COMMISSIONER OF INTERNAL REVENUE, Petitio ner,

G.R. No. 167560 Present: YNARESSANTIAGO, J., Chairpers on, AUSTRIAMARTINEZ, CHICONAZARIO, NACHURA, and REYES, JJ. Promulgated:

Based on the Joint Stipulation of Facts and Admissions[4] of the parties, the CTA summarized the factual and procedural antecedents of the case, the relevant portions of which read:
Petitioner Dominador Menguito [herein respondent] is a Filipino citizen, of legal age, married to Jeanne Menguito and is engaged in the restaurant and/or cafeteria business. For the years 1991, 1992 and 1993, its principal place of business was at Gloriamaris, CCP Complex, Pasay City and later transferred to Kalayaan Bar (Copper Kettle Cafeteria Specialist or CKCS), Departure Area, Ninoy Aquino International Airport, Pasay City. During the same years, he also operated a branch at Club John Hay, Baguio City carrying the business name of Copper Kettle Cafeteria Specialist (Joint Stipulation of Facts and Admissions, p. 133, CTA records). xxxx

- versus -

DOMINADOR MENGUITO, Respon

September 17, dent. 2008 x---------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.: Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 31, 2005 Decision[1] of the Court of Appeals (CA) which reversed and set aside the Court of Tax Appeals (CTA) April 2, 2002 Decision[2] and October 10, 2002 Resolution[3] ordering Dominador Menguito (respondent) to pay the Commissioner of Internal Revenue (petitioner) deficiency income and percentage taxes and delinquency interest.

Subsequently, BIR Baguio received information that Petitioner [herein respondent] has undeclared income from Texas Instruments and Club John Hay, prompting the BIR to conduct another investigation. Through a letter dated July 28, 1997, Spouses Dominador Menguito and Jeanne Menguito (Spouses Menguito) were informed by the Assessment Division of the said office that they have underdeclared sales totaling P48,721,555.96 (Exhibit 11, p. 83, BIR records). This was followed by a Preliminary Ten (10) Day Letter dated August 11, 1997, informing Petitioner [herein respondent] that in the investigation of his 1991, 1992 and 1993

income, business and withholding tax case, it was found out that there is still due from him the total sum of P34,193,041.55 as deficiency income and percentage tax. On September 2, 1997, the assessment notices subject of the instant petition were issued. These were protested by Ms. Jeanne Menguito, through a letter datedSeptember 28, 1997 (Exhibit 14, p. 112, BIR Records), on the ground that the 40% deduction allowed on their computed gross revenue, is unrealistic. Ms. Jeanne Menguito requested for a period of thirty (30) days within which to coordinate with the BIR regarding the contested assessment. On October 10, 1997, BIR Baguio replied, informing the Spouses Menguito that the source of assessment was not through the disallowance of claimed expenses but on data received from Club John Hay and Texas Instruments Phils., Inc. Said letter gave the spouses ten (10) days to present evidence (Exhibit 15, p. 110, BIR Records). In an effort to clear an alleged confusion regarding Copper Kettle Cafeteria Specialist (CKCS) being a sole proprietorship owned by the Spouses, and Copper Kettle Catering Services, Inc. (CKCS, Inc.) being a corporation with whom Texas Instruments and Club John Hay entered into a contract, Petitioner [respondent] submitted to BIR Baguio a photocopy of the SEC Registration of Copper Kettle Catering Services, Inc. on March 23, 1999 (pp. 134-141, BIR Records). On April 12, 1999, BIR Baguio wrote a letter to Spouses Menguito, informing the latter that a reinvestigation or

reconsideration cannot be given due course by the mere submission of an uncertified photocopy of the Certificate of Incorporation. Thus, it avers that the amendment issued is still valid and enforceable. On May 26, 1999, Petitioner [respondent] filed the present case, praying for the cancellation and withdrawal of the deficiency income tax and percentage tax assessments on account of prescription, whimsical factual findings, violation of procedural due process on the issuance of assessment notices, erroneous address of notices and multiple credit/ investigation by the Respondent [petitioner] of Petitioner's [respondents] books of accounts and other related records for the same tax year. Instead of filing an Answer, Respondent [herein petitioner] moved to dismiss the instant petition on July 1, 1999, on the ground of lack of jurisdiction. According to Respondent [petitioner], the assessment had long become final and executory when Petitioner [respondent] failed to comply with the letter dated October 10, 1997. Petitioner opposed said motion on July 21, 1999, claiming that the final decision on Petitioner's [respondents] protest is the April 12, 1999 letter of the Baguio Regional Office; therefore, the filing of the action within thirty (30) days from receipt of the said letter was seasonably filed. Moreover, Petitioner [respondent] asserted that granting that the April 12, 1999 letter in question could not be construed to mean as a denial or final decision of the protest, still Petitioner's [respondents] appeal was timely filed since Respondent [petitioner] issued a Warrant of Distraint and/or Levy against

the Petitioner [respondent] on May 3, 1999, which warrant constituted a final decision of the Respondent [petitioner] on the protest of the taxpayer. On September 3, 1999, this Court denied Respondent's [petitioners] 'Motion to Dismiss' for lack of merit. Respondent [petitioner] filed his Answer on September 24, 1999, raising the following Special and Affirmative Defenses: xxxx
5. Investigation disclosed that for taxable years 1991, 1992 and 1993, petitioner [respondent] filed false or fraudulent income and percentage tax returns with intent to evade tax by under declaring his sales. 6. The alleged duplication of investigation of petitioner [respondent] by the BIR Regional Office in Baguio City and by the Revenue District Office in Pasay City is justified by the finding of fraud on the part of the petitioner [respondent], which is an exception to the provision in the Tax Code that the examination and inspection of books and records shall be made only once in a taxable year (Section 235, Tax Code). At any rate, petitioner [respondent], in a letter dated July 18, 1994, waived his right to the consolidation of said investigation. 7. The aforementioned falsity or fraud was discovered on August 5, 1997. The assessments were issued on September 2, 1997, or within ten (10) years from the discovery of such falsity or fraud (Section 223, Tax Code). Hence, the assessments have not prescribed. 8. Petitioner's [respondents] allegation that the assessments were not properly addressed is rendered moot and academic by his acknowledgment in his protest letter dated September 28, 1997 that he received the assessments.

9. Respondent [petitioner] complied with the provisions of Revenue Regulations No. 12-85 by informing petitioner [respondent] of the findings of the investigation in letters dated July 28, 1997 and August 11, 1997 prior to the issuance of the assessments. 10. Petitioner [respondent] did not allege in his administrative protest that there was a duplication of investigation, that the assessments have prescribed, that they were not properly addressed, or that the provisions of Revenue Regulations No. 1285 were not observed. Not having raised them in the administrative level, petitioner [respondent] cannot raise the same for the first time on appeal (Aguinaldo Industries Corp. vs. Commissioner of Internal Revenue, 112 SCRA 136). 11. The assessments were issued in accordance with law and regulations. 12. All presumptions are in favor of the correctness of tax assessments (CIR vs. Construction Resources of Asia, Inc., 145 SCRA 67), and the burden to prove otherwise is upon petitioner [respondent]. [5] (Emphasis supplied)

On April 2, 2002, the CTA rendered a Decision, the dispositive portion of which reads:
Accordingly, Petitioner [herein respondent] is ORDERED to PAY the Respondent [herein petitioner] the amount of P11,333,233.94 and P2,573,655.82 as deficiency income and percentage tax liabilities, respectively for taxable years 1991, 1992 and 1993 plus 20% delinquency interest from October 2, 1997 until full payment thereof. SO ORDERED.[6]

Respondent filed a motion for reconsideration but the CTA denied the same in its Resolution of October 10, 2002.[7]

Through a Petition for Review[8] filed with the CA, respondent questioned the CTA Decision and Resolution mainly on the ground that Copper Kettle Catering Services, Inc. (CKCS, Inc.) was a separate and distinct entity from Copper Kettle Cafeteria Specialist (CKCS); the sales and revenues of CKCS, Inc. could not be ascribed to CKCS; neither may the taxes due from one, charged to the other; nor the notices to be served on the former, coursed through the latter.[9] Respondent cited the Joint Stipulation in which petitioner acknowledged that its (respondents) business was called Copper Kettle Cafeteria Specialist, not Copper Kettle Catering Services, Inc.[10] Based on the unrefuted[11] CTA summary, the CA rendered the Decision assailed herein, the dispositive portion of which reads:
WHEREFORE, the instant petition is GRANTED. Reversing the assailed Decision dated April 2, 2002 and Resolution dated October 10, 2002, the deficiency income tax and percentage income tax assessments against petitioner in the amounts of P11,333,233.94 and P2,573,655.82 for taxable years 1991, 1992 and 1993 plus the 20% delinquency interest thereon are annulled. SO ORDERED.[12]

holding that Copper Kettle Cafeteria Specialist owned by respondent and Copper Kettle Catering Services, Inc. owned and managed by respondent's wife are not one and the same. II The Court of Appeals erred in holding that respondent was denied due process for failure of petitioner to validly serve respondent with the post-reporting and preassessment notices as required by law.

On the first issue, the CTA has ruled that CKCS, Inc. and CKCS are one and the same corporation because [t]he contract between Texas Instruments and Copper Kettle was signed by petitioners [respondents] wife, Jeanne Menguito as proprietress.[14] However, the CA reversed the CTA on these grounds:
Respondents [herein petitioners] allegation that Copper Kettle Catering Services, Inc. and Copper Kettle Cafeteria Specialists are not distinct entities and that the under-declared sales/revenues of Copper Kettle Catering Services, Inc. pertain to Copper Kettle Cafeteria Specialist are belied by the evidence on record. In the Joint Stipulation of Facts submitted before the tax court, respondent [petitioner] admitted that petitioners [herein respondents] business name is Copper Kettle Cafeteria Specialist. Also, the Certification of Club John Hay and Letter dated July 9, 1997 of Texas Instruments both addressed to respondent indicate that these companies transacted with Copper Kettle Catering Services, Inc., owned and managed by JEANNE G. MENGUITO, NOT petitioner Dominador Menguito. The alleged under-

Petitioner filed a motion for reconsideration but the CA denied the same in its October 10, 2002 Resolution.[13]
Hence, herein recourse to the Court for the reversal of the CA decision and resolution on the following grounds:
I The Court of Appeals erred in reversing the decision of the Court of Tax Appeals and in

declared sales income subject of the present assessments were shown to have been earned by Copper Kettle Catering Services, Inc. in its commercial transaction with Texas Instruments and Camp John Hay; NOT by petitioners dealing with these companies. In fact, there is nothing on record which shows that Texas Instruments and Camp John Hay conducted business relations with Copper Kettle Cafeteria Specialist, owned by herein petitioner Dominador Menguito. In the absence, therefore, of clear and convincing evidence showing that Copper Kettle Cafeteria Specialist and Copper Kettle Catering Services, Inc. are one and the same, respondent can NOT validly impute alleged underdeclared sales income earned by Copper Kettle Catering Services, Inc. as sales income of Copper Kettle Cafeteria Specialist.[15] (Emphasis supplied)

We are in receipt of the assessment notice you have sent us, dated September 2, 1997. Having taken hold of the same only now following our travel overseas, we were not able to respond immediately and manifest our protest. Also, with the impending termination of our businesses at 19th Tee, Club John Hay and at Texas Instruments, Loakan, Baguio City, we have already started the transfer of our records and books in Baguio City to Manila that we will need more time to review and sort the records that may have to be presented relative to the assessment x x x.[19] (Emphasis supplied)

Respondent is adamant that the CA is correct. Many times in the past, the BIR had treated CKCS separately from CKCS, Inc.: from May 1994 to June 1995, the BIR sent audit teams to examine the books of account and other accounting records of CKCS, and based on said audits, respondent was held liable for deficiency taxes, all of which he had paid.[16] Moreover, the certifications[17] issued by Club John Hay and Texas Instruments identify the concessionaire operating therein as CKCS, Inc., owned and managed by his spouse Jeanne Menguito, and not CKCS.[18] Petitioner impugns the findings of the CA, claiming that these are contradicted by evidence on record consisting of a reply to the September 2, 1997 assessment notice of BIR Baguio which Jeanne Menguito wrote on September 28, 1997, to wit:

Petitioner insists that said reply confirms that the assessment notice is directed against the businesses which she and her husband, respondent herein, own and operate at Club John Hay and Texas Instruments, and establishes that she is protesting said notice not just for herself but also for respondent.[20] Moreover, petitioner argues that if it were true that CKCS, Inc. and CKCS are separate and distinct entities, respondent could have easily produced the articles of incorporation of CKCS, Inc.; instead, what respondent presented was merely a photocopy of the incorporation articles. [21] Worse, petitioner adds, said document was not offered in evidence before the CTA, but was presented only before the CA.[22] Petitioner further insists that CKCS, Inc. and CKCS are merely employing the fiction of their separate corporate existence to evade payment of proper taxes; that the CTA saw through their ploy and rightly disregarded their corporate individuality, treating them instead as one taxable entity with the same tax base and

liability;[23]and that the CA should have sustained the CTA.[24] In effect, petitioner would have the Court resolve a purely factual issue[25] of whether or not there is substantial evidence that CKCS, Inc. and CKCS are one and the same taxable entity. As a general rule, the Court does not venture into a trial of facts in proceedings under Rule 45 of the Rules of Courts, for its only function is to review errors of law.[26] The Court declines to inquire into errors in the factual assessment of the CA, for the latters findings are conclusive, especially when these are synonymous to those of the CTA.[27] But when the CA contradicts the factual findings of the CTA, the Court deems it necessary to determine whether the CA was justified in doing so, for one basic rule in taxation is that the factual findings of the CTA, when supported by substantial evidence, will not be disturbed on appeal unless it is shown that the CTA committed gross error in its appreciation of facts.[28] The Court finds that the CA gravely erred when it ignored the substantial evidence on record and reversed the CTA. In a number of cases, the Court has shredded the veil of corporate identity and ruled that where a corporation is merely an adjunct, business conduit or alter ego of another corporation or when they practice fraud on our internal revenue laws,[29] the fiction of their separate and distinct corporate identities shall be disregarded, and both entities treated as one taxable person, subject to assessment for the same taxable transaction. The Court considers the presence of the following circumstances, to wit: when the owner of one directs and controls the operations of the other, and the payments effected or received by

one are for the accounts due from or payable to the other;[30] or when the properties or products of one are all sold to the other, which in turn immediately sells them to the public,[31] as substantial evidence in support of the finding that the two are actually one juridical taxable personality. In the present case, overwhelming evidence supports the CTA in disregarding the separate identity of CKCS, Inc. from CKCS and in treating them as one taxable entity. First, in respondents Petition for Review before the CTA, he expressly admitted that he is engaged in restaurant and/or cafeteria business and that [i]n 1991, 1992 and 1993, he also operated a branch at Club John Hay, Baguio City with a business name of Copper Kettle Cafeteria Specialist.[32] Respondent repeated such admission in the Joint Stipulation.[33] And then in Exhibit 1[34] for petitioner, a July 18, 1994 letter sent by Jeanne Menguito to BIR, Baguio City, she stated thus:
in connection with the investigation of Copper Kettle Cafeteria Specialist which is located at 19th Tee Club John Hay, Baguio City under letter of authority nos. 0392897, 0392898, and 0392690 dated May 16, 1994, investigating my income, business, and withholding taxes for the years 1991, 1992, and 1993.[35] (Emphasis supplied)

Jeanne Menguito signed the letter as proprietor of Copper Kettle Cafeteria Specialist.[36] Related to Exhibit 1 is petitioner's Exhibit 14, which is another letter dated September 28, 1997, in which Jeanne Menguito protested the September 2, 1997assessment notices directed at Copper Kettle Cafeteria Specialist and referred to the latter as our business at 19th Tee Club John Hay and at Texas Instruments.[37] Taken along with the Joint Stipulation, Exhibits A through C and the August 3, 1993 Certification of Camp John

Hay, Exhibits 1 and 14, confirm that respondent, together with his spouse Jeanne Menguito, own, operate and manage a branch of Copper Kettle Cafeteria Specialist, also called Copper Kettle Catering Services at Camp John Hay. Moreover, in Exhibits A to A-1,[38] Exhibits B to B-1[39] and Exhibits C to C1[40] which are lists of concessionaires that operated in Club John Hay in 1992, 1993 and 1991, respectively,[41] it appears that there is no outlet with the name Copper Kettle Cafeteria Specialist as claimed by respondent. The name that appears in the lists is 19th TEE CAFETERIA (Copper Kettle, Inc.). However, in the light of the express admission of respondent that in 1991, 1992 and 1993, he operated a branch called Copper Kettle Cafeteria Specialist in Club John Hay, the entries in Exhibits A through C could only mean that said branch refers to 19th Tee Cafeteria (Copper Kettle, Inc.). There is no evidence presented by respondent that contradicts this conclusion. In addition, the August 9, 1993 Certification issued by Club John Hay that COPPER KETTLE CATERING SERVICES owned and managed by MS. JEANNE G. MENGUITO is a concessionaire in John Hay since July 1991 up to the present and is operating the outlet 19TH TEE CAFETERIA AND THE TEE BAR[42] convincingly establishes that respondent's branch which he refers to as Copper Kettle Cafeteria Specialist at Club John Hay also appears in the latter's records as Copper Kettle Catering Services with an outlet called 19th Tee Cafeteria and The Tee Bar. Second, in Exhibit 8[43] and Exhibit E,[44] Texas Instruments identified the concessionaire operating its canteen as Copper Kettle Catering Services, Inc.[45] and/or COPPER KETTLE CAFETERIA

SPECIALIST SVCS.[46] It being settled that respondent's Copper Kettle Cafeteria Specialist is also known as Copper Kettle Catering Services, and that respondent and Jeanne Menguito both own, manage and act as proprietors of the business, Exhibit 8 and Exhibit E further establish that, through said business, respondent also had taxable transactions with Texas Instruments. In view of the foregoing facts and circumstances, the Articles of Incorporation of CKCS, Inc. -- a certified true copy of which respondent attached only to his Reply filed with the CA[47] -- cannot insulate it from scrutiny of its real identity in relation to CKCS. It is noted that said Articles of Incorporation of CKCS, Inc. was issued in 1989, but documentary evidence indicate that after said date, CKCS, Inc. has also assumed the name CKCS, and viceversa. The most concrete indication of this practice is the 1991 Quarterly Percentage Tax Returns covering the business name/trade 19th Tee Camp John Hay. In said returns, the taxpayer is identified as Copper Kettle Cafeteria Specialist[48] or CKCS, not CKCS, Inc. Yet, in several documents already cited, the purported owner of 19th Tee Bar at Club John Hay is CKCS, Inc. All these pieces of evidence buttress the finding of the CTA that in 1991, 1992 and 1993, respondent, together with his spouse Jeanne Menguito, owned and operated outlets in Club John Hay and Texas Instruments under the names Copper Kettle Cafeteria Specialist or CKCS and Copper Kettle Catering Services or Copper Kettle Catering Services, Inc.. Turning now to the second issue. In respondent's Petition for Review with the CTA, he questioned the validity of the Assessment Notices,[49] all dated September 2,

1997, issued by BIR,Baguio City against him on the following grounds: 1. The assessment notices, based on income and percentage tax returns filed for 1991, 1992 and 1993, were issued beyond the three-year prescriptive period under Section 203 of the Tax Code;[50] 2. The assessment notices were addressed to Copper Kettle Specialist, Club John Hay, Baguio City, despite notice to petitioner that respondent's principal place of business was at the CCP Complex, Pasay City.[51] 3. The assessment notices were issued in violation of the requirement of Revenue Regulations No. 12-85, dated November 27, 1985, that the taxpayer be issued a post-reporting notice and pre-assessment notice before the preliminary findings of deficiency may ripen into a formal assessment;[52] and 4. The assessment notices did not give respondent a 15-day period to reply to the findings of deficiency.[53] The Court notes that nowhere in his Petition for Review did respondent deny that he received the September 2, 1997 assessment notices. Instead, during the trial, respondent's witness, Ma. Theresa Nalda (Nalda), testified that she informed the BIR, Baguio City that there was no Notic e or letter, that we did not receive, perhaps, because they were not addressed to Mr. Menguito's head office.[54] The CTA correctly upheld the validity of the assessment notices. Citing Section 223 of the Tax Code which provides that the prescriptive period for the issuance of assessment notices based on fraud is 10 years, the CTA ruled that the assessment notices issued against respondent on September 2, 1997 were timely because petitioner discovered the falsity

in respondent's tax returns for 1991, 1992 and 1993 only on February 19, 1997. [55] Moreover, in accordance with Section 2 of Revenue Regulation No. 12-85, which requires that assessment notices be sent to the address indicated in the taxpayer's return, unless the latter gives a notice of change of address, the assessment notices in the present case were sent by petitioner to Camp John Hay, for this was the address respondent indicated in his tax returns. [56] As to whether said assessment notices were actually received, the CTA correctly held that since respondent did not testify that he did not receive said notices, it can be presumed that the same were actually sent to and received by the latter. The Court agrees with the CTA in considering as hearsay the testimony ofNalda that respondent did not receive the notices, because Nalda was not competent to testify on the matter, as she was employed by respondent only in June 1998, whereas the assessment notices were sent on September 2, 1997.[57] Anent compliance with the requirements of Revenue Regulation No. 12-85, the CTA held:
BIR records show that on July 28, 1997, a letter was issued by BIR Baguio to Spouses Menguito, informing the latter of their supposed underdeclaration of sales totalingP48,721,555.96 and giving them 5 days to communicate any objection to the results of the investigation (Exhibit 11, p. 83, BIR Records). Records likewise reveal the issuance of a Preliminary Ten (10) Day Letter on August 11, 1997, informing Petitioner [respondent herein] that the sum of P34,193,041.55 is due from him as deficiency income and percentage tax (Exhibit 13, p. 173, BIR Records). Said letter gave the Petitioner [respondent

herein] a period of ten (10) days to submit his objection to the proposed assessment, either personally or in writing, together with any evidence he may want to present. xxxx As to Petitioner's allegation that he was given only ten (10) days to reply to the findings of deficiency instead of fifteen (15) days granted to a taxpayer under Revenue Regulations No. 12-85, this Court believes that when Respondent [petitioner herein] gave the Petitioner [respondent herein] on October 10, 1997 an additional period of ten (10) days to present documentary evidence or a total of twenty (20) days, there was compliance with Revenue Regulations No. 12-85 and the latter was amply given opportunity to present his side x x x.[58]

adduced sufficient evidence that petitioner [respondent herein] had in fact received the pre-assessment notice and postreporting notice required by law, it cannot be assumed that petitioner [respondent herein] had been served said notices.[61]

No other ground was cited by the CA for the reversal of the finding of the CTA on the issue. The CA is gravely mistaken. In their Petition for Review with the CTA, respondent expressly stated that [s]ometime in September 1997, petitioner [respondent herein] received various assessment notices, all dated 02 September 1997, issued by BIR-Baguio for alleged deficiency income and percentage taxes for taxable years ending 31 December 1991, 1992 and 1993 x x x.[62] In their September 28, 1997 protest to the September 2, 1997 assessment notices, respondent, through his spouses Jeanne Menguito, acknowledged that [they] are in receipt of the assessment notice you have sent us, dated September 2, 1997 x x x.[63] Respondent is therefore estopped from denying actual receipt of the September 2, 1997 assessment notices, notwithstanding the denial of his witness Nalda. As to the address indicated on the assessment notices, respondent cannot question the same for it is the said address which appears in its percentage tax returns.[64] While respondent claims that he had earlier notified petitioner of a change in his business address, no evidence of such written notice was presented. Under Section 11 of Revenue Regulation No. 12-85, respondent's failure to give written notice of change of address bound him to whatever communications were sent to the address

The CTA further held that respondent was estopped from raising procedural issues against the assessment notices, because these were not cited in theSeptember 28, 1997 letterprotest which his spouse Jeanne Menguito filed with petitioner.[59] On appeal by respondent,[60] the CA resolved the issue, thus:
Moreover, if the taxpayer denies ever having received an assessment from the BIR, it is incumbent upon the latter to prove by competent evidence that such notice was indeed received by the addressee. Here, respondent [petitioner herein] merely alleged that it forwarded the assessment notices to petitioner [respondent herein]. The respondent did not show any proof of mailing, registry receipt or acknowledgment receipt signed by the petitioner [respondent herein]. Since respondent [petitioner herein] has not

appearing in the tax returns for the period involved in the investigation.[65] Thus, what remain in question now are: whether petitioner issued and mailed a postreporting notice and a pre-assessment notice; and whether respondent actually received them. There is no doubt that petitioner failed to prove that it served on respondent a postreporting notice and a pre-assessment notice. Exhibit 11[66] of petitioner is a mere photocopy of a July 28, 1997 letter it sent to respondent, informing him of the initial outcome of the investigation into his sales, and the release of a preliminary assessment upon completion of the investigation, with notice for the latter to file any objection within five days from receipt of the letter. Exhibit 13[67] of petitioner is also a mere photocopy of an August 11, 1997 Preliminary Ten (10) Day Letter to respondent, informing him that he had been found to be liable for deficiency income and percentage tax and inviting him to submit a written objection to the proposed assessment within 10 days from receipt of notice. But nowhere on the face of said documents can be found evidence that these were sent to and received by respondent. Nor is there separate evidence, such as a registry receipt of the notices or a certification from the Bureau of Posts, that petitioner actually mailed said notices. However, while the lack of a postreporting notice and pre-assessment notice is a deviation from the requirements under Section 1[68] and Section 2[69] of Revenue Regulation No. 12-85, the same cannot detract from the fact that formal assessments were issued to and actually received by respondents in accordance with Section 228 of the National Internal Revenue Code which was in effect at the time of assessment.

It should be emphasized that the stringent requirement that an assessment notice be satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said assessment notice have been served on the taxpayer,[70] applies only to formal assessments prescribed under Section 228 of the National Internal Revenue Code, but not to post-reporting notices or pre-assessment notices. The issuance of a valid formal assessment is a substantive prerequisite to tax collection,[71] for it contains not only a computation of tax liabilities but also a demand for payment within a prescribed period, thereby signaling the time when penalties and interests begin to accrue against the taxpayer and enabling the latter to determine his remedies therefor. Due process requires that it must be served on and received by the taxpayer.
[72]

A post-reporting notice and preassessment notice do not bear the gravity of a formal assessment notice. The post-reporting notice and pre-assessment notice merely hint at the initial findings of the BIR against a taxpayer and invites the latter to an informal conference or clarificatory meeting. Neither notice contains a declaration of the tax liability of the taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice on the taxpayer for as long as the latter is properly served a formal assessment notice. In the case of respondent, a formal assessment notice was received by him as acknowledged in his Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the BIR, Baguio City and eventually a petition with the CTA. WHEREFORE, the petition is GRANTED. The March 31, 2005 Decision of the Court of Appeals is REVERSED and SET ASIDE and the April 2, 2002 Decision and October 10, 2002

Resolution of the Court are REINSTATED. SO ORDERED.

of

Tax

Appeals

COMMISSIONER OF 159694 INTERNAL REVENUE, ner,

G.R. No.

versus

Petitio Present:

Panganiban, CJ, Chairman,

versus

COMMISSIONER OF Promulg ated: INTERNAL REVENUE, Respondent. January 27, 2006 x -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- -- -- -- -- -- -- -- --- -- -- x

Santiago,

YnaresAustria-

DECISION
PANGANIBAN, CJ.: nder the present provisions of the Tax Code and pursuant to elementary due process, taxpayers must be informed in writing of the law and the facts upon which a tax assessment is based; otherwise, the assessment is void. Being invalid, the assessment cannot in turn be used as a basis for the perfection of a tax compromise.

Martinez, AZUCENA T. REYES, C allejo, Sr., and Respondent. ChicoNazario, JJ x -- -- -- -- -- -- -- -- -- -- -- --- x AZUCENA REYES, No. 163581 T. G.R. Petitioner,

The Case Before us are two [1] consolidated Petitions for [2] Review filed under Rule 45 of the Rules of Court, assailing the August 8, 2003 [3] Decision of the Court of Appeals (CA) in CA-GR SP No. 71392. The dispositive portion of the assailed Decision reads as follows:
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Tax Appeals is ANNULLED and SET ASIDE without prejudice to the action of the National Evaluation Board on the proposed compromise settlement of the Maria C. Tancinco estates tax liability.[4]

District Office No. 50 (South Makati) conducted an investigation on the decedents estate (or estate). Subsequently, it issued a Return Verification Order. But without the required preliminary findings being submitted, it issued Letter of Authority No. 132963 for the regular investigation of the estate tax case. Azucena T. Reyes (or [Reyes]), one of the decedents heirs, received the Letter of Authority on March 14, 1997. On February 12, 1998, the Chief, Assessment Division, Bureau of Internal Revenue (or BIR), issued a preliminary assessment notice against the estate in the amount of P14,580,618.67. On May 10, 1998, the heirs of the decedent (or heirs) received a final estate tax assessment notice and a demand letter, both dated April 22, 1998, for the amount of P14,912,205.47, inclusive of surcharge and interest. On June 1, 1998, a certain Felix M. Sumbillo (or Sumbillo) protested the assessment [o]n behalf of the heirs on the ground that the subject property had already been sold by the decedent sometime in 1990. On November 12, 1998, the Commissioner of Internal Revenue (or [CIR]) issued a preliminary collection letter to [Reyes], followed by a Final Notice Before Seizure dated December 4, 1998. On January 5, 1999, a Warrant of Distraint and/or Levy was served upon the estate, followed on February 11, 1999 by Notices of

The Facts The CA narrated the facts as follows:

On July 8, 1993, Maria C. Tancinco (or decedent) died, leaving a 1,292 square-meter residential lot and an old house thereon (or subject property) located at 4931 Pasay Road, Dasmarias Vill age, Makati City. On the basis of a sworn information-for-reward filed on February 17, 1997 by a certain Raymond Abad (or Abad), Revenue

Levy on Real Property and Tax Lien against it. On March 2, 1999, [Reyes] protested the notice of levy. However, on March 11, 1999, the heirs proposed a compromise settlement of P1,000,000.00. In a letter to [the CIR] dated January 27, 2000, [Reyes] proposed to pay 50% of the basic tax due, citing the heirs inability to pay the tax assessment. On March 20, 2000, [the CIR] rejected [Reyess] offer, pointing out that since the estate tax is a charge on the estate and not on the heirs, the latters financial incapacity is immaterial as, in fact, the gross value of the estate amounting to P32,420,360.00 is more than sufficient to settle the tax liability. Thus, [the CIR] demanded payment of the amount of P18,034,382.13 on or before April 15, 2000[;] otherwise, the notice of sale of the subject property would be published. On April 11, 2000, [Reyes] again wrote to [the CIR], this time proposing to pay 100% of the basic tax due in the amount of P5,313,891.00. She reiterated the proposal in a letter dated May 18, 2000. As the estate failed to pay its tax liability within the April 15, 2000 deadline, the Chief, Collection Enforcement Division, BIR, notified [Reyes] on June 6, 2000 that the subject property would be sold at public auction on August 8, 2000. On June 13, 2000, [Reyes] filed a protest with the BIR Appellate

Division. Assailing the scheduled auction sale, she asserted that x x x the assessment, letter of demand[,] and the whole tax proceedings against the estate are void ab initio. She offered to file the corresponding estate tax return and pay the correct amount of tax without surcharge [or] interest. Without acting on [Reyess] protest and offer, [the CIR] instructed the Collection Enforcement Division to proceed with the August 8, 2000 auction sale. Consequently, on June 28, 2000, [Reyes] filed a [P]etition for [R]eview with the Court of Tax Appeals (or CTA), docketed as CTA Case No. 6124. On July 17, 2000, [Reyes] filed a Motion for the Issuance of a Writ of Preliminary Injunction or Status Quo Order, which was granted by the CTA on July 26, 2000. Upon [Reyess] filing of a surety bond in the amount of P27,000,000.00, the CTA issued a [R]esolution dated August 16, 2000 ordering [the CIR] to desist and refrain from proceeding with the auction sale of the subject property or from issuing a [W]arrant of [D]istraint or [G]arnishment of [B]ank[A]ccount[,] pending determination of the case and/or unless a contrary order is issued. [The CIR] filed a [M]otion to [D]ismiss the petition on the grounds (i) that the CTA no longer has jurisdiction over the case[,] because the assessment against the estate is already final and executory; and (ii) that the petition was filed out of time. In a [R]esolution dated November 23,

2000, the CTA denied [the CIRs] motion. During the pendency of the [P]etition for [R]eview with the CTA, however, the BIR issued Revenue Regulation (or RR) No. 6-2000 and Revenue Memorandum Order (or RMO) No. 42-2000 offering certain taxpayers with delinquent accounts and disputed assessments an opportunity to compromise their tax liability. On November 25, 2000, [Reyes] filed an application with the BIR for the compromise settlement (or compromise) of the assessment against the estate pursuant to Sec. 204(A) of the Tax Code, as implemented by RR No. 6-2000 and RMO No. 42-2000. On December 26, 2000, [Reyes] filed an Ex-Parte Motion for Postponement of the hearing before the CTA scheduled on January 9, 2001, citing her pending application for compromise with the BIR. The motion was granted and the hearing was reset to February 6, 2001. On January 29, 2001, [Reyes] moved for postponement of the hearing set on February 6, 2001, this time on the ground that she had already paid the compromise amount of P1,062,778.20 but was still awaiting approval of the National Evaluation Board (or NEB). The CTA granted the motion and reset the hearing to February 27, 2001. On February 19, 2001, [Reyes] filed a Motion to Declare Application for the Settlement of Disputed Assessment as a Perfected

Compromise. In said motion, she alleged that [the CIR] had not yet signed the compromise[,] because of procedural red tape requiring the initials of four Deputy Commissioners on relevant documents before the compromise is signed by the [CIR]. [Reyes] posited that the absence of the requisite initials and signature[s] on said documents does not vitiate the perfected compromise. Commenting on the motion, [the CIR] countered that[,] without the approval of the NEB, [Reyess] application for compromise with the BIR cannot be considered a perfected or consummated compromise. On March 9, 2001, the CTA denied [Reyess] motion, prompting her to file a Motion for Reconsideration Ad Cautelam. In a [R]esolution dated April 10, 2001, the CTA denied the [M]otion for [R]econsideration with the suggestion that[,] for an orderly presentation of her case and to prevent piecemeal resolutions of different issues, [Reyes] should file a [S]upplemental [P]etition for [R]eview[,] setting forth the new issue of whether there was already a perfected compromise. On May 2, 2001, [Reyes] filed a Supplemental Petition for Review with the CTA, followed on June 4, 2001 by its Amplificatory Arguments (for the Supplemental Petition for Review), raising the following issues:
1. Whether or not an offer to compromise by the [CIR], with the acquiescence by the Secretary of Finance, of a tax

liability pending in court, that was accepted and paid by the taxpayer, is a perfected and consummated compromise. 2. Whether this compromise is covered by the provisions of Section 204 of the Tax Code (CTRP) that requires approval by the BIR [NEB].

[Reyes] is likewise ORDERED to PAY 20% delinquency interest on deficiency estate tax due of P17,934,382.13 from January 11, 2001 until full payment thereof pursuant to Section 249(c) of the Tax Code, as amended.

Answering the Supplemental Petition, [the CIR] averred that an application for compromise of a tax liability under RR No. 6-2000 and RMO No. 42-2000 requires the evaluation and approval of either the NEB or the Regional Evaluation Board (or REB), as the case may be. On June 14, 2001, [Reyes] filed a Motion for Judgment on the Pleadings; the motion was granted on July 11, 2001. After submission of memoranda, the case was submitted for [D]ecision. On June 19, 2002, the CTA rendered a [D]ecision, the decretal portion of which pertinently reads:
WHEREFORE, in view of all the foregoing, the instant [P]etition for [R]eview is hereby DENIED. Accordingly, [Reyes] is hereby ORDERED to PAY deficiency estate tax in the amount of Nineteen Million Five Hundred Twenty Four Thousand Nine Hundred Nine and 78/100 (P19,524,909.78), computed as follows: xxx xxx xxx

In arriving at its decision, the CTA ratiocinated that there can only be a perfected and consummated compromise of the estates tax liability[,] if theNEB has approved [Reyess] application for compromise in accordance with RR No. 6-2000, as implemented by RMO No. 422000. Anent the validity of the assessment notice and letter of demand against the estate, the CTA stated that at the time the questioned assessment notice and letter of demand were issued, the heirs knew very well the law and the facts on which the same were based. It also observed that the petition was not filed within the 30day reglementary period provided under Sec. 11 of Rep. Act No. 1125 and Sec. 228 of the Tax Code.[5]

Ruling of the Court of Appeals In partly granting the Petition, the CA said that Section 228 of the Tax Code and RR 12-99 were mandatory and unequivocal in their requirement. The assessment notice and the demand letter

should have stated the facts and the law on which they were based; otherwise, they were deemed void.[6] The appellate court held that while administrative agencies, like the BIR, were not bound by procedural requirements, they were still required by law and equity to observe substantive due process. The reason behind this requirement, said the CA, was to ensure that taxpayers would be duly apprised of -- and could effectively protest -- the basis of tax assessments against them.[7] Since the assessment and the demand were void, the proceedings emanating from them were likewise void, and any order emanating from them could never attain finality. The appellate court added, however, that it was premature to declare as perfected and consummated the compromise of the estates tax liability. It explained that, where the basic tax assessed exceeded P1 million, or where the settlement offer was less than the prescribed minimum rates, the National Evaluation Boards (NEB) prior evaluation and approval were

the conditio sine qua non to the perfection and consummation of any [8] compromise. Besides, the CA pointed out, Section 204(A) of the Tax Code applied to all compromises, whether government-initiated or not. [9] Where the law did not distinguish, courts too should not distinguish. Hence, this Petition.[10] The Issues In GR No. 159694, petitioner raises the following issues for the Courts consideration:
I. Whether petitioners assessment against the estate is valid. II. Whether respondent can validly argue that she, as well as the other heirs, was not aware of the facts and the law on which the assessment in question is based, after she had opted to propose several compromises on the estate tax due, and even prematurely acting on such proposal by paying 20% of the basic estate tax due.[11]

The foregoing issues can be simplified as follows: first, whether the assessment against the estate is valid; and, second, whether the compromise entered into is also valid. The Courts Ruling The Petition unmeritorious. is

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[13] prior to its amendment by Republic Act (RA) No. 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 CIRs findings was changed in 1998 to informing the taxpayer of not only the law, but also of the facts on which an assessment would be made; otherwise, the assessment itself would be invalid. It was on February 12, 1998, that a preliminary assessment notice was issued against the estate. On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also issued. During those dates, RA 8424 was already in effect. The notice required

First Issue: Validity of the Assessment Against the Estate The second paragraph of Section 228 of the Tax Code[12] is clear and mandatory. It provides as follows:
Sec. 228. Protesting Assessment. -xxx xxx of

xxx

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made: otherwise, the assessment shall be void.

In the present case, Reyes was not informed in

under the old law was no longer sufficient under the new law. To be simply informed in writing of the investigation being conducted and of the recommendation for the assessment of the estate taxes due is nothing but a perfunctory discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken to mean that Reyes already knew the law and the facts on which the assessment was based. It does not at all conform to the compulsory requirement under Section 228. Moreover, the Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of investigation and was not even the requisite notice under the law. The procedure for protesting an assessment under the Tax Code is found in Chapter III of Title VIII, which deals with remedies. Being procedural in nature, can its provision then be applied retroactively? The answer is yes.

The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes.[14] Clearly, Section 228 provides for the procedure in case an assessment is protested. The provision does not create new or take away vested rights. In both instances, it can surely be applied retroactively. Moreover, RA 8424 does not state, either expressly or by necessary implication, that pending actions are excepted from the operation of Section 228, or that applying it to pending proceedings would impair vested rights. Second, the nonretroactive application of Revenue Regulation (RR) No. 12-99 is of no moment, considering that it merely implements the law. A tax promulgated secretary to provisions of [15] While it is regulation is by the finance implement the the Tax Code. 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 preassessment 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.[16] 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.[17] 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. Third, neither Section 229 nor RR 12-85 can prevail over Section 228 of the Tax Code. No doubt, Section 228 has replaced Section 229. The provision on protesting an assessment has been amended. Furthermore, in case of discrepancy between the law as amended and its implementing but old regulation, the former [18] necessarily prevails. Thus,

between Section 228 of the Tax Code and the pertinent provisions of RR 12-85, the latter cannot stand because it cannot go beyond the provision of the law. The law must still be followed, even though the existing tax regulation at that time provided for a different procedure. The regulation then simply provided that notice be sent to the respondent in the form prescribed, and that no consequence would ensue for failure to comply with that form. Fourth, petitioner violated the cardinal rule in administrative law that the taxpayer be accorded due process. Not only was the law here disregarded, but no valid notice was sent, either. 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. [19] 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 governments claim, there can be no deprivation of property, because no effective protest can be made.[20] The haphazard shot at slapping an assessment, supposedly based on estate taxations 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 accordance with arbitrariness will very reason for itself.[21]

be made in law as any negate the government

Fifth, the rule against estoppel does not apply. Although the government cannot be estopped by the negligence or omission of its agents, the obligatory provision on protesting a tax assessment cannot be rendered nugatory by a mere act of the CIR . Tax laws are civil in nature.[22] Under our Civil Code, acts executed against the mandatory provisions of law are void, except when the law itself authorizes the validity of those acts. [23] Failure to comply with Section 228 does not only render the assessment void, but also finds no validation in any provision in the Tax Code. We cannot condone errant or enterprising tax officials, as they are expected to be vigilant and law-abiding. Second Issue: Validity of Compromise

It would be premature for this Court to declare that the compromise on the estate tax liability has been perfected and consummated, considering the earlier determination that the assessment against the estate was void. Nothing has been settled or finalized. Under Section 204(A) of the Tax Code, where the basic tax involved exceeds one million pesos or the settlement offered is less than the prescribed minimum rates, the compromise shall be subject to the approval of the NEB composed of the petitioner and four deputy commissioners. Finally, as correctly held by the appellate court, this provision applies to all compromises, whether government-initiated or not. Ubi lex nondistinguit, nec nos distinguere debemos. Wh ere the law does not distinguish, we should not distinguish. WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.
COMMISSIONER OF INTERNAL G.R. No. 166387 REVENUE, Petitioner, Present:

RESOLUTION CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner

PUNO, C.J., Chairperson, CARPIO, v ONA, e r s u s COR

Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision[1] of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron

AZCUNA and LEONARDO-DE CASTRO, JJ.

Subic Power Corporation (Enron) for failure to state the legal and

ENRON SUBIC POWER CORPORATION, Respondent. Promulgated:

factual bases for such assessment. Enron, a domestic with the corporation Subic as Bay a its registered freeport

Metropolitan

Authority

enterprise,[2] filed

annual income tax return for the year 1996 on April 12, 1997. It January 19, 2009 x--------------------------------------------- - - - -x indicated a net loss of P7,684,948. Subsequently, Internal the Bureau through of a Revenue,

preliminary
[3]

five-day it of a of

letter, proposed an deficiency

assessment.

Enron

likewise

informed

questioned the substantive validity of the assessment.[10]

assessment

alleged P2,880,817.25

income tax.[4] Enron disputed the proposed deficiency assessment in its first protest letter.[5]

In a decision dated September 12, 2001, the CTA granted Enrons petition and ordered the cancellation of its deficiency tax

On May 26, 1999, Enron received from the CIR a formal assessment notice[6] requiring alleged it to pay the tax deficiency income

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 CIRs motion for reconsideration of the CTA decision

of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency tax assessment.[7]

Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for review in the Court of Tax Appeals (CTA). It argued that the deficiency tax the assessment disregarded

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

provisions of Section 228 of the National Internal Revenue Code (NIRC), as amended,[8] and Section 3.1.4 of Revenue Regulations (RR) No. 12-99[9] by not providing the legal and factual bases of the

for reconsideration but this was deemed abandoned when he filed a motion for extension to file a petition for review in this Court.

requirements of the NIRC and RR No. 1299. 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 taxpayers 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]

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.

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:

The CIR errs in insisting that the notice of assessment in question complied with the

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 taxpayers 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)

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

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 CTAs findings:
In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge, interest and compromise

properly deficiency.

apprised During

of

its the

tax pre-

assessment stage, the CIR advised Enrons representative of the tax deficiency, proposed informed tax it of the deficiency

assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper[14] allegedly showing in detail

the legal and factual bases of the assessment. The CIR argues that these which steps the sufficed to inform tax Enron of the laws and facts on deficiency assessment was based.

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

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 CIRs 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 markedly tax assessment from is the different

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 The be rendered factual nugatory. alleged

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 the of demand accompanying notice. assessment

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 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 constitutional person shall is made.[16] Such that no of In
[17]

No costs.

SO ORDERED. COMMISSIONER OF INTERNAL REVENUE, Petitioner, PUNO, C.J., Chair person, CARPIO, CORONA, LEONARDO-DE CASTRO, and BERSAMIN, JJ. G.R. Nos. 17204546 Present:

amendment is in keeping with the principle be deprived

property without due process. opportunity for Enron to

view of the absence of a fair 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] versus -

FIRST EXPRESS Promulgated: PAWNSHOP COMPANY, INC., June 16, 2009 Respondent.

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for the Government itself.

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

DECISION CARPIO, J.: The Case The Commissioner of Internal Revenue (petitioner) filed this Petition for Review[1] to reverse the Court of Tax Appeals Decision[2] dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60

WHEREFORE, the

petition

is hereby DENIED. The November 24, 2004 decision of the Court of Appeals is AFFIRMED.

and 62. In the assailed decision, the Court of Tax Appeals (CTA) En Banc partially reconsidered the CTA First Divisions Decision[3] dated 24 September 2004. The Facts On 28 December 2001, petitioner, through Acting Regional Director Ruperto P. Somera of Revenue Region 6 Manila, issued the following assessment notices against First Express Pawnshop Company, Inc. (respondent): a. Assessment No. 31-1-98[4] for deficiency income tax of P20,712.58 with compromise penalty of P3,000; b. Assessment No. 31-14-00005398[5] for deficiency value-added tax (VAT) of P601,220.18 with compromise penalty of P16,000; c. Assessment No. 31-14-00005398[6] for deficiency documentary stamp tax (DST) of P12,328.45 on deposit on subscription with compromise penalty of P2,000; and d. Assessment No. 31-1-00005398[7] for deficiency DST of P62,128.87 on pawn tickets with compromise penalty of P8,500. Respondent received the assessment notices on 3 January 2002. On 1 February 2002, respondent filed its written protest on the above assessments. Since petitioner did not act on the protest during the 180-day period,[8] respondent filed a petition before the CTA on 28 August 2002.[9]

Respondent contended that petitioner did not consider the supporting documents on the interest expenses and donations which resulted in the deficiency income tax. [10] Respondent maintained that pawnshops are not lending investors whose services are subject to VAT, hence it was not liable for deficiency VAT.[11]Respondent also alleged that no deficiency DST was due because Section 180[12] of the National Internal Revenue Code (Tax Code) does not cover any document or transaction which relates to respondent. Respondent also argued that the issuance of a pawn ticket did not constitute a pledge under Section 195[13] of the Tax Code.[14] In its Answer filed before the CTA, petitioner alleged that the assessment was valid and correct and the taxpayer had the burden of proof to impugn its validity or correctness. Petitioner maintained that respondent is subject to 10% VAT based on its gross receipts pursuant to Republic Act No. 7716, or the Expanded Value-Added Tax Law (EVAT). Petitioner also cited BIR Ruling No. 221-91 which provides that pawnshop tickets are subject to DST. [15] On 1 July 2003, respondent paid P27,744.88 as deficiency income tax inclusive of interest.[16]

After trial on the merits, the CTA First Division ruled, thus:

IN VIEW OF ALL THE FOREGOING, the instant petition is hereby PARTIALLY GRANTED. Assessment No. 31-1-000053-98 for deficiency documentary stamp tax in the amount of Sixty-Two Thousand One Hundred Twenty-Eight Pesos and 87/100 (P62,128.87) and Assessment No. 31-14-000053-98 for deficiency documentary stamp tax on deposits on subscription in the amount of Twelve Thousand Three Hundred TwentyEight Pesos and 45/100 (P12,328.45) are CANCELLED and SET ASIDE. However, Assessment No. 31-14000053-98 is hereby AFFIRMED except the imposition of compromise penalty in the absence of showing that petitioner consented thereto (UST vs. Collector, 104 SCRA 1062; Exquisite Pawnshop Jewelry, Inc. vs. Jaime B. Santiago, et al., supra). Accordingly petitioner is ORDERED to PAY the deficiency value added tax in the amount of Six Hundred One Thousand Two Hundred Twenty Pesos and 18/100 (P601,220.18) inclusive of deficiency interest for the year 1998. In addition, petitioner is ORDERED to PAY 25% surcharge and 20% delinquency interest per annum from February 12, 2002 until fully paid pursuant to Sections 248 and 249 of the 1997 Tax Code. SO ORDERED.[17] (Boldfacing in the original)

CTA First Division for lack of merit. Thereafter, both parties filed their respective Petitions for Review under Section 11 of Republic Act No. 9282 (RA 9282) with the CTA En Banc.[18] On 24 March 2006, the CTA En Banc promulgated a Decision affirming respondents liability to pay the VAT and ordering it to pay DST on its pawnshop tickets. However, the CTA En Banc found that respondents deposit on subscription was not subject to DST.[19] Aggrieved by the CTA En Bancs Decision which ruled that respondents deposit on subscription was not subject to DST, petitioner elevated the case before this Court. The Ruling of the Court of Tax Appeals On the taxability of deposit on subscription, the CTA, citing First Southern Philippines Enterprises, Inc. v. Commissioner of Internal Revenue, [20] pointed out that deposit on subscription is not subject to DST in the absence of proof that an equivalent amount of shares was subscribed or issued in consideration for the deposit. Expressed otherwise, deposit on stock subscription is not subject to DST if: (1) there is no agreement to subscribe; (2) there are no shares issued or any additional subscription in the restructuring plan; and (3) there is no proof that the issued shares can be considered as issued certificates of stock.[21]

Both parties filed their Motions for Reconsideration which were denied by the

The CTA ruled that Section 175[22] of the Tax Code contemplates a subscription agreement. The CTA explained that there can be subscription only with reference to shares of stock which have been unissued, in the following cases: (a) the original issuance from authorized capital stock at the time of incorporation; (b) the opening, during the life of the corporation, of the portion of the original authorized capital stock previously unissued; or (c) the increase of authorized capital stock achieved through a formal amendment of the articles of incorporation and registration of the articles of incorporation with the Securities and Exchange Commission.[23]

a question of law in disregarding the rule on finality of assessments prescribed under Section 228 of the Tax Code. Corollarily, petitioner raises the issue on whether respondent is liable to pay P12,328.45 as DST on deposit on subscription of capital stock. The Ruling of the Court Petitioner contends that the CTA erred in disregarding the rule on the finality of assessments prescribed under Section 228 of the Tax Code.[25] Petitioner asserts that even if respondent filed a protest, it did not offer evidence to prove its claim that the deposit on subscription was an advance made by respondents stockholders.[26] Petitioner alleges that respondents failure to submit supporting documents within 60 days from the filing of its protest as required under Section 228 of the Tax Code caused the assessment of P12,328.45 for deposit on subscription to become final and unassailable.[27] Petitioner alleges that revenue officers are afforded the presumption of regularity in the performance of their official functions, since they have the distinct opportunity, aside from competence, to peruse records of the assessments. Petitioner invokes the principle that by reason of the expertise of administrative agencies over matters falling under their jurisdiction, they are in a better position to pass judgment thereon; thus, their findings of fact are generally accorded great respect, if not finality, by the courts.

The CTA held that in this case, there was no subscription or any contract for the acquisition of unissued stock for P800,000 in the taxable year assessed. The General Information Sheet (GIS) of respondent showed only a capital structure of P500,000 as Subscribed Capital Stock and P250,000 as Paid-up Capital Stock and did not include the assessed amount. Mere reliance on the presumption that the assessment was correct and done in good faith was unavailing vis-vis the evidence presented by respondent. Thus, the CTA ruled that the assessment for deficiency DST on deposit on subscription has not become final.[24]

The Issue Petitioner submits this sole issue for our consideration: whether the CTA erred on

Hence, without the supporting documents to establish the non-inclusion from DST of the deposit on subscription, petitioners assessment pursuant to Section 228 of the Tax Code had become final and unassailable.[28] Respondent, citing Standard Chartered Bank-Philippine Branches v. Commissioner of Internal Revenue, [29] asserts that the submission of all the relevant supporting documents within the 60-day period from filing of the protest is directory. Respondent claims that petitioner requested for additional documents in petitioners letter dated 12 March 2002, to wit: (1) loan agreement from lender banks; (2) official receipts of interest payments issued to respondent; (3) documentary evidence to substantiate donations claimed; and (4) proof of payment of DST on subscription.[30] It must be noted that the only document requested in connection with respondents DST assessment on deposit on subscription is proof of DST payment. However, respondent could not produce any proof of DST payment because it was not required to pay the same under the law considering that the deposit on subscription was an advance made by its stockholders for future subscription, and no stock certificates were issued.[31] Respondent insists that petitioner could have issued a subpoena requiring respondent to submit other documents to determine if the latter is liable for DST on deposit on subscription pursuant to Section 5(c) of the Tax Code.[32]

Respondent argues that deposit on future subscription is not subject to DST under Section 175 of the Tax Code. Respondent explains:
It must be noted that deposits on subscription represent advances made by the stockholders and are in the nature of liabilities for which stocks may be issued in the future. Absent any express agreement between the stockholders and petitioner to convert said advances/deposits to capital stock, either through a subscription agreement or any other document, these deposits remain as liabilities owed by respondent to its stockholders. For these deposits to be subject to DST, it is necessary that a conversion/subscription agreement be made by First Express and its stockholders. Absent such conversion, no DST can be imposed on said deposits under Section 175 of the Tax Code.[33] (Underscoring in the original)

Respondent contends that by presenting its GIS and financial statements, it had already sufficiently proved that the amount sought to be taxed is deposit on future subscription, which is not subject to DST.[34] Respondent claims that it cannot be required to submit proof of DST payment on subscription because such payment is non-existent. Thus, the burden of proving that there was an agreement to subscribe and that certificates of stock were issued for the deposit on subscription rests on petitioner and his examiners. Respondent states that

absent any proof, the deficiency assessment has no basis and should be cancelled.[35]

the actual value represented by each share.[38] Section 176. Stamp Tax on Sales, Agreements to Sell, Memoranda of Sales, Deliveries or Transfer of Duebills, Certificates of Obligation, or Shares or Certificates of Stock . - On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or certificates of stock in any association, company or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill, certificate of obligation or stock, there shall be collected a documentary stamp tax of One peso and fifty centavos (P1.50) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such due-bill, certificate of obligation or stock: Provided, That only one tax shall be collected on each sale or transfer of stock or securities from one person to another, regardless of whether or not a certificate of stock or obligation is issued, indorsed, or delivered in pursuance of such sale or transfer: And provided, further, That in the case of stock without par value the amount of the documentary stamp tax herein prescribed shall be equivalent to twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock.[39]

On the Taxability of Deposit on Stock Subscription DST is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. DST is actually an excise tax because it is imposed on the transaction rather than on the document.[36] DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments.[37] The Tax Code provisions on DST relating to shares or certificates of stock state:
Section 175. Stamp Tax on Original Issue of Shares of Stock . - On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp tax of Two pesos (P2.00) on each Two hundred pesos (P200), or fractional part thereof, of the par value, of such shares of stock: Provided, That in the case of the original issue of shares of stock without par value the amount of the documentary stamp tax herein prescribed shall be based upon the actual consideration for the issuance of such shares of stock: Provided, further, That in the case of stock dividends, on

In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc., [40] this Court explained that the DST attaches upon acceptance of the stockholders subscription in the corporations capital stock regardless of actual or constructive delivery of the certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue,[41] the Court held:
The documentary stamp tax under this provision of the law may be levied only once, that is upon the original issue of the certificate. The crucial point therefore, in the case before Us is the proper interpretation of the word issue. In other words, when is the certificate of stock deemed issued for the purpose of imposing the documentary stamp tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in whose name the stocks represented in the certificate appear as certified by the proper officials of the corporation), at the time they are released by the corporation, or at the time they are in the possession (actual or constructive) of the stockholders owning them? xxx Ordinarily, when a corporation issues a certificate of stock (representing the ownership of stocks in the corporation to fully paid subscription) the certificate of stock

can be utilized for the exercise of the attributes of ownership over the stocks mentioned on its face. The stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by the corporation, irrespective of whether or not it is in the actual or constructive possession of the stockholder, is considered issued because it is with value and hence the documentary stamp tax must be paid as imposed by Section 212 of the National Internal Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer of certificates of stock. In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue, this Court held that under Section 176 of the Tax Code, sales to secure the future transfer of due-bills, certificates of obligation or certificates of stock are subject to documentary stamp tax.[42] Revenue Memorandum Order No. 0898 (RMO 08-98) provides the guidelines on

the corporate stock documentary stamp tax program. RMO 08-98 states that:
1. All existing corporations shall file the Corporation Stock DST Declaration, and the DST Return, if applicable when DST is still due on the subscribed share issued by the corporation, on or before the tenth day of the month following publication of this Order. xxx 3. All existing corporations with authorization for increased capital stock shall file their Corporate Stock DST Declaration, together with the DST Return, if applicable when DST is due on subscriptions made after the authorization, on or before the tenth day of the month following the date of authorization. (Boldfacing supplied)

subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same.[44] In this case, respondents Stockholders Equity section of its Balance Sheet as of 31 December 1998[45] shows:
STOCKHOLD ERS EQUITY Authorized Capital Stock 1998 P 2,000,00 0.00 250,000. 00 800,000. 62,820. 34 (858,498 .38) 86) 254,32 P 34 312,820. P 1.96 20 (146,786. 209,607. P 00 1997 2,000,000. 250,000.

Paid-up Capital Stock 00 Deposit on Subscription 00 Retained Earnings Net Income

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 4797), also states that what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time the shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and may exercise attributes of ownership over the stocks. As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed.[43] A stock

TOTAL

The GIS submitted to the Securities and Exchange Commission on 31 March 1999 shows the following Capital Structure:
[46]

B. Financial Profile 1. Capital Structure AUTHORIZED 0.00 SUBSCRIBED 0.00 PAID-UP 0.00

: -

P2,000,00 500,00 250,00

These entries were explained by Miguel Rosario, Jr. (Rosario), respondents external auditor, during the hearing before the CTA on 11 June 2003. Rosario testified in this wise:
Atty. Napiza Q. Mr. Rosario, I refer you to the balance sheet of First Express for the year 1998 particularly the entry of deposit on subscription in the amount of P800 thousand, will you please tell us what is (sic) this entry represents? Mr. Rosario Jr. A. This amount of P800 thousand represents the case given by the stockholders to the company but does not necessarily made (sic) payment to subscribed portion. Atty. Napiza Q. What is (sic) that payment stands for? Mr. Rosario Jr. A. This payment stands as (sic) for the deposit for future subscription. Atty. Napiza Q. Would you know if First Express issued corresponding shares pertinent to the amount being deposited? Mr. Rosario Jr. A. No. Atty. Napiza Q. What do you mean by no? Did they or they did not? Mr. Rosario Jr. A. They did not issue any shares because that is not the payment of

subscription. That is just a mere deposit. Atty. Napiza Q. Would you know, Mr. Rosario, how much is the Subscribed Capital of First Express Pawnshop? Mr. Rosario Jr. A. The Subscribed Capital of First Express Pawnshop Company, Inc. for the year 1998 is P500 thousand. Atty. Napiza Q. How about the Paid Up Capital? Mr. Rosario Jr. A. The Paid Up Capital is P250 thousand. Atty. Napiza Q. Are (sic) all those figures appear in the balance sheet? Mr. Rosario Jr. A. The Paid Up Capital appeared here but the Subscribed Portion was not stated. (Boldfacing supplied)

Based on Rosarios testimony and respondents financial statements as of 1998, there was no agreement to subscribe to the unissued shares. Here, the deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital stock.[47] In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,[48] we held:

We are firmly convinced that the Government stands to lose nothing in imposing the documentary stamp tax only on those stock certificates duly issued, or wherein the stockholders can freely exercise the attributes of ownership and with value at the time they are originally issued. As regards those certificates of stocks temporarily subject to suspensive conditions they shall be liable for said tax only when released from said conditions, for then and only then shall they truly acquire any practical value for their owners. (Boldfacing supplied)

On the Finality of Assessment as Prescribed under Section 228 of the Tax Code Section 228 of the Tax Code provides:
SEC. 228. Protesting of Assessment. When the Commissioner or his duly authorized representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings: Provided, however, That a preassessment notice shall not be required in the following cases: (a) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return; or (b) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent; or (c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding tax for a taxable period was determined to have carried over and automatically applied the same amount claimed against the estimated tax liabilities for the taxable quarter or quarters of the succeeding taxable year; or (d) When the excise tax due on excisable articles has not been paid; or (e) When an article locally purchased or imported by an exempt person, such as, but not limited to, vehicles, capital equipment, machineries and spare parts, has been

Clearly, the deposit on stock subscription as reflected in respondents Balance Sheet as of 1998 is not a subscription agreement subject to the payment of DST. There is no P800,000 worth of subscribed capital stock that is reflected in respondents GIS. The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. The person making a deposit on stock subscription does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. Hence, respondent is not liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

sold, traded or transferred to nonexempt persons. The taxpayer shall be informed in writing of the law and the facts on which the assessment is made; otherwise, the assessment shall be void. Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and demandable. (Boldfacing supplied)

Section 228 of the Tax Code provides the remedy to dispute a tax assessment within a certain period of time. It states that an assessment may be protested by filing a request for reconsideration or reinvestigation within 30 days from receipt of the assessment by the taxpayer. Within 60 days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final.
[49]

In this case, respondent received the tax assessment on 3 January 2002 and it had until 2 February 2002 to submit its protest. On 1 February 2002, respondent submitted its protest and attached the GIS and Balance Sheet as of 31 December 1998. Respondent explained that it received P800,000 as a deposit with the possibility of applying the same as payment for the future issuance of capital stock. Within 60 days from the filing of protest or until 2 April 2002, respondent should submit relevant supporting documents. Respondent, having submitted the supporting documents together with its protest, did not present additional documents anymore. In a letter dated 12 March 2002, petitioner requested respondent to present proof of payment of DST on subscription. In a letter-reply, respondent stated that it could not produce any proof of DST payment because it was not required to pay DST

under the law considering that the deposit on subscription was an advance made by its stockholders for future subscription, and no stock certificates were issued. Since respondent has not allegedly submitted any relevant supporting documents, petitioner now claims that the assessment has become final, executory and demandable, hence, unappealable. We reject petitioners view that the assessment has become final and unappealable. It cannot be said that respondent failed to submit relevant supporting documents that would render the assessment final because when respondent submitted its protest, respondent attached the GIS and Balance Sheet. Further, petitioner cannot insist on the submission of proof of DST payment because such document does not exist as respondent claims that it is not liable to pay, and has not paid, the DST on the deposit on subscription. The term relevant supporting documents should be understood as those documents necessary to support the legal basis in disputing a tax assessment as determined by the taxpayer. The BIR can only inform the taxpayer to submit additional documents. The BIR cannot demand what type of supporting documents should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which may require the production of documents that a taxpayer cannot submit.

After respondent submitted its letterreply stating that it could not comply with the presentation of the proof of DST payment, no reply was received from petitioner. Section 228 states that if the protest is not acted upon within 180 days from submission of documents, the taxpayer adversely affected by the inaction may appeal to the CTA within 30 days from the lapse of the 180-day period. Respondent, having submitted its supporting documents on the same day the protest was filed, had until 31 July 2002 to wait for petitioners reply to its protest. On 28 August 2002 or within 30 days after the lapse of the 180-day period counted from the filing of the protest as the supporting documents were simultaneously filed, respondent filed a petition before the CTA. Respondent has complied with the requisites in disputing an assessment pursuant to Section 228 of the Tax Code. Hence, the tax assessment cannot be considered as final, executory and demandable. Further, respondents deposit on subscription is not subject to the payment of DST. Consequently, respondent is not liable to pay the deficiency DST of P12,328.45. WHEREFORE, we DENY the petition. We AFFIRM the Court of Tax Appeals Decision dated 24 March 2006 in the consolidated cases of C.T.A. EB Nos. 60 and 62.

SO ORDERED.
G.R. No. L-39910 September 26, 1988 CECILIA TEODORO DAYRIT, TORIBIA TEODORO CASTANEDA, PRUDENCIO J. TEODORO, FRANCISCO J. TEODORO, AND JOSEFINA TEODORO TIONGSON, petitioners, vs. THE HONORABLE FERNANDO A. CRUZ, Presiding Judge, Branch XII, Court of First Instance of Rizal, and MISAEL P. VERA, in his capacity as the Commissioner of Internal Revenue, respondents. Atienza, Tabora, Del Rosario & Castillo Law Offices and Tanada, Sanchez, Tanada & Tanada Law Offices for petitioners.

The aforementioned notice of deficiency assessments was received by petitioner Dayrit on August 14, 1972. In a letter dated October 7, 1972, **** petitioners through counsel, asked for a reconsideration of the said assessments alleging that the same are contrary to law and not supported by sufficient evidence. 4 In the same letter, petitioners requested a period of thirty (30) days within which to submit their position paper in support of their claim. Meanwhile, on October 16, 1972, Presidential Decree (P.D) No. 23, entitled "Proclaiming Tax Amnesty Subject to Certain Conditions," was issued by then President Ferdinand E. Marcos, quoted hereunder as follows: xxx xxx xxx 1. In all cases of voluntary disclosure of previously untaxed income realized here or abroad by any taxpayer, natural or juridical, the collection of the income tax and penalties incident to nonpayment, as well as all criminal and civil liabilities under the National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act or any other law applicable thereto, is hereby condoned and, in lieu thereof, a tax of TEN PERCENTUM (10%) on such previously untaxed income is hereby imposed, subject to the following conditions: (a) Such previously untaxed income must have been earned or realized prior to 1972; (b) The taxpayer must file a notice and return with the Commissioner of Internal Revenue on or before March 31, 1972 showing such previously untaxed income; ... 2. The tax imposed under Paragraph 1 hereof, shall be paid within the following period: (a) If the amount does not exceed P10,000.00 the tax must be paid at the time of the filing of notice and return but not later than March 31, 1973; (b) If the amount exceeds P10,000.00 the tax maybe paid in two (2) installments, the first installment to be paid upon the filing of the notice and return but not later than March 31, 1973; and the second installment within three (3) months from the date of the filing of the return but not later than June 30, 1973. .... On November 24, 1972, P.D. No. 67, was issued amending paragraphs 1 and 3 of P.D. No. 23, to read as follows: xxx xxx xxx

GANCAYCO, J.: The application of tax amnesty to the estate of the Teodoros is the issue in this case. Petitioners are the legitimate children and heirs of the deceased spouses Marta J. Teodoro who died intestate on July 1, 1965 and Don Toribio Teodoro who died testate on August 30, 1965. Thereafter, the heirs of the deceased filed separate estate and inheritance tax returns for the estates of the late spouses with the Bureau of Internal Revenue. * In the meantime, testate and intestate proceedings for the settlement of the decedents' estates were filed 1 by Cecilia Teodoro-Dayrit, one of the petitioners herein, in the then Court of First Instance of Caloocan City, ** Branch XII docketed as Special Proceedings No. C-113. 2 On August 14, 1968, said petitioner was appointed administratrix of the estate of Dona Marta and letters testamentary was issued in her favor as executrix of the estate of Don Toribio. On August 9,1972, the respondent Commissioner of Internal Revenue issued the following deficiency estate and inheritance tax assessments: 3
Estate of Doa Marta Estate Tax & penalties Inheritance Tax & interests P1,662,072.34 1,747,790.94

1. In all cases of voluntary disclosure of previously untaxed income and/or wealth such as earnings, receipts, gifts bequests or any other acquisitions from any source whatsoever which are taxable under the National Internal Revenue Code, as amended realized here or abroad by any taxpayer, natural or juridical; the collection of all internal revenue taxes including the increments or penalties on account of non-payment as well as all civil, criminal or administrative liabilities arising from or incident to such disclosures under the National Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt Practices Act, the Revised Administrative Code, the Civil Service laws and regulations, laws and regulations on Immigration and Deportation, or any other applicable law or proclamation, are hereby condoned and, in lieu thereof, a tax of ten per centum (10%) on such previously untaxed income or wealth is hereby imposed, subject to the following conditions: a. Such previously untaxed income and/or wealth must have been earned or realized prior to 1972; b. The taxpayer must file a return with the Commissioner of Internal Revenue on or before March 31, 1973, showing such previously untaxed income and/or wealth; .... In a tax return dated March 31, 1973, petitioner Cecilia Teodoro-Dayrit declared an additional amount of P3,655,595.78 as part of the estates of the Teodoro spouses, for additional valuation over and above the amount declared in the previous return for estates and inheritance taxes of the said late spouses. 5 The Bureau of Internal Revenue issued tax payment acceptance order Nos.1127185-86 and 1533011. 6 Pursuant to the aforesaid tax acceptance orders, the estates and heirs of the deceased spouses Teodoro paid the amounts of P5,000.00, P30,046.68 and P250,000.00 per official receipts Nos. 73201, 774037 and 964467 dated April 2, 1973, July 17, 1973 and October 31, 1973, respectively, 7 amounting to a total of P285,046.68. On March 14, 1974, respondent Commissioner of Internal Revenue filed a motion for Allowance of Claim against the estates of spouses Teodoro and for an order of payment of taxes in S.P. No. C-113 with the then Court of First Instance of Rizal, Branch XII, praying that petitioner Dayrit be ordered to pay the Bureau of Internal Revenue the sum of P6,470,396.81 plus surcharges and interest 8 Petitioners filed two (2) separate oppositions alleging that the estate and inheritance taxes sought to be collected have already been settled in accordance with the provisions of P.D. No. 23, as amended by P.D. No. 67 and that at any rate, the assessments have not become final and executory. 9 In reply thereto, respondent

Commissioner alleged that petitioners could not avail of the tax amnesty in view of the existence of a prior assessment. 10 Petitioners insisted that the tax amnesty could still be availed of invoking Section 4, BIR Revenue Regulation No. 8-72. 11 On July 10, 1974, respondent Judge issued an order approving the claim of respondent Commissioner and directing the payment of the estate and inheritance taxes. 12 Dissastisfied with the decision, petitioners filed a motion for reconsideration 13 but it was denied 14 in an order dated September 30, 1974.***** Hence, the present petition. Petitioners contend that respondent Judge acted without jurisdiction or in excess of jurisdiction or with grave abuse of discretion amounting to lack of jurisdiction in granting the respondent Commissioner's claim for estate and inheritance taxes against the estates of the Teodoro spouses on the ground that due to the pendency of their motion for reconsideration of the deficiency assessments issued by the Commissioner, said tax assessments are not yet final and executory. Petitioners stressed that the absence of a decision on the disputed assessments was a bar against collection of taxes. Finally, petitioners insist that their act of filing an estate and inheritance tax return of a previously untaxed wealth of the estates entitles said estates to tax amnesty under P.D. No. 23, as amended by P.D. 67 and hence, it is an error to grant respondent Commissioner's claim for collection of estate and inheritance taxes. On the other hand, respondent Commissioner contends that petitioners cannot avail of the tax amnesty in view of the prior existing assessments issued against the estates of the deceased spouses before the promulgation of P.D. No. 23. In support thereof, respondent cited Section 4 of Revenue Regulation No. 15-72, amending Section 4 of Regulation No. 8-12. Respondent Commissioner contends further that neither may petitioners' act of filing a return of a previously untaxed income or wealth in the amount of P3,655,595.98 entitled the estates to tax amnesty where petitioners failed to pay the 10% tax in full within the time frame required under P.D. No. 23, and that to allow petitioners to avail of the tax amnesty will render nugatory the provisions of P.D. No. 68. Moreover, said respondent argues that certiorari is not the proper remedy in that respondent Judge committed no grave abuse of discretion in allowing the claim for collection of taxes and that if at all, it was merely an error of judgment which can be corrected only on appeal, and in which case the reglementary period for the same has already prescribed.

The main issue in this petition is whether an estate may avail of tax amnesty under Presidential Decree No. 23 where there is already an existing assessment made prior to the issuance of the said decree on the basis of the submitted estate and inheritance tax returns by merely filing separate estate tax returns of an undeclared and untaxed income over and above the original amount of the estate declared. Anent petitioners' claim that the tax assessments against the estates of the Teodoro spouses are not yet final, the court finds the claim untenable. In petitioners' motion for reconsideration of the aforementioned assessments, petitioners requested then Commissioner Misael P. Vera for a period of thirty (30) days from October 7, 1972 within which to submit a position paper that would embody their grounds for reconsideration. However, no position paper was ever filed. 15 Such failure to file a position paper may be construed as abandonment of the petitioners' request for reconsideration. The court notes that it took the respondent Commissioner a period of more than one (1) year and five (5) months, from October 7, 1972 to March 14, 1974, before finally instituting the action for collection. Under the circumstances of the case, the act of the Commissioner in filing an action for allowance of the claim for estate and inheritance taxes, may be considered as an outright denial of petitioners' request for reconsideration. From the date of receipt of the copy of the Commissioner's letter for collection of estate and inheritance taxes against the estates of the late Teodoro spouses, petitioners must contest or dispute the same and, upon a denial thereof, the petitioners have a period of thirty (30) days within which to appeal the case to the Court of Tax Appeals. 16 This they failed to avail of . Tax assessments made by tax examiners are presumed correct and made in good faith. A taxpayer has to prove otherwise. 17 Failure of the petitioners to appeal to the Court of Tax Appeals in due time made the assessments in question, final, executory and demandable. 18 The petitioners' allegation that the Court of First Instance (CFI) lacks jurisdiction over the subject of the case is likewise untenable. The assessments having become final and executory, the CFI properly acquired jurisdiction. 19Neither is there merit in petitioners' claim that the exclusive jurisdiction of the Court of Tax Appeals (CTA) applies in the case. The aforesaid exclusive jurisdiction of the CTA arises only in cases of disputed tax assessments. 20As noted earlier, petitioners' letter dated October 7, 1972 asking for reconsideration of the questioned

assessments cannot be considered as one disputing the assessments because petitioners failed to substantiate their claim that the deficiency assessments are contrary to law. Petitioners asked for a period of thirty (30) days within which to submit their position paper but they failed to submit the same nonetheless. Hence, petitioners' letter for a reconsideration of the assessments is nothing but a mere scrap of paper. Petitioners' contention that the absence of a decision on their request for reconsideration of the assessments is a bar to granting the claim for collection is likewise without merit. In Republic vs. Lim Tian Teng Son & Co., Inc., 21this Court had occasion to rule that a decision on a request for reinvestigation is not a condition precedent to the filing of an action for collection of taxes already assessed. This Court ruled that "nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for reconsideration before he can go to court for the purpose of collecting the tax assessed. On the contrary, Section 305 of the same Code withheld from all courts, except the Court of Tax Appeals under Republic Act No. 1125, 22 the authority to restrain the collection of any national internal revenue tax, fee or charge, thereby indicating the legislative policy to allow the Collector of Internal Revenue much latitude on the speedy and prompt collection of taxes." Petitioners argue, however, that the Commissioner of Internal Revenue must first rule on the taxpayer's protest against tax assessment so as not to deprive the taxpayer of the remedy of appeal and that it is only from the receipt of the decision that the right to appeal to the Court of Tax Appeals should run, citing for the purpose San Juan vs. Velasquez 23 as well as Commissioner of Internal Revenue vs. Gonzales. 24 The aforementioned cases are both not in point. In San Juan, the taxpayer concerned, through his accountant, disputed the assessments of income tax and deficiency income tax by adducing the reasons and explanations why said assessments of income tax were not due and owing from the taxpayer. Thus, it was therein ruled that having disputed the assessments at the opportune time, the Commissioner of Internal Revenue cannot ignore the disputed assessments by immediate immediately bringing an action to collect. By the same token in Commissioner of Internal Revenue vs. Gonzales, the assessments of estate and inheritance taxes were disputed by the taxpayer by invoking prescription as a defense claiming that the assessments were made after the lapse of more than five (5) years. Payment of taxes being admittedly a burden, taxpayers should not be left without any recourse

when they feel aggrieved due to the erroneous and burdensome assessments made by a Bureau of Internal Revenue agent or by the Commissioner. Said right is vested upon adversely affected taxpayers under Republic Act No. 1125. It cannot be rendered nugatory through the Commissioner's act of immediately filing an action for collection without ruling beforehand on the disputed assessments. 25 However, the remedy of an aggrieved taxpayer is not without any limitation. A taxpayer's right to contest assessments, particularly the right to appeal to the Court of Tax Appeals, may be waived or lost as in this case. 26 The requirement for the Commissioner to rule on disputed assessments before bringing an action for collection is applicable only in cases where the assessment was actually disputed, adducing reasons in support thereto. In the present case where the petitioners did not actually contest the assessments by stating the basis thereof, the respondent Commissioner need not rule on their request. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. We cannot tolerate taxpayers hampering expedient collection of taxes by their failure to act within a reasonable period. No government could exist if all litigants were permitted to delay the collection of its taxes. 27 Thus, this Court ruled earlier that a suit for the collection of internal revenue taxes, as in this case, where the assessment has already become final and executory, the action to collect is akin to an action to enforce the judgment. No inquiry can be made therein as to the merits of the original case or the justness of the judgment relied upon. 28 In view of the foregoing discussions, petitioners' allegation of grave abuse of discretion on the part of the respondent judge must perforce fall. Considering further that the court a quo properly acquired jurisdiction over the subject matter of the case, petitioners should have appealed the case. The order of the court a quo dated September 30,1974, was received by the petitioners on October 16, 1974. Petitioners should have appealed within a period of fifteen (15) days from receipt thereof but they failed to do so. ****** As petitioners failed to file a timely appeal from the order of the trial court, they can no longer avail of the remedy of a special civil action for certiorari in lieu of appeal. There is no error of jurisdiction committed by the trial court. 29 On the other hand with respect the petitioners' plea that the estate is at any rate entitled to tax amnesty, a reading of P.D. No. 23 30 reveals that in order to avail

of tax amnesty, it is required, among others, that there should be a voluntary disclosure of a previously untaxed income. This was the pronouncement of this Court in Nepomuceno vs. Montecillo 31 with respect to P.D. 370 32 which was decreed as a complement of P.D. Nos. 23 and 157. In addition thereto, said income must have been earned or realized prior to 1972 and the tax return must be filed on or before March 31, 1973. Considering that P.D. No. 23 was issued on October 16, 1972, the court rules that the said decree embraces only those income declared in pursuance thereof within the taxable year 1972. The time frame cannot be stretched to include declarations made prior to the issuance of the said decree or those made outside of the time frame as envisioned in the said decree. Thus, the estates of the Teodoro spouses which have been declared separately sometime in the 1960's are clearly outside the coverage of the tax amnesty provision. Petitioners argue, however, that even if a notice of deficiency assessment had already been issued, the estates may still avail of tax amnesty if the basis of such deficiency assessment is either the failure to file a return or the omission of items of taxable income for a return already filed or the under declaration of said return, citing P.D. No. 67 and Section 4 of BIR Revenue Regulation No. 8-72. There is no merit in this contention. Even if P.D. No. 67, as an amendment to P.D. 23, enlarges the coverage of tax amnesty to include wealth such as earnings, receipts, gifts, bequests or any other acquisitions from any source whatsoever, said decree reiterates the need of voluntary disclosure on the part of the taxpayer filing the return in order to avail of the tax amnesty. The only noticeable departure from P.D. No. 23 is the extension of the date for the filing of the return from March 31, 1972 to March 31, 1973. Thus, this Court finds that the same policy observed in the issuance of P.D. No. 23, governs P.D. No. 67. In addition thereto, it gives the tax evaders who failed to avail of the provisions of P.D. No. 23 a chance to reform themselves. An examination of both decrees does not show that taxpayers availing of the tax amnesty in accordance with P.D. No. 67, are entitled to blanket coverage of declarations made prior to the issuance of said decrees. Petitioners argue that the estates of their parents declared for estate tax valuation sometime in the 1960's can avail of the tax amnesty when petitioners declared an additional amount of the estates over and above that which was previously declared. A reading of P.D. No. 67 reveals that tax amnesty is extendible only to those declarations made pursuant to said decree. Thus, if at all, it is only the estates in the amount of P3,655,595.78 declared pursuant to P.D.

No. 67 that is covered, upon payment of 10% of the said amount within the period prescribed under P.D. No. 23, which was up to June 30, 1973. Considering that there has been partial compliance with the said requirement by the payment of P285,046.68, petitioner may claim the benefit of amnesty for said declared amount upon payment of the balance of 10% thereof required to be paid. WHEREFORE, with the above modification of the questioned order of July 10, 1974, said order is hereby affirmed in all other respect. No pronouncement as to costs. SO ORDERED. Cruz, Grio-Aquino and Medialdea, JJ., concur. Narvasa, J., took no part. G.R. No. L-23988 January 2, 1968

1952, 1953, 1954, 1955 and 1956 on April 2, 1952, March 30, 1953, February 26, 1954, March 31, 1955, April 2, 1956 and March 23, 1957, respectively. Subsequently, the Bureau of Internal Revenue determined the income of the Villa spouses by the use of networth method and accordingly issued on February 23, 1961 assessments for deficiency income tax for the years 1951, 1952, 1953, 1954 and 1956 and residence tax for 1951 to 1957. Dr. Villa received the assessments on April 7, 1961. Without contesting the said assessments in the Bureau of Internal Revenue, he filed on May 4, 1961 a petition for review in the Court of Tax Appeals. The Court of Tax Appeals took cognizance of the appeal, tried the case on the merits and rendered the following judgment: IN VIEW OF THE FOREGOING CONSIDERATIONS, with the exception of that portion regarding the additional residence taxes and surcharges for the years 1951 to 1957 in the amount of P244.00, for which we hold petitioner liable, the decision appealed from is hereby reversed. The petitioner is ordered to pay to the Commissioner of Internal Revenue or his representative the sum of P244.00, as additional residence tax and surcharge without pronouncement as to costs. From said judgment, the Commissioner of Internal Revenue has appealed to Us. The law conferring jurisdiction on the Court of Tax Appeals is found in Section 7 of Republic Act 1125, the pertinent part of which states: Sec. 7. Jurisdiction. The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal as herein provided (1) Decisions of the Collector 4of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue; The word "decisions" in paragraph 1, Section 7 of Republic Act 1125, quoted above, has been interpreted to mean the decisions of the Commissioner of Internal Revenue on the protest of the taxpayer against the assessments. Definitely, said word does not signify the assessment itself. We quote what this Court said aptly in a previous case:

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LEONARDO S. VILLA and THE COURT OF APPEALS, respondents. Office of the Solicitor General for petitioner. Jesus P. Garcia for respondents. BENGZON, J.P., J.: Jurisdiction over the subject matter is fundamental for a court to act on a given controversy. It is conferred by law, 1 not by consent of the parties. 2 It can be challenged at any stage of the proceedings and for lack of it, a court can dismiss a case ex mero motu. 3 To inquire into the existence of jurisdiction over the subject matter is the primary concern of a court, for thereon would depend the ability of its entire proceedings. In this case, the parties submitted voluntarily to the jurisdiction of the Court of Tax Appeals, adduced their evidence thereat. Thereafter, they submitted their cause for decision. At no stage of the proceedings have they raised the issue of jurisdiction. However, as aforesaid, the consent of the parties does not confer jurisdiction over the subject matter. Hence, We shall proceed to inquire whether or not the Court of Tax Appeals had jurisdiction to entertain the so-called appeal of the taxpayer in this case. Leonardo S. Villa, a doctor of medicine, and his wife filed joint income tax returns for the years 1951,

In the first place, we believe the respondent court erred in holding that the assessment in question is the respondent Collector's decision or ruling appealable to it, and that consequently, the period of thirty days prescribed by section 11 of Republic Act No. 1125 within which petitioner should have appealed to the respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment, . . . 5(Emphasis supplied) The same interpretation finds support in Section 11 of Republic Act 1125, which states:

RIZAL COMMERCIAL BANKING CORPORATION, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION YNARES-SANTIAGO, J.: This is a petition for review under Rule 45 of the Rules of Court assailing the Decision1 of the Court of Tax Appeals (CTA) En Banc dated June 7, 2005 in C.T.A. EB No. 50 which affirmed the Resolutions of the CTA Second Division dated May 3, 2004 2 and November 5, 20043 in C.T.A. Case No. 6475 denying petitioners Petition for Relief from Judgment and the Motion for Reconsideration thereof, respectively. The undisputed facts are as follows: On July 5, 2001, petitioner Rizal Commercial Banking Corporation received a Formal Letter of Demand dated May 25, 2001 from the respondent Commissioner of Internal Revenue for its tax liabilities particularly for Gross Onshore Tax in the amount of P53,998,428.29 and Documentary Stamp Tax for its Special Savings Placements in the amount of P46,717,952.76, for the taxable year 1997.4 On July 20, 2001, petitioner filed a protest letter/request for reconsideration/reinvestigation pursuant to Section 228 of the National Internal Revenue Code of 1997 (NIRC).5 As the protest was not acted upon by the respondent, petitioner filed on April 30, 2002 a petition for review with the CTA for the cancellation of the assessments which was docketed as C.T.A. Case No. 6475. 6 On July 15, 2003, respondent filed a motion to resolve first the issue of CTAs jurisdiction,7 which was granted by the CTA in a Resolution dated September 10, 2003.8 The petition for review was dismissed because it was filed beyond the 30-day period following the lapse of 180 days from petitioners submission of documents in support of its protest, as provided under Section 228 of the NIRC and Section 11 of R.A. No. 1125, otherwise known as theLaw Creating the Court of Tax Appeals. Petitioner did not file a motion for reconsideration or an appeal to the CTA En Banc from the dismissal of its petition for review. Consequently, the September 10, 2003 Resolution became final and executory on October 1, 2003 and Entry of Judgment was made on December 1, 2003.9 Thereafter, respondent sent a

1wph1.t

Sec. 11. Who may appeal; effect of appeal. Any person, association or corporation adversely affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within thirty days after the receipt of such decision or ruling. (Emphasis supplied) Note that the law uses the word "decisions", not "assessments", further indicating the legislative intention to subject to judicial review the decision of the Commissioner on the protest against an assessment but not the assessment itself. 6 Since in the instant case the taxpayer appealed the assessment of the Commissioner of Internal Revenue without previously contesting the same, the appeal was premature and the Court of Tax Appeals had no jurisdiction to entertain said appeal. For, as stated, the jurisdiction of the Tax Court is to review by appealdecisions of Internal Revenue on disputed assessments. The Tax Court is a court of special jurisdiction. As such, it can take cognizance only of such matters as are clearly within its jurisdiction. 7 WHEREFORE, the judgment appealed from is set aside for lack of jurisdiction and the petition for review filed in the Court of Tax Appeals is hereby ordered dismissed. No costs. So ordered. Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur. G.R. No. 168498 June 16, 2006

Demand Letter to petitioner for the payment of the deficiency tax assessments. On February 20, 2004, petitioner filed a Petition for Relief from Judgment10 on the ground of excusable negligence of its counsels secretary who allegedly misfiled and lost the September 10, 2003 Resolution. The CTA Second Division set the case for hearing on April 2, 200411 during which petitioners counsel was present.12Respondent filed an Opposition13 while petitioner submitted its Manifestation and CounterMotion.14 On May 3, 2004, the CTA Second Division rendered a Resolution15 denying petitioners Petition for Relief from Judgment.
lawph!l.net

he was unjustly deprived of a hearing or was prevented from taking an appeal, in either case, because of fraud, accident, mistake or excusable neglect.18 Petitioner argues that it was denied due process when it was not given the opportunity to be heard to prove that its failure to file a motion for reconsideration or appeal from the dismissal of its petition for review was due to the failure of its employee to forward the copy of the September 10, 2003 Resolution which constitutes excusable negligence. Petitioners argument lacks merit. It is basic that as long as a party is given the opportunity to defend his interests in due course, he would have no reason to complain, for it is this opportunity to be heard that makes up the essence of due process.19 InBatongbakal v. Zafra,20 the Court held that: There is no question that the "essence of due process is a hearing before conviction and before an impartial and disinterested tribunal" but due process as a constitutional precept does not, always and in all situations, require a trial-type proceeding. The essence of due process is to be found in the reasonable opportunity to be heard and submit any evidence one may have in support of ones defense. "To be heard" does not only mean verbal arguments in court; one may be heard also through pleadings. Where opportunity to be heard, either through oral arguments or pleadings, is accorded, there is no denial of procedural due process.(Emphasis supplied) As correctly pointed by the Office of the Solicitor General (OSG), the CTA Second Division set the case for hearing on April 2, 2004 after the filing by the petitioner of its petition for relief from judgment. Petitioners counsel was present on the scheduled hearing and in fact orally argued its petition. Moreover, after the CTA Second Division dismissed the petition for relief from judgment in a Resolution dated May 3, 2004, petitioner filed a motion for reconsideration and the court further required both parties to file their respective memorandum. Indeed, petitioner was not denied its day in court considering the opportunities given to argue its claim. Relief cannot be granted on the flimsy excuse that the failure to appeal was due to the neglect of petitioners counsel.21 Otherwise, all that a losing party would do to salvage his case would be to invoke neglect or

Petitioners motion for reconsideration was denied in a Resolution dated November 5, 2004, 16 hence it filed a petition for review with the CTA En Banc, docketed as C.T.A. EB No. 50, which affirmed the assailed Resolutions of the CTA Second Division in a Decision dated June 7, 2005. Hence, this petition for review based on the following grounds: I. THE HONORABLE CTA AND CTA EN BANC GRAVELY ERRED IN DENYING PETITIONERS PETITION FOR RELIEF, WITHOUT FIRST AFFORDING IT THE OPPORTUNITY TO ADDUCE EVIDENCE TO ESTABLISH THE FACTUAL ALLEGATIONS CONSTITUTING ITS ALLEGED EXCUSABLE NEGLIGENCE, IN CLEAR VIOLATION OF PETITIONERS BASIC RIGHT TO DUE PROCESS. II. CONSIDERING THAT THE SUBJECT ASSESSMENT, INSOFAR AS IT INVOLVES ALLEGED DEFICIENCY DOCUMENTARY STAMP TAXES ON SPECIAL SAVINGS ACCOUNTS, IS AN ISSUE AFFECTING ALL MEMBERS OF THE BANKING INDUSTRY, PETITIONER, LIKE ALL OTHER BANKS, SHOULD BE AFFORDED AN EQUAL OPPORTUNITY TO FULLY LITIGATE THE ISSUE, AND HAVE THE CASE DETERMINED BASED ON ITS MERITS, RATHER THAN ON A MERE TECHNICALITY.17 Relief from judgment under Rule 38 of the Rules of Court is a legal remedy that is allowed only in exceptional cases whereby a party seeks to set aside a judgment rendered against him by a court whenever

mistake of his counsel as a ground for reversing or setting aside the adverse judgment, thereby putting no end to litigation.22 Negligence to be "excusable" must be one which ordinary diligence and prudence could not have guarded against and by reason of which the rights of an aggrieved party have probably been impaired.23 Petitioners former counsels omission could hardly be characterized as excusable, much less unavoidable. The Court has repeatedly admonished lawyers to adopt a system whereby they can always receive promptly judicial notices and pleadings intended for them.24 Apparently, petitioners counsel was not only remiss in complying with this admonition but he also failed to check periodically, as an act of prudence and diligence, the status of the pending case before the CTA Second Division. The fact that counsel allegedly had not renewed the employment of his secretary, thereby making the latter no longer attentive or focused on her work, did not relieve him of his responsibilities to his client. It is a problem personal to him which should not in any manner interfere with his professional commitments. In exceptional cases, when the mistake of counsel is so palpable that it amounts to gross negligence, this Court affords a party a second opportunity to vindicate his right. But this opportunity is unavailing in the case at bar, especially since petitioner had squandered the various opportunities available to it at the different stages of this case. Public interest demands an end to every litigation and a belated effort to reopen a case that has already attained finality will serve no purpose other than to delay the administration of justice.25 Since petitioners ground for relief is not well-taken, it follows that the assailed judgment stands. Assuming ex gratia argumenti that the negligence of petitioners counsel is excusable, still the petition must fail. As aptly observed by the OSG, even if the petition for relief from judgment would be granted, petitioner will not fare any better if the case were to be returned to the CTA Second Division since its action for the cancellation of its assessments had already prescribed.26
lavvphil.e+

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have been submitted; otherwise, the assessment shall become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final, executory and demandable. (Emphasis supplied) The CTA Second Division held: Following the periods provided for in the aforementioned laws, from July 20, 2001, that is, the date of petitioners filing of protest, it had until September 18, 2001 to submit relevant documents and from September 18, 2001, the Commissioner had until March 17, 2002 to issue his decision. As admitted by petitioner, the protest remained unacted by the Commissioner of Internal Revenue. Therefore, it had until April 16, 2002 within which to elevate the case to this court. Thus, when petitioner filed its Petition for Review on April 30, 2002, the same is outside the thirty (30) period.27 As provided in Section 228, the failure of a taxpayer to appeal from an assessment on time rendered the assessment final, executory and demandable. Consequently, petitioner is precluded from disputing the correctness of the assessment. In Ker & Company, Ltd. v. Court of Tax Appeals ,28 the Court held that while the right to appeal a decision of the Commissioner to the Court of Tax Appeals is merely a statutory remedy, nevertheless the requirement that it must be brought within 30 days is jurisdictional. If a statutory remedy provides as a condition precedent that the action to enforce it must be commenced within a prescribed time, such

Petitioner protested the assessments pursuant to Section 228 of the NIRC, which provides: SEC. 228. Protesting of Assessment.- x x x. xxxx

requirement is jurisdictional and failure to comply therewith may be raised in a motion to dismiss. In fine, the failure to comply with the 30-day statutory period would bar the appeal and deprive the Court of Tax Appeals of its jurisdiction to entertain and determine the correctness of the assessment.29 WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50 affirming the Resolutions of the Court of Tax Appeals Second Division dated May 3, 2004 and November 5, 2004 in C.T.A. Case No. 6475 denying petitioners Petition for Relief from Judgment and Motion for Reconsideration, respectively, is AFFIRMED. SO ORDERED.

WHEREFORE, the assailed decision is REVERSED and SET ASIDE. Accordingly, judgment is hereby rendered REMANDING the case to the CTA for proper disposition. [4]
The Facts The facts are undisputed. The Court of Appeals quoted the summary of the CTA as follows:

As succinctly summarized by the Court of Tax appeals (CTA for brevity), the antecedent facts are as follows: In an investigation conducted on the 1986 books of account of [respondent, petitioner] had the preliminary [finding] that [respondent] incurred a total income tax deficiency of P9,985,392.15, inclusive of increments. Upon protest by [respondents] counsel, the said preliminary assessment was reduced to the amount of P325,869.44, a breakdown of which follows: Deficiency Income Tax Deficiency Expanded Withholding Tax ___________ Total P325,869.44 ========== P321,022.68 4,846.76

[G.R. No. 135210. July 11, 2001]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ISABELA CULTURAL CORPORATION, respondent. DECISION
PANGANIBAN, J.:

A final demand letter from the Bureau of Internal Revenue, reiterating to the taxpayer the immediate payment of a tax deficiency assessment previously made, is tantamount to a denial of the taxpayers request for reconsideration. Such letter amounts to a final decision on a disputed assessment and is thus appealable to the Court of Tax Appeals (CTA). The Case Before this Court is a Petition for Review on Certiorari[1] pursuant to Rule 45 of the Rules of Court, seeking to set aside the August 19, 1998 Decision[2] of the Court of Appeals[3] (CA) in CAGR SP No. 46383 and ultimately to affirm the dismissal of CTA Case No. 5211. The dispositive portion of the assailed Decision reads as follows:

(pp. 187-189, BIR records) On February 23, 1990, [respondent] received from [petitioner] an assessment letter, dated February 9, 1990, demanding payment of the amounts of P333,196.86 and P4,897.79 as deficiency income tax and expanded withholding tax inclusive of surcharge and

interest, respectively, for the taxable period from January 1, 1986 to December 31, 1986. (pp. 204 and 205, BIR rec.) In a letter, dated March 22, 1990, filed with the [petitioners] office on March 23, 1990 (pp. 296-311, BIR rec.), [respondent] requested x x x a reconsideration of the subject assessment. Supplemental to its protest was a letter, dated April 2, 1990, filed with the [petitioners] office on April 18, 1990 (pp. 224 & 225, BIR rec.), to which x x x were attached certain documents supportive of its protest, as well as a Waiver of Statute of Limitation, dated April 17, 1990, where it was indicated that [petitioner] would only have until April 5, 1991 within which to asses and collect the taxes that may be found due from [respondent] after the re-investigation. On February 9, 1995, [respondent] received from [petitioner] a Final Notice Before Seizure, dated December 22, 1994 (p. 340, BIR rec.). In said letter, [petitioner] demanded payment of the subject assessment within ten (10) days from receipt thereof. Otherwise, failure on its part would constrain [petitioner] to collect the subject assessment through summary remedies. [Respondent] considered said final notice of seizure as [petitioners] final decision. Hence, the instant petition for review filed with this Court on March 9, 1995. The CTA having rendered judgment dismissing the petition, [respondent] filed the instant petition anchored on the argument that [petitioners] issuance of the Final Notice Before Seizure constitutes [its] decision on [respondents] request for reinvestigation, which the [respondent] may appeal to the CTA.[5]

Ruling of the Court of Appeals In its Decision, the Court of Appeals reversed the Court of Tax Appeals. The CA considered the final notice sent by petitioner as the latters decision, which was appealable to the CTA. The appellate court reasoned that the final Notice before seizure had effectively denied petitioners request for a reconsideration of the commissioners assessment. The CA relied on the long-settled tax jurisprudence that a demand letter reiterating payment of delinquent taxes amounted to a decision on a disputed assessment. Hence, this recourse.[6] Issues In his Memorandum,[7] petitioner presents for this Courts consideration a solitary issue:

Whether or not the Final Notice Before Seizure dated February 9, 1995 signed by Acting Chief Revenue Collection Officer Milagros Acevedo against ICC constitutes the final decision of the CIR appealable to the CTA.[8]
The Courts Ruling The Petition is not meritorious. Sole Issue: The Nature of the Final Notice Before Seizure The Final Notice Before Seizure sent by the Bureau of Internal Revenue (BIR) to respondent reads as follows:

On Feb.9, 1990, [this] Office sent you a letter requesting you to settle the abovecaptioned assessment. To date, however, despite the lapse of a considerable length of

time, we have not been honored with a reply from you. In this connection, we are giving you this LAST OPPORTUNITY to settle the adverted assessment within ten (10) days after receipt hereof. Should you again fail, and refuse to pay, this Office will be constrained to enforce its collection by summary remedies of Warrant of Levy of Road Property, Distraint of Personal Property or Warrant of Garnishment, and/or simultaneous court action. Please give this matter your preferential attention. Very truly yours, ISIDRO B. TECSON, JR. Revenue District Officer By: (Signed) MILAGROS M. ACEVEDO Actg. Chief Revenue Collection Officer [9]
Petitioner maintains that this Final Notice was a mere reiteration of the delinquent taxpayers obligation to pay the taxes due. It was supposedly a mere demand that should not have been mistaken for a decision on a protested assessment. Such decision, the commissioner contends, must unequivocably indicate that it is the resolution of the taxpayers request for reconsideration and must likewise state the reason therefor. Respondent, on the other hand, points out that the Final Notice Before Seizure should be considered as a denial of its request for reconsideration of the disputed assessment. The Notice should be deemed as petitioners last act, since failure to comply with it would lead to the distraint and levy of respondents properties, as indicated therein. We agree with respondent. In the normal course, the revenue district officer sends the taxpayer a

notice of delinquent taxes, indicating the period covered, the amount due including interest, and the reason for the delinquency. If the taxpayer disagrees with or wishes to protest the assessment, it sends a letter to the BIR indicating its protest, stating the reasons therefor, and submitting such proof as may be necessary. That letter is considered as the taxpayers request for reconsideration of the delinquent assessment. After the request is filed and received by the BIR, the assessment becomes a disputed assessment on which it must render a decision. That decision is appealable to the Court of Tax Appeals for review. Prior to the decision on a disputed assessment, there may still be exchanges between the commissioner of internal revenue (CIR) and the taxpayer. The former may ask clarificatory questions or require the latter to submit additional evidence. However, the CIRs position regarding the disputed assessment must be indicated in the final decision. It is this decision that is properly appealable to the CTA for review. Indisputably, respondent received an assessment letter dated February 9, 1990, stating that it had delinquent taxes due; and it subsequently filed its motion for reconsideration on March 23, 1990. In support of its request for reconsideration, it sent to the CIR additional documents on April 18, 1990. The next communication respondent received was already the Final Notice Before Seizure dated November 10, 1994. In the light of the above facts, the Final Notice Before Seizure cannot but be considered as the commissioners decision disposing of the request for reconsideration filed by respondent, who received no other response to its request. Not only was the Notice the only response received; its content and tenor supported the theory that it was the CIRs final act regarding the request for reconsideration. The very title expressly indicated that it was a final notice prior to seizure of property. The letter itself clearly stated that respondent was being given this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to distraint and levy. How then could it have been made to believe that its request for reconsideration was still pending determination, despite the actual threat of seizure of its properties?

Furthermore, Section 228 of the National Internal Revenue Code states that a delinquent taxpayer may nevertheless directly appeal a disputed assessment, if its request for reconsideration remains unacted upon 180 days after submission thereof. We quote:

Sec. 228. Protesting an Assessment. x x x Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest, all relevant supporting documents shall have become final. If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal to the Court of Tax Appeals within (30) days from receipt of the said decision, or from the lapse of the one hundred eighty (180)-day period; otherwise the decision shall become final, executory and demandable.[10]
In this case, the said period of 180 days had already lapsed when respondent filed its request for reconsideration on March 23, 1990, without any action on the part of the CIR. Lastly, jurisprudence dictates that a final demand letter for payment of delinquent taxes may be considered a decision on a disputed or protested assessment. In Commissioner of Internal Revenue v. Ayala Securities Corporation, this Court held:

The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or [respondent corporations] x x x protest o[f] the assessment made by the petitioner, considering that the said letter [was] in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758,687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment, in view of the continued refusal of the respondent corporation to execute the waiver of the period of limitation upon the assessment in question. This being so, the said letter amount[ed] to a decision on a disputed or protested assessment and, there, the court a quo did not err in taking cognizance of this case.[11]
Similarly, in Surigao Electric Co., Inc. v. Court of Tax Appeals[12] and again in CIR v. Union Shipping Corp.,[13] we ruled:

x x x. The letter of demand dated April 29, 1963 unquestionably constitutes the final action taken by the commissioner on the petitioners several requests for reconsideration and recomputation. In this letter the commissioner not only in effect demanded that the petitioner pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically the statement regarding the resort to legal remedies, unmistakably indicate[d] the final nature of the determination made by the commissioner of

the petitioners deficiency franchise tax liability.

As in CIR v. Union Shipping,[14] petitioner failed to rule on the Motion for Reconsideration filed by private respondent, but simply continued to demand payment of the latters alleged tax delinquency. Thus, the Court reiterated the dictum that the BIR should always indicate to the taxpayer in clear and unequivocal language what constitutes final action on a disputed assessment. The object of this policy is to avoid repeated requests for reconsideration by the taxpayer, thereby delaying the finality of the assessment and, consequently, the collection of the taxes due. Furthermore, the taxpayer would not be groping in the dark, speculating as to which communication or action of the BIR may be the decision appealable to the tax court.[15] In the instant case, the second notice received by private respondent verily indicated its nature that it was final. Unequivocably, therefore, it was tantamount to a rejection of the request for reconsideration. Commissioner v. Algue[16] is not in point here. In that case, the Warrant of Distraint and Levy, issued to the taxpayer without any categorical ruling on its request for reconsideration, was not deemed equivalent to a denial of the request. Because such request could not in fact be found in its records, the BIR cannot be presumed to have taken it into consideration. The request was considered only when the taxpayer gave a copy of it, duly stampreceived by the BIR. Hence, the Warrant was deemed premature. In the present case, petitioner does not deny receipt of private respondents protest letter. As a matter of fact, it categorically relates the following in its Statement of Relevant Facts:[17]

4. On April 2, 1990, respondent ICC sent the CIR additional documents in support of its protest/reconsideration. The letter was received by the BIR on April 18, 1990. Respondent ICC further executed a Waiver of Statute of Limitation (dated April 17, 1990) whereby it consented to the BIR to assess and collect any taxes that may be discovered in the process of reinvestigation, until April 3, 1991 (Ibid., pp. 296-311). A copy of the waiver is hereto attached as Annex C.
Having admitted as a fact private respondents request for reconsideration, petitioner must have passed upon it prior to the issuance of the Final Notice Before Seizure. WHEREFORE, the hereby DENIED and Decision AFFIRMED. SO ORDERED. Melo, (Chairman), Vitug, and Sandoval-Gutierrez, JJ., concur. Gonzaga-Reyes, J., on leave.
G.R. No. L-29485 March 31, 1976 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX APPEALS, respondents. Solicitor General Felix V. Makasiar, Assistant Solicitor General Isidro C. Borromeo, Solicitor Lolita O. Gallang and Special Attorney Salvador D. David for petitioner. B. V. Abela M. C. Gutierrez, J. U. Ong and F.J. Malate, Jr. for respondents.

Petition the

is assailed

3. On March 23, 1990, respondent ICC wrote the CIR requesting for a reconsideration of the assessment on the ground that there was an error committed in the computation of interest and that there were expenses which were disallowed (Ibid., pp. 296-311).

ESGUERRA, J.:
Appeal from the decision of the Court of Tax Appeals dated June 20, 1968, in its CTA Case No. 1346, cancelling and declaring of no force and effect the assessment made by the petitioner, Commissioner of

Internal Revenue, against the accumulated surplus of the respondent, Ayala Securities Corporation. The factual background of the case is as follows: On November 29, 1955, respondent Ayala Securities Corporation, a domestic corporation organized and existing under the laws of the Philippines, filed its income tax returns with the office of the petitioner for its fiscal year which ended on September 30, 1955. Attached to its income tax return was the audited financial statements of the respondent corporation as of September 30, 1955, showing a surplus of P2,758,442.37. The income tax due on the return of the respondent corporation was duly paid for within the time prescribed by law. In a letter dated February 21, 1961, petitioner advised the respondent corporation of the assessment of P758.687.04 on its accumulated surplus reflected on its income tax return for the fiscal year which ended September 30, 1955 (Exit. D). The respondent corporation, on the other hand, in a letter dated April 19, 1961, protested against the assessment on its retained and accumulated surplus pertaining to the taxable year 1955 and sought reconsideration thereof for the reasons (1) that the accumulation of the surplus was for a bona fide business purpose and not to avoid the imposition of income tax on the individual shareholders, and (2) that the said assessment was issued beyond the five-year prescriptive period (Exh. E). On May 30, 1961, petitioner wrote respondent corporation's auditing and accounting firm with the "advise that your request for reconsideration will be the subject matter of further reinvestigation and a thorough analysis of the issues involved conditioned, however, upon the execution of your client of the enclosed form for waiver of the defense of prescription". (Exh. F) However, respondent corporation did not execute the requested waiver of the statute of limitations, considering its claim that the assessment in question had already prescribed. On February 21, 1963, respondent corporation received a letter dated February 18, 1963, from the Chief, Manila Examiners, of the Office of the herein petitioner, calling the attention of the respondent corporation to its outstanding and unpaid tax in the amount of P708,687.04 and thereby requesting for the payment of the said amount within five (5) days from receipt of the said letter (Exh. G). Believing the aforesaid letter to be a denial of its protest, the herein respondent corporation filed with the Court of Tax Appeals a Petition for Review of the assessment, docketed as CTA Case No. 1346.

Respondent corporation in its Petition for Review alleges that the assessment made by petitioner Commissioner of Internal Revenue is illegal and invalid considering that (1) the assessment in question, having been issued only on February 21, 1961, and received by the respondent corporation on March 22, 1961, the same was issued beyond the five-year period from the date of the filing of respondent corporations income tax return November 29, 1955, and, therefore, petitioner's right to make the assessment has already prescribed, pursuant to the provision of Section 331 of the National Internal Revenue Code; and (2) the respondent corporation's accumulation of surplus for the taxable year 1955 was not improper, considering that the retention of such surplus was intended for legitimate business purposes and was not availed of by the corporation to prevent the imposition of the income tax upon its shareholders. Petitioner in his answer alleged that the assessment made by his office on the accumulated surplus of the corporation as reflected on its income tax return for the taxable year 1955 has not as yet prescribed and, further, that the respondent corporation's accumulation of surplus for the taxable year 1955 was improper as the retention of such surplus was availed of by the corporation to prevent the imposition of the income tax upon the individual shareholders or members of the said corporation. After trial the Court of Tax Appeals rendered its decision of June 20, 1968, the dispositive portion of which is as follows: WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing petitioner the amount of P758,687.04 as 25 surtax and interest is reversed. Accordingly, said assessment of respondent for 1955 is hereby cancelled and declared of no force and effect. Without pronouncement as to costs. From this decision, the Commissioner of Internal Revenue interposed this appeal. Petitioner maintains that respondent Court of Tax Appeals erred in holding that the letter dated February 18, 1963, (Exh. G) is a denial of the private respondent corporation's protest against the assessment, and as such, is a decision contemplated under the provisions of Sections 7 and 11 of Republic Act No. 1125. Petitioner contends that the letter dated February 18, 1963, is merely an ordinary office letter designed to remind delinquent taxpayers of their obligations to pay their taxes to the Government and, certainly, not a decision on a disputed or protested

assessment contemplated under Section 7(1) of R.A. 1125. Petitioner likewise maintains that the respondent Court of Tax Appeals erred in holding that the assessment of P758,687.04 as surtax on private respondent corporation's unreasonably accumulated profits or surplus had already prescribed. Petitioner further contends that the applicable provision of law to this case is Section 332 (a) of the National Internal Revenue Code which provides for a ten (10) year prescriptive period of assessment, and not Section 331 thereof as held by the Tax Court which provides a period of limitation of assessment for five (5) years only after the filing of the return. Petitioner's theory, therefore, is to the effect that since the Corporate income tax return in question was filed on, November 29, 1955, and the assessment thereto was issued on February 21, 1961, said assessment is not barred by prescription as the same was made very well within the ten (10) year period allowed by law. Petitioner also maintains that the respondent Court of Tax Appeals erred in not deciding the issue as to whether or not the accumulated profits or surplus is indispensable to the business operations of the private respondent corporation. It is the contention of the petitioner that the accumulation of profits or surplus was resorted to by the respondent corporation in order to avoid the payment of taxes by its stockholders or members, and was not availed of in order to meet the reasonable needs of its business operations. The legal issues for resolution by this Court in this case are: (1) Whether or not the instant case falls within the jurisdiction of the respondent Court of Tax Appeals; (2) Whether or not the applicable provision of law to this case is Section 331 of the National Internal Revenue Code, which provides for a five-year period of prescription of assessment from the filing of the return, or Section 332(a) of the same Code which provides for a ten-year period of limitation for the same purpose; and (3) Whether or not the respondent Court of Tax Appeals committed a reversible error in not making any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus in question of the private respondent corporation. I It is to be noted that the respondent Court of Tax Appeals is a court of special appellate jurisdiction created under R. A. No. 1125. Thus under Section 7 (1), R. A. 1125, the Court of Tax Appeals exercises exclusive appellate jurisdiction to review by appeal

"decisions of the Collector of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue". The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a denial of the reconsideration or protest of the respondent corporation on the assessment made by the petitioner, considering that the said letter is in itself a reiteration of the demand by the Bureau of Internal Revenue for the settlement of the assessment already made, and for the immediate payment of the sum of P758, 687.04 in spite of the vehement protest of the respondent corporation on April 21, 1961. This certainly is a clear indication of the firm stand of petitioner against the reconsideration of the disputed assessment in view of the continued refusal of the respondent corporation to execute the waiver of the period of limitation upon the assessment in question. This being so, the said letter amounts to a decision on a disputed or protested assessment and, therefore, the court a quo did not err in taking cognizance of this case. II On the issue of whether Sec. 331 or See. 332(a) of the National Internal Revenue Code should apply to this case, there is no iota of evidence presented by the petitioner as to any fraud or falsity on the return with intent to evade payment of tax, not even in the income tax assessment (Exh. 5) nor in the letterdecision of February 18, 1963 (Exh. G), nor in his answer to the petition for review. Petitioner merely relies on the provisions of Sec 25 of the National Internal Revenue Code, violation of which, according to Petitioner, presupposes the existence of fraud. But this is begging the question and We do not subscribe to the view of the petitioner. Fraud is a question of fact and the circumstances constituting fraud must be alleged and proved in the court below. The finding of the trial court as to its existence and non- existence is final and cannot be reviewed here unless clearly shown to be erroneous (Republic of the Philippines vs. Ker & Company, Ltd., L-21609, Sept. 29, 1966, 18 SCRA 207; Commissioner of Internal Revenue vs. Lilia Yusay Gonzales and the Court of Tax Appeals, L-19495, Nov. 24, 1966, 18 SCRA 757). Fraud is never lightly to be presumed because it is serious charge (Yutivo Sons Hardware Company vs. Court of

Tax Appeals and Collector of Internal Revenue, L13203, January 28,1961, 1 SCRA 160). The applicable provision of law in this case is Section 331 of the National Internal Revenue Code, to wit: SEC. 331. Period of limitation upon assessment and collection. Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. For the purposes of this section, a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this limitation shall not apply to cases already investigated prior to the approval of this Code. Under Section 46(d) of the National Internal Revenue Code, the Ayala Securities Corporation designated September 30, 1955, as the last day of the closing of its fiscal year, and under Section 46(b) the income tax returns for the said corporation shall be filed on or before the fifteenth (15th) day of the fourth (4th) month following the close of its fiscal year. The Ayala Securities Corporation could, therefore, file its income tax returns on or before January 15, 1956. The assessment by the Commissioner of Internal Revenue shall be made within five (5) years from January 15, 1956, or not later than January 15, 1961, in accordance with Section 331 of the National Internal Revenue Code herein above-quoted. As the assessment issued on February 21, 1961, which was received by the Ayala Securities Corporation on March 22, 1961, was made beyond the five-year period prescribed under Section 331 of said Code, the same was made after the prescriptive period had expired and, therefore, was no longer binding on the Ayala Securities Corporation. This Court is of the opinion that the respondent court committed no reversible error in not making any ruling on the reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation. For this reason, We are of the view that after reaching the conclusion that the right of the Commissioner of Internal Revenue to assess the 25% surtax had already prescribed under Section 331 of the National Internal Revenue Code, to delve further into the reasonableness or unreasonableness of the accumulated profits or surplus of the respondent corporation for the fiscal year ending September 30, 1955, will only be an exercise in futility. WHEREFORE, the decision appealed from is hereby affirmed in toto.

Without special pronouncement as to costs. SO ORDERED. Teehankee (Chairman), Makasiar, Muoz Palma and Martin, JJ., concur. G.R. No. L-25289 June 28, 1974 SURIGAO ELECTRIC CO., INC., petitioner, vs. THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. David G. Nitafan for petitioner. Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorney Franciso J. Malate, Jr. for respondents.

CASTRO, J.:p The Court denies the present petition for review of the decision of the Court of Appeals dated October 1, 1965 in its CTA Case No. 1438, which dismissed the appeal filed by the petitioner Surigao Electric Company, Inc. with the tax court on August 1, 1963 on the ground that it was time-barred. In November 1961 the petitioner Surigao Electric Co., Inc., grantee of a legislative electric franchise, received a warrant of distraint and levy to enforce the collection from "Mainit Electric" of a deficiency franchise tax plus surcharge in the total amount of P718.59. In a letter to the Commissioner of Internal Revenue, the petitioner contested this warrant, stating that it did not have a franchise in Mainit, Surigao. Thereafter the Commissioner, by letter dated April 2, 1961, advised the petitioner to take up the matter with the General Auditing Office, enclosing a copy of the 4th Indorsement of the Auditor General dated November 23, 1960. This indorsement indicated that the petitioner's liability for deficiency franchise tax for the period from September 1947 to June 1959 was P21,156.06, excluding surcharge. Subsequently, in a letter to the Auditor General dated August 2, 1962, the petitioner asked for reconsideration of the assessment, admitting liability only for the 2% franchise tax in accordance with its legislative franchise and not at the higher rate of 5% imposed by section 259 of the National Internal Revenue Code, as amended, which latter rate the Auditor General

used as basis in computing the petitioner's deficiency franchise tax. An exchange of correspondence between the petitioner, on the one hand, and the Commissioner and the Auditor General, on the other, ensued, all on the matter of the petitioner's liability for deficiency franchise tax. The controversy culminated in a revised assessment dated April 29, 1963 (received by the petitioner on May 8, 1963) in the amount of P11,533.53, representing the petitioner's deficiency franchise-tax and surcharges thereon for the period from April 1, 1956 to June 30, 1959. The petitioner then requested a recomputation of the revised assessment in a letter to the Commissioner dated June 6, 1963 (sent by registered mail on June 7, 1963). The Commissioner, however, in a letter dated June 28, 1963 (received by the petitioner on July 16, 1963), denied the request for recomputation. On August 1, 1963 the petitioner appealed to the Court of Tax Appeals. The tax court dismissed the appeal on October 1, 1965 on the ground that the appeal was filed beyond the thirty-day period of appeal provided by section 11 of Republic Act 1125. Hence, the present recourse. The case at bar raises only one issue: whether or not the petitioner's appeal to the Court of Tax Appeals was time-barred. The parties disagree on which letter of the Commissioner embodies the decision or ruling appealable to the tax court. A close reading of the numerous letters exchanged between the petitioner and the Commissioner clearly discloses that the letter of demand issued by the Commissioner on April 29, 1963 and received by the petitioner on May 8, 1963 constitutes the definite determination of the petitioner's deficiency franchise tax liability or the decision on the disputed assessment and, therefore, the decision appealable to the tax court. This letter of April 29, 1963 was in response to the communications of the petitioner, particularly the letter of August 2, 1962 wherein it assailed the 4th Indorsement's data and findings on its deficiency, franchise tax liability computed at 5% (on the ground that its franchise precludes the imposition of a rate higher than the 2% fixed in its legislative franchise), and the letter of April 24, 1963 wherein it again questioned the assessment and requested for a recomputation (on the ground that the Government could make an assessment only for the period from May 29, 1956 to June 30, 1959). Thus, as

early as August 2, 1962, the petitioner already disputed the assessment made by the Commissioner. Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes the final action taken by the Commissioner on the petitioner's several requests for reconsideration and recomputation. In this letter, the Commissioner not only in effect demanded that the petitioner pay the amount of P11,533.53 but also gave warning that in the event it failed to pay, the said Commissioner would be constrained to enforce the collection thereof by means of the remedies provided by law. The tenor of the letter, specifically, the statement regarding the resort to legal remedies, unmistakably indicates the final nature of the determination made by the Commissioner of the petitioner's deficiency franchise tax liability. The foregoing-view accords with settled jurisprudence and this despite the fact that nothing in Republic Act 1125, 1 as amended, even remotely suggests the element truly determinative of the appealability to the Court of Appeals of a ruling of the Commissioner of Internal Revenue. Thus, this Court has considered the following communications sent by the Commissioner to taxpayers as embodying rulings appealable to the tax court: (a) a letter which stated the result of the investigation requested by the taxpayer and the consequent modification of the assessment; 2 (b) letter which denied the request of the taxpayer for the reconsideration cancellation, or withdrawal of the original assessment; 3 (c) a letter which contained a demand on the taxpayer for the payment of the revised or reduced assessment; 4 and (d) a letter which notified the taxpayer of a revision of previous assessments. 5 To sustain the petitioner's contention that the Commissioner's letter of June 28, 1963 denying its request for further amendment of the revised assessment constitutes the ruling appealable to the tax court and that the thirty-day period should, therefore, be counted from July 16, 1963, the day it received the June 28, 1963 letter, would, in effect, leave solely to the petitioner's will the determination of the commencement of the statutory thirty-day period, and place the petitioner and for that matter, any taxpayer in a position, to delay at will and on convenience the finality of a tax assessment. This absurd interpretation espoused by the petitioner would result in grave detriment to the interests of the Government, considering that taxes constitute its lifeblood and their prompt and certain availability is an imperative need. 6 The revised assessment embodied in the Commissioner's letter dated April 29, 1963 being, in legal contemplation, the final ruling reviewable by the

tax court, the thirty-day appeal period should be counted from May 8, 1963 (the day the petitioner received a copy of the said letter). From May 8, 1963 to June 7, 1963 (the day the petitioner, by registered mail, sent to the Commissioner its letter of June 6, 1963 requesting for further recomputation of the amount demanded from it) saw the lapse of thirty days. The June 6, 1963 request for further recomputation, partaking of a motion for reconsideration, tolled the running of the thirty-day period from June 7, 1963 (the day the petitioner sent its letter by registered mail) to July 16, 1963 (the day the petitioner received the letter of the Commissioner dated June 28, 1963 turning down its request). The prescriptive period commenced to run again on July 16, 1963. The petitioner filed its petition for review with the tax court on August 1, 1963 after the lapse of an additional sixteen days. The petition for review having been filed beyond the thirty-day period, we rule that the Court of Tax Appeals correctly dismissed the same. The thirty-day period prescribed by section 11 of Republic Act 1125, as amended, within which a taxpayer adversely affected by a decision of the Commissioner of Internal Revenue should file his appeal with the tax court, is a jurisdictional requirement, 7 and the failure of a taxpayer to lodge his appeal within the prescribed period bars his appeal and renders the questioned decision final and executory. 8 Prescinding from all the foregoing, we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the basis of this indicium indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly

making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. ACCORDINGLY, the decision of the Court of Tax Appeals dated October 1, 1965 is affirmed, at petitioner's cost. Makalintal, C.J, Makasiar, Esguerra and Muoz Palma, JJ., concur. Separate Opinions TEEHANKEE, J., concurring: I concur in the disposition of the case affirming the tax court's dismissal of the appeal on the ground of its having been filed beyond the statutory thirty-day period 1 and in the main opinion's admonition that the internal revenue commissioner (and other officials concerned 2) should clearly and unequivocably state in their letter-decision or ruling that the same constitutes his final determination on the disputed assessment and that the tax-payer's next recourse (if he wishes to avail thereof) is to file an appeal with the tax court "within thirty days after the receipt of such decision or ruling" 3) as provided by law. Ordinarily, since petitioner's representation prior to the revised assessment dated April 29, 1963 had resulted in the revision and reduction of the original assessment from P21,156.06 to P11,533.53, petitioner would have been entitled to further request a reconsideration or revision of such revised assessment based on new facts or arguments arising therefrom or calling attention to such facts or arguments, which although not new, might have been wrongly appreciated or disregarded in the revised assessment and the thirty-day period for appeal would be counted only from the receipt of the commissioner's denial dated June 28, 1963 (and received on July 16, 1963). But since it appears that petitioner's request for recomputation dated June 6, 1963 of the revised assessment was but a pro forma request of the revised assessment of April 9, 1963, I concur with the main opinion's affirmance of the dismissal of the appeal on the strength of Filipinas Investment and Finance Corp. vs. Commissioner of Internal Revenue 4 wherein the Court likewise upheld a similar dismissal by the tax court on the ground that the request for reconsideration of the disputed revised assessment was "a mere pro-forma request for reconsideration .... and did not adduce new facts or

arguments" and that "a taxpayer may not delay indefinitely a tax assessment by reiterating his original defenses over and over again, without substantial variation." G.R. No. L-66160 May 21, 1990 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. UNION SHIPPING CORPORATION and THE COURT OF TAX APPEALS, respondents. Artemio M. Lobrin for private respondent.

On January 10, 1979, private respondent filed with respondent court its Petition for Review of the petitioner's assessment of its deficiency income taxes in a letter dated December 27, 1974, docketed therein as CTA Case No. 2989 (Rollo, pp. 44-49), wherein it prays that after hearing, judgment be rendered holding that it is not liable for the payment of the income tax herein involved, or which may be due from foreign shipowner Yee Fong Hong, Ltd.; to which petitioner filed his answer on March 29, 1979 (Rollo, pp. 50-53). Respondent Tax Court, in a decision dated December 9, 1983, ruled in favor of private respondent WHEREFORE, the decision of the Commissioner of Internal Revenue appealed from, assessing against and demanding from petitioner the payment of deficiency income tax, inclusive of 50% surcharge, interest and compromise penalties, in the amounts of P73,958.76 and P583,155.22 for the years 1971 and 1972, respectively, is reversed. Hence, the instant petition. The Second Division of this Court, after the filing of the required pleadings, in a resolution dated January 28, 1985, resolved to give due course to the petition, and directed petitioner therein, to file his brief (Rollo, p. 145). In compliance, petitioner filed his brief on May 10, 1985 (Rollo, p. 151). Respondents, on the other hand, filed their brief on June 6, 1985 (Rollo, p. 156). The main issues in this case are: (a) on the procedural aspect, whether or not the Court of Tax Appeals has jurisdiction over this case and (b) on the merits, whether or not Union Shipping Corporation acting as a mere "husbanding agent" of Yee Fong Hong Ltd. is liable for payment of taxes on the gross receipts or earnings of the latter. The main thrust of this petition is that the issuance of a warrant of distraint and levy is proof of the finality of an assessment because it is the most drastic action of all media of enforcing the collection of tax, and is tantamount to an outright denial of a motion for reconsideration of an assessment. Among others, petitioner contends that the warrant of distraint and levy was issued after respondent corporation filed a request for reconsideration of subject assessment, thus constituting petitioner's final decision in the disputed assessments (Brief for petitioner, pp. 9 and 12). Petitioner argues therefore that the period to appeal to the Court of Tax Appeals commenced to run from receipt of said warrant on November 25, 1976, so that

PARAS, J.: This is a petition for review on certiorari of the December 9, 1983 decision * of the Court of Tax Appeals in CTA Case No. 2989 reversing the Commissioner of Internal Revenue. In a letter dated December 27, 1974 (Exhibit "A") herein petitioner Commissioner of Internal Revenue assessed against Yee Fong Hong, Ltd. and/or herein private respondent Union Shipping Corporation, the total sum of P583,155.22 as deficiency income taxes due for the years 1971 and 1972. Said letter was received on January 4, 1975, and in a letter dated January 10, 1975 (Exhibit "B"), received by petitioner on January 13, 1975, private respondent protested the assessment. Petitioner, without ruling on the protest, issued a Warrant of Distraint and Levy (Exhibit "C"), which was served on private respondent's counsel, Clemente Celso, on November 25, 1976. In a letter dated November 27, 1976 (Exhibit "D"), received by petitioner on November 29, 1976 (Exhibit "D-1") private respondent reiterated its request for reinvestigation of the assessment and for the reconsideration of the summary collection thru the Warrant of Distraint and Levy. Petitioner, again, without acting on the request for reinvestigation and reconsideration of the Warrant of Distraint and Levy, filed a collection suit before Branch XXI of the then Court of First Instance of Manila and docketed as Civil Case No. 120459 against private respondent. Summons (Exhibit "E") in the said collection case was issued to private respondent on December 28, 1978.

on January 10, 1979 when respondent corporation sought redress from the Tax Court, petitioner's decision has long become final and executory. On this issue, this Court had already laid down the dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment. Specifically, this Court ruled: . . . we deem it appropriate to state that the Commissioner of Internal Revenue should always indicate to the taxpayer in clear and unequivocal language whenever his action on an assessment questioned by a taxpayer constitutes his final determination on the disputed assessment, as contemplated by sections 7 and 11 of Republic Act 1125, as amended. On the basis of this statement indubitably showing that the Commissioner's communicated action is his final decision on the contested assessment, the aggrieved taxpayer would then be able to take recourse to the tax court at the opportune time. Without needless difficulty, the taxpayer would be able to determine when his right to appeal to the tax court accrues. This rule of conduct would also obviate all desire and opportunity on the part of the taxpayer to continually delay the finality of the assessment and, consequently, the collection of the amount demanded as taxes by repeated requests for recomputation and reconsideration. On the part of the Commissioner, this would encourage his office to conduct a careful and thorough study of every questioned assessment and render a correct and definite decision thereon in the first instance. This would also deter the Commissioner from unfairly making the taxpayer grope in the dark and speculate as to which action constitutes the decision appealable to the tax court. Of greater import, this rule of conduct would meet a pressing need for fair play, regularity, and orderliness in administrative action. (Surigao Electric Co., Inc. v. C.T.A., 57 SCRA 523, 528, [1974]). There appears to be no dispute that petitioner did not rule on private respondent's motion for reconsideration but contrary to the above ruling of this Court, left private respondent in the dark as to which action of the Commissioner is the decision appealable to the Court of Tax Appeals. Had he categorically stated that he denies private respondent's motion for reconsideration and that his action constitutes his final determination on the disputed assessment, private respondent without needless difficulty would have been able to determine when his right to appeal accrues and the resulting confusion would have been avoided.

Much later, this Court reiterated the above-mentioned dictum in a ruling applicable on all fours to the issue in the case at bar, that the reviewable decision of the Bureau of Internal Revenue is that contained in the letter of its Commissioner, that such constitutes the final decision on the matter which may be appealed to the Court of Tax Appeals and not the warrants of distraint (Advertising Associates, Inc. v. Court of Appeals, 133 SCRA 769 [1984] emphasis supplied). It was likewise stressed that the procedure enunciated is demanded by the pressing need for fair play, regularity and orderliness in administrative action. Under the circumstances, the Commissioner of Internal Revenue, not having clearly signified his final action on the disputed assessment, legally the period to appeal has not commenced to run. Thus, it was only when private respondent received the summons on the civil suit for collection of deficiency income on December 28, 1978 that the period to appeal commenced to run. The request for reinvestigation and reconsideration was in effect considered denied by petitioner when the latter filed a civil suit for collection of deficiency income. So. that on January 10, 1979 when private respondent filed the appeal with the Court of Tax Appeals, it consumed a total of only thirteen (13) days well within the thirty day period to appeal pursuant to Section 11 of R.A. 1125. On the merits, it was found fully substantiated by the Court of Tax Appeals that, respondent corporation is the husbanding agent of the vessel Yee Fong Hong, Ltd. as follows: Coming to the second issue, petitioner contended and was substantiated by satisfactory uncontradicted testimonies of Clemente Celso, Certified Public Accountant, and Rodolfo C. Cabalquinto, President and General Manager, of petitioner that it is actually and legally the husbanding agent of the vessel of Yee Fong Hong, Ltd. as (1) it neither performed nor transacted any shipping business, for and in representation, of Yee Fong Hong, Ltd. or its vessels or otherwise negotiated or procured cargo to be loaded in the vessels of Yee Fong Hong, Ltd. (p. 21, t.s.n., July 16, 1980); (2) it never solicited or procured cargo or freight in the Philippines or elsewhere for loading in said vessels of Yee Fong Hong, Ltd. (pp. 21 & 38, ibid.); (3) it had not collected any freight income or receipts for the said Yee Fong Hong, Ltd. (pp. 22 & 38, ibid; pp. 46 & 48, t.s.n., Nov. 14, 1980.); (4) it never had possession or control, actual or constructive, over the funds representing payment by Philippine shippers for cargo loaded on said vessels (pp. 21 & 38, ibid; p. 48, ibid); petitioner never remitted to Yee Fong Hong, Ltd. any sum of money

representing freight incomes of Yee Fong Hong, Ltd. (p. 21, ibid.; p. 48, ibid); and (5) that the freight payments made for cargo loaded in the Philippines for foreign destination were actually paid directly by the shippers to the said Yee Fong Hong, Ltd. upon arrival of the goods in the foreign ports. (Rollo, pp. 58-59). On the same issue, the Commissioner of Internal Revenue Misael P. Vera, on query of respondent's counsel, opined that respondent corporation being merely a husbanding agent is not liable for the payment of the income taxes due from the foreign ship owners loading cargoes in the Philippines (Rollo, p. 63; Exhibit "I", Rollo, pp. 64-66). Neither can private respondent be liable for withholding tax under Section 53 of the Internal Revenue Code since it is not in possession, custody or control of the funds received by and remitted to Yee Fong Hong, Ltd., a non-resident taxpayer. As correctly ruled by the Court of Tax Appeals, "if an individual or corporation like the petitioner in this case, is not in the actual possession, custody, or control of the funds, it can neither be physically nor legally liable or obligated to pay the so-called withholding tax on income claimed by Yee Fong Hong, Ltd." (Rollo, p. 67). Finally, it must be stated that factual findings of the Court of Tax Appeals are binding on this Court (Industrial Textiles Manufacturing Company of the Phil., Inc. (ITEMCOP) v. Commissioner of Internal Revenue, et al. (136 SCRA 549 [1985]). It is wellsettled that in passing upon petitions for review of the decisions of the Court of Tax Appeals, this Court is generally confined to questions of law. The findings of fact of said Court are not to be disturbed unless clearly shown to be unsupported by substantial evidence (Commissioner of Internal Revenue v. Manila Machinery & Supply Company, 135 SCRA 8 [1985]). A careful scrutiny of the records reveals no cogent reason to disturb the findings of the Court of Tax Appeals. PREMISES CONSIDERED, the instant petition is hereby DISMISSED and the assailed decision of the Court of Tax Appeals is hereby AFFIRMED. SO ORDERED. Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur. G.R. No. L-21731 March 31, 1966

REPUBLIC OF THE PHILIPPINES, plaintiffappellant, vs. LIM TIAN TENG SONS and CO., INC., defendantappellant. Office of the Solicitor General for the plaintiffappellant. P. B. Uy Calderon for the defendant-appellee. BENGZON, J.P., J.: Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, engaged in 1951 and 1952, among others, in the exportation of copra. The copra was weighed before shipment in the port of departure and upon arrival in the port of destination. The weight before shipment was called copra outturn. To allow for lose in weight due to shrinkage, said exporter collected only 95% of the amount appearing in the letter of credit covering every copra outturn. The 5% balance remained outstanding until final liquidation and adjustment. On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on accrued income and expenses. Its return showed a loss of P56,109.98. It took up as part of the beginning inventory for 1952 the copra outturn shipped in 1951 in the sum of P95,500.00 already partially collected, as part of its outstanding stock as of December 31, 1951. In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal Revenue eliminated the P95,500.00 outturn from the beginning inventory for 1952 and considered it as accrued income for 1951. This increased taxpayer's 1952 net income by P95,500.00 which, considering disallowances in the sum of P9,980.85, raised the taxpayer's net taxable income for 1952 to P50,370.87. Accordingly, in a letter dated January 16, 1957 (Exhibit C), received by Lim Tian Teng Sons & Co., Inc. on January 30, 1957, the Collector of Internal Revenue assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon amounting to P5,037.00 and demanded payment thereof not later than February 15, 1957. On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income tax liability. The Collector of Internal Revenue did not reply; instead, he referred the case to the Solicitor General for collection by judicial action. On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the

payment of P15,111.50 within five days, stating that otherwise judicial action would be instituted without further notice. In a letter dated October 5, 1957, received by the Collector of Internal Revenue on October 7, 1957, Lim Tian Teng Sons & Co., Inc. reiterated its request for reinvestigation. It also wrote the Solicitor General on October 8, 1957 requesting that it be allowed to present its explanation together with supporting papers relative to its income tax liability. The Solicitor General transmitted the letter to the Collection of Internal Revenue. Thereupon, the Deputy Collector of Internal Revenue, by his letter dated October 16, 1957, informed the taxpayer that its request for reinvestigation would be granted provided it executed within ten days a waiver of the statute of limitations as required in General Circular V-258 dated August 20, 1957. In his letter dated December 10, 1957, the Deputy Collector of Internal Revenue extended the period within which to execute and file with him the waiver of the statute of limitations to December 31, 1957, but advised that if no waiver is forthcoming on or before said date, judicial action for collection would be instituted without further notice. Receipt of this letter is denied by appellant company. As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector of Internal Revenue instituted eight months after, specifically on September 2, 1958, an action in the Court of First Instance of Cebu for the collection of deficiency income tax. After hearing the parties, the court below rendered the following judgment. IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment (Exh. D, D-1) of income tax in the sum of P15,111.00 due from the defendant to the plaintiff for the year 1952 valid, final and executory; condemning the defendant to pay the same to the plaintiff with interest at one (1) per centum monthly from October 28, 1957 until fully paid. With costs against the defendant. IT IS SO ORDERED. Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration on the ground that it did not include the 5% surcharge for late payment of tax. The motion was denied for the reason that the taxpayer has already been ordered to pay a surcharge of 50%. Both parties appealed, raising only questions of law.

Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and the computation of delinquency interest from October 8, 1957. Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the assessment in question has become final and executory, the correctness of the assessment and the imposition of the 50% surcharge.
1wph1.t

We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction to entertain this case on the ground that the Collector of Internal Revenue has not yet issued his final decision on its requests for reinvestigation. The taxpayer's stand is that final decision of the Collector of Internal Revenue on the disputed assessment is a condition precedent to the filing of an action in the Court of First Instance for the collection of a tax. This argument has no merit. The Collector of Internal Revenue is authorized to collect delinquent internal revenue taxes either by distraint and levy or by judicial action or both simultaneously.1 The only requisite before he can collect the tax is that he must first assess the same within the time fixed by law.2 And in the case of a false or fraudulent return with intent to evade the tax or of a failure to file a return, a proceeding in court for the collection of such tax may be begun without assessment. 3 Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for reinvestigation before he can go to court for the purpose of collecting the tax assessed. On the contrary, Section 305 of the same Code withholds from all courts, except the Court of Tax Appeals under Section 11 of Republic Act 1125, the authority to restrain the collection of any national internal-revenue tax, fee or charge, thereby indicating the legislative policy to allow the Collector of Internal Revenue much latitude in the speedy and prompt collection of taxes. The reason is obvious. It is upon taxation that the government chiefly relies to obtain the means the carry on its operations, and it is of the utmost importance that the modes adopted to enforce collection of taxes levied should be summary and interfered with as little as possible. No government could exist if all litigants were permitted to delay the collection of its taxes.4 Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who desired to contest an assessment issued, by the Collector of Internal Revenue was to pay the tax and bring an action in the ordinary courts for its recovery pursuant to Section 306 of the Code.5 Collection or payment of the tax was not made, to, wait until after the Collector

of Internal Revenue has resolved all issues raised by the taxpayer against an assessment. Republic Act 1125 creating the Court of Appeals allows the taxpayer to dispute the correctness legality of an assessment both in the purely administrative level and in said court, but it does not stop the Collector of Internal Revenue from collecting the tax through any of the means provided for in Section 316 of the Tax Code, except when enjoined by said Court of Tax Appeals. Section 11 of Republic Act 1125 states in part: No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue ... shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the Government and/or the taxpayer the Court at any stage of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. We will now resolve the issue of whether or not the court a quo erred in considering as final and executory the assessment contained in the letter of the Collector of Internal Revenue dated January 16, 1957. As stated, defendant received said assessment on January 30, 1957 and on the following day requested reinvestigation of its tax liability. The Collector of Internal Revenue however did not reply to the request for reinvestigation. Instead, he referred the case to the Solicitor General for collection of the tax. The lower court interpreted this action of the Collector of Internal Revenue as a denial of defendant's request for reinvestigation. Said court, to our mind, committed no error. For what is more indicative of the Collector's decision against reinvestigation than his insistence to collect the tax? This decision was communicated to defendant in a letter dated September 20, 1957 of the office of the Solicitor General which must have been received by defendant not later than October 8, 1957 for on said date it acknowledged receipt thereof. It had thirty days from October 8, 1957 within which to appeal to the Court of Tax Appeals pursuant to Section 11 of Republic Act 1125.6 Instead of appealing to the Tax Court, however, the defendant herein in a letter dated October 8, 1957 reiterated its request for reinvestigation. On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a

reinvestigation will be granted only upon compliance with General Circular No. V-258 dated August 20, 1957, which requires as a prerequisite to the grant of a reinvestigation the execution of a waiver of the statute of limitations". In a subsequent letter, he extended the period within which to submit the aforesaid waiver to December 31, 1957. In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a reinvestigation. However, no such reinvestigation was made inasmuch as taxpayer failed to submit a written waiver of the statute of limitations on or before December 31, 1957. Such omission automatically brought about the denial of the request for reinvestigation. Taxpayer however questions the legality of requiring waiver of the statute of limitations before the grant of reinvestigation as provided for in General Circular No. V-258. This question was not raised in the Bureau of Internal Revenue. Suffice it to say in this connection that General Circular No. V-258 was promulgated pursuant to Section 338 of the Tax Code. The authority thereunder of the Secretary of Finance to issue rules and regulations for the effective enforcement of the provisions of the Tax Code has been sustained by this Court in previous cases.7 Even if we do not count the period from October 8, 1957 (the date when taxpayer received notice of the denial of its request for reinvestigation) to December 31, 1957 (the deadline for the submission of the written waiver of the statute of limitations) in reckoning the 30-day period within which the taxpayer may appeal to the Court of Tax Appeals, said period had long lapsed when the Collector of Internal Revenue filed the complaint in this case on September 2, 1958. Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in question final, executory and demandable. 8 And when the action was instituted on September 2, 1958 to enforce the deficiency assessment in question, it was already barred from disputing the correctness of the assessment or invoking any defense that would reopen the question of his tax liability on merits.9 Otherwise, the period of thirty days for appeal to the Court of Tax Appeals would make little sense. 10 In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case for the enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court. No inquiry can be made therein as to the merits of the original

case or the justness of the judgment relied upon, other than by evidence of want of jurisdiction, of collusion between the parties, or of fraud in the party offering the record with respect to the proceedings. 11 As held by this Court in Insular Government vs. Nico 12 the taxpayer may raise only the questions whether or not the Collector of Internal Revenue had jurisdiction to do the particular act, and whether any fraud was committed in the doing of the act. In that case, Doroteo Nico was fined by the Collector of Internal Revenue for violation of subparagraphs (d), (e) and (g) of Section 28 as well as Sections 36, 101 and 107 of Act 1189. Under Section 54 of the same Act the taxpayer was given the right to appeal from the decision of the Collector of Internal Revenue to the Court of First Instance within a period of ten days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine. Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court of First Instance to enforce his decision and collect the fine. The decision of the Collector of Internal Revenue having become final, this Court, on appeal, allowed no further inquiry into the merits of the same. For the satisfaction of defendant, however, it may be worth stating that on its merits, the assessment in question is correct. It is not controverted that, as appearing from its 1952 income tax return Lim Tian Teng Sons & Co., Inc. employs the "accrual" method of accounting. Following such accounting method the copra outturn in the amount of P95,500.00 outstanding as of December 31, 1951, should have been treated as accrued income for 1951, instead of as stock on hand on January 1, 1952. Defendant took up the copra outturn in question as copra on hand in the beginning inventory for 1952. Said beginning inventory, together with expenses, copra purchased during the year and copra on hand as of December 31, 1952 were deducted as "cost of goods sold" from the total gross sales for the purpose of determining the net sales. Since the P95,500.00 copra outturn formed part of the "cost of goods sold", it diminished the net sales by P95,500.00, thereby also decreasing defendant's net taxable income by the same amount. This procedure of treating the copra outturn in question is inconsistent with defendants accounting method. From the record, then, there is every indication that taxpayer's 1952 income tax return is fraudulent, as alleged in paragraph (7) of the complaint in this case. Firstly, taxpayer's beginning inventory for 1952 did not state the truth in considering the copra outturn as copra on hand, for on December 31, 1951 such copra was not any more in taxpayer's bodega. It was in

transit to a foreign port. And the taxpayer no longer owned the copra. As a matter of fact, it already received payment for the same. Secondly, by observing regularly its own system of accounting, taxpayer had no choice but to account the copra outturn as accrued income. This it did not do. For such deviation, we see no other purpose than to lessen, if not obliterate as in fact it did, its income tax liability per its return. The lower court therefore did not err in imposing the 50% surcharge. We now come to the appeal of the Government. It maintains that the lower court erred in not imposing on defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section 51 of the Tax Code states: SEC. 51. Assessment and payment of income tax. xxx xxx xxx

(c) Surcharge and interest in case of delinquency. To any sum or sums due and unpaid after the dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a month upon said tax from the time the same became due . . . . (Emphasis supplied) As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and automatically due, once the tax is not paid on time. "Shall" is the word that law uses a word normally imperative and a "language of demand". 13 Applicable herein is what has been said of a similar provision the present Section 183 of the Tax Code stating that: If the percentage tax on any business is not paid within the time prescribed above the amount of the tax shall be increased by twenty-five per centum, the increment to be part of the tax. (Emphasis supplied) Said this Court in Lim Co Chui vs. Posadas 14: This provision is mandatory. It provides a plan which works out automatically. It confers no discretion on the Collector of Internal Revenue. That, official may not disregard the law and substitute therefor his own personal judgment. Finally, the Government questions the computation of the delinquency interest, due on the deficiency tax, from October 8, 1957. It insists that payment of such interest should commence from February 15, 1957. Such contention is well-founded. Pursuant to Section 51(d), "the assessment made by the Collector

of Internal Revenue shall be paid ... immediately upon notification of the amount of such assessment." Now, the income tax assessment notice gave defendant up to February 15, 1957 to pay the deficiency tax in question. No payment was made. Hence, pursuant to Section 51 (e), quoted earlier, interest on the unpaid tax fell due starting February 16, 1957 and continues to accrue until full payment of the tax. Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby ordered to pay the sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5% surcharges thereon for fraud and late payment, respectively, and 1% monthly interest upon said tax of P10,074.00, computed from February 16, 1957 until the tax is fully paid. With costs against defendant-appellant. So ordered. Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Regala, Makalintal, Zaldivar and Sanchez, JJ., concur. Dizon, J., is on leave. G.R. No. L-28896 February 17, 1988 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE COURT OF TAX APPEALS, respondents. CRUZ, J.: Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved. The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal Revenue was made on time and in accordance with law. We deal first with the procedural question. The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in engineering, construction and other allied activities,

received a letter from the petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of Internal Revenue with the Court of Tax Appeals. 6 The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal may be made within thirty days after receipt of the decision or ruling challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed rejected."10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine. The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued; indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant was premature and could therefore not be served. As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed, the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period started running again only on April 7, 1965, when the private respondent was definitely informed of the implied rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question. The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the properties of the Philippine Sugar Estate Development Company. Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence, that no distribution of dividends was involved. 18 The petitioner claims that these payments are fictitious because most of the payees are members of the same family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement was understandable, however, in view of the close relationship among the persons in the family corporation. We agree with the respondent court that the amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with the following provision of the Tax Code: SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as deductions (a) Expenses:
(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows: SEC. 70. Compensation for personal services.-Among the ordinary and necessary expenses paid or incurred in carrying on any trade or business may be included a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and deductibility in the case of compensation payments is whether they are reasonable and are, in fact, payments purely for service. This test and its practical

application may be further stated and illustrated as follows: Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services, and the excessive payment correspond or bear a close relationship to the stockholdings of the officers of employees, it would seem likely that the salaries are not paid wholly for services rendered, but the excessive payments are a distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.) It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its controlling stockholders. 23 The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was, sufficiently recompensed. It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power. But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right to complain and the courts will then come to his succor. For all the

awesome power of the tax collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed. We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the petitioner. ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs. SO ORDERED. Teehankee, C.J., Narvasa, Gancayco and GrioAquino, JJ., concur. G.R. No. L-59758 December 26, 1984 ADVERTISING ASSOCIATES, INC., petitioner, vs. COURT OF APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Bito, Misa & Lozada Law Office for petitioner. The Solicitor General for respondents.

AQUINO, J.: This case is about the liability of Advertising Associates, lnc. for P382,700.16 as 3% contractor's percentage tax on its rental income from the lease of neon signs and billboards imposed by section 191 of the Tax Code (as amended by Republic Acts Nos. 1612 and 6110) on business agents and independent contractors. Parenthetically, it may be noted that Presidential Decree No. 69, effective November 24, 1972, added paragraph 17 to section 191 by taxing lessors of personal property. Section 191 defines an independent contractor as including all persons whose activity consists essentially of the sale of all kinds of services for a fee. Section 194(v) of the Tax Code defines a business agent as includingpersons who conduct advertising agencies. It should be noted that in Advertising Associates, Inc. vs. Collector of Internal Revenue, 97 Phil. 636, the taxpayer was held liable as a manufacturer for

the.90% sales tax on its sales of neon-tube signs under section 185(k) of the Tax Code as amended. It paid P11,986.18 as sales tax for the 4th quarter of 1948 to 1951. This Court rejected the taxpayer's contention that it was only a contractor of neon-tube signs and that it should pay only the 3% contractor's tax under section 191 of the Tax Code. In the instant case, Advertising Associates alleged that it sold in 1949 its advertising agency business to Philippine Advertising Counsellors, that its business is limited to the making, construction and installation of billboards and electric signs and making and printing of posters, signs, handbills, etc. (101 tsn). It contends that it is a media company, not an advertising company, It paid sales taxes for selling billboards, electric signs, calendars, posters, etc., realty dealer's tax for leasing billboards and electric signs and 3% contractor's tax for repairing electric signs. The billboards and electric signs manufactured by it are either sold or leased, As already stated, the Commissioner of Internal Revenue subjected to 3% contractor's tax its rental income from billboards and electric signs (p. 10, Appellant's brief ). The Commissioner required Advertising Associates to pay P297,927.06 and P84,773.10 as contractor's tax for 1967-1971 and 1972, respectively, including 25% surcharge (the latter amount includes interest) on its income from billboards and neon signs. The basis of the assessment is the fact that the taxpayer's articles of incorporation provide that its primary purpose is to engage in general advertising business. Its income tax returns indicate that its business was advertising (Exh. 14 and 15, etc.). It is supposed "to conduct a general advertising business, both as principal and agent, including the preparation and arrangements of advertising devices and novelties; to erect, construct, purchase, lease or otherwise acquire fences, billboards, signboards, buildings and other structures suitable for advertising purposes; to carry on the business of printers, publishers, binders, and decorators in connection with advertising business and to make and carry out contracts of every kind and character that may be necessary or conducive to the accomplishment of any of the purposes of the company; to engage in and carry on a general advertising business by the circulation and distribution and the display of cards, signs, posters, dodgers, handbills, programs, banners

and flags to be placed in and on railroad cars, street cars, steam boats, cabs, hacks, omnibuses, stages and any and all kinds of conveyances used for passengers or for any other purposes; to display moveable or changeable signs, cards, pictures, designs, mottoes, etc., operated by clockwork, electricity or any other power; to use, place and display the same in depots, hotels, halls, and other public places, to advertise in the air by airplanes, streamers, skywriting and other similar or dissimilar operation." (Exh. 14-A, pp. 48-49, BIR Records, Vol. I). Advertising Associates contested the assessments in its 'letters of June 25, 1973 (for the 1967-71 deficiency taxes) and March 7, 1974 (for the 1972 deficiency). The Commissioner reiterated the assessments in his letters of July 12 and September 16,1974 (p. 3, Rollo). The taxpayer requested the cancellation of the assessments in its letters of September 13 and November 21, 1974 (p. 3, Rollo). Inexplicably, for about four years there was no movement in the case. Then, on March 31, 1978, the Commissioner resorted to the summary remedy of issuing two warrants of distraint, directing the collection enforcement division to levy on the taxpayer's personal properties as would be sufficient to satisfy the deficiency taxes (pp. 4, 29 and 30, Rollo). The warrants were served upon the taxpayer on April 18 and May 25, 1978. More than a year later, Acting Commissioner Efren I. Plana wrote a letter dated May 23, 1979 in answer to the requests of the taxpayer for the cancellation of the assessments and the withdrawal of the warrants of distraint(Annex C of Petition, pp. 31-32, Rollo). He justified the assessments by stating that the rental income of Advertising Associates from billboards and neon signs constituted fees or compensation for its advertising services. He requested the taxpayer to pay the deficiency taxes within ten days from receipt of the demand; otherwise, the Bureau would enforce the warrants of distraint. He closed his demand letter with this paragraph: This constitutes our final decision on the matter. If you are not agreeable, you may appeal to the Court of Tax Appeals within 30 days from receipt of this letter. Advertising Associates received that letter on June 18, 1979. Nineteen days later or on July 7, it filed its petition for review. In its resolution of August 28, 1979, the Tax Court enjoined the enforcement of the warrants of distraint.

The Tax Court did not resolve the case on the merits. It ruled that the warrants of distraint were the Commissioner's appealable decisions. Since Advertising Associates appealed from the decision of May 23, 1979, the petition for review was filed out of time. It was dismissed. The taxpayer appealed to this Court. We hold that the petition for review was filed on time. The reviewable decision is that contained in Commissioner Plana's letter of May 23, 1979 and not the warrants of distraint. No amount of quibbling or sophistry can blink the fact that said letter, as its tenor shows, embodies the Commissioner's final decision within the meaning of section 7 of Republic Act No. 1125. The Commissioner said so. He even directed the taxpayer to appeal it to the Tax Court. That was the same situation in St. Stephen's Association and St. Stephen's Chinese Girl's School vs. Collector of Internal Revenue, 104 Phil. 314, 317-318. The directive is in consonance with this Court's dictum that the Commissioner should always indicate to the taxpayer in clear and unequivocal language what constitutes his final determination of the disputed assessment. That procedure is demanded by the pressing need for fair play, regularity and orderliness in administrative action (Surigao Electric Co., Inc. vs. Court of Tax Appeals, L-25289, June 28, 1974, 57 SCRA 523). On the merits of the case, the petitioner relies on the Collector's rulings dated September 12, 1960 and June 20, 1967 that it is neither an independent contractor nor a business agent (Exh. G and H). As already stated, it considers itself a media company, like a newspaper or a radio broadcasting company, but not an advertising agency in spite of the purpose stated in its articles of incorporation. It argues that its act of leasing its neon signs and billboards does not make it a business agent or an independent contractor. It stresses that it is a mere lessor of neon signs and billboards and does not perform advertising services. But the undeniable fact is that neon signs and billboards are primarily designed for advertising. We hold that the petitioner is a business agent and an independent contractor as contemplated in sections 191 and 194(v). However, in view of the prior rulings that the taxpayer is not a business agent nor an independent contractor and in view of the controversial nature of the

deficiency assessments, the 25% surcharge should be eliminated (C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue, L-28383, June 22, 1976, 71 SCRA 511, 519; Imus Electric Co., Inc. vs. Commissioner of Internal Revenue, 125 Phil. 1084). Petitioner's last contention is that the collection of the tax had already prescribed. Section 332 of the 1939 Tax Code, now section 319 of the 1977 Tax Code, Presidential Decree No. 1158, effective on June 3, 1977, provides that the tax may be collected by distraint or levy or by a judicial proceeding begun 'within five years after the assessment of the tax". The taxpayer received on June 18, 1973 and March 5, 1974 the deficiency assessments herein. The warrants of distraint were served upon it on April 18 and may 25,1978 or within five years after the assessment of the tax. Obviously, the warrants were issued to interrupt the five-year prescriptive period. Its enforcement was not implemented because of the pending protests of the taxpayer and its requests for withdrawal of the warrants which were eventually resolved in Commissioner Plana's letter of May 23, 1979. It should be noted that the Commissioner did not institute any judicial proceeding to collect the tax. He relied on the warrants of distraint to interrupt the running of the statute of limitations. He gave the taxpayer ample opportunity to contest the assessments but at the same time safeguarded the Government's interest by means of the warrants of distraint. WHEREFORE, the judgment of the Tax Court is reversed and set aside. The Commissioner's deficiency assessments are modified by requiring the petitioner to pay the tax proper and eliminating the 25% surcharge, interest and penalty. In case of nonpayment, the warrants of distrant should be implemented. The preliminary injunction issued by the Tax Court on August 28, 1979 restraining the enforcement of said warrants is lifted. No costs. SO ORDERED. Makasiar (Chairman), Concepcion, Jr., Abad Santos, Escolin and Cuevas, JJ., concur. G.R. No. L-11238 August 21, 1958

ST. STEPHEN'S ASSOCIATION and ST. STEPHEN'S CHINESE GIRLS SCHOOL, petitioners, vs.

THE COLLECTOR OF INTERNAL REVENUE, respondent. Ross, Selph, Carrascoso and Janda for petitioners. Office of the Solicitor General Ambrosia Padilla, Solicitor Conrado T. Limcaoco and Special Attorney Jose G. Azurin for respondent. REYES, J. B. L., J.: Petitioner St. Stephen's Association is a non-stock corporation organized under the laws of the Philippines for the purpose of supporting and maintaining school or schools wherein the arts, sciences, and other studies are taught to children of Chinese parentage and descent; while the other petitioner, the St. Stephen's Chinese Girls School, is a school maintained and supported by funds received from its co-petitioners, the St. Stephen's Association. On January 21, 1950, the petitioner St. Stephen's Association turned over the amount of P9,252.48 to the St. Stephen's Chinese Girls School, and the transfer of funds was entered in the ledger and cash book of the School as a "donation" from the Association. Having come across the book entry in a routine inspection of the books of the School, an examiner of the Bureau of Internal Revenue reported the donation to the Collector and thereafter, the Collector of Internal Revenue sent petitioners his Assessment Notice No. GA-3008-50 dated October 15, 1954, demanding the payment of the amounts of P98.70 and P699.07 as donor's and donee's gift taxes on the donation in question, including surcharges and interests. On November 13, 1954, petitioners wrote the Collector a letter requesting the cancellation and withdrawal of the assessment notice in question on the ground that the amount of P9,252.48 was erroneously entered by the bookkeeper as a donation from the Association to the School, when the truth was that said amount was obtained by the former by means of small contributions from the public and allocated to the School for its maintenance. On April 21, 1955, petitioners received a letter from the Collector dated April 6, 1955, denying the request embodied in their letter of November 13, 1954, and insisting that the assessment in question be paid. On May 9, 1955, petitioners filed their reply to the Collector's letter of April 6, 1955, rebutting the arguments of the Collector in support of the assessment, and asking for its reconsideration. On July 25, 1955, petitioners received the letter of the Collector dated July 11, 1955, again denying their request that the assessment in question be cancelled and withdrawn, and stating in its last paragraph that:

This decision becomes final thirty days after your receipt hereof unless an appeal is taken to the Court of Tax Appeals within the same period, in accordance with the provisions of Republic Act No. 1125. Within thirty days from the receipt of the above letter, or on August 13, 1955, petitioners filed a petition for review with the respondent Court of Tax Appeals. Issues having been joined in the respondent court, the case was tried on the merits and thereafter, the parties were asked to file their respective memoranda. Before they could do so, however, the court required the parties to submit arguments to show whether the petition for review was filed within the thirty-day period prescribed in Section 11 of Republic Act No. 1125. Petitioners filed a memorandum calling attention to the last paragraph of the letter of the Collector of Internal Revenue of July 11, 1955; no memorandum was filed by the respondent Collector. On August 15, 1955, the respondent court promulgated a resolution dismissing the petition for lack of jurisdiction. The resolution was premised on the court's findings that the period for petitioners' appeal started to run from their receipt of the assessment notice in question; that said period was interrupted by the filing of petitioners' two requests for the cancellation of the assessment, but started to run again when said requests were denied; and that from November 12, 1954, when petitioners received the assessment notice, to August 13, 1955, when they filed their petition for review, deducting the time when their two requests for cancellation were pending with the respondent Collector, 37 days had elapsed and therefore, their petition was filed out of time and did not confer jurisdiction upon the respondent court. From this resolution of dismissal, petitioners appealed to this Court. We find merit in the appeal. In the first place, we believe the respondent court erred in holding that the assessment in question is the respondent Collector's decision or ruling appealable to it, and that consequently, the period of thirty days prescribed by section 11 of Republic Act No. 1125 within which petitioner should have appealed to the respondent court must be counted from its receipt of said assessment. Where a taxpayer questions an assessment and asks the Collector to reconsider or cancel the same because he (the taxpayer) believes he is not liable therefor, the assessment becomes a "disputed assessment" that the Collector must decide, and the taxpayer can appeal to the Court of Tax Appeals only upon receipt of the decision of the Collector on the disputed assessment, in accordance with paragraph (1) of section 7, Republic Act No. 1125, conferring appellate jurisdiction upon the Court

of Tax Appeals to review "decisions of the Collector of Internal Revenue in cases involving disputed assessment . . ." (Emphasis supplied). The period for appeal to the respondent court in this case must, therefore, be computed from the time petitioners received the decision of the respondent Collector of Internal Revenue on the disputed assessment, and not from the time they received said assessment. The next question now is: which is the decision of the Collector on the disputed assessment his letter of April 6, 1955, received by petitioners on April 21, 1955, denying their first request for the withdrawal and cancellation of the assessment; or his letter of July 11, 1955, received by petitioners on July 25, 1955, denying their second request that the assessment be cancelled and withdrawn, and stating that: This decision becomes final thirty days after your receipt hereof unless an appeal is taken to the Court of Tax Appeals within the same period, in accordance with the provision of Republic Act No. 1125. From the above-quoted statement appearing in his letter of July 11, 1955, it is evident that the respondent Collector himself considered said letter as his final decision in the case, hence his warning that the same would become final in thirty days unless petitioners appealed to the Court of Tax Appeals within the same period. Prior to his letter-decision of July 11, 1955, then, the Collector must have held the matter under advisement and considered his preceding rulings as merely tentative in character, pending his final determination and resolution of the merits of the arguments of fact and law submitted by petitioners in support of their requests for the cancellation and withdrawal of the assessment. This must have been the reason why, in said letterdecision of July 11, 1955, the Collector included an express statement that said decision was to become final in thirty days unless appealed from within the same period; and it must also have been for this reason that, throughout the proceedings in the respondent Collector never claimed that petitioners' appeal was filed out of time, and it was the Tax Court thatmotu proprio dismissed the petition because it believed it was not filed within the period provided by Republic Act No. 1125. Respondents assert that the Collector of Internal Revenue can not enlarge or extend the period for appeal under section 11 of Republic Act No. 1125. This is not, however, a case where the respondent Collector had enlarged or extended the period for appeal to the respondent Court; this is simply a case where the Collector did not reach a final decision on the matter pending before him until July 11, 1955,

when he released his letter-decision of the same date. Petitioners having filed their appeal on the 19th day from the receipt of this decision, their appeal was filed on time and the respondent Court erred in dismissing the same for lack of jurisdiction. Wherefore, the resolution appealed from is reversed, and the records are ordered remanded to the respondent court for decision on the merits. Without costs. So Ordered. Paras, C. J., Bengzon, Padilla, Montemayor, Reyes A., Bautista Angelo, Concepcion, Endencia and Felix, JJ.,concur. G.R. No. L-45277 August 5, 1985 AUGUSTO BASA, petitioner, vs. REPUBLIC OF THE PHILIPPINES, represented by the Solicitor General, and Judge GUILLERMO F. VILLASOR, Branch XV, Court of First Instance of Manila, respondent. Angel R. Gonzales for petitioner. The Solicitor General for respondents.

AQUINO, J.: The issue in this case is whether the decision of the Court of First Instance of Manila (not the Tax Court) in an income tax case is reviewable by the Appellate Court or by this Court. In a demand letter dated August 31, 1967, the Commissioner of Internal Revenue assessed against Augusto Basa deficiency income taxes for 1957 to 1960 totalling P16,353.12.* As may be noted, the deficiencies were based on the taxpayer's failure to report in full his capital gains on the sales of land. This omission or underdeclaration of income justified the imposition of 50% surcharge. The taxpayer did not contest the assessments in the Tax Court. The Commissioner's letter-decision on the case was dated December 6, 1974. On the assumption that the assessments had become final and incontestable, the Commissioner on September 3, 1975 sued the taxpayer in the Manila Court of First Instance for the collection of said amount.

The trial court in a decision dated April 20, 1976 affirmed the assessments and ordered Basa to pay P16,353.12 plus 5% surcharge and one percent monthly interest from August 31, 1967 to August 31, 1970. Instead of appealing to this Court directly under Republic Act No. 5440, in relation to Rules 41 and 45 of the Rules of Court, since no factual issues are involved, Basa tried to appeal to the Court of Appeals. He did not perfect his appeal within the reglementary period. The trial court dismissed it in its order dated October 1, 1976. On December 23, 1976 Basa filed the instant special civil action of certiorari wherein he assailed the trial court's decision. We hold that the petition is devoid of merit. The trial court acted within its jurisdiction in rendering its decision and dismissing Basa's appeal. He should have appealed to this Court. His failure to do so rendered the decision final and executory. He has no cause of action for certiorari. The decision is correct. If he wanted to contest the assessments, he should have appealed to the Tax Court. Not having done so, he could not contest the same in the Court of First Instance. The issue of prescription raised by him is baseless. The assessments were predicated on the fact that his income tax returns, if not fraudulent, were false because he underdeclared his income. In such a case, the deficiency assessments may be made within ten years after the discovery of the falsity or omission. The court action should be instituted within five years after the assessment but this period is suspended during the time that the Commission is prohibited from instituting a court action.** As explained in the Solicitor General's memorandum, Basa's requests for reinvestigation tolled the prescriptive period of five years within which court action may be brought (Commissioner of Internal Revenue vs. Capitol Subdivision, Inc., 119 Phil. 1051; Collector of Internal Revenue vs. Suyoc Consolidated Mining Company, 104 Phil. 819). Moreover, the issue of prescription should have been raised in the Tax Court. WHEREFORE, the trial court's judgment is affirmed. No costs. SO ORDERED.

Makasiar, C.J., Concepcion, Jr., Escolin and Cuevas, JJ., concur. Abad Santos, J., took no part. GR. No. L-37061 September 5, 1984 MAMBULAO LUMBER COMPANY, petitioner, vs. REPUBLIC OF THE PHILIPPINES, respondent.

CUEVAS, J.: Petitioner in this appeal by certiorari, seeks the reversal of the decision of the defunct Court of Appeals which affirmed the judgment of the then Court of First Instance of Manila ordering petitioner to pay respondent the amount of P15,739.80 representing its tax liability not secured by any bond, with legal interest thereon from August 25, 1961 until fully paid. Sometime in 1957 Agent Nestor Banzuela of the Bureau of Internal Revenue, Regional District No. 6, Bicol Region, Naga City, conducted an examination of the books of accounts of herein petitioner Mambulao number Company for the purpose of determining said taxpayer's forest charges and percentage tax liabilities. On July 31, 1957, Agent Banzuela submitted his report wherein it was stated among others that xxx xxx xxx xxx xxx xxx xxx xxx xxx It can be stated in this connection that sometime in the early part of 1949, the personnel of the local office of the Bureau of Forestry in Daet, Camarines Norte, manifested under the name of the subject taxpayer 2,052.48 cubic meters of timber, with the corresponding forest charges in the total amount of P15,443.65 including surcharges. The Bureau of Forestry then demanded for the payment of said forest charges on January 15, 1949. However, the subject taxpayer, for one reason or the other, contested this assessment until this case reached the hands of the Secretary of Agriculture and Natural Resources, the undersigned cannot therefore include in his assessment this amount in question, hence,

due course is given, recommending that this bureau take proper action regarding this case. Consequently, on August 29, 1958, the Acting Commissioner of Internal Revenue addressed a letter to petitioner, the pertinent portion of which readsMambulao Lumber Company R-406 Samanillo Building Escolta, Manila Gentlemen: xxx xxx xxx It was also ascertained that in 1949 you manifested 2,052.48 cubic meters of timber, the forest charges and surcharges of which in the total amount of P15,443.55 was demanded of you by the Bureau of Forestry on January 15, 1949. ... In view thereof there is due from you the amount of P33,595.26 as deficiency sales tax, forest charges and surcharges, committed as follows: Sales Tax x x x Forest Charges Forest charges and surcharges for the year 1949 appealed to the Secretary of Agriculture and Natural Resources P15,443.55 xxx xxx xxx Total amount due & payable P33,595.26 Demand is hereby made upon you to pay the aforesaid amount of P 33,595.26 to the City Treasurer of Manila or this office within ten (10) days from receipt hereof so that this case may be closed. xxx xxx xxx Sgd.Melencio Domingo Acting Commissioner of Internal Revenue The aforesaid letter was acknowledged to have been received by petitioner on September 19, 1958. 3 On October 18, 1958, petitioner requested for a reinvestigation of its tax liability. Subsequently, in a letter dated July 8, 1959, respondent Commissioner of Internal Revenue give petitioner a period of twenty (20) days from receipt thereof to submit the results of its verification of payments with a warning that failure

to comply therewith would be construed as an abandonment of the request for reinvestigation. For failure of petitioner to comply with the above letter-request and/or to pay its tax liability despite demands for the payment thereof, respondent Commissioner of Internal Revenue filed. a complaint for collection in the Court of First Instance of Manila on August 25, 1961. 4 After trial, judgment was rendered by the trial court, the dispositive portion of which reads WHEREFORE, judgment is rendered (a) Ordering both defendants, jointly and severally, to pay plaintiff the amount of P1,219.95 plus legal interest thereon from August 25, 1961, the date of the filing of the original complaint until fully paid, or in case of failure to Pay the said amount, ordering the forfeiture of GISCOR Bond No. 35 to the amount of P1,219.95; and (b) Ordering defendant Mambulao Lumber Company to pay the plaintiff the amount of P15,739.80 representing its tax liability not secured by any bond, with legal interest thereon from August 25, 1961, until paid. With costs against defendants. From the aforesaid decision, petitioner appealed to the Court of Appeals 5 that portion of the trial court's decision ordering it to pay the amount of P15,443.55 representing forest charges and surcharges due for the year 1949. As herein earlier stated, the then Court of Appeals affirmed the decision of the trial court. Petitioner filed a motion for reconsideration which was denied by the said court in its Resolution dated June 7, 1973. Hence, the instant appeal, petitioner presenting the lone issue of whether or not the right of plaintiff (respondent herein) to file a judicial action for the collection of the amount of P15,443.55 as forest charges and surcharges due from the petitioner Mambulao Lumber Company for the year 1949 has already prescribed. Relying on the provisions of Section 332 of the National Internal Revenue Code which readsSection 332. Exemptions as to period of limitation of assessment and collection of taxes xxx xxx xxx

(c) Where the assessment of any internal revenue tax has been made within the period of limitation above prescribed such tax may be collected by distraint or levy or by a proceeding in court, but only if begun (1) within five years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Collector of Internal Revenue and the taxpayer before the expiration of such five-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. petitioner argues that counting from January 15, 1949 when the Bureau of Forestry in Daet, Camarines Norte made an assessment and demand for payment of the amount of P15,443.55 as forest charges and surcharges for the year 1949, up to the filing of the complaint for collection before the lower court on August 25, 196 1, more than five (5) years had already elapsed, hence, the action had clearly prescribed. Petitioner's aforesaid argument lacks merit. As correctly observed by the trial court and the Court of Appeals in the appealed decision, the letter of demand of the Acting Commissioner of Internal Revenue dated August 29, 1958 was the basis of respondent's complaint filed in this case and not the demand letter of the Bureau of Forestry dated January 15, 1949. This must be so because forest charges are internal revenue taxes 6 and the sole power and duty to collect the same is lodged with the Bureau of Internal Revenue 7 and not with the Bureau of Forestry. The computation and/or assessment of forest charges made by the Bureau of Forestry may or may not be adopted by the Commissioner of Internal Revenue and such computation made by the Bureau of Forestry is not appealable to the Court of Tax Appeals. 8 Therefore, for the purpose of computing the five-year period within which to file a complaint for collection, the demand or even the assessment made by the Bureau of Forestry is immaterial. In the case at bar, the commencement of the five-year period should be counted from August 29, 1958, the date of the letter of demand of the Acting Commissioner of Internal Revenue 9 to petitioner Mambulao Lumber Company. It is this demand or assessment that is appealable to the Court of Tax Appeals. The complaint for collection was filed in the Court of First Instance of Manila on August 25, 1961, very much within the five-year period prescribed by Section 332 (c) of the Tax Code. Consequently, the right of the Commissioner of Internal Revenue to collect the forest charges and surcharges in the amount of P15,443.55 has not prescribed.

Furthermore, it is not disputed that on October 18, 1958, petitioner requested for a reinvestigation of its tax liability. In reply thereto, respondent in a letter dated July 8, 1959, gave petitioner a period of twenty (20) days from receipt thereof to submit the results of its verification of payments and failure to comply therewith would be construed as abandonment of the request for reinvestigation. Petitioner failed to comply with this requirement. Neither did it appeal to the Court of Tax Appeals within thirty (30) days from receipt of the letter dated July 8, 1959, as prescribed under Section 11 of Republic Act No. 1125, thus making the assessment final and executory. Taxpayer's failure to appeal to the Court of Tax Appeals in due time made the assessment in question final, executory and demandable. And when the action was instituted on September 2, 1958 to enforce the deficiency assessment in question, it was already barred from disputing the correctness of the assessment or invoking any defense that would reopen the question of its tax liability. Otherwise, the period of thirty days for appeal to the Court of Tax Appeals would make little sense.
In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case for the enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court. No inquiry can be made therein as to the merits of the original case or the justness of the judgment relied upon, other than by evidence of want of jurisdiction, of collusion between the parties, or of fraud in the party offering the record with respect to the proceedings. As held by this Court in Insular Government vs. Nico the taxpayer may raise only the questions whether or not the Collector of Internal Revenue had jurisdiction to do the particular act, and whether any fraud was committed in the doing of the act. In that case, Doroteo Nico was fined by the Collector of Internal Revenue for violation of sub-paragraphs (d), (e) and (g) of Section 28 as well as Sections 36, 101 and 107 of Act 1189. Under Section 54 of the same Act, the taxpayer was given the right to appeal from the decision of the Collector of Internal Revenue to the Court of First Instance within a period of ten days from notice of imposition of the fine. Nico did not appeal, neither did he pay the fine. Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court of First Instance to enforce his decision and collect the fine. The decision of the Collector of Internal Revenue having become final, this Court, on appeal, allowed no further inquiry into the merits of the same. 10

In a suit for collection of internal revenue taxes, as in this case, where the assessment has already become final and executory, the action to collect is akin to an action to enforce a judgment. No inquiry can be made therein as to the merits of the original case or the justness of the judgment relied upon. Petitioner is

thus already precluded from raising the defense of prescription.

Where the taxpayer did not contest the deficiency income tax assessed against him, the same became final and properly collectible by means of an ordinary court action. The taxpayer cannot dispute an assessment which is being enforced by judicial action, He should have disputed it before it was brought to court. 11

WHEREFORE, the decision appealed from is hereby AFFIRMED and the petition DISMISSED. No costs. SO ORDERED. Abad Santos, Escolin and Gutierrez, Jr.,* JJ concur. Makasiar, (Chairman) and Guerrero, JJ., are on leave. Concepcion, Jr., J., took no part. G.R. No. L-28467 February 28, 1973 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CENTRAL AZUCARERA DON PEDRO, respondent. Office of the Solicitor General Antonio P. Barredo, Solicitor Lolita O. Gal-lang and Special Atty. Sonia S. Soriano for petitioner. Leido, Perez, Andrada, Tarriela and Associates for respondent.

used in its central. As the different shipments arrived from abroad, one after another, they were withdrawn from customs upon payment of the corresponding customs duties, special import tax, compensating tax and miscellaneous charges. As compensating tax, the amount of P294,705.00 was collected pursuant to Section 190 of the Internal Revenue Code. One such shipment, which arrived at the port of Manila in May 1963, was valued at US $155,000.00, on which a compensating tax of P48,302.00 was collected on May 29, 1963, when the Central's application for tax exemption under Rep. Act No. 3127 was still pending before the Board of Industries. The Central did, however, advise the Commissioner of Internal Revenue of such fact on July 22, 1965, saying that it would submit the certificate of tax exemption as soon as its application was granted. The application was approved by the Board of Industries in its meeting of September 20, 1965 and the corresponding certificate of tax exemption was issued on the following October 5. The certificate stated, among other things, as follows: ... upon application filed by Central Azucarera Don Pedro in respect to the manufacture/production of "sugar alcohol and dry yeast out of sugar cane," said industry has been determined to be basic under Sec. 2, Paragraph B and S of Republic Act No. 3127 and Regulation 2; Paragraph 28 (c) and 5 of Regulation 1, S 1961 of the Board of Industries, in view of which this Certificate of Tax Exemption has been issued entitling the above-named person firm to exemption from the payment of ... compensating tax ... directly payable by him/it in respect to the importation of machinery, spare parts and or equipment found to be directly and actually needed and will be used exclusively by the said industry, listed in the attached duly stamped Annex 1 of this certificate ... . On November 3, 1965 the Central informed the Commissioner of Internal Revenue of the approval of its application for tax exemption and claimed a tax credit for the entire amount of P294,705.00 which it had paid as compensating tax. Included therein was the amount of P48,302.00 which was collected on May 29, 1963. In a letter dated May 12, 1966 the Commissioner informed the Central that he was allowing a tax credit of only P246,403.00 and disallowing the sum of P48,302.00 on the ground that the claim for tax credit with respect thereto was filed only on July 22, 1965, or more than two (2) years after it was paid, and therefore under Sec. 309 of the Tax Code the right to recover the same had already prescribed.

MAKALINTAL, J.: The Commissioner of Internal Revenue seeks a review of the decision of the Court of Tax Appeals dated November 8, 1967 in CTA Case No. 1768, ordering him to allow the respondent Central Azucarera Don Pedro a tax credit in the amount of P48,302.00. The Central Azucarera Don Pedro, hereinafter referred to as the Central, is a domestic corporation engaged in the operation of a sugar mill and in the manufacture of alcohol and yeast from sugar cane. On May 22, 1963 it filed an application with the Board of Industries for tax exemption privileges under Rep. Act No. 3127 in connection with its importations of machineries, spare parts and other equipment to be

On June 8, 1966, or within thirty (30) days from receipt of the Commissioner's ruling, it was elevated for review by the Court of Tax Appeals, which thereafter rendered a judgment of reversal. The only issue before Us is whether the statutory period of prescription fixed in Sections 306 and 309 of the Internal Revenue Code applies in this case. These sections provide: SEC. 306. Recovery of tax erroneously or illegally collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner of Internal Revenue, but such suit or proceeding may be maintained, whether or not such tax penalty, or sum has been paid under protest of duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty. SEC. 309. Authority of Commissioner to make compromises and to refund taxes. The Commissioner of Internal Revenue may compromise any civil or other case arising under this Code or other law or part of law administered by the Bureau of Internal Revenue, may credit or refund taxes erroneously or illegally received, or penalties imposed without authority, and may remit before payment any tax that appears to be unjustly assessed or excessive. xxx xxx xxx The authority of the Commissioner of Internal Revenue to credit or refund taxes or penalties under this section can only be exercised if the claim for credit or refund is made to writing and filed with him within two years after the payment of the tax or penalty. The Court of Tax Appeals held that the foregoing statutory provisions do not apply in this case since they refer to taxes erroneously or illegally or in any manner wrongfully collected, or penalties collected without authority, citing Our decision in Muller & Phipps (Manila), Ltd., vs. Coll. of Int. Revenue , March 20, 1958, 103 Phil 145. That the period within which a claim for credit or refund should be filed with the Commissioner of Internal Revenue, or a suit or proceeding commenced in court for the same purpose, should start from the date of payment of the tax is logical in the cases covered by the said

provisions, inasmuch as the collection is tainted with illegality or error from the beginning and therefore it is from that moment that the basis for the claim or the cause of action in the suit may be said to have arisen. In connection with the claim for tax credit filed by the respondent Central, the basis thereof is the tax exemption granted by the Board of Industries under Rep. Act No. 3127. Before the application for such exemption was approved there was absolutely no basis for the Central to file a claim with the Commissioner or to commence a suit in court. The petitioner suggests that the respondent could have refused to pay the tax in question if only to forestall the running of the two-year prescriptive period while its application for tax exemption with the Board of Industries was still pending. The suggestion is not only unrealistic because non-payment of the tax would prevent the release of the goods from customs custody, but altogether unjustified since the tax was due and payable and its collection was neither illegal or erroneous. As a matter of fact the petitioner admits that "under Bureau of Internal Revenue policy, one who has merely filed with the Board of Industries an application for tax exemption privileges under Rep. Act No. 3127, which is still being processed but not yet approved or granted by said board, is not allowed to withdraw the importation covered by said application from customs custody without the prepayment of the compensating tax thereon." 1 Under Rep. Act No. 3127, Sec. 7, the granting of a tax exemption to an applicant engaged in a basic industry retroacts to the date of the filing of application for exemption. If it is the grant of exemption by the Board of Industries that gives rise to the right to file a claim for tax credit or tax refund with the Commissioner of Internal Revenue, what is the period within which the claim should be filed and when does it begin to run? The case of Muller & Phipps, supra, was relied upon by the Court of Tax Appeals in reversing the action of the herein petitioner. In that case advance sales taxes were paid on imported raw materials upon their withdrawal from customs custody. Subsequently, since not all of said materials could be used, the importer shipped back a portion of them to its supplier in the United States and then filed a claim for the refund of the corresponding amount of advance sales taxes which it had paid. The Collector of Internal Revenue denied the claim and the importer went to the Court of Tax Appeals. The petition for review, however, was filed beyond the two-year prescriptive period fixed in Section 306 of the Tax Code and the Court of Tax Appeals dismissed the same upon motion by the Collector. The case was thereafter brought before this Court for review on appeal, and

We held that "the prescriptive period of two (2) years from payment, fixed by Section 306 of the Tax Code, cannot apply to the present case," on the ground that the advance sales tax in question was not erroneously or illegally collected but that although it was legitimately due when paid the tax payer subsequently became entitled to a partial refund by reason of a supervening circumstance, namely, the re-exportation of the imported materials. The ruling was subsequently clarified by this Court in a later case, Commissioner of Internal Revenue vs. Insular Lumber Co., Dec. 11, 1967, 21 SCRA 1237. It was there held that Sections 306 and 309 of the Internal Revenue Code were intended to govern all kinds of refunds of internal revenue taxes those taxes imposed and collected pursuant to the National Internal Revenue Code. In other words the prescriptive period of two (2) years therein provided is the one which should govern and not any other prescriptive period, such as that of ten (10) years provided for in Article 1144, paragraph (2), of the Civil Code. But at the same time this Court ruled: "since in those cases the tax sought to be refunded was collected legally, the running of the two-year prescriptive period provided for in Section 306 should commence, not from the date the tax was paid, but from the happening of the supervening cause which entitled the tax payer to a tax refund. And the claim for refund should be filed with the Commissioner of Internal Revenue, and the subsequent appeal to the Court of Tax Appeals must be instituted within the said two-year period." Clarifying the point further, this Court added: "In fine, when the tax sought to be refunded is illegally or erroneously collected, the period of prescription starts from the date the tax was paid; but when the tax is legally collected, the prescriptive period commences to run from the date of occurrence of the supervening cause which gave rise to the right of refund. The ruling in Muller & Phipps is accordingly modified." Considering that in the present case the supervening cause from which the right to the tax credit applied for arose was the issuance of the certificate of tax exemption by the Board of Industries on October 5, 1965 and the Central filed its claim for tax credit with the Commissioner of Internal Revenue on the following November 3, or well within the two-year period, it is clear that the said claim had not yet prescribed. WHEREFORE the judgment of the Court of Tax Appeals is hereby affirmed, without pronouncement as to costs in this instance. Concepcion, C.J., Zaldivar, Castro, Fernando, Teehankee, Makasiar, Antonio and Esguerra, JJ., concur.

Barredo, J. took no part. G.R. No. L-3029 July 25, 1950

SANTIAGO M. BERMEJO, plaintiff-appellant, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee. Jose Y. Torres for appellant. Office of the Solicitor General Felix Bautista Angelo and Solicitor Ramon L. Avancea for appellee. BENGZON, J.: Acting by Santiago M. Bermejo to recover the sums which he has paid the Collector of Internal Revenue for taxes. On June 25, 1946, said officer determined, and so informed Bermejo, that for sales of nipa shingles and charcoal made in the third quarter of 1945 and from October to November of 1945, the latter owed the Government the sum of P1,083.75. He objected to the assessment, contending mainly that the products were agricultural, and as such, free from taxation; but after the exchange of some correspondence he at last proposed to pay the tax by installments, without prejudice to whatever action he may take on the matter. His request was granted. After paying the first installment, he sued for recovery. The defendant made answer maintaining the validity of the assessment and levy. But before the trial, he submitted a motion for dismissal of the complaint on the ground that the plaintiff had not complied with the provisions of section 306 of the Internal Revenue Law, inasmuch as said plaintiff had not before suing, filed a claim with the collector for the refund of the amount he had delivered. The court postponed decision on the motion and heard the case. Afterwards, the Honorable Fernando Hernandez, Judge, absolved the defendant on two grounds, to wit: (a) plaintiff failed to comply with section 306; and (b) the tax had been properly imposed. The plaintiff appealed. Refuting the first ground of dismissal, he argues that section 306 has been substantially complied with, because previous to the institution of this proceeding, there were letters sent to the collector protesting against the tax. Section 306 reads as follows: SEC. 306. Recovery of tax erroneously of illegally collected. No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have

been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Collector of Internal Revenue; . . . (Com. Act No. 466.) The law clearly stipulates that after paying the tax, the citizen must submit a claim for refund before resorting to the courts. The idea probably is, first, to afford the collector an opportunity to correct the action of subordinate officers; and second, to notify the Government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure. Previous objections to the tax may not take place of that claim for refund, because there may be reason to believe that, in paying, the tax payer has finally come to realize the validity of assessment. Anyway, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied here and in the United States.1 Going into the merits of the controversy, we notice that the issue is the application to section 194 (x) of the National Internal Revenue Code to a person who, for profit, makes nipa shingles or produces charcoal. For convenience, said provision of law is reproduced: (x) "Manufacturer" includes every person who by physical or chemical process alters the exterior texture or form of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special uses to which it could not have been put in its original condition, or who by any such process alters the quality of any such raw material or manufactured or partially manufactured product so as to reduce it to marketable shape or prepare it for any of the uses of industry, or who by any such process combines any such raw material or manufactured products with other materials or products of the same or of different kind is and such manner that the finished product of such process or manufacture can be put to a special uses to which such raw material or partially manufactured products in their original condition could not have been put, and who in condition alters such raw material, or combines the same to produce such finished products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption. (Sec. 194 [x], Com. Act No. 466.) Nipa shingles are made in this manner: Nipa leaves (the compound leaves) are cut from nipa trees which

are grown and cultivated like other plants. The small long leaflets are then removed from the stem or stalk. These leaflets are folded over a bamboo stick of convenient length and then sewed together with the nipa midribs locally known as "pipis". Then the shingle is ready for the market, for use as roofing material. Unless converted into shingles, nipa leaves may not be used, and are not used, for roofing; although they may be utilized for partitions, windows, and doors. In the light of section 194 (x), it seems clear that in making nipa shingles, the plaintiff altered by physical process the exterior form of the nipa leaves in such manner as to prepare them for special use (as roofing material), to which the leaves could not be dedicated in their original condition. He also combined nipa raw materials with other materials (bamboo sticks) in such manner that the finished product (nipa shingle) may be put to a special use (roofing) to which neither the bamboo nor the nipa could have been destined. In principle, the nipa shingle industry could not be distinguished from hat-weaving or mat-weaving or the making of sawali. These are admittedly Philippine "manufactures". (See Miller, Principles of Economics Applied to the Philippines, pp. 468, et seq.) On the other hand, charcoal is produced by plaintiff as follows: Trees growing in the swamps are felled and cut into pieces of certain length and size. The pieces are piled in a pit or oven. They are covered with cogon and earth. Then the fire is set on them of several days. When the smoke becomes clear, the pit or oven is closed, the fire is extinguished and the wood has become charcoal. It is common knowledge that charcoal is locally used for ironing clothes. Firewood would not do. Charcoal has also some scientific usefulness which is not possessed by firewood. . . . Charcoal is used in the arts as . . .; a filter, a defector and decolorizer of solutions and water; an absorbent of gases and aqueous vapors; a nonconducting packing in icehouses, safes and refrigerators; an ingredient in gunpowder and fireworks; and in the galvanic battery and the electric light. . . . (The Encyclopedia Americana, Vol. 6, 303.) The application of section 194 (x) to charcoal is more easily perceivable. The process is a chemical or physical process altering the exterior texture and inner substance of the firewood in such manner as to prepare it for special uses to which firewood may not be dedicated. Wherefore, in making charcoal for the market, plaintiff became a manufacturer within the meaning of the law.

Judgment affirmed, with costs. Ozaeta, Pablo, Tuason, Montemayor and Reyes, JJ., concur. G.R. No. L-19927 February 26, 1965

was filed beyond the two-year period provided for in Section 309 of the National Internal Revenue Code. Subsequently, Leopoldo R. Aguinaldo died, but Andrea Vda. de Aguinaldo, his surviving spouse and administratrix, appealed to the Court of Tax Appeals. After hearing, the Tax Court dismissed the appeal for "lack of cause of action". Petitioner thereupon elevated the case to this Court. The single issue is whether or not petitioner is entitled to tax credit for the year 1953 pursuant to Section 309 of the Tax Code. Petitioner contends that Section 309 does not require the filing of a claim within two years from the payment of the tax before tax credit could be given. On the other hand, respondent Commissioner maintains that the authority of the Commissioner of Internal Revenue under Section 309 can only be exercised if a claim f or credit is made in writing and filed with him within two years from the payment of the tax. Section 309 of the Tax Code states: SEC. 309. Authority of Collector to make compromises and refund taxes.The Collector of Internal Revenue may compromise any civil or other cases arising under this Code or other law or part of law administered by the Bureau of Internal Revenue, may credit or refund taxes erroneously or illegally received, or penalties imposed without authority, and may remit before payment any tax that appears to be unjustly assessed or excessive. He shall refund the value of internal-revenue stamps when the same are returned in good condition by the purchaser, and may, in his discretion, redeem or exchange unused stamps that have been rendered unfit for use, and may refund their value upon proof of destruction. The authority of the Collector of Internal Revenue to credit or refund taxes or penalties under this section can only be exercised if the claim for credit or refund is made in writing and filed with him within two years after the payment of the tax or penalty.
1wph1.t

ANDREA R. VDA. DE AGUINALDO, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and the COURT OF TAX APPEALS, respondents. V. E. del Rosario and Associates for petitioner. Office of the Solicitor General for respondents. BENGZON, J.P., J.: Leopoldo R. Aguinaldo and his wife received in 1952 cash dividends in the sum of P10,000.00 from Aguinaldo Brothers, Inc. The spouses did not declare said dividends in their joint income tax return for 1952, but declared P5,000.00 thereof in their income tax return for 1953. On August 14, 1954, they paid the tax due on their declared income for 1953. One year after or in August 1955 agents of the Bureau of Internal Revenue re-examined the 1952 and 1953 joint income tax returns of Leopoldo R. Aguinaldo and his wife and discovered the same. Whereupon, they readjusted the returns, increasing the declared income for 1952 by P10,000.00 and eliminating from the 1953 income tax return the reported dividends of P5,000.00. The result was a deficiency income tax of P3,840.00 for 1952 and an overpayment of tax in the amount of P1,600.00 for 1953. The examination report, dated August 29, 1955, stated that it was a "mere adjustment of 1952 and 1953 returns", and recommended that the overpayment for 1953 in the amount of P1,600.00 be credited against the deficiency tax for 1952. The Collector of Internal Revenue, however, by his letter dated October 28, 1957, assessed against Leopoldo R. Aguinaldo the amount of P3,840.00 as deficiency income tax for 1952, without crediting in his favor the overpayment in 1953. Aguinaldo's counsel, in a letter dated January 10, 1958, protested against the assessment, and requested that the overpayment for 1953 be credited in favor of the taxpayer. The request was denied and the taxpayer asked for reconsideration. Finally, the Commissioner of Internal Revenue informed him that the amount of P1,600.00 cannot be credited against the tax for 1952 inasmuch as the claim for tax credit

The third paragraph of Section 309, afore-quoted, clearly requires the filing by the taxpayer of a written claim for credit or refund within two years after payment of the tax, before the Commissioner of Internal Revenue canexercise his authority to grant the credit or refund. Such requirement is therefore a condition precedent and non-compliance therewith

precludes the Commissioner of Internal Revenue from exercising the authority thereunder given. As noted, the Aguinaldos paid the income tax for 1953 on August 14, 1954 although the adjustment took place on August 29, 1955. From both dates to January 13, 1958, when the claim for tax credit was filed, more than two years have elapsed. Evidently, petitioner's claim for tax credit was filed beyond the period stated in Section 309. WHEREFORE, the judgment appealed from is hereby affirmed, with costs. It is so ordered. Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and Zaldivar, JJ., concur. Makalintal, J., reserves his vote. G.R. No. L-29059 December 15, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS, respondents.

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund should be charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of the Tax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt from sales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of any national internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed in Rep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax assessments have already prescribed because the prescriptive period should be counted from the filing of the sales tax returns, which had not yet been done by the private respondent. For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not a manufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of the Tax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co. v. Collector of Internal Revenue, 9 decided in 1968. Here Justice Eugenio Angeles declared that "before the effectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement was taxable as a manufactured product under Section 186, in connection with Section 194(4) of the said Code," thereby implying that it was not considered a manufactured product afterwards. Also, the alleged sales tax deficiency could not as yet be enforced against it because the tax assessment was not yet final, the same being still under protest and still to be definitely resolved on the merits. Besides, the assessment had already prescribed, not having been made within the reglementary five-year period from the filing of the tax returns. 10 Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement has always been considered a manufactured product and not a mineral product. This matter was extensively discussed and categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation, 11 decided on August 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a unanimous Court: From all the foregoing cases, it is clear that cement qua cement was never considered as a mineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least 80% of its

CRUZ, J.: By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by the Supreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the Cebu Portland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes on cement produced and sold by it after October 1957. 1 On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the private respondent, the latter moved for a writ of execution to enforce the said judgment . 2 The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales tax liability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balance owing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3 On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of the private respondent was still being questioned and therefore could not be set-off against the refund. 4

components are minerals, for the simple reason that cement is the product of a manufacturingprocess and is no longer the mineral product contemplated in the Tax Code (i.e.; minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax. What has apparently encouraged the herein respondents to maintain their present posture is the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give the impression that Republic Act No. 1299, which amended Section 246, reclassified cement as a mineral product that was not subject to sales tax. ... xxx xxx xxx After a careful study of the foregoing, we conclude that reliance on the decision penned by Justice Angeles is misplaced. The said decision is no authority for the proposition that after the enactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80% mineral content), cement became a 'mineral product," as distinguished from a "manufactured product," and therefore ceased to be subject to sales tax. It was not necessary for the Court to so rule. It was enough for the Court to say in effect that even assuming Republic Act No. 1299 had reclassified cement was a mineral product, the reclassification could not be given retrospective application (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted) because laws operate prospectively only, unless the legislative intent to the contrary is manifest, which was not so in the case of Republic Act 1266. [The situation would have been different if the Court instead had ruled in favor of refund, in which case it would have been absolutely necessary (1) to make an unconditional ruling that Republic Act 1299 re-classified cement as a mineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis for granting refund of sales tax paid before Republic Act 1299.] In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar as its pronouncements or any implication therefrom conflict with the instant decision. The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus: The nature of cement as a "manufactured product" (rather than a "mineral product") is well-settled. The issue has repeatedly presented itself as a threshold

question for determining the basis for computing the ad valorem mining tax to be paid by cement Companies. No pronouncement was made in these cases that as a "manufactured product" cement is subject to sales tax because this was not at issue. The decision sought to be reconsidered here referred to the legislative history of Republic Act No. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246 of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-20563) that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot be construed to mean that, after the law took effect, cement ceased to be so subject to the tax. To erase any and all misconceptions that may have been spawned by reliance on the case of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, October 29, 1968 (28 SCRA 789) penned by Justice Eugenio Angeles, the Court has expressly overruled it insofar as it may conflict with the decision of August 10, 1983, now subject of these motions for reconsideration. On the question of prescription, the private respondent claims that the five-year reglementary period for the assessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, the assessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree. This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in the aforestated resolution: In order to avail itself of the benefits of the five-year prescription period under Section 331 of the Tax Code, the taxpayer should have filed the required return for the tax involved, that is, a sales tax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L21516, April 29, 1966, 16 SCRA 277). Thus CEPOC should have filed sales tax returns of its gross sales for the subject periods. Both parties admit that returns were made for the ad valorem mining tax. CEPOC argues that said returns contain the information necessary for the assessment of the sales tax. The Commissioner does not consider such returns as compliance with the requirement for the filing of tax returns so as to start the running of the five-year prescriptive period.
We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that the filing of an income tax return cannot be considered as substantial compliance with the requirement of filing sales tax returns, in the same way that an income tax return

cannot be considered as a return for compensating tax for the purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of Internal Revenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed by CEPOC, the statute of stations in Sec. 331 did not begin to run against the government. The assessment made by the Commissioner in 1968 on CEPOC's cement sales during the period from July 1, 1959 to December 31, 1960 is not barred by the fiveyear prescriptive period. Absent a return or when the return is false or fraudulent, the applicable period is ten (10) days from the discovery of the fraud, falsity or omission. The question in this case is: When was CEPOC's omission to file tha return deemed discovered by the government, so as to start the running of said period? 13

Teehankee, C.J., Narvasa, Paras and Gancayco, JJ., concur.

[G.R. No. 120324. April 21, 1999]

PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, AND THE COURT OF APPEALS, respondents. DECISION
QUISUMBING, J.:

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of the urgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could be postponed by simply questioning their validity, the machinery of the state would grind to a halt and all government functions would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides: Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority to grant an injunction to restrain the collection of any national internal revenue tax, fee or charge imposed by this Code. It goes without saying that this injunction is available not only when the assessment is already being questioned in a court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the administrative level. There is all the more reason to apply the rule here because it appears that even after crediting of the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent. To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which he will later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that the respondent Court of Tax Appeals erred in ordering such a charade. WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE, without any pronouncement as to costs. SO ORDERED.

This petition for certiorari pursuant to Rule 45 of the Rules of Court seeks to set aside the May 18, 1995 Decision[1] of the Court of Appeals in CA-GR SP No. 34988, which affirmed the Decision of the Court of the Tax Appeals in CTA Case No. 3547. The Court of Tax Appeals disposed of the case as follows:

WHEREFORE, the respondent, COMMISSIONER OF INTERNAL REVENUE is hereby ordered to REFUND in favor of petitioner, PHILEX MINING CORP., the sum of P16,747.36 without interest, equivalent to 25% partial refund of specific taxes paid on its purchases of gasoline, oils and lubricants, diesel and fuel oils pursuant to the provision of Section 5 of Republic Act No. 1435, in relation to Section 142 (b) and (c) of the National Internal Revenue Code and Section 145 as prescribed under Sections 1 and 2 of R.A. No. 1435. No pronouncement as to costs. SO ORDERED.[2]
As set forth in the decision of the Court of Appeals, the following relevant incidents took place:

Petitioner as a domestic mining corporation had entered into a Mining License Agreement with the then Ministry of Natural Resources (now the Department of Environment and Natural Resources). From the period July 1, 1980 to December 31, 1981, petitioner purchased from several oil companies, refined and manufactured mineral oils, motor fuels, and diesel fuel oils. The specific taxes passed on to the petitioner amounted to two million, four hundred ninety-two thousand, six hundred seventy-seven pesos and twenty-two centavos (P2,492,677.22). On October 22, 1982, pursuant to Republic Act No. 1435, petitioner filed a claim for refund with the Commissioner of Internal Revenue (CIR) for six hundred twenty-three thousand, one hundred sixty-nine pesos and thirty centavos (P623,169.30), representing the twenty-five (25%) percent of the specific taxes paid. The petitioner presented as evidence the affidavits of its president, purchasing manager, and two disinterested representatives of another licensed mining corporation. They averred that for the period July 1980 to December 1981, petitioner used refined and manufactured mineral oils, motor fuels and diesel fuel oils in their business operation and paid the corresponding specific taxes. Pending CIR action, on November 16, 1982, the petitioner filed a case for tax refund with the Court of Tax Appeals (CTA). The petitioner sought judgment ordering the CIR to pay as refund the amount of P623,169.30, with twenty (20%) percent interest per annum, plus the costs of suit. On August 4, 1994, the CTA rendered its decision, quoted at the outset, granting the petitioners claim, but only to the extent of sixteen thousand, seven hundred forty-seven pesos and thirty-six centavos (P16,747.36). The Court of Appeals affirmed the decision of the CTA. Before us, the petitioner now cites the following alleged errors of the Court of Appeals:

NO. 1435 IS CONTRARY TO THE SUPREME COURTS EN BANC DECISION IN INSULAR LUMBER CO. V. COURT OF TAX APPEALS WHICH GRANTED THE CLAIM FOR PARTIAL REFUND ON THE BASIS OFSPECIFIC TAXES ACTUALLY PAID BY THE CLAIMANT WITHOUT QUALIFICATION OR LIMITATION. "II. THE SAID RULING OF THE RESPONDENT COURT IGNORES THE INCREASE IN RATES IMPOSED BY SUCCEEDING AMENDATORY LAWS, UNDER WHICH THE PETITIONER PAID THE SPECIFIC TAXES ON MANUFACTURED AND DIESEL FUELS. "III. IN MAKING THE RULING, THE RESPONDENT COURT WENT AGAINST THE ESTABLISHED RULES OF CONSTRUCTION IN THAT IT LENT ITSELF TO INTERPRETING SECTION 5 OF R.A. NO. 1435, WHEN THE CONSTRUCTION OF SAID LAW IS NOT NECESSARY. "IV. SECTIONS 1 AND 2 OF R.A. NO. 1435 ARE NOT THE OPERATIVE PROVISIONS TO BE APPLIED BUT RATHER, SECTIONS 142 AND 145 (WHICH WOULD BECOME SECTIONS 153 AND 156) OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED. "V. BASING THE COMPUTATION OF THE PARTIAL TAX REFUND ON SECTIONS 1 AND 2 OF R.A. NO. 1435, RATHER THAN ON SECTIONS 153 AND 156 OF THE NATIONAL INTERNAL REVENUE CODE, IS UNFAIR, ERRONEOUS, ARBITRARY, INEQUITABLE AND OPPRESSIVE.[3]

"I. BASING THE REFUND ON THE AMOUNTS DEEMED PAID UNDER SECTIONS 1 AND 2 OF R.A.

There are two clear-cut issues now raised before the Court:
1) Whether respondent court erred in basing the tax refund under Sections 1 and 2 of R.A. 1435, instead of the increased rates imposed by Sections 142 and 145 (which became Sections 153 and 156) of the National Internal Revenue Code, as amended. 2) Whether the respondent court erred in relying on the Supreme Courts decision in Commissioner of Internal Revenue vs. Rio Tuba Nickel Mining Corp.[4] which allegedly runs
counter to the Courts decision in Insular Lumber Co. vs. Court of Tax Appeals.[5]

Code: Provided, further, That no new road shall be constructed unless the routes or location thereof shall have been approved by the Commissioner of Public Highways after a determination that such road can be made part of an integral and articulated route in the Philippine Highway System, as required in section twenty-six of the Philippine Highway Act of 1953.
In 1977, P.D. 1158 codified all existing laws. Sections 142 and 145 of the Tax Code, as amended by Sections 1 and 2 of R.A. 1435 were re-numbered to Sections 153 and 156. [6] Later, these sections were amended by P.D. No. 1672 and subsequently by E.O. 672 increasing the tax rates for certain oil and fuel products.[7] When the Highway Special Fund was abolished in 1985, the reason for the refund ceased to exist. This Court, in a string of decisions, repeatedly held that the tax refund under R.A. 1435 is computed on the basis of the specific tax deemed paid under Sections 1 and 2, and not on the increased rates actually paid under the 1977 NIRC. Among these cases, are CIR vs. Rio Tuba Nickel Mining Corporation,[8] CIR vs. CA and Atlas Consolidated Mining and Development Corp.,[9] en bancs ruling in Davao Gulf Lumber Corporation vs. CIR and CA,[10] Atlas Consolidated Mining and Development Corp. vs. CIR, et. al. [11] and the recently decided consolidated cases of CIR vs. C.A. and CDCP Mining Corporation[12] and Sirawai Plywood & Lumber Co., Inc. vs. CA and CIR..[13] The fundamental issues raised herein appear to be the very issues settled in the case of Davao Gulf Lumber Corporation vs. CIR and CA.[14] We are guided and constrained by this precedent in now reaching a similar resolution of the issues, adverse to herein petitioner. In Davao Gulf, the Court en banc held:

R.A. 1435, An Act to Provide Means for Increasing the Highway Special Fund, states that the specific taxes collected on gasoline and fuel which accrue to the Fund shall be used for the construction and maintenance of the highway system. Mining and lumber companies seldom use national highways. Since the gasoline and fuel purchased by mining and lumber companies are used within their own compounds and roads, and they do not benefit directly from the Fund, the government granted to these companies a 25% partial refund of specific taxes paid on purchases of manufactured diesel and fuel oils. This tax relief was embodied in Section 5 of R.A. No. 1435, which states:

Sec. 5 of R.A. 1435 -- The proceeds of the additional tax on manufactured oils shall accrue to the road and bridge funds of the political subdivision for whose benefit the tax is collected: Provided, however, That whenever any oils mentioned above are used by miners or forest concessionaires in their operations, twenty-five per centum of the specific tax paid thereon shall be refunded by the Collector of Internal Revenue upon submission of proof of actual use of oils and under similar conditions enumerated in sub-paragraphs one and two of section one hereof, amending section one hundred forty-two of the Internal Revenue

x x x Since the partial refund authorized under Section 5, R.A. 1435, is in the nature of a tax exemption, it must be construed strictissimi juris against the

grantee. Hence, petitioners claim of refund on the basis of the specific taxes it actually paid must expressly be granted in a statute stated in a language too clear to be mistaken. We have carefully scrutinized R.A. 1435 and the subsequent pertinent statutes and found no expression of a legislative will authorizing a refund based on the higher rates claimed by petitioner. x x x When the law itself does not explicitly provide that a refund under R.A. 1435 may be based on higher rates which were non-existent at the time of its enactment, this Court cannot presume otherwise. A legislative lacuna cannot be filled by judicial fiat. (citations omitted)[15]
In Davao Gulf, the Court also laid to rest the alleged conflict between the Insular Lumber and the Rio Tuba decisions, in this manner:

proscription that no doctrine or principle of law laid down by the Court in a decision rendered en banc or in division may be modified or reversed except by the Court sitting en banc. Finally, petitioner asserts that equity and justice demand that the computation of the tax refunds be based on actual amounts paid under Sections 153 and 156 of the NIRC. We disagree. According to an eminent authority on taxation, there is no tax exemption solely on the ground of equity. (citations omitted)[16]
The subsequent codification of tax laws under the 1977 NIRC, Sections 153 and 156, mandated the increased rates of specific taxes levied on manufactured oils, other fuels and diesel fuel oils. Although Philex Mining Corporation paid the taxes on their oil and fuel purchases based on the increased rates, the latter law did not specifically provide for a refund based on the increased rates. Since the grant of refund privileges must be strictly construed against the taxpayer, the basis for the refund remains to be the amounts deemed paid under Sections 1 and 2 of R.A. 1435. [17] Furthermore, the claims for refund which were not filed with the CIR and those that prescribed must be deemed excluded, for being outside the ambit of the legislative enactment. As to the 20% interest per annum prayed by the petitioner, we reiterate our pronouncement in Rio Tuba, where no interest was awarded although the claim for refund was granted. As aptly stated by the CTA, viz.:

Insular Lumber Co. decided a claim for refund on specific tax paid on petroleum products purchased in the year 1963, when the increased rates under the NIRC of 1977 were not yet in effect. Thus, the issue now before us did not exist at the time, since the applicable rates were still those prescribed under Sections 1 and 2 of R.A. 1435.
xxx x xx xxx

Clearly it is impossible for these two decisions to clash with our pronouncements in Rio Tuba and second Atlas case, in which we ruled that the refund granted be computed on the basis of the amounts deemed paid under Sections 1 and 2 of R.A. 1435. In the light, we find no basis for petitioners invocation of the constitutional

x x x [T]he rule is that no interest on refund of tax can be awarded unless authorized by law or the collection of the tax was attended by arbitrariness. An action is not arbitrary when exercised honestly and upon due consideration where there is room for two opinions, however much it may be believed that an

erroneous conclusion was reached. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. None of the exceptions are present in the case at bar. Respondents decision denying petitioners claim for refund was based on an honest interpretation of law. We, therefore see no reason why petitioner should be entitled to the payment of interest. (citations omitted)[18]
WHEREFORE, the instant petition is hereby DENIED, and the assailed decision of the Court of Appeals is hereby AFFIRMED. Costs against petitioner. SO ORDERED. Bellosillo (Chairman), Puno, and Mendoza, JJ., concur. Buena, J., no part.
G.R. No. L-67649 June 28, 1988 ENGRACIO FRANCIA, petitioner, vs. INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property. Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas. On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of Deeds. On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980. On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads: WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and ordering: (a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled. (b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on Appeal) The Intermediate Appellate Court affirmed the decision of the lower court in toto.

GUTIERREZ, JR., J.: The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the latter's name. The antecedent facts are as follows: Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

Hence, this petition for review. Francia prefaced his arguments with the following assignments of grave errors of law: I RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE FORMER. II RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00. III RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo) We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was sold at public auction without notice to him and that the price paid for the property was shockingly inadequate, amounting to fraud and deprivation without due process of law. A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to dismiss it. Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government owed him P4,116.00 when a portion of his land was

expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977. There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements provided by Article 1279, to wit: (1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other; xxx xxx xxx (3) that the two debts be due. xxx xxx xxx This principal contention of the petitioner has no merit. We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government. In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that: A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is wellsettled that no set-off admissible against demands for taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..." We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a

claim against the governmental body not included in the tax levy. This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off." There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction. Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of the auction sale without reading it. Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied) We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there was compliance with all the prescribed requisites for a tax sale. The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that: xxx xxx xxx ... [D]ue process of law to be followed in tax proceedings must be established by proof and

thegeneral rule is that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings leading up to the sale. (emphasis supplied) There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be regular. But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The records sustain the lower court's finding that: [T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was substantial compliance with the requirements of the notice, the validity of the auction sale can not be assailed ... . We quote the following testimony of the petitioner on cross-examination, to wit: Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this letter? A. I just signed it because I was not able to read the same. It was just sent by mail carrier. Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not read the contents of it? A. Yes, sir, as I was in a hurry. Q. After you received that original where did you place it? A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force. Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held: ... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering the wide divergence between their assessed values and the amounts for which they had been actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption. And so it was aptly said: "When there is the right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the auction sale." The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290): If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555): Like most cases of this character there is here a certain element of hardship from which we would be glad to relieve, but do so would unsettle longestablished rules and lead to uncertainty and difficulty in the collection of taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring hardship only to those who have invited it by their own neglect. We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us to deny the petition. And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale. WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent court is affirmed. SO ORDERED. Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur.