PANSACOLA VS.

COMMISSIONER OF INTERNAL REVENUE

FACTS:
Carmelino Pansacola filed his income tax return for the taxable year 1997 that
reflected an overpayment of P5,950 which he claimed as the increased amounts of
personal and additional exemptions under Section 35 of the NIRC. BIR denied his
claim for a refund of P5,950. The CTA also denied his claim because according to the
tax court, it would be absurd for the law to allow the deduction from a taxpayers
gross income earned on a certain year of exemptions availing on a different taxable
year. Petitioner sought reconsideration, but the same was denied. On appeal, the
Court of Appeals denied his petition for lack of merit and ruled that Umali v.
Estanislao, relied upon by petitioner, was inapplicable to his case. It further ruled
that the NIRC took effect on January 1, 1998, thus the increased exemptions were
effective only to cover taxable year 1998 and cannot be applied retroactively.
ISSUE:
Whether or not the exemptions under Section 35 of the NIRC, which took effect on
January 1, 1998, be availed of for the taxable year 1997.
HELD:
NO. Since NIRC took effect on January 1, 1998, the increased amounts of personal
and additional exemptions under Section 35, can only be allowed as deductions from
the individual taxpayers gross or net income, as the case maybe, for the taxable
year 1998 to be filed in 1999. The availability of the deductions if he is thus entitled,
would be reflected on his tax return filed on or before the 15th day of April 1999 as
mandated by Section 51 (C) (1). The NIRC made no reference that the personal and
additional exemptions shall apply on income earned before January 1, 1998.
As provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and
Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the
taxpayers income as derived and computed during the calendar year, his taxable
year. What the law should consider for the purpose of determining the tax due from
an individual taxpayer is his status and qualified dependents at the close of the
taxable year and not at the time the return is filed and the tax due thereon is paid.
Consequently, his correct taxable income and his corresponding allowable
deductions e.g. personal and additional deductions, if any, had already been
determined as of the end of the calendar year. Petitioners reliance in Umali v.
Estanislao is misplaced because in that case the adjustment provided by Rep. Act
No. 7167 effective 1992 was made to cover the past year 1991, for the reason that it
is a social legislation which would especially benefit lower and middle-income
taxpayers, and as cited in that case, the legislative intent is also clear in the records
of the House of Representatives Journal.
There is nothing in the law that expresses any such intent of making its application
retroactive. The policy declaration in the enactment of R.A. No. 8424 do not indicate
it was a social legislation that adjusted personal and additional exemption should
retroact. What is the nature of personal exemptions? Personal exemptions are the
theoretical personal, living and family expenses of an individual taxpayer. These are
arbitrary amounts which have been calculated by our lawmakers to be roughly
equivalent to the minimum of subsistence, taking into account the personal status
and additional qualified dependents of the taxpayer.
LUZON STEVEDORING V. TRINIDAD
RULING: The case of Brown vs. German-American, etc. Co. gave a definition for a
contractor, which was adopted with approval in the case of In re Unger "as one who
contracts or covenants either with . . . a public body or private parties . . . to . . .
contract works or erect buildings . . . at a certain price or rate." Said definition was

adopted from the Century Dictionary. The definition of lexicographers, however,

cannot always be adopted as a correct meaning for statutory words and phrases.
The intention of the Legislature and the object which it intended to attain must be
taken into consideration for the purpose of determining the meaning of words and
phrases used, rather than the set definition of lexicographers. Moreover, revenue
laws imposing taxeson business must be strictly construed in favor of the citizen. In
construing a word or expression in the statute susceptible of two or more meanings,
the court will adopt that interpretation most in accord with the manifest purpose of
the statute as gathered from the context. Where a particular word is obscure or of
doubtful meaning, taken by itself, its obscurity or doubt may be removed by
reference to associate words. If the question presented in the interpretation of a
tariff law is one of doubt, the doubt would be resolved in favor of the importer, as
duties are never imposed upon citizens upon vague and doubtful interpretation.
From all of the foregoing it seems clear to us that the plaintiff is not a contractor in
the sense that that word is used in said section 1462 of Act No. 2711, and therefore
the tax paid by the plaintiff under protest was illegally collected and should be
repaid.
Umali vs. Estanislao May 29, 1992
Facts: Congress enacted Republic Act 7167 amending the NIRC (adjusting the
basic and additional exemptions allowable to individuals for income tax purposes to
the poverty threshold level). The said Act was signed and approved by the President
on 19 December 1991 and published on 14 January 1992 in "Malaya" a newspaper
of general circulation. On 26 December 1991, the CIR promulgated Revenue
Regulations No. 1-92 stating that the regulations shall take effect on compensation
income from January 1, 1992. Petitioners filed a petition for mandamus to compel
the CIR to implement RA 7167 in regard to income earned or received in 1991, and
prohibition to enjoin the CIR from implementing the revenue regulation.
Issue: Assuming that Rep. Act 7167 took effect on 30 January 1992 (15 days after
its publication in Malaya), whether or not the said law nonetheless covers or
applies to compensation income earned or received during calendar year 1991.
HELD: A law may be made operative partly on facts that occurred prior to the effectivity of such
law without being retroactive.
Rep. Act 7167 says that the increased personal exemptions shall be available after
the law shall have become effective. These exemptions are available upon the filing
of personal income tax returns, done not later than the 15th day of April after the
end of a calendar year. Thus, under Rep. Act 7167, which became effective, on 30
January 1992, the increased exemptions are literally available on or before 15 April
1992 [though not before 30 January 1992]. But these increased exemptions can be
available on 15 April 1992 only in respect of compensation income earned or
received during the calendar year 1991. The personal exemptions as increased by
Rep. Act 7167 are not available in respect of compensation income received during
the 1990 calendar year; the tax due in respect of said income had already accrued,
and been presumably paid (The law does not state retroactive application). The
personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
as to compensation income received during 1992 because it would in effect
postpone the availability of the increased exemptions to 1 January-15 April 1993.
The implementing regulations collide with Section 3 of Rep. Act 7167 which states
that the statute "shall take effect upon its approval.

Fortune Tobacco filed a petition for review with the CTA. 8 CTA upheld the position of
Fortune. CA affirmed.
The revenue regulation should take effect on compensation income earned or
received from 1 January 1991. Since this decision is promulgated after 15 April 1992,
those taxpayers who have already paid are entitled to refunds or credits.
Reiterating Tanada v. Tuvera, The clause "unless it is otherwise provided" refers to
the date of effectivity and not to the requirement of publication itself which cannot
in any event be omitted. This clause does not mean that the legislator may make
the law effective immediately upon approval, or on any other date without its
previous publication. Publication is indispensable in every case, but the legislature
may in its discretion provide that the usual fifteen (15) day period shall be shortened
or extended.

CIR vs. CA, CTA and FORTUNE TOBACCO CORP., G.R. No. 119761; August 29,
1996

Facts: Fortune Tobacco Corporation ("Fortune Tobacco"), engaged in the manufacture

of different brands of cigarettes, registered "Champion," "Hope," and "More"
cigarettes. BIR classified them as foreign brands since they were listed in the World
Tobacco Directory as belonging to foreign companies. However, Fortun changed the
names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing
the said brands from the foreign brand category.

A 45% Ad Valorem taxes were imposed on these brands. Then Republic Act ("RA")
No. 7654 was enacted 55% for locally manufactured foreign brand while 45% for
locally manufactured brands. 2 days before the effectivity of RA 7654, Revenue
Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR saying since
there is no showing who the real owner/s are of Champion, Hope and More, it follows
that the same shall be considered locally manufactured foreign brand for purposes
of determining the ad valorem tax - 55%. BIR sent via telefax a copy of RMC 37-93
to Fortune Tobacco addressed to no one in particular. Then Fortune Tobacco
received, by ordinary mail, a certified xerox copy of RMC 37-93. CIR assessed
Fortune Tobacco for ad valorem tax deficiency amounting to P9,598,334.00.

____________________
FACTS: Fortune Tobacco Corporation is engaged in the manufacture of different
brands of cigarettes.
On various dates, the Philippine Patent Office issued to the corporation separate
certificates of trademark registration over "Champion," "Hope," and "More"
cigarettes. The CIR initially classified 'Champion,' 'Hope,' and 'More' as foreign
brands since they were listed in the World Tobacco Directory as belonging to foreign
companies. However, Fortune changed the names of 'Hope' to Hope Luxury' and
'More' to 'Premium More,' thereby removing the said brands from the foreign brand
category. Fortune also submitted proof the BIR that 'Champion' was an original
register and therefore a local brand. Ad Valorem taxes were imposed on these
brands.
RA 7654 was passed in it was provided that 55% ad valorem tax will be imposed on
local brands carrying a foreign name. Two days before the effectivity of RA 7654, the
BIR issued Revenue Memorandum Circular No. 37-93, in which Fortune was to be
imposed 55% ad valorem tax on the three brands classifying them as local brands
carrying a foreign name. Fortune filed a petition with the CTA which was granted
finding the RMC as defective. The CIR filed a motion for reconsideration with the CTA
which was denied, then to the CA, an appeal, which was also denied.
ISSUE: Whether the REVENUE MEMORANDUM CIRCULAR NO. 37-93 was valid.
RULING: NO. The RMC was made to place the three brands as locally made
cigarettes bearing foreign brands and to thereby have them covered by RA 7654.
Specifically, the new law would have its amendatory provisions applied to locally
manufactured cigarettes which at the time of its effectivity were not so classified as
bearing foreign brands. Prior to the issuance of the RMC, the brands were subjected
to 45% ad valorem tax. In so doing, the BIR not simply interpreted the law but it
legislated under its quasi-legislative authority. The due observance of the
requirements of notice, of hearing, and of publication should not have been then
ignored.
The Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a
valid and effective administrative issuance.
Ratio: 1.Contrary to petitioners contention, the memo was not a mere interpretative
rule but a legislative rule in the nature of subordinate legislation, designed to
implement a primary legislation by providing the details thereof. Promulgated
legislative rules must be published. 2. On the other hand, interpretative rules only
provide guidelines to the law which the administrative agency is in charge of
enforcing.

3.BIR,

in reclassifying the 3 brands and raising their applicable tax rate,

did not simply interpret RA 7654 but legislated under its quasi-legislative authority.
BELLOSILLO separate opinion: the administrative issuance was notquasi-legislative
but quasi-judicial. Due process should still be observed of course but use Ang Tibay
v. CIR
CIR vs. MICHEL J. LHUILLIER PAWNSHOP, INC.
FACTS: Revenue Memorandum Orders (RMOs) were issued imposing a 5% lending
investors tax on pawnshop. Pursuant to this, the BIR issued an assessment against
Michel J. Lhuillier Pawnshop, Inc. (hereafter Lhuillier) demanding payment of
deficiency percentage tax. Lhuillier filed an administrative protest, contending, inter
alia, that pawnshops are different from lending investors, which are subject to the
5% percentage tax under the specific provision of the Tax Code. Its protest having
been unacted upon, Lhuillier with the CTA which declared the RMOs in question null
and void insofar as they classify pawnshops as lending investors subject to 5%
percentage tax.
ISSUE: Are pawnshops included in the term lending investors for the purpose of
imposing the 5% percentage tax under then Section 116 of the NIRC?
HELD: NO. While it is true that pawnshops are engaged in the business of lending
money, they are not considered lending investors for the purpose of imposing the
5% percentage taxes since: (1) prior to its amendment the NIRC, pawnshops and
lending investors were subjected to different tax treatments; (2) Congress never
intended pawnshops to be treated in the same way as lending investors, since the
amendment of the NIRC treated both tax subjects differently (3) Under the maxim
expressio unius est exclusio alterius, the mention of one thing implies the exclusion
of another thing not mentioned, Sec. 116 subjects to percentage tax dealers in
securities and lending investors only.
ISSUE: Whether or not the RMOs in question are valid
HELD: NO. There are two kinds of administrative issuances: the legislative rule and
the interpretative rule. A legislative rule is in the nature of subordinate legislation,
designed to implement a primary legislation by providing the details thereof. An
interpretative rule, on the other hand, is designed to provide guidelines to the law
which the administrative agency is in charge of enforcing When an administrative
rule is merely interpretative in nature, its applicability needs nothing further than its
bare issuance, for it gives no real consequence more than what the law itself has
already prescribed. When, on the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render least cumbersome the
implementation of the law but substantially increases the burden of those governed,
it behooves the agency to accord at least to those directly affected a chance to be
heard, and thereafter to be duly informed, before that new issuance is given the
force and effect of law.[15] RMO No. 15-91 and RMC No. 43-91 cannot be viewed
simply as implementing rules or corrective measures revoking in the process the
previous rulings of past Commissioners. Specifically, they would have been
amendatory provisions applicable to pawnshops. Without these disputed CIR
issuances, pawnshops would not be liable to pay the 5% percentage tax, considering

that they were not specifically included in Section 116 of the NIRC of 1977, as
amended. In so doing, the CIR did not simply interpret the law. The due observance
of the requirements of notice, hearing, and publication should not have been
ignored.

CIR v. Benguet Corp, G.R. Nos. 134587 and 134588; January 8, 2005
Facts: Benguet Corporation is a domestic corporation engaged in the exploration,
development and operation of mineral resources, and the sale or marketing thereof
to various entities. It is a VAT registered enterprise.
The transactions in question occurred during the period between 1988 and 1991.
Under Sec. 99 of NIRC as amended by E.O. 273 s. 1987 then in effect, any person
who, in the course of trade or business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any person who imports goods is
liable for output VAT at rates of either 10% or 0% (zero-rated) depending on the
classification of the transaction under Sec. 100 of the NIRC.
In January of 1988, Benguet applied for and was granted by the BIR zero-rated
status on its sale of gold to Central Bank. On 28 August 1988 VAT Ruling No. 378888 was issued which declared that the sale of gold to Central Bank is considered as
export sale subject to zero-rate pursuant to
Section 100 of the Tax Code, as amended by EO 273.
Relying on its zero-rated status and the above issuances, Benguet sold gold to the
Central Bank during the period of 1 August 1989 to 31 July 1991 and entered into
transactions that resulted in input VAT incurred in relation to the subject sales of
gold. It then filed applications for tax refunds/credits
corresponding to input VAT.
However, such request was not granted due to BIR VAT Ruling No. 008-92 dated 23
January 1992 that was issued subsequent to the consummation of the subject sales
of gold to the Central Ban`k which provides that sales of gold to the Central Bank
shall not be considered as export sales and thus, shall be subject to 10% VAT. BIR
VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR
issuances.
Both petitioner and Benguet agree that the retroactive application of VAT Ruling No.
008-92 is valid only if such application would not be prejudicial to the Benguet
pursuant Sec. 246 of the NIRC.
Issues: (1) WON Benguets sale of gold to the Central Bank during the
period when such was classified by BIR issuances as zerorated could be taxed validly
at a 10% rate after the consummation of the transactions involved; (2) WON there
was prejudice to Benguet Corp due to the new BIR VAT Ruling.
Held: (1) NO. At the time when the subject transactions were consummated, the
prevailing BIR regulations relied upon by Benguet ordained that gold sales to the
Central Bank were zero-rated. Benguet should not be faulted for relying on the BIRs
interpretation of the said laws and regulations.
While it is true, as CIR alleges, that government is not estopped from collecting
taxes which remain unpaid on account of the errors or mistakes of its agents and/or
officials and there could be no vested right arising from an erroneous interpretation
of law, these principles must give way to

exceptions based on and in keeping with the interest of justice and fair play. (then
the Court cited the ABS-CBN case).
(2) YES. The adverse effect is that Benguet Corp became the unexpected and
unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its
product, a liability it previously could have recovered from the BIR in a zero-rated
scenario or at least passed on to the Central Bank had it known it would have been
taxed at a 10% rate. Thus, it is clear that Benguet suffered economic prejudice when
it consummated sales of gold to the Central Bank were taken out of the zero-rated
category. The change in the VAT rating of Benguets transactions with the Central
Bank resulted in the twin loss of its exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time subjected it to the 10%
VATsans the option to pass on this cost to the Central Bank, with the total prejudice
in money terms being equivalent to the 10% VAT levied on its sales of gold to the
Central Bank.
Even assuming that the right to recover Benguets excess payment of income tax
has not yet prescribed, this relief would only address Benguets overpayment of
income tax but not the other burdens discussed above. Verily, this remedy is not a
feasible option for Benguet because the very reason why it was issued a deficiency
tax assessment is that its input VAT
was not enough to offset its retroactive output VAT. Indeed, the burden of having to
go through an unnecessary and cumbersome refund process is prejudice enough.
CIR v. CA (Alhambra Industries)G.R. No. 117982; February 6, 1997
Facts:
Private respondent Alhambra Industries, Inc., engaged in the manufacture and sale
of cigar and cigarette products, received from Commissioner of Internal Revenue a
letter stating that it has a deficiency Ad Valorem Tax of P488,396.62 on the removals
of cigarette products from their place of production from November 2, 1990 to
January 22, 1991. Alhambra filed a protest but the same was denied. CIR requested
payment of the revised amount of P520,835.39. Without waiting for CIRs reply to its
reconsideration, Alhambra filed a petition for review with the Court of Tax Appeals.
Meanwhile, CIR denied the request for reconsideration; Alhambra then paid the
disputed ad valorem tax in the sum of P520,835.29 under protest. CTA, in its
decision, ordered CIR to refund to Alhambra the amount erroneously paid, explaining
that the subject deficiency excise tax assessment resulted from Alhambras use of
the computation mandated by BIR Ruling473-88 dated October 4, 1988 as basis for
computing the 15% ad valorem tax. BIR Ruling 017-91revoked BIR Ruling 473-88 for
being violative of Sec. 142 of the Tax Code; it included back the VAT to the gross
selling price in determining the tax base for computing the ad valorem tax on
cigarettes.
Issue:
Whether or not private respondent's reliance on a void BIR ruling conferred upon the
latter a vested right to apply the same in the computation of its ad valorem tax and
claim for tax refund?
Ruling: The present dispute arose from the discrepancy in the taxable base on
which the excise tax is to apply on account of two incongruous BIR Rulings: (1) BIR
Ruling 473-88 dated October 4, 1988 which excluded the VAT from the tax base in
computing the 15% excise tax due; and, (2) BIR Ruling 017-91 dated February 11,
1991 which included back the VAT in computing the tax base for purposes of the
15% ad valorem tax. The question as to the correct computation of the excise tax on
cigarettes in the case at bar has been sufficiently addressed by BIR Ruling 017-91
which revoked BIR Ruling 473-88.It is to be noted that Section 127 (b) of the Tax
Code as amended applies in general to domestic products and excludes the valueadded tax in the determination of the gross selling price, which is the tax base for

purposes of the imposition of ad valorem tax. On the other hand , the last
paragraph of Section 142 of the same Code which includes the value-added tax in
the computation of the ad valorem tax refers specifically to cigar and cigarettes only.
It does not include/apply to any other articles or goods subject to the ad valorem
tax. Accordingly, Section142 must perforce prevail over Section 127 (b) which is a
general provision of law insofar as the imposition of the ad valorem tax on cigar and
cigarettes is concerned. Moreover, the phrase unless otherwise provided in
Section 127 (b) purports of exceptions to the general rule contained therein,
such as that of Section 142, last paragraph thereof which explicitly provides that in
the case of cigarettes, the tax base for purposes of the advalorem tax shall include,
among others, the value-added tax.
Private respondent did not question the correctness of the above BIR ruling. In fact,
upon knowledge of the effectivity of BIR Ruling No. 017-91, private
respondent
immediately implemented the method of computation mandated
therein by restoring the VAT in computing the tax base for purposes of the 15% ad
valorem tax. However, well-entrenched is the rule that rulings and circulars, rules
and regulations promulgated by the Commissioner of Internal Revenue would have
no retroactive application if to so apply them would be prejudicial to the taxpayers.
The applicable law is Sec. 246 of the Tax Code which provides:Sec. 246. Nonretroactivity of rulings.- Any revocation, modification, or reversal of any rules and
regulations promulgated in accordance with the preceding section or any
of
the
rulings
or circulars promulgated by the Commissioner of Internal
Revenue shall not be given retroactive application if the revocation, modification, or
reversal will be prejudicial to the taxpayers except in the following cases: a) where
the taxpayer deliberately misstates or omits material facts from hi sreturn or in any
document required of him by the Bureau of Internal Revenue; b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or c) where the taxpayer acted in bad
faith.Without doubt, private respondent would be prejudiced by the retroactive
application of the revocation as it would be assessed deficiency excise tax. The
Court finds no convincing evidence on petitioners claim that private respondent
falls under the third exception in Sec. 246,i.e., that the taxpayer has acted in bad
faith. To the contrary, as a sign of good faith, private respondent immediately
reverted to the computation mandated by BIR Ruling 017-91 upon knowledge of its
issuance on 11 February 1991

PBCom. vs. CIR(GR 112024. Jan. 28, 1999)

FACTS: Petitioner, Philippine Bank of Communications (PBCom), a commercial
banking corporation duly organized under Philippine laws, filed its quarterly income
tax returns for the first and second quarters of 1985, reported profits, and paid the
total income tax of P5,016,954.00 by applying PBCom's tax credit memos for
P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom
suffered net loss of P25,317,228.00, thereby showing no income tax liability in its
Annual Income Tax Returns for the year-ended December 31, 1985. For the
succeeding year, ending December 31, 1986, the petitioner likewise reported a net
loss of P14,129,602.00, and thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties.
The lessees withheld and remitted to the BIR withholding creditable taxes of

P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner

requested the Commissioner of Internal Revenue, among others, for a tax credit of
P5,016,954.00 representing the overpayment of taxes in the first and second
quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes
withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986
for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue,
petitioner instituted a Petition for Review on November 18, 1988 before the Court of
Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled:
"Philippine Bank of Communications vs. Commissioner of Internal Revenue."
The CTA decided in favor of the BIR on the ground that the Petition was filed out of
time as the same was filed beyond the two-year reglementary period. A motion for
Reconsideration was denied and the appeal to Court of Appeals was likewise denied.
Thus, this appeal to Supreme Court.
Issues: a) Whether or not Revenue Regulations No. 7-85 which alters the
reglementary period from two (2) years to ten (10) years is valid.

issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.
Further, fundamental is the rule that the State cannot be put in estoppel by the
mistakes or errors of its officials or agents. As pointed out by the respondent courts,
the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal
Revenue is an administrative interpretation which is not in harmony with Sec. 230 of
1977 NIRC, for being contrary to the express provision of a statute. Hence, his
interpretation could not be given weight for to do so would, in effect, amend the
statute.
By implication of the above, claim for refund had already prescribed.
Since the petition had been filed beyond the prescriptive period, the same has
already prescribed. The fact that the final adjusted return show an excess tax credit
does not automatically entitle taxpayer claim for refund without any express intent.
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.
ENGRACIO FRANCIA VS INTERMEDIATE APPELLATE COURT 162 SCRA 753
General Principles Set-off of Taxes

b) Whether or not the petition for tax refund had already prescribed.
Ruling: RR 7-85 altering the 2-year prescriptive period imposed by law to 10-year
prescriptive period is invalid.
Administrative issuances are merely interpretations and not expansions of the
provisions of law, thus, in case of inconsistency, the law prevails over them.
Administrative agencies have no legislative power.

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income
tax payments, such circular created a clear inconsistency with the provision of Sec.
230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered
administrative rulings (in the sense of more specific and less general interpretations
of tax laws) which are issued from time to time by the Commissioner of Internal
Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts. Nevertheless, such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not countenance administrative

Engracio Francia was the owner of a 328 square meter land in Pasay City. In October
1977, a portion of his land (125 square meter) was expropriated by the government
for P4,116.00. The expropriation was made to give way to the expansion of a nearby
road.
It also appears that Francia failed to pay his real estate taxes since 1963 amounting
to P2,400.00. So in December 1977, the remaining 203 square meters of his land
was sold at a public auction (after due notice was given him). The highest bidder
was a certain Ho Fernandez who paid the purchase price of P2,400.00 (which was
lesser than the price of the portion of his land that was expropriated).
Later, Francia filed a complaint to annul the auction sale on the ground that the
selling price was grossly inadequate. He further argued that his land
should have never been auctioned because the P2,400.00 he owed the government
in taxes should have been set-off by the debt the government owed him (legal
compensation). He alleged that he was not paid by the government for the
expropriated portion of his land because though he knew that the payment therefor
was deposited in the Philippine National Bank, he never withdrew it.
ISSUE: Whether or not the tax owed by Francia should be set-off by the debt owed
him by the government.

HELD: No. As a rule, set-off of taxes is not allowed. 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). This is not applicable in taxes. There can be no off-setting of taxes against
the claims that the taxpayer may have against the government. A person cannot
refuse to pay a tax on the ground that the government owes him an amount equal
to or greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.
The Supreme Court emphasized: 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.
Further, the government already Francia. All he has to do was to withdraw the
money. Had he done that, he could have paid his tax obligations even before the
auction sale or could have exercised his right to redeem which he did not do.
Anent the issue that the selling price of P2,400.00 was grossly inadequate, the
same is not tenable. The Supreme Court said: 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. 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. 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.
REPUBLIC VS. MAMBULAO LUMBER
FACTS:
Mambulao Lumber Company paid the Government a total of P9,127.50 as
reforestation charges. Having found liable for an aggregate amount of P4,802.37 for
forest charges, it contended that since the Republic (Government) has not made use
of the reforestation charges for reforesting the denuded area of the land covered by
the companys license, the Republic should refund said amount or, if it cannot be
refunded, at least the company should be compensated with what it owed the
Republic for reforestation charges.
ISSUE:
Whether taxes may be subject of set-off or compensation.
HELD:
Internal revenue taxes, such as forest charges, cannot be the subject of set-off or
compensation. 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 subject of recoupment since they do not
arise out of the contract or transaction sued on.
Taxes are not in the nature of contracts between the parties but grow out of a 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.
PHILEX MINING VS CIR
FACTS: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals
affirming the Court of Tax Appeals decision ordering it to pay the amount of P110.7
M as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. Philex protested the demand for
payment of the tax liabilities stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P120
M plus interest. Therefore these claims for tax credit/refund should be applied
against the tax liabilities.
ISSUE: Can there be an off-setting between the tax liabilities vis-a-vis claims of tax
refund of the petitioner?
HELD: No. Philex's claim is an outright disregard of the basic principle in tax law that
taxes are the lifeblood of the government and so should be collected without
unnecessary hindrance. Evidently, to countenance Philex's whimsical reason would
render ineffective our tax collection system. Too simplistic, it finds no support in law
or in jurisprudence.
To be sure, Philex cannot be allowed to refuse the payment of its tax liabilities on
the ground that it has a tax claim for refund or credit against the government which
has not yet been granted. Taxes cannot be
subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other. There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity,
while taxes are due to the Government in its sovereign capacity. xxx 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.

DOMINGO VS. GARLITOS GR L-18993, 29 JUNE 1963

Facts: In Domingo vs. Moscoso (106 PHIL 1138), the Supreme Court declared as final
and executory the order of the Court of First Instance of Leyte for the payment of
estate and inheritance taxes, charges and penalties amounting to P40,058.55 by the
Estate of the late Walter Scott Price. The petition for execution filed by the fiscal,
however, was denied by the lower court. The Court held that the execution is
unjustified as the Government itself is indebted to the Estate for 262,200; and
ordered the amount of inheritance taxes be deducted from the Governments
indebtedness to the Estate.

Issue: Whether a tax and a debt may be compensated.

Held: The court having jurisdiction of the Estate had found that the claim of the
Estate against the Government has been recognized and an amount of P262,200 has
already been appropriated by a corresponding law (RA 2700). Under the
circumstances, both the claim of the Government for inheritance taxes and the claim
of the intestate for services rendered have already become overdue and
demandable as well as fully liquidated. Compensation, therefore, takes place by
operation of law, in accordance with Article 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount.
2. Court having jurisdiction also found that the claim of the estate has been
recognized by the govt and has already appropriated the corresponding amount.

3.Claim of the Govt for inheritance taxes against the estate is due and
demandable. The claim of the estate against the Govt is also due, demandable and
is fully liquidated. Compensation, therefore, takes place by operation of law, in
accordance with theprovisions of Articles 1279 and 1290 of the Civil Code, and both
debts are extinguished to the concurrent amount.