Republic of the Philippines 1.

Books of Accounts for the year 1987;

SUPREME COURT
Manila 2. Record of Importations of Synthetic Resin
and Calcium Carbonate for the year 1987;
SECOND DIVISION
3. Income tax returns & attachments for 1987;
G.R. No. 136975 March 31, 2005 and

COMMISSION OF INTERNAL REVENUE, Petitioner, 4. Record of tax payments.7

vs.
HANTEX TRADING CO., INC., respondent. However, the respondent’s president and general
manager refused to comply with the subpoena,
DECISION contending that its books of accounts and records of
importation of synthetic resin and calcium bicarbonate
CALLEJO, SR., J.: had been investigated repeatedly by the Bureau of
Internal Revenue (BIR) on prior occasions.8 The IIPO
Before us is a petition for review of the Decision1 of the explained that despite such previous investigations,
Court of Appeals (CA) which reversed the Decision2 of the EIIB was still authorized to conduct an investigation
the Court of Tax Appeals (CTA) in CTA Case No. 5126, pursuant to Section 26-A of Executive Order No. 127.
upholding the deficiency income and sales tax Still, the respondent refused to comply with the
assessments against respondent Hantex Trading Co., subpoena issued by the IIPO. The latter forthwith
Inc. secured certified copies of the Profit and Loss
Statements for 1987 filed by the respondent with the
Securities and Exchange Commission
The Antecedents
(SEC).9 However, the IIPO failed to secure certified
copies of the respondent’s 1987 Consumption Entries
The respondent is a corporation duly organized and from the Bureau of Customs since, according to the
existing under the laws of the Philippines. Being custodian thereof, the original copies had been eaten
engaged in the sale of plastic products, it imports by termites.10
synthetic resin and other chemicals for the
manufacture of its products. For this purpose, it is
In a Letter dated June 28, 1990, the IIPO requested the
required to file an Import Entry and Internal Revenue
Chief of the Collection Division, Manila International
Declaration (Consumption Entry) with the Bureau of
Container Port, and the Acting Chief of the Collection
Customs under Section 1301 of the Tariff and Customs
Division, Port of Manila, to authenticate the machine
Code.
copies of the import entries supplied by the informer.
However, Chief of the Collection Division Merlita D.
Sometime in October 1989, Lt. Vicente Amoto, Acting Tomas could not do so because the Collection Division
Chief of Counter-Intelligence Division of the Economic did not have the original copies of the entries. Instead,
Intelligence and Investigation Bureau (EIIB), received she wrote the IIPO that, as gleaned from the records,
confidential information that the respondent had the following entries had been duly processed and
imported synthetic resin amounting released after the payment of duties and taxes:
to P115,599,018.00 but only
declared P45,538,694.57.3 According to the informer,
based on photocopies of 77 Consumption Entries IMPORTER – HANTEX TRADING CO., INC. – SERIES
furnished by another informer, the 1987 importations of ENTRY NO. DATE ENTRY NO. DATE
the respondent were understated in its accounting RELEASED RELEA
records.4 Amoto submitted a report to the EIIB 03058-87 1/30/87 50265-87 12/9/8
Commissioner recommending that an inventory audit
of the respondent be conducted by the Internal Inquiry 09120-87 3/20/87 46427-87 11/27/
and Prosecution Office (IIPO) of the EIIB.5 18089-87 5/21/87 30764-87 8/21/8
19439-87 6/2/87 30833-87 8/20/8
Acting on the said report, Jose T. Almonte, then 19441-87 6/3/87 34690-87 9/16/8
Commissioner of the EIIB, issued Mission Order No.
398-896dated November 14, 1989 for the audit and 11667-87 4/15/87 34722-87 9/11/8
investigation of the importations of Hantex for 1987. 23294-87 7/7/87 43234-87 11/2/8
The IIPO issued subpoena duces tecum and ad 45478-87 11/16/87 44850-87 11/16/
testificandum for the president and general manager of
the respondent to appear in a hearing and bring the 45691-87 12/2/87 44851-87 11/16/
following:
 25464-87 7/16/87 46461-87 Profit and Loss Statement for 1987 and 1988 on file
11/19/87
with the SEC, the machine copies of the Consumption
26483-87 7/23/87 46467-87 11/18/87
Entries, Series of 1987, submitted by the informer, as
29950-87 8/11/87 48091-87 11-27-87 11
well as excerpts from the entries certified by Tomas
and Danganan.
Acting Chief of the Collection Division of the Bureau of
Customs Augusto S. Danganan could not authenticate Based on the documents/records on hand, inclusive of
the machine copies of the import entries as well, since the machine copies of the Consumption Entries, the
the original copies of the said entries filed with the EIIB found that for 1987, the respondent had
Bureau of Customs had apparently been eaten by importations totaling P105,716,527.00 (inclusive of
termites. However, he issued a certification that the advance sales tax). Compared with the declared sales
following enumerated entries were filed by the based on the Profit and Loss Statements filed with the
respondent which were processed and released from SEC, the respondent had unreported sales in the
the Port of Manila after payment of duties and taxes, to amount of P63,032,989.17, and its corresponding
wit: income tax liability was P41,916,937.78, inclusive of
penalty charge and interests.
Hantex Trading Co., Inc.
EIIB Commissioner Almonte transmitted the entire
Entry No. Date Released Entry No. Date Released
docket of the case to the BIR and recommended the
3903 1/29/87 22869 4/8/87 collection of the total tax assessment from the
4414 1/20/87 19441 3/31/87respondent.13
10683 2/17/87 24189 4/21/87
On February 12, 1991, Deputy Commissioner
12611 2/24/87 26431 4/20/87
Deoferio, Jr. issued a Memorandum to the BIR
12989 2/26/87 45478 7/3/87 Assistant Commissioner for Special Operations
17050 3/13/87 26796 4/23/87Service, directing the latter to prepare a conference
4/30/87letter advising the respondent of its deficiency taxes.
14
17169 3/13/87 28827
18089 3/16/87 31617 5/14/87Meanwhile, as ordered by the Regional Director,
19439 4/1/87 39068 6/5/87 Revenue Enforcement Officers Saturnino D. Torres
21189 4/3/87 42581 6/21/87and Wilson Filamor conducted an investigation on the
1987 importations of the respondent, in the light of the
43451 6/29/87 42793 6/23/87
records elevated by the EIIB to the BIR, inclusive of the
42795 6/23/87 45477 7/3/87 photocopies of the Consumption Entries. They were to
35582 not received 85830 ascertain the respondent’s liability for deficiency sales
11/13/87
45691 7/3/87 86650 and income taxes for 1987, if any. Per Torres’ and
not received
Filamor’s Report dated March 6, 1991 which was
46187 7/8/87 87647 11/18/87
based on the report of the EIIB and the
46427 7/3/87 88829 documents/records appended thereto, there was
11/23/87
57669 8/12/87 92293 12/3/87a prima facie case of fraud against the respondent in
filing its 1987 Consumption Entry reports with the
62471 8/28/87 93292 12/7/87Bureau of Customs. They found that the respondent
63187 9/2/87 96357 12/16/87
had unrecorded importation in the total amount
66859 9/15/87 96822 of P70,661,694.00, and that the amount was not
12/15/87
declared in its income tax return for 1987. The District
67890 9/17/87 98823 not received
Revenue Officer and the Regional Director of the BIR
68115 9/15/87 99428 12/28/87
concurred with the report.15
69974 9/24/87 99429 12/28/87
72213 10/2/87 99441 Based on the said report, the Acting Chief of the
12/28/87
Special Investigation Branch wrote the respondent and
77688 10/16/87 101406 1/5/87 invited its representative to a conference at 10:00 a.m.
84253 11/10/87 101407 1/8/87 of March 14, 1991 to discuss its deficiency internal
85534 11/11/87 3118 1-19-87revenue
12 taxes and to present whatever documentary
and other evidence to refute the same.16 Appended to
the letter was a computation of the deficiency income
Bienvenido G. Flores, Chief of the Investigation and sales tax due from the respondent, inclusive of
Division, and Lt. Leo Dionela, Lt. Vicente Amoto and increments:
Lt. Rolando Gatmaitan conducted an investigation.
They relied on the certified copies of the respondent’s
 B. Computations:
1. Cost of Sales Ratio A2/A1
2. Undeclared Sales – Imported A3/B1
3. Undeclared Gross Profit B2-A3
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35%
50% Surcharge C1 x 50%
Interest to 2/28/91 C1 x 57.5%
Total
2. Deficiency Sales Tax
at 10%
at 20%
Total Due
Less: Advanced Sales Taxes Paid
Deficiency Sales Tax
50% Surcharge C2 x 50%
Interest to 2/28/91
Total
The invitation was reiterated in a Letter dated March
15, 1991. In his Reply dated March 15, 1991, Mariano
O. Chua, the President and General Manager of the
respondent, requested that the report of Torres and
Filamor be set aside on the following claim:
… [W]e had already been investigated by RDO
No. 23 under Letters of Authority Nos. 0322988
RR dated Oct. 1, 1987, 0393561 RR dated
Aug. 17, 1988 and 0347838 RR dated March
2, 1988, and re-investigated by the Special
Investigation Team on Aug. 17, 1988 under
Letter of Authority No. 0357464 RR, and the
Intelligence and Investigation Office on Sept.
27, 1988 under Letter of Authority No. 0020188
NA, all for income and business tax liabilities
for 1987. The Economic Intelligence and
Investigation Bureau on Nov. 20, 1989,
likewise, confronted us on the same
information for the same year.
In all of these investigations, save your request
for an informal conference, we welcomed them
and proved the contrary of the allegation. Now,
with your new inquiry, we think that there will
be no end to the problem.
Madam, we had been subjected to so many
investigations and re-investigations for 1987
and nothing came out except the payment of
deficiency taxes as a result of oversight. Tax
evasion through underdeclaration of income
had never been proven.18
Invoking Section 23519 of the 1977 National Internal
Revenue Code (NIRC), as amended, Chua requested
85.492923%
that the inquiry be set aside.
110,079,491.61
15,969,316.61
The petitioner, the Commissioner of Internal Revenue,
through Assistant Commissioner for Collection Jaime
M. Maza, sent a Letter dated April 15, 1991 to the
5,589,261.00
respondent demanding payment of its deficiency
2,794,630.50
income tax of P13,414,226.40 and deficiency sales tax
3,213,825.08
of P14,752,903.25, inclusive of surcharge and
11,597,825.58
interest.20 Appended thereto were the Assessment
Notices of Tax Deficiency Nos. FAS-1-87-91-001654
and FAS-4-87-91-001655.21
7,290,082.72
10,493,312.31
On February 12, 1992, the Chief of the Accounts
17,783,395.03
Receivables/Billing Division of the BIR sent a letter to
the respondent demanding payment of its tax liability
11,636,352.00
due for 1987 within ten (10) days from notice, on pain
6,147,043.03
of the collection tax due via a warrant of distraint and
3,073,521.52
levy and/or judicial action.22 The Warrant of Distraint
5,532,338.73
and/or Levy23 was actually served on the respondent
on January1721, 1992. On September 7, 1992, it wrote
14,752,903.28
the Commissioner of Internal Revenue protesting the
assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO
FACTUAL AS WELL AS LEGAL BASIS, THE
FACT THAT NO INVESTIGATION OF OUR
RECORDS WAS EVER MADE BY THE EIIB
WHICH RECOMMENDED ITS ISSUANCE.24
II. THAT GRANTING BUT WITHOUT
ADMITTING THAT OUR PURCHASES FOR
1987 AMOUNTED TO P105,716,527.00 AS
CLAIMED BY THE EIIB, THE ASSESSMENT
OF A DEFICIENCY INCOME TAX IS STILL
DEFECTIVE FOR IT FAILED TO CONSIDER
OUR REAL PURCHASES
OF P45,538,694.57.25
III. THAT THE ASSESSMENT OF A
DEFICIENCY SALES TAX IS ALSO
BASELESS AND UNFOUNDED
CONSIDERING THAT WE HAVE DUTIFULLY
PAID THE SALES TAX DUE FROM OUR
BUSINESS.26
In view of the impasse, administrative hearings were
conducted on the respondent’s protest to the
assessment. During the hearing of August 20, 1993,
the IIPO representative presented the photocopies of
the Consumption and Import Entries and the
Certifications issued by Tomas and Danganan of the
Bureau of Customs. The IIPO representative testified
that the Bureau of Customs failed to furnish the EIIB
with certified copies of the Consumption and Import
Entries; hence, the EIIB relied on the machine copies
from their informer.27
The respondent wrote the BIR Commissioner on July
12, 1993 questioning the assessment on the ground
that the EIIB representative failed to present the
original, or authenticated, or duly certified copies of the
Consumption and Import Entry Accounts, or excerpts
thereof if the original copies were not readily available;
or, if the originals were in the official custody of a public
officer, certified copies thereof as provided for in
Section 12, Chapter 3, Book VII, Administrative
Procedure, Administrative Order of 1987. It stated that
the only copies of the Consumption Entries submitted
to the Hearing Officer were mere machine copies
furnished by an informer of the EIIB. It asserted that the
letters of Tomas and Danganan were unreliable
because of the following:
In the said letters, the two collection officers
merely submitted a listing of alleged import
entry numbers and dates released of alleged
importations by Hantex Trading Co., Inc. of
merchandise in 1987, for which they certified
that the corresponding duties and taxes were
paid after being processed in their offices. In
said letters, no amounts of the landed costs
and advance sales tax and duties were stated,
and no particulars of the duties and taxes paid
per import entry document was presented.
The contents of the two letters failed to indicate
the particulars of the importations per entry
number, and the said letters do not constitute
as evidence of the amounts of importations of
Hantex Trading Co., Inc. in 1987.28
The respondent cited the following findings of the
Hearing Officer:
… [T]hat the import entry documents do not
constitute evidence only indicate that the tax
assessments in question have no factual basis,
and must, at this point in time, be withdrawn
and cancelled. Any new findings by the IIPO
representative who attended the hearing could
not be used as evidence in this hearing,
because all the issues on the tax assessments
in question have already been raised by the
herein taxpayer.29
The respondent requested anew that the income tax
deficiency assessment and the sales tax deficiency
assessment be set aside for lack of factual and legal
basis.
The BIR Commissioner30 wrote the respondent on
December 10, 1993, denying its letter-request for the
dismissal of the assessments.31 The BIR
Commissioner admitted, in the said letter, the
possibility that the figures appearing in the photocopies
of the Consumption Entries had been tampered with.
She averred, however, that she was not proscribed
from relying on other admissible evidence, namely, the
Letters of Torres and Filamor dated August 7 and 22,
1990 on their investigation of the respondent’s tax
liability. The Commissioner emphasized that her
decision was final.32
The respondent forthwith filed a petition for review in
the CTA of the Commissioner’s Final Assessment
Letter dated December 10, 1993 on the following
grounds:
First. The alleged 1987 deficiency income tax
assessment (including increments) and the alleged
1987 deficiency sales tax assessment (including
increments) are void ab initio, since under Sections
16(a) and 49(b) of the Tax Code, the Commissioner
shall examine a return after it is filed and, thereafter,
assess the correct amount of tax. The following facts
obtaining in this case, however, are indicative of the
incorrectness of the tax assessments in question: the
deficiency interests imposed in the income and
percentage tax deficiency assessment notices were
computed in violation of the provisions of Section
249(b) of the NIRC of 1977, as amended; the
percentage tax deficiency was computed on an annual
basis for the year 1987 in accordance with the
provision of Section 193, which should have been
computed in accordance with Section 162 of the 1977
NIRC, as amended by Pres. Decree No. 1994 on a
quarterly basis; and the BIR official who signed the
deficiency tax assessments was the Assistant
Commissioner for Collection, who had no authority to
sign the same under the NIRC.
Second. Even granting arguendo that the deficiency
taxes and increments for 1987 against the respondent
were correctly computed in accordance with the
provisions of the Tax Code, the facts indicate that the
above-stated assessments were based on alleged
documents which are inadmissible in either
administrative or judicial proceedings. Moreover, the
alleged bases of the tax computations were anchored
on mere presumptions and not on actual facts. The
alleged undeclared purchases for 1987 were based on
mere photocopies of alleged import entry documents,
not the original ones, and which had never been duly
certified by the public officer charged with the custody
of such records in the Bureau of Customs. According
to the respondent, the alleged undeclared sales were
computed based on mere presumptions as to the
alleged gross profit contained in its 1987 financial
statement. Moreover, even the alleged financial
statement of the respondent was a mere machine copy
and not an official copy of the 1987 income and
business tax returns. Finally, the respondent was
following the accrual method of accounting in 1987,
yet, the BIR investigator who computed the 1987
income tax deficiency failed to allow as a deductible
item the alleged sales tax deficiency for 1987 as
provided for under Section 30(c) of the NIRC of 1986.33
The Commissioner did not adduce in evidence the
original or certified true copies of the 1987
Consumption Entries on file with the Commission on
Audit. Instead, she offered in evidence as proof of the
contents thereof, the photocopies of the Consumption
Entries which the respondent objected to for being
inadmissible in evidence.34She also failed to present
any witness to prove the correct amount of tax due from
it. Nevertheless, the CTA provisionally admitted the
said documents in evidence, subject to its final
evaluation of their relevancy and probative weight to
the issues involved.35
On December 11, 1997, the CTA rendered a decision,
the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING,
judgment is hereby rendered DENYING the
herein petition. Petitioner is hereby ORDERED
TO PAY the respondent Commissioner of
Internal Revenue its deficiency income and
sales taxes for the year 1987 in the amounts
of P11,182,350.26 and P12,660,382.46,
respectively, plus 20% delinquency interest per
annum on both deficiency taxes from April 15,
1991 until fully paid pursuant to Section
283(c)(3) of the 1987 Tax Code, with costs
against the petitioner.
SO ORDERED.36
The CTA ruled that the respondent was burdened to
prove not only that the assessment was erroneous, but
also to adduce the correct taxes to be paid by it. The
CTA declared that the respondent failed to prove the
correct amount of taxes due to the BIR. It also ruled
that the respondent was burdened to adduce in
evidence a certification from the Bureau of Customs
that the Consumption Entries in question did not
belong to it.
On appeal, the CA granted the petition and reversed
the decision of the CTA. The dispositive portion of the
decision reads:
FOREGOING PREMISES CONSIDERED, the
Petition for Review is GRANTED and the
December 11, 1997 decision of the CTA in CTA
Case No. 5162 affirming the 1987 deficiency
income and sales tax assessments and the
increments thereof, issued by the BIR is hereby
REVERSED. No costs.37
The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency
assessments issued by the petitioner were unlawful
and baseless since the copies of the import entries
relied upon in computing the deficiency tax of the
respondent were not duly authenticated by the public
officer charged with their custody, nor verified under
oath by the EIIB and the BIR investigators.38 The CA
also noted that the public officer charged with the
custody of the import entries was never presented in
court to lend credence to the alleged loss of the
originals.39 The CA pointed out that an import entry is a
public document which falls within the provisions of
Section 19, Rule 132 of the Rules of Court, and to be
admissible for any legal purpose, Section 24, Rule 132
of the Rules of Court should apply.40 Citing the ruling of
this Court in Collector of Internal Revenue v.
Benipayo,41 the CA ruled that the assessments were
unlawful because they were based on hearsay
evidence. The CA also ruled that the respondent was
deprived of its right to due process of law.
The CA added that the CTA should not have just
brushed aside the legal requisites provided for under
the pertinent provisions of the Rules of Court in the
matter of the admissibility of public documents,
considering that substantive rules of evidence should
not be disregarded. It also ruled that the certifications
made by the two Customs Collection Chiefs under the
guise of supporting the respondent’s alleged tax
deficiency assessments invoking the best evidence
obtainable rule under the Tax Code should not be
permitted to supplant the best evidence rule under
Section 7, Rule 130 of the Rules of Court.
Finally, the CA noted that the tax deficiency
assessments were computed without the tax returns.
The CA opined that the use of the tax returns is
indispensable in the computation of a tax deficiency;
hence, this essential requirement must be complied
with in the preparation and issuance of valid tax
deficiency assessments.42
The Present Petition
The Commissioner of Internal Revenue, the petitioner
herein, filed the present petition for review under Rule
45 of the Rules of Court for the reversal of the decision
of the CA and for the reinstatement of the ruling of the
CTA.
As gleaned from the pleadings of the parties, the
threshold issues for resolution are the following: (a)
whether the petition at bench is proper and complies
with Sections 4 and 5, Rule 7 of the Rules of Court; (b)
whether the December 10, 1991 final assessment of
the petitioner against the respondent for deficiency
income tax and sales tax for the latter’s 1987
importation of resins and calcium bicarbonate is based
on competent evidence and the law; and (c) the total
amount of deficiency taxes due from the respondent for
1987, if any.
On the first issue, the respondent points out that the
petition raises both questions of facts and law which
cannot be the subject of an appeal by certiorari under
Rule 45 of the Rules of Court. The respondent notes
that the petition is defective because the verification
and the certification against forum shopping were not
signed by the petitioner herself, but only by the
Regional Director of the BIR. The respondent submits
that the petitioner should have filed a motion for
reconsideration with the CA before filing the instant
petition for review.43
We find and so rule that the petition is sufficient in form.
A verification and certification against forum shopping
signed by the Regional Director constitutes sufficient
compliance with the requirements of Sections 4 and 5,
Rule 7 of the Rules of Court. Under Section 10 of the
NIRC of 1997,44 the Regional Director has the power to
administer and enforce internal revenue laws, rules
and regulations, including the assessment and
collection of all internal revenue taxes, charges and
fees. Such power is broad enough to vest the Revenue
Regional Director with the authority to sign the
verification and certification against forum shopping in
behalf of the Commissioner of Internal Revenue. There
is no other person in a better position to know the
collection cases filed under his jurisdiction than the
Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-
83,45 the Regional Director is authorized to sign all
pleadings filed in connection with cases referred to the
Revenue Regions by the National Office which,
otherwise, require the signature of the petitioner.
We do not agree with the contention of the respondent
that a motion for reconsideration ought to have been
filed before the filing of the instant petition. A motion for
reconsideration of the decision of the CA is not a
condition sine qua non for the filing of a petition for
review under Rule 45. As we held in Almora v. Court of
Appeals:46
Rule 45, Sec. 1 of the Rules of Court, however,
distinctly provides that:
A party may appeal by certiorari from a
judgment of the Court of Appeals, by
filing with the Supreme Court a petition
for certiorari within fifteen (15) days
from notice of judgment, or of the denial
of his motion for reconsideration filed in
due time. (Emphasis supplied)
The conjunctive "or" clearly indicates that the
15-day reglementary period for the filing of a
petition for certiorari under Rule 45
commences either from notice of the
questioned judgment or from notice of denial of
the appellant’s motion for reconsideration. A
prior motion for reconsideration is not
indispensable for a petition for review on
certiorari under Rule 45 to prosper. …47
While Rule 45 of the Rules of Court provides that only
questions of law may be raised by the petitioner and
resolved by the Court, under exceptional
circumstances, the Court may take cognizance thereof
and resolve questions of fact. In this case, the findings
and conclusion of the CA are inconsistent with those of
the CTA, not to mention those of the Commissioner of
Internal Revenue. The issues raised in this case relate
to the propriety and the correctness of the tax
assessments made by the petitioner against the
respondent, as well as the propriety of the application
of Section 16, paragraph (b) of the 1977 NIRC, as
amended by Pres. Decree Nos. 1705, 1773, 1994 and
Executive Order No. 273, in relation to Section 3, Rule
132 of the Rules of Evidence. There is also an
imperative need for the Court to resolve the threshold
factual issues to give justice to the parties, and to
determine whether the CA capriciously ignored,
misunderstood or misinterpreted cogent facts and
circumstances which, if considered, would change the
outcome of the case.
On the second issue, the petitioner asserts that since
the respondent refused to cooperate and show its 1987
books of account and other accounting records, it was
proper for her to resort to the best evidence obtainable
– the photocopies of the import entries in the Bureau of
Customs and the respondent’s financial statement filed
with the SEC.48 The petitioner maintains that these
import entries were admissible as secondary evidence
under the best evidence obtainable rule, since they
were duly authenticated by the Bureau of Customs
officials who processed the documents and released
the cargoes after payment of the duties and taxes
due.49 Further, the petitioner points out that under the
best evidence obtainable rule, the tax return is not
important in computing the tax deficiency.50
The petitioner avers that the best evidence obtainable
rule under Section 16 of the 1977 NIRC, as amended,
legally cannot be equated to the best evidence rule
under the Rules of Court; nor can the best evidence
rule, being procedural law, be made strictly operative
in the interpretation of the best evidence obtainable
rule which is substantive in character.51 The petitioner
posits that the CTA is not strictly bound by technical
rules of evidence, the reason being that the quantum
of evidence required in the said court is merely
substantial evidence.52
Finally, the petitioner avers that the respondent has the
burden of proof to show the correct assessments;
otherwise, the presumption in favor of the correctness
of the assessments made by it stands.53 Since the
respondent was allowed to explain its side, there was
no violation of due process.54
The respondent, for its part, maintains that the resort
to the best evidence obtainable method was illegal. In
the first place, the respondent argues, the EIIB agents
are not duly authorized to undertake examination of the
taxpayer’s accounting records for internal revenue tax
purposes. Hence, the respondent’s failure to accede to
their demands to show its books of accounts and other
accounting records cannot justify resort to the use of
the best evidence obtainable method.55 Secondly,
when a taxpayer fails to submit its tax records upon
demand by the BIR officer, the remedy is not to assess
him and resort to the best evidence obtainable rule, but
to punish the taxpayer according to the provisions of
the Tax Code.56
In any case, the respondent argues that the
photocopies of import entries cannot be used in making
the assessment because they were not properly
authenticated, pursuant to the provisions of Sections
2457 and 2558of Rule 132 of the Rules of Court. It avers
that while the CTA is not bound by the technical rules
of evidence, it is bound by substantial rules.59 The
respondent points out that the petitioner did not even
secure a certification of the fact of loss of the original
documents from the custodian of the import entries. It
simply relied on the report of the EIIB agents that the
import entry documents were no longer available
because they were eaten by termites. The respondent
posits that the two collectors of the Bureau of Customs
never authenticated the xerox copies of the import
entries; instead, they only issued certifications stating
therein the import entry numbers which were
processed by their office and the date the same were
released.60
The respondent argues that it was not necessary for it
to show the correct assessment, considering that it is
questioning the assessments not only because they
are erroneous, but because they were issued without
factual basis and in patent violation of the assessment
procedures laid down in the NIRC of 1977, as
amended.61 It is also pointed out that the petitioner
failed to use the tax returns filed by the respondent in
computing the deficiency taxes which is contrary to
law;62 as such, the deficiency assessments constituted
deprivation of property without due process of law.63
Central to the second issue is Section 16 of the NIRC
of 1977, as amended,64 which provides that the
Commissioner of Internal Revenue has the power to
make assessments and prescribe additional
requirements for tax administration and enforcement.
Among such powers are those provided in paragraph
(b) thereof, which we quote:
(b) Failure to submit required returns,
statements, reports and other documents. –
When a report required by law as a basis for
the assessment of any national internal
revenue tax shall not be forthcoming within the
time fixed by law or regulation or when there is
reason to believe that any such report is false,
incomplete or erroneous, the Commissioner
shall assess the proper tax on the best
evidence obtainable.
In case a person fails to file a required return or
other document at the time prescribed by law,
or willfully or otherwise files a false or
fraudulent return or other document, the
Commissioner shall make or amend the return
from his own knowledge and from such
information as he can obtain through testimony
or otherwise, which shall be prima facie correct
and sufficient for all legal purposes.65
This provision applies when the Commissioner of
Internal Revenue undertakes to perform her
administrative duty of assessing the proper tax against
a taxpayer, to make a return in case of a taxpayer’s
failure to file one, or to amend a return already filed in
the BIR.
The petitioner may avail herself of the best evidence or
other information or testimony by exercising her power
or authority under paragraphs (1) to (4) of Section 7 of
the NIRC:
(1) To examine any book, paper, record or
other data which may be relevant or material to
such inquiry;
(2) To obtain information from any office or
officer of the national and local governments,
government agencies or its instrumentalities,
including the Central Bank of the Philippines
and government owned or controlled
corporations;
(3) To summon the person liable for tax or
required to file a return, or any officer or
employee of such person, or any person
having possession, custody, or care of the
books of accounts and other accounting
records containing entries relating to the
business of the person liable for tax, or any
other person, to appear before the
Commissioner or his duly authorized
representative at a time and place specified in
 the summons and to produce such books,
papers, records, or other data, and to give
testimony;
(4) To take such testimony of the person
concerned, under oath, as may be relevant or
material to such inquiry; …66
The "best evidence" envisaged in Section 16 of the
1977 NIRC, as amended, includes the corporate and
accounting records of the taxpayer who is the subject
of the assessment process, the accounting records of
other taxpayers engaged in the same line of business,
including their gross profit and net profit sales.67 Such
evidence also includes data, record, paper, document
or any evidence gathered by internal revenue officers
from other taxpayers who had personal transactions or
from whom the subject taxpayer received any income;
and record, data, document and information secured
from government offices or agencies, such as the SEC,
the Central Bank of the Philippines, the Bureau of
Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or
material records and data in the person of the taxpayer.
It places no limit or condition on the type or form of the
medium by which the record subject to the order of the
BIR is kept. The purpose of the law is to enable the BIR
to get at the taxpayer’s records in whatever form they
may be kept. Such records include computer tapes of
the said records prepared by the taxpayer in the course
of business.68 In this era of developing information-
storage technology, there is no valid reason to
immunize companies with computer-based, record-
keeping capabilities from BIR scrutiny. The standard is
not the form of the record but where it might shed light
on the accuracy of the taxpayer’s return.
In Campbell, Jr. v. Guetersloh,69 the United States
(U.S.) Court of Appeals (5th Circuit) declared that it is
the duty of the Commissioner of Internal Revenue to
investigate any circumstance which led him to believe
that the taxpayer had taxable income larger than
reported. Necessarily, this inquiry would have to be
outside of the books because they supported the return
as filed. He may take the sworn testimony of the
taxpayer; he may take the testimony of third parties; he
may examine and subpoena, if necessary, traders’ and
brokers’ accounts and books and the taxpayer’s book
accounts. The Commissioner is not bound to follow any
set of patterns. The existence of unreported income
may be shown by any practicable proof that is available
in the circumstances of the particular situation. Citing
its ruling in Kenney v. Commissioner,70 the U.S.
appellate court declared that where the records of the
taxpayer are manifestly inaccurate and incomplete, the
Commissioner may look to other sources of information
to establish income made by the taxpayer during the
years in question.71
We agree with the contention of the petitioner that the
best evidence obtainable may consist of hearsay
evidence, such as the testimony of third parties or
accounts or other records of other taxpayers similarly
circumstanced as the taxpayer subject of the
investigation, hence, inadmissible in a regular
proceeding in the regular courts.72Moreover, the
general rule is that administrative agencies such as the
BIR are not bound by the technical rules of evidence. It
can accept documents which cannot be admitted in a
judicial proceeding where the Rules of Court are strictly
observed. It can choose to give weight or disregard
such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section
16 of the 1977 NIRC, as amended, does not include
mere photocopies of records/documents. The
petitioner, in making a preliminary and final tax
deficiency assessment against a taxpayer, cannot
anchor the said assessment on mere machine copies
of records/documents. Mere photocopies of the
Consumption Entries have no probative weight if
offered as proof of the contents thereof. The reason for
this is that such copies are mere scraps of paper and
are of no probative value as basis for any deficiency
income or business taxes against a taxpayer. Indeed,
in United States v. Davey,73 the U.S. Court of Appeals
(2nd Circuit) ruled that where the accuracy of a
taxpayer’s return is being checked, the government is
entitled to use the original records rather than be forced
to accept purported copies which present the risk of
error or tampering.74
In Collector of Internal Revenue v. Benipayo,75 the
Court ruled that the assessment must be based on
actual facts. The rule assumes more importance in this
case since the xerox copies of the Consumption
Entries furnished by the informer of the EIIB were
furnished by yet another informer. While the EIIB tried
to secure certified copies of the said entries from the
Bureau of Customs, it was unable to do so because the
said entries were allegedly eaten by termites. The
Court can only surmise why the EIIB or the BIR, for that
matter, failed to secure certified copies of the said
entries from the Tariff and Customs Commission or
from the National Statistics Office which also had
copies thereof. It bears stressing that under Section
1306 of the Tariff and Customs Code, the Consumption
Entries shall be the required number of copies as
prescribed by regulations.76 The Consumption Entry is
accomplished in sextuplicate copies and quadruplicate
copies in other places. In Manila, the six copies are
distributed to the Bureau of Customs, the Tariff and
Customs Commission, the Declarant (Importer), the
Terminal Operator, and the Bureau of Internal
Revenue. Inexplicably, the Commissioner and the BIR
personnel ignored the copy of the Consumption Entries
filed with the BIR and relied on the photocopies
supplied by the informer of the EIIB who secured the
same from another informer. The BIR, in preparing and
issuing its preliminary and final assessments against
the respondent, even ignored the records on the
investigation made by the District Revenue officers on
the respondent’s importations for 1987.
The original copies of the Consumption Entries were of
prime importance to the BIR. This is so because such
entries are under oath and are presumed to be true and
correct under penalty of falsification or perjury.
Admissions in the said entries of the importers’
documents are admissions against interest and
presumptively correct.77
In fine, then, the petitioner acted arbitrarily and
capriciously in relying on and giving weight to the
machine copies of the Consumption Entries in fixing
the tax deficiency assessments against the
respondent.
The rule is that in the absence of the accounting
records of a taxpayer, his tax liability may be
determined by estimation. The petitioner is not required
to compute such tax liabilities with mathematical
exactness. Approximation in the calculation of the
taxes due is justified. To hold otherwise would be
tantamount to holding that skillful concealment is an
invincible barrier to proof.78 However, the rule does not
apply where the estimation is arrived at arbitrarily and
capriciously.79
We agree with the contention of the petitioner that, as
a general rule, tax assessments by tax examiners are
presumed correct and made in good faith. All
presumptions are in favor of the correctness of a tax
assessment. It is to be presumed, however, that such
assessment was based on sufficient evidence. Upon
the introduction of the assessment in evidence, a prima
facie case of liability on the part of the taxpayer is
made.80 If a taxpayer files a petition for review in the
CTA and assails the assessment, the prima
facie presumption is that the assessment made by the
BIR is correct, and that in preparing the same, the BIR
personnel regularly performed their duties. This rule for
tax initiated suits is premised on several factors other
than the normal evidentiary rule imposing proof
obligation on the petitioner-taxpayer: the presumption
of administrative regularity; the likelihood that the
taxpayer will have access to the relevant information;
and the desirability of bolstering the record-keeping
requirements of the NIRC.81
However, the prima facie correctness of a tax
assessment does not apply upon proof that an
assessment is utterly without foundation, meaning it is
arbitrary and capricious. Where the BIR has come out
with a "naked assessment," i.e., without any foundation
character, the determination of the tax due is without
rational basis.82 In such a situation, the U.S. Court of
Appeals ruled83 that the determination of the
Commissioner contained in a deficiency notice
disappears. Hence, the determination by the CTA must
rest on all the evidence introduced and its ultimate
determination must find support in credible evidence.
The issue that now comes to fore is whether the tax
deficiency assessment against the respondent based
on the certified copies of the Profit and Loss Statement
submitted by the respondent to the SEC in 1987 and
1988, as well as certifications of Tomas and
Danganan, is arbitrary, capricious and illegal. The CTA
ruled that the respondent failed to overcome the prima
facie correctness of the tax deficiency assessment
issued by the petitioner, to wit:
The issue should be ruled in the affirmative as
petitioner has failed to rebut the validity or
correctness of the aforementioned tax
assessments. It is incongruous for petitioner to
prove its cause by simply drawing an inference
unfavorable to the respondent by attacking the
source documents (Consumption Entries)
which were the bases of the assessment and
which were certified by the Chiefs of the
Collection Division, Manila International
Container Port and the Port of Manila, as
having been processed and released in the
name of the petitioner after payment of duties
and taxes and the duly certified copies of
Financial Statements secured from the
Securities and Exchange Commission. Any
such inference cannot operate to relieve
petitioner from bearing its burden of proof and
this Court has no warrant of absolution. The
Court should have been persuaded to grant the
reliefs sought by the petitioner should it have
presented any evidence of relevance and
competence required, like that of a certification
from the Bureau of Customs or from any other
agencies, attesting to the fact that those
consumption entries did not really belong to
them.
The burden of proof is on the taxpayer
contesting the validity or correctness of an
assessment to prove not only that the
Commissioner of Internal Revenue is wrong
but the taxpayer is right (Tan Guan v. CTA, 19
SCRA 903), otherwise, the presumption in
favor of the correctness of tax assessment
stands (Sy Po v. CTA, 164 SCRA 524). The
burden of proving the illegality of the
assessment lies upon the petitioner alleging it
 to be so. In the case at bar, petitioner miserably
failed to discharge this duty.84
We are not in full accord with the findings and
ratiocination of the CTA. Based on the letter of the
petitioner to the respondent dated December 10, 1993,
the tax deficiency assessment in question was based
on (a) the findings of the agents of the EIIB which was
based, in turn, on the photocopies of the Consumption
Entries; (b) the Profit and Loss Statements of the
respondent for 1987 and 1988; and (c) the
certifications of Tomas and Danganan dated August 7,
1990 and August 22, 1990:
In reply, please be informed that after a
thorough evaluation of the attending facts, as
well as the laws and jurisprudence involved,
this Office holds that you are liable to the
assessed deficiency taxes. The conclusion
was arrived at based on the findings of agents
of the Economic Intelligence & Investigation
Bureau (EIIB) and of our own examiners who
have painstakingly examined the records
furnished by the Bureau of Customs and the
Securities & Exchange Commission (SEC).
The examination conducted disclosed that
while your actual sales for 1987 amounted
to P110,731,559.00, you declared for taxation
purposes, as shown in the Profit and Loss
Statements, the sum of P47,698,569.83 only.
The difference, therefore, of P63,032,989.17
constitutes as undeclared or unrecorded sales
which must be subjected to the income and
sales taxes.
You also argued that our assessment has no
basis since the alleged amount of
underdeclared importations were lifted from
uncertified or unauthenticated xerox copies of
consumption entries which are not admissible
in evidence. On this issue, it must be
considered that in letters dated August 7 and
22, 1990, the Chief and Acting Chief of the
Collection Division of the Manila International
Container Port and Port of Manila, respectively,
certified that the enumerated consumption
entries were filed, processed and released
from the port after payment of duties and taxes.
It is noted that the certification does not touch
on the genuineness, authenticity and
correctness of the consumption entries which
are all xerox copies, wherein the figures therein
appearing may have been tampered which
may render said documents inadmissible in
evidence, but for tax purposes, it has been held
that the Commissioner is not required to make
his determination (assessment) on the basis of
evidence legally admissible in a formal
proceeding in Court (Mertens, Vol. 9, p. 214,
citing Cohen v. Commissioner). A statutory
notice may be based in whole or in part upon
admissible evidence (Llorente v.
Commissioner, 74 TC 260
(1980); Weimerskirch v. Commissioner, 67 TC
672 (1977); and Rosano v. Commissioner, 46
TC 681 (1966). In the case also
of Weimerskirch v. Commissioner (1977), the
assessment was given due course in the
presence of admissible evidence as to how the
Commissioner arrived at his determination,
although there was no admissible evidence
with respect to the substantial issue of whether
the taxpayer had unreported or undeclared
income from narcotics sale. …85
Based on a Memorandum dated October 23, 1990 of
the IIPO, the source documents for the actual cost of
importation of the respondent are the machine copies
of the Consumption Entries from the informer which the
IIPO claimed to have been certified by Tomas and
Danganan:
The source documents for the total actual cost
of importations, abovementioned, were the
different copies of Consumption Entries, Series
of 1987, filed by subject with the Bureau of
Customs, marked Annexes "F-1" to "F-68." The
total cost of importations is the sum of the
Landed Costs and the Advance Sales Tax as
shown in the annexed entries. These entries
were duly authenticated as having been
processed and released, after payment of the
duties and taxes due thereon, by the Chief,
Collection Division, Manila International
Container Port, dated August 7, 1990, "Annex-
G," and the Port of Manila, dated August 22,
1990, "Annex-H." So, it was established that
subject-importations, mostly resins, really
belong to HANTEX TRADING CO., INC.86
It also appears on the worksheet of the IIPO, as culled
from the photocopies of the Consumption Entries from
its informer, that the total cost of the respondent’s
importation for 1987 was P105,761,527.00. Per the
report of Torres and Filamor, they also relied on the
photocopies of the said Consumption Entries:
The importations made by taxpayer verified by
us from the records of the Bureau of Customs
and xerox copies of which are hereto attached
shows the big volume of importations made
and not declared in the income tax return filed
by taxpayer.
Based on the above findings, it clearly shows
that a prima facie case of fraud exists in the
herein transaction of the taxpayer, as a
 consequence of which, said transaction has
not been possibly entered into the books of
accounts of the subject taxpayer.87
In fine, the petitioner based her finding that the 1987
importation of the respondent was underdeclared in the
amount of P105,761,527.00 on the worthless machine
copies of the Consumption Entries. Aside from such
copies, the petitioner has no other evidence to prove
that the respondent imported goods
costing P105,761,527.00. The petitioner cannot find
solace on the certifications of Tomas and Danganan
because they did not authenticate the machine copies
of the Consumption Entries, and merely indicated
therein the entry numbers of Consumption Entries and
the dates when the Bureau of Customs released the
same. The certifications of Tomas and Danganan do
not even contain the landed costs and the advance
sales taxes paid by the importer, if any. Comparing the
certifications of Tomas and Danganan and the
machine copies of the Consumption Entries, only 36 of
the entry numbers of such copies are included in the
said certifications; the entry numbers of the rest of the
machine copies of the Consumption Entries are not
found therein.
Even if the Court would concede to the petitioner’s
contention that the certification of Tomas and
Danganan authenticated the machine copies of the
Consumption Entries referred to in the certification, it
appears that the total cost of importations inclusive of
advance sales tax is only P64,324,953.00 – far from
the amount of P105,716,527.00 arrived at by the EIIB
and the BIR,88 or even the amount of P110,079,491.61
arrived at by Deputy Commissioner Deoferio, Jr.89 As
gleaned from the certifications of Tomas and
Danganan, the goods covered by the Consumption
Entries were released by the Bureau of Customs, from
which it can be presumed that the respondent must
have paid the taxes due on the said importation. The
petitioner did not adduce any documentary evidence to
prove otherwise.
Thus, the computations of the EIIB and the BIR on the
quantity and costs of the importations of the
respondent in the amount of P105,761,527.00 for 1987
have no factual basis, hence, arbitrary and capricious.
The petitioner cannot rely on the presumption that she
and the other employees of the BIR had regularly
performed their duties. As the Court held in Collector of
Internal Revenue v. Benipayo,90 in order to stand
judicial scrutiny, the assessment must be based on
facts. The presumption of the correctness of an
assessment, being a mere presumption, cannot be
made to rest on another presumption.
Moreover, the uncontroverted fact is that the BIR
District Revenue Office had repeatedly examined the
1987 books of accounts of the respondent showing its
importations, and found that the latter had minimal
business tax liability. In this case, the presumption that
the District Revenue officers performed their duties in
accordance with law shall apply. There is no evidence
on record that the said officers neglected to perform
their duties as mandated by law; neither is there
evidence aliunde that the contents of the 1987 and
1988 Profit and Loss Statements submitted by the
respondent with the SEC are incorrect.
Admittedly, the respondent did not adduce evidence to
prove its correct tax liability. However, considering that
it has been established that the petitioner’s
assessment is barren of factual basis, arbitrary and
illegal, such failure on the part of the respondent
cannot serve as a basis for a finding by the Court that
it is liable for the amount contained in the said
assessment; otherwise, the Court would thereby be
committing a travesty.
On the disposition of the case, the Court has two
options, namely, to deny the petition for lack of merit
and affirm the decision of the CA, without prejudice to
the petitioner’s issuance of a new assessment against
the respondent based on credible evidence; or, to
remand the case to the CTA for further proceedings, to
enable the petitioner to adduce in evidence certified
true copies or duplicate original copies of the
Consumption Entries for the respondent’s 1987
importations, if there be any, and the correct tax
deficiency assessment thereon, without prejudice to
the right of the respondent to adduce controverting
evidence, so that the matter may be resolved once and
for all by the CTA. In the higher interest of justice to
both the parties, the Court has chosen the latter option.
After all, as the Tax Court of the United States
emphasized in Harbin v. Commissioner of Internal
Revenue,91taxation is not only practical; it is vital. The
obligation of good faith and fair dealing in carrying out
its provision is reciprocal and, as the government
should never be over-reaching or tyrannical, neither
should a taxpayer be permitted to escape payment by
the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is
GRANTED. The Decision of the Court of Appeals is
SET ASIDE. The records are REMANDED to the Court
of Tax Appeals for further proceedings, conformably
with the decision of this Court. No costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
 G.R. No. 197590 November 24, 1998
2014 [P]133,532.36 [P] 191,915.10 [P] 325,447.46 [P]55,834.00< [P] 2
1999 142,550.50
BUREAU OF INTERNAL REVENUE, as represented 260,961.78 403,512.28 79,254.00 324,
by the COMMISSIONER OF 2000 INTERNAL
141,450.00 213,740.67 355,190.67 64,757.21 290,
REVENUE,Petitioner,
vs. 2001 151,500.00 233,396.62 384,896.62 73,669.00 311,
COURT OF APPEALS, SPOUSES ANTONIO
VILLAN MANLY, and RUBY 2002 ONG
148,500.00 186,106.62 334,606.62 58,581.00 276,
MANLY, Respondents. 2003 148,100.00 152,817.53 300.917.93 48,729.00 252,

DECISION
[Total] P865,633.26 P1,238,938.32 P2,104,571.58 P380,824.21 P1,7
DEL CASTILLO, J.:

There is grave abuse of discretion when the
determination of probable cause is exercised in an
arbitrary or despotic manner, due to passion or
personal hostility, so patent and gross as to amount to
an evasion of a positive duty or a virtual refusal to
perform a duty enjoined by law.1 This Petition for
Certiorari2 under Rule 65 of the Rules of Court assails
the Decision3 dated October 28, 2010 and the
Resolution4 dated May 10, 2011 of the Court of
Appeals (CA) in CA-G.R. SP No. 112479.
Factual Antecedents
and that despite his modestincome for the said years,
respondent spouses were able to purchase in cash the
following properties:
1) a luxurious vacation house in Tagaytay City
valuedat P17,511,010.0013 in the year 2000,
evidenced by a Deed of Absolute Sale14 dated
October 24, 2000;
2) a Toyota RAV4 for P1,350,000.00 in the
year 2001, evidenced by a Sales
Invoice15 dated June 28, 2001; and

Respondent Antonio Villan Manly (Antonio) is a
stockholder and the Executive Vice-President of
Standard Realty Corporation, a family-owned
corporation.5 He is also engaged in rental
business.6 His spouse, respondent Ruby Ong Manly, is
a housewife.7
On April 27, 2005, petitioner Bureau of Internal
Revenue (BIR) issued Letter of Authority No. 2001
000123878authorizing its revenue officers to
investigate respondent spouses’ internal revenue tax
liabilities for taxable year 2003 and prior years.
On June 6, 2005, petitioner issued a letter9 to
respondent spouses requiring them to submit
documentary evidence to substantiate the source of
their cash purchase of a 256-square meter log cabin in
Tagaytay City worth P17,511,010.00. Respondent
spouses, however, failedto comply with the letter.10
On June 23, 2005, the revenue officers executed a
Joint Affidavit11 alleging that respondent Antonio’s
reported or declared annual income for the taxable
years 1998-2003 are as follows:
Net Profit
able Rental Business
Total sources
mpensation (1169-73 G. Tax Due/paid
of Funds
me Masangkay St.,
Tondo, Manila
3) a Toyota Prado for P2,000,000.00 in 2003,
evidenced by a Deed of Sale16 dated July 9,
2003.17
Since respondent spouses failed to showthe source of
their cash purchases, the revenue officers concluded
that respondent Antonio’s Income Tax Returns (ITRs)
for taxable years 2000, 2001,and 2003 were
underdeclared.18And since the under declaration
exceeded 30% of the reported or declared income, it
was considered a prima facie evidence of fraud with
intent to evade the payment of proper taxes due to the
government.19 The revenue officers, thus,
recommended the filing of criminal cases against
respondent spouses for failing to supply correct and
accurate information intheir ITRs for the years 2000,
2001, and 2003, punishable under Sections 25420 and
25521in relation to Section 248(B)22 of Republic Act No.
8424 or the "Tax Reform Act of 1997," hereinafter
referred to as the National Internal Revenue Code
(NIRC).23
Respondent spouses, in their Joint Counter-
Affidavit,24 denied the accusations hurled against them
and alleged that they used their accumulated savings
from their earnings for the past24 years in purchasing
the properties.25They also contended that the criminal
complaint should be dismissed because petitioner
CASH
failed to issue a deficiency assessment against them.26
In response, the revenue officers executed a Joint
Reply-Affidavit.27 Respondent spouses, in turn,
executed a Joint Rejoinder-Affidavit.28
Ruling of the State Prosecutor
On August 31, 2006, State ProsecutorMa. Cristina A.
Montera-Barot issued a Resolution29 in I.S. No. 2005-
573 recommending the filing of criminal
charges30 against respondent spouses, to wit:
WHEREFORE, premises considered, it is respectfully
recommended that [respondent] spouses ANTONIO
VILLAN MANLY and RUBY ONG MANLY be charged
[with] the following:
(1) Three (3) counts of Violation of Section 254
– Attempt to Evade or Defeat Tax of the NIRC
for taxable years 2000, 2001, and 2003;
(2) Three (3) counts for Violation of Section 255
of the NIRC – Failure to Supply Correct and
Accurate Information for taxable years 2000,
2001 and 2003;
(3) Three counts of Violation ofSection 255 of
the NIRC – Failure to Pay, as a consequence
of [respondent spouses’] failure to supply
correct and accurate information on their tax
returns for taxable years 2000, 2001, and
2003.31
Respondent spouses moved for reconsideration but 32
the State Prosecutor denied the same in a
Resolution33dated November 29, 2007.
Ruling of the Secretary of Justice
On appeal to the Secretary of Justice via a Petition for
Review,34 Acting Justice Secretary Agnes VST
Devanadera (Devanadera) reversed the Resolution of
the State Prosecutor. She found no willfulfailure to pay
or attempt to evade or defeat the tax on the part of
respondent spouses as petitioner allegedly failed to
specify the amount of tax due and the likely source of
income from which the same was based.35 She also
pointed out petitioner’s failure to issue a deficiency tax
assessment against respondentspouses which is a
prerequisite to the filing of a criminal case for tax
evasion.36 The dispositive portion of the
Resolution37 dated July 27, 2009 reads:
WHEREFORE, the assailed Resolution is hereby
REVERSED and SET ASIDE. The Chief State
Prosecutor ishereby directed to withdraw the
Information filed against [respondent spouses] Antonio
Villan Manly and Ruby Ong Manly, if one has been
filed, and report the action taken thereon within ten (10)
days from receipt hereto.
SO ORDERED.38
Petitioner sought reconsideration39 but Acting Justice
Secretary Devanadera denied the same in a
Resolution40dated November 5, 2009.
Ruling of the Court of Appeals
Unfazed, petitioner filed a Petition for Certiorari41 with
the CA imputing grave abuse of discretion on the part
of Acting Justice Secretary Devanadera in finding no
probable cause to indict respondent spouses for
willfulattempt to evade or defeat tax and willful failure
to supply correct and accurate information for taxable
years 2000, 2001 and 2003.
On October 28, 2010, the CA rendered the assailed
Decision42 dismissing the Petition for Certiorari.
Although it disagreed that anassessment is a condition
sine qua nonin filing a criminal case for tax evasion, the
CA, nevertheless, ruled that there was no probable
cause to charge respondent spouses as petitioner
allegedly failed to state their exact tax liability and to
show sufficient proof of their likely source of
income.43 The CA further said that before one could be
prosecuted for tax evasion,the fact that a tax is due
must first be proved.44 Thus:
IN LIGHT OF ALL THE FOREGOING, the instant
petition is hereby DENIED, and the assailed Resolution
of the Secretary of Justice dated July 27, 2009
dismissing I.S. No. 2005-573 against private
respondents, AFFIRMED. However, the dismissal of
the instant case is without prejudice to the refiling by
the BIR of a complaint sufficient in form and substance
before the appropriate tribunal.
SO ORDERED.45
The CA likewise denied petitioner’s Motion for
Reconsideration46 in its Resolution47 dated May 10,
2011.
Issues
Hence, petitioner filed the instant Petition contending
that the CA committed grave abuse of discretion
amounting to lackor excess of jurisdiction in holding
that:
I. A CATEGORICAL FINDING OF THE EXACT
AMOUNT OF TAX DUE FROM THE PRIVATE
RESPONDENT SHOULD BE SPECIFICALLY
ALLEGED [AND THAT] SINCE THE BIR
 FAILED TO MAKE SUCH FINDINGS
THEYCONSEQUENTLYFAILED TO BUILD A
CASE FOR TAX EVASION AGAINST
[RESPONDENT SPOUSES] DESPITE THE
WELL ESTABLISHED DOCTRINE THAT IN
TAX EVASION CASES, A PRECISE
COMPUTATION OF THE [TAX] DUE IS NOT
NECESSARY.
II. THE BIR FAILED TO SHOW SUFFICIENT
PROOF OF A LIKELY SOURCE OF
[RESPONDENT SPOUSES’] INCOME
DESPITE THE FACT THAT THE BIR WAS
SUFFICIENTLY ABLE TO SHOW PROOF OF
SUCH INCOME.48
Petitioner’s Arguments
Petitioner imputes grave abuse of discretion on the part
of the CA in affirming the dismissal of the criminal
cases against respondent spouses. Petitioner
contends that in filing a criminal case for tax evasion, a
prior computation or assessment of tax is not required
because the crime is complete when the violator
knowingly and willfully filed a fraudulent return with
intentto evade a part or all of the tax.49 In this case, an
analysis of respondent spouses’ income and
expenditure shows that their cash expenditure is
grossly disproportionate to their reported or declared
income, leading petitioner to believe that they under
declared their income.50 In computing the unreported or
undeclared income, which was likely sourced from
respondent Antonio’s rental business,51 petitioner used
the expenditure method of reconstructing income, a
method used to determine a taxpayer’s income tax
liability when his records are inadequate or
inaccurate.52 And since respondent spouses failed to
explain the alleged unreported or undeclared income,
petitioner asserts that criminal charges for tax evasion
should be filed against them.
Respondent spouses’ Arguments
Respondent spouses, on the other hand, argue that the
instant Petition should be dismissed as petitioner
availed of the wrong remedy in filing a Petition for
Certiorari under Rule 65 of the Rules of Court.53 And
even if the Petition is given due course, the same
should still be dismissed because no grave abuse of
discretion can be attributed to the CA.54 They maintain
that petitioner miserably failed to prove that a tax is
actually due.55 Neither was it able to show the source of
the alleged unreported or undeclared income as
required by Revenue Memorandum Order No. 15-95,
Guidelines and Investigative Procedures in the
Development of Tax Fraud Cases for Internal Revenue
Officers.56 As to the method used by petitioner, they
claim that it completely ignored their lifetime savings
because it was limited to the years 1998-2003.57
Our Ruling
The Petition is meritorious.
Before discussing the merits of thiscase, we shall first
discuss the procedural matter raised by respondent
spouses that petitioner availed of the wrong remedy in
filing a Petition for Certiorari under Rule 65 of the Rules
of Court, instead of a Petition for Review on Certiorari
under Rule 45.
Indeed, the remedy of a party aggrieved by a decision,
final order, or resolution of the CA is to file a Petition
for Review on Certiorari under Rule 45 of the Rules of
Court, which is a continuation of the appellate process
over the original case.58 And as a rule, if the remedy of
an appeal is available, an action for certiorari under
Rule 65 of the Rules of Court, which is anoriginal or
independent action based on grave abuse of discretion
amounting to lack or excess of jurisdiction, will not
prosper59 because it is not a substitute for a lost
appeal.60
There are, however, exceptions to this rule, to wit: 1)
when public welfare and the advancement of public
policy dictate; 2) when the broader interest of justice so
requires; 3) when the writs issued are null and void; 4)
when the questioned order amounts to an oppressive
exercise of judicial authority; 5) when, for persuasive
reasons, the rules may be relaxed to relieve a litigant
of an injustice not commensurate with his failure to
comply with the prescribed procedure; 6) when the
judgment or order is attended by grave abuse of
discretion; or 7) in other meritorious cases.61
In this case, after considering the arguments raised by
the parties, we find that there is reason to give due
course to the instant Petition for Certiorari as petitioner
was able to convincingly show that the CA committed
grave abuse of discretion when it affirmed the
dismissal of the criminal charges against respondent
spouses despite the fact that there isprobable cause
toindict them.
Although the Court has consistently adopted the policy
of non-interference in the conduct and determination of
probable cause,62 which is exclusively within the
competence of the Executive Department, through the
Secretary of Justice,63 judicial intrusion, in the form of
judicial review, is allowed when there is proof that the
Executive Department gravely abused its discretion in
making its determination and in arriving atthe
conclusion it reached.64
Grave abuse of discretion is defined as a capricious
and whimsical exercise of judgment tantamount to lack
or excess of jurisdiction, a blatant abuse of authority so
grave and so severe as to deprive the court of its very
power to dispense justice, or an exercise of powerin an
arbitrary and despotic manner, due to passion,
prejudice or personal hostility, sopatent and gross as
to amount to an evasion or to a unilateral refusal to
perform the duty enjoined or to act in contemplation of
the law.65 Such is the situation in this case.
Having resolved the foregoing procedural matter, we
shall now proceed to determine the main issue in this
case.
Sections 254 and 255 of the NIRC pertinently provide:
SEC. 254. Attempt to Evade or Defeat Tax. – Any
person who willfully attempts in any manner to evade
or defeat any tax imposed under this Code or the
payment thereof shall, in addition to other penalties
provided by law, upon conviction thereof, be punished
must first be proved before one can be prosecuted for
tax evasion.70
In the case of income, for it to be taxable, there must
be a gain realized or received by the taxpayer, which is
not excluded by law or treaty from taxation.71 The
government is allowed to resort to all evidence or
resources available to determine a taxpayer’s income
and to use methods to reconstruct his income.72 A
method commonly used by the government isthe
expenditure method, which is a method of
reconstructing a taxpayer’s income by deducting the
aggregate yearly expenditures from the declared
yearly income.73 The theory of this method is that when
the amount of the money that a taxpayer spends during
a given year exceeds his reported or declared income
and the source of such money is unexplained, it may
be inferred that such expenditures represent
unreported or undeclared income.74
In the case at bar, petitioner used this method to
determine respondent spouses’ tax liability. Petitioner
1âwphi 1

by a fine of not less than Thirty thousand pesos deducted respondent spouses’ major cash acquisitions
(P30,000.00) but not more than One hundred thousand from their available funds. Thus:
pesos (P100,000.00) and suffer imprisonment of not
less than two (2) years but not more than four (4) years:
Provided, That the conviction or acquittal obtained
under this Section shall not be a bar to the filing of a Cash Loan With Funds Major Unex
civil suit for the collection of taxes. s dra availa Acqui plaine
(busi wal ble sition d
ness of s Sourc
SEC. 255. Failure to File Return, Supply Correct and ) Cap es of
Accurate Information, Pay Tax, Withhold and Remit ital Funds
Tax and Refund Excess Taxes Withheld on
Compensation. – Any person required under this Code 19 P 900, 130, 1,300,
or by rules and regulations promulgated thereunder to 98 269,6 000. 638. 252.44
pay any tax, make a return, keep any record, or supply 13.46 00 98
correct and accurate information, who willfully fails to
pay such tax, make such return, keep such record, or 19 324,2 (400, 39,2 1,263,
supply such correct and accurate information, or 99 58.28 000. 81.8 792.59
withhold or remit taxes withheld, or refund excess 00) 7
taxes withheld on compensation at the time or times
required by law or rules and regulations shall, in 20 290,4 - 102, 1,656, 17,51 (15,8
addition to other penalties provided by law, upon 00 33.46 024. 251.02 1,010 54,75
conviction thereof, be punished by a fine of not less 97 .00 8.98)
than Ten thousand pesos (P10,000.00) and suffer 20 311,2 - 406, 717,53 1,350 (632,
imprisonment of not less than one (1) year but not more 01 27.62 309. 7.32 ,000. 462.6
than ten (10) years. 70 00 8)

In Ungab v. Judge Cusi, Jr.,66 we ruled that tax evasion 20 276,0 (100, 184, 360,11
is deemed complete when the violator has knowingly 02 25.62 000. 092. 7.65
and willfully filed a fraudulent return with intent to evade 00) 03
and defeat a part or all of the tax.67 Corollarily, an
assessment of the tax deficiency is notrequired in a 20 252,1 - 245, 857,47 2,000 (1,14
criminal prosecution for tax evasion.68 However, in 03 88.93 167. 4.55 ,000. 2,525.
Commissioner of Internal Revenue v. Court of 97 00 45)
Appeals,69 we clarified that although a deficiency
assessment is not necessary, the fact that a tax is due
 [T P1,72 20,86 (17,62
7 Acting Justice Secretary Devanadera that petitioner
5

ot 3,747 1,010 9,747. failed to make "a categorical finding of the exact
al: .37 .00 11) amount of tax due from [respondent spouses]" and "to
] show sufficient proof of a likely source of [respondent
spouses’] income that enabled them to purchase the
2000 2001 2003 real and personal properties adverted to x x x."78 We
find otherwise.
Unexplained funds – [P]15, [P]63 [P]
under declaration 854,75 2,462 1,142, The amount of tax due from respondent spouses was
8.98 .68 525.4 specifically alleged in the Complaint-Affidavit.79 The
5 computation, as wellas the method used in determining
the tax liability, was also clearly explained. The
Taxable income [P]15, [P]63 [P]
revenue officers likewise showed that the under
854,75 2,462 1,142,
declaration exceeded 30% of the reported or declared
8.98 .68 525.4
income.
5

Income Tax due thereon: The revenue officers alsoidentified the likely source of
the unreported or undeclared income intheir Reply-
First Php500,000.00 125,00 125,0 125,0 Affidavit. The pertinent portion reads:
0.00 00.00 00.00
In excess of 4,913, 42,38 205,6 7. x x x x
Php500,000.00 522.87 8.06 08.14
[Respondent spouses] are into rental business and the
Total income tax due 4,973, 93,71 281,8 net profit for six (6) years before tax summed only
(net tax paid) 765.66 9.06 79.14 to P1,238,938.32 (an average of more or less
Php200,000.00 annually). We asked respondent
[Antonio] if we can proceed to his rented property to
Add: 50% Surcharge 2,486, 46,85 165,3
882.83 9.53 04.07 [appraise] the earning capacity of the building [for]
lease/ rent, but he declined our proposition. Due to
20% Interest (up to 4,104, 77,33 272,7 such refusal made by the respondent, [petitioner], thru
5/31/2005) - 825 376.29 7.43 51.72 its examiners,took pictures of the subject property and
came up with the findings that indeed the unexplained
funds sought to have been used in acquiring the
[P]11, [P]21 [P] valuable property in Tagaytay x x x came from the
Total Tax Due inclusive 7
565,02 7,916 655,3 6 underdeclaration of rental income.80
of Increments
4.79 .02 69.01
Apparently, the revenue officers considered
respondent Antonio’s rental business to be the likely
source of their unreported or undeclared income due to
2000 2001 2003his unjustified refusal to allow the revenue officers to
Funds [Underdeclaration] [P]15,854,758.98 [P]632,462.68 inspect the building.
[P]1,142,525.45
Funds as per Financial [P]1,656,251.02 [P]717,537.32 [P]817,474.55
Respondent spouses’ defense that they had sufficient
as attached to the Income savings to purchase the properties remains self-
serving at thispoint since they have not yet presented
of underdeclaration 957.27% 88.14% any 77evidence to support this. And since there is no
133.24%
evidence yet to suggest that the money they used to
buy the properties was from an existing fund, it is safe
And since the underdeclaration is more than 30%of to assume that that money is income or a flowof wealth
respondent spouses’ reported or declared income, other than a mere return on capital. It is a basic concept
which under Section 248(B) of the NIRC constitutes as in taxation that income denotes a flow of wealth during
prima facie evidence of false or fraudulent return, a definite period of time, while capital is a fund or
petitioner recommended the filing of criminal cases property existing at one distinct point in time.81
against respondent spouses under Sections 254 and
255, in relation to Section 248(B) of the NIRC. Moreover, by just looking at the tables presented by
petitioner, there is a manifest showing that respondent
The CA, however, found no probable cause to indict spouses had under declared their income. The huge
respondent spouses for tax evasion. It agreed with disparity between respondent Antonio’s reported or
declared annual income for the past several years and A. Montera-Barot in LS. No. 2005-573 finding probable
respondent spouses’ cash acquisitions for the years cause to indict respondent spouses Antonio Villan
2000, 2001, and 2003 cannot be ignored. Infact, it Manly and Ruby Ong Manly for Violation of Sections
makes uswonder how they were able to purchase the 254 and 255 of the National Internal Revenue Code are
properties in cash given respondent Antonio’s meager hereby REINSTATED.
income.
SO ORDERED.
In view of the foregoing,we are convinced that there is
probable cause to indict respondent spouses for tax Republic of the Philippines
evasion aspetitioner was able to show that a tax is due SUPREME COURT
from them. Probable cause, for purposes of filing a Manila
criminal information, is defined as such facts that are
sufficient to engender a well-founded belief that a crime FIRST DIVISION
has been committed, that the accusedis probably guilty EN BANC
thereof, and that he should be held for trial.82 It bears
stressing that the determination of probable cause
G.R. No. 166387 January 19, 2009
does not require actual or absolute certainty, nor clear
and convincing evidence of guilt; it only requires
reasonable belief or probability that more likely than not COMMISSIONER OF INTERNAL
a crime has been committed by the accused.83 REVENUE, Petitioners,
vs.
ENRON SUBIC
In completely disregarding the evidence presented and
POWERCORPORATION, Respondents.
in affirming the ruling of the Acting Justice Secretary
Devanadera that no probable cause exists, we find that
the CA committed grave abuse of discretion amounting RESOLUTION
to lack or excess of jurisdiction. As we have said,
ifthere is grave abuse of discretion, the court may step CORONA, J.:
in and proceed to make its own independent
determination of probable cause as judicial review is In this petition for review on certiorari under Rule 45 of
allowed to ensure that the Executive Department acts the Rules of Court, petitioner Commissioner of Internal
within the permissible bounds of its authority or does Revenue (CIR) assails the November 24, 2004
not gravely abuse the same.84 decision1 of the Court of Appeals (CA) annulling the
formal assessment notice issued by the CIR against
We must make it clear, however, that we are only here respondent Enron Subic Power Corporation (Enron) for
to determine probable cause. As to whether
1âwphi1
failure to state the legal and factual bases for such
respondent spouses are guilty of tax evasion is an assessment.
issue that must be resolved during the trial of the
criminal case, where the quantum of proof required is Enron, a domestic corporation registered with the
proof beyond reasonable doubt. Subic Bay Metropolitan Authority as a freeport
enterprise,2 filed its annual income tax return for the
Before we close, we must stress that our ruling in this year 1996 on April 12, 1997. It indicated a net loss of
case should not be interpreted as an unbridled license P7,684,948. Subsequently, the Bureau of Internal
for our tax officials to engage in fishing expeditions and Revenue, through a preliminary five-day
witch-hunting. They should not abuse their letter,3 informed it of a proposed assessment of an
investigative powers, instead they should exercise the alleged P2,880,817.25 deficiency income tax.4 Enron
same within the bounds of the law. They must properly disputed the proposed deficiency assessment in its first
observe the guidelines in making assessments and protest letter.5
investigative procedures to ensure that the
constitutional rights of the taxpayers are well protected On May 26, 1999, Enron received from the CIR a
as we cannot allow the floodgates to be opened for formal assessment notice6 requiring it to pay the
frivolous and malicious tax suits. alleged deficiency income tax of P2,880,817.25 for the
taxable year 1996. Enron protested this deficiency tax
WHEREFORE, the Petition is hereby GRANTED. The assessment.7
Decision dated October 28, 2010 and the Resolution
dated May 10, 2011 of the Court of Appeals in CA-G.R. Due to the non-resolution of its protest within the 180-
SP No. 112479 are hereby REVERSED and SET day period, Enron filed a petition for review in the Court
ASIDE. The Resolutions dated August 31, 2006 and of Tax Appeals (CTA). It argued that the deficiency tax
November 29, 2007 of State Prosecutor Ma. Cristina assessment disregarded the provisions of Section 228
of the National Internal Revenue Code (NIRC), as
amended,8and Section 3.1.4 of Revenue Regulations
(RR) No. 12-999by not providing the legal and factual
bases of the assessment. Enron likewise questioned
the substantive validity of the assessment.10
In a decision dated September 12, 2001, the CTA
granted Enron’s petition and ordered the cancellation
of its deficiency tax assessment for the year 1996. The
CTA reasoned that the assessment notice sent to
Enron failed to comply with the requirements of a valid
written notice under Section 228 of the NIRC and RR
No. 12-99. The CIR’s motion for reconsideration of the
CTA decision was denied in a resolution dated
November 12, 2001.
The CIR appealed the CTA decision to the CA but the
CA affirmed it. The CA held that the audit working
papers did not substantially comply with Section 228 of
the NIRC and RR No. 12-99 because they failed to
show the applicability of the cited law to the facts of the
assessment. The CIR filed a motion for reconsideration
but this was deemed abandoned when he filed a
motion for extension to file a petition for review in this
Court.
The CIR now argues that respondent was informed of
the legal and factual bases of the deficiency
assessment against it.
We adopt in toto the findings of fact of the CTA, as
affirmed by the CA. In Compagnie Financiere Sucres
et Denrees v. CIR,11 we held:
We reiterate the well-established doctrine that as a
matter of practice and principle, [we] will not set aside
the conclusion reached by an agency, like the CTA,
especially if affirmed by the [CA]. By the very nature of
its function, it has dedicated itself to the study and
consideration of tax problems and has necessarily
developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority
on its part, which is not present here.
The CIR errs in insisting that the notice of assessment
in question complied with the requirements of the NIRC
and RR No. 12-99.
A notice of assessment is:
[A] declaration of deficiency taxes issued to a
[t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or
whose reply to the PAN was found to be without merit.
The Notice of Assessment shall inform the [t]axpayer
of this fact, and that the report of investigation
submitted by the Revenue Officer conducting the audit
shall be given due course.
The formal letter of demand calling for payment of the
taxpayer’s deficiency tax or taxes shall state the fact,
the law, rules and regulations or jurisprudence on
which the assessment is based, otherwise the
formal letter of demand and the notice of
assessment shall be void. (emphasis supplied)12
Section 228 of the NIRC provides that the taxpayer
shall be informed in writing of the law and the facts on
which the assessment is made. Otherwise, the
assessment is void. To implement the provisions of
Section 228 of the NIRC, RR No. 12-99 was enacted.
Section 3.1.4 of the revenue regulation reads:
3.1.4. Formal Letter of Demand and Assessment
Notice. – The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand
calling for payment of the taxpayer’s deficiency tax
or taxes shall state the facts, the law, rules and
regulations, or jurisprudence on which the
assessment is based, otherwise, the formal letter
of demand and assessment notice shall be
void. The same shall be sent to the taxpayer only by
registered mail or by personal delivery. xxx (emphasis
supplied)
It is clear from the foregoing that a taxpayer must be
informed in writing of the legal and factual bases of the
tax assessment made against him. The use of the word
“shall” in these legal provisions indicates the
mandatory nature of the requirements laid down
therein. We note the CTA’s findings:
In [this] case, [the CIR] merely issued a formal
assessment and indicated therein the supposed tax,
surcharge, interest and compromise penalty due
thereon. The Revenue Officers of the [the CIR] in the
issuance of the Final Assessment Notice did not
provide Enron with the written bases of the law and
facts on which the subject assessment is based. [The
CIR] did not bother to explain how it arrived at such an
assessment. Moreso, he failed to mention the specific
provision of the Tax Code or rules and regulations
which were not complied with by Enron.13
Both the CTA and the CA concluded that the deficiency
tax assessment merely itemized the deductions
disallowed and included these in the gross income. It
also imposed the preferential rate of 5% on some items
categorized by Enron as costs. The legal and factual
bases were, however, not indicated.
The CIR insists that an examination of the facts shows
that Enron was properly apprised of its tax deficiency.
During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed
it of the proposed tax deficiency assessment through a
preliminary five-day letter and furnished Enron a copy
of the audit working paper14 allegedly showing in detail
the legal and factual bases of the assessment. The CIR
argues that these steps sufficed to inform Enron of the
laws and facts on which the deficiency tax assessment
was based.
We disagree. The advice of tax deficiency, given by the
CIR to an employee of Enron, as well as the preliminary
five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual
bases of the assessment. These steps were mere
perfunctory discharges of the CIR’s duties in correctly
assessing a taxpayer.15 The requirement for issuing a
preliminary or final notice, as the case may be,
informing a taxpayer of the existence of a deficiency
tax assessment is markedly different from the
requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in
the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which
the deficiency tax assessment was made.
The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand
and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article
228 of the NIRC and RR No. 12-99 would be rendered
nugatory. The alleged “factual bases” in the advice,
preliminary letter and “audit working papers” did not
suffice. There was no going around the mandate of the
law that the legal and factual bases of the assessment
be stated in writing in the formal letter of demand
accompanying the assessment notice.
We note that the old law merely required that the
taxpayer be notified of the assessment made by the
CIR. This was changed in 1998 and the taxpayer must
now be informed not only of the law but also of the facts
on which the assessment is made. Such amendment
16
is in keeping with the constitutional principle that no
person shall be deprived of property without due
process.17 In view of the absence of a fair opportunity
for Enron to be informed of the legal and factual bases
of the assessment against it, the assessment in
question was void. We reiterate our ruling in Reyes v.
Almanzor, et al.:18
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 197515 July 2, 2014
COMMISSIONER OF INTERNAL
REVENUE, Petitioner,
vs.
UNITED SALVAGE AND TOWAGE (PHILS.),
INC., Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari
under Rule 45 of the Revised Rules of Court which
seeks to review, reverse and set aside the Decision1 of
the Court of Tax Appeals En Banc (CTA En Banc),
dated June 27, 2011, in the case entitled
Commissioner of Internal Revenue v. United Salvage
and Towage (Phils.), Inc. (USTP), docketed as C.T.A.
EB No. 662. The facts as culled from the records:
Respondent is engaged in the business of sub-
contracting work for service contractors engaged in
petroleum operations in the Philippines.2 During the
taxable years in question, it had entered into various
contracts and/or sub-contracts with several petroleum
service contractors, such as Shell Philippines
Exploration, B.V. and Alorn Production Philippines for
the supply of service vessels.3
In the course of respondent’s operations, petitioner
found respondent liable for deficiency income tax,
withholding tax, value-added tax (VAT) and
documentary stamp tax (DST) for taxable years
1992,1994, 1997 and 1998.4Particularly, petitioner,
through BIR officials, issued demand letters with
attached assessment notices for withholding tax on
compensation (WTC) and expanded withholding tax
(EWT) for taxable years 1992, 1994 and
1998,5 detailed as follows:

Assessment Notice No. Tax Covered Period Amou

Verily, taxes are the lifeblood of the Government and
so should be collected without unnecessary 25-1-000545-92
hindrance. WTC 1992 P50,42
However, such collection should be25-1-000546-92
made in EWT 1992 P14,07
accordance with law as any arbitrariness will negate
the very reason for the Government itself.034-14-000029-94 EWT 1994 P48,46
034-1-000080-98 EWT 1998 P22,43
WHEREFORE, the petition is hereby DENIED. The
November 24, 2004 decision of the Court of Appeals
isAFFIRMED.
On January 29, 1998 and October 24, 2001, USTP
filed administrative protests against the 1994 and 1998
EWT assessments, respectively.7
On February 21, 2003, USTP appealed by way of
Petition for Review before the Court in action (which
was thereafter raffled to the CTA-Special First Division)
alleging, among others, that the Notices of Assessment
are bereft of any facts, law, rules and regulations or
jurisprudence; thus, the assessments are void and the
right of the government to assess and collect
deficiency taxes from it has prescribed on account of
the failure to issue a valid notice of assessment within
the applicable period.8
During the pendency of the proceedings, USTP moved
to withdraw the aforesaid Petition because it availed of
the benefits of the Tax Amnesty Program under
Republic Act (R.A.) No. 9480.9 Having complied with all
the requirements therefor, the CTA-Special First
Division partially granted the Motion to Withdraw and
declared the issues on income tax, VAT and DST
deficiencies closed and terminated in accordance with
our pronouncement in Philippine Banking Corporation
v. Commissioner of Internal Revenue.10 Consequently,
the case was submitted for decision covering the
remaining issue on deficiency EWT and WTC,
respectively, for taxable years 1992, 1994 and 1998.11
The CTA-Special First Division held that the
Preliminary Assessment Notices (PANs) for deficiency
EWT for taxable years 1994 and 1998 were not
formally offered; hence, pursuant to Section 34, Rule
132 of the Revised Rules of Court, the Court shall
neither consider the same as evidence nor rule on their
validity.12 As regards the Final Assessment Notices
(FANs) for deficiency EWT for taxable years 1994 and
1998, the CTA-Special First Division held that the
same do not show the law and the facts on which the
assessments were based.13 Said assessments were,
therefore, declared void for failure to comply with
Section 228 of the 1997 National Internal Revenue
Code (Tax Code).14 From the foregoing, the only
remaining valid assessment is for taxable year 1992.15
Nevertheless, the CTA-Special First Division declared
that the right of petitioner to collect the deficiency EWT
and WTC, respectively, for taxable year 1992 had
already lapsed pursuant to Section 203 of the Tax
Code.16 Thus, in ruling for USTP, the CTA-Special First
Division cancelled Assessment Notice Nos. 25-1-
00546-92 and 25-1-000545-92, both dated January 9,
1996 and covering the period of 1992, as declared in
its Decision17 dated March 12, 2010, the dispositive
portion of which provides:
WHEREFORE, the instant Petition for Review is
hereby GRANTED. Accordingly, Assessment Notice
No. 25-1-00546-92 dated January 9, 1996 for
deficiency Expanded Withholding Tax and Assessment
Notice No. 25-1-000545 dated January 9, 1996 for
deficiency Withholding Tax on Compensation are
hereby CANCELLED.
SO ORDERED.18
Dissatisfied, petitioner moved to reconsider the
aforesaid ruling. However, in a Resolution19 dated July
15, 2010, the CTA-Special First Division denied the
same for lack of merit.
On August 18, 2010, petitioner filed a Petition for
Review with the CTA En Banc praying that the Decision
of the CTA-Special First Division, dated March 12,
2010,be set aside.20
On June 27, 2011, the CTA En Banc promulgated a
Decision which affirmed with modification the Decision
dated March 12, 2010 and the Resolution dated July
15, 2010 of the CTA-Special First Division, the
dispositive portion of which reads:
WHEREFORE, premises considered, the Petition is
PARTLY GRANTED. The Decision dated March 12,
2010 and the Resolution dated July 15, 2010 are
AFFIRMED with MODIFICATION upholding the 1998
EWT assessment. In addition to the basic EWT
deficiency of P14,496.79, USTP is ordered to pay
surcharge, annual deficiency interest, and annual
delinquency interest from the date due until full
payment pursuant to Section 249 of the 1997 NIRC.
SO ORDERED.21
Hence, the instant petition raising the following issues:
1. Whether or not the Court of Tax Appeals is
governed strictly by the technical rules of
evidence;
2. Whether or not the Expanded Withholding
Tax Assessments issued by petitioner against
the respondent for taxable year 1994 was
without any factual and legal basis; and
3. Whether or not petitioner’s right to collect the
creditable withholding tax and expanded
withholding tax for taxable year 1992 has
already prescribed.22
After careful review of the records and evidence
presented before us, we find no basis to overturn the
decision of the CTA En Banc.
On this score, our ruling in Compagnie Financiere
Sucres Et Denrees v. CIR,23 is enlightening, to wit:
We reiterate the well-established doctrine that as a
matter of practice and principle, [we] will not set aside
the conclusion reached by an agency, like the CTA,
especially if affirmed by the [CA]. By the very nature of
its function, it has dedicated itself to the study and
consideration of tax problems and has necessarily
developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority
on its part, which is not present here.24
Now, to the first issue.
Petitioner implores unto this Court that technical rules
of evidence should not be strictly applied in the interest
of substantial justice, considering that the mandate of
the CTA explicitly provides that its proceedings shall
not be governed by the technical rules of
evidence.25 Relying thereon, petitioner avers that while
it failed to formally offer the PANs of EWTs for taxable
years 1994and 1998, their existence and due
execution were duly tackled during the presentation of
petitioner’s witnesses, Ruleo Badilles and Carmelita
Lynne de Guzman (for taxable year 1994) and Susan
Salcedo-De Castro and Edna A. Ortalla (for taxable
year 1998).26 Petitioner further claims that although the
PANs were not marked as exhibits, their existence and
value were properly established, since the BIR records
for taxable years 1994 and 1998 were forwarded by
petitioner to the CTA in compliance with the latter’s
directive and were, in fact, made part of the CTA
records.27
Under Section 828 of Republic Act (R.A.) No. 1125, the
CTA is categorically described as a court of record.29 As
such, it shall have the power to promulgate rules and
regulations for the conduct of its business, and as may
be needed, for the uniformity of decisions within its
jurisdiction.30 Moreover, as cases filed before it are
litigated de novo, party-litigants shall prove every
minute aspect of their cases.31 Thus, no evidentiary
value can be given the pieces of evidence submitted
by the BIR, as the rules on documentary evidence
require that these documents must be formally offered
before the CTA.32 Pertinent is Section 34, Rule 132 of
the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. – The court shall consider
no evidence which has not been formally offered. The
purpose for which the evidence is offered must be
specified.
Although in a long line of cases, we have relaxed the
foregoing rule and allowed evidence not formally
offered to be admitted and considered by the trial court,
we exercised extreme caution in applying the
exceptions to the rule, as pronounced in Vda. de Oñate
v. Court of Appeals,33 thus:
From the foregoing provision, it is clear that for
evidence to be considered, the same must be formally
offered. Corollarily, the mere fact that a particular
document is identified and marked as an exhibit does
not mean that it has already been offered as part of the
evidence of a party. In Interpacific Transit, Inc. v.
Aviles[186 SCRA 385, 388-389 (1990)], we had the
occasion to make a distinction between identification of
documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of
the trial and is accompanied by the marking of the
evidence as an exhibit while the second is done only
when the party rests its case and not before. A party,
therefore, may opt to formally offer his evidence if he
believes that it will advance his cause or not to do so
at all. In the event he chooses to do the latter, the trial
court is not authorized by the Rules to consider the
same.
However, in People v. Napat-a[179 SCRA 403 (1989)]
citing People v. Mate[103 SCRA 484 (1980)], we
relaxed the foregoing rule and allowed evidence not
formally offered to be admitted and considered by the
trial court provided the following requirements are
present, viz.: first, the same must have been duly
identified by testimony duly recorded and, second, the
same must have been incorporated in the records of
the case.34
The evidence may, therefore, be admitted provided the
following requirements are present: (1) the same must
have been duly identified by testimony duly recorded;
and (2) the same must have been incorporated in the
records of the case. Being an exception, the same may
only be applied when there is strict compliance with the
requisites mentioned above; otherwise, the general
rule in Section 34 of Rule 132 of the Rules of Court
should prevail.35
In the case at bar, petitioner categorically admitted that
it failed to formally offer the PANs as evidence. Worse,
it advanced no justifiable reason for such fatal
omission. Instead, it merely alleged that the existence
and due execution of the PANs were duly tackled by
petitioner’s witnesses. We hold that such is not
sufficient to seek exception from the general rule
requiring a formal offer of evidence, since no evidence
of positive identification of such PANs by petitioner’s
witnesses was presented. Hence, we agree with the
CTA En Banc’s observation that the 1994 and 1998
PANs for EWT deficiencies were not duly identified by
testimony and were not incorporated in the records of
the case, as required by jurisprudence.
While we concur with petitioner that the CTA is not
governed strictly by technical rules of evidence, as
rules of procedure are not ends in themselves but are
primarily intended as tools in the administration of
justice,36 the presentation of PANs as evidence of the
taxpayer’s liability is not mere procedural technicality.
It is a means by which a taxpayer is informed of his
liability for deficiency taxes. It serves as basis for the
taxpayer to answer the notices, present his case and
adduce supporting evidence.37 More so, the same is
the only means by which the CTA may ascertain and
verify the truth of respondent's claims. We are,
therefore, constrained to apply our ruling in Heirs of
Pedro Pasag v. Spouses Parocha,38 viz.:
x x x. A formal offer is necessary because judges are
mandated to rest their findings of facts and their
judgment only and strictly upon the evidence offered by
the parties at the trial. Its function is to enable the trial
judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other
hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it
facilitates review as the appellate court will not be
required to review documents not previously
scrutinized by the trial court.
Strict adherence to the said rule is not a trivial matter.
The Court in Constantino v. Court of Appeals ruled that
the formal offer of one's evidence is deemed waived
after failing to submit it within a considerable period of
time. It explained that the court cannot admit an offer
of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity
if not non-compliance with a court order which, in
effect, would encourage needless delays and derail the
speedy administration of justice."
Applying the aforementioned principle in this case, we
find that the trial court had reasonable ground to
consider that petitioners had waived their right to make
a formal offer of documentary or object evidence.
Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment
and allowed almost five months to lapse before finally
submitting it. Petitioners' failure to comply with the rule
on admissibility of evidence is anathema to the
efficient, effective, and expeditious dispensation of
justice. x x x.39
Anent the second issue, petitioner claims that the EWT
assessment issued for taxable year 1994 has factual
and legal basis because at the time the PAN and FAN
were issued by petitioner to respondent on January 19,
1998, the provisions of Revenue Regulation No. 12-
9940 which governs the issuance of assessments was
not yet operative. Hence, its compliance with Revenue
Regulation No. 12-8541 was sufficient. In any case,
petitioner argues that a scrutiny of the BIR records of
respondent for taxable year 1994 would show that the
details of the factual finding of EWT were itemized from
the PAN issued by petitioner.42
In order to determine whether the requirement for a
valid assessment is duly complied with, it is important
to ascertain the governing law, rules and regulations
and jurisprudence at the time the assessment was
issued. In the instant case, the PANs and FANs
pertaining to the deficiency EWT for taxable years
1994 and 1998, respectively, were issued on January
19, 1998, when the Tax Code was already in effect, as
correctly found by the CTA En Banc:
The date of issuance of the notice of assessment
determines which law applies- the 1997 NIRC or the
old Tax Code. The case of Commissioner of Internal
Revenue v. Bank of Philippine Islands is instructive:
In merely notifying BPI of his findings, the CIR relied on
the provisions of the former Section 270 prior to its
amendment by RA 8424 (also known as the Tax
Reform Act of 1997). In CIR v. Reyes, we held that:
In the present case, Reyes was not informed in writing
of the law and the facts on which the assessment of
estate taxes had been made. She was merely notified
of the findings by the CIR, who had simply relied upon
the provisions of former Section 229 prior to its
amendment by [RA] 8424, otherwise known as the Tax
Reform Act of 1997.
First, RA 8424 has already amended the provision of
Section 229 on protesting an assessment. The old
requirement of merely notifying the taxpayer of the
CIR's findings was changed in 1998to informing the
taxpayer of not only the law, but also of the facts on
which an assessment would be made; otherwise, the
assessment itself would be invalid.
It was on February 12, 1998, that a preliminary
assessment notice was issued against the estate. On
April 22, 1998, the final estate tax assessment notice,
as well as demand letter, was also issued. During those
dates, RA 8424 was already in effect. The notice
required under the old law was no longer sufficient
under the new law.(Emphasis ours.)
In the instant case, the 1997 NIRC covers the 1994 and
1998 EWT FANs because there were issued on
January 19, 1998 and September 21, 2001,
respectively, at the time of the effectivity of the 1997
NIRC. Clearly, the assessments are governed by the
law.43
Indeed, Section 228 of the Tax Code provides that the
taxpayer shall be informed in writing of the law and the
facts on which the assessment is made. Otherwise, the
assessment is void. To implement the aforesaid
provision, Revenue Regulation No. 12-99was enacted
by the BIR, of which Section 3.1.4 thereof reads:
3.1.4. Formal Letter of Demand and Assessment
Notice. –The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling
for payment of the taxpayer’s deficiency tax or taxes
shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment
notice shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal
delivery. x x x44
It is clear from the foregoing that a taxpayer must be
informed in writing of the legal and factual bases of the
tax assessment made against him. The use of the word
"shall" in these legal provisions indicates the
mandatory nature of the requirements laid down
therein.
In the present case, a mere perusal of the FAN for the
deficiency EWT for taxable year 1994will show that
other than a tabulation of the alleged deficiency taxes
due, no further detail regarding the assessment was
provided by petitioner. Only the resulting interest,
surcharge and penalty were anchored with legal
basis.45 Petitioner should have at least attached a
detailed notice of discrepancy or stated an explanation
why the amount of P48,461.76 is collectible against
respondent46 and how the same was arrived at. Any
short-cuts to the prescribed content of the assessment
or the process thereof should not be countenanced, in
consonance with the ruling in Commissioner of Internal
Revenue v. Enron Subic Power Corporation47 to wit:
The CIR insists that an examination of the facts shows
that Enron was properly apprised of its tax deficiency.
During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed
it of the proposed tax deficiency assessment through a
preliminary five-day letter and furnished Enron a copy
of the audit working paper allegedly showing in detail
the legal and factual bases of the assessment. The CIR
argues that these steps sufficed to inform Enron of the
laws and facts on which the deficiency tax assessment
was based.
We disagree. The advice of tax deficiency, given by the
CIR to an employee of Enron, as well as the preliminary
five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual
bases of the assessment. These steps were mere
perfunctory discharges of the CIR’s duties incorrectly
assessing a taxpayer. The requirement for issuing a
preliminary or final notice, as the case may be,
informing a taxpayer of the existence of a deficiency
tax assessment is markedly different from the
requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in
the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which
the deficiency tax assessment was made.
The law requires that the legal and factual bases of the
assessment be stated in the formal letter of demand
and assessment notice. Thus, such cannot be
presumed. Otherwise, the express provisions of Article
228 of the NIRC and RR No. 12-99 would be rendered
nugatory. The alleged "factual bases" in the advice,
preliminary letter and "audit working papers" did not
suffice. There was no going around the mandate of the
law that the legal and factual bases of the assessment
be stated in writing in the formal letter of demand
accompanying the assessment notice.
We note that the old law merely required that the
taxpayer be notified of the assessment made by the
CIR. This was changed in 1998 and the taxpayer must
now be informed not only of the law but also of the facts
on which the assessment is made. Such amendment
is in keeping with the constitutional principle that no
person shall be deprived of property without due
process. In view of the absence of a fair opportunity for
Enron to be informed of the legal and factual bases of
the assessment against it, the assessment in question
was void. x x x.48
In the same vein, we have held in Commissioner of
Internal Revenue v. Reyes,49 that:
Even a cursory review of the preliminary assessment
notice, as well as the demand letter sent, reveals the
lack of basis for -- not to mention the insufficiency of --
the gross figures and details of the itemized deductions
indicated in the notice and the letter. This Court cannot
countenance an assessment based on estimates that
appear to have been arbitrarily or capriciously arrived
at. Although taxes are the lifeblood of the government,
their assessment and collection "should be made in
accordance with law as any arbitrariness will negate
the very reason for government itself."50
Applying the aforequoted rulings to the case at bar, it
is clear that the assailed deficiency tax assessment for
the EWT in 1994disregarded the provisions of Section
228 of the Tax Code, as amended, as well as Section
3.1.4 of Revenue Regulations No. 12-99 by not
providing the legal and factual bases of the
assessment. Hence, the formal letter of demand and
the notice of assessment issued relative thereto are
void.
In any case, we find no basis in petitioner’s claim that
Revenue Regulation No. 12-99 is not applicable at the
time the PAN and FAN for the deficiency EWT for
taxable year 1994 were issued. Considering that such
regulation merely implements the law, and does not
create or take away vested rights, the same may be
applied retroactively, as held in Reyes:
x x x x.
Second, the non-retroactive application of Revenue
Regulation (RR) No. 12-99 is of no moment,
considering that it merely implements the law.
A tax regulation is promulgated by the finance
secretary to implement the provisions of the Tax Code.
While it is desirable for the government authority or
administrative agency to have one immediately issued
after a law is passed, the absence of the regulation
does not automatically mean that the law itself would
become inoperative.
At the time the pre-assessment notice was issued to
Reyes, RA 8424 already stated that the taxpayer must
be informed of both the law and facts on which the
assessment was based. Thus, the CIR should have
required the assessment officers of the Bureau of
Internal Revenue (BIR) to follow the clear mandate of
the new law. The old regulation governing the issuance
of estate tax assessment notices ran afoul of the rule
that tax regulations-- old as they were -- should be in
harmony with, and not supplant or modify, the law.
It may be argued that the Tax Code provisions are not
self- executory. It would be too wide a stretch of the
imagination, though, to still issue a regulation that
would simply require tax officials to inform the
taxpayer, in any manner, of the law and the facts on
which an assessment was based. That requirement is
neither difficult to make nor its desired results hard to
achieve. Moreover, an administrative rule interpretive
of a statute, and not declarative of certain rights and
corresponding obligations, is given retroactive effect as
of the date of the effectivity of the statute. RR 12-99 is
one such rule. Being interpretive of the provisions of
the Tax Code, even if it was issued only on September
6, 1999, this regulation was to retroact to January 1,
1998 -- a date prior to the issuance of the preliminary
assessment notice and demand letter.51
Indubitably, the disputed assessments for taxable year
1994 should have already complied with the
requirements laid down under Revenue Regulation No.
12-99. Having failed so, the same produces no legal
effect.
Notwithstanding the foregoing findings, we sustain the
CTA En Banc’s findings on the deficiency EWT for
taxable year 1998 considering that it complies with
Section 228 of the Tax Code as well as Revenue
Regulation No. 12-99, thus:
On the other hand, the 1998 EWT FAN reflected the
following: a detailed factual account why the basic
EWT is P14,496.79 and the legal basis, Section 57 B
of the 1997 NIRC supporting findings of EWT liability
of P22,437.01. Thus, the EWT FAN for 1998 is duly
issued in accordance with the law.52
As to the last issue, petitioner avers that its right to
collect the EWT for taxable year 1992 has not yet
prescribed. It argues that while the final assessment
notice and demand letter on EWT for taxable year 1992
were all issued on January 9, 1996, the five (5)-year
prescriptive period to collect was interrupted when
respondent filed its request for reinvestigation on
March 14, 1997 which was granted by petitioner on
January 22, 2001 through the issuance of Tax
Verification Notice No. 00165498 on even date.53 Thus,
the period for tax collection should have begun to run
from the date of the reconsidered or modified
assessment.54
This argument fails to persuade us.
The statute of limitations on assessment and collection
of national internal revenue taxes was shortened from
five (5) years to three (3) years by virtue of Batas
Pambansa Blg. 700.55 Thus, petitioner has three (3)
years from the date of actual filing of the tax return to
assess a national internal revenue tax or to commence
court proceedings for the collection thereof without an
assessment.56 However, when it validly issues an
assessment within the three (3)-year period, it has
another three (3) years within which to collect the tax
due by distraint, levy, or court proceeding.57 The
assessment of the tax is deemed made and the three
(3)-year period for collection of the assessed tax
begins to run on the date the assessment notice had
been released, mailed or sent to the taxpayer.58
On this matter, we note the findings of the CTA-Special
First Division that no evidence was formally offered to
prove when respondent filed its returns and paid the
corresponding EWT and WTC for taxable year 1992.59
Nevertheless, as correctly held by the CTA En Banc,
the Preliminary Collection Letter for deficiency taxes for
taxable year 1992 was only issued on February 21,
2002, despite the fact that the FANs for the deficiency
EWT and WTC for taxable year 1992 was issued as
early as January 9, 1996. Clearly, five (5) long years
had already lapsed, beyond the three (3)-year
prescriptive period, before collection was pursued by
petitioner.
Further, while the request for reinvestigation was made
on March 14, 1997, the same was only acted upon by
petitioner on January22, 2001, also beyond the three
(3) year statute of limitations reckoned from January 9,
1996, notwithstanding the lack of impediment to rule
upon such issue. We cannot countenance such
inaction by petitioner to the prejudice of respondent
pursuant to our ruling in Commissioner of Internal
Revenue v. Philippine Global Communication, Inc.,60 to
wit:
The assessment, in this case, was presumably issued
on 14 April 1994 since the respondent did not dispute
the CIR’s claim. Therefore, the BIR had until 13 April
1997. However, as there was no Warrant of Distraint
and/or Levy served on the respondents nor any judicial
proceedings initiated by the BIR, the earliest attempt of
the BIR to collect the tax due based on this assessment
was when it filed its Answer in CTA Case No. 6568 on
9 January 2003, which was several years beyond the
three-year prescriptive period. Thus, the CIR is now
prescribed from collecting the assessed tax.61
Here, petitioner had ample time to make a factually and
legally well-founded assessment and implement
collection pursuant thereto. Whatever examination
1âw phi1
that petitioner may have conducted cannot possibly
outlast the entire three (3)-year prescriptive period
provided by law to collect the assessed tax. Thus, there
is no reason to suspend the running of the statute of
limitations in this case.
Moreover, in Bank of the Philippine Islands, citing
earlier jurisprudence, we held that the request for
reinvestigation should be granted or at least acted
upon in due course before the suspension of the
statute of limitations may set in, thus:
In BPI v. Commissioner of Internal Revenue, the Court
emphasized the rule that the CIR must first grant the
request for reinvestigation as a requirement for the
suspension of the statute of limitations. The Court said:
In the case of Republic of the Philippines v. Gancayco,
taxpayer Gancayco requested for a thorough
reinvestigation of the assessment against him and
placed at the disposal of the Collector of Internal
Revenue all the evidences he had for such purpose;
yet, the Collector ignored the request, and the records
and documents were not at all examined. Considering
the given facts, this Court pronounced that—
x x x The act of requesting a reinvestigation alone does
not suspend the period. The request should first be
granted, in order to effect suspension. (Collector v.
Suyoc Consolidated, supra; also Republic v. Ablaza,
supra). Moreover, the Collector gave appellee until
April 1, 1949, within which to submit his evidence,
which the latter did one day before. There were no
impediments on the part of the Collector to file the
collection case from April 1, 1949…
In Republic of the Philippines v. Acebedo, this Court
similarly found that –
x x x T]he defendant, after receiving the assessment
notice of September 24, 1949, asked for a
reinvestigation thereof on October 11, 1949 (Exh. "A").
There is no evidence that this request was considered
or acted upon. In fact, on October 23, 1950 the then
Collector of Internal Revenue issued a warrant of
distraint and levy for the full amount of the assessment
(Exh. "D"), but there was follow-up of this warrant.
Consequently, the request for reinvestigation did not
suspend the running of the period for filing an action for
collection.[Emphasis in the original]62 With respect to
petitioner’s argument that respondent’s act of elevating
its protest to the CTA has fortified the continuing
interruption of petitioner’s prescriptive period to collect
under Section 223 of the Tax Code,63 the same is
flawed at best because respondent was merely
exercising its right to resort to the proper Court, and
does not in any way deter petitioner’s right to collect
taxes from respondent under existing laws.
On the strength of the foregoing observations, we
ought to reiterate our earlier teachings that "in
balancing the scales between the power of the State to
tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the
constitutional rights of a citizen to due process of law
and the equal protection of the laws on the other, the
scales must tilt in favor of the individual, for a citizen’s
right is amply protected by the Bill of Rights under the
Constitution."64 Thus, while "taxes are the lifeblood of
the government," the power to tax has its limits, in spite
of all its plenitude.65 Even as we concede the
inevitability and indispensability of taxation, it is a
requirement in all democratic regimes that it be
exercised reasonably and in accordance with the
prescribed procedure.66
After all, the statute of limitations on the collection of
taxes was also enacted to benefit and protect the
taxpayers, as elucidated in the case of Philippine
Global Communication, Inc.,67 thus:
x x x The report submitted by the tax commission
clearly states that these provisions on prescription
should be enacted to benefit and protect taxpayers:
Under the former law, the right of the Government to
collect the tax does not prescribe. However, in
1âwphi1
fairness to the taxpayer, the Government should be
estopped from collecting the tax where it failed to make
the necessary investigation and assessment within 5
years after the filing of the return and where it failed to
collect the tax within 5 years from the date of
assessment thereof. Just as the government is
interested in the stability of its collections, so also are
the taxpayers entitled to an assurance that they will not
be subjected to further investigation for tax purposes
after the expiration of a reasonable period of time. (Vol.
II, Report of the Tax Commission of the Philippines, pp.
321-322).68
WHEREFORE, the petition is DENIED. The June 27,
2011 Decision of the Court of Tax Appeals En Banc in
C.T.A. EB No. 662 is hereby AFFIRMED.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 193100 December 10, 2014
SAMAR-I ELECTRIC COOPERATIVE, Petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
VILLARAMA, JR., J.:
At bar is a petition for review on certiorari of the
Decision1 of the Court of Tax Appeals En Banc (CTA
EB) dated March 11, 2010 and it,s Resolution2 dated
July 28, 2010 in C.T.A. EB Nos. 460 and 462 (C.T.A.
Case No. 6697) affirming the May 27, 2008
Decision3 and the January 19, 2009 Amended
Decision4 of the CTA's First Division, and ordering
petitioner to pay respondent Commissioner of Internal
Revenue (CIR) deficiency withholding tax on
compensation in the aggregate amount
of P2,690,850.91, plus 20% interest starting
September 30, 2002, until fully paid, pursuant to
Section 249( c) of the National Internal Revenue Code
(NIRC) of 1997.
The following facts are undisputed as found by the
CTA's First Division and adopted by the CTA EB:
Samar-I Electric Cooperative, Inc. (Petitioner) is an
electric cooperative, with principal office at Barangay
Carayman, Calbayog City.
It was issued a Certificate of Registration by the
National Electrification Administration (NEA) on
February 27, 1974 pursuant to Presidential Decree
(PD) 269. Likewise, it was granted a Certificate of
Provisional Registration under Republic Act (RA) 6938,
otherwise known as the Cooperative Code of the
Philippines on March 16, 1993, by the Cooperative
Development Authority (CDA).
Respondent Commissioner of InternalRevenue is a
public officer authorized under the National Internal
Revenue Code (NIRC) to examine any taxpayer
including inter alia, the power to issue tax assessment,
evaluate, and decide upon protests relative thereto.
On July 13, 1999 and April 17, 2000, petitioner filed its
1998 and 1999 income tax returns, respectively.
Petitioner filed its 1997, 1998, and 1999 Annual
Information Return of Income Tax Withheld on
Compensation, Expanded and Final Withholding
Taxes on February 17, 1998, February 1, 1999, and
February 4, 2000, in that order.
On November 13, 2000, respondent issued a duly
signed Letter of Authority (LOA) No. 1998 00023803;
covering the examination of petitioner’s books of
account and other accounting records for income and
withholding taxes for the period 1997 to 1999. The LOA
was received by petitioner on November 14, 2000.
Petitioner cooperated in the audit and investigation
conducted by the Special Investigation Division of the
BIR by submitting the required documents on
December 5, 2000.
On October 19, 2001, respondent sent a Notice for
Informal Conference which was received by petitioner
in November 2001; indicating the allegedly income and
withholding tax liabilities of petitioner for 1997 to 1999.
Attached to the letter is a summary of the report, with
an explanation of the findingsof the investigators.
In response, petitioner sent a letter dated November
26, 2001 to respondent maintaining its indifference to
the latter’s findings and requesting details of the
assessment.
On December 13, 2001, petitioner executed a Waiver
of the Defense of Prescription under the Statute of
Limitations, good until March 29, 2002.
On February 27, 2002, a letter was sent by petitioner
to respondent requesting a detailed computation of the
alleged 1997, 1998 and 1999 deficiency withholding
tax on compensation. On February 28, 2002,
respondent issued a Preliminary Assessment Notice
(PAN). The PAN was received by petitioner on April 9,
2002, which was protested on April 18, 2002.
Respondent’s Reply dated May 27, 2002, contained
the explanation of the legal basis of the issuance of the
questioned tax assessments.
However, on July 8, 2002, respondent dismissed
petitioner’s protest and recommended the issuance of
a Final Assessment Notice.
Consequently, on September 15, 2002, petitioner
received a demand letter and assessments notices
(Final Assessment Notices) for the alleged 1997, 1998,
and 1999 deficiency withholding tax in the amount of
[P]3,760,225.69, as well as deficiency income tax
covering the years 1998 to 1999 in the amount of
[P]440,545.71, or in the aggregate amount of
[P]4,200,771.40. Petitioner filed its protest and
Supplemental Protest to the Final Assessment Notices
on October 14, 2002 and November 4, 2002,
respectively. But on the Final Decision on Disputed
Assessment issued on April 10, 2003, petitioner was
still held liable for the alleged tax liabilities.5
The CTA EB narrates the following succeeding events:
On May 29, 2003, the Petition for Review was filed by
SAMELCO-I with the Court in division.
On May 27, 2008, the assailed Decision partially
granting SAMELCO-I’s petition was promulgated.
Dissatisfied, both parties sought reconsideration of the
said decision. CIR filed the "Motion for Partial
Reconsideration (Re: Decision dated 27 May 2008[)]"
on June 13, 2008. On the other hand, SAMELCOI’s
"Motion for Reconsideration" was filed on June 17,
2008.
On January 19, 2009, the Court in division promulgated
its Amended Decision which denied CIR’s motion and
partially granted SAMELCO-I’s motion.
Thereafter, CIR and SAMELCO-I filed their "Motion for
Extension of Time to File Petition for Review" on
February 6, 2009 and February 11, 2009, respectively.
Both motionswere granted by the Court.6
The following issues were raised by the parties in their
petitions for review before the CTA EB. In C.T.A. EB
460, herein respondent CIR raised the following
grounds:
I. Whether or not SAMELCO-I is entitled to tax
privileges accorded to members in accordance
with Republic Act No. 6938, or the Cooperative
Code, or to privileges of Presidential Decree
(PD) No. 269.
II. Whether or not SAMELCO-I is liable for the
minimum corporate income tax (MCIT) for
taxable years 1998 to 1999.
III. Whether or not SAMELCO-I is liable to pay
the total deficiency expanded withholding tax of
[P]3,760,225.69 for taxable years 1997 to
1999.7
On the other hand, petitioner SAMELCO-I raised the
following legal and factual errors in C.T.A. EB No. 462,
viz.:
I. The Court in Division gravely erred in holding
that the 1997 and 1998 assessments on
withholding tax on compensation (received by
SAMELCO-I on September 15, 2002), have not
prescribed even if the waiver validly executed
was good only until March 29, 2002.
II. The Court in Divisionerred in holding that
CIR can validly assess within the ten (10)-year
prescriptive period even if the notice of informal
conference, PAN, formal letter of demand, and
assessment notice mention not a word that the
BIR is invoking Section 222 (a) of the 1997 Tax
Code [then Sec. 223, NIRC], due to alleged
false withholding tax returns filed by
[SAMELCO-I] as the same assertions were
mere afterthought to justify application of the
10-year prescriptive period to assess.
III. The Court in Division failed to consider that
CIR made no findings as to SAMELCO-I’s filing
of a false return as clearly manifested by the
non-imposition of 50% surcharge on the 1997,
1998 and 1999 basic withholding tax deficiency
in the PAN, demand notice and even in the
assessment notice other than interest charges.
IV. The Court in Division erred innot holding
that given SAMELCOI’s filing of its 1997, 1998,
and 1999 withholding tax returns in good faith,
and in close consultation with the BIR
personnel in Calbayog City where SAMELCO-
I’s place of business is located, the latter
should no longer be imposed the incremental
penalties (surcharge and interest).
V. The Court in Division failed to rule that since
there was no substantial under remittance of
1998 withholding tax as the basic deficiency
tax per amended decision is less than 30% of
the computed total tax due per return,
SAMELCO-I did not file a false return.
VI. The Court in Division overlooked the fact
that for taxable year 1999, [SAMELCO-I]
 remitted the amount of [P]844,958.00 as
withholding tax in compensation instead of
[P]786,702.43 as indicated in Page 8, Annex C
of the CTA (1st Division) Decision.
VII. The Court in Division erred in failing to
declare as void both the formal letter of
demand and assessment notice on withholding
tax on compensation for 1997 taxable year,
given its non-compliance with Section 3.1.4 of
RR 12-99.8
On February 26, 2009, the CTA EB consolidated both
cases. After the filing of the respective Comments of
both parties, the cases were deemed submitted for
decision. The CTA EB found that the issues and
arguments raised by the parties were "mere
reiterations of what have been considered and passed
upon by the Court in division in the assailed Decision
and the Amended Decision."9 It ruled that SAMELCO-I
is exempted in the payment of the Minimum Corporate
Income Tax (MCIT); that due process was observed in
the issuance of the assessments in accordance with
Section 228 of the Tax Code; and that the 1997 and
1998 assessments on deficiency withholding tax on
compensation have not prescribed. Finding no
reversible error in the Decision and the Amended
Decision, the CTA EB ruled, viz.:
WHEREFORE, premises considered, We deny the
petitions for lack of merit. Accordingly, We AFFIRM the
May 27, 2008 Decision and the January 19, 2009
Amended Decision promulgated by the First Division of
this Court.
SO ORDERED.10
Petitioner moved for reconsideration.In a Resolution
dated July 28, 2010, the CTA EB denied the motion.
Petitioner now comes to this Court raising the following
assignment of errors:
A. The Honorable CTA En Banc gravely erred
in holding that respondent sufficiently complied
withthe due process requirements mandated
by Section 228 of the 1997 Tax Code in the
issuance of 1997-1999 assessments to
petitioner, even if the details of discrepancies
on which the assessments were factually and
legally based as required under Section 3.1.4
of Revenue Regulations (RR) No[.] 12-99,
were not found in the Formal Letter of Demand
and Final Assessment Notice (FAN) sent to
petitioner, in clear violation of the doctrine
established in the case of Commissioner of
Internal Revenue vs. Enron Subic Power
Corporation, G.R. No. 166387, January 19,
2009, applying Section 3.1.4 of RR 12-99 in
relation to Section 228 NIRC. B. The
Honorable CTA En Banc erred in holding that
respondent observed due process
notwithstanding the missing Annex "A-1" that
was meant to show Details of Discrepancies
and to be attached to BIR’s Letter of
Demand/Final Notice dated September 15,
2002, which was not furnished to petitioner and
worse, a file copy of which is not even found in
the BIR records as part of its Exhibit "16" and
neither is the same found in the CTA records.
C. In deciding that the 1997 and 1998
withholding tax assessments have not yet
prescribed, the Honorable CTA En Banc failed
to consider the singular significance of the
Waiver of the Defense of Prescription validly
agreed upon and executed by the parties.
D. The Honorable CTA En Bancerred in
holding that respondent can validly assess
within the ten (10)-year prescriptive period
even if the Notice of Informal Conference,
PAN, and Final Letter of Demand (dated
September 15, 2002), mentioned not a word as
to the falsity of the returns filed by petitioner,
but as anafter thought that was raised rather
belatedly only in the Answer and during the
trial.
E. The Honorable CTA En Bancerred in
holding as valid the 1997 deficiency
withholding tax assessment being anchored on
RR 2-98 (as cited in Notice of Informal
Conference and PAN), as the said RR 2-98
governs compensation income paid beginning
January 1, 1998.11
We shall resolve the instant controversy by discussing
the following two main issues in seriatim: whether the
1997 and 1998 assessments on withholding tax on
compensation were issued within the prescriptive
period provided by law; and whether the assessments
were issued in accordance with Section 228 of the
NIRC of 1997.
On the issue of prescription, petitioner contends that
the subject 1997 and 1998 withholding tax
assessments on compensation were issued beyond
the prescriptive period of three years under Section
203 of the NIRC of 1997. Under this section, the
government is allowed a period of only three years to
assess the correct tax liability of a taxpayer, viz.:
SEC. 203. Period of Limitation Upon Assessment and
Collection. – Except as provided in Section 222,
internal revenue taxes shall be assessed within three
(3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided,
That in a case where a return is filed beyond the period
prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes
of this Section, a return filed before the last day
prescribed by law for the filing thereof shall be
considered as filed on such last day. Relying on
Section 203, petitioner argues that the subject
deficiency tax assessments issued by respondent on
September 15, 2002 was issued beyond the three-year
prescriptive period. Petitioner filed its Annual
Information Return of Income Tax Withheld on
Compensation, Expanded and Final Withholding
Taxeson the following dates: on February 17, 1998 for
the taxable year 1997; and on February 1, 1999 for the
year taxable 1998. Thus, if the period prescribed under
Section 203 of the NIRC of 1997 is to be followed, the
three-year prescriptive period to assess for the taxable
years 1997 and 1998 should have ended on February
16,2001 and January 31, 2002, respectively.
We disagree.
While petitioner is correct that Section 203 sets the
three-year prescriptive period to assess, the following
exceptions are provided under Section 222 of the NIRC
of 1997, viz.:
SEC. 222. Exceptions as to Period of Limitation of
Assessment and Collection of Taxes. –
(a) In the case of a false or fraudulent return
with intent to evade tax or of failure to file a
return, the tax may be assessed, or a
proceeding in court for the collection of such
tax may be filed without assessment, at any
time within ten (10) years after the discovery of
the falsity, fraud or omission: Provided, That in
a fraud assessment which has become final
and executory, the factof fraud shall be
judicially taken cognizance of in the civil or
criminal action for the collection thereof.
(b) If before the expiration of the time
prescribed in Section 203 for the assessment
of the tax, both the Commissioner and the
taxpayer have agreed in writing to its
assessment after such time, the tax may be
assessed within the period agreed upon. The
period so agreed upon may be extended by
subsequent written agreement made before
the expiration of the period previously agreed
upon.
(c) Any internal revenue tax which has been
assessed within the period of limitation as
prescribed in paragraph (a) hereof may be
collected by distraint or levy or by a proceeding
in court within five (5) years following the
assessment of the tax.
(d) Any internal revenue tax, which has been
assessed within the period agreed upon as
provided in paragraph (b) herein above, may
be collected by distraint orlevy or by a
proceeding incourt within the period agreed
upon in writing before the expiration of the five
(5)-year period. The period so agreed upon
may be extended by subsequent written
agreements made before the expiration of the
period previously agreed upon.
(e) Provided, however, That nothing in the
immediately preceding Section and paragraph
(a) hereof shall be construed to authorize the
examination and investigation or inquiry into
any tax return filed in accordance with the
provisions of any tax amnesty law or decree.
(Emphasis supplied.)
In the case at bar, it was petitioner’s substantial under
declaration of withholding taxes in the amount
of P2,690,850.91 which constituted the "falsity" in the
subject returns – giving respondent the benefit of the
period under Section 222 of the NIRC of 1997 to
assess the correct amount of tax "at any time within ten
(10) years after the discovery of the falsity, fraud or
omission."12 The case of Aznar v. Court of Tax
Appeals13 discusses what acts or omissions may
constitute falsity, viz.:
Petitioner argues that Sec. 332 of the NIRC does not
apply because the taxpayer did not file false and
fraudulent returns with intent to evade tax, while
respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals
concluding that the very "substantial under
declarations ofincome for six consecutive years
eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment
of tax."
To our minds we can dispense with these controversial
arguments on facts, although we do not deny that the
findings of facts by the Court of Tax Appeals, supported
as they are by very substantial evidence, carry great
weight, by resorting to a proper interpretation of
Section 332 of the NIRC. We believe that the proper
and reasonable interpretation of said provision should
be that in the three different cases of (1) false return,
(2) fraudulent return with intent to evade tax, (3) failure
to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten
years after the discovery of the (1) falsity, (2) fraud,(3)
omission. Our stand that the law should be interpreted
to mean a separation of the three different situations of
false return, fraudulent return with intent to evade tax,
and failure to file a return is strengthened
immeasurably by the last portion of the provision which
segregates the situations into three different classes,
namely "falsity," "fraud" and "omission." That there is a
difference between "false return" and "fraudulent
return" cannot be denied. While the first merely implies
deviation from the truth, whether intentional or not, the
second implies intentional or deceitful entry with intent
to evade the taxes due.
The ordinary period of prescription of 5 years within
which to assess tax liabilities under Sec. 331 of the
NIRC should be applicable to normal circumstances,
but whenever the government is placed at a
disadvantage so as to prevent its lawful agents
fromproper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment
of tax or failure to file returns, the period of ten years
provided for in Sec. 332 (a) NIRC, from the time of the
discovery of the falsity, fraud or omission even seems
to be inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case,
We affirm the conclusion of the respondent Court of
Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess
petitioner’s tax liability had not expired at the time said
assessment was made.14
A careful examination of the evidence on record yields
to no other conclusion but that petitioner failed to
withhold taxes from its employees’ 13th month pay and
other benefits inexcess of thirty thousand pesos
(P30,000.00) amounting to P2,690,850.91for the
taxable years 1997 to 1999 – resulting to its filing of the
subject false returns. Petitioner failed to refute this
finding, both in fact and in law, before the courts a quo.
We quote the following portion of the assailed Decision
of the CTA EB, viz.:
It is noteworthy to mention that during the trial, the
witness for the CIR testified that SAMELCO-I did not
file an accurate return, as follows:
ATTY. FRANCIA:
Q: Did the petitioner file an accurate Return?
MS. RAPATAN:
A: No.
ATTY. FRANCIA:
Q: Can you please explain?
MS. RAPATAN:
A: Because I based the computation of my deficiency
withholding taxes on declared taxable income per
alpha list submitted then, I have extracted a data from
the Alpha List, particularly that of the manager and
other officials, only their basic salary and their overtime
pay were declared but the other benefits were not
actually subjected to withholding tax. So, the deficiency
withholding taxes from the taxes on the taxable 13th
month pay and other benefits in excess of the
[P]12,000.00 for 1997 and for the taxable years 1998
and 1999, in excess of the [P]30,000.00. I also noticed
that the per diem of the Manager was not included in
the withholding tax computation of SAMELCO[-]I.
ATTY. FRANCIA:
Nothing further, your Honors.
JUSTICE BAUTISTA:
Any re-cross?
ATTY. NAPUTO:
No re-cross, your Honors.15
We have consistently held that courts will not interfere
in matters which are addressed to the sound discretion
of the government agency entrusted with the regulation
of activities coming under its special and technical
training and knowledge.16 The findings of fact of these
quasijudicial agencies are generally accorded respect
and even finality as long as they are supported by
substantial evidence– in recognition of their expertise
on the specific matters under their consideration.17 In
the case at bar, petitioner failed to proffer convincing
argument and evidence that would persuade us to
disturb the factual findings of the CTA First Division, as
affirmed by the CTA EB. As such, we cannot but affirm
the finding of petitioner’s substantial under declaration
of withholding taxes in the amount of P2,690,850.91
which constituted the "falsity" in the subject returns.
Anent the issue of violation of due process in the
issuance of the final notice of assessment and letter of
demand, Section 228 of the NIRC of 1997 provides:
SEC. 228. Protesting of Assessment. – x x x
xxxx
The taxpayers shall be informed in writing of the law
and the factson which the assessment is made:
otherwise, the assessment shall be void.
Petitioner contends that as the Final Demand Letter
and Assessment Notices (FAN) were silent as to the
nature and basis of the assessments, it was denied
due process,18 and the assessments must be declared
void. It likewise invokes Revenue Regulations(RR) No.
12-99 which states, viz.:
3.1.4 Formal Letter of Demand and Assessment
Notice.– The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling
for payment of the taxpayer’s deficiency tax or taxes
shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based,
otherwise, the formal letter of demand and assessment
notice shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal
delivery. x x x
We uphold the assessments issued to petitioner.
Both Section 228 of the NIRC of 1997 and Section
3.1.4 of RR No. 12-99 clearly require the written details
on the nature, factual and legal bases of the subject
deficiency tax assessments. The reason for the
mandatory nature of this requirement isexplained in the
case of Commissioner of Internal Revenue v. Reyes:19
A void assessment bears no valid fruit.
The law imposes a substantive, not merely a formal,
requirement. To proceed heedlessly with tax collection
without first establishing a valid assessment is
evidently violative of the cardinal principle in
administrative investigations: that taxpayers should be
able to present their case and adduce supporting
evidence. In the instant case, respondent has not been
informed of the basis of the estate tax liability. Without
complying with the unequivocal mandate of first
informing the taxpayer of the government’s claim, there
can be no deprivation of property, because no effective
protest can be made. The haphazard shot at slapping
an assessment, supposedly based on estate taxation’s
general provisions that are expected to be known by
the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment
notice, as well as the demand letter sent, reveals the
lack of basis for – not to mention the insufficiency of –
the gross figures and details of the itemized deductions
indicated in the notice and the letter. This Court cannot
countenance an assessment based on estimates that
appear to have been arbitrarily or capriciously arrived
at. Although taxes are the lifeblood of the government,
their assessment and collection "should be made in
accordance with law as any arbitrariness will negate
the very reason for government itself." (Emphasis
supplied; citations omitted)
In Commissioner of Internal Revenue v. Enron Subic
Power Corporation,20 we held that the law requires that
the legal and factual bases of the assessment be
stated in the formal letter of demand and assessment
notice, and that the alleged "factual bases" in the
advice, preliminary letter and "audit working papers"
did not suffice. Thus:
Both the CTA and the CA concluded that the deficiency
tax assessment merely itemized the deductions
disallowed and included these in the gross income. It
also imposed the preferential rate of 5% on some items
categorized by Enron as costs. The legal and factual
bases were, however, not indicated.
The CIR insists that an examination of the facts shows
that Enron was properly apprised of its tax deficiency.
During the pre-assessment stage, the CIR advised
Enron’s representative of the tax deficiency, informed
it of the proposed tax deficiency assessment through a
preliminary five-day letter and furnished Enron a copy
of the audit working paper allegedly showing in detail
the legal and factual bases of the assessment. The CIR
argues that these steps sufficed to inform Enron of the
laws and facts on which the deficiency tax assessment
was based.
We disagree. The advice of tax deficiency, given by the
CIR to an employee of Enron, as well as the preliminary
five-day letter, were not valid substitutes for the
mandatory notice in writing of the legal and factual
bases of the assessment. These steps were mere
perfunctory discharges of the CIR’s duties in correctly
assessing a taxpayer. The requirement for issuing a
preliminary or final notice, as the case may be,
informing a taxpayer of the existence of a deficiency
tax assessment is markedly different from the
requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in
the order required by law, does not necessarily mean
that Enron was informed of the law and facts on which
the deficiency tax assessment was made.21 (Emphasis
supplied)
In this case, we agree with the respondent that
petitioner was sufficiently apprised of the nature,
factual and legal bases, as well as how the deficiency
taxes being assessed against it were computed.
Records reveal that on October 19, 2001, prior to the
conduct of an informal conference, petitioner was
already informed of the results and findings of the
investigations made by the respondent, and was duly
furnished with a copy of the summary of the report
submitted by Revenue Officer Elisa G. Ponferrada-
Rapatan of the Special Investigation Division. Said
summary report contained an explanation of Findings
of Investigation stating the legal and factual bases for
the deficiency assessment. In a letter dated February
27, 2002 petitioner requested for copies of working
papers indicating how the deficiency withholding taxes
were computed.22 Respondent promptly responded in a
letter-reply dated February 28, 2002 stating:
please be informed that the cooperative’s deficiency
withholding taxes on compensation were due to the
failure of the cooperative to withhold taxes on the
taxable 13th month pay and other benefits in excess
of P30,000.00 threshold pursuant to Section 3 of
Revenue Regulation No. 2-95 implementing Republic
Act No. 7833 and Section 2.78/1 B 11 of Revenue
Regulation 2-98 implementing Section 32 B e of
Republic Act No. 8424. Further, we are providing you
hereunder the computational format on how deficiency
withholding taxes were computed and sample
computation from our working papers, for your
information and guidance.23
On April 9, 2002, petitioner received the PAN dated
February 28, 2002 which contained the computations
of its deficiency income and withholding
taxes. Attached to the PAN was the detailed
1âwphi 1
explanation of the particular provision of law and
revenue regulation violated, thus: DETAILS OF
DISCREPANCIES
1. Deficiency income taxes for 1998 and 1999
respectively result from non-payment of the
minimum corporate income tax (MCIT)
imposed pursuant to Section 27(E) of the 1997
Tax Reform Act.
2. Deficiency Withholding Taxes on
Compensation for 1997-1999 are the total
withholding taxes on compensation of all
employees of SAMELCO[-]I resulting from
failureof employer to withhold taxes on the
taxable 13th month pay and other benefits in
excess of [P]30,000.00 threshold pursuant to
Revenue Regulation 2-98.24
The above information provided to petitioner enabled it
to protest the PAN by questioning respondent's
interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and
assessment of minimum corporate income tax despite
petitioner's position that it remains exempt
therefrom.25 In its letter-reply dated May 27, 2002,
respondent answered the arguments raised by
petitioner in its protest, and requested it to pay the
assessed deficiency on the date of payment stated in
the PAN. A second protest letter dated June 23, 2002
was sent by petitioner, to which respondent replied
(letter dated July 8, 2002) answering each of the two
issues reiterated by petitioner: ( 1) validity of EO 93
withdrawing the tax exemption privileges under PD
269; and (2) retroactive application of RR No. 8-
2000.26 The FAN was finally received by petitioner on
September 24, 2002, and protested by it in a letter
dated October 14, 2002 which reiterated in lengthy
arguments its earlier interpretation of the laws and
regulations upon which the assessments were based.27
Although the FAN and demand letter issued to
petitioner were not accompanied by a written
explanation of the legal and factual bases of the
deficiency taxes assessed against the petitioner, the
records showed that respondent in its letter dated April
10, 2003 responded to petitioner's October 14, 2002
letter-protest, explaining at length the factual and legal
bases of the deficiency tax assessments and denying
the protest.28
Considering the foregoing exchange of
correspondence and documents between the parties,
we find that the requirement of Section 228 was
substantially complied with. Respondent had fully
informed petitioner in writing of the factual and legal
bases of the deficiency taxes assessment, which
enabled the latter to file an "effective" protest, much
unlike the taxpayer's situation in Enron. Petitioner's
right to due process was thus not violated.
WHEREFORE, the petition is DENIED. The assailed
Decision and Resolution of the Court of Tax Appeals
En Banc dated March 11, 2010 and July 28, 2010,
respectively, in C.T.A. EB Nos. 460 and 462 (C.T.A.
Case No. 6697), are hereby AFFIRMED and UPHELD.
With costs against the petitioner.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 155541 January 27, 2004
ESTATE OF THE LATE JULIANA DIEZ VDA. DE
GABRIEL, petitioner,
vs.
COMMISSIONER OF INTERNAL
REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the
decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002,1 which reversed
the November 19, 1995 Order of Regional Trial Court
of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994,
entitled "Testate Estate of Juliana Diez Vda. De
Gabriel". The petition was filed by the Estate of the Late
Juliana Diez Vda. De Gabriel, represented by
Prudential Bank as its duly appointed and qualified
Administrator.
As correctly summarized by the Court of Appeals, the
relevant facts are as follows:
During the lifetime of the decedent, Juliana
Vda. De Gabriel, her business affairs were
managed by the Philippine Trust Company
(Philtrust). The decedent died on April 3, 1979.
Two days after her death, Philtrust, through its
Trust Officer, Atty. Antonio M. Nuyles, filed her
Income Tax Return for 1978. The return did not
indicate that the decedent had died.
On May 22, 1979, Philtrust also filed a verified petition
for appointment as Special Administrator with the
Regional Trial Court of Manila, Branch XXXVIII,
docketed as Sp. Proc. No. R-82-6994. The court a quo
appointed one of the heirs as Special Administrator.
Philtrust’s motion for reconsideration was denied by
the probate court.
On January 26, 1981, the court a quo issued an Order
relieving Mr. Diez of his appointment, and appointed
Antonio Lantin to take over as Special Administrator.
Subsequently, on July 30, 1981, Mr. Lantin was also
relieved of his appointment, and Atty. Vicente Onosa
was appointed in his stead.
In the meantime, the Bureau of Internal Revenue
conducted an administrative investigation on the
decedent’s tax liability and found a deficiency income
tax for the year 1977 in the amount of P318,233.93.
Thus, on November 18, 1982, the BIR sent by
registered mail a demand letter and Assessment
Notice No. NARD-78-82-00501 addressed to the
decedent "c/o Philippine Trust Company, Sta. Cruz,
Manila" which was the address stated in her 1978
Income Tax Return. No response was made by
Philtrust. The BIR was not informed that the decedent
had actually passed away.
In an Order dated September 5, 1983, the court a quo
appointed Antonio Ambrosio as the Commissioner and
Auditor Tax Consultant of the Estate of the decedent.
On June 18, 1984, respondent Commissioner of
Internal Revenue issued warrants of distraint and levy
to enforce collection of the decedent’s deficiency
income tax liability, which were served upon her heir,
Francisco Gabriel. On November 22, 1984, respondent
filed a "Motion for Allowance of Claim and for an Order
of Payment of Taxes" with the court a quo. On January
7, 1985, Mr. Ambrosio filed a letter of protest with the
Litigation Division of the BIR, which was not acted upon
because the assessment notice had allegedly become
final, executory and incontestable.
On May 16, 1985, petitioner, the Estate of the
decedent, through Mr. Ambrosio, filed a formal
opposition to the BIR’s Motion for Allowance of Claim
based on the ground that there was no proper service
of the assessment and that the filing of the aforesaid
claim had already prescribed. The BIR filed its Reply,
contending that service to Philippine Trust Company
was sufficient service, and that the filing of the claim
against the Estate on November 22, 1984 was within
the five-year prescriptive period for assessment and
collection of taxes under Section 318 of the 1977
National Internal Revenue Code (NIRC).
On November 19, 1985, the court a quo issued an
Order denying respondent’s claim against the
Estate,2 after finding that there was no notice of its tax
assessment on the proper party.3
On July 2, 1986, respondent filed an appeal with the
Court of Appeals, docketed as CA-G.R. CV No.
09107,4assailing the Order of the probate court dated
November 19, 1985. It was claimed that Philtrust, in
filing the decedent’s 1978 income tax return on April 5,
1979, two days after the taxpayer’s death, had
"constituted itself as the administrator of the estate of
the deceased at least insofar as said return is
concerned."5 Citing Basilan Estate Inc. v.
Commissioner of Internal Revenue,6 respondent
argued that the legal requirement of notice with respect
to tax assessments7 requires merely that the
Commissioner of Internal Revenue release, mail and
send the notice of the assessment to the taxpayer at
the address stated in the return filed, but not that the
taxpayer actually receive said assessment within the
five-year prescriptive period.8 Claiming that Philtrust
had been remiss in not notifying respondent of the
decedent’s death, respondent therefore argued that
the deficiency tax assessment had already become
final, executory and incontestable, and that petitioner
Estate was liable therefor.
On September 30, 2002, the Court of Appeals
rendered a decision in favor of the respondent.
Although acknowledging that the bond of agency
between Philtrust and the decedent was severed upon
the latter’s death, it was ruled that the administrator of
the Estate had failed in its legal duty to inform
respondent of the decedent’s death, pursuant to
Section 104 of the National Internal Revenue Code of
1977. Consequently, the BIR’s service to Philtrust of
the demand letter and Notice of Assessment was
binding upon the Estate, and, upon the lapse of the
statutory thirty-day period to question this claim, the
assessment became final, executory and
incontestable. The dispositive portion of said decision
reads:
WHEREFORE, finding merit in the appeal, the
appealed decision is REVERSED AND SET
ASIDE. Another one is entered ordering the
Administrator of the Estate to pay the
Commissioner of Internal Revenue the
following:
a. The amount of P318,223.93,
representing the deficiency income tax
liability for the year 1978, plus 20%
interest per annum from November 2,
1982 up to November 2, 1985 and in
addition thereto 10% surcharge on the
basic tax of P169,155.34 pursuant to
Section 51(e)(2) and (3) of the Tax
Code as amended by PD 69 and 1705;
and
b. The costs of the suit.
SO ORDERED.9
Hence, the instant petition, raising the following issues:
1. Whether or not the Court of Appeals erred in
holding that the service of deficiency tax
assessment against Juliana Diez Vda. de
Gabriel through the Philippine Trust Company
was a valid service in order to bind the Estate;
2. Whether or not the Court of Appeals erred in
holding that the deficiency tax assessment and
final demand was already final, executory and
incontestable.
Petitioner Estate denies that Philtrust had any legal
personality to represent the decedent after her death.
As such, petitioner argues that there was no proper
notice of the assessment which,
therefore, never became final, executory and
incontestable.10 Petitioner further contends that
respondent’s failure to file its claim against the Estate
within the proper period prescribed by the Rules of
Court is a fatal error, which forever bars its claim
against the Estate.11
Respondent, on the other hand, claims that because
Philtrust filed the decedent’s income tax return
subsequent to her death, Philtrust was the de facto
administrator of her Estate.12 Consequently, when the
Assessment Notice and demand letter dated
November 18, 1982 were sent to Philtrust, there was
proper service on the Estate.13Respondent further
asserts that Philtrust had the legal obligation to inform
petitioner of the decedent’s death, which requirement
is found in Section 104 of the NIRC of 1977.14 Since
Philtrust did not, respondent contends that petitioner
Estate should not be allowed to profit from this
omission.15 Respondent further argues that Philtrust’s
failure to protest the aforementioned assessment
within the 30-day period provided in Section 319-A of
the NIRC of 1977 meant that the assessment had
already become final, executory and incontestable.16
The resolution of this case hinges on the legal
relationship between Philtrust and the decedent, and,
by extension, between Philtrust and petitioner Estate.
Subsumed under this primary issue is the sub-issue of
whether or not service on Philtrust of the demand letter
and Assessment Notice No. NARD-78-82-00501 was
valid service on petitioner, and the issue of whether
Philtrust’s inaction thereon could bind petitioner. If both
sub-issues are answered in the affirmative,
respondent’s contention as to the finality of
Assessment Notice No. NARD-78-82-00501 must be
answered in the affirmative. This is because Section
319-A of the NIRC of 1977 provides a clear 30-day
period within which to protest an assessment. Failure
to file such a protest within said period means that the
assessment ipso jure becomes final and unappealable,
as a consequence of which legal proceedings may
then be initiated for collection thereof.
We find in favor of the petitioner.
The first point to be considered is that the relationship
between the decedent and Philtrust was one
of agency, which is a personal relationship between
agent and principal. Under Article 1919 (3) of the Civil
Code, death of the agent or principal automatically
terminates the agency. In this instance, the death of the
decedent on April 3, 1979 automatically severed the
legal relationship between her and Philtrust, and
such could not be revived by the mere fact that
Philtrust continued to act as her agent when, on April
5, 1979, it filed her Income Tax Return for the year
1978.
Since the relationship between Philtrust and the
decedent was automatically severed at the moment of
the Taxpayer’s death, none of Philtrust’s acts or
omissions could bind the estate of the Taxpayer.
Service on Philtrust of the demand letter and
Assessment Notice No. NARD-78-82-00501 was
improperly done.
It must be noted that Philtrust was never appointed as
the administrator of the Estate of the decedent, and,
indeed, that the court a quo twice rejected Philtrust’s
motion to be thus appointed. As of November 18, 1982,
the date of the demand letter and Assessment Notice,
the legal relationship between the decedent and
Philtrust had already been non-existent for three years.
Respondent claims that Section 104 of the National
Internal Revenue Code of 1977 imposed the legal
obligation on Philtrust to inform respondent of the
decedent’s death. The said Section reads:
SEC. 104. Notice of death to be filed. – In all
cases of transfers subject to tax or where,
though exempt from tax, the gross value of the
estate exceeds three thousand pesos, the
executor, administrator, or any of the legal
heirs, as the case may be, within two months
after the decedent’s death, or within a like
period after qualifying as such executor or
administrator, shall give written notice thereof
to the Commissioner of Internal Revenue.
The foregoing provision falls in Title III, Chapter
I of the National Internal Revenue Code of
1977, or the chapter on Estate Tax, and
pertains to "all cases of transfers subject to tax"
or where the "gross value of the estate exceeds
three thousand pesos". It has absolutely no
applicability to a case for deficiency income
tax, such as the case at bar. It further lacks
applicability since Philtrust was never the
executor, administrator of the decedent’s
estate, and, as such, never had the legal
obligation, based on the above provision, to
inform respondent of her death.
Although the administrator of the estate may
have been remiss in his legal obligation to
inform respondent of the decedent’s death, the
consequences thereof, as provided in Section
119 of the National Internal Revenue Code of
1977, merely refer to the imposition of certain
penal sanctions on the administrator. These do
not include the indefinite tolling of the
prescriptive period for making deficiency tax
assessments, or the waiver of the notice
requirement for such assessments.
Thus, as of November 18, 1982, the date of the
demand letter and Assessment Notice No.
NARD-78-82-00501, there was absolutely no
legal obligation on the part of Philtrust to either
(1) respond to the demand letter and
assessment notice, (2) inform respondent of
the decedent’s death, or (3) inform petitioner
that it had received said demand letter and
assessment notice. This lack of legal obligation
was implicitly recognized by the Court of
Appeals, which, in fact, rendered its assailed
decision on grounds of "equity".17
Since there was never any valid notice of this
assessment, it could not have become final, executory
and incontestable, and, for failure to make the
assessment within the five-year period provided in
Section 318 of the National Internal Revenue Code of
1977, respondent’s claim against the petitioner Estate
is barred. Said Section 18 reads:
SEC. 318. Period of limitation upon
assessment and collection. – Except as
provided in the succeeding section, internal
revenue taxes shall be assessed within five
years after the return was filed, and no
proceeding in court without assessment for the
collection of such taxes shall be begun after the
expiration of such period. For the purpose of
this section, a return filed before the last day
prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided,
That this limitation shall not apply to cases
already investigated prior to the approval of this
Code.
Respondent argues that an assessment is deemed
made for the purpose of giving effect to such
assessment when the notice is released, mailed or
sent to the taxpayer to effectuate the assessment, and
there is no legal requirement that the taxpayer actually
receive said notice within the five-year period.18 It must
be noted, however, that the foregoing rule requires that
the notice be sent to the taxpayer, and not merely to a
disinterested party. Although there is no specific
requirement that the taxpayer should receive the notice
within the said period, due process requires at the very
least that such notice actually be received. In
Commissioner of Internal Revenue v. Pascor Realty
and Development Corporation,19 we had occasion to
say:
An assessment contains not only a
computation of tax liabilities, but also a demand
for payment within a prescribed period. It also
signals the time when penalties and interests
begin to accrue against the taxpayer. To
enable the taxpayer to determine his remedies
thereon, due process requires that it must be
served on and received by the taxpayer.
In Republic v. De le Rama,20 we clarified that, when an
estate is under administration, notice must be sent to
the administrator of the estate, since it is the said
administrator, as representative of the estate, who has
the legal obligation to pay and discharge all debts of
the estate and to perform all orders of the court. In that
case, legal notice of the assessment was sent to two
heirs, neither one of whom had any authority to
represent the estate. We said:
The notice was not sent to the taxpayer for the
purpose of giving effect to the assessment, and
said notice could not produce any effect. In the
case of Bautista and Corrales Tan v. Collector
of Internal Revenue … this Court had occasion
to state that "the assessment is deemed made
when the notice to this effect is released,
mailed or sent to the taxpayer for the purpose
of giving effect to said assessment." It
appearing that the person liable for the
payment of the tax did not receive the
assessment, the assessment could not
become final and executory. (Citations omitted,
emphasis supplied.)
In this case, the assessment was served not even on
an heir of the Estate, but on a completely disinterested
third party. This improper service was clearly not
binding on the petitioner.
By arguing that (1) the demand letter and assessment
notice were served on Philtrust, (2) Philtrust was
remiss in its obligation to respond to the demand letter
and assessment notice, (3) Philtrust was remiss in its
obligation to inform respondent of the decedent’s
death, and (4) the assessment notice is therefore
binding on the Estate, respondent is arguing in circles.
The most crucial point to be remembered is that
Philtrust had absolutely no legal relationship to the
deceased, or to her Estate. There was therefore no
assessment served on the Estate as to the alleged
underpayment of tax. Absent this assessment, no
proceedings could be initiated in court for the collection
of said tax,21 and respondent’s claim for collection, filed
with the probate court only on November 22, 1984, was
barred for having been made beyond the five-year
prescriptive period set by law.
WHEREFORE, the petition is GRANTED. The
Decision of the Court of Appeals in CA-G.R. CV No.
09107, dated September 30, 2002, is REVERSED and
SET ASIDE. The Order of the Regional Trial Court of
Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994,
dated November 19, 1985, which denied the claim of
the Bureau of Internal Revenue against the Estate of
Year Net Income
Juliana Diez Vda. De Gabriel for the deficiency income
tax of the decedent for the year 1977 in the amount of
P318,223.93, is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-20569 August 23, 1974
JOSE B. AZNAR, in his capacity as Administrator
of the Estate of the deceased, Matias H.
Aznar,petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF
INTERNAL REVENUE, respondents.
Sato, Enad Garcia for petitioner.
Office of the Solicitor General Arturo A. Alafriz, Solicitor
Alejandro B. Afurong and Special Attorney Librada R.
Natividad for respondents.
ESGUERRA, J.:p
Petitioner, as administrator of the estate of the
deceased, Matias H. Aznar, seeks a review and
nullification of the decision of the Court of Tax Appeals
in C.T.A. Case No. 109, modifying the decision of
respondent Commissioner of Internal Revenue and
ordering the petitioner to pay the government the sum
of P227,691.77 representing deficiency income taxes
for the years 1946 to 1951, inclusive, with the condition
that if the said amount is not paid within thirty days from
the date the decision becomes final, there shall be
added to the unpaid amount the surcharge of 5%, plus
interest at the rate of 12% per annum from the date of
delinquency to the date of payment, in accordance with
Section 51 of the National Internal Revenue Code, plus
costs against the petitioner.
It is established that the late Matias H. Aznar who died
on May 18, 1958, predecessor in interest of herein
petitioner, during his lifetime as a resident of Cebu City,
filed his income tax returns on the cash and
disbursement basis, reporting therein the following:
Amount Exhibit
of Tax
Paid
P12,822.00 P114.66 pp. Based on the above findings of Examiner Guerrero,
85-88 respondent Commissioner, in his letter dated
November 28, 1952, notified the taxpayer (Matias H.
B.I.R.
Aznar) of the assessed tax delinquency to the amount
rec.
of P723,032.66, plus compromise penalty. The
,910.94 114.66 38-A taxpayer requested a reinvestigation which was
(pp. granted for the purpose of verifying the merits of the
329- various objections of the taxpayer to the deficiency
332 income tax assessment of November 28, 1952.
B.I.R
rec.) After the reinvestigation, another deficiency
assessment to the reduced amount of P381,096.07
0,200.00 132.00 39 dated February 16, 1955, superseded the previous
(pp. assessment and notice thereof was received by Matias
75-78 H. Aznar on March 2, 1955.
B.I.R
rec.) The new deficiency assessment was based on the
following computations:
,148.34 68.90 40
(pp. 1946
70-73
B.I.R.
rec.) Net income per return ........................ P9,910.94
Add: Under declared income .............. 22,559.94
,990.66 59.72 41 Net income per investigation............... 32,470.45
(pp.
64-67 Deduct: Income tax liability
B.I.R. per return as assessed
rec.) ...................................................... 114.66
Balance of tax due
,364.50 28.22 42 ........................................................... P3,687.10
(pp. Add: 50% surcharge
59-62, ........................................................ 1,843.55
BIR DEFICIENCY INCOME TAX
rec.) ...................................... P5,530.65

,800.00 none 43 1947

(pp.
54-57
Net income per return
BIR
..................................................... P10,200.00
rec.).
Add: Under declared income
............................................ 90,413.56
The Commissioner of Internal Revenue having his Net income per reinvestigation
doubts on the veracity of the reported income of one ....................................... P100,613.56
obviously wealthy, pursuant to the authority granted Deduct: Personal and additional exemption
him by Section 38 of the National Internal Revenue ...................... 7,000.00
Code, caused B.I.R. Examiner Honorio Guerrero to Amount of income subject to tax
ascertain the taxpayer's true income for said years by ...................................... P93,613.56
using the net worth and expenditures method of tax Total tax liability
investigation. The assets and liabilities of the taxpayer ............................................................... P24,753.15
during the above-mentioned years were ascertained Deduct: Income tax liability per return as assessed
and it was discovered that from 1946 to 1951, his net ............ 132.00
worth had increased every year, which increases in net Balance of tax due
worth was very much more than the income reported ........................................................... P24,621.15
during said years. The findings clearly indicated that Add: 50% surcharge
the taxpayer did not declare correctly the income ........................................................ 12,310.58 DEFICI
reported in his income tax returns for the aforesaid ENCY INCOME TAX
years. ...................................... P36,931.73
1948 Total tax liability
............................................................... P185,883.00
Net income per return Deduct: Income tax liability per return as assessed
...................................................... P9,148.34 ............. 28.00
Add: Under declared income Balance of tax due
............................................. 15,624.63 ............................................................ P185,855.00
Net income per reinvestigation Add: 50% surcharge
.......................................... P24,772.97 ......................................................... 92,928.00
Deduct: Personal and additional exemptions DEFICIENCY INCOME TAX .......................................
...................... 7,000.00 P278,783.00
Amount of income subject to tax
....................................... P17,772.97 1951
Total tax liability
............................................................... 2,201.40 Net income per return
Deduct: Income tax liability per return as assessed ........................................................ P6,800.00
............ 68.90 Add: Under declared income
Balance of tax due ............................................... 33,355.80
........................................................... P2,132.500 Net income per reinvestigation
Add: 50% surcharge ............................................ P40,155.80
........................................................ 1,066.25 DEFICIE Deduct: Personal and additional exemptions
NCY INCOME TAX ........................ 7,200.00
...................................... P3,198.75 Amount of income subject to tax
......................................... P32,955.80
1949 Total tax liability
.................................................................. P7,684.00
Net income per return Deduct: Income tax liability per return as assessed
....................................................... P9,990.66 ............... - o - .
Add: Under declared income Balance of tax due
............................................. 105,418.53 .............................................................. P7,684.00
Net income per reinvestigation Add: 50% surcharge
.......................................... 114,409.19 ........................................................... 3,842.00 DEFIC
Deduct: Personal and additional exemptions IENCY INCOME TAX
...................... P7,000.00 .......................................... P11,526.00
Amount of income subject to tax
....................................... P107,409.19 SUMMARY
Total tax liability
............................................................... P30,143.68 1946
Deduct: Income tax liability per return as assessed .... P5,530.65
............. 59.72
1947 .... 36,931.73
Balance of tax due
............................................................ P30,083.96 1948 .... 3,198.75
Add: 50% surcharge
......................................................... 15,041.98 DEFIC 1949 .... 45,125.94
IENCY INCOME TAX
....................................... P45,125.94 1950 .... 278,783.00

1950 1951 .... 11,526.00

Total .... P381,096.07

Net income per return
....................................................... P8,364.50
Add: Under declared income In determining the unreported income, the respondent
............................................. 365,578.76 Commissioner of Internal Revenue resorted to the
Net income per reinvestigation networth method which is based on the following
.......................................... P373,943.26 computations:
Deduct: Personal and additional exemptions
...................... 7,800.00 1945
Amount of income subject to tax
....................................... P366,143.26
Real estate inventory ................................ P64,738.00 Add: Estimated living expenses ................... 7,000.00
Other assets ............................................. 37,606.87 Net income ................................................ P24,772.97
Total assets ............................................ P102,344.87
Less: Depreciation allowed ...................... 2,027.00 1949
Networth as of Dec. 31, 1945 ................ P100,316.97
Real estate inventory .................................
1946 P400,515.52
Investment in schools and other colleges .... 23,105.29
Real estate inventory ................................. Other assets ............................................. 70,311.00
P86,944.18 Total assets ...............................................
Other assets ............................................. 60,801.65 P493,931.81
Total assets ............................................. P147,745.83 Less: Depreciation allowed ........................ 32,657.08
Less: Depreciation allowed ...................... 4,875.41 Net assets .................................................
Net assets ................................................ P461.274.73
P142,870.42 Less; Liabilities .................. P116,608.59
Less: Liabilities .................. P17,000.00 Networth as of
Net Worth as of Jan. 1, 1949 ...................... 237,256.95 P353,865.54
Jan. 1, 1946 ................... P100,316.97 P117,316.97 Increase in networth ..................................
Increase in networth ................................. 25,553.45 P107,409.19
Add: Estimated living expenses ................. 6,917.00 Add: Estimated living expenses .................. 7,000.00
Net income .............................................. P32,470.45 Net income
............................................... P114,409.19
1947
1950
Real estate inventory ..................................
P237,824.18 Real estate inventory ..................................
Other assets ............................................... 54,495.52 P412,465.52
Total assets ............................................... Investment in Schools and
P292,319.70 other colleges ................................ 193,460.99
Less: Depreciation allowed ......................... 12,835.72 October assets
Net assets .................................................. .......................................... 310,788.87
279,483.98 Total assets ...............................................
Less: Liabilities ................... P60,000.00 P916,715.38
Networth as of Less; Depreciation allowed ........................ 47,561.99
Jan. 1, 1947 ........................ 125,870.42 P185,870.42 Net assets .................................................
Increase in networth ................................... P869,153.39
P93,613.56 Less: Liabilities .................. P158,343.99
Add: Estimated living expenses ................... 7,000.00 Networth as of Jan. 1, 1950
Net income ... 344,666.14 P503,010.13
................................................P100,613.56 Increase in networth ...................................
P366,143.26
1948 Add: Estimated living expenses ................... 7,800.00
Net income .................................................
Real estate inventory .................................. P373,943.26
P244,824.18
Other assets 1951
.............................................. 118,720.60
Total assets ............................................... Real estate inventory ...................................
P363,544.78 P412,465.52
Less: Depreciation allowed ........................ 20,936.03 Investment in schools and other colleges .....
Net assets ................................................. 214,016.21
P342,608.75 Other assets
Less: Liabilities ................... P105,351.80 ............................................... 320,209.40
Networth as of Total assets ................................................
Jan. 1, 1948 ...................... 219,483.98 P324,835.78 P946,691.13
Increase in networth ................................... Less: Depreciation allowed ......................... 62,466.90
P17,772.97 Net assets ..................................................
P884,224.23
Less: Liabilities ........................................... Deficiency income tax
P140,459.03 ................................................ P5,530.65
Networth as of
Jan. 1, 1951 ................ 710,809.40 P851,268.43 1947
Increase in networth ....................................
P32,955.80 Net income per return ............................................
Add: Estimated living expenses .................... 7,200.00 P10,200.00
Net income Add: Under declared income
................................................. P40,155.80 .................................. 57,551.19
Net income ...........................................................
(Exh. 45-B, BIR rec. p. 188) P67,751.19
Less: Personal and additional exemptions
On February 20, 1953, respondent Commissioner of ............... 7,000.00
Internal Revenue, thru the City Treasurer of Cebu, Income subject to tax
placed the properties of Matias H. Aznar under distraint ............................................. P60,751.19
and levy to secure payment of the deficiency income Tax due thereon .....................................................
tax in question. Matias H. Aznar filed his petition for P13,420.38
review of the case with the Court of Tax Appeals on Less: Tax already assessed
April 1, 1955, with a subsequent petition immediately ..................................... P132.00
thereafter to restrain respondent from collecting the Balance of tax due ...................................................
deficiency tax by summary method, the latter petition P13,288.38
being granted on February 8, 1956, per C.T.A. Add: 50% surcharge
resolution, without requiring petitioner to file a bond. ................................................ 6,644.19
Upon review, this Court set aside the C.T.A. resolution Deficiency income tax
and required the petitioner to deposit with the Court of .............................................. P19,932.57
Tax Appeals the amount demanded by the
Commissioner of Internal Revenue for the years 1949 1948
to 1951 or furnish a surety bond for not more than
double the amount. Net income per return ..............................................
P9,148.34
On March 5, 1962, in a decision signed by the presiding Add: Under declared income
judge and the two associate judges of the Court of Tax ..................................... 8,732.10
Appeals, the lower court concluded that the tax liability Net income ............................................................
of the late Matias H. Aznar for the year 1946 to 1951, P17,880.44
inclusive should be P227,788.64 minus P96.87 Less: Personal and additional exemptions
representing the tax credit for 1945, or P227,691.77, ................. 7,000.00
computed as follows: Income subject to tax ..............................................
P10,880.44
1946 Tax due thereon
...................................................... P1,029.67
Net income per return .............................................. Less: Tax already assessed .......................................
P9,910.94 68.90
Add: Under declared income Balance of tax due ....................................................
..................................... 22,559.51 960.77
Net income ............................................................ Add: 50% surcharge
P32,470.45 ................................................. 480.38
Less: Personal and additional exemptions Deficiency income tax
.................. 6,917.00 ............................................... P1,441.15
Income subject to tax
............................................. P25,553.45 1949
Tax due thereon ......................................................
P3,801.76 Net income per return .................................................
Less: Tax already assessed P8,990.66
...................................... 114.66 Add: under declared income
Balance of tax due .................................................... ......................................... 43,718.53
P3,687.10 Net income ...............................................................
Add: 50% surcharge P52,709.19
................................................. 1,843.55 Less: Personal and additional exemptions
.................... 7,000.00 Deficiency income tax
Income subject to tax ................................................ P175 980.00
................................................. P45,709.19
Tax due thereon ......................................................... SUMMARY
P8,978.57
Less: Tax already assessed 1946 P5,530.65
......................................... 59.72
Balance of tax due .......................................................
1947 19,932.57
P8,918.85
Add: 50% surcharge
.................................................... 4,459.42 1948 1,441.15
Deficiency income tax
................................................. P13,378.27 1949 13,378.27

1950 1950 175,980.00

Net income per return .................................................. 1951 11,526.00

P6,800.00
Add: Under declared income P227,788.64.
......................................... 33,355.80
Net income ................................................................. I
P40,155.80
Less: Personal and additional exemptions The first vital issue to be decided here is whether or not
...................... 7,200.00 the right of the Commissioner of Internal Revenue to
Income subject to tax assess deficiency income taxes of the late Matias H.
.................................................. P32,955.80 Aznar for the years 1946, 1947, and 1948 had already
Tax due thereon ........................................................... prescribed at the time the assessment was made on
P7,684.00 November 28, 1952.
Less: Tax already assessed
........................................... -o- .
Petitioner's contention is that the provision of law
Balance of tax due ........................................................ applicable to this case is the period of five years
P7,684.00
limitation upon assessment and collection from the
Add: 50% surcharge filing of the returns provided for in See. 331 of the
.................................................... 3,842.00 National Internal Revenue Code. He argues that since
Deficiency income tax the 1946 income tax return could be presumed filed
.................................................. P11,526.00
before March 1, 1947 and the notice of final and last
assessment was received by the taxpayer on March 2,
1951 1955, a period of about 8 years had elapsed and the
five year period provided by law (Sec. 331 of the
Net income per return ................................................... National Internal Revenue Code) had already expired.
P8,364.50 The same argument is advanced on the taxpayer's
Add: Under declared income return for 1947, which was filed on March 1, 1948, and
........................................ 246,449.06 the return for 1948, which was filed on February 28,
Net income ............................................................... 1949. Respondents, on the other hand, are of the firm
P254.813.56 belief that regarding the prescriptive period for
Less: Personal and additional exemptions assessment of tax returns, Section 332 of the National
.................... 7,800.00 Internal Revenue Code should apply because, as in
Income subject to tax this case, "(a) In the case of a false or fraudulent return
................................................ P247,013.56 with intent to evade tax or of a failure to file a return,
Tax due thereon ........................................................ the tax may be assessed, or a proceeding in court for
P117,348.00 the collection of such tax may be begun without
Less: Tax already assessed assessment, at any time within ten years after the
........................................ 28.00 discovery of the falsity, fraud or omission" (Sec. 332 (a)
Balance of tax due ..................................................... of the NIRC).
P117,320.00
Add: 50% surcharge Petitioner argues that Sec. 332 of the NIRC does not
.................................................. 58,660.00 apply because the taxpayer did not file false and
fraudulent returns with intent to evade tax, while
respondent Commissioner of Internal Revenue insists
contrariwise, with respondent Court of Tax Appeals
concluding that the very "substantial under
declarations of income for six consecutive years
eloquently demonstrate the falsity or fraudulence of the
income tax returns with an intent to evade the payment
of tax."
To our minds we can dispense with these controversial
arguments on facts, although we do not deny that the
findings of facts by the Court of Tax Appeals, supported
as they are by very substantial evidence, carry great
weight, by resorting to a proper interpretation of
Section 332 of the NIRC. We believe that the proper
and reasonable interpretation of said provision should
be that in the three different cases of (1) false return,
(2) fraudulent return with intent to evade tax, (3) failure
to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may
be begun without assessment, at any time within ten
years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted
to mean a separation of the three different situations of
false return, fraudulent return with intent to evade tax,
and failure to file a return is strengthened
immeasurably by the last portion of the provision which
segregates the situations into three different classes,
namely "falsity", "fraud" and "omission". That there is a
difference between "false return" and "fraudulent
return" cannot be denied. While the first merely implies
deviation from the truth, whether intentional or not, the
second implies intentional or deceitful entry with intent
to evade the taxes due.
The ordinary period of prescription of 5 years within
which to assess tax liabilities under Sec. 331 of the
NIRC should be applicable to normal circumstances,
but whenever the government is placed at a
disadvantage so as to prevent its lawful agents from
proper assessment of tax liabilities due to false returns,
fraudulent return intended to evade payment of tax or
failure to file returns, the period of ten years provided
for in Sec. 332 (a) NIRC, from the time of the discovery
of the falsity, fraud or omission even seems to be
inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case,
We affirm the conclusion of the respondent Court of
Tax Appeals that Sec. 332 (a) of the NIRC should apply
and that the period of ten years within which to assess
petitioner's tax liability had not expired at the time said
assessment was made.
II
As to the alleged errors committed by the Court of Tax
Appeals in not deducting from the alleged undeclared
income of the taxpayer for 1946 the proceeds from the
sale of jewelries valued at P30,000; in not excluding
from other schedules of assets of the taxpayer (a)
accounts receivable from customers in the amount of
P38,000 for 1948, P126,816.50 for 1950, and
provisions for doubtful accounts in the amount of
P41,810.56 for 1950; (b) over valuation of hospital and
dental buildings for 1949 in the amount of P32,000 and
P6,191.32 respectively; (c) investment in hollow block
business in the amount of P8,603.22 for 1949; (d) over
valuation of surplus goods in the amount of P23,000 for
the year 1949; (e) various lands and buildings included
in the schedule of assets for the years 1950 and 1951
in the total amount of P243,717.42 for 1950 and
P62,564.00 for 1951, these issues would depend for
their resolution on determination of questions of facts
based on an evaluation of evidence, and the general
rule is that the findings of fact of the Court of Tax
Appeals supported by substantial evidence should not
be disturbed upon review of its decision (Section 2,
Rule 44, Rules of Court).
On the question of the alleged sale of P30,000 worth
of jewelries in 1946, which amount petitioner contends
should be deducted from the taxpayer's net worth as of
December 31, 1946, the record shows that Matias H.
Aznar, when interviewed by B.I.R. Examiner Guerrero,
stated that at the beginning of 1945 he had P60,000
worth of jewelries inherited from his ancestors and
were disposed off as follows: 1945, P10,000; 1946,
P20,000; 1947, P10,000; 1948, P10,000; 1949,
P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R.
rec. pp. 90-94).
During the hearing of this case in the Court of Tax
Appeals, petitioner's accountant testified that on
January 1, 1945, Matias H. Aznar had jewelries worth
P60,000 which were acquired by purchase during the
Japanese occupation (World War II) and sold on
various occasions, as follows: 1945, P5,000 and 1946,
P30,000. To corroborate the testimony of the
accountant, Mrs. Ramona Agustines testified that she
bought from the wife of Matias H. Aznar in 1946 a
diamond ring and a pair of earrings for P30,000; and in
1947 a wrist watch with diamonds, together with
antique jewelries, for P15,000. Matias H. Aznar, on the
other hand testified that in 1945, his wife sold to Sards
Parino jewelries for P5,000 and question, Mr. Aznar
stated that his transaction with Sards Parino, with
respect to the sale of jewelries, amounted to P15,000.
The lower court did not err in finding material
inconsistencies in the testimonies of Matias H. Aznar
and his witnesses with respect to the values of the
jewelries allegedly disposed off as stated by the
witnesses. Thus, Mr. Aznar stated to the B.I.R.
examiner that jewelries worth P10,000 were sold in
1945, while his own accountant testified that the same
jewelries were sold for only P5,000. Mr. Aznar also
testified that Mrs. Agustines purchased from his wife
jewelries for P35,000, and yet Mrs. Agustines herself
testified that she bought jewelries for P30,000 and
P15,000 on two occasions, or a total of P45,000.
We do not see any plausible reason to challenge the
fundamentally sound basis advanced by the Court of
Tax Appeals in considering the inconsistencies of the
witnesses' testimony as material, in the following
words:
We do not say that witnesses testifying
on the same transaction should give
identical testimonies. Because of the
frailties and the limitations of the
human mind, witnesses' statements
are apt to be inconsistent in certain
points, but usually the inconsistencies
refer to the minor phases of the
transaction. It is the insignificance of
the detail of an occurrence that fails to
impress the human mind. When that
same mind, made to recall what
actually happened, the significant point
which it failed to take note is naturally
left out. But it is otherwise as regards
significant matters, for they leave
indelible imprints upon the human
mind. Hence, testimonial
inconsistencies on the minor details of
an occurrence are dismissed lightly by
the courts, while discrepancies on
significant points are taken seriously
and weigh adversely to the party
affected thereby.
There is no sound basis for deviating from the lower
court's conclusion that: "Taxwise in view of the
aforesaid inconsistencies, which we deem material and
significant, we dismiss as without factual basis
petitioner's allegation that jewelries form part of his
inventory of assets for the purpose of establishing his
net worth at the beginning of 1946."
As to the accounts receivable from the United States
government for the amount of P38,254.90,
representing a claim for goods commandered by the
U.S. Army during World War II, and which amount
petitioner claimed should be included in his net worth
as of January 1, 1946, the Court of Tax Appeals
correctly concluded that the uncontradicted evidence
showed that "the collectible accounts of Mr. Aznar from
the U.S. Government in the sum of P38,254.90 should
be added to his assets (under accounts receivable) as
of January 1, 1946. As of December 31, 1947, and
December 31, 1948, the years within which the
accounts were paid to him, the 'accounts receivable
shall decrease by P31,362.37 and P6,892.53,
respectively."
Regarding a house in Talisay Cebu, (covered by Tax
Declaration No. 8165) which was listed as an asset
during the years 1945 and 1947 to 1951, but which was
not listed as an asset in 1946 because of a notation in
the tax declaration that it was reconstructed in 1947,
the lower court correctly concluded that the
reconstruction of the property did not render it
valueless during the time it was being reconstructed
and consequently it should be listed as an asset as of
January 1, 1946, with the same valuation as in 1945,
that is P1,500.
On the question of accounts receivable from customers
in the amount of P38,000 for 1948, and P123,816.58
for the years 1950 and 1951, which were included in
the assets of Mr. Aznar for those years by the
respondent Commissioner of Internal Revenue, it is
very clear that those figures were taken from the
statements (Exhs. 31 and 32) filed by Mr. Matias H.
Aznar with the Philippine National Bank when he was
intending to obtain a loan. These statements were
under oath and the natural implication is that the
information therein reflected must be the true and
accurate financial condition of the one who executed
those statements. To believe the petitioner's argument
that the late Mr. Aznar included those figures in his
sworn statement only for the purpose of obtaining a
bigger credit from the bank is to cast suspicion on the
character of a man who can no longer defend himself.
It would be as if pointing the finger of accusation on the
late Mr. Aznar that he intentionally falsified his sworn
statements (Exhs. 31 and 32) to make it appear that
there were non-existent accounts receivable just to
increase his assets by fictitious entries so that his credit
with the Philippine National Bank could be enhanced.
Besides, We do not lose sight of the fact that those
statements (Exhs. 31 and 32) were executed before
this tax controversy arose and the disputable
presumptions that a person is innocent of crime or
wrong; that a person intends the ordinary
consequences of his voluntary act; that a person takes
ordinary care of his concerns; that private transaction
have been fair and regular; that the ordinary course of
business has been followed; that things have
happened according to the ordinary course of nature
and the ordinary habits of life; that the law has been
obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131
of the Rules of Court), together with the conclusive
presumption that "whenever a party has, by his own
declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing
true, and to act upon such belief, he cannot, in any
litigation arising out of such declaration, act or
omission, be permitted to falsify it" (Sec. 3 (a), Rule
131, Rules of Court), convincingly indicate that the
accounts receivable stated by Mr. Aznar in Exhibits 31
and 32 were true, in existence, and accurate to the very
amounts mentioned.
There is no merit to petitioners argument that those
statements were only for the purpose of obtaining a
bigger credit from the bank (impliedly stating that those
statements were false) and those accounts were
allegedly back accounts of students of the
Southwestern Colleges and were worthless, and if
collected, would go to the funds of the school. The
statement of the late Mr. Aznar that they were accounts
receivable from customers should prevail over the
mere allegation of petitioner, unsupported as they are
by convincing evidence. There is no reason to disturb
the lower court's conclusion that the amounts of
P38,000 and P123,816.58 were accounts receivable
from customers and as such must be included as
petitioner's assets for the years indicated.
As to the questions of doubtful accounts (bad debts),
for the amount of P41,810.56, it is clear that said
amount is taken from Exhibit 31, the sworn statement
of financial condition filed by Mr. Matias H. Aznar with
the Philippine National Bank. The lower court did not
commit any error in again giving much weight to the
statement of Mr. Aznar and in concluding that
inasmuch as this is an item separate and apart from
the taxpayer's accounts receivable and non-deductible
expense, it should be reverted to the accounts
receivable and, consequently, considered as an asset
in 1950.
On the alleged over valuation of two buildings (hospital
building which respondent Commissioner of Internal
Revenue listed as an asset from 1949-1951 at the
basic valuation of P130,000, and which petitioner
claims to be over valued by P32,000; dentistry building
valued by respondent Commissioner of Internal
Revenue at P36,191.34, which petitioner claims to be
over valued by P6,191.34), We find no sufficient
reason to alter the conclusion of respondent Court of
Tax Appeals sustaining the respondent Commissioner
of Internal Revenue's valuation of both properties.
Respondent Commissioner of Internal Revenue based
his valuation of the hospital building on the
representation of Mr. Matias H. Aznar himself who, in
his letter (Exh. 35) to the Philippine National Bank
dated September 5, 1949, stated that the hospital
building cost him P132,000. However in view of the
effect of a typhoon in 1949 upon the building, the value
allowed was P130,000. Exhibit 35, contrary to
petitioner's contention, should be given probative value
because, although it is an unsigned plain copy, that
exhibit was taken by the investigating examiner of the
B.I.R. from the files of the Southwestern Colleges and
formed part of his report of investigation as a public
official. The estimates of an architect and a civil
engineer who agreed that a value of P84,240 is fair for
the hospital building, made years after the building was
constructed, cannot prevail over the petitioner's own
estimate of his property's value.
Respondent Commissioner of Internal Revenue's
valuation of P36,191.34 of the Dentistry Building is
based on the letter of Mr. and Mrs. Matias H. Aznar to
the Southwestern Colleges, dated December 15, 1950,
which is embodied in the minutes of the meeting of the
Board of Trustees of the Southwestern Colleges held
on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is
the cash book of the Southwestern Colleges, this
building was listed as of the same amount. Petitioner's
estimate of P30,000 for this building, based on
Architect Paca's opinion, cannot stand against the
owner's estimate and that which appears in the cash
book of the Southwestern Colleges, if we take into
consideration that the owner's (Mr. Matias H. Aznar)
letter was written long before this tax proceeding was
initiated, while architect Paca's estimate was made
upon petitioner's request solely for the purpose of
evidence in this tax case.
In the inventory of assets of petitioner, respondent
Commissioner of Internal Revenue included the
administrative building valued at P19,200 for the years
1947 and 1948, and P16,700 for the years 1949 to
1951; and a high school building valued at P48,000 for
1947 and 1948, and P45,000 for 1949, 1950 and 1951.
The reduced valuation for the latter years are due to
allowance for partial loss resulting from the 1949
typhoon. Petitioner did not question the inclusion of
these buildings in the inventory for the years prior to
1950, but objected to their inclusion as assets as of
January 1, 1950, because both buildings were
destroyed by a typhoon in November of 1949. There is
sufficient evidence (Exh. G-1, affidavit of Jesus S.
Intan, employee in the office of City Assessor of Cebu
City, Exh. 18, Mr. Intan's testimony, a copy of a letter
of the City Assessor of Cebu City) to prove that the two
buildings were really destroyed by typhoon in 1949
and, therefore, should be eliminated from the
petitioner's inventory of assets beginning December
31, 1949.
On the issue of investment in the hollow blocks
business, We see no compelling reason to alter the
lower court's conclusion that "whatever was spent in
the hollow blocks business is an investment, and being
an investment, the same should be treated as an asset.
With respect to the amount representing the value of
the building, there is no duplication in the listing as the
inventory of real property does not include the building
in question."
Respondent Commissioner of Internal Revenue
included in the inventory, under the heading of other
asset, the amount of P8,663.22, treated as investment
in the hollow block business. Petitioner objects to the
inclusion of P1,683.42 which was spent on the building
and in the business and of P674.35 which was spent
for labor, fuel, raw materials, office supplies etc.,
contending that the former amount is a duplication of
inventory (included among the list of properties) and
the latter is a business expense which should be
eliminated from the list of assets.
The inclusion of expenses (labor and raw materials) as
part of the hollow block business is sanctioned in the
inventory method of tax verification. It is a sound
accounting practice to include raw materials that will be
used for future manufacture. Inclusion of direct labor is
also proper, as all these items are to be embodied in a
summary of assets (investment by the taxpayer
credited to his capital account as reflected in Exhibit
72-A, which is a working sheet with entries taken from
the journal of the petitioner concerning his hollow
blocks business). There is no evidence to show that
there was duplication in the inclusion of the building
used for hollow blocks business as part of petitioner's
investment as this building was not included in the
listing of real properties of petitioner (Exh. 45-C p. 187
B.I.R. rec.).
As to the question of the real value of the surplus goods
purchased by Mr. Matias H. Aznar from the U.S. Army,
the best evidence, as observed correctly by the lower
court, is the statement of Mr. Matias H. Aznar, himself,
as appearing Exh. 35 (copy of a letter dated September
5, 1949 to the Philippine National Bank), to the effect
"as part of my assets I have different merchandise from
Warehouse 35, Tacloban, Leyte at a total cost of
P43,000.00 and valued at no less than P20,000 at
present market value." Petitioner's claim that the goods
should be valued at only P20,000 in accordance with
an alleged invoice is not supported by evidence since
the invoice was not presented as exhibit. The lower
court's act in giving more credence to the statement of
Mr. Aznar cannot be questioned in the light of clear
indications that it was never controverted and it was
given at a time long before the tax controversy arose.
The last issue on propriety of inclusion in petitioner's
assets made by respondent Commissioner of Internal
Revenue concerns several buildings which were
included in the list of petitioner's assets as of
December 31, 1950. Petitioner contends that those
buildings were conveyed and ceded to Southwestern
Colleges on December 15, 1950, in consideration of
P100,723.99 to be paid in cash. The value of the
different buildings are listed as: hospital building,
P130,000; gymnasium, P43,000; dentistry building,
P36,191.34; bodega 1, P781.18; bodega 2, P7,250;
college of law, P10,950; laboratory building, P8,164;
home economics, P5,621; morgue, P2,400; science
building, P23,600; faculty house, P5,760. It is
suggested that the value of the buildings be eliminated
from the real estate inventory and the sum of
P100,723.99 be included as asset as of December 31,
1950.
The lower court could not find any evidence of said
alleged transfer of ownership from the taxpayer to the
Southwestern Colleges as of December 15, 1950, an
allegation which if true could easily be proven. What is
evident is that those buildings were used by the
Southwestern Colleges. It is true that Exhibit G-1
shows that Mr. and Mrs. Matias H. Aznar offered those
properties in exchange for shares of stocks of the
Southwestern Colleges, and Exhibit "G" which is the
minutes of the meeting of the Board of Trustees of the
Southwestern Colleges held on August 6, 1951, shows
that Mr. Aznar was amenable to the value fixed by the
board of trustees and that he requested to be paid in
cash instead of shares of stock. But those are not
sufficient evidence to prove that transfer of ownership
actually happened on December 15, 1950. Hence, the
lower court did not commit any error in sustaining the
respondent Commissioner of Internal Revenue's act of
including those buildings as part of the assets of
petitioner as of December 31, 1950.
Petitioner also contends that properties allegedly
ceded to the Southwestern Colleges in 1951 for
P150,000 worth of shares of stocks, consisting of: land,
P22,684; house, P13,700; group of houses, P8,000;
building, P12,000; nurses home, P4,100; nurses home,
P2,080, should be excluded from the inventory of
assets as of December 31, 1951. The evidence (Exh.
H), however, clearly shows that said properties were
formally conveyed to the Southwestern Colleges only
on September 25, 1952. Undoubtedly, petitioner was
the owner of those properties prior to September 25,
1952 and said properties should form part of his assets
as of December 31, 1951.
The uncontested portions of the lower court's decision
consisting of its conclusions that library books valued
at P7,041.03, appearing in a journal of the
Southwestern Colleges marked as' Exhibit 25-A, being
an investment, should be treated as an asset beginning
December 31, 1950; that the expenses for construction
to the amount of P113,353.70, which were spent for the
improvement of the buildings appearing in Exhibit 24
are deemed absorbed in the increased value of the
buildings as appraised by respondent Commissioner of
Internal Revenue at cost after improvements were
made, and should be taken out as additional assets;
that the amount receivable of P5,776 from a certain
Benito Chan should be treated as petitioner's asset but
the amount of P5,776 representing the value of a
house and lot given as collateral to secure said loan
should not be considered as an asset of petitioner
since to do so would result in a glaring duplication of
items, are all affirmed. There seems to be no
controversy as to the rest of the items listed in the
inventory of assets.
III
The second issue which appears to be of vital
importance in this case centers on the lower court's
imposition of the fraud penalty (surcharge of 50%
authorized in Section 72 of the Tax Code). The
petitioner insists that there might have been false
returns by mistake filed by Mr. Matias H. Aznar as
those returns were prepared by his accountant
employees, but there were no proven fraudulent
returns with intent to evade taxes that would justify the
imposition of the 50% surcharge authorized by law as
fraud penalty.
The lower court based its conclusion that the 50% fraud
penalty must be imposed on the following reasoning: .
It appears that Matias H. Aznar
declared net income of P9,910.94,
P10,200, P9,148.34, P8,990.66,
P8,364.50 and P6,800 for the years
1946, 1947, 1948, 1949, 1950 and
1951, respectively. Using the net worth
method of determining the net income
of a taxpayer, we find that he had net
incomes of P32,470.45, P67,751.19,
P17,880.44, P52,709.11, P254,813.56
and P40,155.80 during the respective
years 1946, 1947, 1948, 1949, 1950,
and 1951. In consequence, he
underdeclared his income by 227% for
1946, 564% for 1947, 95%, for 1948,
486% for 1949, 2,946% for 1950 and
490% for 1951. These substantial
under declarations of income for six
consecutive years eloquently
demonstrate the falsity or fraudulence
of the income tax return with an intent
to evade the payment of tax. Hence,
the imposition of the fraud penalty is
proper (Perez vs. Court of Tax
Appeals, G.R. No. L-10507, May 30,
1958). (Emphasis supplied)
As could be readily seen from the above rationalization
of the lower court, no distinction has been made
between false returns (due to mistake, carelessness or
ignorance) and fraudulent returns (with intent to evade
taxes). The lower court based its conclusion on the
petitioner's alleged fraudulent intent to evade taxes on
the substantial difference between the amounts of net
income on the face of the returns as filed by him in the
years 1946 to 1951 and the net income as determined
by the inventory method utilized by both respondents
for the same years. The lower court based its
conclusion on a presumption that fraud can be
deduced from the very substantial disparity of incomes
as reported and determined by the inventory method
and on the similarity of consecutive disparities for six
years. Such a basis for determining the existence of
fraud (intent to evade payment of tax) suffers from an
inherent flaw when applied to this case. It is very
apparent here that the respondent Commissioner of
Internal Revenue, when the inventory method was
resorted to in the first assessment, concluded that the
correct tax liability of Mr. Aznar amounted to
P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a
reinvestigation the same respondent, in another
assessment dated February 16, 1955, concluded that
the tax liability should be reduced to P381,096.07. This
is a crystal-clear, indication that even the respondent
Commissioner of Internal Revenue with the use of the
inventory method can commit a glaring mistake in the
assessment of petitioner's tax liability. When the
respondent Court of Tax Appeals reviewed this case
on appeal, it concluded that petitioner's tax liability
should be only P227,788.64. The lower court in three
instances (elimination of two buildings in the list of
petitioner's assets beginning December 31, 1949,
because they were destroyed by fire; elimination of
expenses for construction in petitioner's assets as
duplication of increased value in buildings, and
elimination of value of house and lot in petitioner's
assets because said property was only given as
collateral) supported petitioner's stand on the wrong
inclusions in his lists of assets made by the respondent
Commissioner of Internal Revenue, resulting in the
very substantial reduction of petitioner's tax liability by
the lower court. The foregoing shows that it was not
only Mr. Matias H. Aznar who committed mistakes in
his report of his income but also the respondent
Commissioner of Internal Revenue who committed
mistakes in his use of the inventory method to
determine the petitioner's tax liability. The mistakes
committed by the Commissioner of Internal Revenue
which also involve very substantial amounts were also
repeated yearly, and yet we cannot presume therefrom
the existence of any taint of official fraud.
From the above exposition of facts, we cannot but
emphatically reiterate the well established doctrine that
fraud cannot be presumed but must be proven. As a
corollary thereto, we can also state that fraudulent
intent could not be deduced from mistakes however
frequent they may be, especially if such mistakes
emanate from erroneous entries or erroneous
classification of items in accounting methods utilized
for determination of tax liabilities The predecessor of
the petitioner undoubtedly filed his income tax returns
for "the years 1946 to 1951 and those tax returns were
prepared for him by his accountant and employees. It
also appears that petitioner in his lifetime and during
the investigation of his tax liabilities cooperated readily
with the B.I.R. and there is no indication in the record
of any act of bad faith committed by him.
The lower court's conclusion regarding the existence of
fraudulent intent to evade payment of taxes was based
merely on a presumption and not on evidence
establishing a willful filing of false and fraudulent
returns so as to warrant the imposition of the fraud
penalty. The fraud contemplated by law is actual and
not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted
to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent
to the fraud with intent to evade the tax contemplated
by the law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily
follows that a mere mistake cannot be considered as
fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method
of determining tax liability, it would be unfair to treat the
mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty

authorized under Section 72 of the Tax Code should
not be imposed, but eliminated from the income tax
deficiency for each year from 1946 to 1951, inclusive.
The tax liability of the petitioner for each year should,
therefore, be:

1946 P 3,687.10
1947 13,288.38
1948 960.77
1949 8,918.85
1950 117,320.00
1951 7,684.00
P151,859.10

The total sum of P151,859.10 should be decreased by

P96.87 representing the tax credit for 1945, thereby
leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax

Appeals is modified in so far as the imposition of the
50% fraud penalty is concerned, and affirmed in all
other respects. The petitioner is ordered to pay to the
Commissioner of Internal Revenue, or his duly
authorized representative, the sum of P151,762.23,
representing deficiency income taxes for the years
1946 to 1951, inclusive, within 30 days from the date
this decision becomes final. If the said amount is not
paid within said period, there shall be added to the
unpaid amount the surcharge of 5%, plus interest at the
rate of 12% per annum from the date of delinquency to
the date of payment, in accordance with Section 51 of
the National Internal Revenue Code.

With costs against the petitioner.