SEC. 4.

Power of the Commissioner to Interpret Tax Laws and to Decide Tax

Cases. - The power to interpret the provisions of this Code and other tax laws shall be
under the exclusive and original jurisdiction of the Commissioner, subject to review by
the Secretary of Finance.
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals. [3]
SEC. 5. Power of the Commissioner to Obtain Information, and to Summon,
Examine, and Take Testimony of Persons. - In ascertaining the correctness of any
return, or in making a return when none has been made, or in determining the liability of
any person for any internal revenue tax, or in collecting any such liability, or in
evaluating tax compliance, the Commissioner is authorized:
(A) To examine any book, paper, record, or other data which may be relevant or material
to such inquiry;
(B) To obtain on a regular basis from any person other than the person whose internal
revenue tax liability is subject to audit or investigation, or from any office or officer of the
national and local governments, government agencies and instrumentalities, including the
Bangko Sentral ng Pilipinas and government-owned or -controlled corporations, any
information such as, but not limited to, costs and volume of production, receipts or sales
and gross incomes of taxpayers, and the names, addresses, and financial statements of
corporations, mutual fund companies, insurance companies, regional operating
headquarters of multinational companies, joint accounts, associations, joint ventures of
consortia and registered partnerships, and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the books
of accounts and other accounting records containing entries relating to the business of
the person liable for tax, or any other person, to appear before the Commissioner or his
duly authorized representative at a time and place specified in the summons and to
produce such books, papers, records, or other data, and to give testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to time of any
revenue district or region and inquire after and concerning all persons therein who may
be liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding, nothing in this Section shall
be construed as granting the Commissioner the authority to inquire into bank deposits
other than as provided for in Section 6(F) of this Code.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe
Additional Requirements for Tax Administration and Enforcement. -
(A) Examination of Return and Determination of Tax Due. After a return has been
filed as required under the provisions of this Code, the Commissioner or his duly
authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however, That failure to file a return
shall not prevent the Commissioner from authorizing the examination of any taxpayer.
The tax or any deficiency tax so assessed shall be paid upon notice and demand from
the Commissioner or from his duly authorized representative.
Any return, statement of declaration filed in any office authorized to receive the same
shall not be withdrawn: Provided, That within three (3) years from the date of such filing,
the same may be modified, changed, or amended: Provided, further, That no notice for
audit or investigation of such return, statement or declaration has in the meantime been
actually served upon the taxpayer.
(B) Failure to Submit Required Returns, Statements, Reports and other
Documents. - When a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the time fixed by laws or
rules and regulations or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax on the best
evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by
law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.
(C) Authority to Conduct Inventory-taking, Surveillance and to Prescribe
Presumptive Gross Sales and Receipts. - The Commissioner may, at any time during
the taxable year, order inventory-taking of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities, or may place the business operations of
any person, natural or juridical, under observation or surveillance if there is reason to
believe that such person is not declaring his correct income, sales or receipts for
internal revenue tax purposes. The findings may be used as the basis for assessing the
taxes for the other months or quarters of the same or different taxable years and such
assessment shall be deemed prima facie correct.
When it is found that a person has failed to issue receipts and invoices in violation of the
requirements of Sections 113 and 237 of this Code, or when there is reason to believe
that the books of accounts or other records do not correctly reflect the declarations made
or to be made in a return required to be filed under the provisions of this Code, the
Commissioner, after taking into account the sales, receipts, income or other taxable base
of other persons engaged in similar businesses under similar situations or circumstances
or after considering other relevant information may prescribe a minimum amount of such
gross receipts, sales and taxable base, and such amount so prescribed shall be prima
facie correct for purposes of determining the internal revenue tax liabilities of such person.
(D) Authority to Terminate Taxable Period. - When it shall come to the knowledge of
the Commissioner that a taxpayer is retiring from business subject to tax, or is intending
to leave the Philippines or to remove his property therefrom or to hide or conceal his
property, or is performing any act tending to obstruct the proceedings for the collection
of the tax for the past or current quarter or year or to render the same totally or partly
ineffective unless such proceedings are begun immediately, the Commissioner shall
declare the tax period of such taxpayer terminated at any time and shall send the
taxpayer a notice of such decision, together with a request for the immediate payment
of the tax for the period so declared terminated and the tax for the preceding year or
quarter, or such portion thereof as may be unpaid, and said taxes shall be due and
payable immediately and shall be subject to all the penalties hereafter prescribed,
unless paid within the time fixed in the demand made by the Commissioner.
(E) Authority of the Commissioner to Prescribe Real Property Values. - The
Commissioner is hereby authorized to divide the Philippines into different zones or
areas and shall, upon consultation with competent appraisers both from the private and
public sectors, determine the fair market value of real properties located in each zone or
area. For purposes of computing any internal revenue tax, the value of the property
shall be, whichever is the higher of:
(1) The fair market value as determined by the Commissioner; or
(2) The fair market value as shown in the schedule of values of the Provincial and City
Assessors.
(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and
Other Related information held by Financial Institutions. [4] - Notwithstanding any
contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise known
as the Foreign Currency Deposit Act of the Philippines, and other general or special
laws, the Commissioner is hereby authorized to inquire into the bank deposits and other
related information held by financial institutions of:
(1) A decedent to determine his gross estate; and
(2) Any taxpayer who has filed an application for compromise of his tax liability under
Section 204(A)(2) of this Code by reason of financial incapacity to pay his tax
liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on
his claim that his financial position demonstrates a clear inability to pay the tax
assessed, his application shall not be considered unless and until he waives in
writing his privilege under Republic Act No. 1405, Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act of the Philippines, or under other
general or special laws, and such waiver shall constitute the authority of the
Commissioner to inquire into the bank deposits of the taxpayer.
(3) A specific taxpayer or taxpayers subject of a request for the supply of tax information
from a foreign tax authority pursuant to an international convention or agreement
on tax matters to which the Philippines is a signatory or a party of: Provided, That
the information obtained from the banks and other financial institutions may be used
by the Bureau of Internal Revenue for tax assessment, verification, audit and
enforcement purposes.
In case of a request from a foreign tax authority for tax information held by banks and
 financial institutions, the exchange of information shall be done in a secure manner
to ensure confidentiality thereof under such rules and regulations as may be
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.
The Commissioner shall provide the tax information obtained from banks and financial
institutions pursuant to a convention or agreement upon request of the foreign tax
authority when such requesting foreign tax authority has provided the following
information to demonstrate the foreseeable relevance of the information to the
request:
(a) The identity of the person under examination or investigation;
(b) A statement of the information being sought, including its nature and the form in which
the said foreign tax authority prefers to receive the information from the
Commissioner;
(c) The tax purpose for which the information is being sought;
(d) Grounds for believing that the information requested is held in the Philippines or is in
the possession or control of a person within the jurisdiction of the Philippines;
(e) To the extent known, the name and address of any person believed to be in
possession of the requested information;
(f) A statement that the request is in conformity with the law and administrative practices
of the said foreign tax authority, such that if the requested information was within
the jurisdiction of the said foreign tax authority then it would be able to obtain the
information under its laws or in the normal course of administrative practice and that
it is in conformity with a convention or international agreement; and
(g) A statement that the requesting foreign tax authority has exhausted all means
available in its own territory to obtain the information, except those that would give
rise to disproportionate difficulties.
The Commissioner shall forward the information as promptly as possible to the requesting
foreign tax authority. To ensure a prompt response, the Commissioner shall confirm
receipt of a request in writing to the requesting tax authority and shall notify the latter of
deficiencies in the request, if any, within sixty (60) days from receipt of the request.
If the Commissioner is unable to obtain and provide the information within ninety (90)
days from receipt of the request, due to obstacles encountered in furnishing the
information or when the bank or financial institution refuses to furnish the information, he
shall immediately inform the requesting tax authority of the same, explaining the nature
of the obstacles encountered or the reasons for refusal.
The term "foreign tax authority," as used herein, shall refer to the tax authority or tax
administration of the requesting State under the tax treaty or convention to which the
Philippines is a signatory or a party of.
(G) Authority to Accredit and Register Tax Agents. - The Commissioner shall
accredit and register, based on their professional competence, integrity and moral
fitness, individuals and general professional partnerships and their representatives who
prepare and file tax returns, statements, reports, protests, and other papers with or who
appear before, the Bureau for taxpayers. Within one hundred twenty (120) days from
January 1, 1998, the Commissioner shall create national and regional accreditation
boards, the members of which shall serve for three (3) years, and shall designate from
among the senior officials of the Bureau, one (1) chairman and two (2) members for
each board, subject to such rules and regulations as the Secretary of Finance shall
promulgate upon the recommendation of the Commissioner.
Individuals and general professional partnerships and their representatives who are
denied accreditation by the Commissioner and/or the national and regional accreditation
boards may appeal such denial to the Secretary of Finance, who shall rule on the appeal
within sixty (60) days from receipt of such appeal. Failure of the Secretary of Finance to
rule on the Appeal within the prescribed period shall be deemed as approval of the
application for accreditation of the appellant.
(H) Authority of the Commissioner to Prescribe Additional Procedural or
Documentary Requirements. - The Commissioner may prescribe the manner of
compliance with any documentary or procedural requirement in connection with the
submission or preparation of financial statements accompanying the tax returns.
SEC. 7.Authority of the Commissioner to Delegate Power. - The Commissioner may
delegate the powers vested in him under the pertinent provisions of this Code to any or
such subordinate officials with the rank equivalent to a division chief or higher, subject
to such limitations and restrictions as may be imposed under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner:
Provided, however, That the following powers of the Commissioner shall not be
delegated:
(a) The power to recommend the promulgation of rules and regulations by the Secretary
of Finance;
(b) The power to issue rulings of first impression or to reverse, revoke or modify any
existing ruling of the Bureau;
(c) The power to compromise or abate, under Sec. 204 (A) and (B) of this Code, any tax
liability: Provided, however, That assessments issued by the regional offices
involving basic deficiency taxes of Five hundred thousand pesos (P500,000) or less,
and minor criminal violations, as may be determined by rules and regulations to be
promulgated by the Secretary of finance, upon recommendation of the
Commissioner, discovered by regional and district officials, may be compromised
by a regional evaluation board which shall be composed of the Regional Director as
Chairman, the Assistant Regional Director, the heads of the Legal, Assessment and
Collection Divisions and the Revenue District Officer having jurisdiction over the
taxpayer, as members; and
(d) The power to assign or reassign internal revenue officers to establishments where
articles subject to excise tax are produced or kept.
Section 8. Duty of the Commissioner to Ensure the Provision and Distribution of
Forms, Receipts, Certificates, and Appliances, and the Acknowledgment of
Payment of Taxes. -
(A) Provision and Distribution to Proper-Officials. - Any law to the contrary
notwithstanding, it shall be the duty of the Commissioner, among other things, to
prescribe, provide, and distribute to the proper officials the requisite licenses; internal
revenue stamps; unique, secure and non-removable identification markings (hereafter
called unique identification markings), such as codes or stamps, be affixed to or form
part of all unit packets and packages and any outside packaging of cigarettes and
bottles of distilled spirits; labels and other forms; certificates; bonds; records; invoices;
books; receipts; instruments; appliances and apparatus used in administering the laws
falling within the jurisdiction of the Bureau. For this purpose, internal revenue stamps, or
other markings and labels shall be caused by the Commissioner to be printed with
adequate security features.
Internal revenue stamps, whether of a bar code or fuson design, or other markings shall
be firmly and conspicuously affixed or printed on each pack of cigars and cigarettes and
bottles of distilled spirits subject to excise tax in the manner and form as prescribed by
the Commissioner, upon approval of the Secretary of Finance.
To further improve tax administration, cigarette and alcohol manufacturers shall be
required to install automated volume-counters of packs and bottles to deter over-removals
and misdeclaration of removals.
(B) Receipts for Payment Mode. - It shall be the duty of the Commissioner or his duly
authorized representative or an authorized agent bank to whom any payment of any tax
is made under the provisions of this Code to acknowledge the payment of such tax,
expressing the amount paid and the particular account for which such payment was
made in a form and manner prescribed therefor by the Commissioner.

FITNESS BY DESIGN v, CIR

On March 17, 2004, the Commissioner on Internal Revenue (respondent) assessed

Fitness by Design, Inc. (petitioner) for deficiency income taxes for the tax year 1995 in
the total amount of 10,647,529.69.1 Petitioner protested the assessment on the ground
that it was issued beyond the three-year prescriptive period under Section 203 of the
Tax Code.2 Additionally, petitioner claimed that since it was incorporated only on May
30, 1995, there was no basis to assume that it had already earned income for the tax
year 1995.3
On February 1, 2005, respondent issued a warrant of distraint and/or levy against
petitioner,4 drawing petitioner to file on March 1, 2005 a Petition for Review (with Motion
to Suspend Collection of Income Tax, Value Added Tax, Documentary Stamp Tax and
Surcharges and Interests subject of this Petition)5 before the Court of Tax Appeals
(CTA) before which it reiterated its defense of prescription. The petition was docketed
as CTA Case No. 7160.
In his Answer,6 respondent alleged:
The right of the respondent to assess petitioner for deficiency income tax, VAT and
Documentary Stamp Tax for the year 1995 has not prescribed pursuant to Section
222(a) of the 1997 Tax Code. Petitioners 1995 Income Tax Return (ITR) filed on April
11, 1996 was false and fraudulent for its deliberate failure to declare its true sales.
Petitioner declared in its 1995 Income Tax Return that it was on its pre-operation stage
and has not declared its income. Investigation by the revenue officers of the
respondent, however, disclosed that it has been operating/doing business and had
sales operations for the year 1995 in the total amount of 7,156,336.08 which it failed to
report in its 1995 ITR. Thus, for the year 1995, petitioner filed a fraudulent annual
income return with intent to evade tax. Likewise, petitioner failed to file Value-Added
Tax (VAT) Return and reported the amount of P7,156,336.08 as its gross sales for the
year 1995. Hence, for failure to file a VAT return and for filing a fraudulent income
tax return for the year 1995, the corresponding taxes may be assessed at any
time within ten (10) years after the discovery of such omission or fraud pursuant to
Section 222(a) of the 1997 Tax Code.
The subject deficiency tax assessments have already become final, executory and
demandable for failure of the petitioner to file a protest within the reglementary period
provided for by law. The "alleged protest" allegedly filed on June 25, 2004 at the Legal
Division, Revenue Region No. 8, Makati City is nowhere to be found in the BIR Records
nor reflected in the Record Book of the Legal Division as normally done by our receiving
clerk when she receive[s] any document. The respondent, therefore, has legal basis to
collect the tax liability either by distraint and levy or civil action.7 (Emphasis and
underscoring supplied)
The aforecited Section 222(a)8 of the 1997 Tax Code provides:
In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be filed without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud, or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof. (Underscoring supplied)
The Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a criminal
complaint before the Department of Justice against the officers and accountant of
petitioner for violation of the provisions of "The National Internal Revenue Code of 1977,
as amended,9 covering the taxable year 1995." The criminal complaint was docketed as
I.S. No. 2005-203.
On motion of petitioner in CTA Case No. 7160, a preliminary hearing on the issue of
prescription10 was conducted during which petitioners former bookkeeper attested that
a former colleague certified public accountant Leonardo Sablan (Sablan) illegally
took custody of petitioners accounting records, invoices, and official receipts and turned
them over to the BIR.11
On petitioners request, a subpoena ad testificandum was issued to Sablan for the
hearing before the CTA scheduled on September 4, 2006 but he failed to appear.12
Petitioner thus requested for the issuance of another subpoena ad testificandum to
Sablan for the hearing scheduled on October 23, 2006,13 and of subpoena duces tecum
to the chief of the National Investigation Division of the BIR for the production of the
Affidavit of the Informer bearing on the assessment in question. 14 Petitioners requests
were granted.15
During the scheduled hearing of the case on October 23, 2006, on respondents
counsels manifestation that he was not furnished a copy of petitioners motion for the
issuance of subpoenaes, the CTA ordered petitioner to file a motion for the issuance of
subpoenas and to furnish respondents counsel a copy thereof. 16 Petitioner complied
with the CTA order.17
In a related move, petitioner submitted written interrogatories addressed to Sablan and
to Henry Sarmiento and Marinella German, revenue officers of the National
Investigation Division of the BIR.18
By Resolution19 of January 15, 2007, the CTA denied petitioners Motion for Issuance
of Subpoenas and disallowed the submission by petitioner of written interrogatories to
Sablan, who is not a party to the case, and the revenue officers,20 it finding that the
testimony, documents, and admissions sought are not relevant.21 Besides, the CTA
found that to require Sablan to testify would violate Section 2 of Republic Act No. 2338,
as implemented by Section 12 of Finance Department Order No. 46-66, proscribing the
revelation of identities of informers of violations of internal revenue laws, except when
the information is proven to be malicious or false.22
In any event, the CTA held that there was no need to issue a subpoena duces tecum to
obtain the Affidavit of the Informer as the same formed part of the BIR records of the
case, the production of which had been ordered by it.23
Petitioners Motion for Reconsideration24 of the CTA Resolution of January 15, 2007
was denied,25 hence, the present Petition for Certiorari26 which imputes grave abuse of
discretion to the CTA
I.
x x x in holding that the legality of the mode of acquiring the documents which are the
bases of the above discussed deficiency tax assessments, the subject matter of the
Petition for Review now pending in the Honorable Second Division, is not material and
relevant to the issue of prescription.
II.
x x x in holding that Mr. Leonardo Sablans testimony, if allowed, would violate RA 2338
which prohibits the BIR to reveal the identity of the informer since 1) the purpose of the
subpoena is to elicit from him the whereabouts of the original accounting records,
documents and receipts owned by the Petitioner and not to discover if he is the informer
since the identity of the informer is not relevant to the issues raised; 2) RA 2338 cannot
legally justify violation of the Petitioners property rights by a person, whether he is an
informer or not, since such RA cannot allow such invasion of property rights otherwise
RA 2338 would run counter to the constitutional mandate that "no person shall be
deprive[d] of life, liberty or property without due process of law."
III.
x x x in holding that the issuance of subpoena ad testificandum would constitute a
violation of the prohibition to reveal the identity of the informer because compliance with
such prohibition has been rendered moot and academic by the voluntary admissions of
the Respondent himself.
IV.
x x x in holding that the constitutional right of an accused to examine the witness
against him does not exist in this case. The Petitioners liability for tax deficiency
assessment which is the main issue in the Petition for Review is currently pending at the
Honorable Second Division. Therefore, it is a prejudicial question raised in the criminal
case filed by the herein Respondent against the officers of the Petitioner with the
Department of Justice.
V.
x x x in dismissing the request for subpoena ad testificandum because the Opposition
thereto submitted by the Respondent was not promptly filed as provided by the Rules of
Court thus, it is respectfully submitted that, Respondent has waived his right to object
thereto.
VI.
x x x when the Honorable Court of Tax Appeals ruled that the purpose of the Petitioner
in requesting for written interrogatories is to annoy, embarrass, or oppress the witness
because such ruling has no factual basis since Respondent never alleged nor proved
that the witnesses to whom the interrogatories are addressed will be annoyed,
embarrassed or oppressed; besides the only obvious purpose of the Petitioner is to
know the whereabouts of accounting records and documents which are in the
possession of the witnesses to whom the interrogatories are directed and to ultimately
get possession thereof. Granting without admitting that there is annoyance,
embarrassment or oppression; the same is not unreasonable.
VII.
x x x when it failed to rule that the BIR officers and employees are not covered by the
prohibition under RA 2338 and do not have the authority to withhold from the taxpayer
documents owned by such taxpayer.
VIII.
x x x when it required the "clear and unequivocal proof" of relevance of the documents
as a condition precedent for the issuance of subpoena duces tecum.
IX.
x x x when it quashed the subpoena duces tecum as the Honorable Court had issued
an outstanding order to the Respondent to certify and forward to the CTA all the records
of the case because up to the date of this Petition the BIR records have not been
submitted yet to the CTA.27
Grave abuse of discretion implies such capricious and whimsical exercise of judgment
as equivalent to lack of jurisdiction or, in other words, when the power is exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, and it must be
so patent and gross as to amount to an evasion of positive duty or a virtual refusal of
duty enjoined or to act at all in contemplation of law.28
The Court finds that the issuance by the CTA of the questioned resolutions was not
tainted by arbitrariness.
The fact that Sablan was not a party to the case aside, the testimonies, documents, and
admissions sought by petitioner are not indeed relevant to the issue before the CTA.
For in requesting the issuance of the subpoenas and the submission of written
interrogatories, petitioner sought to establish that its accounting records and related
documents, invoices, and receipts which were the bases of the assessment against it
were illegally obtained. The only issues, however, which surfaced during the preliminary
hearing before the CTA, were whether respondents issuance of assessment against
petitioner had prescribed and whether petitioners tax return was false or fraudulent.
Besides, as the CTA held, the subpoenas and answers to the written interrogatories
would violate Section 2 of Republic Act No. 2338 as implemented by Section 12 of
Finance Department Order No. 46-66.
Petitioner claims, however, that it only intended to elicit information on the whereabouts
of the documents it needs in order to refute the assessment, and not to disclose the
identity of the informer.29 Petitioners position does not persuade. The interrogatories
addressed to Sablan and the revenue officers show that they were intended to confirm
petitioners belief that Sablan was the informer. Thus the questions for Sablan read:
1. Under what circumstances do you know petitioner corporation? Please state in what
capacity, the date or period you obtained said knowledge.
2. Do you know a Ms. Elnora Carpio, who from 1995 to the early part of 1996 was the
book keeper of petitioner? Please state how you came to know of Ms. Carpio.
3. At the time that Ms. Carpio was book keeper of petitioner did she consult you or show
any accounting documents and records of petitioner?
4. What documents, if any, did you obtain from petitioner?
5. Were these documents that you obtained from petitioner submitted to the Bureau of
Internal Revenue (BIR)? Please describe said documents and under what
circumstances the same were submitted.
6. Was the consent of the petitioner, its officers or employees obtained when the
documents that you obtained were submitted to the BIR? Please state when and from
whom the consent was obtained.
7. Did you execute an affidavit as an informer in the assessment which was issued by
the BIR against petitioner for the tax year 1995 and other years?30 (Underscoring
supplied)
while the questions for the revenue officers read:
1. Where did you obtain the documents, particularly the invoices and official receipts,
which [were] used by your office as evidence and as basis of the assessment for
deficiency income tax and value added tax for the tax year 1995 issued against
petitioner?
2. Do you know Mr. Leonardo Sablan? Please state under what circumstance you came
to know Mr. Sablan?31 (Underscoring supplied)
Petitioner impugns the manner in which the documents in question reached the BIR,
Sablan having allegedly submitted them to the BIR without its (petitioners) consent.
Petitioners lack of consent does not, however, imply that the BIR obtained them illegally
or that the information received is false or malicious. Nor does the lack of consent
preclude the BIR from assessing deficiency taxes on petitioner based on the
documents. Thus Section 5 of the Tax Code provides:
In ascertaining the correctness of any return, or in making a return when none has been
made, or in determining the liability of any person for any internal revenue tax, or in
collecting any such liability, or in evaluating tax compliance, the Commissioner is
authorized:
(A) To examine any book, paper, record or other data which may be relevant or material
to such query;
(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office
or officer of the national and local governments, government agencies and
instrumentalities, including the Bangko Sentral ng Pilipinas and government-owned and
controlled corporations, any information such as, but not limited to, costs and volume
of production, receipts or sales and gross incomes of taxpayers, and the names,
addresses, and financial statements of corporations, mutual fund companies, insurance
companies, regional operating headquarters of multinational companies, joint accounts,
associations, joint ventures or consortia and registered partnerships and their members;
(C) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to
the business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representatives at a time and place specified in the
summons and to produce such books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; and
(E) To cause revenue officers and employees to make a canvass from time to time of
any revenue district or region and inquire after and concerning all persons therein who
may be liable to pay any internal revenue tax, and all persons owning or having the
care, management or possession of any object with respect to which a tax is imposed.
x x x x (Emphasis and underscoring supplied)
The law thus allows the BIR access to all relevant or material records and data in the
person of the taxpayer,32 and the BIR can accept documents which cannot be admitted
in a judicial proceeding where the Rules of Court are strictly observed.33 To require the
consent of the taxpayer would defeat the intent of the law to help the BIR assess and
collect the correct amount of taxes.
Petitioners invocation of the rights of an accused in a criminal prosecution to cross
examine the witness against him and to have compulsory process issued to secure the
attendance of witnesses and the production of other evidence in his behalf does not lie.
CTA Case No. 7160 is not a criminal prosecution, and even granting that it is related to
I.S. No. 2005-203, the respondents in the latter proceeding are the officers and
accountant of petitioner-corporation, not petitioner. From the complaint and supporting
affidavits in I.S. No. 2005-203, Sablan does not even appear to be a witness against the
respondents therein.34
AT ALL EVENTS, issuance of subpoena duces tecum for the production of the
documents requested by the petitioner which documents petitioner claims to be
crucial to its defense35 is unnecessary in view of the CTA order for respondent to
certify and forward to it all the records of the case.36 If the order has not been complied
with, the CTA can enforce it by citing respondent for indirect contempt. 37
WHEREFORE, in light of the foregoing disquisition, the petition is DISMISSED.
Costs against petitioner.

CIR v. AQUAFRESH

Before this Court is a petition for review on certiorari,1 under Rule 45 of the Rules of
Court, seeking to set aside the November 9, 2005 Decision2 of the Court of Tax Appeals
(CTA) En Banc in CTA-E.B. No. 77. The CTA En Banc affirmed the December 22, 2004
Decision of the CTA First Division.
The facts of the case are as follows:
On June 7, 1999, respondent Aquafresh Seafoods Inc. sold to Philips Seafoods, Inc.
two parcels of land, including improvements thereon, located at Barrio Banica, Roxas
City, for the consideration of Three Million One Hundred Thousand Pesos (Php 3,100,
000.00). Said properties were covered under Transfer Certificate of Titles Nos. T-21799
and T-21804.
Respondent then filed a Capital Gains Tax Return/Application for Certification
Authorizing Registration and paid the amount of Php186,000.00, representing the
Capital Gains Tax (CGT) and the amount of Php46,500.00, representing the
Documentary Stamp Tax (DST) due from the said sale. Subsequently, Revenue District
Officer Gil G. Tabanda issued Certificate Authorizing Registration No. 1071477.
The Bureau of Internal Revenue (BIR), however, received a report that the lots sold
were undervalued for taxation purposes. This prompted the Special Investigation
Division (SID) of the BIR to conduct an occular inspection over the properties. After the
investigation, the SID concluded that the subject properties were commercial with a
zonal value of Php2,000.00 per square meter.
On September 15, 2000, Regional Director Leonardo Q. Sacamos (Director Sacamos)
of the Revenue Region Iloilo City sent two Assessment Notices apprising respondent of
CGT and DST defencies in the sum of Php1,372,171.46 and Php356,267.62,
respectively. Director Sacamos relied on the findings of the SID that the subject
properties were commercial with a zonal valuation of Php2,000.00 per square meter.
On October 1, 2000, respondent sent a letter protesting the assessments made by
Director Sacamos. On December 1, 2000, Director Sacamos denied respondent's
protest for lack of legal basis. Respondent appealed, but the same was denied with
finality on February 13, 2002.
On March 19, 2002, respondent filed a petition for review3 before the CTA seeking the
reversal of the denial of its protest. The main thrust of respondent's petition was that the
subject properties were located in Barrio Banica, Roxas, where the pre-defined zonal
value was Php650.00 per square meter based on the "Revised Zonal Values of Real
Properties in the City of Roxas under Revenue District Office No. 72 Roxas City"
(1995 Revised Zonal Values of Real Properties). Respondent asserted that the subject
properties were classified as "RR" or residential and not commercial. Respondent
argued that since there was already a pre-defined zonal value for properties located in
Barrio Banica, the BIR officials had no business re-classifying the subject properties to
commercial.
On December 22, 2004, the CTA promulgated a Decision4 ruling in favor of respondent,
the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, respondent's assessments for deficiency capital
against tax and documentary stamp taxes are hereby CANCELLED and SET ASIDE. x
xx
SO ORDERED.5
Ruling in favor of respondent, the CTA opined that that the existing Revised Zonal
Values in the City of Roxas should prevail for purposes of determining respondent's tax
liabilities, thus:
While respondent is given the authority to determine the fair market value of the subject
properties for the purpose of computing internal revenue taxes, such authority is not
without restriction or limitation. The first sentence of Section 6(E) sets the limitation
or condition in the exercise of such power by requiring respondent to consult
with competent appraisers both from private and public sectors. As there was no
re-evaluation and no revision of the zonal values of the subject properties in Roxas City
at the time of the sale, respondent cannot unilaterally determine the zonal values of the
subject properties by invoking his powers of obtaining information and making
assessments under Sections 5 and 6 of the NIRC. The existing Revised Zonal Values
of Real Properties in the City of Roxas shall prevail for the purpose of
determining the proper tax liabilities of petitioner.6
Petitioner Commissioner of Internal Revenue filed a Motion for Reconsideration, which
was, however, denied by the CTA in a Resolution7 dated April 4, 2005.
Petitioner then appealed to the CTA En Banc.
In a Decision dated November 9, 2005, the CTA En Banc dismissed petitioner's appeal,
the dispositive portion of which reads:
WHEREFORE, premises considered, the Petition for Review is DISMISSED for lack of
merit.
SO ORDERED.8
The CTA En Banc ruled that the 1995 Revised Zonal Values of Real Properties should
prevail. Said court relied on Section 6 (E) of the National Internal Revenue Code (NIRC)
which requires consultation from appraisers, from both the public and private sectors, in
fixing the zonal valuation of properties. The CTA En Banc held that petitioner failed to
prove any amendment effected on the 1995 Revised Zonal Values of Real Properties at
the time of the sale of the subject properties.
Hence, herein petition, with petitioner raising the following issues for this Court's
resolution, to wit:
I.
WHETHER OR NOT THE REQUIREMENT OF CONSULTATION WITH COMPETENT
APPRAISERS BOTH FROM THE PRIVATE AND PUBLIC SECTORS IN
DETERMINING THE FAIR MARKET VALUE OF THE SUBJECT LOTS IS
APPLICABLE IN THE CASE AT BAR.
II.
WHETHER OR NOT THE COURT OF TAX APPEALS EN BANC COMMITTED GRAVE
ERROR IN APPLYING THE FAIR MARKET VALUE BASED ON THE ZONAL
VALUATION OF A RESIDENTIAL LAND AS TAX BASE IN THE COMPUTATION OF
CAPITAL GAINS TAX AND DOCUMENTARY STAMP TAX DEFICIENCIES OF
RESPONDENT.9
The petition is not meritorious. The issues being interrelated, this Court shall discuss the
same in seriatim.
Under Section 27(D)(5) of the NIRC of 1997, a CGT of six (6%) percent is imposed on
the gains presumed to have been realized in the sale, exchange or disposition of lands
and/or buildings which are not actively used in the business of a corporation and which
are treated as capital assets based on the gross selling price or fair market value as
determined in accordance with Section 6(E) of the NIRC, whichever is higher.
On the other hand, under Section 196 of the NIRC, DST is based on the consideration
contracted to be paid or on its fair market value determined in accordance with Section
6(E) of the NIRC, whichever is higher.
Thus, in determining the value of CGT and DST arising from the sale of a property, the
power of the CIR to assess is subject to Section 6(E) of the NIRC, which provides:
Section 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. -
xxxx
(E) Authority of the Commissioner to Prescribe Real Property Values The
Commissioner is hereby authorized to divide the Philippines into different zones or area
and shall, upon consultation with competent appraisers both from the private and
public sectors, determine the fair market value of real properties located in each zone
or area. For purposes of computing internal revenue tax, the value of the property shall
be, whichever is higher of:
(1) the fair market value as determined by the Commissioner; or
(2) the fair market value as shown in the schedule of values of the Provincial and City
Assessors.
While the CIR has the authority to prescribe real property values and divide the
Philippines into zones, the law is clear that the same has to be done upon consultation
with competent appraisers both from the public and private sectors. It is undisputed that
at the time of the sale of the subject properties found in Barrio Banica, Roxas City, the
same were classified as "RR," or residential, based on the 1995 Revised Zonal Value of
Real Properties. Petitioner, thus, cannot unilaterally change the zonal valuation of such
properties to "commercial" without first conducting a re-evaluation of the zonal values as
mandated under Section 6(E) of the NIRC.
Petitioner argues, however, that the requirement of consultation with competent
appraisers is mandatory only when it is prescribing real property values that is when a
formulation or change is made in the schedule of zonal values. Petitioner also contends
that what it did in the instant case was not to prescribe the zonal value, but merely
classify the same as commercial and apply the corresponding zonal value for such
classification based on the existing schedule of zonal values in Roxas City. 10
We disagree.
To this Court's mind, petitioner's act of re-classifying the subject properties from
residential to commercial cannot be done without first complying with the procedures
prescribed by law. It bears to stress that ALL the properties in Barrio Banica were
classified as residential, under the 1995 Revised Zonal Values of Real Properties. Thus,
petitioner's act of classifying the subject properties involves a re-classification and
revision of the prescribed zonal values.
In addition, Revenue Memorandum No. 58-69 provides for the procedures on the
establishment of the zonal values of real properties, viz.:
(1) The submission or review by the Revenue District Offices Sub-Technical Committee
of the schedule of recommended zonal values to the TCRPV;
(2) The evaluation by TCRPV of the submitted schedule of recommended zonal values
of real properties;
(3) Except in cases of correction or adjustment, the TCRPV finalizes the schedule and
submits the same to the Executive Committee on Real Property Valuation (ECRPV);
(3) Upon approval of the schedule of zonal values by the ECRPV, the same is
embodied in a Department Order for implementation and signed by the Secretary of
Finance. Thereafter, the schedule takes effect (15) days after its publication in the
Official Gazette or in any newspaper of general circulation.
Petitioner failed to prove that it had complied with Revenue Memorandum No. 58-69
and that a revision of the 1995 Revised Zonal Values of Real Properties was made prior
to the sale of the subject properties. Thus, notwithstanding petitioner's disagreement to
the classification of the subject properties, the same must be followed for purposes of
computing the CGT and DST. It bears stressing, and as observed by the CTA En Banc,
that the 1995 Revised Zonal Values of Real Properties was drafted by petitioner, BIR
personnel, representatives from the Department of Finance, National Tax Research
Center, Institute of Philippine Real Estate Appraisers and Philippine Association of
Realtors Board, which duly satisfied the requirement of consultation with public and
private appraisers.11
Petitioner contends, nevertheless, that its act of classifying the subject properties based
on actual use was in accordance with guidelines number 1-b and 2 as set forth in
"Certain Guidelines in the Implementation of Zonal Valuation of Real Properties for RDO
72 Roxas City" (Zonal Valuation Guidelines).12
Section 1 (b) of the Zonal Valuation Guidelines reads:
1. No zonal value has been prescribed for a particular classification of real property.
Where in the approved schedule of zonal values for a particular barangay -
xxxx
b) No zonal value has been prescribed for a particular classification of real property in
one barangay, the zonal value prescribed for the same classification of real property
located in an adjacent barangay of similar conditions shall be used.
Section 1 (b) does not apply to the case at bar for the simple reason that said proviso
operates only when "no zonal valuation has been prescribed." The properties located in
Barrio Banica, Roxas City were already subject to a zonal valuation, a fact which even
petitioner has admitted in its petition, thus:
It must be noted that under the schedule of zonal values, Barangay Banica, where the
subject lots are situated, has a single classification only that of a residential area.
Accordingly, it has a prescribed zonal value of Php650.00 per square meter. 13
Petitioner, however, also relies on Section 2 (a) of the Zonal Valuation Guidelines, to
justify its action. Said section states:
2. Predominant Use of Property.
a) All real properties, regardless of actual use, located in a street/barangay zone, the
use of which are predominantly commercial shall be classified as "Commercial" for
purposes of zonal valuation.
In BIR Ruling No. 041-2001, issued on September 18, 2001, the BIR tackled the
application of a provision which is identical to Section 2 (a) of the Zonal Valuation
Guidelines. BIR Ruling No. 041-2001 involved a request by the Iglesia Ni Cristo that the
re-computation of CGT and DST based on the predominant use of the real properties
located at Mindanao Avenue, Quezon City, be set aside. In said case, the Iglesia ni
Cristo paid the CGT and DST based on the zonal value of residential lots in Quezon
City. The Revenue District Officer, however, ordered a re-computation of the CGT and
DST based on the ground that the real property is located in a predominantly
commercial area and must be classified as commercial for purposes of zonal valuation.
The BIR ruled in favor of Iglesia ni Cristo stating that "Certain Guidelines in the
Implementation of Zonal Valuation of Real Properties for RDO No. 38, applying the
predominant use of property as the basis for the computation of the Capital Gains and
Documentary Stamp Taxes, shall apply only when the real property is located in an
area or zone where the properties are not yet classified and their respective zonal
valuation are not yet determined." The pertinent portion of BIR Ruling No. 041-2001
reads:
In reply, please be informed that this Office finds your request meritorious. The number
2 guideline laid down in Certain Guidelines in the implementation of Zonal valuation of
Real Properties for RDO No. 38- North Quezon City xxx does not apply to this case.
Number 2 of the CERTAIN GUIDELINES IN THE IMPLEMENTATION OF ZONAL
VALUATION OF REAL PROPERTIES FOR RD NO. 38 NORTH QUEZON CITY"
provides:
"2. PREDOMINANT USE OF PROPERTY:
ALL REAL PROPERTIES REGARDLESS OF ACTUAL USE, LOCATED IN A
STREET/BARANGAY ZONE, THE USE OF WHICH ARE PREDOMINANTLY
COMMERCIAL SHALL BE CLASSIFIED AS 'COMMERICIAL'FOR PURPOSES OF
ZONAL VALUATION."
It is the considered opinion of this Office that the guideline applies when the real
property is located in an area or zone where the properties are not yet classified
and their respective zonal valuation are not yet determined.
In the instant case, however, the classification and valuation of the properties
located in Mindanao Avenue, Bagong Bantay, have already been determined. Under
Department of Finance Order No. 6-2000, the properties along Mindanao Avenue had
already been classified as residential and commercial. The zonal valuation thereof had
already been determined. x x x Therefore, the Revenue District Officer of RDO No. 38
has no discretion to determine the classification or valuation of the properties
located in the pertinent area. The computation of the capital gains and documentary
stamp taxes shall be based on the zonal of residential properties located at Mindanao
Avenue, Bago Bantay, Quezon City.141avvphil
Based on the foregoing, this Court need not belabour on the applicability of Section 2 (a),
as the BIR itself has already ruled that the same shall apply only when the real property
is located in an area or zone where the properties are not yet classified and their
respective zonal valuation are not yet determined. As mentioned earlier, the subject
properties were already part of the 1995 Revised Zonal Value of Real Properties which
classified the same as residential with a zonal value of Php650.00 per square meter; thus,
Section 2 (a) clearly has no application.
This Court agrees with the observation of the CTA that "zonal valuation was established
with the objective of having an efficient tax administration by minimizing the use of
discretion in the determination of the tax based on the part of the administrator on one
hand and the taxpayer on the other hand." 15 Zonal value is determined for the purpose
of establishing a more realistic basis for real property valuation. Since internal revenue
taxes, such as CGT and DST, are assessed on the basis of valuation, the zonal valuation
existing at the time of the sale should be taken into account.16
If petitioner feels that the properties in Barrio Banica should also be classified as
commercial, then petitioner should work for its revision in accordance with Revenue
Memorandum Order No. 58-69. The burden was on petitioner to prove that the
classification and zonal valuation in Barrio Banica have been revised in accordance with
the prevailing memorandum. In the absence of proof to the contrary, the 1995 Revised
Zonal Values of Real Properties must be followed.
Lastly, this Court takes note of the wording of Section 2 (b) of the Zonal Valuation
Guidelines, to wit:
2. Predominant Use of Property.
b) The predominant use of other classification of properties located in a street/barangay
zone, regardless of actual use shall be considered for purposes of zonal valuation.
Based thereon, this Court rules that even assuming arguendo that the subject properties
were used for commercial purposes, the same remains to be residential for zonal value
purposes. It appears that actual use is not considered for zonal valuation, but the
predominant use of other classification of properties located in the zone. Again, it is
undisputed that the entire Barrio Banica has been classified as residential.
WHEREFORE, premises considered, the petition is denied. The November 9, 2005
Decision of the Court of Tax Appeals En Banc, in CTA-E.B. No. 77, is hereby
AFFIRMED.
SO ORDERED.

CIR v. HANTEX

Before us is a petition for review of the Decision1 of the Court of Appeals (CA) which
reversed the Decision2 of the Court of Tax Appeals (CTA) in CTA Case No. 5126,
upholding the deficiency income and sales tax assessments against respondent Hantex
Trading Co., Inc.
The Antecedents
The respondent is a corporation duly organized and existing under the laws of the
Philippines. Being engaged in the sale of plastic products, it imports synthetic resin and
other chemicals for the manufacture of its products. For this purpose, it is required to file
an Import Entry and Internal Revenue Declaration (Consumption Entry) with the Bureau
of Customs under Section 1301 of the Tariff and Customs Code.
Sometime in October 1989, Lt. Vicente Amoto, Acting Chief of Counter-Intelligence
Division of the Economic Intelligence and Investigation Bureau (EIIB), received
confidential information that the respondent had imported synthetic resin amounting to
P115,599,018.00 but only declared P45,538,694.57.3 According to the informer, based
on photocopies of 77 Consumption Entries furnished by another informer, the 1987
importations of the respondent were understated in its accounting records.4 Amoto
submitted a report to the EIIB Commissioner recommending that an inventory audit of
the respondent be conducted by the Internal Inquiry and Prosecution Office (IIPO) of the
EIIB.5
Acting on the said report, Jose T. Almonte, then Commissioner of the EIIB, issued
Mission Order No. 398-896 dated November 14, 1989 for the audit and investigation of
 the importations of Hantex for 1987. The IIPO issued subpoena duces tecum and ad
testificandum for the president and general manager of the respondent to appear in a
hearing and bring the following:
1. Books of Accounts for the year 1987;
2. Record of Importations of Synthetic Resin and Calcium Carbonate for the year 1987;
3. Income tax returns & attachments for 1987; and
4. Record of tax payments.7
However, the respondents president and general manager refused to comply with the
subpoena, contending that its books of accounts and records of importation of synthetic
resin and calcium bicarbonate had been investigated repeatedly by the Bureau of
Internal Revenue (BIR) on prior occasions.8 The IIPO explained that despite such
previous investigations, the EIIB was still authorized to conduct an investigation
pursuant to Section 26-A of Executive Order No. 127. Still, the respondent refused to
comply with the subpoena issued by the IIPO. The latter forthwith secured certified
copies of the Profit and Loss Statements for 1987 filed by the respondent with the
Securities and Exchange Commission (SEC).9 However, the IIPO failed to secure
certified copies of the respondents 1987 Consumption Entries from the Bureau of
Customs since, according to the custodian thereof, the original copies had been eaten
by termites.10
In a Letter dated June 28, 1990, the IIPO requested the Chief of the Collection Division,
Manila International Container Port, and the Acting Chief of the Collection Division, Port
of Manila, to authenticate the machine copies of the import entries supplied by the
informer. However, Chief of the Collection Division Merlita D. Tomas could not do so
because the Collection Division did not have the original copies of the entries. Instead,
she wrote the IIPO that, as gleaned from the records, the following entries had been
duly processed and released after the payment of duties and taxes:
IMPORTER HANTEX TRADING CO., INC. SERIES OF 1987
ENTRY NO. DATE ENTRY NO. DATE RELEASED
RELEASED
03058-87 1/30/87 50265-87 12/9/87
09120-87 3/20/87 46427-87 11/27/87
18089-87 5/21/87 30764-87 8/21/87
19439-87 6/2/87 30833-87 8/20/87
19441-87 6/3/87 34690-87 9/16/87
11667-87 4/15/87 34722-87 9/11/87
23294-87 7/7/87 43234-87 11/2/87
45478-87 11/16/87 44850-87 11/16/87
45691-87 12/2/87 44851-87 11/16/87
25464-87 7/16/87 46461-87 11/19/87
26483-87 7/23/87 46467-87 11/18/87
29950-87 8/11/87 48091-87 11-27-8711
Acting Chief of the Collection Division of the Bureau of Customs Augusto S. Danganan
could not authenticate the machine copies of the import entries as well, since the
original copies of the said entries filed with the Bureau of Customs had apparently been
eaten by termites. However, he issued a certification that the following enumerated
entries were filed by the respondent which were processed and released from the Port
of Manila after payment of duties and taxes, to wit:
Hantex Trading Co., Inc.
Entry No. Date Released Entry No. Date Released
3903 1/29/87 22869 4/8/87
4414 1/20/87 19441 3/31/87
10683 2/17/87 24189 4/21/87
12611 2/24/87 26431 4/20/87
12989 2/26/87 45478 7/3/87
17050 3/13/87 26796 4/23/87
17169 3/13/87 28827 4/30/87
18089 3/16/87 31617 5/14/87
19439 4/1/87 39068 6/5/87
21189 4/3/87 42581 6/21/87
43451 6/29/87 42793 6/23/87
42795 6/23/87 45477 7/3/87
35582 not received 85830 11/13/87
45691 7/3/87 86650 not received
46187 7/8/87 87647 11/18/87
46427 7/3/87 88829 11/23/87
57669 8/12/87 92293 12/3/87
62471 8/28/87 93292 12/7/87
63187 9/2/87 96357 12/16/87
66859 9/15/87 96822 12/15/87
67890 9/17/87 98823 not received
68115 9/15/87 99428 12/28/87
69974 9/24/87 99429 12/28/87
72213 10/2/87 99441 12/28/87
77688 10/16/87 101406 1/5/87
84253 11/10/87 101407 1/8/87
85534 11/11/87 3118 1-19-8712
Bienvenido G. Flores, Chief of the Investigation Division, and Lt. Leo Dionela, Lt.
Vicente Amoto and Lt. Rolando Gatmaitan conducted an investigation. They relied on
the certified copies of the respondents Profit and Loss Statement for 1987 and 1988 on
file with the SEC, the machine copies of the Consumption Entries, Series of 1987,
submitted by the informer, as well as excerpts from the entries certified by Tomas and
Danganan.
Based on the documents/records on hand, inclusive of the machine copies of the
Consumption Entries, the EIIB found that for 1987, the respondent had importations
totaling P105,716,527.00 (inclusive of advance sales tax). Compared with the declared
sales based on the Profit and Loss Statements filed with the SEC, the respondent had
unreported sales in the amount of P63,032,989.17, and its corresponding income tax
liability was P41,916,937.78, inclusive of penalty charge and interests.
EIIB Commissioner Almonte transmitted the entire docket of the case to the BIR and
recommended the collection of the total tax assessment from the respondent. 13
On February 12, 1991, Deputy Commissioner Deoferio, Jr. issued a Memorandum to
the BIR Assistant Commissioner for Special Operations Service, directing the latter to
prepare a conference letter advising the respondent of its deficiency taxes. 14
Meanwhile, as ordered by the Regional Director, Revenue Enforcement Officers
Saturnino D. Torres and Wilson Filamor conducted an investigation on the 1987
importations of the respondent, in the light of the records elevated by the EIIB to the
BIR, inclusive of the photocopies of the Consumption Entries. They were to ascertain
the respondents liability for deficiency sales and income taxes for 1987, if any. Per
Torres and Filamors Report dated March 6, 1991 which was based on the report of the
EIIB and the documents/records appended thereto, there was a prima facie case of
fraud against the respondent in filing its 1987 Consumption Entry reports with the
Bureau of Customs. They found that the respondent had unrecorded importation in the
total amount of P70,661,694.00, and that the amount was not declared in its income tax
return for 1987. The District Revenue Officer and the Regional Director of the BIR
concurred with the report.15
Based on the said report, the Acting Chief of the Special Investigation Branch wrote the
respondent and invited its representative to a conference at 10:00 a.m. of March 14,
1991 to discuss its deficiency internal revenue taxes and to present whatever
documentary and other evidence to refute the same.16 Appended to the letter was a
computation of the deficiency income and sales tax due from the respondent, inclusive
of increments:
B. Computations:
1. Cost of Sales Ratio A2/A1 85.492923%
2. Undeclared Sales Imported A3/B1 110,079,491.61
3. Undeclared Gross Profit B2-A3 15,969,316.61
C. Deficiency Taxes Due:
1. Deficiency Income Tax B3 x 35% 5,589,261.00
50% Surcharge C1 x 50% 2,794,630.50
Interest to 2/28/91 C1 x 57.5% 3,213,825.08
Total 11,597,825.58
2. Deficiency Sales Tax
at 10% 7,290,082.72
at 20% 10,493,312.31
Total Due 17,783,395.03
Less: Advanced Sales Taxes Paid 11,636,352.00
Deficiency Sales Tax 6,147,043.03
50% Surcharge C2 x 50% 3,073,521.52
Interest to 2/28/91 5,532,338.73
Total 14,752,903.2817
The invitation was reiterated in a Letter dated March 15, 1991. In his Reply dated March
15, 1991, Mariano O. Chua, the President and General Manager of the respondent,
requested that the report of Torres and Filamor be set aside on the following claim:
[W]e had already been investigated by RDO No. 23 under Letters of Authority Nos.
0322988 RR dated Oct. 1, 1987, 0393561 RR dated Aug. 17, 1988 and 0347838 RR
dated March 2, 1988, and re-investigated by the Special Investigation Team on Aug. 17,
1988 under Letter of Authority No. 0357464 RR, and the Intelligence and Investigation
Office on Sept. 27, 1988 under Letter of Authority No. 0020188 NA, all for income and
business tax liabilities for 1987. The Economic Intelligence and Investigation Bureau on
Nov. 20, 1989, likewise, confronted us on the same information for the same year.
In all of these investigations, save your request for an informal conference, we
welcomed them and proved the contrary of the allegation. Now, with your new inquiry,
we think that there will be no end to the problem.
Madam, we had been subjected to so many investigations and re-investigations for
1987 and nothing came out except the payment of deficiency taxes as a result of
oversight. Tax evasion through underdeclaration of income had never been proven. 18
Invoking Section 23519 of the 1977 National Internal Revenue Code (NIRC), as
amended, Chua requested that the inquiry be set aside.
The petitioner, the Commissioner of Internal Revenue, through Assistant Commissioner
for Collection Jaime M. Maza, sent a Letter dated April 15, 1991 to the respondent
demanding payment of its deficiency income tax of P13,414,226.40 and deficiency
sales tax of P14,752,903.25, inclusive of surcharge and interest.20 Appended thereto
were the Assessment Notices of Tax Deficiency Nos. FAS-1-87-91-001654 and FAS-4-
87-91-001655.21
On February 12, 1992, the Chief of the Accounts Receivables/Billing Division of the BIR
sent a letter to the respondent demanding payment of its tax liability due for 1987 within
ten (10) days from notice, on pain of the collection tax due via a warrant of distraint and
levy and/or judicial action.22 The Warrant of Distraint and/or Levy23 was actually served
on the respondent on January 21, 1992. On September 7, 1992, it wrote the
Commissioner of Internal Revenue protesting the assessment on the following grounds:
I. THAT THE ASSESSMENT HAS NO FACTUAL AS WELL AS LEGAL BASIS, THE
FACT THAT NO INVESTIGATION OF OUR RECORDS WAS EVER MADE BY THE
EIIB WHICH RECOMMENDED ITS ISSUANCE.24
II. THAT GRANTING BUT WITHOUT ADMITTING THAT OUR PURCHASES FOR
1987 AMOUNTED TO P105,716,527.00 AS CLAIMED BY THE EIIB, THE
ASSESSMENT OF A DEFICIENCY INCOME TAX IS STILL DEFECTIVE FOR IT
FAILED TO CONSIDER OUR REAL PURCHASES OF P45,538,694.57.25
III. THAT THE ASSESSMENT OF A DEFICIENCY SALES TAX IS ALSO BASELESS
AND UNFOUNDED CONSIDERING THAT WE HAVE DUTIFULLY PAID THE SALES
TAX DUE FROM OUR BUSINESS.26
In view of the impasse, administrative hearings were conducted on the respondents
protest to the assessment. During the hearing of August 20, 1993, the IIPO
representative presented the photocopies of the Consumption and Import Entries and
the Certifications issued by Tomas and Danganan of the Bureau of Customs. The IIPO
representative testified that the Bureau of Customs failed to furnish the EIIB with
certified copies of the Consumption and Import Entries; hence, the EIIB relied on the
machine copies from their informer.27
The respondent wrote the BIR Commissioner on July 12, 1993 questioning the
assessment on the ground that the EIIB representative failed to present the original, or
authenticated, or duly certified copies of the Consumption and Import Entry Accounts, or
excerpts thereof if the original copies were not readily available; or, if the originals were
in the official custody of a public officer, certified copies thereof as provided for in
Section 12, Chapter 3, Book VII, Administrative Procedure, Administrative Order of
1987. It stated that the only copies of the Consumption Entries submitted to the Hearing
Officer were mere machine copies furnished by an informer of the EIIB. It asserted that
the letters of Tomas and Danganan were unreliable because of the following:
In the said letters, the two collection officers merely submitted a listing of alleged import
entry numbers and dates released of alleged importations by Hantex Trading Co., Inc.
of merchandise in 1987, for which they certified that the corresponding duties and taxes
were paid after being processed in their offices. In said letters, no amounts of the
landed costs and advance sales tax and duties were stated, and no particulars of the
duties and taxes paid per import entry document was presented.
The contents of the two letters failed to indicate the particulars of the importations per
entry number, and the said letters do not constitute as evidence of the amounts of
importations of Hantex Trading Co., Inc. in 1987.28
The respondent cited the following findings of the Hearing Officer:
[T]hat the import entry documents do not constitute evidence only indicate that the
tax assessments in question have no factual basis, and must, at this point in time, be
withdrawn and cancelled. Any new findings by the IIPO representative who attended the
hearing could not be used as evidence in this hearing, because all the issues on the tax
assessments in question have already been raised by the herein taxpayer. 29
The respondent requested anew that the income tax deficiency assessment and the
sales tax deficiency assessment be set aside for lack of factual and legal basis.
The BIR Commissioner30 wrote the respondent on December 10, 1993, denying its
letter-request for the dismissal of the assessments.31 The BIR Commissioner admitted,
in the said letter, the possibility that the figures appearing in the photocopies of the
Consumption Entries had been tampered with. She averred, however, that she was not
proscribed from relying on other admissible evidence, namely, the Letters of Torres and
Filamor dated August 7 and 22, 1990 on their investigation of the respondents tax
liability. The Commissioner emphasized that her decision was final.32
The respondent forthwith filed a petition for review in the CTA of the Commissioners
Final Assessment Letter dated December 10, 1993 on the following grounds:
First. The alleged 1987 deficiency income tax assessment (including increments) and
the alleged 1987 deficiency sales tax assessment (including increments) are void ab
initio, since under Sections 16(a) and 49(b) of the Tax Code, the Commissioner shall
examine a return after it is filed and, thereafter, assess the correct amount of tax. The
following facts obtaining in this case, however, are indicative of the incorrectness of the
tax assessments in question: the deficiency interests imposed in the income and
percentage tax deficiency assessment notices were computed in violation of the
provisions of Section 249(b) of the NIRC of 1977, as amended; the percentage tax
deficiency was computed on an annual basis for the year 1987 in accordance with the
provision of Section 193, which should have been computed in accordance with Section
162 of the 1977 NIRC, as amended by Pres. Decree No. 1994 on a quarterly basis; and
the BIR official who signed the deficiency tax assessments was the Assistant
Commissioner for Collection, who had no authority to sign the same under the NIRC.
Second. Even granting arguendo that the deficiency taxes and increments for 1987
against the respondent were correctly computed in accordance with the provisions of
the Tax Code, the facts indicate that the above-stated assessments were based on
alleged documents which are inadmissible in either administrative or judicial
proceedings. Moreover, the alleged bases of the tax computations were anchored on
mere presumptions and not on actual facts. The alleged undeclared purchases for 1987
were based on mere photocopies of alleged import entry documents, not the original
ones, and which had never been duly certified by the public officer charged with the
custody of such records in the Bureau of Customs. According to the respondent, the
alleged undeclared sales were computed based on mere presumptions as to the
alleged gross profit contained in its 1987 financial statement. Moreover, even the
alleged financial statement of the respondent was a mere machine copy and not an
official copy of the 1987 income and business tax returns. Finally, the respondent was
following the accrual method of accounting in 1987, yet, the BIR investigator who
computed the 1987 income tax deficiency failed to allow as a deductible item the
alleged sales tax deficiency for 1987 as provided for under Section 30(c) of the NIRC of
1986.33
The Commissioner did not adduce in evidence the original or certified true copies of the
1987 Consumption Entries on file with the Commission on Audit. Instead, she offered in
evidence as proof of the contents thereof, the photocopies of the Consumption Entries
which the respondent objected to for being inadmissible in evidence.34 She also failed to
present any witness to prove the correct amount of tax due from it. Nevertheless, the
CTA provisionally admitted the said documents in evidence, subject to its final
evaluation of their relevancy and probative weight to the issues involved.35
On December 11, 1997, the CTA rendered a decision, the dispositive portion of which
reads:
IN THE LIGHT OF ALL THE FOREGOING, judgment is hereby rendered DENYING the
herein petition. Petitioner is hereby ORDERED TO PAY the respondent Commissioner
of Internal Revenue its deficiency income and sales taxes for the year 1987 in the
amounts of P11,182,350.26 and P12,660,382.46, respectively, plus 20% delinquency
interest per annum on both deficiency taxes from April 15, 1991 until fully paid pursuant
to Section 283(c)(3) of the 1987 Tax Code, with costs against the petitioner.
SO ORDERED.36
The CTA ruled that the respondent was burdened to prove not only that the assessment
was erroneous, but also to adduce the correct taxes to be paid by it. The CTA declared
that the respondent failed to prove the correct amount of taxes due to the BIR. It also
ruled that the respondent was burdened to adduce in evidence a certification from the
Bureau of Customs that the Consumption Entries in question did not belong to it.
On appeal, the CA granted the petition and reversed the decision of the CTA. The
dispositive portion of the decision reads:
FOREGOING PREMISES CONSIDERED, the Petition for Review is GRANTED and the
December 11, 1997 decision of the CTA in CTA Case No. 5162 affirming the 1987
deficiency income and sales tax assessments and the increments thereof, issued by the
BIR is hereby REVERSED. No costs.37
The Ruling of the Court of Appeals
The CA held that the income and sales tax deficiency assessments issued by the
petitioner were unlawful and baseless since the copies of the import entries relied upon
in computing the deficiency tax of the respondent were not duly authenticated by the
public officer charged with their custody, nor verified under oath by the EIIB and the BIR
investigators.38 The CA also noted that the public officer charged with the custody of the
import entries was never presented in court to lend credence to the alleged loss of the
originals.39 The CA pointed out that an import entry is a public document which falls
within the provisions of Section 19, Rule 132 of the Rules of Court, and to be admissible
for any legal purpose, Section 24, Rule 132 of the Rules of Court should apply. 40 Citing
the ruling of this Court in Collector of Internal Revenue v. Benipayo,41 the CA ruled that
the assessments were unlawful because they were based on hearsay evidence. The
CA also ruled that the respondent was deprived of its right to due process of law.
The CA added that the CTA should not have just brushed aside the legal requisites
provided for under the pertinent provisions of the Rules of Court in the matter of the
admissibility of public documents, considering that substantive rules of evidence should
not be disregarded. It also ruled that the certifications made by the two Customs
Collection Chiefs under the guise of supporting the respondents alleged tax deficiency
assessments invoking the best evidence obtainable rule under the Tax Code should not
be permitted to supplant the best evidence rule under Section 7, Rule 130 of the Rules
of Court.
Finally, the CA noted that the tax deficiency assessments were computed without the
tax returns. The CA opined that the use of the tax returns is indispensable in the
computation of a tax deficiency; hence, this essential requirement must be complied
with in the preparation and issuance of valid tax deficiency assessments. 42
The Present Petition
The Commissioner of Internal Revenue, the petitioner herein, filed the present petition
for review under Rule 45 of the Rules of Court for the reversal of the decision of the CA
and for the reinstatement of the ruling of the CTA.
As gleaned from the pleadings of the parties, the threshold issues for resolution are the
following: (a) whether the petition at bench is proper and complies with Sections 4 and
5, Rule 7 of the Rules of Court; (b) whether the December 10, 1991 final assessment of
the petitioner against the respondent for deficiency income tax and sales tax for the
latters 1987 importation of resins and calcium bicarbonate is based on competent
evidence and the law; and (c) the total amount of deficiency taxes due from the
respondent for 1987, if any.
On the first issue, the respondent points out that the petition raises both questions of
facts and law which cannot be the subject of an appeal by certiorari under Rule 45 of
the Rules of Court. The respondent notes that the petition is defective because the
verification and the certification against forum shopping were not signed by the
petitioner herself, but only by the Regional Director of the BIR. The respondent submits
that the petitioner should have filed a motion for reconsideration with the CA before
filing the instant petition for review.43
We find and so rule that the petition is sufficient in form. A verification and certification
against forum shopping signed by the Regional Director constitutes sufficient
compliance with the requirements of Sections 4 and 5, Rule 7 of the Rules of Court.
Under Section 10 of the NIRC of 1997,44 the Regional Director has the power to
administer and enforce internal revenue laws, rules and regulations, including the
assessment and collection of all internal revenue taxes, charges and fees. Such power
is broad enough to vest the Revenue Regional Director with the authority to sign the
verification and certification against forum shopping in behalf of the Commissioner of
Internal Revenue. There is no other person in a better position to know the collection
cases filed under his jurisdiction than the Revenue Regional Director.
Moreover, under Revenue Administrative Order No. 5-83,45 the Regional Director is
authorized to sign all pleadings filed in connection with cases referred to the Revenue
Regions by the National Office which, otherwise, require the signature of the petitioner.
We do not agree with the contention of the respondent that a motion for reconsideration
ought to have been filed before the filing of the instant petition. A motion for
reconsideration of the decision of the CA is not a condition sine qua non for the filing of
a petition for review under Rule 45. As we held in Almora v. Court of Appeals:46
Rule 45, Sec. 1 of the Rules of Court, however, distinctly provides that:
A party may appeal by certiorari from a judgment of the Court of Appeals, by filing with
the Supreme Court a petition for certiorari within fifteen (15) days from notice of
judgment, or of the denial of his motion for reconsideration filed in due time. (Emphasis
supplied)
The conjunctive "or" clearly indicates that the 15-day reglementary period for the filing of
a petition for certiorari under Rule 45 commences either from notice of the questioned
judgment or from notice of denial of the appellants motion for reconsideration. A prior
motion for reconsideration is not indispensable for a petition for review on certiorari
under Rule 45 to prosper. 47
While Rule 45 of the Rules of Court provides that only questions of law may be raised
by the petitioner and resolved by the Court, under exceptional circumstances, the Court
may take cognizance thereof and resolve questions of fact. In this case, the findings
and conclusion of the CA are inconsistent with those of the CTA, not to mention those of
the Commissioner of Internal Revenue. The issues raised in this case relate to the
propriety and the correctness of the tax assessments made by the petitioner against the
respondent, as well as the propriety of the application of Section 16, paragraph (b) of
the 1977 NIRC, as amended by Pres. Decree Nos. 1705, 1773, 1994 and Executive
Order No. 273, in relation to Section 3, Rule 132 of the Rules of Evidence. There is also
an imperative need for the Court to resolve the threshold factual issues to give justice to
the parties, and to determine whether the CA capriciously ignored, misunderstood or
misinterpreted cogent facts and circumstances which, if considered, would change the
outcome of the case.
On the second issue, the petitioner asserts that since the respondent refused to
cooperate and show its 1987 books of account and other accounting records, it was
proper for her to resort to the best evidence obtainable the photocopies of the import
entries in the Bureau of Customs and the respondents financial statement filed with the
SEC.48 The petitioner maintains that these import entries were admissible as secondary
evidence under the best evidence obtainable rule, since they were duly authenticated
by the Bureau of Customs officials who processed the documents and released the
cargoes after payment of the duties and taxes due.49 Further, the petitioner points out
that under the best evidence obtainable rule, the tax return is not important in computing
the tax deficiency.50
The petitioner avers that the best evidence obtainable rule under Section 16 of the 1977
NIRC, as amended, legally cannot be equated to the best evidence rule under the Rules
of Court; nor can the best evidence rule, being procedural law, be made strictly
operative in the interpretation of the best evidence obtainable rule which is substantive
in character.51 The petitioner posits that the CTA is not strictly bound by technical rules
of evidence, the reason being that the quantum of evidence required in the said court is
merely substantial evidence.52
Finally, the petitioner avers that the respondent has the burden of proof to show the
correct assessments; otherwise, the presumption in favor of the correctness of the
assessments made by it stands.53 Since the respondent was allowed to explain its side,
there was no violation of due process.54
The respondent, for its part, maintains that the resort to the best evidence obtainable
method was illegal. In the first place, the respondent argues, the EIIB agents are not
duly authorized to undertake examination of the taxpayers accounting records for
internal revenue tax purposes. Hence, the respondents failure to accede to their
demands to show its books of accounts and other accounting records cannot justify
resort to the use of the best evidence obtainable method.55 Secondly, when a taxpayer
fails to submit its tax records upon demand by the BIR officer, the remedy is not to
assess him and resort to the best evidence obtainable rule, but to punish the taxpayer
according to the provisions of the Tax Code.56
In any case, the respondent argues that the photocopies of import entries cannot be
used in making the assessment because they were not properly authenticated, pursuant
to the provisions of Sections 2457 and 2558 of Rule 132 of the Rules of Court. It avers
that while the CTA is not bound by the technical rules of evidence, it is bound by
substantial rules.59 The respondent points out that the petitioner did not even secure a
certification of the fact of loss of the original documents from the custodian of the import
entries. It simply relied on the report of the EIIB agents that the import entry documents
were no longer available because they were eaten by termites. The respondent posits
that the two collectors of the Bureau of Customs never authenticated the xerox copies
of the import entries; instead, they only issued certifications stating therein the import
entry numbers which were processed by their office and the date the same were
released.60
The respondent argues that it was not necessary for it to show the correct assessment,
considering that it is questioning the assessments not only because they are erroneous,
but because they were issued without factual basis and in patent violation of the
assessment procedures laid down in the NIRC of 1977, as amended.61 It is also pointed
out that the petitioner failed to use the tax returns filed by the respondent in computing
the deficiency taxes which is contrary to law;62 as such, the deficiency assessments
constituted deprivation of property without due process of law.63
Central to the second issue is Section 16 of the NIRC of 1977, as amended, 64 which
provides that the Commissioner of Internal Revenue has the power to make
assessments and prescribe additional requirements for tax administration and
enforcement. Among such powers are those provided in paragraph (b) thereof, which
we quote:
(b) Failure to submit required returns, statements, reports and other documents.
When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by law or regulation or when
there is reason to believe that any such report is false, incomplete or erroneous, the
Commissioner shall assess the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed
by law, or willfully or otherwise files a false or fraudulent return or other document, the
Commissioner shall make or amend the return from his own knowledge and from such
information as he can obtain through testimony or otherwise, which shall be prima facie
correct and sufficient for all legal purposes.65
This provision applies when the Commissioner of Internal Revenue undertakes to
perform her administrative duty of assessing the proper tax against a taxpayer, to make
a return in case of a taxpayers failure to file one, or to amend a return already filed in
the BIR.
The petitioner may avail herself of the best evidence or other information or testimony
by exercising her power or authority under paragraphs (1) to (4) of Section 7 of the
NIRC:
(1) To examine any book, paper, record or other data which may be relevant or material
to such inquiry;
(2) To obtain information from any office or officer of the national and local
governments, government agencies or its instrumentalities, including the Central Bank
of the Philippines and government owned or controlled corporations;
(3) To summon the person liable for tax or required to file a return, or any officer or
employee of such person, or any person having possession, custody, or care of the
books of accounts and other accounting records containing entries relating to the
business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in the
summons and to produce such books, papers, records, or other data, and to give
testimony;
(4) To take such testimony of the person concerned, under oath, as may be relevant or
material to such inquiry; 66
The "best evidence" envisaged in Section 16 of the 1977 NIRC, as amended, includes
the corporate and accounting records of the taxpayer who is the subject of the
assessment process, the accounting records of other taxpayers engaged in the same
line of business, including their gross profit and net profit sales.67 Such evidence also
includes data, record, paper, document or any evidence gathered by internal revenue
officers from other taxpayers who had personal transactions or from whom the subject
taxpayer received any income; and record, data, document and information secured
from government offices or agencies, such as the SEC, the Central Bank of the
Philippines, the Bureau of Customs, and the Tariff and Customs Commission.
The law allows the BIR access to all relevant or material records and data in the person
of the taxpayer. It places no limit or condition on the type or form of the medium by
which the record subject to the order of the BIR is kept. The purpose of the law is to
enable the BIR to get at the taxpayers records in whatever form they may be kept.
Such records include computer tapes of the said records prepared by the taxpayer in
the course of business.68 In this era of developing information-storage technology, there
is no valid reason to immunize companies with computer-based, record-keeping
capabilities from BIR scrutiny. The standard is not the form of the record but where it
might shed light on the accuracy of the taxpayers return.
In Campbell, Jr. v. Guetersloh,69 the United States (U.S.) Court of Appeals (5th Circuit)
declared that it is the duty of the Commissioner of Internal Revenue to investigate any
circumstance which led him to believe that the taxpayer had taxable income larger than
reported. Necessarily, this inquiry would have to be outside of the books because they
supported the return as filed. He may take the sworn testimony of the taxpayer; he may
take the testimony of third parties; he may examine and subpoena, if necessary,
traders and brokers accounts and books and the taxpayers book accounts. The
Commissioner is not bound to follow any set of patterns. The existence of unreported
income may be shown by any practicable proof that is available in the circumstances of
the particular situation. Citing its ruling in Kenney v. Commissioner,70 the U.S. appellate
court declared that where the records of the taxpayer are manifestly inaccurate and
incomplete, the Commissioner may look to other sources of information to establish
income made by the taxpayer during the years in question.71
We agree with the contention of the petitioner that the best evidence obtainable may
consist of hearsay evidence, such as the testimony of third parties or accounts or other
records of other taxpayers similarly circumstanced as the taxpayer subject of the
investigation, hence, inadmissible in a regular proceeding in the regular courts. 72
Moreover, the general rule is that administrative agencies such as the BIR are not
bound by the technical rules of evidence. It can accept documents which cannot be
admitted in a judicial proceeding where the Rules of Court are strictly observed. It can
choose to give weight or disregard such evidence, depending on its trustworthiness.
However, the best evidence obtainable under Section 16 of the 1977 NIRC, as
amended, does not include mere photocopies of records/documents. The petitioner, in
making a preliminary and final tax deficiency assessment against a taxpayer, cannot
anchor the said assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if offered as proof of
the contents thereof. The reason for this is that such copies are mere scraps of paper
and are of no probative value as basis for any deficiency income or business taxes
against a taxpayer. Indeed, in United States v. Davey,73 the U.S. Court of Appeals (2nd
Circuit) ruled that where the accuracy of a taxpayers return is being checked, the
government is entitled to use the original records rather than be forced to accept
purported copies which present the risk of error or tampering.74
In Collector of Internal Revenue v. Benipayo,75 the Court ruled that the assessment
must be based on actual facts. The rule assumes more importance in this case since
the xerox copies of the Consumption Entries furnished by the informer of the EIIB were
furnished by yet another informer. While the EIIB tried to secure certified copies of the
said entries from the Bureau of Customs, it was unable to do so because the said
entries were allegedly eaten by termites. The Court can only surmise why the EIIB or
the BIR, for that matter, failed to secure certified copies of the said entries from the
Tariff and Customs Commission or from the National Statistics Office which also had
copies thereof. It bears stressing that under Section 1306 of the Tariff and Customs
Code, the Consumption Entries shall be the required number of copies as prescribed by
regulations.76 The Consumption Entry is accomplished in sextuplicate copies and
quadruplicate copies in other places. In Manila, the six copies are distributed to the
Bureau of Customs, the Tariff and Customs Commission, the Declarant (Importer), the
Terminal Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner
and the BIR personnel ignored the copy of the Consumption Entries filed with the BIR
and relied on the photocopies supplied by the informer of the EIIB who secured the
same from another informer. The BIR, in preparing and issuing its preliminary and final
assessments against the respondent, even ignored the records on the investigation
made by the District Revenue officers on the respondents importations for 1987.
The original copies of the Consumption Entries were of prime importance to the BIR.
This is so because such entries are under oath and are presumed to be true and correct
under penalty of falsification or perjury. Admissions in the said entries of the importers
documents are admissions against interest and presumptively correct.77
In fine, then, the petitioner acted arbitrarily and capriciously in relying on and giving
weight to the machine copies of the Consumption Entries in fixing the tax deficiency
assessments against the respondent.
The rule is that in the absence of the accounting records of a taxpayer, his tax liability
may be determined by estimation. The petitioner is not required to compute such tax
liabilities with mathematical exactness. Approximation in the calculation of the taxes due
is justified. To hold otherwise would be tantamount to holding that skillful concealment is
an invincible barrier to proof.78 However, the rule does not apply where the estimation is
arrived at arbitrarily and capriciously.79
We agree with the contention of the petitioner that, as a general rule, tax assessments
by tax examiners are presumed correct and made in good faith. All presumptions are in
favor of the correctness of a tax assessment. It is to be presumed, however, that such
assessment was based on sufficient evidence. Upon the introduction of the assessment
in evidence, a prima facie case of liability on the part of the taxpayer is made.80 If a
taxpayer files a petition for review in the CTA and assails the assessment, the prima
facie presumption is that the assessment made by the BIR is correct, and that in
preparing the same, the BIR personnel regularly performed their duties. This rule for tax
initiated suits is premised on several factors other than the normal evidentiary rule
imposing proof obligation on the petitioner-taxpayer: the presumption of administrative
regularity; the likelihood that the taxpayer will have access to the relevant information;
and the desirability of bolstering the record-keeping requirements of the NIRC.81
However, the prima facie correctness of a tax assessment does not apply upon proof
that an assessment is utterly without foundation, meaning it is arbitrary and capricious.
Where the BIR has come out with a "naked assessment," i.e., without any foundation
character, the determination of the tax due is without rational basis.82 In such a
situation, the U.S. Court of Appeals ruled83 that the determination of the Commissioner
contained in a deficiency notice disappears. Hence, the determination by the CTA must
rest on all the evidence introduced and its ultimate determination must find support in
credible evidence.
The issue that now comes to fore is whether the tax deficiency assessment against the
respondent based on the certified copies of the Profit and Loss Statement submitted by
the respondent to the SEC in 1987 and 1988, as well as certifications of Tomas and
Danganan, is arbitrary, capricious and illegal. The CTA ruled that the respondent failed
to overcome the prima facie correctness of the tax deficiency assessment issued by the
petitioner, to wit:
The issue should be ruled in the affirmative as petitioner has failed to rebut the validity
or correctness of the aforementioned tax assessments. It is incongruous for petitioner to
prove its cause by simply drawing an inference unfavorable to the respondent by
attacking the source documents (Consumption Entries) which were the bases of the
assessment and which were certified by the Chiefs of the Collection Division, Manila
International Container Port and the Port of Manila, as having been processed and
released in the name of the petitioner after payment of duties and taxes and the duly
certified copies of Financial Statements secured from the Securities and Exchange
Commission. Any such inference cannot operate to relieve petitioner from bearing its
burden of proof and this Court has no warrant of absolution. The Court should have
been persuaded to grant the reliefs sought by the petitioner should it have presented
any evidence of relevance and competence required, like that of a certification from the
Bureau of Customs or from any other agencies, attesting to the fact that those
consumption entries did not really belong to them.
The burden of proof is on the taxpayer contesting the validity or correctness of an
assessment to prove not only that the Commissioner of Internal Revenue is wrong but
the taxpayer is right (Tan Guan v. CTA, 19 SCRA 903), otherwise, the presumption in
favor of the correctness of tax assessment stands (Sy Po v. CTA, 164 SCRA 524). The
burden of proving the illegality of the assessment lies upon the petitioner alleging it to
be so. In the case at bar, petitioner miserably failed to discharge this duty. 84
We are not in full accord with the findings and ratiocination of the CTA. Based on the
letter of the petitioner to the respondent dated December 10, 1993, the tax deficiency
assessment in question was based on (a) the findings of the agents of the EIIB which
was based, in turn, on the photocopies of the Consumption Entries; (b) the Profit and
Loss Statements of the respondent for 1987 and 1988; and (c) the certifications of
Tomas and Danganan dated August 7, 1990 and August 22, 1990:
In reply, please be informed that after a thorough evaluation of the attending facts, as
well as the laws and jurisprudence involved, this Office holds that you are liable to the
assessed deficiency taxes. The conclusion was arrived at based on the findings of
agents of the Economic Intelligence & Investigation Bureau (EIIB) and of our own
examiners who have painstakingly examined the records furnished by the Bureau of
Customs and the Securities & Exchange Commission (SEC). The examination
conducted disclosed that while your actual sales for 1987 amounted to
P110,731,559.00, you declared for taxation purposes, as shown in the Profit and Loss
Statements, the sum of P47,698,569.83 only. The difference, therefore, of
P63,032,989.17 constitutes as undeclared or unrecorded sales which must be
subjected to the income and sales taxes.
You also argued that our assessment has no basis since the alleged amount of
underdeclared importations were lifted from uncertified or unauthenticated xerox copies
of consumption entries which are not admissible in evidence. On this issue, it must be
considered that in letters dated August 7 and 22, 1990, the Chief and Acting Chief of the
Collection Division of the Manila International Container Port and Port of Manila,
respectively, certified that the enumerated consumption entries were filed, processed
and released from the port after payment of duties and taxes. It is noted that the
certification does not touch on the genuineness, authenticity and correctness of the
consumption entries which are all xerox copies, wherein the figures therein appearing
may have been tampered which may render said documents inadmissible in evidence,
but for tax purposes, it has been held that the Commissioner is not required to make his
determination (assessment) on the basis of evidence legally admissible in a formal
proceeding in Court (Mertens, Vol. 9, p. 214, citing Cohen v. Commissioner). A statutory
notice may be based in whole or in part upon admissible evidence (Llorente v.
Commissioner, 74 TC 260 (1980); Weimerskirch v. Commissioner, 67 TC 672 (1977);
and Rosano v. Commissioner, 46 TC 681 (1966). In the case also of Weimerskirch v.
Commissioner (1977), the assessment was given due course in the presence of
admissible evidence as to how the Commissioner arrived at his determination, although
there was no admissible evidence with respect to the substantial issue of whether the
taxpayer had unreported or undeclared income from narcotics sale. 85
Based on a Memorandum dated October 23, 1990 of the IIPO, the source documents
for the actual cost of importation of the respondent are the machine copies of the
Consumption Entries from the informer which the IIPO claimed to have been certified by
Tomas and Danganan:
The source documents for the total actual cost of importations, abovementioned, were
the different copies of Consumption Entries, Series of 1987, filed by subject with the
Bureau of Customs, marked Annexes "F-1" to "F-68." The total cost of importations is
the sum of the Landed Costs and the Advance Sales Tax as shown in the annexed
entries. These entries were duly authenticated as having been processed and released,
after payment of the duties and taxes due thereon, by the Chief, Collection Division,
Manila International Container Port, dated August 7, 1990, "Annex-G," and the Port of
Manila, dated August 22, 1990, "Annex-H." So, it was established that subject-
importations, mostly resins, really belong to HANTEX TRADING CO., INC.86
It also appears on the worksheet of the IIPO, as culled from the photocopies of the
Consumption Entries from its informer, that the total cost of the respondents importation
for 1987 was P105,761,527.00. Per the report of Torres and Filamor, they also relied on
the photocopies of the said Consumption Entries:
The importations made by taxpayer verified by us from the records of the Bureau of
Customs and xerox copies of which are hereto attached shows the big volume of
importations made and not declared in the income tax return filed by taxpayer.
Based on the above findings, it clearly shows that a prima facie case of fraud exists in
the herein transaction of the taxpayer, as a consequence of which, said transaction has
not been possibly entered into the books of accounts of the subject taxpayer. 87
In fine, the petitioner based her finding that the 1987 importation of the respondent was
underdeclared in the amount of P105,761,527.00 on the worthless machine copies of
the Consumption Entries. Aside from such copies, the petitioner has no other evidence
to prove that the respondent imported goods costing P105,761,527.00. The petitioner
cannot find solace on the certifications of Tomas and Danganan because they did not
authenticate the machine copies of the Consumption Entries, and merely indicated
therein the entry numbers of Consumption Entries and the dates when the Bureau of
Customs released the same. The certifications of Tomas and Danganan do not even
contain the landed costs and the advance sales taxes paid by the importer, if any.
Comparing the certifications of Tomas and Danganan and the machine copies of the
Consumption Entries, only 36 of the entry numbers of such copies are included in the
said certifications; the entry numbers of the rest of the machine copies of the
Consumption Entries are not found therein.
Even if the Court would concede to the petitioners contention that the certification of
Tomas and Danganan authenticated the machine copies of the Consumption Entries
referred to in the certification, it appears that the total cost of importations inclusive of
advance sales tax is only P64,324,953.00 far from the amount of P105,716,527.00
arrived at by the EIIB and the BIR,88 or even the amount of P110,079,491.61 arrived at
by Deputy Commissioner Deoferio, Jr.89 As gleaned from the certifications of Tomas
and Danganan, the goods covered by the Consumption Entries were released by the
Bureau of Customs, from which it can be presumed that the respondent must have paid
the taxes due on the said importation. The petitioner did not adduce any documentary
evidence to prove otherwise.
Thus, the computations of the EIIB and the BIR on the quantity and costs of the
importations of the respondent in the amount of P105,761,527.00 for 1987 have no
factual basis, hence, arbitrary and capricious. The petitioner cannot rely on the
presumption that she and the other employees of the BIR had regularly performed their
duties. As the Court held in Collector of Internal Revenue v. Benipayo,90 in order to
stand judicial scrutiny, the assessment must be based on facts. The presumption of the
correctness of an assessment, being a mere presumption, cannot be made to rest on
another presumption.
Moreover, the uncontroverted fact is that the BIR District Revenue Office had repeatedly
examined the 1987 books of accounts of the respondent showing its importations, and
found that the latter had minimal business tax liability. In this case, the presumption that
the District Revenue officers performed their duties in accordance with law shall apply.
There is no evidence on record that the said officers neglected to perform their duties as
mandated by law; neither is there evidence aliunde that the contents of the 1987 and
1988 Profit and Loss Statements submitted by the respondent with the SEC are
incorrect.
Admittedly, the respondent did not adduce evidence to prove its correct tax liability.
However, considering that it has been established that the petitioners assessment is
barren of factual basis, arbitrary and illegal, such failure on the part of the respondent
cannot serve as a basis for a finding by the Court that it is liable for the amount
contained in the said assessment; otherwise, the Court would thereby be committing a
travesty.
On the disposition of the case, the Court has two options, namely, to deny the petition
for lack of merit and affirm the decision of the CA, without prejudice to the petitioners
issuance of a new assessment against the respondent based on credible evidence; or,
to remand the case to the CTA for further proceedings, to enable the petitioner to
adduce in evidence certified true copies or duplicate original copies of the Consumption
Entries for the respondents 1987 importations, if there be any, and the correct tax
deficiency assessment thereon, without prejudice to the right of the respondent to
adduce controverting evidence, so that the matter may be resolved once and for all by
the CTA. In the higher interest of justice to both the parties, the Court has chosen the
latter option. After all, as the Tax Court of the United States emphasized in Harbin v.
Commissioner of Internal Revenue,91 taxation is not only practical; it is vital. The
obligation of good faith and fair dealing in carrying out its provision is reciprocal and, as
the government should never be over-reaching or tyrannical, neither should a taxpayer
be permitted to escape payment by the concealment of material facts.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the
Court of Appeals is SET ASIDE. The records are REMANDED to the Court of Tax
Appeals for further proceedings, conformably with the decision of this Court. No costs.