until an actual liability is incurred, even if payment has not been made. 17
Here we have to distinguish between (1) the method of accounting used by the Company in determining its net
income for tax purposes; and (2) the method of computation agreed upon between the Company and Benguet in
determining the amount of compensation that was to be paid by the former to the latter. The parties, being free
to do so, had contracted that in the method of computing compensation the basis were "cash receipts" and "cash
payments." Once determined in accordance with the stipulated bases and procedure, then the amount due
Benguet for each month accrued at the end of that month, whether the Company had made payment or not (see
par. XIV of the agreement). To make the Company deduct as an expense one-half of the "Accounts Receivable"
would, in effect, be equivalent to giving Benguet a right which it did not have under the contract, and to
substitute for the parties' choice a mode of computation of compensation not contemplated by them. 18
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not accruing
said one-half as a deduction. The Company was not using a hybrid method of accounting, but was consistent in
its use of the accrual method of accounting. The first issue raised by the Company is with respect to the rate of
mine depletion used by the Court of Tax Appeals. The Tax Code provides that in computing net income there
shall be allowed as deduction, in the case of mines, a reasonable allowance for depletion thereof not to exceed
the market value in the mine of the product thereof which has been mined and sold during the year for which
the return is made [Sec. 30(g) (1) (B)]. 19
The formula 20 for computing the rate of depletion is:
Cost of Mine Property
---------------------- = Rate of Depletion Per Unit Estimated ore Deposit of Product Mined and sold
The Commissioner and the Company do not agree as to the figures corresponding to either factor that affects the
rate of depletion per unit. The figures according to the Commissioner are:
P2,646,878.44 (mine cost) P0.59189 (rate of
------------------------- = depletion per ton)
4,471,892 tons (estimated ore deposit)
while the Company insists they are:
P4,238,974.57 (mine cost) P1.0197 (rate of
------------------------- - = depletion per ton)
4,156,888 tons (estimated
ore deposit)
They agree, however, that the "cost of the mine property" consists of (1) mine cost; and (2) expenses of
development before production. As to mine cost, the parties are practically in agreement the Commissioner
says it is P2,515,000 (the Company puts it at P2,500,000). As to expenses of development before production the
Commissioner and the Company widely differ. The Company claims it is P1,738,974.56, while the
Commissioner says it is only P131,878.44. The Company argues that the Commissioner's figure is "a patently
insignificant and inadequate figure when one considers the tens of millions of pesos of revenue and production
that petitioner's chromite mine fields have finally produced."
As an income tax concept, depletion is wholly a creation of the statute 21 "solely a matter of legislative
grace." 22Hence, the taxpayer has the burden of justifying the allowance of any deduction claimed. 23 As in
connection with all other tax controversies, the burden of proof to show that a disallowance of depletion by the
Commissioner is incorrect or that an allowance made is inadequate is upon the taxpayer, and this is true with
respect to the value of the property constituting the basis of the deduction. 24 This burden-of-proof rule has been
frequently applied and a value claimed has been disallowed for lack of evidence. 25
As proof that the amount spent for developing the mines was P1,738,974.56, the Company relies on the
testimony of Eligio S. Garcia and on Exhibits 1, 31 and 38.
Exhibit I is the Company's report to its stockholders for the year 1947. It contains the Company's balance sheet
as of December 31, 1946 (Exhibit I-1). Among the assets listed is "Mines, Improvement & Dev." in the amount
of P4,238,974.57, which, according to the Company, consisted of P2,500,000, purchase price of the mine, and
P1,738,974.56, cost of developing it. The Company also points to the statement therein that "Benguet invested
approximately P2,500,000 to put the property in operation, the greater part of such investment being devoted to
the construction of a 25-kilometer road and the installation of port facilities." This amount of P2,500,000 was
only an estimate. The Company has not explained in detail in what this amount or the lesser amount of
P1,738,974.56 consisted. Nor has it explained how that bigger amount became P1,738,974.56 in the balance
sheet for December 31, 1946.
According to the Company the total sum of P4,238,974.57 as "Mines, Improvement & Dev." was taken from its
pre-war balance sheet of December 31, 1940. As proof of this it cites the sworn certification (Exhibit 38)
executed on October 25, 1946 by R.P. Flood, in his capacity as treasurer of the Company, and attached to other
papers of the Company filed with the Securities and Exchange Commission in compliance with the provisions
of Republic Act No. 62 (An Act to require the presentation of proof of ownership of securities and the
reconstruction of corporate and partnership records, and for other purposes). In said certification there are
statements to the effect that "the Statement of Assets & Liabilities of Consolidated Mines, Incorporated,
submitted to the Securities & Exchange Commission as a requirement for the reconstitution of the records of the
said corporation, is as of September 4, 1946;" and that "the figure P4,238,974.57 representing the value of
Mines, Improvements and Developments appearing therein, was taken from the Balance Sheet as of December
31, 1940, which is the only available source of information of the Corporation regarding the above and
consequently the undersigned considers the stated figure to be only an estimate of the value of those items at the
present time. "This figure, the Company claims, is based on entries made in the ordinary and regular course of
its business dating as far back as before the war. The Company places reliance on Sec. 39, Rule 130, Revised
Rules of Court (formerly Sec. 34, Rule 123), which provides that entries made at, or near the time of the
transactions to which they refer, by a person deceased, outside of the Philippines or unable to testify, who was in
a position to know the facts therein stated, may be received as prima facie evidence, if such person made the
entries in his professional capacity or in the performance of duty and in the ordinary or regular course of
business or duty."
Note that Exhibit 38 is not the "entries," covered by the rule. The Company, however, urges, unreasonably, we
think, that it should be afforded the same probative value since it is based on such "entries" meaning the balance
sheet of December 31, 1940, which was not presented in evidence. Even with the presentation of said balance
sheet the Company would still have had to prove (1) that the person who made the entry did so in his
professional capacity or in the performance of a duty; (2) that the entry was made in the ordinary course of
business or duty; (3) that the entry was made at or near the time of the transaction to which it related; (4) that
the one who made it was in a position to know the facts stated in the entry; and (5) that he is dead, outside the
Philippines or unable to testify 26
A balance sheet may not be considered as "entries made in the ordinary course of business," which, according to
Moran:
means that the entries have been made regularly, as is usual, in the management of the trade or business. It is
essential, therefore, that there be regularity in the entries. The entry which is being introduced in evidence
should appear to be part of a group of regular entries. ... The regularity of the entries maybe proved by the form
in which they appear in the corresponding book. 27
A balance sheet, as that word is uniformly used by bookkeepers and businessmen, is a paper which shows "a
summation or general balance of all accounts," but not the particular items going to make up the several
accounts; and it is therefore essentially different from a paper embracing "a full and complete statement of all
the disbursements and receipts, showing from what sources such receipts were derived, and for what and to
whom such disbursements or payments were made, and for what object or purpose the same were made;" but
such matters may find an appropriate place in an itemized account. 28 Neither can it be said that a balance sheet
complies with the third requisite, since the entries therein were not made at or near the time of the transactions
to which they related.
In order to render admissible books of account it must appear that they are books of original entry, that the
entries were made in the ordinary course of business, contemporaneously with the facts recorded, and by one
who had knowledge of the facts. San Francisco Teaming Co v Gray (1909) 11 CA 314, 104 P 999. See Brown v
Ball (1932) 123 CA 758, 12 P2d 28, to the effect that the books must be kept in the regular course of business. 29
A "ledger" is a book of accounts in which are collected and arranged, each under its appropriate head, the
various transactions scattered throughout the journal or daybook, land is not a "book of original entries," within
the rule making such books competent evidence. First Nat. Building Co. v. Vanderberg, 119 P 224, 227; 29 Okl.
583. 30
Code Iowa, No. 3658, providing that "books of account" are receivable in evidence, etc., means a book
containing charges, and showing a continuous dealing with persons generally. A book, to be admissible, must be
kept as an account book, and the charges made in the usual course of business. Security Co. v. Graybeal, 52 NW
497, 85 Iowa 543, 39 Am St Rep 311. 31
Books of account may therefore be admissible under the rule. In tax cases, however, this Court appears not to
place too high a probative value on them, considering the statement in the case of Collector of Internal Revenue
v. Reyes 32 that "books of account do not prove per se that they are veracious; in fact they may be more
consistent than truthful." Indeed, books of account may be used to carry out a plan of tax evasion. 33
At most, therefore, the presentation of the balance sheet of December 31, 1940 would only prove that the figure
P4,238,974.57 appears therein as corresponding to mine cost. But the Company would still need to present
proof to justify its adoption of that figure. It had burden of establishing the components of the amount of
P1,738,974.57: what were the particular expenses made and the corresponding amount of each, so that it may be
determined whether the expenses were actually made and whether the items are properly part of cost of mine
development, or are actually depreciable items.
In this connection we take up Exhibit 31 of the Commissioner. This is the memorandum of BIR Examiner Cesar
P. Aguirre to the Chief of the Investigating Division of the Bureau of Internal Revenue. According to this report
"the counsel of the taxpayer alleges that the cost of Masinloc Mine properties and improvement is
P4,238,974.56 instead of P2,646,879.44 as taken up in this report," and that the expenses as of 1941 were as
follows:
Assets subject to:
1941
1. Depletion P2,646,878.44
2. 10 years depreciation 1,188,987.76
3. 3 years depreciation 78,283.75
4. 20 years depreciation 9,143.63
5. 10% amortization 171,985.00
Less: Cost Chromite Field P4,085,277.58
Expenses by operator 2,515,000.00 P1,570,277.58
The examiner concluded that "in the light of the figures listed above, the counsel for the taxpayer fairly stated
the amount disbursed by the operator until the mine property was put to production in 1939." The Company
capitalizes on this conclusion, completely disregarding the examiner's other statements, as follows:
The counsel, however, is not aware of the fact that the expenses made by the operator are those which are
depreciable and\or amortizable instead of depletable expenditures. The first post-war Balance Sheet (12/31/46)
of the taxpayer shows that its Mines, Improvement & Dev. is P4,328,974.57. Considering the expenditures
incurred by Benguet Consolidated as of 1941 (P1,570,277.58); the rehabilitation expenses in 1946
(P211,223.72); and the cost of the Masinloc Chromite Field, the total cost would only be P4,296,501.30. Of the
total expenditure of P1,570,277.58 as of 1941, P1,438,389.124 were spent on depreciable and/or amortizable
expenses and P131,878.44 were made for the direct improvement of the mine property.
In as much as the expenditure of the operator as of 1941 and the cost of the mine property were taken up in the
account Mines, Improvement & Rehabilitation in 1946, all its assets that were rightfully subject to depletion
was P2,646,878.44.
34
Because of the above qualification a large part of the amount spent by the operator may not be allowed for
purpose of depletion deduction, 35 depletion being different from depreciation. 36
The Company's balance sheet for December 31, 1947 lists the "mine cost" of P2,500,000 as "development cost"
and the amount of P1,738,974.37 as "suspense account (mining properties subject to war losses)." The
Company claims that its accountant, Mr. Calpo, made these errors, because he was then new at the job. Granting
that was what had happened, it does not affect the fact that the, evidence on hand is insufficient to prove the cost
of development alleged by the Company.
Nor can we rely on the statements of Eligio S. Garcia, who was the Company's treasurer and assistant secretary
at the time he testified on August 14, 1959. He admitted that he did not know how the figure P4,238,974.57 was
arrived at, explaining: "I only know that it is the figure appearing on the balance sheet as of December 31, 1946
as certified by the Company's auditors; and this we made as the basis of the valuation of the depletable value of
the mines." (p. 94, t.s.n.)
We, therefore, have to rely on the Commissioner's assertion that the "development cost" was P131,878.44,
broken down as follows: assessment, P34,092.12; development, P61,484.63; exploration, P13,966.62; and
diamond drilling, P22,335.07.
The question as to which figure should properly correspond to "mine cost" is one of fact. 37 The findings of fact
of the Tax Court, where reasonably supported by evidence, are conclusive upon the Supreme Court. 38
As regards the estimated ore deposit of the Company's mines, the Company's figure is "4,156,888 tons," while
that of the Commissioner is the larger figure "4,471,892 tons." The difference of 315,004 tons was due to the
fact that the Commissioner took into account all the ore that could probably be removed and marketed by the
Company, utilizing the total tonnage shipped before and after the war (933,180 tons) and the total reserve of
shipping material pegged at 3,583,712 tons. On the other hand the Company's estimate was arrived at by taking
into consideration only the quantity shipped from solid ore namely, 733,180 tons (deducting from the total
tonnage shipped before and after the war an estimated float of 200,000 tons), and then adding the total
recoverable ore which was assessed at 3,423,708 tons.
The above-stated figures were obtained from the report 39 of geologist Paul A. Schaeffer, who had been earlier
commissioned by the Company to conduct a study of the metallurgical possibilities of the Company's mines. In
order to have a fair understanding of how the contending parties arrived at their respective figures, We quote a
pertinent portion of the geologist's report:
Milling Data
Ore mined before the war ............... 336,850 tons
Ore mined after the war ............... 1,779,350 tons
Total ........................................... 2,116,200 tons
x Ore shipped before the war ......... 337,611 tons
xx Ore shipped after the war ............ 595,569 tons
Total ................................................ 933,180 tons
Less an estimated float of .................. 200,000 tons
Total shipped from solid ore .............. 733,180 tons
Proportion shipped 733,180
-------- = -----------
mined 2,116,200
or approximately 35% of mine ore is shipped.
Dumps
Material on dumps now total 383,346 tons. Using the above tonnage for ore shipped from mining (excluding
float) there should have been a total of 1,383,020 tons of waste produced of which almost 1,000,00 tons has
been removed from the mining area of the hill. I believe that half still remains as alluviuma long the three
principal intermittent creeks which head in the mining area, and the remaining half million has washed into the
river. Of course this is pure speculation.
x much was float material, probably about one half, leaving about 170.000 tons mined from the hill.
xx some float included.
xxx xxx xxx
Ore Reserve
The A and B ore is considered sufficiently developed by drilling and tunnels to constitute the ore reserve. C ore
must be checked by drilling.
Tons
A . . . . . . . . . . . . . 7,729,800
B . . . . . . . . . . . . . 1,780,500
Total . . . . . . . . . . 9,510,300
C . . . . . . . . . . . . . 2,212,00
Grand Total . . . . 11,722,300
Therefore, the total ore reserve may be considered to be 9,510,300 tons. Based on past experience 35% is
shipping ore.
With the present mill there is considerably more recovery. The ore is mined selectively (between dikes). The
results are about as follows:
Of 1,500 tons mined, 500 tons are sorted and shipped direct, the remaining 1,000 tons going to the mill from
which 250 tons ore recovered for shipment. Thus 50% of the selectively mined ore is recovered.
Thus for the reserve tonnage:
Total reserve . . . . . . . . . . . . . . . 9,510,300
Less 20% dike material . . . . . . . 1,902,060
7,608,240
Less 10% low grade ore . . . . . . 760,824
6,847,416
x
.50 =
Total recoverable ore . . . . . . . . . . 3,423,708 tons
It is probable that 30% of the dump material could be recovered by milling. So adding to the above 115,004 ore
recoverable from the dumps, we get a total reserve of shipping material of 3,538,712 tons. With the sink float
section added to the mill this should be increased by perhaps 20%.
On the basis of the above report the Company faults the Tax Court is sustaining the Commissioner's estimate of
the ore deposit. While the figures corresponding to the total gross tonnage shipped before and after the war have
not been assailed as erroneous, the Company maintains that the estimated float 40 of 200,000 tons as reported in
the geologist's study should have been deducted therefrom, such that the combined total of the ore shipped
should have been placed at a net of 733,180 tons instead of 933,180 tons. The other figure the Company assails
as having been improperly included by the Commissioner in his statement of ore reserve refers to the
"Recoverable ore from dump material 115,004 tons." The Company's argument in this regard runs thus:
... This apparently was included by respondent by virtue of the geologist's report that "it is probable that 30% of
the dump material should be recovered by milling." Actually, however, such recovery from dump or waste
material is problematical and is merely a contingency, and hence, the item of 115,004 tons should not be
included in the statement of the ore reserves. Taking out these two items improperly and erroneously included in
respondent Commissioner of Internal Revenue's examiner's report, to wit, float or waste material of 200,060
tons and supposedly recoverable ore from dump materials of 115,004 tons, totaling 315,004 tons, from the total
figure of 4,471,892 tons given by him, the figure of 4,156.888 tons results as the proper statement of the total
estimated ore as correctly used by petitioner in its statement of ore reserves for purposes of depletion. 41
We agree with the Company's observation on this point. The geological report appears clear enough: the
estimated float of 200,000 tons consisting of pieces of ore that had broken loose and become detached by
erosion from their original position could hardly be viewed as still forming part of the total estimated ore
deposit. Having already been broken up into numerous small pieces and practically rendered useless for mining
purposes, the same could not appreciably increase the ore potentials of the Company's mines. As to the 115,004
tons which geologist Paul A. Schaeffer believed could still be recovered by milling from the material on dumps,
there are no sufficient data on which to affirm or deny the accuracy of the said figure. It may, however, be taken
as correct, considering that it came from the Company's own commissioned geologist and that by the
Company's own admission 42 by 1957 it had mined and sold much more than its original estimated ore deposit
of 4,156,888 tons. We think that 4,271,892 tons 43 would be a fair estimate of the ore deposit in the Company's
mines.
The correct figures therefore are:
P2,515,000.00 (mine cost proper) + P131,878.44 (development cost)
4,271,892 (estimated ore deposit)
or
P2,646,878.44 (mine cost) = P0.6196 (rate of depletion
4,271,892 (estimated ore per ton)
deposit)
In its second assigned error, the Company questions the disallowance by the Tax Court of the depreciation
charges claimed by the Company as deductions from its gross income 44 The items thus disallowed consist
mainly of depreciation expenses for the years 1953 and 1954 allegedly sustained as a result of the deterioration
of some of the Company's incomplete constructions.
The initial memorandum 45 of the BIR examiner assigned to verify the income tax liabilities of the Company
pursuant to the latter's claim of having overpaid its income taxes states the basic reason why the Company's
claimed depreciation should be disallowed or re-adjusted, thus: since "..., up to its completion (the incomplete
asset) has not been and is not capable of use in the operation, the depreciation claimed could not, in fairness to
the Government and the taxpayer, be considered as proper deduction for income tax purposes as the said asset is
still under construction." Vis-a-Vis the Commissioner's consistent position in this regard the company simply
repeatedly requested for time 46 in view of the alleged voluminous working sheets that had to be re-evaluated
and recomputed to justify its claimed depreciation items within which to submit a separate memorandum in
itemized form detailing the Company's objections to the items of depreciation adjustments or disallowances for
the years involved. Strangely enough, despite the period granted, the record is bare that the Company ever
submitted its itemized objection as proposed. Inasmuch as the taxpayer has the burden of justifying the
deductions claimed for depreciation, the Company's failure to discharge the burden prevents this Court, from
disturbing the Commissioner's computation. For taxation purposes the phrase "out of its not being used," with
reference to depreciation allowable on assets which are idle or the use of which is temporarily suspended,
should be understood to refer only to property that has once been used in the trade or business, not to property
that has never been actually devoted to the taxpayer's business, particularly incomplete assets that have yet to be
used. .
The Company's third assigned error assails the Court of Tax Appeals in not allowing the deduction from its
gross income of certain miscellaneous business expenditures in the course of its operation for the years 1954
and 1956. For 1954 the deduction claimed amounted to P38,081.20, of which the Court allowed P25,600.00 and
disallowed P13,481.20, 47 "for lack of any supporting paper or evidence." For the year 1956 the claim amounted
to P20,050.00 of which the Court allowed P2,460.00, representing the one-month salary Christmas bonus given
to some of the employees, and upheld the disallowance of P17,590.00 on the ground that the Company "failed
to prove substantially that said expenses were actually incurred and are legally deductible expenses."
Regarding the disallowed amount of P13,481.20 the year 1954, the Company submits that it consisted of
expenses supported by "vouchers and cancelled checks evidencing payments of these amounts," and were
necessary and ordinary expenses of business for that year. On the disallowance by the Tax Court of the sum of
P17,590.00 out of a total deduction for miscellaneous expenses for 1956 among to P20,050.00, the Company
advances the same argument, namely, that the amount consisted of normal and regular expenses for that year as
evidenced by vouchers and cancelled checks.
These vouchers and cancelled checks of the Company, however, only show that the amounts claimed had indeed
been spent, and confirm the fact of disbursement, but do not necessarily prove that the expenses for which they
we're disbursed are deductible items. In the case of Collector of Internal Revenue vs. Goodrich International
Rubber Co. 48 this Court rejected the taxpayer's similar claim for deduction of alleged representation expenses,
based upon receipts issued not by the entities to which the alleged expenses but by the officers of taxpayer
corporation who allegedly paid them. It was there stated:
If the expenses had really been incurred, receipts or chits would have been issued by the entities to which the
payments have been made, and it would have been easy for Goodrich or its officers to produce such receipts.
These receipts issued by said officers merely attest to their claim that they had incurred and paid said expenses.
They do not establish payment of said alleged expenses to the entities in which the same are said to have been
incurred.
In the case before Us, except for the Company's own vouchers and cancelled checks, together with the
Company treasurer's lone and uncorroborated testimony regarding the purpose of said disbursements, there is no
other supporting evidence to show that the expenses were legally deductible items. We therefore affirm the Tax
Court's disallowance of the same.
In resume, this Court finds:
(1) that the Company was not using a "hybrid" method of accounting in the preparation of its income tax
returns, but was consistent in its use of the accrual method of accounting;
49
(2) that the rate of depletion per ton of the ore deposit mined and sold by the Company is P0.6196 per ton not
P0.59189 as contended by the Commissioner nor P1.0197 as claimed by the Company;
(3) that the disallowance by the Tax Court of the depreciation charges claimed by the Company is correct in
view of the latter's failure to itemize and/or substantiate with definite proof that the Commissioner's own
method of determining depreciation is unreasonable or inaccurate;
(4) that for lack of supporting evidence to show that the Company's claimed expenses were legally deductible
items, the Tax Court's disallowance of the same is affirmed.
As recomputed then, the deficiency income taxes due from the Company are as follows:
1953
Net income as per audited return _________________ P5,193,716.89
Unallowable deductions & additional income
Depletion overcharged _________________________ P178,477.04 Depreciation adjustment
________________________ 93,862.96
Total adjustments _____________________________ 272,340.00
Net income as per investigation ___________________ 5,466,056.89
Income tax due thereon 50 _______________________ 1,522,495.92
Less amount already assessed ____________________ 1,446,241.00
DEFICIENCY TAX DUE ______________________ 76,254.92
1954
Net income as per audited return _________________ P3,320,307.68 Unallowable deductions & additional
income
Depletion overcharged _________________________ P147,895.72 Depreciation adjustment
________________________ 11,878.12 Miscellaneous expenses ________________________ 13,481.20
Total adjustments _____________________________ 173,255.04
Net income as per investigation ___________________ 3,493,562.72
Income tax due thereon _________________________ 970,197.56
Less amount already assessed ____________________ 921,686.00 DEFICIENCY TAX DUE
______________________ 48,511.56
1956
Net income as per audited return _________________ P11,504,483.97 Unallowable deductions & additional
income
Depletion overcharged _________________________ P221,272.98 Miscellaneous expenses
________________________ 17,590.00
Total adjustments _____________________________ 238,862.98
Net income as per investigation __________________ 11,743,346.95
Income tax due thereon ________________________ 3,280,137.14
Less amount already assessed ___________________ 3,213,256.00 DEFICIENCY TAX DUE
______________________ 66,881.14
TOTAL DEFICIENCY TAXES DUE _____________ 191,647.62
WHEREFORE, the appealed decision is hereby modified by ordering Consolidated Mines, Inc. to pay the
Commissioner of Internal Revenue the amounts of P76,254.92, P48,511.56 and P66,881.14 as deficiency
income taxes for the years 1953, 1954 and 1956, respectively, or the total sum of P191,647.62 under the terms
specified by the Tax Court, without pronouncement as to costs.
Castro, Makasiar, Esguerra and Muoz Palma, JJ., concur. Teehankee, J., took no part.
G.R. No. 102967 February 10, 2000
BIBIANO V. BAAS, JR., petitioner,
vs.
COURT OF APPEALS, AQUILINO T. LARIN, RODOLFO TUAZON AND PROCOPIO
TALON, respondents.
QUISUMBING, J.:
For review is the Decision of the Court of Appeals in CA-C.R. CV No. 17251 promulgated on November 29,
1991. It affirmed in toto the judgment of the Regional Trial Court (RTC), Branch 39, Manila, in Civil Case No.
82-12107. Said judgment disposed as follows:
FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment DISMISSING the
complaint against all the defendants and ordering plaintiff [herein petitioner] to pay defendant Larin the amount
of P200,000.00 (Two Hundred Thousand Pesos) as actual and compensatory damages; P200,000.00 as moral
damages; and P50,000.00 as exemplary damages and attorneys fees of P100,000.00.1
The facts, which we find supported by the records, have been summarized by the Court of Appeals as follows:
On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment Corporation (AYALA), 128,265
square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight thousand, seven
hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that upon the signing of the contract
AYALA shall pay four hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance
of one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be paid in four
equal consecutive annual installments, with twelve (12%) percent interest per annum on the outstanding
balance. AYALA issued one promissory note covering four equal annual installments. Each periodic payment of
P461,754.00 pesos shall be payable starting on February 20, 1977, and every year thereafter, or until February
20, 1980.
The same day, petitioner discounted the promissory note with AYALA, for its face value of P1,847,016.00,
evidenced by a Deed of Assignment signed by the petitioner and AYALA. AYALA issued nine (9) checks to
petitioner, all dated February 20, 1976, drawn against Bank of the Philippine Islands with the uniform amount
of two hundred five thousand, two hundred twenty-four (P205,224.00) pesos.
In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income from disposition of
capital asset.2

Selling Price of Land P2,308,770.00

3
Less Initial Payment 461,754.00

Unrealized Gain
P1,847,016.00
 1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00

Less: Cost of land and other incidental Expenses ( 76,547.90)

Income P385,206.10

Income subject to tax (P385,206. 10 x 50%) P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred thirty thousand, eight
hundred seventy-seven (P230,877.00) pesos4 as gain from sale of capital asset. In his 1980 income tax amnesty
return, petitioner also reported the same amount of P230,877.00 as the realized gain on disposition of capital
asset for the year.
On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners, Rodolfo Tuazon and
Procopio Talon to examine the books and records of petitioner for the year 1976. They discovered that petitioner
had no outstanding receivable from the 1976 land sale to AYALA and concluded that the sale was cash and the
entire profit should have been taxable in 1976 since the income was wholly derived in 1976.
Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-five thousand, nine
hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income. They recommended deficiency tax
assessment for two million, four hundred seventy-three thousand, six hundred seventy-three (P2,473,673.00)
pesos.
Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A. After reviewing
the examiners' report, Larin directed the revision of the audit report, with instruction to consider the land as
capital asset. The tax due was only fifty (50%) percent of the total gain from sale of the property held by the
taxpayer beyond twelve months pursuant to Section 345 of the 1977 National Internal Revenue Code (NIRC).
The deficiency tax assessment was reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos
and fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976.
On June 27, 1980, respondent Larin sent a letter to petitioner informing of the income tax deficiency that must
be settled him immediately.
On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the sale of his land to
AYALA was on installment.
On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the National Office of the
BIR. The Chief of the Tax Fraud Unit recommended the prosecution of a criminal case for conspiring to file
false and fraudulent returns, in violation of Section 51 of the Tax Code against petitioner and his accountants,
Andres P. Alejandre and Conrado Baas.
On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.
On July 1, 1981, news items appeared in the now defunct Evening Express with the headline: "BIR Charges
Realtor" and another in the defunct Evening Post with a news item: "BIR raps Realtor, 2 accountants." Another
news item also appeared in the July 2, 1981, issue of the Bulletin Today entitled: "3-face P1-M tax evasion
raps." All news items mentioned petitioner's false income tax return concerning the sale of land to AYALA.
On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the amount of forty-one
thousand, seven hundred twenty-nine pesos and eighty-one centavos (P41,729.81). On November 2, 1981,
petitioner again filed an Amnesty Tax Return under P.D. 1840 and paid an additional amount of one thousand,
five hundred twenty-five pesos and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his
sale of land to AYALA was on cash basis.
Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC of Manila an
action6for damages against respondents Larin, Tuazon and Talon for extortion and malicious publication of the
BIR's tax audit report. He claimed that the filing of criminal complaints against him for violation of tax laws
were improper because he had already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and
1840.
The trial court decided in favor of the respondents and awarded Larin damages, as already stated. Petitioner
seasonably appealed to the Court of Appeals. In its decision of November 29, 1991, the respondent court
affirmed the trial court's decision, thus:
The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee Larin were
unwarranted and baseless and as a result thereof, defendant-appellee Larin was subjected to unnecessary anxiety
and humiliation is therefore supported by the evidence on record.1wphi1.nt
Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact, the criminal charges
filed against him in the Tanodbayan and in the City Fiscal's Office were all dismissed.
WHEREFORE, the appealed judgment is hereby AFFIRMED in toto.7
Hence this petition, wherein petitioner raises before us the following queries:
I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF PERTINENT TAX
LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND ACCURACY OF PETITIONER'S
RETURN OF THE INCOME DERIVED FROM THE SALE OF THE LAND TO AYALA.
II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE WAS AN ALLEGED
ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE RESPONDENTS.
III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF PRESIDENTIAL
DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S IMMUNITY FROM CRIMINAL
PROSECUTION.
IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF WELL-
ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE AWARD OF ACTUAL,
MORAL AND EXEMPLARY DAMAGES IN FAVOR OF RESPONDENT LARIN.
In essence, petitioner asks the Court to resolve seriatim the following issues:
1. Whether respondent court erred in ruling that there was no extortion attempt by BIR officials;
2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax amnesties did not grant
immunity from tax suits;
3. Whether respondent court erred in finding that petitioner's income from the sale of land in 1976 should be
declared as a cash transaction in his tax return for the same year (because the buyer discounted the promissory
note issued to the seller on future installment payments of the sale, on the same day of the sale);
4. Whether respondent court erred and committed grave abuse of discretion in awarding damages to respondent
Larin.
The first issue, on whether the Court of Appeals erred in finding that there was no extortion, involves a
determination of fact. The Court of Appeals observed,
The only evidence to establish the alleged extortion attempt by defendants-appellees is the plaintiff-appellant's
self serving declarations.
As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and counsel on record,
yet, said counsel did not take the witness stand to corroborate the testimony of plaintiff."8
As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual findings of the trial
court will not be disturbed by this Court, unless these findings are not supported by evidence.9 Similarly, neither
should we disturb a finding of the trial court and appellate court that an allegation is not supported by evidence
on record. Thus, we agree with the conclusion of respondent court that herein private respondents, on the basis
of evidence, could not be held liable for extortion.
On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also granted immunity
from criminal prosecution against tax offenses, the pertinent sections of these laws state:
P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE INCOME TAX LAW
UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME FOR INCOME TAX PURPOSES AND
REQUIRING PERIODIC SUBMISSION OF NET WORTH STATEMENT.
xxx xxx xxx
Sec. 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for any or all of the taxable
years 1974 to 1979, had failed to file a return is hereby, allowed to file a return for each of the aforesaid taxable
years and accurately declare therein the true and correct income, deductions and exemptions and pay the income
tax due per return. Likewise, any individual who filed a false or fraudulent return for any taxable year in the
period mentioned above may amend his return and pay the correct amount of tax due after deducting the taxes
already paid, if any, in the original declaration. (emphasis ours)
xxx xxx xxx
Sec. 5. Immunity from Penalties. Any individual who voluntarily files a return under this Decree and pays the
income tax due thereon shall be immune from the penalties, civil or criminal, under the National Internal
Revenue Code arising from failure to pay the correct income tax with respect to the taxable years from which an
amended return was filed or for which an original return was filed in cases where no return has been filed for
any of the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in cases where
the amount of net taxable income declared under this Decree is understated to the extent of 25% or more of the
correct net taxable income. (emphasis ours)
P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR WEALTH EARNED
OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND REQUIRING THE FILING OF THE
STATEMENT OF ASSETS, LIABILITIES, AND NET WORTH.
Sec. 1. Coverage. In case of voluntary disclosure of previously untaxed income and/or wealth such as
earnings, receipts, gifts, bequests or any other acquisition from any source whatsoever, realized here or abroad,
by any individual taxpayer, which are taxable under the National Internal Revenue Code, as amended, the
assessment and collection of all internal revenue taxes, including the increments or penalties on account of non-
payment, as well as all civil, criminal or administrative liabilities arising from or incident thereto under the
National Internal Revenue Code, are hereby condoned provided that the individual taxpayer shall pay.
(emphasis ours) . . .
Sec. 2. Conditions for Immunity. The immunity granted under Section one of this Decree shall apply only
under the following conditions:
a) Such previously untaxed income and/or wealth must have been earned or realized in any of the years 1974 to
1980;
b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully pay the tax due thereon;
c) The amnesty tax paid by the taxpayer under this Decree shall not be less than P1,000.00 per taxable year; and
d) The taxpayer must file a statement of assets, liabilities and net worth as of December 31, 1980, as required
under Section 6 hereof. (emphasis ours)
It will be recalled that petitioner entered into a deed of sale purportedly on installment. On the same day, he
discounted the promissory note covering the future installments. The discounting seems questionable because
ordinarily, when a bill is discounted, the lender (e.g. banks, financial institution) charges or deducts a certain
percentage from the principal value as its compensation. Here, the discounting was done by the buyer. On July
2, 1981, two weeks after the filing of the tax evasion complaint against him by respondent Larin on June 17,
1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return for the years 1974 -
1979 was filed with the BIR office of Valenzuela, Bulacan, instead of Manila where the petitioner's principal
office was located. He again availed of the tax amnesty under P.D. No. 1840. His disclosure, however, did not
include the income from his sale of land to AYALA on cash basis. Instead he insisted that such sale was on
installment. He did not amend his income tax return. He did not pay the tax which was considerably increased
by the income derived from the discounting. He did not meet the twin requirements of P.D. 1740 and 1840,
declaration of his untaxed income and full payment of tax due thereon. Clearly, the petitioner is not entitled to
the benefits of P.D. Nos. 1740 and 1840. The mere filing of tax amnesty return under P.D. 1740 and 1840 does
not ipso facto shield him from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who
want to start a clean tax slate. It also gives the government a chance to collect uncollected tax from tax evaders
without having to go through the tedious process of a tax case. To avail of a tax amnesty granted by the
government, and to be immune from suit on its delinquencies, the tax payer must have voluntarily disclosed his
previously untaxed income and must have paid the corresponding tax on such previously untaxed income.10
It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax exemption must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.11 Hence, on this matter, it is our view that petitioner's
claim of immunity from prosecution under the shield of availing tax amnesty is untenable.
On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis but on installment
as clearly specified in the Deed of Sale which states:
That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT THOUSAND
SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency, to be paid as follows:
1. P461,754.00, upon the signing of the Deed of Sale; and,
2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual installments with interest
thereon at the rate of twelve percent (12%) per annum, beginning on February 20, 1976, said installments to be
evidenced by four (4) negotiable promissory notes.12
Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to support his claim.
Sec. 43 of the 1977 NIRC states,
Installment basis. (a) Dealers in personal property. . . .
(b) Sales of realty and casual sales of personalty In the case (1) of a casual sale or other casual disposition of
personal property (other than property of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year), for a price exceeding one thousand pesos, or (2) of a sale or
other disposition of real property if in either case the initial payments do not exceed twenty-five percentum of
the selling price, the income may, under regulations prescribed by the Minister of Finance, be returned on the
basis and in the manner above prescribed in this section. As used in this section the term "initial payment"
means the payments received in cash or property other than evidences of indebtedness of the purchaser during
the taxable period in which the sale or other disposition is made. . . . (emphasis ours)
Revenue Regulation No. 2, Section 175 provides,
Sale of real property involving deferred payments. Under section 43 deferred-payment sales of real property
include (1) agreements of purchase and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in which there is
an immediate transfer of title, the vendor being protected by a mortgage or other lien as to deferred payments.
Such sales either under (a) or (b), fall into two classes when considered with respect to the terms of sale, as
follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in cash or property
other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made do not
exceed 25 per cent of the selling price;
(2) Deferred-payment sales not on the installment plan, that is sales in which the payments received in cash or
property other than evidences of indebtedness of the purchaser during the taxable year in which the sale is made
exceed 25 per cent of the selling price;
In the sale of mortgaged property the amount of the mortgage, whether the property is merely taken subject to
the mortgage or whether the mortgage is assumed by the purchaser, shall be included as a part of the "selling
price" but the amount of the mortgage, to the extent it does not exceed the basis to the vendor of the property
sold, shall not be considered as a part of the "initial payments" or of the "total contract price," as those terms are
used in section 43 of the Code, in sections 174 and 176 of these regulations, and in this section. The term "initial
payments" does not include amounts received by the vendor in the year of sale from the disposition to a third
person of notes given by the vendee as part of the purchase price which are due and payable in subsequent
years. Commissions and other selling expenses paid or incurred by the vendor are not to be deducted or taken
into account in determining the amount of the "initial payments," the "total contract price," or the "selling
price." The term "initial payments" contemplates at least one other payment in addition to the initial payment. If
the entire purchase price is to be paid in a lump sum in a later year, there being no payment during the year, the
income may not be returned on the installment basis. Income may not be returned on the installment basis
where no payment in cash or property, other than evidences of indebtedness of the purchaser, is received during
the first year, the purchaser having promised to make two or more payments, in later years.
Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved, the respective
installments as provided by the deed of sale between him and AYALA. Consequently, he religiously reported his
yearly income from sale of capital asset, subject to tax, as follows:

Year 1977 (50% of P461,754) P230,877.00

1978 230,877.00

1979 230,877.00

1980 230,877.00

Petitioner says that his tax declarations are acceptable modes of payment under Section 175 of the Revenue
Regulations (RR) No. 2. The term "initial payment", he argues, does not include amounts received by the
vendor which are part of the complete purchase price, still due and payable in subsequent years. Thus, the
proceeds of the promissory notes, not yet due which he discounted to AYALA should not be included as income
realized in 1976. Petitioner states that the original agreement in the Deed of Sale should not be affected by the
subsequent discounting of the bill.
On the other hand, respondents assert that taxation is a matter of substance and not of form. Returns are
scrutinized to determine if transactions are what they are and not declared to evade taxes. Considering the
progressive nature of our income taxation, when income is spread over several installment payments through
the years, the taxable income goes down and the tax due correspondingly decreases. When payment is in lump
sum the tax for the year proportionately increases. Ultimately, a declaration that a sale is on installment
diminishes government taxes for the year of initial installment as against a declaration of cash sale where taxes
to the government is larger.
As a general rule, the whole profit accruing from a sale of property is taxable as income in the year the sale is
made. But, if not all of the sale price is received during such year, and a statute provides that income shall be
taxable in the year in which it is "received," the profit from an installment sale is to be apportioned between or
among the years in which such installments are paid and received.13
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned installment method is a
seller of real property who disposes his property on installment, provided that the initial payment does not
exceed 25% of the selling price. They also state what may be regarded as installment payment and what
constitutes initial payment. Initial payment means the payment received in cash or property excluding evidences
of indebtedness due and payable in subsequent years, like promissory notes or mortgages, given of the
purchaser during the taxable year of sale. Initial payment does not include amounts received by the vendor in
the year of sale from the disposition to a third person of notes given by the vendee as part of the purchase price
which are due and payable in subsequent years.14 Such disposition or discounting of receivable is material only
as to the computation of the initial payment. If the initial payment is within 25% of total contract price,
exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale, otherwise it is a deferred
sale.15
Although the proceed of a discounted promissory note is not considered part of the initial payment, it is still
taxable income for the year it was converted into cash. The subsequent payments or liquidation of certificates of
indebtedness is reported using the installment method in computing the proportionate income16 to be returned,
during the respective year it was realized. Non-dealer sales of real or personal property may be reported as
income under the installment method provided that the obligation is still outstanding at the close of that year. If
the seller disposes the entire installment obligation by discounting the bill or the promissory note, he necessarily
must report the balance of the income from the discounting not only income from the initial installment
payment.
Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even
if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of
merchandise in case of default.17 This rule prevails in the United States.18 Since our income tax laws are of
American origin,19 interpretations by American courts an our parallel tax laws have persuasive effect on the
interpretation of these laws.20 Thus, by analogy, all the more would a taxable disposition result when the
discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is
discharged, while the seller acquires money for the settlement of his receivables. Logically then, the income
should be reported at the time of the actual gain. For income tax purposes, income is an actual gain or an actual
increase of wealth.21 Although the proceeds of a discounted promissory note is not considered initial payment,
still it must be included as taxable income on the year it was converted to cash. When petitioner had the
promissory notes covering the succeeding installment payments of the land issued by AYALA, discounted by
AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a
taxable disposition resulted and petitioner was required by law to report in his returns the income derived from
the discounting. What petitioner did is tantamount to an attempt to circumvent the rule on payment of income
taxes gained from the sale of the land to AYALA for the year 1976.
Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due to acts of another has the burden of
proving said damages as well as the amount thereof.22 Larin says the extortion cases filed against him hampered
his immediate promotion, caused him strong anxiety and social humiliation. The trial court awarded him two
hundred thousand (P200,000,00) pesos as actual damages. However, the appellate court stated that, despite
pendency of this case, Larin was given a promotion at the BIR. Said respondent court:
We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11 December
1985), to show that he suffered loss of seniority that allegedly barred his promotion. In fact, he was promoted to
his present position despite the pendency of the instant case (TSN, pp. 35-39, 04 November 1985).23
Moreover, the records of the case contain no statement whatsoever of the amount of the actual damages
sustained by the respondents. Actual damages cannot be allowed unless supported by evidence on the
record.24The court cannot rely on speculation, conjectures or guesswork as to the fact and amount of
damages.25 To justify a grant of actual or compensatory damages, it is necessary to prove with a reasonable
degree of certainty, the actual amount of loss.26 Since we have no basis with which to assess, with certainty, the
actual or compensatory damages counter-claimed by respondent Larin, the award of such damages should be
deleted.
Moral damages may be recovered in cases involving acts referred to in Article 2127 of the Civil Code.28 As a
rule, a public official may not recover damages for charges of falsehood related to his official conduct unless he
proves that the statement was made with actual malice. In Babst, et. al. vs. National Intelligence Board, et. al.,
132 SCRA 316, 330 (1984), we reiterated the test for actual malice as set forth in the landmark American case
of New York Times vs. Sullivan,29 which we have long adopted, in defamation and libel cases, viz.:
. . . with knowledge that it was false or with reckless disregard of whether it was false or not.
We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had honestly believed that
the law allowed him to declare the sale of the land, in installment. We can further grant that the pertinent tax
laws needed construction, as we have earlier done. That petitioner was offended by the headlines alluding to
him as tax evader is also fully understandable. All these, however, do not justify what amounted to a baseless
prosecution of respondent Larin. Petitioner presented no evidence to prove Larin extorted money from him. He
even admitted that he never met nor talked to respondent Larin. When the tax investigation against the
petitioner started, Larin was not yet the Regional Director of BIR Region IV-A, Manila. On respondent Larin's
instruction, petitioner's tax assessment was considered one involving a sale of capital asset, the income from
which was subjected to only fifty percent (50%) assessment, thus reducing the original tax assessment by half.
These circumstances may be taken to show that Larin's involvement in extortion was not indubitable. Yet,
petitioner went on to file the extortion cases against Larin in different fora. This is where actual malice could
attach on petitioner's part. Significantly, the trial court did not err in dismissing petitioner's complaints, a ruling
affirmed by the Court of Appeals.
Keeping all these in mind, we are constrained to agree that there is sufficient basis for the award of moral and
exemplary damages in favor of respondent Larin. The appellate court believed respondent Larin when he said
he suffered anxiety and humiliation because of the unfounded charges against him. Petitioner's actions against
Larin were found "unwarranted and baseless," and the criminal charges filed against him in the Tanodbayan and
City Fiscal's Office were all dismissed.30 Hence, there is adequate support for respondent court's conclusion that
moral damages have been proved.
Now, however, what would be a fair amount to be paid as compensation for moral damages also requires
determination. Each case must be governed by its own peculiar circumstances.31 On this score, Del Rosario
vs.Court of Appeals,32 cites several cases where no actual damages were adjudicated, and where moral and
exemplary damages were reduced for being "too excessive," thus:
In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the following observation
from RCPI v. Rodriguez, viz:
** **. Nevertheless, we find the award of P100,000.00 as moral damages in favor of respondent Rodriguez
excessive and unconscionable. In the case of Prudenciado v. Alliance Transport System,Inc. (148 SCRA 440
[1987]) we said: . . . [I]t is undisputed that the trial courts are given discretion to determine the amount of moral
damages (Alcantara v. Surro, 93 Phil. 472) and that the Court of Appeals can only modify or change the amount
awarded when they are palpably and scandalously excessive "so as to indicate that it was the result of passion,
prejudice or corruption on the part of the trial court" (Gellada v. Warner Barnes & Co., Inc., 57 O.G. [4] 7347,
7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and Adone v. Bacharach Motor Co., Inc., 57 O.G.
656). But in more recent cases where the awards of moral and exemplary damages are far too excessive
compared to the actual loses sustained by the aggrieved party, this Court ruled that they should be reduced to
more reasonable amounts. . . . . (Emphasis ours.)
In other words, the moral damages awarded must be commensurate with the loss or injury suffered.
In the same case (PNB v. CA), this Court found the amount of exemplary damages required to be paid
(P1,000,000,00) "too excessive" and reduced it to an "equitable level" (P25,000.00).
It will be noted that in above cases, the parties who were awarded moral damages were not public officials.
Considering that here, the award is in favor of a government official in connection with his official function, it
is with caution that we affirm granting moral damages, for it might open the floodgates for government officials
counter-claiming damages in suits filed against them in connection with their functions. Moreover, we must be
careful lest the amounts awarded make citizens hesitate to expose corruption in the government, for fear of
lawsuits from vindictive government officials. Thus, conformably with our declaration that moral damages are
not intended to enrich anyone,33 we hereby reduce the moral damages award in this case from two hundred
thousand (P200,000.00) pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set
at P25,000.00 only.
The law allows the award of attorney's fees when exemplary damages are awarded, and when the party to a suit
was compelled to incur expenses to protect his interest.34 Though government officers are usually represented
by the Solicitor General in cases connected with the performance of official functions, considering the nature of
the charges, herein respondent Larin was compelled to hire a private lawyer for the conduct of his defense as
well as the successful pursuit of his counterclaims. In our view, given the circumstances of this case, there is
ample ground to award in his favor P50,000,00 as reasonable attorney's fees.
WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is hereby AFFIRMED
with MODIFICATION so that the award of actual damages are deleted; and that petitioner is hereby
ORDERED to pay to respondent Larin moral damages in the amount of P75,000.00, exemplary damages in the
amount of P25,000.00, and attorney's fees in the amount of P50,000.00 only.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.
FIRST DIVISION

SYSTRA PHILIPPINES, INC., G.R. No. 176290

Petitioner,
-versus-
COMMISSIONER OF
INTERNAL REVENUE,
Respondent. Promulgated:
September 21, 2007

x---------------------------------------------------x

R ES OLUTIO N
CORONA, J.:

This resolves petitioner Systra Philippines, Inc.s (1) motion for leave to file a second motion for reconsideration
and (2) second motion for reconsideration of the Courts March 28, 2007 resolution.

On March 9, 2007, petitioner filed a petition for review on certiorari assailing the January 18, 2007 decision [1] of
the Court of Tax Appeals (CTA) in CTA EB Case No. 135. The Court denied the petition in its March 28, 2007
resolution on the following grounds:
(a) failure of petitioners counsel to submit his IBP[2] O.R.[3] number showing proof of payment of IBP dues
for the current year (the IBP O.R. No. was for 2006, i.e., it was dated November 20, 2006);
(b) submitting a verification of the petition, certification of non-forum shopping and affidavit of service that
failed to comply with the 2004 Rules on Notarial Practice with respect to competent evidence of affiants
identities and
(c) failure to give an explanation why service was not done personally as required by Section 11, Rule 13
in relation to Section 3, Rule 45 and Section 5(d), Rule 56 of the Rules of Court.

On July 5, 2007, petitioners motion for reconsideration was denied with finality as there was no compelling
reason to warrant a modification of the March 28, 2007 resolution. Thus, the present motions.

Petitioner claims that this Court has granted second and even third motions for reconsideration for
extraordinarily persuasive reasons. It avers that this Court should look into the importance of the issues
involved in deciding whether leave to file a second motion for reconsideration should be granted or not. It prays
that its petition should not be denied on the basis of procedural lapses alone and points out that the substantial
amount involved in the petition justifies relaxation of technical rules. It asserts that there is an important legal
issue involved in this case: whether the exercise of the option to carry over excess income tax credits under
Section 76 of the National Internal Revenue Code of 1997, as amended (Tax Code) bars a taxpayer from
claiming the excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year.
Finally, it contends that the assailed CTA decision was contradictory to the decisions of the Court of Appeals
(CA)[4] in Bank of the Philippine Islands v. Commissioner of Internal Revenue [5] and Raytheon Ebasco Overseas
Ltd. Philippine Branch v. Commissioner of Internal Revenue [6] which involved the same issue as that in this
case. According to petitioner, in view of those CA decisions, it is unjust to deprive it of the right to claim a
refund.
We deny petitioners motions.

A SECOND MOTION FOR

RECONSIDERATION IS
PROHIBITED

The denial of a motion for reconsideration is final. It means that the Court will no longer entertain and consider
further arguments or submissions from the parties respecting the correctness of its decision or resolution. [7] It
signifies that, in the Courts considered view, nothing more is left to be discussed, clarified or done in the case
since all issues raised have been passed upon and definitely resolved. Any other issue which could and should
have been raised is deemed waived and is no longer available as ground for a second motion. A denial with
finality underscores that the case is considered closed.[8] Thus, as a rule, a second motion for reconsideration is a
prohibited pleading.[9] The Court stressed in Ortigas and Company Limited Partnership v. Velasco:[10]

A second motion for reconsideration is forbidden except for extraordinarily persuasive reasons, and only
upon express leave first obtained.[11] (emphasis supplied)

It is true that procedural rules may be relaxed in the interest of substantial justice. They are not, however, to be
disdained as mere technicalities that may be ignored at will to suit the convenience of a party. [12] They are
intended to ensure the orderly administration of justice and the protection of substantive rights in judicial
proceedings.[13] Thus, procedural rules are not to be belittled or dismissed simply because their non-observance
may have resulted in prejudicing a partys substantive rights. [14] Like all rules, they are required to be followed
except only when, for the most persuasive of reasons, they may be relaxed to relieve a litigant of negative
consequences commensurate with the degree of thoughtlessness in not complying with the prescribed
procedure.[15]

In this case, contrary to petitioners claim, there was no compelling reason to excuse non-compliance with the
rules. Nor were the grounds raised by it extraordinarily persuasive.[16]

Moreover, petitioner can neither properly nor successfully rely on the decisions of the CA in the Bank of the
Philippine Islands and Raytheon Ebasco Overseas Ltd. Philippine Branch cases. First, the CA and the CTA are
now of the same level pursuant to RA 9282.[17] Decisions of the CA are thus no longer superior to nor reversive
of those of the CTA. Second, a decision of the CA in an action in personam binds only the parties in that case. A
third party in an action in personam cannot claim any right arising from a decision therein. Finally and most
importantly, while a ruling of the CA on any question of law is not conclusive on this Court, all rulings of this
Court on questions of law are conclusive and binding on all courts including the CA. All courts must take their
bearings from the decisions of this Court.[18]

ON THE SUBSTANTIVE ASPECT, THE PETITION HAS NO MERIT

The antecedents of this case are as follows:

On April 16, 2001, petitioner filed with the [Bureau of Internal Revenue (BIR)] its Annual Income Tax Return
(ITR) for the taxable year ended December 31, 2000 declaring revenues in the amount of [P18,252,719] the
bulk of which consists of income from management consultancy services rendered to the Philippine Branch of
Group Systra SA, France. Subjecting said income from consultancy services of petitioner to 5% creditable
withholding tax, a total amount of [P4,703,019] was declared by petitioner as creditable taxes withheld for the
taxable year 2000.

For the same period, petitioner reflected a total gross income of [P3,752,129], a net loss of [P17,930] and a
minimum corporate income tax (MCIT) of [P75,043]. Said MCIT of P75,043 was offset against its total tax
credits for the year 2000 amounting to [P4,703,019] thereby leaving a total unutilized tax credits of
[P4,627,976], computed as follows:
Gross Income P3,752,129.00
Less: Deductions P3,770,059.00
Net loss P 17,930.00
Minimum Corporate Income Tax Due P75,043.00

Less: Tax Credits

Prior years excess credits P -
Creditable taxes withheld P4,703,019.00 P4,703,019.00
during the year
Tax Overpayment P4,627,976.00

Petitioner opted to carry over the said excess tax credit to the succeeding taxable year 2001.

For the taxable year ended December 31, 2001, petitioner filed with the BIR its Annual ITR on April 12, 2002,
reflecting a total gross income of [P4,771,419] and a total creditable taxes withheld of [P1,111,587] for
consultancy services. It likewise declared a taxable income of [P1,936,851] with corresponding normal income
tax due in the amount of [P619,792]. After deducting the unexpired excess of the previous year MCIT [1999
and 2000] in the amount of [P222,475] from the normal income tax due for the period, petitioners net tax due of
[P397,317] was applied against the accumulated tax credits of [P5,739,563]. Said reported tax credits comprised
of prior years excess tax credits in the amount of [P4,627,976] and creditable taxes withheld during the year
2001 in the sum of [P1,111,587]. These excess tax credits were utilized to pay off the income tax still due of
[P397,317] resulting to an overpayment of [P5,342,246], computed as follows:

Gross Income P4,771,419.00

Less: Deductions P2,834,568.00

Taxable Income P1,936,851.00

Income Tax Due at the Normal Rate of 32% P 619,792.00

Less: Unexpired Excess of Prior Years MCIT
Over Normal Income Tax Rate P 222,475.00 P 397,317.00
Income Tax Still Due
Less: Tax Credits
Prior years excess credits P4,627,976.00
Creditable taxes withheld
during the year 1,111,587.00 P5,739,563.00

Tax Overpayment P5,342,246.00

Petitioner indicated in the 2001 ITR the option To be issued a Tax Credit Certificate relative to its tax
overpayments.

On August 9, 2002, petitioner instituted a claim for refund or issuance of a tax credit certificate with the BIR of
its unutilized creditable withholding taxes in the amount ofP5,342,246.00 as of December 31, 2001.

Due to the inaction of the BIR on petitioners claim for refund and to preserve its right to claim for the refund to
its unutilized CWT for CYs 2000 and 2001 by judicial action, petitioner filed a petition for review with the
Court in Division on April 14, 2003.[19]

In its August 3, 2005 decision, the First Division of the CTA partially granted the petition and ordered the
issuance of a tax credit certificate to petitioner in the amount ofP1,111,587 representing the excess or unutilized
creditable withholding taxes for taxable year 2001. The CTA, however, denied petitioners claim for refund of
the excess tax credits for the year 2000 in the amount of P4,627,976. It ruled that petitioner was precluded from
claiming a refund thereof or requesting a tax credit certificate therefor. Once it was made for a particular taxable
period, the option to carry over became irrevocable.

Petitioner moved for reconsideration but it was denied. Petitioner elevated the case to the CTA en banc which
rendered the assailed decision. Thus, this petition.

As already stated, petitioner formulated the issue in this petition as follows: whether the exercise of the option
to carry-over excess income tax credits under Section 76 of the Tax Code bars a taxpayer from claiming the
excess tax credits for refund even if the amount remains unutilized in the succeeding taxable year. Petitioner
contends that it does not.

We disagree.

Section 76 of the Tax Code provides:

SEC. 76. Final Adjustment Return. Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the excess amount shown on its final adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of
the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for cash refund or issuance of a tax credit certificate shall be allowed
therefor. (emphasis supplied)

A corporation entitled to a tax credit or refund of the excess estimated quarterly income taxes paid has two
options: (1) to carry over the excess credit or (2) to apply for the issuance of a tax credit certificate or to claim a
cash refund. If the option to carry over the excess credit is exercised, the same shall be irrevocable for that
taxable period.

In exercising its option, the corporation must signify in its annual corporate adjustment return (by marking the
option box provided in the BIR form) its intention either to carry over the excess credit or to claim a refund. To
facilitate tax collection, these remedies are in the alternative and the choice of one precludes the other.[20]
This is known as the irrevocability rule and is embodied in the last sentence of Section 76 of the Tax Code. The
phrase such option shall be considered irrevocable for that taxable period means that the option to carry over the
excess tax credits of a particular taxable year can no longer be revoked.

The rule prevents a taxpayer from claiming twice the excess quarterly taxes paid: (1) as automatic credit against
taxes for the taxable quarters of the succeeding years for which no tax credit certificate has been issued and (2)
as a tax credit either for which a tax credit certificate will be issued or which will be claimed for cash refund.[21]

In this case, it was in the year 2000 that petitioner derived excess tax credits and exercised the irrevocable
option to carry them over as tax credits for the next taxable year. Under Section 76 of the Tax Code, a claim for
refund of such excess credits can no longer be made. The excess credits will only be applied against income tax
due for the taxable quarters of the succeeding taxable years.

The legislative intent to make the option irrevocable becomes clearer when Section 76 is viewed in comparison
to Section 69 of the (old) 1977 Tax Code:

SECTION 69. Final Adjustment Return. Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable
net income of that year the corporation shall either:

(A) Pay the excess tax still due; or

(B) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the refundable amount shown on its final adjustment return may be credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable year.
Under Section 69 of the 1977 Tax Code, there was no irrevocability rule. Instead of claiming a refund, the
excess tax credits could be credited against the estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable year, that is, the immediately following year only. In contrast, Section 76 of the present
Tax Code formulates an irrevocability rule which stresses and fortifies the nature of the remedies or options as
alternative, not cumulative. It also provides that the excess tax credits may be carried over and credited against
the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years until fully
utilized.

Furthermore, this case is closely similar to Philam Asset Management, Inc. v. Commissioner of Internal
Revenue.[22] In that case, Philam Asset Management, Inc. had an unapplied creditable withholding tax in the
amount of P459,756.07 for the year 1998. It carried over the said excess tax to the following taxable year, 1999.
In the next succeeding year, it had a tax due in the amount of P80,042 and a creditable withholding tax in the
amount of P915,995. As such, the amount due for the year 1999 (P80,042) was credited to its P915,995
creditable withholding tax for that year. Thus, its 1998 creditable withholding tax in the amount of P459,756.07
remained unutilized. Thereafter, it filed a claim for refund with respect to the unapplied creditable withholding
tax of P459,756.07 for the year 1998. The Court denied the claim and ruled:

Section 76 [is] clear and unequivocal. Once the carry-over option is taken, actually or constructively, it
becomes irrevocable. Petitioner has chosen that option for its 1998 creditable withholding taxes. Thus, it is no
longer entitled to a tax refund of P459,756.07, which corresponds to its 1998 excess tax credit. Nonetheless, the
amount will not be forfeited in the governments favor, because it may be claimed by petitioner as tax credits in
the succeeding taxable years. (emphasis supplied)

Since petitioner elected to carry over its excess credits for the year 2000 in the amount of P4,627,976 as tax
credits for the following year, it could no longer claim a refund. Again, at the risk of being repetitive, once the
carry over option was made, actually or constructively, it became forever irrevocable regardless of whether the
excess tax credits were actually or fully utilized. Nevertheless, as held in Philam Asset Management, Inc., the
amount will not be forfeited in favor of the government but will remain in the taxpayers account. Petitioner may
claim and carry it over in the succeeding taxable years, creditable against future income tax liabilities until fully
utilized.[23]

WHEREFORE, petitioners motion for leave to file a second motion for reconsideration and the second motion
for reconsideration are hereby DENIED.

Costs against petitioner.

No further pleadings shall be entertained. Let entry of judgment be made in due course.

SO ORDERED.
PHILAM ASSET G.R. Nos. 156637/162004
MANAGEMENT, INC.,
Petitioner,
- versus -
COMMISSIONER OF INTERNAL REVENUE,
Respondent. Promulgated:
December 14, 2005
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION

PANGANIBAN, J.:

U
nder Section 76 of the National Internal Revenue Code, a taxable corporation with excess quarterly income tax
payments may apply for either a taxrefund or a tax credit, but not both. The choice of one precludes the other.
Failure to indicate a choice, however, will not bar a valid request for a refund, should this option be chosen by
the taxpayer later on.
The Case

Before us are two consolidated Petitions for Review [1] under Rule 45 of the Rules of Court, seeking to review
and reverse the December 19, 2002 Decision [2] of the Court of Appeals (CA) in CA-GR SP No. 69197 and its
January 30, 2004 Decision[3] in CA-GR SP No. 70882.

The dispositive portion of the assailed December 19, 2002 Decision, on the one hand, reads as follows:

WHEREFORE, the petition is hereby DENIED. The assailed decision and resolution of the Court of Tax
Appeals are AFFIRMED.[4]
That of the assailed January 30, 2004 Decision, on the other hand, was similarly worded, except that it referred
to the May 2, 2002 Decision of the Court of Tax Appeals (CTA).[5]
The Facts

In GR No. 156637, the CA adopted the CTAs narration of the facts as follows:

Petitioner, formerly Philam Fund Management, Inc., is a domestic corporation duly organized and existing
under the laws of the Republic of the Philippines. It acts as the investment manager of both Philippine Fund,
Inc. (PFI) and Philam Bond Fund, Inc. (PBFI), which are open-end investment companies[,] in the sale of their
shares of stocks and in the investment of the proceeds of these sales into a diversified portfolio of debt and
equity securities. Being an investment manager, [p]etitioner provides management and technical services to PFI
and PBFI. Petitioner is, likewise, PFIs and PBFIs principal distributor which takes charge of the sales of said
companies shares to prospective investors. Pursuant to the separate [m]anagement and [d]istribution agreements
between the [p]etitioner and PFI and PBFI, both PFI and PBFI [agree] to pay the [p]etitioner, by way of
compensation for the latters services and facilities, a monthly management fee from which PFI and PBFI
withhold the amount equivalent to [a] five percent (5%) creditable tax[,] pursuant to the Expanded Withholding
Tax Regulations.

On April 3, 1998, [p]etitioner filed its [a]nnual [c]orporate [i]ncome [t]ax [r]eturn for the taxable year 1997
representing a net loss of P2,689,242.00. Consequently, it failed to utilize the creditable tax withheld in the
amount of Five Hundred Twenty-Two Thousand Ninety-Two Pesos (P522,092.00) representing [the] tax
withheld by [p]etitioners withholding agents, PFI and PBFI[,] on professional fees.

The creditable tax withheld by PFI and PBFI in the amount of P522,092.00 is broken down as follows:

PFI P496,702.05
PBFI 25,389.66_
Total P522,091.71

On September 11, 1998, [p]etitioner filed an administrative claim for refund with the [Bureau of Internal
Revenue (BIR)] -- Appellate Division in the amount ofP522,092.00 representing unutilized excess tax credits
for calendar year 1997. Thereafter, on July 28, 1999, a written request was filed with the same division for the
early resolution of [p]etitioners claim for refund.

Respondent did not act on [p]etitioners claim for refund[;] hence, a Petition for Review was filed with this
Court[6] on November 29, 1999 to toll the running of the two-year prescriptive period.[7]
On October 9, 2001, the CTA rendered a Decision denying petitioners Petition for Review. Its Motion for
Reconsideration was likewise denied in a Resolution dated January 29, 2002.

In GR No. 162004, the antecedents are narrated by the CA in this wise:

On April 13, 1999, [petitioner] filed its Annual Income Tax Return with the [BIR] for the taxable year 1998
declaring a net loss of P1,504,951.00. Thus, there was no tax due against [petitioner] for the taxable year 1998.
Likewise, [petitioner] had an unapplied creditable withholding tax in the amount of P459,756.07, which amount
had been previously withheld in that year by petitioners withholding agents[,] namely x x x [PFI], x x x [PBFI],
and Philam Strategic Growth Fund, Inc. (PSGFI).

In the next succeeding year, [petitioner] had a tax due in the amount of P80,042.00, and a creditable withholding
tax in the amount of P915,995.00. [Petitioner] likewise declared in its 1999 tax return the amount
of P459,756.07, which represents its prior excess credit for taxable year 1998.

Thereafter, on November 14, 2000, [petitioner] filed with the Revenue District Office No. 50, Revenue Region
No. 8, a written administrative claim for refund with respect to the unapplied creditable withholding tax
of P459,756.07. According to [petitioner,] the amount of P80,042.00, representing the tax due for the taxable
year 1999 has been credited from its P915,995.00 creditable withholding tax for taxable year 1999, thus leaving
its 1998 creditable withholding tax in the amount of P459,756.07 still unapplied.

The claim for refund yielded no action on the part of the BIR. [Petitioner] then filed a Petition for Review
before the CTA on December 26, 2000, asserting that it is entitled [to] the refund [of P459,756.07,] since said
amount has not been applied against its tax liabilities in the taxable year 1998.

On May 2, 2002, the CTA rendered [a] x x x decision denying [petitioners] Petition for Review. x x x.[8]

Ruling of the Court of Appeals

The CA denied the claim of petitioner for a refund of the latters excess creditable taxes withheld for the years
1997 and 1998, despite compliance with the basic requirements of Revenue Regulations (RR) No. 12-94. The
appellate court pointed out that, in the respective Income Tax Returns (ITRs) for both years, petitioner did not
indicate its option to have the amounts either refunded or carried over and applied to the succeeding year. It was
held that to request for either a refund or a credit of income tax paid, a corporation must signify its intention by
marking the corresponding option box on its annual corporate adjustment return.

The CA further held in GR No. 156637 that the failure to present the 1998 ITR was fatal to the claim for a
refund, because there was no way to verify if the tax credit for 1997 could not have been applied against the
1998 tax liabilities of petitioner.

In GR No. 162004, however, the subsequent acts of petitioner demonstrated its option to carry over its tax credit
for 1998, even if it again failed to tick the appropriate box for that option in its 1998 ITR. Under RR 12-94, its
failure to indicate that option resulted in the automatic carry-over of any excess tax credit for the prior year. The
appellate court said that the government would not be unjustly enriched by denying a refund, because there
would be no forfeiture of the amount in its favor. The amount claimed as a refund would remain in the account
of the taxpayer until utilized in succeeding taxable years.
Hence, these Petitions.[9]
The Issues

Petitioner raises two issues in GR No. 156637 for the Courts consideration:
A.

Whether or not the failure of the [p]etitioner to indicate in its [a]nnual [i]ncome [t]ax [r]eturn the option to
refund its creditable withholding tax is fatal to its claim for refund.

B.

Whether or not the presentation in evidence of the [p]etitioners [a]nnual [i]ncome [t]ax [r]eturn for the
succeeding calendar year is a legal requisite in a claim for refund of unapplied creditable withholding tax.[10]

In GR No. 162004, petitioner raises one question only:

Whether or not the petitioner is entitled to the refund of its unutilized creditable withholding tax in the taxable
year 1998 in the amount of P459,756.07.[11]

In both cases, a simple issue needs to be resolved: whether petitioner is entitled to a refund of its creditable
taxes withheld for taxable years 1997 and 1998.

The Courts Ruling

The Petition in GR No. 156637 is meritorious, but that in GR No. 162004 is not.

Main Issue:
Entitlement to Refund

The provision on the final adjustment return (FAR) was originally found in Section 69 of Presidential Decree
(PD) No. 1158, otherwise known as the National Internal Revenue Code of 1977. [12] On August 1, 1980, this
provision was restated as Section 86[13] in PD 1705.[14]

On November 5, 1985, all prior amendments and those introduced by PD 1994[15] were codified[16] into the
National Internal Revenue Code (NIRC) of 1985, as a result of which Section 86 was renumbered [17] as Section
79.[18]
On July 31, 1986, Section 24 of Executive Order (EO) No. 37 changed all net income phrases appearing in Title
II of the NIRC of 1977 to taxable income. Section 79 of the NIRC of 1985,[19] however, was not amended.

On July 25, 1987, EO 273[20] renumbered[21] Section 86 of the NIRC[22] as Section 76,[23] which was also
rearranged[24] to fall under Chapter 10 of Title II of the NIRC. Section 79, which had earlier been renumbered by
PD 1994, remained unchanged.

Thus, Section 69 of the NIRC of 1977 was renumbered as Section 86 under PD 1705; later, as Section 79 under
PD 1994;[25] then, as Section 76 under EO 273.[26] Finally, after being renumbered and reduced to the chaff of a
grain, Section 69 was repealed by EO 37. Subsequently, Section 69 reappeared in the NIRC (or Tax Code) of
1997 as Section 76, which reads:

Section 76. Final Adjustment Return. -- Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income[27] for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable
net income[28] of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable
amount shown on its final adjustment return may be credited against the estimated quarterly income tax
liabilities for the taxable quarters of the succeeding taxable year.

GR No. 156637

This section applies to the first case before the Court. Differently numbered in 1977 but similarly worded 20
years later (1997), Section 76 offers two options to a taxable corporation whose total quarterly income tax
payments in a given taxable year exceeds its total income tax due. These options are (1) filing for a tax refund or
(2) availing of a tax credit.

The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government
may be refunded, provided that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on the FAR of a given taxable year,
against the estimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. [29] The choice of one precludes the other. Indeed,
in Philippine Bank of Communications v. Commissioner of Internal Revenue,[30] the Court ruled that a
corporation must signify its intention -- whether to request a tax refund or claim a tax credit -- by marking the
corresponding option box provided in the FAR.[31] While a taxpayer is required to mark its choice in the form
provided by the BIR, this requirement is only for the purpose of facilitating tax collection.
One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to
signify ones intention in the FAR does not mean outright barring of a valid request for a refund, should one still
choose this option later on. A tax credit should be construed merely as an alternative remedy to a tax refund
under Section 76, subject to prior verification and approval by respondent.[32]

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration,
[33]
particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or
preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses
uncertainty or lack of preference and hence shows simple negligence or plain oversight.

In the present case, respondent denied the claim of petitioner for a refund of excess taxes withheld in 1997,
because the latter (1) had not indicated in its ITR for that year whether it was opting for a credit or a refund; and
(2) had not submitted as evidence its 1998 ITR, which could have been the basis for determining whether its
claimed 1997 tax credit had not been applied against its 1998 tax liabilities.
Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in requesting a tax refund has
no basis in law and jurisprudence.

First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing of the FAR for
the preceding -- not the succeeding -- taxable year. Indeed, any refundable amount indicated in the FAR of the
preceding taxable year may be credited against the estimated income tax liabilities for the taxable quarters of
the succeeding taxable year. However, nowhere is there even a tinge of a hint in any of the provisions of the Tax
Code that the FAR of the taxable year following the period to which the tax credits are originally being applied
should also be presented to the BIR.

Second, Section 5[34] of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that claims for the
refund of income taxes deducted and withheld from income payments shall be given due course only (1) when it
is shown on the ITR that the income payment received is being declared part of the taxpayers gross income; and
(2) when the fact of withholding is established by a copy of the withholding tax statement, duly issued by the
payor to the payee, showing the amount paid and the income tax withheld from that amount.[35]

Undisputedly, the records do not show that the income payments received by petitioner have not been declared
as part of its gross income, or that the fact of withholding has not been established. According to the CTA,
[p]etitioner substantially complied with the x x x requirements of RR 12-94 [t]hat the fact of withholding is
established by a copy of a statement duly issued by the payor (withholding agent) to the payee, showing the
amount paid and the amount of tax withheld therefrom; and x x x [t]hat the income upon which the taxes were
withheld were included in the return of the recipient.[36]

The established procedure is that a taxpayer that wants a cash refund shall make a written request for it, and the
ITR showing the excess expanded withholding tax credits shall then be examined by the BIR. For the grant of
refund, RRs 12-94 and 6-85 state that all pertinent accounting records should be submitted by the taxpayer.
These records, however, actually refer only to (1) the withholding tax statements; (2) the ITR of the present
quarter to which the excess withholding tax credits are being applied; and (3) the ITR of the quarter for the
previous taxable year in which the excess credits arose. [37] To stress, these regulations implementing the law do
not require the proffer of the FAR for the taxable year following the period to which the tax credits are being
applied.

Third, there is no automatic grant of a tax refund. As a matter of procedure, the BIR should be given the
opportunity to investigate and confirm the veracity[38] of a taxpayers claim, before it grants the refund.
Exercising the option for a tax refund or a tax credit does not ipso facto confer upon a taxpayer the right to an
immediate availment of the choice made. Neither does it impose a duty on the government to allow tax
collection to be at the sole control of a taxpayer.[39]

Fourth, the BIR ought to have on file its own copies of petitioners FAR for the succeeding year, on the basis of
which it could rebut the assertion that there was a subsequent credit of the excess income tax payments for the
previous year. Its failure to present this vital document to support its contention against the grant of a tax
refund to petitioner is certainly fatal.

Fifth, the CTA should have taken judicial notice [40] of the fact of filing and the pendency of petitioners
subsequent claim for a refund of excess creditable taxes withheld for 1998. The existence of the claim ought to
be known by reason of its judicial functions. Furthermore, it is decisive to and will easily resolve the material
issue in this case. If only judicial notice were taken earlier, the fact that there was no carry-over of the excess
creditable taxes withheld for 1997 would have already been crystal clear.
Sixth, the Tax Code allows the refund of taxes to a taxpayer that claims it in writing within two years after
payment of the taxes erroneously received by the BIR. [41] Despite the failure of petitioner to make the
appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of its
choice to request a tax refund, instead of atax credit. To assert that any future claim for a tax refund will be
instantly hindered by a failure to signify ones intention in the FAR is to render nugatory the clear provision that
allows for a two-year prescriptive period.

In fact, in BPI-Family Savings Bank v. CA,[42] this Court even ordered the refund of a taxpayers excess
creditable taxes, despite the express declaration in the FAR to apply the excess to the succeeding year.[43] When
circumstances show that a choice of tax credit has been made, it should be respected. But when indubitable
circumstances clearly show that another choice -- a tax refund -- is in order, it should be granted. Technicalities
and legalisms, however exalted, should not be misused by the government to keep money not belonging to it
and thereby enrich itself at the expense of its law-abiding citizens.[44]

In the present case, although petitioner did not mark the refund box in its 1997 FAR, neither did it perform any
act indicating that it chose a tax credit. On the contrary, it filed on September 11, 1998, an administrative claim
for the refund of its excess taxes withheld in 1997. In none of its quarterly returns for 1998 did it apply the
excess creditable taxes. Under these circumstances, petitioner is entitled to a tax refund of its 1997 excess tax
credits in the amount of P522,092.

GR No. 162004

As to the second case, Section 76 also applies. Amended by Republic Act (RA) No. 8424, otherwise known as
the Tax Reform Act of 1997, it now states:

SEC. 76. Final Adjustment Return. -- Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid,
the excess amount shown on its final adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and
no application for cash refund or issuance of a tax credit certificate shall be allowed therefor.

The carry-over option under Section 76 is permissive. A corporation that is entitled to a tax refund or a tax
credit for excess payment of quarterly income taxes may carry over and credit the excess income taxes paid in a
given taxable year against the estimated income tax liabilities of the succeeding quarters. Once chosen, the
carry-over option shall be considered irrevocable[45] for that taxable period, and no application for a tax
refund or issuance of a tax credit certificate shall then be allowed.
According to petitioner, it neither chose nor marked the carry-over option box in its 1998 FAR. [46] As this option
was not chosen, it seems that there is nothing that can be considered irrevocable. In other words, petitioner
argues that it is still entitled to a refund of its 1998 excess income tax payments.
This argument does not hold water. The subsequent acts of petitioner reveal that it has effectively chosen the
carry-over option.

First, the fact that it filled out the portion Prior Years Excess Credits in its 1999 FAR means that it categorically
availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states
Less: Tax Credits/Payments. The contention that it merely filled out that portion because it was a requirement --
and that to have done otherwise would have been tantamount to falsifying the FAR -- is a long shot.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found the
itemization and summary of additions to and deductions from income taxes due. These entries are not without
rhyme or reason. They are required, because they facilitate the tax administration process.

Failure to indicate the amount of prior years excess credits does not mean falsification by a taxpayer of its
current years FAR. On the contrary, if an application for a tax refund has been -- or will be -- filed, then that
portion of the BIR form should necessarily be blank, even if the FAR of the previous taxable year already shows
an overpayment in taxes.

Second, the resulting redundancy in the claim of petitioner for a refund of its 1998 excess tax credits on
November 14, 2000[47] cannot be countenanced. It cannot be allowed to avail itself of a tax refund and a tax
credit at the same time for the same excess income taxes paid. Besides, disallowing it from getting a tax
refund of those excess tax credits will not enervate the two-year prescriptive period under the Tax Code. That
period will apply if the carry-over option has not been chosen.

Besides, tax refunds x x x are construed strictly against the taxpayer.[48] Petitioner has failed to meet the burden
of proof required in order to establish the factual basis of its claim for a tax refund.

Third, the first-in first-out (FIFO) principle enunciated by the CTA[49] does not apply.[50] Money is fungible
property.[51] The amount to be applied against theP80,042 income tax due in the 1998 FAR [52] of petitioner may
be taken from its excess credits in 1997 or from those withheld in 1998 or from both. Whichever of these the
amount will be taken from will not make a difference.

Even if the FIFO principle were to be applied, the tax credits would have to be in consonance with the usual and
normal course of events. In fact, the FAR is cumulative in nature. [53] Following a natural sequence, the prior
years excess tax credits will have to be reduced first to answer for any current tax liabilities before the current
years withheld amounts can be applied. Otherwise, there will be no sense in requiring a taxpayer to fill out the
line items in the FAR to segregate its sources of tax credits.

Whether the FIFO principle is applied or not, Section 76 remains clear and unequivocal. Once the carry-over
option is taken, actually or constructively, it becomes irrevocable. Petitioner has chosen that option for its 1998
creditable withholding taxes. Thus, it is no longer entitled to a tax refund of P459,756.07, which corresponds to
its 1998 excess tax credit. Nonetheless, the amount will not be forfeited in the governments favor, because it
may be claimed by petitioner as tax credits in the succeeding taxable years.

WHEREFORE, the Petition in GR No. 156637 is GRANTED and the assailed December 19, 2002
Decision REVERSED and SET ASIDE. No pronouncement as to costs. The Petition in GR No. 162004 is,
however, DENIED and the assailed January 30, 2004 Decision AFFIRMED. Costs against petitioner.
 UNITED AIRLINES, INC., G.R. No. 178788
Petitioner,
- versus - Promulgated:
COMMISSIONER OF INTERNAL September 29, 2010
REVENUE,
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR., J.:

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended,
of the Decision[1] dated July 5, 2007 of the Court of Tax AppealsEn Banc (CTA En Banc) in C.T.A. EB No. 227
denying petitioners claim for tax refund of P5.03 million.

The undisputed facts are as follows:

Petitioner United Airlines, Inc. is a foreign corporation organized and existing under the laws of the State of
Delaware, U.S.A., engaged in the international airline business.

Petitioner used to be an online international carrier of passenger and cargo, i.e., it used to operate passenger and
cargo flights originating in the Philippines. Upon cessation of its passenger flights in and out of the Philippines
beginning February 21, 1998, petitioner appointed a sales agent in the Philippines -- Aerotel Ltd. Corp., an
independent general sales agent acting as such for several international airline companies. [2] Petitioner continued
operating cargo flights from the Philippines until January 31, 2001.[3]

On April 12, 2002, petitioner filed with respondent Commissioner a claim for income tax refund, pursuant to
Section 28(A)(3)(a)[4] of the National Internal Revenue Code of 1997 (NIRC) in relation to Article 4(7) [5] of the
Convention between the Government of the Republic of the Philippines and the Government of the United
States of America with respect to Income Taxes (RP-US Tax Treaty). Petitioner sought to refund the total
amount of P15,916,680.69 pertaining to income taxes paid on gross passenger and cargo revenues for the
taxable years 1999 to 2001, which included the amount of P5,028,813.23 allegedly representing income taxes
paid in 1999 on passenger revenue from tickets sold in the Philippines, the uplifts of which did not originate in
the Philippines. Citing the change in definition of Gross Philippine Billings (GPB) in the NIRC, petitioner
argued that since it no longer operated passenger flights originating from the Philippines beginning February 21,
1998, its passenger revenue for 1999, 2000 and 2001 cannot be considered as income from sources within the
Philippines, and hence should not be subject to Philippine income tax under Article 9 [6] of the RP-US Tax
Treaty.[7]

As no resolution on its claim for refund had yet been made by the respondent and in view of the two (2)-year
prescriptive period (from the time of filing the Final Adjustment Return for the taxable year 1999) which was
about to expire on April 15, 2002, petitioner filed on said date a petition for review with the Court of Tax
Appeals (CTA).[8]

Petitioner asserted that under the new definition of GPB under the 1997 NIRC and Article 4(7) of the RP-US
Tax Treaty, Philippine tax authorities have jurisdiction to tax only the gross revenue derived by US air and
shipping carriers from outgoing traffic in the Philippines. Since the Bureau of Internal Revenue (BIR)
erroneously imposed and collected income tax in 1999 based on petitioners gross passenger revenue, as
beginning 1998 petitioner no longer flew passenger flights to and from the Philippines, petitioner is entitled to a
refund of such erroneously collected income tax in the amount of P5,028,813.23.[9]

In its Decision[10] dated May 18, 2006, the CTAs First Division [11] ruled that no excess or erroneously paid tax
may be refunded to petitioner because the income tax on GPB under Section 28(A)(3)(a) of the NIRC applies as
well to gross revenue from carriage of cargoes originating from the Philippines. It agreed that petitioner cannot be
taxed on its 1999 passenger revenue from flights originating outside the Philippines. However, in reporting a cargo
revenue of P740.33 million in 1999, it was found that petitioner deducted two (2) items from its gross cargo
revenue of P2.84 billion: P141.79 million as commission and P1.98 billion as other incentives of its agent. These
deductions were erroneous because the gross revenue referred to in Section 28(A)(3)(a) of the NIRC was total
revenue before any deduction of commission and incentives. Petitioners gross cargo revenue in 1999, being P2.84
billion, the GPB tax thereon was P42.54 million and not P11.1 million, the amount petitioner paid for the reported
net cargo revenue of P740.33 million. The CTA First Division further noted that petitioner even underpaid its
taxes on cargo revenue by P31.43 million, which amount was much higher than the P5.03 million it asked to be
refunded.

A motion for reconsideration was filed by petitioner but the First Division denied the same. It held that
petitioners claim for tax refund was not offset with its tax liability; that petitioners tax deficiency was due to
erroneous deductions from its gross cargo revenue; that it did not make an assessment against petitioner; and
that it merely determined if petitioner was entitled to a refund based on the undisputed facts and whether
petitioner had paid the correct amount of tax.[12]

Petitioner elevated the case to the CTA En Banc which affirmed the decision of the First Division.

Hence, this petition anchored on the following grounds:

 I. THE CTA EN BANC GROSSLY ERRED IN DENYING THE PETITIONERS CLAIM
FOR REFUND OF ERRONEOUSLY PAID INCOME TAX ON GROSS PHILIPPINE
BILLINGS [GPB] BASED ON ITS FINDING THAT PETITIONERS UNDERPAYMENT
OF [P31.43 MILLION] GPB TAX ON CARGO REVENUES IS A LOT HIGHER THAN
THE GPB TAX OF [P5.03 MILLION] ON PASSENGER REVENUES, WHICH IS THE
SUBJECT OF THE INSTANT CLAIM FOR REFUND. THE DENIAL OF PETITIONERS
CLAIM ON SUCH GROUND CLEARLY AMOUNTS TO AN OFF-SETTING OF TAX
LIABILITIES, CONTRARY TO WELL-SETTLED JURISPRUDENCE.

II. THE DECISION OF THE CTA EN BANC VIOLATED PETITIONERS RIGHT TO DUE
PROCESS.

III. THE CTA EN BANC ACTED IN EXCESS OF ITS JURISDICTION BY DENYING

PETITIONERS CLAIM FOR REFUND OF ERRONEOUSLY PAID INCOME TAX ON
GROSS PHILIPPINE BILLINGS BASED ON ITS FINDING THAT PETITIONER
UNDERPAID GPB TAX ON CARGO REVENUES IN THE AMOUNT OF [P31.43
MILLION] FOR THE TAXABLE YEAR 1999.

IV. THE CTA EN BANC HAS NO AUTHORITY UNDER THE LAW TO MAKE ANY
ASSESSMENTS FOR DEFICIENCY TAXES. THE AUTHORITY TO MAKE
ASSESSMENTS FOR DEFICIENCY NATIONAL INTERNAL REVENUE TAXES IS
VESTED BY THE 1997 NIRC UPON RESPONDENT.

V. ANY ASSESSMENT AGAINST PETITIONER FOR DEFICIENCY INCOME TAX FOR

THE TAXABLE YEAR 1999 IS ALREADY BARRED BY PRESCRIPTION.[13]

The main issue to be resolved is whether the petitioner is entitled to a refund of the amount of P5,028,813.23 it
paid as income tax on its passenger revenues in 1999.

Petitioner argues that its claim for refund of erroneously paid GPB tax on off-line passenger revenues cannot be
denied based on the finding of the CTA that petitioner allegedly underpaid the GPB tax on cargo revenues
by P31,431,171.09, which underpayment is allegedly higher than the GPB tax of P5,028,813.23 on passenger
revenues, the amount of the instant claim. The denial of petitioners claim for refund on such ground is
tantamount to an offsetting of petitioners claim for refund of erroneously paid GPB against its alleged tax
liability. Petitioner thus cites the well-entrenched rule in taxation cases that internal revenue taxes cannot be the
subject of set-off or compensation.[14]

According to petitioner, the offsetting of the liabilities is very clear in the instant case because the
amount of petitioners claim for refund of erroneously paid GPB tax ofP5,028,813.23 for the taxable year 1999
is being offset against petitioners alleged deficiency GPB tax liability on cargo revenues for the same year,
which was not even the subject of an investigation nor any valid assessment issued by respondent against the
petitioner. Under Section 228[15] of the NIRC, 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. This administrative process of
issuing an assessment is part of procedural due process enshrined in the 1987 Constitution. Records do not show
that petitioner has been assessed by the BIR for any deficiency GBP tax for 1999, nor was there any finding or
investigation being conducted by respondent of any liability of petitioner for GPB tax for the said taxable
period. Clearly, petitioners right to due process was violated.[16]

Petitioner further argues that the CTA acted in excess of its jurisdiction because the exclusive appellate
jurisdiction of the CTA covers only decisions or inactions of the respondent in cases involving disputed
assessments. The CTA has effectively assessed petitioner with a P31.43 million tax deficiency when it
concluded that petitioner underpaid its GPB tax on cargo revenue. Since respondent did not issue an assessment
for any deficiency tax, the alleged deficiency tax on its cargo revenue in 1999 cannot be considered a disputed
assessment that may be passed upon by the CTA. Petitioner stresses that the authority to issue an assessment for
deficiency internal revenue taxes is vested by law on respondent, not with the CTA.[17]

Lastly, petitioner argues that any assessment against it for deficiency income tax for taxable year 1999 is barred
by prescription. Petitioner claims that the prescriptive period within which an assessment for deficiency income
tax may be made has prescribed on April 17, 2003, three (3) years after it filed its 1999 tax return.[18]

Respondent Commissioner maintains that the CTA acted within its jurisdiction in denying petitioners claim for
tax refund. It points out that the objective of the CTAs determination of whether petitioner correctly paid its
GPB tax for the taxable year 1999 was to ascertain the latters entitlement to the claimed refund and not for the
purpose of imposing any deficiency tax. Hence, petitioners arguments regarding the propriety of the CTAs
determination of its deficiency tax on its GPB for gross cargo revenues for 1999 are clearly misplaced.[19]

The petition has no merit.

As correctly pointed out by petitioner, inasmuch as it ceased operating passenger flights to or from the
Philippines in 1998, it is not taxable under Section 28(A)(3)(a) of the NIRC for gross passenger revenues. This
much was also found by the CTA. In South African Airways v. Commissioner of Internal Revenue,[20] we ruled
that the correct interpretation of the said provisions is that, if an international air carrier maintains flights to and
from the Philippines, it shall be taxed at the rate of 2% of its GPB, while international air carriers that do not
have flights to and from the Philippines but nonetheless earn income from other activities in the country will be
taxed at the rate of 32% of such income.

Here, the subject of claim for tax refund is the tax paid on passenger revenue for taxable year 1999 at the time
when petitioner was still operating cargo flights originating from the Philippines although it had ceased
passenger flight operations. The CTA found that petitioner had underpaid its GPB tax for 1999 because
petitioner had made deductions from its gross cargo revenues in the income tax return it filed for the taxable
year 1999, the amount of underpayment even greater than the refund sought for erroneously paid GPB tax on
passenger revenues for the same taxable period. Hence, the CTA ruled petitioner is not entitled to a tax refund.
Petitioners arguments regarding the propriety of such determination by the CTA are misplaced.

Under Section 72 of the NIRC, the CTA can make a valid finding that petitioner made erroneous
deductions on its gross cargo revenue; that because of the erroneous deductions, petitioner reported a lower cargo
revenue and paid a lower income tax thereon; and that petitioner's underpayment of the income tax on cargo
revenue is even higher than the income tax it paid on passenger revenue subject of the claim for refund, such that
the refund cannot be granted.

Section 72 of the NIRC reads:

SEC. 72. Suit to Recover Tax Based on False or Fraudulent Returns. - When an
assessment is made in case of any list, statement or return, which in the opinion of the
Commissioner was false or fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suit, unless it is proved that the said
list, statement or return was not false nor fraudulent and did not contain any understatement or
undervaluation; but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines.

In the afore-cited case of South African Airways, this Court rejected similar arguments on the denial of claim for
tax refund, as follows:

Precisely, petitioner questions the offsetting of its payment of the tax under Sec.
28(A)(3)(a) with their liability under Sec. 28(A)(1), considering that there has not yet been
any assessment of their obligation under the latter provision. Petitioner argues that such
offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.

Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same
time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable,
they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by
third persons and communicated in due time to the debtor.

And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue, thus:

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. 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. We
find no cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, 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, 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 set-off.

Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged
tax deficiency is unavailing under Art. 1279 of the Civil Code.

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the

offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioners supplemental motion for reconsideration alleging bringing to said courts
attention the existence of the deficiency income and business tax assessment against
Citytrust. The fact of such deficiency assessment is intimately related to and inextricably
intertwined with the right of respondent bank to claim for a tax refund for the same year.
To award such refund despite the existence of that deficiency assessment is an absurdity
and a polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the same year.

The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a challenge
against the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which
was the applicable law when the claim of Citytrust was filed, provides that (w)hen an
assessment is made in case of any list, statement, or return, which in the opinion of the
Commissioner of Internal Revenue was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suits unless it is proved that the said list, statement, or return was not
false nor fraudulent and did not contain any understatement or undervaluation; but this
 provision shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines.

Moreover, to grant the refund without determination of the proper

assessment and the tax due would inevitably result in multiplicity of proceedings or
suits. If the deficiency assessment should subsequently be upheld, the Government will
be forced to institute anew a proceeding for the recovery of erroneously refunded taxes
which recourse must be filed within the prescriptive period of ten years after discovery of
the falsity, fraud or omission in the false or fraudulent return involved. This would
necessarily require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and impede or delay
the collection of much-needed revenue for governmental operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it

is both logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax
due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be
only just and fair that the taxpayer and the Government alike be given equal opportunities
to avail of remedies under the law to defeat each others claim and to determine all matters
of dispute between them in one single case. It is important to note that in determining
whether or not petitioner is entitled to the refund of the amount paid, it would [be]
necessary to determine how much the Government is entitled to collect as taxes. This
would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to
all the matters subject thereof or necessarily involved therein. (Emphasis supplied.)

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC.
The above pronouncements are, therefore, still applicable today.

Here, petitioners similar tax refund claim assumes that the tax return that it filed
was correct. Given, however, the finding of the CTA that petitioner, although not liable
under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of
the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.[21] (Additional emphasis supplied.)

In the case at bar, the CTA explained that it merely determined whether petitioner is entitled to a refund based
on the facts. On the assumption that petitioner filed a correct return, it had the right to file a claim for refund of
GPB tax on passenger revenues it paid in 1999 when it was not operating passenger flights to and from the
Philippines. However, upon examination by the CTA, petitioners return was found erroneous as it understated
its gross cargo revenue for the same taxable year due to deductions of two (2) items consisting of commission
and other incentives of its agent. Having underpaid the GPB tax due on its cargo revenues for 1999, petitioner is
not entitled to a refund of its GPB tax on its passenger revenue, the amount of the former being even much higher
(P31.43 million) than the tax refund sought (P5.2 million). The CTA therefore correctly denied the claim for tax
refund after determining the proper assessment and the tax due. Obviously, the matter of prescription raised by
petitioner is a non-issue. The prescriptive periods under Sections 203[22] and 222[23] of the NIRC find no
application in this case.

We must emphasize that tax refunds, like tax exemptions, are construed strictly against the taxpayer and
liberally in favor of the taxing authority.[24] In any event, petitioner has not discharged its burden of proof in
establishing the factual basis for its claim for a refund and we find no reason to disturb the ruling of the CTA. It
has been a long-standing policy and practice of the Court to respect the conclusions of quasi-judicial agencies
such as the CTA, a highly specialized body specifically created for the purpose of reviewing tax cases.[25]

WHEREFORE, we DENY the petition for lack of merit and AFFIRM the Decision dated July 5, 2007 of the
Court of Tax Appeals En Banc in C.T.A. EB No. 227.

With costs against the petitioner.

SO ORDERED.