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Republic of the Philippines 1.

Books of Accounts for the year 1987;


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

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


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

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

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

Respondent Antonio Villan Manly (Antonio) is a 3) a Toyota Prado for P2,000,000.00 in 2003,
stockholder and the Executive Vice-President of evidenced by a Deed of Sale16 dated July 9,
Standard Realty Corporation, a family-owned 2003.17
corporation.5 He is also engaged in rental
business.6 His spouse, respondent Ruby Ong Manly, is Since respondent spouses failed to showthe source of
a housewife.7 their cash purchases, the revenue officers concluded
that respondent Antonio’s Income Tax Returns (ITRs)
On April 27, 2005, petitioner Bureau of Internal for taxable years 2000, 2001,and 2003 were
Revenue (BIR) issued Letter of Authority No. 2001 underdeclared.18And since the under declaration
000123878authorizing its revenue officers to exceeded 30% of the reported or declared income, it
investigate respondent spouses’ internal revenue tax was considered a prima facie evidence of fraud with
liabilities for taxable year 2003 and prior years. intent to evade the payment of proper taxes due to the
government.19 The revenue officers, thus,
On June 6, 2005, petitioner issued a letter9 to recommended the filing of criminal cases against
respondent spouses requiring them to submit respondent spouses for failing to supply correct and
documentary evidence to substantiate the source of accurate information intheir ITRs for the years 2000,
their cash purchase of a 256-square meter log cabin in 2001, and 2003, punishable under Sections 25420 and
Tagaytay City worth P17,511,010.00. Respondent 25521in relation to Section 248(B)22 of Republic Act No.
spouses, however, failedto comply with the letter.10 8424 or the "Tax Reform Act of 1997," hereinafter
referred to as the National Internal Revenue Code
On June 23, 2005, the revenue officers executed a (NIRC).23
Joint Affidavit11 alleging that respondent Antonio’s
reported or declared annual income for the taxable Respondent spouses, in their Joint Counter-
years 1998-2003 are as follows: Affidavit,24 denied the accusations hurled against them
and alleged that they used their accumulated savings
from their earnings for the past24 years in purchasing
Net Profit the properties.25They also contended that the criminal
able Rental Business complaint should be dismissed because petitioner
Total sources
mpensation (1169-73 G. Tax Due/paid CASH
failed to issue a deficiency assessment against them.26
of Funds
me Masangkay St.,
Tondo, Manila
In response, the revenue officers executed a Joint filed, and report the action taken thereon within ten (10)
Reply-Affidavit.27 Respondent spouses, in turn, days from receipt hereto.
executed a Joint Rejoinder-Affidavit.28
SO ORDERED.38
Ruling of the State Prosecutor
Petitioner sought reconsideration39 but Acting Justice
On August 31, 2006, State ProsecutorMa. Cristina A. Secretary Devanadera denied the same in a
Montera-Barot issued a Resolution29 in I.S. No. 2005- Resolution40dated November 5, 2009.
573 recommending the filing of criminal
charges30 against respondent spouses, to wit: Ruling of the Court of Appeals

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

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

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

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

Income Tax due thereon: The revenue officers alsoidentified the likely source of
the unreported or undeclared income intheir Reply-
First Php500,000.00 125,00 125,0 125,0 Affidavit. The pertinent portion reads:
0.00 00.00 00.00
In excess of 4,913, 42,38 205,6 7. x x x x
Php500,000.00 522.87 8.06 08.14
[Respondent spouses] are into rental business and the
Total income tax due 4,973, 93,71 281,8 net profit for six (6) years before tax summed only
(net tax paid) 765.66 9.06 79.14 to P1,238,938.32 (an average of more or less
Php200,000.00 annually). We asked respondent
[Antonio] if we can proceed to his rented property to
Add: 50% Surcharge 2,486, 46,85 165,3
882.83 9.53 04.07 [appraise] the earning capacity of the building [for]
lease/ rent, but he declined our proposition. Due to
20% Interest (up to 4,104, 77,33 272,7 such refusal made by the respondent, [petitioner], thru
5/31/2005) - 825 376.29 7.43 51.72 its examiners,took pictures of the subject property and
came up with the findings that indeed the unexplained
funds sought to have been used in acquiring the
[P]11, [P]21 [P] valuable property in Tagaytay x x x came from the
Total Tax Due inclusive 7
565,02 7,916 655,3 6 underdeclaration of rental income.80
of Increments
4.79 .02 69.01
Apparently, the revenue officers considered
respondent Antonio’s rental business to be the likely
source of their unreported or undeclared income due to
2000 2001 2003his unjustified refusal to allow the revenue officers to
Funds [Underdeclaration] [P]15,854,758.98 [P]632,462.68 inspect the building.
[P]1,142,525.45
Funds as per Financial [P]1,656,251.02 [P]717,537.32 [P]817,474.55
Respondent spouses’ defense that they had sufficient
as attached to the Income savings to purchase the properties remains self-
serving at thispoint since they have not yet presented
of underdeclaration 957.27% 88.14% any 77evidence to support this. And since there is no
133.24%
evidence yet to suggest that the money they used to
buy the properties was from an existing fund, it is safe
And since the underdeclaration is more than 30%of to assume that that money is income or a flowof wealth
respondent spouses’ reported or declared income, other than a mere return on capital. It is a basic concept
which under Section 248(B) of the NIRC constitutes as in taxation that income denotes a flow of wealth during
prima facie evidence of false or fraudulent return, a definite period of time, while capital is a fund or
petitioner recommended the filing of criminal cases property existing at one distinct point in time.81
against respondent spouses under Sections 254 and
255, in relation to Section 248(B) of the NIRC. Moreover, by just looking at the tables presented by
petitioner, there is a manifest showing that respondent
The CA, however, found no probable cause to indict spouses had under declared their income. The huge
respondent spouses for tax evasion. It agreed with disparity between respondent Antonio’s reported or
declared annual income for the past several years and A. Montera-Barot in LS. No. 2005-573 finding probable
respondent spouses’ cash acquisitions for the years cause to indict respondent spouses Antonio Villan
2000, 2001, and 2003 cannot be ignored. Infact, it Manly and Ruby Ong Manly for Violation of Sections
makes uswonder how they were able to purchase the 254 and 255 of the National Internal Revenue Code are
properties in cash given respondent Antonio’s meager hereby REINSTATED.
income.
SO ORDERED.
In view of the foregoing,we are convinced that there is
probable cause to indict respondent spouses for tax Republic of the Philippines
evasion aspetitioner was able to show that a tax is due SUPREME COURT
from them. Probable cause, for purposes of filing a Manila
criminal information, is defined as such facts that are
sufficient to engender a well-founded belief that a crime FIRST DIVISION
has been committed, that the accusedis probably guilty EN BANC
thereof, and that he should be held for trial.82 It bears
stressing that the determination of probable cause
G.R. No. 166387 January 19, 2009
does not require actual or absolute certainty, nor clear
and convincing evidence of guilt; it only requires
reasonable belief or probability that more likely than not COMMISSIONER OF INTERNAL
a crime has been committed by the accused.83 REVENUE, Petitioners,
vs.
ENRON SUBIC
In completely disregarding the evidence presented and
POWERCORPORATION, Respondents.
in affirming the ruling of the Acting Justice Secretary
Devanadera that no probable cause exists, we find that
the CA committed grave abuse of discretion amounting RESOLUTION
to lack or excess of jurisdiction. As we have said,
ifthere is grave abuse of discretion, the court may step CORONA, J.:
in and proceed to make its own independent
determination of probable cause as judicial review is In this petition for review on certiorari under Rule 45 of
allowed to ensure that the Executive Department acts the Rules of Court, petitioner Commissioner of Internal
within the permissible bounds of its authority or does Revenue (CIR) assails the November 24, 2004
not gravely abuse the same.84 decision1 of the Court of Appeals (CA) annulling the
formal assessment notice issued by the CIR against
We must make it clear, however, that we are only here respondent Enron Subic Power Corporation (Enron) for
to determine probable cause. As to whether
1âwphi1
failure to state the legal and factual bases for such
respondent spouses are guilty of tax evasion is an assessment.
issue that must be resolved during the trial of the
criminal case, where the quantum of proof required is Enron, a domestic corporation registered with the
proof beyond reasonable doubt. Subic Bay Metropolitan Authority as a freeport
enterprise,2 filed its annual income tax return for the
Before we close, we must stress that our ruling in this year 1996 on April 12, 1997. It indicated a net loss of
case should not be interpreted as an unbridled license P7,684,948. Subsequently, the Bureau of Internal
for our tax officials to engage in fishing expeditions and Revenue, through a preliminary five-day
witch-hunting. They should not abuse their letter,3 informed it of a proposed assessment of an
investigative powers, instead they should exercise the alleged P2,880,817.25 deficiency income tax.4 Enron
same within the bounds of the law. They must properly disputed the proposed deficiency assessment in its first
observe the guidelines in making assessments and protest letter.5
investigative procedures to ensure that the
constitutional rights of the taxpayers are well protected On May 26, 1999, Enron received from the CIR a
as we cannot allow the floodgates to be opened for formal assessment notice6 requiring it to pay the
frivolous and malicious tax suits. alleged deficiency income tax of P2,880,817.25 for the
taxable year 1996. Enron protested this deficiency tax
WHEREFORE, the Petition is hereby GRANTED. The assessment.7
Decision dated October 28, 2010 and the Resolution
dated May 10, 2011 of the Court of Appeals in CA-G.R. Due to the non-resolution of its protest within the 180-
SP No. 112479 are hereby REVERSED and SET day period, Enron filed a petition for review in the Court
ASIDE. The Resolutions dated August 31, 2006 and of Tax Appeals (CTA). It argued that the deficiency tax
November 29, 2007 of State Prosecutor Ma. Cristina assessment disregarded the provisions of Section 228
of the National Internal Revenue Code (NIRC), as The formal letter of demand calling for payment of the
amended,8and Section 3.1.4 of Revenue Regulations taxpayer’s deficiency tax or taxes shall state the fact,
(RR) No. 12-999by not providing the legal and factual the law, rules and regulations or jurisprudence on
bases of the assessment. Enron likewise questioned which the assessment is based, otherwise the
the substantive validity of the assessment.10 formal letter of demand and the notice of
assessment shall be void. (emphasis supplied)12
In a decision dated September 12, 2001, the CTA
granted Enron’s petition and ordered the cancellation Section 228 of the NIRC provides that the taxpayer
of its deficiency tax assessment for the year 1996. The shall be informed in writing of the law and the facts on
CTA reasoned that the assessment notice sent to which the assessment is made. Otherwise, the
Enron failed to comply with the requirements of a valid assessment is void. To implement the provisions of
written notice under Section 228 of the NIRC and RR Section 228 of the NIRC, RR No. 12-99 was enacted.
No. 12-99. The CIR’s motion for reconsideration of the Section 3.1.4 of the revenue regulation reads:
CTA decision was denied in a resolution dated
November 12, 2001. 3.1.4. Formal Letter of Demand and Assessment
Notice. – The formal letter of demand and assessment
The CIR appealed the CTA decision to the CA but the notice shall be issued by the Commissioner or his duly
CA affirmed it. The CA held that the audit working authorized representative. The letter of demand
papers did not substantially comply with Section 228 of calling for payment of the taxpayer’s deficiency tax
the NIRC and RR No. 12-99 because they failed to or taxes shall state the facts, the law, rules and
show the applicability of the cited law to the facts of the regulations, or jurisprudence on which the
assessment. The CIR filed a motion for reconsideration assessment is based, otherwise, the formal letter
but this was deemed abandoned when he filed a of demand and assessment notice shall be
motion for extension to file a petition for review in this void. The same shall be sent to the taxpayer only by
Court. registered mail or by personal delivery. xxx (emphasis
supplied)
The CIR now argues that respondent was informed of
the legal and factual bases of the deficiency It is clear from the foregoing that a taxpayer must be
assessment against it. informed in writing of the legal and factual bases of the
tax assessment made against him. The use of the word
We adopt in toto the findings of fact of the CTA, as “shall” in these legal provisions indicates the
affirmed by the CA. In Compagnie Financiere Sucres mandatory nature of the requirements laid down
et Denrees v. CIR,11 we held: therein. We note the CTA’s findings:

We reiterate the well-established doctrine that as a In [this] case, [the CIR] merely issued a formal
matter of practice and principle, [we] will not set aside assessment and indicated therein the supposed tax,
the conclusion reached by an agency, like the CTA, surcharge, interest and compromise penalty due
especially if affirmed by the [CA]. By the very nature of thereon. The Revenue Officers of the [the CIR] in the
its function, it has dedicated itself to the study and issuance of the Final Assessment Notice did not
consideration of tax problems and has necessarily provide Enron with the written bases of the law and
developed an expertise on the subject, unless there facts on which the subject assessment is based. [The
has been an abuse or improvident exercise of authority CIR] did not bother to explain how it arrived at such an
on its part, which is not present here. assessment. Moreso, he failed to mention the specific
provision of the Tax Code or rules and regulations
The CIR errs in insisting that the notice of assessment which were not complied with by Enron.13
in question complied with the requirements of the NIRC
and RR No. 12-99. Both the CTA and the CA concluded that the deficiency
tax assessment merely itemized the deductions
A notice of assessment is: disallowed and included these in the gross income. It
also imposed the preferential rate of 5% on some items
categorized by Enron as costs. The legal and factual
[A] declaration of deficiency taxes issued to a
bases were, however, not indicated.
[t]axpayer who fails to respond to a Pre-Assessment
Notice (PAN) within the prescribed period of time, or
whose reply to the PAN was found to be without merit. The CIR insists that an examination of the facts shows
The Notice of Assessment shall inform the [t]axpayer that Enron was properly apprised of its tax deficiency.
of this fact, and that the report of investigation During the pre-assessment stage, the CIR advised
submitted by the Revenue Officer conducting the audit Enron’s representative of the tax deficiency, informed
shall be given due course. it of the proposed tax deficiency assessment through a
preliminary five-day letter and furnished Enron a copy Republic of the Philippines
of the audit working paper14 allegedly showing in detail SUPREME COURT
the legal and factual bases of the assessment. The CIR Manila
argues that these steps sufficed to inform Enron of the
laws and facts on which the deficiency tax assessment THIRD DIVISION
was based.
G.R. No. 197515 July 2, 2014
We disagree. The advice of tax deficiency, given by the
CIR to an employee of Enron, as well as the preliminary COMMISSIONER OF INTERNAL
five-day letter, were not valid substitutes for the REVENUE, Petitioner,
mandatory notice in writing of the legal and factual vs.
bases of the assessment. These steps were mere UNITED SALVAGE AND TOWAGE (PHILS.),
perfunctory discharges of the CIR’s duties in correctly INC., Respondent.
assessing a taxpayer.15 The requirement for issuing a
preliminary or final notice, as the case may be,
DECISION
informing a taxpayer of the existence of a deficiency
tax assessment is markedly different from the
requirement of what such notice must contain. Just PERALTA, J.:
because the CIR issued an advice, a preliminary letter
during the pre-assessment stage and a final notice, in Before the Court is a petition for review on certiorari
the order required by law, does not necessarily mean under Rule 45 of the Revised Rules of Court which
that Enron was informed of the law and facts on which seeks to review, reverse and set aside the Decision1 of
the deficiency tax assessment was made. the Court of Tax Appeals En Banc (CTA En Banc),
dated June 27, 2011, in the case entitled
The law requires that the legal and factual bases of the Commissioner of Internal Revenue v. United Salvage
assessment be stated in the formal letter of demand and Towage (Phils.), Inc. (USTP), docketed as C.T.A.
and assessment notice. Thus, such cannot be EB No. 662. The facts as culled from the records:
presumed. Otherwise, the express provisions of Article
228 of the NIRC and RR No. 12-99 would be rendered Respondent is engaged in the business of sub-
nugatory. The alleged “factual bases” in the advice, contracting work for service contractors engaged in
preliminary letter and “audit working papers” did not petroleum operations in the Philippines.2 During the
suffice. There was no going around the mandate of the taxable years in question, it had entered into various
law that the legal and factual bases of the assessment contracts and/or sub-contracts with several petroleum
be stated in writing in the formal letter of demand service contractors, such as Shell Philippines
accompanying the assessment notice. Exploration, B.V. and Alorn Production Philippines for
the supply of service vessels.3
We note that the old law merely required that the
taxpayer be notified of the assessment made by the In the course of respondent’s operations, petitioner
CIR. This was changed in 1998 and the taxpayer must found respondent liable for deficiency income tax,
now be informed not only of the law but also of the facts withholding tax, value-added tax (VAT) and
on which the assessment is made. Such amendment
16 documentary stamp tax (DST) for taxable years
is in keeping with the constitutional principle that no 1992,1994, 1997 and 1998.4Particularly, petitioner,
person shall be deprived of property without due through BIR officials, issued demand letters with
process.17 In view of the absence of a fair opportunity attached assessment notices for withholding tax on
for Enron to be informed of the legal and factual bases compensation (WTC) and expanded withholding tax
of the assessment against it, the assessment in (EWT) for taxable years 1992, 1994 and
question was void. We reiterate our ruling in Reyes v. 1998,5 detailed as follows:
Almanzor, et al.:18

Assessment Notice No. Tax Covered Period Amou


Verily, taxes are the lifeblood of the Government and
so should be collected without unnecessary 25-1-000545-92
hindrance. WTC 1992 P50,42
However, such collection should be25-1-000546-92
made in EWT 1992 P14,07
accordance with law as any arbitrariness will negate
the very reason for the Government itself.034-14-000029-94 EWT 1994 P48,46
034-1-000080-98 EWT 1998 P22,43
WHEREFORE, the petition is hereby DENIED. The
November 24, 2004 decision of the Court of Appeals
isAFFIRMED.
On January 29, 1998 and October 24, 2001, USTP No. 25-1-00546-92 dated January 9, 1996 for
filed administrative protests against the 1994 and 1998 deficiency Expanded Withholding Tax and Assessment
EWT assessments, respectively.7 Notice No. 25-1-000545 dated January 9, 1996 for
deficiency Withholding Tax on Compensation are
On February 21, 2003, USTP appealed by way of hereby CANCELLED.
Petition for Review before the Court in action (which
was thereafter raffled to the CTA-Special First Division) SO ORDERED.18
alleging, among others, that the Notices of Assessment
are bereft of any facts, law, rules and regulations or Dissatisfied, petitioner moved to reconsider the
jurisprudence; thus, the assessments are void and the aforesaid ruling. However, in a Resolution19 dated July
right of the government to assess and collect 15, 2010, the CTA-Special First Division denied the
deficiency taxes from it has prescribed on account of same for lack of merit.
the failure to issue a valid notice of assessment within
the applicable period.8 On August 18, 2010, petitioner filed a Petition for
Review with the CTA En Banc praying that the Decision
During the pendency of the proceedings, USTP moved of the CTA-Special First Division, dated March 12,
to withdraw the aforesaid Petition because it availed of 2010,be set aside.20
the benefits of the Tax Amnesty Program under
Republic Act (R.A.) No. 9480.9 Having complied with all On June 27, 2011, the CTA En Banc promulgated a
the requirements therefor, the CTA-Special First Decision which affirmed with modification the Decision
Division partially granted the Motion to Withdraw and dated March 12, 2010 and the Resolution dated July
declared the issues on income tax, VAT and DST 15, 2010 of the CTA-Special First Division, the
deficiencies closed and terminated in accordance with dispositive portion of which reads:
our pronouncement in Philippine Banking Corporation
v. Commissioner of Internal Revenue.10 Consequently,
WHEREFORE, premises considered, the Petition is
the case was submitted for decision covering the
PARTLY GRANTED. The Decision dated March 12,
remaining issue on deficiency EWT and WTC,
2010 and the Resolution dated July 15, 2010 are
respectively, for taxable years 1992, 1994 and 1998.11
AFFIRMED with MODIFICATION upholding the 1998
EWT assessment. In addition to the basic EWT
The CTA-Special First Division held that the deficiency of P14,496.79, USTP is ordered to pay
Preliminary Assessment Notices (PANs) for deficiency surcharge, annual deficiency interest, and annual
EWT for taxable years 1994 and 1998 were not delinquency interest from the date due until full
formally offered; hence, pursuant to Section 34, Rule payment pursuant to Section 249 of the 1997 NIRC.
132 of the Revised Rules of Court, the Court shall
neither consider the same as evidence nor rule on their
SO ORDERED.21
validity.12 As regards the Final Assessment Notices
(FANs) for deficiency EWT for taxable years 1994 and
1998, the CTA-Special First Division held that the Hence, the instant petition raising the following issues:
same do not show the law and the facts on which the
assessments were based.13 Said assessments were, 1. Whether or not the Court of Tax Appeals is
therefore, declared void for failure to comply with governed strictly by the technical rules of
Section 228 of the 1997 National Internal Revenue evidence;
Code (Tax Code).14 From the foregoing, the only
remaining valid assessment is for taxable year 1992.15 2. Whether or not the Expanded Withholding
Tax Assessments issued by petitioner against
Nevertheless, the CTA-Special First Division declared the respondent for taxable year 1994 was
that the right of petitioner to collect the deficiency EWT without any factual and legal basis; and
and WTC, respectively, for taxable year 1992 had
already lapsed pursuant to Section 203 of the Tax 3. Whether or not petitioner’s right to collect the
Code.16 Thus, in ruling for USTP, the CTA-Special First creditable withholding tax and expanded
Division cancelled Assessment Notice Nos. 25-1- withholding tax for taxable year 1992 has
00546-92 and 25-1-000545-92, both dated January 9, already prescribed.22
1996 and covering the period of 1992, as declared in
its Decision17 dated March 12, 2010, the dispositive After careful review of the records and evidence
portion of which provides: presented before us, we find no basis to overturn the
decision of the CTA En Banc.
WHEREFORE, the instant Petition for Review is
hereby GRANTED. Accordingly, Assessment Notice
On this score, our ruling in Compagnie Financiere exceptions to the rule, as pronounced in Vda. de Oñate
Sucres Et Denrees v. CIR,23 is enlightening, to wit: v. Court of Appeals,33 thus:

We reiterate the well-established doctrine that as a From the foregoing provision, it is clear that for
matter of practice and principle, [we] will not set aside evidence to be considered, the same must be formally
the conclusion reached by an agency, like the CTA, offered. Corollarily, the mere fact that a particular
especially if affirmed by the [CA]. By the very nature of document is identified and marked as an exhibit does
its function, it has dedicated itself to the study and not mean that it has already been offered as part of the
consideration of tax problems and has necessarily evidence of a party. In Interpacific Transit, Inc. v.
developed an expertise on the subject, unless there Aviles[186 SCRA 385, 388-389 (1990)], we had the
has been an abuse or improvident exercise of authority occasion to make a distinction between identification of
on its part, which is not present here.24 documentary evidence and its formal offer as an
exhibit. We said that the first is done in the course of
Now, to the first issue. the trial and is accompanied by the marking of the
evidence as an exhibit while the second is done only
Petitioner implores unto this Court that technical rules when the party rests its case and not before. A party,
of evidence should not be strictly applied in the interest therefore, may opt to formally offer his evidence if he
of substantial justice, considering that the mandate of believes that it will advance his cause or not to do so
the CTA explicitly provides that its proceedings shall at all. In the event he chooses to do the latter, the trial
not be governed by the technical rules of court is not authorized by the Rules to consider the
evidence.25 Relying thereon, petitioner avers that while same.
it failed to formally offer the PANs of EWTs for taxable
years 1994and 1998, their existence and due However, in People v. Napat-a[179 SCRA 403 (1989)]
execution were duly tackled during the presentation of citing People v. Mate[103 SCRA 484 (1980)], we
petitioner’s witnesses, Ruleo Badilles and Carmelita relaxed the foregoing rule and allowed evidence not
Lynne de Guzman (for taxable year 1994) and Susan formally offered to be admitted and considered by the
Salcedo-De Castro and Edna A. Ortalla (for taxable trial court provided the following requirements are
year 1998).26 Petitioner further claims that although the present, viz.: first, the same must have been duly
PANs were not marked as exhibits, their existence and identified by testimony duly recorded and, second, the
value were properly established, since the BIR records same must have been incorporated in the records of
for taxable years 1994 and 1998 were forwarded by the case.34
petitioner to the CTA in compliance with the latter’s
directive and were, in fact, made part of the CTA The evidence may, therefore, be admitted provided the
records.27 following requirements are present: (1) the same must
have been duly identified by testimony duly recorded;
Under Section 828 of Republic Act (R.A.) No. 1125, the and (2) the same must have been incorporated in the
CTA is categorically described as a court of record.29 As records of the case. Being an exception, the same may
such, it shall have the power to promulgate rules and only be applied when there is strict compliance with the
regulations for the conduct of its business, and as may requisites mentioned above; otherwise, the general
be needed, for the uniformity of decisions within its rule in Section 34 of Rule 132 of the Rules of Court
jurisdiction.30 Moreover, as cases filed before it are should prevail.35
litigated de novo, party-litigants shall prove every
minute aspect of their cases.31 Thus, no evidentiary In the case at bar, petitioner categorically admitted that
value can be given the pieces of evidence submitted it failed to formally offer the PANs as evidence. Worse,
by the BIR, as the rules on documentary evidence it advanced no justifiable reason for such fatal
require that these documents must be formally offered omission. Instead, it merely alleged that the existence
before the CTA.32 Pertinent is Section 34, Rule 132 of and due execution of the PANs were duly tackled by
the Revised Rules on Evidence which reads: petitioner’s witnesses. We hold that such is not
sufficient to seek exception from the general rule
SEC. 34. Offer of evidence. – The court shall consider requiring a formal offer of evidence, since no evidence
no evidence which has not been formally offered. The of positive identification of such PANs by petitioner’s
purpose for which the evidence is offered must be witnesses was presented. Hence, we agree with the
specified. CTA En Banc’s observation that the 1994 and 1998
PANs for EWT deficiencies were not duly identified by
Although in a long line of cases, we have relaxed the testimony and were not incorporated in the records of
foregoing rule and allowed evidence not formally the case, as required by jurisprudence.
offered to be admitted and considered by the trial court,
we exercised extreme caution in applying the
While we concur with petitioner that the CTA is not petitioner argues that a scrutiny of the BIR records of
governed strictly by technical rules of evidence, as respondent for taxable year 1994 would show that the
rules of procedure are not ends in themselves but are details of the factual finding of EWT were itemized from
primarily intended as tools in the administration of the PAN issued by petitioner.42
justice,36 the presentation of PANs as evidence of the
taxpayer’s liability is not mere procedural technicality. In order to determine whether the requirement for a
It is a means by which a taxpayer is informed of his valid assessment is duly complied with, it is important
liability for deficiency taxes. It serves as basis for the to ascertain the governing law, rules and regulations
taxpayer to answer the notices, present his case and and jurisprudence at the time the assessment was
adduce supporting evidence.37 More so, the same is issued. In the instant case, the PANs and FANs
the only means by which the CTA may ascertain and pertaining to the deficiency EWT for taxable years
verify the truth of respondent's claims. We are, 1994 and 1998, respectively, were issued on January
therefore, constrained to apply our ruling in Heirs of 19, 1998, when the Tax Code was already in effect, as
Pedro Pasag v. Spouses Parocha,38 viz.: correctly found by the CTA En Banc:

x x x. A formal offer is necessary because judges are The date of issuance of the notice of assessment
mandated to rest their findings of facts and their determines which law applies- the 1997 NIRC or the
judgment only and strictly upon the evidence offered by old Tax Code. The case of Commissioner of Internal
the parties at the trial. Its function is to enable the trial Revenue v. Bank of Philippine Islands is instructive:
judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other In merely notifying BPI of his findings, the CIR relied on
hand, this allows opposing parties to examine the the provisions of the former Section 270 prior to its
evidence and object to its admissibility. Moreover, it amendment by RA 8424 (also known as the Tax
facilitates review as the appellate court will not be Reform Act of 1997). In CIR v. Reyes, we held that:
required to review documents not previously
scrutinized by the trial court.
In the present case, Reyes was not informed in writing
of the law and the facts on which the assessment of
Strict adherence to the said rule is not a trivial matter. estate taxes had been made. She was merely notified
The Court in Constantino v. Court of Appeals ruled that of the findings by the CIR, who had simply relied upon
the formal offer of one's evidence is deemed waived the provisions of former Section 229 prior to its
after failing to submit it within a considerable period of amendment by [RA] 8424, otherwise known as the Tax
time. It explained that the court cannot admit an offer Reform Act of 1997.
of evidence made after a lapse of three (3) months
because to do so would "condone an inexcusable laxity
First, RA 8424 has already amended the provision of
if not non-compliance with a court order which, in
Section 229 on protesting an assessment. The old
effect, would encourage needless delays and derail the
requirement of merely notifying the taxpayer of the
speedy administration of justice."
CIR's findings was changed in 1998to informing the
taxpayer of not only the law, but also of the facts on
Applying the aforementioned principle in this case, we which an assessment would be made; otherwise, the
find that the trial court had reasonable ground to assessment itself would be invalid.
consider that petitioners had waived their right to make
a formal offer of documentary or object evidence.
It was on February 12, 1998, that a preliminary
Despite several extensions of time to make their formal
assessment notice was issued against the estate. On
offer, petitioners failed to comply with their commitment
April 22, 1998, the final estate tax assessment notice,
and allowed almost five months to lapse before finally
as well as demand letter, was also issued. During those
submitting it. Petitioners' failure to comply with the rule
dates, RA 8424 was already in effect. The notice
on admissibility of evidence is anathema to the
required under the old law was no longer sufficient
efficient, effective, and expeditious dispensation of
under the new law.(Emphasis ours.)
justice. x x x.39
In the instant case, the 1997 NIRC covers the 1994 and
Anent the second issue, petitioner claims that the EWT
1998 EWT FANs because there were issued on
assessment issued for taxable year 1994 has factual
January 19, 1998 and September 21, 2001,
and legal basis because at the time the PAN and FAN
respectively, at the time of the effectivity of the 1997
were issued by petitioner to respondent on January 19,
NIRC. Clearly, the assessments are governed by the
1998, the provisions of Revenue Regulation No. 12-
law.43
9940 which governs the issuance of assessments was
not yet operative. Hence, its compliance with Revenue
Regulation No. 12-8541 was sufficient. In any case, Indeed, Section 228 of the Tax Code provides that the
taxpayer shall be informed in writing of the law and the
facts on which the assessment is made. Otherwise, the preliminary or final notice, as the case may be,
assessment is void. To implement the aforesaid informing a taxpayer of the existence of a deficiency
provision, Revenue Regulation No. 12-99was enacted tax assessment is markedly different from the
by the BIR, of which Section 3.1.4 thereof reads: requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter
3.1.4. Formal Letter of Demand and Assessment during the pre-assessment stage and a final notice, in
Notice. –The formal letter of demand and assessment the order required by law, does not necessarily mean
notice shall be issued by the Commissioner or his duly that Enron was informed of the law and facts on which
authorized representative. The letter of demand calling the deficiency tax assessment was made.
for payment of the taxpayer’s deficiency tax or taxes
shall state the facts, the law, rules and regulations, or The law requires that the legal and factual bases of the
jurisprudence on which the assessment is based, assessment be stated in the formal letter of demand
otherwise, the formal letter of demand and assessment and assessment notice. Thus, such cannot be
notice shall be void. The same shall be sent to the presumed. Otherwise, the express provisions of Article
taxpayer only by registered mail or by personal 228 of the NIRC and RR No. 12-99 would be rendered
delivery. x x x44 nugatory. The alleged "factual bases" in the advice,
preliminary letter and "audit working papers" did not
It is clear from the foregoing that a taxpayer must be suffice. There was no going around the mandate of the
informed in writing of the legal and factual bases of the law that the legal and factual bases of the assessment
tax assessment made against him. The use of the word be stated in writing in the formal letter of demand
"shall" in these legal provisions indicates the accompanying the assessment notice.
mandatory nature of the requirements laid down
therein. We note that the old law merely required that the
taxpayer be notified of the assessment made by the
In the present case, a mere perusal of the FAN for the CIR. This was changed in 1998 and the taxpayer must
deficiency EWT for taxable year 1994will show that now be informed not only of the law but also of the facts
other than a tabulation of the alleged deficiency taxes on which the assessment is made. Such amendment
due, no further detail regarding the assessment was is in keeping with the constitutional principle that no
provided by petitioner. Only the resulting interest, person shall be deprived of property without due
surcharge and penalty were anchored with legal process. In view of the absence of a fair opportunity for
basis.45 Petitioner should have at least attached a Enron to be informed of the legal and factual bases of
detailed notice of discrepancy or stated an explanation the assessment against it, the assessment in question
why the amount of P48,461.76 is collectible against was void. x x x.48
respondent46 and how the same was arrived at. Any
short-cuts to the prescribed content of the assessment In the same vein, we have held in Commissioner of
or the process thereof should not be countenanced, in Internal Revenue v. Reyes,49 that:
consonance with the ruling in Commissioner of Internal
Revenue v. Enron Subic Power Corporation47 to wit: Even a cursory review of the preliminary assessment
notice, as well as the demand letter sent, reveals the
The CIR insists that an examination of the facts shows lack of basis for -- not to mention the insufficiency of --
that Enron was properly apprised of its tax deficiency. the gross figures and details of the itemized deductions
During the pre-assessment stage, the CIR advised indicated in the notice and the letter. This Court cannot
Enron’s representative of the tax deficiency, informed countenance an assessment based on estimates that
it of the proposed tax deficiency assessment through a appear to have been arbitrarily or capriciously arrived
preliminary five-day letter and furnished Enron a copy at. Although taxes are the lifeblood of the government,
of the audit working paper allegedly showing in detail their assessment and collection "should be made in
the legal and factual bases of the assessment. The CIR accordance with law as any arbitrariness will negate
argues that these steps sufficed to inform Enron of the the very reason for government itself."50
laws and facts on which the deficiency tax assessment
was based. Applying the aforequoted rulings to the case at bar, it
is clear that the assailed deficiency tax assessment for
We disagree. The advice of tax deficiency, given by the the EWT in 1994disregarded the provisions of Section
CIR to an employee of Enron, as well as the preliminary 228 of the Tax Code, as amended, as well as Section
five-day letter, were not valid substitutes for the 3.1.4 of Revenue Regulations No. 12-99 by not
mandatory notice in writing of the legal and factual providing the legal and factual bases of the
bases of the assessment. These steps were mere assessment. Hence, the formal letter of demand and
perfunctory discharges of the CIR’s duties incorrectly the notice of assessment issued relative thereto are
assessing a taxpayer. The requirement for issuing a void.
In any case, we find no basis in petitioner’s claim that taxable year 1998 considering that it complies with
Revenue Regulation No. 12-99 is not applicable at the Section 228 of the Tax Code as well as Revenue
time the PAN and FAN for the deficiency EWT for Regulation No. 12-99, thus:
taxable year 1994 were issued. Considering that such
regulation merely implements the law, and does not On the other hand, the 1998 EWT FAN reflected the
create or take away vested rights, the same may be following: a detailed factual account why the basic
applied retroactively, as held in Reyes: EWT is P14,496.79 and the legal basis, Section 57 B
of the 1997 NIRC supporting findings of EWT liability
x x x x. of P22,437.01. Thus, the EWT FAN for 1998 is duly
issued in accordance with the law.52
Second, the non-retroactive application of Revenue
Regulation (RR) No. 12-99 is of no moment, As to the last issue, petitioner avers that its right to
considering that it merely implements the law. collect the EWT for taxable year 1992 has not yet
prescribed. It argues that while the final assessment
A tax regulation is promulgated by the finance notice and demand letter on EWT for taxable year 1992
secretary to implement the provisions of the Tax Code. were all issued on January 9, 1996, the five (5)-year
While it is desirable for the government authority or prescriptive period to collect was interrupted when
administrative agency to have one immediately issued respondent filed its request for reinvestigation on
after a law is passed, the absence of the regulation March 14, 1997 which was granted by petitioner on
does not automatically mean that the law itself would January 22, 2001 through the issuance of Tax
become inoperative. Verification Notice No. 00165498 on even date.53 Thus,
the period for tax collection should have begun to run
At the time the pre-assessment notice was issued to from the date of the reconsidered or modified
Reyes, RA 8424 already stated that the taxpayer must assessment.54
be informed of both the law and facts on which the
assessment was based. Thus, the CIR should have This argument fails to persuade us.
required the assessment officers of the Bureau of
Internal Revenue (BIR) to follow the clear mandate of The statute of limitations on assessment and collection
the new law. The old regulation governing the issuance of national internal revenue taxes was shortened from
of estate tax assessment notices ran afoul of the rule five (5) years to three (3) years by virtue of Batas
that tax regulations-- old as they were -- should be in Pambansa Blg. 700.55 Thus, petitioner has three (3)
harmony with, and not supplant or modify, the law. years from the date of actual filing of the tax return to
assess a national internal revenue tax or to commence
It may be argued that the Tax Code provisions are not court proceedings for the collection thereof without an
self- executory. It would be too wide a stretch of the assessment.56 However, when it validly issues an
imagination, though, to still issue a regulation that assessment within the three (3)-year period, it has
would simply require tax officials to inform the another three (3) years within which to collect the tax
taxpayer, in any manner, of the law and the facts on due by distraint, levy, or court proceeding.57 The
which an assessment was based. That requirement is assessment of the tax is deemed made and the three
neither difficult to make nor its desired results hard to (3)-year period for collection of the assessed tax
achieve. Moreover, an administrative rule interpretive begins to run on the date the assessment notice had
of a statute, and not declarative of certain rights and been released, mailed or sent to the taxpayer.58
corresponding obligations, is given retroactive effect as
of the date of the effectivity of the statute. RR 12-99 is On this matter, we note the findings of the CTA-Special
one such rule. Being interpretive of the provisions of First Division that no evidence was formally offered to
the Tax Code, even if it was issued only on September prove when respondent filed its returns and paid the
6, 1999, this regulation was to retroact to January 1, corresponding EWT and WTC for taxable year 1992.59
1998 -- a date prior to the issuance of the preliminary
assessment notice and demand letter.51 Nevertheless, as correctly held by the CTA En Banc,
the Preliminary Collection Letter for deficiency taxes for
Indubitably, the disputed assessments for taxable year taxable year 1992 was only issued on February 21,
1994 should have already complied with the 2002, despite the fact that the FANs for the deficiency
requirements laid down under Revenue Regulation No. EWT and WTC for taxable year 1992 was issued as
12-99. Having failed so, the same produces no legal early as January 9, 1996. Clearly, five (5) long years
effect. had already lapsed, beyond the three (3)-year
prescriptive period, before collection was pursued by
Notwithstanding the foregoing findings, we sustain the petitioner.
CTA En Banc’s findings on the deficiency EWT for
Further, while the request for reinvestigation was made which the latter did one day before. There were no
on March 14, 1997, the same was only acted upon by impediments on the part of the Collector to file the
petitioner on January22, 2001, also beyond the three collection case from April 1, 1949…
(3) year statute of limitations reckoned from January 9,
1996, notwithstanding the lack of impediment to rule In Republic of the Philippines v. Acebedo, this Court
upon such issue. We cannot countenance such similarly found that –
inaction by petitioner to the prejudice of respondent
pursuant to our ruling in Commissioner of Internal x x x T]he defendant, after receiving the assessment
Revenue v. Philippine Global Communication, Inc.,60 to notice of September 24, 1949, asked for a
wit: reinvestigation thereof on October 11, 1949 (Exh. "A").
There is no evidence that this request was considered
The assessment, in this case, was presumably issued or acted upon. In fact, on October 23, 1950 the then
on 14 April 1994 since the respondent did not dispute Collector of Internal Revenue issued a warrant of
the CIR’s claim. Therefore, the BIR had until 13 April distraint and levy for the full amount of the assessment
1997. However, as there was no Warrant of Distraint (Exh. "D"), but there was follow-up of this warrant.
and/or Levy served on the respondents nor any judicial Consequently, the request for reinvestigation did not
proceedings initiated by the BIR, the earliest attempt of suspend the running of the period for filing an action for
the BIR to collect the tax due based on this assessment collection.[Emphasis in the original]62 With respect to
was when it filed its Answer in CTA Case No. 6568 on petitioner’s argument that respondent’s act of elevating
9 January 2003, which was several years beyond the its protest to the CTA has fortified the continuing
three-year prescriptive period. Thus, the CIR is now interruption of petitioner’s prescriptive period to collect
prescribed from collecting the assessed tax.61 under Section 223 of the Tax Code,63 the same is
flawed at best because respondent was merely
Here, petitioner had ample time to make a factually and exercising its right to resort to the proper Court, and
legally well-founded assessment and implement does not in any way deter petitioner’s right to collect
collection pursuant thereto. Whatever examination
1âw phi1 taxes from respondent under existing laws.
that petitioner may have conducted cannot possibly
outlast the entire three (3)-year prescriptive period On the strength of the foregoing observations, we
provided by law to collect the assessed tax. Thus, there ought to reiterate our earlier teachings that "in
is no reason to suspend the running of the statute of balancing the scales between the power of the State to
limitations in this case. tax and its inherent right to prosecute perceived
transgressors of the law on one side, and the
Moreover, in Bank of the Philippine Islands, citing constitutional rights of a citizen to due process of law
earlier jurisprudence, we held that the request for and the equal protection of the laws on the other, the
reinvestigation should be granted or at least acted scales must tilt in favor of the individual, for a citizen’s
upon in due course before the suspension of the right is amply protected by the Bill of Rights under the
statute of limitations may set in, thus: Constitution."64 Thus, while "taxes are the lifeblood of
the government," the power to tax has its limits, in spite
In BPI v. Commissioner of Internal Revenue, the Court of all its plenitude.65 Even as we concede the
emphasized the rule that the CIR must first grant the inevitability and indispensability of taxation, it is a
request for reinvestigation as a requirement for the requirement in all democratic regimes that it be
suspension of the statute of limitations. The Court said: exercised reasonably and in accordance with the
prescribed procedure.66
In the case of Republic of the Philippines v. Gancayco,
taxpayer Gancayco requested for a thorough After all, the statute of limitations on the collection of
reinvestigation of the assessment against him and taxes was also enacted to benefit and protect the
placed at the disposal of the Collector of Internal taxpayers, as elucidated in the case of Philippine
Revenue all the evidences he had for such purpose; Global Communication, Inc.,67 thus:
yet, the Collector ignored the request, and the records
and documents were not at all examined. Considering x x x The report submitted by the tax commission
the given facts, this Court pronounced that— clearly states that these provisions on prescription
should be enacted to benefit and protect taxpayers:
x x x The act of requesting a reinvestigation alone does
not suspend the period. The request should first be Under the former law, the right of the Government to
granted, in order to effect suspension. (Collector v. collect the tax does not prescribe. However, in
1âwphi1

Suyoc Consolidated, supra; also Republic v. Ablaza, fairness to the taxpayer, the Government should be
supra). Moreover, the Collector gave appellee until estopped from collecting the tax where it failed to make
April 1, 1949, within which to submit his evidence, the necessary investigation and assessment within 5
years after the filing of the return and where it failed to February 27, 1974 pursuant to Presidential Decree
collect the tax within 5 years from the date of (PD) 269. Likewise, it was granted a Certificate of
assessment thereof. Just as the government is Provisional Registration under Republic Act (RA) 6938,
interested in the stability of its collections, so also are otherwise known as the Cooperative Code of the
the taxpayers entitled to an assurance that they will not Philippines on March 16, 1993, by the Cooperative
be subjected to further investigation for tax purposes Development Authority (CDA).
after the expiration of a reasonable period of time. (Vol.
II, Report of the Tax Commission of the Philippines, pp. Respondent Commissioner of InternalRevenue is a
321-322).68 public officer authorized under the National Internal
Revenue Code (NIRC) to examine any taxpayer
WHEREFORE, the petition is DENIED. The June 27, including inter alia, the power to issue tax assessment,
2011 Decision of the Court of Tax Appeals En Banc in evaluate, and decide upon protests relative thereto.
C.T.A. EB No. 662 is hereby AFFIRMED.
On July 13, 1999 and April 17, 2000, petitioner filed its
SO ORDERED. 1998 and 1999 income tax returns, respectively.
Petitioner filed its 1997, 1998, and 1999 Annual
Republic of the Philippines Information Return of Income Tax Withheld on
SUPREME COURT Compensation, Expanded and Final Withholding
Manila Taxes on February 17, 1998, February 1, 1999, and
February 4, 2000, in that order.
THIRD DIVISION
On November 13, 2000, respondent issued a duly
G.R. No. 193100 December 10, 2014 signed Letter of Authority (LOA) No. 1998 00023803;
covering the examination of petitioner’s books of
account and other accounting records for income and
SAMAR-I ELECTRIC COOPERATIVE, Petitioner,
withholding taxes for the period 1997 to 1999. The LOA
vs.
was received by petitioner on November 14, 2000.
COMMISSIONER OF INTERNAL
REVENUE, Respondent.
Petitioner cooperated in the audit and investigation
conducted by the Special Investigation Division of the
DECISION
BIR by submitting the required documents on
December 5, 2000.
VILLARAMA, JR., J.:
On October 19, 2001, respondent sent a Notice for
At bar is a petition for review on certiorari of the Informal Conference which was received by petitioner
Decision1 of the Court of Tax Appeals En Banc (CTA in November 2001; indicating the allegedly income and
EB) dated March 11, 2010 and it,s Resolution2 dated withholding tax liabilities of petitioner for 1997 to 1999.
July 28, 2010 in C.T.A. EB Nos. 460 and 462 (C.T.A. Attached to the letter is a summary of the report, with
Case No. 6697) affirming the May 27, 2008 an explanation of the findingsof the investigators.
Decision3 and the January 19, 2009 Amended
Decision4 of the CTA's First Division, and ordering
In response, petitioner sent a letter dated November
petitioner to pay respondent Commissioner of Internal
26, 2001 to respondent maintaining its indifference to
Revenue (CIR) deficiency withholding tax on
the latter’s findings and requesting details of the
compensation in the aggregate amount
assessment.
of P2,690,850.91, plus 20% interest starting
September 30, 2002, until fully paid, pursuant to
Section 249( c) of the National Internal Revenue Code On December 13, 2001, petitioner executed a Waiver
(NIRC) of 1997. of the Defense of Prescription under the Statute of
Limitations, good until March 29, 2002.
The following facts are undisputed as found by the
CTA's First Division and adopted by the CTA EB: On February 27, 2002, a letter was sent by petitioner
to respondent requesting a detailed computation of the
alleged 1997, 1998 and 1999 deficiency withholding
Samar-I Electric Cooperative, Inc. (Petitioner) is an
tax on compensation. On February 28, 2002,
electric cooperative, with principal office at Barangay
respondent issued a Preliminary Assessment Notice
Carayman, Calbayog City.
(PAN). The PAN was received by petitioner on April 9,
2002, which was protested on April 18, 2002.
It was issued a Certificate of Registration by the Respondent’s Reply dated May 27, 2002, contained
National Electrification Administration (NEA) on
the explanation of the legal basis of the issuance of the II. Whether or not SAMELCO-I is liable for the
questioned tax assessments. minimum corporate income tax (MCIT) for
taxable years 1998 to 1999.
However, on July 8, 2002, respondent dismissed
petitioner’s protest and recommended the issuance of III. Whether or not SAMELCO-I is liable to pay
a Final Assessment Notice. the total deficiency expanded withholding tax of
[P]3,760,225.69 for taxable years 1997 to
Consequently, on September 15, 2002, petitioner 1999.7
received a demand letter and assessments notices
(Final Assessment Notices) for the alleged 1997, 1998, On the other hand, petitioner SAMELCO-I raised the
and 1999 deficiency withholding tax in the amount of following legal and factual errors in C.T.A. EB No. 462,
[P]3,760,225.69, as well as deficiency income tax viz.:
covering the years 1998 to 1999 in the amount of
[P]440,545.71, or in the aggregate amount of I. The Court in Division gravely erred in holding
[P]4,200,771.40. Petitioner filed its protest and that the 1997 and 1998 assessments on
Supplemental Protest to the Final Assessment Notices withholding tax on compensation (received by
on October 14, 2002 and November 4, 2002, SAMELCO-I on September 15, 2002), have not
respectively. But on the Final Decision on Disputed prescribed even if the waiver validly executed
Assessment issued on April 10, 2003, petitioner was was good only until March 29, 2002.
still held liable for the alleged tax liabilities.5
II. The Court in Divisionerred in holding that
The CTA EB narrates the following succeeding events: CIR can validly assess within the ten (10)-year
prescriptive period even if the notice of informal
On May 29, 2003, the Petition for Review was filed by conference, PAN, formal letter of demand, and
SAMELCO-I with the Court in division. assessment notice mention not a word that the
BIR is invoking Section 222 (a) of the 1997 Tax
On May 27, 2008, the assailed Decision partially Code [then Sec. 223, NIRC], due to alleged
granting SAMELCO-I’s petition was promulgated. false withholding tax returns filed by
[SAMELCO-I] as the same assertions were
Dissatisfied, both parties sought reconsideration of the mere afterthought to justify application of the
said decision. CIR filed the "Motion for Partial 10-year prescriptive period to assess.
Reconsideration (Re: Decision dated 27 May 2008[)]"
on June 13, 2008. On the other hand, SAMELCOI’s III. The Court in Division failed to consider that
"Motion for Reconsideration" was filed on June 17, CIR made no findings as to SAMELCO-I’s filing
2008. of a false return as clearly manifested by the
non-imposition of 50% surcharge on the 1997,
On January 19, 2009, the Court in division promulgated 1998 and 1999 basic withholding tax deficiency
its Amended Decision which denied CIR’s motion and in the PAN, demand notice and even in the
partially granted SAMELCO-I’s motion. assessment notice other than interest charges.

Thereafter, CIR and SAMELCO-I filed their "Motion for IV. The Court in Division erred innot holding
Extension of Time to File Petition for Review" on that given SAMELCOI’s filing of its 1997, 1998,
February 6, 2009 and February 11, 2009, respectively. and 1999 withholding tax returns in good faith,
Both motionswere granted by the Court.6 and in close consultation with the BIR
personnel in Calbayog City where SAMELCO-
I’s place of business is located, the latter
The following issues were raised by the parties in their
should no longer be imposed the incremental
petitions for review before the CTA EB. In C.T.A. EB
penalties (surcharge and interest).
460, herein respondent CIR raised the following
grounds:
V. The Court in Division failed to rule that since
there was no substantial under remittance of
I. Whether or not SAMELCO-I is entitled to tax
1998 withholding tax as the basic deficiency
privileges accorded to members in accordance
tax per amended decision is less than 30% of
with Republic Act No. 6938, or the Cooperative
the computed total tax due per return,
Code, or to privileges of Presidential Decree
SAMELCO-I did not file a false return.
(PD) No. 269.
VI. The Court in Division overlooked the fact
that for taxable year 1999, [SAMELCO-I]
remitted the amount of [P]844,958.00 as relation to Section 228 NIRC. B. The
withholding tax in compensation instead of Honorable CTA En Banc erred in holding that
[P]786,702.43 as indicated in Page 8, Annex C respondent observed due process
of the CTA (1st Division) Decision. notwithstanding the missing Annex "A-1" that
was meant to show Details of Discrepancies
VII. The Court in Division erred in failing to and to be attached to BIR’s Letter of
declare as void both the formal letter of Demand/Final Notice dated September 15,
demand and assessment notice on withholding 2002, which was not furnished to petitioner and
tax on compensation for 1997 taxable year, worse, a file copy of which is not even found in
given its non-compliance with Section 3.1.4 of the BIR records as part of its Exhibit "16" and
RR 12-99.8 neither is the same found in the CTA records.

On February 26, 2009, the CTA EB consolidated both C. In deciding that the 1997 and 1998
cases. After the filing of the respective Comments of withholding tax assessments have not yet
both parties, the cases were deemed submitted for prescribed, the Honorable CTA En Banc failed
decision. The CTA EB found that the issues and to consider the singular significance of the
arguments raised by the parties were "mere Waiver of the Defense of Prescription validly
reiterations of what have been considered and passed agreed upon and executed by the parties.
upon by the Court in division in the assailed Decision
and the Amended Decision."9 It ruled that SAMELCO-I D. The Honorable CTA En Bancerred in
is exempted in the payment of the Minimum Corporate holding that respondent can validly assess
Income Tax (MCIT); that due process was observed in within the ten (10)-year prescriptive period
the issuance of the assessments in accordance with even if the Notice of Informal Conference,
Section 228 of the Tax Code; and that the 1997 and PAN, and Final Letter of Demand (dated
1998 assessments on deficiency withholding tax on September 15, 2002), mentioned not a word as
compensation have not prescribed. Finding no to the falsity of the returns filed by petitioner,
reversible error in the Decision and the Amended but as anafter thought that was raised rather
Decision, the CTA EB ruled, viz.: belatedly only in the Answer and during the
trial.
WHEREFORE, premises considered, We deny the
petitions for lack of merit. Accordingly, We AFFIRM the E. The Honorable CTA En Bancerred in
May 27, 2008 Decision and the January 19, 2009 holding as valid the 1997 deficiency
Amended Decision promulgated by the First Division of withholding tax assessment being anchored on
this Court. RR 2-98 (as cited in Notice of Informal
Conference and PAN), as the said RR 2-98
SO ORDERED.10 governs compensation income paid beginning
January 1, 1998.11
Petitioner moved for reconsideration.In a Resolution
dated July 28, 2010, the CTA EB denied the motion. We shall resolve the instant controversy by discussing
Petitioner now comes to this Court raising the following the following two main issues in seriatim: whether the
assignment of errors: 1997 and 1998 assessments on withholding tax on
compensation were issued within the prescriptive
A. The Honorable CTA En Banc gravely erred period provided by law; and whether the assessments
in holding that respondent sufficiently complied were issued in accordance with Section 228 of the
withthe due process requirements mandated NIRC of 1997.
by Section 228 of the 1997 Tax Code in the
issuance of 1997-1999 assessments to On the issue of prescription, petitioner contends that
petitioner, even if the details of discrepancies the subject 1997 and 1998 withholding tax
on which the assessments were factually and assessments on compensation were issued beyond
legally based as required under Section 3.1.4 the prescriptive period of three years under Section
of Revenue Regulations (RR) No[.] 12-99, 203 of the NIRC of 1997. Under this section, the
were not found in the Formal Letter of Demand government is allowed a period of only three years to
and Final Assessment Notice (FAN) sent to assess the correct tax liability of a taxpayer, viz.:
petitioner, in clear violation of the doctrine
established in the case of Commissioner of SEC. 203. Period of Limitation Upon Assessment and
Internal Revenue vs. Enron Subic Power Collection. – Except as provided in Section 222,
Corporation, G.R. No. 166387, January 19, internal revenue taxes shall be assessed within three
2009, applying Section 3.1.4 of RR 12-99 in (3) years after the last day prescribed by law for the
filing of the return, and no proceeding in court without prescribed in paragraph (a) hereof may be
assessment for the collection of such taxes shall be collected by distraint or levy or by a proceeding
begun after the expiration of such period: Provided, in court within five (5) years following the
That in a case where a return is filed beyond the period assessment of the tax.
prescribed by law, the three (3)-year period shall be
counted from the day the return was filed. For purposes (d) Any internal revenue tax, which has been
of this Section, a return filed before the last day assessed within the period agreed upon as
prescribed by law for the filing thereof shall be provided in paragraph (b) herein above, may
considered as filed on such last day. Relying on be collected by distraint orlevy or by a
Section 203, petitioner argues that the subject proceeding incourt within the period agreed
deficiency tax assessments issued by respondent on upon in writing before the expiration of the five
September 15, 2002 was issued beyond the three-year (5)-year period. The period so agreed upon
prescriptive period. Petitioner filed its Annual may be extended by subsequent written
Information Return of Income Tax Withheld on agreements made before the expiration of the
Compensation, Expanded and Final Withholding period previously agreed upon.
Taxeson the following dates: on February 17, 1998 for
the taxable year 1997; and on February 1, 1999 for the (e) Provided, however, That nothing in the
year taxable 1998. Thus, if the period prescribed under immediately preceding Section and paragraph
Section 203 of the NIRC of 1997 is to be followed, the (a) hereof shall be construed to authorize the
three-year prescriptive period to assess for the taxable examination and investigation or inquiry into
years 1997 and 1998 should have ended on February any tax return filed in accordance with the
16,2001 and January 31, 2002, respectively. provisions of any tax amnesty law or decree.
(Emphasis supplied.)
We disagree.
In the case at bar, it was petitioner’s substantial under
While petitioner is correct that Section 203 sets the declaration of withholding taxes in the amount
three-year prescriptive period to assess, the following of P2,690,850.91 which constituted the "falsity" in the
exceptions are provided under Section 222 of the NIRC subject returns – giving respondent the benefit of the
of 1997, viz.: period under Section 222 of the NIRC of 1997 to
assess the correct amount of tax "at any time within ten
SEC. 222. Exceptions as to Period of Limitation of (10) years after the discovery of the falsity, fraud or
Assessment and Collection of Taxes. – omission."12 The case of Aznar v. Court of Tax
Appeals13 discusses what acts or omissions may
(a) In the case of a false or fraudulent return constitute falsity, viz.:
with intent to evade tax or of failure to file a
return, the tax may be assessed, or a Petitioner argues that Sec. 332 of the NIRC does not
proceeding in court for the collection of such apply because the taxpayer did not file false and
tax may be filed without assessment, at any fraudulent returns with intent to evade tax, while
time within ten (10) years after the discovery of respondent Commissioner of Internal Revenue insists
the falsity, fraud or omission: Provided, That in contrariwise, with respondent Court of Tax Appeals
a fraud assessment which has become final concluding that the very "substantial under
and executory, the factof fraud shall be declarations ofincome for six consecutive years
judicially taken cognizance of in the civil or eloquently demonstrate the falsity or fraudulence of the
criminal action for the collection thereof. income tax returns with an intent to evade the payment
of tax."
(b) If before the expiration of the time
prescribed in Section 203 for the assessment To our minds we can dispense with these controversial
of the tax, both the Commissioner and the arguments on facts, although we do not deny that the
taxpayer have agreed in writing to its findings of facts by the Court of Tax Appeals, supported
assessment after such time, the tax may be as they are by very substantial evidence, carry great
assessed within the period agreed upon. The weight, by resorting to a proper interpretation of
period so agreed upon may be extended by Section 332 of the NIRC. We believe that the proper
subsequent written agreement made before and reasonable interpretation of said provision should
the expiration of the period previously agreed be that in the three different cases of (1) false return,
upon. (2) fraudulent return with intent to evade tax, (3) failure
to file a return, the tax may be assessed, or a
(c) Any internal revenue tax which has been proceeding in court for the collection of such tax may
assessed within the period of limitation as be begun without assessment, at any time within ten
years after the discovery of the (1) falsity, (2) fraud,(3) Q: Can you please explain?
omission. Our stand that the law should be interpreted
to mean a separation of the three different situations of MS. RAPATAN:
false return, fraudulent return with intent to evade tax,
and failure to file a return is strengthened A: Because I based the computation of my deficiency
immeasurably by the last portion of the provision which withholding taxes on declared taxable income per
segregates the situations into three different classes, alpha list submitted then, I have extracted a data from
namely "falsity," "fraud" and "omission." That there is a the Alpha List, particularly that of the manager and
difference between "false return" and "fraudulent other officials, only their basic salary and their overtime
return" cannot be denied. While the first merely implies pay were declared but the other benefits were not
deviation from the truth, whether intentional or not, the actually subjected to withholding tax. So, the deficiency
second implies intentional or deceitful entry with intent withholding taxes from the taxes on the taxable 13th
to evade the taxes due. month pay and other benefits in excess of the
[P]12,000.00 for 1997 and for the taxable years 1998
The ordinary period of prescription of 5 years within and 1999, in excess of the [P]30,000.00. I also noticed
which to assess tax liabilities under Sec. 331 of the that the per diem of the Manager was not included in
NIRC should be applicable to normal circumstances, the withholding tax computation of SAMELCO[-]I.
but whenever the government is placed at a
disadvantage so as to prevent its lawful agents ATTY. FRANCIA:
fromproper assessment of tax liabilities due to false
returns, fraudulent return intended to evade payment
Nothing further, your Honors.
of tax or failure to file returns, the period of ten years
provided for in Sec. 332 (a) NIRC, from the time of the
discovery of the falsity, fraud or omission even seems JUSTICE BAUTISTA:
to be inadequate and should be the one enforced.
There being undoubtedly false tax returns in this case, Any re-cross?
We affirm the conclusion of the respondent Court of
Tax Appeals that Sec. 332 (a) of the NIRC should apply ATTY. NAPUTO:
and that the period of ten years within which to assess
petitioner’s tax liability had not expired at the time said No re-cross, your Honors.15
assessment was made.14
We have consistently held that courts will not interfere
A careful examination of the evidence on record yields in matters which are addressed to the sound discretion
to no other conclusion but that petitioner failed to of the government agency entrusted with the regulation
withhold taxes from its employees’ 13th month pay and of activities coming under its special and technical
other benefits inexcess of thirty thousand pesos training and knowledge.16 The findings of fact of these
(P30,000.00) amounting to P2,690,850.91for the quasijudicial agencies are generally accorded respect
taxable years 1997 to 1999 – resulting to its filing of the and even finality as long as they are supported by
subject false returns. Petitioner failed to refute this substantial evidence– in recognition of their expertise
finding, both in fact and in law, before the courts a quo. on the specific matters under their consideration.17 In
the case at bar, petitioner failed to proffer convincing
We quote the following portion of the assailed Decision argument and evidence that would persuade us to
of the CTA EB, viz.: disturb the factual findings of the CTA First Division, as
affirmed by the CTA EB. As such, we cannot but affirm
It is noteworthy to mention that during the trial, the the finding of petitioner’s substantial under declaration
witness for the CIR testified that SAMELCO-I did not of withholding taxes in the amount of P2,690,850.91
file an accurate return, as follows: which constituted the "falsity" in the subject returns.

ATTY. FRANCIA: Anent the issue of violation of due process in the


issuance of the final notice of assessment and letter of
Q: Did the petitioner file an accurate Return? demand, Section 228 of the NIRC of 1997 provides:

MS. RAPATAN: SEC. 228. Protesting of Assessment. – x x x

A: No. xxxx

ATTY. FRANCIA:
The taxpayers shall be informed in writing of the law their assessment and collection "should be made in
and the factson which the assessment is made: accordance with law as any arbitrariness will negate
otherwise, the assessment shall be void. the very reason for government itself." (Emphasis
supplied; citations omitted)
Petitioner contends that as the Final Demand Letter
and Assessment Notices (FAN) were silent as to the In Commissioner of Internal Revenue v. Enron Subic
nature and basis of the assessments, it was denied Power Corporation,20 we held that the law requires that
due process,18 and the assessments must be declared the legal and factual bases of the assessment be
void. It likewise invokes Revenue Regulations(RR) No. stated in the formal letter of demand and assessment
12-99 which states, viz.: notice, and that the alleged "factual bases" in the
advice, preliminary letter and "audit working papers"
3.1.4 Formal Letter of Demand and Assessment did not suffice. Thus:
Notice.– The formal letter of demand and assessment
notice shall be issued by the Commissioner or his duly Both the CTA and the CA concluded that the deficiency
authorized representative. The letter of demand calling tax assessment merely itemized the deductions
for payment of the taxpayer’s deficiency tax or taxes disallowed and included these in the gross income. It
shall state the facts, the law, rules and regulations, or also imposed the preferential rate of 5% on some items
jurisprudence on which the assessment is based, categorized by Enron as costs. The legal and factual
otherwise, the formal letter of demand and assessment bases were, however, not indicated.
notice shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal The CIR insists that an examination of the facts shows
delivery. x x x that Enron was properly apprised of its tax deficiency.
During the pre-assessment stage, the CIR advised
We uphold the assessments issued to petitioner. Enron’s representative of the tax deficiency, informed
it of the proposed tax deficiency assessment through a
Both Section 228 of the NIRC of 1997 and Section preliminary five-day letter and furnished Enron a copy
3.1.4 of RR No. 12-99 clearly require the written details of the audit working paper allegedly showing in detail
on the nature, factual and legal bases of the subject the legal and factual bases of the assessment. The CIR
deficiency tax assessments. The reason for the argues that these steps sufficed to inform Enron of the
mandatory nature of this requirement isexplained in the laws and facts on which the deficiency tax assessment
case of Commissioner of Internal Revenue v. Reyes:19 was based.

A void assessment bears no valid fruit. We disagree. The advice of tax deficiency, given by the
CIR to an employee of Enron, as well as the preliminary
The law imposes a substantive, not merely a formal, five-day letter, were not valid substitutes for the
requirement. To proceed heedlessly with tax collection mandatory notice in writing of the legal and factual
without first establishing a valid assessment is bases of the assessment. These steps were mere
evidently violative of the cardinal principle in perfunctory discharges of the CIR’s duties in correctly
administrative investigations: that taxpayers should be assessing a taxpayer. The requirement for issuing a
able to present their case and adduce supporting preliminary or final notice, as the case may be,
evidence. In the instant case, respondent has not been informing a taxpayer of the existence of a deficiency
informed of the basis of the estate tax liability. Without tax assessment is markedly different from the
complying with the unequivocal mandate of first requirement of what such notice must contain. Just
informing the taxpayer of the government’s claim, there because the CIR issued an advice, a preliminary letter
can be no deprivation of property, because no effective during the pre-assessment stage and a final notice, in
protest can be made. The haphazard shot at slapping the order required by law, does not necessarily mean
an assessment, supposedly based on estate taxation’s that Enron was informed of the law and facts on which
general provisions that are expected to be known by the deficiency tax assessment was made.21 (Emphasis
the taxpayer, is utter chicanery. supplied)

Even a cursory review of the preliminary assessment In this case, we agree with the respondent that
notice, as well as the demand letter sent, reveals the petitioner was sufficiently apprised of the nature,
lack of basis for – not to mention the insufficiency of – factual and legal bases, as well as how the deficiency
the gross figures and details of the itemized deductions taxes being assessed against it were computed.
indicated in the notice and the letter. This Court cannot Records reveal that on October 19, 2001, prior to the
countenance an assessment based on estimates that conduct of an informal conference, petitioner was
appear to have been arbitrarily or capriciously arrived already informed of the results and findings of the
at. Although taxes are the lifeblood of the government, investigations made by the respondent, and was duly
furnished with a copy of the summary of the report the PAN. A second protest letter dated June 23, 2002
submitted by Revenue Officer Elisa G. Ponferrada- was sent by petitioner, to which respondent replied
Rapatan of the Special Investigation Division. Said (letter dated July 8, 2002) answering each of the two
summary report contained an explanation of Findings issues reiterated by petitioner: ( 1) validity of EO 93
of Investigation stating the legal and factual bases for withdrawing the tax exemption privileges under PD
the deficiency assessment. In a letter dated February 269; and (2) retroactive application of RR No. 8-
27, 2002 petitioner requested for copies of working 2000.26 The FAN was finally received by petitioner on
papers indicating how the deficiency withholding taxes September 24, 2002, and protested by it in a letter
were computed.22 Respondent promptly responded in a dated October 14, 2002 which reiterated in lengthy
letter-reply dated February 28, 2002 stating: arguments its earlier interpretation of the laws and
regulations upon which the assessments were based.27
please be informed that the cooperative’s deficiency
withholding taxes on compensation were due to the Although the FAN and demand letter issued to
failure of the cooperative to withhold taxes on the petitioner were not accompanied by a written
taxable 13th month pay and other benefits in excess explanation of the legal and factual bases of the
of P30,000.00 threshold pursuant to Section 3 of deficiency taxes assessed against the petitioner, the
Revenue Regulation No. 2-95 implementing Republic records showed that respondent in its letter dated April
Act No. 7833 and Section 2.78/1 B 11 of Revenue 10, 2003 responded to petitioner's October 14, 2002
Regulation 2-98 implementing Section 32 B e of letter-protest, explaining at length the factual and legal
Republic Act No. 8424. Further, we are providing you bases of the deficiency tax assessments and denying
hereunder the computational format on how deficiency the protest.28
withholding taxes were computed and sample
computation from our working papers, for your Considering the foregoing exchange of
information and guidance.23 correspondence and documents between the parties,
we find that the requirement of Section 228 was
On April 9, 2002, petitioner received the PAN dated substantially complied with. Respondent had fully
February 28, 2002 which contained the computations informed petitioner in writing of the factual and legal
of its deficiency income and withholding bases of the deficiency taxes assessment, which
taxes. Attached to the PAN was the detailed
1âwphi 1 enabled the latter to file an "effective" protest, much
explanation of the particular provision of law and unlike the taxpayer's situation in Enron. Petitioner's
revenue regulation violated, thus: DETAILS OF right to due process was thus not violated.
DISCREPANCIES
WHEREFORE, the petition is DENIED. The assailed
1. Deficiency income taxes for 1998 and 1999 Decision and Resolution of the Court of Tax Appeals
respectively result from non-payment of the En Banc dated March 11, 2010 and July 28, 2010,
minimum corporate income tax (MCIT) respectively, in C.T.A. EB Nos. 460 and 462 (C.T.A.
imposed pursuant to Section 27(E) of the 1997 Case No. 6697), are hereby AFFIRMED and UPHELD.
Tax Reform Act.
With costs against the petitioner.
2. Deficiency Withholding Taxes on
Compensation for 1997-1999 are the total SO ORDERED.
withholding taxes on compensation of all
employees of SAMELCO[-]I resulting from Republic of the Philippines
failureof employer to withhold taxes on the SUPREME COURT
taxable 13th month pay and other benefits in Manila
excess of [P]30,000.00 threshold pursuant to
Revenue Regulation 2-98.24
FIRST DIVISION
The above information provided to petitioner enabled it
G.R. No. 155541 January 27, 2004
to protest the PAN by questioning respondent's
interpretation of the laws cited as legal basis for the
computation of the deficiency withholding taxes and ESTATE OF THE LATE JULIANA DIEZ VDA. DE
assessment of minimum corporate income tax despite GABRIEL, petitioner,
petitioner's position that it remains exempt vs.
therefrom.25 In its letter-reply dated May 27, 2002, COMMISSIONER OF INTERNAL
respondent answered the arguments raised by REVENUE, respondent.
petitioner in its protest, and requested it to pay the
assessed deficiency on the date of payment stated in DECISION
YNARES-SANTIAGO, J.: On June 18, 1984, respondent Commissioner of
Internal Revenue issued warrants of distraint and levy
This petition for review on certiorari assails the to enforce collection of the decedent’s deficiency
decision of the Court of Appeals in CA-G.R. CV No. income tax liability, which were served upon her heir,
09107, dated September 30, 2002,1 which reversed Francisco Gabriel. On November 22, 1984, respondent
the November 19, 1995 Order of Regional Trial Court filed a "Motion for Allowance of Claim and for an Order
of Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, of Payment of Taxes" with the court a quo. On January
entitled "Testate Estate of Juliana Diez Vda. De 7, 1985, Mr. Ambrosio filed a letter of protest with the
Gabriel". The petition was filed by the Estate of the Late Litigation Division of the BIR, which was not acted upon
Juliana Diez Vda. De Gabriel, represented by because the assessment notice had allegedly become
Prudential Bank as its duly appointed and qualified final, executory and incontestable.
Administrator.
On May 16, 1985, petitioner, the Estate of the
As correctly summarized by the Court of Appeals, the decedent, through Mr. Ambrosio, filed a formal
relevant facts are as follows: opposition to the BIR’s Motion for Allowance of Claim
based on the ground that there was no proper service
During the lifetime of the decedent, Juliana of the assessment and that the filing of the aforesaid
Vda. De Gabriel, her business affairs were claim had already prescribed. The BIR filed its Reply,
managed by the Philippine Trust Company contending that service to Philippine Trust Company
(Philtrust). The decedent died on April 3, 1979. was sufficient service, and that the filing of the claim
Two days after her death, Philtrust, through its against the Estate on November 22, 1984 was within
Trust Officer, Atty. Antonio M. Nuyles, filed her the five-year prescriptive period for assessment and
Income Tax Return for 1978. The return did not collection of taxes under Section 318 of the 1977
indicate that the decedent had died. National Internal Revenue Code (NIRC).

On May 22, 1979, Philtrust also filed a verified petition On November 19, 1985, the court a quo issued an
for appointment as Special Administrator with the Order denying respondent’s claim against the
Regional Trial Court of Manila, Branch XXXVIII, Estate,2 after finding that there was no notice of its tax
docketed as Sp. Proc. No. R-82-6994. The court a quo assessment on the proper party.3
appointed one of the heirs as Special Administrator.
Philtrust’s motion for reconsideration was denied by On July 2, 1986, respondent filed an appeal with the
the probate court. Court of Appeals, docketed as CA-G.R. CV No.
09107,4assailing the Order of the probate court dated
On January 26, 1981, the court a quo issued an Order November 19, 1985. It was claimed that Philtrust, in
relieving Mr. Diez of his appointment, and appointed filing the decedent’s 1978 income tax return on April 5,
Antonio Lantin to take over as Special Administrator. 1979, two days after the taxpayer’s death, had
Subsequently, on July 30, 1981, Mr. Lantin was also "constituted itself as the administrator of the estate of
relieved of his appointment, and Atty. Vicente Onosa the deceased at least insofar as said return is
was appointed in his stead. concerned."5 Citing Basilan Estate Inc. v.
Commissioner of Internal Revenue,6 respondent
argued that the legal requirement of notice with respect
In the meantime, the Bureau of Internal Revenue
to tax assessments7 requires merely that the
conducted an administrative investigation on the
Commissioner of Internal Revenue release, mail and
decedent’s tax liability and found a deficiency income
send the notice of the assessment to the taxpayer at
tax for the year 1977 in the amount of P318,233.93.
the address stated in the return filed, but not that the
Thus, on November 18, 1982, the BIR sent by
taxpayer actually receive said assessment within the
registered mail a demand letter and Assessment
five-year prescriptive period.8 Claiming that Philtrust
Notice No. NARD-78-82-00501 addressed to the
had been remiss in not notifying respondent of the
decedent "c/o Philippine Trust Company, Sta. Cruz,
decedent’s death, respondent therefore argued that
Manila" which was the address stated in her 1978
the deficiency tax assessment had already become
Income Tax Return. No response was made by
final, executory and incontestable, and that petitioner
Philtrust. The BIR was not informed that the decedent
Estate was liable therefor.
had actually passed away.
On September 30, 2002, the Court of Appeals
In an Order dated September 5, 1983, the court a quo
rendered a decision in favor of the respondent.
appointed Antonio Ambrosio as the Commissioner and
Although acknowledging that the bond of agency
Auditor Tax Consultant of the Estate of the decedent.
between Philtrust and the decedent was severed upon
the latter’s death, it was ruled that the administrator of
the Estate had failed in its legal duty to inform Respondent, on the other hand, claims that because
respondent of the decedent’s death, pursuant to Philtrust filed the decedent’s income tax return
Section 104 of the National Internal Revenue Code of subsequent to her death, Philtrust was the de facto
1977. Consequently, the BIR’s service to Philtrust of administrator of her Estate.12 Consequently, when the
the demand letter and Notice of Assessment was Assessment Notice and demand letter dated
binding upon the Estate, and, upon the lapse of the November 18, 1982 were sent to Philtrust, there was
statutory thirty-day period to question this claim, the proper service on the Estate.13Respondent further
assessment became final, executory and asserts that Philtrust had the legal obligation to inform
incontestable. The dispositive portion of said decision petitioner of the decedent’s death, which requirement
reads: is found in Section 104 of the NIRC of 1977.14 Since
Philtrust did not, respondent contends that petitioner
WHEREFORE, finding merit in the appeal, the Estate should not be allowed to profit from this
appealed decision is REVERSED AND SET omission.15 Respondent further argues that Philtrust’s
ASIDE. Another one is entered ordering the failure to protest the aforementioned assessment
Administrator of the Estate to pay the within the 30-day period provided in Section 319-A of
Commissioner of Internal Revenue the the NIRC of 1977 meant that the assessment had
following: already become final, executory and incontestable.16

a. The amount of P318,223.93, The resolution of this case hinges on the legal
representing the deficiency income tax relationship between Philtrust and the decedent, and,
liability for the year 1978, plus 20% by extension, between Philtrust and petitioner Estate.
interest per annum from November 2, Subsumed under this primary issue is the sub-issue of
1982 up to November 2, 1985 and in whether or not service on Philtrust of the demand letter
addition thereto 10% surcharge on the and Assessment Notice No. NARD-78-82-00501 was
basic tax of P169,155.34 pursuant to valid service on petitioner, and the issue of whether
Section 51(e)(2) and (3) of the Tax Philtrust’s inaction thereon could bind petitioner. If both
Code as amended by PD 69 and 1705; sub-issues are answered in the affirmative,
and respondent’s contention as to the finality of
Assessment Notice No. NARD-78-82-00501 must be
b. The costs of the suit. answered in the affirmative. This is because Section
319-A of the NIRC of 1977 provides a clear 30-day
period within which to protest an assessment. Failure
SO ORDERED.9
to file such a protest within said period means that the
assessment ipso jure becomes final and unappealable,
Hence, the instant petition, raising the following issues: as a consequence of which legal proceedings may
then be initiated for collection thereof.
1. Whether or not the Court of Appeals erred in
holding that the service of deficiency tax We find in favor of the petitioner.
assessment against Juliana Diez Vda. de
Gabriel through the Philippine Trust Company
The first point to be considered is that the relationship
was a valid service in order to bind the Estate;
between the decedent and Philtrust was one
of agency, which is a personal relationship between
2. Whether or not the Court of Appeals erred in agent and principal. Under Article 1919 (3) of the Civil
holding that the deficiency tax assessment and Code, death of the agent or principal automatically
final demand was already final, executory and terminates the agency. In this instance, the death of the
incontestable. decedent on April 3, 1979 automatically severed the
legal relationship between her and Philtrust, and
Petitioner Estate denies that Philtrust had any legal such could not be revived by the mere fact that
personality to represent the decedent after her death. Philtrust continued to act as her agent when, on April
As such, petitioner argues that there was no proper 5, 1979, it filed her Income Tax Return for the year
notice of the assessment which, 1978.
therefore, never became final, executory and
incontestable.10 Petitioner further contends that Since the relationship between Philtrust and the
respondent’s failure to file its claim against the Estate decedent was automatically severed at the moment of
within the proper period prescribed by the Rules of the Taxpayer’s death, none of Philtrust’s acts or
Court is a fatal error, which forever bars its claim omissions could bind the estate of the Taxpayer.
against the Estate.11 Service on Philtrust of the demand letter and
Assessment Notice No. NARD-78-82-00501 was assessment notice, (2) inform respondent of
improperly done. the decedent’s death, or (3) inform petitioner
that it had received said demand letter and
It must be noted that Philtrust was never appointed as assessment notice. This lack of legal obligation
the administrator of the Estate of the decedent, and, was implicitly recognized by the Court of
indeed, that the court a quo twice rejected Philtrust’s Appeals, which, in fact, rendered its assailed
motion to be thus appointed. As of November 18, 1982, decision on grounds of "equity".17
the date of the demand letter and Assessment Notice,
the legal relationship between the decedent and Since there was never any valid notice of this
Philtrust had already been non-existent for three years. assessment, it could not have become final, executory
and incontestable, and, for failure to make the
Respondent claims that Section 104 of the National assessment within the five-year period provided in
Internal Revenue Code of 1977 imposed the legal Section 318 of the National Internal Revenue Code of
obligation on Philtrust to inform respondent of the 1977, respondent’s claim against the petitioner Estate
decedent’s death. The said Section reads: is barred. Said Section 18 reads:

SEC. 104. Notice of death to be filed. – In all SEC. 318. Period of limitation upon
cases of transfers subject to tax or where, assessment and collection. – Except as
though exempt from tax, the gross value of the provided in the succeeding section, internal
estate exceeds three thousand pesos, the revenue taxes shall be assessed within five
executor, administrator, or any of the legal years after the return was filed, and no
heirs, as the case may be, within two months proceeding in court without assessment for the
after the decedent’s death, or within a like collection of such taxes shall be begun after the
period after qualifying as such executor or expiration of such period. For the purpose of
administrator, shall give written notice thereof this section, a return filed before the last day
to the Commissioner of Internal Revenue. prescribed by law for the filing thereof shall be
considered as filed on such last day: Provided,
The foregoing provision falls in Title III, Chapter That this limitation shall not apply to cases
I of the National Internal Revenue Code of already investigated prior to the approval of this
1977, or the chapter on Estate Tax, and Code.
pertains to "all cases of transfers subject to tax"
or where the "gross value of the estate exceeds Respondent argues that an assessment is deemed
three thousand pesos". It has absolutely no made for the purpose of giving effect to such
applicability to a case for deficiency income assessment when the notice is released, mailed or
tax, such as the case at bar. It further lacks sent to the taxpayer to effectuate the assessment, and
applicability since Philtrust was never the there is no legal requirement that the taxpayer actually
executor, administrator of the decedent’s receive said notice within the five-year period.18 It must
estate, and, as such, never had the legal be noted, however, that the foregoing rule requires that
obligation, based on the above provision, to the notice be sent to the taxpayer, and not merely to a
inform respondent of her death. disinterested party. Although there is no specific
requirement that the taxpayer should receive the notice
Although the administrator of the estate may within the said period, due process requires at the very
have been remiss in his legal obligation to least that such notice actually be received. In
inform respondent of the decedent’s death, the Commissioner of Internal Revenue v. Pascor Realty
consequences thereof, as provided in Section and Development Corporation,19 we had occasion to
119 of the National Internal Revenue Code of say:
1977, merely refer to the imposition of certain
penal sanctions on the administrator. These do An assessment contains not only a
not include the indefinite tolling of the computation of tax liabilities, but also a demand
prescriptive period for making deficiency tax for payment within a prescribed period. It also
assessments, or the waiver of the notice signals the time when penalties and interests
requirement for such assessments. begin to accrue against the taxpayer. To
enable the taxpayer to determine his remedies
Thus, as of November 18, 1982, the date of the thereon, due process requires that it must be
demand letter and Assessment Notice No. served on and received by the taxpayer.
NARD-78-82-00501, there was absolutely no
legal obligation on the part of Philtrust to either In Republic v. De le Rama,20 we clarified that, when an
(1) respond to the demand letter and estate is under administration, notice must be sent to
the administrator of the estate, since it is the said SO ORDERED.
administrator, as representative of the estate, who has
the legal obligation to pay and discharge all debts of Republic of the Philippines
the estate and to perform all orders of the court. In that SUPREME COURT
case, legal notice of the assessment was sent to two Manila
heirs, neither one of whom had any authority to
represent the estate. We said: FIRST DIVISION

The notice was not sent to the taxpayer for the


purpose of giving effect to the assessment, and
said notice could not produce any effect. In the
G.R. No. L-20569 August 23, 1974
case of Bautista and Corrales Tan v. Collector
of Internal Revenue … this Court had occasion
to state that "the assessment is deemed made JOSE B. AZNAR, in his capacity as Administrator
when the notice to this effect is released, of the Estate of the deceased, Matias H.
mailed or sent to the taxpayer for the purpose Aznar,petitioner,
of giving effect to said assessment." It vs.
appearing that the person liable for the COURT OF TAX APPEALS and COLLECTOR OF
payment of the tax did not receive the INTERNAL REVENUE, respondents.
assessment, the assessment could not
become final and executory. (Citations omitted, Sato, Enad Garcia for petitioner.
emphasis supplied.)
Office of the Solicitor General Arturo A. Alafriz, Solicitor
In this case, the assessment was served not even on Alejandro B. Afurong and Special Attorney Librada R.
an heir of the Estate, but on a completely disinterested Natividad for respondents.
third party. This improper service was clearly not
binding on the petitioner.

By arguing that (1) the demand letter and assessment ESGUERRA, J.:p
notice were served on Philtrust, (2) Philtrust was
remiss in its obligation to respond to the demand letter Petitioner, as administrator of the estate of the
and assessment notice, (3) Philtrust was remiss in its deceased, Matias H. Aznar, seeks a review and
obligation to inform respondent of the decedent’s nullification of the decision of the Court of Tax Appeals
death, and (4) the assessment notice is therefore in C.T.A. Case No. 109, modifying the decision of
binding on the Estate, respondent is arguing in circles. respondent Commissioner of Internal Revenue and
The most crucial point to be remembered is that ordering the petitioner to pay the government the sum
Philtrust had absolutely no legal relationship to the of P227,691.77 representing deficiency income taxes
deceased, or to her Estate. There was therefore no for the years 1946 to 1951, inclusive, with the condition
assessment served on the Estate as to the alleged that if the said amount is not paid within thirty days from
underpayment of tax. Absent this assessment, no the date the decision becomes final, there shall be
proceedings could be initiated in court for the collection added to the unpaid amount the surcharge of 5%, plus
of said tax,21 and respondent’s claim for collection, filed interest at the rate of 12% per annum from the date of
with the probate court only on November 22, 1984, was delinquency to the date of payment, in accordance with
barred for having been made beyond the five-year Section 51 of the National Internal Revenue Code, plus
prescriptive period set by law. costs against the petitioner.

WHEREFORE, the petition is GRANTED. The It is established that the late Matias H. Aznar who died
Decision of the Court of Appeals in CA-G.R. CV No. on May 18, 1958, predecessor in interest of herein
09107, dated September 30, 2002, is REVERSED and petitioner, during his lifetime as a resident of Cebu City,
SET ASIDE. The Order of the Regional Trial Court of filed his income tax returns on the cash and
Manila, Branch XXXVIII, in Sp. Proc. No. R-82-6994, disbursement basis, reporting therein the following:
dated November 19, 1985, which denied the claim of
the Bureau of Internal Revenue against the Estate of
Year Net Income Amount Exhibit
Juliana Diez Vda. De Gabriel for the deficiency income
tax of the decedent for the year 1977 in the amount of of Tax
P318,223.93, is AFFIRMED. Paid

No pronouncement as to costs.
P12,822.00 P114.66 pp. Based on the above findings of Examiner Guerrero,
85-88 respondent Commissioner, in his letter dated
November 28, 1952, notified the taxpayer (Matias H.
B.I.R.
Aznar) of the assessed tax delinquency to the amount
rec.
of P723,032.66, plus compromise penalty. The
,910.94 114.66 38-A taxpayer requested a reinvestigation which was
(pp. granted for the purpose of verifying the merits of the
329- various objections of the taxpayer to the deficiency
332 income tax assessment of November 28, 1952.
B.I.R
rec.) After the reinvestigation, another deficiency
assessment to the reduced amount of P381,096.07
0,200.00 132.00 39 dated February 16, 1955, superseded the previous
(pp. assessment and notice thereof was received by Matias
75-78 H. Aznar on March 2, 1955.
B.I.R
rec.) The new deficiency assessment was based on the
following computations:
,148.34 68.90 40
(pp. 1946
70-73
B.I.R.
rec.) Net income per return ........................ P9,910.94
Add: Under declared income .............. 22,559.94
,990.66 59.72 41 Net income per investigation............... 32,470.45
(pp.
64-67 Deduct: Income tax liability
B.I.R. per return as assessed
rec.) ...................................................... 114.66
Balance of tax due
,364.50 28.22 42 ........................................................... P3,687.10
(pp. Add: 50% surcharge
59-62, ........................................................ 1,843.55
BIR DEFICIENCY INCOME TAX
rec.) ...................................... P5,530.65

,800.00 none 43 1947


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

1950 1951 .... 11,526.00

Total .... P381,096.07


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

1950 1950 175,980.00

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


P6,800.00
Add: Under declared income P227,788.64.
......................................... 33,355.80
Net income ................................................................. I
P40,155.80
Less: Personal and additional exemptions The first vital issue to be decided here is whether or not
...................... 7,200.00 the right of the Commissioner of Internal Revenue to
Income subject to tax assess deficiency income taxes of the late Matias H.
.................................................. P32,955.80 Aznar for the years 1946, 1947, and 1948 had already
Tax due thereon ........................................................... prescribed at the time the assessment was made on
P7,684.00 November 28, 1952.
Less: Tax already assessed
........................................... -o- .
Petitioner's contention is that the provision of law
Balance of tax due ........................................................ applicable to this case is the period of five years
P7,684.00
limitation upon assessment and collection from the
Add: 50% surcharge filing of the returns provided for in See. 331 of the
.................................................... 3,842.00 National Internal Revenue Code. He argues that since
Deficiency income tax the 1946 income tax return could be presumed filed
.................................................. P11,526.00
before March 1, 1947 and the notice of final and last
assessment was received by the taxpayer on March 2,
1951 1955, a period of about 8 years had elapsed and the
five year period provided by law (Sec. 331 of the
Net income per return ................................................... National Internal Revenue Code) had already expired.
P8,364.50 The same argument is advanced on the taxpayer's
Add: Under declared income return for 1947, which was filed on March 1, 1948, and
........................................ 246,449.06 the return for 1948, which was filed on February 28,
Net income ............................................................... 1949. Respondents, on the other hand, are of the firm
P254.813.56 belief that regarding the prescriptive period for
Less: Personal and additional exemptions assessment of tax returns, Section 332 of the National
.................... 7,800.00 Internal Revenue Code should apply because, as in
Income subject to tax this case, "(a) In the case of a false or fraudulent return
................................................ P247,013.56 with intent to evade tax or of a failure to file a return,
Tax due thereon ........................................................ the tax may be assessed, or a proceeding in court for
P117,348.00 the collection of such tax may be begun without
Less: Tax already assessed assessment, at any time within ten years after the
........................................ 28.00 discovery of the falsity, fraud or omission" (Sec. 332 (a)
Balance of tax due ..................................................... of the NIRC).
P117,320.00
Add: 50% surcharge Petitioner argues that Sec. 332 of the NIRC does not
.................................................. 58,660.00 apply because the taxpayer did not file false and
fraudulent returns with intent to evade tax, while
respondent Commissioner of Internal Revenue insists sale of jewelries valued at P30,000; in not excluding
contrariwise, with respondent Court of Tax Appeals from other schedules of assets of the taxpayer (a)
concluding that the very "substantial under accounts receivable from customers in the amount of
declarations of income for six consecutive years P38,000 for 1948, P126,816.50 for 1950, and
eloquently demonstrate the falsity or fraudulence of the provisions for doubtful accounts in the amount of
income tax returns with an intent to evade the payment P41,810.56 for 1950; (b) over valuation of hospital and
of tax." dental buildings for 1949 in the amount of P32,000 and
P6,191.32 respectively; (c) investment in hollow block
To our minds we can dispense with these controversial business in the amount of P8,603.22 for 1949; (d) over
arguments on facts, although we do not deny that the valuation of surplus goods in the amount of P23,000 for
findings of facts by the Court of Tax Appeals, supported the year 1949; (e) various lands and buildings included
as they are by very substantial evidence, carry great in the schedule of assets for the years 1950 and 1951
weight, by resorting to a proper interpretation of in the total amount of P243,717.42 for 1950 and
Section 332 of the NIRC. We believe that the proper P62,564.00 for 1951, these issues would depend for
and reasonable interpretation of said provision should their resolution on determination of questions of facts
be that in the three different cases of (1) false return, based on an evaluation of evidence, and the general
(2) fraudulent return with intent to evade tax, (3) failure rule is that the findings of fact of the Court of Tax
to file a return, the tax may be assessed, or a Appeals supported by substantial evidence should not
proceeding in court for the collection of such tax may be disturbed upon review of its decision (Section 2,
be begun without assessment, at any time within ten Rule 44, Rules of Court).
years after the discovery of the (1) falsity, (2) fraud, (3)
omission. Our stand that the law should be interpreted On the question of the alleged sale of P30,000 worth
to mean a separation of the three different situations of of jewelries in 1946, which amount petitioner contends
false return, fraudulent return with intent to evade tax, should be deducted from the taxpayer's net worth as of
and failure to file a return is strengthened December 31, 1946, the record shows that Matias H.
immeasurably by the last portion of the provision which Aznar, when interviewed by B.I.R. Examiner Guerrero,
segregates the situations into three different classes, stated that at the beginning of 1945 he had P60,000
namely "falsity", "fraud" and "omission". That there is a worth of jewelries inherited from his ancestors and
difference between "false return" and "fraudulent were disposed off as follows: 1945, P10,000; 1946,
return" cannot be denied. While the first merely implies P20,000; 1947, P10,000; 1948, P10,000; 1949,
deviation from the truth, whether intentional or not, the P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R.
second implies intentional or deceitful entry with intent rec. pp. 90-94).
to evade the taxes due.
During the hearing of this case in the Court of Tax
The ordinary period of prescription of 5 years within Appeals, petitioner's accountant testified that on
which to assess tax liabilities under Sec. 331 of the January 1, 1945, Matias H. Aznar had jewelries worth
NIRC should be applicable to normal circumstances, P60,000 which were acquired by purchase during the
but whenever the government is placed at a Japanese occupation (World War II) and sold on
disadvantage so as to prevent its lawful agents from various occasions, as follows: 1945, P5,000 and 1946,
proper assessment of tax liabilities due to false returns, P30,000. To corroborate the testimony of the
fraudulent return intended to evade payment of tax or accountant, Mrs. Ramona Agustines testified that she
failure to file returns, the period of ten years provided bought from the wife of Matias H. Aznar in 1946 a
for in Sec. 332 (a) NIRC, from the time of the discovery diamond ring and a pair of earrings for P30,000; and in
of the falsity, fraud or omission even seems to be 1947 a wrist watch with diamonds, together with
inadequate and should be the one enforced. antique jewelries, for P15,000. Matias H. Aznar, on the
other hand testified that in 1945, his wife sold to Sards
There being undoubtedly false tax returns in this case, Parino jewelries for P5,000 and question, Mr. Aznar
We affirm the conclusion of the respondent Court of stated that his transaction with Sards Parino, with
Tax Appeals that Sec. 332 (a) of the NIRC should apply respect to the sale of jewelries, amounted to P15,000.
and that the period of ten years within which to assess
petitioner's tax liability had not expired at the time said The lower court did not err in finding material
assessment was made. inconsistencies in the testimonies of Matias H. Aznar
and his witnesses with respect to the values of the
II jewelries allegedly disposed off as stated by the
witnesses. Thus, Mr. Aznar stated to the B.I.R.
As to the alleged errors committed by the Court of Tax examiner that jewelries worth P10,000 were sold in
Appeals in not deducting from the alleged undeclared 1945, while his own accountant testified that the same
income of the taxpayer for 1946 the proceeds from the jewelries were sold for only P5,000. Mr. Aznar also
testified that Mrs. Agustines purchased from his wife
jewelries for P35,000, and yet Mrs. Agustines herself Regarding a house in Talisay Cebu, (covered by Tax
testified that she bought jewelries for P30,000 and Declaration No. 8165) which was listed as an asset
P15,000 on two occasions, or a total of P45,000. during the years 1945 and 1947 to 1951, but which was
not listed as an asset in 1946 because of a notation in
We do not see any plausible reason to challenge the the tax declaration that it was reconstructed in 1947,
fundamentally sound basis advanced by the Court of the lower court correctly concluded that the
Tax Appeals in considering the inconsistencies of the reconstruction of the property did not render it
witnesses' testimony as material, in the following valueless during the time it was being reconstructed
words: and consequently it should be listed as an asset as of
January 1, 1946, with the same valuation as in 1945,
We do not say that witnesses testifying that is P1,500.
on the same transaction should give
identical testimonies. Because of the On the question of accounts receivable from customers
frailties and the limitations of the in the amount of P38,000 for 1948, and P123,816.58
human mind, witnesses' statements for the years 1950 and 1951, which were included in
are apt to be inconsistent in certain the assets of Mr. Aznar for those years by the
points, but usually the inconsistencies respondent Commissioner of Internal Revenue, it is
refer to the minor phases of the very clear that those figures were taken from the
transaction. It is the insignificance of statements (Exhs. 31 and 32) filed by Mr. Matias H.
the detail of an occurrence that fails to Aznar with the Philippine National Bank when he was
impress the human mind. When that intending to obtain a loan. These statements were
same mind, made to recall what under oath and the natural implication is that the
actually happened, the significant point information therein reflected must be the true and
which it failed to take note is naturally accurate financial condition of the one who executed
left out. But it is otherwise as regards those statements. To believe the petitioner's argument
significant matters, for they leave that the late Mr. Aznar included those figures in his
indelible imprints upon the human sworn statement only for the purpose of obtaining a
mind. Hence, testimonial bigger credit from the bank is to cast suspicion on the
inconsistencies on the minor details of character of a man who can no longer defend himself.
an occurrence are dismissed lightly by It would be as if pointing the finger of accusation on the
the courts, while discrepancies on late Mr. Aznar that he intentionally falsified his sworn
significant points are taken seriously statements (Exhs. 31 and 32) to make it appear that
and weigh adversely to the party there were non-existent accounts receivable just to
affected thereby. increase his assets by fictitious entries so that his credit
with the Philippine National Bank could be enhanced.
There is no sound basis for deviating from the lower Besides, We do not lose sight of the fact that those
court's conclusion that: "Taxwise in view of the statements (Exhs. 31 and 32) were executed before
aforesaid inconsistencies, which we deem material and this tax controversy arose and the disputable
significant, we dismiss as without factual basis presumptions that a person is innocent of crime or
petitioner's allegation that jewelries form part of his wrong; that a person intends the ordinary
inventory of assets for the purpose of establishing his consequences of his voluntary act; that a person takes
net worth at the beginning of 1946." ordinary care of his concerns; that private transaction
have been fair and regular; that the ordinary course of
business has been followed; that things have
As to the accounts receivable from the United States
happened according to the ordinary course of nature
government for the amount of P38,254.90,
and the ordinary habits of life; that the law has been
representing a claim for goods commandered by the
obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131
U.S. Army during World War II, and which amount
of the Rules of Court), together with the conclusive
petitioner claimed should be included in his net worth
presumption that "whenever a party has, by his own
as of January 1, 1946, the Court of Tax Appeals
declaration, act, or omission, intentionally and
correctly concluded that the uncontradicted evidence
deliberately led another to believe a particular thing
showed that "the collectible accounts of Mr. Aznar from
true, and to act upon such belief, he cannot, in any
the U.S. Government in the sum of P38,254.90 should
litigation arising out of such declaration, act or
be added to his assets (under accounts receivable) as
omission, be permitted to falsify it" (Sec. 3 (a), Rule
of January 1, 1946. As of December 31, 1947, and
131, Rules of Court), convincingly indicate that the
December 31, 1948, the years within which the
accounts receivable stated by Mr. Aznar in Exhibits 31
accounts were paid to him, the 'accounts receivable
and 32 were true, in existence, and accurate to the very
shall decrease by P31,362.37 and P6,892.53,
amounts mentioned.
respectively."
There is no merit to petitioners argument that those Respondent Commissioner of Internal Revenue's
statements were only for the purpose of obtaining a valuation of P36,191.34 of the Dentistry Building is
bigger credit from the bank (impliedly stating that those based on the letter of Mr. and Mrs. Matias H. Aznar to
statements were false) and those accounts were the Southwestern Colleges, dated December 15, 1950,
allegedly back accounts of students of the which is embodied in the minutes of the meeting of the
Southwestern Colleges and were worthless, and if Board of Trustees of the Southwestern Colleges held
collected, would go to the funds of the school. The on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is
statement of the late Mr. Aznar that they were accounts the cash book of the Southwestern Colleges, this
receivable from customers should prevail over the building was listed as of the same amount. Petitioner's
mere allegation of petitioner, unsupported as they are estimate of P30,000 for this building, based on
by convincing evidence. There is no reason to disturb Architect Paca's opinion, cannot stand against the
the lower court's conclusion that the amounts of owner's estimate and that which appears in the cash
P38,000 and P123,816.58 were accounts receivable book of the Southwestern Colleges, if we take into
from customers and as such must be included as consideration that the owner's (Mr. Matias H. Aznar)
petitioner's assets for the years indicated. letter was written long before this tax proceeding was
initiated, while architect Paca's estimate was made
As to the questions of doubtful accounts (bad debts), upon petitioner's request solely for the purpose of
for the amount of P41,810.56, it is clear that said evidence in this tax case.
amount is taken from Exhibit 31, the sworn statement
of financial condition filed by Mr. Matias H. Aznar with In the inventory of assets of petitioner, respondent
the Philippine National Bank. The lower court did not Commissioner of Internal Revenue included the
commit any error in again giving much weight to the administrative building valued at P19,200 for the years
statement of Mr. Aznar and in concluding that 1947 and 1948, and P16,700 for the years 1949 to
inasmuch as this is an item separate and apart from 1951; and a high school building valued at P48,000 for
the taxpayer's accounts receivable and non-deductible 1947 and 1948, and P45,000 for 1949, 1950 and 1951.
expense, it should be reverted to the accounts The reduced valuation for the latter years are due to
receivable and, consequently, considered as an asset allowance for partial loss resulting from the 1949
in 1950. typhoon. Petitioner did not question the inclusion of
these buildings in the inventory for the years prior to
On the alleged over valuation of two buildings (hospital 1950, but objected to their inclusion as assets as of
building which respondent Commissioner of Internal January 1, 1950, because both buildings were
Revenue listed as an asset from 1949-1951 at the destroyed by a typhoon in November of 1949. There is
basic valuation of P130,000, and which petitioner sufficient evidence (Exh. G-1, affidavit of Jesus S.
claims to be over valued by P32,000; dentistry building Intan, employee in the office of City Assessor of Cebu
valued by respondent Commissioner of Internal City, Exh. 18, Mr. Intan's testimony, a copy of a letter
Revenue at P36,191.34, which petitioner claims to be of the City Assessor of Cebu City) to prove that the two
over valued by P6,191.34), We find no sufficient buildings were really destroyed by typhoon in 1949
reason to alter the conclusion of respondent Court of and, therefore, should be eliminated from the
Tax Appeals sustaining the respondent Commissioner petitioner's inventory of assets beginning December
of Internal Revenue's valuation of both properties. 31, 1949.

Respondent Commissioner of Internal Revenue based On the issue of investment in the hollow blocks
his valuation of the hospital building on the business, We see no compelling reason to alter the
representation of Mr. Matias H. Aznar himself who, in lower court's conclusion that "whatever was spent in
his letter (Exh. 35) to the Philippine National Bank the hollow blocks business is an investment, and being
dated September 5, 1949, stated that the hospital an investment, the same should be treated as an asset.
building cost him P132,000. However in view of the With respect to the amount representing the value of
effect of a typhoon in 1949 upon the building, the value the building, there is no duplication in the listing as the
allowed was P130,000. Exhibit 35, contrary to inventory of real property does not include the building
petitioner's contention, should be given probative value in question."
because, although it is an unsigned plain copy, that
exhibit was taken by the investigating examiner of the Respondent Commissioner of Internal Revenue
B.I.R. from the files of the Southwestern Colleges and included in the inventory, under the heading of other
formed part of his report of investigation as a public asset, the amount of P8,663.22, treated as investment
official. The estimates of an architect and a civil in the hollow block business. Petitioner objects to the
engineer who agreed that a value of P84,240 is fair for inclusion of P1,683.42 which was spent on the building
the hospital building, made years after the building was and in the business and of P674.35 which was spent
constructed, cannot prevail over the petitioner's own for labor, fuel, raw materials, office supplies etc.,
estimate of his property's value. contending that the former amount is a duplication of
inventory (included among the list of properties) and The lower court could not find any evidence of said
the latter is a business expense which should be alleged transfer of ownership from the taxpayer to the
eliminated from the list of assets. Southwestern Colleges as of December 15, 1950, an
allegation which if true could easily be proven. What is
The inclusion of expenses (labor and raw materials) as evident is that those buildings were used by the
part of the hollow block business is sanctioned in the Southwestern Colleges. It is true that Exhibit G-1
inventory method of tax verification. It is a sound shows that Mr. and Mrs. Matias H. Aznar offered those
accounting practice to include raw materials that will be properties in exchange for shares of stocks of the
used for future manufacture. Inclusion of direct labor is Southwestern Colleges, and Exhibit "G" which is the
also proper, as all these items are to be embodied in a minutes of the meeting of the Board of Trustees of the
summary of assets (investment by the taxpayer Southwestern Colleges held on August 6, 1951, shows
credited to his capital account as reflected in Exhibit that Mr. Aznar was amenable to the value fixed by the
72-A, which is a working sheet with entries taken from board of trustees and that he requested to be paid in
the journal of the petitioner concerning his hollow cash instead of shares of stock. But those are not
blocks business). There is no evidence to show that sufficient evidence to prove that transfer of ownership
there was duplication in the inclusion of the building actually happened on December 15, 1950. Hence, the
used for hollow blocks business as part of petitioner's lower court did not commit any error in sustaining the
investment as this building was not included in the respondent Commissioner of Internal Revenue's act of
listing of real properties of petitioner (Exh. 45-C p. 187 including those buildings as part of the assets of
B.I.R. rec.). petitioner as of December 31, 1950.

As to the question of the real value of the surplus goods Petitioner also contends that properties allegedly
purchased by Mr. Matias H. Aznar from the U.S. Army, ceded to the Southwestern Colleges in 1951 for
the best evidence, as observed correctly by the lower P150,000 worth of shares of stocks, consisting of: land,
court, is the statement of Mr. Matias H. Aznar, himself, P22,684; house, P13,700; group of houses, P8,000;
as appearing Exh. 35 (copy of a letter dated September building, P12,000; nurses home, P4,100; nurses home,
5, 1949 to the Philippine National Bank), to the effect P2,080, should be excluded from the inventory of
"as part of my assets I have different merchandise from assets as of December 31, 1951. The evidence (Exh.
Warehouse 35, Tacloban, Leyte at a total cost of H), however, clearly shows that said properties were
P43,000.00 and valued at no less than P20,000 at formally conveyed to the Southwestern Colleges only
present market value." Petitioner's claim that the goods on September 25, 1952. Undoubtedly, petitioner was
should be valued at only P20,000 in accordance with the owner of those properties prior to September 25,
an alleged invoice is not supported by evidence since 1952 and said properties should form part of his assets
the invoice was not presented as exhibit. The lower as of December 31, 1951.
court's act in giving more credence to the statement of
Mr. Aznar cannot be questioned in the light of clear The uncontested portions of the lower court's decision
indications that it was never controverted and it was consisting of its conclusions that library books valued
given at a time long before the tax controversy arose. at P7,041.03, appearing in a journal of the
Southwestern Colleges marked as' Exhibit 25-A, being
The last issue on propriety of inclusion in petitioner's an investment, should be treated as an asset beginning
assets made by respondent Commissioner of Internal December 31, 1950; that the expenses for construction
Revenue concerns several buildings which were to the amount of P113,353.70, which were spent for the
included in the list of petitioner's assets as of improvement of the buildings appearing in Exhibit 24
December 31, 1950. Petitioner contends that those are deemed absorbed in the increased value of the
buildings were conveyed and ceded to Southwestern buildings as appraised by respondent Commissioner of
Colleges on December 15, 1950, in consideration of Internal Revenue at cost after improvements were
P100,723.99 to be paid in cash. The value of the made, and should be taken out as additional assets;
different buildings are listed as: hospital building, that the amount receivable of P5,776 from a certain
P130,000; gymnasium, P43,000; dentistry building, Benito Chan should be treated as petitioner's asset but
P36,191.34; bodega 1, P781.18; bodega 2, P7,250; the amount of P5,776 representing the value of a
college of law, P10,950; laboratory building, P8,164; house and lot given as collateral to secure said loan
home economics, P5,621; morgue, P2,400; science should not be considered as an asset of petitioner
building, P23,600; faculty house, P5,760. It is since to do so would result in a glaring duplication of
suggested that the value of the buildings be eliminated items, are all affirmed. There seems to be no
from the real estate inventory and the sum of controversy as to the rest of the items listed in the
P100,723.99 be included as asset as of December 31, inventory of assets.
1950.
III
The second issue which appears to be of vital inherent flaw when applied to this case. It is very
importance in this case centers on the lower court's apparent here that the respondent Commissioner of
imposition of the fraud penalty (surcharge of 50% Internal Revenue, when the inventory method was
authorized in Section 72 of the Tax Code). The resorted to in the first assessment, concluded that the
petitioner insists that there might have been false correct tax liability of Mr. Aznar amounted to
returns by mistake filed by Mr. Matias H. Aznar as P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a
those returns were prepared by his accountant reinvestigation the same respondent, in another
employees, but there were no proven fraudulent assessment dated February 16, 1955, concluded that
returns with intent to evade taxes that would justify the the tax liability should be reduced to P381,096.07. This
imposition of the 50% surcharge authorized by law as is a crystal-clear, indication that even the respondent
fraud penalty. Commissioner of Internal Revenue with the use of the
inventory method can commit a glaring mistake in the
The lower court based its conclusion that the 50% fraud assessment of petitioner's tax liability. When the
penalty must be imposed on the following reasoning: . respondent Court of Tax Appeals reviewed this case
on appeal, it concluded that petitioner's tax liability
It appears that Matias H. Aznar should be only P227,788.64. The lower court in three
declared net income of P9,910.94, instances (elimination of two buildings in the list of
P10,200, P9,148.34, P8,990.66, petitioner's assets beginning December 31, 1949,
P8,364.50 and P6,800 for the years because they were destroyed by fire; elimination of
1946, 1947, 1948, 1949, 1950 and expenses for construction in petitioner's assets as
1951, respectively. Using the net worth duplication of increased value in buildings, and
method of determining the net income elimination of value of house and lot in petitioner's
of a taxpayer, we find that he had net assets because said property was only given as
incomes of P32,470.45, P67,751.19, collateral) supported petitioner's stand on the wrong
P17,880.44, P52,709.11, P254,813.56 inclusions in his lists of assets made by the respondent
and P40,155.80 during the respective Commissioner of Internal Revenue, resulting in the
years 1946, 1947, 1948, 1949, 1950, very substantial reduction of petitioner's tax liability by
and 1951. In consequence, he the lower court. The foregoing shows that it was not
underdeclared his income by 227% for only Mr. Matias H. Aznar who committed mistakes in
1946, 564% for 1947, 95%, for 1948, his report of his income but also the respondent
486% for 1949, 2,946% for 1950 and Commissioner of Internal Revenue who committed
490% for 1951. These substantial mistakes in his use of the inventory method to
under declarations of income for six determine the petitioner's tax liability. The mistakes
consecutive years eloquently committed by the Commissioner of Internal Revenue
demonstrate the falsity or fraudulence which also involve very substantial amounts were also
of the income tax return with an intent repeated yearly, and yet we cannot presume therefrom
to evade the payment of tax. Hence, the existence of any taint of official fraud.
the imposition of the fraud penalty is
proper (Perez vs. Court of Tax From the above exposition of facts, we cannot but
Appeals, G.R. No. L-10507, May 30, emphatically reiterate the well established doctrine that
1958). (Emphasis supplied) fraud cannot be presumed but must be proven. As a
corollary thereto, we can also state that fraudulent
As could be readily seen from the above rationalization intent could not be deduced from mistakes however
of the lower court, no distinction has been made frequent they may be, especially if such mistakes
between false returns (due to mistake, carelessness or emanate from erroneous entries or erroneous
ignorance) and fraudulent returns (with intent to evade classification of items in accounting methods utilized
taxes). The lower court based its conclusion on the for determination of tax liabilities The predecessor of
petitioner's alleged fraudulent intent to evade taxes on the petitioner undoubtedly filed his income tax returns
the substantial difference between the amounts of net for "the years 1946 to 1951 and those tax returns were
income on the face of the returns as filed by him in the prepared for him by his accountant and employees. It
years 1946 to 1951 and the net income as determined also appears that petitioner in his lifetime and during
by the inventory method utilized by both respondents the investigation of his tax liabilities cooperated readily
for the same years. The lower court based its with the B.I.R. and there is no indication in the record
conclusion on a presumption that fraud can be of any act of bad faith committed by him.
deduced from the very substantial disparity of incomes
as reported and determined by the inventory method The lower court's conclusion regarding the existence of
and on the similarity of consecutive disparities for six fraudulent intent to evade payment of taxes was based
years. Such a basis for determining the existence of merely on a presumption and not on evidence
fraud (intent to evade payment of tax) suffers from an establishing a willful filing of false and fraudulent
returns so as to warrant the imposition of the fraud
penalty. The fraud contemplated by law is actual and
not constructive. It must be intentional fraud, consisting
of deception willfully and deliberately done or resorted
to in order to induce another to give up some legal right.
Negligence, whether slight or gross, is not equivalent
to the fraud with intent to evade the tax contemplated
by the law. It must amount to intentional wrong-doing
with the sole object of avoiding the tax. It necessarily
follows that a mere mistake cannot be considered as
fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed
mistakes in making entries in the returns and in the
assessment, respectively, under the inventory method
of determining tax liability, it would be unfair to treat the
mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty


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

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

The total sum of P151,859.10 should be decreased by


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

WHEREFORE, the decision of the Court of Tax


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

With costs against the petitioner.