G.R. No.

48532 August 31, 1992

HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA, BENJAMIN T.

ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO A. RIALP,
LEANDRO G. SANTILLAN, and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

G.R. No. 48533 August 31, 1992

ENRIQUE R. ABAD SANTOS, HERNANDO B. CONWI, TEDDY L. DIMAYUGA, JAIME E. DY-

LIACCO, MELQUIADES J. GAMBOA, JR., MANUEL L. GUZMAN, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O. MICIANO, EDUARDO
A. RIALP and JAIME A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL
REVENUE, respondents.

Angara, Abello, Concepcion, Regala & Cruz for petitioners.

NOCON, J.:

Petitioners pray that his Court reverse the Decision of the public respondent Court of Tax Appeals,
promulgated September 26, 1977 1 denying petitioners' claim for tax refunds, and order the Commissioner of
Internal Revenue to refund to them their income taxes which they claim to have been erroneously or illegally
paid or collected.

As summarized by the Solicitor General, the facts of the cases are as follows:

Petitioners are Filipino citizens and employees of Procter and Gamble, Philippine
Manufacturing Corporation, with offices at Sarmiento Building, Ayala Avenue, Makati,
Rizal. Said corporation is a subsidiary of Procter & Gamble, a foreign corporation based
in Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners were assigned, for
certain periods, to other subsidiaries of Procter & Gamble, outside of the Philippines,
during which petitioners were paid U.S. dollars as compensation for services in their
foreign assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos. 2511 and
2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case No. 2511 filed their
income tax returns for the year 1970, they computed the tax due by applying the dollar-to-
peso conversion on the basis of the floating rate ordained under B.I.R. Ruling No. 70-027
dated May 14, 1970, as follows:

From January 1 to February 20, 1970 at the conversion rate of P3.90 to

U.S. $1.00;

From February 21 to December 31, 1970 at the conversion rate of P6.25

to U.S. $1.00

Petitioners in C.T.A. Case No. 2594 likewise used the above conversion rate in
converting their dollar income for 1971 to Philippine peso. However, on February 8, 1973
and October 8, 1973, petitioners in said cases filed with the office of the respondent
Commissioner, amended income tax returns for the above-mentioned years, this time
using the par value of the peso as prescribed in Section 48 of Republic Act No. 265 in
 relation to Section 6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699 as the basis for converting their respective dollar income
into Philippine pesos for purposes of computing and paying the corresponding income tax
due from them. The aforesaid computation as shown in the amended income tax returns
resulted in the alleged overpayments, refund and/or tax credit. Accordingly, claims for
refund of said over-payments were filed with respondent Commissioner. Without
awaiting the resolution of the Commissioner of the Internal Revenue on their claims,
petitioners filed their petitioner for review in the above-mentioned cases.

Respondent Commissioner filed his Answer to petitioners' petition for review in C.T.A.
Case No. 2511 on July 31, 1973, while his Answer in C.T.A. Case No. 2594 was filed on
August 7, 1974.

Upon joint motion of the parties on the ground that these two cases involve common
question of law and facts, that respondent Court of Tax Appeals heard the cases jointly. In
its decision dated September 26, 1977, the respondent Court of Tax Appeals held that the
proper conversion rate for the purpose of reporting and paying the Philippine income tax
on the dollar earnings of petitioners are the rates prescribed under Revenue Memorandum
Circulars Nos. 7-71 and 41-71. Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and the petitions for review dismissed,
with costs against petitioners. Hence, this petition for review on certiorari. 2

Petitioners claim that public respondent Court of Tax Appeals erred in holding:

1. That petitioners' dollar earnings are receipts derived from foreign exchange transactions.

2. That the proper rate of conversion of petitioners' dollar earnings for tax purposes in the prevailing free
market rate of exchange and not the par value of the peso; and

3. That the use of the par value of the peso to convert petitioners' dollar earnings for tax purposes into
Philippine pesos is "unrealistic" and, therefore, the prevailing free market rate should be the rate used.

Respondent Commissioner of Internal Revenue, on the other hand, refutes petitioners' claims as follows:

At the outset, it is submitted that the subject matter of these two cases are Philippine
income tax for the calendar years 1970 (CTA Case No. 2511) and 1971 (CTA Case No.
2594) and, therefore, should be governed by the provisions of the National Internal
Revenue Code and its implementing rules and regulations, and not by the provisions of
Central Bank Circular No. 42 dated May 21, 1953, as contended by petitioners.

Section 21 of the National Internal Revenue Code, before its amendment by Presidential
Decrees Nos. 69 and 323 which took effect on January 1, 1973 and January 1, 1974,
respectively, imposed a tax upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing here or abroad.

Petitioners are citizens of the Philippines temporarily residing abroad by virtue of their
employment. Thus, in their tax returns for the period involved herein, they gave their
legal residence/address as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal
(Annexes "A" to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511
and 2594).

Petitioners being subject to Philippine income tax, their dollar earnings should be
converted into Philippine pesos in computing the income tax due therefrom, in
accordance with the provisions of Revenue Memorandum Circular No. 7-71 dated
February 11, 1971 for 1970 income and Revenue Memorandum Circular No. 41-71 dated
 December 21, 1971 for 1971 income, which reiterated BIR Ruling No. 70-027 dated May
4, 1970, to wit:

For internal revenue tax purposes, the free marker rate of conversion
(Revenue Circulars Nos. 7-71 and 41-71) should be applied in order to
determine the true and correct value in Philippine pesos of the income of
petitioners. 3

After a careful examination of the records, the laws involved and the jurisprudence on the matter, We are
inclined to agree with respondents Court of Tax Appeals and Commissioner of Internal Revenue and thus
vote to deny the petition.

This basically an income tax case. For the proper resolution of these cases income may be defined as an
amount of money coming to a person or corporation within a specified time, whether as payment for
services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. 4 Income can also be though of as flow of the fruits of one's labor. 5

Petitioners are correct as to their claim that their dollar earnings are not receipts derived from foreign
exchange transactions. For a foreign exchange transaction is simply that a transaction in foreign
exchange, foreign exchange being "the conversion of an amount of money or currency of one country into
an equivalent amount of money or currency of another." 6 When petitioners were assigned to the foreign
subsidiaries of Procter & Gamble, they were earning in their assigned nation's currency and were ALSO
spending in said currency. There was no conversion, therefore, from one currency to another.

Public respondent Court of Tax Appeals did err when it concluded that the dollar incomes of petitioner fell
under Section 2(f)(g) and (m) of C.B. Circular No. 42. 7

The issue now is, what exchange rate should be used to determine the peso equivalent of the foreign
earnings of petitioners for income tax purposes. Petitioners claim that since the dollar earnings do not fall
within the classification of foreign exchange transactions, there occurred no actual inward remittances,
and, therefore, they are not included in the coverage of Central Bank Circular No. 289 which provides for
the specific instances when the par value of the peso shall not be the conversion rate used. They conclude
that their earnings should be converted for income tax purposes using the par value of the Philippine peso.

Respondent Commissioner argues that CB Circular No. 289 speaks of receipts for export products, receipts
of sale of foreign exchange or foreign borrowings and investments but not income tax. He also claims that
he had to use the prevailing free market rate of exchange in these cases because of the need to ascertain the
true and correct amount of income in Philippine peso of dollar earners for Philippine income tax purposes.

A careful reading of said CB Circular No. 289 8 shows that the subject matters involved therein are export products, invisibles,
receipts of foreign exchange, foreign exchange payments, new foreign borrowing and
investments nothing by way of income tax payments. Thus, petitioners are in error by concluding that since C.B. Circular No. 289 does not apply
to them, the par value of the peso should be the guiding rate used for income tax purposes.

The dollar earnings of petitioners are the fruits of their labors in the foreign subsidiaries of Procter &
Gamble. It was a definite amount of money which came to them within a specified period of time of two
yeas as payment for their services.

Section 21 of the National Internal Revenue Code, amended up to August 4, 1969, states as follows:

Sec. 21. Rates of tax on citizens or residents. A tax is hereby imposed upon the taxable
net income received during each taxable year from all sources by every individual,
whether a citizen of the Philippines residing therein or abroad or an alien residing in the
Philippines, determined in accordance with the following schedule:

xxx xxx xxx

And in the implementation for the proper enforcement of the National Internal Revenue Code, Section 338
thereof empowers the Secretary of Finance to "promulgate all needful rules and regulations" to effectively
enforce its provisions. 9

Pursuant to this authority, Revenue Memorandum Circular Nos. 7-71 10 and 41-71 11 were issued to
prescribed a uniform rate of exchange from US dollars to Philippine pesos for INTERNAL REVENUE TAX
PURPOSES for the years 1970 and 1971, respectively. Said revenue circulars were a valid exercise of the
authority given to the Secretary of Finance by the Legislature which enacted the Internal Revenue Code. And
these are presumed to be a valid interpretation of said code until revoked by the Secretary of Finance himself. 12

Petitioners argue that since there were no remittances and acceptances of their salaries and wages in US
dollars into the Philippines, they are exempt from the coverage of such circulars. Petitioners forget that
they are citizens of the Philippines, and their income, within or without, and in these cases wholly without,
are subject to income tax. Sec. 21, NIRC, as amended, does not brook any exemption.

Since petitioners have already paid their 1970 and 1971 income taxes under the uniform rate of exchange
prescribed under the aforestated Revenue Memorandum Circulars, there is no reason for respondent
Commissioner to refund any taxes to petitioner as said Revenue Memorandum Circulars, being of long
standing and not contrary to law, are valid. 13

Although it has become a worn-out cliche, the fact still remains that "taxes are the lifeblood of the
government" and one of the duties of a Filipino citizen is to pay his income tax.

WHEREFORE, the petitioners are denied for lack of merit. The dismissal by the respondent Court of Tax
Appeals of petitioners' claims for tax refunds for the income tax period for 1970 and 1971 is AFFIRMED.
Costs against petitioners.

SO ORDERED.
G.R. No. L-65773-74 April 30, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS, respondents.

Quasha, Asperilla, Ancheta, Pea, Valmonte & Marcos for respondent British Airways.

MELENCIO-HERRERA, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks a review on certiorari of the joint Decision of
the Court of Tax Appeals (CTA) in CTA Cases Nos. 2373 and 2561, dated 26 January 1983, which set
aside petitioner's assessment of deficiency income taxes against respondent British Overseas Airways
Corporation (BOAC) for the fiscal years 1959 to 1967, 1968-69 to 1970-71, respectively, as well as its
Resolution of 18 November, 1983 denying reconsideration.

BOAC is a 100% British Government-owned corporation organized and existing under the laws of the
United Kingdom It is engaged in the international airline business and is a member-signatory of the
Interline Air Transport Association (IATA). As such it operates air transportation service and sells
transportation tickets over the routes of the other airline members. During the periods covered by the
disputed assessments, it is admitted that BOAC had no landing rights for traffic purposes in the
Philippines, and was not granted a Certificate of public convenience and necessity to operate in the
Philippines by the Civil Aeronautics Board (CAB), except for a nine-month period, partly in 1961 and
partly in 1962, when it was granted a temporary landing permit by the CAB. Consequently, it did not carry
passengers and/or cargo to or from the Philippines, although during the period covered by the assessments,
it maintained a general sales agent in the Philippines Wamer Barnes and Company, Ltd., and later
Qantas Airways which was responsible for selling BOAC tickets covering passengers and cargoes. 1

G.R. No. 65773 (CTA Case No. 2373, the First Case)

On 7 May 1968, petitioner Commissioner of Internal Revenue (CIR, for brevity) assessed BOAC the
aggregate amount of P2,498,358.56 for deficiency income taxes covering the years 1959 to 1963. This was
protested by BOAC. Subsequent investigation resulted in the issuance of a new assessment, dated 16
January 1970 for the years 1959 to 1967 in the amount of P858,307.79. BOAC paid this new assessment
under protest.

On 7 October 1970, BOAC filed a claim for refund of the amount of P858,307.79, which claim was denied
by the CIR on 16 February 1972. But before said denial, BOAC had already filed a petition for review with
the Tax Court on 27 January 1972, assailing the assessment and praying for the refund of the amount paid.

G.R. No. 65774 (CTA Case No. 2561, the Second Case)

On 17 November 1971, BOAC was assessed deficiency income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional amounts of
P1,000.00 and P1,800.00 as compromise penalties for violation of Section 46 (requiring the filing of
corporation returns) penalized under Section 74 of the National Internal Revenue Code (NIRC).

On 25 November 1971, BOAC requested that the assessment be countermanded and set aside. In a letter,
dated 16 February 1972, however, the CIR not only denied the BOAC request for refund in the First Case
but also re-issued in the Second Case the deficiency income tax assessment for P534,132.08 for the years
1969 to 1970-71 plus P1,000.00 as compromise penalty under Section 74 of the Tax Code. BOAC's
request for reconsideration was denied by the CIR on 24 August 1973. This prompted BOAC to file the
Second Case before the Tax Court praying that it be absolved of liability for deficiency income tax for the
years 1969 to 1971.

This case was subsequently tried jointly with the First Case.

On 26 January 1983, the Tax Court rendered the assailed joint Decision reversing the CIR. The Tax Court
held that the proceeds of sales of BOAC passage tickets in the Philippines by Warner Barnes and
Company, Ltd., and later by Qantas Airways, during the period in question, do not constitute BOAC
income from Philippine sources "since no service of carriage of passengers or freight was performed by
BOAC within the Philippines" and, therefore, said income is not subject to Philippine income tax. The
CTA position was that income from transportation is income from services so that the place where services
are rendered determines the source. Thus, in the dispositive portion of its Decision, the Tax Court ordered
petitioner to credit BOAC with the sum of P858,307.79, and to cancel the deficiency income tax
assessments against BOAC in the amount of P534,132.08 for the fiscal years 1968-69 to 1970-71.

Hence, this Petition for Review on certiorari of the Decision of the Tax Court.

The Solicitor General, in representation of the CIR, has aptly defined the issues, thus:

1. Whether or not the revenue derived by private respondent British Overseas Airways
Corporation (BOAC) from sales of tickets in the Philippines for air transportation, while
having no landing rights here, constitute income of BOAC from Philippine sources, and,
accordingly, taxable.

2. Whether or not during the fiscal years in question BOAC s a resident foreign
corporation doing business in the Philippines or has an office or place of business in the
Philippines.

3. In the alternative that private respondent may not be considered a resident foreign
corporation but a non-resident foreign corporation, then it is liable to Philippine income
tax at the rate of thirty-five per cent (35%) of its gross income received from all sources
within the Philippines.

Under Section 20 of the 1977 Tax Code:

(h) the term resident foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein.

(i) The term "non-resident foreign corporation" applies to a foreign corporation not
engaged in trade or business within the Philippines and not having any office or place of
business therein

It is our considered opinion that BOAC is a resident foreign corporation. There is no specific criterion as to
what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light
of its peculiar environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose
and object of the business organization. 2 "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to establish a continuous business,
such as the appointment of a local agent, and not one of a temporary character. 3

BOAC, during the periods covered by the subject - assessments, maintained a general sales agent in the
Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets;
(2) breaking down the whole trip into series of trips each trip in the series corresponding to a different
airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various
airline companies on the basis of their participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." 4 Those
activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent
during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax
upon its total net income received in the preceding taxable year from all sources within the Philippines. 5

Sec. 24. Rates of tax on corporations. ...

(b) Tax on foreign corporations. ...

(2) Resident corporations. A corporation organized, authorized, or existing under the

laws of any foreign country, except a foreign fife insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Next, we address ourselves to the issue of whether or not the revenue from sales of tickets by BOAC in the
Philippines constitutes income from Philippine sources and, accordingly, taxable under our income tax
laws.

The Tax Code defines "gross income" thus:

"Gross income" includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on
for gain or profile, or gains, profits, and income derived from any source whatever (Sec.
29[3]; Emphasis supplied)

The definition is broad and comprehensive to include proceeds from sales of transport documents. "The
words 'income from any source whatever' disclose a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws." Income means "cash received or its
equivalent"; it is the amount of money coming to a person within a specific time ...; it means something
distinct from principal or capital. For, while capital is a fund, income is a flow. As used in our income tax
law, "income" refers to the flow of wealth. 6

The records show that the Philippine gross income of BOAC for the fiscal years 1968-69 to 1970-71
amounted to P10,428,368 .00. 7

Did such "flow of wealth" come from "sources within the Philippines",

The source of an income is the property, activity or service that produced the income. 8 For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the
income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency.
The site of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.

A transportation ticket is not a mere piece of paper. When issued by a common carrier, it constitutes the
contract between the ticket-holder and the carrier. It gives rise to the obligation of the purchaser of the
ticket to pay the fare and the corresponding obligation of the carrier to transport the passenger upon the
terms and conditions set forth thereon. The ordinary ticket issued to members of the traveling public in
general embraces within its terms all the elements to constitute it a valid contract, binding upon the parties
entering into the relationship. 9

True, Section 37(a) of the Tax Code, which enumerates items of gross income from sources within the
Philippines, namely: (1) interest, (21) dividends, (3) service, (4) rentals and royalties, (5) sale of real
property, and (6) sale of personal property, does not mention income from the sale of tickets for
international transportation. However, that does not render it less an income from sources within the
Philippines. Section 37, by its language, does not intend the enumeration to be exclusive. It merely directs
that the types of income listed therein be treated as income from sources within the Philippines. A cursory
reading of the section will show that it does not state that it is an all-inclusive enumeration, and that no
other kind of income may be so considered. " 10

BOAC, however, would impress upon this Court that income derived from transportation is income for
services, with the result that the place where the services are rendered determines the source; and since
BOAC's service of transportation is performed outside the Philippines, the income derived is from sources
without the Philippines and, therefore, not taxable under our income tax laws. The Tax Court upholds that
stand in the joint Decision under review.

The absence of flight operations to and from the Philippines is not determinative of the source of income
or the site of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent
to this case. The test of taxability is the "source"; and the source of an income is that activity ... which
produced the income. 11 Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom
was derived from a activity regularly pursued within the Philippines. business a And even if the BOAC tickets sold covered the "transport of
passengers and cargo to and from foreign cities", 12 it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The
word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines. 13

It should be pointed out, however, that the assessments upheld herein apply only to the fiscal years covered
by the questioned deficiency income tax assessments in these cases, or, from 1959 to 1967, 1968-69 to
1970-71. For, pursuant to Presidential Decree No. 69, promulgated on 24 November, 1972, international
carriers are now taxed as follows:

... Provided, however, That international carriers shall pay a tax of 2- per cent on their
cross Philippine billings. (Sec. 24[b] [21, Tax Code).

Presidential Decree No. 1355, promulgated on 21 April, 1978, provided a statutory definition of the term
"gross Philippine billings," thus:

... "Gross Philippine billings" includes gross revenue realized from uplifts anywhere in
the world by any international carrier doing business in the Philippines of passage
documents sold therein, whether for passenger, excess baggage or mail provided the
cargo or mail originates from the Philippines. ...

The foregoing provision ensures that international airlines are taxed on their income from Philippine
sources. The 2- % tax on gross Philippine billings is an income tax. If it had been intended as an excise
or percentage tax it would have been place under Title V of the Tax Code covering Taxes on Business.

Lastly, we find as untenable the BOAC argument that the dismissal for lack of merit by this Court of the
appeal in JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969, is res
judicata to the present case. The ruling by the Tax Court in that case was to the effect that the mere sale of
tickets, unaccompanied by the physical act of carriage of transportation, does not render the taxpayer
therein subject to the common carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or removing passengers and
cargo from one place to another. It purports to tax the business of transportation. 14 Being an excise tax,
the same can be levied by the State only when the acts, privileges or businesses are done or performed
within the jurisdiction of the Philippines. The subject matter of the case under consideration is income tax,
a direct tax on the income of persons and other entities "of whatever kind and in whatever form derived
from any source." Since the two cases treat of a different subject matter, the decision in one cannot be res
judicata to the other.

WHEREFORE, the appealed joint Decision of the Court of Tax Appeals is hereby SET ASIDE. Private
respondent, the British Overseas Airways Corporation (BOAC), is hereby ordered to pay the amount of
P534,132.08 as deficiency income tax for the fiscal years 1968-69 to 1970-71 plus 5% surcharge, and 1%
monthly interest from April 16, 1972 for a period not to exceed three (3) years in accordance with the Tax
Code. The BOAC claim for refund in the amount of P858,307.79 is hereby denied. Without costs.

SO ORDERED.

Paras, Gancayco, Padilla, Bidin, Sarmiento and Cortes, JJ., concur.

Fernan, J., took no part.

Separate Opinions

TEEHANKEE, C.J., concurring:

I concur with the Court's majority judgment upholding the assessments of deficiency income taxes against
respondent BOAC for the fiscal years 1959-1969 to 1970-1971 and therefore setting aside the appealed
joint decision of respondent Court of Tax Appeals. I just wish to point out that the conflict between the
majority opinion penned by Mr. Justice Feliciano as to the proper characterization of the taxable income
derived by respondent BOAC from the sales in the Philippines of tickets foe BOAC form the issued by its
general sales agent in the Philippines gas become moot after November 24, 1972. Booth opinions state that
by amendment through P.D. No.69, promulgated on November 24, 1972, of section 24(b) (2) of the Tax
Code providing dor the rate of income tax on foreign corporations, international carriers such as
respondent BOAC, have since then been taxed at a reduced rate of 2-% on their gross Philippine billings.
There is, therefore, no longer ant source of substantial conflict between the two opinions as to the present
2-% tax on their gross Philippine billings charged against such international carriers as herein respondent
foreign corporation.

FELICIANO, J., dissenting:

With great respect and reluctance, i record my dissent from the opinion of Mme. Justice A.A. Melencio-
Herrera speaking for the majority . In my opinion, the joint decision of the Court of Tax Appeals in CTA
Cases Nos. 2373 and 2561, dated 26 January 1983, is correct and should be affirmed.

The fundamental issue raised in this petition for review is whether the British Overseas Airways
Corporation (BOAC), a foreign airline company which does not maintain any flight operations to and from
the Philippines, is liable for Philippine income taxation in respect of "sales of air tickets" in the Philippines
through a general sales agent, relating to the carriage of passengers and cargo between two points both
outside the Philippines.

1. The Solicitor General has defined as one of the issue in this case the question of:

2. Whether or not during the fiscal years in question 1 BOAC [was] a resident foreign corporation doing
business in the Philippines or [had] an office or place of business in the Philippines.
It is important to note at the outset that the answer to the above-quoted issue is not determinative of the
lialibity of the BOAC to Philippine income taxation in respect of the income here involved. The liability of
BOAC to Philippine income taxation in respect of such income depends, not on BOAC's status as a
"resident foreign corporation" or alternatively, as a "non-resident foreign corporation," but rather on
whether or not such income is derived from "source within the Philippines."

A "resident foreign corporation" or foreign corporation engaged in trade or business in the Philippines or
having an office or place of business in the Philippines is subject to Philippine income taxation only in
respect of income derived from sources within the Philippines. Section 24 (b) (2) of the National Internal
Revenue CODE ("Tax Code"), as amended by Republic Act No. 2343, approved 20 June 1959, as it
existed up to 3 August 1969, read as follows:

(2) Resident corporations. A foreign corporation engaged in trade or business with in

the Philippines (expect foreign life insurance companies) shall be taxable as provided in
subsection (a) of this section.

Section 24 (a) of the Tax Code in turn provides:

Rate of tax on corporations. (a) Tax on domestic corporations. ... and a like tax
shall be livied, collected, and paid annually upon the total net income received in the
preceeding taxable year from all sources within the Philippines by every corporation
organized, authorized, or existing under the laws of any foreign country: ... . (Emphasis
supplied)

Republic Act No. 6110, which took effect on 4 August 1969, made this even clearer when it amended once
more Section 24 (b) (2) of the Tax Code so as to read as follows:

(2) Resident Corporations. A corporation, organized, authorized or existing under the

laws of any foreign counrty, except foreign life insurance company, engaged in trade or
business within the Philippines, shall be taxable as provided in subsection (a) of this
section upon the total net income received in the preceding taxable year from all sources
within the Philippines. (Emphasis supplied)

Exactly the same rule is provided by Section 24 (b) (1) of the Tax Code upon non-resident foreign
corporations. Section 24 (b) (1) as amended by Republic Act No. 3825 approved 22 June 1963, read as
follows:

(b) Tax on foreign corporations. (1) Non-resident corporations. There shall be

levied, collected and paid for each taxable year, in lieu of the tax imposed by the
preceding paragraph upon the amount received by every foreign corporation not engaged
in trade or business within the Philippines, from all sources within the Philippines, as
interest, dividends, rents, salaries, wages, premium, annuities, compensations,
remunerations, emoluments, or other fixed or determinative annual or periodical gains,
profits and income a tax equal to thirty per centum of such amount: provided, however,
that premiums shall not include reinsurance premiums. 2

Clearly, whether the foreign corporate taxpayer is doing business in the Philippines and therefore a
resident foreign corporation, or not doing business in the Philippines and therefore a non-resident foreign
corporation, it is liable to income tax only to the extent that it derives income from sources within the
Philippines. The circumtances that a foreign corporation is resident in the Philippines yields no inference
that all or any part of its income is Philippine source income. Similarly, the non-resident status of a foreign
corporation does not imply that it has no Philippine source income. Conversely, the receipt of Philippine
source income creates no presumption that the recipient foreign corporation is a resident of the Philippines.
The critical issue, for present purposes, is therefore whether of not BOAC is deriving income from sources
within the Philippines.
2. For purposes of income taxation, it is well to bear in mind that the "source of income" relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather to the "property, activity or
service which produced the income." In Howden and Co., Ltd. vs. Collector of Internal Revenue, 3 the court
dealt with the issue of the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign reinsurance company in respect of risks located in the Philippines. The Court said:

The source of an income is the property, activity or services that produced the income.
The reinsurance premiums remitted to appellants by virtue of the reinsurance contract,
accordingly, had for their source the undertaking to indemnify Commonwealth Insurance
Co. against liability. Said undertaking is the activity that produced the reinsurance
premiums, and the same took place in the Philippines. [T]he reinsurance, the liabilities
insured and the risk originally underwritten by Commonwealth Insurance Co., upon
which the reinsurance premiums and indemnity were based, were all situated in the
Philippines. 4

The Court may be seen to be saying that it is the underlying prestation which is properly regarded as the
activity giving rise to the income that is sought to be taxed. In the Howden case, that underlying prestation
was theindemnification of the local insurance company. Such indemnification could take place only in the
Philippines where the risks were located and where payment from the foreign reinsurance (in case the
casualty insured against occurs) would be received in Philippine pesos under the reinsurance premiums
paid by the local insurance companies constituted Philippine source income of the foreign reinsurances.

The concept of "source of income" for purposes of income taxation originated in the United States income
tax system. The phrase "sources within the United States" was first introduced into the U.S. tax system in
1916, and was subsequently embodied in the 1939 U.S. Tax Code. As is commonly known, our Tax Code
(Commonwealth Act 466, as amended) was patterned after the 1939 U.S. Tax Code. It therefore seems
useful to refer to a standard U.S. text on federal income taxation:

The Supreme Court has said, in a definition much quoted but often debated, that income
may be derived from three possible sources only: (1) capital and/or (2) labor and/or (3)
the sale of capital assets. While the three elements of this attempt at definition need not
be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a
particular item is from "source within the United States" and suggest an investigation into
the nature and location of the activities or property which produce the income. If the
income is from labor (services) the place where the labor is done should be decisive; if it
is done in this counrty, the income should be from "source within the United States." If
the income is from capital, the place where the capital is employed should be decisive; if
it is employed in this country, the income should be from "source within the United
States". If the income is from the sale of capital assets, the place where the sale is made
should be likewise decisive. Much confusion will be avoided by regarding the term
"source" in this fundamental light. It is not a place; it is an activity or property. As such,
it has a situs or location; and if that situs or location is within the United States the
resulting income is taxable to nonresident aliens and foreign corporations. The intention
of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis
of taxing nonresident aliens and foreign corporations and to make the test of taxability the
"source", or situs of the activities or property which produce the income . . . . Thus, if
income is to taxed, the recipient thereof must be resident within the jurisdiction, or the
property or activities out of which the income issue or is derived must be situated within
the jurisdiction so that the source of the income may be said to have a situs in this
country. The underlying theory is that the consideration for taxation is protection of life
and propertyand that the income rightly to be levied upon to defray the burdens of the
United States Government is that income which is created by activities and property
protected by this Government or obtained by persons enjoying that protection. 5

3. We turn now to the question what is the source of income rule applicable in the instant case. There are
two possibly relevant source of income rules that must be confronted; (a) the source rule applicable in
respect of contracts of service; and (b) the source rule applicable in respect of sales of personal property.
Where a contract for the rendition of service is involved, the applicable source rule may be simply stated as
follows: the income is sourced in the place where the service contracted for is rendered. Section 37 (a) (3)
of our Tax Code reads as follows:

Section 37. Income for sources within the Philippines.

(a) Gross income from sources within the Philippines. The following items of gross
income shall be treated as gross income from sources within the Philippines:

xxx xxx xxx

(3) Services. Compensation for labor or personal services performed

in the Philippines;... (Emphasis supplied)

Section 37 (c) (3) of the Tax Code, on the other hand, deals with income from sources without the
Philippines in the following manner:

(c) Gross income from sources without the Philippines. The following items of gross
income shall be treated as income from sources without the Philippines:

(3) Compensation for labor or personal services performed without the Philippines; ...
(Emphasis supplied)

It should not be supposed that Section 37 (a) (3) and (c) (3) of the Tax Code apply only in respect of
services rendered by individual natural persons; they also apply to services rendered by or through the
medium of a juridical person. 6 Further, a contract of carriage or of transportation is assimilated in our Tax
Code and Revenue Regulations to a contract for services. Thus, Section 37 (e) of the Tax Code provides as
follows:

(e) Income form sources partly within and partly without the Philippines. Items of
gross income, expenses, losses and deductions, other than those specified in subsections
(a) and (c) of this section shall be allocated or apportioned to sources within or without
the Philippines, under the rules and regulations prescribed by the Secretary of Finance. ...
Gains, profits, and income from (1) transportation or other services rendered partly
within and partly without the Philippines, or (2) from the sale of personnel property
produced (in whole or in part) by the taxpayer within and sold without the Philippines, or
produced (in whole or in part) by the taxpayer without and sold within the Philippines,
shall be treated as derived partly from sources within and partly from sources without the
Philippines. ... (Emphasis supplied)

It should be noted that the above underscored portion of Section 37 (e) was derived from the 1939 U.S.
Tax Code which "was based upon a recognition that transportation was a service and that the source of the
income derived therefrom was to be treated as being the place where the service of transportation was
rendered. 7

Section 37 (e) of the Tax Code quoted above carries a strong well-nigh irresistible, implication that income
derived from transportation or other services rendered entirely outside the Philippines must be treated as
derived entirely from sources without the Philippines. This implication is reinforced by a consideration of
certain provisions of Revenue Regulations No. 2 entitled "Income Tax Regulations" as amended, first
promulgated by the Department of Finance on 10 February 1940. Section 155 of Revenue Regulations No.
2 (implementing Section 37 of the Tax Code) provides in part as follows:

Section 155. Compensation for labor or personnel services. Gross income from
sources within the Philippines includes compensation for labor or personal services
 within the Philippines regardless of the residence of the payer, of the place in which the
contract for services was made, or of the place of payment (Emphasis supplied)

Section 163 of Revenue Regulations No. 2 (still relating to Section 37 of the Tax Code) deals with a
particular species of foreign transportation companies i.e., foreign steamship companies deriving
income from sources partly within and partly without the Philippines:

Section 163 Foreign steamship companies. The return of foreign steamship

companies whose vessels touch parts of the Philippines should include as gross income,
the total receipts of all out-going business whether freight or passengers. With the gross
income thus ascertained, the ratio existing between it and the gross income from all ports,
both within and without the Philippines of all vessels, whether touching of the Philippines
or not, should be determined as the basis upon which allowable deductions may be
computed, . (Emphasis supplied)

Another type of utility or service enterprise is dealt with in Section 164 of Revenue Regulations No. 2
(again implementing Section 37 of the Tax Code) with provides as follows:

Section 164. Telegraph and cable services. A foreign corporation carrying on the
business of transmission of telegraph or cable messages between points in the Philippines
and points outside the Philippines derives income partly form source within and partly
from sources without the Philippines.

... (Emphasis supplied)

Once more, a very strong inference arises under Sections 163 and 164 of Revenue Regulations No. 2 that
steamship and telegraph and cable services rendered between points both outside the Philippines give rise
to income wholly from sources outside the Philippines, and therefore not subject to Philippine income
taxation.

We turn to the "source of income" rules relating to the sale of personal property, upon the one hand, and to
the purchase and sale of personal property, upon the other hand.

We consider first sales of personal property. Income from the sale of personal property by the producer or
manufacturer of such personal property will be regarded as sourced entirely within or entirely without the
Philippines or as sourced partly within and partly without the Philippines, depending upon two factors: (a)
the place where the sale of such personal property occurs; and (b) the place where such personal property
was produced or manufactured. If the personal property involved was both produced or manufactured and
sold outside the Philippines, the income derived therefrom will be regarded as sourced entirely outside the
Philippines, although the personal property had been produced outside the Philippines, or if the sale of the
property takes place outside the Philippines and the personal was produced in the Philippines, then, the
income derived from the sale will be deemed partly as income sourced without the Philippines. In other
words, the income (and the related expenses, losses and deductions) will be allocated between sources
within and sources without the Philippines. Thus, Section 37 (e) of the Tax Code, although already quoted
above, may be usefully quoted again:

(e) Income from sources partly within and partly without the Philippines. ... Gains, profits
and income from (1) transportation or other services rendered partly within and partly
without the Philippines; or (2) from the sale of personal property produced (in whole or
in part) by the taxpayer within and sold without the Philippines, or produced (in whole or
in part) by the taxpayer without and sold within the Philippines, shall be treated as
derived partly from sources within and partly from sources without the Philippines. ...
(Emphasis supplied)
In contrast, income derived from the purchase and sale of personal property i. e., trading is, under
the Tax Code, regarded as sourced wholly in the place where the personal property is sold. Section 37 (e)
of the Tax Code provides in part as follows:

(e) Income from sources partly within and partly without the Philippines ... Gains, profits
and income derived from the purchase of personal property within and its sale without
the Philippines or from the purchase of personal property without and its sale within the
Philippines, shall be treated as derived entirely from sources within the country in which
sold. (Emphasis supplied)

Section 159 of Revenue Regulations No. 2 puts the applicable rule succinctly:

Section 159. Sale of personal property. Income derived from the purchase and sale of
personal property shall be treated as derived entirely from the country in which sold. The
word "sold" includes "exchange." The "country" in which "sold" ordinarily means the
place where the property is marketed. This Section does not apply to income from the sale
personal property produced (in whole or in part) by the taxpayer within and sold without
the Philippines or produced (in whole or in part) by the taxpayer without and sold within
the Philippines. (See Section 162 of these regulations). (Emphasis supplied)

4. It will be seen that the basic problem is one of characterization of the transactions entered into by BOAC
in the Philippines. Those transactions may be characterized either as sales of personal property (i. e., "sales
of airline tickets") or as entering into a lease of services or a contract of service or carriage. The
applicable "source of income" rules differ depending upon which characterization is given to the BOAC
transactions.

The appropriate characterization, in my opinion, of the BOAC transactions is that of entering into contracts
of service, i.e., carriage of passengers or cargo between points located outside the Philippines.

The phrase "sale of airline tickets," while widely used in popular parlance, does not appear to be correct as
a matter of tax law. The airline ticket in and of itself has no monetary value, even as scrap paper. The value
of the ticket lies wholly in the right acquired by the "purchaser" the passenger to demand a prestation
from BOAC, which prestation consists of the carriage of the "purchaser" or passenger from the one point
to another outside the Philippines. The ticket is really the evidence of the contract of carriage entered into
between BOAC and the passenger. The money paid by the passenger changes hands in the Philippines. But
the passenger does not receive undertaken to be delivered by BOAC. The "purchase price of the airline
ticket" is quite different from the purchase price of a physical good or commodity such as a pair of shoes
of a refrigerator or an automobile; it is really the compensation paid for the undertaking of BOAC to
transport the passenger or cargo outside the Philippines.

The characterization of the BOAC transactions either as sales of personal property or as purchases and
sales of personal property, appear entirely inappropriate from other viewpoint. Consider first purchases and
sales: is BOAC properly regarded as engaged in trading in the purchase and sale of personal property?
Certainly, BOAC was not purchasing tickets outside the Philippines and selling them in the Philippines.
Consider next sales: can BOAC be regarded as "selling" personal property produced or manufactured by
it? In a popular or journalistic sense, BOAC might be described as "selling" "a product" its service.
However, for the technical purposes of the law on income taxation, BOAC is in fact entering into contracts
of service or carriage. The very existance of "source rules" specifically and precisely applicable to the
rendition of services must preclude the application here of "source rules" applying generally to sales, and
purchases and sales, of personal property which can be invoked only by the grace of popular language. On
a slighty more abstract level, BOAC's income is more appropriately characterized as derived from a
"service", rather than from an "activity" (a broader term than service and including the activity of selling)
or from the here involved is income taxation, and not a sales tax or an excise or privilege tax.
5. The taxation of international carriers is today effected under Section 24 (b) (2) of the Tax Code, as
amended by Presidential Decree No. 69, promulgated on 24 November 1972 and by Presidential Decree
No. 1355, promulgated on 21 April 1978, in the following manner:

(2) Resident corporations. A corporation organized, authorized, or existing under the

laws of any foreign country, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income received in
the preceeding taxable year from all sources within the Philippines: Provided,
however, That international carriers shall pay a tax of two and one-half per cent on their
gross Philippine billings. "Gross Philippines of passage documents sold therein, whether
for passenger, excess baggege or mail, provide the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail shall include the gross
freight charge up to final destination. Gross revenues from chartered flights originating
from the Philippines shall likewise form part of "gross Philippine billings" regardless of
the place of sale or payment of the passage documents. For purposes of determining the
taxability to revenues from chartered flights, the term "originating from the Philippines"
shall include flight of passsengers who stay in the Philippines for more than forty-eight
(48) hours prior to embarkation. (Emphasis supplied)

Under the above-quoted proviso international carriers issuing for compensation passage documentation in
the Philippines for uplifts from any point in the world to any other point in the world, are not charged any
Philippine income tax on their Philippine billings (i.e., billings in respect of passenger or cargo originating
from the Philippines). Under this new approach, international carriers who service port or points in the
Philippines are treated in exactly the same way as international carriers not serving any port or point in the
Philippines. Thus, the source of income rule applicable, as above discussed, to transportation or other
services rendered partly within and partly without the Philippines, or wholly without the Philippines, has
been set aside. in place of Philippine income taxation, the Tax Code now imposes this 2 per cent tax
computed on the basis of billings in respect of passengers and cargo originating from the Philippines
regardless of where embarkation and debarkation would be taking place. This 2- per cent tax is
effectively a tax on gross receipts or an excise or privilege tax and not a tax on income. Thereby, the
Government has done away with the difficulties attending the allocation of income and related expenses,
losses and deductions. Because taxes are the very lifeblood of government, the resulting potential "loss" or
"gain" in the amount of taxes collectible by the state is sometimes, with varying degrees of consciousness,
considered in choosing from among competing possible characterizations under or interpretation of tax
statutes. It is hence perhaps useful to point out that the determination of the appropriate characterization
here that of contracts of air carriage rather than sales of airline tickets entails no down-the-road loss
of income tax revenues to the Government. In lieu thereof, the Government takes in revenues generated by
the 2- per cent tax on the gross Philippine billings or receipts of international carriers.

I would vote to affirm the decision of the Court of Tax Appeals.

G.R. No. L-48194 March 15, 1990

JOSE M. JAVIER and ESTRELLA F. JAVIER, petitioners,

vs.
COURT OF APPEALS and LEONARDO TIRO, respondents.

Eddie Tamondong for petitioners.

Lope Adriano and Emmanuel Pelaez, Jr. for private respondent.

REGALADO, J.:

Petitioners pray for the reversal of the decision of respondent Court of Appeals in CA-G.R. No. 52296-R,
dated March 6, 1978, 1 the dispositive portion whereof decrees:

WHEREFORE, the judgment appealed from is hereby set aside and another one entered
ordering the defendants-appellees, jointly and solidarily, to pay plaintiff-appellant the
sum of P79,338.15 with legal interest thereon from the filing of the complaint, plus
attorney's fees in the amount of P8,000.00. Costs against defendants-appellees. 2

As found by respondent court or disclosed by the records, 3 this case was generated by the following
antecedent facts.

Private respondent is a holder of an ordinary timber license issued by the Bureau of Forestry covering
2,535 hectares in the town of Medina, Misamis Oriental. On February 15, 1966 he executed a "Deed of
Assignment" 4 in favor of herein petitioners the material parts of which read as follows:

xxx xxx xxx

I, LEONARDO A. TIRO, of legal age, married and a resident of Medina, Misamis

Oriental, for and in consideration of the sum of ONE HUNDRED TWENTY
THOUSAND PESOS (P120,000.00), Philippine Currency, do by these presents,
ASSIGN, TRANSFER AND CONVEY, absolutely and forever unto JOSE M. JAVIER
and ESTRELLA F. JAVIER, spouses, of legal age and a resident (sic) of 2897 F.B.
Harrison, Pasay City, my shares of stocks in the TIMBERWEALTH CORPORATION in
the total amount of P120,000.00, payment of which shall be made in the following
manner:

1. Twenty thousand (P20,000.00) Pesos upon signing of this contract;

2. The balance of P100,000.00 shall be paid P10,000.00 every shipment

of export logs actually produced from the forest concession of
Timberwealth Corporation.

That I hereby agree to sign and endorse the stock certificate in favor of Mr. & Mrs. Jose
M. Javier, as soon as stock certificates are issued.

xxx xxx xxx

At the time the said deed of assignment was executed, private respondent had a pending application, dated
October 21, 1965, for an additional forest concession covering an area of 2,000 hectares southwest of and
adjoining the area of the concession subject of the deed of assignment. Hence, on February 28, 1966,
private respondent and petitioners entered into another "Agreement" 5 with the following stipulations:
 xxx xxx xxx

1. That LEONARDO TIRO hereby agrees and binds himself to transfer, cede and convey
whatever rights he may acquire, absolutely and forever, to TIMBERWEALTH
CORPORATION, a corporation duly organized and existing under the laws of the
Philippines, over a forest concession which is now pending application and approval as
additional area to his existing licensed area under O.T. License No. 391-103166, situated
at Medina, Misamis Oriental;

2. That for and in consideration of the aforementioned transfer of rights over said
additional area to TIMBERWEALTH CORPORATION, ESTRELLA F. JAVIER and
JOSE M. JAVIER, both directors and stockholders of said corporation, do hereby
undertake to pay LEONARDO TIRO, as soon as said additional area is approved and
transferred to TIMBERWEALTH CORPORATION the sum of THIRTY THOUSAND
PESOS (P30,000.00), which amount of money shall form part of their paid up capital
stock in TIMBERWEALTH CORPORATION;

3. That this Agreement is subject to the approval of the members of the Board of
Directors of the TIMBERWEALTH CORPORATION.

xxx xxx xxx

On November 18, 1966, the Acting Director of Forestry wrote private respondent that his forest concession
was renewed up to May 12, 1967 under O.T.L. No. 391-51267, but since the concession consisted of only
2,535 hectares, he was therein informed that:

In pursuance of the Presidential directive of May 13, 1966, you are hereby given until
May 12, 1967 to form an organization such as a cooperative, partnership or corporation
with other adjoining licensees so as to have a total holding area of not less than 20,000
hectares of contiguous and compact territory and an aggregate allowable annual cut of not
less than 25,000 cubic meters, otherwise, your license will not be further renewed. 6

Consequently, petitioners, now acting as timber license holders by virtue of the deed of assignment
executed by private respondent in their favor, entered into a Forest Consolidation Agreement 7 on April 10,
1967 with other ordinary timber license holders in Misamis Oriental, namely, Vicente L. De Lara, Jr., Salustiano
R. Oca and Sanggaya Logging Company. Under this consolidation agreement, they all agreed to pool together
and merge their respective forest concessions into a working unit, as envisioned by the aforementioned
directives. This consolidation agreement was approved by the Director of Forestry on May 10, 1967. 8 The
working unit was subsequently incorporated as the North Mindanao Timber Corporation, with the petitioners
and the other signatories of the aforesaid Forest Consolidation Agreement as incorporators. 9

On July 16, 1968, for failure of petitioners to pay the balance due under the two deeds of assignment,
private respondent filed an action against petitioners, based on the said contracts, for the payment of the
amount of P83,138.15 with interest at 6% per annum from April 10, 1967 until full payment, plus
P12,000.00 for attorney's fees and costs.

On September 23, 1968, petitioners filed their answer admitting the due execution of the contracts but
interposing the special defense of nullity thereof since private respondent failed to comply with his
contractual obligations and, further, that the conditions for the enforceability of the obligations of the
parties failed to materialize. As a counterclaim, petitioners sought the return of P55,586.00 which private
respondent had received from them pursuant to an alleged management agreement, plus attorney's fees and
costs.

On October 7, 1968, private respondent filed his reply refuting the defense of nullity of the contracts in this
wise:
 What were actually transferred and assigned to the defendants were plaintiff's rights and
interest in a logging concession described in the deed of assignment, attached to the
complaint and marked as Annex A, and agreement Annex E; that the "shares of stocks"
referred to in paragraph II of the complaint are terms used therein merely to designate or
identify those rights and interests in said logging concession. The defendants actually
made use of or enjoyed not the "shares of stocks" but the logging concession itself; that
since the proposed Timberwealth Corporation was owned solely and entirely by
defendants, the personalities of the former and the latter are one and the same. Besides,
before the logging concession of the plaintiff or the latter's rights and interests therein
were assigned or transferred to defendants, they never became the property or assets of
the Timberwealth Corporation which is at most only an association of persons composed
of the defendants. 10

and contending that the counterclaim of petitioners in the amount of P55,586.39 is actually only a part of
the sum of P69,661.85 paid by the latter to the former in partial satisfaction of the latter's claim. 11

After trial, the lower court rendered judgment dismissing private respondent's complaint and ordering him
to pay petitioners the sum of P33,161.85 with legal interest at six percent per annum from the date of the
filing of the answer until complete payment. 12

As earlier stated, an appeal was interposed by private respondent to the Court of Appeals which reversed
the decision of the court of a quo.

On March 28, 1978, petitioners filed a motion in respondent court for extension of time to file a motion for
reconsideration, for the reason that they needed to change counsel. 13 Respondent court, in its resolution
dated March 31, 1978, gave petitioners fifteen (15) days from March 28, 1978 within which to file said motion
for reconsideration, provided that the subject motion for extension was filed on time. 14 On April 11, 1978,
petitioners filed their motion for reconsideration in the Court of Appeals. 15 On April 21, 1978, private
respondent filed a consolidated opposition to said motion for reconsideration on the ground that the decision of
respondent court had become final on March 27, 1978, hence the motion for extension filed on March 28, 1978
was filed out of time and there was no more period to extend. However, this was not acted upon by the Court of
Appeals for the reason that on April 20, 1978, prior to its receipt of said opposition, a resolution was issued
denying petitioners' motion for reconsideration, thus:

The motion for reconsideration filed on April 11, 1978 by counsel for defendants-
appellees is denied. They did not file any brief in this case. As a matter of fact this case
was submitted for decision without appellees' brief. In their said motion, they merely tried
to refute the rationale of the Court in deciding to reverse the appealed judgment. 16

Petitioners then sought relief in this Court in the present petition for review on certiorari. Private
respondent filed his comment, reiterating his stand that the decision of the Court of Appeals under review
is already final and executory.

Petitioners countered in their reply that their petition for review presents substantive and fundamental
questions of law that fully merit judicial determination, instead of being suppressed on technical and
insubstantial reasons. Moreover, the aforesaid one (1) day delay in the filing of their motion for extension
is excusable, considering that petitioners had to change their former counsel who failed to file their brief in
the appellate court, which substitution of counsel took place at a time when there were many successive
intervening holidays.

On July 26, 1978, we resolved to give due course to the petition.

The one (1) day delay in the filing of the said motion for extension can justifiably be excused, considering
that aside from the change of counsel, the last day for filing the said motion fell on a holiday following
another holiday, hence, under such circumstances, an outright dismissal of the petition would be too harsh.
Litigations should, as much as possible, be decided on their merits and not on technicalities. In a number of
cases, this Court, in the exercise of equity jurisdiction, has relaxed the stringent application of technical
rules in order to resolve the case on its merits. 17 Rules of procedure are intended to promote, not to defeat,
substantial justice and, therefore, they should not be applied in a very rigid and technical sense.

We now proceed to the resolution of this case on the merits.

The assignment of errors of petitioners hinges on the central issue of whether the deed of assignment dated
February 15, 1966 and the agreement of February 28, 1966 are null and void, the former for total absence
of consideration and the latter for non-fulfillment of the conditions stated therein.

Petitioners contend that the deed of assignment conveyed to them the shares of stocks of private
respondent in Timberwealth Corporation, as stated in the deed itself. Since said corporation never came
into existence, no share of stocks was ever transferred to them, hence the said deed is null and void for lack
of cause or consideration.

We do not agree. As found by the Court of Appeals, the true cause or consideration of said deed was the
transfer of the forest concession of private respondent to petitioners for P120,000.00. This finding is
supported by the following considerations, viz:

1. Both parties, at the time of the execution of the deed of assignment knew that the Timberwealth
Corporation stated therein was non-existent. 18

2. In their subsequent agreement, private respondent conveyed to petitioners his inchoate right over a forest
concession covering an additional area for his existing forest concession, which area he had applied for,
and his application was then pending in the Bureau of Forestry for approval.

3. Petitioners, after the execution of the deed of assignment, assumed the operation of the logging
concessions of private respondent. 19

4. The statement of advances to respondent prepared by petitioners stated: "P55,186.39 advances to L.A.
Tiro be applied to succeeding shipments. Based on the agreement, we pay P10,000.00 every after (sic)
shipment. We had only 2 shipments" 20

5. Petitioners entered into a Forest Consolidation Agreement with other holders of forest concessions on
the strength of the questioned deed of assignment. 21

The aforesaid contemporaneous and subsequent acts of petitioners and private respondent reveal that the
cause stated in the questioned deed of assignment is false. It is settled that the previous and simultaneous
and subsequent acts of the parties are properly cognizable indica of their true intention. 22 Where the parties
to a contract have given it a practical construction by their conduct as by acts in partial performance, such
construction may be considered by the court in construing the contract, determining its meaning and
ascertaining the mutual intention of the parties at the time of contracting. 23 The parties' practical construction of
their contract has been characterized as a clue or index to, or as evidence of, their intention or meaning and as an
important, significant, convincing, persuasive, or influential factor in determining the proper construction of the
agreement. 24

The deed of assignment of February 15, 1966 is a relatively simulated contract which states a false cause
or consideration, or one where the parties conceal their true agreement. 25 A contract with a false
consideration is not null and void per se. 26 Under Article 1346 of the Civil Code, a relatively simulated
contract, when it does not prejudice a third person and is not intended for any purpose contrary to law, morals,
good customs, public order or public policy binds the parties to their real agreement.

The Court of Appeals, therefore, did not err in holding petitioners liable under the said deed and in ruling
that
 . . . In view of the analysis of the first and second assignment of errors, the defendants-
appellees are liable to the plaintiff-appellant for the sale and transfer in their favor of the
latter's forest concessions. Under the terms of the contract, the parties agreed on a
consideration of P120,000.00. P20,000.00 of which was paid, upon the signing of the
contract and the balance of P100,000.00 to be paid at the rate of P10,000.00 for every
shipment of export logs actually produced from the forest concessions of the appellant
sold to the appellees. Since plaintiff-appellant's forest concessions were consolidated or
merged with those of the other timber license holders by appellees' voluntary act under
the Forest Consolidation Agreement (Exhibit D), approved by the Bureau of Forestry
(Exhibit D-3), then the unpaid balance of P49,338.15 (the amount of P70,661.85 having
been received by the plaintiff-appellant from the defendants-appellees) became due and
demandable. 27

As to the alleged nullity of the agreement dated February 28, 1966, we agree with petitioners that they
cannot be held liable thereon. The efficacy of said deed of assignment is subject to the condition that the
application of private respondent for an additional area for forest concession be approved by the Bureau of
Forestry. Since private respondent did not obtain that approval, said deed produces no effect. When a
contract is subject to a suspensive condition, its birth or effectivity can take place only if and when the
event which constitutes the condition happens or is fulfilled. 28 If the suspensive condition does not take
place, the parties would stand as if the conditional obligation had never existed. 29

The said agreement is a bilateral contract which gave rise to reciprocal obligations, that is, the obligation of
private respondent to transfer his rights in the forest concession over the additional area and, on the other
hand, the obligation of petitioners to pay P30,000.00. The demandability of the obligation of one party
depends upon the fulfillment of the obligation of the other. In this case, the failure of private respondent to
comply with his obligation negates his right to demand performance from petitioners. Delivery and
payment in a contract of sale, are so interrelated and intertwined with each other that without delivery of
the goods there is no corresponding obligation to pay. The two complement each other. 30

Moreover, under the second paragraph of Article 1461 of the Civil Code, the efficacy of the sale of a mere
hope or expectancy is deemed subject to the condition that the thing will come into existence. In this case,
since private respondent never acquired any right over the additional area for failure to secure the approval
of the Bureau of Forestry, the agreement executed therefor, which had for its object the transfer of said
right to petitioners, never became effective or enforceable.

WHEREFORE, the decision of respondent Court of Appeals is hereby MODIFIED. The agreement of the
parties dated February 28, 1966 is declared without force and effect and the amount of P30,000.00 is
hereby ordered to be deducted from the sum awarded by respondent court to private respondent. In all
other respects, said decision of respondent court is affirmed.

SO ORDERED.
G.R. Nos. L-18169, L-18262 & L-21434 July 31, 1964

COMMISSIONER OF INTERNAL REVENUES, petitioner,

vs.
V.E. LEDNICKY and MARIA VALERO LEDNICKY, respondents.

Office of the Solicitor General for petitioner.

Ozaeta, Gibbs and Ozaeta for respondents.

REYES, J.B.L., J.:

The above-captioned cases were elevated to this Court under separate petitions by the Commissioner for
review of the corresponding decisions of the Court of Tax Appeals. Since these cases involve the same
parties and issues akin to each case presented, they are herein decided jointly.

The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, respectively, both
American citizens residing in the Philippines, and have derived all their income from Philippine sources
for the taxable years in question.

In compliance with local law, the aforesaid respondents, on 27 March 1957, filed their income tax return
for 1956, reporting therein a gross income of P1,017,287. 65 and a net income of P733,809.44 on which
the amount of P317,395.4 was assessed after deducting P4,805.59 as withholding tax. Pursuant to the
petitioner's assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the
withheld taxes, on 15 April 1957.

On 17 March 1959, the respondents Lednickys filed an amended income tax return for 1956. The
amendment consists in a claimed deduction of P205,939.24 paid in 1956 to the United States government
as federal income tax for 1956. Simultaneously with the filing of the amended return, the respondents
requested the refund of P112,437.90.

When the petitioner Commissioner of Internal Revenue failed to answer the claim for refund, the
respondents filed their petition with the Tax Court on 11 April 1959 as CTA Case No. 646, which is now
G. R. No. L-18286 in the Supreme Court.

G. R. No. L-18169 (formerly CTA Case No. 570) is also a claim for refund in the amount of P150,269.00,
as alleged overpaid income tax for 1955, the facts of which are as follows:

On 28 February 1956, the same respondents-spouses filed their domestic income tax return for 1955,
reporting a gross income of P1,771,124.63 and a net income of P1,052,550.67. On 19 April 1956, they
filed an amended income tax return, the amendment upon the original being a lesser net income of
P1,012,554.51, and, on the basis of this amended return, they paid P570,252.00, inclusive of withholding
taxes. After audit, the petitioner determined a deficiency of P16,116.00, which amount, the respondents
paid on 5 December 1956.

Back in 1955, however, the Lednickys filed with the U.S. Internal Revenue Agent in Manila their federal
income tax return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine sources on a
cash basis. Payment of these federal income taxes, including penalties and delinquency interest in the
amount of P264,588.82, were made in 1955 to the U.S. Director of Internal Revenue, Baltimore, Maryland,
through the National City Bank of New York, Manila Branch. Exchange and bank charges in remitting
payment totaled P4,143.91.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by
this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not
covered by this stipulation of facts.1wph1.t
On 11 August 1958, the said respondents amended their Philippine income tax return for 1955 to include
the following deductions:

U.S. Federal income taxes P471,867.32

Interest accrued up to May 15, 1955 40,333.92

Exchange and bank charges 4,143.91

Total P516,345.15

and therewith filed a claim for refund of the sum of P166,384.00, which was later reduced to P150,269.00.

The respondents Lednicky brought suit in the Tax Court, which was docketed therein as CTA Case No.
570.

In G. R. No. 21434 (CTA Case No. 783), the facts are similar, but refer to respondents Lednickys' income
tax return for 1957, filed on 28 February 1958, and for which respondents paid a total sum of P196,799.65.
In 1959, they filed an amended return for 1957, claiming deduction of P190,755.80, representing taxes
paid to the U.S. Government on income derived wholly from Philippine sources. On the strength thereof,
respondents seek refund of P90 520.75 as overpayment. The Tax Court again decided for respondents.

The common issue in all three cases, and one that is of first impression in this jurisdiction, is whether a
citizen of the United States residing in the Philippines, who derives income wholly from sources within the
Republic of the Philippines, may deduct from his gross income the income taxes he has paid to the United
States government for the taxable year on the strength of section 30 (C-1) of the Philippine Internal
Revenue Code, reading as follows:

SEC. 30. Deduction from gross income. In computing net income there shall be allowed as
deductions

(a) ...

(b) ...

(c) Taxes:

(1) In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes imposed by the

authority of any foreign country; but this deduction shall be allowed in
the case of a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) of this subsection
(relating to credit for foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to increase

the value of the property assessed. (Emphasis supplied)
The Tax Court held that they may be deducted because of the undenied fact that the respondent
spouses did not "signify" in their income tax return a desire to avail themselves of the benefits of
paragraph 3 (B) of the subsection, which reads:

Par. (c) (3) Credits against tax for taxes of foreign countries. If the taxpayer signifies
in his return his desire to have the benefits of this paragraph, the tax imposed by this Title
shall be credited with

(A) ...;

(B) Alien resident of the Philippines. In the case of an alien resident of the
Philippines, the amount of any such taxes paid or accrued during the taxable year
to any foreign country, if the foreign country of which such alien resident is a
citizen or subject, in imposing such taxes, allows a similar credit to citizens of
the Philippines residing in such country;

It is well to note that the tax credit so authorized is limited under paragraph 4 (A and B) of the
same subsection, in the following terms:

Par. (c) (4) Limitation on credit. The amount of the credit taken under this section shall
be subject to each of the following limitations:

(A) The amount of the credit in respect to the tax paid or accrued to any country
shall not exceed the same proportion of the tax against which such credit is taken,
which the taxpayer's net income from sources within such country taxable under
this Title bears to his entire net income for the same taxable year; and

(B) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's net income from sources
without the Philippines taxable under this Title bears to his entire net income for
the same taxable year.

We agree with appellant Commissioner that the Construction and wording of Section 30
(c) (1) (B) of the Internal Revenue Act shows the law's intent that the right to deduct
income taxes paid to foreign government from the taxpayer's gross income is given only
as an alternative or substitute to his right to claim a tax credit for such foreign income
taxes under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim
such tax credit if he so chooses, he is precluded from deducting the foreign income taxes
from his gross income. For it is obvious that in prescribing that such deduction shall be
allowed in the case of a taxpayer who does not signify in his return his desire to have to
any extent the benefits of paragraph (3) (relating to credits for taxes paid to foreign
countries), the statute assumes that the taxpayer in question also may signify his desire to
claim a tax credit and waive the deduction; otherwise, the foreign taxes would always be
deductible, and their mention in the list of non-deductible items in Section 30(c) might as
well have been omitted, or at least expressly limited to taxes on income from sources
outside the Philippine Islands.

Had the law intended that foreign income taxes could be deducted from gross income in
any event, regardless of the taxpayer's right to claim a tax credit, it is the latter right that
should be conditioned upon the taxpayer's waiving the deduction; in which Case the right
to reduction under subsection (c-1-B) would have been made absolute or unconditional
(by omitting foreign taxes from the enumeration of non-deductions), while the right to a
tax credit under subsection (c-3) would have been expressly conditioned upon the
taxpayer's not claiming any deduction under subsection (c-1). In other words, if the law
had been intended to operate as contended by the respondent taxpayers and by the Court
of Tax Appeals section 30 (subsection (c-1) instead of providing as at present:
 SEC. 30. Deduction from gross income. In computing net income there shall be allowed as
deductions

(a) ...

(b) ...

(c) Taxes:

(1) In general. Taxes paid or accrued within the taxable year, except

(A) The income tax provided for under this Title;

(B) Income, war-profits, and excess profits taxes imposed by the

authority of any foreign country; but this deduction shall be allowed in
the case of a taxpayer who does not signify in his return his desire to
have to any extent the benefits of paragraph (3) of this subsection
(relating to credit for taxes of foreign countries);

(C) Estate, inheritance and gift taxes; and

(D) Taxes assessed against local benefits of a kind tending to increase

the value of the property assessed.

would have merely provided:

SEC. 30. Decision from grow income. In computing net income there shall be allowed as
deductions:

(a) ...

(b) ...

(c) Taxes paid or accrued within the taxable year, EXCEPT

(A) The income tax provided for in this Title;

(B) Omitted or else worded as follows:

Income, war profits and excess profits taxes imposed by authority of any foreign country
on income earned within the Philippines if the taxpayer does not claim the benefits under
paragraph 3 of this subsection;

(C) Estate, inheritance or gift taxes;

(D) Taxes assessed against local benefits of a kind tending to increase the value of the
property assessed.

while subsection (c-3) would have been made conditional in the following or equivalent terms:

(3) Credits against tax for taxes of foreign countries. If the taxpayer has not deducted such
taxes from his gross income but signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by Title shall be credited with ... (etc.).
Petitioners admit in their brief that the purpose of the law is to prevent the taxpayer from claiming twice
the benefits of his payment of foreign taxes, by deduction from gross income (subs. c-1) and by tax credit
(subs. c-3). This danger of double credit certainly can not exist if the taxpayer can not claim benefit under
either of these headings at his option, so that he must be entitled to a tax credit (respondent taxpayers
admittedly are not so entitled because all their income is derived from Philippine sources), or the option to
deduct from gross income disappears altogether.

Much stress is laid on the thesis that if the respondent taxpayers are not allowed to deduct the income taxes
they are required to pay to the government of the United States in their return for Philippine income tax,
they would be subjected to double taxation. What respondents fail to observe is that double taxation
becomes obnoxious only where the taxpayer is taxed twice for the benefit of the same governmental
entity (cf. Manila vs. Interisland Gas Service, 52 Off. Gaz. 6579; Manuf. Life Ins. Co. vs. Meer, 89 Phil.
357). In the present case, while the taxpayers would have to pay two taxes on the same income, the
Philippine government only receives the proceeds of one tax. As between the Philippines, where the
income was earned and where the taxpayer is domiciled, and the United States, where that income
was not earned and where the taxpayer did not reside, it is indisputable that justice and equity demand that
the tax on the income should accrue to the benefit of the Philippines. Any relief from the alleged double
taxation should come from the United States, and not from the Philippines, since the former's right to
burden the taxpayer is solely predicated on his citizenship, without contributing to the production of the
wealth that is being taxed.

Aside from not conforming to the fundamental doctrine of income taxation that the right of a government
to tax income emanates from its partnership in the production of income, by providing the protection,
resources, incentive, and proper climate for such production, the interpretation given by the respondents to
the revenue law provision in question operates, in its application, to place a resident alien with only
domestic sources of income in an equal, if not in a better, position than one who has both domestic and
foreign sources of income, a situation which is manifestly unfair and short of logic.

Finally, to allow an alien resident to deduct from his gross income whatever taxes he pays to his own
government amounts to conferring on the latter the power to reduce the tax income of the Philippine
government simply by increasing the tax rates on the alien resident. Everytime the rate of taxation imposed
upon an alien resident is increased by his own government, his deduction from Philippine taxes would
correspondingly increase, and the proceeds for the Philippines diminished, thereby subordinating our own
taxes to those levied by a foreign government. Such a result is incompatible with the status of the
Philippines as an independent and sovereign state.

IN VIEW OF THE FOREGOING, the decisions of the Court of Tax Appeals are reversed, and, the
disallowance of the refunds claimed by the respondents Lednicky is affirmed, with costs against said
respondents-appellees.
 THIRD DIVISION

G.R. No. 172231 February 12, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
ISABELA CULTURAL CORPORATION, Respondent.

DECISION

YNARES-SANTIAGO, J.:

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision1 of the Court
of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision2 of the Court of Tax
Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the Assessment Notices for
deficiency income tax and expanded withholding tax issued by the Bureau of Internal Revenue (BIR)
against respondent Isabela Cultural Corporation (ICC).

The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR Assessment
Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of P333,196.86, and Assessment
Notice No. FAS-1-86-90-000681 for deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIRs disallowance of ICCs claimed expense deductions for professional and security
services billed to and paid by ICC in 1986, to wit:

(a) Expenses for the auditing services of SGV & Co.,3 for the year ending December 31,
1985;4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and 1985.5

(c) Expense for security services of El Tigre Security & Investigation Agency for the
months of April and May 1986.6

(2) The alleged understatement of ICCs interest income on the three promissory notes due from
Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was allegedly
due to the failure of ICC to withhold 1% expanded withholding tax on its claimed P244,890.00 deduction
for security services.7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9, 1995,
however, it received a final notice before seizure demanding payment of the amounts stated in the said
notices. Hence, it brought the case to the CTA which held that the petition is premature because the final
notice of assessment cannot be considered as a final decision appealable to the tax court. This was reversed
by the Court of Appeals holding that a demand letter of the BIR reiterating the payment of deficiency tax,
amounts to a final decision on the protested assessment and may therefore be questioned before the CTA.
This conclusion was sustained by this Court on July 1, 2001, in G.R. No. 135210.8 The case was thus
remanded to the CTA for further proceedings.

On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment notices
issued against ICC. It held that the claimed deductions for professional and security services were properly
claimed by ICC in 1986 because it was only in the said year when the bills demanding payment were sent
to ICC. Hence, even if some of these professional services were rendered to ICC in 1984 or 1985, it could
not declare the same as deduction for the said years as the amount thereof could not be determined at that
time.

The CTA also held that ICC did not understate its interest income on the subject promissory notes. It found
that it was the BIR which made an overstatement of said income when it compounded the interest income
receivable by ICC from the promissory notes of Realty Investment, Inc., despite the absence of a
stipulation in the contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed deduction
for security services as shown by the various payment orders and confirmation receipts it presented as
evidence. The dispositive portion of the CTAs Decision, reads:

WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for deficiency
income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency
expanded withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986, are hereby CANCELLED and SET ASIDE.

SO ORDERED.9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,10 holding that although the professional services (legal and auditing services) were rendered to
ICC in 1984 and 1985, the cost of the services was not yet determinable at that time, hence, it could be
considered as deductible expenses only in 1986 when ICC received the billing statements for said services.
It further ruled that ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments for security services
for the taxable year 1986.

Hence, petitioner, through the Office of the Solicitor General, filed the instant petition contending that
since ICC is using the accrual method of accounting, the expenses for the professional services that
accrued in 1984 and 1985, should have been declared as deductions from income during the said years and
the failure of ICC to do so bars it from claiming said expenses as deduction for the taxable year 1986. As
to the alleged deficiency interest income and failure to withhold expanded withholding tax assessment,
petitioner invoked the presumption that the assessment notices issued by the BIR are valid.

The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of the
expenses for professional and security services from ICCs gross income; and (2) held that ICC did not
understate its interest income from the promissory notes of Realty Investment, Inc; and that ICC withheld
the required 1% withholding tax from the deductions for security services.

The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it
must have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying
on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent
papers.11

The requisite that it must have been paid or incurred during the taxable year is further qualified by Section
45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction provided for in this
Title shall be taken for the taxable year in which paid or accrued or paid or incurred, dependent upon
the method of accounting upon the basis of which the net income is computed x x x".

Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions.12 In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred cannot
be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is authorized to
deduct certain expenses and other allowable deductions for the current year but failed to do so cannot
deduct the same for the next year.13

The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts of
income accrue where the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.14

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of income
and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the reasonable accurate determination of such income
or liability.

The all-events test requires the right to income or liability be fixed, and the amount of such income or
liability be determined with reasonable accuracy. However, the test does not demand that the amount of
income or liability be known absolutely, only that a taxpayer has at his disposal the information necessary
to compute the amount with reasonable accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is satisfied where a computation may be unknown,
but is not as much as unknowable, within the taxable year. The amount of liability does not have to be
determined exactly; it must be determined with "reasonable accuracy." Accordingly, the term
"reasonable accuracy" implies something less than an exact or completely accurate amount.[15]

The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably
be expected to have known, at the closing of its books for the taxable year.[16] Accrual method of
accounting presents largely a question of fact; such that the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.17

Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an exemption
must be able to justify the same by the clearest grant of organic or statute law. An exemption from the
common burden cannot be permitted to exist upon vague implications. And since a deduction for income
tax purposes partakes of the nature of a tax exemption, then it must also be strictly construed.18

In the instant case, the expenses for professional fees consist of expenses for legal and auditing services.
The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for reimbursement of the expenses of
said firm in connection with ICCs tax problems for the year 1984. As testified by the Treasurer of ICC,
the firm has been its counsel since the 1960s.19 From the nature of the claimed deductions and the span of
time during which the firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure to determine the exact
amount of the expense during the taxable year when they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the exercise
of due diligence could have inquired into the amount of their obligation to the firm, especially so that it is
using the accrual method of accounting. For another, it could have reasonably determined the amount of
legal and retainer fees owing to its familiarity with the rates charged by their long time legal consultant.

As previously stated, the accrual method presents largely a question of fact and that the taxpayer bears the
burden of establishing the accrual of an expense or income. However, ICC failed to discharge this burden.
As to when the firms performance of its services in connection with the 1984 tax problems were
completed, or whether ICC exercised reasonable diligence to inquire about the amount of its liability, or
whether it does or does not possess the information necessary to compute the amount of said liability
with reasonable accuracy, are questions of fact which ICC never established. It simply relied on the
defense of delayed billing by the firm and the company, which under the circumstances, is not sufficient to
exempt it from being charged with knowledge of the reasonable amount of the expenses for legal and
auditing services.

In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the
year 1985 cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to
present evidence showing that even with only "reasonable accuracy," as the standard to ascertain its
liability to SGV & Co. in the year 1985, it cannot determine the professional fees which said company
would charge for its services.

ICC thus failed to discharge the burden of proving that the claimed expense deductions for the professional
services were allowable deductions for the taxable year 1986. Hence, per Revenue Audit Memorandum
Order No. 1-2000, they cannot be validly deducted from its gross income for the said year and were
therefore properly disallowed by the BIR.

As to the expenses for security services, the records show that these expenses were incurred by ICC in
198620 and could therefore be properly claimed as deductions for the said year.

Anent the purported understatement of interest income from the promissory notes of Realty Investment,
Inc., we sustain the findings of the CTA and the Court of Appeals that no such understatement exists and
that only simple interest computation and not a compounded one should have been applied by the BIR.
There is indeed no stipulation between the latter and ICC on the application of compounded
interest.21 Under Article 1959 of the Civil Code, unless there is a stipulation to the contrary, interest due
should not further earn interest.

Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the BIR is
supported by payment order and confirmation receipts.22 Hence, the Assessment Notice for deficiency
expanded withholding tax was properly cancelled and set aside.

In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for deficiency income
tax should be cancelled and set aside but only insofar as the claimed deductions of ICC for security
services. Said Assessment is valid as to the BIRs disallowance of ICCs expenses for professional
services. The Court of Appeals cancellation of Assessment Notice No. FAS-1-86-90-000681 in the
amount of P4,897.79 for deficiency expanded withholding tax, is sustained.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of the Court
of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that Assessment Notice
No. FAS-1-86-90-000680, which disallowed the expense deduction of Isabela Cultural Corporation for
professional and security services, is declared valid only insofar as the expenses for the professional fees of
SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, are
concerned. The decision is affirmed in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability under
Assessment Notice No. FAS-1-86-90-000680.

SO ORDERED.
G.R. No. L-21551 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-21557 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
FERNANDEZ HERMANOS, INC., and COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24972 September 30, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
FERNANDEZ HERMANOS INC., and the COURT OF TAX APPEALS, respondents.

-----------------------------

G.R. No. L-24978 September 30, 1969

FERNANDEZ HERMANOS, INC., petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, and HON. ROMAN A. UMALI, COURT OF
TAX APPEALS,respondents.

L-21551:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney
Virgilio G. Saldajeno for respondent.

L-21557:

Office of the Solicitor General for petitioner.

Rafael Dinglasan for respondent Fernandez Hermanos, Inc.

L-24972:

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and
Special Attorney Virgilio G. Saldajeno for petitioner.
Rafael Dinglasan for respondent Fernandez Hermanos, Inc.

L-24978:

Rafael Dinglasan for petitioner.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Antonio G. Ibarra and
Special Attorney Virgilio G. Saldajeno for respondent.
TEEHANKEE, J.:

These four appears involve two decisions of the Court of Tax Appeals determining the taxpayer's income
tax liability for the years 1950 to 1954 and for the year 1957. Both the taxpayer and the Commissioner of
Internal Revenue, as petitioner and respondent in the cases a quo respectively, appealed from the Tax
Court's decisions, insofar as their respective contentions on particular tax items were therein resolved
against them. Since the issues raised are interrelated, the Court resolves the four appeals in this joint
decision.

Cases L-21551 and L-21557

The taxpayer, Fernandez Hermanos, Inc., is a domestic corporation organized for the principal purpose of
engaging in business as an "investment company" with main office at Manila. Upon verification of the
taxpayer's income tax returns for the period in question, the Commissioner of Internal Revenue assessed
against the taxpayer the sums of P13,414.00, P119,613.00, P11,698.00, P6,887.00 and P14,451.00 as
alleged deficiency income taxes for the years 1950, 1951, 1952, 1953 and 1954, respectively. Said
assessments were the result of alleged discrepancies found upon the examination and verification of the
taxpayer's income tax returns for the said years, summarized by the Tax Court in its decision of June 10,
1963 in CTA Case No. 787, as follows:

1. Losses

a. Losses in Mati Lumber Co. (1950) P 8,050.00

b. Losses in or bad debts of Palawan Manganese Mines, Inc. (1951) 353,134.25

c. Losses in Balamban Coal Mines

1950 8,989.76
1951 27,732.66

d. Losses in Hacienda Dalupiri

1950 17,418.95
1951 29,125.82
1952 26,744.81
1953 21,932.62
1954 42,938.56

e. Losses in Hacienda Samal

1951 8,380.25
1952 7,621.73

2. Excessive depreciation of Houses

1950 P 8,180.40
1951 8,768.11
1952 18,002.16
 1953 13,655.25
1954 29,314.98

3. Taxable increase in net worth

1950 P 30,050.00
1951 1,382.85

4. Gain realized from sale of real property in 1950 P 11,147.2611

The Tax Court sustained the Commissioner's disallowances of Item 1, sub-items (b) and (e) and
Item 2 of the above summary, but overruled the Commissioner's disallowances of all the
remaining items. It therefore modified the deficiency assessments accordingly, found the total
deficiency income taxes due from the taxpayer for the years under review to amount to
P123,436.00 instead of P166,063.00 as originally assessed by the Commissioner, and rendered the
following judgment:

RESUME

1950 P2,748.00
1951 108,724.00
1952 3,600.00
1953 2,501.00
1954 5,863.00

Total P123,436.00

WHEREFORE, the decision appealed from is hereby modified, and petitioner is ordered to pay
the sum of P123,436.00 within 30 days from the date this decision becomes final. If the said
amount, or any part thereof, is not paid within said period, there shall be added to the unpaid
amount as surcharge of 5%, plus interest as provided in Section 51 of the National Internal
Revenue Code, as amended. With costs against petitioner. (Pp. 75, 76, Taxpayer's Brief as
appellant)

Both parties have appealed from the respective adverse rulings against them in the Tax Court's decision.
Two main issues are raised by the parties: first, the correctness of the Tax Court's rulings with respect to
the disputed items of disallowances enumerated in the Tax Court's summary reproduced above, and
second, whether or not the government's right to collect the deficiency income taxes in question has
already prescribed.

On the first issue, we will discuss the disputed items of disallowances seriatim.

1. Re allowances/disallowances of losses.

(a) Allowance of losses in Mati Lumber Co. (1950). The Commissioner of Internal Revenue questions
the Tax Court's allowance of the taxpayer's writing off as worthless securities in its 1950 return the sum of
P8,050.00 representing the cost of shares of stock of Mati Lumber Co. acquired by the taxpayer on January
1, 1948, on the ground that the worthlessness of said stock in the year 1950 had not been clearly
established. The Commissioner contends that although the said Company was no longer in operation in
1950, it still had its sawmill and equipment which must be of considerable value. The Court, however,
found that "the company ceased operations in 1949 when its Manager and owner, a certain Mr. Rocamora,
left for Spain ,where he subsequently died. When the company eased to operate, it had no assets, in other
words, completely insolvent. This information as to the insolvency of the Company reached (the
taxpayer) in 1950," when it properly claimed the loss as a deduction in its 1950 tax return, pursuant to
Section 30(d) (4) (b) or Section 30 (e) (3) of the National Internal Revenue Code. 2

We find no reason to disturb this finding of the Tax Court. There was adequate basis for the writing off of
the stock as worthless securities. Assuming that the Company would later somehow realize some proceeds
from its sawmill and equipment, which were still existing as claimed by the Commissioner, and that such
proceeds would later be distributed to its stockholders such as the taxpayer, the amount so received by the
taxpayer would then properly be reportable as income of the taxpayer in the year it is received.

(b) Disallowance of losses in or bad debts of Palawan Manganese Mines, Inc. (1951). The taxpayer
appeals from the Tax Court's disallowance of its writing off in 1951 as a loss or bad debt the sum of
P353,134.25, which it had advanced or loaned to Palawan Manganese Mines, Inc. The Tax Court's
findings on this item follow:

Sometime in 1945, Palawan Manganese Mines, Inc., the controlling stockholders of which are
also the controlling stockholders of petitioner corporation, requested financial help from petitioner
to enable it to resume it mining operations in Coron, Palawan. The request for financial assistance
was readily and unanimously approved by the Board of Directors of petitioner, and thereafter a
memorandum agreement was executed on August 12, 1945, embodying the terms and conditions
under which the financial assistance was to be extended, the pertinent provisions of which are as
follows:

"WHEREAS, the FIRST PARTY, by virtue of its resolution adopted on August 10, 1945,
has agreed to extend to the SECOND PARTY the requested financial help by way of
accommodation advances and for this purpose has authorized its President, Mr. Ramon J.
Fernandez to cause the release of funds to the SECOND PARTY.

"WHEREAS, to compensate the FIRST PARTY for the advances that it has agreed to
extend to the SECOND PARTY, the latter has agreed to pay to the former fifteen per
centum (15%) of its net profits.

"NOW THEREFORE, for and in consideration of the above premises, the parties hereto
have agreed and covenanted that in consideration of the financial help to be extended by
the FIRST PARTY to the SECOND PARTY to enable the latter to resume its mining
operations in Coron, Palawan, the SECOND PARTY has agreed and undertaken as it
hereby agrees and undertakes to pay to the FIRST PARTY fifteen per centum (15%) of
its net profits." (Exh. H-2)

Pursuant to the agreement mentioned above, petitioner gave to Palawan Manganese Mines, Inc. yearly
advances starting from 1945, which advances amounted to P587,308.07 by the end of 1951. Despite these
advances and the resumption of operations by Palawan Manganese Mines, Inc., it continued to suffer
losses. By 1951, petitioner became convinced that those advances could no longer be recovered. While it
continued to give advances, it decided to write off as worthless the sum of P353,134.25. This amount "was
arrived at on the basis of the total of advances made from 1945 to 1949 in the sum of P438,981.39, from
which amount the sum of P85,647.14 had to be deducted, the latter sum representing its pre-war assets.
(t.s.n., pp. 136-139, Id)." (Page 4, Memorandum for Petitioner.) Petitioner decided to maintain the
advances given in 1950 and 1951 in the hope that it might be able to recover the same, as in fact it
continued to give advances up to 1952. From these facts, and as admitted by petitioner itself, Palawan
Manganese Mines, Inc., was still in operation when the advances corresponding to the years 1945 to 1949
were written off the books of petitioner. Under the circumstances, was the sum of P353,134.25 properly
claimed by petitioner as deduction in its income tax return for 1951, either as losses or bad debts?

It will be noted that in giving advances to Palawan Manganese Mine Inc., petitioner did not expect to be
repaid. It is true that some testimonial evidence was presented to show that there was some agreement that
the advances would be repaid, but no documentary evidence was presented to this effect. The
memorandum agreement signed by the parties appears to be very clear that the consideration for the
advances made by petitioner was 15% of the net profits of Palawan Manganese Mines, Inc. In other words,
if there were no earnings or profits, there was no obligation to repay those advances. It has been held that
the voluntary advances made without expectation of repayment do not result in deductible losses. 1955 PH
Fed. Taxes, Par. 13, 329, citing W. F. Young, Inc. v. Comm., 120 F 2d. 159, 27 AFTR 395; George B.
Markle, 17 TC. 1593.

Is the said amount deductible as a bad debt? As already stated, petitioner gave advances to Palawan
Manganese Mines, Inc., without expectation of repayment. Petitioner could not sue for recovery under the
memorandum agreement because the obligation of Palawan Manganese Mines, Inc. was to pay petitioner
15% of its net profits, not the advances. No bad debt could arise where there is no valid and subsisting
debt.

Again, assuming that in this case there was a valid and subsisting debt and that the debtor was incapable of
paying the debt in 1951, when petitioner wrote off the advances and deducted the amount in its return for
said year, yet the debt is not deductible in 1951 as a worthless debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner continued to give advances in those years. It has been held that if
the debtor corporation, although losing money or insolvent, was still operating at the end of the taxable
year, the debt is not considered worthless and therefore not deductible. 3

The Tax Court's disallowance of the write-off was proper. The Solicitor General has rightly pointed out
that the taxpayer has taken an "ambiguous position " and "has not definitely taken a stand on whether the
amount involved is claimed as losses or as bad debts but insists that it is either a loss or a bad debt." 4 We
sustain the government's position that the advances made by the taxpayer to its 100% subsidiary, Palawan
Manganese Mines, Inc. amounting to P587,308,07 as of 1951 were investments and not loans. 5 The
evidence on record shows that the board of directors of the two companies since August, 1945, were
identical and that the only capital of Palawan Manganese Mines, Inc. is the amount of P100,000.00 entered
in the taxpayer's balance sheet as its investment in its subsidiary company. 6 This fact explains the liberality
with which the taxpayer made such large advances to the subsidiary, despite the latter's admittedly poor
financial condition.

The taxpayer's contention that its advances were loans to its subsidiary as against the Tax Court's finding
that under their memorandum agreement, the taxpayer did not expect to be repaid, since if the subsidiary
had no earnings, there was no obligation to repay those advances, becomes immaterial, in the light of our
resolution of the question. The Tax Court correctly held that the subsidiary company was still in operation
in 1951 and 1952 and the taxpayer continued to give it advances in those years, and, therefore, the alleged
debt or investment could not properly be considered worthless and deductible in 1951, as claimed by the
taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax Code providing for deduction by
corporations of losses actually sustained and charged off during the taxable year nor under Section 30 (e)
(1) thereof providing for deduction of bad debts actually ascertained to be worthless and charged off within
the taxable year, can there be a partial writing off of a loss or bad debt, as was sought to be done here by
the taxpayer. For such losses or bad debts must be ascertained to be so and written off during the taxable
year, are therefore deductible in full or not at all, in the absence of any express provision in the Tax Code
authorizing partial deductions.

The Tax Court held that the taxpayer's loss of its investment in its subsidiary could not be deducted for the
year 1951, as the subsidiary was still in operation in 1951 and 1952. The taxpayer, on the other hand,
claims that its advances were irretrievably lost because of the staggering losses suffered by its subsidiary in
1951 and that its advances after 1949 were "only limited to the purpose of salvaging whatever ore was
already available, and for the purpose of paying the wages of the laborers who needed help." 7 The
correctness of the Tax Court's ruling in sustaining the disallowance of the write-off in 1951 of the
taxpayer's claimed losses is borne out by subsequent events shown in Cases L-24972 and L-24978
involving the taxpayer's 1957 income tax liability. (Infra, paragraph 6.) It will there be seen that by 1956,
the obligation of the taxpayer's subsidiary to it had been reduced from P587,398.97 in 1951 to P442,885.23
in 1956, and that it was only on January 1, 1956 that the subsidiary decided to cease operations. 8
(c) Disallowance of losses in Balamban Coal Mines (1950 and 1951). The Court sustains the Tax
Court's disallowance of the sums of P8,989.76 and P27,732.66 spent by the taxpayer for the operation of
its Balamban coal mines in Cebu in 1950 and 1951, respectively, and claimed as losses in the taxpayer's
returns for said years. The Tax Court correctly held that the losses "are deductible in 1952, when the mines
were abandoned, and not in 1950 and 1951, when they were still in operation." 9 The taxpayer's claim that
these expeditions should be allowed as losses for the corresponding years that they were incurred, because
it made no sales of coal during said years, since the promised road or outlet through which the coal could
be transported from the mines to the provincial road was not constructed, cannot be sustained. Some
definite event must fix the time when the loss is sustained, and here it was the event of actual abandonment
of the mines in 1952. The Tax Court held that the losses, totalling P36,722.42 were properly deductible in
1952, but the appealed judgment does not show that the taxpayer was credited therefor in the determination
of its tax liability for said year. This additional deduction of P36,722.42 from the taxpayer's taxable income
in 1952 would result in the elimination of the deficiency tax liability for said year in the sum of P3,600.00
as determined by the Tax Court in the appealed judgment.

(d) and (e) Allowance of losses in Hacienda Dalupiri (1950 to 1954) and Hacienda Samal (1951-1952).
The Tax Court overruled the Commissioner's disallowance of these items of losses thus:

Petitioner deducted losses in the operation of its Hacienda Dalupiri the sums of P17,418.95 in
1950, P29,125.82 in 1951, P26,744.81 in 1952, P21,932.62 in 1953, and P42,938.56 in 1954.
These deductions were disallowed by respondent on the ground that the farm was operated solely
for pleasure or as a hobby and not for profit. This conclusion is based on the fact that the farm was
operated continuously at a loss.1awph l.nt

From the evidence, we are convinced that the Hacienda Dalupiri was operated by petitioner for
business and not pleasure. It was mainly a cattle farm, although a few race horses were also raised.
It does not appear that the farm was used by petitioner for entertainment, social activities, or other
non-business purposes. Therefore, it is entitled to deduct expenses and losses in connection with
the operation of said farm. (See 1955 PH Fed. Taxes, Par. 13, 63, citing G.C.M. 21103, CB 1939-
1, p.164)

Section 100 of Revenue Regulations No. 2, otherwise known as the Income Tax Regulations,
authorizes farmers to determine their gross income on the basis of inventories. Said regulations
provide:

"If gross income is ascertained by inventories, no deduction can be made for livestock or
products lost during the year, whether purchased for resale, produced on the farm, as such
losses will be reflected in the inventory by reducing the amount of livestock or products
on hand at the close of the year."

Evidently, petitioner determined its income or losses in the operation of said farm on the basis of
inventories. We quote from the memorandum of counsel for petitioner:

"The Taxpayer deducted from its income tax returns for the years from 1950 to 1954
inclusive, the corresponding yearly losses sustained in the operation of Hacienda
Dalupiri, which losses represent the excess of its yearly expenditures over the receipts;
that is, the losses represent the difference between the sales of livestock and the actual
cash disbursements or expenses." (Pages 21-22, Memorandum for Petitioner.)

As the Hacienda Dalupiri was operated by petitioner for business and since it sustained losses in
its operation, which losses were determined by means of inventories authorized under Section 100
of Revenue Regulations No. 2, it was error for respondent to have disallowed the deduction of said
losses. The same is true with respect to loss sustained in the operation of the Hacienda Samal for
the years 1951 and 1952. 10
The Commissioner questions that the losses sustained by the taxpayer were properly based on the
inventory method of accounting. He concedes, however, "that the regulations referred to does not specify
how the inventories are to be made. The Tax Court, however, felt satisfied with the evidence presented by
the taxpayer ... which merely consisted of an alleged physical count of the number of the livestock in
Hacienda Dalupiri for the years involved." 11The Tax Court was satisfied with the method adopted by the
taxpayer as a farmer breeding livestock, reporting on the basis of receipts and disbursements. We find no
Compelling reason to disturb its findings.

2. Disallowance of excessive depreciation of buildings (1950-1954). During the years 1950 to 1954, the
taxpayer claimed a depreciation allowance for its buildings at the annual rate of 10%. The Commissioner
claimed that the reasonable depreciation rate is only 3% per annum, and, hence, disallowed as excessive
the amount claimed as depreciation allowance in excess of 3% annually. We sustain the Tax Court's
finding that the taxpayer did not submit adequate proof of the correctness of the taxpayer's claim that the
depreciable assets or buildings in question had a useful life only of 10 years so as to justify its 10%
depreciation per annum claim, such finding being supported by the record. The taxpayer's contention that it
has many zero or one-peso assets, 12 representing very old and fully depreciated assets serves but to support
the Commissioner's position that a 10% annual depreciation rate was excessive.

3. Taxable increase in net worth (1950-1951). The Tax Court set aside the Commissioner's treatment as
taxable income of certain increases in the taxpayer's net worth. It found that:

For the year 1950, respondent determined that petitioner had an increase in net worth in the sum of
P30,050.00, and for the year 1951, the sum of P1,382.85. These amounts were treated by
respondent as taxable income of petitioner for said years.

It appears that petitioner had an account with the Manila Insurance Company, the records bearing
on which were lost. When its records were reconstituted the amount of P349,800.00 was set up as
its liability to the Manila Insurance Company. It was discovered later that the correct liability was
only 319,750.00, or a difference of P30,050.00, so that the records were adjusted so as to show the
correct liability. The correction or adjustment was made in 1950. Respondent contends that the
reduction of petitioner's liability to Manila Insurance Company resulted in the increase of
petitioner's net worth to the extent of P30,050.00 which is taxable. This is erroneous. The principle
underlying the taxability of an increase in the net worth of a taxpayer rests on the theory that such
an increase in net worth, if unreported and not explained by the taxpayer, comes from income
derived from a taxable source. (See Perez v. Araneta, G.R. No. L-9193, May 29, 1957; Coll. vs.
Reyes, G.R. Nos. L- 11534 & L-11558, Nov. 25, 1958.) In this case, the increase in the net worth
of petitioner for 1950 to the extent of P30,050.00 was not the result of the receipt by it of taxable
income. It was merely the outcome of the correction of an error in the entry in its books relating to
its indebtedness to the Manila Insurance Company. The Income Tax Law imposes a tax on
income; it does not tax any or every increase in net worth whether or not derived from income.
Surely, the said sum of P30,050.00 was not income to petitioner, and it was error for respondent to
assess a deficiency income tax on said amount.

The same holds true in the case of the alleged increase in net worth of petitioner for the year 1951 in the
sum of P1,382.85. It appears that certain items (all amounting to P1,382.85) remained in petitioner's books
as outstanding liabilities of trade creditors. These accounts were discovered in 1951 as having been paid in
prior years, so that the necessary adjustments were made to correct the errors. If there was an increase in
net worth of the petitioner, the increase in net worth was not the result of receipt by petitioner of taxable
income." 13 The Commissioner advances no valid grounds in his brief for contesting the Tax Court's
findings. Certainly, these increases in the taxpayer's net worth were not taxable increases in net worth, as
they were not the result of the receipt by it of unreported or unexplained taxable income, but were shown
to be merely the result of the correction of errors in its entries in its books relating to its indebtednesses to
certain creditors, which had been erroneously overstated or listed as outstanding when they had in fact
been duly paid. The Tax Court's action must be affirmed.
4. Gain realized from sale of real property (1950). We likewise sustain as being in accordance with the
evidence the Tax Court's reversal of the Commissioner's assessment on all alleged unreported gain in the
sum of P11,147.26 in the sale of a certain real property of the taxpayer in 1950. As found by the Tax
Court, the evidence shows that this property was acquired in 1926 for P11,852.74, and was sold in 1950
for P60,000.00, apparently, resulting in a gain of P48,147.26. 14 The taxpayer reported in its return a gain
of P37,000.00, or a discrepancy of P11,147.26. 15 It was sufficiently proved from the taxpayer's books that
after acquiring the property, the taxpayer had made improvements totalling P11,147.26, 16 accounting for
the apparent discrepancy in the reported gain. In other words, this figure added to the original acquisition
cost of P11,852.74 results in a total cost of P23,000.00, and the gain derived from the sale of the property
for P60,000.00 was correctly reported by the taxpayer at P37,000.00.

On the second issue of prescription, the taxpayer's contention that the Commissioner's action to recover its
tax liability should be deemed to have prescribed for failure on the part of the Commissioner to file a
complaint for collection against it in an appropriate civil action, as contradistinguished from the answer
filed by the Commissioner to its petition for review of the questioned assessments in the case a quo has
long been rejected by this Court. This Court has consistently held that "a judicial action for the collection
of a tax is begun by the filing of a complaint with the proper court of first instance, or where the
assessment is appealed to the Court of Tax Appeals, by filing an answer to the taxpayer's petition for
review wherein payment of the tax is prayed for." 17 This is but logical for where the taxpayer avails of the
right to appeal the tax assessment to the Court of Tax Appeals, the said Court is vested with the authority
to pronounce judgment as to the taxpayer's liability to the exclusion of any other court. In the present case,
regardless of whether the assessments were made on February 24 and 27, 1956, as claimed by the
Commissioner, or on December 27, 1955 as claimed by the taxpayer, the government's right to collect the
taxes due has clearly not prescribed, as the taxpayer's appeal or petition for review was filed with the Tax
Court on May 4, 1960, with the Commissioner filing on May 20, 1960 his Answer with a prayer for
payment of the taxes due, long before the expiration of the five-year period to effect collection by judicial
action counted from the date of assessment.

Cases L-24972 and L-24978

These cases refer to the taxpayer's income tax liability for the year 1957. Upon examination of its
corresponding income tax return, the Commissioner assessed it for deficiency income tax in the amount of
P38,918.76, computed as follows:

Net income per return P29,178.70

Add: Unallowable deductions:
(1) Net loss claimed on Ha. Dalupiri 89,547.33
(2) Amortization of Contractual right claimed as an
expense under Mines Operations 48,481.62

Net income per investigation P167,297.65

Tax due thereon 38,818.00

Less: Amount already assessed 5,836.00

Balance P32,982.00
Add: 1/2% monthly interest from 6-20-59 to 6-20-
62 5,936.76

TOTAL AMOUNT DUE AND COLLECTIBLE P38,918.76 18

The Tax Court overruled the Commissioner's disallowance of the taxpayer's losses in the operation of its
Hacienda Dalupiri in the sum of P89,547.33 but sustained the disallowance of the sum of P48,481.62,
which allegedly represented 1/5 of the cost of the "contractual right" over the mines of its subsidiary,
Palawan Manganese Mines, Inc. which the taxpayer had acquired. It found the taxpayer liable for
deficiency income tax for the year 1957 in the amount of P9,696.00, instead of P32,982.00 as originally
assessed, and rendered the following judgment:

WHEREFORE, the assessment appealed from is hereby modified. Petitioner is hereby ordered to
pay to respondent the amount of P9,696.00 as deficiency income tax for the year 1957, plus the
corresponding interest provided in Section 51 of the Revenue Code. If the deficiency tax is not
paid in full within thirty (30) days from the date this decision becomes final and executory,
petitioner shall pay a surcharge of five per cent (5%) of the unpaid amount, plus interest at the rate
of one per cent (1%) a month, computed from the date this decision becomes final until paid,
provided that the maximum amount that may be collected as interest shall not exceed the amount
corresponding to a period of three (3) years. Without pronouncement as to costs. 19

Both parties again appealed from the respective adverse rulings against them in the Tax Court's decision.

5. Allowance of losses in Hacienda Dalupiri (1957). The Tax Court cited its previous decision
overruling the Commissioner's disallowance of losses suffered by the taxpayer in the operation of its
Hacienda Dalupiri, since it was convinced that the hacienda was operated for business and not for pleasure.
And in this appeal, the Commissioner cites his arguments in his appellant's brief in Case No. L-21557. The
Tax Court, in setting aside the Commissioner's principal objections, which were directed to the accounting
method used by the taxpayer found that:

It is true that petitioner followed the cash basis method of reporting income and expenses in the
operation of the Hacienda Dalupiri and used the accrual method with respect to its mine
operations. This method of accounting, otherwise known as the hybrid method, followed by
petitioner is not without justification.

... A taxpayer may not, ordinarily, combine the cash and accrual bases. The 1954 Code
provisions permit, however, the use of a hybrid method of accounting, combining a cash
and accrual method, under circumstances and requirements to be set out in Regulations to
be issued. Also, if a taxpayer is engaged in more than one trade or business he may use a
different method of accounting for each trade or business. And a taxpayer may report
income from a business on accrual basis and his personal income on the cash basis.' (See
Mertens, Law of Federal Income Taxation, Zimet & Stanley Revision, Vol. 2, Sec. 12.08,
p. 26.) 20

The Tax Court, having satisfied itself with the adequacy of the taxpayer's accounting method and
procedure as properly reflecting the taxpayer's income or losses, and the Commissioner having
failed to show the contrary, we reiterate our ruling [supra, paragraph 1 (d) and (e)] that we find no
compelling reason to disturb its findings.

6. Disallowance of amortization of alleged "contractual rights." The reasons for sustaining this
disallowance are thus given by the Tax Court:

It appears that the Palawan Manganese Mines, Inc., during a special meeting of its Board of
Directors on January 19, 1956, approved a resolution, the pertinent portions of which read as
follows:

"RESOLVED, as it is hereby resolved, that the corporation's current assets composed of

ores, fuel, and oil, materials and supplies, spare parts and canteen supplies appearing in
the inventory and balance sheet of the Corporation as of December 31, 1955, with an
aggregate value of P97,636.98, contractual rights for the operation of various mining
claims in Palawan with a value of P100,000.00, its title on various mining claims in
Palawan with a value of P142,408.10 or a total value of P340,045.02 be, as they are
hereby ceded and transferred to Fernandez Hermanos, Inc., as partial settlement of the
 indebtedness of the corporation to said Fernandez Hermanos Inc. in the amount of
P442,895.23." (Exh. E, p. 17, CTA rec.)

On March 29, 1956, petitioner's corporation accepted the above offer of transfer, thus:

"WHEREAS, the Palawan Manganese Mines, Inc., due to its yearly substantial losses has
decided to cease operation on January 1, 1956 and in order to satisfy at least a part of its
indebtedness to the Corporation, it has proposed to transfer its current assets in the
amount of NINETY SEVEN THOUSAND SIX HUNDRED THIRTY SIX PESOS &
98/100 (P97,636.98) as per its balance sheet as of December 31, 1955, its contractual
rights valued at ONE HUNDRED THOUSAND PESOS (P100,000.00) and its title over
various mining claims valued at ONE HUNDRED FORTY TWO THOUSAND FOUR
HUNDRED EIGHT PESOS & 10/100 (P142,408.10) or a total evaluation of THREE
HUNDRED FORTY THOUSAND FORTY FIVE PESOS & 08/100 (P340,045.08)
which shall be applied in partial settlement of its obligation to the Corporation in the
amount of FOUR HUNDRED FORTY TWO THOUSAND EIGHT HUNDRED
EIGHTY FIVE PESOS & 23/100 (P442,885.23)," (Exh. E-1, p. 18, CTA rec.)

Petitioner determined the cost of the mines at P242,408.10 by adding the value of the contractual
rights (P100,000.00) and the value of its mining claims (P142,408.10). Respondent disallowed the
deduction on the following grounds: (1) that the Palawan Manganese Mines, Inc. could not
transfer P242,408.10 worth of assets to petitioner because the balance sheet of the said corporation
for 1955 shows that it had only current as worth P97,636.96; and (2) that the alleged amortization
of "contractual rights" is not allowed by the Revenue Code.

The law in point is Section 30(g) (1) (B) of the Revenue Code, before its amendment by Republic
Act No. 2698, which provided in part:

"(g) Depletion of oil and gas wells and mines.:

"(1) In general. ... (B) in the case of mines, a reasonable allowance for depletion
thereof not to exceed the market value in the mine of the product thereof, which has been
mined and sold during the year for which the return and computation are made. The
allowances shall be made under rules and regulations to be prescribed by the Secretary of
Finance: Provided, That when the allowances shall equal the capital invested, ... no
further allowance shall be made."

Assuming, arguendo, that the Palawan Manganese Mines, Inc. had assets worth P242,408.10
which it actually transferred to the petitioner in 1956, the latter cannot just deduct one-fifth (1/5)
of said amount from its gross income for the year 1957 because such deduction in the form of
depletion charge was not sanctioned by Section 30(g) (1) (B) of the Revenue Code, as above-
quoted.

xxx xxx xxx

The sole basis of petitioner in claiming the amount of P48,481.62 as a deduction was the
memorandum of its mining engineer (Exh. 1, pp. 31-32, CTA rec.), who stated that the ore
reserves of the Busuange Mines (Mines transferred by the Palawan Manganese Mines, Inc. to the
petitioner) would be exhausted in five (5) years, hence, the claim for P48,481.62 or one-fifth (1/5)
of the alleged cost of the mines corresponding to the year 1957 and every year thereafter for a
period of 5 years. The said memorandum merely showed the estimated ore reserves of the mines
and it probable selling price. No evidence whatsoever was presented to show the produced mine
and for how much they were sold during the year for which the return and computation were
made. This is necessary in order to determine the amount of depletion that can be legally deducted
from petitioner's gross income. The method employed by petitioner in making an outright
deduction of 1/5 of the cost of the mines is not authorized under Section 30(g) (1) (B) of the
 Revenue Code. Respondent's disallowance of the alleged "contractual rights" amounting to
P48,481.62 must therefore be sustained. 21

The taxpayer insists in this appeal that it could use as a method for depletion under the pertinent provision
of the Tax Code its "capital investment," representing the alleged value of its contractual rights and titles to
mining claims in the sum of P242,408.10 and thus deduct outright one-fifth (1/5) of this "capital
investment" every year. regardless of whether it had actually mined the product and sold the products. The
very authorities cited in its brief give the correct concept of depletion charges that they "allow for the
exhaustion of the capital value of the deposits by production"; thus, "as the cost of the raw materials must
be deducted from the gross income before the net income can be determined, so the estimated cost of the
reserve used up is allowed." 22 The alleged "capital investment" method invoked by the taxpayer is not a
method of depletion, but the Tax Code provision, prior to its amendment by Section 1, of Republic Act No.
2698, which took effect on June 18, 1960, expressly provided that "when the allowances shall equal the
capital invested ... no further allowances shall be made;" in other words, the "capital investment" was but
the limitation of the amount of depletion that could be claimed. The outright deduction by the taxpayer of
1/5 of the cost of the mines, as if it were a "straight line" rate of depreciation, was correctly held by the Tax
Court not to be authorized by the Tax Code.

ACCORDINGLY, the judgment of the Court of Tax Appeals, subject of the appeals in Cases Nos. L-
21551 and L-21557, as modified by the crediting of the losses of P36,722.42 disallowed in 1951 and 1952
to the taxpayer for the year 1953 as directed in paragraph 1 (c) of this decision, is hereby affirmed. The
judgment of the Court of Tax Appeals appealed from in Cases Nos. L-24972 and L-24978 is affirmed in
toto. No costs. So ordered.
G.R. No. L-21570 July 26, 1966

LIMPAN INVESTMENT CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Vicente L. San Luis for petitioner.

Office of the Solicitor General A. A. Alafriz, Assistant Solicitor General F. B. Rosete, Solicitor A. B.
Afurong and Atty. V. G. Saldajeno for respondents.

REYES, J.B.L., J.:

Appeal interposed by petitioner Limpan Investment Corporation against a decision of the Court of Tax
Appeals, in its CTA Case No. 699, holding and ordering it (petitioner) to pay respondent Commissioner of
Internal Revenue the sums of P7,338.00 and P30,502.50, representing deficiency income taxes, plus 50%
surcharge and 1% monthly interest from June 30, 1959 to the date of payment, with cost.

The facts of this case are:

Petitioner, a domestic corporation duly registered since June 21, 1955, is engaged in the business of leasing
real properties. It commenced actual business operations on July 1, 1955. Its principal stockholders are the
spouses Isabelo P. Lim and Purificacion Ceiza de Lim, who own and control ninety-nine per cent (99%)
of its total paid-up capital. Its president and chairman of the board is the same Isabelo P. Lim. 1 wph 1.t

Its real properties consist of several lots and buildings, mostly situated in Manila and in Pasay City, all of
which were acquired from said Isabelo P. Lim and his mother, Vicente Pantangco Vda. de Lim.

Petitioner corporation duly filed its 1956 and 1957 income tax returns, reporting therein net incomes of
P3,287.81 and P11,098.36, respectively, for which it paid the corresponding taxes therefor in the sums of
P657.00 and P2,220.00.

Sometime in 1958 and 1959, the examiners of the Bureau of Internal Revenue conducted an investigation
of petitioner's 1956 and 1957 income tax returns and, in the course thereof, they discovered and
ascertained that petitioner had underdeclared its rental incomes by P20,199.00 and P81,690.00 during these
taxable years and had claimed excessive depreciation of its buildings in the sums of P4,260.00 and
P16,336.00 covering the same period. On the basis of these findings, respondent Commissioner of Internal
Revenue issued its letter-assessment and demand for payment of deficiency income tax and surcharge
against petitioner corporation, computed as follows:

90-AR-C-348-58/56

Net income per audited return P 3,287.81

Add: Unallowable deductions:

Undeclared Rental Receipt

(Sched. A) . . . . . . . . . . . . . . . . . . . . P20,199.00
Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . . . 4,260.00 P24,459.00

Net income per investigation P27,746.00

Tax due thereon P5,549.00

Less: Amount already assessed 657.00
 Balance P4,892.00
Add: 50% Surcharge 2,446.00
DEFICIENCY TAX DUE P7,338.00
90-AR-C-1196-58/57

Net income per audited return P11,098.00

Add: Unallowable deductions:

Undeclared Rental Receipt (Sched. A) . . . . . . . . P81,690.00

Excess Depreciation (Sched. B) . . . . . . . . . . . . . . . 16,338.00 P98,028.00

Net income per investigation P109,126.00

Tax due thereon P22,555.00

Less: Amount already assessed 2,220.00

Balance 20,335.00

Add: 50% Surcharge 10,167.50

DEFICIENCY TAX DUE P30,502.50

Petitioner corporation requested respondent Commissioner of Internal Revenue to reconsider the above
assessment but the latter denied said request and reiterated its original assessment and demand, plus 5%
surcharge and the 1% monthly interest from June 30, 1959 to the date of payment; hence, the corporation
filed its petition for review before the Tax Appeals court, questioning the correctness and validity of the
above assessment of respondent Commissioner of Internal Revenue. It disclaimed having received or
collected the amount of P20,199.00, as unreported rental income for 1956, or any part thereof, reasoning
out that 'the previous owners of the leased building has (have) to collect part of the total rentals in 1956 to
apply to their payment of rental in the land in the amount of P21,630.00" (par. 11, petition). It also denied
having received or collected the amount of P81,690.00, as unreported rental income for 1957, or any part
thereof, explaining that part of said amount totalling P31,380.00 was not declared as income in its 1957 tax
return because its president, Isabelo P. Lim, who collected and received P13,500.00 from certain tenants,
did not turn the same over to petitioner corporation in said year but did so only in 1959; that a certain
tenant (Go Tong) deposited in court his rentals amounting to P10,800.00, over which the corporation had
no actual or constructive control; and that a sub-tenant paid P4,200.00 which ought not be declared as
rental income.

Petitioner likewise alleged in its petition that the rates of depreciation applied by respondent Commissioner
of its buildings in the above assessment are unfair and inaccurate.

Sole witness for petitioner corporation in the Tax Court was its Secretary-Treasurer, Vicente G. Solis, who
admitted that it had omitted to report the sum of P12,100.00 as rental income in its 1956 tax return and also
the sum of P29,350.00 as rental income in its 1957 tax return. However, with respect to the difference
between this omitted income (P12,100.00) and the sum (P20,199.00) found by respondent Commissioner
as undeclared in 1956, petitioner corporation, through the same witness (Solis), tried to establish that it did
not collect or receive the same because, in view of the refusal of some tenants to recognize the new owner,
Isabelo P. Lim and Vicenta Pantangco Vda. de Lim, the former owners, on one hand, and the same Isabelo
P. Lim, as president of petitioner corporation, on the other, had verbally agreed in 1956 to turn over to
petitioner corporation six per cent (6%) of the value of all its properties, computed at P21,630.00, in
exchange for whatever rentals the Lims may collect from the tenants. And, with respect to the difference
between the admittedly undeclared sum of P29,350.00 and that found by respondent Commissioner as
unreported rental income, (P81,690.00) in 1957, the same witness Solis also tried to establish that
petitioner corporation did not receive or collect the same but that its president, Isabelo P. Lim, collected
part thereof and may have reported the same in his own personal income tax return; that same Isabelo P.
Lim collected P13,500.00, which he turned over to petitioner in 1959 only; that a certain tenant (Go Tong
deposited in court his rentals (P10,800.00), over which the corporation had no actual or constructive
control and which were withdrawn only in 1958; and that a sub-tenant paid P4,200.00 which ought not be
declared as rental income in 1957.

With regard to the depreciation which respondent disallowed and deducted from the returns filed by
petitioner, the same witness tried to establish that some of its buildings are old and out of style; hence, they
are entitled to higher rates of depreciation than those adopted by respondent in his assessment.

Isabelo P. Lim was not presented as witness to corroborate the above testimony of Vicente G. Solis.

On the other hand, Plaridel M. Mingoa, one of the BIR examiners who personally conducted the
investigation of the 1956 and 1957 income tax returns of petitioner corporation, testified for the respondent
that he personally interviewed the tenants of petitioner and found that these tenants had been regularly
paying their rentals to the collectors of either petitioner or its president, Isabelo P. Lim, but these payments
were not declared in the corresponding returns; and that in applying rates of depreciation to petitioner's
buildings, he adopted Bulletin "F" of the U.S. Federal Internal Revenue Service.

On the basis of the evidence, the Tax Court upheld respondent Commissioner's assessment and demand for
deficiency income tax which, as above stated in the beginning of this opinion, petitioner has appealed to
this Court.

Petitioner corporation pursues, the same theory advocated in the court below and assigns the following
alleged errors of the trial court in its brief, to wit:

I. The respondent Court erred in holding that the petitioner had an unreported rental income of
P20,199.00 for the year 1956.

II. The respondent Court erred in holding that the petitioner had an unreported rental income of
P81,690.00 for the year 1957.

III. The respondent Court erred in holding that the depreciation in the amount of P20,598.00
claimed by petitioner for the years 1956 and 1957 was excessive.

and prays that the appealed decision be reversed.

This appeal is manifestly unmeritorious. Petitioner having admitted, through its own witness (Vicente G.
Solis), that it had undeclared more than one-half (1/2) of the amount (P12,100.00 out of P20,199.00) found
by the BIR examiners as unreported rental income for the year 1956 and more than one-third (1/3) of the
amount (P29,350.00 out of P81,690.00) ascertained by the same examiners as unreported rental income for
the year 1957, contrary to its original claim to the revenue authorities, it was incumbent upon it to establish
the remainder of its pretensions by clear and convincing evidence, that in the case is lacking.

With respect to the balance, which petitioner denied having unreported in the disputed tax returns, the
excuse that Isabelo P. Lim and Vicenta Pantangco Vda. de Lim retained ownership of the lands and only
later transferred or disposed of the ownership of the buildings existing thereon to petitioner corporation, so
as to justify the alleged verbal agreement whereby they would turn over to petitioner corporation six
percent (6%) of the value of its properties to be applied to the rentals of the land and in exchange for
whatever rentals they may collect from the tenants who refused to recognize the new owner or vendee of
the buildings, is not only unusual but uncorroborated by the alleged transferors, or by any document or
unbiased evidence. Hence, the first assigned error is without merit.
As to the second assigned error, petitioner's denial and explanation of the non-receipt of the remaining
unreported income for 1957 is not substantiated by satisfactory corroboration. As above noted, Isabelo P.
Lim was not presented as witness to confirm accountant Solis nor was his 1957 personal income tax return
submitted in court to establish that the rental income which he allegedly collected and received in 1957
were reported therein.

The withdrawal in 1958 of the deposits in court pertaining to the 1957 rental income is no sufficient
justification for the non-declaration of said income in 1957, since the deposit was resorted to due to the
refusal of petitioner to accept the same, and was not the fault of its tenants; hence, petitioner is deemed to
have constructively received such rentals in 1957. The payment by the sub-tenant in 1957 should have
been reported as rental income in said year, since it is income just the same regardless of its source.

On the third assigned error, suffice it to state that this Court has already held that "depreciation is a
question of fact and is not measured by theoretical yardstick, but should be determined by a consideration
of actual facts", and the findings of the Tax Court in this respect should not be disturbed when not shown
to be arbitrary or in abuse of discretion (Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al.,
L-18282, May 29, 1964), and petitioner has not shown any arbitrariness or abuse of discretion in the part
of the Tax Court in finding that petitioner claimed excessive depreciation in its returns. It appearing that
the Tax Court applied rates of depreciation in accordance with Bulletin "F" of the U.S. Federal Internal
Revenue Service, which this Court pronounced as having strong persuasive effect in this jurisdiction, for
having been the result of scientific studies and observation for a long period in the United States, after
whose Income Tax Law ours is patterned (M. Zamora vs. Collector of internal Revenue & Collector of
Internal Revenue vs. M. Zamora; E. Zamora vs. Collector of Internal Revenue and Collector of Internal
Revenue vs. E. Zamora, Nos. L-15280, L-15290, L-15289 and L-15281, May 31, 1963), the foregoing
error is devoid of merit.

Wherefore, the appealed decision should be, as it is hereby, affirmed. With costs against petitioner-
appellant, Limpan Investment Corporation.
COMMISSIONER OF INTERNAL G.R. No. 134062
REVENUE,
Petitioner, Present:

PUNO, C.J., Chairperson,

SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
GARCIA, JJ.

BANK OF THE PHILIPPINE

ISLANDS,
Respondent. Promulgated:

April 17, 2007

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

DECISION

CORONA, J.:

This is a petition for review on certiorari[1] of a decision[2] of the Court of

Appeals (CA) dated May 29, 1998 in CA-G.R. SP No. 41025 which reversed
and set aside the decision[3] and resolution[4] of the Court of Tax Appeals (CTA)
dated November 16, 1995 and May 27, 1996, respectively, in CTA Case No.
4715.

In two notices dated October 28, 1988, petitioner Commissioner of

Internal Revenue (CIR) assessed respondent Bank of the Philippine Islands
(BPIs) deficiency percentage and documentary stamp taxes for the year 1986 in
the total amount of P129,488,656.63:

1986 Deficiency Percentage Tax

Deficiency percentage tax P 7, 270,892.88

 Add: 25% surcharge 1,817,723.22
20% interest from 1-21-87 to
10-28-88 3,215,825.03
Compromise penalty 15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P12,319,441.13

1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax P93,723,372.40

Add: 25% surcharge 23,430,843.10
Compromise penalty 15,000.00
TOTAL AMOUNT DUE AND COLLECTIBLE P117,169,215.50.[5]

Both notices of assessment contained the following note:

Please be informed that your [percentage and documentary stamp

taxes have] been assessed as shown above. Said assessment has been
based on return (filed by you) (as verified) (made by this Office)
(pending investigation) (after investigation). You are requested to pay
the above amount to this Office or to our Collection Agent in the
Office of the City or Deputy Provincial Treasurer of xxx[6]

In a letter dated December 10, 1988, BPI, through counsel, replied as

follows:
1. Your deficiency assessments are no assessments at all. The
taxpayer is not informed, even in the vaguest terms, why it is being
assessed a deficiency. The very purpose of a deficiency assessment is
to inform taxpayer why he has incurred a deficiency so that he can
make an intelligent decision on whether to pay or to protest the
assessment. This is all the more so when the assessment involves
astronomical amounts, as in this case.

We therefore request that the examiner concerned be required to state,

even in the briefest form, why he believes the taxpayer has a
deficiency documentary and percentage taxes, and as to the
percentage tax, it is important that the taxpayer be informed also as to
what particular percentage tax the assessment refers to.

2. As to the alleged deficiency documentary stamp tax, you are aware

of the compromise forged between your office and the Bankers
Association of the Philippines [BAP] on this issue and
 of BPIs submission of its computations under this compromise. There
is therefore no basis whatsoever for this assessment, assuming it is on
the subject of the BAP compromise. On the other hand, if it relates to
documentary stamp tax on some other issue, we should like to be
informed about what those issues are.

3. As to the alleged deficiency percentage tax, we are completely at a

loss on how such assessment may be protested since your letter does
not even tell the taxpayer what particular percentage tax is involved
and how your examiner arrived at the deficiency. As soon as this is
explained and clarified in a proper letter of assessment, we shall
inform you of the taxpayers decision on whether to pay or protest the
assessment.[7]

On June 27, 1991, BPI received a letter from CIR dated May 8,
1991 stating that:

although in all respects, your letter failed to qualify as a protest under

Revenue Regulations No. 12-85 and therefore not deserving of any
rejoinder by this office as no valid issue was raised against the
validity of our assessment still we obliged to explain the basis of the
assessments.

xxx xxx xxx

this constitutes the final decision of this office on the matter.[8]

On July 6, 1991, BPI requested a reconsideration of the assessments

stated in the CIRs May 8, 1991 letter.[9] This was denied in a letter
dated December 12, 1991, received by BPI on January 21, 1992.[10]

On February 18, 1992, BPI filed a petition for review in the CTA. [11] In a
decision dated November 16, 1995, the CTA dismissed the case for lack of
jurisdiction since the subject assessments had become final
and unappealable. The CTA ruled that BPI failed to protest on time under
Section 270 of the National Internal Revenue Code (NIRC) of 1986 and Section
7 in relation to Section 11 of RA 1125. [12] It denied reconsideration in a
resolution dated May 27, 1996.[13]

On appeal, the CA reversed the tax courts decision and resolution and
remanded the case to the CTA[14] for a decision on the merits.[15] It ruled that
the October 28, 1988 notices were not valid assessments because they did not
inform the taxpayer of the legal and factual bases therefor. It declared that the
proper assessments were those contained in the May 8, 1991 letter which

provided the reasons for the claimed deficiencies.[16] Thus, it held that BPI filed
the petition for review in the CTA on time.[17] The CIR elevated the case to this
Court.

This petition raises the following issues:

1) whether or not the assessments issued to BPI for deficiency

percentage and documentary stamp taxes for 1986 had already

become final and unappealable and
2) whether or not BPI was liable for the said taxes.

The former Section 270[18] (now renumbered as Section 228) of the NIRC
stated:

Sec. 270. Protesting of assessment. When the [CIR] or his

duly authorized representative finds that proper taxes should be
assessed, he shall first notify the taxpayer of his findings. Within a
period to be prescribed by implementing regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to
respond, the [CIR] shall issue an assessment based on his findings.

xxx xxx xxx (emphasis supplied)

WERE THE OCTOBER 28, 1988

NOTICES VALID ASSESSMENTS?

The first issue for our resolution is whether or not the October 28,
1988 notices[19] were valid assessments. If they were not, as held by the CA,
then the correct assessments were in the May 8, 1991 letter, received by BPI
on June 27, 1991. BPI, in its July 6, 1991 letter, seasonably asked for a
reconsideration of the findings which the CIR denied in his December 12,
1991 letter, received by BPI on January 21, 1992. Consequently, the petition for
review filed by BPI in the CTA on February 18, 1992 would be well within the
30-day period provided by law.[20]

The CIR argues that the CA erred in holding that the October 28,
1988 notices were invalid assessments. He asserts that he used BIR Form No.
17.08 (as revised in November 1964) which was designed for the precise
purpose of notifying taxpayers of the assessed amounts due and demanding
payment thereof.[21] He contends that there was no law or jurisprudence then
that required notices to state the reasons for assessing deficiency tax
liabilities.[22]

BPI counters that due process demanded that the facts, data and law upon
which the assessments were based be provided to the taxpayer. It insists that the
NIRC, as worded now (referring to Section 228), specifically provides that:

[t]he taxpayer shall be informed in writing of the law and the facts on which
the assessment is made; otherwise, the assessment shall be void.
According to BPI, this is declaratory of what sound tax procedure is and a
confirmation of what due process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC
provides:

Sec. 228. Protesting of Assessment. When the [CIR] 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:
xxx xxx xxx
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.

xxx xxx xxx (emphasis supplied)

Admittedly, the CIR did not inform BPI in writing of the law and facts on which
the assessments of the deficiency taxes were made. He merely notified BPI of
his findings, consisting only of the computation of the tax liabilities and a
demand for payment thereof within 30 days after receipt.

In merely notifying BPI of his findings, the CIR relied on the provisions of the
former Section 270 prior to its amendment by RA 8424 (also known as the Tax
Reform Act of 1997).[23] In CIR v. Reyes,[24] we held that:

In the present case, Reyes was not informed in writing of the

law and the facts on which the assessment of estate taxes had been
made. She was merely notified of the findings by the CIR, who had
simply relied upon the provisions of former Section 229 prior to its
amendment by [RA] 8424, otherwise known as the Tax Reform Act
of 1997.

First, RA 8424 has already amended the provision of Section

229 on protesting an assessment. The old requirement
of merely notifying the taxpayer of the CIR'sfindings 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 under the old law was no longer sufficient under
the new law.[25] (emphasis supplied; italics in the original)

Accordingly, when the assessments were made pursuant to the former Section
270, the only requirement was for the CIR to notify or inform the taxpayer of
his findings. Nothing in the old law required a written statement to the taxpayer
of the law and facts on which the assessments were based. The Court cannot
read into the law what obviously was not intended by Congress. That would be
judicial legislation, nothing less.

Jurisprudence, on the other hand, simply required that the assessments

contain a computation of tax liabilities, the amount the taxpayer was to pay and
a demand for payment within a prescribed period.[26] Everything considered,
there was no doubt the October 28, 1988 notices sufficiently met the
requirements of a valid assessment under the old law and jurisprudence.

The sentence

[t]he taxpayers shall be informed in writing of the law and the facts
on which the assessment is made; otherwise, the assessment shall be
void

was not in the old Section 270 but was only later on inserted in the renumbered
Section 228 in 1997. Evidently, the legislature saw the need to modify the
former Section 270 by inserting the aforequoted sentence.[27] The fact that the
amendment was necessary showed that, prior to the introduction of the
amendment, the statute had an entirely different meaning.[28]

Contrary to the submission of BPI, the inserted sentence in the

renumbered Section 228 was not an affirmation of what the law required under
the former Section 270. The amendment introduced by RA 8424 was an
innovation and could not be reasonably inferred from the old law. [29] Clearly,
the legislature intended to insert a new provision regarding the form and
substance of assessments issued by the CIR.[30]
In ruling that the October 28, 1988 notices were not valid assessments,
the CA explained:
xxx. Elementary concerns of due process of law should have
prompted the [CIR] to inform [BPI] of the legal and factual basis of
the formers decision to charge the latter for deficiency documentary stamp
and gross receipts taxes.[31]

In other words, the CAs theory was that BPI was deprived of due process
when the CIR failed to inform it in writing of the factual and legal bases of the
assessments even if these were not called for under the old law.

We disagree.

Indeed, the underlying reason for the law was the basic constitutional
requirement that no person shall be deprived of his property without due process
of law.[32] We note, however, what the CTA had to say:
xxx xxx xxx

From the foregoing testimony, it can be safely adduced that not

only was [BPI] given the opportunity to discuss with the [CIR] when
the latter issued the former a Pre-Assessment Notice (which [BPI]
ignored) but that the examiners themselves went to [BPI] and "we
 talk to them and we try to [thresh] out the issues, present evidences as
to what they need." Now, how can [BPI] and/or its counsel honestly
tell this Court that they did not know anything about the assessments?

Not only that. To further buttress the fact that [BPI] indeed
knew beforehand the assessments[,] contrary to the allegations of its
counsel[,] was the testimony of Mr. Jerry Lazaro, Assistant Manager
of the Accounting Department of [BPI]. He testified to the fact that he
prepared worksheets which contain his analysis regarding the
findings of the [CIRs] examiner, Mr. San Pedro and that the same
worksheets were presented to Mr. Carlos Tan, Comptroller of [BPI].

xxx xxx xxx

From all the foregoing discussions, We can now conclude that
[BPI] was indeed aware of the nature and basis of the assessments,
and was given all the opportunity to contest the same but ignored it
despite the notice conspicuously written on the assessments which
states that "this ASSESSMENT becomes final and unappealable if
not protested within 30 days after receipt." Counsel resorted to
dilatory tactics and dangerously played with time. Unfortunately,
such strategy proved fatal to the cause of his client.[33]

The CA never disputed these findings of fact by the CTA:

[T]his Court recognizes that the [CTA], which by the very nature of its
function is dedicated exclusively to the consideration of tax problems, has
necessarily developed an expertise on the subject, and its conclusions will not
be overturned unless there has been an abuse or improvident exercise of
authority. Such findings can only be disturbed on appeal if they are not
supported by substantial evidence or there is a showing of gross error or abuse
on the part of the [CTA].[34]

Under the former Section 270, there were two instances when an

assessment became final and unappealable: (1) when it was not protested within
30 days from receipt and (2) when the adverse decision on the protest was not
appealed to the CTA within 30 days from receipt of the final decision:[35]

Sec. 270. Protesting of assessment.

xxx xxx xxx

 Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation in such form and
manner as may be prescribed by the implementing regulations within
thirty (30) days from receipt of the assessment; otherwise, the
assessment shall become final and unappealable.

If the protest is denied in whole or in part, the individual, association

or corporation adversely affected by the decision on the protest may appeal to
the [CTA] within thirty (30) days from receipt of the said decision; otherwise,
the decision shall become final, executory and demandable.

IMPLICATIONS OF A
VALID ASSESSMENT

Considering that the October 28, 1988 notices were valid assessments,
BPI should have protested the same within 30 days from receipt
thereof. The December 10, 1988 reply it sent to the CIR did not qualify as a
protest since the letter itself stated that [a]s soon as this is explained and
clarified in a proper letter of assessment, we shall inform you of the taxpayers
decision on whether to pay or protest the assessment.[36] Hence, by its own

declaration, BPI did not regard this letter as a protest against the
assessments. As a matter of fact, BPI never deemed this a protest since it did not
even consider the October 28, 1988 notices as valid or proper assessments.

The inevitable conclusion is that BPIs failure to protest the assessments

within the 30-day period provided in the former Section 270 meant that they

became final and unappealable. Thus, the CTA correctly dismissed BPIs appeal
for lack of jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that would reopen the
question of its liability on the merits. [37] Not only that. There arose a
presumption of correctness when BPI failed to protest the assessments:

Tax assessments by tax examiners are presumed correct and

made in good faith. The taxpayer has the duty to prove otherwise. In
the absence of proof of any irregularities in the performance of duties,
an assessment duly made by a Bureau of Internal Revenue examiner
and approved by his superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax assessments.[38]

Even if we considered the December 10, 1988 letter as a protest, BPI

must nevertheless be deemed to have failed to appeal the CIRs final decision
regarding the disputed assessments within the 30-day period provided by
law. The CIR, in his May 8, 1991 response, stated that it was his final decision
on the matter. BPI therefore had 30 days from the time it received the decision
on June 27, 1991 to appeal but it did not. Instead it filed a request for

reconsideration and lodged its appeal in the CTA only on February 18, 1992,
way beyond the reglementary period.BPI must now suffer the repercussions of
its omission. We have already declared that:

the [CIR] 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 [RA
1125], as amended. On the basis of his 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.

The 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 [CIR], 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 [CIR]
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.[39] (emphasis supplied)

Either way (whether or not a protest was made), we cannot absolve BPI

of its liability under the subject tax assessments.

We realize that these assessments (which have been pending for almost

20 years) involve a considerable amount of money. Be that as it may, we cannot

legally presume the existence of something which was never there. The state
will be deprived of the taxes validly due it and the public will suffer if taxpayers

will not be held liable for the proper taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the
government can neither exist nor endure. A principal attribute of sovereignty,
the exercise of taxing power derives its source from the very existence of the
state whose social contract with its citizens obliges it to promote public
interest and common good. The theory behind the exercise of the power to tax
emanates from necessity; without taxes, government cannot fulfill its mandate
of promoting the general welfare and well-being of the people.[40]

WHEREFORE, the petition is hereby GRANTED. The May 29,

1998 decision of the Court of Appeals in CA-G.R. SP No. 41025
is REVERSED and SET ASIDE.
 SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. No. 139786

REVENUE,
Petitioner,

- versus -

CITYTRUST INVESTMENT
PHILS., INC.,
Respondent.
x---------------------------------------------x
ASIANBANK CORPORATION,
Petitioner,

G.R. No. 140857

- versus -

Present:
COMMISSIONER OF
INTERNALREVENUE,
Respondent.
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,

CORONA,

AZCUNA, and

GARCIA, JJ.

Promulgated:

September 27, 2006

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

DECISION

SANDOVAL-GUTIERREZ, J.:

Does the twenty percent (20%) final withholding tax (FWT) on a banks
passive income[1] form part of the taxable gross receipts for the purpose of
computing the five percent (5%) gross receipts tax (GRT)? This is the central
issue in the present two (2) consolidated petitions for review.

In G.R. No. 139786, petitioner Commissioner of Internal Revenue

(Commissioner) assails the Court of Appeals Decision dated August 17, 1999 in
CA-G.R. SP No. 52707[2] affirming the Court of Tax Appeals (CTA)
Decision[3] ordering the refund or issuance of tax credit certificate in favor of
respondent Citytrust Investment Philippines., Inc. (Citytrust). In G.R. No.
140857, petitioner Asianbank Corporation (Asianbank) challenges the Court of
Appeals Decision dated November 22, 1999 in CA-G.R. SP No.
51248[4] reversing the CTA Decision[5] ordering a tax refund in its (Asianbanks)
favor.

A brief review of the taxation laws provides an adequate backdrop for our
subsequent narration of facts.

Under Section 27(D), formerly Section 24(e)(1) of the National Internal

Revenue Code of 1997 (Tax Code), the earnings of banks from
passive income are subject to a 20% FWT,[6] thus:
 (D) Rates of Tax on Certain Passive Incomes

(1) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties. A final tax at the rate of twenty percent (20%) is hereby imposed upon
the amount of interest on currency bank deposit and yield or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements
received by domestic corporation and royalties, derived from sources within the
Philippines: x x x

Apart from the 20% FWT, banks are also subject to the 5% GRT on their gross
receipts, which includes their passive income. Section 121 (formerly Section
119) of the Tax Code reads:

SEC. 121. Tax on banks and Non-bank financial intermediaries.

There shall be collected a tax on gross receipts derived from sources within
the Philippines by all banks and non-bank financial intermediaries in
accordance with the following schedule:

(a) On interest, commissions and discounts from lending activities

as well as income from financial leasing, on the basis of
remaining maturities of instruments from which such receipts
are derived:

Short-term maturity (not in excess of two [2] years) 5%

Medium-term maturity (over two [2] years but not

exceeding four [4] years) 3%

Long-term maturity

(1) Over four (4) years but not exceeding

seven (7) years 1%

(2) Over seven (7) years 0%

(b) On dividends 0%

(c) On royalties, rentals of property, real or personal, profits from

exchange and all other items treated as gross income
under Section 32 of this Code 5%

Provided, however, That in case the maturity period referred to in

paragraph (a) is shortened thru pretermination, then the maturity period shall
be reckoned to end as of the date of pretermination for purposes of classifying
 the transaction as short, medium or long-term and the correct rate of tax shall
be applied accordingly.

Nothing in this Code shall preclude the Commissioner from imposing

the same tax herein provided on persons performing similar banking activities.

I - G.R. No. 139786

Citytrust, respondent, is a domestic corporation engaged in quasi-banking

activities. In 1994, Citytrust reported the amount of P110,788,542.30 as its total
gross receipts and paid the amount of P5,539,427.11 corresponding to its 5%
GRT.

Meanwhile, on January 30, 1996, the CTA, in Asian Bank Corporation v.

Commissioner of Internal Revenue[7] (ASIAN BANK case), ruled that the basis in
computing the 5% GRT is the gross receipts minus the 20% FWT. In other
words, the 20% FWT on a banks passive income does not form part of the
taxable gross receipts.

On July 19, 1996, Citytrust, inspired by the above-mentioned CTA ruling,

filed with the Commissioner a written claim for the tax refund or credit in the
amount of P326,007.01. It alleged that its reported total gross receipts included
the 20% FWT on its passive income amounting to P32,600,701.25. Thus, it
sought to be reimbursed of the 5% GRT it paid on the portion of 20% FWT or
the amount of P326,007.01.

On the same date, Citytrust filed a petition for review with the CTA,
which eventually granted its claim.[8]

On appeal by the Commissioner, the Court of Appeals affirmed the CTA

Decision, citing as main bases Commissioner of Internal Revenue v. Tours
Specialist Inc.[9] and Commissioner of Internal Revenue v. Manila Jockey
Club,[10] holding that monies or receipts that do not redound to the benefit of the
taxpayer are not part of its gross receipts, thus:

Patently, as expostulated by our Supreme Court, monies or receipts

that do not redound to the benefit of the taxpayer are not part of its gross
receipts for the purpose of computing its taxable gross receipts. In Manila
Jockey Club, a portion of the wager fund and the ten-peso contribution,
although actually received by the Club, was not considered as part of its gross
receipts for the purpose of imposing the amusement tax. Similarly, in Tours
Specialists, the room or hotel charges actually received by them from the
foreign travel agency was, likewise, not included in its gross receipts for the
imposition of the 3% contractors tax. In both cases, the fees, bets or hotel
charges, as the case may be, were actually received and held in trust by the
taxpayers. On the other hand, the 20% final tax on the Respondents
passive income was already deducted and withheld by various
withholding agents. Hence, the actual or the exact amount received by the
Respondent, as its passive income in the year 1994, was less the 20% final
tax already withheld by various withholding agents. The various
withholding agents at source were required under section 50 (a), of the
National Internal Revenue Code of 1986, to withhold the 20% final tax on
certain passive income x x x.

Moreover, under Section 51 (g) of the said Code, all taxes withheld
pursuant to the provisions of this Code and its implementing regulations
are considered trust funds and shall be maintained in a separate account
and not commingled with any other funds of the withholding agent.

Accordingly, the 20% final tax withheld against the Respondents

passive income was already remitted to the Bureau of Internal Revenue,
for the corresponding year that the same was actually withheld and
considered final withholding taxes under Section 50 of the same
Code. Indubitably, to include the same to the Respondents gross receipts
for the year 1994 would be to tax twice the passive income derived by
Respondent for the said year, which would constitute double taxation
anathema to our taxation laws.

II - G.R. No. 140857

Asianbank, petitioner, is a domestic corporation also engaged in banking

business. For the taxable quarters ending June 30, 1994 to June 30, 1996,
Asianbank filed and remitted to the Bureau of Internal Revenue (BIR) the 5%
GRT on its total gross receipts.
 On the strength of the January 30, 1996 CTA Decision in the ASIAN
BANK case, Asianbank filed with the Commissioner a claim for refund of the
overpaid GRT amounting to P2,022,485.78.

To toll the running of the two-year prescriptive period for filing of

claims, Asianbank also filed a petition for review with the CTA.

On February 3, 1999, the CTA allowed refund in the reduced amount

of P1,345,743.01,[11] the amount proven by Asianbank. Unsatisfied, the
Commissioner filed with the Court of Appeals a petition for review.

On November 22, 1999, the Court of Appeals reversed the CTA Decision
and ruled in favor of the Commissioner, thus:

It is true that Revenue Regulation No. 12-80 provides that the gross
receipts tax on banks and other financial institutions should be based on all
items of income actually received. Actual receipt here is used in opposition to
mere accrual. Accrued income refers to income already earned but not yet
received. (Rep. v. Lim Tian Teng Sons & Co., 16 SCRA 584).

But receipt may be actual or constructive. Article 531 of the Civil

Code provides that possession is acquired by the material occupation of a
thing or the exercise of a right, or by the fact that it is subject to the action of
one will, or by the proper acts and legal formalities established for acquiring
such right. Moreover, taxation income may be received by the taxpayer
himself or by someone authorized to receive it for him (Art. 532, Civil
Code). The 20% final tax withheld from interest income of banks and
other similar institutions is not income that they have not received; it is
simply withheld from them and paid to the government, for their
benefit. Thus, the 20% income tax withheld from the interest income is, in
fact, money of the taxpayer bank but paid by the payor to the government
in satisfaction of the banks obligation to pay the tax on interest earned. It
is the banks obligation to pay the tax. Hence, the withholding of the said
tax and its payment to the government is for its benefit.

xxx

The case of Collector of Internal Revenue vs. Manila Jockey Club is

inapplicable. In that case, a percentage of the gross receipts to be collected by
the Manila Jockey Club was earmarked by law to be turned over to the Board
on Races and distributed as prizes among owners of winning horses and
 authorized bonus for jockeys. The Manila Jockey Club itself derives no benefit
at all from earmarked percentage. That is why it cannot be considered as part
of its gross receipts.

WHEREFORE, the C.T.As judgment herein appealed from is

hereby REVERSED, and judgment is hereby rendered DISMISSING the
respondents Petition for Review in C.T.A Case No. 5412.

SO ORDERED.

Hence, the present consolidated petitions.

The Commissioners arguments in the two (2) petitions may be synthesized as

follows:

first, there is no law which excludes the 20% FWT from the
taxable gross receipts for the purpose of computing the 5% GRT;

second, the imposition of the 20% FWT on the banks

passive income and the 5% GRT on its taxable gross receipts,
which include the banks passive income, does not constitute double
taxation;

third, the ruling by this Court in Manila Jockey

[12]
Club, cited in the ASIAN BANK case, is not applicable; and

fourth, in the computation of the 5% GRT, the passive

income need not be actually received in order to form part of the
taxable gross receipts.

In its Resolution[13] dated January 17, 2000, this Court adopted as Citytrusts
Comment on the instant petition for review its Memorandum submitted to the
CTA and its Comment submitted to the Court of Appeals. Citytrust contends
therein that: first, Section 4(e) of Revenue Regulations No. 12-80
dated November 7, 1980 provides that the rates of taxes on the gross receipts of
financial institutions shall be based only on all items of income actually
received; and, second, this Courts ruling in Manila Jockey Club[14] is
applicable. Asianbank echoes similar arguments.
We rule in favor of the Commissioner.

The issue of whether the 20% FWT on a banks interest income forms part of the
taxable gross receipts for the purpose of computing the 5% GRT is no longer
novel. This has been previously resolved by this Court in a catena of cases, such
as China Banking Corporation v. Court
[15]
of Appeals, Commissioner of Internal Revenue v. Solidbank
Corporation,[16] Commissioner of Internal Revenue v. Bank of
Commerce,[17] and the latest, Commissioner of Internal Revenue v. Bank of the
Philippine Islands.[18]

The above cases are unanimous in defining gross receipts as the entire
receipts without any deduction. We quote the Courts enlightening
ratiocination in Bank of the Philippines Islands,[19] thus:

The Tax Code does not provide a definition of the term gross
receipts. Accordingly, the term is properly understood in its plain and ordinary
meaning and must be taken to comprise of the entire receipts without any
deduction. We, thus, made the following disquisition in Bank of Commerce:

The word gross must be used in its plain and ordinary

meaning. It is defined as whole, entire, total, without deduction. A
common definition is without deduction. Gross is also defined as taking
in the whole; having no deduction or abatement; whole, total as opposed
to a sum consisting of separate or specified parts. Gross is the antithesis
of net. Indeed, in China Banking Corporation v. Court of Appeals, the Court
defined the term in this wise:

As commonly understood, the term gross receipts means

the entire receipts without any deduction. Deducting any amount
from the gross receipts changes the result, and the meaning, to
net receipts. Any deduction from gross receipts is inconsistent with a
law that mandates a tax on gross receipts, unless the law itself makes
an exception. As explained by the Supreme Court of Pennsylvania in
Commonwealth of Pennsylvania v. Koppers Company, Inc.

Highly refined and technical tax concepts have been

developed by the accountant and legal technician primarily
because of the impact of federal income tax
legislation.However, this is no way should affect or control
the normal usage of words in the construction of our statutes;
and we see nothing that would require us not to include the
proceeds here in question in the gross receipts allocation
unless statutorily such inclusion is prohibited. Under the
 ordinary basic methods of handling accounts, the term
gross receipts, in the absence of any statutory definition of
the term, must be taken to include the whole total gross
receipts without any deductions, x x x. [Citations omitted]
(Emphasis supplied)

Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court
of Missouri held:

The word gross appearing in the term gross receipts, as used

in the ordinance, must have been and was there used as the direct
antithesis of the word net. In its usual and ordinary meaning, gross
receipts of a business is the whole and entire amount of the receipts
without deduction, x x x. On the ordinary, net receipts usually are the
receipts which remain after deductions are made from the gross
amount thereof of the expenses and cost of doing business, including
fixed charges and depreciation. Gross receipts become net receipts
after certain proper deductions are made from the gross. And in the
use of the words gross receipts, the instant ordinance, or course,
precluded plaintiff from first deducting its costs and expenses of
doing business, etc., in arriving at the higher base figure upon which
it must pay the 5% tax under this ordinance. (Emphasis supplied)

xxxxxx

Additionally, we held in Solidbank, to wit:

[W]e note that US cases have persuasive effect in our jurisdiction

because Philippine income tax law is patterned after its US counterpart.

[G]ross receipts with respect to any period means the sum of: (a)
The total amount received or accrued during such period from the
sale, exchange, or other disposition of x x x other property of a kind
which would properly be included in the inventory of the taxpayer if
on hand at the close of the taxable year, or property held by the
taxpayer primarily for sale to customers in the ordinary course of its
trade or business, and (b) The gross income, attributable to a trade or
business, regularly carried on by the taxpayer, received or accrued
during such period x x x.

x x x [B]y gross earnings from operations x x x was intended

all operations x x x including incidental, subordinate, and subsidiary
operations, as well as principal operations.

When we speak of the gross earnings of a person or

corporation, we mean the entire earnings or receipts of such person or
corporation from the business or operation to which we refer.
 From these cases, gross receipts refer to the total, as opposed
to the net income. These are therefore the total receipts before any
deduction for the expenses of management. Websters New
International Dictionary, in fact, defines gross as whole or entire.

In China Banking Corporation,[20] this Court further explained that the

legislative intent to apply the term in its plain and ordinary meaning may be
surmised from a historical perspective of the levy on gross receipts. From the
time the GRT on banks was first imposed in 1946 under Republic Act No.
39[21] and throughout its successive re-enactments,[22] the legislature has not
established a definition of the term gross receipts. Under Revenue Regulations
No. 12-80 and No. 17-84, as well as several numbered rulings, the BIR has
consistently ruled that the term gross receipts does not admit of any
deduction. This interpretation has remained unchanged throughout the various
re-enactments of the present Section 121 of the Tax Code. On the presumption
that the legislature is familiar with the contemporaneous interpretation of a
statute given by the administrative agency tasked to enforce the statute, the
reasonable conclusion is that the legislature has adopted the BIRs
interpretation. In other words, the subsequent re-enactments of the present
Section 121, without changes in the term interpreted by the BIR, confirm that its
interpretation carries out the legislative purpose.

Now, bereft of any laudable statutory basis, Citytrust and Asianbank simply
anchor their argument on Section 4(e) of Revenue Regulations No. 12-80
stating that the rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of income actually
received. They contend that since the 20% FWT is withheld at source and is
paid directly to the government by the entities from which the banks derived the
income, the same cannot be considered actually received, hence, must be
excluded from the taxable gross receipts.

The argument is bereft of merit.

First, Section 4(e) merely recognizes that income may be taxable either at
the time of its actual receipt or its accrual, depending on the accounting
method of the taxpayer.It does not really exclude accrued interest income from
the taxable gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank.Thus, while it is true that Section
4(e) states that the rates of taxes to be imposed on the gross receipts of such
financial institutions shall be based on all items of income actually received, it
goes on to distinguish actual receipt from accrual, i.e., that mere accrual shall
not be considered, but once payment is received in such accrual or in case
of prepayment, then the amount actually received shall be included in the
tax base of such financial institutions.

And second, Revenue Regulations No. 12-80, issued on November 7,

1980, had been superseded by Revenue Regulations No. 17-84 issued
on October 12, 1984. Section 4(e) of Revenue Regulations No. 12-80 provides
that only items of income actually received shall be included in the tax base for
computing the GRT. On the other hand, Section 7(c) of Revenue Regulations
No. 17-84 includes all interest income in computing the GRT, thus:

SECTION 7. Nature and Treatment of Interest on Deposits and Yield

on Deposit Substitutes.

(a) The interest earned on Philippine Currency bank deposits and

yield from deposit substitutes subjected to the withholding taxes
in accordance with these regulations need not be included in the
gross income in computing the depositors/investors income tax
liability in accordance with the provision of Section 29 (b), (c) and
(d) of the National Internal Revenue Code, as amended.

(b) Only interest paid or accrued on bank deposits, or yield from

deposit substitutes declared for purposes of imposing the
withholding taxes in accordance with these regulations shall be
allowed as interest expense deductible for purposes of computing
taxable net income of the payor.

(c) If the recipient of the above-mentioned items of income are

financial institutions, the same shall be included as part of the
tax base upon which the gross receipt tax is imposed.

Revenue Regulations No. 17-84 categorically states that if the recipient of

the above-mentioned items of income are financial institutions, the same shall
be included as part of the tax base upon which the gross receipt tax is
imposed. There is, therefore, an implied repeal of Section 4(e). There exists a
disparity between Section 4(e) which imposes the GRT only on all items
of income actually received (as opposed to their mere accrual) and Section 7(c)
which includes all interest income (whether actual or accrued) in computing the
GRT. As held by this Court in Commissioner of Internal Revenue v. Solidbank
Corporation,[23] the exception having been eliminated, the clear intent is that
the later R.R. No. 17-84 includes the exception within the scope of the
general rule. Clearly, then, the current Revenue Regulations require interest
income, whether actually received or merely accrued, to form part of the banks
taxable gross receipts.[24]

Moreover, this Court, in Bank of Commerce,[25] settled the matter by

holding that actual receipt may either be physical receipt or constructive
receipt, thus:
Actual receipt of interest income is not limited to physical
receipt. Actual receipt may either be physical receipt or constructive
receipt. When the depositary bank withholds the final tax to pay the tax
liability of the lending bank, there is prior to the withholding a
constructive receipt by the lending bank of the amount withheld. From the
amount constructively received by the lending bank, the depositary bank
deducts the final withholding tax and remits it to the government for the
account of the lending bank. Thus, the interest income actually received by the
lending bank, both physically and constructively, is the net interest plus the
amount withheld as final tax.

The concept of a withholding tax on income obviously and

necessarily implies that the amount of the tax withheld comes from the income
earned by the taxpayer. Since the amount of the tax withheld constitute
income earned by the taxpayer, then that amount manifestly forms part of the
taxpayers gross receipts. Because the amount withheld belongs to the
taxpayer, he can transfer its ownership to the government in payment of his
tax liability. The amount withheld indubitably comes from the income of the
taxpayer, and thus forms part of his gross receipts.

Corollarily, the Commissioner contends that the imposition of the 20%

FWT and 5% GRT does not constitute double taxation.

We agree.
Double taxation means taxing for the same tax period the same thing or
activity twice, when it should be taxed but once, for the same purpose and with
the same kind of character of tax.[26] This is not the situation in the case at
bar. The GRT is a percentage tax under Title V of the Tax Code ([Section 121],
Other Percentage Taxes), while the FWT is an income tax under Title II of the
Code (Tax on Income). The two concepts are different from each
other. In Solidbank Corporation,[27] this Court defined that a percentage tax is a
national tax measured by a certain percentage of the gross selling price or gross
value in money of goods sold, bartered or imported; or of the gross receipts or
earnings derived by any person engaged in the sale of services. It is not subject
to withholding. An income tax, on the other hand, is a national tax imposed on
the net or the gross income realized in a taxable year. It is subject to
withholding. Thus, there can be no double taxation here as the Tax Code
imposes two different kinds of taxes.

Now, both Asianbank and Citytrust rely on Manila Jockey Club[28] in

support of their positions. We are not convinced. In said case, Manila Jockey
Club paid amusement tax on its commission in the total amount of bets called
wager funds from the period November 1946 to October 1950. But such
payment did not include the 5 % of the funds which went to the Board on Races
and to the owners of horses and jockeys. We ruled that the gross receipts of the
Manila Jockey Club should not include the 5 % because although delivered to
the Club, such money has been especially earmarked by law or regulation for
other persons.

The Manila Jockey Club[29] does not apply to the cases at bar because
what happened there is earmarking and not withholding. Earmarking is not the
same as withholding.Amounts earmarked do not form part of gross receipts
because these are by law or regulation reserved for some person other than the
taxpayer, although delivered or received. On the contrary, amounts withheld
form part of gross receipts because these are in constructive possession and not
subject to any reservation, the withholding agent being merely a conduit in the
collection process.[30] The distinction was explained in Solidbank, thus:

The Manila Jockey Club had to deliver to the Board on Races, horse
owners and jockeys amounts that never became the property of the race track
(Manila Jockey Club merely held that these amounts were held in trust and did
not form part of gross receipts). Unlike these amounts, the interest income
that had been withheld for the government became property of the
financial institutions upon constructive possession thereof. Possession was
indeed acquired, since it was ratified by the financial institutions in whose
name the act of possession had been executed. The money indeed
belonged to the taxpayers; merely holding it in trust was not enough (A
trustee does not own money received in trust.) It is a basic concept in
taxation that such money does not constitute taxable income to the trustee
[China Banking Corp. v. Court of Appeals, supra, p. 27]).

The government subsequently becomes the owner of the money

when the financial institutions pay the FWT to extinguish their obligation
to the government. As this Court has held before, this is the consideration
for the transfer of ownership of the FWT from these institutions to the
government (Ibid., p. 26). It is ownership that determines whether interest
income forms part of taxable gross receipts (Ibid., p. 27). Being originally
owned by these financial institutions as part of their interest income, the
FWT should form part of their taxable gross receipts.
 In fine, let it be stressed that tax exemptions are highly disfavored. It is a
governing principle in taxation that tax exemptions are to be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority and should be granted only by clear and unmistakable terms.

WHEREFORE, in G.R. No. 139786, we GRANT the petition of the

Commissioner of Internal Revenue and REVERSE the Decision of the Court of
Appeals dated August 17, 1999 in CA-G.R. SP No. 52707.

In G.R. No. 140857, we DENY the petition of Asianbank Corporation

and AFFIRM in toto the Decision of the Court of Appeals in CA-G.R. SP No.
51248. Costs against petitioner.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. B.F.
GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL
TIRE CO., INC.) and THE COURT OF APPEALS, respondents.

DECISION
PANGANIBAN, J.:

Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of
Internal Revenue (BIR) still assess a taxpayer even after the latter has already paid the tax
due, on the ground that the previous assessment was insufficient or based on a false return?

The Case

This is the main question raised before us in this Petition for Review
on Certiorari assailing the Decision[1] dated February 14, 1992, promulgated by the Court of
Appeals[2] in CA-GR SP No. 25100.The assailed Decision reversed the Court of Tax Appeals
(CTA)[3] which upheld the BIR commissioners assessments made beyond the five-year statute
of limitations.

The Facts

The facts are undisputed.[4] Private Respondent BF Goodrich Phils., Inc. (now Sime
Darby International Tire Co. Inc.), was an American-owned and controlled corporation
previous to July 3, 1974. As a condition for approving the manufacture by private respondent
of tires and other rubber products, the Central Bank of the Philippines required that it should
develop a rubber plantation. In compliance with this requirement, private respondent
purchased from the Philippine government in 1961, under the Public Land Act and the Parity
Amendment to the 1935 Constitution, certain parcels of land located in Tumajubong, Basilan,
and there developed a rubber plantation.
More than a decade later, on August 2, 1973, the justice secretary rendered an opinion
stating that, upon the expiration of the Parity Amendment on July 3, 1974, the ownership
rights of Americans over public agricultural lands, including the right to dispose or sell their
real estate, would be lost. On the basis of this Opinion, private respondent sold to Siltown
Realty Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in
installments. In accord with the terms of the sale, Siltown Realty Philippines, Inc. leased the
said parcels of land to private respondent for a period of 25 years, with an extension of
another 25 years at the latters option.
Based on the BIRs Letter of Authority No. 10115 dated April 14, 1975, the books and
accounts of private respondent were examined for the purpose of determining its tax liability
for taxable year 1974.The examination resulted in the April 23, 1975 assessment of private
respondent for deficiency income tax in the amount of P6,005.35, which it duly paid.
Subsequently the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR
and Memorandum Authority Reference No. 749157 for the purpose of examining Siltowns
business, income and tax liabilities. On the basis of this examination, the BIR commissioner
issued against private respondent on October 10, 1980, an assessment for deficiency in
donors tax in the amount of P1,020,850, in relation to the previously mentioned sale of its
Basilan landholdings to Siltown. Apparently, the BIR deemed the consideration for the sale
insufficient, and the difference between the fair market value and the actual purchase price a
taxable donation.
In a letter dated November 24, 1980, private respondent contested this assessment. On
April 9, 1981, it received another assessment dated March 16, 1981, which increased
to P1,092,949 the amount demanded for the alleged deficiency donors tax, surcharge, interest
and compromise penalty.
Private respondent appealed the correctness and the legality of these last two assessments
to the CTA. After trial in due course, the CTA rendered its Decision dated March 29, 1991,
the dispositive portion of which reads as follows:

WHEREFORE, the decision of the Commissioner of Internal Revenue assessing

petitioner deficiency gift tax is MODIFIED and petitioner is ordered to pay the
amount of P1,311,179.01 plus 10% surcharge and 20% annual interest from March
16, 1981 until fully paid provided that the maximum amount that may be collected
as interest on delinquency shall in no case exceed an amount corresponding to a
period of three years pursuant to Section 130(b) (1) and (c) of the 1977 Tax Code,
as amended by P.D. No. 1705, which took effect on August 1, 1980.

SO ORDERED.[5]

Undaunted, private respondent elevated the matter to the Court of Appeals, which
reversed the CTA, as follows:

What is involved here is not a first assessment; nor is it one within the 5-year
period stated in Section 331 above. Since what is involved in this case is a multiple
assessment beyond the five-year period, the assessment must be based on the
grounds provided in Section 337, and not on Section 15 of the 1974 Tax
Code. Section 337 utilizes the very specific terms fraud,
irregularity, and mistake. Falsity does not appear to be included in this
enumeration. Falsity suffices for an assessment, which is a first assessment made
within the five-year period. When it is a subsequent assessment made beyond the
five-year period, then, it may be validly justified only by fraud, irregularity and
mistake on the part of the taxpayer.[6]

Hence, this Petition for Review under Rule 45 of the Rules of Court.[7]

The Issues

Before us, petitioner raises the following issues:

I
Whether or not petitioners right to assess herein deficiency donors tax has indeed
prescribed as ruled by public respondent Court of Appeals

II

Whether or not the herein deficiency donors tax assessment for 1974 is valid and in
accordance with law

Prescription is the crucial issue in the resolution of this case.

The Courts Ruling

The petition has no merit.

Main Issue: Prescription

The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue
of prescription, because its ruling was based on factual findings that should have been left
undisturbed on appeal, in the absence of any showing that it had been tainted with gross error
or grave abuse of discretion.[8] The Court is not persuaded.
True, the factual findings of the CTA are generally not disturbed on appeal when
supported by substantial evidence and in the absence of gross error or grave abuse of
discretion. However, the CTAs application of the law to the facts of this controversy is an
altogether different matter, for it involves a legal question. There is a question of law when
the issue is the application of the law to a given set of facts. On the other hand, a question of
fact involves the truth or falsehood of alleged facts.[9] In the present case, the Court of
Appeals ruled not on the truth or falsity of the facts found by the CTA, but on the latters
application of the law on prescription.
Section 331 of the National Internal Revenue Code provides:

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 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.

Applying this provision of law to the facts at hand, it is clear that the October 16, 1980
and the March 1981 assessments were issued by the BIR beyond the five-year statute of
limitations. The Court has thoroughly studied the records of this case and found no basis to
disregard the five-year period of prescription. As succinctly pronounced by the Court of
Appeals:
The subsequent assessment made by the respondent Commissioner on October 10,
1980, modified by that of March 16, 1981, violates the law. Involved in this
petition is the income of the petitioner for the year 1974, the returns for which
were required to be filed on or before April 15 of the succeeding year. The returns
for the year 1974 were duly filed by the petitioner, and assessment of taxes due for
such year -- including that on the transfer of properties on June 21, 1974 -- was
made on April 13, 1975 and acknowledged by Letter of Confirmation No. 101155
terminating the examination on this subject. The subsequent assessment of October
10, 1980 modified, by that of March 16, 1981, was made beyond the period
expressly set in Section 331 of the National Intenal Revenue Code xxx.[10]

Petitioner relies on the CTA ruling, the salient portion of which reads:

Falsity is what we have here, and for that matter, we hasten to add that the second
assessment (March 16, 1981) of the Commissioner was well-advised having been
made in contemplation of his power under Section 15 of the 1974 Code (now
Section 16, of NIRC) to assess the proper tax on the best evidence obtainable when
there is reason to believe that a report of a taxpayer is false, incomplete or
erroneous.More, when there is falsity with intent to evade tax as in this case, the
ordinary period of limitation upon assessment and collection does not apply so that
contrary to the averment of petitioner, the right to assess respondent has not
prescribed.

What is the considered falsity? The transfer through sales of the parcels of land in
Tumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum
of P500,000.00 only whereas said lands had been sworn to under Presidential
Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475, 467
+ P207,700) (see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR
Record).[11]

For the purpose of safeguarding taxpayers from any unreasonable examination,

investigation or assessment, our tax law provides a statute of limitations in the collection of
taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed
in order to afford such protection.[12] As a corollary, the exceptions to the law on prescription
should perforce be strictly construed.
Section 15 of the NIRC, on the other hand, provides that [w]hen a report required by law
as a basis for the assessment of any national internal revenue tax shall not be forthcoming
within the time fixed by law or regulation, or when there is reason to believe that any such
report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess
the proper tax on the best evidence obtainable.Clearly, Section 15 does not provide an
exception to the statute of limitations on the issuance of an assessment, by allowing the initial
assessment to be made on the basis of the best evidence available. Having made its initial
assessment in the manner prescribed, the commissioner could not have been authorized to
issue, beyond the five-year prescriptive period, the second and the third assessments under
consideration before us.
 Nor is petitioners claim of falsity sufficient to take the questioned assessments out of the
ambit of the statute of limitations. The relevant part of then Section 332 of the NIRC, which
enumerates the exceptions to the period of prescription, provides:

SEC. 332. Exceptions as to period of limitation of assessment and collection of

taxes. -- (a) In the case of a false or fraudulent return with intent to evade a tax or
of a failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the falsity, fraud, or omission: xxx.

Petitioner insists that private respondent committed falsity when it sold the property for a
price lesser than its declared fair market value. This fact alone did not constitute a false return
which contains wrong information due to mistake, carelessness or ignorance.[13] It is possible
that real property may be sold for less than adequate consideration for a bona fide business
purpose; in such event, the sale remains an arms length transaction. In the present case, the
private respondent was compelled to sell the property even at a price less than its market
value, because it would have lost all ownership rights over it upon the expiration of the parity
amendment. In other words, private respondent was attempting to minimize its losses. At the
same time, it was able to lease the property for 25 years, renewable for another 25. This can
be regarded as another consideration on the price.
Furthermore, the fact that private respondent sold its real property for a price less than its
declared fair market value did not by itself justify a finding of false return. Indeed, private
respondent declared the sale in its 1974 return submitted to the BIR.[14] Within the five-year
prescriptive period, the BIR could have issued the questioned assessment, because the
declared fair market value of said property was of public record. This it did not do, however,
during all those five years. Moreover, the BIR failed to prove that respondent's 1974 return
had been filed fraudulently. Equally. significant was its failure to prove respondent's intent to
evade the payment of the correct amount of tax.
Ineludibly, the BIR failed to show that private respondent's 1974 return was filed
fraudulently with intent to evade the payment of the correct amount of tax.[15] Moreover, even
though a donor's tax, which is defined as "a tax on the privilege of transmitting one's property
or property rights to another or others without adequate and full valuable consideration,"[16] is
different from capital gains tax, a tax on the gain from the sale of the taxpayer's property
forming part of capital assets,[17] the tax return filed by private respondent to report its income
for the year 1974 was sufficient compliance with the legal requirement to file a return. In
other words, the fact that the sale transaction may have partly resulted in a donation does not
change the fact that private respondent already reported its income for 1974 by filing an
income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent
return with the intent to evade tax, or that it had failed to file a return at all, the period for
assessments has obviously prescribed. Such instances of negligence or oversight on the part
of the BIR cannot prejudice taxpayers, considering that the prescriptive period was precisely
intended to give them peace of mind.
Based on the foregoing, a discussion of the validity and legality of the assailed
assessments has become moot and unnecessary.
 WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the
Court of Appeals is AFFIRMED. No costs.
SO ORDERED.
G.R. No. 106999 June 20, 1996

PHILIPPINE HOME ASSURANCE CORPORATION, petitioner,

vs.
COURT OF APPEALS and EASTERN SHIPPING LINES, INC., respondents.

KAPUNAN, J.:p

Eastern Shipping Lines, Inc. (ESLI) loaded on board SS Eastern Explorer in Kobe, Japan, the following
shipment for carriage to Manila and Cebu, freight pre-paid and in good order and condition, viz: (a) two (2)
boxes internal combustion engine parts, consigned to William Lines, Inc. under Bill of Lading No. 042283;
(b) ten (l0) metric ton. (334 bags) ammonium chloride, consigned to Orca's Company under Bill of Lading
No. KCE-I2; (c) two hundred (200) bags Glue 300, consigned to Pan Oriental Match Company under Bill
of Lading No. KCE-8; and (d) garments, consigned to Ding Velayo under Bills of Lading Nos. KMA-73
and KMA-74.

While the vessel was off Okinawa, Japan, a small flame was detected on the acetylene cylinder located in
the accommodation area near the engine room on the main deck level. As the crew was trying to extinguish
the fire, the acetylene cylinder suddenly exploded sending a flash of flame throughout the accommodation
area, thus causing death and severe injuries to the crew and instantly setting fire to the whole
superstructure of the vessel. The incident forced the master and the crew to abandon the ship.

Thereafter, SS Eastern Explorer was found to be a constructive total loss and its voyage was declared
abandoned.

Several hours later, a tugboat under the control of Fukuda Salvage Co. arrived near the vessel and
commenced to tow the vessel for the port of Naha, Japan.

Fire fighting operations were again conducted at the said port. After the fire was extinguished, the cargoes
which were saved were loaded to another vessel for delivery to their original ports of destination. ESLI
charged the consignees several amounts corresponding to additional freight and salvage charges, as
follows: (a) for the goods covered by Bill of Lading No. 042283, ESLI charged the consignee the sum of
P1,927.65, representing salvage charges assessed against the goods; (b) for the goods covered by Bill of
Lading No. KCE-12, ESLI charged the consignee the sum of P2,980.64 for additional freight and P826.14
for salvage charges against the goods; (c) for the goods covered by Bill of Lading No. KCE-8, ESLI
charged the consignee the sum of P3,292.26 for additional freight and P4,130.68 for salvage charges
against the goods; and
(d) for the goods under Bills of Lading Nos. KMA-73 and KMA-74, ESLI charged the consignee the sum
of P8,337.06 for salvage charges against the goods.

The charges were all paid by Philippine Home Assurance Corporation (PHAC) under protest for and in
behalf of the consignees.

PHAC, as subrogee of the consignees, thereafter filed a complaint before the Regional Trial Court of
Manila, Branch 39, against ESLI to recover the sum paid under protest on the ground that the same were
actually damages directly brought about by the fault, negligence, illegal act and/or breach of contract of
ESLI.

In its answer, ESLI contended that it exercised the diligence required by law in the handling, custody and
carriage of the shipment; that the fire was caused by an unforeseen event; that the additional freight
 and that salvage charges are
charges are due and demandable pursuant to the Bill of Lading; 1
properly collectible under Act No. 2616, known as the Salvage Law.
The trial court dismissed PHAC's complaint and ruled in favor of ESLI ratiocinating thus:

The question to be resolved is whether or not the fire on the vessel which was caused by
the explosion of an acetylene cylinder loaded on the same was the fault or negligence of
the defendant.

Evidence has been presented that the SS "Eastern Explorer" was a seaworthy vessel
(Deposition of Jumpei Maeda, October 23, 1980, p. 3) and before the ship loaded the
Acetylene Cylinder No. NCW 875, the same has been tested, checked and examined and
was certified to have complied with the required safety measures and standards
(Deposition of Senjei Hayashi, October 23, 1980, pp. 2-3). When the fire was detected by
the crew, fire fighting operations was immediately conducted but due to the explosion of
the acetylene cylinder, the crew were unable to contain the fire and had to abandon the
ship to save their lives and were saved from drowning by passing vessels in the vicinity.
The burning of the vessel rendering it a constructive total loss and incapable of pursuing
its voyage to the Philippines was, therefore, not the fault or negligence of defendant but a
natural disaster or calamity which nobody would like to happen. The salvage operations
conducted by Fukuda Salvage Company (Exhibits "4-A" and "6-A") was perfectly a legal
operation and charges made on the goods recovered were legitimate charges.

Act No. 2616, otherwise known as the Salvage Law, is thus applicable to
the case at bar. Section 1 of Act No. 2616 states:

Sec 1. When in case of shipwreck, the vessel or its

cargo shall be beyond the control of the crew, or shall
have been abandoned by them, and picked up and
conveyed to a safe place by other persons, the latter
shall be entitled to a reward for the salvage.

Those who, not being included in the above paragraph,

assist in saving a vessel or its cargo from shipwreck,
shall be entitled to like reward.

In relation to the above provision, the Supreme Court has ruled in

Erlanger & Galinger v. Swedish East Asiatic Co., Ltd., 34 Phil. 178, that
three elements are necessary to a valid salvage claim, namely (a)a
marine peril (b) service voluntarily rendered when not required as an
existing duty or from a special contract and (c) success in whole or in
part, or that the service rendered contributed to such success.

The above elements are all present in the instant case. Salvage charges
may thus be assessed on the cargoes saved from the vessel. As provided
for in Section 13 of the Salvage Law, "The expenses of salvage, as well
as the reward for salvage or assistance, shall be a charge on the things
salvaged or their value." In Manila Railroad Co. v. Macondray Co., 37
Phil. 583, it was also held that "when a ship and its cargo are saved
together, the salvage allowance should be charged against the ship and
cargo in the proportion of their respective values, the same as in a case
of general average . . ." Thus, the "compensation to be paid by the owner
of the cargo is in proportion to the value of the vessel and the value of
the cargo saved." (Atlantic Gulf and Pacific Co. v. Uchida Kisen Kaisha,
42 Phil. 321). (Memorandum for Defendant, Records, pp. 212-213).
 With respect to the additional freight charged by defendant from the consignees of the
goods, the same are also validly demandable.

As provided by the Civil Code:

Art. 1174. Except in cases expressly specified by law, or when it is

otherwise declared by stipulation, or when the nature of the obligation
require the assumption of risk, no person shall be responsible for those
events which could not be foreseen, or which though foreseen, were
inevitable.

Art 1266. The debtor in obligations to do shall also be released when the
prestation becomes legally or physically impossible without the fault of
the obligor."

The burning of "EASTERN EXPLORER" while off Okinawa rendered it physically

impossible for defendant to comply with its obligation of delivering the goods to their
port of destination pursuant to the contract of carriage. Under Article 1266 of the Civil
Code, the physical impossibility of the prestation extinguished defendant's obligation..

It is but legal and equitable for the defendant therefore, to demand additional freight from
the consignees for forwarding the goods from Naha, Japan to Manila and Cebu City on
board another vessel, the "EASTERN MARS." This finds support under Article 844 of
the Code of Commerce which provides as follows:

Art. 844. A captain who may have taken on board the goods saved from
the wreck shall continue his course to the port of destination; and on
arrival should deposit the same, with judicial intervention at the disposal
of their legitimate owners. . . .

The owners of the cargo shall defray all the expenses of this arrival as
well as the payment of the freight which, after taking into consideration
the circumstances of the case, may be fixed by agreement or by a
judicial decision.

Furthermore, the terms and conditions of the Bill of Lading authorize the imposition of
additional freight charges in case of forced interruption or abandonment of the voyage. At
the dorsal portion of the Bills of Lading issued to the consignees is this stipulation:

12. All storage, transshipment, forwarding or other disposition of cargo

at or from a port of distress or other place where there has been a forced
interruption or abandonment of the voyage shall be at the expense of the
owner, shipper, consignee of the goods or the holder of this bill of lading
who shall be jointly and severally liable for all freight charges and
expenses of every kind whatsoever, whether payable in advance or not
that may be incurred by the cargo in addition to the ordinary freight,
whether the service be performed by the named carrying vessel or by
carrier's other vessels or by strangers. All such expenses and charges
shall be due and payable day by day immediately when they are
incurred.

The bill of lading is a contract and the parties are bound by its terms (Gov't of the
Philippine Islands vs. Ynchausti and Co., 40 Phil. 219). The provision quoted is binding
upon the consignee.
 Defendant therefore, can validly require payment of additional freight from the
consignee. Plaintiff can not thus recover the additional freight paid by the consignee to
defendant. (Memorandum for Defendant, Record, pp. 215-216). 2

On appeal to the Court of Appeals, respondent court affirmed the trial court's findings and
conclusions, 3 hence, the present petition for review before this Court on the following
errors:
I. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL
THE TRIAL COURT'S FINDINGS THAT THE BURNING OF THE SS "EASTERN
EXPLORER", RENDERING ET A CONSTRUCTIVE TOTAL LOSS, IS A NATURAL
DISASTER OR CALAMITY WHICH NOBODY WOULD LIKE TO HAPPEN,
DESPITE EXISTING JURISPRUDENCE TO THE CONTRARY.

II. THE RESPONDENT COURT ARBITRARILY RULED THAT THE BURNING OF

THE SS "EASTERN EXPLORER" WAS NOT THE FAULT AND NEGLIGENCE OF
RESPONDENT EASTERN SHIPPING LINES.

III. THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION

IN RULING THAT DEFENDANT HAD EXERCISED THE EXTRAORDINARY
DILIGENCE IN THE VIGILANCE OVER THE GOODS AS REQUIRED BY LAW.

IV. THE RESPONDENT COURT ARBITRARILY RULED THAT THE MARINE

NOTE OF PROTEST AND STATEMENT OF FACTS ISSUED BY THE VESSEL'S
MASTER ARE NOT HEARSAY DESPITE THE FACT THAT THE VESSEL'S
MASTER, CAPT. LICAYLICAY WAS NOT PRESENTED COURT, WITHOUT
EXPLANATION WHATSOEVER FOR HIS NON-PRESENTATION, THUS,
PETITIONER WAS DEPRIVED OF ITS RIGHT TO CROSS- EXAMINE THE
AUTHOR THEREOF.

V. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL

THE TRIAL COURT'S CONCLUSION THAT THE EXPENSES OR AVERAGES
INCURRED IN SAVING THE CARGO CONSTITUTE GENERAL AVERAGE.

VI. THE RESPONDENT COURT ERRONEOUSLY ADOPTED THE TRIAL

COURT'S RULING THAT PETITIONER WAS LIABLE TO RESPONDENT
CARRIER FOR ADDITIONAL FREIGHT AND SALVAGE CHARGES. 4

It is quite evident that the foregoing assignment of errors challenges the findings of fact and the
appreciation of evidence made by the trial court and later affirmed by respondent court. While it is a well-
settled rule that only questions of law may be raised in a petition for review under Rule 45 of the Rules of
Court, it is equally well-settled that the same admits of the following exceptions, namely: (a) when the
conclusion is a finding grounded entirely on speculation, surmises or conjectures; (b) when the inference
made is manifestly mistaken, absurd or impossible; (c) where there is a grave abuse of discretion; (d) when
the judgment is based on a misapprehension of facts; (e) when the findings of fact are conflicting; (f) when
the Court of Appeals, in making its findings, went beyond the issues of the case and the same is contrary to
the admissions of both appellant and appellee; (g) when the findings of the Court of Appeals are contrary
to those of the trial court; (h) when the findings of fact are conclusions without citation of specific
evidence on which they are based;
(i) when the facts set forth in the petition as well as in the petitioners' main and reply briefs are not
disputed by the respondents; and (j) when the finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by the evidence on record. 5 Thus, if there is a
showing, as in the instant case, that the findings complained of are totally devoid
of support in the records, or that they are so glaringly erroneous as to constitute
grave abuse of discretion, the same may be properly reviewed and evaluated by
this Court.
It is worthy to note at the outset that the goods subject of the present controversy were neither lost nor
damaged in transit by the fire that razed the carrier. In fact, the said goods were all delivered to the
consignees, even if the transshipment took longer than necessary. What is at issue therefore is not whether
or not the carrier is liable for the loss, damage, or deterioration of the goods transported by them but who,
among the carrier, consignee or insurer of the goods, is liable for the additional charges or expenses
incurred by the owner of the ship in the salvage operations and in the transshipment of the goods via a
different carrier.

In absolving respondent carrier of any liability, respondent Court of Appeals sustained the trial court's
finding that the fire that gutted the ship was a natural disaster or calamity. Petitioner takes exception to this
conclusion and we agree.

In our jurisprudence, fire may not be considered a natural disaster or calamity since it almost always arises
from some act of man or by human means.

It cannot be an act of God unless caused by lightning or a natural disaster or casualty not attributable to
human agency. 6

In the case at bar, it is not disputed that a small flame was detected on the acetylene cylinder and that by
reason thereof, the same exploded despite efforts to extinguish the fire. Neither is there any doubt that the
acetylene cylinder, obviously fully loaded, was stored in the accommodation area near the engine room
and not in a storage area considerably far, and in a safe distance, from the engine room. Moreover, there
was no showing, and none was alleged by the parties, that the fire was caused by a natural disaster or
calamity not attributable to human agency. On the contrary, there is strong evidence indicating that the
acetylene cylinder caught fire because of the fault and negligence of respondent ESLI, its captain and its
crew.

First, the acetylene cylinder which was fully loaded should not have been stored in the accommodation
area near the engine room where the heat generated therefrom could cause the acetylene cylinder to
explode by reason of spontaneous combustion. Respondent ESLI should have easily foreseen that the
acetylene cylinder, containing highly inflammable material was in real danger of exploding because it was
stored in close proximity to the engine room.

Second, respondent ESLI should have known that by storing the acetylene cylinder in the accommodation
area supposed to be reserved for passengers, it unnecessarily exposed its passengers to grave danger and
injury. Curious passengers, ignorant of the danger the tank might have on humans and property, could have
handled the same or could have lighted and smoked cigarettes while repairing in the accommodation area.

Third, the fact that the acetylene cylinder was checked, tested and examined and subsequently certified as
having complied with the safety measures and standards by qualified experts 7 before it was loaded
in the vessel only shows to a great extent that negligence was present in the
handling of the acetylene cylinder after it was loaded and while it was on board the
ship. Indeed, had the respondent and its agents not been negligent in storing the
acetylene cylinder near the engine room, then the same would not have leaked and
exploded during the voyage.
Verily, there is no merit in the finding of the trial court to which respondent court erroneously agreed that
the fire was not the fault or negligence of respondent but a natural disaster or calamity. The records are
simply wanting in this regard.
Anent petitioner's objection to the admissibility of Exhibits "4'' and ''5", the Statement of Facts and the
Marine Note of Protest issued by Captain Tiburcio A. Licaylicay, we find the same impressed with merit
because said documents are hearsay evidence. Capt. Licaylicay, Master of S.S. Eastern Explorer who
issued the said documents, was not presented in court to testify to the truth of the facts he stated therein;
instead, respondent ESLI presented Junpei Maeda, its Branch Manager in Tokyo and Yokohama, Japan,
who evidently had no personal knowledge of the facts stated in the documents at issue. It is clear from
Section 36, Rule 130 of the Rules of Court that any evidence, whether oral or documentary, is hearsay if its
probative value is not based on the personal knowledge of the witness but on the knowledge of some other
person not on the witness stand. Consequently, hearsay evidence, whether objected to or not, has no
probative value unless the proponent can show that the evidence falls within the exceptions to the hearsay
evidence rule. 8 It is excluded because the party against whom it is presented is
deprived of his right and opportunity to cross-examine the persons to whom the
statements or writings are attributed.
On the issue of whether or not respondent court committed an error in concluding that the expenses
incurred in saving the cargo are considered general average, we rule in the affirmative. As a rule, general
or gross averages include all damages and expenses which are deliberately caused in order to save the
vessel, its cargo, or both at the same time, from a real and known risk 9 While the instant case may
technically fall within the purview of the said provision, the formalities prescribed
under Articles 813 10 and 814 11 of the Code of Commerce in order to incur the
expenses and cause the damage corresponding to gross average were not complied
with. Consequently, respondent ESLI's claim for contribution from the consignees
of the cargo at the time of the occurrence of the average turns to naught.
Prescinding from the foregoing premises, it indubitably follows that the cargo consignees cannot be made
liable to respondent carrier for additional freight and salvage charges. Consequently, respondent carrier
must refund to herein petitioner the amount it paid under protest for additional freight and salvage charges
in behalf of the consignees.

WHEREFORE, the judgment appealed from is hereby REVERSED and SET ASIDE. Respondent Eastern
Shipping Lines, Inc. is ORDERED to return to petitioner Philippine Home Assurance Corporation the
amount it paid under protest in behalf of the consignees herein.

SO ORDERED.
 EN BANC

G.R. No. L-56568 May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of
Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE
OF MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO,
FEDERACION OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE
FILIPINAS (FOITAF) USTC EMPLOYEES ASSOCIATION WORKERS UNION-
PTGWO, respondents.

Oscar A. Pascua for assignee F. Candelaria.

Teofilo C. Villarico for respondent Federation.

Pedro A. Lopez for respondent USTC.

FELICIANO, J.:

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980 of the
Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary
Insolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the Order
dated 19 January 1981 of the same court denying the motion for reconsideration of the earlier Order filed
by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality Tobacco
Corporation (the "Insolvent"), the following claims of creditors were filed:

(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an additional sum of P280,672.99 as attorney's fees
had been awarded by the National Labor Relations Commission in NLRC Case No. RB-IV-9775-77. 1

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF),
as separation pay for their members, an amount similarly awarded by the NLRC in the same NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period 1
October 1967 to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various importations
by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of these imported items are
apparently still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims of
USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their
respective members embodied in final awards of the National Labor Relations Commission were to be
preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial court, in
so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period prior to the bankruptcy or
 liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall
be paid in full before other creditors may establish any claim to a share in the assets of the
employer.

The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the
Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include
the separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,

is given to a laborer for a separation from employment computed on the basis of the number of years the
laborer was employed by the employer; it is a form of penalty or damage against the employer in favor of
the employee for the latter's dismissal or separation from service. 3

Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or ascertained
on a time, task, piece, or commission basis, or other method of calculating the same,
which is payable by an employer to an employee under a written or unwritten contract of
employment for work done or to be done, or for services rendered or to be rendered, and
includes the fair and reasonable value, as determined by the Secretary of Labor, of board,
lodging, or other facilities customarily furnished by the employer to the employee. 'Fair
and reasonable value' shall not include any profit to the employer or to any person
affiliated with the employer.(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection, that
in Philippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, 4 the
Solicitor General took a different view and there urged that the term "wages" under Article 110 of the Labor
Code may be regarded as embracing within its scope severance pay or termination or separation pay. In PCIB,
this Court agreed with the position advanced by the Solicitor General. 5 We see no reason for overturning this
particular position. We continue to believe that, for the specific purposes of Article 110 and in the context of
insolvency termination or separation pay is reasonably regarded as forming part of the remuneration or other
money benefits accruing to employees or workers by reason of their having previously rendered services to their
employer; as such, they fall within the scope of "remuneration or earnings for services rendered or to be
rendered ." Liability for separation pay might indeed have the effect of a penalty, so far as the employer is
concerned. So far as concerns the employees, however, separation pay is additional remuneration to which they
become entitled because, having previously rendered services, they are separated from the employer's service.
The relationship between separation pay and services rendered is underscored by the fact that separation pay is
measured by the amount (i.e., length) of the services rendered. This construction is sustained both by the
specific terms of Article 110 and by the major purposes and basic policy embodied in the Labor Code. 6 It is also
the construction that is suggested by Article 4 of the Labor Code which directs that doubts assuming that any
substantial rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code
and its implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather,
Article 110 must be read in relation to the provisions of the Civil Code concerning the classification,
concurrence and preference of credits, which provisions find particular application in insolvency
proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding
manner. 7 It is thus important to begin by outlining the scheme constituted by the provisions of the Civil Code
on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general categories,
namely:

(a) special preferred credits listed in Articles 2241 and 2242,

 (b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that these
credits constitute liens or encumbrances on the specific movable or immovable property to which they
relate. Article 2243 makes clear that these credits "shall be considered as mortgages or pledges of real or
personal property, or liens within the purview of legal provisions governing insolvency." It should be
emphasized in this connection that "duties, taxes and fees due [on specific movable property of the
insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the [insolvent's]
land or building (2242 [1])"stand first in preference in respect of the particular movable or immovable
property to which the tax liens have attached. Article 2243 is quite explicit: "[T]axes mentioned in number
1, Article 2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in numbers 2 to 13 in
Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence; such
claims enjoy their privileged character as liens and may be paid only to the extent that taxes have been paid
from the proceeds of the specific property involved (or from any other sources) and only in respect of the
remaining balance of such proceeds. What is more, these other (non-tax) credits, although constituting
liens attaching to particular property, are not preferred one over another inter se. Provided tax liens shall
have been satisfied, non-tax liens or special preferred credits which subsist in respect of specific movable
or immovable property are to be treated on an equal basis and to be satisfied concurrently and
proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-tier
order of preference. The first tier includes only taxes, duties and fees due on specific movable or immovable
property. All other special preferred credits stand on the same second tier to be satisfied, pari passu and pro
rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take precedence
over ordinary preferred credits so far as concerns the property to which the liens have attached. The
specially preferred credits must be discharged first out of the proceeds of the property to which they relate,
before ordinary preferred creditors may lay claim to any part of such proceeds. 9

If the value of the specific property involved is greater than the sum total of the tax liens and other
specially preferred credits, the residual value will form part of the "free property" of the insolvent i.e.,
property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand, the value
of the specific movable or immovable is less than the aggregate of the tax liens and other specially
preferred credits, the unsatisfied balance of the tax liens and other such credits are to the treated as
ordinary credits under Article 2244 and to be paid in the order of preference there set up. 10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which
follow such property. What Article 2244 creates are simply rights in favor of certain creditors to have the
cash and other assets of the insolvent applied in a certain sequence or order of priority. 11

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In this
sequence, certain taxes and assessments also figure but these do not have the same kind of overriding
preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on the
taxpayer's property. Under Article 2244,

(a) taxes and assessments due to the national government, excluding those which result in
tax liens under Articles 2241 No. 1 and 2242 No. 1 but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached, are
ninth in priority;

(b) taxes and assessments due any province, excluding those impressed as tax liens under
Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not satisfied out of
the movable or immovable property to which such liens attached, are tenth in priority;
and
 (c) taxes and assessments due any city or municipality, excluding those impressed as tax
liens under Articles 2241 No. I and 2242 No. 2 but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached, are
eleventh in priority.

It is within the framework of the foregoing rules of the Civil Code that the question of the relative priority
of the claims of the Bureau of Customs and the Bureau of Internal Revenue, on the one hand, and of the
claims of the Unions for separation pay of their members, on the other hand, is to be resolved. A related
vital issue is what impact Article 110 of the labor Code has had on those provisions of the Civil Code.

A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-

Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer

for duties, taxes and fees and other charges attaching on importation constitute a personal debt due from
the importer to the government which can be discharged only by payment in full of all duties, taxes, fees
and other charges legally accruing It also constitutes a lien upon the articles imported which may be
enforced while such articles are in the custody or subject to the control of the government. (emphasis
supplied)

Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of a
specially preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles
importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and which
are still in the custody or subject to the control of the Bureau of Customs. The goods imported on one
occasion are not subject to a lien for customs duties and taxes assessed upon other importations though
also effected by the Insolvent. Customs duties and taxes which remain unsatisfied after levy upon the
imported articles on which such duties and taxes are due, would have to be paid out of the Insolvent's "free
property" in accordance with the order of preference embodied in Article 2244 of the Civil Code. Such
unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the Civil Code and hence
would be ninth in priority.

B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees

Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later reenacted in Identical terms as
Section 301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related interest, penalties and costs, constitutes a lien in favor
of the Government from the time an assessment therefor is made and until paid, "upon all property and rights to property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed under the
National Internal Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and little VIII,
Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees are collected both for purposes of regulation and control and for
purposes of revenue generation: half of the said fees accrues to the Tobacco Inspection Fund created by Section 12 of Act No. 2613, as amended by
Act No. 3179, while the other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in other words, are imposed both as a
regulatory measure and as a revenue-raising measure. In Commissioner of Internal Revenue us. Guerrero, et al 16 this Court held, through Mr. Chief
Justice Concepcion, that the term "tax" is used in Section 315 of the old Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way of
contributions to the support of the Government, in consideration of general benefits
derived from its operation], but, in a broad sense, encompassing all government revenues
collectible by the Commissioner of Internal Revenue under said Code, whether involving
taxes, in the strict technical sense thereof, or not. x x x As used in Title IX of said Code,
the term 'tax' includes 'any national internal revenue tax, fee or charge imposed by the
Code. 17

It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a
claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets, movable and immovable,
of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the Civil Code, this tax claim must be given
preference over any other claim of any other creditor, in respect of any and all properties of the Insolvent. 19
C. Claims of the Unions for Separation Pay of Their Members

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid
wages either upon all of the properties or upon any particular property owned by their employer. Claims
for unpaid wages do not therefore fall at all within the category of specially preferred claims established
under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are
already covered by Article 2241, number 6. "claims for laborers' wages, on the goods manufactured or the
work done;" or by Article 2242, number 3: "claims of laborers and other workers engaged in the
construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or
other works." To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6
and 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under
Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their
members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other products
produced or manufactured by the Insolvent, but not to other assets owned by the Insolvent. And even in
respect of such tobacco and tobacco products produced by the Insolvent, the claims of the Unions may be
given effect only after the Bureau of Internal Revenue's claim for unpaid tobacco inspection fees shall have
been satisfied out of the products so manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the
Insolvent in favor of workmen who constructed or repaired such building or other real property. Article
2242, number 3, does not however appear relevant in the instant case, since the members of the Unions to
whom separation pay is due rendered services to the Insolvent not (so far as the record of this case would
show) in the construction or repair of buildings or other real property, but rather, in the regular course of
the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a lien or
encumbrance upon any immovable property owned by the Insolvent, but rather, as already indicated, upon
the Insolvent's existing inventory (if any of processed tobacco and tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete scheme
of classification, concurrence and preference of credits in insolvency set out in the Civil Code. We believe
and so hold that Article 110 of the Labor Code did not sweep away the overriding preference accorded
under the scheme of the Civil Code to tax claims of the government or any subdivision thereof which
constitute a lien upon properties of the Insolvent. It is frequently said that taxes are the very lifeblood of
government. The effective collection of taxes is a task of highest importance for the sovereign. It is critical
indeed for its own survival. It follows that language of a much higher degree of specificity than that
exhibited in Article 110 of the Labor Code is necessary to set aside the intent and purpose of the legislator
that shines through the precisely crafted provisions of the Civil Code. It cannot be assumed simpliciter that
the legislative authority, by using in Article 110 the words "first preference" and "any provision of law to
the contrary notwithstanding" intended to disrupt the elaborate and symmetrical structure set up in the
Civil Code. Neither can it be assumed casually that Article 110 intended to subsume the sovereign itself
within the term "other creditors" in stating that "unpaid wages shall be paid in full before other
creditors may establish any claim to a share in the assets of employer." Insistent considerations of public
policy prevent us from giving to "other creditors" a linguistically unlimited scope that would embrace the
universe of creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil
Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code and the
fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase
"first preference" in Article 110 indicates that what Article 110 intended to modify is the order of
preference found in Article 2244, which order relates, as we have seen, to property of the Insolvent that is
not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. We have
noted that Article 2244, number 2, establishes second priority for claims for wages for services rendered
by employees or laborers of the Insolvent "for one year preceding the commencement of the proceedings
in insolvency." Article 110 of the Labor Code establishes "first preference" for services rendered "during
the period prior to the bankruptcy or liquidation, " a period not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect may be given to the provisions of Article 110
without grievously distorting the framework established in the Civil Code by holding, as we so hold, that
Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly,
by removing the one year limitation found in Article 2244, number 2; and (b) secondly, by moving up
claims for unpaid wages of laborers or workers of the Insolvent from second priority to first priority in the
order of preference established I by Article 2244.

Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to the
facts herein, the trial court should inventory the properties of the Insolvent so as to determine specifically:
(a) whether the assets of the Insolvent before the trial court includes stocks of processed or manufactured
tobacco products; and (b) whether the Bureau of Customs still has in its custody or control articles
imported by the Insolvent and subject to the lien of the government for unpaid customs duties and taxes.

In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products, such
inventories must be subjected firstly to the claim of the Bureau of Internal Revenue for unpaid tobacco
inspection fees. The remaining value of such inventories after satisfaction of such fees (or should such
inspection fees be satisfied out of other properties of the Insolvent) will be subject to a lien in favor of the
Unions by virtue of Article 2241, number 6. In case, upon the other hand, the Insolvent no longer has any
inventory of processed or manufactured product, then the claim of the Unions for separation pay would
have to be satisfied out of the "free property" of the Insolvent under Article 2244 of the Civil Code. as
modified by Article 110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still within
customs custody or control, or should the importations still held by the Bureau of Customs be or have
become insufficient in value for the purpose, customs duties and taxes remaining unpaid would have only
ninth priority by virtue of Article 2244, number 9. In respect therefore of the Insolvent's "free property, "
the claims of the Unions will enjoy first priority under Article 2244 as modified and will be paid ahead of
the claims of the Bureau of Customs for any customs duties and taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim for attorney's
fees. Attorney's fees incurred by the Unions do not stand on the same footing as the Unions' claims for
separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19 January
1981 of the trial court are modified accordingly. This case is hereby remanded to the trial court for further
proceedings in insolvency compatible with the rulings set forth above. No pronouncement as to costs.

SO ORDERED.

Teehankee, C.J., Yap, Fernan, Narvasa, Melencio-Herrera, Gutierrez, Jr., Paras, Gancayco, Padilla,
Bidin, Sarmiento and Cortes, JJ., concur,